New York Mortgage Trust
Annual Report 2016

Plain-text annual report

NEW YORK MORTGAGE TRUST INC FORM 10-K (Annual Report) Filed 02/28/17 for the Period Ending 12/31/16 Address Telephone CIK 275 MADISON AVENUE NEW YORK, NY 10016 (212) 792-0107 0001273685 Symbol NYMT SIC Code Industry Sector Fiscal Year 6798 - Real Estate Investment Trusts Specialized REITs Financials 12/31 http://www.edgar-online.com © Copyright 2017, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.  UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549___________________FORM 10-K___________________xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2016 ¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From ____________ to ____________Commission File Number 001-32216NEW YORK MORTGAGE TRUST, INC.(Exact name of registrant as specified in its charter)Maryland 47-0934168(State or other jurisdiction ofincorporation or organization) (I.R.S. EmployerIdentification No.)275 Madison Avenue, New York, NY 10016(Address of principal executive office) (Zip Code)(212) 792-0107(Registrant’s telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which RegisteredCommon Stock, par value $0.01 per share NASDAQ Stock Market7.75% Series B Cumulative Redeemable Preferred Stock,par value $0.01 per share, $25.00 Liquidation Preference NASDAQ Stock Market7.875% Series C Cumulative Redeemable Preferred Stock, par value$0.01 per share, $25.00 Liquidation Preference NASDAQ Stock MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No ¨Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yes ¨ No xIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required tobe submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during1the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):Large Accelerated Filer x Accelerated Filer ¨ Non-Accelerated Filer ¨ Smaller Reporting Company ¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2016 was $ 660,147,923 .The number of shares of the registrant’s common stock, par value $.01 per share, outstanding on February 28, 2017 was 111,843,236 .DOCUMENTS INCORPORATED BY REFERENCEDocument WhereIncorporated Part III, Items 10-141. Portions of the Registrant's Definitive Proxy Statement relating to its 2017 Annual Meeting ofStockholders scheduled for May 2017 to be filed with the Securities and Exchange Commission by no later than April28, 2017. 2NEW YORK MORTGAGE TRUST, INC.FORM 10-KFor the Fiscal Year Ended December 31, 2016TABLE OF CONTENTSPART I Item 1.Business4Item 1A.Risk Factors18Item 1B.Unresolved Staff Comments45Item 2.Properties45Item 3.Legal Proceedings45Item 4.Mine Safety Disclosures45 PART II Item 5.Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities46Item 6.Selected Financial Data49Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations50Item 7A.Quantitative and Qualitative Disclosures About Market Risk83Item 8.Financial Statements and Supplementary Data88Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure88Item 9A.Controls and Procedures88Item 9B.Other Information88 PART III Item 10.Directors and Executive Officers of the Registrant and Corporate Governance89Item 11.Executive Compensation89Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters89Item 13.Certain Relationships and Related Party Transactions and Director Independence89Item 14.Principal Accounting Fees and Services89 PART IV Item 15.Exhibits, Financial Statement Schedules90Table of ContentsPART IItem 1. BUSINESSIn this Annual Report on Form 10-K we refer to New York Mortgage Trust, Inc., together with its consolidated subsidiaries, as “we,” “us,” “Company,”or “our,” unless we specifically state otherwise or the context indicates otherwise, and refer to our wholly-owned taxable REIT subsidiaries as “TRSs” and ourwholly-owned qualified REIT subsidiaries as “QRSs.” In addition, the following defines certain of the commonly used terms in this report: “RMBS” refers toresidential mortgage-backed securities comprised of adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only, and principal onlysecurities; “Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by a federallychartered corporation (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation(“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”); “Agency ARMs” refers toAgency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS; "Agency fixed-rate" refers to Agency RMBS comprised of fixed-rate RMBS; “non-Agency RMBS” refers to RMBS backed by prime jumbo residential mortgage loans, including re-performing and non-performing loans; “IOs” refers collectivelyto interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgageloans; “Agency IOs” refers to IOs that represent the right to the interest components of the cash flow from a pool of residential mortgage loans issued orguaranteed by a GSE or an agency of the U.S. government; “POs” refers to mortgage-backed securities that represent the right to the principal component of thecash flow from a pool of mortgage loans; “ARMs” refers to adjustable-rate residential mortgage loans; “prime ARM loans” and “residential securitized loans”each refer to prime credit quality residential ARM loans (“prime ARM loans”) held in securitization trusts; “distressed residential loans” refers to pools ofperforming and re-performing, fixed-rate and adjustable-rate, fully amortizing, interest-only and balloon, seasoned mortgage loans secured by first liens on one-to four-family properties ; “ CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO orPO securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans; “multi-family CMBS” refers to CMBSbacked by commercial mortgage loans on multi-family properties; “CDO” refers to collateralized debt obligation; “CLO” refers to collateralized loan obligation;“Consolidated K-Series” refers to, as of December 31, 2016 and December 31, 2015 , five separate Freddie Mac- sponsored multi-family loan K-Seriessecuritizations, of which we, or one of our "special purpose entities," or "SPEs," own the first loss PO securities and certain IO securities; “Variable InterestEntity" or "VIE” refers to an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity atrisk for the entity to finance its activities without additional subordinated financial support from other parties; and “Consolidated VIEs” refers to VIEs where theCompany is the primary beneficiary, as it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a rightto receive benefits or absorb losses of the entity that could be potentially significant to the VIE.GeneralWe are a real estate investment trust, or REIT, for federal income tax purposes, in the business of acquiring, investing in, financing and managingmortgage-related and residential housing-related assets and financial assets. Our objective is to deliver long-term stable distributions to our stockholders overchanging economic conditions through a combination of net interest margin and net realized capital gains from a diversified investment portfolio. Our portfolioincludes credit sensitive assets and investments sourced from distressed markets in recent years that create the potential for capital gains, as well as more traditionaltypes of mortgage-related investments that generate interest income. Our investment portfolio includes residential mortgage loans, including second mortgages and loans sourced from distressed markets, non-AgencyRMBS, multi-family CMBS, preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-family properties, equity and debtsecurities issued by entities that invest in residential and commercial real estate and Agency RMBS. Subject to market conditions, we intend to continue to reduceour investment in Agency RMBS in future periods and to redeploy capital from such assets sales to credit sensitive assets. Subject to maintaining our qualificationas a REIT, we also may opportunistically acquire and manage various other types of mortgage-related and financial assets that we believe will compensate usappropriately for the risks associated with them, including, without limitation, collateralized mortgage obligations and securities issued by newly originatedresidential securitizations, including credit sensitive securities from these securitizations.4Table of ContentsIn recent years, we have transitioned our portfolio to one focused increasingly on residential and multi-family credit assets, which we believe will benefitfrom improving credit metrics. As part of our greater focus on credit assets, we acquired 100% of RiverBanc LLC, or RiverBanc, an investment management firmthat managed over $400 million of direct and indirect investments in multi-family apartment properties on behalf of both public and private institutional investors,including our Company, as well as ownership interests in certain other RiverBanc-managed entities. Consistent with this approach to capital allocation, weacquired an additional $314.7 million of residential and multi-family credit assets during the year ended December 31, 2016 , while reducing our net capitalallocated to Agency RMBS and Agency IO by approximately $47.9 million .We seek to achieve a balanced and diverse funding mix to finance our assets and operations. We currently rely primarily on a combination of short-termborrowings, such as repurchase agreements with terms typically of 30 days, longer term repurchase agreement borrowing with terms between one year and 18months and longer term structured financings, such as securitizations with terms longer than one year.We internally manage a portion of our portfolio, including Agency ARMs, Agency fixed-rate RMBS, non-Agency RMBS, residential securitized loans,second mortgage loans, multi-family CMBS and preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-familyproperties. In addition, as part of our investment strategy, we also utilize certain external investment managers to manage specific asset types that we target or own.Accordingly, Headlands Asset Management, LLC, or Headlands, provides investment management services with respect to our investments in distressedresidential loans, and The Midway Group, L.P., or Midway, provides investment management services with respect to our investments in Agency IOs.We have elected to be taxed as a REIT for federal income tax purposes and have complied, and intend to continue to comply, with the provisions of theInternal Revenue Code of 1986, as amended (the “Internal Revenue Code”), with respect thereto. Accordingly, we do not expect to be subject to federal income taxon our REIT taxable income that we currently distribute to our stockholders if certain asset, income, distribution and ownership tests and recordkeepingrequirements are fulfilled. Even if we maintain our qualification as a REIT, we expect to be subject to some federal, state and local taxes on our income generatedin our TRSs.The financial information requirements required under this Item 1 may be found in our consolidated financial statements beginning on page F-1 of thisAnnual Report.Our Investment StrategyOur strategy is to construct a portfolio of mortgage-related and residential housing-related assets that includes elements of credit risk, to a larger extent,and interest rate risk, to a lesser extent. Our investment strategy focuses increasingly on the acquisition and management of “credit residential” assets, which wedefine as (i) residential mortgage loans, including distressed residential loans and second mortgage loans, (ii) non-Agency RMBS, (iii) multi-family investments,including CMBS, mezzanine loans to, and preferred and joint venture equity investments in, owners of multi-family properties, and (iv) equity and debt securitiesissued by entities that invest in residential and commercial real estate. By focusing our investment strategy on credit residential assets, we target assets that webelieve will provide an attractive total rate of return rather than focusing on assets that provide strictly net interest margin. We also own a portfolio of leveragedAgency RMBS, which includes Agency ARMs, Agency fixed-rate and Agency IOs, although we began reducing our investment in this asset class in 2016, and wemay pursue opportunistic acquisitions of other types of assets that meet our investment criteria.Prior to deploying capital to any of the assets we target or determining to dispose of any of our investments, our management team will consider, amongother things, the amount and nature of anticipated cash flows from the asset, our ability to finance or borrow against the asset and the terms of such financing, therelated capital requirements, the credit risk related to the asset or the underlying collateral, the composition of our investment portfolio, REIT qualification andother regulatory requirements and future general market conditions. Consistent with our strategy to produce returns through a combination of net interest marginand net realized capital gains, we will seek, from time to time, to sell certain assets within our portfolio when we believe the combination of realized gains on anasset and reinvestment potential for the related sale proceeds are consistent with our long-term return objectives.Our investment strategy does not, subject to our continued compliance with applicable REIT tax requirements and the maintenance of our exclusion fromthe Investment Company Act of 1940, as amended (the “Investment Company Act”), limit the amount of our capital that may be invested in any of theseinvestments or in any particular class or type of assets. Thus, our future investments may include asset types different from the targeted or other assets described inthis Annual Report. The investment and capital allocation decisions of our Company and our external managers depend on prevailing market conditions, amongother factors, and may change over time in response to opportunities available in different economic and capital market environments. As a result, we cannotpredict the percentage of our capital that will be invested in any particular investment at any given time.5Table of ContentsFor more information regarding our portfolio as of December 31, 2016 , see Item 7 - “Management’s Discussion and Analysis of Financial Condition andResults of Operations” below.Investments in Credit Residential AssetsWe seek to identify credit sensitive assets, primarily relating to residential housing and multi-family housing, from which we can extract value through acombination of current yield and/or capital appreciation. Currently, our portfolio of credit residential assets is comprised of investments in two asset categories:structured multi-family property investments and distressed residential assets.Structured Multi-Family Property InvestmentsWe seek to position our structured multi-family investment platform in the marketplace as a real estate investor focused on debt and equity transactionsinvolving multifamily apartment properties. We do not seek to be the sole owner or day-to-day manager of properties. Rather, we intend to participate at variouslevels within the capital structure of the properties, typically (i)as a “capital partner” by lending to or co-investing alongside a project-level sponsor that has alreadyidentified an attractive investment opportunity, or (ii) through a subordinated tranche of a multi-family loan securitization. Our multi-family property investmentsare not limited to any particular geographic area in the United States. In general terms, we expect to that our multi-family investments will principally be in theform of multi-family CMBS, as well as preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-family apartmentproperties.With respect to those investments where we participate as a capital partner, we generally pursue existing multi-family properties that have in-place cashflow and unique or compelling attributes that provide an opportunity for value creation and increased returns through the combination of better management orcapital improvements that will lead to net cash flow growth and capital gains. Generally, we target investments in multi-family properties that are or have been:• located in a particularly dynamic submarket with strong prospects for rental growth;•located in smaller markets that are underserved and more attractively priced;•poorly managed by the previous owner, creating an opportunity for overall net income growth through better management practices;•undercapitalized and may benefit from an investment in physical improvements; or•highly stable and are suitably positioned to support high-yield preferred equity or mezzanine debt within their capital structure.As a capital partner, we generally seek experienced property-level operators or real estate entrepreneurs who have the ability to identify and managestrong investment opportunities but may lack the financial resources to fully fund the capital needed for a property acquisition. We intend to require our operatingpartners to materially co-invest in every investment we make with them as a capital partner.6Table of ContentsMulti-Family CMBS. Our portfolio of multi-family CMBS is comprised of (i) fixed rate PO securities issued from the first loss tranche, or “first loss,” ofcertain multi-family K-series securitizations sponsored by Freddie Mac and (ii) certain IO securities issued by these securitizations. Our investments in theseprivately placed first loss PO securities generally represent approximately 7.5% of the overall securitization which typically totals approximately $1.0 billion inmulti-family residential loans consisting of 70 to 100 individual properties diversified across a wide geographic footprint in the United States. These first losssecurities are typically backed by balloon non-recourse mortgage loans that provide for the payment of principal at maturity date, which is typically seven to tenyears. Moreover, each first loss tranche of multi-family CMBS in our portfolio is, in most cases, the most junior tranche of security issued by the securitization,meaning it will absorb all losses in the securitization prior to other more senior tranches being exposed to loss. As a result, each of the first loss securities in ourportfolio has been purchased, upon completion of a credit analysis and due diligence by our external manager and after consultation with and approval of oursenior management, at a sizable discount to its then-current par value, which we believe provides us with adequate protection against projected losses. In addition,as the owner of the first loss tranche, the Company has the right to participate in the workout of any distressed property in the securitization. We believe this rightwill allow the Company to mitigate or reduce any possible loss associated with the distressed property. IO securities that we own have been stripped off the entiresecuritization allowing the Company to receive cashflows over the life of the multi-family loans backing the securitization. These investments range from 10 to 17basis points and the underlying notional amount approximates $1.0 billion each. We may in the future invest in more senior tranches of multi-family CMBS, whichmay include some form of leverage, if we believe the risk-adjusted returns for such assets are attractive. In addition, we may acquire multi-family CMBS fromprivate originators of, or investors in, mortgage loans, including non-financial institutions and other entities. With respect to the multi-family CMBS owned by us,all of the loans that back the respective securitizations have been underwritten in accordance with Freddie Mac underwriting guidelines and standards; however,the multi-family securities we own are not guaranteed by Freddie Mac.Preferred Equity . We currently own, and expect to originate in the future, preferred equity investments in entities that directly or indirectly ownmultifamily properties. Preferred equity is not secured, but holders have priority relative to the common equity on cash flow distributions and proceeds from capitalevents. In addition, as a preferred holder we may seek to enhance our position and protect our equity position with covenants that limit the entity’s activities andgrant to the preferred holders the right to control the property upon default under relevant loan agreements or under the terms of our preferred equity investments.Occasionally, the first mortgage on a property prohibits additional liens and a preferred equity structure provides an attractive financing alternative. With preferredequity investments, we may become a special limited partner or member in the ownership entity and may be entitled to take certain actions, or cause a liquidation,upon a default. Under the typical arrangement, the preferred equity investor receives a stated return, and the common equity investor receives all cash flow onlyafter that return has been met. Preferred equity typically is more highly leveraged, with loan-to-value ratios of 85% to 90%. We expect our preferred equityinvestments will have mandatory redemption dates that will generally be coterminous with the maturity date for the senior loan on the property, and we expect tohold these investments until the mandatory redemption date. We generally intend to underwrite these investments such that our investment in these assets willproduce not less than an approximately 12% current return on investment, plus fees.Mezzanine Loans . We currently own, and anticipate making in the future, mezzanine loans that are senior to the operating partner’s equity in, andsubordinate to a first-mortgage loan on, a multi-family property. These loans are secured by pledges of ownership interests, in whole or in part, in entities thatdirectly or indirectly own the real property. In addition, we may require other collateral to secure mezzanine loans, including letters of credit, personal guaranteesor collateral unrelated to the property.We may structure our mezzanine loans so that we receive a stated fixed or variable interest rate on the loan as well as a percentage of gross revenues and apercentage of the increase in the fair market value of the property securing the loan, payable upon maturity, refinancing or sale of the property. Our mezzanineloans may also have prepayment lockouts, prepayment penalties, minimum profit hurdles or other mechanisms to protect and enhance returns in the event ofpremature repayment. We expect these investments will typically have terms from three to ten years and typically bear interest at a rate of 12% to 14% in thecurrent market. Mezzanine loans typically have loan-to-value ratios between 85% and 90%. Similar to our preferred equity investments, we generally expect tounderwrite our mezzanine loans such that a loan will produce not less than an approximately 12% current return on investment, plus fees.7Table of ContentsJoint Venture Equity. We currently own, and may make joint venture investments in entities that own multi-family properties. Joint venture equity is adirect common equity ownership interest in an entity that owns a property. In this type of investment, the return of capital to us is variable and is made on a paripassu basis between us and the other operating partners. In most cases, we expect to provide between 50% and 95% of the total equity capital for the joint venture,with our operating partner providing the balance of the equity capital, although we prefer to provide approximately 80% of the total equity capital in thesestructures. We typically require the operating agreement that governs our joint venture investment to provide for a minimum 10% hurdle return to all investorsbefore the manager of a joint venture property, which is typically affiliated with our operating partners, will become eligible for any promoted interest. Wegenerally expect to underwrite our joint venture equity investments such that our investments in these assets will produce an approximately 15% gross internal rateof return on our investment over our expected holding period, which is typically five to seven years.Other . We may also acquire investments that are structured with terms that reflect a combination of the investment structures described above. We alsomay invest, from time to time, based on market conditions, in other multifamily investments, structured investments in other property categories, equity and debtsecurities issued by entities that invest in residential and commercial real estate or in other mortgage-related assets that enable us to qualify or maintain ourqualification as a REIT or otherwise.Distressed Residential AssetsWe first began acquiring residential mortgage loans in 2012 from select mortgage loan originators and secondary market institutions. We do not originateloans currently nor provide direct financing to lenders; rather, we generally seek to acquire pools of distressed residential mortgage loans from select mortgageloan originators and secondary market institutions and contract with originators to acquire second lien mortgages they originate that meet our purchase criteria. Wedo not directly service the mortgage loans we acquire, and instead contract with fully licensed third-party subservicers to handle substantially all servicingfunctions. Since our inception, we have rotated in and out of non-Agency RMBS as market conditions warranted.Distressed Residential Loans. During the years ended December 31, 2016 and 2015 , we acquired multiple pools of distressed residential mortgage loanshaving an estimated aggregate market value of approximately $59.8 million and $152.2 million , respectively, at the time of their respective acquisitions. Thesedistressed residential mortgage loans consist of performing and re-performing, fixed- and adjustable-rate, fully-amortizing, interest-only and balloon, seasonedmortgage loans secured by first liens on one- to four-family properties. The loans were purchased at a discount to the aggregate principal amount outstanding,which we believe will provide us with adequate credit protection and an opportunity to modify and sell the loan and achieve an attractive yield. Our distressedresidential mortgage loans are sourced and managed by Headlands.Second Mortgages. During the third quarter of 2015, we announced the expansion of our credit residential strategy through investments in targeted newlyoriginated second lien mortgages, or "second mortgages". Pursuant to our second mortgage program, we have established relationships with mortgage originatorsthat will underwrite the second mortgages to guidelines established by us. These guidelines should lead to the origination of a mortgage that will be a qualifiedmortgage as defined by the Consumer Finance Protection Bureau. We intend to purchase from these originators the closed second mortgages that meet ourunderwriting guidelines and have gone through our due diligence procedures. We intend to continue to accumulate second mortgage loans pursuant to flow saleand purchase agreements with our current partners and we intend to pursue new relationships with additional partners in the future. We believe this program willprovide us with an attractive way to expand our portfolio with credit assets that should generate attractive risk-adjusted returns by targeting higher credit-qualityborrowers that we believe are currently underserved by large financial institutions.Investments in Non-Agency RMBS. In 2016, we increased our investments in non-Agency RMBS collateralized by re-performing and non-performingloans. Our non-Agency RMBS were purchased primarily in offerings of new issues of such securities at prices at or around par and represent the senior tranches inthe securitizations of the loan portfolios collateralizing such securities. These non-Agency RMBS are structured with significant credit enhancement (typicallyapproximately 50%, subject to market and credit conditions) to mitigate our exposure to credit risk on these securities. The subordinate tranche(s) absorb(s) allcredit losses (until extinguished) and typically receives no cash flow (interest or principal) until the senior tranche is paid off. In addition, these deal structurescontain an interest rate step-up feature, whereby the coupon on the senior tranche increases by 300 basis points if the security that we hold has not been redeemedby the issuer after 36 months. We expect that the combination of the priority cash flow of the senior tranche and the 36-month step-up will result in thesesecurities’ exhibiting short average lives and, accordingly, reduced interest rate sensitivity. Consequently, we believe that non-Agency RMBS provide attractivereturns given our assessment of the interest rate and credit risk associated with these securities.8Table of ContentsLeveraged Agency RMBS InvestmentsOur Agency RMBS consist of Agency ARMs, Agency fixed-rate RMBS and Agency IOs. Our Agency ARMs and Agency fixed-rate RMBS portfoliosare managed by us, our Agency IO portfolio is managed by Midway. Our Agency ARMs consist of pass-through certificates, the principal and interest of which areguaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, and are backed by ARMs or hybrid ARMs. Our current portfolio of Agency ARMs has interest resetperiods ranging from 30 years to less than three months.Our Agency fixed-rate RMBS portfolio consists of pass-through certificates, the principal and interest of which are guaranteed by Fannie Mae, FreddieMac or Ginnie Mae, which are primarily backed by 15-year residential fixed rate mortgage loans with lesser amounts invested in 20-year residential fixed-ratemortgage loans. The majority of these securities have coupons ranging from 2.5% to 3.5%.Agency IOs are securities that represent the right to receive the interest portion of the cash flow from a pool of mortgage loans issued or guaranteed byFannie Mae, Freddie Mac or Ginnie Mae. Agency IOs allow us to make a direct investment in borrower prepayment trends; however, Agency IOs introduceincreased risk due to price sensitivity as these securities have no underlying principal cash flows, which will cause them to underperform in high prepaymentenvironments as future interest payments will be reduced as a direct result of prepayments. In a rising interest rate environment, the value of an Agency IOgenerally tends to increase as their expected average life increases and prepayments decrease. Our investments in Agency IOs and related hedging and borrowingactivities are managed by Midway. We sometimes refer to these investments and related hedging and borrowing activities as our Agency IO strategy or ourAgency IO portfolio.It should be noted that the guarantee provided by the GSEs on Agency RMBS issued by them does not protect us from prepayment risk. In addition, ourAgency RMBS (including Agency IOs) are at risk to new or modified government-sponsored homeowner stimulus programs that may induce unpredictable andexcessively high prepayment speeds resulting in accelerated premium amortization and reduced net interest margin, both of which could materially adversely affectour business, financial condition and results of operations.OtherResidential Securitized Loans. Our portfolio also includes prime ARM loans held in securitization trusts (which we sometimes refer to as "residentialsecuritized loans" or “residential mortgage loans held in securitization trusts”). The prime ARM loans held in securitization trusts are loans that primarily wereoriginated by our discontinued mortgage lending business, and to a lesser extent purchased from third parties, that we securitized in 2005. These loans aresubstantially prime, full documentation, hybrid ARMs on residential properties and are all first lien mortgages. We maintain the ownership trust certificates, orequity, of these securitizations, which includes rights to excess interest, if any, and also take an active role in managing delinquencies and default risk related to theloans.Our Financing StrategyWe strive to maintain and achieve a balanced and diverse funding mix to finance our assets and operations. To achieve this, we rely primarily on acombination of short-term and longer-term repurchase agreement borrowings and structured financings, including securitized debt, CDOs and long-termsubordinated debt, and the issuance of convertible notes. The Company's policy for leverage is based on the type of asset, underlying collateral and overall marketconditions, with the intent of obtaining more permanent, longer-term financing for our more illiquid assets, such as our credit sensitive first loss tranche multi-family CMBS and distressed residential loans. Currently, we target maximum leverage ratios for callable or short-term financings of 8 to 1, in the case of AgencyRMBS (other than Agency IOs), and 2 to 1, in the case of Agency IOs. We may utilize short term financing on other asset classes with leverage ratios driven by thenature of the underlying asset as well as current market conditions.As of December 31, 2016 , our overall leverage ratio, including our short-term financings, such as repurchase agreements, and longer-term financings,such as securitized debt and subordinated debt (excluding the CDOs issued by the Consolidated K-Series and our residential CDOs), divided by stockholders’equity, was approximately 1.4 to 1. Our leverage ratio on our short term financings or callable debt was approximately 1.1 to 1. In each case, there may beoccasional short-term increases or decreases in the amount of leverage used due to significant market events, and we may change our leverage strategy at any time.We monitor all at risk or short term borrowings to ensure that we have adequate liquidity to satisfy margin calls and liquidity covenant requirements.9Table of ContentsWe primarily rely on short-term repurchase agreements to fund our Agency RMBS portfolio. These repurchase agreements provide us with short-termborrowings (typically 30 days) that bear interest rates that are linked to the London Interbank Offered Rate (“LIBOR”), a short term market interest rate used todetermine short term loan rates. Pursuant to these repurchase agreements, the financial institution that serves as a counterparty will generally agree to provide uswith financing based on the market value of the securities that we pledge as collateral, less a “haircut.” The market value of the collateral represents the price ofsuch collateral obtained from generally recognized sources or most recent closing bid quotation from such source plus accrued income. Our repurchase agreementsmay require us to deposit additional collateral pursuant to a margin call if the market value of our pledged collateral declines as a result of market conditions or dueto principal repayments on the mortgages underlying our pledged securities. Interest rates and haircuts will depend on the underlying collateral pledged.With respect to our investments in credit residential assets, we finance our investment in these assets primarily through working capital and, subject tomarket conditions, both short-term and long-term borrowings. Our financings may include repurchase agreement borrowings with terms of one year or less, orlonger term structured debt financing, such as longer-term repurchase agreement financing and securitized debt where the assets we intend to finance arecontributed to an SPE and serve as collateral for the financing. We engage in longer-term financings for the primary purpose of obtaining longer-term non-recoursefinancing on these assets. As of December 31, 2016 , our multi-family CMBS amounting to approximately $397.8 million and distressed residential mortgage loansamounting to approximately $475.2 million are financed, in part, by some form of repurchase agreement borrowing or securitized debt.Pursuant to the terms of our long-term debt financings, our ability to access the cash flows generated by the assets serving as collateral for theseborrowings may be significantly limited and we may be unable to sell or otherwise transfer or dispose of or modify such assets until the financing has matured. Aspart of each of our securitized debt financings and longer-term master repurchase agreements we are currently party to, we have provided a guarantee with respectto certain terms of some of these longer-term borrowings incurred by certain of our subsidiaries and we may provide similar guarantees in connection with futurefinancings.For more information regarding our outstanding borrowings and debt instruments at December 31, 2016 , see Item 7 - “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” of this Annual Report.Our Hedging Strategy The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments may include interest rateswaps, swaptions, futures, put and call options on futures and mortgage derivatives such as forward-settling purchases and sales of Agency RMBS where theunderlying pools of mortgage loans are “To-Be-Announced,” or TBAs.In connection with our investment in Agency IOs, we utilize several types of derivative instruments such as interest rate swaps, futures, put and calloptions on futures and TBAs to hedge interest rate risk and spread risk. For example, we utilize TBAs to hedge the interest rate and spread risk inherent in ourAgency fixed rate RMBS, including certain of our Agency IOs that are backed by Agency fixed rate RMBS. In a TBA transaction, we would agree to purchase orsell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to bedelivered is not identified until shortly before the TBA settlement date. The Company typically does not take delivery of TBAs, but rather settles with its tradingcounterparties on a net basis prior to the forward settlement date. By utilizing TBA transactions, we attempt to reduce changes in portfolio values due to changes ininterest rates. Although TBAs are liquid and have quoted market prices and represent the most actively traded class of RMBS, the use of TBAs exposes us toincreased market value risk. We typically conduct TBA and other interest rate futures hedging transactions through one of our TRSs.We also use interest rate swaps (separately from the interest rate swaps we use in connection with our Agency IO portfolio) to hedge variable cash flowsassociated with borrowings made under our financing arrangements and Residential CDOs. We typically pay a fixed rate and receive a floating rate based on onemonth LIBOR, on the notional amount of the interest rate swaps. The floating rate we receive under our swap agreements has the effect of offsetting the repricingcharacteristics and cash flows of our financing arrangements.10Table of ContentsIn connection with our hedging strategy, we, together with our external managers, utilize a model based risk analysis system to assist in projectingportfolio performances over a variety of different interest rates and market scenarios, such as shifts in interest rates, changes in prepayments and other factorsimpacting the valuations of our assets and liabilities. However, given the uncertainties related to prepayment rates, it is not possible to perfectly lock-in a spreadbetween the earnings asset yield and the related cost of borrowings. Moreover, the cash flows and market values of certain types of structured Agency RMBS, suchas the IOs we invest in, are more sensitive to prepayment risks than other Agency RMBS. Nonetheless, through active management and the use of evaluative stressscenarios, we believe that we can mitigate a significant amount of both value and earnings volatility.Our External ManagersThe Midway Group, L.P.A portion of our Agency RMBS portfolio comprised of Agency IOs is externally managed and advised by Midway pursuant to an investmentmanagement agreement between Midway and us (as amended, the “Midway Management Agreement”). Midway was founded in 2000 by Mr. Robert Sherak, amortgage industry veteran with more than 25 years’ experience, to serve as investment manager to the Midway Market Neutral Fund LLC, a private investmentfund. Midway has been managing a hedged portfolio of mortgage-related securities for over 15 years.Midway is responsible for administering the business activities and day-to-day operations of our investments in Agency IOs, and certain derivativeinstruments. Midway also may invest from time to time in, among other things, Agency RMBS consisting of pass-through certificates, CMOs, and POs and non-Agency RMBS (which may include IOs and POs). As part of its investment process, we expect that Midway will analyze significant amounts of data regarding thehistorical performance of mortgage-related securities transactions and collateral over various market cycles.Midway has established portfolio management resources for the investment assets described above and an established infrastructure supporting thoseresources. We believe Midway has developed strong relationships with a wide range of dealers and other market participants that provide Midway access to abroad range of trading opportunities and market information.As of December 31, 2016 , we had allocated approximately $76.9 million of capital to investments managed by Midway.The Midway Management AgreementWe entered into an investment management agreement with Midway on February 11, 2011, as amended on March 9, 2012 and April 1, 2014. TheMidway Management Agreement currently operates under a one-year term that is automatically renewed for successive one-year terms unless a termination noticeis delivered by either party to the other party at least six months prior to the end of the then current term. Pursuant to the Midway Management Agreement,Midway implements our Agency IO investment strategy and related hedging and borrowing activities and has complete discretion and authority to manage theseassets and related hedging and borrowing activities, subject to compliance with the written investment guidelines included in the Midway Management Agreementand the other terms and conditions of the Midway Management Agreement, including our authority to direct Midway to modify its investment strategy forpurposes of maintaining our qualification as a REIT and exemption from the Investment Company Act.11Table of ContentsPursuant to the terms of the Midway Management Agreement, Midway receives a base management fee payable monthly in arrears in a cash amountequal to (i) 1.50% per annum of our invested capital in the assets managed by Midway as of the last business day of the previous month, multiplied by (ii) 1/12th.In addition, Midway is entitled to a quarterly incentive fee (the "Midway Incentive Fee") that is calculated quarterly and paid quarterly in arrears. The MidwayIncentive Fee is subject to a high water mark equal to an 11% return on our invested capital in assets managed by Midway (the “High Water Mark”), and is payablein an amount equal to the excess, if any, of 35% of the dollar amount by which adjusted net income (as defined below) attributable to the assets managed byMidway, on a quarterly basis and before accounting for the Midway Incentive Fee, exceeds an annual 12.5% rate of return on invested capital (the “Hurdle Rate”),after adjusting for any carried over shortfall from previous quarters. The return rate for each quarter (the “Calculation Period”) is determined by dividing (i) theadjusted net income for the Calculation Period by (ii) the weighted average of our invested capital in assets managed by Midway during the CalculationPeriod. Upon mutual agreement of the parties to the Midway Management Agreement, a portion of each Midway Incentive Fee payable to Midway may be paid inshares of our common stock. For the purpose of the Midway Management Agreement, adjusted net income is defined as net income (loss) calculated in accordancewith generally accepted accounting principles in the United States (“GAAP”), including any unrealized gains and losses, after giving effect to certain expenses. Allsecurities managed for us by Midway are valued in accordance with GAAP. Unlike the Hurdle Rate, which is calculated on a three month basis, the High WaterMark is calculated on a calendar 12 month basis and resets every 24 months. The High Water Mark is a static dollar figure that Midway is required to recoup, tothe extent there is a deficit in the prior High Water Mark calculation period, before it is eligible again to receive a Midway Incentive Fee.In addition to the base management and incentive fees provided for in the Midway Management Agreement, we issued 213,980 shares of restricted stockto Midway in March 2012 that vested annually in one-third increments beginning on December 31, 2012. All of the restricted shares issued to Midway had vestedin full as of December 31, 2014. We also reimburse Midway for all transaction costs and expenses incurred in connection with the management and administrationof the assets and liabilities that they manage on our behalf.Although the assets and invested capital managed by Midway are held in an account that is wholly owned by our company, we may only redeem investedcapital in an amount equal to the lesser of 10% of our invested capital managed by Midway or $10 million as of the last calendar day of the month upon not lessthan 75 days written notice, subject to our authority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT andexemption from the Investment Company Act. Pursuant to the terms of the Midway Management Agreement, we are only permitted to make one such redemptionrequest in any 75-day period. Headlands Asset Management LLC We engaged Headlands to manage and advise us with respect to the distressed residential mortgage loans that we acquire. Headlands sources andperforms due-diligence procedures on the pools of distressed residential mortgage loans that we acquire and manages the servicing, modification and finaldisposition or resolution of the loans, which can range from modifying a mortgage loan balance, interest rate or payment to selling the underlying loan or the realestate asset. Headlands was founded on May 2008 as an investment manager focused on purchasing, servicing and managing all aspects of a portfolio of residentialmortgage loans. Headlands Management Agreement On November 2, 2016, we entered into a management agreement with Headlands (the "Headlands Management Agreement"), which became effective asof July 1, 2016 (the "Effective Date") and replaces our prior arrangement with Headlands. Pursuant to the terms of the Headlands Management Agreement,Headlands receives a monthly base management fee in arrears in a cash amount equal to the product of (i) 1.50% per annum of “Equity” as of the last business dayof the previous month, multiplied by (ii) 1/12th, where Equity is defined as “Assets” minus “Debt,” Assets is defined as the aggregate net carrying value (inaccordance with GAAP) of those assets of our Company managed by Headlands (specifically excluding (i) any unrealized gains or losses that have impacted netcarrying value as reported in our financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensiveincome or loss or in net income, and (ii) one-time events pursuant to changes in GAAP, (iii) impairment reserves recorded but not realized (if not included inunrealized gains or losses) and (iv) certain non-cash items not otherwise described above, in each case, as mutually agreed between Headlands and us) and Debt isdefined as the greater of (1) the net carrying value (in accordance with GAAP, excluding adjustments for unrealized gains or losses) of all third-party debt orliabilities secured by the Assets and (2) prior to termination of the Headlands Management Agreement, zero. Previously, the base management fee had beencalculated based on assets under management.12Table of ContentsIn addition, Headlands is entitled to an incentive fee that is calculated quarterly and paid in cash in arrears. The incentive fee is based upon the averageEquity during the fiscal quarter, subject to a high water mark equal to a 5% return on Equity, and shall be payable in an amount equal to 35% of the dollar amountby which adjusted net income (as defined in the Headlands Management Agreement) attributable to the Assets, before accounting for any incentive fees payable toHeadlands, exceeds an annualized 12% rate of return on Equity. With respect to the fourth fiscal quarter of each calendar 12-month period during the term of theHeadlands Management Agreement, the incentive fee will be payable in an amount equal to the excess, if any, of the amount by which the incentive fee earnedduring the calendar 12-month period exceeds the total incentive fees paid for the first three quarters of such calendar 12-month period. If incentive fees paid duringthe first three quarters exceed the amount earned on an annual basis, the excess incentive fee paid will be considered prepaid incentive fee and will be deductedfrom future incentive fees owed to Headlands. The Headlands Management Agreement has an initial term that will expire on the first anniversary of the Effective Date and thereafter will beautomatically extended for additional one year terms unless either party delivers written notice to the other party at least 180 days prior to the end of the then-applicable term. Each of the parties has certain other customary termination rights. Neither Headlands nor we will incur a termination fee upon termination of theHeadlands Management Agreement. In certain cases, if we terminate the Headlands Management Agreement, Headlands has, subject to certain conditions, a rightof first refusal to purchase the Assets under management at the time of termination. Prior to July 1, 2016, Headlands received a monthly base management fee equal to 1.5% of assets under management. Conflicts of Interest with Our External Managers; Equitable Allocation of Opportunities Each of Midway and Headlands manages, and is expected to continue to manage, other client accounts with similar or overlapping investment strategies.In connection with the services provided to those accounts, these managers may be compensated more favorably than for the services provided under our externalmanagement agreements, and such discrepancies in compensation may affect the level of service provided to us by our external managers. Moreover, each of ourexternal managers may have an economic interest in the accounts they manage or the investments they propose. In addition, we have in the past engaged in certainco-investment opportunities with an external manager or one of its affiliates and we may participate in future co-investment opportunities with our externalmanagers or their affiliates. In these cases, it is possible that our interests and the interests of our external managers will not always be aligned and this could resultin decisions that are not in the best interests of our company. Midway has agreed that, when making investment allocation decisions between us and its other client accounts, it will seek to allocate investmentopportunities on an equitable basis and in a manner it believes is in the best interests of its relevant accounts. Since certain of the assets that Midway manages onour behave are typically available only in specified quantities and since certain of these assets will also be targeted by other accounts managed by or associatedwith Midway, Midway may not be able to buy as much of certain assets as required to satisfy the needs of all of its clients’ or associated accounts. In these cases,we understand that the allocation procedures and policies of Midway would typically allocate such assets to multiple accounts in proportion to, among other things,the objectives, strategy, and stage of development or needs of each account. Moreover, the investment allocation policies of Midway may permit departure fromproportional allocation when the total allocation would result in an inefficiently small amount of the security being purchased for an account. Although we believethat Midway will seek to allocate investment opportunities in a manner which it believes to be in the best interests of all accounts involved and will seek toallocate, on an equitable basis, investment opportunities believed to be appropriate for us and the other accounts it manages or is associated with, there can be noassurance that a particular investment opportunity will be allocated in any particular manner.Midway is authorized to follow broad investment guidelines in determining which assets it will invest in. Although our Board of Directors will ultimatelydetermine when and how much capital to allocate to assets managed by Midway, we generally will not approve transactions in advance of their execution. As aresult, because Midway has great latitude to determine the types of assets it may decide are proper investments for us, there can be no assurance that we wouldotherwise approve of these investments individually or that they will be successful. In addition to conducting periodic reviews, we will rely primarily oninformation provided to us by our external managers. Finally, our external managers may use complex investment strategies and may engage in complextransactions on our behalf which may be difficult or impossible to unwind. 13Table of ContentsPursuant to the terms of the Midway Management Agreement, we may only redeem invested capital in an amount equal to the lesser of 10% of theinvested capital in assets managed by Midway or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to ourauthority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exemption from the Investment CompanyAct, and we are only permitted to make one such redemption request in any 75-day period. In the event of a significant market event or shock, we may be unable toeffect a redemption of invested capital in greater amounts or at a greater rate unless we obtain the consent of Midway. Because a reduction of invested capitalwould reduce the base management fee under the Midway Management Agreement, Midway may be less inclined to consent to such redemptions. None of our external managers is obligated to dedicate any specific personnel exclusively to us, nor are they or their personnel obligated to dedicate anyspecific portion of their time to the management of our business. As a result, we cannot provide any assurances regarding the amount of time our external managerswill dedicate to the management of our business. Moreover, each of our external managers has significant responsibilities for other investment vehicles and maynot always be able to devote sufficient time to the management of our business. Consequently, we may not receive the level of support and assistance that weotherwise might receive if such services were provided internally by us.Certain Federal Income Tax Considerations and Our Status as a REIT We have elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code for federal income tax purposes, commencing with ourtaxable year ended December 31, 2004, and we believe that our current and proposed method of operation will enable us to continue to qualify as a REIT for ourtaxable year ending December 31, 2017 and thereafter. Accordingly, the net income we earn on our assets is generally not subject to federal income tax to theextent we distribute such income to our stockholders each year (subject to a minimum distribution requirement of 90% of our taxable income) and comply withvarious other requirements. Taxable income generated by TRSs is subject to regular corporate income tax. The benefit of REIT tax status is a tax treatment that avoids “double taxation,” or taxation at both the corporate and stockholder levels, that generallyapplies to distributions by a corporation to its stockholders. Failure to qualify as a REIT would subject us to federal income tax (including any applicable minimumtax) on our taxable income at regular corporate rates and distributions to our stockholders would not be deductible by us.Summary Requirements for QualificationOrganizational Requirements A REIT is a corporation, trust, or association that meets each of the following requirements: 1)It is managed by one or more trustees or directors.2)Its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest.3)It would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws.4)It is neither a financial institution nor an insurance company subject to special provisions of the federal income tax laws.5)At least 100 persons are beneficial owners of its shares or ownership certificates.6)Not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals,which the federal income tax laws define to include certain entities, during the last half of any taxable year.7)It elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrativerequirements established by the IRS that must be met to elect and maintain REIT status.8)It meets certain other qualification tests, described below, regarding the nature of its income and assets.14Table of Contents9)It uses a calendar year for federal income tax purposes and complies with the record keeping requirements of the federal income tax laws.We must meet requirements 1 through 4 and 7 through 9 during our entire taxable year, requirement 5 during at least 335 days of a taxable year of 12months, or during a proportionate part of a taxable year of less than 12 months, and requirement 6 during the last half of our taxable year.Qualified REIT Subsidiaries . A corporation that is a QRS is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items ofincome, deduction, and credit of a “QRS” are treated as assets, liabilities, and items of income, deduction, and credit of the REIT. A “QRS” is a corporation, all ofthe capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any “QRS” that we own will be ignored, and all assets,liabilities, and items of income, deduction, and credit of such subsidiary will be treated as our assets, liabilities, and items of income, deduction, and credit. Taxable REIT Subsidiaries . A REIT is permitted to own up to 100% of the stock of one or more TRSs. A TRS is a fully taxable corporation that may earnincome that would not be qualifying income if earned directly by the parent REIT. Overall, no more than 25% (20% for taxable years beginning after December31, 2017) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS will pay income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid oraccrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. Our TRSs are subject to corporate income tax ontheir taxable income. Qualified REIT Assets . On the last day of each calendar quarter, at least 75% of the value of our assets (which includes any assets held through a QRS)must consist of qualified REIT assets — primarily real estate, mortgage loans secured by real estate, and certain mortgage-backed securities (“Qualified REITAssets”), government securities, cash, and cash items. We believe that substantially all of our assets are and will continue to be Qualified REIT Assets. On the lastday of each calendar quarter, of the assets not included in the foregoing 75% asset test, the value of securities that we hold issued by any one issuer may not exceed5% in value of our total assets and we may not own more than 10% of the voting power or value of any one issuer’s outstanding securities (with an exception forsecurities of a QRS or of a TRS). In addition, the aggregate value of our securities in TRSs cannot exceed 25% (20% for taxable years beginning after December31, 2017) of our total assets, and no more than 25% of the value of our total assets may consist of debt instruments of "publicly offered REITs" (i.e., REITs that arerequired to file annual and periodic reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended, or the Exchange Act). We monitor thepurchase and holding of our assets for purposes of the above asset tests and seek to manage our portfolio to comply at all times with such tests. We may from time to time hold, through one or more TRSs, assets that, if we held them directly, could generate income that would have an adverse effecton our qualification as a REIT or on certain classes of our stockholders. Gross Income TestsWe must meet the following separate gross income-based tests each year:1.The 75% Gross Income Test. At least 75% of our gross income for the taxable year must be derived from Qualified REIT Assets. Such incomeincludes interest (other than interest based in whole or in part on the income or profits of any person) on obligations secured by mortgages onreal property, rents from real property, gains from the sale of Qualified REIT Assets, and qualified temporary investment income or interestsin real property. The investments that we have made and intend to continue to make will give rise primarily to mortgage interest qualifyingunder the 75% income test.2.The 95% Gross Income Test. At least 95% of our gross income for the taxable year must be derived from the sources that are qualifying forpurposes of the 75% test, and from dividends, interest or gains from the sale or disposition of stock or other assets that are not dealer property.Distributions We must distribute to our stockholders each year an amount equal to at least (i) 90% of our taxable income before deduction of dividends paid andexcluding net capital gain, plus (ii) 90% of the excess of the net income from foreclosure property over the tax imposed on such income by the Internal RevenueCode, less (iii) any “excess non-cash income.” We have made and intend to continue to make distributions to our stockholders in sufficient amounts to meet thedistribution requirement for REIT qualification.15Table of ContentsCompetitionOur success depends, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. When we invest in mortgage-backedsecurities, mortgage loans and other investment assets, we compete with other REITs, investment banking firms, savings and loan associations, insurancecompanies, mutual funds, hedge funds, pension funds, banks and other financial institutions and other entities that invest in the same types of assets.Corporate Offices and PersonnelWe were formed as a Maryland corporation in 2003. Our corporate headquarters are located at 275 Madison Avenue, Suite 3200, New York, New York,10016 and our telephone number is (212) 792-0107. As of December 31, 2016 , we employed 19 full-time employees.Access to our Periodic SEC Reports and Other Corporate InformationOur internet website address is www.nymtrust.com. We make available free of charge, through our internet website, our annual report on Form 10-K, ourquarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments thereto that we file or furnish pursuant to Section 13(a) or 15(d) of theExchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Corporate Governance Guidelines andCode of Business Conduct and Ethics and the charters of our Audit, Compensation and Nominating and Corporate Governance Committees are also available onour website and are available in print to any stockholder upon request in writing to New York Mortgage Trust, Inc., c/o Secretary, 275 Madison Avenue, Suite3200, New York, New York, 10016. Information on our website is neither part of, nor incorporated into, this Annual Report on Form 10-K.16Table of ContentsCAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSWhen used in this Annual Report on Form 10-K, in future filings with the SEC or in press releases or other written or oral communications, statementswhich are not historical in nature, including those containing words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,”“would,” “could,” “goal,” “objective,” “will,” “may” or similar expressions, are intended to identify “forward-looking statements” within the meaning of Section27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act, and, as such, may involve known and unknown risks,uncertainties and assumptions.Forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all informationcurrently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events orfactors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from thoseexpressed in our forward-looking statements. The following factors are examples of those that could cause actual results to vary from our forward-lookingstatements: changes in interest rates and the market value of our securities; changes in credit spreads; the impact of the downgrade of the long-term credit ratings ofthe U.S., Fannie Mae, Freddie Mac, and Ginnie Mae; market volatility; changes in the prepayment rates on the mortgage loans underlying our investmentsecurities; increased rates of default and/or decreased recovery rates on our assets; delays in identifying and acquiring our targeted assets; our ability to borrow tofinance our assets and the terms thereof; changes in governmental laws, regulations, or policies affecting our business; changes to our relationships with ourexternal managers; our ability to maintain our qualification as a REIT for federal tax purposes; our ability to maintain our exemption from registration under theInvestment Company Act; and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These andother risks, uncertainties and factors, including the risk factors described in Item 1A – “Risk Factors” elsewhere in this Annual Report on Form 10-K, as updatedby those risks described in our subsequent filings under the Exchange Act, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date on which they are made. New risks and uncertainties arise over time and it isnot possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise anyforward-looking statements, whether as a result of new information, future events or otherwise.17Table of ContentsItem 1A. RISK FACTORSSet forth below are the risks that we believe are material to stockholders and prospective investors. You should carefully consider the following risk factors andthe various other factors identified in or incorporated by reference into any other documents filed by us with the SEC in evaluating our company and ourbusiness. The risks discussed herein can adversely affect our business, liquidity, operating results, prospects and financial condition. These risks could causethe market price of our securities to decline. The risk factors described below are not the only risks that may affect us. Additional risks and uncertainties notpresently known to us, or not presently deemed material by us, also may adversely affect our business, liquidity, operating results, prospects and financialcondition.Risks Related to Our Business and Our CompanyDeclines in the market values of assets in our investment portfolio may adversely affect periodic reported results and credit availability, which may reduceearnings and, in turn, cash available for distribution to our stockholders.The market value of the interest-bearing assets in which we invest and any related hedging instruments may move inversely with changes in interest rates.We anticipate that increases in interest rates will generally tend to decrease our net income and the market value of our interest-bearing assets. A significantpercentage of the securities within our investment portfolio are classified for accounting purposes as “available for sale.” Changes in the market values of tradingsecurities will be reflected in earnings and changes in the market values of available for sale securities will be reflected in stockholders’ equity. As a result, adecline in market values of certain of our investment securities may reduce the book value of our assets. Moreover, if the decline in market value of an availablefor sale security is other than temporary, such decline will reduce earnings.A decline in the market value of our interest-bearing assets may adversely affect us, particularly in instances where we have borrowed money based onthe market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan, whichwould reduce our liquidity and limit our ability to leverage our assets. In addition, if we are, or anticipate being, unable to post the additional collateral, we wouldhave to sell the assets at a time when we might not otherwise choose to do so. In the event that we do not have sufficient liquidity to meet such requirements,lending institutions may accelerate indebtedness, increase interest rates and terminate our ability to borrow, any of which could result in a rapid deterioration of ourfinancial condition and cash available for distribution to our stockholders. Moreover, if we liquidate the assets at prices lower than the amortized cost of suchassets, we will incur losses.The market values of our investments may also decline without any general increase in interest rates for a number of reasons, such as increases indefaults, actual or perceived increases in voluntary prepayments for those investments that we have that are subject to prepayment risk, and widening of creditspreads. If the market values of our investments were to decline for any reason, the value of your investment could also decline.Difficult conditions in the mortgage and real estate markets, the financial markets and the economy generally have caused and may cause us to experiencelosses and these conditions may persist for the foreseeable future.Our business is materially affected by conditions in the residential and commercial mortgage markets, the residential and commercial real estate markets,the financial markets and the economy generally. Furthermore, because a significant portion of our current assets and our targeted assets are credit sensitive, webelieve the risks associated with our investments will be more acute during periods of economic slowdown, recession or market dislocations, especially if theseperiods are accompanied by declining real estate values and defaults. In recent years, concerns about the health of the global economy generally and the residentialand commercial mortgage markets specifically, as well as inflation, energy costs, European sovereign debt, U.S. budget debates and geopolitical issues and theavailability and cost of credit have contributed to increased volatility and uncertainty for the economy and financial markets. The residential and commercialmortgage markets were adversely affected by changes in the lending landscape during the financial market crisis of 2008, the severity of which was largelyunanticipated by the markets, and there is no assurance that these markets will not worsen again.18Table of ContentsIn addition, an economic slowdown, delayed recovery or general disruption in the mortgage markets may result in decreased demand for residential andcommercial property, which would likely further compress homeownership rates and place additional pressure on home price performance, while forcingcommercial property owners to lower rents on properties with excess supply. We believe there is a strong correlation between home price growth rates andmortgage loan delinquencies. Moreover, to the extent that a property owner has fewer tenants or receives lower rents, such property owners will generate less cashflow on their properties, which reduces the value of their property and increases significantly the likelihood that such property owners will default on their debtservice obligations. If the borrowers of our mortgage loans, or the loans underlying certain of our investment securities, default, we may incur material losses onthose loans or investment securities. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interestincome and our ability to acquire our targeted assets in the future on favorable terms or at all. The further deterioration of the mortgage markets, the residential orcommercial real estate markets, the financial markets and the economy generally may result in a decline in the market value of our investments or cause us toexperience losses related to our assets, which may adversely affect our results of operations, the availability and cost of credit and our ability to make distributionsto our stockholders.An increase in interest rates may cause a decrease in the availability of certain of our targeted assets, which could adversely affect our ability to acquiretargeted assets that satisfy our investment objectives and to generate income and pay dividends.Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loansoriginated may affect the volume of targeted assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment andbusiness objectives. Rising interest rates may also cause our targeted assets that were issued or originated prior to an interest rate increase to provide yields that arebelow prevailing market interest rates. If rising interest rates cause us to be unable to acquire a sufficient volume of our targeted assets with a yield that is aboveour borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected.In addition, the RMBS and residential mortgage loans we invest in may be comprised of ARMs that are subject to periodic and lifetime interest rate caps.Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate canincrease over the life of the security or loan. Our borrowings typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interestrates, the interest rates paid on our borrowings could increase without limitation while interest rate caps could limit the interest rates on the Agency ARMs orresidential mortgage loans comprised of ARMs in our portfolio. This problem is magnified for securities backed by, or residential mortgage loans comprised of,ARMs and hybrid ARMs that are not fully indexed. Further, certain securities backed by, or residential mortgage loans comprised of, ARMs and hybrid ARMsmay be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, the payments wereceive on Agency ARMs backed by, or residential mortgage loans comprised of, ARMs and hybrid ARMs may be lower than the related debt service costs. Thesefactors could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.Interest rate fluctuations will also cause variances in the yield curve, which may reduce our net income. The relationship between short-term and longer-term interest rates is often referred to as the “yield curve.” If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of theyield curve), our borrowing costs may increase more rapidly than the interest income earned on our interest-earning assets. For example, because the AgencyRMBS in our investment portfolio typically bear interest based on longer-term rates while our borrowings typically bear interest based on short-term rates, aflattening of the yield curve would tend to decrease our net income and the market value of these securities. Additionally, to the extent cash flows from investmentsthat return scheduled and unscheduled principal are reinvested, the spread between the yields of the new investments and available borrowing rates may decline,which would likely decrease our net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), inwhich event our borrowing costs may exceed our interest income and we could incur significant operating losses.Prepayment rates can change, adversely affecting the performance of our assets.The frequency at which prepayments (including both voluntary prepayments by the borrowers and liquidations due to defaults and foreclosures) occur onthe residential mortgage loans we own and those that underlie our RMBS is difficult to predict and is affected by a variety of factors, including the prevailing levelof interest rates as well as economic, demographic, tax, social, legal, legislative and other factors. Generally, borrowers tend to prepay their mortgages whenprevailing mortgage rates fall below the interest rates on their mortgage loans.19Table of ContentsIn general, “premium” securities (securities whose market values exceed their principal or par amounts) are adversely affected by faster-than-anticipatedprepayments because the above-market coupon that such premium securities carry will be earned for a shorter period of time. Generally, “discount” securities(securities whose principal or par amounts exceed their market values) are adversely affected by slower-than-anticipated prepayments. Since many RMBS will bediscount securities when interest rates are high, and will be premium securities when interest rates are low, these RMBS may be adversely affected by changes inprepayments in any interest rate environment. Although we estimate prepayment rates to determine the effective yield of our assets and valuations, these estimatesare not precise and prepayment rates do not necessarily change in a predictable manner as a function of interest rate changes.The adverse effects of prepayments may impact us in various ways. First, particular investments, such as IOs, may experience outright losses in anenvironment of faster actual or anticipated prepayments. Second, particular investments may under-perform relative to any hedges that we may have constructedfor these assets, resulting in a loss to us. In particular, prepayments (at par) may limit the potential upside of many RMBS to their principal or par amounts,whereas their corresponding hedges often have the potential for unlimited loss. Furthermore, to the extent that faster prepayment rates are due to lower interestrates, the principal payments received from prepayments will tend to be reinvested in lower-yielding assets, which may reduce our income in the long run.Therefore, if actual prepayment rates differ from anticipated prepayment rates, our business, financial condition and results of operations and ability to makedistributions to our stockholders could be materially adversely affected.Some of the commercial real estate loans we may originate or invest in may allow the borrower to make prepayments without incurring a prepaymentpenalty and some may include provisions allowing the borrower to extend the term of the loan beyond the originally scheduled maturity. Because the decision toprepay or extend a commercial loan is typically controlled by the borrower, we may not accurately anticipate the timing of these events, which could affect theearnings and cash flows we anticipate and could impact our ability to finance these assets.Increased levels of prepayments on the mortgages underlying structured mortgage-backed securities, particularly IOs, might decrease net interest income orresult in a net loss, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to ourstockholders.When we acquire structured mortgage-backed securities, such as IOs, we anticipate that the underlying mortgages will prepay at a projected rate,generating an expected yield. When the prepayment rates on the mortgages underlying these securities are higher than expected, our returns on those securities maybe materially adversely affected. For example, the value of our Agency IOs is extremely sensitive to prepayments because holders of these securities do not havethe right to receive any principal payments on the underlying mortgages. As a result, increased levels of prepayments on our Agency IOs will negatively impactour net interest income and may result in a loss.Interest rate mismatches between the interest-earning assets held in our investment portfolio and the borrowings used to fund the purchases of those assetsmay reduce our net income or result in a loss during periods of changing interest rates.Certain of the assets held in our investment portfolio have a fixed coupon rate, generally for a significant period, and in some cases, for the averagematurity of the asset. At the same time, our repurchase agreements and certain other borrowings typically provide for a payment reset period of 30 days or less. Inaddition, the average maturity of our borrowings generally will be shorter than the average maturity of the assets currently in our portfolio and certain othertargeted assets in which we seek to invest. Historically, we have used swap agreements as a means for attempting to fix the cost of certain of our liabilities over aperiod of time; however, these agreements will generally not be sufficient to match the cost of all our liabilities against all of our investments. In the event weexperience unexpectedly high or low prepayment rates on RMBS or other assets, our strategy for matching our assets with our liabilities is more likely to beunsuccessful which may result in reduced earnings or losses and reduced cash available for distribution to our stockholders.Our investments include high yield or subordinated and lower rated securities that have greater risks of loss than other investments, which could adverselyaffect our business, financial condition and cash available for dividends.We own and seek to acquire higher yielding or subordinated or lower rated securities, including subordinated tranches of CMBS or non-Agency RMBS,which involve a higher degree of risk than other investments. Numerous factors may affect a company’s ability to repay its high yield or subordinated securities,including the failure to meet its business plan, a downturn in its industry or negative economic conditions. These assets may not be secured by mortgages or lienson assets. Our right to payment and security interest with respect to such assets may be subordinated to the payment rights and security interests of the seniorlender. Therefore, we may be limited in our ability to enforce our rights to collect on these assets through a foreclosure of collateral.20Table of ContentsOur direct and indirect investments in multi-family and other commercial properties are subject to the ability of the property owner to generate net incomefrom operating the property as well as the risks of delinquency and foreclosure.Our direct and indirect investments in multi-family or other commercial property are subject to risks of delinquency and foreclosure on the properties thatunderlie or back these investments, and risk of loss that may be greater than similar risks associated with loans made on the security of single-family residentialproperty. The ability of a borrower to repay a loan or obligation secured by, or an equity interest in an entity that owns, an income-producing property typically isdependent primarily upon the successful operation of such property. If the net operating income of the subject property is reduced, the borrower's ability to repaythe loan, or our ability to receive adequate returns on our investment, may be impaired. Net operating income of an income-producing property can be adverselyaffected by, among other things:•tenant mix;•success of tenant businesses;•property management decisions;•property location, condition, and design;•new construction of competitive properties;•changes in laws that increase operating expenses or limit rents that may be charged;•changes in national, regional or local economic conditions and/or specific industry segments, including the labor, credit and securitization markets;•declines in regional or local real estate values;•declines in regional or local rental or occupancy rates;•increases in interest rates, real estate tax rates, and other operating expenses;•costs of remediation and liabilities associated with environmental conditions;•the potential for uninsured or underinsured property losses;•changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental legislation and the related costs ofcompliance; and•acts of God, terrorist attacks, social unrest, and civil disturbances.In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of thecollateral and the outstanding principal and accrued interest of the mortgage loan, and any such losses could have a material adverse effect on our cash flow fromoperations and our ability to make distributions to our stockholders. Similarly, the CMBS, mezzanine loans and preferred equity and joint venture equityinvestments we own will be adversely affected by a default on any of the loans that underlie those securities or that are secured by the related property. See "—Weinvest in CMBS that are subordinate to more senior securities issued by the applicable securitization, which entails certain risks."In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of thevalue of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to theavoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can bean expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.21Table of ContentsThe preferred equity investments or mezzanine loan assets that we may acquire or originate will involve greater risks of loss than senior loans secured byincome-producing properties.We may acquire or originate mezzanine loans, which take the form of subordinated loans secured by second mortgages on the underlying property orloans secured by a pledge of the ownership interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns theinterest in the entity owning the property. We also may make preferred equity investments in the entity that owns the property. These types of assets involve ahigher degree of risk than long-term senior mortgage lending secured by income-producing real property, because the loan may become unsecured or our equityinvestment may be effectively extinguished as a result of foreclosure by the senior lender. In addition, mezzanine loans and preferred equity investments are oftenused to achieve a very high leverage on large commercial projects, resulting in less equity in the property and increasing the risk of loss of principal or investment.If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan or preferred equityinvestment will be satisfied only after the senior debt, in case of a mezzanine loan, or all senior and subordinated debt, in case of a preferred equity investment, ispaid in full. Where senior debt exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, acceptprepayments, exercise our remedies or control decisions made in bankruptcy proceedings relating to borrowers or preferred equity investors. As a result, we maynot recover some or all of our investment, which could result in significant losses.To the extent that due diligence is conducted on potential assets, such due diligence may not reveal all of the risks associated with such assets and may notreveal other weaknesses in such assets, which could lead to losses.Before acquiring certain assets, such as whole mortgage loans, CMBS, or other mortgage-related or fixed income assets, we or the external managerresponsible for the acquisition and management of such asset may decide to conduct (either directly or using third parties) certain due diligence. Such due diligencemay include (i) an assessment of the strengths and weaknesses of the asset’s credit profile, (ii) a review of all or merely a subset of the documentation related to theasset, or (iii) other reviews that we or the external manager may deem appropriate to conduct. There can be no assurance that we or the external manager willconduct any specific level of due diligence, or that, among other things, the due diligence process will uncover all relevant facts or that any purchase will besuccessful, which could result in losses on these assets, which, in turn, could adversely affect our business, financial condition and results of operations and ourability to make distributions to our stockholders.Our real estate assets are subject to risks particular to real property.We own real estate and assets secured by real estate, and may in the future acquire more real estate, either through direct or indirect investments or upona default of mortgage loans. Real estate assets are subject to various risks, including:•acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;•acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;•adverse changes in national and local economic and market conditions; and•changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations,fiscal policies and ordinances.The occurrence of any of the foregoing or similar events may reduce our return from an affected property or asset and, consequently, materially adverselyaffect our business, financial condition and results of operations and our ability to make distributions to our stockholders.The lack of liquidity in certain of our assets may adversely affect our business.A portion of the securities or loans we own or acquire may be subject to legal, contractual and other restrictions on resale or will otherwise be less liquidthan publicly-traded securities. For example, certain of our multi-family CMBS is held in a securitization trust and may not be sold or transferred until the noteissued by the securitization trust matures or is repaid. The illiquidity of certain of our assets may make it difficult for us to sell such assets if the need or desirearises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we havepreviously recorded our assets. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited,which could adversely affect our results of operations and financial condition.22Table of ContentsOur Level 2 portfolio investments are recorded at fair value based on market quotations from pricing services and brokers/dealers. Our Level 3 investments arerecorded at fair value utilizing internal valuation models. The value of our common stock could be adversely affected if our determinations regarding the fairvalue of these investments were materially higher than the values that we ultimately realize upon their disposal.All of our current portfolio investments are, and some of our future portfolio investments will be, in the form of securities or other investments that arenot publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We currently value and willcontinue to value these investments on a quarterly-basis at fair value as determined by our management based on market quotations from pricing services andbrokers/dealers and/or internal valuation models. Because such quotations and valuations are inherently uncertain, they may fluctuate over short periods of timeand are based on estimates, our determinations of fair value may differ materially from the values that would have been used if a public market for these securitiesexisted. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments were materially higher thanthe values that we ultimately realize upon their disposal.Our adoption of fair value option accounting could result in income statement volatility, which in turn, could cause significant market price and tradingvolume fluctuations for our securities.We have determined that certain securitization trusts that issued certain of our multi-family CMBS or securitized debt are VIEs of which we are theprimary beneficiary, and elected the fair value option on the assets and liabilities held within those securitization trusts. As a result, we are required to consolidatethe underlying multi-family loan or securities, as applicable, related debt, interest income and interest expense of those securitization trusts in our financialstatements, although our actual investments in these securitization trusts generally represent a small percentage of the total assets of the trusts. Prior to the yearended December 31, 2012, we historically accounted for the multi-family CMBS in our investment portfolio through accumulated other comprehensive income,pursuant to which unrealized gains and losses on those multi-family CMBS were reflected as an adjustment to stockholders’ equity. However, the fair value optionrequires that changes in valuations in the assets and liabilities of those VIEs of which we are the primary beneficiary, such as the Consolidated K-Series, bereflected through our earnings. As we acquire additional multi-family CMBS assets in the future that are similar in structure and form to the Consolidated K-Series’ assets or securitize investment securities owned by us, we may be required to consolidate the assets and liabilities of the issuing or securitization trust andwould expect to elect the fair value option for those assets. Because of this, our earnings may experience greater volatility in the future as a decline in the fair valueof the assets of any VIE that we consolidate in our financial statements could reduce both our earnings and stockholders' equity, which in turn, could causesignificant market price and trading volume fluctuations for our securities.Competition may prevent us from acquiring assets on favorable terms or at all, which could have a material adverse effect on our business, financial conditionand results of operations.We operate in a highly competitive market for investment opportunities. Our net income largely depends on our ability to acquire our targeted assets atfavorable spreads over our borrowing costs. In acquiring our targeted assets, we compete with other REITs, investment banking firms, savings and loanassociations, banks, insurance companies, mutual funds, other lenders and other entities that purchase mortgage-related assets, many of which have greaterfinancial resources than us. Additionally, many of our potential competitors are not subject to REIT tax compliance or required to maintain an exclusion from theInvestment Company Act. As a result, we may not in the future be able to acquire sufficient quantities of our targeted assets at favorable spreads over ourborrowing costs, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to ourstockholders.23Table of ContentsWe may change our investment strategy, hedging strategy and asset allocation and operational and management policies without stockholder consent, whichmay result in the purchase of riskier assets and materially adversely affect our business, financial condition and results of operations and our ability to makedistributions to our stockholders.We may change our investment strategy, hedging strategy and asset allocation and operational and management policies at any time without the consentof our stockholders, which could result in our purchasing assets or entering into hedging transactions that are different from, and possibly riskier than, the assetsand hedging transactions described in this report. A change in our investment strategy or hedging strategy may increase our exposure to real estate values, interestrates, prepayment rates, credit risk and other factors. A change in our asset allocation could result in us purchasing assets in classes different from those describedin this report. Our Board of Directors determines our operational policies and may amend or revise our policies, including those with respect to our acquisitions,growth, operations, indebtedness, capitalization and distributions or approve transactions that deviate from these policies without a vote of, or notice to, ourstockholders. In addition, certain of our external managers have great latitude in making investment and hedging decisions on our behalf. Changes in ourinvestment strategy, hedging strategy and asset allocation and operational and management policies could materially adversely affect our business, financialcondition and results of operations and ability to make distributions to our stockholders.In connection with our operating and investment activity, we rely on third-party service providers, including our external managers, to perform a variety ofservices, comply with applicable laws and regulations, and carry out contractual covenants and terms, the failure of which by any of these third-party serviceproviders may adversely impact our business and financial results.In connection with our business of acquiring and holding loans, engaging in securitization transactions, and investing in third-party issued securities, werely on third-party service providers, including our external managers, to perform a variety of services, comply with applicable laws and regulations, and carry outcontractual covenants and terms. For example, we rely on the mortgage servicers who service the mortgage loans we purchase as well as the mortgage loansunderlying our CMBS to, among other things, collect principal and interest payments on such mortgage loans and perform loss mitigation services. In addition,legislation that has been enacted or that may be enacted in order to reduce or prevent foreclosures through, among other things, loan modifications may reduce thevalue of mortgage loans backing our CMBS or mortgage loans that we acquire. Mortgage servicers may be incentivized by the U.S. Government to pursue suchloan modifications, as well as forbearance plans and other actions intended to prevent foreclosure, even if such loan modifications and other actions are not in thebest interests of the beneficial owners of the mortgage loans. Mortgage servicers and other service providers, such as our external managers, trustees, bondinsurance providers, due diligence vendors and document custodians, may fail to perform or otherwise not perform in a manner that promotes our interests. As aresult, we are subject to the risks associated with a third party’s failure to perform, including failure to perform due to reasons such as fraud, negligence, errors,miscalculations, or insolvency.We may be affected by deficiencies in foreclosure practices of third parties, as well as related delays in the foreclosure process.One of the biggest risks overhanging the RMBS market has been uncertainty around the timing and ability of servicers to foreclose on defaulted loans, sothat they can liquidate the underlying properties and ultimately pass the liquidation proceeds through to RMBS holders. Given the magnitude of the recent housingcrisis, and in response to the well-publicized failures of many servicers to follow proper foreclosure procedures (such as involving "robo-signing"), mortgageservicers are being held to much higher foreclosure-related documentation standards than they previously were. However, because many mortgages have beentransferred and assigned multiple times (and by means of varying assignment procedures) throughout the origination, warehouse, and securitization processes,mortgage servicers are generally having much more difficulty furnishing the requisite documentation to initiate or complete foreclosures. This leads to stalled orsuspended foreclosure proceedings, and ultimately additional foreclosure-related costs. Foreclosure-related delays also tend to increase ultimate loan loss severitiesas a result of property deterioration, amplified legal and other costs, and other factors. Many factors delaying foreclosure, such as borrower lawsuits and judicialbacklog and scrutiny, are outside of a servicer's control and have delayed, and will likely continue to delay, foreclosure processing in both judicial states (whereforeclosures require court involvement) and non-judicial states. The extension of foreclosure timelines also increases the inventory backlog of distressed homes onthe market and creates greater uncertainty about housing prices. The concerns about deficiencies in foreclosure practices of servicers and related delays in theforeclosure process may impact our loss assumptions and affect the values of, and our returns on, our investments in RMBS and residential mortgage loans.24Table of ContentsWe are dependent on certain of our external managers and certain of their key personnel and may not find a suitable replacement if their respectivemanagement agreements with us are terminated or such key personnel are no longer available to us.We historically were organized as a self-advised company that acquired, originated, sold and managed its assets; however, as we modified our businessstrategy and our targeted assets, we began to outsource the management of certain asset classes for which we had limited internal resources or experience. Wepresently utilize two external managers to manage certain of our assets and investment strategies. Each of our external managers, in some manner, identifies,evaluates, negotiates, structures, closes and monitors certain investments on our behalf. In each case, we have engaged these third parties because of the expertiseof certain key personnel of our external managers. The departure of any of the senior officers of our external managers, or of a significant number of investmentprofessionals or principals of our external managers, could have a material adverse effect on our ability to achieve our investment objectives in these asset classes.We are subject to the risk that our external managers will terminate their respective management agreement with us or that we may deem it necessary to terminatesuch agreement or prevent certain individuals from performing services for us, and that no suitable replacement will be found to manage certain of our assets andinvestment strategies on a timely basis or at all.Pursuant to our management agreements, our external managers are entitled to receive a management fee that is payable regardless of the performance of theassets under their management.We will pay each of our external managers substantial base management fees, based on our invested capital regardless of the performance of the assetsunder their management. The external managers’ entitlement in many cases to non-performance based compensation may reduce its incentive to devote the timeand effort of its professionals to seeking profitable investment opportunities for our company, which could result in the under-performance of assets under theirmanagement and negatively affect our ability to pay distributions to our stockholders or to achieve capital appreciation.Pursuant to the terms of our management agreements, our external managers are generally entitled to receive an incentive fee, which may induce them tomake certain investments, including speculative or high risk investments.In addition to the base management fees payable to our external managers, our external managers are generally entitled to receive incentive compensationbased, in part, upon the achievement of targeted levels of net income. In evaluating investments and other management strategies, the opportunity to earn incentivecompensation based on net income may lead our external managers to place undue emphasis on the maximization of net income at the expense of other criteria,such as preservation of capital, maintaining liquidity and/or management of interest rate, credit or market risks, in order to achieve higher incentive compensation.Investments with higher yield potential are generally riskier or more speculative. In addition, Midway has broad discretion regarding the types of investments itwill make pursuant to its management agreement with us. This could result in increased risk to the value of our assets under the management of our externalmanagers.We compete with our external managers’ other clients for access to them.Each of our external managers manages, and is expected to continue to manage, other client accounts with similar or overlapping investment strategies. Inconnection with the services provided to those accounts, these managers may be compensated more favorably than for the services provided under our externalmanagement agreements, and such discrepancies in compensation may affect the level of service provided to us by our external managers. Moreover, each of ourexternal managers may have an economic interest in the accounts they manage or the investments they propose. As a result, we will compete with these otheraccounts and interests for access to our external managers and the benefits derived from those relationships. For the same reasons, the personnel of our externalmanagers may be unable to dedicate a substantial portion of their time managing our investments to the extent they manage or are associated with any futureinvestment vehicles not related to us.There are conflicts of interest in our relationships with our external managers, which could result in decisions that are not in the best interests of ourstockholders.We may acquire or sell assets in which an external manager or its affiliates have or may have an interest, or we may participate in co-investmentopportunities with our external managers or their affiliates. In these cases, it is possible that our interests and the interests of our external managers will not alwaysbe aligned and this could result in decisions that are not in the best interests of our company. Similarly, our external managers or its affiliates may acquire or sellassets in which we have or may have an interest. Although such acquisitions or dispositions may present conflicts of interest, we nonetheless may pursue andconsummate such transactions. Additionally, we may engage in transactions directly with our external managers or their affiliates, including the purchase and saleof all or a portion of a targeted asset.25Table of ContentsAcquisitions made for entities with similar objectives may be different from those made on our behalf. Our external managers may have economicinterests in or other relationships with others in whose obligations or assets we may acquire. In particular, such persons may make and/or hold an investment inassets that we acquire that may be pari passu, senior or junior in ranking to our interest in the assets or in which partners, security holders, officers, directors, agentsor employees of such persons serve on boards of directors or otherwise have ongoing relationships. Each of such ownership and other relationships may result insecurities laws restrictions on transactions in such assets and otherwise create conflicts of interest. In such instances, the external managers may, in their solediscretion, make recommendations and decisions regarding such assets for other entities that may be the same as or different from those made with respect to assetsacquired by us and may take actions (or omit to take actions) in the context of these other economic interests or relationships, the consequences of which may beadverse to our interests.The key personnel of our external managers and its affiliates devote as much time to us as our external managers deem appropriate, however, theseindividuals may have conflicts in allocating their time and services among us and their other accounts and investment vehicles. During turbulent conditions in themortgage or real estate industries, distress in the credit markets or other times when we will need focused support and assistance from our external managers, otherentities for which our external managers serve as manager, or their accounts, will likewise require greater focus and attention, placing the resources of our externalmanagers in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internallymanaged.We, directly or through our external managers, may obtain confidential information about the companies or securities in which we have invested or mayinvest. If we do possess confidential information about such companies or securities, there may be restrictions on our ability to dispose of, increase the amount of,or otherwise take action with respect to the securities of such companies. Our external managers’ management of other accounts could create a conflict of interestto the extent such external manager is aware of material non-public information concerning potential investment decisions and this in turn could impact our abilityto make necessary investment decisions. Any limitations that develop as a result of our access to confidential information could therefore materially adverselyaffect our business, financial condition and results of operations and our ability to make distributions to our stockholders.There are limitations on our ability to withdraw invested capital from the account managed by Midway and our inability to withdraw our invested capital whennecessary may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.Pursuant to the terms of the Midway Management Agreement, we may only redeem invested capital in an amount equal to the lesser of 10% of theinvested capital in the account managed by Midway or $10 million as of the last calendar day of the month upon not less than 75 days written notice, subject to ourauthority to direct Midway to modify its investment strategy for purposes of maintaining our qualification as a REIT and exclusion from the Investment CompanyAct. In addition, we are only permitted to make one such redemption request in any 75-day period. In the event of a significant market event or shock, we may beunable to effect a redemption of invested capital in greater amounts or at a greater rate unless we obtain the consent of Midway. Moreover, because a reduction ofinvested capital would reduce the base management fee under the Midway Management Agreement, Midway may be less inclined to consent to such redemptions.If we are unable to withdraw invested capital as needed to meet our obligations in the future, our business and financial condition could be materially adverselyaffected.Termination of our external management agreements may be difficult and costly.Pursuant to the Midway Management Agreement, in the event we determine to terminate the Midway Management Agreement at any time in the future,Midway has the right to liquidate the assets it manages on our behalf in its sole discretion. Moreover, as discussed above, there are certain restrictions on ourability to redeem invested capital under the Midway Management Agreement. As a result, we may have little control over the liquidation of any of our assets thatare managed by Midway or the timing of the full redemption of our invested capital, which may make it more difficult to terminate our agreement with Midwayand could have a material adverse effect on our business, financial condition and results of operations.In certain cases, if we terminate the Headlands Management Agreement, Headlands has, subject to certain conditions, a right of first refusal to purchasethe loans managed by them at the time of the termination, which could result in the disposition of assets when we otherwise would not choose to dispose of suchassets.26Table of ContentsThe market price and trading volume of our stock may be volatile.The market price of our stock is highly volatile and subject to wide fluctuations. In addition, the trading volume in our stock may fluctuate and causesignificant price variations to occur. Some of the factors that could result in fluctuations in the price or trading volume of our stock include, among other things:actual or anticipated changes in our current or future financial performance; actual or anticipated changes in our current or future dividend yield; changes in marketinterest rates and general market and economic conditions. We cannot assure you that the market price of our stock will not fluctuate or decline significantly.We have not established a minimum dividend payment level for our common stockholders and there are no assurances of our ability to pay dividends tocommon or preferred stockholders in the future.We intend to pay quarterly dividends and to make distributions to our common stockholders in amounts such that all or substantially all of our taxableincome in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REITunder the Internal Revenue Code. We have not established a minimum dividend payment level for our common stockholders and our ability to pay dividends maybe harmed by the risk factors described herein. From July 2007 until April 2008, our Board of Directors elected to suspend the payment of quarterly dividends onour common stock. Our Board’s decision reflected our focus on the elimination of operating losses through the sale of our mortgage lending business and theconservation of capital to build future earnings from our portfolio management operations. All distributions to our common stockholders will be made at thediscretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our REIT status and such other factors as our Boardof Directors may deem relevant from time to time. There are no assurances of our ability to pay dividends to our common or preferred stockholders in the future atthe current rate or at all.Future offerings of debt securities, which would rank senior to our common stock and preferred stock upon our liquidation, and future offerings of equitysecurities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, mayadversely affect the market price of our common stock.In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities, includingcommercial paper, medium-term notes, senior or subordinated notes, convertible notes and classes of preferred stock or common stock. Upon liquidation, holdersof our debt securities and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our preferred stock andcommon stock, with holders of our preferred stock having priority over holders of our common stock. Additional equity and certain convertible notes offeringsmay dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Because our decision to issue securities in any futureoffering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.Thus, holders of our securities bear the risk of our future offerings reducing the market price of our securities and diluting their stock holdings in us.Future sales of our stock or other securities with an equity component could have an adverse effect on the price of our securities.We cannot predict the effect, if any, of future sales of our stock or other securities with an equity component, or the availability of shares for futureissuance, on the market price of our common or preferred stock. Sales of substantial amounts of these securities, or the perception that such sales could occur, mayadversely affect prevailing market prices for our securities.An increase in interest rates may have an adverse effect on the market price of our securities and our ability to make distributions to our stockholders.One of the factors that investors may consider in deciding whether to buy or sell our securities is our dividend rate (or expected future dividend rates) as apercentage of our common stock price, relative to market interest rates. If market interest rates increase, prospective investors may demand a higher dividend rateon our shares or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and capital market conditions can affect themarket price of our securities independent of the effects such conditions may have on our portfolio.27Table of ContentsOur investments could be adversely affected if one of our operating partners or property managers at one of the multi-family projects in which we haveinvested performs poorly, which could adversely affect our business, financial condition and results of operations and our ability to make distributions toour stockholders.In general, with respect to our preferred and joint venture equity investments in, and mezzanine loans to, owners of multi-family properties, we expect torely on our operating partners for the day-to-day management and maintenance of these properties. We will have no control or only limited influence over the day-to-day management and maintenance of such properties. Our operating partners are not fiduciaries to us, and in some cases, may have significantly less capitalinvested in a project than us. In addition, our operating partners engage property managers, which provide on-site management services. One or more of ouroperating partners or property managers may perform poorly in managing one or more of our project investments for a variety of reasons, including failure toproperly adhere to budgets or properly consummate the property business plan. If one of our operating partners or property managers does not perform well at oneof our projects, we may not be able to ameliorate the adverse effects of poor performance by terminating the operating partner or property manager and finding areplacement partner to manage these properties in a timely manner. In such an instance, our business, results of operations, financial condition and ability to makedistributions to our stockholders could be materially adversely affected.Actions of our operating partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions which are in the best interestsof our stockholders, which could result in lower investment returns to our stockholders.We have entered into, and in the future intend to enter into, joint ventures with operating partners to acquire or improve properties. We may also makeinvestments in properties through partnerships, co-tenancies or other co-ownership arrangements. Such investments may involve risks not otherwise present whenacquiring real estate directly, including, for example:•that our operating partners may share certain approval rights over major decisions;•that our operating partners may at any time have economic or business interests or goals which are or which become inconsistent with our businessinterests or goals, including inconsistent goals relating to the sale of properties held in the joint venture or the timing of termination or liquidation ofthe joint venture;•the possibility that our operating partner in a property might become insolvent or bankrupt;•the possibility that we may incur liabilities as a result of an action taken by one of our operating partners;•that one of our operating partners may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives,including our policy with respect to qualifying and maintaining our qualification as a REIT;•disputes between us and our operating partners may result in litigation or arbitration that would increase our expenses and prevent our officers anddirectors from focusing their time and effort on our business, which may subject the properties owned by the applicable joint venture to additionalrisk;•under certain joint venture arrangements, neither venture partner may have the power to control the venture, and an impasse could be reached whichmight have a negative influence on the joint venture; or•that we will rely on our operating partners to provide us with accurate financial information regarding the performance of the joint venture propertiesin which we invest on a timely basis to enable us to satisfy our annual, quarterly and periodic reporting obligations under the Exchange Act and ouroperating partners and the joint venture entities in which we invest may have inadequate internal controls or procedures that could cause us to fail tomeet our reporting obligations and other requirements under the federal securities laws.Actions by one of our operating partners or one of the property managers of the multi-family properties in which we invest, which are generally out of ourcontrol, might subject us to liabilities in excess of those contemplated and thus reduce your investment returns. If we have a right of first refusal or buy/sell right tobuy out an operating partner, we may be unable to finance such a buy-out if it becomes exercisable or we may be required to purchase such interest at a time whenit would not otherwise be in our best interest to do so. If our interest is subject to a buy/sell right, we may not have sufficient cash, available borrowing capacity orother capital resources to allow us to elect to purchase the interest of our operating partner that is subject to the buy/sell right, in which case we may be forced tosell our interest as the result of the exercise of such right when we would otherwise prefer to keep our interest. Finally, we may not be able to sell our interest in ajoint venture if we desire to exit the venture.28Table of ContentsShort-term apartment leases expose us to the effects of declining market rent, which could adversely impact our earnings.Substantially all of the apartment leases at the properties we invest in are for terms of one year or less. Because these leases generally permit the residentsto leave at the end of the lease term without penalty, our earnings may be impacted more quickly by declines in market rents than if these leases were for longerterms, which could have a material adverse effect on our business, results of operations, financial condition and ability to make distributions to our stockholders.The revenues generated by our investments in multi-family properties are significantly influenced by demand for multi-family properties generally, and adecrease in such demand will likely have a greater adverse effect on our revenues than if we owned a more diversified portfolio.A substantial portion of our investment portfolio is comprised of direct or indirect investments in multi-family properties, and we expect that our portfoliogoing forward will continue to heavily focus on these assets. As a result, we are subject to risks inherent in investments concentrated in a single industry, and adecrease in the demand for multi-family apartment properties would likely have a greater adverse effect on our revenues and results of operations than if weinvested in a more diversified portfolio. Resident demand at multi-family apartment properties may be adversely affected by, among other things, reducedhousehold spending, reduced home prices, high unemployment, the rate of household formation or population growth in the markets in which we invest, changes ininterest rates or the changes in supply of, or demand for, similar or competing multi-family apartment properties in an area. Reduced resident demand could causedownward pressure on occupancy and market rents at the properties in which we invest, which could cause a decrease in our revenue. In addition, decreaseddemand could also impair the ability of our joint venture properties or operating partners to satisfy their substantial debt service obligations or make distributionsor payments of principal or interest to us, which in turn could materially adversely affect our business, results of operations, financial condition and ability to makedistributions to our stockholders.Our existing goodwill could become impaired, which may require us to take significant non-cash charges. We evaluate our goodwill for impairment at least annually, or more frequently if circumstances indicate potential impairment may have occurred. We alsoevaluate, at least quarterly, whether events or circumstances have occurred subsequent to the annual impairment testing which indicate that it is more-likely-than-not an impairment loss has occurred. If the fair value of our reporting unit is less than its carrying value, we would record an impairment charge for the excess ofthe carrying amount over the estimated fair value. The valuation of our reporting unit requires significant judgment, which includes the evaluation of recentindicators of market activity and estimated future cash flows, discount rates, and other factors. Any impairment of goodwill as a result of such analysis would resultin a non-cash charge against earnings, which could materially adversely affect our reported financial results for the period in which the charge was taken and theprice of our securities.Your interest in us may be diluted if we issue additional shares.Current stockholders of our company do not have preemptive rights to any common stock issued by us in the future. Therefore, our stockholders mayexperience dilution of their equity investment if we sell additional common stock in the future, sell securities that are convertible into common stock or issueshares of common stock or options exercisable for shares of common stock. In addition, we could sell securities at a price less than our then-current book value pershare.Investing in our securities may involve a high degree of risk.The investments we make in accordance with our investment strategy may result in a high degree of risk or loss of principal than alternative investmentoptions. Our investments may be highly speculative and aggressive, and therefore, an investment in our securities may not be suitable for someone with lower risktolerance.29Table of ContentsThe downgrade of the U.S.'s and certain European countries' or certain European financial institutions’ credit ratings, any future downgrades of the U.S.'sand certain European countries' or certain European financial institutions’ credit ratings and the failure to resolve issues related to U.S. fiscal and debtpolicies may materially adversely affect our business, liquidity, financial condition and results of operations.U.S. debt ceiling and budget deficit concerns in recent years have increased the possibility of credit-rating downgrades or economic slowdowns in theU.S. Although U.S. lawmakers passed legislation to raise the federal debt ceiling in 2011 and again in 2013, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+” in August 2011. The impact of any further downgrades to the U.S. Government's sovereign creditrating or its perceived creditworthiness could adversely affect the U.S. and global financial markets and economic conditions. If the U.S.'s credit rating weredowngraded it would likely impact the credit risk associated with Agency RMBS in our portfolio. A downgrade of the U.S. Government's credit rating or a defaultby the U.S. Government to satisfy its debt obligations likely would create broader financial turmoil and uncertainty, which would weigh heavily on the globalbanking system and these developments could cause interest rates and borrowing costs to rise and a reduction in the availability of credit, which may negativelyimpact the value of the assets in our portfolio, our net income, liquidity and our ability to finance our assets on favorable terms.In the years following the financial and credit crisis of 2007-2008, many financial institutions in Europe experienced financial difficulty and were eitherrescued by government assistance or otherwise benefited from accommodative monetary policy of central banks. Several European governments implementedmeasures to attempt to shore up their financial sectors through loans, credit guarantees, capital infusions, promises of continued liquidity funding and interest ratecuts. Additionally, other governments of the world’s largest economic countries also implemented interest rate cuts. Some of these European financial institutionshave U.S. banking subsidiaries that serve as financing or hedging counterparties to us. Although economic and credit conditions have stabilized in the past fewyears, there is no assurance that these and other plans and programs will be successful in the longer term, and, in particular, when governments and central banksbegin to significantly unwind or otherwise reverse these programs and policies. In addition, in recent years, the U.S. government placed many of the U.S. bankingsubsidiaries of these major European financial institutions on credit watch. If European credit concerns continue to impact these major European banks, there isthe possibility that it will also impact the operations of their U.S. banking subsidiaries. Some of these financial institutions have U.S. banking subsidiaries thatserve as financing or hedging counterparties to us. Any future downgrade of the credit ratings of these European financial institutions could result in greatercounterparty default risk and could materially adversely affect our business, liquidity, access to financing and results of operations.Risks Related to Our Company, Structure and Change in Control ProvisionsWe are highly dependent on information systems and system failures could significantly disrupt our business, which may, in turn, materially adversely affectour business, financial condition and results of operations and our ability to make distributions to our stockholders.Our business is highly dependent on communications and information systems. Any failure or interruption of our systems could cause delays or otherproblems in our securities trading and other investment activities which could materially adversely affect our business, financial condition and results of operationsand our ability to make distributions to our stockholders.The occurrence of cyber-incidents, or a deficiency in our cybersecurity or in those of any of our third party service providers, could negatively impact ourbusiness by causing a disruption to our operations, a compromise or corruption of our confidential information or damage to our business relationships orreputation, all of which could negatively impact our business and results of operations.A cyber-incident is considered to be any adverse event that threatens the confidentiality, integrity, or availability of our information resources or theinformation resources of our third party service providers. More specifically, a cyber-incident is an intentional attack or an unintentional event that can includegaining unauthorized access to systems to disrupt operations, corrupt data, or steal confidential information. As our reliance on technology has increased, so havethe risks posed to our systems, both internal and those we have outsourced. The primary risks that could directly result from the occurrence of a cyber-incidentinclude operational interruption and private data exposure. We have implemented processes, procedures and controls to help mitigate these risks, but thesemeasures, as well as our increased awareness of a risk of a cyber-incident, do not guarantee that our business and results of operations will not be negativelyimpacted by such an incident.30Table of ContentsOur Board of Directors does not approve each of our investment decisions, and may change our investment guidelines without notice or stockholder consent,which may result in riskier investments.Our Board of Directors periodically reviews our investment guidelines, investment portfolio, and potential investment strategies. However, our directorsdo not pre-approve individual investments leaving management and our external managers with day-to-day discretion over the portfolio composition within theinvestment guidelines. Within those guidelines, management and our external managers have discretion to significantly change the composition of the portfolio. Inaddition, in conducting periodic reviews, the directors may rely primarily on information provided to them by our management or external managers. Our Board ofDirectors has the authority to change our investment guidelines at any time without notice to or consent from our stockholders. To the extent that our investmentguidelines change in the future, we may make investments that are different from, and possibly riskier than, the investments described in this Annual Report onForm 10-K. Moreover, because our management and our external managers have great latitude within our investment guidelines in determining the types andamounts of assets in which to invest on our behalf, there can be no assurance that our management and our external managers will not make investments that resultin returns that are substantially below expectations or result in losses, which would materially adversely affect our business, results of operations, financialcondition and ability to make distributions to our stockholders.We are dependent on certain key personnel.We are a small company and are substantially dependent upon the efforts of our Chief Executive Officer, Steven R. Mumma, our President, Kevin M.Donlon, and certain other key individuals employed by us or our external managers. The loss of Mr. Mumma, Mr. Donlon or any key personnel of our Company orour external managers or their services could have a material adverse effect on our operations.The stock ownership limit imposed by our charter may inhibit market activity in our common stock and may restrict our business combination opportunities.In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of the issued and outstanding sharesof our capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) atany time during the last half of each taxable year (other than our first year as a REIT). This test is known as the “5/50 test.” Attribution rules in the InternalRevenue Code apply to determine if any individual or entity actually or constructively owns our capital stock for purposes of this requirement. Additionally, atleast 100 persons must beneficially own our capital stock during at least 335 days of each taxable year (other than our first year as a REIT). To help ensure that wemeet these tests, our charter restricts the acquisition and ownership of shares of our capital stock. Our charter, with certain exceptions, authorizes our directors totake such actions as are necessary and desirable to preserve our qualification as a REIT and provides that, unless exempted by our Board of Directors, no personmay own more than 9.9% in value of the aggregate of the outstanding shares of our capital stock or more than 9.9% in value or in number of shares, whichever ismore restrictive, of the aggregate of our outstanding shares of common stock. The ownership limits contained in our charter could delay or prevent a transaction ora change in control of our company under circumstances that otherwise could provide our stockholders with the opportunity to realize a premium over the thencurrent market price for our common stock or would otherwise be in the best interests of our stockholders.Risks Related to CreditOur efforts to manage credit risks may fail.Despite our efforts to manage credit risk, there are many aspects of credit risk that we cannot control. Our credit policies and procedures may not besuccessful in limiting future delinquencies, defaults, and losses, or they may not be cost effective. Our underwriting reviews may not be effective. Loan servicingcompanies may not cooperate with our loss mitigation efforts or those efforts may be ineffective. Service providers to securitizations, such as trustees, loansservicers, bond insurance providers, and custodians, may not perform in a manner that promotes our interests. Delay of foreclosures could delay resolution andincrease ultimate loss severities, as a result.The value of the properties collateralizing or underlying the loans or securities we own may decline. The frequency of default and the loss severity onloans upon default may be greater than we anticipate. Interest-only loans, negative amortization loans, adjustable-rate loans, larger balance loans, reduceddocumentation loans, non-QM loans, subprime loans, alt-a loans, second lien loans, loans in certain locations, and loans or investments that are partiallycollateralized by non-real estate assets may have increased risks and severity of loss. If property securing or underlying loans become real estate owned as a resultof foreclosure, we bear the risk of not being able to sell the property and recovering our investment and of being exposed to the risks attendant to the ownership ofreal property.31Table of ContentsIf we underestimate the loss-adjusted yields of our investments in credit sensitive assets, we may experience losses.We and our managers expect to value our investments in many credit sensitive assets, including, but not limited to, multi-family CMBS, based on loss-adjusted yields taking into account estimated future losses on the loans that we are investing in directly or that underlie securities owned by us, and the estimatedimpact of these losses on expected future cash flows. Our loss estimates may not prove accurate, as actual results may vary from our estimates. In the event that weunderestimate the losses relative to the price we pay for a particular investment, we may experience material losses with respect to such investment.We invest in CMBS that are subordinate to more senior securities issued by the applicable securitization, which entails certain risks.We currently own and may acquire in the future principal only multi-family CMBS that represent the first loss tranche or other subordinate tranche of amulti-family mortgage loan securitization. These securities are subject to the first risk of loss or greater risk of loss (as applicable) if any losses are realized on theunderlying mortgage loans in the securitization. We also own and may acquire in the future interest only securities issued by multi-family mortgage loansecuritizations. However, these interest only CMBS typically only receive payments of interest to the extent that there are funds available in the securitization tomake the payments. CMBS generally entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of commercial ormulti-family mortgage loans. Consequently, the CMBS, and in particular, first loss principal only CMBS, will be adversely affected by payment defaults,delinquencies and losses on the underlying mortgage loans, each of which could have a material adverse effect on our cash flows and results of operations.Residential mortgage loans, including non-QM residential mortgage loans, subprime residential mortgage loans and non-performing, sub-performing and re-performing residential mortgage loans, are subject to increased risks.We acquire and manage residential whole mortgage loans, including loans sourced from distressed markets. Residential mortgage loans, including non-performing, sub-performing and re-performing mortgage loans as well as subprime mortgage loans and mortgage loans that are not deemed "qualified mortgage",or "QM," loans under the rules of the Consumer Financial Protection Bureau, or "CFPB", are subject to increased risks of loss. Unlike Agency RMBS, theresidential mortgage loans we invest in generally are not guaranteed by the federal government or any GSE. Additionally, by directly acquiring residentialmortgage loans, we do not receive the structural credit enhancements that benefit senior tranches of RMBS. A residential whole mortgage loan is directly exposedto losses resulting from default. Therefore, the value of the underlying property, the creditworthiness and financial position of the borrower and the priority andenforceability of the lien will significantly impact the value of such mortgage. In the event of a foreclosure, we may assume direct ownership of the underlying realestate. The liquidation proceeds upon sale of such real estate may not be sufficient to recover our cost basis in the loan, and any costs or delays involved in theforeclosure or liquidation process may increase losses.Residential mortgage loans are also subject to "special hazard" risk (property damage caused by hazards, such as earthquakes or environmental hazards,not covered by standard property insurance policies), and to bankruptcy risk (reduction in a borrower's mortgage debt by a bankruptcy court). In addition, claimsmay be assessed against us on account of our position as a mortgage holder or property owner, including assignee liability, responsibility for tax payments,environmental hazards and other liabilities. In some cases, these liabilities may be "recourse liabilities" or may otherwise lead to losses in excess of the purchaseprice of the related mortgage or property.Our targeted assets currently include distressed residential loans that we acquire from third parties, typically at a discount. Distressed residential loans sellat a discount because they may constitute riskier investments than those selling at or above par value. The distressed residential loans we invest in may bedistressed because a borrower may have defaulted thereupon, because the borrower is or has been in the past delinquent on paying all or a portion of his obligationunder the loan or because the loan may otherwise contain credit quality that is considered to be poor. The likelihood of full recovery of a distressed loan’s principaland contractual interest is less than that for loans trading at or above par value. Although we typically expect to receive less than the principal amount or face valueof the distressed residential loans that we purchase, the return that we in fact receive thereupon may be less than our investment in such loans due to the failure ofthe loans to perform or reperform. An economic downturn would exacerbate the risks of the recovery of the full value of the loan or the cost of our investmenttherein.32Table of ContentsSecond mortgage loan investments expose us to greater credit risks.We expect to invest in second mortgages on residential properties, which are subject to a greater risk of loss than a traditional mortgage. Our securityinterest in the property securing a second mortgage is subordinated to the interest of the first mortgage holder and the second mortgages have a higher combinedloan-to-value ratio than do the first mortgages. If the borrower experiences difficulties in making senior lien payments or if the value of the property is equal to orless than the amount needed to repay the borrower's obligation to the first mortgage holder upon foreclosure, our investment in the second mortgage loan may notbe repaid in full or at all. Further, it is likely that any investments we make in second mortgages will be placed with private entities and not insured by a GSE.If we sell or transfer any whole mortgage loans to a third party, including a securitization entity, we may be required to repurchase such loans or indemnifysuch third party if we breach representations and warranties.When we sell or transfer any whole mortgage loans to a third party, including a securitization entity, we generally are required to make customaryrepresentations and warranties about such loans to the third party. Our residential mortgage loan sale agreements and terms of any securitizations into which wesell or transfer loans will generally require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser orsecuritization. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. Theremedies available to a purchaser of mortgage loans are generally broader than those available to us against an originating broker or correspondent. Repurchasedloans are typically worth only a fraction of the original price. Significant repurchase activity could materially adversely affect our business, financial condition andresults of operations and our ability to pay dividends to our stockholders.Risks Related to Our Use of Hedging StrategiesHedging against credit events and interest rate changes and other risks may materially adversely affect our business, financial condition and results ofoperations and our ability to make distributions to our stockholders.Subject to compliance with the requirements to qualify as a REIT, we engage in certain hedging transactions to limit our exposure to changes in interestrates and therefore may expose ourselves to risks associated with such transactions. We may utilize instruments such as interest rate swaps, caps, collars and floorsand Eurodollar and U.S. Treasury futures to seek to hedge the interest rate risk associated with our portfolio. Hedging against a decline in the values of ourportfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline.However, we may establish other hedging positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfoliopositions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, at any point in timewe may choose not to hedge all or a portion of these risks, and we generally will not hedge those risks that we believe are appropriate for us to take at such time, orthat we believe would be impractical or prohibitively expensive to hedge.33Table of ContentsEven if we do choose to hedge certain risks, for a variety of reasons we generally will not seek to establish a perfect correlation between our hedginginstruments and the risks being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. Ourhedging activity will vary in scope based on the composition of our portfolio, our market views, and changing market conditions, including the level and volatilityof interest rates. When we do choose to hedge, hedging may fail to protect or could materially adversely affect us because, among other things:•either we or our external managers may fail to correctly assess the degree of correlation between the performance of the instruments used in thehedging strategy and the performance of the assets in the portfolio being hedged;•either we or our external managers may fail to recalculate, re-adjust and execute hedges in an efficient and timely manner;•the hedging transactions may actually result in poorer over-all performance for us than if we had not engaged in the hedging transactions;•credit hedging can be expensive, particularly when the market is forecasting future credit deterioration and when markets are more illiquid;•interest rate hedging can be expensive, particularly during periods of volatile interest rates;•available hedges may not correspond directly with the risks for which protection is sought;•the durations of the hedges may not match the durations of the related assets or liabilities being hedged;•many hedges are structured as over-the-counter contracts with counterparties whose creditworthiness is not guaranteed, raising the possibility that thehedging counterparty may default on their payment obligations; and•to the extent that the creditworthiness of a hedging counterparty deteriorates, it may be difficult or impossible to terminate or assign any hedgingtransactions with such counterparty.For these and other reasons, our hedging activity may materially adversely affect our business, financial condition and results of operations and our abilityto make distributions to our stockholders.Hedging instruments and other derivatives may not, in many cases, be traded on regulated exchanges, or guaranteed or regulated by any U.S. or foreigngovernmental authorities and involve risks and costs that could result in material losses.Hedging instruments and other derivatives involve risk because they may not, in many cases, be traded on regulated exchanges and may not be guaranteedor regulated by any U.S. or foreign governmental authorities. Consequently, for these instruments, there are no requirements with respect to record keeping,financial responsibility or segregation of customer funds and compliance with applicable statutory and commodity and other regulatory requirements and,depending on the identity of the counterparty, applicable international requirements. We are not restricted from dealing with any particular counterparty or fromconcentrating any or all of our transactions with one counterparty. The business failure of a hedging counterparty with whom we enter into a hedging transactionwill most likely result in a default under the hedging agreement. Default by a party with whom we enter into a hedging transaction may result in losses and mayforce us to re-initiate similar hedges with other counterparties at the then-prevailing market levels. Generally, we will seek to reserve the right to terminate ourhedging transactions upon a counterparty’s insolvency, but absent an actual insolvency, we may not be able to terminate a hedging transaction without the consentof the hedging counterparty, and we may not be able to assign or otherwise dispose of a hedging transaction to another counterparty without the consent of both theoriginal hedging counterparty and the potential assignee. If we terminate a hedging transaction, we may not be able to enter into a replacement contract in order tocover our risk. There can be no assurance that a liquid secondary market will exist for hedging instruments purchased or sold, and therefore we may be required tomaintain any hedging position until exercise or expiration, which could materially adversely affect our business, financial condition and results of operations.The Commodity Futures Trading Commission ("CFTC") and certain commodity exchanges have established limits referred to as speculative positionlimits or position limits on the maximum net long or net short position which any person or group of persons may hold or control in particular futures and options.Limits on trading in options contracts also have been established by the various options exchanges. It is possible that trading decisions may have to be modifiedand that positions held may have to be liquidated in order to avoid exceeding such limits. Such modification or liquidation, if required, could materially adverselyaffect our business, financial condition and results of operation and our ability to make distributions to our stockholders.34Table of ContentsOur delayed delivery transactions, including TBAs, subject us to certain risks, including price risks and counterparty risks.We purchase a significant portion of our Agency RMBS through delayed delivery transactions, including TBAs. In a delayed delivery transaction, weenter into a forward purchase agreement with a counterparty to purchase either (i) an identified Agency RMBS, or (ii) a to-be-issued (or “to-be-announced”)Agency RMBS with certain terms. As with any forward purchase contract, the value of the underlying Agency RMBS may decrease between the contract date andthe settlement date. Furthermore, a transaction counterparty may fail to deliver the underlying Agency RMBS at the settlement date. If any of the above risks wereto occur, our financial condition and results of operations may be materially adversely affected.Risks Related to Debt FinancingFailure to procure adequate funding and capital would adversely affect our results and may, in turn, negatively affect the value of our securities and ourability to distribute cash to our stockholders.We depend upon the availability of adequate funding and capital for our operations. To maintain our status as a REIT, we are required to distribute at least90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders andtherefore are not able to retain our earnings for new investments. We cannot assure you that any, or sufficient, funding or capital will be available to us in the futureon terms that are acceptable to us. In the event that we cannot obtain sufficient funding and capital on acceptable terms, there may be a negative impact on thevalue of our securities and our ability to make distributions to our stockholders, and you may lose part or all of your investment.Our access to financing sources, which may not be available on favorable terms, or at all, may be limited, and this may materially adversely affect ourbusiness, financial condition and results of operations and our ability to make distributions to our stockholders.We depend upon the availability of adequate capital and financing sources on acceptable terms to fund our operations. However, as previously discussed,the capital and credit markets have experienced unprecedented levels of volatility and disruption in recent years that has generally caused a reduction of availablecredit. Continued volatility or disruption in the credit markets or a downturn in the global economy could materially adversely affect one or more of our lendersand could cause one or more of our lenders to be unwilling or unable to provide us with financing, or to increase the costs of that financing, or to become insolvent.Although we finance some of our assets with longer-term structured financing having terms of three years or more, we rely heavily on access to short-termborrowings, primarily in the form of repurchase agreements, to finance our investments. We are currently party to repurchase agreements of a short duration andthere can be no assurance that we will be able to roll over or re-set these borrowings on favorable terms, if at all. In the event we are unable to roll over or re-setour repurchase agreement borrowings, it may be more difficult for us to obtain debt financing on favorable terms or at all. In addition, regulatory capitalrequirements imposed on our lenders have changed the willingness of many repurchase agreement lenders to make repurchase agreement financing available andadditional regulatory capital requirements imposed on our lenders may cause them to change, limit, or increase the cost of, the financing they provide to us. Ingeneral, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. Under current marketconditions, securitizations are generally unavailable or limited, which has also limited borrowings under warehouse facilities and other credit facilities that areintended to be refinanced by such securitizations. Consequently, depending on market conditions at the relevant time, we may have to rely on additional equityissuances to meet our capital and financing needs, which may be dilutive to our stockholders, or we may have to rely on less efficient forms of debt financing thatrestrict our operations or consume a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future businessopportunities, cash distributions to our stockholders and other purposes. We cannot assure you that we will have access to such equity or debt capital on favorableterms (including, without limitation, cost and term) at the desired times, or at all, which may cause us to curtail our investment activities and/or dispose of assets,which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.We may incur increased borrowing costs related to repurchase agreements and that would adversely affect our profitability.Currently, a significant portion of our borrowings are collateralized borrowings in the form of repurchase agreements. If the interest rates on theseagreements increase at a rate higher than the increase in rates payable on our investments, our profitability would be adversely affected.35Table of ContentsOur borrowing costs under repurchase agreements generally correspond to short-term interest rates such as LIBOR or a short-term Treasury index, plus orminus a margin. The margins on these borrowings over or under short-term interest rates may vary depending upon a number of factors, including, withoutlimitation:•the movement of interest rates;•the availability of financing in the market; and•the value and liquidity of our mortgage-related assets.During 2008 and 2009, many repurchase agreement lenders required higher levels of collateral than they had required in the past to support repurchaseagreements collateralized by RMBS. Although these collateral requirements have been reduced to more appropriate levels, we cannot assure you that they will notagain experience a dramatic increase. If the interest rates, lending margins or collateral requirements under our short-term borrowings, including repurchaseagreements, increase, or if lenders impose other onerous terms to obtain this type of financing, our results of operations will be adversely affected.The repurchase agreements that we use to finance our investments may require us to provide additional collateral, which could reduce our liquidity and harmour financial condition.We use repurchase agreements to finance certain of our investments, primarily RMBS. If the market value of the loans or securities pledged or sold by usto a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced, butwe may not have the funds available to do so. Posting additional collateral to support our repurchase agreements will reduce our liquidity and limit our ability toleverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase ourborrowing rates, liquidate our collateral at inopportune times and terminate our ability to borrow. This could result in a rapid deterioration of our financialcondition and possibly require us to file for protection under the U.S. Bankruptcy Code.We leverage our equity, which can exacerbate any losses we incur on our current and future investments and may reduce cash available for distribution to ourstockholders.We leverage our equity through borrowings, generally through the use of repurchase agreements and other short-term borrowings, longer-term structureddebt, such as CDOs and other forms of securitized debt, or corporate-level debt, such as convertible notes. We may, in the future, utilize other forms of borrowing.The amount of leverage we incur varies depending on the asset type, our ability to obtain borrowings, the cost of the debt and our lenders’ estimates of the value ofour portfolio’s cash flow. The return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in marketconditions cause the cost of our financing to increase relative to the income that can be derived from the assets we hold in our investment portfolio. Further, theleverage on our equity may exacerbate any losses we incur.Our debt service payments will reduce the net income available for distribution to our stockholders. We may not be able to meet our debt serviceobligations and, to the extent that we cannot, we risk the loss of some or all of our assets to sale to satisfy our debt obligations. A decrease in the value of the assetsmay lead to margin calls under our repurchase agreements which we will have to satisfy. Significant decreases in asset valuation, could lead to increased margincalls, and we may not have the funds available to satisfy any such margin calls. Although we have established target leverage amounts for many of our assets, thereis no established limitation, other than may be required by our financing arrangements, on our leverage ratio or on the aggregate amount of our borrowings.If we are unable to leverage our equity to the extent we currently anticipate, the returns on certain of our assets could be diminished, which may limit oreliminate our ability to make distributions to our stockholders.If we are limited in our ability to leverage our assets to the extent we currently anticipate, the returns on these assets may be harmed. A key element of ourstrategy is our use of leverage to increase the size of our portfolio in an attempt to enhance our returns. Our repurchase agreements, excluding our repurchaseagreements with Deutsche Bank AG, Cayman Islands Branch that finance our residential mortgage loans, including our distressed residential loans, are notcurrently committed facilities, meaning that the counterparties to these agreements may at any time choose to restrict or eliminate our future access to the facilitiesand we have no other committed credit facilities through which we may leverage our equity. If we are unable to leverage our equity to the extent we currentlyanticipate, the returns on our portfolio could be diminished, which may limit or eliminate our ability to make distributions to our stockholders.36Table of ContentsDespite our current debt levels, we may still incur substantially more debt or take other actions which could have the effect of diminishing our ability to makepayments on our indebtedness when due and distributions to our stockholders.Despite our current consolidated debt levels, we and our subsidiaries may be able to incur substantial additional debt in the future, subject to therestrictions contained in our debt instruments, some of which may be secured debt. We are not restricted presently under the terms of the agreements governing ourborrowings from incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of other actions that could have the effect ofdiminishing our ability to make payments on our indebtedness when due and distributions to our stockholders.We directly or indirectly utilize non-recourse securitizations and recourse structured financings and such structures expose us to risks that could result inlosses to us.We sometimes utilize non-recourse securitizations of our investments in mortgage loans or CMBS to the extent consistent with the maintenance of ourREIT qualification and exclusion from the Investment Company Act in order to generate cash for funding new investments and/or to leverage existing assets. Inmost instances, this involves us transferring loans or CMBS owned by us to a SPE in exchange for cash and typically the ownership certificate or residual interestin the entity. In some sale transactions, we also retain a subordinated interest in the loans or CMBS sold, such as a B-note. The securitization or other structuredfinancing of our portfolio investments might magnify our exposure to losses on those portfolio investments because the subordinated interest we retain in the loansor CMBS sold would be subordinate to the senior interest in the loans or CMBS sold, and we would, therefore, absorb all of the losses sustained with respect to aloan sold before the owners of the senior interest experience any losses. Under the terms of these financings, which generally have terms of three to ten years, wemay agree to receive no cash flows from the assets transferred to the SPE until the debt issued by the special purpose entity has matured or been repaid. We cannotbe assured that we will be able to access the securitization markets in the future, or be able to do so at favorable rates. The inability to consummate longer termfinancing for the credit sensitive assets in our portfolio could require us to seek other forms of potentially less attractive financing or to liquidate assets at aninopportune time or price, which could adversely affect our performance and our ability to grow our business.In addition, under the terms of the securitization or structured financing, we may have limited or no ability to sell, transfer or replace the assets transferredto the SPE, which could have a material adverse effect on our ability to sell the assets opportunistically or during periods when our liquidity is constrained or torefinance the assets. Finally, we have in the past and may in the future guarantee certain terms or conditions of these financings, including the payment of principaland interest on the debt issued by the SPE, the cash flows for which are typically derived from the assets transferred to the entity. If a SPE defaults on itsobligations and we have guaranteed the satisfaction of that obligation, we may be materially adversely affected.If a counterparty to our repurchase transactions defaults on its obligation to resell the underlying security back to us at the end of the transaction term or if wedefault on our obligations under the repurchase agreement, we may incur losses.When we engage in repurchase transactions, we generally sell RMBS, CMBS, mortgage loans or certain other assets to lenders (i.e., repurchaseagreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same security or asset back to us at the end of the term of thetransaction. Because the cash we receive from the lender when we initially sell the security or asset to the lender is less than the value of that security or asset (thisdifference is referred to as the “haircut”), if the lender defaults on its obligation to resell the same security or asset back to us we would incur a loss on thetransaction equal to the amount of the haircut (assuming there was no change in the value of the security). Certain of the assets that we pledge as collateral,including Agency IOs and distressed residential loans are currently subject to significant haircuts. Further, if we default on one of our obligations under arepurchase transaction, the lender can terminate the transaction and cease entering into any other repurchase transactions with us. Our repurchase agreementscontain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Anylosses we incur on our repurchase transactions could adversely affect our earnings and thus our cash available for distribution to our stockholders.Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy.Our borrowings under repurchase agreements may qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid theautomatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without delay in the eventthat we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover ourpledged assets in the event that a lender files for bankruptcy. Thus, the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcyfiling by either a lender or us.37Table of ContentsOur liquidity may be adversely affected by margin calls under our repurchase agreements because we are dependent in part on the lenders' valuation of thecollateral securing the financing.Each of these repurchase agreements allows the lender, to varying degrees, to revalue the collateral to values that the lender considers to reflect marketvalue. If a lender determines that the value of the collateral has decreased, it may initiate a margin call requiring us to post additional collateral to cover thedecrease. When we are subject to such a margin call, we must provide the lender with additional collateral or repay a portion of the outstanding borrowings withminimal notice. Any such margin call could harm our liquidity, results of operation and financial condition. Additionally, in order to obtain cash to satisfy a margincall, we may be required to liquidate assets at a disadvantageous time, which could cause it to incur further losses and adversely affect our results of operations andfinancial condition.Risks Related to Regulatory MattersChanges in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. government may adversely affect our business.Payments on the Agency RMBS (excluding Agency IOs) in which we invest are guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Fannie Maeand Freddie Mac are government sponsored enterprises, or "GSEs," but their guarantees are not backed by the full faith and credit of the United States. As broadlypublicized, significant losses at Fannie Mae and Freddie Mac caused the U.S. Government to place Fannie Mae and Freddie Mac under federal conservatorship andto inject significant capital in these businesses. Questions regarding the continued viability of Fannie Mae and Freddie Mac, as currently structured, including theguarantees that back the RMBS issued by them, and the U.S. Government’s participation in the U.S. residential mortgage market through the GSEs, continue topersist. In February 2011, the U.S. Department of the Treasury along with the U.S. Department Housing and Urban Development released a much-awaited reporttitled “ Reforming America’s Housing Finance Market, ” which outlines recommendations for reforming the U.S. housing system, including reducing the roles ofFannie Mae and Freddie Mac and transforming the government’s involvement in the housing market and its relationship to Fannie Mae and Freddie Mac. InFebruary 2012, the Federal Housing Finance Agency, or FHFA, released its “Strategic Plan for Enterprise Conservatorships,” as updated in May 2014, which setsforth three goals for the next phase of the Fannie Mae and Freddie Mac conservatorships, which include (i) build a new infrastructure for the secondary mortgagemarket, (ii) gradually reduce Fannie Mae and Freddie Mac’s presence in the marketplace while simplifying and shrinking their operations, and (iii) maintainingforeclosure prevention activities and credit availability for new and refinanced mortgages. Since the FHFA first released its strategic plan, there have been anumber of other housing finance reform proposals introduced, both from industry groups and by the U.S. Congress, many of which could potentially increaseprivate capital flows to the mortgage sector while reducing taxpayer risk and some of which involve the elimination of Freddie Mac and Fannie Mae. To date, nodefinitive legislation has been enacted with respect to a possible unwinding of Fannie Mae or Freddie Mac or a material reduction in their roles in the U.S.mortgage market and it is not possible at this time to predict the scope and nature of the actions that the U.S. Government will ultimately take with respect to theseentities.As discussed above, each of Fannie Mae, Freddie Mac and Ginnie Mae could be dissolved and the U.S. Government could determine to stop providingliquidity support of any kind to the mortgage market. If Fannie Mae, Freddie Mac or Ginnie Mae were eliminated, or their structures were to change radically orthe U.S. Government significantly reduced its support for any or all of them which would drastically reduce the amount and type of mortgage-backed securities, orMBS, available for purchase, we may be unable or significantly limited in our ability to acquire MBS, which, in turn, could materially adversely affect our abilityto maintain our exclusion from regulation as an investment company under the Investment Company Act. Moreover, any changes to the nature of the guaranteesprovided by, or laws affecting, Fannie Mae, Freddie Mac and Ginnie Mae could materially adversely affect the credit quality of the guarantees, could increase therisk of loss on purchases of MBS issued by these GSEs and could have broad adverse market implications for the MBS they currently guarantee and the mortgageindustry generally. Any action that affects the credit quality of the guarantees provided by Fannie Mae, Freddie Mac and Ginnie Mae could materially adverselyaffect the value of the MBS and other mortgage-related assets that we own or seek to acquire. In addition, any market uncertainty that arises from any suchproposed changes, or the perception that such changes will come to fruition, could have a similar impact on us and the values of the MBS and other mortgage-related assets that we own.In addition, we rely on our Agency RMBS as collateral for our financings under the repurchase agreements that we have entered into. Any decline in theirvalue, or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on our Agency RMBS on acceptable terms or atall, or to maintain compliance with the terms of any financing transactions.38Table of ContentsMortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, our targeted assets.The U.S. Government, through the U.S. Treasury, the Federal Housing Administration, or "FHA", and the Federal Deposit Insurance Corporation, or“FDIC," commenced implementation of programs designed to provide homeowners with assistance in avoiding residential or commercial mortgage loanforeclosures, including the Home Affordable Modification Program, or “HAMP,” which provides homeowners with assistance in avoiding residential mortgageloan foreclosures, and the Home Affordable Refinance Program, or “HARP,” which allows borrowers who are current on their mortgage payments to refinance andreduce their monthly mortgage payments at loan-to-value ratios up to 125% without new mortgage insurance. The programs may involve, among other things, themodification of residential mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms ofthe loans.Loan modification and refinance programs may adversely affect the performance of Agency RMBS, non-Agency RMBS and residential mortgage loansowned by us. Residential distressed mortgage loans and non-Agency RMBS are particularly sensitive to loan modification and refinance programs, as a significantnumber of loan modifications with respect to a given security or pool of loans, including those related to principal forgiveness and coupon reduction, couldnegatively impact the realized yields and cash flows on such investments. In addition, it is also likely that loan modifications would result in increasedprepayments on some RMBS and residential mortgage loans.The U.S. Congress and various state and local legislatures have considered in the past, and in the future may adopt, legislation, which, among otherprovisions, would permit limited assignee liability for certain violations in the mortgage loan origination process, and would allow judicial modification of loanprincipal in the event of personal bankruptcy. We cannot predict whether or in what form the U.S. Congress or the various state and local legislatures may enactlegislation affecting our business or whether any such legislation will require us to change our practices or make changes in our portfolio in the future. Thesechanges, if required, could materially adversely affect our business, results of operations and financial condition and our ability to make distributions to ourstockholders, particularly if we make such changes in response to new or amended laws, regulations or ordinances in any state where we acquire a significantportion of our mortgage loans, or if such changes result in us being held responsible for any violations in the mortgage loan origination process. These loanmodification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification ofoutstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Macor Ginnie Mae, may adversely affect the value of, and the returns on, our assets which, in turn, could materially adversely affect our business, financial conditionand results of operations and our ability to make distributions to our stockholders.Actions of the U.S. Government, including the U.S. Congress, the U.S. Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, tostabilize or reform the financial markets and economy may not achieve their desired effect and may materially adversely affect our business, financialcondition and results of operations and our ability to pay dividends to our stockholdersIn response to turmoil in the financial markets beginning in 2007, the U.S. Government, including the U.S. Congress, U.S. Federal Reserve, U.S. Treasuryand other governmental and regulatory bodies have taken a number of actions designed to stabilize and reform the financial markets and economy. For example,the Federal Reserve implemented three different parts of the Federal Reserve’s accommodative monetary policy that was designed to keep long-term interest ratesat low levels. The most recent quantitative easing program, known as "QE3," involved the purchase by the Federal Reserve of an additional $40 billion of AgencyRMBS and an additional $45 million of longer-term U.S. Treasury securities per month until key economic indicators showed sufficient signs of improvement.Given indications that the U.S. economy had improved sufficiently, the Federal Reserve reduced the pace of its purchases beginning in December 2013and ultimately ending QE3 in October 2014. In December 2015, for the first time since 2006, the Federal Reserve increased the target for the federal funds rate by25 basis points and increased it by an additional 25 basis points again in December 2016. The Federal Reserve has indicated its expectations for additional ratehikes in 2017. Should the U.S. economy begin to indicate signs of deterioration, the Federal Reserve could decide to restart an asset purchase program or instituteother measures designed to reduce interest rates. These measures could lead to a flattening in the yield curve, and increased prepayment rates (resulting from lowerlong-term interest rates, including mortgage rates), and a narrowing of our net interest margin.39Table of ContentsThere can be no assurance that, in the long term, these actions taken by the U.S. Government will improve the efficiency and stability of the financialmarkets or the economy. To the extent the financial markets do not respond favorably to any of these actions or such actions do not function as intended over thelonger term, our business may be harmed. The U.S. Government, the U.S. Federal Reserve, the U.S. Treasury and other governmental and regulatory bodies maytake additional actions in the future to address financial crises and stimulate the economy. We cannot predict whether or when such actions may occur, and suchactions could have an adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.We could be subject to liability for potential violations of predatory lending laws, which could materially adversely affect our business, financial condition andresults of operations, and our ability to pay dividends to our stockholders.Residential mortgage loan originators and servicers are required to comply with various federal, state and local laws and regulations, including anti-predatory lending laws and laws and regulations imposing certain restrictions on requirements on high cost loans. Failure of residential mortgage loan originatorsor servicers to comply with these laws, to the extent any of their residential mortgage loans become part of our investment portfolio, could subject us, as anassignee or purchaser of the related residential mortgage loans, to monetary penalties and could result in the borrowers rescinding the affected residential mortgageloans. Lawsuits have been brought in various states making claims against assignees or purchasers of high cost loans for violations of state law. Named defendantsin these cases have included numerous participants within the secondary mortgage market. If the loans are found to have been originated in violation of predatoryor abusive lending laws, we could incur losses that would materially adversely affect our business.The Dodd-Frank Act and regulations implementing such legislation have had a substantial impact on the mortgage industry and the RMBS markets; theseregulations as well as new and pending regulations yet to be implemented under Dodd-Frank may have an adverse impact on our business, results ofoperations and financial condition.On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which has changed and continues to significantly change the regulation offinancial institutions and the financial services industry, including the mortgage industry. The Dodd-Frank Act tasked many agencies with issuing a variety of newregulations, including rules related to mortgage origination, mortgage servicing, securitization transactions and derivatives. While a majority of the rulemakingrequirements established by the Dodd-Frank Act have been finalized, a significant number of rulemakings remain in the proposal phase. Consequently, it is notpossible to predict how additional regulation under the Dodd-Frank Act will affect our business, and there can be no assurance that new rules promulgated underthe Dodd-Frank Act will not have an adverse effect on our business, results of operations and financial condition.The Dodd-Frank Act created a new regulator, the CFPB, which is responsible for regulating the offering and provision of financial products and servicesfor personal, family and household purposes. In addition to assuming many of the consumer financial protection functions exercised by other federal regulatorsunder certain enumerated financial protection statutes, such as the Truth in Lending Act, or "TILA," the Real Estate Settlement Procedures Act, or "RESPA" andthe Fair Credit Reporting Act, the CFPB was granted broad rulemaking and enforcement authority to protect consumers from unfair, deceptive or abusivepractices. The CFPB has issued a series of final rules as part of ongoing efforts to effect reforms and create uniform standards for the mortgage lending andservicing industries. These new rules, many of which became effective recently, include requirements addressing how lenders must evaluate a consumer’s ability torepay a mortgage loan, what specific communications must be made to consumers at various stages in the mortgage lending and servicing processes, howconsumer account records must be maintained and how servicers must respond to written borrower requests, complaints and notices of errors. The rules alsoprovide specific guidance relating to servicing delinquent loans, undertaking loss mitigation efforts and commencing foreclosure proceedings. The foregoing ruleshave led and will likely lead to increased costs to originate and service loans across the mortgage industry, and given their complexity, it is anticipated theoriginators, servicers and other mortgage industry participants will be exposed to greater regulatory scrutiny from federal and state regulators, and increasedlitigation and complaints from both consumers and government officials. We have incurred and expect in the future to incur ongoing operational and system costsas we build and maintain processes to ensure compliance with the rules and regulations applicable to us as well as to monitor compliance by our business partnersand third-party service providers. Additional rules and regulations implemented by the CFPB could lead to changes in the way we conduct or business andincreased costs of compliance, both of which may have an adverse impact on our business and financial condition.40Table of ContentsCertain provisions of Maryland law and our charter and bylaws could hinder, delay or prevent a change in control which could have an adverse effect on thevalue of our securities.Certain provisions of Maryland law, our charter and our bylaws may have the effect of delaying, deferring or preventing transactions that involve anactual or threatened change in control. These provisions include the following, among others:•our charter provides that, subject to the rights of one or more classes or series of preferred stock to elect one or more directors, a director may beremoved with or without cause only by the affirmative vote of holders of at least two-thirds of all votes entitled to be cast by our stockholdersgenerally in the election of directors;•our bylaws provide that only our Board of Directors shall have the authority to amend our bylaws;•under our charter, our Board of Directors has authority to issue preferred stock from time to time, in one or more series and to establish the terms,preferences and rights of any such series, all without the approval of our stockholders;•the Maryland Business Combination Act; and•the Maryland Control Share Acquisition Act.Although our Board of Directors has adopted a resolution exempting us from application of the Maryland Business Combination Act and our bylawsprovide that we are not subject to the Maryland Control Share Acquisition Act, our Board of Directors may elect to make the “business combination” statute and“control share” statute applicable to us at any time and may do so without stockholder approval.Maintenance of our Investment Company Act exemption imposes limits on our operations.We have conducted and intend to continue to conduct our operations so as not to become regulated as an investment company under the InvestmentCompany Act. We believe that there are a number of exclusions under the Investment Company Act that are applicable to us. To maintain the exclusion, the assetsthat we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. OnAugust 31, 2011, the SEC published a concept release entitled “Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments”(Investment Company Act Rel. No. 29778). This release suggests that the SEC may modify the exclusion relied upon by companies similar to us that invest inmortgage loans and mortgage-backed securities. If the SEC acts to narrow the availability of, or if we otherwise fail to qualify for, our exclusion, we could, amongother things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) toregister as an investment company, either of which could have a material adverse effect on our operations and the market price of our common stock.Tax Risks Related to Our StructureFailure to qualify as a REIT would adversely affect our operations and ability to make distributions.We have operated and intend to continue to operate so to qualify as a REIT for federal income tax purposes. Our continued qualification as a REIT willdepend on our ability to meet various requirements concerning, among other things, the ownership of our outstanding stock, the nature of our assets, the sources ofour income, and the amount of our distributions to our stockholders. In order to satisfy these requirements, we might have to forego investments we mightotherwise make. Thus, compliance with the REIT requirements may hinder our investment performance. Moreover, while we intend to continue to operate so toqualify as a REIT for federal income tax purposes, given the highly complex nature of the rules governing REITs, there can be no assurance that we will so qualifyin any taxable year.If we fail to qualify as a REIT in any taxable year and we do not qualify for certain statutory relief provisions, we would be subject to federal income tax(including any applicable alternative minimum tax) on our taxable income at regular corporate rates. We might be required to borrow funds or liquidate someinvestments in order to pay the applicable tax. Our payment of income tax would reduce our net earnings available for investment or distribution to stockholders.Furthermore, if we fail to qualify as a REIT and do not qualify for certain statutory relief provisions, we would no longer be required to make distributions tostockholders. Unless our failure to qualify as a REIT were excused under the federal income tax laws, we generally would be disqualified from treatment as a REITfor the four taxable years following the year in which we lost our REIT status.41Table of ContentsREIT distribution requirements could adversely affect our liquidity.In order to qualify as a REIT, we generally are required each year to distribute to our stockholders at least 90% of our REIT taxable income, excludingany net capital gain. To the extent that we distribute at least 90%, but less than 100% of our REIT taxable income, we will be subject to corporate income tax onour undistributed REIT taxable income. In addition, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paidby us with respect to any calendar year are less than the sum of (i) 85% of our ordinary REIT income for that year, (ii) 95% of our REIT capital gain net income forthat year, and (iii) 100% of our undistributed REIT taxable income from prior years.We have made and intend to continue to make distributions to our stockholders to comply with the 90% distribution requirement and to avoid corporateincome tax and the nondeductible excise tax. However, differences in timing between the recognition of REIT taxable income and the actual receipt of cash couldrequire us to sell assets or to borrow funds on a short-term basis to meet the 90% distribution requirement and to avoid corporate income tax and the nondeductibleexcise tax.Certain of our assets may generate substantial mismatches between REIT taxable income and available cash. Such assets could include mortgage-backedsecurities we hold that have been issued at a discount and require the accrual of taxable income in advance of the receipt of cash. As a result, our taxable incomemay exceed our cash available for distribution and the requirement to distribute a substantial portion of our net taxable income could cause us to:•sell assets in adverse market conditions,•borrow on unfavorable terms or•distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt in order to comply with theREIT distribution requirements.Further, our lenders could require us to enter into negative covenants, including restrictions on our ability to distribute funds or to employ leverage, whichcould inhibit our ability to satisfy the 90% distribution requirement.Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.The maximum U.S. federal income tax rate for dividends payable to domestic stockholders that are individuals, trust and estates is 20%. Dividendspayable by REITs, however, are generally not eligible for the reduced rates. Although the reduced U.S. federal income tax rate applicable to dividend income fromregular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rate applicable to regular corporatedividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in thestocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common shares.Complying with REIT requirements may cause us to forego or liquidate otherwise attractive investments.To qualify as a REIT, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, theamounts we distribute to our stockholders and the ownership of our common stock. In order to meet these tests, we may be required to forego investments wemight otherwise make. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available fordistribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source of income or asset diversificationrequirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our investment performance.Complying with REIT requirements may limit our ability to hedge effectively.The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge the RMBS in our investment portfolio. Our aggregate grossincome from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have tolimit our use of advantageous hedging techniques or implement those hedges through a TRS. Any hedging income earned by a TRS would be subject to federal,state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated with changes ininterest rates than we would otherwise want to bear.42Table of ContentsOur ability to invest in and dispose of “to be announced” securities could be limited by our REIT status, and we could lose our REIT status as a result of theseinvestments.In connection with our investment in Agency IOs, we may purchase Agency RMBS through TBAs, or dollar roll transactions. In certain instances, ratherthan take delivery of the Agency RMBS subject to a TBA, we will dispose of the TBA through a dollar roll transaction in which we agree to purchase similarsecurities in the future at a predetermined price or otherwise, which may result in the recognition of income or gains. We account for dollar roll transactions aspurchases and sales. The law is unclear regarding whether TBAs will be qualifying assets for the 75% asset test and whether income and gains from dispositions ofTBAs will be qualifying income for the 75% gross income test.Until such time as we seek and receive a favorable private letter ruling from the IRS, or we are advised by counsel that TBAs should be treated asqualifying assets for purposes of the 75% asset test, we will limit our investment in TBAs and any non-qualifying assets to no more than 25% of our assets at theend of any calendar quarter. Further, until such time as we seek and receive a favorable private letter ruling from the IRS or we are advised by counsel that incomeand gains from the disposition of TBAs should be treated as qualifying income for purposes of the 75% gross income test, we will limit our gains from dispositionsof TBAs and any non-qualifying income to no more than 25% of our gross income for each calendar year. Accordingly, our ability to purchase Agency RMBSthrough TBAs and to dispose of TBAs, through dollar roll transactions or otherwise, could be limited.Moreover, even if we are advised by counsel that TBAs should be treated as qualifying assets or that income and gains from dispositions of TBAs shouldbe treated as qualifying income, it is possible that the IRS could successfully take the position that such assets are not qualifying assets and such income is notqualifying income. In that event, we could be subject to a penalty tax or we could fail to qualify as a REIT if (i) the value of our TBAs, together with our non-qualifying assets for the 75% asset test, exceeded 25% of our gross assets at the end of any calendar quarter or (ii) our income and gains from the disposition ofTBAs, together with our non-qualifying income for the 75% gross income test, exceeded 25% of our gross income for any taxable year.The failure of certain investments subject to a repurchase agreement to qualify as real estate assets would adversely affect our ability to qualify as a REIT.We have entered and intend to continue to enter into repurchase agreements under which we will nominally sell certain of our investments to acounterparty and simultaneously enter into an agreement to repurchase the sold investments. We believe that for U.S. federal income tax purposes thesetransactions will be treated as secured debt and we will be treated as the owner of the investments that are the subject of any such agreement notwithstanding thatsuch agreement may transfer record ownership of such investments to the counterparty during the term of the agreement. It is possible, however, that the IRS couldsuccessfully assert that we do not own the investments during the term of the repurchase agreement, in which case our ability to continue to qualify as a REITcould be adversely affected.We could fail to continue to qualify as a REIT if the IRS successfully challenges our treatment of our mezzanine loans.We currently own, and in the future may originate or acquire, mezzanine loans, which are loans secured by equity interests in an entity that directly orindirectly owns real property, rather than by a direct mortgage of the real property. In Revenue Procedure 2003-65, the IRS established a safe harbor under whichloans secured by a first priority security interest in ownership interests in a partnership or limited liability company owning real property will be treated as realestate assets for purposes of the REIT asset tests, and interest derived from those loans will be treated as qualifying income for both the 75% and 95% grossincome tests, provided several requirements are satisfied. Although Revenue Procedure 2003-65 provides a safe harbor on which taxpayers may rely, it does notprescribe rules of substantive tax law. Moreover, our mezzanine loans typically do not meet all of the requirements for reliance on the safe harbor. Consequently,there can be no assurance that the IRS will not challenge our treatment of such loans as qualifying real estate assets, which could adversely affect our ability tocontinue to qualify as a REIT. We have invested, and will continue to invest, in mezzanine loans in a manner that will enable us to continue to satisfy the REITgross income and asset tests.43Table of ContentsWe may incur a significant tax liability as a result of selling assets that might be subject to the prohibited transactions tax if sold directly by us.A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of assets heldprimarily for sale to customers in the ordinary course of business. There is a risk that certain loans that we are treating as owning for federal income tax purposesand property received upon foreclosure of these loans will be treated as held primarily for sale to customers in the ordinary course of business. Although we expectto avoid the prohibited transactions tax by contributing those assets to one of our TRSs and conducting the marketing and sale of those assets through that TRS, noassurance can be given that the IRS will respect the transaction by which those assets are contributed to our TRS. Even if those contribution transactions arerespected, our TRS will be subject to federal, state and local corporate income tax and may incur a significant tax liability as a result of those sales.We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may beamended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S.federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretationmay take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation oradministrative interpretation.44Table of ContentsItem 1B. UNRESOLVED STAFF COMMENTSNone.Item 2. PROPERTIESThe Company does not own any materially important physical properties; however, it does have residential homes (or real estate owned) that it acquires,from time to time, through or in lieu of foreclosures on mortgage loans. As of December 31, 2016 , our principal executive and administrative offices are located inleased space at 275 Madison Avenue, Suite 3200, New York, New York 10016. We also maintain an office in Charlotte, North Carolina.Item 3. LEGAL PROCEEDINGSWe are at times subject to various legal proceedings arising in the ordinary course of our business. As of the date of this report, we do not believe that anyof our current legal proceedings, individually or in the aggregate, will have a material adverse effect on our operations, financial condition or cash flows.Item 4. MINE SAFETY DISCLOSURESNot applicable.45Table of ContentsPART IIItem 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIESMarket Price of and Dividends on the Registrant’s Common Equity and Related Stockholder MattersOur common stock is traded on the NASDAQ Global Select Market under the trading symbol “NYMT”. As of December 31, 2016 , we had 111,474,521shares of common stock outstanding and as of December 31, 2016 , there were approximately 29 holders of record of our common stock. This figure does notreflect the beneficial ownership of shares held in nominee name.The following table sets forth, for the periods indicated, the high, low and quarter end closing sales prices per share of our common stock and the cashdividends paid or payable on our common stock on a per share basis: Common Stock Prices Cash Dividends High Low QuarterEnd DeclarationDate PaymentDate AmountPer ShareYear Ended December 31, 2016 Fourth quarter$6.95 $5.70 $6.60 12/15/2016 1/26/2017 0.24Third quarter6.55 5.87 6.02 9/15/2016 10/28/2016 0.24Second quarter6.62 4.64 6.10 6/16/2016 7/25/2016 0.24First quarter5.51 3.98 4.74 3/18/2016 4/25/2016 0.24 Common Stock Prices Cash Dividends High Low QuarterEnd DeclarationDate PaymentDate AmountPer ShareYear Ended December 31, 2015 Fourth quarter$6.01 $4.99 $5.33 12/16/2015 1/25/2016 0.24Third quarter7.80 5.49 5.49 9/18/2015 10/26/2015 0.24Second quarter8.04 7.48 7.48 6/18/2015 7/27/2015 0.27First quarter8.11 7.48 7.76 3/18/2015 4/27/2015 0.27We intend to continue to pay quarterly dividends to holders of shares of our common stock. Future distributions will be at the discretion of the Board ofDirectors and will depend on our earnings and financial condition, maintenance of our REIT qualification, restrictions on making distributions under Maryland lawand such other factors as our Board of Directors deems relevant.Purchases of Equity Securities by the Issuer and Affiliated PurchasersNone.46Table of ContentsSecurities Authorized for Issuance Under Equity Compensation PlansThe following table sets forth information as of December 31, 2016 with respect to compensation plans under which equity securities of the Company areauthorized for issuance. The Company has no such plans that were not approved by security holders.Plan Category Number of Securities to beIssued upon Exercise ofOutstanding Options,Warrants and Rights Weighted Average Exercise Priceof Outstanding Options,Warrants and Rights Number of SecuritiesRemaining Available forFuture Issuance under EquityCompensation PlansEquity compensation plans approved by securityholders — $— 326,663Performance GraphThe following line graph sets forth, for the period from December 31, 2011 through December 31, 2016 , a comparison of the percentage change in thecumulative total stockholder return on the Company’s common stock compared to the cumulative total return of the Russell 2000 Index and the FTSE NationalAssociation of Real Estate Investment Trusts Mortgage REIT (“FTSE NAREIT Mortgage REITs”) Index. The graph assumes that the value of the investment inthe Company’s common stock and each of the indices were $100 as of December 31, 2011 .The foregoing graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K intoany filing under the Securities Act or under the Exchange Act, except to the extent we specifically incorporate this information by reference, and shall nototherwise by deemed filed under those acts.47Table of Contents48Table of ContentsItem 6. SELECTED FINANCIAL DATA The following table sets forth our selected historical operating and financial data. The selected historical operating and financial data for the years endedDecember 31, 2016 , 2015 , 2014 , 2013 and 2012 have been derived from our historical financial statements.The information presented below is only a summary and does not provide all of the information contained in our historical financial statements, includingthe related notes. You should read the information below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” and our historical financial statements, including the related notes (amounts in thousands, except per share data):Selected Statement of Operations Data: For the Years Ended December 31, 2016 2015 2014 2013 2012Interest income$319,306 $336,838 $378,847 $291,727 $137,348Interest expense254,668 260,651 301,010 231,178 105,926Net interest income64,638 76,187 77,837 60,549 31,422Other income41,238 45,841 105,208 29,062 9,105General, administrative and other expenses35,221 39,480 40,459 19,917 11,427Net income attributable to Company's common stockholders$54,651 $67,023 $130,379 $65,387 $28,279Per share basic income$0.50 $0.62 $1.48 $1.11 $1.08Per share diluted income$0.50 $0.62 $1.48 $1.11 $1.08Dividends declared per common share$0.96 $1.02 $1.08 $1.08 $1.06Weighted average shares outstanding-basic109,594 108,399 87,867 59,102 26,067Weighted average shares outstanding-diluted109,594 108,399 87,867 59,102 26,067Selected Balance Sheet Data: As of December 31, 2016 2015 2014 2013 2012Investment securities, available for sale, at fair value$818,976 $765,454 $885,241 $1,005,021 $1,105,870Residential mortgage loans held in securitization trusts (net)95,144 119,921 149,614 163,237 187,229Distressed residential mortgage loans (net)503,094 558,989 582,697 264,434 60,459Multi-family loans held in securitization trusts, at fair value6,939,844 7,105,336 8,365,514 8,111,022 5,442,906Investment in unconsolidated entities79,259 87,662 49,828 14,849 136Mezzanine loan and preferred equity investments100,150 44,151 24,907 13,209 3,522Total assets (1)8,951,631 9,056,242 10,540,005 9,898,675 7,160,401Financing arrangements, portfolio investments773,142 577,413 651,965 791,125 889,134Financing arrangements, residential mortgage loans192,419 212,155 238,949 — —Residential collateralized debt obligations91,663 116,710 145,542 158,410 180,979Multi-family collateralized debt obligations, at fair value6,624,896 6,818,901 8,048,053 7,871,020 5,319,573Securitized debt158,867 116,541 232,877 304,964 117,591Subordinated debentures45,000 45,000 45,000 45,000 45,000Total liabilities (1)8,100,469 8,175,716 9,722,078 9,418,009 6,838,395Total stockholders’ equity$851,162 $880,526 $817,927 $480,666 $322,006(1)Our consolidated balance sheets include assets and liabilities of Consolidated VIEs, as the Company is the primary beneficiary of these VIEs. As ofDecember 31, 2016 , December 31, 2015 and December 31, 2014 , assets of the Company's Consolidated VIEs totaled $7,330,872 , $7,412,093 and$8,847,078 , respectively, and the liabilities of these Consolidated VIEs totaled $6,902,536 , $7,077,175 and $8,457,034 , respectively. See Note 9 of ourconsolidated financial statements included in this Annual Report for further discussion.49Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsGeneralWe are a real estate investment trust, or REIT, for federal income tax purposes, in the business of acquiring, investing in, financing and managingprimarily mortgage-related and residential-housing related assets and financial assets. Our objective is to deliver long-term stable distributions to our stockholdersover changing economic conditions through a combination of net interest margin and net realized capital gains from a diversified investment portfolio. Ourportfolio includes certain credit sensitive assets and investments sourced from distressed markets in recent years that create the potential for capital gains, as wellas more traditional types of mortgage-related investments that generate interest income.Our investment portfolio includes residential mortgage loans, including second mortgages and loans sourced from distressed markets, non-AgencyRMBS, multi-family CMBS, preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-family properties, equity and debtsecurities issued by entities that invest in residential and commercial real estate and Agency RMBS. Subject to maintaining our qualification as a REIT, we alsomay opportunistically acquire and manage various other types of mortgage-related and financial assets that we believe will compensate us appropriately for therisks associated with them, including, without limitation, collateralized mortgage obligations and securities issued by newly originated residential securitizations,including credit sensitive securities from these securitizations.In recent years, we have transitioned our portfolio to one focused increasingly on residential and multi-family credit assets, which we believe will benefitfrom improving credit metrics. As part of our greater focus on credit assets, we acquired 100% of RiverBanc LLC, or RiverBanc, an investment management firmthat managed over $400 million of direct and indirect investments in multi-family apartment properties on behalf of both public and private institutional investors,including our Company, as well as ownership interests in certain other RiverBanc-managed entities. Consistent with this approach to capital allocation, weacquired an additional $314.7 million of residential and multi-family credit assets during the year ended December 31, 2016 , while reducing our net capitalallocated to Agency RMBS and Agency IO by approximately $47.9 million .We seek to achieve a balanced and diverse funding mix to finance our assets and operations. We currently rely primarily on a combination of short-termborrowings, such as repurchase agreements with terms typically of 30 days, longer term repurchase agreement borrowing with terms between one year and 18months and longer term structured financings, such as securitizations, with terms longer than one year.We internally manage a portion of our portfolio, including Agency ARMs, Agency fixed-rate RMBS, non-Agency RMBS, residential securitized loans,second mortgage loans, multi-family CMBS and preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-familyproperties. In addition, as part of our investment strategy, we also utilize certain external investment managers to manage specific asset types that we target or own.Accordingly, Headlands Asset Management, LLC, or Headlands, provides investment management services with respect to our investments in distressedresidential mortgage loans and The Midway Group, L.P., or Midway, provides investment management services with respect to our investments in Agency IOs.50Table of ContentsSignificant Events in 2016•We generated net income attributable to common stockholders in 2016 of $54.7 million , or $ 0.50 per share.•We declared aggregate 2016 dividends of $0.96 per common share.•We issued and sold 1,905,206 shares of common stock under our at-the-market offering programs, resulting in net proceeds to us of $12.8 million .•On May 16, 2016, we completed the acquisition of the outstanding common equity interests in RiverBanc LLC ("RiverBanc"), RB MultifamilyInvestors LLC ("RBMI") and RB Development Holding Company LLC ("RBDHC") that were not previously owned by us. By acquiring a 100%ownership interest in RiverBanc, we internalized the management of our multi-family investments. We expect to achieve certain synergies related toprocesses and personnel as a result of this internalization. RBMI and RBDHC are investment vehicles managed by RiverBanc. In connection with theacquisitions, on May 16, 2016, Kevin M. Donlon, the founder and Chief Executive Officer of RiverBanc, was named President of the Company.•We repaid the outstanding notes from our 2013 distressed residential mortgage loans securitizations, which had an outstanding principal balance of$31.9 million at the time of repayment. The notes were issued in 2013 in an aggregate original principal amount of $138.3 million.•We repaid $55.9 million of outstanding notes from our November 2013 collateralized recourse financing, which was comprised of securities issuedfrom three separate Freddie Mac-sponsored multi-family K-Series securitizations. In connection with the repayment of the notes, $181.9 million ofsecurities serving as collateral for the notes were transferred back to the Company.•We closed on a securitization transaction that involved the issuance and sale of $177.5 million of Class A Notes representing beneficial ownership ina pool of performing and re-performing seasoned mortgage loans. We retained $25.5 million of Class M Notes and a $79.8 million equity certificateissued by the securitization entity. We also hold 5% of the Class A Notes issued. The sale of the remaining Class A Notes resulting in gross proceedsto us of approximately $167.7 million.•We repaid all of our outstanding FHLBI advances, which was funded primarily through repurchase agreement financing.•We funded $44.3 million of preferred equity investments in owners of multi-family properties and purchased $82.1 million of multi-family CMBSsecurities.•We sold residential mortgage loans, including distressed residential mortgage loans, with a carrying value of approximately $74.9 million foraggregate proceeds of approximately $91.6 million , which resulted in a net realized gain, before income taxes, of approximately $16.7 million .•We acquired residential mortgage loans, including distressed residential mortgage loans and second mortgages, for an aggregate purchase cost ofapproximately $82.2 million .•Purchased approximately $188.3 million of non-Agency RMBS backed by re-performing and non-performing loans during the year.51Table of ContentsKey Fourth Quarter 2016 DevelopmentsRepayment of Outstanding Notes from 2013 Collateralized Recourse FinancingIn October 2016, the Company repaid $55.9 million of outstanding notes from its November 2013 collateralized recourse financing, which was comprisedof securities issued from three separate Freddie Mac-sponsored multi-family K-Series securitizations. In connection with the repayment of the notes, $181.9million of securities serving as collateral on the notes were transferred back to the Company.Fourth Quarter 2016 Common Stock and Preferred Stock DividendsOn December 15, 2016 , our Board of Directors declared a regular quarterly cash dividend of 0.24 per common share for the quarter ended December 31,2016 . The dividend was paid on January 26, 2017 to our common stockholders of record as of December 27, 2016 .On December 15, 2016 , our Board of Directors declared a Series B Preferred Stock quarterly cash dividend of $0.484375 per share of Series B PreferredStock. The dividend was paid on January 15, 2017 to our preferred stockholders of record as of January 1, 2017 .On December 15, 2016 , our Board of Directors declared a Series C Preferred Stock quarterly cash dividend of $0.4921875 per share of Series C PreferredStock. The dividend was paid on January 15, 2017 to our preferred stockholders of record as of January 1, 2017 .Subsequent EventsOn January 23, 2017 , the Company completed the issuance and sale to Nomura Securities International, Inc. of $138.0 million aggregate principalamount of its 6.25% Senior Convertible Notes due 2022 (the "Convertible Notes"), including $18.0 million aggregate principal amount of the Convertible Notesissued upon exercise of an over-allotment option, in an underwritten public offering. The net proceeds to the Company from the sale of the Convertible Notes, afterdeducting the underwriter's discounts and commissions and estimated offering expenses, is approximately $127.3 million .The Convertible Notes were issued at 96% of the principal amount, bear interest at a rate equal to 6.25% per year, payable semi-annually in arrears onJanuary 15 and July 15 of each year, commencing July 15, 2017, and are expected to mature on January 15, 2022 , unless earlier converted or repurchased. TheCompany does not have the right to redeem the Convertible Notes prior to maturity and no sinking fund is provided for the Convertible Notes. Holders of theConvertible Notes will be permitted to convert their Convertible Notes into shares of the Company's common stock at any time prior to the close of business on thebusiness day immediately proceeding January 15, 2022 . The conversion rate for the Convertible Notes, which is subject to adjustment upon the occurrence ofcertain specified events, initially equals 142.7144 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalentto a conversion price of approximately $7.01 per share of the Company’s common stock, based on a $1,000 principal amount of the Convertible Notes. TheCompany estimates the all in cost of the Convertible Notes to be approximately 8.14%. 52Table of ContentsCurrent Market Conditions and Commentar yThe housing market, credit conditions and the interest rate environment each have a significant impact on our business. The 2016 fiscal year was markedby significant volatility in the equity and energy markets during the first part of the year, with markets stabilizing and then rallying in the second half of the year. In2016, economic indicators have suggested that the global economy is expanding again, buoyed in large part by a resurgent China, improved global industrialactivity, continued, albeit moderate, economic expansion in the United States and signs that inflation is moving closer to expected levels. Interest rates continued toexperience significant swings in 2016, as evidenced by an approximately 100 basis points increase in the ten-year U.S. Treasury Note during the fourth quarter of2016. The U.S. election results in November 2016 boosted hopes for greater economic growth in the U.S. and abroad in 2017 and future years, but the widedistribution of potential policy outcomes that may result from the new U.S. administration poses uncertainty and may result in increased market volatility.In light of market conditions in 2016 and what we expect to be a continued difficult hedging and earnings environment for Agency RMBS, we determinedin 2016 to transition our portfolio to one increasingly focused on multi-family and residential credit assets, purchasing approximately $396.9 million of creditsensitive assets, while reducing our capital allocation to Agency RMBS, including Agency IOs, by 26% during the year. We intend to continue this portfoliotransition in 2017. The market conditions discussed below significantly influence our investment strategy and results.General. The U.S. economy grew at a slower pace in 2016 as compared to 2015, with real gross domestic product (“GDP”) expanding by 1.6% in 2016versus 2.6% in 2015, again performing below Federal Reserve policymakers’ forecasts at the outset of the 2016 fiscal year. According to data from the Bureau ofEconomic Analysis, the deceleration in real GDP growth from 2015 to 2016 was influenced by a downturn in private inventory investment, a downturn innonresidential fixed investment, and decelerations in residential fixed investment and in state and local government spending, among other things. According to theminutes of the Federal Reserve’s December 2016 meeting, Federal Reserve policymakers expect slightly higher GDP growth in 2017 and 2018, with the centraltendency projections for GDP growth ranging from 1.9% to 2.3% for 2017 and 1.8% to 2.2% for 2018.The labor market continued to display signs of improvement in 2016. According to the U.S. Department of Labor, the U.S. unemployment rate fell from5.0% as of the end of December 2015 to 4.7% as of the end of December 2016, while total nonfarm payroll employment posted an average monthly increase of187,000 jobs in 2016, down from an average monthly increase of 221,000 jobs in 2015. Data from the U.S. Department of Labor in January 2017 indicated that theU.S. unemployment rate showed little change from 2016 at 4.8%, while total nonfarm payroll employment added 227,000 jobs in January 2017. Federal Reserve and Monetary Policy. In December 2016, in view of realized and expected labor market conditions and inflation, the Federal Reserveannounced that it would raise the target range for the federal funds rate by 25 basis points to 0.50% to 0.75% and has indicated its expectations for additional ratehikes in 2017, although the Federal Reserve opted not to increase the rate at its January 2017 meeting. The Federal Reserve last increased the target range for thefederal funds rate in December 2015. The Federal Reserve indicated that in determining the size and timing of future adjustments to the target range for the federalfunds rate, it will assess “realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation." Significant uncertaintywith respect to the speed at which the Federal Reserve will tighten its monetary policy continues to persist and may result in significant volatility in 2017 andfuture periods. Greater uncertainty frequently leads to wider asset spreads or lower prices and higher hedging costs.Single-Family Homes and Residential Mortgage Market. The residential real estate market continued to display signs of growth during 2016. Datareleased by S&P Indices for its S&P/Case-Shiller Home Price Indices for November 2016 showed that, on average, home prices increased 5.3% for the 20-CityComposite over November 2015. In addition, according to data provided by the U.S. Department of Commerce, privately-owned housing starts for single familyhomes averaged a seasonally adjusted annual rate of 830,000 during the fourth quarter of 2016, which was 8.1% above the fourth quarter 2015 rate of 768,000. Weexpect the single-family residential real estate market to continue to improve modestly in the near term. We expect that improving single family housingfundamentals will have a positive impact on the overall credit profile of our existing portfolio of distressed residential loans.53Table of ContentsMulti-family Housing. Apartments and other residential rental properties remain one of the better performing segments of the commercial real estatemarket. According to data provided by the U.S. Department of Commerce, starts on multi-family homes containing five units or more averaged a seasonallyadjusted annual rate of 377,000 during the fourth quarter of 2016 and 373,000 for the full year 2016, as compared to 410,000 for the full year 2015. Moreover,even with the supply expansion in recent years, vacancy trends in the multi-family sector appear to remain stable. According to the Multifamily Vacancy Index(“MVI”), which is produced by the National Association of Home Builders and surveys the multifamily housing industry’s perception of vacancies, the MVI wasat 42 for the second quarter of 2016, up from 39 for the first quarter of 2016, the highest score since the second quarter of 2013, but still largely in-line with indexscores over the prior year. Strength in the multi-family housing sector has contributed to valuation improvements for multi-family properties and, in turn, many ofthe multi-family CMBS that we own, although those gains have slowed over the past year. Credit Spreads. Credit spreads generally tightened throughout much of 2016 and this had a positive impact on the value of many of our credit sensitiveassets while also resulting in a more challenging current return environment for new investment in many of these asset classes. Tightening credit spreads generallyincrease the value of many of our credit sensitive assets while widening credit spreads generally decrease the value of these assets. Financing markets. During 2016, the bond market again experienced a significant amount of volatility with the closing yield of the ten-year U.S.Treasury Note trading between 1.36% and 2.60%, settling at 2.44% at December 31, 2016. During the second half of 2016, the Treasury curve steepened with thespread between the 2-Year U.S. Treasury yield and the 10-Year U.S. Treasury yield closing to 126 basis points, up 37 basis points from June 30, 2016. This spreadis important as it is indicative of opportunities for investing in levered assets.Developments at Fannie Mae and Freddie Mac. Payments on the Agency ARMs and Agency fixed-rate RMBS in which we invest are guaranteed byFannie Mae and Freddie Mac. In addition, although not guaranteed by Freddie Mac, all of our multi-family CMBS has been issued by securitization vehiclessponsored by Freddie Mac and the Agency IOs we invest in are issued by Fannie Mae, Freddie Mac or Ginnie Mae. As broadly publicized, Fannie Mae andFreddie Mac are presently under federal conservatorship as the U.S. Government continues to evaluate the future of these entities and what role the U.S.Government should continue to play in the housing markets in the future. Since being placed under federal conservatorship, there have been a number of proposalsintroduced, both from industry groups and by the U.S. Congress, relating to changing the role of the U.S. government in the mortgage market and reforming oreliminating Fannie Mae and Freddie Mac. It remains unclear how the U.S. Congress will move forward on such reform at this time and what impact, if any, thisreform will have on mortgage REITs. See “Item 1A. Risk Factors-Risks Related to Our Business and Our Company-Changes in laws and regulations affecting therelationship between Fannie Mae and Freddie Mac and the U.S. government may adversely affect our business.”54Table of ContentsSignificant Estimates and Critical Accounting PoliciesWe prepare our consolidated financial statements in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions thataffect reported amounts. These estimates are based, in part, on our judgment and assumptions regarding various economic conditions that we believe arereasonable based on facts and circumstances existing at the time of reporting. The results of these estimates affect reported amounts of assets, liabilities andaccumulated other comprehensive income at the date of the consolidated financial statements and the reported amounts of income, expenses and othercomprehensive income during the periods presented.Changes in the estimates and assumptions could have a material effect on these financial statements. Accounting policies and estimates related to specificcomponents of our consolidated financial statements are disclosed in the notes to our consolidated financial statements. In accordance with SEC guidance, thosematerial accounting policies and estimates that we believe are most critical to an investor’s understanding of our financial results and condition and which requirecomplex management judgment are discussed below.Revenue Recognition . Interest income on our investment securities is accrued based on the outstanding principal balance and their contractualterms. Premiums and discounts associated with investment securities at the time of purchase or origination are amortized into interest income over the life of suchsecurities using the effective yield method. Adjustments to premium amortization are made for actual prepayment activity.Interest income on our credit sensitive securities, such as our CMBS that were purchased at a discount to par value, is recognized based on the security’seffective interest rate. The effective interest rate on these securities is based on management’s estimate from each security of the projected cash flows, which areestimated based on assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis,management reviews and, if appropriate, adjusts its cash flow projections based on input and analysis received from external sources, internal models, and its ownjudgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, orfrom those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on these securities.A portion of the purchase discount on the Company’s first loss tranche PO multi-family CMBS is designated as non-accretable purchase discount orcredit reserve, which partially mitigates the Company’s risk of loss on the mortgages collateralizing such multi-family CMBS, and is not expected to be accretedinto interest income. The amount designated as a credit reserve may be adjusted over time, based on the actual performance of the security, its underlyingcollateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit reserve is morefavorable than forecasted, a portion of the amount designated as credit reserve may be accreted into interest income over time. Conversely, if the performance of asecurity with a credit reserve is less favorable than forecasted, the amount designated as credit reserve may be increased, or impairment charges and write-downs ofsuch securities to a new cost basis could be required.With respect to interest rate swaps that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such swaps willbe recognized in current earnings.Fair Value. The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, whereavailable. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based orindependently-sourced market parameters, including interest rate yield curves. Such inputs to the valuation methodology are unobservable and significant to thefair value measurement. The Company’s interest-only CMBS, principal-only CMBS, multi-family loans held in securitization trusts and multi-family CDOs areconsidered to be the most significant of its fair value estimates.The Company’s valuation methodologies are described in “Note 16 – Fair Value of Financial Instruments” included in Item 8 of this Annual Report onForm 10-K.Residential Mortgage Loans Held in Securitization Trusts – Impaired Loans (net) – Impaired residential mortgage loans held in securitization trusts arerecorded at amortized cost less specific loan loss reserves. Impaired loan value is based on management’s estimate of the net realizable value taking intoconsideration local market conditions of the distressed property, updated appraisal values of the property and estimated expenses required to remediate theimpaired loan.55Table of ContentsVariable Interest Entities – A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity inwhich equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activitieswithout additional subordinated financial support from other parties. The Company consolidates a VIE when it is the primary beneficiary of such VIE. As primarybeneficiary, it has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits orabsorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIEeach reporting period, based upon changes in the facts and circumstances pertaining to the VIE.Loan Consolidation Reporting Requirement for Certain Multi-Family K-Series Securitizations – As of December 31, 2016 , we owned 100% of the firstloss tranche securities of the “Consolidated K-Series.” The Consolidated K-Series collectively represents, as of December 31, 2016 and December 31, 2015 , fiveseparate Freddie Mac sponsored multi-family loan K-Series securitizations, of which we, or one of our special purpose entities, or SPEs, own the first loss tranchePO securities and certain IO securities.We determined that the Consolidated K-Series were VIEs and that we are the primary beneficiary of the Consolidated K-Series. As a result, we arerequired to consolidate the Consolidated K-Series’ underlying multi-family loans including their liabilities, income and expenses in our consolidated financialstatements. We have elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations inthe assets and liabilities of the Consolidated K-Series will be reflected in our consolidated statement of operations.Fair Value Option – The fair value option provides an election that allows companies to irrevocably elect fair value for financial assets and liabilities onan instrument-by-instrument basis at initial recognition. Changes in fair value for assets and liabilities for which the election is made will be recognized in earningsas they occur. The Company elected the fair value option for its Agency IO strategy, certain of its investments in unconsolidated entities and the Consolidated K-Series (as defined in Note 2 to our consolidated financial statements included in this report).Acquired Distressed Residential Mortgage Loans – Acquired distressed residential mortgage loans that have evidence of deteriorated credit quality atacquisition are accounted for under Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality("ASC 310-30"). Management evaluates whether there is evidence of credit quality deterioration as of the acquisition date using indicators such as past due ormodified status, risk ratings, recent borrower credit scores and recent loan-to-value percentages. Acquired distressed residential mortgage loans are recorded at fairvalue at the date of acquisition, with no allowance for loan losses. Under ASC 310-30, the acquired loans may be aggregated and accounted for as a pool of loans ifthe loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an expectation ofaggregate cash flows. Once a pool is assembled, it is treated as if it was one loan for purposes of applying the accounting guidance.Under ASC 310-30, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” isaccreted into interest income over the life of the loans in each pool or individually using a level yield methodology. Accordingly, our acquired distressed residentialmortgage loans accounted for under ASC 310-30 are not subject to classification as nonaccrual classification in the same manner as our residential mortgage loansthat were not distressed when acquired by us. Rather, interest income on acquired distressed residential mortgage loans relates to the accretable yield recognized atthe pool level or on an individual loan basis, and not to contractual interest payments received at the loan level. The difference between contractually requiredprincipal and interest payments and the cash flows expected to be collected, referred to as the “nonaccretable difference,” includes estimates of both the impact ofprepayments and expected credit losses over the life of the individual loan, or the pool (for loans grouped into a pool).Management monitors actual cash collections against its expectations, and revised cash flow expectations are prepared as necessary. A decrease inexpected cash flows in subsequent periods may indicate that the loan pool or individual loan, as applicable, is impaired, thus requiring the establishment of anallowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previouslyestablished allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount ofaccretable yield for the loan pool. The adjustment of accretable yield due to a significant increase in expected cash flows is accounted for prospectively as a changein estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodicaccretion is adjusted accordingly over the remaining life of the loans in the pool or individual loan, as applicable. The impacts of (i) prepayments, (ii) changes invariable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income.56Table of ContentsBusiness Combinations - The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business.The Company accounts for business combinations by applying the acquisition method in accordance with ASC 805, Business Combinations . Transaction costsrelated to acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired,liabilities assumed and non-controlling interests, if any, in an acquired entity are recognized and measured at their estimated fair values. The excess of the fairvalue of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity,net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimatesand assumptions, especially with respect to intangible assets and liabilities.Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business ismeasured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration issettled, with changes in fair value included in net income.Net cash paid to acquire a business is classified as investing activities on the accompanying consolidated statements of cash flows.Recent Accounting PronouncementsA discussion of recent accounting pronouncements and the possible effects on our financial statements is included in “Note 2 — Summary of SignificantAccounting Policies” included in Item 8 of this Annual Report on Form 10-K.57Table of ContentsCapital AllocationThe following tables set forth our allocated capital by investment type at December 31, 2016 and December 31, 2015, respectively (dollar amounts inthousands):At December 31, 2016 : AgencyRMBS (1) Agency IOs Multi-Family (2) DistressedResidential (3) ResidentialSecuritizedLoans (4) Other (5) TotalCarrying value$441,472 $87,778 $628,522 $671,272 $95,144 $32,215 $1,956,403Liabilities: Callable (6)(391,707) (60,862) (206,824) (306,168) — — (965,561)Non-callable— — (28,332) (130,535) (91,663) (45,000) (295,530)Hedges (Net) (7)2,500 5,417 — — — — 7,917Cash (8)4,415 39,673 3,687 9,898 — 75,725 133,398Goodwill— — — — — 25,222 25,222Other3,166 4,874 (2,652) 13,436 890 (30,401) (10,687)Net capital allocated$59,846 $76,880 $394,401 $257,903 $4,371 $57,761 $851,162% of capital allocated7.0% 9.0% 46.4% 30.3% 0.5% 6.8% 100.0%(1)Includes both Agency ARMs and Agency fixed-rate RMBS.(2)The Company determined it is the primary beneficiary of the Consolidated K-Series and has consolidated the Consolidated K-Series into the Company’sfinancial statements. A reconciliation to our financial statements as of December 31, 2016 follows:Multi-Family loans held in securitization trusts, at fair value$6,939,844Multi-Family CDOs, at fair value(6,624,896)Net carrying value314,948Investment securities available for sale, at fair value126,442Total CMBS, at fair value441,390Mezzanine loan, preferred equity investments and investments in unconsolidated entities169,678Real estate under development17,454Financing arrangements(206,824)Securitized debt(28,332)Other1,035Net Capital in Multi-Family (a)$394,401(a) Net Capital in Multi-Family includes $3.1 million of non-controlling interest.(3)Includes $503.1 million of distressed residential loans and $162.1 million of non-Agency RMBS backed by re-performing and non-performing loans.(4)Represents our residential mortgage loans held in securitization trusts. We securitized these loans in 2005.(5)Other includes investments in unconsolidated entities amounting to $9.7 million and mortgage loans held for sale and mortgage loans held for investmenttotaling $21.3 million . Mortgage loans held for sale and mortgage loans held for investment are included in the Company's accompanying consolidatedbalance sheet in receivables and other assets. Other non-callable liabilities consist of $45 million in subordinated debentures.(6)Includes repurchase agreements.(7)Includes derivative assets, derivative liabilities, payable for securities purchased and restricted cash posted as margin.(8)Includes $35.6 million held in overnight deposits in our Agency IO portfolio to be used for trading purposes. These deposits are included in theCompany’s accompanying consolidated balance sheet in receivables and other assets.58Table of ContentsAt December 31, 2015 : AgencyRMBS (1) Agency IOs Multi-Family (2) DistressedResidential (3) ResidentialSecuritizedLoans (4) Other (5) TotalCarrying value$547,745 $175,408 $450,228 $562,303 $119,921 $15,184 $1,870,789Liabilities: Callable (6)(489,253) (88,160) — (214,490) — — (791,903)Non-callable— — (83,242) (33,299) (116,710) (45,000) (278,251)Hedges (Net) (7)2,997 2,623 — — — — 5,620Cash (8)5,477 13,663 525 551 — 56,213 76,429Other9,311 4,799 (2,814) 12,972 1,187 (27,613) (2,158)Net capital allocated$76,277 $108,333 $364,697 $328,037 $4,398 $(1,216) $880,526% of capital allocated8.7% 12.3% 41.4% 37.3% 0.5% (0.1)% (1)Includes both Agency ARMs and Agency fixed-rate RMBS.(2)The Company determined it is the primary beneficiary of the Consolidated K-Series and has consolidated the Consolidated K-Series into the Company’sfinancial statements. A reconciliation to our financial statements as of December 31, 2015 follows:Multi-Family loans held in securitization trusts, at fair value$7,105,336Multi-Family CDOs, at fair value(6,818,901)Net carrying value286,435Investment securities available for sale, at fair value held in securitization trusts40,734Total CMBS, at fair value327,169Mezzanine loan, preferred equity investments and investments in unconsolidated entities123,059Securitized debt(83,871)Other(1,660)Net Capital in Multi-Family$364,697(3)Includes mortgage loans held for sale with a carrying value of $3.3 million that is included in the Company’s accompanying consolidated balance sheet inreceivables and other assets.(4)Represents our residential mortgage loans held in securitization trusts. We securitized these loans in 2005.(5)Other includes non-Agency RMBS and mortgage loans held for sale and mortgage loans held for investment. Other non-callable liabilities consist of $45million in subordinated debentures.(6)Includes repurchase agreements and FHLBI advances.(7)Includes derivative assets, derivative liabilities, payable for securities purchased and restricted cash posted as margin.(8)Includes $11.6 million held in overnight deposits in our Agency IO portfolio to be used for trading purposes. These deposits are included in theCompany’s accompanying consolidated balance sheet in receivables and other assets.59Table of ContentsResults of OperationsComparison of the Year Ended December 31, 2016 to the Year Ended December 31, 2015For the year ended December 31, 2016 , we reported net income attributable to the Company's common stockholders of $ 54.7 million , as compared tonet income attributable to the Company's common stockholders of $67.0 million for the prior year. The main components of the change in net income for the yearended December 31, 2016 as compared to the prior year are detailed in the following table (amounts in thousands, except per share data): For the Years Ended December 31, 2016 2015 $ ChangeNet interest income$64,638 $76,187 $(11,549)Total other income$41,238 $45,841 $(4,603)Total general, administrative and other expenses$35,221 $39,480 $(4,259)Income from operations before income taxes$70,655 $82,548 $(11,893)Income tax expense$3,095 $4,535 $(1,440)Net income attributable to Company$67,551 $78,013 $(10,462)Preferred stock dividends$12,900 $10,990 $1,910Net income attributable to Company's common stockholders$54,651 $67,023 $(12,372)Basic income per common share$0.50 $0.62 $(0.12)Diluted income per common share$0.50 $0.62 $(0.12)Net Interest IncomeThe decrease in net interest income of approximately $11.5 million for the year ended December 31, 2016 as compared to the corresponding period in 2015was driven by:•A decrease in net interest income of approximately $4.2 million in our Agency IO portfolio in 2016 due to higher prepayment experience onthese assets and an increase in financing costs in 2016.•A decrease in net interest income of approximately $3.1 million in our Agency ARM and Agency fixed-rate RMBS portfolio due to a decrease inaverage interest earning assets in this portfolio and higher prepayment rates. During 2016, we determined to begin reducing the amount ofcapital we allocate to our Agency RMBS strategy.•An increase in net interest income of approximately $7.0 million in our multi-family portfolio due to an increasein average interest earning assets attributable to new multi-family preferred equity investments and CMBS purchased during the 2016 period.Also contributing to higher net interest income in this portfolio in 2016 was an increase in the weighted average yield on the interest earningassets in our multi-family portfolio during the 2016 period and lower average cost of funds during the period as compared to the correspondingperiod in 2015.•A decrease in net interest income of approximately $0.7 million in our residential securitized loan portfolio due to an increase in financing costsand a decrease in average interest earning assets in this portfolio in 2016.•A decrease in net interest income of approximately $4.1 million in our distressed residential portfolio due to a decrease in net interest income onour distressed residential mortgage loans of approximately $6.5 million partially offset by an increase in net interest income on our non-AgencyRMBS of approximately $2.4 million . Net interest income on our distressed residential mortgage loans decreased due to seasoning of theportfolio resulting in less accretion of discount in the 2016 period as compared to the corresponding period in 2015 and an increase in financingcosts in 2016. Net interest income on our non-Agency RMBS increased due to an increase in average interest earning assets in this portfolio in2016.•The partial year contribution of approximately $6.5 million of net interest income in 2015 by certain CLO securities. The CLO securities weresold during the second quarter of 2015.60Table of ContentsOther IncomeTotal other income decreased by $4.6 million for the year ended December 31, 2016 as compared to the prior year. The change was primarily driven by:•A decrease in realized gains on distressed residential mortgage loans of $16.4 million due to decreased sales activity in 2016 as compared to theprior year.•A decline in net unrealized gains on multi-family loans and debt held in securitization trusts of $9.3 million for the year ended December 31,2016 as compared to the prior year. Credit spreads on our Freddie Mac K-Series securities tightened during the year ended December 31, 2015(relative to credit spreads at December 31, 2014), which in turn drove valuations on these securities higher in 2015, while credit spreadsremained relatively stable in 2016, thereby resulting in lower unrealized gain for the 2016 period.•An increase in net unrealized gains and an increase in realized gain on investment securities and related hedges of $9.7 million and $1.0 million ,respectively, for the year ended December 31, 2016 as compared to the prior year, primarily related to improved hedging performance in ourAgency IO portfolio.•An increase in other income of $9.7 million in the 2016 period, which is primarily due to gains recognized as a result of the Company's re-measurement of its previously held membership interests in RiverBanc, RBMI, and RBDHC in accordance with U.S. GAAP. In addition, otherincome increased due to income recognized from investments in unconsolidated entities made during the 2016 fiscal year.Comparative General, Administrative and Other Expenses (dollar amounts in thousands) For the Years Ended December 31,General, Administrative and Other Expenses: 2016 2015 $ ChangeSalaries, benefits and directors’ compensation $8,795 $4,661 $4,134Professional fees 2,877 2,542 335Base management and incentive fees 9,261 19,188 (9,927)Expenses on distressed residential mortgage loans 10,714 10,364 350Other 3,574 2,725 849Total $35,221 $39,480 $(4,259) For the year ended December 31, 2016 as compared to the prior year, general, administrative and other expenses decreased by $4.3 million . Salaries,benefits and directors’ compensation was driven higher during the 2016 period as compared to prior year primarily due to the increase in employee headcountresulting from the RiverBanc acquisition, which was offset by a $9.9 million decline in base management and incentive fees during the 2016 period as compared tothe prior year. The decline in base management and incentive fees was due in part to the termination of the RiverBanc management agreement on May 17, 2016and lower incentive fees earned in 2016. In addition, management fees on our distressed residential loan strategy decreased due to a change in methodology forcalculating base management fees from 1.5% of assets under management to 1.5% of invested capital beginning in the third quarter of 2016.61Table of ContentsComparison of the Year Ended December 31, 2015 to the Year Ended December 31, 2014For the year ended December 31, 2015 , we reported net income attributable to common stockholders of $ 67.0 million , as compared to net incomeattributable to common stockholders of $130.4 million for the prior year. The main components of the change in net income for the year ended December 31, 2015as compared to the prior year are detailed in the following table (dollar amounts in thousands, except per share data): For the Years Ended December 31, 2015 2014 $ ChangeNet interest income$76,187 $77,837 $(1,650)Total other income$45,841 $105,208 $(59,367)Total general, administrative and other expenses$39,480 $40,459 $(979)Income from continuing operations before income taxes$82,548 $142,586 $(60,038)Income tax expense$4,535 $6,395 $(1,860)Net income attributable to Company$78,013 $136,191 $(58,178)Preferred stock dividends$10,990 $5,812 $5,178Net income attributable to Company's common stockholders$67,023 $130,379 $(63,356)Basic income per common share$0.62 $1.48 $(0.86)Diluted income per common share$0.62 $1.48 $(0.86)Net Interest IncomeThe decrease in net interest income of approximately $1.7 million for the year ended December 31, 2015 as compared to the corresponding period in 2014was driven by:•A decrease in net interest income of approximately $7.8 million and $3.4 million in our Agency IO and Agency ARM and Agency fixed-rateRMBS portfolios, respectively, in 2015 due to a decrease in average interest earning assets in these portfolios and higher prepayment experienceon these assets in 2015.•A decrease in net interest income of approximately $2.6 million in our multi-family portfolio in 2015 due to a reduction in this portfolio’saverage interest earning assets. We sold two multi-family CMBS PO and two IO securities in the third and fourth quarters of 2014, one multi-family CMBS PO security in the first quarter of 2015, and multiple multi-family CMBS IO securities in the third quarter of 2015.•A decrease in net interest income of approximately $3.2 million in 2015 due to the sale of CLO securities in the second quarter of 2015.•A decrease in net interest income of approximately $0.6 million in our residential securitized loan portfolio due to a decrease in average interestearning assets in this portfolio in 2015.•An increase in net interest income of approximately $16.0 million in our distressed residential loan portfolio due to an increase in averageinterest earning assets in this portfolio in 2015. Average interest earning assets in this portfolio increased to $572.8 million for the year endedDecember 31, 2015 as compared to $249.0 million for the prior year.62Table of ContentsOther IncomeTotal other income decreased by $59.4 million for the year ended December 31, 2015 as compared to the prior year. The change was primarily driven by:•A decrease in realized gain on investment securities and related hedges of $46.7 million in 2015. Realized gains in the 2014 period weresignificantly higher than realized gains in the 2015 period due to the sale of certain multi-family CMBS investments in the third and fourthquarters of 2014 that resulted in realized gain amounting to $39.1 million. In addition, our Agency IO portfolio generated a $10.9 millionincrease in realized losses on its derivative instruments for the year ended December 31, 2015 . These changes were partially offset by realizedgains recognized on the sale of the Company's CLO securities in 2015 amounting to $3.2 million.•A decrease in net unrealized loss on investment securities and related hedges of $5.0 million for the year ended December 31, 2015 , primarilyrelated to our Agency IO portfolio.•A decline in net unrealized gains on multi-family loans and debt held in securitization trusts of $44.6 million in 2015 due to more moderatecredit spread tightening in 2015 as compared to significant tightening in 2014.•An increase in realized gains on distressed residential mortgage loans of $16.9 million in 2015 due primarily to the sale of two pools ofdistressed residential mortgage loans in September 2015 with a carrying value of $120.3 million for aggregate proceeds of approximately $144.2million.•An increase in gain on de-consolidation of $1.5 million in 2015 due to the sale in the first quarter of 2015 of a first loss PO security issued by asingle Freddie Mac-sponsored securitization included in the Consolidated K-Series.•An increase in other income of $4.6 million in 2015, which is primarily due to an increase in income from our common and preferred equityownership interests in RBMI.Comparative General, Administrative and Other Expenses (dollar amounts in thousands) For the Years Ended December 31,General, Administrative and Other Expenses: 2015 2014 $ ChangeSalaries, benefits and directors’ compensation $4,661 $4,281 $380Professional fees 2,542 2,618 (76)Base management fees and incentive fees 19,188 24,530 (5,342)Expenses on distressed residential mortgage loans 10,364 6,429 3,935Other 2,725 2,601 124Total $39,480 $40,459 $(979)The decrease in base management and incentive fees for the year ended December 31, 2015 as compared to the same period in 2014 was primarilydriven by a decrease in incentive compensation earned by RiverBanc. In the third and fourth quarter of 2014, RiverBanc earned incentive compensation from thesale of certain multi-family CMBS investments that generated $39.1 million in realized gains.The increase in expenses related to distressed residential mortgage loans for the year ended December 31, 2015 as compared to the same period in 2014is due to a higher average balance of loans outstanding in the 2015 period, thereby resulting in higher servicing costs, work-out costs and due diligence costs.63Table of ContentsComparative Portfolio Net Interest MarginOur results of operations for our investment portfolio during a given period typically reflect, in large part, the net interest income earned on ourinvestment portfolio of RMBS, CMBS (including CMBS held in securitization trusts), residential securitized loans, distressed residential loans (includingdistressed residential loans held in securitization trusts), loans held for investment, mezzanine loans and preferred equity investments, where the risks and paymentcharacteristics are equivalent to and accounted for as loans, loans held for sale and CLOs (collectively, our “Interest Earning Assets”). The net interest spread isimpacted by factors such as our cost of financing, the interest rate that our investments bear and our interest rate hedging strategies. Furthermore, the amount ofpremium or discount paid on purchased portfolio investments and the prepayment rates on portfolio investments will impact the net interest spread as such factorswill be amortized over the expected term of such investments. Realized and unrealized gains and losses on TBAs, Eurodollar and Treasury futures and otherderivatives associated with our Agency IO investments, which do not utilize hedge accounting for financial reporting purposes, are included in other income in ourstatement of operations, and therefore, not reflected in the data set forth below.The following table sets forth certain information about our portfolio by investment type and their related interest income, interest expense, weightedaverage yield on interest earning assets, average cost of funds and portfolio net interest margin for the years ended December 31, 2016 , 2015 and 2014 (dollaramounts in thousands):Year Ended December 31, 2016 AgencyRMBS Agency IOs Multi-Family (1)(2) DistressedResidential ResidentialSecuritizedLoans Other TotalInterest Income$7,093 $8,636 $40,786 $36,592 $2,941 $705 $96,753Interest Expense(3,887) (2,290) (7,490) (14,078) (1,246) (3,124) (32,115)Net Interest Income$3,206 $6,346 $33,296 $22,514 $1,695 $(2,419) $64,638 Average Interest Earning Assets (2) (3)$523,355 $122,104 $330,242 $629,412 $112,083 $12,009 $1,729,205Weighted Average Yield on InterestEarning Assets (4)1.36 % 7.07 % 12.35 % 5.81 % 2.62 % 5.87% 5.60 %Average Cost of Funds (5)(0.86)% (2.91)% (6.44)% (3.75)% (1.17)% — (2.67)%Portfolio Net Interest Margin (6)0.50 % 4.16 % 5.91 % 2.06 % 1.45 % 5.87% 2.93 %Year Ended December 31, 2015 Agency RMBS Agency IOs Multi- Family (1)(2) Distressed Residential Residential Securitized Loans Other TotalInterest Income$11,039 $11,412 $32,311 $39,739 $3,285 $6,081 $103,867Interest Expense(4,693) (892) (6,006) (13,125) (936) (2,028) (27,680)Net Interest Income$6,346 $10,520 $26,305 $26,614 $2,349 $4,053 $76,187 Average Interest Earning Assets (2) (3)$624,111 $132,468 $268,726 $572,796 $143,200 $17,108 $1,758,409Weighted Average Yield on InterestEarning Assets (4)1.77 % 8.61 % 12.02 % 6.94 % 2.29 % 35.54% 5.91 %Average Cost of Funds (5)(0.87)% (1.28)% (7.11)% (4.03)% (0.69)% — (2.23)%Portfolio Net Interest Margin (6)0.90 % 7.33 % 4.91 % 2.91 % 1.60 % 35.54% 3.68 %64Table of ContentsYear Ended December 31, 2014 Agency RMBS Agency IOs Multi- Family (1)(2) Distressed Residential Residential Securitized Loans Other TotalInterest Income$14,360 $19,068 $37,668 $18,681 $3,895 $9,259 $102,931Interest Expense(4,588) (797) (8,784) (8,075) (904) (1,946) (25,094)Net Interest Income$9,772 $18,271 $28,884 $10,606 $2,991 $7,313 $77,837 Average Interest Earning Assets (2) (3)$724,769 $146,001 $302,009 $248,970 $161,596 $24,828 $1,608,173Weighted Average Yield on InterestEarning Assets (4)1.98 % 13.06 % 12.47 % 7.50 % 2.41 % 37.29 % 6.40 %Average Cost of Funds (5)(0.74)% (0.92)% (7.17)% (4.82)% (0.58)% (1.59)% (2.00)%Portfolio Net Interest Margin (6)1.24 % 12.14 % 5.30 % 2.68 % 1.83 % 35.70 % 4.40 %(1)The Company, through its ownership of certain securities has determined it is the primary beneficiary of the Consolidated K-Series and has consolidatedthe Consolidated K-Series into the Company’s consolidated financial statements. Average Interest Earning Assets for the periods indicated exclude allConsolidated K-Series assets other than those securities actually owned by the Company. Interest income amounts represent interest income earned bysecurities that are actually owned by the Company. A reconciliation of our interest income in multi-family investments to our consolidated financialstatements for the years ended December 31, 2016 , 2015 and 2014 is set forth below (dollar amounts in thousands): For the Years Ended December 31, 2016 2015 2014Interest income, multi-family loans held in securitization trusts $249,191 $257,417 $301,877Interest income, investment securities, available for sale (a) 5,036 3,516 9,167Interest income, mezzanine loan and preferred equity investments 9,112 4,349 2,540Interest expense, multi-family collateralized debt obligation 222,553 232,971 275,916Interest income, multi-family CMBS 40,786 32,311 37,668Interest expense, investment securities, available for sale 1,859 — —Interest expense, securitized debt 5,631 6,006 8,784Net interest income, Multi-Family $33,296 $26,305 $28,884(a) Included in the Company’s accompanying consolidated statements of operations in interest income, investment securities andother.(2)Average Interest Earning Assets for the period excludes all Consolidated K-Series assets other than those securities issued by the securitizationscomprising the Consolidated K-Series that are actually owned by the Company.(3)Our Average Interest Earning Assets is calculated based on daily average amortized cost for the respective periods.(4)Our Weighted Average Yield on Interest Earning Assets was calculated by dividing our annualized interest income by our Average Interest EarningAssets for the respective periods.(5)Our Average Cost of Funds was calculated by dividing our annualized interest expense by our average interest bearing liabilities, excluding subordinateddebentures for the respective periods. Our Average Cost of Funds includes interest expense on our interest rate swaps.(6)Portfolio Net Interest Margin is the difference between our Weighted Average Yield on Interest Earning Assets and our Average Cost of Funds, excludingthe Weighted Average Cost of subordinated debentures.65Table of ContentsPrepayment HistoryThe following table sets forth the actual constant prepayment rates (“CPR”) for selected asset classes, by quarter, for the periods indicated:Quarter Ended Agency ARMs Agency Fixed-RateRMBS Agency IOs Non-Agency RMBS ResidentialSecuritizations Total WeightedAverageDecember 31, 2016 21.7% 12.3% 19.4% 14.8% 11.1% 16.9%September 30, 2016 20.7% 10.0% 18.2% 21.0% 15.9% 16.1%June 30, 2016 17.6% 10.2% 15.6% 14.4% 17.8% 14.6%March 31, 2016 13.5% 7.9% 14.7% 12.9% 14.8% 12.7%December 31, 2015 16.9% 8.5% 14.6% 15.3% 31.2% 14.7%September 30, 2015 18.6% 10.5% 18.0% 12.5% 8.9% 15.1%June 30, 2015 9.2% 10.6% 16.3% 12.5% 11.1% 13.3%March 31, 2015 9.1% 6.5% 14.7% 15.5% 13.7% 11.5%December 31, 2014 12.3% 6.5% 14.6% 13.7% 5.4% 11.1%September 30, 2014 20.5% 9.2% 15.2% 18.7% 5.4% 13.1%June 30, 2014 9.9% 6.7% 12.7% 10.5% 7.0% 10.1%March 31, 2014 8.8% 5.2% 11.3% 9.7% 7.5% 8.8%The change in CPR during 2016 primarily negatively impacted the net interest income from our Agency IOs, Agency fixed-rate RMBS and AgencyARMs. When prepayment expectations over the remaining life of assets increase, we have to amortize premiums over a shorter time period resulting in a reducedyield to maturity on our investment assets. Conversely, if prepayment expectations decrease, the premium would be amortized over a longer period resulting in ahigher yield to maturity. In addition, the market values and cash flows from our Agency IOs can be materially adversely affected during periods of elevatedprepayments. We monitor our prepayment experience on a monthly basis and adjust the amortization rate to reflect current market conditions.Financial ConditionAs of December 31, 2016 , we had approximately $9.0 billion of total assets, as compared to approximately $9.1 billion of total assets as of December 31,2015 . A significant portion of our assets represents the assets comprising the Consolidated K-Series, which we consolidate under the accounting rules. As ofDecember 31, 2016 and December 31, 2015 , the Consolidated K-Series assets amounted to approximately $7.0 billion and $7.1 billion , respectively. See"Significant Estimates and Critical Accounting Policies - Loan Consolidation Reporting Requirement for Certain Multi-Family K-Series Securitizations."66Table of ContentsBalance Sheet AnalysisInvestment Securities Available for Sale . At December 31, 2016 , our securities portfolio includes Agency RMBS, including Agency fixed-rate andAgency ARM pass-through certificates, Agency IOs, CMBS, non-Agency RMBS, and U.S. Treasuries, which are classified as investment securities available forsale. At December 31, 2016 , we had no investment securities in a single issuer or entity that had an aggregate book value in excess of 10% of our total assets. Theincrease in our investment securities available for sale as of December 31, 2016 as compared to December 31, 2015 is primarily related to our purchases of non-Agency RMBS and CMBS during the period.The following tables set forth the balances of our investment securities available for sale by vintage (i.e., by issue year) as of December 31, 2016 andDecember 31, 2015 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015 Par Value CarryingValue Par Value CarryingValueAgency RMBS ARMs Prior to 2012$22,173 $23,203 $47,463 $49,670201286,449 89,642 116,517 120,3792013— — 1,282 1,3132014— — 1,203 1,2332015— — 401 418Total ARMs108,622 112,845 166,866 173,013 Fixed-Rate Prior to 20121,011 1,042 21,947 24,9472012317,974 327,132 386,293 397,5412013— — 309 3352015411 453 1,668 1,890Total Fixed-Rate319,396 328,627 410,217 424,713IO Prior to 2013321,237 49,617 484,683 74,652201387,142 14,635 113,845 19,214201451,716 5,634 65,295 7,976201555,338 9,578 91,837 13,548201675,770 5,427 — —Total IOs591,203 84,891 755,660 115,390 Total Agency RMBS1,019,221 526,363 1,332,743 713,116 US Treasury Securities Prior to 2012— — 10,000 10,03720163,000 2,887 — —Total US Treasury Securities3,000 2,887 10,000 10,037 Non-Agency RMBS 20061,659 1,229 2,088 1,567201527,574 27,643 — —2016133,647 134,412 — —Total Non-Agency RMBS162,880 163,284 2,088 1,567 CMBS Prior to 2013 (1)835,447 43,897 853,408 40,73420135,912 5,733 — —20142,500 2,158 — —201516,880 14,364 — —201664,873 60,290 — —Total CMBS925,612 126,442 853,408 40,734 Total$2,110,713 $818,976 $2,198,239 $765,454(1)These amounts represent multi-family CMBS available for sale held in securitization trusts at December 31, 2016 and December 31, 2015 . 67Table of ContentsResidential Mortgage Loans Held in Securitization Trusts (net) . Included in our portfolio are prime ARM loans that we originated or purchased in bulkfrom third parties that met our investment criteria and portfolio requirements and that we subsequently securitized in 2005.At December 31, 2016 , residential mortgage loans held in securitization trusts totaled approximately $95.1 million . The Company’s net investment inthe residential securitization trusts, which is the maximum amount of the Company’s investment that is at risk to loss and represents the difference between thecarrying amount of (i) the ARM loans, real estate owned and receivables held in residential securitization trusts and (ii) the amount of Residential CDOsoutstanding, was $4.4 million . Of the residential mortgage loans held in securitized trusts, 100% are traditional ARMs or hybrid ARMs, 80.7% of which are ARMloans that are interest only, at the time of origination. With respect to the hybrid ARMs included in these securitizations, interest rate reset periods werepredominately five years or less and the interest-only period is typically 9 years, which mitigates the “payment shock” at the time of interest rate reset. None of theresidential mortgage loans held in securitization trusts are pay option-ARMs or ARMs with negative amortization. At December 31, 2016, the interest only periodfor the interest only ARM loans included in these securitizations has ended.The following table details our residential mortgage loans held in securitization trusts at December 31, 2016 and December 31, 2015 , respectively (dollaramounts in thousands): Number of Loans Unpaid Principal Carrying ValueDecember 31, 2016287 $98,303 $95,144December 31, 2015331 $122,545 $119,921Characteristics of Our Residential Mortgage Loans Held in Securitization Trusts:The following table sets forth the composition of our residential mortgage loans held in securitization trusts as of December 31, 2016 and December 31,2015 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015 Average High Low Average High LowGeneral Loan Characteristics: Original Loan Balance$424 $2,850 $48 $432 $2,850 $48Current Coupon Rate3.35% 5.25% 1.63% 2.82% 4.63% 1.38%Gross Margin2.36% 4.13% 1.13% 2.37% 4.13% 1.13%Lifetime Cap11.3% 13.25% 9.38% 11.3% 13.25% 9.38%Original Term (Months)360 360 360 360 360 360Remaining Term (Months)221 228 187 233 240 199Average Months to Reset5 11 1 5 11 1Original FICO Score724 818 593 724 818 593Original LTV69.80% 95.00% 13.94% 69.77% 95.00% 13.94%68Table of ContentsThe following tables detail the activity for the residential mortgage loans held in securitization trusts (net) for the years ended December 31, 2016 and2015 , respectively (dollar amounts in thousands): Principal Premium Allowance forLoan Losses Net CarryingValueBalance, January 1, 2016 $122,545 $775 $(3,399) $119,921Principal repayments (23,781) — — (23,781)Provision for loan loss — — (612) (612)Transfer to real estate owned (461) — 117 (344)Charge-Offs — — 112 112Amortization of premium — (152) — (152)Balance, December 31, 2016 $98,303 $623 $(3,782) $95,144 Principal Premium Allowance forLoan Losses Net CarryingValueBalance, January 1, 2015 $152,277 $968 $(3,631) $149,614Principal repayments (30,684) — — (30,684)Provision for loan loss — — (1,161) (1,161)Transfer to real estate owned (75) — — (75)Charge-Offs 1,027 — 1,393 2,420Amortization of premium — (193) — (193)Balance, December 31, 2015 $122,545 $775 $(3,399) $119,92169Table of ContentsAcquired Distressed Residential Mortgage Loans . Distressed residential mortgage loans are comprised of pools of fixed and adjustable rate residentialmortgage loans acquired by the Company at a discount, with evidence of credit deterioration since their origination and where it is probable that the Company willnot collect all contractually required principal payments. Management evaluates whether there is evidence of credit quality deterioration as of the acquisition dateusing indicators such as past due or modified status, risk ratings, recent borrower credit scores and recent loan-to-value percentages. Distressed residentialmortgage loans held in securitization trusts are distressed residential mortgage loans transferred to Consolidated VIEs that have been securitized into beneficialinterests.The following table details our portfolio of distressed residential mortgage loans, including those distressed residential mortgage loans held insecuritization trusts, at December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): Number of Loans Unpaid Principal Carrying ValueDecember 31, 20165,275 $559,945 $503,094December 31, 20155,877 $640,570 $558,989The Company’s distressed residential mortgage loans held in securitization trusts with a carrying value of approximately $ 195.3 million and $114.2million at December 31, 2016 and December 31, 2015 , respectively, are pledged as collateral for certain of the securitized debt issued by the Company. TheCompany’s net investment in these securitization trusts, which is the maximum amount of the Company’s investment that is at risk to loss and represents thedifference between the carrying amount of the net assets and liabilities associated with the distressed residential mortgage loans held in securitization trusts, was$77.1 million and $86.3 million at December 31, 2016 and 2015 , respectively.In addition, distressed residential mortgage loans with a carrying value of approximately $ 279.9 million and $307.0 million at December 31, 2016 andDecember 31, 2015 , respectively, are pledged as collateral for a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch.Characteristics of our Distressed Residential Mortgage Loans, including Distressed Residential Mortgage Loans Held in Securitization Trusts:Loan to Value at PurchaseDecember 31, 2016 December 31, 201550.00% or less4.1% 3.3%50.01% - 60.00%4.3% 3.6%60.01% - 70.00%6.8% 6.7%70.01% - 80.00%10.8% 10.0%80.01% - 90.00%12.7% 11.9%90.01% - 100.00%14.0% 13.1%100.01% and over47.3% 51.4%Total100.0% 100.0%FICO Scores at PurchaseDecember 31, 2016 December 31, 2015550 or less18.5% 17.7%551 to 60028.7% 30.3%601 to 65028.0% 28.2%651 to 70015.6% 15.4%701 to 7506.6% 6.5%751 to 8002.3% 1.7%801 and over0.3% 0.2%Total100.0% 100.0%70Table of ContentsCurrent CouponDecember 31, 2016 December 31, 20153.00% or less13.5% 14.9%3.01% - 4.00%11.8% 9.3%4.01 to 5.00%22.0% 21.3%5.01 - 6.00%11.8% 11.5%6.01% and over40.9% 43.0%Total100.0% 100.0%Delinquency StatusDecember 31, 2016 December 31, 2015Current69.7% 68.1%31- 60 days11.6% 11.0%61 - 90 days4.2% 9.0%90+ days14.5% 11.9%Total100.0% 100.0%Origination YearDecember 31, 2016 December 31, 20152005 or earlier27.0% 27.1%200618.1% 19.0%200733.6% 34.2%2008 or later21.3% 19.7%Total100.0% 100.0%Consolidated K-Series. As of December 31, 2016 and December 31, 2015 , we owned 100% of the first loss securities of the Consolidated K-Series. TheConsolidated K-Series are comprised of multi-family mortgage loans held in five Freddie Mac-sponsored multi-family K-Series securitizations as of each ofDecember 31, 2016 and December 31, 2015 of which we, or one of our SPEs, own the first loss securities and certain IOs. We determined that the securitizationscomprising the Consolidated K-Series were VIEs and that we are the primary beneficiary of these securitizations. Accordingly, we are required to consolidate theConsolidated K-Series’ underlying multi-family loans and related debt, income and expense in our financial statements.We have elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations in theassets and liabilities of the Consolidated K-Series will be reflected in our consolidated statements of operations. As of December 31, 2016 and December 31, 2015, the Consolidated K-Series was comprised of $6.9 billion and $7.1 billion , respectively, in multi-family loans held in securitization trusts and $6.6 billion and $6.8billion , respectively, in multi-family CDOs, with a weighted average interest rate of 3.97% and 3.98% respectively. As a result of the consolidation of theConsolidated K-Series, our consolidated statements of operations for the years ended December 31, 2016 and 2015 included $249.2 million and $257.4 million ininterest income, respectively, and $222.6 million and $233.0 million in interest expense, respectively. Also, we recognized a $3.0 million and $12.4 millionunrealized gain in the consolidated statements of operations for the years ended December 31, 2016 and 2015 , respectively, as a result of the fair value accountingmethod election.We do not have any claims to the assets (other than the security represented by our first loss piece) or obligations for the liabilities of the Consolidated K-Series. Our investment in the Consolidated K-Series is limited to the multi-family CMBS comprised of first loss tranche PO securities and or/certain IOs issued bythese K-Series securitizations with an aggregate net carrying value of $314.9 million and $286.4 million as of December 31, 2016 and December 31, 2015 ,respectively.In February 2015, the Company sold a first loss tranche PO security in one of the Company’s Consolidated K-Series obtaining total proceeds ofapproximately $44.3 million and realizing a gain of approximately $1.5 million . The sale resulted in a de-consolidation of $1.1 billion in Multi-Family loans heldin a securitization trust and $1.0 billion in Multi-Family CDOs.71Table of ContentsMulti-Family CMBS Loan Characteristics:The following table details the loan characteristics of the loans that back our multi-family CMBS (including the Consolidated K-Series) in our portfolio asof December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015 Current balance of loans$8,824,481 $9,034,361 Number of loans543 548 Weighted average original LTV68.8% 68.8% Weighted average underwritten debt service coverage ratio1.49x 1.49x Current average loan size$16,251 $16,486 Weighted average original loan term (in months)120 120 Weighted average current remaining term (in months)79 79 Weighted average loan rate4.39% 4.40% First mortgages100% 100% Geographic state concentration (greater than 5.0%): California13.8% 13.8% Texas12.4% 12.3% New York8.1% 8.0% Maryland5.3% 5.2% Investment in Unconsolidated Entities. Investment in unconsolidated entities is comprised of ownership interests in entities that invest in multifamily orresidential real estate and related assets. As of December 31, 2016 and December 31, 2015 , we had approximately $79.3 million and $87.7 million ofinvestments in unconsolidated entities, respectively. The net decrease in investment in unconsolidated entities is attributable to our acquisition on May 16, 2016 ofthe outstanding ownership interests in RiverBanc, RBMI, and RBDHC that were not previously owned by the Company, which resulted in consolidation of theseentities into the Company's financial statements, partially offset by one additional investment made during the year ended December 31, 2016 . As a result of thebusiness combination, the Company's equity investments in RiverBanc, RBMI and RBDHC were replaced by the recognition of joint venture equity investmentstotaling $52.2 million as of May 16, 2016. See Note 21 to our consolidated financial statements included in this report for more information on these businesscombinations.Mezzanine Loan and Preferred Equity Investments. The Company had mezzanine loan and preferred equity investments in the amounts of $100.2million and $44.2 million as of December 31, 2016 and December 31, 2015 , respectively. The net increase at December 31, 2016 is attributable to sixadditional investments and our acquisition of the outstanding ownership interests in RBMI that were not previously owned by us, which resulted in consolidationof this entity into the Company's financial statements. As a result of the business combination and related consolidation, the Company recognized an additional $23.6 million of mezzanine and preferred equity investments as of May 16, 2016. See Note 21 to our consolidated financial statements included in this report formore information on the business combination.As of December 31, 2016 , all mezzanine loan and preferred equity investments were paying in accordance with their contractual terms. During the yearended December 31, 2016 , there were no impairments with respect to our mezzanine loans and preferred equity investments. 72Table of ContentsThe following tables summarize our mezzanine loans and preferred equity investments as of December 31, 2016 and December 31, 2015 (dollars inthousands): December 31, 2016 Count Carrying Amount (1) Investment Amount(1) Weighted AverageInterest or PreferredReturn Rate (2) Weighted AverageRemaining Life(Years)Mezzanine loans5 $18,881 $19,058 12.53% 8.8Preferred equity investments14 81,269 82,096 12.10% 7.4 Total19 $100,150 $101,154 12.18% 7.65 December 31, 2015 Count Carrying Amount (1) Investment Amount(1) Weighted AverageInterest or PreferredReturn Rate (2) Weighted AverageRemaining Life(Years)Mezzanine loans2 $8,663 $8,735 12.50% 11.0Preferred equity investments9 35,488 35,794 12.38% 7.2 Total11 $44,151 $44,529 12.41% 8.0(1)The difference between the carrying amount and the investment amount consists of any unamortized premium or discount, deferred fees, or deferredexpenses.(2)Based upon investment amount and contractual interest or preferred return rate.Financing Arrangements, Portfolio Investments . The Company finances its portfolio investments primarily through repurchase agreements with thirdparty financial institutions. These financing arrangements are short-term borrowings that bear interest rates typically based on a spread to LIBOR, and are securedby the securities which they finance.As of December 31, 2016 , the Company had repurchase agreements with an outstanding balance of $773.1 million and a weighted average interest rate of1.92% . At December 31, 2015 , the Company had repurchase agreements and FHLBI advances with an outstanding balance of $577.4 million and a weightedaverage interest rate of 0.71% . Our repurchase agreements typically have terms of 30 days or less.At December 31, 2016 , the Company's only exposure where the amount at risk was in excess of 5% of the Company's stockholders' equity was toDeutsche Bank AG, London Branch at 5.1% . At December 31, 2015 , we had no counterparties where the amount at risk was in excess of 5% of the Company'sstockholders’ equity. The amount at risk is defined as the fair value of securities pledged as collateral to the financing arrangement in excess of the financingarrangement liability.As of December 31, 2016 , the outstanding balance under our repurchase agreements was funded at an advance rate of 84.6% that implies an averagehaircut of 15.4% . As of December 31, 2015 , the outstanding balance under our repurchase agreements was funded at an advance rate of 92.1% that implies anaverage haircut of 7.9% . The weighted average “haircut” related to our repurchase agreement financing for our Agency RMBS (excluding Agency IOs), non-Agency RMBS, CMBS and Agency IOs was approximately 5% , 25% , 27% and 25% , respectively, at December 31, 2016 .73Table of ContentsThe following table details the ending balance, quarterly average balance and maximum balance at any month-end during each quarter in 2016 , 2015 and2014 for repurchase agreement borrowings outstanding (dollar amounts in thousands):Quarter Ended Quarterly AverageBalance End of QuarterBalance Maximum Balanceat any Month-EndDecember 31, 2016 $742,594 $773,142 $773,142September 30, 2016 $686,348 $671,774 $699,506June 30, 2016 $615,930 $618,050 $642,536March 31, 2016 $576,822 $589,919 $589,919 December 31, 2015 $574,847 $577,413 $578,136September 30, 2015 $578,491 $586,075 $586,075June 30, 2015 $513,254 $585,492 $585,492March 31, 2015 $633,132 $619,741 $645,162 December 31, 2014 $658,360 $651,965 $668,901September 30, 2014 $639,831 $627,881 $653,181June 30, 2014 $725,761 $668,428 $758,857March 31, 2014 $774,545 $767,827 $784,019Financing Arrangements, Residential Mortgage Loans.The Company has a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch with a maximum aggregate committed principalamount of $200.0 million and a maximum uncommitted principal amount of $50.0 million to fund distressed residential mortgage loans, expiring on December13, 2017 . At December 31, 2015 , the master repurchase agreement provided for an aggregate principal committed amount of up to $250.0 million . Theoutstanding balance on this master repurchase agreement as of December 15, 2016 and December 31, 2015 amounts to approximately $193.8 million and $214.5 million , respectively, bearing interest at one-month LIBOR plus 2.50% ( 3.26% and 2.92% at December 31, 2016 and December 31, 2015 , respectively).Distressed residential mortgage loans with a carrying value of approximately $279.9 million at December 31, 2016 are pledged as collateral for the borrowingsunder this master repurchase agreement. The Company expects to roll outstanding borrowings under this master repurchase agreement into a new repurchaseagreement or other financing prior to or at maturity.On November 25, 2015 , the Company entered into a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch in an aggregateprincipal amount of up to $100.0 million to fund the future purchase of residential mortgage loans, particularly second mortgage loans. The outstanding balance onthe master repurchase agreement will bear interest at one-month LIBOR plus 4% and expires on May 25, 2017. There was no outstanding balance on this masterrepurchase agreement as of December 31, 2016 .Residential Collateralized Debt Obligations . As of December 31, 2016 and 2015 , we had residential collateralized debt obligations, or ResidentialCDOs, of $ 91.7 million and $116.7 million , respectively. As of December 31, 2016 and 2015 , the weighted average interest rate of these Residential CDOs was1.37% and 0.8% , respectively. The Residential CDOs are collateralized by ARM loans with a principal balance of $98.3 million and $122.5 million atDecember 31, 2016 and 2015 , respectively. The Company retained the owner trust certificates, or residual interest, for three securitizations, and had a netinvestment in the residential securitization trusts of $4.4 million at December 31, 2016 and 2015 .74Table of ContentsSecuritized Debt . As of December 31, 2016 and 2015 , we had approximately $158.9 million and $116.5 million of securitized debt, respectively. As ofDecember 31, 2016 and 2015 , the weighted average interest rate for our securitized debt was 4.24% and 5.28% , respectively. The Company’s securitized debt iscollateralized by multi-family CMBS and distressed residential mortgage loans. In February 2016, the Company repaid the outstanding notes from its distressedresidential mortgage loan securitization transactions completed in 2013 with original principal amounts of $138.3 million and outstanding principal balance at thetime of repayment amounting to $31.9 million . In April 2016, the Company closed on a securitization transaction that involved the issuance and sale of $177.5million of Class A Notes representing beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of theClass A Notes issued. In October 2016, the Company repaid $55.9 million of outstanding notes from a November 2013 collateralized recourse financing, whichwas collateralized by multi-family CMBS from three separate Freddie Mac-sponsored multi-family K-Series securitizations. See Note 9 to our consolidatedfinancial statements included in this report for more information on securitized debt.Subordinated Debentures . As of December 31, 2016 and 2015 , certain of our wholly owned subsidiaries had trust preferred securities outstanding of$45.0 million with a weighted average interest rate of 4.79% and 4.32% , respectively. The securities are fully guaranteed by us with respect to distributions andamounts payable upon liquidation, redemption or repayment. These securities are classified as subordinated debentures in the liability section of our consolidatedbalance sheets.Derivative Assets and Liabilities. The Company enters into derivative instruments in connection with its risk management activities. These derivativeinstruments may include interest rate swaps, swaptions, futures, put and call options on futures and mortgage derivatives such as forward-settling purchases andsales of Agency RMBS where the underlying pools of mortgage loans are “To-Be-Announced,” or TBAs.In connection with our investment in Agency IOs, we utilize several types of derivative instruments such as interest rate swaps, futures, put and calloptions on futures and TBAs to hedge the interest rate risk and spread risk. This hedging technique is dynamic in nature and requires frequent adjustments, whichaccordingly makes it very difficult to qualify for hedge accounting treatment. Hedge accounting treatment requires specific identification of a risk or group of risksand then requires that we designate a particular trade to that risk with no minimal ability to adjust over the life of the transaction. Because we and Midway arefrequently adjusting these derivative instruments in response to current market conditions, we have determined to account for all the derivative instruments relatedto our Agency IO investments as derivatives not designated as hedging instruments. Realized and unrealized gains and losses associated with derivatives in ourAgency IO portfolio are recognized through earnings in the consolidated statements of operations.We also use interest rate swaps (separately from interest rate swaps in our Agency IO portfolio) to hedge variable cash flows associated with borrowingsmade under our financing arrangements and Residential CDOs. We typically pay a fixed rate and receive a floating rate based on one month LIBOR, on thenotional amount of the interest rate swaps. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics and cashflows of our financing arrangements. At December 31, 2016 and December 31, 2015 , the Company had $215 million of notional amount of interest rate swapsoutstanding that qualify as cash flow hedges for financial reporting purposes. The interest rate swaps had a net fair market asset value of $0.1 million and $0.3million at December 31, 2016 and December 31, 2015 , respectively. See Note 10 to our consolidated financial statements included in this Form 10-K for moreinformation on our derivative instruments and hedging activities.Derivative financial instruments may contain credit risk to the extent that the institutional counterparties may be unable to meet the terms of theagreements. We minimize this risk by limiting our counterparties to major financial institutions with good credit ratings. In addition, we regularly monitor thepotential risk of loss with any one party resulting from this type of credit risk. Accordingly, we do not expect any material losses as a result of default by otherparties, but we cannot guarantee that we will not experience counterparty failures in the future.75Table of ContentsBalance Sheet Analysis - Stockholders’ EquityStockholders’ equity at December 31, 2016 was $851.2 million and included $3.1 million in non-controlling interest and $1.6 million of accumulatedother comprehensive income. The accumulated other comprehensive income consisted of $10.8 million in unrealized losses related to our Agency RMBS and non-Agency RMBS offset by $12.3 million in net unrealized gains related to our CMBS and $0.1 million in unrealized derivative gains related to cash flow hedges.Stockholders’ equity at December 31, 2015 was $880.5 million and included $2.9 million of accumulated other comprehensive loss. The accumulated othercomprehensive loss consisted of $15.2 million in unrealized losses related to our Agency RMBS and non-Agency RMBS offset by $12.0 million in net unrealizedgains related to our CMBS and $0.3 million in unrealized derivative gains related to cash flow hedges.Analysis of Changes in Book ValueThe following table analyzes the changes in book value for the quarter and year ended December 31, 2016 , respectively (amounts in thousands, exceptper share): Quarter Ended December 31, 2016 Year Ended December 31, 2016 Amount Shares Per Share (1) Amount Shares Per Share (1)Beginning Balance$694,990 109,569 $6.34 $715,526 109,402 $6.54Common stock issuance, net13,112 1,905 14,010 2,072 Balance after share issuance activity708,102 111,474 6.35 729,536 111,474 6.54Dividends declared(26,754) (0.24) (105,605) (0.95)Net change AOCI: (2) Hedges404 — (202) —RMBS(8,395) (0.07) 4,472 0.05CMBS46 — 223 —Net income attributable to Company'scommon stockholders9,672 0.09 54,651 0.49Ending Balance$683,075 111,474 $6.13 $683,075 111,474 $6.13(1)Outstanding shares used to calculate book value per share for the quarter and year ended periods are based on outstanding shares as of December 31, 2016of 111,474,521 .(2)Accumulated other comprehensive income (“AOCI”).(3)The decrease in fair value related to our RMBS investments can be attributed to the rate sell off in the bond market during the fourth quarter.76Table of ContentsThe following table analyzes the changes in book value for the quarter and year ended December 31, 2015 , respectively (amounts in thousands, exceptper share): Quarter Ended December 31, 2015 Year Ended December 31, 2015 Amount Shares Per Share (1) Amount Shares Per Share (1)Beginning Balance$745,648 109,402 $6.82 $742,927 105,095 $7.07Common stock issuance, net230 — 32,782 4,307 Preferred stock issuance, net— — 86,862 — Preferred stock liquidation preference— — (90,000) — Balance after share issuance activity745,878 109,402 6.82 772,571 109,402 7.06Dividends declared(26,256) (0.24) (111,199) (1.02)Net change AOCI: (2) Hedges1,112 0.01 (831) (0.01)RMBS(5,651) (0.05) (2,613) (0.02)CMBS(539) (0.01) (362) —CLOs— — (9,063) (0.08)Net income attributable to Company'scommon stockholders982 0.01 67,023 0.61Ending Balance$715,526 109,402 $6.54 $715,526 109,402 $6.54(1)Outstanding shares used to calculate book value per share for the quarter and year ended periods are based on outstanding shares as of December 31, 2015of 109,401,721 .(2)Accumulated other comprehensive income (“AOCI”).Liquidity and Capital ResourcesGeneralLiquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintaininvestments, comply with margin requirements, fund our operations, pay management and incentive fees, pay dividends to our stockholders and other generalbusiness needs. Our investments and assets, excluding the principal only multi-family CMBS we invest in, generate liquidity on an ongoing basis through principaland interest payments, prepayments, net earnings retained prior to payment of dividends and distributions from unconsolidated investments. Our principal onlymulti-family CMBS are backed by balloon non-recourse mortgage loans that provide for the payment of principal at maturity date, which is typically seven to tenyears from the date the underlying mortgage loans are originated, and therefore do not directly contribute to monthly cash flows. In addition, the Company will,from time to time, sell on an opportunistic basis certain assets from its investment portfolio as part of its overall investment strategy and these sales are expected toprovide additional liquidity.77Table of ContentsDuring the year ended December 31, 2016 , net cash increased primarily as a result of $53.8 million provided by operating activities and $33.7 millionprovided by investing activities, which was partially offset by $65.9 million used in financing activities. Our investing activities primarily included $136.8 millionin principal paydowns on investment securities available for sale, $122.6 million in principal repayments and proceeds from sales and refinancings of distressedresidential mortgage loans, $208.2 million in proceeds from sales of investment securities, $136.3 million in principal repayments received on multi-family loansheld in securitization trusts, $23.6 million in principal repayments received on residential mortgage loans held in securitization trusts, $10.9 million of return ofcapital from unconsolidated entities and preferred equity investments, $5.4 million from the redemption of FHLBI stock, $4.5 million from principal repaymentsreceived on mezzanine loans and preferred equity investments and $2.1 million in proceeds from sale of real estate owned, partially offset by $82.2 million ofpurchases of residential mortgage loans and distressed residential mortgage loans, $423.2 million of purchases of investment securities, $46.9 million in thefunding of mezzanine loans, equity and preferred equity investments, a $35.2 million decrease in restricted cash, $28.5 million of cash used in the acquisition ofbusinesses, and $0.9 million in net payments on other derivative instruments settled during the period. Our financing activities primarily included $136.3 million inpayments made on multi-family CDOs, $118.0 million in dividends paid on common stock, Series B Preferred Stock and Series C Preferred Stock, $25.2 million inpayments made on Residential CDOs, $126.0 million in payments made on securitized debt and $16.3 million for the redemption of preferred equity, partiallyoffset by net proceeds from financing arrangements of $176.0 million , $166.3 million of proceeds from issuance of securitized debt and $13.5 million in netproceeds from common stock issuances.We fund our investments and operations through a balanced and diverse funding mix, which includes proceeds from the issuance of equity and debtsecurities, including convertible notes, short-term and longer-term repurchase agreement borrowings, CDOs, securitized debt, trust preferred debentures and, untilJanuary 2016, we also used FHLBI advances. The type and terms of financing used by us depends on the asset being financed and the financing available at thetime of the financing. In those cases where we utilize some form of structured financing, be it through CDOs, longer-term repurchase agreements or securitizeddebt, the cash flow produced by the assets that serve as collateral for these structured finance instruments may be restricted in terms of its use or applied to payprincipal or interest on CDOs, repurchase agreements, or notes that are senior to our interests. At December 31, 2016 , we had cash and cash equivalents balancesof $83.6 million , which increased from $62.0 million at December 31, 2015 . Based on our current investment portfolio, new investment initiatives, leverage ratioand available and future possible borrowing arrangements, we believe our existing cash balances, funds available under our various financing arrangements andcash flows from operations will meet our liquidity requirements for at least the next 12 months.Liquidity – Financing ArrangementsWe rely primarily on short-term repurchase agreements to finance the more liquid assets in our investment portfolio, such as Agency RMBS. In recentyears, certain repurchase agreement lenders have elected to exit the repo lending market for various reasons, including new capital requirement regulations.However, as certain lenders have exited the space, other financing counterparties that had not participated in the repo lending market historically have begun tostep in to replace many of the lenders that have elected to exit.78Table of ContentsAs of December 31, 2016 , we have outstanding short-term repurchase agreements, a form of collateralized short-term borrowing, with eight differentfinancial institutions. These agreements are secured by certain of our investment securities and bear interest rates that have historically moved in close relationshipto LIBOR. Our borrowings under repurchase agreements are based on the fair value of our investment securities portfolio. Interest rate changes and increasedprepayment activity can have a negative impact on the valuation of these securities, reducing the amount we can borrow under these agreements. Moreover, ourrepurchase agreements allow the counterparties to determine a new market value of the collateral to reflect current market conditions and because these lines offinancing are not committed, the counterparty can call the loan at any time. Market value of the collateral represents the price of such collateral obtained fromgenerally recognized sources or most recent closing bid quotation from such source plus accrued income. If a counterparty determines that the value of thecollateral has decreased, the counterparty may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion ofthe outstanding borrowing in cash, on minimal notice. Moreover, in the event an existing counterparty elected to not renew the outstanding balance at its maturityinto a new repurchase agreement, we would be required to repay the outstanding balance with cash or proceeds received from a new counterparty or to surrenderthe securities that serve as collateral for the outstanding balance, or any combination thereof. If we are unable to secure financing from a new counterparty and hadto surrender the collateral, we would expect to incur a loss. In addition, in the event one of our lenders under the repurchase agreement defaults on its obligation to“re-sell” or return to us the securities that are securing the borrowings at the end of the term of the repurchase agreement, we would incur a loss on the transactionequal to the amount of “haircut” associated with the short-term repurchase agreement, which we sometimes refer to as the “amount at risk.” As of December 31,2016 , we had an aggregate amount at risk under our repurchase agreements with eight counterparties of approximately $172.0 million , with no more thanapproximately $43.2 million at risk with any single counterparty. At December 31, 2016 , the Company had short-term repurchase agreement borrowings on itsinvestment securities of $773.1 million as compared to $577.4 million as of December 31, 2015 .As of December 31, 2016 , our available liquid assets include unrestricted cash and cash equivalents, overnight deposits and unencumbered securities webelieve may be posted as margin. The Company had $83.6 million in cash and cash equivalents, $35.6 million in overnight deposits in our Agency IO portfolioincluded in restricted cash and $85.1 million in unencumbered investment securities to meet additional haircuts or market valuation requirements. Theunencumbered securities that we believe may be posted as margin as of December 31, 2016 included $29.1 million of Agency RMBS, $43.6 million of CMBS and$12.3 million of non-Agency RMBS. We believe the cash and unencumbered securities, which collectively represent 26.4% of our financing arrangements, areliquid and could be monetized to pay down or collateralize a liability immediately.At December 31, 2016 , the Company also had two master repurchase agreements, with Deutsche Bank AG, Cayman Islands Branch in aggregatecommitted principal amounts of up to $200.0 million and $100.0 million , expiring on December 13, 2017 and May 25, 2017, respectively. The outstandingbalances under the master repurchase agreement in an aggregate principal amount of up to $200.0 million amounted to approximately $193.8 million and $214.5million at December 31, 2016 and December 31, 2015 , respectively. The agreement with an aggregate committed principal amount of up to $200.0 million iscollateralized by distressed residential mortgage loans with a carrying value of $279.9 million at December 31, 2016 . We had no outstanding balances under theother master repurchase agreement at December 31, 2016 and December 31, 2015 .At December 31, 2016 , we also had other longer-term debt, including Residential CDOs outstanding of $91.7 million , multi-family CDOs outstanding of$6.6 billion (which represent obligations of the Consolidated K-Series), subordinated debt of $45.0 million and securitized debt of $158.9 million . The CDOs arecollateralized by residential and multi-family loans held in securitization trusts, respectively. The securitized debt as of December 31, 2016 represents the notesissued in (i) our May 2012 multi-family re-securitization transaction and (ii) our April 2016 distressed residential mortgage loan securitization transactions, whichis described in Note 9 of our consolidated financial statements.On January 23, 2017 , the Company completed the issuance of $138.0 million aggregate principal amount of the Convertible Notes in a public offering.The Convertible Notes were issued at 96% of the principal amount, bear interest at a rate equal to 6.25% per year, payable semi-annually in arrears on January 15and July 15 of each year, commencing July 15, 2017, and are expected to mature on January 15, 2022, unless earlier converted or repurchased. The Company doesnot have the right to redeem the Convertible Notes prior to maturity and no sinking fund is provided for the Convertible Notes. Holders of the Convertible Notesare permitted to convert their Convertible Notes into shares of the Company's common stock at any time prior to the close of business on the business dayimmediately proceeding January 15, 2022 . The conversion rate for the Convertible Notes, which is subject to adjustment upon the occurrence of certain specifiedevents, initially equals 142.7144 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalent to a conversionprice of approximately $7.01 per share of the Company’s common stock, based on a $1,000 principal amount of the Convertible Notes. The Company estimates theall in cost of the Convertible Notes to be approximately 8.14%.79Table of ContentsAs of December 31, 2016 , our overall leverage ratio, including both our short-term and longer-term financing, such as securitized debt and subordinateddebt (and excluding the CDO’s issued by the Consolidated K-Series and our Residential CDOs) divided by the Company's stockholders’ equity, was approximately1.4 to 1. As of December 31, 2016 , our leverage ratio on our short term financings or callable debt was approximately 1.1 to 1. We monitor all at risk or short termborrowings to ensure that we have adequate liquidity to satisfy margin calls and have the ability to respond to other market disruptions.Liquidity – Hedging and Other FactorsCertain of our hedging instruments may also impact our liquidity. We use interest rate swaps, swaptions, TBAs, Eurodollar or other futures contracts tohedge interest rate and spread risk associated with our investments in Agency RMBS, including Agency IOs.With respect to interest rate swaps, futures contracts and TBAs, initial margin deposits, which can be comprised of either cash or securities, will be madeupon entering into these contracts. During the period these contracts are open, changes in the value of the contract are recognized as unrealized gains or losses bymarking to market on a daily basis to reflect the market value of these contracts at the end of each day’s trading. We may be required to satisfy variable marginpayments periodically, depending upon whether unrealized gains or losses are incurred. In addition, because delivery of TBAs extend beyond the typical settlementdates for most non-derivative investments, these transactions are more prone to market fluctuations between the trade date and the ultimate settlement date, andthereby are more vulnerable to increasing amounts at risk with the applicable counterparties. The use of TBAs associated with our Agency IO investments createssignificant short term payables (and/or receivables) amounting to $148.0 million at December 31, 2016 , and is included in payable for securities purchased on ourconsolidated balance sheets.We also use interest rate swaps (separately from interest rate swaps in our Agency IO portfolio) to hedge variable cash flows associated with borrowingsmade under our financing arrangements and Residential CDOs.For additional information regarding the Company’s derivative instruments and hedging activities for the periods covered by this report, including the fairvalues and notional amounts of these instruments and realized and unrealized gains and losses relating to these instruments, please see Note 10 to our consolidatedfinancial statements included in this report. Also, please see Item 7A. Quantitative and Qualitative Disclosures about Market Risk, under the caption, “Fair ValueRisk”, for a tabular presentation of the sensitivity of the market value and net duration changes of the Company’s portfolio across various changes in interest rates,which takes into account the Company’s hedging activities.Liquidity — Securities OfferingsIn addition to the financing arrangements described above under the caption “Liquidity—Financing Arrangements,” we also rely on secondary equityofferings of common and preferred stock, and may utilize from time to time in the future debt securities offerings, as a source of both short-term and long-termliquidity. We also may generate liquidity through the sale of shares of our common stock in an “at the market” offering program pursuant to an equity distributionagreement (the "ATM Program"), as well as through the sale of shares of our common stock pursuant to our Dividend Reinvestment Plan, or DRIP. Our DRIPprovides for the issuance of up to $20,000,000 of shares of our common stock.On March 20, 2015, the Company entered into separate equity distribution agreements (collectively, the “Equity Distribution Agreements”) with each ofJMP Securities LLC (“JMP”) and MLV & Co. LLC (“MLV”), each an “Agent” and collectively, the “Agents”, pursuant to which the Company may sell up to$75,000,000 of aggregate value of (i) shares of the Company’s common stock, par value $0.01 per and (ii) shares of the Company’s Series B Preferred Stock, fromtime to time through the Agents. On August 25, 2016, the Company entered into an amendment to the equity distribution agreement with JMP (as amended, the"JMP Agreement") and a separate equity distribution agreement (the “Ladenburg Equity Distribution Agreement” and, together with the JMP Agreement, the“Equity Distribution Agreements”) with Ladenburg Thalmann & Co. Inc. (“Ladenburg” and, together with JMP, the “Agents”), pursuant to which the Companymay sell the Offered Securities remaining under the existing ATM Program through the Agents. The Company has no obligation to sell any of the shares under theEquity Distribution Agreements and may at any time suspend solicitations and offers under the Equity Distribution Agreements.80Table of ContentsOn August 19, 2016, in anticipation of the Company’s execution of the Equity Distribution Agreements described above, the Company delivered to MLVnotice of termination of the equity distribution agreement, dated as of March 20, 2015, by and between the Company and MLV which termination becameeffective August 22, 2016. During the year ended December 31, 2016 , the Company issued 1,905,206 shares under the Equity Distribution Agreements at anaverage sales price of $6.87 per share, resulting in total net proceeds to the Company of $12.8 million . Pursuant to the Equity Distribution Agreements, the sharesmay be offered and sold through the Agents in transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933,as amended, including sales made directly on The Nasdaq Global Select Market or sales made to or through a market maker other than on an exchange or, subjectto the terms of a written notice from us, in privately negotiated transactions. We have no obligation to sell any of the shares under the Equity DistributionAgreements and may at any time suspend solicitations and offers under the Equity Distribution Agreements. As of December 31, 2016 , approximately $39.8million of securities remains available for issuance under the Equity Distribution Agreements.Management AgreementsWe have investment management agreements with Midway and Headlands, pursuant to which we pay these managers a base management and incentivefee, if earned, quarterly in arrears. See "- Results of Operations - Comparison of the Year Ended December 31, 2016 to Year Ended December 31, 2015 -Comparative General, Administrative and Other Expenses" for more information regarding the management fees paid during the year ended December 31, 2016 .DividendsFor information regarding the declaration and payment of dividends on our preferred stock for the periods covered by this report, please see Note 17 toour consolidated financial statements included in this report. For information regarding the declaration and payment of dividends on our common stock, see “Item5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” above. We expect to continue to pay quarterly cash dividends on our common stock during the near term. However, our Board of Directors will continue toevaluate our dividend policy each quarter and will make adjustments as necessary, based on a variety of factors, including, among other things, the need tomaintain our REIT status, our financial condition, liquidity, earnings projections and business prospects. Our dividend policy does not constitute an obligation topay dividends.We intend to make distributions to our stockholders to comply with the various requirements to maintain our REIT status and to minimize or avoidcorporate income tax and the nondeductible excise tax. However, differences in timing between the recognition of REIT taxable income and the actual receipt ofcash could require us to sell assets or to borrow funds on a short-term basis to meet the REIT distribution requirements and to minimize or avoid corporate incometax and the nondeductible excise tax.Exposure to European financial counterpartiesWe finance the acquisition of a significant portion of our mortgage-backed securities with repurchase agreements. In connection with these financingarrangements, we pledge our securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the financingwith the extent of over-collateralization from 5% of the amount borrowed (in the case of Agency ARM and Agency fixed rate RMBS collateral) and up to 27% (inthe case of our CMBS).While our repurchase agreement financing results in us recording a liability to the counterparty in our consolidated balance sheet, we are exposed to thecounterparty, if during the term of the repurchase agreement financing, a lender should default on its obligation and we are not able to recover our pledged assets.The amount of this exposure is the difference between the amount loaned to us plus interest due to the counterparty and the fair value of the collateral pledged byus to the lender (including accrued interest receivable on such collateral).Several large European banks have experienced financial difficulty in recent years, some of whom have required a rescue or assistance from other largeEuropean banks or the European Central Bank. Some of these banks have U.S. banking subsidiaries which have provided repurchase agreement financing orinterest rate swap agreements to us in connection with the acquisition of various investments, including mortgage-backed securities investments. We haveoutstanding repurchase agreement borrowings with Deutsche Bank AG, Cayman Islands Branch, in the amount of $278.5 million at December 31, 2016 , with anet exposure of $129.4 million . In addition, certain of our U.S. based counterparties may have significant exposure to the financial and economic turmoil inEurope which could impact their future lending activities or cause them to default under agreements with us. In the event one or more of these counterparties ortheir affiliates experience liquidity difficulties in the future, our liquidity could be materially adversely affected.81Table of ContentsInflationFor the periods presented herein, inflation has been relatively low and we believe that inflation has not had a material effect on our results of operations.The impact of inflation is primarily reflected in the increased costs of our operations. Virtually all our assets and liabilities are financial in nature. Our consolidatedfinancial statements and corresponding notes thereto have been prepared in accordance with GAAP, which require the measurement of financial position andoperating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. As a result,interest rates and other factors influence our performance far more than inflation. Inflation affects our operations primarily through its effect on interest rates, sinceinterest rates typically increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand formortgages and a borrower’s ability to qualify for mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interestrates, borrowers may prepay their mortgages, which in turn may adversely affect our yield and subsequently the value of our portfolio of mortgage assets.82Table of ContentsContractual Obligations and CommitmentsThe Company had the following contractual obligations at December 31, 2016 (dollar amounts in thousands): Less than 1year 1 to 3 years 4 to 5 years More than 5years TotalOperating leases$337 $701 $515 $435 $1,988Financing arrangements965,561 — — — 965,561Subordinated debentures (1)2,206 4,412 4,419 74,839 85,876Securitized debt (1)(3)— 144,154 — — 144,154Interest rate swaps (1)242 176 15 33 466Management fees (2)4,261 — — — 4,261Employment agreements1,450 240 — — 1,690Total contractual obligations (3)$974,057 $149,683 $4,949 $75,307 $1,203,996(1)Amounts include projected interest payments during the period. Interest based on interest rates in effect on December 31, 2016 .(2)Amounts include the base fees for Midway and Headlands based on the current invested capital. The management fees exclude incentive fees which arebased on future performance.(3)We exclude our Residential CDOs from the contractual obligations disclosed in the table above as this debt is non-recourse and not cross-collateralizedand, therefore, must be satisfied exclusively from the proceeds of the residential mortgage loans and real estate owned held in the securitization trusts. SeeNote 13 in the Notes to Consolidated Financial Statements for further information regarding our Residential CDOs. We also exclude the securitized debtrelated to our May 2012 re-securitization transaction as this debt is non-recourse to the Company. See Note 9 in the Notes to Consolidated FinancialStatements for further information regarding our Securitized Debt. The Company’s Multi-Family CDOs, which represent the CDOs issued by theConsolidated K-Series are excluded as this debt is non-recourse to the Company.Off-Balance Sheet ArrangementsWe did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance orspecial purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, wehave not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide funding to any such entities.Item 7A. Quantitative and Qualitative Disclosures about Market RiskThis section should be read in conjunction with “Item 1A. Risk Factors” in this Annual Report on Form 10-K and our subsequent periodic reports filedwith the SEC.We seek to manage risks that we believe will impact our business including, interest rates, liquidity, prepayments, credit quality and market value. Whenmanaging these risks we consider the impact on our assets, liabilities and derivative positions. While we do not seek to avoid risk completely, we believe the riskcan be quantified from historical experience. We seek to actively manage that risk, to generate risk-adjusted total returns that we believe compensate usappropriately for those risks and to maintain capital levels consistent with the risks we take.The following analysis includes forward-looking statements that assume that certain market conditions occur. Actual results may differ materially fromthese projected results due to changes in our portfolio assets and borrowings mix and due to developments in the domestic and global financial and real estatemarkets. Developments in the financial markets include the likelihood of changing interest rates and the relationship of various interest rates and their impact onour portfolio yield, cost of funds and cash flows. The analytical methods that we use to assess and mitigate these market risks should not be considered projectionsof future events or operating performance.83Table of ContentsInterest Rate RiskInterest rates are sensitive to many factors, including governmental, monetary, tax policies, domestic and international economic conditions, and politicalor regulatory matters beyond our control. Changes in interest rates affect the value of the financial assets we manage and hold in our investment portfolio and thevariable-rate borrowings we use to finance our portfolio. Changes in interest rates also affect the interest rate swaps and caps, Eurodollar and other futures, TBAsand other securities or instruments we use to hedge our portfolio. As a result, our net interest income is particularly affected by changes in interest rates.For example, we hold RMBS, some of which may have fixed rates or interest rates that adjust on various dates that are not synchronized to the adjustmentdates on our repurchase agreements. In general, the re-pricing of our repurchase agreements occurs more quickly than the re-pricing of our variable-interest rateassets. Thus, it is likely that our floating rate borrowings, such as our repurchase agreements, may react to interest rates before our RMBS because the weightedaverage next re-pricing dates on the related borrowings may have shorter time periods than that of the RMBS. In addition, the interest rates on our Agency ARMsbacked by hybrid ARMs may be limited to a “periodic cap,” or an increase of typically 1% or 2% per adjustment period, while our borrowings do not havecomparable limitations. Moreover, changes in interest rates can directly impact prepayment speeds, thereby affecting our net return on RMBS. During a declininginterest rate environment, the prepayment of RMBS may accelerate (as borrowers may opt to refinance at a lower interest rate) causing the amount of liabilitiesthat have been extended by the use of interest rate swaps to increase relative to the amount of RMBS, possibly resulting in a decline in our net return on RMBS, asreplacement RMBS may have a lower yield than those being prepaid. Conversely, during an increasing interest rate environment, RMBS may prepay more slowlythan expected, requiring us to finance a higher amount of RMBS than originally forecast and at a time when interest rates may be higher, resulting in a decline inour net return on RMBS. Accordingly, each of these scenarios can negatively impact our net interest income.We seek to manage interest rate risk in our portfolio by utilizing interest rate swaps, swaptions, caps, Eurodollar and other futures, options and U.S.Treasury securities with the goal of optimizing the earnings potential while seeking to maintain long term stable portfolio values. We continually monitor theduration of our mortgage assets and have a policy to hedge the financing of those assets such that the net duration of the assets, our borrowed funds related to suchassets, and related hedging instruments, is less than one year. In addition, we utilize TBAs to mitigate the risks on our long Agency RMBS positions associatedwith our investments in Agency IOs.We utilize a model-based risk analysis system to assist in projecting portfolio performances over a scenario of different interest rates. The modelincorporates shifts in interest rates, changes in prepayments and other factors impacting the valuations of our financial securities and instruments, includingmortgage-backed securities, repurchase agreements, interest rate swaps and interest rate caps, TBAs and Eurodollar futures.Based on the results of the model, the instantaneous changes in interest rates specified below would have had the following effect on net interest incomefor the next 12 months based on our assets and liabilities as of December 31, 2016 (dollar amounts in thousands):Changes in Net Interest IncomeChanges in Interest Rates (basis points) Changes in Net Interest Income+200 $(1,047)+100 $1,168-100 $(5,631)Interest rate changes may also impact our net book value as our financial assets and related hedge derivatives are marked-to-market each quarter.Generally, as interest rates increase, the value of our mortgage assets, other than IOs, decreases, and conversely, as interest rates decrease, the value of suchinvestments will increase. The value of an IO will likely be negatively affected in a declining interest rate environment due to the risk of increasing prepaymentrates because the IOs’ value is wholly contingent on the underlying mortgage loans having an outstanding balance. In general, we expect that, over time, decreasesin the value of our portfolio attributable to interest rate changes will be offset, to the degree we are hedged, by increases in the value of our interest rate swaps orother financial instruments used for hedging purposes, and vice versa. However, the relationship between spreads on securities and spreads on our hedginginstruments may vary from time to time, resulting in a net aggregate book value increase or decline. That said, unless there is a material impairment in value thatwould result in a payment not being received on a security or loan, changes in the book value of our portfolio will not directly affect our recurring earnings or ourability to make a distribution to our stockholders.84Table of ContentsLiquidity RiskLiquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintaininvestments, pay dividends to our stockholders and other general business needs. We recognize the need to have funds available to operate our business. It is ourpolicy to have adequate liquidity at all times. We plan to meet liquidity through normal operations with the goal of avoiding unplanned sales of assets oremergency borrowing of funds. Our principal sources of liquidity are repurchase agreements, the CDOs we have issued to finance our loans held in securitization trusts, securitized debt,trust preferred securities, the principal and interest payments from our assets and cash proceeds from the issuance of equity or debt securities (as market and otherconditions permit). We believe our existing cash balances and cash flows from operations will be sufficient for our liquidity requirements for at least the next 12months.We are subject to “margin call” risk under our repurchase agreements. In the event the value of our assets pledged as collateral suddenly decreases,margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Additionally, if one or more of ourrepurchase agreement counterparties chooses not to provide ongoing funding, we may be unable to replace the financing through other lenders on favorable termsor at all. As such, we provide no assurance that we will be able to roll over our repurchase agreements as they mature from time to time in the future. See Item 7,"Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" in this Annual Report on Form 10-Kfor further information about our liquidity and capital resource management.Derivative financial instruments used to hedge interest rate risk are subject to “margin call” risk. For example, under our interest rate swaps, typically wepay a fixed rate to the counterparties while they pay us a floating rate. If interest rates drop below the fixed rate we are paying on an interest rate swap, we may berequired to post cash margin.Prepayment RiskWhen borrowers repay the principal on their residential mortgage loans before maturity or faster than their scheduled amortization, the effect is to shortenthe period over which interest is earned, and therefore, reduce the yield for residential mortgage assets purchased at a premium to their then current balance, aswith our portfolio of Agency RMBS. Conversely, residential mortgage assets purchased for less than their then current balance, such as our distressed residentialmortgage loans, exhibit higher yields due to faster prepayments. Furthermore, actual prepayment speeds may differ from our modeled prepayment speedprojections impacting the effectiveness of any hedges we have in place to mitigate financing and/or fair value risk. Generally, when market interest rates decline,borrowers have a tendency to refinance their mortgages, thereby increasing prepayments. The impact of increasing prepayment rates, whether as a result ofdeclining interest rates, government intervention in the mortgage markets or otherwise, is particularly acute with respect to our Agency IOs. Because the value ofan IO security is wholly contingent on the underlying mortgage loans having an outstanding principal balance, an unexpected increase in prepayment rates on thepool of mortgage loans underlying the IOs could significantly negatively impact the performance of our Agency IOs.Our modeled prepayments will help determine the amount of hedging we use to off-set changes in interest rates. If actual prepayment rates are higher thanmodeled, the yield will be less than modeled in cases where we paid a premium for the particular residential mortgage asset. Conversely, when we have paid apremium, if actual prepayment rates experienced are slower than modeled, we would amortize the premium over a longer time period, resulting in a higher yield tomaturity.In an environment of increasing prepayment speeds, the timing difference between the actual cash receipt of principal paydowns and the announcement ofthe principal paydown may result in additional margin requirements from our repurchase agreement counterparties.We mitigate prepayment risk by constantly evaluating our residential mortgage assets relative to prepayment speeds observed for assets with similarstructures, quantities and characteristics. Furthermore, we stress-test the portfolio as to prepayment speeds and interest rate risk in order to further develop or makemodifications to our hedge balances. Historically, we have not hedged 100% of our liability costs due to prepayment risk.Credit RiskCredit risk is the risk that we will not fully collect the principal we have invested in our credit sensitive assets, including distressed residential and othermortgage loans, non-Agency RMBS, CMBS, mezzanine loans and preferred equity and joint venture equity investments, due to borrower defaults. In selecting thecredit sensitive assets in our portfolio, we seek to identify and invest in assets with characteristics that we believe offset or limit the exposure of borrower defaultsto the Company.85Table of ContentsWe seek to manage credit risk through our pre-acquisition or pre-funding due diligence process, and by factoring projected credit losses into the purchaseprice we pay or loan terms we negotiate for all of our credit sensitive assets. In general, we evaluate relative valuation, supply and demand trends, prepaymentrates, delinquency and default rates, vintage of collateral and macroeconomic factors as part of this process. Nevertheless, these procedures do not guaranteeunanticipated credit losses which would materially affect our operating results.With respect to the $503.1 million of distressed residential mortgage loans the Company owned at December 31, 2016 , the mortgage loans werepurchased at a discount to par reflecting their distressed state or perceived higher risk of default, which may include higher loan to value ratios and, in certaininstances, delinquent loan payments. Prior to the acquisition of distressed residential mortgage loans, the Company validates key information provided by thesellers that is necessary to determine the value of the distressed residential mortgage loans. We then seek to maximize the value of the mortgage loans that weacquire either through borrower assisted refinancing, outright loan sale or through foreclosure and resale of the underlying home. We evaluate credit quality on anongoing basis by reviewing borrower’s payment status and current financial and economic condition. Additionally, we look at the carrying value of any delinquentloan and compare to the current value of the underlying collateral.As of December 31, 2016 , we own $350.9 million of first loss CMBS comprised primarily of first loss POs that are backed by commercial mortgageloans on multi-family properties at a weighted average amortized purchase price of approximately 40.1% of current par. Prior to the acquisition of each of our firstloss CMBS securities, the Company completed an extensive review of the underlying loan collateral, including loan level cash flow re-underwriting, siteinspections on selected properties, property specific cash flow and loss modeling, review of appraisals, property condition and environmental reports, and othercredit risk analyses. We continue to monitor credit quality on an ongoing basis using updated property level financial reports provided by borrowers and periodicsite inspection of selected properties. We also reconcile on a monthly basis the actual bond distributions received against projected distributions to assure properallocation of cash flow generated by the underlying loan pool.As of December 31, 2016 , we owned approximately $179.4 million of mezzanine loan, preferred equity and equity investments in owners of residentialand multi-family properties. The performance and value of these investments depend upon the applicable operating partner’s or borrower’s ability to effectivelyoperate the multifamily and residential properties, that serve as the underlying collateral, to produce cash flows adequate to pay distributions, interest or principaldue to us. The Company monitors the performance and credit quality of the underlying assets that serve as collateral for its investments. In the case of our multi-family investments, the procedures for ongoing monitoring include financial statement analysis and regularly scheduled site inspections of portfolio properties toassess property physical condition, performance of on-site staff and competitive activity in the sub-market. We also formulate annual budgets and performancegoals alongside our operating partners for use in measuring the ongoing investment performance and credit quality of our investments.We are exposed on the credit risk in our investments in non-Agency RMBS backed by re-performing or nonperforming loans totaling $162.1 million asof December 31, 2016 . Our non-Agency RMBS backed by re-performing or nonperforming loans were purchased primarily through new issue at prices at oraround par and represent the senior tranches of the related securitizations. The non-Agency RMBS backed by re-performing or nonperforming loans are structuredwith significant credit enhancement (typically approximately 50%) and the subordinate tranches absorb all credit losses (until those tranches are extinguished) andtypically receive no cash flow (interest or principal) until the senior tranche is paid off. Prior to purchase, we analyze the deal structure in order to assess theassociated credit risk. Subsequent to purchase, the ongoing credit risk associated with the deal is evaluated by analyzing the extent to which actual credit lossesoccur that result in a reduction in the amount of subordination enjoyed by our bond. Based on the recent performance of the collateral underlying our non-AgencyRMBS backed by re-performing or nonperforming loans and current subordination levels, we do not believe that we are currently exposed to significant risk ofcredit loss on these investments.Fair Value RiskChanges in interest rates also expose us to market value (fair value) fluctuation on our assets, liabilities and hedges. While the fair value of the majority ofour assets (when excluding all Consolidated K-Series assets other than the securities we actually own) that are measured on a recurring basis are determined usingLevel 2 fair values, we own certain assets, such as our first loss PO CMBS investments, for which fair values may not be readily available if there are no activetrading markets for the instruments. In such cases, fair values would only be derived or estimated for these investments using various valuation techniques, such ascomputing the present value of estimated future cash flows using discount rates commensurate with the risks involved. However, the determination of estimatedfuture cash flows is inherently subjective and imprecise. Minor changes in assumptions or estimation methodologies can have a material effect on these derived orestimated fair values. Our fair value estimates and assumptions are indicative of the interest rate environments as of December 31, 2016 , and do not take intoconsideration the effects of subsequent interest rate fluctuations.86Table of ContentsWe note that the values of our investments in derivative instruments will be sensitive to changes in market interest rates, interest rate spreads, creditspreads and other market factors. The value of these investments can vary and has varied materially from period to period.The following describes the methods and assumptions we use in estimating fair values of our financial instruments:Fair value estimates are made as of a specific point in time based on estimates using present value or other valuation techniques. These techniques involveuncertainties and are significantly affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments,discount rates, estimate of future cash flows, future expected loss experience and other factors.Changes in assumptions could significantly affect these estimates and the resulting fair values. Derived fair value estimates cannot be substantiated bycomparison to independent markets and, in many cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologiesand assumptions used to estimate fair values, the fair values used by us should not be compared to those of other companies.The table below presents the sensitivity of the market value and net duration changes of our portfolio as of December 31, 2016 , using a discounted cashflow simulation model assuming an instantaneous interest rate shift. Application of this method results in an estimation of the fair market value change of ourassets, liabilities and hedging instruments per 100 basis point (“bp”) shift in interest rates.The use of hedging instruments is a critical part of our interest rate risk management strategies, and the effects of these hedging instruments on the marketvalue of the portfolio are reflected in the model's output. This analysis also takes into consideration the value of options embedded in our mortgage assets includingconstraints on the re-pricing of the interest rate of assets resulting from periodic and lifetime cap features, as well as prepayment options. Assets and liabilities thatare not interest rate-sensitive such as cash, payment receivables, prepaid expenses, payables and accrued expenses are excluded.Changes in assumptions including, but not limited to, volatility, mortgage and financing spreads, prepayment behavior, defaults, as well as the timing andlevel of interest rate changes will affect the results of the model. Therefore, actual results are likely to vary from modeled results.Market Value ChangesChanges in Interest Rates Changes in Market Value Net Duration(basis points) ($ amounts in thousands) +200 $(84,424) 2.97+100 $(42,551) 2.89Base 2.4-100 $34,049 1.83It should be noted that the model is used as a tool to identify potential risk in a changing interest rate environment but does not include any changes inportfolio composition, financing strategies, market spreads or changes in overall market liquidity.Although market value sensitivity analysis is widely accepted in identifying interest rate risk, it does not take into consideration changes that may occursuch as, but not limited to, changes in investment and financing strategies, changes in market spreads and changes in business volumes. Accordingly, we makeextensive use of an earnings simulation model to further analyze our level of interest rate risk.There are a number of key assumptions in our earnings simulation model. These key assumptions include changes in market conditions that affect interestrates, the pricing of our portfolio, the availability of investment assets and the availability and the cost of financing for portfolio assets. Other key assumptionsmade in using the simulation model include prepayment speeds and management's investment, financing and hedging strategies. The assumptions used representour estimate of the likely effect of changes in interest rates and do not necessarily reflect actual results. The earnings simulation model takes into account periodicand lifetime caps embedded in our assets in determining the earnings at risk.87Table of ContentsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAOur financial statements and the related notes, together with the Report of Independent Registered Public Accounting Firm thereon, as required by thisItem 8, are set forth beginning on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.Item 9A. CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information requiredto be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified inthe rules and forms of the SEC, and that such information is accumulated and communicated to our management as appropriate to allow timely decisions regardingrequired disclosures. An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as ofDecember 31, 2016 . Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedureswere effective as of December 31, 2016 .Management’s Report on Internal Control Over Financial Reporting . Our management is responsible for establishing and maintaining adequate internalcontrol over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system was designed to provide reasonable assuranceto our management and Board of Directors regarding the reliability, preparation and fair presentation of published financial statements in accordance withgenerally accepted accounting principles. Under the supervision and with the participation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013) (the "COSO framework"). Based on ourevaluation under the COSO framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2016 .The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by Grant Thornton LLP, an independentregistered public accounting firm, as stated in their report which appears in Item 15(a) of this Annual Report on Form 10-K and is incorporated by reference herein.Changes in Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting during the quarterended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of Controls. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expectthat our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how welldesigned and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system mustreflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitationsin all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues andinstances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdownscan occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or bymanagement override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controlseffectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree ofcompliance with policies or procedures.Item 9B. OTHER INFORMATIONNone.88Table of ContentsPART IIIItem 10. DIRECTORS, EXECUTIVE OFFICER AND CORPORATE GOVERNANCEThe information required by this item is included in our Proxy Statement for our 2017 Annual Meeting of Stockholders to be filed with the SEC within120 days after the end of the fiscal year ended December 31, 2016 (the “ 2017 Proxy Statement”) and is incorporated herein by reference.Item 11. EXECUTIVE COMPENSATIONThe information required by this item is included in the 2017 Proxy Statement and is incorporated herein by reference.Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSExcept as set forth below, the information required by this item is included in the 2017 Proxy Statement and is incorporated herein by reference.The information presented under the heading “Market for the Registrant’s Common Equity and Related Stockholder Matters—Securities Authorized forIssuance Under Equity Compensation Plans” in Item 5 of Part II of this Form 10-K is incorporated herein by reference.Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEThe information required by this item is included in the 2017 Proxy Statement and is incorporated herein by reference.Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICESThe information required by this item is included in the 2017 Proxy Statement and is incorporated herein by reference.89Table of ContentsPART IVItem 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES(a)Financial Statements Page Reports of Independent Registered Public Accounting Firm - Grant Thornton LLPF-2 Consolidated Balance SheetsF-4 Consolidated Statements of OperationsF-5 Consolidated Statements of Comprehensive Income (Loss)F-6 Consolidated Statements of Changes in Stockholders’ EquityF-7 Consolidated Statements of Cash FlowsF-8 Notes to Consolidated Financial StatementsF-10 Schedule IV - Mortgage Loans on Real EstateF-64(b)Exhibits.The information set forth under “Exhibit Index” below is incorporated herein by reference.SIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized. NEW YORK MORTGAGE TRUST, INC. Date: February 28, 2017By: /s/ Steven R. Mumma Steven R. Mumma Chairman of the Board and Chief Executive Officer (Principal Executive Officer)Date: February 28, 2017By: /s/ Kristine R. Nario Kristine R. Nario Chief Financial Officer (Principal Financial and Accounting Officer)Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.Signature Title Date /s/ Steven R. Mumma Chairman of the Board and Chief Executive Officer February 28, 2017Steven R. Mumma (Principal Executive Officer) /s/ Kristine R. Nario Chief Financial Officer February 28, 2017Kristine R. Nario (Principal Financial and Accounting Officer) /s/ Kevin M. Donlon President and Director February 28, 2017Kevin M. Donlon /s/ Michael B Clement Director February 28, 2017Michael B Clement /s/ Alan L. Hainey Director February 28, 2017Alan L. Hainey /s/ Steven G. Norcutt Director February 28, 2017Steven G. Norcutt Director February 28, 2017David R. Bock NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTSANDREPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMFor Inclusion in Form 10-KFiled withUnited States Securities and Exchange CommissionDecember 31, 2016NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESIndex to Consolidated Financial StatementsFINANCIAL STATEMENTS:PAGE Reports of Independent Registered Public Accounting Firm - Grant Thornton LLPF-2 Consolidated Balance SheetsF-4 Consolidated Statements of OperationsF-5 Consolidated Statements of Comprehensive IncomeF-6 Consolidated Statements of Changes in Stockholders' EquityF-7 Consolidated Statements of Cash FlowsF-8 Notes to Consolidated Financial StatementsF-10 Schedule IV - Mortgage Loans on Real EstateF-64REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersNew York Mortgage Trust, Inc.We have audited the accompanying consolidated balance sheets of New York Mortgage Trust, Inc. (a Maryland corporation) and subsidiaries (the “Company”) asof December 31, 2016 and 2015 , and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2016 . Our audits of the basic consolidated financial statements included the financial statementschedule listed in the index appearing under Item 15(a). These financial statements and financial statement schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basisfor our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of New York Mortgage Trust,Inc. and subsidiaries as of December 31, 2016 and 2015 , and the results of their operations and their cash flows for each of the three years in the period endedDecember 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financialstatement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control overfinancial reporting as of December 31, 2016 , based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2017 expressed an unqualified opinion./s/ Grant Thornton LLPNew York, New YorkFebruary 28, 2017F-2REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and StockholdersNew York Mortgage Trust, Inc.We have audited the internal control over financial reporting of New York Mortgage Trust, Inc. (a Maryland corporation) and subsidiaries (the “Company”) as ofDecember 31, 2016 , based on criteria established in the 2013 Internal Control-Integrated Framewor k issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluatingthe design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for our opinion.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance withthe policies or procedures may deteriorate.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016 based on criteriaestablished in the 2013 Internal Control-Integrated Framework issued by COSO.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statementsof the Company as of and for the year ended December 31, 2016 , and our report dated February 28, 2017 expressed an unqualified opinion on those financialstatements./s/ Grant Thornton LLPNew York, New YorkFebruary 28, 2017F-3Table of ContentsNEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(Dollar amounts in thousands, except share data) December 31, 2016 December 31, 2015ASSETS Investment securities, available for sale, at fair value (including $43,897 and $40,734 held in securitization trusts as ofDecember 31, 2016 and December 31, 2015, respectively and pledged securities of $690,592 and $639,683, as ofDecember 31, 2016 and December 31, 2015, respectively)$818,976 $765,454Residential mortgage loans held in securitization trusts (net)95,144 119,921Distressed residential mortgage loans, net (including $195,347 and $114,214 held in securitization trusts as ofDecember 31, 2016 and December 31, 2015, respectively)503,094 558,989Multi-family loans held in securitization trusts, at fair value6,939,844 7,105,336Derivative assets150,296 228,775Cash and cash equivalents83,554 61,959Investment in unconsolidated entities79,259 87,662Mezzanine loan and preferred equity investments100,150 44,151Goodwill25,222 —Receivables and other assets156,092 83,995Total Assets (1)$8,951,631 $9,056,242LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Financing arrangements, portfolio investments$773,142 $577,413Financing arrangements, residential mortgage loans192,419 212,155Residential collateralized debt obligations91,663 116,710Multi-family collateralized debt obligations, at fair value6,624,896 6,818,901Securitized debt158,867 116,541Derivative liabilities498 1,500Payable for securities purchased148,015 227,969Accrued expenses and other liabilities65,969 59,527Subordinated debentures45,000 45,000Total liabilities (1)$8,100,469 $8,175,716Commitments and Contingencies Stockholders' Equity: Preferred stock, $0.01 par value, 7.75% Series B cumulative redeemable, $25 liquidation preference per share,6,000,000 shares authorized, 3,000,000 shares issued and outstanding$72,397 $72,397Preferred stock, $0.01 par value, 7.875% Series C cumulative redeemable, $25 liquidation preference per share,4,140,000 shares authorized, 3,600,000 shares issued and outstanding86,862 86,862Common stock, $0.01 par value, 400,000,000 shares authorized, 111,474,521 and 109,401,721 shares issued andoutstanding as of December 31, 2016 and December 31, 2015, respectively1,115 1,094Additional paid-in capital748,599 734,610Accumulated other comprehensive income (loss)1,639 (2,854)Accumulated deficit(62,537) (11,583)Company's stockholders' equity848,075 880,526Non-controlling interest3,087 —Total equity$851,162 $880,526 Total Liabilities and Stockholders' Equity$8,951,631 $9,056,242(1) Our consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company is the primary beneficiaryof these VIEs. As of December 31, 2016 and December 31, 2015 , assets of consolidated VIEs totaled $7,330,872 and $7,412,093 , respectively, and theliabilities of consolidated VIEs totaled $6,902,536 and $7,077,175 , respectively. See Note 9 for further discussion.The accompanying notes are an integral part of the consolidated financial statements.F-4Table of ContentsNEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Amounts in thousands, except per share data) For the Years Ended December 31, 2016 2015 2014INTEREST INCOME: Investment securities and other$33,696 $36,390 $54,391Multi-family loans held in securitization trusts249,191 257,417 301,877Residential mortgage loans held in securitization trusts3,770 3,728 3,755Distressed residential mortgage loans32,649 39,303 18,824Total interest income$319,306 $336,838 $378,847 INTEREST EXPENSE: Investment securities and other$17,764 $13,737 $5,569Multi-family collateralized debt obligations222,553 232,971 275,916Residential collateralized debt obligations1,246 936 904Securitized debt11,044 11,126 16,762Subordinated debentures2,061 1,881 1,859Total interest expense$254,668 $260,651 $301,010 NET INTEREST INCOME$64,638 $76,187 $77,837 OTHER INCOME (LOSS): Recovery (provision) for loan losses$838 $(1,363) $(1,939)Realized (loss) gain on investment securities and related hedges, net(3,645) (4,617) 42,091Gain on de-consolidation of multi-family loans held in securitization trust and multi-family collateralizeddebt obligations— 1,483 —Realized gain on distressed residential mortgage loans14,865 31,251 14,380Unrealized gain (loss) on investment securities and related hedges, net7,070 (2,641) (7,667)Unrealized gain on multi-family loans and debt held in securitization trusts, net3,032 12,368 56,931Loss on extinguishment of debt— — (3,397)Other income19,078 9,360 4,809Total other income$41,238 $45,841 $105,208 Base management and incentive fees$9,261 $19,188 $24,530Expenses related to distressed residential mortgage loans10,714 10,364 6,429Other general and administrative expenses15,246 9,928 9,500Total general, administrative and other expenses$35,221 $39,480 $40,459 INCOME FROM OPERATIONS BEFORE INCOME TAXES$70,655 $82,548 $142,586Income tax expense3,095 4,535 6,395 NET INCOME$67,560 $78,013 $136,191Net income attributable to non-controlling interest(9) — —NET INCOME ATTRIBUTABLE TO COMPANY$67,551 $78,013 $136,191Preferred stock dividends(12,900) (10,990) (5,812)NET INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS$54,651 $67,023 $130,379 Basic income per common share$0.50 $0.62 $1.48Diluted income per common share$0.50 $0.62 $1.48Weighted average shares outstanding-basic109,594 108,399 87,867Weighted average shares outstanding-diluted109,594 108,399 87,867The accompanying notes are an integral part of the consolidated financial statements.F-5NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Dollar amounts in thousands) For the Years Ended December 31, 2016 2015 2014NET INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS$54,651 $67,023 $130,379OTHER COMPREHENSIVE INCOME (LOSS) Increase (decrease) in fair value of available for sale securities4,695 (2,975) 20,881Reclassification adjustment for net gain included in net income— (9,063) (13,033)Decrease in fair value of derivative instruments utilized for cash flow hedges(202) (831) (906)TOTAL OTHER COMPREHENSIVE INCOME (LOSS)$4,493 $(12,869) $6,942COMPREHENSIVE INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS$59,144 $54,154 $137,321The accompanying notes are an integral part of the consolidated financial statements.F-6Table of ContentsNEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITYFor the Years Ended December 31, 2016, 2015 and 2014(Dollar amounts in thousands) CommonStock PreferredStock AdditionalPaid-InCapital Retained Earnings(AccumulatedDeficit) Accumulated OtherComprehensiveIncome (Loss) TotalCompanyStockholders'Equity Non-ControllingInterest TotalBalance, December 31, 2013$641 $72,397 $404,555 $— $3,073 $480,666 $— $480,666Net income— — — 136,191 — 136,191 — 136,191Common Stock issuance, net410 — 297,316 — — 297,726 — 297,726Dividends declared oncommon stock— — — (97,786) — (97,786) — (97,786)Dividends declared onpreferred stock— — — (5,812) — (5,812) — (5,812)Reclassification adjustmentfor net gain included in netincome— — — — (13,033) (13,033) — (13,033)Increase in fair value ofavailable for sale securities— — — — 20,881 20,881 — 20,881Decrease in fair value ofderivative instrumentsutilized for cash flowhedges— — — — (906) (906) — (906)Balance, December 31, 2014$1,051 $72,397 $701,871 $32,593 $10,015 $817,927 $— $817,927Net income— — — 78,013 — 78,013 — 78,013Common Stock issuance, net43 — 32,739 — — 32,782 — 32,782Preferred Stock issuance, net— 86,862 — — — 86,862 — 86,862Dividends declared oncommon stock— — — (111,199) — (111,199) — (111,199)Dividends declared onpreferred stock— — — (10,990) — (10,990) — (10,990)Reclassification adjustmentfor net gain included in netincome— — — — (9,063) (9,063) — (9,063)Decrease in fair valueof available for salesecurities— — — — (2,975) (2,975) — (2,975)Decrease in fair value ofderivative instrumentsutilized for cash flowhedges— — — — (831) (831) — (831)Balance, December 31, 2015$1,094 $159,259 $734,610 $(11,583) $(2,854) $880,526 $— $880,526Net income— — — 67,551 — 67,551 9 67,560Common Stock issuance, net21 — 13,989 — — 14,010 — 14,010Dividends declared oncommon stock— — — (105,605) — (105,605) — (105,605)Dividends declared onpreferred stock— — — (12,900) — (12,900) — (12,900)Increase in fair value ofavailable for sale securities— — — — 4,695 4,695 — 4,695Decrease in fair value ofderivative instrumentsutilized for cash flowhedges— — — — (202) (202) — (202)Increase in non-controllinginterest related toconsolidation of interest ina limited liability company— — — — — — 3,078 3,078Balance, December 31, 2016$1,115 $159,259 $748,599 $(62,537) $1,639 $848,075 $3,087 $851,162The accompanying notes are an integral part of the consolidated financial statements.F-7Table of ContentsNEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollar amounts in thousands) For the Years Ended December 31, 2016 2015 2014Cash Flows from Operating Activities: Net income$67,560 $78,013 $136,191Adjustments to reconcile net income to net cash provided by operating activities: Net amortization (accretion)7,648 542 (2,671)Realized loss (gain) on investment securities and related hedges, net3,645 4,617 (42,091)Realized gain on distressed residential mortgage loans(14,865) (31,251) (14,380)Unrealized (gain) loss on investment securities and related hedges, net(7,070) 2,641 7,667Gain on de-consolidation of multi-family loans held in securitization trusts and multi-family collateralized debtobligations— (1,483) —Gain on remeasurement of existing membership interest in businesses acquired(5,052) — —Gain on bargain purchase on businesses acquired(65) — —Unrealized gain on loans and debt held in multi-family securitization trusts(3,032) (12,368) (56,931)Loss on extinguishment of debt— — 3,397Net decrease in loans held for sale432 323 87(Recovery of) provision for loan losses(838) 1,363 1,939Income from unconsolidated entity, mezzanine loan and preferred equity investments(22,202) (12,997) (4,562)Distributions of income from unconsolidated entity, mezzanine loan and preferred equity investments15,801 9,827 2,238Amortization of stock based compensation, net514 983 1,180Changes in operating assets and liabilities: Receivables and other assets6,756 10,945 (3,631)Accrued expenses and other liabilities and accrued expenses, related parties4,612 (14,819) 9,118Net cash provided by operating activities$53,844 $36,336 $37,551 Cash Flows from Investing Activities: Acquisition of businesses, net of cash acquired$(28,468) $— $—Restricted cash(35,172) 33,448 (10,150)Proceeds from sales of investment securities208,229 99,235 93,578Purchases of investment securities(423,175) (152,883) (20,273)Redemption (purchases) of FHLBI stock5,445 (5,445) —Purchases of other assets(103) (61) (254)Funding of mezzanine loans, equity and preferred equity investments(46,896) (58,215) (49,816)Principal repayments received on mezzanine loans and preferred equity investments4,464 4,308 5,590Return of capital from unconsolidated entities and preferred equity investments10,940 — —Net (payments) proceeds from other derivative instruments settled during the period(933) (5,766) 1,124Principal repayments received on residential mortgage loans held in securitization trusts23,648 28,166 12,687Principal repayments and proceeds from sales and refinancing of distressed residential mortgage loans122,552 238,798 64,715Principal repayments received on multi-family loans held in securitization trusts136,331 85,980 80,451Principal paydowns on investment securities - available for sale136,836 105,774 98,877Proceeds from sale of real estate owned2,131 1,044 3,882Purchases of residential mortgage loans and distressed residential mortgage loans(82,167) (156,005) (405,427)Proceeds from sales of loans held in multi-family securitization trusts— 65,587 —Net cash provided by (used in) investing activities$33,662 $283,965 $(125,016) Cash Flows from Financing Activities: Proceeds from (payments made on) financing arrangements, net of FHLBI advances and payments$175,993 $(99,011) $99,789Proceeds from issuance of securitized debt166,347 — —Common stock issuance, net13,496 31,799 296,546Preferred stock issuance, net— 86,862 —Dividends paid on common stock(105,108) (113,318) (86,705)Dividends paid on preferred stock(12,900) (9,218) (5,812)Payments made on residential collateralized debt obligations(25,152) (28,952) (12,918)Payments made on multi-family collateralized debt obligations(136,314) (85,966) (83,839)Payments made on securitized debt(126,018) (116,136) (75,796)Redemption of preferred equity(16,255) — —Net cash (used in) provided by financing activities$(65,911) $(333,940) $131,265Net Increase (Decrease) in Cash and Cash Equivalents21,595 (13,639) 43,800Cash and Cash Equivalents - Beginning of Period61,959 75,598 31,798Cash and Cash Equivalents - End of Period$83,554 $61,959 $75,598 F-8Table of ContentsNEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollar amounts in thousands)Supplemental Disclosure: Cash paid for interest$300,992 $307,162 $352,232Cash paid for income taxes$4,061 $4,922 $8,295Non-Cash Investment Activities: Purchase of investment securities not yet settled$148,015 $227,969 $283,537Deconsolidation of multi-family loans held in securitization trusts— 1,075,529 —Deconsolidation of multi-family collateralized debt obligations— 1,009,942 —Non-Cash Financing Activities: Dividends declared on common stock to be paid in subsequent period$26,754 $26,256 $28,376Dividends declared on preferred stock to be paid in subsequent period$3,225 $3,225 $1,453The accompanying notes are an integral part of the consolidated financial statements.F-9Table of ContentsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 20161.OrganizationNew York Mortgage Trust, Inc., together with its consolidated subsidiaries (“NYMT,” "we," "our," or the “Company”), is a real estate investment trust, orREIT, in the business of acquiring, investing in, financing and managing primarily mortgage-related assets and financial assets. Our objective is to deliver stabledistributions to our stockholders over diverse economic conditions through a combination of income generated by net interest margin and net realized capital gainsfrom our diversified investment portfolio. Our portfolio includes residential mortgage loans, including loans sourced from distressed markets, multi-family CMBS,preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-family properties, equity securities issued by entities that investin residential and commercial real estate, non-Agency RMBS, Agency RMBS consisting of fixed-rate, adjustable-rate and hybrid adjustable-rate RMBS andAgency IOs consisting of interest only and inverse interest-only RMBS that represent the right to the interest component of the cash flow from a pool of mortgageloans and certain other investments in mortgage-related and financial assets.The Company conducts its business through the parent company, New York Mortgage Trust, Inc., and several subsidiaries, including special purposesubsidiaries established for residential loan, distressed residential loan and CMBS securitization purposes, taxable REIT subsidiaries ("TRSs") and qualified REITsubsidiaries ("QRSs"). The Company consolidates all of its subsidiaries under generally accepted accounting principles in the United States of America (“GAAP”).The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. As such, the Company will generally not besubject to federal income taxes on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to itsstockholders by the due date of its federal income tax return and complies with various other requirements.2.Summary of Significant Accounting PoliciesDefinitions – The following defines certain of the commonly used terms in these financial statements: “RMBS” refers to residential adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only and principal only mortgage-backedsecurities;“Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by a federally charteredcorporation (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or anagency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”);“Non-Agency RMBS” refers to RMBS backed by prime jumbo mortgage loans, including re-performing and non-performing loans;“IOs” refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cashflow from a pool of mortgage loans;“POs” refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans;“Agency IOs” refers to an IO that represents the right to the interest component of the cash flows from a pool of residential mortgage loans issued orguaranteed by a GSE or an agency of the U.S. government;“ARMs” refers to adjustable-rate residential mortgage loans;“Prime ARM loans” and “residential securitized loans” each refer to prime credit quality residential ARM loans (“prime ARM loans”) held insecuritization trusts formed in 2005;“Agency ARMs” refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS;“Agency fixed-rate RMBS” refers to Agency RMBS comprised of fixed-rate RMBS;“CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO or PO securities thatrepresent the right to a specific component of the cash flow from a pool of commercial mortgage loans;“Multi-family CMBS” refers to CMBS backed by commercial mortgage loans on multi-family properties;“CDOs” refers to collateralized debt obligations; and“CLO” refers to collateralized loan obligations.F-10Table of ContentsBasis of Presentation – The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance withGAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Management has made significant estimates in several areas, including valuation of its CMBS investments, multi-familyloans held in securitization trusts and multi-family CDOs, as well as income recognition on distressed residential mortgage loans purchased at a discount. Althoughthe Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could bedifferent than anticipated in those estimates, which could materially impact the Company’s results of operations and its financial condition.Reclassifications – Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation.Business Combinations – The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business.The Company accounts for business combinations by applying the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805,Business Combinations . Transaction costs related to acquisition of a business are expensed as incurred and excluded from the fair value of considerationtransferred. The identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity are recognized and measured at theirestimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuationsrequire management to make significant estimates and assumptions, especially with respect to intangible assets and liabilities.Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business ismeasured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration issettled, with changes in fair value included in net income.Net cash paid to acquire a business is classified as investing activities on the accompanying consolidated statements of cash flows.On May 16, 2016, the Company acquired the outstanding membership interests in RiverBanc LLC (“RiverBanc”), RB Multifamily Investors LLC(“RBMI”), and RB Development Holding Company, LLC (“RBDHC”) that were not previously owned by the Company through the consummation of separatemembership interest purchase agreements, thereby increasing the Company's ownership of each of these entities to 100% ( see Note 21 ). These transactions wereaccounted for by applying the acquisition method for business acquisitions under ASC 805.Principles of Consolidation and Variable Interest Entities (VIE) – The accompanying consolidated financial statements of the Company include theaccounts of all its subsidiaries which are majority-owned, controlled by the Company or a variable interest entity (“VIE”) where the Company is the primarybeneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do nothave the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. The Company consolidates a VIE when it is the primary beneficiary of such VIE, herein referred to as“Consolidated VIE”. As primary beneficiary, it has both the power to direct the activities that most significantly impact the economic performance of the VIE anda right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation ofwhether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.Investment Securities Available for Sale – The Company's investment securities, where the fair value option has not been elected and which are reportedat fair value with unrealized gains and losses reported in Other Comprehensive Income (“OCI”),include Agency RMBS, non-Agency RMBS and CMBS. The Company has elected the fair value option for its Agency IOs, U.S.Treasury securities, certain Agency ARMs and Agency fixed-rate RMBS within the Agency IO portfolio, which measures unrealized gains and losses throughearnings in the accompanying consolidated statements of operations. The fair value option was elected for these investment securities to better match theaccounting for these investment securities with the related derivative instruments within the Agency IO portfolio, which are not designated as hedging instrumentsfor accounting purposes.F-11Table of ContentsThe Company generally intends to hold its investment securities until maturity; however, from time to time, it may sell any of its securities as part of theoverall management of its business. As a result, our investment securities are classified as available for sale securities. Realized gains and losses recorded on thesale of investment securities available for sale are based on the specific identification method and included in realized (loss) gain on investment securities andrelated hedges in the accompanying consolidated statements of operations.Interest income on our investment securities available for sale is accrued based on the outstanding principal balance and their contractual terms. Purchasepremiums or discounts on investment securities are amortized or accreted to interest income over the estimated life of the investment securities using the effectiveyield method. Adjustments to amortization are made for actual prepayment activity.Interest income on certain of our credit sensitive securities, such as our CMBS that were purchased at a discount to par value, is recognized based on thesecurity’s effective interest rate. The effective interest rate on these securities is based on management’s estimate of the projected cash flows from each security,which are estimated based on assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least aquarterly basis, management reviews and, if appropriate, adjusts its cash flow projections based on input and analysis received from external sources, internalmodels, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from thoseoriginally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on these securities.A portion of the purchase discount on the Company’s first loss tranche PO multi-family CMBS is designated as non-accretable purchase discount orcredit reserve, which partially mitigates the Company’s risk of loss on the mortgages collateralizing such multi-family CMBS, and is not expected to be accretedinto interest income. The amount designated as a credit reserve may be adjusted over time, based on the actual performance of the security, its underlyingcollateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit reserve is morefavorable than forecasted, a portion of the amount designated as credit reserve may be accreted into interest income over time. Conversely, if the performance of asecurity with a credit reserve is less favorable than forecasted, the amount designated as credit reserve may be increased, or impairment charges and writedowns ofsuch securities to a new cost basis could be required.The Company accounts for debt securities that are of high credit quality (generally those rated AA or better by a Nationally Recognized Statistical RatingOrganization, or NRSRO), at date of acquisition in accordance with ASC 320-10, Investments - Debt and Equity Securities ("ASC 320-10"). The Companyaccounts for debt securities that are not of high credit quality (i.e., those whose risk of loss is more than remote) or securities that can be contractually prepaid suchthat we would not recover our initial investment at the date of acquisition in accordance with ASC 325-40, Investments - Beneficial Interest in SecuritizedFinancial Assets ("ASC 325-40"). The Company considers credit ratings, the underlying credit risk and other market factors in determining whether the debtsecurities are of high credit quality; however, securities rated lower than AA or an equivalent rating are not considered of high credit quality and are accounted forin accordance with ASC 325-40. If ratings are inconsistent among NRSROs, the Company uses the lower rating in determining whether the securities are of highcredit quality.The Company assesses its impaired securities on at least a quarterly basis and designates such impairments as either “temporary” or “other-than-temporary” by applying the guidance prescribed in ASC 320-10. When the fair value of an investment security is less than its amortized cost as of the reportingbalance sheet date, the security is considered impaired. If the Company intends to sell an impaired security, or it is more likely than not that it will be required tosell the impaired security before its anticipated recovery, then it must recognize an other-than-temporary impairment through earnings equal to the entire differencebetween the investment’s amortized cost and its fair value as of the balance sheet date. If the Company does not expect to sell an other-than-temporarily impairedsecurity, only the portion of the other-than-temporary impairment related to credit losses is recognized through earnings with the remainder recognized as acomponent of other comprehensive income (loss) on the accompanying consolidated balance sheets. Impairments recognized through other comprehensive income(loss) do not impact earnings. Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security,which may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings maybe accreted back to the amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual andsubjective information available at the time of assessment as well as the Company’s estimates of the future performance and cash flow projections. As a result, thetiming and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change. F-12Table of ContentsIn determining the other-than temporary impairment related to credit losses for securities that are not of high credit quality, the Company compares thepresent value of the remaining cash flows expected to be collected at the prior reporting date or purchase date, whichever is most recent, against the present valueof the cash flows expected to be collected at the current financial reporting date. The Company considers information available about the past and expected futureperformance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities and delinquency rates.Residential Mortgage Loans Held in Securitization Trusts – Residential mortgage loans held in securitization trusts are comprised of certain ARM loanstransferred to Consolidated VIEs that have been securitized into sequentially rated classes of beneficial interests. The Company accounted for these securitizationtrusts as financings which are consolidated into the Company’s financial statements. Residential mortgage loans held in securitization trusts are carried at theirunpaid principal balances, net of unamortized premium or discount, unamortized loan origination costs and allowance for loan losses. Interest income is accruedand recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual ofinterest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when paymentbecomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.We establish an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of residential mortgageloans held in securitization trusts. Estimation involves the consideration of various credit-related factors, including but not limited to, macro-economic conditions,current housing market conditions, loan-to-value ratios, delinquency status, historical credit loss severity rates, purchased mortgage insurance, the borrower'scurrent economic condition and other factors deemed to warrant consideration. Additionally, we look at the balance of any delinquent loan and compare that to thecurrent value of the collateralizing property. We utilize various home valuation methodologies including appraisals, broker pricing opinions, internet-basedproperty data services to review comparable properties in the same area or consult with a broker in the property's area.Acquired Distressed Residential Mortgage Loans – Distressed residential mortgage loans are comprised of pools of fixed and adjustable rate residentialmortgage loans acquired by the Company at a discount, with evidence of credit deterioration since their origination and where it is probable that the Company willnot collect all contractually required principal payments. Distressed residential mortgage loans held in securitization trusts are distressed residential mortgage loanstransferred to Consolidated VIEs that have been securitized into beneficial interests. The Company accounted for these securitization trusts as financings which areconsolidated into the Company’s financial statements.Acquired distressed residential mortgage loans that have evidence of deteriorated credit quality at acquisition are accounted for under ASC 310-30, Loansand Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Management evaluates whether there is evidence of credit quality deterioration asof the acquisition date using indicators such as past due or modified status, risk ratings, recent borrower credit scores and recent loan-to-value percentages.Acquired distressed residential mortgage loans are recorded at fair value at the date of acquisition, with no allowance for loan losses. Under ASC 310-30, theacquired loans may be accounted for individually or aggregated and accounted for as a pool of loans if the loans being aggregated have common riskcharacteristics. A pool is accounted for as a single asset with a single composite interest rate and an expectation of aggregate cash flows. Once a pool is assembled,it is treated as if it was one loan for purposes of applying the accounting guidance.Under ASC 310-30, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” isaccreted into interest income over the life of the loans in each pool or individually using a level yield methodology. Accordingly, our acquired distressed residentialmortgage loans accounted for under ASC 310-30 are not subject to classification as nonaccrual classification in the same manner as our residential mortgage loansthat were not distressed when acquired by us. Rather, interest income on acquired distressed residential mortgage loans relates to the accretable yield recognized atthe pool level or on an individual loan basis, and not to contractual interest payments received at the loan level. The difference between contractually requiredprincipal and interest payments and the cash flows expected to be collected, referred to as the “nonaccretable difference,” includes estimates of both the impact ofprepayments and expected credit losses over the life of the individual loan, or the pool (for loans grouped into a pool).F-13Table of ContentsManagement monitors actual cash collections against its expectations, and revised cash flow expectations are prepared as necessary. A decrease inexpected cash flows in subsequent periods may indicate that the loan pool or individual loan, as applicable, is impaired, thus requiring the establishment of anallowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previouslyestablished allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount ofaccretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for prospectively as a change inestimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodicaccretion is adjusted accordingly over the remaining life of the loans in the pool or individual loan, as applicable. The impacts of (i) prepayments, (ii) changes invariable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income.A distressed residential mortgage loan disposal, which may include a loan sale, receipt of payment in full from the borrower or foreclosure, results inremoval of the loan from the loan pool at its allocated carrying amount. In the event of a sale of the loan and receipt of payment (in full or partial) from theborrower, a gain or loss on sale is recognized and reported based on the difference between the sales proceeds or payment from the borrower and the allocatedcarrying amount of the acquired distressed residential mortgage loan. In the case of a foreclosure, an individual loan is removed from the pool and a loss isrecognized if the carrying value exceeds the fair value of the collateral less costs to sell. A gain is not recognized if the fair value of collateral less costs to sellexceeds the carrying value.The Company uses the specific allocation method for the removal of loans as the estimated cash flows and related carrying amount for each individualloan are known. In these cases, the remaining accretable yield is unaffected and any material change in remaining effective yield caused by the removal of the loanfrom the pool is addressed by the re-assessment of the estimate of cash flows for the pool prospectively.Acquired distressed residential mortgage loans subject to modification are not removed from the pool even if those loans would otherwise be consideredtroubled debt restructurings because the pool, and not the individual loan, represents the unit of account.For individual loans not accounted for in pools that are sold or satisfied by payment in full, a gain or loss on sale is recognized and reported based on thedifference between the sales proceeds or payment from the borrower and the carrying amount of the acquired distressed residential mortgage loan. In the case of aforeclosure, a loss is recognized if the carrying value exceeds the fair value of the collateral less costs to sell. A gain is not recognized if the fair value of collateralless costs to sell exceeds the carrying value.Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are comprised of multi-family mortgage loans held infive Freddie Mac-sponsored multi-family K-Series securitizations (the “Consolidated K-Series”) as of December 31, 2016 and December 31, 2015 . Based on anumber of factors, we determined that we were the primary beneficiary of each VIE within the Consolidated K-Series, met the criteria for consolidation and,accordingly, have consolidated these Freddie Mac-sponsored multi-family K-Series securitizations, including their assets, liabilities, income and expenses in ourfinancial statements. The Company has elected the fair value option on each of the assets and liabilities held within the Consolidated K-Series, which requires thatchanges in valuations be reflected in the Company's accompanying consolidated statements of operations. The Company adopted Accounting Standards Update("ASU") 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity, effective January 1, 2016. As aresult, the Company measures both the financial assets and financial liabilities of a qualifying consolidated collateralized financing entity ("CFE") using the fairvalue of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the Company’s securitization trusts are considered qualifyingCFEs, the Company determines the fair value of multi-family loans held in securitization trusts based on the fair value of its multi-family collateralized debtobligations and its retained interests from these securitizations (eliminated in consolidation in accordance with U.S. GAAP), as the fair value of these instrumentsis more observable.Interest income is accrued and recognized as revenue when earned according to the terms of the multi-family loans and when, in the opinion ofmanagement, it is collectible. The accrual of interest on multi-family loans is discontinued when, in management’s opinion, the interest is not collectible in thenormal course of business, but in all cases when payment becomes greater than 90 days delinquent. The multi-family loans return to accrual status when principaland interest become current and are anticipated to be fully collectible.F-14Table of ContentsMezzanine Loan and Preferred Equity Investments - The Company invests in mezzanine loans and preferred equity of entities that have significant realestate assets. The mezzanine loan is secured by a pledge of the borrower’s equity ownership in the property. Unlike a mortgage, this loan does not represent a lienon the property. Therefore, it is always junior and subordinate to any first lien as well as second liens, if applicable, on the property. These loans are senior to anypreferred equity or common equity interests.A preferred equity investment is an equity investment in the entity that owns the underlying property. Preferred equity is not secured by the underlyingproperty, but holders have priority relative to common equity holders on cash flow distributions and proceeds from capital events. In addition, preferred equityholders may be able to enhance their position and protect their equity position with covenants that limit the entity’s activities and grant the holder the exclusiveright to control the property after an event of default.Mezzanine loans and preferred equity investments, where the risks and payment characteristics are equivalent to mezzanine loans, are accounted for asloans and are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances, and areincluded in receivables and other assets in the accompanying consolidated balance sheets. The Company has evaluated its mezzanine loan and preferred equityinvestments for accounting treatment as loans versus equity investment utilizing the guidance provided by the ADC Arrangements Subsection of ASC 310,Receivables .For mezzanine loan and preferred equity investments where the characteristics, facts and circumstances indicate that loan accounting treatment isappropriate, the Company accretes or amortizes any discounts or premiums and deferred fees and expenses over the life of the related asset utilizing the effectiveinterest method or straight line-method, if the result is not materially different. Management evaluates the collectability of both interest and principal of each of our loans, if circumstances warrant, to determine whether they areimpaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to theexisting contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to theestimated fair value of the loan or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. Interest income is accrued andrecognized as revenue when earned according to the terms of the loans and when, in the opinion of management, it is collectible. The accrual of interest on loans isdiscontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when payment becomes greater than90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.Mezzanine loans and preferred equity investments where the risks and payment characteristics are equivalent to an equity investment are accounted forusing the equity method of accounting. See “ Investment in Unconsolidated Entities ”.Mortgage Loans Held for Investment – Mortgage loans held for investment are stated at unpaid principal balance, adjusted for any unamortized premiumor discount, deferred fees or expenses, net of valuation allowances, and are included in receivables and other assets. Interest income is accrued on the principalamount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interestincome, amortization of premiums and discounts and prepayment fees are reported in interest income. A loan is considered to be impaired when it is probable thatbased upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Based on thefacts and circumstances of the individual loans being impaired, loan specific valuation allowances are established for the excess carrying value of the loan overeither: (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate; (ii) the estimated fair value of the loan’sunderlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent; or (iii) the loan’s observable market price.Investment in Unconsolidated Entities – Non-controlling, unconsolidated ownership interests in an entity may be accounted for using the equity method orthe cost method. In circumstances where the Company has a non-controlling interest but either owns a significant interest or is able to exert influence over theaffairs of the enterprise, the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased eachperiod for additional capital contributions and a proportionate share of the entity’s earnings or preferred return and decreased for cash distributions and aproportionate share of the entity’s losses. Management periodically reviews its investments for impairment based on projected cash flows from the entity over theholding period. When any impairment is identified, the investments are written down to recoverable amounts.F-15Table of ContentsThe Company may elect the fair value option for an investment in an unconsolidated entity that is accounted for using the equity method. The Companyelected the fair value option for certain investments in unconsolidated entities that own interests (directly or indirectly) in commercial and residential real estateassets because the Company determined that such presentation represents the underlying economics of the respective investment. The Company records the changein fair value of its investment in other income in the consolidated statements of operations. The Company had investments in unconsolidated entities at fair valueoption included in investment in unconsolidated entities in the amounts of $60.3 million and $67.6 million as of December 31, 2016 and December 31, 2015 ,respectively.Real Estate Under Development – The Company's expenditures which directly relate to the acquisition, development, construction and improvement ofproperties are capitalized, at cost. During the development period, which culminates once a property is substantially complete and ready for intended use, operatingand carrying costs such as interest expense, real estate taxes, insurance and other direct costs are capitalized. Advertising and general administrative costs that donot relate to the development of a property are expensed as incurred. Real estate under development as of December 31, 2016 and December 31, 2015 of $17.5million and $0 , respectively, is included in receivables and other assets on the consolidated balance sheets.The Company periodically evaluates its long-lived assets for indicators of impairment. The judgments regarding the existence of impairment indicatorsare based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company's ability to hold and itsintent with regard to each asset. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment iswarranted. If impairment indicators exist for long-lived assets to be held and used, and the expected future undiscounted cash flows are less than the carryingamount of the asset, then the Company will record an impairment loss for the difference between the fair value of the asset and its carrying amount. If the asset isto be disposed of, then an impairment loss is recognized for the difference between the estimated fair value of the asset, less costs to sell, and its carrying amount.Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits, all of which have originalmaturities of 90 days or less. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceedinsurable amounts.Goodwill – Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair values of identifiableassets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity.Goodwill is not amortized but tested for impairment annually or more frequently if events or circumstances indicate that goodwill may be impaired. Goodwill of$25.2 million as of December 31, 2016 relates to the Company's multifamily investment reporting unit.Goodwill is evaluated for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist, by initiallyperforming a qualitative screen and, if necessary, then comparing fair value of the reporting unit to its carrying value, including goodwill. If the fair value of thereporting unit is less than the carrying value, a second step is performed to determine the implied fair value of goodwill. If the implied fair value of goodwill islower than its carrying value, an impairment charge equal to the difference is recorded. The Company evaluated goodwill as of October 1, 2016 and no impairmentwas indicated.Intangible Assets – Intangible assets consisting of acquired trade name, acquired technology, and employment/non-compete agreements with useful livesranging from 1 to 10 years are included in receivables and other assets on the consolidated balance sheets. Intangible assets with estimable useful lives areamortized on a straight-line basis over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicatethat the carrying value may not be recoverable. The useful lives of intangible assets are evaluated on an annual basis to determine whether events andcircumstances warrant a revision to the remaining useful life.Receivables and Other Assets – Receivables and other assets as of December 31, 2016 and 2015 include restricted cash held by third parties of $56.0million and $20.8 million , respectively. Included in restricted cash is $ 35.6 million and $ 11.6 million held in our Agency IO portfolio to be used for tradingpurposes and $6.1 million and $6.3 million held by counterparties as collateral for hedging instruments as of December 31, 2016 and 2015 , respectively. Interestreceivable on multi-family loans held in securitization trusts is also included in receivables and other assets in the amounts of $24.1 million and $24.6 million as ofDecember 31, 2016 and 2015 , respectively.F-16Table of ContentsFinancing Arrangements, Portfolio Investments – The Company finances the majority of its investment securities available for sale using repurchaseagreements. Under a repurchase agreement, an asset is sold to a counterparty to be repurchased at a future date at a predetermined price, which represents theoriginal sales price plus interest. The Company accounts for these repurchase agreements as financings and are carried at their contractual amounts, as specified inthe respective agreements. Borrowings under repurchase agreements generally bear interest rates of a specified margin over one-month LIBOR.On February 20, 2015, our wholly-owned, captive-insurance subsidiary, Great Lakes Insurance Holdings LLC (“GLIH”), became a member of theFederal Home Loan Bank of Indianapolis (“FHLBI”). On January 12, 2016, the regulator of the Federal Home Loan Bank ("FHLB") system, the Federal HousingFinance Agency, released a final rule that amends regulations governing FHLB membership, including preventing captive insurance companies from being eligiblefor FHLB membership. Under the terms of the final rule, the Company's captive insurance subsidiary was required to terminate its membership and repay itsexisting advances within one year following the effective date of the final rule. In addition, the Company's captive insurance subsidiary was prohibited from takingnew advances or renewing existing maturing advances during the one year transition period. The final rule became effective on February 19, 2016. During January2016, the Company repaid all of its outstanding FHLBI advances, which repayment was funded primarily through repurchase agreement financing. On December15, 2016, FHLBI redeemed our remaining 21,700 shares of stock completing the withdrawal of our membership.Financing Arrangements, Residential Mortgage Loans – The Company finances a portion of its residential mortgage loans, including its distressedresidential mortgage loans through repurchase agreements that expire within 12 - 15 months. The borrowings under the repurchase agreements bear an interest rateof a specified margin over one-month LIBOR. The repurchase agreements are treated as collateralized financing transactions and carried at the contractualamounts, as specified in the respective agreement. Costs related to the establishment of the repurchase agreement which include underwriting, legal, accountingand other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company's accompanyingconsolidated balance sheets in the amount of $1.3 million and $2.3 million as of December 31, 2016 and December 31, 2015 , respectively. These deferred chargesare amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.Residential Collateralized Debt Obligations (“Residential CDOs”) – We use Residential CDOs to permanently finance our residential mortgage loansheld in securitization trusts. For financial reporting purposes, the ARM loans held as collateral are recorded as assets of the Company and the Residential CDOs arerecorded as the Company’s debt. The Company completed four securitizations in 2005 and 2006. The first three were accounted for as a permanent financing whilethe fourth was accounted for as a sale and accordingly, is not included in the Company’s accompanying consolidated financial statements.Multi-Family Collateralized Debt Obligations (“Multi-Family CDOs”) – We consolidate the Consolidated K-Series including their debt, referred to asMulti-Family CDOs, in our financial statements. The Multi-Family CDOs permanently finance the multi-family mortgage loans held in the Consolidated K-Seriessecuritizations. For financial reporting purposes, the loans held as collateral are recorded as assets of the Company and the Multi-Family CDOs are recorded as theCompany’s debt. We refer to both the Residential CDOs and Multi-Family CDOs as CDOs in this report.Securitized Debt –Securitized Debt represents third-party liabilities of Consolidated VIEs and excludes liabilities of the VIEs acquired by the Companythat are eliminated on consolidation. The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the specialpurpose entities (the “SPEs”) that were created to facilitate the transactions and to which underlying assets in connection with the financing were transferred. TheCompany engaged in these transactions primarily to obtain permanent or longer term financing on a portion of its multi-family CMBS and acquired distressedresidential mortgage loans.Costs related to issuance of securitized debt which include underwriting, rating agency, legal, accounting and other fees are reflected as deferred charges.Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying consolidated balance sheets in the amount of $1.4million and $1.0 million as of December 31, 2016 and December 31, 2015 , respectively. These deferred charges are amortized as an adjustment to interest expenseusing the effective interest method, or straight line-method, if the result is not materially different.Derivative Financial Instruments – In accordance with ASC 815, Derivatives and Hedging , the Company records derivative financial instruments on itsconsolidated balance sheet as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments andwhether they qualify for hedge accounting treatment.F-17Table of ContentsIn connection with our investment in Agency IOs, the Company uses several types of derivative instruments such as interest rate swaps, futures, put andcall options on futures and TBAs to hedge the interest rate risk, as well as spread risk associated with these investments. The Company also purchases, or sellsshort, To-Be-Announced securities (“TBAs”) through its Agency IO portfolio. TBAs are forward-settling purchases and sales of Agency RMBS where theunderlying pools of mortgage loans are “To-Be-Announced.” Pursuant to these TBA transactions, we agree to purchase or sell, for future settlement, AgencyRMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified untilshortly before the TBA settlement date. For TBA contracts that we have entered into, we have not asserted that physical settlement is probable, therefore we havenot designated these forward commitments as hedging instruments. The use of TBAs, futures, options on futures and interest rate swaps in our Agency IO portfoliohedge the overall risk profile of investment securities in the portfolio. The derivative instruments in our Agency IO portfolio are not designated as hedginginstruments, therefore realized and unrealized gains and losses associated with these derivative instruments are recognized through earnings and reported as part ofthe other income category in the Company's consolidated statements of operations.The Company also uses interest rate swaps to hedge the variable cash flows associated with borrowings made under our financing arrangements andResidential CDOs. We typically pay a fixed rate and receive a floating rate based on one month LIBOR, on the notional amount of the interest rate swaps. Thefloating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics and cash flows of our financing arrangements. Theseinterest rate swaps, qualify as a cash flow hedge, where the effective portion of the gain or loss on the derivative instrument is reported as a component of OCI andreclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivativeinstruments in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during theperiod of change.Termination of Hedging Relationships – The Company employs risk management monitoring procedures to ensure that the designated hedgingrelationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basisif it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedgeditem.Additionally, the Company may elect to un-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedgeprofile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair valuewith changes recorded in earnings.Manager Compensation – We are a party to separate investment management agreements with Headlands Asset Management LLC (“Headlands”) andThe Midway Group, LP (“Midway”), with Headlands providing investment management services with respect to our investments in certain distressed residentialmortgage loans and Midway providing investment management services with respect to our investments in Agency IOs. These investment management agreementsprovide for the payment to our investment managers of a management fee, incentive fee and reimbursement of certain operating expenses, which are accrued andexpensed during the period for which they are earned or incurred.Other Comprehensive Income (Loss) – The Company’s comprehensive income/(loss) attributable to the Company's common stockholders includes netincome, the change in net unrealized gains/(losses) on its available for sale securities and its derivative hedging instruments, currently comprised of interest rateswaps, (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of accumulated other comprehensiveincome/(loss) for available for sale securities, reduced by dividends declared on the Company’s preferred stock and increased/decreased for net loss/incomeattributable to noncontrolling interest.Employee Benefits Plans – The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as adeferred salary arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Company made $0.1million in contributions to the Plan for the year ended December 31, 2016 . The Company made no contributions to the Plan for the year ended December 31, 2015.Stock Based Compensation – The Company has awarded restricted stock to eligible employees and officers as part of their compensation. Compensationexpense for equity based awards and stock issued for services are recognized over the vesting period of such awards and services based upon the fair value of theaward at the grant dateIn May 2015, the Company granted certain Performance Share Awards (“PSAs”) which cliff vest after a three -year period, subject to the achievement ofcertain performance criteria based on a formula tied to the Company’s achievement of three -year total stockholder return (“TSR”) and the Company’s TSRrelative to the TSR of certain peer companies. The feature in this award constitutes a “market condition” which impacts the amount of compensation expenserecognized for these awards. The grant date fair values of PSAs were determined through Monte-Carlo simulation analysis.F-18Table of ContentsIncome Taxes – The Company operates in such a manner so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirementsfor qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certainrestrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders, of which 85% plus anyundistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. Distribution of theremaining balance may extend until timely filing of the Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income aredeductible by a REIT in computing taxable income.Certain activities of the Company are conducted through TRSs and therefore are subject to federal and various state and local income taxes. Accordingly,deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.ASC 740, Income Taxes ("ASC 740"), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in thefinancial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns todetermine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. In situations involving uncertain tax positionsrelated to income tax matters, we do not recognize benefits unless it is more likely than not that they will be sustained. ASC 740 was applied to all open taxableyears as of the effective date. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based on factors including,but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company will recognize interest and penalties, if any, related touncertain tax positions as income tax expense in our consolidated statements of operations.Earnings Per Share – Basic earnings per share excludes dilution and is computed by dividing net income attributable to the Company's commonstockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution thatcould occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock thatthen shared in the earnings of the Company.Segment Reporting – ASC 280, Segment Reporting , is the authoritative guidance for the way public entities report information about operating segmentsin their annual financial statements. We are a REIT focused on the business of acquiring, investing in, financing and managing primarily mortgage-related assets,and financial assets, and currently operate in only one reportable segment.Summary of Recent Accounting PronouncementsRevenue Recognition (Topic 606)In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This guidance creates a new, principle-basedrevenue recognition framework that will affect nearly every revenue-generating entity. ASU 2014-09 also creates a new topic in the Codification, Topic 606 (“ASC606”). In addition to superseding and replacing nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 doesthe following: (1) establishes a new control-based revenue recognition model; (2) changes the basis for deciding when revenue is recognized over time or at a pointin time; (3) provides new and more detailed guidance on specific aspects of revenue recognition; and (4) expands and improves disclosures about revenue. InAugust 2015, the FASB issued ASU 2015-14 that defers the effective date of ASU 2014-09 for public business entities for annual reporting periods beginning afterDecember 15, 2017, including interim periods therein. Early application is permitted for public business entities only as of annual reporting periods beginning afterDecember 15, 2016, including interim reporting periods within that reporting period.F-19Table of ContentsASU 606 applies to all contracts with customers with exceptions for financial instruments and other contractual rights or obligations that are within thescope of other ASC Topics. Exclusions from the scope of ASC 606 include investment securities available for sale (subject to ASC 320, Investments - Debt andEquity Securities or ASC 325, Investments - Other ); residential mortgage loans, distressed residential mortgage loans, multi-family loans, and mezzanine loan andpreferred equity investments (subject to either ASC 310, Receivables or ASC 825, Financial Instruments ); derivative assets and derivative liabilities (subject toASC 815, Derivatives and Hedging ); and investment in unconsolidated entities (subject to either ASC 323, Investments - Equity Method and Joint Ventures orASC 825, Financial Instruments ). The Company evaluated the applicability of this ASU with respect to its investment portfolio, considering the scope exceptionslisted above, and has determined that the adoption of this ASU will not have a material impact on the Company's financial condition or results of operations as themajority of the Company's revenue is generated by financial instruments and other contractual rights and obligations that are not within the scope of ASC 606.Financial Instruments —Credit Losses (Topic 326)In June 2016, the FASB issued ASU 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on FinancialInstruments ("ASU 2016-13"). The amendments require the measurement of all expected credit losses for financial assets held at the reporting date based onhistorical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-lookinginformation to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities andpurchased financial assets with credit deterioration. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years,beginning after December 15, 2019. Early adoption as of the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 ispermitted. The Company is currently assessing the impact of this guidance as the ASU will have an effect on the Company's estimation of credit losses ondistressed residential mortgage loans, residential mortgage loans held in securitization trusts, and mezzanine loans and preferred equity investments that areaccounted for as loans.Statement of Cash Flows (Topic 230)In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18") . These amendments requirethat a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash orrestricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cashequivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide adefinition of restricted cash or restricted cash equivalents. The amendments are effective for all entities for fiscal years, and interim periods within those fiscalyears, beginning after December 15, 2017. Early adoption is permitted. The Company will adopt the ASU effective January 1, 2017 and will include restricted cashof $56.0 million and $20.8 million as of December 31, 2016 and 2015 , respectively, with cash and cash equivalents as shown on the statement of cash flows.Intangibles - Goodwill and Other (Topic 350)In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU2017-04"). The amendments simplify annual or interim goodwill impairment tests by eliminating a second stop to compute the implied fair value of goodwill if thefair value of a reporting unit is less than its carrying amount. Instead, should the fair value of a reporting unit be less than its carrying amount, an entity shouldrecognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value (in an amount not to exceed the total amountof goodwill allocated to that reporting unit). The amendments are effective for all entities for their annual or any interim goodwill impairment tests in fiscal yearsbeginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.The Company will adopt the ASU effective January 1, 2017 and apply the guidance to the performance of our annual impairment test of $25.2 million in goodwillfor the year ended December 31, 2017.F-20Table of Contents3.Investment Securities Available For SaleInvestment securities available for sale consisted of the following as of December 31, 2016 and December 31, 2015 (dollar amounts in thousands): December 31, 2016 December 31, 2015 Amortized Costs Unrealized Fair Value AmortizedCosts Unrealized Fair Value Gains Losses Gains Losses Agency RMBS (1) : Agency ARMs Freddie Mac$39,138 $24 $(528) $38,634 $62,383 $41 $(770) $61,654Fannie Mae69,031 71 (698) 68,404 92,605 121 (1,334) 91,392Ginnie Mae6,011 — (204) 5,807 20,172 55 (260) 19,967Total AgencyARMs114,180 95 (1,430) 112,845 175,160 217 (2,364) 173,013Agency Fixed Rate Freddie Mac26,338 — (644) 25,694 31,076 — (719) 30,357Fannie Mae312,515 — (10,035) 302,480 380,684 — (12,149) 368,535Ginnie Mae457 — (4) 453 25,923 9 (111) 25,821Total Agency FixedRate339,310 — (10,683) 328,627 437,683 9 (12,979) 424,713Agency IOs (1) Freddie Mac19,768 559 (3,363) 16,964 28,970 680 (4,471) 25,179Fannie Mae27,597 478 (4,777) 23,298 39,603 433 (6,341) 33,695Ginnie Mae49,788 1,223 (6,382) 44,629 63,050 511 (7,045) 56,516Total Agency IOs97,153 2,260 (14,522) 84,891 131,623 1,624 (17,857) 115,390 Total Agency RMBS550,643 2,355 (26,635) 526,363 744,466 1,850 (33,200) 713,116Non-Agency RMBS162,220 1,218 (154) 163,284 1,727 51 (211) 1,567U.S. Treasury securities(1)2,920 — (33) 2,887 10,113 — (76) 10,037CMBS (2)113,955 12,876 (389) 126,442 28,692 12,042 — 40,734Total investmentsecurities available forsale$829,738 $16,449 $(27,211) $818,976 $784,998 $13,943 $(33,487) $765,454(1)Included in investment securities available for sale are Agency IOs, Agency RMBS and U.S. Treasury securities managed by Midway that are measuredat fair value through earnings.(2)Included in CMBS is $43.9 million and $40.7 million of investment securities for sale held in securitization trusts as of December 31, 2016 andDecember 31, 2015 , respectively.Realized Gain or Loss ActivityDuring the year ended December 31, 2016 , the Company received total proceeds of approximately $208.2 million realizing approximately $2.3 million ofnet losses, from the sale of investment securities available for sale. During the year ended December 31, 2015 , the Company received total proceeds ofapproximately $99.2 million , realizing approximately $2.1 million of net gains, from the sale of investment securities available for sale. During the year endedDecember 31, 2014 , the Company received total proceeds of approximately $93.6 million , realizing approximately $39.1 million of net gains, from the sale ofinvestment securities available for sale.F-21Table of ContentsWeighted Average LifeActual maturities of our available for sale securities are generally shorter than stated contractual maturities (with maturities up to 30 years ), as they areaffected by periodic payments and prepayments of principal on the underlying mortgages. As of December 31, 2016 and 2015 , the weighted average life of theCompany’s available for sale securities portfolio was approximately 4.3 years and 5.0 years , respectively.The following table sets forth the weighted average lives our investment securities available for sale as of December 31, 2016 and December 31, 2015(dollar amounts in thousands):Weighted Average LifeDecember 31, 2016 December 31, 20150 to 5 years$606,079 $518,594Over 5 to 10 years177,765 219,74710+ years35,132 27,113Total$818,976 $765,454Portfolio Interest Reset PeriodsThe following tables set forth the stated interest reset periods of our investment securities available for sale and investment securities available for saleheld in securitization trusts at December 31, 2016 and December 31, 2015 at carrying value (dollar amounts in thousands): December 31, 2016 December 31, 2015 Less than 6months 6 to 24months More than24 months Total Less than 6months 6 to 24months More than24 months TotalAgency RMBS$53,043 $27,272 $446,048 $526,363 $92,693 $44,700 $575,723 $713,116Non-Agency RMBS50,080 — 113,204 163,284 188 1,379 — 1,567U.S. Treasury securities— — 2,887 2,887 10,037 — — 10,037CMBS82,545 — 43,897 126,442 — — 40,734 40,734Total investment securitiesavailable for sale$185,668 $27,272 $606,036 $818,976 $102,918 $46,079 $616,457 $765,454Unrealized Losses in OCIThe following tables present the Company's investment securities available for sale in an unrealized loss position reported through OCI, aggregated byinvestment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016 and December 31, 2015(dollar amounts in thousands):December 31, 2016Less than 12 Months Greater than 12 months Total CarryingValue GrossUnrealizedLosses CarryingValue GrossUnrealizedLosses CarryingValue GrossUnrealizedLossesAgency RMBS$96,357 $(1,290) $328,474 $(10,819) $424,831 $(12,109)Non-Agency RMBS— — 596 (154) 596 (154)CMBS16,523 (389) — — 16,523 (389)Total investment securities available for sale$112,880 $(1,679) $329,070 $(10,973) $441,950 $(12,652) F-22Table of ContentsDecember 31, 2015Less than 12 Months Greater than 12 months Total CarryingValue GrossUnrealizedLosses CarryingValue GrossUnrealizedLosses CarryingValue GrossUnrealizedLossesAgency RMBS$71,587 $(688) $476,157 $(14,497) $547,744 $(15,185)Non-Agency RMBS771 — 796 (211) 1,567 (211)CMBS— — — — — —Total investment securities available for sale$72,358 $(688) $476,953 $(14,708) $549,311 $(15,396)Other than Temporary ImpairmentFor the years ended December 31, 2016 , 2015 and 2014 , the Company did not recognize other-than-temporary impairment through earnings.4.Residential Mortgage Loans Held in Securitization Trusts (Net) and Real Estate OwnedResidential mortgage loans held in securitization trusts (net) consist of the following at December 31, 2016 and December 31, 2015 , respectively (dollaramounts in thousands): December 31, 2016 December 31, 2015Unpaid principal balance$98,303 $122,545Deferred origination costs – net623 775Reserve for loan losses(3,782) (3,399)Total$95,144 $119,921Allowance for Loan Losses - The following table presents the activity in the Company's allowance for loan losses on residential mortgage loans held insecuritization trusts for the years ended December 31, 2016 , 2015 and 2014 , respectively (dollar amounts in thousands): Years Ended December 31, 2016 2015 2014Balance at beginning of period$3,399 $3,631 $2,989Provisions for loan losses612 1,161 998Transfer to real estate owned(117) — (356)Charge-offs(112) (1,393) —Balance at the end of period$3,782 $3,399 $3,631On an ongoing basis, the Company evaluates the adequacy of its allowance for loan losses. The Company’s allowance for loan losses at December 31,2016 was $3.8 million , representing 385 basis points of the outstanding principal balance of residential loans held in securitization trusts, as compared to 277 basispoints as of December 31, 2015 . As part of the Company’s allowance for loan loss adequacy analysis, management will assess an overall level of allowanceswhile also assessing credit losses inherent in each non-performing residential mortgage loan held in securitization trusts. These estimates involve the considerationof various credit related factors, including but not limited to, current housing market conditions, current loan to value ratios, delinquency status, the borrower’scurrent economic and credit status and other relevant factors.F-23Table of ContentsReal Estate Owned – The following table presents the activity in the Company’s real estate owned held in residential securitization trusts for the yearsended December 31, 2016 , 2015 and 2014 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015 December 31, 2014Balance at beginning of period$411 $965 $1,108Write downs(9) — (103)Transfer from mortgage loans held in securitization trusts352 — 537Disposal(604) (554) (577)Balance at the end of period$150 $411 $965Real estate owned held in residential securitization trusts are included in receivables and other assets on the accompanying consolidated balance sheetsand write downs are included in provision for loan losses in the statement of operations for reporting purposes.All of the Company’s mortgage loans and real estate owned held in residential securitization trusts are pledged as collateral for the Residential CDOsissued by the Company. The Company’s net investment in the residential securitization trusts, which is the maximum amount of the Company’s investment that isat risk to loss and represents the difference between (i) the carrying amount of the mortgage loans, real estate owned and receivables held in residentialsecuritization trusts and (ii) the amount of Residential CDOs outstanding, was $4.4 million and $4.4 million , as of December 31, 2016 and December 31, 2015 ,respectively.Delinquency Status of Our Residential Mortgage Loans Held in Securitization TrustsAs of December 31, 2016 , we had 31 delinquent loans with an aggregate principal amount outstanding of approximately $18.7 million categorized asResidential Mortgage Loans Held in Securitization Trusts (net), of which $11.2 million , or 60% , are under some form of temporary modified payment plan. Thetable below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including real estate owned (REO) through foreclosure,as of December 31, 2016 (dollar amounts in thousands):December 31, 2016Days LateNumber ofDelinquentLoans TotalUnpaidPrincipal % of LoanPortfolio30 - 601 $247 0.25%61 - 90— $— —90+30 $18,416 18.68%Real estate owned through foreclosure1 $268 0.27%As of December 31, 2015 , we had 31 delinquent loans with an aggregate principal amount outstanding of approximately $18.0 million categorized asResidential Mortgage Loans Held in Securitization Trusts (net), of which $11.9 million , or 67% , were under some form of modified payment plan. The tablebelow shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including REO through foreclosure, as of December 31, 2015(dollar amounts in thousands):December 31, 2015Days LateNumber ofDelinquentLoans TotalUnpaidPrincipal % of LoanPortfolio30 - 603 $825 0.67%61 - 902 $1,763 1.43%90+26 $15,365 12.48%Real estate owned through foreclosure3 $574 0.47%Table of ContentsThe geographic concentrations of credit risk exceeding 5% of the total loan balances in our residential mortgage loans held in securitization trusts andREO held in residential securitization trusts at December 31, 2016 and December 31, 2015 are as follows: December 31, 2016 December 31, 2015New York33.8% 35.6%Massachusetts19.9% 20.7%New Jersey10.8% 11.1%Florida8.9% 7.7%Connecticut7.4% 6.5%5.Distressed Residential Mortgage LoansAs of December 31, 2016 and December 31, 2015 , the carrying value of the Company’s distressed residential mortgage loans, including distressedresidential mortgage loans held in securitization trusts, amounts to approximately $503.1 million and $559.0 million , respectively.The Company considers its purchase price for the distressed residential mortgage loans, including distressed residential mortgage loans held insecuritization trusts, to be at fair value at the date of acquisition. The Company only establishes an allowance for loan losses subsequent to acquisition.The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and theestimated fair value of the distressed residential mortgage loans acquired during the years ended December 31, 2016 and December 31, 2015 , respectively (dollaramounts in thousands): December 31, 2016 December 31, 2015Contractually required principal and interest$188,444 $327,611Non-accretable yield(14,512) (17,276)Expected cash flows to be collected173,932 310,335Accretable yield(114,153) (158,149)Fair value at the date of acquisition$59,779 $152,186Table of ContentsThe following table details activity in accretable yield for the distressed residential mortgage loans, including distressed residential mortgage loans heldin securitization trusts, for the years ended December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015Balance at beginning of period$579,009 $640,416Additions128,386 173,497Disposals(144,242) (195,615)Accretion(32,641) (39,289)Balance at end of period (1)$530,512 $579,009(1)Accretable yield is the excess of the distressed residential mortgage loans’ cash flows expected to be collected over the purchase price. The cash flowsexpected to be collected represents the Company’s estimate of the amount and timing of undiscounted principal and interest cash flows. Additions includeaccretable yield estimates for purchases made during the period and reclassification to accretable yield from nonaccretable yield. Deletions includedistressed residential mortgage loan dispositions, which include refinancing, sale and foreclosure of the underlying collateral and resulting removal of thedistressed residential mortgage loans from the accretable yield, and reclassifications from accretable to nonaccretable yield. The reclassifications betweenaccretable and nonaccretable yield and the accretion of interest income is based on various estimates regarding loan performance and the value of theunderlying real estate securing the loans. As the Company continues to update its estimates regarding the loans and the underlying collateral, theaccretable yield may change. Therefore, the amount of accretable income recorded in the twelve-month periods ended December 31, 2016 andDecember 31, 2015 is not necessarily indicative of future results.The geographic concentrations of credit risk exceeding 5% of the unpaid principal balance in our distressed residential mortgage loans, includingdistressed residential mortgage loans held in securitization trusts, as of December 31, 2016 and December 31, 2015 , respectively, are as follows: December 31, 2016 December 31, 2015Florida12.2% 12.6%California8.8% 7.7%North Carolina7.7% 8.1%Georgia6.0% 6.1%New York5.4% 5.2%Maryland5.2% 5.4%The Company’s distressed residential mortgage loans held in securitization trusts with a carrying value of approximately $195.3 million and $114.2million at December 31, 2016 and December 31, 2015 , respectively, are pledged as collateral for certain of the Securitized Debt issued by the Company (see Note9) . In addition, distressed residential mortgage loans with a carrying value of approximately $279.9 million and $307.0 million at December 31, 2016 andDecember 31, 2015 , respectively, are pledged as collateral for a Master Repurchase Agreement, with Deutsche Bank AG, Cayman Islands Branch (see Note 12) .F-26Table of Contents6.Consolidated K-SeriesThe Company has elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes invaluations in the assets and liabilities of the Consolidated K-Series be reflected in the Company's statements of operations. Our investment in the Consolidated K-Series is limited to the first loss tranche PO securities and/or certain IOs issued by certain Freddie Mac K-Series securitizations with an aggregate net carryingvalue of $314.9 million and $286.4 million at December 31, 2016 and 2015 , respectively ( see Note 9 ).The condensed consolidated balance sheets of the Consolidated K-Series at December 31, 2016 and December 31, 2015 , respectively, are as follows(dollar amounts in thousands):Balance SheetsDecember 31, 2016 December 31, 2015Assets Multi-family loans held in securitization trusts$6,939,844 $7,105,336Receivables24,098 24,579Total Assets$6,963,942 $7,129,915Liabilities and Equity Multi-family CDOs$6,624,896 $6,818,901Accrued expenses24,003 24,483Total Liabilities6,648,899 6,843,384Equity315,043 286,531Total Liabilities and Equity$6,963,942 $7,129,915The multi-family loans held in securitization trusts had unpaid aggregate principal balances of approximately $6.7 billion and $6.8 billion atDecember 31, 2016 and December 31, 2015 , respectively. The multi-family CDOs had aggregate unpaid principal balances of approximately $6.7 billion and $6.8billion at December 31, 2016 and December 31, 2015 , respectively. As of December 31, 2016 and 2015 , the current weighted average interest rate on these Multi-Family CDOs was 3.97% and 3.98% , respectively.In February 2015, the Company sold a first loss tranche PO security that was part of the Consolidated K-Series obtaining total proceeds of approximately$44.3 million and realizing a gain of approximately $1.5 million . The sale resulted in a de-consolidation of $1.1 billion in Multi-Family loans held in asecuritization trust and $1.0 billion in Multi-Family CDOs.F-27Table of ContentsThe Company does not have any claims to the assets or obligations for the liabilities of the Consolidated K-Series other than the securities represented byour first loss tranche securities. We have elected the fair value option for the Consolidated K-Series. The net fair value of our investment in the Consolidated K-Series, which represents the difference between the carrying values of multi-family loans held in securitization trusts less the carrying value of multi-family CDOs,approximates the fair value of our underlying securities. The fair value of our underlying securities is determined using the same valuation methodology as ourCMBS investments available for sale (see Note 16) .The condensed consolidated statements of operations of the Consolidated K-Series for the years ended December 31, 2016 , 2015 , and 2014 ,respectively, are as follows (dollar amounts in thousands): Years Ended December 31,Statements of Operations2016 2015 2014Interest income$249,191 $257,417 $301,877Interest expense222,553 232,971 275,916Net interest income26,638 24,446 25,961Unrealized gain on multi-family loans and debt held in securitization trusts, net3,032 12,368 56,931Net Income$29,670 $36,814 $82,892The geographic concentrations of credit risk exceeding 5% of the total loan balances related to our CMBS investments included in investment securitiesavailable for sale and multi-family loans held in securitization trusts as of December 31, 2016 and December 31, 2015 , respectively, are as follows: December 31, 2016 December 31, 2015California13.8% 13.8%Texas12.4% 12.3%New York8.1% 8.0%Maryland5.3% 5.2%F-28Table of Contents7.Investment in Unconsolidated EntitiesThe Company's investments in unconsolidated entities accounted for under the equity method consist of the following as of December 31, 2016 andDecember 31, 2015 (dollar amounts in thousands): December 31, 2016 December 31, 2015Investment Name OwnershipInterest CarryingAmount OwnershipInterest CarryingAmountAutumnwood Investments LLC — $2,092 — $2,127200 RHC Hoover, LLC 63% 8,886 63% 8,649BBA-EP320 II, L.L.C., BBA-Ten10 II, L.L.C., and Lexington on the GreenApartments, L.L.C. (collectively) 45% 7,949 — —RiverBanc LLC (1) ("RiverBanc") — — 20% 597Kiawah River View Investors LLC (2) ("KRVI") — — 31% 8,718Total $18,927 $20,091(1)As of May 16, 2016, RiverBanc became a wholly-owned subsidiary of the Company as a result of the Company's acquisition of the remaining ownershipinterests in RiverBanc held by other unaffiliated entities ( see Note 21 ).(2)As of May 16, 2016, the Company consolidated KRVI in its consolidated financial statements ( see Note 9 ). The Company's investments in unconsolidated entities accounted for at fair value consist of the following as of December 31, 2016 and December 31,2015 (dollar amounts in thousands): December 31, 2016 December 31, 2015Investment Name OwnershipInterest CarryingAmount OwnershipInterest CarryingAmountRB Development Holding Company, LLC (1) ("RBDHC") — $— 63% $1,927RB Multifamily Investors LLC (1) (2) ("RBMI") — — 70% 56,891Morrocroft Neighborhood Stabilization Fund II, LP 11% 9,732 13% 8,753Evergreens JV Holdings, LLC (3) 85% 3,810 — —Bent Tree JV Holdings, LLC (3) 78% 9,890 — —Summerchase LR Partners LLC (3) 80% 4,410 — —Lake Mary Realty Partners, LLC (3) 80% 7,690 — —The Preserve at Port Royal Venture, LLC (3) 77% 12,280 — —WR Savannah Holdings, LLC (3) 90% 12,520 — —Total $60,332 $67,571(1)As of May 16, 2016, RBDHC and RBMI became wholly-owned subsidiaries of the Company as a result of the Company's acquisition of the remainingownership interests in those entities held by other unaffiliated entities ( see Note 21 ).(2)As of December 31, 2015, includes the Company's preferred and common equity interests in this entity.(3)Investments held by RBMI that are consolidated into the Company's financial statements beginning May 16, 2016. F-29Table of ContentsThe following table presents income (loss) from investments in unconsolidated entities for the years ended December 31, 2016 , 2015 , and 2014 (dollaramounts in thousands): For the Years Ended December 31,Investment Name 2016 2015 2014Autumnwood Investments LLC $260 $281 $276200 RHC Hoover, LLC 1,370 394 —BBA-EP320 II, L.L.C., BBA-Ten10 II, L.L.C., and Lexington on the Green Apartments, L.L.C.(collectively) 433 — —RiverBanc LLC 125 815 2,644Kiawah River View Investors LLC 1,250 866 611RB Development Holding Company, LLC 107 (9) 373RB Multifamily Investors LLC 2,262 5,263 657Morrocroft Neighborhood Stabilization Fund II, LP 910 254 —Evergreens JV Holdings, LLC 199 — —Bent Tree JV Holdings, LLC 411 — —Summerchase LR Partners LLC 380 — —Lake Mary Realty Partners, LLC 554 — —The Preserve at Port Royal Venture, LLC 834 — —WR Savannah Holdings, LLC 692 — —Summary combined financial information for the Company's investments in unconsolidated entities as of December 31, 2016 and December 31, 2015 andfor the years ended December 31, 2016 , 2015 , and 2014 is shown below (dollars amounts in thousands). December 31, 2016 December 31, 2015Balance Sheets: Real estate, net $346,078 $111,216Investments in unconsolidated entities — 31,636Mezzanine loan and preferred equity investments — 23,629Other assets 16,042 35,293Total assets $362,120 $201,774 Notes payable, net $236,388 $41,918Other liabilities 6,686 8,624Total liabilities 243,074 50,542Members' equity 119,046 151,232Total liabilities and members' equity $362,120 $201,774F-30Table of Contents For the Years Ended December 31, 2016 2015 2014Operating Statements: (1) Rental revenues $26,397 $2,121 $—Other income 3,131 3,732 12,034Operating expenses 19,227 9,267 3,097Income (loss) before debt service, acquisition costs, and depreciation and amortization 10,301 (3,414) 8,937Interest expense (6,149) (356) —Acquisition costs (1,448) (1,660) —Depreciation and amortization (15,879) (1,711) (8)Net (loss) income $(13,175) $(7,141) $8,929(1) The Company records income (loss) from investments in unconsolidated entities under either the equity method of accounting or the fair value option.Accordingly, the combined net (loss) income shown above is not indicative of the income recognized by the Company from investments inunconsolidated entities.8.Mezzanine Loan and Preferred Equity InvestmentsMezzanine loan and preferred equity investments consist of the following as of December 31, 2016 and December 31, 2015 (dollar amounts inthousands): December 31, 2016 December 31, 2015Investment amount$101,154 $44,529Deferred loan fees, net(1,004) (378)Total$100,150 $44,151There were no delinquent mezzanine loan or preferred equity investments as of December 31, 2016 and December 31, 2015 .The geographic concentrations of credit risk exceeding 5% of the total mezzanine loan and preferred equity investment amounts as of December 31, 2016and December 31, 2015 are as follows: December 31, 2016 December 31, 2015Texas43.3% 31.4%Virginia14.9% 9.4%South Carolina9.4% 10.0%Kentucky7.2% 16.0%Massachusetts6.9% 15.7%Georgia6.3% —Florida5.1% —F-31Table of Contents9.Use of Special Purpose Entities (SPE) and Variable Interest Entities (VIE)The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. Theobjective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets onimproved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized inthe normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE anddepending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excessassets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or otherform of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment inaccordance with the terms of their investment agreement. The Company has entered into resecuritization and financing transactions which required the Company to analyze and determine whether the SPEs thatwere created to facilitate the transactions are VIEs in accordance with ASC 810, Consolidation , and if so, whether the Company is the primary beneficiaryrequiring consolidation. The Company evaluated the following resecuritization and financing transactions: 1) its Residential CDOs; 2) its multi-family CMBS re-securitization transaction; 3) its collateralized recourse financing transactions and 4) its distressed residential mortgage loan securitization transactions (each a“Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions are VIEs and that theCompany is the primary beneficiary of these VIEs. Accordingly, the Company consolidated the Financing VIEs as of December 31, 2016 .The Company invests in multi-family CMBS consisting of PO securities that represent the first loss tranche of the securitizations from which they wereissued, and certain IOs issued from Freddie Mac-sponsored multi-family K-Series securitization trusts. The Company has evaluated these CMBS investments inFreddie Mac-sponsored K-Series securitization trusts to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiringconsolidation. The Company has determined that five Freddie Mac-sponsored multi-family K-Series securitization trusts are VIEs as of December 31, 2016 andDecember 31, 2015 . The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and accordingly, hasconsolidated its assets, liabilities, income and expenses in the accompanying consolidated financial statements ( see Notes 2 and 6 ). Of the Company’s multi-family CMBS investments included in the Consolidated K-Series, four and one of these investments are not deposited as collateral to any Financing VIE as ofDecember 31, 2016 and December 31, 2015 , respectively.In analyzing whether the Company is the primary beneficiary of the Consolidated K-Series and the Financing VIEs, the Company considered itsinvolvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resultedin the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, thefollowing factors were assessed:•whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and•whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.On May 16, 2016, the Company acquired the remaining outstanding membership interests in RBDHC, resulting in 100% ownership. RBDHC owns 50%of KRVI, a limited liability company that owns developed land and residential homes under development in Kiawah Island, SC, for which RiverBanc is themanager. The Company has evaluated KRVI to determine if it is a VIE and if so, whether the Company is the primary beneficiary requiring consolidation. TheCompany has determined that KRVI is a VIE for which RBDHC is the primary beneficiary as the Company, collectively through its wholly-owned subsidiariesRiverBanc and RBDHC, has both the power to direct the activities that most significantly impact the economic performance of KRVI and has a right to receivebenefits or absorb losses of KRVI that could be potentially significant to KRVI. Accordingly, the Company has consolidated KRVI in its consolidated financialstatements with a non-controlling interest for the third-party ownership of KRVI membership interests.The Consolidated K-Series, the Financing VIEs, and KRVI are collectively referred to in this footnote as "Consolidated VIEs".F-32Table of ContentsThe following tables present a summary of the assets and liabilities of these Consolidated VIEs as of December 31, 2016 and December 31, 2015 ,respectively. Intercompany balances have been eliminated for purposes of this presentation.Assets and Liabilities of Consolidated VIEs as of December 31, 2016 (dollar amounts in thousands): Financing VIEs Other VIEs Multi-familyCMBS Re-securitization (1) DistressedResidentialMortgageLoanSecuritization (2) ResidentialMortgageLoan Securitization Multi-familyCMBS (3) Other TotalCash and cash equivalents$— $— $— $— $186 $186Investment securities available for sale, atfair value held in securitization trusts43,897 — — — — 43,897Residential mortgage loans held insecuritization trusts (net)— — 95,144 — — 95,144Distressed residential mortgage loans heldin securitization trusts, (net)— 195,347 — — — 195,347Multi-family loans held in securitizationtrusts, at fair value1,196,835 — — 5,743,009 — 6,939,844Receivables and other assets4,420 13,610 912 19,753 17,759 56,454Total assets$1,245,152 $208,957 $96,056 $5,762,762 $17,945 $7,330,872 Residential collateralized debt obligations$— $— $91,663 $— $— $91,663Multi-family collateralized debtobligations, at fair value1,137,002 — — 5,487,894 — 6,624,896Securitized debt28,332 130,535 — — — 158,867Accrued expenses and other liabilities4,400 1,336 20 19,753 1,601 27,110Total liabilities$1,169,734 $131,871 $91,683 $5,507,647 $1,601 $6,902,536(1)The Company classified the multi-family CMBS issued by two K-Series securitizations and held by this Financing VIE as available for sale securities asthe purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBSowned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Companydetermined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization ( see Note 6 ).(2)The Company engaged in these transactions for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressedresidential mortgage loans serving as collateral for the financings are comprised of performing, re-performing and, to a lesser extent, non-performing,fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties.Balances as of December 31, 2016 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of ClassA Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of the ClassA Notes issued as part of this securitization transaction, which have been eliminated in consolidation.(3)Four of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series are not held in a FinancingVIE as of December 31, 2016 . In October 2016, the Company repaid $55.9 million of outstanding notes from its November 2013 collateralized recoursefinancing, which was comprised of securities issued from three separate Freddie Mac-sponsored multi-family K-Series securitizations. In connection withthe repayment of the notes, the Company terminated and de-consolidated the Financing VIE that facilitated this financing transaction and securitiesserving as collateral on the notes were transferred back to the Company.F-33Table of ContentsAssets and Liabilities of Consolidated VIEs as of December 31, 2015 (dollar amounts in thousands): Financing VIEs Other VIEs Multi-family CMBSre-securitization (1) CollateralizedRecourseFinancing (2) Distressed ResidentialMortgage Loan Securitization (3) ResidentialMortgage LoanSecuritization Multi- family CMBS (2) TotalInvestment securities available forsale, at fair value held insecuritization trusts$40,734 $— $— $— $— $40,734Residential mortgage loans held insecuritization trusts (net)— — — 119,921 — 119,921Distressed residential mortgageloans held in securitizationtrusts (net)— — 114,214 — — 114,214Multi-family loans held insecuritization trusts, at fairvalue1,224,036 4,633,061 — — 1,248,239 7,105,336Receivables and other assets4,458 15,057 5,717 1,200 5,456 31,888Total assets$1,269,228 $4,648,118 $119,931 $121,121 $1,253,695 $7,412,093 Residential collateralized debtobligations$— $— $— $116,710 $— $116,710Multi-family collateralized debtobligations, at fair value1,168,470 4,464,340 — — 1,186,091 6,818,901Securitized debt27,613 55,629 33,299 — — 116,541Accrued expenses and otherliabilities4,436 14,750 368 13 5,456 25,023Total liabilities$1,200,519 $4,534,719 $33,667 $116,723 $1,191,547 $7,077,175(1)The Company classified the multi-family CMBS issued by two K-Series securitizations and held by the Financing VIE as available for sale securities asthe purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBSowned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Companydetermined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization ( see Note 6 ).(2)The multi-family CMBS serving as collateral under the November 2013 collateralized recourse financing are comprised of securities issued from threeseparate Freddie Mac-sponsored multifamily K-Series securitizations. The Financing VIE consolidated these K-Series securitizations, including theirassets, liabilities and expenses, in its financial statements as based on a number of factors, the Company determined that it was the primary beneficiaryand has a controlling financial interest in such K-Series securitizations ( see Note 6 ). One of the Company's Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series is not held in a Financing VIE as of December 31, 2015 .(3)The Company engaged in these transactions for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressedresidential mortgage loans serving as collateral for the financings are comprised of performing, re-performing and, to a lesser extent, non-performing,fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by the first liens on one to four family properties.Balances are related to distressed residential mortgage loan securitizations transactions completed in 2013. The outstanding notes from these transactionswere repaid in February 2016, which resulted in the termination and de-consolidation of the Financing VIE that facilitated these financing transactions.F-34Table of ContentsThe following table summarizes the Company’s securitized debt collateralized by multi-family CMBS or distressed residential mortgage loans (dollaramounts in thousands): Multi-family CMBSRe-securitization (1) CollateralizedRecourse Financings (2) DistressedResidential MortgageLoan SecuritizationsPrincipal Amount at December 31, 2016$33,553 $— $132,319Principal Amount at December 31, 2015$33,781 $55,853 $33,656Carrying Value at December 31, 2016 (3)$28,332 $— $130,535Carrying Value at December 31, 2015 (3)$27,613 $55,629 $33,299Pass-through rate of Notes issued5.35% One-month LIBORplus 5.25% 4.00% - 4.85%(1)The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse financing on a portion of its multi-familyCMBS portfolio. As a result of engaging in this transaction, the Company remains economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE. The holders of the Note issued in this re-securitization have no recourse to the general credit of theCompany, but the Company does have the obligation, under certain circumstances, to repurchase assets upon the breach of certain representations andwarranties. The Company will receive all remaining cash flow, if any, through its retained ownership.(2)The Company entered into a CMBS Master Repurchase Agreement with a three -year term for the purpose of financing a portion of its multi-familyCMBS portfolio. In connection with the transaction, the Company agreed to guarantee the due and punctual payment of its wholly-owned subsidiary'sobligations under the CMBS Master Repurchase Agreement. In October 2016, the Company repaid the $55.9 million of outstanding notes.(3)Classified as securitized debt in the liability section of the Company’s accompanying consolidated balance sheets.The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of December 31, 2016 and December 31,2015 , respectively (dollar amounts in thousands):Scheduled Maturity (principal amount) December 31, 2016 December 31, 2015Within 24 months $— $89,509Over 24 months to 36 months 132,319 —Over 36 months 33,553 33,781Total 165,872 123,290Discount (5,589) (5,763)Debt Issuance Cost (1,416) (986)Carrying value $158,867 $116,541There is no guarantee that the Company will receive any cash flows from these securitization trusts.Residential Mortgage Loan Securitization TransactionThe Company has completed four residential mortgage loan securitizations (other than the distressed residential mortgage loan securitizations discussedabove) since inception; the first three were accounted for as permanent financings and have been included in the Company’s accompanying consolidated financialstatements. The fourth was accounted for as a sale and accordingly, is not included in the Company's accompanying consolidated financial statements.F-35Table of ContentsUnconsolidated VIEsThe Company has evaluated its multi-family CMBS investments in two Freddie Mac-sponsored K-Series securitizations as of December 31, 2016 and2015 , respectively, and its mezzanine loan, preferred equity and other equity investments to determine whether they are VIEs and should be consolidated by theCompany. Based on a number of factors, the Company determined that it does not have a controlling financial interest and is not the primary beneficiary of theseVIEs. The following table presents the classification and carrying value of unconsolidated VIEs as of December 31, 2016 and 2015 (dollar amounts in thousands): December 31, 2016 Investment securities available for sale, atfair value, held insecuritization trusts Receivables andother assets Mezzanine loan andpreferred equityinvestments Investment inunconsolidatedentities TotalMulti-Family CMBS$43,897 $74 $— $— $43,971Mezzanine/Construction loan onmulti-family properties— — 18,881 — 18,881Preferred equity investment onmulti-family properties— — 81,269 18,928 100,197Equity investments in entities thatinvest in multi-family properties— — — 22,252 22,252Total assets$43,897 $74 $100,150 $41,180 $185,301 December 31, 2015 Investment securities available for sale, atfair value, held insecuritization trusts Receivables andother assets Mezzanine loan andpreferred equityinvestments Investment inunconsolidatedentities TotalMulti-Family CMBS$40,734 $76 $— $— $40,810Mezzanine/Construction loan onmulti-family properties— — 8,663 8,718 17,381Preferred equity investment onmulti-family properties— — 35,488 10,776 46,264Equity investments in entities thatinvest in multi-family properties— — — 66,242 66,242Total assets$40,734 $76 $44,151 $85,736 $170,697Our maximum loss exposure on the multi-family CMBS investments and mezzanine loan, preferred equity and other equity investments is approximately$185.3 million and $170.7 million at December 31, 2016 and December 31, 2015 , respectively. The Company’s maximum exposure does not exceed the carryingvalue of its investments.F-36Table of Contents10.Derivative Instruments and Hedging ActivitiesThe Company enters into derivative instruments in connection with its risk management activities. These derivative instruments include interest rateswaps, swaptions and futures. The Company may also purchase or sell short TBAs, purchase put or call options on U.S. Treasury futures or invest in other types ofmortgage derivative securities.Derivatives Not Designated as Hedging InstrumentsThe following table presents the fair value of derivative instruments that were not designated as hedging instruments and their location in our consolidatedbalance sheets at December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): Balance Sheet Location December 31, 2016 December 31, 2015TBA Securities Derivative assets $148,139 $226,929Eurodollar futures Derivative assets 1,175 —Options on U.S. Treasury futures Derivative assets — 15Interest rate swap futures Derivative assets 444 706Swaptions Derivative assets 431 821Eurodollar futures Derivative liabilities — 1,242U.S. Treasury futures Derivative liabilities 107 —Interest rate swaps (1) Derivative liabilities 384 258(1)Includes interest rate swaps in our Agency IO portfolio. There was no netting of interest rate swaps at December 31, 2016 and December 31, 2015 .The tables below summarize the activity of derivative instruments not designated as hedges for the years ended December 31, 2016 and 2015 ,respectively (dollar amounts in thousands). Notional Amount For the Year Ended December 31, 2016 December 31, 2015 Additions Settlement,Expirationor Exercise December 31, 2016TBA securities$222,000 $4,070,000 $(4,143,000) $149,000U.S. Treasury futures— 201,900 (184,800) 17,100Interest rate swap futures(137,200) 868,800 (883,300) (151,700)Eurodollar futures(2,769,000) 6,323,000 (6,129,000) (2,575,000)Options on U.S. Treasury futures28,000 111,000 (139,000) —Swaptions159,000 — (5,000) 154,000Interest rate swaps10,000 5,000 — 15,000 Notional Amount For the Year Ended December 31, 2015 December 31, 2014 Additions Settlement,Expirationor Exercise December 31, 2015TBA securities$273,000 $3,801,000 $(3,852,000) $222,000U.S. Treasury futures2,300 150,200 (152,500) —Interest rate swap futures(190,100) 1,165,200 (1,112,300) (137,200)Eurodollar futures(2,961,000) 2,925,000 (2,733,000) (2,769,000)Options on U.S. Treasury futures21,000 375,000 (368,000) 28,000Swaptions180,000 9,000 (30,000) 159,000Interest rate swaps10,000 — — 10,000F-37Table of ContentsThe following table presents the components of realized and unrealized gains and losses related to our derivative instruments that were not designated ashedging instruments included in other income category in our consolidated statements of operations for the years ended December 31, 2016 , 2015 and 2014 : Years Ended December 31, 2016 2015 2014 RealizedGains(Losses) UnrealizedGains (Losses) RealizedGains (Losses) UnrealizedGains (Losses) RealizedGains (Losses) UnrealizedGains (Losses) TBA$3,998 $534 $5,244 $(2,253) $13,708 $2,472Eurodollar futures (1)(3,202) 2,417 (2,321) (342) (2,146) 533Interest rate swaps— (126) — (26) 259 (232)Swaptions— 568 — (658) — (1,068)U.S. Treasury and Interest rate swap futures andoptions(2,040) (336) (9,631) 579 (8,831) (3,332)Total$(1,244) $3,057 $(6,708) $(2,700) $2,990 $(1,627)(1)At December 31, 2016 , the Eurodollar futures consist of 2,575 contracts with expiration dates ranging between March 2017 and June 2018 .The use of TBAs exposes the Company to market value risk, as the market value of the securities that the Company is required to purchase pursuant to aTBA transaction may increase or decrease from the agreed-upon purchase price. At December 31, 2016 and December 31, 2015 , our consolidated balance sheetsinclude TBA-related liabilities of $148.0 million and $228.0 million included in payable for securities purchased, respectively. Open TBA purchases and salesinvolving the same counterparty, same underlying deliverable and the same settlement date are reflected in our consolidated financial statements on a net basis.TBA sales amounting to approximately $114.4 million were netted against TBA purchases amounting to approximately $262.4 million at December 31, 2016 .There was $55.1 million netting of TBA sales against TBA purchases of $283.1 million at December 31, 2015 .Derivatives Designated as Hedging InstrumentsThe Company’s interest rate swaps, except interest swaps included in its Agency IO portfolio, are used to hedge the variable cash flows associated withborrowings made under our financing arrangements, including FHLBI advances until January 2016 when we repaid them, and are designated as cash flow hedges.There were no costs incurred at the inception of the Company's interest rate swaps, under which the Company agrees to pay a fixed rate of interest and receive avariable interest rate based on one month LIBOR, on the notional amount of the interest rate swaps.The Company documents its risk-management policies, including objectives and strategies, as they relate to its hedging activities, and upon entering intohedging transactions, documents the relationship between the hedging instrument and the hedged liability contemporaneously. The Company assesses, both atinception of a hedge and on an on-going basis, whether or not the hedge is “highly effective” when using the matched term basis.The Company discontinues hedge accounting on a prospective basis and recognizes changes in the fair value through earnings when: (i) it is determinedthat the derivative is no longer effective in offsetting cash flows of a hedged item (including forecasted transactions); (ii) it is no longer probable that the forecastedtransaction will occur; or (iii) it is determined that designating the derivative as a hedge is no longer appropriate. The Company’s derivative instruments are carriedon the Company’s balance sheets at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative. For the Company’s derivativeinstruments that are designated as “cash flow hedges,” changes in their fair value are recorded in accumulated other comprehensive income (loss), provided that thehedges are effective. A change in fair value for any ineffective amount of the Company’s derivative instruments would be recognized in earnings. The Companyhas not recognized any change in the value of its existing derivative instruments designated as cash flow hedges through earnings as a result of ineffectiveness ofany of its hedges.F-38Table of ContentsThe following table presents the fair value of derivative instruments designated as hedging instruments and their location in the Company’s consolidatedbalance sheets at December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): Balance Sheet Location December 31, 2016 December 31, 2015Interest rate swaps Derivative assets $108 $304Interest rate swaps Derivative liabilities 6 $—The Company has netting arrangements by counterparty with respect to its interest rate swaps. Contracts in a liability position of $29.1 thousand havebeen netted against the asset position of $133.5 thousand and contracts in a liability position of $0.3 million have been netted against the asset position of $0.3million in the accompanying consolidated balance sheets at December 31, 2016 and December 31, 2015 , respectively.The following table presents the impact of the Company’s interest rate swaps designated as hedging instruments on the Company’s accumulated othercomprehensive income (loss) for the years ended December 31, 2016 , 2015 and 2014 (dollar amounts in thousands): Years Ended December 31, 2016 2015 2014Accumulated other comprehensive income (loss) for derivative instruments: Balance at beginning of the period $304 $1,135 $2,041Unrealized (loss) gain on interest rate swaps (202) (831) (906)Balance at end of the period $102 $304 $1,135The Company estimates that over the next 12 months , approximately $49.2 thousand of the net unrealized losses on the interest rate swaps will bereclassified from accumulated other comprehensive income (loss) into earnings.The following table details the impact of the Company’s interest rate swaps designated as hedging instruments included in interest expense for the yearsended December 31, 2016 , 2015 and 2014 , respectively (dollar amounts in thousands): Years Ended December 31, 2016 2015 2014Interest Rate Swaps: Interest expense-investment securities$743 $1,619 $1,848The following table presents information about our interest rate swaps (including interest rate swaps in our Agency IO portfolio) whereby we receivefloating rate payments in exchange for fixed rate payments as of December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015Swap Maturities NotionalAmount Weighted AverageFixed Interest Rate Weighted Average Variable InterestRate NotionalAmount Weighted AverageFixedInterest Rate Weighted Average Variable InterestRate2017 $215,000 0.83% 0.74% $215,000 0.83% 0.39%2019 10,000 2.25% 0.97% 10,000 2.25% 0.59%Total $225,000 0.90% 0.75% $225,000 0.90% 0.40%F-39Table of ContentsThe following table presents information about our interest rate swaps in our Agency IO portfolio whereby we receive fixed rate payments in exchange forfloating rate payments as of December 31, 2016 and December 31, 2015 , respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015Swap Maturities Notional Amount Weighted Average Fixed Interest Rate Weighted Average Variable InterestRate Notional Amount Weighted AverageFixed Interest Rate Weighted AverageVariable InterestRate2026 $5,000 1.80% 1.00% $— — —Total $5,000 1.80% 1.00% $— — —The use of derivatives exposes the Company to counterparty credit risks in the event of a default by a counterparty. If a counterparty defaults under theapplicable derivative agreement, the Company may be unable to collect payments to which it is entitled under its derivative agreements, and may have difficultycollecting the assets it pledged as collateral against such derivatives. The Company currently has in place with all counterparties bi-lateral margin agreementsrequiring a party to post collateral to the Company for any valuation deficit. This arrangement is intended to limit the Company’s exposure to losses in the event ofa counterparty default.The Company is required to pledge assets under a bi-lateral margin arrangement, including either cash or Agency RMBS, as collateral for its interest rateswaps, futures contracts and TBAs, whose collateral requirements vary by counterparty and change over time based on the market value, notional amount, andremaining term of the agreement. In the event the Company is unable to meet a margin call under one of its agreements, thereby causing an event of default ortriggering an early termination event under one of its agreements, the counterparty to such agreement may have the option to terminate all of such counterparty’soutstanding transactions with the Company. In addition, under this scenario, any close-out amount due to the counterparty upon termination of the counterparty’stransactions would be immediately payable by the Company pursuant to the applicable agreement. The Company believes it was in compliance with all marginrequirements under its agreements as of December 31, 2016 and 2015 . The Company had $6.1 million and $6.3 million of restricted cash related to margin postedfor its agreements as of December 31, 2016 and 2015 , respectively. The restricted cash held by third parties is included in receivables and other assets in theaccompanying consolidated balance sheets.F-40Table of Contents11.Financing Arrangements, Portfolio InvestmentsThe Company entered into repurchase agreements with third party financial institutions to finance its investment portfolio. These financing arrangementsare short-term borrowings that bear interest rates typically based on a spread to LIBOR, and are secured by the securities which they finance. At December 31,2016 , the Company had repurchase agreements with an outstanding balance of $773.1 million and a weighted average interest rate of 1.92% . At December 31,2015 , the Company had repurchase agreements and FHLBI advances with an outstanding balance of $577.4 million and a weighted average interest rate of 0.71%.The following table presents detailed information about the Company’s borrowings under financing arrangements and associated assets pledged ascollateral at December 31, 2016 and December 31, 2015 (dollar amounts in thousands): 2016 2015Assets Pledged as CollateralOutstandingBorrowings Fair Value ofCollateralPledged AmortizedCostOf CollateralPledged OutstandingBorrowings (1) Fair Value ofCollateralPledged AmortizedCostOf CollateralPledgedAgency ARMs$102,088 $109,552 $110,903 $227,609 $141,585 $143,754Agency Fixed Rate289,619 308,411 318,544 261,644 374,691 386,853Agency IOs/U.S. Treasury Securities60,862 82,153 93,819 88,160 123,407 139,218Non-Agency113,749 150,944 149,969 — — —CMBS (2)206,824 294,083 216,092 — — —Balance at end of the period$773,142 $945,143 $889,327 $577,413 $639,683 $669,825(1)Includes FHLBI advances amounting to $121.0 million as of December 31, 2015.(2)Includes first loss tranche PO securities with a fair value amounting to $254.6 million included in the Consolidated K-Series as of December 31, 2016.As of December 31, 2016 and 2015 , the average days to maturity for all financing arrangements,including FHLBI advances, were 12 days and 27 days ,respectively. The Company’s accrued interest payable on outstanding financing arrangements, including FHLBI advances, at December 31, 2016 and 2015amounts to $1.1 million and $0.3 million , respectively, and is included in accrued expenses and other liabilities on the Company’s consolidated balance sheets.The following table presents contractual maturity information about the Company’s outstanding financing arrangements, including FHLBI advances, atDecember 31, 2016 and 2015 (dollar amounts in thousands):Contractual MaturityDecember 31, 2016 December 31, 2015Within 30 days$729,134 $468,402Over 30 days to 90 days44,008 85,423Over 90 days— 23,588Total$773,142 $577,413As of December 31, 2016 , the outstanding balance under our financing arrangements was funded at an advance rate of 84.6% that implies an averagehaircut of 15.4% . As of December 31, 2016 , the weighted average “haircut” related to our repurchase agreement financing for our Agency RMBS (excludingAgency IOs), non-Agency RMBS, CMBS and Agency IOs was approximately 5% , 25% , 27% and 25% , respectively.In the event we are unable to obtain sufficient short-term financing through financing arrangements or our lenders start to require additional collateral, wemay have to liquidate our investment securities at a disadvantageous time, which could result in losses. Any losses resulting from the disposition of our investmentsecurities in this manner could have a material adverse effect on our operating results and net profitability. At December 31, 2016 and December 31, 2015 , theCompany had financing arrangements with eight and six counterparties, respectively. At December 31, 2016 , the Company's only exposure where the amount atrisk was in excess of 5% of the Company's stockholders' equity was to Deutsche Bank AG, London Branch at 5.1% . At December 31, 2015 , we had nocounterparties where the amount at risk was in excess of 5% of the Company's stockholders’ equity. The amount at risk is defined as the fair value of securitiespledged as collateral to the financing arrangement in excess of the financing arrangement liability.F-41Table of ContentsAs of December 31, 2016 , our available liquid assets include unrestricted cash and cash equivalents, overnight deposits and unencumbered securities thatwe believe may be posted as margin. The Company had $83.6 million in cash and cash equivalents, $35.6 million in overnight deposits in our Agency IO portfolioincluded in restricted cash and $85.1 million in unencumbered investment securities to meet additional haircuts or market valuation requirements. Theunencumbered securities that we believe may be posted as margin as of December 31, 2016 included $29.1 million of Agency RMBS, $43.6 million of CMBS and$12.3 million of non-Agency RMBS. The cash and unencumbered securities, which collectively represent 26.4% of our financing arrangements, are liquid andcould be monetized to pay down or collateralize a liability immediately.12.Financing Arrangements, Residential Mortgage LoansThe Company has a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch with a maximum aggregate committed principalamount of $200.0 million and a maximum uncommitted principal amount of $50.0 million to fund distressed residential mortgage loans, expiring on December 13,2017 . At December 31, 2015 , the master repurchase agreement provided for an aggregate principal committed amount of up to $250.0 million . The outstandingbalance on this master repurchase agreement as of December 31, 2016 and December 31, 2015 amounts to approximately $193.8 million and $214.5 million ,respectively, bearing interest at one-month LIBOR plus 2.50% ( 3.26% and 2.92% at December 31, 2016 and December 31, 2015 , respectively).In addition, the Company has entered into a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch in an aggregate principalamount of up to $100.0 million , to fund the future purchase of residential mortgage loans. The outstanding balance on the master repurchase agreement will bearinterest at one-month LIBOR plus 4.0% and expires on May 25, 2017. There was no outstanding balance on this master repurchase agreement as of December 31,2016 and December 31, 2015 .During the terms of the master repurchase agreements, proceeds from the residential mortgage loans, including the Company's distressed residentialmortgage loans, will be applied to pay any price differential and to reduce the aggregate repurchase price of the collateral. The financings under the masterrepurchase agreements are subject to margin calls to the extent the market value of the residential mortgage loans falls below specified levels and repurchase maybe accelerated upon an event of default under the master repurchase agreements. The master repurchase agreements contain various covenants, including amongother things, the maintenance of certain amounts of net worth, liquidity and leverage ratios. The Company is in compliance with such covenants as of February 28,2017 .13.Residential Collateralized Debt ObligationsThe Company’s Residential CDOs, which are recorded as liabilities on the Company’s consolidated balance sheets, are secured by ARM loans pledged ascollateral, which are recorded as assets of the Company. As of December 31, 2016 and 2015 , the Company had Residential CDOs outstanding of $91.7 millionand $116.7 million , respectively. As of December 31, 2016 and 2015 , the current weighted average interest rate on these CDOs was 1.37% and 0.8% ,respectively. The Residential CDOs are collateralized by ARM loans with a principal balance of $98.3 million and $122.5 million at December 31, 2016 and 2015 ,respectively. The Company retained the owner trust certificates, or residual interest for three securitizations, and, as of December 31, 2016 and 2015 , had a netinvestment in the residential securitization trusts of $4.4 million and $4.4 million , respectively.F-42Table of Contents14.Subordinated DebenturesSubordinated debentures are trust preferred securities that are fully guaranteed by the Company with respect to distributions and amounts payable uponliquidation, redemption or repayment. The following table summarizes the key details of the Company’s subordinated debentures as of December 31, 2016 andDecember 31, 2015 (dollar amounts in thousands): NYM Preferred Trust I NYM Preferred Trust IIPrincipal value of trust preferred securities$25,000 $20,000Interest RateThree month LIBOR plus 3.75%,resetting quarterly Three month LIBOR plus 3.95%,resetting quarterlyScheduled maturityMarch 30, 2035 October 30, 2035As of February 28, 2017 the Company has not been notified, and is not aware, of any event of default under the covenants for the subordinateddebentures.15.Commitments and ContingenciesLoans Sold to Third Parties – In the normal course of business, the Company is obligated to repurchase loans based on violations of representations andwarranties in its loan sale agreements. The Company did not repurchase any loans during the three years ended December 31, 2016 .Outstanding Litigation – The Company is at times subject to various legal proceedings arising in the ordinary course of business. As of December 31,2016 , the Company does not believe that any of its current legal proceedings, individually or in the aggregate, will have a material adverse effect on itsoperations, financial condition or cash flows.Leases – As of December 31, 2016 , the Company has entered into multi-year lease agreements for office space accounted for as non-cancelable operatingleases. Total property lease expense on these leases for the years ended December 31, 2016 , 2015 , and 2014 amounted to $0.3 million , $0.2 million , and $0.2million , respectively. The leases are secured by cash deposits in the amount of $0.2 million .As of December 31, 2016 , obligations under non-cancelable operating leases are as follows (dollar amounts in thousands):Year Ending December 31,Total2017$3372018348201935320202982021217Thereafter435 $1,988F-43Table of Contents16.Fair Value of Financial InstrumentsThe Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. Iflisted prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves.A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement. The three levels of valuation hierarchy are defined as follows:Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable forthe asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the generalclassification of such instruments pursuant to the valuation hierarchy.a.Investment Securities Available for Sale – Fair value for the investment securities in our portfolio, except the CMBS held in securitization trusts, arevalued using a third-party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. Thedealers will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as wellas underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or ageof the security. If quoted prices for a security are not reasonably available from a dealer, the security will be re-classified as a Level 3 security and, asa result, management will determine the fair value based on characteristics of the security that the Company receives from the issuer and availablemarket information. Management reviews all prices used in determining fair value to ensure they represent current market conditions. This reviewincludes surveying similar market transactions, comparisons to interest pricing models as well as offerings of like securities by dealers. TheCompany's investment securities, except the CMBS held in securitization trusts, are valued based upon readily observable market parameters and areclassified as Level 1 or 2 fair values.The Company’s CMBS held in securitization trusts are comprised of securities for which there are not substantially similar securities that tradefrequently. The Company classifies these securities as Level 3 fair values. Fair value of the Company’s CMBS investments held in securitizationtrusts is based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by marketparticipants. The significant unobservable inputs used in the measurement of these investments are projected losses of certain identified loans withinthe pool of loans and a discount rate. The discount rate used in determining fair value incorporates default rate, loss severity and current marketinterest rates. The discount rate ranges from 4.5% to 10.5% . Significant increases or decreases in these inputs would result in a significantly lower orhigher fair value measurement.b.Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are carried at fair value as a result of a fair valueelection and classified as Level 3 fair values. Effective January 1, 2016, the Company determines the fair value of multi-family loans held insecuritization trusts based on the fair value of its Multi-Family CDOs and its retained interests from these securitizations (eliminated in consolidationin accordance with U.S. GAAP), as the fair value of these instruments is more observable. Prior to January 1, 2016, fair value was based on aninternal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significantunobservable inputs used in the measurement of these investments are discount rates. The discount rate used in determining fair value incorporatesdefault rate, loss severity and current market interest rates.c.Derivative Instruments – The fair value of interest rate swaps, swaptions, options and TBAs are based on dealer quotes. The fair value of futures isbased on exchange-traded prices. The Company’s derivatives are classified as Level 1 or Level 2 fair values.F-44Table of Contentsd.Multi-Family CDOs – Multi-Family collateralized debt obligations are recorded at fair value and classified as Level 3 fair values. The fair value ofMulti-Family CDOs is determined using a third party pricing service or are based on quoted prices provided by dealers who make markets in similarfinancial instruments. The dealers will consider contractual cash payments and yields expected by market participants. Dealers also incorporatecommon market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlyingcharacteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of thesecurity. The Company’s Multi-Family CDOs are classified as Level 3 fair values.e.Investments in Unconsolidated Entities – Fair value for investments in unconsolidated entities is determined based on a valuation model usingassumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the unconsolidatedentities and a discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 in the fairvalue hierarchy.Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and thepricing for certain products becomes more transparent, the Company continues to refine its valuation methodologies. The methods described above may produce afair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuationmethods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certainfinancial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of each reporting date,which may include periods of market dislocation, during which time price transparency may be reduced. This condition could cause the Company’s financialinstruments to be reclassified from Level 2 to Level 3 in future periods.F-45Table of ContentsThe following table presents the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2016 and 2015 ,respectively, on the Company’s consolidated balance sheets (dollar amounts in thousands): Measured at Fair Value on a Recurring Basis at December 31, 2016 December 31, 2015 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 TotalAssets carried at fair value Investment securitiesavailable for sale: Agency RMBS$— $526,363 $— $526,363 $— $713,116 $— $713,116Non-Agency RMBS— 163,284 — 163,284 — 1,567 — 1,567U.S. Treasury Securities2,887 — — 2,887 10,037 — — 10,037CMBS— 82,545 43,897 126,442 — — 40,734 40,734Multi-family loans held insecuritization trusts— — 6,939,844 6,939,844 — — 7,105,336 7,105,336Derivative Assets: TBA Securities— 148,139 — 148,139 — 226,929 — 226,929Options on U.S.Treasury futures— — — — 15 — — 15Interest rate swap futures444 — — 444 706 — — 706Interest rate swaps— 108 — 108 — 304 — 304Swaptions— 431 — 431 — 821 — 821Eurodollar Futures1,175 — — 1,175 — — — —Investments inunconsolidated entities— — 60,332 60,332 — — 67,571 67,571Total$4,506 $920,870 $7,044,073 $7,969,449 $10,758 $942,737 $7,213,641 $8,167,136Liabilities carried at fairvalue Multi-family collateralizeddebt obligations$— $— $6,624,896 $6,624,896 $— $— $6,818,901 $6,818,901Derivative liabilities: US Treasury Futures107 — — 107 — — — —Interest rate swaps— 391 — 391 — 258 — 258Eurodollar futures— — — — 1,242 — — 1,242Total$107 $391 $6,624,896 $6,625,394 $1,242 $258 $6,818,901 $6,820,401F-46Table of ContentsThe following table details changes in valuation for the Level 3 assets for the years ended December 31, 2016 , 2015 and 2014 , respectively (amounts inthousands):Level 3 Assets: Years Ended December 31, 2016 2015 2014Balance at beginning of period$7,213,641 $8,442,604 $8,209,702Total gains (realized/unrealized) Included in earnings (1)(19,460) (90,662) 384,826Included in other comprehensive income (loss)224 (360) (5,863)Sales (2)— (1,075,529) (93,578)Transfers in (3)52,176 — —Transfers out (4)(56,756) — —Contributions3,200 26,461 33,075Paydowns(141,263) (85,979) (80,451)Distributions(7,689) (2,894) (1,712)Sale of real estate owned— — (3,395)Balance at the end of period$7,044,073 $7,213,641 $8,442,604(1)Amounts included in interest income from multi-family loans held in securitization trusts, unrealized gain on multi-family loans and debt held insecuritization trusts, realized gain (loss) on investment securities and related hedges, gain on de-consolidation, and other income.(2)In February 2015, the Company sold a first loss PO security from one of the Company’s Consolidated K-Series securitizations obtaining total proceeds ofapproximately $44.3 million and realizing a gain of approximately $1.5 million . The sale resulted in a de-consolidation of $1.1 billion in Multi-Familyloans held in a securitization trust and $1.0 billion in Multi-Family CDOs.(3)Transfers into Level 3 are investments in unconsolidated entities held by RiverBanc and RBMI for which the Company accounts under the equity methodof accounting with a fair value election. These transfers in are a result of the Company’s acquisition of the outstanding membership interests inRiverBanc and RBMI that were not previously owned by the Company on May 16, 2016, which resulted in consolidation of these entities into theCompany's financial statements. (s ee Note 21 ).(4)Transfers out of Level 3 are the Company’s previously held membership interests in RBMI and RBDHC that were accounted for under the equity methodof accounting with a fair value election. These transfers out are a result of the Company’s acquisition of the outstanding membership interests in RBMIand RBDHC that were not previously owned by the Company on May 16, 2016, which resulted in consolidation of these entities into the Company'sfinancial statements. ( see Note 21 ).F-47Table of ContentsThe following table details changes in valuation for the Level 3 liabilities for the years ended December 31, 2016 , 2015 and 2014 , respectively (amountsin thousands):Level 3 Liabilities: Years Ended December 31, 2016 2015 2014Balance at beginning of period$6,818,901 $8,048,053 $7,871,020Total gains (realized/unrealized) Included in earnings (1)(57,687) (133,245) 260,872Included in other comprehensive income— — —Purchases/(Sales) (2)— (1,009,942) —Paydowns(136,318) (85,965) (83,839)Balance at the end of period$6,624,896 $6,818,901 $8,048,053(1)Amounts included in interest expense on multi-family collateralized debt obligations, realized gain (loss) on investment securities and related hedges, netand unrealized gain on multi-family loans and debt held in securitization trusts, net.(2)In February 2015, the Company sold a first loss PO security from one of the Company’s Consolidated K-Series securitizations obtaining total proceeds ofapproximately $44.3 million and realizing a gain of approximately $1.5 million . The sale resulted in a de-consolidation of $1.1 billion in Multi-Familyloans held in a securitization trust and $1.0 billion in Multi-Family CDOs.The following table details the changes in unrealized gains (losses) included in earnings for our Level 3 assets and liabilities for the years endedDecember 31, 2016 , 2015 and 2014 , respectively (dollar amounts in thousands): Years Ended December 31, 2016 2015 2014Change in unrealized gains (losses) – assets$10,794 $(61,957) $390,371Change in unrealized (losses) gains – liabilities(7,762) 74,325 (333,440)Net change in unrealized gains included in earnings for assets and liabilities$3,032 $12,368 $56,931The following table presents assets measured at fair value on a non-recurring basis as of December 31, 2016 and 2015 , respectively, on the Company'sconsolidated balance sheets (dollar amounts in thousands): Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2016 December 31, 2015 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 TotalResidential Mortgage loans held insecuritization trusts – impaired loans (net)$— $— $9,050 $9,050 $— $— $8,976 $8,976Real estate owned held in residentialsecuritization trusts— — 150 150 — — 411 411The following table presents gains (losses) incurred for assets measured at fair value on a non-recurring basis for the years ended December 31, 2016 ,2015 and 2014 , respectively, on the Company’s consolidated statements of operations (dollar amounts in thousands): Years Ended December 31, 2016 2015 2014Residential mortgage loans held in securitization trusts – impaired loans (net)$(482) $(1,261) $(998)Real estate owned held in residential securitization trusts(130) 100 (103)F-48Table of ContentsResidential Mortgage Loans Held in Securitization Trusts – Impaired Loans (net) – Impaired residential mortgage loans held in securitization trusts arerecorded at amortized cost less specific loan loss reserves. Impaired loan value is based on management’s estimate of the net realizable value taking intoconsideration local market conditions of the property, updated appraisal values of the property and estimated expenses required to remediate the impaired loan.Real Estate Owned Held in Residential Securitization Trusts – Real estate owned held in the residential securitization trusts are recorded at net realizablevalue. Any subsequent adjustment will result in the reduction in carrying value with the corresponding amount charged to earnings. Net realizable value is based onan estimate of disposal taking into consideration local market conditions of the property, updated appraisal values of the property and estimated expenses requiredto sell the property.The following table presents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2016 and 2015 ,respectively (dollar amounts in thousands): December 31, 2016 December 31, 2015 Fair ValueHierarchyLevel CarryingValue EstimatedFair Value CarryingValue EstimatedFair ValueFinancial Assets: Cash and cash equivalentsLevel 1 $83,554 $83,554 $61,959 $61,959Investment securities available for sale (1)Level 1, 2 or 3 818,976 818,976 765,454 765,454Residential mortgage loans held in securitization trusts (net)Level 3 95,144 88,718 119,921 109,120Distressed residential mortgage loans (net) (2)Level 3 503,094 504,915 558,989 564,310Multi-family loans held in securitization trusts, at fair valueLevel 3 6,939,844 6,939,844 7,105,336 7,105,336Derivative assetsLevel 1 or 2 150,296 150,296 228,775 228,775Mortgage loans held for sale (net) (3)Level 3 7,847 7,959 5,471 5,557Mortgage loans held for investment (3)Level 3 19,529 19,641 2,706 2,846Mezzanine loan and preferred equity investments (4)Level 3 100,150 101,408 44,151 44,540Investments in unconsolidated entities (5)Level 3 79,259 79,390 87,662 87,558Financial Liabilities: Financing arrangements, portfolio investmentsLevel 2 $773,142 $773,142 $577,413 $577,413Financing arrangements, distressed residential mortgage loansLevel 2 192,419 192,419 212,155 212,155Residential collateralized debt obligationsLevel 3 91,663 85,568 116,710 105,606Multi-family collateralized debt obligations, at fair valueLevel 3 6,624,896 6,624,896 6,818,901 6,818,901Securitized debtLevel 3 158,867 163,884 116,541 123,776Derivative liabilitiesLevel 1 or 2 498 498 1,500 1,500Payable for securities purchasedLevel 1 148,015 148,015 227,969 227,969Subordinated debenturesLevel 3 45,000 43,132 45,000 42,731(1)Includes $43.9 million and $40.7 million of investment securities for sale held in securitization trusts as of December 31, 2016 and December 31,2015 , respectively.(2)Includes distressed residential mortgage loans held in securitization trusts with a carrying value amounting to approximately $195.3 million and $114.2million at December 31, 2016 and December 31, 2015 , respectively and distressed residential mortgage loans with a carrying value amounting toapproximately $307.7 million and $444.8 million at December 31, 2016 and December 31, 2015 , respectively.(3)Included in receivables and other assets in the accompanying consolidated balance sheets.(4)Includes mezzanine loan and preferred equity investments accounted for as loans (see Note 8 ).(5)Includes investments in unconsolidated entities accounted for under the fair value option with a carrying value of $60.3 million and $67.6 million atDecember 31, 2016 and December 31, 2015, respectively.F-49Table of ContentsIn addition to the methodology to determine the fair value of the Company’s financial assets and liabilities reported at fair value on a recurring basis andnon-recurring basis, as previously described, the following methods and assumptions were used by the Company in arriving at the fair value of the Company’sother financial instruments in the table immediately above:a.Cash and cash equivalents – Estimated fair value approximates the carrying value of such assets.b.Residential mortgage loans held in securitization trusts (net) – Residential mortgage loans held in securitization trusts are recorded at amortized cost.Fair value is based on an internal valuation model that considers the aggregated characteristics of groups of loans such as, but not limited to,collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated usingthe estimated market prices for similar types of loans.c.Distressed residential mortgage loans (net) – Fair value is estimated using pricing models taking into consideration current interest rates, loanamount, payment status and property type, and forecasts of future interest rates, home prices and property values, prepayment speeds, default, lossseverities, and actual purchases and sales of similar loans.d.Receivable for securities sold – Estimated fair value approximates the carrying value of such assets.e.Mortgage loans held for sale (net) - The fair value of mortgage loans held for sale (net) are estimated by the Company based on the price that wouldbe received if the loans were sold as whole loans taking into consideration the aggregated characteristics of the loans such as, but not limited to,collateral type, index, interest rate, margin, length of fixed interest rate period, life time cap, periodic cap, underwriting standards, age and credit.f.Mezzanine loan and preferred equity investments – Estimated fair value is determined by both market comparable pricing and discounted cash flows.The discounted cash flows are based on the underlying contractual cash flows and estimated changes in market yields. The fair value also reflectsconsideration of changes in credit risk since the origination or time of initial investment.g.Financing arrangements – The fair value of these financing arrangements approximates cost as they are short term in nature.h.Residential collateralized debt obligations – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparableobligations.i.Securitized debt – The fair value of securitized debt is based on discounted cash flows using management’s estimate for market yields.j.Payable for securities purchased – Estimated fair value approximates the carrying value of such liabilities.k.Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate formarket yields.F-50Table of Contents17.Stockholders’ Equity(a)Dividends on Preferred StockThe Company had 200,000,000 authorized shares of preferred stock, par value $0.01 per share, with 6,600,000 shares issued and outstanding as ofDecember 31, 2016 and 2015 .On June 4, 2013, the Company issued 3,000,000 shares of 7.75% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”), with apar value of $0.01 per share and a liquidation preference of $25 per share, in an underwritten public offering, for net proceeds of approximately $72.4 million ,after deducting underwriting discounts and offering expenses. As of December 31, 2016 and December 31, 2015 , there were 6,000,000 shares of Series BPreferred Stock authorized. The Series B Preferred Stock is entitled to receive a dividend at a rate of 7.75% per year on the $25 liquidation preference and is seniorto the common stock with respect to distributions upon liquidation, dissolution or winding up.On April 22, 2015, the Company issued 3,600,000 shares of 7.875% Series C Cumulative Redeemable Preferred Stock (“Series C Preferred Stock”), witha par value of $0.01 per share and a liquidation preference of $25 per share, in an underwritten public offering, for net proceeds of approximately $86.9 million ,after deducting underwriting discounts and offering expenses. As of December 31, 2016 and December 31, 2015 , there were 4,140,000 shares of Series CPreferred Stock authorized. The Series C Preferred Stock is entitled to receive a dividend at a rate of 7.875% per year on the $25 liquidation preference and issenior to the common stock with respect to dividends and distribution of assets upon liquidation, dissolution or winding up.The Series B Preferred Stock and Series C Preferred Stock generally do not have any voting rights, subject to an exception in the event the Company failsto pay dividends on such stock for six or more quarterly periods (whether or not consecutive). Under such circumstances, holders of the Series B Preferred Stockand Series C Preferred Stock, voting together as a single class with the holders of all other classes or series of our preferred stock upon which like voting rightshave been conferred and are exercisable and which are entitled to vote as a class with the Series B Preferred Stock and Series C Preferred Stock, will be entitled tovote to elect two additional directors to the Company’s Board of Directors (the “Board”) until all unpaid dividends have been paid or declared and set apart forpayment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock and Series C Preferred Stock cannot be made without theaffirmative vote of holders of at least two-thirds of the outstanding shares of Series B Preferred Stock or Series C Preferred Stock, respectively.Neither the Series B Preferred Stock and the Series C Preferred Stock are redeemable by the Company prior to June 4, 2018, in the case of the Series BPreferred Stock, or April 22, 2020, in the case of the Series C Preferred Stock, except under circumstances intended to preserve the Company’s qualification as aREIT and except upon the occurrence of a Change of Control (as defined in the Articles Supplementary designating the Series B Preferred Stock and Series CPreferred Stock, respectively). On and after June 4, 2018 and April 22, 2020, the Company may, at its option, redeem the Series B Preferred Stock and Series CPreferred stock, respectively, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $25.00 per share, plus any accumulatedand unpaid dividends.In addition, upon the occurrence of a Change of Control, the Company may, at its option, redeem the Series B Preferred Stock and Series C PreferredStock, in whole or in part, within 120 days after the first date, on which such Change of Control occurred, for cash at a redemption price of $25.00 per share, plusany accumulated and unpaid dividends.Each of the Series B Preferred Stock and Series C Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption andwill remain outstanding indefinitely unless repurchased or redeemed by the Company or converted into the Company’s common stock in connection with a Changeof Control.Upon the occurrence of a Change of Control, each holder of Series B Preferred Stock and Series C Preferred Stock will have the right (unless theCompany has exercised its right to redeem the Series B Preferred Stock or Series C Preferred Stock, respectively) to convert some or all of the Series B PreferredStock or Series C Preferred Stock held by such holder into a number of shares of our common stock per share of Series B Preferred Stock or Series C PreferredStock determined by a formula, in each case, on the terms and subject to the conditions described in the applicable Articles Supplementary for such series.F-51Table of ContentsFrom the time of original issuance of the Series B Preferred Stock and the Series C Preferred Stock through December 31, 2016 , the Company hasdeclared and paid all required quarterly dividends on such series of stock. The following table presents the relevant dates with respect to such quarterly cashdividends on the Series B Preferred Stock commencing January 1, 2014 through December 31, 2016 and Series C Preferred Stock from its respective time oforiginal issuance through December 31, 2016 : Series B Preferred Stock Series C Preferred Stock DeclarationDate Record Date Payment Date Cash Dividend Per Share Declaration Date Record Date Payment Date CashDividendPer Share December 15,2016 January 1, 2017 January 15, 2017 $0.484375 December 15, 2016 January 1, 2017 January 15,2017 $0.4921875 September 15,2016 October 1, 2016 October 15,2016 0.484375 September 15, 2016 October 1, 2016 October 15,2016 0.4921875 June 16, 2016 July 1, 2016 July 15, 2016 0.484375 June 16, 2016 July 1, 2016 July 15, 2016 0.4921875 March 18, 2016 April 1, 2016 April 15, 2016 0.484375 March 18, 2016 April 1, 2016 April 15, 2016 0.4921875 December 16,2015 January 1, 2016 January 15, 2016 0.484375 December 16, 2015 January 1, 2016 January 15,2016 0.4921875 September 18,2015 October 1, 2015 October 15,2015 0.484375 September 18, 2015 October 1, 2015 October 15,2015 0.4921875 June 18, 2015 July 1, 2015 July 15, 2015 0.484375 June 18, 2015 July 1, 2015 July 15, 2015 0.4539100(1) March 18, 2015 April 1, 2015 April 15, 2015 0.484375 — — — — December 12,2014 January 1, 2015 January 15, 2015 0.484375 — — — — September 18,2014 October 1, 2014 October 15,2014 0.484375 — — — — June 18, 2014 July 1, 2014 July 15, 2014 0.484375 — — — — March 13, 2014 April 1, 2014 April 15, 2014 0.484375 — — — — (1)Cash dividend for the partial quarterly period that began on April 22, 2015 and ended on July 14, 2015.F-52Table of Contents(b)Dividends on Common StockThe following table presents cash dividends declared by the Company on its common stock with respect to each of the quarterly periods commencingJanuary 1, 2014 and ended December 31, 2016 :Period Declaration Date Record Date Payment Date CashDividendPer ShareFourth Quarter 2016 December 15, 2016 December 27, 2016 January 26, 2017 $0.24Third Quarter 2016 September 15, 2016 September 26, 2016 October 28, 2016 0.24Second Quarter 2016 June 16, 2016 June 27, 2016 July 25, 2016 0.24First Quarter 2016 March 18, 2016 March 28, 2016 April 25, 2016 0.24Fourth Quarter 2015 December 16, 2015 December 28, 2015 January 25, 2016 0.24Third Quarter 2015 September 18, 2015 September 28, 2015 October 26, 2015 0.24Second Quarter 2015 June 18, 2015 June 29, 2015 July 27, 2015 0.27First Quarter 2015 March 18, 2015 March 30, 2015 April 27, 2015 0.27Fourth Quarter 2014 December 12, 2014 December 22, 2014 January 26, 2015 0.27Third Quarter 2014 September 18, 2014 September 29, 2014 October 27, 2014 0.27Second Quarter 2014 June 18, 2014 June 30, 2014 July 25, 2014 0.27First Quarter 2014 March 13, 2014 March 24, 2014 April 25, 2014 0.27During 2016 , dividends for our common stock were $0.96 per share. For tax reporting purposes, the 2016 dividends were classified as ordinary incomeand return of capital in the amounts of $0.44 and $0.52 per share, respectively. During 2015 , dividends for our common stock were $1.02 per share. For taxreporting purposes, the 2015 dividends were classified as ordinary income, capital gain distribution and return of capital in the amounts of $0.40 , $0.07 and $0.55 ,respectively, per share. During 2014 , dividends for our common stock were $1.08 per share. For tax reporting purposes, the 2014 dividends were classified asordinary income, capital gain distribution and return of capital in the amounts of $0.61 , $0.35 and $0.12 , respectively, per share.(c)Public Offering of Common StockThe table below presents information with respect to shares of the Company’s common stock issued through underwritten public offerings during thethree years ended December 31, 2016 (amounts in thousands):Share Issue Date Shares Issued Net Proceeds (1)November 26, 2014 14,410 $110,784April 7, 2014 14,950 $109,916January 10, 2014 11,500 $75,846(1) Proceeds are net of underwriting costs and offering expenses paid by the Company.(d)Equity Distribution AgreementsOn March 20, 2015, the Company entered into separate equity distribution agreements with each of JMP Securities LLC (“JMP”) and MLV & Co. LLC(“MLV”), pursuant to which the Company may sell up to $75,000,000 of aggregate value of (i) shares of the Company’s common stock, par value $0.01 per and(ii) shares of the Company’s Series B Preferred Stock (the “Series B Preferred Stock” and, together with the Common Stock, the “Offered Securities”), from timeto time. On August 25, 2016, the Company entered into an amendment to the equity distribution agreement with JMP (as amended, the “JMP Agreement”) and aseparate equity distribution agreement (the “Ladenburg Equity Distribution Agreement” and, together with the JMP Agreement, the “Equity DistributionAgreements”) with Ladenburg Thalmann & Co. Inc. (“Ladenburg” and, together with JMP, the “Agents”), pursuant to which the Company may sell the OfferedSecurities remaining under the existing ATM Program through the Agents. The Company has no obligation to sell any of the shares under the Equity DistributionAgreements and may at any time suspend solicitations and offers under the Equity Distribution Agreements.On August 19, 2016, in anticipation of the Company’s execution of the Equity Distribution Agreements described above, the Company delivered to MLVnotice of termination of the equity distribution agreement, dated as of March 20, 2015, by and between the Company and MLV, which termination becameeffective on August 22, 2016.F-53Table of ContentsDuring the twelve months ended December 31, 2016 , the Company issued 1,905,206 shares under the Equity Distribution Agreements, at an averagesales price of $6.87 per share, resulting in total net proceeds to the Company of $12.8 million , after deducting the placement fees. As of December 31, 2016 ,approximately $39.8 million of securities remains available for issuance under the Equity Distribution Agreements. During the twelve months endedDecember 31, 2015 , the Company issued 2,789,439 shares of its common stock under these Equity Distribution Agreements, at an average sales price of $7.91per share, resulting in total net proceeds to the Company of $21.6 million , after deducting the placement fees.On March 20, 2015, in connection with the Company’s execution of the Equity Distribution Agreements described above, the Company delivered to JMPa notice of termination of the Equity Distribution Agreement dated June 11, 2012 (the “Prior Equity Distribution Agreement”), which termination became effectiveMarch 23, 2015. The Prior Equity Distribution Agreement provided for the sale by the Company of common stock having a maximum aggregate value of up to$25,000,000 from time to time through JMP, as the Company’s agent. During the twelve months ended December 31, 2015 , the Company issued 1,326,676 sharesunder the Prior Equity Distribution Agreement, at an average sales price of $7.89 per share resulting in total net proceeds to the Company of $10.3 million , afterdeducting the placement fees. During the term of the Prior Equity Distribution Agreement, the Company sold a total of 2,153,989 shares of its common stock at anaverage price of $7.63 per share pursuant to the Prior Distribution Agreement, resulting in aggregate net proceeds to the Company of approximately $16.1 million .18.Earnings Per ShareThe Company calculates basic net income per share by dividing net income for the period by weighted-average shares of common stock outstanding forthat period. Diluted net income per share takes into account the effect of dilutive instruments, such as convertible preferred stock, stock options and unvestedrestricted or performance stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to theweighted-average number of shares outstanding. There were no dilutive instruments for the years ended December 31, 2016 , 2015 and 2014 .The following table presents the computation of basic and dilutive net income per share for the periods indicated (amounts in thousands, except per shareamounts): For the Years Ended December 31, 2016 2015 2014Numerator : Net income attributable to Company's common stockholders – Basic$54,651 $67,023 $130,379Net income attributable to Company's common stockholders– Dilutive$54,651 $67,023 $130,379Denominator: Weighted average basic and dilutive shares outstanding109,594 108,399 87,867EPS: Basic EPS$0.50 $0.62 $1.48Dilutive EPS$0.50 $0.62 $1.48F-54Table of Contents19.Stock Incentive PlanPursuant to the Company’s 2010 Stock Incentive Plan (the “2010 Plan”), as approved by the Company's stockholders, eligible employees, officers anddirectors of the Company have the opportunity to acquire the Company's common stock through the award of common stock, restricted common stock,performance share awards and other equity awards under the 2010 Plan. The maximum number of shares that may be issued under the 2010 Plan is 1,190,000 .Of the common stock authorized at December 31, 2016 and December 31, 2015 , 326,663 shares and 551,609 shares, respectively, were reserved forissuance under the 2010 Plan. The Company's non-employee directors have been issued 207,014 and 146,935 shares under the 2010 Plan as of December 31, 2016and December 31, 2015 , respectively. The Company’s employees have been issued 562,280 and 401,827 shares under the 2010 Plan as of December 31, 2016 andDecember 31, 2015 , respectively. At December 31, 2016 and December 31, 2015 , there were 319,058 and 280,457 shares of non-vested restricted stockoutstanding under the 2010 Plan.(a)Restricted Common Stock AwardsDuring the years ended December 31, 2016 , 2015 and 2014 , the Company recognized non-cash compensation expense of $1.0 million , $0.9 million and$0.4 million , respectively. Dividends are paid on all restricted stock issued, whether those shares have vested or not. In general, non-vested restricted stock isforfeited upon the recipient's termination of employment. There were no forfeitures during the years ended December 31, 2016 , 2015 and 2014 .A summary of the activity of the Company's non-vested restricted stock under the 2010 Plan for the years ended December 31, 2016 , 2015 and 2014 ,respectively, is presented below: 2016 2015 2014 Number ofNon-vestedRestrictedShares WeightedAverage PerShareGrant DateFair Value (1) Number ofNon-vestedRestrictedShares WeightedAverage PerShareGrant DateFair Value (1) Number ofNon-vestedRestrictedShares WeightedAverage PerShareGrant DateFair Value (1)Non-vested shares at January 1280,457 $7.63 162,171 $7.26 94,873 $7.01Granted160,453 5.11 185,650 7.79 104,517 7.39Vested(121,852) 7.54 (67,364) 7.18 (37,219) 6.97Non-vested shares as of December 31319,058 $6.40 280,457 $7.63 162,171 $7.26Weighted-average restricted stockgranted during the period160,453 $5.11 185,650 $7.79 104,517 $7.39(1)The grant date fair value of restricted stock awards is based on the closing market price of the Company’s common stock at the grant date.At December 31, 2016 and December 31, 2015 , the Company had unrecognized compensation expense of $1.2 million and $1.3 million , respectively,related to the non-vested shares of restricted common stock under the 2010 Plan. The unrecognized compensation expense at December 31, 2016 is expected to berecognized over a weighted average period of 1.8 years . The total fair value of restricted shares vested during the years ended December 31, 2016 , 2015 and 2014was $0.6 million , $0.5 million and $0.3 million , respectively. The requisite service period for restricted shares at issuance is three years .F-55Table of Contents(b)Performance Share AwardsIn May 2015, the Compensation Committee of the Board of Directors approved a performance share award (“PSA”) under the 2010 Plan to the Company’sChairman and Chief Executive Officer. At the time of grant, the target number of shares pursuant to the PSA consisted of 89,629 shares of common stock. ThePSA had a grant date fair value of approximately $0.4 million . The PSA award under which the number of underlying shares of Company common stock that canbe earned will generally range from 0% to 200% of the target number of shares, with the target number of shares increased to reflect the value of the reinvestmentof any dividends declared on Company common stock during the vesting period. Vesting of the PSA will occur at the end of three years based on three -year totalstockholder return, or TSR, as follows:•If three -year TSR is less than 33% , then 0% of the PSUs will vest;•If three -year TSR is greater than or equal to 33% and the TSR is not in the bottom quartile of an identified peer group, then 100% of the PSAs willvest;•If three -year TSR is greater than or equal to 33% and the TSR is in the top quartile of an identified peer group, then 200% of the PSAs will vest;•If three -year TSR is greater than or equal to 33% and the TSR is in the bottom quartile of an identified peer group, then 50% of the PSAs will vest.TSR is defined, with respect to the Company and each member of the identified peer group, as applicable, as the average annual total shareholder returnbased on common stock price appreciation/depreciation during the applicable measurement period or until the date of a change of control, whichever first occurs,plus the value on the last day of the applicable measurement period or the date of a change of control of common shares if all cash dividends declared on acommon share during such period were reinvested in additional common shares.Under the terms of the agreement pursuant to which the PSA was granted (the "PSA Agreement"), the PSA is subject to the terms and conditions of the2010 Plan and in the event of any conflict between the terms of the 2010 Plan and the PSA Agreement, the terms of the 2010 Plan govern. The 2010 Plan providesthat the Compensation Committee may determine that the amount payable when an award of performance shares is earned may be settled in cash, by the issuanceof shares, or a combination thereof. The maximum number of shares which may be issued under the PSA is limited to 94,043 shares of common stock. In theevent the PSA is earned at a level that would cause the Company to issue more than 94,043 shares, the dollar value of the PSA earned in excess of 94,043 shareswill be paid in cash, subject to the terms of the 2010 Plan.The grant date fair values of PSAs were determined through a Monte-Carlo simulation of the Company’s common stock total shareholder return and thecommon stock total shareholder return of its peer companies to determine the TSR of the Company’s common stock relative to its peer companies over a futureperiod of three years. For the 2015 PSA grant, the inputs used by the model to determine the fair value are (i) historical stock return volatilities of the Company andits peer companies over the most recent three year period, (ii) a risk free rate based on the three year U.S. Treasury rate on grant date, and (iii) historical pairwisestock return correlations between the Company and its peer companies over the most recent three year period.Compensation expense related to PSAs was $ 0.1 million for the year ended December 31, 2016 . As of December 31, 2016 , there was $0.2 million ofunrecognized compensation cost related to the unvested portion of the PSA.The 2010 Plan also provides that the maximum number of shares of common stock for which awards may be granted to any participant in any calendaryear is 250,000 shares (the “Annual Share Limit”). In the event that PSA is earned at a level that would cause the grants to a participant exceed the Annual ShareLimit, the dollar value of the PSA earned in excess of the limit will be paid in cash, subject to the terms of the 2010 Plan.F-56Table of Contents20.Income TaxesFor the years ended December 31, 2016 , 2015 and 2014 , the Company qualified to be taxed as a REIT under the Code for U.S. federal income taxpurposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extentit annually distributes 100% of its taxable income to stockholders and does not engage in prohibited transactions. Certain activities the Company performs mayproduce income that will not be qualifying income for REIT purposes. The Company has designated its TRSs to engage in these activities. The tables below reflectthe taxes accrued at the TRS level and the tax attributes included in the consolidated financial statements.The income tax provision for the years ended December 31, 2016 , 2015 and 2014 is comprised of the following components (dollar amounts inthousands): Years Ended December 31, 2016 2015 2014Current income tax expense Federal$2,771 $3,158 $4,572State187 1,283 2,423Total current income tax expense$2,958 $4,441 $6,995Deferred income tax expense (benefit) Federal$104 $69 $(458)State33 25 (142)Total deferred income tax expense (benefit)$137 $94 $(600) Total provision$3,095 $4,535 $6,395The Company’s estimated taxable income differs from the statutory U.S. federal rate as a result of state and local taxes, non-taxable REIT income,valuation allowance and other differences. A reconciliation of the statutory income tax provision to the effective income tax provision for the years endedDecember 31, 2016 , 2015 and 2014 , respectively, are as follows (dollar amounts in thousands). December 31, 2016 2015 2014Provision at statutory rate$24,561 35.0 % $28,892 35.0 % $49,316 35.0 %Non-taxable REIT income(20,672) (29.5) (25,733) (31.2) (44,247) (31.4)State and local tax provision187 0.3 1,284 1.6 2,420 1.7Other(502) (0.7) 24,047 29.1 (1,227) (0.9)Valuation allowance(479) (0.7) (23,955) (29.0) 133 0.1Total provision$3,095 4.4 % $4,535 5.5 % $6,395 4.5 %F-57Table of ContentsDeferred Tax Assets and LiabilitiesThe major sources of temporary differences included in the deferred tax assets and their deferred tax effect as of December 31, 2016 and 2015 are asfollows (dollar amounts in thousands): December 31, 2016 December 31, 2015Deferred tax assets Net operating loss carryforward$2,287 $2,083Net capital loss carryforward1,123 2,029Other3,059 3,043Total deferred tax assets (1)$6,469 $7,155Deferred tax liabilities Deferred tax liabilities$303 $192Total deferred tax liabilities (2)$303 $192Valuation allowance(5,978) (6,457)Total net deferred tax asset$188 $506(1)Included in receivables and other assets in the accompanying consolidated balance sheets.(2)Included in accrued expenses and other liabilities in the accompanying consolidated balance sheets.As of December 31, 2016 , the Company through a wholly owned TRS, had incurred net operating losses in the aggregate amount of approximately $5.0million . The Company’s carryforward net operating losses will expire between 2033 and 2034 if they are not offset by future taxable income. Additionally, as ofDecember 31, 2016 , the Company, through one of its wholly owned TRSs, had also incurred approximately $2.5 million in capital losses. The Company’scarryforward capital losses will expire between 2018 and 2020 if they are not offset by future capital gains. At December 31, 2016 , the Company has recorded avaluation allowance against the deferred tax assets management does not believe it is more likely than not to be realized.The Company files income tax returns with the U.S. federal government and various state and local jurisdictions. The Company is no longer subject to taxexaminations by tax authorities for years prior to 2013. The Company has assessed its tax positions for all open years, which includes 2013 to 2016 and concludedthat there are no material uncertainties to be recognized.In addition, based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’sfinancial statements.F-58Table of Contents21.Business CombinationsOn May 16, 2016 (the “Acquisition Date”), the Company acquired the outstanding common equity interests in RiverBanc, RBMI, and RBDHC(collectively, the “Acquirees”) that were not previously owned by the Company through the consummation of separate membership interest purchase agreements,thereby increasing the Company's ownership of each of these entities to 100% . The results of the Acquirees’ operations have been included in the consolidatedfinancial statements since the Acquisition Date. Prior to the Acquisition Date, the Company owned 20.0% , 67.19% and 62.5% of the outstanding common equityinterests in RiverBanc, RBMI and RBDHC, respectively. RiverBanc is an investment management firm and registered investment adviser under the InvestmentAdvisers Act of 1940 that was founded in 2010 and has sourced and managed direct and indirect investments in multi-family apartment properties on behalf ofboth public and private institutional investors, including the Company, RBMI and RBDHC. Prior to the completion of the RiverBanc acquisition, RiverBanc hadserved as an external manager of the Company pursuant to an investment management agreement, for which it received base management and incentive fees. Inconnection with the acquisition, the Company terminated its investment management agreement with RiverBanc on May 17, 2016. As of March 31, 2016,RiverBanc managed approximately $371.5 million of the Company’s capital. In acquiring a 100% ownership interest in RiverBanc, the Company has internalizedthe management of its multi-family investments. The Company expects to achieve certain synergies related to processes and personnel as a result of thisinternalization. In connection with the acquisitions, on the Acquisition Date, the Company named Kevin M. Donlon, the founder and Chief Executive Officer ofRiverBanc, President of the Company and entered into an employment agreement with Mr. Donlon effective on the Acquisition Date. On June 16, 2016, theCompany’s Board of Directors approved the appointment of Mr. Donlon as a director of the Company. Prior to the completion of the acquisitions described above,Donlon Family LLC beneficially owned 59.40% , 5.47% and 6.25% of the outstanding common equity interests in RiverBanc, RMI and RBDHC, respectively. Mr.Donlon beneficially owns 100% of Donlon Family LLC.The estimated Acquisition Date fair value of the consideration transferred totaled $53.5 million, which consisted of the following (dollar amounts inthousands):Cash (1)$29,073Contingent consideration3,800Fair value of previously held membership interests20,608Total consideration transferred$53,481(1)Includes $16.3 million paid to Donlon Family LLC and reflects a post-closing working capital adjustment of $20 thousand delivered to the sellers ofRiverBanc on July 15, 2016.Prior to the Acquisition Date, the Company accounted for its previously held membership interests in the Acquirees as equity method investments,utilizing the fair value election for both RBMI and RBDHC. The Acquisition Date fair value of the Company's previously held membership interests in theAcquirees was $20.6 million and is included in the measurement of consideration transferred. In the year ended December 31, 2016 , the Company recorded a netgain as a result of remeasuring its previously held membership interests in RiverBanc, RBMI, and RBDHC totaling $5.0 million. This net gain is included in otherincome on the Company's consolidated statements of operations.The Company determined the estimated fair value of its previously held membership interests in RiverBanc using assumptions for the timing and amountof expected net future cash flow for the managed portfolio and a discount rate. The Company determined the estimated fair value of its previously heldmembership interests in RBMI and RBDHC using assumptions for the timing and amount of expected future cash flow for income and realization events for theunderlying assets and a discount rate.The contingent consideration includes two components:•A cash holdback in the amount of $3.0 million to be released to Donlon Family LLC upon the purchase by Mr. Donlon or his affiliates of $3.0million in Company common shares on the open market within 90 days of the Acquisition Date. This cash holdback was paid to Donlon Family LLCon June 10, 2016 upon satisfaction of the conditions to the release of this holdback.•A severance holdback in the amount of $0.8 million to fund the aggregate amount of all severance compensation and severance benefits to be paid orprovided to current or former RiverBanc employees as a result of the acquisition. The severance holdback was settled in cash and paid to a separatedemployee on June 30, 2016 and the holdback amount in excess of actual severance costs was delivered to the sellers of RiverBanc on July 15, 2016. F-59Table of ContentsThe following table summarizes the estimated fair values of the assets acquired and liabilities assumed by the Company at the Acquisition Date (dollaramounts in thousands). The membership interest purchase agreement for the acquisition of RiverBanc included a post-closing working capital adjustment that wascalculated at $20 thousand and settled with the sellers of RiverBanc on July 15, 2016. Additionally, the excess severance holdback amount described above wassettled with the sellers of RiverBanc on July 15, 2016. The Company engaged a third party for valuations of certain intangible assets.Cash$4,325Investment in unconsolidated entities52,176Mezzanine loan and preferred equity investments23,638Real estate under development (1)14,922Receivables and other assets911Intangible assets (1)3,490 Total identifiable assets acquired$99,462 Construction loan payable (2)$8,499Accrued expenses and other liabilities2,864 Total liabilities assumed$11,363 Preferred equity (3)$56,697 Net identifiable assets acquired$31,402 Goodwill (4)$25,222Gain on bargain purchase (5)(65)Non-controlling interest (6)(3,078)Net assets acquired$53,481(1)Included in receivables and other assets on the consolidated balance sheets.(2)Construction loan payable to the Company is eliminated on the consolidated balance sheets.(3)Includes $40.4 million of preferred equity owned by the Company that is eliminated on the consolidated balance sheets. Remaining $16.3 million ofpreferred equity owned by third parties was redeemed on June 10, 2016 and June 24, 2016.(4)Goodwill recognized in the acquisition of RiverBanc.(5)Gain on bargain purchase recognized in the acquisitions of RBMI and RBDHC.(6)Represents third-party ownership of KRVI membership interests ( see Note 9 ). The Company consolidates its investment in KRVI. The third-partyownership in KRVI is represented in the consolidated financial statements and the pro forma net income attributable to the Company's commonstockholders as non-controlling interests. The fair value of the non-controlling interests in KRVI is estimated to be $3.1 million . The fair value of thenon-controlling interests in KRVI, a private company, was estimated using assumptions for the timing and amount of expected future cash flow forincome and realization events for the underlying real estate.The $3.5 million of intangible assets relates to the RiverBanc acquisition and was recognized at estimated fair value on the Acquisition Date. Intangibleassets include an acquired trade name, acquired technology, and employment/non-compete agreements with useful lives ranging from 1 to 10 years.The $25.2 million of goodwill recognized is attributable primarily to expected synergies and economies of scale from combining with RiverBanc and theassembled workforce of RiverBanc. For the Company’s ongoing evaluation of Goodwill for impairment in accordance with ASC 350, Intangibles - Goodwill andOther , the Company’s multifamily investment portfolio (inclusive of RiverBanc) will be considered a reporting unit. As of December 31, 2016 , there werechanges in the recognized amounts of Goodwill resulting from the acquisition of RiverBanc as a result of payment of the post-closing working capital adjustmentof $20 thousand and adjustments to the estimated fair value of intangible assets in the amount of $0.4 million . The Company evaluated goodwill as of October 1,2016 and no impairment was indicated.F-60Table of ContentsThe acquisition of both RBMI and RBDHC was negotiated directly with the sellers and the fair value of identifiable assets acquired and liabilitiesassumed exceed the fair value of the consideration transferred. Subsequently, the Company reassessed the identification and recognition of identifiable assetsacquired and liabilities assumed, the Company’s previously held membership interests, and the consideration transferred and concluded that all items wererecognized and that the valuation procedures and measurements were appropriate. Accordingly, the Company recorded a net gain on bargain purchase of $0.1million that is included in other income on the Company’s consolidated statements of operations.The amount of revenue of the Acquirees included in the Company’s consolidated statements of operations from the Acquisition Date to the period endedDecember 31, 2016 is $5.3 million .The following represents the pro forma consolidated revenue and net income attributable to the Company's common stockholders as if the Acquirees hadbeen included in the consolidated results of the Company for the years ended December 31, 2016 and 2015 , respectively (dollar amounts in thousands): Years Ended December 31, 2016 2015Revenue$356,138 $390,576Net income attributable to Company's common stockholders$51,782 $72,707 Basic pro forma income per share$0.47 $0.67Diluted pro forma income per share$0.47 $0.67These amounts have been calculated after applying the Company’s accounting policies and adjustments for consolidation and amortization that wouldhave been charged assuming the estimated fair value adjustments to intangible assets had been applied on January 1, 2015. Material, nonrecurring pro formaadjustments directly attributable to the business combinations have been included in the pro forma consolidated revenue and net income attributable to theCompany's common stockholders shown above as if the transaction occurred on January 1, 2015. These adjustments include a $5.0 million net gain onremeasurement of the Company's previously held membership interests, a $0.1 million net gain on bargain purchase, and the estimated related income tax expenseof $2.1 million.22.Related Party TransactionsThe Company terminated its management agreement with RiverBanc on May 17, 2016 as a result of the Company's acquisition of the remaining 80% membership interest in RiverBanc, which resulted in consolidation of RiverBanc into the Company's financial statements (see Note 21 ). Prior to May 16, 2016 ,RiverBanc sourced and managed direct and indirect investments in multi-family properties on behalf of the Company pursuant to a management agreement enteredinto on April 5, 2011 and amended and restated on March 13, 2013 . The amended and restated management agreement had an effective date of January 1, 2013and had an initial term that expired on December 31, 2015 and was subject to annual automatic one-year renewals (subject to any notice of termination).Prior to May 16, 2016 and as of December 31, 2015 , the Company owned a 20% membership interest in RiverBanc. For the years ended December 31,2016 , 2015 and 2014 , the Company recognized approximately $0.1 million , $0.8 million and $2.6 million in equity income related to its investment inRiverBanc, respectively.For the years ended December 31, 2016 , 2015 and 2014 , the Company expensed $1.8 million , $8.1 million and $14.8 million in fees to RiverBanc,respectively. As of December 31, 2015, the Company had fees payable to RiverBanc of $1.7 million included in accrued expenses and other liabilities.F-61Table of Contents23.Quarterly Financial Data (unaudited)The following table is a comparative breakdown of our unaudited quarterly results for the immediately preceding eight quarters (amounts in thousands,except per share data): Three Months Ended Mar 31, 2016 Jun 30, 2016 Sep 30, 2016 Dec 31, 2016Interest income$81,626 $79,766 $79,525 $78,389Interest expense63,984 63,102 64,007 63,575Net interest income$17,642 $16,664 $15,518 $14,814 Other Income (loss): Recovery (provision) for loan losses$645 $42 $(26) $177Realized gain (loss) on investment securities and related hedges, net1,266 1,761 2,306 (8,978)Realized gain on distressed residential mortgage loans5,548 26 6,416 2,875Unrealized (loss) gain on investment securities and related hedges, net(2,490) (667) 1,563 8,664Unrealized gain on multi-family loans and debt held in securitization trusts, net818 784 738 692Other income3,073 8,125 5,635 2,245Total other income$8,860 $10,071 $16,632 $5,675 General, administrative and other expenses9,360 9,936 8,705 7,220Income from operations before income taxes$17,142 $16,799 $23,445 $13,269Income tax expense191 2,366 163 375Net income$16,951 $14,433 $23,282 $12,894Net loss (income) attributable to non-controlling interest— 2 (14) 3Net income attributable to Company$16,951 $14,435 $23,268 $12,897Preferred stock dividends(3,225) (3,225) (3,225) (3,225)Net income attributable to Company's common stockholders$13,726 $11,210 $20,043 $9,672 Per share basic income$0.13 $0.10 $0.18 $0.09Per share diluted income$0.13 $0.10 $0.18 $0.09Dividends declared per common share$0.24 $0.24 $0.24 $0.24Weighted average shares outstanding-basic109,402 109,489 109,569 109,911Weighted average shares outstanding-diluted109,402 109,489 109,569 109,911F-62Table of Contents Three Months Ended Mar 31, 2015 Jun 30, 2015 Sep 30, 2015 Dec 31, 2015Interest income$88,985 $84,400 $82,587 $80,866Interest expense67,384 64,097 64,295 64,875Net interest income$21,601 $20,303 $18,292 $15,991 Other Income: (Provision) recovery for loan losses$(436) $(112) $(1,117) $302Realized gain (loss) on investment securities and related hedges, net1,124 (1,291) (2,895) (1,555)Gain on de-consolidation of multi-family loans held in securitization trust and multi-family collateralized debt obligations1,483 — — —Realized gain (loss) on distressed residential mortgage loans676 3,614 27,224 (263)Unrealized (loss) gain on investment securities and related hedges, net(5,728) 4,716 (2,631) 1,002Unrealized gain (loss) on multi-family loans and debt held in securitization trusts, net13,628 5,418 (2,170) (4,508)Other income2,286 2,300 1,807 2,967Total other income (loss)$13,033 $14,645 $20,218 $(2,055) General, administrative and other expenses$10,846 $9,139 $9,830 $9,665Income from operations before income taxes$23,788 $25,809 $28,680 $4,271Income tax expense245 1,178 3,048 64Net income attributable to Company$23,543 $24,631 $25,632 $4,207Preferred stock dividends(1,453) (3,087) (3,225) (3,225)Net income attributable to Company's common stockholders$22,090 $21,544 $22,407 $982 Per share basic income$0.21 $0.20 $0.20 $0.01Per share diluted income$0.21 $0.20 $0.20 $0.01Dividends declared per common share$0.27 $0.27 $0.24 $0.24Weighted average shares outstanding-basic105,488 109,252 109,402 109,402Weighted average shares outstanding-diluted105,488 109,252 109,402 109,40224.Subsequent EventsOn January 23, 2017 , the Company completed the issuance and sale to Nomura Securities International, Inc. of $138.0 million aggregate principalamount of its 6.25% Senior Convertible Notes due 2022 (the "Convertible Notes"), including $18.0 million aggregate principal amount of the Convertible Notesissued upon exercise of Nomura's over-allotment option, in a public offering. The net proceeds to the Company from the sale of the Convertible Notes, afterdeducting the underwriter's discounts and commissions and estimated offering expenses, is approximately $127.3 million .The Convertible Notes were issued at 96% of the principal amount, bear interest at a rate equal to 6.25% per year, payable semi-annually in arrears onJanuary 15 and July 15 of each year, commencing July 15, 2017, and are expected to mature on January 15, 2022, unless earlier converted or repurchased. TheCompany does not have the right to redeem the Convertible Notes prior to maturity and no sinking fund is provided for the Convertible Notes. Holders of theConvertible Notes will be permitted to convert their Convertible Notes into shares of the Company's common stock at any time prior to the close of business on thebusiness day immediately proceeding January 15, 2022 . The conversion rate for the Convertible Notes, which is subject to adjustment upon the occurrence ofcertain specified events, initially equals 142.7144 shares of the Company’s common stock per $1,000 principal amount of Convertible Notes, which is equivalentto a conversion price of approximately $7.01 per share of the Company’s common stock, based on a $1,000 principal amount of the Convertible Notes.F-63Table of ContentsSchedule IV - Mortgage Loans on Real Estate(dollar amounts in thousands)December 31, 2016Asset Type Number ofLoans Interest Rate Maturity Date CarryingValue Principal Amount ofLoans Subject toDelinquent Principalor InterestDistressed residential mortgage loans First mortgage loans Original loan amount $0 - $99,999 2,999 1.01% - 14.99% 8/18/2007 -5/1/2062 $142,652 $21,783Original loan amount $100,000 - $199,999 1,484 1.75% - 12.85% 11/1/2009 -1/1/2057 160,433 24,407Original loan amount $200,000 - $299,999 457 0.00% - 12.04% 9/15/2016 -8/1/2061 84,261 13,810Original loan amount over $299,999 335 0.75% - 10.46% 4/1/2020 - 7/1/2057 115,748 20,868 Residential mortgage loans held in securitizationtrusts First mortgage loans Original loan amount $0 - $99,999 11 3.13% - 3.63% 10/1/2034 -8/1/2035 662 —Original loan amount $100,000 - $199,999 65 2.75% - 4.25% 10/1/2034 -1/1/2036 7,646 525Original loan amount $200,000 - $299,999 76 2.88% - 5.25% 8/1/2032 -12/1/2035 14,739 2,211Original loan amount $300,000 - $399,999 44 1.75% - 4.13% 8/1/2033 - 1/1/2036 11,821 1,079Original loan amount $400,000 - $499,999 28 2.38% - 3.75% 8/1/2033 -12/1/2035 9,785 1,261Original loan amount over $499,999 63 1.63% - 3.88% 8/1/2033 -12/1/2035 50,492 13,341 Other mortgage loans Residential and commercial first mortgage loans 47 2.63% - 15.00% 12/15/2013 -10/1/2046 9,607 1,760Residential second mortgage loans 259 5.88% - 9.00% 11/1/2030 -1/1/2047 17,769 — Multi-family loans First mortgage loans 376 3.04% - 6.18% 1/1/2017 - 8/1/2023 6,939,844 — $7,565,459 $101,045F-64Table of ContentsReconciliation of Balance Sheet Reported Amounts of Mortgage Loans on Real Estate For the year ended December 31,(in thousands) 2016 2015 2014Beginning balance $7,792,422 $9,107,248 $8,543,904Additions during period: Purchases 82,167 156,952 405,427Accretion of purchase discount 32,688 39,537 18,704Deconsolidation — 1,483 —Change in realized and unrealized gains (losses) 10,794 — 390,370Deductions during period: Repayments of principal (175,216) (130,651) (100,689)Collection of interest (32,928) (36,344) (18,478)Transfer to REO (8,892) (2,829) (2,380)Cost of mortgages sold (96,344) (1,241,266) (75,610)Provision for loan loss 847 (1,363) (1,881)Change in realized and unrealized gains (losses) — (59,262) —Amortization of premium (40,079) (41,083) (52,119)Balance at end of period $7,565,459 $7,792,422 $9,107,248F-65EXHIBIT INDEXExhibits: The exhibits required by Item 601 of Regulation S-K are listed below. Management contracts or compensatory plans are filed as Exhibits 10.7 through10.15.Exhibit Description2.1 Membership Purchase Agreement, by and among Donlon Family LLC, JMP Investment Holdings LLC, Hypotheca Capital, LLC,RiverBanc LLC and the Company, dated May 3, 2016 (Incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report onFrom 10-Q filed with the Securities and Exchange Commission on May 5, 2016). 3.1 Articles of Amendment and Restatement of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the Company's AnnualReport on Form 10-K filed with the Securities and Exchange Commission on March 10, 2014). 3.2 Bylaws of the Company, as amended (Incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K filed withthe Securities and Exchange Commission on March 4, 2011). 3.3 Articles Supplementary designating the Company’s 7.75% Series B Cumulative Redeemable Preferred Stock (the “Series B PreferredStock”) (Incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form 8-A filed with the Securities andExchange Commission on May 31, 2013). 3.4 Articles Supplementary classifying and designating 2,550,000 additional shares of the Series B Preferred Stock (Incorporated by referenceto Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2015). 3.5 Articles Supplementary classifying and designating the Company's 7.875% Series C Cumulative Redeemable Preferred Stock (the “SeriesC Preferred Stock”) (Incorporated by reference to Exhibit 3.5 to the Company’s Registration Statement on Form 8-A filed with theSecurities and Exchange Commission on April 21, 2015). 4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-11(Registration No. 333-111668) filed with the Securities and Exchange Commission on June 18, 2004). 4.2 Form of Certificate representing the Series B Preferred Stock Certificate (Incorporated by reference to Exhibit 3.4 to the Company’sRegistration Statement on Form 8-A filed with the Securities and Exchange Commission on May 31, 2013). 4.3 Form of Certificate representing the Series C Preferred Stock (Incorporated by reference to Exhibit 3.6 to the Company’s RegistrationStatement on Form 8-A filed with the Securities and Exchange Commission on April 21, 2015). 4.4(a) Junior Subordinated Indenture between The New York Mortgage Company, LLC and JPMorgan Chase Bank, National Association, astrustee, dated September 1, 2005. (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with theSecurities and Exchange Commission on September 6, 2005). 4.4(b) Amended and Restated Trust Agreement among The New York Mortgage Company, LLC, JPMorgan Chase Bank, National Association,Chase Bank USA, National Association and the Administrative Trustees named therein, dated September 1, 2005. (Incorporated byreference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on September6, 2005). 4.4(c) Parent Guarantee Agreement between the Company and JPMorgan Chase Bank, National Association, as guarantee trustee, datedSeptember 1, 2005. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the Securities andExchange Commission on September 6, 2005). 4.5(a) Junior Subordinated Indenture between The New York Mortgage Company, LLC and JPMorgan Chase Bank, National Association, astrustee, dated March 15, 2005 (Incorporated by reference to Exhibit 4.3(a) to the Company's Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission on August 9, 2012). 4.5(b) Parent Guarantee Agreement between the Company and JPMorgan Chase Bank, National Association, as guarantee trustee, dated March15, 2005. (Incorporated by reference to Exhibit 4.3(b) to the Company's Quarterly Report on Form 10-Q filed with the Securities andExchange Commission on August 9, 2012). 4.6 Parent Guarantee Agreement by the Company for the benefit of the Federal Home Loan Bank of Indianapolis, dated April 1, 2015(Incorporated by reference to Exhibit 4.3(d) to the Company Quarterly Report on Form 10-Q filed with the Securities and ExchangeCommission on May 7, 2015). 4.7 Indenture, dated April 15, 2016, by and between NYMT Residential 2016-RP1, LLC and U.S. Bank National Association (Incorporated byreference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on April 19,2016). 4.8 Indenture, dated January 23, 2017, between the Company and U.S. Bank National Association, as trustee (Incorporated by reference toExhibit 4.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January 23, 2017). 4.9 First Supplemental Indenture, dated January 23, 2017, between the Company and U.S. Bank National Association, as trustee (Incorporatedby reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on January23, 2017). 4.10 Form of 6.25% Senior Convertible Notes Due 2022 of the Company (Incorporated by reference to Exhibit 4.3 to the Company's CurrentReport on Form 8-K filed with the Securities and Exchange Commission on January 23, 2017). Certain instruments defining the rights of holders of long-term debt securities of the Company and its subsidiaries are omitted pursuant toItem 601(b)(4)(iii) of Regulation S-K. The Company hereby undertakes to furnish to the Securities and Exchange Commisssion, uponrequest, copies of any such instruments. 10.1 Investment Management Agreement, by and between the Company and The Midway Group, LP dated as of February 11, 2011(Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and ExchangeCommission on May 5, 2011). 10.2 First Amendment to Investment Management Agreement by and between the Company and The Midway Group, L.P., dated March 9, 2012(Incorporated by reference to Exhibit 10.19 to the Company’s Annual Report on Form 10-K filed with the Securities and ExchangeCommission on March 12, 2012).10.3 Second Amendment to Investment Management Agreement by and between the Company and The Midway Group, L.P., dated April 1, 2014(Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and ExchangeCommission on August 7, 2014). 10.4 Amended and Restated Management Agreement, by and between RB Commercial Mortgage LLC, the Company and RiverBanc, LLC, datedas of March 13, 2013 (Incorporated by reference to Exhibit 10.7 to the Company’s Annual Report on Form 10-K filed with the Securities andExchange Commission on March 18, 2013). 10.5 Waiver Letter to Certain Provisions of the Management Agreement among the Company, RB Commercial Mortgage LLC and RiverBancLLC, dated as of June 30, 2015 (Incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission on August 6, 2015). 10.6 Advances, Pledge and Security Agreement, dated March 23, 2015, between Great Lakes Insurance Holdings LLC and the Federal HomeLoan Bank of Indianapolis (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed with theSecurities and Exchange Commission on May 7, 2015). 10.7 The Company's 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filedwith the Securities and Exchange Commission on May 17, 2010). 10.8 The Company's 2013 Incentive Compensation Plan (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 26, 2013). 10.9 The Company's 2013 Incentive Compensation Plan (effective for fiscal year 2015) (Incorporated by reference to Exhibit 10.2 to theCompany’s Form 8-K filed with the Securities and Exchange Commission on May 29, 2015). 10.10 Form of Restricted Stock Award Agreement for Officers (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K filed with the Securities and Exchange Commission on July 14, 2009). 10.11 Form of Restricted Stock Award Agreement for Directors (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report onForm 8-K filed with the Securities and Exchange Commission on July 14, 2009). 10.12 Performance Share Award Agreement between Steven R. Mumma and the Company, dated as of May 28, 2015 (Incorporated by reference toExhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on May 29, 2015). 10.13 Second Amended and Restated Employment Agreement, by and between the Company and Steven R. Mumma, dated as of November 3,2014 (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the Securities and ExchangeCommission on November 6, 2014). 10.14 Employment Agreement of Kevin Donlon, dated May 16, 2016, by and between the Company and Kevin Donlon (Incorporated by referenceto Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on May 16, 2016). 10.15 Employment Contract, dated May 26, 2015, by and between RiverBanc LLC and Douglas Neal (Incorporated by reference to Exhibit 10.2 tothe Company’s Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 5, 2016). 10.16 Equity Distribution Agreement, dated March 20, 2015, by and between the Company and JMP Securities LLC (Incorporated by reference toExhibit 1.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2015). 10.17 Amendment No. 1 to Equity Distribution Agreement, dated August 25, 2016, by and between the Company and JMP Securities LLC(Incorporated by reference to Exhibit 1.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commissionon August 25, 2016). 10.18 Equity Distribution Agreement, dated March 20, 2015, by and between the Company and MLV & Co. LLC. (Incorporated by reference toExhibit 1.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 20, 2015). 10.19 Equity Distribution Agreement, dated August 25, 2016, by and between the Company and Ladenburg Thalmann & Co. Inc. (Incorporated byreference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on August 25,2016). 10.20 Underwriting Agreement, dated as of April 15, 2015, by and among the Company, Morgan Stanley & Co. LLC, UBS Securities LLC andKeefe, Bruyette & Woods, Inc. (Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with theSecurities and Exchange Commission on April 21, 2015). 10.21 Underwriting Agreement, dated as of January 23, 2017, by and among the Company and Nomura Securities International, Inc. (Incorporatedby reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January23, 2017). 12.1 Statement re: Computation of Ratios.*21.1 List of Subsidiaries of the Registrant.* 23.1 Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP).* 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, asadopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002** 101.INS XBRL Instance Document *** 101.SCH Taxonomy Extension Schema Document *** 101.CAL Taxonomy Extension Calculation Linkbase Document *** 101.DE XBRL Taxonomy Extension Definition Linkbase Document *** 101.LAB Taxonomy Extension Label Linkbase Document *** 101.PRE Taxonomy Extension Presentation Linkbase Document ****Filed herewith.**Furnished herewith. Such certification shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended.***Submitted electronically herewith. Attached as Exhibit 101 to this report are the following documents formatted in XBRL (Extensible Business ReportingLanguage): (i) Consolidated Balance Sheets at December 31, 2016 and 2015 ; (ii) Consolidated Statements of Operations for the years ended December 31,2016 , 2015 and 2014 ; (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 , 2015 and 2014 ; (iv) ConsolidatedStatements of Changes in Stockholders’ Equity for the years ended December 31, 2016 , 2015 and 2014 ; (v) Consolidated Statements of Cash Flows for theyears ended December 31, 2016 , 2015 and 2014 ; and (vi) Notes to Consolidated Financial Statements.Exhibit 12.1 Ratio of Earnings to Fixed ChargesRatio of Earnings to Combined Fixed Charges and Preferred Stock Dividends(dollars in thousands) For the Years Ended December 31, 2016 2015 2014 2013 2012Earnings: Pretax income from operations$70,655 $82,548 $142,586 $69,694 $29,100Fixed charges (1)32,115 27,680 25,094 20,949 8,894Income from unconsolidated entities(13,055) (7,865) (4,562) (2,297) (622)Distributions of income from unconsolidated entities7,509 5,392 2,238 2,112 584Noncontrolling interest(9) — — — 97Total Earnings$97,215 $107,755 $165,356 $90,458 $38,053Fixed Charges: Interest expense (1)$32,115 $27,680 $25,094 $20,949 $8,894Total Fixed Charges32,115 27,680 25,094 20,949 8,894Preferred stock dividends12,900 10,990 5,812 3,568 —Total Combined Fixed Charges and Preferred Stock Dividends$45,015 $38,670 $30,906 $24,517 $8,894Ratio of earnings to fixed charges3.03 3.89 6.59 4.32 4.28Ratio of earnings to combined fixed charges and preferred stockdividends2.16 2.79 5.35 3.69 4.28Deficiency related to ratio of earnings to fixed chargesNA NA NA NA NADeficiency related to ratio of earnings to combined fixed chargesand preferred stock dividendsNA NA NA NA NA(1) Excludes interest expense on multi-family collateralized debt obligations of the Consolidated K-Series, which we are required to consolidate in ourfinancial statements under generally accepted accounting principles. We do not have any claims to the assets (other than the securities represented by ourfirst loss pieces) or obligations for the liabilities of the Consolidated K-Series.Exhibit 21.1List of Significant SubsidiariesName State of Incorporation Names under which it does BusinessHypotheca Capital, LLC (formerly known asThe New York Mortgage Company, LLC) New York n/aNew York Mortgage Funding, LLC Delaware n/aNew York Mortgage Trust 2005-1 Delaware n/aNew York Mortgage Trust 2005-2 Delaware n/aNew York Mortgage Trust 2005-3 Delaware n/aNYMT Commercial LLC Delaware n/aGreat Lakes Insurance Holdings, LLC Michigan n/aNYMT-Midway LLC Delaware n/aNYMT Residential, LLC Delaware n/aNYMT Loan Financing, LLC Delaware n/aRB Commercial Mortgage LLC Delaware n/aCONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe have issued our reports dated February 28, 2017, with respect to the consolidated financial statements, schedule, and internal control over financial reportingincluded in the Annual Report of New York Mortgage Trust, Inc. on Form 10-K for the year ended December 31, 2016. We consent to the incorporation byreference of said reports in the Registration Statements of New York Mortgage Trust, Inc. on Form S-3 ASR (File No. 333-213316 effective August 25, 2016),Form S-3 (File No. 333-186016 effective January 14, 2013) and on Form S-8 (File No. 333-167609 effective June 17, 2010)./s/ Grant Thornton LLPNew York, New YorkFebruary 28, 2017Exhibit 31.1CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Steven R. Mumma, certify that: 1.I have reviewed this annual report on Form 10-K for the year ended December 31, 2016 of New York Mortgage Trust, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and 5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 28, 2017 /s/ Steven R. Mumma Steven R. Mumma Chairman of the Board and Chief ExecutiveOfficer(Principal Executive Officer)Exhibit 31.2CERTIFICATION PURSUANT TO SECTION 302OF THE SARBANES-OXLEY ACT OF 2002 I, Kristine R. Nario, certify that:1.I have reviewed this annual report on Form 10-K for the year ended December 31, 2016 of New York Mortgage Trust, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in ExchangeAct Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for theregistrant and have:(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this report is being prepared;(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles; (c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d)Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recentfiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially affect, the registrant's internal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonablylikely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controlover financial reporting.Date: February 28, 2017 /s/ Kristine R. Nario Kristine R. Nario Chief Financial Officer(Principal Financial and Accounting Officer)Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of New York Mortgage Trust, Inc., (the “Company”) on Form 10-K for the year ended December 31, 2016 , as filed withthe Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant tosection 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to theSecurities and Exchange Commission or its staff upon request. Date: February 28, 2017 /s/ Steven R. Mumma Steven R. Mumma Chairman of the Board and Chief ExecutiveOfficer (Principal Executive Officer)Date: February 28, 2017 /s/ Kristine R. Nario Kristine R. Nario Chief Financial Officer(Principal Financial and Accounting Officer)

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