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YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.06pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.06pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.18pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adversely+19
default+14
failure+10
adverse+8
loss+7
Positive rising
advances+9
satisfy+8
greater+4
able+3
achieve+3
Risk Factors (Item 1A)
32,364 words
Item 1A. Risk Factors
You should carefully consider the following factors, together with all the other information included in this 2025 Form 10-K, in evaluating our company and our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected, and the value of our stock could decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. As such, you should not consider this list to be a complete statement of all potential risks or uncertainties.
Summary Risk Factors
Risks Related to Financing
• Our inability to access funding, our cost of funding or the terms on which such funding is available could have a material adverse effect on our financial condition, liquidity or profitability.
• An increase in our borrowing costs relative to the interest we receive on our assets may materially adversely affect our profitability.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
easing+5
losses+4
declined+3
closed+3
challenges+3
Positive rising
gain+13
enhance+4
opportunities+3
gains+2
efficiency+2
MD&A (Item 7)
24,283 words
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Part IV of this 2025 Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this 2025 Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.
This section of the 2025 Form 10-K generally discusses 2025 and 2024 items and year-to-year comparisons between 2025 and 2024. Discussions of 2023 items and year-to-year comparisons between 2024 and 2023 that are not included in this 2025 Form 10-K, can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024.
Executive Summary
We are a diversified real estate company that invests in, originates, and manages primarily residential real estate assets. The assets we may invest in and manage for others, through our wholly-owned subsidiary PAS, include residential mortgage loans, Non-Agency RMBS, Agency RMBS, business purpose loans (including RTLs) and investor loans, MSRs and other real estate-related assets such as Agency CMBS, junior liens and HELOCs, equity appreciation rights, and reverse mortgages. Also, through our wholly-owned subsidiary, HomeXpress, we originate consumer Non-QM and investor business purpose residential mortgage loans as well as QM residential mortgage loans.
• We may not achieve what we believe to be optimal levels of leverage or we may become overleveraged, which may materially adversely affect our liquidity, results of operations, profitability or financial condition.
• Failure to effectively manage our liquidity could adversely affect our results and financial condition.
• Our financing facilities may contain covenants that restrict our business activities.
• We may have difficulty accessing or be unable to access capital markets.
Risks Associated with Our Investments
• Interest rate fluctuations and changes in the yield curve may have various negative effects on us and may lead to reduced earnings, increased volatility in our earnings, and reduction in our book value.
• The impact of inflation and related monetary policy efforts may adversely affect our financial performance.
• The nature of the mortgage loans we acquire and that underlie the RMBS we acquire exposes us to credit risk that could negatively affect the value of those assets and investments.
• A significant portion of our investments are in the most subordinated first-loss position of the capital structure of Non-Agency RMBS, disproportionatelyexposing us to credit risk.
• A significant portion of the RMBS we acquire through securitization is subject to the Risk Retention Rules.
• We have a significant amount of investments in Non-Agency RMBS collateralized by mortgage loans that do not meet the prime loan underwriting standards and are subject to increased risk of losses.
• Our investments in mortgage loans and MSRs depend on the performance of third-party mortgage servicers.
• Falling rates may accelerate mortgage prepayments, reducing future servicing income and decreasing MSR valuations.
• We may be required to fund servicing advances on delinquent loans with respect to our MSR investments, which could create liquidity demands, particularly during market downturns or periods of increased borrower distress.
• Changes in prepayment rates could negatively affect the value of our investment portfolio, which could result in reduced earnings, book value impairments, and/or negatively affect the cash available for distribution to our stockholders.
• A significant portion of our Non-Agency RMBS and residential loans are secured by properties in a small number of geographic areas and may be disproportionately affected by adverse events in those markets.
• We may change our investment strategy, adjust our asset allocation, or enter other operating businesses or financing plans without stockholder consent.
• Changes in the fair values of our assets, liabilities, and derivatives can reduce earnings, affect liquidity, increase earnings volatility, and create variability in our book value.
• Our calculations of the fair value of the assets we own or consolidate as well as liabilities related to consolidated securitizations are based upon assumptions that are inherently subjective, and the failure to realize such valuations may have a material adverse effect on our financial condition.
• Any deterioration or uncertainty in market conditions for mortgages and mortgage-related assets, as well as in broader U.S. and global economic and geopolitical conditions, could have a material adverse effect on us.
Risks Related to Our Recent Acquisition and Loan Origination and Acquisition Business
• We may fail to realize the expected benefits of the HomeXpress Acquisition.
• Our loan origination and acquisition volume and ability to sell loans are highly dependent on macroeconomic and U.S. residential real estate market conditions.
• A disruption in the secondary home loan market, our ability to sell the loans that we originate or acquire, or loan compliance issues could have a negative effect on our business.
• Our subsidiary, HomeXpress, relies on warehouse facilities, structured as repurchase agreements, to finance loan originations and acquisitions. These facilities are short-term and subject us to various risks.
• Our business is dependent on our ability to maintain and expand our relationships with our clients, the independent mortgage brokers and bankers.
• Our mortgage loans are primarily initiated by third parties, which exposes us to business and other risks.
Risks Related to Our Investment Management and Advisory Services
• Our investment management and advisory services involve certain risks, which could adversely affect our business, financial condition and results of operations.
• Our failure to appropriately manage or address conflicts of interest could damage our reputation.
• Two of our subsidiaries are currently required to be registered as an investment adviser or a relying adviser, subjecting us to extensive regulation and examination by the SEC.
• Our asset management and advisory services business has significant client concentration. Failure to attract, grow, and retain a diverse and balanced client base could adversely affect our asset management and advisory services business.
Risks Related to Hedging
• Hedging against interest rate exposure may not be successful in mitigating the risks associated with interest rates and may reduce our cash and adversely affect our financial condition and result of operations.
• We may enter into hedging instruments that could expose us to contingent liabilities in the future, which could materially adversely affect our results of operations.
• The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty risks, which could adversely affect our business and results of operations.
Risks Associated with Our Operations
• Through certain of our wholly owned subsidiaries we may from time to time engage in securitization transactions relating to residential mortgage loans, which may expose us to potentially material risks.
• Our ability to profitably execute future securitization transactions may be negatively impacted by adverse market conditions.
• Competition may affect our ability to source our target assets at attractive prices and grow our investment management and advisory services, which may have a material adverse effect on our business, financial condition and results of operations.
• Risks related to servicers and other third parties, including their ability to perform their services at a high level and comply with applicable laws, may have an adverse impact on our business.
• Our use of third-party analytical models and data introduce risks related to model accuracy that may have an adverse effect on our execution of investment activities.
• We are dependent on information technology and systems and their failure, including through cyber-attacks, could significantly disrupt our business.
• The development, proliferation and use of artificial intelligence could give rise to legal and/or regulatory action, damage our reputation or otherwise materially impact our business, financial condition, and liquidity.
• The loss of key employee may materially adversely affect our business.
Risks Related to Regulatory Matters, Accounting, and Our 1940 Act Exemption
• Our business is subject to extensive regulation that may subject us to significant costs and compliance requirements, and there can be no assurance that we will satisfactorily comply with such regulations.
• There is no assurance we will be able to obtain various state licenses to purchase mortgage loans.
• Loss of our 1940 Act exemption would negatively affect our share price, our ability to distribute dividends, and us generally.
U.S. Federal Income Tax Risks and Risk Related to Our REIT Status
• Risks related to compliance with REIT requirements, our qualification as a REIT and our election to qualify as a REIT.
• Distributions or gain on sale may be treated as unrelated business taxable income to tax-exempt investors.
• Classification of our securitizations or financing arrangements as a taxable mortgage pool could subject us or certain of our stockholders to increased taxation.
• Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.
Risks Related to Our Organization and Structure
• Certain provisions of Maryland Law, of our charter, and of our bylaws may inhibit potential acquisition bids that stockholders may consider favorable and may affect the market price of our capital stock
Risks Related to Financing
Our inability to access funding, our cost of funding or the terms on which such funding is available could have a material adverse effect on our financial condition, liquidity or profitability, particularly during times of severe market disruption in the financial, mortgage, housing or related sectors.
Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our financing arrangements, including repurchase agreements, secured financing trusts and warehouse facilities with our counterparties. Because repurchase agreements and warehouse facilities are often short-term commitments of capital, lenders may respond to market conditions by making it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have and may continue to impose more onerous conditions when rolling such financings. For example, times of significant dislocation in the financial markets may result in lenders being unwilling or unable to provide us with financing, which could force us to sell assets at an inopportune time or negatively affect lenders’ valuation of our target assets which may result in margin calls, requiring a pledge of additional collateral or cash to re-establish the required ratio of borrowing to collateral value under our repurchase agreements. In addition, the regulatory capital requirements imposed on our lenders may change, or our lenders may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, including requiring additional collateral in the form of cash, which may adversely affect our ability to fund our operations. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities, or if we are required to post more collateral or face larger haircuts or if we otherwise fail to effectively manage and maintain our liquidity resources, we may have to curtail our asset acquisition activities and/or dispose of assets at a loss. In addition, posting additional collateral or cash to support our credit will reduce our liquidity and limit our ability to leverage our assets, which could materially adversely affect our business.
An increase in our borrowing costs relative to the interest income we receive on our assets may materially adversely affect our profitability.
Our earnings are primarily generated from the difference between the interest income we earn on our investment portfolio, less net amortization of purchase premiums and discounts, and the interest expense we pay on our borrowings. During a period of rising or elevated interest rates, our borrowing costs generally will increase at a faster pace than our interest earnings on the leveraged portion of our investment portfolio, which could result in a decline in our net interest spread and net interest margin. We may rely on borrowings under repurchase agreements to finance our investments, which have short-term contractual maturities, or we may use longer-term mark-to-market, non-MTM, and limited MTM financing, which may be more expensive than traditional short-term mark-to-market financing but offers more certainty with respect to funding availability. In general, if the interest expense on our borrowings increases relative to the interest income we earn on our investments, our profitability may be materially adversely affected.
Our business strategy involves the use of leverage. We may not achieve what we believe to be optimal levels of leverage or we may become overleveraged, which may materially adversely affect our liquidity, results of operations, profitability or financial condition.
Our business strategy involves the use of borrowing, or leverage. Pursuant to our leverage strategy, we borrow against a substantial portion of our assets and use the borrowed funds to finance our investment portfolio and the acquisition of additional investment assets. Future increases in the amount by which the collateral value is required to contractually exceed the amount borrowed in such leverage financing transactions, decreases in the market value of our residential mortgage investments, increases in interest rate volatility and changes in the availability of acceptable financing from our existing lenders or alternative sources could cause us to be unable to achieve the amount of leverage we believe to be optimal for achieving our profitability objectives. The return on our assets and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions prevent us from achieving the desired amount of leverage on our investments or cause the cost of our financing to increase relative to the income earned on our leveraged assets. For certain investments we may evaluate the feasibility of entering into non-MTM financing in order to mitigate liquidity risks related to volatile interest rates and credit market conditions. Non-MTM facilities typically have higher interest rates and deleveraging provisions which reduce the net cash we receive from underlying assets. If the interest income on the investments that we have purchased with borrowed funds fails to cover the interest expense of the related borrowings, we will experience net interest losses and may experience net losses from operations. Such losses could be significant because of our leveraged structure. The risks associated with leverage are more acute during periods of economic slowdown or recession and may further hinder our ability to achieve what we believe to be optimal levels of leverage or increase our risk of becoming overleveraged. The use of leverage to finance our investments involves many other risks, including, among other things, the following:
• If we or a counterparty to our repurchase transactions defaults on its obligation under the repurchase agreement, we could incur losses. When we engage in repurchase transactions, we generally sell assets to the counterparty to the agreement for cash. Because the cash we receive from the counterparty is less than the value of those securities (this difference is referred to as the “haircut”), if the lender defaults on its obligation to transfer the same securities back 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). See Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” of this 2025 Form 10-K, for further discussion regarding risks related to exposure to financial institution counterparties. Generally, if we default on a repurchase transaction, the counterparty could liquidate the assets and use the proceeds to repay the amounts it is owed. If the amount received from the sale is equal to or less than the amount owed, we will incur a loss equal to the haircut and the counterparty has recourse to us to repay any remaining deficiency. In addition, if we default on a transaction under any one agreement and fail to honor the related guarantee, the counterparties to our other repurchase agreements could also declare a default under their respective repurchase agreements. Any losses we incur on our repurchase transactions could materially adversely affect our earnings and thus our cash available for distribution to our stockholders and could also adversely affect our liquidity.
• Adverse developments involving major financial institutions or involving one of our lenders could result in a rapid reduction in our ability to borrow and materially adversely affect our business, profitability, and liquidity. As of December 31, 2025, we had amounts outstanding under repurchase agreements with 20 separate lenders, including amounts at risk with Nomura Securities International, Inc. (“Nomura”), of 18% of our equity related to the collateral posted on secured financing agreements. A material adverse development involving one or more major financial institutions or the financial markets, in general, could result in us reducing exposure to certain lenders to mitigate credit risk or our lenders reducing our access to funds available under our repurchase agreements or terminating such repurchase agreements altogether. Because substantially all our repurchase agreements are uncommitted and renewable at our lenders’ discretion, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time, which could materially adversely affect our business and profitability. Furthermore, if a few of our lenders became unwilling or unable to continue to provide us with financing, we could be forced to sell assets, including assets in unrealized loss positions, to maintain liquidity. Forced sales, particularly under adverse market conditions, could result in lower sale prices than ordinary market sales made in normal market conditions. If our investments were liquidated at prices below our amortized cost of such assets, we would incur losses, which would adversely affect our earnings.
• Our use of repurchase agreements to borrow money may give our lenders greater rights in the event of bankruptcy. In the event of our insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the Bankruptcy Code, the effect of which, among other things, would be to allow the creditor under the agreement to avoid the automatic stay provisions of the Bankruptcy Code and take possession of, and liquidate, the collateral under such repurchase agreements without delay.
• A recharacterization of the repurchase agreements as sales for tax purposes rather than as secured lending transactions would adversely affect our ability to maintain our qualification as a REIT and to maintain our 1940 Act exemption. When we enter into a repurchase agreement, we generally sell assets to our counterparty to the agreement for cash. The counterparty is obligated to resell the assets back to us at the end of the transaction term. We believe that for U.S. federal income tax purposes we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions 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 or the SEC could successfully assert that we did not own these assets during the term of the repurchase agreements, in which case we could fail to qualify as a REIT or fail to maintain our 1940 Act exemption, respectively.
• Our financing facilities may contain covenants that restrict our operations. Certain financing facilities we may enter into contain restrictions, covenants, and representations and warranties that, among other things, require us to satisfy specified financial, asset quality, loan eligibility, and loan performance tests. If we fail to meet or satisfy any of these covenants or representations and warranties, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their respective rights against collateral pledged under such agreements, and restrict our ability to make additional borrowings. Certain financing agreements may contain cross-default provisions by a guarantor so that if a default occurs under any guaranty agreement, the lenders under our other financing agreements could also declare a default under their respective agreements. Further, under our mark-to-market agreements, we are typically required to pledge additional assets to our lenders in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional securities, loans or cash. These
restrictions may interfere with our ability to obtain financing or to engage in other business activities, which may have a significant negative impact on our business, financial condition, liquidity and results of operations. A default and resulting repayment acceleration could significantly reduce our liquidity, which could require us to sell our assets to repay amounts due and outstanding whether or not the prices and terms of such sales are favorable to us. A default will also significantly limit our financing alternatives such that we will be unable to pursue our leverage strategy, which could lower our investment returns. This could also significantly harm our business, financial condition, results of operations, and our ability to make distributions, which could cause the value of our stock to decline.
We may have difficulty accessing or be unable to access capital markets.
We may not be able to readily raise capital from external sources in a timely manner or on favorable terms. Many of the same factors that could make the pricing for investments in real estate loans and securities attractive, such as the availability of assets from distressed owners who need to liquidate them at reduced prices, and uncertainty about credit risk, housing, and the economy, may limit investors’ and lenders’ willingness to provide us with additional capital on terms that are favorable to us, if at all. These risks may be more acute during periods of heightened volatility in securities prices in the mortgage sector, making it more difficult to raise capital accretive to our earnings, book value and overall results of operations. There may also be other reasons we are not able to readily raise capital in a timely manner or on favorable terms, and, as a result, may not be able to finance growth in our business and in our portfolio of assets and we could experience other adverse impacts. To the extent we need to raise capital on unfavorable terms, we may experience greater dilution of existing shareholders, higher interest costs, or higher transaction costs.
Risks Associated with Our Investments
Interest rate fluctuations, including as a result of the Federal Reserve's monetary policy, may have various negative effects on us and may reduce the market value of our investments and negatively affect our book value, earnings and cash available for distribution, as well as increasing volatility.
Changes in interest rates, the interrelationships between various rates, interest rate volatility, and the shape of the yield curve, including changes to the Federal Reserve’s interest rate policies in response to inflation, labor market conditions and other economic factors, may have negative effects on our earnings, the fair value of our assets and liabilities, loan prepayment rates, and our access to liquidity. For example, interest rate changes, particularly increases in interest rates, could have one more of the following consequences:
• Some of the loans and securities we own or may acquire have adjustable-rate coupons or may be subordinate securities entitled to cash flow only after the more senior securities have been paid. As such, the cash flows and earnings we receive from these assets may vary as a function of interest rates.
• Changes in interest rates may harm the credit performance of our assets and result in costlier financing, which may affect our earnings results, reduce our ability to securitize, re-securitize, or sell our assets, or reduce our liquidity.
• Higher interest rates could reduce mortgage borrowers’ ability to make interest payments or to refinance their loans, reduce property values, lead to increased credit losses, and reduce mortgage originations, thus reducing our opportunities to acquire or originate new assets.
• Our investment portfolio contains a significant allocation to MBS and residential loans, which are generally sensitive to changes in long-term interest rates. In a rising rate environment, the market value of longer-duration investments typically declines. As interest rates increase, the duration and weighted average life of our target assets may also extend, further magnifying potential declines in value. Decreases in the market value of these investments may reduce our earnings or result in realized losses, which could negatively impact our stockholders by reducing the cash available for distribution and/or book value.
• If both short-term and long-term interest rates rise significantly, we may be subject not only to higher financing costs on our repurchase agreements but also to declining valuations in our portfolio. These combined pressures may reduce our net income, book value, and overall financial performance. If these
conditions persist, they may have a material adverse effect on our results of operations and our ability to make distributions to our stockholders.
We may seek to hedge a majority of, but not all interest rate risks. Our hedging may not work effectively or be successful at all, and we may change our hedging strategies or the degree or type of interest rate risk we assume.
Changes in the yield curve may cause differences in timing between interest rate adjustments on our interest-earning assets and our borrowings, adversely affecting our net interest spread, and may impact our assets and liabilities differently, adversely affecting our book value if our assets are negatively impacted or the value of our liabilities increase.
Our earnings depend, in part, on the difference between the interest income on our interest-earning assets and the interest expense on our borrowings. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” In a normal yield curve environment, short-term interest rates are lower than longer-term interest rates. If short-term rates rise disproportionately relative to longer-term rates (often called a “flattening” or “inversion” of the yield curve), our borrowing costs generally increase more rapidly than the interest income we earn, compressing our net interest margin. Because our assets, on average, bear interest based on longer-term rates than our borrowings, a flattening or inversion of the yield curve would tend to decrease our net interest margin, net income, book value, and the market value of our net assets. In the event that short-term rates exceed longer-term rates, we could experience negative net interest spread and incur operating losses.
Additionally, when principal from our investments is returned (either through scheduled or unscheduled payments) and must be reinvested in new assets, the spread between the yields on new investments and our available borrowing rates may narrow. This reinvestment dynamic could further reduce our net income. Changes in the yield curve may also affect the pace and profitability of securitization transactions if the market environment becomes less favorable for issuing or pricing securitized products. In addition, changes in the shape of the yield curve may impact our assets and liabilities differently, and when such changes negatively impact the value of our assets, or increase the value of our liabilities, it may adversely affect our book value.
The impact of inflation and related monetary policy efforts may adversely affect our financial performance.
Certain actions taken by the U.S. government, including the Federal Reserve, may impact our results. In response to concerns about inflation, labor market conditions, or other economic factors, the Federal Reserve may adjust monetary policy. Given our reliance on short-term borrowings to generate interest income, if the yield curve were to flatten or even invert, or if the Federal Reserve finds itself falling behind on inflation and more aggressively tightens monetary policy, our results of operations, financial condition and business could be materially adversely impacted.
The nature of the mortgage loans we acquire and that underlie the RMBS and MSRs we acquire exposes us to credit risk that could negatively affect the value of those assets and investments.
We assume credit risk primarily through the ownership of MSRs and securities backed by residential, multi-family, and commercial real estate loans and through direct investments in residential real estate loans. The substantial majority of our investment assets are subject to various credit risks, as discussed below.
No U.S. Government Guarantee . We acquire residential loans including reperforming loans, nonperforming loans, Non-QMs, jumbo prime loans, and RTLs, which are subject to increased risk of loss. Unlike Agency RMBS, Non-Agency RMBS and residential mortgage loans generally are not guaranteed by the U.S. Government or any GSEs such as Fannie Mae and Freddie Mac. Additionally, by directly acquiring residential loans, we do not receive the structural credit enhancements that benefit senior tranches of RMBS. A residential loan is directly exposed to losses resulting from a borrower default. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower, and the priority and enforceability of the lien will significantly impact the value of such mortgage loan. In the event of a foreclosure, we may assume direct ownership of the underlying real estate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, and any costs or delays involved in the foreclosure or liquidation process may increase losses. In addition, claims may be assessed against us because of our position as a mortgage holder or property owner, including assignee liability, environmental hazards, and other liabilities. We could also be responsible for property taxes. In some cases, these claims may lead to losses exceeding the purchase price of the related mortgage or property. The occurrence of any of these risks could materially adversely impact our results of operations, financial condition, and business.
Non-QM Loan Risks . In addition, we acquire and may retain Non-QMs that will not have the benefit of enhanced legal protections otherwise available to residential mortgage loans originated to a more restrictive credit standard than just determining a borrower’s ability to repay. The ownership of Non-QMs subjects us to legal, regulatory and other risks, including
those arising under federal consumer protection laws and regulations designed to regulate residential mortgage loan underwriting and originators’ lending processes, standards, and disclosures to borrowers. Failure of residential mortgage loan originators or servicers to comply with the CFPB’s Ability-to-Repay Rule could subject us, as an assignee or purchaser of these loans (or as an investor in securities backed by these loans), to monetary penalties assessed by the CFPB through its administrative enforcement authority and by mortgagors through a private right of action against lenders or as a defense to foreclosure, including by recoupment or setoff of finance charges and fees collected, and could result in rescission of the affected residential mortgage loans, which could adversely impact our business and financial results.
Lower Underwriting Standards Risk. A majority of the Non-Agency RMBS we have acquired on the secondary market or retained in our securitizations are backed by collateral pools containing mortgage loans that were originated using underwriting standards that were less strict than those used in underwriting conventional or prime credit quality mortgage loans. These lower standards permitted mortgage loans, often with LTV ratios exceeding 80%, to be made to borrowers having impaired credit histories, lower credit scores, higher debt-to-income ratios or unverified income. Such mortgage loans are likely to experience delinquency, foreclosure, bankruptcy, and other losses at rates that are higher than those experienced by conventional or prime credit quality mortgage loans. Thus, the performance of our Non-Agency RMBS that are backed by these types of loans could be correspondingly worse than those backed by other types of mortgage loan products, especially during times of economic stress, which could materially adversely impact our results of operations, financial condition, and business.
Greater General Credit Risks . In addition, credit losses on residential real estate loans can occur for many reasons (many of which are beyond our control), including, but not limited to: fraud; poor underwriting; poor servicing practices; weak economic conditions; increases in payments required to be made by borrowers; declines in the value of homes; earthquakes, the effects of climate change (including flooding, drought, wildfire and severe weather), and other natural disaster events; uninsured property loss; borrower over-leveraging; costs of remediation of environmental conditions, such as indoor mold; changes in zoning or building codes and the related costs of compliance; acts of war or terrorism; pandemics; changes in legal protections for borrowers and other changes in law or regulation; and personal events affecting borrowers, such as reduction in income and job loss. Additionally, the amount and timing of credit losses could be affected by loan modifications, foreclosure and evictionmoratoriums, reductions in mortgage debt by bankruptcy courts, delays in the liquidation process, documentation errors, deficient or missing collateral files, and other actions by servicers. Weakness in the U.S. economy or the housing market could cause our credit losses to increase beyond levels that we currently anticipate.
A significant portion of our investments are in Non-Agency RMBS that are the most subordinate securities in securitizations, making us the first-loss security holder, which means these securities are subject to significant credit risk, are illiquid, and are difficult to value.
A significant portion of our Non-Agency RMBS are subordinate classes we have acquired through securitization of mortgage loans. The mortgage loans we have securitized are generally recorded on our balance sheet as “securitized mortgage loans” for GAAP purposes, but in effect we own these assets in the form of securities. A substantial portion of the mortgage loans that we securitize and the subordinate securities that we retain are not newly originated “prime mortgage loans” but rather seasoned reperforming mortgage loans and Non-QM loans that have less strict underwriting standards and are therefore subject to greater risk of loss.
When we securitize mortgage loans, we sell the most senior and mezzanine securities backed by those loans and retain the most subordinate classes of securities, which means we are the first-loss security holder and the securities we own represent a portion of the “securitized mortgage loans” on our balance sheet. Losses on any residential mortgage loan securing our RMBS will be borne first by the owner of the property (i.e., the owner will first lose any equity invested in the property) and, thereafter, by us as the first-loss security holder, and then by holders of more senior securities. If the losses incurred upon loan default exceed any reserve fund, letter of credit, and classes of securities junior to those we own (if any), we may not be able to recover our investment in such securities. Also, if the underlying properties have been overvalued by the originating appraiser or if the values subsequently decline resulting in less collateral available to satisfy interest and principal payments due on the related security, as the first-loss security holder, we may suffer a total loss of our investment, followed by losses on the more senior securities (or other RMBS that we may own). Losses with respect to these investments, which are subject to significant credit risk, could increase or otherwise be higher than anticipated. For a description of the credit risk we are exposed to, see the Risk Factor above captioned “The nature of the mortgage loans we acquire and that underlie the RMBS and MSRs we acquire exposes us to credit risk that could negatively affect the value of those assets and investments.”
In addition, many of our Non-Agency RMBS securities are first loss and subject to the Risk Retention Rules. Pursuant to the Risk Retention Rules, when we sponsor a residential mortgage loan securitization, we are required to retain at least 5% of the fair value of the MBS issued in the securitization. We can retain either an “eligible vertical interest” (which consists of at least 5% of each class of securities issued in the securitization), an “eligible horizontal residual interest” (which is the most
subordinate class of securities with a fair market value of at least 5% of the aggregate credit risk) or a combination of both totaling 5% (the “Required Credit Risk”). We typically own the eligible horizontal residual interest. We are required to hold the Required Credit Risk until the later of (i) the fifth anniversary of the securitization closing date and (ii) the date on which the aggregate unpaid principal balance of the mortgage loans in such securitization has been reduced to 25% of the aggregate unpaid principal balance of the mortgage loans as of the securitization closing date, but no longer than the seventh anniversary of the closing date (the “Sunset Date”). In addition, before the Sunset Date, we may not engage in any hedging transactions if payments on the hedge instrument are materially related to the Required Credit Risk and the hedge position would limit our financial exposure to the Required Credit Risk. Also, we may not pledge our interest in any Required Credit Risk as collateral for any financing unless such financing is full recourse to us. We have financed certain Required Credit Risk positions in full recourse transactions and our ability to refinance the full recourse transactions at maturity on similar or equivalent terms exposes us to certain liquidity and financial risks. Our Required Credit Risk subjects us to the first losses on our securitizations and is illiquid, which may make it more difficult to meet our liquidity needs, each of which may materially and adversely affect our business and financial condition.
The fair value of securities, especially our first loss credit risk retention securities, reperforming mortgage loans (loans that typically were significantly delinquent and subsequently modified), and other investments we make that are not frequently traded may not be readily determinable, and it may be difficult to obtain third-party pricing on such investments. Also, validating third-party pricing for illiquid investments may be more subjective than more liquid investments and may not be reliable. Illiquid investments may also experience greater price volatility because an active market does not exist. We value our investments quarterly based on internally developed processes and valuation models and in accordance with our valuation policy. Because such valuations are inherently uncertain, our fair value determination may differ materially from the values obtained from third parties or the values that would have been used if an active trading market existed for these investments. Our results of operations, financial condition and business could be materially adversely affected if our fair value determinations of the investments were materially different than the values that would exist if a ready market existed for these assets.
The illiquidity of our investments may make it difficult, or impossible for certain assets subject to the Risk Retention Rules, for us to sell these assets. Financing may also be more difficult. Also, if we quickly liquidate all or a portion of our portfolio (for example, to meet a margin call), we may realize significantly less than the value at which we have previously recorded our investments. Thus, our ability to adjust our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations, financial condition and the value of our capital stock.
Our interests in MSR financing receivables expose us to risk of loss if the related master servicer is unable to satisfy its obligations to the GSEs and/or to us.
We have interests in MSR financing receivables that expose us to risk of loss. We do not hold the requisite licenses to purchase or hold MSRs directly. Instead, we have entered and, in the future, may enter into purchase agreements with licensed, GSE-approved residential mortgage loan servicers to acquire base and excess servicing compensation rights (known as MSRs) that enable us to garner the economic return of an investment in an MSR purchased by the mortgage servicing counterparty through an MSR financing transaction.
Generally, an MSR financing transaction with a licensed, GSE-approved residential mortgage loan servicer provides that we: (i) purchase an interest in the “excess servicing spread” from such mortgage servicing counterparty, entitling us to monthly distributions of the servicing fees collected by the mortgage servicing counterparty in respect of the underlying MSRs in excess of a base rate (often approximately 12.5 basis points per annum for conventional loans) and (ii) enter into a Reference Spread Agreement for Agency Loans (“RESPA”) with the mortgage loan servicer, or an affiliate thereof, that references the performance of the underlying MSRs. The amount that we pay to enter into a RESPA entitles us to receive an amount generally equivalent to the excess of servicing proceeds (which may include servicing fee revenue, income generated on escrow balances, reimbursements for previously made servicing advances, and proceeds from the sale of the underlying MSRs) over the sum of the excess servicing spread and the actual costs of servicing (including amounts paid for servicing advances, master and subservicing fees, and other costs and expenses). Interests in MSR financing receivables also generally entitle us to distributions of corresponding proceeds upon a sale of the underlying MSRs.
We rely on the mortgage loan servicer to maintain the state licenses required to hold and manage the underlying MSRs, and, when the underlying MSRs related to mortgage loans are guaranteed by a GSE, to maintain the required GSE approvals. If the mortgage loan servicer were to default under its servicing or other obligations to a GSE, such GSE could transfer the related servicing rights to another servicer, in which case we could realize a significant loss on our interests in MSR financing
receivables, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
While our interests in MSR financing receivables involving GSE-guaranteed loans are often subject to an “acknowledgement agreement” with the GSE, which gives us some rights in the event of a mortgage loan servicer default, such rights are not absolute and the underlying MSRs remain subject and subordinate in all respects to the interests of the related GSE.
In addition to being subject to regulations by the GSEs, mortgage servicers are also subject to extensive federal, state and local laws, regulations and administrative decisions. As mortgage servicers, their failures to comply with these laws, regulations and administrative decisions can expose the mortgage loan servicing counterparty to fines, damages and losses. Mortgage loan servicers operate in a highly litigious industry that also subject them to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices. Furthermore, mortgage loan servicers can often be held responsible for the actions of any subservicers they employ.
Finally, if a mortgage loan servicer becomes insolvent, we may become a general unsecured creditor of such mortgage loan servicer with respect to the related interests in MSR financing receivables, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our interests in MSR financing receivables may expose us to additional financing-related risks, and we may be reliant on acknowledgement agreements with the GSEs and a master servicer's cooperation with its financing sources and its compliance with covenants in its MSR financing facility.
For our current investments in MSR financing receivables, we allow the mortgage loan servicer to apply leverage to the underlying MSRs by pledging them under an MSR financing facility, in which case the lender would have a secured interest in the pledged underlying MSRs. Under a typical MSR financing facility, if the fair value of the pledged underlying MSRs declines and the lender demands additional collateral from the mortgage loan servicer through a margin call, we would be required to provide the mortgage loan servicer with additional funds or other assets to meet such margin call; if we were unable to satisfy such margin call, the lender could declare an event of default. MSR financing facilities typically require the mortgage loan servicer to satisfy various covenants, conditions and tests, the failure of which could lead to an amortization event and/or an event of default, and the satisfaction of which is out of our control. An event of default under an MSR financing facility could result in the liquidation by the lender of the pledged underlying MSRs to satisfy the loan obligation, which could result in a material loss on our interests in MSR financing receivables and materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Further, our MSR financing facility may also cross-collateralize MSR financing facilities of other investors of the related mortgage loan servicer, whose MSR-related investments (that may or may not be similar to our interests in MSR financing receivables) secure such other investor’s MSR financing facility. Each MSR financing facility requires each of the servicer borrower and the investor borrower to be jointly and severally liable for the obligations of other borrower. Through the servicer borrower, as a common co-borrower on every investor MSR financing facility, each investor borrower may be jointly and severally liable with every other investor borrower. As a result, we may have liability not only for our own obligations under our MSR financing facility, but our MSR financing receivables may also cross-collateralize another investor’s MSR financing facility. In a scenario where those other MSR-related investments decline in value and trigger margin calls under the other investor’s MSR financing facility, if the applicable borrower does not provide funds or additional assets to meet such margin calls, the MSR financing lender could declare a default under the other investor’s MSR financing facility. If that were to occur, we could be required to repay all outstanding obligations under our MSR financing facility on short notice in order to preserve the value of our own investments and avoid an amortization event and/or an event of default under our MSR financing facility. In addition, any inability to repay all outstanding obligations under our MSR financing facility within the required repayment period, including repayments required due to margin calls made because of declines in the value of the MSRs, could lead to impairments to the extent our interests in MSR financing receivables were to be applied to satisfy outstanding obligations of the other investor’s MSR financing facility before satisfying our outstanding obligations under our MSR financing facility.
In addition, the borrowing capacity under any MSR financing is limited, and if the mortgage loan servicer is not successful in upsizing an MSR financing facility or finding a larger replacement facility, we may not be able to achieve our projected leveraged economic returns on our interests in MSR financing receivables. In addition, any new MSR financing facility entered into by a mortgage loan servicer would be subject to approval by the relevant GSE. If the mortgage loan servicer cannot obtain such GSE approval, it may not be able to obtain financing for us on favorable terms or at all.
We may have to fund amounts equal to the servicing advances due under our interests in MSR financing receivables, which could adversely impact our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Pursuant to certain RESPA contracts, to the extent that costs of servicing exceed servicing proceeds, we may be obligated to pay the equivalent of such excess to cover such “servicing advances,” which can include the payment of unpaid principal and interest due to the third-party owners of the loans, property taxes and insurance premiums, legal expenses and other protective advances that have not yet been received from the individual borrowers. Subject to the terms of the relevant servicing agreements, the mortgage loan servicer is generally entitled to reimbursement for servicing advances that are not subsequently collected from the underlying borrowers, and under the RESPA we would in turn be reimbursed by the RESPA counterparty for any servicing advances that we had funded. Our right to such reimbursement is unsecured.
During periods of economic disruption, there is a greater possibility that mortgage loan borrowers could fail to pay principal and interest payments, request forbearance of their monthly mortgage payments altogether, or otherwise miss scheduled payments including property taxes and insurance premium escrows, which could greatly increase the amount of servicing advances we would be required to indirectly fund, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our interests in MSR financing receivables may involve complex or novel structures.
Our interests in MSR financing receivables may involve complex or novel structures. Accordingly, the risks associated with the transactions and structures are not fully known. In the case of interests in MSR financing receivables that reference mortgages guaranteed by GSEs, the GSEs may require that we submit to costly or burdensome conditions as a prerequisite to their consent to an investment in, or our financing of, those MSRs. These conditions, which could include large capital requirements, may greatly reduce the potential returns available from these investments.
It is possible that a GSE’s views on whether any such acquisition structure is appropriate or acceptable may not be known to us when we make an investment and may change from time to time for any reason, even with respect to a completed investment. A GSE could even impose new conditions on our existing interests in MSR financing receivables, including rights with respect to such MSRs. Such new conditions may be costly or burdensome and could require us to dispose of the interests in MSR financing receivables at an inopportune time.
Moreover, complying with such new conditions could require us or our co-investment counterparties to agree to material structural or economic changes, as well as agree to indemnification or other terms that expose us to risks to which we have not previously been exposed, all of which could negatively affect the returns from our investments.
In addition, the novelty and/or complexity of such structures may limit our ability to transfer such interests, including as a result of required GSE consents and/or the unsecured nature of our interest, and the market for investors willing to invest in an asset with such a novel and complex structure may be limited or may not exist at all, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We do not have legal title to the underlying MSRs.
The licensed residential mortgage loan servicer, rather than us, owns legal title to the MSRs and is responsible for performing all servicing activities. While we do purchase the excess servicing spread from the mortgage loan servicer, we do not purchase an interest in the underlying MSRs, and instead rely on the RESPA and True Excess Spread Agreement for FNMA Loans, which entitles us to payments based on the performance of the underlying MSRs but does not give us any security interest or buyer's rights to the underlying MSRs. The validity or priority of our interest in the underlying MSRs, which is not secured, could be challenged in a bankruptcy proceeding of the mortgage servicing counterparty, the parent company of the mortgage loan servicer, or a subservicer, and the related purchase agreement could be rejected in such proceeding. Any of the foregoing events could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
The value of our MSR investments may vary substantially with changes in interest rates.
The values of our MSR investments are highly sensitive to changes in interest rates. The value of MSRs typically increases when interest rates rise and decreases when interest rates decline because of the effect those changes in interest rates have on
prepayment estimates. Changes in interest rates influence a variety of assumptions included in the valuation of MSRs, including prepayment speeds, assumed yields used to discount future cashflows, the value of float income earned on escrow balances and other servicing valuation elements. Subject to qualifying and maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates.
Changes in prepayment rates could negatively affect the value of our investment portfolio, which could result in reduced earnings, losses, book value impairments and/or negatively affect the cash available for distribution to our stockholders.
There are seldom any restrictions on consumer borrowers’ abilities to prepay their residential mortgage loans. Homeowners tend to prepay mortgage loans faster when interest rates decline and not prepay when interest rates increase, resulting in loan owners having to reinvest the money received from prepayments at the lower prevailing rates or being unable to reinvest money that would have been received from prepayments at the higher prevailing interest rates, respectively. In addition, our Agency RMBS are protected from the risk of default on the underlying mortgages by guarantees from the U.S. Government or any GSEs such as Fannie Mae and Freddie Mac. Defaults on mortgage loans underlying Agency MBS typically have the same effect as prepayments because of the underlying Agency guarantee. Volatility in interest rates may increase the likelihood borrower’s may prepay the mortgage loans, and variability in prepayment rates may affect the earnings and value of our portfolio of residential mortgage loans, RMBS and MSRs, and may result in reduced earnings or losses, and negatively affect the cash available for distribution to our stockholders. In addition, if we purchased an investment at a premium, faster than expected prepayments would result in a faster than expected amortization of the premium paid, which would adversely affect our earnings. Conversely, if these investments were purchased at a discount, slower than expected prepayments would reduce our recognition of the discount, which would adversely affect our earnings.
A significant portion of our investment portfolio is secured by properties in a small number of geographic areas and may be disproportionately affected by economic or housing downturns, natural disasters, including natural disastersexacerbated by climate change, terrorist events, regulatory changes, or other adverse events specific to those markets.
A significant number of the mortgages underlying our Non-Agency RMBS and Loans held for investments are concentrated in certain geographic areas. For example, we have significant exposure in California, New York, Florida, Illinois, and Texas, among others. For further information on the geographic concentration of our investments see Note 3 and Note 4 to the consolidated financial statements within this 2025 Form 10-K. Any event that adversely affects the economy or real estate market (including business layoffs or downsizing, industry slowdowns, changing demographics, over or under building of housing, availability and cost of insurance, oversupply or reduced demand and other factors) in areas of high concentration could have a disproportionatelyadverse effect on our investments. In general, any material decline in the economy or significant problems in a particular real estate market would likely cause a decline in the value of residential properties securing the mortgages in that market, thereby increasing the risk of delinquency, default, and foreclosure of mortgage loans underlying our investments and the risk of loss upon liquidation of these assets. This could have a material adverse effect on our credit loss experience in the affected market if higher-than-expected rates of default or higher-than-expected lossseverities on such loans were to occur.
In addition, the occurrence of a natural disaster or a terrorist attack may cause a sudden decrease in the value of real estate in the area or areas affected and would likely reduce the value of the properties securing the mortgages collateralizing our investments. Recent years have seen frequent and severe natural disasters in the U.S., including wildfires, hurricanes, high winds, hail, severe flooding and mudslides, the frequency and intensity of which may be indicative of the impact of climate change. The impacts of climate change, which may persist or worsen in the future, could have a more significant localized effect in the areas where our borrowers and real estate are concentrated, resulting in a disproportionate impact on us. Because certain natural disasters such as hurricanes or certain flooding are not typically covered by the standard hazard insurance policies maintained by borrowers, or the proceeds payable under any such policy are not sufficient to cover the related repairs, the affected borrowers may have to pay for any repairs themselves. Under these circumstances, borrowers may decide not to repair their property or may stop paying their mortgages. This would cause defaults and credit lossseverities to increase. The availability and cost of property and hazard insurance has become increasingly uncertain as insurance carriers reduce coverage or withdraw from certain states, which may limit options for borrowers and would be homeowners and impair collateral protection. If borrowers are unable to obtain or afford adequate insurance, the value of our mortgage assets and the performance of the affected loans could deteriorate and adversely impact our financial results.
Changes in local laws and regulations, fiscal policies, property taxes and zoning ordinances in such states can also have a negative impact on property values, which could result in borrowers deciding to stop paying their mortgages. This circumstance could cause defaults and lossseverities to increase, thereby adversely impacting our results of operations.
We may change our investment strategy or asset allocation or enter other operating businesses or financing plans without stockholder consent, which may result in riskier investments or subject us to new or increased regulatory risks and have an adverse effect on our business, results of operations and financial condition.
We may change our investment strategy or asset allocation or enter other operating businesses or financing plans 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 in this 2025 Form 10-K. For example, we recently expanded our scope of business via the HomeXpress Acquisition. See “Risks Related to Our Recent Acquisition and Loan Origination and Acquisition Business” for further discussion.
A change in our investment strategy or financing plans could increase our exposure to interest rate and default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this 2025 Form 10-K. Additionally, we may enter other operating businesses that may or may not be closely related to our current business. These new assets or business operations may have new, different or increased risks than what we are currently exposed to, including potential unknown liabilities and disputes associated with these new assets or business operations that could lead to litigation, and we may not be able to manage these risks successfully. Additionally, when investing in new assets or businesses we could be exposed to the risk that those assets, or income generated by those assets or businesses, affects our ability to meet the requirements to maintain our qualification as a REIT or our exemption from registration under the 1940 Act. If we are not able to successfully manage the risks associated with new asset types or businesses, our business, results of operations and financial condition could be adversely affected.
Changes in the fair values of our assets, liabilities, and derivatives can have various negative effects on us, including reduced earnings, less liquidity, increased earnings volatility, and variability in our book value.
Fair values for our assets and liabilities, including derivatives, can be volatile and our revenue and income can be impacted by changes in fair values. Fair values can change rapidly and significantly, and changes can result from changes in interest rates, perceived risk, credit spreads, supply, demand, and actual and projected cash flows, prepayments, and credit performance. A decrease in fair value may not necessarily be the result of deterioration in future cash flows. Fair values for illiquid assets can be difficult to estimate, which could lead to volatility and uncertainty of earnings and book value. For GAAP purposes, we mark-to-market most, but not all, of the assets and liabilities on our Consolidated Statements of Financial Condition. In addition, valuation adjustments on certain consolidated assets and our derivatives are reflected in our Consolidated Statements of Operations. Assets that are funded with certain liabilities and hedges may have different mark-to-market treatment than the liability or hedge. If we sell an asset that has not been marked to market through our Consolidated Statements of Operations at a reduced market price relative to its cost basis, our reported earnings will be reduced. Our loan sale profit margins are generally reflective of gains (or losses) over the period from when we identify a loan for purchase until we subsequently sell or securitize the loan. These profit margins may encompass elements of positive or negative market valuation adjustments on loans, hedging gains or losses associated with related risk management activities, and any other related transaction expenses. However, under GAAP, the different elements may be realized unevenly over the course of one or more quarters for financial reporting purposes, with the result that our financial results may be more volatile and less reflective of the underlying economics of our business activity.
Our calculations of the fair value of the assets we own or consolidate are based upon assumptions that are inherently subjective and involve a high degree of management judgment, and such assumptions may be more difficult to calculate during times of severe market disruption in the mortgage, housing, rates or other financial market related sectors.
We report the fair values of securities, loans, derivatives, and certain other assets on our Consolidated Statements of Financial Condition. In computing the fair values for these assets, we may make several market-based assumptions, including assumptions regarding future interest rates, prepayment rates, discount rates, credit loss rates, and the timing of credit losses. These assumptions are inherently subjective and involve a high degree of management judgment, particularly for illiquid securities and other assets for which market prices are not readily determinable. These assumptions may be more difficult to calculate during times of severe market disruption in the mortgage, housing, rates or other financial market related sectors. For further information regarding our assets recorded at fair value see Note 6 to the consolidated financial statements within this 2025 Form 10-K. Use of different assumptions could materially affect our fair value calculations and our financial results and our actual experience may cause us to substantially revise our assumptions. Further discussion of the risk of our ownership and valuation of illiquid securities is set forth in the Risk Factors above and in this 2025 Form 10-K.
Any deterioration or uncertainty in broader U.S. and global economic conditions could materially adversely affect our business and financial condition.
Our results of operations are materially affected by conditions in the broader financial markets and the economy generally. Concerns over actual or anticipated low economic growth rates, higher levels of unemployment, a reduction in housing market
activity, inability of the U.S. government to address debt ceiling crises, increases in the supply of or decreases in demand for U.S. government issued securities, uncertainty over tariffs and potential international trade disputes, uncertainty regarding future U.S. monetary policy, potential prolongedshutdowns of the federal government, or geopolitical conflicts may contribute to increased financial market volatility and a decline in business volume. A reduction in our business volume can reduce our net interest income and adversely affect our financial results. Global economic conditions can also adversely affect our business and financial results. Changes or volatility in market conditions resulting from deterioration in or uncertainty regarding global economic conditions can adversely affect the value of our assets, which could materially adversely affect our results of operations, net worth and financial condition. To the extent global economic conditions negatively affect the U.S. economy, they also could negatively affect the credit performance of the loans in our investment portfolio. Volatility or uncertainty in global or domestic political conditions also can significantly affect economic conditions and financial markets. Global or domestic political unrest could adversely affect economic conditions and financial markets. Such events may contribute to heightened inflationary pressures, increased interest rates, market volatility, reduced liquidity, and disruptions in capital markets, any of which could negatively impact economic growth, the value of our investments, our access to financing, and our overall financial condition and results of operations.
Risks Related to Our Recent Acquisition and Loan Origination and Acquisition Business
We may fail to realize the expected benefits of the HomeXpress Acquisition.
We will be required to devote significant management attention and resources to the integration of HomeXpress’ business in order to realize the anticipated benefits and synergies of the HomeXpress Acquisition. The potential difficulties we may encounter in combining the companies include, but are not limited to, the following:
• the inability to successfully integrate HomeXpress businesses in a manner that permits us to achieve the anticipated benefits and synergies expected to result from the HomeXpress Acquisition in the timeframe currently anticipated or at all;
• the diversion of management’s attention from our ongoing business as a result of the devotion of time and resources to integration of the HomeXpress Acquisition;
• addressing possible differences in business backgrounds, corporate cultures and management philosophies;
• maintaining employee morale and attracting, motivating and retaining management personnel and other key employees;
• complying with an expanded regulatory framework, including the wide array of laws, rules and regulation, including federal and state consumer lending regulations, related to our loan origination and acquisition business;
• the possibility of faulty assumptions underlying expectations regarding the HomeXpress Acquisition;
• potential unknown liabilities and unforeseen increased expenses, delays or conditions associated with the HomeXpress Acquisition and HomeXpress’ operations;
• performance shortfalls as a result of the diversion of management’s attention caused by integrating HomeXpress’ operations;
• consolidating corporate and administrative infrastructures and eliminating duplicative operations;
• unanticipated issues and costs in integrating information technology, communications and other systems; and
• unanticipated changes in federal or state laws or regulations.
The operations acquired through the HomeXpress Acquisition are subject to certain of the same risks as our existing business. Due to the HomeXpress Acquisition, we are, however, subject to additional risks due to the heavily regulated nature of the mortgage industry and are required to comply with a wide array of laws, rules and regulations, including federal and state consumer lending regulations, that concern, among other things, the manner in which we conduct our loan origination and acquisition business, as well as other risks described in “Risks Related to Our Recent Acquisition and Loan Origination and Acquisition Business.”
It is possible that the integration process could take longer than anticipated or that the management of the combined organizations and achievement of anticipated benefits and synergies could be more difficult than expected. The integration of HomeXpress into Chimera could also result in the disruption of ongoing businesses, processes, systems and business relationships or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements, any of which could adversely affect our ability to achieve the anticipated benefits of the HomeXpress Acquisition. The integration process is subject to a number of risks and uncertainties, and no assurance can be given that the anticipated benefits of the HomeXpress Acquisition will be realized or, if realized, the timing of its realization. Failure to achieve these anticipated benefits could adversely affect our business, financial condition and results of operations.
Our loan origination and acquisition volume and ability to sell loans are highly dependent on macroeconomic and U.S. residential real estate market conditions which are outside of our control, and which may impact our ability to originate or acquire quality and profitable loans at an appropriate and consistent cost.
As a result of the HomeXpress Acquisition, we originate and sell consumer Non-QM and investor business purpose mortgage loans secured primarily by residential real estate properties with up to eight units, which are substantially all Non-QM loans sourced primarily on a wholesale basis through independent mortgage brokers and bankers. We also have a non-delegated correspondent channel, and may expand to include a delegated correspondent channel, in which we acquire and sell the same type of mortgage loans which are originated by correspondent lenders, with whom we partner. We refer to our network of independent mortgage brokers and correspondent lenders collectively as our “HomeXpress clients.” The HomeXpress business has been, and may continue to be, affected by a number of factors that are beyond our control, including the health of the U.S. residential real estate industry, changes in general economic and capital market conditions, including increases and decreases in interest rates, inflation, credit spreads, competition from competitors who may have greater financial and other resources than we have (including access to capital), changes in the costs to originate our loans, and the ability of borrowers to buy homes and make mortgage payments. In addition, the consumer Non-QM and investor business purpose mortgage loan market is highly sensitive to interest-rate volatility, securitization execution, and investor demand, and disruptions in these markets may limit our ability to sell or finance loans on acceptable terms and such conditions could reduce origination volumes, compress margins, or require us to retain assets longer than anticipated. The majority of the properties securing HomeXpress’ loans that are originated and held for sale are located in California, Florida, and Texas, and conditions in these regions’ real estate markets could have an outsized negative impact on the HomeXpress business.
Our consumer Non-QM loans are designed for borrowers who do not meet traditional qualified mortgage standards and documentation requirements and typically carry higher interest rates than traditional qualified mortgages. The business purpose loans that we originate are for investors in 1-to-8-unit investment rental properties and rely on the income from the property to service the debt. Loans made to borrowers who are self-employed borrowers or have a credit profile that does not meet qualified mortgage standards or are based on rental properties and their debt service coverage typically have a higher risk of default. Our underwriting guidelines strive to account for these characteristics, but our risk management and procedures may not be effective in assessing the likelihood of default and identifying potential valuation issues.
A disruption in the secondary home loan market, our ability to sell the loans that we originate or acquire, or loan compliance issues could have a negative effect on our business.
Our subsidiary, HomeXpress, sells mortgage loans to a variety of aggregators, insurance companies, banks, and other institutional investors who either hold such loans for investment or securitize such loans, which we currently sell on a servicing-released basis. Demand in the secondary market for the purchase of such loans and our ability to sell the mortgage loans that we originate or acquire depend on many factors that are beyond our control, including general economic conditions, the willingness of investors to provide funding for and to purchase mortgage loans, and changes in regulatory requirements. The gain recognized from sales represents a significant portion of HomeXpress’ revenues and earnings. If it is not possible or economical for us to continue selling mortgages to such investors or other loan purchasers, our business could be materially and adversely affected. Similarly, if we choose to retain a portion of HomeXpress’ loan originations in lieu of selling to investors, we may forgo current gain-on-sale earnings in favor of longer-term investment income, which could materially alter the timing of our earnings and adversely impact our financial condition.
Furthermore, non-GSE sales typically take longer to execute which can increase the amount of time that a mortgage loan is held by us, exposing us to additional market and interest rate risk, including prepayment risk where a mortgage loan has no prepayment penalty or such penalty is waived, and increased liquidity requirements.
Additionally, if a mortgage loan does not comply with the representations and warranties that we made with respect to it at the time of our sale, we may be required to either repurchase the loan with the identified defects or indemnify the investor or insurer for any loss. In addition, we may be required to repay all, or a portion of, the premium initially paid by an investor in the case of an early loan payoff or early default on certain loans. We may also be required to repurchase loans as a result of borrower fraud or if a payment default occurs on a loan shortly after its sale. Actual repurchase, premium recapture and indemnification obligations could materially exceed the reserves recorded in our consolidated financial statements. Any significant repurchases, premium recapture, or indemnifications could be detrimental to our business.
Our subsidiary, HomeXpress, relies on warehouse facilities, structured as repurchase agreements, to finance its loan originations and acquisitions. These facilities are short-term and subject us to various risks different from other types of credit facilities.
We fund substantially all of the mortgage loans we originate or acquire from our HomeXpress clients under HomeXpress’ short-term warehouse facilities and funds generated by HomeXpress’ operations. These borrowings are in turn generally repaid
with the proceeds we receive from mortgage loan sales. We depend upon several financial institutions to provide the warehouse lines of credit for these loans. Our ability to fund loan originations may be impacted by the ability of HomeXpress to secure further such borrowings on acceptable terms and the ability of our counterparties to continue to provide financing. HomeXpress’ warehouse facilities are uncommitted and can generally be terminated by the applicable lender at any time. In addition, these warehouse facilities contain restrictions, covenants and conditions that require HomeXpress to satisfy, among other things, specified financial and loan eligibility tests. The failure to satisfy such conditions could result in such warehouse facility being made unavailable to us, an event of default or other negative consequences. In the event that a significant number of these loan funding facilities become unavailable or are terminated or are not renewed, or if the aggregate principal amount that may be drawn under our funding agreements were to decrease significantly, we may be unable to find replacement financing on commercially favorable terms, or at all. Our liquidity with respect to the HomeXpress entity may be further constrained as there may be less demand from investors to acquire our mortgage loans in the secondary market. Further, if we are unable to refinance or obtain additional liquidity for borrowing, our ability to maintain or grow our loan origination business could be limited. If the refinancing or borrowing guidelines under these facilities become more stringent and those changes result in increased costs to comply or decreased origination volume, those changes could be detrimental to our liquidity and business operations.
Our business is dependent on our ability to maintain and expand our relationships with our clients, the independent mortgage brokers and bankers.
Our clients are independent mortgage brokers and bankers who refer or sell us mortgage loans to originate or fund. Consequently, our results of operations are dependent, in large part, on our ability to maintain and expand our relationships with these clients. If we are unable to attract these clients to join our network and to provide a level of service such that our clients remain with the network or refer or sell a greater number of their mortgage loans to us, our ability to originate loans will be significantly impaired. The willingness of independent mortgage brokers and bankers to originate mortgage loans with us is dependent on (i) the rates that we are able to offer our clients’ borrowers for mortgage loans, (ii) our customer service, (iii) products and (iv) compensation. In determining with whom to partner, our clients are also focused on the technological services and platforms we can provide so that they can best attract and serve their customers. If our clients are dissatisfied with our services or our platform or technological capabilities, or if they cannot offer prospective borrowers competitive products and rates, we could lose a number of clients, which would have a negative impact on our business, operating results and financial condition.
Our mortgage loans are primarily initiated by third parties, which exposes us to business, competitive and underwriting risks.
We market, originate and, acquire mortgage loans primarily through independent third parties, comprised of independent mortgage brokers and bankers. While we believe using independent mortgage brokers and bankers best serves mortgage loan consumers, our reliance on third parties presents risks and challenges, including the following:
• Our business depends in large part on the marketing efforts of our clients and on our ability to offer loan products and services that meet the requirements of our clients and their borrowers. However, loan officers are not obligated to sell or promote our products and many sell or promote competitors’ loan products in addition to our products. Some of our competitors may have higher financial strength ratings, may offer a larger variety of products, and/or may offer higher incentives than we do. Therefore, we may not be able to continue to attract and retain clients to source loans for us. The failure or inability of our clients to successfully market our mortgage products to prospective borrowers could, in turn, have a material adverse impact on our business, financial condition and results of operations.
• Communication with prospective borrowers is made through loan officers employed by third parties. Consequently, we rely on our clients and their loan officers to provide us with accurate information on behalf of borrowers, including financial statements and other financial information, for us to use in deciding whether to approve loans. While we have procedures in place to independently verify certain borrower information that we use in our lending decisions, if any of this information is intentionally or negligentlymisrepresented and such misrepresentation is not detected prior to loan funding, the fair value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the borrower, the loan officer or one of our team members, we generally bear the risk of loss associated with the misrepresentation and may be exposed to repurchase obligations or regulatory violations. Our controls and processes may not detect or may not have detected all misrepresented information in our loan originations. Likewise, our clients may also lack sufficient controls and processes. Any such misrepresented information could have a material adverse effect on our business and results of operations.
• Wholesale mortgage lending presents some unique reputational and brand recognition risks. We attempt to provide high quality and transparent service to our clients so that our clients and prospective clients have confidence in our
ability to deliver our services in a timely and effective manner. To maintain good client relations, we attempt to do business with mortgage brokers and bankers that have a good reputation. Clients are monitored and those with excessive borrower complaints or misrepresented information are generally terminated. Our reputation and brand may suffer if we lose our clients’ confidence, which could have a material adverse impact on our results of operations and profitability.
• Growth in our market share is principally dependent on growth in the market share controlled by us within the wholesale and correspondent chann els. Co ntinued advancements or the perception of efficiency in “direct-to-the-consumer” distribution models may impact the overall market share controlled by our clients and make it more difficult for us to grow or require us to establish new, or modify existing, client relationships.
The conduct of the independent mortgage brokers and bankers through whom we originate mortgage loans could subject us to fines or other penalties.
We depend primarily on independent mortgage brokers and bankers for our loan originations and acquisitions. These clients are subject to parallel and separate legal obligations. While these laws may not explicitly hold the originating lenders responsible for the legal violations of such entities, U.S. federal and state agencies increasingly have sought to impose such liability. For example, the U.S. Department of Justice (“DOJ”), through its use of a disparate impact theory under the Fair Housing Act, has held originating lenders responsible for the pricing practices of third parties, alleging that the lender is directly responsible for the total fees and charges paid by the borrower even if the lender neither dictated what the third party could charge nor kept the money for its own account. In the past few years, there were a number of actions brought by the DOJ and other federal and state agencies under the Equal Credit Opportunity Act that allege that lenders have engaged in “redlining” by engaging in acts or practices directed at discouraging potential loan applicants from seeking financing. Even though we do not market directly to consumers, the failure or inability of our clients and their loan officers to attract certain classes of borrowers could result in actions being brought against us. In addition, under the TILA-RESPA Integrated Disclosure rule, we may be held responsible for improper disclosures made to borrowers by our clients. While the current presidential administration has suggested that these types of claims will not be pursued by the DOJ or federal agencies to the same degree, there is no assurance that state or private parties will not pursue similar claims. While we seek to use technology, and other means to monitor whether these clients and their loan officers are complying with their obligations, our ability to enforce such compliance is extremely limited. Consequently, we may be subject to claims for fines or other penalties based upon the conduct of our clients and their loan officers with whom we do business, which could have a material effect on our operating results and financial condition.
The mortgage lending industry can be very cyclical, with loan origination volumes varying materially based on macroeconomic conditions. If we are unable to effectively manage our team members during periods of volatility, it could adversely affect our current business operations and our growth.
The mortgage lending industry can be very cyclical, with loan origination volumes varying materially based largely on macroeconomic conditions. Our ability to effectively manage the volatility from significant increases and decreases in loan origination and acquisition volume will depend on our ability to hire, integrate, train and retain highly qualified personnel for all areas of our organization during these periods of changing volume. Any talent acquisition and retention challenges or mismanagement of our personnel needs in these situations could reduce our operating efficiency, increase our costs of operations and harm our overall financial condition. As the pool of qualified candidates has continued to be limited and there continues to be significant competition for talent, we may face challenges in hiring and retaining such highly qualified personnel in changing environments. Additionally, we invest heavily in training our team members, which increases their value to competitors who may seek to recruit them. If we do not effectively manage our pool of team members in times of volatility, it could disrupt our business operations and have a negative impact on our long-term growth.
We operate in a heavily regulated industry, and our mortgage loan origination activities as a result of our acquisition of HomeXpress, exposes us to risks of noncompliance with an increasing and inconsistent body of complex laws and regulations, including federal and state consumer lending regulations.
Due to the heavily regulated nature of the mortgage industry, we and our HomeXpress clients are required to comply with a wide array of laws, rules and regulations, including federal and state consumer lending regulations, that concern, among other things, the manner in which we conduct our loan origination and acquisition business and the fees that we may charge, and the collection, use, retention, protection, disclosure, transfer and processing of personal information by us and our clients. Governmental authorities and various U.S. federal and state agencies, including the CFPB, have broad oversight and supervisory authority over our HomeXpress business.
Because we originate and acquire mortgage loans in 46 states and the District of Columbia, we must be licensed in all relevant jurisdictions that require licensure for the type of mortgages we originate or acquire, and we are required to comply with each such jurisdiction’s respective laws and regulations, as well as with judicial and administrative decisions applicable to us. Such
licensing requirements also generally require the submission of information regarding any person who has 10% or more of the combined voting power of our outstanding equity interests. In addition, we and our clients are currently subject to a variety of, and may in the future become subject to additional, U.S. federal, state and local laws that are continuously evolving and developing.
We expect more states to enact legislation similar to the California Consumer Privacy Act and California Privacy Rights Act, which increase the privacy and security obligations of entities handling certain personal information of such consumers and could require us to provide consumers with privacy rights, such as the right to request deletion of their data, the right to receive data on record for them and the right to know what categories of data (generally) are maintained about them. These regulations directly impact our business and require ongoing compliance, monitoring and internal and external compliance audits as they continue to evolve and may result in ever-increasing public scrutiny with escalating levels of enforcement and sanctions. Subsequent changes to data protection and privacy laws could also impact how we process personal information and therefore limit the effectiveness of our products or services or our ability to operate or expand our business, including limiting strategic partnerships that may involve the sharing of personal information. Additionally, the interpretation of such data protection and privacy laws is rapidly evolving, making implementation and enforcement, and thus compliance requirements, ambiguous, uncertain, and potentially inconsistent. Although we make reasonable efforts to comply with all applicable data protection laws and regulations, our interpretations and such measures may have been or may prove to be insufficient or incorrect.
We and our HomeXpress clients must also comply with a number of federal, state and local consumer financial services, laws and regulations including, among others, the TILA, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act, the Telephone Consumer Protection Act, the Gramm-Leach-Bliley Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Home Mortgage Disclosure Act, the SAFE Act, the Federal Trade Commission Act, the TILA-RESPA Integrated Disclosure rule rules, the Dodd-Frank Act, the Appraisal Independence Rule, the Bank Secrecy Act, U.S. federal and state laws prohibiting unfair, deceptive, or abusive acts or practices, and state foreclosure laws. These laws and regulations mandate certain disclosures and notices to borrowers and apply to loan origination, home appraisal, marketing, use of credit reports, safeguarding of non-public, personally identifiable information about borrowers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features. The Appraisal Independence Rule requires that there be a separation of duties to ensure no conflicts of interest. While we believe that our programs meet all of the regulatory and legal requirements, there is a risk that a regulatory agency could decide that our programs do not meet all of the regulatory and legal requirements, or that our programs will not be accepted by other market participants, which could expose us to additional liability, or subject us to repurchase obligations.
Our Non-QM loans have more flexibility in underwriting guidelines than traditional qualified mortgage loan standards and are subject to increased credit risk compared to QM loans. These loans are also subject to relatively more litigation potential due to the subjectivity of the regulations and because they do not benefit from compliance with safe harbors. The underwriting guidelines for our Non-QM loans may be more permissive as to the borrower’s debt to income ratio, credit history, and/or income documentation than QM loans. Loans that are underwritten pursuant to less stringent underwriting guidelines could experience substantially higher rates of delinquencies, defaults and foreclosures than those experienced by loans underwritten to more stringent underwriting guidelines. If our Non-QM loans are underwritten to more flexible guidelines which have increased risk and may cause higher delinquency, default, or foreclosure rates given economic stress, the performance of the Non-QM loans we originate or acquire for resale could be correspondingly adversely affected, which could materially and adversely affect us.
Various federal, state and local laws have been enacted that are designed to discouragepredatory lending practices. The Home Ownership and Equity Protection Act of 1994 (“HOEPA”) prohibits inclusion of certain provisions in consumer-purpose residential loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases impose restrictions and requirements greater than those in HOEPA. In addition, under the anti-predatory lending laws of some states, the origination of certain residential loans, including loans that are not classified as “high cost” loans under applicable law, must satisfy a net tangible benefits test with respect to the related borrower. This test may be highly subjective and open to interpretation. As a result, a court may determine that a residential loan, for example, does not meet the test even if the related originator reasonably believed that the test was satisfied. Our failure to comply with these laws, or the failure of residential loan originators to comply with these laws, to the extent any of their residential loans are or become part of our mortgage-related assets, could subject us, as an originator, or, in the case of acquired loans, as an assignee or purchaser, to monetary penalties and could result in the borrowers rescinding the affected loans. Lawsuits have been brought in various states making claimsagainst originators, assignees and purchasers of high-cost loans for violations of state law. Named defendants in these cases have included numerous participants within the secondary mortgage market. If our loans are found to have been originated in violation of predatory or abusive lending laws, we could be subject to lawsuits or governmental actions, and we could be fined or incur losses.
Both the scope of the laws, rules and regulations and the intensity of the regulatory oversight to which our business is subject has increased over time. In the past years, regulatory enforcement and fines have become more significant across the financial
services sector. For example, various federal regulatory agencies and departments, including the DOJ and CFPB, have historically taken the position that antidiscrimination statutes, such as the Fair Housing Act and the ECOA, that prohibit creditors from discriminating against loan applicants and borrowers based on certain characteristics, such as race, ethnicity, sex, religion and national origin apply not only to intentional discrimination, but also to neutral practices that have a disparate impact on a group that shares a characteristic that a creditor may not consider in making credit decisions (i.e., creditor practices that have a disproportionatenegative effect on a protected class of individuals). While there is a perception that the enforcement agenda of the federal regulatory agencies may be curtailed under the current presidential administration, state regulators may fill the gap, and it is not clear the scope of such future limitations or the timing for implementation. Furthermore, it is not clear what effect those changes will have, or whether as a result of lesser oversight by the federal authorities, states will increase their regulatory oversight. Moreover, subsequent changes in various government administrations may result in yet other changes in regulatory oversight and enforcement. As these U.S. federal, state and local laws evolve, it may be more difficult for us to identify these developments comprehensively, to interpret changes accurately and to train our team members effectively with respect to these laws and regulations. These difficulties potentially increase our exposure to the risks of noncompliance with these laws and regulations, including loss of our licenses and approvals to engage in our lending businesses, costs associated with defending ourselves from investigations and enforcement actions or resulting administrative fines and penalties and civil and criminal liability, including class action lawsuits, which could be detrimental to our business.
The laws and regulations applicable to us are subject to administrative or judicial interpretation. Furthermore, state and federal agencies may differ in their interpretations as may private plaintiffs. Litigation amongst these various agencies and between private plaintiffs, including participants in the mortgage industry, and these agencies have added complexity and ambiguity in interpreting these regulations. Ambiguities in applicable laws and regulations may leave uncertainty with respect to permitted or restricted conduct and may make compliance with laws, and risk assessment decisions with respect to compliance with laws difficult, uncertain and costly. The adoption by industry participants of different interpretations of these statutes and regulations has added uncertainty and complexity to compliance and may result in them having a short- or long-term competitive advantage. If we are deemed to have violated applicable statutes or regulations, it could result in regulatory investigations, state or federal governmental actions or private civil claims, including class actions, being brought against us. Such litigation would cause us to incur costs, fines and legal expenses in connection with these matters, regardless of any eventual ruling in our favor, and could also harm the reputation of our brand, any of which could have a material adverse effect on our business, financial condition or results of operations.
To resolve issues raised in examinations or other governmental actions, we may be required to take various corrective actions, including changing certain business practices, making refunds and/or taking other actions that could be financially or competitively detrimental to us. We expect to continue to incur costs to comply with governmental regulations. In addition, certain legislative actions and judicial decisions can give rise to the initiation of lawsuits against us for activities we conducted in the past. Furthermore, provisions in our mortgage loan documentation, including but not limited to the mortgage and promissory notes we use in loan originations, could be construed as unenforceable by a court.
Although we have compliance management systems and procedures to comply with these legal and regulatory requirements, we cannot be assured that more restrictive laws and regulations will not be adopted in the future, or that governmental bodies or courts will not interpret existing laws or regulations in a more restrictive manner, which could render our current business practices non-compliant or which could make compliance more difficult or expensive. Any of these, or other, changes in laws or regulations could have a detrimental effect on our business.
Risks Related to Our Investment Management and Advisory Services
Our investment management and advisory services involve certain risks, which could adversely affect our business, financial condition and results of operations.
On December 2, 2024, we acquired TPG, PAS, Palisades Technology Holdings, LLC, and their respective subsidiaries (the “Palisades Acquisition”). As a result of the Palisades Acquisition, we began providing investment management and advisory services primarily through TPG and PAS (together with TPG, “Palisades”). TPG is registered with the SEC as an investment adviser under the Advisers Act, and PAS is a relying adviser with respect to TPG’s investment adviser registration.
Our investment management and advisory services are provided on a discretionary basis through investment funds that we manage and on a non-discretionary basis with respect to assets acquired and owned by third-party institutions, including insurance companies, credit funds, and other institutional investors. We do not own an interest in the Discretionary Funds other than any capital commitment that we may make in the future on a direct or indirect basis, including through co-investments. The Company did not acquire the general partners of the existing Discretionary Funds, for which the investment period has ended, as part of the Palisades Acquisition. Our subsidiary, however, is the non-member manager of the general partners of the existing Discretionary Funds and serves as the investment manager of the existing Discretionary Funds. Accordingly, we have certain obligations and responsibilities with respect to the existing Discretionary Funds and other third-party clients of our non-discretionary investment management and advisory services. In the future, we may form and manage new Discretionary Funds
for which we may act as the general partner and investment manager. Accordingly, our role as investment manager and advisor is subject to certain risks including, but not limited to:
• the possibility that investors in a Discretionary Fund or a managed account might become bankrupt or otherwise be unable to meet their capital commitment obligations;
• to the extent we were to become a general partner or limited partner in a new Discretionary Fund, the possibility that operating and/or management agreements applicable to such Discretionary Fund or a managed account may restrict our ability to transfer or liquidate our interest when we desire or on advantageous terms;
• that our relationships with clients of our non-discretionary investment management and advisory services are concentrated with certain clients and are generally contractual in nature and may be terminated (with or without cause) under the terms of the applicable agreements;
• that our role as investment manager and advisor of a Discretionary Fund or a managed account is generally contractual in nature and may be terminated or dissolved under the terms of the applicable agreements, or we may be removed as the non-member manager of the general partner of the existing Discretionary Funds;
• that our role as the general partner of any new Discretionary Fund is generally contractual in nature, and we may be removed as the general partner of any new Discretionary Fund under the terms of the applicable agreements;
• that we may fail to manage conflicts of interests among the general partner and limited partners of Discretionary Funds, and their respective principals, officers, employees, members and affiliates, as well as any conflicts of interests involving our business outside of the Discretionary Funds or managed accounts;
• that disputes between us and the investors in a Discretionary Fund or a managed account may result in litigation or arbitration that would increase our expenses and prevent our officers and directors from focusing their time and effort on our business and result in subjecting the investments owned by such Discretionary Fund or managed account to additional risk;
• that by reason of being the general partner for new Discretionary Funds, non-member manager of the general partner for existing Discretionary Funds, or investment manager, we will be required to make various decisions and perform various tasks, including preparing disclosures, tax filings and financial reports, that could expose us to liability, including for claimed breaches of fiduciary duties;
• that difficult market conditions could adversely affect a Discretionary Fund in many ways, including by negatively impacting its performance and reducing the ability of new Discretionary Funds to raise or deploy capital, thereby reducing assets under management and lowering management fee income and incentive-based income;
• that SEC examination of one or more of our subsidiaries currently required to be registered as an investment adviser or relying adviser may uncoverdeficiencies and potentially subject us to enforcement proceedings and sanctions for violations, including censure or termination of SEC registration, litigation and reputational harm; and
• that our business and financial condition may be materially adversely impacted by the loss of any of our key executives or other investment professionals.
Many of these factors are outside of our control and any one of them could adversely affect our business, financial condition and results of operations. Any incentive-based income that we may be entitled to with respect to future Discretionary Funds may be affected by changes in the market value of securities held in client accounts due to fluctuations in the securities markets and is highly variable. Such income may also be delayed due to the nature of a fund’s investment cycle.
Under the Advisers Act, the investment advisory contracts entered into by our investment adviser subsidiary may not be assigned without the client’s consent. A deemed “change of control” of our company could require us to obtain the consent of our clients, and a failure to do so properly could adversely affect our operations, financial conditions or business.
Our registered investment adviser and relying adviser subsidiaries are regulated and subject to examination by the SEC. The Advisers Act imposes numerous obligations, on registered investment advisers, including fiduciary duties, disclosure obligations recordkeeping and reporting requirements, marketing restrictions and general anti-fraud prohibitions. The failure to comply with the Advisers Act and other securities laws and regulations could cause the SEC to institute proceedings and impose sanctions for violations, including censure or terminating our registered investment adviser’s SEC registration, and could also result in litigation or reputational harm.
Our failure to appropriately manage or address conflicts of interest could damage our reputation and adversely affect our business, financial condition and results of operations.
As we expand the number of funds and scope of our business, we may confront potential conflicts of interest relating to our investment activities and the Discretionary Funds’ investment activities. With respect to each of the existing Discretionary Funds, the investment period has ended, and investments made on behalf of any future Discretionary Funds will be subject to a comprehensive policy regarding the allocation of investment opportunities between such future Discretionary Funds and our own account. Nevertheless, Discretionary Funds could have overlapping investment objectives, and such investment objectives could additionally overlap with our own investment objectives. Potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among us and the Discretionary Funds. For example, we may allocate an investment opportunity that is appropriate for two or more Discretionary Funds in a manner that excludes one or more Discretionary Funds or results in a disproportionate allocation based on factors or criteria that we determine, such as sourcing of the transaction, the specific nature of the investment or size and type of the investment, amount of capital available to invest in a related investment by a fund, among other factors. The Discretionary Fund investors and our public stockholders may perceive conflicts of interest regarding investment decisions and will have very limited ability to challenge those decisions.
In addition, the challenge of allocating investment opportunities to certain Discretionary Funds may be exacerbated if we expand our business to include more lines of business. Allocating investment opportunities appropriately frequently involves significant and subjective judgments. In addition, the perception of noncompliance with such requirements or policies could harm our reputation with Fund investors and our public stockholders.
In the event we were to acquire new businesses or service providers, these newly acquired affiliates could become service providers or counterparties to the Discretionary Funds and receive fees or other compensation for services that are not shared with the Discretionary Fund investors. In such instances, we may be incentivized to cause the Discretionary Funds or portfolio companies to purchase such services from our affiliates rather than an unaffiliated service provider despite the fact that a third-party service provider could potentially provide higher quality services or offer them at a lower cost.
It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. While we believe we have appropriate policies and procedures in place to manage conflicts of interest, this process is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation, which would materially adversely affect our business, financial condition or results of operations in a number of ways, including an inability to raise additional Discretionary Funds and a reluctance of counterparties to do business with us.
Two of our subsidiaries are currently required to be registered as an investment adviser or a relying adviser, subjecting us to extensive regulation and examination by the SEC that could adversely affect our ability to manage our business.
While Chimera Investment Corporation is currently not registered as an investment adviser under the Advisers Act, two of our subsidiaries are currently required to be registered as an investment adviser or relying adviser, and other subsidiaries may be required to register as such in the future. As a result, we and/or our subsidiaries are subject to extensive regulation which could adversely affect our ability to manage our business. Investment advisers are subject to various requirements under the Advisers Act such as fiduciary duties to clients, anti-fraud provisions, substantive prohibitions and requirements, contractual and record-keeping requirements and administrative oversight by the SEC (primarily by inspection). In addition, investment advisers must continually address potential conflicts between their interests and those of clients. Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. If we are deemed to be out of compliance with any such rules and regulations, we may be subject to civil liability, criminal liability and/or regulatory sanctions.
Our asset management and advisory services business has significant client concentration, with a limited number of clients accounting for a significant portion of fees. Failure to attract, grow, and retain a diverse and balanced client base could adversely affect our asset management and advisory services business.
Our asset management and advisory services business has a limited number of clients that account for a substantial portion of its fees. Revenues from these clients may fluctuate from time to time based on these clients’ business needs and client experience, the timing of which may be affected by market conditions or other factors outside of our control. Competitive pressures may also cause us to reduce the prices we charge, which could have an adverse effect on our margins and financial position and could negatively affect our revenues. If any of our large clients terminates its relationship with us or materially reduces the services they acquire from us, such termination or reduction could materially reduce the revenues we derive from our asset management and advisory services business. Because our operating costs may not decline proportionately with any such reductions, any client redemption or mandate termination could negatively impact our profitability.
Our ability to attract, grow, and retain a diverse and balanced client base may affect our ability to grow our revenues. Our ability to attract clients depends on a variety of factors, including our service offerings. If we are unable to expand or improve our service offerings, we may fail to develop, grow, and retain a diverse and balanced client base, which could adversely affect our asset management and advisory services business and the revenues derived therefrom.
Risks Related to Hedging
Hedging interest rate exposure may not be successful in mitigating the risks associated with interest rates and may reduce our cash available for distribution to our stockholders and adversely affect our financial condition and result of operations.
Subject to maintaining our qualification as a REIT, we use various hedging strategies to reduce our exposure to losses from rising interest rates in the current market. Hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held, financing used, and other changing market conditions. There are no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Alternatively, we 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 may use, including interest rate caps, options, futures, and swap futures, to hedge our interest rate exposure, may not fully protect us from adverse market movements and could expose us to additional risks such as basis risk, margin calls, and liquidity constraints. Our hedging instruments can be traded on an exchange, or administered through a clearing house or under bilateral agreements between us and a counterparty. Bilateral agreements expose us to increased counterparty risk, and we may be at risk of losing any collateral held by a hedging counterparty if the counterparty becomes insolvent or files for bankruptcy.
The nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could also increase our risk and losses. Our hedging strategies rely on models, assumptions, and historical correlations that may prove inaccurate, particularly in periods of market disruption. If these relationships break down or our models fail to capture relevant risk drivers, our hedges may underperform and result in financial losses. In addition, our hedging activities could result in losses if the anticipated market movements do not occur or if the hedging instruments do not effectively match the duration, timing, or other characteristics of the related assets or liabilities, or otherwise fail to correlate as intended with the risks being hedged. Regulatory changes that alter margin or clearing requirements could increase our costs and limit our hedging flexibility. Lastly, the amount of income that we may earn from hedging transactions to offset interest rate losses may be limited by U.S. federal tax provisions governing REITs.
The hedging transactions we undertake, which are intended to limit losses, may limit gains and increase our exposure to losses. Thus, if our hedging strategies fail or market conditions change unexpectedly, it may result in a reduction of our cash available for distribution and we could incur losses that adversely affect our financial condition and results of operations.
We may enter into hedging instruments that could expose us to contingent liabilities in the future, which could materially adversely affect our results of operations.
Subject to maintaining our qualification as a REIT, part of our financing strategy involves entering into hedging instruments that could require us to fund cash payments in certain circumstances (e.g., the early termination of a hedging instrument caused by an event of default or other voluntary or involuntarytermination event or the decision by a hedging counterparty to request the posting of collateral that it is contractually owed under the terms of a hedging instrument). With respect to the termination of an existing derivative or hedge instrument, the amount due would generally be equal to the unrealized loss of the open position with the hedging counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. Any losses we incur on our hedging instruments could materially adversely affect our earnings and thus our cash available for distribution to our stockholders.
The characteristics of hedging instruments present various concerns, including illiquidity, enforceability, and counterparty risks, which could adversely affect our business and results of operations.
As indicated above, from time to time we enter into various forms of hedge instruments. Entities entering into derivatives are exposed to credit losses in the event of non-performance by counterparties to these transactions. Rules issued by the Commodity Futures Trading Commission (the “CFTC”) that became effective in October 2012 require, with limited exceptions, the clearing of all standardized swap transactions through registered derivatives clearing organizations, or swap execution facilities, through standardized documents under which each swap counterparty transfers its position to another entity whereby the centralized clearinghouse effectively becomes the counterparty to each side of the swap. In addition to greater initial and
periodic margin (collateral) requirements and additional transaction fees both by the swap execution facility and the clearinghouse, the swap transactions are now subjected to greater regulation by both the CFTC and the SEC. In response to events having or expected to have adverse economic consequences or which create market uncertainty, clearing facilities or exchanges upon which some of our hedging instruments (i.e., interest rate swaps) are traded may also require us to post additional collateral against our hedging instruments. These additional fees, costs, margin requirements, documentation requirements, and regulations could adversely affect our business and results of operations.
Risks Associated with Our Operations
Through certain of our wholly owned subsidiaries, we have engaged in the past, and expect to continue to engage in, securitization transactions relating to residential mortgage loans. These types of transactions and investments expose us to potentially material risks.
A significant part of our business and growth strategy is to engage in various securitization transactions related to mortgage assets, and such transactions expose us to potentially material risks, including without limitation:
• Financing at Unfavorable Terms Risk: Engaging in securitization transactions and other similar transactions generally require us to incur short-term debt on a recourse basis to finance the accumulation of residential mortgage loans. If investor demand for securitization transactions weakens sufficiently, we may be unable to complete the securitization of loans accumulated for that purpose on favorable terms, or at all, which may hurt our business or financial results. We have a limited capacity to hold loans on our balance sheet as investments, and many of our financings are not structured as buy-and-hold facilities. If demand for securitized securities weakens, we may be forced to incur additional debt on unfavorable terms or may be unable to borrow to finance these assets, which may in turn impact our ability to continue acquiring loans over the short or long term.
• Diligence Risk: We engage in due diligence with respect to the loans or other assets we are securitizing and make representations and warranties relating to those loans and assets. When conducting due diligence, we rely on resources and data available to us and on a review of the collateral by third parties, each of which may be limited. We may also only conduct due diligence on a sample of a pool of loans or assets we are acquiring and assume that the sample is representative of the entire pool. Our due diligence efforts may not reveal matters which could lead to losses. If our due diligence process is not robust enough, or the scope of our due diligence is limited, we may incur losses. Losses could occur because a counterparty that sold us a loan or other asset refuses or is unable (e.g., due to its financial condition) to repurchase that loan or asset or pay damages to us if we determine after purchase that one or more of the representations or warranties made to us was inaccurate or because we do not get a representation or warranty that covers a discovered defect or violation. In addition, losses with respect to such loans will generally be borne by us as the holder of the “first-loss” securities in our securitizations.
• Disclosure and Indemnity Risk: When engaging in securitization transactions, we also prepare marketing and disclosure documentation, including term sheets and prospectuses, that include disclosures regarding the securitization transactions, the securitization transaction agreements and the assets being securitized. If our marketing and disclosure documentation are alleged or found to contain inaccuracies or omissions, we may be liable under federal and state securities laws (or under other laws) for damages to third parties that invest in these securitization transactions, including in circumstances where we relied on a third party in preparing accurate disclosures, or we may incur other expenses and costs disputing these allegations or settling claims. Additionally, we typically retain various third-party service providers when we engage in securitization transactions, including underwriters, trustees, administrative and paying agents, servicers and custodians, among others. We frequently contractually agree to indemnify these service providers against various claims and losses they may suffer from providing these services to us or the securitization trust. If any of these service providers are liable for damages to third parties that have invested in these securitization transactions, we may incur costs and expenses because of these indemnities.
• Call Right Risk : We often retain call rights with respect to certain sponsored securitizations that permit us to redeem securities at par, and because these securitizations are generally consolidated, exercising such rights may affect our GAAP book value. Specifically, if the redeemed securities are carried below par at the time of redemption, our GAAP book value may decline.
• Documentation Defects : If there are problems with the establishment of title to underlying mortgaged property and lien priority rights are transferred, securitization transactions that we sponsored and third-party sponsored securitizations that we hold investments in may experience losses, which could expose us to losses and could damage our ability to engage in future securitization transactions.
Our ability to profitably execute or participate in future securitization transactions depends, in part, on our ability to compete with other purchasers of residential mortgage loans and the cost and availability of short-term debt, which may be negatively impacted by adverse market conditions beyond our control.
A significant part of our business and growth strategy is to engage in various securitization transactions related to residential mortgage loans. There are many factors that can have a significant impact on whether a securitization transaction is profitable to us or result in a loss. One of these factors is the price we pay for the mortgage loans that we securitize, which, in the case of residential mortgage loans, is impacted by the level of competition in the marketplace for acquiring residential mortgage loans and the relative desirability to originators or other financial institutions of retaining residential mortgage loans as investments or selling them to third parties such as us. The cost and availability of the short-term debt we use to finance our mortgage loans before securitization impacts our profitability. This short-term debt cost is affected by several factors including its availability to us, its interest rate, its duration, and the percentage of our mortgage loans for which third parties are willing to provide short-term financing.
After we acquire mortgage loans that we intend to securitize, we can also sufferlosses if the value of those loans declines before securitization. Declines in the value of a residential mortgage loan, for example, can be due to, among other things, changes in interest rates, changes in the credit quality of the loan, changes in the projected yields required by investors to invest in securitization transactions, and increased delinquencies. Hedging against a decline in loan value due to changes in interest rates may impact the profitability of a securitization.
The price that investors in MBS will pay for securities issued in our securitization transactions also has a significant impact on the profitability of the transactions to us, and these prices are impacted by numerous market forces and factors including the uncertainty, potential delinquencies, and lack of liquidity. In addition, the underwriter(s) or placement agent(s) we select for securitization transactions, the terms of their engagement and the transaction costs incurred in such securitizations can also impact the profitability of our securitizations. Also, any liability that we may incur, or may be required to reserve for when executing a transaction can cause a loss to us. To the extent that we are not able to profitably execute future securitizations of residential mortgage loans or other assets, including for the reasons described above or for other reasons, it could have a material adverse impact on our business and financial results.
Competition may affect our ability to source our target assets at attractive prices and grow our investment management and advisory services, which may have a material adverse effect on our business, financial condition and results of operations.
We operate in a highly competitive market for investment opportunities. In acquiring real estate-related assets for ourselves or for any new Discretionary Fund in our capacity as investment manager, we compete with other mortgage REITs, investment management firms, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, exchange traded funds, mutual funds, institutional investors, investment banking firms, financial institutions, private equity funds, hedge funds, governmental bodies (including the Federal Reserve) and other entities. Many of our competitors are significantly larger than we are, have access to greater capital, technical, technological, marketing and other resources, and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances, different risk assessments, or fewer regulatory burdens and restrictions, which could allow them to consider a wider variety of investments and establish more favorable relationships than we can. The existence of these entities, as well as the possibility of additional entities forming in the future, may increase the competition for the acquisition of residential mortgage assets, resulting in higher prices and lower yields on such assets, as well as limiting our ability to raise third-party funds for, and therefore earn fees and incentive-based income from, any new Discretionary Funds.
We also provide investment management and advisory services on a non-discretionary basis. In that regard, we compete with investment management firms and similar entities for clients. Our clients may also choose to perform these functions internally and discontinue their relationships with us. Many of our competitors are significantly larger than we are, have access to greater capital and other resources, and may have other advantages over us. The existence of these entities, as well as the possibility of additional entities forming in the future, may limit our ability to grow fees from our non-discretionary investment management and advisory services or our ability to obtain new third-party non-discretionary accounts. The competitive pressures we face may have a material adverse effect on our business, financial condition and results of operations.
We rely on third parties to perform certain services particularly as it relates to loan servicing, comply with applicable laws and regulations, and carry out contractual covenants and terms, the failure of which by any of these third parties may adversely impact our business and financial results.
To conduct our business of acquiring loans, engaging in securitization transactions, and investing in third-party issued securities and other assets, we rely on third-party service providers to perform certain services, comply with applicable laws and regulations, and carry out contractual covenants and terms. Thus, we are subject to the risks associated with a third party’s failure to perform, including failure to perform due to reasons such as fraud, negligence, errors, miscalculations, or insolvency.
We rely on third-party loan servicers to service and manage the mortgage loans we beneficially own and that underlie our RMBS. Third-party servicers also service and manage the mortgage loans underlying MSRs that we may invest in. The ultimate returns generated by our investments may depend on the quality of the service providers, the selection of which we may not always have control. For example, servicers not vigilantly monitoring required monthly payments or taking longer than expected to resolve non-performing loans or liquidate related real properties may adversely impact the value of these investments and our financial performance. In addition, while we have contracted with third-party servicers to carry out the actual servicing of the loans we beneficially own, other than our securitized loans (including all direct interface with the borrowers) we are nevertheless ultimately responsible, vis-à-vis the borrowers and state and federal regulators, for ensuring that the loans are serviced in accordance with the terms of the related notes and mortgages and applicable law and regulation. See “Risks Related to Regulatory Matters, Accounting, and Our 1940 Act Exemption” for further discussion. Considering the current regulatory environment, such exposure could be significant even though we might have contractual claimsagainst our servicers for any failure to service the loans to the required standard.
For a majority of the loans that we beneficially own (other than securitized loans), we also beneficially own the right to service those loans, and we retain a sub-servicer to service those loans. In these circumstances, we are exposed to certain risks, including, without limitation, that we may not be able to enter into sub-servicing agreements on favorable terms to us or at all, or that the sub-servicer may not properly service the loan in compliance with applicable laws and regulations or the contractual provisions governing their sub-servicing role, and that we would be held liable for the sub-servicer’s improper acts or omissions. Additionally, in its capacity as a servicer of residential mortgage loans, a sub-servicer will have access to borrowers’ non-public personal information, and we could incur liability for a data breach relating to a sub-servicer or misuse or mismanagement of data by a sub-servicer. In the past, one of our sub-servicers experienced a data breach of personal information requiring notifications to borrowers and remedial actions. We also rely on technology infrastructure and systems of third parties who provide services to us and with whom we transact business. To the extent any one sub-servicer counterparty services a significant percentage of the loans with respect to which we own the servicing rights, the risks associated with our use of that sub-servicer are concentrated around this single sub-servicer counterparty. To the extent that there are significant amounts of advances that need to be funded in respect of loans where we own the servicing right, it could have a material adverse effect on our business and financial results.
We also rely on corporate trustees to act on behalf of us in enforcing our rights as security holders. Under the terms of most RMBS we hold, we do not have the right to directly enforce remedies against the issuer of the security but instead must rely on a trustee to act on behalf of us and other security holders. Should a trustee not be required to act under the terms of the securities, or fail to act, we could experience losses.
The expanding body of federal, state and local regulations and the investigations of servicers may increase their cost of compliance and the risks of noncompliance and may adversely affect their ability to perform their servicing obligations.
We rely on third-party servicers to service the residential mortgage loans that we acquire through consolidated trusts and that underlie the RMBS that we acquire. The mortgage servicing business is subject to extensive regulation by federal, state and local governmental authorities and various laws and judicial and administrative decisions imposing requirements and restrictions and increased compliance costs on a substantial portion of their operations. The volume of new or modified laws and regulations has increased in recent years. Some jurisdictions and municipalities have enacted laws that restrict loan servicing activities, including delaying or preventing prompt foreclosures, forcing the modification of certain mortgages, or preventing the collection of interest or other charges from borrowers under certain circumstances. Certain mortgage lenders and third-party servicers may also voluntarily, or as part of settlements with law enforcement authorities, establish loan modification programs relating to loans they hold or service, even if such loan modifications and other actions are not in the best interests of the beneficial owners of the mortgages. These federal, state and local legislative or regulatory actions that result in modifications of our outstanding mortgages, or interests in mortgages acquired by us either directly through consolidated trusts or through our investments in RMBS, may adversely affect the value of, and returns on, such investments. The foregoing matters may cause our business, financial condition, results of operations and ability to pay dividends to be adversely affected.
We utilize third-party analytical models and data to value our investments, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.
Given the complexity of our investments and strategies, we rely heavily on analytical models and information and data supplied by third parties, (“Third-Party Data”). Third-Party Data is used to value investments or potential investments and to hedge our investments. When we rely on Third-Party Data that proves to be incorrect, misleading or incomplete, our decisions expose us to potential risks. For example, by relying on Third-Party Data, especially valuation models, we may be induced to buy certain investments at prices that are too high, to sell certain other investments at prices that are too low, or to missfavorableopportunities altogether. Similarly, any hedging based on faulty Third-Party Data may prove to be unsuccessful. Furthermore, any valuations of our investments that are based on valuation models may prove to be incorrect.
These risks include the following: (i) collateral cash flows and/or liability structures may be incorrectly modeled in all or only certain scenarios, or may be modeled based on simplifying assumptions that lead to errors; (ii) information about collateral may be incorrect, incomplete, or misleading; (iii) collateral or bond historical performance (such as historical prepayments, defaults, cash flows, etc.) may be incorrectly reported, or subject to interpretation (e.g., different issuers may report delinquency statistics based on different definitions of what constitutes a delinquent loan); or (iv) collateral or bond information may be outdated, in which case the models may contain incorrect assumptions as to what has occurred since the date information was last updated.
Some of the Third-Party Data we use, such as mortgage prepayment models or mortgage default models, are predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses on a cash flow and/or a mark-to-market basis. In addition, the predictive models we use may differ substantially from those models used by other market participants, with the result that valuations based on these predictive models may be substantially higher or lower for certain investments than actual market prices. Furthermore, since predictive models are usually constructed based on historical data supplied by third parties, the success of relying on such models may depend heavily on the accuracy and reliability of the supplied historical data and the ability of these historical models to accurately reflect future periods.
All valuation models rely on correct market data inputs. Certain assumptions used as inputs to the models may be based on historical trends and these trends may not be indicative of future results. If incorrect market data is used, even a well-designed valuation model may result in incorrect valuations. Even if market data is appropriately captured in the model, the resulting “model prices” will often differ substantially from market prices, especially for securities with complex characteristics, such as derivative securities. Volatility in any asset class, including real estate and mortgage-related assets, increases the likelihood of Third-Party Data being inaccurate as market participants attempt to value assets that have frequent, significant swings in pricing.
We are dependent on information technology and systems, including those of third parties, and their failure, including through a cyber-attack, could significantly disrupt our business or result in the disclosure or misuse of confidential or other information, including personal information, which could damage our reputation, result in regulatory sanctions, subject us to litigation and/or increase our costs and cause losses that have a material adverse impact on our business, financial results and financial condition.
Our business is highly dependent on our information and communications systems. These information and communications systems include hardware, software and cloud-based solutions. Our business is also highly dependent on the information and communications systems of third parties with whom we do business or that facilitate our business activities, including clearing agents, mortgage servicers, trustees, business counterparties, technology service providers and financial intermediaries. Our relationships with certain of these third parties allow for the external storage and processing of our information, including personal information, and counterparty and borrower information, including on cloud-based systems. In addition, third parties to whom we provide investment management and advisory services and a few customers who license two of our internally developed data analytics technologies, may also share their confidential information, including personal information, with us, which information may be processed and stored in, and transmitted through, our computer systems and networks.
We may not be able to anticipate, detect or recognize threats to our systems and assets, or to implement effective preventive measures against all cyber threats, especially because the techniques used in cyber-attacks are increasingly sophisticated, change frequently, are complex, and are often not recognized until launched. Cyber-attacks can occur and persist for an extended period of time without detection. Investigations of cyber-attacks are inherently unpredictable, and it takes time to complete an investigation and have full and reliable information. These and other challenges could further increase the costs and consequences of a cyber-attack and may inhibit our ability to provide rapid, complete and reliable information about a cyber-attack to our business partners, counterparties and regulators, as well as the public.
Any failure, interruption, attack or security breach of our networks or systems or those of key third parties could cause delays or other problems in our business or result in the disclosure or misuse of confidential or other information, including personal information, that belongs to us, to third parties to whom we provide investment management and advisory services, or to a few customers who license two of our internally developed data analytics technologies. Such delays, problems or unintentional
disclosures could damage our reputation, result in regulatory sanctions or liability to third parties and/or increase our costs and cause losses that have a material adverse impact on our business, financial results and financial condition. Cyber criminals are now deploying sophisticated techniques to conduct more advanced and persistent attacks. We have been and continue to be the target of such attacks. From time to time, third parties with whom we do business, including servicers and due diligence and third-party data providers, have experienced data breaches or other cybersecurity incidents. Such attacks, as well as an actual or perceived failure by us or third parties to comply with privacy, data protection and information security laws, regulations, standards, policies and contractual obligations could result in legal liabilities, fines, regulatory action and reputational harm that have a material adverse impact on our business, financial results and financial condition. We cannot assure you that our cybersecurity control and response plans will be sufficient to prevent or mitigate all potential risks of cybersecurity threats and incidents. Especially due to the current hybrid working environments, where our personnel are spending some time working from home, there is an elevated risk of such events occurring.
The development, proliferation, and use of artificial intelligence could give rise to legal and/or regulatory action, damage our reputation or otherwise materially impact our business, financial condition, and liquidity.
We currently use artificial intelligence in certain aspects of our operations, and we believe the development and proliferation of artificial intelligence will have a significant impact in our industry; however, the emerging and rapidly evolving nature of artificial intelligence presents risks, challenges, and unintended consequences, including potential defects in the design and development of the technologies used to automate processes, misapplication of artificial intelligence-enabled technologies, the reliance on data, rules or assumptions that may prove incomplete or inaccurate, information security vulnerabilities and operational failures to meet internal or external expectations for reliability, accuracy, fairness, and among others. This risk affects the adoption and use of this technology to the extent artificial intelligence algorithms and machine learning methods are flawed or insufficiently tested. For example, the use of artificial intelligence may raise ethical concerns and legal issues in the origination of mortgage loans. While we aim to use artificial intelligence responsibly, we may be unsuccessful in identifying or resolving issues before they arise. Artificial intelligence-related issues, including potential government regulation of artificial intelligence, deficiencies or failures could give rise to legal and regulatory actions, damage our reputation or otherwise materially impact our business, financial condition, and liquidity.
Laws and regulations related to artificial intelligence are developing rapidly, and there is significant uncertainty as to the potential adoption of new laws and regulations, which may vary amongst various states, that may restrict or impose burdensome and costly requirements on our ability to use artificial intelligence. We may receive claims from third parties, including our competitors, alleging that the use of artificial intelligence technology infringes on or violates such third party’s intellectual property rights. Adverse consequences of these risks related to artificial intelligence could undermine the decisions, predictions or analyses such technologies produce and subject us to competitive harm, legal liability, heightened regulatory scrutiny and brand or reputational harm. We could face competitive pressure to adopt AI at a pace consistent with technological advancements across our industry. If we are unable to implement AI capabilities as quickly or effectively as our competitors, our relative market position could be negatively affected.
Our executive officers and other key personnel are critical to our success and the loss of any executive officer or key employee may materially adversely affect our business.
Our success and our ability to manage anticipated future growth depend, in large part, upon the efforts of our highly skilled employees, and particularly on our key personnel, including our executive officers. Our executive officers have extensive experience and strong reputations in our industry and have been instrumental in setting our strategic direction, operating our business, identifying, recruiting, and training our other key personnel, and arranging necessary financing. Retention and motivation of certain key employees is particularly important to our business in light of the recent HomeXpress Acquisitions due to the uncertainty and difficulty of integration, as well as the time and attention required by our management team. See the Risk Factor above captioned “We may fail to realize the expected benefits of the HomeXpress Acquisition ”. In addition, the governing agreements of the Discretionary Funds typically require the suspension or termination of the investment period if certain members of our senior management team or key personnel cease to devote sufficient professional time to or cease to be employed by the Company, often called a “key person event,” or in connection with certain other events. The departure of any of our executive officers or other key personnel, or our inability to attract, motivate and retain highly qu alified employees at all levels of the firm in light of the intense competition for talent, could adversely affect our business, operating results or financial condition, diminish our investment opportunities, or weaken our relationships with lenders, counterparties and other parties important to our business and strategy.
Risks Related to Regulatory Matters, Accounting, and Our 1940 Act Exemption
Our business is subject to extensive regulation that may subject us to significant costs and compliance requirements, and there can be no assurance that we will satisfactorily comply with such regulations. A ny changes in regulatory and
legal requirements, including changes in their interpretation and enforcement by lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity, and results of operations.
Our business is subject to extensive regulation by federal and state governmental authorities, self-regulatory organizations, and securities exchanges. We are required to comply with numerous federal and state laws. The laws, rules and regulations comprising this regulatory framework change frequently, as can the interpretation and enforcement of existing laws, rules, and regulations. We incur significant ongoing costs to comply with these government regulations.
Our portfolio includes or may include investments in mortgage pass-through certificates issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. The FHFA and Congress have considered various measures that would significantly reform the country’s mortgage finance system, including, among other things, eliminating Freddie Mac and Fannie Mae and replacing them with a single new MBS insurance agency. While the likelihood that major mortgage finance system reform will be enacted in the short term or through administrative action remains uncertain, it is possible that the adoption of any such reforms could adversely affect the types of assets we can buy, the costs of these assets and our business operations. A reduction in the ability of mortgage loan originators to access Fannie Mae and Freddie Mac to sell their mortgage loans may adversely affect the mortgage markets generally and adversely affect the ability of mortgagors to refinance their mortgage loans. In addition, any decline in the value of securities issued by Fannie Mae and Freddie Mac may affect the value of MBS in general.
Although we do not currently directly service residential mortgage loans, where this activity is subject to separate state and federal regulatory requirements, we may do so in the future. We and our HomeXpress clients are required to comply with a wide array of laws, rules and regulations, including federal and state consumer lending regulations, that concern, among other things, the manner in which we conduct our loan origination and acquisition business and the fees that we may charge, and the collection, use, retention, protection, disclosure, transfer and processing of personal information by us and our clients. Governmental authorities and various U.S. federal and state agencies, including the CFPB, have broad oversight and supervisory authority over our HomeXpress business. See “Risks Related to Our Recent Acquisition and Loan Origination and Acquisition Business” for further discussion. We are also subject to various federal and state laws, rules, and regulations because we purchase residential mortgage loans, including rules promulgated under the Dodd-Frank Act and the Gramm-Leach-Bliley Financial Modernization Act of 1999. The CFPB, has broad authority over a wide range of consumer financial products and services, including mortgage lending and servicing. One portion of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (or Mortgage Reform Act), contains underwriting and servicing standards for the mortgage industry and various other requirements related to mortgage origination and servicing. In addition, the Dodd-Frank Act grants enforcement authority and broad discretionary regulatory authority to the CFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that the CFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that the CFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating rating agencies.
Numerous regulations have been issued pursuant to the Dodd-Frank Act, including regulations regarding mortgage loan servicing, underwriting and loan originator compensation and others could be issued in the future. These requirements can and do change, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative proceedings concerning the mortgage industry generally. As a result, we are unable to predict how the Dodd-Frank Act, as well as future laws or regulations, will affect our business, results of operations and financial condition, or the environment for financing or investing. We believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us.
In 2020, in response to the COVID-19 pandemic, wide-ranging legal protections for homeowners, including foreclosuremoratoria and forbearance provisions, were enacted and extended multiple times including through the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act), which was signed into law on March 27, 2020, and rules and letters issued by the Federal Housing Agency and the CFPB. If the COVID-19 pandemic resurges or another public health crisisbreaks out in the future, similar measures may be reenacted, which could adversely affect our business, results of operations and financial condition.
Although we believe that we have structured our operations and investments to comply with existing legal and regulatory requirements and interpretations, changes in regulatory and legal requirements, including changes in their interpretation and enforcement by lawmakers and regulators, could materially and adversely affect our business and our financial condition, liquidity, and results of operations.
The need to operate within the parameters that allow us to be excluded from regulation as a commodity pool operator could limit the use of swaps by us below the level we would otherwise consider optimal or may lead to the registration of us or our directors as commodity pool operators, which will subject us to additional regulatory oversight, compliance and costs.
The Dodd-Frank Act established a comprehensive regulatory framework for derivative contracts commonly referred to as “swaps.” Under the Dodd-Frank Act, any investment fund that trades in swaps may be considered a “commodity pool,” which would cause its operators to be regulated as a commodity pool operator (“CPO”). In December 2012, the CFTC issued a no-action letter, giving relief to operators of mortgage REITs from the requirement to register as a CPO. In order to qualify, we must, among other non-operation requirements: (1) limit our initial margin and premiums required to establish our swap or futures positions to no more than 5% of the fair market value of our total assets; and (2) limit our net income derived annually from our swaps and futures positions that are not “qualifying hedging transactions” to less than 5% of our gross income. The need to operate within these parameters could limit the use of swaps by us below the level that we would otherwise consider optimal or may lead to the registration of us or our directors as commodity pool operators, which will subject us to additional regulatory oversight, compliance and costs.
We may be required to obtain various state licenses to purchase mortgage loans in the secondary market and there is no assurance we will be able to obtain or maintain those licenses.
While we are not required to obtain licenses to purchase MBS, the purchase of residential mortgage loans in the secondary market may, in some circumstances, require us, or the entities, including securitization trusts, we use to conduct our business, to maintain various state licenses. Acquiring the right to service residential mortgage loans may also, in some circumstances, require us to maintain various state licenses even though we currently do not expect to directly engage in loan servicing ourselves. Thus, we could be delayed in conducting certain business if we were first required to obtain a state license. We cannot assure you that we will be able to obtain all the licenses we need or that we would not experience significant delays in obtaining these licenses. Furthermore, once licenses are issued, we are required to comply with various information reporting and other regulatory requirements to maintain those licenses, and there is no assurance that we will be able to satisfy those requirements or other regulatory requirements applicable to our business of acquiring residential mortgage loans on an ongoing basis. Our failure to obtain or maintain required licenses or our failure to comply with regulatory requirements that are applicable to our business of acquiring residential mortgage loans may restrict our business and investment options and could harm our business and expose us to penalties or other claims.
Our GAAP financial results may not be an accurate indicator of taxable income and dividend distributions.
Generally, the cumulative net income we report over the life of an asset will be the same for GAAP and tax purposes, although the timing of this income recognition over the life of the asset could be materially different. Differences exist in the accounting for GAAP net income and REIT taxable income, which can lead to significant variances in the amount and timing of when income and losses are recognized under these two measures. Due to these differences, our reported GAAP financial results could materially differ from our determination of taxable income, which impacts our dividend distribution requirements, and, therefore, our GAAP results may not be an accurate indicator of future taxable income and dividend distributions.
Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.
The Financial Accounting Standards Board, or the FASB, and other regulatory bodies that establish the accounting rules applicable to us have recently proposed or enacted a wide array of changes to accounting rules. Moreover, in the future, these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial performance in ways that we cannot predict or protect against. We cannot predict whether any changes to current accounting rules will occur or what impact any codified changes will have on our business, results of operations, liquidity or financial condition, directly or through their impact on our business partners or counterparties.
Loss of our 1940 Act exemption would adversely affect us and negatively affect the market price of shares of our capital stock and our ability to distribute dividends.
We conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities issued by majority-owned subsidiaries that are not themselves investment companies and are not
relying on the exclusion from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
Because we are a holding company that conducts its businesses primarily through wholly owned subsidiaries and majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our adjusted total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through our subsidiaries. In addition, the assets we and our subsidiaries may acquire are limited by the provisions of the 1940 Act, the rules and regulations promulgated under the 1940 Act and SEC staff interpretative guidance, which may adversely affect our performance.
Certain of our subsidiaries may rely on Section 3(c)(7) for their 1940 Act exemption and, therefore, our interest in each of these subsidiaries would constitute an “investment security” for purposes of determining whether we pass the 40% test.
Certain of our subsidiaries rely on the exemption from registration provided by Section 3(c)(5)(C) of the 1940 Act. Section 3(c)(5)(C) as interpreted by the staff of the SEC, requires us to invest at least 55% of our assets in “mortgages and other liens on and interest in real estate” (“Qualifying Real Estate Assets”) and at least 80% of our assets in Qualifying Real Estate Assets plus real estate-related assets. The assets that we acquire, therefore, are limited by the provisions of the 1940 Act and the rules and regulations promulgated under the 1940 Act. If the SEC determines that any of our subsidiaries’ securities are not Qualifying Real Estate Assets or real estate-related assets or otherwise believes such subsidiary does not satisfy the exemption under Section 3(c)(5)(C) of the 1940 Act, we could be required to restructure our activities or sell certain of our assets. The net effect of these factors will be to lower our net interest income. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage would be substantially reduced, and we would not be able to conduct our business as described.
Certain of our subsidiaries may rely on Rule 3a-7, which exempts certain securitization vehicles. There are numerous requirements that must be met to exclude such subsidiaries from the definition of an investment company. Our ability to manage assets held in a special purpose subsidiary that complies with Rule 3a-7 will be limited and we may not be able to purchase or sell assets owned by that subsidiary when we would otherwise desire to do so, which could lead to losses.
The determination of whether an entity is a majority-owned subsidiary of our company is made by us. The 1940 Act defines a majority-owned subsidiary of a person as a company of which 50% or more of the outstanding voting securities are owned by such person, or by another company which is a majority-owned subsidiary of such person. The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. We treat companies in which we own at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. We have not requested the SEC to approve our treatment of any company as a majority-owned subsidiary, and the SEC has not done so. If the SEC were to disagree with our treatment of one or more companies as majority-owned subsidiaries, we may need to adjust our strategy and our assets to continue to pass the 40% test. Any such adjustment in our strategy could have a material adverse effect on us.
There can be no assurance that the laws and regulations governing the 1940 Act status of REITs, including guidance from the Division of Investment Management of the SEC regarding these exemptions, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exception or exemption from the 1940 Act, we could, among other things, be required either to (a) substantially change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the value of our capital stock, the sustainability of our business model, and our ability to make distributions, which could have an adverse effect on our business and the market price for our shares of capital stock.
U.S. Federal Income Tax Risks and Risks Related to Our REIT Status
Complying with REIT requirements may cause us to forego otherwise attractiveopportunities or to liquidate otherwise attractive investments.
To maintain our qualification as a REIT, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. To meet these tests, we may be required to forego investments we might otherwise make. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our investment performance. In particular, we generally must ensure that at the end of each calendar quarter at least 75% of the value of our total assets consists of cash, cash items, government securities and qualifying
real estate assets, including certain mortgage loans and MBS. The remainder of our investments in securities (other than government securities and qualifying 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, qualifying real estate assets, and stock in one or more TRSs) 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 (20% for taxable years beginning before January 1, 2026). If we fail to comply with these requirements at the end of any quarter, we must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT status and sufferingadverse tax consequences. Thus, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Internal Revenue Code of 1986, as amended (the “Code”), substantially limit our ability to hedge our assets and related borrowings. Under these provisions, any income that we generate from transactions intended to hedge our interest rate, inflation and/or currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (1) interest rate risk on liabilities incurred to carry or acquire real estate or (2) risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the REIT 75% or 95% gross income tests, and such instrument is properly identified under applicable Treasury Department regulations. Our annual gross income from non-qualifying hedges, together with any other income not generated from qualifying real estate assets, cannot exceed 25% of our annual gross income. In addition, our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement certain hedges through a TRS. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.
We may invest in TBAs, which have some uncertainty in their treatment under the REIT asset and income tests.
We may in the future purchase and sell Agency RMBS through to-be-announced forward contracts (“TBAs”) and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise. 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 REIT 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property or other qualifying income for purposes of the REIT 75% gross income test, we intend to treat the GAAP value of our TBAs under which we contract to purchase to-be-announced Agency RMBS 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 REIT 75% gross income test. 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 successfullychallenge our position, 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.
Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders.
We have elected to be treated as a REIT for U.S. federal income tax purposes and intend to operate so that we will qualify as a REIT. However, the U.S. federal income tax laws governing REITs are extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we intend to operate so as to maintain our qualification as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the tax treatment of certain investments we may make, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year.
We also indirectly own an entity that has elected to be taxed as a REIT under the U.S. federal income tax laws (the “Subsidiary REIT”). Our Subsidiary REIT is subject to the same REIT qualification requirements that are applicable to us. If our Subsidiary REIT were to fail to qualify as a REIT, then (i) that Subsidiary REIT would become subject to regular U.S. federal, state and local corporate income tax, (ii) our interest in such Subsidiary REIT would cease to be a qualifying asset for purposes of the REIT asset tests, and (iii) it is possible that we would fail certain of the REIT asset tests, in which event we also would fail to qualify as a REIT unless we could avail ourselves of certain relief provisions. While we believe that the Subsidiary REIT has qualified as a REIT under the Code, we have joined the Subsidiary REIT in filing a “protective” TRS election under Section 856(l) of the Code for each taxable year in which we have owned an interest in the Subsidiary REIT. We cannot assure you that such "protective" TRS election would be effective to avoid adverse consequences to us. Moreover, even if the “protective” election were to be effective, the Subsidiary REIT would be subject to regular corporate income tax, and we cannot assure you
that we would not fail to satisfy the requirement that not more than 25% (20% for taxable years beginning before January 1, 2026) of the value of our total assets may be represented by the securities of one or more TRSs. See “Our ownership of and relationship with our TRSs will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.” below.
If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income at regular corporate income tax rates. We might need to borrow money or sell assets to pay any such tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT was excused under U.S. federal tax laws, we would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost.
The ability of our Board of Directors to revoke our REIT election without stockholder approval may cause adverse consequences to our stockholders.
Our charter provides that our Board of Directors may revoke or otherwise terminate our REIT election, without the approval of our stockholders, if our Board of Directors determines that it is no longer in our best interest to attempt to, or continue to, qualify as a REIT. If we cease to qualify as a REIT, we would become subject to U.S. federal income tax on our net taxable income and we generally would no longer be required to distribute any of our net taxable income to our stockholders, which may have adverse consequences on the total return to our stockholders.
Distributions may be treated as unrelated business taxable income to tax-exempt investors.
If (1) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (2) we are a ‘‘pension-held REIT,’’ (3) a tax-exempt stockholder has incurred debt to purchase or hold our capital stock, or (4) the residual REMIC interests, we buy (if any) generate “excess inclusion income,” then a portion of the distributions to and, in the case of a stockholder described in clause (3), gains realized on the sale of capital stock by such tax-exempt stockholder may be subject to U.S. federal income tax as unrelated business taxable income under the Code.
Classification of our securitizations or financing arrangements as a taxable mortgage pool could subject us or certain of our stockholders to increased taxation.
We intend to structure our securitization and financing arrangements so as to not allocate “excess inclusion income” to our stockholders. However, if we have borrowings with two or more maturities and, (1) those borrowings are secured by mortgages or MBS and (2) the payments made on the borrowings are related to the payments received on the underlying assets, then the borrowings and the pool of mortgages or MBS to which such borrowings relate may be classified as a taxable mortgage pool under the Code. If any part of our investments were to be treated as a taxable mortgage pool, then our REIT status would not be impaired, but a portion of the taxable income we recognize may, under regulations to be issued by the Treasury Department, be characterized as excess inclusion income and allocated among our stockholders to the extent of and generally in proportion to the distributions we make to each stockholder. Any excess inclusion income would:
• not be allowed to be offset by a stockholder’s net operating losses;
• be subject to a tax as unrelated business income if a stockholder were a tax-exempt stockholder;
• be subject to the application of U.S. federal withholding tax at the maximum rate (without reduction for any otherwise applicable income tax treaty) with respect to amounts allocable to foreign stockholders; and
• be taxable (at the highest corporate tax rate) to us, rather than to our stockholders, to the extent the excess inclusion income relates to stock held by disqualified organizations (generally, tax-exempt organizations not subject to tax on unrelated business income, including governmental organizations).
Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.
To maintain our qualification as a REIT, we must distribute to our stockholders each calendar year at least 90% of our REIT taxable income (excluding certain items of non-cash income in excess of a specified threshold), determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:
• 85% of our REIT ordinary income for that year;
• 95% of our REIT capital gain net income for that year; and
• any undistributed taxable income from prior years.
We intend to distribute all of our REIT taxable income to our stockholders so as to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax.
Our taxable income may substantially exceed our net income as determined by GAAP. As an example, realized capital losses may be included in our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets. Also, our ability, or the ability of our subsidiaries, to deduct interest may be limited under Section 163(j) of the Code. To the extent that we generate such non-cash taxable income or have limitations on our deductions in a taxable year, we may incur corporate income tax and the 4% nondeductible excise tax on that income if we do not distribute such income to stockholders in that year. In that event, we may be required to use cash reserves, incur debt, or liquidate non-cash assets at rates or at times that we regard as unfavorable to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year. Moreover, our ability to distribute cash may be limited by available financing facilities. Therefore, our dividend payment level may fluctuate significantly, and, under some circumstances, we may not pay dividends at all.
Our ownership of and relationship with our TRSs will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
A REIT may own up to 100% of the equity of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. Overall, no more than 25% (20% for taxable years beginning before January 1, 2026) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS will pay U.S. federal, state and local income tax at regular corporate rates on any taxable income that it earns and could be subject to the 15% corporate alternative minimum tax on its adjusted financial statement income if certain income thresholds are met. In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. Our TRS after-tax net income would be available for distribution to us but would not be required to be distributed to us. We expect to satisfy the 25% limitation discussed above and conduct transactions with any TRS on an arm's length basis. There can be no assurance, however, that we will be able to comply with the 25% limitation or to avoid application of the 100% excise tax.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we sold or securitized our assets in a manner that was treated as a sale for U.S. federal income tax purposes. Therefore, to avoid the prohibited transactions tax, we may choose not to engage in certain sales of assets at the REIT level and may securitize assets in transactions that are treated as financing transactions and not as sales for tax purposes even though such transactions may not be the optimal execution on a pre-tax basis. We could avoid any prohibited transactions tax concerns by engaging in securitization transactions or sales of loans, including loans originated by HomeXpress , through a TRS, subject to certain limitations described above. To the extent that we engage in such activities through domestic TRSs, the income associated with such activities will be subject to U.S. federal (and applicable state and local) corporate income tax. There can be no assurance, however, that we will avoid the application of the 100% tax on net income from prohibited transactions described above.
The interest apportionment rules may affect our ability to comply with the REIT asset and gross income tests.
The mortgage loans we acquire may be subject to the interest apportionment rules under Treasury Regulations Section 1.856-5(c) (the “Interest Apportionment Regulation”), which generally provides that if a mortgage is secured by both real property and other property, a REIT is required to apportion its annual interest income for purposes of the REIT 75% gross income test. If a mortgage is secured by both real property and personal property and the value of the personal property does not exceed 15% of the aggregate value of the property securing the mortgage, the mortgage is treated as secured solely by real property for this purpose.
For purposes of the asset tests applicable to REITs, Revenue Procedure 2014-51 provides a safe harbor under which the IRS will generally not challenge a REIT’s treatment of a loan as being in part a real estate asset in an amount equal to the lesser of the fair market value of the loan or the fair market value of the real property securing the loan at certain relevant testing dates. We believe that all of the mortgage loans that we acquire are secured only by real property. Therefore, we believe that the Interest Apportionment Regulation does not apply to our portfolio.
Nevertheless, if the IRS were to assert successfully that our mortgage loans were secured by property other than real estate, that the Interest Apportionment Regulation applied for purposes of our REIT testing, and that the position taken in Revenue Procedure 2014-51 should be applied to our portfolio, then we might not be able to meet the REIT 75% gross income test, and possibly the asset tests applicable to REITs. If we did not meet these tests, we could lose our REIT status or be required to pay a tax penalty to the IRS.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted because of a foreclosure, excise taxes, state or local income, property and transfer taxes, such as mortgage recording taxes, and other taxes. In addition, to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income, 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 originate or hold some of our assets through our TRSs or other subsidiary corporations that will be subject to corporate-level income tax at regular corporate rates. In certain circumstances, the ability of our TRSs to deduct net interest expense may be limited. Any of these taxes would decrease cash available for distribution to our stockholders.
The failure of excess MSRs held by us to qualify as real estate assets, or the failure of the income from excess MSRs to qualify as interest from mortgages, could adversely affect our ability to qualify as a REIT.
We may hold excess MSRs. In certain private letter rulings, the IRS ruled that excess MSRs meeting certain requirements would be treated as an interest in mortgages on real property and thus a real estate asset for purposes of the 75% REIT asset test, and interest received by a REIT from such excess MSRs will be considered interest on obligations secured by mortgages on real property for purposes of the 75% gross income test. A private letter ruling may be relied upon only by the taxpayer to whom it is issued, and the IRS may revoke a private letter ruling. We intend to treat any excess MSRs that we acquire that are consistent with the requirements provided in the private letter rulings as qualifying assets for purposes of the 75% gross asset test, and we intend to treat income from such excess MSRs as qualifying income for purposes of the 75% and 95% gross income tests. Notwithstanding the IRS's determination in the private letter rulings described above, it is possible that the IRS could successfully assert that any excess MSRs that we acquire do not qualify for purposes of the 75% REIT asset test and income from such MSRs does not qualify for purposes of the 75% and/or 95% gross income tests, which could cause us to be subject to a penalty tax and could adversely impact our ability to qualify as a REIT.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our capital stock and our business in general.
At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
Risks Related to Our Organization and Structure
Certain provisions of Maryland Law, of our charter, and of our bylaws contain provisions that may inhibit potential acquisition bids that stockholders may consider favorable, and the market price of our capital stock may be lower as a result.
• There are ownership limits and restrictions on transferability and ownership in our charter . To qualify as a REIT, not more than 50% of the value of our outstanding stock may be owned, directly or constructively, by five or fewer individuals during the second half of any calendar year. To assist us in satisfying this test, among other things, our charter generally prohibits any person or entity from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our outstanding capital stock. This restriction
may discourage a tender offer or other transactions or a change in the composition of our Board of Directors or control that might involve a premium price for our shares or otherwise be in the best interests of our stockholders and any shares issued or transferred in violation of such restrictions being automatically transferred to a trust for a charitable beneficiary, thereby resulting in a forfeiture of the additional shares.
• Our charter permits our Board of Directors to issue stock with terms that may discourage a third party from acquiring us. Our charter permits our Board of Directors to amend the charter without stockholder approval to increase the total number of authorized shares of stock or the number of shares of any class or series and to issue common or preferred stock, having preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, and terms or conditions of redemption as determined by our Board of Directors. Thus, our Board of Directors could authorize the issuance of stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares.
• Maryland Control Share Acquisition Act. Maryland law provides that holders of ‘‘control shares’’ of our company (defined as voting shares of stock which, when aggregated with all other shares controlled by the acquiring stockholder, 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 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 all interested shares. Our bylaws provide that we are not subject to the “control share” provisions of Maryland law. Our Board of Directors, however, may elect to make the “control share” statute applicable to us at any time and may do so without stockholder approval.
• Business Combinations. We are subject to the “business combination” provisions of Maryland law that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then outstanding voting capital stock or an affiliate or associate of ours who, at any time within the two‑year period before the date in question, was the beneficial owner of 10% or more of our then outstanding voting capital stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five‑year prohibition, any business combination between us and an interested stockholder generally must be recommended by our Board of Directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of our voting capital stock and (ii) two‑thirds of the votes entitled to be cast by holders of voting capital stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super‑majority voting requirements do not apply if our common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of Maryland law also do not apply to business combinations that are approved or exempted by a Board of Directors before 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 any other person, provided, that such 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).
• Unsolicited Takeovers : The “unsolicited takeover” provisions of Maryland law, permit 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 any or all of five provisions, including a classified board, a two-thirds vote requirement for removing a director, a requirement that the number of directors be fixed only by vote of the directors, a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred, and majority requirement for the calling of a special meeting of stockholders. Through provisions in our charter and bylaws unrelated to this statute, we (i) require, unless called by the chairman of our Board of Directors, our chief executive officer, our president or our Board of Directors, the request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at the meeting to call a special meeting of
stockholders, (ii) require that the number of directors be fixed only by our Board of Directors, (iii) have a classified board and (iv) have a two-thirds vote requirement for the removal of a director. We have elected in our charter to be subject to the provision whereby any vacancy on the board is filled only by a vote of the remaining directors (whether or not they constitute a quorum) for the remainder of the full term of the directorship in which the vacancy occurred and until a successor is duly elected and qualifies. These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring, or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a premium over the then current market price.
• Classified Board. Our Board of Directors is divided into three classes of directors. Directors of each class are chosen for terms expiring at the annual meeting of stockholders held in the third year following the year of their election, and each year one class of directors is elected by the stockholders. The classified terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interests of our stockholders.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit stockholders’ recourse in the event of actions not in their best interests.
Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:
• actual receipt of an improperbenefit or profit in money, property or services; or
• a judgment or other final adjudication adverse to the director or officer based upon a finding of active and deliberatedishonesty by the director or officer that was material to the cause of action adjudicated in the proceeding.
In addition, our charter authorizes us to obligate our company to indemnify, and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding, each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made or threatened to be made, a party because of his or her service to us.
Risks Related to Our Securities
The market price and trading volume of shares of our capital stock may be volatile.
The market price of shares of our capital stock, including our common and preferred stock, may be highly volatile and could be subject to wide fluctuations. A variety of factors may influence the price of our common and preferred stock in the public trading markets. For example, some investors may perceive REITs as yield-driven investments and compare the annual yield from dividends by REITs with yields on various other types of financial instruments. An increase in market interest rates may lead purchasers of stock to seek a higher annual dividend rate from other investments, which could adversely affect the market price of the stock. Also, the trading volume in shares of our capital stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of shares of our capital 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 shares of common and preferred stock include those set forth in this Item 1A. “Risk Factors” section.
We may not be able to pay dividends or other distributions on our capital stock.
Under Maryland law, no distributions on stock may be made if, after giving effect to the distribution, (i) the corporation would not be able to pay the indebtedness of the corporation as such indebtedness becomes due in the usual course of business or (ii) except in certain limited circumstances when distributions are made from net earnings, the corporation’s total assets would be less than the sum of the corporation’s total liabilities plus, unless the charter provides otherwise (which our charter does, with respect to any outstanding series of preferred stock), the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution. There can be no guarantee that we will have sufficient cash to pay dividends on any series of our capital stock. Our ability to pay dividends may be impaired if any of the risks described in this
Item 1A “Risk Factors” section were to occur. In addition, payment of our dividends depends upon our earnings, our financial condition, maintenance of our REIT qualification and other factors as our Board of Directors may deem relevant from time to time. The payment of dividends may be more uncertain during disruptions in the mortgage, housing or related sectors, such as the current elevated interest rate environment. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to make distributions on our common stock or any series of our preferred stock.
Interests of holders of our securities are structurally subordinated to the liabilities and obligations of our subsidiaries and may also be adversely affected by future offerings of securities.
We are a holding company that conduct our businesses primarily through our subsidiaries. Accordingly, claims of holders of our capital stock and debt securities are structurally subordinated to all existing and future liabilities and obligations of our subsidiaries. In the future, we may also attempt to increase our capital resources by making offerings of debt or additional offerings of equity or equity-linked securities, including commercial paper, warrants, senior or subordinated notes and series or classes of preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings will receive a distribution of our available assets before the holders of our common stock. With certain limited exceptions related to some financing facilities, we are not required to offer any such shares to existing shareholders on a pre-emptive basis; therefore, additional offerings of equity securities, including securities that may be converted into or exchanged for equity securities, may dilute the holdings of our existing stockholders or reduce the market price of our capital stock, or both. Preferred stock, including our Series A, Series B, Series C, and Series D Preferred Stock, will have a preference on liquidating distributions or a preference on dividend payments or both that could limit our ability to make a dividend distribution to the holders of our capital stock, including our common stock. Because our decision to issue 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 securities bear the risk of our future offerings reducing the market price of our securities and diluting their holdings in us.
Changes in the amount of dividend distributions we pay or in the tax characterization of dividend distributions we pay may adversely affect the market price of our common stock or may result in holders of our common stock being taxed on dividend distributions at a higher rate than initially expected.
Our dividend distributions are driven by a variety of factors, including our minimum dividend distribution requirements under the REIT tax laws and our REIT taxable income as calculated for tax purposes pursuant to the Code. We generally intend to distribute to our common shareholders at least 90% of our REIT taxable income, although our reported financial results for GAAP purposes may differ materially from our REIT taxable income.
Our ability to pay a dividend per common share per quarter and the dividend on each series of our preferred stock at the stated dividend rate may be adversely affected by many factors, including the risk factors described herein. These same factors may affect our ability to pay other future dividends. In addition, to the extent we determine that future dividends would represent a return of capital to investors, rather than the distribution of income, we may determine to discontinue dividend payments until such time that dividends would again represent a distribution of income. Any reduction or elimination of our payment of dividend distributions would not only reduce the number of dividends you would receive as a holder of our common stock but could also have the effect of reducing the market price of our common stock.
Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends.
Qualified dividend income payable to U.S. investors that are individuals, trusts, and estates is subject to the reduced maximum tax rate applicable to long-term capital gains. Dividends payable by REITs, however, generally are not eligible for the reduced qualified dividend rates. Non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations. Although the reduced U.S. federal income tax rate applicable to qualified dividend income does not adversely affect the taxation of REITs or dividends payable by REITs, the more favorable rates applicable to regular corporate qualified dividends and the reduced corporate tax rate could cause certain non-corporate investors 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 shares of REITs, including our stock.
We cannot guarantee that any share repurchase program will be fully consummated or will enhance long-term stockholder value, and share repurchases could increase the volatility of our stock prices and could diminish our cash reserves.
We may engage in share repurchases of our common stock and preferred stock from time to time in accordance with authorizations from the Board of Directors. Our repurchase program does not have an expiration date and does not obligate us to repurchase any specific dollar amount or to acquire any specific number of shares. Further, our share repurchases could affect our share trading prices, increase their volatility, reduce our cash reserves and may be suspended or terminated at any time, which may result in a decrease in the trading prices of our stock.
Holders of our preferred stock have limited voting rights.
The voting rights of holders of any series of our outstanding preferred stock are limited. Our common stock is the only class of our securities that currently carries full voting rights. Holders of any series of our preferred stock may vote only (i) to elect, voting together as a single class, with holders of parity stock having similar voting rights two additional directors to our Board of Directors if six full quarterly dividends (whether or not consecutive) payable on any series of our preferred stock are in arrears, (ii) on amendments to our charter, including the articles supplementary designating any series of our outstanding preferred stock, that materially and adversely affect the rights of the holders of such series or (iii) to authorize or create, or increase the authorized or issued amount of, additional classes or series of stock ranking senior to our outstanding preferred stock.
In 2025, we reevaluated the composition of our reportable segments based on changes in the significance of certain business activities, including the acquisition of HomeXpress, and the manner in which our management reviews operating results and allocates resources. As a result of this reevaluation, we report as two reportable segments: (i) Investment Portfolio, and (ii) Residential Origination. The Investment Portfolio segment consists of our investments and third-party advisory services activities. The Residential Origination segment consists of the stand-alone mortgage origination business of HomeXpress that originates consumer Non-QM, investor business purpose, and other Non-Agency and Agency mortgage loan products.
Investment Portfolio Segment
As of December 31, 2025, based on the fair value of our interest earning assets, approximately 65% of our investment portfolio was allocated to residential mortgage loans, 23% to Agency MBS, 5% to Non-Agency RMBS and less than 1% to interests in MSR financing receivables (excluding loans held for sale by HomeXpress). As of December 31, 2024, based on the fair value of our interest earning assets, approximately 88% of our investment portfolio was allocated to residential mortgage loans, 4% to Agency RMBS, and 8% to Non-Agency RMBS.
We utilize a variety of channels, including securitizations, warehouse facilities, repurchase agreements and other capital market activities to finance our investments, manage liquidity, improve capital efficiency, support the implementation of our investment strategies, as well as to enhance our potential return on equity. We manage interest rate risk using hedging instruments such as interest rate swaps, swap futures, treasury futures, swaptions, and interest rate caps.
Our investment strategy is intended to be durable across a variety of economic, rate, and credit environments. We seek to approach portfolio management in a disciplined manner and expect to operate in an environment characterized by ongoing uncertainty related to global trade dynamics, fiscal and monetary policy, inflation, labor market conditions, economic growth, and domestic and geopolitical tensions.
Residential Origination Segment
During the fourth quarter we completed the HomeXpress Acquisition, which closed on October 1, 2025. We raised liquidity through staggered sales of select assets, some of which we sourced from our Agency RMBS liquidity allocation and the rest from what we viewed to be fully priced Non-Agency RMBS positions. Separately, we also issued unsecured debt.
The HomeXpress Acquisition represents a strategically significant milestone and broadens our business capabilities. We expect that this acquisition will provide us with direct exposure to the growing residential consumer Non-QM and investor business purpose mortgage loan origination market and will enhance the diversification of our earnings sources beyond our core investment activities. As of December 31, 2025, loans held for sale by HomeXpress constituted approximately 6% of our interest earning assets based on fair value.
HomeXpress is a specialty mortgage lender focused primarily on providing first lien, consumer Non-QM loans, and investor business purpose solutions to the residential housing market on a national basis through mortgage brokers and bankers. Non-
QM loans are designed for borrowers who do not meet traditional qualified mortgage standards and typically carry higher interest rates and offer more flexible solutions for potential borrowers. Investor business purpose loans are secured by first liens on non-owner occupied 1–8 unit investment rental properties. HomeXpress is a leading originator of these residential mortgage loans and does so substantially on a wholesale basis through independent mortgage brokers and bankers. HomeXpress currently sells all the loans it originates on a servicing-released basis to third-party institutional investors. Warehouse financing is used by HomeXpress to fund these loans from origination through sale. While the residential real estate market and associated mortgage loan origination volumes are heavily influenced by economic factors such as interest rates, housing prices and employment conditions, additional loan origination growth for HomeXpress is expected to be realized from further development of its existing wholesale origination network as well as from the growth in its recent implementation of a non-delegated correspondent channel. Additional growth is also expected from expansion in its FHA, VA and conventional agency-conforming channel and the implementation of delegated correspondent lending platform.
For a full description of our business, see Part 1 – Business in this Annual Report on Form 10-K.
Market Conditions and our Strategy
Interest Rates, Inflation, Labor Markets, and Economic Activity
Interest rates across the U.S. Treasury curve fluctuated throughout the year as market expectations regarding the timing and magnitude of policy easing evolved in response to incoming inflation, labor, and economic data. Short-term interest rates declined over the course of the year alongside expectations for easing monetary policy, while longer-term Treasury yields declined more slowly reflecting continued inflation uncertainty and term-premium dynamics.
Inflation, as measured by the Consumer Price Index (“CPI”), moderated at times during the year but remained above the Federal Reserve’s stated 2.0% objective. CPI inflation ranged between 2.3% and 3.0% on a year-over-year basis during 2025 and ended the year at 2.7%. Shelter costs continued to be a significant contributor to overall inflation, with rates of increase that generally exceeded those of goods and energy prices.
Labor market conditions moderated over the course of the year but remained relatively resilient. The unemployment rate increased to 4.4% at year-end, but still remained historically low, while job gains and broader indicators pointed to an easing labor market trajectory. Economic activity remained solid as real gross domestic product increased at an annualized rate of 3.8% in the second quarter and 4.4% in the third quarter of 2025.
With this backdrop, the Federal Reserve held short term rates steady through the first half of 2025 and eased 25 basis points at each of the final three Federal Open Market Committee meetings, bringing the yearend federal funds target range between 3.50% and 3.75%.
Consistent with these dynamics, the yield curve evolved with a steepening bias during 2025. The two-year Treasury yield dropped 77 basis points during the year to 3.47%, while the ten-year yield declined just 39 basis points, resulting in the yield curve steepening by 38 basis points during 2025.
Housing Market
U.S. housing market conditions in 2025 were shaped by continued affordability challenges and an ongoing imbalance between housing supply and demand. While mortgage interest rates, home prices, insurance costs, and property taxes continued to pressure homebuyer affordability, several of the largest drivers showed signs of easing over the course of the year.
According to the Freddie Mac Primary Mortgage Market Survey, the average 30-year fixed mortgage rate declined from 6.85% at the beginning of the year to 6.15% at year-end, a decrease of approximately 70 basis points, with most of the decline occurring in the second half of 2025.
Housing supply conditions remained constrained, particularly in the existing home market, as elevated mortgage rates continued to limit homeowner mobility. Existing home inventory increased modestly during the year but remained below long-term averages. In contrast, new home supply and construction remained relatively more active. Homebuilders continued to support transaction volumes through the use of mortgage rate buydowns and other incentives, which helped offset affordability pressures and support new home sales despite higher headline financing costs.
Home price growth moderated relative to prior years, and year-over-year national home price appreciation ended the year below consumer wage growth, representing a step toward easing affordability challenges.
Execution of Our Strategy in 2025
During 2025, we focused on diversifying the portfolio and repositioning the Company as a diversified, vertically integrated residential real estate platform. To execute on these objectives, we exercised redemption rights with respect to several securitized transactions and raised capital organically through re-securitizations of the underlying mortgage loans and loan sales to third parties. We also raised capital through monetizing certain fully valued assets as well as through the issuance of senior unsecured debt. These activities provided the capital necessary as we expanded our platform and mortgage lending capabilities through the acquisition of HomeXpress, increased our allocation to liquid Agency RMBS, made our first investment in MSRs, and began to reshape our allocation of capital, investment mix, and sources of income and earnings.
Full Year and Fourth Quarter 2025 Business Highlights - Investment Portfolio Segment
Investment Activity
Asset Purchases
Agency RMBS. Predominantly starting with the second quarter and through the rest of the year 2025, we purchased approximately $4.3 billion of Agency RMBS, taking advantage of relative value opportunities while simultaneously increasing our liquid securities allocation. These investments allow us to deploy capital in a relatively expedient manner upon raising funds through capital market transactions, asset divestitures, portfolio run-off, or other means and enable us to maintain liquidity that we can access for future investments or other strategic objectives, including business acquisitions. During the fourth quarter we added $606 million of Agency RMBS, net of sales.
MSR Investment. During the third quarter, we gained exposure to a $6.5 billion pool of Fannie Mae MSRs through a third-party servicing partnership. The weighted average interest rate on the loans at the time of acquisition was 4.02% and the weighted average LTV ratio and borrower credit score was 71% and 754, respectively. The purchase price for this investment was $38 million, which represented the net asset value after financing the MSRs by the mortgage loan servicing counterparty. Because MSR valuations typically increase as interest rates rise, offsetting mark-to-market declines on our residential credit portfolio, the MSR allocation is intended to serve as a natural book value hedge to our portfolio. In addition to its hedging characteristics, MSRs are also standalone, income generating assets. The recurring servicing fees, ancillary income, recapture income and float earnings associated with MSRs contribute to earnings while diversifying our interest rate exposure.
RTL Loans. We settled $27 million of business purpose loans during the second quarter that we committed to purchase in the first quarter, funded with warehouse facilities and targeting mid-to-high teen levered returns. These loans were purchased with a weighted average asset yield of 8.46%. We did not purchase any additional RTL loans during the rest of the year.
Asset Sales
Agency CMOs. During the second quarter, we sold Agency CMO securities for $73 million. In addition, we also sold previously purchased Agency RMBS Pass-through securities for $53 million and reallocated the capital to our current portfolio strategy. We received a total of $138 million in net proceeds from this sale and a total of $98 million after paying the financing on these positions. These sales resulted in a net realized loss of $2 million during the quarter, not including any net realized interest income. Proceeds from the sales were largely re-invested in Agency RMBS that increased our liquidity allocation.
Non-Agency and CMBS IO securities. In the third quarter, we also sold $104 million of Non-Agency RMBS subordinate securities, $88 million of Non-Agency RMBS senior securities and $164 million of Agency CMBS IO positions. Net liquidity raised after payment of principal on a secured financing facility that held these securities as collateral was $44 million. These sales generated a realized loss of $8.4 million during the third quarter. In the fourth quarter, we sold $33 million of Non-Agency RMBS subordinate securities. These sales generated a realized loss of $5 million during the fourth quarter.
Non-Agency retained securities. During the third quarter, we sold $237 million of retained bonds from previously issued RPL securitizations and $25 million from previously issued Non-QM and investor securitization for total proceeds of $232 million. Consequently, the retained positions sold will be added to securitized debt as a result of consolidation going forward. Net liquidity raised after payment of principal on a secured financing facility that held these retained bonds as collateral was $72 million.
Non-QM investment loans sales . As a normal discipline of our business operation, we routinely evaluate the potential economic and portfolio benefits of exercising our redemption rights with respect to our sponsored securitizations. These rights provide us with the option to organically raise liquidity by refinancing and/or selling the underlying loans. Through this strategy, during the fourth quarter we redeemed $70 million in securities from the CIM 2022-I1 securitization and sold the
underlying loans with principal balance of $166 million. After satisfying certain recourse financing obligations, the transaction released approximately $28 million in equity.
Securitization Activity
On January 31, 2025, we sponsored CIM 2025-I1, a $288 million securitization of residential mortgage investor loans. The loans had a weighted average coupon of 7.9%, weighted average FICO scores of 748, and LTV ratio of 64%. Securities issued by CIM 2025-I1, with an aggregate balance of approximately $276 million, were sold in a private placement to institutional investors. These senior securities represented approximately 95.8% of the capital structure. We also retained an option to call the securitized mortgage loans on the earlier of (i) February 25, 2028, or (ii) when the unpaid principal balance is less than or equal to 30% of the unpaid principal balance of the securitized mortgage loans as of the cut-off date. The weighted average cost of debt on securities sold was 5.8%. The securitization is rated by Fitch and Morningstar DBRS. PAS is the asset manager for the securitization.
During the first quarter, we redeemed securities in seven outstanding securitizations and sponsored two new securitizations as further detailed below. The net result of these transactions enabled us to organically generate in excess of $187 million in capital for new investments, while moderately lowering our cost of financing by 17 basis points from a weighted average cost of 6.21% from the seven terminated securitizations to a 6.04% weighted average cost on the two new securitizations. Below we describe these transactions in more detail.
On March 25, 2025, we sponsored two securitizations of residential mortgage loans with an aggregate principal balance of $646 million. The mortgage loans for both securitizations were sourced from the redemption of prior Chimera-sponsored securitizations, including CIM 2021-NR1, CIM 2021-NR2, CIM 2021-NR3, CIM 2021-NR4, CIM 2022-NR1, CIM 2023-NR1, and CIM 2023-NR2.
CIM 2025-R1 was a $392 million securitization of residential mortgage loans. The loans had a weighted average coupon of 5.74%, weighted average FICO scores of 636, and LTV ratio of 50.80%. Securities issued by CIM 2025-R1, with an aggregate balance of approximately $333 million, were sold in a private placement to institutional investors. These senior securities represented approximately 85% of the capital structure. We retained subordinate interests in securities with an aggregate balance of approximately $59 million and certain IOs. We also retained an option to call the securitized mortgage loans on the earlier of (i) March 25, 2027 or (ii) when the aggregate principal amount of the offered notes is less than, or equal to, 10% of the aggregate principal amount of the offered notes as of March 25, 2025. The weighted average cost of debt on securities sold was 5.74%. PAS is the asset manager for the securitization.
CIM 2025-NR1 was a $254 million securitization of residential mortgage loans. The loans had a weighted average coupon of 5.67%, weighted average FICO scores of 597, and LTV ratio of 61.61%. Securities issued by CIM 2025-NR1, with an aggregate balance of approximately $184 million, were sold in a private placement to institutional investors. These senior securities represented approximately 72.50% of the capital structure. We retained subordinate interests in securities with an aggregate balance of approximately $70 million. We also retained an option to call the securitized mortgage loans, at the direction of the majority class B1 certificate holder, beginning on March 25, 2026. The weighted average cost of debt on securities sold was 6.59%. PAS is the asset manager for the securitizations.
Secured Financing Activity
During the first quarter of 2025, we exited a maturing $104 million non-MTM secured facility and separately entered into a new non-MTM secured facility with a principal amount of $167 million that will mature in 18 months in July 2026. The interest rate on the new facility was 412.5 basis points lower than the maturing facility.
In addition, we extended a maturing $407 million non-MTM secured facility by an additional 24 months to February 2027. The old facility had a spread of 375 basis points over SOFR with a maximum rate of 8.75%. The new facility has two separate terms: (i) an approximately $283 million financing facility with a fixed rate of 8.15%, and (ii) an approximately $136 million floating-rate facility at a rate of SOFR +425 basis points.
During the fourth quarter of 2025, our secured financing costs overall declined by 43 basis points for the quarter and 158 basis points for the year, and our secured financing agreements (recourse liabilities) increased by a net $352 million for the quarter, reflecting the deployment of leverage to support our Agency RMBS activities. While the purchase of Agency RMBS securities increased toward the end of the year, our Non-Agency RMBS financing saw a decrease of approximately $74 million during the quarter and $78 million during the year due to asset sales and paydowns.
As of December 31, 2025, we had no outstanding warehouse financing exposure (recourse liabilities) backed by residential mortgage loans, other than a $67 million facility related to business purpose loans for the Investment Portfolio segment.
At the end of the year, our total recourse financing exposure on our investment portfolio was $5.2 billion. We continue to seek opportunities to finance our retained notes from securitizations with long-term, limited, or, when conditions are appropriate, non-MTM financing facilities. We currently have $1.3 billion, or 25%, of our recourse financing with these types of facilities.
Hedging Activity
Residential Credit Portfolio . We continued to maintain our strategy of using interest rate derivatives to mitigate the impact of interest rates on our future financing costs and protect against the potential for higher interest rates eroding our earnings and dividend paying ability. Our hedging strategy in our residential credit portfolio seeks to limit the impact of higher short-term interest rates, while maintaining optionality in the event interest rates decline in the future.
As of December 31, 2025, we maintained open interest rate hedge positions attributable to the residential credit portfolio that included: (i) a $500 million 3.45% pay-fixed interest rate swap maturing in January 2026, (ii) a $1.0 billion interest rate cap with a strike rate of 3.95% maturing in February 2027, (iii) $50 million 4.05% par rate equivalent pay-fixed two-year Eris swap futures maturing in March 2027, (iv) a $300 million two-year 3.40% pay fixed rate swaption that expires in January 2027, and (v) a $300 million two-year 3.17% pay fixed rate swaption that expires in February 2027.
Agency RMBS Portfolio . Interest rate swaps and swaptions are valuable tools for managing the interest rate and prepayment risks associated with levered Agency RMBS. By strategically using these derivatives, we seek to mitigate these risks, stabilize cash flows, and potentially enhance the overall risk-adjusted returns of the Agency RMBS portfolio. During the quarter, we executed a variety of interest rate derivative transactions across a range of tenors, including $1.7 billion in pay-fixed interest rate swaps. We also closed out interest rate swaps with a range of maturities and underlying swap tenors representing notional balances of $951 million that resulted in net realized loss of $16 million.
As of December 31, 2025, we maintained open interest rate hedge positions attributable to the Agency RMBS portfolio that included: (i) $3.0 billion 3.44% average pay-fixed interest rate swaps with varying maturities, (ii) $60 million 3.87% par rate equivalent pay-fixed ten-year Eris swap futures maturing in June 2035 and $230 million 3.60% par rate equivalent pay-fixed five-year Eris swap futures maturing in June 2030.
Loan Acquisitions . Considering the velocity and magnitude of interest rate movements, we maintain a hedging program to manage the interest rate risk for the time differential between loan purchase commitment and the closing of loans into securitization. We use a combination of various U.S. Treasury futures contracts to hedge our exposure to future financing costs. Our hedging techniques attempt to mitigate the interest rate risk but do not capture the impact of credit spread risk. We did not have any loan commitments or related futures hedges as of the end of the quarter.
Capital Raising Activity
In September, we issued $120 million of 8.875% unsecured senior notes due August 15, 2030. Net of underwriting fees and offering expenses, we received approximately $116 million in proceeds. These notes may be redeemed, in whole or in part, at any time, from time to time, at our option on or after August 15, 2027. While we continue to favor securitized debt as a source of financing for our assets, the ability to issue unsecured debt helps us to further diversify our capital structure and provides long-term financing to support our investment activities. This was our third overall unsecured bond offering over the past two years, resulting in a combined total issuances of approximately $260 million.
Investment and third-party asset management and advisory fees
Through the Palisades Acquisition in December 2024, we started earning investment management and advisory fees. In addition, PAS was hired to provide asset management services for three securitizations issued by Chimera during the year, and we continue to provide services to unaffiliated investors and private credit funds. Palisades’ fee-based income (both transaction and advisory fees) contributed $9 million in revenue during the fourth quarter and $35 million for the full year 2025.
Acquisition of HomeXpress
On October 1, 2025, we completed the acquisition of HomeXpress for total consideration of $272 million, which consisted of (i) cash of $124 million, representing the Adjusted Book Value of HomeXpress as of September 30, 2025, (ii) cash premium of $120 million, and (iii) issuance of 2,077,151 shares of our common stock.
Fourth Quarter 2025 Business Highlights - Residential Origination Segment
HomeXpress’ loan origination strategy is focused on providing consistent high-quality service to its network of independent mortgage brokers and bankers and having an agile and responsive approach to shifts in market demand for its loan products, institutional investor appetite and regulatory environments. We expect continued growth in loan originations to come from further penetration of HomeXpress’ existing independent mortgage brokers network and the development of new relationships with them and non-delegated correspondent lenders. Our business strategy is also focused on driving loan origination process and operational efficiencies through our customized technology and risk assessment framework so that we can control and enhance the cost of originating our loans. HomeXpress currently sells all the loans it originates on a servicing-released basis to third-party institutional investors for cash premiums. Warehouse financing is used by HomeXpress to fund these loans from origination through sale.
During the fourth quarter of 2025, HomeXpress originated 2,516 mortgage loans for approximately $1.0 billion in principal balance for an average loan balance produced of approximately $412 thousand. Substantially all these loans were consumer Non-QM and investor business purpose loans with approximately 3.7% being FHA, VA and conventional agency-conforming loans. The weighted average interest rate, FICO score and loan-to value on these loans were 7.13%, 739 and 71.6%, respectively.
December 31, 2025
(dollars in thousands)
% total
Unpaid principal balance ("UPB") of mortgage loans originated:
Consumer Non-QM and investor business purpose loans originated
FHA, VA, Conventional and Jumbo loans originated
UPB of loans originated
Secured Financing Activity
HomeXpress maintained a sufficient overall liquidity position during the fourth quarter of 2025 with its cash balances and seven warehouse lines of credit. HomeXpress had a total available capacity of $1.4 billion in warehouse lines as of December 31, 2025, which are all priced utilizing a base pricing of the 30-day SOFR plus a weighted pricing spread of approximately 197 basis points. As of December 31, 2025, HomeXpress held $872 million on unpaid principal balance on the balance sheet that was financed with $802 million of advances from the warehouse lines of credit, with an average advance rate of 92%.
Hedging Activity
Prior to funding a loan, HomeXpress typically enters into an IRLC with the prospective borrower. This IRLC is accounted for as a derivative asset and is valued based on market conditions, loan characteristics, estimated remaining direct expenses, and subject to the anticipated loan funding probability (the “Pull-through Rate”). As of December 31, 2025, the fair value of HomeXpress’ IRLC asset was $4 million. Upon funding of a locked loan, the IRLC is derecognized and the loan is recorded as LHFS at fair value, with origination fees recognized in interest income and direct loan origination costs expensed as incurred. As of December 31, 2025, the total fair value of HomeXpress’ LHFS was $24 million. HomeXpress operates a daily hedging program that utilizes financial instruments (2-year and 5-year U.S. Treasury futures) in an effort to protect its operational results from interest rate risk. The program covers loans from the day the IRLC is issued through the day a loan is committed for sale to an investor. As of December 31, 2025, HomeXpress had hedging instruments with a notional amount of $173 million for U.S. Treasury futures and $199 million for IRLC.
For the fourth quarter of 2025, HomeXpress reported net income of $8 million, inclusive of gain on origination and sale of loans, net, of approximately $21 million, net interest income of $3 million, total operating expenses of approximately $12 million, and amortization of intangibles and depreciation expense of approximately $3 million. Net income, excluding amortization of intangibles and depreciation, resulted in fourth quarter operating income of approximately $11 million. The operating income represented 111 basis points of HomeXpress’ loan origination volume for the quarter.
Operating expenses
Investment Portfolio Segment
Compensation and benefits expenses decreased by $6 million to $8 million during the fourth quarter, primarily due to lower performance-related expense accruals in the current quarter. For the full year 2025, compensation and benefits expenses
increased by $5 million to $46 million from $41 million in the prior year, reflecting the inclusion of staffing costs from the Palisades Acquisition in December 2024.
Servicing expenses decreased by $1 million during the fourth quarter of 2025 to $6 million from $7 million in the prior quarter, due to lower loan balances and loan counts related to our portfolio reallocation strategy.
For the full year 2025, G&A expenses increased by $5 million to $28 million compared to $23 million in the prior year, driven primarily by the inclusion of a full year of G&A expenses related to Palisades following the acquisition in December 2024.
Transaction expense was $625 thousand for the fourth quarter of 2025, reflecting additional costs incurred related to the HomeXpress Acquisition. For the full year, we recorded transaction expense of $17 million related to the HomeXpress Acquisition, reflecting an increase of $10 million from the prior year.
Residential Origination Segment
We recognized compensation and benefits of $10 million for our Residential Origination segment for the quarter and year ended December 31, 2025, following the acquisition of HomeXpress on October 1, 2025. We recognized G&A expenses of $2 million for our Residential Origination segment for the quarter and year ended December 31, 2025, following the acquisition of HomeXpress on October 1, 2025. No such expenses were recognized in the prior reporting periods.
Inducement Grants for HomeXpress employees
On September 19, 2025, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved grants of restricted stock units (“RSUs”), effective October 1, 2025, representing an aggregate of up to 540,000 shares of our common stock, of which 533,391 were granted, under the Chimera Investment Corporation 2025 Inducement Award Plan (the “Award Plan”) to up to 300 individuals offered employment with Chimera in connection with our acquisition of HomeXpress.
In accordance with NYSE Rule 303A.08, the grants were made exclusively to individuals employed by HomeXpress at the time as a material inducement to such individual’s continued service following our acquisition of HomeXpress. The Award Plan reserves up to 540,000 shares of our common stock to be used for inducement grants.
Each grant of RSUs will generally vest in full upon the third anniversary of the grant date, subject to the recipient’s continued service through such vesting date. All of the RSU awards are subject to the terms of the Award Plan and the grant agreements covering such awards.
Earnings and Book Value
During 2025, we diversified our portfolio and positioned it to maintain flexibility and to meet liquidity needs as they arise. In parallel, we continued to evaluate and execute selective asset dispositions related to investments that we believe to be fully valued, not meeting our risk-adjusted return objectives, and/or are no longer consistent with our long-term portfolio objectives. These asset sales were comprised primarily of retained securities from sponsored securitizations and Non-Agency RMBS, with proceeds being redeployed into higher-returning investments to enhance our earnings power, dividend paying ability, and return on equity. We also continue to grow our sources of income, a growth that began with the Palisades Acquisition and continued with the HomeXpress Acquisition that closed on October 1, 2025.
During the quarter, spreads on mortgage loans were relatively unchanged from the third quarter while securitized products continued to tighten. Spread tightening and a steeper yield curve had a more pronounced effect on the bonds issued through our securitization programs than in the underlying mortgage loan assets that we consolidate. As a result, the fair value of our securitized debt liabilities increased more than the fair value of the related mortgage loans.
This dynamic, along with elevated transaction during the fourth quarter, contributed to a decrease in book value per share of 2.7%, to $19.70 as of December 31, 2025, as compared to $20.24 in the prior quarter. For the year ended December 31, 2025, our book value per common share remained relatively unchanged at $19.70, as compared to $19.72 for the year ended December 31, 2024. We declared $1.48 common stock dividends per share in 2025. Our economic return on book value, which includes the overall change in book value for the period plus dividends, was (0.9)% for the fourth quarter and 7.4% for the full year of 2025.
Strategy Outlook
We continue to focus on building a diversified residential platform that can generate income from assets, gains on sale, and fees from operations with the long-term goal of growing both dividends and overall business value. Specifically, we will continue to look for opportunities to grow and diversify our portfolio, increase liquidity and grow our fee-based income revenue streams.
With respect to our portfolio, while we intend to continue to look for opportunities to securitize mortgage loans (whether we manufacture or acquire the loans), we expect to grow our Agency RMBS and MSR portfolios. In addition to supporting our regulatory compliance, we believe that a larger Agency RMBS portfolio will provide portfolio diversity, more stable dividends, a source of liquidity for opportunistic asset and business acquisitions, as well as allowing us to grow our fee-based operations, and protection in periods of volatility. We also intend to look at opportunities to acquire additional MSRs, which we believe will help hedge our loan portfolio, as well as provide a diverse source of income for our dividends.
With the HomeXpress and Palisades acquisitions, we have embarked on our strategy of enhancing returns to our shareholders through diversification of revenue from fee-based income. As we move into 2026 and beyond, we will look for opportunities to grow our residential operating platform both organically and through acquisitions. We believe that HomeXpress is well positioned to grow originations in 2026 and we will continue to assess the strategy of selling versus retaining the loan production volume of HomeXpress, considering how it affects our short-term results and long-term earnings potential. HomeXpress views its loan origination volumes, its loan sale premiums and its cost efficiency to be its key performance indicators and uses these to measure management’s effectiveness in realizing its objectives. With respect to our non-discretionary advisory business, we anticipate heightened competition may pressure client flow volumes which may lead to margin compression across existing and potential client relationships. We will however, continue to navigate through the market challenges and look to maintain and/or grow our non-discretionary investment management and advisory services through a combination of organic and external growth, depending on opportunities and market conditions.
We will continue to seek other opportunities to acquire platforms that we believe will be synergistic and accretive. We believe such opportunities exist and expect acquisitions to continue to be a source of growth and diversification.
Funds for these portfolio diversification and growth initiatives will come from both our existing portfolio, as we return to our re-lever strategy, and the capital markets. We expect to call, and if market conditions are appropriate, either sell loans or re-securitize our NR securitizations, as well as some of our R securitizations, in 2026. Our ability to call and either sell or resecuritize the loans, as well as access the capital markets will depend on a number of factors, including the breakeven economic re-investment rate, relative value opportunity and liquidity needs, among others.
Business Operations
Net Income Summary
The table below presents our net income on a GAAP basis for the years ended December 31, 2025, 2024, and 2023.
Net Income
(dollars in thousands, except share and per share data)
For the Years Ended
December 31, 2025
December 31, 2024
December 31, 2023
Net interest income:
Interest income (1)
Interest expense (2)
Net interest income
Increase in provision for credit losses
Other income (losses):
Net unrealized gains (losses) on derivatives
Realized losses on derivatives
Periodic interest on derivatives, net
Net gains (losses) on derivatives
Investment management and advisory fees
Interest income from investment in MSR financing receivables, net (3)
Net unrealized gains on financial instruments at fair value
Net realized losses on sales of investments
Gains on extinguishment of debt
Other investment gains
Gain on origination and sale of loans, net
Total other income (losses)
Other expenses:
Compensation and benefits (4)
General and administrative expenses
Servicing and asset manager fees
Amortization of intangibles and depreciation expenses
Transaction expenses
Total other expenses
Income before income taxes
Income taxes
Net income
Dividends on preferred stock
Net income available to common shareholders
Net income per share available to common shareholders:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
Dividends declared per share of common stock
(1) Includes interest income of consolidated V IEs of $557,046, $640,499 and $593,384 for the years ended December 31, 2025, 2024, and 2023 respectively.
(2) Includes interest expense of consolidated VIEs of $283,722, $293,509, and $282,542 for the years ended December 31, 2025, 2024, and 2023, respectively.
(3) Includes interest income from investment in MSR financing receivables of a consolidated VIE of $709, $0 and $0 for the years ended December 31, 2025, 2024 and 2023, respectively.
(4) Includes a related-party, non-cash imputed compensation expense from the Palisades Acquisition of $1,364, $10,296, and $0 for the years ended December 31, 2025, 2024 and 2023, respectively.
See accompanying notes to the consolidated financial statements.
Results of Operations for the Years Ended December 31, 2025 and 2024.
The primary source of income for our Investment Portfolio segment is interest income earned on our assets, net of interest expense paid on our financing liabilities, and investment and asset management fees earned through our investment management and advisory business.
The primary source of income for our Residential Origination segment is derived from our mortgage lending activities and includes certain fees collected at the time of origination and gain or loss from the sale of LHFS. Loan origination income reflects the fees earned, net of lender credits from originating the loans. These consist of fees related to loan origination, discount points, underwriting, processing and other fees.
For the year ended December 31, 2025, our net income available to common shareholders was $144 million, or $1.76 per average basic common share, compared to a net income of $90 million, or $1.12 per average basic common share for year ended December 31, 2024. The increase in net income available to common shareholders for the year ended December 31, 2025, as compared to the year ended December 31, 2024, was primarily driven by an increase in net unrealized gains on financial instruments at fair value of $71 million, an increase in investment management and advisory fees of $33 million related to a full year of customized solutions offerings, and an increase in net unrealized gains on derivatives of $7 million. This was offset by an increase in net realized losses on sales of investments of $18 million, an increase in realized losses on derivatives of $12 million, an increases to compensation and benefits of $15 million due to the inclusion of staffing costs from the Palisades Acquisition in December 2024, an increase in transaction expenses of $10 million related to a combination of the HomeXpress Acquisition and higher securitization activity, and an increase in amortization of intangibles and depreciation of $7 million related to the newly acquired intangible assets as part of the business acquisitions.
Interest Income
Our interest income revenues are driven primarily by our Investment Portfolio segment. Interest income increased by $60 million, or 7.9%, to $821 million for the year ended December 31, 2025 as compared to $761 million, for the year ended December 31, 2024. This increase was primarily driven by our Agency Pass-through purchases during the period, resulting in an increase in interest income on our Agency RMBS portfolio of $77 million as compared to the year ended December 31, 2024. The increase was also related to interest income of $13 million on loans held for sale following the acquisition of HomeXpress as reported within our Residential Origination segment. The increase in interest income is offset by decreases in income on our Non-agency RMBS and Loans held for investment portfolios of $10 million and $21 million, respectively, due to asset sales and paydowns during the year.
Interest Expense
Interest expense increased by $59 million, or 11.8%, to $555 million for the year ended December 31, 2025, as compared to $496 million for the year ended December 31, 2024. The increase was primarily driven by an increase in interest expense on our secured financing agreements collateralized by Agency RMBS of $52 million, driven by higher borrowings to finance our Agency CMO and Agency Pass-through purchases, reflecting the deployment of leverage to support our Agency RMBS activities, during the year ended December 31, 2025 as compared to the prior year. Additionally, the interest expense on our Long Term Debt increased to $17 million during the year ended December 31, 2025 as compared to $7 million for the year ended December 31, 2024, driven by our additional unsecured long term debt issuance during the year to support our investment activities. The increase was also driven by the additional interest expense of $10 million on warehouse financing used by HomeXpress to fund our loans from origination through sale.
The increase in interest expense was offset by a decrease in our interest expense on secured financing agreements collateralized by Non-Agency RMBS of $12 million for the year ended December 31, 2025, as compared to the year ended December 31, 2024, due to a reduction in our average secured financing agreements collateralized by Non-Agency RMBS through asset sales and paydowns. Additionally, our interest expense on Securitized debt decreased by $2 million due to a reduction in our average securitized debt balance of $524 million during the year ended December 31, 2025, as compared to the year ended December 31, 2024.
Economic Net Interest Income - Investment Portfolio Segment
Economic net interest income of our Investment Portfolio is a non-GAAP financial measure that equals GAAP net interest income adjusted for net periodic interest on derivatives, interest income from Residential Origination segment and interest income from investment in MSR financing receivables, and excludes interest earned on cash and interest expense from our Residential Origination segment. For the purpose of computing economic net interest income and ratios relating to cost of funds measures throughout this section, interest expense includes net payments on our derivatives, which is presented as a part of Net gains (losses) on derivatives in our Consolidated Statements of Operations. Interest rate swaps, Interest rate cap and Swap
futures are used to manage the increase in interest paid on secured financing agreements in a rising rate environment. Presenting the net contractual interest payments on interest rate derivatives with the interest paid on interest-bearing liabilities reflects our total contractual interest payments. We believe this presentati on is useful to investors because it depicts the economic value of our investment strategy by showing all components of interest expense and net interest income of our investment portfolio. However, Economic net interest income should not be viewed in isolation and is not a substitute for net interest income computed in accordance with GAAP. Where indicated, interest expense, adjusting for any interest earned on cash, is referred to as Economic interest expense. Where indicated, net interest income reflecting net periodic interest on derivatives and any interest earned on cash, is referred to as Economic net interest income.
The following table reconciles the Economic net interest income to GAAP net interest income and Economic interest expense to GAAP interest expense for the periods presented.
GAAP
Interest
Income
Interest Income on Mortgage Loan Origination
Other (1)
Economic Interest
Income
GAAP
Interest
Expense
Periodic Interest On Derivatives, net & Interest Expense on Mortgage Loan Origination
Economic Interest
Expense
GAAP Net Interest
Income
Periodic Interest On Derivatives, net
Other (1)
Net Interest Income on Mortgage Loan Origination
Economic
Net
Interest
Income
For the Year Ended December 31, 2025
For the Year Ended December 31, 2024
For the Year Ended December 31, 2023
For the Quarter Ended December 31, 2025
For the Quarter Ended September 30, 2025
For the Quarter Ended June 30, 2025
For the Quarter Ended March 31, 2025
(1) Primarily interest income on cash and cash equivalents from our Portfolio and Residential Origination segments and interest income from investment in MSR financing receivables.
Net Interest Rate Spread - Investment Portfolio Segment
The following tables show our average earning assets held, interest earned on assets, yield on average interest earning assets, average debt balance, economic interest expense, economic average cost of funds, economic net interest income and net interest rate spread for the periods presented.
For the Quarters Ended
December 31, 2025
September 30, 2025
December 31, 2024
(dollars in thousands)
(dollars in thousands)
(dollars in thousands)
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Assets:
Interest-earning assets (1)(4) :
Agency RMBS (3)
Agency CMBS
Non-Agency RMBS (3)
Loans held for investment
MSR (5)
Total
Liabilities and stockholders' equity:
Interest-bearing liabilities (2)(4) :
Secured financing agreements collateralized by:
Agency RMBS (3)
Agency CMBS
Non-Agency RMBS (3)
Loans held for investment
Securitized Debt
Long Term Debt (3)
Total
Economic net interest income/net interest rate spread
Net interest-earning assets/net interest margin
Ratio of interest-earning assets to interest bearing liabilities
(1) Interest-earning assets at amortized cost.
(2) Interest includes periodic interest on derivatives, net.
(3) These amounts have been adjusted to reflect the daily outstanding averages for which the financial instruments were held during the period.
(4) This table excludes interest-bearing assets and liabilities of our Residential Origination segment. Our Residential Origination segment includes average assets of $775 million, average liabilities of $621 million, interest income of $13 million, interest expense of $10 million, and net interest income of $3 million.
(5) The average balance amount represents committed capital by the Company during the period.
For the Years Ended
December 31, 2025
December 31, 2024
(dollars in thousands)
(dollars in thousands)
Average
Balance
Interest
Average
Yield/Cost
Average
Balance
Interest
Average
Yield/Cost
Assets:
Interest-earning assets (1)(4) :
Agency RMBS (3)
Agency CMBS
Non-Agency RMBS (3)
Loans held for investment
MSR (5)
Total
Liabilities and stockholders' equity:
Interest-bearing liabilities (2)(4) :
Secured financing agreements collateralized by:
Agency RMBS (3)
Agency CMBS
Non-Agency RMBS (3)
Loans held for investment
Securitized Debt
Long Term Debt (3)
Total
Economic net interest income/net interest rate spread
Net interest-earning assets/net interest margin
Ratio of interest-earning assets to interest bearing liabilities
(1) Interest-earning assets at amortized cost.
(2) Interest includes periodic interest on derivatives, net
(3) These amounts have been adjusted to reflect the daily outstanding averages for which the financial instruments were held during the period.
(4) This table excludes interest-bearing assets and liabilities of our Residential Origination segment. Our Residential Origination segment includes average assets of $775 million, average liabilities of $621 million, interest income of $13 million, interest expense of $10 million, and net interest income of $3 million.
(5) The average balance amount represents committed capital by the Company during the period.
Economic Net Interest Income and the Average Earning Assets - Investment Portfolio Segment
Our Economic net interest income (which is a non-GAAP measure, see “Economic net interest income” discussion earlier for details) decreased by $6 million to $275 million for the year ended December 31, 2025, from $281 million for the year ended December 31, 2024. Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, remained relatively unchanged at 1.5% for the years ended December 31, 2025 and 2024, respectively.
Our Average net interest-earning assets decreased by $254 million to $1.8 billion for the year ended December 31, 2025, compared to $2.0 billion for the same period of 2024. Our net interest margin, which equals the yield on our average interest-earning assets less the economic average cost of funds, decreased by 20 basis points for the year ended December 31, 2025, as compared to the year ended December 31, 2024.
Economic Interest Expense and the Cost of Funds - Investment Portfolio Segment
The borrowing rate at which we are able to finance our assets using secured financing agreements is typically correlated to SOFR and the term of the financing. The borrowing rate on the majority of our securitized debt is fixed and correlated to the term of the financing. The table below shows our average borrowed funds, Economic interest expense, average cost of funds (inclusive of periodic interest on swaps and Swap futures), average one-month SOFR, average three-month SOFR and average one-month SOFR relative to average three-month SOFR.
Average Debt Balance
Economic Interest Expense
Average Cost of Funds
Average One-Month SOFR
Average Three-Month SOFR
Average One-Month SOFR Relative to Average Three-Month SOFR
(Ratios have been annualized, dollars in thousands)
For The Year Ended December 31, 2025
For The Year Ended December 31, 2024
For The Year Ended December 31, 2023
For the Quarter Ended December 31, 2025
For the Quarter Ended September 30, 2025
For the Quarter Ended June 30, 2025
For the Quarter Ended March 31, 2025
Average interest-bearing liabilities increased by $1.1 billion for the year ended December 31, 2025, as compared to the year ended December 31, 2024. Economic interest expense increased by $52 million for the year ended December 31, 2025, as compared to the year ended December 31, 2024, due to an increase in borrowings under our secured financing agreements to fund our Agency RMBS purchases.
While we may use interest rate hedges to mitigate risks related to changes in interest rate, the hedges may not fully offset interest expense movements.
Provision for Credit Losses
For the year ended December 31, 2025, we recorded an increase in provision for credit losses of $16 million, as compared to an increase in provision of credit losses of $10 million for the year ended December 31, 2024. The changes in provision for credit losses for the year ended December 31, 2025, as compared to the year ended December 31, 2024, are primarily due to a deterioration in cashflows on a combination of Non-Agency senior and subordinated bonds.
Net Gains (Losses) on Derivatives
We use derivatives to economically hedge the effects of changes in interest rates on our portfolio, specifically our secured financing agreements. Unrealized gains and losses include the change in market value, period over period, on our derivatives portfolio. Changes in market value are generally a result of changes in interest rates. We may or may not ultimately realize these unrealized derivative gains and losses depending on trade activity, changes in interest rates and the values of the underlying securities. The net gains and losses on our derivatives include both unrealized and realized gains and losses. Realized gains and losses include the net cash paid and received on our derivatives portfolio during the period as well as sales, terminations and settlements related to our derivatives portfolio.
The tables below show a summary of our net gains (losses) on derivative instruments for the years ended December 31, 2025, 2024 and 2023.
For the Years Ended
December 31, 2025
December 31, 2024
December 31, 2023
(dollars in thousands)
Periodic interest on derivatives, net
Realized gains (losses) on derivative instruments, net:
Interest rate swaps
Swap futures
Treasury futures
Swaptions
Total realized gains (losses) on derivative instruments, net
Unrealized gains (losses) on derivative instruments, net:
Interest rate swaps
Swap futures
Treasury futures
Swaptions
Interest rate cap
Total unrealized gains (losses) on derivative instruments, net:
Total gains (losses) on derivative instruments, net
In addition, the net gains (losses) attributable to derivatives on our Residential Origination segment was $1.2 million for the year ended December 31, 2025 which is reported in Gain on origination and sale of loans, net, in our Consolidated Statements of Operations.
During the years ended December 31, 2025 and 2024, we recognized total net losses on derivatives of $3 million and total net gains on derivatives of $5 million, respectively. Changes in market value are generally a result of changes in interest rates. We may or may not ultimately realize these unrealized derivative gains and losses depending on trade activity, changes in interest rates and the values of the underlying securities.
Interest Rate Swaps
The weighted average pay rate on our interest rate swaps at December 31, 2025 was 3.44% and the weighted average receive rate was 3.87%. At December 31, 2025, the weighted average maturity on our interest rate swaps was less than 6 years. During the year ended December 31, 2025, we had net realized losses of $26 million related to the interest rate swaps.
The weighted average pay rate on our interest rate swaps at December 31, 2024 was 3.56% and the weighted average receive rate was 4.49%. At December 31, 2024, the weighted average maturity on our interest rate swaps was less than one year.
We had net realized losses of $26 million related to swap terminations during the year ended December 31, 2025. We had a realized loss of $17 million related to the maturity of one swap during the year ended December 31, 2024.
Swap Futures
During the year ended December 31, 2025, we had Swap futures with a notional of $340 million. We had net realized losses of $2 million related to swap futures terminations during the year ended December 31, 2025.
Swaptions
During the year ended December 31, 2025, we had swaptions with a notional of $600 million. We had net realized losses of $6 million related to swaptions during the year ended December 31, 2025. During the year ended December 31, 2024, we did not have any swaption terminations.
Interest Rate Cap
During the year ended December 31, 2025, we entered into an interest rate cap. We paid $7 million for a $1.0 billion notional two-year interest rate cap with a strike rate of 3.95% on SOFR as the market reference rate. At December 31, 2024, we held no interest rate caps.
Treasury Future Contracts
For our Investment Portfolio segment, during the year ended December 31, 2025, we covered our open short position of 1,000 two-year U.S. Treasury Futures contracts for a net realized gain of $82 thousand. During the year ended December 31, 2024, we entered into 1,391 short 5-year and 1,684 short 5-year U.S. Treasury futures contract with a notional of $139 million and $168 million, respectively, which we subsequently covered for a net realized loss of $5 million. Additionally, we covered and reopened our existing open 2-year U.S Treasury futures contract position for a realized gain of $641 thousand. We are short 1,000 2-year U.S. Treasury futures contract at December 31, 2024.
For the Residential Origination segment, during the year ended December 31, 2025, we entered into 360 short 5-year and 1,400 short 2-year U.S. Treasury futures contract with notional amounts of $36 million and $280 million respectively, which we subsequently covered for net realized gain of $31 thousand. We are short 197 5-year and 765 2-year U.S. Treasury futures contracts at December 31, 2025.
Interest Rate Lock Commitments
For the Residential Origination segment, we enter into IRLCs with prospective borrowers to originate mortgage loans at a specified interest rate. This creates a derivative asset which is valued based on market conditions, loan characteristics, estimated remaining direct expenses, and subject to the Pull-through Rate. As of December 31, 2025, HomeXpress’ total IRLC asset had a notional amount of $200 million and a fair value of $4 million.
Changes in our derivative positions were primarily a result of changes in our secured financing composition and changes in interest rates.
Long Term Debt Expense
During the second quarter of 2024, we issued $65 million aggregate principal amount of 9.00% unsecured senior notes due 2029 that pay quarterly interest. After deducting the underwriting discount and other debt issuance costs, we received approximately $251 million of proceeds.
During the third quarter of 2024, we issued $75 million aggregate principal amount (including the additional amount
issued pursuant to the exercise of the over-allotment option) of 9.25% unsecured senior notes due 2029 that pay quarterly interest. After deducting the underwriting discount and other debt issuance costs, we received approximately $72 million of proceeds.
During the third quarter of 2025, we issued $120 million aggregate principal amount (including the additional amount
issued pursuant to the exercise of the over-allotment option) of 8.875% unsecured senior notes due 2030 that pay quarterly interest. After deducting the underwriting discount and other debt issuance costs, we received approximately $116 million of proceeds.
At December 31, 2025, the outstanding principal amount of these notes was $260 million and the accrued interest payable on this debt was $3 million. At December 31, 2025, the unamortized deferred debt issuance cost was $8 million. The net interest expense was $17 million and $7 million for the years ended December 31, 2025 and 2024, respectively.
Investment management and advisory fees
During the fourth quarter of 2024, we started earning investment management and advisory fees through certain investment management agreements entered into with our investment partnerships and privately offered pooled investment vehicles, insurance companies, and other institutional clients. We recognized investment management and advisory fees of $35 million and $3 million for the years ended December 31, 2025 and 2024, respectively.
Gain on origination and sale, net
Gain on origination and sale, net, represents the primary source of revenue for our Residential Origination segment. During the fourth quarter of 2025, revenue derived from our mortgage lending activities includes certain fees collected at the time of origination, gain or loss from the sale of LHFS, net change in the valuations of the IRLC and LHFS, realized and unrealized change in value of the derivative instruments, provisions or benefit for loan repurchase reserves and the direct loan originations costs, net.
Loan origination income, net, reflects the fees earned, net of lender credits from originating the loans. These consist of fees related to loan origination, discount points, underwriting, processing and other fees. Lender credits typically are related to rebates or concessions for certain loan origination costs.
Premiums from loan sales and the mark-to-market changes of LHFS include both the realized and unrealized gains and losses on the sale of LHFS and are included in Gain on origination and sales of loans, net. The valuation of LHFS approximates the
servicing released market value of a loan sold to a private investor. Unrealized gains from derivative instruments are the net change in value of the IRLC derivative asset and the hedge derivatives.
Benefits (provision) for loan repurchase reserves records the net change in the estimated losses retaining to reps and warrant associated with a mortgage loan sale.
Direct loan origination costs, net, are the direct expenses associated with the origination of a mortgage loan. These costs include loan verification services, interim servicing expenses, third party due diligence fees, and commissions to sales employees. Under fair value accounting these expenses are realized when a loan funds.
We recognized gain on origination and sale of loans, net, of $21 million for the year ended December 31, 2025 following the acquisition of HomeXpress on October 1, 2025.
Interest Income from investment in MSR financing receivables
During the year ended December 31, 2025, we entered into purchase agreements to acquire base and excess servicing compensation rights, also known as MSRs, associated with a $6.5 billion portfolio of mortgage loans from a licensed, GSE-approved residential mortgage loan servicer. In these arrangements, the licensed servicer holds legal title to the MSRs and is responsible for performing all servicing activities, while we provide financing or capital support and, in return, receive the economic benefits of a base and excess servicing spread.
We entered into a Reference Spread Agreement for Agency Loans to purchase the base servicing fee on the mortgage servicing loans at a rate of 12.5 basis points less the cost of servicing and other ancillary fees and income. We also entered into a True Excess Spread Agreement for FNMA Loans entitling us to monthly distributions of the servicing fees collected by the mortgage loan servicer in excess of 12.5 basis points per annum and other related servicing cash flows.
Recurring servicing fees, ancillary income, recapture income, and float earnings associated with MSRs are recognized on a cash basis when earned and received. We recognized interest income on our investments in MSR financing receivables, net, of $520 thousand for the year ended December 31, 2025.
Net Unrealized Gains (Losses) on Financial Instruments at Fair Value
During the year ended December 31, 2025, the Federal Reserve cut rates three times by 25 basis points each, bringing the year end range to 3.50%-3.75%. Interest rates generally tracked lower during the year, with the two-year treasury falling 77 basis points to 3.47%, and the ten-year treasury yield dropping 40 basis points to 4.17% at year end. We recorded net unrealized gains on financial instruments at fair value of $82 million and $11 million for the years ended December 31, 2025 and 2024, respectively.
Gains and Losses on Sales of Assets
We do not forecast sales of investments as we generally expect to invest for long-term gains. However, from time to time, we may sell assets to create liquidity necessary to pursue new opportunities, to achieve targeted leverage ratios, as well as for gains when prices indicate a sale is most beneficial to us, or is the most prudent course of action to maintain a targeted risk-adjusted yield for our investors.
During the year ended December 31, 2025, we rebalanced a portion of our investment portfolio and sold certain Agency CMO, Non-Agency RMBS and Loans held for investment assets, which resulted in a net realized loss of $23 million. Proceeds from these sales were largely re-invested in Agency RMBS Pass-through securities and enabled us to maintain liquidity which can be used for investments or acquisitions. During the year ended December 31, 2024, we sold Agency CMBS and Agency CMO assets. These sales resulted in a net realized losses of $5 million.
Gain and Loss on Extinguishment of Debt
When we acquire our outstanding securitized debt, we extinguish the outstanding debt and recognize a gain or loss based on the difference between the carrying value of the debt and the cost to acquire the debt which is reflected in the Consolidated Statements of Operations as a gain or loss on extinguishment of debt.
Securitized Debt Collateralized by Non-Agency RMBS
We did not acquire any securitized debt collateralized by Non-Agency RMBS during the years ended December 31, 2025 and 2024.
Securitized Debt Collateralized by Loans Held for Investment
We acquired securitized debt collateralized by Loans held for investment with an amortized cost balance of $384 million for $382 million during the year ended December 31, 2025. We did not acquire any securitized debt collateralized by loans held for investment during the year ended December 31, 2024.
Compensation, General and Administrative Expenses and Transaction Expenses
The table below shows our total compensation and benefits expense, general and administrative, or G&A expenses, and transaction expenses as compared to average total assets and average equity for the periods presented.
Total Compensation, G&A and Transaction Expenses
Total Compensation, G&A and Transaction Expenses/Average Assets
Total Compensation, G&A and Transaction Expenses/Average Equity
(Ratios have been annualized, dollars in thousands)
For The Year Ended December 31, 2025
For The Year Ended December 31, 2024
For The Year Ended December 31, 2023
For the Quarter Ended December 31, 2025
For the Quarter Ended September 30, 2025
For the Quarter Ended June 30, 2025
For the Quarter Ended March 31, 2025
Compensation and benefits costs were approximately $57 million and $41 million for the year ended December 31, 2025 and December 31, 2024. The increase in Compensation and benefits costs for the year ended December 31, 2025 compared to the year ended December 31, 2024, was driven by higher overall compensation expense related to the increase in employee headcount and expenses related to the acquisitions of Palisades and HomeXpress.
G&A expenses were approximately $30 million and $23 million for the year ended December 31, 2025 and December 31, 2024. G&A expenses are primarily comprised of legal, market data and research, auditing, consulting, information technology, rent and independent investment consulting expenses.
During the year ended December 31, 2025, we incurred transaction expenses of $17 million in relation to the HomeXpress Acquisition. During the year ended December 31, 2024, we incurred transaction expenses of $7 million due to Palisades Acquisition and securitization activity.
Servicing and Asset Manager Fee Expense
Servicing fees and asset manager expenses were $28 million and $30 million for the year ended December 31, 2025 and December 31, 2024, respectively. These servicing fees are primarily related to the servicing costs of the whole loans held in consolidated securitization vehicles and are paid from interest income earned by the VIEs. Servicing fees generally ranged from 2 to 50 basis points of unpaid principal balances of our consolidated VIEs. Servicing and asset manager fee expense decreased by $2 million year over year due to lower loan balances and loan counts at December 31, 2025 related to our portfolio reallocation during the year. Servicing fees paid by the Residential Origination unit are for the interim servicing of loans from organization to sale and are included in Gain on origination and sale of loans, net, in our Consolidated Statements of Operations.
Amortization of intangibles and depreciation expenses
We recognized intangible assets related to investment management agreements, internally developed software, developed technology, broker relationships, trade name and licenses acquired in the acquisitions. The long-lived fixed assets are comprised of leasehold improvements, furniture and fixtures, and computers. The fixed assets and intangible assets are depreciated or amortized over their estimated useful lives. We acquired both intangible assets and long-lived fixed assets through the acquisitions of Palisades and HomeXpress during the fourth quarters of 2024 and 2025, respectively. During the years ended December 31, 2025 and December 31, 2024, we recognized amortization of intangible assets and depreciation expense of $7 million and $321 thousand, respectively.
Segment Results of Operations
Investment Portfolio segment
The Investment Portfolio segment consists of our investments and third-party advisory services activities, and is comprised of our investments and financial assets including (i) MSR Related Investments, (ii) Real Estate Securities, (iii) Properties and Residential Mortgage Loans, (iv) Consumer loans and (v) certain ancillary investments and equity method investments, as well as associated financing, hedging, and various allocable expenses. These activities were previously reflected within our single reportable segment prior to the 2025 segment reevaluation.
Residential Origination segment
In conjunction with the HomeXpress Acquisition, the Residential Origination segment consists of our stand-alone mortgage origination business of HomeXpress that originates consumer Non-QM, investor business purpose, and other Non-Agency and Agency mortgage loan products, and includes the related goodwill, intangible assets, and direct expenses, plus HomeXpress-related residential whole loans and real estate owned.
The following presents, for each reportable segment, revenues, the measure of segment profit or loss, and significant segment expenses. Segment results are prepared on the same basis as our consolidated financial statements and are reconciled to consolidated amounts below:
For the Year Ended
December 31, 2025
(dollars in thousands)
Investment Portfolio
Residential Origination
Total
Net interest income:
Interest income
Interest expense
Net interest income
Increase in provision for credit losses
Other income (losses):
Net unrealized gains (losses) on derivatives
Realized losses on derivatives
Periodic interest on derivatives, net
Net gains (losses) on derivatives
Investment management and advisory fees
Interest income from investment in MSR financing receivables
Net unrealized gains on financial instruments at fair value
Net realized losses on sales of investments
Gains on extinguishment of debt
Other investment gains
Gain on origination and sale of loans, net
Total other income (losses)
Other expenses:
Compensation and benefits
General and administrative expenses
Servicing and asset manager fees
Amortization of intangibles and depreciation expenses
Transaction expenses
Total other expenses
Income before income taxes
Income tax expense (benefit)
Net income
Dividends on preferred stock
Net income available to common shareholders
Earnings Available for Distribution
Earnings available for distribution is a non-GAAP measure and is defined as GAAP net income (loss) excluding (i) unrealized gains or losses on financial instruments carried at fair value with changes in fair value recorded in earnings, (ii) realized gains or losses on the sales of investments, (iii) gains or losses on the extinguishment of debt, (iv) changes in the provision for credit losses, (v) unrealized gains or losses on derivatives, (vi) realized gains or losses on derivatives, (vii) transaction expenses, (viii) stock compensation expenses for retirement eligible awards, (ix) amortization of intangibles and depreciation expenses, net of any tax impact (x) non-cash imputed compensation expense related to business acquisitions, and (xi) other gains and losses on equity investments.
Non-cash imputed compensation expense reflects the portion of the consideration paid in the Palisades Acquisition that pursuant to the seller’s contractual arrangements is distributable to the seller’s legacy employees (who are now our employees) and that for GAAP purposes is recorded as non-cash imputed compensation expense with an offsetting entry recorded as non-cash contribution from a related party to our shareholder’s equity. The excluded amounts do not include any normal, recurring compensation paid to our employees.
Transaction expenses are primarily comprised of costs only incurred at the time of execution of our securitizations, certain structured secured financing agreements, and business combination transactions and include costs such as underwriting fees, legal fees, diligence fees, accounting fees, bank fees and other similar transaction-related expenses. These costs are all incurred prior to or at the execution of the transaction and do not recur. Recurring expenses, such as servicing fees, custodial fees, trustee fees and other similar ongoing fees are not excluded from Earnings available for distribution. We believe that excluding these costs is useful to investors as it is generally consistent with our peer group’s treatment of these costs in their non-GAAP measures presentation, mitigates period to period comparability issues tied to the timing of securitization and structured finance transactions, and is consistent with the accounting for the deferral of debt issuance costs prior to the fair value election option made by us. In addition, we believe it is important for investors to review this metric which is consistent with how management internally evaluates the performance of the Company. Stock compensation expense charges incurred on awards to retirement eligible employees is reflected as an expense over a vesting period (generally 36 months) rather than reported as an immediate expense.
We view Earnings available for distribution as one measure of our investment portfolio's ability to generate income for distribution to common stockholders. Earnings available for distribution is one of the metrics, but not the exclusive metric, that our Board of Directors uses to determine the amount, if any, of dividends on our common stock. Other metrics that our Board of Directors may consider when determining the amount, if any, of dividends on our common stock include, among others, REIT taxable income, dividend yield, book value, cash generated from the portfolio, reinvestment opportunities and other cash needs. To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income (subject to certain adjustments) annually. Earnings available for distribution, however, is different than REIT taxable income. For example, differences between Earnings available for distribution and REIT taxable income generally may result from whether the REIT uses mark-to-market accounting for GAAP purposes, accretion of market discount or OID and amortization of premium, and differences in the treatment of securitizations for GAAP and tax purposes, among other items. Further, REIT taxable income generally does not include earnings of our domestic TRSs unless such income is distributed from current or accumulated earnings and profits. The determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income is not based on Earnings available for distribution and Earnings available for distribution should not be considered as an indication of our REIT taxable income, a guaranty of our ability to pay dividends, or as a proxy for the amount of dividends we may pay. We believe Earnings available for distribution helps us and investors evaluate our financial performance period over period without the impact of certain non-recurring transactions. Therefore, Earnings available for distribution should not be viewed in isolation and is not a substitute for or superior to net income or net income per basic share computed in accordance with GAAP. In addition, our methodology for calculating Earnings available for distribution may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our Earnings available for distribution may not be comparable to the Earnings available for distribution reported by other REITs.
The following table provides GAAP measures of net income and net income per diluted share available to common stockholders for the periods presented and details with respect to reconciling the line items to Earnings available for distribution and related per average diluted common share amounts. Earnings available for distribution is presented on an adjusted dilutive shares basis.
For the Years Ended
December 31, 2025
December 31, 2024
December 31, 2023
(dollars in thousands, except per share data)
GAAP net income available to common stockholders
Adjustments (1) :
Net unrealized gains on financial instruments at fair value
Net realized losses on sales of investments
Gains on extinguishment of debt
Increase in provision for credit losses
Net unrealized (gains) losses on derivatives
Realized losses on derivatives
Transaction expenses
Stock Compensation expense for retirement eligible awards
Amortization of intangibles and depreciation expenses (2)
Non-cash imputed compensation related to business acquisition
Other investment gains
Earnings available for distribution
GAAP net income per diluted common share
Earnings available for distribution per adjusted diluted common share
(1) As a result of the business combinations, we updated the determination of earnings available for distribution to exclude non-recurring acquisition-related transaction expenses, non-cash amortization of intangibles and depreciation expenses, and non-cash imputed compensation expenses. These expenses are excluded as they relate to our business combinations and are not directly related to our income generating activities.
(2) Non-cash amortization of intangibles and depreciation expenses related to acquisitions.
(3) Tax impact on non-cash amortization of intangibles and depreciation expenses related to business combinations.
The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted average adjusted diluted shares used for Earnings available for distribution for the years ended December 31, 2025, 2024 and 2023.
For the Years Ended
December 31, 2025
December 31, 2024
December 31, 2023
Weighted average diluted shares - GAAP
Potentially dilutive shares (1)
Adjusted weighted average diluted shares - Earnings available for distribution
(1) Potentially dilutive shares related to restricted stock units and performance stock units excluded from the computation of weighted average GAAP diluted shares because their effect would have been anti-dilutive given the GAAP net loss available to common shareholders. There were no dilutive shares related to RSU/PSUs given the Company reported GAAP net income available to common shareholders for all periods.
For the Quarters Ended
December 31, 2025
September 30, 2025
June 30, 2025
March 31, 2025
December 31, 2024
(dollars in thousands, except per share data)
GAAP net income (loss) available to common stockholders
Adjustments (1) :
Net unrealized (gains) losses on financial instruments at fair value
Net realized (gains) losses on sales of investments
Gains on extinguishment of debt
Increase in provision for credit losses
Net unrealized (gains) losses on derivatives
Realized (gains) losses on derivatives
Transaction expenses
Stock Compensation expense for retirement eligible awards
Amortization of intangibles and depreciation expenses (2)
Non-cash imputed compensation related to business acquisition
Other investment (gains) losses
Earnings available for distribution
GAAP net income (loss) per diluted common share
Earnings available for distribution per adjusted diluted common share
(1) As a result of the business combinations, we updated the determination of earnings available for distribution to exclude non-recurring acquisition-related transaction expenses, non-cash amortization of intangibles and depreciation expenses, and non-cash imputed compensation expenses. These expenses are excluded as they relate to our business combinations and are not directly related to our income generating activities.
(2) Non-cash amortization of intangibles and depreciation expenses related to acquisitions.
(3) Tax impact on non-cash amortization of intangibles and depreciation expenses related to business combinations.
The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average adjusted diluted shares used for Earnings available for distribution for the periods reported below.
For the Quarters Ended
December 31, 2025
September 30, 2025
June 30, 2025
March 31, 2025
December 31, 2024
Weighted average diluted shares - GAAP
Potentially dilutive shares (1)
Adjusted weighted average diluted shares - Earnings available for distribution
(1) Potentially dilutive shares related to restricted stock units and performance stock units excluded from the computation of weighted average GAAP diluted shares because their effect would have been anti-dilutive given the GAAP net loss available to common shareholders for the quarters ended September 30, 2025 and December 31, 2024.
Earnings available for distribution for the year ended December 31, 2025 were $141 million, or $1.68 per average diluted common share, and increased by $20 million, compared to $121 million, or $1.48 per average diluted common share for the year ended December 31, 2024. As discussed earlier, the increase in Earnings available for distribution was primarily due to our portfolio reallocation efforts, investment and asset management fee revenue and purchase of HomeXpress.
Net Income (Loss) and Return on Total Stockholders' Equity
The table below shows our Net income (loss) and Economic net interest income as a percentage of average stockholders' equity Earnings available for distribution as a percentage of average common stockholders' equity, and Average Tangible Common Equity. Return on average equity is defined as our GAAP net income (loss) as a percentage of average equity. Average equity is defined as the average of our beginning and ending stockholders' equity balance for the period reported. Economic net interest income and Earnings available for distribution are non-GAAP measures as defined in previous sections. Tangible Common Equity is a non-GAAP measure and is defined below.
Return on Average Equity
Economic Net Interest Income/Average Equity (1)
Earnings available for distribution/Average Common Equity
Earnings available for distribution/Average Tangible Common Equity
(Ratios have been annualized)
For the Year Ended December 31, 2025
For the Year Ended December 31, 2024
For the Year Ended December 31, 2023
For the Quarter Ended December 31, 2025
For the Quarter Ended September 30, 2025
For the Quarter Ended June 30, 2025
For the Quarter Ended March 31, 2025
(1) Includes our Economic Net Interest Income and Average equity on our Investment Portfolio.
Return on average equity was 8.91% for year ended December 31, 2025, as compared to 6.72% for the year ended December 31, 2025. This increase was primarily driven by higher mark to market gains on our investment portfolio. Economic net interest income as a percentage of average equity on our in increased by 16 basis points for the year ended December 31, 2025 as compared to the year ended December 31, 2024. Earnings available for distribution as a percentage of average common equity increased by 135 basis points for the year ended December 31, 2025, as compared to the year ended December 31, 2024.
Tangible Common Equity is a non-GAAP measure and is defined as Total stockholders' equity available to common stockholders less intangible assets and goodwill related to the business acquisitions. We believe that this measure helps our management and investors understand our capital adequacy and changes from period to period in our common stockholders' equity exclusive of changes of intangible assets. The following table presents a reconciliation of Total Stockholders’ Equity to Tangible Common Equity as of December 31, 2025.
For the Quarters Ended
December 31, 2025
September 30, 2025
June 30, 2025
March 31, 2025
December 31, 2024
(dollars in thousands)
Total stockholders' equity
Less: Preferred Stock
Total stockholders' equity available to common stockholders
Less: Intangibles
Less: Goodwill
Total Intangibles & Goodwill
Tangible Common Equity
Financial Condition
Portfolio Review
During the year ended December 31, 2025, we focused our efforts on taking advantage of relative value opportunities while simultaneously increasing our liquid securities allocation. During the year ended December 31, 2025, on an aggregate basis, we purchased $4.7 billion of investments and received $1.8 billion in principal payments related to our Agency MBS, Non-Agency RMBS and Loans held for inve stment portfolio.
The following table summarizes certain characteristics of our portfolio at December 31, 2025 and December 31, 2024.
December 31, 2025
December 31, 2024
(dollars in thousands)
Interest earning assets at period-end (1)
Interest bearing liabilities at period-end
GAAP Leverage at period-end
GAAP Leverage at period-end (recourse)
(1) Excludes cash and cash equivalents.
December 31, 2025
December 31, 2024
December 31, 2025
December 31, 2024
Portfolio Composition
Amortized Cost
Fair Value
Non-Agency RMBS
Senior
Subordinated
Interest-only
Agency RMBS
Pass-through
CMO
Interest-only
Agency CMBS
Project loans
Interest-only
Loans held for investment
Interests in MSR financing receivables
Fixed-rate percentage of portfolio
Adjustable-rate percentage of portfolio
GAAP leverage at period-end is calculated as a ratio of our secured financing agreements and securitized debt liabilities over GAAP book value. GAAP recourse leverage is calculated as a ratio of our secured financing agreements over stockholders' equity.
The following table presents details of each asset class in our portfolio, excluding interests in MSR financing receivables, at December 31, 2025 and December 31, 2024. The principal or notional value represents the interest income earning balance of each class. The weighted average figures are weighted by each investment’s respective principal/notional value in the asset class.
December 31, 2025
Principal or Notional Value at Period-End
(dollars in thousands)
Weighted Average Amortized Cost Basis
Weighted Average Fair Value
Weighted Average Coupon
Weighted Average Yield at Period-End (1)
Weighted Average 3 Month Prepay Rate at Period-End
Weighted Average 12 Month Prepay Rate at Period-End
Weighted Average 3 Month CDR at Period-End
Weighted Average 12 Month CDR at Period-End
Weighted Average LossSeverity (2)
Weighted Average Credit Enhancement
Non-Agency RMBS
Senior
Subordinated
Interest-only
Agency RMBS
Pass-through
CMO
Interest-only
Agency CMBS
Project loans
Interest-only
Loans held for investment
Re-performing Loans
Prime Loans
Investor Loans
Business Purpose Loans
(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.
(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)
December 31, 2024
Principal or Notional Value at Period-End
(dollars in thousands)
Weighted Average Amortized Cost Basis
Weighted Average Fair Value
Weighted Average Coupon
Weighted Average Yield at Period-End (1)
Weighted Average 3 Month Prepay Rate at Period-End
Weighted Average 12 Month Prepay Rate at Period-End
Weighted Average 3 Month CDR at Period-End
Weighted Average 12 Month CDR at Period-End
Weighted Average LossSeverity (2)
Weighted Average Credit Enhancement
Non-Agency RMBS
Senior
Subordinated
Interest-only
Agency RMBS
CMO
Interest-only
Agency CMBS
Project loans
Interest-only
Loans held for investment
Re-performing Loans
Prime Loans
Investor Loans
Business Purpose Loans
(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.
(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)
Based on the projected cash flows for our Non-Agency RMBS that are not of high credit quality, a portion of the original purchase discount is designated as Accretable Discount, which reflects the purchase discount expected to be accreted into interest income, and a portion is designated as Non-Accretable Difference, which represents the contractual principal on the security that is not expected to be collected. The amount designated as Non-Accretable Difference may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security is more favorable than previously estimated, a portion of the amount designated as Non-Accretable Difference may be transferred to Accretable Discount and accreted into interest income over time. Conversely, if the performance of a security is less favorable than previously estimated, a provision for credit loss may be recognized resulting in an increase in the amounts designated as Non-Accretable Difference.
The following table presents changes to Accretable Discount (net of premiums) as it pertains to our Non-Agency RMBS portfolio, excluding premiums on interest-only investments, during the previous five quarters.
For the Quarters Ended
(dollars in thousands)
Accretable Discount (Net of Premiums)
December 31, 2025
September 30, 2025
June 30, 2025
March 31, 2025
December 31, 2024
Balance, beginning of period
Accretion of discount
Purchases
Sales
Elimination in consolidation
Transfers from/(to) credit reserve, net
Balance, end of period
Liquidity and Capital Resources
General
Liquidity measures our ability to meet cash requirements, including for ongoing borrowing commitments such as margin calls on non-MTM facilities, purchases of RMBS, residential mortgage loans and other assets for our portfolio, payment of dividends and other general business needs. Our principal sources of capital and funds for additional investments primarily include earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities, including warehouse facilities, and proceeds from equity or other securities
offerings. Over the past several months, we have deliberately positioned the portfolio to maintain flexibility and to meet liquidity needs as they arise, including the HomeXpress Acquisition that closed on October 1, 2025.
Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our master secured financing agreements, warehouse facilities and secured financing agreement facilities with our counterparties. Because secured financing agreements and warehouse facilities are short-term commitments of capital, lenders may respond to market conditions making it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have and may continue to impose more onerous conditions when rolling forward such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities, or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and dispose of assets.
To meet our short-term (one year or less) liquidity needs, we expect to continue to borrow funds in the form of secured financing agreements and, subject to market conditions, other types of financing. The terms of the secured financing transaction borrowings under our master secured financing agreement generally conform to the terms in the standard master secured financing agreement as published by the Securities Industry and Financial Markets Association, (“SIFMA”) or similar market accepted agreements, as to repayment and margin requirements. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master secured financing agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, net asset value, required “haircuts” (which are the difference expressed in percentage terms between the fair value of the collateral and the amount the counterpart will lend to us) purchase price maintenance requirements, and requirements that all disputes related to the secured financing agreement be litigated or arbitrated in a particular jurisdiction. These provisions may differ for each of our lenders.
To meet our longer-term liquidity needs (greater than one year), we expect our principal sources of capital and funds to continue to be provided by earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities, as well as proceeds from equity, debt or other securities offerings.
In addition to the principal sources of capital described above, we may enter into warehouse facilities and use longer-dated structured secured financing agreements. The use of any particular source of capital and funds will depend on market conditions, availability of these facilities, and the investment opportunities available to us.
Current Period
We held cash and cash equivalents of approximately $279 million and $84 million at December 31, 2025 and December 31, 2024, respectively. As a result of our operating, investing and financing activities described below, our cash position increased by $195 million from December 31, 2024 to December 31, 2025.
Our operating activities used net cash of approximately $249 million and provided $206 million for the year ended December 31, 2025 and 2024, respectively. The cash flows from operations were primarily driven by cash used of $374 million related to our mortgage origination activities offset in part by interest received in excess of interest paid of $265 million during the year ended December 31, 2025. The cash flows from operations were primarily driven by interest received in excess of interest paid of $282 million during the year ended December 31, 2024.
Our investing activities used cash of $1.7 billion and provided cash of $178 million for the year ended December 31, 2025 and 2024, respectively. During the year ended December 31, 2025, we used cash to purchase $4.2 billion of Agency MBS and $441 million of Loans held for investment, which were offset by cash received for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $1.8 billion, collectively. We also used cash for the HomeXpress acquisition during the year ended December 31, 2025. During the year ended December 31, 2024, we used cash to purchase $1.1 billion Agency MBS, $657 million Loans held for investment and $96 million Non-Agency RMBS offset by cash received for principal repayments on Agency MBS, Non-Agency RMBS and Loans held for investment of $1.5 billion and from the sale of our Agency MBS of $569 million
Our financing activities provided cash of $2.1 billion and used cash of $522 million for the year ended December 31, 2025 and 2024, respectively. During the year ended December 31, 2025, we received cash from net proceeds on our secured financing agreements of $2.7 billion, and proceeds received from our secured debt borrowings of $1.0 billion. This cash received was offset in part by cash used for repayment of principal on our securitized debt of $1.5 billion, and payment of common and preferred dividends of $209 million. During the year ended December 31, 2024, we received cash from net proceeds on our secured financing agreements of $398 million, and issuance of unsecured notes of $134 million. This cash received was offset
in part by cash used for repayment of principal on our securitized debt of $1.2 billion, and payment of common and preferred dividends of $223 million.
Our recourse leverage increased at December 31, 2025 to 2.4:1 as compared to 1.2:1 at December 31, 2024. This increase was primarily driven by higher borrowings under secured financing agreements to finance our Agency RMBS purchases. Our recourse leverage excludes the securitized debt which can only be repaid from the proceeds on the assets securing this debt in their respective VIEs. Our recourse leverage is presented as a ratio of our secured financing agreements and long-term debt, which are recourse to our assets and our equity.
Based on our current portfolio, leverage ratio and available borrowing arrangements, we believe our assets will be sufficient to enable us to meet anticipated short-term liquidity requirements. However, if our cash resources are insufficient to satisfy our liquidity requirements, we may sell additional investments, reduce our dividends, or issue debt or additional common or preferred equity securities to meet our liquidity needs. As of December 31, 2025 and December 31, 2024, we had $249 million and $526 million of unencumbered assets available to us which can be pledged to access additional short-term financing or sold to raise additional cash, if necessary.
At December 31, 2025 and December 31, 2024, the remaining maturities and borrowing rates on our RMBS and loan secured financing agreements were as follows. The acquisition of HomeXpress added $802 million of secured financing that had a weighted average borrowing rate of 5.84%.
December 31, 2025
December 31, 2024
(dollars in thousands)
Principal (1)
Weighted Average Borrowing Rates
Range of Borrowing Rates
Principal
Weighted Average Borrowing Rates
Range of Borrowing Rates
Overnight
1 to 29 days
30 to 59 days
60 to 89 days
90 to 119 days
120 to 180 days
180 days to 1 year
1 to 2 years
2 to 3 years
Total
(1) The values for secured financing agreements in the table above is net of $271 thousand of deferred financing costs as of December 31, 2025 .
Average remaining maturity of Secured financing agreements secured by:
December 31, 2025
December 31, 2024
Agency RMBS
26 Days
16 Days
Agency CMBS
8 Days
8 Days
Non-Agency RMBS and Loans held for investment
278 Days
237 Days
We collateralize the secured financing agreements we use to finance our operations with our MBS investments and mortgage loans held in trusts controlled by us. Our counterparties negotiate a “haircut”, which is the difference expressed in percentage terms between the fair value of the collateral and the amount the counterparty will lend to us, when we enter into a financing transaction. The size of the haircut reflects the perceived risk and market volatility associated with holding the MBS by the lender. The haircut provides lenders with a cushion for daily market value movements that reduce the need for a margin call to be issued or margin to be returned as normal daily increases or decreases in MBS market values occur. At December 31, 2025, the weighted average haircut on the Company's secured financing agreements collateralized by Agency RMBS was 4.4%, Agency CMBS was 5.4%, Loans-held for sale was 7.3% and Non-Agency RMBS and Loans held for investment was 27.1%. At December 31, 2024, the weighted average haircut on the Company's secured financing agreements collateralized by Agency RMBS was 5.1%, Agency CMBS was 5.5% and Non-Agency RMBS and Loans held for investment was 26.0%.
Because the fair value of the Non-Agency MBS is more difficult to determine in current financial conditions, as well as more volatile period to period than Agency MBS, the Non-Agency MBS typically requires a larger haircut. In addition, when financing assets using the standard form of SIFMA Master Repurchase Agreements, the counterparty to the agreement typically
nets its exposure to us on all outstanding repurchase agreements and issues margin calls if movement of the fair values of the assets in the aggregate exceeds their allowable exposure to us. A decline in asset fair values could create a margin call or may create no margin call depending on the counterparty’s specific policy. In addition, counterparties consider a number of factors, including their aggregate exposure to us as a whole and the number of days remaining before the repurchase transaction closes prior to issuing a margin call. To minimize the risk of margin calls, as of December 31, 2025, we have entered into $890 million of financing arrangements for which the collateral cannot be adjusted as a result of changes in market value, minimizing the risk of a margin call as a result in price volatility. We refer to these agreements as non-MTM facilities. These non-MTM facilities generally have higher costs of financing, but lower the risk of a margin call which could result in sales of our assets at distressed prices. All non-MTM facilities are collateralized by Non-Agency RMBS collateral, which tends to have increased volatile price changes during periods of market stress. In addition we have entered into certain secured financing agreements that are not subject to additional margin requirement until the drop in fair value of collateral is greater than a threshold. We refer to these agreements as limited MTM facilities. As of December 31, 2025 we have $402 million of limited MTM facilities. We believe these non-MTM and limited MTM facilities significantly reduce our financing risks. See Note 6 to our consolidated financial statements for a discussion on how we determine the fair values of the RMBS collateralizing our secured financing agreements.
At December 31, 2025, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS was 4.0%, Agency CMBS was 4.0%, Loans held for sale was 5.84% and Non-Agency MBS and Loans held for investment was 6.4%. At December 31, 2024, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS was 4.8%, Agency CMBS was 4.8% and Non-Agency MBS and Loans held for investment was 6.8%.
We entered into a secured financing agreement during the fourth quarter of 2022 for which we have elected fair value option. We believe electing fair value for this financial instrument better reflects the transactional economics. The total principal balance outstanding on this secured financing at December 31, 2025 and December 31, 2024 was $306 million and $337 million, respectively. The fair value of collateral pledged was $360 million and $383 million as of December 31, 2025 and December 31, 2024, respectively. We carry this secured financing instrument at fair value of $299 million and $319 million as of December 31, 2025 and December 31, 2024, respectively. At December 31, 2025 and December 31, 2024, the weighted average borrowing rate on secured financing agreements at fair value was 5.0%. At December 31, 2025 and December 31, 2024, the haircut for the secured financing agreements at fair value was 7.5%. At December 31, 2025, the maturity on the secured financing agreements at fair value was two years.
The table below presents our average daily secured financing agreements balance and the secured financing agreements balance at each period end for the periods presented. Our balance at period-end tends to fluctuate from the average daily balances due to adjustments to the size of our portfolio resulting from the use of leverage. The acquisition of HomeXpress added $802 million of secured financing as of December 31, 2025 and this financing average $621 million during the quarter ending December 31, 2025.
Period
Average secured financing agreements balances
Secured financing agreements balance at period end
(dollars in thousands)
Quarter End December 31, 2025
Quarter End September 30, 2025
Quarter End June 30, 2025
Quarter End March 31, 2025
Quarter End December 31, 2024
Our secured financing agreements do not require us to maintain any specific leverage ratio. We believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2025 and December 31, 2024, the carrying value of our total interest-bearing debt was approximately $13.1 billion and $9.9 billion, respectively, which represented a leverage ratio of approximately 5.1:1 and 4.0:1, respectively. We include our secured financing agreements, long term debt, and securitized debt in the numerator of our leverage ratio and stockholders’ equity as the denominator.
At December 31, 2025, we had secured financing agreements with 20 counterparties. All of our secured financing agreements are secured by Agency MBS, Non-Agency RMBS and Loans held for investment and cash. Under these secured financing agreements, we may not be able to reclaim our collateral but will still be obligated to pay our repurchase obligations. We mitigate this risk by ensuring our counterparties are rated financial institutions. As of December 31, 2025 and December 31,
2024, we had $7.4 billion and $4.1 billion, respectively, of securities or cash pledged against our secured financing agreements obligations.
We expect to enter into new secured financing agreements at maturity; however, there is a risk that we will not be able to renew our secured financing agreements when we desire to renew them or obtain favorable interest rates and haircuts as a result of uncertainty in the market including, but not limited to, uncertainty as a result of inflation and increases in the federal funds rate. We offset the interest rate risk of our repurchase agreements primarily through the use of derivatives, which primarily consist of interest rate swaps, Swap futures, swaptions, U.S. Treasury futures and interest rate caps. The average remaining maturities on our interest rate swaps at December 31, 2025 was less than six years. All of our swaps are cleared by a central clearing house. When our interest rate swaps are in a net loss position (expected cash payments are in excess of expected cash receipts on the swaps), we post collateral as required by the terms of our swap agreements. The average remaining maturities on our Swap futures at December 31, 2025 is three years. The Swap futures are exchange traded instrument. Similar to our interest rate swaps, we post collateral when we are in a net loss position. The interest rate cap has a two-year maturity with a potential payment every ninety days from the initial settlement date. The payment is dependent upon whether the compounded average market reference rate for the ninety day period is greater than the strike rate on the interest rate cap. We will receive a payment if the difference between the two amounts is positive.
Exposure to Financial Counterparties
We actively manage the number of secured financing counterparties to reduce counterparty risk and manage our liquidity needs. The following table summarizes our exposure to our secured financing agreements counterparties at December 31, 2025:
December 31, 2025
Country
Number of Counterparties
Secured Financing Agreement
Derivative Instruments at Fair Value
Exposure (1)
(dollars in thousands)
United States
Japan
Canada
Spain
South Korea
France
United Kingdom
Total
(1) Represents the amount of securities and/or cash pledged as collateral to each counterparty less the aggregate of secured financing agreement.
HomeXpress represents $802 million of the counterparty balances and is spread among 7 counterparties. This represents 13% of the secured financing agreements as of December 31, 2025.
We regularly monitor our exposure to financing counterparties for credit risk and allocate assets to these counterparties based, in part, on the credit quality and internally developed metrics measuring counterparty risk. Our exposure to a particular counterparty is calculated as the excess collateral that is pledged relative to the secured financing agreement balance. If our exposure to our financing counterparties exceeds internally developed thresholds, we develop a plan to reduce the exposure to an acceptable level. At December 31, 2025, we had amounts at risk with Nomura of 18% of our equity related to the collateral posted on secured financing agreements. The weighted average maturities of the secured financing agreements with Nomura were 287 days. The amount at risk with Nomura was $459 million. At December 31, 2024, we had amounts at risk with Nomura of 20% of our equity related to the collateral posted on secured financing agreements. The weighted average maturities of the secured financing agreements with Nomura were 108 days. The amount at risk with Nomura was $512 million.
At December 31, 2025, we did not use credit default swaps or other forms of credit protection to hedge the exposures summarized in the table above.
Residential Origination Segment
In addition to warehouse bank covenants, we are also subject to liquidity and net worth requirements established by the FHFA for Freddie Mac seller/servicers and HUD. The FHFA and HUD have established minimum liquidity requirements and net worth requirements for their approved non-depository single-family sellers/servicers in the case of Freddie Mac and HUD:
• FHFA liquidity requirement is equal to 0.035% (3.5 basis points) of total Agency servicing UPB at the entity level plus an incremental 200 basis points of the amount by which total nonperforming Agency servicing UPB exceeds 6% of the applicable Agency servicing UPB. Allowable assets to satisfy liquidity requirement include cash and cash equivalents (unrestricted), certain investment-grade securities that are available for sale or held for trading including Agency mortgage-backed securities, obligations of Fannie Mae or Freddie Mac, and U.S. Treasury obligations, and unused and available portions of committed servicing advance lines.
• FHFA net worth requirement is a minimum net worth of $2.5 million plus 0.25% (25 basis points) of UPB at the entity level for total 1-4 unit residential mortgage loans serviced and a tangible net worth/total assets ratio greater than or equal to 6%.
• HUD net worth requirement is equal to $1.0 million plus 1% (100 basis points) of adjusted activity up to a $2.5 million net worth requirement.
These requirements are calculated based on standalone audited financial statements of HomeXpress and we are currently in compliance with the applicable Agency requirements.
Stockholders’ Equity
In January 2024, our Board of Directors updated the authorization of our share repurchase program (the “Share Repurchase Program”) to include our preferred stock and increased the authorization by $33 million back up to $250 million. Such authorization does not have an expiration date, and at present, there is no intention to modify or otherwise rescind such authorization. Shares of our common stock and preferred stock may be purchased in the open market, including through block purchases, 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 “Exchange Act”). 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. Among other factors, we intend to only consider repurchasing shares of our common stock when the purchase price is less than the last publicly reported book value per common share. 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, which sets certain restrictions on the method, timing, price and volume of stock repurchases.
We did not repurchase any of our common stock during the years ended December 31, 2025 and 2024. The approximate dollar value of shares that may yet be purchased under the Share Repurchase Program is $250 million as of December 31, 2025.
In 2022, we entered into separate Distribution Agency Agreements (the “Existing Sales Agreements”) with each of Credit Suisse Securities (USA) LLC, JMP Securities LLC, Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and RBC Capital Markets, LLC. In February 2023, we amended the Existing Sales Agreements and entered into separate Distribution Agency Agreements (together with the Existing Sales Agreements, as amended, the “Sales Agreements”) with J.P. Morgan Securities LLC and UBS Securities LLC (replacing Credit Suisse Securities LLC) to include J.P. Morgan Securities LLC and UBS Securities LLC as additional sales agents. Pursuant to the terms of the Sales Agreements, we may offer and sell shares of our common stock, having an aggregate offering price of up to $500 million from time to time in “at the market offerings” through any of the sales agents under the Securities Act of 1933. We did not issue any shares under the at-the-market sales program during the years ended December 31, 2025 and 2024. The approximate dollar value of shares that may yet be issued under our at-the-market sales program is $426 million as of December 31, 2025.
We declared dividends to Series A preferred stockholders of $12 million, or $2.00 per preferred share, during the years ended December 31, 2025 and December 31, 2024, respectively.
We declared dividends to Series B preferred stockholders of $33 million, or $2.57 per preferred share, during the year ended December 31, 2025. We declared dividends to Series B preferred stockholders of $34 million, or $2.59 per preferred share, during the year ended December 31, 2024.
We declared dividends to Series C preferred stockholders of $21 million, or $2.02 per preferred share, during the year ended December 31, 2025. We declared dividends to Series C preferred stock holders of $20 million, or $1.94 per preferred share, during the year ended December 31, 2024.
We declared dividends to Series D preferred stockholders of $20 million, or $2.50 per preferred share, during the year ended December 31, 2025. We declared dividends to Series D preferred stockholders of $20 million, or $2.55 per preferred share, during the year ended December 31, 2024.
On October 30, 2021, all 5,800,000 issued and outstanding shares of Series A Preferred Stock with an outstanding liquidation preference of $145 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date.
On March 30, 2024, all 13,000,000 issued and outstanding shares of Series B Preferred Stock with an outstanding liquidation preference of $325 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date.
On March 30, 2024, all 8,000,000 issued and outstanding shares of Series D Preferred Stock with an outstanding liquidation preference of $200 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date.
On September 30, 2025, all 10,400,000 issued and outstanding shares of Series C Preferred Stock with an outstanding liquidation preference of $260 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date.
After June 30, 2023, all LIBOR tenors relevant to us ceased to be published or became no longer representative. We believe that the federal Adjustable Interest Rate (LIBOR) Act (the “Act”) and the related regulations promulgated thereunder are applicable to each of our Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock. In light of the applicability of the Act to the aforementioned preferred stock, we believe, given all of the information available to us to date, that three-month CME Term SOFR plus the applicable tenor spread adjustment of 0.26% per annum have automatically replaced three-month LIBOR as the reference rate for calculations of the dividend rate payable on the relevant preferred stock for dividend periods from and after (i) March 30, 2024, in the case of the Series B Preferred Stock, (ii) September 30, 2025, in the case of the Series C Preferred Stock, and (iii) March 30, 2024, in the case of the Series D Preferred Stock.
Stock Based Compensation
On June 14, 2023, the Board of Directors recommended and shareholders approved, the Chimera Investment Corporation 2023 Equity Incentive Plan (the “Plan”). It authorized the issuance of up to 6,666,667 shares of our common stock for the grant of awards under the Plan (adjusted on a retroactive basis to reflect the Company's 1-for-3-reverse stock split effected on
May 21, 2024). The Plan replaced our 2007 Equity Incentive Plan, as amended and restatedeffective December 10, 2015 (the “Prior Plan”), and no new awards will be granted under the Prior Plan. Any awards outstanding under the Prior Plan will remain subject to and be paid under the Prior Plan. Any shares subject to outstanding awards under the Prior Plan that expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the Plan. Also, shares withheld for tax withholding requirements after stockholder approval of the Plan for full value awards originally granted under the Prior Plan (such as the RSUs and PSUs awarded to our named executive officers) will automatically become available for issuance under the Plan.
As of December 31, 2025, approximately 4 million shares were available for future grants under the Plan.
Awards under the Plan may include stock options, stock appreciation rights, restricted stock, dividend equivalent rights (“DERs”) and other share-based awards (including RSUs). Under the Plan, any of these awards may be performance awards that are conditioned on the attainment of performance goals.
The Compensation Committee had previously approved a Stock Award Deferral Program (the “Deferral Program”). The Deferral Program consisted of two distinct non-qualified deferred compensation plans within the meaning of Section 409A of the Code, as amended, one for non-employee directors (the “Director Plan”) and one for certain executive officers (the “Executive Officer Plan”). Under the Deferral Program, non-employee directors and certain executive officers could elect to defer payment of certain stock awards made pursuant to the Plan. Deferred awards are treated as deferred stock units and paid at the earlier of separation from service or a date elected by the participant who is separating. Payments are generally made in a lump sum or, if elected by the participant, in five annual installments. Deferred awards receive dividend equivalents during the deferral period in the form of additional deferred stock units. Amounts are paid at the end of the deferral period by delivery of shares from the Plan (plus cash for any fractional deferred stock units), less any applicable tax withholdings. Deferral elections do not alter any vesting requirements applicable to the underlying stock award. On November 5, 2024, the Compensation Committee irrevocably terminated the Executive Officer Plan and suspended new deferral elections under the Director Plan. The Executive Officer Plan was liquidated as of November 30, 2025, and all amounts outstanding under the Executive Officer Plan on the liquidation date were paid at that time in accordance with applicable tax rules. All deferrals previously made under the Director Plan will remain outstanding, and all deferrals pursuant to prior elections made by directors will be paid on the originally scheduled payment dates. At December 31, 2025 and December 31, 2024, there are approximately 92 thousand and 124 thousand shares for which payments have been deferred until separation or a date elected by the participant, respectively. At December 31, 2025 and December 31, 2024, there are approximately 269 thousand and 229 thousand DERs earned but not yet delivered, respectively.
Grants of RSUs
During the year ended December 31, 2025 and 2024, we granted RSU awards to senior management, employees and directors. These RSU awards are designed to reward our senior management, employees and directors for services provided to us. Generally, the RSU aw ards vest equally over a three-year period and will fully vest after three years. For employees who are retirement elig ible, defined as years of service to us plus age that is equal to or greater than 65, the service period is considered to be fulfilled and all grants are expensed immediately. For senior management who are retirement eligible, defined as having attained age 55 and the sum of his or her age plus his or her years of service is equal or greater than 65, the service period is considered to be fulfilled and all grants are expensed immediately. The RSU awards are valued at the market price of our common stock on the grant date and generally the employees must be employed by us on the vesting dates to receive the RSU awards. We granted 1 million RSU awards during the year ended December 31, 2025 with a grant date fair value of $16 million which includes stock grants to both Chimera and HomeXpress employees for the 2025 performance year. We granted 245 thousand RSU awards during the year ended December 31, 2024 with a grant date fair value of $5 million for the 2024 performance year.
In addition, in connection with the HomeXpress Acquisition, the Compensation Committee adopted the Award Plan, pursuant to which we reserved 540,000 shares of Chimera’s common stock, $0.01 par value per share for issuance under the Award Plan solely to individuals who were not previously employees of Chimera or any subsidiary of Chimera (or who are returning to employment following a bona fide period of interruption of employment with Chimera), in accordance with NYSE Listed Company Manual Rule 303A.08. The Award Plan was approved by the Compensation Committee without shareholder approval pursuant to NYSE Listed Company Manual Rule 303A.08. The Compensation Committee also adopted a form of restricted stock unit award agreement for use with the Award Plan. We issued restricted stock units to certain employees of HomeXpress as a material inducement for such employees to continue their employment with HomeXpress following the completion of the HomeXpress Acquisition. In connection with this transaction, stock-based compensation expense of $7 million will be recognized on a straight-line basis over the three-year vesting period as it relates to the HomeXpress Acquisition.
Grants of Performance Share Units (“PSUs”)
PSU awards are designed to align compensation with the Company’s future performance. The PSU awards granted during the year ended December 31, 2025 and 2024, include a three-year performance period ending on December 31, 2027 and December 31, 2026, respectively. For the PSU awards granted during the year ended December 31, 2025, and 2024, the final number of shares awarded will be between 0% and 200% of the PSUs granted based equally on the Company Economic Return and share price performance compared to a peer group. Our three-year Company Economic Return is equal to the Company’s change in book value per common share plus common stock dividends. Share price performance equals change in share price plus common stock dividends. Compensation expense will be recognized on a straight-line basis over the three-year vesting period based on an es timate of our Economic Return and share price performance in relation to the entities in the peer group and will be adjusted each period based on our best estimate of the actual number of shares awarded. For the year ended December 31, 2025, we granted 296 thousand PSU awards to senior management with a grant date fair value of $4 million. For the year ended December 31, 2024, we granted 179 thousand PSU awards to senior management with a grant date fair value of $3 million.
We recognized stock-based compensa tion expense of $11 million which includes stock grants to both Chimera and HomeXpress employees for the year ended December 31, 2025. We recognized stock-based compensation expense of $8 million for the year ended December 31, 2024.
At December 31, 2025 and December 31, 2024, there were approximately $2 million and $1 million, respectively, unvested shares of RSUs and PSUs issued to our employees and directors.
Capital Raising Activity
During the third quarter of 2025, we issued $120 million aggregate principal amount (including the additional amount issued pursuant to the exercise of the over-allotment option) of 8.875% Senior Notes due 2030 that pay quarterly interest. After deducting the underwriting discount and other debt issuance costs we received approximately $116 million of proceeds. While we continue to favor securitized debt as a source of financing for our assets, the ability to issue unsecured debt helps us to further diversify our capital structure and provides long-term financing to support our investment activities
Contractual Obligations and Commitments
The following tables summarize our contractual obligations at December 31, 2025 and December 31, 2024. The estimated principal repayment schedule of the securitized debt is based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for expected principal write-downs on the underlying collateral of the debt. The acquisition of HomeXpress added $802 million of uncommitted secured financing agreements that mature within one year.
December 31, 2025
(dollars in thousands)
Contractual Obligations
Within One Year
One to Three Years
Three to Five Years
Greater Than or Equal to Five Years
Total
Secured financing agreements
Securitized debt, collateralized by Non-Agency RMBS
Securitized debt at fair value, collateralized by Loans held for investment
Interest expense on MBS secured financing agreements (1)
Interest expense on securitized debt (1)
Total
(1) Interest is based on variable rates in effect as of December 31, 2025.
December 31, 2024
(dollars in thousands)
Contractual Obligations
Within One Year
One to Three Years
Three to Five Years
Greater Than or Equal to Five Years
Total
Secured financing agreements
Securitized debt, collateralized by Non-Agency RMBS
Securitized debt at fair value, collateralized by Loans held for investment
Interest expense on MBS secured financing agreements (1)
Interest expense on securitized debt (1)
Total
(1) Interest is based on variable rates in effect as of December 31, 2024.
Not included in the tables above are the unfunded construction loan commitments of $3 million and $5 million as of December 31, 2025 and December 31, 2024. We expect the majority of these commitments will be paid within one year and are reported under Payable for investments purchased in our Consolidated Statements of Financial Condition.
We have made a $75 million capital commitment to a fund managed by Kah Capital Management, LLC. During the quarter and year ended December 31, 2025, we funded an additional $637 thousand towards that commitment, which brought the total funding to $57 million, leaving an unfunded commitment of $18 million.
Capital Expenditure Requirements
At December 31, 2025 and December 31, 2024, we had no material commitments for capital expenditures.
Dividends
To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income (subject to certain adjustments). Before we pay any dividend, we must first meet any operating requirements and scheduled debt service on our financing facilities and other debt payable.
Critical Accounting Estimates
Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with GAAP requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. Our significant accounting policies and accounting estimates are described in Note 2 to the consolidated financial statements. Critical accounting policies are described in this section. An accounting policy is considered critical if it requires management to make assumptions or judgments about matters that are highly uncertain at the time the accounting estimate was made or require significant management judgment in interpreting the accounting literature. If actual results differ from our judgments and assumptions, or other accounting judgments were made, this could have a significant and potentially adverse impact on our financial condition, results of operations and cash flows.
The accounting policies and estimates which we consider most critical relate to the recognition of revenue on our investments, including recognition of any losses, and the determination of fair value of our financial instruments. The consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities (“VIEs”) for which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.
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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially adversely impact our results of operations and our financial condition. Management has made significant estimates in several areas, including current expected credit losses of Non-Agency RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS, forward interest rates for interest rate swaps, and income recognition on Loans held for investments, Non-Agency RMBS, goodwill, intangibles and contingent earn-out liability. Actual results could differ materially from those estimates.
Recognition of Revenue
We primarily invest in pools of mortgage loans. All mortgage loans are carried at fair value with changes in fair value recognized in earnings. Our investments in mortgage loans pay principal and interest which is accrued when due. We also invest in MBS representing interests in obligations backed by pools of mortgage loans. Our investments in MBS includes investments in both Agency MBS and Non-Agency MBS. We delineate between (1) Agency MBS and (2) Non-Agency RMBS. The Agency MBS are mortgage pass-through certificates, CMOs, and other RMBS representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed as to principal and/or interest repayment by agencies of the U.S. Government or federally chartered corporations such as Ginnie Mae, Freddie Mac or Fannie Mae. The Non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and are therefore subject to credit risk. We also invests in IO MBS strips which represent our right to receive a specified proportion of the contractual interest flows of the collateral.
Income on our investments is recognized based on an effective interest rate we expect to earn over the life of the investment. The effective interest rate is determined based on the cost of the investment and the expectation of future cash flows. To determine the future cash flows, we estimate the amount and timing of principal and interest, referred to as the repayment rate, and our expectations of defaults on payments of principal and interest. These estimates require significant judgment which change over time as our expectations change due to changes in market conditions and changes in our investments as principal and interest, other cash flows or losses are experienced. These estimates are compared to actual results of the investment and other similar investments on a regular basis and updated as necessary. These comparisons may result in a favorable or unfavorable change in the effective interest rate expected to be collected. Any favorable or unfavorable changes are reflected as a change in income. Our estimates of the timing and amount of principal and interest, including our expectation of defaults on payments of principal and interest are critical to accurately reporting interest income.
Our accounting policies for recognition of interest income and current expected credit losses related to MBS investments are described in further detail in Note 2 of the consolidated financial statements.
Revenue derived from our origination activities includes certain fees collected at the time of origination and gain or loss from the sale of LHFS. Loan origination income reflects the fees earned, net of lender credits from originating the loans. These consist of fees related to loan origination, discount points, underwriting, processing and other fees. Lender credits typically are related to rebates or concessions for certain loan origination costs.
Determination of Fair Value
Substantially all of our investments are carried at fair value. In accordance with current accounting guidance, fair value of our financial instruments represents 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 financial statement reporting date. We use internally developed models to determine fair value of our investments.
We determine the fair value of all of our Non-Agency RMBS investment securities, including Non-Agency represented as securitized debt, based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, repayment speeds, expected losses, expected lossseverity, discount rates and other factors. Estimates of repayment speeds, expected losses and expected lossseverity, require significant judgment and are based on what we believe a market participant would use to determine the cash flows. To corroborate that the estimates of fair values generated by these internal models are
reflective of current market prices, we compare the fair values generated by the model to non-binding independent prices provided by an independent third-party pricing services.
We estimate the fair value of our Loans held for investment consisting of seasoned subprime residential mortgage loans on a loan-by-loan basis using an internally developed model which compares the loan held by us with a loan currently offered in the market. The loan price is adjusted in the model by considering the loan factors which would impact the value of a loan. These loan factors include loan coupon as compared to coupon currently available in the market, FICO, LTV ratios, delinquency history, owner occupancy, and property type, among other factors. A baseline is developed for each significant loan factor and adjusts the price up or down depending on how that factor for each specific loan compares to the baseline rate. Generally, the most significant impact on loan value is the loan interest rate as compared to interest rates currently available in the market and delinquency history. The determination of the baseline and the market expectation, requires significant judgment. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, we compare the fair values generated by the model to non-binding independent prices provided by an independent third-party pricing service.
To the extent the inputs used to estimate fair value are observable, the values would be categorized in Level 2 of the fair value hierarchy; otherwise they would be categorized as Level 3. Our fair value estimation process utilizes inputs other than quoted prices that are observed in the market. Our estimates are deemed to be significant to the fair value measurement process, which renders the resulting Non-Agency fair value estimates Level 3 inputs in the fair value hierarchy. Level 3 assets represent approximately 70% of total assets measured at fair value on a recurring basis as of December 31, 2025 and 2024, respectively. Level 3 liabilities represent approximately 96% of total liabilities measured at fair value on a recurring basis as of December 31, 2025 and 2024, respectively.
Loans Held for Sale
LHFS are measured and reported at fair value. Our fair value election for its LHFS is intended to more accurately reflect the underlying economics of our operations. With the election of the fair value option for LHFS, loan origination fees, and the related direct loan origination costs associated with the origination of LHFS, are earned and expensed as incurred, respectively.
Interest Rate Lock Commitments
Interest rate lock commitments do not trade in an active market. Accordingly, the Company estimates the fair value of IRLCs based on the price an investor would be expected to pay to acquire such commitments, using current secondary market pricing for mortgage loans with similar characteristics.
The valuation incorporates observable market inputs, including loan type, underlying loan balance, borrower credit score, LTV ratio, note rate, loan program, expected loan sale date, and prevailing market conditions. The estimated fair value is adjusted at the individual loan level to reflect the servicing release premium, investor-specific pricing adjustments applicable to each loan, and the estimated direct costs required to convert the IRLC into a funded loan.
The resulting base value is further adjusted for the anticipated pull-through rate, which represents the probability that a locked loan will ultimately fund. The anticipated pull-through rate is an unobservable input derived from our historical funding experience and current pipeline characteristics. An increase in the anticipated pull-through rate results in an increase in the estimated fair value of IRLCs, while a decrease in the anticipated pull-through rate results in a decrease in estimated fair value. Due to the significance of this unobservable input, IRLCs are classified as Level 3 within the fair value hierarchy.
Our accounting policies for the determination of fair value of our investments are described in further detail in Note 2 and Note 7 of the consolidated financial statements.
VIEs
VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs’ that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design of the VIE.
Our Consolidated Statements of Financial Condition contain the assets and liabilities related to 36 consolidated variable interest entities or VIEs. Due to the non-recourse nature of these VIEs our net exposure to loss from investments in these entities is limited to our retained beneficial interests.
At December 31, 2025, we consolidated 34 residential mortgage loan securitizations and 2 RMBS re-securitization transactions which are VIEs. The residential mortgage loan securitizations contain jumbo prime and Non-QM residential mortgage loans. The RMBS re-securitization transactions contain Non-Agency RMBS comprised of primarily first lien mortgages of 2005-2007 vintages.
Our determination to consolidate these 36 VIEs was significantly influenced by management’s judgment related to the activities that most significantly impact the economic performance of these entities and the identification of the party with the power over such activities. For the residential mortgage loan securitizations, we determined that our ability to remove the servicer without cause resulted in us having the power that most significantly impacts the economic performance of the VIE. For the three consolidated RMBS re-securitization transactions, we determined that no party has power over any ongoing activities of the entities and therefore the determination of the primary beneficiary should be based on involvement with the initial design of the entity. Since we transferred the RMBS to the securitization entities, we determined we had the power over the design of the entity, which resulted in us being considered the primary beneficiary. This determination was influenced by the amount of economic exposure to the financial performance of the entity and required a significant management judgment in determining that we should consolidate these three entities.
Due to the consolidation of these VIEs, our actual ownership interests in the securitization and re-securitizations have been eliminated in consolidation and the Consolidated Statements of Financial Condition reflect both the assets held and non-recourse debt issued to third parties by these VIEs. In addition, our operating results and cash flows include the gross amounts related to the assets and liabilities of the VIEs as opposed to the actual economic interests we own in these VIEs. Our interest in these VIEs is restricted to the beneficial interests we retained in these transactions. We are not obligated to provide any financial support to these VIEs.
Our Consolidated Statements of Financial Condition separately present: (i) our direct assets and liabilities, and (ii) the assets and liabilities of our consolidated securitization vehicles net of intercompany eliminations representing securities from the securitization trusts retained by us. Assets of all consolidated VIEs can only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us.
We have aggregated all the assets and liabilities of the consolidated securitization vehicles due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful. The notes to our consolidated financial statements describe our direct assets and liabilities and the assets and liabilities of our consolidated securitization vehicles. See Note 10 to our consolidated financial statements for additional information related to our investments in VIEs.
Recent Accounting Pronouncements
Refer to Note 2 in the Notes to consolidated financial statements for a discussion of accounting guidance we have recently adopted or expect to be adopted in the future.
