MTGE Investment Corp. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - MTGE Investment Corp.	Financial_Report.xls
EX-32 - EXHIBIT - MTGE Investment Corp.	mtge6302014ex32.htm
EX-10.2 - EXHIBIT - MTGE Investment Corp.	mtge6302014ex102.htm
EX-31.1 - EXHIBIT - MTGE Investment Corp.	mtge6302014ex311.htm
EX-31.2 - EXHIBIT - MTGE Investment Corp.	mtge6302014ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



Q	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Commission file number 001-35260

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

(Exact name of registrant as specified in its charter)



Maryland		45-0907772
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2 Bethesda Metro Center

14th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 968-9220

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports 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 earlier 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 ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 and post such files).

Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý		Accelerated filer	o

Non-accelerated filer	o	(Do not check if a smaller reporting company)	Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of August 1, 2014 was 51,142,063.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61
Item 4.	Controls and Procedures	65

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67

Signatures		67

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



	June 30, 2014			December 31, 2013
	(unaudited)			(audited)
Assets:
Agency securities, at fair value (including pledged securities of $4,268,417 and $5,618,735, respectively)	$	4,464,193		$	5,641,682
Non-agency securities, at fair value (including pledged securities of $860,779 and $899,176, respectively)	1,051,140			1,011,217
REIT equity securities, at fair value	11,482			38,807
Treasury securities, at fair value (including pledged securities of $141,427 and $571,145, respectively)	148,328			637,342
Cash and cash equivalents	200,015			206,398
Restricted cash and cash equivalents	92,157			21,005
Interest receivable	14,112			20,620
Derivative assets, at fair value	35,524			108,221
Receivable for securities sold	196,616			608,646
Receivable under reverse repurchase agreements	579,364			22,736
Mortgage servicing rights, at fair value	106,164			15,608
Other assets	63,034			65,583
Total assets	$	6,962,129		$	8,397,865
Liabilities:
Repurchase agreements	$	4,999,178		$	7,158,192
Payable for agency and non-agency securities purchased	26,341			—
Derivative liabilities, at fair value	51,027			11,327
Dividend payable	33,900			33,381
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	580,646			22,530
Accounts payable and other accrued liabilities	53,347			69,715
Total liabilities	5,744,439			7,295,145
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000 shares authorized:
8.125% Series A Cumulative Redeemable Preferred Stock; 2,200 shares (aggregate liquidation preference of $55,000) and 0 shares issued and outstanding, respectively	53,018			—
Common stock, $0.01 par value; 300,000 shares authorized, 51,142 and 51,356 shares issued and outstanding, respectively	511			514
Additional paid-in capital	1,197,692			1,201,826
Retained deficit	(33,531		)	(99,620		)
Total stockholders’ equity	1,217,690			1,102,720
Total liabilities and stockholders’ equity	$	6,962,129		$	8,397,865

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Interest income:
Agency securities	$	31,459		$	51,053		$	65,731		$	91,236
Non-agency securities	15,502			12,731			31,470			24,024
Other	77			143			133			234
Interest expense	(7,256		)	(9,113		)	(15,401		)	(17,149		)
Net interest income	39,782			54,814			81,933			98,345

Servicing:
Servicing income	11,389			—			20,953			—
Servicing expense	(14,426		)	—			(28,648		)	—
Net servicing loss	(3,037		)	—			(7,695		)	—

Other gains (losses):
Realized gain (loss) on agency securities, net	4,052			(20,979		)	(9,081		)	(12,305		)
Realized gain on non-agency securities, net	12,983			8,307			14,392			9,726
Realized loss on periodic settlements of interest rate swaps, net	(5,227		)	(10,045		)	(10,174		)	(17,779		)
Realized gain (loss) on other derivatives and securities, net	11,560			23,865			(10,468		)	21,417
Unrealized gain (loss) on agency securities, net	78,336			(292,864		)	145,893			(371,704		)
Unrealized gain (loss) on non-agency securities, net	2,018			(23,751		)	9,848			6,727
Unrealized gain (loss) on other derivatives and securities, net	(49,211		)	213,307			(68,305		)	198,056
Unrealized loss on mortgage servicing rights	(529		)	—			(629		)	—
Total other gains (losses), net	53,982			(102,160		)	71,476			(165,862		)

Expenses:
Management fees	4,377			5,079			8,625			9,523
General and administrative expenses	1,846			1,928			3,676			3,705
Total expenses	6,223			7,007			12,301			13,228

Income (loss) before excise tax	84,504			(54,353		)	133,413			(80,745		)
Excise tax	207			—			356			177
Net income (loss)	84,297			(54,353		)	133,057			(80,922		)
Dividend on preferred stock	(484		)	—			(484		)	—
Net income (loss) available (attributable) to common shareholders	$	83,813		$	(54,353	)	$	132,573		$	(80,922	)

Net income (loss) per common share—basic and diluted	$	1.64		$	(0.94	)	$	2.59		$	(1.53	)

Weighted average number of common shares outstanding—basic and diluted	51,142			57,982			51,207			52,754

Dividend declared per common share	$	0.65		$	0.80		$	1.30		$	1.70

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Preferred Stock			Common Stock					Additional Paid-in Capital			Retained Earnings (Deficit)			Total
	Shares	Amount		Shares		Amount			Additional Paid-in Capital			Retained Earnings (Deficit)			Total
Balance, December 31, 2012	—	$	—	35,964		$	360		$	772,008		$	153,194		$	925,562
Net loss	—	—		—		—			—			(80,922		)	(80,922		)
Issuance of common stock	—	—		23,000		230			583,685			—			583,915
Issuance of restricted stock	—	—		8		—			—			—			—
Repurchase of common stock	—	—		(2,901	)	(29		)	(61,933		)	—			(61,962		)
Stock-based compensation	—	—		—		—			64			—			64
Common dividends declared	—	—		—		—			—			(97,932		)	(97,932		)
Balance, June 30, 2013	—	$	—	56,071		$	561		$	1,293,824		$	(25,660	)	$	1,268,725

Balance, December 31, 2013	—	$	—	51,356		$	514		$	1,201,826		$	(99,620	)	$	1,102,720
Net income	—	—		—		—			—			133,057			133,057
Issuance of preferred stock	2,200	53,018		—		—			—			—			53,018
Repurchase of common stock	—	—		(214	)	(3		)	(4,205		)	—			(4,208		)
Stock-based compensation	—	—		—		—			71			—			71
Preferred dividends declared	—	—		—		—			—			(484		)	(484		)
Common dividends declared	—	—		—		—						(66,484		)	(66,484		)
Balance, June 30, 2014	2,200	$	53,018	51,142		$	511		$	1,197,692		$	(33,531	)	$	1,217,690

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)



	For the Six Months Ended June 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	133,057		$	(80,922	)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Amortization of net premium on agency securities	18,664			18,310
Accretion of net discount on non-agency securities	(20,278		)	(14,860		)
Realization of cash flows from MSR	1,102			—
Unrealized loss (gain) on securities and derivatives, net	(86,807		)	166,921
Realized loss on agency securities, net	9,081			12,305
Realized gain on non-agency securities, net	(14,392		)	(9,726		)
Realized loss (gain) on other derivatives and securities, net	22,481			(3,638		)
Stock-based compensation	71			64
Decrease (increase) in interest receivable	6,508			(5,550		)
Decrease in other assets	2,723			1,498
Increase in accounts payable and other accrued liabilities	8,637			100,287
Net cash flows from operating activities	80,847			184,689
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of agency securities	(133,739		)	(5,032,161		)
Purchases of non-agency securities	(340,376		)	(377,817		)
Purchases of MSR, net of purchase price adjustments	(92,844		)	—
Proceeds from sale of agency securities	1,667,076			3,280,218
Proceeds from sale of non-agency securities	295,211			119,379
Principal collections on agency securities	280,752			311,141
Principal collections on non-agency securities	49,760			48,794
Net payments on reverse repurchase agreements	(556,628		)	(797,708		)
Purchases of U.S. Treasury securities	(1,089,263		)	(3,083,211		)
Proceeds from sale of U.S. Treasury securities	2,064,270			3,374,577
Proceeds from terminations of interest rate swaptions	17,391			—
Payment of premiums for interest rate swaptions	(535		)	(19,115		)
Increase in restricted cash	(71,152		)	(17,376		)
Other investing cash flows, net	(326		)	(1,216		)
Net cash flows from (used in) investing activities	2,089,597			(2,194,495		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Dividends paid	(66,623		)	(85,443		)
Proceeds from preferred stock offerings, net of offering costs	53,018			—
Proceeds from common stock offerings, net of offering costs	—			583,915
Net payments for repurchase of common shares	(4,208		)	(61,962		)
Proceeds from repurchase agreements	17,878,744			24,737,105
Repayments on repurchase agreements	(20,037,758		)	(23,004,148		)
Net cash flows from (used in) financing activities	(2,176,827		)	2,169,467
Net increase (decrease) in cash and cash equivalents	(6,383		)	159,661
Cash and cash equivalents at beginning of the period	206,398			157,314
Cash and cash equivalents at end of period	$	200,015		$	316,975

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Unaudited Interim Consolidated Financial Statements

The unaudited interim consolidated financial statements of American Capital Mortgage Investment Corp. (referred to throughout this report as the "Company", "we", "us" and "our") are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP 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 income and expenses during the reporting period. Actual results could differ from those estimates.

Our unaudited interim consolidated financial statements include the accounts of our wholly-owned subsidiaries, American Capital Mortgage Investment TRS, LLC and American Capital Mortgage 2013, LLC and, in turn, its wholly-owned subsidiary Residential Credit Solutions, Inc. ("RCS"). Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.

Note 2. Organization

We were incorporated in Maryland on March 15, 2011 and commenced operations on August 9, 2011 following the completion of our initial public offering ("IPO"). We are externally managed by American Capital MTGE Management, LLC (our "Manager"), an affiliate of American Capital, Ltd. ("American Capital"). Our common stock is traded on the NASDAQ Global Select Market under the symbol "MTGE."

We invest in, finance and manage a leveraged portfolio of mortgage-related investments, which we define to include agency residential mortgage-backed securities ("RMBS"), non-agency mortgage investments and other mortgage-related investments. Agency RMBS include residential mortgage pass-through certificates and collateralized mortgage obligations ("CMOs") structured from residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsored enterprise ("GSE"), such as Federal National Mortgage Association ("Fannie Mae") and Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as Government National Mortgage Association ("Ginnie Mae"). Non-agency mortgage investments include RMBS backed by residential mortgages that are not guaranteed by a GSE or U.S. Government agency. Non-agency mortgage investments may also include prime and non-prime residential mortgage loans. Other mortgage-related investments may include mortgage servicing rights ("MSR"), GSE credit risk transfer securities, commercial mortgage-backed securities ("CMBS"), commercial mortgage loans and mortgage-related derivatives.

Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term through a combination of dividends and net book value appreciation. In pursuing this objective, we rely on our Manager’s expertise to construct and manage a diversified mortgage investment portfolio by identifying asset classes that, when properly financed and hedged, are designed to produce attractive returns across a variety of market conditions and economic cycles, considering the risks associated with owning such investments.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"). As such, we are required to distribute annually at least 90% of our taxable net income. As long as we continue to qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable net income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

On November 27, 2013, our wholly-owned subsidiary, American Capital Mortgage 2013, LLC acquired RCS, a fully-licensed mortgage servicer based in Fort Worth, Texas that has approvals from Fannie Mae, Freddie Mac, and Ginnie Mae to hold and manage MSR and residential mortgage loans. See Note 11 - Other Assets for additional information.

Note 3. Summary of Significant Accounting Policies

Fair Value of Financial Assets

We have elected the option to account for all of our financial assets, including all mortgage-related investments, at estimated fair value, with changes in fair value reflected in income during the period in which they occur. In management's view, this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of hedging instruments. See Note 9- Fair Value Measurements.

Interest Income

Interest income is accrued based on the outstanding principal amount of the securities and their contractual terms. Premiums or discounts associated with the purchase of agency RMBS and non-agency RMBS of high credit quality are amortized or accreted into interest income, respectively, over the projected lives of the securities, including contractual payments and estimated prepayments, using the effective interest method.

We estimate long-term prepayment speeds using a third-party service and market data. The third-party service estimates prepayment speeds for our securities using models that incorporate the mortgage rates, age, size and loan-to-value ratios of the outstanding underlying loans, as well as current mortgage rates, forward yield curves, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service, and based on our Manager’s judgment, we may make adjustments to its estimates. Actual and anticipated prepayment experience is reviewed at least quarterly and effective yields are recalculated when differences arise between the previously estimated future prepayments and the amounts actually received plus currently anticipated future prepayments. If the actual and anticipated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

At the time we purchase non-agency RMBS and loans that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the impact of default and severity rates on the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.

Mortgage Servicing Rights, at Fair Value

Our MSR represent the right to service mortgage loans for a servicing fee. MSR are reported at fair value on our consolidated balance sheets, with changes in fair value related to changes in valuation inputs and assumptions reported as unrealized loss on MSR on the consolidated statements of operations. Servicing fees, incentive fees and ancillary income are reported within servicing income on the consolidated statements of operations. The related servicing expenses and realization of cash flows related to underlying loan repayments, net of recoveries of contractual prepayment protection are recorded in servicing expenses on the consolidated statements of operations. See Note 10 - Mortgage Servicing Rights for further discussion on MSR.

The accounting model used to evaluate whether a transfer of MSR qualifies as a sale is based on a risks and rewards approach, as MSR are not financial assets. In certain cases where we transfer the economics of MSR while retaining the actual servicing function, we retain the risk associated with servicing and, as a result, the transfer does not qualify for sale accounting. As such, we retain the MSR, together with an offsetting financing liability on our consolidated balance sheets. We have elected the option to account for MSR financing liabilities at estimated fair value, with changes in fair value reflected in income during the period in which they occur. See Note 12 - Accounts Payable and Other Accrued Liabilities for the presentations of our mortgage servicing liability.

We may be obligated to fund advances of principal and interest payments due to third-party owners of the loans, but not yet received from the individual borrowers. We may also be obligated to fund advances of real estate taxes and insurance, as well as protective advances to preserve the value of the underlying property and expenses associated with remedial action in

respect of defaulted loans. These advances are reported as servicing advances within the other assets line item on the consolidated balance sheets.

REIT Equity Securities, at Fair Value

REIT equity securities represent investments in the common stock of other publicly traded mortgage REITs that invest predominately in agency RMBS. We designate our investments in REIT equity securities as trading securities and report them at fair value on the accompanying consolidated balance sheets with changes in fair value recorded in unrealized gain (loss) on other derivatives and securities, net on the accompanying consolidated statements of operations. Dividend income from REIT equity securities is recorded in realized gain (loss) on other derivatives and securities, net.

Repurchase Agreements

We finance the acquisition of agency RMBS and certain non-agency RMBS for our investment portfolio through repurchase transactions under master repurchase agreements. We account for repurchase transactions as collateralized financing transactions which are carried at their contractual amounts, including accrued interest, as specified in the respective transaction agreements. The contractual amounts approximate fair value due to their short-term nature.

Reverse Repurchase Agreements and Obligation to Return Securities Borrowed under Reverse Repurchase Agreements

We from time to time borrow securities to cover short sales of U.S. Treasury securities through reverse repurchase transactions under our master repurchase agreements (see Derivatives below). We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on the consolidated balance sheets based on the value of the underlying borrowed securities as of the reporting date. Our reverse repurchase agreements generally mature daily. The fair value of our reverse repurchase agreements is assumed to equal cost as the interest rates are reset daily.

Derivatives

We utilize a risk management strategy, under which we may use a variety of derivative instruments to hedge some of our exposure to market risks, including interest rate risk, prepayment risk, extension risk and credit risk. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of market conditions. The principal instruments that we currently use are interest rate swaps and options to enter into interest rate swaps ("interest rate swaptions"). We also utilize forward contracts for the purchase or sale of agency RMBS, or to-be-announced forward ("TBA") contracts, and short sales of U.S. Treasury securities and U.S. Treasury futures contracts. We may also purchase or write put or call options on TBA securities and we may invest in other types of mortgage derivatives, such as synthetic total return swaps.

We also enter into TBA contracts as a means of investing in and financing agency RMBS (thereby increasing our "at

risk" leverage) or as a means of disposing of or reducing our exposure to agency RMBS (thereby reducing our "at risk" leverage). Pursuant to TBA contracts, we agree to purchase or sell, for future delivery, agency RMBS with certain principal and interest terms and certain types of collateral, but the particular agency RMBS to be delivered are not identified until shortly before the TBA settlement date. We also may choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting short or long position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing or selling a similar TBA contract for a later settlement date. This transaction is commonly referred to as a "dollar roll." The agency RMBS purchased or sold for a forward settlement date are typically priced at a discount to agency RMBS for settlement in the current month. This difference (or discount) is referred to as the "price drop." The price drop is the economic equivalent of net interest carry income on the underlying agency RMBS over the roll period (interest income less implied financing cost) and is commonly referred to as "dollar roll income (loss)." Consequently, forward purchases of agency RMBS and dollar roll transactions represent a form of off-balance sheet financing.

We recognize all derivative instruments as either assets or liabilities on the balance sheets, measured at fair value. As we have not designated any derivatives as hedging instruments, all changes in fair value are reported in earnings in our consolidated statements of operations in unrealized gain (loss) on other derivatives and securities, net during the period in which they occur. Derivatives in a gain position are reported as derivative assets at fair value and derivatives in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheets. Cash receipts and payments related to derivative instruments are classified in our consolidated statements of cash flows according to the underlying nature or purpose of the derivative transaction, generally in the investing section.

Our derivative agreements generally contain provisions that allow for netting or setting off derivative assets and liabilities with each counterparty; however, we report related assets and liabilities on a gross basis in our consolidated balance sheets.

Interest rate swap agreements

We use interest rate swaps to hedge the variable cash flows associated with short-term borrowings made under our repurchase agreement facilities. Under our interest rate swap agreements, we typically pay a fixed rate and receive a floating rate based on one, three or six-month LIBOR ("payer swaps") with terms up to 15 years. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our swap agreements are privately negotiated in the over-the-counter ("OTC") market and may be centrally cleared through a registered commodities exchange ("centrally cleared swaps").

We estimate the fair value of our centrally cleared interest rate swaps using the daily settlement price determined by the respective exchange. Centrally cleared swaps are valued by the exchange using a pricing model that references the underlying rates, including the overnight index swap rate and LIBOR forward rate, to produce the daily settlement price. We estimate the fair value of our "non-centrally cleared" swaps using a combination of inputs from counterparty and third-party pricing models to estimate the net present value of the future cash flows using a forward yield curve in effect as of the end of the measurement period. We also incorporate any of our own and our counterparties’ unmitigated nonperformance risk in estimating the fair value of our interest rate swaps. In considering the effect of nonperformance risk, we consider the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty credit risk is not significant to the overall valuation of these agreements.

The payment of periodic settlements of net interest on interest rate swaps is reported in realized loss on periodic settlements of interest rate swaps, net in our consolidated statements of operations. Cash payments received or paid for the early termination of an interest rate swap agreement are recorded as realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. Changes in fair value of our interest rate swap agreements are reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

Interest rate swaptions

We purchase interest rate swaptions to help mitigate the potential impact of larger increases or decreases in interest rates

on the performance of our investment portfolio. The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay or receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option. The difference between the premium and the fair value of the swaption is reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If a swaption expires unexercised, the realized loss on the swaption would be equal to the premium paid and reported in realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If we exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the fair value of the underlying interest rate swap and the premium paid and reported in realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

Interest rate swaption agreements are privately negotiated in the OTC market and are not subject to central clearing. We estimate the fair value of interest rate swaptions using a combination of inputs from counterparty and third-party pricing models based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option, adjusted for non-performance risk, if any.

TBA securities

A TBA security is a forward contract for the purchase ("long position") or sale ("short position") of agency RMBS at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific agency RMBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA contracts as a means of hedging

against short-term changes in interest rates. We may also enter into TBA contracts as a means of acquiring or disposing of agency RMBS and we may from time to time utilize TBA dollar roll transactions to finance agency RMBS purchases.

We account for all TBA contracts as derivatives since we cannot assert that it is probable at the inception and throughout the term of the contract that it will not settle net and will result in physical delivery of an agency security when it is issued. A TBA dollar roll transaction is a series of derivative transactions. The net settlement of a TBA contract is reported as realized gain (loss) on other derivatives and securities, net and changes in the fair value of our TBA contracts are reported as unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

We estimate the fair value of TBA securities based on similar methods used to value our agency RMBS.

Forward commitments to purchase or sell specified securities

We may enter into a forward commitment to purchase or sell specified securities as a means of acquiring assets or as a hedge against short-term changes in interest rates. Such forward commitments usually require physical settlement. Contracts for the purchase or sale of specified securities are accounted for as derivatives if the delivery of the specified agency RMBS and settlement extends beyond established market conventions. Realized gains and losses associated with forward commitments are recognized in the line item realized gain (loss) on other derivatives and securities, net and unrealized gains and losses are recognized in unrealized gain (loss) on other derivatives and securities, net on our consolidated statements of operations.

We estimate the fair value of forward commitments to purchase or sell specified RMBS based on methods used to value our RMBS, as well as the remaining length of time of the forward commitment.

U.S. Treasury securities

We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. Realized gains and losses associated with purchases and short sales of U.S. Treasury securities and U.S. Treasury futures contracts are recognized in realized gain (loss) on other derivatives and securities, net, and unrealized gains and losses are recognized in unrealized gain (loss) on other derivatives and securities, net on our consolidated statements of operations.

Reclassifications

Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation.

Note 4. Agency Securities

The following tables summarize our investments in agency RMBS as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014
	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Agency RMBS:
Par value	$	3,502,097		$	799,767		$	—		$	4,301,864
Unamortized premium	154,669			40,278			—			194,947
Amortized cost	3,656,766			840,045			—			4,496,811
Gross unrealized gains	19,689			5,199			—			24,888
Gross unrealized losses	(45,414		)	(12,092		)	—			(57,506		)
Agency RMBS, at fair value	$	3,631,041		$	833,152		$	—		$	4,464,193

Weighted average coupon as of June 30, 2014	3.38		%	3.50		%	—		%	3.40		%
Weighted average yield as of June 30, 2014	2.55		%	2.70		%	—		%	2.57		%
Weighted average yield for the three months ended June 30, 2014	2.58		%	2.67		%	1.93		%	2.59		%
Weighted average yield for the six months ended June 30, 2014	2.50		%	2.61		%	2.05		%	2.52		%



	June 30, 2014
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency RMBS:
Fixed rate	$	4,369,593	$	21,923	$	(57,506	)	$	4,334,010
Adjustable rate	127,218		2,965		—			130,183
Total	$	4,496,811	$	24,888	$	(57,506	)	$	4,464,193



	December 31, 2013
	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Fixed-rate agency RMBS:
Par value	$	4,461,621		$	1,079,180		$	32,792		$	5,573,593
Unamortized premium	195,633			50,265			703			246,601
Amortized cost	4,657,254			1,129,445			33,495			5,820,194
Gross unrealized gains	4,230			1,570			568			6,368
Gross unrealized losses	(150,447		)	(34,433		)	—			(184,880		)
Fixed-rate agency RMBS, at fair value	$	4,511,037		$	1,096,582		$	34,063		$	5,641,682

Weighted average coupon as of December 31, 2013	3.33		%	3.44		%	3.00		%	3.35		%
Weighted average yield as of December 31, 2013	2.53		%	2.67		%	2.12		%	2.56		%
Weighted average yield for the year ended December 31, 2013	2.69		%	2.87		%	2.22		%	2.72		%



	December 31, 2013
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency RMBS:
Fixed rate	$	5,358,579	$	3,678	$	(184,565	)	$	5,177,692
Adjustable rate	461,615		2,690		(315		)	463,990
Total	$	5,820,194	$	6,368	$	(184,880	)	$	5,641,682

Actual maturities of agency RMBS are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments.

The following table summarizes our agency RMBS as of June 30, 2014 and December 31, 2013 according to their estimated weighted average life classification (dollars in thousands):



	June 30, 2014								December 31, 2013
					Weighted Average								Weighted Average
Weighted Average Life	Fair Value		Amortized Cost		Yield		Coupon		Fair Value		Amortized Cost		Yield		Coupon
Less than or equal to three years	$	315	$	310	1.47	%	3.50	%	$	9,089	$	9,095	2.38	%	3.49	%
Greater than three years and less than or equal to five years	1,372,014		1,363,252		2.24	%	3.23	%	2,142,111		2,159,311		2.29	%	3.20	%
Greater than five years and less than or equal to 10 years	3,044,148		3,084,401		2.72	%	3.47	%	3,485,241		3,646,188		2.72	%	3.43	%
Greater than 10 years	47,716		48,848		2.93	%	3.54	%	5,241		5,600		2.96	%	3.50	%
Total	$	4,464,193	$	4,496,811	2.57	%	3.40	%	$	5,641,682	$	5,820,194	2.56	%	3.35	%

As of June 30, 2014 and December 31, 2013, none of our agency RMBS had an estimated weighted average life of less than 2.2 years and 2.1 years, respectively. As of June 30, 2014 and December 31, 2013, the estimated weighted average life of our agency security portfolio was 7.1 years and 6.1 years, respectively, which incorporates anticipated future prepayment assumptions. As of June 30, 2014 and December 31, 2013, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate agency investment portfolio was 8% and 7%, respectively. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs. We estimate long-term prepayment rates using a third-party service and market data. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate reasonableness. As market conditions may change rapidly, we use our judgment in developing our estimates for different securities. Prepayments are dependent on many factors and actual prepayments could differ materially from our estimates. Various market participants could use materially different assumptions. Furthermore, changes in market conditions such as interest rates, housing prices, and broad economic factors such as employment can materially impact prepayments. Additionally, modifications to GSE underwriting criteria or programs, GSE policies surrounding the buyouts or modifications of delinquent loans or other factors could significantly change the prepayment landscape.

Realized Gains and Losses

The following table summarizes our net realized gains and losses from the sale of agency RMBS during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Proceeds from agency RMBS sold	$	335,176		$	1,406,984		$	1,667,076		$	3,280,218
Increase (decrease) in receivable for agency RMBS sold	116,535			40,755			(492,111		)	162,571
Less agency RMBS sold, at cost	(447,659		)	(1,468,718		)	(1,184,046		)	(3,455,094		)
Net realized gain (loss) on sale of agency RMBS	$	4,052		$	(20,979	)	$	(9,081	)	$	(12,305	)

Gross realized gains on sale of agency RMBS	$	6,260		$	4,096		$	7,830		$	18,723
Gross realized losses on sale of agency RMBS	(2,208		)	(25,075		)	(16,911		)	(31,028		)
Net realized gain (loss) on sale of agency RMBS	$	4,052		$	(20,979	)	$	(9,081	)	$	(12,305	)

Pledged Assets

The following tables summarize our agency RMBS pledged as collateral under repurchase agreements and derivative agreements by type as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014
Agency RMBS Pledged	Fannie Mae		Freddie Mac		Total
Under Repurchase Agreements ⁽¹⁾
Fair value	$	3,450,671	$	816,891	$	4,267,562
Accrued interest on pledged agency RMBS	9,309		2,286		11,595
Under Derivative Agreements
Fair value	855		—		855
Accrued interest on pledged agency RMBS	2		—		2
Total Fair Value of Agency RMBS Pledged and Accrued Interest	$	3,460,837	$	819,177	$	4,280,014



	December 31, 2013
Agency RMBS Pledged	Fannie Mae		Freddie Mac		Ginnie Mae		Total
Under Repurchase Agreements
Fair value	$	4,492,566	$	1,092,106	$	34,063	$	5,618,735
Accrued interest on pledged agency RMBS	12,287		3,078		82		15,447
Total Fair Value of Agency RMBS Pledged and Accrued Interest	$	4,504,853	$	1,095,184	$	34,145	$	5,634,182

————————


⁽¹⁾	Agency RMBS pledged do not include $133.8 million pledged under repurchase agreements related to securities sold but not yet settled as of June 30, 2014.

The following table summarizes our agency RMBS pledged as collateral under repurchase agreements by remaining maturity as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014						December 31, 2013
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest on Pledged Agency RMBS		Fair Value		Amortized Cost		Accrued Interest on Pledged Agency RMBS
30 days or less	$	2,031,290	$	2,046,667	$	5,422	$	2,591,560	$	2,672,502	$	7,182
31 - 59 days	855,251		860,797		2,424		1,105,167		1,151,447		3,096
60 - 90 days	380,045		381,585		1,051		1,261,354		1,299,749		3,455
Greater than 90 days	1,000,976		1,010,753		2,698		660,654		673,560		1,714
Total	$	4,267,562	$	4,299,802	$	11,595	$	5,618,735	$	5,797,258	$	15,447

As of June 30, 2014 and December 31, 2013, none of our repurchase agreement borrowings backed by agency RMBS were due on demand or mature overnight.

Note 5. Non-Agency Securities

The following tables summarize our non-agency RMBS as of June 30, 2014 and December 31, 2013 (dollars in thousands):



June 30, 2014
	Fair Value		Gross Unrealized					Amortized Cost		Discount			Par/ Current Face		Weighted Average
Category	Fair Value		Gains		Losses			Amortized Cost		Discount			Par/ Current Face		Coupon ⁽¹⁾		Yield
Prime ⁽²⁾	$	237,033	$	15,707	$	(453	)	$	221,779	$	(211,787	)	$	433,566	2.34	%	6.60	%
Alt-A	468,582		51,369		(2,510		)	419,723		(184,244		)	603,967		1.64	%	7.51	%
Option-ARM	161,813		15,011		(980		)	147,782		(43,490		)	191,272		0.50	%	6.47	%
Subprime	183,712		16,496		(707		)	167,923		(94,254		)	262,177		1.01	%	6.03	%
Total	$	1,051,140	$	98,583	$	(4,650	)	$	957,207	$	(533,775	)	$	1,490,982	1.59	%	6.88	%

————————


⁽¹⁾	Coupon rates are floating, except for $12.9 million, $18.7 million and $40.3 million fair value of fixed-rate prime, Alt-A and subprime non-agency RMBS, respectively, as of June 30, 2014.


⁽²⁾	Prime non-agency RMBS include interest only investments with a fair value of $11.3 million and a current face value of $201.2 million as of June 30, 2014.



December 31, 2013
	Fair Value		Gross Unrealized					Amortized Cost		Discount			Par/ Current Face		Weighted Average
Category	Fair Value		Gains		Losses			Amortized Cost		Discount			Par/ Current Face		Coupon ⁽¹⁾		Yield
Prime ⁽²⁾	$	195,524	$	14,161	$	(5,658	)	$	187,021	$	(222,436	)	$	409,457	2.00	%	6.13	%
Alt-A	467,531		46,311		(3,420		)	424,640		(199,407		)	624,047		1.56	%	7.60	%
Option-ARM	119,054		14,809		(1,650		)	105,895		(45,367		)	151,262		0.54	%	7.40	%
Subprime	229,108		21,471		(1,938		)	209,575		(132,577		)	342,152		1.01	%	6.69	%
Total	$	1,011,217	$	96,752	$	(12,666	)	$	927,131	$	(599,787	)	$	1,526,918	1.46	%	7.07	%

————————


⁽¹⁾	Coupon rates are floating, except for $67.4 million, $16.6 million and $51.9 million fair value of fixed-rate prime, Alt-A and subprime non-agency RMBS, respectively, as of December 31, 2013.


⁽²⁾	Prime non-agency RMBS include interest only investments with a fair value of $11.0 million and a current face value of $206.4 million as of December 31, 2013.

The following table summarizes our non-agency RMBS at fair value, by their estimated weighted average life classifications as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014								December 31, 2013
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Weighted Average Coupon		Fair Value		Amortized Cost		Weighted Average Yield		Weighted Average Coupon
≤ 5 years	$	332,222	$	316,670	5.71	%	2.49	%	$	203,935	$	194,800	5.59	%	2.19	%
> 5 to ≤ 7 years	432,203		380,250		7.87	%	1.33	%	211,013		195,913		6.84	%	2.38	%
>7 years	286,715		260,287		6.86	%	1.27	%	596,269		536,418		7.70	%	1.08	%
Total	$	1,051,140	$	957,207	6.88	%	1.59	%	$	1,011,217	$	927,131	7.07	%	1.46	%

Our Prime non-agency RMBS include investments in securitization trusts issued between 2003 and 2013 and securities that were re-securitized in 2009 and 2010, with underlying prime mortgage loan collateral, as well as GSE credit risk transfer securities. Prime mortgage loans are residential mortgage loans that are considered to have been originated with the most stringent underwriting standards at the time of origination. The loans backing our prime securities issued prior to 2010 with a combined fair value of $165.9 million as of June 30, 2014 were originated during a period in which underwriting standards were generally weaker and housing prices have dropped significantly subsequent to their origination. As a result, there is still material credit risk embedded in these vintages. As of June 30, 2014, Prime securities include $71.1 million in fair value of securities issued during 2012 and 2013, with underlying mortgage loans that were originated in a period of fairly stringent underwriting. As of June 30, 2014, our Prime securities have both floating-rate and fixed-rate coupons ranging from 0.8% to 6.5%, with weighted average coupons of underlying collateral ranging from 2.4% to 6.2%.

Our Alt-A non-agency RMBS include senior tranches in securitization trusts issued between 2002 and 2007 and securities with Alt-A collateral that were re-securitized from 2010 to 2013. Alt-A, or alternative A-paper, mortgage loans are considered riskier than prime mortgage loans and less risky than sub-prime mortgage loans. Alt-A loans are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-value ratios and a higher percentage of investment properties. As of June 30, 2014, our Alt-A securities have both fixed and floating rate coupons ranging from 0.2% to 6.5% with weighted average coupons of underlying collateral ranging from 2.7% to 8.2%.

Our Option-ARM non-agency RMBS include senior tranches in securitization trusts that are collateralized by residential mortgages that have origination and underwriting characteristics similar to Alt-A mortgage loans, with the added feature of providing underlying mortgage borrowers the option, within certain constraints, to make lower payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances. This additional feature can increase the credit risk of these securities. As of June 30, 2014, our Option-ARM securities have coupons ranging from 0.3% to 1.1% and have underlying collateral with weighted average coupons between 2.7% and 3.5%. The loans underlying our Option-ARM securities were originated between 2004 and 2007.

Our Subprime non-agency RMBS issued prior to 2013 include fixed and floating rate, senior tranches in securitization trusts collateralized by residential mortgages originated from 2003 to 2007 that were originally considered to be of lower credit quality. As of June 30, 2014, our Subprime securities issued prior to 2013 have a fair value of $161.0 million with fixed and floating rate coupons ranging from 0.2% to 4.9% and have underlying collateral with weighted-average coupons ranging from 3.8% to 7.8%. Additionally, we have classified certain non-performing loans that were securitized in 2013 and 2014 as subprime securities. These 2013 and 2014 securitizations are backed by loans originated from 1984 to 2010 and, as of June 30, 2014, have a fair value of $22.7 million. As of June 30, 2014, our Subprime securities issued in 2013 and 2014 have fixed rate coupons ranging from 3.3% to 4.3% and have underlying collateral with weighted-average coupons ranging from 5.7% to 8.2%.

More than 98% of our non-agency RMBS are rated below investment grade or have not been rated by credit agencies as of June 30, 2014.

Realized Gains and Losses

The following table summarizes our net realized gains and losses from the sale of non-agency RMBS during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Proceeds from non-agency RMBS sold	$	250,548		$	107,954		$	295,211		$	119,379
Increase (decrease) in receivable for non-agency RMBS sold	(4,743		)	—			—			—
Less: non-agency RMBS sold, at cost	(232,822		)	(99,647		)	(280,819		)	(109,653		)
Net realized gain on sale of non-agency RMBS	$	12,983		$	8,307		$	14,392		$	9,726

Gross realized gain on sale of non-agency RMBS	$	16,886		$	9,288		$	18,295		$	10,707
Gross realized loss on sale of non-agency RMBS	(3,903		)	(981		)	(3,903		)	(981		)
Net realized gain on sale of non-agency RMBS	$	12,983		$	8,307		$	14,392		$	9,726

Pledged Assets

Non-agency RMBS with a fair value of $860.8 million and $899.2 million were pledged as collateral under repurchase agreements as of June 30, 2014 and December 31, 2013, respectively. As of June 30, 2014 and December 31, 2013, none of our repurchase agreement borrowings backed by non-agency RMBS were due on demand or mature overnight.

The following table summarizes our non-agency RMBS pledged as collateral under repurchase agreements by remaining maturity as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014						December 31, 2013
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest on Pledged Non-Agency RMBS		Fair Value		Amortized Cost		Accrued Interest on Pledged Non-Agency RMBS
30 days or less	$	665,039	$	609,170	$	879	$	547,087	$	502,063	$	857
31 - 59 days	84,529		70,461		92		70,478		68,622		57
60 - 90 days	53,904		44,925		5		64,873		58,091		55
Greater than 90 days	57,307		50,989		79		216,738		196,644		242
Total	$	860,779	$	775,545	$	1,055	$	899,176	$	825,420	$	1,211

Note 6. Repurchase Agreements

We pledge certain of our securities as collateral under repurchase arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of June 30, 2014 and December 31, 2013, we have met all margin call requirements and had no agency or non-agency repurchase agreements with original overnight maturities. Repurchase agreements are carried at cost, which approximates fair value due to their short-term nature.

At June 30, 2014 and December 31, 2013, our borrowings under repurchase agreements had the following collateral characteristics (dollars in thousands):



	June 30, 2014					December 31, 2013
			Weighted Average					Weighted Average
Collateral Type	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Agency securities	$	4,139,217	0.38	%	115	$	5,935,610	0.43	%	96
Non-agency securities	639,133		1.73	%	28	647,068		1.79	%	33
Treasury securities	220,828		0.09	%	18	575,514		0.07	%	2
Total repurchase agreements	$	4,999,178	0.54	%	100	$	7,158,192	0.52	%	83

The following table summarizes our borrowings under repurchase arrangements and weighted average interest rates classified by remaining maturities as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014					December 31, 2013
			Weighted Average					Weighted Average
	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Agency and non-agency repurchase agreements
≤ 1 month	$	1,871,454	0.70	%	13	$	3,047,986	0.60	%	14
> 1 to ≤ 2 months	1,043,426		0.41	%	48	816,960		0.55	%	45
> 2 to ≤ 3 months	661,703		0.48	%	77	1,506,888		0.52	%	77
> 3 to ≤ 6 months	530,923		0.57	%	136	621,124		0.54	%	135
> 6 to ≤ 9 months	113,212		0.50	%	207	147,729		0.49	%	249
> 9 to ≤ 12 months	305,607		0.47	%	334	191,991		0.50	%	321
> 12 months	252,025		0.57	%	672	250,000		0.59	%	853
Total	4,778,350		0.56	%	103	6,582,678		0.56	%	90

U.S. Treasury repurchase agreements
Short-term	220,828		0.09	%	18	575,514		0.07	%	2
Total repurchase agreements	$	4,999,178	0.54	%	100	$	7,158,192	0.52	%	83

We had repurchase agreements with 32 and 31 financial institutions as of June 30, 2014 and December 31, 2013, respectively. In addition, less than 5% of stockholders' equity was at risk due to collateral pledged in excess of borrowings under repurchase agreements with any one counterparty, with the top five counterparties representing less than 17% of our equity at risk as of June 30, 2014.

We had agency RMBS with fair values of $4.3 billion and $5.6 billion and non-agency RMBS with fair values of $860.8 million and $899.2 million pledged as collateral against repurchase agreements, as of June 30, 2014 and December 31, 2013, respectively. Agency RMBS pledged do not include $133.8 million million pledged under repurchase agreements related to securities sold but not yet settled as of June 30, 2014.

Note 7. Derivatives and Other Securities

In connection with our risk management strategy, we hedge a portion of our exposure to market risks, including interest rate risk and prepayment risk, by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swaps, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or write put or call options on TBA securities or we may invest in other types of derivative securities, including synthetic total return swaps and credit default swaps. Our risk management

strategy attempts to manage the overall risk of the portfolio and reduce fluctuations in book value. We do not use derivative or other hedging instruments for speculative purposes. Derivatives have not been designated as hedging instruments. We do not offset our derivatives and related cash collateral with the same counterparties under any master netting arrangements. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivatives in Note 3- Summary of Significant Accounting Policies.

The table below presents the balance sheet location and fair value information for our derivatives outstanding as of June 30, 2014 and December 31, 2013 (in thousands):



	June 30, 2014		December 31, 2013
Interest rate swaps	$	13,674	$	51,957
Interest rate swaptions	7,953		50,009
U.S. Treasury futures	637		3,399
TBA securities	13,260		2,856
Derivative assets, at fair value	$	35,524	$	108,221

Interest rate swaps	$	50,331	$	9,490
TBA securities	323		1,837
Mortgage options	373		—
Derivative liabilities, at fair value	$	51,027	$	11,327

The following tables summarize the effect of our outstanding derivatives and other securities on our consolidated statements of operations during the three and six months ended June 30, 2014 and 2013 (in thousands):



	For the Three Months Ended June 30,
	2014									2013
	Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net			Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net
Interest rate swaps	$	(5,227	)	$	—		$	(50,038	)	$	(10,045	)	$	—		$	179,433
Interest rate swaptions	—			(2,164		)	(1,885		)	—			(1,276		)	44,608
TBA securities	—			14,821			12,747			—			19,355			(57,385		)
U.S. Treasuries	—			1,711			1,480			—			(1,070		)	(10,651		)
U.S. Treasury futures	—			(3,203		)	(523		)	—			2,703			7,187
Short sales of U.S. Treasuries	—			(4,417		)	(8,887		)	—			4,153			50,115
REIT equity investments	—			4,812			(1,965		)	—			—			—
Mortgage options	—			—			(140		)	—			—			—
Total	$	(5,227	)	$	11,560		$	(49,211	)	$	(10,045	)	$	23,865		$	213,307



	For the Six Months Ended June 30,
	2014									2013
	Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net			Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net
Interest rate swaps	$	(10,174	)	$	68		$	(78,202	)	$	(17,779	)	$	—		$	177,518
Interest rate swaptions	—			(16,832		)	(8,368		)	—			(3,432		)	43,896
TBA securities	—			5,992			11,918			—			19,386			(53,528		)
U.S. Treasuries	—			2,758			12,438			—			(1,070		)	(10,651		)
U.S. Treasury futures	—			(3,977		)	(2,761		)	—			2,703			7,187
Short sales of U.S. Treasuries	—			(5,964		)	(5,067		)	—			3,830			33,634
REIT equity investments				7,487			1,877			—			—			—
Mortgage options	—			—			(140		)	—			—			—
Total	$	(10,174	)	$	(10,468	)	$	(68,305	)	$	(17,779	)	$	21,417		$	198,056

The following tables summarize changes in notional amounts for our outstanding derivatives and other securities for the six months ended June 30, 2014 and 2013 (in thousands):



	December 31, 2013 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		June 30, 2014 Notional Amount
Interest rate swaps	$	3,240,000		875,000	(50,000	)	$	4,065,000
Interest rate swaptions	$	2,100,000		75,000	(1,775,000	)	$	400,000
TBA securities	$	(773,816	)	9,667,634	(7,769,168	)	$	1,124,650
U.S. Treasuries	$	656,000		280,570	(786,570	)	$	150,000
U.S. Treasury futures	$	(150,000	)	300,000	(300,000	)	$	(150,000	)
Short sales of U.S. Treasuries	$	(23,000	)	813,000	(1,360,000	)	$	(570,000	)
Mortgage options	$	—		—	(100,000	)	$	(100,000	)



	December 31, 2012 Notional Amount			Additions/ Long Positions		Expirations/ Terminations/ Short Positions		June 30, 2013 Notional Amount
Interest rate swaps	$	2,940,000		2,700,000		—		$	5,640,000
Interest rate swaptions	$	1,150,000		1,200,000		(275,000	)	$	2,075,000
TBA securities	$	(522,188	)	14,523,755		(13,880,758	)	$	120,809
U.S. Treasuries	$	—		1,341,500		(310,000	)	$	1,031,500
U.S. Treasury futures	$	—		100,000		(350,000	)	$	(250,000	)
Short sales of U.S. Treasuries	$	(425,000	)	(2,775,000	)	1,975,000		$	(1,225,000	)

Interest Rate Swap Agreements

As of June 30, 2014 and December 31, 2013, our derivative portfolio included interest rate swaps, which have the effect of modifying the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our interest rate swaps are used to manage the interest rate risk created by our use of short-term repurchase agreements. Under our interest rate swaps, we typically pay a fixed rate and receive a floating rate based on LIBOR with terms usually ranging up to 15 years. As of June 30, 2014 and December 31, 2013, we had interest rate swap agreements summarized in the tables below (dollars in thousands).



		June 30, 2014					December 31, 2013
Interest Rate Swaps	Balance Sheet Location	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate swap assets	Derivative assets, at fair value	$	950,000	$	13,674		$	2,275,000	$	51,957
Interest rate swap liabilities	Derivative liabilities, at fair value	3,115,000		(50,331		)	965,000		(9,490		)
		$	4,065,000	$	(36,657	)	$	3,240,000	$	42,467



June 30, 2014
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps ⁽¹⁾	Notional Amount		Fair Value			Fixed Pay Rate ⁽²⁾		Receive Rate ⁽³⁾		Maturity (Years)
≤ 3 years	$	940,000	$	(8,690	)	1.00	%	0.23	%	1.6
> 3 to ≤ 5 years	1,075,000		239			1.58	%	0.23	%	4.2
> 5 to ≤ 7 years	1,050,000		(8,591		)	2.44	%	0.23	%	6.1
> 7 years	1,000,000		(19,615		)	3.16	%	0.23	%	8.5
Total	$	4,065,000	$	(36,657	)	2.06	%	0.23	%	5.1



December 31, 2013
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps⁽⁴⁾	Notional Amount		Fair Value			Fixed Pay Rate ⁽²⁾		Receive Rate ⁽³⁾		Maturity (Years)
≤ 3 years	$	650,000	$	(6,612	)	0.87	%	0.24	%	1.4
> 3 to ≤ 5 years	815,000		4,722			1.11	%	0.24	%	3.9
> 5 to ≤ 7 years	1,025,000		21,434			2.28	%	0.24	%	6.4
> 7 years	750,000		22,923			3.12	%	0.24	%	9.1
Total	$	3,240,000	$	42,467		1.90	%	0.24	%	5.4

————————


⁽¹⁾	Includes swaps with an aggregate notional of $1.9 billion with deferred start dates averaging 1.5 years from June 30, 2014.


⁽²⁾	Excluding forward starting swaps, the weighted average pay rate was 1.22% and 1.18% as of June 30, 2014 and December 31, 2013, respectively.


⁽³⁾	Weighted average receive rate excludes impact of forward starting interest rate swaps.


⁽⁴⁾	Includes swaps with an aggregate notional of $1.2 billion with deferred start dates averaging 1.9 years from December 31, 2013.

As of June 30, 2014, interest rate swaps with an asset fair value of $3.0 thousand and notional amount of $25.0 million and a liability fair value of $(40.8) million and notional amount of $2.1 billion were centrally cleared on a registered exchange.

Interest Rate Swaption Agreements

Our interest rate swaption agreements provide us the option to enter into interest rate swap agreements in the future where we would pay a fixed rate and receive LIBOR. The following tables present certain information about our interest rate swaption agreements as of June 30, 2014 and December 31, 2013 (dollars in thousands):



June 30, 2014
	Option					Underlying Swap
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
≤ 3 months	$	4,027	$	3,031	0.1	$	125,000	2.42	%	6.8
> 3 to ≤ 12 months	—		—		0.0	—		—	%	—
>12 to ≤ 24 months	2,580		883		1.6	150,000		3.98	%	6.3
> 24 months	3,426		4,039		3.4	125,000		3.20	%	5.0
Total / weighted average	$	10,033	$	7,953	1.7	$	400,000	3.25	%	6.1



December 31, 2013
	Option					Underlying Swap
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
≤ 3 months	$	17,015	$	19,841	0.1	$	925,000	2.59	%	8.0
> 3 to ≤ 12 months	13,868		10,406		0.6	550,000		2.94	%	8.2
>12 to ≤ 24 months	8,105		8,979		1.7	400,000		3.63	%	6.3
> 24 months	4,734		10,783		3.2	225,000		3.62	%	5.9
Total / weighted average	$	43,722	$	50,009	0.9	$	2,100,000	2.99	%	7.5

TBA Securities

As of June 30, 2014 and December 31, 2013, we had contracts to purchase ("long position") and sell ("short position") TBA securities on a forward basis, presented in the following table (in thousands):



	June 30, 2014						December 31, 2013
Purchase and Sale Contracts for TBA Securities	Notional Amount ⁽¹⁾			Fair Value ⁽²⁾			Notional Amount ⁽¹⁾			Fair Value ⁽²⁾
TBA assets
Purchase of TBA securities	$	1,384,050		$	13,260		$	210,600		$	158
Sale of TBA securities	—			—			(463,496		)	2,698
Total TBA assets	1,384,050			13,260			(252,896		)	2,856

TBA liabilities
Sale of TBA securities	(259,400		)	(323		)	(520,920		)	(1,837		)
Total TBA liabilities	(259,400		)	(323		)	(520,920		)	(1,837		)
Total net TBA	$	1,124,650		$	12,937		$	(773,816	)	$	1,019

————————


⁽¹⁾	Notional amount represents the par value or principal balance of the underlying agency security.


⁽²⁾	Fair value represents the current market value of the agency RMBS underlying the TBA contract as of period end, less the forward price to be paid for the underlying agency RMBS.

U.S. Treasury Securities and Futures

We purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We had U.S. Treasury securities with a fair value of $148.3 million and $637.3 million and a face amount of $150.0 million and $656.0 million as of June 30, 2014 and December 31, 2013, respectively, which is presented as U.S. Treasury securities, at fair value on the consolidated balance sheets. Receivable for securities sold on the consolidated balance sheets as of June 30, 2014 includes $80.1 million related to U.S. Treasury securities. In addition, we had a short position in U.S. Treasury futures with a fair value of $0.6 million and $3.4 million, respectively, and a notional amount of $(150.0) million as of both June 30, 2014 and December 31, 2013, which is presented in derivative assets, at fair value on the consolidated balance sheets.

We had obligations to return U.S. Treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions with a fair value of $580.6 million and $22.5 million as of June 30, 2014 and December 31, 2013, respectively. The borrowed securities were collateralized by cash payments of $579.4 million and $22.7 million as of June 30, 2014 and December 31, 2013, respectively, which are presented as receivables under reverse repurchase agreements on the consolidated balance sheets. All changes in fair value of long and short U.S. Treasury securities and futures are recorded in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

REIT Equity Securities, at Fair Value

As of June 30, 2014 and December 31, 2013, we held shares of common stock of several publicly-traded mortgage REITs with a cost basis of $10.1 million and $39.3 million and a total fair value of $11.5 million and $38.8 million, respectively. For the three and six months ended June 30, 2014, we recognized $(2.0) million and $1.9 million, respectively, of unrealized gains (losses) as a result of changes in fair value of these investments which are presented in unrealized gain (loss) on other derivatives and securities, net, in our consolidated statements of operations. For the three and six months ended June 30, 2014, these investments had $4.1 million and $5.6 million, respectively, of net realized gains and $0.7 million and $1.8 million, respectively, in dividend income which is included in realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties for instruments which are not centrally cleared on a registered exchange to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, both we and our counterparties may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments is included in restricted cash and cash equivalents on our consolidated balance sheets.

Each of our ISDA Master Agreements contains provisions pursuant to which we are required to fully collateralize our obligations under our interest rate swap agreements if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within our ISDA Master Agreements. We are also required to post initial collateral upon execution of certain of our swap transactions. If we breach any of these provisions, we will be required to settle our obligations under the agreements at their termination values, which approximates fair value.

Further, each of our ISDA Master Agreements also contains a cross default provision under which a default under certain of our other indebtedness in excess of a certain threshold causes an event of default under the agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements at their termination values. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the agreements at their termination values if we fail to maintain either our REIT status or certain minimum stockholders’ equity thresholds, or comply with limits on our leverage above certain specified levels. As of June 30, 2014, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was not material to our consolidated financial statements.

Concerning our non-centrally cleared interest rate swap and swaption agreements, we did not have an counterparty credit risk with any single counterparty in excess of 1% of our stockholders’ equity, as of June 30, 2014.

due to initial and daily exchange of mark to market margin requirements and the clearinghouse guarantee fund and other resources that are available in the event of a clearing member default.

Note 8. Offsetting Assets and Liabilities

Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements), including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a gross basis in our consolidated balance sheets.

The following tables present information about our assets and liabilities that are subject to such agreements and can potentially be offset on our consolidated balance sheets as of June 30, 2014 and December 31, 2013 (in thousands):

Offsetting of Financial Assets and Derivative Assets:



	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Collateral Received ⁽²⁾			Net Amount
June 30, 2014
Interest rate swaps and swaptions ⁽¹⁾	$	21,627	$	—	$	21,627	$	(6,963	)	$	(6,680	)	$	7,984
Receivable under reverse repurchase agreements	579,364		—		579,364		(417,702		)	(161,662		)	—
Total	$	600,991	$	—	$	600,991	$	(424,665	)	$	(168,342	)	$	7,984

December 31, 2013
Interest rate swaps and swaptions ⁽¹⁾	$	101,966	$	—	$	101,966	$	(9,490	)	$	(45,084	)	$	47,392
Receivable under reverse repurchase agreements	22,736		—		22,736		(22,736		)	—			—
Total	$	124,702	$	—	$	124,702	$	(32,226	)	$	(45,084	)	$	47,392

Offsetting of Financial Liabilities and Derivative Liabilities:



	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Collateral Pledged ⁽²⁾			Net Amount
June 30, 2014
Interest rate swaps ⁽¹⁾	$	50,331	$	—	$	50,331	$	(6,963	)	$	(43,368	)	$	—
Repurchase agreements	4,999,178		—		4,999,178		(417,702		)	(4,581,476		)	—
Total	$	5,049,509	$	—	$	5,049,509	$	(424,665	)	$	(4,624,844	)	$	—

December 31, 2013
Interest rate swaps ⁽¹⁾	$	9,490	$	—	$	9,490	$	(9,490	)	$	—		$	—
Repurchase agreements	7,158,192		—		7,158,192		(22,736		)	(7,135,456		)	—
Total	$	7,167,682	$	—	$	7,167,682	$	(32,226	)	$	(7,135,456	)	$	—

————————


⁽¹⁾	Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to Note 7 for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.


⁽²⁾	Includes cash and securities received / pledged as collateral, at fair value. Amounts presented are limited to collateral pledged sufficient to reduce the net amount to zero on a counterparty by counterparty basis, as applicable. Refer to Notes 4 and 5 for additional information regarding assets pledged as collateral.

Note 9. Fair Value Measurements

We have elected the option to account for all of our financial assets, including RMBS, at fair value, with changes in fair value reflected in income during the period in which they occur. We have determined that this presentation most appropriately represents our financial results and position. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the assumptions market participants would use when pricing an asset or liability.

We determine the fair value of our agency and non-agency RMBS, including securities held as collateral, based upon fair value estimates obtained from multiple third-party pricing services and dealers. In determining fair value, third-party pricing sources use various valuation approaches, including market and income approaches. Factors used by third-party sources in estimating the fair value of an instrument may include observable inputs such as recent trading activity, credit data, volatility statistics, and other market data that are current as of the measurement date. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. Third-party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, default and loss severity, especially when estimating fair values for securities with lower levels of recent trading activity. When possible, we make inquiries of third-party pricing sources to understand their use of significant inputs and assumptions.

We review the various third-party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range of third-party estimates for each position, comparison to recent trade activity for similar securities, and our Manager's review for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from third-party pricing sources, we will exclude third-party prices for securities from our determination of fair value if we determine (based on our validation procedures and our Manager's market knowledge and expertise) that the price is significantly different than observable market data would indicate and we cannot obtain a satisfactory understanding from the third party source as to the significant inputs used to determine the price.

We determine the fair value of our MSR based upon discounted cash flow models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels and discount rates).

We utilize a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. We use the results of the validation procedures described above as part of our determination of the appropriate fair value measurement hierarchy classification. The three levels of hierarchy are defined as follows:


•	Level 1 Inputs - Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.


•	Level 2 Inputs - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


•	Level 3 Inputs - Significant unobservable market inputs that are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities.

The following tables present our financial instruments carried at fair value as of June 30, 2014 and December 31, 2013, on the consolidated balance sheets by the valuation hierarchy, as described above (in thousands):



	June 30, 2014
	Level 1		Level 2		Level 3		Total
Assets
Agency RMBS	$	—	$	4,464,193	$	—	$	4,464,193
Non-agency RMBS	—		1,051,140		—		1,051,140
REIT equity securities	11,482		—		—		11,482
U.S. Treasury securities	148,328		—		—		148,328
Derivative assets	—		35,524		—		35,524
MSR assets	—		—		106,164		106,164
Total	$	159,810	$	5,550,857	$	106,164	$	5,816,831

Liabilities
Derivative liabilities	$	—	$	51,027	$	—	$	51,027
Obligation to return securities borrowed under reverse repurchase agreements	580,646		—		—		580,646
MSR financing liabilities	—		—		15,051		15,051
Total	$	580,646	$	51,027	$	15,051	$	646,724



	December 31, 2013
	Level 1		Level 2		Level 3		Total
Assets
Agency RMBS	$	—	$	5,641,682	$	—	$	5,641,682
Non-agency RMBS	—		1,011,217		—		1,011,217
REIT equity securities	38,807		—		—		38,807
U.S. Treasury securities	637,342		—		—		637,342
Derivative assets	—		108,221		—		108,221
MSR assets	—		—		15,608		15,608
Total	$	676,149	$	6,761,120	$	15,608	$	7,452,877

Liabilities
Derivative liabilities	$	—	$	11,327	$	—	$	11,327
Obligation to return securities borrowed under reverse repurchase agreements	22,530		—		—		22,530
MSR financing liabilities	—		—		15,608		15,608
Total	$	22,530	$	11,327	$	15,608	$	49,465

Our agency and non-agency RMBS are valued using the various market data described above, which include inputs determined to be observable or whose significant value drivers are observable. Accordingly, our agency and non-agency RMBS are classified as Level 2 in the fair value hierarchy as of June 30, 2014. We estimate the fair value of our REIT equity securities on a market approach using Level 1 inputs, based on quoted market prices.

For information regarding valuation of our derivative instruments, please refer to the discussion of derivative and other hedging instruments in Note 3. Our interest rate swaps and other derivatives are classified as Level 2 in the fair value hierarchy.

The fair value of our obligation to return securities borrowed under reverse repurchase agreements is based upon the value of the underlying borrowed U.S. Treasury securities as of the reporting date. Both U.S. Treasury securities and our obligation to return borrowed U.S. Treasury securities are classified as Level 1 in the fair value hierarchy.

The following table presents a summary of the changes in fair value for Level 3 assets carried at fair value as of June 30, 2014 (in thousands):



	For the Six Months Ended June 30, 2014
	MSR Under Secured Financing ⁽¹⁾			Purchased MSR			Total MSR
Balance as of December 31, 2013	$	15,608		$	—		$	15,608
Gains/(losses) included in net income:							—
Realized gains (losses)	(551		)	(1,102		)	(1,653		)
Unrealized gains (losses)	(6		)	(629		)	(635		)
Total net gains/(losses) included in net income	(557		)	(1,731		)	(2,288		)
Purchases, net of purchase prices adjustments	—			92,844			92,844
Balance as of June 30, 2014	$	15,051		$	91,113		$	106,164

————————


⁽¹⁾	Gains (losses) included in net income related to MSR under secured financing are offset by the (losses) and gains associated with related MSR financing liabilities.

We use third-party pricing providers in the fair value measurement of our Level 3 MSR. The significant unobservable inputs used in estimating the fair value measurement of our Level 3 MSR assets and financing liabilities include assumptions for underlying loan constant prepayment rates and delinquency rates, as well as discount rates. We review the various third-party fair value estimates used to determine the fair value of our MSR and perform procedures to validate their reasonableness. In reviewing the estimated fair values of our Level 3 MSR provided by third-party pricing providers, we use internal estimates of prepayment and delinquency rates, as well as discount rates on the loans underlying our MSR as comparison points to the third party models.

The following table presents the range of our estimates of loan constant voluntary prepayment rates and constant default rates, together with the discount rates used by third-party pricing providers in estimating the fair value of our Level 3 MSR as of June 30, 2014 (dollars in thousands):



	June 30, 2014
Unobservable Level 3 Input	Fair Value		Minimum	Weighted Average	Maximum
MSR treated as financing arrangements:	$	15,051
Constant prepayment rate			5.7%	14.9%	29.5%
Constant default rate			0.1%	7.6%	23.7%
Discount rate			16.0%	16.0%	16.0%
Purchased MSR:	91,113
Constant prepayment rate			8.2%	8.5%	9.0%
Constant default rate			0.2%	0.3%	0.4%
Discount rate			8.5%	8.8%	9.3%
Total	$	106,164

Our MSR treated as financing arrangements relate to private label mortgages with an average origination year of 2005, whereas our purchased MSR relate to more recently originated mortgages that conform with GSE underwriting standards. As such, the default rate and discount rate for our purchased MSR will generally be lower than for our MSR treated as financing arrangements.

A significant increase in any one of these individual inputs in isolation would likely result in a decrease in fair value measurement. Additionally, a change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of delinquency and a directionally opposite change in the assumption used for prepayment rates. Given the interrelationship between delinquency and prepayment rate estimates and the discount rate, overall MSR market conditions would likely have a more significant impact on our Level 3 fair values than changes in any one unobservable input.

Note 10. Mortgage Servicing Rights

Our $106.2 million balance of MSR as of June 30, 2014 includes $15.1 million related to RCS' acquisition of certain MSR covering private label residential mortgage pools, for which RCS entered into sale and assignment agreements with a third party to transfer its interest in the excess MSR while retaining the actual servicing function. These transfers do not qualify for sale accounting and are treated as financing arrangements, under which we recognize both MSR assets and MSR financing liabilities. Changes in the fair value of assets and liabilities resulting from MSR financing transactions have no net impact on the consolidated statements of operations.

The remaining $91.1 million of MSR were purchased by RCS during the six months ended June 30, 2014 under transactions qualifying for sale accounting, representing approximately 35,000 underlying loans, with a combined unpaid principal balance of approximately $7.5 billion as of June 30, 2014. We have elected to account for all MSR assets and MSR financing liabilities at estimated fair value with changes in fair value reported in net income. The following table summarizes activity related to MSR accounted for as purchases during the six months ended June 30, 2014 (dollars in thousands):



	For the Six Months Ended June 30, 2014
Balance as of December 31, 2013	$	—
Additions from purchases of MSR	93,414
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model	(629		)
Other changes in fair value ⁽¹⁾	(1,102		)
Other changes ⁽²⁾	(570		)
Balance as of June 30, 2014	$	91,113

————————


1.	Other changes in fair value primarily represents changes due to the realization of cash flows.


2.	Other changes includes purchase price adjustments and principally contractual prepayment protection.

The following table presents the components of net servicing loss for the three and six months ended June 30, 2014 (dollars in thousands):



	For the Three Months Ended June 30, 2014			For the Six Months Ended June 30, 2014
Servicing fee income	$	7,502		$	13,325
Incentive, ancillary and other income	3,887			7,628
Servicing income	11,389			20,953

Employee compensation and benefit costs	7,898			16,675
Facility costs	3,347			6,280
Realization of cash flows from MSR	879			1,102
Other servicing costs	2,302			4,591
Servicing expense	14,426			28,648

Net servicing loss	$	(3,037	)	$	(7,695	)

Risk Mitigation Activities

The Company’s acquisitions of MSR expose us to certain risks, including interest rate risk and representation and warranty risk. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. Our primary method of managing the prepayment risk associated with our MSR portfolio is asset selection, both in respect of products and the originators of the underlying loans. Representation and warranty risk refers to the representations and warranties we make (or are deemed to have made) to the applicable investor (including, without limitation, the GSEs) regarding, among other things, the origination and servicing of mortgage loans with respect to which we have acquired MSR.

We mitigate representation and warranty risk through our due diligence in connection with MSR acquisitions, including counterparty reviews and loan file reviews, as well as negotiated contractual protections from our MSR transaction counterparties with respect to origination and prior servicing.

Note 11. Other Assets

The following table summarizes our other assets as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014			December 31, 2013
Property and equipment, at cost	$	4,429		$	4,024
Accumulated depreciation	(1,058		)	(164		)
Net property and equipment	3,371			3,860
Servicing advances	19,602			33,358
Prepaid expenses	6,371			6,978
Intangible assets	15,000			17,000
Receivable from sale of REIT equity securities	15,588			—
Other	3,102			4,387
Total other assets	$	63,034		$	65,583

Servicing Advances

We are required to fund cash advances in connection with our servicing operations. These advances are reported as servicing advances within the other assets line item on the consolidated balance sheets and represent advances for principal and interest, property taxes and insurance, as well as other reasonable out-of-pocket expenses incurred by the Company in the performance of its servicing obligations.

Intangible Assets

During the second quarter of 2014, we sold a portion of RCS' operations for total proceeds of $2.0 million, which was accounted for as a reduction of our goodwill.

Note 12. Accounts Payable and Other Accrued Liabilities

The following table summarizes our accounts payable and other accrued liabilities as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014		December 31, 2013
Cash collateral held on derivatives	$	7,459	$	32,463
Due to manager	1,779		1,885
Payable for equity securities purchased	—		4,581
Payable for MSR purchased	8,963		—
Accrued interest	6,696		4,401
Mortgage servicing financing, at fair value ⁽¹⁾	15,051		15,608
Excise tax payable	350		574
Other accounts payable and accrued expenses	13,049		10,203
Total accounts payable and other accrued liabilities	$	53,347	$	69,715

——————


⁽¹⁾	Mortgage servicing financing represents our obligations associated with excess MSR transferred to a third party which are accounted for as financing arrangements. We have elected the option to account for MSR financing at estimated fair value with changes in fair value reported in net income.

Note 13. Stockholders’ Equity

Preferred Stock Offering

Pursuant to our charter, we are authorized to designate and issue up to 50.0 million shares of preferred stock in one or more classes or series. Our Board of Directors has designated 2.3 million shares as 8.125% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock"). As of June 30, 2014, we have 47.8 million of authorized but unissued shares of preferred stock. Our Board of Directors may designate additional series of authorized preferred stock ranking junior to or in parity with the Series A Preferred Stock or designate additional shares of the Series A Preferred Stock and authorize the issuance of such shares.

In May 2014, we completed a public offering in which 2.2 million shares of our Series A Preferred Stock were sold to the underwriters at a price of $24.2125 per share. Upon completion of the offering we received proceeds, net of offering expenses, of approximately $53.0 million. Our Series A Preferred Stock has no stated maturity and is not subject to any sinking fund or mandatory redemption. Under certain circumstances upon a change of control, the Series A Preferred Stock is convertible to shares of our common stock. Holders of Series A Preferred Stock have no voting rights, except under limited conditions, and holders are entitled to receive cumulative cash dividends at a rate of 8.125% per annum of the $25.00 per share liquidation preference before holders of our common stock are entitled to receive any dividends. Shares of our Series A Preferred Stock are redeemable at $25.00 per share plus accumulated and unpaid dividends (whether or not declared) exclusively at our option commencing on May 22, 2019, or earlier under certain circumstances intended to preserve our qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 15th day of each January, April, July and October. As of June 30, 2014, we had declared all required quarterly dividends on the Series A Preferred Stock.

Stock Repurchase Program

In October 2012, our Board of Directors adopted a program that provided for stock repurchases of up to $50 million of our outstanding shares of common stock through December 31, 2013. In June 2013, our Board of Directors authorized the repurchase of up to an additional $100 million of our outstanding shares of common stock through December 31, 2013. In September 2013, our Board of Directors authorized the repurchase of up to an additional $150 million of our outstanding shares of common stock and extended its authorization through December 31, 2014.

We did not repurchase any shares of our common stock during the three months ended June 30, 2014. During the six months ended June 30, 2014, we repurchased approximately 0.2 million shares of our common stock at an average repurchase price of $19.67 per share, including expenses, totaling $4.2 million. As of June 30, 2014, we had an additional $134.9 million available for repurchases of our common stock through December 31, 2014, as authorized by the Board of Directors.

Dividend Reinvestment and Direct Stock Purchase Plan

We sponsor a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of our common stock by reinvesting some or all of the cash dividends received on shares of our common stock. Stockholders may also make optional cash purchases of shares of our common stock subject to certain limitations detailed in the plan prospectus. We did not issue any shares under the plan during the three and six months ended June 30, 2014.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") provides readers of our consolidated financial statements a narrative from the perspective of management, and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q for the three months ended June 30, 2014. Our MD&A is presented in six sections:


•	Executive Overview


•	Financial Condition


•	Results of Operations


•	Liquidity and Capital Resources


•	Off-Balance Sheet Arrangements


•	Forward-Looking Statements

EXECUTIVE OVERVIEW

The size and composition of our investment portfolio depend on investment strategies implemented by our Manager, the availability of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things, current levels of and expectations for future levels of, interest rates, mortgage prepayments, market liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, evolving regulations or legal settlements that impact servicing practices or other mortgage related activities.

Our Investment Strategy

Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term through a combination of dividends and net book value appreciation. In pursuing this objective, we rely on our Manager's expertise to construct and manage a diversified mortgage investment portfolio by identifying asset classes that, when properly financed and hedged, are selected to produce attractive returns across a variety of market conditions and economic cycles, considering the risks associated with owning such investments. Specifically, our investment strategy is designed to:


•	manage a leveraged investment portfolio of mortgage-related investments to generate attractive risk-adjusted returns;


•	capitalize on discrepancies in the relative valuations in the mortgage-related investments market;


•	manage financing, interest rate, prepayment rate and credit risks;


•	preserve our net book value;


•	provide regular quarterly distributions to our stockholders;


•	qualify as a REIT; and


•	remain exempt from the requirements of the Investment Company Act of 1940, as amended (the "Investment Company Act").

Our Risk Management Strategy

We use a variety of strategies to hedge a portion of our exposure to market risks, including interest rate, prepayment, extension and credit risks to the extent that our Manager believes is prudent, taking into account our investment strategy, the cost of the hedging transactions and our intention to qualify as a REIT. As a result, we may not hedge certain interest rate, prepayment, extension or credit risks if our Manager believes that bearing such risks enhances our return relative to our risk/return profile, or would negatively impact our REIT status.

•

Interest Rate Risk. We hedge some of our exposure to potential interest rate mismatches between the interest we earn on our longer term investments and the interest we pay on our shorter term borrowings. Because a majority of our funding is in the form of repurchase agreements, our financing costs fluctuate based on short-term interest rate indices, such as the London Interbank Offered Rate, or LIBOR. Because the vast majority of our investments are assets that have fixed rates of interest and could mature in up to 40 years, the interest we earn on those assets generally does not move in tandem with the interest rates that we pay on our repurchase agreements, which generally have a maturity of less than one year. We may experience reduced income, losses, or a significant reduction in our book value due to adverse interest rate movements. In order to attempt to mitigate a portion of such risk, we utilize certain hedging techniques to attempt to lock in a portion of the net spread between the interest we earn on our assets and the interest we pay on our financing costs.

Additionally, because prepayments on residential mortgages generally accelerate when interest rates decrease and slow when interest rates increase, mortgage securities typically have "negative convexity." In other words, certain mortgage securities in which we invest may increase in price more slowly than similar duration bonds, or even fall in value, as interest rates decline. Conversely, certain mortgage securities in which we invest may decrease in value more quickly than similar duration bonds as interest rates increase. In order to manage this risk, we monitor, among other things, the "duration gap" between our mortgage assets and our hedge portfolio as well as our convexity exposure. Duration is an estimate of the relative expected percentage change in market value of our mortgage assets or our hedge portfolio that would be caused by a parallel change in short and long-term interest rates. Convexity exposure relates to the way the duration of our mortgage assets or our hedge portfolio changes when the interest rate or prepayment environment changes.

The value of our mortgage assets may also be adversely impacted by fluctuations in the shape of the yield curve or by changes in the market's expectation about the volatility of future interest rates. We analyze our exposure to non-

parallel changes in interest rates and to changes in the market's expectation of future interest rate volatility and take actions to attempt to mitigate these risks.

•

Prepayment Risk. Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we will experience a return of principal on our investments faster than anticipated. Prepayment risk generally increases when interest rates decline. In this scenario, our financial results may be adversely affected as we may have to invest returned principal at lower yields.

•

Extension Risk. Because residential borrowers have the option to make only scheduled payments on their mortgage loans, rather than prepay their mortgage loans, we face the risk that a return of capital on our investment will occur slower than anticipated. Extension risk generally increases when interest rates rise. In this scenario, our financial results may be adversely affected as we may have to finance our investments at potentially higher costs without the ability to reinvest principal into higher yielding securities.

•

Credit Risk. We accept mortgage credit exposure at levels our Manager deems prudent within the context of our diversified investment strategy. Therefore, we may retain all or a portion of the credit risk on the loans underlying our non-agency RMBS, as well as any future investments in CMBS and individual residential and commercial mortgages. We seek to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and sale of assets where we identify negative credit trends. We may also manage credit risk with credit default swaps or other financial derivatives that our Manager believes are appropriate. Additionally, we vary the percentage mix of our non-agency mortgage investments and agency mortgage investments in an effort to actively adjust our credit exposure and to improve the risk/return profile of our investment portfolio.

The principal instruments that we use to hedge a portion of our exposure to interest rate, prepayment and extension risks are interest rate swaps and options to enter into interest rate swaps ("interest rate swaptions"). We also utilize forward contracts for the purchase or sale of agency RMBS on a generic pool, or a TBA contract, basis and on a non-generic, specified pool basis, and we utilize U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also purchase or write put or call options on TBA securities and we may invest in other types of mortgage derivatives, such as interest and principal-only securities.

Our hedging instruments are generally not designed to protect our net book value from "spread risk" (also referred to as "basis risk"), which is the risk of an increase of the market spread between the yield on our agency RMBS and the benchmark yield on U.S. Treasury securities or interest rate swap rates. The inherent spread risk associated with our agency RMBS and the resulting fluctuations in fair value of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the U. S. Federal Reserve ("Fed"), liquidity, or changes in required rates of return on different assets. Consequently, while we use interest rate swaps and other supplemental hedges to attempt to protect our net book value against moves in interest rates, such instruments typically will not protect our net book value against spread risk and, therefore, the value of our agency RMBS and our net book value could decline.

The risk management actions we take may lower our earnings and dividends in the short term to further our objective of maintaining attractive levels of earnings and dividends over the long term. In addition, some of our hedges are intended to provide protection against larger rate moves and as a result may be relatively ineffective for smaller changes in interest rates. There can be no certainty that our Manager's projections of our exposures to interest rates, prepayments, extension, credit or other risks will be accurate or that our hedging activities will be effective and, therefore, actual results could differ materially.

Income from hedging transactions that we enter into to manage risk may not constitute qualifying gross income under one or both of the gross income tests applicable to REITs. Therefore, we may have to limit our use of certain advantageous hedging techniques, which could expose us to greater risks than we would otherwise want to bear, or implement those hedges through a taxable REIT subsidiary ("TRS"). Implementing our hedges through a TRS could increase the cost of our hedging activities because a TRS is subject to tax on income and gains.

Trends and Recent Market Impacts

The fixed income markets saw improvement and a return to relative stability during the first half of 2014, after being one of the hardest hit sectors during 2013. Fixed rate agency RMBS prices were generally higher during both the first and second quarters of 2014, driven by a combination of lower long term rates, tighter mortgage spreads and lower levels of implied interest rate volatility (lower option prices). During the first half of 2014, the Fed began to reduce purchases under its asset

purchase program ("QE3"), in line with its "tapering" guidance issued during December 2013. Mixed economic data and the "measured" tapering actions taken by the Fed during the first half of 2014 led to a meaningful flattening of the yield curve, as the market began to realize that the pace of tightening in Fed monetary policy would likely be more gradual and have a more moderate impact than many had initially expected. Agency mortgage spreads tightened significantly during the first half of 2014, leading to considerably more price appreciation on agency RMBS than on comparable duration U.S. Treasury securities. The relative outperformance of agency RMBS is widely attributed to a combination of historically low mortgage origination volume, conservative positioning by fixed income investors, with many agency RMBS investors meaningfully underweight on their benchmark, and a favorable "stock-effect" due to the Fed's significant ownership of approximately one third, or nearly $1.8 trillion, of the agency RMBS market as of June 30, 2014.

In addition to the general outperformance of the agency RMBS market, our performance during the first half of 2014 was also bolstered by very favorable financing rates in the TBA dollar roll market, our moderate leverage profile and our decision to maintain a larger “duration gap” (the estimated difference between the interest rate sensitivity of our assets and our liabilities and hedges). The combination of these factors drove our aggregate economic return of 11.9% for the first half of 2014, comprised of $1.30 dividends per common share and a $1.26 increase in our net book value per common share.

By the start of 2014, we had increased our agency ARM and 15 year, fixed rate mortgage position to approximately 48% of our agency RMBS portfolio, which benefited our first quarter performance as these assets, on a hedge adjusted basis, generally outperformed 30 year mortgages during the first quarter. Early in the second quarter, the price of higher coupon 15 year agency RMBS began to increase significantly, relative to other agency RMBS instruments, particularly 30 year agency RMBS. In response to this changing dynamic, we reduced our agency ARM and 15 year position to approximately 36% of our agency RMBS portfolio and increased our 30 year position to 60%. This shift further benefited our performance in the second quarter as 30 year mortgages generally outperformed 15 year mortgages.

In addition to operating with a larger duration gap during the first half of 2014, we also shifted the composition of our hedge portfolio toward a greater share of hedges in the three to seven year part of the yield curve and avoided the negative impact of lower option prices by reducing the size of our swaption portfolio beginning in the fourth quarter of 2013.

Our decision to operate with a slightly larger duration gap was consistent with our moderate leverage profile and the minimal extension risk in our portfolio and in agency RMBS more broadly. Our exposure to an increase in interest rates is the combination of our current duration plus the duration extension that occurs as interest rates increase. As such, when extension risk is viewed as more significant, we will tend to operate with a smaller duration gap and when extension risk is deemed less significant, we will tend to operate with a larger duration gap. For further discussion of our interest rate sensitivity, refer to "Quantitative and Qualitative Disclosures about Market Risk" in this Form 10-Q.

Given the very favorable implied financing terms available during the first half of 2014 in the TBA dollar roll market and lower relative benefits of holding specific mortgage pools, we increased our investment allocation in TBA securities, rather than settling specific mortgage pools and funding them with repurchase agreements. Our TBA dollar roll position increased from a net short $(0.8) billion as of December 31, 2013 to a net long $1.2 billion as of June 30, 2014.

Looking ahead, we believe agency RMBS valuations will benefit from favorable supply and demand technical factors throughout the remainder of 2014 and likely into 2015. An important driver of our outlook for agency RMBS is our belief that the Fed will remain a significant purchaser of agency RMBS, as it continues to reinvest paydowns on its portfolio into new agency RMBS holdings, for a considerable time following the conclusion of QE3. We expect new loan origination volumes to be depressed as refinance activity will be muted in the absence of a significant decline in interest rates and as first time homebuyers continue to face a myriad of challenges. We also believe agency RMBS are more attractive to fixed income investors relative to other fixed income investments, as agency RMBS yields have increased by more than 100 bps since the start of QE3 through June 30, 2014, while yields on comparable duration investments have generally fallen. Agency RMBS also offer several advantages over many other fixed-income products, such as greater liquidity and financing opportunities, and a favorable "stock-effect" due to the Fed's significant ownership of agency RMBS.

Given these factors, we believe agency RMBS will perform well relative to other fixed income products and that TBA dollar roll financing will remain very attractive for some period of time, even if funding rates were to rise above, or become less "special" than levels experienced during the first half of 2014. However, if conditions change, resulting in higher interest rates and/or wider mortgage spreads, and assuming we took no further portfolio rebalancing actions, it would likely have an adverse impact on our net book value (for the estimated impact of changes in interests rates and mortgage spreads on our net asset value refer to "Quantitative and Qualitative Disclosures about Market Risk" in this Form 10-Q). Since we employ an active management strategy, the size and composition of our assets, liabilities and hedges will evolve based on our Manager’s view of the current market environment and relative risks and rewards. As such, the actual impact of changes in interest rates and mortgage spreads could differ materially from our estimates.

The table below summarizes interest rates and prices for generic agency RMBS as of the end of each respective quarter since June 30, 2013.



Interest Rate / Security ⁽¹⁾	June 30, 2014			March 31, 2014			December 31, 2013			September 30, 2013			June 30, 2013
LIBOR:
1-Month	0.16		%	0.15		%	0.17		%	0.18		%	0.19		%
3-Month	0.23		%	0.23		%	0.25		%	0.25		%	0.27		%
U.S. Treasury Securities:
2-Year U.S. Treasury	0.46		%	0.42		%	0.38		%	0.32		%	0.36		%
5-Year U.S. Treasury	1.63		%	1.72		%	1.74		%	1.38		%	1.39		%
10-Year U.S. Treasury	3.36		%	2.72		%	3.03		%	2.61		%	2.49		%
Interest Rate Swap Rates:
2-Year Swap Rate	0.58		%	0.55		%	0.49		%	0.46		%	0.51		%
5-Year Swap Rate	1.70		%	1.80		%	1.79		%	1.54		%	1.57		%
10-Year Swap Rate	2.63		%	2.84		%	3.09		%	2.77		%	2.70		%
30-Year Fixed Rate Agency Price:
3.5%	$	102.92		$	100.59		$	99.48		$	101.83		$	101.50
4.0%	$	106.11		$	103.94		$	103.11		$	104.86		$	104.16
4.5%	$	108.30		$	106.69		$	106.06		$	106.80		$	105.82
15-Year Fixed Rate Agency Price:
2.5%	$	101.59		$	99.92		$	99.00		$	100.61		$	100.45
3.0%	$	103.88		$	102.72		$	102.05		$	103.53		$	102.82
3.5%	$	105.98		$	104.83		$	104.58		$	105.58		$	104.20

________________________


⁽¹⁾	Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information can vary by source. Prices in the table above were obtained from a combination of Bloomberg and dealer indications. Interest rates were obtained from Bloomberg.

The table below summarizes pay-ups on specified pools over the corresponding generic agency RMBS as of the end of each respective quarter for a select sample of specified securities. Price information provided in the table below is for illustrative purposes only and is not meant to be reflective of our specific portfolio holdings. Actual pay-ups are dependent on specific securities held in our portfolio and prices can vary depending on the source.



Pay-ups on Specified Mortgage Pools over Generic TBA Price⁽¹⁾⁽²⁾	June 30, 2014		March 31, 2014		December 31, 2013		September 30, 2013		June 30, 2013
30-Year Lower Loan Balance ⁽³⁾:
3.0%	$	0.28	$	0.16	$	0.02	$	0.03	$	—
3.5%	$	0.19	$	0.20	$	0.09	$	0.22	$	0.22
4.0%	$	0.41	$	0.36	$	0.23	$	0.70	$	0.91
30-Year HARP ⁽⁴⁾:
3.0%	$	—	$	—	$	—	$	—	$	—
3.5%	$	0.01	$	0.02	$	—	$	0.03	$	0.16
4.0%	$	0.06	$	0.07	$	0.06	$	0.21	$	0.59

^{________________________}


⁽¹⁾	Source: Bloomberg and dealer indications


⁽²⁾	"Pay-ups" represent the value of the price premium of specified securities over generic TBA pools. The table above includes pay-ups for newly originated specified pools. Price information is provided for information only and is not meant to be reflective of our specific portfolio holdings. Prices can vary materially depending on the source.


⁽³⁾	Lower loan balance pay-ups for pools with original loan balances from $85,000 to $110,000


⁽⁴⁾	HARP pay-ups for pools backed by 100% refinance loans with original loan-to-value ratios between 95% and 100%

The market for legacy non-agency RMBS performed well throughout the first half of 2014, as the housing market continued its gradual recovery and as favorable supply and demand fundamentals put upward pressure on valuations. Although the rate of house price appreciation is beginning to decelerate, the shrinking supply of legacy non-agency RMBS remains supportive of credit spreads. The non-agency market is now under $750 billion in unpaid principal balance, representing a decline of roughly 12% year over year. Additionally, improving loan-to-value ratios, falling delinquency rates and reduced sensitivity to servicer behavior should lead to a further stabilization in cashflow projections. While we continue to have a generally optimistic view of the non-agency RMBS sector, we recognize the potential for housing market weakness. As such, we have increased our non-agency portfolio allocation to securities that we believe would provide more stability in a wider range of housing scenarios.

In November 2013, we acquired Residential Credit Solutions, Inc. ("RCS"), a fully-licensed mortgage servicer based

in Fort Worth, Texas that has approvals from Fannie Mae, Freddie Mac, and Ginnie Mae to hold and manage MSR and residential mortgage loans. During the first half of 2014, we purchased approximately $93 million in MSR with an underlying loan unpaid principal balance of approximately $8 billion. We expect our acquisition of MSR to be measured over the remainder of the year as we work to identify additional opportunities that are appropriately priced, with acceptable levels of exposure to adverse prepayment behavior or counterparty risk.

Summary of Critical Accounting Estimates

Our critical accounting estimates relate to the fair value of our investments and derivatives and recognition of interest income. Certain of these items involve estimates that require management to make judgments that are subjective in nature. We rely on our Manager's experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. Under different conditions, we could report materially different amounts using these critical accounting policies. All of our critical accounting policies are fully described in our MD&A in our Annual Report on Form 10-K for the year ended December 31, 2013. Our significant accounting policies are described in Note 3 to the consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q.

We have elected the option to account for all of our financial assets, including all mortgage-related investments, at fair value, with changes in fair value reflected in income during the period in which they occur. We believe this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of hedging instruments.

FINANCIAL CONDITION

As of June 30, 2014, our investment portfolio with a fair value of $6.8 billion consisted of $4.5 billion of agency RMBS, $1.2 billion in net long TBA positions, $1.1 billion of non-agency RMBS, $0.1 billion MSR and $11.5 million of REIT equity securities. Our investment portfolio increased $0.9 billion from $5.9 billion as of December 31, 2013 due primarily to the combination of unrealized gains on our agency and non-agency investments, $53 million in net proceeds from our Series A Preferred Stock offering and the use of slightly higher leverage.

Our TBA positions are recorded as derivative instruments in our accompanying consolidated financial statements, with the TBA dollar roll transactions representing a form of off-balance sheet financing. As of June 30, 2014, our net TBA position had a net carrying value of $12.9 million reported in derivative assets/(liabilities) on our consolidated balance sheets. The net carrying value represents the difference between the fair value of the underlying agency security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying agency security.

The table below presents our condensed consolidated balance sheets as of June 30, 2014 and December 31, 2013 (dollars in thousands, except per share amounts):



	June 30, 2014		December 31, 2013
Balance Sheet Data:
Total agency and non-agency RMBS	$	5,515,333	$	6,652,899
Total assets	$	6,962,129	$	8,397,865
Repurchase agreements	$	4,999,178	$	7,158,192
Total liabilities	$	5,744,439	$	7,295,145
Total stockholders’ equity	$	1,217,690	$	1,102,720
Net asset value per common share	$	22.73	$	21.47

The following tables summarize certain characteristics of our RMBS portfolio by issuer and investment category as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield ⁽¹⁾
Fannie Mae	$	3,631,041	$	3,656,766	$	3,502,097	3.38	%	2.55	%
Freddie Mac	833,152		840,045		799,767		3.50	%	2.70	%
Agency RMBS total	4,464,193		4,496,811		4,301,864		3.40	%	2.57	%
Non-agency RMBS	1,051,140		957,207		1,490,982		1.59	%	6.88	%
Total RMBS	$	5,515,333	$	5,454,018	$	5,792,846	2.93	%	3.33	%

	December 31, 2013
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield⁽¹⁾
Fannie Mae	$	4,511,037	$	4,657,254	$	4,461,621	3.33	%	2.53	%
Freddie Mac	1,096,582		1,129,445		1,079,180		3.44	%	2.67	%
Ginnie Mae	34,063		33,495		32,792		3.00	%	2.12	%
Agency RMBS total	5,641,682		5,820,194		5,573,593		3.35	%	2.56	%
Non-agency RMBS	1,011,217		927,131		1,526,918		1.46	%	7.07	%
Total RMBS	$	6,652,899	$	6,747,325	$	7,100,511	2.94	%	3.18	%

————————


⁽¹⁾	The weighted average agency security yield incorporates an average future CPR assumption of 8% and 7% as of June 30, 2014 and December 31, 2013, respectively, based on forward rates. For non-agency RMBS, the weighted average yield is based on estimated cash flows that incorporate expected credit losses.

Agency RMBS

As detailed in the tables below, the weighted average agency RMBS portfolio yield remained flat, despite weighted average projected CPR increasing by approximately 1 percentage point from December 31, 2013 to June 30, 2014. The stability in the agency RMBS portfolio yield resulted from our rebalancing of the portfolio towards a larger percentage of higher-yielding, 30-year securities.

The following table summarizes certain characteristics of our agency RMBS portfolio by term and coupon as of June 30, 2014 (dollars in thousands):



	June 30, 2014
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Yield		Projected CPR
Fixed rate
≤ 15-year
2.5%	$	626,989	$	632,790	$	616,052	1.90	%	7	%
3.0%	587,243		583,081		565,298		2.28	%	8	%
3.5%	392,651		386,672		370,084		2.41	%	9	%
4.0%	241,208		240,702		224,912		2.21	%	10	%
4.5%	19,639		19,433		18,193		2.72	%	10	%
≤ 15-year total	1,867,730		1,862,678		1,794,539		2.17	%	8	%
20-year
3.0%	73,446		74,843		72,047		2.29	%	8	%
3.5%	96,233		95,028		92,043		2.88	%	8	%
4.0%	5,848		5,742		5,436		2.80	%	10	%
5.0%	2,535		2,532		2,281		2.15	%	16	%
20-year total	178,062		178,145		171,807		2.62	%	8	%
30-year
3.5%	1,343,017		1,377,239		1,302,609		2.75	%	6	%
4.0%	776,909		785,494		732,067		3.01	%	7	%
4.5%	142,648		140,744		130,486		3.33	%	8	%
30-year total	2,262,574		2,303,477		2,165,162		2.88	%	7	%
Pass through agency RMBS	4,308,366		4,344,300		4,131,508		2.56	%	7	%
Agency CMO	25,644		25,293		41,166		3.13	%	6	%
Total fixed-rate agency RMBS	4,334,010		4,369,593		4,172,674		2.57	%	7	%
Adjustable rate agency RMBS	130,183		127,218		129,190		2.80	%	12	%
Total agency RMBS	$	4,464,193	$	4,496,811	$	4,301,864	2.57	%	8	%

The percentage of our fixed-rate agency RMBS portfolio allocated to HARP and lower loan balance securities was 86% (not including our net long TBA position) as of June 30, 2014 as detailed in the following table (dollars in thousands):



	June 30, 2014
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield		Projected CPR
HARP ⁽¹⁾	$	1,320,489	$	1,335,816	$	1,263,511	3.64	%	2.83	%	7	%
Lower Loan Balance ⁽²⁾	2,399,608		2,414,843		2,296,776		3.46	%	2.56	%	8	%
Other	588,269		593,641		571,221		2.85	%	1.99	%	8	%
Pass through agency RMBS	4,308,366		4,344,300		4,131,508		3.43	%	2.56	%	7	%
Agency CMO	25,644		25,293		41,166		3.05	%	3.13	%	6	%
Total fixed-rate agency RMBS	4,334,010		4,369,593		4,172,674		3.42	%	2.57	%	7	%
Adjustable rate agency RMBS	130,183		127,218		129,190		2.61	%	2.80	%	12	%
Total agency RMBS	$	4,464,193	$	4,496,811	$	4,301,864	3.40	%	2.57	%	8	%

————————


⁽¹⁾	HARP securities are defined as pools backed by 100% refinance loans with LTV greater than or equal to 80%. Our HARP securities had a weighted average LTV of 109% and 118% for 15-year and 30-year securities, respectively, as of June 30, 2014. Includes $490.4 million of >105% LTV pools which are not deliverable into TBA securities.


⁽²⁾	Lower loan balance securities represent pools with maximum original loan balances less than or equal to $150,000. Our lower loan balance securities had a weighted average original loan balance of $103,198 and $86,399 for 15-year and 30-year securities, respectively, as of June 30, 2014.

The following table summarizes certain characteristics of our agency RMBS portfolio by term and coupon as of December 31, 2013 (dollars in thousands):



	December 31, 2013
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Yield		Projected CPR
Fixed rate
≤ 15-year	$	773,891	$	802,613	$	779,508	1.90	%	6	%
2.5%	817,409		826,548		800,668		2.30	%	7	%
3.0%	592,621		592,266		565,929		2.45	%	8	%
3.5%	264,041		265,976		248,051		2.25	%	9	%
4.0%	21,335		21,223		19,832		2.73	%	10	%
4.5%	2,469,297		2,508,626		2,413,988		2.21	%	8	%
≤ 15-year total
20-year	74,408		78,085		75,017		2.37	%	5	%
3.0%	71,283		71,860		69,666		2.96	%	7	%
3.5%	6,162		6,233		5,878		2.91	%	7	%
4.0%	2,529		2,632		2,331		2.34	%	11	%
5.0%	154,382		158,810		152,892		2.66	%	6	%
20-year total
30-year
3.5%	1,599,468		1,698,812		1,607,871		2.80	%	6	%
4.0%	827,131		863,507		803,489		3.01	%	6	%
4.5%	98,998		100,299		93,019		3.41	%	7	%
5.0%	1,607		1,611		1,476		3.30	%	12	%
30-year total	2,527,204		2,664,229		2,505,855		2.89	%	6	%
Pass through agency RMBS	5,150,883		5,331,665		5,072,735		2.56	%	7	%
Agency CMO	26,809		26,914		43,614		3.13	%	6	%
Total fixed-rate agency RMBS	5,177,692		5,358,579		5,116,349		2.57	%	7	%
Adjustable rate agency RMBS	463,990		461,615		457,244		2.46	%	15	%
Total agency RMBS	$	5,641,682	$	5,820,194	$	5,573,593	2.56	%	7	%

The percentage of our agency RMBS portfolio allocated to HARP and lower loan balance securities was 84% as of December 31, 2013 as detailed in the following table (dollars in thousands):



	December 31, 2013
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield		Projected CPR
HARP⁽¹⁾	$	1,523,971	$	1,590,364	$	1,504,635	3.63	%	2.85	%	6	%
Lower Loan Balance⁽²⁾	2,797,879		2,886,100		2,745,545		3.42	%	2.57	%	7	%
Other	829,033		855,200		822,555		2.83	%	2.03	%	7	%
Pass through agency RMBS	5,150,883		5,331,664		5,072,735		3.39	%	2.56	%	7	%
Agency CMO	26,809		26,915		43,614		3.05	%	3.13	%	6	%
Total fixed-rate agency RMBS	5,177,692		5,358,579		5,116,349		3.38	%	2.57	%	7	%
Adjustable rate agency RMBS	463,990		461,615		457,244		2.92	%	2.46	%	15	%
Total agency RMBS	$	5,641,682	$	5,820,194	$	5,573,593	3.35	%	2.56	%	7	%

————————


⁽¹⁾	HARP securities are defined as pools backed by 100% refinance loans with LTVs greater than or equal to 80%. Our HARP securities had a weighted average LTV of 107% and 115% for 15-year and 30-year securities, respectively, as of December 31, 2013. Includes $492.1 million of >105% LTV pools which are not deliverable into TBA securities.


⁽²⁾	Lower loan balance securities represent pools with maximum original loan balances less than or equal to $150,000. Our lower loan balance securities had a weighted average original loan balance of $101,106 and $87,238 for 15-year and 30-year securities, respectively, as of December 31, 2013.

The following table summarizes our agency RMBS at fair value according to their estimated weighted average life classifications as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014								December 31, 2013
Weighted Average Life	Fair Value		Amortized Cost		Yield		Weighted Average Coupon		Fair Value		Amortized Cost		Weighted Average Yield		Weighted Average Coupon
Less than or equal to three years	$	315	$	310	1.47	%	3.50	%	$	9,089	$	9,095	2.38	%	3.49	%
Greater than three years and less than or equal to five years	1,372,014		1,363,252		2.24	%	3.23	%	2,142,111		2,159,311		2.29	%	3.20	%
Greater than five years and less than or equal to 10 years	3,044,148		3,084,401		2.72	%	3.47	%	3,485,241		3,646,188		2.72	%	3.43	%
Greater than 10 years	47,716		48,848		2.93	%	3.54	%	5,241		5,600		2.96	%	3.50	%
Total	$	4,464,193	$	4,496,811	2.57	%	3.40	%	$	5,641,682	$	5,820,194	2.56	%	3.35	%

Actual maturities of agency RMBS are generally shorter than stated contractual maturities primarily as a result of prepayments of principal of the underlying mortgages. The stated contractual final maturity of the mortgage loans underlying our portfolio of securities can range up to 40 years, but the expected maturity is subject to change based on the actual and expected future prepayments of the underlying mortgage loans.

In determining the estimated weighted average years to maturity and yields on our agency RMBS, we estimate the percentage of outstanding principal that is expected to be prepaid over a period of time on an annualized basis, or CPR, based on assumptions for each security using a combination of a third-party service, market data and internal models. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, mortgage rates, current mortgage rates of the outstanding loans, loan age, volatility and other factors. We have estimated that the CPR over the remaining life of our aggregate agency investment portfolio was 8% and 7% as of June 30, 2014 and December 31, 2013, respectively. However, the weighted average expected life of our agency RMBS increased to 7.1 years as of June 30, 2014, from 6.1 years as of December 31, 2013, primarily as a result of rebalancing our portfolio towards a higher percentage of 30-year agency RMBS, with a lower percentage of 15-year agency RMBS. We amortize or accrete premiums and discounts associated with purchases of our agency RMBS into interest income over the estimated life of our securities based on projected CPRs, using the effective yield method. Since the weighted average cost basis of our agency RMBS portfolio was 104.5% of par value as of June 30, 2014, slower actual or projected prepayments can have a meaningful positive impact on our asset yields, while faster actual or projected prepayments can have a meaningful negative impact on our asset yields.

TBA Investments

As of June 30, 2014 and December 31, 2013, we had contracts to purchase ("long position") and sell ("short position") TBA securities on a forward basis. The following tables summarize our net long and short TBA positions as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014
	Notional Amount⁽¹⁾			Cost Basis⁽²⁾			Market Value ⁽³⁾			Net Carrying Value⁽⁴⁾
	Notional Amount⁽¹⁾			Cost Basis⁽²⁾			Market Value ⁽³⁾			Net Carrying Value⁽⁴⁾
15- Year
2.5%	$	153,860		$	154,820		$	156,351		$	1,531
3.5%	(109,400		)	(115,726		)	(116,025		)	(299		)
Subtotal	44,460			39,094			40,326			1,232
30-Year
3.0%	84,700			82,980			83,655			675
3.5%	261,370			265,246			268,235			2,989
4.0%	728,520			761,364			769,364			8,000
4.5%	5,600			6,024			6,065			41
Subtotal	1,080,190			1,115,614			1,127,319			11,705
Portfolio total	$	1,124,650		$	1,154,708		$	1,167,645		$	12,937



	December 31, 2013
	Notional Amount⁽¹⁾			Cost Basis⁽²⁾			Market Value ⁽³⁾			Net Carrying Value ⁽⁴⁾
	Notional Amount⁽¹⁾			Cost Basis⁽²⁾			Market Value ⁽³⁾			Net Carrying Value ⁽⁴⁾
15- Year
2.5%	$	(77,940	)	$	(76,756	)	$	(77,160	)	$	(405	)
3.0%	(336,848		)	(343,163		)	(343,069		)	95
3.5%	(140,000		)	(147,296		)	(146,269		)	1,027
Subtotal	(554,788		)	(567,215		)	(566,498		)	717
30-Year
3.0%	(15,268		)	(14,659		)	(14,522		)	136
3.5%	(271,380		)	(271,088		)	(269,762		)	1,326
4.0%	(142,980		)	(146,107		)	(147,426		)	(1,319		)
4.5%	210,600			223,210			223,368			159
Subtotal	(219,028		)	(208,644		)	(208,342		)	302
Portfolio total	$	(773,816	)	$	(775,859	)	$	(774,840	)	$	1,019

————————


⁽¹⁾	Notional amount represents the par value or principal balance of the underlying agency RMBS.


⁽²⁾	Cost basis represents the forward price to be paid for the underlying agency RMBS.


⁽³⁾	Market value represents the current market value of the agency RMBS underlying the TBA contracts as of period-end.


⁽⁴⁾	Net carrying value represents the difference between the market value of the TBA contract as of period-end and the cost basis and is reported in derivative assets / (liabilities), at fair value in our consolidated balance sheets.

Non-Agency Investments

Non-agency RMBS yields are based on our estimate of the timing and amount of future cash flows and our cost basis. Our cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses and other factors.

The following tables summarize our non-agency RMBS portfolio as of June 30, 2014 and December 31, 2013 (dollars in thousands):



June 30, 2014
	Fair Value		Gross Unrealized					Amortized Cost		Discount			Par/ Current Face		Weighted Average
Category	Fair Value		Gains		Losses			Amortized Cost		Discount			Par/ Current Face		Coupon ⁽¹⁾		Yield
Prime ⁽²⁾	$	237,033	$	15,707	$	(453	)	$	221,779	$	(211,787	)	$	433,566	2.34	%	6.60	%
Alt-A	468,582		51,369		(2,510		)	419,723		(184,244		)	603,967		1.64	%	7.51	%
Option-ARM	161,813		15,011		(980		)	147,782		(43,490		)	191,272		0.50	%	6.47	%
Subprime	183,712		16,496		(707		)	167,923		(94,254		)	262,177		1.01	%	6.03	%
Total	$	1,051,140	$	98,583	$	(4,650	)	$	957,207	$	(533,775	)	$	1,490,982	1.59	%	6.88	%

————————


⁽¹⁾	Coupon rates are floating, except for $12.9 million, $18.7 million, and $40.3 million fair value of fixed-rate prime, Alt-A, and subprime non-agency RMBS, respectively, as of June 30, 2014.


⁽²⁾	Prime non-agency RMBS include interest only investments with a fair value of $11.3 million and a current face value of $201.2 million as of June 30, 2014.



December 31, 2013
	Fair Value		Gross Unrealized					Amortized Cost		Discount			Par/ Current Face		Weighted Average
Category	Fair Value		Gains		Losses			Amortized Cost		Discount			Par/ Current Face		Coupon ⁽¹⁾		Yield
Prime ⁽²⁾	$	195,524	$	14,161	$	(5,658	)	$	187,021	$	(222,436	)	$	409,457	2.00	%	6.13	%
Alt-A	467,531		46,311		(3,420		)	424,640		(199,407		)	624,047		1.56	%	7.60	%
Option-ARM	119,054		14,809		(1,650		)	105,895		(45,367		)	151,262		0.54	%	7.40	%
Subprime	229,108		21,471		(1,938		)	209,575		(132,577		)	342,152		1.01	%	6.69	%
Total	$	1,011,217	$	96,752	$	(12,666	)	$	927,131	$	(599,787	)	$	1,526,918	1.46	%	7.07	%

————————


⁽¹⁾	Coupon rates are floating, except for $67.4 million, $16.6 million and $51.9 million fair value of fixed-rate prime and Alt-A and subprime non-agency RMBS, respectively, as of December 31, 2013.


⁽²⁾	Prime non-agency RMBS include interest only investments with a fair value of $11.0 million and a current face value of $206.4 million as of December 31, 2013.

The following table summarizes our non-agency RMBS by their estimated weighted average life classifications as of June 30, 2014 and December 31, 2013 (dollars in thousands):



	June 30, 2014								December 31, 2013
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Weighted Average Coupon		Fair Value		Amortized Cost		Weighted Average Yield		Weighted Average Coupon
≤ 5 years	$	332,222	$	316,670	5.71	%	2.49	%	$	203,935	$	194,800	5.59	%	2.19	%
> 5 to ≤ 7 years	432,203		380,250		7.87	%	1.33	%	211,013		195,913		6.84	%	2.38	%
>7 years	286,715		260,287		6.86	%	1.27	%	596,269		536,418		7.70	%	1.08	%
Total	$	1,051,140	$	957,207	6.88	%	1.59	%	$	1,011,217	$	927,131	7.07	%	1.46	%

Our non-agency RMBS are subject to risk of loss with regard to principal and interest payments. As of June 30, 2014 and December 31, 2013, our non-agency RMBS were generally either assigned below investment grade ratings by rating agencies, or were not rated. Credit ratings are based on the par value of the non-agency RMBS. However, the non-agency RMBS in our portfolio were generally purchased at a significant discount to par value. The following table summarizes the credit ratings of our non-agency RMBS as of June 30, 2014 and December 31, 2013:



Credit Rating ⁽¹⁾	June 30, 2014		December 31, 2013
AAA	—	%	5	%
A	1	%	2	%
BB	3	%	3	%
B	6	%	7	%
Below B	58	%	56	%
Not Rated	32	%	27	%
Total	100	%	100	%

————————


⁽¹⁾	Represents the lowest of S&P, Moody's and Fitch credit ratings, stated in terms of the S&P equivalent, as of each respective balance sheet date.

We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on rating agencies. These securities were collateralized by mortgages with original weighted average amortized loan to value ratios ("LTV") of 75% as of both June 30, 2014 and December 31, 2013. However, as the home values associated with these mortgages have generally experienced significant price declines since origination and LTV is calculated based on the original home values, we believe that current market-based LTV would be significantly higher. Additionally, as of June 30, 2014 and December 31, 2013, 19% and 22% of the mortgages underlying these securities were either 60 or more days delinquent, undergoing foreclosure or bankruptcy processes, or held as real estate owned by the trusts. Credit enhancement, or protection provided at the security level to absorb future credit losses due to defaults on underlying collateral is another important component of this evaluation. Our non-agency RMBS had weighted average credit enhancements of 7% and 8% as of June 30, 2014 and December 31, 2013, respectively.

The following tables present the fair value and weighted average purchase price for each of our non-agency RMBS categories, together with certain of their respective underlying loan collateral attributes and current performance metrics as of June 30, 2014 and December 31, 2013 (fair value dollars in thousands):



June 30, 2014
	Fair Value		Weighted Average Purchase Price		Weighted Average Collateral Attributes				Weighted Average Current Performance
Category	Fair Value		Weighted Average Purchase Price		Loan Age (months)	Original LTV		Original FICO ⁽¹⁾	60+ Day Delinquent ⁽²⁾		3-Month CPR ⁽³⁾
Prime ⁽⁴⁾	$	237,033	$	93.74	82	73	%	742	6	%	11	%
Alt-A	468,582		67.18		104	75	%	712	18	%	9	%
Option-ARM	161,813		74.73		102	74	%	707	23	%	7	%
Subprime	183,712		63.14		100	80	%	622	35	%	9	%
Total	$	1,051,140	$	73.59	98	75	%	702	19	%	9	%



December 31, 2013
	Fair Value		Weighted Average Purchase Price		Weighted Average Collateral Attributes				Weighted Average Current Performance
Category	Fair Value		Weighted Average Purchase Price		Loan Age (months)	Original LTV		Original FICO ⁽¹⁾	60+ Day Delinquent ⁽²⁾		3-Month CPR ⁽³⁾
Prime ⁽⁴⁾	$	195,524	$	87.07	70	71	%	745	7	%	9	%
Alt-A	467,531		66.42		99	75	%	711	20	%	10	%
Option-ARM	119,054		68.72		97	74	%	708	23	%	10	%
Subprime	229,108		60.41		93	80	%	627	38	%	12	%
Total	$	1,011,217	$	68.94	92	75	%	699	22	%	10	%

————————


⁽¹⁾	FICO represents a mortgage industry accepted credit score of a borrower based on a scale of 300 to 850 with a score of 850 being the highest quality rating.


⁽²⁾	60+ day delinquent represents the percentage of mortgage loans underlying each category of non-agency RMBS that were delinquent for at least 60 days.


⁽³⁾	Three-month CPR is reflective of the prepayment and default rate on the underlying securitization; however, it does not necessarily indicate the proceeds received on our non-agency RMBS. Proceeds received for each security are dependent on the position of the individual security within the structure of each deal.

⁽⁴⁾

Prime non-agency RMBS include interest only investments with a fair value of $11.3 million and $11.0 million, and a current face value of $201.2 million and $206.4 million as of June 30, 2014 and December 31, 2013, respectively. The prime non-agency RMBS average purchase price presented in the table excludes interest only investments with a weighted average purchase price of $4.31 as of June 30, 2014 and December 31, 2013, respectively.

The mortgage loans underlying our non-agency RMBS are located throughout the United States. The following table presents the five states with the largest geographic concentrations of underlying mortgages as of June 30, 2014 and December 31, 2013:



	% of Non-Agency Portfolio
	June 30, 2014		December 31, 2013
California	40	%	38	%
Florida	9	%	9	%
New York	4	%	5	%
Virginia	4	%	4	%
Maryland	4	%	4	%
Total	62	%	60	%

Mortgage Servicing Rights

On November 27, 2013, one of our wholly-owned subsidiaries acquired RCS, which has approvals from Fannie Mae, Freddie Mac and Ginnie Mae to hold and manage MSR. The MSR acquired in conjunction with this acquisition and those subsequently purchased represent the right to service mortgage loans. We do not originate mortgage loans underlying our MSR. As of June 30, 2014, our MSR purchased during the year had a fair market value of $91.1 million.

The following table summarizes certain characteristics as of June 30, 2014 of the loans underlying our purchased MSR:



	June 30, 2014
Unpaid principal balance (in thousands)	$	7,527,736
Number of loans	35,195
Average Loan Size (in thousands)	$	214
Average Loan Age (months)	17
Average Coupon	3.80		%
Average Original Loan-to-Value	75		%
Average Original FICO	761
60+ delinquencies	0.05		%

Repurchase Financing and Hedging

At June 30, 2014 and December 31, 2013, our borrowings under repurchase agreements had the following characteristics (dollars in thousands):



	June 30, 2014					December 31, 2013
			Weighted Average					Weighted Average
Collateral Type	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Agency securities	$	4,139,217	0.38	%	115	$	5,935,610	0.43	%	96
Non-agency securities	639,133		1.73	%	28	647,068		1.79	%	33
Treasury securities	220,828		0.09	%	18	575,514		0.07	%	2
Total repurchase agreements	$	4,999,178	0.54	%	100	$	7,158,192	0.52	%	83



	June 30, 2014					December 31, 2013
			Weighted Average					Weighted Average
	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Agency and non-agency repurchase agreements
≤ 1 month	$	1,871,454	0.70	%	13	$	3,047,986	0.60	%	14
> 1 to ≤ 2 months	1,043,426		0.41	%	48	816,960		0.55	%	45
> 2 to ≤ 3 months	661,703		0.48	%	77	1,506,888		0.52	%	77
> 3 to ≤ 6 months	530,923		0.57	%	136	621,124		0.54	%	135
> 6 to ≤ 9 months	113,212		0.50	%	207	147,729		0.49	%	249
> 9 to ≤ 12 months	305,607		0.47	%	334	191,991		0.50	%	321
> 12 months	252,025		0.57	%	672	250,000		0.59	%	853
Total	4,778,350		0.56	%	103	6,582,678		0.56	%	90

U.S. Treasury repurchase agreements
Short-term	220,828		0.09	%	18	575,514		0.07	%	2
Total repurchase agreements	$	4,999,178	0.54	%	100	$	7,158,192	0.52	%	83

As of June 30, 2014 and December 31, 2013, we had interest rate swap agreements outstanding where we pay a fixed rate and receive a floating rate based on LIBOR, summarized in the tables below (dollars in thousands):



June 30, 2014
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps⁽¹⁾	Notional Amount		Fair Value			Fixed Pay Rate ⁽²⁾		Receive Rate ⁽³⁾		Maturity (Years)
≤ 3 years	$	940,000	$	(8,690	)	1.00	%	0.23	%	1.6
> 3 to ≤ 5 years	1,075,000		239			1.58	%	0.23	%	4.2
> 5 to ≤ 7 years	1,050,000		(8,591		)	2.44	%	0.23	%	6.1
> 7 years	1,000,000		(19,615		)	3.16	%	0.23	%	8.5
Total	$	4,065,000	$	(36,657	)	2.06	%	0.23	%	5.1



December 31, 2013
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps⁽⁴⁾	Notional Amount		Fair Value			Fixed Pay Rate ⁽²⁾		Receive Rate ⁽³⁾		Maturity (Years)
≤ 3 years	$	650,000	$	(6,612	)	0.87	%	0.24	%	1.4
> 3 to ≤ 5 years	815,000		4,722			1.11	%	0.24	%	3.9
> 5 to ≤ 7 years	1,025,000		21,434			2.28	%	0.24	%	6.4
> 7 years	750,000		22,923			3.12	%	0.24	%	9.1
Total	$	3,240,000	$	42,467		1.90	%	0.24	%	5.4

————————


⁽¹⁾	Includes swaps with an aggregate notional of $1.9 billion with deferred start dates averaging 1.5 years from June 30, 2014.


⁽²⁾	Excluding forward starting swaps, the weighted average pay rate was 1.22% and 1.18% as of June 30, 2014 and December 31, 2013, respectively.


⁽³⁾	Weighted average receive rate excludes impact of forward starting interest rate swaps.


⁽⁴⁾	Includes swaps with an aggregate notional of $1.2 billion with deferred start dates averaging 1.9 years from December 31, 2013.

The following tables present certain information about our interest rate swaption agreements as of June 30, 2014 and December 31, 2013 (dollars in thousands):



June 30, 2014
	Option					Underlying Swap
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
≤ 3 months	$	4,027	$	3,031	0.1	$	125,000	2.42	%	6.8
> 3 to ≤ 12 months	—		—		0.0	—		—	%	—
>12 to ≤ 24 months	2,580		883		1.6	150,000		3.98	%	6.3
> 24 months	3,426		4,039		3.4	125,000		3.20	%	5.0
Total / weighted average	$	10,033	$	7,953	1.7	$	400,000	3.25	%	6.1



December 31, 2013
	Option					Underlying Swap
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
Current Option Expiration Date	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
≤ 3 months	$	17,015	$	19,841	0.1	$	925,000	2.59	%	8.0
> 3 to ≤ 12 months	13,868		10,406		0.6	550,000		2.94	%	8.2
>12 to ≤ 24 months	8,105		8,979		1.7	400,000		3.63	%	6.3
> 24 months	4,734		10,783		3.2	225,000		3.62	%	5.9
Total / weighted average	$	43,722	$	50,009	0.9	$	2,100,000	2.99	%	7.5

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

In addition to the results presented in accordance with GAAP, our results of operations discussed herein include certain non-GAAP financial information, including "net spread and dollar roll income" (which includes the periodic interest rate costs of our interest rate swaps, TBA dollar roll income and dividends from REIT equity securities reported in other gains (losses), net in our consolidated statements of operations) and “estimated taxable income” and certain financial metrics derived from non-GAAP information, such as “cost of funds” and “estimated undistributed taxable income.” By providing users of our financial information with such measures in addition to the related GAAP measures, we intend to provide users greater transparency into the information used by our management in its financial and operational decision-making. We believe net spread and dollar roll income is meaningful information to consider as it incorporates the economic costs of financing our investment portfolio inclusive of interest rate swaps used to economically hedge against fluctuations in our borrowing costs and presents our current financial performance without the effects of certain transactions that are not necessarily indicative of our current investment portfolio and operations. We present estimated taxable income and estimated undistributed taxable income, as this information is directly related to the amount of dividends we will be required to distribute over time in order to maintain our REIT qualification status. However, because each of these non-GAAP disclosures are incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, our results computed in accordance with GAAP. In addition, because not all companies use identical calculations, our presentation of such non-GAAP measures may not be comparable to other similarly titled measures provided by other companies. Furthermore, estimated taxable income can include certain information that is subject to potential adjustments up to the time of filing our income tax returns, which occurs after the end of our fiscal year.

The table below presents our consolidated statements of operations during the three and six months ended June 30, 2014 and 2013 (dollars in thousands, except per share amounts):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Interest income:
Agency securities	$	31,459		$	51,053		$	65,731		$	91,236
Non-agency securities	15,502			12,731			31,470			24,024
Other	77			143			133			234
Interest expense	(7,256		)	(9,113		)	(15,401		)	(17,149		)
Net interest income	39,782			54,814			81,933			98,345

Servicing:
Servicing income	11,389			—			20,953			—
Servicing expense	(14,426		)	—			(28,648		)	—
Net servicing loss	(3,037		)	—			(7,695		)	—

Other gains (losses):
Realized gain (loss) on agency securities, net	4,052			(20,979		)	(9,081		)	(12,305		)
Realized gain on non-agency securities, net	12,983			8,307			14,392			9,726
Realized loss on periodic settlements of interest rate swaps, net	(5,227		)	(10,045		)	(10,174		)	(17,779		)
Realized gain (loss) on other derivatives and securities, net	11,560			23,865			(10,468		)	21,417
Unrealized gain (loss) on agency securities, net	78,336			(292,864		)	145,893			(371,704		)
Unrealized gain (loss) on non-agency securities, net	2,018			(23,751		)	9,848			6,727
Unrealized gain (loss) on other derivatives and securities, net	(49,211		)	213,307			(68,305		)	198,056
Unrealized loss on mortgage servicing rights	(529		)	—			(629		)	—
Total other gains (losses), net	53,982			(102,160		)	71,476			(165,862		)

Expenses:
Management fees	4,377			5,079			8,625			9,523
General and administrative expenses	1,846			1,928			3,676			3,705
Total expenses	6,223			7,007			12,301			13,228

Income (loss) before excise tax	84,504			(54,353		)	133,413			(80,745		)
Excise tax	207			—			356			177
Net income (loss)	84,297			(54,353		)	133,057			(80,922		)
Dividend on preferred stock	(484		)	—			(484		)	—
Net income (loss) available (attributable) to common shareholders	$	83,813		$	(54,353	)	$	132,573		$	(80,922	)

Weighted average number of common shares outstanding—basic and diluted	51,142			57,982			51,207			52,754

Net income (loss) per common share—basic and diluted	$	1.64		$	(0.94	)	$	2.59		$	(1.53	)

Interest Income and Asset Yields

The tables below present the interest income and weighted average yield for our agency and non-agency RMBS during the three and six months ended June 30, 2014 and 2013:



	For the Three Months Ended June 30,
	2014						2013
	Average Amortized Cost		Weighted Average Yield		Interest Income		Average Amortized Cost		Weighted Average Yield		Interest Income
Agency RMBS⁽¹⁾	$	4,851,241	2.59	%	$	31,459	$	7,288,238	2.80	%	$	51,053
Non-agency RMBS	927,830		6.68	%	15,502		751,723		6.77	%	12,731
Total	$	5,779,071	3.25	%	$	46,961	$	8,039,961	3.17	%	$	63,784



	For the Six Months Ended June 30,
	2014						2013
	Average Amortized Cost		Weighted Average Yield		Interest Income		Average Amortized Cost		Weighted Average Yield		Interest Income
Agency RMBS⁽¹⁾	$	5,225,699	2.52	%	$	65,731	$	6,652,866	2.74	%	$	91,236
Non-agency RMBS	924,972		6.80	%	31,470		686,958		6.99	%	24,024
Total	$	6,150,671	3.16	%	$	97,201	$	7,339,824	3.14	%	$	115,260

——————


⁽¹⁾	Does not include TBA dollar roll income reported in gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

The following is a summary of the estimated impact of changes in the principal elements of interest income during the three and six months ended June 30, 2014 and 2013 (in thousands):



	For the Three Months Ended June 30, 2014 vs 2013									For the Six Months Ended June 30, 2014 vs 2013
				Due to Change in Average⁽¹⁾									Due to Change in Average⁽¹⁾
	Increase / (Decrease)			Volume			Yield			Increase / (Decrease)			Volume			Yield
Agency RMBS	$	(19,594	)	$	(16,004	)	$	(3,590	)	$	(25,505	)	$	(18,559	)	$	(6,946	)
Non-agency RMBS	2,771			2,938			(167		)	7,446			8,080			(634		)
Total	$	(16,823	)	$	(13,066	)	$	(3,757	)	$	(18,059	)	$	(10,479	)	$	(7,580	)

——————


⁽¹⁾	Variances that are the combined effect of volume and yield, but cannot be separately identified, are allocated to the volume and yield variances based on their respective relative amounts.

Interest income on agency RMBS decreased by $(19.6) million due mainly to reduced average balances and, to a lesser extent, 0.21% lower average yields during the three months ended June 30, 2014 compared to the three months ended June 30, 2013. Interest income on non-agency RMBS increased by $2.8 million during the three months ended June 30, 2014 compared to the three months ended June 30, 2013, due primarily to an increase in average balances.

Interest income on agency RMBS decreased by $(25.5) million due mainly to reduced average balances and, to a lesser extent, 0.22% lower average yields during the six months ended June 30, 2014 compared to the six months ended June 30, 2013. Interest income on non-agency RMBS increased by $7.4 million during the six months ended June 30, 2014 compared to the six months ended June 30, 2013, due primarily to an increase in average balances.

We amortize or accrete premiums and discounts associated with agency RMBS and non-agency RMBS of high credit quality into interest income over the life of such securities using the effective yield method. The effective yield (or asset yield) on these securities is based on actual CPRs realized for individual securities in our investment portfolio through the reporting date and assumes a CPR over the remaining projected life of our aggregate investment portfolio. We estimate projected CPRs on these securities using a third-party service and market data. We update our estimates on at least a quarterly basis, and more

frequently when economic or market conditions warrant. The effective yield on these securities is adjusted retrospectively for differences between actual and projected CPR estimates or for changes in our projected CPR estimates. Our projected CPR estimate for our agency RMBS was 8% and 7% as of June 30, 2014 and December 31, 2013, respectively. The actual CPR realized for individual agency RMBS in our investment portfolio was approximately 8.3% and 7.4% for the three months ended June 30, 2014 and 2013, respectively, and 6.9% for the six months ended June 30, 2014 and 2013, respectively.

Interest income from our agency RMBS is net of premium amortization expense of $(7.9) million and $(9.4) million during the three months ended June 30, 2014 and 2013, respectively, and $(18.7) million and $(18.3) million for the six months ended June 30, 2014 and 2013, respectively. The change in our weighted average CPR estimates resulted in the recognition of approximately $0.3 million and $3.1 million "catch up" premium amortization benefit (expense) during the three months ended June 30, 2014 and 2013, respectively, and $(1.1) million and $5.2 million for the six months ended June 30, 2014 and 2013, respectively. The amortized cost basis of our agency RMBS portfolio was 104.5% and 104.4% of par value, and the net unamortized premium balance of our aggregate agency RMBS portfolio was $194.9 million and $246.6 million, as of June 30, 2014 and December 31, 2013, respectively.

At the time we purchase non-agency RMBS that are not of high credit quality, we determine an effective yield based on our estimate of the timing and amount of future cash flows and our cost basis. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments with any changes in effective yield recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any. Our estimates of future cash flows are based on input and analysis received from external sources, internal models and judgment about interest rates, prepayment rates, the timing and amount of credit losses and other factors. Interest income from our non-agency RMBS includes discount accretion of $9.7 million and $7.8 million during the three months ended June 30, 2014 and 2013, respectively, and $20.3 million and $14.9 million for the six months ended June 30, 2014 and 2013, respectively. The weighted average cost basis of the non-agency portfolio was 64.2% and 60.7% of par as of June 30, 2014 and December 31, 2013, respectively. The total net discount remaining was $533.8 million and $599.8 million, with $184.4 million and $235.0 million designated as credit reserves as of June 30, 2014 and December 31, 2013, respectively.

Leverage

Our leverage, when adjusted for the net payables and receivables for unsettled securities and our net TBA position, was 5.2x and 5.1x our stockholders’ equity less investments in RCS and REIT equity securities as of June 30, 2014 and December 31, 2013, respectively. Since the individual agency mortgage REITs in which we invest employ similar leverage as within our agency portfolio, we acquire these securities on an unleveraged basis and, therefore, exclude from our leverage measurements the portion of our stockholders' equity allocated to investments in other mortgage REITs. In addition, our measurement of leverage excludes repurchase agreements used to fund short-term investments in U.S. Treasury securities due to the highly liquid and temporary nature of these investments. Our net position of TBA commitments should also be considered when determining our effective leverage. While TBA commitments are treated as derivatives under GAAP and thus not included in our actual leverage calculations, they do carry similar risks to agency security purchases on our consolidated balance sheets. Our actual leverage will vary from time to time based on various factors, including our Manager’s opinion of the level of risk of our assets and liabilities, our view of the attractiveness of the return environment, composition of our investment portfolio, our liquidity position, our level of unused borrowing capacity, over-collateralization levels required by lenders when we pledge securities to secure our borrowings and the current market value of our investment portfolio. In addition, certain of our master repurchase agreements and master swap agreements contain a restriction that prohibits our leverage from exceeding certain levels. We do not expect these restrictions to adversely impact our operations.

The table below presents our quarterly average and quarter end repurchase agreement balances outstanding and average leverage ratios for the quarterly periods since June 30, 2013 (dollars in thousands):



	Repurchase Agreements ⁽¹⁾						Average Interest Rate as of Period End ⁽¹⁾		Average Leverage During the Period ⁽²⁾	Leverage as of Period End ⁽³⁾	Adjusted Leverage as of Period End ⁽⁴⁾
Quarter Ended	Average Daily Amount Outstanding		Maximum Daily Amount Outstanding		Ending Amount Outstanding		Average Interest Rate as of Period End ⁽¹⁾		Average Leverage During the Period ⁽²⁾	Leverage as of Period End ⁽³⁾	Adjusted Leverage as of Period End ⁽⁴⁾
June 30, 2014	$	5,062,594	$	5,188,485	$	4,778,350	0.56	%	4.8x	4.2x	5.2x
March 31, 2014	$	5,762,349	$	6,580,860	$	5,188,485	0.58	%	5.6x	5.1x	5.8x
December 31, 2013	$	7,654,594	$	8,352,998	$	6,582,678	0.56	%	6.8x	5.9x	5.1x
September 30, 2013	$	8,298,648	$	8,689,551	$	8,352,628	0.51	%	6.8x	7.0x	5.7x
June 30, 2013	$	7,083,080	$	7,697,739	$	7,632,711	0.52	%	5.1x	6.3x	6.4x

————————


⁽¹⁾	Excludes repurchase agreements collateralized by U.S. Treasury securities.


⁽²⁾	Average leverage for the period was calculated by dividing our daily weighted average agency and non-agency repurchase agreements by our average month-end stockholders’ equity for the period less investments in RCS and REIT equity securities.


⁽³⁾	Leverage as of period end was calculated by dividing the amount outstanding under our agency and non-agency repurchase agreements and net payables and receivables for unsettled agency and non-agency RMBS by our stockholders’ equity at period end less investments in RCS and REIT equity securities.


⁽⁴⁾	Adjusted leverage as of period end was calculated by dividing the sum of the amounts outstanding under our agency and non-agency repurchase agreements, the cost basis (or contract price) of our net TBA position and net payables and receivables for unsettled agency and non-agency RMBS by our total stockholders’ equity at period end less investments in RCS and REIT equity securities.

Our average leverage and leverage as of period end included in the table above does not include the impact of TBA positions, which have the effect of increasing or decreasing our "at risk" leverage. A net long position increases our at risk leverage, while a net short position reduces our at risk leverage. As of June 30, 2014, we had a net long TBA position with a notional value of $1.1 billion and an underlying cost basis of $1.2 billion. Our total at risk leverage including the effect of net TBA positions is shown as the adjusted leverage as of period end in the table above.

Interest Expense and Cost of Funds

Interest expense of $7.3 million and $9.1 million for the three months ended June 30, 2014 and 2013, respectively, and $15.4 million and $17.1 million for the six months ended June 30, 2014 and 2013, respectively, was comprised of interest expense on our repurchase agreements. We also incurred expense for our net periodic interest settlements related to our interest rate swaps of $5.2 million and $10.0 million for the three months ended June 30, 2014 and 2013, respectively, and $10.2 million and $17.8 million for the six months ended June 30, 2014 and 2013, respectively, which is included in realized loss on periodic settlements of interest rate swaps, net, on our consolidated statements of operations.

The table below presents our average adjusted cost of funds during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):



	For the Three Months Ended June 30,
	2014					2013
	Average Balance / Effective Notional		Rate	Adjusted Cost of Funds ⁽¹⁾		Average Balance / Effective Notional	Rate	Adjusted Cost of Funds ⁽¹⁾
Repurchase agreements	$	5,062,594	0.57%	$	7,256	$7,083,080	0.52%	$	9,113
Interest rate swaps	$	2,127,500	0.42%	5,227		$3,590,000	0.56%	10,045
Total adjusted cost of funds			0.99%	$	12,483		1.08%	$	19,158



	For the Six Months Ended June 30,
	2014					2013
	Average Balance / Effective Notional		Rate	Adjusted Cost of Funds ⁽¹⁾		Average Balance / Effective Notional		Rate	Adjusted Cost of Funds ⁽¹⁾
Repurchase agreements	$	5,410,538	0.57%	$	15,401	$	6,459,031	0.54%	$	17,149
Interest rate swaps	$	2,093,571	0.38%	10,174		$	3,318,571	0.55%	17,779
Total adjusted cost of funds			0.95%	$	25,575			1.09%	$	34,928

————————


⁽¹⁾	Our adjusted cost of funds excludes any impacts from other supplemental hedges such as U.S. Treasury securities and swaptions, and the implied financing cost or benefit of our net TBA dollar roll position reported in gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

The following is a summary of the impact of changes in the principal elements of our adjusted cost of funds during the three and six months ended June 30, 2014 and 2013 (in thousands):



	For the Three Months Ended June 30, 2014 vs 2013									For the Six Months Ended June 30, 2014 vs 2013
				Due to Change in Average⁽¹⁾									Due to Change in Average⁽¹⁾
	Increase / (Decrease)			Volume			Rate			Increase / (Decrease)			Volume			Rate
Repurchase agreements	$	(1,857	)	$	(2,933	)	$	1,076		$	(1,748	)	$	(3,144	)	$	1,396
Interest rate swaps	(4,818		)	(2,962		)	(1,856		)	(7,605		)	(4,130		)	(3,475		)
Total adjusted cost of funds	$	(6,675	)	$	(5,895	)	$	(780	)	$	(9,353	)	$	(7,274	)	$	(2,079	)

——————


⁽¹⁾	Variances that are the combined effect of volume and yield, but cannot be separately identified, are allocated to the volume and yield variances based on their respective relative amounts.

The $(6.7) million decrease in our adjusted cost of funds for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 was attributable to a combination of lower average repurchase agreement balances and interest rate swap rates and effective notional amounts, partially offset by a 0.05% increase in repurchase agreement rates.

The $(9.4) million decrease in our adjusted cost of funds for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 was attributable to a combination of lower average effective swap rates and notional amounts and repurchase agreement balances, partially offset by a 0.03% increase in repurchase agreement rates.

Net Servicing Loss

The following table presents the components of servicing income and expense for the three and six months ended June 30, 2014 (dollars in thousands):



	For the Three Months Ended June 30, 2014			For the Six Months Ended June 30, 2014
Servicing fee income	$	7,502		$	13,325
Incentive, ancillary and other income	3,887			7,628
Servicing income	11,389			20,953

Employee compensation and benefit costs	7,898			16,675
Facility costs	3,347			6,280
Realization of cash flows from MSR	879			1,102
Other servicing costs	2,302			4,591
Servicing expense	14,426			28,648

Net servicing loss	$	(3,037	)	$	(7,695	)

As of June 30, 2014, RCS managed a servicing portfolio of approximately 86,000 loans, representing approximately $17 billion in unpaid principal balance. RCS provides full end-to-end services for mortgage servicing solutions, including (i) loan acquisition and boarding, (ii) customer service, collections and loss mitigation, and (iii) foreclosure and real-estate owned services. We have elected to treat our investment in RCS as a TRS, and RCS is therefore subject to corporate income tax on its earnings.

Realized and Unrealized Gain (Loss) on Securities, Net

Sales of securities for the three and six months ended June 30, 2014 were largely driven by a reduction in our on-balance sheet agency RMBS portfolio and a rebalancing of the non-agency RMBS portfolio. These changes in portfolio composition were based upon our Manager's expectations concerning interest rates, Federal government programs, general economic conditions and other factors. During this period, we also increased our net long TBA position through TBA dollar roll transactions, a form of off-balance sheet financing.

The following table is a summary of our net realized gains and losses on agency RMBS during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Proceeds from agency RMBS sold	$	335,176		$	1,406,984		$	1,667,076		$	3,280,218
Increase (decrease) in receivable for agency RMBS sold	116,535			40,755			(492,111		)	162,571
Less agency RMBS sold, at cost	(447,659		)	(1,468,718		)	(1,184,046		)	(3,455,094		)
Net realized gain (loss) on sale of agency RMBS	$	4,052		$	(20,979	)	$	(9,081	)	$	(12,305	)

Gross realized gains on sale of agency RMBS	$	6,260		$	4,096		$	7,830		$	18,723
Gross realized losses on sale of agency RMBS	(2,208		)	(25,075		)	(16,911		)	(31,028		)
Net realized gain (loss) on sale of agency RMBS	$	4,052		$	(20,979	)	$	(9,081	)	$	(12,305	)

The following table is a summary of our net realized gains on non-agency RMBS during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Proceeds from non-agency RMBS sold	$	250,548		$	107,954		$	295,211		$	119,379
Decrease in receivable for non-agency RMBS sold	(4,743		)	—			—			—
Less: non-agency RMBS sold, at cost	(232,822		)	(99,647		)	(280,819		)	(109,653		)
Net realized gain on sale of non-agency RMBS	$	12,983		$	8,307		$	14,392		$	9,726

Gross realized gain on sale of non-agency RMBS	$	16,886		$	9,288		$	18,295		$	10,707
Gross realized loss on sale of non-agency RMBS	(3,903		)	(981		)	(3,903		)	(981		)
Net realized gain on sale of non-agency RMBS	$	12,983		$	8,307		$	14,392		$	9,726

Unrealized net gains of $78.3 million and $145.9 million on agency RMBS for the three and six months ended June 30, 2014 and 2013, respectively, and unrealized net gains of $2.0 million and $9.8 million on non-agency RMBS for the three and six months ended June 30, 2014 and 2013, respectively, were attributable to the changes in market pricing on the underlying instruments as described above in Trends and Recent Market Impacts, as well as the impact of realized gains and losses on sales of securities.

Gain (Loss) on Other Derivatives and Securities, Net

The following table is a summary of our realized and unrealized loss on other derivatives and securities, net, during the three and six months ended June 30, 2014 and 2013 (dollars in thousands):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Realized loss on periodic settlements of interest rate swaps, net	$	(5,227	)	$	(10,045	)	$	(10,174	)	$	(17,779	)
Realized gain (loss) on other derivatives and securities:
Interest rate swaps	$	—		$	—		$	68		$	—
Interest rate swaptions	(2,164		)	(1,276		)	(16,832		)	(3,432		)
TBA securities	14,821			19,355			5,992			19,386
U.S. Treasury securities	1,711			(1,070		)	2,758			(1,070		)
U.S. Treasury futures	(3,203		)	2,703			(3,977		)	2,703
U.S. Treasury securities sold short	(4,417		)	4,153			(5,964		)	3,830
REIT equity investments	4,812			—			7,487			—
Total realized gain (loss) on other derivatives and securities, net	$	11,560		$	23,865		$	(10,468	)	$	21,417
Unrealized gain (loss) on other derivatives and securities:
Interest rate swaps	$	(50,038	)	$	179,433		$	(78,202	)	$	177,518
Interest rate swaptions	(1,885		)	44,608			(8,368		)	43,896
TBA securities	12,747			(57,385		)	11,918			(53,528		)
Mortgage options	(140		)	—			(140		)	—
U.S. Treasury securities	1,480			(10,651		)	12,438			(10,651		)
U.S. Treasury futures	(523		)	7,187			(2,761		)	7,187
U.S. Treasury securities sold short	(8,887		)	50,115			(5,067		)	33,634
REIT equity investments	(1,965		)	—			1,877			—
Total unrealized gain (loss) on other derivatives and securities, net	$	(49,211	)	$	213,307		$	(68,305	)	$	198,056

Net unrealized and realized losses of $50.0 million on interest rate swaps and $4.0 million on interest rate swaptions during the three months ended June 30, 2014 and $78.1 million and $25.2 million, respectively, during the six months ended June 30, 2014 were due mainly to the decrease in longer-term swap interest rates during the period. For further details regarding our derivatives and related hedging activity please refer to Notes 3 and 7 to our consolidated financial statements in this Quarterly Report on Form 10-Q.

Management Fees and General and Administrative Expenses

We pay our Manager a base management fee payable monthly in arrears in an amount equal to one twelfth of 1.50% of our equity. Our equity is defined as our month-end GAAP stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in retained earnings as computed in accordance with GAAP. There is no incentive compensation payable to our Manager pursuant to the management agreement. We incurred management fees of $4.4 million and $5.1 million during the three months ended June 30, 2014 and 2013, respectively, and $8.6 million and $9.5 million during the six months ended June 30, 2014 and 2013, respectively. The period-over-period decrease was primarily a function of our share repurchases and net realized losses on sales of agency RMBS and settlement, expiration or termination of our derivative instruments.

General and administrative expenses were $1.8 million and $1.9 million during the three months ended June 30, 2014 and 2013, respectively, and $3.7 million during both the six months ended June 30, 2014 and 2013. Our general and administrative expenses primarily consist of prime brokerage fees, information technology costs, research and data service fees, audit fees, Board of Directors fees and insurance expenses.

Our management fees and general and administrative expenses as a percentage of our average stockholders’ equity on an annualized basis were 2.13% and 2.04% for the three months ended June 30, 2014 and 2013, respectively, and 2.16% and 2.12% for the six months ended June 30, 2014 and 2013, respectively.

Dividends and Income Taxes

We had estimated taxable income of $23.4 million and $44.1 million (or $0.45 and $0.76 per common share) for the three months ended June 30, 2014 and 2013, respectively, and $54.5 million and $81.9 million (or $1.06 and $1.55 per common share) for the six months ended June 30, 2014 and 2013, respectively.

As a REIT, we are required to distribute annually at least 90% of our taxable income to maintain our status as a REIT and all of our taxable income to avoid Federal and state corporate income taxes. We can treat dividends declared by September 15 and paid by December 31 as having been a distribution of our taxable income for our prior tax year ("spill-back provision"). Income as determined under GAAP differs from income as determined under tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses associated with assets and liabilities marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) timing differences in the recognition of certain realized gains and losses, (iii) losses or undistributed income of taxable REIT subsidiaries and (iv) temporary differences related to the amortization of net premiums paid on investments. Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year.

The following is a reconciliation of our GAAP net income to our estimated taxable income during the three and six months ended June 30, 2014 and 2013 (dollars in thousands).



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net income (loss)	$	84,297		$	(54,353	)	$	133,057		$	(80,922	)
Book to tax differences:
Unrealized (gains) and losses, net
Agency RMBS	(78,336		)	292,864			(145,893		)	371,704
Non-agency RMBS	(2,018		)	23,751			(9,848		)	(6,727		)
Derivatives and other securities	49,740			(213,307		)	68,934			(198,056		)
Premium amortization, net	(4,232		)	(5,730		)	(5,954		)	(3,866		)
Capital losses in excess of capital gains ⁽¹⁾	(34,583		)	—			(15,081		)	—
Realized gains (losses), net ⁽¹⁾	5,323			953			21,235			(407		)
Other	3,244			(36		)	8,051			170
Total book to tax difference	(60,862		)	98,495			(78,556		)	162,818
Estimated taxable income	23,435			44,142			54,501			81,896
Dividend on preferred stock	(484		)	—			(484		)	—
Estimated taxable income available to common shareholders	$	22,951		$	44,142		$	54,017		$	81,896

Weighted average number of common shares outstanding - basic and diluted	51,142			57,982			51,207			52,754

Estimated taxable income per common share	$	0.45		$	0.76		$	1.06		$	1.55
Estimated cumulative undistributed REIT taxable income per common share	$	0.53		$	0.43		$	0.53		$	0.43

Beginning cumulative non-deductible capital losses	$	214,570		$	—		$	195,068		$	—
Current period net capital loss (gain)	(34,583		)	—			(15,081		)	—
Ending cumulative non-deductible capital losses	$	179,987		$	—		$	179,987		$	—
Ending cumulative non-deductible capital losses per common share	$	3.52		$	—		$	3.52		$	—

——————

⁽¹⁾

Our estimated taxable income for the three and six months ended June 30, 2014 excludes $0.68 per common share and $0.30 per common share, respectively, of estimated net capital gains in excess of capital losses, which are not included in our ordinary taxable income but are applied against previously recognized net capital losses, as well as $0.03 per common share and $0.06 per common share, respectively, of gains on terminated swaps and $0.04 per common share and $0.31 per common share, respectively, of gains on terminated or expired swaptions, which for income tax purposes are deferred and amortized into future ordinary taxable income over the remaining terms of the underlying swaps.

The decrease in our estimated taxable income per common share is primarily a function of a decline in estimated taxable net gains on investments and hedging instruments and, to a lesser extent, lower net spread income.

We declared dividends of $0.65 and $0.80 per common share for the three months ended June 30, 2014 and 2013, respectively, and $1.30 and $1.70 per common share for the six months ended June 30, 2014 and 2013, respectively.

As of June 30, 2014, we had an estimated $27.0 million (or $0.53 per common share) of undistributed taxable income, net of the dividend payable as of June 30, 2014 of $33.9 million. We have distributed all of our remaining 2013 taxable income within the allowable time frame, including the available spill-back provision, so that we will not be subject to Federal or state corporate income tax. However, as a REIT, we are still subject to a nondeductible Federal excise tax of 4% to the extent that the sum of (i) 85% of our ordinary taxable income, (ii) 95% of our capital gains and (iii) any undistributed taxable income from the prior year, exceeds our dividends declared in such year and paid by January 31 of the subsequent year. We incurred an excise tax of $0.2 million and $0.0 million for the three months ended June 30, 2014 and 2013, respectively, and $0.4 million and $0.2 million for the six months ended June 30, 2014 and 2013, respectively.

We acquired 100% of RCS, which is taxable as a corporation under Subchapter C of the Internal Revenue Code, on November 27, 2013, with which we filed a joint TRS election. As of June 30, 2014, RCS had Federal net operating loss ("NOL") carryforwards of approximately $55.6 million which can be carried forward for up to twenty years. As a result of the change in ownership, the utilization of most of the NOL is subject to limitations imposed by the Internal Revenue Code. The gross deferred tax assets associated with the NOL and other temporary differences as of June 30, 2014 were approximately $24.1 million, with respect to which RCS has provided a full valuation allowance.

Key Statistics

The table below presents key statistics for the three and six months ended June 30, 2014 and 2013 (dollars in thousands, except per share amounts):



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2014		2013		2014		2013
Ending agency securities, at fair value	$	4,464,193	$	7,777,532	$	4,464,193	$	7,777,532
Ending agency securities, at cost	$	4,496,811	$	8,011,964	$	4,496,811	$	8,011,964
Ending agency securities, at par	$	4,301,864	$	7,597,458	$	4,301,864	$	7,597,458
Average agency securities, at cost	$	4,851,241	$	7,288,238	$	5,225,699	$	6,652,866
Average agency securities, at par	$	4,645,002	$	6,869,169	$	5,004,910	$	6,284,188

Ending non-agency securities, at fair value	$	1,051,140	$	930,647	$	1,051,140	$	930,647
Ending non-agency securities, at cost	$	957,207	$	859,224	$	957,207	$	859,224
Ending non-agency securities, at par	$	1,490,982	$	1,500,219	$	1,490,982	$	1,500,219
Average non-agency securities, at cost	$	927,830	$	751,723	$	924,972	$	686,958
Average non-agency securities, at par	$	1,484,770	$	1,292,633	$	1,497,411	$	1,167,280

Net TBA portfolio - as of period end, at fair value	$	1,167,645	$	90,795	$	1,167,645	$	90,795
Net TBA portfolio - as of period end, at cost	$	1,154,708	$	147,236	$	1,154,708	$	147,236
Average net TBA portfolio, at cost	$	865,738	$	3,378,283	$	277,417	$	2,069,802

Average total assets, at fair value	$	7,205,796	$	10,265,857	$	7,507,289	$	9,250,081
Average agency and non-agency repurchase agreements	$	5,062,594	$	7,083,080	$	5,410,538	$	6,459,031
Average stockholders' equity	$	1,169,456	$	1,379,448	$	1,149,242	$	1,258,813




Average coupon	2.95		%	3.20		%	2.94		%	3.19		%
Average asset yield	3.25		%	3.17		%	3.16		%	3.14		%
Average cost of funds ⁽¹⁾	0.99		%	1.08		%	0.95		%	1.09		%
Average net interest rate spread	2.26		%	2.09		%	2.21		%	2.05		%
Average net interest rate spread, including estimated dollar roll income ⁽²⁾	2.32		%	2.30		%	2.26		%	2.61		%
Average coupon as of period end	2.93		%	3.10		%	2.93		%	3.10		%
Average asset yield as of period end	3.33		%	3.10		%	3.33		%	3.10		%
Average cost of funds as of period end	1.02		%	1.16		%	1.02		%	1.16		%
Average net interest rate spread as of period end	2.31		%	1.94		%	2.31		%	1.94		%
Average actual CPR for agency securities held during the period	8.3		%	7.4		%	6.9		%	6.9		%
Average projected life CPR for agency securities as of period end	7.5		%	6.3		%	7.5		%	6.3		%

Leverage - average during the period ⁽³⁾	4.8x			5.1x			5.2x			5.1x
Leverage - average during the period, including net TBA position	5.6x			7.6x			5.4x			6.8x
Leverage - as of period end ⁽⁴⁾	4.2x			6.3x			4.2x			6.3x
Leverage - as of period end, including net TBA position	5.2x			6.4x			5.2x			6.4x

Expenses % of average total assets - annualized	0.3		%	0.3		%	0.3		%	0.3		%
Expenses % of average stockholders' equity - annualized	2.1		%	2.0		%	2.2		%	2.1		%
Net book value per common share as of period end	$	22.73		$	22.63		$	22.73		$	22.63
Dividends declared per common share	$	0.65		$	0.80		$	1.30		$	1.70
Net return on average stockholders' equity	28.9		%	(15.8		)%	23.4		%	(13.0		)%

————————


⁽¹⁾	Weighted average cost of funds includes periodic settlements of interest rate swaps.


⁽²⁾	Estimated dollar roll income is net of short TBAs used for hedging purposes. Dollar roll income excludes the impact of other supplemental hedges, and is recognized in gain (loss) on derivative instruments and other securities, net.


⁽³⁾	Leverage during the period was calculated by dividing the Company's daily weighted average agency and non-agency repurchase agreements for the period by the Company's average month-ended stockholders' equity for the period less investments in RCS and REIT equity securities. Leverage excludes U.S. Treasury repurchase agreements.


⁽⁴⁾	Leverage at period end was calculated by dividing the sum of the amount outstanding under the Company's agency and non-agency repurchase agreements and the net receivable/payable for unsettled securities at period end by the Company's stockholders' equity at period end less investments in RCS and REIT equity securities. Leverage excludes U.S. Treasury repurchase agreements.

Net Spread Income

The table below presents a reconciliation from GAAP net interest income to adjusted net interest income and net spread income during the three and six months ended June 30, 2014 and 2013 (dollars in thousands, except per share amounts):



	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Interest income:
Agency RMBS	$	31,459		$	51,053		$	65,731		$	91,236
Non-agency RMBS and other	15,579			12,874			31,603			24,258
Interest expense	(7,256		)	(9,113		)	(15,401		)	(17,149		)
Net interest income	39,782			54,814			81,933			98,345
Dividend income from investments in REIT equity securities⁽¹⁾	732			—			1,840			—
Realized loss on periodic settlements of interest rate swaps, net	(5,227		)	(10,045		)	(10,174		)	(17,779		)
Adjusted net interest income	35,287			44,769			73,599			80,566
Management fees and general and administrative expenses	(6,223		)	(7,007		)	(12,301		)	(13,228		)
Net spread income	29,064			37,762			61,298			67,338
Dollar roll income	8,030			23,214			6,206			31,248
Net spread and dollar roll income	37,094			60,976			67,504			98,586
Dividend on preferred stock	(484		)	—			(484		)	—
Net spread and dollar roll income available to common shareholders	$	36,610		$	60,976		$	67,020		$	98,586

Weighted average number of common shares outstanding	51,142			57,982			51,207			52,754

Net spread income per common share	$	0.56		$	0.65		$	1.20		$	1.28
Net spread and dollar roll income per common share	$	0.72		$	1.05		$	1.32		$	1.87

——————


⁽¹⁾	Dividend income from investments in REIT equity securities is included in realized gain (loss) on other derivatives and securities, net on the consolidated statements of operations.

Net spread and dollar roll income per common share fell $0.33 and $0.55 for the three and six months ended June 30, 2014 and 2013, respectively, due primarily to a reduction in leverage, including our net TBA position.

We believe that the above non-GAAP financial measures provide information useful to investors because net spread and dollar roll income is a financial metric used by management and investors and estimated taxable income is directly related to the amount of dividends we are required to distribute in order to maintain its REIT tax qualification status.

We also believe that providing investors with our net spread and dollar roll income, estimated taxable income and certain financial metrics derived from such non-GAAP financial information, in addition to the related GAAP measures, gives investors greater transparency to the information used by management in its financial and operational decision-making. However, because net spread income and estimated taxable income are incomplete measures of our financial performance and involve differences from net income computed in accordance with GAAP, they should be considered as supplementary to, and not as a substitute for, our net income computed in accordance with GAAP as a measure of our financial performance. In addition, because not all companies use identical calculations, our presentation of net spread income and estimated taxable income may not be comparable to other similarly-titled measures of other companies.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of funds are borrowings under master repurchase agreements, equity offerings, asset sales and monthly principal and interest payments on our investment portfolio. Because the level of our borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our balance sheets is significantly less important than the potential liquidity available under our borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, maintenance of any margin

requirements and the payment of cash dividends as required for our continued qualification as a REIT. To qualify as a REIT, we must distribute annually at least 90% of our taxable income. To the extent that we annually distribute all of our taxable income in a timely manner, we will generally not be subject to Federal and state income taxes. We currently expect to distribute all of our taxable income in a timely manner so that we are not subject to Federal and state income taxes. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital from operations.

Equity Capital

To the extent we raise additional equity capital through follow-on equity offerings, we currently anticipate using cash proceeds from such transactions to purchase additional investment securities, to make scheduled payments of principal and interest on our repurchase agreements and for other general corporate purposes. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular terms. In addition, during the six months ended June 30, 2014, we repurchased approximately $4.2 million of our stock under our stock repurchase program as our stock was trading at a meaningful discount to our estimated net asset value per common share.

Stock Repurchase Program

In October 2012, our Board of Directors adopted a program that provided for repurchases of up to $50 million of our outstanding shares of common stock through December 31, 2013. In June 2013, our Board of Directors authorized the repurchase of up to an additional $100 million of our outstanding shares of common stock through December 31, 2013. In September 2013, our Board of Directors authorized the repurchase of up to an additional $150 million of our outstanding shares of common stock and extended its authorization through December 31, 2014. Shares may be purchased in the open market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. We intend to repurchase shares only when the purchase price is less than our estimate of our current net asset value per common share. Generally, when we repurchase our common stock at a discount to our net asset value, the net asset value of our remaining shares outstanding increases. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

Dividend Reinvestment and Direct Stock Purchase Plan

Debt Capital

As part of our investment strategy, we borrow against our agency and non-agency RMBS pursuant to master repurchase agreements. We expect that our borrowings pursuant to repurchase transactions under such master repurchase agreements generally will have maturities of less than one year. When adjusted for net payables and receivables for unsettled agency and non-agency RMBS, our leverage ratio was 4.2x and 5.9x the amount of our stockholders’ equity less our investments in RCS and REIT equity securities as of June 30, 2014 and December 31, 2013, respectively, excluding amounts borrowed under U.S. Treasury repurchase agreements. Our cost of borrowings under master repurchase agreements generally corresponds to LIBOR plus or minus a margin.

To limit our exposure to counterparty credit risk, we diversify our funding across multiple counterparties and by counterparty region. We had repurchase agreements with 32 financial institutions as of June 30, 2014, located throughout North America, Europe and Asia. In addition, less than 5% of our equity was at risk with any one repurchase agreement counterparty, with the top five counterparties representing less than 17% of our equity at risk as of June 30, 2014.

As of June 30, 2014, borrowings of $4.1 billion and $639.1 million, with weighted average remaining days to maturity of 115 days and 28 days, were secured by agency and non-agency RMBS, respectively.

The table below includes a summary of our repurchase agreement funding and number of counterparties by region as of June 30, 2014. Refer to Note 6 to our consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our borrowings under repurchase agreements and weighted average interest rates as of June 30, 2014.



	June 30, 2014
Counterparty Region	Number of Counterparties	Percentage of Repurchase Agreement Funding
North America	17	67%
Asia	5	15%
Europe	10	18%
Total	32	100%

Amounts available to be borrowed under our repurchase agreements are dependent upon lender collateral requirements and the lender's determination of the fair value of the securities pledged as collateral, based on recognized pricing sources agreed to by both parties to the agreement. Collateral fair value can fluctuate with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Our counterparties also apply a "haircut" to the fair value of our pledged collateral, which reflects the underlying risk of the specific collateral and protects our counterparties against a decrease in collateral value, but conversely subjects us to counterparty risk and limits the amount we can borrow against our investment securities. Our master repurchase agreements do not specify the haircut, rather haircuts are determined on an individual repurchase transaction basis. Throughout the three months ended June 30, 2014, haircuts on our pledged collateral remained stable and as of June 30, 2014, our weighted average haircut on agency and non-agency RMBS held as collateral were approximately 5% and 26%, respectively.

Under our repurchase agreements, we may be required to pledge additional assets to repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such counterparties demand additional collateral (a margin call), which may take the form of additional securities or cash. Specifically, margin calls would result from a decline in the value of our securities securing our repurchase agreements and prepayments on the mortgages securing such securities. Similarly, if the estimated fair value of our investment securities increases due to changes in interest rates or other factors, counterparties may release collateral back to us. Our repurchase agreements generally provide that the valuations for the securities securing our repurchase agreements are to be obtained from a generally recognized source agreed to by the parties. However, in certain circumstances and under certain of our repurchase agreements, our lenders have the sole discretion to determine the value of the securities securing our repurchase agreements. In such instances, our lenders are required to act in good faith in making determinations of value. Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made if the lender provides us notice prior to the margin notice deadline on such day.

As of June 30, 2014, we had met all margin requirements and had unrestricted cash and cash equivalents of $200.0 million and unpledged securities of approximately $393.0 million, excluding unsettled purchases of securities, available to meet margin calls on our repurchase agreements and derivative instruments as of June 30, 2014.

Although we believe that we will have adequate sources of liquidity available to us through repurchase agreement financing to execute our business strategy, there can be no assurances that repurchase agreement financing will be available to us upon the maturity of our current repurchase agreements to allow us to renew or replace our repurchase agreement financing on favorable terms or at all. If our repurchase agreement lenders default on their obligations to resell the underlying securities back to us at the end of the term, we could incur a loss equal to the difference between the value of the securities and the cash we originally received.

We maintain an interest rate risk management strategy under which we use derivative financial instruments to help manage the adverse impact of interest rates changes on the value of our investment portfolio as well as our cash flows. In particular, we attempt to mitigate the risk of the cost of our short-term variable rate liabilities increasing at a faster rate than the earnings of our long-term assets during a period of rising interest rates. The principal derivative instruments that we use are interest rate swaps, swaptions and short Treasury positions. We may also supplement our hedge portfolio with the use of TBA positions and other instruments.

Refer to Notes 3 and 7 to our consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our outstanding interest rate swaps as of June 30, 2014 and the related activity for the three months ended June 30, 2014.

Our derivative agreements typically require that we pledge/receive collateral on such agreements to/from our counterparties in a similar manner as we are required to under our repurchase agreements. Our counterparties, or the clearing exchange in the case of our centrally cleared interest rate swaps, typically have the sole discretion to determine the value of the derivative instruments and the value of the collateral securing such instruments. In the event of a margin call, we must generally provide additional collateral on the same business day.

Similar to repurchase agreements, our use of derivatives exposes us to counterparty credit risk relating to potential losses

that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings, by maintaining collateral sufficient to cover the change in market value, and by monitoring positions with individual counterparties.

We did not have an amount at risk with any counterparty related to our non-centrally cleared interest rate swap and swaption agreements greater than 1% of our stockholders’ equity, as of June 30, 2014.

In the case of centrally cleared interest rate swap contracts, we could be exposed to credit risk if the central clearing agency or a clearing member defaults on its respective obligation to perform under the contract; however, the risk is considered minimal due to initial and daily exchange of mark to market margin requirements and the clearinghouse guarantee fund and other resources that are available in the event of a clearing member default.

TBA Dollar Roll Transactions

We also enter into TBA dollar roll transactions as a means of leveraging (long TBAs) or de-leveraging (short TBAs) our investment portfolio. TBA dollar roll transactions represent a form of off-balance sheet financing and are accounted for as derivative instruments in our accompanying consolidated financial statements in this Quarterly Report on Form 10-Q. Inclusive of our net TBA position as of June 30, 2014, our total "at risk" leverage, net of unsettled securities, was 5.2x our stockholders' equity.

Under certain market conditions, it may be uneconomical for us to roll our TBA contracts into future months and we may need to take or make physical delivery of the underlying securities. If we were required to take physical delivery of a long TBA contract, we would have to fund the total purchase commitment with cash or other financing sources and our liquidity position could be negatively impacted. However, as of June 30, 2014, we had a net long TBA position with a cost basis and fair value of the securities underlying our net long TBA position each totaling $1.2 billion.

Our TBA dollar roll contracts are also subject to margin requirements governed by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation and by our prime brokerage agreements, which may establish margin levels in excess of the MBSD. Such provisions require that we establish an initial margin based on the notional value of the TBA contract, which is subject to increase if the estimated fair value of our TBA contract or the estimated fair value of our pledged collateral declines. The MBSD has the sole discretion to determine the value of our TBA contracts and of the collateral pledged securing such contracts. In the event of a margin call, we must generally provide additional collateral on the same business day.

Settlement of our net long TBA obligations by taking delivery of the underlying securities as well as satisfying margin requirements could negatively impact our liquidity position. However, since we do not use TBA dollar roll transactions as our primary source of financing, we believe that we will have adequate sources of liquidity to meet such obligations.

Asset Sales and TBA Eligible Securities

We maintain a portfolio of highly liquid agency RMBS. We may sell our agency RMBS through the TBA market by delivering securities into TBA contracts for the sale of securities, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA"). We may alternatively sell agency RMBS that have more unique attributes on a specified basis when such securities trade at a premium over generic TBA securities or if the securities are not otherwise eligible for TBA delivery. Since the agency TBA market is the second most liquid market (second to the U.S. Treasury market), maintaining a significant level of agency RMBS eligible for TBA delivery enhances our liquidity profile and

provides price support for our TBA eligible securities in a rising interest rate scenario at or above generic TBA prices. As of June 30, 2014, approximately 89% of our agency RMBS portfolio was eligible for TBA delivery.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2014, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of June 30, 2014, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

FORWARD-LOOKING STATEMENTS

All statements contained herein that are not historical facts including, but not limited to, statements regarding anticipated activity are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: (i) changes in the market value of our assets; (ii) changes in net interest rate spreads; (iii) changes in the amount or timing of cash flows from our investment portfolio; (iv) risks associated with our hedging activities; (v) availability and terms of financing arrangements; (vi) further actions by the U.S. government to stabilize the economy; (vii) changes in our business or investment strategy; (viii) legislative and regulatory changes (including changes to laws governing the taxation of REITs); (ix) our ability to meet the requirements of a REIT (including income and asset requirements); and (x) our ability to remain exempt from registration under the Investment Company Act of 1940, as amended. For a discussion of the risks and uncertainties which could cause actual results to differ from those contained in the forward looking statements, please see the information under the caption "Risk Factors" described in this Quarterly Report on Form 10-Q. We caution readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995, as amended and, as such, speak only as of the date made.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk, liquidity risk, extension risk credit risk, and inflation risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest-bearing liabilities. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the RMBS that constitute our investment portfolio, which affects our net income and ability to realize gains from the sale of these assets and impacts our ability and the amount that we can borrow against these securities.

We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our operations. The principal instruments that we use are interest rate swaps and options to enter into interest rate swaps. We also utilize forward contracts for the purchase or sale of agency RMBS on a generic pool, or a TBA contract basis and on a non-generic, specified pool basis, and we utilize U.S. Treasury securities and U.S. Treasury futures contracts, primarily through short sales. We may also purchase or write put or call options on TBA securities and we may invest in other types of mortgage derivatives, such as interest and principal-only securities, and synthetic total return swaps. Derivative instruments may expose us to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.

Our profitability and the value of our investment portfolio (including derivatives used for hedging purposes) may be adversely affected during any period as a result of changing interest rates including changes in forward yield curves.

Primary measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity. The duration of our investment portfolio changes with interest rates and tends to increase when interest rates rise and decrease when

rates fall. The "negative convexity" generally increases the interest rate exposure of our investment portfolio by more than what is measured by duration alone.

We estimate the duration and convexity of our portfolio using both a third-party risk management system and market data. We review the duration estimates from the third-party model and may make adjustments based on our Manager's judgment. These adjustments are intended to, in our Manager's opinion, better reflect the unique characteristics and market trading conventions associated with certain types of securities, such as HARP and lower loan balance securities. These adjustments generally result in shorter durations than what the unadjusted third party model would otherwise produce. Without these adjustments, in rising rate scenarios, the longer unadjusted durations may underestimate price projections on certain securities with slower prepayment characteristics, such as HARP and lower loan balance securities, to a level below those of generic or TBA securities. However, in our Manager's judgment, because these securities are typically deliverable into TBA contracts, the price of these securities is unlikely to drop below the generic or TBA price in rising rate scenarios. The accuracy of the estimated duration of our portfolio and projected agency security prices depends on our Manager's assumptions and judgments. Our Manager may discontinue making these duration adjustments in the future or may choose to make different adjustments. Other models could produce materially different results.

Further, since we do not control the other mortgage REITs that we invest in, we have limited transparency into their underlying investment and hedge portfolios. Therefore, our Manager must make certain assumptions to estimate the duration and convexity of the underlying portfolios and their sensitivity to changes in interest rates. Such estimates do not include the potential impact of other factors which may affect the fair value of our investments in other mortgage REITs, such as stock market volatility. Accordingly, actual results could differ from our estimates.

The table below quantifies the estimated changes in net interest income (including periodic interest costs on our interest rate swaps) and the estimated changes in the fair value of our investment portfolio (including derivatives and other securities used for hedging purposes) and in our net asset value should interest rates go up or down by 50 and 100 basis points, assuming instantaneous parallel shifts in the yield curve, and including the impact of both duration and convexity.

All changes in income and value are measured as percentage changes from the projected net interest income, investment

portfolio value and net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates and prepayment projections as of June 30, 2014 and December 31, 2013. We apply a floor of 0% for the down rate scenarios on our interest bearing liabilities and the variable leg of our interest rate swaps, such that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level.

Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover, if different models were employed in the analysis, materially different projections could result. Lastly, while the table below reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our agency or non-agency RMBS as a part of our overall management of our investment portfolio.



Interest Rate Sensitivity ⁽¹⁾
	Percentage Change in Projected
Change in Interest Rate	Net Interest Income ⁽²⁾		Portfolio Value ^{(3) (4)}		Net Asset Value ^{(3) (5)}
June 30, 2014
+100 basis points	(6.7	)%	(1.6	)%	(9.4	)%
+50 basis points	(3.4	)%	(0.7	)%	(4.3	)%
-50 basis points	4.4	%	0.4	%	2.6	%
-100 basis points	4.2	%	0.2	%	1.0	%
December 31, 2013
+100 basis points	(18.2	)%	(1.3	)%	(7.2	)%
+50 basis points	(9.1	)%	(0.7	)%	(3.8	)%
-50 basis points	10.1	%	0.9	%	4.9	%
-100 basis points	10.3	%	1.6	%	8.6	%

————————


⁽¹⁾	Interest rate sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, assumes there are no changes in mortgage spreads and assumes a static portfolio. Actual results could differ materially from these estimates.

⁽²⁾

Represents the estimated dollar change in net interest income expressed as a percentage of net interest income based on asset yields and cost of funds as of such date. It includes the effect of periodic interest costs on our interest rate swaps, but excludes TBA dollar roll income and costs associated with other supplemental hedges, such as swaptions and U.S. Treasury securities or TBA positions. Estimated dollar change in net interest income does not include the one time impact of retroactive "catch-up" premium amortization benefit/cost due to an increase/decrease in the projected CPR and does not include dividend income from investments in other mortgage REITs.

⁽³⁾ Includes the effect of derivatives and other securities used for hedging purposes.

⁽⁴⁾ Estimated change in portfolio value expressed as a percentage of the total fair value of our investment portfolio.


⁽⁵⁾	Estimated change in net asset value expressed as a percentage of stockholders' equity.

The change in our interest rate sensitivity as of June 30, 2014 compared to December 31, 2013 was a function of a flatter yield curve, partially mitigated by changes in the size and composition of our asset and hedge portfolio.

Prepayment Risk

Because residential borrowers have the option to prepay their mortgage loans at par at any time, we face the risk that we

will experience a return of principal on our investments faster than anticipated. Various factors affect the rate at which mortgage prepayments occur, including changes in the level of and directional trends in housing prices, interest rates, general economic conditions, loan age and size, loan-to-value ratio, the location of the property and social and demographic conditions. Additionally, changes to GSE underwriting practices or other governmental programs could also significantly impact prepayment rates or expectations. Also, the pace at which the loans underlying our securities become seriously delinquent or are modified and the timing of GSE repurchases of such loans from our securities can materially impact the rate of prepayments. Generally, prepayments on agency RMBS increase during periods of falling mortgage interest rates and decrease during periods of rising mortgage interest rates. However, this may not always be the case.

We may reinvest principal repayments at a yield that is lower or higher than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets. Premiums or discounts associated with the purchase of agency RMBS and non-agency RMBS of higher credit quality are amortized or accreted into interest income over the projected lives of the securities, including contractual payments and estimated prepayments using the effective interest method. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate published prepayment data for similar securities, market consensus and current market conditions. If the actual prepayment experienced differs from our estimate of prepayments, we will be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.

Spread Risk

When the market spread between the yield on our RMBS and benchmark interest rates widens, our net book value could decline if the value of our RMBS falls by more than the offsetting fair value increases on our hedging instruments, creating what we refer to as "spread risk" or "basis risk". The spread risk associated with our agency and non-agency RMBS and the resulting fluctuations in fair value of these securities can occur independent of changes in benchmark interest rates and may relate to other factors impacting the mortgage and fixed income markets, such as actual or anticipated monetary policy actions by the Fed, market liquidity, or changes in required rates of return on different assets. Consequently, while we use interest rate swaps and other supplemental hedges to attempt to protect against moves in interest rates, such instruments typically will not protect our net book value against spread risk.

The table below quantifies the estimated changes in the fair value of our investment portfolio (including derivatives and other securities used for hedging purposes) and in our net asset value should spreads between our mortgage assets and benchmark interest rates go up or down by 10 and 25 basis points. These estimated impacts of spread changes are in addition to our sensitivity to interest rate shocks included in the above interest rate sensitivity table. The table below assumes a spread duration of 5.5 years based on interest rates and RMBS prices as of both June 30, 2014 and December 31, 2013. However, our portfolio's sensitivity of mortgage spread changes will vary with changes in interest rates and will generally increase as interest rates rise and prepayments slow. Additionally, we have limited transparency into the underlying investment and hedge portfolios of the other agency mortgage REITs in which we invest.



RMBS Spread Sensitivity ⁽¹⁾
	Percentage Change in Projected
Change in RMBS Spread	Portfolio Market Value ^{(2) (3)}		Net Asset Value ^{(2) (4)}
June 30, 2014
-25 basis points	1.2	%	7.1	%
-10 basis points	0.5	%	2.8	%
+10 basis points	(0.5	)%	(2.8	)%
+25 basis points	(1.2	)%	(7.1	)%
December 31, 2013
-25 basis points	1.2	%	6.2	%
-10 basis points	0.5	%	2.5	%
+10 basis points	(0.5	)%	(2.5	)%
+25 basis points	(1.2	)%	(6.2	)%

————————


⁽¹⁾	Spread sensitivity is derived from models that are dependent on inputs and assumptions provided by third parties as well as by our Manager, and assumes there are no changes in interest rates and a static portfolio. Actual results could differ materially from these estimates.

⁽²⁾Includes the effect of derivatives and other instruments used for hedging purposes.

⁽³⁾Estimated dollar change in portfolio market value expressed as a percentage of the total fair value of our investment portfolio as of such date.


⁽⁴⁾	Estimated dollar change in net asset value expressed as a percentage of stockholders' equity as of such date.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings through repurchase agreements. Our assets that are pledged to secure repurchase agreements are agency and non-agency RMBS and cash. As of June 30, 2014, we had unrestricted cash and cash equivalents of $200.0 million and unpledged securities of approximately $393.0 million, excluding unsettled purchases of securities, available to meet margin calls on our repurchase agreements, derivative instruments and for other corporate purposes. However, should the value of our securities pledged as collateral or the value of our derivative instruments suddenly decrease, margin calls relating to our repurchase and derivative agreements could increase, causing an adverse change in our liquidity position. Further, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

In addition, we may utilize TBA dollar roll transactions as a means of acquiring and financing purchases of agency RMBS. Under certain economic conditions we may be unable to roll our TBA dollar roll transactions prior to the settlement date and we may have to take physical delivery of the underlying securities and settle our obligations for cash, which could negatively impact our liquidity position, result in defaults or force us to sell assets under adverse conditions.

Extension Risk

The projected weighted-average life and the duration (or interest rate sensitivity) of our investments is based on our Manager’s assumptions regarding the rates at which borrowers will prepay or default on the underlying mortgage loans. In general, we use interest rate swaps to help manage our funding cost on our investments in the event that interest rates rise. These swaps allow us to reduce our funding exposure on the notional amount of the swap for a specified period of time by establishing a fixed rate to pay in exchange for receiving a floating rate that generally tracks our financing costs under our repurchase agreements.

However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets generally extends. This could have a negative impact on our results from operations, as our interest rate swap maturities are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our securities collateralized by fixed rate mortgages to decline by more than otherwise would be the case while most of our hedging instruments (with the exception of short TBA mortgage positions, interest-only securities and certain other supplemental

hedging instruments) would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

Credit Risk

We are exposed to credit risk related to our non-agency investments, certain derivative transactions, and our collateral held by funding and derivative counterparties. We accept credit exposure at levels we deem prudent as an integral part of our diversified investment strategy. Therefore, we may retain all or a portion of the credit risk on our non-agency investments. We seek to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, sale of assets where we have identified negative credit trends and the use of various types of credit enhancements. We may also use non-recourse financing, which limits our exposure to credit losses to the specific pool of mortgages subject to the non-recourse financing. Our overall management of credit exposure may also include the use of credit default swaps or other financial derivatives that we believe are appropriate. Additionally, we intend to vary the percentage mix of our non-agency mortgage investments and agency mortgage investments in an effort to actively adjust our credit exposure and to improve the risk/return profile of our investment portfolio. Our credit risk related to certain derivative transactions is largely mitigated through daily adjustments to collateral pledged based on changes in market value and we limit our counterparties to major financial institutions with acceptable credit ratings. There is no guarantee that our efforts to manage credit risk will be successful and we could suffer significant losses if credit performance is worse than our expectations or if economic conditions worsen.

Inflation Risk

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Further, our consolidated financial statements are prepared in accordance with GAAP and our distributions are determined by our Board of Directors based primarily on our net income as calculated for income tax purposes. In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934, as amended (the "Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no changes in our "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our fiscal quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. Neither we, nor any of our consolidated subsidiaries, are currently subject to any material litigation, nor to our knowledge, is any material litigation threatened against us or any consolidated subsidiary.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, except as described below.

You should carefully consider the risks described below and all other information contained in this interim report on Form

10-Q, including our interim consolidated financial statements and the related notes thereto before making a decision to purchase

our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not

presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

We may be subject to representation and warranty risk and counterparty exposure risk in connection with our acquisition of MSR and this risk could adversely impact our financial performance.

When engaging in MSR acquisitions, we typically acquire MSR subject to existing representations and warranties made to the applicable investor (including, without limitation, the GSEs) regarding, among other things, the origination and prior servicing of those mortgage loans, as well as future servicing practices following our acquisition of such MSR. If such representations and warranties are inaccurate, we may be obligated to repurchase certain mortgage loans, which may result in a loss, or indemnify the applicable investor for any losses suffered as a result of the origination or prior servicing of the mortgage loans. As such, the applicable investor will have direct recourse to us for such origination and / or prior servicing issues. Even if we obtain representations and warranties from the loan originator or other parties from whom we acquired the MSR, they may not correspond with the representations and warranties we make or may otherwise not protect us from losses. For example, if representations and warranties we obtain from those parties do not exactly align with the representations and warranties we make, or if the representations and warranties made to us are not enforceable or if we cannot collect damages for a breach (e.g., due to the financial condition of the party that made the representation or warranty to us), we may incur losses that could adversely impact our financial performance.

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.

Item 6. Exhibits



Exhibit No.		Description
*3.1		American Capital Mortgage Investment Corp. Articles of Amendment and Restatement, incorporated herein by reference to Exhibit 3.1 to Form 10-Q for the quarter ended September 30, 2011 (File No. 001-35260), filed November 14, 2011.

*3.2		American Capital Mortgage Investment Corp. Amended and Restated Bylaws, as amended by Amendment No. 1, incorporated herein by reference to Exhibit 3.2 to Amendment No. 4 to Form S-11 (Registration Statement No. 333-173238), filed July 29, 2011.

*3.3		Articles Supplementary of 8.125% Series A Cumulative Redeemable Preferred Stock, incorporated herein by reference to Exhibit 3.3 to Form 8-A (File No. 001-35260), filed May 16, 2014.

*4.1		Form of Certificate for Common Stock, incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to Form S-11 (Registration Statement No. 333-173238), filed July 20, 2011.

*4.2		Instruments defining the rights of holders of securities: See Article VI of our Articles of Amendment and Restatement, incorporated herein by reference to Exhibit 3.1 of Form 10-Q for the quarter ended September 30, 2011 (File No. 001-35260), filed November 14, 2011.

*4.3		Instruments defining the rights of holders of securities: See Article VII of our Amended and Restated Bylaws, as amended by Amendment No. 1, incorporated herein by reference to Exhibit 3.2 to Amendment No. 4 to Form S-11 (Registration Statement No. 333-173238), filed July 29, 2011.

*4.4		Form of certificate representing the 8.125% Series A Cumulative Redeemable Preferred Stock, incorporated herein by reference to Exhibit 4.1 to Form 8-A (File No. 001-35260), filed May 16, 2014.

†*10.1		American Capital Mortgage Investment Corp. Amended and Restated Equity Incentive Plan, incorporated herein by reference to Appendix 1 to Schedule 14A (File No. 001-35260), filed March 18, 2014.

†10.2		Form of Restricted Stock Unit Agreement for independent directors, filed herewith.

31.1		Certification of CEO Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32		Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

______________________

* Previously filed

** This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K.

† Management contract or compensatory plan or arrangement

SIGNATURES

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



American Capital Mortgage Investment Corp.

By:		/s/ MALON WILKUS
		Malon Wilkus
		Chief Executive Officer and Chair of the Board

Date: August 7, 2014

MTGE Investment Corp. - FORM 10-Q - August 7, 2014

Attached files

MTGE Investment Corp. Reports