Receive email alerts for new filings Positive Negative Uncertain Constraining Legalese Litigous Readability H.S. junior Avg 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 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 PagePart I — FINANCIAL INFORMATIONITEM 1.Financial Statements2ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations50ITEM 3.Quantitative and Qualitative Disclosures about Market Risk89ITEM 4.Controls and Procedures95Part II — OTHER INFORMATION96ITEM 1.Legal Proceedings96ITEM 1A.Risk Factors96ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds96ITEM 3.Defaults Upon Senior Securities96ITEM 4.Mine Safety Disclosures96ITEM 5.Other Information96ITEM 6.Exhibits97Signatures98 (Unaudited) September 30,2022December 31, 2021Assets:Cash and cash equivalents$55,352 $40,193 Restricted cash251 260 Agency mortgage-backed securities, at fair value ($233 and $1,172 pledged as collateral, at fair value, respectively)720 1,172 Non-Agency mortgage-backed securities, at fair value ($109,607 and $123,947 pledged as collateral, at fair value, respectively)118,508 133,127 Other securities, at fair value ($38,310 and $51,648 pledged as collateral, at fair value, respectively)38,310 51,648 Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)1,099,625 1,023,502 Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)5,120 5,428 Securitized commercial loans, at fair value1,171,914 1,355,808 Commercial loans, at fair value ($81,326 and $101,459 pledged as collateral, at fair value, respectively)90,103 130,572 Investment related receivable8,720 22,133 Interest receivable11,324 11,823 Due from counterparties3,215 4,565 Derivative assets, at fair value262 105 Other assets2,881 45,364 Total Assets (1)$2,606,305 $2,825,700 Liabilities and Equity:Liabilities:Repurchase agreements, net$218,941 $617,189 Convertible senior unsecured notes, net109,162 119,168 Securitized debt, net ($1,808,397 and $1,344,370 at fair value and $155,135 and $180,116 held by affiliates, respectively)2,159,862 1,863,488 Interest payable (includes $694 and $699 on securitized debt held by affiliates, respectively)10,460 10,272 Derivative liability, at fair value— 602 Accounts payable and accrued expenses3,887 4,842 Payable to affiliate3,353 1,925 Dividend payable2,415 3,623 Other liabilities262 262 Total Liabilities(2)2,508,342 2,621,371 Commitments and contingencies (Note 15)Stockholders’ Equity:Common stock: $0.01 par value, 50,000,000 shares authorized, 6,038,010 and 6,038,010 outstanding, respectively(3)60 60 Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding— — Treasury stock, at cost, 57,981 and 57,981 shares held, respectively(1,665)(1,665)Additional paid-in capital(3)919,106 918,695 Retained earnings (accumulated deficit)(819,553)(723,981)Total Stockholders’ Equity97,948 193,109 Non-controlling interest15 11,220 Total Equity97,963 204,329 Total Liabilities and Equity$2,606,305 $2,825,700 (Unaudited) September 30,2022December 31, 2021(1) Assets of consolidated VIEs included in the total assets above:Cash and cash equivalents$236 $266 Restricted cash251 260 Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)1,099,625 1,023,502 Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)5,120 5,207 Securitized commercial loans, at fair value1,171,914 1,355,808 Commercial loans, at fair value ($14,361 and $14,362 pledged as collateral, at fair value, respectively)14,361 14,362 Investment related receivable8,674 22,087 Interest receivable10,191 10,572 Total assets of consolidated VIEs$2,310,372 $2,432,064 (2) Liabilities of consolidated VIEs included in the total liabilities above:Securitized debt, net ($1,808,397 and $1,344,370 at fair value and $155,135 and $180,116 held by affiliates, respectively)$2,159,862 $1,863,488 Interest payable (includes $694 and $699 on securitized debt held by affiliates, respectively)8,209 6,480 Accounts payable and accrued expenses69 78 Other liabilities251 260 Total liabilities of consolidated VIEs$2,168,391 $1,870,306 For the three months ended September 30, 2022For the three months ended September 30, 2021For the nine months ended September 30, 2022For the nine months ended September 30, 2021Net Interest IncomeInterest income$41,406 $40,141 $116,625 $127,353 Interest expense (includes $3,493, $3,564, $10,412 and $10,919 on securitized debt held by affiliates, respectively)35,707 32,978 100,408 104,352 Net Interest Income5,699 7,163 16,217 23,001 Other Income (Loss)Realized loss, net(35)(1,526)(33,551)(7,367)Unrealized loss, net(43,582)(6,003)(66,300)(39,271)Gain on derivative instruments, net4,882 515 16,599 716 Other, net(61)277 (252)449 Other Income (Loss)(38,796)(6,737)(83,504)(45,473)ExpensesManagement fee to affiliate850 1,502 2,952 4,469 Other operating expenses343 352 901 1,172 Transaction costs2,635 954 5,590 954 General and administrative expenses:Compensation expense515 626 1,143 1,985 Professional fees1,626 947 4,434 2,864 Other general and administrative expenses676 747 2,049 2,793 Total general and administrative expenses2,817 2,320 7,626 7,642 Total Expenses6,645 5,128 17,069 14,237 Loss before income taxes(39,742)(4,702)(84,356)(36,709)Income tax provision (benefit)266 (218)276 (19)Net loss(40,008)(4,484)(84,632)(36,690)Net income (loss) attributable to non-controlling interest2 (271)3,618 (267)Net loss attributable to common stockholders and participating securities$(40,010)$(4,213)$(88,250)$(36,423)Net loss per Common Share — Basic(1)$(6.63)$(0.70)$(14.63)$(6.00)Net loss per Common Share — Diluted(1)$(6.63)$(0.70)$(14.63)$(6.00) Three Months Ended September 30, 2022Common Stock OutstandingAdditional Paid-In Capital(1)Retained Earnings (Accumulated Deficit)Treasury StockTotal Stockholders' EquityNon-Controlling InterestTotal EquityShares(1)ParBalance at June 30, 20226,038,010 $60 $918,974 $(777,095)$(1,665)$140,274 $64 $140,338 Equity distribution— — — — — — (49)(49)Vesting of restricted stock— — 100 — — 100 — 100 Net income (loss)— — — (40,010)— (40,010)2 (40,008)Dividends declared on non-controlling interest— — — — — — (2)(2)Dividends declared on common stock— — 32 (2,448)— (2,416)— (2,416)Balance at September 30, 20226,038,010 $60 $919,106 $(819,553)$(1,665)$97,948 $15 $97,963 Three Months Ended September 30, 2021Common Stock OutstandingAdditional Paid-In Capital(1)Retained Earnings (Accumulated Deficit)Treasury StockTotal Stockholders' EquityNon-Controlling InterestTotal EquityShares(1)ParBalance at June 30, 20216,081,270 $60 $916,331 $(699,920)$(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 stock4,721 — — — — — — — 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, 20216,085,991 60 918,512 (707,808)(578)210,186 11,867 222,053 Nine Months Ended September 30, 2022Common Stock OutstandingAdditional Paid-In Capital(1)Retained Earnings (Accumulated Deficit)Treasury StockTotal Stockholders' EquityNon-Controlling InterestShares(1)ParTotal EquityBalance at December 31, 20216,038,010 $60 $918,695 $(723,981)$(1,665)$193,109 $11,220 $204,329 Equity distribution— — — — — — (14,817)(14,817)Vesting of restricted stock— — 335 — — 335 — 335 Net income (loss)— — — (88,250)— (88,250)3,618 (84,632)Dividends declared on non-controlling interest— — — — — — (6)(6)Dividends declared on common stock— — 76 (7,322)— (7,246)— (7,246)Balance at September 30, 20226,038,010 $60 $919,106 $(819,553)$(1,665)$97,948 $15 $97,963 Nine Months Ended September 30, 2021Common Stock OutstandingAdditional Paid-In Capital(1)Retained Earnings (Accumulated Deficit)Treasury StockTotal Stockholders' EquityNon-Controlling InterestShares(1)ParTotal EquityBalance at December 31, 20206,081,270 $60 $916,007 $(660,377)$(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 stock4,721 — — — — — — — 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, 20216,085,991 $60 $918,512 $(707,808)$(578)$210,186 $11,867 $222,053 For the nine months ended September 30, 2022For the nine months ended September 30, 2021Cash flows from operating activities:Net loss$(84,632)$(36,690)Adjustments to reconcile net loss to net cash provided by operating activities:Premium amortization and (discount accretion), net2,492 145 Interest income earned added to principal of investments(79)(310)Amortization of deferred financing costs1,938 3,935 Amortization of discount on convertible senior unsecured notes648 712 Restricted stock amortization335 453 Premium on purchase of residential whole loans(6,619)(10,281)Unrealized loss, net66,300 39,271 Realized loss on extinguishment of convertible senior notes134 1,337 Realized gain on sale of real estate owned ("REO")(12,198)(54)Unrealized (gain) loss on derivative instruments, net(3,793)97 Realized loss on investments, net45,615 6,084 Loss on derivatives, net1,762 — Loss on foreign currency transactions, net1 — Changes in operating assets and liabilities:Interest receivable499 2,496 Investment related receivable— (704)Other assets— (973)Interest payable188 (4,243)Accounts payable and accrued expenses(953)60 Payable to affiliate1,428 (38)Other liabilities7 1 Net cash provided by operating activities13,073 1,298 Cash flows from investing activities:Purchase of securities(39,952)— Proceeds from sale of securities42,287 — Proceeds from sale of REO54,681 738 Principal repayments and basis recovered on securities6,704 14,685 Purchase of residential whole loans(405,298)(233,041)Proceeds from sale of residential whole loans11,735 — Principal repayments on residential whole loans206,660 313,661 Principal repayments on commercial loans20,593 103,272 Principal repayments on securitized commercial loans— 354,202 Principal repayments on residential bridge loans366 7,052 Premium for credit default swaps, net(347)— Net settlements of TBAs2,051 — Proceeds from sale of interest rate swaptions, net312 — Due from counterparties460 50 Premium for interest rate swaptions, net(473)— Net cash (used in) provided by investing activities(100,221)560,619 Cash flows from financing activities:Payment of offering costs(2)(86)Proceeds from issuance of convertible senior unsecured notes— 86,250 Payments on extinguishment of convertible senior unsecured notes(11,690)(128,645)Proceeds from repurchase agreement borrowings3,164,451 2,527,530 Repayments of repurchase agreement borrowings(3,562,699)(2,403,068) For the nine months ended September 30, 2022For the nine months ended September 30, 2021Proceeds from securitized debt742,432 — Repayments of securitized debt(207,799)(597,221)Payments made for deferred financing costs— (2,536)Due from counterparties, net890 (565)Due to counterparties, net— (321)Decrease in other liabilities(9)(75,873)Equity distributions to non-controlling interest(14,817)— Dividends paid on common stock(8,454)(10,947)Dividends paid to non-controlling interest(4)(4)Net cash provided by (used in) financing activities102,299 (605,486)Effect of exchange rate changes on cash and cash equivalents(1)— Net increase (decrease) in cash, cash equivalents and restricted cash15,150 (43,569)Cash, cash equivalents and restricted cash, beginning of period40,453 107,745 Cash, cash equivalents and restricted cash, end of period$55,603 $64,176 Supplemental disclosure of operating cash flow information:Interest paid$79,700 $87,658 Income taxes paid$50 $192 Supplemental disclosure of non-cash financing/investing activities:Underwriting and offering costs payable$— $6 Dividends and distributions declared, not paid$2,415 $3,651 Dividends to non-controlling interest, not paid$2 $2 Principal payments of residential whole loans, not settled$8,674 $22,621 Principal payments of residential bridge loans, not settled$46 $1,715 Other assets - transfer of bridge loans to REO$— $752 Other assets - Transfer of Commercial Loans to REO$— $30,345 Other assets - Contribution of REO from non-controlling interest$— $12,138 Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:Cash and cash equivalents$55,352 $63,916 Restricted cash251 260 Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows$55,603 $64,176 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. 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 portfolio of real estate related securities, Whole Loans and other financial assets. The Company’s current portfolio is comprised of Non-Qualified ("Non-QM") Residential Whole Loans, Non-Agency RMBS, Commercial Loans, Non-Agency CMBS and to a lesser extent Agency RMBS, GSE Risk Transfer Securities, Residential Bridge Loans, 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 Company's current investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. The Manager will vary the allocation among these 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-qualified 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. Recently issued accounting pronouncements DescriptionEffective DateEffect on Financial StatementsIn 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, 2022The Company will elect to adopt the amendments in ASU 2020-04 and ASU 2021-1 no later than December 31, 2022. With respect to contracts within the scope of Topics 310, Receivables, and 470, Debt, the company intends to account for these as continuations of existing contracts by prospectively adjusting the effective interest rates as modified. September 30, 2022Fair ValueLevel ILevel IILevel IIITotalAssetsAgency RMBS Interest-only strips$— $— $52 $52 Agency RMBS Interest-only strips accounted for as derivatives, included in MBS— — 668 668 Subtotal Agency MBS— — 720 720 Non-Agency CMBS— 88,822 — 88,822 Non-Agency RMBS— 28,513 — 28,513 Non-Agency RMBS Interest-only strips— — 1,173 1,173 Subtotal Non-Agency MBS— 117,335 1,173 118,508 Other securities— 38,310 — 38,310 Total mortgage-backed securities and other securities— 155,645 1,893 157,538 Residential whole loans— — 1,099,625 1,099,625 Residential bridge loans— — 5,120 5,120 Securitized commercial loans— — 1,171,914 1,171,914 Commercial loans— — 90,103 90,103 Derivative assets— 262 — 262 Total Assets$— $155,907 $2,368,655 $2,524,562 LiabilitiesSecuritized debt$— $1,798,511 $9,886 $1,808,397 Total Liabilities$— $1,798,511 $9,886 $1,808,397 December 31, 2021Fair ValueLevel ILevel IILevel IIITotalAssetsAgency RMBS Interest-only strips$— $— $114 $114 Agency RMBS Interest-only strips accounted for as derivatives, included in MBS— — 1,058 1,058 Subtotal Agency MBS— — 1,172 1,172 Non-Agency CMBS— 99,630 5,728 105,358 Non-Agency RMBS— 25,652 — 25,652 Non-Agency RMBS Interest-only strips— — 2,117 2,117 Subtotal Non-Agency MBS— 125,282 7,845 133,127 Other securities— 51,648 — 51,648 Total mortgage-backed securities and other securities— 176,930 9,017 185,947 Residential whole loans— — 1,023,502 1,023,502 Residential bridge loans— — 5,428 5,428 Securitized commercial loan— — 1,355,808 1,355,808 Commercial loans— — 130,572 130,572 Derivative assets— 105 — 105 Total Assets$— $177,035 $2,524,327 $2,701,362 LiabilitiesDerivative liabilities$— $602 $— $602 Securitized debt— 1,329,451 14,919 1,344,370 Total Liabilities$— $1,330,053 $14,919 $1,344,972 Fair values for the Company’s mortgage-backed 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 and SOFR, 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. 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 executions. Their valuation methodology incorporates commonly used market pricing methods, tuned to consider the most significant inputs and weighted assumptions to determine the fair value of the Company's commercial loans. The assumptions made by the independent third party pricing vendor include market discount rates, projected default rates, projected prepayment rates, and loss severity, along with more definable underwriting assumptions, such as; credit documentation, initial loan to value of collateral, geographic diversity, and realized prepayment speeds. The Manager reviews the analysis provided by the pricing service, with a primary focus on the rationale for weighted valuation probabilities relating to unobservable inputs, such as the market discount rate and weighted average life. Due to inherent uncertainty of such valuations, the fair values established for commercial loans held by the Company may differ from the fair values that would have been established if a larger, more actively traded market existed for these individual loans. For all securities and loans, if neither a pricing service, nor broker quote valuations are available, the Company determines the fair value using internal models of the Manager, which are reviewed and approved by the Pricing Committee of the Manager. Accordingly, the Company's commercial loans are all classified as Level III. 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. 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, 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, 2022 and December 31, 2021. See Note 8 for more information. 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, 2022 and December 31, 2021 (dollars in thousands): Fair Value atRangeSeptember 30, 2022Valuation TechniqueUnobservable InputMinimumMaximumWeighted AverageResidential whole loans$1,099,625 Discounted Cash FlowMarket Discount Rate6.4 %7.6 %7.1 %Weighted Average Life1.810.65.7Residential bridge loans$5,120 Discounted Cash FlowMarket Discount Rate12.9 %35.7 %20.7 %Weighted Average Life0.44.12.1Commercial loans$90,103 Discounted Cash FlowMarket Discount Rate2.3 %9.1 %8.0 %Weighted Average Life0.27.12.0 Fair Value atRangeDecember 31, 2021Valuation TechniqueUnobservable InputMinimumMaximumWeighted AverageResidential whole loans$1,023,502 Discounted Cash FlowMarket Discount Rate2.6 %7.5 %3.5 %Weighted Average Life1.48.93.1Residential bridge loans$5,428 Discounted Cash FlowMarket Discount Rate9.8 %23.1 %(1)17.2 %Weighted Average Life0.33.62.4Commercial loans$130,572 Discounted Cash FlowMarket Discount Rate4.5 %21.7 %9.3 %Weighted Average Life0.52.81.2 Three months ended September 30, 2022$ in thousandsAgency MBSNon-Agency MBSResidential Whole LoansResidentialBridge LoansCommercial LoansSecuritized commercial loansSecuritized debtBeginning balance$785 $1,181 $1,195,853 $5,095 $128,421 $1,243,371 $14,919 Transfers into Level III from Level II— — — — — — — Transfers from Level III into Level II— — — — — — — Sales and settlements— — (11,735)— — — — Loan modifications / capitalized interest— — 4 — — — — Principal repayments— — (37,036)— (20,588)— — Total net gains / losses included in net incomeRealized gains/(losses), net on assets— — (33)— — — — Unrealized gains/(losses), net on assets(1)(63)88 (46,545)25 (17,730)(78,046)— Unrealized (gains)/losses, net on liabilities(2)— — — — — — (3,863)Premium and discount amortization, net(2)(96)(883)— — 6,589 (1,170)Ending balance$720 $1,173 $1,099,625 $5,120 $90,103 $1,171,914 $9,886 Unrealized gains/(losses), net on assets held at the end of the period(1)$(63)$88 $(35,855)$25 $(17,730)$(78,046)$— Unrealized gains/(losses), net on liabilities held at the end of the period(2)$— $— $— $— $— $— $3,863 Three months ended September 30, 2021$ in thousandsAgency MBSNon-Agency MBSResidential Whole LoansResidentialBridge LoansCommercial LoansSecuritized commercial loanSecuritized debtBeginning 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 incomeRealized 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)$— Unrealized gains/(losses), net on liabilities held at the end of the period(2)$— $— $— $— $— $— $(1,121) Nine months ended September 30, 2022$ in thousandsAgency MBSNon-Agency MBSResidential Whole-LoansResidentialBridge LoansCommercial LoansSecuritized commercial loanSecuritized debtBeginning balance$1,172 $7,845 $1,023,502 $5,428 $130,572 $1,355,808 $14,919 Transfers into Level III from Level II— — — — — — — Transfers from Level III into Level II— (5,437)— — — — — Purchases— — 402,650 — — — — Sales and settlements— — (11,362)— — — — Loan modifications / capitalized interest— — 79 — — — — Principal repayments— — (184,683)(250)(20,593)— — Total net gains / losses included in net incomeRealized gains/(losses), net on assets— — (32)— — — — Unrealized gains/(losses), net on assets(1)(329)(998)(125,943)(58)(19,876)(203,828)— Unrealized (gains)/losses, net on liabilities(2)— — — — — — (2,064)Premium and discount amortization, net(123)(237)(4,586)— — 19,934 (2,969)Ending balance$720 $1,173 $1,099,625 $5,120 $90,103 $1,171,914 $9,886 Unrealized gains/(losses), net on assets held at the end of the period(1)$(329)$(644)$(107,944)$17 $(19,884)$(203,828)$— Unrealized gains/(losses), net on liabilities held at the end of the period(2)$— $— $— $— $— $— $2,064 Nine months ended September 30, 2021$ in thousandsAgency MBSNon-Agency MBSOther SecuritiesResidential Whole-LoansResidentialBridge LoansCommercial LoansSecuritized commercial loanSecuritized debtBeginning 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 incomeRealized 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) September 30, 2022PrincipalBalanceUnamortizedPremium(Discount),netAmortizedCostUnrealizedGainUnrealizedLossEstimatedFair ValueNetWeightedAverageCoupon Agency RMBS Interest-Only Strips (1) (2)N/AN/A$56 $— $(4)$52 — %Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)N/AN/AN/AN/AN/A668 0.7 %Total Agency MBS— — 56 — (4)720 0.6 %Non-Agency RMBS45,569 (14,848)30,721 1,568 (3,776)28,513 4.2 %Non-Agency RMBS Interest- Only Strips (1)N/A N/A5,307 — (4,134)1,173 0.3 %Subtotal Non-Agency RMBS45,569 (14,848)36,028 1,568 (7,910)29,686 1.1 %Non-Agency CMBS110,115 (2,993)107,122 729 (19,029)88,822 7.4 %Total Non-Agency MBS155,684 (17,841)143,150 2,297 (26,939)118,508 3.4 %Other securities (3)46,493 (8,510)42,942 1,216 (5,848)38,310 7.1 %Total$202,177 $(26,351)$186,148 $3,513 $(32,791)$157,538 3.8 % December 31, 2021PrincipalBalanceUnamortizedPremium(Discount),netAmortizedCostUnrealizedGainUnrealizedLossEstimatedFair ValueNetWeightedAverageCoupon(4)Agency RMBS Interest-Only Strips (1)N/AN/A$59 $55 $— $114 1.3 %Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)N/AN/AN/AN/AN/A1,058 1.3 %Total Agency MBS— — 59 55 — 1,172 1.3 %Non-Agency RMBS36,147 (13,936)22,211 3,476 (35)25,652 4.3 %Non-Agency RMBS Interest- Only Strips (1)N/AN/A5,608 — (3,491)2,117 0.3 %Subtotal Non-Agency RMBS36,147 (13,936)27,819 3,476 (3,526)27,769 1.0 %Non-Agency CMBS179,619 (13,088)166,531 1,543 (62,716)105,358 5.4 %Total Non-Agency MBS215,766 (27,024)194,350 5,019 (66,242)133,127 3.0 %Other securities (3)51,159 (8,229)47,652 4,209 (213)51,648 5.6 %Total$266,925 $(35,253)$242,061 $9,283 $(66,455)$185,947 3.2 % September 30, 2022< or equal to 10years> 10 years and < orequal to 20 years> 20 years and < orequal to 30 years> 30 yearsTotalAgency RMBS Interest-Only Strips$— $— $52 $— $52 Agency RMBS Interest-Only Strips accounted for as derivatives— 668 — — 668 Subtotal Agency— 668 52 — 720 Non-Agency CMBS66,003 12,254 10,565 — 88,822 Non-Agency RMBS— — 9,273 19,240 28,513 Non-Agency RMBS Interest- Only Strips— — 199 974 1,173 Subtotal Non-Agency66,003 12,254 20,037 20,214 118,508 Other securities6,526 3,869 19,684 8,231 38,310 Total$72,529 $16,791 $39,773 $28,445 $157,538 December 31, 2021< or equal to 10 years> 10 years and < or equal to 20 years> 20 years and < or equal to 30 years> 30 yearsTotalAgency RMBS Interest-Only Strips$— $— $114 $— $114 Agency RMBS Interest-Only Strips accounted for as derivatives— 1,058 — — 1,058 Subtotal Agency— 1,058 114 — 1,172 Non-Agency CMBS66,384 17,644 21,171 159 105,358 Non-Agency RMBS— — 10,282 15,370 25,652 Non-Agency RMBS Interest- Only Strips— — 106 2,011 2,117 Subtotal Non-Agency66,384 17,644 31,559 17,540 133,127 Other securities9,255 4,266 25,653 12,474 51,648 Total$75,639 $22,968 $57,326 $30,014 $185,947 September 30, 2022Less than 12 Months12 Months or MoreTotalFair ValueUnrealizedLossesNumber ofSecuritiesFair ValueUnrealizedLossesNumber ofSecuritiesFair ValueUnrealizedLossesNumber ofSecuritiesAgency RMBS Interest-Only Strips$52 $(4)1 $— $— — $52 $(4)1 Subtotal Agency52 (4)1 — — — 52 (4)1 Non-Agency CMBS$— $— — $79,850 $(19,029)11 $79,850 $(19,029)11 Non-Agency RMBS15,141 (3,721)7 169 (55)1 15,310 (3,776)8 Non-Agency RMBS Interest-Only Strips— — — 1,172 (4,134)4 1,172 (4,134)4 Subtotal Non-Agency15,141 (3,721)7 81,191 (23,218)16 96,332 (26,939)23 Other securities24,720 (5,327)4 3,869 (521)2 28,589 (5,848)6 Total$39,913 $(9,052)12 $85,060 $(23,739)18 $124,973 $(32,791)30 December 31, 2021Less than 12 Months12 Months or MoreTotalFair ValueUnrealizedLossesNumber ofSecuritiesFair ValueUnrealizedLossesNumber ofSecuritiesFair ValueUnrealizedLossesNumber ofSecuritiesNon-Agency CMBS$— $— — $96,080 $(62,716)16 $96,080 $(62,716)16 Non-Agency RMBS— — — 201 (35)1 201 (35)1 Non-Agency RMBS Interest-Only Strips— — — 2,117 (3,491)4 2,117 (3,491)4 Subtotal Non-Agency— — — 98,398 (66,242)21 98,398 (66,242)21 Other securities— — — 9,022 (213)4 9,022 (213)4 Total$— $— — $107,420 $(66,455)25 $107,420 $(66,455)25 Three months ended September 30, 2022Three months ended September 30, 2021CouponInterestNet (Premium Amortization/Amortization Basis) Discount AccretionInterestIncomeCouponInterestNet (Premium Amortization/Amortization Basis) Discount AccretionInterestIncomeAgency RMBS$— $2 $2 $11 $(7)$4 Non-Agency CMBS1,949 387 2,336 2,621 1,669 4,290 Non-Agency RMBS446 26 472 609 (240)369 Other securities860 185 1,045 1,043 (270)773 Total$3,255 $600 $3,855 $4,284 $1,152 $5,436 Nine months ended September 30, 2022Nine months ended September 30, 2021CouponInterestNet (Premium Amortization/Amortization Basis) Discount AccretionInterestIncomeCouponInterestNet (Premium Amortization/Amortization Basis) Discount AccretionInterestIncomeAgency RMBS$13 $(4)$9 $38 $(26)$12 Non-Agency CMBS7,050 386 7,436 7,171 6,230 13,401 Non-Agency RMBS1,804 (141)1,663 1,762 (704)1,058 Other securities2,515 223 2,738 3,717 (1,214)2,503 Total$11,382 $464 $11,846 $12,688 $4,286 $16,974 Three months ended September 30, 2022Three months ended September 30, 2021ProceedsGross GainsGross LossesNet Gain (Loss)ProceedsGross GainsGross LossesNet Gain (Loss)Non-Agency CMBS$— $— $— $— $— $— $— $— Non-Agency RMBS— — — — — — — — Other securities— — — — — — — — Total$— $— $— $— $— $— $— $— 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 September 30, 2022 and December 31, 2021, the Company held two and five 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, 2022 and December 31, 2021, the Company’s maximum exposure to loss from these variable interests did not exceed the carrying value of these investments of $17.1 million and $26.5 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, 2022 and December 31, 2021, the Company did not guarantee any obligations of unconsolidated entities or enter into any commitment or intent to provide funding to any such entities. As of September 30, 2022, and December 31, 2021, the Arroyo Trust 2020 owned 440 and 543 Non-QM residential whole loans with a fair value of $135.5 million and $195.7 million, respectively. In February 2022, the Company formed Arroyo Mortgage Trust 2022-1 ("Arroyo Trust 2022-1"), a wholly-owned subsidiary of the Company, to complete its third residential mortgage-backed securitization comprised of $432.0 million of Non-QM residential whole loans. The Arroyo Trust 2022-1 issued $398.9 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. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates. As of September 30, 2022, the Arroyo Trust 2022-1 owned 711 Non-QM residential whole loans with a fair value of $350.1 million. The Company has elected the fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in the Arroyo Trust 2022-1 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable. In July 2022, the Company formed Arroyo Mortgage Trust 2022-2 ("Arroyo Trust 2022-2"), a wholly-owned subsidiary of the Company, to complete its fourth residential mortgage-backed securitization comprised of $402.2 million of Non-QM residential whole loans. The Arroyo Trust 2022-2 issued $351.9 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. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates. As of September 30, 2022, the Arroyo Trust 2022-2 owned 1,038 Non-QM residential whole loans with a fair value of $365.6 million. The Company has elected the fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in the Arroyo Trust 2022-2 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable. In February 2017, the Company formed Revolving Mortgage Investment Trust 2017-BRQ1 ("RMI 2017 Trust") to acquire Residential Bridge Loans. RMI 2017 Trust issued a trust certificate that is wholly-owned by the Company and 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 consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company has eliminated the intercompany trust certificate in consolidation. September 30, 2022December 31, 2021Cash and cash equivalents$236 $266 Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)1,099,625 1,023,502 Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)5,120 5,207 Investment related receivable8,674 22,087 Interest receivable5,066 5,282 Total assets$1,118,721 $1,056,344 Securitized debt, net$998,129 $519,118 Interest payable3,214 1,316 Accounts payable and accrued expenses60 69 Total liabilities$1,001,403 $520,503 Residential whole loans, at Fair ValueResidential bridge loans, at Fair ValueSeptember 30, 2022December 31, 2021September 30, 2022December 31, 2021Principal balance$1,190,326 $989,143 $5,585 $5,834 Unamortized premium31,789 31,070 — — Unamortized discount(1,634)(1,337)— — Amortized cost1,220,481 1,018,876 5,585 5,834 Gross unrealized gains700 14,190 9 78 Gross unrealized losses(121,556)(9,564)(474)(484)Fair value$1,099,625 $1,023,502 $5,120 $5,428 September 30, 2022Weighted AverageCurrent Coupon RateNumber of LoansPrincipal BalanceOriginal LTVOriginal FICO Score(1)Expected Life (years)Contractual Maturity (years)Coupon Rate2.01% – 3.00%40 $22,510 66.3 %758 9.228.52.9 %3.01% – 4.00%431 224,994 65.7 %758 7.328.53.7 %4.01% – 5.00%1,372 467,195 64.0 %749 5.826.24.6 %5.01% – 6.00%902 366,708 65.8 %742 5.127.15.4 %6.01% – 7.00%235 103,067 70.3 %742 3.928.86.4 %7.01% - 8.00%15 5,852 75.1 %731 3.229.47.4 %Total2,995 $1,190,326 65.5 %748 5.827.24.8 % (1)The original FICO score is not available for 236 loans with a principal balance of approximately $77.7 million at September 30, 2022. The Company has excluded these loans from the weighted average computations. December 31, 2021Weighted AverageCurrent Coupon RateNumber of LoansPrincipal BalanceOriginal LTVOriginal FICO Score(1)Expected Life (years)(2)Contractual Maturity (years)Coupon Rate2.01% – 3.00%27 $15,640 65.1 %757 5.328.82.8 %3.01% – 4.00%496 244,022 63.7 %756 3.328.03.7 %4.01% – 5.00%1,051 413,451 65.1 %747 2.928.24.7 %5.01% – 6.00%757 305,344 64.9 %738 3.026.85.4 %6.01% – 7.00%28 10,181 67.9 %721 3.125.86.3 %7.01% - 8.00%2 505 73.2 %753 4.526.87.1 %Total2,361 $989,143 64.8 %746 3.127.74.6 % (1)The original FICO score is not available for 230 loans with a principal balance of approximately $74.3 million at December 31, 2021. The Company has excluded these loans from the weighted average computations. September 30, 2022December 31, 2021StateState ConcentrationPrincipal BalanceStateState ConcentrationPrincipal BalanceCalifornia66.6 %$793,123 California73.9 %$730,771 New York9.4 %112,329 New York11.6 %114,625 Texas4.8 %56,856 Florida2.7 %26,293 Florida4.1 %48,959 Georgia2.5 %25,106 Georgia3.6 %42,347 Texas1.9 %19,062 Other11.5 %136,712 Other7.4 %73,286 Total100.0 %$1,190,326 Total100.0 %$989,143 As of September 30, 2022, the Company had seven remaining residential bridge loans in the portfolio. Of these, six were in non-accrual status with an unpaid principal balance of approximately $4.7 million and a fair value of $4.3 million. These nonperforming loans had an outstanding principal balance of $4.7 million. These loans are collateral dependent. LoanAcquisition DateLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateralCRE 3August 2019Interest-Only Mezzanine loan$90,000 $8,777 58%1-Month LIBOR plus 9.25%6/29/2021None(1)Entertainment and RetailCRE 4September 2019Interest-Only First Mortgage22,204 22,204 63%1-Month LIBOR plus 3.02%8/6/2025(2)NoneRetailCRE 5December 2019Interest-Only First Mortgage24,535 24,405 62%1-Month LIBOR plus 3.75%11/6/2023(3)NoneHotelCRE 6December 2019Interest-Only First Mortgage13,207 13,136 62%1-Month LIBOR plus 3.75%11/6/2023(3)NoneHotelCRE 7December 2019Interest-Only First Mortgage7,259 7,220 62%1-Month LIBOR plus 3.75%11/6/2023(3)NoneHotel$157,205$75,742 As of September 30, 2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million, secured by an indirect pledge of equity in the mortgage borrower and owner of a retail facility, was non-performing and past its maturity date of June 29, 2021. Interest payments on this loan were received from a reserve that was exhausted in May 2021. On October 25, 2022, the senior mezzanine lender notified the Company that it had consummated a strict foreclosure under the Uniform Commercial Code of its equity interest in the mortgage borrower and owner of the property, which had the effect of foreclosing out the Company’s subordinate pledge of equity in the retail facility owner that served as collateral for the junior mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures are successful, the Company could experience a total loss of its investment, which would result in an $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan. Securitized commercial loans are comprised of commercial loans from consolidated third party sponsored CMBS VIE's. At September 30, 2022, 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. 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, 2022, 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. 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, 2022. The loan has a stated maturity date of 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. The two commercial consolidated trusts, CSMC USA and RSBC Trust, collectively held two commercial loans as of September 30, 2022. 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, 2022 and December 31, 2021 (dollars in thousands): September 30, 2022December 31, 2021Restricted cash$251 $260 Securitized commercial loans, at fair value1,171,914 1,355,808 Commercial Loans, at fair value14,361 14,362 Interest receivable5,125 5,290 Total assets$1,191,651 $1,375,720 Securitized debt, at fair value$1,161,733 $1,344,370 Interest payable4,995 5,164 Accounts payable and accrued expenses9 9 Other liabilities251 260 Total liabilities$1,166,988 $1,349,803 CSMC USA Trust Securitized Commercial Loan, at Fair ValueRSBC Trust Commercial Loans, at Fair ValueCommercial Loans, at Fair ValueSeptember 30, 2022December 31, 2021September 30, 2022December 31, 2021September 30, 2022December 31, 2021Principal balance$1,385,591 $1,385,591 $14,362 $14,362 $157,205 $177,797 Unamortized discount(90,836)(110,770)— — — — Amortized cost1,294,755 1,274,821 14,362 14,362 157,205 177,797 Gross unrealized gains— 80,987 — — — — Gross unrealized losses(122,841)— (1)— (81,463)(61,587)Fair value$1,171,914 $1,355,808 $14,361 $14,362 $75,742 $116,210 As of September 30, 2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million, secured by an indirect pledge of equity in the mortgage borrower and owner of a retail facility, was non-performing and past its maturity date of June 29, 2021. Interest payments on this loan were received from a reserve that was exhausted in May 2021. On October 25, 2022, the senior mezzanine lender notified the Company that it had consummated a strict foreclosure under the Uniform Commercial Code of its equity interest in the mortgage borrower and owner of the property, which had the effect of foreclosing out the Company’s subordinate pledge of equity in the retail facility owner that served as collateral for the junior mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures are successful, the Company could experience a total loss of its investment, which would result in an $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan. 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. The facility was recently amended on October 26, 2022 and matures on October 25, 2023. It bears interest at a rate of SOFR plus 2.25%, with a SOFR floor of 0.25%. The Company finances its Non-QM residential whole loans held in RMI 2015 Trust under this facility. As of September 30, 2022, the Company had outstanding borrowings of $4.0 million. The borrowing is secured by Non-QM residential whole loans with a fair value of $5.8 million as of September 30, 2022. The facility was recently amended on October 26, 2022 and matures on November 3, 2023. It bears interest at a rate of SOFR plus 2.25%. As of September 30, 2022, the outstanding balance under this facility was $48.0 million. The borrowing is secured by the performing commercial loans that are held in CRE LLC, with an estimated fair market value of $67.0 million as of September 30, 2022. 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, 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. With the exception of one repurchase agreement for which the Company received a waiver, the Company was in compliance with the terms of such financial tests as of September 30, 2022. September 30, 2022December 31, 2021Securities PledgedRepurchase Agreement BorrowingsWeighted Average Interest Rate on Borrowings Outstanding at end of periodWeighted Average Remaining Maturity (days)Repurchase Agreement BorrowingsWeighted Average Interest Rate on Borrowings Outstanding at end of periodWeighted Average Remaining Maturity (days)Short-term borrowings:Agency RMBS$317 3.15 %32$976 1.02 %58Non-Agency RMBS(1)54,228 6.17 %8838,354 2.94 %4Residential whole loans(2)778 5.40 %111,439 2.57 %5Residential bridge loans(2)2,895 5.60 %114,368 2.61 %5Commercial loans(2)5,630 6.18 %116,463 3.20 %5Other securities1,966 5.75 %172,457 3.50 %18Total short-term borrowings65,814 6.11 %7554,057 2.92 %6Long-term borrowings:Non-Agency CMBS and Non-Agency RMBS FacilityNon-Agency CMBS(1)55,155 2.28 %21459,802 2.14 %125Non-Agency RMBS21,943 2.28 %21415,632 2.14 %125Other securities23,948 2.28 %21427,506 2.22 %125Subtotal101,046 2.28 %214102,940 2.16 %125Residential Whole Loan FacilityResidential whole loans(2)4,049 5.11 %35396,531 2.25 %308Commercial Whole Loan FacilityCommercial loans48,032 4.55 %3563,661 2.27 %268Total long-term borrowings153,127 3.07 %153563,132 2.24 %270Repurchase agreements borrowings$218,941 3.98 %130$617,189 2.30 %247Less unamortized debt issuance costs— N/AN/A— N/AN/ARepurchase agreements borrowings, net$218,941 3.98 %130$617,189 2.30 %247 September 30, 2022December 31, 2021Assets PledgedAccrued Interest Assets Pledged and Accrued InterestAssets PledgedAccrued Interest Assets Pledged and Accrued InterestAssets pledged for borrowings under repurchase agreements:Agency RMBS, at fair value$233 $7 $240 $1,172 $19 $1,191 Non-Agency CMBS, at fair value(1)90,107 439 90,546 107,624 504 108,128 Non-Agency RMBS, at fair value122,401 610 123,011 66,555 343 66,898 Residential whole loans, at fair value(2)7,214 57 7,271 453,447 2,674 456,121 Residential bridge loans(2)5,120 66 5,186 5,207 91 5,298 Commercial loans, at fair value(2)81,326 409 81,735 101,459 360 101,819 Other securities, at fair value38,310 97 38,407 51,648 100 51,748 Cash(3)120 — 120 3,151 — 3,151 Total$344,831 $1,685 $346,516 $790,263 $4,091 $794,354 At September 30, 2022 and December 31, 2021, the Company had $26.0 million and $37.7 million aggregate principal of the 2022 Notes outstanding, respectively. The 2022 Notes were repaid in full upon their maturity on October 3, 2022. Refer to Note 16 - "Subsequent Event" for details. During the quarters ended September 30, 2022, June 30, 2022, and March 31, 2022, the Company repurchased $1.0 million, $7.2 million and $3.4 million aggregate principal amount of the 2022 Notes at par value, 0.6% premium to par value, and 0.8% premium to par value, respectively, plus accrued and unpaid interest. ClassesPrincipal BalanceCoupon Carrying ValueContractual MaturityOffered Notes:Class A-1$176,628 3.3%$176,628 4/25/2049Class A-29,473 3.5%9,473 4/25/2049Class A-315,007 3.8%15,007 4/25/2049Class M-125,055 4.8%25,055 4/25/2049Subtotal$226,163 $226,163 Less: Unamortized Deferred Financing CostsN/A2,830 Total$226,163 $223,333 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, so 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 2020-1's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands): ClassesPrincipal BalanceCoupon Carrying ValueContractual MaturityOffered Notes:Class A-1A$77,393 1.7%$77,393 3/25/2055Class A-1B9,184 2.1%9,184 3/25/2055Class A-213,518 2.9%13,518 3/25/2055Class A-317,963 3.3%17,963 3/25/2055Class M-111,739 4.3%11,739 3/25/2055Subtotal$129,797 $129,797 Less: Unamortized Deferred Financing CostsN/A1,665 Total$129,797 $128,132 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 2020-1 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, 2022, residential whole loans with an outstanding principal balance of approximately $143.0 million serve as collateral for the Arroyo Trust 2020-1'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. In February 2022, the Company completed a residential-mortgage backed securitization comprised of $432.0 million of Non-QM residential whole loans, issuing $398.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net." ClassesPrincipal BalanceCouponFair ValueContractual MaturityOffered Notes:Class A-1A$218,5302.5%$199,52612/25/2056Class A-1B82,9423.3%69,66912/25/2056Class A-221,1683.6%16,61712/25/2056Class A-328,0793.7%21,31212/25/2056Class M-117,9283.7%12,81412/25/2056Total$368,647$319,938 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 2022-1 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, 2022, residential whole loans with an outstanding principal balance of approximately $399.6 million serve as collateral for the Arroyo Trust 2022-1'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 fair value plus accrued interest. In July 2022, the Company completed a residential-mortgage backed securitization comprised of $402.2 million of Non-QM residential whole loans, issuing $351.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net." The Company retained the non-offered securities in the securitization, which include the Class B-1, Class B-2, Class B-3, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-2 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, 2022, residential whole loans with an outstanding principal balance of approximately $390.9 million serve as collateral for the Arroyo Trust 2022-2'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 fair value plus accrued interest. ClassesPrincipal BalanceCoupon Fair ValueContractual MaturityClass A-1$120,391 3.3 %$109,867 9/11/2025Class A-2531,700 4.0 %482,628 9/11/2025Class B136,400 4.2 %119,584 9/11/2025Class C94,500 4.3 %79,772 9/11/2025Class D153,950 4.4 %122,083 9/11/2025Class E180,150 4.4 %132,952 9/11/2025Class F153,600 4.4 %104,961 9/11/2025Class X-1(1)N/A0.5 %8,268 9/11/2025Class X-2(1)N/A— %1,618 9/11/2025$1,370,691 $1,161,733 September 30, 2022December 31, 2021Derivative InstrumentAccounting DesignationConsolidated Balance Sheets LocationNotional AmountFair ValueNotional AmountFair ValueInterest rate swaps, assetNon-HedgeDerivative assets, at fair value$152,000 $262 $— $— Credit default swaps, assetNon-HedgeDerivative assets, at fair value— $— 2,030 $105 Total derivative instruments, assets262105Interest rate swaps, liabilityNon-HedgeDerivative liability, at fair value— — 22,000 (38)Credit default swaps, liabilityNon-HedgeDerivative liability, at fair value— — 4,140 (564)Total derivative instruments, liabilities—(602)Total derivative instruments, net$262$(497) Realized Gain (Loss), netDescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-MarketContractual interest income (expense), net(1)TotalThree months ended September 30, 2022Interest rate swaps$(3,371)$3,423 $— $4,790 $298 $5,140 Interest rate swaptions(161)— — — — (161)Interest-Only Strips— accounted for as derivatives— — (5)(54)16 (43)Credit default swaps(273)— — 283 — 10 TBAs1,319 — — (1,383)— (64)Total$(2,486)$3,423 $(5)$3,636 $314 $4,882 Three months ended September 30, 2021Interest rate swaps$— $485 $— $(71)$96 $510 Interest-Only Strips— accounted for as derivatives— — (59)(90)82 (67)Credit default swap16 — — 56 — 72 Total$16 $485 $(59)$(105)$178 $515 Realized Gain (Loss), netDescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-MarketContractual interest income (expense), net(1)TotalNine months ended September 30, 2022Interest rate swaps$(3,371)$14,744 $— $3,670 $(255)$14,788 Interest rate swaptions(161)— — — — (161)Interest-Only Strips— accounted for as derivatives— — (120)(270)160 (230)Credit default swaps(242)— — 393 — 151 TBAs2,051 — — — — 2,051 Total$(1,723)$14,744 $(120)$3,793 $(95)$16,599 Nine months ended September 30, 2021Interest rate swaps$— $520 $— $(25)$172 $667 Interest-Only Strips— accounted for as derivatives— — (232)(124)305 (51)Credit default swap48 — — 52 — 100 Total$48 $520 $(232)$(97)$477 $716 December 31, 2021Fixed Pay Interest Rate Swap Remaining TermNotional AmountAverage Fixed Pay RateAverage Variable Receive RateAverage Maturity (Years)Greater than 5 years$22,000 1.2 %0.1 %9.8Total$22,000 1.2 %0.1 %9.8 September 30, 2022Gross AmountsGross Amounts Offset in the ConsolidatedBalance Sheets Net Amountsof Assets presented in the ConsolidatedBalance SheetsGross Amounts Not Offset inthe Consolidated BalanceSheetsNet AmountDescriptionFinancial Instruments(1)Cash Collateral (1)Derivative AssetsAgency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$668 $— $668 $(181)$— $487 Derivative asset, at fair value (2)(3)262 — 262 — — 262 Total assets$930 $— $930 $(181)$— $749 Derivative Liabilities and Repurchase AgreementsRepurchase Agreements(4)$218,941 $— $218,941 $(218,857)$(84)$— Total liability$218,941 $— $218,941 $(218,857)$(84)$— (1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, 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 column of the tables above represents amounts pledged or received as collateral against derivative transactions. December 31, 2021Gross AmountsGross Amounts Offset in the ConsolidatedBalance Sheets Net Amountsof Assets presented in the ConsolidatedBalance SheetsGross Amounts Not Offset inthe Consolidated BalanceSheetsNet AmountFinancial Instruments(1)Cash Collateral (1)Derivative AssetsAgency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS$1,058 $— $1,058 $(1,058)$— $— Derivative asset, at fair value(2)105 — 105 (105)— — Total derivative assets$1,163 $— $1,163 $(1,163)$— $— Derivative Liabilities and Repurchase AgreementsDerivative liability, at fair value(2)(3)$602 $— $602 $(105)$(497)$— Repurchase Agreements(4)617,189 — 617,189 (617,189)— — Total derivative liability$617,791 $— $617,791 $(617,294)$(497)$— (1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, 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 column of the tables above represents amounts pledged or received as collateral against derivative transactions. 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. The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 16, 2023. 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-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. 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, 2022 and September 30, 2021, the Company recorded expenses included in general and administrative expenses totaling approximately $64 thousand and approximately $201 thousand, respectively, related to reimbursable employee costs. For the nine months ended September 30, 2022 and September 30, 2021, the Company recorded expenses included in general and administrative expenses totaling approximately $511 thousand and approximately $1.5 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 expense in the Consolidated Statements of Operations. At September 30, 2022 and December 31, 2021, approximately $3.0 million and approximately $1.5 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, 2022 and December 31, 2021, approximately $402 thousand and approximately $457 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. The Company's ability to grant new equity-based awards under the Company's existing equity incentive plans expired on May 9, 2022. At the Annual Meeting of Stockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan and the Western Asset Mortgage Capital Corporation 2022 Manager Omnibus Incentive Plan (collectively, the “2022 Plans”). The 2022 Plans provide for the issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards. On June 30, 2022, the Company granted 200,000 restricted stock units, or 20,000 restricted stock units on a post reverse stock split basis under the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan to the Company’s Chief Financial Officer. These restricted stock units will vest in equal installments on the first and second anniversary of the grant date. During the nine months ended September 30, 2022 and September 30, 2021, 11,716 and 13,782 restricted stock units vested, respectively. The Company recognized stock-based compensation expense of approximately $100 thousand and approximately $165 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively. The Company recognized stock-based compensation expense of approximately $335 thousand and approximately $453 thousand for the nine months ended September 30, 2022 and September 30, 2021, respectively. In addition, the Company had unamortized compensation expense of $398 thousand and $211 thousand for equity awards at September 30, 2022 and December 31, 2021, respectively. Declaration DateRecord DatePayment DateAmount per ShareTax Characterization2022September 22, 2022October 3, 2022October 26, 2022$0.40 Not yet determinedJune 21, 2022July 1, 2022July 25, 2022$0.40 Not yet determinedMarch 23, 2022April 4, 2022April 26, 2022$0.40 Not yet determined2021December 21, 2021December 31, 2021January 26, 2022$0.60 Not yet determined(1)September 23, 2021October 4, 2021October 26, 2021$0.60 Return of capitalJune 22, 2021July 2, 2021July 26, 2021$0.60 Return of capitalMarch 23, 2021April 2, 2021April 26, 2021$0.60 Return of capital (1)The cash distributions made on January 26, 2022, with a record date of December 31, 2021, are treated as received by stockholders on January 26, 2022 and taxable in calendar year 2022. The tax characterization of these distributions will be determined in January 2023. For the three months ended September 30, 2022For the three months ended September 30, 2021For the nine months ended September 30, 2022For the nine months ended September 30, 2021Numerator:Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share$(40,010)$(4,213)$(88,250)$(36,423)Less:Dividends and undistributed earnings allocated to participating securities32 24 62 65 Net loss allocable to common stockholders — basic and diluted$(40,042)$(4,237)$(88,312)$(36,488)Denominator:Weighted average common shares outstanding for basic earnings per share6,038,010 6,079,569 6,036,876 6,077,176 Weighted average common shares outstanding for diluted earnings per share6,038,010 6,079,569 6,036,876 6,077,176 Basic loss per common share$(6.63)$(0.70)$(14.63)$(6.00)Diluted loss per common share$(6.63)$(0.70)$(14.63)$(6.00) 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, 2022. The Company files U.S. federal and state income tax returns. As of September 30, 2022, U.S. federal tax returns filed by the Company for 2020, 2019 and 2018 and state tax returns filed for 2020, 2019, 2018, 2017, and 2016 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. In addition, the REIT generated net operating losses ("NOLs") during the year ended December 31, 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 $18.6 million and $18.6 million in the REIT and $2.0 million and $2.0 million in the TRS as of September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, 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 $20.6 million and $20.6 million, respectively. As of September 30, 2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million secured by an indirect pledge of equity in the mortgage borrower and owner of a retail facility was non-performing and past its maturity date of June 29, 2021. Interest payments on this loan were received from a reserve that was exhausted in May 2021. On October 25, 2022, the senior mezzanine lender notified the Company that it had consummated a strict foreclosure under the Uniform Commercial Code of its equity interest in the mortgage borrower and owner of the property, which had the effect of foreclosing out the Company’s subordinate pledge of equity in the retail facility owner that served as collateral for the junior mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure noted above, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures is successful, the Company could experience a total loss of its investment, which would result in a $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan. 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. 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; outcome and impact of the strategic alternatives review process announced in August 2022; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing effects of the COVID-19 pandemic; and the Manager's expectations regarding the ongoing COVID-19 recovery. 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," to the financial statements contained in this Quarterly Report on Form 10-Q, 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. 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 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 Residential Whole Loans and Non-Agency RMBS, our current target investments, we may also make investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, 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. During 2020, the uncertainties created by the COVID-19 pandemic made it challenging to obtain financing arrangements on favorable terms. In the latter part of 2020 and the beginning of 2021, terms for financing arrangements began to improve significantly. As a result, we diversified our financing sources to provide an alternative to short-term repurchase agreements with daily margin requirements. We expect to continue to seek financing arrangements without daily margin requirements or with margin requirements that apply only after a significant reduction in the valuation of the assets financed, including but not limited to repurchase agreements, term financing, securitization and convertible senior unsecured notes, as the market permits. 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. 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. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our exposure to interest rate volatility and daily margin calls. The following table presents our debt-to-equity ratio on September 30, 2022 and December 31, 2021: Balance atLoan Modification/Capitalized InterestPrincipal Payments and Basis RecoveryProceeds fromSalesTransfers to REORealized Gain/(Loss)Unrealized Gain/(Loss)Premium and discount amortization, netBalance atInvestment TypeDecember 31, 2021PurchasesSeptember 30, 2022Agency RMBS and Agency RMBS IOs$1,172 $— N/A$(124)$— N/A$— $(328)$— $720 Non-Agency RMBS27,769 39,952 N/A(875)(27,729)N/A(1,170)(8,420)159 29,686 Non-Agency CMBS105,358 — N/A(5,705)(10,152)N/A(43,934)42,869 386 88,822 Other securities(1)51,648 — N/A— (4,406)N/A(478)(8,677)223 38,310 Total MBS and other securities185,947 39,952 N/A(6,704)(42,287)N/A(45,582)25,444 768 157,538 Residential whole loans1,023,502 411,917 79 (193,363)(11,735)— (33)(125,482)(5,260)1,099,625 Residential bridge loans5,428 — — (250)— — — (58)— 5,120 Commercial loans130,572 — — (20,593)— — — (19,876)— 90,103 Securitized commercial loans1,355,808 — — — — — — (203,828)19,934 1,171,914 REO43,607 — N/A— (54,681)— 12,198 — N/A1,124 Total Investments$2,744,864 $451,869 $79 $(220,910)$(108,703)$— $(33,417)$(323,800)$15,442 $2,525,424 Weighted AverageCurrent Coupon RateNumber of LoansPrincipalBalanceOriginal LTVOriginalFICO Score(1)ExpectedLife (years)ContractualMaturity(years)CouponRate2.01% – 3.00%40$22,510 66.3 %758 9.228.52.9 %3.01% – 4.00%431224,994 65.7 %758 7.328.53.7 %4.01% – 5.00%1,372467,195 64.0 %749 5.826.24.6 %5.01% – 6.00%902366,708 65.8 %742 5.127.15.4 %6.01% – 7.00%235103,067 70.3 %742 3.928.86.4 %7.01% - 8.00%155,852 75.1 %731 3.229.47.4 %Total2,995$1,190,326 65.5 %748 5.827.24.8 % (1)The original FICO score is not available for 236 loans with a principal balance of approximately $77.7 million at September 30, 2022. We have excluded these loans from the weighted average computations. Residential Whole LoansBridge LoansNo of LoansPrincipalFair ValueNo of LoansPrincipalFair ValueCurrent2,985 $1,184,619 $1,094,291 — $— $— 1-30 days3 2,448 2,324 1 849 858 31-60 days— — — — — — 61-90 days— — — — — — 90+ days7 3,259 3,010 6 4,736 4,262 Total2,995$1,190,326$1,099,6257$5,585$5,120 PrincipalWeighted AverageTypeVintageBalanceFair Value Life (Years)Original LTVConduit:2006-2009$76 $75 0.6 88.7 %2010-202014,982 10,490 6.4 62.3 %15,058 10,565 6.4 62.5 %Single Asset:2010-202095,057 78,257 1.2 65.5 %Total$110,115 $88,822 1.9 65.1 % LoanLoan TypePrincipal BalanceFair ValueOriginal LTVInterest RateMaturity DateExtension OptionCollateralGeographic LocationCRE 3Interest-Only Mezzanine loan$90,000 $8,777 58%1-Month LIBOR plus 9.25%6/29/2021None(1)Entertainment and RetailNJCRE 4Interest-Only First Mortgage22,204 22,204 63%1-Month LIBOR plus 3.02%8/6/2025(2)NoneRetailCTCRE 5Interest-Only First Mortgage24,535 24,405 62%1-Month LIBOR plus 3.75%11/6/2023(3)NoneHotelNYCRE 6Interest-Only First Mortgage13,207 13,136 62%1-Month LIBOR plus 3.75%11/6/2023(3)NoneHotelCACRE 7Interest-Only First Mortgage7,259 7,220 62%1-Month LIBOR plus 3.75%11/6/2023(3)NoneHotelIL, FLSBC 3Interest-Only First Mortgage14,362 14,361 49%1-Month LIBOR plus 4.35%1/6/2023NoneNursing FacilitiesCT$171,567$90,103 mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures is successful, the Company could experience a total loss of its investment, which would result in an $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan. Residential Whole LoansResidential Bridge LoansStateConcentrationPrincipalBalanceStateConcentrationPrincipalBalanceCalifornia66.6 %$793,123 New York47.1 %$2,631 New York9.4 %112,329 California31.4 %1,754 Texas4.8 %56,856 Florida20.1 %1,125 Florida4.1 %48,959 New Jersey1.4 %75 Georgia3.6 %42,347 Total100.0 %$5,585 Other11.5 %136,712 Total100.0 %$1,190,326 MinimumMaximumShort-Term BorrowingsAgency RMBS IOs25%25%Non-Agency RMBS35%60%Residential Whole Loans25%25%Residential Bridge Loans25%25%Commercial Loans60%60%Other Securities60%60%Long-Term BorrowingsNon-Agency CMBS and Non-Agency RMBS FacilityNon-Agency RMBS35%45%Non-Agency CMBS40%40%Other Securities35%35%Residential Whole Loan FacilityResidential Whole Loans(1)10%10%Commercial Whole Loan FacilityCommercial Loans(2)22%32% Securities PledgedRepurchase Agreement BorrowingsWeighted Average Interest Rate on Borrowings Outstanding at end of periodWeighted Average Remaining Maturity (days)Short-Term Borrowings:Agency RMBS$317 3.15 %32Non-Agency RMBS(1)54,228 6.17 %88Residential Whole Loans (2)778 5.40 %11Residential Bridge Loans (2)2,895 5.60 %11Commercial Loans (2)5,630 6.18 %11Other Securities1,966 5.75 %17Total short term borrowings65,814 6.11 %75Long Term Borrowings:Non-Agency CMBS and Non-Agency RMBS FacilityNon-Agency CMBS (1)55,155 2.28 %214Non-Agency RMBS21,943 2.28 %214Other Securities23,948 2.28 %214Subtotal101,046 2.28 %214Residential Whole Loan FacilityResidential Whole Loans (2)4,049 5.11 %35Commercial Whole Loan FacilityCommercial Loans48,032 4.55 %35Total long term borrowings153,127 3.07 %153Repurchase agreements borrowings$218,941 3.98 %130Less unamortized debt issuance costs— N/AN/ARepurchase agreement borrowings, net$218,941 3.98 %130 (dollars in thousands)Repurchase Agreement CounterpartiesAmount OutstandingPercent of Total Amount OutstandingCompany Investments Held as CollateralCounterparty Rating(1)Credit Suisse AG, Cayman Islands Branch (2)$106,309 48.6 %$165,521 ACitigroup Global Markets Inc.101,046 46.2 %152,099 A+Nomura Securities International, Inc. (3)9,303 4.2 %20,857 Unrated (3)Credit Suisse Securities (USA) LLC1,966 0.9 %6,001 AAll other counterparties (4)317 0.1 %233 Total$218,941 100.0 %$344,711 CollateralThree Months Ended September 30, 2022Nine Months Ended September 30, 2022Agency RMBS$321 $501 Non-Agency RMBS(1)56,775 58,521 Non-Agency CMBS(1)55,155 61,279 Residential Whole Loans49,838 180,961 Commercial loans72,456 66,068 Residential Bridge Loans4,955 5,345 Other securities25,944 30,195 Total$265,444 $402,870 Maximum borrowings during the period(2)$218,941 $613,518 ClassesPrincipal BalanceCouponCarrying ValueContractual MaturityIssued Mortgage-Backed NotesClass A-1$176,628 3.3%$176,628 4/25/2049Class A-29,473 3.5%9,473 4/25/2049Class A-315,007 3.8%15,007 4/25/2049Class M-125,055 4.8%25,055 4/25/2049Subtotal$226,163 $226,163 Less: Unamortized deferred financing costsN/A2,830 Total$226,163 $223,333 ClassesPrincipal BalanceCouponCarrying ValueContractual MaturityIssued Mortgage-Backed NotesClass A-1A$77,393 1.7%$77,393 3/25/2055Class A-1B9,184 2.1%9,184 3/25/2055Class A-213,518 2.9%13,518 3/25/2055Class A-317,963 3.3%17,963 3/25/2055Class M-111,739 4.3%11,739 3/25/2055Subtotal$129,797 $129,797 Less: Unamortized deferred financing costsN/A1,665 Total$129,797 $128,132 ClassesPrincipal BalanceCouponFair ValueContractual MaturityIssued Mortgage-Backed NotesClass A-1A$218,530 2.5%$199,526 12/25/2056Class A-1B82,942 3.3%69,669 12/25/2056Class A-221,168 3.6%16,617 12/25/2056Class A-328,079 3.7%21,312 12/25/2056Class M-117,928 3.7%12,814 12/25/2056Total$368,647 $319,938 ClassesPrincipal BalanceCouponFair ValueContractual MaturityIssued Mortgage-Backed NotesClass A-1$273,691 5.0%$263,315 7/25/2057Class A-223,297 5.0%21,916 7/25/2057Class A-328,388 5.0%26,398 7/25/2057Class M-117,694 5.0%15,097 7/25/2057Total$343,070 $326,726 ClassesPrincipal BalanceCoupon Fair ValueContractual MaturityClass A-1$120,391 3.3 %$109,867 9/11/2025Class A-2531,700 4.0 %482,628 9/11/2025Class B136,400 4.2 %119,584 9/11/2025Class C94,500 4.3 %79,772 9/11/2025Class D153,950 4.4 %122,083 9/11/2025Class E180,150 4.4 %132,952 9/11/2025Class F153,600 4.4 %104,961 9/11/2025Class X-1(1)N/A0.5 %8,268 9/11/2025Class X-2(1)N/A— %1,618 9/11/2025$1,370,691 $1,161,733 (dollars in thousands)September 30, 2022December 31, 2021Recourse and non-recourse financing$2,487,965 $2,599,845 Non-recourse financingArroyo 2019-2223,333 337,571 Arroyo 2020-1128,132 181,547 Arroyo 2022-1319,938 — Arroyo 2022-2326,726 — CMSC USA1,161,733 1,344,370 Total recourse financing$328,103 $328,103$736,357 Stockholders' equity$97,948 $193,109 Recourse leverage3.3x3.8x Notional Amount atSettlements, Terminations or ExpirationsNotional Amount atDerivative InstrumentDecember 31, 2021AcquisitionsSeptember 30, 2022Fixed pay interest rate swaps$22,000 $309,500 $(179,500)$152,000 Interest rate swaptions— 560,000 (560,000)— Credit default swaps6,170 — (6,170)— TBA securities - long positions— 600,000 (600,000)— TBA securities - short positions— 600,000 (600,000)— Total derivative instruments$28,170 $2,069,500 $(1,945,670)$152,000 Fair Value atAcquisitionsSettlements, Terminations or ExpirationsRealized Gains / LossesMark-to-marketFair Value atDerivative InstrumentDecember 31, 2021September 30, 2022Fixed pay interest rate swaps$(38)$— $(14,743)$11,373 $3,670 $262 Interest rate swaptions— 473 (312)(161)— — Credit default swaps(459)— 347 (281)393 — TBA securities— — (2,051)2,051 (1,383)(1,383)Total derivative instruments$(497)$473 $(16,759)$12,982 $2,680 $(1,121) During the three months ended September 30, 2022, we sold approximately $11.7 million of residential whole loans and repurchased $1.0 million aggregate principal amount outstanding of our 2022 Notes at par. Due to spread widening, we experienced a significant decline in the fair value of residential whole loan investments. This decline in fair value of $45.3 million was offset by $3.6 million of unrealized gains on derivatives due to our hedging activity. We also reduced the fair value of CRE 3, a commercial junior mezzanine loan by $18.1 million, as a senior lender consummated a foreclosure on the equity interest in the property. See Note 6 for further discussion. Overall, our net loss was $40.0 million, or $6.63 per basic and diluted weighted common share, for the three months ended September 30, 2022. Three Months Ended September 30, 2022Average AmortizedCost of AssetsTotal Interest IncomeYield on Average AssetsInvestmentsAgency RMBS$53 $2 14.97 %Non-Agency CMBS109,898 2,336 8.43 %Non-Agency RMBS36,075 472 5.19 %Residential whole loans1,248,772 13,884 4.41 %Residential bridge loans5,585 28 1.99 %Commercial loans191,929 1,540 3.18 %Securitized commercial loans1,288,238 22,099 6.81 %Other securities42,768 1,045 9.69 %Total investments$2,923,318 $41,406 5.62 %Average Carrying ValueTotal Interest ExpenseAverage Cost of Funds(1)BorrowingsRepurchase agreements$265,444 $2,187 3.27 %Convertible senior unsecured notes, net109,329 2,402 8.72 %Securitized debt2,348,073 31,118 5.26 %Total borrowings$2,722,846 $35,707 5.20 %Net interest income and net interest margin(2)$5,699 0.77 % Three Months Ended September 30, 2021Average AmortizedCost of AssetsTotal Interest IncomeYield on Average AssetsInvestmentsAgency RMBS$70 $4 22.67 %Non-Agency CMBS200,824 4,290 8.48 %Non-Agency RMBS28,528 369 5.13 %Residential whole loans831,634 8,147 3.89 %Residential bridge loans8,714 89 4.05 %Commercial loans243,534 2,847 4.64 %Securitized commercial loan1,407,129 23,622 6.66 %Other securities48,364 773 6.34 %Total investments$2,768,797 $40,141 5.75 %Average Carrying ValueTotal Interest ExpenseAverage Cost of Funds(1)BorrowingsRepurchase agreements$391,559 $3,037 3.08 %Convertible senior unsecured notes, net145,356 3,099 8.46 %Securitized debt1,995,098 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 % For the three months ended September 30, 2022, and September 30, 2021, we earned interest income on our investments of approximately $41.4 million and $40.1 million, respectively. The increase of approximately $1.3 million was mainly due to an increase in interest rates and principal payments and payoffs residential and commercial investments, including partial and full payoffs on two commercial loans. Interest expense increased from $33.0 million for the three months ended September 30, 2021 to $35.7 million for the three months ended September 30, 2022. The increase in interest expense was primarily attributable to increased borrowing costs on our repurchase facilities due to increasing market interest rates. For the three months ended September 30, 2022For the three months ended September 30, 2021Proceeds (Payments)Gross GainsGross LossesNet Gain (Loss)Proceeds (Payments)Gross GainsGross LossesNet Gain (Loss)Residential whole loans$11,736 $43 $(76)$(33)$— $— $— $— Residential bridge loans(1)— — — — — 19 (37)(18)Loans transferred to REO(1)— — — — 68 15 — 15 Disposition of REO— — — — 738 54 — 54 Convertible senior unsecured notes(2)(1,000)— (2)(2)(122,330)165 (1,742)(1,577)Total$10,736 $43 $(78)$(35)$(121,524)$253 $(1,779)$(1,526) Three months ended September 30, 2022Three months ended September 30, 2021Agency RMBS$(8)$(3)Non-Agency CMBS(628)(2,980)Non-Agency RMBS(2,506)2,241 Residential whole loans(45,327)(2,394)Residential bridge loans25 175 Commercial loans(17,729)(5,494)Securitized commercial loans(78,046)(9,616)Other securities(2,409)930 Securitized debt103,046 11,138 Total$(43,582)$(6,003) Realized Gain (Loss), netDescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-MarketContractual interest income (expense), net(1)TotalThree months ended September 30, 2022Interest rate swaps$(3,371)$3,423 $— $4,790 $298 $5,140 Interest rate swaptions$(161)$— $— $— $— $(161)Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (5)(54)16 (43)Credit default swaps(273)— — 283 — 10 TBAs1,319 — — (1,383)— (64)Total$(2,486)$3,423 $(5)$3,636 $314 $4,882 Three months ended September 30, 2021Interest rate swaps$— $485 $— $(71)$96 $510 Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (59)(90)82 (67)Credit default swaps16 — — 56 — 72 Total$16 $485 $(59)$(105)$178 $515 We incurred general and administrative expenses of approximately $2.8 million and $2.3 million for the three months ended September 30, 2022, and September 30, 2021, respectively. The increased expense was primarily driven by an increase in professional fees resulting from accounting related consulting fees incurred during the third quarter to address recent turnover. Due to the evolving COVID-19 pandemic, our results of operations for the nine months ended September 30, 2022 and September 30, 2021 may not be comparable. During the first three quarters of 2022, we continued to make progress towards strengthening our balance sheet, improving liquidity, and the transition of our portfolio to residential investments. Nine Months Ended September 30, 2022Average AmortizedCost of AssetsTotal Interest IncomeYield on Average AssetsInvestmentsAgency RMBS$59 $9 20.39 %Non-Agency CMBS142,362 7,436 6.98 %Non-Agency RMBS43,815 1,663 5.07 %Residential whole loans1,165,929 34,712 3.98 %Residential bridge loans5,688 64 1.50 %Commercial loans192,079 4,046 2.82 %Securitized commercial loans1,274,894 65,957 6.92 %Other securities45,340 2,738 8.07 %Total investments$2,870,166 $116,625 5.43 %Average Carrying ValueTotal Interest ExpenseAverage Cost of Funds(1)BorrowingsRepurchase agreements$402,870 $8,288 2.75 %Convertible senior unsecured notes, net113,670 7,499 8.82 %Securitized debt2,129,146 84,621 5.31 %Total borrowings$2,645,686 $100,408 5.07 %Net interest income and net interest margin(2)$16,217 0.76 % Nine Months Ended September 30, 2021Average AmortizedCost of AssetsTotal Interest IncomeYield on Average AssetsInvestmentsAgency RMBS$89 $12 18.03 %Non-Agency CMBS202,937 13,401 8.83 %Non-Agency RMBS29,270 1,058 4.83 %Residential whole loans883,711 25,724 3.89 %Residential bridge loans11,383 806 9.47 %Commercial loans297,593 11,263 5.06 %Securitized commercial loan1,487,050 72,586 6.53 %Other securities49,355 2,503 6.78 %Total investments$2,961,388 $127,353 5.75 %Average Carrying ValueTotal Interest ExpenseAverage Cost of Funds(1)BorrowingsRepurchase agreements$364,009 $9,755 3.58 %Convertible senior unsecured notes, net159,862 10,056 8.41 %Securitized debt2,170,148 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 % For the nine months ended September 30, 2022, and September 30, 2021, we earned interest income on our investments of approximately $116.6 million and $127.4 million, respectively. The decrease of approximately $10.7 million was mainly due to a smaller investment portfolio from principal payments and payoffs of commercial and residential investments. The decrease was partially offset by acquisitions of residential investments during the nine months ended September 30, 2022. Interest expense decreased from $104.4 million for the nine months ended September 30, 2021 to $100.4 million for the nine months ended September 30, 2022. The decrease in interest expense was primarily a result of a smaller investment portfolio, offset by increased borrowing costs on our repurchase facilities due to increasing market interest rates. For the nine months ended September 30, 2022For the nine months ended September 30, 2021Proceeds (Payments)Gross GainsGross LossesNet Gain (Loss)Proceeds (Payments)Gross GainsGross LossesNet Gain (Loss)Non-Agency CMBS$10,152 $— $(43,934)$(43,934)$— $— $(5,929)$(5,929)Non-Agency RMBS27,729 255 (1,425)(1,170)— — — — Other securities4,406 — (478)(478)— — — — Residential Whole-Loans11,736 43 (76)(33)— — — — Residential Bridge Loans(1)— — — — — 19 (153)(134)Loans transferred to REO(2)— — — — 752 15 (36)(21)Disposition of REO(3)54,681 12,198 — 12,198 738 54 — 54 Convertible senior unsecured notes(4)(11,689)— (134)(134)(128,645)405 (1,742)(1,337)Total$97,015 $12,496 $(46,047)$(33,551)$(127,155)$493 $(7,860)$(7,367) Nine months ended September 30, 2022Nine months ended September 30, 2021Agency RMBS$(59)$16 Non-Agency CMBS42,869 (16,254)Non-Agency RMBS(8,420)3,710 Residential whole loans(125,482)13,667 Residential bridge loans(58)639 Commercial loans(19,876)(48,630)Securitized commercial loans(203,828)107,423 Other securities(8,677)4,553 Securitized debt257,231 (104,395)Total$(66,300)$(39,271) Realized Gain (Loss), netDescriptionOther Settlements / ExpirationsVariation Margin SettlementReturn (Recovery) of BasisMark-to-MarketContractual interest income (expense), net(1)TotalNine months ended September 30, 2022Interest rate swaps$(3,371)$14,744 $— $3,670 $(255)$14,788 Interest rate swaptions(161)— — — — (161)Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (120)(270)160 (230)Credit default swaps(242)— — 393 — 151 TBAs2,051 — — — — 2,051 Total$(1,723)$14,744 $(120)$3,793 $(95)$16,599 Nine months ended September 30, 2021Interest rate swaps$— $520 $— $(25)$172 $667 Agency and Non-Agency Interest-Only Strips— accounted for as derivatives— — (232)(124)305 (51)Credit default swaps48 — — 52 — 100 Total$48 $520 $(232)$(97)$477 $716 Distributable Earnings (formerly referred to as Core Earnings) is a non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments and debt; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) provision for income taxes; (v) non-cash stock-based compensation expense; (vi) non-cash amortization of the convertible senior unsecured notes discount; (vii) one-time charges such as acquisition costs and impairment on loans; and (viii) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of our independent directors. (dollars in thousands)Three months ended September 30, 2022Three months ended September 30, 2021Nine months ended September 30, 2022Nine months ended September 30, 2021Net loss attributable to common stockholders and participating securities$(40,010)$(4,213)$(88,250)$(36,423)Income tax provision (benefit)266 (218)276 (19)Net loss before income taxes(39,744)(4,431)(87,974)(36,442)Adjustments:Investments:Net unrealized loss on investments and securitized debt43,582 6,003 66,300 39,271 Net realized (gain) loss on investments33 (51)36,902 6,030 Realized loss on foreign currency transactions1 — 1 — One-time transaction costs2,632 681 5,708 781 Derivative Instruments:Net realized gain on derivatives(929)(485)(12,982)(520)Net unrealized (gain) loss on derivatives(3,636)105 (3,793)97 Other:Realized loss on extinguishment of convertible senior unsecured notes2 1,577 134 1,337 Amortization of discount on convertible senior unsecured notes209 228 648 712 Other non-cash adjustments— — — 977 Non-cash stock-based compensation expense100 165 335 453 Total adjustments41,994 8,223 93,253 49,138 Distributable Earnings$2,250 $3,792 $5,279 $12,696 (dollars in thousands)Three months ended September 30, 2022Three months ended September 30, 2021Nine months ended September 30, 2022Nine months ended September 30, 2021Net interest income$5,699 $7,163 $16,217 $23,001 Interest income from IOs and IIOs accounted for as derivatives11 23 40 73 Net interest income (expense) from interest rate swaps298 96 (255)172 Adjusted net interest income6,008 7,282 16,002 23,246 Total expenses(6,645)(5,128)(17,069)(14,237)Other non-cash adjustments— — — 977 Non-cash stock-based compensation100 165 335 453 One-time transaction costs2,632 681 5,708 781 Amortization of discount on convertible unsecured senior notes209 228 648 712 Interest income on cash balances and other income (loss), net(52)293 (212)497 Income attributable to non-controlling interest(2)271 (133)267 Distributable Earnings$2,250 $3,792 $5,279 $12,696 $ AmountPer ShareGAAP Book Value at September 30, 2022$97,948$16.22Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities ownedDeconsolidation of VIEs assets(2,281,396)(377.84)Deconsolidation of VIEs liabilities2,168,088 359.07 Interest in securities of VIEs owned, at fair value131,618 21.80 Economic Book Value at September 30, 2022$116,258$19.25 Three Months Ended September 30, 2022Average AmortizedCost of Assets(1)Total Interest Income(2)Yield on Average AssetsInvestmentsAgency RMBS$902 $13 5.72 %Non-Agency CMBS109,898 2,336 8.43 %Non-Agency RMBS36,075 472 5.19 %Residential whole loans1,248,772 13,884 4.41 %Residential bridge loans5,585 28 1.99 %Commercial loans191,929 1,540 3.18 %Securitized commercial loans1,288,238 22,099 6.81 %Other securities42,768 1,045 9.69 %Total investments2,924,167 41,417 5.62 %Adjustments:Securitized commercial loans from consolidated VIEs(1,288,238)(22,099)6.81 %Investments in consolidated VIEs eliminated in consolidation14,079 220 6.20 %Adjusted total investments$1,650,008 $19,538 4.70 %Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of FundsBorrowingsRepurchase agreements$265,444 $2,187 3.27 %Convertible senior unsecured notes, net109,329 2,402 8.72 %Securitized debt2,348,073 31,118 5.26 %Interest rate swapsn/a(298)(0.04)%Total borrowings2,722,846 35,409 5.16 %Adjustments:Securitized debt from consolidated VIEs(3)(1,270,756)(21,132)6.60 %Adjusted total borrowings$1,452,090 $14,277 3.90 %Adjusted net investment income and net interest margin$5,2611.26% Three Months Ended September 30, 2021Average AmortizedCost of Assets(1)Total Interest Income(2)Yield on Average AssetsInvestmentsAgency RMBS$1,160 $27 9.23 %Non-Agency CMBS200,824 4,290 8.48 %Non-Agency RMBS28,528 369 5.13 %Residential whole loans831,634 8,147 3.89 %Residential bridge loans8,714 89 4.05 %Commercial loans243,534 2,847 4.64 %Securitized commercial loan1,407,129 23,622 6.66 %Other securities48,364 773 6.34 %Total investments2,769,887 40,164 5.75 %Adjustments:Securitized commercial loans from consolidated VIEs(1,407,129)(23,622)6.66 %Investments in consolidated VIEs eliminated in consolidation51,278 1,038 8.03 %Adjusted total investments$1,414,036 $17,580 4.93 %Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of FundsBorrowingsRepurchase agreements$391,559 $3,037 3.08 %Convertible senior unsecured notes, net145,356 3,099 8.46 %Securitized debt1,995,098 26,842 5.34 %Interest rate swapsn/a(96)(0.02)%Total borrowings2,532,013 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 investment income and net interest margin$6,4431.81% Nine Months Ended September 30, 2022Average AmortizedCost of Assets(1)Total Interest Income(2)Yield on Average AssetsInvestmentsAgency RMBS$1,023 $49 6.40 %Non-Agency CMBS142,362 7,436 6.98 %Non-Agency RMBS43,815 1,663 5.07 %Residential whole loans1,165,929 34,712 3.98 %Residential bridge loans5,688 64 1.50 %Commercial loans192,079 4,046 2.82 %Securitized commercial loans1,274,894 65,957 6.92 %Other securities45,340 2,738 8.07 %Total investments2,871,130 116,665 5.43 %Adjustments:Securitized commercial loans from consolidated VIEs(1,274,894)(65,957)6.92 %Investments in consolidated VIEs eliminated in consolidation13,966 659 6.31 %Adjusted total investments$1,610,202 $51,367 4.27 %Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of FundsBorrowingsRepurchase agreements$402,870 $8,288 2.75 %Convertible senior unsecured notes, net113,670 7,499 8.82 %Securitized debt2,129,146 84,621 5.31 %Interest rate swapsn/a255 0.01 %Total borrowings2,645,686 100,663 5.09 %Adjustments:Securitized debt from consolidated VIEs(3)(1,264,942)(62,940)6.65 %Adjusted total borrowings$1,380,744 $37,723 3.65 %Adjusted net investment income and net interest margin$13,6441.13% Nine Months Ended September 30, 2021Average AmortizedCost of Assets(1)Total Interest Income(2)Yield on Average AssetsInvestmentsAgency RMBS$1,353 $85 8.40 %Non-Agency CMBS202,937 13,401 8.83 %Non-Agency RMBS29,270 1,058 4.83 %Residential whole loans883,711 25,724 3.89 %Residential bridge loans11,383 806 9.47 %Commercial loans297,593 11,263 5.06 %Securitized commercial loans1,487,050 72,586 6.53 %Other securities49,355 2,503 6.78 %Total investments2,962,652 127,426 5.75 %Adjustments:Securitized commercial loans from consolidated VIEs(1,487,050)(72,586)6.53 %Investments in consolidated VIEs eliminated in consolidation56,396 3,432 8.14 %Adjusted total investments$1,531,998 $58,272 5.09 %Average Carrying ValueTotal Interest ExpenseAverage Effective Cost of FundsBorrowingsRepurchase agreements$364,009 $9,755 3.58 %Convertible senior unsecured notes, net159,862 10,056 8.41 %Securitized debt2,170,148 84,541 5.21 %Interest rate swapsn/a(172)(0.01)%Total borrowings2,694,019 104,180 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 investment income and net interest margin$21,1491.85% The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and nine months ended September 30, 2022 and September 30, 2021: (dollars in thousands)Three months ended September 30, 2022Three months ended September 30, 2021Nine months ended September 30, 2022Nine months ended September 30, 2021Coupon interest income:Agency RMBS$— $11 $13 $38 Non-Agency CMBS1,949 2,621 7,050 7,171 Non-Agency RMBS446 609 1,804 1,762 Residential whole loans14,829 10,268 39,972 32,993 Residential bridge loans28 108 64 827 Commercial loans1,540 2,820 4,046 11,118 Securitized commercial loans15,510 17,533 46,023 54,137 Other securities860 1,043 2,515 3,717 Subtotal coupon interest35,162 35,013 101,487 111,763 Premium accretion, discount amortization and amortization of basis, net:Agency RMBS2 (7)(4)(26)Non-Agency CMBS387 1,669 386 6,230 Non-Agency RMBS26 (240)(141)(704)Residential whole loans(945)(2,121)(5,260)(7,269)Residential bridge loans— (19)— (21)Commercial loans— 27 — 145 Securitized commercial loans6,589 6,089 19,934 18,449 Other securities185 (270)223 (1,214)Subtotal accretion and amortization6,244 5,128 15,138 15,590 Interest income$41,406 $40,141 $116,625 $127,353 Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):Coupon interest income$16 $82 $160 $305 Amortization of basis(5)(59)(120)(232)Subtotal11 23 40 73 Total adjusted interest income$41,417 $40,164 $116,665 $127,426 Three months ended September 30, 2022Three months ended September 30, 2021Nine months ended September 30, 2022Nine months ended September 30, 2021(dollars in thousands)ReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing CostsReconciliationCost of Funds/Effective Borrowing CostsInterest expense$35,707 5.20 %$32,978 5.17 %$100,408 5.07 %$104,352 5.18 %Adjustments:Interest expense on Securitized debt from consolidated VIEs(21,132)(6.60)%(21,745)(6.34)%(62,940)(6.65)%(67,057)(6.25)%Net interest paid - interest rate swaps(298)(0.04)%(96)(0.02)%255 0.01 %(172)(0.01)%Effective Cost of Funds$14,277 3.90 %$11,137 3.77 %$37,723 3.65 %$37,123 3.94 %Weighted average borrowings$1,452,090 $1,170,965 $1,380,744 $1,259,460 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. Our principal sources of funds generally consist of borrowings under repurchase agreements, Residential Whole Loan securitizations, payments of principal and interest we receive on our investment portfolio, cash generated from investment sales, and to the extent such transactions are entered into, proceeds from capital market and unsecured convertible note transactions. September 30, 2022Three months ended September 30, 2022Nine months ended September 30, 2022CollateralBorrowingsOutstandingValue ofCollateralPledgedWeightedAverageInterest Rateend of periodWeightedAverage Costof FundsWeightedAverageEffective Cost ofFunds (Non-GAAP)(1)WeightedAverage Costof FundsWeightedAverageEffective Cost ofFunds (Non-GAAP)(1)WeightedAverageHaircutend of periodAgency RMBS, at fair value$317 $233 3.15 %2.47 %2.47 %1.60 %1.60 %25.00 %Non-Agency CMBS, at fair value(2)55,155 90,107 2.28 %2.31 %2.31 %2.07 %2.07 %40.00 %Non-Agency RMBS, at fair value76,171 122,401 5.05 %3.89 %3.89 %3.04 %3.04 %41.26 %Residential whole loans, at fair value(3)4,827 7,214 5.16 %2.40 %2.40 %2.73 %2.73 %48.34 %Residential bridge loans, at fair value(3)2,895 5,120 5.60 %4.72 %4.72 %3.53 %3.53 %25.00 %Commercial loans, at fair value(3)53,662 81,326 4.72 %4.27 %4.27 %3.34 %3.34 %31.57 %Other securities, at fair value25,914 38,310 2.54 %2.57 %2.57 %2.27 %2.27 %36.90 %Interest rate swapsn/an/an/an/a(0.45)%n/a0.08 %n/aTotal$218,941 $344,711 3.98 %3.27 %2.82 %2.75 %2.84 %38.70 % (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 of approximately $298 thousand received and $255 thousand paid for the three and nine months ended September 30, 2022. 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.” September 30, 2021Three months ended September 30, 2021Nine months ended September 30, 2021CollateralBorrowingsOutstandingFair Value ofCollateralPledged(3)WeightedAverageInterest Rateend of periodWeightedAverage Costof FundsWeightedAverageEffective Cost ofFunds (Non-GAAP)WeightedAverage Costof FundsWeighted Average Effective Cost of Funds(Non-GAAP)(1)WeightedAverageHaircutend of periodAgency 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(1)78,666 136,968 2.07 %2.12 %2.12 %3.33 %3.33 %38.03 %Non-Agency RMBS, at fair value15,632 28,003 2.12 %2.18 %2.18 %3.55 %3.55 %35.00 %Residential whole loans, at fair value(2)277,780 328,811 2.95 %4.10 %4.10 %5.70 %5.70 %18.71 %Residential bridge loans(2)5,817 5,960 2.60 %2.66 %2.66 %2.71 %2.71 %20.00 %Commercial loans, at fair value(2)74,272 101,271 2.40 %2.93 %2.93 %2.63 %2.63 %31.14 %Membership interest(3)— — — %3.08 %3.08 %3.02 %3.02 %— %Other securities, at fair value30,093 52,093 2.24 %2.30 %2.30 %3.20 %3.20 %37.15 %Interest rate swapsn/an/an/an/a(0.10)%n/a(0.06)%n/aTotal$483,308 $654,448 2.64 %3.08 %2.98 %3.58 %3.52 %25.47 % Less than 1year1 to 3years3 to 5yearsMore than5 yearsTotalBorrowings under repurchase agreements$218,941 $— $— $— $218,941 Contractual interest on repurchase agreements3,570 — — — 3,570 Convertible senior unsecured notes26,049 86,250 — — 112,299 Contractual interest on convertible senior unsecured notes6,701 5,822 — — 12,523 Securitized debt(2)— 1,370,691 — 1,067,676 2,438,367 Contractual interest on securitized debt94,702 189,404 77,146 1,071,579 1,432,831 Total$349,963 $1,652,167 $77,146 $2,139,255 $4,218,531 We are subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency CMBS and Agency RMBS, we are exposed to the risk of potential credit losses from general credit spread widening related to Non-Agency RMBS, Non-Agency CMBS, residential whole loans, residential bridge loans, commercial loans, and other portfolio investments in addition to unexpected increase in borrower defaults on these investments. Investment decisions are made following a bottom-up credit analysis and specific relevant risk assumptions. 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 asset portfolio, the investment will undergo a more thorough analysis. 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. 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. 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 at times 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. 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. Exhibit No.Description3.1*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*Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated July 8, 2022, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on July 11, 2022.3.4*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, 20124.1*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, 2017.4.5*Second Supplemental Indenture, dated as of September 14, 2021, 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, 2017.4.6*Form of 6.75% Convertible Senior Notes due 2024 (attached as Exhibit A to the Second Supplemental Indenture filed as Exhibit 4.5 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.31.1Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.31.2Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.32.1Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.101The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021; (iii) the Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2022 and 2021; (iv) the Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2022 and 2021; and (v) the Notes to Consolidated Financial Statements.104Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document). 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 By:/s/ BONNIE M. WONGTRAKOOLBonnie M. WongtrakoolChief Executive Officer and Director (Principal Executive Officer)November 9, 2022By:/s/ ROBERT W. LEHMANRobert W. LehmanChief Financial OfficerNovember 9, 2022 More