MTGE Investment Corp. - FORM 10-K

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - MTGE Investment Corp.	Financial_Report.xls
EX-32 - EXHIBIT 32 - MTGE Investment Corp.	mtge12312014ex32.htm
EX-24 - EXHIBIT 24 - MTGE Investment Corp.	mtge12312014ex24.htm
EX-31.2 - EXHIBIT 31.2 - MTGE Investment Corp.	mtge12312014ex312.htm
EX-31.1 - EXHIBIT 31.1 - MTGE Investment Corp.	mtge12312014ex311.htm
EX-12.1 - EXHIBIT 12.1 - MTGE Investment Corp.	mtge12312014ex121.htm
EX-23 - EXHIBIT 23 - MTGE Investment Corp.	mtge12312014ex23.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



þ	ANNUAL 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 year ended December 31, 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)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class		Name of each exchange on which registered
Common Stock, $0.01 par value per share		The NASDAQ Global Select Market
8.125% Series A Cumulative Redeemable Preferred Stock		The NASDAQ Global Select Market

Securities registered pursuant to section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ. No ¨.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨. No þ.

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 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 þ. No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ. No ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 the definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ		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. þ

As of June 30, 2014, the aggregate market value of the Registrant's common stock held by non-affiliates of the Registrant was approximately $886.2 million based upon the closing price of the Registrant's common stock of $20.02 per share as reported on The NASDAQ Global Select Market on that date. (For this computation, the Registrant has excluded the market value of all shares of its common stock reported as beneficially owned by executive officers and directors of the Registrant and certain other stockholders; such an exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the Registrant.)

DOCUMENTS INCORPORATED BY REFERENCE. The Registrant's definitive proxy statement for the 2015 Annual Meeting of Shareholders is incorporated by reference into certain sections of Part III herein. Certain exhibits previously filed with the Securities and Exchange Commission are incorporated by reference into Part IV of this report.

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of January 31, 2015 was 51,164,902.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

2014 ANNUAL REPORT ON FORM 10K

TABLE OF CONTENTS



PART I.

Item 1.	Business	2
Item 1A.	Risk Factors	18
Item 1B.	Unresolved Staff Comments	45
Item 2.	Properties	45
Item 3.	Legal Proceedings	45
Item 4.	Mine Safety Disclosures	45

PART II.

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	46
Item 6.	Selected Financial Data	49
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	52
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	92
Item 8.	Financial Statements and Supplementary Data	96
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	133
Item 9A.	Controls and Procedures	133
Item 9B.	Other Information	134

PART III.

Item 10.	Directors, Executive Officers and Corporate Governance	135
Item 11.	Executive Compensation	135
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	135
Item 13.	Certain Relationships and Related Transactions, and Director Independence	135
Item 14.	Principal Accountant Fees and Services	135

PART IV.

Item 15.	Exhibits and Financial Statement Schedules	136

Signatures		138

PART I

Item 1. Business

Our Company

American Capital Mortgage Investment Corp. ("MTGE", the "Company", "we", "us", and "our") was 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 the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or by a U.S. Government agency, such as the 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 and GSE credit risk transfer securities ("CRT"), which may incur credit losses based upon the performance of referenced mortgage loans. Non-agency mortgage investments may also include prime and non-prime residential mortgage loans. Other mortgage-related investments may include mortgage servicing rights ("MSR"), mortgage REIT equity securities, commercial mortgage-backed securities ("CMBS"), commercial mortgage loans and mortgage-related derivatives. Our subsidiary, Residential Credit Solutions, Inc. ("RCS") has approvals from Fannie Mae, Freddie Mac, and Ginnie Mae to hold and manage MSR and residential mortgage loans.

We operate so as to qualify 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 qualify as a REIT, we will generally not be subject to U.S. Federal or state corporate taxes on our REIT taxable income to the extent that we distribute all of our annual REIT taxable income to our stockholders.

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 Targeted Investments

We may invest in, finance and manage mortgage-related investments, which we define as agency RMBS, non-agency mortgage investments and other mortgage-related investments, including the principal assets set forth in each of the following asset classes:

Agency RMBS

•

Residential mortgage pass-through certificates. Residential mortgage pass-through certificates are securities representing interests in "pools" of mortgage loans secured by residential real property where payments of both interest and principal on the securities are made monthly to holders of the security, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. In general, mortgage pass-through certificates distribute cash flows from underlying collateral on a pro rata basis among certificate holders. The payment of principal and interest on these securities is guaranteed by Ginnie Mae or a GSE.

•

CMOs. CMOs are securities that are structured instruments representing interests in agency residential pass-through certificates. CMOs consist of multiple classes of securities, with each class having specified characteristics, including stated maturity dates, weighted average lives and rules governing principal and interest distribution. Monthly payments of interest and principal, including prepayments, are typically returned to different classes based on rules described in the trust documents. Principal and interest payments may also be divided between holders of different securities in the CMO and some securities may only receive interest payments while others receive only principal payments.

The agency RMBS that we acquire provide funds for mortgage loans made to residential homeowners. These securities generally represent interests in pools of mortgage loans made by mortgage bankers, commercial banks, savings and loan institutions and other mortgage lenders. These pools of mortgage loans are assembled for sale to investors, such as us, by various government-related or private organizations.

Agency RMBS differ from other forms of traditional debt securities, which normally provide for periodic payments of interest in fixed amounts with principal payments at maturity or on specified call dates. Instead, agency RMBS provide for a monthly payment, which may consist of both interest and principal. In effect, these payments are a "pass-through" of the monthly interest and scheduled and unscheduled principal payments (referred to as "prepayments") made by the individual borrower on the mortgage loans, net of any fees paid to the issuer, servicer or guarantor of the securities.

The investment characteristics of agency RMBS differ from those of traditional fixed-income securities. Major differences include the payment of interest and principal on the securities on a more frequent schedule, as described above, and the possibility that principal may be prepaid, without penalty, at par at any time due to prepayments on the underlying mortgage loans. These differences can result in significantly greater price and yield volatility than is the case with traditional fixed-income securities.

Various factors affect the rate at which mortgage prepayments occur, including changes in housing prices, changes in interest rates, general economic conditions, defaults on the underlying mortgages, the age of the mortgage loans, the size of the loans, the loan-to-value ratios of the mortgages, the locations of the properties and social and demographic conditions. Additionally, changes to GSE guarantee fees, 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 loans from our securities can materially impact the rate of prepayments. Generally, prepayments on agency RMBS increase during periods of declining mortgage interest rates and decrease during periods of rising mortgage interest rates, though this may not always be the case. We may reinvest principal repayments at a yield that is higher or lower than the yield on the repaid investment, thus affecting our net interest income by altering the average yield on our assets.

When interest rates are declining, the value of agency RMBS with prepayment options may not increase as much as other fixed income securities or could even decrease. The rate of prepayments on underlying mortgages affect the price and volatility of agency RMBS and may have the effect of shortening or extending the duration of the security beyond what was anticipated at the time of purchase. When interest rates rise, our holdings of agency RMBS may experience reduced returns if the owners of the underlying mortgages pay off their mortgages slower than anticipated. This could cause the prices of our mortgage assets to fall more than we anticipated and for our hedge portfolio to underperform relative to the decline in the value of our mortgage assets, thus reducing our net book value. This is generally referred to as "extension risk".

Payments of principal and interest on agency RMBS, although not the market value of the securities themselves, are guaranteed either by the full faith and credit of the United States, such as those issued by Ginnie Mae, or by a GSE, such as those issued by Fannie Mae or Freddie Mac.

Agency RMBS are collateralized by pools of fixed-rate mortgage loans ("FRMs"), adjustable-rate mortgage loans ("ARMs") and hybrid ARMs. Hybrid ARMs are mortgage loans that have interest rates that are fixed for an initial period

(typically three, five, seven or 10 years) and, thereafter, reset at regular intervals subject to interest rate caps. Our allocation of investments among securities collateralized by FRMs, ARMs or hybrid ARMs depends on our Manager's assessment of the relative value of the securities, which is based on numerous factors including, but not limited to, expected future prepayment trends, supply and demand, costs of financing, costs of hedging, expected future interest rate volatility and the overall shape of the U.S. Treasury and interest rate swap yield curves.

The types of residential pass-through certificates in which we invest, or which may comprise the CMOs in which we may invest, are described below.

Freddie Mac and Fannie Mae

We invest in agency RMBS issued by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac are stockholder-owned corporations chartered by Congress with a public mission to provide liquidity, stability, and affordability to the U.S. housing market. Fannie Mae and Freddie Mac are currently regulated by the Federal Housing Finance Agency ("FHFA"), the U.S. Department of Housing and Urban Development ("HUD"), the U.S. Securities and Exchange Commission ("SEC"), and the U.S. Department of the Treasury ("U.S. Treasury"), and are currently operating under the conservatorship of FHFA. The U.S. Treasury has agreed to support the continuing operations of Fannie Mae and Freddie Mac with any necessary capital contributions while in conservatorship. However, the U.S. Government does not guarantee the securities or other obligations of Fannie Mae or Freddie Mac.

Fannie Mae and Freddie Mac operate in the secondary mortgage market. They purchase residential mortgage loans and mortgage-related securities from primary mortgage market institutions, such as commercial banks, savings and loan associations, mortgage banking companies, seller/servicers, securities dealers and other investors. Through the mortgage securitization process, they package the purchased mortgage loans into guaranteed RMBS for sale to investors, such as us, in the form of pass-through certificates and guarantee the payment of principal and interest on the securities in exchange for guarantee fees. The underlying loans must meet certain underwriting standards established by Fannie Mae and Freddie Mac (referred to as "conforming loans") and may be fixed or adjustable rate loans with original terms to maturity generally up to 40 years.

Ginnie Mae

Ginnie Mae is a wholly-owned corporate instrumentality of the United States within HUD. Ginnie Mae guarantees the timely payment of the principal and interest on certificates that represent an interest in a pool of mortgages insured by the FHA or partially guaranteed by the Department of Veterans Affairs and other loans eligible for inclusion in mortgage pools underlying Ginnie Mae certificates. Section 306(g) of the Housing Act provides that the full faith and credit of the United States is pledged to the payment of all amounts which may be required to be paid under any guaranty by Ginnie Mae. At present, most Ginnie Mae certificates are backed by single-family mortgage loans.

Non-Agency Mortgage Investments

•

Non-agency securities. Non-agency RMBS are securities backed by residential mortgages, for which the payment of principal and interest is not guaranteed by a GSE or government agency. Instead, a private institution such as a commercial bank will package residential mortgage loans and securitize them through the issuance of RMBS. Non-agency RMBS are often referred to as private label RMBS. Non-agency RMBS may benefit from credit enhancement derived from structural elements, such as subordination, overcollateralization or insurance. Non-agency securities also include CRT, which may incur credit losses. As such, non-agency securities can carry a significantly higher level of credit exposure relative to the credit exposure of agency RMBS. We may purchase highly-rated instruments that benefit from credit enhancement or non-investment grade instruments that absorb credit risk. We focus primarily on non-agency securities where the underlying mortgages are secured by residential properties within the United States. Non-agency securities are backed by residential mortgages that can be comprised of prime mortgage or non-prime mortgage loans.


•	Prime mortgage loans. Prime mortgage loans are residential mortgage loans that generally conform to the underwriting guidelines of a U.S. Government agency or a GSE but that do not carry any credit guarantee from either a U.S. Government agency or a GSE. Jumbo prime mortgage loans are prime mortgage loans that conform to such underwriting guidelines except with respect to maximum loan size.


•	Non-prime mortgage loans. Non-prime mortgage loans are residential mortgage loans that do not meet all of the underwriting guidelines of a U.S. Government agency or a GSE. Consequently, these loans may carry higher credit risk than prime mortgage loans. Non-prime mortgage loans may allow borrowers to qualify for a mortgage loan

with reduced or alternative forms of documentation. This category includes loans commonly referred to as alternative A-paper ("Alt-A") or as subprime. Alt-A mortgage loans are considered riskier than prime mortgage loans and less risky than sub-prime mortgage loans. They are typically characterized by borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios and include a higher percentage of investment properties. Subprime mortgage loans are considered to be of the lowest credit quality. These loans may also include option-ARM loans, which contain a feature providing the borrower the option, within certain constraints, to make lesser payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances.

Other Mortgage-Related Investments

•

Mortgage servicing rights. MSR represent the right to service mortgage loans, which involves activities such as collecting mortgage payments, setting aside taxes and insurance premiums in escrow, and forwarding interest principal payments to the mortgage lender. In return for providing these services, the holder of an MSR is entitled to receive a servicing fee generally measured as a specified number of basis points of the serviced loan's principal balance. We may invest in MSR associated with loans that are related to either agency or non-agency securities.

•

Commercial mortgage-backed securities. CMBS are securities that are structured utilizing collateral pools comprised of commercial mortgage loans. CMBS can be structured as pass-through securities, where the cash flows generated by the collateral pool are passed on pro rata to investors after netting servicer or other fees, or where cash flows are distributed to numerous classes of securities following a predetermined waterfall, which may give priority to selected classes while subordinating other classes. We may invest across the capital structure of these securities, from debt investments with investment grade ratings from one or more nationally recognized rating agencies to unrated equity tranches. We intend to focus on CMBS where underlying collateral is secured by commercial properties located within the United States.

•

Commercial mortgage loans. Commercial mortgage loans are mortgage loans secured by commercial real property with either fixed or floating interest rates and various other terms. These investments may include first or second lien loans or subordinated interests in such loans. In addition, such mortgage loans may also have short terms and serve as bridge financing for the acquisition, construction, or redevelopment of a property. We intend to focus on mortgage loans secured by commercial properties located within the United States.

•

Mortgage-related derivatives. As part of our investment and risk management strategy, we may enter into derivative transactions as a method of enhancing our risk/return profile and/or hedging existing or emerging risks within our investment portfolio. These transactions may include, but are not limited to, buying or selling forward positions and credit default swaps. Our Manager's implementation of this strategy is based upon overall market conditions, the level of volatility in the mortgage market, size of our investment portfolio and our qualification as a REIT.


•	Other mortgage-related investments. Other mortgage-related investments may include mortgage REIT equity securities, GSE credit risk transfer securities, excess interest-only instruments and other investments that may arise as the mortgage market evolves.

Investment in Residential Credit Solutions, Inc.

On November 27, 2013, we acquired RCS, a fully-licensed mortgage servicer based in Fort Worth, Texas. RCS has approvals from Fannie Mae, Freddie Mac and Ginnie Mae and the requisite state licenses to hold and manage MSR as well as residential mortgage loans, or whole loans. As a result of the RCS acquisition, we are able to invest directly in MSR and whole loans and, therefore expand our ability to invest in our targeted investment classes. As of December 31, 2014, RCS managed a servicing portfolio of approximately 66,000 loans, representing almost $14 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 taxable REIT subsidiary ("TRS"), and therefore RCS is subject to corporate income tax on its earnings.

Investment Methods

We purchase RMBS either in initial offerings or on the secondary market through broker-dealers or similar entities. We may also enter into arrangements with originators and intermediaries to source collateral for RMBS.

We utilize to-be-announced forward contracts ("TBAs") in order to invest in agency RMBS or to hedge our investments. Pursuant to these TBAs, we agree to purchase, 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 may also choose, prior to settlement, to move the settlement of these securities out to a later date by entering into an offsetting position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously entering into a similar TBA contract for a later settlement date, which is commonly collectively referred to as a "dollar roll" transaction.

We may invest directly in non-agency residential mortgage loans (prime mortgage loans and non-prime mortgage loans) and MSR through direct purchases of loans and MSR from mortgage originators and through purchases of loans and MSR on the secondary market. We may also enter into purchase agreements for loans and MSR with a number of originators and intermediaries, including mortgage bankers, commercial banks, savings and loan associates, home builders, credit unions and other mortgage conduits. We intend to invest primarily in mortgage loans secured by, and MSR for, properties within the United States.

Our Manager is responsible for making portfolio allocation decisions which are guided by our intent to provide attractive risk-adjusted returns over the long term through the distribution of quarterly dividends and net book value appreciation, while continuing to qualify as a REIT, and to remain exempt from the registration requirements of the Investment Company Act. Our Manager's decisions depend on prevailing market conditions and may change over time in response to its view of opportunities available in different interest rate, economic and credit environments. As a result, we cannot predict the percentage of our assets that will be invested in any of our target asset classes at any given time. We may change our strategy and policies without a vote of our stockholders. We believe that the diversification of our investment portfolio, our Manager's expertise investing in our target assets and the flexibility of our strategy will enable us to achieve attractive risk-adjusted returns under a variety of market conditions and economic cycles.

Our Active Portfolio Management Strategy

Our Manager employs on our behalf an active management strategy to achieve our principal objectives of generating attractive risk-adjusted returns and preserving our net book value. Our active management strategy involves buying and selling investments, including agency and non-agency securities, MSR, prime and non-prime residential loans and other mortgage-related investments, based on our Manager's continual assessment of the relative value and risk and return of these investments and our ability to hedge a portion of our exposure to market risks. Therefore, the composition of our portfolio and hedging strategies will vary as our Manager believes changes to market conditions, risks and valuations warrant. Consequently, we may experience investment gains or losses when we sell securities that our Manager no longer believes will provide attractive risk-adjusted returns or when our Manager believes more attractive alternatives are available elsewhere in the mortgage-related investment market. We may also experience gains or losses as a result of our hedging strategies. Our leverage may also fluctuate as we pursue our active management strategy.

Investment Committee and Investment Guidelines

The investment committee established by our Manager consists of Malon Wilkus, John Erickson, Samuel Flax, Gary Kain and Thomas McHale, each of whom is an officer of our Manager. The role of the investment committee is to monitor the performance of our Manager with respect to our investment guidelines and investment strategy, to monitor our investment portfolio and to monitor our compliance requirements related to our intention to qualify as a REIT and to remain exempt from registration as an investment company under the Investment Company Act. The investment committee meets as frequently as it believes is required to maintain prudent oversight of our investment activities. Our Board of Directors receives an investment report and reviews our investment portfolio and related compliance with the investment guidelines on at least a quarterly basis. Our Board of Directors does not review or approve individual investments, but receives notification in the event that we operate outside of our operating policies or investment guidelines.

Our Board of Directors has approved the following investment guidelines:


•	no investment shall be made that would cause us to fail to qualify as a REIT for Federal income tax purposes;


•	no investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act;


•	prior to entering into any proposed investment transaction with American Capital or any of its affiliates, a majority of our independent directors must approve the terms of the transaction; and


•	our investment portfolio shall not consist of predominantly whole-pool agency securities for so long as we are managed by an affiliate of American Capital.

The investment committee may change these investment guidelines at any time with the approval of our Board of Directors (which must include a majority of our independent directors), but without any approval from our stockholders.

Our Financing Strategy

As part of our investment strategy, we prudently leverage our investment portfolio to increase potential returns to our stockholders. We may finance our investments, subject to market conditions, through a combination of financing arrangements, including, but not limited to, repurchase agreements, warehouse facilities, securitizations, term financing facilities, MSR and servicing advance financing facilities and dollar roll transactions. We primarily finance our investments by entering into master repurchase agreements. A repurchase transaction acts as a financing arrangement under which we effectively pledge our investment assets as collateral to secure a loan. Our borrowings pursuant to these repurchase transactions generally have maturities that range from 30 to 180 days, but may have maturities of fewer than 30 days or more than one year.

We had master repurchase agreements with 31 financial institutions as of December 31, 2014. The terms of the repurchase transaction borrowings under our master repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association ("SIFMA") with respect to repayment, margin requirements and the segregation of all securities we have initially sold under the repurchase transaction. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions differ for each of our lenders and certain of these terms are not determined until we engage in a specific repurchase transaction.

Our leverage may vary periodically depending on market conditions, our portfolio composition and our Manager's assessment of risks and returns. We finance different asset classes through the most efficient means available for a particular asset class at any given time. Therefore, our overall leverage is highly dependent on our investment portfolio composition. Our Manager's selection of funding alternatives is restricted in that we may not enter into funding transactions that would cause us to fail to qualify as a REIT for Federal income tax purposes.

Based on the current financing market for RMBS, which is predominantly short-term repurchase financing, we operate our agency mortgage investment portfolio within a leverage range of six to twelve times the amount of our stockholders' equity and our non-agency mortgage investment portfolio within a leverage range of one to six times the amount of our stockholders' equity. Within each of these asset classes, the level and availability of financing are influenced by the specific security or loan being financed. Our other mortgage-related investments may include certain derivative products, which in many instances may be implicitly leveraged by their structure and, as such, the appropriate financing for such investments will be evaluated on a case-by-case basis. As the financing market evolves, we expect our leverage ranges to change, and they may well increase. Such changes will be discussed with the investment committee and our Board of Directors but do not require stockholder approval.

We may finance the acquisition of agency RMBS by entering into TBA dollar roll transactions in which we would sell a TBA contract for current month settlement and simultaneously purchase a similar, but not identical, TBA contract for a forward settlement date. Prior to the forward settlement date, we may choose to roll the position out to a later date by entering into an offsetting TBA position, net settling the paired off positions for cash, and simultaneously entering into a similar TBA contract for a later settlement date. In such transactions, the TBA contract purchased for a forward settlement date is priced at a discount to the TBA contract sold for settlement/pair off 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." Consequently, dollar roll transactions represent a form of off-balance sheet financing. In evaluating our overall leverage at risk, our Manager considers both our on-balance and off-balance sheet financing.

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 these assets generally does not move in tandem with the interest rates that we pay on our funding 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 that principal at potentially 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.

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 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.

Our Manager

We are externally managed and advised by our Manager pursuant to the terms of a management agreement. Our Manager is an indirect subsidiary of American Capital Asset Management, LLC, which is a portfolio company of American Capital, a publicly-traded private equity firm and global asset manager (NASDAQ: ACAS). American Capital, both directly and through its asset management business, originates, underwrites and manages investments in private equity, leveraged finance, real estate and structured products. Founded in 1986, American Capital had $80 billion of total assets under management and eight offices in the United States and Europe as of December 31, 2014.

The sister company of our Manager is the external manager of American Capital Agency Corp. (NASDAQ: AGNC), a publicly-traded REIT that invests in agency mortgage investments. In connection with the initial public offering of American Capital Agency Corp., American Capital committed not to sponsor an investment vehicle that invests predominantly in agency RMBS that represent undivided beneficial interests in a group or pool of one or more mortgages, or whole-pool agency RMBS, for so long as the current manager of American Capital Agency Corp. or another affiliate of American Capital serves as the manager of American Capital Agency Corp. Thus, our investment portfolio is expected to consist of assets that are not predominantly whole-pool agency RMBS for so long as we are managed by an affiliate of American Capital.

Our Manager is responsible for administering our business activities and day-to-day operations, subject to the supervision and oversight of our Board of Directors. All of our officers and the members of our mortgage investment team and other support personnel, other than employees of RCS, are employees of either the parent company of our Manager or American Capital. Because neither we nor our Manager have any employees, our Manager has entered into an administrative services agreement with American Capital and the parent company of our Manager, pursuant to which our Manager has access to their employees, infrastructure, business relationships, management expertise, information technologies, capital raising capabilities, legal and compliance functions, and accounting, treasury and investor relations capabilities, to enable our Manager to fulfill all of its responsibilities under the management agreement. We are not a party to the administrative services agreement.

Malon Wilkus is our Chair and Chief Executive Officer and the Chief Executive Officer of our Manager and its parent company, American Capital Mortgage Management, LLC. Mr. Wilkus is also the Chair and Chief Executive Officer of American Capital Agency Corp. and the Chief Executive Officer of its manager, American Capital AGNC Management, LLC. In addition, Mr. Wilkus is the Chair and Chief Executive Officer of American Capital Senior Floating, Ltd. (NASDAQ: ACSF), a publicly-traded non-diversified closed-end investment management company. Mr. Wilkus is the founder of American Capital, and has served as its Chief Executive Officer and Chairman of the Board of Directors since 1986, except for the period from 1997 to 1998 during which he served as Chief Executive Officer and Vice Chairman of the Board of Directors. He also served

as President of American Capital from 2001 to 2008 and from 1986 to 1999. Mr. Wilkus has also been the Chairman of European Capital Limited, a European private equity and mezzanine fund, since its formation in 2005. Additionally, Mr. Wilkus is the Chief Executive Officer and President of American Capital Asset Management, LLC, which is the asset fund management portfolio company of American Capital. He has also served on the board of directors of over a dozen middle-market companies in various industries.

Gary Kain is the President of our Manager and also serves as our President and Chief Investment Officer, with primary oversight for all of our investments. He is also the President and Chief Investment Officer of American Capital Agency Corp. and the President of its manager, American Capital AGNC Management, LLC. Mr. Kain joined American Capital in January 2009 as a Senior Vice President and Managing Director and has served in various other roles with American Capital and its affiliates. Prior to joining American Capital, Mr. Kain served as Senior Vice President of Investments and Capital Markets of Freddie Mac from May 2008 to January 2009. He also served as Senior Vice President of Mortgage Investments & Structuring of Freddie Mac from February 2005 to April 2008, during which time he was responsible for managing all of Freddie Mac's mortgage investment activities for its $700 billion retained portfolio. From 2001 to 2005, Mr. Kain served as Vice President of Mortgage Portfolio Strategy at Freddie Mac. From 1995 to 2001, he served as head trader in Freddie Mac’s Securities Sales & Trading Group, where he was responsible for managing all trading decisions including REMIC structuring and underwriting, hedging all mortgage positions, income generation, and risk management. Prior to that, he served as a senior trader, responsible for managing the adjustable-rate mortgage and REMIC sectors.

John R. Erickson is our Executive Vice President and Chief Financial Officer and a member of our Board of Directors, and Executive Vice President and Treasurer of our Manager and American Capital Mortgage Management, LLC. Mr. Erickson is also the Executive Vice President and Chief Financial Officer and a member of the board of directors of American Capital Agency Corp. and the Executive Vice President and Treasurer of its manager, American Capital AGNC Management, LLC. In addition, he is the Executive Vice President and Chief Financial Officer of American Capital Senior Floating, Ltd. and the Executive Vice President and Treasurer of American Capital Asset Management, LLC. Mr. Erickson has also served as President, Structured Finance of American Capital since 2008 and as its Chief Financial Officer since 1998. From 1991 to 1998, Mr. Erickson was the Chief Financial Officer of Storage USA, Inc., a REIT formerly traded on the New York Stock Exchange (NYSE: SUS).

Samuel A. Flax is our Executive Vice President and Secretary and a member of our Board of Directors, and Executive Vice President, Chief Compliance Officer and Secretary of our Manager and American Capital Mortgage Management, LLC. Mr. Flax is also Executive Vice President and Secretary and a member of the board of directors of American Capital Agency Corp. and the Executive Vice President, Chief Compliance Officer and Secretary of its manager, American Capital AGNC Management, LLC. In addition, he is the Executive Vice President, Chief Compliance Officer and Secretary of American Capital Senior Floating, Ltd. and American Capital Asset Management, LLC. Mr. Flax has also served as the Executive Vice President, General Counsel, Chief Compliance Officer and Secretary of American Capital, Ltd. since January 2005. Mr. Flax was a partner in the corporate and securities practice group of the Washington, D.C. law firm of Arnold & Porter LLP from 1990 to January 2005. At Arnold & Porter LLP, he represented American Capital in raising debt and equity capital, advised the company on corporate, securities and other legal matters and represented the company in many of its investment transactions.

Peter J. Federico is the Senior Vice President and Chief Risk Officer of our Manager and also serves as our Senior Vice President and Chief Risk Officer. Mr. Federico is also the Senior Vice President and Chief Risk Officer of AGNC and its manager. He is primarily responsible for overseeing risk management activities for us and other funds managed by American Capital Mortgage Management, LLC’s subsidiaries. Mr. Federico joined the parent company of our Manager in May 2011. Prior to that, Mr. Federico served as Executive Vice President and Treasurer of Freddie Mac from October 2010 through May 2011, where he was primarily responsible for managing the company’s investment activities for its retained portfolio and developing, implementing and managing risk mitigation strategies. He was also responsible for managing Freddie Mac’s $1.2 trillion interest rate derivative portfolio and short and long-term debt issuance programs. Mr. Federico also served in a number of other capacities at Freddie Mac, including as Senior Vice President, Asset & Liability Management.

Christopher Kuehl is a Senior Vice President of our Manager and also serves as our Senior Vice President, Agency Portfolio Investments. Mr. Kuehl is also a Senior Vice President, Agency Portfolio Investments of AGNC and Senior Vice President of its manager, American Capital AGNC Management, LLC. Prior to joining the parent company of our Manager in August 2010, Mr. Kuehl served as Vice President of Mortgage Investments & Structuring of Freddie Mac. In this capacity, Mr. Kuehl was responsible for directing Freddie Mac’s purchases, sales, and structuring activities and structuring activities for all mortgage-backed securities ("MBS") products, including fixed-rate mortgages, ARMs and CMOs. Prior to joining Freddie Mac in 2000, Mr. Kuehl was a Portfolio Manager with TeleBanc/Etrade Bank.

Aaron Pas is a Senior Vice President of our Manager and also serves as our Senior Vice President, Non-Agency Portfolio Management. Mr. Pas joined the parent company of our Manager in March 2011. From 2003-2011, Mr. Pas worked at Freddie Mac, most recently as the Director of Non-Agency Portfolio Management, where he was primarily responsible for managing the firm’s non-agency residential securities portfolio.

The Management Agreement

We have entered into a management agreement with our Manager with a current renewal term through August 9, 2015 and automatic one-year extension options thereafter. The management agreement may only be terminated by either us or our Manager without cause, as defined in the management agreement, after the completion of the current renewal term, or the expiration of any automatic subsequent renewal term, provided that either party provides 180-days prior written notice of non-renewal of the management agreement. If we were not to renew the management agreement without cause, we must pay a termination fee on the last day of the applicable term, equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. We may only not renew the management agreement with or without cause with the consent of a majority of our independent directors. Our Manager is responsible for, among other things, performing all of our day-to-day functions, determining investment criteria in conjunction with our Board of Directors, sourcing, analyzing and executing investments, asset sales and financings and performing asset management duties.

In addition, we reimburse our Manager for expenses directly related to our operations incurred by our Manager, excluding employment-related expenses of our Manager, American Capital and its other affiliates who provide services to us pursuant to the management agreement.

Exemption from Regulation Under the Investment Company Act

We conduct our business so as not to become regulated as an investment company under the Investment Company Act, in reliance on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in "mortgages and other liens on and interest in real estate" or "qualifying real estate interests" and at least 80% of our assets in qualifying real estate interests and "real estate-related assets." In satisfying this 55% requirement, based on pronouncements of the SEC staff, we may treat agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate interests. The SEC staff has not issued guidance with respect to whole pool non-agency RMBS. Accordingly, based on our own judgment and analysis of the SEC's pronouncements with respect to agency whole pool certificates, we may also treat non-agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate interests. We may also treat whole mortgage loans that we acquire directly as qualifying real estate interests provided that 100% of the loan is secured by real estate when we acquire it and we have the unilateral right to foreclose on the mortgage. Although the SEC staff has not issued guidance with respect to investments in controlling classes of CMBS, we may also treat certain investments in the controlling classes of CMBS pools as qualifying real estate interests. We currently treat agency partial pool RMBS and non-agency partial pool RMBS as real estate-related assets.

Real Estate Investment Trust Requirements

We have elected to be taxed as a REIT under the Internal Revenue Code. As long as we qualify as a REIT, we generally will not be subject to Federal income taxes on our taxable income to the extent that we annually distribute all of our taxable income to stockholders. We believe that we have been organized and operate in such a manner as to qualify for taxation as a REIT.

Qualification and taxation as a REIT depends on our ability to meet on a continuing basis various qualification requirements imposed upon REITs by the Internal Revenue Code. Our ability to qualify as a REIT also requires that we satisfy certain asset tests, some of which depend upon the fair market values of assets that we own directly or indirectly, which may be subjective in nature. Accordingly, no assurance can be given that the actual results of our operations for any taxable year will satisfy such requirements for qualification and taxation as a REIT.

Taxation of REITs in General

Provided that we continue to qualify as a REIT, we will generally be entitled to a deduction for dividends that we pay and, therefore, will not be subject to Federal corporate income tax on our taxable income that is currently distributed to our stockholders. This treatment substantially eliminates the "double taxation" at the corporate and stockholder levels that generally results from investment in a domestic corporation. In general, the income that we generate is taxed only at the stockholder level upon a distribution of dividends to our stockholders.

As a REIT, we will nonetheless be subject to Federal tax under certain circumstances including the following:


•	We will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains.


•	We may be subject to the "alternative minimum tax" on our items of tax preference, including any deductions of net operating losses.


•	If we have net income from prohibited transactions, which are, in general, sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business, other than foreclosure property, such income will be subject to a 100% tax.


•	If we should fail to satisfy the 75% gross income test or the 95% gross income test, as discussed below, but nonetheless maintain our qualification as a REIT because we satisfy other requirements, we will be subject to a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.

•

If we should violate the asset tests (other than certain de minimis violations) or other requirements applicable to REITs, as described below, and yet maintain our qualification as a REIT because there is reasonable cause for the failure and other applicable requirements are met, we may be subject to a penalty tax. In that case, the amount of the penalty tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest corporate tax rate (currently 35%) if that amount exceeds $50,000 per failure.

•

If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a nondeductible 4% excise tax on the excess of the required distribution over the sum of (i) the amounts that we actually distributed, (ii) the amounts we retained and upon which we paid income tax at the corporate level, and (iii) any excess distributions from prior periods.


•	We may be required to pay monetary penalties to the Internal Revenue Service ("IRS") in certain circumstances, including if we fail to meet record keeping requirements intended to monitor our compliance with rules relating to the composition of a REIT's stockholders, as described below in "Requirements for Qualification-General."


•	A 100% tax may be imposed on transactions between us and a TRS (as described below), that do not reflect arm's-length terms.

•

If we acquire appreciated assets from a corporation that is not a REIT (i.e., a corporation taxable under subchapter C of the Internal Revenue Code) in a transaction in which the adjusted tax basis of the assets in our hands is determined by reference to the adjusted tax basis of the assets in the hands of the subchapter C corporation, we may be subject to tax on such appreciation at the highest corporate income tax rate then applicable if we subsequently recognize a gain on a disposition of any such assets during the ten-year period following their acquisition from the subchapter C corporation.


•	The earnings of our subsidiaries, including our TRS, are subject to Federal corporate income tax to the extent that such subsidiaries are subchapter C corporations and are not qualified REIT subsidiaries ("QRS").

Requirements for Qualification-General

The Internal Revenue Code defines a REIT as a corporation, trust or association:


1.	that is managed by one or more trustees or directors;


2.	the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest;


3.	that would be taxable as a domestic corporation but for its election to be subject to tax as a REIT;


4.	that is neither a financial institution nor an insurance company subject to specific provisions of the Internal Revenue Code;


5.	the beneficial ownership of which is held by 100 or more persons;


6.	in which, during the last half of each taxable year, not more than 50% in value of the outstanding stock is owned, directly or indirectly, by five or fewer "individuals" (as defined in the Internal Revenue Code to include specified tax-exempt entities); and


7.	which meets other tests described below, including with respect to the nature of its income and assets.

The Internal Revenue Code provides that conditions (1) through (4) must be met during the entire taxable year, and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a shorter taxable year. Our amended and restated articles of incorporation provides restrictions regarding the ownership and transfers of our stock, which are intended to assist us in satisfying the stock ownership requirements described in conditions (5) and (6) above.

To monitor compliance with the stock ownership requirements, we generally are required to maintain records regarding the actual ownership of our stock. To do so, we must demand written statements each year from the record holders of significant percentages of our stock pursuant to which the record holders must disclose the actual owners of the stock (i.e., the persons required to include our dividends in their gross income). We must maintain a list of those persons failing or refusing to comply with this demand as part of our records. We could be subject to monetary penalties if we fail to comply with these record-keeping requirements. If a stockholder fails or refuses to comply with the demands, the stockholder will be required by U.S. Treasury regulations to submit a statement with their tax return disclosing their actual ownership of our stock and other information.

The Internal Revenue Code provides relief from violations of the REIT gross income requirements, as described below under "Income Tests," in cases where a violation is due to reasonable cause and not to willful neglect, and other requirements are met, including the payment of a penalty tax that is based upon the magnitude of the violation. In addition, certain provisions of the Internal Revenue Code extend similar relief in the case of certain violations of the REIT asset requirements (see "Asset Tests" below) and other REIT requirements, again provided that the violation is due to reasonable cause and not willful neglect, and other conditions are met, including the payment of a penalty tax. If we fail to satisfy any of the various REIT requirements, there can be no assurance that these relief provisions would be available to enable us to maintain our qualification as a REIT, and, if such relief provisions are available, the amount of any resultant penalty tax could be substantial.

Effect of Taxable Subsidiaries

In general, we may jointly elect with a subsidiary corporation, whether or not wholly-owned, to treat such subsidiary corporation as a TRS. We generally may not own more than 10% of the securities of a taxable corporation, as measured by voting power or value, unless we and such taxable corporation elect to treat such corporation as a TRS. The separate existence of a TRS or other taxable corporation is not ignored for Federal income tax purposes. Accordingly, such entities generally are subject to corporate income tax on their earnings, which may reduce the cash flow that we and our subsidiaries generate in the aggregate, and may reduce our ability to make distributions to our stockholders.

For determining compliance with the "Income Tests" and "Asset Tests" applicable to REITs described below, the gross income and assets of TRS and other taxable subsidiaries are excluded. Instead, actual dividends paid to the REIT from such taxable subsidiaries, if any, are included in the REIT's gross income tests and the value of the REIT's net investment in such entities is included in the gross asset tests. Because the gross income and assets of a TRS or other taxable subsidiary corporations are excluded in determining compliance with the REIT requirements, we may use such entities to undertake indirectly activities that the REIT rules might otherwise preclude us from doing directly or through pass-through subsidiaries. For example, we may use our TRS or other taxable subsidiary corporations to conduct activities that give rise to certain categories of income or to conduct activities that, if conducted by us directly, could be treated in our hands as non-real estate related or prohibited transactions.

We jointly elected to treat two of our wholly-owned subsidiaries, American Capital Mortgage Investment TRS, LLC and Residential Credit Solutions, Inc., as TRS.

The TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The application of the TRS rules has not resulted in a limitation on the interest expense deduction of our TRS. Further, the rules impose a 100% excise tax on transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis. We intend that all of our transactions with our TRS will be conducted on an arm's-length basis.

Qualified REIT Subsidiaries

A QRS is any corporation in which we own 100% of such corporation’s outstanding stock and for which no election has been made to classify it as a TRS. As such, their assets, liabilities and income would generally be treated as our assets, liabilities and income for purposes of each of the below REIT qualification tests. We currently do not have a QRS.

Income Tests

In order to continue to qualify as a REIT, we must satisfy two gross income requirements on an annual basis.

At least 75% of our gross income for each taxable year, excluding gross income from sales of inventory or dealer property in "prohibited transactions" and certain hedging transactions, generally must be derived from investments relating to real property or mortgages on real property, including interest income derived from mortgage loans secured by real property (including, generally, agency RMBS and certain other types of MBS), "rents from real property," dividends received from other REITs, and gains from the sale of real estate assets, as well as specified income from temporary investments.

At least 95% of our gross income in each taxable year, excluding gross income from prohibited transactions and certain hedging transactions, must be derived from some combination of income that qualifies under the 75% gross income test described above, as well as other dividends, interest, and gains from the sale or disposition of stock or securities, which need not have any relation to real property.

Interest income constitutes qualifying mortgage interest for purposes of the 75% gross income test described above to the extent that the obligation upon which such interest is paid is secured by a mortgage on real property. If we receive interest income with respect to a mortgage loan that is secured by both real property and other property, and the highest principal amount of the loan outstanding during a taxable year exceeds the fair market value of the real property on the date that we acquired or originated the mortgage loan, the interest income will be apportioned between the real property and the other collateral, and our income from the arrangement will qualify for purposes of the 75% gross income test only to the extent that the interest is allocable to the real property. Even if a loan is not secured by real property, or is under-secured, the income that it generates may nonetheless qualify for purposes of the 95% gross income test.

We treat our investments in agency pass-through certificates whose principal and interest payments are guaranteed by a U.S. Government agency, such as Ginnie Mae, or a GSE as interests in grantor trusts for Federal income tax purposes. We treat these investments as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust. The interest on such mortgage loans is qualifying income for purposes of the 75% gross income test to the extent that the obligation is secured by real property, as discussed above. We also invest or intend to invest in CMOs representing interests in agency pass-through certificates, non-agency RMBS and CMBS. A majority of our investments in CMOs, non-agency RMBS and CMBS are interests in real estate mortgage investment conduits ("REMIC") for Federal income tax purposes. In the case of CMOs, non-agency RMBS and CMBS treated as interests in a REMIC, such interests generally qualify as real estate assets and income derived from REMIC interests generally are treated as qualifying income for purposes of the 75% and 95% gross income tests described above. If less than 95% of the assets of a REMIC are real estate assets, however, then only a proportionate part of our interest in the REMIC and income derived from the interest will qualify for purposes of the 75% gross income test. In addition, some REMIC securitizations include imbedded interest rate swap or cap contracts or other derivative instruments that potentially could produce non-qualifying income for the holder of the related REMIC securities. Some of our investments in CMOs and non-agency RMBS are debt securities issued by private issuers. Interests from private debt securities are qualifying income for the 95% gross income tests, but are not qualifying income for the 75% gross income test. We may also invest in credit linked notes issued by a GSE that are taxable as debt instruments. Interests from credit linked notes are qualifying income for the 95% gross income test, but are not qualifying income for the 75% gross income test. We expect that substantially all of our income from agency and non-agency RMBS, CMBS, GSE credit linked notes and other mortgage loans will be qualifying income for the REIT 95% gross income test, and more than 75% of our gross income will be qualifying income for the 75% gross income test. See below under "Asset Tests" for a discussion of the effect of such investments on our qualification as a REIT.

We purchase and sell agency RMBS through TBA contracts and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise, and may continue to do so in the future. While there is no direct authority with respect to the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that, for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBA contracts should be treated as gain

from the sale or disposition of the underlying agency RMBS. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such income is not qualifying income. If the IRS were to successfully challenge the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our income consists of income or gains from the disposition of TBAs.

We may directly or indirectly receive distributions from our TRS or other corporations that are not REITs or QRSs. These distributions generally are treated as dividend income to the extent of the earnings and profits of the distributing corporation. Such distributions will generally constitute qualifying income for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. Any dividends that we receive from a REIT, however, will be qualifying income for purposes of both the 95% and 75% gross income tests.

Any income or gain that we derive from instruments that hedge the risk of changes in interest rates will generally be excluded from both the numerator and the denominator for purposes of the 75% and 95% gross income test, provided that specified requirements are met, including the requirement that the instrument is entered into during the ordinary course of our business, the instrument hedges risks associated with indebtedness issued by us that is incurred to acquire or carry "real estate assets" (as described below under "Asset Tests"), and the instrument is properly identified as a hedge along with the risk that it hedges within prescribed time periods. Income and gain from all other hedging transactions will not be qualifying income for either the 95% or 75% gross income test.

Under The Housing and Economic Recovery Tax Act of 2008, the Secretary of the Treasury has been given broad authority to determine whether particular items of gain or income recognized after July 30, 2008 qualify or not under the 75% and 95% gross income tests, or are to be excluded from the measure of gross income for such purposes.

Asset Tests

At the close of each calendar quarter, we must also satisfy four tests relating to the nature of our assets.

At least 75% of the value of our total assets must be represented by some combination of "real estate assets," cash, cash items, U.S. Government securities, and, under some circumstances, stock or debt instruments purchased with new capital. For this purpose, real estate assets include some kinds of MBS and mortgage loans, as well as interests in real property and stock of other corporations that qualify as REITs. Assets that do not qualify for purposes of the 75% asset test are subject to the additional asset tests described below.


2.	The value of any one issuer's securities that we own may not exceed 5% of the value of our total assets.


3.	We may not own more than 10% of any one issuer's outstanding securities, as measured by either voting power or value. The 5% and 10% asset tests do not apply to securities of a TRS or QRS and the 10% asset test does not apply to "straight debt" having specified characteristics and to certain other securities described below.


4.	The aggregate value of all securities of all TRSs that we hold may not exceed 25% of the value of our total assets.

Our investments in agency pass-through certificates are treated as interests in grantor trusts for Federal income tax purposes and we are treated as owning an undivided beneficial ownership interest in the mortgage loans held by the grantor trust. Such mortgage loans generally qualify as real estate assets to the extent that they are secured by real property. Our investments in CMOs, non-agency RMBS and CMBS are generally treated as interests in REMICs for Federal income tax purposes. Such interests will generally qualify as real estate assets. However, if less than 95% of the assets of the REMIC are real estate assets, then only a proportionate part of our interest in the REMIC would qualify as a real estate asset. Our investments in non-agency RMBS and CMOs that are treated as privately issued debt securities are not qualifying assets for the 75% asset test, and such debt securities may be subject to quarterly 5% and 10% diversification tests. We expect that all of our privately issued debt securities will satisfy such tests at the end of each quarter. Our investments in GSE credit linked notes that are classified as debt securities are treated as government securities, and therefore, are qualifying assets for the 75% asset test.

We enter into sale and repurchase agreements under which we nominally sell certain of our investments to a counterparty and simultaneously enter into an agreement to repurchase the sold assets in exchange for a purchase price that reflects a financing charge. We believe that we would be treated for REIT asset and income test purposes as the owner of the collateral that are the subject of any such agreement, notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own such collateral during the term of the sale and repurchase agreement, in which case we could fail to qualify as a REIT.

As discussed above, we purchase and sell agency RMBS through TBAs and may continue to do so in the future. While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test, we treat our TBAs as qualifying assets for purposes of the REIT asset tests, based on an opinion of Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that, for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying agency RMBS. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets are not qualifying assets. If the IRS were to successfully challenge the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our assets consists of TBAs.

No independent appraisals have been obtained to support our conclusions as to the value of our total assets. Moreover, values of some assets, including instruments issued in securitization transactions, may not be susceptible to a precise determination, and values are subject to change in the future. Furthermore, the proper classification of an instrument as debt or equity for Federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT asset requirements. Accordingly, there can be no assurance that the IRS will not contend that our interests in our subsidiaries or in the securities of other issuers will not cause a violation of the REIT asset tests.

We may purchase mortgage loans. Revenue Procedure 2011-16, as modified by Revenue Procedure 2014-51, discusses modifications of mortgage loans (or interests in mortgage loans) which are held by a REIT, if either (1) the modifications were occasioned by a default on the loan or (2) the modification satisfies both of the following conditions: (a) based on all the facts and circumstances, the REIT or servicer of the loan (the "pre-modified loan") reasonably believes that there is a significant risk of default of the pre-modified loan upon maturity of the loan or at an earlier date, and (b) based on all the facts and circumstances, the REIT or servicer reasonably believes that the modified loan presents a substantially reduced risk of default, as compared with the pre-modified loan. Revenue Procedure 2011-16 provides that a REIT may treat a modification of a mortgage loan described therein as not being a new commitment to make or purchase a loan for purposes of apportioning interest on that loan between interest with respect to real property or other interest. The modification will also not be treated as a prohibited transaction. Further, with respect to the REIT asset test, the IRS will not challenge the REIT’s treatment of a loan as being in part a "real estate asset" if the REIT treats the loan as being a real estate asset in an amount equal to the lesser of (a) the value of the loan as determined under Treasury Regulations Section 1.856-3(a), or (b) the greater of (i) the current value of the real property securing the loan; or (ii) the loan value of the real property securing the loan as determined under Treasury Regulations Section 1.856-5(c) and Revenue Procedure 2014-51.

If we should fail to satisfy the asset tests at the end of a calendar quarter, such a failure would not cause us to lose our REIT qualification if we (1) satisfied the asset tests at the close of the preceding calendar quarter and (2) the discrepancy between the value of our assets and the asset requirements was not wholly or partly caused by an acquisition of non-qualifying assets, but instead arose from changes in the market value of our assets. If the condition described in (2) were not satisfied, we still could avoid disqualification by eliminating any discrepancy within 30 days after the close of the calendar quarter in which it arose or by making use of relief provisions described under "Failure to Qualify" below.

Annual Distribution Requirements

In order to qualify as a REIT, we are required to distribute dividends, other than capital gain dividends, to our stockholders in an amount at least equal to:

(a) the sum of

(1) 90% of our "REIT taxable income," computed without regard to our net capital gains and the deduction for dividends paid, and

(2) 90% of our net income after tax, if any, from foreclosure property, minus

(b) the sum of specified items of non-cash income.

We generally must make these distributions in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the year and if paid with or before the first regular dividend payment after such declaration.

To the extent that we distribute at least 90%, but less than 100%, of our REIT taxable income within the period described above, we will be subject to tax at the applicable corporate tax rates on the retained portion if there is no net operating loss carryover from prior periods available to offset such retained portion. We may elect to retain, rather than distribute, our net

long term capital gains and pay tax on such gains if required. In this case, we could elect for our stockholders to include their proportionate shares of such undistributed long term capital gains in income, and to receive a corresponding credit for their share of the tax that we paid. Our stockholders would then increase their adjusted basis of their stock by the difference between (a) the amounts of capital gain dividends that we designated and that they include in their taxable income, minus (b) the tax that we paid on their behalf with respect to that income.

To the extent that in the future we may have available net operating losses carried forward from prior tax years, such losses may reduce the amount of distributions that we must make in order to comply with the REIT distribution requirements. Such losses, however, will generally not affect the character, in the hands of our stockholders, of any distributions that are actually made as ordinary or capital gain dividends.

If we should fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year, and (c) any undistributed taxable income from prior periods, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (x) the amounts actually distributed for the tax year, (y) the amounts of income we retained and on which we have paid corporate income tax and (z) any excess distributions over required distributions from prior periods.

It is also possible that, from time to time, we may not have sufficient cash to meet the distribution requirements due to timing differences between our actual receipt of cash and our inclusion of items in income for Federal income tax purposes. For example, MBS that are issued at a discount generally require the accrual of taxable economic interest in advance of receipt in cash.

Derivatives and Hedging Transactions

We maintain a risk management strategy, under which we may use a variety of derivative instruments to economically hedge some of our exposure to market risks, including interest rate risk, prepayment risk, extension risk and credit risk. To the extent that we enter into a hedging transaction to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets and the instrument is properly identified as a hedge along with the risk it hedges within prescribed time periods, any periodic income from the instrument, or gain from the disposition of such instrument, would be excluded altogether from the 75% and 95% gross income test.

To the extent that we hedge in other situations, the resultant income may not qualify under the 75% or the 95% gross income test. We intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT. We may conduct some of our hedging activities through our TRS, the income from which would be subject to Federal and state income tax, rather than by participating in the arrangements directly.

Failure to Qualify

If we should fail to satisfy one or more requirements for REIT qualification, we may still qualify as a REIT if our failure is due to reasonable cause and not to willful neglect and if other applicable requirements are met, including completion of applicable IRS filings. It is not possible to state whether we would be entitled to the benefit of these relief provisions in all circumstances. If these relief provisions are inapplicable to a particular set of circumstances, we will not qualify as a REIT. Furthermore, if we satisfy the relief provisions and maintain our qualification as a REIT, we may be still subject to a penalty tax. The amount of the penalty tax will be at least $50,000 per failure, and, in the case of certain asset test failures, will be determined as the amount of net income generated by the assets in question multiplied by the highest corporate tax rate (currently 35%) if that amount exceeds $50,000 per failure, and in case of income test failures, will be a 100% tax on an amount based on the magnitude of the failure, as adjusted to reflect the profit margin associated with our gross income.

If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions described above do not apply, we would be subject to tax, including any applicable alternative minimum tax, on our taxable income at applicable corporate rates. We cannot deduct distributions to stockholders in any year in which we are not a REIT, nor would we be required to make distributions in such a year. In this situation, to the extent of current and accumulated earnings and profits, distributions to domestic stockholders that are individuals, trusts and estates will generally be taxable as a qualified dividend eligible for the maximum Federal rate of 20% in the case of U.S. stockholders, provided that the shares have been held for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date. For certain distributions to preferred stockholders, the relevant holding period is at least 91 days out of the 181 day period beginning 90 days before the ex-dividend date. In addition, subject to the limitations of the Internal Revenue Code, corporate distributees may be eligible for the dividends received deduction. Unless we are entitled to relief under specific statutory provisions, we would also be disqualified from re-

electing to be taxed as a REIT for the four taxable years following the year during which we lost qualification. It is not possible to state whether, in all circumstances, we would be entitled to this statutory relief.

Corporate Information

Our executive offices are located at Two Bethesda Metro Center, 14^th Floor, Bethesda, MD 20814 and our telephone number is (301) 968-9220.

We make available all of our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports as well as our Code of Ethics and Conduct free of charge on our internet website at www.MTGE.com as soon as reasonably practical after such material is electronically filed with or furnished to the SEC. These reports are also available on the SEC internet website at www.sec.gov.

Competition

Our success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. In acquiring mortgage-related investments, we compete with mortgage REITs, mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, other lenders, governmental bodies and other entities. These entities and others that may be organized in the future may have similar asset acquisition objectives and increase competition for the available supply of mortgage assets suitable for purchase. Additionally, our investment strategy is dependent on the amount of financing available to us in the repurchase agreement market, which may also be impacted by competing borrowers. Our investment strategy will be adversely impacted if we are not able to secure financing on favorable terms, if at all.

Employees

We are managed by our Manager pursuant to the management agreement between our Manager and us. Prior to our acquisition of RCS, we did not have any employees. In connection with the RCS transaction, we acquired all of RCS’ servicing operations. As of December 31, 2014, RCS had approximately 270 employees.

Item 1A. Risk Factors

You should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K, including our annual 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.

Risks Related to Our Investing, Portfolio Management and Financing Activities

Our Board of Directors has approved broad investment guidelines for our Manager and will not approve each investment and financing decision made by our Manager.

Our Manager is authorized to follow broad investment guidelines that may be amended from time-to-time. Our Board of Directors periodically reviews our investment guidelines and our investment portfolio but does not, and will not be required to, review all of our proposed investments on an individual basis. In conducting periodic reviews, our Board of Directors relies primarily on information provided to it by our Manager. Furthermore, our Manager may use complex strategies and transactions that may be costly, difficult or impossible to unwind if our Board of Directors determines that they are not consistent with our investment guidelines. In addition, because our Manager has a certain amount of discretion in investment, financing and hedging decisions, our Manager's decisions could result in investment returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business, financial condition and results of operations.

We may experience significant short-term gains or losses and, consequently, greater earnings volatility as a result of our active portfolio management strategy.

Our Manager employs an active management strategy on our behalf to achieve our principal objective of preserving our net book value while generating attractive risk-adjusted returns. Our active management strategy involves buying and selling financial instruments in all sectors of the mortgage market, that can include agency and non-agency securities, CMBS, whole loans, MSR, mortgage-related derivatives and other mortgage-related investments, including marketable equity securities of other agency focused mortgage REITs and GSE credit risk transfer securities based on our Manager's continual assessment of the relative risk/return of those investments. Therefore, the composition of our investment portfolio will vary as our Manager believes changes to market conditions, risks and valuations warrant. Consequently, we may experience significant investment gains or losses when we sell investments that our Manager no longer believes provide attractive risk-adjusted returns or when our Manager believes more attractive alternatives are available. With an active management strategy, our Manager may be incorrect in its assessment of our investment portfolio and select an investment portfolio that could generate lower returns than a more static management strategy. Also, investors are less able to assess the changes in our valuation and performance by observing changes in the mortgage market since we may have changed our strategy and portfolio from the last publicly available data. We may also experience fluctuations in leverage as we pursue our active management strategy.

Purchases and sales of agency RMBS by the Fed may adversely affect the price and return associated with agency RMBS.

From time to time, the Fed may engage in large scale purchases of agency RMBS and U.S. Treasury securities in the private market through a competitive process, with the goal of supporting mortgage markets and promoting its monetary policy objectives. We cannot predict the impact of the Fed's actions on the prices and liquidity of agency RMBS. During periods in which the Fed purchases significant volumes of agency RMBS, yields on agency RMBS will likely be lower, refinancing volumes will likely be higher, and market volatility will likely be considerably higher than would have been absent its large scale purchases. Further, there is also a risk that when the Fed reduces its purchases of agency RMBS, or sells some or all of its holdings of agency RMBS, the pricing of our agency RMBS portfolio and our net book value may be adversely affected.

The mortgage loans in which we either invest, underlie the non-agency securities in which we invest, or are referenced by CRT in which we invest, may be subject to delinquency, foreclosure and loss, which could result in significant losses to us.

Residential mortgage loans are secured by residential property and are subject to risks of delinquency, foreclosure and loss. The ability of a borrower to repay a loan secured by residential property is dependent upon the income or assets of the borrower. A number of factors may impair a borrower's ability to repay its loan, including: loss of employment; divorce; illness; acts of God; acts of war or terrorism; adverse changes in national and local economic and market conditions; changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of complying with such laws and regulations, fiscal policies and ordinances; costs of remediation and liabilities associated with environmental conditions such as mold; and the potential for uninsured or under-insured property losses.

Commercial mortgage loans are generally secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans made on the security of residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income producing property can be affected by, among other things: tenant mix; success of tenant businesses; property management decisions; property location and condition; competition from comparable types of properties; changes in laws that increase operating expense or limit rents that may be charged; any need to address environmental contamination at the property; the occurrence of any uninsured casualty at the property; changes in national, regional or local economic conditions or specific industry segments; declines in regional or local real estate values; declines in regional or local rental or occupancy rates; increases in interest rates; real estate tax rates and other operating expenses; changes in governmental rules, regulations and fiscal policies, including environmental legislation; acts of God, acts of war or terrorism, social unrest and civil disturbances.

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

RMBS evidence interests in, or are secured by, pools of residential mortgage loans. CRT may incur credit losses based upon the performance of referenced mortgage loans. CMBS evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, these securities may be subject to all of the risks of the respective underlying mortgage loans.

Our investments in a mortgage servicer and MSR may expose us to additional risks.

Our acquisition of RCS, a fully-licensed mortgage servicer with approvals from Fannie Mae, Freddie Mac and Ginnie Mae, in November 2013, and our investments in MSR may subject us to risks, including the following:


•	We have limited experience acquiring MSR and operating a servicer and, while ownership of MSR includes many of the same risks as our other target assets, including risks related to prepayment, borrower credit, default, interest rates, hedging, and regulatory changes, there can be no assurance that we will be able to successfully operate RCS and integrate it into our business operations;


•	The status of Fannie Mae, Freddie Mac and Ginnie Mae approvals is subject to compliance with each of their respective guidelines and other conditions they may impose and failure to meet such guidelines and conditions could result in the unilateral termination of the related approval;


•	The owners of the loans we service (including the GSEs) may, under certain circumstances, terminate our MSR and cause us to convey the MSR to a third party, which could be for less than fair market value or no consideration;


•	We subservice loans and MSR for third parties, and the termination of a subservicing contract by any such third party would have an adverse impact on RCS’ financial results;

•

The mortgage servicing business is heavily regulated, including regulation by the Consumer Financial Protection Bureau and other Federal and state agencies. Our failure or alleged failure to follow applicable regulations could result in the loss or suspension of our licenses to conduct our business or subject us to substantial costs and liabilities related to regulatory inquiries and investigations, fines or penalties, court proceedings and litigation settlements. Continued growth in legal and regulatory requirements applicable to mortgage servicing companies could drive a dramatic increase in RCS’ compliance costs;


•	Changes in minimum servicing amounts for GSE loans could occur at any time and could negatively impact the value of the income derived from MSR;


•	GSE reform could have a significant impact on the current servicing economic model, which, in turn, could have a material adverse impact on our investments in MSR;


•	Increased capital requirements for mortgage servicers enacted by FHFA and / or the GSEs could restrict our returns on MSR and projected returns on future acquisitions and, in turn, reduce our ability to realize the expected benefit of our investment in the servicing platform;


•	Investments in MSR are highly illiquid and subject to numerous transfer restrictions and, as a result, there is risk that we would be unable to locate a willing buyer or get approval to sell MSR in the future should we desire to do so;


•	A downgrade in RCS’ servicer ratings with rating agencies could adversely affect RCS’ business, financial condition, and results of operations;


•	The loss of the services of RCS’ senior executives could materially and adversely impact the operations and prospects for the RCS servicing platform;


•	To the extent that we are unable to acquire MSR on favorable terms and scale our servicing platform, we may not realize the expected benefit of our investment in the servicing platform and may need to provide cash to RCS to fund its operations; and


•	As the holder of MSR, we will be required to make servicing advances to meet contractual principal and interest remittance requirements, to pay property taxes and insurance premiums, pay legal expenses and fund other protective advances. These advances may be subject to delays in recovery or may not be recoverable under certain circumstances.

If we are not able to successfully manage these and other risks related to investing and managing MSR and owning and operating RCS, it may adversely affect our investments in RCS, MSR and other assets held by RCS and, in turn, our business, results of operations and financial condition.

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. Additionally, the loan originator or other parties from whom we acquired the MSR may be insolvent or otherwise unable to honor their respective representation and warranties. 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.

We depend on third-party service providers, including mortgage servicers, for a variety of services related to our non-agency RMBS. We are, therefore, subject to the risks associated with third-party service providers.

We depend on a variety of services provided by third-party service providers related to our non-agency RMBS. We rely on the mortgage servicers who service the mortgage loans backing our RMBS to, among other things, collect principal and interest payments on the underlying mortgages and perform loss mitigation services. Mortgage servicers and other service providers to our RMBS, such as trustees, bond insurance providers and custodians, may not perform in a manner that promotes our interests.

For example, legislation intended to reduce or prevent foreclosures through, among other things, loan modifications may reduce the value of mortgage loans underlying our RMBS. Mortgage servicers may be incentivized by the Federal government to pursue such loan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in the best interests of the beneficial owners of the mortgage loans. Similarly, legislation delaying the initiation or completion of foreclosure proceedings on specified types of residential mortgage loans or otherwise limiting the ability of mortgage servicers to take actions that may be essential to preserve the value of the mortgage loans may also reduce the value of mortgage loans underlying our RMBS. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increase servicing costs. As a consequence of the foregoing matters, our business, financial condition and results of operations may be adversely affected.

Our Manager has limited experience acquiring mortgage loans and MSR and has not previously completed a securitization transaction.

Our plans to acquire residential mortgage loans and MSR and securitize residential mortgage loans are subject to many of the same risks as those related to our other target assets, including risks related to changes in interest rates, economic factors in general, prepayment speeds, default risks and risks related to hedging strategies. However, our Manager has limited experience in acquiring mortgage loans and MSR and has not previously completed a securitization transaction. Through the use of existing resources within RCS, the addition of new personnel having significant experience and related skill sets, and the use of experienced outside advisors, we believe that our Manager has sufficient experience to conduct a potential securitization program. Nonetheless, these are new business activities for us, and there can be no assurance that we will be able to implement a securitization program successfully, or at all.

The failure of servicers to service effectively the mortgage loans underlying the non-agency RMBS in our investment portfolio or any mortgage loans we own would materially and adversely affect us.

Most securitizations of residential mortgage loans require a servicer to manage collections on each of the underlying loans. Both default frequency and default severity of loans may depend upon the quality of the servicer. If servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers may be far less likely to make these payments, which could result in a higher frequency of default. If servicers take longer to liquidate non-performing assets, loss severities may tend to be higher than originally anticipated. Additionally, servicers can perform loan modifications, which could potentially be detrimental to the value of our securities. The failure of servicers to effectively service the mortgage loans underlying the RMBS in our investment portfolio or any mortgage loans we own could negatively impact the value of our

investments and our performance. Servicer quality is of prime importance in the default performance of RMBS. If a servicer goes out of business, the transfer of servicing takes time and loans may become delinquent because of confusion or lack of attention. When servicing is transferred, previously advanced principal and interest is often recaptured rapidly by the new servicer, which may have an adverse effect on the credit support of RMBS held by us. In the case of pools of securitized loans, servicers may be required to advance interest on delinquent loans to the extent the servicer deems those advances recoverable. In the event the servicer does not advance funds, interest may be interrupted even on more senior securities. Servicers may also advance more than is in fact recoverable once a defaulted loan is disposed, and the loss to the trust may be greater than the outstanding principal balance of that loan (greater than 100% loss severity).

Our investments may benefit from private mortgage insurance, but this insurance may not be sufficient to cover losses.

In certain instances, non-agency mortgage loans may have private insurance. This insurance is often structured to absorb only a portion of the loss if a loan defaults and, as such, we may be exposed to losses on these loans in excess of the insured portion of the loans. The private mortgage insurance industry has been adversely affected by the housing market decline and this may limit an insurer's ability to perform on its insurance. Lastly, rescission and denial of mortgage insurance may affect our ability to collect on our insurance. If private mortgage insurers fail to remit insurance payments to us for insured portions of loans when losses are incurred and where applicable, whether due to breach of contract or to an insurer's insolvency, we may experience a loss for the amount that was insured by such insurers, though we may maintain claims against the insurers.

Our investments may include subordinated tranches of non-agency securities or CMBS, which are subordinate in right of payment to more senior securities.

Our investments may include subordinated tranches of non-agency securities or CMBS, which are subordinated classes of securities in a structure of securities collateralized by a pool of mortgage loans and, accordingly, are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and may not provide holders thereof with liquid investments.

Investments in non-investment grade non-agency securities or CMBS may be illiquid, may have a higher risk of default and may not produce current returns.

We may invest in non-agency securities or CMBS that are non-investment grade, which means that major rating agencies rate them below the top four investment-grade rating categories (i.e., "AAA" through "BBB"). Non-investment grade, non-agency securities and CMBS bonds and preferred shares tend to be less liquid, may have a higher risk of default and may be more difficult to value than investment grade bonds. Recessions or poor economic or pricing conditions in the markets associated with non-agency securities or CMBS may cause defaults or losses on loans underlying such securities. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not certain.

Our investment portfolio may be concentrated in terms of credit risk.

Although as a general policy we seek to acquire and hold a diverse portfolio of investments, we are not required to observe specific diversification criteria, except as may be set forth in the investment guidelines adopted by our Board of Directors. Therefore, our investment portfolio may at times be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. To the extent that our portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or type of asset may result in defaults on a number of our assets within a short time period, which may reduce our net income and the value of our shares and accordingly reduce our ability to pay dividends to our stockholders. Our portfolio may contain other concentrations of risk, and we may fail to identify, detect or hedge against those risks, resulting in large or unexpected losses.

Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

Some of our investments are rated by Moody's Investors Service, Fitch Ratings or Standard & Poor's. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value of these investments could significantly decline, which would adversely affect the value of

our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

Our Manager's due diligence of potential investments may not reveal all of the potential liabilities associated with such investments and may not reveal other weaknesses in such investments, which could lead to investment losses.

Before making an investment, our Manager assesses the strengths and weaknesses of the originators, borrowers and the underlying property values, as well as other factors and characteristics that are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, our Manager relies on resources available to it and, in some cases, an investigation by third parties. There can be no assurance that our Manager's due diligence process will uncover all relevant facts or that any investment will be successful.

We may be adversely affected by risks affecting borrowers or the asset or property types in which our investments may be concentrated at any given time, as well as from unfavorable changes in the related geographic regions.

Our assets are not subject to any geographic, diversification or concentration limitations, except that we expect our assets to be concentrated in mortgage-related investments. Accordingly, our investment portfolio may be concentrated by geography, asset, property type and/or borrower, increasing the risk of loss to us if the particular concentration in our investment portfolio is subject to greater risks or undergoing adverse developments. In addition, adverse conditions in the areas where the properties securing or otherwise underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply or reduced demand) may have an adverse effect on the value of our investments. A material decline in the demand for real estate in these areas may materially and adversely affect us. Lack of diversification can increase the correlation of non-performance and foreclosure risks among our investments.

We may invest in non-prime mortgage loans or investments collateralized by non-prime mortgage loans, which are subject to increased risks.

We may invest in non-prime mortgage loans or investments collateralized by pools of non-prime mortgage loans. In general, non-prime mortgage loans are loans that have been originated using underwriting standards that do not conform to agency underwriting guidelines. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending practices, non-prime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with non-prime mortgage loans, the performance of non-prime mortgage loans or investments backed by non-prime mortgage loans in which we may invest could be correspondingly adversely affected, which could adversely impact our results of operations, financial condition and business.

Our strategy involves significant leverage, which increases the risk that we may incur substantial losses.

We expect our leverage to vary with market conditions and our assessment of risk/return on investments. We incur this leverage by borrowing against a substantial portion of the market value of our assets. By incurring this leverage, we could enhance our returns. Nevertheless, this leverage, which is fundamental to our investment strategy, also creates significant risks. For example, because of our significant leverage, we may incur substantial losses if our borrowing costs increase or if the value of our investments declines.

Failure to procure adequate repurchase agreement financing or to renew or replace existing repurchase agreement financing as it matures (to which risk we are specifically exposed due to the short-term nature of the repurchase agreement financing we employ) would adversely affect our financial condition and results of operations.

We use debt financing as a strategy to increase our return on equity. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including the following:


•	our lenders do not make repurchase or other financing agreements available to us at acceptable rates;


•	lenders with whom we enter into repurchase or other financing agreements subsequently exit the market;


•	our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or


•	we determine that the leverage would expose us to excessive risk.

Furthermore, because we rely primarily on short-term borrowings, our ability to achieve our investment objectives depends not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are not able to renew or replace maturing borrowings, we may have to sell some or all of our assets, possibly under adverse market conditions. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability. Consequently, we cannot assure you that any, or sufficient, financing will be available to us in the future on terms that are acceptable to us. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the value of our common and preferred stock and our ability to make distributions on our common and preferred stock.

An increase in our borrowing costs would adversely affect our financial condition and results of operations.

Our borrowing costs may increase for any of the following reasons:


•	short-term interest rates increase;


•	the market value of our investments decreases;


•	the "haircut" applied to our assets under our repurchase agreements increases;


•	interest rate volatility increases; or


•	the availability of financing in the market decreases.

An increase in our borrowing costs will reduce the difference, or spread, that we may earn between the yield on the investments we make and the cost of the leverage we employ to finance such investments. Moreover, due to the short-term nature of our repurchase agreements used to finance our investments, our borrowing costs are particularly sensitive to increases in short-term interest rates. It is possible that due to higher borrowing costs, the spread on investments could be reduced to a point at which the profitability from investments would be significantly reduced. This would adversely affect the returns on our assets, financial condition and results of operations and could require us to liquidate certain or all of our assets.

Differences in the stated maturity of our fixed rate assets and borrowings, or in the timing of interest rate adjustments on our adjustable-rate assets and borrowings may adversely affect our profitability.

We rely primarily on short-term and/or variable rate borrowings to acquire fixed-rate securities with long-term maturities. In addition, we may have adjustable rate assets with interest rates that vary over time based upon changes in an objective index, such as LIBOR or the U.S. Treasury rate. These indices generally reflect short-term interest rates but these assets may not reset in a manner that matches our borrowings.

The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a "flattening" of the yield curve), our borrowing costs may increase more rapidly than the interest income earned on our assets. Because our investments generally bear interest at longer-term rates than we pay on our borrowings, a flattening of the yield curve would tend to decrease our net interest income and the market value of our investment portfolio. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve "inversion"), in which event, our borrowing costs may exceed our interest income and we could incur operating losses and our ability to make distributions to our stockholders could be hindered.

Interest rate caps on mortgages backing our adjustable rate securities may adversely affect our profitability.

Adjustable-rate mortgages that we may purchase or that may back securities that we purchase will typically be subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of a mortgage loan we may purchase or that may back securities that we may purchase. Our borrowings typically will not be subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while caps on mortgages could limit the interest rates on our investments in ARMs. This problem is magnified for hybrid ARMs and ARMs that are not fully indexed. Further, some hybrid ARMs and ARMs may be subject to

periodic payment caps on the mortgages that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash income on certain ARMs than we need to pay interest on our related borrowings. These factors could reduce our net interest income and cause us to suffer a loss.

Declines in value of the assets in which we invest will adversely affect our financial condition and results of operations, and make it more costly to finance these assets.

We use our investments as collateral for our financings. A decline in their value, or perceived market uncertainty about their value, could make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Any fixed-rate securities we invest in generally will be more negatively affected by increases in interest rates than adjustable-rate securities. Our investments in mortgage-related securities are recorded at fair value with changes in fair value reported in net income. As a result, a decline in the fair value of our investments could reduce both our net income and stockholders' equity. If market conditions result in a decline in the fair value of our assets it will decrease the amounts we may borrow to purchase additional investments, which may restrict our ability to increase our net income, and our financial condition and results of operations could be adversely affected.

Our hedging strategies may not be successful in mitigating the risks associated with changes in interest rates.

Subject to complying with REIT tax requirements, we employ techniques that limit, or "hedge," the adverse effects of changes in interest rates on our repurchase agreements and our net book value. In general, our hedging strategy depends on our Manager's view of our entire investment portfolio, consisting of assets, liabilities and derivative instruments, in light of prevailing market conditions. Our hedging activities are generally designed to limit certain exposures and not to eliminate them. In addition, they may be unsuccessful and we could misjudge the condition of our investment portfolio or the market. Our hedging activity will vary in scope based on the level and volatility of interest rates and principal repayments, credit market conditions, the type of assets held and other changing market conditions. Our actual hedging decisions will be determined in light of the facts and circumstances existing at the time and may differ from our currently anticipated hedging strategy. These techniques may include entering into interest rate swap agreements, interest rate swaptions, TBAs, short sales, caps, collars, floors, forward contracts, options, futures, credit default swaps or other types of hedging transactions. We may conduct certain hedging transactions through a TRS, which may subject those transactions to Federal, state and, if applicable, local income tax.

There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Additionally, our business model calls for accepting certain amounts of interest rate, mortgage spread, prepayment, extension and liquidity risks and other exposures and thus some risks will generally not be hedged. Alternatively, our Manager may fail to properly assess a risk to our investment portfolio or may fail to recognize a risk entirely, leaving us exposed to losses without the benefit of any offsetting hedging activities. The derivative financial instruments we select may not have the effect of reducing our risk. The nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed hedging strategies or improperly executed transactions could actually increase our risk and losses. In addition, hedging activities could result in losses if the event against which we hedge does not occur. For example, interest rate hedging could fail to protect us or adversely affect us because, among other things:


•	interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;


•	available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;


•	the duration of the hedge may not match the duration of the related liability;


•	the amount of income that a REIT may earn from hedging transactions other than hedging transactions that satisfy certain requirements of the Internal Revenue Code or that are done through a TRS is limited by Federal tax provisions governing REITs;


•	the party owing money in the hedging transaction may default on its obligation to pay;


•	the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and


•	the value of our interest rate hedges declines due to interest rate fluctuations, lapse of time or other factors, reducing our stockholders' equity.

Furthermore, our hedging strategies may adversely affect us because hedging activities involve costs that we incur regardless of the effectiveness of the hedging activity. Those costs may be higher in periods of market volatility, both because the counterparties to our derivative agreements may demand a higher payment for taking risks, and because repeated adjustments of our hedges during periods of interest rate changes also may increase costs. Consequently, we could incur significant hedging-related costs without any corresponding economic benefits, especially if our hedging strategies are not effective.

Our hedging strategies are generally not designed to mitigate spread risk.

When the market spread widens between the yield on our assets and benchmark interest rates, our net book value could decline if the value of our assets falls by more than the offsetting fair value increases on our hedging instruments tied to the underlying benchmark interest rates. We refer to this as "spread risk" or "basis risk." The spread risk associated with our mortgage assets 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, which could adversely affect our financial condition and results of operations.

Changes in prepayment rates may adversely affect our profitability and are difficult to predict.

Our investment portfolio includes securities backed by pools of mortgage loans. For securities backed by pools of mortgage loans, we receive payments, generally, from the payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on our assets. These faster or slower than expected payments may adversely affect our profitability.

We may purchase securities or loans that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the security or loan. In accordance with GAAP, we amortize this premium over the expected term of the security or loan based on our prepayment assumptions. If a security or loan is prepaid in whole or in part at a faster than expected rate, however, we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which would adversely affect our profitability.

We also may purchase securities or loans that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may receive a discount to par value to acquire the security or loan. We accrete this discount over the expected term of the security or loan based on our prepayment assumptions. If a security or loan is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate, which would result in a lower than expected yield on securities and loans purchased at a discount to par.

Moreover, if prepayment rates decrease due to a rising interest rate environment, the average life or duration of our fixed-rate assets or the fixed-rate portion of our hybrid ARMs and other assets will generally extend. 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 agency RMBS collateralized by fixed rate mortgages or hybrid ARMs to decline by more than otherwise would be the case while most of our 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.

Although prepayment rates generally increase when interest rates fall and decrease when interest rates rise, changes in prepayment rates are difficult to predict. Prepayments can also occur when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property. Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are 120 days or more delinquent from RMBS trusts when the cost of guarantee payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in their portfolios. Consequently, prepayment rates also may be affected by conditions in the housing and financial markets, which may result in increased delinquencies on mortgage loans, the government-sponsored entities cost of capital, general economic conditions and the relative interest rates on fixed and adjustable rate loans, which could lead to an acceleration of the payment of the related principal. Additionally, changes in the government-sponsored entities' decisions as to when to repurchase delinquent loans can materially impact prepayment rates.

In addition, the introduction of new government programs could increase the availability of mortgage credit to a large number of homeowners in the United States, which could impact the prepayment rates for the entire mortgage securities market, and in particular for Fannie Mae and Freddie Mac agency RMBS. These new programs or changes to existing programs could cause substantial uncertainty around the magnitude of changes in prepayment speeds. To the extent that actual prepayment speeds differ from our expectations, it could adversely affect our operating results.

Market conditions may disrupt the historical relationship between interest rate changes and prepayment trends, which may make it more difficult for our Manager to analyze our investment portfolio.

Our success depends, in part, on our Manager's ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans that underlie securities we may own. Changes in interest rates and prepayments affect the market price of the assets that we purchase and any assets that we may hold at a given time. As part of our overall portfolio risk management, our Manager analyzes interest rate changes and prepayment trends separately and collectively to assess their effects on our investment portfolio. In conducting its analysis, our Manager depends on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. Dislocations in the residential mortgage market and other developments may disrupt the relationship between the way that prepayment trends have historically responded to interest rate changes and, consequently, may negatively impact our Manager's ability to (i) assess the market value of our investment portfolio, (ii) implement our hedging strategies and (iii) implement techniques to reduce our prepayment rate volatility, which could materially adversely affect our financial condition and results of operations.

Actions of the U.S. Government, including the U.S. Congress, Fed, U.S. Treasury and other governmental and regulatory bodies, to stabilize or reform the financial markets may not achieve the intended effect and may adversely affect our business.

U.S. Government actions may not have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to any such actions or such actions do not function as intended, they could have broad adverse market implications and could negatively impact our financial condition and results of operations.

In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial markets. For instance, the Dodd-Frank Act imposes significant restrictions on the proprietary trading activities of certain banking entities and subjects other systemically significant organizations regulated by the Fed to increased capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the MBS market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. Certain of the new requirements and restrictions exempt agency RMBS, other government issued or guaranteed securities, or other securities. The Dodd-Frank Act also imposes significant regulatory restrictions on the origination of residential mortgage loans and will impact the formation of new issuances of non-agency RMBS.

The Dodd-Frank Act has also created a new regulator, the Consumer Financial Protection Bureau, or the CFPB, which now oversees many of the core laws which regulate the mortgage industry, including among others, the Real Estate Settlement Procedures Act and the Truth in Lending Act. While the full impact of the Dodd-Frank Act and the role of the CFPB cannot be assessed until all implementing regulations are released, the Dodd-Frank Act's extensive requirements may have a significant effect on the financial markets. In addition, the Fed, the Federal Deposit Insurance Corporation and other regulatory entities are currently in the process of implementing new, and possibly more stringent, capital rules on large financial institutions. These new regulatory requirements, when implemented, could adversely affect the availability or terms of financing from our lender counterparties and the availability or terms of RMBS, both of which may have an adverse effect on our financial condition and results of operations.

Pursuant to the terms of borrowings under master repurchase agreements, we are subject to margin calls that could result in defaults or force us to sell assets under adverse market conditions or through foreclosure.

We enter into master repurchase agreements with a number of financial institutions. We borrow under these master repurchase agreements to finance the assets for our investment portfolio. Pursuant to the terms of borrowings under our master repurchase agreements, a decline in the value of the collateral may result in our lenders initiating margin calls. A margin call means that the lender requires us to pledge additional collateral to re-establish the ratio of the value of the collateral to the amount of the borrowing. The specific collateral value to borrowing ratio that would trigger a margin call is not set in the master repurchase agreements and is not determined until we engage in a repurchase transaction under these agreements. Our fixed-rate collateral generally may be more susceptible to margin calls as increases in interest rates tend to affect more negatively the market value of fixed-rate securities. In addition, some collateral may be more illiquid than other instruments in which we invest, which could cause them to be more susceptible to margin calls in a volatile market environment. Moreover, collateral that prepays more quickly increases the frequency and magnitude of potential margin calls as there is a significant time lag between when the prepayment is reported (which reduces the market value of the security) and when the principal payment is actually received. If we are unable to satisfy margin calls, our lenders may foreclose on our collateral. The threat of or occurrence of a margin call could force us to sell, either directly or through a foreclosure, our collateral under adverse market

conditions. Because of the leverage we expect to have, we may incur substantial losses upon the threat or occurrence of a margin call.

Our derivative agreements expose us to margin calls that could result in defaults or force us to sell assets under adverse market conditions.

Our derivative agreements typically require that we pledge collateral on such agreements to our counterparties in a similar manner as we are required to under our repurchase agreements. Our counterparties, or the clearing agency in the case of 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.

Furthermore, our derivative agreements may also contain cross default provisions under which a default under certain of our other indebtedness in excess of a certain threshold amount causes an event of default under the agreement. Following an event of default, we could be required to settle our obligations under the agreements at their termination values.

The threat of or occurrence of margin calls or the forced settlement of our obligations under our derivative agreements at their termination values could force us to sell, either directly or through a foreclosure, our investments under adverse market conditions. Because of the leverage we have, we may incur substantial losses upon the threat or occurrence of either of these events.

Increasingly restrictive rules and regulations adopted by the U.S. Commodity Futures Trading Commission ("CFTC") and regulators of other countries impose increased margin requirements and require additional operational and compliance costs, which could negatively affect our financial condition and results of operations.

Title VII of the Dodd-Frank Act and the rules and regulations adopted and to be adopted by the CFTC introduce a comprehensive regulatory regime for swaps (as defined in the Commodity Exchange Act, as amended). The new laws and regulations subject certain swaps to clearing and exchange trading requirements, and subject us to new burdens, including but not limited to, margin requirements, reporting, recordkeeping and business conduct rules. The final rules under Title VII, including those rules that have already been adopted for both cleared and non-cleared swap transactions, impose increased margin requirements and require additional operational and compliance costs that will likely affect our business and results of operations.

As we also enter into derivative agreements with non-U.S. counterparties, which are subject to increasingly restrictive local regulations similar to the Dodd-Frank Act, we are required to follow some of these local regulations or help the non-U.S. counterparties comply with these local regulations. For example, the EU’s Regulation on OTC derivatives, central counterparties and trade repositories (the "EMIR Regulation") became effective on August 16, 2012 and was implemented during the course of 2013 through a number of implementation measures. The EMIR Regulation has not yet been fully implemented. The EMIR Regulation is intended, among other things, to reduce counterparty risk by requiring that all standardized over-the-counter derivatives meeting specific thresholds be cleared through a central counterparty. In addition, OTC derivatives that are not centrally cleared will be subject to margin requirements. It is possible that the EMIR Regulation will result in increased costs for OTC derivative counterparties and also lead to an increase in the costs of collateral. These increased trading costs and collateral costs may have an adverse impact on our business and results of operations.

As the CFTC and regulators of other countries continue to promulgate new rules and regulations on derivatives, our derivative agreements and ability to engage in derivative transactions with certain counterparties may be adversely affected, which could negatively affect our financial condition and results of operations.

It may be uneconomical to "roll" our TBA dollar roll transactions or we may be unable to meet margin calls on our TBA contracts, which could negatively affect our financial condition and results of operations.

We may utilize TBA dollar roll transactions as a means of investing in and financing agency RMBS. TBA contracts enable us 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. Prior to settlement of the TBA contract we may choose to move the settlement of the securities out to a later date by entering into an offsetting position (referred to as a "pair off"), net settling the paired off positions for cash, and simultaneously purchasing a similar TBA contract for a later settlement date, collectively referred to as a "dollar roll." The agency RMBS purchased for a forward settlement date under the TBA contract 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." Consequently, dollar roll transactions and such forward purchases of agency RMBS represent a form of off-balance sheet financing and increase our "at risk" leverage.

Under certain market conditions, TBA dollar roll transactions may result in negative carry income whereby the agency RMBS purchased for a forward settlement date under the TBA contract are priced at a premium to agency RMBS for settlement in the current month. Additionally, a decline in the Fed's purchases of agency RMBS or sales of some or all of its holdings of agency RMBS could adversely impact the dollar roll market. Under such conditions, it may be uneconomical to roll our TBA positions prior to the settlement date and we could have to take physical delivery of the underlying securities and settle our obligations for cash. We may not have sufficient funds or alternative financing sources available to settle such obligations. In addition, pursuant to the margin provisions established by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation we are subject to margin calls on our TBA contracts. Further, our prime brokerage agreements may require us to post additional margin above the levels established by the MBSD. Negative carry income on TBA dollar roll transactions or failure to procure adequate financing to settle our obligations or meet margin calls under our TBA contracts could result in defaults or force us to sell assets under adverse market conditions or through foreclosure and adversely affect our financial condition and results of operations.

If lenders pursuant to our repurchase transactions default on their obligations to resell the underlying collateral back to us at the end of the transaction term, or if the value of the collateral has declined by the end of the term or if we default on our obligations under the transaction, we will lose money on these transactions.

When we engage in a repurchase transaction, we initially transfer securities or loans to the financial institution under one of our master repurchase agreements in exchange for cash, and our counterparty is obligated to resell such assets to us at the end of the term of the transaction, which is typically from 30 to 120 days, but which may have terms from one day to up to three years or more. The cash we receive when we initially sell the collateral is less than the value of that collateral, which is referred to as the "haircut." As a result, we are able to borrow against a smaller portion of the collateral that we initially sell in these transactions. Increased haircuts require us to post additional collateral. The haircut rates under our master repurchase agreements are not set until we engage in a specific repurchase transaction under these agreements. If our counterparty defaults on its obligation to resell collateral to us, we would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the securities). Any losses we incur on our repurchase transactions could adversely affect our earnings, and, thus, our cash available for distribution to our stockholders.

If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another financial institution in order to continue to leverage our investment portfolio and carry out our investment strategy. We may not be able to secure a suitable replacement facility on acceptable terms or at all.

Further, financial institutions providing the repurchase agreements may require us to maintain a certain amount of cash uninvested or to set aside non-leveraged assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would otherwise choose, which could reduce our return on equity. If we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly. Additionally, our counterparties can unilaterally choose to cease entering into any further repurchase transactions with us.

Our rights under our repurchase agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our lenders under the repurchase agreements.

In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the lender for damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our assets under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages we actually incur.

Our use of derivative agreements may expose us to counterparty risk.

Certain hedging instruments are not traded on regulated exchanges or guaranteed by an exchange or its clearinghouse and involve risks and costs that could result in material losses. Consequently, there may not be requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the domicile of the counterparty, applicable international requirements. Consequently, if a counterparty fails to perform under a derivative agreement we could incur a significant loss.

For example, if a swap counterparty under an interest rate swap agreement that we enter into as part of our hedging strategy cannot perform under the terms of the interest rate swap agreement, we may not receive payments due under that agreement, and, thus, we may lose any potential benefit associated with the interest rate swap. Additionally, we may also risk the loss of any collateral we have pledged to secure our obligations under these swap agreements if the counterparty becomes insolvent or files for bankruptcy. Similarly, if an interest rate swaption counterparty fails to perform under the terms of the interest rate swaption agreement, in addition to not being able to exercise or otherwise cash settle the agreement, we could also incur a loss for the premium paid for that swaption.

Continued adverse developments in the broader residential mortgage market may adversely affect the value of our investments.

Since 2008, the residential mortgage market in the United States has experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Many of these conditions are expected to continue in 2015 and beyond. These factors have impacted investor perception of the risk associated with real estate related assets, including mortgage-related investments. As a result, values for these assets have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of the assets in which we invest.

The risks associated with our business may be severe during economic recessions and are compounded by declining real estate values. Declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers will also be less able to pay principal and interest on loans underlying the securities in which we invest if the value of residential real estate weakens further. Further, declining real estate values significantly increase the likelihood that we will incur losses on RMBS and CMBS in which we intend to invest in the event of default because the value of collateral on the mortgages underlying such securities may be insufficient to cover the outstanding principal amount of the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could increase the rate that the GSEs buy out the delinquent loans from pools underlying the agency RMBS in which we invest, resulting in an increased rate of prepayments that could adversely affect our net interest income from the investments in our portfolio, which could have an adverse effect on our financial condition, results of operations and our ability to make distributions to our stockholders.

A decrease in the volume of newly issued mortgages, or an increase in investor demand for mortgages, could adversely affect our ability to acquire assets that satisfy our investment objectives and to generate income and pay dividends, whereas an increase in the volume of newly issued mortgages, or a decrease in investor demand for mortgages, could negatively affect the valuations for our investments and may adversely affect our liquidity.

A reduction in the volume of mortgage loans originated may affect the volume of investments available to us, which could affect our ability to acquire assets that satisfy our investment objectives. An increase in the volume of mortgage loans originated may negatively impact the valuation for our investment portfolio. A negative impact on valuations of our assets could have an adverse impact on our liquidity profile in the event that we are required to post margin under our repurchase agreements, which could materially and adversely impact our business.

We operate in a highly competitive market for investment opportunities and our competitors may be able to compete more effectively for investment opportunities than we can. This competition may limit our ability to acquire desirable investments in our target assets and could affect the pricing of these investments.

A number of entities compete with us to make investments. We compete with other REITs and public and private funds, including those that may be managed by affiliates of American Capital, such as American Capital Agency Corp., commercial and investment banks, commercial finance and insurance companies and other financial institutions. Our competitors may have greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds than we do or access to funding sources that may not be available to us. Many of our competitors are not subject to the operating constraints associated

with REIT tax compliance and maintenance of an exemption from the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which may allow them to consider a wider variety of investments and establish more relationships than we can. Furthermore, competition for investments in mortgage-related investments may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. The competitive pressures we face could have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objectives.

We may change our targeted investments, investment guidelines and other operational policies without stockholder consent, which may adversely affect the market price of our common stock and our ability to make distributions to stockholders.

We may change our targeted investments and investment guidelines at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described herein. Our Board of Directors also determines our other operational policies and may amend or revise such policies, including our policies with respect to our REIT qualification, acquisitions, dispositions, operations, indebtedness and distributions, or approve transactions that deviate from these policies, without a vote of, or notice to, our stockholders. A change in our targeted investments, investment guidelines and other operational policies may increase our exposure to interest rate, spread, default, credit, prepayment, extension, liquidity and other risks as well as exposure to real estate market fluctuations, all of which could adversely affect the market price of our common stock and our ability to make distributions to our common and preferred stockholders.

Our investments are recorded at fair value, and quoted prices or observable inputs may not be available to determine such value, resulting in the use of significant unobservable inputs to determine value.

The values of our investments may not be readily determinable or ultimately realizable. We measure the fair value of our investments quarterly, in accordance with guidance set forth in FASB Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures. The fair value at which our assets are recorded may not be an indication of their realizable value. Ultimate realization of the value of an asset depends to a great extent on economic and other conditions that are beyond the control of our Manager, our Company or our Board of Directors. Further, fair value is only an estimate based on good faith judgment of the price at which an investment can be sold since market prices of investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular asset, the realized value may be more than or less than the amount at which such asset is valued. Accordingly, the value of our common stock could be adversely affected by our determinations regarding the fair value of our investments, whether in the applicable period or in the future. Additionally, such valuations may fluctuate over short periods of time.

Our Manager's determination of the fair value of our investments includes inputs provided by third-party dealers and pricing services. Valuations of certain investments in which we invest may be difficult to obtain or unreliable. In general, dealers and pricing services heavily disclaim their valuations. Dealers may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and illiquidity of a security, valuations of the same security can vary substantially from one dealer or pricing service to another. Therefore, our results of operations for a given period could be adversely affected if our determinations regarding the fair market value of these investments are materially different than the values that we ultimately realize upon their disposal.

The Federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. Government, may adversely affect our business.

The payments of principal and interest we receive on the agency mortgage investments in which we may invest are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Fannie Mae and Freddie Mac are GSEs, but their guarantees are not backed by the full faith and credit of the United States. Ginnie Mae is part of a U.S. Government agency and its guarantees are backed by the full faith and credit of the United States.

In response to general market instability and, more specifically, the financial conditions of Fannie Mae and Freddie Mac, in July 2008, the Housing and Economic Recovery Act of 2008, or HERA, established FHFA as the new regulator for Fannie Mae and Freddie Mac. In September 2008, the U.S. Treasury, the FHFA and the Fed announced a comprehensive action plan to help stabilize the financial markets, support the availability of mortgage financing and protect taxpayers. Under this plan, among other things, the FHFA was appointed as conservator of both Fannie Mae and Freddie Mac, allowing the FHFA to

control the actions of the two GSEs, without forcing them to liquidate, which would be the case under receivership. Importantly, the primary focus of the plan was to increase the availability of mortgage financing by allowing these GSEs to continue to grow their guarantee business without limit, while limiting the size of their retained mortgage and agency security portfolios and requiring that these portfolios be reduced over time.

Although the U.S. Government has committed to support the positive net worth of Fannie Mae and Freddie Mac, the two GSEs could default on their guarantee obligations, which would materially and adversely affect the value of our agency RMBS. Accordingly, if these government actions are inadequate and the GSEs suffer additional losses or cease to exist, our business, operations and financial condition could be materially and adversely affected.

In addition, the future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantee obligations could be considerably limited relative to historical measurements. Any such changes to the nature of their guarantee obligations could re-define what constitutes an agency security and could have broad adverse implications for the market and our business, operations and financial condition.

We could be negatively affected in a number of ways depending on the manner in which related events unfold for Fannie Mae and Freddie Mac. We rely on our mortgage-related investments, including agency mortgage investments, as collateral for our financings. Any decline in the value of agency mortgage investments, or perceived market uncertainty about their value, could make it more difficult for us to obtain financing on favorable terms or at all, or to maintain our compliance with the terms of any financing transactions for such investments. Further, the current support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from agency mortgage investments, thereby tightening the spread between the interest we earn on our agency mortgage investments and the cost of financing those assets. A reduction in the supply of agency mortgage investments could also negatively affect the pricing of agency mortgage investments by reducing the spread between the interest we earn on our investment portfolio of agency mortgage investments and our cost of financing that portfolio.

Future legislation could change the relationship between Fannie Mae and Freddie Mac and the U.S. Government, and could also nationalize, privatize, or eliminate these entities entirely. Any law affecting these GSEs may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. If the guarantee obligations of Freddie Mac or Fannie Mae were repudiated by FHFA, payments of principal and/or interest to holders of agency RMBS issued by Freddie Mac or Fannie Mae would be reduced in the event of any borrower's late payments or failure to pay or a servicer's failure to remit borrower payments to the trust. In that case, trust administration and servicing fees could be paid from mortgage payments prior to distributions to holders of agency RMBS. Any actual direct compensatory damages owed due to the repudiation of Freddie Mac or Fannie Mae's guarantee obligations may not be sufficient to offset any shortfalls experienced by holders of agency RMBS.

As a result, such laws or changes could increase the risk of loss on our investments in agency mortgage investments guaranteed by Fannie Mae and/or Freddie Mac and could adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially and adversely affect our financial condition and results of operations.

Mortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, RMBS.

The U.S. Government, through the Fed, the FHA, and the Federal Deposit Insurance Corporation, has implemented a number of Federal programs designed to assist homeowners, including the Home Affordable Modification Program, or HAMP, which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, the Hope for Homeowners Program, or H4H Program, which allows certain distressed borrowers to refinance their mortgages into FHA-insured loans in order to avoid residential mortgage loan foreclosures, and the Home Affordable Refinance Program, or HARP, which for loans sold or guaranteed by the GSEs on or prior to May 31, 2009, allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments, with no current loan-to-value ratio upper limit and without requiring new mortgage insurance. HAMP, the H4H Program and other loss mitigation programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans (through forbearance and/or forgiveness) and/or the rate of interest payable on the loans, or the extension of payment terms of the loans. Especially with non-agency RMBS, a significant number of loan modifications with respect to a given security, including, but not limited to, those related to principal forgiveness and coupon reduction, resulting in increased prepayment rates, could negatively impact the realized yields and cash flows on such security. These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as

changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae, may adversely affect the value of, and the returns on, RMBS that we may purchase.

Changes in the underwriting standards by Freddie Mac or Fannie Mae could have an adverse impact on agency mortgage investments in which we may invest or make it more difficult to acquire attractive non-agency mortgage investments.

In April 2010, Freddie Mac and Fannie Mae announced tighter underwriting guidelines for ARMs and hybrid interest-only ARMs in particular. Specifically, Freddie Mac announced that it would no longer purchase interest-only mortgages and Fannie Mae changed its eligibility criteria for purchasing and securitizing ARMs to protect consumers from potentially dramatic payment increases. Our targeted investments include adjustable-rate mortgages and hybrid ARMs. Tighter underwriting standards by Freddie Mac or Fannie Mae could reduce the supply of ARMs, resulting in a reduction in the availability of the asset class. More lenient underwriting standards could also substantially reduce the supply and attractiveness of non-agency opportunities.

We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.

Deficiencies in foreclosure documentation by, among others, several large mortgage servicers have raised various concerns relating to foreclosure practices, and a group consisting of state attorneys general and state bank and mortgage regulators in all 50 states and the District of Columbia has been reviewing foreclosure practices in their various jurisdictions. A number of mortgage servicers temporarily suspended foreclosure proceedings in some or all states in which they do business while they reviewed and made modifications to their foreclosure practices. Any extension of foreclosure timelines can increase the inventory backlog of distressed homes on the market and creates greater uncertainty about housing prices. Prior to making investments in RMBS or residential whole loans, we expect our Manager to carefully consider many factors, including housing prices and foreclosure timelines, and estimate loss assumptions. The concerns about deficiencies in foreclosure practices of servicers and related delays in the foreclosure process may impact our loss assumptions and affect the values of, and our returns on, our investments in RMBS and residential whole loans.

The lack of liquidity in our investments may adversely affect our business.

We may invest in securities, whole loans or other instruments that are not liquid or that could become illiquid. It may be difficult or impossible to obtain third party valuations on these investments and these instruments typically experience greater price volatility than instruments for which a ready market exists. In addition, validating pricing for these instruments may be more subjective than more liquid investments. The lack of liquidity for certain asset classes that we may invest in may make it difficult for us to sell such investments should the need or desire arise. In addition, if we are required to liquidate all or a portion of our investment portfolio quickly, we may realize significant losses. As a result, our ability to change our investment portfolio in response to changing market conditions may be limited, which could adversely affect our results of operations and financial condition.

Additionally, recent legislation and regulations could limit certain market participants' abilities to make markets in certain securities, including non-agency RMBS. These rules have the potential to significantly reduce the liquidity within these markets, making it more difficult for us to sell such investments and may significantly impact the price volatility of the asset class.

Changes in credit spreads may adversely affect our profitability.

We invest in securities and may invest in loans that are exposed to credit risk. A significant component of the fair value of these instruments is attributable to the difference between the value of a financial instrument of a similar maturity with no credit risk, such as a U.S. Treasury Note, and our investments, or the credit spread. Credit spreads are subject to market factors and have been volatile in recent years. In addition, hedging fair value changes associated with credit spreads can be inefficient. Since the fair value of our investments impacts both our statements of operations and stockholders' equity, credit spread changes may adversely affect our profitability.

We may be exposed to environmental liabilities with respect to properties to which we take title.

In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with

environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Risks Related to Our Relationship with Our Manager and American Capital

There are conflicts of interest in our relationship with our Manager and American Capital.

Because we have no employees other than those at RCS, our Manager is responsible for making all of our investment decisions. Certain of our and our Manager's officers are employees of American Capital or its affiliates and these persons do not devote their time exclusively to us. Our Manager's Investment Committee consists of Messrs. Wilkus, Erickson, Flax, Kain and McHale, each of whom is an officer of American Capital or the parent company of our Manager and has significant responsibilities to American Capital and certain of its portfolio companies, affiliated entities or managed funds. Mr. Kain is our President and Chief Investment Officer and also serves as the President of our Manager and its parent company. Mr. Kain is also the President and Chief Investment Officer of American Capital Agency Corp. and the President of its manager. Thus, he has, and may in the future have, significant responsibilities for other funds that are managed by the parent company of our Manager or entities affiliated therewith. In addition, because certain of our and our Manager's officers are also responsible for providing services to American Capital and/or certain of its portfolio companies, affiliated entities or managed funds, they may not devote sufficient time to the management of our business operations.

Additionally, our Manager is a wholly-owned subsidiary of American Capital Mortgage Management, LLC, which is also the parent company of the external manager of American Capital Agency Corp., a publicly-traded REIT that invests in agency mortgage investments and may compete with us for purchases of agency mortgage-related investments. American Capital Mortgage Management, LLC is a subsidiary of American Capital Asset Management, LLC, which is a portfolio company of American Capital. There are no restrictions on American Capital that would prevent American Capital from sponsoring another investment vehicle that competes with us. Accordingly, American Capital or one or more of its affiliates may also compete with us for investments.

Although our Manager and its affiliates have policies in place that seek to mitigate the effects of conflicts of interest, including any potential conflict relating to the allocation of certain types of securities that meet our investment objectives and those of other managed funds or affiliates of our Manager, these policies do not eliminate the conflicts of interest that our officers and the officers of our Manager and its affiliates face in making investment decisions on behalf of American Capital, any other American Capital-sponsored investment vehicles and us. Further, we do not have any agreement or understanding with American Capital that would give us any priority over American Capital, any of its affiliates, or any such American Capital-sponsored investment vehicle in opportunities to invest in mortgage-related investments. Accordingly, we may compete for access to the benefits that we expect from our relationship with our Manager and American Capital.

Our management agreement was not negotiated on an arm's-length basis and the terms, including fees payable, may not be as favorable to us as if they were negotiated with an unaffiliated third party.

The management agreement was originally negotiated between related parties, and we did not have the benefit of arm's-length negotiations of the type normally conducted with an unaffiliated third party. The terms of the management agreement, including fees payable, may not reflect the terms that we may have received if it were negotiated with an unrelated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the management agreement because of our desire to maintain our ongoing relationship with our Manager.

We are completely dependent upon our Manager and certain personnel of American Capital or the parent company of our Manager who provide services to us through the management agreement and the administrative services agreement and we may not find suitable replacements for our Manager and these personnel if the management agreement and the administrative services agreement are terminated or such personnel are no longer available to us.

Because we have no employees or separate facilities other than those at RCS, we are completely dependent on our Manager and its affiliates to conduct our investment operations pursuant to the management agreement. Our Manager does not have any employees and relies upon certain employees of its parent company and American Capital to conduct our day-to-day operations pursuant to an administrative services agreement. Under the administrative services agreement, our Manager is provided with those services and resources necessary for our Manager to perform its obligations and responsibilities under the management agreement in exchange for certain fees payable by our Manager. Neither the administrative services agreement nor the management agreement requires our Manager or its parent company or American Capital to dedicate specific personnel

to our operations. It also does not require any specific personnel of our Manager or its parent company or American Capital to dedicate a specific amount of time to our business. Additionally, because our Manager is relying upon American Capital, we may be negatively impacted by events or factors that negatively impact American Capital's business, financial condition or results of operations.

If we terminate the management agreement without cause, we may not, without the consent of our Manager, employ any employee of the Manager or any of its affiliates, including American Capital, or any person who has been employed by our Manager or any of its affiliates at any time within the two-year period immediately preceding the date on which the person commences employment with us for two years after such termination of the management agreement. We believe that the successful implementation of our investment, financing and hedging strategies depends upon the experience of certain of American Capital and our Manager's officers. American Capital or the parent company of our Manager has entered into retention agreements with certain of these officers. However, none of these individuals' continued service is guaranteed. Furthermore, if the management agreement is terminated or these individuals leave the parent company of our Manager or American Capital, we may be unable to execute our business plan.

We have no recourse to American Capital if it does not fulfill its obligations under the administrative services agreement.

Neither we nor our Manager have any employees or separate facilities other than those at RCS. Our day-to-day investment operations are conducted by employees of American Capital or the parent company of our Manager pursuant to an administrative services agreement among our Manager, its parent company and American Capital. Under the administrative services agreement, our Manager is also provided with the services and other resources necessary for our Manager to perform its obligations and responsibilities under the management agreement in exchange for certain fees payable by our Manager. Although the administrative services agreement may not be terminated unless the management agreement has been terminated pursuant to its terms, American Capital and the parent company of our Manager may assign their rights and obligations thereunder to any of their affiliates, including American Capital Asset Management, LLC, which owns the parent company of our Manager. In addition, because we are not a party to the administrative services agreement, we do not have any recourse to American Capital or the parent company of our Manager if they do not fulfill their obligations under the administrative services agreement or if they elect to assign the agreement to one of their affiliates. Also, our Manager only has nominal assets and we will have limited recourse against our Manager under the Management Agreement to remedy any liability to us from a breach of contract or fiduciary duties.

If we elect not to renew the management agreement without cause, we would be required to pay our Manager a substantial termination fee. These and other provisions in our management agreement make non-renewal of our management agreement difficult and costly.

Electing not to renew the management agreement without cause would be difficult and costly for us. With the consent of the majority of the independent members of our Board of Directors, we may elect not to renew our management agreement upon the expiration of any automatic annual renewal term, upon 180-days prior written notice. If we elect not to renew the management agreement because of a decision by our Board of Directors that the management fee is unfair, our Manager has the right to renegotiate a mutually agreeable management fee. If we elect to not renew the management agreement without cause, we are required to pay our Manager a termination fee equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. These provisions may increase the effective cost to us of electing to not renew the management agreement.

Our Manager's management fee is based on the amount of our stockholders' equity, adjusted to exclude the effect of any unrealized gains or losses included in retained earnings, and is payable regardless of our economic performance.

We pay our Manager a base management fee payable monthly in arrears in an amount equal to one twelfth of 1.50% of our month-end stockholders' equity, adjusted to exclude the effect of any unrealized gains or losses included in retained earnings, each as computed in accordance with GAAP ("Equity"). There is no incentive compensation payable to our Manager pursuant to the management agreement. For example, we would pay our Manager a management fee for a specific period even if we experienced a net unrealized loss during the same period. Increases to our Equity, and a corresponding increase to our management fee, would result from equity issuances and realization of gains from our investment portfolio, whereas decreases to our Equity, and a corresponding decrease to our management fee, would result from repurchases of our common stock and realization of losses on our investment portfolio. These factors could result in a conflict of interest between our Manager and our stockholders with respect to the timing and terms of our equity issuances, share repurchases and realization of gains and losses on our investment portfolio. Thus, while our stockholders bear the risk of our future equity issuances reducing the price of our common stock and diluting the value of their stock holdings in us, the compensation payable to our Manager will increase as a result of future issuances of our equity securities. Similarly, even though the value of our common stock could

potentially increase if we repurchase shares at a discount to our net book value per common share, the compensation payable to our Manager would be reduced if we execute share repurchases, creating a conflict of interest. As such, our Manager may have limited incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns for our investment portfolio. This in turn could harm our ability to make distributions to our stockholders and the market price of our common stock.

Our Manager's liability is limited under the management agreement, and we have agreed to indemnify our Manager against certain liabilities.

The management agreement provides that our Manager will not assume any responsibility other than to provide the services specified in the management agreement. The agreement further provides that our Manager is not responsible for any action of our Board of Directors in following or declining to follow its advice or recommendations. In addition, our Manager and its respective affiliates, managers, officers, directors, employees and members will be held harmless from, and indemnified by us against, certain liabilities on customary terms.

Our results are dependent upon the efforts of our Manager.

Our Manager's success, which is largely determinative of our own success, depends on many factors, including the availability of attractive risk-adjusted investment opportunities that satisfy our targeted investment strategies and then identifying and consummating them on favorable terms, the level and volatility of interest rates, its ability to access on our behalf short-term and long-term financing on favorable terms and conditions in the financial markets, real estate market and the economy, as to which no assurances can be given. In addition, our Manager may face substantial competition for attractive investment opportunities. Our Manager may not be able to successfully cause us to make investments with attractive risk-adjusted returns.

Risks Related to Our Taxation as a REIT

If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

We operate in a manner that allows us to qualify as a REIT for Federal income tax purposes. Although we do not intend to request a ruling from the IRS as to our REIT qualification, we have received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to our qualification as a REIT. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP represents only the view of our counsel based on our counsel's review and analysis of existing law and on certain representations as to factual matters and covenants made by us and our Manager, including representations relating to the values of our assets and the sources of our income. The opinion is expressed as of the date issued and does not cover subsequent periods. Skadden, Arps, Slate, Meagher & Flom LLP has no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, and our qualification as a REIT depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by Skadden, Arps, Slate, Meagher & Flom LLP. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the annual REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt or equity for Federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements as described below. Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or in securities of other issuers will not cause a violation of the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to Federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

Distributions payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from "qualified dividends" payable to domestic stockholders that are individuals, trusts and estates is currently 20%. Distributions of ordinary income payable by REITs, however, generally are not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or distributions payable by REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

REIT distribution requirements could adversely affect our ability to execute our business plan.

We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any net capital gain, in order for Federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to Federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a non-deductible 4% excise tax if the actual amount distributed to our stockholders in a calendar year is less than a minimum amount specified under Federal tax laws. We intend to make distributions to our stockholders to comply with the REIT qualification requirements of the Internal Revenue Code.

From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, if we purchase agency RMBS at issuance with a discount, we are generally required to accrete the discount into taxable income prior to receiving the cash proceeds. Additionally, if we incur capital losses in excess of capital gains, such net capital losses are not allowed to reduce our taxable income for purposes of determining our distribution requirement. Such net capital losses may be carried forward for a period of up to five years and applied against future capital gains subject to the limitation of our ability to generate sufficient capital gains, which cannot be assured. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to maintain our qualification as a REIT or avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our stockholders' equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

We may in the future choose to pay dividends in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.

We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for U.S. Federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain Federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. In addition, in order to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through our TRS or other subsidiary corporations that will be subject to corporate level income tax at regular rates. In addition, if we lend money to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to us, which could result in an even higher corporate level tax liability. Any of these taxes would decrease cash available for distribution to our stockholders.

Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.

To remain qualified as a REIT for Federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to make and, in certain cases, to maintain ownership of, certain attractive investments.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

To remain qualified as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets, including certain mortgage loans and certain kinds of MBS. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our investment portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to remain qualified as a REIT.

We enter into certain financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto. We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.

Distributions to tax-exempt investors may be classified as unrelated business taxable income.

Neither ordinary nor capital gain distributions with respect to our common stock nor gain from the sale of common stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:

•

part of the income and gain recognized by certain qualified employee pension trusts with respect to our common stock may be treated as unrelated business taxable income if shares of our common stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income;


•	part of the income and gain recognized by a tax-exempt investor with respect to our common stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the common stock;


•	part or all of the income or gain recognized with respect to our common stock by social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans which are exempt from Federal income taxation under the Internal Revenue Code may be treated as unrelated business taxable income; and


•	to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a "taxable mortgage pool," or if we hold residual interests in a REMIC, a portion of the distributions paid to a tax-exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To remain qualified as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Internal Revenue Code could substantially limit our ability to hedge our liabilities. Any income from a properly designated hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets generally does not constitute "gross income" for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we may have to limit our use of advantageous hedging techniques or implement those hedges through our TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.

Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.

We purchase and sell agency RMBS through TBAs and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise, and may continue to do so in the future. While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of our TBAs should be treated as gain from the sale or disposition of the underlying agency RMBS. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of Skadden, Arps, Slate, Meagher & Flom LLP is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to successfully challenge the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to remain qualified as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for Federal income tax purposes.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, which would be treated as prohibited transactions for Federal income tax purposes.

Net income that we derive from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by us or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to us. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a prohibited transaction for Federal income tax purposes.

We intend to conduct our operations so that no asset that we own (or are treated as owning) at the REIT level will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain sales of loans at the REIT level, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such treatment. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to avoid prohibited transaction characterization.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT.

The present Federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the Federal income tax treatment of an investment in us. The Federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in Federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us.

We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

We acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectibility rather than current market interest rates. The amount of such discount will nevertheless generally be treated as "market discount" for Federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.

Some of the debt instruments that we acquire may have been issued with original issue discount. We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such debt instruments will be made. If such debt instruments or MBS turn out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectibility is provable.

In addition, we may acquire debt instruments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding instrument are "significant modifications" under the applicable Treasury regulations, the modified instrument will be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified instrument exceeds our adjusted tax basis in the unmodified instrument, even if the value of the instrument or the payment expectations have not changed. Following such a taxable modification, we would hold the modified loan with a cost basis equal to its principal amount for Federal tax purposes.

Finally, in the event that any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectibility. Similarly, we may be required to accrue interest income with respect to debt instruments at its stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter.

The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Securitizations could result in the creation of taxable mortgage pools for Federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their distribution income from

us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we will reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to remain qualified as a REIT.

We may acquire mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. We may acquire mezzanine loans that do not meet all of the requirements of this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor and the IRS successfully challenges such loan's treatment as a real estate asset for purposes of the REIT asset and income tests, then we could fail to remain qualified as a REIT.

Risks Related to Our Business Structure

Loss of our exemption from regulation pursuant to the Investment Company Act would adversely affect us.

We conduct our business so as not to become regulated as an investment company under the Investment Company Act in reliance on the exemption provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C), as interpreted by the staff of the SEC, requires that: (i) at least 55% of our investment portfolio consist of "mortgages and other liens on and interest in real estate," or "qualifying real estate interests," and (ii) at least 80% of our investment portfolio consist of qualifying real estate interests plus "real estate-related assets."

In satisfying this 55% requirement, based on pronouncements of the SEC staff, we may treat whole pool agency RMBS as qualifying real estate interests. The SEC staff has not issued guidance with respect to whole pool non-agency RMBS. However, based on our own judgment and analysis of the SEC's pronouncements with respect to agency whole pool certificates, we may also treat whole pool non-agency RMBS as qualifying real estate interests. We may also treat whole mortgage loans that we acquire directly as qualifying real estate interests provided that 100% of the loan is secured by real estate when we acquire it and we have the unilateral right to foreclose on the mortgage. Although the SEC staff has not issued guidance with respect to investments in controlling classes of CMBS, we may also treat certain investments in the controlling classes of CMBS pools as qualifying real estate interests. We currently intend to treat agency partial pool RMBS and non-agency partial pool RMBS as real estate-related assets.

The mortgage related investments that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated thereunder. If the SEC determines that any of these securities are not qualifying interests in real estate or real estate-related assets, adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exceptions or changes its interpretation of the above exceptions, we could be required to restructure our activities or sell certain of our assets. We may be required at times to adopt less efficient methods of financing certain of our mortgage related investments and we may be precluded from acquiring certain types of higher yielding securities. The net effect of these factors would be to lower our net interest income. If we fail to qualify for an exemption from registration as an investment company or an exclusion from the definition of an investment company, our ability to use leverage would be substantially reduced. Our business will be materially and adversely affected if we fail to qualify for this exemption from regulation pursuant to the Investment Company Act.

Risks Related to Our Common Stock

The market price and trading volume of our common stock may be volatile.

The market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. The stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies' operating performances. If the market price of our common stock declines significantly, you may be unable to resell your shares at a gain. Further, fluctuations in the trading price of our

common stock may adversely affect the liquidity of the trading market for our common stock and, in the event that we seek to raise capital through future equity financings, our ability to raise such equity capital.

We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:


•	actual or anticipated variations in our quarterly operating results or distributions;


•	changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;


•	increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;


•	changes in market valuations of similar companies;


•	adverse market reaction to any increased indebtedness we incur in the future;


•	issuance of additional equity securities;


•	our repurchases of shares of our common stock;


•	actions by institutional stockholders;


•	additions or departures of key management personnel, or changes in our relationship with our Manager or American Capital;


•	speculation in the press or investment community;


•	price and volume fluctuations in the stock market from time to time, which are often unrelated to the operating performance of particular companies;


•	changes in regulatory policies, tax laws and financial accounting and reporting standards, particularly with respect to REITs, or applicable exemptions from the Investment Company Act of 1940, as amended;


•	actual or anticipated changes in our dividend policy and earnings or variations in operating results;


•	any shortfall in revenue or net income or any increase in losses from levels expected by securities analysts;


•	decreases in our net asset value per share;


•	loss of major repurchase agreement providers; and


•	general market and economic conditions.

Future offerings of debt securities, which would rank senior to our common stock and preferred stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may raise capital through the issuance of debt or equity securities. Upon liquidation, holders of our debt securities, if any, preferred stock and lenders with respect to other borrowings will be entitled to our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock has a preference on liquidating distributions and a preference on dividend payments that could limit our ability to pay dividends to the holders of our common stock. Sales of substantial amounts of our common stock, or the perception that these sales could occur, could have a material adverse effect on the price of our common stock. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

Future sales of shares of our common stock may depress the price of our shares.

We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales on the market price of our common stock. Any sales of a substantial number of our shares in the public market, or the perception that sales might occur, may cause the market price of our shares to decline.

We have not established a minimum dividend payment level and we cannot assure you of our ability to pay dividends in the future.

We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially all of our taxable income in each year is distributed to our stockholders. We have not established a minimum dividend payment level and the amount of our dividend will fluctuate. Our ability to pay dividends may be adversely affected

by the risk factors described herein. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, the requirements for REIT qualification and such other factors as our Board of Directors may deem relevant from time to time. We may not be able to make distributions in the future or our Board of Directors may change our dividend policy in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to pay dividends in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for Federal income tax purposes. A return of capital reduces the basis of a stockholder's investment in our common stock to the extent of such basis and is treated as capital gain thereafter.

An increase in market interest rates may cause a material decrease in the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions are likely to affect adversely the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby reducing cash flow and our ability to service our indebtedness and pay distributions.

The stock ownership limit imposed by the Internal Revenue Code for REITs and our charter may restrict our business combination opportunities.

To qualify as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be

owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at

any time during the last half of each taxable year in which we qualify as a REIT. Our charter, with certain exceptions, authorizes our Board of Directors to take the actions that are necessary and desirable to qualify as a REIT. Pursuant to our charter, no person may beneficially or constructively own more than 9.8% in value or in number of shares, whichever is more restrictive, of our common or capital stock.

Our Board of Directors may grant an exemption from this 9.8% stock ownership limitation, in its sole discretion, subject

to such conditions, representations and undertakings as it may determine are reasonably necessary. Pursuant to our charter, our Board of Directors has the power to increase or decrease the percentage of common or capital stock that a person may beneficially or constructively own. However, any decreased stock ownership limit will not apply to any person whose percentage ownership of our common or capital stock, as the case may be, is in excess of such decreased stock ownership limit until that person's percentage ownership of our common or capital stock, as the case may be, equals or falls below the decreased stock ownership limit. Until such a person's percentage ownership of our common or capital stock, as the case may be, falls below such decreased stock ownership limit, any further acquisition of our common or capital stock will be in violation of the decreased stock ownership limit.

The ownership limits imposed by the tax law are based upon direct or indirect ownership by "individuals," but only during the last half of a tax year. The ownership limits contained in our charter apply to the ownership at any time by any "person," which term includes entities. Any attempt to own or transfer shares of our common stock or capital stock in violation of these restrictions may result in the shares being transferred to a charitable trust or may be void. These ownership limitations are intended to assist us in complying with the tax law requirements, and to minimize administrative burdens. However, these ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

The stock ownership limitation contained in our charter generally does not permit ownership in excess of 9.8% of our common or capital stock, and attempts to acquire our common or capital stock in excess of these limits will be ineffective unless an exemption is granted by our Board of Directors.

As described above, our charter generally prohibits beneficial or constructive ownership by any person of more than 9.8% (by value or by number of shares, whichever is more restrictive) of our common or capital stock, unless exempted by our Board of Directors. Our charter's constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than these percentages of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of these percentages of the outstanding stock and thus be subject to our charter's ownership limit. Any

attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the Board of Directors will result in the shares being automatically transferred to a charitable trust or, if the transfer to a charitable trust would not be effective, such transfer being treated as invalid from the outset.

Certain provisions in our charter and bylaws could discourage a change of control that our stockholders may favor, which could also adversely affect the market price of our common stock.

Provisions in our charter and bylaws may make it more difficult and expensive for a third party to acquire control of us, even if a change of control would be beneficial to our stockholders. For example, our charter authorizes our Board of Directors to issue up to 50,000,000 shares of preferred stock in one or more classes or series and to fix the rights, preferences, privileges and restrictions of unissued series of preferred stock, each without any vote or action by our stockholders. We could issue a series of preferred stock to impede the completion of a merger, tender offer or other takeover attempt. These and other provisions in our charter and bylaws may impede takeover attempts, or other transactions, that may be in the best interests of our stockholders and, in particular, our common stockholders. In addition, the market price of our common stock could be adversely affected to the extent that provisions of our charter and bylaws discourage potential takeover attempts, or other transactions, that our stockholders may favor.

Certain provisions of Maryland law may limit the ability of a third party to acquire control of our company.

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of delaying, deferring or preventing a transaction or a change of control of our company that might involve a premium price for holders of our common stock or otherwise be in their best interests.

Subject to certain limitations, provisions of the MGCL prohibit certain business combinations between us and an "interested stockholder" (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding voting stock or an affiliate or associate of ours who beneficially owned 10% or more of the voting power of our then outstanding stock during the two-year period immediately prior to the date in question) or an affiliate of the interested stockholder for five years after the most recent date on which the stockholder became an interested stockholder. After the five-year period, business combinations between us and an interested stockholder or an affiliate of the interested stockholder must generally either provide a minimum price to our stockholders (as defined in the MGCL) in the form of cash or other consideration in the same form as previously paid by the interested stockholder or be recommended by our Board of Directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of our outstanding shares of voting stock and at least two-thirds of the votes entitled to be cast by stockholders other than the interested stockholder and its affiliates and associates. These provisions of the MGCL relating to business combinations do not apply, however, to business combinations that are approved or exempted by our Board of Directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has by resolution exempted business combinations between us and American Capital and its affiliates, and between us and any other person, provided that in the latter case the business combination is first approved by our Board of Directors (including a majority of our directors who are not affiliates or associates of such person). However, our Board of Directors may repeal or modify this resolution at any time in the future, in which case the applicable provisions of this statute will become applicable to business combinations between us and interested stockholders.

The "control share" provisions of the MGCL provide that holders of "control shares" of a Maryland corporation (defined as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership or control of "control shares") have no voting rights with respect to such shares except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our officers and our employees who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

Additionally, Title 3, Subtitle 8 of the MGCL permits our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to elect to be subject to certain provisions relating to corporate governance that may have the effect of delaying, deferring or preventing a transaction or a change of control of our company that might involve a premium to the market price of our common stock or otherwise be in our stockholders' best interests. We are subject to some of these provisions, either by provisions of our charter and bylaws unrelated to Subtitle 8 or by reason of an election in our charter to be subject to certain provisions of Subtitle 8.

Our Board of Directors has the power to cause us to issue additional shares of our stock without stockholder approval.

Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In addition, our Board of Directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our Board of Directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

We do not own any property. Our executive and administrative office is located in Bethesda, Maryland in office space shared with American Capital. RCS operates from leased office space in Fort Worth, Texas.

Item 3. Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As

of December 31, 2014, we are not party to any material litigation or legal proceedings, or to the best of our knowledge, any threatened litigation or legal proceedings, which, in our opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial condition.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Quarterly Stock Prices

Our common stock is listed on The NASDAQ Global Select Market under the symbol "MTGE." As of January 31, 2015, we had 94 stockholders of record. Most of the shares of our common stock are held by brokers and other institutions on behalf of stockholders.

The following table sets forth the range of quarterly high and low sales prices of our common stock as reported on The NASDAQ Global Select Market for the fiscal years ended December 31, 2014 and 2013.



	Common Stock
Period	High		Low
2014
Fourth Quarter	$	20.22	$	18.79
Third Quarter	$	20.62	$	18.81
Second Quarter	$	20.68	$	18.64
First Quarter	$	20.35	$	17.37

2013
Fourth Quarter	$	21.06	$	17.27
Third Quarter	$	21.30	$	16.01
Second Quarter	$	26.62	$	17.38
First Quarter	$	26.71	$	23.81

Dividends Declared

The following table summarizes quarterly dividends declared on our common stock for the years ended December 31, 2014 and 2013 and their related tax characterization (in thousands except per share data):



					Tax Characterization of Dividends
Declaration Date	Record Date	Payment Date	Dividend Per Share		Ordinary Income Per Share		Qualified Dividends		Capital Gains Per Share
December 18, 2014	December 31, 2014	January 27, 2015	$	0.65	$	0.65	$	—	$	—
September 18, 2014	September 30, 2014	October 27, 2014	0.65		0.65		—		—
June 17, 2014	June 30, 2014	July 28, 2014	0.65		0.65		—		—
March 20, 2014	March 31, 2014	April 28, 2014	0.65		0.65		—		—
December 18, 2013	December 31, 2013	January 28, 2014	0.65		0.65		—		—
September 19, 2013	September 30, 2013	October 28, 2013	0.70		0.70		—		—
June 18, 2013	June 28, 2013	July 26, 2013	0.80		0.80		—		—
March 7, 2013	March 20, 2013	April 26, 2013	0.90		0.90		—		—

We intend to pay quarterly dividends on our common stock and to distribute to our stockholders all of our annual taxable income in a timely manner. This will enable us to qualify for the tax benefits accorded to a REIT under the Internal Revenue Code. We have not established a minimum dividend payment level and our ability to pay dividends may be adversely affected for the reasons described under the caption "Risk Factors." In addition, holders of our 8.125% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred Stock") 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. Under certain circumstances upon a change of control, the Series A Redeemable Preferred Stock is convertible to

shares of our common stock. All distributions will be made at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Board of Directors may deem relevant from time to time.

Our stock transfer agent and registrar is Computershare Investor Services. Requests for information from Computershare can be sent to Computershare Investor Services, P.O. Box 43078, Providence, RI 02940-3078 and their telephone number is 1-800-733-5001.

Equity Compensation Plan Information

We have adopted the American Capital Mortgage Investment Corp. Amended and Restated Equity Incentive Plan, or Incentive Plan, to provide for the issuance of equity-based awards, including stock options, restricted stock units and unrestricted stock awards to eligible participants.

The following table provides information as of December 31, 2014 concerning shares of our common stock authorized for issuance under our existing Incentive Plan.



Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights	Weighted-average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in the first column of this table)
Equity compensation plans approved by security holders ⁽¹⁾	290,445	$	—	1,057,661
Equity compensation plans not approved by security holders	—	—		—
Total	290,445	$	—	1,057,661

__________

⁽¹⁾ Represents unvested restricted stock units and unvested shares of restricted stock awarded to our independent directors and certain employees of RCS.

Performance Graph

The following graph compares a stockholder's cumulative total return, assuming $100 invested at August 3, 2011 (the date of our IPO), with the reinvestment of all dividends, as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the Standard & Poor's 500 Stock Index ("S&P 500"); (iii) the stocks included in the FTSE NAREIT Mortgage REIT Index; (iv) an index of selected issuers in our residential mortgage-related REIT Peer Group composed of AG Mortgage Investment Trust Inc, Apollo Residential Mortgage Inc, Chimera Investment Corporation, Dynex Capital Inc., Invesco Mortgage Capital Inc., MFA Financial, Inc., Two Harbors Investment Corp and Western Asset Mortgage Capital Corp. (the "New Peer Group"); and (v) an index of selected issuers in our residential mortgage-related REIT Peer Group composed of Chimera Investment Corporation, Dynex Capital Inc., Invesco Mortgage Capital Inc., MFA Financial, Inc., Pennymac Mortgage Investment Trust, Redwood Trust, Inc. and Two Harbors Investment Corp. (the "Old Peer Group"). AG Mortgage Investment Trust Inc, Apollo Residential Mortgage Inc and Western Asset Mortgage Capital Corp. have been added to the New Peer Group to reflect their status as significant competitors of MTGE's business. Pennymac Mortgage Investment Trust and Redwood Trust, Inc. have been excluded because we no longer believe these companies to be comparable to MTGE in its overall business and operations.



Date	American Capital Mortgage Investment Corp.		S&P 500		FTSE NAREIT Mortgage REITs		New Peer Group		Old Peer Group
8/3/2011	$	100.00	$	100.00	$	100.00	$	100.00	$	100.00
12/31/2011	$	99.32	$	98.31	$	100.03	$	89.37	$	88.43
12/31/2012	$	144.36	$	114.04	$	119.92	$	121.75	$	124.79
12/31/2013	$	124.26	$	150.98	$	117.57	$	125.22	$	132.86
12/31/2014	$	153.09	$	171.64	$	138.60	$	152.44	$	156.83

Item 6. Selected Financial Data.

The following selected financial data are derived from our audited consolidated financial statements for the years ended December 31, 2014, 2013 and 2012 and for the period from August 9, 2011 (date operations commenced) through December 31, 2011. The selected financial data should be read in conjunction with the more detailed information contained in the Consolidated Financial Statements and Notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report on Form 10-K (in thousands, except per share amounts).



	December 31,
	2014			2013			2012			2011
Balance sheet data:
Investment portfolio, at fair value	$	5,918,230		$	5,932,474		$	7,048,445		$	1,779,323
Total assets	$	7,031,252		$	8,397,865		$	7,696,140		$	2,170,322
Repurchase agreements	$	5,423,630		$	7,158,192		$	6,245,791		$	1,706,281
Total liabilities	$	5,855,283		$	7,295,145		$	6,770,578		$	1,961,521
Total stockholders' equity	$	1,175,969		$	1,102,720		$	925,562		$	208,801
Net asset value per common share	$	21.91		$	21.47		$	25.74		$	20.87

	For the Year Ended December 31,									For the Period from August 9, 2011 (date operations commenced) through December 31, 2011
	2014			2013			2012
Statement of operations data:
Interest income	$	183,358		$	255,699		$	145,420		$	16,414
Interest expense	(28,631		)	(38,754		)	(22,067		)	(1,737		)
Net interest income	154,727			216,945			123,353			14,677
Net servicing loss	(15,213		)	(4,139		)	—			—
Other gains (losses)	45,265			(270,676		)	142,665			7,767
Expenses	(25,362		)	(25,921		)	(14,656		)	(2,743		)
Provision for income tax, net	(238		)	(679		)	(1,182		)	(32		)
Net income	159,179			(84,470		)	250,180			19,669
Dividend on preferred stock	(2,718		)	—			—			—
Net income (loss) to common shareholders	$	156,461		$	(84,470	)	$	250,180		$	19,669

Net income per common share - basic and diluted	$	3.06		$	(1.59	)	$	8.90		$	1.97
Weighted average number of common shares outstanding - basic	51,176			53,015			28,100			10,006
Weighted average number of common shares outstanding - diluted	51,192			53,015			28,100			10,006

Dividends declared per common share	$	2.60		$	3.05		$	3.60		$	1.00



	For the Year Ended December 31,									For the Period from August 9, 2011 (date operations commenced) through December 31, 2011
	2014			2013			2012
Ending agency securities, at fair value	$	4,384,139		$	5,641,682		$	6,367,042		$	1,740,091
Ending agency securities, at cost	$	4,374,729		$	5,820,194		$	6,229,770		$	1,726,274
Ending agency securities, at par	$	4,190,407		$	5,573,593		$	5,904,666		$	1,637,060
Average agency securities, at cost	$	4,759,753		$	7,352,882		$	4,580,366		$	1,372,057
Average agency securities, at par	$	4,562,017		$	6,996,922		$	4,363,888		$	1,295,991

Ending non-agency securities, at fair value ⁽¹⁾	$	1,168,834		$	1,011,217		$	681,403		$	75,754
Ending non-agency securities, at cost ⁽¹⁾	$	1,111,123		$	927,131		$	616,707		$	78,044
Ending non-agency securities, at par ⁽¹⁾	$	1,373,652		$	1,526,918		$	1,045,891		$	135,822
Average non-agency securities, at cost ⁽¹⁾	$	971,412		$	788,260		$	341,167		$	54,067
Average non-agency securities, at par ⁽¹⁾	$	1,458,861		$	1,334,104		$	566,446		$	92,839

Net TBA portfolio - as of period end, at fair value	$	271,617		$	(774,840	)	NM			NM
Net TBA portfolio - as of period end, at cost	$	259,985		$	(775,859	)	NM			NM
Average net TBA portfolio, at cost	$	685,683		$	559,724		NM			NM

Average total assets, at fair value	$	7,231,528		$	9,706,830		$	5,587,865		$	1,592,671
Average agency and non-agency repurchase agreements	$	4,989,896		$	7,222,101		$	4,490,364		$	1,300,138
Average stockholders' equity	$	1,165,952		$	1,208,812		$	660,695		$	201,854

Average coupon	2.96		%	3.11		%	3.34		%	3.91		%
Average asset yield	3.19		%	3.14		%	2.97		%	3.07		%
Average cost of funds ⁽²⁾	0.98		%	1.10		%	0.91		%	0.71		%
Average net interest rate spread	2.21		%	2.03		%	2.06		%	2.36		%
Average net interest rate spread, including estimated dollar roll income ⁽³⁾	2.28		%	2.13		%	NM			NM
Average coupon as of period end	3.06		%	2.94		%	3.17		%	3.87		%
Average asset yield as of period end	3.24		%	3.18		%	2.91		%	3.06		%
Average cost of funds as of period end	1.02		%	0.88		%	1.03		%	0.68		%
Average net interest rate spread as of period end	2.22		%	2.30		%	1.88		%	2.38		%
Average actual CPR for agency securities held during the period	7.6		%	6.5		%	6.1		%	4.9		%
Average projected life CPR for agency securities as of period end	8.2		%	7.3		%	9.0		%	11.5		%

Leverage - average during the period ⁽⁴⁾	4.7x			6.0x			6.8x			6.4x
Leverage - average during the period, including net TBA position	5.3x			6.3x			NM			NM
Leverage - as of period end ⁽⁵⁾	4.4x			5.9x			6.7x			8.0x
Leverage - as of period end, including net TBA position	4.6x			5.1x			NM			NM



Expenses % of average total assets - annualized	0.4		%	0.3		%	0.3		%	0.4		%
Expenses % of average stockholders' equity - annualized	2.2		%	2.1		%	2.2		%	3.4		%
Net book value per common share as of period end	$	21.91		$	21.47		$	25.74		$	20.87
Dividends declared per common share	$	2.60		$	3.05		$	3.60		$	1.00
Net return on average stockholders' equity	13.7		%	(7.0		)%	37.9		%	24.5		%

————————


⁽¹⁾	Includes non-agency securities underlying Linked Transactions.


⁽²⁾	Weighted average cost of funds includes periodic settlements of interest rate swaps.


⁽³⁾	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 other derivatives and securities, net.


⁽⁴⁾	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.


⁽⁵⁾	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.

Item 7. 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 Annual Report on Form 10-K for the year ended December 31, 2014. Our MD&A is presented in seven sections:


•	Executive Overview


•	Financial Condition


•	Results of Operations


•	Liquidity and Capital Resources


•	Off-Balance Sheet Arrangements


•	Aggregate Contractual Obligations


•	Forward-Looking Statements

EXECUTIVE OVERVIEW

The size and composition of our investment portfolio depend on investment strategies implemented by our Manager, the accessibility of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to leverage our investment portfolio appropriately. 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, and regulations or legal settlements that impact servicing practices or other mortgage related activities.

Our Investment Strategy


•	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

•

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 financing 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.

•

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 securities, 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 assets and the benchmark yield on U.S. Treasury securities or interest rate swap rates. The inherent spread risk associated with our assets 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.

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 were relatively stable during 2014, a sharp contrast to the extreme interest rate volatility and price deterioration experienced in 2013. The consensus view at the start of 2014 was that interest rates would continue to increase and agency RMBS spreads would widen as the Fed exited its third quantitative easing program ("QE3"). Weaker economic data and lower inflation expectations both domestically and abroad, however, led to a significant rally in interest rates and a flattening of the yield curve. Despite this unexpected decline in interest rates and the Fed’s gradual reduction of asset purchases, agency RMBS outperformed many other fixed income products over the course of 2014.

The strong performance of agency and non-agency securities drove our aggregate economic return of 14.1% for 2014, comprised of $2.60 of dividends per common share and a $0.44 increase in our net book value per common share. Over the year, agency RMBS benefited from historically low mortgage origination volume, conservative portfolio positioning by many fixed income investors who were underweight agency RMBS, and the favorable "stock effect" of the Fed's ownership of a significant portion of the agency RMBS market as of September 30, 2014. Our performance also benefited from our active approach to portfolio management, which included repositioning our asset portfolio, modifying the composition of our hedge portfolio and operating with a larger duration gap.

By the start of 2014, we had increased our 15 year fixed rate mortgage position to approximately 39% of our agency portfolio, which positioned us well for the strong performance of 15 year agency RMBS early in 2014. The relative outperformance of 15 year RMBS, combined with the flattening yield curve and our favorable outlook for 30 year RMBS, led us to gradually reduce our 15 year allocation to 27% of agency investments as of September 30, 2014. During the fourth quarter, in response to changing market conditions, we once again increased our allocation to 15 year RMBS and reduced our allocation to 30 year RMBS, resulting in a 43% allocation of agencies to 15 year investments as of December 31, 2014. This repositioning was in part driven by heightened prepayment risk and greater interest rate volatility, as 15 year RMBS tend to provide greater protection against both of these risks.

Our performance during 2014 also benefited from favorable financing terms available in the TBA dollar roll market. Given the attractiveness of TBA investments, we allocated a larger portion of our portfolio to TBA securities, rather than holding our investments in pool form funded by repurchase agreements. During 2014, we held an average net long TBA dollar roll position of $0.7 billion, compared to an average of $0.6 billion during 2013.

Our non-agency portfolio increased to $1.2 billion as of December 31, 2014 from $1.0 billion as of December 31, 2013. Non-agency securities performed well during 2014 in response to moderate national house price appreciation and favorable supply and demand dynamics. During 2014, average house prices appreciated 5%, slightly less than the appreciation experienced in 2013. Non-agency valuations were also supported by the shrinking supply of legacy securities. As of December 31, 2014, the unpaid principal balance of non-agency RMBS was less than $750 billion, or roughly 12% lower than the prior year. During the year, we shifted our portfolio allocation in favor of non-agency securities that we believe will perform better in a wider range of housing scenarios. Specifically, we reduced our holdings in securities issued prior to 2008 that were backed by subprime mortgages, as these securities tend to be more sensitive to home price appreciation and foreclosure timelines.

Over the course of the year, we opportunistically increased our investments in GSE credit risk transfer ("CRT") securities collateralized by prime mortgage loans to approximately 9% of our non-agency portfolio as of December 31, 2014, compared to less than 1% at the beginning of 2014. Looking forward, our investment in CRTs will likely increase further, given our view of the attractive risk-return attributes of these instruments. In 2015, we expect the GSEs to sell a portion of the credit risk

associated with approximately $300 billion of loans. The credit bonds that will be sold into the market will likely top $12 billion, vastly exceeding the issuance expected in the private label securities market.

Throughout 2014, we operated with a positive duration gap. Our duration gap was slightly larger earlier in the year than what we operated with during much of the prior year and subsequent periods during 2014. Our duration gap position was consistent with our moderate leverage profile and our assessment of the correlation between mortgage spreads and interest rates. Despite our somewhat larger duration gap during the first half of 2014, the aggregate amount of our extension risk was also consistent with historical levels. (For further discussion of our interest rate sensitivity, refer to Quantitative and Qualitative Disclosures about Market Risk in this Form 10-K.)

The table below summarizes interest rates and prices for generic agency RMBS as of the end of each respective quarter since December 31, 2013.



Interest Rate / Security ⁽¹⁾	December 31, 2014			September 30, 2014			June 30, 2014			March 31, 2014			December 31, 2013
LIBOR:
1-Month	0.17		%	0.16		%	0.16		%	0.15		%	0.17		%
3-Month	0.26		%	0.24		%	0.23		%	0.23		%	0.25		%
U.S. Treasury Securities:
2-Year U.S. Treasury	0.67		%	0.57		%	0.46		%	0.42		%	0.38		%
5-Year U.S. Treasury	1.65		%	1.76		%	1.63		%	1.72		%	1.74		%
10-Year U.S. Treasury	2.75		%	3.20		%	3.36		%	2.72		%	3.03		%
Interest Rate Swap Rates:
2-Year Swap Rate	0.89		%	0.82		%	0.58		%	0.55		%	0.49		%
5-Year Swap Rate	1.77		%	1.93		%	1.70		%	1.80		%	1.79		%
10-Year Swap Rate	2.29		%	2.64		%	2.63		%	2.84		%	3.09		%
30-Year Fixed Rate Agency Price:
3.5%	$	104.28		$	102.23		$	102.92		$	100.59		$	99.48
4.0%	$	106.75		$	105.41		$	106.11		$	103.94		$	103.11
4.5%	$	108.56		$	107.91		$	108.30		$	106.69		$	106.06
15-Year Fixed Rate Agency Price:
2.5%	$	101.81		$	100.55		$	101.59		$	99.92		$	99.00
3.0%	$	103.91		$	102.98		$	103.88		$	102.72		$	102.05
3.5%	$	105.61		$	105.11		$	105.98		$	104.83		$	104.58

________________________


⁽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⁾	December 31, 2014		September 30, 2014		June 30, 2014		March 31, 2014		December 31, 2013
30-Year Lower Loan Balance ⁽³⁾:
3.0%	$	0.34	$	0.38	$	0.28	$	0.16	$	0.02
3.5%	$	0.45	$	0.37	$	0.19	$	0.20	$	0.09
4.0%	$	0.98	$	0.67	$	0.41	$	0.36	$	0.23
30-Year HARP ⁽⁴⁾:
3.0%	$	—	$	—	$	—	$	—	$	—
3.5%	$	0.05	$	0.01	$	0.01	$	0.02	$	—
4.0%	$	0.30	$	0.15	$	0.06	$	0.07	$	0.06

^{________________________}


⁽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%.

Our subsidiary, Residential Credit Solutions, Inc. ("RCS"), is 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 2014, we continued to integrate the servicing platform into the broader MTGE operations, implementing cost savings opportunities and increasing RCS’ focus on traditional conforming servicing. We have been cautious in our acquisition of MSR so far, as the prices of these assets increased throughout much of the year. To date, we have purchased approximately $93 million in MSR with an underlying loan unpaid principal balance of approximately $7 billion during 2014. We expect our acquisition of MSR to be measured over the near term as we work to identify additional opportunities that are appropriately priced, with acceptable levels of exposure to adverse prepayment behavior and counterparty risk.

Looking ahead, we believe our portfolio is well positioned for a wide range of interest rate scenarios. There is growing uncertainty regarding future Fed actions with regard to short term interest rates given the apparent divergence between the favorable U.S. economic outlook and the deteriorating global economic picture. In addition, while the employment picture in the U.S. has improved substantially, inflation data and expectations remain well below the Fed’s objective, and global deflationary pressure appears to be gaining strength.

If interest rates continue to decline, we would expect prepayment speeds to accelerate substantially and mortgage spreads to widen somewhat, possibly adversely impacting our net book value in the near term. However, in this falling rate scenario, we also believe that our portfolio should perform relatively well given our sizable portfolio allocation to assets with favorable prepayment characteristics and the relatively low coupon profile of our portfolio, which should help mitigate potential book value declines. In addition, our current low leverage level and conservative interest rate risk profile give us the capacity and flexibility to grow our portfolio quickly if MBS weaken and expected returns on equity improve, thereby improving our future earnings profile. Conversely, if interest rates increase, we would expect MBS spreads to perform well in response to favorable supply and demand forces and rapidly improving prepayment dynamics. (For the estimated impact of changes in interests rates and mortgage spreads on our net book value please refer to Quantitative and Qualitative Disclosures about Market Risk in this Form 10-K.) Furthermore, 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 and, consequently, the actual impact of changes in interest rates and mortgage spreads could differ materially from our estimates.

Summary of Critical Accounting Estimates

Our critical accounting estimates relate to the fair value of our investments and derivatives and the 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 based on such estimates. Our significant accounting policies are described in Note 2 to the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K.

We have not designated any derivatives as hedging instruments and therefore all changes in fair value are reflected in income during the period in which they occur. We also 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. 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 economic hedging instruments.

Fair Value of Investments

We estimate the fair value of our investments based on inputs from multiple third-party pricing services and dealer quotes. The third-party pricing services use pricing models which incorporate such factors as coupons, primary and secondary mortgage rates, prepayment speeds, spread to the U.S. Treasury and interest rate swap curves, convexity, duration, periodic and life caps, default and severity rates and credit enhancements. The dealer quotes incorporate common market pricing methods, including a spread measurement to the U.S. Treasury or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security. Our Manager observes market information relevant to our specific investment portfolio by trading in the market for mortgage related investments. Our Manager uses this observable market information in reviewing the inputs to and the estimates derived from the valuation process for reasonableness. Changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently estimated. See Note 8 to the consolidated financial statements included under Item 8 of this Annual Report on Form 10-K.

Interest Income

Interest income is accrued based on the outstanding principal amount of the securities and their contractual terms. Premiums and discounts associated with the purchase of agency RMBS and non-agency securities of high 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. We estimate long-term prepayment speeds using a third-party service and market data.

The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, current mortgage rates of the outstanding loans, loan age, 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 their 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 current 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 securities and loans that are not of high credit quality, we determine an effective interest rate based on our estimate of the timing and amount of cash flows and our cost basis. 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. Our cash flow estimates for these investments are based on our Manager's judgment and observations of current information and events. These estimates include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. Furthermore, other market participants could use materially different assumptions with respect to default rates, severities, loss timing, or prepayments. Our assumptions are subject to

future events that may impact our estimates and interest income, and as a result, actual results may differ significantly from these estimates.

Derivatives

We maintain a risk management strategy, under which we may use a variety of derivative instruments to economically hedge some of our exposure to market risks, including interest rate risk, prepayment risk, extension risk and credit risk. Our risk management objective is to reduce fluctuations in net book value over a range of interest rate scenarios. 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 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-only securities, and synthetic total return swaps.

We recognize all derivatives as either assets or liabilities on our consolidated 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. In our consolidated statements of cash flows, cash receipts and payments related to derivative instruments are reported in the investing section.

FINANCIAL CONDITION

As of December 31, 2014, our investment portfolio with a fair value of $5.9 billion was consistent with our portfolio fair value as of December 31, 2013 and was comprised of $4.4 billion of agency RMBS, $0.3 billion in net long TBA positions, $1.2 billion of non-agency securities and $0.1 billion MSR.

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 December 31, 2014, our net TBA position had a net carrying value of $11.6 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 December 31, 2014 and 2013 (dollars in thousands, except per share amounts):



	December 31,
	2014		2013
Balance Sheet Data:
Total agency and non-agency securities	$	5,552,973	$	6,652,899
Total assets	$	7,031,252	$	8,397,865
Repurchase agreements	$	5,423,630	$	7,158,192
Total liabilities	$	5,855,283	$	7,295,145
Total stockholders’ equity	$	1,175,969	$	1,102,720
Net asset value per common share	$	21.91	$	21.47

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



	December 31, 2014
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield ⁽¹⁾
Fannie Mae	$	3,482,127	$	3,474,600	$	3,333,348	3.37	%	2.54	%
Freddie Mac	902,012		900,129		857,059		3.50	%	2.65	%
Agency RMBS total	4,384,139		4,374,729		4,190,407		3.39	%	2.56	%
Non-agency securities	1,168,834		1,111,123		1,373,652		2.06	%	5.92	%
Total	$	5,552,973	$	5,485,852	$	5,564,059	3.06	%	3.24	%

	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 securities	1,011,217		927,131		1,526,918		1.46	%	7.07	%
Total	$	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 December 31, 2014 and 2013, respectively, based on forward rates. For non-agency securities, 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 increased slightly, while the weighted average projected CPR increased by approximately 1 percentage point from December 31, 2013 to December 31, 2014. The relative stability in the agency RMBS portfolio yield resulted from our rebalancing of the portfolio towards a larger percentage of higher-yielding, 30-year securities and away from lower yielding 15-year securities.

The following table summarizes certain characteristics of our agency RMBS portfolio by term and coupon as of December 31, 2014 (dollars in thousands):



	December 31, 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%	$	587,127	$	589,786	$	574,772	1.89	%	8	%
3.0%	605,346		599,126		580,701		2.25	%	9	%
3.5%	289,367		284,999		272,918		2.41	%	10	%
4.0%	218,026		216,503		202,751		2.17	%	11	%
4.5%	17,308		17,352		16,271		2.67	%	11	%
≤ 15-year total	1,717,174		1,707,766		1,647,413		2.15	%	9	%
20-year
3.0%	70,689		71,191		68,647		2.27	%	9	%
3.5%	114,113		111,683		108,207		2.87	%	9	%
4.0%	5,320		5,208		4,945		2.72	%	12	%
5.0%	2,471		2,448		2,228		2.14	%	18	%
20-year total	192,593		190,530		184,027		2.63	%	9	%
30-year
3.5%	1,418,564		1,427,505		1,355,051		2.75	%	7	%
4.0%	818,553		817,528		761,885		2.97	%	7	%
4.5%	87,621		85,834		79,705		3.27	%	9	%
30-year total	2,324,738		2,330,867		2,196,641		2.84	%	7	%
Pass through agency RMBS	4,234,505		4,229,163		4,028,081		2.55	%	8	%
Agency CMO	23,928		23,453		38,387		2.92	%	7	%
Total fixed-rate agency RMBS	4,258,433		4,252,616		4,066,468		2.56	%	8	%
Adjustable rate agency RMBS	125,706		122,113		123,939		2.83	%	14	%
Total agency RMBS	$	4,384,139	$	4,374,729	$	4,190,407	2.56	%	8	%

The percentage of our fixed-rate agency RMBS portfolio allocated to HARP and lower loan balance securities was 87% (not including our net long TBA position) as of December 31, 2014 as detailed in the following table (dollars in thousands):



	December 31, 2014
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield		Projected CPR
HARP ⁽¹⁾	$	1,238,790	$	1,236,608	$	1,175,541	3.58	%	2.80	%	7	%
Lower Loan Balance ⁽²⁾	2,476,825		2,471,101		2,349,679		3.47	%	2.55	%	8	%
Other	518,890		521,454		502,861		2.81	%	1.96	%	9	%
Pass through agency RMBS	4,234,505		4,229,163		4,028,081		3.42	%	2.55	%	8	%
Agency CMO	23,928		23,453		38,387		3.05	%	2.92	%	7	%
Total fixed-rate agency RMBS	4,258,433		4,252,616		4,066,468		3.42	%	2.56	%	8	%
Adjustable rate agency RMBS	125,706		122,113		123,939		2.60	%	2.83	%	14	%
Total agency RMBS	$	4,384,139	$	4,374,729	$	4,190,407	3.39	%	2.56	%	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 110% and 125% for 15-year and 30-year securities, respectively, as of December 31, 2014. Includes $601.2 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 $102,962 and $88,127 for 15-year and 30-year securities, respectively, as of December 31, 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
2.5%	$	773,891	$	802,613	$	779,508	1.90	%	6	%
3.0%	817,409		826,548		800,668		2.30	%	7	%
3.5%	592,621		592,266		565,929		2.45	%	8	%
4.0%	264,041		265,976		248,051		2.25	%	9	%
4.5%	21,335		21,223		19,832		2.73	%	10	%
≤ 15-year total	2,469,297		2,508,626		2,413,988		2.21	%	8	%
20-year
3.0%	74,408		78,085		75,017		2.37	%	5	%
3.5%	71,283		71,860		69,666		2.96	%	7	%
4.0%	6,162		6,233		5,878		2.91	%	7	%
5.0%	2,529		2,632		2,331		2.34	%	11	%
20-year total	154,382		158,810		152,892		2.66	%	6	%
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 fixed-rate agency RMBS portfolio allocated to HARP and lower loan balance securities was 83% 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 December 31, 2014 and 2013 (dollars in thousands):



	December 31, 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	$	—	$	—	—	%	—	%	$	9,089	$	9,095	2.38	%	3.49	%
Greater than three years and less than or equal to five years	1,528,121		1,520,350		2.13	%	3.05	%	2,142,111		2,159,311		2.29	%	3.20	%
Greater than five years and less than or equal to 10 years	2,827,653		2,826,297		2.79	%	3.58	%	3,485,241		3,646,188		2.72	%	3.43	%
Greater than 10 years	28,365		28,082		3.12	%	3.52	%	5,241		5,600		2.96	%	3.50	%
Total	$	4,384,139	$	4,374,729	2.56	%	3.39	%	$	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 December 31, 2014 and 2013, respectively. However, the weighted average expected life of our agency RMBS increased to 6.8 years as of December 31, 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 104.4% of par value as of December 31, 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 December 31, 2014 and 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 December 31, 2014 and 2013 (dollars in thousands):



	December 31, 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%	$	169,660		$	171,059		$	172,756		$	1,697
3.0%	178,000			185,601			184,983			(618		)
3.5%	(69,778		)	(73,720		)	(73,673		)	47
Subtotal	277,882			282,940			284,066			1,126
30-Year
3.0%	556,200			556,494			562,478			5,984
3.5%	83,770			86,848			87,357			509
4.0%	(609,180		)	(652,752		)	(648,713		)	4,039
4.5%	(12,500		)	(13,545		)	(13,571		)	(26		)
Subtotal	18,290			(22,955		)	(12,449		)	10,506
Portfolio total	$	296,172		$	259,985		$	271,617		$	11,632



	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	)	$	(404	)
3.0%	(336,848		)	(343,163		)	(343,069		)	94
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		)	137
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			158
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 security 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 securities portfolio as of December 31, 2014 and 2013 (dollars in thousands):



December 31, 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⁾	$	282,338	$	11,434	$	(6,489	)	$	277,393	$	(21,827	)	$	299,220	3.45	%	6.04	%
Alt-A	486,254		42,536		(4,090		)	447,808		(169,221		)	617,029		1.67	%	6.54	%
Option-ARM	173,727		11,317		(2,473		)	164,883		(42,338		)	207,221		0.43	%	5.88	%
Subprime	226,515		5,818		(342		)	221,039		(29,143		)	250,182		2.70	%	4.57	%
Total	$	1,168,834	$	71,105	$	(13,394	)	$	1,111,123	$	(262,529	)	$	1,373,652	2.06	%	5.92	%

————————


⁽¹⁾	Coupon rates are floating, except for $2.5 million, $20.1 million, and $151.2 million fair value of fixed-rate prime, Alt-A, and subprime non-agency securities, respectively, as of December 31, 2014.


⁽²⁾	Prime non-agency securities include GSE credit risk transfer securities with $104.1 million in fair value as of December 31, 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 securities, respectively, as of December 31, 2013.


⁽²⁾	Prime non-agency securities include GSE credit risk transfer securities with $5.3 million in fair value and 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 securities by their estimated weighted average life classifications as of December 31, 2014 and 2013 (dollars in thousands):



	December 31, 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	$	436,385	$	422,400	5.15	%	2.85	%	$	203,935	$	194,800	5.59	%	2.19	%
> 5 to ≤ 7 years	486,869		446,967		6.68	%	1.29	%	211,013		195,913		6.84	%	2.38	%
>7 years	245,580		241,756		5.89	%	2.43	%	596,269		536,418		7.70	%	1.08	%
Total	$	1,168,834	$	1,111,123	5.92	%	2.06	%	$	1,011,217	$	927,131	7.07	%	1.46	%

Our non-agency securities are subject to risk of loss with regard to principal and interest payments. As of December 31, 2014 and 2013, our non-agency securities 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 securities. However, the non-agency securities in our portfolio were generally purchased at a significant discount to par value. The following table summarizes the credit ratings of our non-agency securities as of December 31, 2014 and 2013:



Credit Rating ⁽¹⁾	December 31, 2014		December 31, 2013
AAA	—	%	5	%
A	—	%	2	%
BBB	1	%	—	%
BB	4	%	3	%
B	5	%	7	%
Below B	53	%	56	%
Not Rated	37	%	27	%
Total	100	%	100	%

————————


⁽¹⁾	Represents the lowest of Standard and Poor's, 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 December 31, 2014 and 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 December 31, 2014 and 2013, 21% and 22%, respectively, 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 securities had weighted average credit enhancements of 9% and 8% as of December 31, 2014 and 2013, respectively.

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



December 31, 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⁾	$	282,338	$	93.20	79	73	%	744	5	%	12	%
Alt-A	486,254		68.79		111	76	%	712	17	%	9	%
Option-ARM	173,727		76.12		107	75	%	707	23	%	8	%
Subprime	226,515		87.50		111	78	%	615	48	%	9	%
Total	$	1,168,834	$	79.35	103	75	%	700	21	%	10	%



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 ⁽⁵⁾	$	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 securities 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 securities. Proceeds received for each security are dependent on the position of the individual security within the structure of each deal.


⁽⁴⁾	Prime non-agency securities include GSE credit risk transfer securities with $104.1 million in fair value as of December 31, 2014.

⁽⁵⁾

Prime non-agency securities include GSE credit risk transfer securities with $5.3 million in fair value and 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 prime non-agency securities average purchase price presented in the table excludes interest only investments with a weighted average purchase price of $4.31 as of December 31, 2013.

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



	% of Non-Agency Portfolio
	December 31, 2014		December 31, 2013
California	37	%	38	%
Florida	9	%	9	%
New York	5	%	5	%
Virginia	4	%	4	%
Maryland	4	%	4	%
Total	59	%	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 did not originate the mortgage loans underlying our MSR. As of December 31, 2014, our MSR purchased during the year had a fair market value of $79.6 million.

The following table summarizes certain underlying loan characteristics for our purchased MSR as of December 31, 2014:



	December 31, 2014
Unpaid principal balance (in thousands)	$	7,136,994
Number of loans	33,911
Average Loan Size (in thousands)	$	210
Average Loan Age (months)	23
Average Coupon	3.80		%
Average Original Loan-to-Value	75		%
Average Original FICO	760
60+ delinquencies	0.12		%

Repurchase Financing and Hedging

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



	December 31, 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	$	4,002,291	0.42	%	245	$	5,935,610	0.43	%	96
Non-agency securities	715,704		1.67	%	20	647,068		1.79	%	33
U.S. Treasury securities	705,635		(0.13	)%	7	575,514		0.07	%	2
Total repurchase agreements	5,423,630		0.51	%	190	$	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 December 31, 2014 and 2013 (dollars in thousands):



	December 31, 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	$	2,245,188	0.71	%	13	$	3,047,986	0.60	%	14
> 1 to ≤ 2 months	568,014		0.55	%	45	816,960		0.55	%	45
> 2 to ≤ 3 months	540,201		0.48	%	74	1,506,888		0.52	%	77
> 3 to ≤ 6 months	508,216		0.43	%	142	621,124		0.54	%	135
> 6 to ≤ 9 months	123,947		0.51	%	246	147,729		0.49	%	249
> 9 to ≤ 12 months	217,429		0.51	%	327	191,991		0.50	%	321
> 12 months	515,000		0.63	%	1405	250,000		0.59	%	853
Total	4,717,995		0.61	%	210	6,582,678		0.56	%	90

U.S. Treasury repurchase agreements
Short-term	705,635		(0.13	)%	7	575,514		0.07	%	2
Total repurchase agreements	$	5,423,630	0.51	%	190	$	7,158,192	0.52	%	83

As of December 31, 2014 and 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):



December 31, 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	$	1,065,000	$	(1,635	)	0.97	%	0.23	%	1.6
> 3 to ≤ 5 years	850,000		(4,441		)	1.91	%	0.23	%	4.2
> 5 to ≤ 7 years	1,625,000		(38,780		)	2.66	%	0.23	%	6.0
> 7 years	475,000		(18,782		)	2.87	%	0.25	%	8.2
Total	$	4,015,000	$	(63,638	)	2.08	%	0.23	%	4.7



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 $2.1 billion with deferred start dates averaging 1.1 years from December 31, 2014.


⁽²⁾	Excluding forward starting swaps, the weighted average pay rate was 1.24% and 1.18% as of December 31, 2014 and 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 December 31, 2014 and 2013 (dollars in thousands):



December 31, 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	$	4,013	$	1,972	0.1	$	150,000	2.78	%	4.3
> 3 to ≤ 12 months	3,139		1,432		0.9	200,000		3.29	%	8.8
>12 to ≤ 24 months	1,308		207		1.3	100,000		4.13	%	7.0
> 24 months	2,735		1,853		2.9	100,000		3.21	%	5.0
Total / weighted average	$	11,195	$	5,464	1.1	$	550,000	3.29	%	6.5



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 years ended December 31, 2014, 2013 and 2012 (dollars in thousands, except per share amounts):



	For the Year Ended December 31,
	2014			2013			2012
Interest income:
Agency securities	$	118,764		$	199,964		$	122,082
Non-agency securities	64,282			55,368			23,029
Other	312			367			309
Interest expense	(28,631		)	(38,754		)	(22,067		)
Net interest income	154,727			216,945			123,353

Servicing:
Servicing income	45,873			3,350			—
Servicing expense	(61,086		)	(7,489		)	—
Net servicing loss	(15,213		)	(4,139		)	—

Other gains (losses):
Realized gain (loss) on agency securities, net	(8,263		)	(170,252		)	73,610
Realized gain on non-agency securities, net	39,080			16,856			1,780
Realized loss on periodic settlements of interest rate swaps, net	(20,388		)	(41,006		)	(18,458		)
Realized gain (loss) on other derivatives and securities, net	(20,445		)	112,573			(46,748		)
Unrealized gain (loss) on agency securities, net	187,921			(315,784		)	123,456
Unrealized gain (loss) on non-agency securities, net	(26,375		)	19,391			64,310
Unrealized gain (loss) on other derivatives and securities, net	(98,654		)	107,546			(55,285		)
Unrealized loss on mortgage servicing rights	(7,611		)	—			—
Total other gains (losses), net	45,265			(270,676		)	142,665

Expenses:
Management fees	17,641			18,680			9,638
General and administrative expenses	7,721			7,241			5,018
Total expenses	25,362			25,921			14,656

Income (loss) before provision for income tax	159,417			(83,791		)	251,362
Provision for income tax, net	238			679			1,182
Net income (loss)	159,179			(84,470		)	250,180
Dividend on preferred stock	(2,718		)	—			—
Net income (loss) available (attributable) to common shareholders	$	156,461		$	(84,470	)	$	250,180

Weighted average number of common shares outstanding — basic	51,176			53,015			28,100
Weighted average number of common shares outstanding — diluted	51,192			53,015			28,100

Net income (loss) per common share — basic and diluted	$	3.06		$	(1.59	)	$	8.90

FISCAL YEAR 2014 COMPARED TO FISCAL YEAR 2013

Interest Income and Asset Yields

The tables below present the interest income and weighted average yield for our agency and non-agency securities during the years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014						2013
	Average Amortized Cost		Weighted Average Yield		Interest Income		Average Amortized Cost		Weighted Average Yield		Interest Income
Agency RMBS⁽¹⁾	$	4,759,753	2.50	%	$	118,764	$	7,352,882	2.72	%	$	199,964
Non-agency securities	971,412		6.62	%	64,282		788,260		7.02	%	55,368
Total	$	5,731,165	3.19	%	$	183,046	$	8,141,142	3.14	%	$	255,332

——————


⁽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 years ended December 31, 2014 and 2013 (in thousands):



	For the Year Ended December 31, 2014 vs 2013
				Due to Change in Average⁽¹⁾
	Increase / (Decrease)			Volume			Yield
Agency RMBS	$	(81,200	)	$	(65,806	)	$	(15,394	)
Non-agency securities	8,914			11,873			(2,959		)
Total	$	(72,286	)	$	(53,933	)	$	(18,353	)

——————


⁽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 $(81.2) million during the year ended December 31, 2014 compared to the year ended December 31, 2013, due mainly to reduced average balances resulting from an increased allocation to TBA investments and, to a lesser extent, lower average yields. Interest income on non-agency securities increased by $8.9 million during the year ended December 31, 2014 compared to the year ended December 31, 2013, due primarily to an increase in average balances, partially offset by lower average yields.

We amortize or accrete premiums and discounts associated with agency RMBS and non-agency securities 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 December 31, 2014 and 2013, respectively. The actual CPR realized for individual agency RMBS in our investment portfolio was approximately 7.6% and 6.5% for the years ended December 31, 2014 and 2013, respectively.

Interest income from our agency RMBS is net of premium amortization expense of $35.6 million and $38.9 million for the years ended December 31, 2014 and 2013, respectively. The change in our weighted average CPR estimates resulted in the recognition of "catch up" premium amortization benefit (expense) of approximately $(3.6) million and $8.5 million for the years ended December 31, 2014 and 2013, respectively. The amortized cost basis of our agency RMBS portfolio was 104.4% of par value as of both December 31, 2014 and 2013. The net unamortized premium balance of our aggregate agency RMBS portfolio was $184.3 million and $246.6 million, as of December 31, 2014 and 2013, respectively.

At the time we purchase non-agency securities 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 securities includes discount accretion of $40.6 million and $35.5 million for the years ended December 31, 2014 and 2013, respectively. The weighted average cost basis of the non-agency portfolio was 80.9% and 60.7% of par as of December 31, 2014 and 2013, respectively. The total net discount remaining was $262.5 million and $599.8 million, with $135.9 million and $235.0 million designated as credit reserves as of December 31, 2014 and 2013, respectively.

Leverage

Our leverage, when adjusted for the net payables and receivables for unsettled securities and our net TBA position, was 4.6x and 5.1x our stockholders’ equity less investments in RCS and REIT equity securities as of December 31, 2014 and 2013, respectively. 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 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 December 31, 2012 (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⁾
December 31, 2014	$	4,610,643	$	4,757,415	$	4,717,995	0.61	%	4.3x	4.4x	4.6x
September 30, 2014	$	4,524,189	$	4,778,350	$	4,461,278	0.58	%	4.2x	4.1x	4.9x
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
March 31, 2013	$	5,832,005	$	6,245,791	$	6,137,343	0.52	%	4.9x	4.3x	7.4x
December 31, 2012	$	5,894,642	$	6,299,981	$	6,245,791	0.57	%	6.4x	6.7x	6.7x

————————


⁽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 securities by our total stockholders’ equity at period end less our 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 securities by our total stockholders’ equity at period end less our investments in RCS and REIT equity securities.

Adjusted leverage included in the table above includes 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 December 31, 2014, we had a net long TBA position with a notional value and underlying cost basis of $0.3 billion, respectively.

Interest Expense and Cost of Funds

Interest expense of $28.6 million and $38.8 million for the years ended December 31, 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 $20.4 million and $41.0 million for the years ended December 31, 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 tables below present our average adjusted cost of funds during the years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014					2013
	Average Balance / Effective Notional		Rate	Adjusted Cost of Funds ⁽¹⁾		Average Balance / Effective Notional		Rate	Adjusted Cost of Funds ⁽¹⁾
Repurchase agreements	$	4,989,896	0.57%	$	28,631	$	7,222,101	0.54%	$	38,754
Interest rate swaps	2,053,462		0.99%	20,388		3,411,154		1.20%	41,006
Total adjusted cost of funds			0.98%	$	49,019			1.10%	$	79,760

————————


⁽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 years ended December 31, 2014 and 2013 (in thousands):



	For the Year Ended December 31, 2014 vs 2013
				Due to Change in Average⁽¹⁾
	Increase / (Decrease)			Volume			Rate
Repurchase agreements	$	(10,123	)	$	(12,690	)	$	2,567
Interest rate swaps	(20,618		)	(14,385		)	(6,233		)
Total adjusted cost of funds	$	(30,741	)	$	(27,075	)	$	(3,666	)

——————


⁽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 $(30.7) million decrease in our adjusted cost of funds for the year ended December 31, 2014 compared to the year ended December 31, 2013 was attributable to a combination of lower average repurchase agreement balances and effective interest rate swap notional amounts and net pay rates, partially offset by an increase in repurchase agreement rates.

Net Servicing Loss

The following table presents the components of servicing income and expense for the years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013
Servicing fee income	$	30,544		$	2,603
Incentive, ancillary and other income	15,329			735
Other income	—			12
Servicing income	45,873			3,350

Employee compensation and benefit costs	31,963			2,845
Facility costs	12,591			447
Realization of cash flows from MSR	5,128			—
Other servicing costs	11,404			1,142
Acquisition related costs	—			3,055
Servicing expense	61,086			7,489

Net servicing loss	$	(15,213	)	$	(4,139	)

As of December 31, 2014, RCS managed a servicing portfolio of approximately 66,000 loans, representing approximately $14 billion in unpaid principal balances. 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 year ended December 31, 2014 were largely driven by a reduction in our on-balance sheet agency RMBS portfolio and a rebalancing of the agency and non-agency securities portfolios. 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 years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013
Proceeds from agency RMBS sold	$	2,277,424		$	7,817,303
Increase (decrease) in receivable for agency RMBS sold	(608,646		)	608,646
Less agency RMBS sold, at cost	(1,677,041		)	(8,596,201		)
Net realized gain (loss) on sale of agency RMBS	$	(8,263	)	$	(170,252	)

Gross realized gains on sale of agency RMBS	$	10,706		$	22,424
Gross realized losses on sale of agency RMBS	(18,969		)	(192,676		)
Net realized gain (loss) on sale of agency RMBS	$	(8,263	)	$	(170,252	)

The following table is a summary of our net realized gains on non-agency securities during the years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013
Proceeds from non-agency securities sold	$	583,345		$	197,259
Less: non-agency securities sold, at cost	(544,265		)	(180,403		)
Net realized gain on sale of non-agency securities	$	39,080		$	16,856

Gross realized gain on sale of non-agency securities	$	44,571		$	18,790
Gross realized loss on sale of non-agency securities	(5,491		)	(1,934		)
Net realized gain on sale of non-agency securities	$	39,080		$	16,856

Unrealized net gains of $187.9 million and losses of $(315.8) million on agency RMBS for the years ended December 31, 2014 and 2013, respectively, and unrealized net losses of $(26.4) million and gains of $19.4 million on non-agency securities for the years ended December 31, 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 years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013
Realized loss on periodic settlements of interest rate swaps, net	$	(20,388	)	$	(41,006	)
Realized gain on other derivatives and securities:
Interest rate swaps	$	(13,952	)	$	101,297
Interest rate swaptions	(17,836		)	18,558
TBA securities	33,345			(47,063		)
Mortgage options	257			—
U.S. Treasury securities	2,008			(12,952		)
U.S. Treasury futures	(6,645		)	6,322
U.S. Treasury securities sold short	(26,592		)	45,434
REIT equity investments	8,675			977
Interest only swaps	295			—
Total realized gain on other derivatives and securities, net	$	(20,445	)	$	112,573
Unrealized gain (loss) on other derivatives and securities:
Interest rate swaps	$	(105,529	)	$	97,769
Interest rate swaptions	(12,018		)	11,550
TBA securities	10,613			3,933
Mortgage options	—			—
U.S. Treasury securities	13,291			(11,862		)
U.S. Treasury futures	(4,464		)	3,399
U.S. Treasury securities sold short	(1,344		)	3,259
REIT equity investments	502			(502		)
Interest only swaps	295			—
Total unrealized gain (loss) on other derivatives and securities, net	$	(98,654	)	$	107,546

Realized and unrealized net losses on interest rate swaps and swaptions of $(119.5) million and $(29.9) million, respectively, during the year ended December 31, 2014 were due mainly to the decrease in longer-term swap interest rates during the first half of 2014. Realized and unrealized net gains on TBA securities of $44.0 million during the year ended December 31, 2014 were due mainly to the significant increase in 30-year and 15-year fixed rate agency pricing during the first half of 2014. For further details regarding our derivatives and related hedging activity please refer to Notes 2 and 6 to our consolidated financial statements in this Annual Report on Form 10-K.

Management Fees and General and Administrative Expenses

We pay our Manager a management fee payable monthly in arrears in an amount equal to one twelfth of 1.50% of 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 $17.6 million and $18.7 million during the years ended December 31, 2014 and 2013, respectively. The period-over-period decreases were primarily a function of our share repurchases and net realized losses on agency RMBS during the second half of 2013.

General and administrative expenses were $7.7 million and $7.2 million during the years ended December 31, 2014 and 2013, respectively. 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 2.2% and 2.1% for the years ended December 31, 2014 and 2013, respectively.

Dividends and Income Taxes

We had estimated taxable income of $99.7 million and $172.1 million (or $1.95 and $3.25 per common share) for the years ended December 31, 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 years ended December 31, 2014 and 2013 (dollars in thousands).



	For the Year Ended December 31,
	2014			2013
Net income (loss)	$	159,179		$	(84,470	)
Book to tax differences:
Unrealized (gains) and losses, net
Agency RMBS	(187,921		)	315,784
Non-agency securities	26,375			(19,391		)
Derivatives, MSR and other securities	106,265			(107,546		)
Premium amortization, net	(9,601		)	(9,647		)
Capital losses (gains) in excess of capital gains (losses)⁽¹⁾	(50,171		)	195,160
Realized gains (losses), net ⁽¹⁾	42,672			(122,612		)
Other	15,666			4,775
Total book to tax difference	(56,715		)	256,523
Estimated taxable income	102,464			172,053
Dividend on preferred stock	(2,718		)	—
Estimated taxable income available to common shareholders	99,746			$	172,053

Weighted average number of common shares outstanding — basic	51,176			53,015
Weighted average number of common shares outstanding — diluted	51,192			53,015

Estimated taxable income per common share	$	1.95		$	3.25
Estimated cumulative undistributed REIT taxable income per common share	$	0.12		$	0.77

Beginning cumulative non-deductible capital losses	$	195,068		$	—
Current period net capital loss (gain)	(50,171		)	195,068
Ending cumulative non-deductible capital losses	$	144,897		$	195,068
Ending cumulative non-deductible capital losses per common share	$	2.83		$	3.68

——————

⁽¹⁾

Our estimated taxable income for the years ended December 31, 2014 and 2013 excludes $0.98 per common share and $(3.68) per common share, respectively, of estimated net capital gains (losses) which are not included in our ordinary taxable income, as well as $0.70 per common share and $(2.21) per common share, respectively, of gains (losses) on terminated or expired swaptions and swaps, 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 combined function of utilization of capital loss carryforwards, hedging loss deferral and lower net spread income.

We believe that the above non-GAAP financial measures provide information useful to investors because estimated taxable income has an impact on the amount of dividends we are required to distribute over time in order to maintain our REIT tax qualification status.

We also believe that providing investors with 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 estimated taxable income is an incomplete measure of our financial performance and involves differences from net income computed in accordance with GAAP, this non-GAAP financial information should be considered supplementary to, and not 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 estimated taxable income may not be comparable to other similarly-titled measures of 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.

We declared dividends of $2.60 and $3.05 per common share for the years ended December 31, 2014 and 2013, respectively.

As of December 31, 2014, we had an estimated $6.3 million (or $0.12 per common share) of undistributed taxable income, net of the common stock dividend payable as of December 31, 2014 of $33.3 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 recorded estimated excise tax of $0.7 million for the year ended December 31, 2013.

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 December 31, 2014, RCS had Federal net operating loss ("NOL") carryforwards of approximately $68.0 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 December 31, 2014 were approximately $31.6 million, with respect to which RCS has provided a full valuation allowance.

We recorded $0.2 million of income tax related to income from American Capital Mortgage Investment TRS, LLC, a taxable subsidiary, for the year ended December 31, 2014.

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 years ended December 31, 2014 and 2013 (dollars in thousands, except per share amounts):



	For the Year Ended December 31,
	2014			2013
Interest income:
Agency RMBS	$	118,764		$	199,964
Non-agency securities and other	64,594			55,735
Interest expense	(28,631		)	(38,754		)
Net interest income	154,727			216,945
Dividend income from investments in REIT equity securities⁽¹⁾	1,840			977
Realized loss on periodic settlements of interest rate swaps, net	(20,388		)	(41,006		)
Adjusted net interest income	136,179			176,916
Management fees and general and administrative expenses	(25,362		)	(25,921		)
Net spread income	110,817			150,995
Dollar roll income	26,479			15,388
Net spread and dollar roll income	137,296			166,383
Dividend on preferred stock	(2,718		)	—
Net spread and dollar roll income available to common shareholders	$	134,578		$	166,383

Weighted average number of common shares outstanding — basic	51,176			53,015
Weighted average number of common shares outstanding — diluted	51,192			53,015

Net spread and dollar roll income per common share- basic and diluted	$	2.63		$	3.14
Net spread and dollar roll income, excluding "catch up" amortization per common share- basic and diluted	$	2.69		$	2.98

——————


⁽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 decreased $0.51 for the year ended December 31, 2014 compared to the year ended December 31, 2013 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 and that it is meaningful information to consider related to the economic costs of financing our investment portfolio inclusive of interest rate swaps used to economically hedge against fluctuations in our borrowing costs, without the effects of certain transactions that are not necessarily indicative of our current investment portfolio and operations.

However, because such non-GAAP financial information provides incomplete measures of our financial performance and involve differences from results computed in accordance with GAAP, they should be considered supplementary to, and not 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 of other companies.

FISCAL YEAR 2013 COMPARED TO FISCAL YEAR 2012

Interest Income and Asset Yields

The tables below present the interest income and weighted average yield for our agency and non-agency securities during the years ended December 31, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2013						2012
	Average Amortized Cost		Weighted Average Yield		Interest Income		Average Amortized Cost		Weighted Average Yield		Interest Income ⁽²⁾
Agency RMBS⁽¹⁾	$	7,352,882	2.72	%	$	199,964	$	4,580,366	2.67	%	$	122,082
Non-agency securities	788,260		7.02	%	55,368		341,167		7.01	%	23,921
Total	$	8,141,142	3.14	%	$	255,332	$	4,921,533	2.97	%	$	146,003

——————


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


⁽²⁾	For the year ended December 31, 2012, interest income from non-agency securities includes $0.9 million of interest income on securities classified as Linked Transactions.

The following is a summary of the estimated impact of changes in the principal elements of interest income during the years ended December 31, 2013 and 2012 (in thousands):



	For the Year Ended December 31, 2013 vs. 2012
			Due to Change in Average⁽¹⁾
	Increase		Volume		Yield
Agency RMBS	$	77,882	$	75,329	$	2,553
Non-agency securities	31,447		31,418		29
Total	$	109,329	$	106,747	$	2,582

——————


⁽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 was significantly higher during the year ended December 31, 2013 compared to the year ended December 31, 2012 due primarily to higher average investment balances as a result of issuances of common stock during 2012 and the first quarter of 2013.

We amortize or accrete premiums and discounts associated with agency RMBS and non-agency securities 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 7% and 9% as of December 31, 2013 and 2012, respectively. The actual CPR realized for individual agency RMBS in our investment portfolio was approximately 6.5% and 6.1% for the years ended December 31, 2013 and 2012, respectively.

Interest income from our agency RMBS is net of premium amortization expense of $38.9 million and $32.9 million for the years ended December 31, 2013 and 2012, respectively. The change in our weighted average CPR estimates resulted in the recognition of approximately $8.5 million "catch up" premium amortization benefit during the year ended December 31, 2013. The amortized cost basis of our agency RMBS portfolio was 104.4% and 105.5% of par value, and the net unamortized premium balance of our aggregate agency RMBS portfolio was $246.6 million and $325.1 million, as of December 31, 2013 and 2012, respectively.

At the time we purchase non-agency securities 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 securities, including those non-agency securities underlying Linked Transactions, includes discount accretion of $35.5 million and $14.2 million during the years ended December 31, 2013 and 2012, respectively. The weighted average cost basis of the non-agency portfolio was 60.7% and 59.0% of par as of December 31, 2013 and 2012, respectively. The total net discount remaining was $599.8 million and $429.2 million, with $235.0 million and $300.4 million designated as credit reserves as of December 31, 2013 and 2012, respectively.

Leverage

Our leverage, when adjusted for the net payables and receivables for unsettled securities and our net TBA position, was 5.1x and 6.7x our stockholders’ equity less investments in RCS and REIT equity securities as of December 31, 2013 and 2012, 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 unlevered 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 balance sheet. 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 years ended December 31, 2013 and 2012 (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⁾
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
March 31, 2013	$	5,832,005	$	6,245,791	$	6,137,343	0.52	%	4.9x	4.3x	7.4x
December 31, 2012	$	5,894,642	$	6,299,981	$	6,245,791	0.57	%	6.4x	6.7x	6.7x
September 30, 2012	$	5,834,747	$	6,117,783	$	6,117,783	0.51	%	6.9x	6.6x	6.6x
June 30, 2012	$	4,211,603	$	5,487,628	$	5,399,160	0.47	%	6.5x	6.7x	6.8x
March 31, 2012	$	1,894,945	$	3,602,964	$	3,602,964	0.41	%	6.8x	7.4x	7.6x
December 31, 2011	$	1,516,506	$	1,743,886	$	1,742,835	0.42	%	7.5x	8.2x	8.0x

————————


⁽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 (including those within Linked Transactions) 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 securities 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 securities 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 December 31, 2013, we had a net short TBA position with a notional value of $(773.8) million and an underlying cost basis of $(775.9) million. 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 $38.8 million and $22.1 million for the years ended December 31, 2013 and 2012, respectively, was comprised of interest expense on our repurchase agreements. In addition, we recorded $0.2 million of expense for repurchase agreements reported as Linked Transactions during the year ended December 31, 2012, which is included in unrealized gain (loss) and net interest income on Linked Transactions, net on our consolidated statements of operations. We also incurred expense for our net periodic interest settlements related to our interest rate swaps of $41.0 million and $18.5 million for the years ended December 31, 2013 and 2012, 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 years ended December 31, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2013			2012
	Average Balance / Notional	Rate	Adjusted Cost of Funds ⁽¹⁾	Average Balance / Notional	Rate	Adjusted Cost of Funds ⁽¹⁾⁽²⁾
Repurchase agreements	$7,222,101	0.54%	$38,754	$4,490,364	0.50%	$	22,250
Interest rate swaps	$3,411,154	1.20%	41,006	$2,068,846	0.89%	18,458
Total adjusted cost of funds		1.10%	$79,760		0.91%	$	40,708

————————


⁽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.


⁽²⁾	For the year ended December 31, 2012, repurchase agreement interest expense includes $0.2 million of interest expense on repurchase agreements related to securities underlying Linked Transactions.

The increase in our adjusted cost of funds for the year ended December 31, 2013 compared to the year ended December 31, 2012 was attributable primarily to increases in average interest rate swap notional and repurchase agreement balances, together with higher fixed-pay interest rate swap rates.

The following is a summary of the impact of changes in the principal elements of our adjusted cost of funds during the years ended December 31, 2013 and 2012 (in thousands):



	For the Year Ended December 31, 2013 vs. 2012
			Due to Change in Average⁽¹⁾
	Increase		Volume		Rate
Repurchase agreements	$	16,504	$	14,381	$	2,123
Interest rate swaps	22,548		15,756		6,792
Total adjusted cost of funds	$	39,052	$	30,137	$	8,915

——————


⁽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.

Realized and Unrealized Gain (Loss) on Securities, Net

Sales of securities for the year ended December 31, 2013 were largely driven by a reduction in agency portfolio leverage during the second half of 2013 and the rebalancing of our portfolio towards 15-year agency RMBS and away from 30-year agency RMBS. These changes in portfolio composition were based upon our Manager's expectations concerning interest rates, Federal government programs, general economic conditions and other factors.

The following table is a summary of our net realized gains and losses on agency RMBS during the years ended December 31, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2013			2012
Proceeds from agency RMBS sold	$	7,817,303		$	4,163,571
Increase (decrease) in receivable for agency RMBS sold	608,646			(271,849		)
Less agency RMBS sold, at cost	(8,596,201		)	(3,818,112		)
Net realized gain (loss) on sale of agency RMBS	$	(170,252	)	$	73,610

Gross realized gains on sale of agency RMBS	$	22,424		$	73,668
Gross realized losses on sale of agency RMBS	(192,676		)	(58		)
Net realized gain (loss) on sale of agency RMBS	$	(170,252	)	$	73,610

The following table is a summary of our net realized gains and losses on non-agency securities during the years ended December 31, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2013			2012
Proceeds from non-agency securities sold	$	197,259		$	32,341
Less: non-agency securities sold, at cost	(180,403		)	(30,561		)
Net realized gain on sale of non-agency securities	$	16,856		$	1,780

Gross realized gain on sale of non-agency securities	$	18,790		$	1,780
Gross realized loss on sale of non-agency securities	(1,934		)	—
Net realized gain on sale of non-agency securities	$	16,856		$	1,780

Unrealized net gains (losses) of $(315.8) million and $123.5 million on agency RMBS and unrealized net gains of $19.4 million and $64.3 million on non-agency securities for the years ended December 31, 2013 and 2012, 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 of 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 years ended December 31, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2013			2012
Realized loss on periodic settlements of interest rate swaps, net	$	(41,006	)	$	(18,458	)
Realized gain (loss) on other derivatives and securities:
Interest rate swaps	$	101,297		$	(22,560	)
Interest rate swaptions	18,558			(1,725		)
TBA securities	(47,063		)	(14,057		)
U.S. Treasury securities	(12,952		)	(200		)
U.S. Treasury securities sold short	45,434			(8,206		)
U.S. Treasury futures	6,322			—
Dividend income from REIT equity investments	977			—
Total realized gain (loss) on other derivatives and securities, net	$	112,573		$	(46,748	)
Unrealized gain (loss) on other derivatives and securities:
Interest rate swaps	97,769			(48,930		)
Interest rate swaptions	11,550			(5,263		)
TBA securities	3,933			(1,648		)
U.S. Treasury securities	(11,862		)	—
U.S. Treasury securities sold short	3,259			(2,828		)
U.S. Treasury futures	3,399			—
REIT equity investments	(502		)	—
Unrealized gain and net interest income on Linked Transactions, net	—			3,384
Total unrealized gain (loss) on other derivatives and securities, net	$	107,546		$	(55,285	)

For further details regarding our derivatives and related hedging activity please refer to Notes 2 and 6 to our consolidated financial statements in this Annual Report on Form 10-K.

Management Fees and General and Administrative Expenses

We incurred management fees of $18.7 million and $9.6 million during the years ended December 31, 2013 and 2012, respectively. The period-over-period increase was primarily a function of our follow-on equity raises, net of 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 $7.2 million and $5.0 million during the years ended December 31, 2013 and 2012, respectively. 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 2.1% and 2.2% for the years ended December 31, 2013 and 2012, respectively.

Servicing and other operating expenses totaled $7.5 million during the year ended December 31, 2013, including $3.1 million in non-recurring transaction costs associated with the acquisition of RCS.

Dividends and Income Taxes

We had estimated taxable income of $172.1 million and $146.4 million (or $3.25 and $5.21 per share) for the years ended December 31, 2013 and 2012, respectively.

As a REIT, we are required to distribute annually 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 and (iii) 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 years ended December 31, 2013 and 2012 (dollars in thousands).



	For the Year Ended December 31,
	2013			2012
Net income (loss)	$	(84,470	)	$	250,180
Book to tax differences:
Unrealized (gains) and losses, net
Agency RMBS	315,784			(123,456		)
Non-agency securities	(19,391		)	(64,310		)
Non-agency securities underlying Linked Transactions	—			(2,675		)
Derivatives and other securities	(107,546		)	58,669
Premium amortization, net	(9,647		)	7,342
Capital losses in excess of capital gains ⁽¹⁾	195,160			—
Realized gains (losses), net ⁽¹⁾	(122,612		)	19,515
Other	4,775			1,165
Total book to tax difference	256,523			(103,750		)
Estimated taxable income	$	172,053		$	146,430

Weighted average number of common shares outstanding - basic	53,015			28,100
Weighted average number of common shares outstanding - diluted	53,015			28,100

Estimated taxable income per common share	$	3.25		$	5.21
Estimated cumulative undistributed REIT taxable income per common share	$	0.77		$	1.17

Beginning cumulative non-deductible capital losses	$	—		$	—
Current period net capital loss (gain)	195,068			—
Ending cumulative non-deductible capital losses	$	195,068		$	—
Ending cumulative non-deductible capital losses per common share	$	3.68		$	—

——————

⁽¹⁾

Our estimated taxable income for the year ended December 31, 2013 excludes $(3.68) per share of estimated net capital losses in excess of capital gains, which are not deductible from our ordinary taxable income but may be carried forward for up to five years and applied against future net capital gains, as well as $1.89 per share of gains on terminated swaps and $0.32 per share 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 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 $3.05 and $3.60 per common share for the years ended December 31, 2013 and 2012, respectively.

As of December 31, 2013, we had distributed all of our 2012 taxable income under the available spill-back provision so that we will not be subject to Federal or state corporate income tax for our 2012 tax year. As of December 31, 2013, we had an estimated $39.8 million (or $0.77 per common share) of undistributed taxable income, net of the dividend payable as of December 31, 2013 of $33.4 million. We expect to distribute 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. For the years ended December 31, 2013 and 2012 , we incurred an excise tax of $0.7 million and $1.2 million, respectively.

As of December 31, 2013, RCS had Federal NOL carryforwards of approximately $(50.0) 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 December 31, 2013 were approximately $21.0 million, with respect to which, RCS has provided a full valuation allowance.

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 years ended December 31, 2013 and 2012 (dollars in thousands, except per share amounts):



	For the Year Ended December 31,
	2013			2012
Interest income:
Agency RMBS	$	199,964		$	122,082
Non-agency securities and other	55,735			23,338
Interest expense	(38,754		)	(22,067		)
Net interest income	216,945			123,353
Net interest income on non-agency securities underlying Linked Transactions	—			708
Dividend income from investments in REIT equity securities⁽¹⁾	977			—
Realized loss on periodic settlements of interest rate swaps, net	(41,006		)	(18,458		)
Adjusted net interest income	176,916			105,603
Management fees and general and administrative expenses	(25,921		)	(14,656		)
Net spread income	150,995			90,947
Dollar roll income (loss)	15,388			—
Net spread and dollar roll income	$	166,383		$	90,947

Weighted average number of common shares outstanding — basic	53,015			28,100
Weighted average number of common shares outstanding — diluted	53,015			28,100

Net spread and dollar roll income per common share- basic and diluted	$	3.14		$	3.24
Net spread and dollar roll income, excluding "catch up" amortization per common share- basic and diluted	$	2.98		$	3.30

——————


⁽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.

The period-over-period decline in net spread income per common share is primarily a function of margin compression due to higher cost of funds. During the year ended December 31, 2012, we did not have dollar roll income since we primarily held short TBA contracts for hedging purposes.

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. We also believe that providing investors with our net spread and dollar roll 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 these 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 non-GAAP financial information 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 year ended December 31, 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.

Common 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. In October 2014, our Board of Directors extended the Company's existing stock repurchase program through December 31, 2015. 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 only consider repurchasing shares of our common stock 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.

During the year ended December 31, 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. During 2013, we repurchased approximately 7.6 million shares of our common stock at an average repurchase price of $20.23 per share, including expenses, totaling $154.1 million. As of December 31, 2014, we had an additional $134.9 million available for repurchases of our common stock through December 31, 2015, 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 year ended December 31, 2014.

Debt Capital

As part of our investment strategy, we borrow against our agency and non-agency securities 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 securities, our leverage ratio was 4.4x and 5.9x the amount of our stockholders’ equity less our investments in RCS and REIT equity securities as of December 31, 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 31 financial institutions as of December 31, 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 21% of our equity at risk as of December 31, 2014.

As of December 31, 2014, borrowings of $4.0 billion and $715.7 million, with weighted average remaining days to maturity of 245 days and 20 days, were secured by agency and non-agency securities, respectively.

The table below includes a summary of our repurchase agreement funding and number of counterparties by region as of December 31, 2014. Refer to Note 5 to our consolidated financial statements in this Annual Report on Form 10-K for further details regarding our borrowings under repurchase agreements and weighted average interest rates as of December 31, 2014.



	December 31, 2014
Counterparty Region	Number of Counterparties	Percentage of Repurchase Agreement Funding
North America	17	74%
Asia	5	14%
Europe	9	12%
Total	31	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 year ended December 31, 2014, haircuts on our pledged collateral remained stable and as of December 31, 2014, our weighted average haircut on agency and non-agency securities 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 December 31, 2014, we had met all margin requirements and had unrestricted cash and cash equivalents of $203.4 million and unpledged securities of approximately $378.3 million, excluding unsettled purchases of securities, available to meet margin calls on our repurchase agreements and derivative instruments as of December 31, 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 2 and 6 to our consolidated financial statements in this Annual Report on Form 10-K for further details regarding our outstanding interest rate swaps as of December 31, 2014 and the related activity for the year ended December 31, 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% and 2% of our stockholders’ equity, as of December 31, 2014 and 2013, respectively.

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 Annual Report on Form 10-K. Inclusive of our net TBA position as of December 31, 2014, our total "at risk" leverage, net of unsettled securities, was 4.6x 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 December 31, 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 $0.3 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 December 31, 2014, approximately 86% of our agency RMBS portfolio was eligible for TBA delivery.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 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 December 31, 2014, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

AGGREGATE CONTRACTUAL OBLIGATIONS

The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase

agreements and interest expense on repurchase agreements as of December 31, 2014 (in thousands):



	Year of Maturity ⁽¹⁾
	2015		2017		2019
Repurchase agreements	$	4,908,630	$	250,000	$	265,000
Accrued interest on repurchase agreements	3,582		4,130		8,551
Total	$	4,912,212	$	254,130	$	273,551

——————

⁽¹⁾The Company has no repurchase agreements maturing in 2016 and 2018.

Additionally, RCS has entered into an office lease agreement through December 31, 2019. The lease is classified as an

operating lease and is structured to require the monthly payment of minimum rent in advance, subject to periodic increases

during the term of the lease. Our total obligation under the lease is $6.4 million as of December 31, 2014.

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 Annual Report on Form 10-K. 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 7A. 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 December 31, 2014 and 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 securities 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)}
December 31, 2014
+100 basis points	(6.1	)%	(1.3	)%	(6.9	)%
+50 basis points	(3.1	)%	(0.6	)%	(3.0	)%
-50 basis points	2.2	%	0.2	%	1.0	%
-100 basis points	(0.5	)%	(0.4	)%	(2.0	)%
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 December 31, 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 securities 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 securities 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 5.0 years and 5.5 years based on interest rates and RMBS prices as of December 31, 2014 and 2013, respectively. 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)}
December 31, 2014
-25 basis points	1.1	%	5.6	%
-10 basis points	0.4	%	2.2	%
+10 basis points	(0.4	)%	(2.2	)%
+25 basis points	(1.1	)%	(5.6	)%
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 securities and cash. As of December 31, 2014, we had unrestricted cash and cash equivalents of $203.4 million and unpledged securities of approximately $378.3 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 8. Financial Statements and Supplementary Data

Our management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and necessarily include certain amounts that are based on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report on Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements.

The consolidated financial statements have been audited by Ernst & Young LLP, an independent registered public accounting firm, who conducted their audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) as of December 31, 2014 and 2013, and for the years ended December 31, 2014, 2013 and 2012. The independent registered public accounting firm's responsibility is to express an opinion as to the fairness with which such consolidated financial statements present our financial position, results of operations and cash flows in accordance with accounting principles generally accepted in the United States.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements.

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

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014, utilizing the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control-Integrated Framework (2013 framework). Based on this assessment and those criteria, management determined that our internal control over financial reporting was effective as of December 31, 2014. The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Ernst & Young LLP, our independent registered public accounting firm, as stated in their attestation report included in this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of American Capital Mortgage Investment Corp.

We have audited American Capital Mortgage Investment Corp.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). American Capital Mortgage Investment Corp.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

In our opinion, American Capital Mortgage Investment Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of American Capital Mortgage Investment Corp. as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for the three years in the period ended December 31, 2014 of American Capital Mortgage Investment Corp., and our report dated February 26, 2015 expressed an unqualified opinion thereon.

McLean, Virginia /s/ Ernst & Young

February 26, 2015

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of American Capital Mortgage Investment Corp.

We have audited the accompanying consolidated balance sheets of American Capital Mortgage Investment Corp. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Capital Mortgage Investment Corp. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), American Capital Mortgage Investment Corp.'s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 26, 2015 expressed an unqualified opinion thereon.

McLean, Virginia /s/ Ernst & Young

February 26, 2015

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



	December 31,
	2014			2013
Assets:
Agency securities, at fair value (including pledged securities of $4,235,235 and $5,618,735, respectively)	$	4,384,139		$	5,641,682
Non-agency securities, at fair value (including pledged securities of $940,981 and $899,176, respectively)	1,168,834			1,011,217
REIT equity securities, at fair value	—			38,807
U.S. Treasury securities, at fair value (including pledged securities of $707,284 and $571,145, respectively)	758,629			637,342
Cash and cash equivalents	203,431			206,398
Restricted cash and cash equivalents	82,144			21,005
Interest receivable	15,249			20,620
Derivative assets, at fair value	28,574			108,221
Receivable for securities sold	26,747			608,646
Receivable under reverse repurchase agreements	214,399			22,736
Mortgage servicing rights, at fair value	93,640			15,608
Other assets	55,466			65,583
Total assets	$	7,031,252		$	8,397,865
Liabilities:
Repurchase agreements	$	5,423,630		$	7,158,192
Payable for agency and non-agency securities purchased	49,755			—
Derivative liabilities, at fair value	75,981			11,327
Dividend payable	34,374			33,381
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	230,136			22,530
Accounts payable and other accrued liabilities	41,407			69,715
Total liabilities	5,855,283			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	53,039			—
Common stock, $0.01 par value; 300,000 shares authorized, 51,165 and 51,356 shares issued and outstanding, respectively	512			514
Additional paid-in capital	1,198,560			1,201,826
Retained deficit	(76,142		)	(99,620		)
Total stockholders’ equity	1,175,969			1,102,720
Total liabilities and stockholders’ equity	$	7,031,252		$	8,397,865

See accompanying notes to consolidated financial statements.

100

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



	For the Year Ended December 31,
	2014			2013			2012
Interest income:
Agency securities	$	118,764		$	199,964		$	122,082
Non-agency securities	64,282			55,368			23,029
Other	312			367			309
Interest expense	(28,631		)	(38,754		)	(22,067		)
Net interest income	154,727			216,945			123,353

Servicing:
Servicing income	45,873			3,350			—
Servicing expense	(61,086		)	(7,489		)	—
Net servicing loss	(15,213		)	(4,139		)	—

Other gains (losses):
Realized gain (loss) on agency securities, net	(8,263		)	(170,252		)	73,610
Realized gain on non-agency securities, net	39,080			16,856			1,780
Realized loss on periodic settlements of interest rate swaps, net	(20,388		)	(41,006		)	(18,458		)
Realized gain (loss) on other derivatives and securities, net	(20,445		)	112,573			(46,748		)
Unrealized gain (loss) on agency securities, net	187,921			(315,784		)	123,456
Unrealized gain (loss) on non-agency securities, net	(26,375		)	19,391			64,310
Unrealized gain (loss) on other derivatives and securities, net	(98,654		)	107,546			(55,285		)
Unrealized loss on mortgage servicing rights	(7,611		)	—			—
Total other gains (losses), net	45,265			(270,676		)	142,665

Expenses:
Management fees	17,641			18,680			9,638
General and administrative expenses	7,721			7,241			5,018
Total expenses	25,362			25,921			14,656

Income (loss) before provision for income tax	159,417			(83,791		)	251,362
Provision for income tax, net	238			679			1,182
Net income (loss)	159,179			(84,470		)	250,180
Dividend on preferred stock	(2,718		)	—			—
Net income (loss) available (attributable) to common shareholders	$	156,461		$	(84,470	)	$	250,180

Net income (loss) per common share — basic and diluted	$	3.06		$	(1.59	)	$	8.90

Weighted average number of common shares outstanding — basic	51,176			53,015			28,100
Weighted average number of common shares outstanding — diluted	51,192			53,015			28,100

See accompanying notes to consolidated financial statements.

101

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)



	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, 2011	—	$	—	10,006		$	100		$	199,038		$	9,663		$	208,801
Net income	—	—		—		—			—			250,180			250,180
Issuance of common stock	—	—		26,250		263			579,668			—			579,931
Repurchase of common stock	—	—		(298	)	(3		)	(6,774		)	—			(6,777		)
Stock-based compensation	—	—		6		—			76			—			76
Common dividends declared	—	—		—		—			—			(106,649		)	(106,649		)
Balance, December 31, 2012	—	—		35,964		360			772,008			153,194			925,562
Net loss	—	—		—		—			—			(84,470		)	(84,470		)
Issuance of common stock	—	—		23,000		230			583,685			—			583,915
Repurchase of common stock	—	—		(7,616	)	(76		)	(154,002		)	—			(154,078		)
Stock-based compensation	—	—		8		—			135			—			135
Common dividends declared	—	—		—		—			—			(168,344		)	(168,344		)
Balance, December 31, 2013	—	—		51,356		514			1,201,826			(99,620		)	1,102,720
Net income	—	—		—		—			—			159,179			159,179
Issuance of preferred stock	2,200	53,039		—		—			—			—			53,039
Repurchase of common stock	—	—		(214	)	(3		)	(4,205		)	—			(4,208		)
Stock-based compensation	—	—		23		1			939			—			940
Preferred dividends declared	—	—		—		—			—			(2,718		)	(2,718		)
Common dividends declared	—	—		—		—			—			(132,983		)	(132,983		)
Balance, December 31, 2014	2,200	$	53,039	51,165		$	512		$	1,198,560		$	(76,142	)	$	1,175,969

See accompanying notes to consolidated financial statements.

102

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



	For the Year Ended December 31,
	2014			2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	159,179		$	(84,470	)	$	250,180
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Amortization of net premium on agency securities	35,570			38,915			32,898
Accretion of net discount on non-agency securities	(40,613		)	(35,496		)	(14,209		)
Realization of cash flows from MSR	5,128			—			—
Unrealized loss (gain) on securities and derivatives, net	(55,281		)	188,847			(131,774		)
Realized loss (gain) on agency securities, net	8,263			170,252			(73,610		)
Realized gain on non-agency securities, net	(39,080		)	(16,856		)	(1,780		)
Realized loss (gain) on other derivatives and securities, net	42,673			(70,590		)	65,206
Stock-based compensation	940			135			76
Decrease (increase) in interest receivable	5,371			(2,355		)	(12,699		)
Decrease (increase) in other assets	10,290			1,840			(1,103		)
Increase (decrease) in accounts payable and other accrued liabilities	(733		)	33,954			5,246
Net cash flows from operating activities	131,707			224,176			118,431
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchases of agency securities	(761,638		)	(8,914,575		)	(8,937,456		)
Purchases of non-agency securities	(825,487		)	(561,932		)	(600,470		)
Purchases of MSR, net of purchase price adjustments	(89,696		)	—			—
Proceeds from sale of agency securities	2,277,424			7,817,303			4,163,571
Proceeds from sale of non-agency securities	583,345			197,259			32,341
Principal collections on agency securities	544,246			689,035			393,909
Principal collections on non-agency securities	137,843			106,602			50,058
Net payments on reverse repurchase agreements	(191,663		)	396,152			(368,325		)
Purchases of U.S. Treasury securities	(5,070,401		)	(8,479,099		)	(3,305,123		)
Proceeds from sale of U.S. Treasury securities	5,123,755			7,471,222			3,667,490
Proceeds from terminations of interest rate swaptions	18,110			48,405			—
Payment of premiums for interest rate swaptions	(3,419		)	(46,362		)	(28,103		)
Increase in restricted cash	(61,139		)	7,488			(25,334		)
Other investing cash flows, net	4,657			(81,497		)	(54,927		)
Net cash flows from (used in) investing activities	1,685,937			(1,349,999		)	(5,012,369		)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Dividends paid	(134,881		)	(167,331		)	(82,286		)
Proceeds from preferred stock offerings, net of offering costs	53,039			—			—
Proceeds from common stock offerings, net of offering costs	—			583,915			579,931
Net payments for repurchase of common shares	(4,208		)	(154,078		)	(6,777		)
Proceeds from repurchase agreements	41,501,632			103,914,609			32,504,640
Repayments on repurchase agreements	(43,236,193		)	(103,002,208		)	(28,004,342		)
Other financing cash flows	—			—			2,658
Net cash flows from (used in) financing activities	(1,820,611		)	1,174,907			4,993,824
Net increase (decrease) in cash and cash equivalents	(2,967		)	49,084			99,886
Cash and cash equivalents at beginning of the period	206,398			157,314			57,428
Cash and cash equivalents at end of period	$	203,431		$	206,398		$	157,314
Supplemental non-cash investing and financing activities
Interest paid	$	29,447		$	37,892		$	19,581
Taxes paid	$	580		$	1,277		$	42

See accompanying notes to consolidated financial statements.

103

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. 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 10 - Other Assets for additional information.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Our consolidated financial statements include the accounts of our wholly-owned taxable REIT subsidiaries, American Capital Mortgage Investment TRS, LLC and RCS. Significant intercompany accounts and transactions have been eliminated. The consolidated financial statements reflect the acquisition of the RCS, which was accounted for as a business combination.

Use of Estimates

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, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates.

104

Earnings per Share

Basic earnings per share ("EPS") is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. Shares subject to performance conditions have been excluded from EPS.

The following summarizes the potential outstanding common stock of the Company for the years ended December 31, 2014, 2013 and 2012 (in thousands, except per share data):



	For the Year Ended December 31,
	2014		2013			2012
Weighted average common shares calculation:
Basic weighted average common shares outstanding	51,176		53,015			28,100
Effect of stock based compensation	16		—			—
Diluted weighted average common shares outstanding	51,192		53,015			28,100
Net income (loss)	$	156,461	$	(84,470	)	$	250,180
Net income (loss) per common share — basic and diluted	$	3.06	$	(1.59	)	$	8.90

Cash and Cash Equivalents

Cash and cash equivalents consist of unrestricted demand deposits and highly liquid investments with original maturities of three months or less. Cash and cash equivalents are carried at cost, which approximates fair value.

Restricted Cash and Cash Equivalents

Restricted cash includes cash pledged as collateral for clearing and executing trades, interest rate swaps and repurchase agreements. Restricted cash is carried at cost, which approximates fair value.

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 8 - 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 securities 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.

105

At the time we purchase non-agency securities 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 9 - 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 11 - 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 loan investors prior to receiving payment on the loans from the individual borrowers. We may also be obligated to fund advances of real estate taxes and insurance, protective advances to preserve the value of the underlying property, and expenses associated with remedial action in respect of defaulted loans. These servicing advances are reported within other assets 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.

Intangible Assets

We test intangible assets determined to have indefinite useful lives, including licenses to perform servicing operations, for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired.

Repurchase Agreements

We finance the acquisition of agency RMBS and certain non-agency securities 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

From time to time we 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

106

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.

Manager Compensation

The management agreement provides for the payment to our Manager of a management fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for which they are earned or incurred. Refer to Note 12 for disclosure on the terms of the management agreement.

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 may also 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

107

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

108

commitments 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.

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.

Income Taxes

We have elected to be taxed as a REIT under the provisions of the Internal Revenue Code. In order to qualify as a REIT, we must annually distribute, in a timely manner to our stockholders, at least 90% of our taxable ordinary income. A REIT is not subject to tax on its earnings to the extent that it distributes its annual taxable income to its stockholders and as long as certain asset, income and stock ownership tests are met. We operate in a manner that will allow us to be taxed as a REIT. As permitted by the Internal Revenue Code, a REIT can designate dividends paid in the subsequent year as dividends of the current year if those dividends are both declared by the extended due date of the REIT's Federal income tax return and paid to stockholders by the last day of the subsequent year.

As a REIT, if we fail to distribute in any calendar year at least the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our capital gain net income for such year and (iii) any undistributed taxable income from the prior year, we would be subject to a non-deductible 4% excise tax on the excess of such required distribution over the sum of (a) the amounts actually distributed and (b) the amounts of income we retained and on which we have paid corporate income tax. Dividends declared by December 31 and paid by January 31 are treated as having been a distribution of our taxable income for the prior tax year.

We and two of our domestic subsidiaries, American Capital Mortgage Investment TRS, LLC and Residential Credit Solutions, Inc., have made joint elections to treat the subsidiaries as taxable REIT subsidiaries. As such, American Capital Mortgage Investment TRS, LLC and Residential Credit Solutions, Inc. are subject to Federal, state and, if applicable, local income tax.

We evaluate uncertain income tax positions, if any, in accordance with ASC Topic 740, Income Taxes ("ASC 740"). To the extent we incur interest and/or penalties in connection with our tax obligations, such amounts shall be classified as income tax expense on our consolidated statements of operations.

109

Note 3. Agency Securities

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



	December 31, 2014
	Fannie Mae			Freddie Mac			Total
Agency RMBS:
Par value	$	3,333,348		$	857,059		$	4,190,407
Unamortized premium	141,252			43,070			184,322
Amortized cost	3,474,600			900,129			4,374,729
Gross unrealized gains	26,102			7,550			33,652
Gross unrealized losses	(18,575		)	(5,667		)	(24,242		)
Agency RMBS, at fair value	$	3,482,127		$	902,012		$	4,384,139

Weighted average coupon as of December 31, 2014	3.37		%	3.50		%	3.39		%
Weighted average yield as of December 31, 2014	2.54		%	2.65		%	2.56		%
Weighted average yield for the year ended December 31, 2014	2.48		%	2.58		%	2.50		%



	December 31, 2014
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Agency RMBS:
Fixed rate	$	4,252,616	$	30,059	$	(24,242	)	$	4,258,433
Adjustable rate	122,113		3,593		—			125,706
Total	$	4,374,729	$	33,652	$	(24,242	)	$	4,384,139



	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		%

110



	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 December 31, 2014 and 2013 according to their estimated weighted average life classification (dollars in thousands):



	December 31, 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	$	—	$	—	—	%	—	%	$	9,089	$	9,095	2.38	%	3.49	%
Greater than three years and less than or equal to five years	1,528,121		1,520,350		2.13	%	3.05	%	2,142,111		2,159,311		2.29	%	3.20	%
Greater than five years and less than or equal to 10 years	2,827,653		2,826,297		2.79	%	3.58	%	3,485,241		3,646,188		2.72	%	3.43	%
Greater than 10 years	28,365		28,082		3.12	%	3.52	%	5,241		5,600		2.96	%	3.50	%
Total	$	4,384,139	$	4,374,729	2.56	%	3.39	%	$	5,641,682	$	5,820,194	2.56	%	3.35	%

As of December 31, 2014 and 2013, none of our agency RMBS had an estimated weighted average life of less than 3.2 years and 2.1 years, respectively. As of December 31, 2014 and 2013, the estimated weighted average life of our agency security portfolio was 6.8 years and 6.1 years, respectively, which incorporates anticipated future prepayment assumptions. As of December 31, 2014 and 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.

111

Realized Gains and Losses

The following table summarizes our net realized gains and losses from the sale of agency RMBS during the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013			2012
Proceeds from agency RMBS sold	$	2,277,424		$	7,817,303		$	4,163,571
Increase (decrease) in receivable for agency RMBS sold	(608,646		)	608,646			(271,849		)
Less agency RMBS sold, at cost	(1,677,041		)	(8,596,201		)	(3,818,112		)
Net realized gain (loss) on sale of agency RMBS	$	(8,263	)	$	(170,252	)	$	73,610

Gross realized gains on sale of agency RMBS	$	10,706		$	22,424		$	73,668
Gross realized losses on sale of agency RMBS	(18,969		)	(192,676		)	(58		)
Net realized gain (loss) on sale of agency RMBS	$	(8,263	)	$	(170,252	)	$	73,610

Pledged Assets

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



	December 31, 2014
Agency RMBS Pledged	Fannie Mae		Freddie Mac		Total
Under Repurchase Agreements
Fair value	$	3,395,257	$	838,627	$	4,233,884
Accrued interest on pledged agency RMBS	9,089		2,335		11,424
Under Derivative Agreements
Fair value	677		674		1,351
Accrued interest on pledged agency RMBS	2		2		4
Total Fair Value of Agency RMBS Pledged and Accrued Interest	$	3,405,025	$	841,638	$	4,246,663



	December 31, 2013
Agency RMBS Pledged ⁽¹⁾	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 pledged amounts of $583.2 million under repurchase agreements related to agency RMBS sold but not yet settled as of December 31, 2013.

112

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



	December 31, 2014						December 31, 2013
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest		Fair Value		Amortized Cost		Accrued Interest
30 days or less	$	1,711,727	$	1,707,149	$	4,718	$	2,591,560	$	2,672,502	$	7,182
31 - 59 days	507,160		503,833		1,310		1,105,167		1,151,447		3,096
60 - 90 days	525,089		524,291		1,352		1,261,354		1,299,749		3,455
Greater than 90 days	1,489,908		1,489,667		4,044		660,654		673,560		1,714
Total	$	4,233,884	$	4,224,940	$	11,424	$	5,618,735	$	5,797,258	$	15,447

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

Note 4. Non-Agency Securities

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



December 31, 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⁾	$	282,338	$	11,434	$	(6,489	)	$	277,393	$	(21,827	)	$	299,220	3.45	%	6.04	%
Alt-A	486,254		42,536		(4,090		)	447,808		(169,221		)	617,029		1.67	%	6.54	%
Option-ARM	173,727		11,317		(2,473		)	164,883		(42,338		)	207,221		0.43	%	5.88	%
Subprime	226,515		5,818		(342		)	221,039		(29,143		)	250,182		2.70	%	4.57	%
Total	$	1,168,834	$	71,105	$	(13,394	)	$	1,111,123	$	(262,529	)	$	1,373,652	2.06	%	5.92	%

————————


⁽¹⁾	Coupon rates are floating, except for $2.5 million, $20.1 million and $151.2 million fair value of fixed-rate prime, Alt-A and subprime non-agency securities, respectively, as of December 31, 2014.


⁽²⁾	Prime non-agency securities include GSE credit risk transfer securities with $104.1 million in fair value as of December 31, 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 securities, respectively, as of December 31, 2013.


⁽²⁾	Prime non-agency securities include GSE credit risk transfer securities with $5.3 million in fair value and 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.

113

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



	December 31, 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	$	436,385	$	422,400	5.15	%	2.85	%	$	203,935	$	194,800	5.59	%	2.19	%
> 5 to ≤ 7 years	486,869		446,967		6.68	%	1.29	%	211,013		195,913		6.84	%	2.38	%
>7 years	245,580		241,756		5.89	%	2.43	%	596,269		536,418		7.70	%	1.08	%
Total	$	1,168,834	$	1,111,123	5.92	%	2.06	%	$	1,011,217	$	927,131	7.07	%	1.46	%

Our Prime non-agency securities are either collateralized by or reference the performance of residential mortgage loans that are considered to have been originated with the most stringent underwriting standards at the time of origination. Prime securities include investments in securitization trusts collateralized by loans that were originated between 2003 and 2006, a period of generally weaker underwriting standards and elevated housing prices, resulting in elevated embedded credit risk, and had a combined fair value of $178.2 million as of December 31, 2014. As of December 31, 2014, Prime securities also include $104.1 million in fair value of GSE credit risk transfer securities which are subject to credit risk, as they reference the performance of underlying mortgage loans that were originated with more stringent underwriting from 2012 through 2014. As of December 31, 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 5.8%.

Our Alt-A non-agency RMBS are collateralized by Alt-A mortgage loans that were originated from 2002 to 2007. Alt-A, or alternative A-paper, mortgage loans are considered to have more credit risk than prime mortgage loans and less credit risk 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 December 31, 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 6.9%.

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 December 31, 2014, our Option-ARM securities have coupons ranging from 0.3% to 1.0% and have underlying collateral with weighted average coupons between 2.7% and 4.0%. The loans underlying our Option-ARM securities were originated between 2004 and 2007.

Our Subprime non-agency RMBS issued prior to 2014 include investments in securitization trusts collateralized by residential mortgages originated from 2004 to 2007 that were originally considered to be of lower credit quality. As of December 31, 2014, our Subprime securities issued prior to 2014 have a fair value of $129.5 million with fixed and floating rate coupons ranging from 0.2% to 5.3% and have underlying collateral with weighted-average coupons ranging from 4.5% to 7.6%. Additionally, we have classified certain non-performing loans that were securitized in 2014 as Subprime securities. These 2014 securitizations are backed by loans originated during or before 2009 and, as of December 31, 2014, have a fair value of $97.0 million. As of December 31, 2014, our Subprime securities issued in 2014 have fixed rate coupons ranging from 3.1% to 3.9% and have underlying collateral with weighted-average coupons ranging from 5.9% to 8.0%.

More than 99% of our non-agency securities are rated below investment grade or have not been rated by credit agencies as of December 31, 2014.

114

Realized Gains and Losses

The following table summarizes our net realized gains and losses from the sale of non-agency securities during the years ended December 31, 2014, 2013 and 2012 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013			2012
Proceeds from non-agency securities sold	$	583,345		$	197,259		$	32,341
Less: non-agency securities sold, at cost	(544,265		)	(180,403		)	(30,561		)
Net realized gain on sale of non-agency securities	$	39,080		$	16,856		$	1,780

Gross realized gain on sale of non-agency securities	$	44,571		$	18,790		$	1,780
Gross realized loss on sale of non-agency securities	(5,491		)	(1,934		)	—
Net realized gain on sale of non-agency securities	$	39,080		$	16,856		$	1,780

Pledged Assets

Non-agency securities with a fair value of $0.9 billion were pledged as collateral under repurchase agreements as of both December 31, 2014 and 2013. As of December 31, 2014 and 2013, none of our repurchase agreement borrowings backed by non-agency securities were due on demand or mature overnight.

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



	December 31, 2014						December 31, 2013
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest		Fair Value		Amortized Cost		Accrued Interest
30 days or less	$	791,654	$	770,604	$	1,151	$	547,087	$	502,063	$	857
31 - 59 days	106,097		98,690		77		70,478		68,622		57
60 - 90 days	43,230		39,280		40		64,873		58,091		55
Greater than 90 days	—		—		—		216,738		196,644		242
Total	$	940,981	$	908,574	$	1,268	$	899,176	$	825,420	$	1,211

Note 5. 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 December 31, 2014 and 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.

115

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



	December 31, 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	$	4,002,291	0.42	%	245	$	5,935,610	0.43	%	96
Non-agency securities	715,704		1.67	%	20	647,068		1.79	%	33
U.S. Treasury securities	705,635		(0.13	)%	7	575,514		0.07	%	2
Total repurchase agreements	$	5,423,630	0.51	%	190	$	7,158,192	0.52	%	83



	December 31, 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	$	2,245,188	0.71	%	13	$	3,047,986	0.60	%	14
> 1 to ≤ 2 months	568,014		0.55	%	45	816,960		0.55	%	45
> 2 to ≤ 3 months	540,201		0.48	%	74	1,506,888		0.52	%	77
> 3 to ≤ 6 months	508,216		0.43	%	142	621,124		0.54	%	135
> 6 to ≤ 9 months	123,947		0.51	%	246	147,729		0.49	%	249
> 9 to ≤ 12 months	217,429		0.51	%	327	191,991		0.50	%	321
> 12 months	515,000		0.63	%	1405	250,000		0.59	%	853
Total	4,717,995		0.61	%	210	6,582,678		0.56	%	90

U.S. Treasury repurchase agreements
Short-term	705,635		(0.13	)%	7	575,514		0.07	%	2
Total repurchase agreements	$	5,423,630	0.51	%	190	$	7,158,192	0.52	%	83

We had repurchase agreements with 31 financial institutions as of both December 31, 2014 and 2013. 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 21% of our equity at risk as of December 31, 2014.

We had agency RMBS with fair values of $4.2 billion and $5.6 billion as of December 31, 2014 and 2013, respectively, and non-agency securities with fair values of $0.9 billion pledged as collateral against repurchase agreements, as of both December 31, 2014 and 2013.

Note 6. 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

116

additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivatives in Note 2.

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



	December 31,
	2014		2013
Interest rate swaps	$	9,414	$	51,957
Interest rate swaptions	5,464		50,009
U.S. Treasury futures	—		3,399
TBA securities	13,495		2,856
Interest only swaps	201		—
Derivative assets, at fair value	$	28,574	$	108,221

Interest rate swaps	$	73,052	$	9,490
TBA securities	1,863		1,837
U.S. Treasury futures	1,066		—
Derivative liabilities, at fair value	$	75,981	$	11,327

The following table summarizes the effect of our outstanding derivatives and other securities on our consolidated statements of operations during the years ended December 31, 2014 and 2013 (in thousands):



	For the Year Ended December 31,
	2014									2013
	Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain 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 on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net
Interest rate swaps	$	(20,388	)	$	(13,952	)	$	(105,529	)	$	(41,006	)	$	101,297		$	97,769
Interest rate swaptions	—			(17,836		)	(12,018		)	—			18,558			11,550
TBA securities	—			33,345			10,613			—			(47,063		)	3,933
U.S. Treasuries	—			2,008			13,291			—			(12,952		)	(11,862		)
U.S. Treasury futures	—			(6,645		)	(4,464		)	—			6,322			3,399
Short sales of U.S. Treasuries	—			(26,592		)	(1,344		)	—			45,434			3,259
REIT equity investments	—			8,675			502			—			977			(502		)
Mortgage options	—			257			—			—			—			—
Interest only swap	—			295			295			—			—			—
Total	$	(20,388	)	$	(20,445	)	$	(98,654	)	$	(41,006	)	$	112,573		$	107,546

117

The following tables summarize changes in notional amounts for our outstanding derivatives and other securities for the years ended December 31, 2014, 2013 and 2012 (in thousands):



	December 31, 2013 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		December 31, 2014 Notional Amount
Interest rate swaps	$	3,240,000		1,275,000	(500,000	)	$	4,015,000
Interest rate swaptions	$	2,100,000		425,000	(1,975,000	)	$	550,000
TBA securities	$	(773,816	)	26,657,236	(25,587,248	)	$	296,172
U.S. Treasuries	$	656,000		2,857,070	(2,756,570	)	$	756,500
U.S. Treasury futures	$	(150,000	)	600,000	(600,000	)	$	(150,000	)
Short sales of U.S. Treasuries	$	(23,000	)	2,193,500	(2,399,000	)	$	(228,500	)
Mortgage options	$	—		300,000	(300,000	)	$	—
Interest only swaps	$	—		49,910	(1,171	)	$	48,739



	December 31, 2012 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		December 31, 2013 Notional Amount
Interest rate swaps	$	2,940,000		4,225,000	(3,925,000	)	$	3,240,000
Interest rate swaptions	$	1,150,000		2,150,000	(1,200,000	)	$	2,100,000
TBA securities	$	(522,188	)	3,295,280	(3,546,908	)	$	(773,816	)
U.S. Treasuries	$	—		3,709,500	(3,053,500	)	$	656,000
U.S. Treasury futures	$	—		650,000	(800,000	)	$	(150,000	)
Short sales of U.S. Treasuries	$	(425,000	)	4,983,500	(4,581,500	)	$	(23,000	)



	December 31, 2011 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		December 31, 2012 Notional Amount
Interest rate swaps	$	875,000		2,890,000	(825,000	)	$	2,940,000
Interest rate swaptions	$	50,000		1,325,000	(225,000	)	$	1,150,000
TBA securities	$	(101,000	)	7,233,405	(7,654,593	)	$	(522,188	)
U.S. Treasuries	$	—		130,000	(130,000	)	$	—
Short sales of U.S. Treasuries	$	(50,000	)	3,216,000	(3,591,000	)	$	(425,000	)
Linked transactions	$	88,671		10,920	(99,591	)	$	—

Interest Rate Swap Agreements

As of December 31, 2014 and 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 December 31, 2014 and 2013, we had interest rate swap agreements summarized in the tables below (dollars in thousands).



		December 31, 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	$	925,000	$	9,414		$	2,275,000	$	51,957
Interest rate swap liabilities	Derivative liabilities, at fair value	3,090,000		(73,052		)	965,000		(9,490		)
		$	4,015,000	$	(63,638	)	$	3,240,000	$	42,467

118



December 31, 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	$	1,065,000	$	(1,635	)	0.97	%	0.23	%	1.6
> 3 to ≤ 5 years	850,000		(4,441		)	1.91	%	0.23	%	4.2
> 5 to ≤ 7 years	1,625,000		(38,780		)	2.66	%	0.23	%	6.0
> 7 years	475,000		(18,782		)	2.87	%	0.25	%	8.2
Total	$	4,015,000	$	(63,638	)	2.08	%	0.23	%	4.7



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 $2.1 billion with deferred start dates averaging 1.1 years from December 31, 2014.


⁽²⁾	Excluding forward starting swaps, the weighted average pay rate was 1.24% and 1.18% as of December 31, 2014 and 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 December 31, 2014, interest rate swaps with a notional amount of $2.3 billion and liability fair value of $(67.1) million were centrally cleared on a registered exchange.

119

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 December 31, 2014 and 2013 (dollars in thousands):



December 31, 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	$	4,013	$	1,972	0.1	$	150,000	2.78	%	4.3
> 3 to ≤ 12 months	3,139		1,432		0.9	200,000		3.29	%	8.8
>12 to ≤ 24 months	1,308		207		1.3	100,000		4.13	%	7.0
> 24 months	2,735		1,853		2.9	100,000		3.21	%	5.0
Total / weighted average	$	11,195	$	5,464	1.1	$	550,000	3.29	%	6.5



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 December 31, 2014 and 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):



	December 31, 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	$	829,030		$	8,226		$	210,600		$	158
Sale of TBA securities	(74,758		)	5,269			(463,496		)	2,698
Total TBA assets	754,272			13,495			(252,896		)	2,856

TBA liabilities
Purchase of TBA securities	199,000			(595		)	—			—
Sale of TBA securities	(657,100		)	(1,268		)	(520,920		)	(1,837		)
Total TBA liabilities	(458,100		)	(1,863		)	(520,920		)	(1,837		)
Total net TBA	$	296,172		$	11,632		$	(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.

120

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 $758.6 million and $637.3 million and a face amount of $756.5 million and $656.0 million as of December 31, 2014 and 2013, respectively, which is presented as U.S. Treasury securities, at fair value on the consolidated balance sheets. In addition, we had a short position in U.S. Treasury futures with a fair value of $(1.1) million and $3.4 million, respectively, and a notional amount of $(150.0) million as of both December 31, 2014 and 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 $230.1 million and $22.5 million as of December 31, 2014 and 2013, respectively. The borrowed securities were collateralized by cash payments of $214.4 million and $22.7 million as of December 31, 2014 and 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 December 31, 2013, we held shares of common stock of several publicly-traded mortgage REITs with a cost basis of $39.3 million and a total fair value of $38.8 million. As of December 31, 2014, we no longer held any positions in these securities and for the year ended December 31, 2014, we recognized $6.8 million of net realized gains on disposal and $1.8 million in dividend income which are both included in realized gain 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 December 31, 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 counterparty credit risk with any single counterparty in excess of 1% of our stockholders’ equity, as of December 31, 2014.

121

Note 7. 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 December 31, 2014 and 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 ⁽¹⁾			Net Amount
December 31, 2014
Interest rate swaps and swaptions ⁽²⁾⁽³⁾	$	14,878	$	—	$	14,878	$	(5,192	)	$	(3,059	)	$	6,627
Receivable under reverse repurchase agreements	214,399		—		214,399		(214,399		)	—			—
Total	$	229,277	$	—	$	229,277	$	(219,591	)	$	(3,059	)	$	6,627

December 31, 2013
Interest rate swaps and swaptions ⁽²⁾	$	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 ⁽¹⁾			Net Amount
December 31, 2014
Interest rate swaps ⁽²⁾	$	73,052	$	—	$	73,052	$	(5,192	)	$	(67,860	)	$	—
Repurchase agreements	5,423,630		—		5,423,630		(214,399		)	(5,209,231		)	—
Total	$	5,496,682	$	—	$	5,496,682	$	(219,591	)	$	(5,277,091	)	$	—

December 31, 2013
Interest rate swaps ⁽²⁾	$	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⁾	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 3 and 4 for additional information regarding assets pledged as collateral.


⁽²⁾	Reported under derivative assets / liabilities, at fair value in the accompanying consolidated balance sheets. Refer to Note 6 for a reconciliation of derivative assets / liabilities, at fair value to their sub-components.


⁽³⁾	Interest rate swaps and swaptions are subject to master netting arrangements which could reduce our maximum amount of loss due to credit risk by $5.2 million as of December 31, 2014.

122

Note 8. 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 securities, 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 third party estimates, corroborated by internally developed discounted cash flow models that utilize observable market-based inputs and include substantial 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.

123

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



	December 31, 2014
	Level 1		Level 2		Level 3		Total
Assets
Agency RMBS	$	—	$	4,384,139	$	—	$	4,384,139
Non-agency securities	—		1,168,834		—		1,168,834
U.S. Treasury securities	758,629		—		—		758,629
Derivative assets	—		28,574		—		28,574
MSR assets	—		—		93,640		93,640
Total	$	758,629	$	5,581,547	$	93,640	$	6,433,816

Liabilities
Derivative liabilities	$	—	$	75,981	$	—	$	75,981
Obligation to return securities borrowed under reverse repurchase agreements	230,136		—		—		230,136
MSR financing liabilities	—		—		14,003		14,003
Total	$	230,136	$	75,981	$	14,003	$	320,120



	December 31, 2013
	Level 1		Level 2		Level 3		Total
Assets
Agency RMBS	$	—	$	5,641,682	$	—	$	5,641,682
Non-agency securities	—		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 securities 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 securities are classified as Level 2 in the fair value hierarchy as of December 31, 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 2. 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.

124

Excluded from the table above are financial instruments, including cash and cash equivalents, restricted cash, receivables, payables and borrowings under repurchase agreements, which are presented in our consolidated financial statements at cost, which is determined to approximate fair value, primarily due to the short duration of these instruments. The cost basis of repurchase agreement borrowings with initial terms of greater than one year is determined to approximate fair value, primarily as such agreements have floating rates based on an index plus or minus a fixed spread and the fixed spread is generally consistent with those demanded in the market. We estimate the fair value of these instruments using Level 2 inputs.

The following table presents a summary of the changes in fair value for Level 3 assets carried at fair value as of December 31, 2014 (in thousands):



	For the Year Ended December 31, 2014
	MSR Under Secured Financing ⁽¹⁾			Purchased MSR ⁽²⁾			Total MSR
Balance as of December 31, 2013	$	15,608		$	—		$	15,608
Losses included in net income:
Realized losses	(1,347		)	(5,128		)	(6,475		)
Unrealized losses	(258		)	(7,611		)	(7,869		)
Total net losses included in net income	(1,605		)	(12,739		)	(14,344		)
Purchases, net of purchase price adjustments	—			92,376			92,376
Balance as of December 31, 2014	$	14,003		$	79,637		$	93,640

————————


⁽¹⁾	Losses included in net income related to MSR under secured financing are offset in their entirety by gains associated with related MSR financing liabilities.


⁽²⁾	Realized losses of $(5.1) million on purchased MSR are included in servicing expense and unrealized losses of $(7.6) million are included in unrealized loss on mortgage servicing rights, respectively, on the consolidated statements of operations.

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, we use internal models and our own estimates of prepayment and

delinquency rates on the loans underlying our MSR.

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 December 31, 2014 (dollars in thousands):



	December 31, 2014
Unobservable Level 3 Input	Fair Value		Minimum	Weighted Average	Maximum
MSR treated as financing arrangements:	$	14,003
Constant prepayment rate			5.5%	14.8%	36.5%
Constant default rate			2.5%	7.6%	27.8%
Discount rate			16.0%	16.0%	16.0%
Purchased MSR:	79,637
Constant prepayment rate			8.3%	8.5%	8.8%
Constant default rate			0.2%	0.3%	0.4%
Discount rate			8.3%	8.7%	9.3%
Total	$	93,640

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 to GSE underwriting standards. Private label originations from the pre-2009 era have experienced heightened default rates relative to recently originated conforming mortgages. As such, we anticipate that the default rate and discount rate for our MSR treated as financing arrangements will exceed the default rate and discount rate for our purchased MSR.

125

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. Overall MSR market conditions could have a more significant impact on our Level 3 fair values than changes in any one unobservable input.

Note 9. Mortgage Servicing Rights

Our $93.6 million balance of MSR as of December 31, 2014 includes $14.0 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 corresponding 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 $79.6 million of MSR were purchased by RCS during the year ended December 31, 2014 under transactions qualifying for sale accounting, representing approximately 34 thousand underlying loans, with a combined unpaid principal balance of approximately $7.1 billion, as of December 31, 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 year ended December 31, 2014 (dollars in thousands):



	For the Year Ended December 31, 2014
Beginning balance	$	—
Additions from purchases of MSR	93,465
Changes in fair value due to:
Changes in valuation inputs or assumptions used in valuation model	(7,611		)
Other changes in fair value ⁽¹⁾	(5,128		)
Other changes ⁽²⁾	(1,089		)
Ending balance	$	79,637

————————


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


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

126

The following table presents the components of net servicing loss for the years ended December 31, 2014 and 2013 (dollars in thousands):



	For the Year Ended December 31,
	2014			2013
Servicing fee income	$	30,544		$	2,603
Incentive, ancillary and other income	15,329			735
Other income	—			12
Servicing income	45,873			3,350

Employee compensation and benefit costs	31,963			2,845
Facility costs	12,591			447
Realization of cash flows from MSR	5,128			—
Other servicing costs	11,404			1,142
Acquisition related costs	—			3,055
Servicing expense	61,086			7,489

Net servicing loss	$	(15,213	)	$	(4,139	)

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 10. Other Assets

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



	December 31,
	2014			2013
Property and equipment, at cost	$	4,809		$	4,024
Accumulated depreciation	(1,877		)	(164		)
Net property and equipment	2,932			3,860
Servicing advances	24,393			33,358
Prepaid expenses	7,089			6,978
Intangible assets	15,000			17,000
Other	6,052			4,387
Total other assets	$	55,466		$	65,583

Servicing Advances

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

127

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 intangible assets. During the fourth quarter of 2014, we completed our annual impairment test of licenses and related assets recorded in connection with the RCS acquisition and concluded that these indefinite lived intangible assets were not impaired.

Note 11. Accounts Payable and Other Accrued Liabilities

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



	December 31,
	2014		2013
Cash collateral held on derivatives	$	2,298	$	32,463
Due to manager	1,763		1,885
Swaption premium payable	520		—
Payable for equity securities purchased	—		4,581
Payable for MSR purchased	2,680		—
Accrued interest	4,642		4,401
Mortgage servicing financing, at fair value⁽¹⁾	14,003		15,608
Excise tax payable	—		574
Other accounts payable and accrued expenses	15,501		10,203
Total accounts payable and other accrued liabilities	$	41,407	$	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 12. Management Agreement and Related Parties

We have entered into a management agreement with our Manager with a current renewal term through August 9, 2014 and automatic one-year extension options thereafter. The management agreement may only be terminated by either us or our Manager without cause, as defined in the management agreement, after the completion of the current renewal term, or the expiration of any automatic subsequent renewal term, provided that either party provide 180-days prior written notice of non-renewal of the management agreement. If we were not to renew the management agreement without cause, we must pay a termination fee on the last day of the applicable term, equal to three times the average annual management fee earned by our Manager during the prior 24-month period immediately preceding the most recently completed month prior to the effective date of termination. We may only not renew the management agreement with or without cause with the consent of a majority of our independent directors. Our Manager is responsible for, among other things, performing all of our day-to-day functions, determining investment criteria in conjunction with our Board of Directors, sourcing, analyzing and executing investments, asset sales and financings and performing asset management duties.

In addition, we reimburse our Manager for expenses directly related to our operations, excluding employment-related expenses of our Manager, American Capital and its other affiliates who provide services to us pursuant to the management agreement. We recorded expense reimbursements to our Manager of $2.1 million, $1.8 million and $1.3 million for the years ended December 31, 2014, 2013 and 2012, respectively, of which $0.1 million and $0.1 million is included in accounts payable and other accrued liabilities on the consolidated balance sheet as of December 31, 2014 and 2013, respectively, consisting mostly of information technology systems.

128

As of December 31, 2014, American Capital does not hold any shares of our common stock.

The sister company of our Manager is the external manager of American Capital Agency Corp., a publicly-traded REIT that invests in agency mortgage investments. All of our officers and the members of our mortgage investment team and other support personnel are employees of either the parent company of our Manager or American Capital. Because neither we nor our Manager have any employees other than those at RCS, our Manager has entered into an administrative services agreement with American Capital and the parent company of our Manager, pursuant to which our Manager has access to their employees, infrastructure, business relationships, management expertise, information technologies, capital raising capabilities, legal and compliance functions, and accounting, treasury and investor relations capabilities, to enable our Manager to fulfill all of its responsibilities under the management agreement. We are not a party to the administrative services agreement.

Note 13. Income Taxes

The following table summarizes dividends declared during the years ended December 31, 2014, 2013 and 2012 and their related tax characterization.



					Tax Characterization of Dividends
Year	Dividends Declared Per Share		Dividends Declared		Ordinary Income Per Share		Qualified Dividends		Capital Gains Per Share
8.125% Series A Cumulative Redeemable Preferred Stock Dividends
2014 ⁽¹⁾	$	0.806858	$	1,601	$	0.806858	$	—	$	—
Common Stock Dividends
2014	$	2.600000	$	132,983	$	2.600000	$	—	$	—
2013	$	3.050000	$	168,344	$	3.050000	$	—	$	—
2012	$	3.600000	$	106,649	$	3.600000	$	—	$	—

————————


⁽¹⁾	Excludes Series A Preferred Stock dividend of $0.5078125 per share declared on December 18, 2014 having a record date of January 1, 2015, which for federal income tax purposes is a fiscal year 2015 dividend.

As of December 31, 2014, we had undistributed taxable income of $6.3 million that we expect to declare by the extended due date of our 2014 Federal income tax return and pay in 2015. For the years ended December 31, 2013 and 2012, we did not distribute the required minimum amount of taxable income pursuant to Federal excise tax requirements, as described in Note 2. As such, we accrued an excise tax on the accompanying consolidated statements of operations of $0.7 million and $1.2 million for the years ended December 31, 2013 and 2012, respectively. However, we do not expect to incur any additional income tax liability on our 2014 taxable income.

Based on our analysis of any potential uncertain income tax positions, we concluded that we do not have any uncertain tax positions that meet the recognition or measurement criteria as of December 31, 2014 and 2013. Our tax returns for tax years 2011 through 2013 are open to examination by the Internal Revenue Service ("IRS"). In the event that we incur income tax related interest and penalties, our policy is to classify them as a component of provision for income taxes.

We acquired 100% of RCS, a taxable subchapter C corporation, on November 27, 2013, with which we filed a joint TRS election. As of December 31, 2014, RCS had Federal net operating loss ("NOL") carryforwards of approximately $68.0 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 December 31, 2014 were approximately $31.6 million, with respect to which, RCS has provided a full valuation allowance.

We recorded $0.2 million of income tax related to income from American Capital Mortgage Investment TRS, LLC, a taxable subsidiary, for the year ended December 31, 2014.

129

Note 14. Stockholders’ Equity

Equity Offerings

There were no common stock issuances during the year ended December 31, 2014. During the years ended December 31, 2013 and 2012, we issued the following shares of common stock (amounts in thousands except per share amounts):



Public Offering Date	Price Received Per Share ⁽¹⁾		Number of Shares	Net Proceeds ⁽²⁾
February 2013	$	25.40	23,000	$	583,915
Total	$	25.40	23,000	$	583,915

March 2012	$	21.55	13,600	$	292,780
May 2012	22.74		12,650	287,151
Total	$	22.09	26,250	$	579,931

————————

⁽¹⁾ Price Received Per Share is net of underwriters' discount, if applicable.

⁽²⁾ Net Proceeds are net of any underwriters' discount and other offering costs.

Redeemable 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 December 31, 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 December 31, 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. In October 2014, our Board of Directors extended the Company's existing stock repurchase program through December 31, 2015.

During the year ended December 31, 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 December 31, 2014, we had an additional $134.9 million available for repurchases of our common stock through December 31, 2015, as authorized by the Board of Directors.

130

Long-Term Incentive Plan

We sponsor the American Capital Mortgage Investment Corp. Amended and Restated Equity Incentive Plan ("Incentive Plan" or "plan") to provide for the issuance of equity-based awards, including stock options, restricted stock, restricted stock units and unrestricted stock.

During 2014, we granted restricted stock unit ("RSU") awards under the plan to each of our five independent directors totaling $375,000, or $75,000 to each independent director. The awards represent the right to receive an equivalent number of shares of common stock as measured by the closing price of our common stock on the grant date, plus dividend equivalent RSUs for dividends declared on our common stock, and vest on May 22, 2015, subject to the terms and conditions of the plan. We recorded compensation expense of $0.2 million related to RSU awards to our independent directors for the year ended December 31, 2014. As of December 31, 2014, we had unvested RSU common stock equivalents totaling 20,494 shares, or 4,099 shares for each independent director, based on a closing share price of $19.51 on the grant date, including accrued dividend equivalent RSUs.

During 2014, we granted RSU awards under the plan to certain members of RCS management totaling $5.4 million, or 272,070 RSUs, based on a closing share price on the grant date of $19.93. The awards represent the right to receive an equivalent number of shares of common stock as measured by the closing price of our common stock on the grant date, plus dividend equivalent RSUs for dividends declared on our common stock. Fifty percent (50%) of the awards vests in equal installments over the first five anniversaries of the later of November 26, 2013 and the individual’s employment start date with RCS. The remaining fifty percent (50%) vests, subject to annual catch-up provisions, upon the satisfaction of certain annual performance metrics for each calendar year through 2018. We recorded compensation expense of $0.6 million related to RSU awards to RCS management for the year ended December 31, 2014. We issued 22,839 shares related to the time vesting of RSU awards during the year ended December 31, 2014 and, as of December 31, 2014, had unvested RSU common stock equivalents totaling 227,833 shares including accrued dividend equivalent RSUs.

Following the completion of our IPO, we granted 1,500 shares of restricted common stock to each of our four independent directors for a total of 6,000 shares of restricted common stock with a grant date fair value of $20.00 per share. These shares will vest equally over a three-year period, subject to their continued service on our board of directors. For the years ended December 31, 2013 and 2012, we granted 1,500 shares of restricted stock to each independent director, or a total of 7,500 and 6,000 shares, with a weighted average grant date fair value of $25.23 and $19.67 per share, respectively. As of December 31, 2014 and 2013, we had 7,000 and 13,500 shares of unvested restricted common stock outstanding under the plan, respectively.

During the years ended December 31, 2014, 2013 and 2012, a total of 6,500, 4,000 and 2,000 shares of restricted common stock vested under the plan, respectively. The total fair value of restricted stock awards that vested during the years ended December 31, 2014, 2013 and 2012 was approximately $0.1 million, $0.1 million and $0.0 million, respectively, based upon the fair market value of our common stock on the vesting date. As of December 31, 2014 and 2013, we had unrecognized compensation expense of $0.1 million and $0.2 million, respectively, related to unvested shares of restricted stock. We recorded compensation expense of $0.1 million, $0.1 million and $0.1 million related to restricted stock awards for the years ended December 31, 2014, 2013 and 2012, respectively.

As of December 31, 2014, we had 1,057,661 shares of common stock reserved for future issuance under our long-term incentive plan.

Dividend Reinvestment and Direct Stock Purchase Plan

131

Note 15. Quarterly Results (Unaudited)

The following is a presentation of the quarterly results of operations for the years ended December 31, 2014 and 2013 (in thousands, except per share data).



	For the Three Months Ended
	December 31, 2014			September 30, 2014			June 30, 2014			March 31, 2014
Interest income	$	42,378		$	43,646		$	47,038		$	50,296
Interest expense	(6,823		)	(6,407		)	(7,256		)	(8,145		)
Net interest income	35,555			37,239			39,782			42,151
Net servicing loss	(4,386		)	(3,132		)	(3,037		)	(4,658		)
Total other gains (losses), net	(6,849		)	(19,362		)	53,982			17,494
Total expenses	6,609			6,452			6,223			6,078
Income (loss) before excise tax	17,711			8,293			84,504			48,909
Provision for income tax, net	(118		)	—			207			149
Net income (loss)	17,829			8,293			84,297			48,760
Dividend on preferred stock	(1,117		)	(1,117		)	(484		)	—
Net income available to common shareholders	$	16,712		$	7,176		$	83,813		$	48,760

Net income (loss) per common share—basic and diluted	$	0.33		$	0.14		$	1.64		$	0.95

Weighted average number of common shares outstanding— basic	51,150			51,142			51,142			51,272
Weighted average number of common shares outstanding— diluted	51,175			51,158			51,142			51,272

Dividends declared per common share	$	0.65		$	0.65		$	0.65		$	0.65

132



	For the Three Months Ended
	December 31, 2013			September 30, 2013			June 30, 2013			March 31, 2013
Interest income	$	69,694		$	70,511		$	63,927		$	51,567
Interest expense	(10,656		)	(10,949		)	(9,113		)	(8,036		)
Net interest income	59,038			59,562			54,814			43,531
Net servicing loss	(4,139		)	—			—			—
Total other losses, net	(65,660		)	(39,154		)	(102,160		)	(63,702		)
Total expenses	6,187			6,506			7,007			6,221
Income (loss) before excise tax	(16,948		)	13,902			(54,353		)	(26,392		)
Provision for income tax, net	302			200			—			177
Net income (loss)	(17,250		)	13,702			(54,353		)	(26,569		)
Dividend on preferred stock	—			—			—			—
Net income available to common shareholders	$	(17,250	)	$	13,702		$	(54,353	)	$	(26,569	)

Net income (loss) per common share—basic and diluted	$	(0.33	)	$	0.25		$	(0.94	)	$	(0.56	)

Weighted average number of common shares outstanding— basic	52,028			54,515			57,982			47,469
Weighted average number of common shares outstanding— diluted	52,028			54,515			57,982			47,469

Dividends declared per common share	$	0.65		$	0.70		$	0.80		$	0.90

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. 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 December 31, 2014. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Management's Report on Internal Control over Financial Reporting

Management's Report on Internal Control over Financial Reporting is included in "Item 8.-Financial Statements and Supplementary Data."

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 year ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

133

Item 9B. Other Information

None.

134

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information in response to this Item is incorporated herein by reference to the information provided in our Proxy Statement for our 2015 Annual Meeting of Stockholders (the "2015 Proxy Statement") under the headings "PROPOSAL 1: ELECTION OF DIRECTORS", "EXECUTIVE OFFICERS", "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" and "CODE OF ETHICS AND CONDUCT."

Item 11. Executive Compensation

Information in response to this Item is incorporated herein by reference to the information provided in the 2015 Proxy Statement under the headings "PROPOSAL 1: ELECTION OF DIRECTORS", "EXECUTIVE COMPENSATION" and "REPORT OF THE COMPENSATION AND GOVERNANCE COMMITTEE."

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information in response to this Item is incorporated herein by reference to the information provided in the 2015 Proxy Statement under the heading "SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS."

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information in response to this Item is incorporated herein by reference to the information provided in the 2015 Proxy Statement under the headings "CERTAIN TRANSACTIONS WITH RELATED PERSONS" and "PROPOSAL 1: ELECTION OF DIRECTORS."

Item 14. Principal Accounting Fees and Services

Information in response to this Item is incorporated herein by reference to the information provided in the 2015 Proxy Statement under the heading "PROPOSAL 2: RATIFICATION OF SELECTION OF INDEPENDENT PUBLIC ACCOUNTANT."

135

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) List of documents filed as part of this report:

1. The following financial statements are filed herewith:

a. Consolidated Balance Sheets as of December 31, 2014 and 2013

b. Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012

c. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2014, 2013 and 2012

d. Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012

2. The following exhibits are filed herewith or incorporated herein by reference



Exhibit No.		Description
*3.1		American Capital Mortgage Investment Corp. 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.

*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 of 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 of 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 of 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 of 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 of Form 8-A (File No. 001-35260), filed May 16, 2014.

*10.1		Management Agreement, dated August 9, 2011, by and between American Capital Mortgage Investment Corp. and American Capital MTGE Management, LLC, incorporated herein by reference to Exhibit 10.1 of Form 10-Q for the quarter ended September 30, 2011 (File No. 001-35260), filed November 14, 2011.

*10.2		Amendment and Joinder to Management Agreement, dated September 30, 2011, by and between American Capital Mortgage Investment TRS, LLC and American Capital MTGE Management, LLC, incorporated herein by reference to Exhibit 10.2 of Form 10-Q for the quarter ended September 30, 2011 (File No. 001-35260), filed November 14, 2011.

†*10.3		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.

†*10.4		Form of Restricted Stock Agreement for independent directors, incorporated herein by reference to Exhibit 10.6 to Amendment No. 4 to Form S-11 (Registration Statement No. 333-173238), filed July 29, 2011.

†*10.5		Form of Restricted Stock Unit Agreement for independent directors, incorporated herein by reference to Exhibit 10.2 of Form 10-Q for the quarter ended June 30, 2014 (File No. 001-35260), filed August 7, 2014.

12.1		Calculation of Ratios of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends.

*14		American Capital Mortgage Investment Corp. Code of Ethics and Conduct, adopted July 26, 2011, incorporated herein by reference to Exhibit 14 of Form 10-K for the fiscal year ended December 31, 2011 (File No. 001-35620), filed February 21, 2012.

136



21		Subsidiaries of the Company and jurisdiction of incorporation: 1) American Capital Mortgage Investment TRS, LLC, a Delaware limited liability company 2) American Capital Mortgage 2013 LLC, a Delaware limited liability company 3) Residential Credit Solutions Inc., a Delaware corporation 4) Woodmont Insurance Co. LLC, a Missouri limited liability company

23		Consent of Ernst and Young LLP

24		Powers of Attorney of directors and officers.

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.

137

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: February 26, 2015

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



Name	Title	Date

*	Chief Executive Officer and Chair of the Board (Principal Executive Officer)	February 26, 2015
Malon Wilkus

/s/ JOHN R. ERICKSON	Director, Chief Financial Officer and Executive Vice President (Principal Financial and Accounting Officer)	February 26, 2015
John R. Erickson

*	Director	February 26, 2015
Robert M. Couch

*	Director	February 26, 2015
Morris A. Davis

*	Director	February 26, 2015
Randy E. Dobbs

*	Director	February 26, 2015
Samuel A. Flax

*	Director	February 26, 2015
Larry K. Harvey

*	Director	February 26, 2015
Prue B. Larocca

*	Director	February 26, 2015
Alvin N. Puryear



*By:		/s/ JOHN R. ERICKSON
		John R. Erickson Attorney-in-fact

138

MTGE Investment Corp. - FORM 10-K - February 26, 2015

Attached files

MTGE Investment Corp. Reports