Western Asset Mortgage Capital Corp - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-35543

Western Asset Mortgage Capital Corporation

(Exact name of Registrant as specified in its charter)


Delaware						27-0298092
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

Western Asset Mortgage Capital Corporation

385 East Colorado Boulevard

Pasadena, California 91101

(Address of Registrant’s principal executive offices)

(626) 844-9400

(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 ý No o

Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes ý No o

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes ☐ No ý

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

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

WMC

New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

As of November 3, 2021 there were 60,859,913 shares, par value $0.01, of the registrant’s common stock outstanding.

Table of Contents

TABLE OF CONTENTS


		Page

	Part I — FINANCIAL INFORMATION

ITEM 1.	Financial Statements	2

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	90

ITEM 4.	Controls and Procedures	96

	Part II — OTHER INFORMATION	97

ITEM 1.	Legal Proceedings	97

ITEM 1A.	Risk Factors	97

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	97

ITEM 3.	Defaults Upon Senior Securities	97

ITEM 4.	Mine Safety Disclosures	97

ITEM 5.	Other Information	97

ITEM 6.	Exhibits	98

Signatures		99

Table of Contents

Part I

ITEM I. Financial Statements

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)


	September 30, 2021		December 31, 2020
Assets:
Cash and cash equivalents	$	63,916	$	31,613
Restricted cash	260		76,132
Agency mortgage-backed securities, at fair value ($1,342 and $1,708 pledged as collateral, at fair value, respectively)	1,342		1,708
Non-Agency mortgage-backed securities, at fair value ($153,460 and $167,970 pledged as collateral, at fair value, respectively)	162,661		189,462
Other securities, at fair value ($52,093 and $48,754 pledged as collateral, at fair value, respectively)	52,093		48,754
Residential Whole Loans, at fair value ($949,417 and $1,008,782 pledged as collateral, at fair value, respectively)	949,417		1,008,782
Residential Bridge Loans ($5,960 and $12,813 at fair value and $5,960 and $12,960 pledged as collateral, respectively)	5,960		13,916
Securitized commercial loans, at fair value	1,377,005		1,605,335
Commercial Loans, at fair value ($101,271 and $310,523 pledged as collateral, at fair value, respectively)	128,766		310,523

Investment related receivable	27,586		30,576
Interest receivable	10,726		13,568
Due from counterparties	2,842		2,327
Derivative assets, at fair value	94		161
Other assets	46,676		3,152
Total Assets (1)	$	2,829,344	$	3,336,009

Liabilities and Equity:
Liabilities:
Repurchase agreements, net	$	483,268	$	356,923
Convertible senior unsecured notes, net	126,632		170,797
Securitized debt, net ($1,365,494 and $1,553,722 at fair value and $185,666 and $215,753 held by affiliates, respectively)	1,970,513		2,446,012
Interest payable (includes $712 and $784 on securitized debt held by affiliates, respectively)	7,763		12,006

Due to counterparties	—		321
Derivative liability, at fair value	562		656
Accounts payable and accrued expenses	2,965		2,686
Payable to affiliate	3,133		3,171
Dividend payable	3,651		3,649
Other liabilities	8,804		84,674
Total Liabilities (2)	2,607,291		3,080,895

Commitments and contingencies

Stockholders’ Equity:
Common stock: $0.01 par value, 500,000,000 shares authorized, 60,859,913 and 60,812,701 outstanding, respectively	609		609
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—		—
Treasury stock, at cost, 100,000 and 100,000 shares held, respectively	(578)		(578)
Additional paid-in capital	917,963		915,458
Retained earnings (accumulated deficit)	(707,808)		(660,377)
Total Stockholders’ Equity	210,186		255,112
Non-controlling interest	11,867		2
Total Equity	222,053		255,114
Total Liabilities and Equity	$	2,829,344	$	3,336,009

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands — except share and per share data)

(Unaudited)


	September 30, 2021		December 31, 2020
(1) Assets of consolidated VIEs included in the total assets above:
Cash and cash equivalents	$	9,245	$	—
Restricted cash	260		76,132
Residential Whole Loans, at fair value ($949,417 and $1,008,782 pledged as collateral, at fair value, respectively)	949,417		1,008,782
Residential Bridge Loans ($5,960 and $11,858 at fair value and $5,960 and $12,960 pledged as collateral, respectively)	5,960		12,960
Securitized commercial loans, at fair value	1,377,005		1,605,335
Commercial Loans, at fair value ($14,362 and $68,466 pledged as collateral, at fair value, respectively)	14,362		68,466
Investment related receivable	24,224		27,987
Interest receivable	9,433		10,936
Other assets	80		80
Total assets of consolidated VIEs	$	2,389,986	$	2,810,678

(2) Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, net ($1,365,494 and $1,553,722 at fair value and $185,666 and $215,753 held by affiliates, respectively)	$	1,970,513	$	2,446,012
Interest payable (includes $712 and $784 on securitized debt held by affiliates, respectively)	6,519		7,882
Accounts payable and accrued expenses	49		89
Other liabilities	260		76,132
Total liabilities of consolidated VIEs	$	1,977,341	$	2,530,115

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)


	For the three months ended September 30, 2021		For the three months ended September 30, 2020		For the nine months ended September 30, 2021		For the nine months ended September 30, 2020
Net Interest Income
Interest income	$	40,141	$	43,970	$	127,353	$	130,310
Interest expense (includes $3,564, $2,647, $10,919 and $5,203 on securitized debt held by affiliates, respectively)	32,978		33,853		104,352		94,376
Net Interest Income	7,163		10,117		23,001		35,934

Other Income (Loss)
Realized gain (loss), net	(1,526)		718		(7,367)		82,944

Unrealized gain (loss), net	(6,003)		54,690		(39,271)		(225,381)
Gain (loss) on derivative instruments, net	515		(88)		716		(197,922)
Other, net	277		(31)		449		385
Other Income (Loss)	(6,737)		55,289		(45,473)		(339,974)

Expenses
Management fee to affiliate	1,502		1,513		4,469		3,016
Financing fee	—		—		—		20,540
Other operating expenses	1,306		1,198		2,126		2,994
General and administrative expenses:
Compensation expense	626		716		1,985		2,070
Professional fees	947		827		2,864		3,848
Other general and administrative expenses	747		1,138		2,793		2,263
Total general and administrative expenses	2,320		2,681		7,642		8,181
Total Expenses	5,128		5,392		14,237		34,731

Income (loss) before income taxes	(4,702)		60,014		(36,709)		(338,771)
Income tax provision (benefit)	(218)		205		(19)		367
Net income (loss)	(4,484)		59,809		(36,690)		(339,138)
Net income (loss) attributable to non-controlling interest	(271)		2		(267)		6
Net income (loss) attributable to common stockholders and participating securities	$	(4,213)	$	59,807	$	(36,423)	$	(339,144)

Net income (loss) per Common Share — Basic	$	(0.07)	$	0.98	$	(0.60)	$	(6.02)
Net income (loss) per Common Share — Diluted	$	(0.07)	$	0.98	$	(0.60)	$	(6.02)

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Changes in Equity

(in thousands—except shares and share data)

(Unaudited)


	Three Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares	Par
Balance at June 30, 2021	60,812,701	$	609	$	915,782	$	(699,920)	$	(578)	$	215,893	$	2	$	215,895


Equity contributions	—	—		—		—		—		—		12,138		12,138
Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock to common stock	47,212	—		—		—		—		—		—		—

Offering costs	—	—		(68)		—		—		(68)		—		(68)
Vesting of restricted stock	—	—		165		—		—		165		—		165

Net loss	—	—		—		(4,213)		—		(4,213)		(271)		(4,484)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		24		(3,675)		—		(3,651)		—		(3,651)
Balance at September 30, 2021	60,859,913	$	609	$	917,963	$	(707,808)	$	(578)	$	210,186	$	11,867	$	222,053


	Three Months Ended September 30, 2020
	Common Stock Outstanding			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares	Par
Balance at June 30, 2020	59,458,617	$	595	$	911,488	$	(724,252)	$	(578)	$	187,253	$	2	$	187,255
Exchange of convertible senior unsecured notes	1,354,084	14		3,574		—		—		3,588		—		3,588




Vesting of restricted stock	—	—		182		—		—		182		—		182

Net income	—	—		—		59,807		—		59,807		2		59,809
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		14		(3,055)		—		(3,041)				(3,041)
Balance at September 30, 2020	60,812,701	$	609	$	915,258	$	(667,500)	$	(578)	$	247,789	$	2	$	247,791

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	Nine Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares	Par												Total
Balance at December 31, 2020	60,812,701	$	609	$	915,458	$	(660,377)	$	(578)	$	255,112	$	2	$	255,114


Equity contributions	—	—		—		—		—		—		12,138		12,138
Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock to common stock	47,212	—		—		—		—		—		—		—
Offering costs	—	—		(68)		—		—		(68)		—		(68)

Vesting of restricted stock	—	—		454		—		—		454		—		454

Net loss	—	—		—		(36,423)		—		(36,423)		(267)		(36,690)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(6)		(6)
Dividends declared on common stock	—	—		59		(11,008)		—		(10,949)		—		(10,949)
Balance at September 30, 2021	60,859,913	$	609	$	917,963	$	(707,808)	$	(578)	$	210,186	$	11,867	$	222,053


	Nine Months Ended September 30, 2020
	Common Stock Outstanding			Additional Paid-In Capital		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares	Par												Total
Balance at December 31, 2019	53,523,876	$	535	$	889,227	$	(325,301)	$	—	$	564,461	$	—	$	564,461
Proceeds from public offerings of common stock	6,034,741	60		22,297		—		—		22,357		—		22,357
Offering costs	—	—		(371)		—		—		(371)		—		(371)
Proceeds from non-controlling interest, net of offering costs	—	—		—		—		—		—		2		2

Exchange of convertible senior notes	1,354,084	14		3,574		—		—		3,588		—		3,588

Vesting of restricted stock	—	—		517		—		—		517		—		517
Treasury stock	(100,000)	—		—		—		(578)		(578)		—		(578)
Net loss	—	—		—		(339,144)		—		(339,144)		6		(339,138)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(6)		(6)
Dividends declared on common stock	—	—		14		(3,055)		—		(3,041)		—		(3,041)
Balance at September 30, 2020	60,812,701	$	609	$	915,258	$	(667,500)	$	(578)	$	247,789	$	2	$	247,791

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (in thousands)

(Unaudited)


	For the nine months ended September 30, 2021		For the nine months ended September 30, 2020
Cash flows from operating activities:
Net loss	$	(36,690)	$	(339,138)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Premium amortization and (discount accretion), net	145		5,291
Interest income earned added to principal of investments	(310)		(647)
Amortization of deferred financing costs	3,935		2,165
Amortization of discount on convertible senior unsecured notes	712		830
Restricted stock amortization	453		517

Interest payments and basis recovered on MAC interest rate swaps	—		202
Premium on purchase of Residential Whole Loans	(10,281)		(3,858)


Unrealized loss, net	39,271		225,381
Realized (gain) loss on extinguishment of convertible senior notes	1,337		(1,258)
Realized (gain) loss on sale of real estate owned ("REO")	(54)		680
Unrealized loss on derivative instruments, net	97		4,122

Realized (gain) loss on investments, net	6,084		(82,366)
Loss on derivatives, net	—		13,133

Changes in operating assets and liabilities:
Interest receivable	2,496		5,312
Investment related receivable	(704)		—
Other assets	(973)		(1,933)
Interest payable	(4,243)		(6,161)
Accounts payable and accrued expenses	60		804
Payable to affiliate	(38)		1,107
Other liabilities	1		20,540
Net cash provided by (used in ) in operating activities	1,298		(155,277)
Cash flows from investing activities:
Purchase of securities	—		(320,996)
Proceeds from sale of securities	—		2,216,830
Proceeds from sale of REO	738		2,491
Principal repayments and basis recovered on securities	14,685		32,401
Purchase of Residential Whole Loans	(233,041)		(109,480)
Proceeds from sale of Residential Whole Loans	—		144,258
Principal repayments on Residential Whole Loans	313,661		210,097

Principal repayments on commercial loans	103,272		37,728

Principal repayments on securitized commercial loans	354,202		211,205

Principal repayments on Residential Bridge Loans	7,052		16,759


Premium for credit default swaps, net	—		(14,028)
Net settlements of TBAs	—		(2,430)



Interest payments and basis recovered on MAC interest rate swaps	—		(202)
Due from counterparties	50		2,160



Premium for interest rate swaptions, net	—		80
Net cash provided by investing activities	560,619		2,426,873

Cash flows from financing activities:
Proceeds from issuance of common stock	—		22,357
Payment of offering costs	(86)		(374)
Repurchase of common stock	—		(578)

Proceeds from issuance of convertible senior unsecured notes	86,250		—
Payments on extinguishment of convertible senior unsecured notes	(128,645)		—

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Continued) (in thousands)

(Unaudited)


	For the nine months ended September 30, 2021		For the nine months ended September 30, 2020
Proceeds from offering to non-controlling interest, net of offering costs	—		2
Proceeds from repurchase agreement borrowings	2,527,530		9,149,204
Repayments of repurchase agreement borrowings	(2,403,068)		(11,615,203)

Proceeds from securitized debt	—		460,787
Repayments of securitized debt	(597,221)		(366,828)


Payments made for deferred financing costs	(2,536)		(3,145)
Due from counterparties, net	(565)		95,595
Due to counterparties, net	(321)		(692)
Increase (decrease) in other liabilities	(75,873)		42,634
Dividends paid on common stock	(10,947)		(16,592)
Dividends paid to non-controlling interest	(4)		(4)
Net cash used in financing activities	(605,486)		(2,232,837)



Net (decrease) increase in cash, cash equivalents and restricted cash	(43,569)		38,759
Cash, cash equivalents and restricted cash, beginning of period	107,745		84,279
Cash, cash equivalents and restricted cash, end of period	$	64,176	$	123,038

Supplemental disclosure of operating cash flow information:
Interest paid	$	87,658	$	90,885
Income taxes paid	$	192	$	810
Supplemental disclosure of non-cash financing/investing activities:
Underwriting and offering costs payable	$	6	$	—
Principal payments of securities, not settled	$	—	$	44


Assets of deconsolidated VIE	$	—	$	(150,804)
Liabilities of deconsolidated VIE	$	—	$	143,952
Mortgage-backed securities recorded upon deconsolidation	$	—	$	6,852

Assets of consolidated VIE	$	—	$	1,245,287
Liabilities of consolidated VIE	$	—	$	(1,231,549)
Mortgage-backed securities derecognized upon VIE consolidation	$	—	$	(13,737)
Dividends and distributions declared, not paid	$	3,651	$	3,041
Dividends to non-controlling interest, not paid	$	2	$	2
Principal payments of Residential Whole Loans, not settled	$	22,621	$	16,097
Principal payments of Residential Bridge Loans, not settled	$	1,715	$	2,720

Other assets - Transfer of Bridge Loans to REO	$	752	$	419
Other assets - Transfer of Commercial Loans to REO	$	30,345	$	—
Other assets - Contribution of REO from non-controlling interest	$	12,138	$	—
Financing fee payable	$	—	$	(20,540)
Exchange of convertible senior notes for common stock	$	—	$	3,588

Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents	$	63,916	$	27,459
Restricted cash	260		95,579
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	64,176	$	123,038

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(in thousands- except share and per share data)

The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: “Agency” or “Agencies” refer to a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae” or “GNMA”); references to “MBS” refer to mortgage backed securities, including residential mortgage-backed securities or “RMBS,” commercial mortgage-backed securities or “CMBS,” and “Interest-Only Strips” (as defined herein); “Agency MBS” refer to RMBS, CMBS and Interest-Only Strips issued or guaranteed by the Agencies while “Non-Agency MBS” refer to RMBS, CMBS and Interest-Only Strips that are not issued or guaranteed by the Agencies; references to “ARMs” refers to adjustable rate mortgages; references to “Interest-Only Strips” refer to interest-only (“IO”) and inverse interest-only (“IIO”) securities issued as part of or collateralized with MBS; references to “TBA” refer to To-Be-Announced Securities; and references to “Residential Whole Loans,” “Residential Bridge Loans” and “Commercial Loans” (collectively “Whole Loans”) refer to individual mortgage loans secured by single family, multifamily and commercial properties.

Note 1 — Organization

Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “Company”), commenced operations in May 2012. The Company invests in, finances and manages a diversified portfolio of real estate related securities, Whole Loans and other financial assets. The Company’s current portfolio is comprised of Non-Qualified Residential Whole Loans ("Non-QM"), Commercial Loans, Non-Agency CMBS and to a lesser extent Agency RMBS, Non-Agency RMBS, Residential Bridge Loans, GSE Risk Transfer Securities and asset-backed securities (“ABS”) secured by a portfolio of private student loans. The Company’s investment strategy is based on Western Asset Management Company, LLC’s (the “Manager”) perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time. The Manager will vary the allocation among various asset classes subject to maintaining the Company’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940, as amended (the “1940 Act”). These restrictions limit the Company’s ability to invest in non-qualifying MBS, non-real estate assets and/or assets which are not secured by real estate. Accordingly, the Company’s portfolio will continue to be principally invested in qualifying MBS, Whole Loans and other real estate related assets.

The Company is externally managed by the Manager, an investment advisor registered with the Securities and Exchange Commission (“SEC”). The Manager is a wholly-owned subsidiary of Franklin Resources, Inc. (“Franklin”), which on July 31, 2020 acquired the Manager's previous parent Legg Mason Inc. The Company operates and has elected to be taxed as a real estate investment trust or “REIT” commencing with its taxable year ended December 31, 2012.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited financial statements and related notes have been prepared in conformity with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary have been made to state fairly the Company’s financial position, results of operations and cash flows. The results of operations for the period ended September 30, 2021, are not necessarily indicative of the results to be expected for the full year or any future period. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021.

The consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries, and variable interest entities (“VIEs”) in which it is considered the primary beneficiary. All intercompany amounts between the Company and its subsidiaries and consolidated VIEs have been eliminated in consolidation.

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Variable Interest Entities

VIEs are defined as entities that by design either lack sufficient equity for the entity to finance its activities without additional subordinated financial support or are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. The Company evaluates all of its interests in VIEs for consolidation. When the interests are determined to be variable interests, the Company assesses whether it is deemed the 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 or the right to receive benefits of the VIE that could potentially be significant to the VIE.

To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, it considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes: first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it considers all of its economic interests. This assessment requires the Company to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by the Company.

In instances where the Company and its related parties have variable interests in a VIE, the Company considers whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed. If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed. If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group as a whole meets these two criteria, the determination of primary beneficiary within the related party group requires significant judgment. The analysis is based upon qualitative as well as quantitative factors, such as the relationship of the VIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, with the objective of determining which party is most closely associated with the VIE.

Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Impact of the COVID-19 Pandemic

Beginning with the quarter ended March 31, 2020, the COVID-19 pandemic, created extensive disruptions to the global economy and the lives of individuals throughout the world. Governments and businesses have taken and are continuing to take unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including vaccination efforts, face covering mandates, quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. The pandemic and related efforts to contain the spread of COVID-19 have disrupted global economic activity, impacted interest rates, increased economic and market uncertainty, disrupted trade and supply chains, and created unprecedented financial market conditions and disruptions. This rapid disruption in the fixed income markets in early 2020 specifically in mortgage markets had an adverse impact on our book value, liquidity, results of operations, and financial position. Although market conditions have improved since the first quarter of 2020, the full

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impact of COVID-19 on the mortgage REIT industry, credit markets, and consequently, on the Company's financial condition and results of operations for future periods remain uncertain.

While the roll out of vaccines and booster vaccines offer a prospective timeline for recovery, our Manager's view is that it will take some time, if ever, for economic and social conditions to fully rebound. Our Manager's outlook is that (i) the near-term, ii) COVID-19 continues to impact global populations, but the worst of the delta variant is behind us, iii) U.S. and global grow is decelerating from high levels, iv) monetary accommodation will be reduced from crisis levels, v) the bar for the Federal Reserve tightening remains high and is unlikely to be met in 2022, vi) global fiscal stimulus will be sharply reduced, vii) inflation remains challenging but will ease meaningfully during 2022, and viii)rates should remain range-bound in an estimated band of 1.25%-1.75% for 10-year U.S. treasuries.

Significant Accounting Policies

There have been no significant changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2020, other than the significant accounting policy disclosed below.

Real Estate Owned

REO represents real estate property acquired by the Company through foreclosure and it is classified as held for sale. Upon completion of the foreclosure, the Company initially records the REO at fair value less estimated costs to sell the property. In subsequent periods, REO is reported at the lower of the current carrying amount or fair value less estimated selling costs and it is classified in "Other assets" in the Consolidated Balance Sheets. Gains/losses recognized on foreclosure as well as realized gains/losses on the disposition of REO are reported by the Company in "Realized gain (loss), net" in the Consolidated Statements of Operations.

Recently adopted accounting pronouncements

Description

Adoption Date

Effect on Financial Statements

In January 2020, the FASB issued ASU 2020-01, “Investments-Equity Securities (Topic 321), Investment-Equity Method and Joint Ventures (Topic 323, and Derivatives and Hedging (Topic 815).” The amendments in this update clarified the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchase options accounted for under Topic 815.

January 1, 2021

The adoption of this standard did not have a material impact on the consolidated financial statements.

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Recently issued accounting pronouncements

Description

Effective Date

Effect on Financial Statements

In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).” The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed.

January 1, 2022.

The Company evaluated the impact this standard may have on its consolidated financial statements and does not believe it will have a material impact on its financial statements due to the limited nature of such transactions.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this update provided optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." The amendments in this Update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

March 12, 2020 through December 31, 2022

The Company may elect to adopt the amendments in ASU 2020-04 and ASU 2021-1 at any time after March 12, 2020 but not later than December 31, 2022. Currently, the Company's contracts that are referenced to LIBOR have not been affected by the amendments in these updates. The Company is in the process of evaluating the guidance and the other optional expedients, and the effect on the company's financial statements has not yet been determined

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Note 3 — Fair Value of Financial Instruments

The following tables present the Company’s financial instruments carried at fair value as of September 30, 2021 and December 31, 2020, based upon the valuation hierarchy (dollars in thousands):


	September 30, 2021
	Fair Value
	Level I		Level II		Level III		Total
Assets




Agency RMBS Interest-Only Strips	$	—	$	—	$	134	$	134
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		1,208		1,208
Subtotal Agency MBS	—		—		1,342		1,342

Non-Agency CMBS	—		119,861		14,789		134,650
Non-Agency RMBS	—		25,731		—		25,731
Non-Agency RMBS Interest-Only Strips	—		—		2,280		2,280

Subtotal Non-Agency MBS	—		145,592		17,069		162,661

Other securities	—		52,093		—		52,093
Total mortgage-backed securities and other securities	—		197,685		18,411		216,096

Residential Whole Loans	—		—		949,417		949,417
Residential Bridge Loans	—		—		5,960		5,960
Securitized commercial loans	—		—		1,377,005		1,377,005
Commercial Loans	—		—		128,766		128,766
Derivative assets	—		94		—		94
Total Assets	$	—	$	197,779	$	2,479,559	$	2,677,338

Liabilities
Derivative liabilities	$	—	$	562	$	—	$	562
Securitized debt	—		1,350,574		14,920		1,365,494

Total Liabilities	$	—	$	1,351,136	$	14,920	$	1,366,056

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	December 31, 2020
	Fair Value
	Level I		Level II		Level III		Total
Assets





Agency RMBS Interest-Only Strips	$	—	$	—	$	143	$	143
Agency RMBS Interest-Only Strips accounted for as derivatives, included in MBS	—		—		1,565		1,565
Subtotal Agency MBS	—		—		1,708		1,708

Non-Agency CMBS	—		155,093		8,988		164,081
Non-Agency RMBS	—		—		21,416		21,416
Non-Agency RMBS Interest-Only Strips	—		—		3,965		3,965

Subtotal Non-Agency MBS	—		155,093		34,369		189,462

Other securities	—		40,161		8,593		48,754
Total mortgage-backed securities and other securities	—		195,254		44,670		239,924

Residential Whole Loans	—		—		1,008,782		1,008,782
Residential Bridge Loans	—		—		12,813		12,813
Securitized commercial loan	—		—		1,605,335		1,605,335
Commercial Loans	—		—		310,523		310,523
Derivative assets	—		161		—		161
Total Assets	$	—	$	195,415	$	2,982,123	$	3,177,538

Liabilities
Derivative liabilities	$	—	$	656	$	—	$	656
Securitized debt	—		1,538,304		15,418		1,553,722
Total Liabilities	$	—	$	1,538,960	$	15,418	$	1,554,378

When available, the Company uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Company will use independent pricing services, and if the independent pricing service cannot price a particular asset or liability, the Company will obtain third party broker quotes. The Manager’s pricing group, which functions independently from its portfolio management personnel, reviews the third party broker quotes by comparing the broker quotes for reasonableness to alternate sources when available. If independent pricing services or third party broker quotes, are not available, the Company determines the fair value of the securities using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates and when applicable, estimates of prepayments and credit losses.

In instances when the Company is required to consolidate a VIE that is determined to be a qualifying collateralized financing entity ("CFE"), under GAAP and if the Company has elected the fair value option for the securitized debt, the Company will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.

Mortgage-backed securities and other securities

In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. For Agency IOs, Non-Agency RMBS, CMBS and other securities, to determine whether a security should be a Level II, the securities are grouped by security type and the Manager reviews the internal trade history, for the quarter, for each security type. If there is sufficient trade data above a predetermined threshold of a security type, the

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Manager determines it has sufficient observable market data and the security will be categorized as a Level II; otherwise, the security is classified as a Level III.

Values for the Company’s securities are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments, and are designed to produce a pricing process that is responsive to market conditions. Depending on the type of asset and the underlying collateral, the primary inputs to the model include yields for TBAs, Agency RMBS, the U.S. Treasury market and floating rate indices such as LIBOR, the Constant Maturity Treasury rate and the prime rate as a benchmark yield. In addition, the model may incorporate the current weighted average maturity and additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. When the third party pricing service cannot adequately price a particular security, the Company utilizes a broker’s quote which is reviewed for reasonableness by the Manager’s pricing group.

Residential Whole Loans and Residential Bridge Loans

Values for the Company's Non-QM Residential Whole Loans and Bridge Loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a discounted cash flow valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's Residential Whole Loans and Residential Bridge Loans. The key loan inputs include loan balance, interest rate, loan to value, delinquencies and fair value of the collateral for collateral dependent loans. The assumptions made by the independent third party pricing service includes the market discount rate, default assumptions and loss severity. Other inputs and assumptions relevant to the pricing of Residential Whole Loans include FICO scores and prepayment speeds.

During the quarter ended September 30, 2021, the independent third party pricing service used a combination of recent loan trades and recent residential whole loans securitization transactions adjusted for deal cost and liquidity premium, to form their opinion on the appropriate discount rate.

The Company reviews the analysis provided by pricing service as well as the key assumptions made available to the Company. Due to the inherent uncertainty of such valuation, the fair values established for residential loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company's loans are classified as Level III.

Commercial Loans

Values for the Company's Commercial Loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Company's Commercial Loans. The assumptions made by the independent third party pricing vendor include a market discount rate, default assumption, loss severity, cash flows and probability weighted loss scenarios. The Company reviews the analysis provided by the pricing service as well as the key assumptions. Due to the inherent uncertainty of such valuation, the fair values established for commercial loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company's commercial loans are classified as a Level III.

Securitized commercial loans

Values for the Company’s securitized commercial loans are based on the collateralized financing entity ("CFE") valuation methodology. Since there is an extremely limited market for the securitized commercial loans, the Company determined the securitized debt is more actively traded and therefore was more observable. Due to the inherent uncertainty of the securitized commercial loans' valuation, the Company classifies its securitized commercial loans as Level III.

Securitized debt

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Values for the Company's securitized debt that the Company elected the fair value option are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments. In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. Since the securitized debt represents traded debt securities, the Manager's pricing team reviews the trade activity during the quarter for each security to determine the appropriate level within the fair value hierarchy. If there is sufficient trade data above a predetermined volume threshold, the Manager determines it has sufficient observable market data and the debt security will be categorized as a Level II. If there is not sufficient observable market data the debt security will be categorized as a Level III.

Derivatives

Values for the Company's derivatives are based upon prices from third party pricing services, whose pricing is subject to review by the Manager’s pricing committee. In valuing its over-the-counter interest rate derivatives, such as swaps and swaptions, its currency derivatives, such as swaps and forwards and credit derivatives such as total return swaps, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. No credit valuation adjustment was made in determining the fair value of interest rate derivatives and/or futures contracts for the periods ended September 30, 2021 and December 31, 2020.

Third Party Pricing Data Review

The Company performs quarterly reviews of the independent third party pricing data. These reviews may include a review of the valuation methodology used by third party valuation specialists and review of the daily change in the prices provided by the independent pricing vendor which exceed established tolerances or comparisons to executed transaction prices, utilizing the Manager’s pricing group. The Manager’s pricing group, which functions independently from its portfolio management personnel, reviews the price differences or changes in price by comparing the vendor price to alternate sources including other independent pricing services or broker quotations. If the price change or difference cannot be corroborated, the Manager’s pricing group consults with the portfolio management team for market color in reviewing such pricing data as warranted. To the extent that the Manager has information, typically in the form of broker quotations that would indicate that a price received from the independent pricing service is outside of a tolerance range, the Manager generally challenges the independent pricing service price.

The following tables present a summary of the available quantitative information about the significant unobservable inputs used in the fair value measurement of financial instruments for which the Company has utilized Level III inputs to determine fair value as of September 30, 2021 and December 31, 2020 (dollars in thousands):


	Fair Value at				Range
	September 30, 2021		Valuation Technique	Unobservable Input	Minimum		Maximum			Weighted Average






Residential Whole Loans	$	949,417	Discounted Cash Flow	Market Discount Rate	2.0	%	7.5	%		3.2	%
				Weighted Average Life	1.1		8.6			2.9
Residential Bridge Loans	$	5,960	Discounted Cash Flow	Market Discount Rate	9.7	%	26.3	%	(1)	16.8	%
				Weighted Average Life	0.3		3.3			2.2



Commercial Loans	$	128,766	Discounted Cash Flow	Market Discount Rate	4.2	%	22.0	%		9.1	%
				Weighted Average Life	0.8		2.4			1.3

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	Fair Value at				Range
	December 31, 2020		Valuation Technique	Unobservable Input	Minimum		Maximum			Weighted Average






Residential Whole Loans	$	1,008,782	Discounted Cash Flow	Market Discount Rate	2.1	%	7.5	%		4.1	%
				Weighted Average Life	1.5		8.4			2.9
Residential Bridge Loans	$	12,813	Discounted Cash Flow	Market Discount Rate	8.0	%	35.2	%	(1)	18.0	%
				Weighted Average Life	0.3		2.6			1.3

Commercial Loans	$	310,523	Discounted Cash Flow	Market Discount Rate	6.3	%	18.4	%		10.5	%
				Weighted Average Life	0.5		1.9			0.7

(1) Yield to maturity is the total return on the loan expressed as an annual rate. Delinquent Bridge Loans that are nearing maturity and with fair value that is significantly less than the principal amount have a higher discount rate or yield to maturity.

The following tables present 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 III inputs to determine fair value:


	Three months ended September 30, 2021
$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loans		Securitized debt
Beginning balance	$	1,501	$	11,803	$	801,503	$	7,471	$	267,203	$	1,595,077	$	14,937
Transfers into Level III from Level II	—		5,683		—		—		—		—		—
Transfers from Level III into Level II	—		—		—		—		—		—		—
Purchases	—		—		232,993		—		—		—		—

Transfers to REO	—		—		—		(68)		(30,000)		—		—


Loan modifications / capitalized interest	—		—		34		—		—		—		—
Principal repayments	—		—		(80,607)		(1,575)		(102,969)		(214,545)		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		—		(3)		—		—		—


Unrealized gains/(losses), net on assets(1)	(93)		(399)		(3,074)		154		(5,495)		(9,617)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		1,103
Premium and discount amortization, net	(66)		(18)		(1,432)		(19)		27		6,090		(1,120)
Ending balance	$	1,342	$	17,069	$	949,417	$	5,960	$	128,766	$	1,377,005	$	14,920

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(93)	$	(399)	$	(1,055)	$	36	$	(5,479)	$	(12,336)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	(1,121)

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	Three months ended September 30, 2020
$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	1,975	$	33,984	$	8,695	$	1,124,051	$	24,171	$	323,474	$	465,694	$	31
Transfers into Level III from Level II	—		—		—		—		—		—		—		—
Transfers from Level III into Level II	—		—		—		—		—		—		—		—

Sales and settlements	—		—		—		—		—		—		—		—
Transfers to REO	—		—		—		—		—		—		—		—
VIE consolidation	—		—		—		—		—		—		1,245,287		17,960

Loan modifications / capitalized interest	—		—		—		607		—		33		—		—
Principal repayments	—		(97)		—		(74,818)		(7,942)		(91)		(32,560)		—
Total net gains / losses included in net income					0
Realized gains/(losses), net on assets	—		—		—		—		(288)		—		—		—


Unrealized gains/(losses), net on assets(1)	61		950		(188)		48,108		412		2,195		4,567		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		122
Premium and discount amortization, net	(183)		(91)		6		(951)		(20)		40		4,557		(746)
Ending balance	$	1,853	$	34,746	$	8,513	$	1,096,997	$	16,333	$	325,651	$	1,687,545	$	17,367

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	61	$	950	$	(188)	$	45,948	$	29	$	2,195	$	4,567	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(122)

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	Nine months ended September 30, 2021
$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	1,708	$	34,369	$	8,593	$	1,008,782	$	12,813	$	310,523	$	1,605,335	$	15,418
Transfers into Level III from Level II	—		5,683		—		—		—		—		—		—
Transfers from Level III into Level II	—		(23,370)		(10,306)		—		—		—		—		—
Purchases	—		—		—		241,417		—		—		—		—

Transfers to REO	—		—		—		—		(752)		(30,000)		—		—


Loan modifications / capitalized interest	—		—		—		311		—		—		—		—
Principal repayments	—		(256)		—		(307,543)		(6,542)		(103,272)		(354,202)		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		—		—		(155)		—		—		—


Unrealized gains/(losses), net on assets(1)	(109)		868		1,657		13,160		617		(48,630)		107,423		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		2,810
Premium and discount amortization, net	(257)		(225)		56		(6,710)		(21)		145		18,449		(3,308)
Ending balance	$	1,342	$	17,069	$	—	$	949,417	$	5,960	$	128,766	$	1,377,005	$	14,920

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(109)	$	(1,434)	$	—	$	13,702	$	(60)	$	(48,630)	$	92,424	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(2,357)

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	Nine months ended September 30, 2020
$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	15,915	$	45,814	$	17,196	$	1,375,860	$	33,269	$	370,213	$	909,040	$	1,057
Transfers into Level III from Level II	—		—		—		—		—		—		—		—
Transfers from Level III into Level II	—		—		(6,482)		—		—		—		—		—
Purchases	—		—		—		103,758		—		—		—		—
Sales and settlements	(11,529)		(12,658)		—		(144,259)		—		—		—		—
Transfers to REO	—		—		—		—		(419)		—		—		—
VIE consolidation	—		—		—		—		—		—		1,245,287		17,960
VIE deconsolidation	—		6,852		—		—		—		—		(150,804)		—
Loan modifications / capitalized interest	—		—		—		614		—		33		—		—
Principal repayments	—		(628)		(154)		(199,655)		(15,821)		(37,728)		(211,204)		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	1,528		(60)		—		(10,511)		(346)		—		—		—


Unrealized gains/(losses), net on assets(1)	(2,594)		(3,633)		(2,025)		(25,766)		(290)		(7,218)		(109,683)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		(432)
Premium and discount amortization, net	(1,467)		(941)		(22)		(3,044)		(60)		351		4,909		(1,218)
Ending balance	$	1,853	$	34,746	$	8,513	$	1,096,997	$	16,333	$	325,651	$	1,687,545	$	17,367

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(601)	$	(3,403)	$	(675)	$	(18,880)	$	(618)	$	(7,218)	$	(50,517)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	432

(1)Gains and losses are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.

(2)Gains and losses on securitized debt are included in "Unrealized gain (loss), net" in the Consolidated Statements of Operations.

Transfers between hierarchy levels for the three and nine months ended September 30, 2021 and September 30, 2020 were based on the availability of sufficient observable inputs. Movements from Level II to Level III was based on the back-testing of historical sales transactions performed by the Manager, which did not provide sufficient observable data to meet Level II versus Level III criteria, resulting in the movement from Level II to Level III. Movements from Level III to Level II was based on information received from a third party pricing service which, along with the back-testing of historical sales transactions performed by the Manager, provided the sufficient observable data for the movement from Level III to Level II. The Company did not have transfers between either Level I and Level II or Level I and Level III for the three and nine months ended September 30, 2021 and September 30, 2020.

Other Fair Value Disclosures

Certain Residential Bridge Loans, repurchase agreement borrowings, convertible senior unsecured notes and securitized debt are not carried at fair value in the consolidated financial statements. The following table presents the carrying value and estimated fair value of the Company’s financial instruments that are not carried at fair value as of September 30, 2021 and December 31, 2020 in the consolidated financial statements (dollars in thousands):

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	September 30, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets
Residential Bridge Loans	N/A		N/A		$	1,103	$	1,095
Total	$	—	$	—	$	1,103	$	1,095

Liabilities
Borrowings under repurchase agreements	$	483,268	$	481,009	$	356,923	$	359,799
Convertible senior unsecured notes	126,632		133,365		170,797		155,129
Securitized debt(1)	610,900		618,553		899,207		922,362
Total	$	1,220,800	$	1,232,927	$	1,426,927	$	1,437,290

(1) Carrying value excludes $5.9 million and $6.9 million of deferred financing costs as of September 30, 2021 and December 31, 2020, respectively.

"Due from counterparties" and "Due to counterparties" in the Company’s Consolidated Balance Sheets are reflected at cost which approximates fair value.

Residential Bridge Loans

Values for the Company's Bridge Loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a discounted cash flow valuation model that is calibrated to recent loan trade execution. Their valuation methodology incorporates commonly used market pricing methods, which include the inputs considered most significant to the determination of fair value of the Residential Bridge Loans. The key loan inputs include loan balance, interest rate, loan to value, FICO score, debt to income ratio and delinquencies. The assumption made by the independent third party pricing service includes the market discount rate, prepayment, default assumption and loss severity. The Company reviews the analysis provided by pricing service as well as the key assumptions made available to the Company. Due to the inherent uncertainty of such valuation, the fair values established for residential loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these loans. Accordingly, the Company's loans are classified as Level III.

Borrowings under repurchase agreements

The fair values of the borrowings under repurchase agreements are based on a net present value technique. This method discounts future estimated cash flows using rates the Company determined best estimates current market interest rates that would be offered for loans with similar characteristics and credit quality. The use of different market assumptions or estimation methodologies could have a material effect on the fair value amounts. This fair value measurement is based on observable inputs, and as such, are classified as Level II.

Convertible senior unsecured notes

The fair value of the convertible senior unsecured notes is based on quoted market prices. Accordingly, the Company's convertible senior unsecured notes are classified as Level I.

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Securitized debt

Values for the Company's securitized debt, related to the securitization of a portion of its Residential Whole Loans, are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments. In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. Since the securitized debt represents traded debt securities, the Manager's pricing team reviews the trade activity during the quarter for each security to determine the appropriate level within the fair value hierarchy. If there is sufficient trade data above a predetermined threshold, the Manager determines it has sufficient observable market data and the debt security will be categorized as a Level II. If there is not sufficient observable market data the debt security will be categorized as a Level III. At September 30, 2021, there was not sufficient observable market data for the debt to be classified as a Level II, accordingly it was classified as a Level III.

Note 4 – Mortgage-Backed Securities and other securities

The following tables present certain information about the Company’s investment portfolio at September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021
	Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon





Agency RMBS Interest-Only Strips (1)(2)	N/A		N/A		$	63	$	71	$	—	$	134	1.4	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		1,208		1.3	%

Total Agency MBS	—		—		63		71		—		1,342		1.3	%

Non-Agency RMBS	36,879		(14,437)		22,442		3,327		(38)		25,731		4.3	%
Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,742		—		(3,462)		2,280		0.3	%

Subtotal Non-Agency RMBS	36,879		(14,437)		28,184		3,327		(3,500)		28,011		0.9	%
Non-Agency CMBS	212,440		(15,474)		196,966		2,414		(64,730)		134,650		5.0	%
Total Non-Agency MBS	249,319		(29,911)		225,150		5,741		(68,230)		162,661		2.9	%

Other securities (3)	51,269		(8,046)		48,066		4,198		(171)		52,093		5.3	%
Total	$	300,588	$	(37,957)	$	273,279	$	10,010	$	(68,401)	$	216,096	3.0	%

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	December 31, 2020
	Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon(4)






Agency RMBS Interest-Only Strips (1)	N/A		N/A		$	89	$	54	$	—	$	143	2.1	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		1,565		2.6	%

Total Agency MBS	—		—		89		54		—		1,708		2.5	%

Non-Agency RMBS	38,112		(14,649)		23,463		451		(2,498)		21,416		1.6	%
Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		6,271		—		(2,306)		3,965		0.4	%

Subtotal Non-Agency RMBS	38,112		(14,649)		29,734		451		(4,804)		25,381		0.6	%
Non-Agency CMBS	235,497		(25,258)		210,239		2,850		(49,008)		164,081		5.0	%
Total Non-Agency MBS	273,609		(39,907)		239,973		3,301		(53,812)		189,462		2.4	%

Other securities (3)	51,537		(8,239)		49,420		1,152		(1,818)		48,754		4.4	%
Total	$	325,146	$	(48,146)	$	289,482	$	4,507	$	(55,630)	$	239,924	2.5	%

(1) IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At September 30, 2021, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIO and Agency RMBS IOs and IIOs, accounted for as derivatives was $3.0 million, $200.1 million and $17.6 million, respectively. At December 31, 2020, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs and Agency RMBS IOs and IIOs, accounted for as derivatives was $3.7 million, $306.0 million and $21.6 million, respectively.

(2) Interest on these securities is reported as a component of "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

(3) Other securities include residual interests in asset-backed securities which have no principal balance and an amortized cost of approximately $4.8 million and $6.1 million, as of September 30, 2021 and December 31, 2020, respectively.

(4) The calculation of the weighted average coupon rate includes the weighted average coupon rates of IOs and IIOs accounted for as derivatives using their notional amounts.

As of September 30, 2021 and December 31, 2020 the weighted average expected remaining term of the MBS and other securities investment portfolio was 5.6 years and 5.5 years, respectively.

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The following tables present the fair value and contractual maturities of the Company’s investment securities at September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021
	< or equal to 10 years		> 10 years and < or equal to 20 years		> 20 years and < or equal to 30 years		> 30 years		Total




Agency RMBS Interest-Only Strips	$	—	$	—	$	134	$	—	$	134
Agency RMBS Interest-Only Strips accounted for as derivatives	—		1,208		—		—		1,208
Subtotal Agency	—		1,208		134		—		1,342

Non-Agency CMBS	80,460		17,856		36,110		224		134,650
Non-Agency RMBS	—		—		10,181		15,550		25,731
Non-Agency RMBS Interest- Only Strips	—		—		142		2,138		2,280

Subtotal Non-Agency	80,460		17,856		46,433		17,912		162,661

Other securities	9,394		4,271		25,935		12,493		52,093
Total	$	89,854	$	23,335	$	72,502	$	30,405	$	216,096


	December 31, 2020
	< or equal to 10 years		> 10 years and < or equal to 20 years		> 20 years and < or equal to 30 years		> 30 years		Total




Agency RMBS Interest-Only Strips	$	—	$	—	$	143	$	—	$	143
Agency RMBS Interest-Only Strips accounted for as derivatives	—		1,565		—		—		1,565
Subtotal Agency	—		1,565		143		—		1,708

Non-Agency CMBS	59,724		50,408		53,269		680		164,081
Non-Agency RMBS	—		—		7,958		13,458		21,416
Non-Agency RMBS Interest- Only Strips	—		—		472		3,493		3,965

Subtotal Non-Agency	59,724		50,408		61,699		17,631		189,462

Other securities	7,247		6,203		24,610		10,694		48,754
Total	$	66,971	$	58,176	$	86,452	$	28,325	$	239,924

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The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS and other securities by length of time that such securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities





Non-Agency CMBS	$	—	$	—	—	$	118,859	$	(64,730)	24	$	118,859	$	(64,730)	24
Non-Agency RMBS	—		—		—	216		(38)		1	216		(38)		1
Non-Agency RMBS Interest-Only Strips	—		—		—	2,280		(3,462)		4	2,280		(3,462)		4
Subtotal Non-Agency	—		—		—	121,355		(68,230)		29	121,355		(68,230)		29

Other securities	—		—		—	11,080		(171)		5	11,080		(171)		5
Total	$	—	$	—	—	$	132,435	$	(68,401)	34	$	132,435	$	(68,401)	34


	December 31, 2020
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities





Non-Agency CMBS	$	102,935	$	(33,602)	16	$	50,887	$	(15,406)	15	$	153,822	$	(49,008)	31
Non-Agency RMBS	18,242		(2,498)		4	—		—		—	18,242		(2,498)		4
Non-Agency RMBS Interest-Only Strips	3,492		(790)		3	472		(1,516)		1	3,964		(2,306)		4
Subtotal Non-Agency	124,669		(36,890)		23	51,359		(16,922)		16	176,028		(53,812)		39

Other securities	26,365		(1,818)		6	—		—		—	26,365		(1,818)		6
Total	$	151,034	$	(38,708)	29	$	51,359	$	(16,922)	16	$	202,393	$	(55,630)	45

The following tables present components of interest income on the Company’s MBS and other securities for the three and nine months ended September 30, 2021 and September 30, 2020, respectively (dollars in thousands):


	Three months ended September 30, 2021						Three months ended September 30, 2020
	Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Amortization		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Amortization		Interest Income

Agency RMBS	$	11	$	(7)	$	4	$	25	$	(17)	$	8
Non-Agency CMBS	2,621		1,669		4,290		3,500		1,686		5,186
Non-Agency RMBS	609		(240)		369		616		(154)		462
Other securities	1,043		(270)		773		1,723		(1,013)		710
Total	$	4,284	$	1,152	$	5,436	$	5,864	$	502	$	6,366

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	Nine months ended September 30, 2021						Nine months ended September 30, 2020
	Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Amortization		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Amortization		Interest Income
Agency CMBS	$	—	$	—	$	—	$	11,336	$	(636)	$	10,700
Agency RMBS	38		(26)		12		2,954		(971)		1,983
Non-Agency CMBS	7,171		6,230		13,401		12,257		4,426		16,683
Non-Agency RMBS	1,762		(704)		1,058		2,349		(1,162)		1,187
Other securities	3,717		(1,214)		2,503		6,565		(3,810)		2,755
Total	$	12,688	$	4,286	$	16,974	$	35,461	$	(2,153)	$	33,308

The following tables present the sales and realized gain (loss) of the Company’s MBS and other securities, excluding Interest-Only Strips accounted for as derivatives, for the three and nine months ended September 30, 2021 and September 30, 2020, respectively (dollars in thousands):


	Three months ended September 30, 2021								Three months ended September 30, 2020
	Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)



Non-Agency RMBS	$	—	$	—	$	—	$	—	$	(44)	$	—	$	(44)	$	(44)

Total	$	—	$	—	$	—	$	—	$	(44)	$	—	$	(44)	$	(44)


	Nine months ended September 30, 2021								Nine months ended September 30, 2020
	Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)
Agency CMBS	$	—	$	—	$	—	$	—	$	1,668,149	$	116,463	$	(6,486)	$	109,977
Agency RMBS	—		—		—		—		400,948		12,552		(506)		12,046
Non-Agency CMBS(1)	—		—		(5,929)		(5,929)		94,586		1		(22,703)		(22,702)
Non-Agency RMBS	—		—		—		—		12,658		—		(60)		(60)
Other securities	—		—		—		—		35,957		113		(6,223)		(6,110)
Total	$	—	$	—	$	(5,929)	$	(5,929)	$	2,212,298	$	129,129	$	(35,978)	$	93,151

(1) Realized loss for the nine months ended September 30, 2021 was attributable to a legacy Non-agency CMBS bond that factored down to zero from a cash shortfall in the securitization.

Unconsolidated CMBS VIEs

The Company’s economic interests held in unconsolidated CMBS VIEs are limited in nature to those of a passive holder of CMBS issued by securitization trusts; the Company was not involved in the design or creation of the securitization trusts. The Company evaluates its CMBS holdings, for potential consolidation of the securitized trust, in which it owns the most subordinate tranche or a portion of the controlling class. As of both September 30, 2021 and December 31, 2020, the Company held seven variable interests in unconsolidated CMBS VIEs, respectively, in which it either owned the most subordinate class or a portion of the controlling class. The Company determined it was not the primary beneficiary and accordingly, the CMBS VIEs were not consolidated in the Company’s consolidated financial statements. As of September 30, 2021 and December 31, 2020, the Company’s maximum exposure to loss from these variable interests did not exceed the carrying value of these investments of $27.5 million and $48.9 million, respectively. These investments are classified in "Non-Agency mortgage-backed securities, at fair value" in the Company’s Consolidated Balance Sheets. Further, as of September 30, 2021 and December 31, 2020, the Company did not guarantee any obligations of unconsolidated entities or enter into any commitment or intent to provide funding to any such entities.

Note 5 — Residential Whole Loans and Bridge Loans

Residential Whole-Loan Trust

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The consolidated financial statements include the consolidation of Revolving Mortgage Investment Trust 2015-1QR2 ("RMI 2015 Trust") since it met the definition of a VIE and the Company determined that it was the primary beneficiary of the trust because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. RMI 2015 Trust has issued a trust certificate that is wholly-owned by the Company and represents the entire beneficial interest in pools of Non-QM Residential Whole Loans held by the trust. As of September 30, 2021 and December 31, 2020, the Company financed the trust certificate with $236.8 million and $30.2 million, respectively, on long-term financing facility. The financing liability is held outside the trust. The Company classifies the underlying Residential Whole Loans owned by the trust in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets and has eliminated the intercompany trust certificate in consolidation.

In August 2018, the Company formed Revolving Mortgage Investment Trust 2018-RCR ("RCR Trust") to acquire conforming residential whole loans. The Company determined that RCR Trust was a VIE and that the Company was the primary beneficiary of the trust because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. In May 2020, the conforming mortgages held by RCR Trust were sold and the trust was terminated.

In September 2018, the Company formed Revolving Mortgage Investment Trust 2018-RNR ("RNR Trust") to acquire Non-QM Residential Whole Loans. The Company determined that RNR Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. In April 2020, the RNR Trust was terminated following the transfer of the Non-QM Residential Whole Loans it held to RMI 2015 Trust.

In May 2019, the Company completed a residential mortgage-backed securitization comprised of a portion of its Residential Whole Loan portfolio. During the securitization, RMI 2015 Trust and RNR Trust collectively transferred $945.5 million of Non-QM Residential Whole Loans, to a wholly-owned subsidiary of the Company, Arroyo Mortgage Trust 2019-2 (the "Arroyo Trust 2019"). The Company issued $919.0 million of mortgage-backed notes and retained all the subordinate and residual debt securities ("Owner Certificates"), which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company determined that the Arroyo Trust 2019 was a VIE and that the Company was also the primary beneficiary because the Manager was involved in the design of the trust and the Company has significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the Arroyo Trust 2019 that could potentially be significant to the trust. The Company classifies the underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany Owner Certificates in consolidation.

In November 2019, the Company formed Revolving Mortgage Investment Trust 2019-RBR ("RBR Trust") to acquire Non-QM Residential Whole Loans. The Company determined that RBR Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. In April 2020, the RBR Trust was terminated following the transfer of the Non-QM Residential Whole Loans it held to RMI 2015 Trust.

In June 2020, the Company completed a residential mortgage-backed securitization comprised of a portion of its Residential Whole Loan portfolio. During the securitization, RMI 2015 Trust transferred $355.8 million of Non-QM Residential Whole Loans, to a wholly-owned subsidiary of the Company, Arroyo Mortgage Trust 2020-1 ("Arroyo Trust 2020"). The Company issued $341.7 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company determined that Arroyo Trust 2020 was a VIE and that the Company was also the primary beneficiary because the Manager was involved in the design of the trust and the Company has significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the Arroyo Trust 2020 that could potentially be significant to the trust. The Company classifies the

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underlying Non-QM Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany Owner Certificates in consolidation.

Residential Bridge Loan Trust

In February 2017, The Company formed Revolving Mortgage Investment Trust 2017-BRQ1 ("RMI 2017 Trust") and acquired the trust certificate, which represents the entire beneficial interest in pools of Residential Bridge Loans and certain Residential Whole Loans held by the trust. Residential Bridge Loans are mortgage loans secured by residences, typically short-term. The Company determined that RMI Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust, has oversight rights on defaulted assets and has other significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of September 30, 2021 and December 31, 2020, the Company financed the trust certificate with $7.5 million and $13.4 million, respectively, of repurchase agreement borrowings, which is a liability held outside the trust. The Company classifies both the underlying Residential Bridge Loans carried at amortized cost and the Residential Bridge Loans that it elected the fair value option in "Residential Bridge Loans" and the Residential Whole Loans in "Residential Whole Loans, at fair value" in the Consolidated Balance Sheets. The Company has eliminated the intercompany trust certificate in consolidation.

Consolidated Residential Whole-Loan and Residential Bridge Loan Trusts

The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment. The three consolidated Residential Whole-Loan trusts collectively hold 2,187 Residential Whole Loans and the consolidated Bridge Loan Trust holds 12 Residential Bridge Loans and six Residential Whole Loans as of September 30, 2021.

The following table presents a summary of the assets and liabilities of the consolidated residential whole loan trusts and residential bridge loan trust included in the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021		December 31, 2020

Residential Whole Loans, at fair value ($949,417 and $1,008,782 pledged as collateral, at fair value, respectively)	$	949,417	$	1,008,782
Residential Bridge Loans ($5,960 and $11,858 at fair value and $5,960 and $12,960 pledged as collateral, respectively)	5,960		12,960

Investment related receivable	24,224		27,987
Interest receivable	4,314		4,688
Other assets	80		80
Total assets	$	983,995	$	1,054,497
Securitized debt, net	$	605,019	$	892,290
Interest payable	1,524		2,222
Accounts payable and accrued expenses	40		77

Total liabilities	$	606,583	$	894,589

The Company’s risk with respect to its investment in each residential loan trust is limited to its direct ownership in the trust. The Residential Whole Loans, Residential Bridge Loans and Commercial Loan held by the consolidated trusts are held solely to satisfy the liabilities of the trust, and creditors of the trust have no recourse to the general credit of the Company. The Company is not contractually required and has not provided any additional financial support to the trusts for the three and nine months ended September 30, 2021 and September 30, 2020.

The following table presents the components of the carrying value of Residential Whole Loans and Residential Bridge Loans as of September 30, 2021 and December 31, 2020 (dollars in thousands):

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	Residential Whole Loans, at Fair Value				Residential Bridge Loans, at Fair Value(1)				Residential Bridge Loans, at Amortized Cost(1)
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Principal balance	$	908,512	$	984,555	$	6,654	$	14,144	$	—	$	1,103
Unamortized premium	26,920		24,248		1		3		—		—
Unamortized discount	(1,459)		(1,799)		—		—		—		—
Amortized cost	933,973		1,007,004		6,655		14,147		—		1,103
Gross unrealized gains	19,174		9,282		—		5		N/A		N/A
Gross unrealized losses	(3,730)		(7,504)		(695)		(1,339)		N/A		N/A
Fair value	$	949,417	$	1,008,782	$	5,960	$	12,813	N/A		N/A

(1) These loans are classified in "Residential Bridge Loans" in the Consolidated Balance Sheets.

Residential Whole Loans

The Residential Whole Loans have low LTV's and are comprised of 2,187 Non-QM adjustable rate mortgages and six investor fixed rate mortgages. The following tables present certain information about the Company’s Residential Whole Loan investment portfolio at September 30, 2021 and December 31, 2020 (dollars in thousands):


September 30, 2021
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	14	$	7,816	66.0	%	746	5.7	28.4	2.7	%
3.01% – 4.00%	332	163,681		62.6	%	751	3.2	27.3	3.7	%
4.01% – 5.00%	997	380,394		64.8	%	748	2.7	28.0	4.8	%
5.01% – 6.00%	820	346,778		64.6	%	739	2.9	27.2	5.4	%
6.01% – 7.00%	28	9,337		67.8	%	720	3.0	25.9	6.3	%
7.01% - 8.00%	2	506		73.2	%	753	4.5	26.9	7.1	%

Total	2,193	$	908,512	64.3	%	745	2.9	27.6	4.8	%

(1)The original FICO score is not available for 215 loans with a principal balance of approximately $68.8 million at September 30, 2021. The Company has excluded these loans from the weighted average computations.


December 31, 2020
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)(2)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	4	$	3,239	66.7	%	733	5.9	28.0	2.7	%
3.01% – 4.00%	118	41,489		55.8	%	709	3.8	23.3	3.7	%
4.01% – 5.00%	1,172	403,398		61.8	%	751	2.7	27.7	4.9	%
5.01% – 6.00%	1,166	523,105		64.2	%	740	2.9	27.7	5.4	%
6.01% – 7.00%	35	12,813		67.5	%	720	3.2	27.0	6.3	%
7.01% - 8.00%	2	511		73.2	%	753	4.1	27.6	7.1	%
Total	2,497	$	984,555	62.9	%	744	2.9	27.5	5.1	%

(1)The original FICO score is not available for 236 loans with a principal balance of approximately $75.2 million at December 31, 2020. The Company has excluded these loans from the weighted average computations.

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The following table presents the various states across the United States in which the collateral securing the Company’s Residential Whole Loans at September 30, 2021 and December 31, 2020, based on principal balance, is located (dollars in thousands):


September 30, 2021					December 31, 2020
State	State Concentration		Principal Balance		State	State Concentration		Principal Balance
California	72.3	%	$	656,801	California	65.8	%	$	647,877
New York	14.3	%	129,931		New York	17.7	%	173,788
Georgia	2.7	%	24,300		Georgia	3.4	%	33,577
Florida	2.4	%	21,697		Florida	2.8	%	27,274
New Jersey	2.0	%	18,255		New Jersey	2.5	%	24,704
Other	6.3	%	57,528		Other	7.8	%	77,335
Total	100.0	%	$	908,512	Total	100.0	%	$	984,555

Residential Bridge Loans

The Residential Bridge Loans are comprised of short-term fixed rate loans secured by non-owner occupied single or multi-unit residential properties, with LTVs generally not to exceed 85%. The following tables present certain information about the Company’s Residential Bridge Loan investment portfolio at September 30, 2021 and December 31, 2020 (dollars in thousands):


September 30, 2021
c				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate


7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	7	3,213		75.9	%	2.0	10.3	%
11.01% – 13.00%	2	495		69.7	%	2.0	11.4	%






Total	12	$	6,654	73.0	%	2.0	9.7	%


December 31, 2020
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	10	$	8,295	69.6	%	1.4	8.7	%
9.01% – 11.00%	15	6,123		75.5	%	0.5	10.1	%
11.01% – 13.00%	3	705		69.8	%	0.0	11.4	%


17.01% – 19.00%	1	124		75.0	%	0.0	18.0	%


Total	29	$	15,247	72.0	%	0.8	9.4	%

(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

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The following table presents the U.S. states in which the collateral securing the Company’s Residential Bridge Loans at September 30, 2021 and December 31, 2020, based on principal balance, is located (dollars in thousands):


September 30, 2021					December 31, 2020
State	Concentration		Principal Balance		State	Concentration		Principal Balance
New York	39.5	%	$	2,631	California	37.5	%	$	5,713
California	35.9	%	2,386		New York	17.3	%	2,632
Florida	16.9	%	1,125		Washington	16.1	%	2,461
New Jersey	5.0	%	335		Florida	12.9	%	1,969
Pennsylvania	1.6	%	105		Connecticut	5.7	%	872
Other	1.1	%	72		Other	10.5	%	1,600
Total	100.0	%	$	6,654	Total	100.0	%	$	15,247

Non-performing Loans

The following table presents the aging of the Residential Whole Loans and Bridge Loans as of September 30, 2021 (dollars in thousands):


	Residential Whole Loans					Bridge Loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current(1)	2,156	$	889,231	$	930,286	1	$	75	$	75
1-30 days	15	7,448		7,746		1	105		105
31-60 days	—	—		—		—	—		—
61-90 days	3	1,238		1,259		—	—		—
90+ days	19	10,595		10,126		10	6,474		5,780
Total	2,193	$	908,512	$	949,417	12	$	6,654	$	5,960

(1) Includes one loan in forbearance with unpaid principal balance of $493 thousand.

COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment in certain sectors. At the beginning of the COVID-19 pandemic, some of its Residential Whole Loan borrowers have experienced financial hardship, making it difficult to meet their payment obligations to the Company, leading to requests for forbearance and higher levels of delinquency and potentially defaults. The Company maintains a strong relationship with its servicers and was able to utilize these relationships to manage the impacts of COVID-19 pandemic on the Company's Non-QM loans. As of September 30, 2021, the Company had one Non-QM loan in forbearance and no Non-QM loans in the repayment phase following forbearance. Under the forbearance agreement, the borrower can generally elect to defer the principal and interest payments for 3 to 5 months. At the end of the forbearance period, the borrower can either repay the deferred principal and interest in full or over the next 9 months or capitalize the deferred principal and interest to the loan balance and calculate a new amortization payment. Loans under a forbearance agreement are treated as "Current" in the above table. The loan in forbearance is carried at fair value and had an unpaid principal balance of $493 thousand, a fair value of $434 thousand, an original LTV of 64.7%, and represents approximately 0.1% of the total outstanding principal balance of the Company's Residential Whole Loans.

As of September 30, 2021, there were 19 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $10.6 million and a fair value of $10.1 million. These nonperforming loans represent approximately 1.2% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 60.8%.

As of December 31, 2020, there were 26 Residential Whole Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $15.3 million and a fair value of approximately $14.7 million. These nonperforming loans represent approximately 1.6% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 60.4%.

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These loans are carried at fair value, and accordingly no allowance for credit losses or credit loss expense was recorded, since the adjustment for credit losses, if any, would be reflected in the fair value of these loans as a component of "Unrealized gain (loss), net" in the Consolidated Statements of Operations. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Residential Bridge Loans

As of December 31, 2020, there was one Residential Bridge Loan carried at amortized cost in non-accrual status with an unpaid principal balance of approximately $123.8 thousand and 20 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $9.9 million and a fair value of $8.9 million. These nonperforming loans represent approximately 66.0% of the total outstanding Bridge Loans principal balance of $15.2 million. These loans are collateral dependent with a weighted average original LTV of 73.0%.

The Company concluded that an allowance for credit losses was not necessary for loans carried at amortized costs as of December 31, 2020 since the fair value of the collateral balance less the cost to sell was in excess of the outstanding principal and interest balances. For loans carried at fair value, no allowance for credit losses was recorded as of September 30, 2021 and December 31, 2020 since the valuation adjustment, if any, would be reflected in the fair value of these loans. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of September 30, 2021 and December 31, 2020, the Company had four and three REO properties with an aggregate carrying value of $1.1 million and $1.1 million, respectively, related to foreclosed Bridge Loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheets.

Note 6 — Commercial Loans

Securitized Commercial Loans

Securitized commercial loans is comprised of commercial loans from consolidated third party sponsored CMBS VIE's. At September 30, 2021, the Company had a variable interest in one third party sponsored CMBS VIE, CSMC Trust 2014-USA, that it determined it was the primary beneficiary and was required to consolidate. The commercial loans that serve as collateral for the securitized debt issued by this VIE can only be used to settle the securitized debt. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.

CSMC Trust 2015 - Longhouse MZ

In November 2015, the Company acquired a $14.0 million interest in the trust certificate issued by CSMC Trust 2015 - Longhouse MZ (“CSMC Trust”). The Company determined that CSMC Trust was a VIE and that the Company was the primary beneficiary because it was involved in certain aspects of the design of the trust, has certain oversight rights on defaulted assets and has other significant decision making powers. As the primary beneficiary, the Company was required to consolidate CSMC Trust and accordingly its investment in CSMC Trust was eliminated in consolidation. The CSMC Trust holds a mezzanine loan collateralized by interests in commercial real estate. The mezzanine loan serves as collateral for the trust certificates. In June 2020, the variable interest the Company acquired was paid off and, accordingly, the CSMC Trust is no longer consolidated.

RETL 2019-RVP

RETL 2018 was refinanced with a new securitization RETL 2019-RVP ("RETL 2019 Trust") in March 2019. The Company acquired a $65.3 million interest in the trust certificates issued by the RETL 2019 Trust, including $45.3 million

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which represents the 5% eligible risk retention certificate. The Company determined that RETL 2019 Trust was a VIE and that the Company was also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and the Company together with other related party entities own more than 50% of the controlling class. As the primary beneficiary, the Company consolidated RETL 2019 Trust and its investment in the trust certificates (HRR class and a portion of the C class) of RETL 2019 Trust was eliminated in consolidation. The RETL 2019 Trust held a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate.

On September 15, 2021, the commercial loan was paid in full by the borrower and the RETL HRR bond with an outstanding principal amount of $45.3 million held in WMC RETL LLC, a wholly-owned subsidiary of the Company, was paid off. Accordingly, the RETL 2019 Trust is no longer consolidated.

MRCD 2019-PRKC Mortgage Trust

In December 2019, the Company acquired a $161.4 million interest in the trust certificates issued by the MRCD 2019-PRKC Mortgage Trust ("MRCD Trust"), including $10.5 million which represents the initial controlling class (HRR class). The Company determined that MRCD Trust was a VIE and that the Company was also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and the Company owns the controlling class. As the primary beneficiary, the Company consolidated MRCD Trust and its investment in the trust certificates (HRR class and a portion of the A class) of MRCD Trust were eliminated in the consolidation.

On March 24, 2020, the Company sold its investments in the A Class certificates of the MRCD Trust. Shortly after the sale, the Company entered into an agreement to irrevocably assign the controlling rights and appointed one of the buyers as the new Directing Holder. As a result, the assets and liabilities of the MRCD Trust were deconsolidated, since the Company no longer has the power to direct the activities that significantly impact the economic performance of the MRCD Trust.

MRCD qualified as a CFE under GAAP and the Company measured both the financial assets and financial liabilities using the fair value of the financial liabilities, since it was more observable. The Company recognized an unrealized loss of $43.7 million in earnings, related to the periodic change in fair value of MRCD's assets and liabilities in March 2020, prior to deconsolidation. Also, the Company retained the HRR certificates, which were measured at fair value at the date of deconsolidation and is included in the "Non-Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.

CSMC Trust 2014-USA

The Company together with other related party entities own more than 50% of the controlling class of CSMC Trust 2014-USA ("CSMC USA"). As of September 30, 2021, the Company held an 8.8% interest in the trust certificates issued by CSMC USA (F Class) with an outstanding principal balance of $14.9 million. The Company performs ongoing reassessment of its CMBS VIE holdings for potential consolidation of the securitized trust in which it owns a portion of the controlling class. Since the ownership of the controlling financial interest is held within a related party group, the Company must determine whether it is the primary beneficiary under the related party tie-breaker rule, which requires the evaluation of the following considerations: (1) the principal-agency relationship between parties; (2) relationship and significance of the VIE's activities to the variable interest holders; (3) variable interest holder's exposure to VIE's expected losses and (4) the design of the VIE. As a result of the Company's evaluation, it was determined that the Company is the primary beneficiary of CSMC USA, and effective on August 1, 2020, consolidated CSMC USA. The Company’s investment in the trust certificate of CSMC USA (F Class) was eliminated in the consolidation. The CSMC USA holds a commercial loan secured by a first mortgage lien on the borrowers’ fee and leasehold interests in a portion of a super-regional mall. The outstanding principal balance on this commercial loan is $1.4 billion as of September 30, 2021. The loan's stated maturity date is September 11, 2025 and bears a fixed interest rate of 4.38%. The Company elected the fair value option for the commercial loan as well as the associated securitized debt.

In December 2020, the commercial loan held by CSMC USA was amended to an interest only payment through maturity. As part of the modification, a Cash Management Forbearance Agreement was entered into by the special servicer and the borrower that required both increased reporting requirements and monthly net cash remittance.

Commercial Loans

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In January 2019, WMC CRE LLC ("CRE LLC"), a wholly-owned subsidiary of the Company was formed for the purpose of acquiring commercial loans. The following table presents the commercial loans held by CRE LLC as of September 30, 2021 (dollars in thousands):

Loan

Acquisition Date

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

CRE 3

August 2019

Interest-Only Mezzanine loan

90,000

27,495

58%

1-Month LIBOR plus 9.25%

6/29/2021

Two-Year First Extension and One-Year Second Extension

Entertainment and Retail

CRE 4

September 2019

Interest-Only First Mortgage

38,367

38,294

63%

1-Month LIBOR plus 3.02%

8/6/2022

Two One-Year Extensions

Retail

CRE 5

December 2019

Interest-Only First Mortgage

24,535

24,085

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 6

December 2019

Interest-Only First Mortgage

13,207

12,964

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 7

December 2019

Interest-Only First Mortgage

7,259

7,126

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 8

December 2019

Interest-Only First Mortgage

4,442

4,440

79%

1-Month LIBOR plus 4.85%

12/6/2022

None

Assisted Living Facilities

177,810

114,404

Commercial Loan Payoffs

On September 7, 2021, CRE 2, with an outstanding principal balance of $46.8 million collateralized by nursing facilities, was paid off in full.

Commercial Loan Trust

In March 2018, the Company formed the Revolving Small Balance Commercial Trust 2018-1 ("RSBC Trust") to acquire commercial real estate mortgage loans. The Company determined that the wholly-owned RSBC Trust was a VIE and that the Company was the primary beneficiary because it was involved in the design of the trust and holds significant decision making powers. In addition, the Company has the obligation to absorb losses to the extent of its ownership interest and the right to receive benefits from the trust that could potentially be significant to the trust. As of September 30, 2021, the Company financed the trust certificate with $10.6 million of repurchase agreements, which is a liability held outside the trust.

The following table presents the commercial real estate loan held by RSBC Trust as of September 30, 2021 (dollars in thousands):

Loan

Acquisition Date

Loan Type

Principal Balance

Fair Value

LTV

Interest Rate

Maturity Date

Extension Option

Collateral

SBC 3

January 2019

Interest-Only First Mortgage

14,362

49%

1-Month LIBOR plus 4.10%

7/6/2022

None

Nursing Facilities

14,362

RSBC Trust Loan Payoffs

On July 7, 2021, SBC 1, with an outstanding principal balance of $45.2 million collateralized by nursing facilities, was paid off in full.

On September 24, 2021, SBC 2 with an outstanding principal balance of $9.2 million collateralized by an apartment complex was paid off in full.

Consolidated Securitized Commercial Loan Trusts and Commercial Loan Trust

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The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment. As of September 30, 2021, the Company had two consolidated trusts, CSMC USA and RSBC Trust, that collectively hold two commercial loans.

The following table presents a summary of the assets and liabilities of the two consolidated trusts included in the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021		December 31, 2020
Cash	$	9,245	$	—
Restricted cash	260		76,132
Securitized commercial loans, at fair value	1,377,005		1,605,335
Commercial Loans, at fair value	14,362		68,466
Interest receivable	5,119		6,248
Total assets	$	1,405,991	$	1,756,181
Securitized debt, at fair value	$	1,365,494	$	1,553,722
Interest payable	4,995		5,660
Accounts payable and accrued expenses	9		12
Other liabilities	260		76,132
Total liabilities	$	1,370,758	$	1,635,526

The Company’s risk with respect to its investment in each securitized commercial loan trust is limited to its direct ownership in the trust. The commercial loans held by the consolidated securitized commercial loan trusts are held solely to satisfy the liabilities of the trust, and creditors of the trust have no recourse to the general credit of the Company. The assets of a consolidated securitized commercial loan trust can only be used to satisfy the obligations of that trust. The Company is not contractually required and has not provided any additional financial support to the securitized commercial loan trusts for the three and nine months ended September 30, 2021 and September 30, 2020.

The following table presents the components of the carrying value of the securitized commercial loans and commercial loans as of September 30, 2021 and December 31, 2020 (dollars in thousands):


	RETL Trust Securitized Commercial Loan, at Fair Value(1)			CSMC USA Trust Securitized Commercial Loan, at Fair Value				RSBC Trust Commercial Loans, at Fair Value				Commercial Loans, at Fair Value
		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Principal balance		$	—	$	354,202	$	1,385,591	$	1,385,591	$	14,362	$	68,750	$	177,810	$	256,694
Unamortized premium		—		180		—		—		—		—		—		—
Unamortized discount		—		—		(117,024)		(135,653)		—		(94)		(2)		(53)
Amortized cost		—		354,382		1,268,567		1,249,938		14,362		68,656		177,808		256,641
Gross unrealized gains		—		—		108,438		16,013		—		—		—		1
Gross unrealized losses		—		(14,998)		—		—		—		(190)		(63,404)		(14,585)
Fair value		$	—	$	339,384	$	1,377,005	$	1,265,951	$	14,362	$	68,466	$	114,404	$	242,057

(1) On September 15, 2021, the commercial loan was paid in full by the borrower and the RETL HRR bond with an outstanding principal amount of $45.3 million held in WMC RETL LLC, a wholly-owned subsidiary of the Company, was paid off. Accordingly, the RETL 2019 Trust is no longer consolidated.

Non-Performing Commercial Loans

The following table presents the aging of the Commercial Loans as of September 30, 2021 (dollars in thousands):

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	Commercial Loans
	No of Loans	Principal		Fair Value
Current	6	$	102,172	$	101,271
1-30 days	—	—		—
31-60 days	—	—		—
61-90 days	—	—		—
90+ days	1	90,000		27,495
Total	7	$	192,172	$	128,766

The COVID-19 pandemic has adversely impacted a broad range of industries in which the commercial loan borrowers operate and could impair their ability to fulfill their financial obligations to the Company, most significantly hospitality and retail assets. The low average original LTV of the Company's commercial loan portfolio of 59.7%, reflecting significant equity value that the sponsors are motivated to protect, is a mitigating factor of these risks. Still there is no guarantee that losses will not occur.

CRE 1 Loan

In October 2020, the Company commenced foreclosure proceedings for its non-performing commercial loan with an outstanding principal balance of $30.0 million.secured by a hotel. However, on February 24, 2021, the borrower filed for bankruptcy protection halting the foreclosure process. In August 2021, the bankruptcy case was dismissed by the bankruptcy court and the Company and the other holders of the loan foreclosed on the property through a special purpose entity ("SPE") formed for the purpose of holding the property. The process of marketing the property began following the foreclosure but the borrower has continued to file legal challenges to the sale process. While the Company believes these legal challenges have no merit, they have delayed moving forward with the sale of the property. Based on preliminary bids, the Company believes there is a reasonable likelihood that its investment along with the other members' interest will be recovered, although there is no assurance of full recovery

The SPE is consolidated by the Company and the property is recorded at the lower of cost or fair value less cost to sell. As of September 30, 2021, the REO is recorded at $42.5 million and classified in "Other assets" in the Consolidated Balance Sheets and the other members' interests in the SPE of approximately $11.9 million are recorded as "Non-controlling interest" in the consolidated financial statements.

CRE 3 Loan

As of September 30, 2021, the CRE 3 junior mezzanine loan which has an outstanding principal balance of $90.0 million secured by a class A retail and entertainment complex located in the North East U.S. (the “Property”) was in default. The Property, which was originally scheduled to open in March 2020, was severely impacted by COVID-19 related shutdowns and restrictions and continues to face the challenging conditions impacting large portions of the retail sector. The Company was receiving interest payments on this loan from a reserve that was exhausted in May 2021 and the loan became non-performing.

Additionally, on May 10, 2021, the administrative agent for the senior mortgage loan on the Property (the “Administrative Agent”) notified us, as administrative agent for the junior mezzanine loan, of the Administrative Agent’s intent to accept an assignment in lieu of foreclosure with respect to the Property if the junior mezzanine lenders did not elect to purchase the senior mortgage loan within 30 days pursuant to the terms set forth in an intercreditor agreement among the Administrative Agent, the Company and the senior mezzanine lender. The senior mezzanine lender was provided with a similar notice on May 10, 2021. Since the original notice provided by the Administrative Agent on May 10, 2021, the Administrative Agent has extended the deadline for the junior mezzanine lenders and the senior mezzanine lender to exercise their purchase right with respect to the senior mortgage loan a total of three times, with the most recent extension expired on July 14, 2021, and neither the junior mezzanine lenders nor the senior mezzanine lender offered to purchase the senior mortgage loan.

The Company is currently in discussions with the borrower and certain other lenders regarding alternatives to address the situation which might include modifications of loan terms, deferral of payments and the funding of new advances. There can be no assurance that these discussions will result in an outcome in which the Company would be repaid any amount of the loan and the Company may suffer further declines in fair value with respect to this mezzanine investment. For the three months

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ended September 30, 2021, the Company recorded a further decline of $5.2 million in the fair value of this investment. The Company could experience a total loss of its investment under various scenarios, which at current levels would result in a $27.5 million reduction in the Company’s book value.

Note 7— Financings

Repurchase Agreements

The Company has primarily financed its investment acquisitions with repurchase agreements. The repurchase agreements bear interest at a contractually agreed-upon rate and historically had terms ranging from one month to 18 months. The Company’s repurchase agreement borrowings are accounted for as secured borrowings when the Company maintains effective control of the financed assets. Under these repurchase agreements, the respective counterparties retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets normally requires the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, and is referred to as a margin call. The inability of the Company to post adequate collateral for a margin call by a counterparty, in a timeframe as short as the close of the same business day, could result in a condition of default under the Company’s repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by the Company, which may have a material adverse effect on the Company’s financial position, results of operations and cash flows.

The market disruptions surrounding COVID-19 resulted in the decline of the Company's asset values making it challenging to obtain repurchase agreement financing with favorable terms or at all. The Company's repurchase agreement counterparties have increased borrowing rates and increased haircuts. In order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on the Company’s liquidity, the Company entered into three longer term financing arrangements to reduce its exposure to short-term financings with daily mark to market exposure. Below is a summary of each of these financing arrangements.

Residential Whole Loan Facility

On April 21, 2020, the Company entered into amendments with respect to certain of its loan warehouse facilities. These amendments mainly served to convert an existing residential whole loan facility into a term facility by removing any mark to market margin requirements, and to consolidate the Company’s Non-Qualified Mortgage loans, which were previously financed by three separate, unaffiliated counterparties, into a single facility. The target advance rate under the amended and restated facility was approximately 84% of the aggregate unpaid principal balance of the loans. The facility had an original maturity of October 20, 2021. All principal payments and income generated by the loans during the term of the facility were used to pay principal and interest on the facility. Upon the securitization or sale by the Company of any whole loan subject to this amended and restated facility, the counterparty was entitled to receive a recapture premium fee of 30% of all realized value on any whole loans above such counterparty’s amortized basis as well as an exit fee of 0.50% of the loan amount in circumstances where the counterparty was not involved in the disposition of the loans. The financing cost of this facility was reflective of the challenging market conditions, at such time, when the Company entered into the agreement.

On June 29, 2020, the Company securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "—Securitized Debt" below for additional details). As part of the financing arrangements noted above, the Company agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, the Company accrued a premium recapture fee of approximately $20.5 million, which was payable at the maturity of the facility, and was recorded in "Financing fees" in the Consolidated Statements of Operations.

On October 6, 2020, the Company entered into an amendment with respect to this residential loan warehouse facility. The amendment served to convert the existing residential loan facility to a limited mark to market margin facility that bears an interest rate of LIBOR plus 2.75%, with a LIBOR floor of 0.25%. The target advance rate under the amended facility is 85% and the facility matures on October 5, 2021. In connection with the amendment to the facility, the Company paid $12.0 million of the premium recapture fee. The balance of $8.5 million is payable at October 5, 2021 when the amended facility matures. The premium recapture fee was eliminated for new and remaining investments financed under the amended facility.

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Under the residential whole loan facility, as of September 30, 2021, the Company had approximately $236.8 million in borrowings with an interest rate of one month LIBOR plus 2.75%. The borrowing is secured by Non-QM loans with an estimated fair market value of $287.1 million.

The Company further amended its residential whole loan facility on November 5, 2021. Refer to Note 16 - "Subsequent Events" for details.

Non-Agency CMBS and Non-Agency RMBS Facility

On May 4, 2020, the Company supplemented one of its existing securities repurchase facilities to consolidate most of its CMBS and RMBS assets, which were financed by multiple counterparties, into a single term facility with limited mark to market margin requirements. Pursuant to the agreement, a margin deficit will not occur until such time as the loan to value ratio surpasses a certain threshold (the “LTV Trigger”), on a weighted average basis per asset type, calculated on a portfolio level. If this threshold was reached, the Company may elect to provide cash margin or sell certain assets to the extent necessary to lower the ratio. The term of this facility was 12 months, subject to a 12 month extensions at the counterparty’s option. All interest income generated by the assets during the term of the facility was paid to the Company no less often than monthly. Interest on the facility was due from the Company at a rate of three-month LIBOR plus 5.00% payable quarterly in arrears. Half of all principal repayments on the underlying assets was applied to repay the obligations owed to the counterparty, with the remainder paid to the Company, unless the LTV Trigger has occurred, in which case all principal payments will be applied to repay the obligations.

On May 5, 2021, the Company amended its Non-Agency CMBS and Non-Agency RMBS financing facility to, among other things, extend the facility for an additional 12 months and reduce the interest rate. The amended facility has improved advance rates and bears interest at a rate of three-month LIBOR plus 2.00%. As of September 30, 2021, the outstanding balance under this facility was $111.5 million. The borrowing is secured by investments with an estimated fair market value of $196.7 million as of September 30, 2021.

Commercial Whole Loan Facility

On May 5, 2021, the Company amended its Commercial Whole Loan Facility to, among other things, convert the term to a 12-month facility with up to a 12-month extension option, subject to the lender's consent.

As of September 30, 2021, the Company had approximately $63.7 million in borrowings, with a weighted average interest rate of 2.27% under its commercial whole loan facility. The borrowing is secured by loans with an estimated fair market value of $86.9 million as of September 30, 2021. The facility was subject to automatic monthly rolling until such time that it is terminated pursuant to the terms of the agreement by either the borrower or lender or until certain conditions of default.

Financial Metrics

Certain of the Company’s financing arrangements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if the Company does not maintain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity and liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. The Company was in compliance with the terms of such financial tests as of September 30, 2021.

Outstanding Borrowings

As of September 30, 2021, the Company had borrowings under five of its master repurchase agreements. The following table summarizes certain characteristics of the Company’s repurchase agreements at September 30, 2021 and December 31, 2020 (dollars in thousands):

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	September 30, 2021					December 31, 2020
Securities Pledged	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)
Short-Term Borrowings:

Agency RMBS	$	1,048	1.05	%	59	$	1,418	1.34	%	59
Non-Agency CMBS	10,314		1.75	%	12	10,313		2.25	%	14

Residential Whole Loans (1)	41,013		2.66	%	4	29,800		3.71	%	15
Residential Bridge Loans (1)	5,817		2.60	%	4	11,254		2.73	%	36
Commercial Loans (1)	10,603		3.18	%	4	34,375		3.32	%	75

Membership Interest	—		—	%	0	18,844		2.90	%	29
Other Securities	2,587		3.52	%	19	2,594		4.51	%	19
Subtotal	71,382		2.60	%	7	108,598		3.19	%	39
Long-Term Borrowings:
Non-Agency CMBS (2)	68,352		2.12	%	193	66,767		5.23	%	126
Non-Agency RMBS	15,632		2.12	%	217	14,643		5.23	%	126
Residential Whole Loans (1)(3)	236,767		3.00	%	36	30,224		3.00	%	278
Commercial Loans	63,669		2.27	%	360	124,937		2.17	%	287
Other Securities	27,506		2.12	%	217	13,677		5.24	%	126
Subtotal	411,926		2.65	%	113	250,248		3.74	%	225
Repurchase Agreements Borrowings	$	483,308	2.64	%	98	$	358,846	3.57	%	169
Less Unamortized Debt Issuance Costs	40		N/A		N/A	1,923		N/A		N/A
Repurchase Agreements Borrowings, net	$	483,268	2.64	%	98	$	356,923	3.57	%	169

(1)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated upon consolidation. This includes $39.3 million borrowings on the trust certificates would have been classified as Non-Agency RMBS.

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(3)The Residential Whole Loan facility's maturity was extended one month in October 2021.The weighted average remaining maturity reflects the one month extension.

At September 30, 2021 and December 31, 2020, repurchase agreements collateralized by investments had the following remaining maturities:


(dollars in thousands)	September 30, 2021		December 31, 2020

1 to 29 days	$	307,487	$	59,856
30 to 59 days	—		13,421
60 to 89 days	12,181		35,321

Greater than or equal to 90 days	163,640		250,248
Total	$	483,308	$	358,846

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At September 30, 2021, the following table reflects amounts of collateral at risk under its repurchase agreements greater than 10% of the Company's equity with any counterparty (dollars in thousands):


	September 30, 2021
Counterparty	Amount of Collateral at Risk, at fair value		Weighted Average Remaining Maturity (days)	Percentage of Stockholders’ Equity
Citigroup Global Markets Inc.	$	85,627	202	40.7	%
Credit Suisse AG, Cayman Islands Branch	76,778		71	36.5	%

Collateral for Borrowings under Repurchase Agreements

The following table summarizes the Company’s collateral positions, with respect to its borrowings under repurchase agreements at September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021						December 31, 2020
	Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest		Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:

Agency RMBS, at fair value	$	1,342	$	20	$	1,362	$	1,708	$	49	$	1,757
Non-Agency CMBS, at fair value(1)	136,968		564		137,532		152,275		649		152,924
Non-Agency RMBS, at fair value	28,003		182		28,185		25,382		160		25,542
Residential Whole Loans, at fair value(2)	328,811		1,494		330,305		97,566		543		98,109
Residential Bridge Loans(2)	5,960		78		6,038		12,960		180		13,140
Commercial Loans, at fair value(2)	101,271		346		101,617		310,523		1,850		312,373

Membership interest(3)	—		n/a		—		33,690		—		33,690
Other securities, at fair value	52,093		82		52,175		48,754		44		48,798
Cash(4)	1,428		—		1,428		1,817		—		1,817
Total	$	655,876	$	2,766	$	658,642	$	684,675	$	3,475	$	688,150

(1)Includes securities eliminated upon VIE consolidation.

(2)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.

(3)The pledged amount relates to the Company's non-controlling membership interest in its wholly-owned subsidiary WMC RETL LLC, which was financed under a repurchase agreement. The membership interest is eliminated in consolidation.

(4)Cash posted as collateral is included in "Due from counterparties" in the Company’s Consolidated Balance Sheets.

A reduction in the value of pledged assets typically results in the repurchase agreement counterparties initiating a margin call. At September 30, 2021 and December 31, 2020, investments held by counterparties as security for repurchase agreements totaled approximately $654.4 million and $682.9 million, respectively. Cash collateral held by counterparties at September 30, 2021 and December 31, 2020 was approximately $1.4 million and $1.8 million, respectively. Cash posted by repurchase agreement counterparties at September 30, 2021 and December 31, 2020, was $0 and $320 thousand, respectively.

Convertible Senior Unsecured Notes

6.75% Convertible Senior Unsecured Notes due 2024 (the "2024 Notes")

In September 2021, the Company issued $86.3 million aggregate principal amount of the 2024 Notes for net proceeds of $83.4 million. Interest on the 2024 Notes is paid semiannually. The 2024 Notes are convertible into, at the Company's election, cash, shares of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the

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supplemental indenture for the 2024 Notes. The initial conversion rate was 337.9520 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $2.96 per share of common stock. The 2024 Notes mature on September 15, 2024, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

6.75% Convertible Senior Unsecured Notes due 2022 (the "2022 Notes")

At September 30, 2021 and December 31, 2020, the Company had $45.7 million and $175.0 million aggregate principal amount, respectively, of the 2022 Notes outstanding through three issuances. Interest on the 2022 Notes is paid semiannually. The 2022 Notes are convertible into, at the Company's election, cash, shares of the Company's common stock or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the 2022 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the 2022 Notes. The initial and current conversion rate was 83.1947 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $12.02 per share of common stock. The 2022 Notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

The 2022 Notes Exchanges and Repurchases

On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock, par value $0.01 per share (the “Common Stock”), in exchange for $5.0 million aggregate principal amount of the 2022 Notes pursuant to separate privately negotiated exchange agreements entered into on July 1, 2020 (collectively, the “Exchange Agreement”) between the Company and certain holders of the 2022 Notes. The Company did not receive any cash proceeds as a result of the Exchange Agreement, and the Notes exchanged pursuant to the Exchange Agreement were retired and cancelled. The common stock was issued in reliance upon the exemption set forth in Section 3(a)(9) of the Securities Act of 1933 for securities exchanged by the Company and an existing security holder where no commission or other remuneration is paid or given directly or indirectly by the Company for soliciting such exchange.

During the quarter ended December 31, 2020, the Company repurchased $25.0 million aggregate principal amount of the 2022 Notes at an approximate 13% discount to par value, plus accrued and unpaid interest.

During the quarter ended March 31, 2021, the Company repurchased $6.7 million aggregate principal amount of the 2022 Notes at an approximate 6.3% discount to par value, plus accrued and unpaid interest.

During August 2021, the Company repurchased $22.3 million aggregate principal amount of the 2022 Notes at an approximate 2.8% discount to par value, plus accrued and unpaid interest.

In addition, in September 2021, the Company used the net proceeds from the issuance of the 2024 Notes and $20.2 million in cash on hand to repurchase $100.3 million of the 2022 Notes at par, plus accrued and unpaid interest.

Securitized Debt

Commercial Mortgage-Backed Notes

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2021 (dollars in thousands):

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Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	126,264	9/11/2025
Class A-2	531,700		4.0	%	570,167		9/11/2025
Class B	136,400		4.2	%	138,562		9/11/2025
Class C	94,500		4.3	%	92,630		9/11/2025
Class D	153,950		4.4	%	142,388		9/11/2025
Class E	180,150		4.4	%	161,900		9/11/2025
Class F	153,600		4.4	%	118,664		9/11/2025
Class X-1(1)	N/A		0.5	%	12,347		9/11/2025
Class X-2(1)	N/A		0.03	%	2,572		9/11/2025
	$	1,370,691			$	1,365,494

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2021, respectively.

At September 30, 2021, the Company owned a portion of the class F certificates with an outstanding principal balance of $14.9 million, which is eliminated in consolidation. The remaining CSMC USA debt for which the Company elected the fair value option had a fair value of $1.4 billion at September 30, 2021, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of approximately $1.4 billion, approximately $201.6 million is owned by related parties and approximately $1.2 billion is owned by third parties. The securitized debt of the CSMC USA can only be settled with the commercial loan with an outstanding principal balance of approximately $1.4 billion at September 30, 2021, that serves as collateral for the securitized debt and is non-recourse to the Company. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic change in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized gain (loss), net."

Residential Mortgage-Backed Notes

Arroyo Trust 2019

In May 2019, the Company completed a residential mortgage-backed securitization comprised of $945.5 million of Non-QM Residential Whole Loans, issuing $919.0 million of mortgage-backed notes. The Company did not elect the fair value option for these notes and accordingly they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2019's residential mortgage pass-through certificates at September 30, 2021 (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:
Class A-1	$	330,944	3.3%	$	330,944	4/25/2049
Class A-2	17,740		3.5%	17,740		4/25/2049
Class A-3	28,106		3.8%	28,106		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	401,845		$	401,845
Less: Unamortized Deferred Financing Costs	N/A			3,727
Total	$	401,845		$	398,118

The Company retained the non-offered securities in the securitization, which include the class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2019 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2021, Residential Whole Loans, with an outstanding principal balance of approximately $414.0

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million, serve as collateral for the Arroyo Trust 2019's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2020

In June 2020, the Company completed a residential mortgage-backed securitization comprised of $355.8 million of Non-QM Residential Whole Loans, issuing $341.7 million of mortgage-backed notes. The Company did not elect the fair value option for these notes and accordingly they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2020's residential mortgage pass-through certificates at September 30, 2021 (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:
Class A-1A	$	148,244	1.7%	$	148,244	3/25/2055
Class A-1B	17,591		2.1%	17,591		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	209,055		$	209,055
Less: Unamortized Deferred Financing Costs	N/A			2,154
Total	$	209,055		$	206,901

The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2020 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2021, Residential Whole Loans, with an outstanding principal balance of approximately $216.4 million serve as collateral for the Arroyo Trust 2020's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Note 8 — Derivative Instruments

The Company’s derivatives may include interest rate swaps, swaptions, options, futures contracts, TBAs, Agency and Non-Agency Interest-Only Strips that are classified as derivatives, credit default swaps and total return swaps.

The following table summarizes the Company’s derivative instruments at September 30, 2021 and December 31, 2020 (dollars in thousands):


			September 30, 2021			December 31, 2020
Derivative Instrument	Accounting Designation	Consolidated Balance Sheets Location	Notional Amount	Fair Value			Notional Amount	Fair Value






Credit default swaps, asset	Non-Hedge	Derivative assets, at fair value	2,030	$	94		2,030	$	161

Total derivative instruments, assets				94				161

Interest rate swaps, liability	Non-Hedge	Derivative liability, at fair value	22,000	(25)			—	—




Credit default swaps, liability	Non-Hedge	Derivative liability, at fair value	4,140	(537)			4,140	(656)

Total derivative instruments, liabilities				(562)				(656)
Total derivative instruments, net				$	(468)			$	(495)

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The following table summarizes the effects of the Company’s derivative positions, including Interest-Only Strips characterized as derivatives and TBAs, which are reported in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended September 30, 2021
Interest rate swaps	$	—	$	485	$	—	$	(71)	$	96	$	510

Interest-Only Strips— accounted for as derivatives	—		—		(59)		(90)		82		(67)





Credit default swaps	16		—		—		56		—		72

Total	$	16	$	485	$	(59)	$	(105)	$	178	$	515


Three months ended September 30, 2020


Interest-Only Strips— accounted for as derivatives	$	—	$	—	$	(166)	$	71	$	200	$	105




Credit default swap	166		—		—		(359)		—		(193)

Total	$	166	$	—	$	(166)	$	(288)	$	200	$	(88)


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2021
Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667

Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)





Credit default swaps	48		—		—		52		—		100

Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716


Nine months ended September 30, 2020
Interest rate swaps	$	(262)	$	(179,759)	$	262	$	(2,515)	$	(1,395)	$	(183,669)
Interest rate swaptions	80		—		—		—		—		80
Interest-Only Strips— accounted for as derivatives	(940)		—		(982)		(512)		1,176		(1,258)





Credit default swap	(9,550)		—		—		(2,023)		—		(11,573)
TBAs	(2,430)		—		—		928		—		(1,502)
Total	$	(13,102)	$	(179,759)	$	(720)	$	(4,122)	$	(219)	$	(197,922)

At September 30, 2021 and December 31, 2020, the Company had cash pledged as collateral for derivatives of approximately $1.4 million and $510 thousand, respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets.

Interest rate swaps

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The Company uses interest rate swaps to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting swaps to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements.

The Company has not elected to account for its interest rate swaps as “hedges” under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain (loss) on derivatives instruments, net" in the Consolidated Statements of Operations.

Interest Rate Swaps

From time to time, the Company may enter into interest rate swaps. During the nine months ended September 30, 2021, the Company entered into a fixed-pay interest rate swap and a variable-pay interest rate swap with notional amounts of $22.0 million and $56.5 million, respectively. The Company terminated the variable-pay interest rate swap during the three months ended September 30, 2021.

In March 2020, the Company terminated fixed-pay interest rate swaps with a notional value of approximately $3.1 billion and variable-pay interest rate swaps with a notional value of approximately $1.9 billion to reduce hedging costs and associated margin volatility. As of December 31, 2020, the Company did not have any interest rate swaps in its derivative holdings.

The following table provides additional information on the Company's fixed-pay interest rate swap as of September 30, 2021 (dollars in thousands):


	September 30, 2021
Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)
Greater than 5 years	$	22,000	1.2	%	0.1	%	10
Total	$	22,000	1.2	%	0.1	%	10

Interest-Only Strips

The Company also invests in Interest-Only Strips. In determining the classification of its holdings of Interest-Only Strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Generally, Interest-Only Strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as an MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only Strips, for which the underlying mortgage collateral has been included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives at fair value with changes recognized in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.

Credit Default Swaps

The Company currently has outstanding credit default swaps and, in the future, may continue to enter into these types of credit derivatives. Under these instruments, the buyer makes a monthly premium payment over the term of the contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified credit event.

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Note 9 — Offsetting Assets and Liabilities

The following tables present information about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the Company’s Consolidated Balance Sheets at September 30, 2021 and December 31, 2020 (dollars in thousands):


	September 30, 2021
	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets				Net Amount
Description							Financial Instruments(1)		Cash Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	1,208	$	—	$	1,208	$	(1,208)	$	—	$	—
Derivative asset, at fair value	94		—		94		(94)		—		—

Total assets	$	1,302	$	—	$	1,302	$	(1,302)	$	—	$	—

Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)	$	562	$	—	$	562	$	(94)	$	(468)	$	—
Repurchase Agreements(3)	483,268		—		483,268		(483,268)		—		—
Total liabilities	$	483,830	$	—	$	483,830	$	(483,362)	$	(468)	$	—

(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. In addition, the Financial Instruments column includes reverse repurchase agreement receivables that are available to be offset against repurchase agreement liabilities. Amounts disclosed in the Cash Collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.

(2)Cash collateral pledged against the Company’s derivative counterparties was approximately $1.4 million as of September 30, 2021.

(3)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $654.4 million as of September 30, 2021.


	December 31, 2020
	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets				Net Amount
							Financial Instruments(1)		Cash Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	1,565	$	—	$	1,565	$	(1,565)	$	—	$	—
Derivative asset, at fair value(2)	161		—		161		(161)		—		—
Total derivative assets	$	1,726	$	—	$	1,726	$	(1,726)	$	—	$	—

Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)	$	656	$	—	$	656	$	(161)	$	(495)	$	—
Repurchase Agreements(4)	356,923		—		356,923		(356,923)		—		—
Total derivative liability	$	357,579	$	—	$	357,579	$	(357,084)	$	(495)	$	—

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(1)Amounts disclosed in the Financial Instruments column of the tables above represent securities, Whole Loans and securitized commercial loan collateral pledged and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the Cash Collateral Pledged column of the tables above represents amounts pledged as collateral against derivative transactions.

(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps, credit default swaps and futures contracts.

(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $510 thousand as of December 31, 2020.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $682.9 million as of December 31, 2020.

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.

Note 10 — Related Party Transactions

Management Agreement

In connection with the Company’s initial public offering ("IPO") in May 2012, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company’s operations, including: (i) performing all of its day-to-day functions; (ii) determining investment criteria in conjunction with the Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of the Company’s Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, “stockholders’ equity” means the sum of the net proceeds from any issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the Company’s shares of common stock, excluding any unrealized gains or losses on our investments and derivatives and other non-cash items (excluding other than temporary impairment) that have impacted stockholders' equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. However, if the Company’s stockholders’ equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.

In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company’s chief financial officer, controller and their staff. Expense reimbursements to the Manager are made in cash on a regular basis. The Company’s reimbursement obligation is not subject to any dollar limitation. Because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, 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.

The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 16, 2022. It is automatically renewed for one-year terms on each May 15th unless previously terminated as described below. The Company’s independent directors review the Manager’s performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company’s independent directors, based upon: (i) the Manager’s unsatisfactory performance that is materially detrimental to the Company; or (ii) the Company’s determination that any fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company’s independent directors. The Company will provide the Manager 180 days prior notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-

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month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 days prior written notice from the Company’s Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company’s independent directors, which is defined as: (i) the Manager’s continued material breach of any provision of the Management Agreement (including the Manager’s failure to comply with the Company’s investment guidelines); (ii) the Manager’s fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager’s gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.

For the three months ended September 30, 2021 and September 30, 2020, the Company incurred approximately $1.5 million and approximately $1.5 million in management fees, respectively. For the nine months ended September 30, 2021 and September 30, 2020, the Company incurred approximately $4.5 million and approximately $3.0 million in management fees, respectively. The Manager waived the management fee for three months from March 2020 through May 2020 because of the unprecedented market disruption and dislocation across fixed income markets surrounding the uncertainty related to the COVID-19 pandemic. Future waivers, if any, will be at the Manager's discretion.

In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company as defined in the Management Agreement. For the three months ended September 30, 2021 and September 30, 2020, the Company recorded expenses included in general and administrative expenses totaling approximately $201 thousand and approximately $211 thousand, respectively, related to reimbursable employee costs. For the nine months ended September 30, 2021 and September 30, 2020, the Company recorded expenses included in general and administrative expenses totaling approximately $1.5 million and approximately $1.4 million, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company’s general and administrative expenses in the Consolidated Statements of Operations. At September 30, 2021 and December 31, 2020, approximately $3.0 million and approximately $3.0 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at September 30, 2021 and December 31, 2020, approximately $141 thousand and approximately $148 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets.

Note 11 — Share-Based Payments

In conjunction with the Company’s IPO and concurrent private placement, the Company’s Board of Directors approved the Western Asset Mortgage Capital Corporation Equity Plan (the “Equity Plan”) and the Western Asset Manager Equity Plan (the “Manager Equity Plan” and collectively the “Equity Incentive Plans”). The Equity Incentive Plans include provisions for grants of restricted common stock and other equity-based awards to the Manager, its employees and employees of its affiliates and to the Company’s directors, officers and employees. The Company can issue up to 3.0% of the total number of issued and outstanding shares of its common stock (on a fully diluted basis) at the time of each award (other than any shares previously issued or subject to awards made pursuant to one of the Company’s Equity Incentive Plans) under these Equity Incentive Plans. Upon the completion of the Company's most recent secondary public offerings, the number of shares of common stock available under the Equity Incentive Plans increased to 1,804,258. Approximately 1,140,653 shares have been issued under the Equity Plans with 663,605 shares available for issuance, as of September 30, 2021.

On June 25, 2021, the Company granted a total of 81,160 shares (20,290 each) of restricted common stock under the Equity Plan to the Company’s four independent directors. These restricted shares will vest in full on June 25, 2022, the first anniversary of the grant date. Each of the independent directors has elected to defer the issuance of the shares granted under the Director Deferred Fee Plan.

On June 19, 2020, the Company granted a total of 127,275 shares (25,455 each) of restricted common stock under the Equity Plan to the Company’s then five independent directors. Each of the independent directors elected to defer the issuance of the shares granted under the Director Deferred Fee Plan. In May 2021, one of the independent directors retired. As a result,

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25,455 shares of the unvested restricted stock were forfeited during the nine months ended September 30, 2021. The remaining restricted shares in this grant vested in full on June 19, 2021, the first anniversary of the grant date.

The Director Deferred Fee Plan permits eligible members of the Company's board of directors to defer certain stock awards made under its director compensation programs. The Director Deferred Fee Plan allows directors to defer issuance of their stock awards and therefore defer payment of any tax liability until the deferral is terminated, pursuant to the election form executed each year by each eligible director.

During the nine months ended September 30, 2021 and September 30, 2020, 137,820 and 67,480 restricted common shares vested, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan. The Company recognized stock-based compensation expense of approximately $165 thousand and approximately $182 thousand for the three months ended September 30, 2021 and September 30, 2020, respectively. The Company recognized stock-based compensation expense of approximately $453 thousand and approximately $517 thousand for the nine months ended September 30, 2021 and September 30, 2020, respectively. In addition, the Company had unamortized compensation expense of $376 thousand and $619 thousand for equity awards at September 30, 2021 and December 31, 2020, respectively.

All restricted common shares granted, other than those whose issuance has been deferred pursuant to the Director Deferred Fee Plan, possess all incidents of ownership, including the right to receive dividends and distributions currently, and the right to vote. Dividend equivalent payments otherwise allocable to restricted common shares under the Company's Director Deferred Fee Plan are deemed to purchase additional phantom shares of the Company’s common stock that are credited to each participant’s deferral account. The award agreements include restrictions whereby the restricted shares cannot be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of prior to the lapse of restrictions under the respective award agreement. The restrictions lapse on the unvested restricted shares awarded when vested, subject to the grantee’s continuing to provide services to the Company as of the vesting date. Unvested restricted shares and rights to dividends thereon are forfeited upon termination of the grantee.

The following is a summary of restricted common stock vesting dates as of September 30, 2021 and December 31, 2020, including shares whose issuance has been deferred under the Director Deferred Fee Plan:


	September 30, 2021	December 31, 2020
Vesting Date	Shares Vesting	Shares Vesting
March 2021	—	36,000
June 2021	—	130,365
March 2022	36,000	36,000
June 2022	81,160	—
	117,160	202,365

The following table presents information with respect to shares issued under the Company’s Equity Incentive Plans for the nine months ended September 30, 2021 and September 30, 2020, respectively, including shares whose issuance has been deferred under the Director Deferred Fee Plan:


	September 30, 2021			September 30, 2020
	Shares Issued Under the Equity Incentive Plans	Weighted Average Grant Date Fair Value (1)		Shares Issued Under the Equity Incentive Plans	Weighted Average Grant Date Fair Value (1)
Outstanding at beginning of period	1,025,542	$	14.10	894,289	$	15.76
Granted (2)	140,566	5.21		128,163	2.80
Cancelled/forfeited	(25,455)	2.75		—	—
Outstanding at end of period	1,140,653	13.26		1,022,452	14.13
Unvested at end of period	117,160	$	5.62	199,275	$	5.55

(1)The grant date fair value of the awards is based on the closing market price of the Company’s common stock at the grant date.

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(2)Includes 59,406 and 888 shares attributed to dividends on restricted stock under the Director Deferred Fee Plan for the nine months ended September 30, 2021 and September 30, 2020, respectively.

Note 12 — Stockholders’ Equity

At-The-Market Program

In March 2017, the Company entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to $100.0 million shares of common stock in an At-The-Market equity offering. During the year ended December 31, 2020, the Company sold 6,034,741 shares under this amended agreement with an average price of $3.70 per share for a total net proceeds of $22.0 million. During the nine months ended September 30, 2021, the Company did not sell any shares under the amended agreement.

Stock Repurchase Program

On December 19, 2019, the Board of Directors of the Company reauthorized its repurchase program of up to 2,700,000 shares of its common stock through December 31, 2021. The previous reauthorization announced on December 21, 2017 of the Company's repurchase program of up to 2,100,000 shares of its common stock expired on December 31, 2019. Purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of common shares and the program may be suspended or discontinued at the Company’s discretion without prior notice. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. In March 2020, the Company repurchased 100,000 shares of common stock with a weighted average price of $5.78. The repurchased stock was not retired and is accounted for as treasury stock.

Convertible Notes Exchange

On July 1, 2020, the Company issued an aggregate of 1,354,084 shares of its common stock in exchange for $5.0 million aggregate principal amount of its 2022 Notes. See Note 7 - "Financings" for information related to the convertible notes agreement.

Dividends

To preserve liquidity, the Company suspended its first and second quarter common stock dividends in 2020 given extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic. Starting in the quarter ended September 30, 2020, the Company resumed payment of the quarterly dividend after making progress strengthening its balance sheet and improving liquidity and earnings power of its investment portfolio.

The following table presents cash dividends declared and paid by the Company on its common stock:

Declaration Date

Record Date

Payment Date

Amount per Share

Tax Characterization

2021

September 23, 2021

October 4, 2021

October 26, 2021

0.06

Not yet determined

June 22, 2021

July 2, 2021

July 26, 2021

0.06

Not yet determined

March 23, 2021

April 2, 2021

April 26, 2021

0.06

Not yet determined

2020

December 17, 2020

December 28, 2020

January 26, 2021

0.06

Not yet determined(1)

September 22, 2020

October 2, 2020

October 26, 2020

0.05

Return of capital

(1)The cash distributions made on January 26, 2021, with a record date of December 28, 2020, are treated as received by stockholders on January 26, 2021 and taxable in calendar year 2021. The tax characterization of these distributions will be determined in January 2022.

Note 13 — Net Income (loss) per Common Share

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The table below presents basic and diluted net income (loss) per share of common stock using the two-class method for the three and nine months ended September 30, 2021 and September 30, 2020 (dollars, other than shares and per share amounts, in thousands):


	For the three months ended September 30, 2021		For the three months ended September 30, 2020		For the nine months ended September 30, 2021		For the nine months ended September 30, 2020
Numerator:
Net income (loss) attributable to common stockholders and participating securities for basic and diluted earnings per share	$	(4,213)	$	59,807	$	(36,423)	$	(339,144)
Less:
Dividends and undistributed earnings allocated to participating securities	24		353		65		16
Net income (loss) allocable to common stockholders — basic and diluted	$	(4,237)	$	59,454	$	(36,488)	$	(339,160)

Denominator:
Weighted average common shares outstanding for basic earnings per share	60,795,688		60,740,701		60,771,759		56,293,512
Weighted average common shares outstanding for diluted earnings per share	60,795,688		60,740,701		60,771,759		56,293,512
Basic earnings (loss) per common share	$	(0.07)	$	0.98	$	(0.60)	$	(6.02)
Diluted earnings (loss) per common share	$	(0.07)	$	0.98	$	(0.60)	$	(6.02)

For the three and nine months ended September 30, 2021 and September 30, 2020, the Company excluded the effects of the convertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the convertible senior unsecured notes.

Note 14 — Income Taxes

As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.

Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of September 30, 2021. The Company files U.S. federal and state income tax returns. As of September 30, 2021, U.S. federal tax returns filed by the Company for 2019, 2018 and 2017 and state tax returns filed for 2019, 2018, 2017, 2016 and 2015 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company’s policy is to classify them as a component of its provision for income taxes.

Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three months ended September 30, 2021 and September 30, 2020, the Company recorded a federal and state tax benefit of $218 thousand and tax provision of $205 thousand, respectively, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations. During the nine months ended September 30, 2021 and September 30, 2020, the Company recorded a federal and state tax benefit of $19 thousand and tax provision of $367 thousand, respectively.

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Deferred Tax Asset

As of September 30, 2021 and December 31, 2020, the Company recorded a deferred tax asset of approximately $20.6 million and $21.0 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing of income recognition of certain investments held in the TRS. The capital loss carryforwards may only be recognized to the extent of capital gains. There is uncertainty as to the TRS' ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance of $20.6 million and $21.0 million as of September 30, 2021 and December 31, 2020, respectively.

In addition, the REIT generated net operating losses ("NOLs") during the nine months ended September 30, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the NOLs is apportioned to the TRS. The Company recorded a deferred tax asset relating to the NOLs of $18.8 million and $19.3 million in the REIT and $2.1 million and $2.1 million in the TRS as of September 30, 2021 and December 31, 2020, respectively. The TRS can carryback the NOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years to request a refund for taxes paid. As of September 30, 2021 and December 31, 2020, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized, with the exception of the TRS carryback to 2015, and it has recorded a combined valuation allowance of $20.9 million and $21.4 million, respectively.

Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).

Note 15 — Contingencies

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material contingencies at September 30, 2021.

Note 16 — Subsequent Events

On November 5, 2021, the Company entered into an amendment of its Residential Whole Loan Facility. The amendment facility bears an interest rate to LIBOR plus 2.00%, with a LIBOR floor of 0.25%. The facility is available to finance five types of residential mortgages: Non-Agency mortgage loans, Non-QM loans, investor loans, re-performing and non-performing loans. The advance rates differ by type of loan, but for performing Non-QM loans the advance rate is 90%. The facility matures on November 4, 2022. The facility is a mark to market margin facility once the collateral value declines below par and has a stated capacity of $500 million.

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

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications 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. In particular, it is difficult to fully assess the long-term social, economic and health impact of and success of recovery efforts, including vaccine distribution, relate to COVID-19 at this time.

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,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; changes in interest rates and the market value of the Company’s target assets; credit risks; servicing - related risks, including those associated with foreclosure and liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company’s repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on CMBS and Commercial Loans; the loss severity on Non-Agency MBS; the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, Residential and Commercial Whole Loans, Residential and Commercial Bridge Loans and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; the Company’s understanding of its competition; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing outbreak of COVID-19; and the Manager's expectations regarding COVID-19 recovery.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 5, 2021. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Overview

Western Asset Mortgage Capital Corporation, a Delaware corporation, and its Subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires “we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a diversified portfolio of real estate related securities, whole loans and other financial assets, which we collectively refer to as our target assets. We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended (the "1940 Act"). Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "WMC."

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time. We also deploy leverage as part of our investment strategy to increase potential returns.

Our Investment Strategy

Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a diversified, long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, commercial and residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act. We do not have an established minimum current rating requirement for our investments.

Our Target Assets

Residential Whole Loans. — Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans are mainly adjustable rate mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non-QM mortgages"). Our Manager’s review, relating to Non-QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements. As discussed in Note 7 "Financing," we have and may continue to securitize whole loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary going forward.

Commercial Whole Loans. — Commercial Whole Loans are generally loans ranging from $5 million to $125 million, secured by commercial real estate typically short-term loans. The collateral types may include hospitality, senior care living facilities, multifamily, office retail and industrial properties. These loans may be held directly by us or through consolidated trusts with us holding the beneficial interest in the trust.

Commercial Mezzanine Loans. — Commercial mezzanine loans are generally structured to represent a senior position in the borrower’s equity in, and subordinate to a first mortgage loan, on a property. These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property. At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property. Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing

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the loan. Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender. Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms. Depending on the structure of a transaction, Commercial Mezzanine loans may or may not qualify as "qualifying real estate interests" for purposes of the 1940 Act.

Non-Agency RMBS. — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans that were current at the time of the securitization, but had been delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Non-Agency CMBS. — Fixed and floating rate CMBS for which the principal and interest payments are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity.

Agency CMBS. — Fixed and floating rate CMBS, for which the principal and interest payments are guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, but for which the underlying mortgage loans are secured by real property other than single family residences. These may include, but are not limited to Fannie Mae DUS (Delegated Underwriting and Servicing) MBS, Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral. These securities generally have prepayment protection in the form of defeasance, yield maintenance or points.

Agency RMBS. — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date. These investments can be in the form of pools, TBA and CMO (including interest only, principal only or other structures).

GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac. — From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying mortgages. Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

Other investments. — In addition to MBS, our principal investment, we may also make other investments in securities, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies. These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment portfolio composition at September 30, 2021.

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Our Financing Strategy

During 2020, the uncertainties created by the COVID-19 pandemic made it challenging to obtain financing arrangements on favorable terms, including our repurchase agreements, term financings, and securitizations. In the latter part of 2020 and continuing into 2021 terms for financing arrangements have improved significantly. We have primarily financed our investment acquisitions with repurchase agreements. We believe the amount of leverage we use is consistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors such as general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the creditworthiness of financing counterparties and the health of the U.S. residential and commercial mortgage markets. In utilizing leverage, we seek to enhance equity returns while limiting our exposure to interest rate volatility and daily margin calls. We expect to continue to seek financing arrangements without daily margin requirements or with margin requirements which apply only after a significant reduction in the valuation of the assets financed, including but not limited to term financing, securitization and convertible senior unsecured notes, as the market permits. We expect to maintain a debt-to-equity ratio of two to four and a half times the amount of our stockholders’ equity, depending on our investment composition.

Our repurchase agreements bear interest at a contractually agreed-upon rate and historically had terms ranging from one month to 18 months. Under these repurchase agreements, the respective counterparties retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets may require us to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon advance rates. Our inability to post adequate collateral for a margin call by a counterparty, in a timeframe as short as the close of the same business day, could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse effect on our financial position, results of operations and cash flows.

Our repurchase agreement counterparties generally require collateral in excess of the loan amount, or haircuts. As of September 30, 2021, the ranges of the haircuts on our investments were as follows:

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Collateral	Minimum	Maximum (excluding IOs and IIOs)	Maximum (including IOs and IIOs)
Agency RMBS	25.0%	n/a	25.0%

Non-Agency RMBS	35.0%	35.0%	35.0%
Non-Agency CMBS	25.0%	40.0%	n/a
Other securities	35.0%	60.0%	n/a
Residential Whole Loans(1)	15.0%	50.0%	n/a
Commercial Loans(2)	22.0%	55.0%	n/a

(1) Includes Residential Bridge Loans.

(2) Includes Securitized commercial loans.

Our Hedging Strategy and Risk Management Strategy

Our overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. We believe our broad approach to investing in the real estate mortgage markets, which considers all categories of real estate assets, allows us to invest in a diversified portfolio and help mitigate our portfolio from risks that arise from investing in a single or limited collateral type. In connection with our risk management activities, we may enter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects of market risk and cash flow volatility associated with interest rate risk, including prepayment risk. As part of our hedging strategy, we may enter into, interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, future contracts, TBAs, credit default swaps, forwards and other similar instruments. There can be no assurance that appropriate hedging strategies will be available or that if implemented they will be successful.

Critical Accounting Policies

The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and certain VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we currently apply. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. For a review of recent accounting pronouncements that may impact our results of operations, see Note 2 of our “Notes to Consolidated Financial Statements (Unaudited).”

There have been no significant changes to our critical accounting policies that are disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2020, other than the significant accounting policy disclosed below.

Real Estate Owned

2021 Activity

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Investment Activity

We continually evaluate potential investments and our investment selection is based on supply and demand of our target assets, costs of financing, and the expected future interest rate volatility costs of hedging. During the nine months ended September 30, 2021, we acquired $243.3 million of residential whole loans. We did not sell any investments.

The following table presents our investing activity for the nine months ended September 30, 2021 (dollars in thousands):


	Balance at				Loan Modification/Capitalized Interest		Principal Payments and Basis Recovery		Proceeds from Sales		Transfers to REO		Realized Gain/(Loss)		Unrealized Gain/(loss)		Premium and discount amortization, net			Balance at
Investment Type	December 31, 2020		Purchases																September 30, 2021
Agency RMBS and Agency RMBS IOs	$	1,708	$	—	N/A		$	(258)	$	—	N/A		$	—	$	(108)	$	—		$	1,342
Non-Agency RMBS	25,381		—		N/A		(904)		—		N/A		—		3,710		(176)			28,011

Non-Agency CMBS	164,081		—		N/A		(13,479)		—		N/A		(5,929)		(16,254)		6,231			134,650
Other securities(1)	48,754		—		N/A		—		—		N/A		—		4,553		(1,214)			52,093
Total MBS and other securities	239,924		—		N/A		(14,641)		—		N/A		(5,929)		(8,099)		4,841			216,096
Residential Whole Loans	1,008,782		243,322		310		(309,395)		—		—		—		13,667		(7,269)			949,417
Residential Bridge Loans	13,916		—		—		(7,667)		—		(752)		(155)		639		(21)			5,960
Commercial Loans	310,523		—		—		(103,272)		—		(30,000)		—		(48,630)		145			128,766
Securitized commercial loans	1,605,335		—		—		(354,202)		—		—		—		107,423		18,449			1,377,005
Total Investments	$	3,178,480	$	243,322	$	310	$	(789,177)	$	—	$	(30,752)	$	(6,084)	$	65,000	$	16,145		$	2,677,244

(1) Other securities include $45.8 million of GSE CRTs and $6.3 million of ABS at September 30, 2021.

Portfolio Characteristics

Our Agency Portfolio

The following table summarizes our Agency portfolio by investment category as of September 30, 2021 (dollars in thousands):


	Principal Balance		Amortized Cost		Fair Value		Net Weighted Average Coupon







Agency RMBS IOs and IIOs (1)	N/A		$	63	$	134	1.4	%
Agency RMBS IOs and IIOs accounted for as derivatives (1)	N/A		N/A		1,208		1.3	%
Total Agency RMBS	—		63		1,342		1.3	%
Total	$	—	$	63	$	1,342	1.3	%

(1)IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest-only class of securities.

Credit Sensitive Portfolio

Non-Agency RMBS

The following table presents the fair value and weighted average purchase price for each of our Non-agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of September 30, 2021 (fair value dollars in thousands):

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			Weighted Average
Category	Fair Value		Purchase Price		Life (Years)	Original LTV		Original FICO	60+ Day Delinquent		CPR
Prime	$	10,324	$	74.82	5.6	59.4	%	779	4.1	%	40.5	%
Alt-A	17,687		44.10		10.5	71.4	%	589	18.5	%	9.6	%

Total	$	28,011	$	55.42	8.7	67.0	%	659	13.2	%	21.0	%

Non-Agency CMBS

The following table presents certain characteristics of our Non-Agency CMBS portfolio as of September 30, 2021 (dollars in thousands):


		Principal				Weighted Average
Type	Vintage	Balance		Fair Value		Life (Years)	Original LTV
Conduit:
	2006-2009	$	2,229	$	1,677	2.4	75.0	%
	2010-2020	94,107		34,657		5.8	63.6	%
		96,336		36,334		5.7	64.1	%
Single Asset:
	2010-2020	116,104		98,316		1.7	64.9	%
Total		$	212,440	$	134,650	2.8	64.7	%

Residential Whole Loans

The Residential Whole Loans have low LTV's and are comprised of 2,187 Non-QM adjustable rate mortgages and six investor fixed rate mortgages. The following table presents certain information about our Residential Whole Loans investment portfolio at September 30, 2021 (dollars in thousands):


				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	14	$	7,816	66.0	%	746	5.7	28.4	2.7	%
3.01% – 4.00%	332	163,681		62.6	%	751	3.2	27.3	3.7	%
4.01% – 5.00%	997	380,394		64.8	%	748	2.7	28.0	4.8	%
5.01% – 6.00%	820	346,778		64.6	%	739	2.9	27.2	5.4	%
6.01% – 7.00%	28	9,337		67.8	%	720	3.0	25.9	6.3	%
7.01% - 8.00%	2	506		73.2	%	753	4.5	26.9	7.1	%

Total	2,193	$	908,512	64.3	%	745	2.9	27.6	4.8	%

(1)The original FICO score is not available for 215 loans with a principal balance of approximately $68.8 million at September 30, 2021. We have excluded those loans from the weighted average computation.

Residential Bridge Loans

Our Residential Bridge Loans are comprised of short-term fixed rate mortgages secured by non-owner occupied single and multi-family residences with low LTVs, generally up to 85%. The following table presents certain information about our Residential Bridge Loans investment portfolio at September 30, 2021 (dollars in

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thousands):


				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	7	3,213		75.9	%	2.0	10.3	%
11.01% – 13.00%	2	495		69.7	%	2.0	11.4	%





Total	12	$	6,654	73.0	%	2.0	9.7	%

Non-performing Residential Loans

The following table presents the aging of the Residential Whole Loans and Bridge Loans as of September 30, 2021 (dollars in thousands):


	Residential Whole Loans					Bridge Loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current(1)	2,156	$	889,231	$	930,286	1	$	75	$	75
1-30 days	15	7,448		7,746		1	105		105
31-60 days	—	—		—		—	—		—
61-90 days	3	1,238		1,259		—	—		—
90+ days	19	10,595		10,126		10	6,474		5,780
Total	2,193	$	908,512	$	949,417	12	$	6,654	$	5,960

(1) Includes one loan in forbearance with unpaid principal balance of $493 thousand.

Residential Whole Loans Forbearance Programs

COVID-19 has materially disrupted business operations, resulting in significantly higher levels of unemployment or underemployment in certain sectors. As a result, some Residential Whole Loan borrowers have experienced financial hardship, making it difficult to meet their payment obligations to us, leading to requests for forbearance and higher levels of delinquency and potentially defaults. We maintain a strong relationship with our servicers and have utilized these relationships to manage the impacts of COVID-19 pandemic on our Non-QM loans, including the use of forbearance programs. As of September 30, 2021, we had one Non-QM loan in forbearance and no Non-QM loans in the repayment phase following forbearance. Under the forbearance agreement, the borrower can generally elect to defer the principal and interest payments for 3 to 5 months. At the end of the forbearance period, the borrower can either repay the deferred principal and interest in full or over the next 9 months or, capitalize the deferred principal and interest to the loan balance and calculate a new amortization payment. Loans in forbearance are treated as "Current" in the above table. The loan in forbearance is carried at fair value and had an unpaid principal balance of $493 thousand, a fair value of $434 thousand, an original LTV of 64.7%, and represents approximately 0.1% of the total outstanding principal balance of our Residential Whole Loans.

Residential Whole Loans in Non-Accrual Status

As of September 30, 2021, there were 19 Non-QM loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $10.6 million and a fair value of $10.1 million. These nonperforming loans represent approximately 1.2% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the three and nine months ended September 30, 2021 since the valuation adjustment, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

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As of September 30, 2021, there were 10 Residential Bridge Loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $6.5 million and a fair value of $5.8 million. These nonperforming Residential Bridge Loans represent approximately 97.3% of the total outstanding principal balance. No allowance and provision for credit losses was recorded for loans carried at fair value as of and for the three and nine months ended September 30, 2021 since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of September 30, 2021, we had four real estate owned ("REO") properties with an aggregate carrying value of $1.1 million related to foreclosed Bridge Loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheets.

Commercial Real Estate Investments

The following table presents our commercial loan investments as of September 30, 2021 (dollars in thousands):

Loan

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

Geographic Location

CRE 3

Interest-Only Mezzanine loan

90,000

27,495

58%

1-Month LIBOR plus 9.25%

6/29/2021

Two-Year First Extension and One-Year Second Extension

Entertainment and Retail

CRE 4

Interest-Only First Mortgage

38,367

38,294

63%

1-Month LIBOR plus 3.02%

8/6/2022

Two One-Year Extensions

Retail

CRE 5

Interest-Only First Mortgage

24,535

24,085

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 6

Interest-Only First Mortgage

13,207

12,964

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

CRE 7

Interest-Only First Mortgage

7,259

7,126

62%

1-Month LIBOR plus 3.75%

11/6/2022

Three One-Year Extensions

Hotel

IL, FL

CRE 8

Interest-Only First Mortgage

4,442

4,440

79%

1-Month LIBOR plus 4.85%

12/6/2022

None

Assisted Living Facilities

SBC 3

Interest-Only First Mortgage

14,362

49%

1-Month LIBOR plus 4.10%

7/6/2022

None

Nursing Facilities

192,172

128,766

Commercial Loan Payoffs

On July 7, 2021, SBC 1, with an outstanding principal balance of $45.2 million collateralized by nursing facilities, was paid off in full.

On September 7, 2021, CRE 2, with an outstanding principal balance of $46.8 million collateralized by nursing facilities, was paid off in full.

On September 24, 2021, SBC 2 with an outstanding principal balance of $9.2 million collateralized by an apartment complex was paid off in full.

Non-Performing Commercial Loans

The impact of COVID-19 pandemic has adversely impacted a broad range of industries in which our commercial loan borrowers operate and could impair their ability to fulfill their financial obligations to us, most significantly retail and hospitality asset. All but the two loans discussed below remain current.

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CRE 1 Loan

In October 2020, we commenced foreclosure proceedings. However, on February 24, 2021, the borrower filed for bankruptcy protection halting the foreclosure process. In August 2021, the bankruptcy case was dismissed by the bankruptcy court and we, together with the other holders of the loan, foreclosed on the property through a SPE formed for the purpose of holding the property. The property is currently being marketed for sale. Based on preliminary bids, we believe there is a reasonable likelihood that our investment along with the other members' interest will be recovered, although there is no assurance of full recovery. The borrower has continued to file legal challenge to the sale process. While the Company believes these legal challenges have no merit, they have delayed moving forward with the sale of the property.

The SPE is consolidated by us and the property is recorded at the lower of cost or fair value less cost to sell. As of September 30, 2021, the REO is recorded at $42.5 million and classified in "Other assets" in the Consolidated Balance Sheets and the other members' interests in the SPE of approximately $11.9 million are recorded as "Non-controlling interest" in the consolidated financial statements.

CRE 3 Loan

As of September 30, 2021, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million secured by a retail facility was non-performing and past its maturity date of June 29, 2021. We were receiving interest payments on this loan from a reserve that was exhausted in May 2021. During the second quarter of 2021, the fair value of the loan declined significantly. We are currently in discussions with the borrower and certain other lenders regarding alternatives to address the situation which might include modifications of loan terms, deferral of payments and the funding of new advances. There can be no assurance that these discussions will result in an outcome in which we would be repaid any amount of the loan and we may suffer further declines in fair value with respect to the mezzanine investment. For the three months ended September 30, 2021, we suffered a further decline of $5.2 million in the fair value of this investment. We could experience a total loss of our investment under various scenarios, which at current levels would result in a $27.5 million reduction in the Company’s book value. Refer to Note 6 - "Commercial Loans" for details.

The following table presents the aging of the Commercial Loans as of September 30, 2021 (dollars in thousands):


	Commercial Loans
	No of Loans	Principal		Fair Value
Current	6	$	102,172	$	101,271
1-30 days	—	—		—
31-60 days	—	—		—
61-90 days	—	—		—
90+ days	1	90,000		27,495
Total	7	$	192,172	$	128,766

Securitized Commercial Loan

On August 1, 2020 we consolidated CSMC USA as a result of our ongoing reassessment of our CMBS VIE holdings for potential consolidation of the securitized trust. Our $14.9 million or 8.8% interest in the trust certificate of CSMC USA (F Class) was eliminated in the consolidation. Please refer to Note 6 - "Commercial Real Estate Investments" for details. The CSMC USA holds a commercial loan secured by a first mortgage lien on the borrowers’ fee and leasehold interests in a portion of a super-regional mall. The outstanding principal balance on this commercial loan is $1.4 billion as of September 30, 2021. The loan's stated maturity date is September 11, 2025 and bears a fixed interest rate of 4.38%. The commercial loan served as collateral for the $1.4 billion securitized debt issued by CMSC USA and the securitized debt is non-recourse to us. Refer to Note 7 - "Financings" for details on the associated securitized debt.

In December 2020, the commercial loan held by CSMC USA was amended to an interest only payment through maturity. As part of the modification, a Cash Management Forbearance Agreement was entered into by special servicer and the borrower that required both increased reporting requirements and monthly net cash remittance.

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Geographic Concentration

The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of September 30, 2021, based on fair value (dollars in thousands):


	Non-Agency RMBS					Non-Agency CMBS
	Concentration		Fair Value			Concentration		Fair Value
California	27.2	%	$	7,628	California	30.6	%	$	41,196
New York	9.3	%	2,591		Nevada	14.6	%	19,620
Florida	9.1	%	2,554		Illinois	13.6	%	18,372
New Jersey	4.2	%	1,173		Bahamas	10.6	%	14,330
Maryland	4.0	%	1,125		New York	3.8	%	5,073

The following table presents the various states across the United States in which the collateral securing our Residential Whole Loans and Residential Bridge Loans at September 30, 2021, based on principal balance, is located (dollars in thousands):


	Residential Whole Loans					Residential Bridge Loans
	State Concentration		Principal Balance			State Concentration		Principal Balance
California	72.3	%	$	656,801	New York	39.5	%	$	2,631
New York	14.3	%	129,931		California	35.9	%	2,386
Georgia	2.7	%	24,300		Florida	16.9	%	1,125
Florida	2.4	%	21,697		New Jersey	5.0	%	335
New Jersey	2.0	%	18,255		Pennsylvania	1.6	%	105
Other	6.3	%	57,528		Other	1.1	%	72
Total	100.0	%	$	908,512	Total	100.0	%	$	6,654

Financing Activity

We will look to continue to expand and diversify our financing sources, especially those sources that provide an alternative to short-term repurchase agreements with daily margin requirements. During the nine months ended September 30, 2021, we repurchased $129.3 million aggregate principal amount of the 2022 Notes and issued $86.3 million aggregate principal amount of the 2024 Notes. We did not sell any investments during the nine months ended September 30, 2021.

Repurchase Agreements

Non-Agency CMBS and Non-Agency RMBS Facility

On May 5, 2021, we amended our Non-Agency CMBS and Non-Agency RMBS financing facility to, among other things, extend the facility for an additional 12 months and reduce the interest rate. The amended facility has improved advance rates and bears interest at a rate of three-month LIBOR plus 2.00%. As of September 30, 2021, the outstanding balance under this facility was $111.5 million. The borrowing is secured by investments with an estimated fair market value of $196.7 million as of September 30, 2021.

Commercial Whole Loan Facility

As of September 30, 2021, we had approximately $63.7 million in borrowings, with a weighted average interest rate of 2.27% under our commercial whole loan facility. The borrowing is secured by loans with an estimated fair market value of

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$86.9 million as of September 30, 2021. The facility was subject to automatic monthly rolling until such time that it is terminated pursuant to the terms of the agreement by either the borrower or lender or until certain conditions of default.

Residential Whole Loan Facility

Under the residential whole loan facility, as of September 30, 2021, we had approximately $236.8 million in borrowings with an interest rate of one month LIBOR plus 2.75%. The borrowing is secured by Non-QM loans with an estimated fair market value of $287.1 million.

Recourse and Non-Recourse Financing

We utilize both recourse and non-recourse debt to finance our portfolio. Our recourse debt included our short and long-term repurchase agreement financings and our convertible senior unsecured notes. At September 30, 2021, our total non-recourse financing of approximately $2.0 billion is comprised of $605.0 million of securitized debt issued in connection with our two Residential Whole Loan securitizations and $1.4 billion of securitized debt from owning a $14.9 million Non-Agency CMBS bond deemed to be a controlling financial variable interest in CSMC USA which required us to consolidate the CMBS VIE.


(dollars in thousands)	September 30, 2021			December 31, 2020
Recourse and non-recourse financing	$	2,580,413		$	2,973,732
Non-recourse financing	1,970,513			2,446,012
Total recourse financing	$	609,900	$609,900	$	527,720

Stockholders' equity	$	210,186		$	255,112

Recourse leverage	2.9x			2.1x

Financing Facilities Outstanding Borrowings

At September 30, 2021, we had outstanding borrowings under five of our repurchase agreements. The following table summarizes certain characteristics of our repurchase agreements at September 30, 2021 (dollars in thousands):

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Securities Pledged	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)
Short-Term Borrowings:

Agency RMBS	$	1,048	1.05	%	59
Non-Agency CMBS	10,314		1.75	%	12

Residential Whole Loans (1)	41,013		2.66	%	4
Residential Bridge Loans (1)	5,817		2.60	%	4
Commercial Loans (1)	10,603		3.18	%	4

Other Securities	2,587		3.52	%	19
Subtotal	71,382		2.60	%	7
Long-Term Borrowings:
Non-Agency CMBS (2)	68,352		2.12	%	193
Non-Agency RMBS	15,632		2.12	%	217
Residential Whole Loans (1)(3)	236,767		3.00	%	36
Commercial Loans	63,669		2.27	%	360
Other Securities	27,506		2.12	%	217
Subtotal	411,926		2.65	%	113
Repurchase Agreements Borrowings	$	483,308	2.64	%	98
Less Unamortized Debt Issuance Costs	40		N/A		N/A
Repurchase Agreements Borrowings, net	$	483,268	2.64	%	98

(1)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(3)The Residential Whole Loan facility's maturity was extended one month in October 2021.The weighted average remaining maturity reflects the one month extension.

Certain of the financing arrangements provide the counterparty with the right to terminate the agreement if we do not maintain certain equity, liquidity and leverage metrics. We were in compliance with the terms of such financial tests as of September 30, 2021.

At September 30, 2021, we had outstanding repurchase agreement borrowings with the following counterparties:


(dollars in thousands) Repurchase Agreement Counterparties	Amount Outstanding		Percent of Total Amount Outstanding		Company Investments Held as Collateral		Counterparty Rating(1)
Credit Suisse AG, Cayman Islands Branch (2)	$	339,773	70.3	%	$	414,003	A+
Citigroup Global Markets Inc.	111,491		23.1	%	196,665		A+
Nomura Securities International, Inc. (3)	18,096		3.7	%	22,038		Unrated (3)
Credit Suisse Securities (USA) LLC	12,900		2.7	%	20,400		A+












All other counterparties (4)	1,048		0.2	%	1,342
Total	$	483,308	100.0	%	$	654,448

(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at September 30, 2021 by S&P.

(2)Includes master repurchase agreements in which the buyer includes Alpine Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper conduit.

(3) Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated BBB+ by S&P at September 30, 2021.

(4) Represents amount outstanding with one counterparty, which holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements as of September 30, 2021.

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The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the three and nine months ended September 30, 2021 (dollars in thousands):


Collateral	Three Months Ended September 30, 2021		Nine months ended September 30, 2021
Agency RMBS	$	1,125	$	1,235

Non-Agency RMBS	15,632		15,120
Non-Agency CMBS(1)	81,645		79,890
Residential Whole Loans	133,556		80,565
Commercial loans	106,200		135,398

Residential Bridge Loans	7,897		10,342
Membership interest	15,452		17,863
Other securities	30,052		23,596
Total	$	391,559	$	364,009
Maximum borrowings during the period(2)	$	483,307	$	483,307

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Amount represents the maximum borrowings at month-end during each of the respective periods.

Securitized Debt

Commercial Mortgage-Backed Notes

We hold a controlling financial variable interest in CSMC USA and were required to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The following table summarizes the consolidated 2014 CSMC USA's commercial mortgage pass-through certificates at September 30, 2021 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	126,264	9/11/2025
Class A-2	531,700		4.0	%	570,167		9/11/2025
Class B	136,400		4.2	%	138,562		9/11/2025
Class C	94,500		4.3	%	92,630		9/11/2025
Class D	153,950		4.4	%	142,388		9/11/2025
Class E	180,150		4.4	%	161,900		9/11/2025
Class F	153,600		4.4	%	118,664		9/11/2025
Class X-1(1)	N/A		0.5	%	12,347		9/11/2025
Class X-2(1)	N/A		0.03	%	2,572		9/11/2025
	$	1,370,691			$	1,365,494

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2021, respectively.

The above table does not reflect the portion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bonds represents a controlling financial interest, which resulted in consolidation of the trust, during the quarter. The bond had a fair market value of $11.5 million at September 30, 2021, and our exposure to loss is limited to our ownership interest in this bond.

Residential Mortgage-Backed Notes

In May 2019, we completed a residential mortgage-backed securitization comprised of a portion of our Residential Whole Loan portfolio. RMI 2015 Trust and RNR Trust collectively transferred $945.5 million of Non-QM Residential Whole

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Loans, to our wholly owned subsidiary, Arroyo Trust 2019. Arroyo Trust 2019 issued $919.0 million of mortgage-backed notes and we retained the subordinate non-offered securities. These non-offered securities with an estimated fair value of $35.9 million at September 30, 2021 were eliminated in the consolidation. At September 30, 2021, Residential Whole Loans, with an outstanding principal balance of approximately $414.0 million, serve as collateral for the Arroyo Trust 2019's securitized debt.

The following table summarizes the consolidated Arroyo Trust 2019's issued mortgage-backed notes at September 30, 2021 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	330,944	3.3%	$	330,944	4/25/2049
Class A-2	17,740		3.5%	17,740		4/25/2049
Class A-3	28,106		3.8%	28,106		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	401,845		$	401,845
Less: Unamortized deferred financing costs	N/A			3,727
Total	$	401,845		$	398,118

In June 2020, we completed a residential mortgage-backed securitization comprised of a portion of our Residential Whole Loan portfolio. RMI 2015 Trust transferred $355.8 million of Non-QM Residential Whole Loans, to our wholly owned subsidiary, Arroyo Trust 2020. Arroyo Trust 2020 issued $341.7 million of mortgage-backed notes and we retained the subordinate non-offered securities. These non-offered securities with an estimated fair value of $26.0 million at September 30, 2021 were eliminated in the consolidation. At September 30, 2021, Residential Whole Loans, with an outstanding principal balance of approximately $216.4 million, serve as collateral for the Arroyo Trust 2020's securitized debt.

The following table summarizes the consolidated Arroyo Trust 2020's issued mortgage-backed notes at September 30, 2021 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	148,244	1.7%	$	148,244	3/25/2055
Class A-1B	17,591		2.1%	17,591		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	209,055		$	209,055
Less: Unamortized deferred financing costs	N/A			2,154
Total	$	209,055		$	206,901

Convertible Senior Unsecured Notes

During the quarter we reduced the our overall convertible senior unsecured notes outstanding by $36.4 million and extended the maturity to 2024 for $86.3 million of our convertible senior unsecured debt through the issuance of the 2024 Notes to further strengthen our balance sheet.

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In August 2021, we repurchased $22.3 million aggregate principal amount of our existing 2022 Notes at a weighted average discount to par value of 2.8%.

In September 2021, we issued $86.3 million of 2024 Notes and used the net proceeds, together with approximately $20.2 million of cash on hand, to repurchase an additional $100.3 million of our 2022 Notes.

As of September 30, 2021, we had $45.7 million of the 2022 Notes outstanding. The 2022 Notes mature on October 1, 2022, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

As of September 30, 2021, we had $86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature on September 15, 2024, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

Hedging Activity

The following tables summarize the hedging activity during the nine months ended September 30, 2021 (dollars in thousands):


	Notional Amount at				Settlements, Terminations or Expirations		Notional Amount at
Derivative Instrument	December 31, 2020		Acquisitions				September 30, 2021
Fixed pay interest rate swaps	$	—	$	22,000	$	—	$	22,000
Variable pay interest rate swaps	—		56,500		(56,500)		—







Credit default swaps	6,170		—		—		6,170


Total derivative instruments	$	6,170	$	78,500	$	(56,500)	$	28,170


	Fair Value at		Acquisitions		Settlements, Terminations or Expirations		Realized Gains / Losses		Mark-to-market		Fair Value at
Derivative Instrument	December 31, 2020										September 30, 2021
Fixed pay interest rate swaps	$	—	$	—	$	(341)	$	341	$	(25)	$	(25)
Variable pay interest rate swaps	—		—		(179)		179		—		—







Credit default swaps	(495)		—		—		—		52		(443)

Total derivative instruments	$	(495)	$	—	$	(520)	$	520	$	27	$	(468)

Capital Markets Activity

Convertible Notes Repurchases

During the nine months ended September 30, 2021, we repurchased $129.3 million aggregate principal amount of the 2022 Notes at an approximate 0.8% discount to par value, plus accrued and unpaid interest.

Dividends

During the nine months ended September 30, 2021, we declared dividends totaling $0.18 per share generating a dividend yield of approximately 9.2% based on the stock closing price of $2.61 on September 30, 2021.

Book Value

The following chart reflects our book value per common share basic and diluted over five consecutive quarters:

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During the first half of 2020, the COVID-19 pandemic created unprecedented market disruption and dislocation, requiring us to sell assets to meet margin calls. We have implemented measures to increase liquidity, reduce leverage, and seek alternative financing arrangements to preserve long-term shareholder value. The decrease in book value from $3.55 as of June 30, 2021, to $3.45 as of September 30, 2021, was primarily due to a decline in fair value in our commercial investment portfolio and the fair value adjustment and accelerated premium amortization associated prepayments in our residential whole loan portfolio during the 3rd quarter.

Results of Operations

Comparison of the three months ended September 30, 2021 to the three months ended September 30, 2020.

General

Due to the continued uncertainty still surrounding COVID-19 pandemic, our results of operations for the three months ended September 30, 2021 and September 30, 2020 may not be comparable.

We continued to make progress towards strengthening our balance sheet and improving liquidity. For the three months ended September 30, 2021, we generated a net loss of $4.5 million, or $0.07 per basic and diluted weighted common share. Although the residential credit markets continued to improve in the three months ended September 30, 2021, our commercial real estate investments especially in the retail ans hospitality sectors are taking longer to recover, which impacted valuations and was a key driver of the net loss for the period. Our commercial investment declined in fair value by approximately $8.5 million and further losses are possible. However, during the quarter, certain of our commercial investments benefited from improvements in the commercials mortgage markets resulting in $157.3 million in payoffs from three commercial loans, a CMBS bond and a risk retention bond. We deployed the capital to acquire $233.2 million in Non_QM loans and buy back a portion of our 2022 Notes. We did not dispose of any investments or receive significant margin calls during the third quarter of 2021.

For the three months ended September 30, 2020, due the improved residential credit markets there was significant increase in our residential whole loan investments, which was a key contributor to the generation of net income of $59.8 million, or $0.98 per basic and diluted weighted common share.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the three months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


Three Months Ended September 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	70	$	4	22.67	%
Non-Agency CMBS	200,824		4,290		8.48	%
Non-Agency RMBS	28,528		369		5.13	%
Residential Whole Loans	831,634		8,147		3.89	%
Residential Bridge Loans	8,714		89		4.05	%
Commercial loans	243,534		2,847		4.64	%
Securitized commercial loans	1,407,129		23,622		6.66	%
Other securities	48,364		773		6.34	%
Total investments	$	2,768,797	$	40,141	5.75	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	391,559	$	3,037	3.08	%
Convertible senior unsecured notes, net	145,356		3,099		8.46	%
Securitized debt	1,995,098		26,842		5.34	%
Total borrowings	$	2,532,013	$	32,978	5.17	%

Net interest income and net interest margin(2)			$	7,163	1.03	%


Three Months Ended September 30, 2020	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	136	$	8	23.40	%
Non-Agency CMBS	244,082		5,186		8.45	%
Non-Agency RMBS	30,355		462		6.05	%
Residential Whole Loans	1,137,905		12,698		4.44	%
Residential Bridge Loans	24,328		325		5.31	%
Commercial Loans	332,348		5,390		6.45	%
Securitized commercial loan	1,329,556		19,191		5.74	%
Other securities	51,475		710		5.49	%
Total investments	$	3,150,185	$	43,970	5.55	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	348,360	$	3,503	4.00	%
Convertible senior unsecured notes, net	194,281		4,062		8.32	%
Securitized debt	2,264,800		26,288		4.62	%
Total borrowings	$	2,807,441	$	33,853	4.80	%

Net interest income and net interest margin(2)			$	10,117	1.28	%

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(1) Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain (loss) on derivative instruments, net" in the Consolidated Statements of Operations.

(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit /cost of our interest rate swaps. See Non-GAAP Financial Measure section for net investment income table that includes the benefit/cost from our interest rate swaps.

Interest Income

For the three months ended September 30, 2021, and September 30, 2020, we earned interest income on our investments of approximately $40.1 million and $44.0 million, respectively, a decrease of approximately $3.8 million. The decrease in interest income was a result of payoffs in our commercial investment portfolio and our $90 million commercial mezzanine loan becoming non-performing in May 2021. The decrease was partially offset by the increase in the weighted average yield on our portfolio to 5.75% for the three months ended September 30, 2021 from 5.55% for the three months ended September 30, 2020, due to a larger portion of our portfolio in higher yielding investments.

Interest Expense

Interest expense decreased from $33.9 million for the three months ended September 30, 2020, to $33.0 million for the three months ended September 30, 2021. The decrease in interest expense was a result of improved cost of financing from the improved terms on our amended residential and securities financing facilities and a decrease in our convertible senior unsecured notes outstanding as a result of the repurchases.

Other income (loss), net

Realized gain (loss), net

Realized gain (loss) represents the net gain (loss) on sales or settlements from our investment portfolio and debt. We did not have significant asset sales during the quarter ended September 30, 2021. However, during the quarter ended September 30, 2021, we repurchased $122.6 million aggregate principal amount of our 2022 Notes. Refer to Note 7 - "Financing" for details.

The following table presents the realized gains (losses) of our investments and debt for each of the three months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


	For the three months ended September 30, 2021								For the three months ended September 30, 2020
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)



Non-Agency RMBS	$	—	$	—	$	—	$	—	$	(44)	$	—	$	(44)	$	(44)


Residential Bridge Loans(1)	—		19		(37)		(18)		—		—		(225)		(225)
Loans transferred to REO(2)	68		15		—		15		—		—		—		—
Disposition of REO	738		54		—		54		786		—		(271)		(271)
Convertible senior unsecured notes(3)	(122,330)		165		(1,742)		(1,577)		—		1,258		—		1,258
Total	$	(121,524)	$	253	$	(1,779)	$	(1,526)	$	742	$	1,258	$	(540)	$	718

(1)Realized gains/losses recognized on the final settlement of the loans.

(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

(3)Realized gains/losses recognized on the extinguishment of convertible senior notes.

Unrealized gain (loss), net

Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to

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changes in market pricing on the underlying investments and securitized debt during the period. The residential credit markets improved in the three months ended September 30, 2020 and three months ended September 30, 2021 resulting in improved valuations. However, our commercial real estate investments suffered from lower valuation in the three months ended September 30, 2021.

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):


	Three months ended September 30, 2021		Three months ended September 30, 2020

Agency RMBS	$	(3)	$	(9)
Non-Agency CMBS	(2,980)		5,873
Non-Agency RMBS	2,241		(856)
Residential Whole Loans	(2,394)		48,307
Residential Bridge Loans	175		410
Commercial loans	(5,494)		2,194
Securitized commercial loans	(9,616)		4,567
Other securities	930		1,602
Securitized debt	11,138		(7,523)
REO	—		125

Total	$	(6,003)	$	54,690

Gain (loss) on derivatives, net

In March 2020, we effectively terminated all of our fixed-pay interest rate swaps and our variable-pay interest rate swaps to reduce hedging costs and associated margin volatility. As of September 30, 2021, we had interest rate swaps with a notional amount of $22.0 million. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the three months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended September 30, 2021
Interest rate swaps	$	—	$	485	$	—	$	(71)	$	96	$	510

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(59)		(90)		82		(67)





Credit default swaps	16		—		—		56		—		72

Total	$	16	$	485	$	(59)	$	(105)	$	178	$	515

Three months ended September 30, 2020


Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	$	—	$	—	$	(166)	$	71	$	200	$	105




Credit default swaps	166		—		—		(359)		—		(193)

Total	$	166	$	—	$	(166)	$	(288)	$	200	$	(88)

(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.

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Other, net

For the three months ended September 30, 2021 and September 30, 2020, "Other, net" was a income of $277 thousand and a loss of $31 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $1.5 million and $1.5 million for the three months ended September 30, 2021 and September 30, 2020, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the financial statements contained in this Quarterly Report on Form 10-Q.

Other Operating Expenses

We incurred other operating expenses of approximately $1.3 million and $1.2 million for the three months ended September 30, 2021, and September 30, 2020, respectively. Other operating costs comprise derivative transaction costs, custody, and asset management/loan servicing fees for loans acquired serving released. The increase was primarily due to transaction costs associated with the foreclosure of one of our commercial loans. The hotel REO is held in an SPE in which we have a majority interest and which we consolidate.

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2021 was $2.3 million, a decrease of $361 thousand from $2.7 million for the three months ended September 30, 2020. The decrease was mainly attributable to a decrease in the cost of our D&O insurance.

Comparison of the nine months ended September 30, 2021 to the nine months ended September 30, 2020

General

During the nine months ended September 30, 2021, our results of operations continued to be impacted by ongoing market disruption and dislocation due to the COVID-19 pandemic. In 2021, our portfolio generally experienced improved valuations and earnings. However, the recovery of the commercial mortgage sector, mainly retail and hospitality, has lagged the residential mortgage sector. We expect improvement in the retail and hospitality mortgage markets as the economy reopens, which in turn should improve valuations. However, there is no assurance that this will be the case. Certain of our commercial investments benefited from some improvement in the commercial mortgage markets resulting in $157.3 million in payoffs from three commercial loans, a CMBS bond, and a risk retention bond. We deployed the capital to acquire $243.3 million in Non_QM loans and buy back a portion of our 2022 Notes. We did not sell a material amount of assets or receive significant margin calls during the nine months ended September 30, 2021.

Due to the significant amount of investment sales in the first half of 2020 resulting from the market volatility created by the COVID-19 pandemic, our results of operations for the nine months ended September 30, 2021 and September 30, 2020 may not be comparable.

We continued to make progress towards strengthening our balance sheet and improving liquidity. For the nine months ended September 30, 2021, we generated a net loss of $36.7 million, or $0.60 per basic and diluted weighted common share. The key driver of the net loss was the $52.8 million decline in the fair value of our $90.0 million non-performing commercial mezzanine loan collateralized by the Property. For the nine months ended September 30, 2020, due to a significant decline in

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asset values created by the uncertainty surrounding the pandemic, we generated a net loss of $339.1 million, or $6.02 per basic and diluted weighted common share.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


Nine months ended September 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	89	$	12	18.03	%
Non-Agency CMBS	202,937		13,401		8.83	%
Non-Agency RMBS	29,270		1,058		4.83	%
Residential Whole Loans	883,711		25,724		3.89	%
Residential Bridge Loans	11,383		806		9.47	%
Commercial loans	297,593		11,263		5.06	%
Securitized commercial loans	1,487,050		72,586		6.53	%
Other securities	49,355		2,503		6.78	%
Total investments	$	2,961,388	$	127,353	5.75	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	364,009	$	9,755	3.58	%
Convertible senior unsecured notes, net	159,862		10,056		8.41	%
Securitized debt	2,170,148		84,541		5.21	%
Total borrowings	$	2,694,019	$	104,352	5.18	%

Net interest income and net interest margin(2)			$	23,001	1.04	%


Nine months ended September 30, 2020	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments
Agency CMBS	$	458,152	$	10,700	3.12	%
Agency RMBS	78,167		1,983		3.39	%
Non-Agency CMBS	274,878		16,683		8.11	%
Non-Agency RMBS	33,928		1,187		4.67	%
Residential Whole Loans	1,277,263		42,892		4.49	%
Residential Bridge Loans	29,311		1,542		7.03	%
Commercial loans	340,184		17,777		6.98	%
Securitized commercial loan	846,243		34,791		5.49	%
Other securities	57,730		2,755		6.37	%
Total investments	$	3,395,856	$	130,310	5.13	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	1,361,985	$	31,220	3.06	%
Convertible senior unsecured notes, net	196,826		12,351		8.38	%
Securitized debt	1,650,091		50,805		4.11	%
Total borrowings	$	3,208,902	$	94,376	3.93	%

Net interest income and net interest margin(2)			$	35,934	1.41	%

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(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit /cost of our interest rate swaps. See Non-

Interest Income

For the nine months ended September 30, 2021, and September 30, 2020, we earned interest income on our investments of approximately $127.4 million and $130.3 million, respectively, a decrease of approximately $3.0 million. A smaller investment portfolio from sales in the first six months of 2020, 2021 payoffs in our residential and commercial investments and our $90 million commercial mezzanine loan becoming non-performing in May 2021 mainly drove the decrease in interest income. The consolidation of CSMC USA as of August 1, 2020 and the 2021 acquisition of $243.3 million in Non_QM loans partially offset the decline in interest income.

Interest Expense

Interest expense increased from $94.4 million for the nine months ended September 30, 2020, to $104.4 million for the nine months ended September 30, 2021. The increase in interest expense was mainly a result of the consolidation of CSMC USA, which increased interest expense by $46.9 million. The increase was partially offset by a decline in recourse leverage from a smaller investment portfolio, improved cost of financing from our 2020 residential whole loan securitization, improved terms on our amended residential and securities financing facilities, repurchases of our 2022 Notes and securitized debt paydowns.

Other income (loss), net

Realized gain (loss) on investments, net

Realized gain (loss) on investments represents the net gain (loss) on sales or settlements from our investment portfolio and debt. We did not have a significant amount of asset sales. However, during the nine months ended September 30, 2021, we repurchased $129.3 million of our 2022 Notes. Refer to Note 7 - "Financing" for details. For the nine months ended September 30, 2020, we sold $2.4 billion in investments in order to improve liquidity, reduce our repurchase agreement borrowing, and satisfy our margin calls. These sales generated $82.9 million in realized gains.

The following table presents the realized gains (losses) of our investments and debt for each of the nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


	For the nine months ended September 30, 2021								For the nine months ended September 30, 2020
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)
Agency CMBS	$	—	$	—	$	—	$	—	$	1,668,149	$	116,463	$	(6,486)	$	109,977
Agency RMBS	—		—		—		—		400,948		12,552		(506)		12,046
Non-Agency CMBS	—		—		(5,929)		(5,929)		94,586		1		(22,703)		(22,702)
Non-Agency RMBS	—		—		—		—		12,658		—		(60)		(60)
Other securities	—		—		—		—		35,957		113		(6,223)		(6,110)
Residential Whole-Loans	—		—		—		—		144,259		—		(10,511)		(10,511)
Residential Bridge Loans(1)	—		19		(153)		(134)		—		8		(376)		(368)
Loan transferred to REO(2)	752		15		(36)		(21)		419		126		(32)		94
Disposition of REO	738		54		—		54		1,763		18		(698)		(680)
Convertible senior unsecured notes(3)	(128,645)		405		(1,742)		(1,337)		—		1,258		—		1,258
Total	$	(127,155)	$	493	$	(7,860)	$	(7,367)	$	2,358,739	$	130,539	$	(47,595)	$	82,944

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(1)Realized gains/losses recognized on the final settlement of the loans.

(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

(3)Realized gains/losses recognized on the extinguishment of convertible senior notes.

Unrealized gain (loss), net

We recognized an unrealized loss of $39.3 million for the nine months ended September 30, 2021, mainly driven by a commercial mezzanine loan and our Non-Agency CMBS investments. During the nine months ended September 30, 2021, the fair value of the commercial mezzanine loan declined significantly, and we recognized an unrealized loss of $52.8 million, which reflected the new facts and circumstances that unfolded in the period. Generally, we saw a recovery in asset prices across our residential investments.

We recognized an unrealized loss of $225.4 million for the nine months ended September 30, 2020, driven by the extreme lack of liquidity in mortgage markets combined with forced selling led to swift and dramatic price declines in the first quarter of 2020. While we have seen some price recovery of certain investments in the second quarter of 2020, the rally was not sufficient to significantly reduce the substantial unrealized loss from the dramatic price declines in the first quarter of 2020.

The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):


	Nine months ended September 30, 2021		Nine months ended September 30, 2020
Agency CMBS	$	—	$	(61,034)
Agency RMBS	16		(9,138)
Non-Agency CMBS	(16,254)		(52,180)
Non-Agency RMBS	3,710		(5,490)
Residential Whole Loans	13,667		(25,568)
Residential Bridge Loans	639		(289)
Commercial loans	(48,630)		(7,218)
Securitized commercial loans	107,423		(109,683)
Other securities	4,553		(15,608)
Securitized debt	(104,395)		60,827


Total	$	(39,271)	$	(225,381)

Gain (loss) on derivatives, net

In March 2020, we effectively terminated all of our fixed-pay interest rate swaps and variable-pay interest rate swaps to reduce hedging costs and associated margin volatility. As of September 30, 2021, we had interest rate swaps with a notional amount of $22.0 million. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands):

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	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2021
Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)





Credit default swaps	48		—		—		52		—		100

Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716

Nine months ended September 30, 2020
Interest rate swaps	$	(262)	$	(179,759)	$	262	$	(2,515)	$	(1,395)	$	(183,669)
Interest rate swaptions	80		—		—		—		—		80
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	(940)		—		(982)		(512)		1,176		(1,258)





Credit default swaps	(9,550)		—		—		(2,023)		—		(11,573)
TBAs	(2,430)		—		—		928		—		(1,502)
Total	$	(13,102)	$	(179,759)	$	(720)	$	(4,122)	$	(219)	$	(197,922)

(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.

Other, net

For the nine months ended September 30, 2021 and September 30, 2020, "Other, net" was income of $449 thousand and income of $385 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives and miscellaneous fees collected on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $4.5 million and $3.0 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.5% per annum of our stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The increase was mainly attributable to our Manager waiving the management fee from March 2020 to May 2020 as a result of the impact of COVID-19 and the disruption in the mortgage markets. Future waivers, if any, are at the Manager's discretion.

Financing Fee

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In the nine months ended September 30, 2020, in order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on our liquidity, we entered into a longer term financing arrangement for our Residential Whole Loans, as we sought to reduce our exposure to short-term financings with daily mark to market exposure. Under this agreement, we were required to pay the counterparty a premium recapture fee of 30% of all realized value on any residential whole loans above such counterparty’s amortized basis upon the securitization or sale.

On June 29, 2020, we securitized approximately $355.8 million of the Residential Whole Loans and paid down the facility by approximately $339.4 million (see "—Securitized Debt" below for additional details). As noted above, as part of the financing arrangements, we agreed to pay the lender a fee of 30% of all realized value on the Residential Whole Loans above the counterparty's amortized basis upon securitization or sale. As a result of refinancing the Residential Whole Loans through a securitization, we accrued a premium recapture fee of approximately $20.5 million in the nine months ended September 30, 2020.

In October 2020, the residential financing facility was amended and as part of the amendment the premium recapture fee was eliminated for new and remaining investments financed under the amended facility.

Other Operating Expenses

We incurred other operating expenses of approximately $2.1 million and $3.0 million for the nine months ended September 30, 2021 and September 30, 2020, respectively. Other operating cost is comprised of derivative transaction costs, custody, and asset management/loan servicing fees for loans acquired serving released. The decrease was primarily a result of a decrease in third party asset management/loan servicing fees and special servicing fees.

General and Administrative Expenses

General and administrative expenses for nine months ended September 30, 2021 were $7.6 million, a decrease of $539 thousand from $8.2 million for the nine months ended September 30, 2020. The decrease was mainly attributable to a reduction in professional fees which was partially offset by higher D&O insurance.

Non-GAAP Financial Measures

We believe that our non-GAAP measures (described below), when considered with GAAP, provide supplemental information useful to investors in evaluating the results of our operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net income, as measures of our financial performance or any measure of our liquidity under GAAP.

Distributable Earnings (formerly referred to as Core Earnings) is a non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments and debt; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) other than temporary impairment; (v) provision for income taxes; (vi) non-cash stock-based compensation expense; (vii) non-cash amortization of the convertible senior unsecured notes discount; (viii) one-time charges such as acquisition costs and impairment on loans; and (ix) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of our independent directors.

We utilize Distributable Earnings as a key metric to evaluate the effective yield of the portfolio. Distributable Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense. Distributable Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread. It is one metric of several used in determining the appropriate distributions to our shareholders.

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Due to the significant amount of investment sales resulting from the market volatility created by the COVID-19 pandemic, our distributable earnings for the three and nine months ended September 30, 2021 and September 30, 2020 may not be comparable.

The table below reconciles Net Income to Distributable Earnings for the three and nine months ended September 30, 2021 and September 30, 2020:


(dollars in thousands)	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020
Net income (loss) attributable to common stockholders and participating securities	$	(4,213)	$	59,807	$	(36,423)	$	(339,144)
Income tax provision (benefit)	(218)		205		(19)		367
Net income (loss) before income taxes	(4,431)		60,012		(36,442)		(338,777)

Adjustments:
Investments:
Unrealized (gain) loss on investments, securitized debt and other liabilities	6,003		(54,690)		39,271		225,381
Realized (gain) loss on investments	(51)		540		6,030		(81,686)


One-time transaction costs	681		57		781		20,989

Derivative Instruments:
Net realized (gain) loss on derivatives	(485)		(154)		(520)		193,154
Net unrealized loss on derivatives	105		288		97		4,122

Other:
Realized (gain) loss on extinguishment of convertible senior unsecured notes	1,577		(1,258)		1,337		(1,258)
Amortization of discount on convertible senior unsecured notes	228		284		712		830
Other non-cash adjustments	—		1,130		977		2,118
Non-cash stock-based compensation expense	165		182		453		517
Total adjustments	8,223		(53,621)		49,138		364,167
Distributable Earnings	$	3,792	$	6,391	$	12,696	$	25,390

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Alternatively, our Distributable Earnings can also be derived as presented in the table below by starting with Adjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure) subtracting Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes and adding interest income on cash balances and other income (loss), net:


(dollars in thousands)	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020
Net interest income	$	7,163	$	10,117	$	23,001	$	35,934
Interest income from IOs and IIOs accounted for as derivatives	23		34		73		194
Net interest income (expense) from interest rate swaps	96		—		172		(1,133)
Adjusted net interest income	7,282		10,151		23,246		34,995
Total expenses	(5,128)		(5,392)		(14,237)		(34,731)
Other non-cash adjustments	—		1,130		977		2,118
Non-cash stock-based compensation	165		182		453		517
One-time transaction costs	681		57		781		20,989
Amortization of discount on convertible unsecured senior notes	228		284		712		830
Interest income on cash balances and other income (loss), net	293		(19)		497		678
Income attributable to non-controlling interest	271		(2)		267		(6)
Distributable Earnings	$	3,792	$	6,391	$	12,696	$	25,390

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (CSMC USA, Arroyo 2019-2 and Arroyo 2020-1). Management considers that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value (dollars in thousands - except per share data):


	$ Amount		Per Share



















GAAP Book Value at September 30, 2021	$	210,186	$	3.45

Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets	(2,065,610)		(33.95)
Deconsolidation of VIEs liabilities	1,977,055		32.49
Interest in securities of VIEs owned, at fair value	73,390		1.21
Economic Book Value at September 30, 2021	$	195,021	$	3.20

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Net Interest Income and Net Interest Margin

The following tables set forth certain information regarding our Non-GAAP net investment income and net interest margin which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and excludes the interest expense for third-party consolidated VIEs for the three and nine months ended September 30, 2021 and September 30, 2020 (dollars in thousands):


Three Months Ended September 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,160	$	27	9.23	%
Non-Agency CMBS	200,824		4,290		8.48	%
Non-Agency RMBS	28,528		369		5.13	%
Residential Whole Loans	831,634		8,147		3.89	%
Residential Bridge Loans	8,714		89		4.05	%
Commercial loans	243,534		2,847		4.64	%
Securitized commercial loans	1,407,129		23,622		6.66	%
Other securities	48,364		773		6.34	%

Total investments	2,769,887		40,164		5.75	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,407,129)		(23,622)		6.66	%
Investments in consolidated VIEs eliminated in consolidation	51,278		1,038		8.03	%
Adjusted total investments	$	1,414,036	$	17,580	4.93	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	391,559	$	3,037	3.08	%
Convertible senior unsecured notes, net	145,356		3,099		8.46	%
Securitized debt	1,995,098		26,842		5.34	%
Interest rate swaps	n/a		(96)		(0.02)	%
Total borrowings	2,532,013		32,882		5.15	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,361,048)		(21,745)		6.34	%
Adjusted total borrowings	$	1,170,965	$	11,137	3.77	%

Adjusted net interest income and net interest margin			$	6,443	1.81	%

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Three Months Ended September 30, 2020	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,680	$	42	9.95	%
Non-Agency CMBS	244,082		5,186		8.45	%
Non-Agency RMBS	30,355		462		6.05	%
Residential Whole Loans	1,137,905		12,698		4.44	%
Residential Bridge Loans	24,328		325		5.31	%
Commercial loans	332,348		5,390		6.45	%
Securitized commercial loans	1,329,556		19,191		5.74	%
Other securities	51,475		710		5.49	%
Total investments	$	3,151,729	$	44,004	5.55	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,329,556)		(19,191)		5.74	%
Investments in consolidated VIEs eliminated in consolidation	54,437		1,172		8.56	%
Adjusted total investments	$	1,876,610	$	25,985	5.51	%

	Average Carrying Value		Total Interest Expense(4)		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	348,360	$	3,503	4.00	%
Convertible senior unsecured notes, net	194,281		4,062		8.32	%
Securitized debt	2,264,800		26,288		4.62	%

Total borrowings	2,807,441		33,853		—	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,268,471)		(18,597)		5.83	%
Adjusted total borrowings	$	1,538,970	$	15,256	3.94	%

Adjusted net interest income and net interest margin			$	10,729	2.27	%

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Nine Months Ended September 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,353	$	85	8.40	%
Non-Agency CMBS	202,937		13,401		8.83	%
Non-Agency RMBS	29,270		1,058		4.83	%
Residential Whole Loans	883,711		25,724		3.89	%
Residential Bridge Loans	11,383		806		9.47	%
Commercial loans	297,593		11,263		5.06	%
Securitized commercial loans	1,487,050		72,586		6.53	%
Other securities	49,355		2,503		6.78	%

Total investments	2,962,652		127,426		5.75	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,487,050)		(72,586)		6.53	%
Investments in consolidated VIEs eliminated in consolidation	56,396		3,432		8.14	%
Adjusted total investments	$	1,531,998	$	58,272	5.09	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	364,009	$	9,755	3.58	%
Convertible senior unsecured notes, net	159,862		10,056		8.41	%
Securitized debt	2,170,148		84,541		5.21	%
Interest rate swaps	n/a		(172)		(0.01)	%
Total borrowings	2,694,019		104,180		5.17	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,434,559)		(67,057)		6.25	%
Adjusted total borrowings	$	1,259,460	$	37,123	3.94	%

Adjusted net interest income and net interest margin			$	21,149	1.85	%

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Nine months ended September 30, 2020	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments
Agency CMBS	$	459,539	$	10,751	3.13	%
Agency RMBS	81,068		2,126		3.50	%
Non-Agency CMBS	274,878		16,683		8.11	%
Non-Agency RMBS	33,928		1,187		4.67	%
Residential Whole Loans	1,277,263		42,892		4.49	%
Residential Bridge Loans	29,311		1,542		7.03	%
Commercial loans	340,184		17,777		6.98	%
Securitized commercial loans	846,243		34,791		5.49	%
Other securities	57,730		2,755		6.37	%

Total investments	3,400,144		130,504		5.13	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(846,243)		(34,791)		5.49	%
Investments in consolidated VIEs eliminated in consolidation	107,663		7,466		9.26	%
Adjusted total investments	$	2,661,564	$	103,179	5.18	%

	Average Carrying Value		Total Interest Expense(3)		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	1,361,985	$	31,220	3.06	%
Convertible senior unsecured notes, net	196,826		12,351		8.38	%
Securitized debt	1,650,091		50,805		4.11	%
Interest rate swaps	n/a		1,133		0.05	%
Total borrowings	3,208,902		95,509		3.98	%
Adjustments:
Securitized debt from consolidated VIEs(5)	(787,280)		(30,012)		5.09	%
Adjusted total borrowings	$	2,421,622	$	65,497	3.61	%

Adjusted net interest income and net interest margin			$	37,682	1.89	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from RETL Trust and CSMC USA.

(4)Includes the net amount paid, including accrued amounts and premium amortization for MAC interest rate swaps during the periods included in gain/loss on derivative instruments for GAAP.

(5)Includes only the third-party sponsored securitized debt from RETL Trust, CMSC Trust and MRCD Trust.

The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and nine months ended September 30, 2021 and September 30, 2020:

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(dollars in thousands)	Three months ended September 30, 2021		Three months ended September 30, 2020		Nine months ended September 30, 2021		Nine months ended September 30, 2020
Coupon interest income:
Agency CMBS	$	—	$	—	$	—	$	11,336
Agency RMBS	11		25		38		2,954
Non-Agency CMBS	2,621		3,500		7,171		12,257
Non-Agency RMBS	609		616		1,762		2,349
Residential Whole Loans	10,268		13,847		32,993		46,430
Residential Bridge Loans	108		345		827		1,609
Commercial loans	2,820		5,349		11,118		17,425
Securitized commercial loans	17,533		14,634		54,137		29,882
Other Securities	1,043		1,723		3,717		6,565
Subtotal coupon interest	35,013		40,039		111,763		130,807
Premium accretion, discount amortization and amortization of basis, net:
Agency CMBS	—		—		—		(636)
Agency RMBS	(7)		(17)		(26)		(971)
Non-Agency CMBS	1,669		1,686		6,230		4,426
Non-Agency RMBS	(240)		(154)		(704)		(1,162)
Residential Whole Loans	(2,121)		(1,149)		(7,269)		(3,538)
Residential Bridge Loans	(19)		(20)		(21)		(67)
Commercial loans	27		41		145		352
Securitized commercial loans	6,089		4,557		18,449		4,909
Other Securities	(270)		(1,013)		(1,214)		(3,810)
Subtotal accretion and amortization	5,128		3,931		15,590		(497)
Interest income	$	40,141	$	43,970	$	127,353	$	130,310
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
Coupon interest income	$	82	$	200	$	305	$	1,176
Amortization of basis	(59)		(166)		(232)		(982)


Subtotal	23		34		73		194
Total adjusted interest income	$	40,164	$	44,004	$	127,426	$	130,504

(1)Reported in "Gain (loss) on derivative instruments, net" in our Consolidated Statements of Operations.

Effective Cost of Funds

Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards.

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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and nine months ended September 30, 2021 and September 30, 2020:


	Three months ended September 30, 2021				Three months ended September 30, 2020				Nine months ended September 30, 2021				Nine months ended September 30, 2020
(dollars in thousands)	Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs
Interest expense	$	32,978	5.17	%	$	33,853	4.80	%	$	104,352	5.18	%	$	94,376	3.93	%
Adjustments:
Interest expense on Securitized debt from consolidated VIEs	(21,745)		(6.34)	%	(18,597)		(5.83)	%	(67,057)		(6.25)	%	(30,012)		(5.09)	%
Net interest (received) paid - interest rate swaps	(96)		(0.02)	%	—		—	%	(172)		(0.01)	%	1,133		0.05	%
Effective Cost of Funds	$	11,137	3.77	%	$	15,256	3.94	%	$	37,123	3.94	%	$	65,497	3.61	%
Weighted average borrowings	$	1,170,965			$	1,538,970			$	1,259,460			$	2,421,622

Liquidity and Capital Resources

General

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs. To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. As of September 30, 2021, we had $45.7 million of senior unsecured convertible notes outstanding of which $45.7 million aggregate principal amount mature in October 2022 and $86.3 million aggregate principal amount mature in September 2024. We also had $483.3 million of asset specific financings. As of September 30, 2021, we had $63.9 million in cash and cash equivalents. We continue to take steps towards strengthening our balance sheet by reducing debt and leverage, while improving liquidity and shareholders' equity.

We will continue to closely monitor developments related to COVID-19 as it relates to our liquidity position and financial obligations. At this time, we believe we have sufficient liquidity and access to additional liquidity to meet financial obligations for at least the next 12 months.

Debt to Equity Ratio


	September 30, 2021		December 31, 2020
Total debt(1)	$	609,900	$	527,720
Total equity	$	210,186	$	255,112
Debt to equity ratio	2.9x		2.1x

(1) Total debt excludes the securitized debt which is non-recourse to us.

Sources of Liquidity

Our primary sources of liquidity are as follows:

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Cash Generated from Operations

For the nine months ended September 30, 2021, net cash provided by operating activities was approximately $1.3 million. This was primarily attributable to the net interest income on our investments, less operating expenses, and general and administrative expenses. For the nine months ended September 30, 2020, net cash used in operating activities was approximately $155.3 million. This was primarily attributable to margin settlements of interest rate swaps, operating expenses, and general and administrative expenses, which were offset by the interest income we earned on our investments.

Cash Provided by and Used in Investing Activities

For the nine months ended September 30, 2021, net cash provided by investing activities was approximately $560.6 million. This was primarily attributable to receipts of principal payments and payoffs on our investments. For the nine months ended September 30, 2020, net cash provided by investing activities was approximately $2.4 billion. This was primarily attributable to proceeds from sales to meet the margin calls and receipts of principal payments and payoffs on our investments, which were partially offset by our investment acquisitions.

Cash Provided by and Used in Financing Activities

For the nine months ended September 30, 2021, net cash used in financing activities was approximately $605.5 million. This was attributable to repayment of securitized debt, distribution of escrows related to consolidated VIEs and extinguishment of convertible senior unsecured notes. For the nine months ended September 30, 2020, net cash used in financing activities was approximately $2.2 billion. This was attributable to net repayments of our repurchase agreement borrowings to reduce our exposure to short term financings and repayment of securitized debt related to consolidated VIEs which was offset net proceeds from the Arroyo 2020-1 that closed during the quarter ended June 30, 2020.

Repurchase Agreements

As of September 30, 2021, we had borrowings under five of our master repurchase agreements of approximately $483.3 million. The following tables present our repurchase agreement borrowings by type of collateral pledged, as of September 30, 2021 and September 30, 2020, and the respective effective cost of funds (Non-GAAP financial measure) for the three and nine months ended September 30, 2021 and September 30, 2020, respectively. See “Non-GAAP Financial Measures” (dollars in thousands):


	September 30, 2021						Three months ended September 30, 2021				Nine months ended September 30, 2021
Collateral	Borrowings Outstanding		Value of Collateral Pledged		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	$	1,048	$	1,342	1.05	%	1.06	%	1.06	%	1.19	%	1.19	%	25.00	%
Non-Agency CMBS, at fair value(2)	78,666		136,968		2.07	%	2.12	%	2.12	%	3.33	%	3.33	%	38.03	%
Non-Agency RMBS, at fair value	15,632		28,003		2.12	%	2.18	%	2.18	%	3.55	%	3.55	%	35.00	%
Residential Whole Loans, at fair value(3)	277,780		328,811		2.95	%	4.10	%	4.10	%	5.70	%	5.70	%	18.71	%
Residential Bridge Loans(3)	5,817		5,960		2.60	%	2.66	%	2.66	%	2.71	%	2.71	%	20.00	%
Commercial loans, at fair value(3)	74,272		101,271		2.40	%	2.93	%	2.93	%	2.63	%	2.63	%	31.14	%

Membership interest	—		—		—	%	3.08	%	3.08	%	3.02	%	3.02	%	—	%
Other securities, at fair value	30,093		52,093		2.24	%	2.30	%	2.30	%	3.20	%	3.20	%	37.15	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.10)	%	n/a		(0.06)	%	n/a
Total	$	483,308	$	654,448	2.64	%	3.08	%	2.98	%	3.58	%	3.52	%	25.47	%

(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of approximately $96 thousand and $172 thousand received for the three and nine months ended September 30, 2021. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See “Non-GAAP Financial Measures.”

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

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(3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.


	September 30, 2020						Three months ended September 30, 2020				Nine months ended September 30, 2020
Collateral	Borrowings Outstanding		Fair Value of Collateral Pledged(3)		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period
Agency CMBS, at fair value	$	—	$	—	—	%	—	%	—	%	2.21	%	2.21	%	—	%
Agency RMBS, at fair value	1,438		1,853		1.46	%	1.62	%	1.62	%	2.00	%	2.00	%	25.00	%
Non-Agency CMBS, at fair value(2)	83,264		165,699		5.03	%	5.26	%	5.26	%	3.86	%	3.86	%	41.21	%
Non-Agency RMBS, at fair value	14,742		25,817		5.25	%	5.45	%	5.45	%	4.61	%	4.61	%	33.33	%
Residential Whole Loans, at fair value(3)	40,061		105,059		4.98	%	5.95	%	5.95	%	3.85	%	3.85	%	59.21	%
Residential Bridge Loans(3)	15,763		16,828		2.75	%	2.90	%	2.90	%	3.43	%	3.43	%	20.00	%
Commercial loans, at fair value(3)	168,397		325,651		2.45	%	2.84	%	2.84	%	3.29	%	3.29	%	35.53	%
Membership interest	18,845		33,495		2.90	%	3.88	%	3.88	%	3.87	%	3.87	%	35.00	%

Other securities, at fair value	16,368		41,055		5.13	%	5.34	%	5.34	%	3.93	%	3.93	%	36.87	%
Interest rate swaps	n/a		n/a		n/a		n/a		—	%	n/a		0.11	%	n/a
Total	$	358,878	$	715,457	3.60	%	4.00	%	4.00	%	3.06	%	3.17	%	38.44	%

(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps, net of premium amortization on MAC swaps, of zero and $1.1 million paid for the three and nine months ended September 30, 2020, respectively. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See “Non-GAAP Financial Measures.”

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(3)Repurchase agreement borrowings collateralized by Whole Loans, Bridge Loans and commercial loan owned through trust certificates. The trust certificates are eliminated upon consolidation.

Contractual Obligations and Commitments

Our contractual obligations as of September 30, 2021 are as follows (dollars in thousands):


	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Borrowings under repurchase agreements	$	449,566	$	33,742	$	—	$	—	$	483,308
Contractual interest on repurchase agreements	3,880		87		—		—		3,967
Convertible senior unsecured notes	—		131,948		—		—		131,948
Contractual interest on convertible senior unsecured notes	7,154		13,186		—		—		20,340
Securitized debt(2)	—		—		1,370,691		610,900		1,981,591
Contractual interest on securitized debt	74,416		148,832		92,703		438,585		754,536




Total	$	535,016	$	327,795	$	1,463,394	$	1,049,485	$	3,375,690

(1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.

(2)The securitized debt is non-recourse to us and can only be settled with the loans that serve as collateral. The collateral for the securitized debt has a principal balance of $2.0 billion. Assumes entire outstanding principal balance at September 30, 2021 is paid at maturity.

Management Agreement

On May 9, 2012, we entered into a management agreement (the “Management Agreement”) with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management fee equal to 1.50% per annum of our stockholders’ equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. The Manager waived the management fee for March 2020 through May 2020 because of the

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unprecedented market disruption and dislocation across fixed income markets surrounding the uncertainty related to COVID-19 pandemic. Future waivers, if any, are at the Manager's discretion.

Off-Balance Sheet Arrangements

We do not have any relationships with any entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Further, other than guaranteeing certain obligations of our wholly-owned taxable REIT subsidiary or TRS and the obligations of our wholly-owned subsidiary, WMC CRE LLC, we have not guaranteed any obligations of any entities or entered into any commitment to provide additional funding to any such entities.

Dividends

To preserve liquidity, we suspended our first and second quarter common stock dividends in 2020 given extraordinary market volatility driven by uncertainty surrounding the COVID-19 pandemic. Beginning in the quarter ended September 30, 2020, we resumed paying a quarterly dividend after making progress strengthening our balance sheet and improving liquidity and earnings power of our investment portfolio. We will continue to evaluate each subsequent quarter to determine our ability to pay dividends to our stockholders based on our net taxable income if and to the extent authorized by our Board of Directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service payments. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

Recent Developments

On November 5, 2021, we entered into an amendment of our Residential Whole Loan Facility. The amendment facility bears an interest rate of LIBOR plus 2.00%, with a LIBOR floor of 0.25%. The facility is available to finance five types of residential mortgages: Non-Agency mortgage loans, Non-QM loans, BPL-Long, re-performing and non-performing loans. The advance rates differ by type of loan, but for performing Non-QM loans the advance rate is 90%. The facility matures on November 5, 2022. The facility is a mark to market margin facility once the collateral value declines below par and has a stated capacity of $500 million.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

We seek to manage the risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market values while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns from our assets through ownership of our common stock. While we do not seek to avoid risk completely, our Manager seeks to actively manage risk for us, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets. We are exposed to the risk of potential credit losses from general credit spread widening related to instruments that make up most of our current portfolio. As part of the risk management process, our Manager uses detailed proprietary models, applicable to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure/default frequency, cost and timing. If our Manager determines that the proposed investment can meet the appropriate risk and return criteria as well as complement our existing portfolio, the investment will undergo a more thorough analysis. Investments are evaluated and decisions are made following a bottom-up credit analysis and specific relevant risk assumptions.

As of September 30, 2021, four of our counterparties that we had outstanding repurchase agreement borrowings held collateral which we posted as security for such borrowings in excess of 5% of our stockholders’ equity. Prior to entering into a repurchase agreement with any particular institution, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we expect to finance the acquisition of our assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. These hedging activities may not be effective. We also may engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or other potential influences on the values of our assets.

Interest Rate Effect on Net Interest Income

Our operating results will depend in large part on differences between the income earned on our assets and our borrowing costs. The cost of our borrowings is generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase and the yields earned on our leveraged fixed-rate mortgage assets will remain static. Further, the cost of such financing could increase at a faster pace than the yields earned on our leveraged ARM and hybrid ARM assets. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

Interest Rate Cap Risk

To the extent we invest in adjustable-rate RMBS and Whole-Loans, such instruments may be subject to interest rate caps, which potentially could cause such instruments to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue is magnified to the extent we acquire ARM and hybrid ARM assets that are not based on mortgages which are fully indexed. In addition, ARM and hybrid ARM assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding or a portion of the

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incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could potentially receive less cash income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”

Interest Rate Effects on Fair value

Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments. See “Market Risk” below.

The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.

Market Risk

Our MBS and other assets are reflected at their fair value with unrealized gains and losses included in earnings. The fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the fair value of these assets would be expected to decrease; conversely, in a decreasing interest rate environment, the fair value of these securities would be expected to increase.

The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments, including interest rate swaps, Interest-Only Strips, and net interest income at September 30, 2021, assuming a static portfolio of assets. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience.


Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%	(0.18)	%	(1.13)	%
+0.50%	0.12	%	(0.57)	%
-0.50%	(0.05)	%	0.39	%
-1.00%	(1.22)	%	0.57	%

While the table above reflects the estimated immediate impact of interest rate increases and decreases on a static portfolio, we may rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Certain assumptions have been made in connection with the calculation of the information set forth in the table above and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at September 30, 2021. The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.

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Prepayment Risk

The value of our Agency and Non-Agency RMBS and our Residential Whole Loans may be affected by prepayment rates on the underlying residential mortgage. We acquire RMBS and Residential Whole Loans and anticipate that the underlying residential mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments may reduce the expected yield on our residential mortgage assets because we will have to amortize the related premium on an accelerated basis and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we are required to make a retrospective adjustment to historical amortization. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, such decrease may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we will be required to make a retrospective adjustment to historical amortization.

The value of our Agency and Non-Agency CMBS, as well as Commercial Whole Loans, will also be affected by prepayment rates. However, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection. Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as defeasance.

Likewise, the value of our ABS and other structured securities will also be affected by prepayment rates. The collateral underlying such securities may, similar to most residential mortgages, allow the borrower to prepay at any time or, similar to commercial mortgages, limit the ability of the borrower to prepay by imposing lock-out provisions, prepayment penalties and/or make whole provisions.

Extension Risk

Most residential mortgage loans do not prohibit the partial or full prepayment of principal outstanding. Accordingly, while the stated maturity of a residential mortgage loan may be 30 years, or in some cases even longer, historically the vast majority of residential mortgage loans are satisfied prior to their maturity date. In periods of rising interest rates, borrowers have less incentive to refinance their existing mortgages and mortgage financing may not be as readily available. This generally results in a slower rate of prepayments and a corresponding longer weighted average life for RMBS and Residential Whole Loans. The increase, or extension, in weighted average life is commonly referred to as “Extension Risk” which can negatively impact our portfolio. To the extent we receive smaller pre-payments of principal, we will have less capital to invest in new assets. This is extremely detrimental in periods of rising interest rates as we will be unable to invest in new higher coupon investments and a larger portion of our portfolio will remain invested in lower coupon investments. Further, our borrowing costs are generally short-term and, even if hedged, are likely to increase in a rising interest rate environment, thereby reducing our net interest margin. Finally, to the extent we acquired securities at a discount to par, a portion of the overall return on such investments is based on the recovery of this discount. Slower principal prepayments will result in a longer recovery period and a lower overall return on our investment.

Prepayment rates on Agency and Non-Agency CMBS, as well as Commercial Whole Loans, are generally less volatile than residential mortgage assets as commercial mortgages usually limit the ability of the borrower to prepay the mortgage prior to maturity or a period shortly before maturity. Accordingly, extension risk for Agency and Non-Agency CMBS and Commercial Whole Loans is generally less than RMBS and Residential Whole Loans as it presumed that other than defaults (i.e., involuntary prepayments), most commercial mortgages will remain outstanding for the contractual term of the mortgage.

Prepayment rates on ABS and our other structured securities will be determined by the underlying collateral. The extension risk of such securities will generally be less than residential mortgages, but greater than commercial mortgages.

Real Estate Risk

Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, the COVID 19 pandemic decreases in property values in the retail and the hospitality

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sectors since these sectors were more affected by health related shutdowns. There remains uncertainty around the timing and extent of a recovery in the performance in these property types and the reduction in value of the collateral and the potential proceeds available to a borrower to repay our loans, may cause us to suffer further losses.

Counterparty Risk

The following discussion on counterparty risk reflects how these transactions are structured, rather than how they are presented for financial reporting purposes.

When we engage in repurchase transactions, we generally sell securities to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us, we could incur a loss on the transaction up to the amount of the haircut (assuming there was no change in the value of the securities).

If a counterparty to a bi-lateral interest rate swap cannot perform under the terms of the interest rate swap, we may not receive payments due under that agreement, and thus, we may lose any unrealized gain associated with the interest rate swap. We may also risk the loss of any collateral we have pledged to secure our obligations under an interest rate swap if the counterparty becomes insolvent or files for bankruptcy. In the case of a cleared swap, if our clearing broker were to default, become insolvent or file for bankruptcy, we may also risk the loss of any collateral we have posted to the clearing broker unless we were able to transfer or “port” our positions and held collateral to another clearing broker. In addition, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended. Most of our interest swaps are currently cleared through a central clearing house which reduces but does not eliminate the aforementioned risks. Also see “Liquidity Risk” below.

Prior to entering into a trading agreement or transaction with any particular institution where we take on counterparty risk, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

Funding Risk

We have financed a substantial majority of our assets with repurchase agreement financing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Changes in the regulatory environment, as well as, weakness in the financial markets, the residential mortgage markets, the commercial mortgage markets, the asset-backed securitization markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

Liquidity Risk

Our liquidity risk is principally associated with the financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.

Should the value of our assets pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse consequence on our business and results of operations.

In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.

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Additionally, if one or more of our repurchase agreement counterparties chose not to provide on-going funding, our ability to finance would decline or exist at possibly less advantageous terms. Further, if we are unable to renew, replace or expand repurchase financing with other sources of financing on substantially similar terms, it may have a material adverse effect on our business, financial position, results of operations and cash flows, due to the long term nature of our investments and relatively short-term maturities of our repurchase agreements. As such, there is no assurance that we will always be able to roll over our repurchase agreements.

The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged fixed-rate MBS and other fixed rate assets will remain static. Further, certain of our floating rate assets may contain annual or lifetime interest rate caps as well as limit the frequency or timing of changes to the underlying interest rate index. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could have a material adverse effect on our liquidity and results of operations.

In addition, the assets that comprise our investment portfolio are not traded on a public exchange. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. Recent regulatory changes have imposed new capital requirements and other restrictions on banks and other market intermediaries’ ability and desire to hold assets on their balance sheets and otherwise make markets in fixed income securities and other assets resulting in reduced liquidity in many sectors of the market. As a result of these developments, it may become increasingly difficult for us to sell assets in the market, especially in credit oriented sectors such as Non-Agency RMBS and CMBS, ABS and Whole Loans.

We enter into interest rate swaps to manage our interest rate risk. We are required to pledge cash or securities as collateral as part of a margin arrangement, calculated daily, in connection with the interest rate swaps. The amount of margin that we are required to post will vary and generally reflects collateral required to be posted with respect to interest rate swaps that are in an unrealized loss position to us and is generally based on a percentage of the aggregate notional amount of interest rate swaps per counterparty. Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call could result in a condition of default under our interest rate swap agreements, thereby resulting in liquidation of the collateral pledged by us, which may have a material adverse consequence on our business, financial position, results of operations and cash flows. Conversely, if our interest rate swaps are in an unrealized gain position, our counterparties to bilateral swaps are required to post collateral with us, under the same terms that we post collateral with them. We generally enter into a MAC interest rate swap in which we receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, MAC interest rate swaps are subject to the margin requirements previously described.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily directly correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our net taxable income on an annual basis, in accordance with the REIT regulations, in order to maintain our REIT qualification. In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.

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Foreign Investment risk

We have invested in non U.S. CMBS transactions and, in the future, we may make other investments in non U.S. issuers and transactions. These investments present certain unique risks, including those resulting from future political, legal, and economic developments, which could include favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation, nationalization, or confiscatory taxation of assets, adverse changes in investment capital or exchange control regulations (which may include suspension of the ability to transfer currency from a country), political changes, diplomatic developments, difficulty in obtaining and enforcing judgments against non U.S. entities, the possible imposition of the applicable country’s governmental laws or restrictions, and the reduced availability of public information concerning issuers. In the event of a nationalization, expropriation, or other confiscation of assets, we could lose our entire investment in a security. Legal remedies available to investors in certain jurisdictions may be more limited than those available to investors in the United States. Issuers of non U.S. securities may not be subject to the same degree of regulation as U.S. issuers.

Furthermore, non U.S. issuers are not generally subject to uniform accounting, auditing, and financial reporting standards or other regulatory practices and requirements comparable to those applicable to U.S. issuers. There is generally less government supervision and regulation of non U.S. exchanges, brokers, and issuers than there is in the United States, and there is greater difficulty in taking appropriate legal action in non U.S. courts. There are also special tax considerations that apply to securities of non U.S. issuers and securities principally traded overseas.

To the extent that our investments are denominated in U.S. dollars, these investments are not affected directly by changes in currency exchange rates relative to the dollar and exchange control regulations. We are, however, subject to currency risk with respect to such investments to the extent that a decline in a non U.S. issuer’s or borrower’s own currency relative to the dollar may impair such issuer’s or borrower’s ability to make timely payments of principal and/or interest on a loan or other debt security. To the extent that our investments are in non-dollar denominated securities, the value of the investment and the net investment income available for distribution may be affected favorably or unfavorably by changes in currency exchange rates relative to the dollar and exchange control regulations.

Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of governments or central banks and the imposition of currency controls and speculation. In addition, a security may be denominated in a currency that is different from the currency where the issuer is domiciled.

Currency Risk

We have and may continue in the future to invest in assets which are denominated in a currency other than U.S. dollars and may finance such investments with repurchase financing or other forms of financing which may also be denominated in a currency other than U.S. dollars. To the extent we make such investments and/or enter into such financing arrangements, we may utilize foreign currency swaps, forwards or other derivative instruments to hedge our exposure to foreign currency risk. Despite being economic hedges, we have elected not to treat such derivative instruments as hedges for accounting purposes and therefore the changes in the value of such instruments, including actual and accrued payments, will be included in our Consolidated Statements of Operations. While such transactions are entered into in an effort to minimize our foreign currency risk, there can be no assurance that they will perform as expected. If actual prepayments of the foreign denominated asset are faster, or slower, than expected, the hedge instrument is unlikely to fully protect us from changes in the valuation of such foreign currency. Further, as with interest rate swaps, there is counterparty risk associated with the future creditworthiness of such counterparty.

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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures: Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the required information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of September 30, 2021. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

No change occurred in our internal control over financial reporting (as defined in Rule13a-15(f) and Rule 15d-15(f) of the Exchange Act) during the three months ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2021, the Company was not involved in any material legal proceedings.

ITEM 1A. Risk Factors

There were no material changes during the period covered by this report to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the SEC on March 5, 2021. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operations.

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.

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ITEM 6. Exhibits

The following exhibits are filed as part of this report.


Exhibit No.						Description

3.1*						Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

3.2*						Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated June 3, 2016, incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K, filed March 7, 2017.

3.3*						Amended and restated bylaws of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.2 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

4.1*						Specimen Common Stock Certificate of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 4.1 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

4.2*						Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on October 3, 2017.

4.3*						First Supplemental Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.

4.4*						Form of 6.75% Convertible Senior Notes due 2022 (attached as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.3 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

31.1						Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.

31.2						Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.

32.1						Section 1350 Certifications of Chief Executive Officer Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

101						The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2021 and 2020; (iii) the Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2021 and 2020; (iv) the Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2021 and 2020; and (v) the Notes to Consolidated Financial Statements.

104						Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document).

__________________________________

*Fully or partly previously filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


			By:			/s/ BONNIE M. WONGTRAKOOL

			/s/ BONNIE M. WONGTRAKOOL
			Chief Executive Officer and Director (Principal Executive Officer)

			November 5, 2021


			By:			/s/ LISA MEYER

			Lisa Meyer
			President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

			November 5, 2021