Ready Capital Corp - Quarter Report: 2016 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016
Commission File Number: 001-35808

ZAIS FINANCIAL CORP.

(Exact Name of Registrant as Specified in its Charter)

Maryland	90-0729143
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

Two Bridge Avenue, Suite 322, Red Bank, New Jersey 07701-1106

(Address of Principal Executive Offices, Including Zip Code)

(732) 978-7518

(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting

company)

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

The Company has 7,970,886 shares of common stock, par value $0.0001 per share, outstanding as of May 9, 2016.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 1A.	Forward-Looking Statements	35

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	56

Item 4.	Controls and Procedures	59

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	60

Item 1A.	Risk Factors	60

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	60

SIGNATURES		62

EXHIBIT 31.1 CERTIFICATIONS

EXHIBIT 31.2 CERTIFICATIONS

EXHIBIT 32.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

EXHIBIT 32.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 10 U.S.C. SECTION 1350

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZAIS Financial Corp. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)

	March 31, 2016			December 31, 2015
	(Expressed in United States Dollars, except share data)
Assets
Cash and cash equivalents	$	66,604,813		$	20,793,716
Restricted cash		4,160,074			4,371,725
Mortgage loans held for investment, at fair value – $32,114,039 and $394,942,512 pledged as collateral, respectively		32,114,043			397,678,140
Mortgage loans held for sale previously held for investment, at fair value – $368,071,942 pledged as collateral		368,956,195			—
Mortgage loans held for investment, at cost		1,879,254			1,886,642
Mortgage loans held for sale, at fair value – $110,859,815 and $115,942,230 pledged as collateral, respectively		110,859,815			115,942,230
Real estate securities, at fair value – $78,795,777 and $95,627,850 pledged as collateral, respectively		87,120,006			109,339,281
Other Investment Securities, at fair value – $2,033,403 and $1,989,174 pledged as collateral, respectively		12,878,022			12,804,196
Loans eligible for repurchase from Ginnie Mae		37,480,440			34,745,103
Mortgage servicing rights, at fair value		44,852,686			48,209,016
Derivative assets, at fair value		4,040,132			2,376,187
Other assets		12,858,366			7,928,878
Goodwill		14,183,537			14,183,537
Intangible assets		4,683,185			4,880,270
Total assets	$	802,670,568		$	775,138,921
Liabilities
Warehouse lines of credit	$	101,478,055		$	100,768,428
Treasury security repurchase agreement		39,574,000			—
Loan repurchase facilities		297,392,137			296,789,330
Securities repurchase agreements		60,800,779			73,300,159
Exchangeable Senior Notes		56,784,242			56,509,046
Contingent consideration		11,483,100			11,285,100
Derivative liabilities, at fair value		3,735,023			1,831,967
Dividends and distributions payable		3,559,120			3,559,120
Accounts payable and other liabilities		19,540,931			18,572,613
Liability for loans eligible for repurchase from Ginnie Mae		37,480,440			34,745,103
Total liabilities		631,827,827			597,360,866

Commitments and contingencies (Note 21)

Equity
12.5% Series A cumulative non-voting preferred stock, $0.0001 par value; 50,000,000 shares authorized; zero shares issued and outstanding		—			—
Common stock, $0.0001 par value; 500,000,000 shares authorized; 7,970,886 shares issued and outstanding		798			798
Additional paid-in capital		164,207,617			164,207,617
Accumulated deficit		(11,211,280	)		(4,984,178	)
Total ZAIS Financial Corp. stockholders’ equity		152,997,135			159,224,237
Non-controlling interests		17,845,606			18,553,818
Total equity		170,842,741			177,778,055
Total liabilities and equity	$	802,670,568		$	775,138,921

The accompanying notes are an integral part of these consolidated financial statements.

ZAIS Financial Corp. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended
	March 31, 2016			March 31, 2015
	(Expressed in United States Dollars, except share data)
Interest income
Mortgage loans held for investment	$	294,519		$	6,625,989
Mortgage loans held for sale previously held for investment		6,081,850			—
Mortgage loans held for sale		773,963			608,232
Real estate securities		1,343,237			2,420,633
Other investment securities		211,347			32,543
Total interest income		8,704,916			9,687,397
Interest expense
Warehouse lines of credit		551,820			553,359
Treasury securities repurchase agreement		1,275			—
Loan repurchase facilities		2,459,274			2,352,936
Securities repurchase agreements		321,972			402,509
Exchangeable Senior Notes		1,462,936			1,436,673
Total interest expense		4,797,277			4,745,477
Net interest income		3,907,639			4,941,920

Non-interest income
Mortgage banking activities, net		11,652,914			11,152,389
Loan servicing fee income, net of direct costs		2,053,796			1,637,099
Change in fair value of mortgage servicing rights		(8,054,306	)		(3,424,914	)
Other income		12,460			11,856
Total non-interest income		5,664,864			9,376,430

Other (losses)/gains
Change in unrealized gain or loss on mortgage loans held for investment and sale		2,517,993			(1,199,755	)
Change in unrealized gain or loss on real estate securities		(1,793,101	)		(177,771	)
Change in unrealized gain or loss on Other Investment Securities		24,622			136,320
Change in unrealized gain or loss on real estate owned		(66,766	)		101,780
Change in unrealized gain or loss on treasury securities		5,941			—
Realized gain on mortgage loans held for investment and sale		536,344			144,111
Realized loss on real estate securities		(724,607	)		—
Realized gain on real estate owned		2,229			20,677
Loss on derivative instruments related to investment portfolio		(676,268	)		(907,090	)
Total other (losses)/gains		(173,613	)		(1,881,728	)

Expenses
Advisory fee - related party		767,478			710,800
Salaries, commissions and benefits		7,966,092			7,399,258
Operating expenses		3,040,884			2,919,648
Other expenses		2,603,865			1,135,199
Total expenses		14,378,319			12,164,905

Net (loss)/income before income taxes		(4,979,429	)		271,717

Income tax benefit		(1,603,235	)		(145,529	)
Net (loss)/income		(3,376,194	)		417,246

Net (loss)/income allocated to non-controlling interests		(337,446	)		43,466
Net (loss)/income attributable to ZAIS Financial Corp. common stockholders	$	(3,038,748	)	$	373,780

Net (loss)/income per share applicable to ZAIS Financial Corp. common stockholders:
Basic	$	(0.38	)	$	0.05
Diluted	$	(0.38	)	$	0.05
Weighted average number of shares of common stock:
Basic		7,970,886			7,970,886
Diluted		8,897,800			8,897,800

The accompanying notes are an integral part of these consolidated financial statements.

ZAIS Financial Corp. and Subsidiaries
Condensed Consolidated Statements of Equity (Unaudited)

(Expressed in United States Dollars, except share data)

	Preferred Stock				Common Stock
	Shares of Preferred Stock		Preferred Stock at Par		Shares of Common Stock		Common Stock at Par		Additional Paid-in Capital		(Accumulated Deficit)/Retained Earnings			ZAIS Financial Corp. Stockholders' Equity			Non-Controlling Interests			Total Equity
Three months ended March 31, 2015
Balance at December 31, 2014		—	$	—		7,970,886	$	798	$	164,207,617	$	9,029,947		$	173,238,362		$	20,145,450		$	193,383,812
Distributions on OP units		—		—		—		—		—		—			—			(370,766	)		(370,766	)
Dividends on common stock		—		—		—		—		—		(3,188,354	)		(3,188,354	)		—			(3,188,354	)
Net income		—		—		—		—		—		373,780			373,780			43,466			417,246
Balance at March 31, 2015		—	$	—		7,970,886	$	798	$	164,207,617	$	6,215,373		$	170,423,788		$	19,818,150		$	190,241,938

Three months ended March 31, 2016
Balance at December 31, 2015		—	$	—		7,970,886	$	798	$	164,207,617	$	(4,984,178	)	$	159,224,237		$	18,553,818		$	177,778,055
Distributions on OP units		—		—		—		—		—		—			—			(370,766	)		(370,766	)
Dividends on common stock		—		—		—		—		—		(3,188,354	)		(3,188,354	)		—			(3,188,354	)
Net loss		—		—		—		—		—		(3,038,748	)		(3,038,748	)		(337,446	)		(3,376,194	)
Balance at March 31, 2016		—	$	—		7,970,886	$	798	$	164,207,617	$	(11,211,280	)	$	152,997,135		$	17,845,606		$	170,842,741

The accompanying notes are an integral part of these consolidated financial statements.

ZAIS Financial Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

	Three Months Ended
	March 31, 2016			March 31, 2015
	(Expressed in United States Dollars)
Cash flows from operating activities
Net (loss)/ income	$	(3,376,194	)	$	417,246
Adjustments to reconcile net (loss)/income to net cash provided by/(used in) operating activities
Net accretion of discounts related to mortgage loans held for investment		(1,769,937	)		(2,012,281	)
Net accretion of discounts related to real estate securities		(571,063	)		(1,248,910	)
Net accretion of discounts related to Other Investment Securities		(49,204	)		(10,740	)
Change in unrealized gain or loss on mortgage loans		(2,517,993	)		1,199,755
Change in unrealized gain or loss on real estate securities		1,793,101			177,771
Change in unrealized gain or loss on Other Investment Securities		(24,622	)		(136,320	)
Change in unrealized gain or loss on real estate owned		66,766			(101,780	)
Change in fair value of mortgage servicing rights		8,054,306			3,424,914
Realized gain on mortgage loans held for investment		(536,344	)		(144,111	)
Realized loss on real estate securities		724,607			—
Realized gain on real estate owned		(2,229	)		(20,677	)
Change in unrealized gain or loss on derivative instruments		239,111			(538,062	)
Amortization of Exchangeable Senior Notes discount		275,196			248,934
Depreciation and amortization expense		232,430			227,424
Proceeds from sale and principal payments on mortgage loans held for sale		456,891,268			431,251,708
Originations and purchases of mortgage loans held for sale		(435,225,414	)		(451,669,250	)
Gain on sale of mortgage loans held for sale		(16,583,439	)		(7,920,341	)
Capitalization of originated mortgage servicing rights		(4,697,976	)		(3,409,899	)
Changes in operating assets and liabilities
Increase in other assets		(3,516,147	)		(810,733	)
Increase in accounts payable and other liabilities		968,318			467,431
Increase in contingent consideration		198,000			523,425
Net cash provided by (used in) operating activities		572,541			(30,084,496	)

Cash flows from investing activities
Origination of mortgage loans held for investment		(1,405,191	)		(1,476,838	)
Acquisition of mortgage loans held for investment		(10,123,602	)		—
Proceeds from principal repayments on mortgage loans held for investment and sale		11,455,134			7,460,149
Proceeds from principal repayments on real estate securities		4,178,332			3,942,700
Proceeds from sales of real estate securities		16,094,298			—
Restricted cash provided by investment activities		211,651			4,112,699
Net cash provided by investing activities		20,410,622			14,038,710

Cash flows from financing activities
Net borrowings under warehouse lines of credit		709,627			27,468,994
Borrowings from Treasury security repurchase agreement		39,574,000			—
Net borrowings under loan repurchase facilities		602,807			(244,515	)
Borrowings from securities repurchase agreements		83,722			1,016,063
Repayments of securities repurchase agreements		(12,583,102	)		(4,404,331	)
Dividends on common stock and distributions on OP units (net of change in dividends and distributions payable)		(3,559,120	)		(3,559,120	)
Net cash provided by financing activities		24,827,934			20,277,091
Net increase in cash and cash equivalents		45,811,097			4,231,305

Cash and cash equivalents
Beginning of period		20,793,716			33,791,013
End of period	$	66,604,813		$	38,022,318

Noncash investing and financing activities
Accrued dividends and distributions payable	$	3,559,120		$	3,559,120
Conversion of mortgage loans held for investment to real estate owned	$	1,513,223		$	189,648

The accompanying notes are an integral part of these consolidated financial statements.

ZAIS FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Formation and Organization

ZAIS Financial Corp. and subsidiaries (the "Company") was incorporated in Maryland on May 24, 2011, and has elected to be taxed and to qualify as a real estate investment trust ("REIT") beginning with the taxable year ended December 31, 2011. The Company completed its formation transaction and commenced operations on July 29, 2011.

The Company invests in residential mortgage loans. GMFS, LLC (“GMFS”), a mortgage banking platform the Company acquired in October 2014, originates, sells and services residential mortgage loans and the Company acquires performing, re-performing and newly originated loans through other channels. The Company also invests in, finances and manages residential mortgage-backed securities ("RMBS") that are not issued or guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or an agency of the U.S. Government, such as Government National Mortgage Association ("Ginnie Mae") ("non-Agency RMBS"), with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations and residential mortgage servicing rights (“MSRs”). The Company also has the discretion to invest in RMBS that are issued or guaranteed by a federally chartered corporation or a U.S. Government agency ("Agency RMBS"), including through To-Be-Announced ("TBA") contracts, and in other real estate-related and financial assets.

On April 6, 2016, the Company, ZAIS Financial Partners, L.P. (“Company Operating Partnership” or the “Operating Partnership”), the operating partnership of the Company, ZAIS Merger Sub, LLC (“Merger Sub”), a wholly owned subsidiary of the Company, Sutherland Asset Management Corporation ( “Sutherland”) and Sutherland Partners, L.P. (“Sutherland Operating Partnership”) entered into an agreement and plan of merger, as amended as of May 9, 2016 (the “Sutherland Merger Agreement”). Subject to the terms and conditions of the Sutherland Merger Agreement, (i) Sutherland will merge with and into Merger Sub (the “Sutherland Merger”), with Merger Sub surviving the Sutherland Merger and continuing as a wholly owned subsidiary of the Company and (ii) Sutherland Operating Partnership will merge with and into Company Operating Partnership (the “Partnership Merger” and together with the Sutherland Merger, the “Mergers”), with Company Operating Partnership surviving the Partnership Merger (the “Surviving Partnership”). The transaction will be accounted for as a reverse merger.

In order to reduce market risk in its investment portfolio, prior to entering into the Sutherland Merger Agreement, the Company had begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. The Sutherland Merger Agreement requires the Company to complete the sale of its seasoned, re-performing mortgage loans as a condition to closing of the Mergers. A sale of these mortgage loans is expected to be completed in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company’s investment income and, if the Mergers are not completed, may therefore result in a decision to curtail dividends in the future. Additionally, as part of the strategic review, the Company had made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit purchase program and began the process of terminating contracts and surrendering governmental licenses relating to the Company’s mortgage conduit business. The Sutherland Merger Agreement requires the Company to complete the process of terminating contracts and surrendering governmental licenses relating to its mortgage conduit business.

The Company's income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. The Company's objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly dividend distributions and secondarily through capital appreciation.

The Company's charter authorizes the issuance of up to 500,000,000 shares of common stock with a par value of $0.0001 per share, and 50,000,000 shares of preferred stock, with a par value of $0.0001 per share. The Company's board of directors is authorized to amend its charter, without the approval of stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series of capital stock or to classify and reclassify any unissued shares of its capital stock into other classes or series of stock that the Company has the authority to issue.

The Company is the sole general partner of, and conducts substantially all of its business through, the Operating Partnership. The Company is externally managed by ZAIS REIT Management, LLC (the "Advisor"), a subsidiary of ZAIS Group, LLC ("ZAIS"), and has no employees except for those employed by GMFS. GMFS had 243 employees at March 31, 2016.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") as contained within the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim reporting. In the opinion of management, all adjustments considered necessary for a fair statement of the Company's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for the interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP as contained in the ASC have been condensed or omitted from the unaudited interim consolidated financial statements according to the SEC rules and regulations. The information and disclosures contained in the unaudited interim consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.

The Company operates in two business segments: residential mortgage investments and residential mortgage banking.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership, all of the wholly owned subsidiaries of the Operating Partnership, including its taxable REIT subsidiaries (“TRS Entities”), and a joint venture in which GMFS has a controlling financial interest. All intercompany balances have been eliminated in consolidation.

The Company, which serves as the sole general partner of and conducts substantially all of its business through the Operating Partnership, held approximately 89.6% of the operating partnership units ("OP Units") in the Operating Partnership at March 31, 2016 and December 31, 2015. The Operating Partnership in turn holds directly or indirectly all of the equity interests in its subsidiaries.

Changes in the Company's ownership interest (and transactions with non-controlling interests in its consolidated subsidiaries) while the Company retains its controlling interest in the subsidiaries, are accounted for as equity transactions. The carrying amount of the non-controlling interest is adjusted to reflect the change in its ownership interest in the subsidiaries, with the offset to equity attributable to the Company.

Variable Interest Entities

In February 2015, the FASB issued ASU 2015-02, "Consolidation: Amendments to the Consolidation Analysis" ("ASU 2015-02"). ASU 2015-02 makes changes to both the variable interest model and the voting model. The Company adopted ASU 2015-02 on January 1, 2016. The adoption of this standard did not have a material effect on the Company’s consolidated financial statements.

A variable interest entity ("VIE") is an entity that lacks one or more of the characteristics of a voting interest entity. The Company evaluates each of its investments to determine whether it is a VIE based on: (1) the sufficiency of the entity's equity investment at risk to finance its activities without additional subordinated financial support provided by any parties, including the equity holders; (2) whether as a group the holders of the equity investment at risk have (a) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impacts the entity's economic performance, (b) the obligation to absorb the expected losses of the legal entity or the right to receive the expected residual returns of the legal entity; and (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both, and whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. An investment that lacks one or more of the above three characteristics is considered to be a VIE. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

A VIE is subject to consolidation if the equity investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity's activities, or are not exposed to the entity's losses or entitled to its residual returns. VIEs are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This determination can sometimes involve complex and subjective analyses.

The Company's mortgage loans held for sale are sold predominantly to Fannie Mae and Freddie Mac, which are government sponsored enterprises ("GSEs" or "Agencies"). The Company also issues Ginnie Mae securities by pooling eligible loans through a pool custodian and assigning rights to the loans to Ginnie Mae. Fannie Mae, Freddie Mac and Ginnie Mae provide credit enhancement of the loans through certain guarantee provisions. The Company also purchases RMBS from securitization trusts or similar vehicles. These securitizations involve VIEs as the trusts or similar vehicles, by design, have the characteristics of a VIE.

The Company has evaluated its interests in its real estate investment securities and its interests in the securitizations discussed in the preceding paragraph to determine if each represents a variable interest in a VIE. The Company monitors these investments and its investment in the securities and analyzes them for potential consolidation. The Company determined that it was not the primary beneficiary of the VIEs and therefore none of the VIEs were consolidated at March 31, 2016 or December 31, 2015. The maximum exposure of the Company to VIEs is limited to the fair value of its investments in real estate securities and MSRs as disclosed in the Company's consolidated balance sheets.

Cash and Cash Equivalents

The Company considers highly liquid short-term interest bearing instruments with original maturities of three months or less and other instruments readily convertible into cash to be cash equivalents.

Mortgage Loans Held for Sale Previously Held for Investment, at Fair Value

Mortgage loans which the Company has decided it no longer intends to hold for the foreseeable future are reclassified from mortgage loans held for investment to mortgage loans held for sale previously held for investment in the consolidated balance sheets. These mortgage loans were reported at fair value when held for investment and held for sale.

The Company decided during the three months ended March 31, 2016 that it no longer intended to hold its seasoned, re-performing mortgage loan portfolio for the foreseeable future and, as such, reclassified mortgage loans with a fair value of $368,956,195 from held for investment to held for sale previously held for investment.

Other Investment Securities

The Company held Freddie Mac Structured Agency Credit Risk Notes (“FMRT Notes”) at and during the three months ended March 31, 2016, during the three months ended March 31, 2015 and at December 31, 2015. Additionally, the Company held Fannie Mae's Risk Transfer Notes (“FNRT Notes”) at December 31, 2015 (the FMRT Notes and the FNRT Notes are collectively referred to as the “Other Investment Securities”). The Other Investment Securities represent unsecured general obligations of Fannie Mae and Freddie Mac and are structured to be subject to the performance of a certain pool of residential mortgage loans.

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2011. The Company was organized and has operated and intends to continue to operate in a manner that will enable it to qualify to be taxed as a REIT. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company's annual REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gains and which does not necessarily equal net income as calculated in accordance with U.S. GAAP). As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders and does not engage in prohibited transactions. The majority of states also recognize the Company's REIT status. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company's net income under U.S. GAAP and net cash available for distribution to stockholders. However, it is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements.

The Company has separately made joint elections with three of its subsidiaries, ZFC Funding Inc., ZFC Trust TRS I, LLC and ZFC Honeybee TRS, LLC, to treat such subsidiaries as TRS Entities. The Company may perform certain activities through these TRS entities that could adversely impact the Company's REIT qualification if performed other than through a TRS entity. The Company's TRS entities file separate tax returns and are taxed as standalone U.S. C-Corporations irrespective of the dividends-paid deduction available to REITs for federal income tax purposes.

The Company assesses its tax positions for all open tax years and records tax benefits only if tax positions meet a more-likely-than-not threshold in accordance with U.S. GAAP for guidance on accounting for uncertainty in income taxes.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). The objective of the guidance is to clarify the principles for recognizing revenue. ASU 2014-09 supersedes most current revenue recognition guidance, including industry-specific guidance, and also enhances disclosure requirements around revenue recognition and the related cash flows. The guidance is to be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, for interim and annual periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting this new standard.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-04) Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"), which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. If conditions or events indicate it is probable that an entity will be unable to meet its obligations as they become due within one year after the financial statements are issued, the update requires additional disclosures. The update is effective for periods beginning after December 15, 2016 with early adoption permitted. Adoption of ASU 2014-15 is not expected to have a material effect on the Company's consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments─Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). 'The amendments in ASU 2016-01, among other things: (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) and (iii) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. The Company is currently evaluating the impact of adopting this new standard.

3. GMFS Transaction

The following relates to the acquisition of GMFS in October 2014 pursuant to the terms of the agreement and plan of merger dated August 5, 2014 (the “GMFS Merger Agreement”):

Contingent Consideration

In addition to cash paid at closing, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits will be payable over a four-year period if certain conditions are met (the “Production and Profitability Earn-Out”). The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out are dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option.

Contingent consideration represents the estimated present value of the deferred premiums and Production and Profitability Earn-Out. Contingent consideration was estimated at closing based on future production and earnings projections of GMFS over the four year earn-out period and is re-measured to fair value at each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings. The final consideration paid could be materially different from the estimate and the difference will be recorded through earnings in the consolidated statements of operations.

For the three months ended March 31, 2016 and March 31, 2015, the Company recorded the following changes in the consideration liability:

	Three Months Ended
	March 31, 2016		March 31, 2015
Beginning balance	$	11,285,100	$	11,430,413
Change in fair value		198,000		523,425
Ending balance	$	11,483,100	$	11,953,838

The increase in the estimated liability for the three month period ended March 31, 2016 and March 31, 2015 resulted from the impact of the passage of time. The change in the contingent consideration liability is included in operating expenses in the consolidated statements of operations.

The Company has delayed the first year installment payment of the contingent consideration (see Note 21).

Goodwill

Goodwill, with a carrying amount of $14,183,537 at March 31, 2016 and December 31, 2015, represents the excess of the purchase price over the fair value of the net assets acquired and has been allocated to the Company’s residential mortgage banking segment.

The changes in the carrying amount of the goodwill during the three months ended March 31, 2016 and March 31, 2015.

	Three Months Ended
	March 31, 2016		March 31, 2015
Beginning balance	$	14,183,537	$	16,512,680
Reversal of a liability existing as of the date of acquisition		—		(385,610	)
Ending balance	$	14,183,537	$	16,127,070

Goodwill is not amortized but is tested for impairment on the anniversary date of the acquisition or more frequently if events or changes in circumstances indicate that a potential impairment may have occurred. No impairment losses relating to goodwill were recorded for the three months ended March 31, 2016 or March 31, 2015.

Intangible Assets

The following table presents information about the intangible assets acquired by the Company:

		Estimated Fair Value	Estimated Useful Life
Trade name	$	2.0 million	10 years
Customer relationships		1.3 million	10 years
Licenses		1.0 million	3 years
Favorable lease		1.5 million	12 years
Total Intangible assets	$	5.8 million

Amortization expense related to the intangible assets acquired for the three months ended March 31, 2016 and March 31, 2015 was as follows:

	Three Months Ended
	March 31, 2016		March 31, 2015
Amortization expense	$	197,085	$	197,085

Such amounts are recorded as other expenses in the consolidated statements of operations.

At March 31, 2016 and December 31, 2015, accumulated amortization is as follows:

	March 31, 2016		December 31 2015
Trade name	$	283,339	$	233,338
Customer relationships		184,161		151,662
Licenses		472,226		388,892
Favorable lease		177,089		145,838
Total accumulated amortization	$	1,116,815	$	919,730

Amortization expense related to the intangible assets for the period April 1, 2016 to December 31, 2016 and for the five years subsequent to December 31, 2016 will be as follows:

April 1, 2016 – December 31, 2016	$	591,255
2017	$	732,776
2018	$	455,004
2019	$	455,004
2020	$	455,004
2021	$	455,004

No impairment losses relating to intangible assets were recorded for the three months ended March 31, 2016 or March 31, 2015.

4. Fair Value

Fair Value Measurement

Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following tables present the Company’s financial instruments that were accounted for at fair value on a recurring basis at March 31, 2016 and December 31, 2015 by level within the fair value hierarchy:

March 31, 2016

	Assets and Liabilities at Fair Value
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans held for investment	$	—	$	—	$	32,114,043	$	32,114,043
Mortgage loans held for sale previously held for investment		—		—		368,956,195		368,956,195
Mortgage loans held for sale				110,859,815		—		110,859,815
Non-Agency RMBS		—		—		87,120,006		87,120,006
Other Investment Securities		—		—		12,878,022		12,878,022
MSRs		—		—		44,852,686		44,852,686
Derivative assets		—		—		4,040,132		4,040,132
Total	$	—	$	110,859,815	$	549,961,084	$	660,820,899
Liabilities
Contingent consideration	$	—	$	—	$	11,483,100	$	11,483,100
Derivative liabilities		—		3,735,023		—		3,735,023
Total	$	—	$	3,735,023	$	11,483,100	$	15,218,123

December 31, 2015

	Assets and Liabilities at Fair Value
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans held for investment	$	—	$	—	$	397,678,140	$	397,678,140
Mortgage loans held for sale		—		115,942,230		—		115,942,230
Non-Agency RMBS		—		—		109,339,281		109,339,281
Other Investment Securities		—		—		12,804,196		12,804,196
MSRs		—		—		48,209,016		48,209,016
Derivative assets		—		—		2,376,187		2,376,187
Total	$	—	$	115,942,230	$	570,406,820	$	686,349,050
Liabilities
Contingent consideration	$	—	$	—	$	11,285,100	$	11,285,100
Derivative liabilities		—		1,822,096		9,871		1,831,967
Total	$	—	$	1,822,096	$	11,294,971	$	13,117,067

The following table presents additional information about the Company’s financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

Mortgage Loans Held for Investment and Held for Sale Previously Held for Investment, RMBS and Other Investment Securities

	Three Months Ended									Three Months Ended
	March 31, 2016									March 31, 2015
	Mortgage Loans Held for Investment and Held for Sale Previously Held for Investment			Real Estate Securities			Other Investment Securities			Mortgage Loans Held for Investment			Real Estate Securities			Other Investment Securities
Balance, beginning of period	$	397,678,140		$	109,339,281		$	12,804,196		$	415,959,838		$	148,585,733		$	2,040,532
Originations/acquisitions		11,528,793			—			—			1,476,838			—			—
Proceeds from sales		—			(16,094,298	)		—			—			—			—
Amortization of premiums		(12,568	)		—			—			(384	)		—			—
Net accretion of discounts		1,782,505			571,063			49,204			2,012,665			1,248,910			10,740
Proceeds from principal repayments		(11,447,746	)		(4,178,332	)		—			(7,112,305	)		(3,942,700	)		—
Conversion of mortgage loans to REO		(1,513,223	)		—			—			(189,648	)		—			—
Total losses (realized/unrealized) included in earnings		(4,646,504	)		(3,290,046	)		(45,733	)		(8,823,926	)		(1,028,489	)		—
Total gains (realized/unrealized) included in earnings		7,700,841			772,338			70,355			7,768,282			850,718			136,320
Balance, end of period	$	401,070,238		$	87,120,006		$	12,878,022		$	411,091,360		$	145,714,172		$	2,187,592
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date	$	2,531,471		$	(2,423,297	)	$	24,622		$	(1,204,068	)	$	(177,772	)	$	136,320

Derivative Instruments

	Three Months Ended March 31, 2016					Three Months Ended March 31, 2015
	Loan Purchase Commitments			Interest Rate Lock Commitments		Loan Purchase Commitments		Interest Rate Lock Commitments
Beginning balance	$	(9,871	)	$	2,376,187	$	4,037	$	2,481,063
Change in unrealized gain or loss		32,463			1,641,353		23,822		1,936,514
Ending balance	$	22,592		$	4,017,540	$	27,859	$	4,417,577
The amount of total gains or (losses) for the year included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date	$	32,463		$	1,641,353	$	23,822	$	1,936,514

MSRs

See Note 8 – "Mortgage Servicing Rights, at fair value" for additional information about the Company's MSRs.

Contingent Consideration

See Note 3 – "GMFS Transaction" for additional information about the Company's contingent consideration.

There were no financial assets or liabilities that were accounted for at fair value on a nonrecurring basis at March 31, 2016 or December 31, 2015. During the three months ended March 31, 2016 and March 31, 2015, mortgage loans held for investment were transferred out of Level 3 when the properties were foreclosed and were classified as real estate owned. There were no other transfers into or out of Level 1, Level 2 or Level 3 during the months ended March 31, 2016 or March 31, 2015.

The following tables present quantitative information about the Company's assets which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

	Fair Value at March 31, 2016		Valuation Technique(s)	Unobservable Input	Min			Max			Weighted Average
Mortgage loans Held for Investment and Sale	$	401,070,238	Discounted cash flow model	Constant voluntary prepayment		2.1	%		5.2	%		3.4	%
				Constant default rate		1.6	%		4.0	%		3.0	%
				Loss severity		6.5	%		37.3	%		21.9	%
				Delinquency		6.5	%		13.7	%		11.2	%
Non-Agency RMBS
Alternative – A	$	26,102,680	Broker quotes/comparable trades	Constant voluntary prepayment		2.6	%		16.2	%		11.3	%
				Constant default rate		0.3	%		7.1	%		2.8	%
				Loss severity		0.3	%		85.0	%		20.8	%
				Delinquency		1.7	%		22.4	%		8.8	%
Pay option adjustable rate		25,541,425	Broker quotes/comparable trades	Constant voluntary prepayment		2.2	%		7.1	%		4.1	%
				Constant default rate		1.1	%		15.3	%		3.7	%
				Loss severity		0.1	%		74.0	%		34.7	%
				Delinquency		5.4	%		20.1	%		13.1	%
Prime		28,928,776	Broker quotes/comparable trades	Constant voluntary prepayment		4.2	%		23.6	%		7.9	%
				Constant default rate		0.8	%		8.9	%		3.5	%
				Loss severity		0.0	%		87.8	%		27.5	%
				Delinquency		3.7	%		25.4	%		11.9	%
Subprime		6,547,125	Broker quotes/comparable trades	Constant voluntary prepayment		1.3	%		4.4	%		3.1	%
				Constant default rate		4.3	%		6.0	%		5.3	%
				Loss severity		10.9	%		85.0	%		49.1	%
				Delinquency		19.6	%		27.8	%		23.1	%
Total Non-Agency RMBS	$	87,120,006

Other Investment Securities	$	12,878,022	Broker quotes/comparable trades	Constant voluntary prepayment		4.1	%		23.6	%		7.6	%

MSRs	$	44,852,686	Discounted cash flow model	Constant voluntary prepayment		10.3	%		12.2	%		11.3	%
				Cost of servicing	$	77		$	109		$	91
				Discount rate		9.0	%		10.0	%		9.4	%

Contingent consideration	$	11,483,100	Option pricing model	Discount rate		10.2	%		10.8	%		10.5	%
				Production volatility		—			—			20.0	%
				Profitability volatility		—			—			50.0	%

	Fair Value at December 31, 2015		Valuation Technique(s)	Unobservable Input	Min			Max			Weighted Average
Mortgage loans held for Investment	$	397,678,140	Discounted cash flow model	Constant voluntary prepayment		1.9	%		5.0	%		3.2	%
				Constant default rate		1.4	%		5.0	%		3.1	%
				Loss severity		5.9	%		37.2	%		22.1	%
				Delinquency		6.3	%		13.2	%		10.9	%
Non-Agency RMBS
Alternative – A	$	35,998,175	Broker quotes/comparable trades	Constant voluntary prepayment		2.7	%		18.9	%		12.9	%
				Constant default rate		0.2	%		7.8	%		2.8	%
				Loss severity		0.0	%		85.0	%		21.0	%
				Delinquency		1.4	%		22.2	%		8.9	%
Pay option adjustable rate		32,209,538	Broker quotes/comparable trades	Constant voluntary prepayment		2.2	%		13.5	%		7.5	%
				Constant default rate		0.5	%		13.0	%		3.5	%
				Loss severity		0.0	%		95.6	%		40.0	%
				Delinquency		5.3	%		21.9	%		12.3	%
Prime		32,482,521	Broker quotes/comparable trades	Constant voluntary prepayment		3.6	%		21.0	%		8.0	%
				Constant default rate		0.5	%		9.4	%		3.7	%
				Loss severity		0.0	%		85.1	%		28.9	%
				Delinquency		4.4	%		25.5	%		12.0	%
Subprime		8,649,047	Broker quotes/comparable trades	Constant voluntary prepayment		1.2	%		7.7	%		3.9	%
				Constant default rate		3.0	%		8.0	%		6.2	%
				Loss severity		11.1	%		128.5	%		54.0	%
				Delinquency		18.3	%		28.0	%		22.2	%
Total Non-Agency RMBS	$	109,339,281

Other Investment Securities	$	12,804,196	Broker quotes/comparable trades	Constant voluntary prepayment		4.0	%		18.4	%		6.9	%

MSRs	$	48,209,016	Discounted cash flow model	Constant voluntary prepayment		8.5	%		10.5	%		9.3	%
				Cost of servicing	$	77		$	110		$	92
				Discount rate		9.0	%		10.0	%		9.4	%

Contingent consideration	$	11,285,100	Option pricing model	Discount rate		10.2	%		10.8	%		10.5	%
				Production volatility		—			—			20.0	%
				Profitability volatility		—			—			50.0	%

Derivative Financial Instruments

The Company estimates the fair value of interest rate lock commitments ("IRLC") based on quoted Agency MBS prices, the expected net future cash flows related to servicing the mortgage loan, adjusted for: (i) estimated costs to complete and originate the loan and (ii) an adjustment to reflect the estimated percentage of IRLCs that will result in a closed mortgage loan under the original terms of the agreement (or “pullthrough rate”). The Company categorizes IRLCs as a "Level 3" financial statement item.

The significant unobservable inputs used in the fair value measurement of the Company's IRLCs are the pull-through rate and the expected net future cash flows related to servicing the MSRs component of the Company's estimate of the value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and expected net future cash flows related to servicing the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value.

The following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs at March 31, 2016 and December 31, 2015:

	March 31, 2016		December 31, 2015
Pull-through rate
Range	56.4% - 100.0	%	62.4% – 100.0	%
Weighted average	87.6	%	87.6	%
MSR value expressed as:
Servicing fee multiple
Range	0.1% - 6.1	%	0.8% - 5.9	%
Weighted average	4.2	%	4.3	%
Percentage of unpaid principal balance
Range	0.1% - 1.5	%	0.3% - 1.7	%
Weighted average	1.1	%	1.1	%

The fair value measurements of these assets are sensitive to changes in assumptions regarding prepayment, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Significant changes in any of those inputs in isolation may result in significantly higher or lower fair value measurements. Generally, an increase in the probability of default and loss severity in the event of default would result in a lower fair value measurement. A decrease in these assumptions would have the opposite effect. Conversely, an assumption that the home prices will increase would result in a higher fair value measurement. A decrease in the assumption for home prices would have the opposite effect.

Fair Value Option

Changes in fair value for assets and liabilities for which the fair value option was elected are recognized in earnings as they occur. The fair value option may be elected on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

The following table presents the difference between the fair value and the aggregate unpaid principal amount and/or notional balance of assets for which the fair value option was elected at March 31, 2016 and December 31, 2015:

	March 31, 2016							December 31, 2015
	Fair Value		Unpaid Principal and/or Notional Balance ⁽²⁾		Difference			Fair Value		Unpaid Principal and/or Notional Balance ⁽²⁾		Difference
Financial instruments, at fair value
Mortgage loans held for investment ⁽¹⁾	$	32,114,043	$	31,304,573	$	809,470		$	397,678,140	$	444,500,063	$	(46,821,923	)
Mortgage loans held for sale previously held for investment		368,956,195		411,002,700		(42,046,505	)		—		—		—
Mortgage loans held for sale		110,859,815		105,739,051		5,120,764			115,942,230		111,393,424		4,548,806
Non-Agency RMBS ⁽²⁾		87,120,006		143,682,422		(56,562,416	)		109,339,281		168,925,162		(59,585,881	)
Other Investment Securities		12,878,022		13,395,816		(517,794	)		12,804,196		13,398,851		(594,655	)
MSRs		44,852,686		4,429,521,268		N/A	⁽³⁾		48,209,016		4,173,927,393		N/A	⁽³⁾

	⁽¹⁾	At December 31, 2015, the balance is comprised of loans that are (i) distressed and re-performing at the time of purchase and (ii) newly originated at the time of purchase.
	⁽²⁾	Non-Agency RMBS includes an IO with a notional balance of $33.7 million and $35.0 million at March 31, 2016 and December 31, 2015, respectively.
	⁽³⁾	Amounts not presented. Unpaid principal balance of MSRs is generally significantly greater than their fair value.

Fair Value of Other Financial Instruments

In addition to the above disclosures regarding assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure about the fair value of all other financial instruments. Estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair values.

The following table summarizes the estimated fair value and carrying value for all other financial instruments at March 31, 2016 and December 31, 2015:

	March 31, 2016				December 31, 2015
	Fair Value		Carrying Value		Fair Value		Carrying Value
Other financial instruments
Assets
Cash and cash equivalents	$	66,604,813	$	66,604,813	$	20,793,716	$	20,793,716
Restricted cash		4,160,074		4,160,074		4,371,725		4,371,725
Mortgage loans held for investment, at cost		1,879,254		1,879,254		1,886,642		1,886,642

Liabilities
Warehouse lines of credit	$	101,478,055	$	101,478,055	$	100,768,428	$	100,768,428
Treasury security repurchase facility		39,574,000		39,574,000		—		—
Loan repurchase facilities		297,392,137		297,392,137		296,789,330		296,789,330
Securities repurchase agreements		60,800,779		60,800,779		73,300,159		73,300,159
Exchangeable Senior Notes		57,098,650		56,784,242		56,775,500		56,509,046

Cash and cash equivalents includes cash on hand and treasury securities for which fair value equals carrying value (a Level 1 measurement). Restricted cash represents the Company's cash held by counterparties as collateral against the Company's derivatives, loan repurchase facilities and securities repurchase agreements. Due to the short-term nature of the restrictions, fair value approximates carrying value (a Level 1 measurement). The fair value of the mortgage loans held for investment, at cost is determined, where possible using secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. Accordingly, mortgage loans held for investment, at cost are classified as Level 2 in the fair value hierarchy. The fair value of the Company's warehouse lines of credit and repurchase agreements related to the GMFS mortgage banking platform, treasury security repurchase agreement, loan repurchase facilities and securities repurchase agreements is based on an expected present value technique using observable market interest rates. As such, the Company considers the estimated fair value to be a Level 2 measurement. This method discounts future estimated cash flows using rates the Company determined best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. The fair value of the Exchangeable Senior Notes (see Note 13) is based on observable market prices (a Level 2 measurement).

The differences reflected in the table for mortgage loans held for investment are not necessarily indicative of cumulative gains or losses related to loans because it does not take into account the fair value of the loans at the date of acquisition.

5. Mortgage Loans Held for Investment, at Fair Value and Held for Sale Previously Held for Investment, at Fair Value

Distressed and re-performing loans at the time of purchase

The Company did not acquire any mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase during the three months ended March 31, 2016 or March 31, 2015.

During the three months ended March 31, 2016, the Company decided it no longer intended to hold its seasoned and re-performing loan portfolio which were held as loans held for investment, at fair value at December 31, 2015 for the foreseeable future and reclassified this portfolio to Mortgage loans held for sale previously held for investment, at fair value.

The following tables present certain information regarding the Company's mortgage loans at March 31, 2016 and December 31, 2015 which showed evidence of credit deterioration at the time of purchase:

March 31, 2016

Mortgage Loans Held for Sale Previously Held for Investment

	Unpaid							Gross Unrealized ⁽¹⁾							Difference Between Fair Value and Aggregate Unpaid			Weighted Average
	Principal Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Principal Balance			Coupon			Unleveraged Yield

Performing
Fixed	$	236,675,463	$	(43,298,017	)	$	193,377,446	$	27,002,346	$	(2,374,288	)	$	218,005,504	$	(18,669,959	)		4.74	%		7.65	%
ARM		135,940,617		(14,520,006	)		121,420,611		5,098,008		(3,656,027	)		122,862,592		(13,078,025	)		3.69			7.17
Total performing		372,616,080		(57,818,023	)		314,798,057		32,100,354		(6,030,315	)		340,868,096		(31,747,984	)		4.36			7.47
Non-performing ⁽²⁾		38,386,620		(7,017,147	)		31,369,473		948,312		(4,229,686	)		28,088,099		(10,298,521	)		4.72			7.84
Total	$	411,002,700	$	(64,835,170	)	$	346,167,530	$	33,048,666	$	(10,260,001	)	$	368,956,195	$	(42,046,505	)		4.39	%		7.50	%

December 31, 2015

Mortgage Loans Held for Investment

	Unpaid							Gross Unrealized ⁽¹⁾							Difference Between Fair Value and Aggregate Unpaid			Weighted Average
	Principal Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Principal Balance			Coupon			Unleveraged Yield

Performing
Fixed	$	240,031,119	$	(44,650,666	)	$	195,380,453	$	23,626,555	$	(2,521,921	)	$	216,485,087	$	(23,546,032	)		4.70	%		7.59	%
ARM		143,625,653		(15,597,990	)		128,027,663		5,918,004		(3,126,826	)		130,818,841		(12,806,812	)		3.63			7.15
Total performing		383,656,772		(60,248,656	)		323,408,116		29,544,559		(5,648,747	)		347,303,928		(36,352,844	)		4.30			7.41
Non-performing ⁽²⁾		40,100,775		(7,515,130	)		32,585,645		990,974		(4,245,960	)		29,330,659		(10,770,116	)		4.65			7.78
Total	$	423,757,547	$	(67,763,786	)	$	355,993,761	$	30,535,533	$	(9,894,707	)	$	376,634,587	$	(47,122,960	)		4.34	%		7.45	%

⁽¹⁾

The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded the following as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations:

Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
$	2,147,861			$	(1,086,535	)

⁽²⁾

Loans that are delinquent for 60 days or more are considered non-performing.

The following table presents the change in accretable yield for the Company's mortgages held for investment which had shown evidence of credit deterioration since origination at the time of purchase for the three month period ended March 31, 2016 and March 31, 2015:

	Three Months Ended
	March 31, 2016			March 31, 2015
Accretable yield, beginning of period	$	247,751,944		$	267,509,905
Acquisitions		—			—
Accretion		(6,207,756	)		(6,605,967	)
Reclassifications from nonaccretable difference		(4,282,052	)		(1,686,736	)
Accretable yield, end of period	$	237,262,136		$	259,217,202

Newly originated loans at the time of purchase

During the three months ended March 31, 2016 and March 31, 2015, the Company's acquisition of mortgage loans held for investment which were newly originated at the time of purchase was as follows:

	Three Months Ended
	March 31, 2016		March 31, 2015
Aggregate Unpaid Principal Balance	$	11,382,962	$	1,447,319
Loan Repurchase Facilities Used		10,169,242		1,302,587

The following tables present certain information regarding the Company's mortgage loans held for investment, at fair value, at March 31, 2016 and December 31, 2015 which were newly originated at the time of purchase and sourced through the Company’s loan purchase program:

March 31, 2016

	Unpaid						Gross Unrealized ⁽¹⁾							Weighted Average
	Principal Balance		Premium		Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Performing
Fixed	$	25,079,640	$	412,382	$	25,492,022	$	292,794	$	(10,823	)	$	25,773,993		4.93	%		4.78	%
ARM		6,224,933		86,651		6,311,584		28,463		—			6,340,047		4.46			4.33
Total Mortgage Loans Held for Investment	$	31,304,573	$	499,033	$	31,803,606	$	321,257	$	(10,823	)	$	32,114,040		4.84	%		4.69	%

December 31, 2015

	Unpaid						Gross Unrealized ⁽¹⁾							Weighted Average
	Principal Balance		Premium		Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Performing
Fixed	$	17,674,257	$	315,860	$	17,990,117	$	58,069	$	(99,486	)	$	17,948,700		5.05	%		4.89	%
ARM		3,068,259		44,875		3,113,134		—		(18,280	)		3,094,854		4.37			4.25
Total Mortgage Loans Held for Investment	$	20,742,516	$	360,735	$	21,103,251	$	58,069	$	(117,766	)	$	21,043,554		4.95	%		4.79	%

(1)

Three Months Ended March 31, 2016				Three Months Ended March 31, 2015
$	370,132			$	(5,885	)

Concentrations

The Company's mortgage loans held for investment, at fair value consists of mortgage loans on residential real estate located throughout the United States. The following is a summary of certain concentrations of credit risk in the mortgage loan portfolio at March 31, 2016 and December 31, 2015:

	March 31, 2016			December 31, 2015

Percentage of fair value of mortgage loans with unpaid principal balance to current property value in excess of 100%		37.8	%		44.1	%
Percentage of fair value of mortgage loans secured by properties in the following states:

Each representing 10% or more of fair value:
California		26.1	%		26.2	%
Florida		15.6	%		16.1	%
Additional state representing more than 5% of fair value:
Georgia		6.1	%		6.1	%
Percentage of unpaid principal balance of mortgage loans carrying mortgage insurance		8.0	%		8.2	%

The range of interest rates and contractual maturities of the Company's mortgage loans held for investment at March 31, 2016 and December 31, 2015 were as follows:

	March 31, 2016		December 31, 2015
Interest rates	2.0% - 12.2	%	1.75% - 12.20	%
Contractual maturities	1 – 45 years		1 - 45 years

REO

Additional information about the Company’s REO assets at March 31, 2016 and December 31, 2015, are as follows:

	March 31, 2016		December 31, 2015
Net realizable value (included in other assets in the Company's consolidated balance sheets)	$	2,356,589	$	1,784,670
Carrying amount of mortgage loans held for investment, at fair value secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction		11,254,632		5,597,611

6. Mortgage Loans Held for Sale, at Fair Value

During the three months ended March 31, 2016 and March 31, 2015, the Company's mortgage loans held for sale activity was as follows:

	Three Months Ended
	March 31, 2016			March 31, 2015
Balance at beginning of period	$	115,942,230		$	97,690,960
Originations and repurchases		435,225,414			451,669,250
Proceeds from sales and principal payments		(456,891,268	)		(431,251,708	)
Gain on sale		16,583,439			7,920,341
Balance at end of period	$	110,859,815		$	126,028,843

Mortgage loans held for sale, at fair value at March 31, 2016 and December 31, 2015 is as follows:

	March 31, 2016				December 31, 2015
	Unpaid Principal Balance		Fair Value		Unpaid Principal Balance		Fair Value
Conventional	$	67,791,764	$	70,195,369	$	54,962,904	$	56,586,717
Governmental		20,203,875		21,776,355		30,531,301		32,131,354
United States Department of Agriculture loans		10,445,984		11,054,233		16,222,152		17,059,982
United States Department of Veteran Affairs loans		6,809,762		7,284,408		8,922,978		9,314,255
Reverse mortgage		487,666		549,450		754,089		849,922
Total	$	105,739,051	$	110,859,815	$	111,393,424	$	115,942,230

7. Real Estate Securities and Other Investment Securities, at Fair Value

The Company's non-Agency RMBS portfolio is not issued or guaranteed by Fannie Mae, Freddie Mac or any other U.S. Government agency or a federally chartered corporation and is therefore subject to additional credit risks.

The following tables present certain information regarding the Company's non-Agency RMBS and Other Investment Securities at March 31, 2016 and December 31, 2015:

March 31, 2016

	Principal or							Gross Unrealized ⁽²⁾							Weighted Average
	Notional Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Real estate securities
Non-Agency RMBS:
Alternative – A	$	64,387,620	$	(37,379,264	)	$	27,008,356	$	618,969	$	(1,524,645	)	$	26,102,680		1.82	%		5.19	%
Pay option adjustable rate		35,131,326		(6,102,461	)		29,028,865		—		(3,487,440	)		25,541,425		1.16			4.19
Prime		33,604,620		(4,257,529	)		29,347,091		448,354		(866,669	)		28,928,776		3.68			5.29
Subprime		10,558,856		(3,847,482	)		6,711,374		20,269		(184,518	)		6,547,125		0.59			6.81
Total non-Agency RMBS	$	143,682,422	$	(51,586,736	)	$	92,095,686	$	1,087,592	$	(6,063,272	)	$	87,120,006		2.01	%		5.03	%
Other Investment Securities ⁽¹⁾	$	13,395,816	$	17,975		$	13,413,791	$	77,463	$	(613,232	)	$	12,878,022		4.96	%		6.03	%

December 31, 2015

	Principal or							Gross Unrealized ⁽²⁾							Weighted Average
	Notional Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Real estate securities
Non-Agency RMBS:
Alternative – A	$	76,328,172	$	(40,150,416	)	$	36,177,756	$	846,318	$	(1,025,899	)	$	35,998,175		2.01	%		6.18	%
Pay option adjustable rate		42,562,819		(7,480,996	)		35,081,823		6,863		(2,879,148	)		32,209,538		1.10			5.31
Prime		37,366,079		(4,732,637	)		32,633,442		563,311		(714,232	)		32,482,521		3.62			5.95
Subprime		12,668,092		(4,039,253	)		8,628,839		111,651		(91,443	)		8,649,047		0.93			6.63
Total non-Agency RMBS	$	168,925,162	$	(56,403,302	)	$	112,521,860	$	1,528,143	$	(4,710,722	)	$	109,339,281		2.05	%		5.87	%
Other Investment Securities ⁽¹⁾	$	13,398,851	$	(34,264	)	$	13,364,587	$	897	$	(561,288	)	$	12,804,196		4.94	%		6.65	%

(1)

See Note 2 – Summary of Significant Accounting Policies, “Other Investment Securities".

(2)

The Company has elected the fair value option pursuant to ASC 825 for real estate securities. The Company recorded the changes in unrealized gain or loss in the consolidated statements of operations.

March 31, 2016

December 31, 2015

Non-Agency RMBS

Other Investment
Securities

Non-Agency RMBS

Other Investment
Securities

Notional balance of IO included in Alternative A

33,668,901

—

35,042,860

—

Contractual maturities (range)

19.1 to 31.0 years

8.2 to

12.1 years

19.3 to 31.3 years

8.4 to

12.3 years

Weighted average maturity

24.7 years

9.8 years

21.3 years

10.1 years

Actual maturities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses.

All real estate securities and Other Investment Securities held by the Company at March 31, 2016 and December 31, 2015 were issued by issuers based in the United States.

The Company did not have any realized losses on real estate securities relating to other than temporary impairments for the three months ended March 31, 2016 or March 31, 2015.

8. Mortgage Servicing Rights, at Fair Value

The Company's MSRs consist of conforming conventional loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. Similarly, the government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against loss by the FHA or partially guaranteed against loss by the VA.

The activity of MSRs for the three months ended March 31, 2016 and March 31, 2015 is as follows:

	Three Months Ended
	March 31, 2016			March 31, 2015
Balance at beginning of period	$	48,209,016		$	33,378,978
Additions due to loans sold, servicing retained		4,697,976			3,409,899
Change in fair value of MSRs ⁽¹⁾
Changes in values of market related inputs or assumptions used in a valuation model ⁽²⁾		(6,609,585	)		(2,710,478	)
Other changes ⁽³⁾		(1,444,721	)		(714,436	)
Total - change in fair value of MSRs		(8,054,306	)		(3,424,914	)
Balance at end of period	$	44,852,686		$	33,363,963

⁽¹⁾

Included in change in fair value of MSRs in the Company's consolidated statements of operations.

⁽²⁾

Primarily reflects changes in values of prepayment assumptions due to changes in interest rates.

⁽³⁾

Represents change in value primarily due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid off or paid down during the period.

The Company's MSR portfolio at March 31, 2016 and December 31, 2015 is as follows:

	March 31, 2016				December 31, 2015
	Unpaid Principal Balance		Fair Value		Unpaid Principal Balance		Fair Value
Fannie Mae	$	1,943,871,922	$	18,994,424	$	1,880,177,827	$	20,751,648
Ginnie Mae		1,561,234,153		16,871,814		1,488,159,758		18,231,527
Freddie Mac		924,415,193		8,986,448		805,589,808		9,225,841
Total	$	4,429,521,268	$	44,852,686	$	4,173,927,393	$	48,209,016

The following is a quantitative summary of key input assumptions and their related impact on the estimated fair value of the MSRs from adverse changes in those assumptions (weighted averages are based upon unpaid principal balance) at March 31, 2016 and December 31, 2015:

	March 31, 2016			December 31, 2015
Discount rate:
Range		6.6% - 12.2	%		6.6%-12.2	%
Weighted average		9.4	%		9.4	%

Effect on fair value of adverse change of:
5%	$	(816,293	)	$	(958,786	)
10%	$	(1,604,489	)	$	(1,881,870	)
20%	$	(3,101,957	)	$	(3,628,281	)

Prepayment speed ⁽¹⁾ :
Range		8.2% - 14.6	%		7.0%-12.0	%
Weighted average		11.3	%		9.3	%

Effect on fair value of adverse change of:
5%	$	(1,014,616	)	$	(938,584	)
10%	$	(1,944,772	)	$	(1,756,195	)
20%	$	(3,758,628	)	$	(3,428,890	)

Per-loan annual cost of servicing:
Range	$	63 - $118		$	64-$119
Weighted average	$	91		$	92

Effect on fair value of adverse change of:
5%	$	(520,707	)	$	(547,228	)
10%	$	(1,041,414	)	$	(1,094,455	)
20%	$	(2,082,827	)	$	(2,188,910	)

⁽¹⁾

Prepayment speed is measured using CPR.

	Three Months Ended
	March 31, 2016			March 31, 2015
The amount of total losses for the three months ended included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	(6,609,585	)	$	(2,710,478	)

The Company contracts with licensed sub-servicers to perform all servicing functions for these loans. The following table presents the loan servicing fee income, net of direct costs, for the three months ended March 31, 2016 and March 31, 2015:

	Three Months Ended
	March 31, 2016			March 31, 2015
Loan servicing fee income	$	3,166,264		$	2,384,402
Late fee income		86			35
Sub-servicing costs		(1,112,554	)		(747,338	)
Loan servicing fee income, net of direct costs	$	2,053,796		$	1,637,099

9. Warehouse Lines of Credit

At March 31, 2016 and December 31, 2015, the Company had two warehouse lines of credit and two master repurchase agreements, each with different lenders, which provide financing for the Company's origination of mortgage loans held for sale in its residential mortgage banking segment.

The warehouse lines of credit and repurchase agreements bear interest at a rate that has historically moved in close relationship to LIBOR. The agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants at March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and March 31, 2015.

The following tables present certain information regarding the Company's warehouse lines of credit and repurchase agreements in its residential mortgage banking segment at March 31, 2016 and December 31, 2015:

	March 31, 2016		December 31, 2015
Availability	$	185,000,000	$	185,000,000
Maturity dates		June 2016 – November 2016		June 2016 – November 2016

These obligations are secured by mortgage loans held for sale, at fair value and also fully guaranteed by the Company. The Company expects to renew the warehouse lines of credit at similar terms in the ordinary course of business as the facilities mature.

10. Treasury Securities Repurchase Agreement

On March 29, 2016, the Company purchased Treasury securities with a principal balance of $40,000,000 for a purchase price of $39,973,422. The Treasury securities are non-interest bearing and mature on June 30, 2016. In connection with the purchase, the Company executed a repurchase agreement with a counterparty (the “Treasury Security Repo”). The repurchase agreement bears interest at a fixed annual rate of 0.58% and matured on April 29, 2016. At maturity, the Company renewed the repurchase agreement (see Note 25). The Treasury securities are reported as cash equivalents in accordance with the Company’s accounting policies.

11. Loan Repurchase Facilities

At March 31, 2016 and December 31, 2015, the Company had the following outstanding master repurchase agreements with Citibank, N.A. (the "Citi Loan Repurchase Facility") and Credit Suisse First Boston Mortgage Capital LLC (the "Credit Suisse Loan Repurchase Facility") (collectively, the "Loan Repurchase Facilities") used to fund the purchase of mortgage loans held for investment in its residential mortgage investments segment:

	March 31, 2016				December 31, 2015
	Citibank, N.A Distressed and		Credit Suisse First Boston Mortgage Capital LLC		Citibank, N.A Distressed and		Credit Suisse First Boston Mortgage Capital LLC
Lender Collateral type funded by facility	Re- Performing Loans		Newly Originated Loans		Re- Performing Loans		Newly Originated Loans
Total facility size	$	325,000,000	$	100,000,000	$	325,000,000	$	100,000,000
Amount committed	$	150,000,000	$	25,000,000	$	150,000,000	$	25,000,000
Maturity date		May 20, 2016		June 27, 2016		May 20, 2016		June 27, 2016
Outstanding balance	$	272,199,827	$	25,192,310	$	279,467,573	$	17,321,757

Each of the Loan Repurchase Facilities is collateralized by the underlying mortgages and related documents and instruments in the residential mortgage investments segment and the obligations are fully guaranteed by the Company.

Under the Loan Repurchase Facilities, the Company may sell, and later repurchase trust certificates representing interests in residential mortgage loans (the "Trust Certificates"). The principal amount paid by the lenders under the Loan Repurchase Facilities for the Trust Certificates, which represent interests in residential mortgage loans, is based on (i) in the case of the Citi Loan Repurchase Facility, a percentage of the lesser of the market value or the unpaid principal balance of such mortgage loans backing the Trust Certificates and (ii) in the case of the Credit Suisse Loan Repurchase Facility, a percentage of the lesser of the market value, the unpaid principal balance or the acquisition price of such mortgage loans backing the Trust Certificates. Upon the Company's repurchase of a Trust Certificate sold to the lenders under the Loan Repurchase Facilities, the Company is required to repay the lenders a repurchase amount based on the purchase price plus accrued interest. The Company is also required to pay the lenders a commitment fee for the Loan Repurchase Facilities, as well as certain other administrative costs and expenses in connection with the lenders' structuring, management and ongoing administration of the Loan Repurchase Facilities. The commitment fees are included in interest expense in the consolidated statements of operations.

The Company pledges cash and certain of its Trust Certificates as collateral under the Loan Repurchase Facilities. The amounts available to be borrowed are dependent upon the fair value of the Trust Certificates pledged as collateral, which fluctuates with changes in interest rates, type of underlying mortgage loans and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in the fair value of pledged Trust Certificates, the lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. At March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and March 31, 2015, the Company has met all margin call requirements related to any outstanding balances under its Loan Repurchase Facilities.

The following table presents information with respect to the Company's posting of collateral under its Loan Repurchase Facilities at March 31, 2016 and December 31, 2015:

March 31,

2016

December 31,
2015

Fair value of Trust Certificates pledged as collateral

400,185,981

394,942,512

Cash pledged as collateral

20,886

375,579

The agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth and maximum debt to net worth ratio, as defined in the agreements. The Company was in compliance with all significant debt covenants as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and March 31, 2015.

The maturity dates of the Loan Repurchase Facilities were extended subsequent to March 31, 2016 (see Note 25).

12. Securities Repurchase Agreements

Securities repurchase agreements related to real estate securities and Other Investment Securities involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." Repurchase agreements related to real estate securities and Other Investment Securities entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the end of each arrangement's term, typically 30 to 90 days. The Company maintains the beneficial interest in the specific securities pledged during the term of the repurchase arrangement and receives the related principal and interest payments. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase arrangement at which time the Company may enter into a new repurchase arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. In response to declines in the fair value of pledged securities due to changes in market conditions or the publishing of monthly security paydown factors, the lender requires the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparty in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Under the terms of the Company's master repurchase agreements related to real estate securities and Other Investment Securities, the counterparty may sell or re-hypothecate the pledged collateral.

The Company has master repurchase agreements with four financial institutions at March 31, 2016 and December 31, 2015.

Although securities repurchase agreements are committed borrowings until maturity, the lender retains the right to mark the underlying collateral to fair value. A reduction in the fair value of pledged assets would require the Company to provide additional collateral or cash to fund margin calls.

The Company pledges cash and certain of its non-Agency RMBS and Other Investment Securities as collateral under these securities repurchase agreements. The amounts available to be borrowed are dependent upon the fair value of the RMBS and Other Investment Securities pledged as collateral, which fluctuates with changes in interest rates, type of securities and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in the fair value of pledged RMBS and Other Investment Securities, the lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and March 31, 2015, the Company has met all margin call requirements under its securities repurchase agreements.

The following table presents information with respect to the Company's posting of collateral under its securities repurchase agreements at March 31, 2016 and December 31, 2015:

	March 31, 2016		December 31, 2015
Fair value of non-Agency RMBS pledged as collateral	$	78,795,777	$	95,627,850
Fair value of Other Investment Securities pledged as collateral		2,033,403		1,989,174
Cash pledged as collateral		1,989,775		2,029,581

13. 8.0% Exchangeable Senior Notes due 2016

On November 25, 2013, the Operating Partnership issued the Exchangeable Senior Notes with a stated rate of 8.0% and an aggregate principal amount of $57.5 million (the "Exchangeable Senior Notes"). The Exchangeable Senior Notes were issued pursuant to an Indenture, dated November 25, 2013, between the Company, as guarantor, the Operating Partnership and U.S. Bank National Association, as trustee. The sale of the Exchangeable Senior Notes generated net proceeds of approximately $55.3 million. Aggregate estimated offering expenses in connection with the transaction, including the initial purchasers' discount of approximately $1.7 million, were approximately $2.2 million.

The Exchangeable Senior Notes are the Company's senior unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the Exchangeable Senior Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries, financing vehicles or similar facilities.

The Exchangeable Senior Notes are exchangeable for shares of the Company's common stock or, to the extent necessary to satisfy New York Stock Exchange (“NYSE”) listing requirements, cash, at the applicable exchange rate at any time prior to the close of business on the scheduled trading day prior to November 15, 2016 (the "Maturity Date"). The Company may not elect to issue shares of common stock upon exchange of the Exchangeable Senior Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the Exchangeable Senior Notes (or 1,779,560 or more shares).

As a result of the NYSE related limitation on the use of share-settlement for the full conversion option, the embedded conversion option does not qualify for equity classification and instead is separately valued and accounted for as a derivative liability. The initial value allocated to the derivative liability was $1.3 million, which represents a discount to the debt to be amortized through interest expense using the effective interest method through the Maturity Date. During each reporting period, the conversion option derivative liability is marked to fair value through earnings.

The exchange rate was initially 52.5417 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes (equivalent to an initial exchange price of approximately $19.03 per share of common stock). The exchange rate will be subject to adjustment for certain events, including for regular quarterly dividends in excess of $0.50 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the exchange rate will be increased but will in no event exceed 60.4229 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes. The exchange rate was adjusted on December 27, 2013 to 54.3103 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes pursuant to the Company's special dividend of $0.55 per share of common stock and OP Unit declared on December 19, 2013.

The Company does not have the right to redeem the Exchangeable Senior Notes prior to the Maturity Date, except to the extent necessary to preserve its qualification as a REIT for U.S. federal income tax purposes. No sinking fund is provided for the Exchangeable Senior Notes. In addition, if the Company undergoes certain corporate events that constitute a "fundamental change," the holders of the Exchangeable Senior Notes may require the Company to repurchase for cash all or part of their Exchangeable Senior Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If the Mergers do not close, the Company intends to sell assets and use the proceeds to settle the obligation.

The Exchangeable Senior Notes bear interest at a rate of 8.0% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2014. The effective interest rate of the Exchangeable Senior Notes, which is equal to the stated rate of 8.0% plus the amortization of the original issue discount and associated costs, is 10.2%.

The following table presents information with respect to the Exchangeable Senior Notes at March 31, 2016 and December 31, 2015:

March 31,

2016

December 31,
2015

Fair value of conversion option derivative liability

547,457

612,878

Unamortized discount

715,758

990,954

14. Derivative Instruments

The Company’s derivative instruments, by segment, are as follows:

Residential Mortgage Investments Segment

Interest Rate Swap Agreements

To help mitigate exposure to higher short-term interest rates, the Company uses currently-paying and forward-starting, three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. These swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company's effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates.

The Company's interest rate swap agreements and interest rate swaption agreement have not been designated as hedging instruments.

Loan Purchase Commitments (“LPCs”)

The Company enters into LPCs as a means to help mitigate interest rate risk. The LPCs are pursuant to Master Loan Purchase Agreements with approved, third party residential loan originators to purchase residential loans, which meet the guidelines established by the Company, at a future date. LPCs provide that loans acceptable to the Company be delivered if and when they close and are subject to "pair off" fees if the loans are not delivered by the seller.

Residential Mortgage Banking Segment

IRLCs

The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria.

MBS Forward Sales Contracts and TBA Securities

The Company manages the interest rate price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as MBS forward sales contracts, some of which are TBA securities. The Company expects these derivatives will experience changes in fair value opposite to changes in the fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the IRLCs and mortgage loans held for sale it wants to economically hedge.

Other

Conversion Option – Exchangeable Senior Notes

Changes in the fair value of the conversion option derivative related to the Exchangeable Senior Notes are recorded through earnings.

Derivative Instruments

The following table presents certain information related to derivative instruments held at March 31, 2016 and December 31, 2015:

Non-hedge derivatives	March 31, 2016		December 31, 2015
Notional amount of interest rate swaps	$	17,200,000	$	17,200,000
LPCs (Principal balance of underlying loans)		19,955,150		18,494,332
IRLCs (Principal balance of underlying loans)		243,381,890		190,933,017
Notional amount of MBS forward sales contracts		242,701,243		179,417,280

The notional amount is not representative of the maximum exposure to the Company.

The following table presents the fair value of the Company's derivative instruments and their balance sheet location at March 31, 2016 and December 31, 2015:

Derivative instruments	Designation	Balance Sheet Location	March 31, 2016			December 31, 2015
Interest rate swaps	Non-hedge	Derivative liabilities, at fair value	$	(1,641,200	)	$	(1,009,014	)

LPCs	Non-hedge	Derivative assets (liabilities), at fair value		22,592			(9,871	)

IRLCs	Non-hedge	Derivative assets, at fair value		4,017,540			2,376,187

MBS forward sales contracts	Non-hedge	Derivative liabilities, at fair value		(1,546,366	)		(200,204	)

Conversion Option - Exchangeable Senior Notes	Non-hedge	Derivative liabilities, at fair value		(547,457	)		(612,878	)

At March 31, 2016 and December 31, 2015, no credit valuation adjustment was made in determining the fair value of the interest rate swaption or interest rate swaps.

The following table presents the gains and (losses) related to Company's derivative instruments:

	Income Statement	Three Months Ended
Non-hedge derivatives	Location	March 31, 2016			March 31, 2015
Interest rate swaps	Loss on derivative instruments related to investment portfolio	$	(774,152	)	$	(451,439	)

LPCs	Loss on derivative instruments related to investment portfolio		32,463			23,822

IRLCs	Mortgage banking activities, net		1,641,353			1,936,514

MBS forward sales contracts	Mortgage banking activities, net		(1,346,162	)		(638,711	)

Conversion Option - Exchangeable Senior Notes	Loss on derivative instruments related to investment portfolio		65,421			(479,473	)

Interest Rate Swaps

The following table presents information about the Company's interest rate swap agreements at March 31, 2016 and December 31, 2015:

	March 31, 2016			December 31, 2015
Maturity		2023			2023
Notional Amount	$	17,200,000		$	17,200,000
Weighted Average Pay Rate		2.72	%		2.72	%
Weighted Average Receive Rate		0.39	%		0.33	%
Weighted Average Years to Maturity		7.3			7.6
Cash Pledged as Collateral ⁽¹⁾	$	2,149,413		$	1,966,565

⁽¹⁾

At March 31, 2016 and December 31, 2015 all collateral provided under the interest rate swap agreements consisted of cash collateral which is included in restricted cash in the Company's consolidated balance sheets.

The Company's interest rate swap agreements contain legally enforceable provisions that allow for netting or setting off of all individual interest rate swap receivables and payables with each respective counterparty and, therefore, the fair value of those interest rate swap agreements are netted. The credit support annex provisions of the Company's interest rate swap agreements allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral.

15. Mortgage Banking Activities

The following table presents the components of mortgage banking activities, net, recorded in the Company's consolidated statements of operations for the three months ended March 31, 2016 and March 31, 2015:

	Three Months Ended
	March 31, 2016			March 31, 2015
Gain on sale of mortgage loans held for sale, net of direct costs ⁽¹⁾	$	11,533,909		$	10,956,258
Loan expenses, including provision for loan indemnification		(197,220	)		(192,866	)
Loan origination fee income		316,225			388,997
Total	$	11,652,914		$	11,152,389

⁽¹⁾

Includes the change in fair value related to IRLCs and MBS forward sales contracts held during the period.

16. Loan Indemnification Reserve

A liability has been established for potential losses related to representations and warranties made by GMFS for loans sold with a corresponding provision recorded for loan indemnification losses. The liability is included in accounts payable and other liabilities in the Company's consolidated balance sheets and the provision for loan indemnification losses is included in mortgage banking activities, net in the Company's consolidated statements of operations. In assessing the adequacy of the liability, management evaluates various factors including historical repurchases and indemnifications, historical loss experience, known delinquent and other problem loans, outstanding repurchase demand, historical rescission rates and economic trends and conditions in the industry. Actual losses incurred are reflected as a reduction of the reserve liability.

The activity for the loan indemnification reserve for the three months ended March 31, 2016 and March 31, 2015 is as follows:

	Three Months Ended
	March 31, 2016		March 31, 2015
Balance at the beginning of period	$	3,201,000	$	2,662,162
Loan indemnification losses incurred		—		(42,356	)
Provision for loan indemnification losses		173,373		180,163
Balance at end of period	$	3,374,373	$	2,799,969

Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change. At March 31, 2016 and December 31, 2015, the reasonably possible loss above the recorded loan indemnification reserve was not considered material.

17. Income Taxes

For the three months ended March 31, 2016 and the years ended December 31, 2011 through December 31, 2015, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders and does not engage in prohibited transactions. The majority of States also recognize the Company’s REIT status.

The Company has separately made joint elections with three of its subsidiaries, ZFC Funding, Inc., ZFC Trust TRS I, LLC and ZFC Honeybee TRS, LLC to treat such subsidiaries as TRS entities. The Company’s TRS entities file separate tax returns and are taxed as standalone C-Corporations for U.S. income tax purposes.

The Company recorded income tax benefit of $1,603,235 and $145,529 for the three month period ended March 31, 2016 and March 31, 2015 respectively solely related to U.S. federal, state and local income taxes on activity in its ZFC Honeybee TRS, LLC subsidiary.

The following is a reconciliation of the statutory federal and state rates to the effective rates for the three months ended March 31, 2016 and March 31, 2015:

Reconciliation of Statutory Tax Rate to Effective Tax Rate

	Three Months Ended
	March 31, 2016			March 31, 2015
Tax expense/(benefit) at statutory rate		(34.00	)%		35.00	%
State and local taxes, net of Federal Benefit		(4.09	)%		(10.97	)%
Impact of REIT election ⁽¹⁾		6.26	%		(109.68	)%
Change in valuation allowance ⁽²⁾		(0.74	)%		31.82	%
Other non-deductible/non-taxable items ⁽³⁾		0.37	%		0.27	%
Effective Tax Rate		(32.20	)%		(53.56	)%

(1)

For all tax years, the Company’s effective tax rate differs from its statutory tax rate due to the deduction for dividend distributions required to be paid under Code section 857(a).

(2)

For the three months ended March 31, 2016 and March 31, 2015, the change in valuation allowance relates to the change in reserve related to net operating losses and other future deductible items for ZFC Trust TRS I, LLC and ZFC Funding, Inc.

(3)

For the three months ended March 31, 2016 and March 31, 2015, the amount primarily relates to non-deductible meals and entertainment expenses.

At March 31, 2016, the Company had a net deferred tax liability of $1,961,243 related to unrealized gains and other temporary differences related to activity in ZFC Honeybee TRS, LLC subsidiary.

18. Earnings Per Share

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share:

	Three Months Ended
	March 31, 2016			March 31, 2015
Numerator:
Net (loss)/ income attributable to ZAIS Financial Corp. common stockholders (Basic)	$	(3,038,748	)	$	373,780
Effect of dilutive securities:
Net (loss)/ income allocated to non-controlling interests relating to OP Units exchangeable for shares of common stock of the Company		(337,446	)		43,466
Exchangeable Senior Notes:
Interest expense		—			—
Gain on conversion option derivative liability		—			—
Total – Exchangeable Senior Notes		—			—
Net (loss)/ income available to stockholders, after effect of dilutive securities	$	(3,376,194	)	$	417,246

Denominator:
Weighted average number of shares of common stock		7,970,886			7,970,886
Effect of dilutive securities:
Weighted average number of OP Units		926,914			926,914
Weighted average number of shares convertible under Exchangeable Senior Notes		—			—
Diluted weighted average shares outstanding		8,897,800			8,897,800
Net (loss) income per share applicable to ZAIS Financial Corp. common stockholders – Basic	$	(0.38	)	$	0.05
Net (loss) income per share applicable to ZAIS Financial Corp. common stockholders – Diluted	$	(0.38	)	$	0.05

For purposes of computing diluted earnings per share, the Company assumes the conversion of OP Units and the Exchangeable Senior Notes to shares of common stock unless the effect is anti-dilutive. The dilutive effect of OP Units, if any, is computed assuming all units are converted to common stock. The dilutive effect of the Exchangeable Senior Notes, if any, is computed assuming shares converted are limited to 1,779,560 pursuant to NYSE restrictions.

19. Related Party Transactions

ZAIS REIT Management, LLC

The Company is externally managed and advised by the Advisor, a subsidiary of ZAIS. Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company's affairs on a day-to-day basis including, among other responsibilities, (i) the origination, selection, purchase and sale of the Company's portfolio of assets, (ii) arranging the Company's financing activities and (iii) providing the Company with advisory services.

The Company pays to its Advisor an advisory fee, calculated and payable quarterly in arrears, equal to 1.5% per annum of the Company's stockholders' equity, as defined in the amended and restated investment advisory agreement between the Company and the Advisor, as amended from time to time (the "Investment Advisory Agreement"). Prior to the Company's IPO, the advisory fee paid to the Advisor was calculated based on the Company's net asset value, as set forth in the Investment Advisory Agreement. The Advisor may be paid or reimbursed for the documented cost of its performing certain services for the Company, which may include legal, accounting, due diligence tasks and other services, that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm's-length basis. In addition, the Company may be required to pay its portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Advisor and its affiliates required for the Company's operations. To date, the Advisor has not sought reimbursement for the services and expenses described in the two preceding sentences. In the future, however, the Advisor may seek reimbursement for all such services, costs and expenses, as a result of which the total expense ratio of the Company may increase. The Company is also required to pay directly, or reimburse the Advisor for, products and services, including hardware and software, research and market data provided by third parties, other than those operating expenses required to be borne by the Advisor under the Investment Advisory Agreement (the "Expense Reimbursements").

After an initial three-year term, the Advisor may be terminated annually upon the affirmative vote of at least two-thirds of the Company's independent directors or by a vote of the holders of at least two-thirds of the outstanding shares of the Company's common stock based upon (i) unsatisfactory performance by the Advisor that is materially detrimental to the Company or (ii) a determination that the advisory fees payable to the Advisor are not fair, subject to the Advisor's right to prevent such termination due to unfair fees by accepting a reduction of advisory fees agreed to by at least two-thirds of the Company's independent directors. Additionally, upon such a termination without cause, the Investment Advisory Agreement provides that the Company will pay the Advisor a termination fee equal to three times the average annual advisory fee earned by the Advisor during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal year before the date of termination.

On August 11, 2014, the Company amended its Investment Advisory Agreement to provide that the Company shall pay its Advisor a loan sourcing fee quarterly in arrears in lieu of any payments or reimbursements that would otherwise be due to the Advisor or its affiliates pursuant to Investment Advisory Agreement for loan sourcing services provided. The loan sourcing fee is equal to 0.50% of the principal balance of newly originated residential mortgage loans sourced by the Advisor or its affiliates through its loan conduit program and acquired by the Company's subsidiaries.

On March 17, 2015, a business combination was completed between HF2 Financial Management Inc. ("HF2 Financial"), a special purpose acquisition company, and ZAIS Group Parent, LLC ("ZGP"), which wholly owns ZAIS, pursuant to a definitive agreement dated September 16, 2014. The current owners of ZGP did not receive any proceeds at the closing of the transaction and retained a significant equity stake in ZGP. Following the close of the transaction, ZAIS's management team has remained in place to continue to lead the combined organization.

The Company incurred the following fees pursuant to the Investment Advisory Agreement:

	Three Months Ended
	March 31, 2016		March 31, 2015
Advisory fees	$	710,563	$	702,755
Loan sourcing fees		56,915		8,045
Total – Advisory fees – related party	$	767,478	$	710,800

Such amounts are included in "Advisory fee – related party" in the Company's consolidated statements of operations.

The Company incurred the following Expense Reimbursements for amounts incurred by the Advisor for research and market data (including the amortization expense related to amounts prepaid to the Advisor):

Three Months Ended

March 31,

2016

March 31,

2015

Expense Reimbursements

283,688

101,439

Such amounts are included in operating expenses in the Company's consolidated statements of operations.

Amounts payable to the Advisor for advisory fees, loan sourcing fees and Expense Reimbursements at March 31, 2016 and December 31, 2015 are as follows:

March 31,

2016

December 31,

2015

875,720

867,415

Such amounts were included in accounts payable and other liabilities in the Company's consolidated balance sheets.

Other

GMFS received the following sub-lease income related to a portion of its office space (see Note 21) from a related party:

Three Months Ended

March 31,

2016

March 31,

2015

5,400

4,800

Such amounts are included in other income in the Company's consolidated statements of operations.

20. Dividends and Distributions

During the three months ended March 31, 2016 and March 31, 2015 the Company declared the following dividends and distributions:

Declaration Date	Record Date	Payment Date	Amount per Share and OP Unit
Three months ended March 31, 2016:
March 17, 2016	March 31, 2016	April 15, 2016	$	0.40

Three months ended March 31, 2015:
March 19, 2015	March 31, 2015	April 15, 2015	$	0.40

21. Commitments and Contingencies

Advisor Services

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company's investment portfolio including determination of fair value; and other general and administrative responsibilities. In the event that the Advisor is unable to provide the respective services, the Company will be required to obtain such services from an alternative source.

Litigation

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.

In April 2015, GMFS received a claim from a counterparty of GMFS with respect to residential mortgage loans that were sold servicing released by GMFS to this counterparty’s predecessor prior to its acquisition by the Company on October 31, 2014. GMFS has since executed statute of limitations tolling agreements with this counterparty which have been extended to expire on June 2, 2016 but can be further extended by agreement of the parties (the initial tolling agreement was executed by GMFS on December 12, 2013).

The Company believes that any losses in excess of the loan indemnification reserve will be recovered by the Company as either a reduction of total contingent consideration owed under the GMFS Merger Agreement given the indemnification provisions in the GMFS Merger Agreement or by withdrawing funds from an escrow account established by the sellers at the time of the acquisition (as of March 31, 2016, the balance in the escrow account was $4,005,732). The Company has delayed the first year installment payment of the contingent consideration (see Note 3).

Losses in excess of the loan indemnification reserve, total contingent consideration and the escrow account could have a material adverse impact on the Company's results of operations, financial position or cash flows. In the event of litigation or settlement with the counterparty, the Company intends to pursue claims against the sellers of GMFS seeking indemnification for any losses or any amounts paid in settlement, although there can be no assurance that such claims would be successful or that any amounts available for indemnification would be adequate.

Management is not aware of any other contingencies that would require accrual or disclosure in the consolidated financial statements at March 31, 2016 and December 31, 2015.

Commitments to Originate Loans

GMFS enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and the loan is not economically hedged or committed to an investor. GMFS is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. Upon extension of credit typically consists of a first deed of trust in the mortgagor's residential property.

Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon.

Total commitments to originate loans are as follows at March 31, 2016 and December 31, 2015:

March 31, 2016				December 31, 2015
$	265,054,976			$	216,072,457

Leases

GMFS leases office space in Baton Rouge, LA for its corporate headquarters under a non-cancelable operating lease. The lease provides that GMFS pays taxes, maintenance, insurance, and other occupancy expenses applicable to the leased premises and contains three five-year renewal options at pre-determined amounts specified by the original lease agreement. GMFS also leases space in various states for its branch offices and equipment under various short-term rental agreements. GMFS incurred rent expense as follows:

Three Months Ended
March 31, 2016		March 31, 2015
$	237,391	$	182,987

Such amounts are included in operating expenses in the Company's consolidated statements of operations.

GMFS sub-leases a portion of its office space and furniture and fixtures contained therein to a related party (see Note 19).

At March 31, 2016, the future minimum rental payments for the period April 1, 2016 to December 31, 2016 and the five years subsequent to December 31, 2016 and thereafter are as follows:

April 1, 2016 – December 31, 2016	$	720,626
2017	$	812,919
2018	$	680,366
2019	$	128,358
2020	$	—
Thereafter	$	—

22. Counterparty Risk and Concentration

Counterparty risk is the risk that counterparties may fail to fulfill their obligations, including their inability to post additional collateral in circumstances where their pledged collateral value becomes inadequate. The Company attempts to manage its exposure to counterparty risk through diversification, use of financial instruments and monitoring the creditworthiness of counterparties.

The Company finances the acquisition of a significant portion of its mortgage loans held for investment, RMBS and Other Investment Securities with repurchase agreements. Additionally, the Company finances a significant portion of its mortgages held for sale with its warehouse lines of credit and repurchase agreements. In connection with these financing arrangements, the Company pledges its residential mortgage loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e., the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the repurchase agreement financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.

The Company's deposits with financial institutions may exceed federally insurable limits of $250,000 per institution. The Company mitigates this risk by depositing funds with major financial institutions. At March 31, 2016 and December 31, 2015, a portion of the Company's operating cash was held with two custodians and three other financial institutions. The Company also maintains separate cash accounts with each of its warehouse lenders at March 31, 2016 and December 31, 2015. There is no guarantee that these custodians or other financial institutions will not become insolvent. While there are certain regulations that seek to protect customer property in the event of a failure, insolvency or liquidation of a custodian, there is no certainty that the Company would not incur losses due to its assets being unavailable for a period of time in the event of a failure of a custodian that has custody of the Company's assets. Although management monitors the credit worthiness of its custodians, such losses could be significant and could materially impair the ability of the Company to achieve its investment objective.

In the normal course of business, companies in the mortgage banking industry encounter certain economic and regulatory risks. Economic risks include interest rate risk and credit risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company may experience a decrease in loan production, as well as decreases in the value of mortgage loans held for sale and in commitments to originate loans, which may negatively impact the Company's operations. Credit risk is the risk of default that may result from the borrowers' inability or unwillingness to make contractually required payments during the period in which loans are being held for sale.

GMFS sells loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, GMFS is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that GMFS does not comply with such representations, or there are early payment defaults, GMFS may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay-off within a specified time frame, GMFS may be required to refund a portion of the sales proceeds to the investors.

The Company's business requires substantial cash to support its operating and investing activities. As a result, the Company is dependent on its warehouse lines of credit and repurchase facilities in order to finance its continued operations and investments. If the Company's principal lenders decided to terminate or not to renew any of these credit facilities with the Company, the loss of borrowing capacity could have a material adverse impact on the Company's consolidated financial statements unless the Company found a suitable alternative source.

MSRs are subject to substantial interest rate risk and the value of MSRs generally tend to diminish in periods of declining interest rates as borrowers can prepay the mortgage notes underlying the MSRs. MSRs increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards and product characteristics.

23. Offsetting Assets and Liabilities

The following table presents information about certain liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset in the Company's consolidated balance sheets at March 31, 2016 and December 31, 2015:

					Net Amounts of
					Liabilities
			Gross Amounts		Presented in		Gross Amounts Not Offset in the
	Gross Amounts		Offset in the		the		Consolidated Balance Sheets
	of Recognized		Consolidated		Consolidated		Financial			Cash Collateral
	Liabilities		Balance Sheets		Balance Sheets		Instruments			Pledged			Net Amount
March 31, 2016
Warehouse lines of credit	$	101,478,055	$	—	$	101,478,055	$	(101,478,055	)	$	—		$	—
Treasury repurchase agreement		39,574,000		—		39,574,000		(39,574,000	)		—
Loan Repurchase Facilities		297,392,137		—		297,392,137		(297,371,251	)		(20,886	)		—
Securities repurchase agreements		60,800,779		—		60,800,779		(58,811,004	)		(1,989,775	)		—
Interest rate swap agreements		1,641,200		—		1,641,200		—			(1,641,200	)		—
Total	$	500,886,171	$	—	$	500,886,171	$	(497,234,310	)	$	(3,651,861	)	$	—

December 31, 2015
Warehouse lines of credit	$	100,768,428	$	—	$	100,768,428	$	(100,768,428	)	$	—		$	—
Loan Repurchase Facilities		296,789,330		—		296,789,330		(296,413,751	)		(375,579			—
Securities repurchase agreements		73,300,159		—		73,300,159		(71,270,578	)		(2,029,581	)		—
Interest rate swap agreements		1,009,014		—		1,009,014		—			(1,009,014	)		—
Total	$	471,866,931	$	—	$	471,866,931	$	(468,452,757	)	$	(3,414,174	)	$	—

The Company did not have any assets that are subject to master netting arrangements which can potentially be offset in the Company's consolidated balance sheets at March 31, 2016 or December 31, 2015.

24. Segment Information

The Company operates in two operating segments: residential mortgage investments and residential mortgage banking. These operating segments have been identified based on the Company's organizational and management structure. These segments are based on an internally-aligned segment structure, which is how the Company's results are monitored and performance is assessed.

The residential mortgage investments segment includes a portfolio of mortgage loans which were either distressed, re-performing or newly originated at the time of purchase. The residential mortgage investments segment's profit and loss consist primarily of net interest income from whole loans and RMBS, changes in unrealized gains and losses from the valuation of the portfolio and realized gains and losses recognized upon the paydowns of mortgage loans and sales of RMBS.

Since the operations of GMFS are conducted in ZFC Honeybee TRS, LLC, an indirect subsidiary of the Company, the residential mortgage banking segment includes the operations of GMFS, which originates mortgage loans for subsequent sale as either servicing retained or released, and expenses incurred by ZFC Honeybee TRS, LLC.

Each segment includes the operating and other expenses associated with the respective activities.

Segment contribution represents the measure of profit that management uses to assess the performance of its business segments and make resource allocation and operating decisions. Certain expenses not directly assigned or allocated to one of the two primary segments are included in the Corporate/Other column. These unallocated expenses primarily include interest expense on the Company's Exchangeable Senior Notes and corporate operating expenses such as insurance, public company expenses, advisory fees, transaction costs and general and administrative expenses. All amounts are before amounts allocated to non-controlling interests.

The Company's segment profit and loss information is as follows:

Three Months Ended March 31, 2016:	Residential Mortgage Investments			Residential Mortgage Banking			Corporate/Other			Total
Interest income	$	7,930,953		$	773,963		$	—		$	8,704,916
Interest expense		2,781,246			551,820			1,464,211			4,797,277
Net interest income (expense)		5,149,707			222,143			(1,464,211	)		3,907,639
Non-interest income		—			5,664,864			—			5,664,864
Change in unrealized gain or loss		682,748			—			5,941			688,689
Realized loss		(186,034	)		—			—			(186,034	)
Loss on derivative instruments		(676,268	)		—			—			(676,268	)
Advisory fee – related party		324,939			113,122			329,417			767,478
Salaries, commissions and benefits		—			7,966,092			—			7,966,092
Operating expenses		358,332			1,715,793			966,759			3,040,884
Other Expenses:
Expenses		380,161			—			1,991,274			2,371,435
Depreciation and amortization		—			232,430			—			232,430
Total other expenses		380,161			232,430			1,991,274			2,603,865
Net income (loss) before income taxes		3,906,721			(4,140,430	)		(4,745,720	)		(4,979,429	)
Income tax benefit		—			(1,603,235	)		—			(1,603,235	)
Segment net income (loss)	$	3,906,721		$	(2,537,195	)	$	(4,745,720	)	$	(3,376,194	)

Three Months Ended March 31, 2015:	Residential Mortgage Investments			Residential Mortgage Banking			Corporate/Other			Total
Interest income	$	9,079,165		$	608,232		$	—		$	9,687,397
Interest expense		2,755,445			553,359			1,436,673			4,745,477
Net interest income (expense)		6,323,720			54,873			(1,436,673	)		4,941,920
Non-interest income		—			9,376,430			—			9,376,430
Change in unrealized gain or loss		(1,139,426	)		—			—			(1,139,426	)
Realized gain		164,788			—			—			164,788
Loss on derivative instruments		(907,090	)		—			—			(907,090	)
Advisory fee – related party		328,966			128,836			252,998			710,800
Salaries, commissions and benefits		—			7,399,258			—			7,399,258
Operating expenses		47,395			1,990,288			881,965			2,919,648
Other Expenses:
Expenses		858,452			49,324			—			907,776
Depreciation and amortization		—			227,423			—			227,423
Total other expenses		858,452			276,747			—			1,135,199
Net income (loss) before income taxes		3,207,179			(363,826	)		(2,571,636	)		271,717
Income tax benefit		—			(145,529	)		—			(145,529	)
Segment net income (loss)	$	3,207,179		$	(218,297	)	$	(2,571,636	)	$	417,246

The following table is a reconciliation of the net income of the residential mortgage banking segment to the operations of GMFS:

	Three Months Ended
	March 31, 2016			March 31, 2015
Net loss of the residential mortgage banking segment	$	(2,537,195	)	$	(218,297	)
Add back (deduct) expenses incurred by ZFC
Honeybee TRS, LLC:
Advisory fee – related party		113,122			128,836
Amortization of deferred premiums, production and profitability earn-outs included in salaries, commission and benefits		189,000			269,367
Operating expenses (including change in contingent consideration)		170,900			732,024
Other expenses		197,085			246,409
Income tax benefit		(1,603,235	)		(145,529	)
Net (loss) income of GMFS	$	(3,470,323	)	$	1,012,810

Supplemental Disclosures

Selected segment balance sheet information is as follows:

	Residential Mortgage Investments		Residential Mortgage Banking		Corporate/Other		Total
March 31, 2016
Cash and cash equivalents	$	56,160,193	$	10,440,033	$	4,587	$	66,604,813
Mortgage loans held for investment, at fair value		32,114,043		—		—		32,114,043
Mortgage loans held for sale previously held for investment, at fair value		368,956,195		—		—		368,956,195
Mortgage loans held for investment, at cost		—		1,879,254		—		1,879,254
Mortgage loans held for sale, at fair value		—		110,859,815		—		110,859,815
Real estate securities, at fair value		87,120,006		—		—		87,120,006
Other investment securities, at fair value		12,878,022		—		—		12,878,022
Mortgage servicing rights, at fair value		—		44,852,686		—		44,852,686
Goodwill		—		14,183,537		—		14,183,537
Intangible assets		—		4,683,185		—		4,683,185
Total assets		568,284,662		232,988,961		1,396,945		802,670,568

December 31, 2015
Cash and cash equivalents	$	15,082,286	$	5,702,608	$	9,362	$	20,793,716
Mortgage loans held for investment, at fair value		397,678,140		—		—		397,678,140
Mortgage loans held for investment, at cost		—		1,886,642		—		1,886,642
Mortgage loans held for sale, at fair value		—		115,942,230		—		115,942,230
Real estate securities, at fair value		109,339,281		—		—		109,339,281
Other investment securities, at fair value		12,804,196		—		—		12,804,196
Mortgage servicing rights, at fair value		—		48,209,016		—		48,209,016
Goodwill		—		14,183,537		—		14,183,537
Intangible assets		—		4,880,270		—		4,880,270
Total assets		542,396,756		232,450,793		291,372		775,138,921

25. Subsequent Events

See Note 1 - Formation and Organization for disclosures relating to the Sutherland Merger Agreement.

On April 6, 2016, the Company, Company Operating Partnership, the Advisor, Sutherland and certain subsidiaries of the Company entered into a termination agreement (the “Termination Agreement”). Pursuant to the Termination Agreement, effective upon the closing of the Mergers, the existing advisory agreement between the Company, the Advisor, Company Operating Partnership and the Company’s subsidiaries would be terminated and the Company would pay the Advisor a termination fee in the amount of $8,000,000. In the event that the Sutherland Merger Agreement is terminated prior to the consummation of the Mergers, the Termination Agreement will automatically terminate and be of no further effect.

Additionally, on April 6, 2016, the Company, the Operating Partnership, certain subsidiaries of the Company, Sutherland, and Waterfall Asset Management, LLC (“Waterfall”) entered into a management agreement , as amended as of May 9, 2016 (the “Sutherland Management Agreement”), and the Company and Waterfall entered into a related Side-Letter Agreement (the “Side Letter”). Pursuant to the Sutherland Management Agreement and the Side Letter, effective upon the closing of the Mergers, the Company will retain Waterfall to provide investment advisory services to the Company on the terms and conditions set forth in the Sutherland Management Agreement. In exchange for services provided, the Company will pay Waterfall a management fee and the Operating Partnership will issue Waterfall a newly authorized special limited partnership unit entitling Waterfall to an incentive fee under the terms of the Sutherland Management Agreement. The Sutherland Management Agreement has an initial term of three years, after which it will renew automatically for additional one year terms. In the event that the Merger Agreement is terminated prior to the consummation of the Mergers, the Sutherland Management Agreement and the Side Letter will automatically terminate and be of no further effect.

On April 28, 2016 the Company renewed the Treasury Security Repo. The new agreement bears interest at an annual rate of 0.54% and matures on June 30, 2016.

Additionally, on May 6, 2016, the maturity date of the Credit Suisse Loan Repurchase Facility was extended to September 30, 2016 and the facility size was reduced to $36,000,000.

Item 1A. Forward-Looking Statements

ZAIS Financial Corp. (the "Company") makes forward-looking statements in this quarterly report on Form 10-Q within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company's control. These forward-looking statements include information about possible or assumed future results of the Company's business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "could," "would," "may," "potential" or the negative of these terms or other comparable terminology, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

the Company's investment objectives and business strategy;

the consummation of the strategic combination with Sutherland Asset Management Corporation (“Sutherland”);

the Company's ability to obtain future financing arrangements, and to extend existing arrangements in light of the planned combination with Sutherland Asset Management Corporation;

the Company's expected leverage;

the Company's expected investments;

the GMFS, LLC ("GMFS") transaction;

The HF2 Financial Management Inc. ("HF2 Financial") transaction;

estimates or statements relating to, and the Company's ability to make, future distributions;

the Company's ability to compete in the marketplace;

the Company's ability to originate or acquire the assets it targets and achieve risk-adjusted returns;

the Company's ability to borrow funds at favorable rates;

market, industry and economic trends;

recent market developments and actions taken and to be taken by the U.S. Government, the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, the Federal Depositary Insurance Corporation, the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), the Government National Mortgage Association ("Ginnie Mae") and the U.S. Securities and Exchange Commission ("SEC");

mortgage loan modification programs and future legislative actions;

the Company's ability to maintain its qualification as a real estate investment trust ("REIT");

the Company's ability to maintain its exemption from qualification under the Investment Company Act of 1940, as amended (the "1940 Act");

projected capital and operating expenditures;

availability of qualified personnel;

prepayment rates; and

projected default rates.

The Company's beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company or are within its control, including:

the factors referenced in the Company's annual report on Form 10-K, including those set forth under Item 1, "Business" and Item 1A, "Risk Factors" therein and the factors described herein under this heading, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and under the heading "Quantitative and Qualitative Disclosures about Market Risk"

the risk that the Mergers (as defined below) will not be consummated within the expected time period or at all;

the occurrence of any event, change or other circumstances that could give rise to the termination of the Sutherland Merger Agreement (as defined below);

the inability to obtain stockholder approvals relating to the Mergers or the failure to satisfy the other conditions to completion of the Mergers;

fluctuations in the adjusted book value per share of the shares of both the Company and Sutherland;

risks related to disruption of management's attention from the ongoing business operations due to the proposed Mergers;

the effect of the announcement of the proposed Mergers on the Company's operating results and business generally;

the outcome of any legal proceedings relating to the Mergers;

general volatility of the capital markets;

changes in the Company's investment objectives and business strategy;

the availability, terms and deployment of capital;

the availability of suitable investment opportunities;

the Company's dependence on its external advisor, ZAIS REIT Management, LLC (the "Advisor"), and the Company's ability to find a suitable replacement if the Company or the Advisor were to terminate the investment advisory agreement the Company has entered into with the Advisor;

changes in the Company's assets, interest rates or the general economy;

increased rates of default and/or decreased recovery rates on the Company's investments;

changes in interest rates, interest rate spreads, the yield curve or prepayment rates; changes in prepayments of the Company's assets;

limitations on the Company's business as a result of its qualification as a REIT; and

the degree and nature of the Company's competition, including competition for residential mortgage-backed securities ("RMBS"), loans or its other target assets.

Upon the occurrence of these or other factors, the Company's business, financial condition, liquidity and consolidated results of operations may vary materially from those expressed in, or implied by, any such forward-looking statements.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this quarterly report on Form 10-Q. The Company is not obligated, and does not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item 1A, "Risk Factors," of the Company's annual report on Form 10-K.

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

The following discussion should be read in conjunction with the Company's consolidated financial statements and accompanying Notes included in Item 1, "Financial Statements," of this quarterly report on Form 10-Q and with Items 6, 7, 8, and 9A of the Company's annual report on Form 10-K. See "Forward-Looking Statements" in this quarterly report on Form 10-Q and in the Company's annual report on Form 10-K and "Critical Accounting Policies and Use of Estimates" in the Company's annual report on Form 10-K for certain other factors that could cause actual results or future events to differ, perhaps materially, from historical performance and from those anticipated in the forward-looking statements included in this quarterly report on Form 10-Q.

Overview

The Company invests in residential mortgage loans. GMFS, a mortgage banking platform the Company acquired in October 2014, originates, sells and services residential mortgage loans and the Company acquires performing, re-performing and newly originated loans through other channels. The Company also invests in, finances and manages RMBS that are not issued or guaranteed by a federally chartered corporation, such as Fannie Mae, Freddie Mac or an agency of the U.S. Government, such as Ginnie Mae, ("non-Agency RMBS") with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations and mortgage servicing rights ("MSRs"). The Company also has the discretion to invest in RMBS that are issued or guaranteed by a federally chartered corporation or a U.S. Government agency ("Agency RMBS"), including through To-Be-Announced ("TBA") contracts, and in other real estate-related and financial assets, such as interest only strips created from RMBS ("IOs"). The Company refers collectively to the assets it targets as its “target assets”.

The Company's income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. The Company's objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly distributions and secondarily through capital appreciation.

The Company was incorporated in Maryland on May 24, 2011 and has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2011. The Company is organized in a format pursuant to which it serves as the general partner of, and conducts substantially all of its business through ZAIS Financial Partners, L.P. (the “Company Operating Partnership” or the “Operating Partnership”). The Company is externally managed by the Advisor, a subsidiary of ZAIS Group LLC (“ZAIS”), and has no employees other than those employed by GMFS, its wholly-owned subsidiary. GMFS had 243 employees at March 31, 2016. The Company also expects to operate its business so that it is not required to register as an investment company under the 1940 Act.

The Company is externally managed by the Advisor, a subsidiary of ZAIS. On March 17, 2015, a business combination was completed between HF2 Financial, a special purpose acquisition company, and ZAIS Group Parent, LLC ("ZGP"), which wholly owns ZAIS, pursuant to a definitive agreement dated September 16, 2014. The current owners of ZGP did not receive any proceeds at the closing of the transaction and retained a significant equity stake in ZGP. Following the close of the transaction, ZAIS's management team has remained in place to continue to lead the combined organization.

Definitive Merger Agreement

As described in greater detail in the Company’s current reports on Form 8-K filed on April 7, 2016 and on May 9, 2016, the Company entered into a definitive merger agreement on April 6, 2016 , as amended on May 9, 2016 (the “Sutherland Merger Agreement”) pursuant to which the Company will combine with Sutherland, a privately held commercial mortgage REIT. In the transactions described in the Sutherland Merger Agreement (the “Mergers”), the Company’s stockholders will continue to be stockholders of the surviving corporation and will be eligible to receive cash of up to $64.3 million in a tender offer to be made by the Company following stockholder approval of the transaction. Pursuant to the terms of the Sutherland Merger Agreement, Sutherland stockholders will receive newly issued shares of the Company’s common stock, and holders of Sutherland operating partnership units will receive operating partnership units in the Company Operating Partnership, which will be the surviving operating partnership. Following the Mergers, the combined entity will be renamed Sutherland Asset Management Corporation, and its shares will continue to be listed on the New York Stock Exchange (“NYSE”) under the symbol SLD. Following the Mergers, the Company will be externally managed by Waterfall Asset Management, LLC (“Waterfall”), Sutherland’s current external manager. Upon the effective time of Mergers, expected in the third quarter of 2016, the Company’s board of directors will increase the number of directors to six members, which will consist of the current directors of Sutherland and may include one of the Company’s current directors, and the resignations of the Company’s other directors will become effective. For additional details related to the Mergers, including the closing conditions, please refer to the Company’s Forms 8-K filed with the Securities and Exchange Commission on April 7, 2016 and on May 9, 2016 and "Item 13. Certain Relationships and Related Party Transactions and Director Independence—Conflicts of Interest and Related Party Transactions—Sutherland Management Agreement" in the Company’s report on Form 10-K/A filed on April 29, 2016. The Company does not intend to disclose further developments until the merger transaction is complete.

The Sutherland Merger Agreement has been approved by both companies' boards of directors and is subject to the approval of both companies' stockholders. The completion of the Mergers is subject to the satisfaction of certain other customary conditions, including the commencement and completion or withdrawal of the tender offer described above, the consummation of the sale of the Company’s whole mortgage loan portfolio, receipt of regulatory approvals relating to the issuance of the Company’s common stock, the delivery of certain documents and consents, the representations and warranties of the parties being true and correct, subject to the materiality standards contained in the Sutherland Merger Agreement, and the absence of a material adverse effect with respect to either Sutherland or the Company. The Company expects the transaction to close in the third quarter of 2016.

Additionally, on April 6, 2016, the Company, the Operating Partnership, certain subsidiaries of the Company, Sutherland, and Waterfall entered into a management agreement, as amended on May 9, 2016 (the “Sutherland Management Agreement”), and the Company and Waterfall entered into a related Side-Letter Agreement (the “Side Letter”). Pursuant to the Sutherland Management Agreement and the Side Letter, effective upon the closing of the Mergers, the Company will retain Waterfall to provide investment advisory services to the Company on the terms and conditions set forth in the Sutherland Management Agreement. In exchange for services provided, the Company will pay Waterfall a management fee and the Operating Partnership will issue Waterfall a newly authorized special limited partnership unit entitling Waterfall to an incentive fee under the terms of the Sutherland Management Agreement. The Sutherland Management Agreement has an initial term of three years, after which it will renew automatically for additional one year terms. In the event that the Merger Agreement is terminated prior to the consummation of the Mergers, the Sutherland Management Agreement and the Side Letter will automatically terminate and be of no further effect.

In order to reduce market risk in its investment portfolio, prior to entering into the Sutherland Merger Agreement, the Company had begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. The Sutherland Merger Agreement requires the Company to complete the sale of its seasoned, re-performing mortgage loans as a condition to closing of the Mergers. A sale of these mortgage loans is expected to be completed in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company’s investment income and, if the Mergers are not completed, may therefore result in a decision to curtail dividends in the future. Additionally, as part of the strategic review, the Company had made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit purchase program and began the process of terminating contracts and surrendering governmental licenses relating to the Company’s mortgage conduit business. Consistent with these changes to the Company’s strategy, on March 9, 2016, Brian Hargrave resigned as the Company’s Chief Investment Officer and was succeeded by Christian Zugel, the current Chairman of the Company’s Board of Directors. The Sutherland Merger Agreement requires the Company to complete the process of terminating contracts and surrendering governmental licenses relating to its mortgage conduit business.

In connection with the proposed Mergers, the Company filed a registration statement on Form S-4 with the SEC, that included a preliminary joint proxy statement/prospectus, and will file other relevant documents concerning the proposed Mergers. The registration statement on Form S-4 has not yet been declared effective by the SEC and is subject to revision, some of which may be significant. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. BEFORE MAKING ANY VOTING OR INVESTMENT DECISION, INVESTORS ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED MERGERS OR INCORPORATED BY REFERENCE IN THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY, SUTHERLAND AND THE PROPOSED MERGER.

GMFS Transaction

Pursuant to the terms of the August 5, 2014 agreement and plan of merger (the “GMFS Merger Agreement”) among ZFC Honeybee TRS, LLC (“Honeybee TRS”), an indirect subsidiary of the Company, ZFC Honeybee Acquisitions, LLC (“Honeybee Acquisitions”), a wholly owned subsidiary of Honeybee TRS, GMFS, and Honeyrep, LLC, solely in its capacity as the security holder representative, Honeybee Acquisitions merged with and into GMFS on October 31, 2014, with GMFS continuing as the surviving entity and an indirect subsidiary of the Company. GMFS is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, Department of Housing and Urban Development / Federal Housing Administration (“FHA”) Mortgagee, U.S. Department of Agriculture (“USDA”) approved originator and U.S. Department of Veterans Affairs (“VA”) Lender. GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, VA and USDA through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.

The final purchase price was approximately $61.2 million, net of approximately $1.7 million received from an escrow account pursuant to the GMFS Merger Agreement, based on the final reconciliation of GMFS's net tangible assets. The net tangible assets at closing were comprised of the estimated fair value of GMFS's MSR portfolio, the estimated value of GMFS's net tangible assets and a purchase price premium. In addition to cash paid at closing, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits will be payable over a four-year period if certain conditions are met (the “Production and Profitability Earn-Out”). The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The estimated present value of the total contingent consideration at October 31, 2014 was $11.4 million based on the future production and earnings projections of GMFS over the four-year earn-out period (at March 31, 2016 the contingent consideration liability was $11.5 million; the Company has delayed the first year installment payment of the contingent consideration). The Company funded the closing cash payment through a combination of available cash and the sale of a portion of its non-Agency RMBS portfolio. As discussed above, pursuant to the GMFS Merger Agreement, based on the final reconciliation of the October 31, 2014 values, the Company received approximately $1.7 million in June 2015 from an escrow account established at the time of the closing. The Company recorded a reduction to goodwill in the consolidated balance sheets that included this amount, along with other final closing adjustments. Additionally, in 2016 and 2015, the goodwill and other intangible assets were measured for impairment. The Company determined that it is more likely than not that the carrying amount of these assets are recoverable and therefore, the Company did not recognize any impairment of these assets under accounting principles generally accepted in the United States (“U.S. GAAP”).

Segments

The residential mortgage investments segment includes a portfolio of mortgage loans which were either distressed, re-performing or newly originated at the time of purchase. The residential mortgage banking segment includes the operations of GMFS, which originates mortgage loans for subsequent sale as either servicing retained or released, and expenses incurred by Honeybee TRS.

At March 31, 2016, the Company held a diversified portfolio of residential mortgage loans, RMBS and MSRs with an aggregate fair value of $643.9 million, comprised of the following:

Residential Mortgage Investments

Newly originated loans with a fair value of $32.1 million;

Seasoned and re-performing loans held for sale with a fair value of $369.0 million;

RMBS assets with a fair value of $87.1 million, consisting primarily of senior tranches of non-Agency RMBS that were originally highly rated but subsequently downgraded and,

Residential Mortgage Banking

Mortgage loans originated by the GMFS mortgage banking platform and held for sale with a fair value of $110.9 million; and

MSRs with a fair value of $44.9 million.

The borrowings the Company used to fund the purchase of its portfolio held for investment totaled $415.0 million at March 31, 2016, under: (i) a master repurchase agreement with Citibank, N.A. (the "Citi Loan Repurchase Facility") to fund its distressed and re-performing loan portfolio, (ii) a master repurchase facility with Credit Suisse First Boston Mortgage Capital LLC (the "Credit Suisse Loan Repurchase Facility", and together with the Citi Loan Repurchase Facility, the "Loan Repurchase Facilities") to fund its newly originated loan portfolio, (iii) master securities repurchase agreements with four counterparties and (iv) the 8.0% Exchangeable Senior Notes due 2016 (the "Exchangeable Senior Notes"). Additionally, the borrowings the Company used to fund the origination of its mortgage loans held for sale portfolio totaled $101.5 million at March 31, 2016 under warehouse lines of credit and repurchase agreements with four lenders with an aggregate borrowing capacity of $185.0 million. The Company is also in discussions with other financial institutions to provide it with additional borrowing capacity under various agreements, including repurchase agreements and other types of financing arrangements.

Factors Impacting Operating Results

The Company’s results of operations for the three months ended March 31, 2016 were impacted by a number of factors. Home prices, which are a significant correlating factor to the Company’s performance, rose 2.23% for the three months ended March 31, 2016 according to Case Shiller (20 City index, seasonally adjusted). The underlying fundamentals of the housing market, such as home prices, roll rates and credit losses, remained stable. Credit markets experienced a broad sell-off in most credit sectors through mid-February which pushed many credit asset classes lower. The non-Agency RMBS sector also moved lower during the period. While risk assets performed better from mid-February through quarter end, RMBS assets generally closed with negative returns at the end of the quarter. Performance in the non-Agency sector has continued to improve in the early part of the second quarter. Additionally, the 10-year Treasury rose in price and declined in yield during the quarter while credit spreads over Treasuries widened. Nevertheless, the Company recognized a modest net mark-to-market loss on its non-Agency RMBS during the quarter and also experienced a modest gain on its residential mortgage loans held for investment during the same period.

The Company expects that the results of its operations will also be affected by a number of other factors, including the level of its net interest income, the fair value of its assets and the supply of, and demand for, the target assets in which it may invest. The Company's net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies, primarily as a result of changes in market interest rates and prepayment speeds, as measured by CPR on the Company's target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. The Company's operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans are held directly by the Company or included in its non-Agency RMBS or Other Investment Securities or in other assets it may originate or acquire.

Changes in Fair Value of the Company's Assets

The Company's mortgage loans held for investment, mortgage loans held for sale, RMBS and Other Investment Securities are carried at fair value and future mortgage-related assets may also be carried at fair value. Accordingly, changes in the fair value of the Company's assets may impact the results of its operations for the period in which such change in value occurs. The expectation of changes in real estate prices is a major determinant of the value of mortgage loans and, therefore, of RMBS and Other Investment Securities. This factor is beyond the Company's control.

Changes in Market Interest Rates

With respect to the Company's business operations, increases in interest rates, in general, may, over time, cause: (i) the interest expense associated with the Company's borrowings to increase; (ii) the value of its fixed-rate portfolio to decline; (iii) coupons on its ARMs and hybrid ARMs (including RMBS secured by such collateral) and on its residential mortgage loans and other floating rate securities to reset, although on a delayed basis, to higher interest rates; (iv) prepayments on its residential mortgage investments and RMBS to slow, thereby slowing the amortization of the Company's purchase premiums and the accretion of its purchase discounts; (v) a decrease in the Company's mortgage banking origination volume and operating activities; (vi) the value of its interest rate swap agreements to increase; and (vii) the value of its MSRs to increase.

Conversely, decreases in interest rates, in general, may, over time, cause: (i) prepayments on the Company's residential mortgage investments and RMBS to increase, thereby accelerating the amortization of its purchase premiums and the accretion of its purchase discounts; (ii) the interest expense associated with its borrowings to decrease; (iii) the value of its fixed-rate portfolio to increase; (iv) the value of its interest rate swap agreements to decrease; (v) coupons on its ARMs and hybrid ARMs held for investment (including RMBS secured by such collateral) and other floating rate securities to reset, although on a delayed basis, to lower interest rates; (vi) an increase in the Company's mortgage banking origination volume and operating activities; and (vii) the value of its MSRs to decrease. At March 31, 2016, 34.6% of the Company's performing mortgage loans held for investment, as measured by fair value, consisted of mortgage loans with a variable interest rate component, including ARMs and hybrid ARMs. At March 31, 2016, 35.8% of the Company's RMBS assets, as measured by fair value, consisted of RMBS assets with a variable interest rate component, including ARMs and hybrid ARMs. Additionally, at March 31, 2016, 100% of the Company's Other Investment Securities, as measured by fair value, consisted of the Fannie Mae Risk Transfer Notes (“FMSA Notes”) and Freddie Mac Structured Agency Credit Risk Notes (“FMRT Notes”) with a variable interest rate component.

Prepayment Speeds

Prepayment speeds on residential mortgage loans, and therefore, RMBS and MSRs vary according to interest rates, the type of investment, conditions in the financial markets, competition, defaults, foreclosures and other factors that cannot be predicted with any certainty. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their mortgage loans and, as a result, prepayment speeds tend to decrease. This can extend the period over which the Company earns interest income. When interest rates fall, prepayment speeds on residential mortgage loans, and therefore, RMBS and MSRs tend to increase, thereby decreasing the period over which the Company earns interest income. Additionally, other factors such as the credit rating of the borrower, the rate of home price appreciation or depreciation, financial market conditions, foreclosures and lender competition, none of which can be predicted with any certainty, may affect prepayment speeds on residential mortgage loans, RMBS and MSRs.

Spreads on Non-Guaranteed Mortgage Loans Held for Investment and Sale and Securities

Since the financial crisis that began in 2007, the spreads between swap rates and residential mortgage loans and non-Agency RMBS have been volatile. Spreads on these assets initially moved wider due to the difficult credit conditions and have only recovered a portion of that widening. As the prices of securitized assets declined, a number of investors and a number of structured investment vehicles faced margin calls from dealers and were forced to sell assets in order to reduce leverage. The price volatility of these assets also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment. The spread between the yield on the Company's assets and its funding costs is an important factor in the performance of this aspect of the Company's business. Wider spreads imply greater income on new asset purchases but may have a negative impact on the Company's stated book value. Wider spreads generally negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings, which may require the Company to reduce leverage by selling assets. Conversely, tighter spreads imply lower income on new asset purchases, but may have a positive impact on the Company's stated book value. Tighter spreads generally have a positive impact on asset prices. In this case, the Company may be able to reduce the amount of collateral required to secure borrowings.

Mortgage Extension Risk

The Advisor computes the projected weighted-average life of the Company's investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages and the rate at which defaults, foreclosures and recoveries will occur. In general, when the Company originates or acquires a fixed-rate mortgage or hybrid ARM asset, the Company may, but is not required to, enter into an interest rate swap agreement, MBS forward sales contract or other hedging instrument that effectively fixes the Company's borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect the Company from rising interest rates, because the borrowing costs are effectively fixed for the duration of the fixed-rate portion of the related RMBS.

However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on the Company's consolidated results of operations, as borrowing costs would no longer be fixed after the maturity or termination of hedging instruments while the income earned on the assets would remain fixed. This situation may also cause the fair value of the Company's assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause the Company to incur losses.

In addition, the use of this swap hedging strategy effectively limits increases in the Company's book value in a declining rate environment, due to the effectively fixed nature of the Company's hedged borrowing costs. In an extreme rate decline, prepayment rates on the Company's assets might actually result in certain of its assets being fully paid off while the corresponding swap or other hedge instrument remains outstanding. In such a situation, the Company may be forced to liquidate the swap or other hedge instrument at a level that causes it to incur a loss.

Credit Risk

The Company is subject to credit risk in connection with its investments. Although the Company does not expect to encounter credit risk in its Agency RMBS, if any, it does expect to encounter credit risk related to its non-Agency RMBS, mortgage loans and other target assets, including assets it may originate or acquire. Increases in defaults and delinquencies will adversely impact the Company's operating results, while declines in rates of default and delinquencies may improve the Company's operating results from this aspect of its business. The Company is subject to counterparty risk under the FMSA Notes and FMRT Notes if Freddie Mac or Fannie Mae, respectively, is unable to perform its obligations under the respective notes.

A large portion of the mortgage loans held for investment that the Company acquired was current in their payment status at the time of acquisition. The Company calculates delinquency roll rates for its mortgage loan portfolio which represent the percentage of loans, as measured by unpaid principal balance that were in current payment status in the prior month but became delinquent in the measured month. The Company's delinquency roll rates have generally outperformed its model projections from late 2013, when the whole loan portfolio achieved scale, through March 31, 2016.

Size of Investment Portfolio

The size of the Company's investment portfolio, as measured by the aggregate principal balance of its mortgage-related securities and the other assets the Company owns, is a key driver of revenues and expenses. The amount of interest income the Company receives and the amount of interest expense to finance these assets is generally dependent on the size of the investment portfolio.

Critical Accounting Policies and Use of Estimates

See "Notes to Consolidated Financial Statements, Note 2 - Basis of Presentation" included in Part I, Item 1 - "Financial Statements" included in this quarterly report on Form 10-Q and "Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Polices" included in Part II, Item 8 – "Financial Statements and Supplementary Data" in the Company's report on Form 10-K for the year ended December 31, 2015 for the Company's Critical Accounting Policies.

Selected Financial Highlights

A summary of the Company's results for the three months ended March 31, 2016 and March 31, 2015 is below, followed by an overview of the market conditions that impacted the Company's results during the period:

	Three Months Ended
	March 31, 2016			March 31, 2015
U.S. GAAP net (loss)/income	$	(3.4) million		$	0.4 million
U.S. GAAP net (loss)/income per diluted weighted average share outstanding	$	(0.38	)	$	0.05
Core Earnings	$	1.2 million		$	4.5 million
Core Earnings per diluted weighted average share outstanding	$	0.14		$	0.51

		March 31, 2016			December 31, 2015
Book value per share of common stock and OP Unit, at end of period/year	$	19.19		$	19.98
Leverage ratio, at end of period/year		3.26	x		2.97	x

Non-U.S. GAAP Financial Measures

The Company believes that providing investors with Core Earnings, a non-U.S. GAAP financial measure, in addition to the related U.S. GAAP measures, gives investors greater transparency to the information used by management in its financial and operational decision-making. The Company defines Core Earnings as net interest income, plus non-interest income from its mortgage banking platform (excluding the after tax change in fair value of MSRs resulting from changes in values of market related inputs or assumptions used in a valuation model) less total operating expenses (excluding the after tax effect of depreciation and amortization, changes in contingent consideration, amortization of deferred premiums, production and profitability earn-outs and certain non-recurring adjustments) plus/(less) the income tax benefit/(expense) related to the Company's taxable REIT subsidiaries using the applicable effective tax rate for the period. The Company's mortgage banking platform is primarily comprised of income related to originating, selling, and servicing mortgage loans.

Core Earnings is an incomplete measure of the Company's financial performance and involves differences from net income computed in accordance with U.S. GAAP, therefore it should be considered along with, but not as an alternative to, the Company's net income computed in accordance with U.S. GAAP as a measure of the Company's financial performance. In addition, because not all companies use identical calculations, the Company's presentation of Core Earnings may not be comparable to other similarly-titled measures of other companies.

The following table reconciles net (loss)/income computed in accordance with U.S. GAAP to Core Earnings:

	Three Months Ended
	March 31, 2016			March 31, 2015
	(dollars in thousands, except per share data)
Net (loss)/income – U.S. GAAP	$	(3,376	)	$	417
Recurring adjustments for non-core earnings:
Change in unrealized gain or loss on mortgage loans held for investment and sale		(2,518	)		1,200
Change in unrealized gain or loss on real estate securities		1,793			178
Change in unrealized gain or loss on Other Investment Securities		(25	)		(136	)
Change in unrealized gain or loss on real estate owned		67			(102	)
Change in unrealized gain or loss on Treasury securities		(6	)		—
Realized gain on mortgage loans held for investment and sale		(536	)		(144	)
Realized loss on real estate securities		725			—
Realized gain on real estate owned		(2	)		(21	)
Loss on derivative instruments related to investment portfolio		676			907
Change in fair value of MSRs resulting from changes in valuation inputs or assumptions used in a valuation model, net of tax		4,060			1,626
Change in contingent consideration, net of tax		122			314
Amortization of deferred premiums, production and profitability earn-outs, net of tax		116			162
Depreciation and amortization, net of tax		143			136
Non-controlling interests		(16	)		—
Core Earnings – non-U.S. GAAP	$	1,223		$	4,537
Core Earnings – per diluted weighted average share outstanding – non-U.S. GAAP	$	0.14		$	0.51

Core Earnings was $1.2 million for the three months ended March 31, 2016 compared to $4.5 million for the three months ended March 31, 2015. The decrease in Core Earnings was primarily due to $2.0 million of transaction costs related to the strategic alternatives evaluated by the Company and pending Mergers, a decrease of $1.2 million in net interest margin related to the Company’s residential mortgage investment portfolio and an increase in MSR payoffs of $0.7 million. Core earnings for the Company’s residential mortgage banking segment declined by $0.1 million.

Financial Overview

The Company reported GAAP net loss for the three months ended March 31, 2016 of ($3.4) million or ($0.38) per diluted weighted average share outstanding, compared with net income of $0.4 million or $0.05 per diluted weighted average share outstanding for the same period in 2015. The change was primarily due to a decrease of $3.7 million in non-interest income from the Company’s residential mortgage banking segment which was primarily driven by a decrease in the value of the MSRs from changes in the prepayment assumptions and payoffs, a decrease in net interest income relating to the Company’s residential mortgage loan investment segment of $1.2 million due to sales of non-Agency RMBS and scheduled principal payments related to non-Agency RMBS and an increase in other expenses of $1.5 million due to transaction costs incurred relating to the strategic alternatives evaluated by the Company and the pending Mergers; offset by a reduction in other losses of $1.7 million.

GMFS

Highlights of the GMFS operating activity (which is included in the Company’s residential mortgage banking segment) for the three months ended March 31, 2016 are as follows:

				Increase from the Prior Quarter
Mortgage originations ⁽¹⁾
Unpaid principal balance	$	432.1 million		8.1	%
Percentage of originations
Purchases		66.4	%
Refinancing		33.6	%

Interest rate locks entered into	$	616.7 million		25.9	%

Mortgage loans sold ⁽¹⁾
Unpaid principal balance	$	426.9 million		2.3	%
Percentage of unpaid principal balance
Fannie Mae or Freddie Mac securitizations		62.6	%
Ginnie Mae securitizations		27.7	%
Other investors		9.7	%

Core Earnings ⁽²⁾⁽³⁾	$	3.2 million
Other (primarily the change in the fair value of the MSR portfolio due to changes in values of market related inputs or assumptions used in a valuation model)	$	(6.6) million
Net income before income taxes – U.S. GAAP ⁽³⁾	$	(3.4) million

⁽¹⁾ Excludes reverse mortgages and was obtained from GMFS loan origination system.

⁽²⁾ See definition of Core Earnings in the “Non-U.S. GAAP Financial Measures” section included in this quarterly report on Form 10-Q.

⁽³⁾ Excludes operating and other expenses and income taxes incurred in the residential mortgage banking segment by Honeybee TRS, the parent company of GMFS.

Highlights of the GMFS MSRs at March 31, 2016 are as follows:

MSR
Unpaid principal balance	$	4.4 billion
Fair market value	$	44.9 million
Percentage of unpaid principal balance serviced
Fannie Mae or Freddie Mac securitizations		64.8	%
Ginnie Mae securitizations		35.2	%

Weighted average gross coupon		3.9	%

Investment activity during the three months ended March 31, 2016 and March 31, 2015

Mortgage Loans Held for Investment, at fair value and Held for Sale Previously Held for Investment, at Fair Value

These mortgage loans consist of (i) loans which were distressed and re-performing and showed evidence of credit deterioration at the time of purchase and (ii) newly originated at the time of purchase.

Distressed and re-performing loans at the time of purchase

During the three months ended March 31, 2016 and March 31, 2015, the Company did not acquire or sell any mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase.

The following table sets forth certain information regarding the Company’s mortgage loan portfolio at March 31, 2016 which showed evidence of credit deterioration at the time of purchase and which were held for sale and previously held for investment:

								Gross Unrealized ⁽¹⁾							Difference Between Fair Value and Aggregate			Weighted Average
	Unpaid Principal Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Unpaid Principal Balance			Coupon			Unleveraged Yield
	(dollars in thousands)

Performing
Fixed	$	236,675	$	(43,298	)	$	193,377	$	27,002	$	(2,373	)	$	218,006	$	(18,670	)		4.74	%		7.65	%
ARM		135,941		(14,520	)		121,421		5,098		(3,656	)		122,863		(13,078	)		3.69			7.17
Total performing		372,616		(57,818	)		314,798		32,100		(6,029	)		340,869		(31,748	)		4.36			7.47
Non-performing ⁽²⁾		38,387		(7,018	)		31,369		948		(4,229	)		28,088		(10,299	)		4.72			7.84
Total	$	411,003	$	(64,836	)	$	346,167	$	33,048	$	(10,258	)	$	368,957	$	(42,047	)		4.39	%		7.50	%

(1)

March 31, 2016		March 31, 2015
(dollars in thousands)
$	2,148	$	(1,087	)

(2)

Loans that are delinquent for 60 days or more are considered non-performing.

Newly originated loans at the time of purchase

During the three months ended March 31, 2016 and March 31, 2015, the Company's acquisition of mortgage loans held for investment, which were newly originated at the time of purchase and sourced through its loan purchase program was as follows:

	March 31, 2016		March 31, 2015
	(dollars in thousands)
Aggregate Unpaid Principal Balance	$	11,383	$	1,447
Loan Repurchase Facilities Used		10,169		1,303

The Company did not sell any mortgage loans held for investment which were newly originated at the time of purchase during the three months ended March 31, 2016 or March 31, 2015.

The following table sets forth certain information regarding the Company's mortgage loans held for investment at March 31, 2016 which were newly originated at the time of purchase and sourced through its loan purchase program:

March 31, 2016

	Unpaid						Gross Unrealized ⁽¹⁾							Weighted Average
	Principal Balance		Premium (Discount)		Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
	(dollars in thousands)
Performing
Fixed	$	25,080	$	412	$	25,492	$	293	$	(11	)	$	25,774		4.93	%		4.78	%
ARM		6,225		87		6,312		28		—			6,340		4.46			4.33
Total	$	31,305	$	499	$	31,804	$	321	$	(11	)	$	32,114		4.84	%		4.69	%

(1)

Three Months Ended
March 31, 2016		March 31, 2015
(dollars in thousands)
$	370	$	(6	)

Mortgage Loans Held for Sale, at Fair Value

The Company’s mortgage loans held for sale, at fair value consists of loans originated by its residential mortgage banking platform.

For the three months ended March 31, 2016, the Company's mortgage loans held for sale activity was as follows:

	(dollars in thousands)
Balance at beginning of period	$	115,942
Originations and repurchases		435,225
Proceeds from sales and principal payments		(456,890	)
Gain on sale		16,583
Balance at end of period	$	110,860

The following table sets forth certain information regarding the Company’s mortgage loans held for sale at March 31, 2016:

	Unpaid Principal Balance		Fair Value
	(dollars in thousands)
Conventional	$	67,792	$	70,195
Governmental		20,204		21,776
United States Department of Agriculture loans		10,446		11,054
United States Department of Veteran Affairs loans		6,810		7,285
Reverse mortgages		487		550
Total – Mortgage loans held for sale	$	105,739	$	110,860

RMBS and Other Investment Securities

The Company’s RMBS consist of RMBS that are not issued or guaranteed by a federally chartered corporation, such as Fannie Mae, Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae, with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations.

Other Investment Securities consist of FMRT Notes and FMSA Notes at March 31, 2016.

During the three months ended March 31, 2016, there were no purchases of RMBS or Other Investment Securities and there were no sales of Other Investment Securities. During the three months ended March 31, 2016, the Company sold non-Agency RMBS with a principal balance of $19.4 million.

The following tables present certain information regarding the Company's non-Agency RMBS and Other Investment Securities at March 31, 2016:

	Principal or							Gross Unrealized ⁽²⁾							Weighted Average
	Notional Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
	(dollars in thousands)
Real estate securities
Non-Agency RMBS:
Alternative – A	$	64,387	$	(37,379	)	$	27,008	$	619	$	(1,524	)	$	26,103		1.82	%		5.19	%
Pay option adjustable rate		35,131		(6,102	)		29,029		—		(3,488	)		25,541		1.16			4.19
Prime		33,605		(4,258	)		29,347		449		(867	)		28,929		3.68			5.29
Subprime		10,558		(3,848	)		6,710		20		(183	)		6,547		0.59			6.81
Total non-Agency RMBS	$	143,681	$	(51,587	)	$	92,094	$	1,088	$	(6,062	)	$	87,120		2.01	%		5.03	%
Other Investment Securities ⁽¹⁾	$	13,396	$	18		$	13,414	$	1	$	(537	)	$	12,878		4.96	%		6.03	%

At March 31, 2016, Alternative-A non-Agency RMBS includes an IO with a notional balance of $33.7 million, respectively.

⁽¹⁾

See Note 2 – Summary of Significant Accounting Policies - “Other Investment Securities".

⁽²⁾

The Company has elected the fair value option pursuant to ASC 825 for real estate securities and Other Investment Securities. The Company recorded the changes in unrealized gain or loss in the consolidated statements of operations.

MSRs

The Company's MSRs consist of conforming conventional loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. The government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against losses by the FHA or partially guaranteed against loss by the VA.

The activity of MSRs for the three months ended March 31, 2016 is as follows:

	(dollars in thousands)
Balance at beginning of period	$	48,209
Additions due to loans sold, servicing retained		4,698
Change in fair value of MSRs ⁽¹⁾
Changes in values of market related inputs or assumptions used in a valuation model ⁽²⁾		(6,610	)
Other changes ⁽³⁾		(1,445	)
Total - change in fair value of MSRs		(8,055	)

Balance at end of period	$	44,852

(1)	Included in change in fair value of MSRs in the Company's consolidated statements of operations.

(2)	Primarily reflects changes in values of prepayment assumptions due to changes in interest rates.

(3)	Represents change in value primarily due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid off or paid down during the period.

The Company's MSR portfolio at March 31, 2016 is as follows:

	Unpaid Principal Balance		Fair Value
	(dollars in thousands)
Fannie Mae	$	1,943,872	$	18,994
Ginnie Mae		1,561,234		16,872
Freddie Mac		924,415		8,986
Total - MSRs	$	4,429,521	$	44,852

The following analysis focuses on the results generated during the three months ended March 31, 2016 and March 31, 2015

Net Interest Income

The Company’s interest income is comprised of interest income generated from the Company’s mortgage loans held for investment, mortgage loans held for sale, non-Agency RMBS and Other Investment Securities. The Company’s interest expense is related to the Company’s warehouse lines of credit, the Loan Repurchase Facilities, securities repurchase agreements and the Exchangeable Senior Notes.

The Company’s net interest income for the three months ended March 31, 2016 and March 31, 2015 was as follows:

	Three Months Ended
	March 31, 2016		March 31, 2015
	(dollars in thousands)
Interest income	$	8,705	$	9,687
Interest expense		4,797		4,745
Net interest income	$	3,908	$	4,942

The decrease in interest income was due to (i) a decrease in interest income of $0.3 million related to mortgage loans held for investment and held for sale previously held for investment primarily due to scheduled pay downs and payoffs of $11.5 million and (ii) a decrease in interest income of $1.1 million related to RMBS primarily due to sales of RMBS with an unpaid principal balance of $50.7 million during the twelve month period ended March 31, 2016; offset by an increase in other investment securities of $0.2 and increase in interest income on mortgage loans held for sale of $0.2 million.

The increase in interest expense was due to an increase in interest expense of $0.1 million related to an increase in borrowings on the Company’s Loan Repurchase Facilities used to finance the Company’s residential mortgage loans held for investment and held for sale previously held for investment that were newly originated at the time of purchase and an increase in interest expense of $0.02 related to the amortization of the purchase discount on the Exchangeable Senior Notes offset by a decrease in interest expense of approximately $.08 million related to reduced borrowings on the Company’s securities repurchase agreements as a result of RMBS sales early in the first quarter of 2016.

Net interest income is subject to interest rate risk. See Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” of this quarterly report on Form 10-Q, for more information relating to interest rate risk and its impact on the Company’s operating results.

The weighted average net interest spreads between the yield on the Company’s assets and the cost of funds, including the impact of interest rate hedging, for the Company’s mortgage loans held for investment, non-Agency RMBS and Other Investment Securities at March 31, 2016 and March 31, 2015 were as follows:

	March 31, 2016			March 31, 2015
Mortgage loan investments		4.05	%		4.05	%
Non-Agency RMBS and Other Investment Securities		2.99	%		4.97	%

The Company’s net interest income is also impacted by prepayment speeds, as measured by the weighted average CPR on its assets. The three-month average and the six-month average CPR for the period ended March 31, 2016 for the Company’s mortgage loans, non-Agency RMBS and Other Investment Securities were as follows:

	Three-Month Average			Six-Month Average
Mortgage loan investments		6.4	%		2.0	%
Non-Agency RMBS ⁽¹⁾		12.6	%		11.3	%
Other Investment Securities		9.0	%		8.4	%

(1)

CPR includes both voluntary and involuntary amounts.

Non-interest income

The Company’s non-interest income relates to the Company’s residential mortgage banking segment. The primary components of the Company’s non-interest income are its mortgage banking activities net, loan servicing income, net of direct costs and change in fair value of MSRs. For the three months ended March 31, 2016 and March 31, 2015 the Company’s non-interest income included the following:

	Three Months Ended
	March 31, 2016			March 31, 2015
	(dollars in thousands)
Gain on sale of mortgage loans held for sale, net of direct costs ⁽¹⁾	$	11,534		$	10,956
Loan expenses, including provision for loan indemnification		(197	)		(193	)
Loan origination fees		316			389
Total mortgage banking activities, net	$	11,653		$	11,152

(1)	Includes the change in fair value related to interest rate lock commitments (“IRLCs”) and MBS forward sales contracts held during the period.

	Three Months Ended
	March 31, 2016			March 31, 2015
	(dollars in thousands)
Loan servicing fee income	$	3,166		$	2,384
Late fee income ⁽¹⁾		-			-
Sub-servicing costs		(1,112	)		(747	)
Total loan servicing fee income, net of direct costs	$	2,054		$	1,637

Change in fair value of MSRs	$	(8,054	)		(3,425	)

⁽¹⁾

Less than $100.

The increase in loan servicing fee income, net of direct costs, is due to an increase in the unpaid principal balance of the MSR portfolio.

Expenses

Advisory Fee Expense (Related Party). Pursuant to the terms of the Investment Advisory Agreement, the Company incurred advisory fee expense and loan sourcing fees of $0.8 million for the three months ended March 31, 2016 and $0.7 million for the three months ended March 31, 2015. The increase of $0.1 million is due to an increase in loan sourcing fees related to the purchases of loans that were newly originated at the time of purchase during the three months ended March 31, 2016.

Salaries, commissions and benefits. For the three months ended March 31, 2016, the Company incurred salaries, commissions and benefits of $8.0 million as compared to $7.4 million for the three months ended March 31, 2015. These expenses are directly attributable to the mortgage banking operations of GMFS. The increase of $0.6 million is primarily due to an increase in the number of employees at GMFS.

Operating Expenses

Professional Fees. For the three months ended March 31, 2016, the Company incurred professional fees (primarily related to legal fees, audit fees and consulting fees) of $0.9 million as compared to $0.7 million for the three months ended March 31, 2015. The increase in professional fees was primarily due an increase of $0.3 million of legal and audit fees offset by a decrease of $0.1 million of tax preparation fees.

General and Administrative Expense. For the three months ended March 31, 2016, general and administrative expenses were $2.1 million as compared to $2.3 million for the three months ended March 31, 2015. The decrease in general and administrative expenses was primarily due to a decrease in franchise and licensing fees of $0.1 million and a decrease in contingent consideration expense of $0.3 million, partially offset by an increase in research fees of $0.2 million.

Other Expenses

Loan Servicing Fees. For the three months ended March 31, 2016, loan servicing fees were $0.4 million, as compared to $0.8 million for the three months ended March 31, 2015. The decrease was a result of reduced servicing advances.

Transaction Costs. For the three months ended March 31, 2016, transaction costs were $2.0 million as compared to 0.1 million for the three months ended March 31, 2015. The increase in transaction costs was largely attributable to the strategic alternatives that were being considered by the Company and the pending Mergers.

Amortization Expense. For the three months ended March 31, 2016, amortization expense was $0.2 million as compared to $0.2 million for the three months ended March 31, 2015. The amortization expense is related to the Company’s intangible assets. There was no other changes in the balance of the intangible assets.

Realized and Change in Unrealized Gain or Loss

The following amounts related to realized gains and losses, as well as changes in the estimated fair value of the Company’s investment portfolio, which consists of mortgage loans, RMBS, Other Investment Securities, real estate owned and derivative instruments, are included in the Company’s consolidated statements of operations:

	Three Months Ended
	March 31, 2016			March 31, 2015
	(dollars in thousands)
Change in unrealized gain or loss on mortgage loans held for investment and sale	$	2,518		$	(1,200	)
Change in unrealized gain or loss on real estate securities		(1,793	)		(178	)
Change in unrealized gain or loss on Other Investment Securities		25			136
Change in unrealized gain or loss on real estate owned		(67	)		102
Change in unrealized gain or loss on treasury securities		6			—
Realized gain on mortgage loans held for investment and sale		536			144
Realized loss on real estate securities		(725	)		—
Realized gain on real estate owned		2			21
Loss on derivative instruments related to investment portfolio		(676	)		(907	)
Total other (losses)/gains	$	(174	)	$	(1,882	)

There was no other than temporary impairment for RMBS for the three months ended March 31, 2016 or March 31, 2015.

The Company’s interest rate swap agreements and interest rate swaption agreement have not been designated as hedging instruments.

The Company recorded in earnings as loss on derivative instruments the change in fair value related to following instruments which were held during the three months ended March 31, 2016 and March 31, 2015: (i) interest rate swap agreements (ii) loan purchase commitments (“LPCs”) and (iii) the conversion option related to the Exchangeable Senior Notes. The loss on derivative instruments also includes the net interest rate swap payments for the derivative instruments.

The Company has elected to record the change in fair value related to certain mortgage loans held for investment, mortgage loans held for sale, RMBS, Other Investment Securities and MSRs in earnings by electing the fair value option.

Liquidity and Capital Resources

Liquidity is a measure of the Company's ability to turn non-cash assets into cash and to meet potential cash requirements. The Company uses cash to purchase assets, pay dividends, repay principal and interest on its borrowings, fund its operations and meet other general business needs. The Company's primary sources of liquidity are its existing cash balances, borrowings under warehouse lines of credit and repurchase agreements related to the GMFS origination platform, the Loan Repurchase Facilities, securities repurchase agreements, Treasury repurchase agreements, the net proceeds from offerings of equity and debt securities, notes issued by the Operating Partnership, net cash provided by operating activities, additional private funding sources, including other borrowings structured as repurchase agreements, securitizations, term financings and derivative agreements, and future issuances of common equity, preferred equity, convertible securities, exchangeable notes, trust preferred and/or debt securities.

The Company used borrowings from its Loan Repurchase Facilities, master securities repurchase agreements and the Exchangeable Senior Notes to fund the purchase of its mortgage loans held for investment and RMBS. The borrowings from the Treasury repurchase agreement was used to fund the purchase of the Company’s Treasury securities. GMFS funds its operations with its operating cash and warehouse lines of credit and does not rely on the operations of the Company’s residential mortgage investments segment or corporate activities for funding.

The Loan Repurchase Facilities contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth and maximum debt to net worth ratio, as defined in the agreements. Additionally, the repurchase agreements and warehouse lines of credit used to finance the Company’s mortgages held for sale contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants for the three months ended March 31, 2016 and March 31, 2015 and at March 31, 2016 and December 31, 2015.

Under the repurchase agreements, the Company may be required to pledge additional assets to its counterparties (lenders) in the event that the fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional assets or cash. Generally, the Company's repurchase agreements contain a LIBOR-based financing rate, term and haircuts depending on the types of collateral and the counterparties involved. Further, at March 31, 2016 the range of haircut provisions associated with the Company's repurchase agreements was between 10% and 28% for pledged Trust Certificates, 15% and 35% for pledged non-Agency RMBS and 0% and 5% for pledged mortgage loans held for sale.

If the fair value of the assets increases due to changes in market interest rates or market factors, lenders may release collateral back to the Company. Specifically, margin calls may result from a decline in the value of the investments securing the Company's repurchase agreements, prepayments on the mortgages securing such investments and from changes in the fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of the Company and/or the performance of the assets in question. Historically disruptions in the financial and credit markets have resulted in increased volatility in these levels, and this volatility could persist as market conditions continue to change rapidly. Should prepayment speeds on the mortgages underlying the Company's investments or market interest rates suddenly increase, margin calls on the Company's repurchase agreements could result, causing an adverse change in its liquidity position. To date, the Company has satisfied all of its margin calls and has never sold assets in response to any margin call under these borrowings.

In order to reduce market risk in its investment portfolio, the Company has begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company’s investment income and, if the Mergers are not completed, may therefore result in a decision to curtail dividends in the future.

Warehouse Lines of Credit

The borrowings GMFS used to fund its origination platform totaled $101.5 million at March 31, 2016 which includes borrowings under master repurchase agreements with two lenders totaling $63.6 million and warehouse lines of credit with two counterparties totaling $37.9 million. Total available borrowings under the master repurchase agreements and the warehouse lines of credit is $185.0 million. The master repurchase agreements are comprised of (i) an agreement in aggregate principal amount of up to $65.0 million, of which the entire $65.0 million is committed, expiring on November 25, 2016 and (ii) an agreement in aggregate principal amount of up to $20.0 million, of which the entire $20.0 million is committed, expiring on June 30, 2016. The committed warehouse lines of credit are comprised of (i) a $60.0 million agreement expiring on September 26, 2016 and (ii) a $40.0 million agreement expiring on August 13, 2016. The lines are collateralized by the underlying mortgages and related documents and instruments and contain a LIBOR-based financing rate and term, haircut and collateral posting provisions which depend on the types of collateral and the counterparties involved.

The following tables present certain information regarding the Company's warehouse lines of credit and repurchase agreements in its residential mortgage banking segment at March 31, 2016:

	March 31, 2016
	Balance		Weighted Average Rate
	(dollars in thousands)
Maturity
91-180 days	$	75,397		2.69	%
181 days to 1 year		26,081		2.74
Total balance and weighted average rate	$	101,478		2.70	%

The warehouse lines of credit and repurchase agreements are secured by the Company’s mortgage loans held for sale and bear interest at a rate that has historically moved in close relationship to LIBOR. At March 31, 2016, GMFS had $110.9 million of mortgage loans held for sale pledged against its borrowings under the repurchase agreements and warehouse lines of credit.

The Company expects to renew the warehouse lines of credit at similar terms in the ordinary course of business as the facilities mature.

Treasury Repurchase Agreement

On March 29, 2016, the Company purchased Treasury securities with a principal balance of $40.0 million for a purchase price of $39.97 million. The Treasury securities are non-interest bearing and mature on June 30, 2016. In connection with the purchase, the Company executed a repurchase agreement with a counterparty. The repurchase agreement bears interest at a fixed annual rate of 0.58% and matured on April 29, 2016. At maturity, the Company renewed the repurchase agreement. The new agreement bears interest at an annual rate of 0.54% and matures on June 30, 2016.

Loan Repurchase Facilities

The following presents certain information at March 31, 2016 with respect to the Company’s master repurchase agreements used to fund the purchase of mortgage loans held for investment in its residential mortgage investments segment:

Lender	Citibank, N.A		Credit Suisse First Boston Mortgage Capital LLC

Collateral type funded by facility	Cash and trust certificates representing interests in Seasoned, Re-Performing Loans		Cash and trust certificates representing interests in Newly Originated Loans

Total facility size	$	325.0 million	$	100.0 million
Amount committed	$	150.0 million	$	25.0 million
Maturity date		May 20, 2016		June 27, 2016
Outstanding balance	$	272.2 million	$	25.2 million

	(dollars in thousands)
Fair value of trust certificates pledged as collateral	$	400,186
Cash pledged as collateral		21

The Company is required to pay each counterparty a commitment fee, as well as certain other administrative costs and expenses in connection with each counterparty’s structuring, management and ongoing administration of each respective loan repurchase facility. The obligations are fully guaranteed by the Company. Each of the Loan Repurchase Facilities bears interest at a rate that has historically moved in close relationship to LIBOR.

The Loan Repurchase Facilities mature between 31 and 90 days from March 31, 2016 and have a weighted average interest rate of 3.16%.

On May 6, 2016, the maturity date of the Citi Loan Repurchase Facility was extended to June 3, 2016. This facility is secured by the Company's mortgage loans held for sale previously held for investment and will be settled upon the sale of these loans. The sales are expected to close in the second quarter of 2016. Additionally, on May 6, 2016, the maturity date of the Credit Suisse Loan Repurchase Facility was extended to September 30, 2016 and the facility size was reduced to $36,000,000.

Securities Repurchase Agreements

The following tables present certain information at March 31, 2016 with respect to the Company’s securities repurchase agreements used to fund the purchase of RMBS and Other Investment Securities in its residential mortgage investments segment:

	March 31, 2016
	Non-Agency RMBS					Other Investment Securities
	Balance		Weighted Average Rate			Balance		Weighted Average Rate
	(dollars in thousands)
Maturity
30 days or less	$	53,777		2.02	%	$	1,403		2.19	%
31- 90 days		5,620		2.33			—		—
Total balance/weighted average rate	$	59,397		2.05	%	$	1,403		2.19	%

	March 31, 2016
	(dollars in thousands)
Repurchase agreements		25
Counterparties		4
Fair value of non-Agency RMBS pledged as collateral	$	78,796
Fair value of Other Investment Securities pledged as collateral		2,033
Cash pledged as collateral		1,990

The securities repurchase agreements bear interest at rates that have historically moved in close relationship to LIBOR.

The Company's borrowings under repurchase agreements are renewable at the discretion of its lenders and, as such, the Company's ability to roll-over such borrowings is not guaranteed. The terms of the repurchase transaction borrowings under the Company's repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by the Securities Industry and Financial Markets Association, as to repayment, margin requirements and the segregation of all assets the Company has initially sold under the repurchase transaction. In addition, each lender typically requires that the Company include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts and purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction, and cross default and setoff provisions.

Exchangeable Senior Notes

On November 25, 2013, the Operating Partnership issued the Exchangeable Senior Notes, which may be exchanged for shares of the Company's common stock or, to the extent necessary to satisfy NYSE listing requirements, cash, at the applicable exchange rate at any time prior to the close of business on the scheduled trading day prior to November 15, 2016 (the “Maturity Date”). The Company may not elect to issue shares of common stock upon exchange of the Exchangeable Senior Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the Exchangeable Senior Notes (or 1,779,560 or more shares). The initial exchange rate for each $1,000 aggregate principal amount of the Exchangeable Senior Notes was 52.5417 shares of common stock, equivalent to an exchange price of approximately $19.03 per share, representing an approximate 15% premium to the last reported sale price of the common stock on November 19, 2013 (the date of the initial sale of the Exchangeable Senior Notes), which was $16.55 per share. The exchange rate will be subject to adjustment for certain events, including for regular quarterly dividends in excess of $0.50 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the exchange rate will be increased but will in no event exceed 60.4229 shares of common stock per $1,000 principal amount of the Exchangeable Senior Notes due in 2016. The exchange rate was adjusted on December 27, 2013 to 54.3103 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes pursuant to the Company's special dividend of $0.55 per common share and OP unit declared on December 19, 2013. Pursuant to a registration rights agreement, the Company agreed to file with the SEC within 120 days from the issue date, and to use its commercially reasonable efforts to cause to become effective within 180 days, a shelf registration statement with respect to the resales of the Company's common stock that may be issued upon exchange of the Exchangeable Senior Notes. The Company filed this shelf registration statement with the SEC on March 14, 2014, and the SEC declared it effective on May 23, 2014. If the Company fails to comply with certain of its obligations under the registration rights agreement, the Company will be required to pay liquidated damages to holders of the Exchangeable Senior Notes. The Company will increase the exchange rate by 3% for holders that exchange the Exchangeable Senior Notes when a registration default exists with respect to shares of the Company's common stock.

At March 31, 2016 and at December 31, 2015, the Company had Exchangeable Senior Notes outstanding totaling $57.5 million of aggregate principal balance which matures on the Maturity Date. The Exchangeable Senior Notes bear interest at a rate of 8.0% per year payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2014. The effective interest rate of the Exchangeable Senior Notes, which is equal to the stated rate of 8.0% plus the amortization of the original issue discount and associated costs, is 10.2%.

The Exchangeable Senior Notes will mature on the Maturity Date, unless previously exchanged or repurchased in accordance with their terms. If the Company undergoes certain corporate events, that constitute a "fundamental change," the holders of the Exchangeable Senior Notes may require the Company to repurchase for cash all or part of their Exchangeable Senior Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If the Mergers do not close, the Company intends to sell assets and use the proceeds to settle the obligation.

For additional information related to the Exchangeable Senior Notes, see "Notes to Consolidated Financial Statements—8.0% Exchangeable Senior Notes due 2016."

Derivative Instruments

Residential Mortgage Investments Segment

At March 31, 2016 the Company had outstanding interest rate swap agreements designed to mitigate the effects of increases in interest rates under a portion of its repurchase agreements. These interest rate swap agreements provide for the Company to pay fixed interest rates and receive floating interest rates indexed to LIBOR. The swap agreements effectively fixed the floating interest rates on a portion of the borrowings under the Company’s repurchase agreements.

The following table presents information about the Company's interest rate swap agreements at March 31, 2016:

	(dollars in thousands)
Maturity		2023
Notional Amount	$	17,200
Weighted Average Pay Rate		2.72	%
Weighted Average Receive Rate		0.39	%
Weighted Average Years to Maturity		7.3
Cash Pledged as Collateral	$	2,149

At March 31, 2016, the Company also had outstanding LPCs, IRLCs and MBS forward sales contracts.

The Company enters into LPCs as a means to avoid interest rate risk. The LPCs are pursuant to Master Loan Purchase Agreements with approved, third party residential loan originators to purchase residential loans, which meet the guidelines established by the Company, at a future date. These “best efforts” contracts provide that the loan be delivered if and when it closes and are subject to “pair off” fees if the loan is not delivered by the seller.

The Company had no exposure to TBA contracts at any time during the three months ended March 31, 2016. The Company did not have any TBA contracts outstanding at March 31, 2016.

Residential Mortgage Banking Segment

The Company manages the interest rate price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as MBS forward sales contracts. The Company expects these derivatives will experience changes in fair value opposite to changes in the fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the IRLCs and mortgage loans held for sale it wants to economically hedge.

The following table summarizes information related to the Company’s LPCs, IRLCs and MBS forward sales contracts at March 31, 2016:

Non-hedge derivatives
	(dollar amounts in thousands)
LPCs (Principal balance of underlying loans)	$	19,955
IRLCs (Principal balance of underlying loans)	$	243,382
Notional amount of MBS forward sales contracts	$	242,701

The notional amount is not representative of the maximum exposure to the Company.

See “Note to Consolidated Financial Statements, Note 23 – Offsetting Assets and Liabilities” included in Item 1, “Financial Statements” in this quarterly report on Form 10-Q for discussion about the Company’s master netting arrangements.

Leverage Ratio

At March 31, 2016, the Company had a leverage ratio of 3.26x. The leverage ratio is the ratio of the warehouse lines of credit, Treasury repurchase agreement, Loan Repurchase Facilities, securities repurchase agreements and Exchangeable Senior Notes (including the conversion option which is part of the notes) to the Company’s stockholders equity.

Restricted Cash

The Company maintains certain assets, which, from time to time, may include cash, unpledged mortgage loans, non-Agency RMBS and Other Investment Securities (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and collateral in excess of margin requirements held by the Company's counterparties (collectively, the "Cushion") to meet routine margin calls and protect against unforeseen reductions in the Company's borrowing capabilities. The Company's ability to meet future margin calls will be impacted by the Cushion, which varies based on the fair value of its assets, its cash position and margin requirements. The Company's cash position fluctuates based on the timing of its operating, investing and financing activities and is managed based on the Company's anticipated cash needs. At March 31, 2016, the Company had a Cushion of $25.8 million in addition to certain reserves held with respect to the Loan Repurchase Facilities. The Company's calculation of its Cushion excludes GMFS's warehouse lines of credit and repurchase agreements.

At March 31, 2016, the Company had a total of $4.2 million of restricted cash pledged against its interest rate swaps and repurchase agreements related to its mortgage loans held for investment and RMBS portfolios.

The Company believes these identified sources of liquidity will be adequate for purposes of meeting its short-term (within one year) liquidity and long-term liquidity needs. However, the Company's ability to meet its long-term liquidity and capital resource requirements may require additional financing.

The Company's short-term and long-term liquidity needs include funding future investments and operating costs. In addition, to qualify as a REIT, the Company must distribute annually at least 90% of its net taxable income, excluding net capital gains. These distribution requirements limit the Company's ability to retain earnings and thereby replenish or increase capital for operations.

GMFS Transaction

Pursuant to the GMFS Merger Agreement the Company merged with and into GMFS, with GMFS surviving the merger as an indirect subsidiary of the Company (see Item 1, “Business,” of this annual report on Form 10-K). The transaction closed on October 31, 2014. The final purchase price was approximately $61.2 million which was comprised of (i) the fair market value of GMFS's MSR portfolio, (ii) the fair market value of GMFS's net tangible assets and (iii) a purchase price premium. In addition to cash paid at closing, the total consideration included two contingent $1 million deferred premium payments payable in cash over two years, plus the Production and Profitability Earn-Out. The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The estimated present value of the total contingent consideration at October 31, 2014 and March 31, 2016 was $11.4 million and $11.5 million, respectively, based on the future production and earnings projections of GMFS over the four-year earn-out period. The Company funded the closing cash payment through a combination of available cash and the liquidation of a portion of its non-Agency RMBS portfolio.

As disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2015, GMFS had executed a statute of limitations tolling agreement with at least one counterparty with respect to mortgage loans that were sold by GMFS to this counterparty’s predecessor. This tolling agreement extends the time period which this counterparty could bring claim against GMFS.

The initial tolling agreement was executed by GMFS on December 12, 2013 and then further amended to extend the expiration date. Based on communications received in April 2015 from this counterparty, the Company believes that when this tolling agreement expires, absent further extension of the tolling agreement or settlement of the counterparty's claims, it is probable that the counterparty will initiate litigation against GMFS seeking substantial damages based on alleged breaches of representations and warranties made by GMFS. The most recent amendment of the tolling agreement extended the expiration date to June 2, 2016 and can be further extended by agreement of the parties. The Company also understands that this counterparty has commenced or threatened litigation arising out of historical mortgage loan purchases by its predecessor against a number of other mortgage loan originators. The Company estimates that dating back to a period that began approximately 16 years ago in 1999 and ended in 2006, approximately $1 billion of mortgage loans were sold servicing released by GMFS to the predecessor to this counterparty. While the historical claims experience of GMFS with respect to purchasers of mortgage loans from GMFS over the 1999 to 2006 period has not resulted in material damages claimed against or paid by GMFS, as further disclosed in the Company's Form 10-K for the year ended December 31, 2015, claims brought by this counterparty could expose GMFS to substantial damages that may be material, cause the Company and GMFS to devote significant management time and attention and other resources to resolving or defending these claims, require GMFS, the Company or its other subsidiaries to incur significant costs, or cause significant losses that may be material.

Although the Company has established a loan indemnification reserve for potential losses related to loan sale representations and warranties with a corresponding provision recorded for loan losses due to the limited information available at this stage of the matter, the Company is not able to determine the likelihood of the outcome or estimate an amount of loss or range of losses. The Company believes that losses in excess of the loan indemnification reserve will be recovered by the Company as either a reduction of the total contingent consideration owed under the GMFS Merger Agreement given the indemnification provisions in the GMFS Merger Agreement or by withdrawing funds from an escrow account established by the sellers at the time of the acquisition (as of March 31, 2016, the balance in the escrow account was $4,005,733). Additionally, the Company has delayed the first year installment payment of the contingent consideration. Losses in excess of the loan indemnification reserve, total contingent consideration and the escrow account could have a material adverse impact on the Company's results of operations, financial position or cash flows. In the event of litigation or settlement with the counterparty, the Company intends to pursue claims against the sellers of GMFS seeking indemnification for any losses or any amounts paid in settlement, although there can be no assurance that such claims would be successful or that any amounts available for indemnification would be adequate.

Dividends

The Company's current policy is to pay quarterly distributions which will allow it to qualify as a REIT and generally not be subject to U.S. federal income tax on its undistributed income. Taxable and U.S. GAAP earnings will typically differ due to differences in premium amortization and discount accretion, certain non-taxable unrealized and realized gains and losses, and non-deductible general and administrative expenses.

During 2016, the Company declared the following dividends:

Declaration Date		Record Date		Payment Date		Amount per Share and OP Unit
March 17, 2016		March 31, 2016		April 15, 2016		$	0.40

Cash Flows From Operating Activities

The Company’s cash flows (used in)/provided by operating activities for the three months ended March 31, 2016 and March 31, 2015 were as follows:

Three Months Ended
March 31, 2016		March 31, 2015
(dollars in thousands)
$	573	$	(30,085	)

The cash flows (used in)/provided by operating activities for the three months ended March 31, 2016 and March 31, 2015 are primarily a result of income earned on the Company’s assets, partially offset by interest expense on the Company’s borrowings and operating expenses. Additionally, cash flows from operating activities for the three months ended March 31, 2016 and March 31, 2015 are also impacted by the operations of GMFS including the origination of mortgage loans held for sale, and capitalized MSRs offset by non-interest income and proceeds from the sale of these mortgage loans.

Cash Flows From Investing Activities

The cash flows from the Company's investing activities for the three months ended March 31, 2016 and March 31, 2015 are as follows:

	Three Months Ended
	March 31, 2016			March 31, 2015
	(dollars in thousands)
Origination of mortgage loans held for investment		(1,405	)		(1,477	)
Acquisition of mortgage loans held for investment		(10,124	)		—
Proceeds from principal repayments on mortgage loans held for investment and sale		11,455			7,460
Proceeds from principal repayments on real estate securities		4,178			3,943
Proceeds from sales of real estate securities		16,094			—
Restricted cash provided by investment activities		212			4,113
Net cash provided by investing activities	$	20,410		$	14,039

Cash Flows From Financing Activities

The cash flows from the Company's financing activities for the three months ended March 31, 2016 and March 31, 2015 are as follows:

	Three Months Ended
	March 31, 2016			March 31, 2015
	(dollars in thousands)
Net borrowings under warehouse lines of credit	$	709		$	27,469
Borrowings from Treasury security repurchase agreement		39,574			—
Net borrowings under loan repurchase facilities		603			(245	)
Borrowings from securities repurchase agreements		84			1,016
Repayments of securities repurchase agreements		(12,583	)		(4,404	)
Dividends on common stock and distributions on OP units (net of change in dividends and distributions payable)		(3,559	)		(3,559	)
Net cash provided by financing activities	$	24,828		$	20,277

Contractual Obligations

The Company has entered into an Investment Advisory Agreement with the Advisor. The Advisor is entitled to receive a quarterly advisory fee, loan sourcing fee and the reimbursement of certain expenses; however, these obligations do not have fixed and determinable payments.

The following table presents contractual obligations and commitments at March 31, 2016, as discussed above under “Liquidity and Capital Resources”:

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(dollars in thousands)
Warehouse lines of credit	$	101,478	$	101,478	$	—	$	—	$	—
Interest on warehouse lines of credit ⁽¹⁾		1,372		1,372		—		—		—
Loan repurchase facilities		297,392		297,392		—		—		—
Interest on loan repurchase facilities ⁽¹⁾		1,740		1,740		—		—		—
Repurchase agreements		60,801		60,801		—		—		—
Interest on securities repurchase agreements ⁽¹⁾		279		279		—		—		—
Treasury securities repurchase agreements		39,574		39,574		—		—		—
Exchangeable Senior Notes		57,500		57,500		—		—		—
Interest on Exchangeable Senior Notes		4,600		4,600		—		—		—
Operating leases		2,342		929		1,413		—		—
Total	$	567,078	$	565,665	$	1,413	$	—	$	—

(1)

Interest is calculated based on the interest rates in effect at March 31, 2016 includes all interest expense incurred and expected to be incurred in the future through the contractual maturity of the associated borrowings.

Off-Balance Sheet Arrangements

As of the date of this quarterly report on Form 10-Q, the Company had no off-balance sheet arrangements, except for its operating leases.

Inflation

Virtually all of the Company's assets and liabilities are and will be interest rate sensitive in nature. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company's financial statements are prepared in accordance with U.S. GAAP and the Company's activities and balance sheet shall be measured with reference to historical cost and/or fair value without considering an independent inflation factor.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The primary components of the Company's market risk are related to credit risk, interest rate risk, prepayment risk and fair value risk. While the Company does not seek to avoid risk completely, the Company believes that risk can be quantified from historical experience and the Company will seek to actively manage that risk, to earn sufficient compensation to justify taking risk and to maintain capital levels consistent with the risks the Company undertakes.

Credit Risk

The Company expects to encounter credit risk related to its non-Agency RMBS, mortgage loans and other target assets, including assets it may originate or acquire. A portion of the Company's assets are comprised of residential mortgage loans that are unrated. The credit risk related to these investments pertains to the ability and willingness of borrowers to pay the mortgage loan payments, the ability of which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. The Company believes that residual loan credit quality is primarily determined by the borrowers' credit profiles and loan characteristics. Changes in home price appreciation have a significant impact on the performance of non-Agency RMBS and mortgage loans.

Interest Rate Risk

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

The Company is subject to interest rate risk in connection with any floating or inverse floating rate investments and its repurchase agreements. The Company's repurchase agreements may be of limited duration and are periodically refinanced at current market rates. The Company intends to manage this risk using interest rate derivative agreements. These instruments are intended to serve as a hedge against future interest rate increases on the Company's borrowings. The Company primarily assesses its interest rate risk by estimating and managing the duration of its assets relative to the duration of its liabilities. Duration measures the change in the fair value of an asset based on a change in an interest rate. The Company generally calculates duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

The borrowings the Company used to fund its portfolio included $516.5 million at March 31, 2016 under the warehouse lines of credit and repurchase agreements with four lenders, Loan Repurchase Facilities, master securities repurchase agreements with four counterparties and the Exchangeable Senior Notes. At March 31, 2016, the Company also had interest rate swaps with an outstanding notional amount of $17.2 million, resulting in variable rate debt of $442.5 million. A 50 basis point increase in LIBOR would increase the quarterly interest expense related to the $442.5 million in variable rate debt by $0.6 million. Such hypothetical impact of interest rates on the Company's variable rate debt does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, the Company may take actions to further mitigate its exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company's financial structure.

Net Interest Income

The Company's operating results will depend in part on differences between the income from its investments and its borrowing costs and will also be impacted by the planned sale of the seasoned, re-performing whole loan portfolio in the Company’s residential mortgage investment segment. The Company's Loan Repurchase Facilities, securities repurchase agreements and warehouse lines of credit and repurchase agreements related to the GMFS origination platform, provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. If the federal funds rate is increased above its existing target range, we would ordinarily expect LIBOR to also increase. If this occurs, we would expect the borrowing costs associated with the Company's investments to increase while the income earned by the Company on its fixed interest rate investments to remain substantially unchanged. This will result in a narrowing of the net interest spread between existing assets and borrowings and may result in a decline in asset value or otherwise result in losses. The Company also has interest rate swaps in place to partially hedge the volatility in a portion of its variable rate debt. In addition, as discussed in the Company's Form 10-K for the year ended December 31, 2015, an increase in the federal funds rate, if accompanied by broader increase in interest rates, may also cause other challenges for the Company's business by, for example, reducing the demand for newly originated mortgage loans due to the higher cost of borrowing, which could adversely impact loan production from GMFS.

Hedging techniques are partly based on assumed levels of prepayments of the Company's residential mortgage loans and RMBS. If prepayments are slower or faster than assumed, the effectiveness of any hedging strategies the Company uses will be reduced and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are complex and may produce volatile returns. The Company is considering a variety of steps to address the impact on our business of a rising interest rate environment, including the sale of existing assets that may be sensitive to higher interest rates, changes to our asset and liability hedging strategy, acquiring new assets that may be less sensitive to rising rates or reducing the amount of leverage we use in our business. There can be no assurance that such steps or others which the Company may implement in the near to medium term will be effective in mitigating the impact of a rising rate environment.

Prepayment Risk

As the Company receives prepayments of principal on its investments, premiums paid on such investments will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.

Extension Risk

If prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on the Company's results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the fair market value of the Company's hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause it to incur losses.

Fair Value Risk

The Company intends to elect the fair value option of accounting on most of its residential mortgage investments and loans held for sale, MSRs and securities investments and account for them at their estimated fair value with unrealized gains and losses included in earnings pursuant to accounting guidance. The estimated fair value of these residential mortgage loans, MSRs and securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these residential mortgage loans and securities would be expected to decrease and MSRs would be expected to increase, conversely, in a decreasing interest rate environment, the estimated fair value of these residential mortgage loans, and securities would be expected to increase and MSRs would be expected to decrease.

Counterparty Risk

The Company finances the acquisition of a significant portion of its residential mortgage loans, RMBS and Other Investment Securities with its repurchase agreements and warehouse lines of credit. In connection with these financing arrangements, the Company pledges its residential mortgage loans and securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e. , the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.

Certain of the Company's subsidiaries have entered into over-the-counter interest rate swap agreements to hedge risks associated with movements in interest rates. Because interest rate swaps were not cleared through a central counterparty, the Company remains exposed to the counterparty's ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an over-the-counter swap counterparty cannot perform under the terms of an interest rate swap, the Company's subsidiary would not receive payments due under that agreement, the Company may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While the Company would seek to terminate the relevant over-the-counter swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that the Company would be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, the Company could be forced to cover its unhedged liabilities at the then current market price. The Company may also be at risk for any collateral the Company has pledged to secure the Company's obligations under the over-the-counter interest rate swap if the counterparty becomes insolvent or files for bankruptcy. Therefore, upon a default by an interest rate swap agreement counterparty, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.

During the past several years, certain repurchase agreement and interest rate swap counterparties in the United States and Europe have experienced financial difficulty and have been either rescued by government assistance or otherwise benefited from accommodative monetary policy of their respective central banks.

The following table summarizes the Company’s exposure to its repurchase agreements, warehouse lines of credit and derivative counterparties at March 31, 2016:

	Number of Counterparties		Repurchase Agreement Borrowings ⁽¹⁾		Warehouse Lines of Credit		Swaps & Swaption at Fair Value			Exposure ⁽²⁾		Exposure as a Percentage of Total Assets
	(dollars in thousands)
North America:
U.S.		4	$	317,480	$	75,397	$	—		$	104,542		13.0	%
Canada ⁽³⁾		1		45,532		—		—			14,783		1.8
		5		363,012		75,397		—			119,325		14.9	%
Europe: ⁽³⁾
United Kingdom		1		7,548		—		(1,641	)		4,195		0.5	%
Switzerland		2		27,510		26,081		—			9,552		1.2
		3		35,058		26,081		(1,641	)		13,747		1.7	%
Total Counterparty Exposure		8	$	398,070	$	101,478	$	(1,641	)	$	133,072		16.6	%

	(1)	Includes accrued interest payable.
	(2)	The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and warehouse lines of credit, including interest payable, plus the derivative liability and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets, plus derivative assets.
	(3)	Includes foreign based counterparties as well as U.S. domiciled subsidiaries of such counterparties, as such transactions are generally entered into with a U.S. domiciled subsidiary of such counterparties.

The following table presents information with respect to any counterparty for repurchase agreements for which the Company had greater than 5% of stockholders’ equity at risk in the aggregate at March 31, 2016:

Counterparty	Counterparty Rating ⁽¹⁾	Amount of Risk ⁽²⁾		Weighted Average Months to Maturity for Repurchase Agreements		Percentage of Stockholders’ Equity
	(dollars in thousands)
Citibank, N.A. ⁽³⁾	A/A1	$	98,740		2		57.8	%
RBC Capital Markets, LLC	AA-/A2	$	14,783		<1		8.7	%

	(1)	The counterparty rating presented is the long-term issuer credit rating as rated at March 31, 2016 by S&P and Moody’s, respectively.
	(2)	The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, plus the net unrealized gain on swaps including collateral pledged and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities.
	(3)	Includes amounts at risk with Citibank, N.A. and Citigroup Global Markets Inc. Counterparty rating is for Citibank, N.A. which represents $95.8 million of the total exposure. The remaining exposure is to Citigroup Global Markets Inc. which was rated A/Baa1 by S&P and Moody’s, respectively at March 31, 2016.

Item 4. Controls and Procedures

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

The Company, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of March 31, 2016. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.

Changes in Internal Controls over Financial Reporting

There have been no changes in the Company's "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three month period ended March 31, 2016 that have materially affected, or was reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. As of March 31, 2016, the Company was not involved in any legal proceedings. Also, see “Liquidity and Capital Resources – GMFS Transaction” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this quarterly report on Form 10-Q for a discussion relating to the tolling agreement executed by GMFS.

Item 1A. Risk Factors

See the Company's Annual Report on Form 10-K for the year ended December 31, 2015 and the Company's registration statement on Form S-4. There have been no material changes to the Company's risk factors during the three months ended March 31, 2016 other than the risk factors disclosed in the Company's registration statement on Form S-4.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(a)

Exhibits Files

Exhibit No.		Description
3.1*		Articles of Amendment and Restatement of ZAIS Financial Corp., incorporated by reference to Exhibit 3.1 of the Registrant's Form S-11, as amended (Registration No. 333-185938).

3.2*		Articles Supplementary of ZAIS Financial Corp., incorporated by reference to Exhibit 3.2 of the Registrant's Form S-11, as amended (Registration No. 333-185938).

3.3*		Bylaws of ZAIS Financial Corp., incorporated by reference to Exhibit 3.3 of the Registrant's Form S-11, as amended (Registration No. 333-185938).

4.1*		Specimen Common Stock Certificate of ZAIS Financial Corp., incorporated by reference to Exhibit 4.1 of the Registrant's Form S-11, as amended (Registration No. 333-185938).

10.1*		Agreement of Limited Partnership, dated as of July 29, 2011, of ZAIS Financial Partners, L.P., as amended on August 3, 2011, October 11, 2012, and December 13, 2012, incorporated by reference to Exhibit 10.2 of the Registrant's Form S-11, as amended (Registration No. 333-185938).

10.2*		Amendment to Agreement of Limited Partnership, dated as of February 13, 2013, of ZAIS Financial Partners, L.P., incorporated by reference to Exhibit 10.3 of the Registrant's Form 10-K (No. 001-35808), filed March 28, 2013.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**		Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2**		Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Calculation Linkbase Document

101.DEF		XBRL Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Linkbase Document

101.PRE		XBRL Taxonomy Presentation Linkbase Document

Previously filed.

Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZAIS FINANCIAL CORP

Date: May 10, 2016

	By:	/s/ Michael Szymanski
		Michael Szymanski
		Chief Executive Officer and President

	By:	/s/ Donna J. Blank
		Donna J. Blank
		Chief Financial Officer and Treasurer