Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
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PART I
Item 1. Business
Except where the context suggests otherwise, references in this Annual Report on Form 10-K to "EFC," "we," "us," and "our" refer to Ellington Financial Inc. and its consolidated subsidiaries, including Ellington Financial Operating Partnership LLC, our operating partnership subsidiary, which we refer to as our "Operating Partnership." References in this Annual Report on Form 10-K to (1) "common shares" refer to shares of our common stock, $0.001 par value per share and (2) "common stockholders" refer to holders of shares of our common stock. We conduct all of our operations and business activities through our Operating Partnership. Our "Manager" refers to Ellington Financial Management LLC, our external manager, "Ellington" refers to Ellington Management Group, L.L.C. and its affiliated investment advisory firms, including our Manager, and "Manager Group" refers collectively to officers and directors of EFC, and partners and affiliates of Ellington (including families and family trusts of the foregoing). In certain instances, references to our Manager and services to be provided to us by our Manager may also include services provided by Ellington and its other affiliates from time to time .
Special Note Regarding Forward-Looking Statements
When used in this Annual Report on Form 10-K, in future filings with the Securities and Exchange Commission, or the "SEC," or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as "believe," "expect," "anticipate," "estimate," "project," "plan," "continue," "intend," "should," "would," "could," "goal," "objective," "will," "may," "seek," or similar expressions or their negative forms or references to strategy, plans or intentions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the "Securities Act," and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act," and, as such, may involve known and unknown risks, uncertainties, and assumptions.
Forward-looking statements are based on our beliefs, assumptions, and expectations of our future operations, business strategies, performance, financial condition, liquidity and prospects, taking into account information currently available to us. These beliefs, assumptions, and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, results of operations and strategies may vary materially from those expressed or implied in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-looking statements: changes in interest rates and the market value of our securities or our investments; market volatility; changes in the prepayment rates on the mortgage loans owned by us, or underlying the securities owned by us; increased rates of default and/or decreased recovery rates on our assets; our ability to borrow to finance our assets and the available terms for such borrowings; changes in government regulations affecting our business; our ability to maintain our exclusion from registration under the Investment Company Act of 1940, as amended (the "Investment Company Act"); our ability to maintain our qualification as a real estate investment trust ("REIT"); and risks associated with investing in real estate assets, including changes in business conditions and the general economy such as changes to fiscal or monetary policy, heightened inflation, growth or , and currency fluctuations. These and other risks, uncertainties and factors, including the risk factors described under Item 1A of this Annual Report on Form 10-K, could cause our actual results to differ materially from those projected or implied in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Our Company
We are a Delaware corporation operating as a real estate investment trust ("REIT") and are listed on the New York Stock Exchange ("NYSE") under the symbol “EFC.” We were formed in July 2007 and became a publicly traded company following our initial public offering in October 2010.
We employ a credit-focused investment strategy and manage a diversified portfolio totaling approximately $4.9 billion as of December 31, 2025. Our primary objective is to generate attractive risk-adjusted total returns for our stockholders by making investments that we believe appropriately compensate us for the risks we assume. Our strategic focus is on residential and commercial mortgage loan investments, sourced through a diverse array of loan origination channels, including certain affiliated loan originators. We opportunistically invest in both loans and securities. Through Longbridge Financial LLC (“Longbridge”), a wholly-owned and consolidated subsidiary of our Operating Partnership, we are also in the business of originating, servicing, and investing in reverse mortgage loans.
We are externally managed and advised by our Manager, an affiliate of Ellington, which is responsible for administering our business activities and day-to-day operations. Pursuant to a services agreement between our Manager and Ellington, our Manager relies on Ellington’s personnel and infrastructure to support our operations. Most members of our executive management team also serve as officers of our Manager and Ellington.
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We intend to maintain our qualification to be taxed as a REIT for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”). Provided that we maintain our qualification as a REIT, we generally will not be subject to U.S. federal, state, and local income tax on our REIT taxable income that is currently distributed to our stockholders, so long as we distribute at least 90% of our REIT taxable income (excluding net capital gains) to our stockholders by prescribed dates and comply with various other requirements. Any taxes paid by a taxable REIT subsidiary (“TRS”) will reduce the cash available for distribution to our stockholders.
We acquire and manage mortgage-related, consumer-related, corporate-related, and other financial assets, including those listed below. For a more detailed description of our targeted asset classes, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Targeted Asset Classes."
• Agency RMBS, including (i) whole pool pass-through certificates; (ii) partial pool pass-through certificates; and (iii) agency collateralized mortgage obligations ("CMOs"), including interest only securities ("IOs"), principal only securities ("POs"), and inverse interest only securities ("IIOs");
• CMBS and Commercial Mortgage Loans, including (i) CMBS; (ii) CLOs backed by commercial mortgage loans ("CRE CLOs"); and (iii) commercial mortgage loans and other commercial real estate debt;
• Consumer Loans and ABS, including (i) consumer loans; (ii) ABS backed by consumer loans; (iii) ABS backed by Small Business Administration ("SBA") loans, including IOs backed by SBA loans; and (iv) retained tranches from securitizations to which we have contributed assets;
• Corporate CLOs, including (i) corporate CLO debt and equity tranches; and (ii) investments in CLO loan accumulation facilities;
• Mortgage-Related Derivatives, including (i) To-Be-Announced mortgage pass-through certificates ("TBAs"); (ii) credit default swaps ("CDS") on individual RMBS, on the CMBX and other mortgage-related indices; and (iii) other mortgage-related derivatives;
• Non-Agency RMBS, including: (i) RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, and subprime mortgages; (ii) RMBS backed by fixed rate mortgages, Adjustable rate mortgages ("ARMs"), Option-ARMs, and Hybrid ARMs; (iii) RMBS backed by mortgages on single-family-rental properties; (iv) RMBS backed by first-lien and second-lien mortgages; (v) RMBS backed by performing and non-performing mortgages; (vi) investment grade and non-investment grade securities; (vii) senior and subordinated securities; (viii) IOs, POs, IIOs, and inverse floaters; (ix) collateralized debt obligations ("CDOs"); (x) RMBS backed by European residential mortgages ("European RMBS"); (xi) retained tranches from securitizations in which we have participated; and (xi) credit risk transfer securities ("CRTs");
• Residential mortgage loans, including: (i) residential mortgage loans that are not deemed "qualified mortgage" loans under the rules of the Consumer Financial Protection Bureau ("non-QM loans"); (ii) residential "transition loans," such as residential bridge loans and residential "fix-and-flip" loans; (iii) residential non-performing mortgage loans ("NPLs"); (iv) re-performing loans ("RPLs"), which generally are loans that were modified and/or formerly NPLs where the borrower has resumed making payments in some form or amount; (v) residential mortgage loans that meet the criteria for inclusion in an Agency securitization ("Agency-eligible residential mortgage loans"); (vi) retained tranches from securitizations to which we have contributed assets; (vii) reverse mortgage loans; (viii) closed-end second lien mortgage loans; and (ix) home equity line of credit loans ("HELOCs");
• Strategic investments, including strategic equity and/or debt investments in loan originators, loan servicers, and mortgage-related entities;
• Other investments, including: (i) Mortgage servicing rights ("MSRs") and MSR-related investments; (ii) real estate, including commercial and residential real property; (iii) corporate debt and equity securities and corporate loans; (iv) non-mortgage-related derivatives; and (v) IO strips backed by small business administration loans.
Our loan investments include performing, non-performing, and sub-performing loans. We also invest in the debt and/or equity of other entities engaged in loan-related businesses, such as loan originators and mortgage-related entities. In connection with our investments in loan originators, we may enter into flow agreements that will allow us to purchase loans from those originators in accordance with the parameters set forth in the applicable flow agreement.
In addition, we may from time to time acquire real property.
We also opportunistically utilize derivatives and other hedging instruments to hedge our interest rate risk, yield spread risk, credit risk, and foreign currency risk.
We have two reportable operating segments, which we refer to as the Investment Portfolio Segment and the Longbridge Segment.
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Longbridge is primarily engaged in the business of originating, purchasing, selling and servicing reverse mortgage loans, including home equity conversion mortgage loans, or "HECM loans." Longbridge maintains its corporate office in Paramus, New Jersey, with branch offices in multiple states. Longbridge is approved as a Title II, non-supervised direct endorsement mortgagee with the U.S. Department of Housing and Urban Development, or "HUD." In addition, Longbridge is an approved issuer of Ginnie Mae HECM-backed securities, or "HMBS." Longbridge also originates and services non-FHA guaranteed proprietary reverse mortgage loan products, typically jumbo loans (i.e., loans with balances exceeding FHA limits), and other loan products.
On December 14, 2023, we completed the merger between Arlington Asset Investment Corp., a Virginia corporation ("Arlington"), and our subsidiary EF Merger Sub Inc. (the "Arlington Merger"), through which we increased our capital base and added a portfolio of investments and borrowings that we believe were complementary to our existing investment portfolio and liability structure.
Our Manager and Ellington
We are externally managed and advised by our Manager, an affiliate of Ellington, pursuant to a management agreement. Our Manager was formed solely to serve as our manager and does not have any other clients. In addition, our Manager currently does not have any employees and instead relies on the employees of Ellington to perform its obligations to us. Ellington is an investment management firm and registered investment advisor with an over 30-year history of investing in a broad spectrum of mortgage-backed securities, or "MBS," and related derivatives.
The members of our management team include Michael Vranos, founder and Chief Executive Officer of Ellington, who serves as our Co-Chief Investment Officer; Laurence Penn, Vice Chairman and Chief Operating Officer of Ellington, who serves as our Chief Executive Officer and President and a member of our Board of Directors; Mark Tecotzky, Vice Chairman - Co-Head of Credit Strategies of Ellington, who serves as our Co-Chief Investment Officer; JR Herlihy, a Managing Director of Ellington, who serves as our Chief Financial Officer; Christopher Smernoff, who serves as our Chief Accounting Officer; Daniel Margolis, General Counsel of Ellington, who serves as our General Counsel; Vincent Ambrico, who serves as our Controller; and Alaael-Deen Shilleh, Associate General Counsel of Ellington, who serves as our Associate General Counsel and Secretary. Each of these individuals is an officer of our Manager.
Our Manager is responsible for administering our business activities and day-to-day operations and, pursuant to a services agreement between our Manager and Ellington, relies on the resources of Ellington to support our operations. Ellington has well-established portfolio management resources for our targeted asset classes and an established infrastructure supporting those resources. Through our relationship with our Manager, we benefit from Ellington's highly analytical investment processes, broad-based deal flow, extensive relationships in the financial community, financial and capital structuring skills, investment surveillance database, and operational expertise. For example, Ellington's analytic approach to the investment process involves the collection of substantial amounts of data regarding historical performance of MBS collateral and MBS market transactions. Ellington analyzes this data to identify possible relationships and trends and develops financial models used to support our investment and risk management process. In addition, over its long investing history, Ellington has developed strong relationships with a wide array of dealers and other market participants, providing it with access to a broad range of trading opportunities and market information. As a result, Ellington provides us with access to a wide variety of asset acquisition and disposition opportunities and information that assist us in making asset management decisions across our targeted asset classes, which we believe provides us with a significant competitive . We also from Ellington's finance, accounting, operational, legal, compliance, and administrative functions.
As of December 31, 2025, Ellington had over 170 employees and had assets under management of approximately $20.1 billion.
Our Strategy
We utilize an opportunistic strategy to seek to generate attractive, risk-adjusted returns. We pursue value across various types of mortgage-related, consumer-related, corporate-related, and other financial assets, through investments primarily in loans and securities.
Our strategy is adaptable to changing market environments, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and maintaining our exclusion from registration as an investment company under the Investment Company Act. As a result, although we currently focus on the targeted assets described in the section captioned "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Our Targeted Asset Classes," our acquisition and management decisions depend on prevailing market conditions and our targeted asset classes may vary over time in response to market conditions. We may engage in a high degree of trading volume as we implement our strategy. Our Manager is authorized to follow very broad investment guidelines and, as a result, we cannot predict our portfolio composition. We expect to continue to hold certain of our assets through one or more domestic taxable REIT subsidiaries, or "TRSs." As a
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result, a portion of the income from such assets will be subject to U.S. federal and state corporate income tax. We may change our strategy and policies without a vote of our stockholders. Moreover, although our independent directors may periodically review our investment guidelines and our portfolio, they generally do not review our proposed asset acquisitions or asset management decisions.
We believe that Ellington's capabilities allow our Manager to identify attractive assets, value these assets, monitor and forecast the performance of these assets, and opportunistically hedge our risk with respect to these assets. Ellington's continued emphasis on and development of proprietary credit, interest rate, and prepayment models, as well as other proprietary research and analytics, underscores the importance it places on a disciplined and analytical approach to fixed income investing. In addition, Ellington's analytical and financial resources can help support the loan origination companies in which we have strategic investments. For example, we can provide these companies with a reliable outlet for their production, help enhance their underwriting guidelines, help improve the terms and stability of their financing sources, and help boost their overall visibility in the marketplace. In these ways, we leverage Ellington's skills and resources to seek to meet our investment objectives.
With respect to structured products including MBS, Ellington seeks investments across a wide range of sectors without any restriction as to ratings, structure, or position in the capital structure. Over time and through market cycles, opportunities will present themselves in varying sectors and in varying forms. By rotating between and allocating among various sectors of the structured product markets and, subject to maintaining our qualification as a REIT, adjusting the extent to which it hedges, Ellington believes that it is able to capitalize on the disparities between these sectors as well as on overall trends in the marketplace, and therefore provide better and more consistent returns for its investors. Disparities between sectors vary from time to time and are driven by a combination of factors. For example, as various structured product sectors fall in and out of favor, the relative yields that the market demands for those sectors may vary. In addition, Ellington's performance projections for certain sectors may differ from those of other market participants and such disparities will naturally cause us, from time to time, to gravitate towards certain sectors and away from others. Disparities between structured product sectors and individual securities within such sectors may also be driven by differences in collateral performance (for example, loans originated during certain periods of time when underwriting standards were generally stricter may on average perform than loans originated during other times) and in the structure of particular investments (for example, in the timing of cash flows or the level of credit ), and our Manager may believe that other market participants are or the value of these differences. Furthermore, we believe that risk management, including portfolio hedging and prudent financing and liquidity management, is essential for consistent generation of , risk-adjusted total returns across market cycles.
With respect to loans, we have tended to focus on underserved, niche market segments where inefficiencies exist, and where the segment's size or complexity could present a barrier to entry. Ellington uses its deep network of industry relationships, including the loan originators in which we have invested, to source new loan investments. These relationships have generated a regular flow of investment opportunities from diversified sources, including flow agreements with certain loan originators, including those in which we have invested. By investing opportunistically in both loans and securities, as well as in loan originators, we believe that we are able to achieve attractive diversification and can take advantage of relative value across investment classes.
We believe that our Manager is uniquely qualified to implement our strategy. Our strategy is consistent with Ellington's investment approach, which is based on its distinctive strengths in sourcing, analyzing, trading, and hedging complex structured products and loans. Furthermore, we believe that Ellington's extensive experience in buying, selling, analyzing, and structuring fixed income securities and loans, coupled with its broad access to market information and trading flows, provides us with a steady flow of opportunities to acquire assets with favorable trade executions.
In executing our strategies, subject to maintaining our qualification as a REIT, we employ a wide variety of hedging instruments and derivative contracts. See "—Risk Management" below.
Investment Process
Our investment process benefits from the resources and professionals of our Manager and Ellington. The process is managed by an investment and risk management committee, which includes, among others, the following three officers of our Manager: Mr. Vranos, Mr. Penn, and Mr. Tecotzky. These officers of our Manager also serve as our Co-Chief Investment Officer, Chief Executive Officer, and Co-Chief Investment Officer, respectively. The investment and risk management committee operates under investment guidelines and meets periodically to develop a set of preferences for the composition of our portfolio. The primary focus of the investment and risk management committee, as it relates to us, is to review and approve our investment policies and our portfolio holdings and related compliance with our investment policies and guidelines, and to give guidance and oversight to the various investment teams that make our day-to-day investment decisions. The investment and risk management committee has authority delegated by our Board of Directors to authorize transactions consistent with our
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investment guidelines.
Ellington has focused investment teams for many of our targeted asset classes. Our asset acquisition process includes sourcing and screening of asset acquisition opportunities, credit analysis, due diligence, structuring, financing, and hedging, each as appropriate, to seek attractive total returns commensurate with our risk tolerance. Our asset acquisition process is also informed by our objective to maintain our exclusion from registration as an investment company under the Investment Company Act, and to maintain our qualification as a REIT for U.S. federal income tax purposes.
Valuation of Assets
Our Manager's valuation committee directs our valuation process, which is also subject to the oversight of our independent directors. See Note 2 of the notes to consolidated financial statements included in this report for a discussion of our valuation process.
Risk Management
Risk management is a cornerstone of Ellington's portfolio management process. Ellington's risk management infrastructure system includes "ELLiN," a proprietary portfolio management system used by all departments at Ellington, including trading, research, risk management, finance, operations, accounting, and compliance. We benefit from Ellington's comprehensive risk management infrastructure and ongoing assessment of both portfolio and operational risks. In addition, we utilize derivatives and other hedging instruments to opportunistically hedge our credit risk, yield spread risk, interest rate risk, and foreign currency risk.
Interest Rate Hedging
We opportunistically hedge our interest rate risk by using various hedging strategies to mitigate such risks, subject to maintaining our qualification as a REIT and our exclusion from registration as an investment company under the Investment Company Act. The interest rate hedging instruments that we use and may use in the future include, without limitation:
• To-Be-Announced mortgage pass-through certificates, or "TBAs";
• interest rate swaps (including floating-to-fixed, fixed-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable);
• collateralized mortgage obligations, or "CMOs";
• U.S. Treasury securities;
• swaptions, caps, floors, and other derivatives on interest rates;
• futures and forward contracts; and
• options on any of the foregoing.
Credit Risk Hedging
Subject to maintaining our qualification as a REIT, we enter into credit-hedging positions in order to protect against adverse credit events with respect to certain of our credit assets. Our credit hedging portfolio can vary significantly from period to period, and can encompass a wide variety of financial instruments, including corporate debt or equity-related instruments, RMBS or CMBS-related instruments, or instruments involving other markets. Our hedging instruments can include both "single-name" instruments (i.e., instruments referencing one underlying entity or security) and hedging instruments referencing indices. We also opportunistically overlay our credit hedges with certain relative value long/short positions involving the same or similar instruments.
Foreign Currency Hedging
To the extent we hold instruments denominated in currencies other than U.S. dollars, we may enter into transactions to offset the potential adverse effects of changes in currency exchange rates, subject to maintaining our qualification as a REIT. In particular, we may use currency forward contracts and other currency-related derivatives to mitigate this risk.
Our Financing Strategies and Use of Leverage
We finance our assets with what we believe to be a prudent amount of leverage, the level of which varies from time to time based upon the particular characteristics of our portfolio, availability of financing, and market conditions. As of December 31, 2025, the majority of our recourse borrowings consisted of repurchase agreements, or "repos." Currently, the majority of our repos are collateralized by residential mortgage loans. In a repo, we sell an asset to a counterparty at a discounted value, or the "Loan Amount," and simultaneously agree to repurchase the same asset from such counterparty at a specified later date at a price equal to the Loan Amount plus an interest charge. Despite being legally structured as sales and
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subsequent repurchases, repos are accounted for as collateralized borrowings under U.S. Generally Accepted Accounting Principles, or "U.S. GAAP." During the term of a repo, we generally receive the income and other payments distributed with respect to the underlying assets, and pay interest to the counterparty. While the proceeds of our repo financings are often used to purchase the assets subject to the transaction, our financing arrangements do not restrict our ability to use proceeds from these arrangements to support our other liquidity needs. Our repo arrangements on securities are documented under the Securities Industry and Financial Markets Association's, or "SIFMA's," standard form master repurchase agreement with the ability for both parties to demand margin (i.e., to demand that the other party post additional collateral or repay a portion of the funds advanced) should the value of the underlying assets and posted collateral change. Our repo arrangements on loans are governed by master repurchase agreements that are negotiated and customized facilities, with customized terms governing such matters as termination/principal amortization, advance rates, calculation of market value, and the rules for margin demands or declines in advance rates. As the value of our collateral fluctuates, under most of our master repurchase agreements, we and our repo counterparties are required to post additional collateral to each other from time to time as part of the normal course of our business. Our repo financing counterparties generally have the right, to varying degrees, to determine the value of the underlying collateral for margining purposes, subject to the terms and conditions of our agreement with the counterparty.
In addition to using repos to finance many of our assets, we have also entered into securitization transactions and secured borrowing facilities to finance other assets. For those secured financings, other than repos, for which the associated transfer of assets is not accounted for as a sale, the associated borrowings are included under the captions Other secured borrowings and Other secured borrowings, at fair value, on our Consolidated Balance Sheet. In addition, we have issued senior notes, or "Senior Notes," that are unsecured and are effectively subordinated to our secured indebtedness, to the extent of the value of the collateral securing such indebtedness.
Finally, we have also raised equity capital to finance acquisitions of our assets, including through public offerings of our common and preferred stock, and as a result of the Arlington Merger, where we issued additional shares of our common and preferred stock in exchange for Arlington common and preferred shares.
We may utilize other types of borrowings in the future, including more complex financing structures. We also may raise capital by issuing additional debt securities, additional preferred or common stock, warrants, or other securities.
Our use of leverage, especially in order to increase the amount of assets supported by our capital base, may have the effect of increasing losses when these assets underperform. Our investment policies require no minimum or maximum leverage, and our Manager's investment and risk management committee has the discretion, without the need for further approval by our Board of Directors, to change both our overall leverage and the leverage used for individual asset classes. Because our strategy is flexible, dynamic, and opportunistic, our overall leverage will vary over time. As a result, we do not have a targeted debt-to-equity ratio.
Management Agreement
We entered into a management agreement with our Manager upon our inception in August 2007, pursuant to which our Manager provides for the day-to-day management of our operations.
The management agreement, as amended, requires our Manager to manage our assets, operations, and affairs in conformity with the policies and investment guidelines that are approved and monitored by our Board of Directors. Our Manager is under the supervision and direction of our Board of Directors. Our Manager is responsible for:
• the selection, purchase, and sale of assets in our portfolio;
• our financing and risk management activities;
• providing us with advisory services; and
• providing us with a management team, inclusive of a partially dedicated Chief Financial Officer and appropriate support personnel as necessary.
Our Manager is responsible for our day-to-day operations and performs (or causes to be performed) such services and activities relating to the management, operation, and administration of our assets and liabilities, and business as may be appropriate.
Under the management agreement, we pay our Manager a management fee quarterly in arrears, which includes a "base" component and an "incentive" component, and we reimburse certain expenses of our Manager.
The management agreement provides that 10% of each incentive fee payable to our Manager is to be paid in common shares, with the balance paid in cash; provided, however, that our Manager may, in its sole discretion, elect to receive a greater
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percentage of any incentive fee in the form of common shares by providing our Board of Directors with written notice of its election to receive a greater percentage of its incentive fee in common shares before the first day of the last calendar month in the quarter to which such incentive fee relates. The management agreement further provides that our Manager may not elect to receive common shares as payment of its incentive fee, other than in accordance with all applicable securities exchange rules and securities laws (including prohibitions on insider trading). The number of our common shares to be received by our Manager is based on the fair market value of those common shares, which is determined based on the average of the closing prices of our common shares as reported by the NYSE during the last calendar month of the quarter to which such incentive fee relates. Common shares delivered as payment of the incentive fee are immediately vested, provided that our Manager has agreed not to sell such common shares prior to one year after the date they are issued to our Manager, provided further, however, that this transfer restriction will immediately lapse if the management agreement is terminated.
Base Management Fees, Incentive Fees, and Reimbursement of Expenses
Base Management Fees
Under the management agreement, we pay our Manager a base management fee quarterly in arrears in an amount equal to 1.50% per annum of the total equity of the Operating Partnership (calculated in accordance with U.S. GAAP) as of the end of each fiscal quarter (before deductions for base management and incentive fees payable with respect to such fiscal quarter), provided that the equity of the Operating Partnership is adjusted to exclude one-time events pursuant to changes in U.S. GAAP, as well as non-cash charges after discussion between our Manager and our independent directors, and approval by a majority of our independent directors in the case of non-cash charges.
Incentive Fees
In addition to the base management fee, with respect to each fiscal quarter we pay our Manager an incentive fee equal to the excess, if any, of (i) the product of (A) 25% and (B) the excess of (1) our Adjusted Net Income (as defined below) for the Incentive Calculation Period (which means such fiscal quarter and the immediately preceding three fiscal quarters) over (2) the sum of the Hurdle Amounts (described below) for the Incentive Calculation Period, over (ii) the sum of the incentive fees already paid or payable for each fiscal quarter in the Incentive Calculation Period preceding such fiscal quarter.
For purposes of calculating the incentive fee, "Adjusted Net Income" for the Incentive Calculation Period means the net increase/(decrease) in equity resulting from operations of the Operating Partnership (or such equivalent U.S. GAAP measure based on the basis of presentation of our consolidated financial statements), after all base management fees but before any incentive fees for such period, and excluding any non-cash equity compensation expenses for such period, as reduced by any Loss Carryforward (as described below) as of the end of the fiscal quarter preceding the Incentive Calculation Period. Adjusted Net Income will be adjusted to exclude one-time events pursuant to changes in U.S. GAAP, as well as non-cash charges after discussion between our Manager and our independent directors and approval by a majority of our independent directors in the case of non-cash charges.
For purposes of calculating the incentive fee, the "Loss Carryforward" as of the end of any fiscal quarter is calculated by determining the excess, if any, of (1) the Loss Carryforward as of the end of the immediately preceding fiscal quarter over (2) the net increase in equity resulting from operations of the Operating Partnership (expressed as a positive number) or the net decrease in equity resulting from operations of the Operating Partnership (expressed as a negative number) for such fiscal quarter (or such equivalent U.S. GAAP measures as may be appropriate depending on the basis of presentation of our consolidated financial statements), as the case may be, calculated in accordance with U.S. GAAP, adjusted to exclude one-time events pursuant to changes in U.S. GAAP, as well as non-cash charges after discussion between our Manager and our independent directors and approval by a majority of our independent directors in the case of non-cash charges.
For purposes of calculating the incentive fee, the “Hurdle Amount” for any fiscal quarter is equal to the product of (i) the total members’ equity of the Operating Partnership, calculated in accordance with U.S. GAAP as of the end of the immediately preceding fiscal quarter, adjusted to exclude the effects of one-time events resulting from changes in U.S. GAAP, as well as non-cash charges, in each case after discussion between the Manager and the Company’s independent directors and, in the case of non-cash charges, approval by a majority of the Company’s independent directors, and (ii) one-fourth of the Hurdle Rate. For purposes of the Management Agreement, the “Hurdle Rate” means the greater of (A) 9% and (B) 3% plus the 10-year U.S. Treasury rate for such fiscal quarter. The Hurdle Amount is appropriately adjusted for any issuances or repurchases of shares of common stock during the applicable fiscal quarter.
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Reimbursement of Expenses
Other than with respect to our subsidiary Longbridge, we do not maintain an office or employ personnel, but rather we rely on the facilities and resources of our Manager to conduct our operations. We pay all of our direct operating expenses, except those specifically required to be borne by our Manager under the management agreement. Under the management agreement, we are required to reimburse our Manager for certain operating expenses that it incurs on our behalf in the performance of its duties, including, among other things, our allocable portion of the costs incurred by our Manager for certain dedicated or partially dedicated personnel, based on the portion of their working time and efforts spent on our matters and subject to approval of the reimbursed amounts by the Compensation Committee of our Board of Directors. These dedicated and partially dedicated personnel include a chief financial officer, one or more controllers, an in-house legal counsel, internal audit staff in connection with Sarbanes-Oxley compliance initiatives and certain other personnel performing duties for us, including certain personnel involved in the implementation of our more operationally intensive strategies, such as personnel involved in loan acquisition and loan management.
Term and Termination
The management agreement has a current term that expires on December 31, 2026, and will automatically renew for a one year term on each anniversary date thereafter unless notice of non-renewal is delivered by either party to the other party no earlier than 270 days and no later than 180 days prior to the expiration of the then current term. Our independent directors review our Manager's performance annually, and the management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, or by the affirmative vote of the holders of at least a majority of the outstanding common shares, based upon unsatisfactory performance by our Manager that is materially detrimental to us or a determination that the fees payable to our Manager are not fair, subject to our Manager's right to prevent such a fee-based termination by agreeing to a mutually acceptable reduction of its fees. In the event we terminate the management agreement without cause or elect not to renew the management agreement, we will be required to pay our Manager a termination fee equal to the amount of three times the sum of (i) the average annual base management fees paid or payable to our Manager, and (ii) the average annual incentive fees paid or payable to our Manager, in each case calculated by reference to the two most recent 12-month periods ending on the last day of the most recently completed fiscal quarter prior to the date of the notice of or non-renewal.
We may also terminate the management agreement, without payment of the termination fee, upon 30 days' prior written notice from our Board of Directors to our Manager (and, where applicable, following any applicable cure period) for cause, which is defined as:
• our Manager's continued material breach of any provision of the management agreement following a period of 30 days after written notice of such breach;
• our Manager's fraud, misappropriation of funds, or embezzlement against us;
• our Manager's gross negligence in performance of its duties under the management agreement;
• the occurrence of certain events with respect to the bankruptcy or insolvency of our Manager, including, but not limited to, an order for relief in an involuntary bankruptcy case or our Manager authorizing or filing a voluntary bankruptcy petition;
• the dissolution of our Manager; and
• the occurrence of certain changes of control of our Manager, including but not limited to, the departure of Mr. Vranos from senior management of Ellington, whether through resignation, retirement, withdrawal, disability, death or termination of employment with or without cause or for any other reason.
Our Manager may terminate the management agreement effective upon 60 days prior written notice of termination to us in the event that we or the Operating Partnership default in the performance or observance of any material term, condition or covenant in the management agreement and the default continues for a period of 30 days after written notice to us or the Operating Partnership, as applicable, specifying such default and requesting that the same be remedied in such 30-day period. In the event our Manager terminates the management agreement due to our default in the performance or observance of any material term, condition, or covenant in the management agreement, we will be required to pay our Manager the termination fee in accordance with the management agreement. Our Manager may also terminate the management agreement in the event we become regulated as an investment company under the Investment Company Act, with such termination deemed to occur immediately prior to such event; provided, however, that in the case of such , if our Manager was not at for our becoming regulated as an investment company under the Investment Company Act, we will be required to pay the fee.
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Conflicts of Interest; Equitable Allocation of Opportunities
Ellington manages, and expects to continue to manage, other funds, accounts, and vehicles that have strategies that are similar to, or that overlap with, our strategy; as of December 31, 2025, these other funds, accounts, and vehicles, represented approximately $20.1 billion of assets under management (including $10.6 billion of accounts that do not employ financial leverage). Ellington makes available to our Manager all opportunities to acquire assets that it determines, in its reasonable and good faith judgment, based on our objectives, policies and strategies, and other relevant factors, are appropriate for us in accordance with Ellington's written investment allocation policy, it being understood that we might not participate in each such opportunity, but will equitably participate with Ellington's other accounts in all such opportunities on an overall basis. Ellington's Investment and Risk Management Committee and its Compliance Committee (headed by its Chief Compliance Officer) are responsible for monitoring the administration of, and facilitating compliance with, Ellington's investment allocation procedures and policies.
Because many of our targeted assets are typically available only in specified quantities and are also targeted assets for other Ellington accounts, Ellington often is not able to buy as much of any given asset or group of assets as would be required to satisfy the needs of all of Ellington's accounts. In these cases, Ellington's investment allocation procedures and policies typically allocate such assets to multiple accounts in proportion to their needs and available capital. Ellington may at times allocate opportunities on a preferential basis to accounts that are in a "start-up" or "ramp-up" phase. The policies permit departure from such proportional allocation under certain circumstances, including, for example, when such allocation would result in an inefficiently small amount of the security or assets being purchased for an account. In that case, the policies allow for a protocol of allocating assets so that, on an overall basis, each account is treated equitably. In addition, as part of these policies, we may be excluded from specified allocations of assets for tax, regulatory, risk management, or similar reasons.
Other policies of Ellington that our Manager applies to the management of our company include controls for:
• Cross Transactions— defined as transactions between us or one of our subsidiaries, on the one hand, and an account (other than us or one of our subsidiaries) managed by Ellington or our Manager, on the other hand. It is Ellington's policy to engage in a cross transaction only when the transaction is in the best interests of, and is consistent with the objectives and policies of, both accounts involved in the transaction. Pursuant to the terms of the management agreement, Ellington or our Manager may enter into cross transactions where it acts both on our behalf and on behalf of the other party to the transaction. Although we believe such restrictions on our Manager's ability to engage in cross transactions on our behalf mitigate many risks, cross transactions, even at market prices, may potentially create a conflict of interest between our Manager's and our officers' duties to and interests in us and their duties to and interests in the other party. Upon written notice to our Manager, we may at any time revoke our consent to our Manager's executing cross transactions. Additionally, unless approved in advance by a majority of our independent directors or pursuant to and in accordance with a policy that has been approved by a majority of our independent directors, all cross transactions must be effected at the then-prevailing market prices. Pursuant to our Manager's current policies and procedures, assets for which there are no readily observable market prices may be purchased or sold in cross transactions (i) at prices based upon third-party bids received through auction, (ii) at the average of the bid and lowest offer quoted by third-party dealers, or (iii) according to another pricing methodology approved by our Manager's Chief Compliance Officer.
• Principal Transactions— defined as transactions between Ellington or our Manager (or any related party of Ellington or our Manager, which includes employees of Ellington and our Manager and their families), on the one hand, and us or one of our subsidiaries, on the other hand. Certain cross transactions may also be considered principal transactions whenever our Manager or Ellington (or any related party of Ellington or our Manager, which includes employees of Ellington and our Manager and their families) have a substantial ownership interest in one of the transacting parties. Our Manager is only authorized to execute principal transactions with the prior approval of a majority of our independent directors and in accordance with applicable law. Such prior approval includes approval of the pricing methodology to be used, including with respect to assets for which there are no readily observable market prices.
• Investment in Other Ellington Accounts— pursuant to the management agreement, if we invest at issuance in the equity of any collateralized debt obligation, or "CDO," that is managed, structured, or originated by Ellington or one of its affiliates, or if we invest in any other investment fund or other investment for which Ellington or one of its affiliates receives management, origination, or structuring fees, then, unless agreed otherwise by a majority of our independent directors, the base management and incentive fees payable by us to our Manager will be reduced by (or our Manager will otherwise rebate to us) an amount equal to the applicable portion (as described in the management agreement) of any such management, origination or structuring fees.
• Split Price Executions— pursuant to the management agreement, our Manager is authorized to combine purchase or sale orders on our behalf together with orders for other accounts managed by Ellington, our Manager or their affiliates and allocate the securities or other assets so purchased or sold, on an average price basis or other fair and consistent
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basis, among such accounts.
Our Manager is authorized to follow very broad investment guidelines. Our independent directors will periodically review our investment guidelines and our portfolio. However, our independent directors generally will not review our proposed asset acquisitions, dispositions, or other management decisions. In addition, in conducting periodic reviews, our independent directors will rely primarily on information provided to them by our Manager. Furthermore, our Manager may arrange for us to use complex strategies or to enter into complex transactions that may be difficult or impossible to unwind by the time they are reviewed by our independent directors. Our Manager has great latitude within our broad investment guidelines to determine the types of assets it may decide are proper for purchase by us. The management agreement with our Manager does not restrict the ability of its officers and employees from engaging in other business ventures of any nature, whether or not such ventures are competitive with our business. We may acquire assets from entities affiliated with our Manager, even where the assets were originated by such entities. Affiliates of our Manager may also provide services to entities in which we have invested. In addition, affiliates of Ellington have purchased loans from certain of our loan originator affiliates, and we have entered into and may in the future enter into securitization transactions alongside other funds managed by Ellington or its affiliates.
Our executive officers and the officers and employees of our Manager are also officers and employees of Ellington, and we compete with other Ellington accounts for access to these individuals. We have not adopted a policy that expressly prohibits our directors, officers, security holders, or affiliates from having a direct or indirect pecuniary interest in any asset to be acquired or disposed of by us or any of our subsidiaries or in any transaction to which we or any of our subsidiaries is a party or has an interest, nor do we have a policy that expressly prohibits any such persons from engaging for their own account in business activities of the types conducted by us. However, our code of business conduct and ethics contains a conflicts of interest policy that prohibits our directors, officers, and employees, as well as employees of our Manager who provide services to us, from engaging in any transaction that involves an actual or apparent conflict of interest with us, absent approval by the Board of Directors or except as expressly set forth above or as provided in the management agreement between us and our Manager. In addition, nothing in the management agreement binds or restricts our Manager or any of its affiliates, officers, or employees from buying, selling, or trading any securities or commodities for their own accounts or for the accounts of others for whom our Manager or any of its affiliates, officers, or employees may be acting.
Competition
In acquiring our assets, we compete with other mortgage REITs, specialty finance companies, loan originators and servicers, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, governmental bodies, private equity and private credit firms, and other entities. Many of our competitors are significantly larger than us, have greater access to capital and other resources, and may have other advantages over us. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us, such as funding from the government. Additionally, many of our competitors are not subject to REIT tax compliance or required to maintain an exemption from the Investment Company Act. Our competitors also include other investment vehicles managed by Ellington or its affiliates. In addition to existing competitors, other companies may be organized for similar purposes in the future, including companies focused on purchasing mortgage assets. A proliferation of such companies may increase the competition for equity capital and thereby adversely affect the market price of our common or preferred stock. An increase in the competition for sources of funding could adversely affect the availability and cost of financing, and thereby adversely affect the market price of our common or preferred stock. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of assets, or pay higher prices, than we can.
In the face of this competition, we have access to our Manager's and Ellington's professionals and their industry expertise, which may provide us with a competitive advantage and help us assess risks and determine appropriate pricing for certain potential assets. In addition, we believe that these relationships, along with our strategic equity investments in loan originators, enable us to compete more effectively for attractive asset acquisition opportunities. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.
Operating and Regulatory Structure
Tax Requirements
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or "the Code," commencing with our taxable year ended December 31, 2019. Since January 1, 2019, we have been organized in conformity with, and have operated in a manner that has enabled us to meet, the requirements for qualification as a REIT for U.S. federal income tax purposes. Provided that we maintain our qualification as a REIT, we generally will not be subject to U.S. federal income tax on our REIT taxable income that is currently distributed to our stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their annual REIT taxable income excluding net capital gains. We cannot assure you that we will be able to comply with such requirements. Failure to
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maintain our qualification as a REIT in any taxable year would cause us to be subject to U.S. federal income tax on our taxable income at regular corporate rates (and any applicable state and local taxes). Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state, local, and non-U.S. taxes on our income. For example, any income generated by our domestic TRSs will be subject to U.S. federal, state, and local income tax. Any taxes paid by a TRS will reduce the cash available for distribution to our stockholders.
Investment Company Act Exclusions
Most of our business is conducted through various wholly-owned and majority-owned subsidiaries in a manner such that neither we nor our subsidiaries are subject to registration under the Investment Company Act. Under Section 3(a)(1) of the Investment Company Act, a company is deemed to be an "investment company" if:
• it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities (Section 3(a)(1)(A)); or
• it is engaged or proposes to engage in the business of investing, reinvesting, owning, holding, or trading in securities and does own or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (excluding U.S. government securities and cash) on an unconsolidated basis, or "the 40% Test" (Section 3(a)(1)(C)). "Investment securities" excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company for private funds under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
We believe that we and our Operating Partnership, and a holding company subsidiary of our Operating Partnership, or the "Holding Subsidiary," will not be considered investment companies under Section 3(a)(1) of the Investment Company Act, because we and they satisfy the 40% Test and because we and they do not engage primarily (or hold ourselves or themselves out as being engaged primarily) in the business of investing, reinvesting, or trading in securities. Rather, through wholly-owned or majority-owned subsidiaries, we, our Operating Partnership, and the Holding Subsidiary are primarily engaged in the non-investment company businesses of these subsidiaries.
Our Operating Partnership currently has several subsidiaries that rely on the exclusion provided by Section 3(c)(7) of the Investment Company Act, each a "3(c)(7) subsidiary." In addition, the Holding Subsidiary currently has several 3(c)(7) subsidiaries and several subsidiaries that rely on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act, each a "3(c)(5)(C) subsidiary." While investments in 3(c)(7) subsidiaries are considered investment securities for the purposes of the 40% Test, investments in 3(c)(5)(C) subsidiaries are not considered investment securities for the purposes of the 40% Test, nor are investments in subsidiaries that rely on the exclusion provided by Section 3(a)(1)(C).
Therefore, our Operating Partnership's investments in its 3(c)(7) subsidiaries and its other investment securities cannot exceed 40% of the value of our Operating Partnership's total assets (excluding U.S. government securities and cash) on an unconsolidated basis. In addition, the Holding Subsidiary's investment in its 3(c)(7) subsidiaries and its other investment securities cannot exceed 40% of the value of our Holding Subsidiary's total assets (excluding U.S. government securities and cash) on an unconsolidated basis.
Section 3(c)(5)(C) of the Investment Company Act is designed for entities primarily engaged in the business of "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of the entity's assets on an unconsolidated basis consist of qualifying real estate assets and at least 80% of the entity's assets on an unconsolidated basis consist of qualifying real estate assets or real estate-related assets. Both the 40% Test and the requirements of the Section 3(c)(5)(C) exclusion limit the types of businesses in which we may engage and the types of assets we may hold, as well as the timing of sales and purchases of assets.
On August 31, 2011, the SEC published a concept release entitled "Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments" (Investment Company Act Rel. No. 29778). This release notes that the SEC is reviewing the Section 3(c)(5)(C) exclusion relied upon by companies similar to us that invest in mortgage loans and mortgage-backed securities. There can be no assurance that the laws and regulations governing the Investment Company Act status of companies similar to ours, or the guidance from the Division of Investment Management of the SEC regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects our operations as a result of this review. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon our exclusion from the need to register under the Investment Company Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies that we have chosen. Furthermore, although we intend to monitor the assets of our 3(c)(5)(C) subsidiaries regularly, there can be no assurance that any such subsidiary will be able to maintain this exclusion from registration. In that case, our investment in any such subsidiary would be classified as an investment security, and we might not be able to maintain our overall exclusion from registering as an investment company under the Investment Company
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Act.
If we or our subsidiaries were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), and portfolio composition, including restrictions with respect to diversification and industry concentration and other matters. Compliance with the restrictions imposed by the Investment Company Act would require us to make material changes to our strategy which could materially adversely affect our business, financial condition and results of operations, and our ability to make distributions to our stockholders. Accordingly, to avoid that result, we may be required to adjust our strategy, which could limit our ability to make certain investments or require us to sell assets in a manner, at a price or at a time that we otherwise would not have chosen. This could negatively affect the value of our common or preferred stock, the sustainability of our business model and our ability to make distributions. See "Item 1A. Risk Factors—Risks Related to Our Organization and Structure—Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations."
Investment Advisers Act of 1940
Both Ellington and our Manager are registered as investment advisers under the Investment Advisers Act of 1940, as amended, and are subject to the regulatory oversight of the Division of Investment Management of the SEC.
Regulations Applicable to Longbridge
Longbridge is subject to extensive regulation by federal, state, and local authorities and a variety of statutes, rules, regulations, policies and procedures in numerous jurisdictions throughout the United States. These laws and regulations include, but are not limited to:
• the Truth in Lending Act, or "TILA," which regulates mortgage loan origination activities, requires certain disclosures be made to mortgagors regarding terms of mortgage financing and regulates certain mortgage servicing activities;
• the Fair Credit Reporting Act, which regulates the use and reporting of information related to the credit history of consumers;
• the Equal Credit Opportunity Act, which prohibits discrimination on the basis of age, race and certain other characteristics in the extension of credit;
• the Fair Housing Act, which prohibits discrimination in housing on the basis of race, sex, national origin, and certain other characteristics;
• the Real Estate Settlement Procedures Act, or "RESPA," which governs certain mortgage loan origination activities and practices and the actions of servicers related to transfers, lender-placed insurance, loss mitigation, error resolution, and other customer communications;
• the Homeowners Protection Act, the CARES Act, and similar state laws;
• laws that require and govern communications with consumers or reporting of public data, such as the Gramm-Leach-Bliley Act, which requires initial and periodic communication with consumers on privacy matters and the maintenance of privacy regarding certain consumer data in our possession, and the Home Mortgage Disclosure Act / Regulation C, which requires reporting of certain public loan data;
• state and federal restrictions on marketing activities conducted by telephone, mail, email, mobile device or the internet, including the Telemarketing Sales Rule, the Telephone Consumer Protection Act, state telemarketing laws, and federal and state privacy laws;
• the Controlling the Assault of Non-Solicited Pornography and Marketing and the Federal Trade Commission Act, together with their accompanying regulations and guidelines;
• federal and state laws requiring company, branch and individual licensing for the solicitation of or brokering of consumer loans, including the SAFE Act;
• federal and state laws relating to identity theft;
• the Fair Debt Collection Practices Act, which regulates the timing and content of communications on debt collections;
• the California Consumer Privacy Act, which provides California consumers with additional privacy rights and increases the privacy and security obligations of entities handling certain personal information of such consumers;
• the Servicemembers Civil Relief Act;
• the anti-money laundering and counter-terrorist financing provisions of the Bank Secrecy Act, including the USA Patriot Act, which require non-bank lenders to monitor for, detect, and report suspicious activity to the U.S. Treasury’s Financial Crimes Enforcement Network;
• the prohibition on unfair, deceptive, or abusive acts or practices (“UDAAP”) under the Dodd-Frank Act, which authorizes the CFPB to take enforcement action against entities engaging in practices that are unfair, deceptive, or abusive in connection with consumer financial products or services;
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• the Uniform Electronic Transactions Act (“UETA”) and related federal and state electronic signature laws, which validate the use of electronic records and signatures in commercial and consumer transactions and impose requirements on the use, retention, and enforceability of electronic documentation in connection with mortgage loan origination and servicing activities;
• regulations promulgated by the U.S. Department of Housing and Urban Development (“HUD”) governing the origination, servicing, and securitization of Home Equity Conversion Mortgages (“HECMs”), including eligibility, counseling, disclosure, underwriting, and documentation requirements applicable to FHA-insured reverse mortgage products.
• restrictions imposed by the rules promulgated by the Office of Foreign Assets Control; and
• restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the “Dodd-Frank Act”, and current or future rules promulgated thereunder, including, but not limited to, limitations on fees charged by mortgage lenders, mortgage broker disclosures and rules promulgated by the Consumer Financial Protection Bureau, or the “CFPB,” which was created under the Dodd-Frank Act.
The CFPB’s jurisdiction includes those persons or entities originating, brokering or servicing residential mortgage loans and those persons or entities performing loan modification or foreclosure relief services in connection with such loans. As a result, the CFPB directly impacts the regulation of residential mortgage loan originations and servicing in several ways. First, the CFPB has rulemaking authority with respect to many of the federal consumer protection laws applicable to mortgage servicers, including TILA and RESPA. Second, the CFPB has supervision, examination and enforcement authority over consumer financial products and services offered by certain non-depository institutions, such as Longbridge. The CFPB also has authority, under the Dodd-Frank Act, to prevent unfair, deceptive, or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages. The CFPB continues to take a very active role in the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve.
Many individual states have also been active regulators, as have other regulatory organizations such as the Multistate Mortgage Committee, a multistate coalition of various mortgage banking regulators. In addition to their traditional focus on licensing and examination matters, certain regulators make observations, recommendations or demands with respect to areas such as corporate governance, safety and soundness and risk and compliance management. The CFPB and state regulators have also focused on other issues, such as the use and adequacy of technology in the mortgage servicing industry, privacy concerns, communications from debt collectors, and the ability of borrowers to repay mortgage loans.
Furthermore, in 2020 in response to the COVID-19 pandemic, Longbridge became subject to additional regulations and requirements. These include the CARES Act as well as multiple forbearance programs, various foreclosure and eviction moratoriums, and other programs implemented by states, agencies and regulators. The CFPB also promulgated certain amendments to RESPA (Regulation X) with respect to loss mitigation, early intervention call requirements, and initiating new foreclosures. These federal protections for borrowers expired on January 1, 2022; however, certain states and localities have implemented additional foreclosure-related requirements or borrower protection measures that may affect the timing and administration of foreclosure proceedings.
In recent years, the general trend among federal, state and local legislative bodies and regulatory agencies, as well as state attorneys general, has been toward increasing laws, regulations, investigative proceedings and enforcement actions relating to residential mortgage lenders and servicers.
Human Capital Resources
Other than with respect to our subsidiary Longbridge, we have no employees and all of our executive officers, and our dedicated or partially dedicated personnel, which include our Chief Financial Officer, Chief Accounting Officer, controller, accounting staff, in-house legal counsel, internal audit staff, and other personnel providing services to us are employees of Ellington or one or more of its affiliates. See "—Management Agreement" above. As of December 31, 2025, Longbridge had approximately 500 employees.
Additional Information
A copy of this Annual Report on Form 10-K, as well as our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, on our internet website at www.ellingtonfinancial.com . All of these reports are made available on our internet website as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Our Corporate Governance Guidelines and Code of Business Conduct and Ethics and the charters of the Audit, Compensation and Nominating and Corporate Governance Committees of our Board of Directors are also available at www.ellingtonfinancial.com and are available in print to any stockholder upon request in writing to Ellington Financial Inc., c/o Investor Relations, 53 Forest
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Avenue, Old Greenwich, CT 06870. The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filing we make with the SEC.
In addition, all of our reports filed with or furnished to the SEC can be obtained at the SEC's website at www.sec.gov .
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Item 1A. Risk Factors
Summary of Risk Factors
Risks Related To Our Investments and Investment Activities
• Difficult conditions in the mortgage, real estate, and financial markets, including economic downturns, inflation, elevated interest rates, declining property values, and tightening credit availability, could adversely affect the value of our investments and our financial performance. Market volatility and economic instability may lead to increased borrower delinquencies, declining liquidity, and reduced availability of financing, all of which could negatively impact our returns.
• Regulatory changes affecting Fannie Mae, Freddie Mac, and Ginnie Mae could materially impact mortgage market liquidity and valuations. Any changes in their government backing, capital requirements, or underwriting guidelines could disrupt the market for Agency RMBS and impact the pricing of our mortgage-related assets. Additionally, federal or state-level government intervention, such as mortgage modification programs, foreclosure moratoriums, or new regulations affecting loan servicing, could reduce the value of our assets or delay our ability to recover on defaulted loans.
• We are exposed to significant credit risks through our investments in residential and commercial mortgage loans, MBS, CRTs, and CLOs. Borrower delinquencies, defaults, and declining collateral values may result in losses, particularly in residential and commercial mortgage loans, non-Agency RMBS, CRTs, and loans with lower underwriting standards. Second-lien loans are especially vulnerable, as they are subordinate to first-lien loans and may suffer complete loss in foreclosure scenarios.
• Certain mortgage-backed securities and whole loans we acquire may have been underwritten with less stringent credit standards. Loans originated with reduced documentation requirements, high loan-to-value ratios, or weak borrower credit profiles pose a higher risk of delinquency and default, which may reduce the performance of non-Agency RMBS and CRT securities in which we invest. Additionally, sellers of mortgage loans we acquire may be unable or unwilling to repurchase defective loans, resulting in additional losses.
• We depend on service providers, including mortgage servicers, for a variety of services related to many of our assets, including MSRs, RMBS, CRTs, securitizations, and loan pools. If servicers fail to perform effectively, including loss mitigation efforts or foreclosure processing, we may experience increased delinquencies, reduced cash flows, and reputational harm. We may also be affected by deficiencies in foreclosure practices by third parties, which could cause delays and additional legal risks.
• Interest rate mismatches between our assets and liabilities could negatively impact our net interest income, particularly in periods of rising interest rates. Additionally, certain assets, such as adjustable-rate mortgages and hybrid ARMs, are subject to interest rate caps that may limit our ability to pass on higher interest costs, reducing profitability.
• We rely heavily on analytical models and third-party data for pricing, risk assessment, and portfolio management. If these models fail to accurately predict borrower behavior, prepayments, or credit performance, we could make suboptimal investment decisions that negatively affect our financial condition.
• Fluctuations in interest rates impact the performance of our assets. Rising rates can lead to higher borrowing costs, reduce demand for refinancing, and increase the risk of defaults on adjustable-rate loans. Conversely, falling rates may accelerate mortgage prepayments, reducing the expected cash flows from RMBS and MSRs. Interest rate mismatches between our assets and liabilities may also compress margins and impact profitability.
• The valuation of our investments is inherently uncertain, as many of our assets are illiquid and lack transparent pricing. The values we assign to these assets may fluctuate significantly due to market volatility, changing credit conditions, and external factors beyond our control.
Risks Related to Our Financing, Hedging, and Derivative Activities
• We use leverage to enhance returns, but this approach increases the magnitude of potential losses during adverse market conditions. Rising interest rates or liquidity constraints could limit our ability to obtain financing on favorable terms, forcing us to sell assets at inopportune times or reduce our investment activity.
• Our access to financing depends on the creditworthiness of our collateral and the willingness of lenders to provide credit. Disruptions in capital markets or changes in repo financing terms could restrict our ability to fund investments, subject us to margin calls, or force deleveraging at unfavorable prices.
• Hedging strategies, including interest rate swaps and other derivatives, may not fully protect us from market fluctuations. These instruments carry counterparty risk, and regulatory changes could impact their availability, cost, or effectiveness, potentially increasing our exposure to interest rate and credit risk.
Risks Related to Our Corporate Loans and CLOs
• We invest in corporate loans and CLOs, which expose us to credit and default risks. CLO structures involve leveraged investments in pools of corporate loans, and performance is dependent on the creditworthiness of the underlying borrowers. A rise in corporate defaults or economic downturns could impair cash flows to CLO securities and reduce their market value.
• The performance of our CLO investments is influenced by the actions of the applicable collateral managers, over whom we have limited control. Poor reinvestment decisions, excessive leverage, or adverse economic conditions could negatively impact CLO returns.
• Corporate borrowers in CLO portfolios are often highly leveraged, making them more susceptible to financial distress. Deterioration in credit markets or rising borrowing costs may increase defaults, reducing cash flows and increasing losses on our CLO investments.
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Risks Related to Certain MSR Investments
• Our MSR-related investments depend on the performance of third-party mortgage servicers. Servicing failures, regulatory penalties, or operational disruptions could negatively impact the value and cash flows associated with these assets.
• The value of MSRs is highly sensitive to interest rates. 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, which could create liquidity demands, particularly during market downturns or periods of increased borrower distress.
Risks Related to our Loan Origination and Servicing Businesses
• Our loan origination and servicing businesses require substantial capital, and our ability to operate depends on access to financing and compliance with regulatory requirements. Changes in funding sources or capital requirements could impact profitability.
• The performance of our Longbridge business is highly dependent on government-backed reverse mortgage programs. Changes to FHA, or Ginnie Mae policies could disrupt origination volumes, increase costs, or limit the availability of government insurance for HECM loans.
• We rely on third-party subservicers and service providers for compliance, loan administration, and operational support. Failures or deficiencies in their performance could expose us to financial, operational, and reputational risks.
Other Business Risks
• We may change our investment strategy, investment guidelines, hedging strategy, operating and/or management policies, or REIT election without stockholder approval, which could impact our business model and future distributions.
• We operate in a competitive market for mortgage and structured finance investments. Competition for attractive investment opportunities may limit our ability to deploy capital efficiently or generate expected returns.
• Climate change and regulatory initiatives related to environmental risk may impact the properties underlying our mortgage investments, potentially increasing insurance costs or affecting real estate values in certain regions.
Risks Related to our Relationship with our Manager and Ellington
• We are dependent on Ellington and its personnel for investment management. The loss of key personnel or termination of our management agreement could materially impact operations and financial performance.
• Ellington manages multiple investment accounts, which may create conflicts of interest in allocating investment opportunities and resources.
• Our Manager’s incentive-based fee structure may encourage investments that carry higher risk, which may not align with the interests of our stockholders.
Risks Related to Our Common Stock and Preferred Stock
• Stockholders may not receive dividends or dividends may decline over time. Our stock price may be volatile, and the market for our common stock may have limited liquidity. Market fluctuations, interest rate changes, and broader economic trends may affect stock performance.
• Future issuances of debt or equity securities could dilute existing stockholders, reduce cash flow to our existing common stockholders and/or to service debt, increase leverage, or impact dividend distributions.
Risks Related to Our Organization and Structure
• Our certificate of incorporation and bylaws contain provisions that may discourage acquisition bids or stockholder activism, potentially limiting opportunities for stockholders to realize value.
• To maintain our REIT status, we are subject to ownership restrictions and limitations on stock transferability, which may impact stockholder rights and liquidity.
U.S. Federal Income Tax Risks
• Failure to maintain REIT qualification would subject us to significant corporate tax liabilities, reducing cash available for distributions and potentially impacting stockholder returns.
• Changes in tax laws or regulatory rulings could alter the tax treatment of REITs, negatively affecting our financial position, investment strategy, and distributions to stockholders.
• Complying with our election to be treated as REIT may cause us to forgo or liquidate otherwise attractive investments and/or may limit our ability to hedge efficiently.
The above list is not exhaustive, and we face additional challenges and risks. Please carefully consider all of the information in this Report, including the matters set forth below in this Item 1A.
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If any of the following risks occurs, our business, financial condition or results of operations could be materially and adversely affected. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. In connection with the forward-looking statements that appear in our periodic reports on Form 10-Q and Form 10-K, our Current Reports on Form 8-K, our press releases and our other written and oral communications, stockholders should also carefully review the cautionary statements referred to in such reports and other communications referred to under "Special Note Regarding Forward-Looking Statements."
Risks Related To Our Investments and Investment Activities
Difficult conditions in the mortgage and residential and commercial real estate markets as well as general market concerns may adversely affect the value of the assets in which we invest.
Our business is materially affected by conditions in the residential and commercial mortgage markets, the residential and commercial real estate markets, the financial markets, and the economy, including inflation, interest rates, energy costs, unemployment, geopolitical issues, tariffs, advancements in tools that harness generative artificial intelligence and other machine learning techniques (such tools, collectively, “AI”), concerns over the creditworthiness of governments worldwide and the stability of the global banking system. In particular, the residential and commercial mortgage markets in the U.S. and Europe have experienced a variety of difficulties and challenging economic conditions in the past, including defaults, credit losses, and liquidity concerns. Certain commercial banks, investment banks, insurance companies, loan origination companies and mortgage-related investment vehicles incurred extensive losses from exposure to the residential and commercial mortgage markets as a result of these difficulties and conditions. These factors have impacted, and may in the future impact, investor perception of the risks associated with residential and commercial mortgage loans, MBS, other real estate-related securities and various other asset classes in which we may invest. As a result, values for residential and commercial mortgage loans, MBS, other real estate-related securities and various other asset classes in which we may invest have experienced, and may in the future experience, significant . Any of the mortgage market and investor perception of the risks associated with residential and commercial mortgage loans, MBS, other real estate-related securities, and various other assets that we acquire could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae, Freddie Mac, and Ginnie Mae and the U.S. Government, could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
The payments we receive on our Agency RMBS depend upon a steady stream of payments on the underlying mortgages and such payments are guaranteed by the Federal National Mortgage Association, or "Fannie Mae," the Federal Home Loan Mortgage Corporation, or "Freddie Mac," or GNMA. In addition, Longbridge originates and services HECMs, which are insured by FHA, and which are eligible for inclusion in Ginnie Mae-guaranteed HMBS. Fannie Mae and Freddie Mac are government-sponsored enterprises, or "GSEs," but their guarantees are not backed by the full faith and credit of the United States. Ginnie Mae, which guarantees MBS backed by federally insured or guaranteed loans primarily consisting of loans insured by FHA, or guaranteed by the Department of Veterans Affairs is part of the U.S. Department of Housing and Urban Development and its guarantees are backed by the full faith and credit of the United States. Finally, cash flows from our MSR-related investments depend on the performance of the underlying loans.
In September 2008, in response to the deteriorating financial condition of Fannie Mae and Freddie Mac, the U.S. Government placed Fannie Mae and Freddie Mac into the conservatorship of the Federal Housing Finance Agency, or "FHFA," their federal regulator, pursuant to its powers under the Housing and Economic Recovery Act of 2008. Under this conservatorship, Fannie Mae and Freddie Mac are required to reduce the amount of mortgage loans they own or for which they provide guarantees on Agency RMBS. In addition to the FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Treasury entered into Preferred Stock Purchase Agreements ("PSPAs") with the FHFA and has taken various actions intended to provide Fannie Mae and Freddie Mac with additional liquidity in an effort to ensure their financial stability. In January 2025, the FHFA and the U.S. Treasury announced modifications to the PSPAs intended to support an orderly approach to any eventual release of Fannie Mae and Freddie Mac from conservatorship and to reflect certain existing practices. FHFA also indicated that it would solicit public input, before releasing either Fannie Mae or Freddie Mac from conservatorship, regarding the potential impacts on the housing market.
Statements, policy proposals, and regulatory initiatives regarding housing finance reform, including proposals relating to the structure, capitalization, government support, or conservatorship status of Fannie Mae and Freddie Mac, as well as leadership and policy direction at FHFA, could create significant uncertainty in the housing finance system. These developments and any future initiatives (including the potential efforts to privatize Fannie Mae and Freddie Mac and end their
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federal conservatorship), could reduce or eliminate the availability of government guarantees, reduce liquidity in the Agency RMBS market, increase mortgage rates, widen yield spreads, exacerbate market uncertainty, and adversely affect valuations of Agency RMBS and other mortgage-related assets. Additionally, proposed leadership changes at the FHFA and shifts in regulatory priorities may further impact the guarantees provided by Fannie Mae, Freddie Mac, and Ginnie Mae, increasing market volatility and credit risk, and could materially adversely affect our investments, financing capabilities, and overall financial condition.
Fannie Mae, Freddie Mac, and Ginnie Mae could be dissolved, and the U.S. Government could determine to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae, Freddie Mac, or Ginnie Mae were eliminated, or their structures were to change radically, or if the U.S. Government significantly reduced its support for any or all of them, the value of our currently held Agency RMBS could drop significantly, and we may be unable or significantly limited in our ability to acquire Agency RMBS, which, in turn, could materially adversely affect our ability to maintain our exclusion from registration as an investment company under the Investment Company Act and our ability to maintain our qualification as a REIT. Such changes could also materially adversely affect Longbridge, including its ability to originate HECMs and securitize them through HMBS. With respect to HECM loans that are insured by FHA, the extent of the insurance is limited, and there are situations where the servicer will not recoup all cash outlays. In instances where the servicer is unable to liquidate the underlying REO property within certain timeframes and guidelines, FHA insurance proceeds will be determined relative to an appraised value of the subject property. If the eventual sale price of the related REO property is lower than the appraisal, the servicer will be to an additional .
Moreover, any changes to the nature of the guarantees provided by, or laws affecting, Fannie Mae, Freddie Mac, and Ginnie Mae could materially adversely affect the credit quality of the guarantees, increase the risk of loss on purchases of Agency RMBS issued by these GSEs (or MSRs with underlying loans guaranteed by these GSEs) and have broad adverse market implications for the Agency RMBS they currently guarantee. Any action that affects the credit quality of the guarantees provided by Fannie Mae, Freddie Mac, and Ginnie Mae could materially adversely affect the value of our Agency RMBS and our Forward MSR-related investments. In addition, any market uncertainty that arises from such proposed changes could have a similar impact on us and our Agency RMBS and our Forward MSR-related investments.
In addition, we rely on our Agency RMBS as collateral for our financings under our repos. Any decline in their value, or perceived market uncertainty about their value, could make it more difficult for us to obtain financing on our Agency RMBS on acceptable terms or at all, or to maintain compliance with the terms of any financing transactions.
Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our assets.
The U.S. Government, through the U.S. Treasury, FHA, and the Federal Deposit Insurance Corporation, or "FDIC," has at various points in time, including in response to the COVID-19 pandemic, and may again in the future, implement programs designed to provide homeowners with assistance in avoiding mortgage loan foreclosures or otherwise mitigating mortgage delinquencies and defaults, particularly during periods of economic stress or market disruption. These programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans, the implementation of foreclosure moratoriums, payment deferral programs, or other relief initiatives.
Loan modification and refinance programs may adversely affect the performance of Agency and non-Agency RMBS, residential mortgage loans and MSRs. In the case of non-Agency RMBS, residential mortgage loans, and MSRs, loan modifications, including those related to principal forgiveness and coupon reduction, would generally be expected to negatively impact the realized yields and cash flows on such assets. See also "—Prepayment rates can change, adversely affecting the performance of our assets."
In addition, the U.S. Congress and various state and local legislatures may enact mortgage-related legislation, and governmental authorities may implement mitigation or consumer relief initiatives. We cannot predict whether or in what form these changes may be enacted and how they may affect our business or whether any such legislation will require us to change our practices or adjust our portfolio. Such changes could include expanded loan modification programs, amendments to bankruptcy laws, changes to refinancing eligibility standards for loans associated with Fannie Mae, Freddie Mac, or Ginnie Mae, forbearance or deferral programs, foreclosure prevention measures, tenant protections, judicial modifications of loan principal in bankruptcy, changes to escrow requirements, increased consumer protection enforcement relating to mortgage origination, servicing, loss mitigation, or foreclosure practices, or the imposition of assignee liability for origination-related violations. These actions could increase compliance costs, expose us to litigation, repurchase or indemnification obligations, extend delinquency resolution timelines, alter cash flows, reduce asset valuations or returns, and materially affect our business, financial condition, results of operations, and ability to pay dividends to our stockholders.
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The principal and interest payments on our residential mortgage whole loans, non-Agency RMBS and CRTs are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk.
Our portfolio includes residential mortgage whole loans that do not conform to the Fannie Mae or Freddie Mac underwriting guidelines, as well as non-Agency RMBS and CRT which are backed by, or reference, such mortgage loans. Examples of such mortgage loans include subprime, manufactured housing, Alt-A, prime jumbo, non-QM, and single-family-rental mortgage loans. Consequently, the principal and interest on such mortgage loans, non-Agency RMBS and CRT securities are not guaranteed by GSEs such as Fannie Mae and Freddie Mac or, in the case of Ginnie Mae, the U.S. Government.
A residential mortgage loan is typically secured by single-family residential property and is subject to risks of delinquency and foreclosure and risk of loss. The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, high unemployment, high energy costs, acts of God, pandemics such as the COVID-19 pandemic, war or other geopolitical conflict, terrorism, elevated inflation, tariffs, social unrest, and civil disturbances, may impair borrowers' abilities to repay their mortgage loans. In periods following home price declines, "strategic defaults" (decisions by borrowers to default on their mortgage loans despite having the ability to pay) also may become more prevalent. Additionally, these risks are with respect to second-lien mortgage loans (including HELOCs and -end second lien loans), which are especially to borrower and , as they are subordinate to first-lien loans and only recover value after the first-lien obligations have been . As a result, on second-lien mortgage loans tend to be higher in scenarios, and recovery prospects are significantly , especially in real estate markets or economic . Further, the recent period of elevated interest rates has led to significant higher monthly costs for homeowners who have purchased their homes more recently, while also prepayments on older, lower-rate mortgages, each of which could contribute to higher on the mortgage loans underlying many of our investments.
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. We may also be exposed to a reduction in a borrower's mortgage debt by a bankruptcy court. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. In many jurisdictions, legislation has been enacted that has the effect of making the foreclosure process more difficult, lengthier, and more expensive, and additional such legislation may be enacted in the future.
Residential mortgage loans are also subject to property damage caused by hazards, such as earthquakes, fires or environmental hazards, not covered by standard property insurance policies, or "special hazard risk." Special hazard-related risks also include the risk of rising property insurance costs, the risk of insurers cancelling or non-renewing insurance coverage, and the risk of increased climate-related losses, particularly in regions affected by hurricanes, droughts, wildfires, and flooding. In addition, certain claims may be assessed against us on account of our position as a mortgage holder or property owner, including assignee liability, environmental hazards, and other liabilities, including property taxes, each of which may further increase potential losses on certain of our investments. In some cases, these liabilities may be "recourse liabilities" or may otherwise lead to in excess of the purchase price of the related mortgage or property.
Non-Agency RMBS and CRTs are subject to many of the risks of the respective underlying mortgage loans. If borrowers default on the mortgage loans backing our non-Agency RMBS or CRTs and we are unable to recover any resulting loss through the foreclosure process, it could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Less stringent underwriting guidelines and the resultant potential for delinquencies or defaults on certain mortgage loans could lead to losses on many of the non-Agency RMBS and European RMBS that we hold.
Some of the non-Agency RMBS in which we invest are collateralized by Alt-A and subprime mortgage loans, which are mortgage loans that were originated using less stringent underwriting guidelines than those used in underwriting prime mortgage loans (mortgage loans that generally conform to Fannie Mae or Freddie Mac underwriting guidelines). In addition, we have acquired, and may acquire in the future, European RMBS, including retained tranches from European RMBS securitizations in which we have participated. These European RMBS are backed by residential mortgage loans that were typically originated using less stringent underwriting guidelines than those used in underwriting prime mortgage loans in the United States. The underwriting guidelines for the mortgage loans that collateralize many of the non-Agency RMBS and European RMBS in which we invest are more permissive as to borrower credit history or credit score, borrower debt-to-income ratio, loan-to-value ratio, and/or as to documentation (such as whether and to what extent borrower income was required to be disclosed or verified). In addition, even when specific underwriting guidelines are represented by loan originators as having
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been used in connection with the origination of mortgage loans, there can be no assurance that these guidelines have actually been followed, and/or will be followed in the future, as a result of aggressive lending practices, fraud (including borrower or appraisal fraud), or other factors. Mortgage loans that are underwritten pursuant to less stringent or looser underwriting guidelines, or that are poorly underwritten to their stated guidelines, have experienced, and should be expected to experience in the future, substantially higher rates of delinquencies, defaults, and foreclosures than those experienced by mortgage loans that are underwritten in a manner more consistent with Fannie Mae or Freddie Mac guidelines. These risks may be heightened for loans originated outside of the GSE underwriting framework, including certain non-QM or other expanded-credit products, particularly where borrower repayment capacity is more sensitive to changes in interest rates, home prices, employment conditions or consumer liquidity.
As a result of the higher delinquency rates and losses associated with Alt-A, subprime mortgage loans and European mortgage loans, the performance of RMBS backed by Alt-A, subprime mortgage loans, and European mortgage loans that we may acquire could be negatively affected, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders, particularly during periods of economic stress, rising interest rates, reduced borrower liquidity, or declining residential property values.
We have invested and may in the future invest in securities in the CRT sector that are subject to mortgage credit risk.
We have invested and may in the future invest in credit risk transfer securities, or "CRTs." CRTs are designed to transfer a portion of the mortgage credit risk of a pool of insured or guaranteed mortgage loans from the insurer or guarantor of such loans to CRT investors. In a CRT transaction, interest and/or principal of the CRT is written off following certain credit events, such as delinquencies, defaults, and/or realized losses, on the underlying mortgage pool. To date, the vast majority of CRTs consist of risk sharing transactions issued by the GSEs, namely Fannie Mae's Connecticut Avenue Securities program, or "CAS," and Freddie Mac's Structured Agency Credit Risk program, or "STACR." These securities have historically been unsecured and subject to the credit risk of the underlying mortgage pool.
We rely on analytical models and other data to analyze potential asset acquisition and disposition opportunities and to manage our portfolio. Such models and other data may be incorrect, misleading or incomplete, which could cause us to purchase assets that do not meet our expectations or to make asset management decisions that are not in line with our strategy.
We rely on our Manager and our Manager relies on the analytical models (both proprietary and third-party models) of Ellington and information and data supplied by Ellington itself and by third parties. These models and data may be used to value assets or potential asset acquisitions and dispositions and also in connection with our asset management activities. If Ellington's models (including the data utilized by the models) and/or third-party data prove to be incorrect, misleading, or incomplete, any decisions made in reliance thereon could expose us to potential risks. Our Manager's reliance on Ellington's models and data could lead to us purchasing certain assets at prices that are too high, to sell certain other assets at prices that are too low, or to miss favorable opportunities altogether. Similarly, any hedging activities that are based on faulty models and data may prove to be unsuccessful.
Some of the risks of relying on analytical models and third-party data include the following:
• 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;
• asset, collateral or MBS information (including information related to historical prepayments, defaults, cash flows, etc.) may be incorrect, incomplete, misleading, or subject to interpretation (e.g., different MBS issuers may report delinquency and default statistics based on different definitions of what constitutes a delinquent or defaulted loan); and
• models may not appropriately capture the impact of evolving market conditions, policy changes, legal or regulatory developments, or structural changes in mortgage products, borrower behavior or servicing practices.
Some models, such as prepayment models or default models, may be predictive in nature. The use of predictive models has inherent risks. For example, such models may incorrectly forecast future behavior, leading to potential losses. In addition, the predictive models used by our Manager may differ substantially from those models used by other market participants, which may result in valuations that diverge materially from actual market prices. Furthermore, because 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, in the case of predicting performance in scenarios with little or no historical precedent (such as extreme broad-based declines in home prices, deep economic recessions or depressions), such models must employ greater degrees of extrapolation and are therefore more speculative and of more limited reliability.
All valuation models rely on correct market data inputs. If incorrect market data is entered into even a well-founded valuation model, the resulting valuations will be incorrect. However, even if market data is input correctly, "model prices" will often differ substantially from market prices, especially for securities with complex characteristics or whose values are
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particularly sensitive to various factors. If our market data inputs are incorrect or our model prices differ substantially from market prices, our business, financial condition and results of operations, and our ability to pay dividends to our stockholders could be materially adversely affected.
Prepayment rates can change, adversely affecting the performance of our assets.
The frequency at which prepayments (including both voluntary prepayments by borrowers and liquidations due to defaults and foreclosures) occur on mortgage loans, including those underlying our RMBS and Forward MSR-related investments, is affected by a variety of factors, including the prevailing level of interest rates as well as economic, demographic, tax, social, legal, and other factors. Generally, borrowers tend to prepay their mortgages when prevailing mortgage rates fall below the interest rates on their mortgage loans. When borrowers prepay their mortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on such loans or the related RMBS, Forward MSR-related investments or reverse MSRs. These faster or slower than expected payments may adversely affect our profitability.
We may purchase securities or loans that have a higher interest rate than the then-prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the security or loan. In accordance with U.S. GAAP, we amortize this premium as an expense over the expected term of the security or loan based on our prepayment assumptions. If a security or loan is prepaid in whole or in part at a faster than expected rate, however, we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which will adversely affect our profitability.
We also may purchase securities or loans that have a lower interest rate than the then-prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the security or loan. We accrete this discount as income over the expected term of the security or loan based on our prepayment assumptions. If a security or loan is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate. This will extend the expected life of our investment portfolio and result in a lower-than-expected yield on securities and loans purchased at a discount to par.
Prepayment rates generally increase when interest rates fall and decrease when interest rates rise. Since many RMBS, especially fixed rate RMBS, will be discount securities when interest rates are high, and will be premium securities when interest rates are low, these RMBS may be adversely affected by changes in prepayments in any interest rate environment. Prepayments may also result from borrowers’ desire to monetize a portion of the equity in their homes (“cash-out” refinancing); since higher home values (and therefore also homeowners' equity) are often correlated with lower interest rates, higher cash-out refinancing activity is also often correlated with lower interest rates. In addition, in periods of elevated interest rates, the “lock-in” effect, whereby borrowers with below-market mortgage rates are less likely to refinance or relocate, may reduce borrower mobility and refinancing activity, which may reduce prepayments relative to expectations. Prepayment rates are also affected by factors not directly tied to interest rates or home values, and these factors are difficult to predict. Prepayments can also occur when borrowers sell their properties or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the underlying property and/or from the proceeds of a mortgage insurance policy or other guarantee. Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are 120 days or more from the Agency RMBS pools that they have issued when the cost of guaranteed payments to security holders, including of interest at the security coupon rate, exceeds the cost of holding the non-performing loans in their portfolios. Consequently, prepayment rates also may be affected by conditions in the housing and financial markets, which may result in increased on mortgage loans. Prepayment rates can also be affected by actions of the GSEs and their cost of capital, general economic conditions, and the relative interest rates on fixed and adjustable rate loans. Additionally, changes in the GSEs' decisions as to when to repurchase loans can materially impact prepayment rates on Agency RMBS.
The adverse effects of prepayments may impact us in various ways. First, particular investments may experience outright losses, as in the case of interest only securities, or "IOs," and inverse interest only securities, or "IIOs," in an environment of faster actual or anticipated prepayments. Second, particular investments may underperform relative to any hedges that our Manager may have constructed for these assets, resulting in a loss to us. In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts, whereas their corresponding hedges often have the potential for unlimited loss. Furthermore, to the extent that faster prepayment rates are due to lower interest rates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run.
Prepayments also significantly affect the value of MSRs because an MSR entitles the holder to receive a monthly servicing fee equal to a percentage of the unpaid principal balance of the mortgage loans, as well as other cash flows, for so long as the underlying loans are outstanding. To the extent the underlying mortgage loan principal balances are prepaid or expected to be prepaid at a faster rate, the expected future cash flows from servicing would be lower and the value of our MSR would decline. Actual prepayment rates differing from anticipated prepayment rates could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
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In addition to the foregoing, prepayment risk and reinvestment risk also apply to our CLO investments. As part of the ordinary management of its portfolio, a CLO will typically generate cash flow from asset repayments and sales that is reinvested into substitute assets, subject to compliance with its investment tests and certain other conditions. If the CLO collateral manager causes the CLO to purchase substitute assets at a lower yield than those initially acquired, the excess interest-related cash flow available for distribution to the CLO equity tranches would decline. Furthermore, in most CLO transactions, CLO debt investors are subject to the risk that the holders of a majority of the equity tranche can direct a call or refinancing of a CLO, causing such CLO’s outstanding CLO debt securities to be repaid at par earlier than expected. Such early repayments could adversely affect the investment performance of our CLO debt investments and thereby our overall profitability, similar to the effects of mortgage prepayments on our mortgage-related investments.
Draw Rates on reverse mortgages can change in ways that adversely affect the value of reverse mortgages pools, IOs and MSRs.
Reverse mortgage borrowers often have an undrawn line of credit entitling the borrower to demand future draws from the servicer. A substantial portion of reverse MSR values comes from the expectation that while the servicer funds such future draws at par, it will be able to securitize and sell such future draws at a premium. However, recent interest rate volatility, elevated interest rates, and ongoing policy uncertainty could significantly impact reverse mortgage draw rates, affecting the value of reverse mortgage loans, residual tranches, and MSRs.
Elevated interest rates may discourage borrowers from drawing on their reverse mortgage lines of credit, which could reduce expected future cash flows for servicers. Additionally, if liquidity conditions tighten or securitization markets weaken, our ability to sell future draws at a premium could be impaired, further reducing reverse MSR values. Any regulatory changes affecting reverse mortgage lending, including potential CFPB or HUD actions, could also introduce additional risks to draw rate expectations and securitization economics. Therefore, lower than expected borrower draw rates may have a negative impact on the value of reverse MSRs, loans, and residual tranches. Conversely, draw rates may increase more rapidly than expected, which could require servicers (and us) to fund draws earlier or in greater amounts than anticipated and could adversely affect financing costs, liquidity needs, and securitization execution.
Valuations of many of our assets are inherently uncertain, may be based on estimates, may fluctuate over short periods of time, and may differ from the values that would have been used if a ready market for these assets existed.
The values of many of the assets in our portfolio are not readily determinable with precision. We value the vast majority of our assets monthly at fair value, as determined in good faith by our Manager, subject to the oversight of our Manager's valuation committee. The determination of fair value and, consequently, the amount of unrealized gains and losses in our portfolio, are to a certain degree subjective. Because such valuations are inherently uncertain, may fluctuate over short periods of time, especially during periods of elevated market volatility, and may be based on estimates, our Manager's determinations of fair value may differ from the values that would have been used if a ready market for these assets existed or from the prices at which trades occur. Furthermore, we may not obtain third-party valuations for all of our assets. Changes in the fair value of our assets directly impact our net income and book value through recording unrealized appreciation or depreciation of our investments and derivative instruments, and so our Manager's determination of fair value has a material impact on our net income.
While in many cases our Manager's determination of the fair value of our assets is based on valuations provided by third-party dealers and pricing services, our Manager can and does value assets based upon its judgment and such valuations may differ from those provided by third-party dealers and pricing services. Valuations of certain assets are often difficult to obtain or are unreliable and certain of our credit and MSR interests, including our Forward MSR-related investments and our HMBS MSR Equivalent, trade infrequently and are illiquid. In general, dealers and pricing services heavily disclaim their valuations. Additionally, dealers and pricing services may claim to furnish valuations only as an accommodation and without special compensation, and so they may disclaim any and all liability for any direct, incidental, or consequential damages arising out of any inaccuracy or incompleteness in valuations, including any act of negligence or breach of any warranty. Depending on the complexity and of an asset, valuations of the same asset can vary substantially from one dealer or pricing service to another. Higher valuations of our assets have the effect of increasing the amount of base management fees and incentive fees we pay to our Manager. Therefore, of interest exist because our Manager is involved in the determination of the fair value of our assets.
Market-based inputs are generally the preferred source of values for purposes of measuring the fair value of our assets under U.S. GAAP. However, the markets for our investments have experienced, and could in the future experience, extreme volatility, reduced transaction volume and liquidity, and disruption as a result of certain events, such as the COVID-19 pandemic, the regional banking crisis in 2023, ongoing geopolitical tensions, tariffs, uncertainty in the monetary policy of the Federal Reserve (and other central banks), which has made, and could in the future make, it more difficult for our Manager, and for the third-party dealers and pricing services that we use, to rely on market-based inputs in connection with the valuation of our assets under U.S. GAAP. Furthermore, in determining the fair value of our assets, our Manager uses proprietary models that
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require the use of a significant amount of judgment and the application of various assumptions including, but not limited to, assumptions concerning future prepayment rates, interest rates, default rates and loss severities. These assumptions may be impacted by the unpredictability of interest rate movements, driven by inflation dynamics and shifting guidance from the Federal Reserve (and other central banks) and these assumptions might be especially difficult to project accurately during periods of economic disruption. The fair value of certain of our investments may fluctuate over short periods of time, and our Manager’s determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. Investors purchasing our securities based on an overstated book value per share may pay a higher price than the intrinsic value of our portfolio supports. Conversely, investors selling shares during a period in which our book value per share understates the value of our investments may receive a lower price for their shares than the intrinsic value of our portfolio would justify.
Our business, financial condition and results of operations, and our ability to pay dividends to our stockholders could be materially adversely affected if our Manager's fair value determinations of these assets were materially different from the values that would exist if a ready market existed for these assets.
We depend on service providers, including mortgage servicers, for a variety of services related to our MSRs, MBS, CRTs, European assets, securitizations, and whole mortgage loans and loan pools. We are, therefore, subject to the risks associated with service providers, particularly third-party service providers that we do not control.
We depend on a variety of services provided by service providers related to our MSRs, MBS, CRTs, European assets, securitizations, and whole mortgage loans and loan pools. We rely on the mortgage servicers who service the mortgage loans backing certain of our assets, including our MSRs, MBS, CRTs, our European assets, our securitizations, as well as the mortgage loans and loan pools that we own directly, to, among other things, collect principal and interest payments on the underlying mortgages and perform loss mitigation services.
Mortgage servicers and other service providers, such as trustees, bond insurance providers, due diligence vendors, and custodians, may not always act in a manner that promotes our interests. In addition, legislation that has been enacted or that may be enacted in order to reduce or prevent foreclosures through, among other things, loan modifications, may reduce the value of our MSRs or the mortgage loans backing our MBS, CRTs, or whole mortgage loans that we acquire. Mortgage servicers may be incentivized by U.S. federal, state, or local governments to pursue such loan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in the best interests of the beneficial owners of the mortgage loans.
In addition to legislation that creates financial incentives for mortgage loan servicers to modify loans and take other actions that are intended to prevent foreclosures, legislation and related regulatory actions may provide servicers with safe harbors from certain liabilities and may delay or restrict the initiation or completion of foreclosure proceedings, or otherwise limit actions that may be essential to preserve the value of such loans. Any such limitations are likely to cause delayed or reduced collections from mortgagors and generally increase servicing costs. In addition, state and local foreclosure mitigation or other protection measures may further delay foreclosure timelines and increase costs.
Additionally, our MSRs, MBS, CRTs, European assets, securitizations, and whole mortgage loans and loan pools could also be materially and adversely affected if the mortgage servicer is unable to service the underlying mortgage loans due to a failure to comply with applicable laws and regulations or as a result of new legislative actions, failure to perform its loss mitigation duties, a downgrade in its servicer rating, the failure to perform adequately in its external audits, or a failure in or performance of its operational systems or infrastructure (including cybersecurity incidents, data breaches, or other technology disruptions).
Further, economic disruptions may result in liquidity pressures on servicers and other vendors that we rely upon. Servicers and certain other parties are responsible for dealing with delinquent borrowers, and are responsible in certain capital markets securitization transactions for funding advances with respect to delinquent payments of principal and interest. Therefore, the more delinquent mortgagors there are, the more likely it is that servicers and other parties will experience increased expenses in dealing with delinquent borrowers and increased difficulties funding principal and interest advances. Financial strain on servicers, including as a result of rising delinquency rates, declining mortgage origination activity, industry consolidation, and/or margin compression, could increase counterparty risk and reduce the effectiveness of servicing, and could result in transfers of servicing that me be disruptive, , or value-.
The negative impact of an economic disruption on the business and operations of such servicers or other parties responsible for funding such advances could be significant.
Most of our service providers are third parties that we do not control, and in those cases, the foregoing risks may be exacerbated. If our service providers, including mortgage servicers, do not perform as expected or act in our interests, our business, financial condition and results of operations, and ability to pay dividends to our stockholders could be materially
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adversely affected. See "—Our investments in MSR related assets expose us to additional risk of loss if our counterparty were unable to satisfy its obligation to us" and "—Risks Related to Our Loan Origination and Servicing Businesses—Longbridge relies on subservicers and other service providers to perform reverse mortgage servicing functions, which presents us with a number of risks."
We rely on mortgage servicers to service effectively, including loss mitigation efforts, and we also may engage in our own loss mitigation efforts with respect to whole mortgage loans that we own directly and such loss mitigation efforts may be unsuccessful or not cost effective.
Both default frequency and default severity of mortgage loans are highly dependent on the quality of the mortgage servicer. We depend on the effectiveness of servicing, including loss mitigation efforts of mortgage servicers and in some cases "special servicers," which are mortgage servicers who specialize in servicing non-performing loans. If mortgage servicers are not vigilant in encouraging borrowers to make their monthly payments, the borrowers are far less likely to make those payments. Additionally, servicers can perform loan modifications, which could potentially impact the value of our securities. The failure of servicers to effectively service the mortgage loans underlying the securities in our investment portfolio could negatively impact the value of our investments and our performance. In addition, for the whole mortgage loans that we own directly, we may engage in our own loss mitigation efforts over and beyond the efforts of the mortgage servicers, including more hands-on mortgage servicer oversight and management, borrower refinancing solicitations, as well as other efforts. Our and our mortgage servicers' loss mitigation efforts may be in limiting , , and , or may not be cost , which could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders. Our ability to such mitigation may also be limited by the tax rules governing REITs.
Servicer quality and effectiveness are of particular importance in the performance of non-agency loans and MBS. If a servicer is performing inadequately or goes out of business, the transfer of servicing to a new servicer takes time, and loans may become delinquent because of confusion or lack of attention. Recent regulatory scrutiny and enforcement actions against mortgage servicers, including increased penalties for noncompliance with consumer protection laws and fair servicing requirements, could impact servicer performance and increase costs associated with regulatory compliance. Additionally, disruptions in the servicing industry pose a risk to timely loan processing, payment collection, and loss mitigation efforts. Further, ongoing industry consolidation among mortgage servicers has led, and could continue to lead, to servicing transfer related disruptions. We have already experienced the adverse effects related to servicing transfers on certain of our mortgage loans. When servicing is transferred, the prior servicer’s (e.g., of interest, principal, taxes, or insurance) are often not recaptured by the new servicer, which in the case of securitized loans may have an effect on non-agency MBS credit support. In the case of securitized loans, servicers may be required to advance interest on loans to the extent the servicer deems those recoverable. However, in the event the servicer does not advance such funds, interest may be , even on more senior securities. Servicers may also advance more than is in fact recoverable once a loan is disposed, and the to the securitization trust may be than the outstanding principal balance of that loan (i.e., than 100% ). Finally, an increase in servicing costs, including as a result of an increase in the of or the costs related to mitigation efforts, would lower our yield on the relevant assets and could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.
One of the biggest risks affecting the residential mortgage loan, non-Agency RMBS, and European RMBS markets has been uncertainty around the timing and ability of servicers to foreclose on defaulted loans, so that they can liquidate the underlying properties and ultimately pass the liquidation proceeds through to RMBS holders. In response to well-publicized failures of many servicers to follow proper foreclosure procedures, mortgage servicers are being held to much higher foreclosure-related documentation standards than they previously were. However, because many mortgages have been transferred and assigned multiple times (and by means of varying assignment procedures) throughout the origination, warehouse, and securitization processes, mortgage servicers have had in the past, and may have in the future, much more difficulty furnishing the requisite documentation to initiate or complete foreclosures.
Delays in the foreclosure process may occur, both by operation of law and by delays in the judicial system. These delays lead to stalled or suspended foreclosure proceedings, and ultimately additional foreclosure-related costs. Foreclosure-related delays also tend to increase ultimate loan loss severities as a result of property deterioration, amplified legal and other costs, and other factors. Many factors delaying foreclosure, such as borrower lawsuits and judicial backlog and scrutiny, are outside of a servicer's control and have delayed, and will likely continue to , processing in both judicial states (where require court involvement) and non-judicial states. Furthermore, rising rates, particularly among lower-credit borrowers, may lead to an increase in filings, further judicial and servicer capacity.
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The concerns about deficiencies in foreclosure practices of servicers and related delays in the foreclosure process may impact our loss assumptions and have affected and may continue to affect the values of, and our returns on, our investments in RMBS and residential whole loans.
To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated with such assets and may not reveal other weaknesses in such assets, which could lead to losses.
Before committing to an investment, our Manager may decide to conduct (either directly or using third parties) certain due diligence. There can be no assurance that our Manager will conduct any specific level of due diligence, or that, among other things, our Manager's due diligence processes will uncover all relevant facts or that any purchase will be successful, any such failure could result in losses on these assets and which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Sellers of the mortgage loans that we acquire, or that underlie the non-Agency RMBS or European RMBS in which we invest, may be unable to repurchase defective mortgage loans, which could have a material adverse effect on the value of our loans, or the loans held by the trust that issued the RMBS, and could cause shortfalls in the payments due on the RMBS or losses on the mortgage loans.
Sellers of mortgage loans that we acquire, or that are sold to the trusts that issued the non-Agency RMBS or European RMBS in which we invest, make various representations and warranties related to the mortgage loans sold by them to us or the trusts that issued the RMBS. If a seller fails to cure a material breach of its representations and warranties with respect to any mortgage loan in a timely manner, then we, or the trustee or the servicer of the loans, may have the right to require that the seller repurchase the defective mortgage loan (or in some cases substitute a performing mortgage loan). It is possible, however, that for financial or other reasons, the seller either may not be willing or able to repurchase defective mortgage loans, or may dispute the validity of or otherwise resist its obligation to repurchase defective mortgage loans. In addition, repurchase claims may be subject to contractual limitations, statutes of limitations, cure periods, risk, or other defenses that may , limit, or eliminate recoveries. The or of a seller to repurchase mortgage loans from us or from a non-Agency RMBS trust or European RMBS trust in which we invest would likely cause higher rates of , , and for the mortgage loans we hold, or the mortgage loans backing such non-Agency RMBS or European RMBS, and ultimately for our investment in such assets. These risks may become more acute as we acquire mortgage loans from a larger number of third-party sellers, increase our volume of loan acquisitions from outside sellers, or have exposure to sellers with differing financial , business models, or concentrations, any of which could increase the likelihood that one or more sellers may be or to their repurchase obligations.
Our assets include subordinated and lower-rated securities that generally have greater risk of loss than senior and higher-rated securities.
Certain securities that we acquire are deemed by rating agencies to have substantial vulnerability to default in payment of interest and/or principal. Other securities we acquire have the lowest quality ratings or are unrated. Many securities that we acquire are subordinated in cash flow priority to other more "senior" securities of the same securitization. Certain subordinated securities ("first loss securities") absorb all losses from default before any other class of securities is at risk. Such securities are therefore considered to be highly speculative investments.
In the case of CRTs and subordinated RMBS and CMBS, the risk of defaults on the underlying mortgages and/or declining real estate values is amplified (particularly in light of the distress in certain real estate sectors, such as the office sector), as are the risks associated with possible changes in the market's perception of any entity issuing or guaranteeing such securities, or by changes in government regulations and tax policies. In the case of CLOs, the risk of economic recession and declining creditworthiness of corporate borrowers would be amplified by rising corporate default rates, tightening credit conditions, and potential credit downgrades in leveraged loan markets. Accordingly, the subordinated and lower-rated (or unrated) securities in which we invest may experience significant price and performance volatility and are subject to greater risk of loss than more senior and/or higher-rated securities, which, if realized, could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Increases in interest rates could negatively affect the value of our assets and increase the risk of default on our assets.
Our fixed-rate investments, especially most fixed-rate mortgage loans, fixed-rate MBS, and most MBS backed by fixed-rate mortgage loans, generally decline in value when long-term interest rates increase. Even in the case of Agency RMBS, the guarantees provided by GSEs do not protect us from declines in market value caused by changes in interest rates. In the case of RMBS backed by adjustable-rate mortgages, or "ARMs," increases in interest rates can lead to increases in delinquencies and defaults as borrowers become less able to make their mortgage payments following interest payment resets. Elevated interest rates (including mortgage rates) may contribute to lower housing affordability, increased borrower payment shocks upon ARM interest rate resets, a slowdown in (or reversal of) home price appreciation, and declines in commercial real estate prices, which
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could adversely impact borrower credit performance of both our residential and commercial mortgage loans.
Additionally, an increase in short-term interest rates would increase the amount of interest owed on our repo borrowings, for which see "—Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets." See also "— Certain actions by the Federal Reserve could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.”
Changes in market conditions may cause a decrease in the issuance volumes of certain of our targeted assets, which could adversely affect our ability to acquire assets that satisfy our investment objectives, and which could adversely affect the loan originators in which we invest.
Rising interest rates, elevated interest rate volatility and/or elevated yield spreads generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of targeted assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives, and could also adversely affect the mortgage loan originators in which we are invested, whose businesses depend on demand from borrowers for mortgage loans. In addition, constrained housing supply, reduced housing affordability and the “lock-in” effect may reduce mortgage origination and refinancing activity, which could further reduce issuance volumes of certain targeted assets and of the loan originators in which we are invested. If changes in market conditions cause us to be unable to acquire a sufficient volume of our targeted assets with a yield that is above our borrowing cost, or adversely impact Longbridge and other loan originators in which we invest, our ability to satisfy our investment objectives and to generate income and pay dividends to our stockholders may be materially and adversely affected.
Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets.
Some of our assets are fixed rate or have a fixed-rate component (including non-QM loans, residential transition loans, and RMBS backed by hybrid ARMs). This means that the interest we earn on these assets will not vary over time based upon changes in a short-term interest rate index. Although the interest we earn on our ARMs, our RMBS backed by ARMs, and many of our CLO investments generally will adjust for changing interest rates, such interest rate adjustments may not occur as quickly as the interest rate adjustments to any related borrowings, and such interest rate adjustments will generally be subject to interest rate caps, which potentially could cause such assets to acquire many of the characteristics of fixed rate assets during periods of rising or high interest rates. We generally fund our assets with borrowings whose interest rates reset frequently, and as a result we generally have an interest rate mismatch between our assets and liabilities, which could cause our net interest margin (the spread between the average yield on our assets and our average borrowing costs) to compress, or even become negative. While our interest rate hedges are intended to mitigate a portion of this mismatch, the use of interest rate hedges also introduces the risk of other interest rate mismatches and exposures, as does the use of other financing techniques. In addition, periods of elevated interest rate may increase the costs and complexity of hedging and financing our portfolio.
Additionally, to the extent cash flows from RMBS we hold are reinvested in new RMBS, the spread between the yields of the new RMBS and available borrowing rates may also compress or become negative. If our net interest margin compresses or becomes negative, our business, cash flow, financial condition, results of operations, and ability to pay dividends to our stockholders could be materially affected. In fact, in 2022, 2023 and 2024, which saw periods of rising interest rates, we experienced compressed, and in some cases negative, net interest margin on many of our assets.
Fixed-income assets, including many RMBS, typically decline in value if interest rates increase. If long-term rates were to increase significantly, such as we observed during 2022 and parts of 2023 and 2024, not only would the market value of these assets be expected to decline, but these assets could lengthen in duration because borrowers would be less likely to prepay their mortgages.
Interest rates can change quickly and are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. Moreover, concerns over the United States’ debt ceiling and budget-deficit have increased the possibility of downgrades by rating agencies to the U.S. government’s credit rating, which could cause interest rates and borrowing costs to rise substantially. Interest rate movements are highly uncertain and notoriously difficult to predict. For example, during 2022 and parts of 2023 and 2024, short-term and long-term interest rates increased significantly.
While we opportunistically hedge our exposure to changes in interest rates, such hedging may be limited by our intention to remain qualified as a REIT, and we can provide no assurance that our hedges will be successful, or that we will be able to enter into or maintain such hedges. As a result, interest rate fluctuations can cause significant losses, reductions in income, and can limit the cash available to pay dividends to our stockholders.
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Interest rate caps on ARMs and hybrid ARMs, including those that back our RMBS, may reduce our net interest margin during periods of rising or high interest rates.
ARMs and hybrid ARMs (i.e., residential mortgage loans that have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to a fixed increment over a specified interest rate index) are typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through the maturity of the loan. Our borrowings typically are not subject to similar restrictions. Accordingly, the ARMs and hybrid ARMs that we hold (or that back RMBS that we hold) expose us to interest rate mismatch risks, particularly during prolonged periods of elevated interest rates. See "—Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets."
Certain actions by the Federal Reserve and other central banks could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Actions by the Federal Reserve (and similar actions by other central banks), including tightening or easing of monetary policy, increases or decreases in short-term interest rates, balance sheet liquidations or runoff, or other actions, or the perception that the Federal Reserve or other central banks are failing to take actions deemed necessary or advisable by the market, have caused, and could continue to cause, elevated market volatility and adversely impact the value and performance of our assets and our ability to borrow money or otherwise access capital to fund our operations. See also "—Increases in interest rates could adversely affect the value of our assets and cause our interest expense to increase, and increase the risk of default on our assets, which could result in reduced earnings or losses and negatively affect our profitability as well as the cash available for distribution to stockholders" for the impact of higher interest rates on our business.
If we subsequently resell or securitize any whole mortgage loans that we acquire, we may be required to repurchase such loans or indemnify purchasers if we breach representations and warranties.
If we subsequently resell or securitize any whole mortgage loans that we acquire, we would generally be required to make customary representations and warranties about such loans to the loan purchaser or securitization trust. Our residential mortgage loan sale agreements and terms of any securitizations into which we sell loans will generally require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. Such repurchase demands would be expected to rise if the loans we have sold or securitized experience poor credit performance. In addition, we may be subject to indemnification obligations or other remedies, and repurchase disputes may be costly and time-consuming to resolve.
The remedies available to a purchaser of mortgage loans that we have sold are generally broader than those available to us against an originating broker or correspondent. Repurchased loans are typically worth only a fraction of the original price. Significant repurchase activity against us could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
The commercial mortgage loans that we acquire or originate, and the mortgage loans underlying our CMBS investments, are subject to the ability of the commercial property owner to generate net income from operating the property as well as to the risks of delinquency and foreclosure.
Commercial mortgage loans are secured by commercial property and are subject to risks of delinquency and foreclosure, and risk of loss that may be greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. Furthermore, the market value of a commercial mortgage property is often driven by a “capitalization rate,” which represents the annual net operating income of the property expressed as a percentage of its market value. Capitalization rates tend to be correlated with long-term interest rates, and increases in capitalization rates generally reduce the market value of commercial properties. Upon maturity of our commercial mortgage loans, declines in the net operating income of the property and/or increases in then-prevailing capitalization rates (especially if interest rates have risen substantially from the time the loan was originated), may cause in the market value of the property, which could cause the borrower to be to refinance or repay the maturing loan.
Net operating income of an income-producing property can be adversely affected by, among other things:
• tenant mix;
• declines in tenant income and/or changes to tenant businesses;
• property management decisions;
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• property location, condition, and design;
• new construction of competitive properties;
• changes in laws that increase operating expenses or limit rents that may be charged;
• changes in national, regional, or local economic conditions and/or specific industry segments, including the credit and securitization markets;
• declines in regional or local real estate values;
• declines in regional or local rental or occupancy rates;
• increases in interest rates, real estate tax rates, and other operating expenses;
• costs of remediation and liabilities associated with environmental conditions;
• the potential for uninsured or underinsured property losses;
• changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation, and the related costs of compliance; and
• general economic downturn, including from high energy costs, high unemployment, acts of God, pandemics, war or other geopolitical conflict, terrorism, elevated inflation, social unrest, and civil disturbances.
In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and our cost basis in the outstanding principal and accrued interest of the mortgage loan, and any such losses could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.
In addition, there were several notable regional bank failures in the U.S. during 2023, many of which held a significant amount of commercial mortgage loans. There is a possibility that any resulting instability of the banking system could reduce the rate of global economic growth and might lead to a recessionary environment in certain economies, including the U.S. or Europe. Any decline in the commercial real estate market related to the failed regional banks could have a materially adverse impact on our commercial mortgage loans and REO and could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
CMBS are secured by a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the CMBS we invest in are subject to all of the risks of the respective underlying commercial mortgage loans.
We also have commercial mortgage loans and CMBS where the value of the underlying properties, such as office properties, hotels, and healthcare properties, partly relies on the value associated with the operating businesses at those properties. As such, these loans bear the risks associated with the values of those commercial properties, as well as the risks associated with the underlying operating businesses. Office properties are vulnerable to potential disruptions or changes in business practices caused by technological or other innovations (such as businesses adopting remote work policies, shared spaces, and/or co-working environments), workforce reductions in certain market segments, or other factors, which has recently negatively impacted, and may continue to negatively impact, office demand in the commercial real estate sector, rental rates and occupancy levels. Distress in the commercial real estate sector, including office properties, is negatively impacting and may continue to negatively impact certain commercial real estate-related markets in which we invest, including for example, as a result of low occupancy rates, tenant defaults, the maturation of a significant amount of commercial real estate loans amid an elevated interest rate environment, credit conditions imposed by traditional sources of real estate financing and refinancing, and commercial mortgage loan . If these commercial properties do not generate sufficient income to pay for ongoing operating expenses, our commercial mortgage loans and/or our CMBS may not generate enough principal and/or interest to justify our investment. A in the performance or value of commercial mortgage loans could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our investments in CMBS are at risk of loss.
Our investments in CMBS are at risk of loss. In general, losses on real estate securing a mortgage loan included in a securitization will be borne first by the owner of the property, then by the holder of a mezzanine loan or a subordinated participation interest in a bifurcated first-lien loan, or "B-Note," if any, then by the "first-loss" subordinated security holder
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(generally, the B-piece buyer) and then by the holder of a higher-rated security. In the event of losses on mortgage loans included in a securitization and the subsequent exhaustion of any applicable reserve fund, letter of credit, or classes of securities junior to those in which we invest, we may not be able to recover all of our investment in the securities we purchase. In addition, if any of the real estate underlying the securitization mortgage portfolio has been overvalued by the originator, or if real estate values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related CMBS, we may incur losses. These risks may be heightened during periods of elevated interest rates, reduced liquidity and tightening credit conditions, which may impair refinancing activity and increase defaults. The prices of lower credit quality securities are particularly sensitive to adverse economic downturns or individual issuer developments.
We may not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.
With respect to the CMBS in which we invest, overall control over the special servicing of the related underlying mortgage loans will be held by a "directing certificateholder" or a "controlling class representative," which is generally appointed by the holders of the most subordinate class of CMBS in such series. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions with respect to the specially serviced mortgage loans that could adversely affect our interests, including actions that may increase servicing fees or expenses, extend workout timelines, or result in modifications, extensions, waivers or other resolutions that may reduce or delay recoveries. For further discussion of the risks of our reliance on special servicers, see "—We rely on mortgage servicers to service effectively, including our loss mitigation efforts, and we also may engage in our own loss mitigation efforts with respect to whole mortgage loans that we own directly and such loss mitigation efforts may be unsuccessful or not cost effective."
A portion of our investments currently are, and in the future may be, in the form of non-performing and sub-performing commercial and residential mortgage loans, or loans that may become non-performing or sub-performing, which are subject to increased risks relative to performing loans.
A portion of our investments currently are, and in the future may be, in the form of commercial and residential whole mortgage loans, including subprime mortgage loans and non-performing and sub-performing mortgage loans, which are subject to increased risks of loss. Such loans may already be, or may become, non-performing or sub-performing for a variety of reasons, including because the underlying property is too highly leveraged, property cash flows are inadequate to support a full refinancing upon loan maturity, or the borrower falls upon financial distress. Such non-performing or sub-performing loans may require a substantial amount of workout negotiations and/or restructuring, which may divert the attention of our Manager from other activities and entail, among other things, a substantial reduction in the interest rate, capitalization of interest payments, and a substantial write-down of the principal of the loan. However, even if such restructuring were successfully accomplished, a risk exists that the borrower will not be able or willing to maintain the payments or refinance the mortgage upon maturity. In addition, such modifications could affect our compliance with the tests applicable to REITs, including by increasing our distribution requirement.
In addition, certain non-performing or sub-performing loans that we acquire may have been originated by financial institutions that are or may become insolvent, suffer from serious financial stress, or are no longer in existence. As a result, the standards by which such loans were originated, the recourse to the selling institution, and/or the standards by which such loans are being serviced or operated may be adversely affected. Further, loans on properties operating under the close supervision of a mortgage lender are, in certain circumstances, subject to additional potential liabilities that may exceed the value of our investment.
In the future, it is possible that we may find it necessary or desirable to foreclose on some, if not many, of the loans we acquire, and the foreclosure process may be lengthy and expensive. Borrowers or junior lenders may resist mortgage foreclosure actions by asserting numerous claims, counterclaims, and defenses against us including, without limitation, numerous lender liability claims and defenses, even when such assertions may have no basis in fact, in an effort to prolong the foreclosure action and force the lender into a modification of the loan or capital structure or a favorable buy-out of the borrower's or junior lender's position. In some states, foreclosure actions can sometimes take several years or more to . At any time prior to or during the proceedings, the borrower may file, or a junior lender may cause the borrower to file, for , which would have the effect of staying the actions and further the process. and associated may create a public perception of the related mortgaged property, resulting in a of its value. Even if we are in on a loan, the proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a to us, and the borrower or junior lenders may continue to whether the process was commercially reasonable, which could result in additional costs and potential liability. Any costs or involved in the effectuation of a of the loan or a of the underlying property, or brought after the completion of a , will further reduce the
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proceeds and thus increase the loss. Any such reductions could materially and adversely affect the value we realize from the loans in which we invest.
Whether or not our Manager has participated in the negotiation of the terms of any such mortgage loans, there can be no assurance as to the adequacy of the protection of the terms of the loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests. Furthermore, claims may be asserted that might interfere with enforcement of our rights. 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, resulting in a loss to us.
Commercial whole mortgage loans are also subject to special hazard risk and to bankruptcy risk. In addition, claims may be assessed against us on account of our position as mortgage holder or property owner, including assignee liability, responsibility for tax payments, environmental hazards and other liabilities. In some cases, these liabilities may be "recourse liabilities" or may otherwise lead to losses in excess of the purchase price of the related mortgage or property. Further, increased environmental regulations and climate-related risks could further impact the cost and complexity of managing foreclosed properties, particularly in states imposing stricter environmental compliance standards.
Our real estate assets and our real estate-related assets (including mortgage loans and MBS) are subject to the risks associated with real property.
We own assets secured by real estate, we own real estate directly, and we may acquire additional real estate directly in the future, either through direct acquisitions or upon a default of mortgage loans. Real estate assets are subject to various risks, including:
• declines in the value of real estate, including due to declining property cash flows or rising capitalization rates;
• acts of God, including pandemics, such as the COVID-19 pandemic, earthquakes, floods, droughts, wildfires, hurricanes, mudslides, volcanic eruptions and other natural disasters, which may result in uninsured losses;
• war or geopolitical conflict or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;
• adverse changes in national and local economic and market conditions, including those related to unemployment levels, elevated inflation and high energy costs;
• changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and zoning ordinances;
• costs of remediation and liabilities associated with environmental conditions, such as indoor mold;
• potential liabilities for other legal actions related to property ownership including tort claims; and
• the potential for uninsured or under-insured property losses.
The occurrence of any of the foregoing or similar events could reduce our return from an affected property or asset and, consequently, could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We engage in short selling transactions, which may subject us to additional risks.
Certain of our hedging transactions, and occasionally our investment transactions, may be short sales or short positions. Short selling may involve selling securities that are not owned and typically borrowing the same securities for delivery to the purchaser, with an obligation to repurchase the borrowed securities at a later date. Short selling allows the investor to profit from declines in market prices to the extent such declines exceed the transaction costs and the costs of borrowing the securities. A short sale may create the risk of an unlimited loss, in that the price of the underlying security might theoretically increase without limit, thus increasing the cost of repurchasing the securities. There can be no assurance that securities sold short will be available for repurchase or borrowing. Market conditions, including lower liquidity in certain asset classes and derivatives, and increased short sale restrictions imposed by regulators during periods of financial stress, could limit our ability to execute or maintain short positions effectively and could increase our borrowing costs for securities sold short.
Repurchasing securities to close out a short position can itself cause the price of the securities to rise further, thereby exacerbating the loss, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
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Our investments that are denominated in foreign currencies, domiciled outside the U.S., or that involve non-U.S. assets are subject to risks associated with non-U.S. investing, including in some cases foreign currency risk.
Our investments that are denominated in foreign currencies subject us to foreign currency risk arising from fluctuations in exchange rates between such foreign currencies and the U.S. dollar. While we currently attempt to hedge the vast majority of our foreign currency exposure, we may not always choose to hedge such exposure, or we may not be able to hedge such exposure. To the extent that we are exposed to foreign currency risk, changes in exchange rates between such foreign currencies and the U.S. dollar could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Further, while our CLO investments are primarily in CLOs that hold underlying U.S. assets, we may also invest in CLOs that hold non-U.S. assets, and we expect that many of the CLO issuers in which we invest will be domiciled outside the United States. Investing directly or indirectly in non-U.S. issuers may expose us to additional risks, including political and social instability, expropriation, imposition of foreign taxes, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards, currency fluctuations and greater price volatility. Further, we, and the CLOs in which we invest, may have difficulty enforcing creditor rights in foreign jurisdictions. Non-U.S. investments may also be subject to sanctions, trade restrictions, capital controls, and other restrictions on cross-border transactions, any of which could adversely affect valuations, liquidity, and our ability to realize returns.
Risks Related to Our Financing, Hedging, and Derivative Activities
We use leverage in executing our business strategy, which may adversely affect the return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.
We use leverage to finance our investment activities and to enhance our financial returns. Most of our leverage is in the form of short-term repos for our Agency and credit portfolio assets. Other forms of leverage include our term secured bank facilities, our securitizations, our unsecured borrowings and may in the future include other types of credit facilities, such as term loans and revolving credit facilities.
Through the use of leverage, we may acquire positions with market exposure significantly greater than the amount of capital committed to the transaction. For example, by entering into repos with haircut levels of 5%, we could theoretically leverage capital allocated to Agency RMBS by an asset-to-equity ratio of as much as 20 to 1. A haircut is the percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized.
Although we may from time to time enter into certain contracts with third parties that may limit our leverage, such as certain financing arrangements with lenders, our governing documents do not specifically limit the amount of leverage that we may use. Leverage can enhance our potential returns but can also exacerbate losses. Even if an asset increases in value, if the asset fails to earn a return that equals or exceeds our cost of borrowing, the leverage will diminish our returns.
Leverage also increases the risk of our being forced to precipitously sell our assets at inopportune times. In addition, changes in market volatility, liquidity and financing conditions may result in increased margin requirements or more frequent margin calls, which could further accelerate the pace of sales and potentially amplify losses. See "—Our access to financing may not be available on favorable terms, or may be limited or completely shut off, and our lenders and derivative counterparties may require us to post additional collateral."
Our access to financing may not be available on favorable terms, or may be limited or completely shut off, and our lenders and derivative counterparties may require us to post additional collateral.
Our ability to fund our operations, meet financial obligations, and finance asset acquisitions may be impacted by an inability to secure and maintain our financing through repurchase agreements or other borrowings with our counterparties. Because repurchase agreements for securities are generally short-term transactions, lenders may respond to adverse market conditions by refusing to renew or replace, or making it more difficult for us to renew or replace, our maturing short-term borrowings, including imposing more onerous conditions or offering economically worse terms when renewing ("rolling") such repurchase agreements.
Our lenders are primarily large global financial institutions, with exposures both to global financial markets and to more localized conditions. In addition to borrowing from large banks, we borrow from smaller non-bank financial institutions. Whether because of a global or local financial crisis or other circumstances, such as if one or more of our lenders experiences severe financial difficulties, they or other lenders could become unwilling or unable to provide us with financing, could increase the haircut required for such financing, or could increase the costs of that financing.
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Moreover, we are currently party to short-term borrowings (in the form of repos) and there can be no assurance that we will be able to roll these borrowings as they mature on a continuous basis and it may be more difficult for us to obtain debt financing on favorable terms, or at all. If we are not able to renew our existing repurchase agreements or other borrowings, or arrange for new financing on terms acceptable to us, or if we default on our financial covenants (including those on our repurchase agreements, other borrowings, and our Senior Notes), are otherwise unable to access funds under our financing arrangements, or if we are required to post more collateral or face larger haircuts, we may have to dispose of assets at significantly depressed prices and/or at inopportune times, which could cause significant losses, and may also force us to curtail our asset acquisition activities. Similarly, if we were to move a financing from one counterparty to another that was subject to a larger haircut we would have to repay more cash to the original counterparty than we would be to borrow from the new counterparty. To the extent that we might be compelled to qualifying real estate assets to repay debts, our compliance with the REIT asset tests, income tests, and distribution requirements could be affected, which could our qualification as a REIT. our REIT qualification would cause us to be subject to U.S. federal income tax (and any applicable state and local taxes) on all of our income and decrease and cash available to pay dividends to our stockholders. Any such could also materially affect our ability to maintain our exclusion from registration as an investment company under the Investment Company Act.
In addition, if there is a contraction in the overall availability of financing for our assets, including if the regulatory capital requirements imposed on our lenders change, our lenders may significantly increase the cost of the financing that they provide to us, or increase the amounts of collateral they require as a condition to providing us with financing. Our lenders also have revised, and may continue to revise, their eligibility requirements for the types of assets that they are willing to finance or the terms of such financing arrangements, including increased haircuts and requiring additional cash collateral, based on, among other factors, the regulatory environment and their management of actual and perceived risk, particularly with respect to assignee liability.
Moreover, the amount of financing that we receive under our financing agreements will be directly related to our lenders’ valuation of the financed assets subject to such agreements. Typically, the master repurchase agreements that govern our borrowings under repurchase agreements grant the lender the right to reevaluate the fair market value of the financed assets subject to such repurchase agreements at any time. If a lender determines that the net decrease in the value of the portfolio of financed assets is greater in magnitude than any applicable threshold, it will generally initiate a margin call. In such cases, a lender's valuations of the financed assets may be different than the values that we ascribe to these assets and may be influenced by recent asset sales at distressed levels by forced sellers. A valid margin call requires us to transfer cash or additional qualifying collateral to a lender or to repay a portion of the outstanding borrowings. If we were to dispute the validity of a margin call from a lender under one of our repo agreements and refuse to deliver margin collateral as a result, a lender could still send us a notice of default. In this situation, such lender will have possession of the financed assets, and might still decide to exercise its contractual remedies, the margin . In the event of our , our lenders or derivative counterparties can accelerate our indebtedness, our derivative contracts (potentially on terms requiring additional payments, including additional fees and costs), increase our borrowing rates, our collateral, and our ability to borrow.
In certain cases, a default on one financing agreement or derivative agreement (whether caused by a failure to satisfy margin calls or another event of default) can trigger "cross defaults" on other such agreements. In addition, to the extent that we or our affiliates guarantee any indebtedness or other obligations, whether of affiliates or third parties, a default under such arrangements could also result in direct payment obligations or other liabilities for us under such guarantees; in that case, our failure to perform under such guarantees could also trigger "cross defaults" on our own financing agreements and derivative agreements. Similarly, if the market value of our derivative contracts with a derivative counterparty declines in value, we generally will be subject to a margin call by the derivative counterparty.
Significant margin calls and/or increased repo haircuts could have a material adverse effect on our results of operations, financial condition, business, liquidity, and ability to make distributions to our stockholders, and could cause the value of our capital stock to decline. A sufficiently deep drop in market valuations and/or rapid increase in margin calls or haircuts would have an adverse impact on our liquidity, which could cause us to have to sell assets at inopportune times or prices to meet such obligations.
Consequently, depending on market conditions at the relevant time, we may have to rely on additional equity issuances to meet our capital and financing needs, which we may not be able to issue, or which may be dilutive to our stockholders, or we may have to rely on less efficient forms of debt financing that consume a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future business opportunities, cash dividends to our stockholders, and other purposes. There can be no assurance that we will have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired times, or at all, which may cause us to curtail our asset acquisition activities
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and/or dispose of assets, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders, or in the worst case, cause our insolvency.
A failure to comply with restrictive covenants in our financing arrangements would have a material adverse effect on us, and any future financings may require us to provide additional collateral or pay down debt.
We are subject to various restrictive covenants contained in our existing financing arrangements and may become subject to additional covenants in connection with future financings. For example, the indentures governing certain of our Senior Notes contain covenants that, among other things and subject to a number of exceptions and adjustments: limit our ability to incur additional indebtedness; require us to maintain a minimum net asset value; require us to maintain a minimum amount of assets unencumbered by liens; impose certain maximum debt-to-equity ratios; and impose certain conditions on our merger or consolidation with another company. In addition, the interest rate on certain of our Senior Notes is subject to upward adjustment based on certain changes, if any, in the ratings of the Senior Notes. Furthermore, several of our repo agreements contain financial covenants of a similar nature, including requiring us to maintain a minimum level of liquidity, a minimum level of equity, and a maximum level of additional indebtedness. Compliance with these covenants may be more difficult during periods of market stress, valuation volatility or reduced liquidity.
The covenants in our financing arrangements may limit our flexibility to pursue certain investments or incur additional debt. If we fail to meet or satisfy any of these covenants, subject to any applicable cure provisions, we would be in default under these agreements and our indebtedness could be declared due and payable. In addition, our lenders could terminate their commitments, require the posting of additional collateral and enforce their interests against existing collateral. We may also be subject to cross-default and acceleration rights under our financing arrangements, whereby a default (such as a failure to comply with a covenant) under one financing arrangement can trigger a default under other financing arrangements.
Our securitizations may expose us to additional risks.
In order to generate additional cash for funding new investments, we have securitized, and may in the future seek to securitize certain of our assets, especially our loan assets. Some securitizations are treated as financing transactions for U.S. GAAP, while others are treated as sales. In a typical securitization, we convey assets to a special purpose vehicle, which then issues one or more classes of notes secured by the assets pursuant to the terms of an indenture. To the extent that we retain the most subordinated economic interests in the issuing vehicle, we would continue to be exposed to losses on the assets for as long as those retained interests remained outstanding and therefore able to absorb such losses. Furthermore, our retained interests in a securitization could be less liquid than the underlying assets themselves, and may be subject to U.S. Risk Retention Rules and similar European rules. Moreover, even though we might accumulate assets with a view towards possible securitization, we cannot be assured that we will be able to access the securitization market, or be able to do so under favorable terms, particularly during periods of market , reduced liquidity, or elevated interest rate . The to securitize certain segments of our portfolio, especially certain of our loan assets, could us to resort to what may be methods of financing those assets, could us to sell those loan assets at inopportune times, and could impact our ability to grow our loan acquisition businesses. Furthermore, because we have entered into and may in the future enter into securitization transactions alongside other entities, including other Ellington affiliates, there may be between us, on the one hand, and the other entities, including other Ellington affiliates, on the other hand.
In addition, in anticipation of a securitization transaction, we (either alone or in conjunction with other investors, including other Ellington affiliates) have in the past, and may again in the future, provide capital to a vehicle accumulating assets for the securitization. If such a securitization is not ultimately completed, or if the assets do not perform as expected during the accumulation period, we could lose all or a portion of the capital that we provided to the vehicle. These accumulation vehicles typically enter into warehouse financing facilities to facilitate their accumulation of assets, and so such vehicles carry with them the additional risks associated with financial leverage and covenant compliance.
In connection with our securitizations, we generally are required to prepare disclosure documentation for investors, including term sheets and offering memoranda, which contain information regarding the securitization generally, the securities being issued, and the assets being securitized. If our disclosure documentation for a securitization is alleged or found to contain material inaccuracies or omissions, we may be liable under federal securities laws, state securities laws or other applicable laws for damages to the investors in such securitization, we may be required to indemnify the underwriters of the securitization or other parties, and/or we may incur other expenses and costs in connection with disputing these allegations or settling claims. Such liabilities, expenses, and/or losses could be significant.
We will typically be required to make representations and warranties in connection with our securitizations regarding, among other things, certain characteristics of the assets being securitized. If any of the representations and warranties that we have made concerning the assets are alleged or found to be inaccurate, we may incur expenses disputing the allegations, and we may be obligated to repurchase certain assets, which may result in losses. Even if we previously obtained representations and
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warranties from loan originators or other parties from whom we originally acquired the assets, such representations and warranties may not align with those that we have made for the benefit of the securitization, or may otherwise not protect us from losses, including as a result of the deterioration in the financial condition of the party that provided representations and warranties to us.
Longbridge assumes certain obligations related to each security issued in its securitizations. One significant obligation is the requirement to purchase any HECM loan out of the HMBS if the outstanding principal balance of such loan is equal to or greater than 98% of the maximum claim amount ("MCA Repurchases"). Active repurchased loans are assigned to HUD, and HUD reimburses Longbridge for the outstanding principal balance on the loan up to the maximum claim amount. Longbridge bears the risk to the extent that the amount of the outstanding principal balance on a loan exceeds the maximum claim amount. Inactive repurchased loans, which are loans where a default or maturity event has occurred, such as the borrower passing away, no longer occupying the property or becoming delinquent on tax and insurance payments, are generally liquidated through foreclosure and subsequent sale of real estate owned property (“REO”), with a claim filed with HUD for recoverable remaining principal and advance balances. The recovery timeline for inactive repurchased loans depends on various factors, including foreclosure status at the time of repurchase, state-level foreclosure timelines, and the post-foreclosure REO timeline. The timing and amount of Longbridge’s obligation with respect to MCA Repurchases is uncertain as repurchase is dependent largely on circumstances outside of Longbridge’s control, including the amount and timing of future draws, the status of the loan, and interest rates. MCA Repurchases are expected to continue to increase due to the increased flow of HECMs and REO that are reaching 98% of their maximum claim amount. We typically fund these repurchase obligations using available cash and/or borrowing facilities to finance a portion of the repurchase amount. However, to the extent that our funding commitments exceed our borrowing capacity under these facilities, if we are to renew these facilities upon their maturities, we would be solely dependent on available cash to meet these commitments. If our liquidity position is to fund these amounts, this could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders. In addition, when using these facilities to finance the repurchase, Longbridge also typically earns an interest rate that is frequently less than the cost of financing, and also incurs certain non-reimbursable costs during the process of loans.
If Longbridge is unable to fund its tail funding commitments or securitize its HECM loans (including tail pools), or if HMBS tail pool prices decline, this could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Longbridge originates and services reverse mortgage loans where the borrower has an undrawn line of credit entitling the borrower to demand future draws, which Longbridge as servicer may be obligated to fund. As of December 31, 2025 our commitment to fund such additional borrowing capacity was $2.3 billion. In addition, Longbridge is required to advance mortgage insurance premiums on behalf of HECM borrowers and, separately, may also be required in certain circumstances, in conjunction with its reverse MSRs, to advance funds in and rely on reimbursement from the related securitization trust (and such reimbursement by the trust may be delayed or limited due to structural, operational or liquidity constraints within the securitization structure). Longbridge typically funds these obligations on a short-term basis using available cash and/or its credit facilities, and regularly securitize these amounts (along with our servicing fees) through the issuance of HMBS tail securitizations.
A substantial portion of reverse MSR values comes from the expectation that while the servicer funds such future draws at par, it will be able to securitize and sell such future draws at a premium. However, certain market conditions, including elevated volatility and/or elevated interest rates, may depress execution levels on new HMBS tail pools. When valuing Longbridge’s reverse MSRs, the prices assumed for subsequent HMBS tail pools reflect market conditions that may not be realized. If the actual prices earned on these HMBS pools are lower than forecast, the value of Longbridge’s reverse MSRs could be materially adversely impacted.
Longbridge enters into revolving credit facilities and other financing arrangements to finance these tail draws prior to their securitization into HMBS. However, to the extent that Longbridge's funding commitments exceed its borrowing capacity under these facilities, or if it is unable to renew or replace these facilities upon maturity, Longbridge would be dependent on available cash to meet these commitments. If Longbridge’s liquidity position is insufficient to meet these commitments and Longbridge is unable to fund them through the securitization of the tails into HMBS, this could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Hedging against credit events, interest rate changes, foreign currency fluctuations, and other risks could materially adversely affect our business.
Subject to maintaining our qualification as a REIT and maintaining our exclusion from registration as an investment company under the Investment Company Act, we opportunistically pursue various hedging strategies to seek to reduce our
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exposure to losses from adverse credit events, interest rate changes, foreign currency fluctuations, and other risks. Hedging against a decline in the values of our portfolio positions does not prevent losses if the values of such positions decline, nor does it eliminate the possibility of fluctuations in the value of our portfolio. Hedging transactions generally will limit the opportunity for gain should the values of our other portfolio positions increase. Further, certain hedging transactions could result in significant losses. Qualification as a REIT may require that we forgo certain hedging activities or undertake certain hedging activities in a TRS. Our domestic TRSs are subject to U.S. federal, state, and local income tax. Any taxes paid by our TRSs could reduce our ability to make distributions to our shareholders. Moreover, at any point in time we may choose not to hedge all or a portion of our risks, and we generally will not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be or prohibitively expensive to hedge. Even if we do choose to hedge certain risks, for a variety of reasons we generally will not seek to establish a correlation between our hedging instruments and the risks being hedged. As a result, our hedging instruments may not be closely correlated with the risks being hedged, which may us to a risk of . Our hedging activity will vary in scope based on the composition of our portfolio, our market views, and changing market conditions, including the level and of interest rates. When we do choose to hedge, hedging may to protect or could materially affect us because, among other things:
• our Manager may fail to correctly assess the degree of correlation between the hedging instruments and the assets being hedged;
• our Manager may fail to recalculate, re-adjust, and execute hedges in an efficient and timely manner;
• the hedging transactions may actually result in poorer overall performance for us than if we had not engaged in the hedging transactions;
• credit hedging can be expensive, particularly when the market is forecasting future credit deterioration and when markets are more illiquid;
• interest rate hedging can be expensive, particularly during periods of volatile interest rates;
• available hedges may not correspond directly, or be correlated in the manner desired, with the risks for which protection is sought;
• the durations of the hedges may not match the durations of the related assets or liabilities being hedged;
• many hedges are structured as over-the-counter contracts with counterparties whose creditworthiness is not guaranteed, raising the possibility that the hedging counterparty may default on their payment obligations;
• to the extent that the creditworthiness of a hedging counterparty deteriorates, it may be difficult or impossible to terminate or assign any hedging transactions with such counterparty;
• the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments would reduce our earnings and our stockholders' equity; and
• our hedging instruments are generally structured as derivative contracts and, as a result, are subject to additional risks such as those described under "—Our access to financing may not be available on favorable terms, or may be limited or completely shut off, and our lenders and derivative counterparties may require us to post additional collateral" and and "—Our use of derivatives may expose us to counterparty risk."
For these and other reasons, our hedging activity could materially adversely affect our business, financial condition and results of operations, our ability to pay dividends to our stockholders, and our ability to maintain our qualification as a REIT.
Hedging instruments and other derivatives, including some credit default swaps, may not, in many cases, be traded on regulated exchanges, or may not be guaranteed or regulated by any U.S. or foreign governmental authority and involve risks and costs that could result in material losses.
Hedging instruments and other derivatives, including certain types of credit default swaps, involve risk because they may not, in many cases, be traded on exchanges or cleared on a central counterparty clearinghouse ("CCP"). Consequently, for these instruments there may be less stringent requirements with respect to record keeping and compliance with applicable statutory and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. Our Manager is not restricted from dealing with any particular counterparty or from concentrating any or all of its transactions with one counterparty. Furthermore, our Manager has only a limited internal credit function to evaluate the creditworthiness of its counterparties, mainly relying on its experience with such counterparties and/or their general reputation as participants in these markets. Under the terms of many of our derivatives transaction contracts, the business failure of a derivatives transaction counterparty with whom we enter into a derivatives transaction will most likely result in a default under the governing arrangement. In such an event, we may lose any unrealized gain associated with the terminated derivative and, if the derivative was used for hedging purposes, the underlying asset or liability may become unhedged. by a party with whom we enter into a derivatives transaction may result in and may us to re-initiate similar derivatives transactions with other counterparties at the then-prevailing market levels and, in certain cases, we may also be at risk for any collateral we have
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pledged to such counterparty to secure our obligations under derivative contracts, and we may incur significant costs in attempting to recover such collateral. Generally we will seek to reserve the right to terminate derivatives transactions upon a counterparty's insolvency, but absent an actual insolvency, we may not be able to terminate derivatives transaction without the consent of the derivatives transaction counterparty, and we may not be able to assign or otherwise dispose of derivatives transactions to another counterparty without the consent of both the original counterparty and the potential assignee. If we terminate a derivatives transaction, we may not be able to enter into a replacement contract in order to cover our risk. There can be no assurance that a liquid secondary market will exist for derivatives transactions purchased or sold, and therefore we may be required to maintain any derivatives transaction until exercise or expiration, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders. In this regard, we may be required to hold additional cash or sell other investments in order to obtain cash to close out derivatives to meet the liquidity demands that derivatives can create to make payments of margin, collateral or settlement payments to counterparties.
In addition, some portion of our derivatives transactions may be cleared through a CCP, which we access through a futures commission merchant ("FCM"). Our futures positions also are cleared with a CCP through an FCM. If an FCM that holds our cleared derivatives account were to become insolvent, the CCP will make an effort to move our futures and cleared derivatives positions to an alternate FCM, though it is possible that no alternate FCM could be found to accept our positions, which could result in a total cancellation of our positions in the account; in such a case, if we wished to reinstate such positions, we would have to re-initiate such positions with an alternate FCM. In addition, in the case of both futures and cleared over-the-counter derivatives, there could be knock-on effects of our FCM's insolvency, such as the failure of co-customers of the FCM or other FCMs of the same CCP. In such cases, there could be a shortfall in the funds available to the CCP due to such additional insolvencies and/or exhaustion of the CCP's guaranty fund that could lead to total loss of our positions in the FCM account. Finally, we face a risk of (including total ) of positions in the account in the event of by our FCM or other FCMs of the CCP, where ordinary course remedies would not apply. In addition, increased concentration among clearing members or clearing intermediaries could reduce our ability to transfer or maintain cleared positions on acceptable terms.
Using derivatives is also subject to operational and legal risks. Operational risk generally refers to risk related to potential operational issues, including documentation issues, settlement issues, systems failures, inadequate controls, and human error. Legal risk generally refers to insufficient documentation, insufficient capacity or authority of counterparty, or the legality or enforceability of a contract.
The U.S. Commodity Futures Trading Commission ("CFTC") and certain commodity exchanges have established limits referred to as speculative position limits or position limits on the maximum net long or net short position which any person or group of persons may hold or control in particular futures and options. Limits on trading in options contracts also have been established by the various options exchanges. It is possible that trading decisions may have to be modified and that positions held may have to be liquidated in order to avoid exceeding such limits. Such modification or liquidation, if required, could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our rights under our repos and certain other trading agreements are subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of us or our counterparties.
In the event of our insolvency or bankruptcy, certain repos and other trading agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow our counterparty to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on and/or liquidate the collateral pledged under such agreements without delay. In the event of the insolvency or bankruptcy of a counterparty during the term of a repo or trading agreement, the counterparty may be permitted, under applicable insolvency laws, to repudiate the contract, and our claim against the counterparty for damages may be treated simply as an unsecured claim. In these circumstances, if the counterparty is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, our ability to exercise our rights to recover our collateral or to be compensated for any resulting from the counterparty's may be further limited by those statutes. These would be subject to significant and costs to us and, if and when received, may be substantially less than the we actually incur. In addition, the enforceability and timing of our close-out and set-off rights may be subject to legal and operational uncertainty in these circumstances.
Risks Related to Our Corporate Loans and CLOs
We invest in corporate loans and CLOs backed by corporate loans, which exposes us to certain risks.
We invest in corporate loans and CLOs backed by corporate loans. The assets underlying our CLO investments generally consist of lower-rated first-lien corporate loans, although certain CLO structures may also allow for limited exposure to other asset classes including unsecured loans, second-lien loans, or corporate bonds. Corporate issuers of lower-rated debt securities
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may be highly leveraged and may not have available to them more traditional methods of financing. During economic downturns or sustained periods of rising interest rates, issuers of lower-rated debt securities may be likely to experience financial stress, especially if such issuers are highly leveraged or, in the case of rising interest rates, have floating-rate debt. The risk of loss for lower-rated debt securities is also magnified to the extent that such securities are unsecured or subordinated to more senior creditors. Lower-rated debt securities generally have limited liquidity and limited secondary market support. These risks are further exacerbated in the case of second-lien loans, as they are subordinated to first-lien loans and have weaker recovery prospects in the event of borrower distress or default.
We, and the CLOs in which we invest, may acquire loans to smaller companies, or “middle market” loans, which may carry more inherent risks than loans to larger, publicly traded entities. Compared to larger companies, these middle-market companies tend to have more limited access to capital, weaker financial positions, narrower product lines, and tend to be more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. As a result, the securities issued by CLOs that hold significant investments in middle-market loans are generally considered riskier than securities issued by CLOs that primarily invest in broadly syndicated loans.
The corporate loans that we hold directly, or that underlie our CLO investments, may become nonperforming or impaired for a variety of reasons. Nonperforming or impaired loans may require substantial workout negotiations or restructurings that may result in significant delays in repayment, a significant reduction in the interest rate, and/or a significant write-down of the principal of the loan. A wide range of factors could adversely affect the ability of an underlying corporate borrower to make interest or other payments on its loan. The corporate issuers of the loans or securities that we hold, or that underlie our CLO investments, may be highly leveraged and may be subject to an increased risk of default depending on certain micro- or macro-economic conditions, such as economic recessions, heightened interest rates and/or inflation, tariffs, and other conditions. In addition, reduced access to refinancing markets, including during periods of tighter credit conditions, may increase the risk of borrower default, particularly as the borrower's corporate debt matures and requires refinancing.
Such defaults and losses, especially those in excess of the market’s or our expectations, would have a negative impact on the fair value of our investments, and reduce the cash flows that we receive from our investments, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
In addition, "covenant-lite" corporate loans may comprise a significant portion the corporate loan market, including the underlying collateral of the CLOs in which we invest. Generally, covenant-lite corporate loans provide the obligor with more freedom to take actions that could negatively impact their lenders because the obligor's covenants are incurrence-based and not maintenance-based, which means that they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s financial condition. As a result, lenders may have a more limited ability to intervene at early signs of financial distress, potentially increasing the risk of loss on such investments as compared to corporate loans (or CLOs with underlying corporate loans) with more traditional, maintenance-based covenants.
We may acquire, and the CLOs in which we invest may acquire, interests in corporate loans indirectly, by way of participations. In a participation, the underlying debt obligation remains with the institution that has sold the participation, which typically results in a contractual relationship only with such selling institution, and not with the corporate obligor directly. As a result, the holder of a participation assumes the credit risk of both the obligor and the selling institution, and may only have limited rights to influence any decisions made by the selling institution in connection with the underlying debt obligation.
We, and the CLOs in which we invest, may be subject to risks associated with syndicated loans.
Under the documentation for syndicated loans, a financial institution or other entity typically is designated as the administrative agent and/or collateral agent. This agent is granted a lien on any collateral on behalf of the other lenders and distributes payments on the indebtedness as they are received. The agent is the party responsible for administering and enforcing the loan and generally may take actions only in accordance with the instructions of a majority or two-thirds in commitments and/or principal amount of the associated indebtedness. In most cases for our syndicated loan investments, we do not expect to hold a sufficient amount of the indebtedness to be able to compel any actions by the agent. Consequently, we would only be able to direct such actions if instructions from us were made in conjunction with other holders of associated indebtedness that together with us compose the requisite percentage of the related indebtedness then entitled to take action. Conversely, if holders of the required amount of the associated indebtedness other than us desire to take certain actions, such actions may be taken even if we did not support such actions. Furthermore, if a syndicated loan is subordinated to one or more senior loans made to the applicable obligor, our ability to exercise such rights may be subordinated to the exercise of such rights by the senior lenders. Whenever we are unable to direct such actions, the parties taking such actions may not have interests that are aligned with us, and the actions taken may not be in our interests. In recent years, “liability management transactions” have become increasingly common in the corporate loan market. These out-of-court typically provide priority or collateral to participating lenders, often to the of non-participating lenders. If we were to hold
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distressed debt, either directly or indirectly through our CLO investments, that became subject to a transaction granting senior liens or payment priority to other lenders, we could lose all or a significant part of our investment, which could negatively impact our financial condition.
If an investment is a syndicated revolving loan or delayed drawdown loan, other lenders may fail to satisfy their full contractual funding commitments for such loan, which could create a breach of contract, result in a lawsuit by the obligor against the lenders and adversely affect the fair market value of our investment.
There is a risk that a loan agent may become bankrupt or insolvent. If the loan agent becomes bankrupt or insolvent, we may be delayed and possibly impaired in our ability to access the collateral linked to the related indebtedness. We may also be limited in our ability to direct the agent to take actions against the related obligor. In addition, we may be unable to remove the agent in circumstances in which removal would be in our best interests. Moreover, agented loans typically allow for the agent to resign with certain advance notice, and we may not find a replacement agent on a timely basis, or at all, in order to protect our investment.
Our investments in corporate CLOs involve certain risks.
Investments in corporate CLO securities involve certain risks. Corporate CLOs are securitizations that are typically backed by a pool of corporate loans or similar corporate credit-related assets that serve as collateral. We and other investors in CLOs ultimately bear the credit risk of the underlying collateral. Most CLOs are issued in multiple tranches, offering investors various maturity and credit risk characteristics, often categorized as senior, mezzanine and subordinated/equity according to their relative seniority and degree of risk. If the relevant collateral defaults or otherwise underperforms, payments to the more senior tranches of such securitizations take precedence over those of more junior tranches, such as mezzanine debt and equity tranches, which are the focus of our corporate CLO investment strategy. CLOs present risks similar to those of other types of credit investments, including credit, interest rate and prepayment risks. See "— We invest in corporate loans and CLOs backed by corporate loans, which exposes us to certain risks.”
In addition, if a CLO in which we invest experiences an event of default as a result of failure to make a payment when due, erosion of the underlying collateral, or for other reasons, the CLO would be subject to the possibility of liquidation. In such cases, the risks are heightened that the collateral underlying the CLO may not be able to be readily liquidated, or that when liquidated, the resulting proceeds would be insufficient to redeem the CLO mezzanine debt and equity tranches that are the focus of our corporate CLO investment strategy. CLO equity tranches often suffer a loss of all of their value in these circumstances, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders. Furthermore, following an event of default by a CLO, the holders of CLO mezzanine debt and equity tranches typically have limited rights regarding decisions made with respect to the underlying collateral, with the result that such decisions might favor the more senior tranches of the CLO.
Even though we expect that most of our CLO mezzanine debt investments will have floating rate coupons, these and other of our CLO investments are still exposed to interest rate risk. There can be significant mismatches between the timing and frequency of coupon resets on the floating rate CLO debt tranches and the underlying floating rate corporate loans, and furthermore some of the underlying assets may bear fixed coupon rates. When interest rates are low but increasing, variations between interest rate floors on the CLO debt tranches and the underlying corporate loans can reduce the amount of excess interest available for payment to the CLO debt and equity tranches. This reduction in excess interest could adversely impact our CLO equity cashflows and valuations, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
CLOs have at times experienced negative credit events in their constituent loans, credit rating downgrades of constituent loans and issued debt tranches, and failures of certain deal metrics. The failure by a CLO in which we invest to satisfy certain tests, including with respect to adequate collateralization and/or interest coverage, would generally lead to a reduction in the payments made to holders of its mezzanine debt and equity tranches. Ratings downgrades on our CLO debt investments may result in our investments being viewed as riskier than they were previously thought to be. This perception of increased riskiness resulting from a downgrade can result in adverse impacts on the market value and liquidity of our CLO debt investments, as well as reduce the availability or increase the cost of repo financing for our CLO debt investments.
Our corporate loans and CLO investments are subject to risks related to the financial leverage employed by the underlying corporate borrowers.
Our corporate borrowers may be, and the corporate borrowers underlying our CLO investments typically are, highly leveraged, and there may be few or no restrictions on the amount of indebtedness such borrowers can incur. Substantial indebtedness adds additional risk with respect to a borrower and could (i) limit its ability to borrow money or otherwise access funds for its working capital, capital expenditures, debt service requirements, strategic initiatives or other purposes; (ii) require it to dedicate a substantial portion of its cash flow from operations to the repayment of its indebtedness, thereby reducing funds
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available to it for other purposes; (iii) make it more highly leveraged than some of its competitors, which may place it at a competitive disadvantage; and/or (iv) subject it to restrictive financial and operating covenants, which may preclude it from executing on favorable business activities or from financing future operations or other capital needs. In some cases, proceeds of indebtedness incurred by a borrower could be paid as a dividend to its equity holders rather than retained by the borrowers for its working capital or to pursue favorable opportunities. Highly leveraged companies are often more sensitive to declines in revenues, increases in expenses, and adverse business, political, or financial developments or economic factors such as a significant rise in interest rates, a severe downturn in the economy, or deterioration in the condition of such companies or their industries. A leveraged company’s income and net assets will tend to increase or decrease at a rate than if borrowed money were not used.
If an underlying borrower is unable to generate sufficient cash flow to meet principal and/or interest payments on its indebtedness, it may be forced to take other actions to satisfy its obligations under its indebtedness. These alternative actions may include reducing or delaying capital expenditures, selling assets, seeking additional capital, or restructuring or refinancing indebtedness. Any of these actions could significantly reduce the value of the related asset held by us or a CLO in which we invest. Furthermore, if the borrower is unable to meet its scheduled debt service obligations even after taking these actions, the borrower may be forced into liquidation, dissolution or insolvency, and the value of the related loan could be significantly impaired or even rendered worthless.
We are dependent on the collateral managers of the CLOs in which we invest.
We invest in CLO securities issued by CLOs that are managed by collateral managers unaffiliated with us, and we are dependent on the skill and expertise of such managers. While the actions of the CLO collateral managers may significantly affect the return on our investments, we typically do not have any direct contractual relationship with these collateral managers.
While we also rely on these collateral managers to act in the best interests of the CLOs in which we invest, there can be no assurance that such collateral managers will do so. Moreover, such collateral managers are subject to fiduciary duties owed to other classes of notes besides those in which we invest, and they may have other incentives to manage the CLO portfolios in a manner that disadvantages the particular classes of notes in which we are invested. Furthermore, since the CLO issuer often provides an indemnity to its collateral manager, the CLO tranches we hold may ultimately bear the burden of any legal claims brought against the collateral manager.
We may only have limited information regarding the underlying assets held by the CLOs in which we invest, and collateral managers may not identify or report issues relating to the underlying assets on a timely basis (or at all) to enable us to take appropriate measures to manage our risks.
Our CLO investments are also exposed to the misalignment of interests between CLO collateral managers and CLO investors, such as us. CLO collateral managers are not securitizers subject to the U.S. Risk Retention Rules. This may reduce a CLO collateral manager’s incentives to prioritize the interests of CLO investors, including us, increase the risk of default as a result of less stringent credit or underwriting standards with respect to the underlying portfolios, and limit investor confidence in the CLOs.
CLO collateral managers are subject to removal or replacement by other holders of CLO securities without our consent and may also voluntarily resign as collateral manager or assign their role as collateral manager to another entity. The removal, replacement, resignation, or assignment of any particular CLO collateral manager’s role could adversely affect the returns on the CLO securities in which we invest, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We are subject to risks associated with loan accumulation facilities.
We may invest in CLO warehouse facilities, also known as loan accumulation facilities, or "LAFs" by contributing equity capital to a LAF. LAFs are vehicles that acquire corporate loans and other similar corporate credit-related assets in anticipation of ultimately collateralizing a CLO transaction. While LAF investors generally expect to invest in the equity tranche of the ultimate CLO transaction (assuming it is launched), they are not required to do so.
Investments in LAFs have risks similar to those applicable to investments in CLO equity securities. The use of leverage, typically ranging from three to six times prior to a CLO’s pricing, also magnifies our risk of loss on such investments. See “We use leverage to enhance returns, but this approach increases the magnitude of potential losses during adverse market conditions. Rising interest rates or liquidity constraints could limit our ability to obtain financing on favorable terms, forcing us to sell assets at inopportune times or reduce our investment activity."
Further, if the assets accumulated by a LAF are ultimately not purchased by the planned CLO, or if the planned CLO is not issued, the LAF may be unwound and the accumulated assets liquidated. In such cases, the LAF investors may be
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responsible for either holding or disposing of the assets, exposing them to credit risk and/or market risk, particularly if loan prices have declined. This scenario may become more likely in times of economic distress or when the loans comprising the warehouse collateral, even if still performing, have declined materially in market value. In such instances, we may suffer a loss upon the disposition of the assets and we may not recover our full investment in the LAF.
There can be no assurance that we will invest in the ultimate CLO transaction (if any), and any decision not to do so may result in our realizing losses from our LAF investment and/or forgoing a potentially attractive investment opportunity. The occurrence of any of the foregoing or similar events could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We may invest in distressed debt and equity, which involve significant risks, including uncertainty of recovery and exposure to bankruptcy proceedings.
We may make investments in distressed debt and equity, including in companies that are highly leveraged, thinly capitalized, in early-stage development, or experiencing financial distress. In addition, the corporate loans purchased by the CLOs in which we invest may become distressed, or be converted to equity in the event of a bankruptcy or other restructuring of the corporate issuer. These investments involve a significant risk of loss and are often subject to uncertainty regarding the timing, manner, and ultimate value of any recovery, particularly in bankruptcy proceedings, which these investments are more likely to be subject to.
In the case of distressed debt, potential recoveries may occur through asset liquidation, exchange offers, reorganization plans, or partial repayments. However, there is no assurance that the securities or assets received in such transactions will retain their anticipated value or income potential. Additionally, these securities may be subject to resale restrictions, limiting our ability to liquidate our positions.
Bankruptcy proceedings related to these investments may be adversarial and unpredictable, with outcomes beyond our control. If a company in which we hold a debt or equity investment files for bankruptcy, we may suffer a permanent loss. In liquidation scenarios, asset values may have significantly declined from our initial projections, reducing potential recoveries. The duration of bankruptcy proceedings is difficult to predict, and delays in confirming a plan of reorganization or liquidation can adversely affect investment returns. Administrative costs, which are typically high, are paid out of the debtor’s estate before any distributions to creditors. Furthermore, because the classification of claims under bankruptcy law can be uncertain, our influence in proceedings may be . or contingent may also recoveries. Moreover, courts have the authority to recharacterize debt investments as equity, which could subordinate our to those of other creditors. This risk exists even if our investment was originally structured as senior debt, potentially to significant or total investment . In addition, debtor-in-possession financing and related provisions may further dilute recoveries for existing creditors.
We have made and may in the future make investments in companies that we do not control.
Our investments in loan originators and other operating entities include debt instruments and/or equity securities of companies that we do not control and in which we may have limited or no governance, consent, or information rights. As a result, these companies may make business, financial or management decisions with which we disagree, and their management or majority stakeholders may take risks or otherwise act in ways that do not serve our interests. These companies could be thinly capitalized, highly leveraged, dependent on a small number of key individuals, subject to regulatory concerns, underperform expectations, or face other obstacles that adversely affect the business and results of operations. If any of these events were to occur, the value of these investments could be impaired or even lost in their entirety, which could materially adversely affect our business, financial condition, and results of operations, and our ability to pay dividends to our stockholders. In addition, our ability to exit or monetize these investments may be limited by illiquidity, contractual restrictions, or market conditions.
We have made and may in the future make loans secured by, or invest in structures tied to, legal claims, which subject us to a variety of risks.
We have invested in, and may in the future invest in, litigation finance assets, which are loans secured by, or investments in structures tied to, individual legal claims or portfolios of claims. There is no assurance our Manager will be able to predict aspects of the cases underlying our investments, including to which courts and judges the cases are assigned, the development of evidence during discovery and its presentation at trial, the composition and decisions of juries, timing of the judicial process, likelihood of settlements and collectability of judgments.
In addition, we will not have the ability to control decisions made by the claimholder, defendant, or the law firm, nor can we share details of the underlying cases with our stockholders. We rely on, among other things, the advice and opinion of outside counsel and other experts in assessing potential claims and on the skills and efforts of independent law firms to litigate
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cases. There is no guarantee that the ultimate outcome of any case will be in line with outside counsel's or any expert's initial assessment of the validity and merit of a legal claim.
Litigation finance assets are also subject to evolving legal regulatory and public policy considerations, which could adversely affect our ability to structure, enforce, or realize returns on such assets.
For example, various laws restrict the ability to assign certain types of legal claims or to participate in a lawyer's contingent fee interest in a claim. Failure to comply with any law, rule or regulation could also subject us to liability and jeopardize the enforceability of our investment.
Risks Related to Certain MSR Investments
Our investments in certain MSR-related assets expose us to structural, counterparty, regulatory and liquidity risks that could adversely affect us.
We have investments in MSR-related assets that expose us to risk of loss. Our interests in MSRs, including our Forward MSR-related investments, may involve complex or novel structures, and the risks associated with such transactions and structures may not be fully known. We do not hold the requisite licenses to purchase or hold the underlying MSRs of Forward-MSR related investments directly, but instead we have entered and, in the future, may enter into agreements with licensed residential mortgage loan servicers (each, a “Forward MSR Master Servicer”) that enable us to participate indirectly in the economic returns of the underlying MSRs.
Generally, a Forward MSR-related investment with a Forward MSR Master Servicer provides that we: (i) purchase the "excess servicing spread" from such Forward MSR Master Servicer, entitling us to monthly distributions of the servicing fees collected by the Forward MSR Master Servicer in respect of the underlying MSRs in excess of a base rate (often approximately 12.5 basis points per annum) and (ii) enter into a contract (a "Base MSR Contract") with the Forward MSR Master Servicer or an affiliate thereof (the "Base MSR Contract Counterparty") that references the performance of the underlying MSRs. The amount that we pay to enter into a Base MSR Contract 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). Forward MSR-related investments also generally entitle us to distributions of corresponding proceeds upon a sale of the underlying MSRs.
We rely on the Forward MSR Master 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 Forward MSR Master 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 Forward MSR-related investment, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
While our Forward MSR-related investments involving GSE-guaranteed loans are often subject to an “acknowledgement agreement” with the GSE, any rights we may have through the acknowledgement agreement or otherwise are not absolute and the underlying MSRs remain subject and subordinate in all respects to the interests of the GSE. The GSEs may impose new or additional conditions on our existing or future Forward MSR-related investments, including increased capital, liquidity, reporting or operational requirements, or may determine that particular acquisition or financing structures are no longer acceptable, while also retaining the right to terminate the Forward MSR Master Servicer, transfer the servicing to another party, or take other actions that could effectively extinguish our economic interest in the MSRs. If the GSEs threatened any such actions, we could be forced to liquidate our Forward MSR-related investments from a position of weakness or distress, which could materially impair their value.
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, Forward MSR Master Servicers’ failures to comply with these laws, regulations and administrative decisions can expose Forward MSR Master Servicers to fines, damages and losses. Forward MSR Master Servicers operate in a highly litigious industry that also subjects them to potential lawsuits related to billing and collections practices, modification protocols or foreclosure practices. Furthermore, Forward MSR Master Servicers can often be held responsible for the actions of any subservicers they employ.
Finally, if a Forward MSR Master Servicer becomes insolvent, we may become a general unsecured creditor of such Forward MSR Master Servicer with respect to the related Forward MSR-related investments. In addition, the novelty and complexity of certain MSR investment structures, required GSE consents, and the unsecured nature of our interests may limit our ability to transfer or monetize such investments, and the market for investors willing to invest in such interests may be
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limited or may not exist at all. In such circumstances, we may experience delays or losses in realizing cash flows from or disposing of such investments, or otherwise be unable to realize their anticipated value, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our Forward MSR-related investments 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 some of our Forward MSR-related investments, we allow the Forward MSR Master 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 Forward MSR Master Servicer through a margin call, we would be required to provide the Forward MSR Master Servicer with additional funds or other assets to meet such margin call; if we were unable to satisfy the margin call, the lender could declare an event of default. MSR financing facilities generally require the Forward MSR Master Servicer to satisfy various covenants, conditions and tests, including liquidity and performance-related requirements, 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 by the lender of the pledged underlying MSRs to the loan obligation, which could result in a material on our Forward MSR-related investment and materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
In addition, MSR financing facilities may include other borrowers whose MSR-related investments are commingled with our own, and margin calls or other adverse developments related to those borrowers or their investments could require us to provide additional funds or otherwise adversely affect our investment.
With respect to MSRs involving loans guaranteed by a GSE, any MSR financing facilities used to finance such MSRs are subject to GSE approval, including acknowledgement agreements, pursuant to which our and our lender's rights are subordinate in all respects to the rights of such GSE, which poses additional risks. See "—Our investments in certain MSR-related assets expose us to structural, counterparty, regulatory and liquidity risks that could adversely affect us."
In addition, the borrowing capacity under any MSR financing is limited, and if the Forward MSR Master 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 Forward MSR-related investments.
We may have to fund amounts equal to the servicing advances due under our Forward MSR-related investments, which could adversely impact our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Pursuant to our Base MSR Contracts, to the extent that servicing expenditures exceed servicing proceeds, we are 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 Forward MSR Master Servicer is generally entitled to reimbursement for servicing advances that are not subsequently collected from the underlying borrowers, and under the Base MSR Contract we would in turn be reimbursed by the Base MSR Contract Counterparty for any servicing advances that we had funded. However, our right to such reimbursement is unsecured and subject to the creditworthiness of the Base MSR Contract Counterparty.
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.
We do not have legal title to the Underlying MSRs.
The Forward MSR Master Servicer, rather than us, owns legal title to the MSRs underlying a Forward MSR-related investment of ours. While we do purchase the excess servicing spread from the Forward MSR Master Servicer, we do not purchase an interest in the underlying MSRs, and instead rely on the Base MSR Contract, which entitles us to payments based on the performance of the underlying MSRs but does not give us any legal, equitable, or secured interest in the underlying MSRs.
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As a result, the validity or priority of our interest in the underlying MSRs, being unsecured, could be challenged or disregarded in a bankruptcy proceeding of the Forward MSR Master Servicer, the Base MSR Contract Counterparty, or a subservicer, and the related purchase agreement could be rejected. In such a proceeding, a bankruptcy court could treat our contract as an executory contract and permit its rejection. 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-related assets may vary substantially with changes in interest rates.
The values of our MSR-related assets, including our Forward MSR-related 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 expected prepayment rates. Changes in interest rates influence a variety of assumptions included in the valuation of MSRs, including prepayment speeds, assumed yields used to discount future cash flows, the value of float 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. For a discussion of some of the risks associated with this hedging activity, see "—Hedging against credit events, interest rate changes, foreign currency fluctuations, and other risks could materially adversely affect our business."
Risks Related to Our Loan Origination and Servicing Businesses
If we, or our loan originator affiliates, are unable to obtain sufficient capital to meet the financing requirements of our loan origination businesses, or if we, or our loan originator affiliates, fail to comply with debt agreements, our business, financing activities, financial condition and results of operations will be adversely affected.
We, and our loan originator affiliates, require significant borrowing capacity in order to fund mortgage originations and finance our investments in the mortgage loans originated by our loan originator affiliates and by third parties. Accordingly, our ability, and that of our loan originator affiliates, to fund mortgage originations, to continue to make investments in loans, and to fund existing loan commitments, depends on the ability to secure financing on acceptable terms and to renew and/or replace existing financings as they expire. These financings may not be available on acceptable terms or at all. If we, or our loan originator affiliates, are unable to obtain these financings, our business and results of operations would be adversely affected.
Effective as of the closing of the Longbridge Transaction, we consolidated the indebtedness of Longbridge on our balance sheet. Longbridge is subject to financial covenants pursuant to the terms of its indebtedness, including minimum net worth and liquidity. If Longbridge were to fail to meet or satisfy any of these financial covenants, it could be in default under its agreements, and its lenders could elect to declare all amounts outstanding under the respective financing agreements to be immediately due and payable, enforce their respective security interests under such agreements and restrict Longbridge’s ability to incur additional borrowings. Further, to the extent we or our affiliates provides a guarantee on any of Longbridge’s indebtedness, a default by Longbridge could also result in direct obligations or liabilities to us under such guarantees. In that case, our failure to perform under such guarantees could trigger "cross defaults" on our own financings and trading agreements. In addition, Longbridge’s financing agreements may contain other events of default and cross- provisions, so that if an event of occurs under one agreement, the lenders under certain other agreements could also declare an event of .
Similarly, to the extent that we guarantee certain indebtedness or other obligations of any of our other loan originator affiliates, a default under such arrangements could also result in direct payment obligations for us, and could ultimately trigger cross defaults on our own agreements.
See "—Risks Related to Our Financing, Hedging, and Derivative Activities—Our access to financing may not be available on favorable terms, or may be limited or completely shut off, and our lenders and derivative counterparties may require us to post additional collateral."
Longbridge is required to follow specific guidelines and eligibility standards that impact the way it services and originates U.S. government agency loans.
Longbridge’s status as both an approved non-supervised FHA mortgagee and an approved Ginnie Mae issuer are subject to compliance with FHA's and Ginnie Mae’s regulations, guides, handbooks, mortgagee letters and all participants’ memoranda. For example, as a Ginnie Mae issuer, Longbridge must meet certain minimum capital requirements, including but not limited to Ginnie Mae’s requisite capital and leverage ratio requirements. Longbridge has relied on annual waivers from Ginnie Mae, whereby Ginnie Mae has granted an exception to the leverage ratio requirement in Ginnie Mae’s guidelines, based on Ginnie Mae's determination, in its sole discretion, that Longbridge's failure to meet this requirement is directly attributable to the lack of true sale accounting treatment of its securitized HECM loans. Any loss of Longbridge’s status as an approved non-supervised FHA mortgagee or an approved Ginnie Mae issuer, including a change in Ginnie Mae’s determination to grant an exception to the leverage ratio requirement, could have a material adverse effect on Longbridge’s overall business and our financial position, results of operations and cash flows.
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Longbridge is required to follow specific guidelines and borrower eligibility standards that impact the way it services and originates U.S. government agency loans, including guidelines and standards with respect to:
• credit standards for mortgage loans;
• staffing levels and other servicing practices;
• the servicing and ancillary fees that Longbridge may charge;
• modification standards and procedures;
• the amount of reimbursable and non-reimbursable advances that Longbridge may make; and
• the types of loan products that are eligible for sale or securitization.
These guidelines allow government agencies to provide monetary incentives for loan servicers that perform according to their standards for origination and servicing, and to assess penalties and other supervisory or enforcement actions for those that do not. Longbridge generally cannot negotiate these terms with the agencies, and they are subject to change at any time without Longbridge’s specific consent. A significant change in these guidelines that decreases the fees Longbridge may charge or requires Longbridge to expend additional resources to provide mortgage services could decrease its revenues or increase its costs.
In addition, if Longbridge were to fail to meet its servicing obligations, including its MCA Repurchase obligations, its tail funding obligations and its other servicing obligations, it could forfeit ownership of its HMBS-related mortgage servicing rights, which would represent a total loss of a valuable asset. Furthermore, should Longbridge choose to finance any of its HMBS-related mortgage servicing rights, it would be required to enter into an "acknowledgement agreement" with Ginnie Mae, which would provide Ginnie Mae with additional rights to take adverse actions against such mortgage servicing rights, including forfeiture. Any such forfeitures could adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Failure to comply with FHA guidelines could adversely impact Longbridge’s business.
If Longbridge fails to comply with FHA guidelines when originating or servicing an FHA loan, it could negatively affect Longbridge's business, including by preventing Longbridge from collecting on FHA insurance on such loan, including such loans in a Ginnie Mae pool, or financing such loan via one of Longbridge's warehouse facilities. In addition, Longbridge could be subject to allegations of violations of the False Claims Act asserting that it submitted claims for FHA insurance on loans that had not been originated or serviced in accordance with FHA guidelines. If Longbridge is found to have violated FHA guidelines, it could face fines, supervisory and/or enforcement actions, regulatory penalties, damages in litigation, suffer reputational , and it could incur due to an to collect on FHA insurance, any of which could materially and impact Longbridge’s business, financial condition and results of operations.
Material changes to the laws, regulations or practices applicable to reverse mortgage programs operated by FHA. Ginnie Mae and HUD could adversely affect the reverse mortgage business of Longbridge.
The reverse mortgage industry is largely dependent upon FHA, Ginnie Mae and HUD, and there can be no guarantee that these entities will continue to participate in the reverse mortgage industry or that they will not make material changes to the laws, regulations, rules or practices applicable to reverse mortgage programs. When originating HECM loans, Longbridge must comply with FHA and other regulatory requirements. FHA regulations governing the HECM product have changed at multiple points in time, such as in 2013, 2014 and 2017, which in some cases adversely affected Longbridge’s business and results of operations.
The reverse mortgage business of Longbridge, as well as its other mortgage products, is also subject to state statutory and regulatory requirements including, but not limited to, licensing requirements, required disclosures and requirements regarding the fees that originators are permitted to charge. It is unclear how various regulatory requirements and/or changes would impact Longbridge's reverse mortgage business, and the impact could be adverse to Longbridge’s business and results of operations. In addition, because much of this guidance and regulation relates to the protection of older adults facing foreclosure and eviction, negative publicity arising from actions by other reverse mortgage lenders has in the past caused, and could in the future cause, greater regulatory scrutiny and oversight (which could result in increased regulatory enforcement) of the business of Longbridge.
Longbridge relies on subservicers and other service providers to perform mortgage servicing functions, which presents us with a number of risks.
Longbridge currently relies on subservicer(s) (each, a “Subservicer”) and other service providers to subservice all of the loans in its servicing portfolio. Failure by a Subservicer to meet the requirements of the various servicing guidelines or contractual obligations could expose us to the assessment of fines and loss of reimbursement of loan related advances, expenses, interest and servicing fees. Moreover, if a Subservicer is not vigilant in encouraging borrowers to make their real
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estate tax and property insurance premium payments, particularly in the case of reverse mortgage borrowers, the borrowers may be less likely to make these payments, which could result in a higher frequency of borrower default for failure to make these payments. If a Subservicer or other service providers misses HUD and Ginnie Mae timelines for liquidating non-performing assets and Longbridge’s oversight does not prevent such missed timeline, loss severities may be higher than originally anticipated, and Longbridge may be subject to penalties by HUD and Ginnie Mae, including curtailment of interest. If Longbridge fails to recover fines or any amounts lost from a Subservicer or other service providers, it would eventually realize a loss of such amounts. Since only one company subservices substantially all of Longbridge’s reverse mortgage servicing portfolio, and one other company subservices Longbridge's other product, there is a risk to Longbridge if one of those Subservicers to perform its duties properly, than if Longbridge were to use multiple subservicers.
In the reverse mortgage business, the number of third-party subservicers is highly limited. Unless more subservicers enter this space, the quality of subservicing practices may deteriorate, and Longbridge could have limited options in the event of a reverse mortgage subservicer’s failure. The failure of a subservicer to effectively subservice any of the loans in Longbridge's servicing portfolio could have a material and adverse effect on our business and our financial condition. In addition, regulators or third parties may take the position that we were responsible for the subservicers’ actions or failures to act; in that event, we might be exposed to the same risks as the subservicers.
If any of Longbridge’s subservicers or any of their respective vendors fails to perform their duties pursuant to the related agreement(s), whether due to legal and regulatory issues or financial difficulties as described in the two preceding paragraphs or for any other reason, Longbridge would need to appoint another subservicer to perform such duties, to the extent required pursuant to the related agreement. The process of identifying and engaging a suitable successor subservicer and transitioning the functions performed by such subservicer to such successor subservicer could result in delays in collections and other functions performed by the subservicer and expose Longbridge’s business to breach of contract and indemnity claims relating to its servicing or subservicing obligations. Such delays may also adversely affect the value of the residual interests that we own in our securitizations and loans.
Additionally, whether due to a subservicer’s failure to perform or Longbridge’s independent decision to transition to a new subservicer, the process of transitioning to a new subservicer could involve significant costs, operational complexities, and uncertainties. Transitioning to a new subservicer may require extensive systems integrations, data transfers, and compliance with regulatory approvals, all of which could introduce delays and disruptions to servicing operations. The onboarding of a new subservicer may also require workforce training and adjustments to oversight and monitoring processes to ensure compliance with contractual obligations and regulatory requirements. In addition, such transfer may be further complicated by the need to receive state and federal regulatory, including Ginnie Mae, FHA and/or HUD, approvals in order to effectuate a transition to a new subservicer. Further, given the scarcity of alternative reverse mortgage subservicers, we may face challenges in transitioning to a new subservicer for Longbridge's reverse mortgage products, which could impair our ability to effectively manage our reverse mortgage loan servicing business, potentially leading to delays, increased costs, and regulatory . These factors could result in operational and increased costs, which may have a material effect on Longbridge’s business, financial condition, and results of operations.
Longbridge’s launch of a HELOC product exposes us to additional credit, operational, liquidity, regulatory, and market risks.
In 2025, Longbridge began originating a home equity line of credit (“HELOC”) mortgage product for borrowers aged 62 and older (“HELOC for Seniors ® ”). HELOCs involve risks that may differ from, and in certain respects may be greater than, those associated with other residential mortgage products.
We expect that the majority of HELOC for Seniors ® loans will be second liens, and losses on second-lien loans may exceed losses on first-lien loans because recoveries depend on residual collateral value after satisfaction of senior liens. See "—The principal and interest payments on our residential mortgage whole loans, non-Agency RMBS and CRTs are not guaranteed by any entity, including any government entity or GSE, and therefore are subject to increased risks, including credit risk.” In addition, because borrowers may draw on available credit over time, including during periods of financial stress, utilization may increase when credit performance is deteriorating, resulting in higher outstanding balances and increased loss exposure. This risk may cause funded balances and credit losses to rise concurrently, particularly in adverse economic environments. Longbridge must maintain sufficient liquidity and warehouse capacity to fund draws, and unexpected increases in utilization or stressed market conditions may increase financing costs, liquidity, or make HELOC portfolios more to sell or securitize.
Longbridge has limited experience originating and servicing HELOC products and limited historical data regarding borrower performance, utilization patterns, and loss severities. Accordingly, assumptions regarding pricing, credit performance, capital requirements, and market acceptance may prove inaccurate, potentially resulting in higher-than-expected losses or reduced profitability. Because the HELOC for Seniors ® product is designed for older borrowers and typically include a balloon
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maturity that may be triggered by death, sale of the property, or failure to occupy the property, repayment timing may be less predictable and servicing more complex than for traditional forward mortgage products. Repayment may depend on home sale proceeds, refinancing availability, or estate administration, each of which may be affected by market conditions and legal processes outside of our control.
HELOC originations are subject to complex federal and state consumer credit laws that apply throughout the draw and repayment periods, and noncompliance may result in examination findings, consumer claims, repurchase or indemnification demands, civil monetary penalties, or remediation requirements. In addition, launching a new product requires new systems, processes, and oversight, and errors or delays in implementation could result in defective loans, regulatory violations, financing constraints, and/or reputational harm. Although Longbridge has engaged vendors to support this product, there can be no assurance that it will successfully manage these risks.
Any of the foregoing adverse events could materially affect our business, financial condition, and results of operations, and our ability to pay dividends to our stockholders.
Other Business Risks
We may change our investment strategy, investment guidelines, hedging strategy, operating, and management policies without notice or stockholder consent, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders. In addition, our Board of Directors may authorize us to revoke or otherwise terminate our REIT election without the approval of our stockholders.
Our Board of Directors has the authority to modify, waive or otherwise change our investment strategy, investment guidelines, hedging strategy, and asset allocation, operating, and management policies at any time without notice to or consent from our stockholders. As a result, the types or mix of assets, liabilities, or hedging transactions in our portfolio may be different from, and possibly riskier than, the types or mix of assets, liabilities, and hedging transactions that we have historically held, or that are otherwise described in this report. A change in our strategy may increase our exposure to real estate values, interest rates, and other factors.
Our Board of Directors determines our investment guidelines and our operational policies, and may amend or revise our policies, including those with respect to our acquisitions, growth, operations, indebtedness, capitalization, and dividends or approve transactions that deviate from these policies without a vote of, or notice to, our stockholders.
Although we have elected to be treated as a REIT, our Board of Directors may authorize us to revoke or otherwise terminate our REIT election, without the approval of our stockholders, at any time. Any of the foregoing changes could increase our exposure to the risks described herein or expose us to new risks that are not currently contemplated, and could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We operate in a highly competitive market.
Our profitability depends, in large part, on our ability to acquire targeted assets at favorable prices. We compete with a number of entities when acquiring our targeted assets, including other mortgage REITs, financial companies, loan originators and servicers, public and private funds, commercial and investment banks, and residential and commercial finance companies. In addition, through Longbridge, we face intense competition in the reverse mortgage origination space, including from federally chartered depository institutions that enjoy federal preemption and, as a result, conduct their business under relatively uniform federal rules and are generally not subject to the same state and local laws and licensing requirements as we are.
We may also compete with (i) the Federal Reserve and the U.S. Treasury to the extent they purchase assets in our targeted asset classes and (ii) companies that partner with and/or receive financing from the U.S. Government or consumer bank deposits. Many of our competitors are substantially larger and have considerably more favorable access to capital and other resources than we do. We acquire a significant amount of our loan assets pursuant to flow agreements with various loan originators. If such originators are unable or unwilling to continue to sell loan assets to us, or if we are unable to find additional loan originators from whom to purchase loans at attractive prices, we may be forced to acquire such loan assets at prices that are less attractive, or acquire different assets, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Furthermore, new companies with significant amounts of capital have been formed or have raised additional capital, and may continue to be formed and raise additional capital in the future, and these companies may have objectives that overlap with ours, which may create competition for assets we wish to acquire. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of assets to acquire, or pay higher prices than we can. To compete effectively, we must maintain a high level of operational, technological, and managerial expertise. In addition, some of our competitors may be more successful than us in the development and implementation of new technologies, including digital
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origination channels and services or platforms based on AI, to improve their operations and customer experience. If we are unable to adequately advance our technological capabilities, including our efforts to build digital tools for our customers and partners, or do so at a slower pace than others in our industry, we may be at a competitive disadvantage.
We also may have different operating constraints from those of our competitors including, among others, (i) tax-driven constraints such as those arising from our qualification as a REIT and in some cases to avoid adverse tax consequences to our stockholders, (ii) restraints imposed on us by our attempt to comply with certain exclusions from the definition of an "investment company" or other exemptions under the Investment Company Act and (iii) restraints and additional costs arising from our status as a public company. Furthermore, competition for assets in our targeted asset classes may lead to the price of such assets increasing, which may further limit our ability to generate desired returns. The competitive pressures we face could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Lack of diversification in the number or types of assets we acquire would increase our dependence on relatively few individual assets or asset types.
Our management objectives and policies do not place a limit on the amount of capital used to support, or the exposure to (by any other measure), any individual asset or any group of assets with similar characteristics or risks. As a result, our portfolio may be concentrated in a small number of assets or may be otherwise undiversified, increasing the risk of loss and the magnitude of potential losses to us and our stockholders if one or more of these assets perform poorly.
For example, the properties underlying our portfolio of mortgage-related assets may at times be concentrated in certain sectors that are subject to higher risk of foreclosure, or may be concentrated in a limited number of geographic locations, and our investments may be concentrated in certain of our targeted asset classes such that they are substantial relative to our total equity. In particular, as of December 31, 2025, 29.9% of the reverse mortgage portfolio owned by us (by unpaid principal balance) were secured by properties in the state of California. To the extent that our portfolio is concentrated in any one region or type of security, downturns or other significant events or developments relating generally to such region or type of security, such as natural disasters, climate-related risks, disruptions in hazard insurance availability or affordability or regulatory or other changes affecting property values and/or loan performance, may result in losses on a number of our assets within a short time period, which may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
For instance, properties located in California may be more susceptible to certain natural disasters, such as wildfires, earthquakes, and mudslides, which can disproportionately impact the value of our collateral. The January 2025 wildfires in the Los Angeles area were an example of how such localized events can damage a significant number of properties within our portfolio, potentially leading to uninsured losses, increased defaults, and challenges in monetizing affected loans. Furthermore, the ongoing property insurance crisis in California, characterized by insurer withdrawals and rising premiums, may result in an increase in lapsed policies or higher expenses for Longbridge as servicer to force-place coverage, any of which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We are highly dependent on Ellington's and Longbridge's information systems and those of third-party service providers, including mortgage servicers, and system failures could significantly disrupt our business, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our business is highly dependent on Ellington's communications and information systems, Longbridge’s communications and information systems, as well as those of third-party service providers, including mortgage loan servicers. Any failure or interruption of Ellington's, Longbridge's, or certain third-party service providers' systems or cyber-attacks or security breaches of their networks or systems could cause delays or other problems in our securities trading activities, could allow unauthorized access for purposes of misappropriating assets, stealing proprietary and confidential information, corrupting data or causing operational disruption, or could prevent us from receiving distributions to which we are entitled, any of which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Computer malware, ransomware, viruses, and computer hacking and phishing attacks have become more prevalent in the financial services industry and may occur on Ellington's, Longbridge's, or certain third-party service providers' systems in the future. We rely heavily on Ellington's and Longbridge's financial, accounting and other data processing systems. Financial services institutions have reported breaches of their systems, some of which have been significant, and Ellington has experienced a data breach, which was not material to its or our operations. Even with all reasonable security efforts, not every breach can be prevented or even detected. It is possible that Ellington or certain third-party service providers have experienced an undetected breach, and it is likely that other financial institutions have experienced more breaches than have been detected and reported. There is no assurance that we, Ellington, Longbridge or certain of the third parties that facilitate our, Longbridge's and Ellington's business activities, have not or will not experience a breach. It is difficult to determine what, if any, negative
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impact may directly result from any specific interruption or cyber-attacks or security breaches of either Ellington's or Longbridge's networks or systems (or the networks or systems of certain third parties that facilitate our, Ellington's, and Longbridge's business activities) or any failure to maintain performance, reliability and security of Ellington's, Longbridge's, or certain third-party service providers' technical infrastructure, but such computer malware, ransomware, viruses, and computer hacking and phishing attacks could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Additionally, operational failures or cyber incidents relating to our third-party service providers (or their service providers), including mortgage servicers, have negatively impacted in the past, and may negatively impact in the future, our business. For example, some of our mortgage servicers have experienced cyber-attacks which caused them to delay payments to their counterparties; it is possible that, to the extent a similar future event occurs at one of our counterparties, funds from such counterparty could also be delayed, or not recovered at all. The number and complexity of these threats continue to increase over time and many companies in the mortgage space have recently been targeted by hackers, likely due to the personally identifiable information that these companies hold. While we collaborate with mortgage servicers and other third-party service providers to develop secure transmission capabilities and protect against operational failures and cyber-attacks, we and those third parties may not have all appropriate controls in place to protect from such or attacks. If a material operational or material of the information technology systems of our third-party service providers occurs, we could be required to expend significant amounts of money, be in receiving funds (or not receive them at all) or have to expend significant time and resources to respond to these or , each of which could materially impact our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
New technologies also continue to develop, including AI. AI is developing at a rapid pace and becoming more accessible. As a result, the use of such new technologies by us, Ellington, Longbridge and/or our third-party service providers can present additional known and unknown risks, including, among others, the risk that confidential information may be stolen, misappropriated or disclosed and the risk that we, Ellington, Longbridge and/or our third-party service providers may rely on incorrect, unclear or biased outputs generated by such technologies, any of which could have an adverse impact on us and our business. Additionally, the utilization of AI by third-party bad actors may increase the frequency and effectiveness of cyber-attacks, such as through more sophisticated phishing or social engineering tactics, which could circumvent traditional security measures. See “—Artificial intelligence and other machine learning techniques could increase competitive, operational, legal and regulatory risks to our business in ways that we cannot predict.”
Because we are highly dependent on information systems when sharing information with third party service providers, systems failures, breaches or cyber-attacks could significantly disrupt our business, which could have a material adverse effect on our results of operations and cash flows.
In the ordinary course of our business, we and Longbridge receive non-public personal information, which an identity thief could utilize in engaging in fraudulent activity or theft. We and Longbridge may share this information with third party service providers, including those interested in acquiring such loans from us or financing such loans, or with other third parties, as required or permitted by law. We and Longbridge may be liable for losses suffered by individuals whose personal information is stolen as a result of a breach of the security of the systems on which we, Longbridge, Ellington, or third-party service providers store this information, or as a result of other mismanagement of such information, and any such liability could be material. Even if we are not liable for such losses, any breach of these systems could expose us to material costs in notifying affected individuals or other parties and providing credit monitoring services, as well as to regulatory fines or . In addition, any of these systems could our normal business operations and us to reputational and business, revenues, and profits.
Our acquisitions, equity investments, mergers and the integration of acquired or merged-with businesses and companies subject us to various risks and may not result in all of the cost savings and benefits anticipated, which could adversely affect our financial condition or results of operations.
We have in the past and may in the future, seek to grow our business by making strategic equity investments, acquiring other businesses or merging with other companies that we believe will complement or augment our existing businesses. We cannot predict with certainty the benefits of such acquisitions or mergers, which often constitute multi-year endeavors, and we often make a number of assumptions about a company's assets, investment portfolio and/or liabilities when assessing such transactions. To the extent that we overestimate the value of, and/or projected net income to be generated by certain assets or investment portfolios, and/or underestimate liabilities related to a company or its assets or investment portfolio or we are otherwise incorrect in our assumptions, we may be unable to realize the anticipated benefits of an investment, acquisition or merger. Further, we may incur significant additional costs in connection with the completion of an acquisition or merger, or in connection with any delay in completing an acquisition or merger or termination of the applicable acquisition or merger agreement, and the investment of such upfront costs may not be profitable. Equity investments in entities that we do not control may also limit our ability to influence business decisions and increase the risk of strategic misalignment.
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There is risk that our investments, acquisitions and/or mergers, including the Arlington Merger, may not have the anticipated positive results, including results relating to: correctly assessing the quality of the assets or investment portfolio being acquired, the cost, time and complexities required to complete the integration successfully, being able to successfully redeploy any capital acquired in connection with an investment, acquisition or merger, potential unknown liabilities associated with a target company or investment, including but not limited to those related to taxation issues, pending or threatened litigation or regulatory matters, performance shortfalls as a result of the diversion of management's attention caused by completing an investment, acquisition or merger, any expectation of benefit from certain operating synergies and/or efficiencies, including those related to the elimination of duplicative costs and the spreading of fixed costs across a larger asset base, or the overall performance of the combined entity.
If we are unable to successfully integrate our investments, acquisitions and/or mergers into our business, we may never realize their expected benefits. With each acquisition or merger, including the Arlington Merger, we may discover unexpected costs, liabilities for which we are not indemnified, delays, lower than expected cost savings or synergies, or incurrence of other significant charges, such as impairment of goodwill or other intangible assets and asset or portfolio devaluation. We also may be unable to successfully integrate company cultures, retain key personnel, apply our expertise to new competencies, or react to adverse changes in industry conditions. In addition, to the extent we consolidate an acquired business (as we did with Longbridge), we may face increased complexity and costs associated with integrating financial reporting systems, processes, and internal controls, including controls required to support our compliance with Sarbanes-Oxley, and we may be required to devote significant management time and resources to such efforts. The integration process related to investments, acquisitions or mergers could disrupt our ongoing businesses, create in standards, controls, procedures and policies, affect our ability to maintain relationships with key counterparties, reduce our existing , prevent us from results comparable to those historically by our business, or our ability to effectively manage growth resulting from such transactions.
Additionally, investment, merger and acquisition transactions are frequently the subject of litigation or other legal proceedings, including actions alleging breaches of fiduciary or other duties. If litigation or other legal proceedings are brought against us or against our board of directors in connection with any investment, acquisition or merger, we might not be successful in defending against such proceedings. An adverse outcome in such matters, as well as the costs and efforts of a defense even if successful, could have a material adverse effect on our business, results of operation or financial position, including through the possible diversion of our resources or distraction of key personnel.
The lack of liquidity in our assets may materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We acquire assets and other instruments that are not publicly traded. As such, these assets may be subject to legal and other restrictions on resale, transfer, pledge or other disposition, or will otherwise be less liquid than publicly traded securities. Other assets that we acquire, while publicly traded, may have limited liquidity due to their complexity, turbulent market conditions, or other factors. In addition, mortgage-related assets from time to time have experienced extended periods of illiquidity, including during times of financial stress (such as during the COVID-19 pandemic), which is often when liquidity is most needed. Illiquid assets typically experience greater price volatility because a ready market does not exist, and they can be more difficult to value or sell if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our assets. We may also face restrictions on our ability to liquidate any assets for which we or our Manager has or could be attributed with material non-public information. Furthermore, assets that are are more to finance, and to the extent that we finance assets that are or become , we may that financing or have it reduced. If we are to sell our assets at prices or at all, it could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We may be exposed to environmental liabilities with respect to properties in which we have an interest.
In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, the presence of hazardous substances may adversely affect an owner's ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may materially adversely affect the value of the relevant mortgage-related assets held by us.
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We could be subject to liability for potential violations of various federal, state and local laws and regulations, including predatory lending laws, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Loan originators and servicers are required to comply with various federal, state and local laws and regulations, including anti-predatory lending laws and laws and regulations imposing certain restrictions and requirements applicable to high-cost loans. Failure of loan originators or servicers to comply with these laws, to the extent any of their loans become part of our assets, to the extent we own such loan originator, or to the extent we originated or were deemed to have originated such loans, could subject us, as an originator, assignee or purchaser of the related loans, or as an owner of a loan originator, to monetary penalties and could result in the borrowers rescinding the affected loans.
We have entered into an agreement to acquire a mortgage loan servicer (subject to regulatory approval), and if completed, we would be directly subject to additional operational, regulatory, legal and compliance risks associated with mortgage loan servicing. Ownership of this servicer could expose us to liabilities arising from servicing errors, violations of applicable federal, state and local laws (including consumer protection and fair lending requirements), cybersecurity or data privacy incidents, and regulatory examinations, enforcement actions, litigation, fines, penalties and remediation costs. Any such matters could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Lawsuits have been brought in various states making claims against assignees or purchasers of high-cost loans for violations of state law. Named defendants in these cases have included assignees or purchasers of certain types of loans we invest in. If loans in our portfolio are found to have been originated in violation of predatory or abusive lending laws, we could incur losses, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Consumer loans are subject to delinquency and loss, which could have a negative impact on our financial results.
We are exposed to the performance of consumer loans through those consumer loans that we own directly, through those consumer loans to which we are exposed indirectly through our ownership of consumer-loan-backed ABS, and through our ownership interests in consumer loan originators. The ability of borrowers to repay consumer loans may be adversely affected by numerous borrower-specific factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including a general economic downturn, high energy costs, high unemployment, acts of God, pandemics such as the COVID-19 pandemic, war or other geopolitical conflict, terrorism, elevated inflation, tariffs, social unrest, and civil disturbances may also affect the financial stability of borrowers and impair their ability or willingness to repay their loans. Whenever any of our consumer loans , we are at risk of to the extent of any between the value of the collateral, if any, securing the loan, and the principal and accrued interest of the loan. Many of our consumer loans are unsecured, or are secured by collateral (such as an automobile) that depreciates rapidly; as a result, these loans may be at risk of than residential mortgage loans. Pursuing any remaining following a is often or , especially when the borrower has a low credit score, making further substantial collection efforts . In addition, personal property securing a consumer loan can present additional , including locating and taking physical possession of the collateral. We rely on servicers who service these consumer loans, to, among other things, collect principal and interest payments on the loans and perform mitigation services, and these servicers may not perform or in a manner that promotes our interests. Since we purchase some of our consumer loans and our consumer-loan-backed ABS at a premium to the remaining principal balance, higher-than-expected prepayments may result in . There can be no guarantee that we will not on our investments as a result of the factors set out above, which could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Increased regulatory attention and potential regulatory action in the consumer credit or reverse mortgage businesses could have a negative impact on our reputation, or cause losses on our investments in consumer loans or our equity investments in loan originators.
Certain consumer advocacy groups, media reports, and federal and state legislators have asserted that laws and regulations should be tightened to severely limit, if not eliminate, the availability of certain loan products. The consumer advocacy groups and media reports generally focus on higher-cost consumer loans, which are typically made to less creditworthy borrowers, and which bear interest rates that are higher than the interest rates typically charged by lending institutions to more creditworthy consumers. These consumer advocacy groups and media reports have characterized these consumer loans as predatory or abusive. In addition, reverse mortgage loans have faced similar issues in terms of media reports and potential legislative hurdles, in particular, in the event that a reverse mortgage lender begins foreclosure proceedings on a loan where the borrower still occupies the home. If the negative characterization of these types of loans becomes increasingly accepted by consumers, legislators or regulators, our reputation, as a purchaser of such loans and as an equity investor in both a consumer loan
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originator and a reverse mortgage originator, could be negatively impacted. This reputational risk could be magnified for loan originators that we control, such as Longbridge. Furthermore, if legislators or regulators take action against originators of consumer loans or reverse mortgages or provide for payment relief for borrowers, we could incur additional losses on the consumer loans or reverse mortgage loans that we have purchased and/or with respect to the equity investments that we have made in a consumer loan originator and a reverse mortgage originator.
Risks Related to our Relationship with our Manager and Ellington
We are dependent on our Manager and certain key personnel of Ellington that are provided to us through our Manager and may not find a suitable replacement if our Manager terminates the management agreement or such key personnel are no longer available to us.
Other than Longbridge's employees, who are solely focused on Longbridge’s operations, we do not have any employees of our own. Our officers are employees of Ellington or one or more of its affiliates. Other than Longbridge's office locations, which are dedicated solely to Longbridge’s business, we have no separate facilities and are completely reliant on our Manager, which has significant discretion over the implementation of our operating policies and execution of our business strategies and risk management practices. We also depend on our Manager's access to the professionals of Ellington as well as information and deal flow generated by Ellington. The employees of Ellington identify, evaluate, negotiate, structure, close, and monitor our portfolio. The departure of any of the senior officers of our Manager or Longbridge, or of a significant number of investment professionals of Ellington, or Longbridge’s inability to attract, develop, and retain personnel in a cost-effective manner, or the inability of such personnel to perform their duties due to acts of God, pandemics such as the COVID-19 pandemic, war or other geopolitical conflict, terrorism, elevated inflation, high energy costs, social unrest, or civil disturbances, could have a material effect on our ability to our objectives. We can offer no assurance that our Manager will remain our manager or that we will continue to have access to our Manager's senior management or that Longbridge will be to retain its senior officers. We are subject to the risk that our Manager will the management agreement or that we may deem it necessary to the management agreement or prevent certain individuals from performing services for us, and that no suitable replacement will be found to manage us.
There are risks and conflicts of interest associated with the base management fee we are obligated to pay our Manager.
We pay our Manager substantial base management fees based on the total equity (both common and preferred equity) of the Operating Partnership, regardless of the performance of our portfolio. Our Manager's entitlement to non-performance-based compensation might reduce its incentive to devote the time and effort of its professionals to seeking profitable opportunities for our portfolio, which could result in lower portfolio performance and could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our Manager's incentive fee may induce our Manager to acquire certain assets, including speculative or high risk assets, or to acquire assets with increased leverage, which could increase the risk to our portfolio.
In addition to its base management fee, our Manager is entitled to receive an incentive fee based, in large part, upon our achievement of targeted levels of net income. In evaluating asset acquisition and other management strategies, the opportunity to earn an incentive fee based on net income may lead our Manager to place undue emphasis on the maximization of net income at the expense of other criteria, such as preservation of capital, maintaining liquidity, and/or management of credit risk, interest rate risk, or market risk, in order to achieve a higher incentive fee. Assets with higher yield potential are generally riskier or more speculative. This could result in increased risk to our portfolio.
Our Board of Directors has approved very broad investment guidelines for our Manager and will not approve each decision made by our Manager to acquire, dispose of, or otherwise manage an asset.
Our Manager is authorized to follow very broad guidelines in pursuing our strategy. While our Board of Directors periodically reviews our guidelines and our portfolio and asset-management decisions, it generally does not review individual asset-level decisions, including proposed acquisitions, dispositions, and other management decisions. In addition, in conducting periodic reviews, our Board of Directors relies primarily on information provided to it by our Manager. Furthermore, our Manager may arrange for us to use complex strategies or to enter into complex transactions that may be difficult or impossible to unwind by the time they are reviewed by our Board of Directors. Our Manager has great latitude within the broad guidelines in determining the types of assets it may decide are proper for us to acquire and other decisions with respect to the management of those assets. Poor investment or risk management decisions could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
We compete with Ellington's other accounts for access to Ellington and for opportunities to acquire assets.
Ellington has sponsored and/or currently manages accounts with a focus that overlaps with our investment focus, and expects to continue to do so in the future. Ellington is not restricted in any way from sponsoring or accepting capital from new accounts, even for investing in asset classes or strategies that are similar to, or overlapping with, our asset classes or strategies.
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Therefore, we compete for access to the benefits that our relationship with our Manager and Ellington provides us. For the same reasons, the personnel of Ellington and our Manager may be unable to dedicate a substantial portion of their time to managing our assets.
Further, to the extent that our targeted assets are also targeted assets of other Ellington accounts, we will compete with those accounts for opportunities to acquire assets. Ellington has no duty to allocate such opportunities in a manner that preferentially favors us. Ellington makes available to us all opportunities to acquire assets that it determines, in its reasonable and good faith judgment, based on our objectives, policies and strategies, and other relevant factors, are appropriate for us in accordance with Ellington's written investment allocation policy, it being understood that we might not participate in each such opportunity, but will equitably participate with Ellington's other accounts in such opportunities on an overall basis.
Since many of our targeted assets are typically available only in specified quantities and are also targeted assets for other Ellington accounts, Ellington often is not able to buy as much of any asset or group of assets as would be required to satisfy the needs of all of Ellington's accounts. In these cases, Ellington's investment allocation procedures and policies typically allocate such assets to multiple accounts in proportion to their needs and available capital. As part of these policies, accounts that are in a "start-up" or "ramp-up" phase may get allocations above their proportion of available capital, which could work to our disadvantage, particularly because there are no limitations on Ellington's ability to create new accounts. In addition, Ellington's policies permit departure from proportional allocations under certain circumstances, including, for example, when such allocation would result in an inefficiently small amount of the security or assets being purchased for an account, which may also result in our not participating in certain allocations. In addition, as part of these policies, we may be excluded from specified allocations of assets for tax, regulatory, risk management, or similar reasons.
There are conflicts of interest in our relationships with our Manager and Ellington, which could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with Ellington and our Manager. Certain of our executive officers and directors are employees of Ellington or one or more of its affiliates. As a result, our Manager and our officers may have conflicts between their duties to us and their duties to, and interests in, Ellington or our Manager. For example, Mr. Penn, our President and Chief Executive Officer and one of our directors, also serves as the President and Chief Executive Officer of, and as a member of the Board of Trustees of, Ellington Credit Company, and as Vice Chairman and Chief Operating Officer of Ellington. Mr. Vranos, our Co-Chief Investment Officer, also serves as a Portfolio Manager of, and as a member of the Board of Trustees of, Ellington Credit Company, and as Chairman of Ellington. Mr. Tecotzky, our Co-Chief Investment Officer, also serves as Executive Vice President of Ellington Credit Company, and as Vice Chairman - Co-Head of Credit Strategies of Ellington. Mr. Herlihy, our Chief Financial Officer, also serves as the Chief Operating Officer of Ellington Credit Company, and as a Managing Director of Ellington. Mr. Smernoff, our Chief Accounting Officer, also serves as the Chief Financial Officer of Ellington Credit Company.
We may acquire or sell assets in which Ellington or its affiliates have or may have an interest. Similarly, Ellington or its affiliates may acquire or sell assets in which we have or may have an interest. In addition, affiliates of Ellington have purchased loans from certain of our loan originator affiliates, and we have entered into and may in the future enter into securitization transactions along with other funds managed by Ellington or its affiliates. Although such acquisitions, dispositions, and transactions may present conflicts of interest, we nonetheless may pursue and consummate such transactions. Additionally, we may engage in transactions directly with Ellington or its affiliates, including the purchase and sale of all or a portion of a portfolio asset. We may also, either directly or indirectly through an entity in which we invest, pay Ellington or an affiliate of Ellington to perform administrative services for us. Furthermore, if we securitize any of our assets, Ellington or an affiliate of Ellington may be required under the U.S. Risk Retention Rules to acquire and retain an economic interest in the credit risk of such assets. In connection with any of these transactions we may indemnify, alongside other Ellington affiliates, Ellington or its affiliates or third parties.
Acquisitions made for entities with similar objectives may be different from those made on our behalf. Ellington may have economic interests in, or other relationships with, others in whose obligations or securities we may acquire. In particular, such persons may make and/or hold an investment in securities that we acquire that may be pari passu, senior, or junior in ranking to our interest in the securities or in which partners, security holders, officers, directors, agents, or employees of such persons serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result in securities laws restrictions on transactions in such securities and otherwise create conflicts of interest. In such instances, Ellington may, in its sole discretion, make recommendations and decisions regarding such securities for other entities that may be the same as or different from those made with respect to such securities and may take actions (or omit to take actions) in the context of these other economic interests or relationships the consequences of which may be adverse to our interests.
In deciding whether to issue additional debt or equity securities, we will rely in part on recommendations made by our
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Manager. While such decisions are subject to the approval of our Board of Directors, some of our directors may not be independent. Because our Manager earns base management fees that are effectively based on the total amount of our equity capital, and earns incentive fees that are based in large part on the total net income that we are able to generate, our Manager may have an incentive to recommend that we issue additional debt or equity securities. See "—General Risk Factors—Future offerings of debt securities, which would rank senior to our common and preferred stock upon our liquidation, and future offerings of equity securities, which could dilute our existing stockholders and, in the case of preferred equity, may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock."
The officers of our Manager and its affiliates devote as much time to us as our Manager deems appropriate; however, these officers may have conflicts in allocating their time and services among us and Ellington and its affiliates' accounts. During times when there are turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager and Ellington employees, other entities that Ellington advises or manages will likewise require greater focus and attention, placing our Manager and Ellington's resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed or if Ellington or its affiliates did not act as a manager for other entities.
We, directly or through Ellington, may obtain confidential information about the companies or securities in which we have invested or may invest. If we do possess confidential information about such companies or securities, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action with respect to the securities of such companies. Our Manager's and Ellington's management of other accounts could create a conflict of interest to the extent our Manager or Ellington is aware of material non-public information concerning potential investment decisions. For example, an Ellington affiliate's membership in a loan syndicate or on a loan borrowers' creditors’ committee could potentially prevent our Manager from entering into a transaction involving a CLO that holds the related loan. We have implemented compliance procedures and practices designed to ensure that investment decisions are not improperly made while in possession of material non-public information. There can be no assurance, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of our Manager to make potentially profitable investments, which could have an adverse effect on our operations. These imposed by access to confidential information could materially affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
As of December 31, 2025, the Manager Group owned approximately 3.6% of our outstanding common shares and other equity interests convertible into our common shares. In evaluating opportunities for us and other management strategies, this may lead our Manager to emphasize certain asset acquisition, disposition, or management objectives over others, such as balancing risk or capital preservation objectives against return objectives. This could increase the risks, or decrease the returns, of a stockholder's investment.
The management agreement with our Manager was not negotiated on an arm's-length basis and may not be as favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to terminate.
Our management agreement with our Manager was negotiated between related parties, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party. Various potential and actual conflicts of interest may arise from the activities of Ellington and its affiliates by virtue of the fact that our Manager is controlled by Ellington.
Termination of our management agreement without cause, including termination for poor performance or non-renewal, is subject to several conditions which may make such a termination difficult, lengthy and costly. See "Item 1. Business—Management Agreement—Term and Termination." In the event we terminate the management agreement other than "for cause" (as defined in the management agreement), or elect not to renew the management agreement, we will be required to pay our Manager a termination fee equal to three times the sum of (i) the average annual base management fees paid or payable and (ii) the average annual incentive fees paid or payable, in each case with respect to the two most recent 12-month periods ending on the last day of the most recently completed fiscal quarter prior to the date of notice of termination or non-renewal. These provisions will increase the effective cost to us of the management agreement, thereby affecting our ability to our Manager without cause.
Pursuant to the management agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our Board of Directors in following or declining to follow our Manager's advice or recommendations. Under the terms of the management agreement, our Manager, Ellington, and their affiliates and each of their officers, directors, members, shareholders, managers, investment and risk management committee members, employees, agents, successors and assigns, will not be liable to us for acts or omissions performed in accordance with and pursuant to the management agreement, except because of acts or omissions constituting bad faith, willful misconduct,
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gross negligence, or reckless disregard of their duties under the management agreement. In addition, we will indemnify our Manager, Ellington, and their affiliates and each of their officers, directors, members, shareholders, managers, investment and risk management committee members, employees, agents, successors and assigns, with respect to all liabilities, judgments, costs, charges, losses, expenses, and claims arising from acts or omissions of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties under the management agreement.
If our Manager ceases to be our Manager or one or more of our Manager's key personnel ceases to provide services to us, our lenders and our derivative counterparties may cease doing business with us.
If our Manager ceases to be our Manager, including upon non-renewal of our management agreement, or if one or more of our Manager's key personnel ceases to provide services to us, it could constitute an event of default or early termination event under many of our repo or derivative transaction agreements, upon which the relevant counterparties would have the right to terminate their agreements with us. If our Manager ceases to be our Manager for any reason, including upon the non-renewal of our management agreement, and we are unable to obtain or renew financing or enter into or maintain derivative transactions, it could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Our Manager's failure to identify and acquire assets that meet our asset criteria or perform its responsibilities under the management agreement could materially adversely affect our business, financial condition and results of operations, our ability to pay dividends to our stockholders, and our ability to maintain our qualification as a REIT.
Our ability to achieve our objectives depends on our Manager's ability to identify and acquire assets that meet our asset criteria. Accomplishing our objectives is largely a function of our Manager's structuring of our investment process, our access to financing on acceptable terms, and general market conditions. Our stockholders do not have input into our investment decisions. All of these factors increase the uncertainty, and thus the risk, of investing in our common or preferred stock. The senior management team of our Manager has substantial responsibilities under the management agreement. In order to implement certain strategies, our Manager may need to hire, train, supervise, and manage new employees successfully. In addition, since the closing of the Longbridge Transaction in October 2022, our Manager is also required to provide oversight of Longbridge’s management and business, and since the closing of the Arlington Merger in December 2023, our Manager is also required to manage the investment portfolio acquired from Arlington. Any failure to manage our future growth effectively could materially adversely affect our business, financial condition and results of operations, our ability to maintain our qualification as a REIT, and our ability to pay dividends to our stockholders.
We do not own the Ellington brand or trademark, but may use the brand and trademark as well as our logo pursuant to the terms of a license granted by Ellington.
Ellington has licensed the "Ellington" brand, trademark, and logo to us for so long as our Manager or another affiliate of Ellington continues to act as our manager. We do not own the brand, trademark, or logo that we use in our business and may be unable to protect this intellectual property against infringement from third parties. Ellington retains the right to continue using the "Ellington" brand and trademark. We will further be unable to preclude Ellington from licensing or transferring the ownership of the "Ellington" brand and trademark to third parties, some of whom may compete against us. Consequently, we will be unable to prevent any damage to goodwill that may occur as a result of the activities of Ellington or others.
Furthermore, in the event our Manager or another affiliate of Ellington ceases to act as our manager, or in the event Ellington terminates the license, we will be required to change our name and trademark. Any of these events could disrupt our recognition in the marketplace, damage any goodwill we may have generated, and otherwise harm our business. Finally, the license is a domestic license in the United States only and does not give us any right to use the "Ellington" brand, trademark, and logo overseas even though we are using the brand, trademark, and logo overseas. Our use of the "Ellington" brand, trademark, and logo overseas is therefore unlicensed and could expose us to a claim of infringement.
Risks Related to Our Common Stock and Preferred Stock
Our stockholders may not receive dividends or dividends may decline over time.
The declaration, amount, nature, and payment of any future dividends on shares of our common and preferred stock are at the sole discretion of our Board of Directors. It is possible that we may not be able to pay dividends or other distributions on shares of our common stock or preferred stock. Under Delaware law, cash dividends on capital stock may only be paid from “surplus” or, if there is no “surplus,” from the corporation’s net profits for the then-current or the preceding fiscal year. Unless we operate profitably, our ability to pay cash dividends on shares of our common stock and preferred stock would require the availability of adequate “surplus,” which is defined as the excess, if any, of our net assets (total assets less total liabilities) over our capital. Further, even if an adequate surplus is available to pay cash dividends on shares of our common stock or preferred stock, we may not have sufficient cash to pay dividends on shares of our common stock or preferred stock. In addition, in order to preserve our liquidity, our Board of Directors may elect not to declare a dividend at all or may declare all or any portion of a
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dividend to be payable in stock, may delay the record date or payment date for any previously declared, but unpaid, dividend, convert a previously declared, but unpaid, cash dividend on our common stock to a dividend paid partially or completely in stock, or even revoke a declared, but unpaid, dividend.
Our ability to pay dividends may be impaired if any of the risks described in this filing, or any of our other periodic or current reports filed with the SEC, were to occur. In addition, payment of dividends depends upon our earnings, liquidity, financial condition, the REIT distribution requirements, our financial covenants, and other factors that our Board of Directors may deem relevant from time to time. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings or other capital will be available to us in an amount sufficient to enable us to make distributions on our shares of common stock or preferred stock, to pay our indebtedness, or to fund other liquidity needs. See “U.S. Federal Income Tax Risks—Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.”
Our Board of Directors will continue to assess our common stock dividend rate and our preferred stock dividend payment schedule on an ongoing basis, as market conditions and our financial position continue to evolve. Our Board of Directors is under no obligation to declare any dividend distribution. There can be no assurance that we will achieve results that will allow us to pay a specified level of dividends or to increase dividends from one period to the next. We have in the past reduced, and may in the future reduce, our dividend rate and/or dividend frequency.
An increase in interest rates may have an adverse effect on the market price of our equity or debt securities and our ability to pay dividends to our stockholders.
One of the factors that investors may consider in deciding whether to buy or sell our common stock is our dividend rate (or expected future dividend rates) as a percentage of our common stock price, relative to prevailing market interest rates. Similarly, investors in our preferred equity securities or our debt securities may consider the dividend rate or yield on such securities relative to prevailing market interest rates. If market interest rates continue to increase, prospective investors in our equity or debt securities may demand a higher dividend rate or yield on our securities or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and capital market conditions can affect the market price of our securities independent of the effects such conditions may have on our portfolio. For instance, if interest rates rise without an increase in our dividend rate, the market price of our common stock could decrease because potential investors may require a higher dividend yield on our common stock as market rates on interest-bearing instruments such as bonds rise. See also “Risks Related to our Investments and Investment Activities—Interest rate mismatches between our assets and our borrowings may reduce our income during periods of changing interest rates, and increases in interest rates could adversely affect the value of our assets."
Preferred stock, unsecured debt, and convertible debt securities could reduce the cash flow available to our common stock, including to fund dividends, and could also cause the net asset value of our common stock to be volatile.
We have issued preferred stock and unsecured debt, and in the future may issue additional preferred equity, unsecured debt, and/or convertible debt. There can be no assurance that such issuances will result in a higher yield or return to the holders of our common stock. If the dividend rate on the preferred stock, or the interest rate on the unsecured debt and/or convertible debt securities, were to exceed the net rate of return on our investment portfolio, the use of these instruments would result in a lower rate of return to the holders of our common stock than if we had not issued the preferred stock, unsecured debt or convertible debt securities, which could reduce the value of the common stock and adversely affect our ability to pay dividends to the holders of our common stock. Under the terms of our preferred stock, holders may be entitled to elect directors in the event that dividends on the preferred stock are in arrears for a specified period of time, typically two years, and such rights would remain in effect until the arrearage is eliminated.
The issuance of preferred stock, unsecured debt and/or convertible debt could also cause the net asset value of our common stock to become more volatile. Any decline in the value of our assets would typically be borne entirely by the holders of our common stock. Therefore, if the value of our assets were to decline, the prior issuance of preferred equity and debt would result in a greater decrease in net asset value for holders of our common stock than if we had not issued debt and preferred equity. This decline in net asset value would also tend to cause a greater decline in the market price for our common stock.
A downgrade, suspension or withdrawal of any credit rating assigned by a rating agency to us or to any future issuances of our preferred stock or debt securities, or a change in the debt markets, could cause the liquidity or market value of our preferred stock or debt securities to decline significantly.
Any credit rating assigned to us would represent an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated downgrades, suspension, withdrawals, or other changes in any credit ratings will generally affect the market value of any issuances of our preferred stock or debt securities. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of our preferred stock and debt securities. Credit ratings are
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not a recommendation to buy, sell, or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. We do not undertake any obligation to obtain or maintain any credit ratings or to advise holders of our preferred stock or debt securities of any changes in any credit ratings. There can be no assurance that any credit ratings will be assigned to us or remain in effect for any given period of time, or that such credit ratings will not be lowered or withdrawn entirely by the rating agencies if, in their judgment, future circumstances relating to the basis of the credit rating, such as adverse changes in our condition, so warrant. The conditions of the financial markets and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future, which could have an adverse effect on the market prices of our preferred stock and debt securities. In the case of one issuance of our Senior Notes, a downgrade would trigger a step-up in the applicable interest rate payable on those notes, increasing our cost of borrowing and adversely affecting our results of operations.
Investing in our securities involves a high degree of risk.
The assets we purchase in accordance with our objectives may result in a higher amount of risk than other alternative investment options. The assets we acquire may be highly speculative and may be subject to a variety of risks, including credit risk, prepayment risk, interest rate risk, and market risk. As a result, an investment in our securities may not be suitable for investors with lower risk tolerance or those seeking stable or predictable returns.
Risks Related To Our Organization and Structure
Our certificate of incorporation, bylaws and management agreement contain provisions that may inhibit potential acquisition bids that stockholders may consider favorable, and the market price of our common stock may be lower as a result.
Our certificate of incorporation and bylaws contain provisions that may have an anti-takeover effect, inhibit a change in our Board of Directors or otherwise discourage or delay acquisitions or proposals for changes that stockholders may otherwise find favorable. These provisions include:
• allowing only our Board of Directors to fill newly created directorships resulting from any increase in the authorized number of directors and any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause, even if the remaining directors do not constitute a quorum;
• requiring advance notice for our stockholders to nominate candidates for election to our Board of Directors or to propose business to be considered by our stockholders at a meeting of stockholders;
• the ability of our Board of Directors to cause us to issue additional authorized but unissued shares of common stock or preferred stock without the approval of our stockholders;
• the ability of the Board of Directors to amend, modify or repeal our bylaws without the approval of our stockholders;
• restrictions on the ability of stockholders to call a special meeting without a majority of all the votes entitled to be cast at such meeting;
• limitations on the ability of stockholders to act by written consent; and
• restrictions imposed by Section 203 of the Delaware General Corporation Law, which limit certain business combinations with "interested stockholders" (generally, holders of 15% or more of our voting stock) for a three-year period, unless specific conditions are met.
Certain provisions of the management agreement also could make it more difficult for third parties to acquire control of us by various means, including limitations on our right to terminate the management agreement and a requirement that, under certain circumstances, we make a substantial payment to our Manager in the event of a termination.
There are ownership limits and restrictions on transferability in our certificate of incorporation.
Our certificate of incorporation provides that (subject to certain exceptions described below) no person may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 9.8%, in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of our capital stock that will or may violate any of the foregoing restrictions on transferability and ownership will be required to give written notice immediately to us, or in the case of proposed or attempted transactions will be required to give at least 15 days written notice to us, and provide us with such other information as we may request in order to determine the effect of such transfer on our status as a REIT. Any attempt to own or transfer shares of our capital stock in violation of any of the foregoing restrictions may result in the shares being automatically transferred to a charitable trust or, if the transfer to a charitable trust would not be effective, such transfer being treated as from the outset.
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Our Board of Directors, in its sole discretion, may exempt any person from the foregoing restrictions. Any person seeking such an exemption must provide to our Board of Directors such representations, covenants, and undertakings as our Board of Directors may deem appropriate. Our Board of Directors may also condition any such exemption on the receipt of a ruling from the Internal Revenue Service, or "IRS," or an opinion of counsel as it deems appropriate. Our Board of Directors has granted an exemption from this limitation to Ellington and certain affiliated entities of Ellington, subject to certain conditions.
Additionally, in order for us to maintain our qualification as a REIT, no more than 50% in value of our outstanding shares may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year. "Individuals" for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts.
The ownership limitation and other restrictions could have the effect of discouraging a takeover or other transaction in which holders of our common shares might receive a premium for their common shares over the then-prevailing market price or which holders might believe to be otherwise in their best interests.
Our rights and the rights of our stockholders to take action against our directors and officers or against our Manager or Ellington are limited, which could limit stockholders' recourse in the event actions are taken that are not in their best interests.
Our certificate of incorporation provides that each person that is or was a director, officer, employee, or agent of ours shall not be liable to us or any of our stockholders for any acts or omissions by any such person arising from the performance of their duties and obligations in connection with us, except to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law. In addition, as permitted by Section 102(b)(7) of the Delaware General Corporation Law, our certificate of incorporation provides that our directors will not be liable to us or any holder of shares for monetary damages for breach of a fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under applicable law.
In addition, our certificate of incorporation provides that we may indemnify, to the fullest extent permitted by law, each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in our right), by reason of the fact that the person is or was a director, officer, employee, or agent of ours, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding, if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Our certificate of incorporation also provides that we may indemnify, to the fullest extent permitted by law, any person who was or is a party or is threatened to be made a party to any , pending or completed action or suit by or in our right to procure a judgment in our favor by reason of the fact that the person is or was a director, officer, employee, or agent of ours, expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in faith and in a manner the person reasonably believed to be in or not to our interests, except that no indemnification may be made in respect of any claim, issue or matter as to which such person had been adjudged to be liable to us unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought determines that, the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses. We have entered into indemnification agreements with our directors and officers implementing these indemnification provisions that obligate us to indemnify them to the maximum extent permitted by Delaware law. Such indemnification includes defense costs and expenses incurred by such officers and directors.
Our management agreement with our Manager requires us to indemnify our Manager and its affiliates against any and all claims and demands arising out of claims by third parties caused by acts or omissions of our Manager and its affiliates not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of our Manager's duties under the management agreement.
In light of the liability limitations contained in our certificate of incorporation and our management agreement with our Manager, as well as our indemnification arrangements with our directors and officers and our Manager, our and our stockholders' rights to take action against our directors, officers, and Manager are limited, which could limit stockholders' recourse in the event actions are taken that are not in their best interests.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors or officers.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: any derivative action or proceeding
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brought on our behalf; any action asserting a claim of breach of fiduciary duty owed by any current or former director, officer or stockholder of ours to us or our stockholders; any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our certificate of incorporation or bylaws; or any action asserting a claim against us governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that the stockholder believes is favorable for disputes with us or our directors or officers, which may discourage lawsuits against us and our directors or officers. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Maintenance of our exclusion from registration as an investment company under the Investment Company Act imposes significant limitations on our operations.
We have conducted and intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. Both we and our Operating Partnership are organized as holding companies and conduct our business primarily through wholly-owned subsidiaries of our Operating Partnership. Our Operating Partnership's investments in its 3(c)(7) subsidiaries and its other investment securities cannot exceed 40% of the value of our Operating Partnership's total assets (excluding U.S. government securities and cash) on an unconsolidated basis. In addition, the Holding Subsidiary's investment in its 3(c)(7) subsidiaries and its other investment securities cannot exceed 40% of the value of our Holding Subsidiary's total assets (excluding U.S. government securities and cash) on an unconsolidated basis. These requirements limit the types of businesses in which we may engage and the assets we may hold. Our 3(c)(5)(C) subsidiaries rely on the exclusion provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C) of the Investment Company Act is designed for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of the entity's assets on an unconsolidated basis consist of qualifying real estate assets and at least 80% of the entity's assets on an unconsolidated basis consist of qualifying real estate assets or real estate-related assets. Both the 40% Test and the requirements of the Section 3(c)(5)(C) limit the types of businesses in which we may engage and the types of assets we may hold, as well as the timing of sales and purchases of those assets.
To classify the assets held by our subsidiaries as qualifying real estate assets or real estate-related assets, we rely on no-action letters and other guidance published by the SEC staff regarding those kinds of assets, as well as upon our analyses (in consultation with outside counsel) of guidance published with respect to other types of assets. There can be no assurance that the laws and regulations governing the Investment Company Act status of companies similar to ours, or the guidance from the SEC staff regarding the treatment of assets as qualifying real estate assets or real estate-related assets, will not change in a manner that adversely affects our operations. In fact, in August 2011, the SEC published a concept release in which it asked for comments on this exclusion from registration. To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon our exclusion from the definition of an investment company under the Investment Company Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could further inhibit our ability to pursue the strategies that we have chosen. Furthermore, although we monitor the assets of our subsidiaries regularly, there can be no assurance that our subsidiaries will be able to maintain their exclusion from registration. Any of the foregoing could require us to adjust our strategy, which could limit our ability to make certain investments or require us to sell assets in a manner, at a price or at a time that we otherwise would not have chosen. This could affect the value of our common or preferred stock, the sustainability of our business model, and our ability to pay dividends to our stockholders.
If we were required to register as an investment company under the Investment Company Act, we would be subject to the restrictions imposed by the Investment Company Act, which would require us to make material changes to our strategy.
If we are deemed to be an investment company under the Investment Company Act, we would be required to materially restructure our activities or to register as an investment company under the Investment Company Act, which would have a material adverse effect on our business, financial condition, and results of operations. In connection with any such restructuring, we may be required to sell portfolio assets at a time we otherwise might not choose to do so, and we may incur losses in connection with such sales. Further, our Manager may unilaterally terminate the management agreement if we become regulated as an investment company under the Investment Company Act. In addition, if it were established that we were (or Arlington had been) an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company.
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U.S. Federal Income Tax Risks
An investment in our common or preferred stock has various U.S. federal, state, and local income tax risks.
We strongly urge stockholders to consult their tax advisors concerning the effects of U.S. federal, state, and local income tax law on an investment in our common and preferred stock and on their individual tax situations.
Our failure to maintain our qualification as a REIT would subject us to U.S. federal, state and local income taxes, which could adversely affect the value of our common and preferred stock and would substantially reduce the cash available for distribution to our stockholders.
We elected to be treated as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2019. While we believe that we operated and intend to continue to operate in a manner that will enable us to meet the requirements for taxation as a REIT commencing on January 1, 2019, there can be no assurance that we will remain qualified as a REIT.
The U.S. federal income tax laws governing REITs are 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, our income and our earnings and profits, or "E&P" (calculated pursuant to Sections 316 and 857(d) of the Code and the regulations thereunder), the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. Our ability to satisfy the REIT asset tests depends upon the characterization and fair market values of our assets, some of which are not precisely determinable, and for which we may not obtain independent appraisals. Our compliance with the REIT asset and income tests and the accuracy of our tax reporting to stockholders also depend upon our ability to successfully manage the calculation and composition of our gross and net taxable income, our E&P and our assets on an ongoing basis. Even a technical or inadvertent mistake could jeopardize our REIT status. In addition, our ability to satisfy the requirements to maintain our qualification as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes, or in cases where we own an instrument that the issuer intends to treat as debt, but that the Internal Revenue Service treats as equity or as a non-qualifying asset. Although we operated and intend to operate so as to maintain our qualification as a REIT, given the complex nature of the rules governing REITs, the ongoing importance of factual determinations, including the potential tax treatment of the investments we make, and the possibility of future changes in our circumstances, no assurance can be given that our actual results of operations for any particular taxable year will such requirements.
We also own interests in entities that have elected to be taxed as REITs under the U.S. federal income tax laws (each, a "Subsidiary REIT"). Our Subsidiary REITs are subject to the same REIT qualification requirements that are applicable to us. If a Subsidiary REIT were to fail to maintain its qualification 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 and/or income tests, in which event we also would fail to maintain our qualification as a REIT unless we could avail ourselves of certain relief provisions. While we believe that each Subsidiary REIT has qualified as a REIT under the Code, we have joined each 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. There can be no assurance that such "protective" TRS election would be effective to avoid adverse consequences to us. Moreover, even if the "protective" election were to be , the Subsidiary REIT would be subject to regular corporate income tax, dividends we receive from the Subsidiary REIT would not qualify as income for our REIT 75% gross income test, and there can be no assurance that we would not to the requirement that not more than 25% (20% for the 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 are subject to , and a to comply with the would our REIT status and may result in the application of a 100% excise tax."
If we fail to maintain our qualification as a REIT in any calendar year, and do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax (and any applicable state and local taxes) on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible by us in computing our taxable income (although such dividends received by certain non-corporate U.S. taxpayers generally would be subject to a preferential rate of taxation). Further, if we fail to maintain our qualification as a REIT, we might need to borrow money or sell assets in order to pay any resulting 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, we no longer would be required under U.S. federal tax laws to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to maintain our qualification as a REIT was subject to relief under the U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify.
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We could face adverse tax consequences if Arlington failed to qualify as a REIT prior to the Arlington Merger.
In connection with the closing of the Arlington Merger, we received an opinion of counsel to the effect that Arlington qualified as a REIT for U.S. federal income tax purposes through the time of the Arlington Merger. However, we did not request a ruling from the IRS that Arlington qualified as a REIT. Notwithstanding the opinion of counsel, if the IRS successfully challenged Arlington’s REIT status or tax treatment of its transactions prior to the Arlington Merger, we could face adverse tax consequences, including succeeding to Arlington’s liability for U.S. federal income taxes at regular corporate rates for the periods in which Arlington failed to qualify as a REIT (without regard to the deduction for dividends paid for such periods), any excise or prohibited transaction tax, or any tax liability of Arlington's TRS. These adverse tax consequences could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
Complying with REIT requirements may cause us to forgo or liquidate otherwise attractive investments.
To qualify 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 common shares. In order to meet these tests, we may be required to forgo investments we might otherwise make. Thus, we may choose not to make certain types of investments or pursue certain strategies, which could include certain hedges that would otherwise reduce certain investment risks, or we could make such investments or pursue such strategies in a TRS. Any domestic TRS will be subject to regular U.S. federal, state and local corporate income tax, which may reduce the cash available to be distributed to our stockholders as compared with prior years.
As a REIT, we may be required to pay dividends to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our investment performance.
In particular, we must ensure that at the end of each calendar quarter, we satisfy the REIT 75% asset test, which requires that at least 75% of the value of our total assets consist of cash, cash items, government securities and qualified REIT real estate assets, including RMBS. The remainder of our investments in securities (other than government securities and qualified REIT 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. The 10% value test does not apply to 'straight debt' having specified characteristics and to certain other securities. There can be no assurance that the IRS will agree that the assets we believe satisfy the requirements of straight debt actually satisfy those requirements. In addition, in general, no more than 5% of the value of our total assets (other than government securities, TRS securities and qualified REIT real estate assets) can consist of the securities of any one issuer, and no more than 25% (20% for the taxable years beginning before January 1, 2026) of the value of our total assets can be represented by securities of one or more TRSs. Generally, if we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid our REIT qualification and becoming subject to U.S. federal income tax and any applicable state and local taxes on all of our taxable income.
Further, we must also ensure that each taxable year we satisfy the REIT 75% and 95% gross income tests, which require that, in general, 75% of our gross income come from certain real estate-related sources and 95% of our gross income consist of gross income that qualifies for the REIT 75% gross income test or certain other passive income sources. As a result of the requirement that we satisfy both the REIT 75% asset test and the REIT 75% and 95% gross income tests, we may be required to liquidate from our portfolio otherwise attractive investments or contribute such investments to a TRS, in which event they would be subject to regular corporate U.S. federal, state and local taxes assuming that the TRS is organized in the United States. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders. Generally, if we fail to comply with these requirements at the end of any calendar year, we will lose our REIT qualification and may be subject to U.S. federal income tax and any applicable state and local taxes on all of our taxable income.
Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.
To qualify as a REIT, we must distribute to our stockholders each calendar year at least 90% of our REIT taxable income (including certain items of non-cash income), determined excluding any net capital gains and without regard to the deduction for dividends paid. Distributions of our taxable income must generally occur in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the year and if paid with or before the first regular dividend payment after such declaration. To the extent that we satisfy the REIT 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax (and any applicable state and local taxes) on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by
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which our distributions in any calendar year (subject to specific timing rules for certain dividends paid in January) 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 our taxable income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the corporate income tax. These distributions will limit our ability to retain earnings and thereby replenish or increase capital from operations. However, there is no requirement that TRSs distribute their after-tax net income to their parent REIT.
Our taxable income may substantially exceed our net income as determined based on GAAP, because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. Our Operating Partnership and certain of its subsidiaries have made an election under Section 475(f) of the Code to mark their securities to market, which may cause us to recognize taxable gains for a taxable year with respect to such securities without the receipt of any cash corresponding to such gains. Additionally, E&P in our foreign TRSs are taxable to us, regardless of whether such earnings are distributed. We intend to file consolidated U.S. income tax returns for our domestic TRSs, which means that losses in one domestic TRS can offset federal and certain state income in another domestic TRS. However, overall losses in our TRSs will not reduce our REIT taxable income, and will generally not provide any tax benefit to us, except for being carried forward against future TRS taxable income in the case of a domestic TRS. Also, our ability, or the ability of our subsidiaries, to deduct interest may be limited under Section 163(j) of the Code. 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, or we may modify assets in a way that produces taxable income prior to or in excess of economic income. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. To the extent that we generate such non-cash taxable income in a taxable year or have on our deductions, 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, sell assets, make taxable distributions of our shares or debt securities or non-cash assets at rates, at terms or at times that we regard as , in order to the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year.
Conversely, from time to time, we may generate less taxable income than our income for financial reporting purposes due to GAAP and tax accounting differences or, as mentioned above, due to the timing between the recognition of taxable income and the actual receipt of cash. In such circumstances we may make distributions according to our business plan that are within our wherewithal from an economic or cash management perspective, but that are labeled as return of capital for tax reporting purposes, as they are in excess of taxable income in that period. Utilizing net operating loss or net capital loss carryforwards may allow us to reduce our required distributions to stockholders or our income tax liability, which would allow us to retain future taxable income as capital. However, if we choose nonetheless to make distributions according to our business plan or if we do not generate sufficient taxable income of the appropriate tax character, such net operating loss or net capital loss carryforwards may not be fully utilized. To the extent that our net operating loss or net capital loss carryforwards expire unutilized, we may not fully realize the benefit of these tax attributes which could lead to higher annual distribution requirements or tax liabilities.
Determination of our REIT taxable income involves the application of highly technical and complex Code provisions for which only limited judicial and administrative authorities exist. If the IRS disagrees with our determination, it could affect our satisfaction of the distribution requirement. Under certain circumstances, we may be able to correct a failure to meet the distribution requirement for a year by paying "deficiency dividends" to our stockholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts distributed as deficiency dividends, we will be required to pay interest and a penalty to the IRS based upon the amount of any deduction we take for deficiency dividends.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. In addition, our domestic TRSs will be subject to regular corporate U.S. federal, state and local taxes. One of our domestic TRSs is subject to mark-to-market taxation under Section 475(a) of the Code. If the IRS were to successfully challenge the TRS’s treatment or timing of recognition of its mark-to-market gains or losses or the assets that are not subject to or identified out of mark-to-market treatment, that could increase the
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taxes payable by the TRS or reduce the TRS’s ability to utilize net operating loss carryforwards. Any of these taxes or limitations would decrease cash available for distributions to stockholders.
The failure of MBS subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to maintain our qualification as a REIT.
We have entered into repurchase agreements under which we nominally sell certain of our MBS to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that, for U.S. federal income tax purposes, these transactions will be treated as secured debt and we will be treated as the tax owner of the MBS that are the subject of any such repurchase agreement, notwithstanding that such agreements may transfer record ownership of such assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that we do not own the MBS during the term of the repurchase agreement, in which case we could fail to maintain our qualification as a REIT.
Uncertainty exists with respect to the treatment of our TBAs for purposes of the REIT asset and income tests.
We purchase and sell Agency RMBS through TBAs and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise, and may continue to do so in the future. While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 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 treat the GAAP value of our TBAs under which we contract to purchase to-be-announced Agency RMBS ("long TBAs") as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our long TBAs as qualifying income for purposes of the REIT 75% gross income test, based on an opinion of Hunton Andrews Kurth LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a long TBA should be treated as ownership of real estate assets, and (ii) for purposes of the REIT 75% gross income test, any gain recognized by us in connection with the settlement of our long TBAs should be treated as gain from the sale or disposition of an interest in mortgages on real property. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not the conclusions set forth in such opinions. In addition, it must be emphasized that the opinion of counsel is based on various assumptions relating to our TBAs and is conditioned upon fact-based representations and covenants made by our management regarding our TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to the opinion of counsel, we could be subject to a tax or we could 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 from the disposition of TBAs.
Complying with REIT requirements may limit our ability to hedge effectively.
The REIT provisions of the Code substantially limit our ability to hedge. Under these provisions, any income that we generate from transactions intended to hedge our interest rate or foreign currency risks will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges (i) interest rate risk on liabilities incurred to carry or acquire real estate or (ii) risk of foreign 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 Regulations. The requirements in the Treasury Regulations related to identifying hedging transactions are highly technical and complex for which only limited judicial and administrative authorities exist, and the IRS could disagree with and successfully challenge our treatment and identifications of such hedging transactions. Income from hedging transactions that are not properly identified or hedge different risks will generally constitute non-qualifying income for purposes of both the REIT 75% and 95% gross income tests and could cause us to fail to maintain our qualification as a REIT. Our aggregate gross income from such transactions, along with other gross income that does not qualify for the REIT 95% gross income test, cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of hedging techniques, and we have implemented and may in the future implement certain hedges through a TRS. Any hedging income earned by a domestic TRS would be subject to U.S. federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or us to risks associated with interest rate changes or other changes than we would otherwise want to bear. In addition, in our TRSs will generally not provide any tax , except for being carried forward future TRS taxable income in the case of a domestic TRS. Even if the income from certain of our hedging transactions is excluded from gross income for purposes of the REIT 75% and 95% gross income tests, such income and any will be taken into account in determining our REIT taxable income and our distribution requirement, and the GAAP value of our hedging assets will not be treated as qualified real estate assets for the REIT asset test. If the IRS with our calculation of the amount or timing of recognition of or with respect to our hedging transactions, including the impact of our elections under Section 475(f) of the Code and the treatment of hedging expense and under Section 163(j) of the Code and Treasury Regulation Section 1.446-4, our distribution requirement could increase, which could require that we correct any in distributions by paying dividends to our stockholders in a later year.
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Our ownership of and relationship with our TRSs are subject to limitations, and a failure to comply with the limitations 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 stock of one or more TRSs. A TRS may earn income that would not be qualifying income for purposes of the REIT 75% or 95% gross income tests if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation (other than a REIT) of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for the taxable years beginning before January 1, 2026) of the value of a REIT's total assets may consist of stock or securities of one or more TRSs. The equity investments we make in loan originators, for example, are generally made in or contributed to TRSs. The surviving entity of the Arlington Merger, which is a wholly-owned subsidiary of the Operating Partnership, is also a TRS. Many of the loans we securitize are generally made in or contributed to TRSs. In addition, many of the investments that we made and activities we undertook prior to our REIT election have been contributed to or will be made in one of our TRSs; thus, we hold a significant portion of our assets through, and derive a significant portion of our taxable income and gains in, TRSs. While we intend to manage our affairs so as to satisfy the requirement that no more than 25% of the value of our total assets consists of stock or securities of our TRSs and other non-qualifying assets, as well as the requirement that taxable income from our TRSs plus other non-qualifying gross income not exceed 25% of our total gross income, there can be no assurance that we will be to do so in all market circumstances. Even if we are to do so, compliance with these rules may reduce our flexibility in operating our business. In addition, the two rules may with each other in that our ability to reduce the value of our TRSs below 25% of our assets by causing a TRS to distribute a dividend to us may be limited by our need to comply with the REIT 75% gross income test, which requires that, in general, 75% of our gross income come from certain real estate-related sources (and TRS dividends are not qualifying income for such test). There can be no assurance that we will be to comply with either or both of these tests in all market conditions. Our to comply with either of these tests could have a material effect on our business, financial condition, liquidity, results of operations, qualification as a REIT and ability to make distributions to our stockholders.
The TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also 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 domestic TRSs will pay U.S. federal, state and local income tax on their taxable income (net of deductible interest expense) at regular corporate tax rates, and their after-tax net income will be available for distribution to us but is not required to be distributed to us. In certain circumstances, the ability to deduct interest expense by any TRS that we may form could be limited. In addition, losses in our domestic TRSs generally will not provide any tax benefit prior to liquidation, except for being carried forward against future TRS taxable income. Although our domestic TRSs succeeded to certain net capital losses and net operating losses as a result of the Arlington Merger, our ability to use such losses future TRS taxable income may be limited by Sections 382, 383, and 384 of the Code, and we may be to generate sufficient future taxable income to utilize the net capital and net operating in whole, in part, or at all.
We generally structure our foreign TRSs with the intent that their income and operations will not be subject to U.S. federal, state and local income tax. For example, the Code and the Treasury Regulations promulgated thereunder specifically provide that a non-U.S. corporation is not a U.S. trade or business and therefore is not subject to U.S. federal income tax if it restricts its activities in the United States to trading in stock and securities (or any activity closely related thereto) for its own account irrespective of whether such trading (or such other activity) is conducted by such a non-U.S. corporation or its employees through a resident broker, commission agent, custodian or other agent. However, there is no assurance that our foreign TRSs will successfully operate so that they are not subject to federal, state and local income tax. If the IRS successfully challenged that tax treatment, it would reduce the amount that those foreign TRSs would have available to distribute to us. E&P in our foreign TRSs, including gains from securities marked to market for tax purposes, are taxable to us, and are not qualifying income for the purposes of the REIT 75% gross income tests, regardless of whether such earnings are distributed to us. In addition, losses in our foreign TRSs generally will not provide any tax prior to .
We intend to monitor the value of and the income from our respective investments in our domestic and foreign TRSs for the purpose of ensuring compliance with TRS ownership limitations and the REIT 75% gross income test. In addition, we will review all of our transactions with our TRSs to ensure that they are entered into on arm's-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that we will be able to comply with the 25% limitation, the REIT 75% gross income test or avoid application of the 100% excise tax discussed above.
The failure of our excess servicing spread to qualify as real estate assets or the income from our excess servicing spread to qualify as mortgage interest could adversely affect our ability to qualify as a REIT.
We believe that the excess servicing spread assets that we currently hold represent interests in mortgages on real property and thus are qualifying “real estate assets” for purposes of the REIT asset test, which generate income that qualifies as interest on obligations secured by mortgages on real property for purposes of the REIT income test. If our belief is incorrect, or if we
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acquire an excess servicing spread asset with terms that are different from the terms of our current excess servicing spread assets, the IRS could assert that such excess servicing spread assets do not qualify under the REIT asset and income tests, and if successful, we might fail to qualify as a REIT, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
The issuers of the CLOs in which we invest could become subject to U.S. federal income tax or withholding requirements.
The issuers of the CLOs in which we invest will generally operate pursuant to investment guidelines intended to ensure that the CLO is not treated for U.S. federal income tax purposes as engaged in a U.S. trade or business. If a CLO issuer fails to comply with its investment guidelines, or if the Internal Revenue Service otherwise successfully asserts that the CLO issuer should be treated as engaged in a U.S. trade or business, such CLO issuer could be subject to U.S. federal income tax, which could reduce the amount available to distribute to the CLO mezzanine debt and equity holders, including us.
The U.S. Foreign Account Tax Compliance Act provisions of the Code impose a withholding tax of 30% on certain U.S. source periodic payments, including interest and dividends, to certain non-U.S. entities, including certain non-U.S. financial institutions and investment funds, unless such non-U.S. entity complies with certain reporting requirements regarding its U.S. account holders and its U.S. owners. Most CLOs in which we invest will be treated as non-U.S. financial entities for this purpose, and therefore will be required to comply with these reporting requirements to avoid the 30% withholding. If a CLO in which we invest fails to properly comply with these reporting requirements, certain payments received by such CLO may be subject to the 30% withholding tax, which could reduce the amount available to distribute to the CLO mezzanine debt and equity holders, including us.
Dividends payable by REITs do not qualify for the reduced tax rates available for "qualified dividend income."
Dividends payable by REITs are generally not eligible for the reduced rates applicable to “qualified dividends” paid by non-REIT corporations. This could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.
We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.
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. Changes to the tax laws, with or without retroactive application, could significantly and negatively affect our stockholders or us. We cannot predict the long-term effect of any future changes on REITs or assure our stockholders that any such changes will not adversely affect the taxation of a stockholder. We and our stockholders and the value of our common stock could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.
Our recognition of "phantom" income may reduce a stockholder's after-tax return on an investment in our common stock.
We may recognize phantom income, which is taxable income in excess of our economic income, in the earlier years that we hold certain investments or in the year that we modify certain loan investments, and we may only experience an offsetting excess of economic income over our taxable income in later years, if at all. As a result, stockholders at times may be required to pay U.S. federal income tax on distributions taxable as dividends that economically represent a return of capital rather than a dividend. Taking into account the time value of money, this acceleration or increase of U.S. federal income tax liabilities may reduce the after-tax return on a stockholder's investment to an amount less than the after-tax return on an alternate investment with an identical pre-tax rate of return that did not generate phantom income.
Liquidation of our assets may jeopardize our REIT qualification or may be subject to a 100% tax.
To maintain our qualification as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our assets to repay obligations to our lenders or for other reasons, we may be unable to comply with these requirements, thereby jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as inventory or property held primarily for sale to customers in the ordinary course of business.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing MBS, that would be treated as sales of dealer property for U.S. federal income tax purposes.
A REIT's net income from prohibited transactions is subject to a 100% tax with no offset for losses. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held
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primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we dispose of or securitize mortgage loans or MBS in a manner that was treated as dealer activity for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales or securitization structures, even though the transactions might otherwise be beneficial to us. Alternatively, in order to avoid the prohibited transactions tax, we may choose to implement certain transactions through a TRS, including by contributing the assets to a TRS.
Although we expect to avoid the prohibited transactions tax by conducting the sale of property that may be characterized as dealer property through a TRS, such TRS will be subject to federal, state and local corporate income tax and may incur a significant tax liability as a result of those sales conducted through the TRS. In addition, whether property is held primarily for sale to customers in the ordinary course of a trade or business depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or that we can satisfy certain safe-harbor provisions of the Code that would prevent such treatment. Moreover, no assurance can be given that the IRS will respect the transaction by which property that may be characterized as dealer property is transferred to the TRS. If any property sold is treated as property held for sale to customers or if the contribution of property is not respected, then we may be treated as having engaged in a prohibited transaction, and our net income therefrom would be subject to a 100% tax.
Our Operating Partnership and certain other subsidiaries have made a mark-to-market election under Section 475(f) of the Code. If the IRS challenges our application of that election, it may jeopardize our REIT qualification.
Our Operating Partnership, our subsidiary REIT and certain other subsidiaries have made elections under Section 475(f) of the Code to mark their securities to market. There are limited authorities under Section 475(f) of the Code as to what constitutes a trader for U.S. federal income tax purposes. Under other sections of the Code, the status of a trader in securities depends on all of the facts and circumstances, including the nature of the income derived from the taxpayer's activities, the frequency, extent and regularity of the taxpayer's securities transactions, and the taxpayer's investment intent. There can be no assurance that our Operating Partnership and these subsidiaries will continue to qualify as a trader in securities eligible to make the mark-to-market election. We have not received, nor are we seeking, an opinion from counsel or a ruling from the IRS regarding our or our subsidiaries' qualification as a trader. If the qualification for, or our application of, the mark-to-market election were successfully challenged by the IRS, in whole or in part, it could, depending on the circumstances, result in retroactive (or prospective) changes in the amount or timing of gross income we recognize. Furthermore, the law is unclear as to the treatment of mark-to-market gains and losses under the various REIT tax rules, including, among others, the prohibited transaction and qualified liability hedging rules. While there is limited analogous authority, we treat any mark-to-market as qualifying income for purposes of the REIT 75% gross income test to the extent that the is recognized with respect to a qualifying real estate asset, based on an opinion of Hunton Andrews Kurth LLP substantially to the effect that any such recognized with respect to assets that would produce qualifying income for purposes of the REIT 75% and/or 95% gross income test, as applicable, if they were actually sold should be treated as qualifying income to the same extent for purposes of the REIT 75% and/or 95% gross income test, as applicable, and any such should not be subject to the prohibited transaction tax. If the IRS were to treat our mark-to-market as subject to the prohibited transaction tax or to the treatment or timing of recognition of our mark-to-market or with respect to our qualified liability hedges, we could owe material federal income or tax or, in some circumstances, even to maintain our qualification as a REIT. Finally, mark-to-market and could cause in the amount of our taxable income. For instance, the mark-to-market election could generate in one taxable year that we are to use to offset taxable income, followed by mark-to-market in a subsequent taxable year that us to make additional distributions to our stockholders. Hence, the mark-to-market and could cause us to distribute more dividends to our stockholders in a particular period than would otherwise be from a business perspective.
The interest apportionment rules may affect our ability to comply with the REIT asset and gross income tests.
Most of the distressed mortgage loans that we have acquired were acquired by us at a discount from their outstanding principal amount, because our pricing was generally based on the value of the underlying real estate that secures those mortgage loans. Treasury Regulation Section 1.856-5(c) (the "interest apportionment regulation") provides that if a mortgage is secured by both real property and other property, a REIT is required to apportion its annual interest income to the real property security based on a fraction, the numerator of which is the value of the real property securing the loan, determined when the REIT commits to acquire the loan, and the denominator of which is the highest "principal amount" of the loan during the year. 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. Revenue Procedure 2014-51 interprets the "principal amount" of the loan to be the face amount of the loan, despite the Code requiring taxpayers to treat any market discount, that is the difference between the purchase price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as interest rather than principal.
The interest apportionment regulation applies only if the debt in question is secured both by real property and personal property. We believe that most of the mortgage loans that we acquire at a discount under the circumstances contemplated by
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Revenue Procedure 2014-51 are secured only by real property (including mortgage loans secured by both real property and personal property where the value of the personal property does not exceed 15% of the aggregate value of the property securing the mortgage). Accordingly, we believe that the interest apportionment regulation generally does not apply to our loans.
Nevertheless, if the IRS were to assert successfully that such 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 depending upon the value of the real property securing our loans and their face amount, and the sources of our gross income generally, we might not be able to meet the REIT 75% gross income test, and possibly the REIT asset tests. If we did not meet these tests, we could potentially either lose our REIT status or be required to pay a tax penalty to the IRS. With respect to the REIT 75% asset test, Revenue Procedure 2014-51 provides a safe harbor under which the IRS will not challenge a REIT's treatment of a loan as being a real estate asset in an amount equal to the lesser of (1) the greater of (a) the current value of the real property securing the loan or (b) the fair market value of the real property securing the loan determined as of the date the REIT committed to acquire the loan or (2) the fair market value of the loan on the date of the relevant quarterly REIT asset testing date. This safe harbor, if it applied to us, would help us comply with the REIT asset tests following the acquisition of debt if the value of the real property securing the loan were to subsequently . If we did not meet one or more of the REIT asset tests, then we could potentially either our REIT status or be required to pay a tax to the IRS.
Generally, our investments in residential transition loans, or "RTLs," and occasionally, our investments in small balance commercial mortgage loans, or "SBCs," will require us to make estimates about the fair value of land improvements that may be challenged by the IRS.
Generally, our investments in RTLs, and occasionally our investments in SBCs, are short term loans secured by a mortgage on real estate assets where the proceeds of the loan will be used, in part, to renovate the property. The interest from these investments will be qualifying income for purposes of the REIT income tests, provided that the loan value of the real property securing the investment is equal to or greater than the highest outstanding principal amount of the loan during any taxable year. Under the REIT provisions, where improvements will be constructed with the proceeds of the loan, the loan value of the real property is the fair value of the land and existing real property improvements plus the reasonably estimated cost of the improvements or developments (other than personal property) that will secure the loan and that are to be constructed from the proceeds of the loan. There can be no assurance that the IRS would not challenge our estimate of the loan value of the real property.
The failure of a mezzanine loan or similar debt to qualify as a real estate asset could adversely affect our ability to maintain our qualification as a REIT.
We may invest in mezzanine loans or similar debt. The IRS has provided a safe harbor for mezzanine loans but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying income for purposes of the REIT 75% gross income test. We may acquire mezzanine loans or similar debt that meet most but do not meet all of the requirements of this safe harbor, and we may treat such loans as real estate assets for purposes of the REIT asset and income tests. In the event that we own a mezzanine loan or similar debt that does not meet the safe harbor, the IRS could challenge such loan's treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could fail to maintain our qualification as a REIT.
Our qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.
When purchasing securities, we may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, the value of such securities, and also to what extent those securities constitute qualified real estate assets for purposes of the REIT asset tests and produce income which qualifies under the REIT 75% and/or 95% gross income test. The inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax. Additionally, counsel is generally under no obligation to update any such opinions after they are issued. Hence, subsequent changes to the purchased securities or in the applicable law may cause such opinions to become inaccurate or outdated despite being accurate when issued and may also adversely affect our REIT qualification and result in significant corporate-level tax.
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General Risk Factors
We, Ellington, or its affiliates may be subject to adverse legislative, regulatory or public policy changes.
At any time, U.S. federal, state, local, or foreign laws or regulations that impact our business, or the administrative interpretations of those laws or regulations, may be enacted or amended.
We cannot predict when or if any new law, regulation, or administrative interpretation, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the "Dodd-Frank Act", or any amendment to or repeal of any existing law, regulation, or administrative interpretation, will be adopted or promulgated or will become effective. Additionally, the adoption or implementation of any new law, regulation, or administrative interpretation, or any revisions in or repeals of these laws, regulations, or administrative interpretations, including those related to the Dodd-Frank Act, could cause us to change our portfolio, could constrain our strategy, or increase our costs. In addition, as a result of our consolidation of Longbridge, our business is directly subject to employment-related laws and regulations, including those relating to wages, employee benefits, workplace practices, and scheduling requirements, compliance with which could increase our operating costs or expose us to additional regulatory or litigation risk.
Further, rising geopolitical tensions and increasing protectionist policies in the U.S. and abroad have fueled uncertainty around the future of global free trade. The U.S. government has recently altered its approach to international trade policy, including through the imposition of tariffs, export controls, currency manipulation, increased scrutiny of foreign investments (particularly in strategic sectors such as technology and energy), and the renegotiation of existing trade agreements. These measures, as well as related diplomatic and fiscal pressures, have increased uncertainty for market participants and, in certain cases, have contributed to budgetary strain in other countries. In response, some foreign governments have imposed or threatened retaliatory measures, including imposing tariffs on certain U.S. goods, and have indicated a willingness to take further actions. These actions, and the risk of further escalation, could disrupt global supply chains, increase input costs, and reduce the volume of cross-border trade and investment. Escalating trade disputes, supply chain , and shifting international could contribute to global market and reduced cross-border investment activity. Any of the foregoing may increase , liquidity, reduce investment , and affect the performance of our investments. These developments, along with any future in the global economy resulting from such trade and geopolitical frictions, could affect our performance.
Changes in U.S. federal policy, including tax policies, and at regulatory agencies typically occur over time through policy and personnel changes following elections and otherwise, which lead to changes involving the level of oversight and focus on the financial services industry or the tax rates paid by corporate entities. Such changes may result in new or modified laws, regulations, or tax regimes that affect us and our investments. We cannot predict the ultimate impact of the foregoing on us, our business and investments, or the industries in which we invest generally, and any prolonged uncertainty could also have an adverse impact on us and our investment objectives. Future policy changes may adversely affect our operating environment, including through increasing competition, and therefore our business, operating costs, financial condition and results of operations. In addition, an extended federal government shutdown (such as the one experienced in 2025), resulting from failing to pass budget appropriations, adopt continuing funding resolutions, or raise the debt ceiling, and other budgetary decisions limiting or delaying government spending, could have widespread negative effects on both the U.S. and global economies, including corporate and consumer spending, and liquidity of capital markets. Any of the foregoing could increase , reduce liquidity, constrain the availability of financing, and affect our performance and investment objectives.
We, Ellington, or its affiliates may be subject to regulatory inquiries and proceedings, or other legal proceedings.
At any time, industry-wide or company-specific regulatory or tax inquiries or proceedings can be initiated and we cannot predict when or if any such regulatory inquiries or proceedings will be initiated that involve us or Ellington or its affiliates, including our Manager. We believe that the heightened scrutiny of the financial services industry increases the risk of inquiries and requests from regulatory or enforcement agencies. For example, as discussed under the caption "Item 3. Legal Proceedings" in this Annual Report on Form 10-K, over the years, Ellington and its affiliates have received, and we expect in the future that we and they may receive, inquiries and requests for documents and information from various federal, state, and foreign regulators.
We can give no assurances that, whether the result of regulatory inquiries or otherwise, neither we nor Ellington nor its affiliates will become subject to investigations, enforcement actions, fines, penalties or the assertion of private litigation claims. Any such matters could be disruptive and costly, could divert management attention and resources, and could result in reputational harm. If any such events were to occur, we, or our Manager's ability to perform its obligations to us under the management agreement between us and our Manager, or Ellington's ability to perform its obligations to our Manager under the services agreement between Ellington and our Manager, could be materially adversely impacted, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.
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The market for our common stock and our preferred stock may be limited and the price and trading volume of our common stock and preferred stock may be volatile.
While our common stock and preferred stock are listed on the NYSE, such listing does not provide any assurance as to whether or not the market price reflects our actual financial performance, the liquidity of our stock, a holder's ability to sell our stock and/or at what price such holder could sell our stock. Market prices for our common and preferred stock may be volatile and subject to wide fluctuations, including as a result of the trading volume. There can be no assurance that the market price of our common stock or our preferred stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our common stock price, our preferred stock price, or result in fluctuations in the price or trading volume of our common stock and/or our preferred stock include:
• actual or anticipated variations in our dividends or quarterly operating results;
• changes in our earnings estimates, failure to meet earnings or operating results expectations of public market analysts and investors, or publication of research reports about us or the real estate specialty finance industry;
• increases in market interest rates that lead purchasers of our common stock or our preferred stock to demand a higher yield;
• repurchases and issuances by us of our common stock or our preferred stock;
• passage of legislation, changes in applicable law, court rulings, enforcement actions, or regulatory developments that adversely affect us or our industry;
• changes in government policies or changes in timing of implementation of government policies, including with respect to Fannie Mae, Freddie Mac, and Ginnie Mae;
• changes in market valuations of similar companies;
• adverse market reaction to any increased indebtedness we incur in the future;
• additions or departures of key management personnel;
• actions by stockholders;
• speculation in the press or investment community;
• adverse changes in global, national, regional and local economic and market conditions, including those relating to pandemics, high unemployment, elevated inflation, tariffs, volatile interest rates, volatile and/or elevated credit spreads, concerns regarding a recession, geopolitical conflicts, social unrest, or civil disturbances;
• our inclusion in, or exclusion from, various stock indices;
• our operating performance and the performance of other similar companies; and
• changes in accounting principles.
Since many of the above factors may be unrelated to our individual operating performance or financial condition, the trading price of our common stock and preferred stock may not reflect our underlying operating performance or financial condition.
Future debt or equity offerings may adversely affect the value of our outstanding securities.
In the future, we may seek to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, convertible securities, and additional classes of preferred stock. For example, in October 2025, we completed a debt offering, and in January 2026, we completed an equity offering. Such offerings may not be viewed favorably by the market and could adversely affect the market price of our common stock, preferred stock, unsecured notes, or other outstanding securities, including by increasing perceived credit risk, leverage levels, or refinancing risk.
If we decide to issue additional senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Holders of senior securities may be granted specific rights, including the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under an indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Any such additional debt securities may rank pari passu with, or senior to, our existing indebtedness and could be secured by assets that currently secure no debt, which could reduce the recovery prospects of holders of our existing unsecured debt securities. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences, and privileges more favorable than those of our then-outstanding securities and could dilute our existing stockholders. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Upon liquidation, holders of our debt securities and preferred stock, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock.
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Additional equity offerings, including offerings of our common or preferred stock or other securities convertible into our common stock, may dilute the ownership of our existing stockholders and/or reduce the market price of our existing equity securities, or both. We cannot predict the effect, if any, of future sales of our common or preferred stock or other securities convertible into our common stock, or the availability of such securities for future sales, on the market price of our common stock. Sales of substantial amounts of our common or preferred stock or other securities convertible into our common stock, or the perception that such sales could occur, may adversely affect the prevailing market price for our common stock. Our preferred stock has a preference on liquidating distributions and a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of 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, in the case of holders of our equity securities, diluting their holdings. Any such future debt or equity offerings may increase our leverage or otherwise alter our capital structure, which could adversely affect our credit profile, the trading value of our outstanding debt securities and equity, increase our interest expense, impose additional restrictions on our operations, and reduce the amount of cash available to service our existing indebtedness or pay distributions to our stockholders.
Failure to procure adequate funding and capital would adversely affect our results and may, in turn, negatively affect the value of our common shares, our ability to grow our equity capital base and our ability to pay dividends to our stockholders.
We depend upon the availability of adequate funding and capital for our operations. To maintain our status as a REIT, we are required to distribute to our stockholders at least 90% of our REIT taxable income annually, determined excluding any net capital gains and without regard to the deduction for dividends paid. As a result, we are not able to retain much or any of our earnings for new investments. Further, any material growth in our equity capital base must largely be funded by external sources of capital. There can be no assurance that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. In the event that we cannot obtain sufficient funding and capital on acceptable terms, there may be a negative impact on the value of our shares of common stock and our ability to pay dividends to our stockholders, and stockholders may lose part or all of their investment.
We may experience significant fluctuations in our book value per share and quarterly operating results.
We may experience significant fluctuations in our book value per share from month to month and in our quarterly operating results due to a number of factors, including the timing of distributions to stockholders, fluctuations in the value of our investments, our ability or inability to make investments that meet our investment criteria, the interest and other income earned on our investments, the level of our expenses (including the interest or dividend rate payable on any debt securities or preferred stock that we issue), variations in and the timing of realized and unrealized gains or losses in our portfolio, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, our book value per share and results for any period should not be relied upon as being indicative of our book value per share and/or results in future periods.
We are subject to risks related to corporate social responsibility.
Our business faces public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our reputation if we or affiliates of our Manager are viewed as failing to act responsibly in a number of areas, such as diversity and inclusion, environmental stewardship, support for local communities, corporate governance and transparency and considering ESG factors in our investment processes. Some investors have become more focused on ESG factors in determining whether to invest in companies. However, regional and investor specific sentiment often differ in what constitutes a material positive or negative ESG corporate practice. Our corporate social responsibility practices will not uniformly fit investors’ definitions, particularly across geographies and investor types, of best practices for all ESG considerations. Adverse incidents with respect to ESG activities could impact the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations.
There is growing regulatory interest across jurisdictions in improving transparency regarding the definition, measurement, and disclosure of ESG factors to enable investors to validate and better understand sustainability claims, including an increased regulatory focus on the accuracy of those claims. As a result, we are subject to evolving rules and regulations promulgated by various governmental and self-regulatory organizations, including the SEC, the NYSE, and the Financial Accounting Standards Board. These rules continue to expand in scope and complexity, with new requirements potentially increasing compliance challenges and uncertainty. If we are perceived as, or accused of, "greenwashing" or overstating the extent of our sustainability-related practices, such allegations could damage our reputation, result in litigation or regulatory actions, and negatively impact our ability to raise capital.
At the same time, so-called “anti-ESG” sentiment has also gained momentum across the U.S., with several states having enacted or proposed “anti-ESG” policies, legislation, or issued related legal opinions. For example, certain states now require
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that relevant state entities or managers/administrators of state investments make investments based solely on pecuniary factors without consideration of ESG factors or have enacted "boycott bills." If investors subject to such legislation viewed us, our policies, or our practices, as being in contradiction of such “anti-ESG” policies, legislation or legal opinions, such investors may not invest in us, which could negatively affect our financial performance.
If we fail or are perceived to fail to comply with or meet applicable rules, regulations and stakeholder expectations, it could negatively impact our reputation and our business results. Further, our business could become subject to additional regulations, penalties and/or risks of regulatory scrutiny and enforcement in the future. Moreover, the requirements of various regulations we may become subject to may not be consistent with each other, and the standards, methodologies and disclosure frameworks used to evaluate ESG practices may change over time, be inconsistently applied, or fail to align across jurisdictions or among regulators, rating agencies, investors and other stakeholders. There can be no assurance that our current ESG practices will meet future regulatory requirements, reporting frameworks or actual or perceived best practices, increasing the risk of related enforcement. Compliance with new requirements may lead to increased management burdens and costs.
Climate change has the potential to impact the properties underlying our investments.
Currently, it is not possible to predict how legislation or new regulations that may be adopted to address greenhouse gas emissions will impact the properties underlying our investments. However, any such future laws and regulations imposing reporting obligations, limitations on greenhouse gas emissions, or additional taxation of energy use could require the owners of properties to make significant expenditures to attain and maintain compliance. Any new legislative or regulatory initiatives related to climate change could adversely affect our business.
The physical impact of climate change could also have a material adverse effect on the properties underlying our investments. Physical effects of climate change such as increases in temperature, sea levels, the severity of weather events and the frequency of natural disasters, such as hurricanes, tropical storms, tornadoes, wildfires, droughts, floods and earthquakes, among other effects, could damage the properties underlying our investments. The costs of remediating or repairing such damage, or of investments made in advance of such weather events to minimize potential damage, could be considerable. Additionally, such actual or threatened climate change related damage could increase the cost of, or make unavailable, insurance on favorable terms on the properties underlying our investments. Such repair, remediation or insurance expenses could reduce the net operating income of the properties underlying our investments which may in turn affect us.
Periods of heightened inflation could adversely impact our financial results.
High inflation, whether caused by low unemployment, high corporate demand, supply-chain issues, geopolitical conflicts, quantitative easing, the imposition of tariffs by the federal government, or a combination of these or other factors, may undermine the performance of our investments by reducing the value of such investments and/or the income received from such investments. Inflation and rapid fluctuations in inflation rates have had in the past, and may in the future have, significant effects on interest rates and negative effects on economies and financial markets. See also "—Increases in interest rates could negatively affect the value of our assets and increase the risk of default on our assets.”
In addition, actions that the Federal Reserve and other central banks have taken, and could continue to take in response to changes in inflation, could have an adverse impact on the economy broadly and/or on our financial results specifically. See "—Risks Related To Our Investments and Investment Activities—Certain actions by the Federal Reserve and other central banks could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders."
Artificial intelligence and other machine learning techniques could increase competitive, operational, legal and regulatory risks to our business in ways that we cannot predict.
The use of AI by us and others, and the overall adoption of AI throughout society, may exacerbate or create new and unpredictable competitive, operational, legal and regulatory risks to our business. We are increasingly incorporating AI technologies into our processes, including at Longbridge; however, if we fail to keep pace with rapidly evolving technological developments in AI available in the mortgage space, our competitive position and business results may suffer. There is substantial uncertainty about the extent to which AI will result in dramatic changes throughout the world, and we may not be able to anticipate, prevent, mitigate or remediate all of the potential risks, challenges or impacts of such changes. These changes could potentially disrupt, among other things, our business model, investment strategies, and operational processes. Some of our competitors may be more successful than us in the development and implementation of new technologies, including services and platforms based on AI, to improve their operations. If we are unable to advance our capabilities in these areas, or do so at a pace than others in our industry, we may be at a competitive . Accordingly, our results of operations and competitive position could be affected.
The introduction of these technologies, particularly generative AI, into new or existing offerings may result in new or expanded risks and liabilities. Use of AI has increasingly become the source of significant media attention and political debate, which could lead to enhanced governmental or regulatory scrutiny, litigation, or ethical concerns that adversely affect our reputation. For example, some states, such as Colorado, have recently enacted comprehensive laws relating to the deployment of high-risk AI systems, while California has implemented AI transparency and data requirements. However, the regulatory landscape remains highly uncertain; recent federal executive actions have sought to establish a national AI policy framework and may challenge the enforceability of certain state-level AI regulations. Furthermore, the CFPB and HUD have provided commentary regarding the use of AI in the mortgage industry and may take further actions in relation to its regulation. We will need to ensure that our use of AI remains in compliance with these evolving and potentially conflicting regulatory requirements. If the data we, or third parties whose services we rely on, use in connection with the possible development or deployment of AI is , , or in some way, the performance of our business could . Further, the use of AI can lead to consequences, including generating outputs that appear correct but are factually or reflect biases embedded in training data, algorithms, or model assumptions; this could result in discriminatory or disparate outcomes (including under applicable fair lending laws), even in the of discriminatory intent, and thereby us to legal, regulatory, or reputational risk.
In addition, the broader economic impacts of rapid AI adoption and related capital investment may indirectly affect our business and the performance of our investments. Significant public and private investment in AI infrastructure and related technologies could contribute to shifts in capital allocation, labor market disruption, increased operating costs, supply chain strain, and changes in how and where businesses operate. These structural changes could adversely affect economic growth, employment levels, borrower credit quality, and demand for certain types of commercial and residential real estate, and could increase volatility, competition for capital, or reduce liquidity in capital markets. Any such developments could impair borrowers’ ability to service their obligations, reduce property values or cash flows, increase delinquencies or defaults, and make it more difficult or expensive for us to finance or hedge our investments.
Further, recent technological advances in AI both present opportunities and pose risks to us. Data in technology that uses AI may contain a degree of inaccuracy and error, which could result in flawed algorithms in various models used in our business. The volume and reliance on data and algorithms also make AI more susceptible to cybersecurity threats, including data poisoning and the compromise of underlying models, training data or other intellectual property. The personnel provided to us by our Manager, the personnel of Longbridge and/or our third-party service providers could, without being known to us, improperly utilize AI and machine learning-technology while carrying out their responsibilities. This could reduce the effectiveness of AI technologies and adversely impact us and our operations to the extent that we rely on the AI’s work product.
There is also a risk that AI may be misused or misappropriated by our third party service providers. For example, a user may input confidential information, including material non-public information or personally identifiable information, into AI applications, resulting in the information becoming a part of a dataset that is accessible by third-party technology applications and users, including our competitors. Further, we may not be able to control how third-party AI that we choose to use is developed or maintained, or how data we input is used or disclosed. The misuse or misappropriation of our data could have an adverse impact on our reputation and could subject us to legal and regulatory investigations or actions or create competitive risk.
In addition, the use of AI by us or others may require compliance with legal or regulatory frameworks that are not fully developed or tested, and we may face litigation and regulatory actions related to our use of AI. There has been increased scrutiny, including from global regulators, regarding the use of “big data,” diligence of data sets and oversight of data vendors. Our ability to use data to gain insights into and manage our business may be limited in the future by regulatory scrutiny and legal developments. Any such limitations could reduce the effectiveness of our investment processes, increase compliance costs, and adversely affect our business and financial results.
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Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
As discussed further in "Item 1. Business—Our Manager and Ellington," we are externally managed and advised by our Manager, an affiliate of Ellington. Our Manager does not have any employees and instead relies on the employees of Ellington to fulfill its obligations to us pursuant to a services agreement. Other than with respect to our majority-owned subsidiary Longbridge's operations, we rely on Ellington’s information systems in conducting our day-to-day operations. As such, we also rely on Ellington’s processes for assessing, identifying, and managing material risks from cybersecurity threats.
Ellington’s cybersecurity processes and practices are integrated into Ellington’s risk management and oversight program. In general, Ellington seeks to address cybersecurity risks through a cross-functional approach that is focused on preserving the confidentiality, security and availability of the information that Ellington collects and stores by identifying, preventing and mitigating cybersecurity threats and responding to cybersecurity incidents when they occur.
Longbridge’s cybersecurity processes and practices are integrated into Longbridge’s operational risk oversight program. In general, Longbridge also seeks to address cybersecurity risks through a cross-functional approach that is focused on preserving the confidentiality, security and availability of the information that Longbridge collects and stores by identifying, preventing and mitigating cybersecurity threats and responding to cybersecurity incidents when they occur. Longbridge had approximately 500 employees as of December 31, 2025.
Ellington's Cybersecurity Risk Management and Strategy
Ellington’s cybersecurity program is focused on the following key areas:
• Governance : As discussed in more detail below under "Governance," our Board of Directors' oversight of cybersecurity risk management is supported by the Audit Committee of our Board of Directors (the "Audit Committee"), which regularly interacts with our management team and other professionals who are responsible for assessing and managing material risks from cybersecurity threats at Ellington.
• Collaborative Approach : Ellington has implemented a cross-functional approach to identifying and evaluating, preventing, mitigating and remediating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents. Such escalation allows Ellington to make timely decisions regarding its response to such incidents and whether disclosure to senior management, our Audit Committee and/or the public is appropriate.
• Technical Safeguards : Ellington deploys technical safeguards that are designed to protect information systems from cybersecurity threats. These systems cover many facets of cyber security including identity protection, anti-virus and anti-malware defense, data loss prevention, endpoint protection (including managed detection and response services), patch and vulnerability management and others. Ellington regularly evaluates new technologies as the cyber security landscape evolves.
• Incident Response and Recovery Planning : Ellington has established and maintains incident response and recovery plans that we believe properly address the response to a cybersecurity incident or other business disruption. To the extent feasible, such plans are tested and evaluated on a regular basis.
• Third-Party Risk Management : Ellington follows a risk-based approach to identifying and overseeing cybersecurity risks presented by third-parties, including vendors, service providers and other external users of Ellington’s systems, as well as the systems of third-parties that could adversely impact Ellington’s business in the event of a cybersecurity incident affecting their systems. Third-party service providers are regularly evaluated by Ellington to assess their cyber security posture and general information technology practices to determine if they are suitable partners; where applicable, relevant certifications are obtained such as SOC 2 or ISO 27001.
• Education and Awareness : Ellington: (i) provides regular, mandatory cyber security training to all personnel to equip them with tools to identify and address cybersecurity threats; (ii) communicates evolving information security policies, standards, processes and practices to employees via email; (iii) delivers additional training to all users who have access to personally identifiable information on Ellington’s processes for handling such information; and (iv) conducts regular, monthly phishing tests to assess user alertness, and retains a separate external cybersecurity vendor to conduct similar tests on an annual basis.
Ellington's technology team assesses the firm’s cybersecurity and infrastructure postures regularly with two separate working groups—one group, meeting weekly, focused on IT implementation and one group, meeting bi-weekly, focused on engineering integration. Both groups include senior members of the technology team. These meetings cover a broad range of
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topics including implementation planning for the deployment of new hardware and software, patch and vulnerability management, considerations for disaster recovery and business continuity, user access controls, data security and more. In such continued monitoring of its cybersecurity posture, Ellington conducts continuous deprecation of obsolete or unsuitable technology, including legacy hardware and software, has a robust patch and vulnerability management process, and has personnel dedicated to the continued monitoring of new developments in threat actors’ activities in order to take preventative actions.
Ellington also regularly engages third parties to perform assessments of Ellington’s cybersecurity posture, including penetration testing, user access control reviews and independent reviews of Ellington’s information security control environment, and operating effectiveness. The results of such assessments, tests and reviews are reported to the Audit Committee and our Board of Directors, and Ellington adjusts its cybersecurity policies, standards, processes and practices as necessary based on the information provided by these assessments, tests and reviews, including the implementation of new software and technologies.
To date, no risks from cybersecurity threats to Ellington have materially affected or are reasonably likely to materially affect the Company. Cyber criminals do, however, target us, Ellington and Ellington’s employees and other third parties. Ongoing or future attacks such as these could have impacts on our or Ellington’s operations. For additional information on these ongoing risks, please refer to "Part 1. Item 1A. Risk Factors—We are highly dependent on Ellington's and Longbridge's information systems and those of third-party service providers, including mortgage servicers, and system failures could significantly disrupt our business, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders." and "—Because we are highly dependent on information systems when sharing information with third party service providers, systems failures, breaches or cyber-attacks could significantly disrupt our business, which could have a material adverse effect on our results of operations and cash flows." While Ellington did experience two business email compromise in recent years, neither had a material impact on our business strategy, results of operations or financial condition.
Longbridge's Cybersecurity Risk Management and Strategy
Longbridge’s cybersecurity program is focused on the following key areas:
• Governance : As discussed in more detail below under "Governance,” our Board of Directors’ oversight of cybersecurity risk management is completed through the Audit Committee, which regularly interacts with both our and Longbridge's management teams who are responsible for assessing and managing material risks from cybersecurity threats at Longbridge.
• Collaborative Approach : Longbridge has implemented a cross-functional approach to identifying and evaluating, preventing, mitigating and remediating cybersecurity threats and incidents, while also implementing controls and procedures that provide for the prompt escalation of certain cybersecurity incidents. Such escalation allows us to make decisions regarding its response to such incidents and whether disclosure to senior management, our Audit Committee and/or the public is appropriate.
• Technical Safeguards : Longbridge deploys technical safeguards that are designed to protect information systems from cybersecurity threats. These systems cover many facets of cyber security such as anti-virus and anti-malware defense, data loss prevention, endpoint protection (including managed detection and response services), patch and vulnerability management and others. Longbridge continuously evaluates new technologies as the cyber security landscape evolves.
• Incident Response and Recovery Planning : Longbridge has established and maintains incident response and recovery plans that we believe properly address the response to a cybersecurity incident or other business disruption. To the extent feasible such business disruption plans are tested and evaluated on a regular basis.
• Third-Party Risk Management : Longbridge maintains a risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of Longbridge’s systems, as well as the systems of third-parties that could adversely impact Longbridge’s business in the event of a cybersecurity incident affecting their systems. Third-party service providers are regularly evaluated by Longbridge to assess their cyber security posture and general information technology practices to determine if they are suitable partners; where applicable, relevant certifications are obtained such as SOC 2 or ISO 27001.
• Education and Awareness : Longbridge: (i) provides regular, mandatory cyber security training to all personnel to equip them with tools to identify and address cybersecurity threats; (ii) communicates evolving information security policies, standards, processes and practices to employees via a variety of communication methods; and (iii) conducts phishing and social engineering tests to assess user alertness, and retains an external cybersecurity vendor to conduct similar tests on an annual basis.
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Longbridge's technology team, and its operational risk management group, perform regular assessments of the firm’s cybersecurity and infrastructure posture. These reviews cover a broad range of topics including implementation planning for the deployment of new hardware and software, patch and vulnerability management, considerations for disaster recovery and business continuity, user access controls, data security and Longbridge’s threat monitoring services. In such continued maintenance of its cybersecurity posture, Longbridge conducts continuous deprecation of obsolete or unsuitable technology, including legacy hardware and software, has a robust patch and vulnerability management process, and has an external firm dedicated to the continued monitoring of new developments in threat actors’ activities in order to take preventative actions.
Longbridge also regularly engages third parties to perform assessments of its cybersecurity posture, including cyber risk assessments, penetration testing, user access control reviews and independent reviews of Longbridge’s information security control environment and operating effectiveness. The results of such assessments, tests and reviews are reported to our Audit Committee and Board of Directors, and Longbridge adjusts its cybersecurity policies, standards, processes and practices as necessary based on the information provided by these assessments, tests and reviews, including the implementation of new software and technologies.
To date, no risks from cybersecurity threats from Longbridge have materially affected or are reasonably likely to materially affect our Company. Cyber criminals do, however, target us and Longbridge’s employees and other third parties. Ongoing or future attacks such as these could have impacts on our or Longbridge’s operations. For additional information on these ongoing risks, please refer to “Part 1. Item 1A. Risk Factors—We are highly dependent on Ellington's and Longbridge's information systems and those of third-party service providers, including mortgage servicers, and system failures could significantly disrupt our business, which could materially adversely affect our business, financial condition and results of operations, and our ability to pay dividends to our stockholders.” and “—Because we are highly dependent on information systems when sharing information with third party service providers, systems failures, breaches or cyber-attacks could significantly disrupt our business, which could have a material adverse effect on our results of operations and cash flows.”
Governance
Our Board of Directors, through the Audit Committee, oversees our cybersecurity risk management process. Our Audit Committee receives regular presentations and reports on cybersecurity risks at both Ellington and Longbridge, each of which addresses a wide range of topics including recent developments, evolving standards, vulnerability assessments, third-party and independent reviews, the threat environment, technological trends and information security considerations arising with respect to our peers and third parties.
Each of Ellington and Longbridge employ internal or external resources whose responsibilities include oversight of their respective firm’s cybersecurity posture.
Ellington's cybersecurity team is led by Ellington's Chief Technology Officer (the "CTO"), who is primarily responsible for assessing and managing material risks from cybersecurity threats to Ellington. The CTO has extensive experience in application development, database architecture, systems design, and third-party software integration. During his tenure at Ellington, the CTO led large technical efforts such as the development of Ellington's proprietary internally hosted rapid application system and the overhaul of Ellington’s engineering infrastructure and development services. The CTO works closely with Ellington’s head of Data Platform and Infrastructure (the "DPI Head") to manage Ellington’s infrastructure and cybersecurity posture. During his tenure at Ellington, the DPI Head has led several critical efforts such as the revitalization of Ellington’s hardware, networking and disaster recovery facilities, major improvements to Ellington’s cybersecurity infrastructure, and the development and maintenance of Ellington’s Data Engineering infrastructure. Ellington’s Senior Systems Administrator (the "SSA") works closely with both the CTO and the DPI Head to implement Ellington’s cybersecurity program and infrastructure. The SSA is responsible for all systems and telecommunication design and implementation, with a focus on cybersecurity. The SSA ensures that Ellington's systems are secure and resilient against cyber . Prior to joining Ellington in 1997, the SSA was a Senior PC Technical Support at Bear Stearns for seven years. The CTO, after consultation with others, including the DPI Head and the SSA, regularly provides an assessment of Ellington’s cybersecurity posture and reviews Ellington’s information technology roadmap with the Audit Committee. The CTO's reports cover a range of topics including, at various times, a discussion of the primary cybersecurity risks facing Ellington, an overview of Ellington’s cybersecurity program, common attack vectors and types, the primary functions of Ellington’s cybersecurity program, how Ellington’s cybersecurity programs are applied to cybersecurity areas, any recent cybersecurity , Ellington’s ongoing focus areas in its cybersecurity program, Ellington’s employee education program, management of patches and system , various detection methods, activity monitoring, any new cybersecurity focus areas for Ellington, a review of Ellington’s key technologies, Ellington’s response procedures and Ellington’s backup systems and redundancy and recovery processes.
Longbridge's cybersecurity risk management and strategy is co-led by its Chief Operating Officer ("COO") and its Vice President of Technology and Operational Excellence ("VP of TOE"). Longbridge's COO has extensive leadership experience
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with enterprise information technology in the mortgage banking industry, where he has held various executive roles, including Chief Privacy Officer and Chief Information Officer. Longbridge's COO has developed and executed IT strategy, including cybersecurity programs, and helped achieve and maintain Sarbanes-Oxley compliance and SOC-2 certification. Longbridge's VP of TOE has extensive leadership experience with enterprise information technology, both in the banking and manufacturing industries. She has also developed and executed IT strategy, including cybersecurity programs and helped achieve and maintain Sarbanes-Oxley compliance. Longbridge's COO, accompanied by its VP of TOE, regularly discusses Longbridge’s cybersecurity risks and posture, and its information technology roadmap, with the Audit Committee. In these reviews, Longbridge's COO informs the Audit Committee of what Longbridge believes are the key focus items of Longbridge in its cybersecurity program and the COO and VP of TOE provide an overview of their views of emerging threats, and any significant cyber response activities or incidents.
Item 2. Properties
Our principal offices are located in leased space at 53 Forest Avenue, Old Greenwich, CT 06870. The offices of our Manager and Ellington are at the same location. As part of our management agreement, our Manager is responsible for providing offices necessary for all operations, and accordingly, all lease responsibilities related to our office spaces in Old Greenwich, CT belong to our Manager.
For an overview of our real estate owned (“REO”), see Note 9—Real Estate Owned, of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Item 3. Legal Proceedings
Neither we, nor our subsidiaries, nor Ellington nor its affiliates (including our Manager) are currently subject to any legal proceedings that we or our Manager consider material to us. Nevertheless, we, our subsidiaries, and Ellington and its affiliates operate in highly regulated markets that currently are under regulatory scrutiny, and over the years, Ellington and its affiliates have received, and we expect in the future that we and they may receive, inquiries and requests for documents and information from various federal, state and foreign regulators.
In addition, as described in "Note 27 Subsequent Events — Longbridge Settlement Agreement in the notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K, on January 28, 2026, Longbridge entered into a settlement agreement (the “Settlement Agreement”) pursuant to which it is entitled to receive a payment of $17.0 million from one of the other parties to the Settlement Agreement. The timing and amount of any payment to be received under the Settlement Agreement will depend on the other party’s performance of its obligations thereunder.
We and Ellington cannot provide any assurance that, whether the result of regulatory inquiries or otherwise, neither we nor Ellington nor its affiliates will become subject to investigations, enforcement actions, fines, penalties or the assertion of private litigation claims or that, if any such events were to occur, they would not materially adversely affect us. For a discussion of these and other related risks, see "Part I, Item 1A. Risk Factors—We, Ellington, or its affiliates may be subject to regulatory inquiries and proceedings, or other legal proceedings" of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II—OTHER INFORMATION
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common shares have been listed on the NYSE under the symbol "EFC" since October 8, 2010.
Holders of Our Common Stock
Based upon a review of a securities position listing as of the close of business on February 20, 2026, we had an aggregate of 194 holders of record and holders of our common stock who are nominees for an undetermined number of beneficial owners.
Dividends
While we have historically paid dividends to our common stockholders on a monthly (prior to April 2019, on a quarterly) basis, the declaration of dividends to holders of our common stockholders and the amount of such dividends are at the sole discretion of our Board of Directors. In setting our dividends, our Board of Directors takes into account, among other things, our earnings, liquidity, financial condition, the REIT distribution requirements, our financial covenants, and other factors that our Board of Directors may deem relevant from time to time. In addition, in order to preserve our liquidity, our Board of Directors may declare all or any portion of a dividend to be payable in stock, may delay the record date or payment date for any previously declared, but unpaid, dividend, convert a previously declared, but unpaid, cash dividend on our common stock to a dividend paid partially or completely in stock, or even revoke a declared, but unpaid, dividend. Furthermore, it is possible that some of our future financing arrangements could contain provisions restricting our ability to pay dividends. In addition, our ability to pay dividends is subject to certain restrictions under the Delaware General Corporation Law, or the "DGCL." Under the DGCL, cash dividends on capital stock may only be paid from “surplus” or, if there is no “surplus,” from the corporation’s net profits for the then-current or the preceding fiscal year.
There can be no assurance that we will pay any future dividends to our stockholders and previously declared dividends are not intended to be indicative of the amount and timing of future dividends, if any. We have in the past reduced, and may in the future reduce, our monthly dividend.
Unregistered Sales of Equity Securities
Pursuant to our 2017 Plan, on December 17, 2025, we granted 61,911 OP LTIP Units to certain of our partially dedicated employees. The OP LTIP Units are subject to forfeiture restrictions that will lapse with respect to 33,506 of the OP LTIP Units on December 16, 2026 and 28,405 of the OP LTIP Units on December 16, 2027.
OP LTIP Units may be converted, upon lapse of the applicable vesting restrictions, at the election of the holder, or at any time at our election, into OP Units on a one-for-one basis. Subject to certain conditions, the OP Units are redeemable by the holder for an equivalent number of shares of our common stock or, at our election, for the cash value of such shares of our common stock. Such grants were exempt from the registration requirements of the Securities Act based on the exemption provided in Section 4(a)(2) of the Securities Act.
On December 31, 2025, 7,657 OP LTIP Units previously granted under our 2017 Plan were converted into shares of common stock on a one-for-one basis.
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Performance
This performance graph is furnished and shall not be deemed filed with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act.
The following graph provides a comparison of the cumulative total return on our common shares to the cumulative total return on the Standard & Poor's 500 Composite Stock Price Index, or the "S&P 500," and the FTSE National Association of Real Estate Investment Trusts Mortgage REIT Index, or the "FTSE NAREIT MREIT." The comparison is for the period from December 31, 2020 to December 31, 2025, and assumes in each case, a $100 investment on December 31, 2020 and the reinvestment of dividends.
The actual cumulative total returns shown on the graph above are as follows:
December 31,
Ellington Financial Inc.
FTSE NAREIT MREIT
The performance information above has been obtained from sources believed to be reliable, but neither its accuracy nor its completeness can be guaranteed. The historical information set forth above is not necessarily indicative of future performance. Accordingly, we do not make or endorse any predictions as to future share performance.
Item 6. [Reserved]
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
Our primary objective is to generate attractive risk-adjusted total returns for our stockholders. We seek to attain this objective by utilizing an opportunistic strategy to make investments, without restriction as to ratings, structure, or position in the capital structure, that we believe compensate us appropriately for the risks associated with them rather than targeting a specific yield. At any particular point in time, depending on how we perceive the market's pricing of risk both generally and across sectors, we may favor higher-risk assets or we may favor lower-risk assets, or a combination of the two, in the interests of portfolio diversification or other considerations.
We conduct all of our operations and business activities through the Operating Partnership. As of December 31, 2025, we had an ownership interest of approximately 99.1% in the Operating Partnership. The remaining ownership interest of approximately 0.9% in the Operating Partnership represents the interests in the Operating Partnership that are owned by an affiliate of our Manager, our current and certain former directors, and certain current and former Ellington employees and their related parties, and is reflected in our financial statements as a non-controlling interest. We are externally managed and advised by our Manager, an affiliate of Ellington. Ellington is a registered investment adviser with a 31-year history of investing in the Agency and credit markets.
We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). Provided that we maintain our qualification as a REIT, we generally will not be subject to U.S. federal, state, and local income tax on our REIT taxable income that is currently distributed to our stockholders. Any taxes paid by a domestic taxable REIT subsidiary ("TRS") will reduce the cash available for distribution to our stockholders. REITs are subject to a number of organizational and operational requirements, including a requirement that they currently distribute at least 90% of their annual REIT taxable income excluding net capital gains.
On December 14, 2023, we completed a merger between Arlington Asset Investment Corp., a Virginia corporation ("Arlington"), and our subsidiary EF Merger Sub Inc., a Virginia corporation (such transaction, the "Arlington Merger").
We have two reportable segments, the Investment Portfolio Segment and the Longbridge Segment. In our Investment Portfolio Segment, we invest in a diverse array of financial assets, including residential and commercial mortgage loans; residential mortgage-backed securities ("RMBS"), including RMBS for which the principal and interest payments are guaranteed by a U.S. government agency or a U.S. government-sponsored entity ("Agency RMBS"); commercial mortgage-backed securities ("CMBS"); consumer loans and asset-backed securities ("ABS") including ABS backed by consumer loans; investments referencing mortgage servicing rights on traditional forward mortgage loans ("Forward MSR-related investments"); collateralized loan obligations ("CLOs"); non-mortgage- and mortgage-related derivatives; debt and equity investments in loan origination companies; and other strategic investments. We refer to the portion of our investment portfolio excluding Agency RMBS as our credit portfolio.
Our Longbridge Segment is focused on the origination and servicing of, and investment in, reverse mortgage loans, including associated financial assets, financing, hedging, and allocated expenses. Longbridge Financial, LLC ("Longbridge") originates home equity conversion mortgage loans ("HECM loans"), which are insured by the Federal Housing Administration ("FHA"), and non-FHA-insured reverse mortgage loans, which we refer to as "proprietary reverse mortgage loans." HECM loans are generally eligible for securitization into HECM-backed MBS ("HMBS"), which are guaranteed by the Government National Mortgage Association ("GNMA").
The strategies that we employ are intended to capitalize on opportunities in the current market environment. Subject to maintaining our qualification as a REIT and our exclusion from registration as an investment company under the Investment Company Act, we intend to adjust our strategies to changing market conditions by shifting our asset allocations across various asset classes as credit and liquidity trends evolve over time. We believe that this flexibility, combined with Ellington's experience, will help us generate more consistent returns on our capital throughout changing market cycles. Additionally, subject to maintaining our qualification as a REIT, we opportunistically hedge our credit risk, interest rate risk, yield spread risk, and foreign currency risk; however, at any point in time we may choose not to hedge all or a portion of these risks, and we will generally not hedge those risks that we believe are appropriate for us to take at such time, or that we believe would be impractical or prohibitively expensive to hedge. For more information on our targeted assets, see "—Our Targeted Asset Classes" below.
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Our Targeted Asset Classes
Our targeted asset classes currently include investments in the U.S. and Europe (as applicable) in the categories listed below. Subject to maintaining our qualification as a REIT, we expect to continue to invest in these targeted asset classes. Also, we expect to continue to hold certain of our targeted assets through one or more TRSs. As a result, a portion of the income from such assets will be subject to U.S. federal and certain state corporate income taxes, as applicable.
Asset Class
Principal Assets
Agency RMBS
Whole pool pass-through certificates;
Partial pool pass-through certificates;
Agency collateralized mortgage obligations ("CMOs"), including interest only securities ("IOs"), principal only securities ("POs"), and inverse interest only securities ("IIOs").
CMBS and Commercial Mortgage Loans
CMBS;
CLOs backed by commercial mortgage loans ("CRE CLOs"); and
Commercial mortgage loans and other commercial real estate debt.
Consumer Loans and ABS
Consumer loans;
ABS backed by consumer loans;
ABS backed by Small Business Administration ("SBA") loans, including IOs backed by SBA loans; and
Retained tranches from securitizations to which we have contributed assets.
Corporate CLOs
Corporate CLO debt and equity tranches; and
Investments in CLO loan accumulation facilities.
Mortgage-Related Derivatives
To-Be-Announced mortgage pass-through certificates ("TBAs");
Credit default swaps ("CDS") on individual RMBS, on the CMBX and on other mortgage-related indices; and
Other mortgage-related derivatives.
Non-Agency RMBS
RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, and subprime mortgages;
RMBS backed by fixed rate mortgages, Adjustable rate mortgages ("ARMs"), Option-ARMs, and Hybrid ARMs;
RMBS backed by mortgages on single-family-rental properties;
RMBS backed by first-lien and second-lien mortgages;
RMBS backed by performing and non-performing mortgages;
Investment grade and non-investment grade securities;
Senior and subordinated securities;
IOs, POs, IIOs, and inverse floaters;
Collateralized debt obligations ("CDOs");
RMBS backed by European residential mortgages ("European RMBS");
Retained tranches from securitizations in which we have participated; and
Credit risk transfer securities ("CRTs").
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Asset Class
Principal Assets
(continued)
Residential Mortgage Loans
Residential mortgage loans that are not deemed "qualified mortgage" loans under the rules of the Consumer Financial Protection Bureau ("non-QM loans");
Residential "transition loans," such as residential bridge loans and residential "fix-and-flip" loans;
Residential non-performing mortgage loans ("NPLs");
Re-performing loans ("RPLs"), which generally are loans that were modified and/or formerly NPLs where the borrower has resumed making payments in some form or amount;
Residential mortgage loans that meet the criteria for inclusion in an Agency securitization ("Agency-eligible residential mortgage loans")
Retained tranches from securitizations to which we have contributed assets;
Reverse mortgage loans
Closed-end second lien mortgage loans; and
Home equity line of credit loans ("HELOCs").
Strategic Investments
Strategic equity and/or debt investments in loan originators, loan servicers, and mortgage-related entities;
Other
Mortgage servicing rights ("MSRs") and MSR-related investments;
Real estate, including commercial and residential real property;
Corporate debt and equity securities and corporate loans;
Non-mortgage-related derivatives; and
IO strips backed by small business administration loans.
Agency RMBS
Our Agency RMBS assets consist primarily of whole pool (and to a lesser extent, partial pool) pass-through certificates, the principal and interest of which are guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or the Government National Mortgage Association, within the U.S. Department of Housing and Urban Development ("Ginnie Mae") and which are backed by ARMs, Hybrid ARMs, or fixed-rate mortgages. In addition to investing in pass-through certificates which are backed by traditional mortgages, we have also invested in Agency RMBS backed by reverse mortgages. Reverse mortgages are mortgage loans for which neither principal nor interest is due until the borrower dies, the home is sold, or other trigger events occur. Mortgage pass-through certificates are securities representing undivided interests in pools of mortgage loans secured by real property where payments of both interest and principal, plus prepaid principal, on the securities are made monthly to holders of the security, in effect "passing through" monthly payments made by the individual borrowers on the mortgage loans that underlie the securities, net of fees paid to the issuer/guarantor and servicers of the securities. Whole pool pass-through certificates are mortgage pass-through certificates that represent the entire ownership of (as opposed to merely a partial undivided interest in) a pool of mortgage loans.
Our Agency RMBS assets are typically concentrated in specified pools. Specified pools are fixed-rate Agency pools consisting of mortgages with special characteristics, such as mortgages with low loan balances, mortgages backed by investor properties, mortgages originated through the government-sponsored "Making Homes Affordable" refinancing programs, and mortgages with various other characteristics. We maintain our portfolio of Agency RMBS in part to help maintain our qualification as a REIT and to help maintain our exclusion from registration as an investment company under the Investment Company Act.
Our Agency strategy also includes RMBS that are backed by ARMs or Hybrid ARMs and reverse mortgages, and CMOs, including IOs, POs, and IIOs.
CLOs
CLOs are a form of asset-backed security typically collateralized by syndicated corporate loans or commercial mortgage loans. Our CLO holdings may include both debt and equity interests. Some of our CLOs include retained tranches from CLO securitizations for which we participated in the accumulation of the underlying assets.
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CMBS
We acquire CMBS, which are securities collateralized by mortgage loans on commercial properties. The majority of CMBS issued are fixed rate securities backed by fixed rate loans made to multiple borrowers on a variety of property types, though single-borrower CMBS and floating rate CMBS have also been issued.
The majority of CMBS utilize senior/subordinate structures, similar to those found in non-Agency RMBS. Subordination levels vary so as to provide for one or more AAA credit ratings on the most senior classes, with less senior securities rated investment grade and non-investment grade, including a first loss component which is typically unrated. This first loss component is commonly referred to as the "B-piece," which is the most subordinated (and therefore highest yielding and riskiest) tranche of a CMBS securitization. We acquire investment grade, non-investment grade, and non-rated CMBS. Our target assets also include single-asset single-borrower CMBS ("SASB CMBS"). SASB CMBS can be collateralized by single properties or by a portfolio of properties.
Commercial Mortgage Loans and Other Commercial Real Estate Debt
We directly originate and participate in the origination of commercial mortgage "bridge" loans, which are loans secured by liens on commercial properties, and which have shorter terms and higher interest rates than more traditional commercial mortgage loans. Bridge loans are often secured by properties in transition, where the borrower is in the process of either re-developing or stabilizing operations at the property.
We also acquire seasoned commercial mortgage bridge loans, as well as longer-term commercial mortgage loans. Some of the seasoned commercial mortgage loans that we acquire may be non-performing, underperforming, or otherwise distressed; these loans are typically acquired at a discount both to their unpaid principal balances and to the value of the underlying real estate.
Our commercial mortgage loans may be fixed or floating rate and will generally have maturities ranging from one to two years. We typically originate and acquire first-lien loans but may also originate and acquire subordinated loans. As of December 31, 2025, all of our commercial mortgage loans were first-lien loans. Commercial real estate debt typically limits the borrower's right to freely prepay for a period of time through provisions such as prepayment fees, lockout, yield maintenance, or defeasance provisions.
Within both our loan origination and acquisition strategies, we often focus on smaller balance loans and/or loan packages that are less-competitively-bid. These loans typically have balances that are less than $30 million, and are secured by real estate and, in some cases, a personal guarantee from the borrower.
Consumer Loans and ABS
We acquire U.S. consumer whole loans and ABS, including ABS backed by U.S. consumer loans. Our U.S. consumer loan portfolio consists of unsecured loans and secured auto loans. We purchase newly originated consumer loans under flow agreements with certain originators and may also purchase seasoned consumer loans in the secondary market, and we continue to evaluate new opportunities.
MSRs and MSR-Related Investments
An MSR represents the right to service one or more mortgage loans in exchange for a specified revenue stream, typically a portion of the interest payments due on such mortgage loans together with certain other ancillary revenue. While the owner of an MSR is ultimately responsible for servicing the underlying loans in accordance with applicable regulations, the actual loan servicing functions are often subcontracted out to third-party licensed subservicers. The mortgages underlying MSRs can either be traditional "forward" mortgage loans ("Forward MSRs") or reverse mortgage loans ("Reverse MSRs").
The revenue stream associated with an MSR is often bifurcated into two components: a "base servicing fee," representing the actual or approximate cost of performing the loan servicing functions; and the remaining revenue, or "excess servicing spread." We have in the past acquired, and, may in the future acquire, excess servicing spread from mortgage loan servicers.
As a result of the Arlington Merger, we, through certain of our subsidiaries, are party to various agreements that enable us to participate in the economic returns of a portfolio of forward MSRs. The mortgage loans underlying such Forward MSR-related investments consist solely of residential mortgage loans guaranteed by Fannie Mae or Freddie Mac.
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Non-Agency RMBS
We acquire non-Agency RMBS backed by prime jumbo, Alt-A, non-QM, manufactured housing, subprime residential, and single-family-rental mortgage loans. The loans backing our non-Agency RMBS can be performing or non-performing. Our non-Agency RMBS holdings can include investment-grade and non-investment grade classes, including non-rated classes.
Non-Agency RMBS are generally debt obligations issued by private originators of, or investors in, residential mortgage loans. Non-Agency RMBS generally are issued as CMOs and are backed by pools of whole mortgage loans or by mortgage pass-through certificates. Non-Agency RMBS generally are securitized in senior/subordinated structures, or in excess spread/over-collateralization structures. In senior/subordinated structures, the subordinated tranches generally absorb all losses on the underlying mortgage loans before any losses are borne by the senior tranches. In excess spread/over-collateralization structures, losses are first absorbed by any existing over-collateralization, then borne by subordinated tranches and excess spread, which represents the difference between the interest payments received on the mortgage loans backing the RMBS and the interest due on the RMBS debt tranches, and finally by senior tranches and any remaining excess spread. We also have acquired, and may acquire in the future, both Agency-issued and non-Agency-issued CRTs, which have credit risks similar to those of subordinated RMBS tranches, as well as RMBS backed by non-QM and CES loans, including retained tranches from loan securitizations in which we have participated.
We also have acquired, and may acquire in the future, European RMBS, including retained tranches from European RMBS securitizations in which we have participated.
Residential Mortgage Loans
Our residential mortgage loans include newly originated non-QM loans, residential transition loans, as well as legacy residential NPLs and RPLs. A non-QM loan is not necessarily high-risk, or subprime, but is instead a loan that does not conform to the complex Qualified Mortgage ("QM") rules of the Consumer Financial Protection Bureau. For example, many non-QM loans are made to creditworthy borrowers who cannot provide traditional documentation for income, such as borrowers who are self-employed. There is also demand from certain creditworthy borrowers for loans above the QM 43% debt-to-income ratio limit that still meet all ability-to-repay standards. We hold equity investments in various non-QM originators, and to date we have purchased the majority of our non-QM loans from these originators, although we could potentially purchase a greater share of non-QM loans from other sources in the future.
The residential transition loans that we purchase are typically newly originated loans and include: (i) "fix and flip" loans, which are made to real estate investors for the purpose of acquiring residential homes, making value-add improvements to such homes, and reselling the newly rehabilitated homes for a potential profit, and (ii) loans made to real estate investors for a "business purpose," such as purchasing a rental investment property, financing or refinancing a fully rehabilitated home awaiting sale, or securing short-term financing pending qualification for longer-term lower-rate financing. Our residential transition loans are secured by non-owner occupied properties, and are typically structured as fixed-rate, interest-only loans with terms to maturity between 6 and 24 months. Our underwriting guidelines focus on both the "as is" and "as repaired" property values, borrower experience as a real estate investor, and asset verification.
We are active in the market for residential NPLs and RPLs. The market for large residential NPL and RPL pools has remained highly concentrated, with the great majority having traded to only a handful of large players who typically securitize the residential NPLs and RPLs that they purchase. As a result, we have continued to focus our acquisitions on less-competitively-bid, and more attractively-priced mixed legacy pools sourced from motivated sellers.
We acquire HELOCs and closed-end second lien loans, which are loans made to homeowners collateralized by the existing equity in their homes. Closed-end second lien loans allow the borrower to take a one-time lump sum and are subordinate to the rights of the first lien mortgage holder as well as other potential senior liens. A HELOC is a line of credit that allows the borrower to draw down on their available line of credit as needed, and is subordinate to the rights of the first lien mortgage holder and to the rights of any other lien-holder on the home.
In addition to originating reverse mortgage loans, Longbridge also originates HELOCs designed for homeowners aged 62 or older. These loans are typically interest only, first or second lien loans that do not require principal payments as long as the borrower remains in compliance with specific terms of the loan such as related to owner-occupancy, payment of property taxes, and keeping insurance coverage and interest payments current. They differ from traditional HELOCs in that the principal is deferred until the borrower dies, sells the home, or becomes delinquent on property taxes or homeowners insurance.
We also acquire residential mortgage loans that have been originated in compliance with U.S government Agency or government-sponsored enterprise ("GSE") guidelines that are eligible for sale to or securitization by the GSEs ("Agency-eligible residential mortgage loans"). Such loans may be collateralized by owner-occupied or non-owner occupied properties.
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Reverse Mortgage Loans, Reverse MSRs
Reverse mortgage loans are residential mortgage loans for which neither principal nor interest is due until the borrower dies, the home is sold, or other trigger events occur. Reverse mortgage loans can have either fixed interest rates or adjustable interest rates. In the case of most fixed-rate reverse mortgage loans, the borrower must draw the loan proceeds up front in one lump sum, while many adjustable-rate mortgage loans provide the borrower with a line of credit that can be drawn over time.
We consolidate Longbridge, which acquires reverse mortgage loans both through its origination activities and through secondary market purchases. Historically, the majority of loans acquired by Longbridge have been home equity conversion mortgage loans ("HECMs"), which are insured by FHA and eligible for inclusion in GNMA-guaranteed HECM-backed MBS ("HMBS"). Longbridge is an approved issuer of HMBS, and it pools and securitizes the majority of its HECM loans into HMBS, which it then sells in the secondary market while retaining the servicing rights on the underlying HECM loans. In addition, Longbridge opportunistically acquires, in the secondary market, HECM loans that have been mandatorily repurchased from HMBS pools ("HECM Buyout Loans") by other HECM servicers upon the outstanding principal balance of such loans reaching 98% of their respective maximum claim amount. Depending on their status, HECM Buyout Loans are either eligible to be assigned to HUD in connection with an FHA insurance claim ("assignable buyout loans" or "ABOs"), or ineligible to be assigned to HUD ("non-assignable buyout loans" or "NABOs").
Longbridge also originates and purchases proprietary reverse mortgage loans, which typically carry loan balances or credit lines that exceed FHA limits or have other characteristics that make them ineligible for FHA insurance.
The majority of Longbridge's existing MSRs relate to HECM loans that Longbridge pooled and securitized into HMBS and then sold into the secondary market with servicing rights retained. In accordance with U.S. GAAP, so long as Longbridge retains such mortgage servicing rights and the obligations relating thereto, such HECM loans do not meet the requirement for sale accounting and remain on Longbridge's balance sheet. The sold HMBS securities are accounted for as secured borrowings. In addition, Longbridge opportunistically acquires, in the secondary market or otherwise, MSRs associated with either proprietary reverse mortgage loans, HECMs or HECM buyout loans.
Strategic Investments
We have made, and in the future may make additional, equity and/or debt investments in loan originators, loan servicers, and other related operating companies. Our investments may either be controlling interests (as is the case with Longbridge), or non-controlling interests (as is the case with our other investments in these types of operating companies). We have also acquired debt investments and/or warrants in certain of these loan originators. We have also entered into various other arrangements, such as entering into flow agreements or providing guarantees or financing lines, with certain of the loan originators in which we have invested.
TBAs and Other Mortgage-Related Derivatives
In addition to investing in specified pools of Agency RMBS, we utilize TBA transactions, whereby we agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. TBAs are liquid, have quoted market prices, and represent the most actively traded class of mortgage-backed securities ("MBS"). TBA trading is based on the assumption that mortgage pools that are eligible to be delivered at TBA settlement are fungible and thus the specific mortgage pools to be delivered do not need to be explicitly identified at the time a trade is initiated.
We generally engage in TBA transactions for purposes of managing certain risks associated with our investment strategies. Other than with respect to TBA transactions entered into by our TRSs, most of our TBA transactions are treated for tax purposes as hedging transactions used to hedge indebtedness incurred to acquire or carry real estate assets ("qualifying liability hedges"). The principal risks that we use TBAs to mitigate are interest rate and yield spread risks. For example, we may hedge the interest rate and/or yield spread risk inherent in our long Agency RMBS by taking short positions in TBAs that are similar in character. Alternatively, we may opportunistically engage in TBA transactions because we find them attractive in their own right, from a relative value perspective or otherwise. For accounting purposes, in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") we classify TBA transactions as derivatives.
We also take long and short positions in various other mortgage-related derivative instruments, including mortgage-related credit default swaps. A credit default swap is a credit derivative contract in which one party (the protection buyer) pays an ongoing periodic premium (and often an upfront payment as well) to another party (the protection seller) in return for compensation for default (or similar credit event) by a reference entity. In this case, the reference entity can be an individual MBS or an index of several MBS, such as a CMBX index. Payments from the protection seller to the protection buyer typically occur if a credit event takes place. A credit event can be triggered by, among other things, the reference entity's failure to pay its principal obligations or a severe ratings downgrade of the reference entity.
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Other Investment Assets
Our other investment assets include real estate, including residential and commercial real property, corporate debt and equity securities, corporate loans, loans collateralized by accounts receivable, litigation finance assets, and non-mortgage-related derivatives. We do not typically purchase real property directly; rather, our real estate ownership usually results from foreclosure activity with respect to our residential and commercial mortgage loans.
Hedging Instruments
Interest Rate Hedging
We opportunistically hedge our interest rate risk by using various hedging strategies, subject to maintaining our qualification as a REIT. The interest rate hedging instruments that we use and may use in the future include, without limitation:
• TBAs;
• interest rate swaps (including floating-to-fixed, fixed-to-floating, floating-to-floating, or more complex swaps such as floating-to-inverse floating, callable or non-callable);
• CMOs;
• U.S. Treasury securities;
• swaptions, caps, floors, and other derivatives on interest rates;
• futures and forward contracts; and
• options on any of the foregoing.
Because fluctuations in short-term interest rates may expose us to fluctuations in the spread between the interest we earn on certain of our investments and the interest we pay on certain of our borrowings, we may seek to manage such exposure by entering into short positions in interest rate swaps. An interest rate swap is an agreement to exchange interest rate cash flows, calculated on a notional principal amount, at specified payment dates during the life of the agreement. Typically, one party pays a fixed interest rate and receives a floating interest rate and the other party pays a floating interest rate and receives a fixed interest rate. Each party's payment obligation is computed using a different interest rate. In an interest rate swap, the notional principal is generally not exchanged. We generally enter into these transactions to offset the potential adverse effects of rising interest rates on short-term repurchase agreements. Our repurchase agreements generally have maturities of up to 364 days and carry interest rates that are determined by reference to a benchmark rate such as the Secured Overnight Financing Rate ("SOFR"). As each then-existing fixed-rate repurchase agreement ("repo") borrowing matures, it will generally be replaced with a new fixed-rate repo borrowing based on market interest rates established at that future date.
In the case of interest rate swaps, most of our agreements are structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The variable interest rate on which payments are received is generally calculated based on various reset mechanisms for a benchmark rate such as SOFR. To the extent that the benchmark rates used to calculate the payments we receive on our interest rate swaps continue to be highly correlated with our repo borrowing costs, our interest rate swap contracts should help to reduce the variability of our overall repo borrowing costs, thus reducing risk to the extent we hold fixed-rate assets that are financed with repo borrowings.
Credit Risk Hedging
We enter into credit-hedging positions in order to protect against adverse credit events with respect to our credit investments, subject to maintaining our qualification as a REIT. Our credit hedging portfolio can vary significantly from period to period, and can encompass a wide variety of financial instruments, including corporate debt or equity-related instruments, RMBS- or CMBS-related instruments, or instruments involving other markets. Our hedging instruments can include both "single-name" instruments (i.e., instruments referencing one underlying entity or security) and hedging instruments referencing indices.
Our credit hedges consist of financial instruments tied to corporate credit, such as CDS on corporate bond indices, short positions in and CDS on corporate bonds, and positions involving exchange traded funds ("ETFs") of corporate bonds. They also include put contracts on certain equity indices, as well as CDS tied to individual MBS or an index of several MBS, such as CDS on CMBS indices ("CMBX").
Foreign Currency Hedging
To the extent that we hold instruments denominated in currencies other than U.S. dollars, we may enter into transactions to offset the potential adverse effects of changes in currency exchange rates, subject to maintaining our qualification as a REIT. In particular, we may use currency forward contracts and other currency-related derivatives to mitigate this risk.
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Trends and Recent Market Developments
Market Overview
Federal Reserve Policy
• After lowering its target range for the federal funds rate by a full percentage point to 4.25%–4.50% in the second half of 2024, the U.S. Federal Reserve (the "Federal Reserve") maintained that range through the first eight months of 2025, noting increased uncertainty around the economic outlook.
Beginning in September, the Federal Reserve initiated a gradual easing cycle, lowering the target range by 25 basis points at each of its September, October, and December meetings, bringing the target range to 3.50%–3.75% at year end. The December Summary of Economic Projections signaled a slower pace of rate cuts in 2026, with the median member’s projection implying only one additional 25-basis-point reduction.
• Beginning in April, the Federal Reserve decelerated the pace of its balance sheet contraction by lowering the cap on portfolio runoff of U.S. Treasury securities from $25 billion to $5 billion, while maintaining the $35 billion cap on Agency RMBS runoff. In October, the Federal Reserve announced that balance sheet runoff would conclude on December 1, 2025, at which point principal payments from both U.S. Treasury and Agency securities would be reinvested into U.S. Treasury securities. At its December meeting, the Federal Reserve further announced it would initiate purchases of short-term Treasury securities to maintain an ample level of reserves.
Tariff Policy
• During the first quarter of 2025, the administration announced a new round of tariffs, primarily on imports from China, Canada, and Mexico, along with additional tariffs on certain goods and sectors. The administration also announced plans for broad “reciprocal” tariffs aimed at matching the tariff rates that other countries impose on U.S. exports. These announcements contributed to increased market volatility and notable declines in major equity indices late in the quarter.
• In early April, the U.S. administration announced its plans for broad-based tariffs. These announcements caused uncertainty in financial markets, contributing to heightened volatility and further declines in major equity indices and widening of credit spreads in early April. Financial markets recovered following the April 9th announcement of a 90-day pause on most tariffs, excluding those applied to Chinese imports. In mid-May, the U.S. and China mutually agreed to reduce minimum tariff rates on bilateral trade, contributing to improved market sentiment. By the end of the second quarter, multiple major equity indices had reached all-time highs.
• In the third quarter, the U.S. administration continued to adjust the broad-based tariffs announced in early April and introduced additional tariffs affecting various countries and industries. Several trading partners, including the United Kingdom, the European Union, Japan, South Korea, and others, reportedly reached agreements with the U.S. to reduce tariff levels, though implementation remained ongoing. The administration also extended the pause on higher tariffs for Chinese imports, leaving the reduced minimum tariff rate in place.
• In the fourth quarter, the U.S. administration delayed scheduled tariffs on certain countries and sectors while advancing negotiations with additional trading partners, announcing framework agreements with Vietnam, Argentina, and Switzerland, among others. At the same time, several tariff measures remained subject to ongoing judicial review, creating additional uncertainty regarding the scope, timing, and potential retroactive application of certain trade actions.
Government Shutdown
• A partial U.S. government shutdown began on October 1, 2025, following a lapse in federal appropriations due to disagreements over spending levels. Essential government functions continued to operate, but many agencies temporarily furloughed employees. The shutdown disrupted the release of key economic data and contributed to short-term market uncertainty.
• After setting a record for the longest shutdown in U.S. history, the shutdown ended on November 12th with a continuing resolution to keep most agencies running through January 30, 2026.
Interest Rates
• After rising sharply in the fourth quarter of 2024, interest rates declined significantly in the first quarter of 2025, with yields on 2- and 10-year U.S. Treasury securities falling by 36 basis points quarter over quarter, ending at 3.88% and 4.21%, respectively.
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Interest rates were relatively volatile in the second quarter in response to economic uncertainty and evolving expectations for monetary policy. The yield on the 2-year U.S. Treasury security traded within a 45-basis point range before ending the quarter down 16 basis points to 3.72%. The yield on the 10-year U.S. Treasury security traded within a 60-basis point range before ending the quarter up just 2 basis points to 4.23%.
In the third quarter, interest rates continued to trend lower. The yield on the 2-year U.S. Treasury security ended the quarter down 11 basis points at 3.61%, while the yield on the 10-year U.S. Treasury ended the quarter down 8 basis points at 4.15%.
In the fourth quarter, the yield on the 2-year U.S. Treasury security continued to fall, ending the quarter down 14 basis points to 3.47%. The yield on the 10-year U.S. Treasury increased modestly by 2 basis points to 4.17%.
Interest rate volatility declined significantly over the course of the year, with the MOVE Index ending 2025 down approximately 35% year over year.
• Mortgage rates generally tracked the decline in long-term interest rates during the year. The Freddie Mac 30-year mortgage rate survey began the year at 6.85% and peaked at 7.04% in mid-January, before declining steadily and ending the year at 6.18%.
• Secured Overnight Financing Rates (“SOFR”) were largely stable in the first half of 2025 but fell sharply in the second half, reflecting the Federal Reserve rate cuts. For the full year, one-month SOFR rate declined by 64 basis points to 3.69%, while three-month SOFR rate fell by 65 basis points to 3.65%. SOFR rates drive many of our financing costs.
Housing and Economic Indicators
• The S&P Cotality Case-Shiller US National Home Price Index rose 2.6% in the first half of 2025 before declining modestly in the second half, ending the year up 1.3% overall. Housing affordability followed a similar arc, deteriorating through mid-year before recovering as mortgage rates fell, with the National Association of Realtors Housing Affordability Index finishing 2025 up 10.5% from where it began.
• The Mortgage Bankers Association's Refinance Index rose significantly in the first three quarters of 2025, more than tripling between the start of the year and late September, before declining sharply in the fourth quarter. Despite the late-year pullback, refinancing activity ended 2025 significantly higher than at the start of the year.
• Mortgage prepayment speeds generally rose during the year, but remained low by historical standards. Prepayment speeds for Fannie Mae 30-year RMBS started the year at 5.2 CPR, reached a peak of 10.2 CPR in October, and then declined into year end, registering 8.7 CPR in December.
• U.S. real GDP contracted at an estimated annualized rate of 0.5% in the first quarter of 2025, before expanding by 3.8% in the second quarter and 4.4% in the third quarter. Fourth-quarter growth moderated but remained positive at 1.4%. Unemployment rose modestly during 2025, from 4.1% at the start of the year to 4.4% by year end.
• Inflation trended lower in early 2025, with the 12-month percentage change in the Consumer Price Index for All Urban Consumers, not seasonally adjusted, falling from 3.0% in January to 2.3% in April, before rising to 2.7% in December.
Fixed Income Performance
• MBS returns were generally positive throughout 2025, with the Bloomberg U.S. MBS Index posting a full-year return of 8.58% and an excess return (on a duration-adjusted basis) of 1.71% relative to the Bloomberg U.S. Treasury Index.
• Corporate bonds also posted strong returns. The Bloomberg U.S. Corporate Bond Index returned 7.77% with an excess return of 1.19%, while the Bloomberg High Yield Bond Index posted an 8.62% return and 2.60% excess return. High Yield corporate credit spreads widened modestly during the year with the Markit CDX North America High Yield Index increasing by 5 basis points. The Markit CDX North America Investment Grade Index was largely unchanged year over year.
Equity Markets
• Despite early-year declines due to trade policy uncertainty, U.S. equities posted strong gains in 2025, with the Dow Jones rising 13.0%, the S&P 500 rising 16.4%, and the NASDAQ rising 20.4%. International equities performed even better, with the FTSE 100 and MSCI World Indexes rising 21.5% and 19.5%, respectively.
• Equity volatility spiked early in the year before declining steadily, ending 2025 lower overall.
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Portfolio Overview and Outlook—Investment Portfolio Segment
Investment Portfolio—Credit (1)
The following tables summarize the long investments in our credit portfolio as of December 31, 2025 and 2024.
December 31, 2025
December 31, 2024 (2)
($ in thousands)
Fair Value
% of Total
Fair Value
% of Total
Dollar Denominated:
Agency-eligible residential mortgage loans
CLOs
CMBS
Commercial mortgage loans (3)(5)
Consumer loans and ABS backed by consumer loans (6)
Corporate debt and equity and corporate loans
Debt and equity investments in loan origination entities (7)
Forward MSR-related investments
HELOC and CES loans and retained RMBS (6)(8)
Non-Agency RMBS
Non-QM loans and retained RMBS (3)(6)(8)
Other investments (9)(10)
Residential transition loans and other residential mortgage loans (3)(4)
Non-Dollar Denominated:
CLOs
Corporate debt and equity
RMBS (11)(12)
Other residential mortgage loans
Total Long Credit Portfolio
Adjustments:
Less: Non-retained tranches of consolidated securitization trusts
Total adjusted long credit portfolio
(1) This information does not include U.S. Treasury securities, securities sold short, or financial derivatives.
(2) Conformed to current period presentation.
(3) Includes related REO. In accordance with U.S. GAAP, REO is not considered a financial instrument and, as a result, is included at the lower of cost or fair value, as discussed in Note 2 of the notes to consolidated financial statements.
(4) Other residential mortgage loans include secondary market purchases of non-performing and re-performing mortgage loans.
(5) Includes equity investments in unconsolidated entities holding commercial mortgage loans and REO and corporate loans secured by commercial mortgage loans.
(6) Includes equity investments in securitization-related vehicles.
(7) Includes corporate loans to certain loan origination entities in which we hold an equity investment.
(8) Retained RMBS represents RMBS issued by non-consolidated Ellington-sponsored loan securitization trusts, and interests in entities holding such RMBS.
(9) Includes equity investment in Ellington affiliate.
(10) Includes equity investment in an unconsolidated entity which purchases certain other loans for eventual securitization.
(11) Includes loan to an entity which purchases residential mortgage loans for eventual securitization.
(12) Includes investment in an unconsolidated entity holding European RMBS.
Our total adjusted long credit portfolio increased by 24% to $4.11 billion as of December 31, 2025, compared to $3.33 billion as of December 31, 2024. The increase was driven by net purchases of non-QM loans, commercial mortgage bridge loans, Agency-eligible loans, ABS, and CLOs; and a larger portfolio of retained RMBS. These increases were partially offset by the impact of loans sold into securitizations, net sales of non-Agency RMBS, and a smaller residential transition loan portfolio, with principal paydowns in that portfolio, together with the net effect of a securitization, exceeding new purchases. During the year, we also added two additional equity investments in loan originators, and signed an agreement to acquire a small residential mortgage servicer which, pending regulatory approval, would enable us to bring servicing capabilities in-house.
Positive performance was driven by higher net interest income along with net realized and unrealized gains on non-QM retained tranches, forward MSR-related investments, closed-end second lien retained tranches, home equity line of credit loans, NPL/RPL residential loans, and ABS. We also benefitted from strong results from our equity investments in loan originators
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and strong credit performance across our loan businesses. Partially offsetting higher net interest income were net realized and unrealized losses on CLOs, CMBS, consumer loans, and residential REO.
The percentages of delinquent loans in our residential and commercial mortgage loan portfolios (including loans accounted for as equity method investments) increased year over year, although these percentages decreased during the fourth quarter. Both of these portfolios continue to experience low levels of realized credit losses and strong overall credit performance, though we continue to work out several non-performing assets.
During the year, the net interest margin on our credit portfolio increased to 3.25% from 2.83%, driven by an increase in asset yields and a lower cost of funds. We continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.
Supplemental Credit Portfolio Information:
The following tables provide supplemental information to, and should be read in conjunction with, the notes to our financial statements. See Note 5— Investments in Loans , Note 7— Forward MSR-related Investments , and Note 8— Investments in Unconsolidated Entities, of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
The table below details certain information regarding our investments in commercial mortgage loans as of December 31, 2025:
Gross Unrealized
Weighted Average
($ in thousands)
Unpaid Principal Balance
Premium (Discount)
Amortized Cost
Gains
Losses
Fair Value
Coupon
Yield (1)
Life (Years) (2)
Commercial mortgage loans (3)(4)
(1) Excludes commercial mortgage loans in non-accrual status, with a fair value of $79.1 million.
(2) Expected average lives of loans are generally shorter than stated contractual maturities. Average lives are affected by scheduled periodic payments of principal and unscheduled prepayments of principal.
(3) Includes our allocable portion of commercial mortgage loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Consolidated Balance Sheet.
(4) As of December 31, 2025, all of our commercial mortgage loans were first-lien mortgages.
The table (1)(2) below summarizes our interests in commercial mortgage loans by payment status of the loan as of December 31, 2025:
December 31, 2025
(In thousands)
Unpaid
Principal Balance
Fair Value
Performing
Non-performing
Total
(1) Includes our allocable portion of commercial mortgage loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Consolidated Balance Sheet.
(2) As discussed in Note 2 and Note 5 of the Notes to Consolidated Financial Statements, commercial loans that are 90 days or more delinquent are considered non-performing.
As of December 31, 2025, we held three commercial REO properties with a fair value of $19.1 million. Additionally, as of December 31, 2025, an unconsolidated variable interest entity in which we co-invest with other Ellington affiliates held a commercial REO property; the fair value of our allocable portion of such REO was approximately $40.3 million.
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The table below summarizes our interests in commercial mortgage loans by property type of the underlying real estate collateral, as a percentage of total outstanding unpaid principal balance, as of December 31, 2025:
Property Type (1)
December 31, 2025
Multifamily
Hotel
Retail
Commercial Mixed Use
Industrial
Office
Healthcare
Mobile Home Community
Self Storage
(1) Includes our allocable portion of commercial mortgage loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Consolidated Balance Sheet.
The table below summarizes our interests in commercial mortgage loans by geographic location of the underlying real estate collateral, as a percentage of total outstanding unpaid principal balance, as of December 31, 2025:
Property Location by U.S. State (1)
December 31, 2025
New York
Florida
Texas
New Jersey
Illinois
All other states <5%
(1) Includes our allocable portion of commercial mortgage loans, based on our ownership percentage, held in variable interest entities. Our equity investments in such variable interest entities are included in Investments in unconsolidated entities, at fair value on the Consolidated Balance Sheet.
The table below summarizes our interests in residential mortgage loans by loan type, and REO resulting from the foreclosure of residential mortgage loans, as of December 31, 2025:
Loan Type
Unpaid Principal Balance
Fair Value
(In thousands)
North America—United States:
Non-QM loans
Residential transition loans
HELOCs and closed-end second lien loans
Agency eligible mortgage loans
Other residential mortgage loans (1)
Europe—United Kingdom:
Other residential mortgage loans
Total residential mortgage loans
Residential REO (2)
Total residential mortgage loans and residential REO (2)
(1) Other residential mortgage loans include secondary market purchases of non-performing and re-performing mortgage loans.
(2) REO is not considered a financial instrument and, as a result, is included at the lower of cost or fair value, as discussed in Note 2 of the notes to consolidated financial statements.
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The table (1) below provides additional details for residential mortgage loans that are 90 days or more past due as of December 31, 2025:
Loan Type
Unpaid Principal Balance
Fair Value
(In thousands)
Non-performing residential mortgage loans — non-performing at acquisition
Non-performing residential mortgage loans — performing at acquisition
Total non-performing residential mortgage loans
Total residential mortgage loans
Total residential mortgage loans, excluding non-performing residential mortgage loans — non-performing at acquisition
Total delinquency (%)
Delinquency excluding loans non-performing at acquisition (%)
(1) Excludes the assets of the European Mortgage Loan Securitization (see Note 13, Securitization Transactions — Residential Mortgage Loan Securitizations—European Residential Mortgage Loans ), which is a consolidated VIE holding non-performing residential mortgage loans with an unpaid principal balance and fair value of 20.4 million and 14.5 million, respectively. The net fair value of the interest held by us in this VIE was $64 thousand.
The table below details (in thousands) the underlying reference amounts and components of our Forward MSR-related investments as of December 31, 2025:
Fair Value of Underlying MSR
Financing
Advances Receivable
Cash and Other Net Receivables
Fair Value of Forward MSR-related Investments
The table below provides additional details on the MSRs underlying our Forward MSR-related investments as of December 31, 2025:
Weighted Average
Holder of Mortgage Loan
Unpaid Principal Balance
Fair Value
Rate
Servicing Fee
Loan Age (Months)
Projected CPR
Market Yield
Multiple
(In thousands)
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
Total
As discussed in Note 16 of the notes to our consolidated financial statements, we, through a wholly-owned trust subsidiary, purchase automobile loans under agreements with a consumer loan originator. We have beneficial interests in the loan cash flows, which are net of servicing-related fees and expenses including a deferred performance-based fee to the consumer loan originator, in which we have a non-controlling equity interest. The total fair value of these investments, which are included in Securities, at fair value on the Consolidated Balance Sheet, was $53.1 million as of December 31, 2025. The table below provides additional information about the automobile loans underlying these participation certificates, which comprise our investments in ABS backed by consumer loans, as of December 31, 2025:
Weighted Average
($ in thousands)
Unpaid Principal Balance
Premium (Discount)
Amortized Cost
Fair Value
Life (Years)
Delinquency (Days)
Automobile loans underlying ABS backed by consumer loans (1)
(1) Excludes charged-off consumer loans with an aggregate unpaid principal balance and fair value of $97.2 million and $0.4 million, respectively, for which we have determined that it is probable the servicer will be able to collect principal and interest. See Note 5 of the Notes to Consolidated Financial Statements for additional details on charged-off consumer loans.
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The following table provides additional details about our investments in unconsolidated entities as of December 31, 2025:
Investment in Unconsolidated Entity
Description
Fair Value
Loan Originators:
Entity Type
(In thousands)
LendSure Mortgage Corp.
Residential Mortgage Loan Originator
Other
Residential Mortgage Loan, Commercial Mortgage Loan, and Consumer Loan Originators
Other Unconsolidated Entities:
Underlying Product Type
Co-investments with Ellington affiliate(s)
Commercial Mortgage Loans and REO
Equity investments in securitization-related risk retention vehicles
Consumer Loans and European RMBS
Equity investments in securitization-related risk retention vehicles
Residential Mortgage Loan
Other
Various
Investment Portfolio—Agency RMBS
December 31, 2025
December 31, 2024
($ in thousands)
Fair Value
% of Long Agency Portfolio
Fair Value
% of Long Agency Portfolio
Long Agency RMBS:
Fixed Rate
Reverse Mortgages
IOs
Total Long Agency RMBS
Our total long Agency RMBS portfolio decreased by 26% year over year to $218.4 million as of December 31, 2025, compared to $296.7 million as of December 31, 2024, primarily driven by net sales.
Net gains on our Agency RMBS, along with net interest income, were the primary drivers of the strong results in our Agency strategy in 2025. Declining interest rate volatility and tightening Agency yield spreads for much of the year provided broad support to our portfolio. These net gains were partially offset by net losses on our interest rate hedges, driven by declining interest rates.
During the quarter, we continued to hedge interest rate risk through the use of interest rate swaps and short positions in TBAs, U.S. Treasury securities and futures. We ended the quarter with a net long TBA position, on both a duration-weighted and notional basis, associated with the Agency strategy.
The net interest margin on our Agency portfolio, excluding the Catch-up Amortization Adjustment, increased to 2.32% for the year ended December 31, 2025, from 1.84% for the year ended December 31, 2024, primarily driven by a lower cost of funds. We continued to benefit from positive carry on our interest rate swap hedges, where we overall receive a higher floating rate and pay a lower fixed rate.
As of December 31, 2025 and 2024, the weighted average net pass-through rate on our fixed-rate specified pools was 3.9% and 4.1%, respectively.
We expect to continue to target specified pools that, taking into account their particular composition and based on our prepayment projections, should: (1) generate attractive yields relative to other Agency RMBS and U.S. Treasury securities, (2) have less prepayment sensitivity to government policy shocks, and/or (3) create opportunities for trading gains once the market recognizes their value, which for newer pools may come only after several months, when actual prepayment experience can be observed. We believe that our research team, proprietary prepayment models, and extensive databases remain essential tools in our implementation of this strategy.
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The following table summarizes the prepayment rates for our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) for the three-month periods ended December 31, 2025, September 30, 2025, June 30, 2025, March 31, 2025, and December 31, 2024.
Three-Month Period Ended
December 31, 2025
September 30,
June 30, 2025
March 31, 2025
December 31, 2024
Three-Month Constant Prepayment Rates (1)
(1) Excludes Agency fixed-rate RMBS without any prepayment history.
The following table provides details about the composition of our portfolio of fixed-rate specified pools (excluding those backed by reverse mortgages) as of December 31, 2025 and 2024:
December 31, 2025
December 31, 2024
Coupon (%)
Current Principal
Fair Value
Weighted
Average Loan
Age (Months)
Weighted Average Coupon
Current Principal
Fair Value
Weighted
Average Loan
Age (Months)
Weighted Average Coupon
(In thousands)
(In thousands)
Fixed-rate Agency RMBS:
15-year fixed-rate mortgages:
Total 15-year fixed-rate mortgages
30-year fixed-rate mortgages:
Total 30-year fixed-rate mortgages
Total fixed-rate Agency RMBS
Portfolio Overview and Outlook—Longbridge Segment
As discussed in Note 13 of the Notes to the Consolidated Financial Statements, when Longbridge pools HECM loans into HMBS, such transfers do not qualify as sales under U.S. GAAP, and as a result, such transactions are treated as secured borrowings on our Consolidated Balance Sheet. The pooled HECM loans are included in Loans, at fair value, and the related liabilities are reflected as HMBS-related obligations, at fair value. After pooling the HECM loans into HMBS, Longbridge retains the mortgage servicing rights associated with such HMBS, which we refer to as the "HMBS MSR Equivalent."
Additionally, Longbridge typically retains the MSRs associated with the proprietary reverse mortgage loans that it originates and has acquired MSRs on reverse mortgage loans in the secondary market (collectively, "Reverse MSRs"). We have also securitized some of the proprietary reverse mortgage loans originated by Longbridge, and we have retained certain securitization tranches in compliance with credit risk retention rules.
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The following table summarizes loan-related assets (1) in the Longbridge segment as of December 31, 2025 and 2024:
(In thousands)
December 31, 2025
December 31, 2024
HMBS assets (2)(3)
Less: HMBS liabilities
HMBS MSR Equivalent
Unsecuritized HECM loans (4)
Proprietary reverse mortgage loans (3)(5)
Reverse MSRs
Unsecuritized REO (3)
Total
Less: Non-retained tranches of consolidated securitization trusts
Total, excluding non-retained tranches of consolidated securitization trusts
(1) This information does not include financial derivatives or loan commitments.
(2) Includes HECM loans, REO, and claims or other receivables.
(3) REO is not considered a financial instrument and, as a result, is included at the lower of cost or fair value, as discussed in Note 2 of the notes to consolidated financial statements.
(4) As of December 31, 2025, includes $28.5 million of active HECM Buyout Loans, $19.0 million of inactive HECM Buyout Loans, and $6.1 million of other inactive HECM loans. As of December 31, 2024, includes $7.8 million of active HECM Buyout Loans, $11.1 million of inactive HECM Buyout Loans, and $5.0 million of other inactive HECM loans.
(5) As of December 31, 2025, includes $1.4 billion of securitized proprietary reverse mortgage loans and related REO, $26.0 million of cash held in a securitization reserve fund, and $19.9 million of investment related receivables. As of December 31, 2024, includes $606.8 million of securitized proprietary reverse mortgage loans and $15.0 million of cash held in a securitization reserve fund.
Our Longbridge segment reported excellent results for the year, with positive contributions from both originations and servicing. Strong performance from originations was driven by significantly higher origination volumes of proprietary reverse mortgage loans year over year, higher origination margins for HECM loans, and net gains related to proprietary reverse mortgage loan securitizations completed during the year. Strong results from servicing reflected steady base servicing net income, strong tail securitization executions, and a net gain on the HMBS MSR Equivalent, driven primarily by tighter HMBS yield spreads. These gains were partially offset by net unrealized losses on the retained tranches of consolidated proprietary reverse mortgage loan securitization trusts, due to faster prepayment speed assumptions, lower HPA projections, and higher applied discount rates; as well as net losses on interest rate hedges.
Our Longbridge portfolio, excluding non-retained tranches of consolidated securitization trusts, increased by 47% year over year to $617.2 million as of December 31, 2025, primarily driven by proprietary reverse mortgage loan originations, partially offset by the impact of securitizations of that product completed during the year.
Supplemental Longbridge Information:
The following table summarizes origination volumes by channel for the years ended December 31, 2025 and 2024:
Year Ended December 31,
($ In thousands)
Channel
Units
New Loan Origination Volume (1)
% of New Loan Origination Volume
Units
New Loan Origination Volume (1)
% of New Loan Origination Volume
Wholesale and correspondent
Retail
Total
(1) Represents initial borrowed amounts on reverse mortgage loans.
Corporate/Other
Results for the year also reflect: (i) an increase in the unrealized loss on our unsecured debt driven by credit spread tightening, (ii) debt issuance costs related to our October unsecured notes offering, which were fully expensed at issuance, (iii) higher corporate-level interest expense due to a larger amount of unsecured notes outstanding, (iv) an increase in incentive fee incurred, (v) an increase in income tax expense, (vi) a realized loss related to the par redemption of our 6.75% unsecured notes that we had carried at a slight discount to par. These higher expenses were partially offset by net gains on the fixed receiver interest rate swaps used to hedge the fixed payments on our unsecured notes and preferred equity, with interest rates lower during the year.
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Financing—Overall
We have various financing arrangements in place as of December 31, 2025, including both secured and unsecured borrowings. We use repos, secured lines of credit, and various other secured borrowings to finance our portfolios, each of which we account for as collateralized borrowings. We have also obtained, through the securitization markets, term financing for residential mortgage loans, proprietary reverse mortgage loans, and consumer loans. Additionally, as an issuer of HMBS, we account for HMBS-related obligations as secured borrowings. Finally, as of December 31, 2025, we had $662.8 million of outstanding Unsecured borrowings including: (i) senior notes of $400.0 million, maturing in September 2030 and bearing an interest rate of 7.375%, (ii) senior notes of $210.0 million, maturing in April 2027 and bearing an interest rate of 5.875%, and (iii) senior notes of $37.8 million, maturing in August 2026 and bearing an interest rate of 6.00% (collectively, the "Senior Notes"); as well as $15.0 million of unregistered junior subordinated unsecured debt securities (the "Trust Preferred Debt"). The indentures governing the outstanding Senior Notes contain a number of covenants, including several financial covenants. See Note 14 of the Notes to the Consolidated Financial Statements for additional details on our Unsecured borrowings.
As of December 31, 2025, outstanding borrowings under repos and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Consolidated Balance Sheet) were $5.9 billion, of which approximately 3%, or $201.7 million, related to our Agency RMBS holdings. The remaining outstanding borrowings related to our credit portfolio and Longbridge. Additionally, we had $10.4 billion of HMBS-related obligations.
The following table details our borrowings outstanding and debt-to-equity ratios as of December 31, 2025 and 2024:
($ in thousands)
December 31, 2025
December 31, 2024
Recourse borrowings:
Repurchase agreements
Other secured borrowings
Unsecured borrowings, at par
Total recourse borrowings
Debt-to-equity ratio based on total recourse borrowings
Debt-to-equity ratio based on total recourse borrowings excluding borrowings collateralized by U.S. Treasury securities
Debt-to-equity ratio based on total recourse borrowings excluding borrowings collateralized by U.S. Treasury securities, adjusted for unsettled purchases and sales (1)
Non-Recourse (2) Borrowings:
Other Secured Borrowings, at fair value (3)
HMBS-related obligations, at fair value
Total non-recourse borrowings
Total Recourse and Non-Recourse Borrowings
Debt-to-equity ratio based on total recourse and non-recourse borrowings
Debt-to-equity ratio based on total recourse and non-recourse borrowings excluding borrowings collateralized by U.S. Treasury securities
Debt-to-equity ratio based on total recourse and non-recourse borrowings excluding borrowings collateralized by U.S. Treasury securities, adjusted for unsettled purchases and sales (1)
(1) For unsettled purchases and sales, assumes associated borrowings are subject to haircuts of 5.8% and 5.9% as of December 31, 2025 and 2024, respectively.
(2) All of our non-recourse borrowings are secured by collateral. In the event of default under a non-recourse borrowing, the lender has a claim against the collateral but not any of the Operating Partnership's other assets. In the event of default under a recourse borrowing, the lender's claim is not limited to the collateral (if any).
(3) Relates to our residential mortgage and reverse mortgage loan securitizations, where we have elected the fair value option on the related debt. See Note 2 and Note 13 of our consolidated financials statements.
Our recourse debt-to-equity ratio, excluding borrowings collateralized by U.S. Treasury securities and adjusted for unsettled purchases and sales, increased to 1.9:1 as of December 31, 2025, compared to 1.8:1 as of December 31, 2024. The increase reflected an unsecured notes offering completed in October and an increase in repo borrowings on our larger credit and Longbridge portfolios, even as a portion of the proceeds from that unsecured notes offering were used to replace repo borrowings. The increase was also partially offset by higher shareholders' equity and the impact of securitizations.
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Our overall debt-to-equity ratio, based on total recourse and non-recourse borrowings excluding borrowings collateralized by U.S. Treasury securities, adjusted for unsettled purchases and sales, was 9.0:1 and 8.8:1 as of December 31, 2025 and 2024, respectively.
Our debt-to-equity ratio does not account for liabilities other than debt financings and does not include debt associated with securitization transactions accounted for as sales.
Our secured financing costs include interest expense related to our repo borrowings and Total other secured borrowings (which include Other secured borrowings and Other secured borrowings, at fair value, as presented on our Consolidated Balance Sheet but exclude HMBS-related obligations). For the year ended December 31, 2025, the average cost of funds on our secured financings decreased to 5.18%, as compared to 5.65% for the year ended December 31, 2024. Our unsecured financing costs consist of interest expense related to our Unsecured borrowings; for the years ended December 31, 2025 and 2024, the average borrowing rate on our unsecured financings was 6.42% and 6.12%, respectively. Our average cost of funds, including both secured and unsecured financings, decreased to 5.26% from 5.68% over the same period.
Critical Accounting Estimates
Our consolidated financial statements include the accounts of Ellington Financial Inc., its Operating Partnership, its subsidiaries, and variable interest entities ("VIEs"), for which we are deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated.
The preparation of our consolidated financial statements in accordance with U.S. GAAP require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our critical accounting estimates are those which require assumptions to be made about matters that are highly uncertain. Actual results could differ from those estimates and such differences could have a material impact on our financial condition and/or results of operations. We believe that all of the decisions and assessments upon which our consolidated financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on the experience of our Manager and Ellington and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. See Note 2 of the notes to our consolidated financial statements for a complete discussion of our significant accounting policies. We have identified our most critical accounting estimates to be the following:
Valuation : We have elected the fair value option for the vast majority of our assets and liabilities for which such election is permitted, as provided for under ASC 825, Financial Instruments ("ASC 825"). For financial instruments that are traded in an "active market," the best measure of fair value is the quoted market price. However, many of our financial instruments are not traded in an active market. Therefore, management generally uses third-party valuations when available. If third-party valuations are not available, management uses other valuation techniques, such as the discounted cash flow methodology.
Summary descriptions, for various categories of financial instruments, of the valuation methodologies management uses in determining fair value of our financial instruments are detailed in Note 2 of the notes to our consolidated financial statements. Management utilizes such methodologies to assign a good faith fair value (the estimated price that, in an orderly transaction at the valuation date, would be received to sell an asset, or paid to transfer a liability, as the case may be) to each such financial instrument. See the notes to our consolidated financial statements for more information on valuation techniques used by management in the valuation of our assets and liabilities.
Because of the inherent uncertainty of valuation, the estimated fair value of our financial instruments may differ significantly from the values that would have been used had a ready market for the financial instruments existed, and the differences could be material to our consolidated financial statements.
The determination of estimated fair value of those of our financial instruments that are not traded in an active market requires the use of both macroeconomic and microeconomic assumptions and/or inputs, which are generally based on current market and economic conditions. Changes in market and/or economic conditions could have a significant adverse effect on the estimated fair value of our financial instruments. Changes to assumptions, including assumed market yields, may significantly impact the estimated fair value of our investments. Our valuations are sensitive to changes in interest rate; see the interest rate sensitivity analysis included in Item 7A. Quantitative and Qualitative Disclosures about Market Risk in this Annual Report on Form 10-K for further information.
VIEs : We evaluate each of our investments and other contractual arrangements to determine whether our interest constitutes a variable interest in a VIE, and if so whether we are the primary beneficiary of such VIE. In making these determinations we use both qualitative and quantitative analyses involving a significant amount of judgment, taking into consideration factors such as which interests in the VIE create or absorb variability, the contractual terms related to such
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interests, other transactions or agreements with the entity, key decision makers and their impact on the VIE’s economic performance, and related party relationships.
Purchases and Sales of Investments and Investment Income : Purchase and sales transactions are generally recorded on trade date. Realized and unrealized gains and losses are calculated based on identified cost.
For securities, residential and commercial mortgage loans, consumer loans, and corporate loans, we generally amortize premiums and accrete discounts using the effective interest method. For certain of our securities, for purposes of estimating future expected cash flows, management uses assumptions including, but not limited to, assumptions for future prepayment rates, default rates, and loss severities (each of which may in turn incorporate various macroeconomic assumptions, such as future housing prices, GDP growth rates, and unemployment rates). In estimating future cash flows on certain of our loans, there are a number of assumptions that are subject to significant uncertainties and contingencies, including assumptions relating to prepayment rates, default rates, loan loss severities, and loan repurchases. These estimates require the use of a significant amount of judgment. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.
The effective yield on our debt securities that are deemed to be of high credit quality (including Agency RMBS, exclusive of interest only securities) can be significantly impacted by our estimate of future prepayments. Future prepayment rates are difficult to predict. We estimate prepayment rates over the remaining life of our securities using models that generally incorporate the forward yield curve, current mortgage rates, mortgage rates on the outstanding loans, age and size of the outstanding loans, and other factors. We compare estimated prepayments to actual prepayments on a quarterly basis, and effective yields are recalculated retroactive to the time of purchase. When differences arise between our previously calculated effective yields and our current calculated effective yields, a catch-up adjustment ("Catch-up Amortization Adjustment") is made to interest income to reflect the cumulative impact of the changes in effective yields. For the years ended December 31, 2025, 2024, and 2023, we recognized a Catch-Up Amortization Adjustment of $0.9 million, $(0.6) million, and $(0.1) million, respectively. The Catch-up Amortization Adjustment is reflected as an increase (decrease) to Interest income on the Consolidated Statement of Operations.
See the notes to our consolidated financial statements for more information on the assumptions and methods that we use to amortize purchase premiums and accrete purchase discounts.
Income Taxes : We have elected to be taxed as a REIT for U.S. federal income tax purposes, and are generally are not subject to corporate-level federal and state income tax on net income we distribute to our stockholders within the prescribed timeframes. We have elected to treat certain domestic and foreign subsidiaries as TRSs. Our financial results are generally not expected to reflect provisions for current or deferred income taxes, except for any activities conducted through one or more TRSs that are subject to corporate income taxation. Establishing a provision for income tax expense requires judgment and interpretation of the application of various federal, state, local, and foreign jurisdiction's tax laws. We may take positions with respect to certain tax issues which depend on legal interpretation of facts or applicable tax regulations. Should the relevant tax regulators successfully challenge any such positions, we might be found to have a tax liability that has not been recorded in the accompanying consolidated financial statements. Also, management's conclusions regarding the authoritative guidance may be subject to review and adjustment at a later date based on changing tax laws, regulations, and interpretations thereof. See Note 2 and Note 15 to our consolidated financial statements for additional details on income taxes.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements for a description of relevant recent accounting pronouncements, if any.
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Financial Condition
The following table summarizes the fair value of our consolidated portfolio of investments (1) as of December 31, 2025 and 2024.
(In thousands)
December 31, 2025
December 31, 2024 (2)
Long:
Investment Portfolio:
Credit:
Dollar denominated:
Agency-eligible residential mortgage loans
CLOs
CMBS
Commercial mortgage loans (3)(5)
Consumer loans and ABS backed by consumer loans (6)
Other investments (9)
Corporate debt and equity and corporate loans
Debt and equity investments in loan origination entities (7)
Non-Agency RMBS
Non-QM loans and retained non-QM RMBS (3)(6)(8)
Residential transition loans and other residential mortgage loans (3)(4)
HELOC and CES Loans and retained RMBS (6)(8)
Forward MSR-related investments
Non-Dollar denominated:
CLO
Corporate debt and equity
RMBS (10)(11)
Other residential mortgage loans
Agency:
Fixed-rate specified pools
IOs
Reverse mortgage pools
Government debt
Longbridge:
Reverse mortgage loans (3)
Reverse MSRs
Total long
Short:
Investment Portfolio:
Government debt:
Dollar denominated
Non-Dollar denominated
Total short
(1) For more detailed information about the investments in our portfolio, please see the notes to the consolidated financial statements.
(2) Conformed to current period presentation.
(3) Includes related REO. REO is not eligible to elect the fair value option as described in Note 2 of the notes to the consolidated financial statements and, as a result, is included at the lower of cost or fair value.
(4) Other residential mortgage loans include secondary market purchases of non-performing and re-performing mortgage loans.
(5) Includes equity investments in unconsolidated entities holding commercial mortgage loans and REO and corporate loans secured by commercial mortgage loans.
(6) Includes equity investments in securitization-related vehicles.
(7) Includes corporate loans made to certain loan origination entities in which we hold an equity investment.
(8) Retained RMBS represents RMBS issued by non-consolidated Ellington-sponsored loan securitization trusts, and interest in entities holding such RMBS.
(9) Includes equity investment in Ellington affiliate.
(10) Includes loan to an entity which purchases residential mortgage loans for eventual securitization.
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(11) Includes an equity investment in an unconsolidated entity holding European RMBS.
The following table summarizes our financial derivatives portfolio (1)(2) as of December 31, 2025.
Notional
Net Fair Value
(In thousands)
Long
Short
Net
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices
Total Net Mortgage-Related Derivatives
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond Indices
Total Return Swaps
Options
Warrants (3)
Total Net Corporate-Related Derivatives
Interest Rate-Related Derivatives:
TBAs
Interest Rate Swaps
U.S. Treasury Futures (4)
Total Interest Rate-Related Derivatives
Other Derivatives:
Foreign Currency Forwards (5)
Total Net Other Derivatives
Net Total
(1) For more detailed information about the financial derivatives in our portfolio, please refer to Note 10 of the notes to the consolidated financial statements.
(2) In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As of December 31, 2025, derivative assets and derivative liabilities were $142.7 million and $(53.1) million, respectively, for a net fair value of $89.7 million, as reflected in "Net Total" above.
(3) Notional represents the maximum number of shares available to be purchased upon exercise.
(4) Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of December 31, 2025, a total of 19 long and 2,323 short U.S. Treasury futures contracts were held.
(5) Short notional value represents U.S. Dollars to be received by us at the maturity of the forward contract.
The following table summarizes our financial derivatives portfolio (1)(2) as of December 31, 2024.
Notional
Net
Fair Value
(In thousands)
Long
Short
Net
Mortgage-Related Derivatives:
CDS on MBS and MBS Indices
Total Net Mortgage-Related Derivatives
Corporate-Related Derivatives:
CDS on Corporate Bonds and Corporate Bond Indices
Options
Warrants (3)
Total Net Corporate-Related Derivatives
Interest Rate-Related Derivatives:
TBAs
Interest Rate Swaps
U.S. Treasury Futures (4)
Total Interest Rate-Related Derivatives
Other Derivatives:
Foreign Currency Forwards (5)
Total Net Other Derivatives
Net Total
(1) For more detailed information about the financial derivatives in our portfolio, please refer to Note 10 of the notes to the consolidated financial statements.
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(2) In the table above, fair value of certain derivative transactions are shown on a net basis. The accompanying financial statements separate derivative transactions as either assets or liabilities. As of December 31, 2024, derivative assets and derivative liabilities were $184.4 million and $(71.0) million, respectively, for a net fair value of $113.4 million, as reflected in "Net Total" above.
(3) Notional represents the maximum number of shares available to be purchased upon exercise.
(4) Notional value represents the total face amount of U.S. Treasury securities underlying all contracts held. As of December 31, 2024, a total of 19 long and 821 short U.S. Treasury futures contracts were held.
(5) Short notional value represents U.S. Dollars to be received by us at the maturity of the forward contract.
As of December 31, 2025, our Consolidated Balance Sheet reflected total assets of $19.4 billion and total liabilities of $17.5 billion. As of December 31, 2024, our Consolidated Balance Sheet reflected total assets of $16.3 billion and total liabilities of $14.7 billion. Our investments in securities, loans, MSRs, Forward MSR-related investments, unconsolidated entities, loan commitments, financial derivatives, and real estate owned included in total assets were $18.3 billion and $15.5 billion as of December 31, 2025 and 2024, respectively. Our investments in securities sold short and financial derivatives included in total liabilities were $325.8 million and $364.6 million as of December 31, 2025 and 2024, respectively. As of both December 31, 2025 and 2024, investments in securities sold short consisted principally of short positions in U.S. Treasury securities and sovereign bonds. We primarily use short positions in U.S. Treasury securities and sovereign bonds to hedge the risk of rising interest rates and foreign currency risk.
We frequently hold a net short position in TBAs. The amounts of net short TBAs, as well as of other hedging instruments, may fluctuate according to the size of our investment portfolio as well as according to how we view market dynamics as favoring the use of one hedging instrument or another. As of December 31, 2025 and 2024, we had a net short notional TBA position of $238.9 million and $13.1 million, respectively.
For a more detailed discussion of our investment portfolio, see "— Trends and Recent Market Developments—Portfolio Overview and Outlook " above.
We use mortgage-related credit derivatives primarily to hedge credit risk in certain credit strategies, although we have also taken net long positions in certain CDS on RMBS and CMBS indices. Our CDS on individual RMBS represent "single-name" positions whereby we have synthetically purchased credit protection on specific non-Agency RMBS bonds. As there is no longer an active market for CDS on individual RMBS or CDS on RMBS indices, our portfolios in these sectors continues to run off. We also use CDS on corporate bond indices, options thereon, and various other instruments as a means to hedge credit risk. As market conditions change, especially as the pricing of various credit hedging instruments changes in relation to our outlook on future credit performance, we continuously re-evaluate both the extent to which we hedge credit risk and the particular mix of instruments that we use to hedge credit risk.
We may hold long and/or short positions in corporate bonds or equities. Our long and short positions in corporate bonds or equities may serve as outright investments or portfolio hedges.
We use a variety of instruments to hedge interest rate risk in our portfolio, including non-derivative instruments such as U.S. Treasury securities and sovereign debt instruments, and derivative instruments such as interest rate swaps, TBAs, Eurodollar and U.S. Treasury futures, and options on the foregoing. The mix of instruments that we use to hedge interest rate risk may change materially from one period to the next. We have also entered into foreign currency forward and futures contracts in order to hedge risks associated with foreign currency fluctuations.
We have entered into repos to finance many of our assets. We account for our repos as collateralized borrowings. As of December 31, 2025 indebtedness outstanding on our repos was approximately $2.7 billion. As of December 31, 2025, our assets financed with repos consisted of Agency RMBS of $214.2 million, credit portfolio assets of $2.9 billion, reverse mortgage loans of $142.3 million, and U.S. Treasury securities of $33.0 million. As of December 31, 2025, outstanding indebtedness under repos was $201.7 million for Agency RMBS, $2.3 billion for credit portfolio assets, $121.0 million of reverse mortgage loans, and $33.3 million for U.S. Treasury securities. As of December 31, 2024 indebtedness outstanding on our repos was approximately $2.6 billion. As of December 31, 2024, our assets financed with repos consisted of Agency RMBS of $249.4 million, credit portfolio assets of $2.7 billion, reverse mortgage loans of $40.3 million, and U.S. Treasury securities of $226.5 million. As of December 31, 2024, outstanding indebtedness under repos was $238.1 million for Agency RMBS, $2.1 billion for credit portfolio assets, $30.4 million on reverse mortgage loans, and $227.3 million for U.S. Treasury securities.
In addition to our repos, as of December 31, 2025 we had Total other secured borrowings of $3.2 billion, collateralized primarily by $3.5 billion of residential mortgage loans, ABS backed by consumer loans, reverse mortgage loans, and reserve cash. This compares to Total other secured borrowings of $2.2 billion as of December 31, 2024, used to finance $2.4 billion of residential mortgage loans, ABS backed by consumer loans, reverse mortgage loans, Reverse MSRs, and reserve cash. Additionally, as of December 31, 2025, we had HMBS-related obligations of $10.4 billion collateralized by $10.5 billion of HMBS assets, and as of December 31, 2024, we had HMBS-related obligations of $9.2 billion collateralized by $9.2 billion of HMBS assets, which include HECM loans as well as REO and claims and other receivables. In addition to our secured
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borrowings, as of December 31, 2025 and 2024, we had Unsecured borrowings outstanding of $662.8 million and $297.7 million, respectively.
As of December 31, 2025 and 2024, our debt-to-equity ratio was 9.1:1 and 8.9:1, respectively. Our recourse debt-to-equity ratio was 1.9:1 as of December 31, 2025 as compared to 2.0:1 as of December 31, 2024. See the discussion in "— Liquidity and Capital Resources " below for further information on our borrowings.
Equity
As of December 31, 2025, our equity increased by $280.3 million to $1.871 billion from $1.591 billion as of December 31, 2024. The increase principally consisted of net proceeds from the issuance of common stock of $301.8 million, after commissions and offering costs; net income of $150.8 million; and contributions from non-controlling interests of $35.7 million. These increases were partially offset by common and preferred dividends of $186.4 million and distributions to non-controlling interests of $25.5 million. Stockholders' equity, which excludes the non-controlling interests related to the minority interest in the Operating Partnership as well as the minority interests of our joint venture partners, was $1.834 billion as of December 31, 2025. As of December 31, 2025, our book value per share of common stock, calculated using Total Stockholders' Equity less the aggregate liquidation preference of outstanding preferred stock, was $13.16.
Results of Operations
The following tables summarize our results of operations by segment (as applicable) for the years ended December 31, 2025 and 2024:
Year Ended December 31, 2025
(In thousands except per share amounts)
Investment Portfolio
Longbridge
Corporate/ Other
Total
Interest Income (Expense)
Interest income
Interest expense
Net interest income
Other Income (Loss)
Realized and unrealized gains (losses) on securities and loans, net
Realized and unrealized gains (losses) on financial derivatives, net
Realized and unrealized gains (losses) on real estate owned, net
Unrealized gains (losses) on other secured borrowings, at fair value, net
Realized and unrealized gains (losses) on unsecured borrowings, at fair value
Net change from HECM reverse mortgage loans, at fair value
Net change related to HMBS obligations, at fair value
Other, net
Total other income (loss)
Expenses
Base management fee to affiliate, net of fee rebates (1)
Incentive fee to affiliate
Investment and transaction related expenses
Other operating expenses
Total expenses
Net Income (Loss) before Income Tax Expense (Benefit) and Earnings (Losses) from Investments in Unconsolidated Entities
Income tax expense (benefit)
Earnings (losses) from investments in unconsolidated entities
Net Income (Loss)
Net income (loss) attributable to non-controlling interests
Dividends on preferred stock
Net Income (Loss) Attributable to Common Stockholders
Net Income (Loss) Per Common Share
(1) See Note 16 of the notes to the consolidated financial statements for further details on management fee rebates.
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Year Ended December 31, 2024
(In thousands except per share amounts)
Investment Portfolio
Longbridge
Corporate/Other
Total
Interest Income (Expense)
Interest income
Interest expense
Net interest income
Other Income (Loss)
Realized and unrealized gains (losses) on securities and loans, net
Realized and unrealized gains (losses) on financial derivatives, net
Realized and unrealized gains (losses) on real estate owned, net
Unrealized gains (losses) on other secured borrowings, at fair value, net
Unrealized gains (losses) on unsecured borrowings, at fair value
Net change from HECM reverse mortgage loans, at fair value
Net change related to HMBS obligations, at fair value
Other, net
Total other income (loss)
Expenses
Base management fee to affiliate, net of fee rebates (1)
Investment and transaction related expenses
Other operating expenses
Total expenses
Net Income (Loss) before Income Tax Expense (Benefit) and Earnings (Losses) from Investments in Unconsolidated Entities
Income tax expense (benefit)
Earnings (losses) from investments in unconsolidated entities
Net Income (Loss)
Net income (loss) attributable to non-controlling interests
Dividends on preferred stock
(Gain) loss on redemption of preferred stock
Net Income (Loss) Attributable to Common Stockholders
Net Income (Loss) Per Common Share
(1) See Note 16 of the notes to the consolidated financial statements for further details on management fee rebates.
Net Income (Loss) Attributable to Common Stockholders
For the year ended December 31, 2025 we had net income (loss) attributable to common stockholders of $118.7 million, compared to $117.8 million for the year ended December 31, 2024.
Interest Income
Interest income was $494.5 million for the year ended December 31, 2025, as compared to $416.0 million for the year ended December 31, 2024. Interest income includes coupon payments received and accrued on our holdings, the net accretion and amortization of purchase discounts and premiums on various holdings, and interest on our cash balances, including those balances held by our counterparties as collateral.
Investment Portfolio
Interest income from our investment portfolio segment for the year ended December 31, 2025 increased to $375.7 million, as compared to $358.3 million for the year ended December 31, 2024.
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The following table details our interest income, average holdings of yield-bearing assets, and weighted average yield based on amortized cost for the years ended December 31, 2025 and 2024:
Credit (1)
Agency (1)
Total (1)
(In thousands)
Interest Income
Average Holdings
Yield
Interest Income
Average Holdings
Yield
Interest Income
Average Holdings
Yield
Year ended
December 31, 2025
Year ended
December 31, 2024
(1) Amounts exclude interest income on cash and cash equivalents (including when posted as margin) and long positions in U.S. Treasury securities.
For the year ended December 31, 2025, interest income from our credit portfolio was $352.8 million, as compared to $320.6 million for the year ended December 31, 2024. This year-over-year increase was primarily driven by a larger average credit portfolio and by higher average asset yields for the year ended December 31, 2025.
For the year ended December 31, 2025 and 2024, interest income from our Agency RMBS was $12.3 million and $22.6 million, respectively. This year-over-year decrease was due to a significantly smaller Agency portfolio in the current year, partially offset by higher average asset yields for the year ended December 31, 2025.
Some of the variability in our interest income and portfolio yields is due to the Catch-up Amortization Adjustment. For the year ended December 31, 2025 we had a positive Catch-up Amortization Adjustment of $0.9 million which increased our interest income. Comparatively, for the year ended December 31, 2024 we had a negative Catch-up Amortization Adjustment of $(0.6) million which decreased our interest income. Excluding the Catch-up Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 4.22% and 7.35%, respectively, for the year ended December 31, 2025. Excluding the Catch-up Amortization Adjustment, the weighted average yield of our Agency portfolio and our total portfolio was 4.21% and 7.03%, respectively, for the year ended December 31, 2024.
In addition, we had $6.8 million and $9.6 million of interest income related to long U.S. Treasury securities and reverse repo on short U.S. Treasury securities for the years ended December 31, 2025 and 2024, respectively, which we generally use to hedge our exposure to changes in interest rates.
Longbridge
For the years ended December 31, 2025 and 2024, interest income from the Longbridge segment was $112.0 million and $50.7 million, respectively. The increase was primarily related to a larger portfolio of proprietary reverse mortgage loans period over period, as well as an increase in interest income related to reverse repo on short positions in U.S. Treasury securities for the year ended December 31, 2025.
Corporate/Other
For the years ended December 31, 2025 and 2024, interest income not allocable to either the investment portfolio segment or the Longbridge segment was $6.8 million and $7.0 million, respectively, primarily related to interest income earned on cash balances and cash collateral held by counterparties.
Interest Expense
Interest expense primarily includes interest on funds borrowed under repos and Total other secured borrowings, interest on our unsecured borrowings, coupon interest on securities sold short, the related net accretion and amortization of purchase discounts and premiums on those short holdings, and interest on our counterparties' cash collateral held by us. For the years ended December 31, 2025 and 2024, we had total interest expense of $304.5 million and $279.6 million, respectively.
Investment Portfolio
Total interest expense in our investment portfolio segment decreased to $196.5 million for the year ended December 31, 2025, as compared to $216.1 million for the year ended December 31, 2024. The decline in interest expense was primarily the result of a decline in financing rates and a decline in average borrowings on our smaller Agency RMBS portfolio and U.S. Treasury securities. These declines were partially offset by an increase in borrowings on our larger credit portfolio.
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The table below summarizes the components of interest expense in our Investment Portfolio for the years ended December 31, 2025 and 2024.
Year Ended
(In thousands)
December 31, 2025
December 31, 2024
Repos and Total Other Secured Borrowings
Securities Sold Short (1)
Other
Total
(1) Amount includes the related net accretion and amortization of purchase discounts and premiums.
The following table summarizes our aggregate secured borrowings, including repos and Total other secured borrowings, for the years ended December 31, 2025 and 2024.
Year Ended
December 31, 2025
December 31, 2024
Collateral for Secured Borrowing
Average
Borrowings
Interest Expense
Average
Cost of
Funds
Average
Borrowings
Interest Expense
Average
Cost of
Funds
(In thousands)
Credit
Agency RMBS
Subtotal (1)
U.S. Treasury Securities
Total
(1) Excludes U.S. Treasury securities.
Among other instruments, we use interest rate swaps to hedge against the risk of rising interest rates. If we were to include as a component of our cost of funds the actual and accrued periodic payments on our interest rate swaps used to hedge our assets, our total average cost of funds would decrease to 4.17% and 4.30% for the years ended December 31, 2025 and 2024, respectively. Excluding the Catch-up Amortization Adjustment, our net interest margin, defined as the average yield on our portfolio of yield-bearing assets less the average cost of funds on our secured borrowings (including actual and accrued periodic payments on interest rate swaps as described above), was 3.18% and 2.73% for the years ended December 31, 2025 and 2024, respectively. These metrics do not include costs associated with any unsecured debt or costs associated with other instruments that we use to hedge interest rate risk, such as TBAs and futures.
Longbridge
Interest expense in the Longbridge segment primarily relates to Other secured borrowings and repurchase agreements. For the years ended December 31, 2025 and 2024, interest expense in the Longbridge segment was $84.7 million and $45.2 million, respectively. The increase in interest expense in the current period was primarily due to a significant increase in our average borrowings on proprietary reverse mortgage loans as well as an increase in interest expense on securities sold short, partially offset by a significant decrease in financing rates for the year ended December 31, 2025.
The table below summarizes the components of interest expense in the Longbridge segment for the years ended December 31, 2025 and 2024.
Year Ended
(In thousands)
December 31, 2025
December 31, 2024
Repos and Total Other Secured Borrowings
Securities Sold Short (1)
Other
Total
(1) Amount includes the related net accretion and amortization of purchase discounts and premiums.
For the year ended December 31, 2025, our average borrowings in the Longbridge segment were $1.3 billion and our average cost of funds was 5.60%. This compares to average borrowings of $555.7 million and an average cost of funds of 7.39% for the year ended December 31, 2024.
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Corporate/Other
Certain items of interest expense are not allocable to either the investment portfolio segment or the Longbridge segment, such as interest expense on our Unsecured borrowings and certain cash collateral held by us. Total interest expense not allocable to either the investment portfolio segment or the Longbridge segment was $23.4 million and $18.3 million for the years ended December 31, 2025 and 2024, respectively. The rise in interest expense during the current period was primarily due to an increase in the amount of unsecured notes outstanding in the current year.
The table below summarizes the components of interest expense not included in either segment for the years ended December 31, 2025 and 2024.
Year Ended
(In thousands)
December 31, 2025
December 31, 2024
Unsecured borrowings
Other
Total
Base Management Fees
Corporate/Other
For the year ended December 31, 2025, the net base management fee, which is based on total equity at the end of each quarter less any applicable rebates our Manager credited us, was $25.4 million as compared to $23.5 million for the year ended December 31, 2024. The increase in the net base management fee period over period was due to a larger capital base at the end of each fiscal quarter of 2025, as compared to 2024. See Note 16 of the notes to our consolidated financial statements for further detail on management fee rebates.
Incentive Fees
Corporate/Other
Each quarter, in addition to the base management fee, our Manager is also entitled to an incentive fee if our performance (as measured by adjusted net income, as defined in the management agreement) over the relevant rolling four quarter calculation period (including any opening loss carryforward) exceeds a defined return hurdle for the period. For the year ended December 31, 2025, we incurred an incentive fee of $4.5 million. No incentive fee was incurred for the year ended December 31, 2024, since for each quarter our income did not exceed the prescribed hurdle amount on a rolling four quarter basis. Because our operating results can vary materially from one period to another, incentive fee expense can be highly variable.
Investment and Transaction Related Expenses
Investment and transaction related expenses consist of servicing fees on our mortgage and consumer loans, origination expenses, as well as various other expenses and fees directly related to our financial assets and certain financial liabilities carried at fair value. For the years ended December 31, 2025 and 2024, investment and transaction related expenses were $80.8 million and $57.1 million, respectively.
Investment Portfolio
For the years ended December 31, 2025 and 2024, Investment and transaction related expenses in our investment portfolio segment were $22.2 million and $15.2 million, respectively. The increase in investment and transaction related expenses was primarily due to an increase in due diligence expenses on newly originated loans we purchased, as well as an increase in servicing expense on our larger average residential and commercial mortgage loan portfolios during the period.
Longbridge
Investment and transaction related expenses in the Longbridge segment primarily consist of servicing expense related to reverse mortgage loans and various loan origination expenses. For the years ended December 31, 2025 and 2024, Investment and transaction related expenses were $52.6 million and $41.9 million, respectively; such increase was primarily due to increases in various loan origination expenses, servicing expenses resulting from our larger originations and holdings of reverse mortgage loans, and debt issuance costs related to other secured borrowings, at fair value.
Corporate/Other
For the year ended December 31, 2025, investment and transaction related expenses not allocable to either the investment portfolio segment or the Longbridge segment were $6.0 million, representing debt issuance costs related to unsecured borrowings, at fair value.
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Other Operating Expenses
Other operating expenses consist of professional fees, compensation and benefit expenses related to our dedicated or partially dedicated personnel, and various other operating expenses necessary to run our business. Other operating expenses exclude management and incentive fees, interest expense, and investment and transaction related expenses. Other operating expenses were $127.8 million for the year ended December 31, 2025 as compared to $108.9 million for the year ended December 31, 2024.
Investment Portfolio
Other operating expenses in our investment portfolio segment were $8.8 million and $5.5 million for the years ended December 31, 2025 and 2024, respectively. The increase in other operating expenses for the year ended December 31, 2025 was due to an increase in compensation and benefits expense.
Longbridge
For the years ended December 31, 2025 and 2024, other operating expenses in the Longbridge segment were $98.8 million and $82.8 million, respectively. These expenses primarily consist of compensation and benefits expense, and consist to a lesser extent of various overhead costs including rent expense, licensing fees, expenses related to office equipment, and amortization of intangible assets. The year-over-year increase was primarily due to an increase in compensation and benefits expenses and professional fees.
Corporate/Other
For the years ended December 31, 2025 and 2024, other operating expenses not allocable to either the investment portfolio segment or the Longbridge segment were $20.3 million and $20.5 million, respectively.
Other Income (Loss)
Other income (loss) consists of net realized and unrealized gains (losses) on securities and residential mortgage, commercial mortgage, consumer, and corporate loans, financial derivatives, and real estate owned, unrealized gains (losses) on other secured borrowings, at fair value and Unsecured borrowings, at fair value, net change from HECM reverse mortgage loans, at fair value, and net change related to HMBS obligations, at fair value. Other, net, another component of Other income (loss), includes rental income and income related to loan originations, as well as income on MSRs and Forward MSR-related investments, unrealized gains (losses) on loan commitments, realized gains (losses) on foreign currency transactions, and unrealized gains (losses) on foreign currency remeasurement.
Investment Portfolio
For the year ended December 31, 2025, other income (loss) was $0.6 million, consisting primarily of net realized and unrealized gains of $92.0 million on our securities and loans and $22.1 million of Other, net, partially offset by net unrealized losses of $(55.8) million on our Other secured borrowings, at fair value, net realized and unrealized losses of $(44.4) million on our financial derivatives, and $(13.4) million on real estate owned. Net realized and unrealized gains of $92.0 million on our securities and loans were primarily on non-QM loans and retained tranches, Agency RMBS, closed-end second lien loans and retained tranches, Agency-eligible loans, NPL/RPL residential loans, and other loans ABS. These gains were partially offset by net realized and unrealized losses on consumer loans, CMBS, and CLOs. Net realized and unrealized losses of $(44.4) million on our financial derivatives were primarily related to net realized and unrealized losses, driven by lower interest rates, on our interest rate swaps, and to a lesser extent, our TBAs. Other, net of $22.1 million consists primarily of net realized and unrealized on our forward MSR-related investments, realized on foreign currency transactions, unrealized on foreign currency remeasurement, various origination and loan income, and rental income. We recognized net unrealized of $(55.8) million on our Other secured borrowings, at fair value for the quarter ended December 31, 2025, related to borrowings on our securitized residential mortgage loans. Change in net unrealized () on these securitized residential mortgage loans for the year ended December 31, 2025, was $51.9 million, which is included in Unrealized () on securities and loans, net.
For the year ended December 31, 2024, other income (loss) was $28.6 million, consisting primarily of net realized and unrealized gains of $33.7 million on our securities and loans, $31.6 million on our financial derivatives, and $8.3 million of Other, net. These gains were partially offset by net unrealized losses of $(40.0) million on our Other secured borrowings, at fair value, and net realized and unrealized losses of $(4.9) million on real estate owned, net. Net realized and unrealized gains of $33.7 million on our securities and loans were primarily on non-Agency RMBS, non-QM loans and retained tranches, and ABS, due primarily to yield spread tightening. These gains were partially offset by net realized and unrealized losses on commercial mortgage loans, residential transition loans, consumer loan, and closed-end second lien mortgage loans, as well as Agency RMBS. Net realized and unrealized gains of $31.6 million on our financial derivatives were primarily related to net realized and unrealized on our interest rate swaps and net short TBA positions driven by higher interest rates during much
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of the year (with the exception of the third quarter, where declining interest rates drove net losses for the period). Other, net of $8.3 million consists primarily of net income and realized and unrealized gains on our Forward MSR-related investments, various origination and loan income, and rental income. We recognized net unrealized losses of $(40.0) million on our Other secured borrowings, at fair value for the year ended December 31, 2024, related to borrowings on our securitized non-QM loans. These securitized non-QM loans had net unrealized gains of $43.1 million, which are included in Unrealized gains (losses) on securities and loans, net.
Longbridge
For the year ended December 31, 2025, other income (loss) from the Longbridge segment was $158.7 million, consisting primarily of gains from Net change from HECM reverse mortgage loans, at fair value of $708.3 million, net gains of $53.7 million on securities and loans, and $30.3 million of Other, net, which were partially offset by Net change related to HMBS obligations, at fair value of $(585.3) million, net losses of $(37.0) million on Other secured borrowings, at fair value, and net losses of $(11.8) million on financial derivatives. Net change from HECM reverse mortgage loans at fair value of $708.3 million primarily consisted of $596.1 million of coupon income on HECM loans, as well as net realized and unrealized gains of $118.5 million on HECM loans primarily driven by profitable new originations and tail fundings, as well as tighter yield spreads. Net change related to HMBS obligations, at fair value of $(585.3) million primarily consisted of $(555.4) million of interest expense on the HMBS obligations and net unrealized losses of $(30.0) million on the HMBS obligations, which partially offset the interest income and net realized and unrealized on HECM loans. Other, net of $30.3 million is primarily related to $20.3 million of origination fees and $8.0 million of servicing fees. Net of $53.7 million on securities and loans were primarily driven by unrealized on proprietary reverse mortgage loans, including related to securitizations of proprietary reverse mortgage loans, and on short positions in U.S. Treasury securities.
For the year ended December 31, 2024, other income (loss) from the Longbridge segment was $156.5 million, consisting primarily of gains from Net change from HECM reverse mortgage loans, at fair value of $637.0 million, net gains of $24.8 million on securities and loans, $20.3 million of Other, net, net gains of $16.0 million on financial derivatives, and net gains of $4.1 million on Other secured borrowings, at fair value. These gains were partially offset by Net change related to HMBS obligations, at fair value of $(545.7) million. Net change from HECM reverse mortgage loans at fair value of $637.0 million primarily consisted of $572.7 million of coupon income on HECM loans, as well as net realized and unrealized gains of $84.1 million on HECM loans primarily driven by profitable new originations and tail fundings, as well as tighter yield spreads. Net change related to HMBS obligations, at fair value of $(545.7) million primarily consisted of $(538.2) million of interest expense on the HMBS obligations and net unrealized losses of $(7.5) million on the HMBS obligations, which partially offset the interest income and net realized and unrealized on HECM loans. Other, net of $20.3 million is primarily related to $10.1 million of origination fees and $8.5 million of servicing fees. Net of $24.8 million on securities and loans were primarily driven by related to the securitizations of proprietary reverse mortgage loans, and net on interest rate hedges.
Corporate/Other
For the year ended December 31, 2025, other income (loss) was $(12.8) million, consisting primarily of an unrealized loss on our unsecured debt driven by credit spread tightening and a realized loss related to the par redemption of our 6.75% unsecured notes that we had carried at a slight discount to par. For the year ended December 31, 2024, other income (loss) was $(15.9) million, consisting primarily of net losses on our Unsecured borrowings, at fair value and on the fixed receiver interest rate swaps that we use to hedge the fixed payments on both our unsecured long-term debt and our preferred equity.
Income Tax Expense (Benefit)
Corporate/Other
Income tax expense (benefit) was $3.8 million for the year ended December 31, 2025, as compared to $0.6 million for the year ended December 31, 2024.
Earnings (Losses) from Investments in Unconsolidated Entities
Investment Portfolio
We have elected the fair value option for our equity investments in unconsolidated entities. Earnings (losses) from investments in unconsolidated entities was $56.7 million for the year ended December 31, 2025, as compared to $32.4 million for the year ended December 31, 2024. For the year ended December 31, 2025, Earnings (losses) from investments in unconsolidated entities of $56.7 million primarily consisted of net realized and unrealized gains on investments in loan originators, investments in unconsolidated entities related to residential mortgage loan securitizations, and investments in entities holding commercial mortgage loans and REO, in which we co-invest with other Ellington affiliates.
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For the year ended December 31, 2024, Earnings (losses) from investments in unconsolidated entities of $32.4 million primarily consisted of net realized and unrealized gains on investments in loan originators and on investments in entities holding commercial mortgage loans and REO, in which we co-invest with other Ellington affiliates, partially offset by net unrealized losses on investments in unconsolidated entities related vehicles related to non-QM loan securitizations.
Adjusted Distributable Earnings
We calculate Adjusted Distributable Earnings as U.S. GAAP net income (loss) as adjusted for: (i) realized and unrealized gain (loss) on securities and loans, REO, mortgage servicing rights, financial derivatives (excluding periodic settlements on interest rate swaps), any borrowings carried at fair value, and foreign currency transactions; (ii) incentive fee to affiliate; (iii) Catch-up Amortization Adjustment (as defined below); (iv) non-cash equity compensation expense; (v) provision for income taxes; (vi) certain non-capitalized transaction costs; and (vii) other income or loss items that are of a non-recurring nature. For certain investments in unconsolidated entities, we include the relevant components of net operating income in Adjusted Distributable Earnings. The Catch-up Amortization Adjustment is a quarterly adjustment to premium amortization or discount accretion triggered by changes in actual and projected prepayments on our Agency RMBS (accompanied by a corresponding offsetting adjustment to realized and unrealized gains and losses). The adjustment is calculated as of the beginning of each quarter based on our then-current assumptions about cash flows and prepayments, and can vary significantly from quarter to quarter. Non-capitalized transaction costs include expenses, generally professional fees, incurred in connection with the acquisition of an investment or issuance of long-term debt. We also include in Adjusted Distributable Earnings, for all loans that we originate through Longbridge, any realized and unrealized () on such loans up to the point of loan sale or securitization, net of sale or securitization costs.
Adjusted Distributable Earnings is a supplemental non-GAAP financial measure. We believe that the presentation of Adjusted Distributable Earnings provides information useful to investors, because: (i) we believe that it is a useful indicator of both current and projected long-term financial performance, in that it excludes the impact of certain current-period earnings components that we believe are less useful in forecasting long-term performance and dividend-paying ability; (ii) we use it to evaluate the effective net yield provided by our investment portfolio, after the effects of financial leverage and by Longbridge, to reflect the earnings from its reverse mortgage origination and servicing operations; and (iii) we believe that presenting Adjusted Distributable Earnings assists investors in measuring and evaluating our operating performance, and comparing our operating performance to that of our residential mortgage REIT and mortgage originator peers. Please note, however, that: (I) our calculation of Adjusted Distributable Earnings may differ from the calculation of similarly titled non-GAAP financial measures by our peers, with the result that these non-GAAP financial measures might not be directly comparable; and (II) Adjusted Distributable Earnings excludes certain items that may impact the amount of cash that is actually available for distribution.
In addition, because Adjusted Distributable Earnings is an incomplete measure of our financial results and differs from net income (loss) computed in accordance with U.S. GAAP, it should be considered supplementary to, and not as a substitute for, net income (loss) computed in accordance with U.S. GAAP.
Furthermore, Adjusted Distributable Earnings is different from REIT taxable income. As a result, the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our stockholders, in order to maintain our qualification as a REIT, is not based on whether we distributed 90% of our Adjusted Distributable Earnings.
In setting our dividends, our Board of Directors considers our earnings, liquidity, financial condition, REIT distribution requirements, and financial covenants, along with other factors that the Board of Directors may deem relevant from time to time.
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The following tables reconcile, for the years ended December 31, 2025 and 2024 our Adjusted Distributable Earnings by segment to the line on our Consolidated Statement of Operations entitled Net Income (Loss), which we believe is the most directly comparable U.S. GAAP measure:
Year Ended December 31, 2025
Year Ended December 31, 2024 (1)
(In thousands, except per share amounts)
Investment Portfolio
Longbridge
Corporate/Other
Total
Investment Portfolio
Longbridge
Corporate/Other
Total
Net Income (Loss)
Income tax expense (benefit)
Net income (loss) before income tax expense (benefit)
Adjustments:
Realized (gains) losses, net (2)
Unrealized (gains) losses, net (3)
Unrealized (gains) losses on MSRs, net of hedge (gains) losses (4)
Incentive fee to affiliate
Negative (positive) component of interest income represented by Catch-up Amortization Adjustment
Adjustment related to consolidated proprietary reverse mortgage loan securitizations (5)
Non-capitalized transaction costs and other expense adjustments (6)
(Earnings) losses from investments in unconsolidated entities
Adjusted distributable earnings from investments in unconsolidated entities (7)
Total Adjusted Distributable Earnings
Dividends on preferred stock
Adjusted Distributable Earnings attributable to non-controlling interests
Adjusted Distributable Earnings Attributable to Common Stockholders
Adjusted Distributable Earnings Attributable to Common Stockholders, per share
(1) Conformed to current period methodology.
(2) Includes realized (gains) losses on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps and foreign currency transactions which are components of Other Income (Loss) on the Consolidated Statement of Operations.
(3) Includes unrealized (gains) losses on securities and loans, REO, financial derivatives (excluding periodic settlements on interest rate swaps), borrowings carried at fair value, and foreign currency transactions which are components of Other Income (Loss) on the Consolidated Statement of Operations.
(4) Represents net change in fair value of HMBS MSR Equivalent and mortgage servicing rights related to proprietary mortgage loans attributable to changes in market conditions and model assumptions. This adjustment also includes net (gains) losses on certain hedging instruments (including interest rate swaps, futures, and short U.S. Treasury securities), which are components of realized and/or unrealized gains (losses) on financial derivatives, net, realized and/or unrealized gains (losses) on securities and loans, net, interest income, and interest expense on the Consolidated Statement of Operations.
(5) Represents the effect of replacing mortgage loan interest income (net of securitization debt expense) with interest income of the retained tranches.
(6) For the year ended December 31, 2025, includes $7.6 million of non-capitalized transaction costs, $6.0 million of debt issuances costs related to unsecured borrowings, at fair value, $4.4 million of non-cash equity compensation and depreciation expense, $1.9 million of debt issuance costs related to Other secured borrowings, at fair value, and $1.4 million of various other expenses. For the year ended December 31, 2024, includes $7.2 million of non-capitalized transaction costs, $2.1 million of non-cash equity compensation and depreciation expense, $2.0 million of one-time compensation expense related to the cancellation of employee stock options, $0.5 million of merger and other business transition related-expenses, and $1.2 million of various other expenses.
(7) Includes our proportionate share of net interest income, net loan origination income (expense), and operating expenses for certain investments in unconsolidated entities including certain of our non-consolidated equity investments in loan originators that have been making (or are expected to make)
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distributions to us. The additional adjusted distributable earnings related to our equity investments in certain loan originators was $14.4 million for the year ended December 31, 2024.
Liquidity and Capital Resources
Liquidity refers to our ability to generate and obtain adequate amounts of cash to meet our requirements, including repaying our borrowings, funding and maintaining positions in our assets, making distributions in the form of dividends, and other general business needs. Our short-term (the 12 months following period end) and long-term (beyond 12 months from period end) liquidity requirements include acquisition costs for assets we acquire, payment of our base management fee and incentive fee, compliance with margin requirements under our repos, reverse repos, and financial derivative contracts, repayment of repo borrowings and other secured borrowings to the extent we are unable or unwilling to extend such borrowings, payment of our general operating expenses, payment of interest payments on our unsecured borrowings, and payment of our dividends. Our capital resources primarily include cash on hand, cash flow from our investments (including principal and interest payments received on our investments and proceeds from the sale of investments), borrowings under repos and other secured borrowings, and proceeds from equity and debt offerings. We expect that these sources of funds will be sufficient to meet our short-term and long-term liquidity needs.
We held cash and cash equivalents of approximately $201.9 million and $192.4 million as of December 31, 2025 and 2024, respectively.
The following summarizes our borrowings under repos by remaining maturity:
(In thousands)
December 31, 2025
December 31, 2024
Remaining Days to Maturity
Outstanding Borrowings
% of Total
Outstanding Borrowings
% of Total
30 Days or Less
31 - 60 Days
61 - 90 Days
91 - 120 Days
121 - 150 Days
151 - 180 Days
181 - 364 Days
> 364 Days
Repos involving underlying investments that were sold prior to period end for settlement following period end, are shown using their contractual maturity dates even though such repos may be expected to be terminated early upon settlement of the sale of the underlying investment.
The amounts borrowed under our repo agreements are generally subject to the application of "haircuts." A haircut is the percentage discount that a repo lender applies to the market value of an asset serving as collateral for a repo borrowing, for the purpose of determining whether such repo borrowing is adequately collateralized. As of December 31, 2025, the weighted average contractual haircut applicable to the assets that serve as collateral for our outstanding repo borrowings was 20.7% with respect to credit portfolio assets, 15.4% with respect to reverse mortgage loans, 5.8% with respect to Agency RMBS assets, and 19.3% overall. As of December 31, 2024, the weighted average contractual haircuts were 23.8% with respect to credit portfolio assets, 17.8% with respect to reverse mortgage loans, 5.9% with respect to Agency RMBS assets, and 20.8% overall.
We expect to continue to borrow funds in the form of repos as well as other similar types of financings. The terms of our repo borrowings are predominantly governed by master repurchase agreements, which generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association as to repayment and margin requirements. In addition, each lender may require that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions include the addition of or changes to provisions relating to margin calls, net asset value requirements, cross default provisions, certain key person events, changes in corporate structure, and requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction. These provisions may differ for each of our repo lenders.
As of December 31, 2025 and 2024, we had $2.7 billion and $2.6 billion, respectively, of borrowings outstanding under our repos. As of December 31, 2025, the remaining terms on our repos ranged from 2 days to 636 days, with a weighted average remaining term of 268 days. Our repo borrowings were with a total of 21 counterparties as of December 31, 2025. As of December 31, 2025, our repos had interest rates ranging from 2.79% to 7.05%, with a weighted average borrowing rate of
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5.18%. As of December 31, 2024, the remaining terms on our repos ranged from 2 days to 563 days, with a weighted average remaining term of 169 days. Our repo borrowings were with a total of 24 counterparties as of December 31, 2024. As of December 31, 2024, our repos had interest rates ranging from 3.65% to 7.96%, with a weighted average borrowing rate of 6.12%. Investments transferred as collateral under repos had an aggregate fair value of $3.3 billion as of both December 31, 2025 and 2024. It is expected that amounts due upon maturity of our repos will be funded primarily through the roll/re-initiation of repos and, if we are unable or unwilling to roll/re-initiate our repos, through free cash and proceeds from the sale or securitization of assets being financed.
The following table details total outstanding borrowings, average outstanding borrowings, and the maximum outstanding borrowings at any month end for each quarter under repos for the past twelve quarters:
Quarter Ended
Borrowings Outstanding at
Quarter End
Average
Borrowings Outstanding
Maximum Borrowings Outstanding at Any Month End
(In thousands)
December 31, 2025
September 30, 2025
June 30, 2025
March 31, 2025
December 31, 2024
September 30, 2024
June 30, 2024
March 31, 2024
December 31, 2023
September 30, 2023
June 30, 2023
March 31, 2023 (1)
(1) During this quarter, our borrowings decreased as the size of our investment portfolio decreased, driven primarily by our participation in a non-QM loan securitization in February 2023.
In addition to our borrowings under repos, we have entered into various other types of transactions to finance certain of our investments, including residential and commercial mortgage loans and REO, consumer loans and ABS backed by consumer loans, reverse mortgage loans, and Reverse MSRs; such transactions are accounted for as secured borrowings. As of December 31, 2025 and 2024, we had outstanding borrowings related to such transactions in the amount of $3.2 billion and $2.2 billion, respectively, which is reflected under the captions "Other secured borrowings" and "Other secured borrowings, at fair value" on the Consolidated Balance Sheet. As of December 31, 2025 and 2024, the fair value of assets collateralizing our Total other secured borrowings was $3.5 billion and $2.4 billion, respectively. Additionally, as of December 31, 2025, as an HMBS issuer, we had HMBS-related obligations of $10.4 billion collateralized by $10.5 billion of HMBS assets and as of December 31, 2024, we had HMBS-related obligations of $9.2 billion collateralized by $9.2 billion of HMBS assets; HMBS assets include HECM loans as well as REO and claims and other receivables. See Note 14 in the notes to our consolidated financial statements for further information on our other secured borrowings and HMBS-related obligations.
As of December 31, 2025 and 2024, we had $662.8 million and $297.7 million, respectively, of outstanding unsecured borrowings. As of December 31, 2025, our outstanding unsecured borrowings were comprised of $400.0 million of 7.375% Senior Notes due September 2030, $210.0 million of 5.875% Senior Notes due April 2027, $37.8 million of 6.00% Senior Notes due August 2026, and $15.0 million of unregistered junior subordinated unsecured debt securities, the "Trust Preferred Debt." The Trust Preferred Debt includes $10.0 million which accrues and requires the payment of interest quarterly at three-month term SOFR plus 3.26% and which matures on October 7, 2033, and $5.0 million which accrues and requires the payment of interest quarterly at three-month term SOFR plus 2.51% and which matures on July 7, 2035. As of December 31, 2024, our outstanding unsecured borrowings were comprised of $210.0 million of 5.875% Senior Notes due April 2027, $37.8 million of 6.00% Senior Notes due August 2026, and $15.0 million of Trust Preferred Debt. See Note 14 in the notes to our consolidated financial statements for further detail on our unsecured borrowings.
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As of December 31, 2025, we had an aggregate amount at risk under our repos with 21 counterparties of approximately $616.5 million, and as of December 31, 2024, we had an aggregate amount at risk under our repos with 23 counterparties of approximately $687.6 million. Amounts at risk represent the excess, if any, for each counterparty of the fair value of collateral held by such counterparty over the amounts outstanding under repos. If the amounts outstanding under repos with a particular counterparty are greater than the collateral held by the counterparty, there is no amount at risk for the particular counterparty. Amount at risk as of December 31, 2025 and 2024, does not include approximately $0.4 million and $3.2 million, respectively, of net accrued interest receivable (payable), which is defined as accrued interest on securities held as collateral less interest payable on cash borrowed.
Our derivatives are predominantly subject to bilateral master trade agreements or clearing in accordance with the Dodd-Frank Act. We may be required to deliver or receive cash or securities as collateral upon entering into derivative transactions. Changes in the relative value of derivative transactions may require us or the counterparty to post or receive additional collateral. Entering into derivative contracts involves market risk in excess of amounts recorded on our balance sheet. In the case of cleared derivatives, the clearinghouse becomes our counterparty and the future commission merchant acts as an intermediary between us and the clearinghouse with respect to all facets of the related transaction, including the posting and receipt of required collateral.
As of December 31, 2025, we had an aggregate amount at risk under our derivative contracts, excluding TBAs, with seven counterparties of approximately $21.8 million. We also had $47.6 million of initial margin for cleared over-the-counter ("OTC") derivatives posted to central clearinghouses as of that date. As of December 31, 2024, we had an aggregate amount at risk under our derivatives contracts, excluding TBAs, with seven counterparties of approximately $9.4 million. We also had $57.6 million of initial margin for cleared OTC derivatives posted to central clearinghouses as of that date. Amounts at risk under our derivatives contracts represent the excess, if any, for each counterparty of the fair value of our derivative contracts plus our collateral held directly by the counterparty less the counterparty's collateral held by us. If a particular counterparty's collateral held by us is greater than the aggregate fair value of the financial derivatives plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.
We purchase and sell TBAs and Agency pass-through certificates on a when-issued or delayed delivery basis. The delayed delivery for these securities means that these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, and therefore are more vulnerable, especially in the absence of margining arrangements with respect to these transactions, to increasing amounts at risk with the applicable counterparties. As of December 31, 2025, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with four counterparties of approximately $1.4 million. As of December 31, 2024, in connection with our forward settling TBA and Agency pass-through certificates, we had an aggregate amount at risk with five counterparties of approximately $1.3 million. Amounts at risk in connection with our forward settling TBA and Agency pass-through certificates represent the excess, if any, for each counterparty of the net fair value of the forward settling transactions plus our collateral held directly by the counterparty less the counterparty's collateral held by us. If a particular counterparty's collateral held by us is greater than the aggregate fair value of the forward settling transactions plus our collateral held directly by the counterparty, there is no amount at risk for the particular counterparty.
We have an "at-the-market" offering program for shares of our common stock (the "Common ATM Program") in connection with which we have entered into equity distribution agreements with sales agents. Under the current Common ATM Program we are authorized to offer and sell up to $500.0 million of common stock from time to time. During the year ended December 31, 2025, we issued 22,400,438 shares of common stock under the Common ATM Program which provided $301.8 million of net proceeds after $2.1 million of agent commissions and $0.4 million of offering costs. During the year ended December 31, 2024, we issued 7,715,891 shares of common stock under the Common ATM Program which provided $99.6 million of net proceeds after $0.8 million of agent commissions and $0.6 million of offering costs. Under the current Common ATM Program we had a remaining authorization to issue $495.3 million of common shares as of December 31, 2025.
Subsequent to December 31, 2025, we issued 2,735,163 shares of common stock under the Common ATM Program which provided $37.4 million of net proceeds after $0.2 million of agent commissions and $36 thousand of offering costs. Additionally, on January 28, 2026, we completed a follow-on offering of 8,775,000 shares of our common stock. The issuance and sale of such shares of common stock generated net proceeds, after underwriters' discounts and commissions and offering costs, of $117.2 million.
On February 27, 2026, the Company redeemed all 4,600,000 outstanding shares of Series A Preferred Stock at of price of $115.8 million, based on the liquidation preference of $25.00 per share, plus accrued and unpaid dividends. See Note 27 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
We have commenced an "at-the-market" offering for our Series A Preferred Stock and Series B Preferred Stock (the
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"Preferred ATM Program"), in connection with which we have entered into equity distribution agreements with third party sales agents under which we are authorized to offer and sell up to $100.0 million of 6.750% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.001 par value per share ("Series A Preferred Stock") and/or 6.250% Series B Fixed-Rate Reset Cumulative Redeemable Preferred Stock, $0.001 par value per share ("Series B Preferred Stock") from time to time. As of December 31, 2025, we had remaining authorization under the Preferred ATM Program to issue $99.5 million of preferred stock. We did not issue any preferred stock under the Preferred ATM Program during the years ended December 31, 2025, 2024, and 2023.
In accordance with the terms of the Arlington Merger Agreement, each of the 957,133 outstanding shares of Arlington’s 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share, was automatically converted into the right to receive one newly issued share of our 8.250% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.001 par value per share ("Series E Preferred Stock"). The Series E Preferred Stock became redeemable by us on March 30, 2024 and was fully redeemed on December 13, 2024.
Our Board of Directors approved the adoption of a share repurchase program under which we are authorized to repurchase up to $50 million of common stock (the "Common Share Repurchase Program"). The Common Share Repurchase Program is open-ended in duration and allows us to make repurchases from time to time on the open market or in negotiated transactions, including under 10b5-1 plans. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations. In addition to making discretionary repurchases, we from time to time use 10b5-1 plans to increase the number of trading days available to implement these repurchases. During the year ended December 31, 2024, we repurchased 62,300 shares of common stock at an average price per share of $11.00 and a total cost of $0.7 million. During the year ended December 31, 2023, we repurchased 1,084,336 shares of common stock at an average price per share of $11.39 and a total cost of $12.4 million. We did not repurchase any common shares during the year ended December 31, 2025. As of December 31, 2025, we have authorization to repurchase an additional $45.1 million of common stock under the Common Share Repurchase Program.
On February 21, 2022, our Board of Directors approved the adoption of a share repurchase program under which we are authorized to repurchase up to $30.0 million of Series A Preferred Stock and Series B Preferred Stock (the "Preferred Share Repurchase Program"). The Preferred Share Repurchase Program, which is open-ended in duration, allows us to make repurchases from time to time on the open market or in negotiated transactions, including under 10b5-1 plans. Repurchases are at our discretion, subject to applicable law, share availability, price and our financial performance, among other considerations. We have not yet repurchased any shares of preferred stock under the Preferred Share Repurchase Program.
We may declare dividends based on, among other things, our earnings, our financial condition, the REIT qualification requirements of the Internal Revenue Code of 1986, as amended, our working capital needs and new opportunities. The declaration of dividends to our stockholders and the amount of such dividends are at the discretion of our Board of Directors.
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The following table sets forth the dividend distributions authorized by the Board of Directors payable to common stockholders and holders of Convertible Non-controlling Interest Units (as defined in Note 2 of the consolidated financial statements) for the years ended December 31, 2025 and 2024:
Declaration Date
Dividend Per Share
Dividend Amount
Record Date
Payment Date
(In thousands)
December 4, 2025
December 31, 2025
January 30, 2026
November 10, 2025
November 28, 2025
December 31, 2025
October 7, 2025
October 31, 2025
November 28, 2025
September 8, 2025
September 30, 2025
October 31, 2025
August 7, 2025
August 29, 2025
September 30, 2025
July 8, 2025
July 31, 2025
August 29, 2025
June 9, 2025
June 30, 2025
July 31, 2025
May 7, 2025
May 30, 2025
June 30, 2025
April 3, 2025
April 30, 2025
May 27, 2025
March 7, 2025
March 31, 2025
April 25, 2025
February 10, 2025
February 28, 2025
March 25, 2025
January 8, 2025
January 31, 2025
February 25, 2025
December 6, 2024
December 31, 2024
January 27, 2025
November 7, 2024
November 29, 2024
December 26, 2024
October 7, 2024
October 31, 2024
November 25, 2024
September 9, 2024
September 30, 2024
October 25, 2024
August 7, 2024
August 30, 2024
September 25, 2024
July 8, 2024
July 31, 2024
August 26, 2024
June 10, 2024
June 28, 2024
July 25, 2024
May 7, 2024
May 31, 2024
June 25, 2024
April 8, 2024
April 30, 2024
May 28, 2024
March 7, 2024
March 29, 2024
April 25, 2024
February 7, 2024
February 29, 2024
March 25, 2024
January 8, 2024
January 31, 2024
February 26, 2024
On January 8, 2026, the Board of Directors approved a dividend in the amount of $0.13 per share of common stock payable on February 27, 2026 to stockholders of record as of January 30, 2026.
On February 9, 2026, the Board of Directors approved a dividend in the amount of $0.13 per share of common stock payable on March 31, 2026 to stockholders of record as of February 27, 2026.
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The following table sets forth the dividend distributions authorized by the Board of Directors during the years ended December 31, 2025 and 2024 to holders of our preferred stock:
Declaration Date
Dividend Per Share
Dividend Amount
Record Date
Payment Date
(In thousands)
Series A Preferred Stock:
December 4, 2025
December 31, 2025
January 30, 2026
September 8, 2025
September 30, 2025
October 30, 2025
June 9, 2025
June 30, 2025
July 30, 2025
March 7, 2025
March 31, 2025
April 30, 2025
December 6, 2024
December 31, 2024
January 30, 2025
September 9, 2024
September 30, 2024
October 30, 2024
June 10, 2024
June 28, 2024
July 30, 2024
March 7, 2024
March 29, 2024
April 30, 2024
Series B Preferred Stock:
December 4, 2025
December 31, 2025
January 30, 2026
September 8, 2025
September 30, 2025
October 30, 2025
June 9, 2025
June 30, 2025
July 30, 2025
March 7, 2025
March 31, 2025
April 30, 2025
December 6, 2024
December 31, 2024
January 30, 2025
September 9, 2024
September 30, 2024
October 30, 2024
June 10, 2024
June 28, 2024
July 30, 2024
March 7, 2024
March 29, 2024
April 30, 2024
Series C Preferred Stock:
December 4, 2025
December 31, 2025
January 30, 2026
September 8, 2025
September 30, 2025
October 30, 2025
June 9, 2025
June 30, 2025
July 30, 2025
March 7, 2025
March 31, 2025
April 30, 2025
December 6, 2024
December 31, 2024
January 30, 2025
September 9, 2024
September 30, 2024
October 30, 2024
June 10, 2024
June 28, 2024
July 30, 2024
March 7, 2024
March 29, 2024
April 30, 2024
Series D Preferred Stock:
December 4, 2025
December 20, 2025
December 30, 2025
September 8, 2025
September 20, 2025
September 30, 2025
June 9, 2025
June 20, 2025
June 30, 2025
March 7, 2025
March 20, 2025
March 30, 2025
December 6, 2024
December 20, 2024
December 30, 2024
September 9, 2024
September 20, 2024
September 30, 2024
June 10, 2024
June 20, 2024
July 1, 2024
March 7, 2024
March 20, 2024
April 1, 2024
Series E Preferred Stock:
December 31, 2024 (1)
December 13, 2024
September 9, 2024
September 20, 2024
September 30, 2024
June 10, 2024
June 20, 2024
July 1, 2024
March 7, 2024
March 20, 2024
April 1, 2024
(1) Declared and paid through redemption date of December 13, 2024.
At those times when cash flows from our operating activities are insufficient to fund our dividend payments, we fund such dividend payments through cash flows from our investing and/or financing activities, and in some cases from additional cash on hand. The following paragraphs summarize our cash flows for the years ended December 31, 2025 and 2024.
For the year ended December 31, 2025, our operating activities used net cash in the amount of $925.5 million and our
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investing activities used net cash in the amount of $4.07 billion. Our repo activity used to finance many of our investments (including repayments of amounts borrowed under our repos) provided net cash of $3.47 billion. We received $2.76 billion in proceeds from the issuance of Total other secured borrowings, and we used $2.28 billion for principal payments on our Total other secured borrowings. Thus our operating and investing activities, when combined with our repo financings and Other secured borrowings (net of repayments), used net cash of $1.04 billion during the year ended December 31, 2025. We received proceeds from the issuance of HMBS-related obligations of $1.54 billion and used $858.5 million for principal payments on HMBS-related obligations. We used $34.9 million to repay the 6.75% senior notes. We received proceeds from the issuance of common stock, net of underwriters' discounts, commissions, and offering costs paid of $301.7 million, $394.0 million of proceeds from the issuance of the Company's 7.375% Senior Notes net of debt issuance costs, and contributions from non-controlling interests of $35.4 million. We used $183.6 million to pay dividends and $25.5 million for distributions to non-controlling interests (our joint venture partners). As a result there was an increase in our cash holdings of $129.2 million, from $208.9 million as of December 31, 2024 to $338.2 million as of December 31, 2025.
For the year ended December 31, 2024, our operating activities used net cash in the amount of $430.5 million and our investing activities used net cash in the amount of $728.3 million. Our repo activity used to finance many of our investments (including repayments of amounts borrowed under our repos) provided net cash of $669.8 million. We received $2.04 billion in proceeds from the issuance of Total other secured borrowings, and we used $1.92 billion for principal payments on our Total other secured borrowings. Thus our operating and investing activities, when combined with our repo financings and Other secured borrowings (net of repayments), used net cash of $374.5 million during the year ended December 31, 2024. We received proceeds from HMBS-related obligations of $1.45 billion and used $1.00 billion for principal payments on HMBS-related obligations. We received proceeds from the issuance of common stock, net of underwriters' discounts, commissions, and offering costs paid, of $99.3 million and contributions from non-controlling interests of $12.9 million. We used $163.5 million to pay dividends, $10.8 million for distributions to non-controlling interests (our joint venture partners), $23.9 million to redeem preferred stock, $3.6 million related to the cancellation of employee stock options, $0.7 million to repurchase common stock, and $0.7 million to purchase non-controlling interests. As a result there was an decrease in our cash holdings of $21.6 million, from $230.5 million as of December 31, 2023 to $208.9 million as of December 31, 2024.
Based on our current portfolio, amount of free cash on hand, debt-to-equity ratio, and current and anticipated availability of credit, we believe that our capital resources will be sufficient to enable us to meet anticipated short-term and long-term liquidity requirements. However, the unexpected inability to finance our Agency RMBS portfolio would create a serious short-term strain on our liquidity and would require us to liquidate much of that portfolio, which in turn would require us to restructure our portfolio to maintain our exclusion from registration as an investment company under the Investment Company Act and to maintain our qualification as a REIT. Steep declines in the values of our credit assets financed using repos, or in the values of our derivative contracts, would result in margin calls that would significantly reduce our free cash position. Furthermore, a substantial increase in prepayment rates on our assets financed by repos could cause a temporary liquidity shortfall, because we are generally required to post margin on such assets in proportion to the amount of the announced principal paydowns before the actual receipt of the cash from such principal paydowns. If our cash resources are at any time to our liquidity requirements, we may have to sell assets or issue additional debt or equity securities.
Although we may from time to time enter into financing arrangements that limit our leverage, our investment guidelines do not limit the amount of leverage that we may use, and we believe that the appropriate leverage for the particular assets we hold depends on the credit quality and risk of those assets, as well as the general availability and terms of stable and reliable financing for those assets.
Contractual Obligations and Commitments
We are a party to a management agreement with our Manager. Pursuant to that agreement, our Manager is entitled to receive a base management fee, an incentive fee, reimbursement of certain expenses and, in certain circumstances, a termination fee. Such fees and expenses do not have fixed and determinable payments. For a description of the management agreement provisions, see Note 16 to our consolidated financial statements.
We have numerous contractual obligations and commitments related to our outstanding borrowings (see Note 14 of the notes to our consolidated financial statements) and related to our financial derivatives (see Note 10 of the notes to our consolidated financial statements).
See Note 24 of the notes to our consolidated financial statements for further detail on our other contractual obligations and commitments.
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Off-Balance Sheet Arrangements
As of December 31, 2025, we did not have any material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities, nor do we have any commitment to provide funding to any such entities, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or resources that would be material to an investor in our securities. As such, we are not materially exposed to any market, credit, liquidity, or financing risk that could arise if we had engaged in such relationships.
Longbridge has a fiduciary responsibility related to escrow balances held in trust for borrowers' draws and other custodial funds due to servicing customers; as of December 31, 2025 the amount held in such accounts was $88.6 million. These funds, which do not represent assets or liabilities of ours, are maintained in segregated accounts at Longbridge, and accordingly, are not reflected on the Consolidated Balance Sheet.
At December 31, 2025, we have not entered into any repurchase agreements for which delivery of the borrowed funds is not scheduled until after period end.
Inflation
Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors generally influence our performance more than does inflation, although inflation rates often have a meaningful influence over the direction of interest rates, including influencing the Federal Reserve's monetary policy. In any event, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.
In addition, elevated, long-term inflation could adversely impact the performance of our investment portfolio, or the prices of our investments, or both. For example, if higher inflation is not matched by an increase in wages, inflation could cause the real income of the borrowers on our residential and consumer loans to decline. In addition, in the case of borrowers on our commercial mortgage loans, net cash flow could decline if rents and/or expense reimbursements do not increase in kind with higher inflation.
