Company: NLY-PF
Filing Date: 2025-02-13
Form Type: 10-K
Source: 0001628280-25-005451
Chunk: 117

Company: ANNALY CAPITAL MANAGEMENT INC
Filing Date: 2025-02-13
Form: 10-K
Item: Item 16
Chunk 117
---
 critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.

F-1

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIESFinancial Statements

Valuation of mortgage servicing rights Description of the MatterThe Company invests in servicing related assets comprised of mortgage servicing rights (“MSR”) totaling $2.9 billion as of December 31, 2024 as included in Note 7 to the consolidated financial statements. The Company records MSR at fair value on a recurring basis with changes in fair value recognized in the statement of comprehensive income (loss). These fair value estimates are based on valuation techniques used to estimate future cash flows that incorporate unobservable assumptions, including discount rate, prepayment rate, delinquency rate and cost to service.Auditing the valuation of MSR is complex and required the use of a specialist due to the high degree of judgement in the assumptions made by management which are unobservable in nature. Additionally, selecting and applying audit procedures to address the estimation uncertainty involves auditor subjectivity and industry-specific knowledge of MSR, including the current market conditions considered by a market participant.How We Addressed theMatter in OurAuditWe obtained an understanding, evaluated and tested the Company’s processes and the design and operating effectiveness of internal controls addressing the valuation of MSR, comprising management’s governance over the functionality of the discounted cash flow model utilized to estimate fair value; management’s review of the reasonableness of the unobservable assumptions used in the discounted cash flow model (i.e., discount rate, prepayment rate, delinquency rate and cost to service); management’s comparison of the assumptions used to independent third-party data; and management’s evaluation of the internal fair value mark to third-party management specialists’ ranges, as well as their evaluation of the competence and objectivity of those third-party management specialists, to assess the reasonableness of the fair values developed by the Company.To test the valuation of MSR, our audit procedures included, among others, evaluating the Company’s valuation techniques used to estimate future cash flows, validating the accuracy and completeness of model objective inputs by agreeing these inputs to the Company’s underlying records and third-party data, evaluating the Company’s model, and testing the significant unobservable assumptions used by management by comparing them to current industry, market and economic trends. We involved our valuation specialists to assist in our evaluation of the Company’s valuation techniques and the assumptions used by management, and to independently develop a range of fair values for the MSR. We compared the assumptions made