0001465885wmc:CommercialMortgagePassThroughCertificateClassA1BMemberus-gaap:SecuredDebtMemberwmc:ArroyoMortgageTrust2020Member2022-01-012022-06-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2021~~2022


☐			Transition 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						27-0298092
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

Western Asset Mortgage Capital Corporation

~~385 East Colorado Boulevard~~47 W 200 South, Suite 200

~~Pasadena, California 91101~~Salt Lake City, Utah 84101

(Address of Registrant’s principal executive offices)

~~(626) 844-9400~~(801) 952-3390

(Registrant’s telephone number, including area code)

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 and posted 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 filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

☐

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 is a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes ☐ No ý

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

WMC

New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

As of ~~November 3, 2021~~August 9, 2022 there were ~~60,859,913~~6,038,010 shares, par value $0.01, of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

~~Table of Contents~~

Part I

ITEM I. Financial Statements

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
Assets:	Assets:					Assets:
Cash and cash equivalents	Cash and cash equivalents	$	63,916	$	31,613	Cash and cash equivalents	$	15,878	$	40,193
Restricted cash	Restricted cash	260		76,132		Restricted cash	257		260
Agency mortgage-backed securities, at fair value ($1,342 and $1,708 pledged as collateral, at fair value, respectively)		1,342		1,708
Non-Agency mortgage-backed securities, at fair value ($153,460 and $167,970 pledged as collateral, at fair value, respectively)		162,661		189,462
Other securities, at fair value ($52,093 and $48,754 pledged as collateral, at fair value, respectively)		52,093		48,754
Residential Whole Loans, at fair value ($949,417 and $1,008,782 pledged as collateral, at fair value, respectively)		949,417		1,008,782
Residential Bridge Loans ($5,960 and $12,813 at fair value and $5,960 and $12,960 pledged as collateral, respectively)		5,960		13,916
Agency mortgage-backed securities, at fair value ($264 and $1,172 pledged as collateral, at fair value, respectively)						Agency mortgage-backed securities, at fair value ($264 and $1,172 pledged as collateral, at fair value, respectively)	785		1,172
Non-Agency mortgage-backed securities, at fair value ($116,331 and $123,947 pledged as collateral, at fair value, respectively)						Non-Agency mortgage-backed securities, at fair value ($116,331 and $123,947 pledged as collateral, at fair value, respectively)	125,294		133,127
Other securities, at fair value ($40,534 and $51,648 pledged as collateral, at fair value, respectively)						Other securities, at fair value ($40,534 and $51,648 pledged as collateral, at fair value, respectively)	40,534		51,648
Residential whole loans, at fair value ($1,195,853 and $1,023,502 pledged as collateral, at fair value, respectively)						Residential whole loans, at fair value ($1,195,853 and $1,023,502 pledged as collateral, at fair value, respectively)	1,195,853		1,023,502
Residential bridge loans, at fair value ($5,095 and $5,207 pledged as collateral, at fair value, respectively)						Residential bridge loans, at fair value ($5,095 and $5,207 pledged as collateral, at fair value, respectively)	5,095		5,428
Securitized commercial loans, at fair value	Securitized commercial loans, at fair value	1,377,005		1,605,335		Securitized commercial loans, at fair value	1,243,371		1,355,808
Commercial Loans, at fair value ($101,271 and $310,523 pledged as collateral, at fair value, respectively)		128,766		310,523
Commercial loans, at fair value ($101,487 and $101,459 pledged as collateral, at fair value, respectively)						Commercial loans, at fair value ($101,487 and $101,459 pledged as collateral, at fair value, respectively)	128,421		130,572

Investment related receivable	Investment related receivable	27,586		30,576		Investment related receivable	11,952		22,133
Interest receivable	Interest receivable	10,726		13,568		Interest receivable	12,538		11,823
Due from counterparties	Due from counterparties	2,842		2,327		Due from counterparties	5,789		4,565
Derivative assets, at fair value	Derivative assets, at fair value	94		161		Derivative assets, at fair value	1,748		105
Other assets	Other assets	46,676		3,152		Other assets	3,734		45,364
Total Assets (1)	Total Assets (1)	$	2,829,344	$	3,336,009	Total Assets (1)	$	2,791,249	$	2,825,700

Liabilities and Equity:	Liabilities and Equity:					Liabilities and Equity:
Liabilities:	Liabilities:					Liabilities:
Repurchase agreements, net	Repurchase agreements, net	$	483,268	$	356,923	Repurchase agreements, net	$	555,076	$	617,189
Convertible senior unsecured notes, net	Convertible senior unsecured notes, net	126,632		170,797		Convertible senior unsecured notes, net	109,661		119,168
Securitized debt, net ($1,365,494 and $1,553,722 at fair value and $185,666 and $215,753 held by affiliates, respectively)		1,970,513		2,446,012
Interest payable (includes $712 and $784 on securitized debt held by affiliates, respectively)		7,763		12,006
Securitized debt, net ($1,574,468 and $1,344,370 at fair value and $164,264 and $180,116 held by affiliates, respectively)						Securitized debt, net ($1,574,468 and $1,344,370 at fair value and $164,264 and $180,116 held by affiliates, respectively)	1,962,787		1,863,488
Interest payable (includes $699 and $699 on securitized debt held by affiliates, respectively)						Interest payable (includes $699 and $699 on securitized debt held by affiliates, respectively)	10,740		10,272

Due to counterparties	Due to counterparties	—		321		Due to counterparties	360		—
Derivative liability, at fair value	Derivative liability, at fair value	562		656		Derivative liability, at fair value	1,872		602
Accounts payable and accrued expenses	Accounts payable and accrued expenses	2,965		2,686		Accounts payable and accrued expenses	3,585		4,842
Payable to affiliate	Payable to affiliate	3,133		3,171		Payable to affiliate	3,978		1,925
Dividend payable	Dividend payable	3,651		3,649		Dividend payable	2,415		3,623
Other liabilities	Other liabilities	8,804		84,674		Other liabilities	437		262
Total Liabilities (2)	Total Liabilities (2)	2,607,291		3,080,895		Total Liabilities(2)	2,650,911		2,621,371

Commitments and contingencies		0		0
Commitments and contingencies (Note 15)						Commitments and contingencies (Note 15)	0		0

Stockholders’ Equity:	Stockholders’ Equity:					Stockholders’ Equity:
Common stock: $0.01 par value, 500,000,000 shares authorized, 60,859,913 and 60,812,701 outstanding, respectively		609		609
Common stock: $0.01 par value, 50,000,000 shares authorized, 6,038,010 and 6,038,010 outstanding, respectively(3)						Common stock: $0.01 par value, 50,000,000 shares authorized, 6,038,010 and 6,038,010 outstanding, respectively(3)	60		60
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—		—		Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—		—
Treasury stock, at cost, 100,000 and 100,000 shares held, respectively		(578)		(578)
Treasury stock, at cost, 57,981 and 57,981 shares held, respectively						Treasury stock, at cost, 57,981 and 57,981 shares held, respectively	(1,665)		(1,665)
Additional paid-in capital(3)	Additional paid-in capital(3)	917,963		915,458		Additional paid-in capital(3)	918,974		918,695
Retained earnings (accumulated deficit)	Retained earnings (accumulated deficit)	(707,808)		(660,377)		Retained earnings (accumulated deficit)	(777,095)		(723,981)
Total Stockholders’ Equity	Total Stockholders’ Equity	210,186		255,112		Total Stockholders’ Equity	140,274		193,109
Non-controlling interest	Non-controlling interest	11,867		2		Non-controlling interest	64		11,220
Total Equity	Total Equity	222,053		255,114		Total Equity	140,338		204,329
Total Liabilities and Equity	Total Liabilities and Equity	$	2,829,344	$	3,336,009	Total Liabilities and Equity	$	2,791,249	$	2,825,700

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands — except share and per share data)

(Unaudited)


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021
(1) Assets of consolidated VIEs included in the total assets above:	(1) Assets of consolidated VIEs included in the total assets above:					(1) Assets of consolidated VIEs included in the total assets above:
Cash and cash equivalents	Cash and cash equivalents	$	9,245	$	—	Cash and cash equivalents	$	—	$	266
Restricted cash	Restricted cash	260		76,132		Restricted cash	257		260
Residential Whole Loans, at fair value ($949,417 and $1,008,782 pledged as collateral, at fair value, respectively)		949,417		1,008,782
Residential Bridge Loans ($5,960 and $11,858 at fair value and $5,960 and $12,960 pledged as collateral, respectively)		5,960		12,960
Residential whole loans, at fair value ($1,195,853 and $1,023,502 pledged as collateral, at fair value, respectively)						Residential whole loans, at fair value ($1,195,853 and $1,023,502 pledged as collateral, at fair value, respectively)	1,195,853		1,023,502
Residential bridge loans, at fair value ($5,095 and $5,207 pledged as collateral, at fair value, respectively)						Residential bridge loans, at fair value ($5,095 and $5,207 pledged as collateral, at fair value, respectively)	5,095		5,207
Securitized commercial loans, at fair value	Securitized commercial loans, at fair value	1,377,005		1,605,335		Securitized commercial loans, at fair value	1,243,371		1,355,808
Commercial Loans, at fair value ($14,362 and $68,466 pledged as collateral, at fair value, respectively)		14,362		68,466
Commercial loans, at fair value ($14,398 and $14,362 pledged as collateral, at fair value, respectively)						Commercial loans, at fair value ($14,398 and $14,362 pledged as collateral, at fair value, respectively)	14,398		14,362
Investment related receivable	Investment related receivable	24,224		27,987		Investment related receivable	11,906		22,087
Interest receivable	Interest receivable	9,433		10,936		Interest receivable	11,506		10,572
Other assets		80		80

Total assets of consolidated VIEs	Total assets of consolidated VIEs	$	2,389,986	$	2,810,678	Total assets of consolidated VIEs	$	2,482,386	$	2,432,064

(2) Liabilities of consolidated VIEs included in the total liabilities above:	(2) Liabilities of consolidated VIEs included in the total liabilities above:					(2) Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, net ($1,365,494 and $1,553,722 at fair value and $185,666 and $215,753 held by affiliates, respectively)		$	1,970,513	$	2,446,012
Interest payable (includes $712 and $784 on securitized debt held by affiliates, respectively)		6,519		7,882
Securitized debt, net ($1,574,468 and $1,344,370 at fair value and $164,264 and $180,116 held by affiliates, respectively)						Securitized debt, net ($1,574,468 and $1,344,370 at fair value and $164,264 and $180,116 held by affiliates, respectively)	$	1,962,787	$	1,863,488
Interest payable (includes $699 and $699 on securitized debt held by affiliates, respectively)						Interest payable (includes $699 and $699 on securitized debt held by affiliates, respectively)	6,901		6,480
Accounts payable and accrued expenses	Accounts payable and accrued expenses	49		89		Accounts payable and accrued expenses	70		78
Other liabilities	Other liabilities	260		76,132		Other liabilities	257		260
Total liabilities of consolidated VIEs	Total liabilities of consolidated VIEs	$	1,977,341	$	2,530,115	Total liabilities of consolidated VIEs	$	1,970,015	$	1,870,306

(3) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

~~Table of Contents~~

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)


		For the three months ended September 30, 2021		For the three months ended September 30, 2020		For the nine months ended September 30, 2021		For the nine months ended September 30, 2020			For the three months ended June 30, 2022		For the three months ended June 30, 2021		For the six months ended June 30, 2022		For the six months ended June 30, 2021
Net Interest Income	Net Interest Income									Net Interest Income
Interest income	Interest income	$	40,141	$	43,970	$	127,353	$	130,310	Interest income	$	39,577	$	41,195	$	75,219	$	87,212
Interest expense (includes $3,564, $2,647, $10,919 and $5,203 on securitized debt held by affiliates, respectively)		32,978		33,853		104,352		94,376
Interest expense (includes $3,476, $3,662, $6,919 and $7,355 on securitized debt held by affiliates, respectively)										Interest expense (includes $3,476, $3,662, $6,919 and $7,355 on securitized debt held by affiliates, respectively)	33,342		34,605		64,701		71,374
Net Interest Income	Net Interest Income	7,163		10,117		23,001		35,934		Net Interest Income	6,235		6,590		10,518		15,838

Other Income (Loss)	Other Income (Loss)									Other Income (Loss)
Realized gain (loss), net		(1,526)		718		(7,367)		82,944
Realized loss, net										Realized loss, net	(45,661)		(116)		(33,516)		(5,841)

Unrealized gain (loss), net	Unrealized gain (loss), net	(6,003)		54,690		(39,271)		(225,381)		Unrealized gain (loss), net	16,185		(42,318)		(22,718)		(33,268)
Gain (loss) on derivative instruments, net		515		(88)		716		(197,922)
Gain on derivative instruments, net										Gain on derivative instruments, net	4,781		175		11,717		201
Other, net	Other, net	277		(31)		449		385		Other, net	(46)		200		(191)		172
Other Income (Loss)	Other Income (Loss)	(6,737)		55,289		(45,473)		(339,974)		Other Income (Loss)	(24,741)		(42,059)		(44,708)		(38,736)

Expenses	Expenses									Expenses
Management fee to affiliate	Management fee to affiliate	1,502		1,513		4,469		3,016		Management fee to affiliate	1,002		1,490		2,102		2,967
Financing fee		—		—		—		20,540

Other operating expenses	Other operating expenses	1,306		1,198		2,126		2,994		Other operating expenses	262		428		558		820
Transaction costs										Transaction costs	344		—		2,955		—
General and administrative expenses:	General and administrative expenses:									General and administrative expenses:
Compensation expense	Compensation expense	626		716		1,985		2,070		Compensation expense	130		651		628		1,359
Professional fees	Professional fees	947		827		2,864		3,848		Professional fees	1,552		1,038		2,808		1,917
Other general and administrative expenses	Other general and administrative expenses	747		1,138		2,793		2,263		Other general and administrative expenses	637		984		1,373		2,046
Total general and administrative expenses	Total general and administrative expenses	2,320		2,681		7,642		8,181		Total general and administrative expenses	2,319		2,673		4,809		5,322
Total Expenses	Total Expenses	5,128		5,392		14,237		34,731		Total Expenses	3,927		4,591		10,424		9,109

Income (loss) before income taxes		(4,702)		60,014		(36,709)		(338,771)
Loss before income taxes										Loss before income taxes	(22,433)		(40,060)		(44,614)		(32,007)
Income tax provision (benefit)	Income tax provision (benefit)	(218)		205		(19)		367		Income tax provision (benefit)	(46)		101		10		199
Net income (loss)		(4,484)		59,809		(36,690)		(339,138)
Net income (loss) attributable to non-controlling interest		(271)		2		(267)		6
Net income (loss) attributable to common stockholders and participating securities		$	(4,213)	$	59,807	$	(36,423)	$	(339,144)
Net loss										Net loss	(22,387)		(40,161)		(44,624)		(32,206)
Net income attributable to non-controlling interest										Net income attributable to non-controlling interest	—		2		3,616		4
Net loss attributable to common stockholders and participating securities										Net loss attributable to common stockholders and participating securities	$	(22,387)	$	(40,163)	$	(48,240)	$	(32,210)

Net income (loss) per Common Share — Basic		$	(0.07)	$	0.98	$	(0.60)	$	(6.02)
Net income (loss) per Common Share — Diluted		$	(0.07)	$	0.98	$	(0.60)	$	(6.02)
Net loss per Common Share — Basic(1)										Net loss per Common Share — Basic(1)	$	(3.71)	$	(6.61)	$	(8.00)	$	(5.31)
Net loss per Common Share — Diluted(1)										Net loss per Common Share — Diluted(1)	$	(3.71)	$	(6.61)	$	(8.00)	$	(5.31)

(1) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

~~Table of Contents~~

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Changes in Equity

(in thousands—except shares and share data)

(Unaudited)

Three Months Ended September 30, 2021
Common Stock Outstanding Additional
Paid-In Capital Retained
Earnings
(Accumulated Deficit) Treasury Stock Total Stockholders' Equity Non-Controlling Interest Total Equity
Shares Par
Balance at June 30, 2021 60,812,701 $ 609 $ 915,782 $ (699,920) $ (578) $ 215,893 $ 2 $ 215,895
Equity contributions — — — — — — 12,138 12,138
Equity component of convertible senior unsecured notes — — 2,060 — — 2,060 — 2,060
Exchange of phantom stock to common stock 47,212 — — — — — — —
Offering costs — — (68) — — (68) — (68)
Vesting of restricted stock — — 165 — — 165 — 165
Net loss — — — (4,213) — (4,213) (271) (4,484)
Dividends declared on non-controlling interest — — — — — — (2) (2)
Dividends declared on common stock — — 24 (3,675) — (3,651) — (3,651)
Balance at September 30, 2021 60,859,913 $ 609 $ 917,963 $ (707,808) $ (578) $ 210,186 $ 11,867 $ 222,053


	Three Months Ended June 30, 2022
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares(1)	Par
Balance at March 31, 2022	6,038,010	$	60	$	918,874	$	(752,263)	$	(1,665)	$	165,006	$	144	$	165,150


Equity distribution	—	—		—		—		—		—		(78)		(78)




Vesting of restricted stock	—	—		70		—		—		70		—		70

Net loss	—	—		—		(22,387)		—		(22,387)		—		(22,387)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		30		(2,445)		—		(2,415)		—		(2,415)
Balance at June 30, 2022	6,038,010	$	60	$	918,974	$	(777,095)	$	(1,665)	$	140,274	$	64	$	140,338

Three Months Ended September 30, 2020
Common Stock Outstanding Additional
Paid-In Capital Retained
Earnings
(Accumulated Deficit) Treasury Stock Total Stockholders' Equity Non-Controlling Interest Total Equity
Shares Par
Balance at June 30, 2020 59,458,617 $ 595 $ 911,488 $ (724,252) $ (578) $ 187,253 $ 2 $ 187,255
Exchange of convertible senior unsecured notes 1,354,084 14 3,574 — — 3,588 — 3,588
Vesting of restricted stock — — 182 — — 182 — 182
Net income — — — 59,807 — 59,807 2 59,809
Dividends declared on non-controlling interest — — — — — — (2) (2)
Dividends declared on common stock — — 14 (3,055) — (3,041) (3,041)
Balance at September 30, 2020 60,812,701 $ 609 $ 915,258 $ (667,500) $ (578) $ 247,789 $ 2 $ 247,791


	Three Months Ended June 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares(1)	Par
Balance at March 31, 2021	6,081,270	$	60	$	916,208	$	(656,091)	$	(578)	$	259,599	$	2	$	259,601





Vesting of restricted stock	—	—		106		—		—		106		—		106

Net income (loss)	—	—		—		(40,163)		—		(40,163)		2		(40,161)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		17		(3,666)		—		(3,649)		—		(3,649)
Balance at June 30, 2021	6,081,270	$	60	$	916,331	$	(699,920)	$	(578)	$	215,893	$	2	$	215,895

~~Table of Contents~~

Nine Months Ended September 30, 2021
Common Stock Outstanding Additional
Paid-In Capital Retained
Earnings
(Accumulated Deficit) Treasury Stock Total Stockholders' Equity Non-Controlling Interest
Shares Par Total
Balance at December 31, 2020 60,812,701 $ 609 $ 915,458 $ (660,377) $ (578) $ 255,112 $ 2 $ 255,114
Equity contributions — — — — — — 12,138 12,138
Equity component of convertible senior unsecured notes — — 2,060 — — 2,060 — 2,060
Exchange of phantom stock to common stock 47,212 — — — — — — —
Offering costs — — (68) — — (68) — (68)
Vesting of restricted stock — — 454 — — 454 — 454
Net loss — — — (36,423) — (36,423) (267) (36,690)
Dividends declared on non-controlling interest — — — — — — (6) (6)
Dividends declared on common stock — — 59 (11,008) — (10,949) — (10,949)
Balance at September 30, 2021 60,859,913 $ 609 $ 917,963 $ (707,808) $ (578) $ 210,186 $ 11,867 $ 222,053


	Six Months Ended June 30, 2022
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares(1)	Par												Total Equity
Balance at December 31, 2021	6,038,010	$	60	$	918,695	$	(723,981)	$	(1,665)	$	193,109	$	11,220	$	204,329


Equity distribution	—	—		—		—		—		—		(14,768)		(14,768)




Vesting of restricted stock	—	—		235		—		—		235		—		235

Net income (loss)	—	—		—		(48,240)		—		(48,240)		3,616		(44,624)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(4)		(4)
Dividends declared on common stock	—	—		44		(4,874)		—		(4,830)		—		(4,830)
Balance at June 30, 2022	6,038,010	$	60	$	918,974	$	(777,095)	$	(1,665)	$	140,274	$	64	$	140,338

Nine Months Ended September 30, 2020
Common Stock Outstanding Additional
Paid-In Capital Retained
Earnings
(Accumulated Deficit) Treasury Stock Total Stockholders' Equity Non-Controlling Interest
Shares Par Total
Balance at December 31, 2019 53,523,876 $ 535 $ 889,227 $ (325,301) $ — $ 564,461 $ — $ 564,461
Proceeds from public offerings of common stock 6,034,741 60 22,297 — — 22,357 — 22,357
Offering costs — — (371) — — (371) — (371)
Proceeds from non-controlling interest, net of offering costs — — — — — — 2 2
Exchange of convertible senior notes 1,354,084 14 3,574 — — 3,588 — 3,588
Vesting of restricted stock — — 517 — — 517 — 517
Treasury stock (100,000) — — — (578) (578) — (578)
Net loss — — — (339,144) — (339,144) 6 (339,138)
Dividends declared on non-controlling interest — — — — — — (6) (6)
Dividends declared on common stock — — 14 (3,055) — (3,041) — (3,041)
Balance at September 30, 2020 60,812,701 $ 609 $ 915,258 $ (667,500) $ (578) $ 247,789 $ 2 $ 247,791


	Six Months Ended June 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares(1)	Par												Total Equity
Balance at December 31, 2020	6,081,270	$	60	$	916,007	$	(660,377)	$	(578)	$	255,112	$	2	$	255,114






Vesting of restricted stock	—	—		289		—		—		289		—		289

Net income (loss)	—	—		—		(32,210)		—		(32,210)		4		(32,206)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(4)		(4)
Dividends declared on common stock	—	—		35		(7,333)		—		(7,298)		—		(7,298)
Balance at June 30, 2021	6,081,270	$	60	$	916,331	$	(699,920)	$	(578)	$	215,893	$	2	$	215,895

(1) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (in thousands)

(Unaudited)


		For the nine months ended September 30, 2021		For the nine months ended September 30, 2020			For the six months ended June 30, 2022		For the six months ended June 30, 2021
Cash flows from operating activities:	Cash flows from operating activities:					Cash flows from operating activities:
Net loss	Net loss	$	(36,690)	$	(339,138)	Net loss	$	(44,624)	$	(32,206)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:						Adjustments to reconcile net loss to net cash provided by operating activities:
Premium amortization and (discount accretion), net	Premium amortization and (discount accretion), net	145		5,291		Premium amortization and (discount accretion), net	2,599		204
Interest income earned added to principal of investments	Interest income earned added to principal of investments	(310)		(647)		Interest income earned added to principal of investments	(75)		(278)
Amortization of deferred financing costs	Amortization of deferred financing costs	3,935		2,165		Amortization of deferred financing costs	1,298		2,660
Amortization of discount on convertible senior unsecured notes	Amortization of discount on convertible senior unsecured notes	712		830		Amortization of discount on convertible senior unsecured notes	439		484
Restricted stock amortization	Restricted stock amortization	453		517		Restricted stock amortization	235		288

Interest payments and basis recovered on MAC interest rate swaps		—		202
Premium on purchase of Residential Whole Loans		(10,281)		(3,858)

Premium on purchase of residential whole loans						Premium on purchase of residential whole loans	(6,619)		(274)

Unrealized loss, net	Unrealized loss, net	39,271		225,381		Unrealized loss, net	22,718		33,268
Realized (gain) loss on extinguishment of convertible senior notes	Realized (gain) loss on extinguishment of convertible senior notes	1,337		(1,258)		Realized (gain) loss on extinguishment of convertible senior notes	132		(240)
Realized (gain) loss on sale of real estate owned ("REO")		(54)		680
Unrealized loss on derivative instruments, net		97		4,122
Realized gain on sale of real estate owned ("REO")						Realized gain on sale of real estate owned ("REO")	(12,198)		—
Unrealized gain on derivative instruments, net						Unrealized gain on derivative instruments, net	(157)		(8)

Realized (gain) loss on investments, net		6,084		(82,366)
Loss on derivatives, net		—		13,133
Realized loss on investments, net						Realized loss on investments, net	45,582		6,081
Gain on derivatives, net						Gain on derivatives, net	(732)		—

Changes in operating assets and liabilities:	Changes in operating assets and liabilities:					Changes in operating assets and liabilities:
Interest receivable	Interest receivable	2,496		5,312		Interest receivable	(715)		2,022
Investment related receivable	Investment related receivable	(704)		—		Investment related receivable	—		269
Other assets	Other assets	(973)		(1,933)		Other assets	(853)		(787)
Interest payable	Interest payable	(4,243)		(6,161)		Interest payable	468		(1,358)
Accounts payable and accrued expenses	Accounts payable and accrued expenses	60		804		Accounts payable and accrued expenses	(1,255)		(799)
Payable to affiliate	Payable to affiliate	(38)		1,107		Payable to affiliate	2,053		(1,599)
Other liabilities	Other liabilities	1		20,540		Other liabilities	179		145
Net cash provided by (used in ) in operating activities		1,298		(155,277)
Net cash provided by operating activities						Net cash provided by operating activities	8,475		7,872

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Purchase of securities	Purchase of securities	—		(320,996)		Purchase of securities	(39,952)		—
Proceeds from sale of securities	Proceeds from sale of securities	—		2,216,830		Proceeds from sale of securities	42,287		—
Proceeds from sale of REO	Proceeds from sale of REO	738		2,491		Proceeds from sale of REO	54,681		—
Principal repayments and basis recovered on securities	Principal repayments and basis recovered on securities	14,685		32,401		Principal repayments and basis recovered on securities	2,543		2,667
Purchase of Residential Whole Loans		(233,041)		(109,480)
Proceeds from sale of Residential Whole Loans		—		144,258
Principal repayments on Residential Whole Loans		313,661		210,097
Purchase of residential whole loans						Purchase of residential whole loans	(405,298)		(9,799)

Principal repayments on residential whole loans						Principal repayments on residential whole loans	165,236		226,734

Principal repayments on commercial loans	Principal repayments on commercial loans	103,272		37,728		Principal repayments on commercial loans	4		303

Principal repayments on securitized commercial loans	Principal repayments on securitized commercial loans	354,202		211,205		Principal repayments on securitized commercial loans	—		139,657

Principal repayments on Residential Bridge Loans		7,052		16,759
Principal repayments on residential bridge loans						Principal repayments on residential bridge loans	366		6,192

Premium for credit default swaps, net		—		(14,028)

Net settlements of TBAs	Net settlements of TBAs	—		(2,430)		Net settlements of TBAs	732		—

Interest payments and basis recovered on MAC interest rate swaps		—		(202)

Due from counterparties	Due from counterparties	50		2,160		Due from counterparties	150		—

Premium for interest rate swaptions, net		—		80
Net cash provided by investing activities		560,619		2,426,873

Net cash (used in) provided by investing activities						Net cash (used in) provided by investing activities	(179,251)		365,754

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Proceeds from issuance of common stock		—		22,357

Payment of offering costs	Payment of offering costs	(86)		(374)		Payment of offering costs	(2)		(24)
Repurchase of common stock		—		(578)

Proceeds from issuance of convertible senior unsecured notes		86,250		—

Payments on extinguishment of convertible senior unsecured notes	Payments on extinguishment of convertible senior unsecured notes	(128,645)		—		Payments on extinguishment of convertible senior unsecured notes	(10,690)		(6,315)

Proceeds from repurchase agreement borrowings						Proceeds from repurchase agreement borrowings	2,838,689		1,482,074
Repayments of repurchase agreement borrowings						Repayments of repurchase agreement borrowings	(2,900,802)		(1,475,438)

Proceeds from securitized debt						Proceeds from securitized debt	397,934		—
Repayments of securitized debt						Repayments of securitized debt	(156,843)		(351,428)

Payments made for deferred financing costs						Payments made for deferred financing costs	—		(10)
Due from counterparties, net						Due from counterparties, net	(1,374)		(1,121)
Due to counterparties, net						Due to counterparties, net	360		100
Decrease in other liabilities						Decrease in other liabilities	(4)		(53,157)

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Continued) (in thousands)

(Unaudited)

For the nine months ended September 30, 2021 For the nine months ended September 30, 2020
Proceeds from offering to non-controlling interest, net of offering costs — 2
Proceeds from repurchase agreement borrowings 2,527,530 9,149,204
Repayments of repurchase agreement borrowings (2,403,068) (11,615,203)
Proceeds from securitized debt — 460,787
Repayments of securitized debt (597,221) (366,828)
Payments made for deferred financing costs (2,536) (3,145)
Due from counterparties, net (565) 95,595
Due to counterparties, net (321) (692)
Increase (decrease) in other liabilities (75,873) 42,634
Dividends paid on common stock (10,947) (16,592)
Dividends paid to non-controlling interest (4) (4)
Net cash used in financing activities (605,486) (2,232,837)
Net (decrease) increase in cash, cash equivalents and restricted cash (43,569) 38,759
Cash, cash equivalents and restricted cash, beginning of period 107,745 84,279
Cash, cash equivalents and restricted cash, end of period $ 64,176 $ 123,038
Supplemental disclosure of operating cash flow information:
Interest paid $ 87,658 $ 90,885
Income taxes paid $ 192 $ 810
Supplemental disclosure of non-cash financing/investing activities:
Underwriting and offering costs payable $ 6 $ —
Principal payments of securities, not settled $ — $ 44
Assets of deconsolidated VIE $ — $ (150,804)
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 $ 3,651 $ 3,041
Dividends to non-controlling interest, not paid $ 2 $ 2
Principal payments of Residential Whole Loans, not settled $ 22,621 $ 16,097
Principal payments of Residential Bridge Loans, not settled $ 1,715 $ 2,720
Other assets - Transfer of Bridge Loans to REO $ 752 $ 419
Other assets - Transfer of Commercial Loans to REO $ 30,345 $ —
Other assets - Contribution of REO from non-controlling interest $ 12,138 $ —
Financing fee payable $ — $ (20,540)
Exchange of convertible senior notes for common stock $ — $ 3,588
Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents $ 63,916 $ 27,459
Restricted cash 260 95,579
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows $ 64,176 $ 123,038


	For the six months ended June 30, 2022		For the six months ended June 30, 2021
Equity distributions to non-controlling interest	(14,768)		—
Dividends paid on common stock	(6,038)		(7,298)
Dividends paid to non-controlling interest	(4)		(4)
Net cash provided by (used in) financing activities	146,458		(412,621)



Net decrease in cash, cash equivalents and restricted cash	(24,318)		(38,995)
Cash, cash equivalents and restricted cash, beginning of period	40,453		107,745
Cash, cash equivalents and restricted cash, end of period	$	16,135	$	68,750

Supplemental disclosure of operating cash flow information:
Interest paid	$	50,791	$	58,531
Income taxes paid	$	—	$	173
Supplemental disclosure of non-cash financing/investing activities:











Dividends and distributions declared, not paid	$	2,415	$	3,649

Principal payments of residential whole loans, not settled	$	11,906	$	28,695
Principal payments of residential bridge loans, not settled	$	46	$	—

Other assets - transfer of bridge loans to REO	$	—	$	684





Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents	$	15,878	$	45,775
Restricted cash	257		22,975
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	16,135	$	68,750

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(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; and references to “Residential Whole Loans,” “Residential Bridge Loans” and “Commercial Loans” (collectively “Whole Loans”) refer to individual mortgage loans secured by single family, multifamily and commercial properties.

Note 1 — Organization

Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “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’s current portfolio is comprised of Non-Qualified ("Non-QM") Residential Whole Loans, ~~("Non-QM"),~~Non-Agency RMBS, Commercial Loans, Non-Agency CMBS and to a lesser extent Agency RMBS, ~~Non-Agency RMBS, Residential Bridge Loans,~~ GSE Risk Transfer Securities, Residential Bridge Loans, and asset-backed securities (“ABS”) secured by a portfolio of private student loans. The Company’s investment strategy is based on Western Asset Management Company, LLC’s (the “Manager”) perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time. The Company's current investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. The Manager will vary the allocation among ~~various~~these asset classes subject to maintaining the Company’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940, as amended (the “1940 Act”). These restrictions limit the Company’s ability to invest in ~~non-qualifying~~non-qualified MBS, non-real estate assets and/or assets which are not secured by real estate. Accordingly, the Company’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.~~. The Company operates and has elected to be taxed as a real estate investment trust or “REIT” commencing with its taxable year ended December 31, 2012.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in ~~conformity~~accordance with accounting principles generally accepted ~~accounting principles~~ in the United States of America ~~(“GAAP”~~("GAAP") for interim financial reporting ~~in accordance with Article 10 of Regulation S-X~~ and the instructions to Form ~~10-Q. In the opinion~~10-Q and Rule 10-01 of ~~management,~~Regulation S-X. For all ~~adjustments (which include only normal recurring adjustments) necessary~~periods presented, all per share amounts and common shares outstanding have been ~~made~~adjusted on a retroactive basis to ~~state fairly~~reflect the ~~Company’s financial position, results of operations and cash flows.~~Company's one-for-ten reverse stock split, which was effected on July 11, 2022. The results of operations for the period ended ~~September~~June 30, ~~2021,~~2022, are not necessarily indicative of the results to be expected for the full year or any future period. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the SEC on March ~~5, 2021.~~

8, 2022.

The consolidated financial statements include the accounts of the Company, its wholly-owned and majority-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.

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Reverse Stock Split

Our amended and restated certificate of incorporation as of June 30, 2022, authorizes the Company to issue a total of 600,000,000 shares of capital stock, consisting of 500,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share.

Following approval by the Company’s stockholders of a reverse stock split between a range of 1-for-5 and 1-for-10 of currently outstanding shares of the Company’s common stock, on June 30, 2022, the Company's board of directors selected a one-for-ten reverse stock split ratio. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and the total number of issued and outstanding shares from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Our stockholders' equity, in the aggregate, will remain unchanged. Per share net income or loss will be increased because there will be fewer shares of common stock outstanding. The common stock held in treasury will be reduced in proportion to the Reverse Stock Split Ratio. The Company does not anticipate that any other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, will arise as a result of the Reverse Stock Split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the Effective Date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

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 most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are 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:~~include; the design of the VIE, including its capitalization ~~structure;~~structure, subordination of ~~interests;~~interests, payment ~~priority;~~priority, relative share of interests held across various classes within the VIE’s capital ~~structure;~~structure, and the reasons why the interests are held by the Company.

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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~~

Beginning with the quarter ended March 31, 2020, the COVID-19 pandemic, created extensive disruptions to the global economy and the lives of individuals throughout the world. Governments and businesses have taken and are continuing to take unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including vaccination efforts, face covering mandates, 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 pandemic and related efforts to contain the spread of 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 in early 2020 specifically in mortgage markets had an adverse impact on our book value, liquidity, results of operations, and financial position. Although market conditions have improved since the first quarter of 2020, the full

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~~impact of COVID-19 on the mortgage REIT industry, credit markets, and consequently, on the Company's financial condition and results of operations for future periods remain uncertain.~~

While the roll out of vaccines and booster vaccines offer a prospective timeline for recovery, our Manager's view is that it will take some time, if ever, for economic and social conditions to fully rebound. Our Manager's outlook is that (i) the near-term, ii) COVID-19 continues to impact global populations, but the worst of the delta variant is behind us, iii) U.S. and global grow is decelerating from high levels, iv) monetary accommodation will be reduced from crisis levels, v) the bar for the Federal Reserve tightening remains high and is unlikely to be met in 2022, vi) global fiscal stimulus will be sharply reduced, vii) inflation remains challenging but will ease meaningfully during 2022, and viii)rates should remain range-bound in an estimated band of 1.25%-1.75% for 10-year U.S. treasuries.

Significant Accounting Policies

There have been no significant changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, ~~2020, other than the significant accounting policy disclosed below.~~

~~Real Estate Owned~~

REO represents real estate property acquired by the Company through foreclosure and it is classified as held for sale. Upon completion of the foreclosure, the Company initially records the REO at fair value less estimated costs to sell the property. In subsequent periods, REO is reported at the lower of the current carrying amount or fair value less estimated selling costs and it is classified in "Other assets" in the Consolidated Balance Sheets. Gains/losses recognized on foreclosure as well as realized gains/losses on the disposition of REO are reported by the Company in "Realized gain (loss), net" in the Consolidated Statements of Operations.

2021.

Recently adopted accounting pronouncements

Description

Adoption ~~Date~~

~~Effect 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 clarified 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.

~~January 1, 2021~~

~~The adoption of this standard did not have a material impact on the consolidated financial statements.~~

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~~Recently issued accounting pronouncements~~

~~Description~~

~~Effective~~ Date

Effect on 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.

January 1, ~~2022.~~2022

The ~~Company evaluated the impact~~adoption of this standard ~~may have on its consolidated financial statements and does~~did not ~~believe it will~~ have a material impact on ~~its~~the Company's consolidated financial statements due to the limited nature of such transactions.

Recently issued accounting pronouncements

Description

Effective Date

Effect on 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 provided 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. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." The amendments in this Update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

March 12, 2020 through December 31, 2022

The Company may elect to adopt the amendments in ASU 2020-04 and ASU 2021-1 at any time after March 12, 2020 but not later than December 31, 2022. Currently, the Company's contracts that are referenced to LIBOR have not been affected by the amendments in these updates. The Company is in the process of evaluating the guidance and the other optional expedients, and the effect on the ~~company's~~Company's financial statements has not yet been ~~determined~~determined.

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Note 3 — Fair Value of Financial Instruments

The following tables present the Company’s financial instruments carried at fair value as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, based upon the valuation hierarchy (dollars in thousands):


		September 30, 2021									June 30, 2022
		Fair Value									Fair Value
		Level I		Level II		Level III		Total			Level I		Level II		Level III		Total
Assets	Assets									Assets

Agency RMBS Interest-Only Strips	Agency RMBS Interest-Only Strips	$	—	$	—	$	134	$	134	Agency RMBS Interest-Only Strips	$	—	$	—	$	57	$	57
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		1,208		1,208		Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		728		728
Subtotal Agency MBS	Subtotal Agency MBS	—		—		1,342		1,342		Subtotal Agency MBS	—		—		785		785

Non-Agency CMBS	Non-Agency CMBS	—		119,861		14,789		134,650		Non-Agency CMBS	—		93,096		—		93,096
Non-Agency RMBS	Non-Agency RMBS	—		25,731		—		25,731		Non-Agency RMBS	—		31,017		—		31,017
Non-Agency RMBS Interest-Only Strips	Non-Agency RMBS Interest-Only Strips	—		—		2,280		2,280		Non-Agency RMBS Interest-Only Strips	—		—		1,181		1,181

Subtotal Non-Agency MBS	Subtotal Non-Agency MBS	—		145,592		17,069		162,661		Subtotal Non-Agency MBS	—		124,113		1,181		125,294

Other securities	Other securities	—		52,093		—		52,093		Other securities	—		40,534		—		40,534
Total mortgage-backed securities and other securities	Total mortgage-backed securities and other securities	—		197,685		18,411		216,096		Total mortgage-backed securities and other securities	—		164,647		1,966		166,613

Residential Whole Loans	Residential Whole Loans	—		—		949,417		949,417		Residential Whole Loans	—		—		1,195,853		1,195,853
Residential Bridge Loans	Residential Bridge Loans	—		—		5,960		5,960		Residential Bridge Loans	—		—		5,095		5,095
Securitized commercial loans	Securitized commercial loans	—		—		1,377,005		1,377,005		Securitized commercial loans	—		—		1,243,371		1,243,371
Commercial Loans	Commercial Loans	—		—		128,766		128,766		Commercial Loans	—		—		128,421		128,421
Derivative assets	Derivative assets	—		94		—		94		Derivative assets	—		1,748		—		1,748
Total Assets	Total Assets	$	—	$	197,779	$	2,479,559	$	2,677,338	Total Assets	$	—	$	166,395	$	2,574,706	$	2,741,101

Liabilities	Liabilities									Liabilities
Derivative liabilities	Derivative liabilities	$	—	$	562	$	—	$	562	Derivative liabilities	$	—	$	1,872	$	—	$	1,872
Securitized debt	Securitized debt	—		1,350,574		14,920		1,365,494		Securitized debt	—		1,559,549		14,919		1,574,468

Total Liabilities	Total Liabilities	$	—	$	1,351,136	$	14,920	$	1,366,056	Total Liabilities	$	—	$	1,561,421	$	14,919	$	1,576,340

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		December 31, 2020									December 31, 2021
		Fair Value									Fair Value
		Level I		Level II		Level III		Total			Level I		Level II		Level III		Total
Assets	Assets									Assets

Agency RMBS Interest-Only Strips	Agency RMBS Interest-Only Strips	$	—	$	—	$	143	$	143	Agency RMBS Interest-Only Strips	$	—	$	—	$	114	$	114
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		1,565		1,565		Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		1,058		1,058
Subtotal Agency MBS	Subtotal Agency MBS	—		—		1,708		1,708		Subtotal Agency MBS	—		—		1,172		1,172

Non-Agency CMBS	Non-Agency CMBS	—		155,093		8,988		164,081		Non-Agency CMBS	—		99,630		5,728		105,358
Non-Agency RMBS	Non-Agency RMBS	—		—		21,416		21,416		Non-Agency RMBS	—		25,652		—		25,652
Non-Agency RMBS Interest-Only Strips	Non-Agency RMBS Interest-Only Strips	—		—		3,965		3,965		Non-Agency RMBS Interest-Only Strips	—		—		2,117		2,117

Subtotal Non-Agency MBS	Subtotal Non-Agency MBS	—		155,093		34,369		189,462		Subtotal Non-Agency MBS	—		125,282		7,845		133,127

Other securities	Other securities	—		40,161		8,593		48,754		Other securities	—		51,648		—		51,648
Total mortgage-backed securities and other securities	Total mortgage-backed securities and other securities	—		195,254		44,670		239,924		Total mortgage-backed securities and other securities	—		176,930		9,017		185,947

Residential Whole Loans	Residential Whole Loans	—		—		1,008,782		1,008,782		Residential Whole Loans	—		—		1,023,502		1,023,502
Residential Bridge Loans	Residential Bridge Loans	—		—		12,813		12,813		Residential Bridge Loans	—		—		5,428		5,428
Securitized commercial loan	Securitized commercial loan	—		—		1,605,335		1,605,335		Securitized commercial loan	—		—		1,355,808		1,355,808
Commercial Loans	Commercial Loans	—		—		310,523		310,523		Commercial Loans	—		—		130,572		130,572
Derivative assets	Derivative assets	—		161		—		161		Derivative assets	—		105		—		105
Total Assets	Total Assets	$	—	$	195,415	$	2,982,123	$	3,177,538	Total Assets	$	—	$	177,035	$	2,524,327	$	2,701,362

Liabilities	Liabilities									Liabilities
Derivative liabilities	Derivative liabilities	$	—	$	656	$	—	$	656	Derivative liabilities	$	—	$	602	$	—	$	602
Securitized debt	Securitized debt	—		1,538,304		15,418		1,553,722		Securitized debt	—		1,329,451		14,919		1,344,370
Total Liabilities	Total Liabilities	$	—	$	1,538,960	$	15,418	$	1,554,378	Total Liabilities	$	—	$	1,330,053	$	14,919	$	1,344,972

~~When available, the Company uses quoted market prices to determine~~As described in Note 2, the fair value of ~~an asset or liability. If~~financial instruments that are recorded at fair value is determined by the Manager in accordance with ASC 820, "Fair Value Measurements and Disclosures." When possible, the Company determines fair value using independent data sources. ASC 820 establishes a hierarchy that prioritizes the inputs to valuation techniques giving the highest priority to readily available unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements) when market prices are not readily 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.reliable.

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.

Residential whole loans and residential bridge loans

In determining the fair value of the Company's residential whole loans and residential bridge loans, the Company considers data such as; loan origination information, borrower credit information, loan servicing data (as available), forward interest rates, general economic conditions, home price index forecasts, and monthly valuations of the underlying properties. The assumptions considered most significant to the determination of the fair value of the Company's mortgage loans include market-implied discount rates, projections of default rates, delinquency rates, prepayment rates and loss severity. Projections of default and prepayment rates are impacted by other variables such as re-performance rates and timeline to liquidation. The

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Company uses loan level data and macro-economic inputs to generate loss adjusted cash flows and other information in determining the fair value of its mortgage loans, and with the inherent uncertainty of such valuation, the fair values established for whole loans and 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 mortgage loans, as such, the Company classifies its residential whole loans and residential bridge loans as Level III.

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. 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

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~~Manager~~ 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 and SOFR, 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 assumptions made by the independent third party pricing service includes the market discount rate, default assumptions and loss severity. Other inputs and assumptions relevant to the pricing of Residential Whole Loans include FICO scores and prepayment speeds.

~~During the quarter ended September 30, 2021, the independent third party pricing service used a combination of recent loan trades and recent residential whole~~Commercial loans ~~securitization transactions adjusted for deal cost and liquidity premium, to form their opinion on the appropriate discount rate.~~

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 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~~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.~~executions. Their valuation methodology incorporates commonly used market pricing methods, ~~which include~~tuned to consider the ~~inputs considered~~ most significant inputs and weighted assumptions to determine 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,~~estimated rates of prepayments, weighted collateral loss estimates, and the loss severity ~~cash flows~~of collateral losses, along with more definable underwriting assumptions, such as; credit documentation, initial loan to value of collateral, geographic diversity, and ~~probability weighted loss scenarios.~~realized prepayment speeds. The Company reviews the analysis provided by the pricing service as well as the key ~~assumptions. Due~~assumptions made available to the Company by the Manager, with a primary focus on the rationale for weighted valuation probabilities relating to unobservable inputs, such as, the market discount rate and weighted average life, and due to inherent uncertainty of such ~~valuation,~~valuations, 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~~larger, more actively traded market existed for these individual loans. Accordingly, the Company's ~~commercial~~ loans are classified as a Level III.

Securitized commercial loans

Values for the Company’s securitized commercial loans are based on the collateralized financing entity ("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 loans' valuation, the Company classifies its securitized commercial loans as Level III.

Securitized debt

~~Table of Contents~~

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~~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

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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. No credit valuation adjustment was made in determining the fair value of interest rate derivatives and/or futures contracts for the periods ended ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. See Note 8 for more information.

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~~ 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

Fair Value at Range
September 30, 2021 Valuation Technique Unobservable Input Minimum Maximum Weighted Average

Residential Whole Loans $ 949,417 Discounted Cash Flow Market Discount Rate 2.0 % 7.5 % 3.2 %
Weighted Average Life 1.1 8.6 2.9
Residential Bridge Loans $ 5,960 Discounted Cash Flow Market Discount Rate 9.7 % 26.3 % (1) 16.8 %
Weighted Average Life 0.3 3.3 2.2
Commercial Loans $ 128,766 Discounted Cash Flow Market Discount Rate 4.2 % 22.0 % 9.1 %
Weighted Average Life 0.8 2.4 1.3


	Fair Value at				Range
	June 30, 2022		Valuation Technique	Unobservable Input	Minimum		Maximum		Weighted Average






Residential whole loans	$	1,195,853	Discounted Cash Flow	Market Discount Rate	5.5	%	7.7	%	6.0	%
				Weighted Average Life	1.8		10.6		4.7
Residential bridge loans	$	5,095	Discounted Cash Flow	Market Discount Rate	12.9	%	35.7	%	16.4	%
				Weighted Average Life	0.4		4.1		2.9



Commercial loans	$	128,421	Discounted Cash Flow	Market Discount Rate	7.1	%	24.2	%	11.4	%
				Weighted Average Life	0.4		3.8		1.3


	Fair Value at				Range
	December 31, 2021		Valuation Technique	Unobservable Input	Minimum		Maximum			Weighted Average






Residential whole loans	$	1,023,502	Discounted Cash Flow	Market Discount Rate	2.6	%	7.5	%		3.5	%
				Weighted Average Life	1.4		8.9			3.1
Residential bridge loans	$	5,428	Discounted Cash Flow	Market Discount Rate	9.8	%	23.1	%	(1)	17.2	%
				Weighted Average Life	0.3		3.6			2.4

Commercial loans	$	130,572	Discounted Cash Flow	Market Discount Rate	4.5	%	21.7	%		9.3	%
				Weighted Average Life	0.5		2.8			1.2

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Fair Value at Range
December 31, 2020 Valuation Technique Unobservable Input Minimum Maximum Weighted Average

Residential Whole Loans $ 1,008,782 Discounted Cash Flow Market Discount Rate 2.1 % 7.5 % 4.1 %
Weighted Average Life 1.5 8.4 2.9
Residential Bridge Loans $ 12,813 Discounted Cash Flow Market Discount Rate 8.0 % 35.2 % (1) 18.0 %
Weighted Average Life 0.3 2.6 1.3
Commercial Loans $ 310,523 Discounted Cash Flow Market Discount Rate 6.3 % 18.4 % 10.5 %
Weighted Average Life 0.5 1.9 0.7

(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 discount rate or yield to maturity.

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:

Three months ended September 30, 2021
$ in thousands Agency MBS Non-Agency MBS Residential
Whole Loans Residential
Bridge Loans Commercial Loans Securitized
commercial
loans Securitized debt
Beginning balance $ 1,501 $ 11,803 $ 801,503 $ 7,471 $ 267,203 $ 1,595,077 $ 14,937
Transfers into Level III from Level II — 5,683 — — — — —
Transfers from Level III into Level II — — — — — — —
Purchases — — 232,993 — — — —
Transfers to REO — — — (68) (30,000) — —
Loan modifications / capitalized interest — — 34 — — — —
Principal repayments — — (80,607) (1,575) (102,969) (214,545) —
Total net gains / losses included in net income
Realized gains/(losses), net on assets — — — (3) — — —
Unrealized gains/(losses), net on assets(1)
(93) (399) (3,074) 154 (5,495) (9,617) —
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — 1,103
Premium and discount amortization, net (66) (18) (1,432) (19) 27 6,090 (1,120)
Ending balance $ 1,342 $ 17,069 $ 949,417 $ 5,960 $ 128,766 $ 1,377,005 $ 14,920
Unrealized gains/(losses), net on assets held at the end of the period(1)
$ (93) $ (399) $ (1,055) $ 36 $ (5,479) $ (12,336) $ —
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$ — $ — $ — $ — $ — $ — $ (1,121)


	Three months ended June 30, 2022
$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loans		Securitized debt
Beginning balance	$	940	$	6,659	$	1,002,710	$	5,350	$	128,495	$	1,288,943	$	14,919
Transfers into Level III from Level II	—		—		—		—		—		—		—
Transfers from Level III into Level II	—		(5,437)		—		—		—		—		—
Purchases	—		—		292,168		—		—		—		—




Loan modifications / capitalized interest	—		—		10		—		—		—		—
Principal repayments	—		—		(60,548)		(145)		—		—		—
Total net gains / losses included in net income



Unrealized gains/(losses), net on assets(1)	(110)		18		(37,165)		(110)		(74)		(52,218)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		988
Premium and discount amortization, net	(45)		(59)		(1,322)		—		—		6,646		(988)
Ending balance	$	785	$	1,181	$	1,195,853	$	5,095	$	128,421	$	1,243,371	$	14,919

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(110)	$	89	$	(34,740)	$	(33)	$	(74)	$	(52,218)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	(988)


	Three months ended June 30, 2021
$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	1,629	$	35,618	$	9,056	$	929,215	$	11,212	$	312,061	$	1,636,127	$	14,946
Transfers into Level III from Level II	—		—		—		—		—		—		—		—
Transfers from Level III into Level II	—		(23,370)		(10,306)		—		—		—		—		—
Purchases	—		—		—		10,073		—		—		—		—




Loan modifications / capitalized interest	—		—		—		103		—		—		—		—
Principal repayments	—		(137)		—		(133,525)		(3,885)		(155)		(88,489)		—
Total net gains / losses included in net income					0
Realized gains/(losses), net on assets	—		—		—		—		(117)		—		—		—


Unrealized gains/(losses), net on assets(1)	(41)		(34)		1,231		(1,944)		261		(44,758)		41,230		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		931
Premium and discount amortization, net	(87)		(274)		19		(2,419)		—		55		6,209		(940)
Ending balance	$	1,501	$	11,803	$	—	$	801,503	$	7,471	$	267,203	$	1,595,077	$	14,937

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(41)	$	(866)	$	—	$	1,490	$	(178)	$	(44,758)	$	41,230	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(931)

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		Three months ended September 30, 2020																Six months ended June 30, 2022
$ in thousands	$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt			$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	Beginning balance	$	1,975	$	33,984	$	8,695	$	1,124,051	$	24,171	$	323,474	$	465,694	$	31		Beginning balance	$	1,172	$	7,845	$	1,023,502	$	5,428	$	130,572	$	1,355,808	$	14,919
Transfers into Level III from Level II	Transfers into Level III from Level II	—		—		—		—		—		—		—		—			Transfers into Level III from Level II	—		—		—		—		—		—		—
Transfers from Level III into Level II	Transfers from Level III into Level II	—		—		—		—		—		—		—		—			Transfers from Level III into Level II	—		(5,437)		—		—		—		—		—
Purchases																			Purchases	—		—		409,853		—		—		—		—

Sales and settlements		—		—		—		—		—		—		—		—
Transfers to REO		—		—		—		—		—		—		—		—
VIE consolidation		—		—		—		—		—		—		1,245,287		17,960

Loan modifications / capitalized interest	Loan modifications / capitalized interest	—		—		—		607		—		33		—		—			Loan modifications / capitalized interest	—		—		75		—		—		—		—
Principal repayments	Principal repayments	—		(97)		—		(74,818)		(7,942)		(91)		(32,560)		—			Principal repayments	—		—		(154,748)		(250)		(4)		—		—
Total net gains / losses included in net income	Total net gains / losses included in net income					0													Total net gains / losses included in net income
Realized gains/(losses), net on assets		—		—		—		—		(288)		—		—		—

Unrealized gains/(losses), net on assets(1)	Unrealized gains/(losses), net on assets(1)	61		950		(188)		48,108		412		2,195		4,567		—			Unrealized gains/(losses), net on assets(1)	(266)		(1,086)		(79,045)		(83)		(2,147)		(125,782)		—
Unrealized (gains)/losses, net on liabilities(2)	Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		122			Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		1,799
Premium and discount amortization, net	Premium and discount amortization, net	(183)		(91)		6		(951)		(20)		40		4,557		(746)			Premium and discount amortization, net	(121)		(141)		(3,784)		—		—		13,345		(1,799)
Ending balance	Ending balance	$	1,853	$	34,746	$	8,513	$	1,096,997	$	16,333	$	325,651	$	1,687,545	$	17,367		Ending balance	$	785	$	1,181	$	1,195,853	$	5,095	$	128,421	$	1,243,371	$	14,919

Unrealized gains/(losses), net on assets held at the end of the period(1)	Unrealized gains/(losses), net on assets held at the end of the period(1)	$	61	$	950	$	(188)	$	45,948	$	29	$	2,195	$	4,567	$	—		Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(266)	$	(732)	$	(73,658)	$	(8)	$	(2,147)	$	(125,782)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(122)		Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	(1,799)

~~Table of Contents~~

Nine months ended September 30, 2021
$ in thousands Agency MBS Non-Agency MBS Other Securities Residential
Whole-Loans Residential
Bridge Loans Commercial Loans Securitized
commercial
loan Securitized debt
Beginning balance $ 1,708 $ 34,369 $ 8,593 $ 1,008,782 $ 12,813 $ 310,523 $ 1,605,335 $ 15,418
Transfers into Level III from Level II — 5,683 — — — — — —
Transfers from Level III into Level II — (23,370) (10,306) — — — — —
Purchases — — — 241,417 — — — —
Transfers to REO — — — — (752) (30,000) — —
Loan modifications / capitalized interest — — — 311 — — — —
Principal repayments — (256) — (307,543) (6,542) (103,272) (354,202) —
Total net gains / losses included in net income
Realized gains/(losses), net on assets — — — — (155) — — —
Unrealized gains/(losses), net on assets(1)
(109) 868 1,657 13,160 617 (48,630) 107,423 —
Unrealized (gains)/losses, net on liabilities(2)
— — — — — — — 2,810
Premium and discount amortization, net (257) (225) 56 (6,710) (21) 145 18,449 (3,308)
Ending balance $ 1,342 $ 17,069 $ — $ 949,417 $ 5,960 $ 128,766 $ 1,377,005 $ 14,920
Unrealized gains/(losses), net on assets held at the end of the period(1)
$ (109) $ (1,434) $ — $ 13,702 $ (60) $ (48,630) $ 92,424 $ —
Unrealized gains/(losses), net on liabilities held at the end of the period(2)
$ — $ — $ — $ — $ — $ — $ — $ (2,357)

~~Table of Contents~~


		Nine months ended September 30, 2020																Six months ended June 30, 2021
$ in thousands	$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt			$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	Beginning balance	$	15,915	$	45,814	$	17,196	$	1,375,860	$	33,269	$	370,213	$	909,040	$	1,057		Beginning balance	$	1,708	$	34,369	$	8,593	$	1,008,782	$	12,813	$	310,523	$	1,605,335	$	15,418
Transfers into Level III from Level II	Transfers into Level III from Level II	—		—		—		—		—		—		—		—			Transfers into Level III from Level II	—		—		—		—		—		—		—		—
Transfers from Level III into Level II	Transfers from Level III into Level II	—		—		(6,482)		—		—		—		—		—			Transfers from Level III into Level II	—		(23,370)		(10,306)		—		—		—		—		—
Purchases	Purchases	—		—		—		103,758		—		—		—		—			Purchases	—		—		—		10,073		—		—		—		—
Sales and settlements		(11,529)		(12,658)		—		(144,259)		—		—		—		—

Transfers to REO	Transfers to REO	—		—		—		—		(419)		—		—		—			Transfers to REO	—		—		—		—		(684)		—		—		—
VIE consolidation		—		—		—		—		—		—		1,245,287		17,960
VIE deconsolidation		—		6,852		—		—		—		—		(150,804)		—

Loan modifications / capitalized interest	Loan modifications / capitalized interest	—		—		—		614		—		33		—		—			Loan modifications / capitalized interest	—		—		—		278		—		—		—		—
Principal repayments	Principal repayments	—		(628)		(154)		(199,655)		(15,821)		(37,728)		(211,204)		—			Principal repayments	—		(256)		—		(228,541)		(4,967)		(302)		(139,657)		—
Total net gains / losses included in net income	Total net gains / losses included in net income																		Total net gains / losses included in net income
Realized gains/(losses), net on assets	Realized gains/(losses), net on assets	1,528		(60)		—		(10,511)		(346)		—		—		—			Realized gains/(losses), net on assets	—		—		—		—		(153)		—		—		—

Unrealized gains/(losses), net on assets(1)	Unrealized gains/(losses), net on assets(1)	(2,594)		(3,633)		(2,025)		(25,766)		(290)		(7,218)		(109,683)		—			Unrealized gains/(losses), net on assets(1)	(15)		1,267		1,657		15,543		464		(43,136)		117,039		—
Unrealized (gains)/losses, net on liabilities(2)	Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		(432)			Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		1,707
Premium and discount amortization, net	Premium and discount amortization, net	(1,467)		(941)		(22)		(3,044)		(60)		351		4,909		(1,218)			Premium and discount amortization, net	(192)		(207)		56		(4,632)		(2)		118		12,360		(2,188)
Ending balance	Ending balance	$	1,853	$	34,746	$	8,513	$	1,096,997	$	16,333	$	325,651	$	1,687,545	$	17,367		Ending balance	$	1,501	$	11,803	$	—	$	801,503	$	7,471	$	267,203	$	1,595,077	$	14,937

Unrealized gains/(losses), net on assets held at the end of the period(1)	Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(601)	$	(3,403)	$	(675)	$	(18,880)	$	(618)	$	(7,218)	$	(50,517)	$	—		Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(15)	$	(1,035)	$	—	$	16,271	$	(113)	$	(43,136)	$	117,039	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	432		Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(1,707)

(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.

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Transfers ~~between~~into the Level 3 category of the fair value hierarchy occur due to the above segmented classes of investments exhibiting indications of reduced levels ~~for the three~~of market transparency, including changes in observable transactions or executable quotes involving these investments or similar classes of investments. Changes in these indications could impact price transparency, and nine months ended September 30, 2021 and September 30, 2020 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, resultingthereby cause a change 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, provided the sufficient observable data for the movement from Level III to Level II.level designations. The Company did not have transfers between either Level I and Level II or Level I and Level III for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020.~~2021.

Other Fair Value Disclosures

~~Certain Residential Bridge Loans,~~The Company's repurchase agreement borrowings, convertible senior unsecured notes, and securitized debt are not carried at fair value in the consolidated financial statements.

Borrowings under repurchase agreements

The fair values of the Company's repurchase agreements approximates the carrying value due to the floating interest rates that are based on an index plus a spread, which is typically consistent with those demanded in the market and the short-term maturities of generally one year or less. The Company's repurchase agreements are classified as Level II.

The following table presents the carrying value and estimated fair value of the Company’s ~~financial instruments~~convertible senior unsecured notes and securitized debt that are not carried at fair value as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 in the consolidated financial statements (dollars in thousands):

~~Table of Contents~~


		September 30, 2021				December 31, 2020					June 30, 2022				December 31, 2021
		Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value			Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets
Residential Bridge Loans		N/A		N/A		$	1,103	$	1,095
Total		$	—	$	—	$	1,103	$	1,095

Liabilities	Liabilities									Liabilities
Borrowings under repurchase agreements		$	483,268	$	481,009	$	356,923	$	359,799
Convertible senior unsecured notes	Convertible senior unsecured notes	126,632		133,365		170,797		155,129		Convertible senior unsecured notes	$	109,661	$	98,333	$	119,168	$	122,133
Securitized debt(1)	Securitized debt(1)	610,900		618,553		899,207		922,362		Securitized debt(1)	393,163		379,107		524,649		528,046
Total	Total	$	1,220,800	$	1,232,927	$	1,426,927	$	1,437,290	Total	$	502,824	$	477,440	$	643,817	$	650,179

(1) Carrying value excludes ~~$5.9~~$4.8 million and ~~$6.9~~$5.5 million of deferred financing costs as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 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~~were classified as Level I.

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~~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 Lev~~el III. At September 30, 2021, 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.~~

Note 4 – Mortgage-Backed Securities and other securities

The following tables present certain information about the Company’s investment portfolio at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


		September 30, 2021													June 30, 2022
		Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon			Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon

Agency RMBS Interest-Only Strips (1)(2)		N/A		N/A		$	63	$	71	$	—	$	134	1.4	%
Agency RMBS Interest-Only Strips (1) (2)																Agency RMBS Interest-Only Strips (1) (2)	N/A		N/A		$	53	$	4	$	—	$	57	0.5	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		1,208		1.3	%	Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		728		1.5	%

Total Agency MBS	Total Agency MBS	—		—		63		71		—		1,342		1.3	%	Total Agency MBS	—		—		53		4		—		785		1.4	%

Non-Agency RMBS	Non-Agency RMBS	36,879		(14,437)		22,442		3,327		(38)		25,731		4.3	%	Non-Agency RMBS	45,844		(15,074)		30,770		2,827		(2,580)		31,017		4.2	%
Non-Agency RMBS Interest- Only Strips (1)	Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,742		—		(3,462)		2,280		0.3	%	Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,402		—		(4,221)		1,181		0.2	%

Subtotal Non-Agency RMBS	Subtotal Non-Agency RMBS	36,879		(14,437)		28,184		3,327		(3,500)		28,011		0.9	%	Subtotal Non-Agency RMBS	45,844		(15,074)		36,172		2,827		(6,801)		32,198		1.1	%
Non-Agency CMBS	Non-Agency CMBS	212,440		(15,474)		196,966		2,414		(64,730)		134,650		5.0	%	Non-Agency CMBS	114,148		(3,378)		110,770		982		(18,656)		93,096		6.7	%
Total Non-Agency MBS	Total Non-Agency MBS	249,319		(29,911)		225,150		5,741		(68,230)		162,661		2.9	%	Total Non-Agency MBS	159,992		(18,452)		146,942		3,809		(25,457)		125,294		3.1	%

Other securities (3)	Other securities (3)	51,269		(8,046)		48,066		4,198		(171)		52,093		5.3	%	Other securities (3)	46,517		(8,586)		42,772		2,025		(4,263)		40,534		6.1	%
Total	Total	$	300,588	$	(37,957)	$	273,279	$	10,010	$	(68,401)	$	216,096	3.0	%	Total	$	206,509	$	(27,038)	$	189,767	$	5,838	$	(29,720)	$	166,613	3.4	%

~~Table of Contents~~


		December 31, 2020													December 31, 2021
		Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon(4)			Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon(4)

Agency RMBS Interest-Only Strips (1)	Agency RMBS Interest-Only Strips (1)	N/A		N/A		$	89	$	54	$	—	$	143	2.1	%	Agency RMBS Interest-Only Strips (1)	N/A		N/A		$	59	$	55	$	—	$	114	1.3	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		1,565		2.6	%	Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		1,058		1.3	%

Total Agency MBS	Total Agency MBS	—		—		89		54		—		1,708		2.5	%	Total Agency MBS	—		—		59		55		—		1,172		1.3	%

Non-Agency RMBS	Non-Agency RMBS	38,112		(14,649)		23,463		451		(2,498)		21,416		1.6	%	Non-Agency RMBS	36,147		(13,936)		22,211		3,476		(35)		25,652		4.3	%
Non-Agency RMBS Interest- Only Strips (1)	Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		6,271		—		(2,306)		3,965		0.4	%	Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,608		—		(3,491)		2,117		0.3	%

Subtotal Non-Agency RMBS	Subtotal Non-Agency RMBS	38,112		(14,649)		29,734		451		(4,804)		25,381		0.6	%	Subtotal Non-Agency RMBS	36,147		(13,936)		27,819		3,476		(3,526)		27,769		1.0	%
Non-Agency CMBS	Non-Agency CMBS	235,497		(25,258)		210,239		2,850		(49,008)		164,081		5.0	%	Non-Agency CMBS	179,619		(13,088)		166,531		1,543		(62,716)		105,358		5.4	%
Total Non-Agency MBS	Total Non-Agency MBS	273,609		(39,907)		239,973		3,301		(53,812)		189,462		2.4	%	Total Non-Agency MBS	215,766		(27,024)		194,350		5,019		(66,242)		133,127		3.0	%

Other securities (3)	Other securities (3)	51,537		(8,239)		49,420		1,152		(1,818)		48,754		4.4	%	Other securities (3)	51,159		(8,229)		47,652		4,209		(213)		51,648		5.6	%
Total	Total	$	325,146	$	(48,146)	$	289,482	$	4,507	$	(55,630)	$	239,924	2.5	%	Total	$	266,925	$	(35,253)	$	242,061	$	9,283	$	(66,455)	$	185,947	3.2	%

(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 ~~September~~June 30, ~~2021,~~2022, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs, and IIO and Agency RMBS IOs and IIOs, accounted for as derivatives was ~~$3.0~~$2.6 million, ~~$200.1~~$153.5 million, and ~~$17.6~~$14.6 million, respectively. At December 31, ~~2020,~~2021, 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~~$2.9 million, ~~$306.0~~$181.0 million, and ~~$21.6~~$16.8 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~~ABS which have no principal balance and an amortized cost of approximately $4.8 million and ~~$6.1~~$4.7 million, as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021, the weighted average expected remaining term of the MBS and other securities investment portfolio was ~~5.6~~7.0 years and ~~5.5~~5.9 years, respectively.

2218

Table of Contents

The following tables present the fair value and contractual maturities of the Company’s investment securities at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


		September 30, 2021											June 30, 2022
		< 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 years		Total

Agency RMBS Interest-Only Strips	Agency RMBS Interest-Only Strips	$	—	$	—	$	134	$	—	$	134	Agency RMBS Interest-Only Strips	$	—	$	—	$	57	$	—	$	57
Agency RMBS Interest-Only Strips accounted for as derivatives	Agency RMBS Interest-Only Strips accounted for as derivatives	—		1,208		—		—		1,208		Agency RMBS Interest-Only Strips accounted for as derivatives	—		728		—		—		728
Subtotal Agency	Subtotal Agency	—		1,208		134		—		1,342		Subtotal Agency	—		728		57		—		785

Non-Agency CMBS	Non-Agency CMBS	80,460		17,856		36,110		224		134,650		Non-Agency CMBS	66,247		16,049		10,800		—		93,096
Non-Agency RMBS	Non-Agency RMBS	—		—		10,181		15,550		25,731		Non-Agency RMBS	—		—		10,197		20,820		31,017
Non-Agency RMBS Interest- Only Strips	Non-Agency RMBS Interest- Only Strips	—		—		142		2,138		2,280		Non-Agency RMBS Interest- Only Strips	—		—		217		964		1,181

Subtotal Non-Agency	Subtotal Non-Agency	80,460		17,856		46,433		17,912		162,661		Subtotal Non-Agency	66,247		16,049		21,214		21,784		125,294

Other securities	Other securities	9,394		4,271		25,935		12,493		52,093		Other securities	6,717		3,733		20,159		9,925		40,534
Total	Total	$	89,854	$	23,335	$	72,502	$	30,405	$	216,096	Total	$	72,964	$	20,510	$	41,430	$	31,709	$	166,613


		December 31, 2020											December 31, 2021
		< 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 years		Total

Agency RMBS Interest-Only Strips	Agency RMBS Interest-Only Strips	$	—	$	—	$	143	$	—	$	143	Agency RMBS Interest-Only Strips	$	—	$	—	$	114	$	—	$	114
Agency RMBS Interest-Only Strips accounted for as derivatives	Agency RMBS Interest-Only Strips accounted for as derivatives	—		1,565		—		—		1,565		Agency RMBS Interest-Only Strips accounted for as derivatives	—		1,058		—		—		1,058
Subtotal Agency	Subtotal Agency	—		1,565		143		—		1,708		Subtotal Agency	—		1,058		114		—		1,172

Non-Agency CMBS	Non-Agency CMBS	59,724		50,408		53,269		680		164,081		Non-Agency CMBS	66,384		17,644		21,171		159		105,358
Non-Agency RMBS	Non-Agency RMBS	—		—		7,958		13,458		21,416		Non-Agency RMBS	—		—		10,282		15,370		25,652
Non-Agency RMBS Interest- Only Strips	Non-Agency RMBS Interest- Only Strips	—		—		472		3,493		3,965		Non-Agency RMBS Interest- Only Strips	—		—		106		2,011		2,117

Subtotal Non-Agency	Subtotal Non-Agency	59,724		50,408		61,699		17,631		189,462		Subtotal Non-Agency	66,384		17,644		31,559		17,540		133,127

Other securities	Other securities	7,247		6,203		24,610		10,694		48,754		Other securities	9,255		4,266		25,653		12,474		51,648
Total	Total	$	66,971	$	58,176	$	86,452	$	28,325	$	239,924	Total	$	75,639	$	22,968	$	57,326	$	30,014	$	185,947

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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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

September 30, 2021
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
Non-Agency CMBS $ — $ — — $ 118,859 $ (64,730) 24 $ 118,859 $ (64,730) 24
Non-Agency RMBS — — — 216 (38) 1 216 (38) 1
Non-Agency RMBS Interest-Only Strips — — — 2,280 (3,462) 4 2,280 (3,462) 4
Subtotal Non-Agency — — — 121,355 (68,230) 29 121,355 (68,230) 29
Other securities — — — 11,080 (171) 5 11,080 (171) 5
Total $ — $ — — $ 132,435 $ (68,401) 34 $ 132,435 $ (68,401) 34


	June 30, 2022
	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





Non-Agency CMBS	$	—	$	—	—	$	84,051	$	(18,656)	11	$	84,051	$	(18,656)	11
Non-Agency RMBS	14,790		(2,526)		6	175		(54)		1	14,965		(2,580)		7
Non-Agency RMBS Interest-Only Strips	—		—		—	1,180		(4,221)		4	1,180		(4,221)		4
Subtotal Non-Agency	14,790		(2,526)		6	85,406		(22,931)		16	100,196		(25,457)		22

Other securities	26,398		(3,613)		4	3,733		(650)		2	30,131		(4,263)		6
Total	$	41,188	$	(6,139)	10	$	89,139	$	(23,581)	18	$	130,327	$	(29,720)	28


		December 31, 2020																December 31, 2021
		Less than 12 Months					12 Months or More					Total						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		Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities

Non-Agency CMBS	Non-Agency CMBS	$	102,935	$	(33,602)	16	$	50,887	$	(15,406)	15	$	153,822	$	(49,008)	31	Non-Agency CMBS	$	—	$	—	—	$	96,080	$	(62,716)	16	$	96,080	$	(62,716)	16
Non-Agency RMBS	Non-Agency RMBS	18,242		(2,498)		4	—		—		—	18,242		(2,498)		4	Non-Agency RMBS	—		—		—	201		(35)		1	201		(35)		1
Non-Agency RMBS Interest-Only Strips	Non-Agency RMBS Interest-Only Strips	3,492		(790)		3	472		(1,516)		1	3,964		(2,306)		4	Non-Agency RMBS Interest-Only Strips	—		—		—	2,117		(3,491)		4	2,117		(3,491)		4
Subtotal Non-Agency	Subtotal Non-Agency	124,669		(36,890)		23	51,359		(16,922)		16	176,028		(53,812)		39	Subtotal Non-Agency	—		—		—	98,398		(66,242)		21	98,398		(66,242)		21

Other securities	Other securities	26,365		(1,818)		6	—		—		—	26,365		(1,818)		6	Other securities	—		—		—	9,022		(213)		4	9,022		(213)		4
Total	Total	$	151,034	$	(38,708)	29	$	51,359	$	(16,922)	16	$	202,393	$	(55,630)	45	Total	$	—	$	—	—	$	107,420	$	(66,455)	25	$	107,420	$	(66,455)	25

The following tables present components of interest income on the Company’s MBS and other securities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, respectively (dollars in thousands):


		Three months ended September 30, 2021						Three months ended September 30, 2020							Three months ended June 30, 2022						Three months ended June 30, 2021
		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 Accretion		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income

Agency RMBS	Agency RMBS	$	11	$	(7)	$	4	$	25	$	(17)	$	8	Agency RMBS	$	5	$	(2)	$	3	$	12	$	(8)	$	4
Non-Agency CMBS	Non-Agency CMBS	2,621		1,669		4,290		3,500		1,686		5,186		Non-Agency CMBS	2,129		401		2,530		2,213		2,131		4,344
Non-Agency RMBS	Non-Agency RMBS	609		(240)		369		616		(154)		462		Non-Agency RMBS	813		(152)		661		740		(406)		334
Other securities	Other securities	1,043		(270)		773		1,723		(1,013)		710		Other securities	767		272		1,039		1,083		(175)		908
Total	Total	$	4,284	$	1,152	$	5,436	$	5,864	$	502	$	6,366	Total	$	3,714	$	519	$	4,233	$	4,048	$	1,542	$	5,590

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		Nine months ended September 30, 2021						Nine months ended September 30, 2020							Six months ended June 30, 2022						Six months ended June 30, 2021
		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 Accretion		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income
Agency CMBS		$	—	$	—	$	—	$	11,336	$	(636)	$	10,700

Agency RMBS	Agency RMBS	38		(26)		12		2,954		(971)		1,983		Agency RMBS	$	13	$	(6)	$	7	$	27	$	(19)	$	8
Non-Agency CMBS	Non-Agency CMBS	7,171		6,230		13,401		12,257		4,426		16,683		Non-Agency CMBS	5,101		(1)		5,100		4,550		4,561		9,111
Non-Agency RMBS	Non-Agency RMBS	1,762		(704)		1,058		2,349		(1,162)		1,187		Non-Agency RMBS	1,358		(167)		1,191		1,153		(464)		689
Other securities	Other securities	3,717		(1,214)		2,503		6,565		(3,810)		2,755		Other securities	1,655		38		1,693		2,674		(944)		1,730
Total	Total	$	12,688	$	4,286	$	16,974	$	35,461	$	(2,153)	$	33,308	Total	$	8,127	$	(136)	$	7,991	$	8,404	$	3,134	$	11,538

The following tables present the sales and realized gain (loss) of the Company’s MBS and other securities ~~excluding Interest-Only Strips accounted for as derivatives,~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, respectively (dollars in thousands):


		Three months ended September 30, 2021								Three months ended September 30, 2020									Three months ended June 30, 2022								Three months ended June 30, 2021
		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)			Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)

Non-Agency CMBS																		Non-Agency CMBS	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	—	$	—
Non-Agency RMBS	Non-Agency RMBS	$	—	$	—	$	—	$	—	$	(44)	$	—	$	(44)	$	(44)	Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—

Other securities																		Other securities	4,406		—		(478)		(478)		—		—		—		—
Total	Total	$	—	$	—	$	—	$	—	$	(44)	$	—	$	(44)	$	(44)	Total	$	42,287	$	255	$	(45,837)	$	(45,582)	$	—	$	—	$	—	$	—

Nine months ended September 30, 2021 Nine months ended September 30, 2020
Proceeds Gross Gains Gross Losses Net Gain (Loss) Proceeds Gross Gains Gross Losses Net Gain (Loss)
Agency CMBS $ — $ — $ — $ — $ 1,668,149 $ 116,463 $ (6,486) $ 109,977
Agency RMBS — — — — 400,948 12,552 (506) 12,046
Non-Agency CMBS(1)
— — (5,929) (5,929) 94,586 1 (22,703) (22,702)
Non-Agency RMBS — — — — 12,658 — (60) (60)
Other securities — — — — 35,957 113 (6,223) (6,110)
Total $ — $ — $ (5,929) $ (5,929) $ 2,212,298 $ 129,129 $ (35,978) $ 93,151


	Six months ended June 30, 2022								Six months ended June 30, 2021
	Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)


Non-Agency CMBS(1)	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	(5,929)	$	(5,929)
Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—
Other securities	4,406		—		(478)		(478)		—		—		—		—
Total	$	42,287	$	255	$	(45,837)	$	(45,582)	$	—	$	—	$	(5,929)	$	(5,929)

(1) ~~Realized~~The realized loss for the ~~nine~~six months ended ~~September~~June 30, 2021 was attributable to a legacy ~~Non-agency~~Non-Agency CMBS bond that factored down to zero from a cash shortfall in the securitization.

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~~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 both ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company held 72 and 5 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s maximum exposure to loss from these variable interests did not exceed the carrying value of these investments of ~~$27.5~~$16.9 million and ~~$48.9~~$26.5 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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~~

Table of Contents

Note 5 — Residential Whole Loans and Bridge Loans

~~The consolidated financial statements include the consolidation of~~

Residential Whole-Loan Trusts

Revolving Mortgage Investment Trust 2015-1QR2

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 obligationformed 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.~~acquire Non-QM residential whole loans. 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~~residential whole loans held by the trust. AsThe Company consolidates the trust since it met the definition of ~~September 30, 2021~~a VIE and ~~December 31, 2020,~~ the Company ~~financed~~determined that it was the ~~trust certificate with $236.8 million and $30.2 million, respectively, on long-term financing facility. The financing liability is held outside the trust.~~primary beneficiary. The Company classifies the underlying ~~Residential Whole Loans~~Non-QM residential whole loans owned by the trust in "Residential ~~Whole Loans,~~whole loans, at fair value" in the Consolidated Balance Sheets and has eliminated the intercompany trust certificate in consolidation.

~~In August 2018,~~As of June 30, 2022 and December 31, 2021, the RMI 2015 Trust owns 1,065 and 770 Non-QM residential whole loans with a fair value of $401.5 million and $451.7 million, respectively. The loans are financed under the Company's residential whole loan facility, and the Company ~~formed Revolving Mortgage Investment Trust 2018-RCR ("RCR Trust")~~holds the financing liability outside the RMI 2015 Trust. Refer 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. In May 2020, the conforming mortgages held by RCR Trust were sold and the trust was terminated.Note 7 - Financings for details.

~~In September 2018, the Company formed Revolving~~Arroyo 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 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. In April 2020, the RNR Trust was terminated following the transfer of the Non-QM Residential Whole Loans it held to RMI 2015 Trust.2019-2

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~~formed Arroyo Mortgage Trust ~~and RNR~~2019-2 ("Arroyo Trust ~~collectively transferred $945.5 million of Non-QM Residential Whole Loans, to~~2019"), a wholly-owned subsidiary of the Company, to complete its first residential mortgage-backed securitization comprised of $945.5 million of Non-QM residential whole loans. The Arroyo ~~Mortgage~~ Trust ~~2019-2 (the "Arroyo Trust 2019"). The Company~~2019 issued $919.0 million of mortgage-backed notes and retained all the subordinate and residual debt securities ("Owner Certificates"), which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for ~~details on~~details. The Company consolidates the ~~associated securitized debt. The~~trust since it met the definition of a VIE and the Company determined that ~~the Arroyo Trust 2019~~it 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 2019 that could potentially be significant to the trust.beneficiary. The Company classifies the underlying Non-QM ~~Residential Whole Loans~~residential whole loans in "Residential ~~Whole Loans,~~whole loans, at fair value" in the Consolidated Balance ~~Sheets. The Company has~~Sheets and eliminated the intercompany Owner Certificates in consolidation.

~~In November~~As of June 30, 2022 and December 31, 2021, the Arroyo Trust 2019 ~~the Company formed Revolving~~owns 859 and 1,042 Non-QM residential whole loans with a fair value of $275.0 million and $374.3 million, respectively.

Arroyo 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. In April 2020, the RBR Trust was terminated following the transfer of the Non-QM Residential Whole Loans it held to RMI 2015 Trust.2020-1

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,formed Arroyo Mortgage Trust 2020-1 ("Arroyo Trust 2020")., a wholly-owned subsidiary of the Company, to complete its second residential mortgage-backed securitization comprised of $355.8 million of Non-QM residential whole loans. The ~~Company~~Arroyo Trust 2020 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~~details. The Company consolidates the ~~associated securitized debt. The~~trust since it met the definition of a VIE and the Company determined that ~~Arroyo Trust 2020~~it was ~~a VIE and that the Company was also~~ the primary ~~beneficiary because~~beneficiary. The Company classifies the ~~Manager was involved~~underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the ~~design~~Consolidated Balance Sheets and eliminated the intercompany Owner Certificates.

As of ~~the trust~~June 30, 2022, 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~~December 31, 2021, the Arroyo Trust 2020 owns 455 and 543 Non-QM Non-QM residential whole loans with a fair value of $145.2 million and $195.7 million, respectively.

Arroyo Mortgage Trust 2022-1

In February 2022, the Company formed Arroyo Mortgage Trust 2022-1 ("Arroyo Trust 2022-1"), a wholly-owned subsidiary of the Company, to complete its third residential mortgage-backed securitization comprised of $432.0 million of Non-QM residential whole loans. The Arroyo Trust 2022-1 issued $398.9 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. The Company consolidates the trust since it met the definition of a VIE and the Company determined that ~~could potentially be significant to~~it was the ~~trust.~~primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates.

2622

Table of Contents

~~underlying~~ As of June 30, 2022, the Arroyo Trust 2022-1 owns 718 Non-QM ~~Residential Whole Loans in "Residential Whole Loans, at~~residential whole loans with a fair ~~value" in the Consolidated Balance Sheets.~~value of $372.7 million. The Company has ~~eliminated~~elected the ~~intercompany Owner Certificates~~fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in ~~consolidation.~~the Arroyo Trust 2022-1 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable.

Residential Bridge Loan Trust

In February 2017, ~~The~~the Company formed Revolving Mortgage Investment Trust 2017-BRQ1 ("RMI 2017 Trust") ~~and acquired the~~to acquire Residential Bridge Loans. RMI 2017 Trust issued a trust certificate ~~which~~that is wholly-owned by the Company and represents the entire beneficial interest in pools of ~~Residential Bridge Loans~~residential bridge loans and certain ~~Residential Whole Loans~~residential whole loans held by the trust. Residential ~~Bridge Loans~~bridge loans are mortgage loans secured by residences, typically short-term. The Company ~~determined that RMI Trust was~~consolidates the trust since it met the definition of a VIE and ~~that~~ the Company determined that it 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 September 30, 2021 and December 31, 2020, the Company financed the trust certificate with $7.5 million and $13.4 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 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.beneficiary. The Company has eliminated the intercompany trust certificate in consolidation.

The Company is no longer allocating capital to residential bridge loans. As of June 30, 2022, and December 31, 2021, there were 7 and 8 remaining residential bridge loans in the RMI 2017 Trust with a fair value of $5.1 million and $5.2 million, respectively. As of June 30, 2022, and December 31, 2021, the trust also owned 5 and 6 investor fixed rate residential mortgages with a fair value of $1.4 million and $1.7 million, respectively.

Consolidated Residential ~~Whole-Loan~~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 3 consolidated Residential Whole-Loan trusts collectively hold 2,187 Residential Whole Loans and the consolidated Bridge Loan Trust holds 12 Residential Bridge Loans and 6 Residential Whole Loans as of September 30, 2021.

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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


		September 30, 2021		December 31, 2020			June 30, 2022		December 31, 2021

Residential Whole Loans, at fair value ($949,417 and $1,008,782 pledged as collateral, at fair value, respectively)		$	949,417	$	1,008,782
Residential Bridge Loans ($5,960 and $11,858 at fair value and $5,960 and $12,960 pledged as collateral, respectively)		5,960		12,960
Cash and cash equivalents						Cash and cash equivalents	$	—	$	266
Residential whole loans, at fair value ($1,195,853 and $1,023,502 pledged as collateral, at fair value, respectively)						Residential whole loans, at fair value ($1,195,853 and $1,023,502 pledged as collateral, at fair value, respectively)	1,195,853		1,023,502
Residential bridge loans, at fair value ($5,095 and $5,207 pledged as collateral, at fair value, respectively)						Residential bridge loans, at fair value ($5,095 and $5,207 pledged as collateral, at fair value, respectively)	5,095		5,207

Investment related receivable	Investment related receivable	24,224		27,987		Investment related receivable	11,906		22,087
Interest receivable	Interest receivable	4,314		4,688		Interest receivable	6,387		5,282
Other assets		80		80

Total assets	Total assets	$	983,995	$	1,054,497	Total assets	$	1,219,241	$	1,056,344
Securitized debt, net	Securitized debt, net	$	605,019	$	892,290	Securitized debt, net	$	730,087	$	519,118
Interest payable	Interest payable	1,524		2,222		Interest payable	1,906		1,316
Accounts payable and accrued expenses	Accounts payable and accrued expenses	40		77		Accounts payable and accrued expenses	61		69

Total liabilities	Total liabilities	$	606,583	$	894,589	Total liabilities	$	732,054	$	520,503

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~~whole loans held by the consolidated ~~trusts~~Arroyo Trust 2019, Arroyo Trust 2020, and Arroyo Trust 2022-1 are held solely to satisfy the liabilities of ~~the~~each respective trust, and ~~creditors of the trust have~~has 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 ~~three~~periods ended June 30, 2022 and ~~nine months ended September 30, 2021 and September 30, 2020.~~ December 31, 2021.

The following table presents the components of the ~~carrying~~fair value of ~~Residential Whole Loans~~residential whole loans and ~~Residential Bridge Loans~~residential bridge loans as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

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Residential Whole Loans, at Fair Value
Residential Bridge Loans, at Fair Value(1)
Residential Bridge Loans, at Amortized Cost(1)
September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020
Principal balance $ 908,512 $ 984,555 $ 6,654 $ 14,144 $ — $ 1,103
Unamortized premium 26,920 24,248 1 3 — —
Unamortized discount (1,459) (1,799) — — — —
Amortized cost 933,973 1,007,004 6,655 14,147 — 1,103
Gross unrealized gains 19,174 9,282 — 5 N/A N/A
Gross unrealized losses (3,730) (7,504) (695) (1,339) N/A N/A
Fair value $ 949,417 $ 1,008,782 $ 5,960 $ 12,813 N/A N/A

~~(1) These loans are classified in "Residential Bridge Loans" in the Consolidated Balance Sheets.~~


	Residential whole loans, at Fair Value				Residential bridge loans, at Fair Value
	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Principal balance	$	1,239,970	$	989,143	$	5,585	$	5,834
Unamortized premium	33,176		31,070		—		—
Unamortized discount	(1,764)		(1,337)		—		—
Amortized cost	1,271,382		1,018,876		5,585		5,834
Gross unrealized gains	1,860		14,190		—		78
Gross unrealized losses	(77,389)		(9,564)		(490)		(484)
Fair value	$	1,195,853	$	1,023,502	$	5,095	$	5,428

Residential Whole Loans

The ~~Residential Whole Loans~~residential whole loans have low LTV's and are comprised of ~~2,187~~3,097 Non-QM adjustable rate mortgages and 65 investor fixed rate residential mortgages. The following tables present certain information about the Company’s ~~Residential Whole Loan~~residential whole loan investment portfolio at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


September 30, 2021
June 30, 2022												June 30, 2022
					Weighted Average											Weighted Average
Current Coupon Rate	Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate		Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	2.01% – 3.00%	14	$	7,816	66.0	%	746	5.7	28.4	2.7	%	2.01% – 3.00%	40	$	22,650	66.3	%	758	9.0	28.8	2.9	%
3.01% – 4.00%	3.01% – 4.00%	332	163,681		62.6	%	751	3.2	27.3	3.7	%	3.01% – 4.00%	484	247,017		65.0	%	757	6.2	28.2	3.7	%
4.01% – 5.00%	4.01% – 5.00%	997	380,394		64.8	%	748	2.7	28.0	4.8	%	4.01% – 5.00%	1,451	498,639		63.6	%	749	4.8	26.4	4.6	%
5.01% – 6.00%	5.01% – 6.00%	820	346,778		64.6	%	739	2.9	27.2	5.4	%	5.01% – 6.00%	895	366,805		66.2	%	742	4.0	27.5	5.5	%
6.01% – 7.00%	6.01% – 7.00%	28	9,337		67.8	%	720	3.0	25.9	6.3	%	6.01% – 7.00%	216	98,409		71.7	%	742	3.1	29.4	6.4	%
7.01% - 8.00%	7.01% - 8.00%	2	506		73.2	%	753	4.5	26.9	7.1	%	7.01% - 8.00%	16	6,450		75.1	%	737	2.7	29.6	7.4	%

Total	Total	2,193	$	908,512	64.3	%	745	2.9	27.6	4.8	%	Total	3,102	$	1,239,970	65.4	%	748	4.8	27.4	4.8	%

(1)The original FICO score is not available for ~~215~~250 loans with a principal balance of approximately ~~$68.8~~$83.2 million at ~~September~~June 30, ~~2021.~~2022. The Company has excluded these loans from the weighted average computations.


December 31, 2020
December 31, 2021												December 31, 2021
					Weighted Average											Weighted Average
Current Coupon Rate	Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)(2)	Contractual Maturity (years)	Coupon Rate		Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)(2)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	2.01% – 3.00%	4	$	3,239	66.7	%	733	5.9	28.0	2.7	%	2.01% – 3.00%	27	$	15,640	65.1	%	757	5.3	28.8	2.8	%
3.01% – 4.00%	3.01% – 4.00%	118	41,489		55.8	%	709	3.8	23.3	3.7	%	3.01% – 4.00%	496	244,022		63.7	%	756	3.3	28.0	3.7	%
4.01% – 5.00%	4.01% – 5.00%	1,172	403,398		61.8	%	751	2.7	27.7	4.9	%	4.01% – 5.00%	1,051	413,451		65.1	%	747	2.9	28.2	4.7	%
5.01% – 6.00%	5.01% – 6.00%	1,166	523,105		64.2	%	740	2.9	27.7	5.4	%	5.01% – 6.00%	757	305,344		64.9	%	738	3.0	26.8	5.4	%
6.01% – 7.00%	6.01% – 7.00%	35	12,813		67.5	%	720	3.2	27.0	6.3	%	6.01% – 7.00%	28	10,181		67.9	%	721	3.1	25.8	6.3	%
7.01% - 8.00%	7.01% - 8.00%	2	511		73.2	%	753	4.1	27.6	7.1	%	7.01% - 8.00%	2	505		73.2	%	753	4.5	26.8	7.1	%
Total	Total	2,497	$	984,555	62.9	%	744	2.9	27.5	5.1	%	Total	2,361	$	989,143	64.8	%	746	3.1	27.7	4.6	%

(1)The original FICO score is not available for ~~236~~230 loans with a principal balance of approximately ~~$75.2~~$74.3 million at December 31, ~~2020.~~2021. The Company has excluded these loans from the weighted average computations.

~~Table of Contents~~

The following table presents the various states across the United States in which the collateral securing the Company’s Residential Whole Loans at September 30, 2021 and December 31, 2020, based on principal balance, is located (dollars in thousands):

September 30, 2021 December 31, 2020
State State Concentration Principal Balance State State Concentration Principal Balance
California 72.3 % $ 656,801 California 65.8 % $ 647,877
New York 14.3 % 129,931 New York 17.7 % 173,788
Georgia 2.7 % 24,300 Georgia 3.4 % 33,577
Florida 2.4 % 21,697 Florida 2.8 % 27,274
New Jersey 2.0 % 18,255 New Jersey 2.5 % 24,704
Other 6.3 % 57,528 Other 7.8 % 77,335
Total 100.0 % $ 908,512 Total 100.0 % $ 984,555

~~Residential Bridge Loans~~

The Residential Bridge Loans are comprised of short-term fixed rate loans secured by non-owner occupied 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 September 30, 2021 and December 31, 2020 (dollars in thousands):

September 30, 2021
c Weighted Average
Current Coupon Rate Number of Loans Principal
Balance Original LTV
Contractual
Maturity
(months)(1)
Coupon
Rate
7.01% – 9.00% 3 $ 2,946 70.4 % 0.0 8.8 %
9.01% – 11.00% 7 3,213 75.9 % 2.0 10.3 %
11.01% – 13.00% 2 495 69.7 % 2.0 11.4 %
Total 12 $ 6,654 73.0 % 2.0 9.7 %

December 31, 2020
Weighted Average
Current Coupon Rate Number of Loans Principal
Balance Original LTV
Contractual
Maturity
(months)(1)
Coupon
Rate
7.01% – 9.00% 10 $ 8,295 69.6 % 1.4 8.7 %
9.01% – 11.00% 15 6,123 75.5 % 0.5 10.1 %
11.01% – 13.00% 3 705 69.8 % 0.0 11.4 %
17.01% – 19.00% 1 124 75.0 % 0.0 18.0 %
Total 29 $ 15,247 72.0 % 0.8 9.4 %

(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.

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The following table presents ~~the~~geographic concentrations by U.S. ~~states~~state in which the collateral securing the Company’s ~~Residential Bridge Loans at September~~residential whole loans are located as of June 30, ~~2021~~2022 and December 31, ~~2020, based on principal balance, is located (dollars in thousands):~~

September 30, 2021 December 31, 2020
State Concentration Principal Balance State Concentration Principal Balance
New York 39.5 % $ 2,631 California 37.5 % $ 5,713
California 35.9 % 2,386 New York 17.3 % 2,632
Florida 16.9 % 1,125 Washington 16.1 % 2,461
New Jersey 5.0 % 335 Florida 12.9 % 1,969
Pennsylvania 1.6 % 105 Connecticut 5.7 % 872
Other 1.1 % 72 Other 10.5 % 1,600
Total 100.0 % $ 6,654 Total 100.0 % $ 15,247

~~Non-performing Loans~~

~~The following table presents the aging of the Residential Whole Loans and Bridge Loans as of September 30,~~ 2021 (dollars in thousands):

Residential Whole Loans Bridge Loans
No of Loans Principal Fair Value No of Loans Principal Fair Value
Current(1)
2,156 $ 889,231 $ 930,286 1 $ 75 $ 75
1-30 days 15 7,448 7,746 1 105 105
31-60 days — — — — — —
61-90 days 3 1,238 1,259 — — —
90+ days 19 10,595 10,126 10 6,474 5,780
Total 2,193 $ 908,512 $ 949,417 12 $ 6,654 $ 5,960

~~(1) Includes 1 loan in forbearance with unpaid principal balance of $493 thousand.~~

COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment in certain sectors. At the beginning of the COVID-19 pandemic, 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 was able to utilize these relationships to manage the impacts of COVID-19 pandemic on the Company's Non-QM loans. As of September 30, 2021, the Company had 1 Non-QM loan in forbearance and 0 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 to 5 months. At the end of the forbearance period, the borrower can either 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. The loan in forbearance is carried at fair value and had an unpaid principal balance of $493 thousand, a fair value of $434 thousand, an original LTV of 64.7%, and represents approximately 0.1% of the total outstanding principal balance of the Company's ~~Residential Whole Loans.~~

As of September 30, 2021, there were 19 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $10.6 million and a fair value of $10.1 million. These nonperforming loans represent approximately 1.2% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 60.8%.

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%.

~~Table of Contents~~


June 30, 2022					December 31, 2021
State	State Concentration		Principal Balance		State	State Concentration		Principal Balance
California	66.4	%	$	823,450	California	73.9	%	$	730,771
New York	9.8	%	121,760		New York	11.6	%	114,625
Texas	4.7	%	58,349		Florida	2.7	%	26,293
Florida	4.0	%	49,888		Georgia	2.5	%	25,106
Georgia	3.6	%	44,224		Texas	1.9	%	19,062
Other	11.5	%	142,299		Other	7.4	%	73,286
Total	100.0	%	$	1,239,970	Total	100.0	%	$	989,143

These loans are carried at fair value, and accordingly no allowance 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 stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Residential Bridge Loans

The Company is no longer allocating capital to residential bridge loans. The following tables present certain information about the remaining residential bridge loans which are non-performing in the Company's investment portfolio at June 30, 2022 and December 31, 2021 (dollars in thousands):


June 30, 2022
c				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate


7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	2	2,144		78.1	%	0.0	10.4	%
11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%






Total	7	$	5,585	73.3	%	0.0	9.7	%


December 31, 2021
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	4	2,393		76.7	%	0.0	10.4	%
11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%





Total	9	$	5,834	72.9	%	0.0	9.7	%

Table of Contents

The following table presents geographic concentrations by U.S. state in which the collateral securing the Company’s residential bridge loans are located as of June 30, 2022 and December 31, 2021 (dollars in thousands):


June 30, 2022					December 31, 2021
State	Concentration		Principal Balance		State	Concentration		Principal Balance
New York	47.1	%	$	2,631	New York	45.1	%	$	2,631
California	31.4	%	1,754		California	30.1	%	1,754
Florida	20.1	%	1,125		Florida	19.3	%	1,125
New Jersey	1.4	%	75		New Jersey	3.7	%	219
Total	100.0	%	5,585		Pennsylvania	1.8	%	105

					Total	100.0	%	$	5,834

Non-performing Loans

The following table presents the aging of the residential whole loans and bridge loans as of June 30, 2022 (dollars in thousands):


	Residential whole loans(1)					Bridge loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current(1)	3,073	$	1,226,815	$	1,183,917	—	$	—	$	—
1-30 days	8	2,213		2,142		—	—		—
31-60 days	1	359		361		1	849		832
61-90 days	—	—		—		—	—		—
90+ days	20	10,583		9,433		6	4,736		4,263
Total	3,102	$	1,239,970	$	1,195,853	7	$	5,585	$	5,095

(1) As of ~~September~~June 30, ~~2021,~~2022, there was 1 loan in forbearance.

Residential Whole Loans

As of June 30, 2022, there were ~~10 Residential Bridge Loans~~20 residential whole loans carried at fair value in non-accrual status with an unpaid principal balance of approximately ~~$6.5~~$10.6 million and a fair value of ~~$5.8~~$9.4 million. These nonperforming loans represent approximately ~~97.3%~~0.9% of the total outstanding ~~Bridge Loans~~ principal ~~balance of $6.7 million.~~balance. These loans are collateral dependent with a weighted average original LTV of ~~73.1%~~64.0%.

As of December 31, ~~2020,~~2021, 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~~were 20 ~~Residential Bridge Loans~~residential whole loans carried at fair value in non-accrual status with an unpaid principal balance of approximately ~~$9.9~~$12.2 million and a fair value of ~~$8.9~~approximately $12.0 million. These nonperforming loans represent approximately ~~66.0%~~1.2% of the total outstanding ~~Bridge Loans~~ principal ~~balance of $15.2 million.~~balance. These loans are collateral dependent with a weighted average original LTV of ~~73.0%~~60.0%.

Residential Bridge Loans

As of June 30, 2022, the Company had 7 remaining residential bridge loans in the portfolio. Of these, 6 were in non-accrual status with an unpaid principal balance of approximately $4.7 million and a fair value of $4.3 million. These nonperforming loans had an outstanding principal balance of $4.7 million. These loans are collateral dependent.

Table of Contents

As of December 31, 2021, the Company had 9 remaining Residential Bridge Loans in the portfolio. Of these, 6 were in non-accrual status with an unpaid principal balance of $4.8 million and a fair value of $4.4 million. These nonperforming loans had an outstanding principal balance of $5.8 million. These loans are collateral dependent.

The Company concluded that an allowance for credit losses was not necessary for loans carried at amortized costs as of December 31, 2020 since the fair value of the collateral balance less the cost to sell was in excess of the outstanding principal and interest balances. For loansremaining Residential Bridge Loans were carried at fair ~~value, no~~value. No allowance for credit losses was recorded because the valuation adjustments as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020 since the valuation adjustment,~~2021, 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.

Residential Real Estate Owned

As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had 4 ~~and 3~~residential REO properties with an aggregate carrying value of $1.1 million, ~~and $1.1 million, respectively,~~ related to foreclosed Bridge Loans. The residential REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The residential REO properties are classified in "Other assets" in the Consolidated Balance Sheets.

Note 6 — Commercial Loans

Commercial Loans

In January 2019, WMC CRE LLC ("CRE LLC"), a wholly-owned subsidiary of the Company was formed for the purpose of acquiring Commercial Loans. The Commercial Loans owned by CRE LLC are financed under the Commercial Whole Loan Facility. Refer to Note 7 - Financings for details.

The following table presents information about the Commercial Loans owned by CRE LLC as of June 30, 2022 (dollars in thousands):

Loan

Acquisition Date

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

CRE 3

August 2019

Interest-Only Mezzanine loan

90,000

26,934

58%

1-Month LIBOR plus 9.25%

6/29/2021

None(1)

Entertainment and Retail

CRE 4

September 2019

Interest-Only First Mortgage

38,367

37,980

63%

1-Month LIBOR plus 3.02%

8/6/2022

One-Year Extension(2)

Retail

CRE 5

December 2019

Interest-Only First Mortgage

24,535

24,362

62%

1-Month LIBOR plus 3.75%

11/6/2022

NaN One-Year Extensions

Hotel

CRE 6

December 2019

Interest-Only First Mortgage

13,207

13,114

62%

1-Month LIBOR plus 3.75%

11/6/2022

NaN One-Year Extensions

Hotel

CRE 7

December 2019

Interest-Only First Mortgage

7,259

7,208

62%

1-Month LIBOR plus 3.75%

11/6/2022

NaN One-Year Extensions

Hotel

CRE 8

December 2019

Interest-Only First Mortgage

4,425

79%

1-Month LIBOR plus 4.85%

12/6/2022

None

Assisted Living Facilities

177,793

114,023

(1) CRE 3 is in default and not eligible for extension

(2) Extension terms are under discussion. A 30-day forbearance of the maturity was agreed to in order to complete the negotiations and documentation of the extension.

Commercial Loan Trust

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 consolidates the trust because it determined that the wholly-owned RSBC Trust was a VIE and that the Company was the primary beneficiary. As of June 30, 2022, there was one loan remaining in the trust and it is financed under one of the Company's short-term repurchase agreements. The Company holds the financing liability outside the RSBC Trust. Refer to Note 7 - "Financings" for details.

Table of Contents

The following table presents information on the commercial real estate mortgage loan held by RSBC Trust as of June 30, 2022 (dollars in thousands):

Loan

Acquisition Date

Loan Type

Principal Balance

Fair Value

LTV

Interest Rate(1)

Maturity Date(1)

Extension Option

Collateral

SBC 3

January 2019

Interest-Only First Mortgage

14,362

14,398

49%

1-Month LIBOR plus 4.35%

1/6/2023

None

Nursing Facilities

14,362

14,398

(1) During July 2022,the SBC 3 loan was granted a six month extension through January 6, 2023, with a 25 bps increase in rate and a 25 bps extension fee.

Securitized Commercial Loans

Securitized commercial loans isare comprised of commercial loans from consolidated third party sponsored CMBS VIE's. At ~~September~~June 30, ~~2021,~~2022, the Company had a variable interest in 1 third party sponsored CMBS VIE, CSMC 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 this VIE 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.

~~CSMC Trust 2015 - Longhouse MZ~~

In November 2015, the Company acquired a $14.0 million interest in the trust certificate issued by CSMC Trust 2015 - Longhouse MZ (“CSMC Trust”). The Company determined that CSMC 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. As the primary beneficiary, the Company was required to consolidate CSMC Trust and accordingly its investment in CSMC Trust was eliminated in consolidation. The CSMC Trust holds a mezzanine loan collateralized by interests in commercial real estate. The mezzanine loan serves as collateral for the trust certificates. In June 2020, the variable interest the Company acquired was paid off and, accordingly, the CSMC Trust is no longer consolidated.

RETL 2019-RVP

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

~~Table of Contents~~

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 was eliminated in consolidation. The RETL 2019 Trust held a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate.

On September 15, 2021, the commercial loan was paid in full by the borrower and the RETL HRR bond with an outstanding principal amount of $45.3 million held in WMC RETL LLC, a wholly-owned subsidiary of the Company, was paid off. Accordingly, the RETL 2019 Trust is no longer consolidated.

~~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.

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.

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 ~~September~~June 30, ~~2021,~~2022, 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.rule. 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 a commercial loan secured by a first mortgage lien on the borrowers’ fee and leasehold interests in a portion of a super-regional mall. The outstanding principal balance on this commercial loan is $1.4 billion as of ~~September~~June 30, ~~2021.~~2022. The ~~loan's~~loan has a stated maturity date isof 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.

~~Commercial Loans~~

~~Table of Contents~~

In January 2019, WMC CRE LLC ("CRE LLC"), a wholly-owned subsidiary of the Company was formed for the purpose of acquiring commercial loans. The following table presents the commercial loans held by CRE LLC as of September 30, 2021 (dollars in thousands):

Loan Acquisition Date Loan Type Principal Balance Fair Value Original LTV Interest Rate Maturity Date Extension Option Collateral
CRE 3 August 2019 Interest-Only Mezzanine loan $ 90,000 $ 27,495 58% 1-Month LIBOR plus 9.25% 6/29/2021
Two-Year First Extension and One-Year Second Extension
Entertainment and Retail
CRE 4 September 2019 Interest-Only First Mortgage 38,367 38,294 63% 1-Month LIBOR plus 3.02% 8/6/2022
NaN One-Year Extensions
Retail
CRE 5 December 2019 Interest-Only First Mortgage 24,535 24,085 62% 1-Month LIBOR plus 3.75% 11/6/2022
NaN One-Year Extensions
Hotel
CRE 6 December 2019 Interest-Only First Mortgage 13,207 12,964 62% 1-Month LIBOR plus 3.75% 11/6/2022
NaN One-Year Extensions
Hotel
CRE 7 December 2019 Interest-Only First Mortgage 7,259 7,126 62% 1-Month LIBOR plus 3.75% 11/6/2022
NaN One-Year Extensions
Hotel
CRE 8 December 2019 Interest-Only First Mortgage 4,442 4,440 79% 1-Month LIBOR plus 4.85% 12/6/2022 None Assisted Living Facilities
$ 177,810 $ 114,404

~~Commercial Loan Payoffs~~

~~On September 7, 2021, CRE 2, with an outstanding principal balance of $46.8 million collateralized by nursing facilities, was paid off in full.~~

~~Commercial Loan Trust~~

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 September 30, 2021, the Company financed the trust certificate with $10.6 million of repurchase agreements, which is a liability held outside the trust.

~~The following table presents the commercial real estate loan held by RSBC Trust as of September 30, 2021 (dollars in thousands):~~

Loan Acquisition Date Loan Type Principal Balance Fair Value LTV Interest Rate Maturity Date Extension Option Collateral
SBC 3 January 2019 Interest-Only First Mortgage $ 14,362 $ 14,362 49% 1-Month LIBOR plus 4.10% 7/6/2022 None Nursing Facilities
$ 14,362 $ 14,362

~~RSBC Trust Loan Payoffs~~

~~On July 7, 2021, SBC 1, with an outstanding principal balance of $45.2 million collateralized by nursing facilities, was paid off in full.~~

~~On September 24, 2021, SBC 2 with an outstanding principal balance of $9.2 million collateralized by an apartment complex was paid off in full.~~

Consolidated Securitized Commercial Loan Trusts and Commercial Loan Trust

3328

Table of Contents

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. As of September 30, 2021, the Company had~~ 2 commercial consolidated trusts, CSMC USA and RSBC Trust, ~~that~~ collectively ~~hold~~held 2 ~~commercial loans.~~Commercial Loans as of

June 30, 2022

. The following table presents a summary of the assets and liabilities of the 2 consolidated trusts included in the Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

September 30, 2021 December 31, 2020
Cash $ 9,245 $ —
Restricted cash 260 76,132
Securitized commercial loans, at fair value 1,377,005 1,605,335
Commercial Loans, at fair value 14,362 68,466
Interest receivable 5,119 6,248
Total assets $ 1,405,991 $ 1,756,181
Securitized debt, at fair value $ 1,365,494 $ 1,553,722
Interest payable 4,995 5,660
Accounts payable and accrued expenses 9 12
Other liabilities 260 76,132
Total liabilities $ 1,370,758 $ 1,635,526


	June 30, 2022		December 31, 2021

Restricted cash	$	257	$	260
Securitized commercial loans, at fair value	1,243,371		1,355,808
Commercial Loans, at fair value	14,398		14,362
Interest receivable	5,119		5,290
Total assets	$	1,263,145	$	1,375,720
Securitized debt, at fair value	$	1,232,700	$	1,344,370
Interest payable	4,995		5,164
Accounts payable and accrued expenses	9		9
Other liabilities	257		260
Total liabilities	$	1,237,961	$	1,349,803

The Company’s risk with respect to its investment in ~~each~~the securitized commercial loan trust is limited to its direct ownership in the trust. The commercial ~~loans~~loan held by the consolidated securitized commercial loan ~~trusts are~~trust is 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~~ securitized commercial loan of the trust can only be used to satisfy the obligations of that trust. The Company is not contractually required to provide, and has not provided any additional financial support to the securitized commercial loan ~~trusts~~trust for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020.~~2021.

The following table presents the components of the ~~carrying~~fair value of the securitized commercial loans and commercial loans as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

RETL Trust Securitized Commercial Loan, at Fair Value(1)
CSMC USA Trust Securitized Commercial Loan, at Fair Value RSBC Trust Commercial Loans, at Fair Value Commercial Loans, at Fair Value
September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020
Principal balance $ — $ 354,202 $ 1,385,591 $ 1,385,591 $ 14,362 $ 68,750 $ 177,810 $ 256,694
Unamortized premium — 180 — — — — — —
Unamortized discount — — (117,024) (135,653) — (94) (2) (53)
Amortized cost — 354,382 1,268,567 1,249,938 14,362 68,656 177,808 256,641
Gross unrealized gains — — 108,438 16,013 — — — 1
Gross unrealized losses — (14,998) — — — (190) (63,404) (14,585)
Fair value $ — $ 339,384 $ 1,377,005 $ 1,265,951 $ 14,362 $ 68,466 $ 114,404 $ 242,057

~~(1)~~ On September 15, 2021, the commercial loan was paid in full by the borrower and the RETL HRR bond with an outstanding principal amount of $45.3 million held in WMC RETL LLC, a wholly-owned subsidiary of the Company, was paid off. Accordingly, the RETL 2019 Trust is no longer consolidated.


	CSMC USA Trust Securitized Commercial Loan, at Fair Value	RSBC Trust Commercial Loans, at Fair Value				Commercial Loans, at Fair Value
		June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Principal balance		$	1,385,591	$	1,385,591	$	14,362	$	14,362	$	177,793	$	177,797
Unamortized premium		—		—		—		—		—		—
Unamortized discount		(97,425)		(110,770)		—		—		—		—
Amortized cost		1,288,166		1,274,821		14,362		14,362		177,793		177,797
Gross unrealized gains		—		80,987		36		—		—		—
Gross unrealized losses		(44,795)		—		—		—		(63,770)		(61,587)
Fair value		$	1,243,371	$	1,355,808	$	14,398	$	14,362	$	114,023	$	116,210

Non-Performing Commercial Loans

The following table presents the aging of the Commercial Loans as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands):

Table of Contents


		Commercial Loans						Commercial Loans
		No of Loans	Principal		Fair Value			No of Loans	Principal		Fair Value
Current	Current	6	$	102,172	$	101,271	Current	6	$	102,155	$	101,487
1-30 days	1-30 days	—	—		—		1-30 days	—	—		—
31-60 days	31-60 days	—	—		—		31-60 days	—	—		—
61-90 days	61-90 days	—	—		—		61-90 days	—	—		—
90+ days	90+ days	1	90,000		27,495		90+ days	1	90,000		26,934
Total	Total	7	$	192,172	$	128,766	Total	7	$	192,155	$	128,421

The 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 ~~assets.~~assets, and with the general return to pre-covid operations with pent up demand, leisure hospitality has come back strong in desirable markets, but other retail sectors are showing slower recovery due to a mix of post-COVID economic factors. The low average original LTV of the Company's commercial loan portfolio of 59.7%, reflecting significant equity value that the sponsors are motivated to protect, is a mitigating factor of these risks. ~~Still~~However, there is no guarantee that losses will not occur.

CRE ~~1 Loan~~

In October 2020, the Company commenced foreclosure proceedings for its non-performing commercial loan with an outstanding principal balance of $30.0 million.secured by a hotel. However, on February 24, 2021, the borrower filed for bankruptcy protection halting the foreclosure process. In August 2021, the bankruptcy case was dismissed by the bankruptcy court and the Company and the other holders of the loan foreclosed on the property through a special purpose entity ("SPE") formed for the purpose of holding the property. The process of marketing the property began following the foreclosure but the borrower has continued to file legal challenges to the sale process. While the Company believes these legal challenges have no merit, they have delayed moving forward with the sale of the property. Based on preliminary bids, the Company believes there is a reasonable likelihood that its investment along with the other members' interest will be recovered, although there is no assurance of full recovery

The SPE is consolidated by the Company and the property is recorded at the lower of cost or fair value less cost to sell. As of September 30, 2021, the REO is recorded at $42.5 million and classified in "Other assets" in the Consolidated Balance Sheets and the other members' interests in the SPE of approximately $11.9 million are recorded as "Non-controlling interest" in the consolidated financial statements.

~~CRE~~ 3 Loan

As of ~~September~~June 30, ~~2021,~~2022, the CRE 3 junior mezzanine loan which has an outstanding principal balance of $90.0 million secured by a class A retail and entertainment complex located in the North East U.S. (the “Property”) was in default. The Property, which was originally scheduled to open in March 2020, was severely impacted by COVID-19 related shutdowns and restrictions and continues to face the challenging conditions impacting large portions of the retail sector. The Company was receiving interest payments on this loan from a reserve that was exhausted in May 2021 and the loan became non-performing.

Additionally, on May 10, 2021, the administrative agent for the senior mortgage loan on the Property (the “Administrative Agent”) notified us, as administrative agent for the junior mezzanine loan, of the Administrative Agent’s intent to accept an assignment in lieu of foreclosure with respect to the Property if the junior mezzanine lenders did not elect to purchase the senior mortgage loan within 30 days pursuant to the terms set forth in an intercreditor agreement among the Administrative Agent, the Company and the senior mezzanine lender. The senior mezzanine lender was provided with a similar notice on May 10, 2021. Since the original notice provided by the Administrative Agent on May 10, 2021, the Administrative Agent has extended the deadline for the junior mezzanine lenders and the senior mezzanine lender to exercise their purchase right with respect to the senior mortgage loan a total of three times, with the most recent extension expired on July 14, 2021, and neither the junior mezzanine lenders nor the senior mezzanine lender offered to purchase the senior mortgage loan.

The Company is currently in discussions with the borrower and certain other lenders regarding alternatives to address the situation which might include modifications of loan terms, deferral of payments, ~~and~~and/or the funding of new advances. There can be no assurance that these discussions will result in an outcome in which the Company would be repaid any amount of the loan and the Company may suffer further declines in fair value with respect to this mezzanine investment. ~~For the three months~~

~~Table of Contents~~

~~ended September 30, 2021, the Company recorded a further decline~~ ~~of $5.2 million in the fair value of this investment. T~~heThe Company could experience a total loss of its investment under various scenarios, which at current levels would result in a ~~$27.5~~$26.9 million reduction in the Company’s book value.

Commercial Real Estate Owned

Hotel REO

In February 2022, the Company along with other Hotel REO investors, sold the unencumbered hotel property which was foreclosed on in the third quarter of 2021 for $55.9 million. The Company and the other investors fully recovered their aggregate initial investment of $42.0 million. The Company and the other investors recognized a gain on sale of approximately $12.2 million.

Table of Contents

Note 7— Financings

Repurchase Agreements

The Company has primarily financed its investment acquisitions with repurchase agreements. The repurchase agreements bear interest at a contractually agreed-upon rate and historically had terms ranging from one month to 1812 months. The Company’s repurchase agreement borrowings are accounted for as secured borrowings when the Company maintains effective control of the financed assets. Under these 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 ~~timeframe~~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.

The market disruptions surrounding COVID-19 resulted in the decline of the Company's asset values making it challenging to obtain repurchase agreement financing with favorable terms or at all. The Company's repurchase agreement counterparties have increased borrowing rates and increased haircuts. 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 3 longer term financing arrangements to reduce its exposure to short-term financings with daily ~~mark to market~~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 was ~~approximately 84% of the aggregate unpaid principal balance of the loans. The facility had an original maturity of October 20, 2021. All principal payments~~extended on May 6, 2022 and ~~income generated by the loans during the term of the facility were used to pay principal and~~matures on Nov 4, 2022. It bears 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~~at 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 such time, when the Company 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 part of the financing arrangements noted above, 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 was payable at the maturity of the facility, and was 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 served to convert the existing residential loan facility to a limited mark to market margin facility that bears an interest rate of ~~LIBOR~~SOFR plus ~~2.75%,~~2.00% with a ~~LIBOR~~SOFR 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.~~ The ~~balance of~~ ~~$8.5 million~~ ~~is payable at October 5, 2021 when the amended facility matures. The premium recapture fee was eliminated for new and remaining investments financed under the amended facility.~~

~~Table of Contents~~

~~Under the~~Company finances its Non-QM residential whole ~~loan facility, as~~loans held in RMI 2015 Trust under this facility. As of ~~September~~June 30, ~~2021,~~2022, the Company had ~~approximately $236.8 million in~~outstanding borrowings ~~with an interest rate~~ of ~~one month LIBOR plus 2.75%.~~$344.5 million. The borrowing is secured by Non-QM residential whole loans with ~~an estimated~~a fair ~~market~~ value of $~~287.1 million.~~401.5 million as of June 30, 2022.

~~The Company further amended its residential whole loan facility on November 5, 2021. Refer to Note 16 - "Subsequent Events" for details.~~

Non-Agency CMBS and Non-Agency RMBS Facility

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 was reached, the Company may elect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The ~~term of this~~ facility was 12 months, subject to a 12 month extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility was paid to the Company no less often than monthly. Interestextended on ~~the facility was due from the Company at a rate of three-month LIBOR plus 5.00% payable quarterly in arrears. Half of all principal repayments~~May 2, 2022 and matures on the underlying assets was applied to repay the obligations 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.

On May 5, 2021, the Company amended its Non-Agency CMBS and Non-Agency RMBS financing facility to, among other things, extend the facility for an additional 12 months and reduce the interest rate. The amended facility has improved advance rates and1, 2023. It bears interest at a rate of ~~three-month LIBOR~~SOFR plus 2.00%. As of ~~September~~June 30, ~~2021,~~2022, the outstanding balance under this facility was ~~$111.5~~$101.0 million. The borrowing is secured by investments with ~~an estimated~~a fair market value of ~~$196.7~~$161.0 million as of ~~September~~June 30, ~~2021.~~2022.

Commercial Whole Loan Facility

OnThe facility was extended on May ~~5, 2021, the Company amended its Commercial Whole Loan Facility to, among other things, convert the term to~~30, 2022 and matures on Nov 4, 2022. It bears interest at a ~~12-month facility with up to a 12-month extension option, subject to the lender's consent.~~

rate of SOFR plus 2.25%. As of ~~September~~June 30, ~~2021,~~2022, the ~~Company had approximately~~outstanding balance under this facility was $63.7 ~~million in borrowings, with a weighted average interest rate of 2.27% under its commercial whole loan facility.~~million. The borrowing is secured by the performing commercial loans that are held in CRE LLC, with an estimated fair market value of ~~$86.9~~$87.1 million as of ~~September~~June 30, 2021. The facility was subject to automatic monthly rolling until such time that it is terminated pursuant to the terms of the agreement by either the borrower or lender or until certain conditions of default.2022.

Financial Metrics

Certain of the Company’s financing arrangements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if the Company does not maintain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity, ~~and~~ liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. ~~The~~With the exception of one repurchase agreement for which the Company received a waiver, the Company was in compliance with the terms of such financial tests as of ~~September~~June 30, ~~2021.~~

~~Outstanding Borrowings~~

2022.

As of ~~September~~June 30, ~~2021,~~2022, the Company had borrowings under 5 of its master repurchase agreements. The following table summarizes certain characteristics of the Company’s repurchase agreements at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):

Table of Contents


		September 30, 2021					December 31, 2020						June 30, 2022					December 31, 2021
Securities Pledged	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)	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:	Short-Term Borrowings:											Short-Term Borrowings:

Agency RMBS	Agency RMBS	$	1,048	1.05	%	59	$	1,418	1.34	%	59	Agency RMBS	$	329	1.82	%	32	$	976	1.02	%	58
Non-Agency CMBS		10,314		1.75	%	12	10,313		2.25	%	14

Residential Whole Loans (1)		41,013		2.66	%	4	29,800		3.71	%	15
Non-Agency RMBS (1)												Non-Agency RMBS (1)	31,628		3.44	%	1	38,354		2.94	%	4
Residential Whole Loans (2)												Residential Whole Loans (2)	1,116		4.12	%	26	1,439		2.57	%	5
Residential Bridge Loans ~~(1)~~(2)	Residential Bridge Loans ~~(1)~~(2)	5,817		2.60	%	4	11,254		2.73	%	36	Residential Bridge Loans ~~(1)~~(2)	4,166		4.13	%	26	4,368		2.61	%	5
Commercial Loans ~~(1)~~(2)	Commercial Loans ~~(1)~~(2)	10,603		3.18	%	4	34,375		3.32	%	75	Commercial Loans ~~(1)~~(2)	6,463		4.73	%	26	6,463		3.20	%	5

Membership Interest		—		—	%	0	18,844		2.90	%	29
Other Securities												Other Securities	2,126		4.09	%	18	2,457		3.50	%	18
Total short-term borrowings												Total short-term borrowings	45,828		3.72	%	8	54,057		2.92	%	6
Long-Term Borrowings:												Long-Term Borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility												Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS (1)												Non-Agency CMBS (1)	55,155		2.28	%	234	59,802		2.14	%	125
Non-Agency RMBS												Non-Agency RMBS	21,943		2.28	%	307	15,632		2.14	%	125
Other Securities	Other Securities	2,587		3.52	%	19	2,594		4.51	%	19	Other Securities	23,948		2.28	%	308	27,506		2.22	%	125
Subtotal	Subtotal	71,382		2.60	%	7	108,598		3.19	%	39	Subtotal	101,046		2.28	%	267	102,940		2.16	%	125
Long-Term Borrowings:
Non-Agency CMBS (2)		68,352		2.12	%	193	66,767		5.23	%	126
Non-Agency RMBS		15,632		2.12	%	217	14,643		5.23	%	126
Residential Whole Loans (1)(3)		236,767		3.00	%	36	30,224		3.00	%	278
Residential Whole Loan Facility												Residential Whole Loan Facility
Residential Whole Loans (2)												Residential Whole Loans (2)	344,544		3.61	%	127	396,531		2.25	%	308
Commercial Whole Loan Facility												Commercial Whole Loan Facility
Commercial Loans	Commercial Loans	63,669		2.27	%	360	124,937		2.17	%	287	Commercial Loans	63,658		2.64	%	87	63,661		2.27	%	268
Other Securities		27,506		2.12	%	217	13,677		5.24	%	126
Subtotal		411,926		2.65	%	113	250,248		3.74	%	225
Total long-term borrowings												Total long-term borrowings	509,248		3.23	%	150	563,132		2.24	%	270
Repurchase Agreements Borrowings	Repurchase Agreements Borrowings	$	483,308	2.64	%	98	$	358,846	3.57	%	169	Repurchase Agreements Borrowings	$	555,076	3.27	%	138	$	617,189	2.30	%	247
Less Unamortized Debt Issuance Costs	Less Unamortized Debt Issuance Costs	40		N/A		N/A	1,923		N/A		N/A	Less Unamortized Debt Issuance Costs	—		N/A		N/A	—		N/A		N/A
Repurchase Agreements Borrowings, net	Repurchase Agreements Borrowings, net	$	483,268	2.64	%	98	$	356,923	3.57	%	169	Repurchase Agreements Borrowings, net	$	555,076	3.27	%	138	$	617,189	2.30	%	247

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

(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated ~~upon~~in consolidation. ~~This includes $39.3 million borrowings on the trust certificates would have been classified as Non-Agency RMBS.~~

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

~~(3)The Residential Whole Loan facility's maturity was extended one month in October 2021.The weighted average remaining maturity reflects the one month extension.~~

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, repurchase agreements collateralized by investments had the following remaining maturities:


(dollars in thousands)	(dollars in thousands)	September 30, 2021		December 31, 2020		(dollars in thousands)	June 30, 2022		December 31, 2021

1 to 29 days	1 to 29 days	$	307,487	$	59,856	1 to 29 days	$	54,127	$	53,081
30 to 59 days	30 to 59 days	—		13,421		30 to 59 days	30,257		370
60 to 89 days	60 to 89 days	12,181		35,321		60 to 89 days	—		606

Greater than or equal to 90 days	Greater than or equal to 90 days	163,640		250,248		Greater than or equal to 90 days	470,692		563,132
Total	Total	$	483,308	$	358,846	Total	$	555,076	$	617,189

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At ~~September~~June 30, ~~2021,~~2022, 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):


		September 30, 2021						June 30, 2022
Counterparty	Counterparty	Amount of Collateral at Risk, at fair value		Weighted Average Remaining Maturity (days)	Percentage of Stockholders’ Equity		Counterparty	Amount of Collateral at Risk, at fair value		Weighted Average Remaining Maturity (days)	Percentage of Stockholders’ Equity
Credit Suisse AG, Cayman Islands Branch							Credit Suisse AG, Cayman Islands Branch	$	82,801	112	59.0	%
Citigroup Global Markets Inc.	Citigroup Global Markets Inc.	$	85,627	202	40.7	%	Citigroup Global Markets Inc.	60,229		267	42.9	%
Credit Suisse AG, Cayman Islands Branch		76,778		71	36.5	%

Collateral for Borrowings under Repurchase Agreements

The following table summarizes the Company’s collateral positions, with respect to its borrowings under repurchase agreements at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


		September 30, 2021						December 31, 2020							June 30, 2022						December 31, 2021
		Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest		Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest			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:	Assets pledged for borrowings under repurchase agreements:													Assets pledged for borrowings under repurchase agreements:

Agency RMBS, at fair value	Agency RMBS, at fair value	$	1,342	$	20	$	1,362	$	1,708	$	49	$	1,757	Agency RMBS, at fair value	$	264	$	6	$	270	$	1,172	$	19	$	1,191
Non-Agency CMBS, at fair value(1)	Non-Agency CMBS, at fair value(1)	136,968		564		137,532		152,275		649		152,924		Non-Agency CMBS, at fair value(1)	94,809		413		95,222		107,624		504		108,128
Non-Agency RMBS, at fair value	Non-Agency RMBS, at fair value	28,003		182		28,185		25,382		160		25,542		Non-Agency RMBS, at fair value	63,469		334		63,803		66,555		343		66,898
Residential Whole Loans, at fair value(2)	Residential Whole Loans, at fair value(2)	328,811		1,494		330,305		97,566		543		98,109		Residential Whole Loans, at fair value(2)	402,870		2,949		405,819		453,447		2,674		456,121
Residential Bridge Loans(2)	Residential Bridge Loans(2)	5,960		78		6,038		12,960		180		13,140		Residential Bridge Loans(2)	5,095		66		5,161		5,207		91		5,298
Commercial Loans, at fair value(2)	Commercial Loans, at fair value(2)	101,271		346		101,617		310,523		1,850		312,373		Commercial Loans, at fair value(2)	101,487		346		101,833		101,459		360		101,819

Membership interest(3)		—		n/a		—		33,690		—		33,690

Other securities, at fair value	Other securities, at fair value	52,093		82		52,175		48,754		44		48,798		Other securities, at fair value	40,534		75		40,609		51,648		100		51,748
Cash~~(4)~~(3)	Cash~~(4)~~(3)	1,428		—		1,428		1,817		—		1,817		Cash~~(4)~~(3)	784		—		784		3,151		—		3,151
Total	Total	$	655,876	$	2,766	$	658,642	$	684,675	$	3,475	$	688,150	Total	$	709,312	$	4,189	$	713,501	$	790,263	$	4,091	$	794,354

(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.

A reduction in the value of pledged assets typically results in the repurchase agreement counterparties initiating a margin call. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, investments held by counterparties as security for repurchase agreements totaled approximately ~~$654.4~~$708.5 million and ~~$682.9~~$787.1 million, respectively. Cash collateral held by counterparties at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 was approximately ~~$1.4 million~~$784 thousand and ~~$1.8~~$3.2 million, respectively. Cash posted by repurchase agreement counterparties at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021 was $0approximately $360 thousand and ~~$320 thousand,~~zero, respectively.

Convertible Senior Unsecured Notes

6.75% Convertible Senior Unsecured Notes due 2024 (the "2024 Notes")

In September 2021, the Company issued $86.3 million aggregate principal amount of the 2024 Notes for net proceeds of ~~$83.4~~$83.3 million. Interest on the 2024 Notes is paid semiannually. The 2024 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 2024 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the 2024 Notes. The post reverse stock split conversion rate is 33.7952 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $29.59 per share of common stock. The 2024 Notes

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supplemental indenture for the 2024 Notes. The initial conversion rate was 337.9520 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $2.96 per share of common stock. The 2024 Notes mature on September 15, 2024, 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.

6.75% Convertible Senior Unsecured Notes due 2022 (the "2022 Notes")

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had ~~$45.7~~$27.0 million and ~~$175.0~~$37.7 million aggregate principal amount, respectively, of the 2022 Notes ~~outstanding through 3 issuances.~~outstanding. Interest on the 2022 Notes is paid semiannually. The 2022 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 2022 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the 2022 Notes. The ~~initial and current~~post reverse stock split conversion rate ~~was 83.1947~~is 8.3195 shares of common stock per $1,000 principal amount of notes and represented a conversion price of ~~$12.02~~$120.20 per share of common stock. The 2022 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 2022 Notes Exchanges and Repurchases

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 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.

During the ~~quarter~~quarters ended ~~December~~June 30, 2022 and March 31, ~~2020,~~2022, respectively, the Company repurchased ~~$25.0~~$7.2 million and $3.4 million aggregate principal amount of the 2022 Notes at an approximate ~~13% discount~~0.6% and 0.8% premium to par value, plus accrued and unpaid interest.

During the quarter ended March 31, 2021, the Company repurchased $6.7 million aggregate principal amount of the 2022 Notes at an approximate 6.3% discount to par value, plus accrued and unpaid interest.

~~During August 2021, the Company repurchased $22.3 million aggregate principal amount of the 2022 Notes at an approximate 2.8% discount to par value, plus accrued and unpaid interest.~~

In addition, in September 2021, the Company used the net proceeds from the issuance of the 2024 Notes and $20.2 million in cash on hand to repurchase $100.3 million of the 2022 Notes at par, plus accrued and unpaid interest.

Securitized Debt

~~Commercial Mortgage-Backed Notes~~

~~CSMC 2014 USA~~

~~The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2021 (dollars in thousands):~~

~~Table of Contents~~

Classes Principal Balance Coupon Fair Value Contractual Maturity
Class A-1 $ 120,391 3.3 % $ 126,264 9/11/2025
Class A-2 531,700 4.0 % 570,167 9/11/2025
Class B 136,400 4.2 % 138,562 9/11/2025
Class C 94,500 4.3 % 92,630 9/11/2025
Class D 153,950 4.4 % 142,388 9/11/2025
Class E 180,150 4.4 % 161,900 9/11/2025
Class F 153,600 4.4 % 118,664 9/11/2025
Class X-1(1)
N/A 0.5 % 12,347 9/11/2025
Class X-2(1)
N/A 0.03 % 2,572 9/11/2025
$ 1,370,691 $ 1,365,494

~~(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2021, respectively.~~

At September 30, 2021, 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 for which the Company elected the fair value option had a fair value of $1.4 billion at September 30, 2021, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of approximately $1.4 billion, approximately $201.6 million is owned by related parties and approximately $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 September 30, 2021, 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 change 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,~~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 cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2019's residential mortgage pass-through certificates at ~~September~~June 30, ~~2021~~2022 (dollars in thousands):


Classes	Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity	Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:	Offered Notes:							Offered Notes:
Class A-1	Class A-1	$	330,944	3.3%	$	330,944	4/25/2049	Class A-1	$	203,885	3.3%	$	203,885	4/25/2049
Class A-2	Class A-2	17,740		3.5%	17,740		4/25/2049	Class A-2	10,934		3.5%	10,934		4/25/2049
Class A-3	Class A-3	28,106		3.8%	28,106		4/25/2049	Class A-3	17,323		3.8%	17,323		4/25/2049
Class M-1	Class M-1	25,055		4.8%	25,055		4/25/2049	Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	Subtotal	$	401,845		$	401,845		Subtotal	$	257,197		$	257,197
Less: Unamortized Deferred Financing Costs	Less: Unamortized Deferred Financing Costs	N/A			3,727			Less: Unamortized Deferred Financing Costs	N/A			3,056
Total	Total	$	401,845		$	398,118		Total	$	257,197		$	254,141

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 were eliminated in consolidation. The securitized debt of the Arroyo Trust 2019 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At ~~September~~June 30, ~~2021, Residential Whole Loans,~~2022, residential whole loans, with an outstanding principal balance of approximately ~~$414.0~~

~~Table of Contents~~

$277.1 million, serve as collateral for the Arroyo Trust 2019's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the 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.

Table of Contents

Arroyo Trust 2020

In June 2020, the Company completed a residential mortgage-backed securitization comprised of $355.8 million of Non-QM ~~Residential Whole Loans,~~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 the issued Arroyo Trust 2020's residential mortgage pass-through certificates at ~~September~~June 30, ~~2021~~2022 (dollars in thousands):


Classes	Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity	Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:	Offered Notes:							Offered Notes:
Class A-1A	Class A-1A	$	148,244	1.7%	$	148,244	3/25/2055	Class A-1A	$	82,908	1.7%	$	82,908	3/25/2055
Class A-1B	Class A-1B	17,591		2.1%	17,591		3/25/2055	Class A-1B	9,838		2.1%	9,838		3/25/2055
Class A-2	Class A-2	13,518		2.9%	13,518		3/25/2055	Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	Class A-3	17,963		3.3%	17,963		3/25/2055	Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	Class M-1	11,739		4.3%	11,739		3/25/2055	Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	Subtotal	$	209,055		$	209,055		Subtotal	$	135,966		$	135,966
Less: Unamortized Deferred Financing Costs	Less: Unamortized Deferred Financing Costs	N/A			2,154			Less: Unamortized Deferred Financing Costs	N/A			1,788
Total	Total	$	209,055		$	206,901		Total	$	135,966		$	134,178

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 were eliminated in consolidation. The securitized debt of the Arroyo Trust 2020 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At ~~September~~June 30, ~~2021~~2022, ~~Residential Whole Loans,~~residential whole loans with an outstanding principal balance of approximately ~~$216.4~~$148.0 million serve as collateral for the Arroyo Trust 2020's securitized debt. The Company 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 equal to or less than 30% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2022-1

In February 2022, the Company completed a residential-mortgage backed securitization comprised of $432.0 million of Non-QM residential whole loans, issuing $398.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with 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."

The following table summarizes the issued Arroyo Trust 2022-1's residential mortgage pass-through certificates at June 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Offered Notes:
Class A-1A	$	223,469	2.5%	$	211,365	12/25/2056
Class A-1B	82,942		3.3%	74,912		12/25/2056
Class A-2	21,168		3.6%	18,250		12/25/2056
Class A-3	28,079		3.7%	23,241		12/25/2056
Class M-1	17,928		3.7%	14,000		12/25/2056


Total	$	373,586		$	341,768

Table of Contents

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 were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-1 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At June 30, 2022, residential whole loans with an outstanding principal balance of approximately$405.0 millionserve as collateral for the Arroyo Trust 2022-1's securitized debt. The Company 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 equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.

Commercial Mortgage-Backed Notes

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at June 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	112,237	9/11/2025
Class A-2	531,700		4.0	%	502,516		9/11/2025
Class B	136,400		4.2	%	125,513		9/11/2025
Class C	94,500		4.3	%	83,954		9/11/2025
Class D	153,950		4.4	%	142,388		9/11/2025
Class E	180,150		4.4	%	141,159		9/11/2025
Class F	153,600		4.4	%	110,014		9/11/2025
Class X-1(1)	N/A		0.5	%	12,347		9/11/2025
Class X-2(1)	N/A		—	%	2,572		9/11/2025
	$	1,370,691			$	1,232,700

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of June 30, 2022, respectively.

At June 30, 2022, 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 $1.2 billion at June 30, 2022, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of $1.4 billion, $198.3 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 June 30, 2022, 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."

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 September 30, 2021 and December 31, 2020 (dollars in thousands):~~

September 30, 2021 December 31, 2020
Derivative Instrument Accounting Designation Consolidated Balance Sheets Location Notional Amount Fair Value Notional Amount Fair Value
Credit default swaps, asset Non-Hedge Derivative assets, at fair value 2,030 $ 94 2,030 $ 161
Total derivative instruments, assets 94 161
Interest rate swaps, liability Non-Hedge Derivative liability, at fair value 22,000 (25) — —
Credit default swaps, liability Non-Hedge Derivative liability, at fair value 4,140 (537) 4,140 (656)
Total derivative instruments, liabilities (562) (656)
Total derivative instruments, net $ (468) $ (495)

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The following table summarizes the Company’s derivative instruments at June 30, 2022 and December 31, 2021 (dollars in thousands):


			June 30, 2022			December 31, 2021
Derivative Instrument	Accounting Designation	Consolidated Balance Sheets Location	Notional Amount	Fair Value			Notional Amount	Fair Value






Credit default swaps, asset	Non-Hedge	Derivative assets, at fair value	2,030	$	365		2,030	$	105
TBA securities, asset	Non-Hedge	Derivative assets, at fair value	100,000	1,383			—	—
Total derivative instruments, assets				1,748				105

Interest rate swaps, liability	Non-Hedge	Derivative liability, at fair value	174,000	(1,158)			22,000	(38)




Credit default swaps, liability	Non-Hedge	Derivative liability, at fair value	4,140	(714)			4,140	(564)

Total derivative instruments, liabilities				(1,872)				(602)
Total derivative instruments, net				$	(124)			$	(497)

The following ~~table summarizes~~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 three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):

Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Return (Recovery) of Basis Mark-to-Market
Contractual interest income (expense), net(1)
Total
Three months ended September 30, 2021
Interest rate swaps $ — $ 485 $ — $ (71) $ 96 $ 510
Interest-Only Strips— accounted for as derivatives — — (59) (90) 82 (67)
Credit default swaps 16 — — 56 — 72
Total $ 16 $ 485 $ (59) $ (105) $ 178 $ 515
Three months ended September 30, 2020
Interest-Only Strips— accounted for as derivatives $ — $ — $ (166) $ 71 $ 200 $ 105
Credit default swap 166 — — (359) — (193)
Total $ 166 $ — $ (166) $ (288) $ 200 $ (88)


		Realized Gain (Loss), net													Realized Gain (Loss), net
Description	Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total		Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2021
Three months ended June 30, 2022														Three months ended June 30, 2022
Interest rate swaps	Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667	Interest rate swaps	$	—	$	5,781	$	—	$	(671)	$	(262)	$	4,848

Interest-Only Strips— accounted for as derivatives	Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)		Interest-Only Strips— accounted for as derivatives	—		—		(43)		(107)		55		(95)

Credit default swaps	Credit default swaps	48		—		—		52		—		100		Credit default swaps	16		—		—		(2,103)		—		(2,087)

TBAs														TBAs	732		—		—		1,383		—		2,115
Total	Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716	Total	$	748	$	5,781	$	(43)	$	(1,498)	$	(207)	$	4,781

Nine months ended September 30, 2020
Three months ended June 30, 2021														Three months ended June 30, 2021
Interest rate swaps	Interest rate swaps	$	(262)	$	(179,759)	$	262	$	(2,515)	$	(1,395)	$	(183,669)	Interest rate swaps	$	—	$	35	$	—	$	46	$	76	$	157
Interest rate swaptions		80		—		—		—		—		80

Interest-Only Strips— accounted for as derivatives	Interest-Only Strips— accounted for as derivatives	(940)		—		(982)		(512)		1,176		(1,258)		Interest-Only Strips— accounted for as derivatives	—		—		(79)		(34)		102		(11)

Credit default swap														Credit default swap	16		—		—		13		—		29

Credit default swap		(9,550)		—		—		(2,023)		—		(11,573)
TBAs		(2,430)		—		—		928		—		(1,502)
Total	Total	$	(13,102)	$	(179,759)	$	(720)	$	(4,122)	$	(219)	$	(197,922)	Total	$	16	$	35	$	(79)	$	25	$	178	$	175

At September 30, 2021 and December 31, 2020, the Company had cash pledged as collateral for derivatives of approximately $1.4 million and $510 thousand, respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets.

~~Interest rate swaps~~

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	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Six months ended June 30, 2022
Interest rate swaps	$	—	$	11,321	$	—	$	(1,120)	$	(553)	$	9,648

Interest-Only Strips— accounted for as derivatives	—		—		(115)		(216)		144		(187)





Credit default swaps	31		—		—		110		—		141
TBAs	732		—		—		1,383		—		2,115
Total	$	763	$	11,321	$	(115)	$	157	$	(409)	$	11,717


Six months ended June 30, 2021
Interest rate swaps	$	—	$	35	$	—	$	46	$	76	$	157

Interest-Only Strips— accounted for as derivatives	—		—		(173)		(34)		223		16




Credit default swap	32		—		—		(4)		—		28

Total	$	32	$	35	$	(173)	$	8	$	299	$	201

At June 30, 2022 and December 31, 2021, the Company had cash pledged as collateral for derivatives of approximately $5.0 million and $1.4 million, respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets. In addition, at June 30, 2022 and December 31, 2021, the Company held securities of $2.8 million and zero, respectively, received as collateral from its derivative counterparties to satisfy margin requirements.

Interest rate swaps

The Company uses interest rate swaps 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 to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. 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. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin 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~~

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From time to time, the Company may enter into interest rate swaps. During the nine months ended September 30, 2021, the Company entered into a fixed-pay interest rate swap and a variable-pay interest rate swap with notional amounts of $22.0 million and $56.5 million, respectively. The Company terminated the variable-pay interest rate swap during the three months ended September 30, 2021.

In March 2020, the Company terminated fixed-pay interest rate swaps with a notional value of approximately $3.1 billion and variable-pay interest rate swaps with a notional value of approximately $1.9 billion to reduce hedging costs and associated margin volatility. As of December 31, 2020, the Company did not have any interest rate swaps in its derivative holdings.

The following ~~table provides~~tables provide additional information on the Company's fixed-pay interest rate ~~swap~~swaps as of ~~September~~June 30, 2022 and December 31, 2021 (dollars in thousands):


		September 30, 2021								June 30, 2022
Fixed Pay Interest Rate Swap Remaining Term	Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)	Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)	Forward Starting
Greater than 1 year and less than 3 years									Greater than 1 year and less than 3 years	$	60,000	1.4	%	0.6	%	1.8	—	%
Greater than 3 years and less than 5 years									Greater than 3 years and less than 5 years	70,000		1.4	%	0.4	%	4.6	—	%
Greater than 5 years	Greater than 5 years	$	22,000	1.2	%	0.1	%	10	Greater than 5 years	44,000		2.1	%	0.3	%	15.1	50.0	%
Total	Total	$	22,000	1.2	%	0.1	%	10	Total	$	174,000	1.6	%	0.5	%	6.3	12.6	%


	December 31, 2021
Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)	Forward Starting


Greater than 5 years	$	22,000	1.2	%	0.1	%	9.8	—	%
Total	$	22,000	1.2	%	0.1	%	9.8	—	%

To-Be-Announced Securities

The Company purchased or sold TBAs during the six months ended June 30, 2022. There were no open TBA positions as of December 31, 2021. The following is a summary of the Company's TBA positions as of June 30, 2022, reported in "Derivative assets, at fair value" and "Derivative liability, at fair value" in the Consolidated Balance Sheets (dollars in thousands):


	June 30, 2022
	Notional Amount		Fair Value
Purchase contracts, asset	$	—	$	—
Sale contracts, asset	(100,000)		1,383
TBA securities, asset	(100,000)		1,383
Purchase contracts, liability	—		—
Sale contracts, liability	—		—
TBA securities, liability	—		—
TBA securities, net	$	(100,000)	$	1,383

The following table presents additional information about the Company's contracts to purchase and sell TBAs for the six months ended June 30, 2022 (dollars in thousands):


	Notional Amount December 31, 2021		Additions		Settlement, Termination, Expiration or Exercise		Notional Amount June 30, 2022
Purchase of TBAs	$	—	$	400,000	$	(400,000)	$	—
Sale of TBAs	$	—	$	500,000	$	(400,000)	$	100,000

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

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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

The Company currently has outstanding 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.

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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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 (dollars in thousands):


		September 30, 2021														June 30, 2022
		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				Net Amount			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				Net Amount
Description	Description					Financial Instruments(1)			Cash Collateral (1)		Description							Financial Instruments(1)						Cash Collateral (1)
Derivative Assets	Derivative Assets																		Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	1,208	$	—		$	1,208	$	(1,208)	$	—	$	—	Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	728			$	—	$	728		$	(206)	$	—	$	522
Derivative asset, at fair value(2)	Derivative asset, at fair value(2)	94		—			94		(94)		—		—		Derivative asset, at fair value(2)	1,748				—		1,748			(365)		—		1,383

Total assets	Total assets	$	1,302	$	—		$	1,302	$	(1,302)	$	—	$	—	Total assets	$	2,476			$	—	$	2,476		$	(571)	$	—	$	1,905

Derivative Liabilities and Repurchase Agreements	Derivative Liabilities and Repurchase Agreements														Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value~~(2)~~(3)	Derivative liability, at fair value~~(2)~~(3)	$	562	$	—		$	562	$	(94)	$	(468)	$	—	Derivative liability, at fair value~~(2)~~(3)	$	1,872			$	—	$	1,872		$	(365)	$	(1,467)	$	40
Repurchase Agreements~~(3)~~(4)	Repurchase Agreements~~(3)~~(4)	483,268		—			483,268		(483,268)		—		—		Repurchase Agreements~~(3)~~(4)	555,076				—		555,076			(555,010)		(66)		—
Total liabilities		$	483,830	$	—		$	483,830	$	(483,362)	$	(468)	$	—
Total liability															Total liability	$	556,948			$	—	$	556,948		$	(555,375)	$	(1,533)	$	40

(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, whole loans, 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 and credit default swaps.

(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $5.0 million as of June 30, 2022.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $708.5 million as of June 30, 2022.

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	December 31, 2021
	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				Net Amount
							Financial Instruments(1)		Cash Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	1,058	$	—	$	1,058	$	(1,058)	$	—	$	—
Derivative asset, at fair value(2)	105		—		105		(105)		—		—
Total derivative assets	$	1,163	$	—	$	1,163	$	(1,163)	$	—	$	—

Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)	$	602	$	—	$	602	$	(105)	$	(497)	$	—
Repurchase Agreements(4)	617,189		—		617,189		(617,189)		—		—
Total derivative liability	$	617,791	$	—	$	617,791	$	(617,294)	$	(497)	$	—

(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. ~~In addition, the Financial Instruments column includes reverse repurchase agreement receivables that are available to be offset against repurchase agreement liabilities.~~ Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.

(2)~~Cash collateral pledged against the Company’s derivative counterparties was approximately $1.4 million as of September 30, 2021.~~

~~(3)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $654.4 million as of September 30, 2021.~~

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 Net Amount
Financial
Instruments(1)
Cash
Collateral (1)
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) $ —

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~~(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 Pledged column of the tables above represents amounts pledged as collateral against derivative transactions.

~~(2)~~Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps and credit default ~~swaps and futures contracts.~~swaps.

(3)Cash collateral pledged against the Company’s derivative counterparties was approximately ~~$510 thousand~~$1.4 million as of December 31, ~~2020.~~2021.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately ~~$682.9~~$787.1 million as of December 31, ~~2020.~~2021.

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:~~ including;(i) performing all of its day-to-day ~~functions;~~functions, (ii) determining investment criteria in conjunction with the Board of ~~Directors;~~Directors, (iii) sourcing, analyzing and executing investments, asset sales and ~~financings;~~financings, (iv) performing asset management ~~duties;~~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 other than temporary impairment) 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.

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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, ~~2022.~~2023. 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 3 times the average annual management fee earned by the Manager during the prior ~~24-~~

~~Table of Contents~~

~~month~~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.

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 December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

For the three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, the Company incurred approximately ~~$1.5~~$1.0 million and approximately $1.5 million in management fees, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, the Company incurred approximately ~~$4.5~~$2.1 million and approximately $3.0 million in management fees, respectively. The Manager 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.

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 three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, the Company recorded expenses included in general and administrative expenses totaling approximately ~~$201~~$296 thousand and approximately ~~$211 thousand,~~$1.1 million, respectively, related to reimbursable employee costs. For the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, the Company recorded expenses included in general and administrative expenses totaling approximately ~~$1.5 million~~$447 thousand and approximately ~~$1.4~~$1.3 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 ~~expenses~~expense in the Consolidated Statements of Operations. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, approximately ~~$3.0~~$3.6 million and approximately ~~$3.0~~$1.5 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, approximately ~~$141~~$409 thousand and approximately ~~$148~~$457 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets.

Note 11 — 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 offerings, the number of shares of common stock available under the Equity Incentive Plans increased to 1,804,258. Approximately 1,140,653 shares have been issued under the Equity Plans with 663,605 shares available for issuance, as of September 30, 2021.

On June 25, 2021, the Company granted a total of 81,160 shares (20,290 each) of restricted common stock under the Equity Plan to the Company’s 4 independent directors. These restricted shares will vest in full on June 25, 2022, the first anniversary of the grant date. Each of the independent directors has elected to defer the issuance of the shares granted under the Director Deferred Fee Plan.

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 then 5 independent directors. Each of the independent directors elected to defer the issuance of the shares granted under the Director Deferred Fee Plan. In May 2021, 1 of the independent directors retired. As a result,

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~~25,455~~

The Company's ability to grant new equity-based awards under the Company's existing equity incentive plans expired on May 9, 2022. At the Annual Meeting of Stockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan and the Western Asset Mortgage Capital Corporation 2022 Manager Omnibus Incentive Plan (collectively, the “2022 Plans”). The 2022 Plans provide for the issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards.

The aggregate maximum number of shares of our common stock available for future issuances under the 2022 Plans is 1,000,000 shares, which was reduced to 100,000 shares following the completion of the reverse stock split. The officers, employees, non-employee directors, independent contractors, and consultants of the Company or any affiliate of the Company, including any individuals who are employees of the Manager or one of the Manager’s affiliates, are eligible to participate in the Incentive Plan, provided that they have been selected by the Plan Administrator.

On June 24, 2022, the Company granted a total of 217,040 restricted stock units (54,260 per each independent director) or 21,704 shares (5,425 per each independent director) on a post reverse stock split basis, to each of the Company's 4 independent directors. These restricted stock units will vest in full on June 24, 2023, the first anniversary of the grant date, and will be settled in shares of the ~~unvested~~Company’s common stock upon each of the independent director’s separation from service with the Company.

On June 25, 2021, the Company granted a total of 81,160 restricted stock ~~were forfeited during~~units (20,290 each per each independent director), or 8,116 shares (2,029 per each independent director) on a post reverse stock split basis, to each of the ~~nine months ended September 30, 2021. The remaining~~Company’s 4 independent directors. These restricted ~~shares~~stock units in this grant vested in full on June ~~19, 2021,~~25, 2022, the first anniversary of the grant ~~date.~~date, and will be settled in shares of the Company’s common stock upon each of the independent director’s separation from service with the Company.

~~The Director Deferred Fee~~On June 24, 2022, the Company granted 200,000 restricted stock units, or 20,000 restricted stock units on a post reverse stock split basis under the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan ~~permits eligible members~~to the Company’s Chief Financial Officer. These restricted stock units will vest in equal installments on the first and second anniversary 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.grant date.

During the ~~nine~~six months ended ~~September~~June 30, 2022 and June 30, 2021, 11,716 and ~~September 30, 2020, 137,820 and 67,480~~13,782 restricted ~~common shares~~stock units vested, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan. The Company recognized stock-based compensation expense of approximately $165 thousand and approximately $182 thousand for the three months ended September 30, 2021 and September 30, 2020, respectively. The Company recognized stock-based compensation expense of approximately ~~$453~~$70 thousand and approximately ~~$517~~$106 thousand for the ~~nine~~three months ended ~~September~~June 30, 2022 and June 30, 2021, respectively. The Company recognized stock-based compensation expense of approximately $235 thousand and ~~September~~approximately $288 thousand for the six months ended June 30, ~~2020,~~2022 and June 30, 2021, respectively. In addition, the Company had unamortized compensation expense of ~~$376~~$499 thousand and ~~$619~~$211 thousand for equity awards at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~All~~Holders of 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~~stock units are entitled to receive dividends (or dividend equivalent payments) and distributions ~~currently, and~~that become payable on the ~~right to vote.~~restricted stock units during the restricted period. Dividend equivalent payments ~~otherwise~~ allocable to restricted ~~common shares under the Company's Director Deferred Fee Plan~~stock units are deemed to purchase additional phantom shares of the ~~Company’s~~Company's common stock that are credited to each ~~participant’s~~participant's deferral account. The award agreements include restrictions whereby the restricted ~~shares~~stock units 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~~stock units awarded when vested, subject to the ~~grantee’s~~grantee's continuing to provide services to the Company as of the vesting date. Unvested restricted ~~shares~~stock units and rights to dividends thereon are forfeited upon termination of the grantee.

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The following is a summary of restricted ~~common stock~~equity awards vesting dates as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, including shares whose issuance has been deferred under the Director Deferred Fee Plan:~~2021:


		September 30, 2021	December 31, 2020		June 30, 2022	December 31, 2021
Vesting Date	Vesting Date	Shares Vesting	Shares Vesting	Vesting Date	Shares Vesting	Shares Vesting
March 2021		—	36,000
June 2021		—	130,365
March 2022	March 2022	36,000	36,000	March 2022	—	3,600
June 2022	June 2022	81,160	—	June 2022	—	8,116
		117,160	202,365
June 2023				June 2023	31,704	—
June 2024				June 2024	10,000	—
Total				Total	41,704	11,716

The following table presents information with respect to shares issued under the Company’s Equity Incentive Plans for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan:~~2021:


		September 30, 2021			September 30, 2020				June 30, 2022			June 30, 2021
		Shares Issued Under the Equity Incentive Plans	Weighted Average Grant Date Fair Value (1)		Shares Issued Under the Equity Incentive Plans	Weighted Average Grant Date Fair Value (1)			Restricted Stock Units	Weighted Average Grant Date Fair Value (1)		Restricted Stock Units	Weighted Average Grant Date Fair Value (1)
Outstanding at beginning of period	Outstanding at beginning of period	1,025,542	$	14.10	894,289	$	15.76	Outstanding at beginning of period	114,825	$	131.85	102,554	$	140.99
Granted (2)	Granted (2)	140,566	5.21		128,163	2.80		Granted (2)	43,577	12.74		8,623	32.47
Cancelled/forfeited	Cancelled/forfeited	(25,455)	2.75		—	—		Cancelled/forfeited	—	—		(2,546)	27.50
Outstanding at end of period	Outstanding at end of period	1,140,653	13.26		1,022,452	14.13		Outstanding at end of period	158,402	99.02		108,631	135.03
Unvested at end of period	Unvested at end of period	117,160	$	5.62	199,275	$	5.55	Unvested at end of period	41,704	$	12.52	11,716	$	56.19

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

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(2)Includes ~~59,406~~1,873 and ~~888~~507 shares attributed to dividends on restricted stock under the Director Deferred Fee Plan for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, respectively.

Note 12 — Stockholders’ Equity

Reverse stock split

On June 30, 2022, the Company announced that its board of directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The ten-for-one reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 shares, resulting in the number of common shares outstanding reducing from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

At-The-Market Program

In March 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~~At-

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The-Market equity offering. During the ~~year ended December 31, 2020, the Company sold 6,034,741 shares under this amended agreement with an average price of $3.70 per share for a total net proceeds of $22.0 million. During the nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company did not sell any shares under the amended agreement.

Stock Repurchase Program

OnIn December ~~19, 2019,~~2021, the Company extended its stock repurchase program as authorized by its Board of ~~Directors of~~Directors. Under the extended program, the Company ~~reauthorized its~~is permitted to repurchase ~~program of~~ up to ~~2,700,000~~300,000 shares of its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split, through December 31, ~~2021.~~2023. 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~~authorization expired on December 31, ~~2019. Purchases~~2021. Any 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 Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of common shares, or any shares at all, and the program may be suspended or discontinued at the ~~Company’s~~Company's discretion without prior notice. ~~The timing, manner, price and amount of any repurchases will be determined by~~

During the six months ended June 30, 2022, the Company ~~in its discretion and will be subject to economic and market conditions,~~did not repurchase any shares under the stock price, applicable legal requirements and other factors. In March 2020, the Company repurchased 100,000 shares of common stock with a weighted average price of $5.78. The repurchased stock was not retired and is accounted for as treasury stock.repurchase program.

~~Convertible Notes Exchange~~

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

Dividends

To preserve liquidity, the Company suspended its first and second quarter common stock dividends in 2020 given extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic. Starting in the quarter ended September 30, 2020, the Company resumed payment of the quarterly dividend after making progress strengthening its balance sheet and improving liquidity and earnings power of its investment portfolio.

The following table presents cash dividends declared and paid by the Company on its common ~~stock:~~stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Declaration Date

Record Date

Payment Date

Amount per Share

Tax Characterization

~~2021~~2022

June 21, 2022

July 1, 2022

July 25, 2022

0.40

Not yet determined

March 23, 2022

April 4, 2022

April 26, 2022

0.40

Not yet determined

2021

December 21, 2021

December 31, 2021

January 26, 2022

0.60

Not yet determined(1)

September 23, 2021

October 4, 2021

October 26, 2021

~~0.06~~0.60

~~Not yet determined~~Return of capital

June 22, 2021

July 2, 2021

July 26, 2021

~~0.06~~0.60

~~Not yet determined~~Return of capital

March 23, 2021

April 2, 2021

April 26, 2021

~~0.06~~

~~Not yet determined~~

~~2020~~

~~December 17, 2020~~

~~December 28, 2020~~

~~January 26, 2021~~

~~0.06~~

~~Not yet determined(1)~~

~~September 22, 2020~~

~~October 2, 2020~~

~~October 26, 2020~~

~~0.05~~0.60

Return of capital

(1)The cash distributions made on January 26, ~~2021,~~2022, with a record date of December ~~28, 2020,~~31, 2021, are treated as received by stockholders on January 26, ~~2021~~2022 and taxable in calendar year ~~2021.~~2022. The tax characterization of these distributions will be determined in January ~~2022.~~2023.

Note 13 — Net ~~Income (loss)~~Loss per Common Share

The table below presents basic and diluted net loss per share of common stock using the two-class method for the three and six months ended June 30, 2022 and June 30, 2021 (dollars, other than shares and per share amounts, in thousands), adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

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The table below presents basic and diluted net income (loss) per share of common stock using the two-class method for the three and nine months ended September 30, 2021 and September 30, 2020 (dollars, other than shares and per share amounts, in thousands):


		For the three months ended September 30, 2021		For the three months ended September 30, 2020		For the nine months ended September 30, 2021		For the nine months ended September 30, 2020			For the three months ended June 30, 2022		For the three months ended June 30, 2021		For the six months ended June 30, 2022		For the six months ended June 30, 2021
Numerator:	Numerator:									Numerator:
Net income (loss) attributable to common stockholders and participating securities for basic and diluted earnings per share		$	(4,213)	$	59,807	$	(36,423)	$	(339,144)
Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share										Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share	$	(22,387)	$	(40,163)	$	(48,240)	$	(32,210)
Less:	Less:									Less:
Dividends and undistributed earnings allocated to participating securities	Dividends and undistributed earnings allocated to participating securities	24		353		65		16		Dividends and undistributed earnings allocated to participating securities	15		19		30		40
Net income (loss) allocable to common stockholders — basic and diluted		$	(4,237)	$	59,454	$	(36,488)	$	(339,160)
Net loss allocable to common stockholders — basic and diluted										Net loss allocable to common stockholders — basic and diluted	$	(22,402)	$	(40,182)	$	(48,270)	$	(32,250)

Denominator:	Denominator:									Denominator:
Weighted average common shares outstanding for basic earnings per share	Weighted average common shares outstanding for basic earnings per share	60,795,688		60,740,701		60,771,759		56,293,512		Weighted average common shares outstanding for basic earnings per share	6,038,010		6,077,670		6,036,300		6,075,960
Weighted average common shares outstanding for diluted earnings per share	Weighted average common shares outstanding for diluted earnings per share	60,795,688		60,740,701		60,771,759		56,293,512		Weighted average common shares outstanding for diluted earnings per share	6,038,010		6,077,670		6,036,300		6,075,960
Basic earnings (loss) per common share		$	(0.07)	$	0.98	$	(0.60)	$	(6.02)
Diluted earnings (loss) per common share		$	(0.07)	$	0.98	$	(0.60)	$	(6.02)
Basic loss per common share										Basic loss per common share	$	(3.71)	$	(6.61)	$	(8.00)	$	(5.31)
Diluted loss per common share										Diluted loss per common share	$	(3.71)	$	(6.61)	$	(8.00)	$	(5.31)

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, 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.

Note 14 — Income Taxes

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 ~~September~~June 30, ~~2021.~~2022. The Company files U.S. federal and state income tax returns. As of ~~September~~June 30, ~~2021,~~2022, U.S. federal tax returns filed by the Company for 2020, 2019 ~~2018~~ and ~~2017~~2018 and state tax returns filed for 2020, 2019, 2018, 2017 ~~2016~~ and ~~2015~~2016 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 taxable REIT subsidiaries ("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. During the three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, the Company recorded a federal and state tax benefit of ~~$218~~$46 thousand and tax provision of ~~$205~~$101 thousand, respectively, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations. During the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, the Company recorded a federal and state tax ~~benefit~~provision of ~~$19~~$10 thousand and tax provision of ~~$367~~$199 thousand, respectively.

Deferred Tax Asset

As of June 30, 2022 and December 31, 2021, the Company recorded a deferred tax asset of approximately $15.1 million and $13.0 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing

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~~Deferred Tax Asset~~

As of September 30, 2021 and December 31, 2020, the Company recorded a deferred tax asset of approximately $20.6 million and $21.0 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'~~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 of $20.6 million and $21.0 million as of September 30, 2021 and December 31, 2020, respectively.~~allowance.

In addition, the REIT generated net operating losses ("NOLs") during the year~~nine months~~ ended ~~September 30,~~December 31, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the NOLs is apportioned to the TRS. The Company recorded a deferred tax asset relating to the NOLs of ~~$18.8~~$18.6 million and ~~$19.3~~$18.6 million in the REIT and ~~$2.1~~$2.0 million and ~~$2.1~~$2.0 million in the TRS as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. The TRS can carryback the NOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years to request a refund for taxes paid. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~$20.9~~$20.6 million and ~~$21.4~~$20.6 million, respectively.

Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).

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 ~~September~~June 30, ~~2021.~~2022.

Note 16 — Subsequent Events

Reverse Stock Split

On ~~November 5, 2021,~~June 30, 2022, the Company ~~entered into an amendment~~announced that its board of directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The ten-for-one reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 shares, resulting in the number of common shares outstanding reducing from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Securitization of Arroyo 2022-2 Trust

In July 2022, the Company completed its fourth securitization of $402.2 million of Residential Whole ~~Loan Facility.~~Loans, issuing and priced an aggregate $351.9 million of Mortgage-Backed Notes, Series 2022-2 (the “Notes”) in a residential mortgage-backed securitization comprised of a portfolio of residential whole loans. The ~~amendment facility bears an~~Notes, which initially will be issued by Arroyo Mortgage Trust 2022-2 in four classes, were priced with a weighted average fixed interest rate of approximately 5.9% per annum. All of the Notes are anticipated to ~~LIBOR plus 2.00%~~have a final payment date in July 2057. The Notes will be issued in a private placement to qualified institutional investors and non-US persons under Regulation S of the Securities Act. It is expected that S&P and DBRS will rate the Notes at closing. The anticipated S&P and DBRS ratings for the Class A-1 Notes are AAA(sf) and AAA(sf), ~~with~~respectively.

Announcement of Review of Strategic Alternatives

On August, 4, 2022, the Company announced that its Board of Directors has authorized a ~~LIBOR floor~~review of ~~0.25%.~~strategic alternatives for the Company aimed at enhancing shareholder value, which may include a sale or merger of the Company. JMP Securities, A Citizens Company, has been retained as exclusive financial advisor to the Company. No assurance can be given that the review being undertaken will result in a sale, merger, or other transaction sale or other business combination involving the Company, and the Company has not set a timetable for completion of the review process. The ~~facility is available~~Company does not intend to ~~finance five types~~

Table of residential mortgages: Non-Agency mortgage loans, Non-QM loans, investor loans, re-performing and non-performing loans. The advance rates differ by type of loan, but for performing Non-QM loans the advance rate is 90%. The facility matures on November 4, 2022. The facility is a mark to market margin facility once the collateral value declines below par and has a stated capacity of $500 million.Contents

make any further statements regarding this process unless and until a definitive agreement for a transaction has been reached, or until the process of exploring strategic alternatives has ended.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 ~~long-term social, economic and health~~ongoing impact of the COVID-19 pandemic on the United States economy, the mortgage finance markets and ~~success~~the broader financial markets. There is still uncertainty around the severity and duration of ~~recovery~~the pandemic domestically and internationally, as well as uncertainty around the efficacy of Federal, State and local governments' efforts ~~including vaccine distribution, relate~~ to contain the spread of COVID-19 ~~at this time.~~and respond to its direct and indirect impacts on many aspects of Americans' lives 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~~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; the Company’s understanding of its competition; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing outbreak of COVID-19; and the Manager's expectations regarding COVID-19 recovery.

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” herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the SEC on March ~~5, 2021.~~8, 2022. 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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Overview

Western Asset Mortgage Capital Corporation, a Delaware corporation, and its ~~Subsidiaries~~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~~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 ~~Investment Company Act of~~ 1940 ~~as amended (the "1940 Act").~~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 distributable earnings (which we previously referred to as 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 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.

In December 2021, we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We ~~do not have~~believe this focus will allow us to address attractive market opportunities while maintaining alignment with our Manager’s core competencies. The portfolio transition is expected to be accomplished over the next 12 months from now. We plan to transition out of the commercial investments in our portfolio, though we may from time to time make commercial investments on an ~~established minimum current rating requirement for our investments.~~opportunistic basis.

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 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~~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.~~ —~~Commercial~~mezzanine 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

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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~~Government-

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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.~~

~~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. These investments can be in the form of pools, TBA and CMO (including interest only, principal only or other structures).

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.

Other investments. — In addition to ~~MBS,~~Residential Whole Loans and Non-Agency RMBS, our ~~principal investment,~~current target investments, we may also make ~~other~~ investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, 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 strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS and other related investments. The portfolio transition is expected to be accomplished over the next 12 months from now.

Our investment portfolio composition at ~~September~~June 30, ~~2021~~2022:.

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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.~~terms. In the latter part of 2020 and ~~continuing into~~the beginning of 2021, terms for financing arrangements have improved significantly. As a result, we diversified our financing sources to provide an alternative to short-term repurchase agreements with daily margin requirements. We ~~have primarily~~expect to continue to seek financing arrangements without daily margin requirements or with margin requirements that apply only after a significant reduction in the valuation of the assets financed, ~~our investment acquisitions with~~including but not limited to repurchase ~~agreements.~~agreements, term financing, securitization and convertible senior unsecured notes, as the market permits. We believe the amount of leverage we use is consistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account 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 creditworthiness of financing counterparties and the health of the U.S. residential and commercial mortgage markets. In utilizing leverage, we seek to enhance equity returns while limiting our exposure to interest rate volatility and daily margin calls. We expect to continue to seek financing arrangements without daily margin requirements or with margin requirements which apply only after a significant reduction in the valuation of the assets financed, including but not limited to term financing, securitization and convertible senior unsecured notes, as the market permits. We expect to maintain a debt-to-equity ratio of two to four and a half times the amount of our ~~stockholders’~~stockholders' equity, depending on our investment composition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our exposure to interest rate volatility and daily margin calls. The following table presents our debt-to-equity ratio on June 30, 2022 and December 31, 2021:

Our repurchase agreements bear interest at a contractually agreed-upon rate and historically had terms ranging from one month to 18 months. Under these 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 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, in a timeframe 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.

Our repurchase agreement counterparties generally require collateral in excess of the loan amount, or haircuts. As of September 30, 2021, the ranges of the haircuts on our investments were as follows:

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Collateral Minimum Maximum (excluding IOs and IIOs) Maximum (including IOs and IIOs)
Agency RMBS 25.0% n/a 25.0%
Non-Agency RMBS 35.0% 35.0% 35.0%
Non-Agency CMBS 25.0% 40.0% n/a
Other securities 35.0% 60.0% n/a
Residential Whole Loans(1)
15.0% 50.0% n/a
Commercial Loans(2)
22.0% 55.0% n/a


(dollars in thousands)	June 30, 2022		December 31, 2021
Total debt(1)	$	664,737	$	736,357
Total equity	$	140,274	$	193,109
Debt-to-equity ratio	4.7		3.8

(1) ~~Includes Residential Bridge Loans.~~

~~(2) Includes Securitized commercial loans.~~Total debt excludes the securitized debt which is non-recourse to us.

Our Hedging ~~Strategy~~ 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. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to

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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, credit default swaps, 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.

Critical Accounting Policies

The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and certain 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, see Note 2 of our “Notes to Consolidated Financial Statements (Unaudited).”~~

There have been no significant changes to our critical accounting policies that are disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, ~~2020, other than the significant accounting policy disclosed below.~~

~~Real Estate Owned~~

~~2021~~2022 Activity

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Investment Activity

We continually evaluate potential investments and our investment selection is based on supply and demand of our target assets, costs of financing, and the expected future interest rate volatility costs of hedging. During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we acquired ~~$243.3~~$411.9 million of ~~residential whole loans.~~Residential Whole Loans and $40.0 million of Non-Agency RMBS. We ~~did not sell any investments.~~

also, along with the other investors, sold a Commercial REO for total proceeds of $54.7 million.

The following table presents our investing activity for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 (dollars in thousands):
Balance at Loan Modification/Capitalized Interest Principal Payments and Basis Recovery Proceeds from
Sales Transfers to REO Realized Gain/(Loss) Unrealized Gain/(loss) Premium and discount amortization, net Balance at
Investment Type December 31, 2020 Purchases September 30, 2021
Agency RMBS and Agency RMBS IOs $ 1,708 $ — N/A $ (258) $ — N/A $ — $ (108) $ — $ 1,342
Non-Agency RMBS 25,381 — N/A (904) — N/A — 3,710 (176) 28,011
Non-Agency CMBS 164,081 — N/A (13,479) — N/A (5,929) (16,254) 6,231 134,650
Other securities(1)
48,754 — N/A — — N/A — 4,553 (1,214) 52,093
Total MBS and other securities 239,924 — N/A (14,641) — N/A (5,929) (8,099) 4,841 216,096
Residential Whole Loans 1,008,782 243,322 310 (309,395) — — — 13,667 (7,269) 949,417
Residential Bridge Loans 13,916 — — (7,667) — (752) (155) 639 (21) 5,960
Commercial Loans 310,523 — — (103,272) — (30,000) — (48,630) 145 128,766
Securitized commercial loans 1,605,335 — — (354,202) — — — 107,423 18,449 1,377,005
Total Investments $ 3,178,480 $ 243,322 $ 310 $ (789,177) $ — $ (30,752) $ (6,084) $ 65,000 $ 16,145 $ 2,677,244


	Balance at				Loan Modification/Capitalized Interest		Principal Payments and Basis Recovery		Proceeds from Sales		Transfers to REO		Realized Gain/(Loss)		Unrealized Gain/(loss)		Premium and discount amortization, net			Balance at
Investment Type	December 31, 2021		Purchases																June 30, 2022
Agency RMBS and Agency RMBS IOs	$	1,172	$	—	N/A		$	(121)	$	—	N/A		$	—	$	(266)	$	—		$	785
Non-Agency RMBS	27,769		39,952		N/A		(749)		(27,729)		N/A		(1,170)		(5,914)		39			32,198

Non-Agency CMBS	105,358		—		N/A		(1,673)		(10,152)		N/A		(43,934)		43,497		—			93,096
Other securities(1)	51,648		—		N/A		—		(4,406)		N/A		(478)		(6,268)		38			40,534
Total MBS and other securities	185,947		39,952		N/A		(2,543)		(42,287)		N/A		(45,582)		31,049		77			166,613
Residential Whole Loans	1,023,502		411,917		75		(155,171)		—		—		—		(80,155)		(4,315)			1,195,853
Residential Bridge Loans	5,428		—		—		(250)		—		—		—		(83)		—			5,095
Commercial Loans	130,572		—		—		(4)		—		—		—		(2,147)		—			128,421
Securitized commercial loans	1,355,808		—		—		—		—		—		—		(125,782)		13,345			1,243,371
REO	43,607		—		N/A		—		(54,681)		—		12,198		—		N/A			1,124
Total Investments	$	2,744,864	$	451,869	$	75	$	(157,968)	$	(96,968)	$	—	$	(33,384)	$	(177,118)	$	9,107		$	2,740,477

(1) Other securities include ~~$45.8~~$34.0 million of GSE CRTs and ~~$6.3~~$6.6 million of ABS at ~~September~~June 30, ~~2021.~~2022.

Portfolio Characteristics

~~Our Agency Portfolio~~

~~The following table summarizes our Agency portfolio by investment category as of September 30, 2021 (dollars in thousands):~~
Principal Balance Amortized Cost Fair Value Net Weighted
Average Coupon
Agency RMBS IOs and IIOs (1)
N/A $ 63 $ 134 1.4 %
Agency RMBS IOs and IIOs accounted for as derivatives (1)
N/A N/A 1,208 1.3 %
Total Agency RMBS — 63 1,342 1.3 %
Total $ — $ 63 $ 1,342 1.3 %

~~(1)~~Residential Real Estate InvestmentsIOs 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.

~~Credit Sensitive Portfolio~~

~~Non-Agency RMBS~~Residential Whole Loans

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 September 30, 2021 (fair value dollars in thousands):

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Weighted Average
Category Fair Value Purchase
Price Life (Years) Original LTV Original
FICO 60+ Day
Delinquent CPR
Prime $ 10,324 $ 74.82 5.6 59.4 % 779 4.1 % 40.5 %
Alt-A 17,687 44.10 10.5 71.4 % 589 18.5 % 9.6 %
Total $ 28,011 $ 55.42 8.7 67.0 % 659 13.2 % 21.0 %

~~Non-Agency CMBS~~

~~The following table presents certain characteristics of our Non-Agency CMBS portfolio as of September 30, 2021 (dollars in thousands):~~
Principal Weighted Average
Type Vintage Balance Fair Value Life (Years) Original LTV
Conduit:
2006-2009 $ 2,229 $ 1,677 2.4 75.0 %
2010-2020 94,107 34,657 5.8 63.6 %
96,336 36,334 5.7 64.1 %
Single Asset:
2010-2020 116,104 98,316 1.7 64.9 %
Total $ 212,440 $ 134,650 2.8 64.7 %

~~Residential Whole Loans~~

The Residential Whole Loans have low LTV's and are comprised of ~~2,187~~3,097 Non-QM adjustable rate mortgages and ~~six~~five investor fixed rate mortgages. The following table presents certain information about our Residential Whole Loans investment portfolio at ~~September~~June 30, ~~2021~~2022 (dollars in thousands):


					Weighted Average											Weighted Average
Current Coupon Rate	Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate		Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	2.01% – 3.00%	14	$	7,816	66.0	%	746	5.7	28.4	2.7	%	2.01% – 3.00%	40	$	22,650	66.3	%	758	9.0	28.8	2.9	%
3.01% – 4.00%	3.01% – 4.00%	332	163,681		62.6	%	751	3.2	27.3	3.7	%	3.01% – 4.00%	484	247,017		65.0	%	757	6.2	28.2	3.7	%
4.01% – 5.00%	4.01% – 5.00%	997	380,394		64.8	%	748	2.7	28.0	4.8	%	4.01% – 5.00%	1,451	498,639		63.6	%	749	4.8	26.4	4.6	%
5.01% – 6.00%	5.01% – 6.00%	820	346,778		64.6	%	739	2.9	27.2	5.4	%	5.01% – 6.00%	895	366,805		66.2	%	742	4.0	27.5	5.5	%
6.01% – 7.00%	6.01% – 7.00%	28	9,337		67.8	%	720	3.0	25.9	6.3	%	6.01% – 7.00%	216	98,409		71.7	%	742	3.1	29.4	6.4	%
7.01% - 8.00%	7.01% - 8.00%	2	506		73.2	%	753	4.5	26.9	7.1	%	7.01% - 8.00%	16	6,450		75.1	%	737	2.7	29.6	7.4	%

Total	Total	2,193	$	908,512	64.3	%	745	2.9	27.6	4.8	%	Total	3,102	$	1,239,970	65.4	%	748	4.8	27.4	4.8	%

(1)The original FICO score is not available for ~~215~~250 loans with a principal balance of approximately ~~$68.8~~$83.2 million at ~~September~~June 30, ~~2021.~~2022. We have excluded ~~those~~these loans from the weighted average ~~computation.~~computations.

Residential Bridge Loans

~~Our~~We are no longer allocating capital to 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%.~~Loans. The following table presents certain information about ~~our~~the remaining eight Residential Bridge Loans ~~investment~~left in the portfolio at ~~September~~June 30, ~~2021~~2022 (dollars in

~~Table of Contents~~ thousands):

~~thousands):~~


					Weighted Average									Weighted Average
Current Coupon Rate	Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate		Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%	7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	9.01% – 11.00%	7	3,213		75.9	%	2.0	10.3	%	9.01% – 11.00%	2	2,144		78.1	%	0.0	10.4	%
11.01% – 13.00%	11.01% – 13.00%	2	495		69.7	%	2.0	11.4	%	11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%

Total	Total	12	$	6,654	73.0	%	2.0	9.7	%	Total	7	$	5,585	73.3	%	0.0	9.7	%

Non-performing Residential Loans

The following table presents the aging of the Residential Whole Loans and Bridge Loans as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands):

~~(1) Includes one loan in forbearance with unpaid principal balance of $493 thousand.~~

~~Residential Whole Loans Forbearance Programs~~


	Residential Whole Loans					Bridge Loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current	3,073	$	1,226,815	$	1,183,917	—	$	—	$	—
1-30 days	8	2,213		2,142		—	—		—
31-60 days	1	359		361		1	849		832
61-90 days	—	—		—		—	—		—
90+ days	20	10,583		9,433		6	4,736		4,263
Total	3,102	$	1,239,970	$	1,195,853	7	$	5,585	$	5,095

COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment in certain sectors. As a result, some 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, including the use of forbearance programs. As of September 30, 2021, we had one Non-QM loan in forbearance and no 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 to 5 months. At the end of the forbearance period, the borrower can either 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 in forbearance are treated as "Current" in the above table. The loan in forbearance is carried at fair value and had an unpaid principal balance of ~~$493 thousand,~~ ~~a fair value of~~ ~~$434 thousand,~~ ~~an original LTV of~~ ~~64.7%, and represents approximately~~ ~~0.1%~~ ~~of the total outstanding principal balance of our Residential Whole Loans.~~

Residential Whole Loans in Non-Accrual Status

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As of ~~September~~June 30, ~~2021,~~2022, there were 1920 Non-QM loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $10.6 million and a fair value of ~~$10.1~~$9.4 million. These nonperforming loans represent approximately ~~1.2%~~0.9% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 since the valuation adjustment, 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 ~~September~~June 30, ~~2021,~~2022, there were 10six Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately ~~$6.5~~$4.7 million and a fair value of ~~$5.8~~$4.3 million. ~~These nonperforming Residential Bridge Loans represent approximately 97.3% 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 three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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.

As of ~~September~~June 30, ~~2021,~~2022, we had four real estate owned ("REO") properties with an aggregate carrying value of $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 ~~Sheets.~~Sheet.

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 June 30, 2022 (fair value dollars in thousands):


			Weighted Average
Category	Fair Value		Purchase Price		Life (Years)	Original LTV		Original FICO	60+ Day Delinquent		CPR
Prime	$	14,181	$	79.99	9.9	67.8	%	748	1.2	%	22.0	%
Alt-A	18,017		63.68		13.2	74.6	%	675	12.8	%	14.0	%

Total	$	32,198	$	70.86	11.8	71.6	%	707	7.7	%	17.5	%

Agency RMBS Portfolio

The following table summarizes our Agency portfolio by investment category as of June 30, 2022 (dollars in thousands):


	Principal Balance		Amortized Cost		Fair Value		Net Weighted Average Coupon







Agency RMBS IOs and IIOs (1)	N/A		$	53	$	57	0.5	%
Agency RMBS IOs and IIOs accounted for as derivatives (1)	N/A		N/A		728		1.5	%

Total	$	—	$	53	$	785	1.4	%

(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.

Commercial Real Estate Investments

With the new focus on residential real estate related investments, we plan to transition out of commercial real estate investments over the next 12 months.

Non-Agency CMBS

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The following table presents certain characteristics of our Non-Agency CMBS portfolio as of June 30, 2022 (dollars in thousands):


		Principal				Weighted Average
Type	Vintage	Balance		Fair Value		Life (Years)	Original LTV
Conduit:
	2006-2009	$	87	$	85	2.2	88.7	%
	2010-2020	14,982		10,715		7.1	62.3	%
		15,069		10,800		7.1	62.5	%
Single Asset:
	2010-2020	99,079		82,296		1.5	65.0	%
Total		$	114,148	$	93,096	2.1	64.7	%

Commercial Real Estate Investments

The following table presents our commercial loan investments as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands):

Loan

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

Geographic Location

Loan

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

Geographic Location

CRE 3

Interest-Only Mezzanine loan

90,000

27,495

58%

1-Month LIBOR plus 9.25%

6/29/2021

Two-Year First Extension and One-Year Second Extension

Entertainment and Retail

CRE 3

Interest-Only Mezzanine loan

90,000

26,934

58%

1-Month LIBOR plus 9.25%

6/29/2021

None(1)

Entertainment and Retail

CRE 4

Interest-Only First Mortgage

38,367

38,294

63%

1-Month LIBOR plus 3.02%

8/6/2022

Two One-Year Extensions

Retail

CRE 4

Interest-Only First Mortgage

38,367

37,980

63%

1-Month LIBOR plus 3.02%

8/6/2022

A One-Year Extensions(2)

Retail

CRE 5

Interest-Only First Mortgage

24,535

24,085

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 5

Interest-Only First Mortgage

24,535

24,362

62%

1-Month LIBOR plus 3.75%

11/6/2022

Two One-Year Extensions

Hotel

CRE 6

Interest-Only First Mortgage

13,207

12,964

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 6

Interest-Only First Mortgage

13,207

13,114

62%

1-Month LIBOR plus 3.75%

11/6/2022

Two One-Year Extensions

Hotel

CRE 7

Interest-Only First Mortgage

7,259

7,126

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

IL, FL

CRE 7

Interest-Only First Mortgage

7,259

7,208

62%

1-Month LIBOR plus 3.75%

11/6/2022

Two One-Year Extensions

Hotel

IL, FL

CRE 8

Interest-Only First Mortgage

4,442

4,440

79%

1-Month LIBOR plus 4.85%

12/6/2022

None

Assisted Living Facilities

CRE 8

Interest-Only First Mortgage

4,425

79%

1-Month LIBOR plus 4.85%

12/6/2022

None

Assisted Living Facilities

SBC 3

Interest-Only First Mortgage

14,362

49%

1-Month LIBOR plus 4.10%

7/6/2022

None

Nursing Facilities

SBC 3

Interest-Only First Mortgage

14,362

14,398

49%

1-Month LIBOR plus 4.35%

1/6/2023

None

Nursing Facilities

192,172

128,766

192,155

128,421

(1) CRE 3 is in default and not eligible for extension.

~~Commercial Loan Payoffs~~

~~On July 7, 2021, SBC 1, with an outstanding principal balance~~(2) Extension terms are under discussion. A 30-day forbearance of ~~$45.2 million collateralized by nursing facilities,~~the maturity was ~~paid off~~agreed to in ~~full.~~

~~On September 7, 2021, CRE 2, with an outstanding principal balance~~order to complete the negotiations and documentation of ~~$46.8 million collateralized by nursing facilities, was paid off in full.~~

~~On September 24, 2021, SBC 2 with an outstanding principal balance of $9.2 million collateralized by an apartment complex was paid off in full.~~

the extension.

Non-Performing Commercial Loans

The ~~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 retail and hospitality asset. All but the ~~two loans~~one loan discussed below remain current.

CRE 3 Loan

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~~CRE 1 Loan~~

In October 2020, we commenced foreclosure proceedings. However, on February 24, 2021, the borrower filed for bankruptcy protection halting the foreclosure process. In August 2021, the bankruptcy case was dismissed by the bankruptcy court and we, together with the other holders of the loan, foreclosed on the property through a SPE formed for the purpose of holding the property. The property is currently being marketed for sale. Based on preliminary bids, we believe there is a reasonable likelihood that our investment along with the other members' interest will be recovered, although there is no assurance of full recovery. The borrower has continued to file legal challenge to the sale process. While the Company believes these legal challenges have no merit, they have delayed moving forward with the sale of the property.

~~The SPE is consolidated by us and the property is recorded at the lower of cost or fair value less cost to sell.~~ As of ~~September~~June 30, 2021, the REO is recorded at $42.5 million and classified in "Other assets" in the Consolidated Balance Sheets and the other members' interests in the SPE of approximately $11.9 million are recorded as "Non-controlling interest" in the consolidated financial statements.

~~CRE 3 Loan~~

~~As of September 30, 2021,~~2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million secured by a retail facility was non-performing and past its maturity date of June 29, 2021. We were receiving interest payments on this loan from a reserve that was exhausted in May 2021. ~~During the second quarter of 2021, the fair value of the loan declined significantly.~~ We are currently in discussions with the borrower and certain other lenders regarding alternatives to address the situation which might include modifications of loan terms, deferral of payments and the funding of new advances. There can be no assurance that these discussions will result in an outcome in which we would be repaid any amount of the loan and we may suffer further declines in fair value with respect to the mezzanine investment. ~~For the three months ended September 30, 2021, we suffered a further decline~~ ~~of $5.2 million in the fair value of this investment.~~ We could experience a total loss of our investment under various scenarios, which at current levels would result in a ~~$27.5~~$26.9 million reduction in the Company’s book value. Refer to Note 6 - "Commercial Loans" for details.

The following table presents the aging of the Commercial Loans as of ~~September~~June 30, ~~2021~~2022 (dollars in thousands):
Commercial Loans
No of Loans Principal Fair Value
Current 6 $ 102,172 $ 101,271
1-30 days — — —
31-60 days — — —
61-90 days — — —
90+ days 1 90,000 27,495
Total 7 $ 192,172 $ 128,766


	Commercial Loans
	No of Loans	Principal		Fair Value
Current	6	$	102,155	$	101,487
1-30 days	—	—		—
31-60 days	—	—		—
61-90 days	—	—		—
90+ days	1	90,000		26,934
Total	7	$	192,155	$	128,421

~~Securitized~~ Commercial ~~Loan~~

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 a commercial loan secured by a first mortgage lien on the borrowers’ fee and leasehold interests in a portion of a super-regional mall. The outstanding principal balance on this commercial loan is $1.4 billion as of September 30, 2021. The 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.~~Owned

In December 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 servicerFebruary 2022, we and the ~~borrower that required both increased reporting requirements~~other investors sold the unencumbered hotel property for $55.9 million which was foreclosed on in the third quarter of 2021. We and ~~monthly net cash remittance.~~the other investors fully recovered our aggregate initial investment of $42.0 million. We recognized a gain on sale of approximately $12.2 million.

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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 ~~September~~June 30, ~~2021,~~2022, based on fair value (dollars in thousands):


		Non-Agency RMBS					Non-Agency CMBS					Non-Agency RMBS					Non-Agency CMBS
		Concentration		Fair Value			Concentration		Fair Value			Concentration		Fair Value			Concentration		Fair Value
California	California	27.2	%	$	7,628	California	30.6	%	$	41,196	California	29.1	%	$	9,385	California	40.7	%	$	37,920
Florida											Florida	12.6	%	4,069		Nevada	21.0	%	19,506
New York	New York	9.3	%	2,591		Nevada	14.6	%	19,620		New York	6.4	%	2,076		Bahamas	15.5	%	14,474
Florida		9.1	%	2,554		Illinois	13.6	%	18,372
Texas											Texas	4.5	%	1,439		Texas	4.4	%	4,080
New Jersey	New Jersey	4.2	%	1,173		Bahamas	10.6	%	14,330		New Jersey	4.2	%	1,348		Florida	4.2	%	3,901
Maryland		4.0	%	1,125		New York	3.8	%	5,073

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 ~~September~~June 30, ~~2021,~~2022, based on principal balance, is located (dollars in thousands):

Residential Whole Loans Residential Bridge Loans
State
Concentration Principal
Balance State
Concentration Principal
Balance
California 72.3 % $ 656,801 New York 39.5 % $ 2,631
New York 14.3 % 129,931 California 35.9 % 2,386
Georgia 2.7 % 24,300 Florida 16.9 % 1,125
Florida 2.4 % 21,697 New Jersey 5.0 % 335
New Jersey 2.0 % 18,255 Pennsylvania 1.6 % 105
Other 6.3 % 57,528 Other 1.1 % 72
Total 100.0 % $ 908,512 Total 100.0 % $ 6,654

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	Residential Whole Loans					Residential Bridge Loans
	State Concentration		Principal Balance			State Concentration		Principal Balance
California	66.4	%	$	823,450	New York	47.1	%	$	2,631
New York	9.8	%	121,760		California	31.4	%	1,754
Texas	4.7	%	58,349		Florida	20.1	%	1,125
Florida	4.0	%	49,888		New Jersey	1.4	%	75
Georgia	3.6	%	44,224		Total	100.0	%	5,585
Other	11.5	%	142,299
Total	100.0	%	$	1,239,970

Financing Activity

We will look to continue to expand and diversify our financing sources, especially those sources that provide an alternative to short-term repurchase agreements with daily margin requirements.During the nine months ended September 30, 2021, we repurchased $129.3 million aggregate principal amount of the 2022 Notes and issued $86.3 million aggregate principal amount of the 2024 Notes. We did not sell any investments during the nine months ended September 30, 2021.

Repurchase Agreements

~~Non-Agency CMBS~~Our repurchase agreements bear interest at a contractually agreed-upon rate and ~~Non-Agency RMBS Facility~~have terms ranging from one month to 12 months. Our counterparties generally require collateral in excess of the loan amount, or haircuts. As of June 30, 2022, the contractual haircuts required under repurchase agreements on our investments were as follows:

~~On May 5, 2021, we amended our Non-Agency CMBS and Non-Agency RMBS financing facility to, among other things, extend the facility for an additional 12 months and reduce the interest rate.~~


	Minimum	Maximum
Short-Term Borrowings
Agency RMBS IOs	25%	25%
Non-Agency RMBS	35%	50%
Residential Whole Loans	21%	21%
Residential Bridge Loans	20%	20%
Commercial Loans	55%	55%
Other Securities	60%	60%

Long-Term Borrowings
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency RMBS	35%	45%
Non-Agency CMBS	40%	40%
Other Securities	35%	35%

Residential Whole Loan Facility
Residential Whole Loans(1)	10%	10%

Commercial Whole Loan Facility
Commercial Loans(2)	22%	32%

(1) The ~~amended facility has improved advance rates and bears interest at a rate~~haircut is based on 10% of ~~three-month LIBOR plus 2.00%. As of~~ ~~September 30, 2021~~, the outstanding ~~balance~~principal amount of the Residential Whole Loans.

(2) Each Commercial Loan is financed separately under this facility ~~was~~ ~~$111.5 million. The borrowing is secured by investments with an estimated fair market value~~and the haircuts are dependent on the type of ~~$196.7 million as of September 30, 2021.~~collateral.

~~Commercial Whole Loan Facility~~

As of September 30, 2021, we had approximately $63.7 million in borrowings, with a weighted average interest rate of 2.27% under our commercial whole loan facility. The borrowing is secured by loans with an estimated fair market value of

6258

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Convertible Senior Unsecured Notes

During the quarter ended March 31, 2022, we repurchased $~~86.9~~3.4 million aggregate principal amount of the 2022 Notes at an approximate 0.8% premium to par value, plus accrued and unpaid interest.

During the quarter ended June 30, 2022, we repurchased $7.2 million aggregate principal amount of the 2022 Notes at an approximate 0.6% premium to par value, plus accrued and unpaid interest.

Securitized Debt

In February 2022, we completed a residential mortgage-backed securitization. The Arroyo Trust 2022-1 issued $398.9 million of mortgage-backed notes and we retained the subordinate non-offered securities in the securitization, which include the Class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in the consolidation. As of June 30, 2022, Residential Whole Loans, with an outstanding principal balance of approximately $405.0 million, serve as collateral for the Arroyo Trust 2022-1's securitized debt.

Outstanding Borrowings

Repurchase Agreements

At June 30, 2022, we had outstanding borrowings under five of our repurchase agreements. The following table summarizes certain characteristics of our repurchase agreements at June 30, 2022 (dollars in thousands):


Securities Pledged	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)
Short-Term Borrowings:

Agency RMBS	$	329	1.82	%	32

Non-Agency RMBS(1)	31,628		3.44	%	1
Residential Whole Loans (2)	1,116		4.12	%	26
Residential Bridge Loans (2)	4,166		4.13	%	26
Commercial Loans (2)	6,463		4.73	%	26

Other Securities	2,126		4.09	%	18
Total short term borrowings	45,828		3.72	%	8
Long Term Borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS (1)	55,155		2.28	%	234
Non-Agency RMBS	21,943		2.28	%	307
Other Securities	23,948		2.28	%	308
Subtotal	101,046		2.28	%	267
Residential Whole Loan Facility
Residential Whole Loans (2)	344,544		3.61	%	127
Commercial Whole Loan Facility
Commercial Loans	63,658		2.64	%	87
Total long term borrowings	509,248		3.23	%	150
Repurchase agreements borrowings	$	555,076	3.27	%	138
Less unamortized debt issuance costs	—		N/A		N/A
Repurchase agreement borrowings, net	$	555,076	3.27	%	138

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

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(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

At June 30, 2022, 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)
Credit Suisse AG, Cayman Islands Branch (2)	$	439,829	79.2	%	$	519,870	A
Citigroup Global Markets Inc.	101,046		18.2	%	160,982		A+
Nomura Securities International, Inc. (3)	11,745		2.1	%	20,856		Unrated (3)













All other counterparties (4)	2,456		0.5	%	6,820
Total	$	555,076	100.0	%	$	708,528

(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at June 30, 2022 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 June 30, 2022.

(4) Represents amount outstanding with two 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 ~~September~~June 30, ~~2021.~~ 2022.

The ~~facility~~following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the three and six months ended June 30, 2022 (dollars in thousands):


Collateral	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
Agency RMBS	$	338	$	593

Non-Agency RMBS(1)	61,990		59,408
Non-Agency CMBS(1)	57,060		64,391
Residential Whole Loans	293,479		247,608
Commercial loans	60,398		62,822

Residential Bridge Loans	5,462		5,543

Other securities	27,874		32,356
Total	$	506,601	$	472,721
Maximum borrowings during the period(2)	$	576,874	$	613,518

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

(2)Amount represents the maximum borrowings at month-end during each of the respective periods.

Repurchase Agreements Financial Metrics

Certain of our financing agreements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if we do not maintain certain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity and liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. with borrowings outstanding as of June 30, 2022. With the exception of one repurchase agreement for which the Company received a waiver, the Company was ~~subject to automatic monthly rolling until such time that it is terminated pursuant to~~in compliance with the terms of ~~the agreement by either the borrower or lender or until certain conditions~~such financial tests as of ~~default.~~June 30, 2022.

Securitized Debt

Residential ~~Whole Loan Facility~~Mortgage-Backed Notes

~~Under~~

Arroyo Trust 2019

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The following table summarizes the ~~residential whole loan facility,~~consolidated Arroyo Trust 2019's issued mortgage-backed notes at June 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	203,885	3.3%	$	203,885	4/25/2049
Class A-2	10,934		3.5%	10,934		4/25/2049
Class A-3	17,323		3.8%	17,323		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	257,197		$	257,197
Less: Unamortized deferred financing costs	N/A			3,056
Total	$	257,197		$	254,141

Arroyo Trust 2020

The following table summarizes the consolidated Arroyo Trust 2020's issued mortgage-backed notes at June 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	82,908	1.7%	$	82,908	3/25/2055
Class A-1B	9,838		2.1%	9,838		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	135,966		$	135,966
Less: Unamortized deferred financing costs	N/A			1,788
Total	$	135,966		$	134,178

Arroyo Trust 2022-1

The following table summarizes the consolidated Arroyo Trust 2022-1's issued mortgage-backed notes at June 30, 2022 which is classified as "Securitized debt, net" on the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	223,469	2.5%	$	211,365	12/25/2056
Class A-1B	82,942		3.3%	74,912		12/25/2056
Class A-2	21,168		3.6%	18,250		12/25/2056
Class A-3	28,079		3.7%	23,241		12/25/2056
Class M-1	17,928		3.7%	14,000		12/25/2056


Total	$	373,586		$	341,768

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Commercial Mortgage-Backed Notes

We hold a controlling financial variable interest in CSMC USA and are required to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The following table summarizes the consolidated CSMC USA's commercial mortgage pass-through certificates at June 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	112,237	9/11/2025
Class A-2	531,700		4.0	%	502,516		9/11/2025
Class B	136,400		4.2	%	125,513		9/11/2025
Class C	94,500		4.3	%	83,954		9/11/2025
Class D	153,950		4.4	%	142,388		9/11/2025
Class E	180,150		4.4	%	141,159		9/11/2025
Class F	153,600		4.4	%	110,014		9/11/2025
Class X-1(1)	N/A		0.5	%	12,347		9/11/2025
Class X-2(1)	N/A		—	%	2,572		9/11/2025
	$	1,370,691			$	1,232,700

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of ~~September~~June 30, ~~2021, we~~2022, respectively.

The above table does not reflect the portion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bond represents a controlling financial interest, which resulted in consolidation of the trust. The bond had ~~approximately $236.8 million in borrowings with an interest rate of one month LIBOR plus 2.75%. The borrowing is secured by~~ ~~Non-QM loans~~ ~~with an estimated~~a fair market value of ~~$287.1 million.~~$10.7 million at June 30, 2022, and our exposure to loss is limited to our ownership interest in this bond.

Convertible Senior Unsecured Notes

2022 Notes

As of June 30, 2022, we had $27.0 million of the 2022 Notes outstanding. The 2022 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.

2024 Notes

As of June 30, 2022, we had $86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature on September 15, 2024, 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.

Recourse and Non-Recourse Financing

We utilize both recourse and non-recourse debt to finance our portfolio. Our recourse debt included our short and long-term repurchase agreement financings and our convertible senior unsecured notes. At ~~September~~June 30, ~~2021,~~2022, our total non-recourse financing ~~of approximately $2.0 billion~~ is comprised of ~~$605.0~~$730.1 million of securitized debt issued in connection with our ~~two~~three Residential Whole Loan securitizations and ~~$1.4~~$1.2 billion of securitized debt from owning a ~~$14.9 million~~ Non-Agency CMBS bond with a fair value of $10.7 million that was deemed to be a controlling financial variable interest in CSMC USA which required us to consolidate the CMBS VIE.

(dollars in thousands) September 30, 2021 December 31, 2020
Recourse and non-recourse financing $ 2,580,413 $ 2,973,732
Non-recourse financing 1,970,513 2,446,012
Total recourse financing $ 609,900 $609,900 $ 527,720
Stockholders' equity $ 210,186 $ 255,112
Recourse leverage 2.9x 2.1x

~~Financing Facilities Outstanding Borrowings~~

At September 30, 2021, we had outstanding borrowings under five of our repurchase agreements. The following table summarizes certain characteristics of our repurchase agreements at September 30, 2021 (dollars in thousands):

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Securities Pledged Repurchase Agreement Borrowings Weighted Average Interest Rate on Borrowings Outstanding at end of period Weighted Average Remaining Maturity (days)
Short-Term Borrowings:
Agency RMBS $ 1,048 1.05 % 59
Non-Agency CMBS 10,314 1.75 % 12
Residential Whole Loans (1)
41,013 2.66 % 4
Residential Bridge Loans (1)
5,817 2.60 % 4
Commercial Loans (1)
10,603 3.18 % 4
Other Securities 2,587 3.52 % 19
Subtotal 71,382 2.60 % 7
Long-Term Borrowings:
Non-Agency CMBS (2)
68,352 2.12 % 193
Non-Agency RMBS 15,632 2.12 % 217
Residential Whole Loans (1)(3)
236,767 3.00 % 36
Commercial Loans 63,669 2.27 % 360
Other Securities 27,506 2.12 % 217
Subtotal 411,926 2.65 % 113
Repurchase Agreements Borrowings $ 483,308 2.64 % 98
Less Unamortized Debt Issuance Costs 40 N/A N/A
Repurchase Agreements Borrowings, net $ 483,268 2.64 % 98

~~(1)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.~~

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

~~(3)The Residential Whole Loan facility's maturity was extended one month in October 2021.The weighted average remaining maturity reflects the one month extension.~~

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. We were in compliance with the terms of such financial tests as of September 30, 2021.

~~At September 30, 2021, 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)
Credit Suisse AG, Cayman Islands Branch (2)
$ 339,773 70.3 % $ 414,003 A+
Citigroup Global Markets Inc. 111,491 23.1 % 196,665 A+
Nomura Securities International, Inc. (3)
18,096 3.7 % 22,038
Unrated (3)
Credit Suisse Securities (USA) LLC 12,900 2.7 % 20,400 A+
All other counterparties (4)
1,048 0.2 % 1,342
Total $ 483,308 100.0 % $ 654,448

~~(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at September 30, 2021 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 September 30, 2021.~~

(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 September 30, 2021.

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The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the three and nine months ended September 30, 2021 (dollars in thousands):

Collateral Three Months Ended September 30, 2021 Nine months ended September 30, 2021
Agency RMBS $ 1,125 $ 1,235
Non-Agency RMBS 15,632 15,120
Non-Agency CMBS(1)
81,645 79,890
Residential Whole Loans 133,556 80,565
Commercial loans 106,200 135,398
Residential Bridge Loans 7,897 10,342
Membership interest 15,452 17,863
Other securities 30,052 23,596
Total $ 391,559 $ 364,009
Maximum borrowings during the period(2)
$ 483,307 $ 483,307

~~(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.~~

~~(2)Amount represents the maximum borrowings at month-end during each of the respective periods.~~

~~Securitized Debt~~

~~Commercial Mortgage-Backed Notes~~

We hold a controlling financial variable interest in CSMC USA and were required to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The following table summarizes the consolidated 2014 CSMC USA's commercial mortgage pass-through certificates at September 30, 2021 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):

~~(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2021, respectively.~~

The above table does not reflect the portion 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 $11.5 million at September 30, 2021, and our exposure to loss is limited to our ownership interest in 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

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Loans, to our wholly owned subsidiary, Arroyo Trust 2019. Arroyo Trust 2019 issued $919.0 million of mortgage-backed notes and we retained the subordinate non-offered securities. These non-offered securities with an estimated fair value of $35.9 million at September 30, 2021 were eliminated in the consolidation. At September 30, 2021, Residential Whole Loans, with an outstanding principal balance of approximately $414.0 million, serve as collateral for the Arroyo Trust 2019's securitized debt.

The following table summarizes the consolidated Arroyo Trust 2019's issued mortgage-backed notes at September 30, 2021 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):

Classes Principal Balance Coupon Carrying Value Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1 $ 330,944 3.3% $ 330,944 4/25/2049
Class A-2 17,740 3.5% 17,740 4/25/2049
Class A-3 28,106 3.8% 28,106 4/25/2049
Class M-1 25,055 4.8% 25,055 4/25/2049
Subtotal $ 401,845 $ 401,845
Less: Unamortized deferred financing costs N/A 3,727
Total $ 401,845 $ 398,118

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 $26.0 million at September 30, 2021~~ ~~were eliminated in the consolidation.~~ ~~At September 30, 2021, Residential Whole Loans, with an outstanding principal balance of approximately $216.4 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 September 30, 2021 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):

Classes Principal Balance Coupon Carrying Value Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A $ 148,244 1.7% $ 148,244 3/25/2055
Class A-1B 17,591 2.1% 17,591 3/25/2055
Class A-2 13,518 2.9% 13,518 3/25/2055
Class A-3 17,963 3.3% 17,963 3/25/2055
Class M-1 11,739 4.3% 11,739 3/25/2055
Subtotal $ 209,055 $ 209,055
Less: Unamortized deferred financing costs N/A 2,154
Total $ 209,055 $ 206,901

~~Convertible Senior Unsecured Notes~~

During the quarter we reduced the our overall convertible senior unsecured notes outstanding by $36.4 million and extended the maturity to 2024 for $86.3 million of our convertible senior unsecured debt through the issuance of the 2024 Notes to further strengthen our balance sheet.

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~~In August 2021, we repurchased $22.3 million aggregate principal amount of our existing 2022 Notes at a weighted average discount to par value of 2.8%.~~

In September 2021, we issued $86.3 million of 2024 Notes and used the net proceeds, together with approximately $20.2 million of cash on hand, to repurchase an additional $100.3 million of our 2022 Notes.

As of September 30, 2021, we had $45.7 million of the 2022 Notes outstanding. The 2022 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.

As of September 30, 2021, we had $86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature on September 15, 2024, 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.


(dollars in thousands)	June 30, 2022			December 31, 2021
Recourse and non-recourse financing	$	2,627,524		$	2,599,845
Non-recourse financing
Arroyo 2019-2	254,141			337,571
Arroyo 2020-1	134,178			181,547
Arroyo 2022-1	341,768			—

CMSC USA	1,232,700			1,344,370
Total recourse financing	$	664,737	$664,737	$	736,357

Stockholders' equity	$	140,274		$	193,109

Recourse leverage	4.7x			3.8x

Hedging Activity

The following tables summarize the hedging activity during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 (dollars in thousands):
Notional Amount at Settlements, Terminations or Expirations Notional Amount at
Derivative Instrument December 31, 2020 Acquisitions September 30, 2021
Fixed pay interest rate swaps $ — $ 22,000 $ — $ 22,000
Variable pay interest rate swaps — 56,500 (56,500) —
Credit default swaps 6,170 — — 6,170
Total derivative instruments $ 6,170 $ 78,500 $ (56,500) $ 28,170


		Fair Value at		Acquisitions				Settlements, Terminations or Expirations		Realized Gains / Losses			Mark-to-market				Fair Value at			Notional Amount at							Settlements, Terminations or Expirations		Notional Amount at
Derivative Instrument	Derivative Instrument	December 31, 2020										September 30, 2021			Derivative Instrument	December 31, 2021				Acquisitions						June 30, 2022
Fixed pay interest rate swaps	Fixed pay interest rate swaps	$	—			$	—			$	(341)		$	341			$	(25)			$	(25)	Fixed pay interest rate swaps	$	22,000		$	309,500	$	(157,500)	$	174,000
Variable pay interest rate swaps		—		—				(179)		179			—				—

Credit default swaps	Credit default swaps	(495)		—				—		—			52				(443)		Credit default swaps	6,170				—			—		6,170

TBA securities - long positions																			TBA securities - long positions	—				400,000			(400,000)		—
TBA securities - short positions																			TBA securities - short positions	—				500,000			(400,000)		100,000
Total derivative instruments	Total derivative instruments	$	(495)	$	—			$	(520)	$	520		$	27			$	(468)	Total derivative instruments	$	28,170			$	1,209,500		$	(957,500)	$	280,170


	Fair Value at		Acquisitions		Settlements, Terminations or Expirations		Realized Gains / Losses		Mark-to-market		Fair Value at
Derivative Instrument	December 31, 2021										June 30, 2022
Fixed pay interest rate swaps	$	(38)	$	—	$	(11,321)	$	11,321	$	(1,120)	$	(1,158)








Credit default swaps	(459)		—		—		—		110		(349)
TBA securities	—		—		(732)		732		1,383		1,383
Total derivative instruments	$	(497)	$	—	$	(12,053)	$	12,053	$	373	$	(124)

~~Capital Markets Activity~~

~~Convertible Notes Repurchases~~

During the nine months ended September 30, 2021, we repurchased $129.3 million aggregate principal amount of the 2022 Notes at an approximate 0.8% discount to par value, plus accrued and unpaid interest.

Dividends

During the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, we declared dividends totaling ~~$0.18~~$0.80 per share generating a dividend yield of approximately ~~9.2%~~13.2% based on the stock closing price of ~~$2.61~~$12.10 on ~~September~~June 30, ~~2021.~~2022.

Book Value

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

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~~During the first half of 2020, the COVID-19 pandemic created unprecedented market disruption and dislocation, requiring us~~We continue to ~~sell assets to meet margin calls. We have implemented~~implement measures to ~~increase~~improve our balance sheet by increasing liquidity, ~~reduce~~reducing leverage, and seek alternative financing arrangements to preserve long-term shareholder value. The decrease in book value from ~~$3.55~~$27.33 as of March 31, 2022, to $23.23 as of June 30, ~~2021, to $3.45 as of September 30, 2021,~~2022, was primarily driven by spread widening across our holdings, but mainly from our residential whole-loans due to ~~a decline~~their relative size in ~~fair value in our commercial investment portfolio and~~ the ~~fair value adjustment and accelerated premium amortization associated prepayments in our residential whole loan portfolio during the 3rd quarter.~~overall portfolio.

Results of Operations

Comparison of the three months ended ~~September~~June 30, ~~2021~~2022 to the three months ended ~~September~~June 30, ~~2020.~~2021.

General

Due to financial results which occured during the ~~continued uncertainty still surrounding~~evolving COVID-19 pandemic, our results of operations for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021 may not be comparable.

We During the second quarter of 2022, we continued to make progress towards strengthening our balance sheet, improving liquidity, and ~~improving liquidity. For~~the transition of our portfolio to residential investments.

During the three months ended ~~September~~June 30, ~~2021,~~2022, the Company acquired $292.8 million of residential whole loans, sold approximately $42 million of investments, including Non-Agency RMBS and CMBS, as well as repurchasing another $7.2 million aggregate principal amount of our existing 2022 Notes at an approximate premium to par value of 1.0%. Due to spread widening, we ~~generated~~experienced a significant decline in the fair value of residential whole loan investments. This decline in fair value of $38.3 million was offset by a gain of $6.5 million of net gains on derivatives due to our hedging activity. Overall our net loss ~~of $4.5~~was $22.4 million, or ~~$0.07~~$3.71 per basic and diluted weighted common ~~share. Although the residential credit markets continued to improve in~~share for the three months ended ~~September~~June 30, ~~2021, our commercial real estate investments especially in the retail ans hospitality sectors are taking longer to recover, which impacted valuations and was a key driver of the net loss~~2022.

In contrast, for the period. Our commercial investment declined in fair value by approximately $8.5 million and further losses are possible. However, during the quarter, certain of our commercial investments benefited from improvements in the commercials mortgage markets resulting in $157.3 million in payoffs from three commercial loans, a CMBS bond and a risk retention bond.We deployed the capital to acquire $233.2 million in Non_QM loans and buy back a portion of our 2022 Notes. We did not dispose of any investments or receive significant margin calls during the third quarter of 2021.

~~For~~ the three months ended ~~September~~June 30, ~~2020, due the improved residential credit markets there was significant increase in our residential whole loan investments, which was a key contributor to~~2021, the generation of a net ~~income~~loss of ~~$59.8~~$40.2 million, or ~~$0.98~~$6.61 per basic and diluted weighted common ~~share.~~share, was primarily due to a decline in fair value in a commercial real estate mezzanine loan with an outstanding balance of $90 million.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):


Three Months Ended September 30, 2021		Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets
Three Months Ended June 30, 2022								Three Months Ended June 30, 2022	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments	Investments							Investments

Agency RMBS	Agency RMBS	$	70	$	4	22.67	%	Agency RMBS	$	55	$	3	21.88	%
Non-Agency CMBS	Non-Agency CMBS	200,824		4,290		8.48	%	Non-Agency CMBS	151,288		2,530		6.71	%
Non-Agency RMBS	Non-Agency RMBS	28,528		369		5.13	%	Non-Agency RMBS	54,816		661		4.84	%
Residential Whole Loans	Residential Whole Loans	831,634		8,147		3.89	%	Residential Whole Loans	1,199,076		12,082		4.04	%
Residential Bridge Loans	Residential Bridge Loans	8,714		89		4.05	%	Residential Bridge Loans	5,682		16		1.13	%
Commercial loans	Commercial loans	243,534		2,847		4.64	%	Commercial loans	192,154		1,260		2.63	%
Securitized commercial loans	Securitized commercial loans	1,407,129		23,622		6.66	%	Securitized commercial loans	1,281,594		21,986		6.88	%
Other securities	Other securities	48,364		773		6.34	%	Other securities	45,467		1,039		9.17	%
Total investments	Total investments	$	2,768,797	$	40,141	5.75	%	Total investments	$	2,930,132	$	39,577	5.42	%

		Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)			Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings	Borrowings							Borrowings
Repurchase agreements	Repurchase agreements	$	391,559	$	3,037	3.08	%	Repurchase agreements	$	506,601	$	3,659	2.90	%
Convertible senior unsecured notes, net	Convertible senior unsecured notes, net	145,356		3,099		8.46	%	Convertible senior unsecured notes, net	115,785		2,500		8.66	%
Securitized debt	Securitized debt	1,995,098		26,842		5.34	%	Securitized debt	2,047,853		27,183		5.32	%
Total borrowings	Total borrowings	$	2,532,013	$	32,978	5.17	%	Total borrowings	$	2,670,239	$	33,342	5.01	%

Net interest income and net interest margin(2)	Net interest income and net interest margin(2)			$	7,163	1.03	%	Net interest income and net interest margin(2)			$	6,235	0.85	%


Three Months Ended September 30, 2020		Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets
Three Months Ended June 30, 2021								Three Months Ended June 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments	Investments							Investments

Agency RMBS	Agency RMBS	$	136	$	8	23.40	%	Agency RMBS	$	78	$	4	20.57	%
Non-Agency CMBS	Non-Agency CMBS	244,082		5,186		8.45	%	Non-Agency CMBS	205,734		4,344		8.47	%
Non-Agency RMBS	Non-Agency RMBS	30,355		462		6.05	%	Non-Agency RMBS	29,211		334		4.59	%
Residential Whole Loans	Residential Whole Loans	1,137,905		12,698		4.44	%	Residential Whole Loans	850,385		7,519		3.55	%
Residential Bridge Loans	Residential Bridge Loans	24,328		325		5.31	%	Residential Bridge Loans	11,338		487		17.23	%
Commercial Loans	Commercial Loans	332,348		5,390		6.45	%	Commercial Loans	325,109		3,199		3.95	%
Securitized commercial loan	Securitized commercial loan	1,329,556		19,191		5.74	%	Securitized commercial loan	1,505,871		24,400		6.50	%
Other securities	Other securities	51,475		710		5.49	%	Other securities	48,592		908		7.50	%
Total investments	Total investments	$	3,150,185	$	43,970	5.55	%	Total investments	$	2,976,318	$	41,195	5.55	%

		Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)			Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings	Borrowings							Borrowings
Repurchase agreements	Repurchase agreements	$	348,360	$	3,503	4.00	%	Repurchase agreements	$	351,452	$	3,114	3.55	%
Convertible senior unsecured notes, net	Convertible senior unsecured notes, net	194,281		4,062		8.32	%	Convertible senior unsecured notes, net	165,220		3,417		8.30	%
Securitized debt	Securitized debt	2,264,800		26,288		4.62	%	Securitized debt	2,178,868		28,074		5.17	%
Total borrowings	Total borrowings	$	2,807,441	$	33,853	4.80	%	Total borrowings	$	2,695,540	$	34,605	5.15	%

Net interest income and net interest margin(2)	Net interest income and net interest margin(2)			$	10,117	1.28	%	Net interest income and net interest margin(2)			$	6,590	0.89	%

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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 in this table does not reflect the benefit ~~/cost~~/ cost of our interest rate swaps. See ~~Non-GAAP~~"Non-GAAP Financial ~~Measure section~~Measures" for net investment income table that includes the ~~benefit/~~benefit / cost from our interest rate swaps.

~~Interest Income~~

For the three months ended September 30, 2021, and September 30, 2020, we earned interest income on our investments of approximately $40.1 million and $44.0 million, respectively, a decrease of approximately $3.8 million. The decrease in interest income was a result of payoffs in our commercial investment portfolio and our $90 million commercial mezzanine loan becoming non-performing in May 2021. The decrease was partially offset by the increase in the weighted average yield on our portfolio to 5.75% for the three months ended September 30, 2021 from 5.55% for the three months ended September 30, 2020, due to a larger portion of our portfolio in higher yielding investments.

~~Interest Expense~~

Interest expense decreased from $33.9 million for the three months ended September 30, 2020, to $33.0 million for the three months ended September 30, 2021. The decrease in interest expense was a result of improved cost of financing from the improved terms on our amended residential and securities financing facilities and a decrease in our convertible senior unsecured notes outstanding as a result of the repurchases.

~~Other income (loss), net~~

~~Realized gain (loss), net~~

Realized gain (loss) represents the net gain (loss) on sales or settlements from our investment portfolio and debt. We did not have significant asset sales during the quarter ended September 30, 2021. However, during the quarter ended September 30, 2021, we repurchased $122.6 million aggregate principal amount of our 2022 Notes. Refer to Note 7 - "Financing" for details.

~~The following table presents the realized gains (losses) of our investments and debt for each of the three months ended September 30, 2021 and September 30, 2020 (dollars in thousands):~~

For the three months ended September 30, 2021 For the three months ended September 30, 2020
Proceeds (Payments) Gross Gains Gross Losses Net Gain (Loss) Proceeds (Payments) Gross Gains Gross Losses Net Gain (Loss)
Non-Agency RMBS $ — $ — $ — $ — $ (44) $ — $ (44) $ (44)
Residential Bridge Loans(1)
— 19 (37) (18) — — (225) (225)
Loans transferred to REO(2)
68 15 — 15 — — — —
Disposition of REO 738 54 — 54 786 — (271) (271)
Convertible senior unsecured notes(3)
(122,330) 165 (1,742) (1,577) — 1,258 — 1,258
Total $ (121,524) $ 253 $ (1,779) $ (1,526) $ 742 $ 1,258 $ (540) $ 718

~~(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.~~

~~(3)Realized gains/losses recognized on the extinguishment of convertible senior notes.~~

~~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

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changes in market pricing on the underlying investments and securitized debt during the period. The residential credit markets improved in the three months ended September 30, 2020 and three months ended September 30, 2021 resulting in improved valuations. However, our commercial real estate investments suffered from lower valuation in the three months ended September 30, 2021.

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

Three months ended September 30, 2021 Three months ended September 30, 2020
Agency RMBS $ (3) $ (9)
Non-Agency CMBS (2,980) 5,873
Non-Agency RMBS 2,241 (856)
Residential Whole Loans (2,394) 48,307
Residential Bridge Loans 175 410
Commercial loans (5,494) 2,194
Securitized commercial loans (9,616) 4,567
Other securities 930 1,602
Securitized debt 11,138 (7,523)
REO — 125
Total $ (6,003) $ 54,690

~~Gain (loss) on derivatives, net~~

In March 2020, we effectively terminated all of our fixed-pay interest rate swaps and our variable-pay interest rate swaps to reduce hedging costs and associated margin volatility. As of September 30, 2021, we had interest rate swaps with a notional amount of $22.0 million. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

~~The following table presents the components of gain (loss) on derivatives for the three months ended September 30, 2021 and September 30, 2020 (dollars in thousands):~~

Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Return (Recovery) of Basis Mark-to-Market
Contractual interest income (expense), net(1)
Total
Three months ended September 30, 2021
Interest rate swaps $ — $ 485 $ — $ (71) $ 96 $ 510
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives — — (59) (90) 82 (67)
Credit default swaps 16 — — 56 — 72
Total $ 16 $ 485 $ (59) $ (105) $ 178 $ 515
Three months ended September 30, 2020
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives $ — $ — $ (166) $ 71 $ 200 $ 105
Credit default swaps 166 — — (359) — (193)
Total $ 166 $ — $ (166) $ (288) $ 200 $ (88)

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

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~~Other, net~~

For the three months ended September 30, 2021 and September 30, 2020, "Other, net" was a income of $277 thousand and a loss of $31 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees and expenses on residential mortgage loans.

~~Expenses~~

~~Management Fee~~

We incurred management fee expense of approximately $1.5 million and $1.5 million for the three months ended September 30, 2021 and September 30, 2020, 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 management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the financial statements contained in this Quarterly Report on Form 10-Q.

~~Other Operating Expenses~~

We incurred other operating expenses of approximately $1.3 million and $1.2 million for the three months ended September 30, 2021, and September 30, 2020, respectively. Other operating costs comprise derivative transaction costs, custody, and asset management/loan servicing fees for loans acquired serving released. The increase was primarily due to transaction costs associated with the foreclosure of one of our commercial loans. The hotel REO is held in an SPE in which we have a majority interest and which we consolidate.

~~General and Administrative Expenses~~

General and administrative expenses for the three months ended September 30, 2021 was $2.3 million, a decrease of $361 thousand from $2.7 million for the three months ended September 30, 2020. The decrease was mainly attributable to a decrease in the cost of our D&O insurance.

~~Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020~~

~~General~~

During the nine months ended September 30, 2021, our results of operations continued to be impacted by ongoing market disruption and dislocation due to the COVID-19 pandemic. In 2021, our portfolio generally experienced improved valuations and earnings. However, the recovery of the commercial mortgage sector, mainly retail and hospitality, has lagged the residential mortgage sector. We expect improvement in the retail and hospitality mortgage markets as the economy reopens, which in turn should improve valuations. However, there is no assurance that this will be the case. Certain of our commercial investments benefited from some improvement in the commercial mortgage markets resulting in $157.3 million in payoffs from three commercial loans, a CMBS bond, and a risk retention bond. We deployed the capital to acquire $243.3 million in Non_QM loans and buy back a portion of our 2022 Notes. We did not sell a material amount of assets or receive significant margin calls during the nine months ended September 30, 2021.

Due to the significant amount of investment sales in the first half of 2020 resulting from the market volatility created by the COVID-19 pandemic, our results of operations for the nine months ended September 30, 2021 and September 30, 2020 may not be comparable.

We continued to make progress towards strengthening our balance sheet and improving liquidity. For the nine months ended September 30, 2021, we generated a net loss of $36.7 million, or $0.60 per basic and diluted weighted common share. The key driver of the net loss was the $52.8 million decline in the fair value of our $90.0 million non-performing commercial mezzanine loan collateralized by the Property. For the nine months ended September 30, 2020, due to a significant decline in

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~~asset values created by the uncertainty surrounding the pandemic, we generated a net loss of $339.1 million, or $6.02 per basic and diluted weighted common share.~~

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~~Net Interest Income~~

The following tables set forth certain information regarding our net interest income on our investment portfolio for the nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands):

Nine months ended September 30, 2021 Average Amortized
Cost of Assets Total Interest Income Yield on Average Assets
Investments
Agency RMBS $ 89 $ 12 18.03 %
Non-Agency CMBS 202,937 13,401 8.83 %
Non-Agency RMBS 29,270 1,058 4.83 %
Residential Whole Loans 883,711 25,724 3.89 %
Residential Bridge Loans 11,383 806 9.47 %
Commercial loans 297,593 11,263 5.06 %
Securitized commercial loans 1,487,050 72,586 6.53 %
Other securities 49,355 2,503 6.78 %
Total investments $ 2,961,388 $ 127,353 5.75 %
Average Carrying Value Total Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements $ 364,009 $ 9,755 3.58 %
Convertible senior unsecured notes, net 159,862 10,056 8.41 %
Securitized debt 2,170,148 84,541 5.21 %
Total borrowings $ 2,694,019 $ 104,352 5.18 %
Net interest income and net interest margin(2)
$ 23,001 1.04 %

Nine months ended September 30, 2020 Average Amortized
Cost of Assets Total Interest Income Yield on Average Assets
Investments
Agency CMBS $ 458,152 $ 10,700 3.12 %
Agency RMBS 78,167 1,983 3.39 %
Non-Agency CMBS 274,878 16,683 8.11 %
Non-Agency RMBS 33,928 1,187 4.67 %
Residential Whole Loans 1,277,263 42,892 4.49 %
Residential Bridge Loans 29,311 1,542 7.03 %
Commercial loans 340,184 17,777 6.98 %
Securitized commercial loan 846,243 34,791 5.49 %
Other securities 57,730 2,755 6.37 %
Total investments $ 3,395,856 $ 130,310 5.13 %
Average Carrying Value Total Interest Expense
Average Cost of Funds(1)
Borrowings
Repurchase agreements $ 1,361,985 $ 31,220 3.06 %
Convertible senior unsecured notes, net 196,826 12,351 8.38 %
Securitized debt 1,650,091 50,805 4.11 %
Total borrowings $ 3,208,902 $ 94,376 3.93 %
Net interest income and net interest margin(2)
$ 35,934 1.41 %

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~~(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit /cost of our interest rate swaps. See Non-~~

Interest Income

For the ~~nine~~three months ended ~~September~~June 30, ~~2021,~~2022, and ~~September~~June 30, ~~2020,~~2021, we earned interest income on our investments of approximately ~~$127.4~~$39.6 million and ~~$130.3~~$41.2 million, ~~respectively, a~~respectively. The decrease of approximately ~~$3.0 million. A~~$1.6 million was mainly due to a smaller investment portfolio ~~from sales in the first six months~~and principal payments and payoffs of ~~2020, 2021 payoffs in~~commercial and residential investments. Also, interest income was further reduced by our ~~residential and commercial investments and our $90~~$90.0 million commercial mezzanine loan becoming non-performing in May 2021, ~~mainly drove the~~and certain Non-Agency CMBS positions were placed on non-accrual status. The decrease ~~in interest income. The consolidation of CSMC USA as of August 1, 2020 and the 2021 acquisition of $243.3 million in Non_QM loans~~was partially offset by the ~~decline in~~ interest ~~income.~~

income generated from the acquisitions of residential investments for the twelve months ended June 30, 2022.

Interest Expense

Interest expense ~~increased~~decreased from ~~$94.4~~$34.6 million for the ~~nine~~three months ended ~~September~~June 30, ~~2020,~~2021 to ~~$104.4~~$33.3 million for the ~~nine~~three months ended ~~September~~June 30, ~~2021.~~2022. The ~~increase~~decrease in interest expense was ~~mainly a result~~due to the reduction of ~~the consolidation~~approximately $55 million of ~~CSMC USA, which increased interest expense by $46.9 million. The increase was partially~~2022 Convertible Notes offset by ~~a decline~~increased financing costs as the Company acquired individual Non-QM residential home loans for the Aroyyo 2022-2 securitization which occurred in recourse leverage from a smaller investment portfolio, improved cost of financing from our 2020 residential whole loan securitization, improved terms on our amended residential and securities financing facilities, repurchases of our 2022 Notes and securitized debt paydowns.July 2022.

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 and debt. We did not have ~~a significant amount of~~ asset ~~sales. However,~~sales during the ~~nine months~~quarter ended ~~September~~June 30, 2021, we repurchased $129.3 million of our 2022 Notes. Refer to Note 7 - "Financing" for details. For the nine months ended September 30, 2020, we sold $2.4 billion in investments in order to improve liquidity, reduce our repurchase agreement borrowing, and satisfy our margin calls. These sales generated $82.9 million in realized gains.2021.

The following table presents the realized gains (losses) of our investments and debt for each of the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):


	For the three months ended June 30, 2022								For the three months ended June 30, 2021
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)


Non-Agency CMBS	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	—	$	—
Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—
Other securities	4,406		—		(478)		(478)		—		—		—		—

Residential Bridge Loans(1)	—		—		—		—		—		—		(116)		(116)


Convertible senior unsecured notes(2)	(7,281)		—		(79)		(79)		—		—		—		—
Total	$	35,006	$	255	$	(45,916)	$	(45,661)	$	—	$	—	$	(116)	$	(116)

For the nine months ended September 30, 2021 For the nine months ended September 30, 2020
Proceeds (Payments) Gross Gains Gross Losses Net Gain (Loss) Proceeds (Payments) Gross Gains Gross Losses Net Gain (Loss)
Agency CMBS $ — $ — $ — $ — $ 1,668,149 $ 116,463 $ (6,486) $ 109,977
Agency RMBS
— — — — 400,948 12,552 (506) 12,046
Non-Agency CMBS — — (5,929) (5,929) 94,586 1 (22,703) (22,702)
Non-Agency RMBS — — — — 12,658 — (60) (60)
Other securities — — — — 35,957 113 (6,223) (6,110)
Residential Whole-Loans — — — — 144,259 — (10,511) (10,511)
Residential Bridge Loans(1)
— 19 (153) (134) — 8 (376) (368)
Loan transferred to REO(2)
752 15 (36) (21) 419 126 (32) 94
Disposition of REO 738 54 — 54 1,763 18 (698) (680)
Convertible senior unsecured notes(3)
(128,645) 405 (1,742) (1,337) — 1,258 — 1,258
Total $ (127,155) $ 493 $ (7,860) $ (7,367) $ 2,358,739 $ 130,539 $ (47,595) $ 82,944

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(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~~extinguishment of the ~~real estate on the date of transfer.~~

~~(3)Realized gains/losses recognized on the extinguishment of convertible senior notes.~~

2022 Notes. See Note 7 - Financings for details.

Unrealized gain (loss), net

~~We recognized an unrealized loss~~

Table of $39.3 million for the nine months ended September 30, 2021, mainly driven by a commercial mezzanine loan and our Non-Agency CMBS investments. During the nine months ended September 30, 2021, the fair value of the commercial mezzanine loan declined significantly, and we recognized an unrealized loss of $52.8 million, which reflected the new facts and circumstances that unfolded in the period. Generally, we saw a recovery in asset prices across our residential investments.Contents

We recognized an unrealized loss of $225.4 million for the nine months ended September 30, 2020, driven by 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 some price recovery of certain investments in the second quarter of 2020, the rally was not sufficient to significantly reduce the substantial unrealized loss from the dramatic price declines in the first quarter of 2020.

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


		Nine months ended September 30, 2021		Nine months ended September 30, 2020			Three months ended June 30, 2022		Three months ended June 30, 2021
Agency CMBS		$	—	$	(61,034)

Agency RMBS	Agency RMBS	16		(9,138)		Agency RMBS	$	(3)	$	(7)
Non-Agency CMBS	Non-Agency CMBS	(16,254)		(52,180)		Non-Agency CMBS	42,523		698
Non-Agency RMBS	Non-Agency RMBS	3,710		(5,490)		Non-Agency RMBS	(2,490)		15
Residential Whole Loans	Residential Whole Loans	13,667		(25,568)		Residential Whole Loans	(38,312)		(1,260)
Residential Bridge Loans	Residential Bridge Loans	639		(289)		Residential Bridge Loans	(110)		261
Commercial loans	Commercial loans	(48,630)		(7,218)		Commercial loans	(74)		(44,758)
Securitized commercial loans	Securitized commercial loans	107,423		(109,683)		Securitized commercial loans	(52,218)		41,229
Other securities	Other securities	4,553		(15,608)		Other securities	(3,894)		2,942
Securitized debt	Securitized debt	(104,395)		60,827		Securitized debt	70,763		(41,438)

Total	Total	$	(39,271)	$	(225,381)	Total	$	16,185	$	(42,318)

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.~~ As of ~~September~~June 30, ~~2021,~~2022, we had interest rate swaps with a notional amount of $174.0 million, including $22.0 ~~million.~~million of forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):

~~Table of Contents~~

Realized Gain (Loss), net
Description Other Settlements / Expirations Variation Margin Settlement Return (Recovery) of Basis Mark-to-Market
Contractual interest income (expense), net(1)
Total
Nine months ended September 30, 2021
Interest rate swaps $ — $ 520 $ — $ (25) $ 172 $ 667
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives — — (232) (124) 305 (51)
Credit default swaps 48 — — 52 — 100
Total $ 48 $ 520 $ (232) $ (97) $ 477 $ 716
Nine months ended September 30, 2020
Interest rate swaps $ (262) $ (179,759) $ 262 $ (2,515) $ (1,395) $ (183,669)
Interest rate swaptions 80 — — — — 80
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives (940) — (982) (512) 1,176 (1,258)
Credit default swaps (9,550) — — (2,023) — (11,573)
TBAs (2,430) — — 928 — (1,502)
Total $ (13,102) $ (179,759) $ (720) $ (4,122) $ (219) $ (197,922)


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended June 30, 2022
Interest rate swaps	$	—	$	5,781	$	—	$	(671)	$	(262)	$	4,848

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(43)		(107)		55		(95)





Credit default swaps	16		—		—		(2,103)		—		(2,087)
TBAs	732		—		—		1,383		—		2,115
Total	$	748	$	5,781	$	(43)	$	(1,498)	$	(207)	$	4,781

Three months ended June 30, 2021
Interest rate swaps	$	—	$	35	$	—	$	46	$	76	$	157

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(79)		(34)		102		(11)




Credit default swaps	16		—		—		13		—		29

Total	$	16	$	35	$	(79)	$	25	$	178	$	175

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

Other, net

For the ~~nine~~three months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, "Other, net" was ~~income~~a loss of ~~$449~~$46 thousand and income of ~~$385~~$200 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income

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(expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees ~~collected~~and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately ~~$4.5~~$1.0 million and ~~$3.0~~$1.5 million for the ~~nine~~three months ended ~~September~~June 30, 2022 and June 30, 2021, ~~and September 30, 2020,~~ respectively. ~~Pursuant to the terms of the Management Agreement, our Manager is paid a~~The decline in 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 increase~~fees was ~~mainly attributable to our Manager waiving the management fee from March 2020 to May 2020 as~~ a result of our Manager voluntarily waiving 25% of its management fee solely for the ~~impact~~duration of ~~COVID-19~~calendar year 2022 in order to support our earnings potential and ~~the disruption in the mortgage markets.~~our transition to a residential focused investment portfolio. Future waivers, if any, ~~are~~will be at the Manager's discretion.

~~Financing Fee~~Other Operating Expenses

We incurred other operating expenses of approximately $262 thousand and $428 thousand for the three months ended June 30, 2022, and June 30, 2021, respectively. Other operating costs comprise bank fees, trustee fees and asset management/loan servicing fees for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.

Transaction costs

We incurred transaction costs of $344 thousand for the three months ended June 30, 2022, and there were no similar costs for the three months ended June 30, 2021. The transaction costs are primarily associated with the Arroyo Trust 2022-1 securitization that was completed in February 2022.

General and Administrative Expenses

We incurred general and administrative expenses of approximately $2.3 million and $2.7 million for the three months ended June 30, 2022, and June 30, 2021, respectively. The lower expense was primarily driven by lower compensation expense of $521 thousand due to recent personnel turnover and lower general and administrative expenses of $347 thousand. This was offset by higher professional fees of $514 thousand, as a result of higher accounting related consulting fees.

Comparison of the six months ended June 30, 2022 to the six months ended June 30, 2021.

General

Due to financial results which occured during the evolving COVID-19 pandemic, our results of operations for the six months ended June 30, 2022 and June 30, 2021 may not be comparable. During the fist half of 2022, we continued to make progress towards strengthening our balance sheet, improving liquidity, and the transition of our portfolio to residential investments.

During the six months ended June 30, 2022, the Company acquired $405.3 million of residential whole loans, sold $42,3 million of investments, including Non-Agency RMBS and CMBS, sold the hotel REO realizing a gain on sale of $12.2 million, as well as repurchasing another $10.6 million aggregate principal amount of our existing 2022 Notes at an approximate premium to par value of 1.0%. Due to spread widening, we experienced a significant decline in the fair value of our investments. This decline in fair value of $80.2 million was a key contributor to the generation of a net loss of $48.2 million, or $8.00 per basic and diluted weighted common share for the six months ended June 30, 2022.

In contrast, for the six months ended June 30, 2021, the key driver of a net loss of $32.2 million, or $5.31 per basic and diluted weighted common share was due to a $48.7 million decline in the fair value of our $90 million non-performing commercial mezzanine loan offset by unrealized gains from other investments.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the six months ended June 30, 2022 and June 30, 2021 (dollars in thousands):


Six Months Ended June 30, 2022	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	59	$	7	23.93	%
Non-Agency CMBS	158,860		5,100		6.47	%
Non-Agency RMBS	47,664		1,191		5.04	%
Residential Whole Loans	1,126,074		20,828		3.73	%
Residential Bridge Loans	5,740		36		1.26	%
Commercial loans	192,155		2,506		2.63	%
Securitized commercial loans	1,274,895		43,858		6.94	%
Other securities	46,665		1,693		7.32	%
Total investments	$	2,852,112	$	75,219	5.32	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	472,721	$	6,101	2.60	%
Convertible senior unsecured notes, net	117,046		5,097		8.78	%
Securitized debt	2,019,682		53,503		5.34	%
Total borrowings	$	2,609,449	$	64,701	5.00	%

Net interest income and net interest margin(2)			$	10,518	0.74	%


Six Months Ended June 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	89	$	8	18.13	%
Non-Agency CMBS	206,179		9,111		8.91	%
Non-Agency RMBS	29,411		689		4.72	%
Residential Whole Loans	906,352		17,577		3.91	%
Residential Bridge Loans	12,732		717		11.36	%
Commercial Loans	325,136		8,416		5.22	%
Securitized commercial loan	1,533,956		48,964		6.44	%
Other securities	49,378		1,730		7.07	%
Total investments	$	3,063,233	$	87,212	5.74	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	350,004	$	6,718	3.87	%
Convertible senior unsecured notes, net	167,115		6,957		8.40	%
Securitized debt	2,257,673		57,699		5.15	%
Total borrowings	$	2,774,792	$	71,374	5.19	%

Net interest income and net interest margin(2)			$	15,838	1.04	%

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(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the ~~severe market conditions and~~benefit / cost of our interest rate swaps. See "Non-GAAP Financial Measures" for net investment income table that includes the ~~resulting large margin demands~~benefit / cost from ~~lenders and pressure on~~ our ~~liquidity, we~~interest rate swaps.

~~entered into a longer term financing arrangement for our Residential Whole Loans, as we sought to reduce our exposure to short-term financings with daily mark to market exposure.~~ Under this agreement, we were required to pay the counterparty a premium recapture fee of 30% of all realized value on any residential whole loans above such counterparty’s amortized basis upon the securitization or sale.

OnInterest Income

For the six months ended June ~~29, 2020,~~30, 2022, and June 30, 2021, we ~~securitized~~earned interest income on our investments of approximately ~~$355.8~~$75.2 million and $87.2 million, respectively. The decrease of approximately $12.0 million was mainly due to a smaller investment portfolio from principal payments and payoffs of commercial and residential investments. The decrease was partially offset by acquisitions of residential investments for the ~~Residential Whole Loans and paid down~~twelve months ended June 30, 2022.

Interest Expense

Interest expense decreased from $71.4 million for the ~~facility by approximately $339.4~~six months ended June 30, 2021 to $64.7 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~~six months ended June 30, 2022. The decrease in interest expense was primarily a result of ~~refinancing the Residential Whole Loans through~~ a ~~securitization, we accrued a premium recapture fee of approximately $20.5 million in the nine months ended September 30, 2020.~~smaller investment portfolio, offset by increased borrowing costs on our Repo facilities due to increasing market interest rates.

~~In October 2020,~~

Other income (loss), net

Realized gain (loss), net

Realized gain (loss) represents the ~~residential financing facility was amended~~net gain (loss) on sales or settlements from our investment portfolio and ~~as part~~debt. The following table presents the realized gains (losses) of our investments and debt for each of the ~~amendment~~six months ended June 30, 2022 and June 30, 2021 (dollars in thousands):


	For the six months ended June 30, 2022								For the six months ended June 30, 2021
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)


Non-Agency CMBS	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	(5,929)	$	(5,929)
Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—
Other securities	4,406		—		(478)		(478)		—		—		—		—

Residential Bridge Loans(1)	—		—		—		—		—		—		(116)		(116)
Loans transferred to REO(2)	—		—		—		—		684		—		(36)		(36)
Disposition of REO(3)	54,681		12,198		—		12,198		—		—		—		—
Convertible senior unsecured notes(4)	(10,689)		—		(132)		(132)		(6,315)		240		—		240
Total	$	86,279	$	12,453	$	(45,969)	$	(33,516)	$	(5,631)	$	240	$	(6,081)	$	(5,841)

(1)Realized gains/losses recognized on the ~~premium recapture~~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.

(3)Realized gains/losses recognized in connection with the sale of the hotel REO.

(4)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7 - Financings for details.

Unrealized gain (loss), net

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


	Six months ended June 30, 2022		Six months ended June 30, 2021

Agency RMBS	$	(51)	$	19
Non-Agency CMBS	43,497		(13,274)
Non-Agency RMBS	(5,914)		1,469
Residential Whole Loans	(80,155)		16,061
Residential Bridge Loans	(83)		464
Commercial loans	(2,147)		(43,136)
Securitized commercial loans	(125,782)		117,039
Other securities	(6,268)		3,623
Securitized debt	154,185		(115,533)


Total	$	(22,718)	$	(33,268)

Gain (loss) on derivatives, net

As of June 30, 2022, we had interest rate swaps with a notional amount of $174.0 million, including $22.0 million of forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the six months ended June 30, 2022 and June 30, 2021 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Six months ended June 30, 2022
Interest rate swaps	$	—	$	11,321	$	—	$	(1,120)	$	(553)	$	9,648

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(115)		(216)		144		(187)





Credit default swaps	31		—		—		110		—		141
TBAs	732		—		—		1,383		—		2,115
Total	$	763	$	11,321	$	(115)	$	157	$	(409)	$	11,717

Six months ended June 30, 2021
Interest rate swaps	$	—	$	35	$	—	$	46	$	76	$	157

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(173)		(34)		223		16




Credit default swaps	32		—		—		(4)		—		28

Total	$	32	$	35	$	(173)	$	8	$	299	$	201

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

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Other, net

For the six months ended June 30, 2022 and June 30, 2021, "Other, net" was a loss of $191 thousand and income of $172 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $2.1 million and $3.0 million for the six months ended June 30, 2022 and June 30, 2021, respectively. The decline in management fees was ~~eliminated~~a result of our Manager voluntarily waiving 25% of its management fee solely for ~~new~~the duration of calendar year 2022 in order to support our earnings potential and ~~remaining investments financed under~~our transition to a residential focused investment portfolio. Future waivers, if any, will be at the ~~amended facility.~~Manager's discretion.

Other Operating Expenses

We incurred other operating expenses of approximately ~~$2.1 million~~$558 thousand and ~~$3.0 million~~$820 thousand for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022, and ~~September~~June 30, ~~2020,~~2021, respectively. Other operating ~~cost is comprised of derivative transaction~~ costs ~~custody,~~comprise bank fees, trustee fees and asset management/loan servicing fees for loans acquired serving released. ~~The decrease was primarily a result of a decrease~~Formerly, transaction and financing costs were included in ~~third party asset management/loan servicing fees and special servicing fees.~~

this expense category.

Transaction costs

We incurred transaction costs of $3.0 million for the six months ended June 30, 2022, and there were no similar costs for the six months ended June 30, 2021. The transaction costs are primarily associated with the Arroyo Trust 2022-1 securitization that was completed in February 2022.

General and Administrative Expenses

~~General~~We incurred general and administrative expenses of approximately $4.8 million and $5.3 millionfor ~~nine~~the six months ended ~~September~~June 30, 2022, and June 30, 2021, ~~were $7.6 million, a decrease~~ respectively. The lower expense was primarily driven by lower compensation expense of ~~$539~~$731 thousand ~~from $8.2 million for the nine months ended September 30, 2020. The decrease~~ ~~was mainly attributable~~due to ~~a reduction in professional fees which~~recent personnel turnover and lower general and administrative expenses of $673 thousand. This was ~~partially~~ offset by higher ~~D&O insurance.~~professional fees of $891 thousand, primarily as a result of higher accounting related consulting fees.

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.

Distributable Earnings (formerly referred to as 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 and debt; (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)~~(v) non-cash stock-based compensation expense; ~~(vii)~~(vi) non-cash amortization of the convertible senior unsecured notes discount; ~~(viii)~~(vii) one-time charges such as acquisition costs and impairment on loans; and ~~(ix)~~(viii) one-time

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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 our independent directors.

We utilize Distributable Earnings as a key metric to evaluate the effective yield of the portfolio. Distributable Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense. Distributable 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. It is one metric of several used in determining the appropriate distributions to our shareholders.

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Due to the significant amount of investment sales resulting from the market volatility created by the COVID-19 pandemic, our distributable earnings for the three and nine months ended September 30, 2021 and September 30, 2020 may not be comparable.

The table below reconciles Net ~~Income~~Loss to Distributable Earnings for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020:~~2021:


(dollars in thousands)	(dollars in thousands)	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020		(dollars in thousands)	Three months ended June 30, 2022		Three months ended June 30, 2021		Six months ended June 30, 2022		Six months ended June 30, 2021
Net income (loss) attributable to common stockholders and participating securities		$	(4,213)	$	59,807	$	(36,423)	$	(339,144)
Net loss attributable to common stockholders and participating securities										Net loss attributable to common stockholders and participating securities	$	(22,387)	$	(40,163)	$	(48,240)	$	(32,210)
Income tax provision (benefit)	Income tax provision (benefit)	(218)		205		(19)		367		Income tax provision (benefit)	(46)		101		10		199
Net income (loss) before income taxes		(4,431)		60,012		(36,442)		(338,777)
Net loss before income taxes										Net loss before income taxes	(22,433)		(40,062)		(48,230)		(32,011)

Adjustments:	Adjustments:									Adjustments:
Investments:	Investments:									Investments:
Unrealized (gain) loss on investments, securitized debt and other liabilities	Unrealized (gain) loss on investments, securitized debt and other liabilities	6,003		(54,690)		39,271		225,381		Unrealized (gain) loss on investments, securitized debt and other liabilities	(16,185)		42,318		22,718		33,268
Realized (gain) loss on investments		(51)		540		6,030		(81,686)
Net realized loss on investments										Net realized loss on investments	45,582		116		36,869		6,081

One-time transaction costs	One-time transaction costs	681		57		781		20,989		One-time transaction costs	336		104		3,076		100

Derivative Instruments:	Derivative Instruments:									Derivative Instruments:
Net realized (gain) loss on derivatives	Net realized (gain) loss on derivatives	(485)		(154)		(520)		193,154		Net realized (gain) loss on derivatives	(6,513)		(35)		(12,053)		(35)
Net unrealized loss on derivatives		105		288		97		4,122
Net unrealized (gain) loss on derivatives										Net unrealized (gain) loss on derivatives	1,498		(25)		(157)		(8)

Other:	Other:									Other:
Realized (gain) loss on extinguishment of convertible senior unsecured notes	Realized (gain) loss on extinguishment of convertible senior unsecured notes	1,577		(1,258)		1,337		(1,258)		Realized (gain) loss on extinguishment of convertible senior unsecured notes	79		—		132		(240)
Amortization of discount on convertible senior unsecured notes	Amortization of discount on convertible senior unsecured notes	228		284		712		830		Amortization of discount on convertible senior unsecured notes	216		239		439		484
Other non-cash adjustments	Other non-cash adjustments	—		1,130		977		2,118		Other non-cash adjustments	—		—		—		977
Non-cash stock-based compensation expense	Non-cash stock-based compensation expense	165		182		453		517		Non-cash stock-based compensation expense	70		106		235		288
Total adjustments	Total adjustments	8,223		(53,621)		49,138		364,167		Total adjustments	25,083		42,823		51,259		40,915
Distributable Earnings	Distributable Earnings	$	3,792	$	6,391	$	12,696	$	25,390	Distributable Earnings	$	2,650	$	2,761	$	3,029	$	8,904

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Alternatively, our Distributable 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:


(dollars in thousands)	(dollars in thousands)	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020		(dollars in thousands)	Three months ended June 30, 2022		Three months ended June 30, 2021		Six months ended June 30, 2022		Six months ended June 30, 2021
Net interest income	Net interest income	$	7,163	$	10,117	$	23,001	$	35,934	Net interest income	$	6,235	$	6,590	$	10,518	$	15,838
Interest income from IOs and IIOs accounted for as derivatives	Interest income from IOs and IIOs accounted for as derivatives	23		34		73		194		Interest income from IOs and IIOs accounted for as derivatives	12		23		29		50
Net interest income (expense) from interest rate swaps	Net interest income (expense) from interest rate swaps	96		—		172		(1,133)		Net interest income (expense) from interest rate swaps	(262)		76		(553)		76
Adjusted net interest income	Adjusted net interest income	7,282		10,151		23,246		34,995		Adjusted net interest income	5,985		6,689		9,994		15,964
Total expenses	Total expenses	(5,128)		(5,392)		(14,237)		(34,731)		Total expenses	(3,927)		(4,591)		(10,424)		(9,109)
Other non-cash adjustments	Other non-cash adjustments	—		1,130		977		2,118		Other non-cash adjustments	—		—		—		977
Non-cash stock-based compensation	Non-cash stock-based compensation	165		182		453		517		Non-cash stock-based compensation	70		106		235		288
One-time transaction costs	One-time transaction costs	681		57		781		20,989		One-time transaction costs	336		104		3,076		100
Amortization of discount on convertible unsecured senior notes	Amortization of discount on convertible unsecured senior notes	228		284		712		830		Amortization of discount on convertible unsecured senior notes	216		239		439		484
Interest income on cash balances and other income (loss), net	Interest income on cash balances and other income (loss), net	293		(19)		497		678		Interest income on cash balances and other income (loss), net	(30)		216		(160)		204
Income attributable to non-controlling interest	Income attributable to non-controlling interest	271		(2)		267		(6)		Income attributable to non-controlling interest	—		(2)		(131)		(4)
Distributable Earnings	Distributable Earnings	$	3,792	$	6,391	$	12,696	$	25,390	Distributable Earnings	$	2,650	$	2,761	$	3,029	$	8,904

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 (CSMC USA, Arroyo 2019-2, Arroyo 2020-1 and Arroyo ~~2020-1)~~2022-1). 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 (dollars in thousands - except per share data):


		$ Amount		Per Share			$ Amount		Per Share

GAAP Book Value at September 30, 2021		$	210,186	$	3.45
GAAP Book Value at June 30, 2022						GAAP Book Value at June 30, 2022	$	140,274	$	23.23

Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned	Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned					Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets	Deconsolidation of VIEs assets	(2,065,610)		(33.95)		Deconsolidation of VIEs assets	(2,054,011)		(340.18)
Deconsolidation of VIEs liabilities	Deconsolidation of VIEs liabilities	1,977,055		32.49		Deconsolidation of VIEs liabilities	1,969,705		326.22
Interest in securities of VIEs owned, at fair value	Interest in securities of VIEs owned, at fair value	73,390		1.21		Interest in securities of VIEs owned, at fair value	92,441		15.31
Economic Book Value at September 30, 2021		$	195,021	$	3.20
Economic Book Value at June 30, 2022						Economic Book Value at June 30, 2022	$	148,409	$	24.58

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Net Interest Income and Net Interest Margin

The following tables set forth certain information regarding our Non-GAAP net investment income and net interest margin which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and excludes the interest expense for third-party consolidated VIEs for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020~~2021 (dollars in thousands):


Three Months Ended September 30, 2021		Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets
Three Months Ended June 30, 2022								Three Months Ended June 30, 2022	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments	Investments							Investments

Agency RMBS	Agency RMBS	$	1,160	$	27	9.23	%	Agency RMBS	$	946	$	15	6.36	%
Non-Agency CMBS	Non-Agency CMBS	200,824		4,290		8.48	%	Non-Agency CMBS	151,288		2,530		6.71	%
Non-Agency RMBS	Non-Agency RMBS	28,528		369		5.13	%	Non-Agency RMBS	54,816		661		4.84	%
Residential Whole Loans	Residential Whole Loans	831,634		8,147		3.89	%	Residential Whole Loans	1,199,076		12,082		4.04	%
Residential Bridge Loans	Residential Bridge Loans	8,714		89		4.05	%	Residential Bridge Loans	5,682		16		1.13	%
Commercial loans	Commercial loans	243,534		2,847		4.64	%	Commercial loans	192,154		1,260		2.63	%
Securitized commercial loans	Securitized commercial loans	1,407,129		23,622		6.66	%	Securitized commercial loans	1,281,594		21,986		6.88	%
Other securities	Other securities	48,364		773		6.34	%	Other securities	45,467		1,039		9.17	%

Total investments	Total investments	2,769,887		40,164		5.75	%	Total investments	2,931,023		39,589		5.42	%
Adjustments:	Adjustments:							Adjustments:
Securitized commercial loans from consolidated VIEs	Securitized commercial loans from consolidated VIEs	(1,407,129)		(23,622)		6.66	%	Securitized commercial loans from consolidated VIEs	(1,281,594)		(21,986)		6.88	%
Investments in consolidated VIEs eliminated in consolidation	Investments in consolidated VIEs eliminated in consolidation	51,278		1,038		8.03	%	Investments in consolidated VIEs eliminated in consolidation	14,022		220		6.29	%
Adjusted total investments	Adjusted total investments	$	1,414,036	$	17,580	4.93	%	Adjusted total investments	$	1,663,451	$	17,823	4.30	%

		Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds			Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings	Borrowings							Borrowings
Repurchase agreements	Repurchase agreements	$	391,559	$	3,037	3.08	%	Repurchase agreements	$	506,601	$	3,659	2.90	%
Convertible senior unsecured notes, net	Convertible senior unsecured notes, net	145,356		3,099		8.46	%	Convertible senior unsecured notes, net	115,785		2,500		8.66	%
Securitized debt	Securitized debt	1,995,098		26,842		5.34	%	Securitized debt	2,047,853		27,183		5.32	%
Interest rate swaps	Interest rate swaps	n/a		(96)		(0.02)	%	Interest rate swaps	n/a		262		0.04	%
Total borrowings	Total borrowings	2,532,013		32,882		5.15	%	Total borrowings	2,670,239		33,604		5.05	%
Adjustments:	Adjustments:							Adjustments:
Securitized debt from consolidated VIEs(3)	Securitized debt from consolidated VIEs(3)	(1,361,048)		(21,745)		6.34	%	Securitized debt from consolidated VIEs(3)	(1,264,922)		(20,979)		6.65	%
Adjusted total borrowings	Adjusted total borrowings	$	1,170,965	$	11,137	3.77	%	Adjusted total borrowings	$	1,405,317	$	12,625	3.60	%

Adjusted net interest income and net interest margin	Adjusted net interest income and net interest margin			$	6,443	1.81	%	Adjusted net interest income and net interest margin			$	5,198	1.25	%

(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 only the third-party sponsored securitized debt from CSMC USA.

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Three Months Ended September 30, 2020
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency RMBS $ 1,680 $ 42 9.95 %
Non-Agency CMBS 244,082 5,186 8.45 %
Non-Agency RMBS 30,355 462 6.05 %
Residential Whole Loans 1,137,905 12,698 4.44 %
Residential Bridge Loans 24,328 325 5.31 %
Commercial loans 332,348 5,390 6.45 %
Securitized commercial loans 1,329,556 19,191 5.74 %
Other securities 51,475 710 5.49 %
Total investments $ 3,151,729 $ 44,004 5.55 %
Adjustments:
Securitized commercial loans from consolidated VIEs (1,329,556) (19,191) 5.74 %
Investments in consolidated VIEs eliminated in consolidation 54,437 1,172 8.56 %
Adjusted total investments $ 1,876,610 $ 25,985 5.51 %
Average Carrying Value
Total Interest Expense(4)
Average Effective Cost of Funds
Borrowings
Repurchase agreements $ 348,360 $ 3,503 4.00 %
Convertible senior unsecured notes, net 194,281 4,062 8.32 %
Securitized debt 2,264,800 26,288 4.62 %
Total borrowings 2,807,441 33,853 — %
Adjustments:
Securitized debt from consolidated VIEs(3)
(1,268,471) (18,597) 5.83 %
Adjusted total borrowings $ 1,538,970 $ 15,256 3.94 %
Adjusted net interest income and net interest margin $ 10,729 2.27 %

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Nine Months Ended September 30, 2021
Average Amortized
Cost of Assets(1)
Total Interest Income(2)
Yield on Average Assets
Investments
Agency RMBS $ 1,353 $ 85 8.40 %
Non-Agency CMBS 202,937 13,401 8.83 %
Non-Agency RMBS 29,270 1,058 4.83 %
Residential Whole Loans 883,711 25,724 3.89 %
Residential Bridge Loans 11,383 806 9.47 %
Commercial loans 297,593 11,263 5.06 %
Securitized commercial loans 1,487,050 72,586 6.53 %
Other securities 49,355 2,503 6.78 %
Total investments 2,962,652 127,426 5.75 %
Adjustments:
Securitized commercial loans from consolidated VIEs (1,487,050) (72,586) 6.53 %
Investments in consolidated VIEs eliminated in consolidation 56,396 3,432 8.14 %
Adjusted total investments $ 1,531,998 $ 58,272 5.09 %
Average Carrying Value Total Interest Expense Average Effective Cost of Funds
Borrowings
Repurchase agreements $ 364,009 $ 9,755 3.58 %
Convertible senior unsecured notes, net 159,862 10,056 8.41 %
Securitized debt 2,170,148 84,541 5.21 %
Interest rate swaps n/a (172) (0.01) %
Total borrowings 2,694,019 104,180 5.17 %
Adjustments:
Securitized debt from consolidated VIEs(3)
(1,434,559) (67,057) 6.25 %
Adjusted total borrowings $ 1,259,460 $ 37,123 3.94 %
Adjusted net interest income and net interest margin $ 21,149 1.85 %

~~Table of Contents~~


Nine months ended September 30, 2020		Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets
Three Months Ended June 30, 2021								Three Months Ended June 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments	Investments							Investments
Agency CMBS		$	459,539	$	10,751	3.13	%
Agency RMBS	Agency RMBS	81,068		2,126		3.50	%	Agency RMBS	$	1,247	$	27	8.68	%
Non-Agency CMBS	Non-Agency CMBS	274,878		16,683		8.11	%	Non-Agency CMBS	205,734		4,344		8.47	%
Non-Agency RMBS	Non-Agency RMBS	33,928		1,187		4.67	%	Non-Agency RMBS	29,211		334		4.59	%
Residential Whole Loans	Residential Whole Loans	1,277,263		42,892		4.49	%	Residential Whole Loans	850,385		7,519		3.55	%
Residential Bridge Loans	Residential Bridge Loans	29,311		1,542		7.03	%	Residential Bridge Loans	11,338		487		17.23	%
Commercial loans	Commercial loans	340,184		17,777		6.98	%	Commercial loans	325,109		3,199		3.95	%
Securitized commercial loans		846,243		34,791		5.49	%
Securitized commercial loan								Securitized commercial loan	1,505,871		24,400		6.50	%
Other securities	Other securities	57,730		2,755		6.37	%	Other securities	48,592		908		7.50	%

Total investments	Total investments	3,400,144		130,504		5.13	%	Total investments	2,977,487		41,218		5.55	%
Adjustments:	Adjustments:							Adjustments:
Securitized commercial loans from consolidated VIEs	Securitized commercial loans from consolidated VIEs	(846,243)		(34,791)		5.49	%	Securitized commercial loans from consolidated VIEs	(1,505,871)		(24,400)		6.50	%
Investments in consolidated VIEs eliminated in consolidation	Investments in consolidated VIEs eliminated in consolidation	107,663		7,466		9.26	%	Investments in consolidated VIEs eliminated in consolidation	59,104		1,201		8.15	%
Adjusted total investments	Adjusted total investments	$	2,661,564	$	103,179	5.18	%	Adjusted total investments	$	1,530,720	$	18,019	4.72	%

		Average Carrying Value		Total Interest Expense(3)		Average Effective Cost of Funds			Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings	Borrowings							Borrowings
Repurchase agreements	Repurchase agreements	$	1,361,985	$	31,220	3.06	%	Repurchase agreements	$	351,452	$	3,114	3.55	%
Convertible senior unsecured notes, net	Convertible senior unsecured notes, net	196,826		12,351		8.38	%	Convertible senior unsecured notes, net	$	165,220	$	3,417	8.30	%
Securitized debt	Securitized debt	1,650,091		50,805		4.11	%	Securitized debt	2,178,868		28,074		5.17	%
Interest rate swaps	Interest rate swaps	n/a		1,133		0.05	%	Interest rate swaps	n/a		(76)		(0.01)	%
Total borrowings	Total borrowings	3,208,902		95,509		3.98	%	Total borrowings	2,695,540		34,529		5.14	%
Adjustments:	Adjustments:							Adjustments:
Securitized debt from consolidated VIEs(5)		(787,280)		(30,012)		5.09	%
Securitized debt from consolidated VIEs(3)								Securitized debt from consolidated VIEs(3)	(1,447,218)		(22,277)		6.17	%
Adjusted total borrowings	Adjusted total borrowings	$	2,421,622	$	65,497	3.61	%	Adjusted total borrowings	$	1,248,322	$	12,252	3.94	%

Adjusted net interest income and net interest margin	Adjusted net interest income and net interest margin			$	37,682	1.89	%	Adjusted net interest income and net interest margin			$	5,767	1.51	%

(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 only the third-party sponsored securitized debt from RETL Trust and CSMC USA.

~~(4)~~

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Six Months Ended June 30, 2022	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,022	$	36	7.10	%
Non-Agency CMBS	158,860		5,100		6.47	%
Non-Agency RMBS	47,664		1,191		5.04	%
Residential Whole Loans	1,126,074		20,828		3.73	%
Residential Bridge Loans	5,740		36		1.26	%
Commercial loans	192,155		2,506		2.63	%
Securitized commercial loans	1,274,895		43,858		6.94	%
Other securities	46,665		1,693		7.32	%

Total investments	2,853,075		75,248		5.32	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,274,895)		(43,858)		6.94	%
Investments in consolidated VIEs eliminated in consolidation	13,966		439		6.34	%
Adjusted total investments	$	1,592,146	$	31,829	4.03	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	472,721	$	6,101	2.60	%
Convertible senior unsecured notes, net	117,046		5,097		8.78	%
Securitized debt	2,019,682		53,503		5.34	%
Interest rate swaps	—		553		0.04	%
Total borrowings	2,609,449		65,254		5.04	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,262,035)		(41,808)		6.68	%
Adjusted total borrowings	$	1,347,414	$	23,446	3.51	%

Adjusted net interest income and net interest margin			$	8,383	1.06	%

(1)Includes ~~the net amount paid, including accrued amounts~~Agency and ~~premium amortization~~Non-Agency Interest-Only Strips accounted for ~~MAC interest rate swaps during the periods included in gain/loss on derivative instruments for GAAP.~~as derivatives.

~~(5)~~(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Six Months Ended June 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,352	$	58	8.65	%
Non-Agency CMBS	206,179		9,111		8.91	%
Non-Agency RMBS	29,411		689		4.72	%
Residential Whole Loans	906,352		17,577		3.91	%
Residential Bridge Loans	12,732		717		11.36	%
Commercial loans	325,136		8,416		5.22	%
Securitized commercial loans	1,533,956		48,964		6.44	%
Other securities	49,378		1,730		7.07	%

Total investments	3,064,496		87,262		5.74	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,533,956)		(48,964)		6.44	%
Investments in consolidated VIEs eliminated in consolidation	59,051		2,394		8.18	%
Adjusted total investments	$	1,589,591	$	40,692	5.16	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	350,004	$	6,718	3.87	%
Convertible senior unsecured notes, net	167,115		6,957		8.40	%
Securitized debt	2,257,673		57,699		5.15	%
Interest rate swaps	n/a		(76)		(0.01)	%
Total borrowings	2,774,792		71,298		5.18	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,471,314)		(45,312)		6.21	%
Adjusted total borrowings	$	1,303,478	$	25,986	4.02	%

Adjusted net interest income and net interest margin			$	14,706	1.87	%

(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 only the third-party sponsored securitized debt from RETL Trust ~~CMSC Trust~~ and ~~MRCD Trust.~~

CSMC 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 three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020:~~2021:

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(dollars in thousands)	(dollars in thousands)	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020		(dollars in thousands)	Three months ended June 30, 2022		Three months ended June 30, 2021		Six months ended June 30, 2022		Six months ended June 30, 2021
Coupon interest income:	Coupon interest income:									Coupon interest income:
Agency CMBS		$	—	$	—	$	—	$	11,336

Agency RMBS	Agency RMBS	11		25		38		2,954		Agency RMBS	$	5	$	12	$	13	$	27
Non-Agency CMBS	Non-Agency CMBS	2,621		3,500		7,171		12,257		Non-Agency CMBS	2,129		2,213		5,101		4,550
Non-Agency RMBS	Non-Agency RMBS	609		616		1,762		2,349		Non-Agency RMBS	813		740		1,358		1,153
Residential Whole Loans	Residential Whole Loans	10,268		13,847		32,993		46,430		Residential Whole Loans	13,860		10,620		25,143		22,725
Residential Bridge Loans	Residential Bridge Loans	108		345		827		1,609		Residential Bridge Loans	16		487		36		719
Commercial loans	Commercial loans	2,820		5,349		11,118		17,425		Commercial loans	1,260		3,145		2,506		8,298
Securitized commercial loans	Securitized commercial loans	17,533		14,634		54,137		29,882		Securitized commercial loans	15,340		18,190		30,513		36,604
Other Securities	Other Securities	1,043		1,723		3,717		6,565		Other Securities	767		1,083		1,655		2,674
Subtotal coupon interest	Subtotal coupon interest	35,013		40,039		111,763		130,807		Subtotal coupon interest	34,190		36,490		66,325		76,750
Premium accretion, discount amortization and amortization of basis, net:	Premium accretion, discount amortization and amortization of basis, net:									Premium accretion, discount amortization and amortization of basis, net:
Agency CMBS		—		—		—		(636)

Agency RMBS	Agency RMBS	(7)		(17)		(26)		(971)		Agency RMBS	(2)		(8)		(6)		(19)
Non-Agency CMBS	Non-Agency CMBS	1,669		1,686		6,230		4,426		Non-Agency CMBS	401		2,131		(1)		4,561
Non-Agency RMBS	Non-Agency RMBS	(240)		(154)		(704)		(1,162)		Non-Agency RMBS	(152)		(406)		(167)		(464)
Residential Whole Loans	Residential Whole Loans	(2,121)		(1,149)		(7,269)		(3,538)		Residential Whole Loans	(1,778)		(3,101)		(4,315)		(5,148)
Residential Bridge Loans	Residential Bridge Loans	(19)		(20)		(21)		(67)		Residential Bridge Loans	—		—		—		(2)
Commercial loans	Commercial loans	27		41		145		352		Commercial loans	—		54		—		118
Securitized commercial loans	Securitized commercial loans	6,089		4,557		18,449		4,909		Securitized commercial loans	6,646		6,210		13,345		12,360
Other Securities	Other Securities	(270)		(1,013)		(1,214)		(3,810)		Other Securities	272		(175)		38		(944)
Subtotal accretion and amortization	Subtotal accretion and amortization	5,128		3,931		15,590		(497)		Subtotal accretion and amortization	5,387		4,705		8,894		10,462
Interest income	Interest income	$	40,141	$	43,970	$	127,353	$	130,310	Interest income	$	39,577	$	41,195	$	75,219	$	87,212
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):	Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):									Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
Coupon interest income	Coupon interest income	$	82	$	200	$	305	$	1,176	Coupon interest income	$	55	$	102	$	144	$	223
Amortization of basis	Amortization of basis	(59)		(166)		(232)		(982)		Amortization of basis	(43)		(79)		(115)		(173)

Subtotal	Subtotal	23		34		73		194		Subtotal	12		23		29		50
Total adjusted interest income	Total adjusted interest income	$	40,164	$	44,004	$	127,426	$	130,504	Total adjusted interest income	$	39,589	$	41,218	$	75,248	$	87,262

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

Effective Cost of Funds

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 three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020:~~2021:


		Three months ended September 30, 2021				Three months ended September 30, 2020				Nine months ended September 30, 2021				Nine months ended September 30, 2020					Three months ended June 30, 2022				Three months ended June 30, 2021				Six months ended June 30, 2022				Six months ended June 30, 2021
(dollars in thousands)	(dollars in thousands)	Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		(dollars in thousands)	Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs
Interest expense	Interest expense	$	32,978	5.17	%	$	33,853	4.80	%	$	104,352	5.18	%	$	94,376	3.93	%	Interest expense	$	33,342	5.01	%	$	34,605	5.15	%	$	64,701	5.00	%	$	71,374	5.19	%
Adjustments:	Adjustments:																	Adjustments:
Interest expense on Securitized debt from consolidated VIEs	Interest expense on Securitized debt from consolidated VIEs	(21,745)		(6.34)	%	(18,597)		(5.83)	%	(67,057)		(6.25)	%	(30,012)		(5.09)	%	Interest expense on Securitized debt from consolidated VIEs	(20,979)		(6.65)	%	(22,277)		(6.17)	%	(41,808)		(6.68)	%	(45,312)		(6.21)	%
Net interest (received) paid - interest rate swaps		(96)		(0.02)	%	—		—	%	(172)		(0.01)	%	1,133		0.05	%
Net interest paid - interest rate swaps																		Net interest paid - interest rate swaps	262		0.04	%	(76)		(0.01)	%	553		0.04	%	(76)		(0.01)	%
Effective Cost of Funds	Effective Cost of Funds	$	11,137	3.77	%	$	15,256	3.94	%	$	37,123	3.94	%	$	65,497	3.61	%	Effective Cost of Funds	$	12,625	3.60	%	$	12,252	3.94	%	$	23,446	3.51	%	$	25,986	4.02	%
Weighted average borrowings	Weighted average borrowings	$	1,170,965			$	1,538,970			$	1,259,460			$	2,421,622			Weighted average borrowings	$	1,405,317			$	1,248,322			$	1,347,414			$	1,303,478

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. AsOur principal sources of ~~September 30, 2021,~~funds generally consist of borrowings under repurchase agreements, Residential Whole Loan securitizations, payments of principal and interest we ~~had $45.7 million of senior~~receive on our investment portfolio, cash generated from investment sales and, to the extent such transactions are entered into, proceeds from capital market and unsecured convertible notes outstanding of which $45.7 million aggregate principal amount mature in October 2022 and $86.3 million aggregate principal amount mature in September 2024. We also had $483.3 million of asset specific financings. As of September 30, 2021, we had $63.9 million in cash and cash equivalents. We continue to take steps towards strengthening our balance sheet by reducing debt and leverage, while improving liquidity and shareholders' equity.note transactions.

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~~We currently believe we have sufficient liquidity and ~~access to additional liquidity to meet financial obligations~~capital resources available, for at least the next 12 ~~months.~~

~~Debt~~months, to ~~Equity Ratio~~

September 30, 2021 December 31, 2020
Total debt(1)
$ 609,900 $ 527,720
Total equity $ 210,186 $ 255,112
Debt to equity ratio 2.9x 2.1x

~~(1) Total debt excludes~~fund our operations, meet our financial obligations, purchase our target assets, and make dividend payments to maintain our REIT qualifications. As of June 30, 2022, we had $15.9 million in cash and cash equivalents. Also our other sources of liquidity were unencumbered investments, and unused borrowing capacity in certain borrowing facilities since the ~~securitized debt which~~amount borrowed is ~~non-recourse to us.~~

less than the maximum advance rate.

Sources of Liquidity

Our primary sources of liquidity are as follows:

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Cash Generated from Operations

For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, net cash provided by operating activities was approximately ~~$1.3~~$8.5 million. This was primarily attributable to margin settlements of interest rate swaps and the net interest income on our investments, less operating expenses, and general and administrative expenses. For the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, net cash ~~used in~~provided by operating activities was approximately ~~$155.3~~$7.9 million. This was primarily attributable to ~~margin settlements of~~net interest ~~rate swaps,~~income on our investments, less operating expenses, and general and administrative ~~expenses, which were offset by the interest income we earned on our investments.~~expenses.

Cash Provided by and Used in Investing Activities

For the ~~nine~~six months ended ~~September~~June 30, 2022, net cash used in investing activities was approximately $179.3 million. This was primarily attributable to purchases of Non-Agency RMBS and Residential Whole Loans during the period, which was

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partially offset by receipts of principal payments and payoffs on our investments and the sale of an REO hotel. For the six months ended June 30, 2021, net cash provided by investing activities was approximately ~~$560.6~~$365.8 million. This was primarily attributable to receipts of principal payments and payoffs on our investments. For the nine months ended September 30, 2020, net cash provided by investing activities was approximately $2.4 billion. This was primarily attributable to proceeds from sales to meet the margin calls and receipts of principal payments and payoffs on our investments, which were partially offset by our investment acquisitions.

Cash Provided by and Used in Financing ~~Activities~~Activities

For the ~~nine~~six months ended ~~September~~June 30, 2022, net cash provided by financing activities was approximately $146.5 million. This was attributable the Arroyo Trust 2022-1 securitization, which was partially offset by a net decrease in repurchase agreement borrowings, paydowns in our securitized debt, and extinguishment of convertible senior unsecured notes. For the six months ended June 30, 2021, net cash used in financing activities was approximately ~~$605.5~~$412.6 million. This was attributable to repayment of securitized debt and distribution of escrows related to consolidated VIEs and extinguishment of convertible senior unsecured notes. For the nine months ended September 30, 2020, net cash used in financing activities was approximately $2.2 billion. This was attributable to net repayments of our repurchase agreement borrowings to reduce our exposure to short term financings and repayment of securitized debt related to consolidated VIEs which was offset net proceeds from the Arroyo 2020-1 that closed during the quarter ended June 30, 2020.VIEs.

Repurchase Agreements

As of ~~September~~June 30, ~~2021,~~2022, we had borrowings under five of our master repurchase agreements of approximately ~~$483.3~~$555.1 million. The following tables present our repurchase agreement borrowings by type of collateral pledged, as of ~~September~~June 30, ~~2021~~2022 and ~~September~~June 30, ~~2020,~~2021, and the respective effective cost of funds (Non-GAAP financial measure) for the three and ~~nine~~six months ended ~~September~~June 30, 2022 and June 30, 2021, ~~and September 30, 2020, respectively.~~respectively (dollars in thousands). See “Non-GAAP Financial Measures” ~~(dollars in thousands):~~for more information:


		September 30, 2021						Three months ended September 30, 2021				Nine months ended September 30, 2021							June 30, 2022						Three months ended June 30, 2022				Six months ended June 30, 2022
Collateral	Collateral	Borrowings 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 Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period		Collateral	Borrowings 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 Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	Agency RMBS, at fair value	$	1,048	$	1,342	1.05	%	1.06	%	1.06	%	1.19	%	1.19	%	25.00	%	Agency RMBS, at fair value	$	329	$	264	1.82	%	2.37	%	2.37	%	1.36	%	1.36	%	25.00	%
Non-Agency CMBS, at fair value(2)	Non-Agency CMBS, at fair value(2)	78,666		136,968		2.07	%	2.12	%	2.12	%	3.33	%	3.33	%	38.03	%	Non-Agency CMBS, at fair value(2)	55,155		94,809		2.28	%	2.25	%	2.25	%	1.97	%	1.97	%	40.00	%
Non-Agency RMBS, at fair value	Non-Agency RMBS, at fair value	15,632		28,003		2.12	%	2.18	%	2.18	%	3.55	%	3.55	%	35.00	%	Non-Agency RMBS, at fair value	53,571		63,469		2.96	%	2.73	%	2.73	%	2.63	%	2.63	%	39.16	%
Residential Whole Loans, at fair value(3)	Residential Whole Loans, at fair value(3)	277,780		328,811		2.95	%	4.10	%	4.10	%	5.70	%	5.70	%	18.71	%	Residential Whole Loans, at fair value(3)	345,660		402,870		3.61	%	3.06	%	3.06	%	2.76	%	2.76	%	10.00	%
Residential Bridge Loans(3)		5,817		5,960		2.60	%	2.66	%	2.66	%	2.71	%	2.71	%	20.00	%
Residential Bridge Loans, at fair value(3)																		Residential Bridge Loans, at fair value(3)	4,166		5,095		4.13	%	3.30	%	3.30	%	2.98	%	2.98	%	20.00	%
Commercial loans, at fair value(3)	Commercial loans, at fair value(3)	74,272		101,271		2.40	%	2.93	%	2.93	%	2.63	%	2.63	%	31.14	%	Commercial loans, at fair value(3)	70,121		101,487		2.83	%	3.06	%	3.06	%	2.80	%	2.80	%	29.73	%

Membership interest		—		—		—	%	3.08	%	3.08	%	3.02	%	3.02	%	—	%

Other securities, at fair value	Other securities, at fair value	30,093		52,093		2.24	%	2.30	%	2.30	%	3.20	%	3.20	%	37.15	%	Other securities, at fair value	26,074		40,534		2.43	%	2.45	%	2.45	%	2.14	%	2.14	%	37.04	%
Interest rate swaps	Interest rate swaps	n/a		n/a		n/a		n/a		(0.10)	%	n/a		(0.06)	%	n/a		Interest rate swaps	n/a		n/a		n/a		n/a		0.21	%	n/a		0.24	%	n/a
Total	Total	$	483,308	$	654,448	2.64	%	3.08	%	2.98	%	3.58	%	3.52	%	25.47	%	Total	$	555,076	$	708,528	3.27	%	2.90	%	3.10	%	2.60	%	2.84	%	19.66	%

(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 ~~$96~~$262 thousand and ~~$172~~$553 thousand ~~received~~ for the three and ~~nine~~six months ended ~~September~~June 30, 2021. 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.~~

~~Table of Contents~~

~~(3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.~~

September 30, 2020 Three months ended September 30, 2020 Nine months ended September 30, 2020
Collateral Borrowings
Outstanding
Fair Value of
Collateral
Pledged(3)
Weighted
Average
Interest Rate
end of period Weighted
Average Cost
of Funds
Weighted
Average
Effective Cost of
Funds (Non-GAAP)(1)
Weighted
Average Cost
of Funds
Weighted Average Effective Cost of Funds
(Non-GAAP)(1)
Weighted
Average
Haircut
end of period
Agency CMBS, at fair value $ — $ — — % — % — % 2.21 % 2.21 % — %
Agency RMBS, at fair value 1,438 1,853 1.46 % 1.62 % 1.62 % 2.00 % 2.00 % 25.00 %
Non-Agency CMBS, at fair value(2)
83,264 165,699 5.03 % 5.26 % 5.26 % 3.86 % 3.86 % 41.21 %
Non-Agency RMBS, at fair value 14,742 25,817 5.25 % 5.45 % 5.45 % 4.61 % 4.61 % 33.33 %
Residential Whole Loans, at fair value(3)
40,061 105,059 4.98 % 5.95 % 5.95 % 3.85 % 3.85 % 59.21 %
Residential Bridge Loans(3)
15,763 16,828 2.75 % 2.90 % 2.90 % 3.43 % 3.43 % 20.00 %
Commercial loans, at fair value(3)
168,397 325,651 2.45 % 2.84 % 2.84 % 3.29 % 3.29 % 35.53 %
Membership interest 18,845 33,495 2.90 % 3.88 % 3.88 % 3.87 % 3.87 % 35.00 %
Other securities, at fair value 16,368 41,055 5.13 % 5.34 % 5.34 % 3.93 % 3.93 % 36.87 %
Interest rate swaps n/a n/a n/a n/a — % n/a 0.11 % n/a
Total $ 358,878 $ 715,457 3.60 % 4.00 % 4.00 % 3.06 % 3.17 % 38.44 %

~~(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 zero and $1.1 million paid for the three and nine months ended September 30, 2020, respectively.2022. 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 commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.

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	June 30, 2021						Three months ended June 30, 2021				Six months ended June 30, 2021
Collateral	Borrowings Outstanding		Fair Value of Collateral Pledged(3)		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	$	1,156	$	1,501	1.04	%	1.32	%	1.32	%	1.25	%	1.25	%	25.00	%
Non-Agency CMBS, at fair value(1)	84,625		146,325		2.13	%	3.12	%	3.12	%	3.96	%	3.96	%	38.17	%
Non-Agency RMBS, at fair value	15,632		26,122		2.18	%	3.36	%	3.36	%	4.27	%	4.27	%	35.00	%
Residential Whole Loans, at fair value(2)	61,122		93,038		2.95	%	7.41	%	7.41	%	7.72	%	7.72	%	33.81	%
Residential Bridge Loans(2)	6,801		8,205		2.68	%	2.70	%	2.70	%	2.73	%	2.73	%	20.00	%
Commercial loans, at fair value(2)	146,240		234,492		2.30	%	2.63	%	2.63	%	2.52	%	2.52	%	34.42	%
Membership interest(3)	20,022		34,578		2.85	%	2.93	%	2.93	%	2.99	%	2.99	%	60.00	%

Other securities, at fair value	29,884		51,433		2.29	%	3.03	%	3.03	%	3.87	%	3.87	%	36.99	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.09)	%	n/a		(0.04)	%	n/a
Total	$	365,482	$	595,694	2.39	%	3.55	%	3.47	%	3.87	%	3.83	%	35.10	%

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

(2)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and commercial loan owned through trust certificates. The trust certificates are eliminated upon ~~consolidation~~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.

Contractual Obligations and Commitments

Our contractual obligations as of ~~September~~June 30, ~~2021~~2022 are as follows (dollars in thousands):


		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total			Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Borrowings under repurchase agreements	Borrowings under repurchase agreements	$	449,566	$	33,742	$	—	$	—	$	483,308	Borrowings under repurchase agreements	$	555,076	$	—	$	—	$	—	$	555,076
Contractual interest on repurchase agreements	Contractual interest on repurchase agreements	3,880		87		—		—		3,967		Contractual interest on repurchase agreements	8,242		—		—		—		8,242
Convertible senior unsecured notes	Convertible senior unsecured notes	—		131,948		—		—		131,948		Convertible senior unsecured notes	27,049		86,250		—		—		113,299
Contractual interest on convertible senior unsecured notes	Contractual interest on convertible senior unsecured notes	7,154		13,186		—		—		20,340		Contractual interest on convertible senior unsecured notes	6,735		8,733		—		—		15,468
Securitized debt(2)	Securitized debt(2)	—		—		1,370,691		610,900		1,981,591		Securitized debt(2)	—		—		1,370,691		766,749		2,137,440
Contractual interest on securitized debt	Contractual interest on securitized debt	74,416		148,832		92,703		438,585		754,536		Contractual interest on securitized debt	79,000		158,000		59,774		599,865		896,639

Total	Total	$	535,016	$	327,795	$	1,463,394	$	1,049,485	$	3,375,690	Total	$	676,102	$	252,983	$	1,430,465	$	1,366,614	$	3,726,164

(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 ~~$2.0~~$2.2 billion. Assumes entire outstanding principal balance at ~~September~~June 30, ~~2021~~2022 is paid at maturity.

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 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~~

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~~unprecedented market disruption~~In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and ~~dislocation across fixed income markets surrounding the uncertainty related~~our transition to CO~~VID-19 pandemic.~~a residential focused investment portfolio. Future waivers, if any, ~~are~~will be at the Manager's discretion.

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

To ~~preserve liquidity,~~maintain our qualification as a REIT, U.S. federal income tax law generally requires that we suspended our first and second quarter common stock dividends in 2020 given extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic. Beginning in the quarter ended September 30, 2020, we resumed paying a quarterly dividend after making progress strengthening our balance sheet and improving liquidity and earnings powerdistribute at least 90% of our ~~investment portfolio.~~REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding capital gains. We ~~will continue~~must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income.

We evaluate each ~~subsequent~~ quarter to determine our ability to pay 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 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.~~

~~Recent Developments~~

On November 5, 2021, we entered into an amendment of our Residential Whole Loan Facility. The amendment facility bears an interest rate of LIBOR plus 2.00%, with a LIBOR floor of 0.25%. The facility is available to finance five types of residential mortgages: Non-Agency mortgage loans, Non-QM loans, BPL-Long, re-performing and non-performing loans. The advance rates differ by type of loan, but for performing Non-QM loans the advance rate is 90%. The facility matures on November 5, 2022. The facility is a mark to market margin facility once the collateral value declines below par and has a stated capacity of $500 million.

distribution.

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ITEM 3. 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. WeAlthough 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 ~~instruments that make up most of our current portfolio.~~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 thoroughanalysis. ~~Investments are evaluated and decisions are made following a bottom-up credit analysis and specific relevant risk assumptions.~~

As of ~~September~~June 30, ~~2021, four~~2022, three of ~~our~~the counterparties ~~that~~with which 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

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caps that result in some portion of the interest being deferred and added to the principal outstanding or a portion of the

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incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could 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 ~~September~~June 30, ~~2021,~~2022, 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	Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value		Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%	+1.00%	(0.18)	%	(1.13)	%	+1.00%	(19.99)	%	0.80	%
+0.50%	+0.50%	0.12	%	(0.57)	%	+0.50%	(9.99)	%	0.41	%
-0.50%	-0.50%	(0.05)	%	0.39	%	-0.50%	13.65	%	(0.39)	%
-1.00%	-1.00%	(1.22)	%	0.57	%	-1.00%	32.36	%	(0.67)	%

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 ~~September~~June 30, ~~2021.~~2022. 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.

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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 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,~~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 by 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, ~~the COVID 19 pandemic~~ decreases in property values inreduce the ~~retail~~value of the collateral and the ~~hospitality~~potential proceeds

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sectors since these sectors were more affected by health related shutdowns. There remains uncertainty around the timing and extent of a recovery in the performance in these property types and the reduction in value of the collateral and the potential proceeds available to a borrower to repay our loans, ~~may~~which could also cause us to suffer ~~further~~ 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

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 an 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.

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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 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~~at times 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.

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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.

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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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures: Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information we are required to disclose 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. Disclosure controls and procedures include controls and procedures designed to ensure that the required information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of ~~September~~June 30, ~~2021.~~2022. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us 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 applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

No change occurred in our internal control over financial reporting (as defined in Rule13a-15(f) and Rule 15d-15(f) of the Exchange Act) during the three months ended ~~September~~June 30, ~~2021~~2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. ~~As of September~~During the three months ended June 30, ~~2021,~~2022, the Company was not involved in any material legal proceedings.

ITEM 1A. Risk Factors

There were no material changes during the period covered by this report to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, as filed with the SEC on March ~~5, 2021.~~8, 2022. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

The following exhibits are filed as part of this report.


Exhibit No.						Description

3.1*						Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

3.2*						Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated June 3, 2016, incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K, filed March 7, 2017.

3.3*						Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated July 8, 2022, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on July 11, 2022.

3.4*						Amended and restated bylaws of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.2 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

4.1*						Specimen Common Stock Certificate of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 4.1 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

4.2*						Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on October 3, 2017.

4.3*						First Supplemental Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.

4.4*						Form of 6.75% Convertible Senior Notes due 2022 (attached as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.3 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

4.5*						Second Supplemental Indenture, dated as of September 14, 2021, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.

4.6*						Form of 6.75% Convertible Senior Notes due 2024 (attached as Exhibit A to the Second Supplemental Indenture filed as Exhibit 4.5 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

31.1						Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.

31.2						Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.

32.1						Section 1350 Certifications of Chief Executive Officer ~~Section 1350 Certifications of Chief Executive Officer~~ and Chief Financial Officer.

101						The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2021,~~2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020;~~2021; (ii) the Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020;~~2021; (iii) the Consolidated Statements of Changes in Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020;~~2021; (iv) the Consolidated Statements of Cash Flows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020;~~2021; and (v) the Notes to Consolidated Financial Statements.

104						Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document).

Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

*Fully or partly previously filed.

9892

Table of Contents

SIGNATURES

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:			/s/ BONNIE M. WONGTRAKOOL

			~~/s/ BONNIE~~Bonnie M. ~~WONGTRAKOOL~~Wongtrakool
			Chief Executive Officer and Director (Principal Executive Officer)

			~~November 5, 2021~~August 9, 2022


			By:			/s/ ~~LISA MEYER~~ROBERT W. LEHMAN

			~~Lisa Meyer~~Robert W. Lehman
			~~President,~~ Chief Financial Officer ~~and Treasurer (Principal Financial and Accounting Officer)~~

			~~November 5, 2021~~August 9, 2022

9993


		Page

	Part I — FINANCIAL INFORMATION

ITEM 1.	Financial Statements	2

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5249

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	9084

ITEM 4.	Controls and Procedures	9690

	Part II — OTHER INFORMATION	9791

ITEM 1.	Legal Proceedings	9791

ITEM 1A.	Risk Factors	9791

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	9791

ITEM 3.	Defaults Upon Senior Securities	9791

ITEM 4.	Mine Safety Disclosures	9791

ITEM 5.	Other Information	9791

ITEM 6.	Exhibits	9892

Signatures		9993


	Three Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares	Par
Balance at June 30, 2021	60,812,701	$	609	$	915,782	$	(699,920)	$	(578)	$	215,893	$	2	$	215,895


Equity contributions	—	—		—		—		—		—		12,138		12,138
Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock to common stock	47,212	—		—		—		—		—		—		—

Offering costs	—	—		(68)		—		—		(68)		—		(68)
Vesting of restricted stock	—	—		165		—		—		165		—		165

Net loss	—	—		—		(4,213)		—		(4,213)		(271)		(4,484)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		24		(3,675)		—		(3,651)		—		(3,651)
Balance at September 30, 2021	60,859,913	$	609	$	917,963	$	(707,808)	$	(578)	$	210,186	$	11,867	$	222,053


	For the nine months ended September 30, 2021		For the nine months ended September 30, 2020
Proceeds from offering to non-controlling interest, net of offering costs	—		2
Proceeds from repurchase agreement borrowings	2,527,530		9,149,204
Repayments of repurchase agreement borrowings	(2,403,068)		(11,615,203)

Proceeds from securitized debt	—		460,787
Repayments of securitized debt	(597,221)		(366,828)


Payments made for deferred financing costs	(2,536)		(3,145)
Due from counterparties, net	(565)		95,595
Due to counterparties, net	(321)		(692)
Increase (decrease) in other liabilities	(75,873)		42,634
Dividends paid on common stock	(10,947)		(16,592)
Dividends paid to non-controlling interest	(4)		(4)
Net cash used in financing activities	(605,486)		(2,232,837)



Net (decrease) increase in cash, cash equivalents and restricted cash	(43,569)		38,759
Cash, cash equivalents and restricted cash, beginning of period	107,745		84,279
Cash, cash equivalents and restricted cash, end of period	$	64,176	$	123,038

Supplemental disclosure of operating cash flow information:
Interest paid	$	87,658	$	90,885
Income taxes paid	$	192	$	810
Supplemental disclosure of non-cash financing/investing activities:
Underwriting and offering costs payable	$	6	$	—
Principal payments of securities, not settled	$	—	$	44


Assets of deconsolidated VIE	$	—	$	(150,804)
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	$	3,651	$	3,041
Dividends to non-controlling interest, not paid	$	2	$	2
Principal payments of Residential Whole Loans, not settled	$	22,621	$	16,097
Principal payments of Residential Bridge Loans, not settled	$	1,715	$	2,720

Other assets - Transfer of Bridge Loans to REO	$	752	$	419
Other assets - Transfer of Commercial Loans to REO	$	30,345	$	—
Other assets - Contribution of REO from non-controlling interest	$	12,138	$	—
Financing fee payable	$	—	$	(20,540)
Exchange of convertible senior notes for common stock	$	—	$	3,588

Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents	$	63,916	$	27,459
Restricted cash	260		95,579
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	64,176	$	123,038


	Residential Whole Loans, at Fair Value				Residential Bridge Loans, at Fair Value(1)				Residential Bridge Loans, at Amortized Cost(1)
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Principal balance	$	908,512	$	984,555	$	6,654	$	14,144	$	—	$	1,103
Unamortized premium	26,920		24,248		1		3		—		—
Unamortized discount	(1,459)		(1,799)		—		—		—		—
Amortized cost	933,973		1,007,004		6,655		14,147		—		1,103
Gross unrealized gains	19,174		9,282		—		5		N/A		N/A
Gross unrealized losses	(3,730)		(7,504)		(695)		(1,339)		N/A		N/A
Fair value	$	949,417	$	1,008,782	$	5,960	$	12,813	N/A		N/A


	September 30, 2021		December 31, 2020
Cash	$	9,245	$	—
Restricted cash	260		76,132
Securitized commercial loans, at fair value	1,377,005		1,605,335
Commercial Loans, at fair value	14,362		68,466
Interest receivable	5,119		6,248
Total assets	$	1,405,991	$	1,756,181
Securitized debt, at fair value	$	1,365,494	$	1,553,722
Interest payable	4,995		5,660
Accounts payable and accrued expenses	9		12
Other liabilities	260		76,132
Total liabilities	$	1,370,758	$	1,635,526


Collateral	Minimum	Maximum (excluding IOs and IIOs)	Maximum (including IOs and IIOs)
Agency RMBS	25.0%	n/a	25.0%

Non-Agency RMBS	35.0%	35.0%	35.0%
Non-Agency CMBS	25.0%	40.0%	n/a
Other securities	35.0%	60.0%	n/a
Residential Whole Loans(1)	15.0%	50.0%	n/a
Commercial Loans(2)	22.0%	55.0%	n/a