SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 FORM
10-K
 
 
 
 (MARK
ONE)
 
 [X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 FOR
THE FISCAL YEAR ENDED:  DECEMBER 31, 2009
 
 OR
 
 [  ]
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:  1-33796
 
 CHIMERA
INVESTMENT CORPORATION
 (Exact
Name of Registrant as Specified in its Charter)
 
  MARYLAND
                  
                  26-0630461(State or other jurisdiction of
      incorporationof
      organization)
                  
                  (I.R.S.
      Employer Identification
Number)
  1211
      Avenue of the Americas, Suite 2902
                  
                  10036New
      York, New York
                    (Address
      of Principal Executive Offices)
                  
                  (Zip
      Code)
   (646)
454-3759
 (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 $.01 per share
                  New
      York Stock Exchange
 
 Securities
registered pursuant to Section 12(g) of the Act:
 
 None.
 
 Indicate
by check mark whether the Registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act.   Yes XNo
 
 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  X
 
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
 Yes
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 to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
 Yes___
No____
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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 any amendment to this
Form 10-K. o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “accelerated filer, large 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 Act).    Yes
__   No  X.
 
 At
June 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $2,177,976,715 based on the closing sale
price on the New York Stock Exchange on that date.
 
 The
number of shares of the Registrant’s Common Stock outstanding on February 25,
2010 was 670,371,002.
 
 Documents
Incorporated by Reference
  The
registrant intends to file a definitive proxy statement pursuant to Regulation
14A within 120 days of the end of the fiscal year ended December 31,
2009.  Portions of such proxy statement are incorporated by reference
into Part III of this Form 10-K.
   
   CHIMERA
INVESTMENT CORPORATION
 2009
FORM 10-K ANNUAL REPORT
 TABLE
OF CONTENTS
   PAGEPART IITEM 1.
                  BUSINESS
                  2ITEM 1A.
                  RISK FACTORS
                  11ITEM 1B.
                  UNRESOLVED STAFF COMMENTS
                  47ITEM 2.
                  PROPERTIES
                  47ITEM 3.
                  LEGAL PROCEEDINGS
                  47ITEM 4.
                  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                  47PART IIITEM 5.
                  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
                  48ITEM 6.
                  SELECTED FINANCIAL DATA
                  50ITEM 7.
                  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
                  51ITEM 7A.
                  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                  78ITEM 8.
                  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                  82ITEM 9.
                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                  82ITEM 9A.
                  CONTROLS AND PROCEDURES
                  82ITEM 9B.
                  OTHER INFORMATION
                  83PART IIIITEM 10.
                  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
                  84ITEM 11.
                  EXECUTIVE COMPENSATION
                  84ITEM 12.
                  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
                  84ITEM 13.
                  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
      INDEPENDENCE
                  84ITEM 14.
                  PRINCIPAL ACCOUNTANT FEES AND SERVICES
                  84PART IVITEM 15.
                  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
                  85FINANCIAL STATEMENTS
                  F-1SIGNATURES
                  S-1EXHIBITS
   ii
  
  SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
  We make
forward-looking statements in this annual report that are subject to risks and
uncertainties. These forward-looking statements include information about
possible or assumed future results of our business, financial condition,
liquidity, results of operations, plans and objectives. When we use the words
‘‘believe,’’ ‘‘expect,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘plan,’’ ‘‘continue,’’
‘‘intend,’’ ‘‘should,’’ ‘‘may,’’ ‘‘would,’’ ‘‘will’’ or similar expressions, we
intend to identify forward-looking statements.  Statements regarding
the following subjects, among others, are forward-looking by their
nature:
  ·
                our
      business and investment strategy;
  ·
                our
      projected financial and operating
results;
  ·
                our
      ability to maintain existing financing arrangements, obtain future
      financing arrangements and the terms of such
  arrangements;
  ·
                general
      volatility of the securities markets in which we
  invest;
  ·
                the
      implementation, timing and impact of, and changes to, various government
      programs, including the US Department of the Treasury’s plan to buy Agency
      residential mortgage-backed securities, the Term Asset-Backed Securities
      Loan Facility and the Public-Private Investment
  Program;
  ·
                our
      expected investments;
  ·
                changes
      in the value of our investments;
  ·
                interest
      rate mismatches between our investments and our borrowings used to fund
      such purchases;
  ·
                changes
      in interest rates and mortgage prepayment
rates;
  ·
                effects
      of interest rate caps on our adjustable-rate
  investments;
  ·
                rates
      of default or decreased recovery rates on our
  investments;
  ·
                prepayments
      of the mortgage and other loans underlying our mortgage-backed or other
      asset-backed securities;
  ·
                the
      degree to which our hedging strategies may or may not protect us from
      interest rate volatility;
  ·
                impact
      of and changes in governmental regulations, tax law and rates, accounting
      guidance, and similar matters;
  ·
                availability
      of investment opportunities in real estate-related and other
      securities;
  ·
                availability
      of qualified personnel;
  ·
                estimates
      relating to our ability to make distributions to our stockholders in the
      future;
  ·
                our
      understanding of our competition;
and
  ·
                market
      trends in our industry, interest rates, the debt securities markets or the
      general economy.
  The
forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. You should not place undue reliance on these
forward-looking statements. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us. Some of these factors are described under the caption ‘‘Risk
Factors’’ in this Annual Report on Form 10-K and any subsequent Quarterly
Reports on Form 10-Q.  If a change occurs, our business, financial
condition, liquidity and results of operations may vary materially from those
expressed in our forward-looking statements. Any forward-looking statement
speaks only as of the date on which it is made. New risks and uncertainties
arise from time to time, and it is impossible for us 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 any forward-looking statements, whether as a
result of new information, future events or otherwise.
  1
 
 PART I
 
 Item
1.                    Business
 
 The
Company
 
 We are a
specialty finance company that invests, either directly or indirectly through
our subsidiaries, in residential mortgage-backed securities, or RMBS,
residential mortgage loans, real estate-related securities and various other
asset classes.  We elected to be taxed as a real estate investment
trust, or REIT, for federal income tax purposes commencing with our taxable year
ending on December 31, 2007.  Therefore, we generally will not be
subject to federal income tax on our taxable income that is distributed to our
stockholders.  We were incorporated in Maryland in June 2007 and
commenced operations in November 2007.  We listed our common stock on
the New York Stock Exchange, or NYSE, in November 2007 and trade under the
symbol “CIM”.
 
 We are
externally managed by Fixed Income Discount Advisory Company, which we refer to
as our Manager or FIDAC.  Our Manager is an investment advisor
registered with the Securities and Exchange Commission, or
SEC.  Additionally, our Manager is a wholly-owned subsidiary of Annaly
Capital Management, Inc., or Annaly, a New York Stock Exchange-listed REIT,
which has a long track record of managing investments in U.S. government agency
mortgage-backed securities.
 
 Our
objective is to provide attractive risk-adjusted returns to our investors over
the long-term, primarily through dividends and secondarily through capital
appreciation. We intend to achieve this objective by investing in a broad class
of financial assets to construct an investment portfolio that is designed to
achieve attractive risk-adjusted returns and that is structured to comply with
the various federal income tax requirements for REIT status and to maintain our
exclusion from regulation under the Investment Company Act of 1940, or 1940
Act.
 
 Our
Manager
 
 We are
externally managed and advised by FIDAC, a fixed-income management company,
pursuant to a management agreement.  All of our officers are employees
of our Manager or one of its affiliates.  We believe our relationship
with our Manager enables us to leverage our Manager’s well-respected and
established portfolio management resources for each of our targeted asset
classes and its sophisticated infrastructure supporting those resources,
including investment professionals focusing on residential mortgage loans, U.S.
government agency residential mortgage-backed securities, or Agency RMBS, which
are mortgage pass-through certificates, collateralized mortgage obligations, or
CMOs, and other mortgage-backed securities representing interests in or
obligations backed by pools of mortgage loans issued or guaranteed by the
Federal National Mortgage Association, or Fannie Mae, the Federal Home Loan
Mortgage Corporation, or Freddie Mac, and the Government National Mortgage
Association, or Ginnie Mae, non-Agency RMBS and other asset-backed securities,
or ABS.  Additionally, we have benefitted and expect to continue to
benefit from our Manager’s finance and administration functions, which address
legal, compliance, investor relations and operational matters, including
portfolio management, trade allocation and execution, securities valuation, risk
management and information technologies in connection with the performance of
its duties.  Our Manager commenced active investment management
operations in 1994.  At December 31, 2009 our Manager was the adviser
or sub-adviser for investment vehicles, including us and CreXus Investment Corp.
(a NYSE-listed commercial mortgage REIT), with approximately $6.0 billion in net
assets and $13.6 billion in gross assets.
 
 Our
Manager is responsible for administering our business activities and day-to-day
operations.  Pursuant to the terms of the management agreement, our
Manager provides us with our management team, including our officers, along with
appropriate support personnel.  Our Manager is at all times subject to
the supervision and oversight of our board of directors and has only such
functions and authority as we delegate to it.
 
 Our
Investment Strategy
 
 Our
objective is to provide attractive risk-adjusted returns to our investors over
the long-term, primarily through dividends and secondarily through capital
appreciation.  We intend to achieve this objective by investing in a
diversified investment portfolio of RMBS, residential mortgage loans, real
estate-related securities and various other asset classes, subject to
maintaining our REIT status and exemption from registration under the 1940
Act.  The RMBS, ABS, commercial mortgage backed securities, or CMBS,
and collateralized debt obligations, or CDOs, we purchase may include
investment-grade and non-investment grade classes, including the BB-rated,
B-rated and non-rated classes.
  2
  We rely
on our Manager’s expertise in identifying assets within our target asset
classes.  Our Manager makes investment decisions based on various
factors, including expected cash yield, relative value, risk-adjusted returns,
current and projected credit fundamentals, current and projected macroeconomic
considerations, current and projected supply and demand, credit and market risk
concentration limits, liquidity, cost of financing and financing availability,
as well as maintaining our REIT qualification and our exemption from
registration under the 1940 Act.
 
 Over
time, we will modify our investment allocation strategy as market conditions
change to seek to maximize the returns from our investment
portfolio.  We believe this strategy, combined with our Manager’s
experience, will enable us to pay dividends and achieve capital appreciation
throughout changing interest rate and credit cycles and provide attractive
long-term returns to investors.
 
 Our
targeted asset classes and the principal investments we expect to make in each
are as follows:
 
 Asset Class
                
                
                Principal InvestmentsResidential
      Mortgage-Backed Securities
                
                ·
                Non-Agency
      RMBS, including investment-grade and non-investment grade classes,
      including the BB-rated, B-rated and non-rated classes.·
                Agency
      RMBS.Residential
      Mortgage Loans
                
                ·
                Prime
      mortgage loans, which are mortgage loans that conform to the underwriting
      guidelines of Fannie Mae and Freddie Mac, which we refer to as Agency
      Guidelines; and jumbo prime mortgage loans, which are mortgage loans that
      conform to the Agency Guidelines except as to loan size.·
                Alt-A
      mortgage loans, which are mortgage loans that may have been originated
      using documentation standards that are less stringent than the
      documentation standards applied by certain other first lien mortgage loan
      purchase programs, such as the Agency Guidelines, but have one or more
      compensating factors such as a borrower with a strong credit or mortgage
      history or significant assets.Other
      Asset-Backed Securities
                
                ·
                CMBS.·
                Debt
      and equity tranches of CDOs.·
                Consumer
      and non-consumer ABS, including investment-grade and non-investment grade
      classes, including the BB-rated, B-rated and non-rated
  classes.
 
 Since we
commenced operations in November 2007, we have focused our investment activities
on acquiring non-Agency RMBS and on purchasing residential mortgage loans that
have been originated by select high-quality originators, including the retail
lending operations of leading commercial banks.  Our investment
portfolio at December 31, 2009 was weighted toward non-Agency
RMBS.   At December 31, 2009, approximately 67.7% of our
investment portfolio was non-Agency RMBS, 25.0% of our investment portfolio was
Agency RMBS, and 7.3% of our investment portfolio was securitized residential
mortgage loans.  At December 31, 2008, approximately 52.5% of our
investment portfolio was non-Agency RMBS, 13.7% of our investment portfolio was
Agency RMBS, and 33.8% of our investment portfolio was securitized residential
mortgage loans. We expect that over the near term, our investment portfolio will
continue to be weighted toward RMBS, subject to maintaining our REIT
qualification and our 1940 Act exemption.
  3
  In
addition, we have engaged in and anticipate continuing to engage in transactions
with residential mortgage lending operations of leading commercial banks and
other high-quality originators in which we identify and re-underwrite
residential mortgage loans owned by such entities, and rather than purchasing
and securitizing such residential mortgage loans ourselves, we and the
originator would structure the securitization and we would purchase the
resulting mezzanine and subordinate non-Agency RMBS.  We may also
engage in similar transactions with non-Agency RMBS in which we acquire
AAA-rated non-Agency RMBS and immediately re-securitize those
securities.  We may sell the resulting AAA-rated super senior RMBS and
retain the AAA-rated mezzanine RMBS.  Our investment decisions,
however, will depend on prevailing market conditions and will change over
time.  As a result, we cannot predict the percentage of our assets
that will be invested in each asset class or whether we will invest in other
classes of investments.  We may change our investment strategy and
policies without a vote of our stockholders.
 
 We have
elected to be taxed as a REIT commencing with our taxable year ended December
31, 2007 and operate our business to be exempt from registration under the 1940
Act, and therefore we are required to invest a substantial majority of our
assets in loans secured by mortgages on real estate and real estate-related
assets.  Subject to maintaining our REIT qualification and our 1940
Act exemption, we do not have any limitations on the amounts we may invest in
any of our targeted asset classes.
 
 Investment
Portfolio
 
 The
following briefly discusses the principal types of investments that we have made
and expect to make:
 
 Residential
Mortgage-Backed Securities
 
 We have
invested in and intend to continue to invest in RMBS which are typically
pass-through certificates created by the securitization of a pool of mortgage
loans that are collateralized by residential real estate
properties.
 
 The
securitization process is governed by one or more of the rating agencies,
including Fitch Ratings, Moody’s Investors Service and Standard & Poor’s,
which determine the respective bond class sizes, generally based on a sequential
payment structure.  Bonds that are rated from AAA to BBB by the rating
agencies are considered “investment grade.” Bond classes that are subordinate to
the BBB class are considered “below-investment grade” or “non-investment
grade.”  The respective bond class sizes are determined based on the
review of the underlying collateral by the rating agencies.  The
payments received from the underlying loans are used to make the payments on the
RMBS.  Based on the sequential payment priority, the risk of
nonpayment for the investment grade RMBS is lower than the risk of nonpayment
for the non-investment grade bonds.  Accordingly, the investment grade
class is typically sold at a lower yield compared to the non-investment grade
classes which are sold at higher yields.
 
 We invest
in investment grade and non-investment grade RMBS.  We evaluate the
credit characteristics of these types of securities, including, but not limited
to, loan balance distribution, geographic concentration, property type,
occupancy, periodic and lifetime cap, weighted-average loan-to-value and
weighted-average FICO score.  Qualifying securities are then analyzed
using base line expectations of expected prepayments and losses from given
sectors, issuers and the current state of the fixed-income
market.  Losses and prepayments are stressed simultaneously based on a
credit risk-based model.  Securities in this portfolio are monitored
for variance from expected prepayments, severities, losses and cash flow. The
due diligence process is particularly important and costly with respect to newly
formed originators or issuers because there may be little or no information
publicly available about these entities and investments.
 
 We may
invest in net interest margin securities, or NIMs, which are notes that are
payable from and secured by excess cash flow that is generated by RMBS or home
equity line of credit-backed securities, or HELOCs, after paying the debt
service, expenses and fees on such securities.  The excess cash flow
represents all or a portion of a residual that is generally retained by the
originator of the RMBS or HELOCs.  The residual is illiquid, thus the
originator will monetize the position by securitizing the residual and issuing a
NIM, usually in the form of a note that is backed by the excess cash flow
generated in the underlying securitization.
  4
  We may
invest in mortgage pass-through certificates issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac.  We refer to these U.S. government agencies
as Agencies, and to the mortgage pass-through certificates they issue or
guarantee as Agency Mortgage Pass-through Certificates.  More
specifically, Agency Mortgage Pass-through Certificates are securities
representing interests in “pools” of mortgage loans secured by residential real
property where payments of both interest and principal, plus pre-paid principal,
on the securities are made monthly to holders of the security, in effect
“passing through” monthly payments made by the individual borrowers on the
mortgage loans that underlie the securities, net of fees paid to the
issuer/guarantor and servicers of the securities.  We may also invest
in CMOs issued by the Agencies.  CMOs consist of multiple classes of
securities, with each class bearing different stated maturity
dates.  Monthly payments of principal, including prepayments, are
first returned to investors holding the shortest maturity class; investors
holding the longer maturity classes receive principal only after the first class
has been retired.  We refer to these types of securities as Agency
CMOs, and we refer to Agency Mortgage Pass-through Certificates and Agency CMOs
as Agency RMBS.
 
 Agency
RMBS are collateralized by either fixed-rate mortgage loans, or FRMs,
adjustable-rate mortgage loans, or ARMs, or hybrid ARMs.  Hybrid ARMs
are mortgage loans that have interest rates that are fixed for an initial period
(typically three, five, seven or ten years) and thereafter reset at regular
intervals subject to interest rate caps.  Our allocation between
securities collateralized by FRMs, ARMs or hybrid ARMs will depend on various
factors including, but not limited to, relative value, expected future
prepayment trends, supply and demand, costs of financing, costs of hedging,
expected future interest rate volatility and the overall shape of the U.S.
Treasury and interest rate swap yield curves.  We take these factors
into account when we make these types of investments.
 
 We
anticipate engaging in transactions with residential mortgage lending operations
of leading commercial banks and other high-quality originators in which we
identify and re-underwrite residential mortgage loans owned by such entities,
and rather than purchasing and securitizing such residential mortgage loans
ourselves, we and the originator would structure the securitization and we would
purchase the resulting mezzanine and subordinate non-Agency RMBS.  We
may also engage in similar transactions with non-Agency RMBS in which we would
acquire AAA-rated non-Agency RMBS and immediately re-securitize those
securities.  We may sell the resulting AAA-rated super senior RMBS and
retain the AAA-rated mezzanine RMBS.
 
 Residential
Mortgage Loans
 
 We have
invested and intend to continue to invest in residential mortgage loans
(mortgage loans secured by residential real property) primarily through direct
purchases from selected high-quality originators.  We intend to enter
into additional mortgage loan purchase agreements with a number of primary
mortgage loan originators, including mortgage bankers, commercial banks, savings
and loan associations, home builders, credit unions and mortgage
conduits.  We may also purchase mortgage loans on the secondary
market.  We expect these loans to be secured primarily by residential
properties in the United States.
 
 We invest
primarily in residential mortgage loans underwritten to our
specifications.  The originators perform the credit review of the
borrowers, the appraisal of the properties securing the loan, and maintain other
quality control procedures.  We generally consider the purchase of
loans when the originators have verified the borrowers’ income and assets,
verified their credit history and obtained appraisals of the
properties.  We or a third party perform an independent underwriting
review of the processing, underwriting and loan closing methodologies that the
originators used in qualifying a borrower for a loan.  Depending on
the size of the loans, we may not review all of the loans in a pool, but rather
select loans for underwriting review based upon specific risk-based criteria
such as property location, loan size, effective loan-to-value ratio, borrower’s
credit score and other criteria we believe to be important indicators of credit
risk.  Additionally, before the purchase of loans, we obtain
representations and warranties from each originator stating that each loan is
underwritten to our requirements or, in the event underwriting exceptions have
been made, we are informed so that we may evaluate whether to accept or reject
the loans.  An originator who breaches these representations and
warranties in making a loan that we purchase may be obligated to repurchase the
loan from us.  As added security, we use the services of a third-party
document custodian to insure the quality and accuracy of all individual mortgage
loan closing documents and to hold the documents in safekeeping.  As a
result, all of the original loan collateral documents that are signed by the
borrower, other than the original credit verification documents, are examined,
verified and held by the third-party document custodian.
 
 We
currently do not intend to originate mortgage loans or provide other types of
financing to the owners of real estate.  We currently do not intend to
establish a loan servicing platform, but expect to retain highly-rated servicers
to service our mortgage loan portfolio.  We purchase certain
residential mortgage loans on a servicing-retained basis.  In the
future, however, we may decide to originate mortgage loans or other types of
financing, and we may elect to service mortgage loans and other types of
assets.
  5
  We expect
that all servicers servicing our loans will be highly rated by the rating
agencies.  We also conduct a due diligence review of each servicer
before executing a servicing agreement.  Servicing procedures will
typically follow Fannie Mae guidelines but will be specified in each servicing
agreement.  All servicing agreements will meet standards for inclusion
in highly rated mortgage-backed or asset-backed securitizations.  We
have entered into a master servicing agreement with Wells Fargo, N.A. to assist
us with management, servicing oversight, and other administrative duties
associated with managing our mortgage loans.
 
 We expect
that the loans we acquire will be first lien, single-family residential
traditional fixed-rate, adjustable-rate and hybrid adjustable-rate loans with
original terms to maturity of not more than 40 years and are either fully
amortizing or are interest-only for up to ten years, and fully amortizing
thereafter.  Fixed-rate mortgage loans bear an interest rate that is
fixed for the life of the loan.  All adjustable-rate and hybrid
adjustable-rate residential mortgage loans will bear an interest rate tied to an
interest rate index.  Most loans have periodic and lifetime
constraints on how much the loan interest rate can change on any predetermined
interest rate reset date.  The interest rate on each adjustable-rate
mortgage loan resets monthly, semi-annually or annually and generally adjusts to
a margin over a U.S. Treasury index or the LIBOR index.  Hybrid
adjustable-rate loans have a fixed rate for an initial period, generally three
to ten years, and then convert to adjustable-rate loans for their remaining term
to maturity.
 
 We
acquire residential mortgage loans for our portfolio with the intention of
either securitizing them and retaining them in our portfolio as securitized
mortgage loans, or holding them in our residential mortgage loan
portfolio.  To facilitate the securitization or financing of our
loans, we expect to generally create subordinate certificates, which provide a
specified amount of credit enhancement.  We expect to issue securities
through securities underwriters and either retain these securities or finance
them in the repurchase agreement market.  There is no limit on the
amount we may retain of these below-investment-grade subordinate
certificates.  Until we securitize our residential mortgage loans, we
expect to finance our residential mortgage loan portfolio through the use of
warehouse facilities and repurchase agreements.
 
 Other
Asset-Backed Securities
 
 We may
invest in securities issued in various CDO offerings to gain exposure to bank
loans, corporate bonds, ABS, mortgages, RMBS and CMBS and other
instruments.  To avoid any actual or perceived conflicts of interest
with our Manager, an investment in any such security structured or managed by
our Manager will be approved by a majority of our independent
directors.  To the extent such securities are treated as debt of the
CDO issuer for federal income tax purposes, we will hold the securities
directly, subject to the requirements of our continued qualification as a
REIT.  To the extent the securities represent equity interests in a
CDO issuer for federal income tax purposes, we may be required to hold such
securities through a taxable REIT subsidiary, or TRS, which would cause the
income recognized with respect to such securities to be subject to federal (and
applicable state and local) corporate income tax.  See “Risk Factors –
Tax Risks.”  We could fail to qualify as a REIT or we could become
subject to a penalty tax if the income we recognize from certain investments
that are treated or could be treated as equity interests in a foreign
corporation exceed 5% of our gross income in a taxable year.
 
 We may
invest in CMBS, which are secured by, or evidence ownership interests in, a
single commercial mortgage loan or a pool of mortgage loans secured by
commercial properties.  These securities may be senior, subordinated,
investment grade or non-investment grade.  We intend to invest in CMBS
that will yield current interest income and where we consider the return of
principal to be likely.  We intend to acquire CMBS from private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage bankers, commercial banks, finance companies, investment
banks and other entities.
 
 In
general, CDO issuers are special purpose vehicles that hold a portfolio of
income-producing assets financed through the issuance of rated debt securities
of different seniority and equity.  The debt tranches are typically
rated based on cash flow structure, portfolio quality, diversification and
credit enhancement.  The equity securities issued by the CDO vehicle
are the “first loss” piece of the CDO vehicle’s capital structure, but they are
also generally entitled to all residual amounts available for payment after the
CDO vehicle’s senior obligations have been satisfied.  Some CDO
vehicles are “synthetic,” in which the credit risk to the collateral pool is
transferred to the CDO vehicle by a credit derivative such as a credit default
swap.
  6
  We
also may invest in consumer ABS.  These securities are generally
securities for which the underlying collateral consists of assets such as home
equity loans, credit card receivables and auto loans.  We also expect
to invest in non-consumer ABS.  These securities are generally secured
by loans to businesses and consist of assets such as equipment loans, truck
loans and agricultural equipment loans.  Issuers of consumer and
non-consumer ABS generally are special purpose entities owned or sponsored by
banks and finance companies, captive finance subsidiaries of non-financial
corporations or specialized originators such as credit card
lenders.  We may purchase RMBS and ABS which are denominated in
foreign currencies or are collateralized by non-U.S. assets.
 
 Investment
Guidelines
 
 We have
adopted a set of investment guidelines that set out the asset classes, risk
tolerance levels, diversification requirements and other criteria used to
evaluate the merits of specific investments as well as the overall portfolio
composition.  Our Manager’s Investment Committee reviews our
compliance with the investment guidelines periodically and our board of
directors receives an investment report at each quarter-end in conjunction with
its review of our quarterly results.  Our board also reviews our
investment portfolio and related compliance with our investment policies and
procedures and investment guidelines at each regularly scheduled board of
directors meeting.
 
 Our board
of directors and our Manager’s Investment Committee have adopted the following
guidelines for our investments and borrowings:
 
 ·
                No
      investment shall be made that would cause us to fail to qualify as a REIT
      for federal income tax purposes;
 
 ·
                No
      investment shall be made that would cause us to be regulated as an
      investment company under the 1940
Act;
 
 ·
                With
      the exception of real estate and housing, no single industry shall
      represent greater than 20% of the securities or aggregate risk exposure in
      our portfolio; and
 
 ·
                Investments
      in non-rated or deeply subordinated ABS or other securities that are
      non-qualifying assets for purposes of the 75% REIT asset test will be
      limited to an amount not to exceed 50% of our stockholders’
      equity.
 
 These
investment guidelines may be changed by a majority of our board of directors
without the approval of our stockholders.
 
 Our board
of directors has also adopted a separate set of investment guidelines and
procedures to govern our relationships with FIDAC.  We have also
adopted detailed compliance policies to govern our interaction with FIDAC,
including when FIDAC is in receipt of material non-public
information.
 
 Our
Financing Strategy
 
 We use
leverage to increase potential returns to our stockholders.  We are
not required to maintain any specific debt-to-equity ratio as we believe the
appropriate leverage for the particular assets we are financing depends on the
credit quality and risk of those assets.  At December 31, 2009, our
ratio of debt-to-equity was 1.1:1. For purposes of calculating this ratio, our
equity is equal to the total stockholders’ equity on our consolidated statements
of financial condition.  Our debt consists of repurchase agreements
and securitized debt.   As part of our borrowing, we have entered
into a RMBS repurchase agreement with Annaly, which owns approximately 6.7% of
our outstanding shares of common stock.  As of December 31, 2009, we
had outstanding under this agreement $259.0 million which consists of
approximately 13% of our total financing.
 
 Subject
to our maintaining our qualification as a REIT, we may use a number of sources
to finance our investments, including the following:
  7
  ·
                Repurchase
      Agreements.  We finance certain of our assets through the
      use of repurchase agreements.  We anticipate that repurchase
      agreements will be one of the sources we will use to achieve our desired
      amount of leverage for our residential real estate assets.  We
      maintain formal relationships with multiple counterparties to obtain
      financing on favorable terms.
 
 ·
                Warehouse
      Facilities.  We may utilize credit facilities for capital
      needed to fund our assets.  We intend to maintain formal
      relationships with multiple counterparties to maintain warehouse lines on
      favorable terms.
 
 ·
                Securitization.  We
      have and may continue to acquire residential mortgage loans for our
      portfolio with the intention of securitizing them and retaining the
      securitized mortgage loans in our portfolio.  To facilitate the
      securitization or financing of our loans, we generally create subordinate
      certificates, providing a specified amount of credit enhancement, which we
      intend to retain in our portfolio.
 
 ·
                Asset-Backed Commercial
      Paper.  We may finance certain of our assets using
      asset-backed commercial paper, or ABCP, conduits, which are
      bankruptcy-remote special purpose vehicles that issue commercial paper and
      the proceeds of which are used to fund assets, either through repurchase
      or secured lending programs.  We may utilize ABCP conduits of
      third parties or create our own
conduit.
 
 ·
                Term Financing
      CDOs.  We may finance certain of our assets using term
      financing strategies, including CDOs and other match-funded financing
      structures.  CDOs are multiple class debt securities, or bonds,
      secured by pools of assets, such as mortgage-backed securities and
      corporate debt.  Like typical securitization structures, in a
      CDO:
 
 o
                the
      assets are pledged to a trustee for the benefit of the holders of the
      bonds;
 o
                one
      or more classes of the bonds are rated by one or more rating agencies;
      and
 o
                one
      or more classes of the bonds are marketed to a wide variety of
      fixed-income investors, which enables the CDO sponsor to achieve a
      relatively low cost of long-term
financing.
 
 Unlike
typical securitization structures, the underlying assets may be sold, subject to
certain limitations, without a corresponding pay-down of the CDO, provided the
proceeds are reinvested in qualifying assets.  As a result, CDOs
enable the sponsor to actively manage, subject to certain limitations, the pool
of assets.  We believe CDO financing structures may be an appropriate
financing vehicle for our target asset classes because they will enable us to
obtain relatively low, long-term cost of funds and minimize the risk that we may
have to refinance our liabilities before the maturities of our investments,
while giving us the flexibility to manage credit risk and, subject to certain
limitations, to take advantage of profit opportunities.
 
 Our
Interest Rate Hedging and Risk Management Strategy
 
 We may,
from time to time, utilize derivative financial instruments to hedge all or a
portion of the interest rate risk associated with our
borrowings.  Under the federal income tax laws applicable to REITs, we
generally enter into certain transactions to hedge indebtedness that we incur,
or plan to incur, to acquire or carry real estate assets, although our total
gross income from such hedges and other non-qualifying sources must not exceed
25% of our gross income.
 
 We engage
in a variety of interest rate management techniques that seek to mitigate
changes in interest rates or other potential influences on the values of our
assets.  The federal income tax rules applicable to REITs require us
to implement certain of these techniques through a TRS that is fully subject to
corporate income taxation.  Our interest rate management techniques
may include:
 
 ·
                puts
      and calls on securities or indices of
  securities;
 
 ·
                Eurodollar
      futures contracts and options on such
contracts;
 
 ·
                interest
      rate caps, swaps and swaptions;
 
 ·
                U.S.
      treasury securities and options on U.S. treasury securities;
      and
  ·
                other
      similar transactions.
  8
  We
attempt to reduce interest rate risks and to minimize exposure to interest rate
fluctuations through the use of match funded financing structures, when
appropriate, whereby we seek (i) to match the maturities of our debt obligations
with the maturities of our assets and (ii) to match the interest rates on our
investments with like-kind debt (i.e., floating rate assets are financed with
floating rate debt and fixed-rate assets are financed with fixed-rate debt),
directly or through the use of interest rate swaps, caps or other financial
instruments, or through a combination of these strategies.  This will
allow us to minimize the risk that we have to refinance our liabilities before
the maturities of our assets and to reduce the impact of changing interest rates
on our earnings.
 
 Compliance
with REIT and Investment Company Requirements
 
 We
monitor our investment securities and the income from these securities and, to
the extent we enter into hedging transactions, we monitor income from our
hedging transactions as well, so as to ensure at all times that we maintain our
qualification as a REIT and our exempt status under the 1940 Act.
 
 Employees
 
 We are
externally managed and advised by our Manager pursuant to a management agreement
as discussed below.  We have no employees other than our officers,
each of whom is also an employee of our Manager or one of its
affiliates.  Our Manager is not obligated to dedicate certain of its
employees exclusively to us, nor is it or its employees obligated to dedicate
any specific portion of its time to our business.  Our Manager uses
the proceeds from its management fee in part to pay compensation to its officers
and employees who, notwithstanding that certain of them also are our officers,
receive no cash compensation directly from us.
 
 The
Management Agreement
 
 We
entered into a management agreement with our Manager with an initial term ending
December 31, 2010, with automatic, one-year renewals at the end of each calendar
year following the initial term, subject to approval by our independent
directors.  Under the management agreement, our Manager implements our
business strategy and performs certain services for us, subject to oversight by
our board of directors.  Our Manager is responsible for, among other
things, performing all of our day-to-day functions; determining investment
criteria in conjunction with our board of directors; sourcing, analyzing and
executing investments; asset sales and financings; and performing asset
management duties.
 
 Our
independent directors review our Manager’s performance annually, and following
the initial term, the management agreement may be terminated by us without cause
upon the affirmative vote of at least two-thirds of our independent directors,
or by a vote of the holders of at least a majority of the outstanding shares of
our common stock (other than shares held by Annaly or its affiliates), based
upon: (i) our Manager’s unsatisfactory performance that is materially
detrimental to us, or (ii) our determination that the management fees payable to
our Manager are not fair, subject to our Manager’s right to prevent termination
based on unfair fees by accepting a reduction of management fees agreed to by at
least two-thirds of our independent directors.  We will provide our
Manager with 180-days’ prior notice of such termination.  Upon
termination without cause, we will pay our Manager a substantial termination
fee.  We may also terminate the management agreement with 30 days’
prior notice from our board of directors, without payment of a termination fee,
for cause or upon a change of control of Annaly or our Manager, each as defined
in the management agreement. Our Manager may terminate the management agreement
if we become required to register as an investment company under the 1940 Act,
with such termination deemed to occur immediately before such event, in which
case we would not be required to pay a termination fee.  Our Manager
may also decline to renew the management agreement by providing us with
180-days’ written notice, in which case we would not be required to pay a
termination fee.
 
 We pay
our Manager a management fee quarterly in arrears in an amount equal to 1.50%
per annum, calculated quarterly, of our stockholders’ equity.  For
purposes of calculating the management fee, our stockholders’ equity means the
sum of the net proceeds from any issuances of our equity securities since
inception (allocated on a pro rata daily basis for such issuances during the
fiscal quarter of any such issuance), plus our retained earnings at the end of
such quarter  (without taking into account any non-cash equity
compensation expense incurred in current or prior periods), less any amount that
we pay for repurchases of our common stock, and less any unrealized gains,
losses or other items that do not affect realized net income (regardless of
whether such items are included in other comprehensive income, or OCI, or loss,
or in net income).  This amount is adjusted to exclude one-time events
pursuant to changes in generally accepted accounting principles, or GAAP, and
certain non-cash charges after discussions between our Manager and our
independent directors and approved by a majority of our independent
directors.  The management fee will be reduced, but not below zero, by
our proportionate share of any CDO base management fees FIDAC receives in
connection with the CDOs in which we invest, based on the percentage of equity
we hold in such CDOs.  The management fee is payable independent of
the performance of our investment portfolio.
  9
  For the
years ended December 31, 2009 and 2008 and the period November 21, 2007 to
December 31, 2007, our Manager earned management fees of $25.7 million, $8.4
million and $1.2 million, respectively and received expense reimbursement of $0,
$0 and $698 thousand, respectively.  From our inception through 2009,
our Manager waived its right to require us to pay our pro rata portion of rent,
telephone, utilities, office furniture, equipment, machinery and other office,
internal and overhead expenses of our Manager and its affiliates required for
our operations.
 
 Competition
 
 Our net
income depends, in large part, on our ability to acquire assets at favorable
spreads over our borrowing costs. In acquiring real estate-related assets, we
will compete with other mortgage REITs, specialty finance companies, savings and
loan associations, banks, mortgage bankers, insurance companies, mutual funds,
institutional investors, investment banking firms, financial institutions,
governmental bodies and other entities.  In addition, there are
numerous mortgage REITs with similar asset acquisition objectives, including a
number that have been recently formed, and others that may be organized in the
future. These other REITs will increase competition for the available supply of
mortgage assets suitable for purchase. Many of our competitors are significantly
larger than we are, have access to greater capital and other resources and may
have other advantages over us.  In addition, some of our competitors
may have higher risk tolerances or different risk assessments, which could allow
them to consider a wider variety of investments and establish more favorable
relationships than we can. Current market conditions may attract more
competitors, which may increase the competition for sources of
financing.  An increase in the competition for sources of funding
could adversely affect the availability and cost of financing, and thereby
adversely affect the market price of our common stock.
 
 Distributions
 
 To
maintain our qualification as a REIT, we must distribute substantially all of
our taxable income to our stockholders for each year.  We have
declared and paid regular quarterly dividends in the past and intend to do so in
the future.
 
 Available
Information
 
 Our
investor relations website is www.chimerareit.com.  We make available
on the website under "Financial Information/SEC filings," free of charge, our
annual report on Form 10-K and any other reports as soon as reasonably
practicable after we electronically file or furnish such materials to the SEC.
Information on our website, however, is not part of this Annual Report on Form
10-K.  All reports filed with the Securities and Exchange Commission
may also be read and copied at the SEC’s public reference room at 100 F Street,
N.E., Washington, D.C. 20549. Further information regarding the operation of the
public reference room may be obtained by calling 1-800-SEC-0330.  In
addition, all of our filed reports can be obtained at the SEC’s website at
www.sec.gov.
  10
  Item 1A.  Risk Factors
 
 The risks
and uncertainties described below are not the only ones facing us. Additional
risks and uncertainties that we are unaware of, or that we currently deem
immaterial, also may become important factors that affect us.
 
 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 common stock could decline, and stockholders may lose some or all
of their investment.
 
 Risks
Associated With Recent Adverse Developments in the Mortgage Finance and Credit
Markets
 
 Difficult
conditions in the financial markets and the economy generally have caused us and
may continue to cause us market value losses related to our holdings, and we do
not expect these conditions to improve in the near future.
 
 Our
results of operations are materially affected by conditions in the mortgage
market, the financial markets and the economy generally. Recently, concerns over
inflation, energy costs, geopolitical issues, the availability and cost of
credit, the mortgage market and a declining real estate market have contributed
to increased volatility and diminished expectations for the economy and markets
going forward. The mortgage market, including the market for prime and Alt-A
loans, has been severely affected by changes in the lending landscape and there
is no assurance that these conditions have stabilized or that they will not
worsen. The severity of the liquidity limitation was largely unanticipated by
the markets. For now (and for the foreseeable future), access to mortgages has
been substantially limited. This has an impact on new demand for homes, which
will compress the home ownership rates and weigh heavily on future home price
performance. There is a strong correlation between home price growth rates and
mortgage loan delinquencies. The market deterioration has caused us to expect
increased losses related to our holdings and, during 2008, to sell assets at a
loss.  Continued market deterioration may once again force us to sell
assets at a loss.
 
 A
substantial portion of our assets are classified for accounting purposes as
“available-for-sale” and carried at fair value. Changes in the fair values of
those assets are directly charged or credited to OCI. As a result, a decline in
values may reduce the book value of our assets. Moreover, if the decline in
value of an available-for-sale security is other than temporary, such decline
will reduce earnings.
 
 All of
our repurchase agreements and interest rate swap agreements are subject to
bilateral margin calls in the event that the collateral securing our obligations
under those facilities exceeds or does not meet our collateralization
requirements.   For example, during 2008, due to the
deterioration in the market value of our assets, we received and met margin
calls under our repurchase agreements, which required us to obtain additional
funding from third parties, including from Annaly, and taking other steps to
increase our liquidity. Additionally, the disruptions during 2008 resulted in us
not being in compliance with the net income covenant in one of our whole loan
repurchase agreements and the liquidity covenants in our other whole loan
repurchase agreement at a time during which we had no amounts outstanding under
those facilities. We amended these covenants, and on July 29, 2008, we
terminated those facilities to avoid paying non-usage fees.  We can
provide no assurances that such events will not occur again and at a time when
we cannot find additional funding which may result in us having to dispose of
assets at an inopportune time when prices are depressed.
 
 Dramatic
declines in the housing market, with falling home prices and increasing
foreclosures and unemployment, have resulted in significant asset write-downs by
financial institutions, which have caused many financial institutions to seek
additional capital, to merge with other institutions and, in some cases, to
fail. In addition, we rely on the availability of financing to acquire
residential mortgage loans, real estate-related securities and real estate loans
on a leveraged basis. Institutions from which we will seek to obtain financing
may have owned or financed residential mortgage loans, real estate-related
securities and real estate loans, which have declined in value and caused them
to suffer losses as a result of the recent downturn in the residential mortgage
market. Many lenders and institutional investors have reduced and, in some
cases, ceased to provide funding to borrowers, including other financial
institutions. If these conditions persist, these institutions may become
insolvent or tighten their lending standards, which could make it 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 investments.
  Mortgage
loan modification programs, future legislative action and changes in the
requirements necessary to qualify for refinancing a mortgage may adversely
affect the value of, and the returns on, the assets in which we
invest.
  During
the second half of 2008, in 2009, and so far in 2010, the U.S. government,
through the Federal Housing Administration, or FHA, and the FDIC, implemented
programs designed to provide homeowners with assistance in avoiding residential
mortgage loan foreclosures including the Hope for Homeowners Act of 2008, which
allows certain distressed borrowers to refinance their mortgages into
FHA-insured loans and the Home Affordable Modification Program, or HAMP, which
provides a detailed, uniform model for one-time modification of eligible
residential mortgage loans.  The programs may also involve, among other
things, the modification of 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 of the loans.  Members of the U.S. Congress have indicated support
for additional legislative relief for homeowners, including an amendment of the
bankruptcy laws to permit the modification of mortgage loans in bankruptcy
proceedings.  These loan modification programs, including future
legislative or regulatory actions and amendments to the bankruptcy laws, that
result in the modification of outstanding mortgage loans, as well as changes in
the requirements necessary to qualify for refinancing a mortgage may adversely
affect the value of, and the returns on, our non-Agency RMBS and Agency
RMBS.  Depending on whether or not we purchased an instrument at a
premium or discount, the yield we receive may be positively or negatively
impacted by any modification.
  11
 The
U.S. Government's pressing for refinancing of certain loans may affect
prepayment rates for mortgage loans in mortgage-backed securities.
  In
addition to the increased pressure upon residential mortgage loan investors and
servicers to engage in loss mitigation activities, the U.S. Government is
pressing for refinancing of certain loans, and this encouragement may affect
prepayment rates for mortgage loans in mortgage-backed securities.  In
connection with government-related securities, in February 2009 President Obama
unveiled the Homeowner Affordability and Stability Plan, which, in part, calls
upon Fannie Mae and Freddie Mac to loosen their eligibility criteria for the
purchase of loans in order to provide access to low-cost refinancing for
borrowers who are current on their mortgage payments but who cannot otherwise
qualify to refinance at a lower market rate.  The major change was to
permit an increase in the loan-to-value, or LTV, ratio of a refinancing loan
eligible for sale up to 105%.  In July 2009, the FHFA authorized Fannie Mae
and Freddie Mac to raise the present LTV ratio ceiling of 105% to 125%. 
The charters governing the operations of Fannie Mae and Freddie Mac prohibit
purchases of loans with loan to value ratios in excess of 80% unless the loans
have mortgage insurance (or unless other types of credit enhancement are
provided in accordance with the statutory requirements).  The FHFA, which
regulates Fannie Mae and Freddie Mac, determined that new mortgage insurance
will not be required on the refinancing if the applicable entity already owns
the loan or guarantees the related mortgage-backed securities. 
Additionally, the Treasury reports that in some cases a new appraisal will not
be necessary upon refinancing.  The Treasury estimates that up to 5,000,000
homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac may be
eligible for this refinancing program, which is scheduled to terminate in June
2010.
 
 The HERA
authorized a voluntary FHA mortgage insurance program called HOPE for
Homeowners, or H4H Program, designed to refinance certain delinquent borrowers
into new FHA-insured loans.  The H4H Program targets delinquent borrowers
under conventional mortgage loans, as well as under government-insured or
-guaranteed mortgage loans, that were originated on or before January 1,
2008.  Holders of existing mortgage loans being refinanced under the H4H
Program must accept a write-down of principal and waive all prepayment
fees.  While the use of the program has been extremely limited to date,
Congress continues to amend the program to encourage its use.  The H4H
Program is effective through September 30, 2011.
 
 To the
extent these and other economic stabilization or stimulus efforts are successful
in increasing prepayment speeds for residential mortgage loans, such as those in
mortgage-backed securities, that could potentially harm our income and operating
results, particularly in connection with loans or mortgage-backed securities
purchased at a premium or our interest-only securities.
  The
actions of the U.S. government, Federal Reserve and Treasury, including the
establishment of the TALF and the PPIP, may adversely affect our
business.
  The TALF
was first announced by the Treasury on November 25, 2008, and has been expanded
in size and scope since its initial announcement.  Under the TALF, the
Federal Reserve Bank of New York makes non-recourse loans to borrowers to fund
their purchase of eligible assets, currently certain asset backed securities but
not RMBS.  The nature of the eligible assets has been expanded several
times.  The Treasury has stated that through its expansion of the TALF,
non-recourse loans will be made available to investors to certain fund purchases
of legacy securitization assets.  On March 23, 2009, the Treasury in
conjunction with the FDIC, and the Federal Reserve, announced the PPIP. The PPIP
aims to recreate a market for specific illiquid residential and commercial loans
and securities through a number of joint public and private investment
funds.  The PPIP is designed to draw new private capital into the market
for these securities and loans by providing government equity co-investment and
attractive public financing.
 
 12
 It is not
possible to predict how the TALF, the PPIP, or other recent U.S. Government
actions will impact the financial markets, including current significant levels
of volatility, or our current or future investments.  To the extent the
market does not respond favorably to these initiatives or they do not function
as intended, our business may not receive any benefits from this
legislation.  In addition, the U.S. government, Federal Reserve, Treasury
and other governmental and regulatory bodies have taken or are considering
taking other actions to address the financial crisis.  We cannot predict
whether or when such actions may occur, and such actions could have a dramatic
impact on our business, results of operations and financial
condition.
  There
can be no assurance that the actions of the U.S. Government, the Federal
Reserve, the Treasury and other governmental and regulatory bodies for the
purpose of stabilizing the financial markets, including the establishment of the
TALF and the PPIP, or market response to those actions, will achieve the
intended effect, that our business will benefit from these actions or that
further government or market developments will not adversely impact
us.
  In
response to the financial issues affecting the banking system and the financial
markets and going concern threats to investment banks and other financial
institutions, the U.S. Government, the Federal Reserve, the Treasury and other
governmental and regulatory bodies have taken action to attempt to stabilize the
financial markets.  Significant measures include the enactment of the
Economic Stabilization Act of 2008, or the EESA, to, among other things,
establish the Troubled Asset Relief Program, or the TARP; the enactment of the
HERA, which established a new regulator for Fannie Mae and Freddie Mac; the
establishment of the TALF; and the establishment of the PPIP.
 
 There can
be no assurance that the EESA, HERA, TALF, PPIP or other recent U.S. Government
actions will have a beneficial impact on the financial markets, including on
current levels of volatility.  To the extent the market does not respond
favorably to these initiatives or these initiatives do not function as intended,
our business may not receive the anticipated positive impact from the
legislation.  There can also be no assurance that we will be eligible to
participate in any programs established by the U.S. Government such as the TALF
or the PPIP or, if we are eligible, that we will be able to utilize them
successfully or at all.  In addition, because the programs are designed, in
part, to provide liquidity to restart the market for certain of our targeted
assets, the establishment of these programs may result in increased competition
for attractive opportunities in our targeted assets.  It is also possible
that our competitors may utilize the programs which would provide them with
attractive debt and equity capital funding from the U.S. Government. In
addition, the U.S. Government, the Federal Reserve, the Treasury and other
governmental and regulatory bodies have taken or are considering taking other
actions to address the financial crisis.  We cannot predict whether or when
such actions may occur, and such actions could have a dramatic impact on our
business, results of operations and financial condition.
  The
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 U.S. Government, may adversely affect our
business.
  Due to
increased market concerns about Fannie Mae and Freddie Mac’s ability to
withstand future credit losses associated with securities held in their
investment portfolios, and on which they provide guarantees, without the direct
support of the U.S. Government, on July 30, 2008, Congress passed the Housing
and Economic Recovery Act of 2008, or the HERA.  Among other things, the
HERA established the Federal Housing Finance Agency, or FHFA, which has broad
regulatory powers over Fannie Mae and Freddie Mac.  On September 6, 2008,
the FHFA placed Fannie Mae and Freddie Mac into conservatorship and, together
with the Treasury, established a program designed to boost investor confidence
in Fannie Mae’s and Freddie Mac’s debt and Agency RMBS.  As the conservator
of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of
Fannie Mae and Freddie Mac and may (1) take over the assets of and operate
Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator’s appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
of the conservator. A primary focus of this new legislation is to increase the
availability of mortgage financing by allowing Fannie Mae and Freddie Mac to
continue to grow their guarantee business without limit, while limiting net
purchases of mortgage-backed securities to a modest amount through the end of
2009. It is currently planned for Fannie Mae and Freddie Mac to reduce gradually
their mortgage-backed securities portfolios beginning in 2010.
 
 13
 In
addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the
Treasury and FHFA have entered into Preferred Stock Purchase Agreements (PSPAs)
between the Treasury and Fannie Mae and Freddie Mac pursuant to which the
Treasury will ensure that each of Fannie Mae and Freddie Mac maintains a
positive net worth. On December 24, 2009, the U.S. Treasury amended the terms of
the U.S. Treasury’s  PSPAs with Fannie Mae and Freddie Mac to remove the
$200 billion per institution limit established under the PSPAs until the end of
2012.  The U.S. Treasury also amended the PSPAs with respect to the
requirements for Fannie Mae and Freddie Mac to reduce their
portfolios.
 
 Although
the Treasury has committed capital to Fannie Mae and Freddie Mac, there can be
no assurance that these actions will be adequate for their needs. If these
actions are inadequate, Fannie Mae and Freddie Mac could continue to suffer
losses and could fail to honor their guarantees and other obligations. The
future roles of Fannie Mae and Freddie Mac could be significantly reduced and
the nature of their guarantees could be considerably diminished. Any changes to
the nature of the guarantees provided by Fannie Mae and Freddie Mac could
redefine what constitutes Agency RMBS and could have broad adverse market
implications and severe adverse consequences to our business.
 
 Such
consequences to us may include an inability to use Agency RMBS as collateral for
our financings under our repurchase agreements since any decline in their value,
or perceived market uncertainty about their value, would make it more difficult
for us to obtain financing on acceptable terms or at all, or to maintain our
compliance with the terms of any financing transactions, or to maintain our
exemption under the 1940 Act.  Further, the current credit support provided
by the Treasury to Fannie Mae and Freddie Mac, and any additional credit support
it may provide in the future, could have the effect of lowering the interest
rates we expect to receive from Agency RMBS, thereby tightening the spread
between the interest we earn on these securities and the cost of financing
them.  All of the foregoing as well as unforeseen consequences resulting
from the foregoing could materially and adversely affect our business,
operations and financial condition.
  A
significant portion of our financing is from Annaly which is a significant
shareholder of ours and which owns our Manager.
  Our
ability to fund our investments on a leveraged basis depends to a large extent
upon our ability to secure warehouse, repurchase, credit, and/or commercial
paper financing on acceptable terms. The current dislocation in the non-Agency
mortgage sector has made it difficult for us to obtain short-term financing on
favorable terms. As a result, we have completed loan securitizations in order to
obtain long-term financing and terminated our un-utilized whole loan repurchase
agreements in order to avoid paying non-usage fees under those agreements. In
addition, commencing in 2008, we entered into a RMBS repurchase agreement with
Annaly, which owns approximately 6.7% of our outstanding shares of common stock.
This agreement contains customary representations, warranties and covenants
contained in such agreements including Annaly having the right to make margin
calls if the value of our RMBS collateralizing the agreement
falls.  As of December 31, 2009, we had $259.0 million outstanding
under this agreement which consists of approximately 13% of our total
financing.  Our RMBS repurchase agreement with Annaly is at market
rates and is secured by the RMBS pledged under the agreement and is callable by
Annaly on a weekly basis. We do not expect to increase significantly the amount
of securities pledged to Annaly or significantly increase or decrease the funds
we borrow from Annaly. We cannot assure you that Annaly will continue to provide
us with such financing. If Annaly does not provide us with financing, we cannot
assure you that we will be able to replace such financing.  If we are
not able to replace this financing, we could be forced to sell our assets at an
inopportune time when prices are depressed.
 Risks
Associated With Our Management and Relationship With Our Manager
 
 We
are dependent on our Manager and its key personnel for our success.
 
 We have
no separate facilities and are completely reliant on our Manager. We have no
employees other than our officers.  Our officers are also employees of
our Manager, which has significant discretion as to the implementation of our
investment and operating policies and strategies.   Accordingly,
we depend on the diligence, skill and network of business contacts of the senior
management of our Manager.  Our Manager’s employees evaluate,
negotiate, structure, close and monitor our investments; therefore, our success
will depend on their continued service.  The departure of any of the
senior managers of our Manager could have a material adverse effect on our
performance.  In addition, we can offer no assurance that our Manager
will remain our investment manager or that we will continue to have access to
our Manager’s senior managers.  Our management agreement with our
Manager only extends until December 31, 2010.  If the management
agreement is terminated and no suitable replacement is found to manage us, we
may not be able to execute our business plan.  Moreover, our Manager
is not obligated to dedicate certain of its employees exclusively to us nor is
it obligated to dedicate any specific portion of its time to our business, and
none of our Manager’s employees are contractually dedicated to us under our
management agreement with our Manager.  The only employees of our
Manager who are primarily dedicated to our operations are Christian J.
Woschenko, our Head of Investments, and William B. Dyer, our Head of
Underwriting.
  14
  There
are conflicts of interest in our relationship with our Manager and Annaly, which
could result in decisions that are not in the best interests of our
stockholders.
 
 We are
subject to conflicts of interest arising out of our relationship with Annaly and
our Manager.  An Annaly executive officer is our Manager’s sole
director, two of Annaly’s employees are our directors and several of Annaly’s
employees are officers of our Manager and us.   Specifically,
each of our officers also serves as an employee of our Manager or its
affiliates.   As a result, our Manager and our officers may have
conflicts between their duties to us and their duties to, and interests in,
Annaly or our Manager.   There may also be conflicts in
allocating investments which are suitable both for us and Annaly as well as
other FIDAC managed investment vehicles, including CreXus Investment Corp., or
CreXus, a public specialty finance company that acquires, manages, and finances,
directly or through its subsidiaries, commercial mortgage loans and other
commercial real estate debt, CMBS, and other commercial real estate-related
assets.  Annaly owns approximately 4.5 million shares of common stock
of CreXus.  Annaly and CreXus    may compete with
us with respect to certain investments which we may want to acquire, and as a
result we may either not be presented with the opportunity or have to compete
with Annaly to acquire these investments.   Our Manager and our
officers may choose to allocate favorable investments to Annaly or CreXus
instead of to us.   The ability of our Manager and its officers
and employees to engage in other business activities may reduce the time our
Manager spends managing us.   Further, during turbulent
conditions in the mortgage industry, distress in the credit markets or other
times when we will need focused support and assistance from our Manager, other
entities for which our Manager also acts as an investment manager will likewise
require greater focus and attention, placing our Manager’s resources in high
demand.   In such situations, we may not receive the necessary
support and assistance we require or would otherwise receive if we were
internally managed or if our Manager did not act as a manager for other
entities.   There is no assurance that the allocation policy that
addresses some of the conflicts relating to our investments will be adequate to
address all of the conflicts that may arise.  In addition, we have
entered into a repurchase agreement with Annaly, our Manager’s parent, to
finance our RMBS.  This financing arrangement may make us less likely
to terminate our Manager.  It could also give rise to further
conflicts because Annaly may be a creditor of ours.  As one of our
creditors, Annaly’s interests may diverge from the interests of our
stockholders.
 
 We pay
our Manager substantial management fees regardless of the performance of our
portfolio.   Our Manager’s entitlement to substantial
nonperformance-based compensation might reduce its incentive to devote its time
and effort to seeking investments that provide attractive risk-adjusted returns
for our portfolio.   This in turn could hurt both our ability to
make distributions to our stockholders and the market price of our common
stock.  Annaly owns approximately 6.7% of our outstanding shares of
common stock which entitles them to receive quarterly
distributions.  In evaluating investments and other management
strategies, this may lead our Manager to place emphasis on the maximization of
revenues at the expense of other criteria, such as preservation of
capital.  Investments with higher yield potential are generally
riskier or more speculative. This could result in increased risk to the value of
our invested portfolio.  Annaly may sell the shares in us purchased
concurrently with our initial public offering at any time after the earlier of
(i) November 15, 2010 or (ii) the termination of the management
agreement.  Annaly may sell the shares in us purchased immediately
after our 2008 secondary offering at any time after the earlier of (i) October
24, 2011 or (ii) the termination of the management agreement.  Annaly
may sell the shares in us that it purchased immediately after our April 15, 2009
secondary offering at any time after the earlier of (i) April 15, 2012 or (ii)
the termination of the management agreement. Annaly may sell the shares in us
that it purchased immediately after our May 27, 2009 secondary offering at any
time after the earlier of (i) May 27, 2012 or (ii) the termination of the
management agreement.  To the extent Annaly sells some of its shares,
its interests may be less aligned with our interests.
  15
  The
management agreement with our Manager was not negotiated on an arm’s-length
basis and may not be as favorable to us as if it had been negotiated with an
unaffiliated third party and may be costly and difficult to
terminate.
 
 Our
president, chief financial officer, head of investments, treasurer, controller,
secretary and head of underwriting also serve as employees of our
Manager.   In addition, certain of our directors are employees of
our Manager or its affiliates.   Our management agreement with
our Manager was negotiated between related parties, and its terms, including
fees payable, may not be as favorable to us as if it had been negotiated with an
unaffiliated third party. Termination of the management agreement with our
Manager without cause is difficult and costly. Our independent directors will
review our Manager’s performance and the management fees annually, and following
the initial term, the management agreement may be terminated annually by us
without cause upon the affirmative vote of at least two-thirds of our
independent directors, or by a vote of the holders of at least a majority of the
outstanding shares of our common stock (other than those shares held by Annaly
or its affiliates), based upon: (i) our Manager’s unsatisfactory performance
that is materially detrimental to us, or (ii) a determination that the
management fees payable to our Manager are not fair, subject to our Manager’s
right to prevent termination based on unfair fees by accepting a reduction of
management fees agreed to by at least two-thirds of our independent directors.
Our Manager must be provided 180-days’ prior notice of any such termination.
Additionally, upon such termination, the management agreement provides that we
will pay our Manager a termination fee equal to three times the average annual
base management fee calculated as of the end of the most recently completed
fiscal quarter.   These provisions may adversely affect our
ability to terminate our Manager without cause. Our Manager is only
contractually committed to serve us until December 31,
2010.   Thereafter, the management agreement is renewable on an
annual basis, however, our Manager may terminate the management agreement
annually upon 180-days’ prior notice.   If the management
agreement is terminated and no suitable replacement is found to manage us, we
may not be able to execute our business plan.
 
 Our
board of directors approved very broad investment guidelines for our Manager and
will not approve each investment decision made by our Manager.
 
 Our
Manager is authorized to follow very broad investment
guidelines.   Our board of directors periodically reviews our
investment guidelines and our investment portfolio, but does not, and is not
required to review all of our proposed investments or any type or category of
investment, except that an investment in a security structured or managed by our
Manager must be approved by a majority of our independent
directors.   In addition, in conducting periodic reviews, our
board of directors relies primarily on information provided to them by our
Manager.   Furthermore, our Manager uses complex strategies, and
transactions entered into by our Manager may be difficult or impossible to
unwind by the time they are reviewed by our board of
directors.   Our Manager has great latitude within the broad
investment guidelines in determining the types of assets it may decide are
proper investments for us, which could result in investment returns that are
substantially below expectations or that result in losses, which would
materially and adversely affect our business operations and
results.   Further, decisions made and investments entered into
by our Manager may not be in the best interests of our
stockholders.
 
 We
may change our investment strategy, asset allocation, or financing plans without
stockholder consent, which may result in riskier investments.
 
 We may
change our investment strategy, asset allocation, or financing plans at any time
without the consent of our stockholders, which could result in our making
investments that are different from, and possibly riskier than, the investments
described in this Form 10-K.  A change in our investment strategy or
financing plans may increase our exposure to interest rate and default risk and
real estate market fluctuations. Furthermore, a change in our asset allocation
could result in our making investments in asset categories different from those
described in this Form 10-K. These changes could adversely affect the market
price of our common stock and our ability to make distributions to our
stockholders.
 
 While
investments in investment vehicles managed by our Manager require approval by a
majority of our independent directors, our Manager has an incentive to invest
our funds in investment vehicles managed by our Manager because of the
possibility of generating an additional incremental management fee, which may
reduce other investment opportunities available to us.  In addition,
we cannot assure you that investments in investment vehicles managed by our
Manager will prove beneficial to us.
 
 We
may invest in CDOs managed by our Manager, including the purchase or sale of all
or a portion of the equity of such CDOs, which may result in an immediate loss
in book value and present a conflict of interest between us and our
Manager.
 
 We may
invest in securities of CDOs managed by our Manager. If all of the securities of
a CDO managed by our Manager were not fully placed as a result of our not
investing, our Manager could experience losses due to changes in the value of
the underlying investments accumulated in anticipation of the launch of such
investment vehicle. The accumulated investments in a CDO transaction are
generally sold at the price at which they were purchased and not the prevailing
market price at closing. Accordingly, to the extent we invest in a portion of
the equity securities for which there has been a deterioration of value since
the securities were purchased, we would experience an immediate loss equal to
the decrease in the market value of the underlying investment. As a result, the
interests of our Manager in our investing in such a CDO may conflict with our
interests and that of our stockholders.
 
 16
 
 Our
investment focus is different from those of other entities that are or have been
managed by our Manager.
 
 Our
investment focus is different from those of other entities that are or have been
managed by our Manager. In particular, entities managed by our Manager have not
purchased whole mortgage loans or structured whole loan securitizations. In
addition, our Manager has limited experience in managing CDOs and investing in
CDOs, non-Agency RMBS, CMBS and other ABS which we may pursue as part of our
investment strategy. Accordingly, our Manager’s historical returns are not
indicative of its performance for our investment strategy and we can offer no
assurance that our Manager will replicate the historical performance of the
Manager’s investment professionals in their previous endeavors. Our investment
returns could be substantially lower than the returns achieved by our Manager’s
investment professionals’ previous endeavors.
 
 We
compete with investment vehicles of our Manager for access to our Manager’s
resources and investment opportunities.
 
 Our
Manager provides investment and financial advice to a number of investment
vehicles, including CreXus, and some of our Manager’s personnel are also
employees of Annaly and in that capacity are involved in Annaly’s investment
process. Accordingly, we will compete with our Manager’s other investment
vehicles and with Annaly for our Manager’s resources. Our Manager may sponsor
and manage other investment vehicles with an investment focus that overlaps with
ours, which could result in us competing for access to the benefits that we
expect our relationship with our Manager will provide to us.
 
 Risks
Related To Our Business
 
 We
have a limited operating history and may not continue to operate successfully or
generate sufficient revenue to make or sustain distributions to our
stockholders.
 
 We were
organized in June 2007, commenced operations in November 2007, and have a
limited operating history.  We cannot assure you that we will be able
to operate our business successfully or implement our operating policies and
strategies described in this Form 10-K.  The results of our operations
depend on many factors, including the availability of opportunities for the
acquisition of assets, the valuation of our assets, the level and volatility of
interest rates, readily accessible short and long-term financing and the terms
of the financing, conditions in the financial markets and economic
conditions.
 
 Failure
to procure adequate capital and funding on favorable terms, or at all, would
adversely affect our results and may, in turn, negatively affect the market
price of shares of our common stock and our ability to distribute dividends to
our stockholders.
 
 The
capital and credit markets have been experiencing extreme volatility and
disruption for more than a year.  The volatility and disruption have
reached unprecedented levels. In some cases, the markets have exerted downward
pressure on stock prices and credit capacity for certain lenders.  We
depend upon the availability of adequate funding and capital for our
operations.  We intend to finance our assets over the long-term
through a variety of means, including repurchase agreements, credit facilities,
securitizations, commercial paper and CDOs.  Our access to capital
depends upon a number of factors over which we have little or no control,
including:
 
 ·
                  general
      market conditions;
 ·
                  the
      market’s perception of our growth
potential;
 ·
                  our
      current and potential future earnings and cash
    distributions;
 ·
                  the
      market price of the shares of our capital stock;
  and
 ·
                  the
      market’s view of the quality of our
assets.
  17
  The current situation in the mortgage
sector and the current weakness in the broader credit markets could adversely
affect one or more of our potential lenders and could cause one or more of our
lenders or potential lenders to be unwilling or unable to provide us with
financing. In general, this could potentially increase our financing costs and
reduce our liquidity or require us to sell assets at an inopportune time or
price.
 
 We have
and expect to use a number of sources to finance our investments, including
repurchase agreements, warehouse facilities, securitizations, asset-backed
commercial paper and term CDOs. Current market conditions have affected the cost
and availability of financing from each of these sources — and their individual
providers — to different degrees; some sources generally are unavailable, some
are available but at a high cost, and some are largely unaffected. For example,
in the repurchase agreement market, borrowers have been affected differently
depending on the type of security they are financing. Non-Agency RMBS have been
harder to finance, depending on the type of assets collateralizing the RMBS. The
amount, term and margin requirements associated with these types of financings
have been negatively impacted.
 
 Currently,
warehouse facilities to finance whole loan prime residential mortgages are
generally available from major banks, but at significantly higher cost and
greater margin requirements than previously offered. Many major banks that offer
warehouse facilities have also reduced the amount of capital available to new
entrants and consequently the size of those facilities offered now are smaller
than those previously available.
 
 It is
currently a challenging market to term finance whole loans through
securitization or bonds issued by a CDO structure. The highly rated senior bonds
in these securitizations and CDO structures currently have liquidity, but at
much wider spreads than issues priced earlier this year. The junior subordinate
tranches of these structures currently have few buyers and current market
conditions have forced issuers to retain these lower rated bonds rather than
sell them.
  Certain
issuers of ABCP, have been unable to place (or roll) their securities, which has
resulted, in some instances, in forced sales of MBS, and other securities which
has further negatively impacted the market value of these
assets.  These market conditions are fluid and likely to change over
time.
  As a
result, the execution of our investment strategy may be dictated by the cost and
availability of financing from these different sources.
  In
addition, the impairment of other financial institutions could negatively affect
us.  If one or more major market participants fails or otherwise
experience a major liquidity crisis, as was the case for Bear Stearns & Co.
in March 2008, and Lehman Brothers Holdings Inc. in September 2008, it could
adversely affect the marketability of all fixed income securities and this could
negatively impact the value of the securities we acquire, thus reducing our net
book value.
  Furthermore,
if any of our potential lenders or any of our lenders are unwilling or unable to
provide us with financing, we could be forced to sell our securities or
residential mortgage loans at an inopportune time when prices are
depressed.
  Our
business, results of operations and financial condition may be materially
adversely affected by disruptions in the financial markets.  We cannot
assure you, under such extreme conditions, that these markets will remain an
efficient source of long-term financing for our assets.  If our
strategy is not viable, we will have to find alternative forms of financing for
our assets, which may not be available.  Further, as a REIT, we are
required to distribute annually at least 90% of our REIT taxable income,
determined without regard to the deduction for dividends paid and excluding net
capital gain, to our stockholders and are therefore not able to retain
significant amounts of our earnings for new investments.  We cannot
assure you that any, or sufficient, funding or capital will be available to us
in the future on terms that are acceptable to us.  If we cannot obtain
sufficient funding on acceptable terms, there may be a negative impact on the
market price of our common stock and our ability to make distributions to our
stockholders.  Moreover, our ability to grow will be dependent on our
ability to procure additional funding.  To the extent we are not able
to raise additional funds through the issuance of additional equity or
borrowings, our growth will be constrained.
  We
operate in a highly competitive market for investment opportunities and more
established competitors may be able to compete more effectively for investment
opportunities than we can.
 
 A number
of entities compete with us to make the types of investments that we plan to
make. We compete with other REITs, public and private funds, commercial and
investment banks and commercial finance companies. Many of our competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than we do. Several other REITs have recently raised, or are
expected to raise, significant amounts of capital, and may have investment
objectives that overlap with ours, which may create competition for investment
opportunities. Some competitors may have a lower cost of funds and access to
funding sources that are not available to us. In addition, some of our
competitors may have higher risk tolerances or different risk assessments, which
could allow them to consider a wider variety of investments and establish more
favorable relationships than us. We cannot assure you that the competitive
pressures we face will not have a material adverse effect on our business,
financial condition and results of operations. Also, as a result of this
competition, we may not be able to take advantage of attractive investment
opportunities from time to time, and we can offer no assurance that we will be
able to identify and make investments that are consistent with our investment
objectives.
 
 18
 
 Loss
of our 1940 Act exemption would adversely affect us and negatively affect the
market price of shares of our common stock and our ability to distribute
dividends and could result in the termination of the management agreement with
our Manager.
  We intend
to conduct our operations so that neither we nor any of our subsidiaries are
required to register as an investment company under the 1940 Act. Because we are
a holding company that will conduct its businesses primarily through
wholly-owned subsidiaries, the securities issued by these subsidiaries that are
excepted from the definition of “investment company” under Section 3(c)(1) or
Section 3(c)(7) of the 1940 Act, together with any other investment securities
we may own, may not have a combined value in excess of 40% of the value of our
adjusted total assets on an unconsolidated basis. This requirement limits the
types of businesses in which we may engage through our subsidiaries. In
addition, the assets we and our subsidiaries may acquire are limited by the
provisions of the 1940 Act, the rules and regulations promulgated under the 1940
Act and SEC staff interpretative guidance, which may adversely affect our
performance.
  If the
value of securities issued by our subsidiaries that are excepted from the
definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940
Act, together with any other investment securities we own, exceeds 40% of our
adjusted total assets on an unconsolidated basis, or if one or more of such
subsidiaries fail to maintain an exception or exemption from the 1940 Act, we
could, among other things, be required either (a) to substantially change the
manner in which we conduct our operations to avoid being required to register as
an investment company or (b) to register as an investment company under the 1940
Act, either of which could have an adverse effect on us and the market price of
our securities. If we were required to register as an investment company under
the 1940 Act, we would become subject to substantial regulation with respect to
our capital structure (including our ability to use leverage), management,
operations, transactions with affiliated persons (as defined in the 1940 Act),
portfolio composition, including restrictions with respect to diversification
and industry concentration, and other matters.
  We expect
Chimera Asset Holding LLC and certain subsidiaries that we may form in the
future to rely upon the exemption from registration as an investment company
under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is
available for entities “primarily engaged in the business of purchasing or
otherwise acquiring mortgages and other liens on and interests in real estate.”
This exemption generally requires that at least 55% of these subsidiaries’
assets must be comprised of qualifying real estate assets and at least 80% of
each of their portfolios must be comprised of qualifying real estate assets and
real estate-related assets under the 1940 Act. We expect each of our
subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the
SEC staff or on our analyses of guidance published with respect to other types
of assets to determine which assets are qualifying real estate assets and real
estate-related assets. If the SEC staff publishes new or different guidance with
respect to these matters, we may be required to adjust our strategy accordingly.
In addition, we may be limited in our ability to make certain investments and
these limitations could result in the subsidiary holding assets we might wish to
sell or selling assets we might wish to hold.
  Certain
of our subsidiaries may rely on the exemption provided by Section 3(c)(6) which
excludes from the definition of “investment company” any company primarily
engaged, directly or through majority-owned subsidiaries, in a business, among
others, described in Section 3(c)(5)(C) of the 1940 Act (from which not less
than 25% of such company's gross income during its last fiscal year was derived)
together with an additional business or additional businesses other than
investing, reinvesting, owning, holding or trading in securities. The SEC staff
has issued little interpretive guidance with respect to Section 3(c)(6) and any
guidance published by the staff could require us to adjust our strategy
accordingly.
  19
  We expect
certain of our subsidiaries we may form in the future, including subsidiaries we
may form for the purpose of borrowing under TALF, to rely on Section 3(c)(7) for
their 1940 Act exemption and, therefore our interest in each of these
subsidiaries would constitute an “investment security” for purposes of
determining whether we pass the 40% test.
  We may in
the future, however, organize one or more subsidiaries, including subsidiaries
we may form for the purpose of borrowing under TALF, that seek to rely on the
1940 Act exemption provided to certain structured financing vehicles by Rule
3a-7.  If we organize subsidiaries that rely on Rule 3a-7 for an
exemption from the 1940 Act, these subsidiaries will also need to comply with
the restrictions described in “Business—Operating and Regulatory Structure—1940
Act Exemption.” In general, Rule 3a-7 exempts from the 1940 Act issuers that
limit their activities as follows:
  •           the
issuer issues securities the payment of which depends primarily on the cash flow
from “eligible assets” that by their terms convert into cash within a finite
time period;
  •           the
securities sold are fixed income securities rated investment grade by at least
one rating agency (fixed income securities which are unrated or rated below
investment grade may be sold to institutional accredited investors and any
securities may be sold to “qualified institutional buyers” and to persons
involved in the organization or operation of the issuer);
  •           the
issuer acquires and disposes of eligible assets (1) only in accordance with the
agreements pursuant to which the securities are issued, (2) so that the
acquisition or disposition does not result in a downgrading of the issuer’s
fixed income securities and (3) the eligible assets are not acquired or disposed
of for the primary purpose of recognizing gains or decreasing losses resulting
from market value changes; and
  •           unless
the issuer is issuing only commercial paper, the issuer appoints an independent
trustee, takes reasonable steps to transfer to the trustee an ownership or
perfected security interest in the eligible assets, and meets rating agency
requirements for commingling of cash flows.
  Any
subsidiary also would need to be structured to comply with any guidance that may
be issued by the Division of Investment Management of the SEC on how the
subsidiary must be organized to comply with the restrictions contained in Rule
3a-7. Compliance with Rule 3a-7 may require that the indenture governing the
subsidiary include additional limitations on the types of assets the subsidiary
may sell or acquire out of the proceeds of assets that mature, are refinanced or
otherwise sold, on the period of time during which such transactions may occur,
and on the amount of transactions that may occur. In light of the requirements
of Rule 3a-7, our ability to manage assets held in a special purpose subsidiary
that complies with Rule 3a-7 will be limited and we may not be able to purchase
or sell assets owned by that subsidiary when we would otherwise desire to do so,
which could lead to losses. Initially, we will limit the aggregate value of our
interests in our subsidiaries that may in the future seek to rely on Rule 3a-7
to 20% or less of our total assets on an unconsolidated basis, as we continue to
discuss with the SEC staff the use of subsidiaries that rely on Rule 3a-7 to
finance our operations.
  The
determination of whether an entity is a majority-owned subsidiary of our company
is made by us. The 1940 Act defines a majority-owned subsidiary of a person as a
company of which 50% or more of the outstanding voting securities are owned by
such person, or by another company which is a majority-owned subsidiary of such
person. The 1940 Act further defines voting securities as any security presently
entitling the owner or holder thereof to vote for the election of directors of a
company. We treat companies in which we own at least a majority of the
outstanding voting securities as majority-owned subsidiaries for purposes of the
40% test. We have not requested the SEC to approve our treatment of any company
as a majority-owned subsidiary and the SEC has not done so. If the SEC were to
disagree with our treatment of one or more companies as majority-owned
subsidiaries, we would need to adjust our strategy and our assets in order to
continue to pass the 40% test. Any such adjustment in our strategy could have a
material adverse effect on us.
  There can
be no assurance that the laws and regulations governing the 1940 Act status of
REITs, including the Division of Investment Management of the SEC providing more
specific or different guidance regarding these exemptions, will not change in a
manner that adversely affects our operations. If we or our subsidiaries fail to
maintain an exception or exemption from the 1940 Act, we could, among other
things, be required either to (a) change the manner in which we conduct our
operations to avoid being required to register as an investment company, (b)
effect sales of our assets in a manner that, or at a time when, we would not
otherwise choose to do so, or (c) register as an investment company, any of
which could negatively affect the value of our common stock, the sustainability
of our business model, and our ability to make distributions which could have an
adverse effect on our business and the market price for our shares of common
stock.
  20
  Rapid
changes in the values of our RMBS, residential mortgage loans, and other real
estate-related investments may make it more difficult for us to maintain our
qualification as a REIT or our exemption from the 1940 Act.
  If the
market value or income potential of our RMBS, residential mortgage loans, and
other real estate-related investments declines as a result of increased interest
rates, prepayment rates or other factors, we may need to increase our real
estate investments and income or liquidate our non-qualifying assets to maintain
our REIT qualification or our exemption from the 1940 Act. If the decline in
real estate asset values or income occurs quickly, this may be especially
difficult to accomplish. This difficulty may be exacerbated by the illiquid
nature of any non-real estate assets we may own. We may have to make investment
decisions that we otherwise would not make absent the REIT and 1940 Act
considerations.
 
 We
leverage our investments, which may adversely affect our return on our
investments and may reduce cash available for distribution to our
stockholders.
 
 We
leverage our investments through borrowings, generally through the use of
repurchase agreements, warehouse facilities, credit facilities, securitizations,
commercial paper and CDOs. We are not required to maintain any specific
debt-to-equity ratio. The amount of leverage we use varies depending on our
ability to obtain credit facilities, the lenders’ and rating agencies’ estimates
of the stability of the investments’ cash flow, and our assessment of the
appropriate amount of leverage for the particular assets we are funding. Under
some credit facilities, we expect to be required to maintain minimum average
cash balances in connection with borrowings. Our return on our investments and
cash available for distribution to our stockholders may be reduced to the extent
that changes in market conditions prevent us from leveraging our investments,
require us to decrease our rate of leverage, increase the amount of collateral
we post, or increase the cost of our financing relative to the income that can
be derived from the assets acquired. Our debt service payments will reduce cash
flow available for distributions to stockholders, which could adversely affect
the price of our common stock. We may not be able to meet our debt service
obligations, and, to the extent that we cannot, we risk the loss of some or all
of our assets to foreclosure or sale to satisfy the obligations. We leverage
certain of our assets through repurchase agreements. A decrease in the value of
these assets may lead to margin calls which we will have to satisfy. We may not
have the funds available to satisfy any such margin calls and we may be forced
to sell assets at significantly depressed prices due to market conditions or
otherwise. The satisfaction of such margin calls may reduce cash flow available
for distribution to our stockholders. Any reduction in distributions to our
stockholders or sales of assets at inopportune times or prices may cause the
value of our common stock to decline, in some cases, precipitously.
 
 We
depend on warehouse and repurchase facilities, credit facilities and commercial
paper to execute our business plan, and our inability to access funding could
have a material adverse effect on our results of operations, financial condition
and business.
 
 Our
ability to fund our investments depends to a large extent upon our ability to
secure warehouse, repurchase, credit, and commercial paper financing on
acceptable terms. We can provide no assurance that we will be successful in
establishing sufficient warehouse, repurchase, and credit facilities and issuing
commercial paper. In addition, because warehouse, repurchase, and credit
facilities and commercial paper are short-term commitments of capital, the
lenders may respond to market conditions, which may favor an alternative
investment strategy for them, making it more difficult for us to secure
continued financing. During certain periods of the credit cycle, such as
recently, lenders may curtail their willingness to provide financing. If we are
not able to renew our then existing warehouse, repurchase, and credit facilities
and issue commercial paper or arrange for new financing on terms acceptable to
us, or if we default on our covenants or are otherwise unable to access funds
under any of these facilities, we will have to curtail our asset acquisition
activities.
 
 21
 It
is possible that the lenders that provide us with financing could experience
changes in their ability to advance funds to us, independent of our performance
or the performance of our investments, including our mortgage loans. In
addition, if the regulatory capital requirements imposed on our lenders change,
they may be required to significantly increase the cost of the warehouse
facilities that they provide to us. Our lenders also may revise their
eligibility requirements for the types of residential mortgage loans they are
willing to finance or the terms of such financings, based on, among other
factors, the regulatory environment and their management of perceived risk,
particularly with respect to assignee liability. Financing of equity-based
lending, for example, may become more difficult in the future. Moreover, the
amount of financing we will receive under our warehouse and repurchase
facilities will be directly related to the lenders’ valuation of the assets that
secure the outstanding borrowings. Typically warehouse, repurchase, and credit
facilities grant the respective lender the absolute right to reevaluate the
market value of the assets that secure outstanding borrowings at any time. If a
lender determines in its sole discretion that the value of the assets has
decreased, it has the right to initiate a margin call. A margin call would
require us to transfer additional assets to such lender without any advance of
funds from the lender for such transfer or to repay a portion of the outstanding
borrowings. Any such margin call could have a material adverse effect on our
results of operations, financial condition, business, liquidity and ability to
make distributions to our stockholders, and could cause the value of our common
stock to decline. We may be forced to sell assets at significantly depressed
prices to meet such margin calls and to maintain adequate liquidity, which could
cause us to incur losses. Moreover, to the extent we are forced to sell assets
at such time, given market conditions, we may be forced to sell assets at the
same time as others facing similar pressures to sell similar assets, which could
greatly exacerbate a difficult market environment and which could result in our
incurring significantly greater losses on our sale of such assets. In an extreme
case of market duress, a market may not even be present for certain of our
assets at any price.
 
 The
current dislocation and weakness in the broader mortgage markets could adversely
affect one or more of our potential lenders and could cause one or more of our
potential lenders to be unwilling or unable to provide us with
financing.  This could potentially increase our financing costs and
reduce our liquidity.  If one or more major market participants fails
or otherwise experiences a major liquidity crisis, as was the case for Bear
Stearns & Co. in March 2008 and Lehman Brothers Holdings Inc. in September
2008, it could negatively impact the marketability of all fixed income
securities, including Agency and non-Agency RMBS, residential mortgage loans and
real estate related securities, and this could negatively impact the value of
the securities we acquire, thus reducing our net book
value.  Furthermore, if any of our potential lenders or any of our
lenders, including Annaly, are unwilling or unable to provide us with financing,
we could be forced to sell our assets at an inopportune time when prices are
depressed.
 
 Beginning
in mid-February 2008, credit markets experienced a dramatic and sudden adverse
change.  The severity of the limitation on liquidity was largely
unanticipated by the markets.   Credit once again froze, and in
the mortgage market, valuations of non-Agency RMBS and whole mortgage loans came
under severe pressure.  This credit crisis began in early February
2008, when a heavily leveraged investor announced that it had to de-lever and
liquidate a portfolio of approximately $30 billion of non-Agency
RMBS.  Prices of these types of securities dropped dramatically, and
lenders started lowering the prices on non-Agency RMBS that they held as
collateral to secure the loans they had extended.  The subsequent
failure in March 2008 of Bear Stearns & Co. worsened the
crisis.  As the year progressed, deterioration in the fair value of
our assets continued, we received and met margin calls under our repurchase
agreements, which resulted in our obtaining additional funding from third
parties, including from Annaly, an affiliate, and taking other steps to increase
our liquidity.
 
 The
challenges of 2008 and 2009 have continued as financing difficulties have
severely pressured liquidity and asset values.  In September 2008,
Lehman Brothers Holdings, Inc., a major investment bank, experienced a major
liquidity crisis and failed.  Securities trading remains limited and
mortgage securities financing markets remain challenging as the industry
continues to report negative news.  This dislocation in the non-Agency
mortgage sector has made it difficult for us to obtain short-term financing on
favorable terms.   As a result, we have completed loan
securitizations in order to obtain long-term financing and terminated our
un-utilized whole loan repurchase agreements in order to avoid paying non-usage
fees under those agreements.  In addition, we have continued to seek
funding from Annaly.  Under these circumstances, we expect to take
actions intended to protect our liquidity, which may include reducing borrowings
and disposing of assets as well as raising capital.
 
 During
this period of market dislocation, fiscal and monetary policymakers have
established new liquidity facilities for primary dealers and commercial banks,
reduced short-term interest rates, and passed legislation that is intended to
address the challenges of mortgage borrowers and lenders.  It is not
possible for us to predict how these actions will impact our
business.  Although these aggressive steps are intended to protect and
support the US housing and mortgage market, we continue to operate under very
difficult market conditions.  As a result, there can be no assurance
that the EESA, the TARP, the TALF, PPIP or other policy initiatives will have a
beneficial impact on the financial markets, including current extreme levels of
volatility.  We cannot predict whether or when such actions may occur
or what impact, if any, such actions could have on our business, results of
operations and financial condition.
 
 22
 
 Certain
financing facilities may contain covenants that restrict our operations and may
inhibit our ability to grow our business and increase revenues.
 
 Certain
financing facilities we may enter into may contain extensive restrictions,
covenants, and representations and warranties that, among other things, require
us to satisfy specified financial, asset quality, loan eligibility and loan
performance tests. If we fail to meet or satisfy any of these covenants or
representations and warranties, we would be in default under these agreements
and our lenders could elect to declare all amounts outstanding under the
agreements to be immediately due and payable, enforce their respective interests
against collateral pledged under such agreements and restrict our ability to
make additional borrowings. Certain financing agreements may contain
cross-default provisions, so that if a default occurs under any one agreement,
the lenders under our other agreements could also declare a default. The
covenants and restrictions we expect in our financing facilities may restrict
our ability to, among other things:
 
 ·
                  incur
      or guarantee additional debt;
 ·
                  make
      certain investments or
acquisitions;
 ·
                  make
      distributions on or repurchase or redeem capital
  stock;
 ·
                  engage
      in mergers or consolidations;
 ·
                  finance
      mortgage loans with certain
attributes;
 ·
                  reduce
      liquidity below certain levels;
 ·
                  grant
      liens;
 ·
                  incur
      operating losses for more than a specified
  period;
 ·
                  enter
      into transactions with affiliates;
and
 ·
                  hold
      mortgage loans for longer than established time
  periods.
 
 These
restrictions may interfere with our ability to obtain financing, including the
financing needed to qualify as a REIT, or to engage in other business
activities, which may significantly harm our business, financial condition,
liquidity and results of operations. A default and resulting repayment
acceleration could significantly reduce our liquidity, which could require us to
sell our assets to repay amounts due and outstanding. This could also
significantly harm our business, financial condition, results of operations, and
our ability to make distributions, which could cause the value of our common
stock to decline. A default will also significantly limit our financing
alternatives such that we will be unable to pursue our leverage strategy, which
could curtail our investment returns.
 
 The
repurchase agreements, warehouse facilities and credit facilities and commercial
paper that we use to finance our investments may require us to provide
additional collateral and may restrict us from leveraging our assets as fully as
desired.
 
 We will
use repurchase agreements, warehouse facilities, credit facilities and
commercial paper to finance our investments. We currently have uncommitted
repurchase agreements with 18 counterparties, including Annaly, for financing
our RMBS.  Our repurchase agreements are uncommitted and the
counterparty may refuse to advance funds under the agreements to
us.  If the market value of the loans or securities pledged or sold by
us to 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, but we may not have the funds available to do so. Posting additional
collateral will reduce our liquidity and limit our ability to leverage our
assets, which could adversely affect our business. In the event we do not have
sufficient liquidity to meet such requirements, lending institutions can
accelerate repayment of our indebtedness, increase our borrowing rates,
liquidate our collateral or terminate our ability to borrow. Such a situation
would likely result in a rapid deterioration of our financial condition and
possibly necessitate a filing for protection under the U.S. Bankruptcy Code.
Further, financial institutions may require us to maintain a certain amount of
cash that is not invested or to set aside non-levered assets sufficient to
maintain a specified liquidity position which would allow us to satisfy our
collateral obligations. As a result, we may not be able to leverage our assets
as fully as we would choose which could reduce our return on equity. If we are
unable to meet these collateral obligations, then, as described above, our
financial condition could deteriorate rapidly.
  23
  If
the 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 the value of the underlying security has declined as of the end of that term
or if we default on our obligations under the repurchase agreement, we will lose
money on our repurchase transactions.
 
 When we
engage in a repurchase transaction, we generally sell securities to the
transaction counterparty and receive cash from the counterparty. The
counterparty is obligated to resell the securities back to us at the end of the
term of the transaction, which is typically 30-90 days. Because the cash we
receive from the counterparty when we initially sell the securities to the
counterparty is less than the value of those securities (this difference is
referred to as the haircut), if the counterparty defaults on its obligation to
resell the securities back to us we would incur a loss on the transaction equal
to the amount of the haircut (assuming there was no change in the value of the
securities). We would also lose money on a repurchase transaction if the value
of the underlying securities has declined as of the end of the transaction term,
as we would have to repurchase the securities for their initial value but would
receive securities worth less than that amount. Any losses we incur on our
repurchase transactions could adversely affect our earnings, and thus our cash
available for distribution to our stockholders. If we default on one of our
obligations under a repurchase transaction, the counterparty can terminate the
transaction and cease entering into any other repurchase transactions with us.
In that case, we would likely need to establish a replacement repurchase
facility with another repurchase dealer in order to continue to leverage our
portfolio and carry out our investment strategy. There is no assurance we would
be able to establish a suitable replacement facility.
 
 Our
rights under our repurchase agreements are subject to the effects of the
bankruptcy laws in the event of the bankruptcy or insolvency of us or our
lenders under the repurchase agreements.
 
 In the
event of our insolvency or bankruptcy, certain repurchase agreements may qualify
for special treatment under the U.S. Bankruptcy Code, the effect of which, among
other things, would be to allow the lender under the applicable repurchase
agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and
to foreclose on the collateral agreement without delay. In the event of the
insolvency or bankruptcy of a lender during the term of a repurchase agreement,
the lender may be permitted, under applicable insolvency laws, to repudiate the
contract, and our claim against the lender for damages may be treated simply as
an unsecured creditor. In addition, if the lender is a broker or dealer subject
to the Securities Investor Protection Act of 1970, or an insured depository
institution subject to the Federal Deposit Insurance Act, our ability to
exercise our rights to recover our securities under a repurchase agreement or to
be compensated for any damages resulting from the lender’s insolvency may be
further limited by those statutes. These claims would be subject to significant
delay and, if and when received, may be substantially less than the damages we
actually incur.
 
 An
increase in our borrowing costs relative to the interest we receive on our
assets may adversely affect our profitability, and thus our cash available for
distribution to our stockholders.
 
 As our
repurchase agreements and other short-term borrowings mature, we will be
required either to enter into new borrowings or to sell certain of our
investments. An increase in short-term interest rates at the time that we seek
to enter into new borrowings would reduce the spread between our returns on our
assets and the cost of our borrowings. This would adversely affect our returns
on our assets that are subject to prepayment risk, including our mortgage-backed
securities, which might reduce earnings and, in turn, cash available for
distribution to our stockholders.
 
 If
we issue senior securities we will be exposed to additional risks.
 
 If we
decide to issue senior securities in the future, it is likely that they will be
governed by an indenture or other instrument containing covenants restricting
our operating flexibility. Additionally, any convertible or exchangeable
securities that we issue in the future may have rights, preferences and
privileges more favorable than those of our common stock and may result in
dilution to owners of our common stock. We and, indirectly, our stockholders,
will bear the cost of issuing and servicing such securities.
 
 Our
securitizations will expose us to additional risks.
 
 We have
and expect to continue to securitize certain of our portfolio investments to
generate cash for funding new investments. We expect to structure these
transactions either as financing transactions or as sales for
GAAP.  In each such transaction, we convey a pool of assets to a
special purpose vehicle, the issuing entity, and the issuing entity issues one
or more classes of non-recourse notes pursuant to the terms of an indenture. The
notes are secured by the pool of assets. In exchange for the transfer of assets
to the issuing entity, we receive the cash proceeds of the sale of non-recourse
notes and a 100% interest in the equity of the issuing entity. The
securitization of our portfolio investments might magnify our exposure to losses
on those portfolio investments because any equity interest we retain in the
issuing entity would be subordinate to the notes issued to investors and we
would, therefore, absorb all of the losses sustained with respect to a
securitized pool of assets before the owners of the notes experience any losses.
Moreover, we cannot be assured that we will be able to access the securitization
market, or be able to do so at favorable rates. The inability to securitize our
portfolio could hurt our performance and our ability to grow our
business.
 
 24
 
 The
use of CDO financings with over-collateralization requirements may have a
negative impact on our cash flow.
 
 We expect
that the terms of CDOs we may sponsor will generally provide that the principal
amount of assets must exceed the principal balance of the related bonds by a
certain amount, commonly referred to as ‘‘over-collateralization.’’ We
anticipate that the CDO terms will provide that, if certain delinquencies or
losses exceed the specified levels based on the analysis by the rating agencies
(or any financial guaranty insurer) of the characteristics of the assets
collateralizing the bonds, the required level of over-collateralization may be
increased or may be prevented from decreasing as would otherwise be permitted if
losses or delinquencies did not exceed those levels. Other tests (based on
delinquency levels or other criteria) may restrict our ability to receive net
income from assets collateralizing the obligations. We cannot assure you that
the performance tests will be satisfied. In advance of completing negotiations
with the rating agencies or other key transaction parties on our future CDO
financings, we cannot assure you of the actual terms of the CDO delinquency
tests, over-collateralization terms, cash flow release mechanisms or other
significant factors regarding the calculation of net income to us. Given recent
volatility in the CDO market, rating agencies may depart from historic practices
for CDO financings, making them more costly for us. Failure to obtain favorable
terms with regard to these matters may materially and adversely affect the
availability of net income to us. If our assets fail to perform as anticipated,
our over-collateralization or other credit enhancement expense associated with
our CDO financings will increase.
 
 Hedging
against interest rate exposure may adversely affect our earnings, which could
reduce our cash available for distribution to our stockholders.
 
 Subject
to maintaining our qualification as a REIT, we pursue various hedging strategies
to seek to reduce our exposure to losses from adverse changes in interest rates.
Our hedging activity varies in scope based on the level and volatility of
interest rates, the type of assets held and other changing market conditions.
Interest rate hedging may fail to protect or could adversely affect us because,
among other things:
 
 ·
                  interest
      rate hedging can be expensive, particularly during periods of rising and
      volatile interest rates;
 ·
                  available
      interest rate hedges may not correspond directly with the interest rate
      risk for which protection is
sought;
 ·
                  the
      duration of the hedge may not match the duration of the related
      liability;
 ·
                  the
      amount of income that a REIT may earn from hedging transactions (other
      than through TRSs) to offset interest rate losses is limited by federal
      tax provisions governing REITs;
 ·
                  the
      credit quality of the party owing money on the hedge may be downgraded to
      such an extent that it impairs our ability to sell or assign our side of
      the hedging transaction; and
 ·
                  the
      party owing money in the hedging transaction may default on its obligation
      to pay.
 
 Our
hedging transactions, which are intended to limit losses, may actually limit
gains and increase our exposure to losses. As a result, our hedging activity may
adversely affect our earnings, which could reduce our cash available for
distribution to our stockholders. In addition, hedging instruments involve risk
since they often are not traded on regulated exchanges, guaranteed by an
exchange or its clearing house, or regulated by any U.S. or foreign governmental
authorities. Consequently, there are no requirements with respect to record
keeping, financial responsibility or segregation of customer funds and
positions. Furthermore, the enforceability of agreements underlying derivative
transactions may depend on compliance with applicable statutory and commodity
and other regulatory requirements and, depending on the identity of the
counterparty, applicable international requirements. The business failure of a
hedging counterparty with whom we enter into a hedging transaction will most
likely result in its default. Default by a party with whom we enter into a
hedging transaction may result in the loss of unrealized profits and force us to
cover our commitments, if any, at the then current market price. Although
generally we will seek to reserve the right to terminate our hedging positions,
it may not always be possible to dispose of or close out a hedging position
without the consent of the hedging counterparty, and we may not be able to enter
into an offsetting contract in order to cover our risk. We cannot assure you
that a liquid secondary market will exist for hedging instruments purchased or
sold, and we may be required to maintain a position until exercise or
expiration, which could result in losses.
 
 25
 
 Our
hedging strategies may not be successful in mitigating the risks associated with
interest rates.
 
 Subject
to complying with REIT tax requirements, we have employed and intend to continue
to employ techniques that limit, or hedge, the adverse effects of rising
interest rates on our short-term repurchase agreements.  In general,
our hedging strategy depends on our view of our entire portfolio, consisting of
assets, liabilities and derivative instruments, in light of prevailing market
conditions. We could misjudge the condition of our investment portfolio or the
market.
 
 Our
hedging activity will vary in scope based on the level and volatility of
interest rates and principal repayments, the type of securities held and other
changing market conditions. Our actual hedging decisions will be determined in
light of the facts and circumstances existing at the time and may differ from
our currently anticipated hedging strategy. These techniques may include
entering into interest rate caps, collars, floors, forward contracts, futures or
swap agreements. We may conduct certain hedging transactions through a TRS,
which will be subject to federal, state and, if applicable, local income
tax.
 
 There are
no perfect hedging strategies, and interest rate hedging may fail to protect us
from loss. Alternatively, we may fail to properly assess a risk to our
investment portfolio or may fail to recognize a risk entirely, leaving us
exposed to losses without the benefit of any offsetting hedging activities. The
derivative financial instruments we select may not have the effect of reducing
our interest rate risk. The nature and timing of hedging transactions may
influence the effectiveness of these strategies. Poorly designed strategies or
improperly executed transactions could actually increase our risk and losses. In
addition, hedging activities could result in losses if the event against which
we hedge does not occur. For example, interest rate hedging could fail to
protect us or adversely affect us because, among other things:
 
 ·
                  available
      interest rate hedging may not correspond directly with the interest rate
      risk for which protection is
sought;
 ·
                  the
      duration of the hedge may not match the duration of the related
      liability;
 ·
                  as
      explained in further detail in the risk factor immediately below, the
      party owing money in the hedging transaction may default on its obligation
      to pay;
 ·
                  the
      credit quality of the party owing money on the hedge may be downgraded to
      such an extent that it impairs our ability to sell or assign our side of
      the hedging transaction; and
 ·
                  the
      value of derivatives used for hedging may be adjusted from time to time in
      accordance with accounting rules to reflect changes in fair value.
      Downward adjustments, or “mark-to-market losses,” would reduce our
      stockholders’ equity.
 
 Whether
the derivatives we acquire achieve hedge accounting treatment or not, hedging
generally involves costs and risks. Our hedging strategies may adversely affect
us because hedging activities involve costs that we will incur regardless of the
effectiveness of the hedging activity. Those costs may be higher in periods of
market volatility, both because the counterparties to our derivative agreements
may demand a higher payment for taking risks, and because repeated adjustments
of our hedges during periods of interest rate changes also may increase costs.
Especially if our hedging strategies are not effective, we could incur
significant hedging-related costs without any corresponding economic
benefits.
 
 We
have elected not to qualify for hedge accounting treatment.
 
 We record
derivative and hedge transactions in accordance with GAAP.  We have
elected not to qualify for hedge accounting treatment.  As a result,
our operating results may suffer because losses on the derivatives that we enter
into may not be offset by a change in the fair value of the related hedged
transaction.
 
 26
 
 Declines
in the fair values of our investments may adversely affect periodic reported
results and credit availability, which may reduce earnings and, in turn, cash
available for distribution to our stockholders.
 
 A
substantial portion of our assets are classified for accounting purposes as
“available-for-sale” and carried at fair value.  Changes in the fair
values of those assets will be directly charged or credited to
OCI.  In addition, a decline in values will reduce the book value of
our assets. A decline in the fair value of our assets may adversely affect us,
particularly in instances where we have borrowed money based on the fair value
of those assets. If the fair value of those assets declines, the lender may
require us to post additional collateral to support the loan. If we were unable
to post the additional collateral, we would have to sell the assets at a time
when we might not otherwise choose to do so. A reduction in credit available may
reduce our earnings and, in turn, cash available for distribution to
stockholders.
 
 The
lack of liquidity in our investments may adversely affect our
business.
 
 We may
invest in securities or other instruments that are not liquid. It may be
difficult or impossible to obtain third party pricing on the investments we
purchase.   Illiquid investments typically experience greater
price volatility as a ready market does not exist.  In addition,
validating third party pricing for illiquid investments may be more subjective
than more liquid investments.  The illiquidity of our investments may
make it difficult for us to sell such investments if the need or desire arises.
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 have
previously recorded our investments. 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.
 
 We
are highly dependent on information systems and third parties, and systems
failures could significantly disrupt our business, which may, in turn,
negatively affect the market price of our common stock and our ability to pay
dividends to our stockholders.
 
 Our
business is highly dependent on communications and information systems. Any
failure or interruption of our systems could cause delays or other problems in
our securities trading activities, including mortgage-backed securities trading
activities, which could have a material adverse effect on our operating results
and negatively affect the market price of our common stock and our ability to
pay dividends to our stockholders.
 
 Terrorist
attacks and other acts of violence or war may affect the market for our common
stock, the industry in which we conduct our operations and our
profitability.
 
 Terrorist
attacks may harm our results of operations and your investment. We cannot assure
you that there will not be further terrorist attacks against the United States
or U.S. businesses. These attacks or armed conflicts may directly impact the
property underlying our asset-based securities or the securities markets in
general. Losses resulting from these types of events are uninsurable. More
generally, any of these events could cause consumer confidence and spending to
decrease or result in increased volatility in the United States and worldwide
financial markets and economies. Adverse economic conditions could harm the
value of the property underlying our asset-backed securities or the securities
markets in general which could harm our operating results and revenues and may
result in the volatility of the value of our securities.
 
 We
are subject to the requirements of the Sarbanes-Oxley Act of 2002.
 
 As we are
a public company, our management is required to deliver a report that assesses
the effectiveness of our internal controls over financial reporting, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act. Section
404 of the Sarbanes-Oxley Act requires an independent registered public
accounting firm to deliver an attestation report on management’s assessment of,
and the operating effectiveness of our internal controls over financial
reporting in conjunction with their opinion on our audited financial statements
beginning with the year ending December 31, 2008. Substantial work on our part
is required to implement appropriate processes, document the system of internal
control over key processes, assess their design, remediate any deficiencies
identified and test their operation. This process is expected to be both costly
and challenging.  We cannot give any assurances that material
weaknesses will not be identified in the future in connection with our
compliance with the provisions of Sections 302 and 404 of the Sarbanes-Oxley
Act.  The existence of any material weakness described above would
preclude a conclusion by management and our independent auditors that we
maintained effective internal control over financial reporting.  Our
management may be required to devote significant time and expense to remediate
any material weaknesses that may be discovered and may not be able to remediate
all material weaknesses in a timely manner.  The existence of any
material weaknesses in our internal control over financial reporting could also
result in errors in our financial statements that could require us to restate
our financial statements, cause us to fail to meet our reporting obligations and
cause investors to lose confidence in our reported financial information, all of
which could lead to a decline in the trading price of our stock.
 
 27
 
 The
increasing number of proposed federal, state and local laws may increase our
risk of liability with respect to certain mortgage loans, may include judicial
modification provisions and could increase our cost of doing
business.
 
 The
United States Congress and various state and local legislatures are considering
legislation, which, among other provisions, would permit limited assignee
liability for certain violations in the mortgage loan origination process, and
would allow judicial modification of loan principal in the event of personal
bankruptcy.  We cannot predict whether or in what form Congress or the
various state and local legislatures may enact legislation affecting our
business.  We are evaluating the potential impact of these
initiatives, if enacted, on our practices and results of
operations.  As a result of these and other initiatives, we are unable
to predict whether federal, state or local authorities will require changes in
our practices in the future or in our portfolio.  These changes, if
required, could adversely affect our profitability, particularly if we make such
changes in response to new or amended laws, regulations or ordinances in any
state where we acquire a significant portion of our mortgage loans, or if such
changes result in us being held responsible for any violations in the mortgage
loan origination process, or if the principal amount of loans we own or are in
RMBS pools we own are modified in the personal bankruptcy process.
 
 Risks
Related to Our Investments
 
 We
might not be able to purchase residential mortgage loans, mortgage-backed
securities and other investments that meet our investment criteria or at
favorable spreads over our borrowing costs.
 
 To the
extent we purchase assets using leverage, our net income depends on our ability
to acquire residential mortgage loans, mortgage-backed securities and other
investments at favorable spreads over our borrowing costs.  Our
investments are selected by our Manager, and our stockholders will not have
input into such investment decisions. Our Manager has conducted due diligence
with respect to each investment purchased.  However, there can be no
assurance that our Manager's due diligence processes will uncover all relevant
facts or that any investment will be successful.
 
 We
may not realize income or gains from our investments.
 
 We invest
to generate both current income and capital appreciation. The investments we
invest in may, however, not appreciate in value and, in fact, may decline in
value, and the debt securities we invest in may default on interest or principal
payments. Accordingly, we may not be able to realize income or gains from our
investments. Any gains that we do realize may not be sufficient to offset any
other losses we experience. Any income that we realize may not be sufficient to
offset our expenses.
 
 Our
investments may be concentrated and will be subject to risk of
default.
 
 While we
intend to diversify our portfolio of investments, we are not required to observe
specific diversification criteria. To the extent that our portfolio is
concentrated in any one region or type of security, downturns relating generally
to such region or type of security may result in defaults on a number of our
investments within a short time period, which may reduce our net income and the
value of our shares and accordingly may reduce our ability to pay dividends to
our stockholders.
 
 Our
investments in subordinated RMBS are generally in the “first loss” position and
our investments in the mezzanine RMBS are generally in the “second loss”
position and therefore subject to losses.
 
 In
general, losses on a mortgage loan included in a securitization will be borne
first by the equity holder of the issuing trust, and then by the “first loss”
subordinated security holder and then by the “second loss” mezzanine
holder.  In the event of default and the exhaustion of any classes of
securities junior to those in which we invest and there is any further loss, we
will not be able to recover all of our investment in the securities we
purchase.  In addition, if the underlying mortgage portfolio has been
overvalued by the originator, or if the values subsequently decline and, as a
result, less collateral is available to satisfy interest and principal payments
due on the related RMBS, the securities in which we invest may effectively
become the “first loss” position behind the more senior securities, which may
result in significant losses to us.  The prices of lower credit
quality securities are generally less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual issuer developments.  A projection of an economic
downturn, for example, could cause a decline in the price of lower credit
quality securities because the ability of obligors of mortgages underlying RMBS
to make principal and interest payments may be impaired.  In such
event, existing credit support in the securitization structure may be
insufficient to protect us against loss of our principal on these
securities.
 
 28
 
 Increases
in interest rates could negatively affect the value of our investments, which
could result in reduced earnings or losses and negatively affect the cash
available for distribution to our stockholders.
 
 We have
and will continue to invest in real estate-related assets by acquiring RMBS,
residential mortgage loans, CMBS and CDOs backed by real estate-related
assets.  Under a normal yield curve, an investment in these assets
will decline in value if long-term interest rates increase. Declines in market
value may ultimately reduce earnings or result in losses to us, which may
negatively affect cash available for distribution to our stockholders. A
significant risk associated with these investments is the risk that both
long-term and short-term interest rates will increase significantly. If
long-term rates were to increase significantly, the market value of these
investments would decline, and the duration and weighted average life of the
investments would increase. We could realize a loss if these assets were sold.
At the same time, an increase in short-term interest rates would increase the
amount of interest owed on the repurchase agreements or other adjustable rate
financings we may enter into to finance the purchase of these
assets.  Market values of our investments may decline without any
general increase in interest rates for a number of reasons, such as increases in
defaults, increases in voluntary prepayments for those investments that are
subject to prepayment risk and widening of credit spreads.
 
 In
a period of rising interest rates, our interest expense could increase while the
interest we earn on our fixed-rate assets would not change, which would
adversely affect our profitability.
 
 Our
operating results will depend in large part on the differences between the
income from our assets, net of credit losses and financing costs. We anticipate
that, in most cases, the income from such assets will respond more slowly to
interest rate fluctuations than the cost of our borrowings. Consequently,
changes in interest rates, particularly short-term interest rates, may
significantly influence our net income. Increases in these rates will tend to
decrease our net income and market value of our assets. Interest rate
fluctuations resulting in our interest expense exceeding our interest income
would result in operating losses for us and may limit or eliminate our ability
to make distributions to our stockholders.
 
 Interest
rate mismatches between our investments and any borrowings used to fund
purchases of these assets may reduce our income during periods of changing
interest rates.
 
 We intend
to fund some of our acquisitions of residential mortgage loans, real
estate-related securities and real estate loans with borrowings that have
interest rates based on indices and repricing terms with shorter maturities than
the interest rate indices and repricing terms of our adjustable-rate
assets.  Accordingly, if short-term interest rates increase, this may
harm our profitability.
 
 Some of
the residential mortgage loans, real estate-related securities and real estate
loans we acquire are and will be fixed-rate securities.  This means
that their interest rates will not vary over time based upon changes in a
short-term interest rate index.  Therefore, the interest rate indices
and repricing terms of the assets that we acquire and their funding sources will
create an interest rate mismatch between our assets and
liabilities.  During periods of changing interest rates, these
mismatches could reduce our net income, dividend yield and the market price of
our stock.
 
 Accordingly,
in a period of rising interest rates, we could experience a decrease in net
income or a net loss because the interest rates on our borrowings adjust whereas
the interest rates on our fixed-rate assets remain unchanged.
 
 Interest
rate caps on our adjustable rate RMBS may adversely affect our
profitability.
 
 Adjustable-rate
RMBS are typically 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 can
increase over the life of the security. Our borrowings typically will not be
subject to similar restrictions. Accordingly, in a period of rapidly increasing
interest rates, the interest rates paid on our borrowings could increase without
limitation while caps could limit the interest rates on our adjustable-rate
RMBS. This problem is magnified for hybrid adjustable-rate and adjustable-rate
RMBS that are not fully indexed. Further, some hybrid adjustable-rate and
adjustable-rate RMBS may 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, we may receive less cash income on hybrid adjustable-rate and
adjustable-rate RMBS than we need to pay interest on our related borrowings.
These factors could reduce our net interest income and cause us to suffer a
loss.
 
 29
 
 A
significant portion of our portfolio investments will be recorded at fair value,
as determined in accordance with our pricing policy as approved by our board of
directors and, as a result, there will be uncertainty as to the value of these
investments.
 
 A
significant portion of our portfolio of investments is in the form of securities
that are not publicly traded. The fair value of securities and other investments
that are not publicly traded may not be readily determinable.  It may
be difficult or impossible to obtain third party pricing on the investments we
purchase.  We value these investments quarterly at fair value, as
determined in accordance with our pricing policy as approved by our board of
directors. Because such valuations are inherently uncertain, may fluctuate over
short periods of time and may be based on estimates, our determinations of fair
value may differ materially from the values that would have been used if a ready
market for these securities existed. The value of our common stock could be
adversely affected if our determinations regarding the fair value of these
investments were materially higher than the values that we ultimately realize
upon their disposal.
 
 A
prolonged economic slowdown, a recession or declining real estate values could
impair our investments and harm our operating results.
 
 Many of
our investments are susceptible to economic slowdowns or recessions, which could
lead to financial losses in our investments and a decrease in revenues, net
income and assets. Unfavorable economic conditions also could increase our
funding costs, limit our access to the capital markets or result in a decision
by lenders not to extend credit to us. These events could prevent us from
increasing investments and have an adverse effect on our operating
results.
 
 Changes
in prepayment rates could negatively affect the value of our investment
portfolio, which could result in reduced earnings or losses and negatively
affect the cash available for distribution to our stockholders.
 
 There are
seldom any restrictions on borrowers’ abilities to prepay their residential
mortgage loans. Homeowners tend to prepay mortgage loans faster when interest
rates decline. Consequently, owners of the loans have to reinvest the money
received from the prepayments at the lower prevailing interest rates.
Conversely, homeowners tend not to prepay mortgage loans when interest rates
increase. Consequently, owners of the loans are unable to reinvest money that
would have otherwise been received from prepayments at the higher prevailing
interest rates. This volatility in prepayment rates may affect our ability to
maintain targeted amounts of leverage on our portfolio of residential mortgage
loans, RMBS, and CDOs backed by real estate-related assets and may result in
reduced earnings or losses for us and negatively affect the cash available for
distribution to our stockholders.
 
 To the
extent our investments are purchased at a premium, faster than expected
prepayments result in a faster than expected amortization of the premium paid,
which would adversely affect our earnings.  Conversely, if these
investments were purchased at a discount, faster than expected prepayments
accelerate our recognition of income.  On February 10, 2010, Fannie
Mae and Freddie Mac announced their intention to significantly increase their
purchases of delinquent loans from the pools of mortgages collateralizing their
Agency MBS beginning in March 2010, which could materially impact the rate of
principal prepayments on our Agency MBS guaranteed by these two government
sponsored enterprises or GSEs.
 
 30
 
 The
mortgage loans we invest in and the mortgage loans underlying the mortgage and
asset-backed securities we invest in are subject to delinquency, foreclosure and
loss, which could result in losses to us.
 
 Residential
mortgage loans are typically secured by single-family residential property and
are subject to risks of delinquency and foreclosure and risks of loss. The
ability of a borrower to repay a loan secured by a residential property is
dependent upon the income or assets of the borrower. A number of factors,
including a general economic downturn, acts of God, terrorism, social unrest and
civil disturbances, may impair borrowers’ abilities to repay their loans. In
addition, we invest in non-Agency RMBS, which are backed by residential real
property but, in contrast to Agency RMBS, their principal and interest is not
guaranteed by federally chartered entities such as Fannie Mae and Freddie Mac
and, in the case of Ginnie Mae, the U.S. government. The U.S. Department of
Treasury and FHFA have also entered into preferred stock purchase agreements
between the U.S. Department of Treasury and Fannie Mae and Freddie Mac pursuant
to which the U.S. Department of Treasury will ensure that each of Fannie Mae and
Freddie Mac maintains a positive net worth.  Asset-backed securities
are bonds or notes backed by loans or other financial assets. The ability of a
borrower to repay these loans or other financial assets is dependent upon the
income or assets of these borrowers. Commercial mortgage loans are secured by
multifamily or commercial property and are subject to risks of delinquency and
foreclosure, and risks of loss that are greater than similar risks associated
with loans made on the security of single-family residential property. The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such property
rather than upon the existence of independent income or assets of the borrower.
If the net operating income of the property is reduced, the borrower’s ability
to repay the loan may be impaired. Net operating income of an income producing
property can be affected by, among other things, tenant mix, success of tenant
businesses, property management decisions, property location and condition,
competition from comparable types of properties, changes in laws that increase
operating expense or limit rents that may be charged, any need to address
environmental contamination at the property, the occurrence of any uninsured
casualty at the property, changes in national, regional or local economic
conditions or specific industry segments, 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,
changes in governmental rules, regulations and fiscal policies, including
environmental legislation, acts of God, terrorism, 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 of principal to the extent of any deficiency
between the value of the collateral and the principal and accrued interest of
the mortgage loan, which could have a material adverse effect on our cash flow
from operations. 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 the value 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 the avoidance 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 be an expensive and lengthy process which
could have a substantial negative effect on our anticipated return on the
foreclosed mortgage loan. RMBS evidence interests in or are secured by pools of
residential mortgage loans and CMBS evidence interests in or are secured by a
single commercial mortgage loan or a pool of commercial mortgage loans.
Accordingly, the RMBS and CMBS we invest in are subject to all of the risks of
the respective underlying mortgage loans.
 
 We
may be required to repurchase mortgage loans or indemnify investors if we breach
representations and warranties, which could harm our earnings.
 
 If we
sell loans, we would be required to make customary representations and
warranties about such loans to the loan purchaser. Our residential mortgage loan
sale agreements will require us to repurchase or substitute loans in the event
we breach a representation or warranty given to the loan purchaser. 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. Likewise, we are required to
repurchase or substitute loans if we breach a representation or warranty in
connection with our securitizations. The remedies available to a purchaser of
mortgage loans are generally broader than those available to us against the
originating broker or correspondent. Further, if a purchaser enforces its
remedies against us, we may not be able to enforce the remedies we have against
the sellers. The repurchased loans typically can only be financed at a steep
discount to their repurchase price, if at all. They are also typically sold at a
significant discount to the unpaid principal balance. Significant repurchase
activity could harm our cash flow, results of operations, financial condition
and business prospects.
 
 We
may enter into derivative contracts that could expose us to contingent
liabilities in the future.
 
 Subject
to maintaining our qualification as a REIT, part of our investment strategy
involves entering into derivative contracts that could require us to fund cash
payments in certain circumstances. These potential payments will be contingent
liabilities and therefore may not appear on our consolidated statement of
financial condition. Our ability to fund these contingent liabilities will
depend on the liquidity of our assets and access to capital at the time, and the
need to fund these contingent liabilities could adversely impact our financial
condition.
 
 31
 
 Our
Manager’s due diligence of potential investments may not reveal all of the
liabilities associated with such investments and may not reveal other weaknesses
in such investments, which could lead to investment losses.
 
 Before
making an investment, our Manager assesses the strengths and weaknesses of the
originator or issuer of the asset as well as other factors and characteristics
that are material to the performance of the investment. In making the assessment
and otherwise conducting customary due diligence, our Manager relies on
resources available to it and, in some cases, an investigation by third parties.
This process is particularly important with respect to newly formed originators
or issuers with unrated and other subordinated tranches of MBS and ABS because
there may be little or no information publicly available about these entities
and investments. There can be no assurance that our Manager’s due diligence
process will uncover all relevant facts or that any investment will be
successful.
 
 Our
real estate investments are subject to risks particular to real
property.
 
 We own
assets secured by real estate and may own real estate directly in the future,
either through direct investments or upon a default of mortgage loans. Real
estate investments 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;
 ·
                  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;
 ·
                  costs
      of remediation and liabilities associated with environmental conditions
      such as indoor mold; and
 ·
                  the
      potential for uninsured or under-insured property
  losses.
 
 If any of
these or similar events occurs, it may reduce our return from an affected
property or investment and reduce or eliminate our ability to make distributions
to stockholders.
 
 We
may be exposed to environmental liabilities with respect to properties to which
we take title.
 
 In the
course of our business, we may take title to real estate, and, if we do take
title, we could be subject to environmental liabilities with respect to these
properties. In such a circumstance, we may be held liable to a governmental
entity or to third parties for property damage, personal injury, investigation,
and clean-up costs incurred by these parties in connection with environmental
contamination, or may be required to investigate or clean up hazardous or toxic
substances, or chemical releases at a property. The costs associated with
investigation or remediation activities could be substantial. If we ever become
subject to significant environmental liabilities, our business, financial
condition, liquidity, and results of operations could be materially and
adversely affected.
 
 We
may in the future invest in RMBS collateralized by subprime mortgage loans,
which are subject to increased risks.
 
 We may in
the future invest in RMBS backed by collateral pools of subprime residential
mortgage loans. ‘‘Subprime’’ mortgage loans refer to mortgage loans that have
been originated using underwriting standards that are less restrictive than the
underwriting requirements used as standards for other first and junior lien
mortgage loan purchase programs, such as the programs of Fannie Mae and Freddie
Mac. These lower standards include mortgage loans made to borrowers having
imperfect or impaired credit histories (including outstanding judgments or prior
bankruptcies), mortgage loans where the amount of the loan at origination is 80%
or more of the value of the mortgage property, mortgage loans made to borrowers
with low credit scores, mortgage loans made to borrowers who have other debt
that represents a large portion of their income and mortgage loans made to
borrowers whose income is not required to be disclosed or verified. Due to
economic conditions, including increased interest rates and lower home prices,
as well as aggressive lending practices, subprime mortgage loans have in recent
periods experienced increased rates of delinquency, foreclosure, bankruptcy and
loss, and they are likely to continue to experience delinquency, foreclosure,
bankruptcy and loss rates that are higher, and that may be substantially higher,
than those experienced by mortgage loans underwritten in a more traditional
manner. Thus, because of the higher delinquency rates and losses associated with
subprime mortgage loans, the performance of RMBS backed by subprime mortgage
loans in which we may invest could be correspondingly adversely affected, which
could adversely impact our results of operations, financial condition and
business.
 
 32
 
 Our
Manager will utilize analytical models and data in connection with the valuation
of our investments, and any incorrect, misleading or incomplete information used
in connection therewith would subject us to potential risks.
 
 Given the
complexity of our investments and strategies, our Manager must rely heavily on
analytical models (both net present value based loss mitigation models and those
supplied by third-parties) and information and data supplied by third-parties,
or Models and Data.  Models and Data will be used to value investments
or potential investments and also in connection with hedging our
investments.  When Models and Data prove to be incorrect, misleading
or incomplete, any decisions made in reliance thereon expose us to potential
risks. For example, by relying on Models and Data, especially valuation models,
our Manager may be induced to buy certain investments at prices that are too
high, to sell certain other investments at prices that are too low or to miss
favorable opportunities altogether.  Similarly, any hedging based on
faulty Models and Data may prove to be unsuccessful.  Furthermore, any
valuations of our investments that are based on valuation models may prove to be
incorrect.
 
 Some of
the risks of relying on analytical models and third-party data are particular to
analyzing tranches from securitizations, such as MBS. These risks include, but
are not limited to, the following: (i) collateral cash flows and/or liability
structures may be incorrectly modeled in all or only certain scenarios, or may
be modeled based on simplifying assumptions that lead to errors; (ii)
information about collateral may be incorrect, incomplete, or misleading; (iii)
collateral or bond historical performance (such as historical prepayments,
defaults, cash flows, etc.) may be incorrectly reported, or subject to
interpretation (e.g., different issuers may report delinquency statistics based
on different definitions of what constitutes a delinquent loan); or (iv)
collateral or bond information may be outdated, in which case the models may
contain incorrect assumptions as to what has occurred since the date information
was last updated.
 
 Some of
the analytical models used by our Manager, such as mortgage prepayment models or
mortgage default models, are predictive in nature.  The use of
predictive models has inherent risks.  For example, such models may
incorrectly forecast future behavior, leading to potential losses on a cash flow
and/or a mark-to-market basis. In addition, the predictive models used by our
Manager may differ substantially from those models used by other market
participants, with the result that valuations based on these predictive models
may be substantially higher or lower for certain investments than actual market
prices.  Furthermore, since predictive models are usually constructed
based on historical data supplied by third-parties, the success of relying on
such models may depend heavily on the accuracy and reliability of the supplied
historical data and the ability of these historical models to accurately reflect
future periods.
 
 All
valuation models rely on correct market data inputs. If incorrect market data is
entered into even a well-founded valuation model, the resulting valuations will
be incorrect. However, even if market data is inputted correctly, “model prices”
will often differ substantially from market prices, especially for securities
with complex characteristics, such as derivative securities.
 
 Exchange
rate fluctuations may limit gains or result in losses.
 
 If we
directly or indirectly hold assets denominated in currencies other than U.S.
dollars, we will be exposed to currency risk that may adversely affect
performance. Changes in the U.S. dollar’s rate of exchange with other currencies
may affect the value of investments in our portfolio and the income that we
receive in respect of such investments. In addition, we may incur costs in
connection with conversion between various currencies, which may reduce our net
income and accordingly may reduce our ability to pay distributions to our
stockholders.
 
 Regulatory
and Legal Risks
 
 Violations
of federal, state and local laws by the originator, the servicer, or may result
in rescission of the loans or penalties that may adversely impact our
income.
 
 Violations
of certain provisions of federal, state and local laws by the originator, the
servicer or us, as well as actions by governmental agencies, authorities and
attorneys general, may limit our or the servicer’s ability to collect all or
part of the principal of, or interest on, the residential mortgage loans we
purchase and hold, and loans that serve as security for the MBS we purchase and
hold.  Violations could also subject the entity that made or modified
the loans to damages and administrative enforcement (including disgorgement of
prior interest and fees paid).  In particular, a loan seller’s failure
to comply with certain requirements of federal and state laws could subject the
seller (and other assignees of the mortgage loans) to monetary penalties and
result in the obligors’ rescinding the mortgage loans against the seller and any
subsequent holders of the mortgage loans, even if the assignee was not
responsible for and was unaware of those violations.  These adverse
consequences vary depending on the applicable law and may vary depending on the
type or severity of the violation, but they typically include:
  33
  ·
                  the
      ability of the homeowner to rescind, or cancel, the
  loan;
  ·
                  the
      inability of the holder of the loan to collect all of the principal and
      interest otherwise due on the loan;
  ·
                  the
      right of the homeowner to a refund of amounts previously paid (which may
      include amounts financed by the loan), or to set off those amounts against
      his or her future loan obligations;
and
  ·
                  the
      liability of the servicer and the owner of the loan for actual damages,
      statutory damages and punitive damages, civil or criminal penalties, costs
      and attorneys’ fees.
  The terms
of the documents under which we intend to purchase loans, and the terms of the
documents used to create the MBS we intend to purchase, may entitle the holders
of the loans and the special purpose vehicles that hold loans in MBS to
contractual indemnification against these liabilities.  For example,
the sellers of loans placed in an MBS typically represent that each mortgage
loan was made in compliance with applicable federal and state laws and
regulations at the time it was made.  If there is a material breach of
that representation, the seller may be contractually obligated to cure the
breach or repurchase or replace the affected mortgage loan.  If the
seller is unable or otherwise fails to satisfy these obligations, the yield on
the loans and MBS might be materially and adversely affected.  Due to
the well publicized recent deterioration in the housing and commercial property
markets, many of the sellers that issued these indemnifications are no longer in
business or are unable to financially respond to their indemnification
obligations.  Consequently, holders of interests in the loans and MBS
may ultimately have to absorb the losses arising from the sellers’
violations.  While we attempt to take these factors into account in
the prices we pay for loans and MBS, we can offer no assurances concerning the
validity of the assumptions we use in our pricing decisions.
 
 Furthermore,
the volume of new and modified laws and regulations at both the federal and
state levels has increased in recent years.  For example, H.R. 1105,
which was signed into law in March 2009, gives the Federal Trade Commission, or
FTC, authority to issue rules under which it will define what constitutes unfair
and deceptive practices relating to mortgage lending and loan servicing and
which gives enforcement authority to state attorneys general.  There
is also an increased risk that the both we and the servicer of loans we purchase
or that are held in MBS we purchase may be involved in litigation over
violations or alleged violations of recently enacted and proposed
laws.  It is possible that these laws might result in additional
significant costs and liabilities, which could further adversely affect the
results of our operations.  Any litigation would increase our expenses
and reduce funds available for distribution to our stockholders.
 
 Some
local municipalities also have enacted laws that impose potentially significant
penalties on loan servicing activities related to abandoned properties or real
estate owned properties.
 
 Any of
these preceding could result in delays and/or reductions in receipts of amounts
due on the loans we intend to purchase or on the loans held in MBS we intend to
purchase, harming our income and operating results.
 
 We
may be subject to liability for potential violations of predatory lending and
other laws, which could adversely impact our results of operations, financial
condition and business.
 
 Various
federal, state and local laws have been enacted that are designed to discourage
predatory lending practices and more are currently proposed. The federal Home
Ownership and Equity Protection Act of 1994, commonly known as HOEPA, prohibits
inclusion of certain provisions in residential mortgage loans that have mortgage
rates or origination costs in excess of prescribed levels and requires that
borrowers be given certain disclosures before origination.  Some
states have enacted, or may enact, similar laws or regulations, which in some
cases impose restrictions and requirements greater than those in
HOEPA.  In addition, under the anti-predatory lending laws of some
states, the origination of certain residential mortgage loans, including loans
that are not classified as “high cost” loans under applicable law, must satisfy
a net tangible benefits test with respect to the related
borrower.  This test may be highly subjective and open to
interpretation. As a result, a court may determine that a residential mortgage
loan we hold, for example, does not meet the test even if the related originator
reasonably believed that the test was satisfied.
 
 34
 Failure
of residential mortgage loan originators or servicers to comply with these laws,
to the extent any of their residential mortgage loans become part of our
mortgage-related assets, could subject us, as an assignee or purchaser of the
related residential mortgage loans or RMBS, to monetary penalties and could
result in the borrowers rescinding the affected residential mortgage
loans.  Lawsuits have been brought in various states making claims
against assignees or purchasers of high cost loans for violations of state
law.  Named defendants in these cases have included numerous
participants in the secondary mortgage market.  If the loans are found
to have been originated in violation of predatory or abusive lending laws, we
could incur losses, which could adversely impact our results of operations,
financial condition and business.
 
 There
is the potential for limitations on our ability to finance purchases of loans
and MBS, and for losses on the loans and MBS we purchase, as a result of
violations of law by the originating lenders.
 
 In June
2003, a California jury found a warehouse lender and securitization underwriter
liable in part for fraud on consumers committed by a lender to whom it provided
financing and underwriting services.  The jury found that the
investment bank was aware of the fraud and substantially assisted the lender in
perpetrating the fraud by providing financing and underwriting services that
allowed the lender to continue to operate, and held it liable for 10% of the
plaintiff’s damages.  This instance of liability is the first case we
know of in which an investment bank was held partly responsible for violations
committed by a mortgage lender customer.  Shortly after the
announcement of the jury verdict in the California case, the Florida Attorney
General filed suit against the same financial institution, seeking an injunction
to prevent it from financing mortgage loans within Florida, as well as damages
and civil penalties, based on theories of unfair and deceptive trade practices
and fraud.  The suit claimed that this financial institution aided and
abetted the same lender involved in the California case in its commission of
fraudulent representations in Florida.
 
 In
December of 2008, the Massachusetts Supreme Judicial Court upheld a lower
court’s order entered against a lender that enjoined the lender from
foreclosing, without court approval, on certain mortgage loans secured by the
borrower’s principal dwelling that the court considered “presumptively
unfair.”
 
 In May of
2009, another securitizer of residential mortgage loans entered into a
settlement agreement with the Commonwealth of Massachusetts stemming from its
investigation of subprime lending and securitization markets.  The
securitizer agreed to provide loan restructuring (including significant
principal write-downs) valued at approximately $50 million to Massachusetts
subprime borrowers and to make a $10 million payment to the
Commonwealth.
 If other
courts or regulators take similar actions, investment banks and investors in
residential and commercial mortgage loans and MBS (such as us) might face
increased litigation as they are named as defendants in lawsuits and regulatory
actions against the mortgage companies or securitizers with which they do
business or they might be prohibited from foreclosing on loans they
purchased.  Some investment banks may charge more for warehouse
lending and reduce the prices they pay for loans to build in the costs of this
potential litigation or exit the business entirely, thereby increasing our cost
of borrowing.  Any such actions by courts and regulators, and any such
increases in our costs of borrowing, could, in turn, have a material adverse
effect on our results of operations, financial condition, and business
prospects.
 
 We
are required to obtain various state licenses in order to purchase mortgage
loans in the secondary market and there is no assurance we will be able to
obtain or maintain those licenses.
 
 While we
are not required to obtain licenses to purchase mortgage-backed securities, we
are required to obtain various state licenses to purchase mortgage loans in the
secondary market. There is no assurance that we will obtain all of the licenses
that we desire or that we will not experience significant delays in seeking
these licenses. Furthermore, we will be subject to various information reporting
requirements to maintain these licenses, and there is no assurance that we will
satisfy those requirements. Our failure to obtain or maintain licenses will
restrict our investment options and could harm our business.
 
 The
federal government’s pressing for refinancing of certain loans may affect
prepayment rates for mortgage loans in MBS.
 
 In
addition to the increased pressure upon residential mortgage loan investors and
servicers to engage in loss mitigation activities, the federal government is
pressing for refinancing of certain loans, and this encouragement may affect
prepayment rates for mortgage loans in MBS.  In connection with
government-related securities, in February 2009 President Obama unveiled the
Homeowner Affordability and Stability Plan, which, in part, calls upon Fannie
Mae and Freddie Mac to loosen their eligibility criteria for the purchase of
loans in order to provide access to low-cost refinancing for borrowers who are
current on their mortgage payments but who cannot otherwise qualify to refinance
at a lower market rate.  The major change is to permit an increase in
the LTV ratio of a refinancing loan eligible for sale up to 105%.  The
charters governing the operations of Fannie Mae and Freddie Mac prohibit
purchases of loans with loan to value ratios in excess of 80% unless the loans
have mortgage insurance (or unless other types of credit enhancement are
provided in accordance with the statutory requirements).  The FHFA,
which regulates Fannie Mae and Freddie Mac, determined that new mortgage
insurance will not be required on the refinancing if the applicable entity
already owns the loan or guarantees the related MBS.  Additionally,
the U.S. Treasury reports that in some cases a new appraisal will not be
necessary upon refinancing.  The U.S. Treasury estimates that up to
5,000,000 homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac
may be eligible for this refinancing program, which is scheduled to terminate in
June 2010.
 
 35
 In
connection with all RMBS, the HERA authorized a voluntary FHA mortgage insurance
program called HOPE for Homeowners, or H4H Program, designed to refinance
certain delinquent borrowers into new FHA-insured loans.  The H4H
Program targets delinquent borrowers under conventional mortgage loans, as well
as under government-insured or -guaranteed mortgage loans, that were originated
on or before January 1, 2008.  Holders of existing mortgage loans
being refinanced under the H4H Program must accept a write-down of principal and
waive all prepayment fees.  While the use of the program has been
extremely limited to date, Congress continues to amend the program to encourage
its use.  The H4H Program is effective through September 30,
2011.
 
 To the
extent these and other economic stabilization or stimulus efforts are successful
in increasing prepayment speeds for residential mortgage loans, such as those in
RMBS, that could potentially harm our income and operating results, particularly
in connection with loans or MBS purchased at a premium or our interest-only
securities.
 
 Federal
and state agencies have taken enforcement actions and enacted regulations and
government programs  that require government sponsored enterprises
(such as Fannie Mae and Freddie Mac), insured depository institutions, and state
regulated loan servicers to engage in loss mitigation activities relating to
residential mortgage loans.
 
 Federal
and state agencies have taken enforcement actions and enacted regulations that
require government sponsored enterprises (such as Fannie Mae and Freddie Mac),
insured depository institutions, and state regulated loan servicers to engage in
loss mitigation activities relating to residential mortgage
loans.  Other agencies have published policies that strongly recommend
these entities to engage in loss mitigation activities.  These loss
mitigation activities may include, for example, loan modifications that
significantly reduce interest and payments, deferrals of payments, and
reductions of principal balances.
 
 On March
4, 2009, the U.S. Treasury announced HAMP, which is intended to enable borrowers
to retain their homes when feasible.  Eligibility for relief initially
is limited to owner occupant borrowers with loans of less than $729,000 that
were in existence as of January 1, 2009.  HAMP requires eligibility
criteria and modification terms that may be more favorable to the borrower than
an investor or the servicer may otherwise choose to use.  As the
modification plan applies to owner occupied residential mortgage loans in
default or imminent default, absent a modification the loans may be subject to
foreclosure.  Nevertheless, an increase in loans that take advantage
of the modification opportunities may result in the repurchase of pooled loans
in RMBS, thereby terminating our rights to earn interest on those
loans.
 
 There is
litigation currently pending that challenges prior loss mitigation activities on
the premise that they are contrary to the terms of the agreements under which
established residential mortgage securities were formed. Nevertheless, the
recent enactment of the HFSTH Act provides a safe harbor in some circumstances
from these types of lawsuits for servicers entering into “qualified loss
mitigation plans” with respect to residential mortgages originated before the
act was enacted.  A servicer’s duty to any investor or other party to
maximize the net present value of any mortgage being modified will be construed
to apply to all investors and other parties and will be deemed satisfied when
the following criteria are met:  (a) a default on the payment of the
mortgage has occurred, is imminent, or is reasonably foreseeable, (b) the
mortgagor occupies the property securing the mortgage as his or her principal
residence and (c) the servicer reasonably determined that the application of
such qualified loss mitigation plan will likely provide an anticipated recovery
on the outstanding principal mortgage debt that will exceed the anticipated
recovery through foreclosure.  Any servicer that is deemed to be
acting in the best interests of all investors and parties is relieved of
liability to any party owed a duty as discussed above and shall not be subject
to any injunction, stay or other equitable relief to such party based solely
upon the implementation by the servicer of a qualified loss mitigation
plan.  The act further provides that any person, including a trustee,
issuer and loan originator, shall not be liable for monetary damages or subject
to an injunction, stay or other equitable relief based solely upon that person’s
cooperation with a servicer in implementing a qualified loss mitigation program
that meets the criteria set forth above.   By protecting
servicers from such liabilities, this safe harbor may encourage loan
modifications and servicers may not be able to service the mortgage loans in
accordance with their prior practices.  As a result of the enactment
of the HFSTH Act, loss mitigation activities may result in even more significant
reductions in the returns on loans and RMBS we purchase, potentially harming our
income and operating results.
 
 36
 Proposed
Congressional legislation (H.R. 3126) supported by President Obama would, if
passed, create a Consumer Financial Protection Agency (“CFPA”).  The
bill has undergone numerous changes since its introduction, and there are
reports about broad revisions to the bill.  The bill would establish a
new federal agency whose principal purpose would be to regulate the provision of
financial services and products.  As proposed, the bill would grant
the CFPA sweeping and broad powers and provide the CFPA authority to both
mandate and limit the financial products offered to consumers.  It is
possible the CFPA could significantly limit our ability to offer products and
services, and impose requirements on us as to what financial services and
products we offer and the manner in which we market our services and
products.  Because of the uncertainty concerning whether the bill will
be passed, and its coverage, it is difficult to predict the impact it will have
on our operations, income and expenses.
 
 We
will likely be subject to civil liability if we fail to make required
disclosures to consumers.
 
 Purchasers
of consumer purpose, residential mortgage loans have affirmative disclosure
obligations to consumers under the HFSTH Act, which Congress enacted in May 2009
with an immediate effective date.  This new statutory obligation will
subject purchasers of mortgage loans to civil liability if they fail to make the
required disclosures. Specifically, section 404 of the HFSTH Act amends the
Truth in Lending Act to provide that a creditor that purchases or is assigned a
mortgage loan must notify the borrower in writing of a sale or transfer of his
or her mortgage loan, not later than 30 days after the transaction’s
completion.  The notice must include how to reach an agent or party
having authority to act on behalf of the new creditor, the location of the place
where the transfer of ownership is recorded and any other relevant information
about the new creditor.  This disclosure would be in addition to any
transfer of servicing notice required under the Real Estate Settlement
Procedures Act.  Federal consumer credit law does not typically impose
responsibility on assignees to communicate directly with mortgagors, and the
statutory language is ambiguous.
 
 Litigation
alleging inability to foreclose may limit our ability to recover on some of the
loans we purchase or that are held in RMBS.
 
 In
October 2007, a judge in the U.S. District Court for the Northern District of
Ohio dismissed 14 cases in which plaintiffs sought to foreclose mortgages held
in securitization trusts by ruling that those plaintiffs lacked standing to
sue.  In each case, the judge found that the plaintiff was not the
owner of the note and mortgage on the date the foreclosure complaint was filed
in court.  Similar actions have been initiated in other
states.  These actions arise as a result of the common practice in the
mortgage industry of mortgage loan sellers providing the loan purchasers
unrecorded assignments of the mortgage in blank (i.e., the assignments do not
name the assignee).  Some courts have held that before a note holder
may initiate a foreclosure, the note holder must show proof to the court that
the mortgage itself has been properly assigned to the purchaser each time the
mortgage loan has been sold.  It is sometimes difficult to obtain and
then record originals of each successive assignment.  It is still
unclear whether higher courts will uphold the requirements imposed by these
lower courts.
 
 Until the
issue is settled, investors in mortgage loans are at risk of being unable to
foreclose on defaulted loans, or at a minimum will be subject to delays until
all assignments in the chain of the loan’s title are properly
recorded.  Thus, we may not be able to recover on some of the loans we
purchase or that are held in the RMBS we purchase, or we may suffer delays in
foreclosure, all of which could result in a lower return on our loans and
RMBS.
  In
addition, some legislatures are also instituting stringent proof of ownership
requirements that a servicer must satisfy before commencing a foreclosure
action. By way of example, the New York State Assembly earlier this year amended
state law to require that any foreclosure complaint contain an affirmative
allegation that the plaintiff is the owner and holder of the note and mortgage
at issue or has been delegated the authority to institute the foreclosure action
by the owner and holder of the subject mortgage and note.  Again, laws
of this type may limit our ability to recover on some of the loans we purchase
or that are held in the RMBS we purchase, and may result in delays in the
foreclosure process, all of which could result in a lower return on our loans
and RMBS.
 37
 
 Legislative
action to provide mortgage relief and foreclosure moratoriums may negatively
impact our business.
 
 As
delinquencies and defaults in residential mortgages have recently increased,
there has been an increasing amount of legislative action that might restrict
our ability to foreclose and resell the property of a customer in
default.  For example, some recently enacted state laws may require
the lender to deliver a notice of intent to foreclose, provide borrowers
additional time to cure or reinstate their loans, impose mandatory settlement
conference and mediation requirements, require lenders to offer loan
modifications, and prohibit initiation of foreclosure until the borrower has
been provided time to consult with foreclosure counselors.
 
 Alternatively,
new federal legislation and some legislatures provide a subsidy to a customer to
permit the customer to continue to make payments during a period of
hardship.  In the case of a subsidy, it is possible that we might be
required to forego a portion of the amount otherwise due on the loan for a
temporary period.
 
 Finally,
some state legislatures are requiring foreclosing lenders to give special
notices to tenants in properties that the lenders are foreclosing on, or to
permit the tenants to remain in the property for a period of time following the
foreclosure.
 
 These
laws delay the initiation or completion of foreclosure proceedings on specified
types of residential mortgage loans, or otherwise limit the ability of
residential loan servicers to take actions that may be essential to preserve the
value of the mortgage loans on behalf of the holders of
MBS.   Any such limitations are likely to cause delayed or
reduced collections from mortgagors and generally increased servicing
costs.  Any restriction on our ability to foreclose on a loan, any
requirement that we forego a portion of the amount otherwise due on a loan or
any requirement that we modify any original loan terms is likely to negatively
impact our business, financial condition, liquidity and results of
operations.
 
 United
States military operations may increase risk of Servicemembers Civil Relief Act
shortfalls.
 
 Under the
federal Service members Civil Relief Act, a borrower who enters active military
service after the origination of his or her mortgage loan generally may not be
required to pay interest above an annual rate of 6%, and the note holder is
restricted from exercising certain enforcement remedies, during the period of
the borrower’s active duty status.  Several states also have enacted
or are considering similar laws with varying applicability and
effect.  As a result of military operations in Afghanistan and Iraq,
the United States has placed a substantial number of armed forces reservists and
members of the National Guard on active duty status.  It is possible
that the number of reservists and members of the National Guard placed on active
duty status may remain at high levels for an extended time.  To the
extent that a member of the military, or a member of the armed forces reserves
or National Guard who is called to active duty, is a mortgagor on a loan
underlying RMBS we may purchase, the interest rate limitation of the
Servicemembers Civil Relief Act, and any comparable state law, will
apply.  An increase in the number of borrowers taking advantage of
those laws may increase servicing expenses for loans underlying RMBS we may
purchase, and may also reduce cash flow and the interest payments collected from
those borrowers.  In the event of default, the laws may result in
delaying or preventing the loan servicer from exercising otherwise available
remedies for default.  If these events occur, they may result in
interest shortfalls on the loans in underlying RMBS we may purchase that will be
borne by holders of those RMBS.
 
 Risks
Related To Our Common Stock
 
 The
market price and trading volume of our shares of common stock may be
volatile.
 
 At
December 31, 2009, we had 670,371,587 shares of common stock issued and
outstanding.  The market price of shares of our common stock may be
highly volatile and could be subject to wide fluctuations.  In
addition, the trading volume in our shares of common stock may fluctuate and
cause significant price variations to occur. We cannot assure you that the
market price of our shares of common stock will not fluctuate or decline
significantly in the future. Some of the factors that could negatively affect
our share price or result in fluctuations in the price or trading volume of our
shares of common stock include those set forth under “Risk Factors” and “A
Warning About Forward-Looking Statements” and in the information incorporated
and deemed to be incorporated by reference herein, as well as:
  38
 
 ·
                  actual
      or anticipated variations in our quarterly operating results or business
      prospects;
 ·
                  changes
      in our earnings estimates or publication of research reports about us or
      the real estate industry;
 ·
                  an
      inability to meet or exceed securities analysts' estimates or
      expectations;
 ·
                  increases
      in market interest rates;
 ·
                  hedging
      or arbitrage trading activity in our shares of common
    stock;
 ·
                  capital
      commitments;
 ·
                  changes
      in market valuations of similar
companies;
 ·
                  changes
      in valuations of our assets;
 ·
                  adverse
      market reaction to any increased indebtedness we incur in the
      future;
 ·
                  additions
      or departures of management
personnel;
 ·
                  actions
      by institutional shareholders;
 ·
                  speculation
      in the press or investment
community;
 ·
                  changes
      in our distribution policy;
 ·
                  regulatory
      changes affecting our industry generally or our
  business;
 ·
                  general
      market and economic conditions; and
 ·
                  future
      sales of our shares of common stock or securities convertible into, or
      exchangeable or exercisable for, our shares of common
    stock.
 
 Common
stock eligible for future sale may have adverse effects on our share
price.
 
 If we
issue a significant number of shares of common stock or securities convertible
into common stock in a short period of time, there could be a dilution of the
existing common stock and a decrease in the market price of the common
stock.
  We cannot
predict the effect, if any, of future sales of common stock, or the availability
of shares for future sales, on the market price of the common
stock.  Sales of substantial amounts of common stock, or the
perception that such sales could occur, may adversely affect prevailing market
prices for the common stock.  At December 31, 2009, we had 670,371,587
shares of common stock issued and outstanding.  Annaly owned
approximately 6.7% of our outstanding shares of common stock as of December 31,
2009.  Our equity incentive plan provides for grants of restricted
common stock and other equity-based awards up to an aggregate of 8% of the
issued and outstanding shares of our common stock (on a fully diluted basis) at
the time of the award, subject to a ceiling of 40,000,000 shares available for
issuance under the plan.  On January 2, 2008, our executive officers
and other employees of our Manager and our independent directors were granted,
as a group, 1,301,000 shares of our restricted common stock.  The
restricted common stock granted to our executive officers and other employees of
our Manager or its affiliates vests in equal installments on the first business
day of each fiscal quarter over a period of 10 years beginning on January 2,
2008, of which 269,800 shares vested and 21,955 shares were forfeited as of
December 31, 2009.  The restricted common stock granted to our
executive officers and other employees of our Manager or its affiliates that
remain outstanding and are unvested will fully vest on the death of the
individual.  The 1,031,200 shares of our restricted common stock
granted to our executive officers and other employees of our Manager or its
affiliates and to our independent directors that remains unvested as of December
31, 2009 represents approximately 0.15% of the issued and outstanding shares of
our common stock (on a fully diluted basis).  We will not make
distributions on shares of restricted stock that have not vested.
 
 Annaly
has agreed with us to a further lock-up period in connection with the shares
purchased by Annaly concurrently with our initial public offering that will
expire at the earlier of (i) November 15, 2010 or (ii) the termination of the
management agreement.  Annaly has agreed with us to a further lock-up
period in connection with the shares purchased by Annaly immediately after our
2008 secondary offering that will expire at the earlier of (i) October 24, 2011
or (ii) the termination of the management agreement.  Annaly has
agreed with us to a further lock-up period in connection with the shares
purchased by Annaly immediately after our April 15, 2009 secondary offering that
will expire at the earlier of (i) April 15, 2012 or (ii) the termination of the
management agreement. Annaly has agreed with us to a further lock-up period in
connection with the shares purchased by Annaly immediately after our May 27,
2009 secondary offering that will expire at the earlier of (i) May 27, 2012 or
(ii) the termination of the management agreement. When the lock-up periods
expire, these common shares will become eligible for sale, in some cases subject
to the requirements of Rule 144 under the Securities Act of 1933, as amended, or
the Securities Act.   The market price of our common stock may
decline significantly when the restrictions on resale by certain of our
stockholders lapse.  Sales of substantial amounts of common stock or
the perception that such sales could occur may adversely affect the prevailing
market price for our common stock.
 39
  There
is a risk that our stockholders may not receive distributions or that
distributions may not grow over time.
 
 We intend
to make distributions on a quarterly basis out of assets legally available to
our stockholders in amounts such that all or substantially all of our REIT
taxable income in each year is distributed. We have not established a minimum
distribution payment level and our ability to pay distributions may be adversely
affected by a number of factors, including the risk factors described
herein.  All distributions will be made at the discretion of our board
of directors and will depend on our earnings, our financial condition,
maintenance of our REIT status and other factors as our board of directors may
deem relevant from time to time. Among the factors that could adversely affect
our results of operations and impair our ability to pay distributions to our
stockholders are:
 
 ·
                  the
      profitability of the investments of net proceeds from our equity
      raises;
 ·
                  our
      ability to make profitable
investments;
 ·
                  margin
      calls or other expenses that reduce our cash
  flow;
 ·
                  defaults
      in our asset portfolio or decreases in the value of our portfolio;
      and
 ·
                  the
      fact that anticipated operating expense levels may not prove accurate, as
      actual results may vary from
estimates.
 
 A change
in any one of these factors could affect our ability to make distributions. We
cannot assure you that we will achieve investment results that will allow us to
make a specified level of cash distributions or year-to-year increases in cash
distributions.
 
 Market
interest rates may have an effect on the trading value of our
shares.
 
 One of
the factors that investors may consider in deciding whether to buy or sell our
shares is our distribution rate as a percentage of our share price relative to
market interest rates. If market interest rates increase, prospective investors
may demand a higher distribution rate or seek alternative investments paying
higher dividends or interest. As a result, interest rate fluctuations and
capital market conditions can affect the market value of our shares. For
instance, if interest rates rise, it is likely that the market price of our
shares will decrease as market rates on interest-bearing securities, such as
bonds, increase.
 
 Investing
in our shares may involve a high degree of risk.
 
 The
investments we make in accordance with our investment objectives may result in a
high amount of risk when compared to alternative investment options and
volatility or loss of principal. Our investments may be highly speculative and
aggressive, are subject to credit risk, interest rate, and market value risks,
among others, and therefore an investment in our shares may not be suitable for
someone with lower risk tolerance.
 
 Broad
market fluctuations could negatively impact the market price of our common
stock.
 
 The stock
market has experienced extreme price and volume fluctuations that have affected
the market price of many companies in industries similar or related to ours and
that have been unrelated to these companies’ operating performances. These broad
market fluctuations could reduce the market price of our common stock.
Furthermore, our operating results and prospects may be below the expectations
of public market analysts and investors or may be lower than those of companies
with comparable market capitalizations, which could lead to a material decline
in the market price of our common stock.
 
 Future
sales of shares may have adverse consequences for investors.
 
 We may
issue additional shares in subsequent public offerings or private placements to
make new investments or for other purposes. We are not required to offer any
such shares to existing shareholders on a pre-emptive basis. Therefore, it may
not be possible for existing shareholders to participate in such future share
issues, which may dilute the existing shareholders’ interests in us. Annaly owns
approximately 6.7% of our shares of common stock excluding unvested shares of
restricted stock granted to our executive officers and employees of our Manager
or its affiliates.  Annaly will be permitted, subject to the
requirements of Rule 144 under the Securities Act, to sell such shares upon the
earlier of (i) (a) November 15, 2010 with respect to shares acquired
concurrently with our initial public offering and (b) October 24, 2011 with
respect to shares Annaly acquired immediately after our 2008 secondary offering
(c) April 15, 2012 with respect to shares Annaly acquired immediately after our
April 2009 secondary offering (d) May 27, 2012 with respect to shares Annaly
acquired immediately after our May 2009 secondary offering or (ii) the
termination of the management agreement.
 
 40
 
 Our
charter and bylaws contain provisions that may inhibit potential acquisition
bids that stockholders may consider favorable, and the market price of our
common stock may be lower as a result.
 
 Our
charter and bylaws contain provisions that have an anti-takeover effect and
inhibit a change in our board of directors. These provisions include the
following:
 
 ·
                  There are ownership limits and
      restrictions on transferability and ownership in our charter. To
      qualify as a REIT for each taxable year after 2007, not more than 50% of
      the value of our outstanding stock may be owned, directly or
      constructively, by five or fewer individuals during the second half of any
      calendar year. In addition, our shares must be beneficially owned by 100
      or more persons during at least 335 days of a taxable year of 12 months or
      during a proportionate part of a shorter taxable year for each taxable
      year after 2007. To assist us in satisfying these tests, our charter
      generally prohibits any person from beneficially or constructively owning
      more than 9.8% in value or number of shares, whichever is more
      restrictive, of any class or series of our outstanding capital stock.
      These restrictions may discourage a tender offer or other transactions or
      a change in the composition of our board of directors or control that
      might involve a premium price for our shares or otherwise be in the best
      interests of our stockholders and any shares issued or transferred in
      violation of such restrictions being automatically transferred to a trust
      for a charitable beneficiary, thereby resulting in a forfeiture of the
      additional shares.
 
 ·
                  Our charter permits our board
      of directors to issue stock with terms that may discourage a third party
      from acquiring us. Our charter permits our board of directors to
      amend the charter without stockholder approval to increase the total
      number of authorized shares of stock or the number of shares of any class
      or series and to issue common or preferred stock, having preferences,
      conversion or other rights, voting powers, restrictions, limitations as to
      dividends or other distributions, qualifications, or terms or conditions
      of redemption as determined by our board.  Thus, our board could
      authorize the issuance of stock with terms and conditions that could have
      the effect of discouraging a takeover or other transaction in which
      holders of some or a majority of our shares might receive a premium for
      their shares over the then-prevailing market price of our
      shares.
 
 ·
                  Maryland Control Share
      Acquisition Act. Maryland law provides that ‘‘control shares’’ of a
      corporation acquired in a ‘‘control share acquisition’’ will have no
      voting rights except to the extent approved by a vote of two-thirds of the
      votes eligible to be cast on the matter under the Maryland Control Share
      Acquisition Act. ‘‘Control shares’’ means voting shares of stock that, if
      aggregated with all other shares of stock owned by the acquirer or in
      respect of which the acquirer is able to exercise or direct the exercise
      of voting power (except solely by a revocable proxy), would entitle the
      acquirer to exercise voting power in electing directors within one of the
      following ranges of voting power: one-tenth or more but less than
      one-third, one-third or more but less than a majority, or a majority or
      more of all voting power. A ‘‘control share acquisition’’ means the
      acquisition of control shares, subject to certain
    exceptions.
 
 If voting
rights or control shares acquired in a control share acquisition are not
approved at a stockholders’ meeting, or if the acquiring person does not deliver
an acquiring person statement as required by the Maryland Control Share
Acquisition Act, then, subject to certain conditions and limitations, the issuer
may redeem any or all of the control shares for fair value. If voting rights of
such control shares are approved at a stockholders’ meeting and the acquirer
becomes entitled to vote a majority of the shares of stock entitled to vote, all
other stockholders may exercise appraisal rights. Our bylaws contain a provision
exempting acquisitions of our shares from the Maryland Control Share Acquisition
Act. However, our board of directors may amend our bylaws in the future to
repeal or modify this exemption, in which case any control shares of our company
acquired in a control share acquisition will be subject to the Maryland Control
Share Acquisition Act.
 
 ·
                  Business Combinations.
      Under Maryland law, ‘‘business combinations’’ between a Maryland
      corporation and an interested stockholder or an affiliate of an interested
      stockholder are prohibited for five years after the most recent date on
      which the interested stockholder becomes an interested stockholder. These
      business combinations include a merger, consolidation, share exchange or,
      in circumstances specified in the statute, an asset transfer or issuance
      or reclassification of equity securities. An interested stockholder is
      defined as:
  41
  o
                  any
      person who beneficially owns 10% or more of the voting power of the
      corporation’s shares; or
 
 o
                  an
      affiliate or associate of the corporation who, at any time within the
      two-year period before the date in question, was the beneficial owner of
      10% or more of the voting power of the then outstanding voting stock of
      the corporation.
 
 A person
is not an interested stockholder under the statute if the board of directors
approved in advance the transaction by which such person otherwise would have
become an interested stockholder. However, in approving a transaction, the board
of directors may provide that its approval is subject to compliance, at or after
the time of approval, with any terms and conditions determined by the
board.  After the five-year prohibition, any business combination
between the Maryland corporation and an interested stockholder generally must be
recommended by the board of directors of the corporation and approved by the
affirmative vote of at least:
 
 o
                  80%
      of the votes entitled to be cast by holders of outstanding shares of
      voting stock of the corporation;
and
 
 o
                  two-thirds
      of the votes entitled to be cast by holders of voting stock of the
      corporation, other than shares held by the interested stockholder with
      whom or with whose affiliate the business combination is to be effected or
      held by an affiliate or associate of the interested
      stockholder.
 
 These
super-majority vote requirements do not apply if the corporation’s common
stockholders receive a minimum price, as defined under Maryland law, for their
shares in the form of cash or other consideration in the same form as previously
paid by the interested stockholder for its shares.  The statute
permits various exemptions from its provisions, including business combinations
that are exempted by the board of directors before the time that the interested
stockholder becomes an interested stockholder.  Our board of directors
has adopted a resolution which provides that any business combination between us
and any other person is exempted from the provisions of the Maryland Control
Share Acquisition Act, provided that the business combination is first approved
by the board of directors.  This resolution, however, may be altered
or repealed in whole or in part at any time.  If this resolution is
repealed, or the board of directors does not otherwise approve a business
combination, this statute may discourage others from trying to acquire control
of us and increase the difficulty of consummating any offer.
 
 ·
                  Staggered board. Our
      board of directors is divided into three classes of directors. The current
      terms of the directors expire in 2010, 2011 and 2012 respectively.
      Directors of each class are chosen for three-year terms upon the
      expiration of their current terms, and each year one class of directors is
      elected by the stockholders. The staggered terms of our directors may
      reduce the possibility of a tender offer or an attempt at a change in
      control, even though a tender offer or change in control might be in the
      best interests of our stockholders.
 
 ·
                  Our charter and bylaws contain
      other possible anti-takeover provisions.  Our charter and
      bylaws contains other provisions that may have the effect of delaying,
      deferring or preventing a change in control of us or the removal of
      existing directors and, as a result, could prevent our stockholders from
      being paid a premium for their common stock over the then-prevailing
      market price.
 
 Our
rights and the rights of our stockholders to take action against our directors
and officers are limited, which could limit stockholder's recourse in the event
of actions not in their best interests.
 
 Our
charter limits the liability of our directors and officers to us and our
stockholders for money damages, except for liability resulting
from:
 
 ·
                  actual
      receipt of an improper benefit or profit in money, property or services;
      or
 ·
                  a
      final judgment based upon a finding of active and deliberate dishonesty by
      the director or officer that was material to the cause of action
      adjudicated
 
 for which
Maryland law prohibits such exemption from liability.
 
 42
 In
addition, our charter authorizes us to obligate our company to indemnify our
present and former directors and officers for actions taken by them in those
capacities to the maximum extent permitted by Maryland law. Our bylaws require
us to indemnify each present or former director or officer, to the maximum
extent permitted by Maryland law, in the defense of any proceeding to which he
or she is made, or threatened to be made, a party because of his or her service
to us. In addition, we may be obligated to fund the defense costs incurred by
our directors and officers.
 
 Tax
Risks
 
 Your
investment has various federal income tax risks.
 
 This
summary of certain tax risks is limited to the federal tax risks addressed
below. Additional risks or issues may exist that are not addressed in this Form
10-K and that could affect the federal tax treatment of us or our
stockholders.  This is not intended to be used and cannot be used by
any stockholder to avoid penalties that may be imposed on stockholders under the
Internal Revenue Code, or the Code. We strongly urge you to seek advice based on
your particular circumstances from an independent tax advisor concerning the
effects of federal, state and local income tax law on an investment in common
stock and on your individual tax situation.
 
 Complying
with REIT requirements may cause us to forego otherwise attractive
opportunities.
 
 To
qualify as a REIT for federal income tax purposes, we must continually satisfy
various tests regarding the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our stockholders and
the ownership of our stock. To meet these tests, we may be required to forego
investments we might otherwise make. We may be required to make distributions to
stockholders at disadvantageous times or when we do not have funds readily
available for distribution. Thus, compliance with the REIT requirements may
hinder our investment performance.
 
 Complying
with REIT requirements may force us to liquidate otherwise attractive
investments.
 
 To
qualify as a REIT, we generally must ensure that at the end of each calendar
quarter at least 75% of the value of our total assets consists of cash, cash
items, government securities and qualified REIT real estate assets, including
certain mortgage loans and mortgage-backed securities. The remainder of our
investment in securities (other than government securities and qualifying real
estate assets) generally cannot include more than 10% of the outstanding voting
securities of any one issuer or more than 10% of the total value of the
outstanding securities of any one issuer. In addition, in general, no more than
5% of the value of our assets (other than government securities, qualifying real
estate assets, and stock in one or more TRSs) can consist of the securities of
any one issuer, and no more than 25% of the value of our total securities can be
represented by securities of one or more TRSs.  If we fail to comply
with these requirements at the end of any quarter, we must correct the failure
within 30 days after the end of such calendar quarter or qualify for certain
statutory relief provisions to avoid losing our REIT status and suffering
adverse tax consequences. As a result, we may be required to liquidate from our
portfolio otherwise attractive investments. These actions could have the effect
of reducing our income and amounts available for distribution to our
stockholders.
 
 Potential
characterization of distributions or gain on sale may be treated as unrelated
business taxable income to tax-exempt investors.
 
 If (1)
all or a portion of our assets are subject to the rules relating to taxable
mortgage pools, (2) we are a ‘‘pension-held REIT,’’ or (3) a tax-exempt
stockholder has incurred debt to purchase or hold our common stock, then a
portion of the distributions to and, in the case of a stockholder described in
clause (3), gains realized on the sale of common stock by such tax-exempt
stockholder may be subject to federal income tax as unrelated business taxable
income under the Internal Revenue Code.
 
 Classification
of a securitization or financing arrangement we enter into as a taxable mortgage
pool could subject us or certain of our stockholders to increased
taxation.
 
 We intend
to structure our securitization and financing arrangements as to not create a
taxable mortgage pool. However, if we have borrowings with two or more
maturities and, (1) those borrowings are secured by mortgages or mortgage-backed
securities and (2) the payments made on the borrowings are related to the
payments received on the underlying assets, then the borrowings and the pool of
mortgages or mortgage-backed securities to which such borrowings relate may be
classified as a taxable mortgage pool under the Internal Revenue Code. If any
part of our investments were to be treated as a taxable mortgage pool, then our
REIT status would not be impaired, but a portion of the taxable income we
recognize may, under regulations to be issued by the Treasury Department, be
characterized as ‘‘excess inclusion’’ income and allocated among our
stockholders to the extent of and generally in proportion to the distributions
we make to each stockholder. Any excess inclusion income would:
  43
  ·
                  not
      be allowed to be offset by a stockholder’s net operating
      losses;
 ·
                  be
      subject to a tax as unrelated business income if a stockholder were a
      tax-exempt stockholder;
 ·
                  be
      subject to the application of federal income tax withholding at the
      maximum rate (without reduction for any otherwise applicable income tax
      treaty) with respect to amounts allocable to foreign stockholders;
      and
 ·
                  be
      taxable (at the highest corporate tax rate) to us, rather than to our
      stockholders, to the extent the excess inclusion income relates to stock
      held by disqualified organizations (generally, tax-exempt organizations
      not subject to tax on unrelated business income, including governmental
      organizations).
 
 Failure
to qualify as a REIT would subject us to federal income tax, which would reduce
the cash available for distribution to our stockholders.
 
 We
qualify as a REIT for federal income tax purposes commencing with our taxable
year ending on December 31, 2007. However, the federal income tax laws governing
REITs are extremely complex, and interpretations of the federal income tax laws
governing qualification as a REIT are limited. Qualifying as a REIT requires us
to meet various tests regarding the nature of our assets and our income, the
ownership of our outstanding stock, and the amount of our distributions on an
ongoing basis. While we intend to operate so that we will qualify as a REIT,
given the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations, including the tax treatment of certain
investments we may make, and the possibility of future changes in our
circumstances, no assurance can be given that we will so qualify for any
particular year. If we fail to qualify as a REIT in any calendar year and we do
not qualify for certain statutory relief provisions, we would be required to pay
federal income tax on our taxable income. We might need to borrow money or sell
assets to pay that tax. Our payment of income tax would decrease the amount of
our income available for distribution to our stockholders. Furthermore, if we
fail to maintain our qualification as a REIT and we do not qualify for certain
statutory relief provisions, we no longer would be required to distribute
substantially all of our REIT taxable income to our stockholders. Unless our
failure to qualify as a REIT were excused under federal tax laws, we would be
disqualified from taxation as a REIT for the four taxable years following the
year during which qualification was lost.
 
 Failure
to make required distributions would subject us to tax, which would reduce the
cash available for distribution to our stockholders.
 
 To
qualify as a REIT, we must distribute to our stockholders each calendar year at
least 90% of our REIT taxable income (excluding certain items of non-cash income
in excess of a specified threshold), determined without regard to the deduction
for dividends paid and excluding net capital gain. To the extent that we satisfy
the 90% distribution requirement, but distribute less than 100% of our taxable
income, we will be subject to federal corporate income tax on our undistributed
income. In addition, we will incur a 4% nondeductible excise tax on the amount,
if any, by which our distributions in any calendar year are less than the sum
of:
 
 ·
                  85%
      of our REIT ordinary income for that
year;
 ·
                  95%
      of our REIT capital gain net income for that year;
  and
 ·
                  any
      undistributed taxable income from prior
years.
 
 We intend
to distribute our REIT taxable income to our stockholders in a manner intended
to satisfy the 90% distribution requirement and to avoid both corporate income
tax and the 4% nondeductible excise tax. However, there is no requirement that
TRSs distribute their after-tax net income to their parent REIT or their
stockholders. Our taxable income may substantially exceed our net income as
determined by GAAP, because, for example, realized capital losses will be
deducted in determining our GAAP net income, but may not be deductible in
computing our taxable income. In addition, we may invest in assets that generate
taxable income in excess of economic income or in advance of the corresponding
cash flow from the assets. To the extent that we generate such non-cash taxable
income in a taxable year, we may incur corporate income tax and the 4%
nondeductible excise tax on that income if we do not distribute such income to
stockholders in that year. As a result of the foregoing, we may generate less
cash flow than taxable income in a particular year. In that event, we may be
required to use cash reserves, incur debt, or liquidate non-cash assets at rates
or at times that we regard as unfavorable to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in that year.  Moreover, our ability to distribute cash may be
limited by financing facilities we may enter into.
 
 44
 
 Ownership
limitations may restrict change of control or business combination opportunities
in which our stockholders might receive a premium for their shares.
 
 In order
for us to qualify as a REIT for each taxable year after 2007, no more than 50%
in value of our outstanding capital stock may be owned, directly or indirectly,
by five or fewer individuals during the last half of any calendar year.
‘‘Individuals’’ for this purpose include natural persons, private foundations,
some employee benefit plans and trusts, and some charitable trusts. To preserve
our REIT qualification, our charter generally prohibits any person from directly
or indirectly owning more than 9.8% in value or in number of shares, whichever
is more restrictive, of any class or series of the outstanding shares of our
capital stock. This ownership limitation could have the effect of discouraging a
takeover or other transaction in which holders of our common stock might receive
a premium for their shares over the then prevailing market price or which
holders might believe to be otherwise in their best interests.
 
 Our
ownership of and relationship with any TRS which we may form or acquire will be
limited, and a failure to comply with the limits would jeopardize our REIT
status and may result in the application of a 100% excise tax.
 
 A REIT
may own up to 100% of the stock of one or more TRSs. A TRS may earn income that
would not be qualifying income if earned directly by the parent REIT. Both the
subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.
Overall, no more than 25% of the value of a REIT’s assets may consist of stock
or securities of one or more TRSs. A TRS will pay federal, state and local
income tax at regular corporate rates on any income that it earns. In addition,
the TRS rules impose a 100% excise tax on certain transactions between a TRS and
its parent REIT that are not conducted on an arm’s-length basis. Any TRS that we
may form would pay federal, state and local income tax on its taxable income,
and its after-tax net income would be available for distribution to us but would
not be required to be distributed to us. We anticipate that the aggregate value
of the TRS stock and securities owned by us will be less than 25% of the value
of our total assets (including the TRS stock and securities). Furthermore, we
will monitor the value of our investments in our TRSs to ensure compliance with
the rule that no more than 25% of the value of our assets may consist of TRS
stock and securities (which is applied at the end of each calendar quarter). In
addition, we will scrutinize all of our transactions with taxable REIT
subsidiaries to ensure that they are entered into on arm’s-length terms to avoid
incurring the 100% excise tax described above. There can be no assurance,
however, that we will be able to comply with the 25% limitation discussed above
or to avoid application of the 100% excise tax discussed above.
 
 We
could fail to qualify as a REIT or we could become subject to a penalty tax if
income we recognize from certain investments that are treated or could be
treated as equity interests in a foreign corporation exceeds 5% of our gross
income in a taxable year.
 
 We may
invest in securities, such as subordinated interests in certain CDO offerings,
that are treated or could be treated for federal (and applicable state and
local) corporate income tax purposes as equity interests in foreign
corporations. Categories of income that qualify for the 95% gross income test
include dividends, interest and certain other enumerated classes of passive
income. Under certain circumstances, the federal income tax rules concerning
controlled foreign corporations and passive foreign investment companies require
that the owner of an equity interest in a foreign corporation include amounts in
income without regard to the owner’s receipt of any distributions from the
foreign corporation. Amounts required to be included in income under those rules
are technically neither actual dividends nor any of the other enumerated
categories of passive income specified in the 95% gross income test.
Furthermore, there is no clear precedent with respect to the qualification of
such income under the 95% gross income test. Due to this uncertainty, we intend
to limit our direct investment in securities that are or could be treated as
equity interests in a foreign corporation such that the sum of the amounts we
are required to include in income with respect to such securities and other
amounts of non-qualifying income do not exceed 5% of our gross income. We cannot
assure you that we will be successful in this regard. To avoid any risk of
failing the 95% gross income test, we may be required to invest only indirectly,
through a domestic TRS, in any securities that are or could be considered to be
equity interests in a foreign corporation. This, of course, will result in any
income recognized from any such investment to be subject to federal income tax
in the hands of the TRS, which may, in turn, reduce our yield on the
investment.
 
 45
 
 Liquidation
of our assets may jeopardize our REIT qualification.
 
 To
qualify as a REIT, we must comply with requirements regarding our assets and our
sources of income. If we are compelled to liquidate our investments to repay
obligations to our lenders, we may be unable to comply with these requirements,
ultimately jeopardizing our qualification as a REIT, or we may be subject to a
100% tax on any resultant gain if we sell assets in transactions that are
considered to be prohibited transactions.
 
 The
tax on prohibited transactions will limit our ability to engage in transactions,
including certain methods of securitizing mortgage loans that would be treated
as sales for federal income tax purposes.
 
 A REIT’s
net income from prohibited transactions is subject to a 100% tax. In general,
prohibited transactions are sales or other dispositions of property, other than
foreclosure property, but including mortgage loans, held primarily for sale to
customers in the ordinary course of business. We might be subject to this tax if
we sold or securitized our assets in a manner that was treated as a sale for
federal income tax purposes. Therefore, to avoid the prohibited transactions
tax, we may choose not to engage in certain sales of assets at the REIT level
and may securitize assets only in transactions that are treated as financing
transactions and not as sales for tax purposes even though such transactions may
not be the optimal execution on a pre-tax basis.  We could avoid any
prohibited transactions tax concerns by engaging in securitization transactions
through a TRS, subject to certain limitations described above. To the extent
that we engage in such activities through domestic TRSs, the income associated
with such activities will be subject to federal (and applicable state and local)
corporate income tax.
 
 Characterization
of the repurchase agreements we enter into to finance our investments as sales
for tax purposes rather than as secured lending transactions would adversely
affect our ability to qualify as a REIT.
 
 We have
entered into and will enter into repurchase agreements with a variety of
counterparties to achieve our desired amount of leverage for the assets in which
we invest. When we enter into a repurchase agreement, we generally sell assets
to our counterparty to the agreement and receive cash from the counterparty. The
counterparty is obligated to resell the assets back to us at the end of the term
of the transaction, which is typically 30 to 90 days. We believe that for
federal income tax purposes we will be treated as the owner of the assets that
are the subject of repurchase agreements and that the repurchase agreements will
be treated as secured lending transactions notwithstanding that such agreement
may transfer record ownership of the assets to the counterparty during the term
of the agreement. It is possible, however, that the IRS could successfully
assert that we did not own these assets during the term of the repurchase
agreements, in which case we could fail to qualify as a REIT.
 
 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
mortgage-backed securities and related borrowings. Under these provisions, our
annual gross income from non-qualifying hedges, together with any other income
not generated from qualifying real estate assets, cannot exceed 25% of our
annual gross income. In addition, our aggregate gross income 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 to limit our use of advantageous
hedging techniques or implement those hedges through a TRS, which we may form in
the future. This could increase the cost of our hedging activities or expose us
to greater risks associated with changes in interest rates than we would
otherwise want to bear.
 
 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 federal income tax laws or regulations governing REITs or the
administrative interpretations of those laws or regulations may be amended. We
cannot predict when or if any new federal income tax law, regulation or
administrative interpretation, or any amendment to any existing federal income
tax law, regulation or administrative interpretation, will be adopted,
promulgated or become effective and any such law, regulation or interpretation
may take effect retroactively. We and our stockholders could be adversely
affected by any such change in, or any new, federal income tax law, regulation
or administrative interpretation.
 
 46
 
 Dividends
payable by REITs do not qualify for the reduced tax rates.
 
 Legislation
enacted in 2003 generally reduces the maximum tax rate for dividends payable to
domestic stockholders that are individuals, trusts and estates from 38.6% to 15%
(through 2010). Dividends payable by REITs, however, are generally not eligible
for the reduced rates. Although this legislation does not adversely affect the
taxation of REITs or dividends paid by REITs, the more favorable rates
applicable to regular corporate dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be
relatively less attractive than investments in stock of non-REIT corporations
that pay dividends, which could adversely affect the value of the stock of
REITs, including our common stock.
 
 Item 1B.  Unresolved Staff Comments
 
 None.
 
 Item 2.  Properties
 
 We do not
own any property.  Our executive and administrative office is located
at 1211 Avenue of the Americas, Suite 2902, New York, New York 10036, telephone
(646) 454-3759.  We share this office space with Annaly and
FIDAC.
 
 Item 3.  Legal Proceedings
 
 We are
not party to any material litigation or legal proceedings, or to the best of our
knowledge, any threatened litigation or legal proceedings, which, in our
opinion, individually or in the aggregate, would have a material adverse effect
on our results of operations or financial condition.
 
 Item 4.  Submission of Matters to a Vote of Security
Holders
 
 None.
 47
 
  Part II
 
 Item 5.  Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
 
 Our
common stock began trading publicly on the New York Stock Exchange under the
trading symbol “CIM” on November 16, 2007.  As of February 17, 2010,
we had 670,371,002 shares of common stock issued and outstanding which were held
by approximately 81,155 beneficial holders. The following tables set forth, for
the periods indicated, the high, low, and closing sales prices per share of our
common stock as reported on the New York Stock Exchange composite tape and the
cash dividends declared per share of our common stock.
  Stock
      PriceHigh
                      
                      
                      Low
                      
                      
                      CloseQuarter
      Ended December 31, 2009
                      
                      $
                      4.14
                      
                      
                      $
                      3.49
                      
                      
                      $
                      3.88Quarter
      Ended September 30, 2009
                      
                      $
                      4.30
                      
                      
                      $
                      3.20
                      
                      
                      $
                      3.82Quarter
      Ended June 30, 2009
                      
                      $
                      3.78
                      
                      
                      $
                      3.04
                      
                      
                      $
                      3.49Quarter
      Ended March 31, 2009
                      
                      $
                      3.60
                      
                      
                      $
                      2.49
                      
                      
                      $
                      3.36Quarter
      Ended December 31, 2008
                      
                      $
                      6.10
                      
                      
                      $
                      1.90
                      
                      
                      $
                      3.45Quarter
      Ended September 30, 2008
                      
                      $
                      9.05
                      
                      
                      $
                      4.73
                      
                      
                      $
                      6.21Quarter
      Ended June 30, 2008
                      
                      $
                      14.17
                      
                      
                      $
                      9.01
                      
                      
                      $
                      9.01Quarter
      Ended March 31, 2008
                      
                      $
                      19.59
                      
                      
                      $
                      12.00
                      
                      
                      $
                      12.30
  Common
      Dividends Declared Per ShareQuarter
      Ended December 31, 2009
                      
                      $
                      0.17Quarter
      Ended September 30, 2009
                      
                      $
                      0.12Quarter
      Ended June 30, 2009
                      
                      $
                      0.08Quarter
      Ended March 31, 2009
                      
                      $
                      0.06Quarter
      Ended December 31, 2008
                      
                      $
                      0.04Quarter
      Ended September 30, 2008
                      
                      $
                      0.16Quarter
      Ended June 30, 2008
                      
                      $
                      0.16Quarter
      Ended March 31, 2008
                      
                      $
                      0.26
  We pay
quarterly dividends and distribute to our stockholders all or substantially all
of our taxable income in each year (subject to certain
adjustments).  This enables us to qualify for the tax benefits
accorded to a REIT under the Code. We have not established a minimum dividend
payment level and our ability to pay dividends may be adversely affected for the
reasons described under the caption “Risk Factors.” All distributions will be
made at the discretion 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 board of directors may deem relevant from time to
time.
  48
 
 Share
Performance Graph
  The following graph and table set forth
certain information comparing the yearly percentage change in cumulative total
return on our common stock to the cumulative total return of the Standard &
Poor’s Composite-500 Stock Index or S&P 500 Index, and the Bloomberg REIT
Mortgage Index, or BBG REIT Index, an industry index of mortgage
REITs.  The comparison is for the period from November 15, 2007, the
day our common stock commenced trading on the NYSE, to December 31, 2009 and
assumes the reinvestment of dividends.  The graph and table assume
that $100 was invested in our common stock and the two other indices on November
15, 2007.  Upon written request we will provide stockholders with a
list of the REITs included in the BBG REIT Index.
 
   11/15/2007
                  12/31/2007
                  12/31/2008
                  12/31/2009Chimera
                  100
                  119
                  27
                  33S&P
      500 Index
                  100
                  101
                  64
                  81BBG
      REIT Index
                  100
                  105
                  65
                  78
  The
information in the share performance graph and table has been obtained from
sources believed to be reliable, but neither its accuracy nor its completeness
can be guaranteed.  The historical information set forth above is not
necessarily indicative of future performance.  Accordingly, we do not
make or endorse any predictions as to future share performance.
 
 The share performance graph and table
shall not be deemed, under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, to be (i) “soliciting material” or
“filed” or (ii) incorporated by reference by any general statement into any
filing made by us with the Securities and Exchange Commission, except to the
extent that we specifically incorporates such share performance graph and table
by reference.
 49
  Equity
Compensation Plan Information
  We have
adopted a long term stock incentive plan, or Incentive Plan, to provide
incentives to our independent directors, employees of our Manager and its
affiliates to stimulate their efforts towards our continued success long-term
growth and profitability and to attract, reward and retain personnel and other
service providers.  The Incentive Plan authorizes the Compensation
Committee of the board of directors to grant awards, including incentive stock
options as defined under Section 422 of the Code, or ISOs, non-qualified stock
options, or NQSOs, restricted shares and other types of incentive
awards.  The Incentive Plan authorizes the granting of options or
other awards for an aggregate of 40,000,000 shares of common
stock.  For a description of our Incentive Plan, see Note 9 to the
Consolidated Financial Statements.
  The
following table provides information as of December 31, 2009 concerning shares
of our common stock authorized for issuance under our existing Incentive
Plan.
  Plan
      Category
                Number
      of Securities
                  to
      be Issued Upon
                  Exercise
      of
                  Outstanding
      Options,
                  Warrants,
      and Rights
                Weighted
      Average
                  Exercise
      Price of
                  Outstanding
                  Options,
      Warrants,
                  and
      Rights
                Number
      of Securities
                  Remaining
      Available
                  for
      Future Issuance
                  Under
      Equity
                  Compensation
      PlansEquity
      Compensation Plans Approved
                  by
      Stockholders
                1,031,200
                -
                38,968,800Equity
      Compensation Plans Not
                  Approved
      by Stockholders (1)
                -
                -
                -Total
                1,031,200
                -
                38,968,800(1)
      We do not have any equity plans that have not been approved by our
      stockholders.
  Item 6.  Selected Financial Data
 
 The
following selected financial data are derived from our audited consolidated
financial statements for the years ended December 31, 2009 and
2008.  The selected financial data should be read in conjunction with
the more detailed information contained in the Consolidated Financial Statements
and Notes thereto and  “Management's Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this Form
10-K.
  Consolidated
      Statements of Financial Condition Highlights(dollars
      in thousands, except share and per share data)December
      31,
                
                
                December
      31,2009
                
                
                2008Non-Agency
      Mortgage-Backed securities
                
                $
                2,398,865
                
                
                $
                613,105Agency
      Mortgage-Backed securities
                
                $
                1,690,029
                
                
                $
                242,362Securitized
      loans held for investment
                
                $
                470,533
                
                
                $
                583,346Total
      assets
                
                $
                4,618,328
                
                
                $
                1,477,501Repurchase
      agreements
                
                $
                1,716,398
                
                
                $
                -Repurchase
      agreements with affiliates
                
                $
                259,004
                
                
                $
                562,119Securitized
      debt
                
                $
                390,350
                
                
                $
                488,743Total
      liabilities
                
                $
                2,491,766
                
                
                $
                1,063,046Shareholders'
      equity
                
                $
                2,126,562
                
                
                $
                414,455Book
      value per share
                
                $
                3.17
                
                
                $
                2.34Number
      of shares outstanding
                
                
                670,371,587
                
                
                
                177,198,212
  50
  Consolidated
      Statement of Operations Highlights(dollars
      in thousands, except share and per share data)For
      the
                
                
                For
      the
                
                
                For
      the periodyear
      ended
                
                
                year
      ended
                
                
                November
      21, 2007 toDecember
      31, 2009
                
                
                December
      31, 2008
                
                
                December
      31, 2007Net
      interest income
                
                $
                263,456
                
                
                $
                44,715
                
                
                $
                3,077Net
      income (loss)
                
                $
                323,983
                
                
                $
                (119,809
                )
                
                $
                (2,906
                )Income
      (loss) per share-basic and diluted
                
                $
                0.64
                
                
                $
                (1.90
                )
                
                $
                (0.08
                )Average
      shares-basic and diluted
                
                
                507,042,421
                
                
                
                63,155,878
                
                
                
                37,401,737Dividends
      declared per share (1)
                
                $
                0.43
                
                
                $
                0.62
                
                
                $
                0.025(1)
      For applicable period as reported in our earnings
      announcements.
  Item 7.  Management's Discussion and Analysis of Financial
Condition and Result of Operations
 
 The
following discussion of our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and notes to
those statements included in Item 8 of this Form 10-K.  The discussion
may contain certain forward-looking statements that involve risks and
uncertainties.  Forward-looking statements are those that are not
historical in nature.  As a result of many factors, such as those set
forth under “Risk Factors” in this Form 10-K, our actual results may differ
materially from those anticipated in such forward-looking
statements.
 
 Executive
Summary
  We are a
specialty finance company that invests, either directly or indirectly through
our subsidiaries, in residential mortgage-backed securities, or RMBS,
residential mortgage loans, real estate related securities and various other
asset classes.  We are externally managed by Fixed Income Discount
Advisory Company, which we refer to as FIDAC or our Manager.  FIDAC is
a fixed-income investment management company that is registered as an investment
adviser with the Securities and Exchange Commission, or SEC.  FIDAC is
a wholly owned subsidiary of Annaly Capital Management, Inc., or
Annaly.  FIDAC has a broad range of experience in managing investments
in Agency RMBS, non-Agency RMBS, collateralized debt obligations, or CDOs, and
other real estate related investments including managing CreXus Investment
Corp., a publicly traded REIT.
  We have
elected and intend to qualify to be taxed as a REIT for federal income tax
purposes commencing with our taxable year ending on December 31,
2007.  Our targeted asset classes and the principal investments we
expect to make in each are as follows:
 
 ·
                RMBS,
      consisting of:
 
 o
                Non-Agency
      RMBS, including investment-grade and non-investment grade classes,
      including the BB-rated, B-rated and non-rated
  classes
  o
                Agency
      RMBS
  ·
                Whole
      mortgage loans, consisting of:
 
 o
                Prime
      mortgage loans
  o
                Jumbo
      prime mortgage loans
  o
                Alt-A
      mortgage loans
  ·
                Asset
      Backed Securities, or ABS, consisting
of:
 
 o
                Commercial
      mortgage-backed securities, or CMBS
  o
                Debt
      and equity tranches of collateralized debt obligations, or
      CDOs
  o
                Consumer
      and non-consumer ABS, including investment-grade and non-investment grade
      classes, including the BB-rated, B-rated and non-rated
    classes
  51
  We
completed our initial public offering on November 21, 2007.  In that
offering and in a concurrent private offering we raised net proceeds of
approximately $533.6 million.  We completed a second public offering
and second private offering on October 29, 2008.  In these offerings
we raised net proceeds of approximately $301.0 million.  During the
second quarter 2009, we completed a third public offering and third private
offering on April 21, 2009, and a fourth public offering and fourth private
offering June 2, 2009.  In these offerings,we raised net
proceeds of approximately $850.9 million and $612.4 million.
 
 Our
objective is to provide attractive risk-adjusted returns to our investors over
the long-term, primarily through dividends and secondarily through capital
appreciation.  We intend to achieve this objective by investing in a
broad class of financial assets to construct an investment portfolio that is
designed to achieve attractive risk-adjusted returns and that is structured to
comply with the various federal income tax requirements for REIT status and to
maintain our exemption from the Investment Company Act of 1940, or the 1940
Act.
 
 Since we
commenced operations in November 2007, we have focused our investment activities
on acquiring non-Agency RMBS and on purchasing residential mortgage loans that
have been originated by select high-quality originators, including the retail
lending operations of leading commercial banks.  Our investment
portfolio is weighted toward non-Agency RMBS.  At December 31, 2009,
approximately 67.7% of our investment portfolio was non-Agency RMBS, 25.0% of
our investment portfolio was Agency RMBS, and 7.3% of our investment portfolio
was secured residential mortgage loans.  At December 31, 2008,
approximately 52.5% of our investment portfolio was non-Agency RMBS, 13.7% of
our investment portfolio was Agency RMBS, and 33.8% of our investment portfolio
was secured residential mortgage loans.  We expect that over the near
term our investment portfolio will continue to be weighted toward RMBS, subject
to maintaining our REIT qualification and our 1940 Act exemption.  In
addition, we have engaged in and depending on market conditions, anticipate
continuing to engage in transactions with residential mortgage lending
operations of leading commercial banks and other high-quality originators in
which we identify and re-underwrite residential mortgage loans owned by such
entities, and rather than purchasing and securitizing such residential mortgage
loans ourselves, we and the originator would structure the securitization and we
would purchase the resulting mezzanine and subordinate non-Agency
RMBS.  We may also engage in similar transactions with non-Agency RMBS
in which we would acquire AAA-rated non-Agency RMBS and re-securitize those
securities.  We would sell some or all of the resulting AAA-rated RMBS
and retain some of the AAA-rated RMBS and other subordinate bonds and
interests.
 
 Our
investment strategy is intended to take advantage of opportunities in the
current interest rate and credit environment.  We will adjust our
strategy to changing market conditions by shifting our asset allocations across
these various asset classes as interest rate and credit cycles change over
time.  We believe that our strategy, combined with FIDAC’s experience,
will enable us to pay dividends and achieve capital appreciation throughout
changing market cycles.  We expect to take a long-term view of assets
and liabilities, and our reported earnings and mark-to-market valuations at the
end of a financial reporting period will not significantly impact our objective
of providing attractive risk-adjusted returns to our stockholders over the
long-term.
 
 We use
leverage to seek to increase our potential returns and to fund the acquisition
of our assets.  Our income is generated primarily by the difference,
or net spread, between the income we earn on our assets and the cost of our
borrowings.  We expect to finance our investments using a variety of
financing sources including, when available, repurchase agreements, warehouse
facilities, securitizations, commercial paper and term financing
CDOs.  We may manage our debt by utilizing interest rate hedges, such
as interest rate swaps, to reduce the effect of interest rate fluctuations
related to our debt.
 
 Recent
Developments
  We
commenced operations in November 2007 in the midst of challenging market
conditions which affected the cost and availability of financing from the
facilities with which we expected to finance our investments.  These
instruments included repurchase agreements, warehouse facilities,
securitizations, asset-backed commercial paper, or ABCP, and term
CDOs.  The liquidity crisis which commenced in August 2007 affected
each of these sources—and their individual providers—to different degrees; some
sources generally became unavailable, some remained available but at a high
cost, and some were largely unaffected.  For example, in the
repurchase agreement market, non-Agency RMBS became harder to finance, depending
on the type of assets collateralizing the RMBS.  The amount, term and
margin requirements associated with these types of financings were also
impacted.  At that time, warehouse facilities to finance whole loan
prime residential mortgages were generally available from major banks, but at
significantly higher cost and had greater margin requirements than previously
offered.  It was also extremely difficult to term finance whole loans
through securitization or bonds issued by a CDO structure.  Financing
using ABCP froze as issuers became unable to place (or roll) their securities,
which resulted, in some instances, in forced sales of mortgage-backed
securities, or MBS, and other securities which further negatively impacted the
market value of these assets.
 52
  Although
the credit markets had been undergoing much turbulence, as we started ramping up
our portfolio in late 2007, we noted a slight easing.  We entered into
a number of repurchase agreements we could use to finance RMBS.  In
January 2008, we entered into two whole mortgage loan repurchase
agreements.  As we began to see the availability of financing, we were
also seeing better underwriting standards used to originate new
mortgages.  We commenced buying and financing RMBS and also entered
into agreements to purchase whole mortgage loans.  We purchased high
credit quality assets which we believed we would be readily able to
finance.
 
 Beginning
in mid-February 2008, credit markets experienced a dramatic and sudden adverse
change.  The severity of the limitation on liquidity was largely
unanticipated by the markets.   Credit once again froze, and in
the mortgage market, valuations of non-Agency RMBS and whole mortgage loans came
under severe pressure.  This credit crisis began in early February
2008, when a heavily leveraged investor announced that it had to de-lever and
liquidate a portfolio of approximately $30 billion of non-Agency
RMBS.  Prices of these types of securities dropped dramatically, and
lenders started lowering the prices on non-Agency RMBS that they held as
collateral to secure the loans they had extended.  The subsequent
failure in March 2008 of Bear Stearns & Co. worsened the
crisis.  As the year progressed, deterioration in the fair value of
our assets continued, we received and met margin calls under our repurchase
agreements, which resulted in our obtaining additional funding from third
parties, including from Annaly Capital Management, Inc., or Annaly, an
affiliate, and taking other steps to increase our liquidity.
 
 The
challenges of the first half of 2008 continued throughout 2008 and 2009, as
financing difficulties have severely pressured liquidity and asset
values.  In September 2008, Lehman Brothers Holdings, Inc., a major
investment bank, experienced a major liquidity crisis and
failed.  Securities trading remains limited and mortgage securities
financing markets remain challenging as the industry continues to report
negative news.  This dislocation in the non-Agency mortgage sector has
made it difficult for us to obtain short-term financing on favorable
terms.   As a result, we have completed loan securitizations in
order to obtain long-term financing and terminated our un-utilized whole loan
repurchase agreements in order to avoid paying non-usage fees under those
agreements.  In addition, we have continued to seek funding from
Annaly.  Under these circumstances, we expect to take actions intended
to protect our liquidity, which may include reducing borrowings and disposing of
assets as well as raising capital.
 
 Subsequent
to June 30, 2008, there were increased market concerns about Freddie Mac and
Fannie Mae’s ability to withstand future credit losses associated with
securities held in their investment portfolios, and on which they provide
guarantees, without the direct support of the U.S. Government.  In
September 2008, Fannie Mae and Freddie Mac were placed into the conservatorship
of the Federal Housing Finance Agency, or FHFA, their federal regulator,
pursuant to its powers under The Federal Housing Finance Regulatory Reform Act
of 2008, a part of the Housing and Economic Recovery Act of 2008.  As the
conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the
operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and
operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors, and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator’s appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
of the conservator.
 
 In
addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the
Treasury and FHFA have entered into Preferred Stock Purchase Agreements,
or PSPAs between the Treasury and Fannie Mae and Freddie Mac pursuant to
which the Treasury will ensure that each of Fannie Mae and Freddie Mac maintains
a positive net worth.  On December 24, 2009, the U.S. Treasury amended the
terms of the U.S. Treasury’s  PSPAs with Fannie Mae and Freddie Mac to
remove the $200 billion per institution limit established under the PSPAs until
the end of 2012.  The U.S. Treasury also amended the PSPAs with respect to
the requirements for Fannie Mae and Freddie Mac to reduce their
portfolios.
  53
  The
Emergency Economic Stabilization Act of 2008, or EESA, was also enacted. 
The EESA provides the U.S. Secretary of the Treasury with the authority to
establish a Troubled Asset Relief Program, or TARP, to purchase from financial
institutions up to $700 billion of equity or preferred securities, residential
or commercial mortgages and any securities, obligations, or other instruments
that are based on or related to such mortgages, that in each case was originated
or issued on or before March 14, 2008, as well as any other financial instrument
that the U.S. Secretary of the Treasury, after consultation with the Chairman of
the Board of Governors of the Federal Reserve System, determines the purchase of
which is necessary to promote financial market stability, upon transmittal of
such determination, in writing, to the appropriate committees of the U.S.
Congress.  The EESA also provides for a program that would allow companies
to insure their troubled assets.
 
 In
addition, the U.S. Government, the Board of Governors of the Federal Reserve
System, or Federal Reserve, and other governmental and regulatory bodies have
taken or are considering taking other actions to address the financial
crisis.  The Term Asset-Backed Securities Loan Facility, or TALF, was first
announced by the U.S. Department of Treasury, or the Treasury, on November 25,
2008, and has been expanded in size and scope since its initial
announcement.  Under the TALF, the Federal Reserve Bank of New York makes
non-recourse loans to borrowers to fund their purchase of eligible assets,
currently certain asset-backed securities but not residential mortgage-backed
securities.    On March 23, 2009, the U.S. Treasury announced
preliminary plans to expand the TALF beyond non-mortgage ABS to include legacy
securitization assets, including non-Agency RMBS and CMBS that were originally
rated AAA and issued prior to January 1, 2009.  On May 1, 2009, the Federal
Reserve published the terms for the expansion of TALF to CMBS and announced
that, beginning in June 2009, up to $100 billion of TALF loans would be
available to finance purchases of CMBS.  The Federal Reserve has also
announced that, beginning in July 2009, eligible legacy CMBS may also be
purchased under the TALF.  Many legacy CMBS, however, have had their
ratings downgraded, and at least one rating agency, S&P, has announced that
further downgrades are likely in the future as property values have
declined.  These downgrades may significantly reduce the quantity of legacy
CMBS that are TALF eligible.  There can be no assurance that we will be
able to utilize this program successfully or at all.
 
 In
addition, on March 23, 2009 the government announced that the Treasury in
conjunction with the Federal Deposit Insurance Corporation, or FDIC, and the
Federal Reserve, would create the Public-Private Investment Program, or
PPIP.  The PPIP aims to recreate a market for specific illiquid residential
and commercial loans and securities through a number of joint public and private
investment funds.  The PPIP is designed to draw new private capital into
the market for these securities and loans by providing government equity
co-investment and attractive public financing.  As these programs are still
in early stages of operations, it is not possible for us to predict how these
programs will impact our business.
 
 There can
be no assurance that the EESA, TALF, PPIP or other policy initiatives will have
a beneficial impact on the financial markets, including current extreme levels
of volatility.  We cannot predict whether or when such actions may occur or
what impact, if any, such actions could have on our business, results of
operations and financial condition.
 
 The
liquidity crisis could adversely affect one or more of our lenders and could
cause one or more of our lenders to be unwilling or unable to provide us with
additional financing.  This could potentially increase our financing costs
and reduce liquidity.  If one or more major market participants fails, it
could negatively impact the marketability of all fixed income securities,
including mortgage securities, and this could negatively impact the value of the
securities in our portfolio, thus reducing its net book value. 
Furthermore, if many of our lenders are unwilling or unable to provide us with
additional financing, we could be forced to sell our assets at an inopportune
time when prices are depressed.
 
 Trends
  We expect
the results of our operations to be affected by various factors, many of which
are beyond our control.  Our results of operations will primarily
depend on, among other things, the level of our net interest income, the market
value of our assets, and the supply of and demand for such
assets.  Our net interest income, which reflects the amortization of
purchase premiums and accretion of discounts, varies primarily as a result of
changes in interest rates, borrowing costs, and prepayment speeds, which is a
measurement of how quickly borrowers pay down the unpaid principal balance on
their mortgage loans.
  Prepayment Speeds. Prepayment
speeds, as reflected by the Constant Prepayment Rate, or CPR, vary according to
interest rates, the type of investment, conditions in financial markets,
competition and other factors, none of which can be predicted with any
certainty.  In general, when interest rates rise, it is relatively
less attractive for borrowers to refinance their mortgage loans, and as a
result, prepayment speeds tend to decrease.  When interest rates fall,
prepayment speeds tend to increase. For mortgage loan and RMBS investments
purchased at a premium, as prepayment speeds increase, the amount of income we
earn decreases because the purchase premium we paid for the bonds amortizes
faster than expected.  Conversely, decreases in prepayment speeds
result in increased income and can extend the period over which we amortize the
purchase premium. For mortgage loan and RMBS investments purchased at a
discount, as prepayment speeds increase, the amount of income we earn increases
because of the acceleration of the accretion of the discount into interest
income. Conversely, decreases in prepayment speeds result in decreased income
and can extend the period over which we accrete the purchase discount into
interest income.
 
 54
 Rising Interest Rate Environment.As indicated above, as interest rates rise, prepayment speeds generally
decrease.  Rising interest rates, however, increase our financing costs
which may result in a net negative impact on our net interest
income.  In addition, if we acquire Agency and non-Agency RMBS
collateralized by monthly reset adjustable-rate mortgages, or ARMs, and three-
and five-year hybrid ARMs, such interest rate increases could result in
decreases in our net investment income, as there could be a timing mismatch
between the interest rate reset dates on our RMBS portfolio and the financing
costs of these investments. We
expect, however, that our fixed-rate assets would decline in value in a rising
interest rate environment and that our net interest spreads on fixed rate assets
could decline in a rising interest rate environment to the extent such assets
are financed with floating rate debt.
  Falling Interest Rate Environment.As interest rates fall, prepayment speeds generally
increase.  Falling interest rates, however, decrease our financing
costs which may result in a net positive impact on our net interest
income.  In addition, if we acquire Agency and non-Agency RMBS
collateralized by monthly reset adjustable-rate mortgages, or ARMs, and three-
and five-year hybrid ARMs, such interest rate decreases could result in
increases in our net investment income, as there could be a timing mismatch
between the interest rate reset dates on our RMBS portfolio and the financing
costs of these investments. We
expect, however, that our fixed-rate assets would increase in value in a falling
interest rate environment and that our net interest spreads on fixed rate assets
could increase in a falling interest rate environment to the extent such assets
are financed with floating rate debt.
  Credit Risk.One
of our strategic focuses is acquiring assets which we believe to be of high
credit quality. We believe this strategy will generally keep our credit losses
and financing costs low.  We retain the risk of potential credit
losses on all of the residential mortgage loans we hold in our
portfolio.  Additionally, some of our investments in RMBS may be
qualifying interests for purposes of maintaining our exemption from the 1940 Act
because we retain a 100% ownership interest in the underlying
loans.  If we purchase all classes of these securitizations, we have
the credit exposure on the underlying loans.  Prior to the purchase of
these securities, we conduct a due diligence process that allows us to remove
loans that do not meet our credit standards based on loan-to-value ratios,
borrowers’ credit scores, income and asset documentation and other criteria that
we believe to be important indications of credit risk.
  Size of Investment
Portfolio.The size of our investment portfolio, as measured
by the aggregate unpaid principal balance of our mortgage loans and aggregate
principal balance of our mortgage related securities and the other assets we own
is also a key revenue driver.  Generally, as the size of our
investment portfolio grows, the amount of interest income we receive
increases.  The larger investment portfolio, however, drives increased
expenses as we incur additional interest expense to finance the purchase of our
assets.
  55
 Since
changes in interest rates may significantly affect our activities, our operating
results depend, in large part, upon our ability to effectively manage interest
rate risks and prepayment risks while maintaining our status as a
REIT.
  Current
Environment.  The current weakness in the broader mortgage
markets could adversely affect one or more of our potential lenders or any of
our lenders and could cause one or more of our potential lenders or any of our
lenders to be unwilling or unable to provide us with financing or require us to
post additional collateral.  In general, this could potentially
increase our financing costs and reduce our liquidity or require us to sell
assets at an inopportune time.  We expect to use a number of sources
to finance our investments, including repurchase agreements, warehouse
facilities, securitizations, asset-backed commercial paper and term
CDOs.  Current market conditions have affected the cost and
availability of financing from each of these sources and their individual
providers to different degrees; some sources generally are unavailable, some are
available but at a high cost, and some are largely unaffected.  For
example, in the repurchase agreement market, borrowers have been affected
differently depending on the type of security they are
financing.  Non-Agency RMBS have been harder to finance, depending on
the type of assets collateralizing the RMBS.  The amount, term and
margin requirements associated with these types of financings have been
negatively impacted.
  Currently,
warehouse facilities to finance whole loan prime residential mortgages are
generally available from major banks, but at significantly higher cost and have
greater margin requirements than previously offered. Many major banks that offer
warehouse facilities have also reduced the amount of capital available to new
entrants and consequently the size of those facilities offered now are smaller
than those previously available.
  It is
currently a challenging market to term finance whole loans through
securitization or bonds issued by a CDO structure. The highly rated senior bonds
in these securitizations and CDO structures currently have liquidity, but at
much wider spreads than issues priced in recent history. The junior subordinate
tranches of these structures currently have few buyers and current market
conditions have forced issuers to retain these lower rated bonds rather than
sell them.
  Certain
issuers of ABCP have been unable to place (or roll) their securities, which has
resulted, in some instances, in forced sales of MBS and other securities which
has further negatively impacted the market value of these
assets.  These market conditions are fluid and likely to change over
time.   As a result, the execution of our investment strategy may
be dictated by the cost and availability of financing from these different
sources.
  If one or
more major market participants fails or otherwise experiences a major liquidity
crisis, as was the case for Bear Stearns & Co. in March 2008, and Lehman
Brothers Holdings Inc. in September 2008, it could negatively impact the
marketability of all fixed income securities and this could negatively impact
the value of the securities we acquire, thus reducing our net book
value.  Furthermore, if many of our potential lenders or any of our
lenders are unwilling or unable to provide us with financing, we could be forced
to sell our securities or residential mortgage loans at an inopportune time when
prices are depressed.
 
 As
described above, there has been significant government action in the capital
markets.  However, there can be no assurance that the government’s
actions with respect to Freddie Mac and Fannie Mae, the EESA, the TARP, the
TALF, the PPIP or other policy initiatives will have a beneficial impact on the
financial markets.  To the extent the market does not respond
favorably to these actions, or these actions do not function as intended, our
business may not receive the anticipated positive impact from
them.  In addition, the U.S. Government, Federal Reserve and other
governmental and regulatory bodies have taken or are considering taking other
actions to address the financial crisis. We cannot predict whether or when such
actions may occur or what impact, if any, such actions could have on our
business, results of operations and financial condition.
 
 In the
current market, it may be difficult or impossible to obtain third party pricing
on the investments we purchase.  In addition, validating third party
pricing for our investments may be more subjective as fewer participants may be
willing to provide this service to us.  Moreover, the current market
is more illiquid than in recent history for some of the investments we
purchase.  Illiquid investments typically experience greater price
volatility as a ready market does not exist.    As
volatility increases or liquidity decreases we may have greater difficulty
financing our investments which may negatively impact our earnings and the
execution of our investment strategy.
  56
  Critical
Accounting Policies
  Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, or
GAAP.  These accounting principles may require us to make some complex
and subjective decisions and assessments.  Our most critical
accounting policies will involve decisions and assessments that could affect our
reported assets and liabilities, as well as our reported revenues and
expenses.  We believe that all of the decisions and assessments upon
which our consolidated financial statements are based will be reasonable at the
time made and based upon information available to us at that time.  At
each quarter end, we calculate estimated fair value of the investment portfolio
using a pricing model.  We validate our pricing model by obtaining
independent pricing on all of our assets and performing a verification of those
sources to our own internal estimate of fair value.  The following are
our most critical accounting policies:
  Mortgage
Loan Sales and Securitizations
  We
periodically enter into transactions in which we sell financial assets, such as
RMBS, mortgage loans and other assets.  We also securitize and
re-securitize financial assets.  These transactions are recorded as
either a “sale” and the loans held for investment are removed from the
consolidated statements of financial condition or as a “financing” and are
classified as “Securitized loans held for investment” on our consolidated
statements of financial condition, depending upon the structure of the
securitization transaction.  In these securitizations and
re-securitizations we sometimes retain or acquire senior or subordinated
interests in the securitized or re-securitized assets.  Gains and
losses on such securitizations or re-securitizations are recognized using a
financial components approach that focuses on control.  Under this
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished.
  We
determine the gain or loss on sale of mortgage loans by allocating the carrying
value of the underlying mortgage between securities or loans sold and the
interests retained based on their fair values.  The gain or loss on
sale is the difference between the cash proceeds from the sale and the amount
allocated to the securities or loans sold.
  Valuation
of Investments
  FASB establishes a framework for
measuring fair value, and establishes a three-level valuation hierarchy for
disclosure of fair value measurement and enhances disclosure requirements for
fair value measurements.  The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability as of the
measurement date.  The three levels are defined as
follows:
  Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets and 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 for the 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 overall
fair value.
  Non-Agency
and Agency MBS are valued using a pricing model.  The MBS pricing
model incorporates such factors as coupons, prepayment speeds, spread to the
Treasury and swap curves, convexity, duration, periodic and life caps, and
credit enhancement.  Management reviews the fair values determined by
the pricing model and compares its results to dealer quotes received on each
investment to validate the reasonableness of the valuations indicated by the
pricing models.  The dealer quotes incorporate common market pricing
methods, including spread measurement to the Treasury curve or interest rate
swap curve as well as underlying characteristics of the particular security
including coupon, periodic and life caps, rate reset period, issuer, additional
credit support and expected life of the security.
 
 Although we utilize a pricing model to
compute the fair value of the securities in our portfolio, we validate our fair
values by seeking indications of fair value from third-party dealers and/or
pricing services. The variability of fair value among dealers and pricing
services can be wide at this time as full liquidity for the non-Agency RMBS
market has yet to return.  In addition, there are fewer participants
in the RMBS sector available to fair value investments.  In the
aggregate, our internal valuations of the securities on which we received dealer
marks were 1.05% lower than the aggregated dealer marks.
 
 Any changes to the valuation
methodology are reviewed by management to ensure the changes are appropriate. As
markets and products develop and the pricing for certain products becomes more
transparent, we continue to refine our valuation methodologies. The methods used
by us may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. Furthermore, while we
believe our valuation methods are appropriate and consistent with other market
participants, the use of different methodologies, or assumptions, to determine
the fair value of certain financial instruments could result in a different
estimate of fair value at the reporting date.  We use inputs that are
current as of the measurement date, which may include periods of market
dislocation, during which price transparency may be reduced.  This
condition could cause our financial instruments to be reclassified from Level 2
to Level 3.
 
 57
 
 Other-than-Temporary
Impairments
  FASB
issued new guidance to improve the recognition, presentation and disclosure of
other-than-temporary impairments, or OTTI, on debt and equity securities. 
We evaluate each investment in our RMBS portfolio for OTTI quarterly or more
often if market conditions warrant.  The amortized cost of each investment
in an unrealized loss position is compared to the present value of expected
future cash flows of the position.  If the amortized cost of the security
is less than the present value of its expected future cash flows, an
other-than-temporary credit impairment has occurred.  If we do not intend
to sell nor are required to sell the debt security prior to its anticipated
recovery, the credit loss, if any, is recognized in the statement of earnings,
while the balance of impairment related to other factors is recognized in
OCI.  If we intend to sell the debt security, or will be required to sell
the security before its anticipated recovery, the full OTTI is recognized in the
statement of earnings.  The determination cannot be overcome by management
judgment of the probability of collecting all cash flows previously
projected.
  Securitized
Loans Held for Investment
  Our
securitized residential mortgage loans are comprised of fixed-rate and
adjustable-rate loans.  Mortgage loans are designated as held for
investment, recorded on trade date, and are carried at their principal balance
outstanding, plus any premiums or discounts which are amortized or accreted over
the estimated life of the loan, less allowances for loan losses.
  Non-Agency
and Agency Residential Mortgage-Backed Securities
  We invest
in RMBS representing interests in obligations backed by pools of mortgage loans
and carry those securities at fair value estimated using a pricing
model.  Management reviews the fair values generated by the model to
determine whether prices are reflective of the current
market.  Management performs a validation of the fair value calculated
by the pricing model by comparing its results to independent prices provided by
dealers in the securities and/or third party pricing services.  If
dealers or independent pricing services are unable to provide a price for an
asset, or if the price provided by them is deemed unreliable by FIDAC, then the
asset will be valued at its fair value as determined in good faith by
FIDAC.  In the current market, it may be difficult or impossible to
obtain third party pricing on certain of our investments.   In
addition, validating third party pricing for our investments may be more
subjective as fewer participants may be willing to provide this service to
us.  Moreover, the current market is more illiquid than in recent
history for some of the investments we own.  Illiquid investments
typically experience greater price volatility as a ready market does not
exist.  As volatility increases or liquidity decreases, we may have
greater difficulty financing its investments which may negatively impact its
earnings and the execution of its investment strategy.
  Our
investment securities are classified as either trading investments,
available-for-sale investments or held-to-maturity investments. We intend to
hold our RMBS as available-for-sale and as such may sell any of our RMBS as part
of our overall management of our portfolio.  All assets classified as
available-for-sale are reported at estimated fair value, with unrealized gains
and losses included in other comprehensive income (loss).
 
 When the
fair value of an available-for-sale security is less than its amortized cost for
an extended period or there is a significant decline in value, we consider
whether there is OTTI in the value of the security.  If, based on our
analysis, a credit portion of OTTI exists, the cost basis of the security is
written down to the then-current fair value, and the unrealized loss is
transferred from accumulated other comprehensive loss as an immediate reduction
of current earnings (as if the loss had been realized in the period of
OTTI).  The determination of OTTI is a subjective process, and
different judgments and assumptions could affect the timing of loss
realization.
  58
 We
consider the following factors when determining OTTI for a
security:
  ·
                the
      length of time and the extent to which the market value has been less than
      the amortized cost;
  ·
                our
      intent not to sell;
  ·
                and
      the financial condition and near-term prospects of the
    issuer;
  ·
                the
      credit quality and cash flow performance of the security;
    and
  ·
                whether
      we will be more likely than not required to sell the investment before the
      expected recovery.
  The
determination of OTTI is made at least quarterly.  If we determine an
impairment to be other than temporary we will realize a loss which will
negatively impact current income.
  RMBS
transactions are recorded on the trade date.  Realized gains and
losses from sales of RMBS are determined based on the specific identification
method and recorded as a gain (loss) on sale of investments in the statement of
operations.  Accretion of discounts or amortization of premiums on
available-for-sale securities and mortgage loans is computed using the effective
interest yield method and is included as a component of interest income in the
statement of operations.
  Interest
Income
  Interest
income on RMBS and loans held for investment is recognized over the life of the
investment using the effective interest method.  Income recognition is
suspended for loans when, in the opinion of management, a full recovery of
income and principal becomes doubtful.  Income recognition is resumed
when the loan becomes contractually current and performance is demonstrated to
be resumed.
  Accounting
For Derivative Financial Instruments and Hedging Activities
  Our
policies permit us to enter into derivative contracts, including interest rate
swaps and interest rate caps, as a means of mitigating our interest rate risk.
We intend to use interest rate derivative instruments to mitigate interest rate
risk rather than to enhance returns. If we hedge using interest rate swaps we
account for these instruments as either assets or liabilities in the
consolidated statement of financial condition, and measure the derivatives at
fair value with realized and unrealized gains and losses recognized in
earnings.
  The FASB
issued additional guidance that attempts to improve the transparency of
financial reporting by providing additional information about how derivative and
hedging activities affect an entity’s financial position, financial performance
and cash flows.  This guidance requires the disclosure requirements
for derivative instruments and hedging activities by requiring enhanced
disclosure about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items, and (3) how derivative
instruments and related hedged items affect the entity’s financial position,
financial performance, and cash flows.
 
 We use
derivatives for economic hedging purposes rather than speculation. We will rely
on quotations from third parties to determine fair values.  If our
hedging activities do not achieve our desired results, our reported earnings may
be adversely affected.
  Allowance
for Loan Losses
  We have
established an allowance for loan losses at a level that management believes is
adequate based on an evaluation of known and inherent probable losses related to
our loan portfolio.  The estimate is based on a variety of factors
including current economic conditions, industry loss experience, the loan
originator’s loss experience, credit quality trends, loan portfolio composition,
delinquency trends, national and local economic trends, national unemployment
data, changes in housing appreciation or depreciation and whether specific
geographic areas where we have significant loan concentrations are experiencing
adverse economic conditions and events such as natural disasters that may affect
the local economy or property values. Upon purchase of the pools of loans, we
obtained written representations and warranties from the sellers that we could
be reimbursed for the value of the loan if the loan fails to meet the agreed
upon origination standards.  Since we have little history of our own
to establish loan trends, we use delinquency trends of the originators and the
current market conditions in determining the allowance for loan
losses.  We also performed due diligence procedures on a sample of
loans that met our criteria during the purchase process.  We have
created an unallocated provision for probable loan losses estimated as a
percentage of the remaining principal on the loans.  Management’s
estimate is based on historical experience of similarly underwritten
pools.
 
 59
 When we
determine it is probable that specific contractually due amounts are
uncollectible, the amount is considered impaired.  Where impairment is
indicated, a valuation write-off is measured based upon the excess of the
recorded investment over the net fair value of the collateral, reduced by
selling costs.  Any deficiency between the carrying amount of an asset
and the net sales price of repossessed collateral is charged to the allowance
for loan losses.
  Income
Taxes
  We have
elected and intend to qualify to be taxed as a REIT.  Therefore we
will generally not be subject to corporate federal or state income tax to the
extent that we make qualifying distributions to our stockholders, and provided
we satisfy on a continuing basis, through actual investment and operating
results, the REIT requirements including certain asset, income, distribution and
stock ownership tests.
  If we
fail to qualify as a REIT, and do not qualify for certain statutory relief
provisions, we will be subject to federal, state and local income taxes and may
be precluded from qualifying as a REIT for the subsequent four taxable years
following the year in which we lost our REIT
qualification.  Accordingly, our failure to qualify as a REIT could
have a material adverse impact on our results of operations and amounts
available for distribution to our stockholders.
  The
dividends paid deduction of a REIT for qualifying dividends to its stockholders
is computed using our taxable income as opposed to net income reported on the
consolidated financial statements.  Taxable income, generally, will
differ from net income reported on the consolidated financial statements because
the determination of taxable income is based on tax provisions and not financial
accounting principles.
  Recent
Accounting Pronouncements
 General
Principles
 
 Generally Accepted
Accounting Principles (ASC 105)
 
 In June
2009, the Financial Accounting Standards Board or FASB issued The Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, or Codification which revises the framework for selecting the
accounting principles to be used in the preparation of financial statements that
are presented in conformity with Generally Accepted Accounting Principles or
GAAP.  The objective of the Codification is to establish the FASB
Accounting Standards Codification, or ASC as the source of authoritative
accounting principles recognized by the FASB.  Codification was
effective for us as of September 30, 2009.  In adopting the
Codification, all non-grandfathered, non-SEC accounting literature not included
in the Codification was superseded and deemed
non-authoritative.  Codification requires any references within our
consolidated financial statements be modified from FASB issues to
ASC.  However, in accordance with the FASB Accounting Standards
Codification Notice to Constituents (v 2.0), we do not reference specific
sections of the ASC but will use broad topic references.
 
 Our
recent accounting pronouncements section has been reformatted to reflect the
same organizational structure as the ASC.  Broad topic references will
be updated with pending content as they are released.
 
 Assets
 
 Investments in Debt and
Equity Securities (ASC 320)
 
 New
guidance was provided to make impairment guidance more operational and to
improve the presentation and disclosure of OTTI on debt and equity securities,
as well as beneficial interests in securitized financial assets, in financial
statements.  This guidance was the result of the Securities and
Exchange Commission, or SEC mark-to-market study mandated under the
EESA.  The SEC’s recommendation was to “evaluate the need for
modifications (or the elimination) of current OTTI guidance to provide for a
more uniform system of impairment testing standards for financial
instruments.”  The guidance revises the OTTI evaluation
methodology.  Previously the analytical focus was on whether the
company had the “intent and ability to retain its investment in the debt
security for a period of time sufficient to allow for any anticipated recovery
in fair value.”   Now the focus is on whether the company (1) has
the intent to sell the investment securities, (2) is more likely than not that
it will be required to sell the investment securities before recovery, or (3)
does not expect to recover the entire amortized cost basis of the investment
securities.  Further, the security is analyzed for credit loss, (the
difference between the present value of cash flows expected to be collected and
the amortized cost basis).  The credit loss, if any, is then be
recognized in the statement of operations, while the balance of impairment
related to other factors will be recognized in OCI.  If the entity
intends to sell the security, or will be required to sell the security before
its anticipated recovery, the full OTTI will be recognized in the statement of
operations.
  60
  OTTI has
occurred if there has been an adverse change in future estimated cash flows and
its impact reflected in current earnings.  The determination cannot be
overcome by management judgment of the probability of collecting all cash flows
previously projected.   The objective of OTTI analysis is to
determine whether it is probable that the holder will realize some portion of
the unrealized loss on an impaired security.  Factors to consider when
making OTTI decisions include information about past events, current conditions,
reasonable and supportable forecasts, remaining payment terms, financial
condition of the issuer, expected defaults, value of underlying collateral,
industry analysis, sector credit rating, credit enhancement, and financial
condition of guarantor.  Our non-Agency RMBS and Agency RMBS
investments fall under this guidance and as such, we will assess each security
for OTTI based on estimated future cash flows.  This guidance became
effective for us on June 30, 2009.
 
 Broad
Transactions
 
 Business Combinations (ASC
805)
 
 This
guidance establishes principles and requirements for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed and any
non-controlling interest in a business combination at their fair value at
acquisition date.  ASC 805 alters the treatment of acquisition-related
costs, business combinations achieved in stages (referred to as a step
acquisition), the treatment of gains from a bargain purchase, the recognition of
contingencies in business combinations, the treatment of in-process research and
development in a business combination as well as the treatment of recognizable
deferred tax benefits.  ASC 805 is effective for business combinations
closed in fiscal years beginning after December 15, 2008 and is applicable
to business acquisitions completed after January 1, 2009.  We did
not make any business acquisitions during the year ended December 31, 2009. The
adoption of ASC 805 did not have a material impact on our consolidated financial
statements.
 
 Consolidation (ASC
810)
 
 On
January 1, 2009, FASB amended the guidance concerning non-controlling interests
in consolidated financial statements.  This guidance required us to
classify non-controlling interests (previously referred to as “minority
interest”) as part of consolidated net income and to include the accumulated
amount of non-controlling interests as part of stockholders’
equity.  Similarly, in its presentation of stockholders’ equity, we
distinguish between equity amounts attributable to controlling interest and
amounts attributable to the non-controlling interests – previously classified as
minority interest outside of stockholders’ equity.  In addition to these
financial reporting changes, this guidance provides for significant changes in
accounting related to non-controlling interests; specifically, increases and
decreases in its controlling financial interests in consolidated subsidiaries
will be reported in equity similar to treasury stock transactions. If a change
in ownership of consolidated subsidiary results in a loss of control and
deconsolidation, any retained ownership interests are re-measured with the gain
or loss reported in net earnings.
 
 Effective
January 1, 2010, the consolidation standards have been amended by ASU
2009-17.  This amendment updates the existing standard and eliminates the
exemption from consolidation of a Qualified Special Purpose Entity or
QSPE.    The update requires an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest entity, or VIE.
The analysis identifies the primary beneficiary of a VIE as the enterprise that
has both: a) the power to direct the activities that most significantly impact
the entity’s economic performance and b) the obligation to absorb losses of the
entity or the right to receive benefits from the entity which could potentially
be significant to the VIE.  The update requires enhanced disclosures
to provide users of financial statements with more transparent information about
an enterprises involvement in a VIE.  Further, ongoing assessments of
whether an enterprise is the primary beneficiary on a VIE are
required.  We expect that we will be required to consolidate RMBS
re-securitization transactions previously recorded during the year ended
December 31, 2009 as sales for GAAP beginning with the effective date of this
ASU.  We expect consolidation of these transactions to increase our
non-Agency portfolio by including approximately $1.3 billion in principal value
of AAA senior securities.  In addition, we expect to record a corresponding
increase of $1.3 billion in principal value of non-recourse liabilities, for
which we have no continuing obligations, in our consolidated financial
statements.  The consolidation is expected to reverse approximately $98.1
million in previously recorded GAAP gains on sales of assets related to the
re-securitizations undertaken in 2009.  The reversal of this gain will be
accreted into interest income over the remaining life of the re-securitized
assets.  We are currently considering the complete impact of this ASU
on our consolidated financial statements.
  61
 On
January 27, 2010, the FASB voted to indefinitely defer the effective date of ASU
2009-17 for a reporting enterprises interest in entities for which it is
industry practice to issue financial statements in accordance with investment
company standards (ASC 946).   This deferral is expected to most
significantly affect reporting entities in the investment management industry
and therefore, as it stands, has no material impact on our consolidated
financial statements.
 
 Derivatives and Hedging (ASC
815)
 
 Effective
January 1, 2009 and adopted prospectively, the FASB issued additional guidance
attempting to improve the transparency of financial reporting by mandating
the provision of additional information about how derivative and hedging
activities affect an entity’s financial position, financial performance and cash
flows.  This guidance changed the disclosure requirements for
derivative instruments and hedging activities by requiring enhanced disclosure
about (1) how and why an entity uses derivative instruments, (2) how derivative
instruments and related hedged items are accounted for, and (3) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.  To adhere to this guidance,
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts, gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements must be made.  This disclosure
framework is intended to better convey the purpose of derivative use in terms of
the risks that an entity is intending to manage.  The adoption of this
ASC had no material effect on our consolidated financial
statements.
 
 Fair Value Measurements and
Disclosures (ASC 820)
 
 In
response to the deterioration of the credit markets, FASB issued guidance
clarifying how fair value measurements should be applied when valuing securities
in markets that are not active.  The guidance provides an illustrative
example, utilizing management’s internal cash flow and discount rate assumptions
when relevant observable data do not exist.  It further clarifies how
observable market information and market quotes should be considered when
measuring fair value in an inactive market.  It reaffirms the notion
of fair value as an exit price as of the measurement date and that fair value
analysis is a transactional process and should not be broadly applied to a group
of assets.  The guidance was effective upon issuance including prior
periods for which financial statements had not been issued.  The
implementation of this guidance did not have a material effect on the fair value
of our assets.
 
 In
October 2008 the EESA was signed into law.  Section 133 of the EESA
mandated that the SEC conduct a study on mark-to-market accounting
standards.  The SEC provided its study to the U.S. Congress on
December 30, 2008.  Part of the recommendations within the study
indicated that “fair value requirements should be improved through development
of application and best practices guidance for determining fair value in
illiquid or inactive markets.”  As a result of this study and the
recommendations therein, on April 9, 2009, the FASB issued additional guidance
for determining fair value when the volume and level of activity for the asset
or liability have significantly decreased when compared with normal market
activity for the asset or liability (or similar assets or
liabilities).  The guidance gives specific factors to evaluate if
there has been a decrease in normal market activity and if so, provides a
methodology to analyze transactions or quoted prices and make necessary
adjustments to fair value.  The objective is to determine the point
within a range of fair value estimates that is most representative of fair value
under current market conditions.  This guidance became effective for
the June 30, 2009 reporting period.  The adoption did not have a
material impact on the manner in which we estimate fair value, nor did it have
any impact on our financial statement disclosures.
 
 In August
2009, FASB provided further guidance in ASU 2009-05 regarding the fair value
measurement of liabilities.  The guidance states that a quoted price
for the identical liability when traded as an asset in an active market is a
Level 1 fair value measurement.  If the value must be adjusted for
factors specific to the liability, then the adjustment to the quoted price of
the asset shall render the fair value measurement of the liability a lower level
measurement.  This guidance had no material effect on the fair
valuation of our liabilities.
 
 62
 In
September 2009, FASB issued guidance in ASU 2009-12 on measuring the fair value
of certain alternative investments.  This guidance offers investors a
practical expedient for measuring the fair value of investments in certain
entities that calculate net asset value or NAV per share.  If an
investment falls within the scope of the ASU, the reporting entity is permitted,
but not required to use the investment’s NAV to estimate its fair
value.  This guidance had no material effect on the fair valuation of
our assets, as we do not hold any assets qualifying under this
guidance.
 
 In
January 2010, FASB issues guidance in ASU 2010-06, which increases disclosure
regarding the fair value of assets.  The key provisions of this
guidance include the requirement to disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 including a description
of the reason for the transfers.  Previously this was only required of
transfers between Level 2 and Level 3 assets.  Further, reporting
entities are required to provide fair value measurement disclosures for each
class of assets and liabilities; a class is potentially a subset of the assets
or liabilities within a line item in the statement of financial
position.  Additionally, disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements are required for either Level 2 or Level 3
assets.  This portion of the guidance is effective for all interim and
annual reporting periods after December 15, 2009. The guidance also requires
that the disclosure on any Level 3 assets is presented separately information
for purchases, sales, issuances and settlements.  In other words,
Level 3 assets are presented on a gross basis rather than as one net
number.  However, this last portion of the guidance is not effective
until December 15, 2010.  Adoption of this guidance results in
increased footnote disclosure.
 
 Financial Instruments (ASC
820)
 
 On April
9, 2009, the FASB issued guidance which requires disclosures about fair value of
financial instruments for interim reporting periods as well as in annual
financial statements.  This guidance became effective June 30,
2009.  The adoption did not have any impact on financial reporting as
all financial instruments are currently reported at fair value in both interim
and annual periods.
 
 Subsequent Events (ASC
855)
  ASC 855
provides general standards governing accounting for and disclosures of events
that occur after the balance sheet date through the date of issuance of the
consolidated financial statements but before the financial statements are issued
or are available to be issued.  ASC 855 also provides guidance on the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions occurring after the balance
sheet date. We adopted this ASC effective June 30, 2009, and adoption had no
impact on our consolidated financial statements.  The were no material
subsequent events through the date of issuance of this Annual Report on Form
10-K.
 
 Transfers and Servicing (ASC
860)
 
 In
February 2008, FASB issued guidance addressing whether transactions where assets
purchased from a particular counterparty and financed through a repurchase
agreement with the same counterparty can be considered and accounted for as
separate transactions, or are required to be considered “linked” transactions
and may be considered derivatives.  This guidance requires purchases
and subsequent financing through repurchase agreements be considered linked
transactions unless all of the following conditions apply: (1) the initial
purchase and the use of repurchase agreements to finance the purchase are not
contractually contingent upon each other; (2) the repurchase financing entered
into between the parties provides full recourse to the transferee and the
repurchase price is fixed; (3) the financial assets are readily obtainable in
the market; and (4) the financial instrument and the repurchase agreement are
not coterminous.  This guidance was effective on January 1, 2009 and
the implementation did not have a material effect on our consolidated financial
statements.
 
 63
 On June
12, 2009, the FASB issued ASU 2009-16 an amendment update to the accounting
standards governing the transfer and servicing of financial assets. This
amendment updates the existing standard and eliminates the concept of a QSPE
clarifies the surrendering of control to effect sale treatment; and modifies the
financial components approach – limiting the circumstances in which a financial
asset or portion thereof should be derecognized when the transferor maintains
continuing involvement.  It defines the term “Participating
Interest”.  Under this standard update, the transferor must recognize
and initially measure at fair value all assets obtained and liabilities incurred
as a result of a transfer, including any retained beneficial interest.
Additionally, the amendment requires enhanced disclosures regarding the
transferors risk associated with continuing involvement in any transferred
assets.   The amendment is effective beginning January 1, 2010
and is not expected to have a material impact on our consolidated financial
statements.
  Financial
Condition
  At
December 31, 2009, and 2008 our portfolio consisted of $4.6 billion and $1.4
billion of RMBS and securitized loans, respectively.
 
 The following table summarizes certain
characteristics of our portfolio at December 31, 2009, and
2008:
 Consolidated
      Statements of Financial Condition Highlights(dollars
      in thousands, except share and per share data)December
      31,
                  
                  
                  December
      31,2009
                  
                  
                  2008Non-Agency
      Mortgage-Backed securities
                  
                  $
                  2,398,865
                  
                  
                  $
                  613,105Agency
      Mortgage-Backed securities
                  
                  $
                  1,690,029
                  
                  
                  $
                  242,362Securitized
      loans held for investment
                  
                  $
                  470,533
                  
                  
                  $
                  583,346Total
      assets
                  
                  $
                  4,618,328
                  
                  
                  $
                  1,477,501Repurchase
      agreements
                  
                  $
                  1,716,398
                  
                  
                  $
                  -Repurchase
      agreements with affiliates
                  
                  $
                  259,004
                  
                  
                  $
                  562,119Securitized
      debt
                  
                  $
                  390,350
                  
                  
                  $
                  488,743Total
      liabilities
                  
                  $
                  2,491,766
                  
                  
                  $
                  1,063,046Shareholders'
      equity
                  
                  $
                  2,126,562
                  
                  
                  $
                  414,455Book
      value per share
                  
                  $
                  3.17
                  
                  
                  $
                  2.34Number
      of shares outstanding
                  
                  
                  670,371,587
                  
                  
                  
                  177,198,212
 The
following tables summarize certain characteristics of our RMBS portfolio at
December 31, 2009 and 2008.  The CPR presented is the actual
experience of the asset class.
  Non-Agency
      RMBSDecember
      31, 2009
                
                Senior
                
                
                Subordinated
                
                
                Agency
      RMBS
                
                
                Securitized
      LoansWeighted
      average cost basis
                
                $
                77.27
                
                
                $
                23.93
                
                
                $
                103.41
                
                
                $
                101.09Weighted
      average fair value (1)
                
                $
                73.35
                
                
                $
                23.30
                
                
                $
                104.55
                
                
                $
                101.09Weighted
      average coupon
                
                
                5.74
                %
                
                
                5.90
                %
                
                
                5.50
                %
                
                
                5.49
                %Fixed-rate
      percentage of portfolio
                
                
                12.97
                %
                
                
                11.58
                %
                
                
                25.02
                %
                
                
                3.14
                %Adjustable-rate
      percentage of portfolio
                
                
                29.71
                %
                
                
                13.44
                %
                
                
                0.00
                %
                
                
                4.14
                %Weighted
      average 3 month CPR at period-end (2)
                
                
                17.34
                %
                
                
                15.25
                %
                
                
                22.78
                %
                
                
                18.86
                %Non-Agency
      RMBSDecember
      31, 2008
                
                Senior
                
                
                Subordinated
                
                
                Agency
      RMBS
                
                
                Securitized
      LoansWeighted
      average cost basis
                
                $
                98.13
                
                
                $
                93.83
                
                
                $
                102.71
                
                
                $
                101.03Weighted
      average fair value (1)
                
                $
                68.44
                
                
                $
                55.08
                
                
                $
                103.58
                
                
                $
                101.03Weighted
      average coupon
                
                
                5.98
                %
                
                
                5.35
                %
                
                
                6.69
                %
                
                
                5.95
                %Fixed-rate
      percentage of portfolio
                
                
                0.48
                %
                
                
                0.78
                %
                
                
                13.70
                %
                
                
                15.00
                %Adjustable-rate
      percentage of portfolio
                
                
                50.95
                %
                
                
                0.29
                %
                
                
                0.00
                %
                
                
                18.80
                %Weighted
      average 3 month CPR at period-end (2)
                
                
                12.57
                %
                
                
                6.80
                %
                
                
                14.50
                %
                
                
                7.80
                %(1)
      Securitized loans are carried at amortized cost.(2)
      Represents the estimated percentage of principal that will be prepaid over
      the next three months based on historical principal
    paydowns.
  64
  After the
reset date, interest rates on our hybrid adjustable rate RMBS securities adjust
annually based on spreads over various LIBOR and Treasury indices. These
interest rates are subject to caps that limit the amount the applicable interest
rate can increase during any year, known as periodic cap, and through the
maturity of the applicable security, known as a lifetime cap. The weighted
average periodic cap for the RMBS portfolio is 0.92% and the weighted average
maximum increases for the RMBS portfolio is 5.27%.
 
 The
constant prepayment rate, or CPR, attempts to predict the percentage of
principal that will be prepaid over the next 12 months based on historical
principal paydowns. As interest rates rise, the rate of refinancings typically
declines, which we expect may result in lower rates of prepayment and, as a
result, a lower portfolio CPR. Conversely, as interest rates fall, the rate of
refinancings typically increases, which we expect may result in higher rates of
prepayment and, as a result, a higher portfolio CPR.
 
 The
following table summarizes certain characteristics of our non-Agency portfolio
at December 31, 2009 and 2008:
  December
      31, 2009
                
                
                December
      31, 2008Number
      of securities in portfolio
                
                
                209
                
                
                
                
                30Weighted
      average maturity (years)
                
                
                28.5
                
                
                
                
                22.1Weighted
      average amortized loan to value
                
                
                73.8
                %
                
                
                
                74.2
                %Weighted
      average FICO
                
                
                715.7
                
                
                
                
                717.5Weighted
      average loan balance (in thousands)
                
                
                415.9
                
                
                
                
                394.3Weighted
      average percentage owner occupied
                
                
                82.8
                %
                
                
                
                77.8
                %Weighted
      average percentage single family residence
                
                
                59.9
                %
                
                
                
                54.8
                %Weighted
      average current credit enhancement
                
                
                12.2
                %
                
                
                
                25.4
                %Weighted
      average geographic concentration
                CA
                
                44.8
                %
                
                CA
                
                53.0
                %FL
                
                17.3
                %
                
                FL
                
                10.6
                %NY
                
                7.5
                %
                
                AZ
                
                8.2
                %MD
                
                4.9
                %
                
                NV
                
                5.6
                %NJ
                
                4.4
                %
                
                NJ
                
                4.1
                %
  65
  Residential
Mortgage-Backed Securities
  The
tables below summarize our RMBS investments at December 31, 2009 and
2008:
  December
      31, 2009(dollars
      in thousands)Principal
      Value
                
                
                Unamortized
                  Premium
                
                
                Unamortized
                  Discount
                
                
                Gross
      Unrealized
                  Gain
                
                
                Gross
      Unrealized
                  Loss
                
                
                Fair
      ValueNon-Agency
      RMBSSenior
                
                $
                2,757,212
                
                
                $
                1,536
                
                
                $
                (628,209
                )
                
                $
                83,946
                
                
                $
                (192,079
                )
                
                $
                2,022,406Subordinated
                
                
                1,616,031
                
                
                
                10,346
                
                
                
                (1,239,769
                )
                
                
                65,996
                
                
                
                (76,145
                )
                
                
                376,459Agency
      RMBS
                
                
                1,616,450
                
                
                
                55,081
                
                
                
                (29
                )
                
                
                20,767
                
                
                
                (2,240
                )
                
                
                1,690,029Total
                
                $
                5,989,693
                
                
                $
                66,963
                
                
                $
                (1,868,007
                )
                
                $
                170,709
                
                
                $
                (270,464
                )
                
                $
                4,088,894December
      31, 2008(dollars
      in thousands)Principal
      Value
                
                
                Unamortized
                  Premium
                
                
                Unamortized
                  Discount
                
                
                Gross
      Unrealized
                  Gain
                
                
                Gross
      Unrealized
                  Loss
                
                
                Fair
      ValueNon-Agency
      RMBSSenior
                
                $
                881,111
                
                
                $
                1,858
                
                
                $
                (18,372
                )
                
                $
                3,457
                
                
                $
                (265,052
                )
                
                $
                603,002Subordinated
                
                
                18,345
                
                
                
                247
                
                
                
                (1,381
                )
                
                
                2,208
                
                
                
                (9,316
                )
                
                
                10,103Agency
      RMBS
                
                
                233,976
                
                
                
                6,350
                
                
                
                -
                
                
                
                2,036
                
                
                
                -
                
                
                
                242,362Total
                
                $
                1,133,432
                
                
                $
                8,455
                
                
                $
                (19,753
                )
                
                $
                7,701
                
                
                $
                (274,368
                )
                
                $
                855,467
  As of
December 31, 2009 and 2008, the RMBS in our portfolio were purchased at a net
discount to their par value and our RMBS had a weighted average amortized cost
of 69.9 and 99.0, respectively.
 
 The table
below summarizes the credit ratings of our RMBS investments at December 31, 2009
and 2008:
  RMBS
      PortfolioDecember
      31, 2009
                
                
                December
      31, 2008AAA
                
                
                39.41
                %
                
                
                97.28
                %AA
                
                
                0.75
                %
                
                
                0.40
                %A
                
                
                0.55
                %
                
                
                0.04
                %BBB
                
                
                1.07
                %
                
                
                0.02
                %BB
                
                
                1.77
                %
                
                
                0.03
                %B
                
                
                2.18
                %
                
                
                0.01
                %Below
      B or not rated
                
                
                54.27
                %
                
                
                2.22
                %Total
                
                
                100.00
                %
                
                
                100.00
                %
  66
  The
tables below summarize our RMBS according to their estimated weighted average
life classifications as of December 31, 2009 and 2008:
  December
      31, 2009(dollars
      in thousands)Weighted
      Average Life
                
                Non-Agency
                  Senior
      RMBS
                  Fair
      Value
                
                
                Non-Agency
      Subordinated
                  RMBS
      Fair
                  Value
                
                
                Agency
      RMBS
                  Fair
      Value
                
                Non-Agency
                  Senior
      RMBS Amortized
                  Cost
                
                
                Non-Agency
      Subordinated
                  RMBS
                  Amortized
      Cost
                
                
                Agency
      RMBS Amortized
                  CostLess
      than one year
                
                $
                20,533
                
                
                $
                137
                
                
                $
                -
                
                
                $
                20,549
                
                
                $
                76
                
                
                $
                -Greater
      than one year
                  and
      less than five years
                
                
                1,520,809
                
                
                
                204,481
                
                
                
                1,690,029
                
                
                
                1,631,461
                
                
                
                244,937
                
                
                
                1,671,502Greater
      than five years
                
                
                481,065
                
                
                
                171,840
                
                
                
                -
                
                
                
                478,530
                
                
                
                141,594
                
                
                
                -Total
                
                $
                2,022,407
                
                
                $
                376,458
                
                
                $
                1,690,029
                
                
                $
                2,130,540
                
                
                $
                386,607
                
                
                $
                1,671,502December
      31, 2008(dollars
      in thousands)Weighted
      Average Life
                
                Non-Agency
                  Senior
      RMBS
                  Fair
      Value
                
                
                Non-Agency
      Subordinated
                  RMBS
      Fair
                  Value
                
                
                Agency
      RMBS
                  Fair
      Value
                
                Non-Agency
                  Senior
      RMBS Amortized
                  Cost
                
                
                Non-Agency
      Subordinated
                  RMBS
                  Amortized
      Cost
                
                
                Agency
      RMBS Amortized
                  CostLess
      than one year
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Greater
      than one year
                  and
      less than five years
                
                
                520,733
                
                
                
                5,068
                
                
                
                242,362
                
                
                
                729,495
                
                
                
                6,013
                
                
                
                240,326Greater
      than five years
                
                
                82,269
                
                
                
                5,035
                
                
                
                -
                
                
                
                135,102
                
                
                
                11,198
                
                
                
                -Total
                
                $
                603,002
                
                
                $
                10,103
                
                
                $
                242,362
                
                
                $
                864,597
                
                
                $
                17,211
                
                
                $
                240,326
  Actual
maturities of RMBS are generally shorter than stated contractual maturities, as
they are affected by the contractual lives of the underlying mortgages, periodic
payments of principal, and prepayments of principal. The stated contractual
final maturity of the mortgage loans underlying our portfolio of RMBS ranges up
to 39 years, but the expected maturity is subject to change based on the
prepayments of the underlying loans. As of December 31, 2009 and 2008, the
average final contractual maturity of the RMBS portfolio was 29 and 30 years,
respectively.
 
 Securitized
Loan Portfolio Characteristics
 
 The
following tables present certain characteristics of our securitized loans
portfolio as of December 31, 2009 and 2008.
  (dollars
      in thousands)December
      31, 2009
                
                
                December
      31, 2008Original
      loan balance
                
                $
                500,016
                
                
                $
                598,403Unpaid
      principal balance
                
                $
                469,976
                
                
                $
                578,996Weighted
      average coupon rate on loans
                
                
                5.93
                %
                
                
                5.95
                %Weighted
      average original term (years)
                
                
                29
                
                
                
                29Weighted
      average remaining term (years)
                
                
                27
                
                
                
                28
  67
  December
      31, 2009Geographic
      Distribution
                
                Remaining
      BalanceTop
      5 States
                
                (dollars
      in thousands)
                
                
                %
      of Loan Portfolio
                
                
                Loan
      CountCalifornia
                
                $
                158,812
                
                
                
                33.79
                %
                
                
                218Florida
                
                
                29,945
                
                
                
                6.37
                %
                
                
                41New
      Jersey
                
                
                29,688
                
                
                
                6.32
                %
                
                
                43Illinois
                
                
                28,243
                
                
                
                6.01
                %
                
                
                38Virginia
                
                
                22,553
                
                
                
                4.80
                %
                
                
                37Total
                
                $
                269,241
                
                
                
                57.29
                %
                
                
                377December
      31, 2008Geographic
      Distribution
                
                Remaining
      BalanceTop
      5 States
                
                (dollars
      in thousands)
                
                
                %
      of Loan Portfolio
                
                
                Loan
      CountCalifornia
                
                $
                190,004
                
                
                
                32.82
                %
                
                
                254New
      Jersey
                
                
                38,576
                
                
                
                6.66
                %
                
                
                57Florida
                
                
                34,208
                
                
                
                5.91
                %
                
                
                46Illinois
                
                
                34,027
                
                
                
                5.88
                %
                
                
                45New
      York
                
                
                26,643
                
                
                
                4.60
                %
                
                
                42Total
                
                $
                323,458
                
                
                
                55.87
                %
                
                
                444
  December
      31, 2009
                
                
                December
      31, 2008Remaining
                
                
                
                
                
                
                
                
                RemainingBalance
                
                
                %
      of
                
                
                
                
                
                Balance
                
                
                %
      of(dollars
      in
                
                
                Loan
                
                
                Loan
                
                
                (dollars
      in
                
                
                Loan
                
                
                LoanOccupancy
      Status
                
                thousands)
                
                
                Portfolio
                
                
                Count
                
                
                thousands)
                
                
                Portfolio
                
                
                CountOwner
      occupied
                
                $
                427,022
                
                
                
                90.86
                %
                
                
                611
                
                
                $
                521,212
                
                
                
                90.02
                %
                
                
                740Second
      home
                
                
                35,087
                
                
                
                7.47
                %
                
                
                55
                
                
                
                47,784
                
                
                
                8.25
                %
                
                
                65Investor
                
                
                7,867
                
                
                
                1.67
                %
                
                
                15
                
                
                
                10,000
                
                
                
                1.73
                %
                
                
                17Total
                
                $
                469,976
                
                
                
                100.00
                %
                
                
                681
                
                
                $
                578,996
                
                
                
                100.00
                %
                
                
                822
  %
      of Loan PortfolioLoan
      Purpose
                
                December
      31, 2009
                
                
                December
      31, 2008Purchase
                
                
                62.78
                %
                
                
                62.96
                %Cash
      out refinance
                
                
                21.53
                %
                
                
                14.95
                %Rate
      and term refinance
                
                
                15.69
                %
                
                
                22.09
                %Total
                
                
                100.00
                %
                
                
                100.00
                %
  %
      of ARM LoansARM
      Loan Type
                
                December
      31, 2009
                
                
                December
      31, 2008Traditional
      ARM loans
                
                
                -
                
                
                
                -Hybrid
      ARM loans
                
                
                100.00
                %
                
                
                100.00
                %Total
                
                
                100.00
                %
                
                
                100.00
                %
  December
      31, 2009
                
                
                December
      31, 2008Unpaid
      Principal Balance
                
                (dollars
      in thousands)$417,000
      or less
                
                $
                4,664
                
                
                $
                5,486$417,001
      to $650,000
                
                
                186,157
                
                
                
                225,927$650,001
      to $1,000,000
                
                
                188,743
                
                
                
                237,625$1,000,001
      to $2,000,000
                
                
                84,846
                
                
                
                104,359$2,000,001
      to $3,000,000
                
                
                5,566
                
                
                
                5,599Over
      $3,000,001
                
                
                -
                
                
                
                -Total
                
                $
                469,976
                
                
                $
                578,996
  68
  %
      of Loan PortfolioFICO
      Score
                
                December
      31, 2009
                
                
                December
      31, 2008740
      and above
                
                
                69.55
                %
                
                
                69.82
                %700
      to 739
                
                
                17.42
                %
                
                
                18.33
                %660
      to 699
                
                
                10.01
                %
                
                
                9.28
                %620
      to 659
                
                
                2.13
                %
                
                
                1.74
                %Below
      620
                
                
                0.89
                %
                
                
                0.83
                %Total
                
                
                100
                %
                
                
                100
                %Weighted
      average FICO score
                
                
                756
                
                
                
                758
  December
      31, 2009
                
                
                December
      31, 2008Original
      Loan to Value Ratio
                
                (dollars
      in thousands)80.01%
      and above
                
                $
                54,844
                
                
                $
                65,32070.01
      to 80.00%
                
                $
                267,353
                
                
                $
                321,15060.01%
      to 70.00%
                
                $
                72,058
                
                
                $
                89,54260.00%
      or less
                
                $
                75,721
                
                
                $
                102,984Total
                
                $
                469,976
                
                
                $
                578,996Weighted
      Average OriginalLoan
      to Value Ratio
                
                
                73.02
                %
                
                
                72.51
                %
  %
      of Loan PortfolioProperty
      Type
                
                December
      31, 2009
                
                
                December
      31, 2008Single-family
      detached
                
                
                60.01
                %
                
                
                59.60
                %Planned
      urban development-detached
                
                
                31.31
                %
                
                
                31.72
                %Condominium
                
                
                6.39
                %
                
                
                6.60
                %Other
      residential
                
                
                2.29
                %
                
                
                2.08
                %Total
                
                
                100.00
                %
                
                
                100.00
                %
  %
      of ARM LoansPeriodic
      Cap on Hybrid ARM Loans
                
                December
      31, 2009
                
                
                December
      31, 20083.00%
      or less
                
                
                100.00
                %
                
                
                100.00
                %3.01%
      to 4.00%
                
                
                -
                
                
                
                -4.01%
      to 5.00%
                
                
                -
                
                
                
                -Total
                
                
                100.00
                %
                
                
                100.00
                %
  Results
of Operations for the Years Ended December 31, 2009, 2008 and the Period Ended
December 31, 2007
  We
commenced operations on November 21, 2007, and therefore do not have any
comparable results for prior periods.
 
 Net
Income (Loss) Summary
 
 Our net
income for the year ended December 31, 2009 was $324.0 million, or $0.64 per
average share.  Our net loss for the year ended December 31, 2008 was
$119.8 million, or $1.90 per average share.  Our net loss for the
period commencing November 21, 2007 and ending December 31, 2007 was $2.9
million, or $0.08 per average share.
 
 Net
income per share increased by $2.54 per share and total net income increased by
$443.8 million for the year ending December 31, 2009, when compared to the year
ending December 31, 2008.  We attribute the increase in net income in
part to realized gains on sales of investments equal to $103.6 million for the
year ending December 31, 2009 as compared to realized losses on sales of
investments equal to $144.3 million for the year ending December 31,
2008.  Net income for the year ending December 31, 2009 also increased
in part due to the 355 basis point increase in interest rate spread on the
portfolio of assets for the year ending December 31, 2009, when compared to the
year ending December 31, 2008.
  69
  Net loss
per share increased by $1.82 per share and total net loss increased by $116.9
million for the year ending December 31, 2008, when compared to the period
November 21, 2007 to December 31, 2007.  We attribute the increase in
net loss per share to the realized losses on sale of investments of $144.3
million recorded during the year ending December 31, 2008.  There were
no gains or losses on sales of investments during the period November 21, 2007
to December 31, 2007.
 
 The table
below presents the net income (loss) summary for the years ended December 31,
2009 and 2008 and the period commencing November 21, 2007 to December 31,
2007:
  CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(dollars
      in thousands, except share and per share data)For
      the Year EndedDecember 31,
                    2009
                  
                  
                  For
      the Year EndedDecember 31,
                    2008
                  
                  
                  For
      the PeriodNovember 21, to December 31,
                    2007Net
      Interest Income:Interest
      income
                  
                  $
                  298,539
                  
                  
                  $
                  105,259
                  
                  
                  $
                  3,492Interest
      expense
                  
                  
                  35,083
                  
                  
                  
                  60,544
                  
                  
                  
                  415Net
      interest income
                  
                  
                  263,456
                  
                  
                  
                  44,715
                  
                  
                  
                  3,077Other-than-temporary
      impairments:Total
      other-than-temporary impairment losses
                  
                  
                  (16,264
                  )
                  
                  
                  -
                  
                  
                  
                  -Non-credit
      portion of loss recognized in other
                    comprehensive
      income (loss)
                  
                  
                  6,268
                  
                  
                  
                  -
                  
                  
                  
                  -Net
      other-than-temporary credit impairment losses
                  
                  
                  (9,996
                  )
                  
                  
                  -
                  
                  
                  
                  -Other
      gains (losses):Unrealized
      gains (losses)  on interest rate swaps
                  
                  
                  -
                  
                  
                  
                  4,156
                  
                  
                  
                  (4,156
                  )Realized
      gains (losses) on sales of investments, net
                  
                  
                  103,646
                  
                  
                  
                  (144,304
                  )
                  
                  
                  -Realized
      losses on principal write-downs of non-Agency
                    RMBS
                  
                  
                  (255
                  )
                  
                  
                  -
                  
                  
                  
                  -Realized
      losses on terminations of interest rate swaps
                  
                  
                  -
                  
                  
                  
                  (10,337
                  )
                  
                  
                  -Total
      other gains (losses)
                  
                  
                  103,391
                  
                  
                  
                  (150,485
                  )
                  
                  
                  (4,156
                  )Net
      investment income (expense)
                  
                  
                  356,851
                  
                  
                  
                  (105,770
                  )
                  
                  
                  (1,079
                  )Other
      expenses:Management
      fee
                  
                  
                  25,704
                  
                  
                  
                  8,428
                  
                  
                  
                  1,217Provision
      for loan losses
                  
                  
                  3,102
                  
                  
                  
                  1,540
                  
                  
                  
                  81General
      and administrative expenses
                  
                  
                  4,061
                  
                  
                  
                  4,059
                  
                  
                  
                  524Total
      other expenses
                  
                  
                  32,867
                  
                  
                  
                  14,027
                  
                  
                  
                  1,822Income
      (loss) before income taxes
                  
                  
                  323,984
                  
                  
                  
                  (119,797
                  )
                  
                  
                  (2,901
                  )Income
      taxes
                  
                  
                  1
                  
                  
                  
                  12
                  
                  
                  
                  5Net
      income (loss)
                  
                  $
                  323,983
                  
                  
                  $
                  (119,809
                  )
                  
                  $
                  (2,906
                  )Net
      income (loss) per share-basic and diluted
                  
                  $
                  0.64
                  
                  
                  $
                  (1.90
                  )
                  
                  $
                  (0.08
                  )Weighted
      average number of shares outstanding-basic and diluted
                  
                  
                  507,042,421
                  
                  
                  
                  63,155,878
                  
                  
                  
                  37,401,737Comprehensive
      income (loss):Net
      income (loss)
                  
                  $
                  323,983
                  
                  
                  $
                  (119,809
                  )
                  
                  $
                  (2,906
                  )Other
      comprehensive income (loss):Unrealized
      gain (loss) on available-for-sale securities
                  
                  
                  260,309
                  
                  
                  
                  (421,125
                  )
                  
                  
                  10,153Reclassification
      adjustment for net losses included in net
                    income
      for other-than-temporary credit impairment losses
                  
                  
                  9,996
                  
                  
                  
                  -
                  
                  
                  
                  -Reclassification
      adjustment for realized (gains) losses
                    included
      in net income (loss)
                  
                  
                  (103,391
                  )
                  
                  
                  144,304
                  
                  
                  
                  -Other
      comprehensive income (loss):
                  
                  
                  166,914
                  
                  
                  
                  (276,821
                  )
                  
                  
                  10,153Comprehensive
      income (loss)
                  
                  $
                  490,897
                  
                  
                  $
                  (396,630
                  )
                  
                  $
                  7,247
  70
  We had
average earning assets of $4.3 billion, $1.7 billion and $399.7 million for the
years ended December 31, 2009, 2008 and the period November 21, 2007 to December
31, 2007, respectively.  Our primary source of income is interest
income earned on our assets.  Our interest income was $298.5 million,
$105.3 million and $3.5 million for the years ended December 31, 2009, 2008 and
the period November 21, 2007 to December 31, 2007, respectively.  The
yield on our portfolio was 6.90%, 5.96% and 7.02% for the years ended December
31, 2009, 2008 and the period November 21, 2007 to December 31, 2007,
respectively.  The prepayment speeds increased to an average of 17%
CPR for the year ended December 31, 2009 from a 10% CPR for the year ended
December 31, 2008 and 9% for the period November 21, 2007 to December 31,
2007.  For the year ended December 31, 2009 as compared to the year
ended December 31, 2008, interest income increased by $193.3 million due to the
increase in the yield on average earning assets of 94 basis
points.  Interest income for the year ended December 31, 2008
increased as compared to the period November 21, 2007 to December 31, 2007 due
to the shortened period for our initial year of operations.
  Interest Expense and the Cost of
Funds
  Our
largest expense is the cost of borrowed funds.  We had average
borrowed funds of $1.7 billion, $1.3 billion and $270.6 million and total
interest expense of $35.1 million, $60.5 million and $415,000 for the years
ended December 31, 2009, 2008 and the period November 21, 2007 to December 31,
2007, respectively.  Our average cost of funds was 2.03%, 4.64% and
5.08% for the years ended December 31, 2009, 2008 and the period November 21,
2007 to December 31, 2007, respectively.   The average cost of
funds rate declined by 261 basis points and the average borrowed funds increased
by $419.8 million during the year ended December 31, 2009, when compared to the
year ended December 31, 2008.  We attribute the decline in our
interest expense to the decline in the average cost of funds.
  The table
below shows our average borrowed funds and average cost of funds as compared to
average one-month and average six-month LIBOR for the years ended December 31,
2009 and 2008 and the quarters ended December 31, 2008 through December 31,
2009.
  Average
      Cost of FundsAverage
      Borrowed
                    Funds
                  
                  
                  Interest
                    Expense
                  
                  
                  Average
                    Cost
      of
                    Funds
                  
                  
                  Average
                    One-
                    Month
                    LIBOR
                  
                  
                  Average
                    Six-
                    Month
                    LIBOR
                  
                  
                  Average
      One-Month
                    LIBOR
                    Relative
      to Average Six-Month
                    LIBOR
                  
                  
                  Average
      Cost
                    of
      Funds
                    Relative
      to Average One-Month
                    LIBOR
                  
                  
                  Average
      Cost
                    of
      Funds
                    Relative
      to Average Six-Month
                    LIBOR(Ratios
      have been annualized, dollars in thousands)For
      the year endedDecember
      31, 2009
                  
                  $
                  1,724,698
                  
                  
                  $
                  35,083
                  
                  
                  
                  2.03
                  %
                  
                  
                  0.33
                  %
                  
                  
                  1.12
                  %
                  
                  
                  (0.79
                  %)
                  
                  
                  1.70
                  %
                  
                  
                  0.91
                  %For
      the quarter endedDecember
      31, 2009
                  
                  $
                  2,266,357
                  
                  
                  $
                  8,530
                  
                  
                  
                  1.51
                  %
                  
                  
                  0.24
                  %
                  
                  
                  0.52
                  %
                  
                  
                  (0.28
                  %)
                  
                  
                  1.27
                  %
                  
                  
                  0.99
                  %For
      the quarter endedSeptember
      30, 2009
                  
                  $
                  2,207,441
                  
                  
                  $
                  9,197
                  
                  
                  
                  1.67
                  %
                  
                  
                  0.27
                  %
                  
                  
                  0.84
                  %
                  
                  
                  (0.57
                  %)
                  
                  
                  1.40
                  %
                  
                  
                  0.83
                  %For
      the quarter endedJune
      30, 2009
                  
                  $
                  1,386,535
                  
                  
                  $
                  8,313
                  
                  
                  
                  2.40
                  %
                  
                  
                  0.37
                  %
                  
                  
                  1.39
                  %
                  
                  
                  (1.02
                  %)
                  
                  
                  2.03
                  %
                  
                  
                  1.01
                  %For
      the quarter endedMarch
      31, 2009
                  
                  $
                  1,038,460
                  
                  
                  $
                  9,042
                  
                  
                  
                  3.48
                  %
                  
                  
                  0.46
                  %
                  
                  
                  1.74
                  %
                  
                  
                  (1.28
                  %)
                  
                  
                  3.02
                  %
                  
                  
                  1.74
                  %For
      the year endedDecember
      31, 2008
                  
                  $
                  1,304,873
                  
                  
                  $
                  60,544
                  
                  
                  
                  4.64
                  %
                  
                  
                  2.68
                  %
                  
                  
                  3.06
                  %
                  
                  
                  (0.38
                  %)
                  
                  
                  1.96
                  %
                  
                  
                  1.58
                  %For
      the quarter endedDecember
      31, 2008
                  
                  $
                  1,105,239
                  
                  
                  $
                  10,954
                  
                  
                  
                  3.96
                  %
                  
                  
                  2.23
                  %
                  
                  
                  2.94
                  %
                  
                  
                  (0.71
                  %)
                  
                  
                  1.73
                  %
                  
                  
                  1.02
                  %
  Net
Interest Income
  Our net interest income, which equals
interest income less interest expense, totaled $263.5 million, $44.7 million and
$3.1 million for the years ended December 31, 2009, 2008 and the period November
21, 2007 to December 31, 2007, respectively. Our net interest spread, which
equals the yield on our average assets for the period less the average cost of
funds for the period, was 4.87%, 1.32% and 1.94% for the years ended December
31, 2009, 2008 and the period November 21, 2007 to December 31, 2007,
respectively.  Our net interest income increased by $218.8 million for
the year ended December 31, 2009, when compared to the year ended December 31,
2008 due to the 355 basis point increase in our net interest
spread.  Our net interest income increased by $41.6 million for the
year ended December 31, 2008 as compared to the period November 21, 2007 to
December 31, 2007.  We attribute the increase in net interest income
during the year ended December 31, 2008, when compared to the period November
21, 2007 to December 31, 2007, to the shortened operating history for
2007.
  71
  The table
below shows our average assets held, total interest income, yield on average
interest earning assets, average balance of repurchase agreements, interest
expense, average cost of funds, net interest income, and net interest rate
spread for the years ended December 31, 2009 and 2008 and the quarters ended
December 31, 2008 through December 31, 2009.
  Net
      Interest IncomeAverage
                      Earning
      Assets Held
                    
                    
                    Interest
                      Earned
      on
                      Assets
                    
                    
                    Yield
      on
                      Average
                      Interest
                      Earning
                      Assets
                    
                    
                    Average
      Debt Balance
                    
                    
                    Interest
                      Expense
                    
                    
                    Average
      Cost
                      of
      Funds
                    
                    
                    Net
      Interest Income
                    
                    
                    Net
      Interest
                      Rate
      Spread(Ratios
      have been annualized, dollars in thousands)For
      the year endedDecember
      31, 2009
                    
                    $
                    4,328,892
                    
                    
                    $
                    298,539
                    
                    
                    
                    6.90
                    %
                    
                    $
                    1,724,698
                    
                    
                    $
                    35,083
                    
                    
                    
                    2.03
                    %
                    
                    $
                    263,456
                    
                    
                    
                    4.87
                    %For
      the quarter endedDecember
      31, 2009
                    
                    $
                    6,329,585
                    
                    
                    $
                    100,765
                    
                    
                    
                    6.37
                    %
                    
                    $
                    2,266,357
                    
                    
                    $
                    8,530
                    
                    
                    
                    1.51
                    %
                    
                    $
                    92,235
                    
                    
                    
                    4.86
                    %For
      the quarter endedSeptember
      30, 2009
                    
                    $
                    5,433,321
                    
                    
                    $
                    104,690
                    
                    
                    
                    7.71
                    %
                    
                    $
                    2,207,441
                    
                    
                    $
                    9,197
                    
                    
                    
                    1.67
                    %
                    
                    $
                    95,493
                    
                    
                    
                    6.04
                    %For
      the quarter endedJune
      30, 2009
                    
                    $
                    3,812,897
                    
                    
                    $
                    65,077
                    
                    
                    
                    6.83
                    %
                    
                    $
                    1,386,535
                    
                    
                    $
                    8,313
                    
                    
                    
                    2.40
                    %
                    
                    $
                    56,764
                    
                    
                    
                    4.43
                    %For
      the quarter endedMarch
      31, 2009
                    
                    $
                    1,739,767
                    
                    
                    $
                    28,007
                    
                    
                    
                    6.44
                    %
                    
                    $
                    1,038,460
                    
                    
                    $
                    9,042
                    
                    
                    
                    3.48
                    %
                    
                    $
                    18,965
                    
                    
                    
                    2.96
                    %For
      the year endedDecember
      31, 2008
                    
                    $
                    1,711,705
                    
                    
                    $
                    105,259
                    
                    
                    
                    5.96
                    %
                    
                    $
                    1,304,873
                    
                    
                    $
                    60,544
                    
                    
                    
                    4.64
                    %
                    
                    $
                    44,715
                    
                    
                    
                    1.32
                    %For
      the quarter endedDecember
      31, 2008
                    
                    $
                    1,621,205
                    
                    
                    $
                    23,656
                    
                    
                    
                    5.74
                    %
                    
                    $
                    1,105,239
                    
                    
                    $
                    10,954
                    
                    
                    
                    3.96
                    %
                    
                    $
                    12,702
                    
                    
                    
                    1.78
                    %
  Management
Fee, Loan Loss Provision and General and Administrative Expenses
  We paid
FIDAC a management fee of $25.7 million, $8.4 million and $1.2 million for the
years ended December 31, 2009, 2008 and the period November 21, 2007 to December
31, 2007, respectively.  We attribute the $17.3 million increase in
management fees recorded during the year ended December 31, 2009, when compared
to the year ended December 31, 2008, to the increase in stockholders equity
resulting from our April and May 2009 secondary offerings.  Our
management fee increased by $7.2 million for the period ending December 31,
2008, when compared to the period November 21, 2007 to December 31,
2007.  The increase in management fees reflects the increase in
stockholder’s equity from our October 2008 secondary offering and our short
operating history for the period November 21, 2007 to December 31,
2007.
  The loan
loss provision was $3.1 million, $1.5 million and $81,000 for the years ended
December 31, 2009, 2008 and the period November 21, 2007 to December 31, 2007,
respectively.  Our loan loss provision increased by $1.6 million for
the year ending December 31, 2009, when compared to the year ending December 31,
2008 due to management’s estimate of the effect that increasing rates of
delinquencies, foreclosure and bankruptcy activities specific to our securitized
loans and the broader mortgage market as a whole will have on the realizable
value our securitized loan portfolio.  The loan loss provision for the
year ending December 31, 2008 increased by $1.5 million when compared to the
period November 21, 2007 to December 31, 2007.  This increase in the
provision is attributable to the increase in the principal value of the loan
portfolio.
  General
and administrative expenses, or G&A, were $4.1 million, $4.1 million and
$524,000 for the years ended December 31, 2009, 2008 and the period November 21,
2007 to December 31, 2007, respectively.  G&A remained relatively
unchanged for the year ending December 31, 2009, when compared to the year
ending December 31, 2008.  Our G&A expenses increased by $3.5
million for the year ended December 31, 2008, when compared to the period
November 21, 2007 to December 31, 2007, largely due to the short period of our
operating history during 2007.
  72
  Total
expenses as a percentage of average total assets were 0.99%, 0.85% and 1.55% for
the years ended December 31, 2009, 2008 and the period November 21, 2007 to
December 31, 2007, respectively.
  From our
inception through 2009, FIDAC has waived its right to require us to pay our pro
rata portion of rent, telephone, utilities, office furniture, equipment,
machinery and other office, internal and overhead expenses of FIDAC and its
affiliates required for our operations.
  The table
below shows our total management fee, loan loss provision and G&A expenses
as compared to average total assets and average equity for the years ended
December 31, 2009 and 2008 and the quarters ended December 31, 2008 through
December 31, 2009.
  Management
      Fees, Loan Loss Provision and G&A Expenses and Operating Expense
      RatiosTotal
                    Management
                    Fee,
      Loan Loss Provision and
                    G&A
      Expenses
                  
                  
                  Management
      Fee, Loan Loss
                    Provision
      and
                    G&A
                    Expenses/Total
      Assets
                  
                  
                  Management
      Fee, Loan Loss
                    Provision
      and
                    G&A
      Expenses/Average Equity(Ratios
      have been annualized, dollars in thousands)For
      the year ended December 31, 2009
                  
                  $
                  32,867
                  
                  
                  
                  0.99
                  %
                  
                  
                  2.25
                  %For
      the quarter ended December 31, 2009
                  
                  $
                  11,446
                  
                  
                  
                  1.02
                  %
                  
                  
                  2.12
                  %For
      the quarter ended September 30, 2009
                  
                  $
                  9,753
                  
                  
                  
                  0.91
                  %
                  
                  
                  1.89
                  %For
      the quarter ended June 30, 2009
                  
                  $
                  7,946
                  
                  
                  
                  1.08
                  %
                  
                  
                  2.67
                  %For
      the quarter ended March 31, 2009
                  
                  $
                  3,722
                  
                  
                  
                  0.94
                  %
                  
                  
                  3.51
                  %For
      the year ended December 31, 2008
                  
                  $
                  14,027
                  
                  
                  
                  0.85
                  %
                  
                  
                  3.50
                  %For
      the quarter ended December 31, 2008
                  
                  $
                  3,918
                  
                  
                  
                  1.10
                  %
                  
                  
                  4.78
                  %
  Net
Income (Loss) and Return on Average Equity
  Our net
income was $324.0 million for the year ended December 31, 2009.  Our
net loss was $119.8 million and $2.9 million for the year ended December 31,
2008 and for the period November 21, 2007 to December 31, 2007,
respectively.  We attribute the $443.8 million increase in net income
for the year ended December 31, 2009, when compared to the year ended December
31, 2008 to realized gains on sales of investments equal to $103.6 million
during 2009 and realized losses on sales of investments totaling $144.3 million
during 2008.  In addition, our net interest income increased by $218.7
million for the year ending December 31, 2009, when compared to December 31,
2008.  The table below shows our net interest income, loss on sale of
assets and termination of interest rate swaps, unrealized gains (loss) on
interest rate swaps, total expenses, income tax, each as a percentage of average
equity, and the return on average equity for the years ended December 31, 2009
and 2008 and the quarters ended December 31, 2008 through December 31,
2009.
 Components
      of Return on Average EquityNet
      Interest Income/Average Equity
                
                
                Realized
      Gain
                  (Loss)
      on Sales,
                  Credit
      Losses
                  and
                  OTTI/Average
                  Equity
                
                
                Unrealized
                  Gain
      (Loss) on
                  Interest
      Rate Swaps/Average Equity
                
                
                Total
                  Expenses/
                  Average
                  Equity
                
                
                Income
                  Tax/Average
                  Equity
                
                
                Return
      on
                  Average
                  Equity(Ratios
      have been annualized)For
      the year ended December 31, 2009
                
                
                18.03
                %
                
                
                6.41
                %
                
                
                0.00
                %
                
                
                (2.25
                %)
                
                
                0.00
                %
                
                
                22.19
                %For
      the quarter ended December 31, 2009
                
                
                17.09
                %
                
                
                2.72
                %
                
                
                0.00
                %
                
                
                (2.12
                %)
                
                
                0.00
                %
                
                
                17.69
                %For
      the quarter ended September 30, 2009
                
                
                18.47
                %
                
                
                13.97
                %
                
                
                0.00
                %
                
                
                (1.89
                %)
                
                
                0.00
                %
                
                
                30.55
                %For
      the quarter ended June 30, 2009
                
                
                19.08
                %
                
                
                0.95
                %
                
                
                0.00
                %
                
                
                (2.67
                %)
                
                
                0.00
                %
                
                
                17.36
                %For
      the quarter ended March 31, 2009
                
                
                17.91
                %
                
                
                3.42
                %
                
                
                0.00
                %
                
                
                (3.51
                %)
                
                
                0.00
                %
                
                
                17.82
                %For
      the year ended December 31, 2008
                
                
                11.17
                %
                
                
                (38.64
                %)
                
                
                1.04
                %
                
                
                (3.50
                %)
                
                
                0.00
                %
                
                
                (29.93
                %)For
      the quarter ended December 31, 2008
                
                
                15.50
                %
                
                
                0.00
                %
                
                
                0.00
                %
                
                
                (4.78
                %)
                
                
                0.00
                %
                
                
                10.72
                %
  73
  Liquidity
and Capital Resources
  Liquidity
measures our ability to meet cash requirements, including ongoing commitments to
repay our borrowings, fund and maintain RMBS, mortgage loans and other assets,
pay dividends and other general business needs.  Our principal sources
of capital and funds for additional investments primarily include earnings from
our investments, borrowings under securitizations, repurchase agreements and
other financing facilities, and proceeds from equity offerings.  We
expect these sources of financing will be sufficient to meet our short-term
liquidity needs.
  We expect
to continue to borrow funds in the form of repurchase agreements as well as
other types of financing.  The terms of the repurchase transaction
borrowings under our master repurchase agreements generally conform to the terms
in the standard master repurchase agreement as published by the Securities
Industry and Financial Markets Association, or SIFMA, as to repayment, margin
requirements and the segregation of all securities we have initially sold under
the repurchase transaction.  In addition, each lender typically
requires that we include supplemental terms and conditions to the standard
master repurchase agreement.  Typical supplemental terms and
conditions include changes to the margin maintenance requirements, required
haircuts, purchase price maintenance requirements, requirements that all
controversies related to the repurchase agreement be litigated in a particular
jurisdiction and cross default provisions.  These provisions will
differ for each of our lenders and will not be determined until we engage in a
specific repurchase transaction.
  For our
short-term (one year or less) and long-term liquidity, which include investing
and compliance with collateralization requirements under our repurchase
agreements (if the pledged collateral decreases in value or in the event of
margin calls created by prepayments of the pledged collateral), we also rely on
the cash flow from investments, primarily monthly principal and interest
payments to be received on our RMBS and whole mortgage loans, cash flow from the
sale of securities as well as any primary securities offerings authorized by our
board of directors.
  Based on
our current portfolio, leverage ratio and available borrowing arrangements, we
believe our assets will be sufficient to enable us to meet anticipated
short-term (one year or less) liquidity requirements such as to fund our
investment activities, pay fees under our management agreement, fund our
distributions to stockholders and pay general corporate expenses. However, a
decline in the value of our collateral or an increase in prepayment rates
substantially above our expectations could cause a temporary liquidity shortfall
due to the timing of the necessary margin calls on the financing arrangements
and the actual receipt of the cash related to principal paydowns. If our cash
resources are at any time insufficient to satisfy our liquidity requirements, we
may have to sell debt or additional equity securities in a common stock
offering. If required, the sale of RMBS or whole mortgage loans at prices lower
than their carrying value would result in losses and reduced
income.
  Our
ability to meet our long-term (greater than one year) liquidity and capital
resource requirements will be subject to obtaining additional debt financing and
equity capital. Subject to our maintaining our qualification as a REIT, we
expect to use a number of sources to finance our investments, including
repurchase agreements, warehouse facilities, securitization, commercial paper
and term financing CDOs.  Such financing will depend on market
conditions for capital raises and for the investment of any proceeds. If we are
unable to renew, replace or expand our sources of financing on substantially
similar terms, it may have an adverse effect on our business and results of
operations. Upon liquidation, holders of our debt securities and shares of
preferred stock and lenders with respect to other borrowings will receive a
distribution of our available assets prior to the holders of our common
stock.
  We held
cash and cash equivalents of approximately $24.3 million, $27.5 million and $6.0
million at December 31, 2009, 2008 and 2007, respectively.
  Our
operating activities provided net cash of approximately $168.7 million and $30.7
million and used cash of approximately $1.5 million for the years ended December
31, 2009, 2008 and the period November 21, 2007 to December 31, 2007,
respectively.
  Our
investing activities used net cash of $2.8 billion, $1.1 billion and $795.6
million for the years ended December 31, 2009, 2008 and the period November 21,
2007 to December 31, 2007, respectively, primarily for the purchases of
investments and the securitizations which were accounted for as
sales.
  74
 Our
financing activities as of December 31, 2009 consisted of net proceeds from our
April and May, 2009 secondary offerings in which we raised approximately $1.5
billion, repurchase agreements, and payments received on our
securitizations.  We currently have established uncommitted repurchase
agreements for RMBS with 18 counterparties, including Annaly. As of December 31,
2009, we had $259.0 million outstanding under our repurchase agreement with
Annaly, which constituted 10.95% of our total financing.  As of
December 31, 2009, our repurchase agreement with Annaly has weighted average
borrowing rates of 1.72% and weighted average remaining maturities of 5
days.  This agreement is collateralized by our RMBS which had an
estimated fair value of $314.3 million at December 31, 2009.  The
interest rates of these repurchase agreements are generally indexed to the
one-month LIBOR rate and reprice accordingly.
 
 Our
financing activities as of December 31, 2008 consisted of net proceeds from our
October 2008 secondary offerings in which we raised approximately $299.6
million, repurchase agreements, and the debt obligations of a $619.7 million
securitization which was accounted for as a financing.  As of December
31, 2008 we had established uncommitted repurchase agreements for RMBS with 13
counterparties, including Annaly.  As of December 31, 2008, we had
$562.1 million outstanding under our repurchase agreement with Annaly, which
constituted approximately 53% of our total financing.  At December 31,
2008, our repurchase agreement with Annaly had weighted average borrowing rates
of 1.43% and weighted average remaining maturities of 2 days.  This
agreement is collateralized by our RMBS which had an estimated fair value of
$680.8 million at December 31, 2008.  The interest rates of these
repurchase agreements are generally indexed to the one-month LIBOR rate and
reprice accordingly.
 
 AtDecember
31, 2009 and 2008, the repurchase agreements for RMBS had the following
remaining maturities:
  December
      31, 2009
                  
                  
                  December
      31, 2008(dollars
      in thousands)Overnight
                  
                  $
                  -
                  
                  
                  $
                  -1-30
      days (1)
                  
                  
                  1,772,662
                  
                  
                  
                  562,11930
      to 59 days
                  
                  
                  62,243
                  
                  
                  
                  -60
      to 89 days
                  
                  
                  -
                  
                  
                  
                  -90
      to 119 days
                  
                  
                  -
                  
                  
                  
                  -Greater
      than or equal to 120 days
                  
                  
                  140,497
                  
                  
                  
                  -Total
                  
                  $
                  1,975,402
                  
                  
                  $
                  562,119(1)
      Repurchase agreements with affiliates totalled $259.0 million and $562.1
      million for the years ended December 31, 2009 and 2008,
      respectively.
  We are
not required to maintain any specific debt-to-equity ratio as we believe the
appropriate leverage for the particular assets we are financing depends on the
credit quality and risk of those assets.  At December 31, 2009, 2008
and 2007, our total debt was approximately $2.4 billion, $1.1 billion and $270.6
million, which represented a debt-to-equity ratio of approximately 1.1:1, 2.5:1
and 0.5:1, respectively.
  Stockholders’
Equity
  OnApril
15, 2009, we announced the sale of 235,000,000 shares of common stock at $3.00
per share for estimated proceeds, less the underwriters’ discount and offering
expenses, of $674.8 million.  Immediately following the sale of these
shares Annaly purchased 24,955,752 shares at the same price per share as the
public offering, for proceeds of approximately $74.9 million. In addition, on
April 16, 2009 the underwriters exercised the option to purchase up to an
additional 35,250,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters’ discount, of approximately $101.3 million.
These sales were completed on April 21, 2009.  In all, we raised net
proceeds of approximately $850.9 in these offerings.
 
 On May
27, 2009, we announced the sale of 168,000,000 shares of common stock at $3.22
per share for estimated proceeds, less the underwriters’ discount and offering
expenses, of $519.3 million.  Immediately following the sale of these
shares Annaly purchased 4,724,017 shares at the same price per share as the
public offering, for proceeds of approximately $15.2 million. In addition, on
June 1, 2009 the underwriters exercised the option to purchase up to an
additional 25,200,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters’ discount, of approximately $77.9 million. These
sales were completed on June 2, 2009.  In all, we raised net proceeds
of approximately $612.4 million in these offerings.
 75
 On
October 24, 2008, we announced the sale of 110,000,000 shares of common stock at
$2.25 per share for estimated proceeds, less the underwriters’ discount and
offering expenses, of $238.8 million.  Immediately following the sale
of these shares Annaly purchased 11,681,415 shares at the same price per share
as the public offering, for proceeds of approximately $26.3 million. In
addition, on October 28, 2008 the underwriters exercised the option to purchase
up to an additional 16,500,000 shares of common stock to cover over-allotments
for proceeds, less the underwriters’ discount, of approximately $26.2 million.
These sales were completed on October 29, 2008.  In all, we raised net
proceeds of approximately $301.0 million in these offerings.
 
 On
September 24, 2009, we adopted a dividend reinvestment and share purchase plan,
or DRSPP.  The DRSPP provides holders of record of our common stock an
opportunity to automatically reinvest all or a portion of their cash
distributions received on common stock in additional shares of our common stock
as well as to make optional cash payments to purchase shares of our common
stock. Persons who are not already stockholders may also purchase our common
stock under the plan through optional cash payments.   The DRSPP
is administered by the Administrator, The Bank of New York Mellon.  To
date no shares were issued under the DRSPP.
 
 During
the year ended December 31, 2009, we declared dividends to common shareholders
totaling $242.4 million, or $0.43 per share.  During the year ended
December 31, 2008, we declared dividends to common shareholders totaling $28.9
million, or $0.62 per share.
 
 There was
no preferred stock issued or outstanding as of December 31, 2009 and
2008.
 
 Our
charter provides that we may issue up to 1,100,000,000 shares of stock,
consisting of up to 1,000,000,000 shares of common stock having a par value of
$0.01 per share and up to 100,000,000 shares of preferred stock having a par
value of $0.01 per share.  On May 22, 2009, we filed an amendment to
our Articles of Incorporation.  Our Articles of Incorporation
previously allowed us to issue up to a total of 550,000,000 shares of capital
stock, par value $0.01 per share.  As of May 22, 2009, we had
472,401,769 shares of common stock issued and outstanding.  To retain
the ability to issue additional shares of capital stock, we have increased the
number of shares are authorized to issue to 1,100,000,000 shares consisting of
1,000,000,000 shares of common stock, $0.01 par value per common share, and
100,000,000 shares of preferred stock, $0.01 par value per preferred
share.
 Management
Agreement and Related Party Transactions
 
 Management
Agreement
 
 On
November 15, 2007 we entered into a management agreement with FIDAC, pursuant to
which FIDAC is entitled to receive a management fee and, in certain
circumstances, a termination fee and reimbursement of certain expenses as
described in the management agreement.  Such fees and expenses do not
have fixed and determinable payments.  The management fee is payable
quarterly in arrears in an amount equal to 1.50% per annum, calculated
quarterly, of our stockholders’ equity (as defined in the management
agreement).  FIDAC uses the proceeds from its management fee in part
to pay compensation to its officers and employees who, notwithstanding that
certain of them also are our officers, receive no cash compensation directly
from us.  The management fee will be reduced, but not below zero, by
our proportionate share of any CDO base management fees FIDAC receives in
connection with the CDOs in which we invest, based on the percentage of equity
we hold in such CDOs.
 
 Financing
Arrangements with Annaly
 
 In March
2008, we entered into a RMBS repurchase agreement with Annaly.  This
agreement contains customary representations, warranties and covenants contained
in such agreements.  As of December 31, 2009 and 2008, we had $259.0
million, $562.1 million outstanding under the agreement with a weighted average
borrowing rate of 1.72% and 1.43%.
 
 Restricted
Stock Grants
 
 We
granted 1,301,000 shares of restricted stock to our Manager’s employees and
members of our board of directors during the year ended December 31,
2008.   During the years ended December 31, 2009 and 2008,
128,900 and 140,900 shares of restricted stock we had awarded to FIDAC’s
employees and our board members vested and 4,075 and 17,880 shares were
forfeited or cancelled, respectively.  At December 31, 2009 and 2008
there are approximately 1.0 million and 1.2 million unvested shares of
restricted stock issued to employees of FIDAC, respectively.  For the
years ended December 31, 2009 and 2008, compensation expense less general and
administrative costs associated with the amortization of the fair value of the
restricted stock totaled $451,150 and $1.7 million, respectively.
 76
 Contractual
Obligations and Commitments
 
 The
following tables summarize our contractual obligations at December 31, 2009 and
2008.
  December
      31, 2009Contractual
      Obligations
                
                Within
      One
                  Year
                
                
                One
      to
                  Three
      Years
                
                
                Three
      to
                  Five
      Years
                
                
                Greater
                  Than
      or
                  Equal
      to
                  Five
      Years
                
                
                Total(dollars
      in thousands)Repurchase
      agreements for RMBS (1)
                
                $
                1,975,402
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,975,402Securitized
      debt
                
                
                37,192
                
                
                
                70,885
                
                
                
                59,382
                
                
                
                240,945
                
                
                
                408,404Interest
      expense on RMBS repurchaseagreements
      (2)
                
                
                1,050
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,050Interest
      expense on securitized debt (2)
                
                
                19,708
                
                
                
                36,826
                
                
                
                30,306
                
                
                
                132,418
                
                
                
                219,258Total
                
                $
                2,033,352
                
                
                $
                107,711
                
                
                $
                89,688
                
                
                $
                373,363
                
                
                $
                2,604,114(1)
      Repurchase agreements with affiliates for $259.0 million are included in
      balance.(2)
      Interest is based on variable rates in effect as of December 31,
      2009.December
      31, 2008Contractual
      Obligations
                
                Within
      One
                  Year
                
                
                One
      to
                  Three
      Years
                
                
                Three
      to
                  Five
      Years
                
                
                Greater
                  Than
      or
                  Equal
      to
                  Five
      Years
                
                
                Total(dollars
      in thousands)Repurchase
      agreements for RMBS (1)
                
                $
                562,119
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -
                
                
                $
                562,119Securitized
      debt
                
                
                65,561
                
                
                
                112,745
                
                
                
                85,955
                
                
                
                246,535
                
                
                
                510,796Interest
      expense on RMBS repurchaseagreements
      (2)
                
                
                22
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                22Interest
      expense on securitized debt (2)
                
                
                26,469
                
                
                
                42,694
                
                
                
                31,965
                
                
                
                92,125
                
                
                
                193,253Total
                
                $
                654,171
                
                
                $
                155,439
                
                
                $
                117,920
                
                
                $
                338,660
                
                
                $
                1,266,190(1)
      Repurchase agreements with affiliates represents entire
      balance.(2)
      Interest is based on variable rates in effect as of December 31,
      2008.
  The
repurchase agreements for our repurchase facilities generally do not include
substantive provisions other than those contained in the standard master
repurchase agreement as published by the Securities Industry and Financial
Markets Association.
 
 Off-Balance
Sheet Arrangements
 
 We do not
have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities, which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited
purposes.  Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide
funding to any such entities.  As such, we are not materially exposed
to any market, credit, liquidity or financing risk that could arise if we had
engaged in such relationships.
 
 Dividends
 
 To
qualify as a REIT, we must pay annual dividends to our stockholders of at least
90% of our taxable income, determined without regard to the deduction for
dividends paid and excluding any net capital gains. We intend to pay regular
quarterly dividends to our stockholders. Before we pay any dividend, whether for
U.S. federal income tax purposes or otherwise, which would only be paid out of
available cash to the extent permitted under our financing facilities, we must
first meet any operating requirements and scheduled debt service on our
financing facilities and other debt payable.
 77
 Inflation
 
 Virtually
all of our assets and liabilities are interest rate sensitive in nature. As a
result, interest rates and other factors influence our performance far more so
than does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our consolidated financial
statements are prepared in accordance with GAAP and our distributions will be
determined by our board of directors consistent with our obligation to
distribute to our stockholders at least 90% of our REIT taxable income on an
annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost
and/or fair market value without considering inflation.
 
 Subsequent
Events
 
 On
January 28, 2010, we formed Chimera Special Holdings LLC, a Delaware limited
liability company, as a wholly owned subsidiary of Chimera Asset Holding LLC,
which is a wholly owned subsidiary of Chimera Investment
Corporation.
 
 On
January 29, 2010, we transferred $1.7 billion in principal value of our
RMBS to the CSMC 2010-1R Trust in a re-securitization transaction.  In
this transaction, we sold $128.1 million of AAA-rated fixed rate bonds to third
party investors for net proceeds of $127.7 million.  We retained
$563.6 million of AAA-rated bonds, $1.0 billion in subordinated bonds and the
owner trust certificate, and interest only bonds with a notional value of $1.6
billion.  The subordinated bonds and the owner trust certificate
provide credit support to the AAA-rated bonds.  The bonds issued by
the trust are collateralized by RMBS that were transferred to the CSMC 2010-1R
Trust.
 
 Item 7A.  Quantitative and Qualitative Disclosures About
Market
Risk
 
 The
primary components of our market risk are related to credit risk, interest rate
risk, prepayment risk, market value risk and real estate market risk. While we
do not seek to avoid risk completely, we believe the risk can be quantified from
historical experience and we seek to actively manage that risk, to earn
sufficient compensation to justify taking those risks and to maintain capital
levels consistent with the risks we undertake.
 
 Credit
Risk
 
 We are
subject to credit risk in connection with our investments and face more credit
risk on assets we own which are rated below ‘‘AAA’’. The credit risk related to
these investments pertains to the ability and willingness of the borrowers to
pay, which is assessed before credit is granted or renewed and periodically
reviewed throughout the loan or security term. We believe that residual loan
credit quality is primarily determined by the borrowers’ credit profiles and
loan characteristics. Our Manager uses a comprehensive credit review process.
Our Manager’s analysis of loans includes borrower profiles, as well as valuation
and appraisal data. Our Manager uses compensating factors such as liquid assets,
low loan to value ratios and job stability in evaluating loans.  Our
Manager’s resources include a proprietary portfolio management system, as well
as third party software systems. Our Manager utilizes a third party due
diligence firm to perform an independent underwriting review to insure
compliance with existing guidelines. Our Manager selects loans for review
predicated on risk-based criteria such as loan-to-value, borrower’s credit
score(s) and loan size. Our Manager  also outsources underwriting
services to review higher risk loans, either due to borrower credit profiles or
collateral valuation issues. In addition to statistical sampling techniques, our
Manager creates adverse credit and valuation samples, which we individually
review. Our Manager rejects loans that fail to conform to our standards. Our
Manager will accept only those loans which meet our underwriting criteria. Once
we own a loan, our Manager’s surveillance process includes ongoing analysis
through our proprietary data warehouse and servicer files. Additionally, the
non-Agency RMBS and other ABS which we acquire for our portfolio are reviewed by
our Manager to ensure that they satisfy our risk based criteria. Our Manager’s
review of non-Agency RMBS and other ABS includes utilizing its proprietary
portfolio management system. Our Manager’s review of non-Agency RMBS and other
ABS are based on quantitative and qualitative analysis of the risk-adjusted
returns on non-Agency RMBS and other ABS present.
 78
 Interest
Rate Risk
 
 Interest
rate risk is highly sensitive to many factors, including governmental monetary
and tax policies, domestic and international economic and political
considerations and other factors beyond our control. We are subject to interest
rate risk in connection with our investments and our related debt obligations,
which are generally repurchase agreements, warehouse facilities, securitization,
commercial paper and term financing CDOs. Our repurchase agreements and
warehouse facilities may be of limited duration that are periodically refinanced
at current market rates. We intend to mitigate this risk through utilization of
derivative contracts, primarily interest rate swap agreements.
 
 Interest
Rate Effect on Net Interest Income
 
 Our
operating results depend, in large part, on differences between the income from
our investments and our borrowing costs. Most of our warehouse facilities and
repurchase agreements provide financing based on a floating rate of interest
calculated on a fixed spread over LIBOR. The fixed spread varies depending on
the type of underlying asset which collateralizes the financing. Accordingly,
the portion of our portfolio which consists of floating interest rate assets
will be match-funded utilizing our expected sources of short-term financing,
while our fixed interest rate assets will not be match-funded. During periods of
rising interest rates, the borrowing costs associated with our investments tend
to increase while the income earned on our fixed interest rate investments may
remain substantially unchanged. This will result in a narrowing of the net
interest spread between the related assets and borrowings and may even result in
losses. Further, during this portion of the interest rate and credit cycles,
defaults could increase and result in credit losses to us, which could adversely
affect our liquidity and operating results. Such delinquencies or defaults could
also have an adverse effect on the spread between interest-earning assets and
interest-bearing liabilities. Hedging techniques are partly based on assumed
levels of prepayments of our fixed-rate and hybrid adjustable-rate mortgage
loans and RMBS. If prepayments are slower or faster than assumed, the life of
the mortgage loans and RMBS will be longer or shorter, which would reduce the
effectiveness of any hedging strategies we may use and may cause losses on such
transactions. Hedging strategies involving the use of derivative securities are
highly complex and may produce volatile returns.
 
 Interest
Rate Effects on Fair Value
 
 Another
component of interest rate risk is the effect changes in interest rates will
have on the fair value of the assets we acquire. We face the risk that the fair
value of our assets will increase or decrease at different rates than that of
our liabilities, including our hedging instruments. We primarily assess our
interest rate risk by estimating the duration of our assets and the duration of
our liabilities. Duration essentially measures the market price volatility of
financial instruments as interest rates change. We generally calculate duration
using various financial models and empirical data. Different models and
methodologies can produce different duration numbers for the same
securities.
 
 It is
important to note that the impact of changing interest rates on fair value can
change significantly when interest rates change beyond 100 basis points from
current levels. Therefore, the volatility in the fair value of our assets could
increase significantly when interest rates change beyond 100 basis points. In
addition, other factors impact the fair value of our interest rate-sensitive
investments and hedging instruments, such as the shape of the yield curve,
market expectations as to future interest rate changes and other market
conditions. Accordingly, in the event of changes in actual interest rates, the
change in the fair value of our assets would likely differ from that shown above
and such difference might be material and adverse to our
stockholders.
 
 Interest
Rate Cap Risk
 
 We also
invest in adjustable-rate mortgage loans and RMBS. These are mortgages or RMBS
in which the underlying mortgages are typically subject to periodic and lifetime
interest rate caps and floors, which limit the amount by which the security’s
interest yield may change during any given period. However, our borrowing costs
pursuant to our financing agreements will not be subject to similar
restrictions. Therefore, in a period of increasing interest rates, interest rate
costs on our borrowings could increase without limitation by caps, while the
interest-rate yields on our adjustable-rate mortgage loans and RMBS would
effectively be limited. This problem will be magnified to the extent we acquire
adjustable-rate RMBS that are not based on mortgages which are fully indexed. In
addition, the mortgages or the underlying mortgages in an RMBS may be subject to
periodic payment caps that result in some portion of the interest being deferred
and added to the principal outstanding. This could result in our receipt of less
cash income on our adjustable-rate mortgages or RMBS than we need in order to
pay the interest cost on our related borrowings. These factors could lower our
net interest income or cause a net loss during periods of rising interest rates,
which would harm our financial condition, cash flows and results of
operations.
 79


Interest
Rate Mismatch Risk





We intend
to fund a substantial portion of our acquisitions of hybrid adjustable-rate
mortgages and RMBS with borrowings that, after the effect of hedging, have
interest rates based on indices and repricing terms similar to, but of somewhat
shorter maturities than, the interest rate indices and repricing terms of the
mortgages and RMBS. Thus, we anticipate that in most cases the interest rate
indices and repricing terms of our mortgage assets and our funding sources will
not be identical, thereby creating an interest rate mismatch between assets and
liabilities. Therefore, our cost of funds would likely rise or fall more quickly
than would our earnings rate on assets. During periods of changing interest
rates, such interest rate mismatches could negatively impact our financial
condition, cash flows and results of operations. To mitigate interest rate
mismatches, we may utilize the hedging strategies discussed above. Our analysis
of risks is based on our Manager’s experience, estimates, models and
assumptions. These analyses rely on models which utilize estimates of fair value
and interest rate sensitivity. Actual economic conditions or implementation of
investment decisions by our management may produce results that differ
significantly from the estimates and assumptions used in our models and the
projected results shown in this Form 10-K.





Our profitability and the value of our
portfolio (including interest rate swaps) may be adversely affected during any
period as a result of changing interest rates.  The following table
quantifies the potential changes in net interest income, portfolio value should
interest rates go up or down 25, 50, and 75 basis points, assuming the yield
curves of the rate shocks will be parallel to each other and the current yield
curve.  All changes in income and value are measured as percentage
changes from the projected net interest income and portfolio value at the base
interest rate scenario.  The base interest rate scenario assumes
interest rates at December 31, 2009 and various estimates regarding prepayment
and all activities are made at each level of rate shock.  Actual
results could differ significantly from these estimates.




Change
      in Interest Rate
              Projected
      Percentage Change in Net
                Interest
      Income %
              Projected
      Percentage Change in
                Portfolio
      Value %-75
      Basis Points
              8.05%
              4.59%-50
      Basis Points
              6.00%
              3.05%-25
      Basis Points
              2.93%
              1.52%Base
      Interest Rate+25
      Basis Points
              (4.62%)
              (1.51%)+50
      Basis Points
              (6.51%)
              (3.01%)+75
      Basis Points
              (8.40%)
              (4.50%)




Prepayment
Risk
 
 As we
receive prepayments of principal on these investments, premiums paid on such
investments are amortized against interest income. In general, an increase in
prepayment rates will accelerate the amortization of purchase premiums, thereby
reducing the interest income earned on the investments. Conversely, discounts on
such investments are accreted into interest income.
 
 Extension
Risk
 
 Our Manager computes
the projected weighted-average life of our investments based on assumptions
regarding the rate at which the borrowers will prepay the underlying mortgages.
In general, when fixed-rate or hybrid adjustable-rate mortgage loans or RMBS are
acquired with borrowings, we may, but are not required to, enter into an
interest rate swap agreement or other hedging instrument that effectively fixes
our borrowing costs for a period close to the anticipated average life of the
fixed-rate portion of the related assets. This strategy is designed to protect
us from rising interest rates because the borrowing costs are fixed for the
duration of the fixed-rate portion of the related assets.  However, if
prepayment rates decrease in a rising interest rate environment, the life of the
fixed-rate portion of the related assets could extend beyond the term of the
swap agreement or other hedging instrument. This could have a negative impact on
our results from operations, as borrowing costs would no longer be fixed after
the end of the hedging instrument while the income earned on the hybrid
adjustable-rate assets would remain fixed. This situation may also cause the
market value of our hybrid adjustable-rate assets to decline, with little or no
offsetting gain from the related hedging transactions. In extreme situations, we
may be forced to sell assets to maintain adequate liquidity, which could cause
us to incur losses.
 80


Market
Risk





Market
Value Risk





Our
available-for-sale securities are reflected at their estimated fair value with
unrealized gains and losses excluded from earnings and reported in
OCI.  The estimated fair value of these securities fluctuates
primarily due to changes in interest rates and other
factors.  Generally, in a rising interest rate environment, the
estimated fair value of these securities would be expected to decrease;
conversely, in a decreasing interest rate environment, the estimated fair value
of these securities would be expected to increase.  As market
volatility increases or liquidity decreases, the fair value of our investments
may be adversely impacted.  If we are unable to readily obtain
independent pricing to validate our estimated fair value of securities in the
portfolio, the fair value gains or losses recorded in OCI may be adversely
affected.





Real
Estate Risk





We own assets secured
by real property and may own real property directly in the
future.  Residential property values are subject to volatility and may
be affected adversely by a number of factors, including, but not limited to,
national, regional and local economic conditions (which may be adversely
affected by industry slowdowns and other factors); local real estate conditions
(such as an oversupply of housing); changes or continued weakness in specific
industry segments; construction quality, age and design; demographic factors;
and retroactive changes to building or similar codes. In addition, decreases in
property values reduce the value of the collateral and the potential proceeds
available to a borrower to repay our loans, which could also cause us to suffer
losses.





Risk
Management





To the
extent consistent with maintaining our REIT status, we seek to manage risk
exposure to protect our portfolio of residential mortgage loans, RMBS, and other
assets and related debt against the effects of major interest rate changes. We
generally seek to manage our risk by:





·
            monitoring
      and adjusting, if necessary, the reset index and interest rate related to
      our RMBS and our financings;





·
            attempting
      to structure our financings agreements to have a range of different
      maturities, terms, amortizations and interest rate adjustment
      periods;





·
            using
      derivatives, financial futures, swaps, options, caps, floors and forward
      sales to adjust the interest rate sensitivity of our MBS and our
      borrowings;





·
            using
      securitization financing to lower average cost of funds relative to
      short-term financing vehicles further allowing us to receive the benefit
      of attractive terms for an extended period of time in contrast to short
      term financing and maturity dates of the investments included in the
      securitization; and





·
            actively
      managing, on an aggregate basis, the interest rate indices, interest rate
      adjustment periods, and gross reset margins of our MBS and the interest
      rate indices and adjustment periods of our
  financings.





Our
efforts to manage our assets and liabilities are concerned with the timing and
magnitude of the repricing of assets and liabilities.  We attempt to
control risks associated with interest rate movements.  Methods for
evaluating interest rate risk include an analysis of our interest rate
sensitivity “gap”, which is the difference  between interest-earning
assets and interest-bearing liabilities maturing or repricing within a given
time period.  A gap is considered positive when the amount of
interest-rate sensitive assets exceeds the amount of interest-rate sensitive
liabilities.  A gap is considered negative when the amount of
interest-rate sensitive liabilities exceeds interest-rate sensitive
assets.  During a period of rising interest rates, a negative gap
would tend to adversely affect net interest income, while a positive gap would
tend to result in an increase in net interest income.  During a period
of falling interest rates, a negative gap would tend to result in an increase in
net interest income, while a positive gap would tend to affect net interest
income adversely.  Because different types of assets and liabilities
with the same or similar maturities may react differently to changes in overall
market rates or conditions, changes in interest rates may affect net interest
income positively or negatively even if an institution were perfectly matched in
each maturity category.


81


The following table sets forth the
estimated maturity or repricing of our interest-earning assets and
interest-bearing liabilities at December 31, 2009.  The amounts of
assets and liabilities shown within a particular period were determined in
accordance with the contractual terms of the assets and liabilities, except
adjustable-rate loans, and securities are included in the period in which their
interest rates are first scheduled to adjust and not in the period in which they
mature and does include the effect of the interest rate swaps.  The
interest rate sensitivity of our assets and liabilities in the table could vary
substantially if based on actual prepayment experience.
 Within
      3
                  Months
                
                
                3-12
      Months
                
                
                1
      Year to
                  3
      Years
                
                
                Greater
      than
                  3
      Years
                
                
                TotalRate
      sensitive assets
                
                $
                3,465,428
                
                
                $
                212,743
                
                
                $
                1,682,238
                
                
                $
                1,099,493
                
                
                $
                6,459,902Cash
      equivalents
                
                
                24,279
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                24,279Total
      rate sensitive assets
                
                
                3,489,707
                
                
                
                212,743
                
                
                
                1,682,238
                
                
                
                1,099,493
                
                
                
                6,484,181Rate
      sensitive liabilities
                
                
                2,243,309
                
                
                
                140,497
                
                
                
                -
                
                
                
                -
                
                
                
                2,383,806Interest
      rate sensitivity gap
                
                $
                1,246,398
                
                
                $
                72,246
                
                
                $
                1,682,238
                
                
                $
                1,099,493
                
                
                $
                4,100,375Cumulative
      rate sensitivity gap
                
                $
                1,246,398
                
                
                $
                1,318,644
                
                
                $
                3,000,882
                
                
                $
                4,100,375Cumulative
      interest rate sensitivity gap as apercentage
      of total rate sensitive assets
                
                
                19
                %
                
                
                20
                %
                
                
                46
                %
                
                
                63
                %




Our
analysis of risks is based on our manager’s experience, estimates, models and
assumptions.  These analyses rely on models which utilize estimates of
fair value and interest rate sensitivity.  Actual economic conditions
or implementation of investment decisions by our manager may produce results
that differ significantly from the estimates and assumptions used in our models
and the projected results shown in the above tables and in this Form
10-K.  These analyses contain certain forward-looking statements and
are subject to the safe harbor statement set forth under the heading, “Special
Note Regarding Forward-Looking Statements.”
 
 Item 8.  Financial Statements and Supplementary
Data
 
 Our
consolidated financial statements and the related notes, together with the
Report of Independent Registered Public Accounting Firm thereon, are set forth
on pages F-1 through F-26 of this Form 10-K.
  Item 9.  Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
 
 None.
 
 Item 9A.  Controls and Procedures
 
 Our
management, including our Chief Executive Officer, or CEO and Chief Financial
Officer, or CFO, reviewed and evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of the
period covered by this annual report.  Based on that review and evaluation,
the CEO and CFO have concluded that our current disclosure controls and
procedures, as designed and implemented, (1) were effective in ensuring that
information regarding the Company and its subsidiaries is made known to our
management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure and (2) were effective in providing reasonable
assurance that information the Company must disclose in its periodic reports
under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods prescribed by the SEC’s rules and
forms.
  There
have been no changes in the Company’s internal controls over financial reporting
that occurred during the quarter ended December 31, 2009 that have materially
affected, or are reasonably likely to affect its internal control over financial
reporting.
 82


Management
Report On Internal Control Over Financial Reporting






Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting.  Internal control over financial
reporting is defined in Rules 13a-15(f) under the Securities Exchange Act as a
process designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the Company’s Board
of Directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures
that:




·
            pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company; ·
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the Company
      are being made only in accordance with authorizations of management and
      directors of the Company; and ·
                provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized 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.  As a result, even systems
determined to be effective can provide only reasonable assurance regarding the
preparation and presentation of financial statements.  Moreover,
projections of any evaluation of effectiveness to future periods are subject to
the risks that controls may become inadequate because of changes in conditions
or that the degree of compliance with the policies or procedures may
deteriorate.




The Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009.  In making this
assessment, the Company’s management used criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.




Based on management’s assessment, the Company’s management believes that, as of
December 31, 2009, the Company’s internal control over financial reporting was
effective based on those criteria.  The Company’s independent registered
public accounting firm, Deloitte & Touche LLP, has issued an attestation
report on the Company’s internal control over financial reporting.  This
report appears on page F-1 of this annual report on Form 10-K.




Item 9B.  Other Information





None.


83


PART III





Item 10. Directors, Executive Officers and Corporate
Governance





The
information required by Item 10 as to our directors is incorporated herein by
reference to the proxy statement to be filed with the SEC within 120 days after
December 31, 2009.




The
information regarding our executive officers required by Item 10 is incorporated
by reference to the proxy statement to be filed with the SEC within 120 days
after December 31, 2009.




The information required by Item 10 as
to our compliance with Section 16(a) of the Securities Exchange Act of 1934 is
incorporated by reference to the proxy statement to be filed with the SEC within
120 days after December 31, 2009.




We have
adopted a Code of Business Conduct and Ethics within the meaning of Item 406(b)
of Regulation S-K.  This Code of Business Conduct and Ethics applies
to our principal executive officer, principal financial officer and principal
accounting officer.  This Code of Business Conduct and Ethics is
publicly available on our website at www.chimerareit.com.   If we
make substantive amendments to this Code of Business Conduct and Ethics or grant
any waiver, including any implicit waiver, we intend to disclose these events on
our website.





The
information regarding certain matters pertaining to our corporate governance
required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated
by reference to the Proxy Statement to be filed with the SEC within 120 days
after December 31, 2009.





Item 11.  Executive Compensation





The
information required by Item 11 is incorporated herein by reference to the proxy
statement to be filed with the SEC within 120 days after December 31,
2009.





Item
12.  Security Ownership of Certain Beneficial Owners and Management and
Related StockholderMatters





The
information required by Item 12 is incorporated herein by reference to the proxy
statement to be filed with the SEC within 120 days after December 31,
2009.





Item 13.  Certain Relationships and Related Transactions, and
Director Independence





The
information required by Item 13 is incorporated herein by reference to the proxy
statement to be filed with the SEC within 120 days after December 31,
2009.





Item 14.  Principal Accountant Fees and Services





The
information required by Item 14 is incorporated herein by reference to the proxy
statement to be filed with the SEC within 120 days after December 31,
2009.


84


PART IV





Item 15. Exhibits, Financial Statement Schedules





(a)
Documents filed as part of this report:





1.  Financial
Statements.





2.  Schedules
to Financial Statements.





All
financial statement schedules have been omitted because they are either
inapplicable or the information required is provided in our Financial Statements
and Notes thereto, included in Part II, Item 8, of this Annual Report on Form
10-K.





3.           Exhibits:




EXHIBIT
INDEX
  Exhibit
                  Number
                Description3.1
                Articles
      of Amendment and Restatement of Chimera Investment
      Corporation  (filed as Exhibit 3.1 to the Company’s Registration
      Statement on Amendment No. 1 to Form S-11 (File No. 333-145525) filed on
      September 27, 2007 and incorporated herein by reference)3.2
                Articles
      of Amendment of Chimera Investment Corporation  (filed as Exhibit 3.1
      to the Company’s Report on Form 8-K filed on May  28, 2009 and
      incorporated herein by reference)3.3
                Amended
      and Restated Bylaws of Chimera Investment Corporation  (filed as
      Exhibit 3.2 to the Company’s Registration Statement on Amendment No. 2 to
      Form S-11 (File No. 333-145525) filed on November 5, 2007 and incorporated
      herein by reference)4.1
                Specimen
      Common Stock Certificate of Chimera Investment Corporation (filed as
      Exhibit 4.1 to the Company’s Registration Statement on Amendment No. 1 to
      Form S-11 (File No. 333-145525) filed on September 27, 2007 and
      incorporated herein by reference)10.1
                Form
      of Management Agreement between Chimera Investment Corporation and Fixed
      Income Discount Advisory Company (filed as Exhibit 10.1 to the Company’s
      Registration Statement on Amendment No. 1 to Form S-11 (File No.
      333-145525) filed on September 27, 2007 and incorporated herein by
      reference)10.2
                Form
      of Amendment No. 1 to the Management Agreement between Chimera Investment
      Corporation and Fixed Income Discount Advisory Company (filed as Exhibit
      10.2 to the Company’s Registration Statement on Amendment No. 1 to Form
      S-11 (File No. 333-151403) filed on October 14, 2008 and incorporated
      herein by reference)10.3
                Form
      of Amendment No. 2 to the Management Agreement between Chimera Investment
      Corporation and Fixed Income Discount Advisory Company (filed as Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed on October 20, 2008
      and incorporated herein by reference)10.4†
                Form
      of Equity Incentive Plan  (filed as Exhibit 10.2 to the
      Company’s Registration Statement on Amendment No. 1 to Form S-11 (File No.
      333-145525) filed on September 27, 2007 and incorporated herein by
      reference)10.5†
                Form
      of Restricted Common Stock Award (filed as Exhibit 10.3 to the Company’s
      Registration Statement on Amendment No. 1 to Form S-11 (File No.
      333-145525) filed on September 27, 2007 and incorporated herein by
      reference)10.6†
                Form
      of Stock Option Grant (filed as Exhibit 10.4 to the Company’s Registration
      Statement on Amendment No. 1 to Form S-11 (File No. 333-145525) filed on
      September 27, 2007 and incorporated herein by reference)10.7
                Form
      of Master Securities Repurchase Agreement  (filed as Exhibit
      10.5 to the Company’s Registration Statement on Amendment No. 3 to Form
      S-11 (File No. 333-145525) filed on November 13, 2007 and incorporated
      herein by reference)12.1
                Computation
      of Ratio of Earnings to Fixed Charges21.1
                Subsidiaries
      of Registrant23.3
                Consent
      of Independent Registered Public Accounting Firm.31.1
                Certification
      of Matthew Lambiase, Chief Executive Officer and President of the
      Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.31.2
                Certification
      of A. Alexandra Denahan, Chief Financial Officer of the Registrant,
      pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
                Certification
      of Matthew Lambiase, Chief Executive Officer and President of the
      Registrant, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2
                Certification
      of A. Alexandra Denahan, Chief Financial Officer of the Registrant,
      pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.




†
Represents a management contract or compensatory plan or
arrangement.
 85


CHIMERA
      INVESTMENT CORPORATIONFINANCIAL STATEMENTSReport of Independent Registered Public Accounting
      Firm
            F-2Consolidated
      Financial Statements for the years ended December 31, 2009 and
      2008Consolidated Statements of Financial
      Condition
            F-3Consolidated Statements of Operations and
      Comprehensive Income (Loss)
            F-4Consolidated Statements of Stockholders'
      Equity
            F-5Consolidated Statements of Cash Flows
            F-6Notes to Consolidated Financial
    Statements
            F-8




F-1




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 To the
Board of Directors and Stockholders of
 Chimera
Investment Corporation
 New York,
New York
 
 We have
audited the accompanying consolidated statements of financial condition of
Chimera Investment Corporation and subsidiaries (the "Company") as of December
31, 2009 and 2008, and the related consolidated statements of operations and
comprehensive income (loss), changes in stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 2009, December 31, 2008,
and for the period November 21, 2007 to December 31, 2007.  We also
have audited the Company's internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.  The Company's management is responsible for
these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management Report
On Internal Control Over Financial Reporting at Item 9A.  Our
responsibility is to express an opinion on these financial statements and an
opinion on the Company's internal control over financial reporting 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 we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide a reasonable basis for our
opinions.
 
 A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
 
 Because
of the inherent limitations of internal control over financial reporting,
including the possibility of collusion or improper management override of
controls, material misstatements due to error or fraud may not be prevented or
detected on a timely basis.  Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Chimera Investment
Corporation and subsidiaries as of December 31, 2009 and 2008, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2009, December 31, 2008, and for the period November 21, 2007
to December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.  Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on the criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
 
 /s/
Deloitte & Touche LLP
 New York,
New York
 February
25, 2010
 F-2


CHIMERA INVESTMENT CORPORATIONCONSOLIDATED
      STATEMENTS OF FINANCIAL CONDITION(dollars
      in thousands, except share and per share data)December
      31,
              2009
            
            
            December
      31,
              2008Assets:Cash
      and cash equivalents
            
            $
            24,279
            
            
            $
            27,480Non-Agency
      Mortgage-Backed Securities, at fair value
            
            
            2,398,865
            
            
            
            613,105Agency
      Mortgage-Backed Securities, at fair value
            
            
            1,690,029
            
            
            
            242,362Securitized
      loans held for investment, net of allowance for loan losses of $4.6
      million and $1.6 million, respectively
            
            
            470,533
            
            
            
            583,346Accrued
      interest receivable
            
            
            33,128
            
            
            
            9,951Other
      assets
            
            
            1,494
            
            
            
            1,257Total
      assets
            
            $
            4,618,328
            
            
            $
            1,477,501Liabilities:Repurchase
      agreements
            
            $
            1,716,398
            
            
            $
            -Repurchase
      agreements with affiliates
            
            
            259,004
            
            
            
            562,119Securitized
      debt
            
            
            390,350
            
            
            
            488,743Accrued
      interest payable
            
            
            3,235
            
            
            
            2,465Dividends
      payable
            
            
            113,788
            
            
            
            7,040Accounts
      payable and other liabilities
            
            
            472
            
            
            
            387Investment
      management fees payable to affiliate
            
            
            8,519
            
            
            
            2,292Total
      liabilites
            
            $
            2,491,766
            
            
            $
            1,063,046Commitments
      and Contingencies (Note 13)
            
            
            -
            
            
            
            -Stockholders'
      Equity:Common
      stock: par value $0.01 per share; 1,000,000,000 shares
              authorized,  670,371,587
      and 177,198,212 shares issued and outstanding,
respectively
            
            $
            6,693
            
            
            $
            1,760Additional
      paid-in-capital
            
            
            2,290,614
            
            
            
            831,966Accumulated
      other comprehensive loss
            
            
            (99,754
            )
            
            
            (266,668
            )Accumulated
      deficit
            
            
            (70,991
            )
            
            
            (152,603
            )Total
      stockholders' equity
            
            $
            2,126,562
            
            
            $
            414,455Total
      liabilities and stockholders' equity
            
            $
            4,618,328
            
            
            $
            1,477,501See
      notes to consolidated financial statements.




F-3


CHIMERA INVESTMENT
    CORPORATIONCONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(dollars
      in thousands, except share and per share data)For
      the Year Ended
              December
      31,
              2009
            
            
            For
      the Year Ended
              December
      31,
              2008
            
            
            For
      the PeriodNovember 21, to
              December
      31,
              2007Net
      Interest Income:Interest
      income
            
            $
            298,539
            
            
            $
            105,259
            
            
            $
            3,492Interest
      expense
            
            
            35,083
            
            
            
            60,544
            
            
            
            415Net
      interest income
            
            
            263,456
            
            
            
            44,715
            
            
            
            3,077Other-than-temporary
      impairments:Total
      other-than-temporary impairment losses
            
            
            (16,264
            )
            
            
            -
            
            
            
            -Non-credit
      portion of loss recognized in other comprehensive income
      (loss)
            
            
            6,268
            
            
            
            -
            
            
            
            -Net
      other-than-temporary credit impairment losses
            
            
            (9,996
            )
            
            
            -
            
            
            
            -Other
      gains (losses):Unrealized
      gains (losses)  on interest rate swaps
            
            
            -
            
            
            
            4,156
            
            
            
            (4,156
            )Realized
      gains (losses) on sales of investments, net
            
            
            103,646
            
            
            
            (144,304
            )
            
            
            -Realized
      losses on principal write-downs of non-Agency RMBS
            
            
            (255
            )
            
            
            -
            
            
            
            -Realized
      losses on terminations of interest rate swaps
            
            
            -
            
            
            
            (10,337
            )
            
            
            -Total
      other gains (losses)
            
            
            103,391
            
            
            
            (150,485
            )
            
            
            (4,156
            )Net
      investment income (expense)
            
            
            356,851
            
            
            
            (105,770
            )
            
            
            (1,079
            )Other
      expenses:Management
      fee
            
            
            25,704
            
            
            
            8,428
            
            
            
            1,217Provision
      for loan losses
            
            
            3,102
            
            
            
            1,540
            
            
            
            81General
      and administrative expenses
            
            
            4,061
            
            
            
            4,059
            
            
            
            524Total
      other expenses
            
            
            32,867
            
            
            
            14,027
            
            
            
            1,822Income
      (loss) before income taxes
            
            
            323,984
            
            
            
            (119,797
            )
            
            
            (2,901
            )Income
      taxes
            
            
            1
            
            
            
            12
            
            
            
            5Net
      income (loss)
            
            $
            323,983
            
            
            $
            (119,809
            )
            
            $
            (2,906
            )Net
      income (loss) per share-basic and diluted
            
            $
            0.64
            
            
            $
            (1.90
            )
            
            $
            (0.08
            )Weighted
      average number of shares outstanding-basic and diluted
            
            
            507,042,421
            
            
            
            63,155,878
            
            
            
            37,401,737Comprehensive
      income (loss):Net
      income (loss)
            
            $
            323,983
            
            
            $
            (119,809
            )
            
            $
            (2,906
            )Other
      comprehensive income (loss):Unrealized
      gain (loss) on available-for-sale securities
            
            
            260,309
            
            
            
            (421,125
            )
            
            
            10,153Reclassification
      adjustment for net losses included in net
              income
      for other-than-temporary credit impairment losses
            
            
            9,996
            
            
            
            -
            
            
            
            -Reclassification
      adjustment for realized (gains) losses
              included
      in net income (loss)
            
            
            (103,391
            )
            
            
            144,304
            
            
            
            -Other
      comprehensive income (loss):
            
            
            166,914
            
            
            
            (276,821
            )
            
            
            10,153Comprehensive
      income (loss)
            
            $
            490,897
            
            
            $
            (396,630
            )
            
            $
            7,247See
      notes to consolidated financial statements.





F-4


CHIMERA INVESTMENT CORPORATIONCONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY(dollars
      in thousands, except per share data)Common
      Stock
              Par
      Value
            
            
            Additional
      Paid-
              in
      Capital
            
            
            Accumulated
              Other
              Comprehensive
              Loss
            
            
            Accumulated
              Deficit
            
            
            TotalBalance,
      November 21, 2007
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -(date
      operations commenced)Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,906
            )
            
            
            (2,906
            )Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            10,153
            
            
            
            -
            
            
            
            10,153Proceeds
      from direct purchase
            
            
            -
            
            
            
            11
            
            
            
            -
            
            
            
            -
            
            
            
            11Proceeds
      from common stock offerings
            
            
            341
            
            
            
            477,910
            
            
            
            -
            
            
            
            -
            
            
            
            478,251Proceeds
      from common stock offeringsto
      affiliate
            
            
            36
            
            
            
            54,287
            
            
            
            -
            
            
            
            -
            
            
            
            54,323Common
      dividends declared,$0.025
      per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (943
            )
            
            
            (943
            )Balance,
      December 31, 2007
            
            $
            377
            
            
            $
            532,208
            
            
            $
            10,153
            
            
            $
            (3,849
            )
            
            $
            538,889Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (119,809
            )
            
            
            (119,809
            )Other
      comprehensive loss
            
            
            -
            
            
            
            -
            
            
            
            (276,821
            )
            
            
            -
            
            
            
            (276,821
            )Proceeds
      from direct purchase
            
            
            -
            
            
            
            97
            
            
            
            -
            
            
            
            -
            
            
            
            97Proceeds
      from common stock offerings
            
            
            1,265
            
            
            
            272,036
            
            
            
            -
            
            
            
            -
            
            
            
            273,301Proceeds
      from common stock offeringsto
      affiliate
            
            
            117
            
            
            
            26,166
            
            
            
            -
            
            
            
            -
            
            
            
            26,283Proceeds
      from restricted stock grants
            
            
            1
            
            
            
            1,459
            
            
            
            -
            
            
            
            -
            
            
            
            1,460Common
      dividends declared,$0.62
      per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (28,945
            )
            
            
            (28,945
            )Balance,
      December 31, 2008
            
            $
            1,760
            
            
            $
            831,966
            
            
            $
            (266,668
            )
            
            $
            (152,603
            )
            
            $
            414,455Net
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            323,983
            
            
            
            323,983Other
      comprehensive income
            
            
            -
            
            
            
            -
            
            
            
            166,914
            
            
            
            -
            
            
            
            166,914Proceeds
      from direct purchase
            
            
            -
            
            
            
            50
            
            
            
            -
            
            
            
            -
            
            
            
            50Proceeds
      from common stock offerings
            
            
            4,635
            
            
            
            1,368,246
            
            
            
            -
            
            
            
            -
            
            
            
            1,372,881Proceeds
      from common stock offeringsto
      affiliate
            
            
            296
            
            
            
            89,782
            
            
            
            -
            
            
            
            -
            
            
            
            90,078Proceeds
      from restricted stock grants
            
            
            2
            
            
            
            570
            
            
            
            -
            
            
            
            -
            
            
            
            572Common
      dividends declared,
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -$0.43
      per share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (242,371
            )
            
            
            (242,371
            )Balance,
      December 31, 2009
            
            $
            6,693
            
            
            $
            2,290,614
            
            
            $
            (99,754
            )
            
            $
            (70,991
            )
            
            $
            2,126,562See
      notes to consolidated financial statements.





F-5


CHIMERA INVESTMENT CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOW(dollars
      in thousands)For
      The Year Ended
                December
      31, 2009
              
              
              For
      The Year Ended
                December
      31, 2008
              
              
              For
      The Period
                November
      21, 2007
                to
      December 31, 2007Cash
      Flows From Operating Activites:Net
      income (loss)
              
              $
              323,983
              
              
              $
              (119,809
              )
              
              $
              (2,906
              )Adjustments
      to reconcile net income (loss) to netcash
      provided by operating activities:(Accretion)
      amortization of investment discounts
              
              
              (49,249
              )
              
              
              294
              
              
              
              (98
              )Unrealized
      (gains) losses on interest rate swaps
              
              
              -
              
              
              
              (4,156
              )
              
              
              4,156Realized
      loss on termination of interest rate swaps
              
              
              -
              
              
              
              10,337
              
              
              
              -Realized
      (gain) loss on sale of investments
              
              
              (103,646
              )
              
              
              144,304
              
              
              
              -Realized
      losses on principal write-downs of non-Agency RMBS
              
              
              255
              
              
              
              -
              
              
              
              -Net
      other-than-temporary credit impairment losses
              
              
              9,996
              
              
              
              -
              
              
              
              -Provision
      for loan losses
              
              
              3,102
              
              
              
              1,540
              
              
              
              81Restricted
      stock grants
              
              
              572
              
              
              
              1,460
              
              
              
              -Changes
      in operating assets:Increase
      in accrued interest receivable
              
              
              (23,177
              )
              
              
              (5,613
              )
              
              
              (4,337
              )Increase
      in other assets
              
              
              (237
              )
              
              
              (694
              )
              
              
              (563
              )Changes
      in operating liabilities:Increase
      (decrease) in accounts payable and other liabilities
              
              
              85
              
              
              
              (126
              )
              
              
              512Increase
      in investment management fees payable to affiliate
              
              
              6,227
              
              
              
              1,076
              
              
              
              1,217Increase
      in accrued interest payable
              
              
              770
              
              
              
              2,050
              
              
              
              415Net
      cash provided by (used in) operating activities
              
              $
              168,681
              
              
              $
              30,663
              
              
              $
              (1,523
              )Cash
      Flows From Investing Activities:Mortgage-Backed
      Securities portfolio:Purchases
              
              
              (5,324,267
              )
              
              
              (1,483,416
              )
              
              
              (368,593
              )Sales
              
              
              1,857,210
              
              
              
              567,455
              
              
              
              -Principal
      payments
              
              
              548,048
              
              
              
              174,449
              
              
              
              1,788Loans
      held for investment portfolio:Purchases
              
              
              -
              
              
              
              (735,271
              )
              
              
              (162,465
              )Sales
              
              
              -
              
              
              
              90,732
              
              
              
              -Principal
      payments
              
              
              -
              
              
              
              23,115
              
              
              
              -Securitized
      loans:Purchases
              
              
              -
              
              
              
              (111
              )
              
              
              -Principal
      payments
              
              
              108,850
              
              
              
              40,714
              
              
              
              -Reverse
      repurchase agreements
              
              
              -
              
              
              
              265,000
              
              
              
              (265,000
              )Restricted
      cash
              
              
              -
              
              
              
              1,350
              
              
              
              (1,350
              )Net
      cash used in investing activities
              
              $
              (2,810,159
              )
              
              $
              (1,055,983
              )
              
              $
              (795,620
              )Cash
      Flows From Financing Activities:Proceeds
      from repurchase agreements
              
              
              59,370,624
              
              
              
              85,585,116
              
              
              
              270,584Payments
      on repurchase agreements
              
              
              (57,957,341
              )
              
              
              (85,293,581
              )
              
              
              -Net
      proceeds from common stock offerings
              
              
              1,372,881
              
              
              
              273,301
              
              
              
              478,250Net
      proceeds from common stock offerings to affiliates
              
              
              90,078
              
              
              
              26,283
              
              
              
              54,324Proceeds
      from collateralized mortgage debt borrowings
              
              
              -
              
              
              
              526,716
              
              
              
              -Payments
      on collateralized mortgage debt borrowings
              
              
              (102,393
              )
              
              
              (37,973
              )
              
              
              -Net
      proceeds from direct purchases of common stock
              
              
              50
              
              
              
              97
              
              
              
              11Net
      payments on termination of interest rate swaps
              
              
              -
              
              
              
              (10,337
              )
              
              
              -Common
      dividends paid
              
              
              (135,622
              )
              
              
              (22,848
              )
              
              
              -Net
      cash provided by financing activities
              
              $
              2,638,277
              
              
              $
              1,046,774
              
              
              $
              803,169Net
      (decrease) increase in cash and cash equivalents
              
              
              (3,201
              )
              
              
              21,454
              
              
              
              6,026Cash
      and cash equivalents at beginning of period
              
              
              27,480
              
              
              
              6,026
              
              
              
              -Cash
      and cash equivalents at end of period
              
              $
              24,279
              
              
              $
              27,480
              
              
              $
              6,026
  F-6
 CHIMERA
      INVESTMENT CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOW(dollars
      in thousands)Supplemental
      disclosure of cash flow information:Interest
      paid
              
              $
              34,452
              
              
              $
              58,493
              
              
              $
              -Taxes
      paid
              
              $
              1
              
              
              $
              33
              
              
              $
              -Net
      cash investing activities:Payable
      for investments purchased
              
              $
              -
              
              
              $
              -
              
              
              $
              748,920Transfer
      from loans held for investment tomortgage-backed
      securities
              
              $
              -
              
              
              $
              735,271
              
              
              $
              -Net
      change in unrealized gain (loss) on available-for-sale
      securities
              
              $
              166,914
              
              
              $
              (276,821
              )
              
              $
              10,153Net
      cash financing activities:Common
      dividends declared, not yet paid
              
              $
              113,788
              
              
              $
              7,040
              
              
              $
              943See
      notes to consolidated financial statements.





F-7


CHIMERA INVESTMENT CORPORATION


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


For
the Years Ended December 31, 2009 and 2008 and the Period November 21, 2007 to
December 31, 2007





1.   Organization


Chimera
Investment Corporation (“Company”) was organized in Maryland on June 1,
2007.  The Company commenced operations on November 21, 2007 when it
completed its initial public offering.  The Company has elected to be
taxed as a real estate investment trust (“REIT”), under the Internal Revenue
Code of 1986, as amended.  As long as the Company qualifies as a REIT,
the Company will generally not be subject to U.S. federal or state corporate
taxes on its income to the extent that the Company distributes at least 90% of
its taxable net income to its stockholders.  In July 2008, the Company
formed Chimera Securities Holdings, LLC, a wholly-owned
subsidiary.  In June 2009, the Company formed Chimera Asset Holding
LLC and Chimera Holding LLC, both wholly-owned subsidiaries.  Chimera
Securities Holdings LLC, Chimera Asset Holding LLC and Chimera Holding, LLC are
qualified REIT subsidiaries.  Annaly Capital Management, Inc.
(“Annaly”) owns approximately 6.7% of the Company’s common
shares.  The Company is managed by Fixed Income Discount Advisory
Company (“FIDAC”), an investment advisor registered with the Securities and
Exchange Commission (“SEC”).  FIDAC is a wholly-owned subsidiary of
Annaly.
 
 2.  Summary
of the Significant Accounting Policies
 
 (a)
Basis of Presentation
  The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Chimera Securities Holdings, LLC, Chimera Asset
Holding LLC and Chimera Holding LLC.  All intercompany balances and
transactions have been eliminated.
  (b)
Cash and Cash Equivalents
  Cash and
cash equivalents include cash on hand and cash deposited overnight in money
market funds.
 
 (c)
Non-Agency and Agency Residential Mortgage-Backed Securities
  The
Company invests in residential mortgage-backed securities (“RMBS”) representing
interests in obligations backed by pools of mortgage loans.   The
Company classifies its investment securities as either “trading,”
“available-for-sale,” or “held-to-maturity.”   The Company holds
its RMBS as available-for-sale, records investments at estimated fair value as
described in Note 5 of these consolidated financial statements, and unrealized
gains and losses are included in other comprehensive income (loss) in the
consolidated statements of operations and comprehensive income
(loss).  From time to time, as part of the overall management of its
portfolio, the Company may sell any of its RMBS investments and recognize a
realized gain or loss as a component of earnings in the consolidated statements
of operations and comprehensive income (loss) utilizing the specific
identification method.
 
 Interest
income on RMBS is computed on the remaining principal balance of the investment
security.  Premiums or discounts on investment securities that are
guaranteed as to principal and/or interest repayment as is with agencies of the
U.S. Government or federally chartered corporations such as Ginnie Mae, Freddie
Mac, or Fannie Mae (“Agency RMBS”) are recognized over the life of the
investment using the effective interest method.  Premiums or
discount amortization/accretion on non-Agency RMBS is recognized in accordance
with Accounting Standards Codification (“ASC”) 325, Investment-Other.  For
non-Agency RMBS the Company estimates at the time of purchase expected future
cash flows, prepayment speeds, credit losses, loss severity, and loss timing
based on the Company’s observation of available market data, its experience, and
the collective judgment of its management team to determine the effective
interest rate on the RMBS.  Not less than quarterly, the Company
reevaluates, and if necessary, makes adjustments to its analysis utilizing
internal models, external market research and sources in conjunction with its
view on performance in the non-Agency RMBS sector.  Changes to the
Company’s assumptions subsequent to the purchase date may increase or decrease
the amortization/accretion of premiums and discounts which affects interest
income.  Changes to assumptions that decrease expected future cash
flows may result in other-than-temporary impairment.
 
 Fair
value of RMBS is determined  utilizing a pricing model that
incorporates such factors as coupon, prepayment speeds, weighted average life,
collateral composition, borrower characteristics, expected interest rates, life
caps, periodic caps, reset dates, collateral seasoning, expected losses,
expected default severity, credit enhancement, and other pertinent
factors.  The Company validates the fair value determined by the
pricing model with quotes provided by independent dealers and/or pricing
services.    Material differences and the impact of the
differences between the fair values determined by the Company and third party
sources are disclosed in Note 5 of the consolidated financial
statements.
 F-8


If the
fair value of an investment security is less than its amortized cost at the date
of the consolidated statement of financial condition, the Company analyzes the
investment security for other-than-temporary impairment.  Management
evaluates the Company’s RMBS for other-than-temporary impairment at least on a
quarterly basis, and more frequently when economic or market concerns warrant
such evaluation.  Consideration is given to (1) the length of time and
the extent to which the fair value has been lower than carrying value, (2) the
intent of the Company to sell the investment prior to recovery in fair value (3)
whether the Company will be more likely than not required to sell the investment
before the expected recovery in fair value, (4) and the expected future cash
flows of the investment in relation to its amortized cost.  Unrealized
losses on assets that are considered other-than-temporary credit impairments are
recognized in income and the cost basis of the asset is adjusted.




(d)
Securitized Loans Held for Investment




The
Company’s securitized residential mortgage loans are comprised of fixed-rate and
variable-rate loans.  The Company purchases pools of residential
mortgage loans through a select group of originators.   Mortgage
loans are designated as held for investment, recorded on trade date, and are
carried at their principal balance outstanding, plus any premiums or discounts,
less allowances for loan losses.  Interest income on loans held for
investment is recognized over the life of the investment using the effective
interest method.  Income recognition is suspended for loans when, in
the opinion of management, a full recovery of income and principal becomes
doubtful.  Income recognition is resumed when the loan becomes
contractually current and performance is demonstrated to be
resumed.  The Company estimates fair value of securitized loans as
described in Note 5 of these consolidated financial statements.





(e)
Allowance for Loan Losses




The
Company has established an allowance for loan losses at a level that management
believes is adequate based on an evaluation of known and inherent risks related
to the Company’s loan portfolio.  The estimate is based on a variety
of factors including current economic conditions, industry loss experience, the
loan originator’s loss experience, credit quality trends, loan portfolio
composition, delinquency trends, national and local economic trends, national
unemployment data, changes in housing  appreciation or depreciation
and whether specific geographic areas where the Company has significant loan
concentrations are experiencing adverse economic conditions and events such as
natural disasters that may affect the local economy or property values. Upon
purchase of a pool of loans, the Company obtains written representations and
warranties from the sellers that the Company could be reimbursed for the value
of the loan if the loan fails to meet the agreed upon origination
standards.  While the Company has little history of its own to
establish loan trends, delinquency trends of the originators and the current
market conditions aid in determining the allowance for loan
losses.  The Company also performed due diligence procedures on a
sample of loans that met its criteria during the purchase
process.  The Company has created an unallocated provision for
probable loan losses estimated as a percentage of the remaining unpaid principal
balance on the loans.  Management’s estimate is based on historical
experience of similarly underwritten pools.





When the
Company determines it is probable that specific contractually due amounts are
uncollectible, the amount is considered impaired.  Where impairment is
indicated, a valuation write-off is measured based upon the excess of the
recorded investment over the net fair value of the collateral, reduced by
selling costs.  Any deficiency between the carrying amount of an asset
and the net sales price of repossessed collateral is charged to the allowance
for loan losses.





(f)
Repurchase Agreements




The
Company may finance the acquisition of its investment securities through the use
of repurchase agreements. Repurchase agreements are treated as collateralized
financing transactions and are carried at their contractual amounts, including
accrued interest, as specified in the respective agreements.





(g)
Securitized Debt




The
Company has issued securitized debt to finance a portion of its residential
mortgage loan portfolio.  The securitizations are collateralized by
residential adjustable or fixed rate mortgage loans or RMBS that have been
placed in a trust and pay interest and principal payments to the debt holders of
that securitization.  The Company’s securitizations, which are
accounted for as financings, are recorded as an asset called “Securitized loans
held for investment” on the consolidated statements of financial condition and
the corresponding debt as “Securitized debt” in the consolidated statements of
financial condition.  The Company estimates fair value of securitized
debt as described in Note 5 to these consolidated financial
statements.


F-9


(h)
Fair Value Disclosure




A
complete discussion of the methodology utilized by the Company to fair value its
financial instruments is included in Note 5 to these consolidated financial
statements.





(i)
Derivative Financial Instruments and Hedging Activity




The
Company’s policies permit us to enter into derivative contracts, including
interest rate swaps and interest rate caps, as a means of mitigating our
interest rate risk. The Company intends to use interest rate derivative
instruments to mitigate interest rate risk rather than to enhance returns. If
the Company hedges using interest rate swaps these instruments are accounted for
as either assets or liabilities in the consolidated statement of financial
condition, are measured at fair value with realized and unrealized gains and
losses recognized in earnings.
  The FASB
issued additional guidance that attempts to improve the transparency of
financial reporting by providing additional information about how derivative and
hedging activities affect an entity’s financial position, financial performance
and cash flows.  This guidance requires the disclosure requirements
for derivative instruments and hedging activities by requiring enhanced
disclosure about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items, and (3) how derivative
instruments and related hedged items affect the entity’s financial position,
financial performance, and cash flows.
 
 In the
normal course of business, the Company may use a variety of derivative financial
instruments to manage, or hedge, interest rate risk. These derivative financial
instruments must be effective in reducing our interest rate risk exposure in
order to qualify for hedge accounting. When the terms of an underlying
transaction are modified, or when the underlying hedged item ceases to exist,
all changes in the fair value of the instrument are included in net income for
each period until the derivative instrument matures or is settled. Any
derivative instrument used for risk management that does not meet the hedging
criteria is carried at fair value with the changes in value included in net
income.
  The
Company uses derivatives for economic hedging purposes rather than speculation
and will rely on quotations from third parties to determine fair
values.  If our hedging activities do not achieve our desired results,
the Company’s reported earnings may be adversely affected.




(j)
Mortgage Loan Sales and Securitizations




The
Company periodically enters into transactions in which it sells financial
assets, such as RMBS, mortgage loans and other assets.  It may also
securitize and re-securitize financial assets.  These transactions are
accounted for as either a “sale” and the loans held for investment are removed
from the consolidated statements of financial condition or as a “financing” and
are classified as “Securitized loans held for investment” on the Company’s
consolidated statements of financial condition, depending upon the structure of
the securitization transaction.  In these securitizations and
re-securitizations the Company sometimes retains or acquires senior or
subordinated interests in the securitized or re-securitized
assets.  Gains and losses on such securitizations or
re-securitizations are recognized using a financial components approach that
focuses on control.  Under this approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when
extinguished.




The
Company determines the gain or loss on sale of mortgage loans by allocating the
carrying value of the underlying mortgage loans between securities or loans sold
and the interests retained based on their fair values, as disclosed in Note 5 to
these consolidated financial statements.  The gain or loss on sale is
the difference between the cash proceeds from the sale and the amount allocated
to the securities or loans sold, net of transaction costs.




(k) Income Taxes




The
Company qualifies to be taxed as a REIT, and therefore it generally will not be
subject to corporate, federal, or state income tax to the extent that qualifying
distributions are made to stockholders and the REIT requirements, including
certain asset, income, distribution and stock ownership tests are
met.  If the Company failed to qualify as a REIT and did not qualify
for certain statutory relief provisions, the Company would be subject to
federal, state and local income taxes and may be precluded from qualifying as a
REIT for the subsequent four taxable years following the year in which the REIT
qualification was lost.





(l)
Net Income (Loss) per Share




The
Company calculates basic net income (loss) per share by dividing net income
(loss) for the period by the weighted-average shares of its common stock
outstanding for that period.  Diluted net income (loss) per share
takes into account the effect of dilutive instruments, such as stock options,
but uses the average share price for the period in determining the number of
incremental shares that are to be added to the weighted average number of shares
outstanding.  The Company had no potentially dilutive securities
outstanding during the periods presented.





(m)
Stock-Based Compensation




The
Company accounts for stock based compensation awards granted to the employees of
FIDAC in accordance with GAAP guidance for compensation to
non-employees.  GAAP requires the Company to measure the fair value of
the equity instrument using the stock prices and other measurement assumptions
as of the earlier of either the date at which a performance commitment by the
counterparty is reached or the date at which the counterparty's performance is
complete.  Compensation expense related to the grants of stock and
stock options is recognized over the vesting period of such grants based on the
estimated fair value.





(n)
Use of Estimates




The
preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
reporting period. The most significant estimates are related to the following:
all assets classified as available-for-sale and are reported at their estimated
fair value; all investment securities are amortized/accreted based on yields
that incorporate management’s assumptions as to the expected performance of the
investment over time; loan loss provisions reflect management estimates with
regard to expected losses of the securitized loan portfolio.  Actual
results could differ from those estimates.


F-10


(o)
Recent Accounting Pronouncements





Generally Accepted
Accounting Principles (ASC 105)





In June
2009, the Financial Accounting Standards Board (“FASB”) issued The Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles“Codification” which revises the framework for selecting the accounting
principles to be used in the preparation of financial statements that are
presented in conformity with Generally Accepted Accounting Principles
(“GAAP”).  The objective of the Codification is to establish the FASB
ASC as the source of authoritative accounting principles recognized by the
FASB.  Codification was effective for the Company as of September 30,
2009.   In adopting the Codification, all non-grandfathered,
non-SEC accounting literature not included in the Codification was superseded
and deemed non-authoritative.  Codification requires any references
within the Company’s consolidated financial statements be modified from FASB
issues to ASC.  However, as recommended in the FASB Accounting
Standards Codification Notice to Constituents (v 2.0), the Company does not
reference specific sections of the ASC but will use broad topic
references.





The
Company’s recent accounting pronouncements section has been reformatted to
reflect the same organizational structure as the ASC.  Broad topic
references will be updated with pending content as they are
released.





Assets





Investments in Debt and
Equity Securities (ASC 320)





New
guidance was provided to make impairment guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments
(“OTTI”) on debt and equity securities, as well as beneficial interests in
securitized financial assets, in financial statements.  This guidance
was the result of the Securities and Exchange Commission (“SEC”) mark-to-market
study mandated under the Emergency Economic Stabilization Act of 2008
(“EESA”).  The SEC’s recommendation was to “evaluate the need for
modifications (or the elimination) of current OTTI guidance to provide for a
more uniform system of impairment testing standards for financial
instruments.”  The guidance revises the OTTI evaluation
methodology.  Previously the analytical focus was on whether the
company had the “intent and ability to retain its investment in the debt
security for a period of time sufficient to allow for any anticipated recovery
in fair value.”   Now the focus is on whether the company (1) has
the intent to sell the investment securities, (2) is more likely than not that
it will be required to sell the investment securities before recovery, or (3)
does not expect to recover the entire amortized cost basis of the investment
securities.  Further, the security is analyzed for credit loss, (the
difference between the present value of cash flows expected to be collected and
the amortized cost basis).  The credit loss, if any, is then be
recognized in the statement of operations, while the balance of impairment
related to other factors will be recognized in Other Comprehensive Income
(“OCI”).  If the entity intends to sell the security, or will be
required to sell the security before its anticipated recovery, the full OTTI
will be recognized in the statement of operations.





OTTI has
occurred if there has been an adverse change in future estimated cash flows and
its impact is reflected in current earnings.  The determination cannot
be overcome by management judgment of the probability of collecting all cash
flows previously projected.   The objective of OTTI analysis is
to determine whether it is probable that the holder will realize some portion of
the unrealized loss on an impaired security.  Factors to consider when
making OTTI decisions include information about past events, current conditions,
reasonable and supportable forecasts, remaining payment terms, financial
condition of the issuer, expected defaults, value of underlying collateral,
industry analysis, sector credit rating, credit enhancement, and financial
condition of guarantor.  The Company’s non-Agency RMBS and Agency RMBS
investments fall under this guidance and as such, the Company will assess each
security for OTTI based on estimated future cash flows.  This guidance
became effective for the Company on June 30, 2009.


F-11


Broad
Transactions





Business Combinations (ASC
805)





This
guidance establishes principles and requirements for recognizing and measuring
identifiable assets and goodwill acquired, liabilities assumed and any
noncontrolling interest in a business combination at their fair value at
acquisition date.  ASC 805 alters the treatment of acquisition-related
costs, business combinations achieved in stages (referred to as a step
acquisition), the treatment of gains from a bargain purchase, the recognition of
contingencies in business combinations, the treatment of in-process research and
development in a business combination as well as the treatment of recognizable
deferred tax benefits.  ASC 805 was effective for business
combinations closed in fiscal years beginning after December 15,
2008.  The Company did not make any business acquisitions during the year
ended December 31, 2009. The adoption of ASC 805 did not have a material impact
on the Company’s consolidated financial statements.





Consolidation (ASC
810)





On
January 1, 2009, FASB amended the guidance concerning noncontrolling interests
in consolidated financial statements, which required the Company to make certain
changes to the presentation of its consolidated financial
statements.  This guidance requires classification of noncontrolling
interests (previously referred to as “minority interest”) as part of
consolidated net income and including the accumulated amount of noncontrolling
interests as part of stockholders’ equity.  Further, this guidance
requires distinction between equity amounts attributable to controlling interest
and amounts attributable to the noncontrolling interests – previously classified
as minority interest outside of stockholders’ equity.  In addition to these
financial reporting changes, this guidance provided for significant changes in
accounting related to noncontrolling interests; specifically, increases and
decreases in its controlling financial interests in consolidated subsidiaries
would be reported in equity similar to treasury stock transactions. If a change
in ownership of a consolidated subsidiary results in loss of control and
deconsolidation.  Any retained ownership interests are re-measured
with the gain or loss reported in net earnings.





Effective
January 1, 2010, the consolidation standards have been amended to update the
existing standard and eliminate the exemption from consolidation of a Qualified
Special Purpose Entity (“QSPE”).    The update requires an
enterprise to perform an analysis to determine whether the enterprise’s variable
interest or interests give it a controlling financial interest in a variable
interest entity (“VIE”). The analysis identifies the primary beneficiary of a
VIE as the enterprise that has both: a) the power to direct the activities that
most significantly impact the entity’s economic performance and b) the
obligation to absorb losses of the entity or the right to receive benefits from
the entity which could potentially be significant to the VIE.  The
update requires enhanced disclosures to provide users of financial statements
with more transparent information about an enterprises involvement in a
VIE.  We expect that we will be required to consolidate RMBS
re-securitization transactions previously recorded during the year ended
December 31, 2009 as sales for GAAP beginning with the effective date of this
ASU.  We expect consolidation of these transactions to increase our
non-Agency portfolio by including approximately $1.3 billion in principal value
of AAA senior securities.  In addition, we expect to record a corresponding
increase of $1.3 billion in principal value of non-recourse liabilities, for
which we have no continuing obligations, in our consolidated financial
statements.  The consolidation is expected to reverse approximately $98.1
million in previously recorded GAAP gains on sales of assets related to the
re-securitizations undertaken in 2009.  The reversal of this gain will be
accreted into interest income over the remaining life of the re-securitized
assets.  The Company is currently considering the complete impact of
this ASU on its March 31, 2010 consolidated financial statements.





On
January 27, 2010, the FASB voted to indefinitely defer the effective date of ASU
2009-17 for a reporting enterprises interest in entities for which it is
industry practice to issue financial statements in accordance with investment
company standards (ASC 946).   This deferral is expected to most
significantly affect reporting entities in the investment management industry
and therefore, as it stands, has no material impact on the Company’s
consolidated financial statements.





Derivatives and Hedging (ASC
815)





Effective
January 1, 2009 and adopted by the Company prospectively, the FASB issued
additional guidance attempting  to improve the transparency of
financial reporting by mandating the provision of additional information about
how derivative and hedging activities affect an entity’s financial position,
financial performance and cash flows.  This guidance changed the
disclosure requirements for derivative instruments and hedging activities by
requiring enhanced disclosure about (1) how and why an entity uses derivative
instruments, (2) how derivative instruments and related hedged items are
accounted for, and (3) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows.  To adhere to this guidance, qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts, gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative agreements must be
made.  This disclosure framework is intended to better convey the
purpose of derivative use in terms of the risks that an entity is intending to
manage.  The adoption of this ASC had no material impact on the
Company’s consolidated financial statements.


F-12


Fair Value Measurements and
Disclosures (ASC 820)





In
response to the deterioration of the credit markets, FASB issued guidance
clarifying how fair value measurements should be applied when valuing securities
in markets that are not active.  The guidance provides an illustrative
example, utilizing management’s internal cash flow and discount rate assumptions
when relevant observable data do not exist.  It further clarifies how
observable market information and market quotes should be considered when
measuring fair value in an inactive market.  It reaffirms the notion
of fair value as an exit price as of the measurement date and that fair value
analysis is a transactional process and should not be broadly applied to a group
of assets.  The guidance was effective upon issuance including prior
periods for which financial statements had not been issued.  The
implementation of this guidance did not have a material impact on the fair value
of the Company’s assets as the Company’s methodologies previously employed to
value assets complied with the new guidance.





In
October 2008 EESA was signed into law.  Section 133 of the EESA
mandated that the SEC conduct a study on mark-to-market accounting
standards.  The SEC provided its study to the U.S. Congress on
December 30, 2008.  Part of the recommendations within the study
indicated that “fair value requirements should be improved through development
of application and best practices guidance for determining fair value in
illiquid or inactive markets.”  As a result of this study and the
recommendations therein, on April 9, 2009, the FASB issued additional guidance
for determining fair value when the volume and level of activity for the asset
or liability have significantly decreased when compared with normal market
activity for the asset or liability (or similar assets or
liabilities).  The guidance gives specific factors to evaluate if
there has been a decrease in normal market activity and if so, provides a
methodology to analyze transactions or quoted prices and make necessary
adjustments to fair value.  The objective is to determine the point
within a range of fair value estimates that is most representative of fair value
under current market conditions.  This guidance became effective for
the Company’s June 30, 2009 reporting period.  The adoption did not
have a material impact on the manner in which the Company estimates fair value,
nor did it have any impact on our financial statement disclosures.





In August
2009, FASB provided further guidance (in ASU 2009-05) regarding the fair value
measurement of liabilities.  The guidance stated that a quoted price
for the identical liability when traded as an asset in an active market is a
Level 1 fair value measurement.  If the value must be adjusted for
factors specific to the liability, then the adjustment to the quoted price of
the asset renders the fair value measurement of the liability a lower level
measurement.  This guidance had no material effect on the fair
valuation of the Company’s liabilities.





In
September 2009, FASB issued guidance (in ASU 2009-12) on measuring the fair
value of certain alternative investments.  This guidance offered
investors a practical expedient for measuring the fair value of investments in
certain entities that calculate net asset value (“NAV”) per share.  If
an investment falls within the scope of the ASU, the reporting entity is
permitted, but not required to use the investment’s NAV to estimate its fair
value.  This guidance had no material effect on the fair valuation of
the Company’s assets, as the Company does not hold any assets qualifying under
this guidance.





In
January 2010, FASB issues guidance (in ASU 2010-06) to increases disclosure
regarding the fair value of assets.  The key provisions of this
guidance include the requirement to disclose separately the amounts of
significant transfers in and out of Level 1 and Level 2 including a description
of the reason for the transfers.  Previously this was only required of
transfers between Level 2 and Level 3 assets.  Further, reporting
entities are required to provide fair value measurement disclosures for each
class of assets and liabilities; a class is potentially a subset of the assets
or liabilities within a line item in the statement of financial
position.  Additionally, disclosures about the valuation techniques
and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements are required for either Level 2 or Level 3
assets.  This portion of the guidance is effective for the Company
beginning January 1, 2010. The guidance also requires that the disclosure on any
Level 3 assets presents separately information about purchases, sales, issuances
and settlements.  In other words, Level 3 assets are presented on a
gross basis rather than as one net number.  However, this last portion
of the guidance is not effective until January 1, 2011.  Adoption of
this guidance will result in increased financial statement disclosure for the
Company.


F-13


Financial Instruments (ASC
820)





On April
9, 2009, the FASB issued guidance which requires disclosures about fair value of
financial instruments for interim reporting periods as well as in annual
financial statements.  This guidance became effective for the Company
June 30, 2009.  The adoption did not have any impact on financial
reporting as all financial instruments are currently reported at fair value in
both interim and annual periods.





Subsequent Events (ASC
855)




ASC 855
provides general standards governing accounting for and disclosure of events
that occur after the balance sheet date through the date of issuance of the
consolidated financial statements.  ASC 855 also provides guidance on the
period after the balance sheet date during which management of a reporting
entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an
entity should make about events or transactions occurring after the balance
sheet date. The Company adopted this ASC effective June 30, 2009, and adoption
had no impact on the Company’s consolidated financial
statements.  There were no material subsequent events through the date
of issuance of this Annual Report on Form 10-K except as disclosed in Note
14.





Transfers and Servicing (ASC
860)





In
February 2008 FASB issued guidance addressing whether transactions where assets
purchased from a particular counterparty and financed through a repurchase
agreement with the same counterparty can be considered and accounted for as
separate transactions, or are required to be considered “linked” transactions
and may be considered derivatives.  This guidance requires purchases
and subsequent financing through repurchase agreements be considered linked
transactions unless all of the following conditions apply: (1) the initial
purchase and the use of repurchase agreements to finance the purchase are not
contractually contingent upon each other; (2) the repurchase financing entered
into between the parties provides full recourse to the transferee and the
repurchase price is fixed; (3) the financial assets are readily obtainable in
the market; and (4) the financial instrument and the repurchase agreement are
not coterminous.  This guidance was effective for the Company on
January 1, 2009 and the implementation did not have a material impact on the
consolidated financial statements of the Company.





On June
12, 2009, the FASB issued (in ASU 2009-16) an amendment update to the accounting
standards governing the transfer and servicing of financial assets.  This
amendment  updated the existing standard and eliminates the concept of
a QSPE clarified the surrendering of control to effect sale treatment; and
modified the financial components approach – limiting the circumstances in which
a financial asset or portion thereof should be derecognized when the transferor
maintains continuing involvement.  It defined the term “Participating
Interest”.  Under this standard update, the transferor must recognize
and initially measure at fair value all assets obtained and liabilities incurred
as a result of a transfer, including any retained beneficial interest.
Additionally, the amendment required enhanced disclosures regarding the
transferors risk associated with continuing involvement in any transferred
assets.   The amendment is effective beginning January 1,
2010.   The Company has determined the amendment has no material
impact on the consolidated financial statements.  See
discussion under Consolidation (ASC 810) above.





3.  Mortgage-Backed
Securities





The
following tables represent the Company’s available-for-sale RMBS portfolio as of
December 31, 2009 and December 31, 2008, at fair value.  The Company
classifies its non-Agency RMBS into senior and subordinated
interests.  Senior interests in non-Agency RMBS are considered to be
entitled first to principal repayments in their prorata ownership
interests.


F-14


December
      31, 2009(dollars
      in thousands)Principal
      Value
            
            
            Unamortized
              Premium
            
            
            Unamortized
              Discount
            
            
            Gross
      Unrealized
              Gain
            
            
            Gross
      Unrealized
              Loss
            
            
            Fair
      ValueNon-Agency
      RMBSSenior
            
            $
            2,757,212
            
            
            $
            1,536
            
            
            $
            (628,209
            )
            
            $
            83,946
            
            
            $
            (192,079
            )
            
            $
            2,022,406Subordinated
            
            
            1,616,031
            
            
            
            10,346
            
            
            
            (1,239,769
            )
            
            
            65,996
            
            
            
            (76,145
            )
            
            
            376,459Agency
      RMBS
            
            
            1,616,450
            
            
            
            55,081
            
            
            
            (29
            )
            
            
            20,767
            
            
            
            (2,240
            )
            
            
            1,690,029Total
            
            $
            5,989,693
            
            
            $
            66,963
            
            
            $
            (1,868,007
            )
            
            $
            170,709
            
            
            $
            (270,464
            )
            
            $
            4,088,894December
      31, 2008(dollars
      in thousands)Principal
      Value
            
            
            Unamortized
              Premium
            
            
            Unamortized
              Discount
            
            
            Gross
      Unrealized
              Gain
            
            
            Gross
      Unrealized
              Loss
            
            
            Fair
      ValueNon-Agency
      RMBSSenior
            
            $
            881,111
            
            
            $
            1,858
            
            
            $
            (18,372
            )
            
            $
            3,457
            
            
            $
            (265,052
            )
            
            $
            603,002Subordinated
            
            
            18,345
            
            
            
            247
            
            
            
            (1,381
            )
            
            
            2,208
            
            
            
            (9,316
            )
            
            
            10,103Agency
      RMBS
            
            
            233,976
            
            
            
            6,350
            
            
            
            -
            
            
            
            2,036
            
            
            
            -
            
            
            
            242,362Total
            
            $
            1,133,432
            
            
            $
            8,455
            
            
            $
            (19,753
            )
            
            $
            7,701
            
            
            $
            (274,368
            )
            
            $
            855,467




The
following tables present the gross unrealized losses and estimated fair value of
the Company’s RMBS by length of time that such securities have been in a
continuous unrealized loss position at December 31, 2009 and 2008.
  December
      31, 2009(dollars
      in thousands)Unrealized
      Loss Position For:Less
      than 12 Months
                
                
                12
      Months or More
                
                
                TotalRMBS
                
                Estimated
      Fair
                  Value
                
                
                Unrealized
                  Losses
                
                
                Estimated
      Fair
                  Value
                
                
                Unrealized
                  Losses
                
                
                Estimated
      Fair
                  Value
                
                
                Unrealized
                  LossesNon-Agency
      RMBSSenior
                
                $
                539,579
                
                
                $
                (38,466
                )
                
                $
                489,670
                
                
                $
                (153,613
                )
                
                $
                1,029,249
                
                
                $
                (192,079
                )Subordinated
                
                
                179,226
                
                
                
                (72,438
                )
                
                
                5,862
                
                
                
                (3,707
                )
                
                
                185,088
                
                
                
                (76,145
                )Agency
                
                
                682,681
                
                
                
                (2,240
                )
                
                
                -
                
                
                
                -
                
                
                
                682,681
                
                
                
                (2,240
                )Total
                
                $
                1,401,486
                
                
                $
                (113,144
                )
                
                $
                495,532
                
                
                $
                (157,320
                )
                
                $
                1,897,018
                
                
                $
                (270,464
                )December
      31, 2008(dollars
      in thousands)Unrealized
      Loss Position For:Less
      than 12 Months
                
                
                12
      Months or More
                
                
                TotalRMBS
                
                Estimated
      Fair
                  Value
                
                
                Unrealized
                  Losses
                
                
                Estimated
      Fair
                  Value
                
                
                Unrealized
                  Losses
                
                
                Estimated
      Fair
                  Value
                
                
                Unrealized
                  LossesNon-Agency
      RMBSSenior
                
                $
                587,611
                
                
                $
                (265,052
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                587,611
                
                
                $
                (265,052
                )Subordinated
                
                
                267,856
                
                
                
                (9,316
                )
                
                
                -
                
                
                
                -
                
                
                
                267,856
                
                
                
                (9,316
                )Agency
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                855,467
                
                
                $
                (274,368
                )
                
                $
                -
                
                
                $
                -
                
                
                $
                855,467
                
                
                $
                (274,368
                )




F-15


The Company recorded a $10.0 million
other-than-temporary credit impairment during the year on investments where the
expected future cash flows of certain subordinated non-Agency RMBS were less
than their amortized cost basis.  The Company evaluates each investment in
our RMBS portfolio for OTTI quarterly or more often if market conditions
warrant.  The amortized cost of each investment in an unrealized loss
position is compared to the present value of expected future cash flows of the
position.  If the amortized cost of the security is less than the present
value of its expected future cash flows, an other-than-temporary credit
impairment has occurred.  If the Company does not intend to sell nor are
required to sell the debt security prior to its anticipated recovery, the credit
loss, if any, is recognized in the statement of operations, while the balance of
impairment related to other factors is recognized in Other Comprehensive Income
(“OCI”).  If we intend to sell the debt security, or will be required to
sell the security before its anticipated recovery, the full OTTI is recognized
in the statement of operations.  The determination cannot be overcome by
management judgment of the probability of collecting all cash flows previously
projected.





Actual
maturities of mortgage-backed securities are generally shorter than stated
contractual maturities.  Actual maturities of the Company’s RMBS are
affected by the contractual lives of the underlying mortgages, periodic payments
of principal and prepayments of principal.  The following tables
summarize the Company’s RMBS at December 31, 2009 and 2008 according to their
estimated weighted-average life classifications:





The
weighted-average lives of the mortgage-backed securities at December 31, 2009
and 2008 in the tables below are based on data provided through dealer quotes,
assuming constant prepayment rates to the balloon or reset date for each
security.  The prepayment model considers current yield, forward
yield, steepness of the curve, current mortgage rates, mortgage rates of the
outstanding loan, loan age, margin and volatility.




December
      31, 2009(dollars
      in thousands)Weighted
      Average Life
              
              Non-Agency
                Senior
      RMBS
                Fair
      Value
              
              
              Non-Agency
                Subordinated
                RMBS
      Fair
                Value
              
              
              Agency
      RMBS
                Fair
      Value
              
              
              Non-Agency
                Senior
      RMBS
                Amortized
                Cost
              
              
              Non-Agency
                Subordinated
                RMBS
                Amortized
      Cost
              
              
              Agency
      RMBS
                Amortized
                CostLess
      than one year
              
              $
              20,533
              
              
              $
              137
              
              
              $
              -
              
              
              $
              20,549
              
              
              $
              76
              
              
              $
              -Greater
      than one year and less than five years
              
              
              1,520,809
              
              
              
              204,481
              
              
              
              1,690,029
              
              
              
              1,631,461
              
              
              
              244,937
              
              
              
              1,671,502Greater
      than five years
              
              
              481,065
              
              
              
              171,840
              
              
              
              -
              
              
              
              478,530
              
              
              
              141,594
              
              
              
              -Total
              
              $
              2,022,407
              
              
              $
              376,458
              
              
              $
              1,690,029
              
              
              $
              2,130,540
              
              
              $
              386,607
              
              
              $
              1,671,502December
      31, 2008(dollars
      in thousands)Weighted
      Average Life
              
              Non-Agency
                Senior
      RMBS
                Fair
      Value
              
              
              Non-Agency
                Subordinated
                RMBS
      Fair
                Value
              
              
              Agency
      RMBS
                Fair
      Value
              
              
              Non-Agency
                Senior
      RMBS
                Amortized
                Cost
              
              
              Non-Agency
                Subordinated
                RMBS
                Amortized
      Cost
              
              
              Agency
      RMBS
                Amortized
                CostLess
      than one year
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Greater
      than one year and less than five years
              
              
              520,733
              
              
              
              5,068
              
              
              
              242,362
              
              
              
              729,495
              
              
              
              6,013
              
              
              
              240,326Greater
      than five years
              
              
              82,269
              
              
              
              5,035
              
              
              
              -
              
              
              
              135,102
              
              
              
              11,198
              
              
              
              -Total
              
              $
              603,002
              
              
              $
              10,103
              
              
              $
              242,362
              
              
              $
              864,597
              
              
              $
              17,211
              
              
              $
              240,326




F-16





The RMBS
portfolio has the following characteristics at December 31, 2009 and
2008:




Non-Agency
      RMBSDecember
      31, 2009
              
              Senior
              Subordinated
              Agency
      RMBS
              Securitized
      LoansWeighted
      average cost basis
              
              $77.27
              $23.93
              $103.41
              $101.09Weighted
      average fair value (1)
              
              $73.35
              $23.30
              $104.55
              $101.09Weighted
      average coupon
              
              5.74%
              5.90%
              5.50%
              5.49%Fixed-rate
      percentage of portfolio
              
              12.97%
              11.58%
              25.02%
              3.14%Adjustable-rate
      percentage of portfolio
              
              29.71%
              13.44%
              0.00%
              4.14%Weighted
      average 3 month CPR at period-end (2)
              
              17.34%
              15.25%
              22.78%
              18.86%Non-Agency
      RMBSDecember
      31, 2008
              
              Senior
              Subordinated
              Agency
      RMBS
              Securitized
      LoansWeighted
      average cost basis
              
              $98.13
              $93.83
              $102.71
              $101.03Weighted
      average fair value (1)
              
              $68.44
              $55.08
              $103.58
              $101.03Weighted
      average coupon
              
              5.98%
              5.35%
              6.69%
              5.95%Fixed-rate
      percentage of portfolio
              
              0.48%
              0.78%
              13.70%
              15.00%Adjustable-rate
      percentage of portfolio
              
              50.95%
              0.29%
              0.00%
              18.80%Weighted
      average 3 month CPR at period-end (2)
              
              12.57%
              6.80%
              14.50%
              7.80%(1)
      Securitized loans are carried at amortized cost.(2)
      Represents the estimated percentage of principal that will be prepaid over
      the next three months based on historical principal
    paydowns.




The
non-Agency RMBS portfolio is subject to credit risk.  The Company
seeks to mitigate credit risk through its asset selection
process.  The investment securities contained in this portion of the
portfolio have the following collateral characteristics at December 31, 2009 and
2008.
  December
      31, 2009
                  
                  
                  December
      31, 2008Number
      of securities in portfolio
                  
                  209
                  
                  
                  
                  30Weighted
      average maturity (years)
                  
                  28.5
                  
                  
                  
                  22.1Weighted
      average amortized loan to value
                  
                  73.8
                  %
                  
                  
                  74.2
                  %Weighted
      average FICO
                  
                  715.7
                  
                  
                  
                  717.5Weighted
      average loan balance (in thousands)
                  
                  415.9
                  
                  
                  
                  394.3Weighted
      average percentage owner occupied
                  
                  82.8
                  %
                  
                  
                  77.8
                  %Weighted
      average percentage single family residence
                  
                  59.9
                  %
                  
                  
                  54.8
                  %Weighted
      average current credit enhancement
                  
                  12.2
                  %
                  
                  
                  25.4
                  %Weighted
      average geographic concentration
                  CA
                  44.8
                  %
                  
                  CA
                  53.0
                  %FL
                  17.3
                  %
                  
                  FL
                  10.6
                  %NY
                  7.5
                  %
                  
                  AZ
                  8.2
                  %MD
                  4.9
                  %
                  
                  NV
                  5.6
                  %NJ
                  4.4
                  %
                  
                  NJ
                  4.1
                  %
 On July
30, 2009, the Company transferred $1.5 billion in principal value of its RMBS to
the JPMRT 2009-7 Trust in a re-securitization transaction.  In this
transaction, the Company sold $166.3 million of AAA-rated fixed and floating
rate bonds to third party investors and realized a gain on the sale of
approximately $7.3 million.  The Company retained $690.6 million of
AAA-rated bonds, $665.5 million in subordinated bonds and the owner trust
certificate.  The subordinated bonds and the owner trust certificate
provide credit support to the AAA-rated bonds.  The bonds issued by
the trust are collateralized by RMBS that have been transferred to the JPMRT
2009-7 Trust.
 
 On
September 30, 2009, the Company transferred $1.7 billion in principal value of
its RMBS to the CMSC 2009-12R Trust in a re-securitization
transaction.  In this transaction, the Company sold $260.6 million of
AAA-rated fixed and floating rate bonds to third party investors and realized a
gain on sale of approximately $5.2 million.  The Company retained
$655.0 million of AAA-rated bonds, $815.1 million in subordinated bonds and the
owner trust certificate.  The subordinated bonds and the owner trust
certificate provide credit support to the AAA-rated bonds.  The bonds
issued by the trust are collateralized by RMBS that have been transferred to the
CSMC 2009-12R Trust.
 F-17


During
the year ended December 31, 2009, the Company sold RMBS with a carrying value of
$1.8 billion for realized gains of $103.6 million.  During the year
ended December 31, 2008, the Company sold RMBS with a carrying value of $704.9
million for realized losses of approximately $137.4 million and terminated
interest rate swaps with a notional value of $983.4 million, for realized losses
of approximately $10.5 million.




4.  Securitized
Loans Held for Investment





The
following table represents the Company’s securitized residential mortgage loans
classified as held for investment at December 31, 2009 and 2008.  At
December 31, 2009, approximately 57% of the Company’s securitized loans are
adjustable rate mortgage loans and 43% are fixed rate mortgage
loans.  All of the adjustable rate loans held for investment are
hybrid adjustable rate mortgages (“ARM”).  Hybrid ARMs are mortgages
that have interest rates that are fixed for an initial period (typically three,
five, seven or ten years) and thereafter reset at regular intervals subject to
interest rate caps.  The periodic cap on all hybrid ARMS in the
securitized loan portfolio range from 0.00% to 3.00% for the years ended
December 31, 2009 and 2008.  The securitized loans held for investment
are carried at their principal balance outstanding less an allowance for loan
losses:




December
      31, 2009
              
              
              December
      31, 2008(dollars
      in thousands)Securitized
      mortgage loans, at principal balance
              
              $
              475,084
              
              
              $
              584,967Less:
      allowance for loan losses
              
              
              4,551
              
              
              
              1,621Securitized
      loans held for investment
              
              $
              470,533
              
              
              $
              583,346
 The
following table summarizes the changes in the allowance for loan losses for the
securitized mortgage loan portfolio during the years ended December 31, 2009 and
2008:
  December
      31, 2009
                  
                  
                  December
      31, 2008
                  
                  
                  December
      31, 2007(dollars
      in thousands)Balance,
      beginning of period
                  
                  $
                  1,621
                  
                  
                  
                  -
                  
                  
                  $
                  -Provision
      for loan losses
                  
                  
                  3,101
                  
                  
                  
                  1,621
                  
                  
                  
                  -Charge-offs
                  
                  
                  (171
                  )
                  
                  
                  -
                  
                  
                  
                  -Balance,
      end of period
                  
                  $
                  4,551
                  
                  
                  $
                  1,621
                  
                  
                  $
                  -
 On a
quarterly basis, the Company evaluates the adequacy of its allowance for loan
losses.  The Company’s allowance for loan losses for the year ended
December 31, 2009 was $4.6 million, representing 97 basis points of the
principal balance of the Company’s securitized mortgage loan
portfolio.  The Company’s allowance for loan losses was $1.6 million
for the year ended December 31, 2008, representing 28 basis points of the
principal balance of the Company’s securitized loan portfolio.  At
December 31, 2009, 1.82% of the securitized loans held for investment were
greater than 60 days delinquent and 0.89% were in some stage of
foreclosure.  As of December 31, 2008, 0.12% of the securitized loans
held for investment were greater than 60 days delinquent and no loans were in
foreclosure.
 
 5.  Fair
Value Measurements
 
 GAAP
defines fair value, establishes a framework for measuring fair value,
establishes a three-level valuation hierarchy for disclosure of fair value
measurement and enhances disclosure requirements for fair value
measurements.  The valuation hierarchy is based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement
date.  The three levels are defined as follows:
  Level 1 –
inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets and 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 for the 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 fair
value.
 F-18


The
following discussion describes the methodologies utilized by the Company to fair
value its financial instruments by instrument class.




Short-term
Instruments




The
carrying value of cash and cash equivalents, accrued interest receivable,
dividends payable, accounts payable, and accrued interest payable generally
approximates estimated fair value due to the short term nature of these
financial instruments.




Non-Agency
and Agency RMBS




The
Company determines the fair value of its investment securities utilizing a
pricing model that incorporates such factors as coupon, prepayment speeds,
weighted average life, collateral composition, borrower characteristics,
expected interest rates, life caps, periodic caps, reset dates, collateral
seasoning, expected losses, expected default severity, credit enhancement, and
other pertinent factors.  Management reviews the fair values generated
by the model to determine whether prices are reflective of the current
market.  Management performs a validation of the fair value calculated
by the pricing model by comparing its results to independent prices provided by
dealers in the securities and/or third party pricing services.




Any
changes to the valuation methodology are reviewed by management to ensure the
changes are appropriate. As markets and products develop and the pricing for
certain products becomes more transparent, the Company will continue to refine
its valuation methodologies. The methods used to produce a fair value
calculation may not be indicative of net realizable value or reflective of
future fair values. Furthermore, while the Company believes its valuation
methods are appropriate and consistent with other market participants, the use
of different methodologies, or assumptions, to determine the fair value of
certain financial instruments could result in a different estimate of fair value
at the reporting date.  The Company uses inputs that are current as of
the measurement date, which may include periods of market dislocation, during
which price transparency may be reduced.




During
times of market dislocation, as has been experienced for some time, the
observability of prices and inputs can be reduced for certain
instruments.  If dealers or independent pricing services are unable to
provide a price for an asset, or if the price provided by them is deemed
unreliable by the Company, then the asset will be valued at its fair value as
determined in good faith by the Company.  In addition, validating
third party pricing for the Company’s investments may be more subjective as
fewer participants may be willing to provide this service to the
Company.  Illiquid investments typically experience greater price
volatility as a ready market does not exist.  As fair value is not an
entity specific measure and is a market based approach which considers the value
of an asset or liability from the perspective of a market participant,
observability of prices and inputs can vary significantly from period to
period.  A condition such as this can cause instruments to be
reclassified from Level 1 to Level 2 or Level 2 to Level 3 when the Company is
unable to obtain third party pricing verification.




If at the
valuation date, the fair value of an investment security is less than its
amortized cost at the date of the consolidated statement of financial condition,
the Company analyzes the investment security for OTTI.  Management
evaluates the Company’s RMBS for OTTI at least on a quarterly basis, and more
frequently when economic or market concerns warrant such
evaluation.  Consideration is given to (1) the length of time and the
extent to which the fair value has been lower than carrying value, (2) the
intent of the Company to sell the investment prior to recovery in fair value (3)
whether the Company will be more likely than not required to sell the investment
before the expected recovery, (4) and the expected future cash flows of the
investment in relation to its amortized cost.  Unrealized losses on
assets that are considered OTTI due to credit are recognized in earnings and the
cost basis of the assets are adjusted.




At
December 31, 2009 and 2008, the Company has classified its RMBS as “Level
2”.  The Company’s financial assets carried at fair value on a
recurring basis are valued at December 31, 2009 and 2008 as
follows:




December
      31, 2009Level
      1
                
                
                Level
      2
                
                
                Level
      3(dollars
      in thousands)Assets:Non-Agency
      mortgage-backed securities
                
                $
                -
                
                
                $
                2,398,865
                
                
                $
                -Agency
      mortgage-backed securities
                
                $
                -
                
                
                $
                1,690,029
                
                
                $
                -
  F-19
  December
      31, 2008Level
      1
                
                
                Level
      2
                
                
                Level
      3(dollars
      in thousands)Assets:Non-Agency
      mortgage-backed securities
                
                $
                -
                
                
                $
                613,105
                
                
                $
                -Agency
      mortgage-backed securities
                
                $
                -
                
                
                $
                242,362
                
                
                $
                -




As of the
years ended December 31, 2009 and 2008, the Company was able to obtain third
party pricing verification for all assets classified as Level 2.  The
classification of assets and liabilities by level remains unchanged at December
31, 2009, when compared to the previous year.  In the aggregate, the
Company’s fair valuation of RMBS investments were 1.05% and 0.03% lower than the
aggregated dealer marks for the years ended December 31, 2009 and
2008.
 
 Securitized
Loans Held for Investment
  The
Company records securitized loans held for investment when it securitizes or
re-securitizes assets and records the transaction as a
“financing.”  The Company carries securitized loans held for
investment at principal value, plus premiums or discounts paid, less an
allowance for loan losses.  The Company fair values its securitized
loans held for investment by estimating future cash flows of the underlying
assets.  The Company models each underlying asset by considering,
among other items, the structure of the underlying security, coupon, servicer,
actual and expected defaults, actual and expected default severities, reset
indices, and prepayment speeds in conjunction with market research for similar
collateral performance and management’s expectations of general economic
conditions in the sector and greater economy.
  Repurchase
Agreements
  The
Company records repurchase agreements at their contractual amounts including
accrued interest payable.  Repurchase agreements are collateralized
financing transactions utilized by the Company to acquire investment
securities.  Due to the short term nature of these financial
instruments, the Company estimated the fair value of these repurchase agreements
to be the contractual obligation plus accrued interest payable at
maturity.
  Securitized
Debt
  The
Company records securitized debt for certificates or notes sold in
securitization or re-securitization transactions treated as “financings”
pursuant to ASC 860.  The Company carries securitized debt at the
principal balance outstanding on non-retained notes associated with its
securitized loans held for investment plus premiums or discounts recorded with
the sale of the notes to third parties.  The premiums or discounts
associated with the sale of the notes or certificates are amortized over the
life of the instrument.  The Company estimates the fair value of
securitized debt by estimating the future cash flows associated with underlying
assets collateralizing the secured debt outstanding.  The Company
models each underlying asset by considering, among other items, the structure of
the underlying security, coupon, servicer, actual and expected defaults, actual
and expected default severities, reset indices, and prepayment speeds in
conjunction with market research for similar collateral performance and
management’s expectations of general economic conditions in the sector and
greater economy.
  The
following table presents the carrying value and estimated fair value, as
described above, of the Company’s financial instruments at December 31, 2009 and
2008:
  December
      31, 2009
                
                
                December
      31, 2008Carrying
                  Amount
                
                
                Estimated
      Fair
                  Value
                
                
                Carrying
                  Amount
                
                
                Estimated
      Fair
                  Value(dollars
      in thousands)Non-Agency
      RMBS
                
                $
                2,517,147
                
                
                $
                2,398,865
                
                
                $
                881,808
                
                
                $
                613,105Agency
      RMBS
                
                
                1,671,502
                
                
                
                1,690,029
                
                
                
                240,326
                
                
                
                242,362Securitized
      loans held for investment
                
                
                470,533
                
                
                
                453,388
                
                
                
                583,346
                
                
                
                577,893Repurchase
      agreements
                
                
                1,975,402
                
                
                
                1,977,664
                
                
                
                562,119
                
                
                
                562,164Securitized
      debt
                
                
                390,350
                
                
                
                408,404
                
                
                
                488,743
                
                
                
                510,796
 
 F-20


6.  Repurchase
Agreements





The
Company had outstanding $2.0 billion and $562.1 million of repurchase agreements
with weighted average borrowing rates of 0.60% and 1.43% and weighted average
remaining maturities of 26 and 2 days as of December 31, 2009 and 2008,
respectively.  At December 31, 2009 and 2008, RMBS pledged as
collateral under these repurchase agreements had an estimated fair value of $2.0
billion and $680.8 million, respectively.   The interest rates of
these repurchase agreements are generally indexed to the one-month LIBOR rate
and re-price accordingly.





At
December 31, 2009 and 2008, the repurchase agreements collateralized by RMBS had
the following remaining maturities:




December
      31, 2009
              
              
              December
      31, 2008(dollars
      in thousands)Overnight
              
              $
              -
              
              
              $
              -1-30
      days (1)
              
              
              1,772,662
              
              
              
              562,11930
      to 59 days
              
              
              62,243
              
              
              
              -60
      to 89 days
              
              
              -
              
              
              
              -90
      to 119 days
              
              
              -
              
              
              
              -Greater
      than or equal to 120 days
              
              
              140,497
              
              
              
              -Total
              
              $
              1,975,402
              
              
              $
              562,119(1)
      Repurchase agreements with affiliates totalled $259.0 million and $562.1
      million for the years ended December 31, 2009 and 2008,
      respectively.
 At
December 31, 2009, the Company did not have an amount at risk greater than 10%
of its equity with any counterparty.  At December 31, 2008 the Company
had an amount at risk of approximately 29% of its equity with Annaly, an
affiliate.
 
 7.  Securitized
Debt
 
 All of
the Company’s securitized debt is collateralized by residential mortgage
loans.  For financial reporting purposes, the Company’s securitized
debt is accounted for as a financing.  Thus, the residential mortgage
loans held as collateral are recorded in the assets of the Company as
securitized loans held for investment and the securitized debt is recorded as a
liability in the statements of financial condition.
 
 At
December 31, 2009, the Company’s securitized debt collateralized by residential
mortgage loans had a principal balance of $390.4 million.  The debt
matures between the years 2015 and 2038.  At December 31, 2009, the
debt carried a weighted average cost of financing equal to 5.50%, that is
secured by residential mortgage loans of which approximately 43% of the
remaining principal balance pays a fixed rate of 6.33% and 57% of the remaining
principal balance pays a variable rate of 5.63%.  At December 31,
2008, securitized debt collateralized by residential mortgage loans had a
principal balance of $488.7 million.  At December 31, 2008, the debt
carried a weighted average cost of financing equal to 5.55%, of which
approximately 44% of the remaining principal balance is a fixed rate at 6.32%
and 56% of the remaining principal balance at a variable rate of
5.65%.
 
 The
following table presents the estimated principal repayment schedule of the
securitized debt held by the Company outstanding at December 31, 2009 and 2008,
based on expected cashflows of the loans collateralizing the debt:
  December
      31, 2009
                  
                  
                  December
      31, 2008(dollars
      in thousands)Within
      One Year
                  
                  $
                  37,192
                  
                  
                  $
                  65,561One
      to Three Years
                  
                  
                  70,885
                  
                  
                  
                  112,745Three
      to Five Years
                  
                  
                  59,382
                  
                  
                  
                  85,955Greater
      Than or Equal to Five Years
                  
                  
                  240,945
                  
                  
                  
                  246,535Total
                  
                  $
                  408,404
                  
                  
                  $
                  510,796
 
 F-21


Maturities
of the Company’s securitized debt are dependent upon cash flows received from
the underlying loans. The estimate of their repayment is based on scheduled
principal payments on the underlying loans. This estimate will differ from
actual amounts to the extent prepayments and/or loan losses are
experienced.





As of
December 31, 2009 and 2008, the Company had no off balance sheet credit
risk.





8.  Common
Stock





On September 24, 2009, the Company
adopted a dividend reinvestment and share purchase plan
(“DRSPP”).  The DRSPP provides holders of record of our common stock
an opportunity to automatically reinvest all or a portion of their cash
distributions received on common stock in additional shares of our common stock
as well as to make optional cash payments to purchase shares of our common
stock. Persons who are not already stockholders may also purchase our common
stock under the plan through optional cash payments.   The DRSPP
is administered by the Administrator, The Bank of New York Mellon.  To
date no shares were issued under the DRSPP.





On May
27, 2009, the Company announced the sale of 168,000,000 shares of common stock
at $3.22 per share for estimated proceeds, less the underwriters’ discount and
offering expenses, of $519.3 million.  Immediately following the sale
of these shares Annaly purchased 4,724,017 shares at the same price per share as
the public offering, for proceeds of approximately $15.2 million. In addition,
on June 1, 2009 the underwriters exercised the option to purchase up to an
additional 25,200,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters’ discount, of approximately $77.9 million. These
sales were completed on June 2, 2009.  In all, the Company raised net
proceeds of approximately $612.4 million in these offerings.





On May
22, 2009, the Company filed an amendment to its Articles of
Incorporation.  The Company’s Articles of Incorporation previously
allowed the Company to issue up to a total of 550,000,000 shares of capital
stock, par value $0.01 per share.  As of May 22, 2009, the Company had
472,401,769 shares of common stock issued and outstanding.  To retain
the ability to issue additional shares of capital stock, the Company has
increased the number of shares it is authorized to issue to 1,100,000,000 shares
consisting of 1,000,000,000 shares of common stock, $0.01 par value per common
share, and 100,000,000 shares of preferred stock, $0.01 par value per preferred
share.





On April
15, 2009, the Company announced the sale of 235,000,000 shares of common stock
at $3.00 per share for estimated proceeds, less the underwriters’ discount and
offering expenses, of $674.8 million.  Immediately following the sale
of these shares Annaly purchased 24,955,752 shares at the same price per share
as the public offering, for proceeds of approximately $74.9 million. In
addition, on April 16, 2009 the underwriters exercised the option to purchase up
to an additional 35,250,000 shares of common stock to cover over-allotments for
proceeds, less the underwriters’ discount, of approximately $101.3 million.
These sales were completed on April 21, 2009.  In all, the Company
raised net proceeds of approximately $850.9 in these offerings.





On
October 24, 2008, the Company announced the sale of 110,000,000 shares of common
stock at $2.25 per share for estimated proceeds, less the underwriters’ discount
and offering expenses, of $237.9 million.  Immediately following the
sale of these shares, Annaly purchased 11,681,415 shares at the same price per
share as the public offering, for proceeds of approximately $26.3
million.  In addition, on October 28, 2008 the underwriters exercised
the option to purchase up to an additional 16,500,000 shares of common stock to
cover over-allotments for proceeds, less the underwriters’ discount, of
approximately $35.8 million.  These sales were completed on October
29, 2008.  In all, the Company’s raised net proceeds of approximately
$299.9 million.





There was
no preferred stock issued or outstanding as of December 31, 2009 or
2008.





During
the year ended December 31, 2009, the Company declared dividends to common
shareholders totaling $242.4 million or $0.43 per share.  During the
year ended December 31, 2008, the Company declared dividends to common
shareholders totaling $28.9 million or $0.62 per share.


F-22


9.  Long
Term Incentive Plan





The
Company has adopted a long term stock incentive plan to provide incentives to
its independent directors and employees of FIDAC and its affiliates, to
stimulate their efforts towards the Company’s continued success, long-term
growth and profitability and to attract, reward and retain personnel and other
service providers.  The incentive plan authorizes the Compensation
Committee of the board of directors to grant awards, including incentive stock
options, non-qualified stock options, restricted shares and other types of
incentive awards.  The specific award granted to an individual is
based upon, in part, the individual’s position within FIDAC, the individual’s
position within the Company, his or her contribution to the Company’s
performance, market practices, as well as the recommendations of
FIDAC.  The incentive plan authorizes the granting of options or other
awards for an aggregate of the greater of 8.0% of the outstanding shares of the
Company’s common stock up to a ceiling of 40,000,000 shares.





On
January 2, 2008, the Company granted restricted stock awards in the amount of
1,301,000 shares to FIDAC’s employees and the Company’s independent
directors.  The awards to the independent directors vested on the date
of grant and the awards to FIDAC’s employees vest quarterly over a period of 10
years.  Of these shares, as of December 31, 2009, 269,800 shares have
vested and 21,955 shares were forfeited or cancelled.  There have been
no incentive awards granted since January 2, 2008.




As of
December 31, 2009, there was $18.4 million of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
the long term incentive plan. That cost is expected to be recognized over a
weighted-average period of 8.0 years. The total fair value of shares vested
during the year ended December 31, 2009 was $451,150.




10.  Income
Taxes





As a
REIT, the Company is not subject to Federal income tax to the extent that it
makes qualifying distributions to its stockholders, and provided it satisfies on
a continuing basis, through actual investment and operating results, the REIT
requirements including certain asset, income, distribution and stock ownership
tests.  Most states recognize REIT status as well.  During
the year ended December 31, 2009, the Company recorded $1,000 in income tax
expense related to state and federal tax liabilities on undistributed
income.  During the year ended December 31, 2008, the Company recorded
$12,431 in income tax expense related to state and federal tax liabilities on
undistributed income.





In
general, common stock cash dividends declared by the Company will be considered
ordinary income to stockholders for income tax purposes.  From time to
time, a portion of the Company’s dividends may be characterized as capital gains
or return of capital.  During the year ended December 31, 2009 the
Company estimates that all income distributed in the form of dividends will be
characterized as ordinary income.  For the year ended December 31,
2008, all income distributed in the form of dividends was characterized as
ordinary income.





11.  Credit
Risk and Interest Rate Risk





The
Company’s primary components of market risk are credit risk and interest rate
risk.  The Company is subject to credit risk and interest rate risk in
connection with its investments in non-Agency residential mortgage loans and
credit sensitive mortgage-backed securities.  When the Company assumes
credit risk, it attempts to minimize interest rate risk through asset selection,
hedging and matching the income earned on mortgage assets with the cost of
related liabilities.  The Company is subject to interest rate risk,
primarily in connection with its investments in fixed-rate and adjustable-rate
mortgage-backed securities, residential mortgage loans, and borrowings under
repurchase agreements.  The Company attempts to minimize credit risk
through due diligence and asset selection by purchasing loans underwritten to
agreed-upon specifications of selected originators.  The Company has
established a whole loan target market including prime borrowers with FICO
scores generally greater than 650, Alt-A documentation, geographic
diversification, owner-occupied property, and moderate loan to value
ratio.  These factors are considered to be important indicators of
credit risk





12.  Management
Agreement and Related Party Transactions





The
Company has entered into a management agreement with FIDAC, which provides for
an initial term through December 31, 2010 with an automatic one-year extension
option and subject to certain termination rights.  The Company pays
FIDAC a quarterly management fee equal to 1.75% per annum of the gross
Stockholders’ Equity (as defined in the management agreement) of the
Company.





On
October 13, 2008, the Company and FIDAC amended the management agreement to
reduce the base management fee from 1.75% per annum to 1.50% per annum of the
Company’s stockholders’ equity and provide that the incentive fees may be in
cash or shares of the Company’s common stock, at the election of the Company’s
board of directors.


F-23


On
October 19, 2008, the Company and FIDAC further amended the management agreement
to provide that the incentive fee be eliminated in its entirety and FIDAC
receive only the management fee of 1.50% per annum of the Company’s
stockholders’ equity.  From the Company’s inception to termination of
the incentive fee in October 2008, the Company had not paid incentive
fees.





Management
fees accrued and paid to FIDAC for the year ended December 31, 2009 and 2008
were $25.7 million and $8.4 million, respectively.





The
Company is obligated to reimburse FIDAC for its costs incurred under the
management agreement.  In addition, the management agreement permits
FIDAC to require the Company to pay for its pro rata portion of rent, telephone,
utilities, office furniture, equipment, machinery and other office, internal and
overhead expenses that FIDAC incurred in the operation of the
Company.  These expenses are allocated between FIDAC and the Company
based on the ratio of the Company’s proportion of gross assets compared to all
remaining gross assets managed by FIDAC as calculated at each quarter
end.   FIDAC and the Company will modify this allocation
methodology, subject to the Company’s board of directors’ approval if the
allocation becomes inequitable (i.e., if the Company becomes very highly
leveraged compared to FIDAC’s other funds and accounts).  FIDAC has
waived its right to request reimbursement from the Company of these expenses
until such time as it determines to rescind that waiver.





During
the year ended December 31, 2009 and 2008, 128,900 and 140,900 shares of
restricted stock issued by the Company to FIDAC’s employees vested, as discussed
in Note 9.





In March
2008, the Company entered into a Securities Industry and Financial Markets
Association standard preprinted form Master Repurchase Agreement with
Annaly.  This standard agreement does not contain any sort of
liquidity, net worth or other similar types of positive or negative
covenants.  Rather, the agreement contains covenants that require the
buyer and seller of securities to deliver collateral or securities, and similar
covenants which are customary in the form Master Repurchase
Agreement.  As of December 31, 2009, the Company was financing $259.0
million under this agreement at a weighted average rate of 1.72%.  At
December 31, 2008, the Company financed $562.1 million under this agreement at a
weighted average rate of 1.43%.  The Company has been in compliance
with all covenants of this agreement since it entered into this
agreement.





13.  Commitments
and Contingencies





From time
to time, the Company may become involved in various claims and legal actions
arising in the ordinary course of business.  Management is not aware
of any reported or unreported contingencies at December 31, 2009.





14.  Subsequent
Events





On
January 28, 2010, we formed Chimera Special Holdings LLC, a Delaware limited
liability company, as a wholly owned subsidiary of Chimera Asset Holding LLC,
which is a wholly owned subsidiary of Chimera Investment
Corporation.





On
January 29, 2010, the Company transferred $1.7 billion in principal value of its
RMBS to the CSMC 2010-1R Trust in a re-securitization transaction.  In
this transaction, the Company sold $128.1 million of AAA-rated fixed rate bonds
to third party investors for net proceeds of $127.7 million.  The
Company retained $563.6 million of AAA-rated bonds, $1.0 billion in subordinated
bonds and the owner trust certificate, and interest only bonds with a notional
value of $1.6 billion.  The subordinated bonds and the owner trust
certificate provide credit support to the AAA-rated bonds.  The bonds
issued by the trust are collateralized by RMBS that were transferred to the CSMC
2010-1R Trust.





There
were no material recognized or unrecognized subsequent events through the date
our consolidated financial statements were available to be issued.


F-24


15.  Summarized
Quarterly Results (Unaudited)





The
following is a presentation of the results of operations for the quarters ended
December 31, 2009, September 30, 2009, June 30, 2009 and March 31,
2009.




CHIMERA INVESTMENT
      CORPORATIONCONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(dollars
      in thousands, except share and per share data)(unaudited)For
      the Quarters EndedDecember
      31,
                2009
              
              
              September
      30,
                2009
              
              
              June
      30,
                2009
              
              
              March
      31,
                2009Net
      Interest Income:Interest
      income
              
              $
              100,765
              
              
              $
              104,690
              
              
              $
              65,077
              
              
              $
              28,007Interest
      expense
              
              
              8,530
              
              
              
              9,197
              
              
              
              8,313
              
              
              
              9,042Net
      interest income
              
              
              92,235
              
              
              
              95,493
              
              
              
              56,764
              
              
              
              18,965Other-than-temporary
      impairments:Total
      other-than-temporary impairment losses
              
              
              (1,480
              )
              
              
              (6,209
              )
              
              
              (8,575
              )
              
              
              -Non-credit
      portion of loss recognized in other comprehensive income
      (loss)
              
              
              164
              
              
              
              4,024
              
              
              
              2,080
              
              
              
              -Net
      other-than-temporary credit impairment losses
              
              
              (1,316
              )
              
              
              (2,185
              )
              
              
              (6,495
              )
              
              
              -Other
      gains:Realized
      gains on sales of investments, net
              
              
              16,191
              
              
              
              74,508
              
              
              
              9,321
              
              
              
              3,627Realized
      losses on principal write-downs on non-Agency RMBS
              
              
              (195
              )
              
              
              (61
              )
              
              
              -
              
              
              
              -Total
      other gains
              
              
              15,996
              
              
              
              74,447
              
              
              
              9,321
              
              
              
              3,627Net
      investment income
              
              
              106,915
              
              
              
              167,755
              
              
              
              59,590
              
              
              
              22,592Other
      expenses:Management
      fee
              
              
              8,516
              
              
              
              8,649
              
              
              
              5,955
              
              
              
              2,583Provision
      for loan losses
              
              
              1,692
              
              
              
              47
              
              
              
              1,130
              
              
              
              234General
      and administrative expenses
              
              
              1,238
              
              
              
              1,057
              
              
              
              861
              
              
              
              905Total
      other expenses
              
              
              11,446
              
              
              
              9,753
              
              
              
              7,946
              
              
              
              3,722Income
      before income taxes
              
              
              95,469
              
              
              
              158,002
              
              
              
              51,644
              
              
              
              18,870Income
      taxes
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1Net
      income
              
              $
              95,469
              
              
              $
              158,002
              
              
              $
              51,644
              
              
              $
              18,869Net
      income per share-basic and diluted
              
              $
              0.14
              
              
              $
              0.24
              
              
              $
              0.10
              
              
              $
              0.11Weighted
      average number of shares outstanding-basic and diluted
              
              
              670,324,435
              
              
              
              670,324,854
              
              
              
              503,110,132
              
              
              
              177,196,959Comprehensive
      income:Net
      income
              
              $
              95,469
              
              
              $
              158,002
              
              
              $
              51,644
              
              
              $
              18,869Other
      comprehensive (loss) income:Unrealized
      (loss) gain on available-for-sale securities
              
              
              (31,753
              )
              
              
              238,969
              
              
              
              39,501
              
              
              
              13,590Reclassification
      adjustment for net losses included in net income for
                other-than-temporary
      credit impairment losses
              
              
              1,316
              
              
              
              2,185
              
              
              
              6,495
              
              
              
              -Reclassification
      adjustment for realized gains included in net income
              
              
              (15,996
              )
              
              
              (74,447
              )
              
              
              (9,321
              )
              
              
              (3,627
              )Other
      comprehensive (loss) income:
              
              
              (46,433
              )
              
              
              166,707
              
              
              
              36,675
              
              
              
              9,963Comprehensive
      income
              
              $
              49,036
              
              
              $
              324,709
              
              
              $
              88,319
              
              
              $
              28,832
 
 F-25


CHIMERA
      INVESTMENT CORPORATIONCONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)(dollars
      in thousands, except share and per share data)(unaudited)    For
      the Quarters EndedDecember
      31,
                2008
              
              
              September
      30,
                2008
              
              
              June
      30,
                2008
              
              
              March
      31,
                2008Net
      Interest Income:Interest
      income
              
              $
              23,656
              
              
              $
              23,458
              
              
              $
              29,951
              
              
              $
              28,194Interest
      expense
              
              
              10,954
              
              
              
              15,543
              
              
              
              20,025
              
              
              
              14,022Net
      interest income
              
              
              12,702
              
              
              
              7,915
              
              
              
              9,926
              
              
              
              14,172Other
      (losses) gains:Unrealized
      gains (losses) on interest rate swaps
              
              
              -
              
              
              
              10,065
              
              
              
              25,584
              
              
              
              (31,493
              )Realized
      (losses) gains on sales of investments, net
              
              
              -
              
              
              
              (113,130
              )
              
              
              1,644
              
              
              
              (32,819
              )Realized
      (losses) gains on termination of interest rate swaps
              
              
              -
              
              
              
              (10,460
              )
              
              
              123
              
              
              
              -Total
      other (losses) gains
              
              
              -
              
              
              
              (113,525
              )
              
              
              27,351
              
              
              
              (64,312
              )Net
      investment income
              
              
              12,702
              
              
              
              (105,610
              )
              
              
              37,277
              
              
              
              (50,140
              )Other
      expenses:Management
      fee
              
              
              2,292
              
              
              
              1,681
              
              
              
              2,228
              
              
              
              2,227Provision
      for/reduction of loan losses
              
              
              940
              
              
              
              (563
              )
              
              
              (15
              )
              
              
              1,179General
      and administrative expenses
              
              
              686
              
              
              
              816
              
              
              
              1,167
              
              
              
              1,386Total
      other expenses
              
              
              3,918
              
              
              
              1,934
              
              
              
              3,380
              
              
              
              4,792Income
      (loss) before income taxes
              
              
              8,784
              
              
              
              (107,544
              )
              
              
              33,897
              
              
              
              (54,932
              )Income
      taxes
              
              
              (3
              )
              
              
              12
              
              
              
              -
              
              
              
              3Net
      income (loss)
              
              $
              8,787
              
              
              $
              (107,556
              )
              
              $
              33,897
              
              
              $
              (54,935
              )Net
      income (loss) per share-basic and diluted
              
              $
              0.07
              
              
              $
              (2.76
              )
              
              $
              0.87
              
              
              $
              (1.46
              )Weighted
      average number of shares outstanding-basic and diluted
              
              
              135,115,190
              
              
              
              38,992,893
              
              
              
              38,999,950
              
              
              
              37,744,486Comprehensive
      loss:Net
      income (loss) per share-basic and diluted
              
              $
              8,787
              
              
              $
              (107,556
              )
              
              $
              33,897
              
              
              $
              (54,935
              )Other
      comprehensive loss:Unrealized
      (loss) gain on available-for-sale securities
              
              
              (128,361
              )
              
              
              (146,456
              )
              
              
              (58,051
              )
              
              
              (88,257
              )Reclassification
      adjustment for realized gains (losses) included in net income
      (loss)
              
              
              -
              
              
              
              113,130
              
              
              
              (1,644
              )
              
              
              32,819Other
      comprehensive loss:
              
              
              (128,361
              )
              
              
              (33,326
              )
              
              
              (59,695
              )
              
              
              (55,438
              )Comprehensive
      loss
              
              $
              (119,574
              )
              
              $
              (140,882
              )
              
              $
              (25,798
              )
              
              $
              (110,373
              )





F-26


SIGNATURES





Pursuant
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 its behalf by
the undersigned, thereunto duly authorized, in the city of New York, State of
New York.




CHIMERA
      INVESTMENT CORPORATIONBy:
              /s/ Matthew LambiaseMatthew
      LambiaseChief
      Executive Officer and PresidentFebruary
      25, 2010




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
 
 Signatures
              Title
              Date/s/
      Matthew Lambiase
              Chief
      Executive Officer, President, and
                Director
      (Principal Executive Officer)
              February
      25, 2010Matthew
      Lambiase/s/
      A. Alexandra Denahan
              Chief
      Financial Officer (Principal Financial
                and
      Accounting Officer)
              February
      25, 2010A.
      Alexandra Denahan/s/
      Jeremy Diamond
              Director
              February
      25, 2010Jeremy
      Diamond/s/
      Mark Abrams
              Director
              February
      25, 2010Mark
      Abrams/s/
      Paul A. Keenan
              Director
              February
      25, 2010Paul
      A. Keenan/s/
      Paul Donlin
              Director
              February
      25, 2010Paul
      Donlin