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The transaction is expected to close during the second quarter of JAVELIN has declared and will pay its regular monthly dividend for the month of March, but will not declare any regular monthly dividends thereafter during the pendency of the transaction.
ARMOUR is a Maryland corporation that invests primarily in fixed rate residential, adjustable rate and hybrid adjustable rate mortgage-backed securities issued or guaranteed by U. Government-sponsored enterprises, or guaranteed by the Government National Mortgage Association.
This press release is neither an offer to purchase nor a solicitation of an offer to sell any securities. Free copies of the offer to purchase, the related letter of transmittal and certain other offering documents will be made available by ARMOUR when available at its website at www. This press release includes "forward-looking statements" within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of Actual results may differ from expectations, estimates and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events.
Words such as "expect," "estimate," "project," "budget," "forecast," "anticipate," "intend," "plan," "may," "will," "could," "should," "believes," "predicts," "potential," "continue," and similar expressions are intended to identify such forward-looking statements. We may also enter into purchase agreements with a number of loan originators and intermediaries, including mortgage bankers, commercial banks, savings and loan associates, home builders, credit unions and other mortgage conduits.
We intend to invest primarily in mortgage loans secured by properties within the United States. Our board of directors has approved the following investment guidelines:. We do not expect to purchase target assets with a view to selling them shortly after purchase.
However, in order to maximize returns and manage portfolio risk while remaining opportunistic, we may dispose of securities earlier than anticipated or hold securities longer than anticipated depending upon prevailing market conditions, credit performance, availability of leverage or other factors regarding a particular security or our capital position. We may change these investment guidelines at any time with the approval of our board of directors which must include a majority of our independent directors , but without any approval from our stockholders.
Any changes to these investment guidelines will be disclosed in our next required periodic report following the approval of such changes by our board of directors. We intend to invest in, finance and manage our target assets, which we define as agency mortgage-backed securities, non-agency mortgage-backed securities and other mortgage-related investments. Each of these asset classes is described below. Residential mortgage pass-through certificates. In general, mortgage pass-through certificates distribute cash flows from underlying collateral on a pro rata basis among certificate holders.
CMOs are securities that are structured from residential mortgage pass-through certificates. In general, CMOs receive monthly payments of principal and interest from underlying mortgage pass-through certificates. CMOs can divide these cash flows into different classes of securities. For example, CMOs may direct all interest payments to one class of security an interest only security, or IO and all principal payments, including pre-paid principal, to another class of security.
CMOs may also redirect cash flows between classes, effectively giving priority to some classes while subordinating other classes. Non-agency residential mortgage-backed securities. Non-agency residential mortgage-backed securities are securities backed by residential mortgages. Instead, non-agency residential mortgage-backed securities may benefit from credit enhancement derived from structural elements, such as subordination, overcollateralization or insurance.
As such, non-agency residential mortgage-backed securities can carry a significantly higher level of credit exposure relative to the credit exposure of agency mortgage-backed securities. We may purchase highly-rated instruments that benefit from credit enhancement or non-investment grade instruments that absorb credit risk. We expect to focus primarily on non-agency residential mortgage-backed securities where the underlying mortgages are secured by residential properties within the United States.
CMBS are securities that are structured utilizing collateral pools comprised of commercial mortgage loans. CMBS can be structured as pass-through securities, where the cash flows generated by the collateral pool are passed on pro rata to investors after netting for servicer or other fees, or where cash flows are distributed to numerous classes of securities following a predetermined waterfall, which may give priority to selected classes while subordinating other classes. We may invest across the capital structure of these securities, from debt investments with investment grade ratings from one or more nationally recognized rating agencies to unrated equity tranches.
We intend to focus on CMBS where underlying collateral is secured by commercial properties located within the United States. Prime mortgage loans. Prime mortgage loans are residential mortgage loans that conform to the underwriting guidelines of a U. Government agency or a GSE but that do not carry any credit guarantee from either a U. Government agency or a GSE.
Jumbo prime mortgage loans are prime mortgage loans that conform to such underwriting guidelines except as to loan size. Non-prime mortgage loans. Non-prime mortgage loans are residential mortgage loans that do not meet all of the underwriting guidelines of the GSEs. Consequently, these loans may carry higher credit risk than prime mortgage loans. Non-prime mortgage loans may allow borrowers to qualify for a mortgage loan with reduced or alternative forms of documentation.
This category includes loans commonly referred to as Alt-A or as subprime. Commercial mortgage loans. Commercial mortgage loans are mortgage loans secured by commercial real property with either fixed or floating interest rates and various other terms. Mortgage-related derivatives. These transactions may include, but are not limited to, buying or selling forward positions and credit default swaps.
Our Manager intends to implement this strategy based upon overall market conditions, the level of volatility in the mortgage market, size of our investment portfolio and our intention to qualify as a REIT. Other mortgage-related investments. Other mortgage-related investments include mortgage servicing rights, excess interest-only instruments and other investments that may arise as the mortgage market evolves.
We will assess the allocation of investments across our target asset classes based on the risk-adjusted relative value of each asset and the overall contribution of each asset to the performance of our investment portfolios and the value added to our investment portfolios. Additional factors that may impact the allocation of our investments include, but are not limited to, security, structure, seniority credit enhancement, legal matters, geography and the profiles of underlying borrowers.
The balance of our equity capital will be held in unlevered agency mortgage-backed securities, cash and derivatives. During the remainder of the 12 months following this offering, we expect to increase the portion of our equity capital allocated to support investments in levered non-agency mortgage-backed securities based on market conditions and the availability of appropriate investments. Any such increase in the portion of our equity capital allocated to levered non-agency mortgage-backed securities would generally result in a corresponding decrease in the portion of our equity capital allocated to levered agency mortgage-backed securities.
Our investment allocation expectations in the first 12 months following this offering and subsequently are subject to change based on our Manager's assessment of the factors described above. We plan to borrow against investments in our target assets primarily using repurchase agreements.
These borrowings generally have maturities that range from one month or less up to one year, although occasionally we may enter into longer dated borrowing agreements to more closely match the rate adjustment period of the securities we own. Depending on market conditions, we may enter into additional repurchase arrangements with similar longer-term maturities or a committed borrowing facility.
The level of our borrowings may vary periodically depending on market conditions. Despite recent credit market developments and prevailing trends, we believe our target assets will continue to be eligible for financing in the repurchase agreement market. We may use a variety of strategies to hedge a portion of our exposure to interest rate, prepayment and credit risk to the extent that our Manager believes is prudent, taking into account our investment strategy, the cost of the hedging transactions and our intention to qualify as a REIT.
Interest Rate Risk. We intend to hedge some of our exposure to potential interest rate mismatches between the interest we earn on our longer term investments and the borrowing costs on our shorter term borrowings. Because our leverage will primarily be in the form of repurchase agreements, our financing costs will fluctuate based on short-term interest rate indices, such as LIBOR.
Because some of our investments will be in assets that have fixed rates of interest and mature in up to 30 years, the interest we will earn on those assets will generally not move in tandem with the interest rates that we pay on our repurchase agreements, which generally have a maturity of less than one year. We may experience reduced income or losses based on these rate movements. In order to mitigate such risk, we may utilize certain hedging techniques as discussed below.
We plan to design interest rate risk mitigation strategies to reduce the impact on our income caused by the potential adverse effects of changes in interest rates on our assets and liabilities. Subject to complying with REIT requirements, we intend to use derivative instruments to mitigate the risk of adverse changes in interest rates on the value of our assets as well as the differences between the interest rate adjustments on our assets and borrowings.
These strategies will primarily consist of purchasing or selling futures contracts and may also include entering into interest rate swap, interest rate cap or interest rate floor agreements, purchasing put and call options on securities or securities underlying futures contracts, or entering into forward rate agreements. Although we will not be limited in our use of interest rate risk mitigation strategies, we intend to limit our use of derivative instruments to only those techniques described above and to enter into derivative transactions only with counterparties that we believe have a strong credit rating to help mitigate the risk of counterparty default or insolvency.
These transactions will be entered into solely for the purpose of mitigating interest rate risk. Since we will not qualify for hedge accounting treatment as prescribed by GAAP, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on the derivative instruments may not be offset by changes in the fair values or cash flows of the related investment or borrowing transactions within the same accounting period, or ever.
Because residential borrowers are able to prepay their mortgage loans which underlie the RMBS in which we intend to invest at par at any time, we face the risk that we will experience a return of principal on our investments earlier than anticipated, and we may have to invest that principal at potentially lower yields. Conversely, certain mortgage securities in which we invest may decrease in value more quickly than similar duration bonds as interest rates increase. Duration is the relative expected percentage change in market value of our assets that would be caused by a parallel change in short and long-term interest rates.
Convexity exposure relates to the way the duration of a mortgage security changes when the interest rate and prepayment environment changes. We intend to accept mortgage credit exposure at levels our Manager deems prudent as an integral part of our diversified investment strategy. Therefore, we may retain all or a portion of the credit risk on our investments in residential and commercial mortgage loans as well as on the loans underlying our RMBS and CMBS.
We will seek to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, sale of assets where we identify negative credit trends, the use of various types of credit enhancements and by using non-recourse financing, which limits our exposure to credit losses to the specific pool of mortgages subject to the non-recourse financing.
Our overall management of credit exposure may also include credit default swaps or other financial derivatives that our Manager believes are appropriate. Our objective will be to selectively construct and actively manage a diversified mortgage investment portfolio comprised of asset classes that, when properly financed and hedged, are designed to produce attractive risk-adjusted returns across a variety of market conditions and economic cycles. We believe that we will possess the core strengths that will enable us to realize our objectives and provide us with competitive advantages in the marketplace.
We believe our core strengths include:. Significant Experience of Our Management Team. We believe that the extensive experience of our management team provides us with significant expertise in investing, financing and managing mortgage-related investments. The senior members of our research and investment team have an aggregate of 52 years of experience in mortgage-backed securities investing, including experience in performing advisory services for investment banks, funds, other investment vehicles and other managed and discretionary accounts.
Ulm has 25 years of structured finance and debt capital markets experience, including mortgage-backed securities. Ulm has advised numerous U. Zimmer has significant experience in the mortgage-backed securities market over a 27 year period. Disciplined Relative Value Investment Approach. We intend to follow a disciplined security selection process and to be, in essence, a relative value investor in our target assets. ARRM has conducted with respect to agency mortgage-backed securities, and will conduct with respect to non-agency mortgage-backed securities and other mortgage-related investments, top-down market assessments of the various segments of the mortgage-related investments market in order to identify the most attractive segments and investment opportunities consistent with our portfolio objectives and risk management strategy.
In employing this detailed analysis, ARRM will seek to identify the best values available in mortgage-related investments. We will select our mortgage-related investments based on extensive bottom up analysis including factors such as financial structure, seniority, prepayment trends, average remaining life, amortization schedules, fixed versus floating interest rates, geographic concentration, property type, loan-to-value ratios and credit scores.
Considering the large size of the mortgage-related investments market, we believe we can be very selective with our investments and buy only the securities we deem to be the most attractive. Portfolio Construction. We anticipate that returns to our stockholders will be realized over the long-term primarily through dividends and secondarily through capital appreciation.
ARRM will use its fixed income expertise across the range of asset classes within the mortgage-related investments markets to build a portfolio that seeks to balance income, cash, capital, leverage and the aforementioned risks.
Through the careful and disciplined selection of assets, and continual portfolio monitoring, we believe we can build and maintain an investment portfolio that provides value to stockholders over time, both in absolute terms and relative to other mortgage-related investment portfolios.
Analytical Tools, Infrastructure and Expertise. ARRM's experienced investment team will construct and manage our mortgage-related investment portfolio through the use of focused qualitative and quantitative analysis, which will help us manage risk on a security-by-security and portfolio basis. We rely on a variety of analytical tools and models to assess our investments and risk management.
We will focus on in-depth analysis of the numerous factors that influence our target assets, including:. We will also use these tools to guide the interest rate risk mitigation strategies developed by ARRM to the extent consistent with the requirements for qualification as a REIT. ARRM maintains extensive relationships with financial intermediaries including investment banks, asset originators, broker-dealers and asset custodians.
We believe these relationships will enhance our ability to source, finance, protect and mitigate the credit and interest rate risk on our investments and, thus, enable us to succeed in various credit and interest rate environments. Alignment of Interests. An entity controlled by Messrs. We believe that the indirect ownership of our common stock by Messrs.
Staton and Bell, who also own the Sub-Manager, will align their interests with the interests of our other stockholders. Each of our executive officers is also an employee of ARRM. Therefore, these individuals have a direct interest in the financial success of ARRM, which may encourage these individuals to support strategies that impact us based upon these considerations. As a result of these relationships, our executive officers may have a conflict of interest with respect to our agreements and arrangements with ARRM and its affiliates.
Our executive officers are not required to devote a specific amount of time to our affairs. ARRM and its affiliates may in the future form funds or sponsor investment vehicles and ventures that have overlapping objectives with us and therefore may also compete with us for investment opportunities. Due to the relationships of our executive officers with ARRM, our management agreement with ARRM was not negotiated at arm's length, and its terms may not be as favorable to us as if they had been negotiated with an unaffiliated third party.
ARRM's liability is limited under the management agreement, and we have agreed to indemnify ARRM, and its affiliates, directors, officers, stockholders, equity holders, employees, representatives and agents, and any affiliates thereof, with respect to all expenses, losses, costs, damages, liabilities, demands, charges and claims of any nature, actual or threatened including reasonable attorneys' fees , arising from or in respect of any acts or omissions, errors of judgment or mistakes of law or any alleged acts or omissions, errors of judgment or mistakes of law performed or made while acting in any capacity contemplated under the management agreement or pursuant to any underwriting or similar agreement to which ARRM is a party that is related to our activities, unless ARRM was grossly negligent, acted with reckless disregard or engaged in willful misconduct or fraud while discharging its duties under the management agreement.
The management fee may not sufficiently incentivize ARRM to pursue business that maximizes risk-adjusted returns on our investment portfolio. Further, ARRM will have an incentive to increase Gross Equity Raised for example, by recommending follow-on stock offerings , potentially to the detriment of our then existing stockholders. We are subject to conflicts of interest arising out of our relationship with ARRM and its affiliates. Factors in making such a determination may include the ARRM Client's liquidity, the ARRM Client's overall investment strategy and objectives, the composition of the ARRM Client's existing portfolio, the size or amount of the available opportunity, the characteristics of the securities involved, the liquidity of the markets in which the securities trade, the risks involved, and other factors relating to the ARRM Client and the investment opportunity.
If ARRM determines that an investment opportunity is appropriate for both us and an ARRM Client, then ARRM will allocate that opportunity in a manner that they determine, exercising their judgment in good faith, to be fair and equitable, taking into consideration all allocations among us and the ARRM investments taken as a whole. ARRM has broad discretion in making that determination, and in amending that determination over time.
The contrasting strategies, time horizons and risk profiles of the participating clients;. The relative capitalization and cash availability of the clients;. The different liquidity positions and requirements of the participating clients;.
Whether a client has appropriate exposure to or concentration in the securities, issuer, sector, industry, or markets in question, taking into account both the client's overall investment objectives and the client's exposure or concentration relative to other clients sharing in the allocation;. Whether an opportunity can be split between the clients, or whether it must be allocated entirely to one client or the other;.
Borrowing base considerations such as repo, securities lending, prime brokerage, or ISDA terms ;. Expectations regarding the timing and sources of new capital;. Whether a client has the documentation in place to participate in a trade with the applicable counterparty; and. In certain circumstances, strict compliance with the foregoing allocation procedures may not be feasible and unusual or extraordinary conditions may, on occasion, warrant deviation from the practices and procedures described above.
In such circumstances, senior personnel of ARRM may be called upon to determine the appropriate action which will serve the best interests of, and will be fair and equitable to, all clients involved. We refer to the shares of common stock sold in the concurrent private placement as the private placement shares or the registrable shares.
We will enter into a registration rights agreement with the Purchaser of the private placement shares, pursuant to which we will agree to register the resale of the private placement shares. Pursuant to the registration rights agreement, at any time following the consummation of this offering and the concurrent private placement and prior to the date that is days after the consummation of this offering, the Purchaser may make one demand that we cause its registrable shares to be registered for resale on a shelf registration statement that may be filed at any time after the date that is 30 days after the consummation of this offering and the concurrent private placement.
We must maintain the effectiveness of this shelf registration statement until the earlier of a the filing of a shelf registration statement on Form S-3 as soon as practicable after we become eligible to use such Form S-3 or b all the registrable shares have been sold under the shelf registration statement or sold pursuant to Rule under the Securities Act.
We will be required to use our reasonable best efforts to maintain the effectiveness of this mandatory shelf registration statement until all of the registrable shares have been sold under this registration statement or distributed to the public pursuant to Rule under the Securities Act. REIT Qualification. We intend to be organized in conformity with the requirements for qualification as a REIT under the Code and we intend for our manner of operations and corporate structure and stockholder ownership to enable us to meet on a continuing basis the requirements for taxation as a REIT for federal income tax purposes.
If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax at regular corporate rates. We intend to conduct our business so as not to become regulated as an investment company under the Act. If we were to fall within the definition of an investment company, we would be unable to conduct our business as described in this prospectus.
We intend to rely on the exclusion provided by Section 3 c 5 C of the Act. Restrictions on Ownership of our Common Stock. To assist us in complying with the REIT limitations on the concentration of ownership imposed by the Code, our charter prohibits, with certain exceptions, any stockholder from beneficially or constructively owning, applying certain attribution rules under the Code including deemed ownership of shares underlying warrants or options to purchase stock , more than 9.
Our board of directors may, in its sole discretion, waive the 9. We may to grant waivers from the 9. Accordingly, we intend to pay monthly dividends of substantially all of our taxable income out of assets legally available for such purposes to our stockholders of record when and if issued, and as and if declared by our board of directors. We are not restricted from using the proceeds of equity or debt offerings to pay dividends, but we do not intend to do so. We anticipate that we will declare our monthly dividends for November and December of in early November We have not made a decision whether to take advantage of any or all of these exemptions.
If we do take advantage of any of these exemptions, we do not know if some investors will find our common stock less attractive as a result. The result may be a less active trading market for our common stock and our stock price may be more volatile. We intend to take advantage of such an extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with public company effective dates.
An investment in our common stock involves various risks. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our securities could decline, and you may lose some or all of your investment. Volatile market conditions for mortgages and mortgage related assets as well as the broader financial markets may adversely affect the value of the assets in which we invest.
Continued adverse developments in the global capital markets, including defaults, credit losses and liquidity concerns, as well as mergers, acquisitions or bankruptcies of potential repurchase agreement counterparties, could make it difficult for us to borrow money to acquire our target assets on a leveraged basis, on favorable terms, or at all, which could adversely affect our profitability.
Continued adverse developments in the residential mortgage market may adversely affect the value of our target assets. Mortgage loan modification programs and future legislative action may adversely affect the value of, and the returns on, the target assets in which we invest.
We may not be able to operate our business or implement our operating policies and strategies successfully. The residential mortgage loans in which we intend to invest and that underlie the non-agency mortgage-backed securities in which we intend to invest may be subject to delinquency, foreclosure and loss, which could result in significant losses to us.
We may invest in non-prime mortgage loans or investments collateralized by non-prime mortgage loans, which are subject to increased risks. Actions of the U. Government, including the U. Congress, Federal Reserve, U. Treasury and other governmental and regulatory bodies for the purpose of stabilizing or reforming the financial markets, or market response to those actions, may not achieve the intended effect or benefit our business and may adversely affect our business. Our use of derivative instruments may expose us to counterparty risk.
We may incur increased borrowing costs related to repurchase agreements which could harm our results of operations. We intend to leverage our portfolio investments in our target assets, which may adversely affect our return on our investments and may reduce cash available for distribution to our stockholders.
Ulm and Mr. The loss of ARRM as our Manager and key personnel could severely and detrimentally affect our operations. Our intended qualification as a REIT will subject us to a broad array of financial and operating parameters that may influence our business and investment decisions and limit our flexibility in reacting to market developments.
If we fail to comply with applicable REIT requirements, we will have to dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences. If we fail to qualify as a REIT, we will be subject to federal income tax as a regular corporation and may face substantial tax liability.
We were incorporated in the state of Maryland on June 18, Our phone number is Our website is www. The contents of our website are not a part of this prospectus. The information on our website is not intended to form a part of or be incorporated by reference into this prospectus. Common stock to be outstanding after this offering. We plan to use all of the net proceeds from this offering and the concurrent private placement to acquire our target assets, which include agency mortgage-backed securities, non-agency mortgage-backed securities and other mortgage-related investments, in accordance with our objectives and strategies described in this prospectus.
Until appropriate assets can be identified, we may invest the net proceeds from this offering in interest-bearing short-term investments, including funds that are consistent with our intended qualification as a REIT. These investments are expected to provide lower net return that we will seek to achieve from our target assets.
We intend to make monthly cash distributions to holders of our common stock consistent with maintaining our REIT qualification for U. To assist us in qualifying as a REIT, ownership of shares of our common stock by any person will be limited, with certain exceptions, to 9.
Our charter also provides for certain other ownership restrictions. We may grant waivers from the 9. Includes , shares of our common stock to be issued and sold in the concurrent private placement to an entity controlled by Messrs. Staton and Bell and 50 shares issued in connection with our initial capitalization in June An investment in our securities involves a high degree of risk. You should consider carefully the material risks described below, together with the other information contained in this prospectus, before making a decision to invest in our securities.
If any of the following events occur, our business, financial condition and operating results may be materially adversely affected. In that event, the trading price of our securities could decline, and you could lose all or part of your investment. This prospectus also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. We were incorporated on June 18, , and we will not build an investment portfolio until after the completion of this offering and the concurrent private placement. Our Manager may not be able to execute successfully our investment, financing and hedging strategies as described in this prospectus, which could result in a loss of some or all of your investment.
The results of our operations will depend on many factors, including, without limitation, the availability of attractively priced mortgage-related investments, the level and volatility of interest rates, readily accessible financing for our proposed investment portfolio, conditions in the financial markets and the economy in general.
Our net interest income will depend, in large part, on our ability to acquire assets at favorable spreads over our borrowing costs. If we are unable to acquire assets that generate favorable spreads, our results of operations will be adversely affected, which will affect our ability to make or sustain distributions to our stockholders.
Our Manager employs an investment team focused on agency and non-agency mortgage-backed securities and other mortgage-related investments. Although we intend to pursue investments in non-agency mortgage investments, prior to the recent hiring of certain non-agency mortgage investment professionals, our Manager and its affiliates had limited experience managing investment vehicles that pursued a non-agency mortgage-backed securities investment strategy, which may limit our ability to achieve our investment objectives.
Our results of operations will be materially affected by conditions in the markets for mortgages and mortgage related assets, including mortgage backed securities, as well as the broader financial markets and the economy generally. Beginning in , significant adverse changes in financial market conditions resulted in a deleveraging of the entire global financial system and the forced sale of large quantities of mortgage related and other financial assets.
More recently, concerns over economic recession, inflation, geopolitical issues, unemployment, the availability and cost of financing, the mortgage market and a declining real estate market have contributed to increased volatility and diminished expectations for the economy and markets.
In particular, the residential mortgage market in the U. Certain commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the residential mortgage market. These factors have impacted investor perception of the risk associated with residential mortgage backed securities, real estate-related securities and various other asset classes in which we may invest.
As a result, values for residential mortgage backed securities, real estate-related securities and various other asset classes in which we may invest have experienced volatility. Any decline in the value of our investments, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Further increased volatility and deterioration in the broader residential mortgage and mortgage backed securities markets may adversely affect the performance and market value of our investments.
We will rely on the availability of financing to acquire our target assets on a leveraged basis. Institutions from which we intend to obtain financing may invest in or finance mortgage-backed securities and other assets that decline in value as a result of the recent downturn in the residential mortgage market, causing these institutions to suffer losses. If these conditions persist, these institutions may be forced to exit the repurchase market, become insolvent or further tighten their lending standards or increase the amount of equity capital or the weighted average margin requirement, or the percentage.
Under such circumstances, it could be more difficult for us to obtain financing on favorable terms or at all. Our profitability may be adversely affected if we are unable to obtain cost-effective financing for our future investments.
While the overall financing environment has improved over the last twelve months, further credit losses or mergers, acquisitions, or bankruptcies of investment banks and commercial banks that have historically acted as repurchase agreement counterparties may occur.
This would result in a fewer number of potential repurchase agreement counterparties operating in the market and could potentially impact the pricing and availability of financing for our business. The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the federal government, may adversely affect our business. The payments we receive on the target assets in which we invest depend upon a steady stream of payments by borrowers on the underlying mortgages and the fulfillment of guarantees by Ginnie Mae or GSEs such as Fannie Mae and Freddie Mac.
Ginnie Mae is part of a U. Government agency and its guarantees are backed by the full faith and credit of the U. Fannie Mae and Freddie Mac are U. Government-sponsored entities, but their guarantees are not backed by the full faith and credit of the U. Since , Fannie Mae and Freddie Mac have reported substantial losses and a need for substantial amounts of additional capital.
In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the credit market disruption, Congress and the U. Treasury undertook a series of actions to stabilize these government-sponsored entities and the financial markets, generally. Those efforts resulted in significant U. Government financial support and increased control of the GSEs. The U. Treasury has committed to support the positive net worth of Fannie Mae and Freddie Mac, through preferred stock purchases as necessary, through Both the secured short-term credit facility and the agency mortgage-backed securities program initiated by the U.
Treasury expired on December 31, However, through that securities purchase program from September through December , the U. In addition, while the U. Subject to specified investment guidelines, the portfolios of agency mortgage-backed securities purchased through the programs established by the U. Treasury and the U. Federal Reserve may be held to maturity and, based on mortgage market conditions, adjustments may be made to these portfolios.
This flexibility may adversely affect the pricing and availability of agency mortgage-backed securities that we seek to acquire during the remaining term of these portfolios. Although the U. Government has committed to support the positive net worth of Fannie Mae and Freddie Mac through , there can be no assurance that these actions will be adequate for their needs.
These uncertainties lead to questions about the availability of and trading market for, agency mortgage-backed securities. Despite the steps taken by the U. Government, Fannie Mae and Freddie Mac could default on their guarantee obligations which would materially and adversely affect the value of our agency mortgage-backed securities.
Accordingly, if these government actions are inadequate and the GSEs continue to suffer losses or cease to exist, our business, operations and financial condition could be materially and adversely affected. In addition, the problems faced by Fannie Mae and Freddie Mac, resulting in their being placed into federal conservatorship and receiving significant U. Government support, have sparked serious debate among federal policy makers regarding the continued role of the U.
Government in providing liquidity for mortgage loans. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantee obligations could be. Government could determine to stop providing liquidity support of any kind to the mortgage market.
Any changes to the nature of their guarantee obligations could redefine what constitutes an agency mortgage-backed security and could have broad adverse implications for the market and our business, operations and financial condition. If Fannie Mae or Freddie Mac were eliminated, or their structures were to change radically i.
We could be negatively affected in a number of ways depending on the manner in which related events unfold for Fannie Mae and Freddie Mac. We will rely on our agency mortgage-backed securities, among other mortgage-related investments, as collateral for our financings under our repurchase agreements. Any decline in their value or perceived market uncertainty about their value, would make it more difficult for us to obtain financing on our agency mortgage-backed securities on acceptable terms or at all, or to maintain our compliance with the terms of any financing transactions.
Further, the current support provided by the U. Treasury to Fannie Mae and Freddie Mac and any additional support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from agency mortgage-backed securities, thereby tightening the spread between the interest we earn on our agency mortgage-backed securities and the cost of financing those assets.
A reduction in the supply of agency mortgage-backed securities could also negatively affect the pricing of agency mortgage-backed securities, by reducing the spread between the interest we earn on our portfolio of agency mortgage-backed securities and our cost of financing that portfolio. As indicated above, legislation has changed the relationship between Fannie Mae and Freddie Mac and the U. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.
Government and could also nationalize, privatize, or eliminate such entities entirely. Any law affecting these GSEs may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. It also is possible that such laws could adversely impact the market for such securities and spreads at which they trade.
All of the foregoing could materially and adversely affect our business, operations and financial condition. Certain actions by the U. Federal Reserve could cause a flattening of the yield curve, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.
On September 21, , the U. Treasury securities with remaining maturities between six and 30 years and sold an equal amount of U. Treasury securities with remaining maturities of three years or less. On June 20, , the U. The effect of Operation Twist could be a flattening in the yield curve, which could result in increased prepayment rates due to lower long-term interest rates and a narrowing of our net interest margin.
Consequently, Operation Twist and any other future securities purchase programs by the U. Federal Reserve could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. Mortgage loan modification and refinancing programs and future legislative action may adversely affect the value of, and our returns on, residential mortgage-backed securities.
Government, through the U. Especially with non-agency securities, a significant number of loan modifications with respect to a given security, including, but not limited to, those related to principal forgiveness and coupon reduction, resulting in increased prepayment rates, could negatively impact the realized yields and cash flows on such security. These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae, may adversely affect the value of, and the returns on, residential mortgage-backed securities that we may purchase.
Changes in the underwriting standards by Freddie Mac or Fannie Mae could have an adverse impact on agency mortgage investments in which we may invest or make it more difficult to acquire attractive non-agency mortgage investments. Specifically, Freddie Mac announced that it would no longer purchase interest-only mortgages and Fannie Mae changed its eligibility criteria for purchasing and securitizing ARMs to protect consumers from potentially dramatic payment increases.
Our targeted assets include adjustable-rate mortgages and hybrid ARMs. Tighter underwriting standards by Freddie Mac or Fannie Mae could reduce the supply of ARMs, resulting in a reduction in the availability of the asset class. More lenient underwriting standards could also substantially reduce the supply and attractiveness of investments in non-agency MBS.
The results of our operations depend on many factors, including, without limitation, the availability of opportunities for the acquisition of attractively priced target assets, the level and volatility of interest rates, readily accessible funding in the financial markets and our ability to cost-effectively hedge risks as well as overall economic conditions. We may not be able to maintain agreements with our lenders on favorable terms or at all.
Furthermore, we may not be able to operate our business successfully or implement our operating policies and strategies as described in this prospectus, which could result in the loss of some or all of your investment. Changes in prepayment rates may adversely affect our profitability. Our investment portfolio will consist of whole mortgage loans or securities backed by pools of mortgage loans. For securities backed by pools of mortgage loans, we receive payments, generally, from the payments that are made on these underlying mortgage loans.
When borrowers prepay their mortgage loans at rates that are faster or slower than expected, it results in prepayments that are faster or slower than expected on our assets. These faster or slower than expected payments may adversely affect our profitability. We may purchase securities or loans that have a higher interest rate than the then prevailing market interest rate. In exchange for this higher interest rate, we may pay a premium to par value to acquire the security or loan.
In accordance with GAAP, we amortize this premium over the expected term of the security or loan based on our prepayment assumptions. If a security or loan is prepaid in whole or in part at a faster than expected rate, however, we must expense all or a part of the remaining unamortized portion of the premium that was paid at the time of the purchase, which will adversely affect our profitability.
We also may purchase securities or loans that have a lower interest rate than the then prevailing market interest rate. In exchange for this lower interest rate, we may pay a discount to par value to acquire the security or loan. We accrete this discount over the expected term of the security or loan based on our prepayment assumptions. If a security or loan is prepaid at a slower than expected rate, however, we must accrete the remaining portion of the discount at a slower than expected rate.
This will extend the expected life of investment portfolio and result in a lower than expected yield on securities and loans purchased at a discount to par. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayments can also occur when borrowers sell the property and use the sale proceeds to prepay the mortgage as part of a physical relocation or when borrowers default on their mortgages and the mortgages are prepaid from the proceeds of a foreclosure sale of the property.
Fannie Mae and Freddie Mac will generally, among other conditions, purchase mortgages that are days or more delinquent from mortgage-backed securities trusts when the cost of guaranteed payments to security holders, including advances of interest at the security coupon rate, exceeds the cost of holding the nonperforming loans in their portfolios.
Consequently, prepayment rates also may be affected by conditions in the housing and financial markets, which may result in increased delinquencies on mortgage loans, the government-sponsored entities, cost of capital, general economic conditions and the relative interest rates on fixed and adjustable rate loans, which could lead to an acceleration of the payment of the related principal. In addition, the introduction of new government programs, such as the U.
These new programs along with any new additional programs or changes to existing programs may cause substantial uncertainty around the magnitude of changes in prepayment speeds. To the extent that actual prepayment speeds differ from our expectations, it could adversely affect our operating results.
Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our portfolio. Our success will depend on our ability to analyze the relationship of changing interest rates and prepayments of the mortgages that underlie our target assets.
Changes in interest rates and prepayments will affect the market price of the target assets that we purchase and any target assets that we hold at a given time. As part of our overall portfolio risk management, we analyze interest rate changes and prepayment trends separately and collectively to assess their effects on our portfolio. In conducting our analysis, we depend on industry-accepted assumptions with respect to the relationship between interest rates and prepayments under normal market conditions.
If the dislocation in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, our ability to assess the market value of our portfolio would be significantly affected and could materially adversely affect our financial position and results of operations. The downgrade of the U. Government, the credit rating downgrades of the U.
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