WESTERN ASSET MORTGAGE CAPITAL CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q) | MarketScreener

FORWARD-LOOKING INFORMATION


The Company makes forward-looking statements herein and will make
forward-looking statements in future filings with the Securities and Exchange
Commission (the "SEC"), press releases or other written or oral communications
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). For these statements, the Company claims the
protections of the safe harbor for forward-looking statements contained in such
sections. Forward-looking statements are subject to substantial risks and
uncertainties, many of which are difficult to predict and are generally beyond
the Company's control.

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.

The forward-looking statements are based on the Company's beliefs, assumptions
and expectations of its future performance, taking into account all information
currently available to it. Forward-looking statements are not predictions of
future events. These beliefs, assumptions and expectations can change as a
result of many possible events or factors, not all of which are known to the
Company. Some of these factors, are described in "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 2021, filed with the SEC on March 8, 2022. These and other
risks, uncertainties and factors, including those described in the annual,
quarterly and current reports that the Company files with the SEC, could cause
its actual results to differ materially from those included in any
forward-looking statements the Company makes. All forward-looking statements
speak only as of the date they are made. New risks and uncertainties arise over
time and it is not possible to predict those events or how they may affect the
Company. Except as required by law, the Company is not obligated to, and does
not intend to, update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.

Overview

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

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

Our Investment Strategy


Our Manager's investment philosophy, which developed from a singular focus in
fixed-income asset management over a variety of credit cycles and conditions, is
to provide clients with a long-term value-oriented portfolio. We benefit from
the breadth and depth of our Manager's overall investment philosophy, which
focuses on a macroeconomic analysis as well as an in-depth analysis of
individual assets and their relative value. In making investment decisions on
our behalf, our Manager seeks to identify assets across the broad mortgage
universe with attractive risk adjusted returns, which incorporates its view on
the outlook for the mortgage markets, including relative valuation, supply and
demand trends, the level of interest rates, the shape of the yield curve,
prepayment rates, financing and liquidity, residential real estate prices,
delinquencies, default rates, recovery of various segments of the economy and
vintage of collateral, subject to maintaining our REIT qualification and our
exemption from registration under the 1940 Act.

In December 2021, we announced that our 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. We
believe this focus will allow us to address attractive market opportunities
while maintaining alignment with our Manager's core competencies. We are
continuing to transition out of the commercial investments in our portfolio,
though we may from time to time make commercial investments on an opportunistic
basis.

Our Target Assets

 Residential Whole Loans - Residential Whole Loans are mortgages secured by
single family residences held directly by us or through consolidated trusts with
us holding the beneficial interest in the trusts. Our Residential Whole Loans
are mainly adjustable rate mortgages that do not qualify for the Consumer
Finance Protection Bureau's (or CFPB) safe harbor provision for "qualified
mortgages" ("Non-QM mortgages"). Our Manager's review, relating to Non-QM
mortgages, includes an analysis of the loan originator's procedures and
documentation for compliance with Ability to Repay requirements. As discussed in
Note 7 "Financing," 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
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delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages,
adjustable-rate mortgages or hybrid adjustable-rate mortgages.


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.

Our Investment Portfolio

Our 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. We are continuing to transition
out of our commercial loan investments.

Our investment portfolio composition at September 30, 2022:

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                     [[Image Removed: wmc-20220930_g2.jpg]]




Our Financing Strategy

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:

(dollars in thousands)          September 30, 2022              December 31, 2021
Total debt(1)              $                    328,103    $                   736,357
Total equity               $                     97,948    $                   193,109
Debt-to-equity ratio                                3.3                            3.8



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

Our Hedging and Risk Management Strategy


Our overall portfolio strategy is designed to generate attractive returns to our
investors through various economic cycles. In connection with our risk
management activities, we may enter into a variety of derivative and
non-derivative instruments. When purchased, our primary objective for acquiring
these derivatives and non-derivative instruments is to
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mitigate our exposure to future events that are outside our control. Our
derivative instruments are designed to mitigate the effects of market risk and
cash flow volatility associated with interest rate risk, including prepayment
risk. As part of our hedging strategy, we may enter into interest rate swaps,
including forward starting swaps, interest rate swaptions, U.S. Treasury
options, future contracts, TBAs, credit default swaps, forwards and other
similar instruments. There can be no assurance that appropriate hedging
strategies will be available or that if implemented they will be successful.

Critical Accounting Policies


The consolidated financial statements include our accounts, those of our
wholly-owned subsidiaries and certain VIEs in which we are the primary
beneficiary. All intercompany amounts have been eliminated in consolidation. In
accordance with GAAP, our consolidated financial statements require the use of
estimates and assumptions that involve the exercise of judgment and use of
assumptions as to future uncertainties. Our most critical accounting policies
will involve decisions and assessments that could affect our reported assets and
liabilities, as well as our reported revenues and expenses. We believe that all
of the decisions and assessments upon which our consolidated financial
statements have been based were reasonable at the time made and based upon
information available to us at that time. There have been no significant changes
to our critical accounting policies that are disclosed in our most recent Annual
Report on Form 10-K for the year ended December 31, 2021.

2022 Activity

Investment Activity


We continually evaluate potential investments and our investment selection is
based on supply and demand of our target assets, costs of financing, and the
expected future interest rate volatility costs of hedging. During the nine
months ended September 30, 2022, we acquired $411.9 million of residential whole
loans and $40.0 million of Non-Agency RMBS. We also, along with the other
investors, sold a Commercial REO for total proceeds of $54.7 million.

The following table presents our investing activity for the nine months ended
September 30, 2022 (dollars in thousands):

                                            Balance at                                                                                                                                                                                                      Balance at
                                           December 31,                 

Loan Modification/Capitalized Principal Payments Proceeds from

                          Realized        Unrealized    Premium and discount
Investment Type                                2021         Purchases              Interest                and Basis Recovery           Sales         

Transfers to REO Gain/(Loss) Gain/(Loss) amortization, net

    September 30, 2022
Agency RMBS and Agency RMBS IOs           $      1,172    $        -                                N/A $                 (124)   $             -                     N/A $           -    $        (328)   $                -                            $        720
Non-Agency RMBS                                 27,769        39,952                                N/A                   (875)           (27,729)                    N/A        (1,170)          (8,420)                  159                                  29,686

Non-Agency CMBS                                105,358             -                                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 securities                 185,947        39,952                                N/A                 (6,704)           (42,287)                    N/A       (45,582)          25,444                   768                                 157,538
Residential whole loans                      1,023,502       411,917                              79                  (193,363)           (11,735)                   -              (33)        (125,482)               (5,260)                              1,099,625
Residential bridge loans                         5,428             -                               -                      (250)                 -                    -                -              (58)                    -                                   5,120
Commercial loans                               130,572             -                               -                   (20,593)                 -                    -                -          (19,876)                    -                                  90,103
Securitized commercial loans                 1,355,808             -                               -                         -                  -                    -                -         (203,828)               19,934                               1,171,914
REO                                             43,607             -                                N/A                      -            (54,681)                   -           12,198                -                      N/A                                1,124
Total Investments                         $  2,744,864    $  451,869    $                         79    $             (220,910)   $      (108,703)   $               -    $     (33,417)   $    (323,800)   $           15,442                            $  2,525,424



(1) Other securities include $32.3 million of GSE CRTs and $6.0 million of ABS
at September 30, 2022.


Portfolio Characteristics

Residential whole loans

The residential whole loans have low LTV's and are comprised of 2,990 Non-QM
adjustable rate mortgages and five investor fixed rate mortgages. The following
table presents certain information about our residential whole loans investment
portfolio at September 30, 2022 (dollars in thousands):
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                                                                                                  Weighted Average
                                                                                                                            Contractual
                                                Principal                               Original            Expected          Maturity        Coupon
Current Coupon Rate       Number of Loans        Balance         Original LTV         FICO Score(1)       Life (years)        (years)          Rate
    2.01% - 3.00%               40            $    22,510                66.3  %           758                      9.2              28.5      2.9  %
    3.01% - 4.00%               431               224,994                65.7  %           758                      7.3              28.5      3.7  %
    4.01% - 5.00%              1,372              467,195                64.0  %           749                      5.8              26.2      4.6  %
    5.01% - 6.00%               902               366,708                65.8  %           742                      5.1              27.1      5.4  %
    6.01% - 7.00%               235               103,067                70.3  %           742                      3.9              28.8      6.4  %
    7.01% - 8.00%               15                  5,852                75.1  %           731                      3.2              29.4      7.4  %

Total                          2,995          $ 1,190,326                65.5  %           748                      5.8              27.2      4.8  %



(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 bridge loans


  We are no longer allocating capital to residential bridge loans. The following
table presents certain information about the remaining eight residential bridge
loans left in the portfolio at September 30, 2022 (dollars in thousands):

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

    7.01% - 9.00%                3            $    2,946                70.4  %               0.0      8.8  %
   9.01% - 11.00%                2                 2,144                78.1  %               0.0     10.4  %
   11.01% - 13.00%               2                   495                69.7  %               0.0     11.4  %

Total                            7            $    5,585                73.3  %               0.0      9.7  %




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

Non-performing residential loans

The following table presents the aging of the residential whole loans and bridge
loans as of September 30, 2022 (dollars in thousands):

                                           Residential Whole Loans                                             Bridge Loans
                            No of Loans          Principal            Fair Value           No of Loans           Principal           Fair Value
Current                        2,985           $ 1,184,619          $ 1,094,291                  -             $        -          $         -
1-30 days                          3                 2,448                2,324                  1                    849                  858
31-60 days                         -                     -                    -                  -                      -                    -
61-90 days                         -                     -                    -                  -                      -                    -
90+ days                           7                 3,259                3,010                  6                  4,736                4,262
Total                          2,995           $ 1,190,326          $ 1,099,625                  7             $    5,585          $     5,120



Residential whole loans in non-accrual status


As of September 30, 2022, there were seven Non-QM loans carried at fair value in
non-accrual status with an unpaid principal balance of approximately $3.3
million and a fair value of $3.0 million. These nonperforming loans represent
approximately 0.3% of the total outstanding principal balance. No allowance or
provision for credit losses was recorded as of and for the three and nine months
ended September 30, 2022, since the valuation adjustment, if any, would be
reflected in the
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fair value of these loans. We stopped accruing interest income for these loans
when they became contractually 90 days delinquent.


  As of September 30, 2022, there were six residential bridge loans carried at
fair value in non-accrual status with an unpaid principal balance of
approximately $4.7 million and a fair value of $4.3 million. No allowance and
provision for credit losses was recorded for loans carried at fair value as of
and for the three and nine months ended September 30, 2022, since valuation
adjustments, if any, would be reflected in the fair value of these loans. We
stopped accruing interest income for these loans when they became contractually
90 days delinquent.

  As of September 30, 2022, we had four real estate owned ("REO") properties
with an aggregate carrying value of $1.1 million related to foreclosed bridge
loans. The REO properties are held for sale and accordingly carried at the lower
of cost or fair value less cost to sell. The REO properties are classified in
"Other assets" in the Consolidated Balance Sheet.

Non-Agency RMBS


The following table presents the fair value and weighted average purchase price
for each of our Non-Agency RMBS categories, including IOs accounted for as
derivatives, together with certain of their respective underlying loan
collateral attributes and current performance metrics as of September 30, 2022
(fair value dollars in thousands):

                                                                         Weighted Average
                                      Purchase                                               Original        60+ Day
Category       Fair Value              Price             Life (Years)      Original LTV        FICO         Delinquent       CPR
Prime         $     12,865      $      79.89                12.1                 67.8  %       748               5.0  %     18.0  %
Alt-A               16,821             63.55                14.3                 74.5  %       675              11.8  %     12.6  %

Total         $     29,686      $      70.63                13.3                 71.6  %       707               8.8  %     15.0  %



Agency RMBS Portfolio

The following table summarizes our Agency portfolio by investment category as of
September 30, 2022 (dollars in thousands):

                                                                                                                           Net Weighted
                                              Principal Balance           Amortized Cost          Fair Value              Average Coupon

Agency RMBS IOs and IIOs (1)                                  N/A       $            56          $       52                               -  %
Agency RMBS IOs and IIOs accounted for as
derivatives (1)                                               N/A                      N/A              668                             0.7  %

Total                                       $                -          $            56          $      720                             0.6  %




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

Non-Agency CMBS

The following table presents certain characteristics of our Non-Agency CMBS
portfolio as of September 30, 2022 (dollars in thousands):

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                                   Principal                                Weighted Average
Type                 Vintage        Balance       Fair Value         Life (Years)        Original LTV
Conduit:
                    2006-2009     $      76      $         75                  0.6             88.7  %
                    2010-2020        14,982            10,490                  6.4             62.3  %
                                     15,058            10,565                  6.4             62.5  %
Single Asset:
                    2010-2020        95,057            78,257                  1.2             65.5  %
Total                             $ 110,115      $     88,822                  1.9             65.1  %


Commercial real estate investments


With the new focus on residential real estate related investments, we are
continuing to transition out of our commercial loan investments. The following
table presents our commercial loan investments as of September 30, 2022 (dollars
in thousands):

                                         Principal
     Loan             Loan Type           Balance      Fair Value     Original LTV          Interest Rate           Maturity Date        Extension Option             Collateral            Geographic Location
CRE 3          Interest-Only Mezzanine $   90,000    $     8,777           58%         1-Month LIBOR plus 9.25%       6/29/2021               None(1)          Entertainment and Retail              NJ
               loan
CRE 4          Interest-Only First         22,204         22,204           63%         1-Month LIBOR plus 3.02%      8/6/2025(2)               None                     Retail                       CT
               Mortgage
CRE 5          Interest-Only First         24,535         24,405           62%         1-Month LIBOR plus 3.75%      11/6/2023(3)              None                      Hotel                       NY
               Mortgage
CRE 6          Interest-Only First         13,207         13,136           62%         1-Month LIBOR plus 3.75%      11/6/2023(3)              None                      Hotel                       CA
               Mortgage
CRE 7          Interest-Only First          7,259          7,220           62%         1-Month LIBOR plus 3.75%      11/6/2023(3)              None                      Hotel                     IL, FL
               Mortgage

SBC 3          Interest-Only First         14,362         14,361           49%         1-Month LIBOR plus 4.35%        1/6/2023                None               Nursing Facilities                 CT
               Mortgage
                                       $  171,567    $    90,103




(1) CRE 3 is in default and not eligible for extension.
(2) The CRE 4 loan was granted a 3 year extension through August 6, 2025, with a
principal pay down of $16.2 million.
(3) CRE 5, 6, and 7 were each granted one-year extensions through November 6,
2023.

Non-performing commercial loans

All but the one loan discussed below remain current.

CRE 3 Loan


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
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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.

The following table presents the aging of the Commercial Loans as of
September 30, 2022 (dollars in thousands):

                               Commercial Loans
                 No of Loans       Principal      Fair Value
Current                5          $  81,567      $    81,326
1-30 days              -                  -                -
31-60 days             -                  -                -
61-90 days             -                  -                -
90+ days               1             90,000            8,777
Total                  6          $ 171,567      $    90,103


Commercial loan investment payoffs

On September 16, 2022, CRE 8, which had an outstanding principal balance of
$4.4 million collateralized by assisted living facilities, was paid off in full.

Commercial Real Estate Owned


In February 2022, we and the other investors sold the unencumbered hotel
property for $55.9 million which was foreclosed on in the third quarter of 2021.
We and the other investors fully recovered our aggregate initial investment of
$42.0 million. We recognized a gain on sale of approximately $12.2 million.

Geographic Concentration


The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in
various states across the United States and other countries. The following table
presents the five largest concentrations by location for the mortgages
collateralizing our Non-Agency RMBS and Non-Agency CMBS as of September 30,
2022, based on fair value (dollars in thousands):

                     Non-Agency RMBS                                    Non-Agency CMBS
              Concentration      Fair Value                      Concentration      Fair Value
California           29.0  %    $     8,614      California             41.9  %    $    37,176
Florida              12.7  %          3,759      Nevada                 22.1  %         19,651
New York              6.4  %          1,910      Bahamas                16.4  %         14,527
Texas                 4.5  %          1,327      Texas                   4.0  %          3,511
New Jersey            4.2  %          1,244      Pennsylvania            2.2  %          1,913



The following table presents the various states across the United States in
which the collateral securing our residential whole loans and residential bridge
loans at September 30, 2022, based on principal balance, is located (dollars in
thousands):
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                                    Residential Whole Loans                                                           Residential Bridge Loans
                                   State                  Principal                                                  State                  Principal
                               Concentration               Balance                                               Concentration               Balance
California                                66.6  %       $   793,123                New York                                 47.1  %       $    2,631
New York                                   9.4  %           112,329                California                               31.4  %            1,754
Texas                                      4.8  %            56,856                Florida                                  20.1  %            1,125
Florida                                    4.1  %            48,959                New Jersey                                1.4  %               75
Georgia                                    3.6  %            42,347                Total                                   100.0  %       $    5,585
Other                                     11.5  %           136,712
Total                                    100.0  %       $ 1,190,326



Financing Activity

We will look to continue to expand and diversify our financing sources,
especially those sources that provide an alternative to short-term repurchase
agreements with daily margin requirements.

Repurchase Agreements


Our repurchase agreements bear interest at a contractually agreed-upon rate and
have terms ranging from one month to 12 months. Our counterparties generally
require collateral in excess of the loan amount, or haircuts. As of
September 30, 2022, the contractual haircuts required under repurchase
agreements on our investments were as follows:

                                                  Minimum        Maximum
Short-Term Borrowings
Agency RMBS IOs                                     25%            25%
Non-Agency RMBS                                     35%            60%
Residential Whole Loans                             25%            25%
Residential Bridge Loans                            25%            25%
Commercial Loans                                    60%            60%
Other Securities                                    60%            60%

Long-Term Borrowings
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency RMBS                                     35%            45%
Non-Agency CMBS                                     40%            40%
Other Securities                                    35%            35%

Residential Whole Loan Facility
Residential Whole Loans(1)                          10%            10%

Commercial Whole Loan Facility
Commercial Loans(2)                                 22%            32%



(1) The haircut is based on 10% of the outstanding principal amount of the
Residential Whole Loans.
(2) Each Commercial Loan is financed separately under this facility and the
haircuts are dependent on the type of collateral.

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Convertible Senior Unsecured Notes


During the quarter ended March 31, 2022, we repurchased $3.4 million aggregate
principal amount of the 2022 Notes at an approximate 0.8% premium to par value,
plus accrued and unpaid interest.

During the quarter ended June 30, 2022, we repurchased $7.2 million aggregate
principal amount of the 2022 Notes at an approximate 0.6% premium to par value,
plus accrued and unpaid interest.

During the quarter ended September 30, 2022, we repurchased $1.0 million
aggregate principal amount of the 2022 Notes at par value, plus accrued and
unpaid interest.

Securitized Debt


In February 2022, we completed a residential mortgage-backed securitization. The
Arroyo Trust 2022-1 issued $398.9 million of mortgage-backed notes and we
retained the subordinate 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 the consolidation. As of 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.

In July 2022, we completed a residential mortgage-backed securitization. The
Arroyo Trust 2022-2 issued $351.9 million of mortgage-backed notes and we
retained the subordinate non-offered securities in the securitization, which
included 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 the consolidation.
As of 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.

Repurchase Agreements

At September 30, 2022, we had outstanding borrowings under five of our
repurchase agreements. The following table summarizes certain characteristics of
our repurchase agreements at September 30, 2022 (dollars in thousands):

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Weighted Average Interest Rate on

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

Agency RMBS                                      $             317                                    3.15  %                                 32

Non-Agency RMBS(1)                                          54,228                                    6.17  %                                 88
Residential Whole Loans (2)                                    778                                    5.40  %                                 11
Residential Bridge Loans (2)                                 2,895                                    5.60  %                                 11
Commercial Loans (2)                                         5,630                                    6.18  %                                 11

Other Securities                                             1,966                                    5.75  %                                 17
Total short term borrowings                                 65,814                                    6.11  %                                 75
Long Term Borrowings:
Non-Agency CMBS and Non-Agency RMBS
Facility
Non-Agency CMBS (1)                                         55,155                                    2.28  %                                214
Non-Agency RMBS                                             21,943                                    2.28  %                                214
Other Securities                                            23,948                                    2.28  %                                214
Subtotal                                                   101,046                                    2.28  %                                214
Residential Whole Loan Facility
Residential Whole Loans (2)                                  4,049                                    5.11  %                                 35
Commercial Whole Loan Facility
Commercial Loans                                            48,032                                    4.55  %                                 35
Total long term borrowings                                 153,127                                    3.07  %                                153
Repurchase agreements borrowings                 $         218,941                                    3.98  %                                130
Less unamortized debt issuance costs                             -                                        N/A                                N/A
Repurchase agreement borrowings, net             $         218,941                                    3.98  %                                130




(1)Includes repurchase agreement borrowings on securities eliminated upon VIE
consolidation.
(2)Repurchase agreement borrowings on loans owned are through trust
certificates. The trust certificates are eliminated in consolidation.

At September 30, 2022, we had outstanding repurchase agreement borrowings with
the following counterparties:


(dollars in thousands)                                                        Amount              Percent of Total Amount           Company Investments
Repurchase Agreement Counterparties                                         Outstanding                 Outstanding                  Held as Collateral            Counterparty Rating(1)
Credit Suisse AG, Cayman Islands Branch (2)                               $    106,309                              48.6  %       $             165,521                       A
Citigroup 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) LLC                                               1,966                               0.9  %                       6,001                       A

All other counterparties (4)                                                       317                               0.1  %                         233
Total                                                                     $    218,941                             100.0  %       $             344,711




(1)The counterparty ratings presented above are the long-term issuer credit
ratings as rated at September 30, 2022 by S&P.
(2)Includes master repurchase agreements in which the buyer includes Alpine
Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper
conduit.
(3)  Nomura Holdings, Inc., the parent company of Nomura Securities
International, Inc., is rated BBB+ by S&P at September 30, 2022.
(4)  Represents amount outstanding with one counterparty, which holds collateral
valued less than 5% of our stockholders' equity as security for our obligations
under the applicable repurchase agreements as of September 30, 2022.

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The following table presents our average repurchase agreement borrowings,
excluding unamortized debt issuance costs, by type of collateral pledged for the
three and nine months ended September 30, 2022 (dollars in thousands):


                                                    Three Months Ended                Nine Months Ended
Collateral                                          September 30, 2022                September 30, 2022
Agency RMBS                                     $                    321          $                   501

Non-Agency RMBS(1)                                                56,775                           58,521
Non-Agency CMBS(1)                                                55,155                           61,279
Residential Whole Loans                                           49,838                          180,961
Commercial loans                                                  72,456                           66,068

Residential Bridge Loans                                           4,955                            5,345

Other securities                                                  25,944                           30,195
Total                                           $                265,444          $               402,870
Maximum borrowings during the period(2)         $                218,941          $               613,518




(1)Includes repurchase agreement borrowings on securities eliminated upon VIE
consolidation.
(2)Amount represents the maximum borrowings at month-end during each of the
respective periods.

Repurchase agreements financial metrics


Certain of our financing agreements provide the counterparty with the right to
terminate the agreement and accelerate amounts due under the associated
agreement if we do not maintain certain financial metrics. Although specific to
each financing arrangement, typical financial metrics include minimum equity and
liquidity requirements, leverage ratios, and performance triggers. In addition,
some of the financing arrangements contain cross-default features, whereby
default under an agreement with one lender simultaneously causes default under
agreements with other lenders with borrowings outstanding as of September 30,
2022. With the exception of one repurchase agreement for which we received a
waiver, we were in compliance with the terms of such financial tests as of
September 30, 2022.

Securitized Debt

Residential Mortgage-Backed Notes

Arroyo Trust 2019

The following table summarizes the consolidated Arroyo Trust 2019’s issued
mortgage-backed notes at September 30, 2022 which is classified in “Securitized
debt, net” in the Consolidated Balance Sheets (dollars in thousands):


Classes                                 Principal Balance       Coupon        Carrying Value       Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1                             $          176,628         3.3%       $       176,628                       4/25/2049
Class A-2                                          9,473         3.5%                 9,473                       4/25/2049
Class A-3                                         15,007         3.8%                15,007                       4/25/2049
Class M-1                                         25,055         4.8%                25,055                       4/25/2049
Subtotal                              $          226,163                    $       226,163
Less: Unamortized deferred financing
costs                                                   N/A                           2,830
Total                                 $          226,163                    $       223,333



Arroyo Trust 2020

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The following table summarizes the consolidated Arroyo Trust 2020’s issued
mortgage-backed notes at September 30, 2022 which is classified in “Securitized
debt, net” in the Consolidated Balance Sheets (dollars in thousands):


Classes                                 Principal Balance       Coupon        Carrying Value       Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A                            $           77,393         1.7%       $        77,393                       3/25/2055
Class A-1B                                         9,184         2.1%                 9,184                       3/25/2055
Class A-2                                         13,518         2.9%                13,518                       3/25/2055
Class A-3                                         17,963         3.3%                17,963                       3/25/2055
Class M-1                                         11,739         4.3%                11,739                       3/25/2055
Subtotal                              $          129,797                    $       129,797
Less: Unamortized deferred financing
costs                                                   N/A                           1,665
Total                                 $          129,797                    $       128,132



Arroyo Trust 2022-1

The following table summarizes the consolidated Arroyo Trust 2022-1's issued
mortgage-backed notes at September 30, 2022 which is classified as "Securitized
debt, net" on the Consolidated Balance Sheets (dollars in thousands):

Classes                                           Principal Balance       Coupon         Fair Value         Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A                                      $          218,530         2.5%       $      199,526                      12/25/2056
Class A-1B                                                  82,942         3.3%               69,669                      12/25/2056
Class A-2                                                   21,168         3.6%               16,617                      12/25/2056
Class A-3                                                   28,079         3.7%               21,312                      12/25/2056
Class M-1                                                   17,928         3.7%               12,814                      12/25/2056

Total                                           $          368,647                    $      319,938



Arroyo Trust 2022-2

The following table summarizes the consolidated Arroyo Trust 2022-2's issued
mortgage-backed notes at September 30, 2022 which is classified as "Securitized
debt, net" on the Consolidated Balance Sheets (dollars in thousands):

Classes                                           Principal Balance       Coupon         Fair Value         Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1                                       $          273,691         5.0%       $      263,315                       7/25/2057
Class A-2                                                   23,297         5.0%               21,916                       7/25/2057
Class A-3                                                   28,388         5.0%               26,398                       7/25/2057
Class M-1                                                   17,694         5.0%               15,097                       7/25/2057

Total                                           $          343,070                    $      326,726


Commercial Mortgage-Backed Notes


We hold a controlling financial variable interest in CSMC USA and are required
to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The
following table summarizes the consolidated CSMC USA's commercial mortgage
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pass-through certificates at September 30, 2022 which is classified in
“Securitized debt, net” in the Consolidated Balance Sheets (dollars in
thousands):


Classes         Principal Balance    Coupon    Fair Value   Contractual Maturity
Class A-1      $          120,391     3.3  % $   109,867                 9/11/2025
Class A-2                 531,700     4.0  %     482,628                 9/11/2025
Class B                   136,400     4.2  %     119,584                 9/11/2025
Class C                    94,500     4.3  %      79,772                 9/11/2025
Class D                   153,950     4.4  %     122,083                 9/11/2025
Class E                   180,150     4.4  %     132,952                 9/11/2025
Class F                   153,600     4.4  %     104,961                 9/11/2025
Class X-1(1)                    N/A   0.5  %       8,268                 9/11/2025
Class X-2(1)                    N/A     -  %       1,618                 9/11/2025
               $        1,370,691            $ 1,161,733



(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1
million
and $733.5 million as of September 30, 2022, respectively.


The above table does not reflect the portion of the class F bond held by us
because the bond is eliminated in consolidation. Our ownership interest in the F
bond represents a controlling financial interest, which resulted in
consolidation of the trust. The bond had a fair market value of $10.2 million at
September 30, 2022, and our exposure to loss is limited to our ownership
interest in this bond.

Convertible Senior Unsecured Notes

2022 Notes


As of September 30, 2022, we had $26.0 million of the 2022 Notes outstanding.
The 2022 Notes were repaid in full upon their maturity on October 3, 2022. Refer
to Note 16 - Subsequent Events for details.

2024 Notes


As of September 30, 2022, we had $86.3 million aggregate principal amount of the
2024 Notes outstanding. The 2024 notes mature on September 15, 2024, unless
earlier converted, redeemed or repurchased by the holders pursuant to their
terms, and are not redeemable by us except during the final three months prior
to maturity.

Recourse and Non-Recourse Financing


We utilize both recourse and non-recourse debt to finance our portfolio. Our
recourse debt included our short and long-term repurchase agreement financings
and our convertible senior unsecured notes. At September 30, 2022, our total
non-recourse financing is comprised of $998.1 million of securitized debt issued
in connection with our four Residential Whole Loan securitizations and
$1.2 billion of securitized debt from owning a Non-Agency CMBS bond with a fair
value of $10.2 million that was deemed to be a controlling financial variable
interest in CSMC USA which required us to consolidate the CMBS VIE.

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(dollars in thousands)                                 September 30, 2022                 December 31, 2021
Recourse and non-recourse financing                  $         2,487,965                $        2,599,845
Non-recourse financing
Arroyo 2019-2                                                    223,333                           337,571
Arroyo 2020-1                                                    128,132                           181,547
Arroyo 2022-1                                                    319,938                                 -
Arroyo 2022-2                                                    326,726                                 -
CMSC USA                                                       1,161,733                         1,344,370
Total recourse financing                             $           328,103    $328,103    $          736,357

Stockholders' equity                                 $            97,948                $          193,109

Recourse leverage                                                      3.3x                              3.8x




Hedging Activity

The following tables summarize the hedging activity during the nine months ended
September 30, 2022 (dollars in thousands):


                                      Notional Amount at                                  Settlements,           Notional Amount at
                                                                                        Terminations or
Derivative Instrument                 December 31, 2021           Acquisitions            Expirations            September 30, 2022
Fixed pay interest rate swaps       $            22,000          $    

309,500 $ (179,500) $ 152,000


Interest rate swaptions                               -               560,000                 (560,000)                          -

Credit default swaps                              6,170                     -                   (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 at                                  Settlements,             Realized                                  Fair Value at
                             December 31,                                 Terminations or            Gains /                                  September 30,
Derivative Instrument            2021              Acquisitions             Expirations              Losses            Mark-to-market             2022
Fixed 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)



Dividends

During the nine months ended September 30, 2022, we declared dividends totaling
$1.20 per share generating a dividend yield of approximately 14.3% based on the
stock closing price of $11.19 on September 30, 2022.

Book Value

The following chart reflects our book value per common share basic and diluted

                        over five consecutive quarters:
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                     [[Image Removed: wmc-20220930_g3.jpg]]

  We continue to implement measures to improve our balance sheet by increasing
liquidity, reducing leverage, and seeking alternative financing arrangements to
preserve long-term shareholder value. The decrease in book value from $23.23 as
of June 30, 2022, to $16.22 as of September 30, 2022, was primarily driven by
spread widening across our holdings, but mainly from our residential whole-loans
due to their relative size in the overall portfolio.

Review of Strategic Alternatives


On August, 4, 2022, we announced that our Board of Directors had authorized a
review of strategic alternatives for the Company aimed at enhancing shareholder
value, which may include a sale or merger of the Company. JMP Securities, A
Citizens Company, was retained as exclusive financial advisor to the Company. No
assurance can be given that the review being undertaken will result in a sale,
merger, or other transaction sale or other business combination involving the
Company, and we have not set a timetable for completion of the review process.
As previously announced, we do not intend to make any further statements
regarding this process unless and until a definitive agreement for a transaction
has been reached, or until the process of exploring strategic alternatives has
ended.

Results of Operations

Comparison of the three months ended September 30, 2022 to the three months
ended September 30, 2021.

General


Due to financial results which occurred during the evolving COVID-19 pandemic,
our results of operations for the three months ended September 30, 2022 and
September 30, 2021 may not be comparable. During the third quarter of 2022, we
continued to make progress towards strengthening our balance sheet, improving
liquidity, and the transition of our portfolio to residential investments.

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.

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In contrast, for the three months ended September 30, 2021, we had a net loss of
$4.2 million, or $0.70 per basic and diluted weighted common share, which was
primarily attributable to a decline in fair value in our commercial real estate
loans.

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Net Interest Income

  The following tables set forth certain information regarding our net interest
income on our investment portfolio for the three months ended September 30, 2022
and September 30, 2021 (dollars in thousands):
Three Months Ended September 30,           Average Amortized          Total Interest
2022                                        Cost of Assets                Income              Yield on Average Assets

Investments

Agency RMBS                               $             53          $              2                         14.97  %
Non-Agency CMBS                                    109,898                     2,336                          8.43  %
Non-Agency RMBS                                     36,075                       472                          5.19  %
Residential whole loans                          1,248,772                    13,884                          4.41  %
Residential bridge loans                             5,585                        28                          1.99  %
Commercial loans                                   191,929                     1,540                          3.18  %
Securitized commercial loans                     1,288,238                    22,099                          6.81  %
Other securities                                    42,768                     1,045                          9.69  %
Total investments                         $      2,923,318          $         41,406                          5.62  %

                                           Average Carrying           Total Interest              Average Cost of
                                                 Value                    Expense                    Funds(1)
Borrowings
Repurchase agreements                     $        265,444          $          2,187                          3.27  %
Convertible senior unsecured notes,
net                                                109,329                     2,402                          8.72  %
Securitized debt                                 2,348,073                    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,           Average Amortized          Total Interest
2021                                        Cost of Assets                Income              Yield on Average Assets

Investments

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

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

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


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(1) Average cost of funds does not include the interest expense related to our
derivatives. In accordance with GAAP, such costs are included in "Gain on
derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin in this
table does not reflect the benefit / cost of our interest rate swaps. See
"Non-GAAP Financial Measures" for net investment income table that includes the
benefit / cost from our interest rate swaps.

Interest Income


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

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.

Other income (loss), net

Realized gain (loss), net

Realized gain (loss) represents the net gain (loss) on sales or settlements from
our investment portfolio and debt. The following table presents the realized
gains (losses) of our investments and debt for each of the three months ended
September 30, 2022 and September 30, 2021 (dollars in thousands):

                                                     For the three months ended September 30, 2022                                               For 

the three months ended September 30, 2021

                                   Proceeds                                                                                                                                                            Net Gain
                                  (Payments)            Gross Gains           Gross Losses           Net Gain  (Loss)         Proceeds (Payments)         Gross Gains           Gross Losses            (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)




(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See
Note 7 – Financings for details.

Unrealized gain (loss), net


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

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

                                                              Three months ended          Three months ended
                                                              September 30, 2022          September 30, 2021

Agency 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 loans                                                     25                         175
Commercial loans                                                        (17,729)                     (5,494)
Securitized commercial loans                                            (78,046)                     (9,616)
Other securities                                                         (2,409)                        930
Securitized debt                                                        103,046                      11,138

Total                                                        $          (43,582)         $           (6,003)


Gain (loss) on derivatives, net


  As of September 30, 2022, we had interest rate swaps with a notional amount of
$152.0 million and no forward starting swaps. Our hedging strategy is designed
to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for
the three months ended September 30, 2022 and September 30, 2021 (dollars in
thousands):

                                                 Realized Gain (Loss), net
                                               Other
                                           Settlements /         Variation Margin       Return (Recovery) of                                   Contractual interest
Description                                 Expirations             Settlement                 Basis                Mark-to-Market           income (expense), net(1)             Total
Three months ended September 30,
2022
Interest 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
TBAs                                              1,319                      -                          -                  (1,383)                                 -                  (64)
Total                                     $      (2,486)         $       3,423          $              (5)         $        3,636          $                     314          $     4,882

Three months ended September 30,
2021
Interest rate swaps                       $           -          $         485          $               -          $          (71)         $                      96          $       510

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

Credit default swaps                                 16                      -                          -                      56                                  -                   72

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



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

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Other, net

For the three months ended September 30, 2022 and September 30, 2021, "Other,
net" was a loss of $61 thousand and income of $277 thousand, respectively. The
balance is mainly comprised of income on cash balances, miscellaneous net
interest income (expense) on cash collateral for our repurchase agreements and
derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $850 thousand and $1.5
million for the three months ended September 30, 2022 and September 30, 2021,
respectively. The decline in management fees was a result of our Manager
voluntarily waiving 25% of its management fee solely for the duration of
calendar year 2022 in order to support our earnings potential and our transition
to a residential focused investment portfolio. Future waivers, if any, will be
at the Manager's discretion.

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

Other Operating Expenses


We incurred other operating expenses of approximately $343 thousand and $352
thousand for the three months ended September 30, 2022, and September 30, 2021,
respectively. Other operating costs comprise bank fees, trustee fees, and asset
management/loan servicing fees for loans acquired serving released. Formerly,
transaction and financing costs were included in this expense category.

Transaction costs


We incurred transaction costs of $2.6 million and $954 thousand for the three
months ended September 30, 2022 and September 30, 2021, respectively. The
increase in transaction costs is primarily associated with the Arroyo Trust
2022-2 securitization that was completed in July 2022. Transaction costs
incurred for the three months ended September 30, 2021 were associated with the
foreclosure of one of our commercial loans.

General and Administrative Expenses


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.

Comparison of the nine months ended September 30, 2022 to the nine months ended
September 30, 2021.


General

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.

During the nine months ended September 30, 2022, we acquired $405.3 million of
residential whole loans, sold $42.3 million of investments, including Non-Agency
RMBS and CMBS, sold $11.7 million in residential whole loans, realized a gain on
the sale of a REO hotel of $12.2 million, and repurchased $1.0 million aggregate
principal amount of our existing 2022 Notes at par. 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. Also, due to spread widening, we experienced a
significant decline in the fair value of our residential whole loan investments.
This decline in fair value of $125.5 million, coupled with transaction costs
incurred in the securitizations of Arroyo 2022-1 and Arroyo 2022-2 of

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$5.6 million were key contributors to the generation of a net loss of
$88.3 million, or $14.63 per basic and diluted weighted common share for the
nine months ended September 30, 2022.


In contrast, for the nine months ended September 30, 2021, the key driver of a
net loss of $36.4 million, or $6.00 per basic and diluted weighted common share,
was declines in fair values of our non-performing commercial mezzanine loan and
of our Non-Agency CMBS holdings of $48.6 million and $16.3 million,
respectively. These were offset by unrealized gains from other investments.
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Net Interest Income

  The following tables set forth certain information regarding our net interest
income on our investment portfolio for the nine months ended September 30, 2022
and September 30, 2021 (dollars in thousands):
Nine Months Ended September 30,            Average Amortized          Total Interest
2022                                        Cost of Assets                Income              Yield on Average Assets

Investments

Agency RMBS                               $             59          $              9                         20.39  %
Non-Agency CMBS                                    142,362                     7,436                          6.98  %
Non-Agency RMBS                                     43,815                     1,663                          5.07  %
Residential whole loans                          1,165,929                    34,712                          3.98  %
Residential bridge loans                             5,688                        64                          1.50  %
Commercial loans                                   192,079                     4,046                          2.82  %
Securitized commercial loans                     1,274,894                    65,957                          6.92  %
Other securities                                    45,340                     2,738                          8.07  %
Total investments                         $      2,870,166          $        116,625                          5.43  %

                                           Average Carrying           Total Interest              Average Cost of
                                                 Value                    Expense                    Funds(1)
Borrowings
Repurchase agreements                     $        402,870          $          8,288                          2.75  %
Convertible senior unsecured notes,
net                                                113,670                     7,499                          8.82  %
Securitized debt                                 2,129,146                    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,            Average Amortized          Total Interest
2021                                        Cost of Assets                Income              Yield on Average Assets

Investments

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

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

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


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(1) Average cost of funds does not include the interest expense related to our
derivatives. In accordance with GAAP, such costs are included in "Gain on
derivative instruments, net" in the Consolidated Statements of Operations.
(2) Since we do not apply hedge accounting, our net interest margin in this
table does not reflect the benefit / cost of our interest rate swaps. See
"Non-GAAP Financial Measures" for net investment income table that includes the
benefit / cost from our interest rate swaps.


Interest Income


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

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.

Other income (loss), net

Realized gain (loss), net


Realized gain (loss) represents the net gain (loss) on sales or settlements from
our investment portfolio and debt. The following table presents the realized
gains (losses) of our investments and debt for each of the nine months ended
September 30, 2022 and September 30, 2021 (dollars in thousands):

                                                     For the nine months ended September 30, 2022                                                For 

the nine months ended September 30, 2021

                                   Proceeds                                                                                        Proceeds                                                           Net Gain
                                  (Payments)            Gross Gains           Gross Losses           Net Gain  (Loss)             (Payments)             Gross Gains           Gross Losses            (Loss)

Non-Agency CMBS                 $     10,152          $          -          $     (43,934)         $         (43,934)         $             -          $          -          $      (5,929)         $  (5,929)
Non-Agency RMBS                       27,729                   255                 (1,425)                    (1,170)                       -                     -                      -                  -
Other securities                       4,406                     -                   (478)                      (478)                       -                     -                      -                  -
Residential Whole-Loans               11,736                    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)





(1)Realized gains/losses recognized on the final settlement of the loans.
(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans
to REO. Proceeds represent the fair value less estimated selling costs of the
real estate on the date of transfer.
(3)Realized gains/losses recognized in connection with the sale of the hotel
REO.
(4)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See
Note 7 - Financings for details.

Unrealized gain (loss), net


Our investments, and securitized debt, for which we have elected the fair value
option are recorded at fair value with the periodic changes in fair value being
recorded in earnings. The change in unrealized gain (loss) is directly
attributable to changes in market pricing on the underlying investments and
securitized debt during the period.
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The following table presents the net unrealized gains (losses) we recorded on
our investments and securitized debt (dollars in thousands):

                                                                Nine months ended        Nine months ended
                                                                September 30, 2022       September 30, 2021

Agency RMBS                                                     $           (59)         $            16
Non-Agency CMBS                                                          42,869                  (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 debt                                                        257,231                 (104,395)

Total                                                           $       (66,300)         $       (39,271)


Gain (loss) on derivatives, net


  As of September 30, 2022, we had interest rate swaps with a notional amount of
$152.0 million, and no forward starting swaps. Our hedging strategy is designed
to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for
the nine months ended September 30, 2022 and September 30, 2021 (dollars in
thousands):

                                                 Realized Gain (Loss), net
                                               Other
                                           Settlements /         Variation Margin             Return                                          Contractual interest
Description                                 Expirations            

Settlement (Recovery) of Basis Mark-to-Market income (expense), net(1)

             Total
Nine months ended September 30,
2022
Interest 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
TBAs                                              2,051                      -                         -                       -                                  -                2,051
Total                                     $      (1,723)         $      14,744          $           (120)         $        3,793          $                     (95)         $    16,599

Nine months ended September 30,
2021
Interest rate swaps                       $           -          $         520          $              -          $          (25)         $                     172          $       667

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

Credit default swaps                                 48                      -                         -                      52                                  -                  100

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



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

Other, net

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For the nine months ended September 30, 2022 and September 30, 2021, "Other,
net" was a loss of $252 thousand and income of $449 thousand, respectively. The
balance is mainly comprised of income on cash balances, miscellaneous net
interest income (expense) on cash collateral for our repurchase agreements and
derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $3.0 million and
$4.5 million for the nine months ended September 30, 2022 and September 30,
2021, respectively. The decline in management fees was a result of our Manager
voluntarily waiving 25% of its management fee solely for the duration of
calendar year 2022 in order to support our earnings potential and our transition
to a residential focused investment portfolio. Future waivers, if any, will be
at the Manager's discretion.

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

Other Operating Expenses


We incurred other operating expenses of approximately $901 thousand and
$1.2 million for the nine months ended September 30, 2022, and September 30,
2021, respectively. Other operating costs comprise bank fees, trustee fees and
asset management/loan servicing fees for loans acquired serving released.
Formerly, transaction and financing costs were included in this expense
category.

Transaction costs


We incurred transaction costs of $5.6 million and $954 thousand for the nine
months ended September 30, 2022 and September 30, 2021, respectively. The
increase in transaction costs was primarily associated with the securitizations
of Arroyo Trust 2022-1 in February 2022 and of Arroyo Trust 2022-2 in July 2022.
Transaction costs incurred for the three months ended September 30, 2021 were
associated with the foreclosure of one of our commercial loans.

General and Administrative Expenses


We incurred general and administrative expenses of approximately $7.6 million
and $7.6 million for the nine months ended September 30, 2022, and September 30,
2021, respectively. There was no change between comparable periods.

Non-GAAP Financial Measures


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

Distributable Earnings


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

The table below reconciles Net Loss to Distributable Earnings for the three and
nine months ended September 30, 2022 and September 30, 2021:

                                                       Three months            Three months            Nine months           Nine months
                                                      ended September         ended September        ended September       ended September
(dollars in thousands)                                   30, 2022                30, 2021               30, 2022              30, 2021
Net 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 debt                                             43,582                   6,003                66,300                39,271
Net realized (gain) loss on investments                          33                     (51)               36,902                 6,030
Realized loss on foreign currency transactions                    1                       -                     1                     -

One-time transaction costs                                    2,632                     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 notes                                            2                   1,577                   134                 1,337
Amortization of discount on convertible senior
unsecured notes                                                 209                     228                   648                   712
Other non-cash adjustments                                        -                       -                     -                   977
Non-cash stock-based compensation expense                       100                     165                   335                   453
Total adjustments                                            41,994                   8,223                93,253                49,138
Distributable Earnings                               $        2,250          $        3,792          $      5,279          $     12,696




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

                                                                                                         Nine months            Nine months
                                                     Three months ended       Three months ended       ended September        ended September
(dollars in thousands)                               September 30, 2022       September 30, 2021           30, 2022               30, 2021
Net interest income                                  $         5,699       

$ 7,163 $ 16,217 $ 23,001
Interest income from IOs and IIOs accounted
for as derivatives

                                                11                       23                     40                     73
Net interest income (expense) from interest
rate swaps                                                       298                       96                   (255)                   172
Adjusted net interest income                                   6,008                    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 compensation                                100                      165                    335                    453
One-time transaction costs                                     2,632                      681                  5,708                    781
Amortization of discount on convertible
unsecured senior notes                                           209                      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



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


"Economic book value" is a non-GAAP financial measure of our financial position
on an unconsolidated basis. We own certain securities that represent a
controlling variable interest, which under GAAP requires consolidation; however,
our economic exposure to these variable interests is limited to the fair value
of the individual investments. Economic book value is calculated by taking the
GAAP book value and 1) adding the fair value of the retained interest or
acquired security of the VIEs held by us and 2) removing the asset and
liabilities associated with each of consolidated trusts (CSMC USA, Arroyo
2019-2, Arroyo 2020-1, Arroyo 2022-1, and Arroyo 2022-2). Management believes
that Economic book value provides investors with a useful supplemental measure
to evaluate our financial position as it reflects the actual financial interest
of these investments irrespective of the variable interest consolidation model
applied for GAAP reporting purposes. Economic book value does not represent and
should not be considered as a substitute for Stockholders' Equity, as determined
in accordance with GAAP, and our calculation of this measure may not be
comparable to similarly titled measures reported by other companies.

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

                                                                           $ Amount             Per Share

GAAP Book Value at September 30, 2022                                   $   

97,948 $ 16.22

Adjustments to deconsolidate VIEs and reflect the Company’s
interest in the securities owned
Deconsolidation of VIEs assets

                                            (2,281,396)            (377.84)
Deconsolidation of VIEs liabilities                                        2,168,088              359.07
Interest in securities of VIEs owned, at fair value                          131,618               21.80
Economic Book Value at September 30, 2022                               $    116,258          $    19.25




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Adjusted Net Investment Income and Net Interest Margin


Adjusted net investment income is a non-GAAP financial measure that is an
adjustment to net income which excludes the net interest income for third-party
consolidated VIEs, and includes premium amortization for interest rate swaps
included in gain/loss on derivative instruments. Adjusted net investment income
is used as an input when calculating net interest margin in the below tables and
gives investors another view of portfolio performance. Adjusted net investment
income may not be comparable to similar measures presented by other companies,
as it is a non-GAAP financial measure that is not based on a comprehensive set
of accounting rules or principles and therefore may be defined differently by
other companies. Adjusted net investment income should be considered in addition
to, not as a substitute for, or superior to, financial measures determined in
accordance with GAAP.

Net interest margin is a non-GAAP financial measure calculated by dividing
annualized adjusted net investment income for the period by adjusted total
investments for the period. Net interest margin provides investors visibility
into the Company's profitability of interest income versus interest expense
after excluding consolidating VIEs and adding the net effect of our interest
rate swaps and derivatives. However, since net interest margin is an adjusted
measure derived from net investment income (non-GAAP), and differs from net
income (loss) as computed in accordance with GAAP, which may not be comparable
to similar measures provided by other companies, it should be considered as
supplementary to, and not as a substitute for, net income margin computed by net
income (loss) in accordance with GAAP.

The following tables set forth certain information regarding our non-GAAP
adjusted net investment income and net interest margin which includes interest
income on Agency and Non-Agency Interest-Only Strips classified as derivatives
and excludes the interest expense for third-party consolidated VIEs for the
three and nine months ended September 30, 2022 and September 30, 2021 (dollars
in thousands):

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                                              Average Amortized          Total Interest
Three Months Ended September 30, 2022         Cost of Assets(1)             Income(2)            Yield on Average Assets

Investments

Agency RMBS                                  $            902          $             13                           5.72  %
Non-Agency CMBS                                       109,898                     2,336                           8.43  %
Non-Agency RMBS                                        36,075                       472                           5.19  %
Residential whole loans                             1,248,772                    13,884                           4.41  %
Residential bridge loans                                5,585                        28                           1.99  %
Commercial loans                                      191,929                     1,540                           3.18  %
Securitized commercial loans                        1,288,238                    22,099                           6.81  %
Other securities                                       42,768                     1,045                           9.69  %

Total investments                                   2,924,167                    41,417                           5.62  %
Adjustments:
Securitized commercial loans from
consolidated VIEs                                  (1,288,238)                  (22,099)                          6.81  %
Investments in consolidated VIEs
eliminated in consolidation                            14,079                       220                           6.20  %
Adjusted total investments                   $      1,650,008          $         19,538                           4.70  %

                                              Average Carrying           Total Interest           Average Effective Cost
                                                    Value                    Expense                     of Funds
Borrowings
Repurchase agreements                        $        265,444          $          2,187                           3.27  %
Convertible senior unsecured notes,
net                                                   109,329                     2,402                           8.72  %
Securitized debt                                    2,348,073                    31,118                           5.26  %
Interest rate swaps                                          n/a                   (298)                         (0.04) %
Total borrowings                                    2,722,846                    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                                                        $          5,261                           1.26  %



(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as
derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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

Investments
Agency RMBS                                   $         1,160          $            27                          9.23  %
Non-Agency CMBS                                       200,824                    4,290                          8.48  %
Non-Agency RMBS                                        28,528                      369                          5.13  %
Residential whole loans                               831,634                    8,147                          3.89  %
Residential bridge loans                                8,714                       89                          4.05  %
Commercial loans                                      243,534                    2,847                          4.64  %
Securitized commercial loan                         1,407,129                   23,622                          6.66  %
Other securities                                       48,364                      773                          6.34  %
Total investments                                   2,769,887                   40,164                          5.75  %
Adjustments:
Securitized commercial loans from
consolidated VIEs                                  (1,407,129)                 (23,622)                         6.66  %
Investments in consolidated VIEs
eliminated in consolidation                            51,278                    1,038                          8.03  %
Adjusted total investments                    $     1,414,036          $        17,580                          4.93  %

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

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




(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as
derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from RETL Trust and
CSMC USA.

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                                              Average Amortized          Total Interest
Nine Months Ended September 30, 2022          Cost of Assets(1)             Income(2)            Yield on Average Assets

Investments

Agency RMBS                                  $          1,023          $             49                           6.40  %
Non-Agency CMBS                                       142,362                     7,436                           6.98  %
Non-Agency RMBS                                        43,815                     1,663                           5.07  %
Residential whole loans                             1,165,929                    34,712                           3.98  %
Residential bridge loans                                5,688                        64                           1.50  %
Commercial loans                                      192,079                     4,046                           2.82  %
Securitized commercial loans                        1,274,894                    65,957                           6.92  %
Other securities                                       45,340                     2,738                           8.07  %

Total investments                                   2,871,130                   116,665                           5.43  %
Adjustments:
Securitized commercial loans from
consolidated VIEs                                  (1,274,894)                  (65,957)                          6.92  %
Investments in consolidated VIEs
eliminated in consolidation                            13,966                       659                           6.31  %
Adjusted total investments                   $      1,610,202          $         51,367                           4.27  %

                                              Average Carrying           Total Interest           Average Effective Cost
                                                    Value                    Expense                     of Funds
Borrowings
Repurchase agreements                        $        402,870          $          8,288                           2.75  %
Convertible senior unsecured notes,
net                                                   113,670                     7,499                           8.82  %
Securitized debt                                    2,129,146                    84,621                           5.31  %
Interest rate swaps                                          n/a                    255                           0.01  %
Total borrowings                                    2,645,686                   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                                                        $         13,644                           1.13  %



(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as
derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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

Investments

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

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

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

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




(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as
derivatives.
(2)Refer to below table for components of interest income.
(3)Includes only the third-party sponsored securitized debt from RETL Trust and
CSMC USA.

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:
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                                                             Three months          Three months           Nine months           Nine months
                                                            ended September       ended September       ended September       ended September
(dollars in thousands)                                         30, 2022              30, 2021              30, 2022              30, 2021
Coupon interest income:

Agency RMBS                                                 $          -          $         11          $         13          $         38
Non-Agency CMBS                                                    1,949                 2,621                 7,050                 7,171
Non-Agency RMBS                                                      446                   609                 1,804                 1,762
Residential whole loans                                           14,829                10,268                39,972                32,993
Residential bridge loans                                              28                   108                    64                   827
Commercial loans                                                   1,540                 2,820                 4,046                11,118
Securitized commercial loans                                      15,510                17,533                46,023                54,137
Other securities                                                     860                 1,043                 2,515                 3,717
Subtotal coupon interest                                          35,162                35,013               101,487               111,763
Premium accretion, discount amortization and
amortization of basis, net:

Agency RMBS                                                            2                    (7)                   (4)                  (26)
Non-Agency CMBS                                                      387                 1,669                   386                 6,230
Non-Agency RMBS                                                       26                  (240)                 (141)                 (704)
Residential whole loans                                             (945)               (2,121)               (5,260)               (7,269)
Residential bridge loans                                               -                   (19)                    -                   (21)
Commercial loans                                                       -                    27                     -                   145
Securitized commercial loans                                       6,589                 6,089                19,934                18,449
Other securities                                                     185                  (270)                  223                (1,214)
Subtotal accretion and amortization                                6,244                 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)

Subtotal                                                              11                    23                    40                    73
Total adjusted interest income                              $     41,417          $     40,164          $    116,665          $    127,426



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

Effective Cost of Funds


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

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The following table reconciles the Effective Cost of Funds (Non-GAAP financial
measure) with interest expense for the three and nine months ended September 30,
2022 and September 30, 2021:

                                                    Three months ended September 30, 2022               Three months ended September 30, 2021     
         Nine months ended September 30, 2022               Nine months

ended September 30, 2021

                                                                             Cost of Funds/                                      Cost of Funds/                                     Cost of Funds/                                     Cost of Funds/
                                                                               Effective                                           Effective                                          Effective                                          Effective
(dollars in thousands)                             Reconciliation           Borrowing Costs            Reconciliation           Borrowing Costs           Reconciliation           Borrowing Costs           Reconciliation           Borrowing Costs
Interest 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 and Capital Resources

General


Liquidity is a measure of our ability to meet potential cash requirements,
including ongoing commitments to repay borrowings, fund and maintain our assets
and operations, make distributions to our stockholders, and other general
business needs.  To maintain our REIT qualifications under the Internal Revenue
Code, we must distribute annually at least 90% of our taxable income, excluding
capital gains and, such distributions requirements limit our ability to retain
earnings and increase capital for operations. 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.

We currently believe we have sufficient liquidity and capital resources
available, for at least the next 12 months, to fund our operations, meet our
financial obligations, purchase our target assets, and make dividend payments to
maintain our REIT qualifications. As of September 30, 2022, we had $55.4 million
in cash and cash equivalents. Also our other sources of liquidity were
unencumbered investments, and unused borrowing capacity in certain borrowing
facilities since the amount borrowed is less than the maximum advance rate.

Sources of Liquidity

Our primary sources of liquidity are as follows:

Cash Generated from Operations



For the nine months ended September 30, 2022, net cash provided by operating
activities was approximately $13.1 million. This was primarily attributable to
margin settlements of interest rate swaps, the net interest income on our
investments, realized gain on the sale of an REO hotel, less operating expenses,
and general and administrative expenses. For the nine months ended September 30,
2021, net cash provided by operating activities was approximately $1.3 million.
This was primarily attributable to net interest income on our investments, less
operating expenses, and general and administrative expenses.

Cash Provided by and Used in Investing Activities

For the nine months ended September 30, 2022, net cash used in investing
activities was approximately $100.2 million. This was primarily attributable to
purchases of Non-Agency RMBS and residential whole loans during the period,

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which was partially offset by receipts of principal payments and payoffs on our
investments and the sale of an REO hotel. For the nine months ended September
30, 2021, net cash provided by investing activities was approximately $560.6
million. This was primarily attributable to receipts of principal payments and
payoffs on our investments.

Cash Provided by and Used in Financing Activities


For the nine months ended September 30, 2022, net cash provided by financing
activities was approximately $102.3 million. This was attributable to the net
cash proceeds from the Arroyo Trust 2022-1 and Arroyo Trust 2022-2
securitizations, which was partially offset by a net decrease in repurchase
agreement borrowings, paydowns in our securitized debt, and extinguishment of
convertible senior unsecured notes. For the nine months ended September 30,
2021, net cash used in financing activities was approximately $605.5 million.
This was attributable to repayment of securitized debt and distribution of
escrows related to consolidated VIEs.

Repurchase Agreements


As of September 30, 2022, we had borrowings under five of our master repurchase
agreements of approximately $218.9 million. The following tables present our
repurchase agreement borrowings by type of collateral pledged, as of
September 30, 2022 and September 30, 2021, and the respective effective cost of
funds (Non-GAAP financial measure) for the three and nine months ended
September 30, 2022 and September 30, 2021, respectively (dollars in thousands).
See "Non-GAAP Financial Measures" for more information:


                                                   September 30, 2022                                            Three months ended September 30, 2022                              Nine months ended September 30, 2022
                                                                              Weighted                                                        Weighted                                                          Weighted                          Weighted
                                                   Value of                   Average                       Weighted                           Average                         Weighted                         Average                            Average
                            Borrowings            Collateral               Interest Rate                  Average Cost                    Effective Cost of                  Average Cost                  Effective Cost of                       Haircut
Collateral                  Outstanding             Pledged                end of period                    of Funds                     Funds (Non-GAAP)(1)                   of Funds                   Funds (Non-GAAP)(1)                   end of period

Agency 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
value                           76,171               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
value                           25,914                38,310                           2.54  %                       2.57  %                               2.57  %                     2.27  %                              2.27  %                        36.90  %
Interest rate swaps                   n/a                   n/a                            n/a                           n/a                              (0.45) %                         n/a                              0.08  %                             n/a
Total                     $    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."
(2)Includes repurchase agreement borrowings on securities eliminated upon VIE
consolidation.
(3)Repurchase agreement borrowings collateralized by whole loans, bridge loans,
and commercial loans owned through trust certificates. The trust certificates
are eliminated upon consolidation.

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                                                       September 30, 2021                                           Three months ended September 30, 2021                            Nine months ended September 30, 2021
                                                                                   Weighted                                                       Weighted                                                                                       Weighted
                                                     Fair Value of                 Average                       Weighted                         Average                        Weighted                    Weighted Average                     Average
                               Borrowings             Collateral                Interest Rate                  Average Cost                  Effective Cost of                 Average Cost              Effective Cost of Funds                  Haircut
Collateral                     Outstanding            Pledged(3)                end of period                    of Funds                     Funds (Non-GAAP)                   of Funds                     (Non-GAAP)(1)                    end of period

Agency RMBS, at fair value $ 1,048 $ 1,342

                 1.05  %                       1.06  %                            1.06  %                     1.19  %                            1.19  %                      25.00  %
Non-Agency CMBS, at fair
value(1)                           78,666                 136,968                           2.07  %                       2.12  %                            2.12  %                     3.33  %                            3.33  %                      38.03  %
Non-Agency RMBS, at fair
value                              15,632                  28,003                           2.12  %                       2.18  %                            2.18  %                     3.55  %                            3.55  %                      35.00  %
Residential whole loans, at
fair value(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
value                              30,093                  52,093                           2.24  %                       2.30  %                            2.30  %                     3.20  %                            3.20  %                      37.15  %
Interest rate swaps                      n/a                     n/a                            n/a                           n/a                           (0.10) %                         n/a                           (0.06) %                           n/a
Total                        $    483,308          $      654,448                           2.64  %                       3.08  %                            2.98  %                     3.58  %                            3.52  %
                     25.47  %





(1)Includes repurchase agreement borrowings on securities eliminated upon VIE
consolidation.
(2)Repurchase agreement borrowings collateralized by whole loans, bridge loans,
and commercial loan owned through trust certificates. The trust certificates are
eliminated upon consolidation.
(3)The pledged amount relates to our non-controlling membership interest in our
wholly-owned subsidiary, WMC RETL LLC, which was financed under a repurchase
agreement. The membership interest is eliminated in consolidation.


Contractual Obligations and Commitments


Our contractual obligations as of September 30, 2022 are as follows (dollars in
thousands):

                                              Less than 1             1 to 3             3 to 5            More than
                                                 year                 years               years             5 years               Total

Borrowings under repurchase agreements $ 218,941 $ – $ – $ – $ 218,941
Contractual interest on repurchase
agreements

                                         3,570                    -                 -                    -                3,570
Convertible senior unsecured notes                26,049               86,250                 -                    -              112,299
Contractual interest on convertible senior
unsecured notes                                    6,701                5,822                 -                    -               12,523
Securitized debt(2)                                    -            1,370,691                 -            1,067,676            2,438,367
Contractual interest on securitized debt          94,702              189,404            77,146            1,071,579            1,432,831

Total                                       $    349,963          $ 1,652,167          $ 77,146          $ 2,139,255          $ 4,218,531





(1)The table above does not include amounts due under the Management Agreement
(as defined herein) with our Manager, as those obligations do not have fixed and
determinable payments.
(2)The securitized debt is non-recourse to us and can only be settled with the
loans that serve as collateral. The collateral for the securitized debt has a
principal balance of $2.6 billion. Assumes entire outstanding principal balance
at September 30, 2022 is paid at maturity.


Management Agreement


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

In December 2021, the Manager agreed to voluntarily waive 25% of its management
fee solely for the duration of calendar year 2022 in order to support our
earnings potential and our transition to a residential focused investment
portfolio. Future waivers, if any, will be at the Manager’s discretion.

Off-Balance Sheet Arrangements


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

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

Dividends


To maintain our qualification as a REIT, U.S. federal income tax law generally
requires that we distribute at least 90% of our REIT taxable income annually,
determined without regard to the deduction for dividends paid and excluding
capital gains. We must pay tax at regular corporate rates to the extent that we
annually distribute less than 100% of our taxable income.

We evaluate each quarter to determine our ability to pay dividends to our
stockholders based on our net taxable income if and to the extent authorized by
our Board of Directors. Before we pay any dividend, whether for U.S. federal
income tax purposes or otherwise, we must first meet both our operating
requirements and debt service payments. If our cash available for distribution
is less than our net taxable income, we could be required to sell assets or
borrow funds to make cash distributions or we may make a portion of the required
distribution in the form of a taxable stock distribution.


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