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UNITED
STATESSECURITIES AND
EXCHANGE COMMISSIONWASHINGTON, D.C. 20549




**FORM 10-K**

|x |  | ANNUAL REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934    
|- |  | ----------------------------------------------------------------------------------------------------
|  |  | **For the fiscal
      year ended December 31, 2012**                                               
|  |  | OR                                                                                                  
|o |  | TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
|  |  | For the transition
      period from         
      to                                              

**Commission File
Number: 001-35808**




ZAIS FINANCIAL CORP.**(Exact name of
registrant as specified in its charter)**




Maryland
    90-0729143(State or other jurisdiction of
    (I.R.S. Employerincorporation or organization)
    Identification No.)Two Bridge Avenue, Suite 322Red Bank, New Jersey
    07701-1106(Address of principal executive
      offices)
    (Zip
Code)


(732)
978-7518(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 Registered
|------------------------------------- | ---- | -----------------------------------------------
|Common Stock, $0.0001
      par value |      | New York Stock
      Exchange                  

Securities registered
pursuant to Section 12(g) of the Act:None



|
|

Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes  ̈ No x

Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange 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  ̈ No x

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
(§ 229.405 of this chapter) 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. x

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
large accelerated filer, accelerated filer and smaller reporting company
in Rule 12b-2 of the Exchange Act.

|Large accelerated filer  ̈                                                   | Accelerated filer  ̈        
|--------------------------------------------------------------------------- | ---------------------------
|Non-accelerated filer x (Do not check if a smaller
      reporting company) | Smaller reporting company  ̈

Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes  ̈ No x

As of June 30,
2012, the last business day of the registrants most recently completed second
fiscal quarter, the registrants common stock was not listed on any exchange or
over-the counter market. The registrants common stock began trading on the New
York Stock Exchange on February 8, 2013. On March 25, 2013, the aggregate market
value of the registrants common stock held by non-affiliates of the registrant
was$161,213,497, based on a closing sales
price of the registrants common stock on such date as reported on the New York
Stock Exchange.

On March 25, 2013,
the registrant had a total of 7,970,886 shares of common stock, $0.0001 par
value, outstanding.



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Table of Contents

CONTENTS

|           |  |                                                                                                  | Page
|---------- |  | ------------------------------------------------------------------------------------------------ | ----
|PART I    
|Item 1.    |  | Business                                                                                         | 3   
|Item 1A.   |  | Risk Factors                                                                                     | 8   
|Item 1B.   |  | Unresolved Staff Comments                                                                        | 47  
|Item 2.    |  | Properties                                                                                       | 47  
|Item 3.    |  | Legal Proceedings                                                                                | 47  
|Item 4.    |  | Mine Safety Disclosures                                                                          | 47  
|          
|PART II   
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters
      and Issuer Purchases of |     
|           |  | Equity Securities                                                                                | 48  
|Item 6.    |  | Selected Financial Data                                                                          | 50  
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and
      Results of Operations      | 51  
|Item 7A.   |  | Quantitative and Qualitative Disclosures
      About Market Risk                                 | 69  
|Item 8.    |  | Financial Statements and Supplementary Data                                                      | 71  
|Item 9.    |  | Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure       | 97  
|Item 9A.   |  | Controls and Procedures                                                                          | 97  
|Item 9B.   |  | Other Information                                                                                | 97  
|          
|PART III  
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                           | 98  
|Item 11.   |  | Executive Compensation                                                                           | 105 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder     |     
|           |  | Matters                                                                                          | 109 
|Item 13.   |  | Certain Relationships and Related
      Transactions and Director Independence                   | 111 
|Item 14.   |  | Principal Accountant Fees and Services                                                           | 115 
|          
|PART IV   
|Item 15.   |  | Exhibits                                                                                         | 116 
|Signatures |  |                                                                                                  | 118 

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Table of Contents

FORWARD-LOOKING
STATEMENTS

The Company makes forward-looking statements in this annual report on
Form 10-K within the meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E of the Securities Exchange Act
of 1934, as amended (the Exchange Act). For these statements, the Company
claims the protections of the safe harbor for forward-looking statements
contained in such Sections. Forward-looking statements are subject to
substantial risks and uncertainties, many of which are difficult to predict and
are generally beyond the Companys control. These forward-looking statements
include information about possible or assumed future results of the Companys
business, financial condition, liquidity, results of operations, plans and
objectives. When the Company uses the words believe, expect, anticipate,
estimate, plan, continue, intend, should, could, would, may,
potential or the negative of these terms or other comparable terminology, the
Company intends to identify forward-looking statements. Statements regarding the
following subjects, among others, may be forward-looking:

- the Companys investment objectives and business
  strategy;
- the Companys ability to obtain future
  financing arrangements;
- the Companys expected
  leverage;
- the Companys expected
  investments;
- estimates or statements relating to,
  and the Companys ability to make, future distributions;
- the Companys ability to compete in
  the marketplace;
- market, industry and economic
  trends;
- recent market developments and actions
  taken and to be taken by the U.S. Government, the U.S. Department of the
  Treasury and the Board of Governors of the Federal Reserve System, the Federal
  Depositary Insurance Corporation, the Federal National Mortgage Association
  (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac),
  the Government National Mortgage Association (Ginnie Mae) and the U.S.
  Securities and Exchange Commission (SEC);
- mortgage loan modification programs
  and future legislative actions;
- the Companys ability to maintain its
  qualification as a real estate investment trust (REIT);
- the Companys ability to maintain its
  exemption from qualification under the Investment Company Act of 1940, as
  amended (the 1940 Act);
- projected capital and operating
  expenditures;availability of
  investment opportunities in mortgage-related, real estate-related and other
  securities;
- availability of qualified
  personnel;
- prepayment rates; and
- projected default rates.

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Table of Contents

The Companys beliefs, assumptions and expectations can change as a
result of many possible events or factors, not all of which are known to it or
are within its control. If any such change occurs, the Companys business,
financial condition, liquidity and results of operations may vary materially
from those expressed in, or implied by, the Companys forward-looking
statements. These risks, along with, among others, the following factors, could
cause actual results to vary from the Companys forward-looking
statements:

- the factors referenced in this annual report on Form 10-K, including
  those set forth under Item 1, Business and Item 1A, Risk
  Factors;
- the Companys limited operating
  history;
- general volatility of the capital
  markets;
- changes in the Companys investment
  objectives and business strategy;
- availability, terms and deployment of
  capital; availability of suitable investment
  opportunities;
- the Companys dependence on its
  external advisor, ZAIS REIT Management, LLC (the Advisor), and the Companys
  ability to find a suitable replacement if the Company or the Advisor were to
  terminate the investment advisory agreement the Company has entered into with
  the Advisor;
- changes in the Companys assets,
  interest rates or the general economy;
- increased rates of default and/or
  decreased recovery rates on the Companys investments;
- changes in interest rates, interest
  rate spreads, the yield curve or prepayment rates; changes in prepayments of the
  Companys assets;
- limitations on the Companys business
  by the REIT requirements; and
- the degree and nature of the Companys
  competition, including competition for residential mortgage-backed securities
  (RMBS).

Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. These forward-looking
statements apply only as of the date of this annual report on Form 10-K. The
Company is not obligated, and does not intend, to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. See Item 1A, Risk Factors of this annual report on Form
10-K.

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Table of Contents

PART I

In this annual report on Form 10-K, references to the Company refer
to ZAIS Financial Corp., a Maryland corporation, together with its consolidated
subsidiaries; references to the Advisor refer to ZAIS REIT Management, LLC, a
Delaware limited liability company; references to the Operating Partnership
refer to ZAIS Financial Partners, L.P., a Delaware limited partnership; in each
case unless specifically stated otherwise or the context otherwise indicates,
and references to risk-adjusted returns refer to the profile of expected asset
returns across a range of potential macroeconomic scenarios.

Item 1. Business.

GENERAL; FORMATION
TRANSACTION AND INITIAL PUBLIC OFFERING

The Company is a
Maryland corporation that invests in, finances and manages a diversified
portfolio of residential mortgage assets, other real estate-related securities
and financial assets, which the Company refers to as its target assets. The
Company was organized and commenced operations on July 29, 2011 and completed
its initial public offering on February 13, 2013. The Companys shares of common
stock are traded on the New York Stock Exchange (NYSE) under the Symbol
ZFC.

The Company
currently primarily invests in, finances and manages RMBS, including RMBS that
are not issued or guaranteed by a federally chartered corporation, such as the
Federal National Mortgage Association (Fannie Mae), or the Federal Home Loan
Mortgage Corporation (Freddie Mac), or an agency of the U.S. Government, such
as the Government National Mortgage Association (Ginnie Mae) (non-Agency
RMBS), as well as RMBS that are issued or guaranteed by a federally chartered
corporation or a U.S. Government agency (Agency RMBS). The Companys RMBS
strategy focuses on non-Agency RMBS with an emphasis on securities that, when
originally issued, were rated in the highest rating category by one or more of
the nationally recognized statistical rating organizations, as well as Agency
RMBS. The Companys strategy will also emphasize the purchase of performing and
re-performing residential whole loans. The Company will also have the discretion
to invest in other real estate-related and financial assets, including mortgage
servicing rights (MSRs), interest only strips created from RMBS (IOs),
commercial mortgage-backed securities (CMBS) and asset-backed securities
(ABS).

The Companys
income is generated primarily by the net spread between the income the Company
earns on its assets and the cost of the Companys financing and hedging
activities. The Companys objective is to provide attractive risk-adjusted
returns to its stockholders, primarily through quarterly distributions and
secondarily through capital appreciation.

The Company is
externally managed and advised by ZAIS REIT Management, LLC (the Advisor), a
subsidiary of ZAIS Group, LLC (ZAIS). ZAIS was established in 1997 and is an
investment adviser registered with the U.S. Securities and Exchange Commission
(the SEC) specializing in structured credit, including residential whole loans,
RMBS and ABS. As of December 31, 2012, ZAIS estimates that it had approximately
$5.4 billion of assets under management (comprised of the net asset value of
managed funds, and the aggregate principal balance of collateralized debt
obligation (CDO) vehicles and other entities, which do not mark their
securities to fair market value under U.S. generally accepted accounting
principles (U.S. GAAP)) and has built long-term relationships with a global
investor base, including public and private pension funds,
endowment/foundations, insurance companies, family offices, fund of funds,
sovereign wealth funds and investment advisors. ZAIS possesses a comprehensive
analytics and technology infrastructure, credit modeling, loan and securities
valuation, loan data management and servicing oversight capabilities and
significant structuring and securitization experience. As of December 31, 2012,
ZAISs team included 130 professionals in the United States, Europe and Asia.
ZAIS is the managing member of the Advisor and ZAIS and its employees support
the Advisor in providing services to the Company pursuant to the terms of a
shared facilities and services agreement between ZAIS and the Advisor. The
Company relies on the Advisor and ZAIS to provide or obtain, on the Companys
behalf, the personnel and services necessary for the Company to conduct its
business because the Company has no employees of its own.

The Company
completed its formation transaction and commenced operations on July 29, 2011.
The formation transaction involved the exchange by investors in two funds from
the Matrix VI series of funds (the Matrix VI Funds) of cash and RMBS assets
for an aggregate of 3,022,617 shares of the Companys commonstock. The Company received approximately $60.5
million in this transaction, including $8.65 million from certain current and
former employees of ZAIS and relatives of such persons as well as current and
former members and owners of ZAIS (the ZAIS Parties), and deployed the cash
together with additional borrowings to build a diversified portfolio of RMBS
assets.

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On
February 13, 2013, the Company successfully completed its initial public
offering (the IPO), pursuant to which it sold 5,650,000 shares of its common
stock to the public at a price of $21.25 per share for gross proceeds of $120.1
million. In connection with the IPO, the Advisor paid an underwriting fee of
$6.3 million. The Company did not pay any underwriting fees, discounts or
commissions in connection with the IPO. Net proceeds after the payment of
offering costs of approximately $1.2 million were $118.9 million.

As of December 31,
2012, the Company held a diversified portfolio of RMBS assets with an estimated
fair market value of $170.7 million, consisting primarily of senior tranches of
non-Agency RMBS that were originally highly rated but subsequently downgraded,
and Agency RMBS collateralized by either fixed rate loans or adjustable rate
mortgages (ARMs). The borrowings the Company used to fund the purchase of its
portfolio totaled approximately $116.1 million as of December 31, 2012 under
master repurchase agreements with three counterparties. The Company is also in
discussions with other financial institutions to provide it with additional
borrowing capacity under various agreements, including repurchase agreements and
other types of financing arrangements.

The Company is a
Maryland corporation and is organized in a traditional umbrella partnership real
estate investment trust (UpREIT) format pursuant to which the Company serves
as the general partner of, and conducts substantially all of its business
through, its Operating Partnership subsidiary, ZAIS Financial Partners, L.P., a
Delaware limited partnership (the Operating Partnership). As of December 31,
2012, the Company owned an approximate 69.1% partnership interest in the
Operating Partnership (comprised of a general and limited partnership interest),
and an approximate 89.3% partnership interest immediately upon the completion of
the IPO. The Company has elected to be taxed as a REIT for U.S. federal income
tax purposes commencing with its taxable year ended December 31,
2011.

The Companys
principal place of business is Two Bridge Avenue, Suite 322, Red Bank, New
Jersey 07701-1106. The Companys telephone number is (732) 978-7518. The
Companys website address is www.zaisfinancial.com. The information found on, or
otherwise accessible through, the Companys website is not incorporated into,
and does not form a part of, this report.

INVESTMENT
STRATEGY

The Companys
objective is to provide attractive risk-adjusted returns to its stockholders
over the long-term, primarily through quarterly distributions and secondarily
through capital appreciation. The Company intends to achieve this objective by
selectively constructing a portfolio of its target assets. The Company may
utilize ZAISs experience and relationships developed in managing its existing
whole loan investment platform to purchase loans originated prior to the
financial crisis that began in 2007 at prices below the par amount of such loan.
The Advisor is actively reviewing, for the Company, a pipeline of multiple whole
loan portfolio transactions and is continually seeking to source available
assets for the Company. The Company believes that its target assets currently
present attractive risk-adjusted return profiles and that current market
conditions present opportunities for it to selectively acquire its target assets
at attractive trading prices. As market conditions change over time, the Company
intends to adjust its strategy by shifting its asset allocations across its
target asset classes to take advantage of changes in interest rates and credit
spreads as well as economic and credit conditions. The Company believes that the
diversification of its portfolio of assets, its expertise among mortgage loans
and securities and the flexibility of its strategy will position it to generate
attractive risk-adjusted returns for its stockholders over the long-term.

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The Company relies
on the Advisors investment expertise in identifying and efficiently financing
its assets. The Advisor makes investment decisions based on a variety of
factors, including expected risk-adjusted returns, credit fundamentals,
liquidity, availability of adequate financing, borrowing costs and macroeconomic
conditions, as well as maintaining the Companys REIT qualification and its
exemption from registration as an investment company under the 1940 Act. The
Company follows a predominantly long-term buy and hold strategy with respect to
many of the assets that it acquires. However, certain assets purchased during
the deployment of theIPO proceeds
may be sold as the Company seeks assets that meet the Companys target
allocations described below over the long-term. The Companys target assets are
as follows:

Non-Agency RMBS. RMBS that are not issued or guaranteed by
a U.S. Government agency or federally chartered corporation, with an emphasis on
securities that, when originally issued, were rated in the highest rating
category by one or more of the nationally recognized statistical rating
organizations.

The mortgage loan
collateral for non-Agency RMBS consists of residential mortgage loans that do
not generally conform to underwriting guidelines issued by Fannie Mae, Freddie
Mac or Ginnie Mae, due to certain factors, including mortgage balances in excess
of agency underwriting guidelines, borrower characteristics, loan
characteristics and level of documentation, and therefore are not issued or
guaranteed by an agency. The mortgage loan collateral may be classified as
prime, subprime and alternative-A and alternative-B mortgage loans, which may be
adjustable-rate, hybrid and/or fixed-rate residential mortgage loans, and pay
option ARMs.

**Agency
RMBS**. RMBS that are issued
or guaranteed by a federally chartered corporation or a U.S. Government agency.
The Agency RMBS the Company targets can be collateralized by either fixed rate
loans or ARMs. To-be-announced forward contracts are pools of mortgages with
specific investment terms to be issued by one or more of the federally chartered
corporations, such as Fannie Mae or Freddie Mac, or an agency of the U.S.
Government, such as Ginnie Mae (Agencies) at a future date.

**Residential Mortgage Loans**. Prime, subprime and alternative-A and
alternative-B mortgage loans, which may be adjustable-rate, hybrid and/or
fixed-rate residential mortgage loans, and pay option ARMs. The Company expects
that the residential mortgage loans that it may acquire will be primarily, but
not exclusively, performing and re-performing loans at the time of acquisition.

**MSRs and
Other Real Estate-Related and Financial Assets**. An MSR provides a mortgage servicer with the
right to service a pool of mortgages in exchange for a portion of the interest
payments made on the underlying mortgages. IO securities are mortgage-backed
securities structured with two or more classes that receive different
distributions of principal or interest on a pool of Agency RMBS or non-Agency
RMBS or whole loans. IOs receive only interest. CMBS are securities backed by
obligations (including certificates of participation in obligations) that are
principally secured by commercial mortgages on real property or interests
therein having a multifamily or commercial use, such as regional malls, other
retail space, office buildings, industrial or warehouse properties, hotels,
apartments, nursing homes and senior living facilities. Subject to maintaining
its qualification as a REIT, the Company may acquire debt and equity tranches of
securitizations backed by various asset classes, including small balance
commercial mortgages, manufactured housing, aircraft, automobiles, credit cards,
equipment, manufactured housing, franchises, recreational vehicles and student
loans.

**Asset
Allocations**. Based on
current market conditions, over time, the Company expects to allocate an
estimated: 50% to 60% of its equity to whole loans; 30% to 40% of its equity to
non-Agency RMBS; 5% to 10% of its equity to MSRs, other real estate-related and
financial assets and cash; and 0% to 5% of its equity to Agency RMBS. As market
conditions change, the Company intends to adjust its strategy by shifting its
asset allocations across its target asset classes. The Company believes that the
diversification of its portfolio of assets, its expertise among its target
assets and the flexibility of its strategy will position it to generate
attractive risk-adjusted returns for its stockholders in a variety of assets and
market conditions. The Company will rely on the Advisors expertise in
identifying assets within the target assets described above and, to the extent
that leverage is employed, efficiently financing those assets. The Company
expects allocation decisions will be based on a variety of factors, including
expected risk-adjusted returns, credit fundamentals liquidity and the
availability of certain assets.

**FINANCING
STRATEGY**

The Company uses
leverage primarily for the purposes of financing its portfolio and increasing
potential returns to stockholders rather than for the purpose of speculating on
changes in interest rates. The Company funds the acquisition of its target
assets through the use of prudent amounts of leverage. The borrowings the
Company used to fund the purchase of its portfolio totaled approximately $116.1
million as of December 31, 2012 under master repurchase agreements with three
counterparties. The Company is also in discussions with other financial
institutions to provide it with additional borrowing capacity under various
agreements, including repurchase agreements and other types of financing
arrangements.

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The Companys income is generated primarily by the net spread between the
income it earns on its assets and the cost of its financing and hedging
activities. Although the Company is not required to maintain any particular
leverage ratio, the amount of leverage it deploys for particular investments in
its target assets depends upon the Advisors assessment of a variety of factors,
which may include the anticipated liquidity and price volatility of the assets
in its investment portfolio, the gap between the duration of its assets and
liabilities, including hedges, the availability and cost of financing assets,
its opinion of the creditworthiness of its financing counterparties, the health
of the U.S. economy and residential and commercial mortgage-related markets, its
outlook for the level, slope, and volatility of interest rates, the credit
quality of collateral underlying the Companys non-Agency RMBS, Agency RMBS,
residential mortgage loans and other target assets, its outlook for asset
spreads relative to the LIBOR curve and regulatory requirements limiting the
permissible amount of leverage to be utilized. Based on current market
conditions, the Company expects that it may deploy, on a debt-to-equity basis,
up to nine to one leverage on its Agency RMBS assets. In addition, the Company
expects that it may deploy, on a debt-to-equity basis, up to three to one
leverage on its non-Agency RMBS assets and up to four to one leverage on its
residential whole loans. To the extent the Company securitizes any residential
mortgage loans in the future, it expects that the leverage obtained through such
structures will vary considerably depending on the characteristics of the
underlying loans.

The Company is
restricted in the amount of leverage it may employ by the terms and provisions
of its existing repurchase agreement borrowings as well as other financing
agreements that it may enter into in the future. The Company may also be subject
to margin calls as a result of its financing activities. In addition, the
Company intends to rely on short-term financing such as repurchase transactions
under master repurchase agreements, the duration of which is typically 30 to 90
days but in some cases may be longer.

See Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations, of this annual report on Form 10-K, for a discussion of the
Companys borrowings under repurchase agreements as of December 31, 2012.

The Company
utilizes derivative financial instruments to hedge the interest rate risk
associated with its borrowings. Subject to maintaining its qualification as a
REIT and exemption from registration as an investment company under the 1940
Act, the Company may also engage in a variety of interest rate management
techniques that seek on one hand to mitigate the influence of interest rate
changes on the values of some of its assets and on the other hand help the
Company achieve its risk management objectives. The Companys interest rate
management techniques may include: interest rate swap agreements, interest rate
cap agreements, exchange-traded derivatives and swaptions;puts
and calls on securities or indices of securities; U.S. Department of the
Treasury securities and options on U.S. Department of the Treasury securities;
IOs and MSRs; and other similar transactions and financial
instruments.

CORPORATE
GOVERNANCE

The Company
strives to maintain an ethical workplace in which the highest standards of
professional conduct are practiced.

- The Companys board of directors is
composed of a majority of independent directors. The Audit, Nominating and
Corporate Governance and Compensation Committees are composed exclusively of
independent directors.
- In order to foster the highest standards of ethics and conduct in all
  business relationships, the Company has adopted a Code of Conduct and Ethics
  policy, which covers a wide range of business practices and procedures, that
  applies to its officers, directors, employees, if any, and independent
  contractors, to its Advisor and its Advisor's officers and employees, to ZAIS
  and ZAISs officers and employees, and to any other affiliates of ZAIS or the
  Advisor, and such affiliates officers and employees, who provide services to
  the Company or the Advisor in respect of the Company. In addition, the Company
  has implemented Whistleblowing Procedures for Accounting and Auditing Matters
  and Code of Conduct and Ethics Violations (the Whistleblower Policy) that
  set forth procedures by which any Covered Persons (as defined in the
  Whistleblower Policy) may raise, on a confidential basis, concerns regarding,
  among other things, any questionable or unethical accounting, internal
  accounting controls or auditing matters and any potential violations of the Code of
  Conduct and Ethics with the Audit Committee or the chief compliance officer of
  ZAIS.
- The Company has adopted an Insider Trading
  Policy for Trading in the Securities of the Company (the Insider Trading
  Policy), that governs the purchase or sale of the Companys securities by any
  of directors, officers, and associates (as defined in the Insider Trading
  Policy) of the Company, if any, and independent contractors, as well as
  officers and employees of the Advisor and officers, employees and affiliates
  of ZAIS, and that prohibits any such persons from buying or selling the
  Companys securities on the basis of material nonpublic information.

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COMPETITION

The Companys success depends, in large part, on its ability to acquire
assets at favorable spreads over its borrowing costs and its ability to
efficiently manage its portfolio risks. In acquiring its target assets and
establishing hedge positions, the Company competes with other existing mortgage
REITs (both internally and externally managed), government sponsored
enterprises, mortgage finance and specialty finance companies, savings and loan
associations, banks, mortgage bankers, insurance companies, hedge funds
(including those managed by ZAIS), mutual funds, institutional investors,
investment banking firms, governmental bodies and other companies with similar
asset acquisition objectives. It is likely that the Company will also compete
with other entities which may be organized in the future. Some of the Companys
competitors may have greater financial resources and access to lower cost of
capital than the Company has, including the U.S. Department of the Treasury and
the Federal Reserve, both of which have recently become dominant players in the
RMBS markets. These competitors may not be subject to the same regulatory
constraints (such as REIT compliance or maintaining an exemption under the 1940
Act) as the Company. The effect of the existence of additional REITs and other
market participants may be to increase competition for the available supply of
mortgage assets suitable for purchase, as well as the amount of financing
available to the Company in the repurchase agreement market.

EMPLOYEES;
STAFFING

The Company has no
employees and is managed by the Advisor pursuant to an amended and restated
investment advisory agreement between the Company and the Advisor, dated as of
December 13, 2012, as amended from time to time (the Investment Advisory
Agreement). All of the Companys officers and non-independent directors are
employees of the Advisor or its affiliates.

AVAILABLE
INFORMATION

The Company maintains a website at www.zaisfinancial.com and
will make available, free of charge, on the Companys website (a) its annual
report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K (including any amendments thereto), proxy statements and other information
(collectively, Company Documents) filed with, or furnished to, the SEC, as
soon as reasonably practicable after such documents are so filed or furnished,
(b) Corporate Governance Guidelines, (c) director independence standards, (d)
Code of Conduct and Ethics and (e) written charters of the Audit Committee,
Compensation Committee and Nominating and Corporate Governance Committee of the
board of directors. Company Documents filed with, or furnished to, the SEC are
also available for review and copying by the public at the SECs Public
Reference Room at 100 F Street, NE., Washington, DC 20549 and at the SECs
website at www.sec.gov. Information
regarding the operation of the Public Reference Room may be obtained by calling
the SEC at 1-800-SEC-0330. The Company provides copies of its Corporate
Governance Guidelines and Code of Conduct and Ethics, free of charge, to
stockholders who request such documents. Requests should be directed to Scott
Eckstein, Financial Relations Board, an MWW Company at 304 Park Avenue South,
8th Floor, New York, New York 10010.

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Item 1A. Risk Factors.

*The Companys
business and operations are subject to a number of risks and uncertainties, the
occurrence of which could adversely affect its business, financial condition,
results of operations and ability to make distributions to stockholders and
could cause the value of the Companys capital stock to decline. Please refer to
the section entitled Forward-Looking Statements.*

Risks Relating to the
Companys Business

The lack of liquidity
in the Companys assets may adversely affect its business.

A
portion of the securities the Company owns or acquires may be subject to legal
and other restrictions on resale or will otherwise be less liquid than
publicly-traded securities. The illiquidity of the Companys assets may make it
difficult for it to sell such assets if the need or desire arises. In addition,
if the Company is required to liquidate all or a portion of its portfolio
quickly, it may realize significantly less than the value at which it has
previously recorded its assets. As a result, the Companys ability to vary its
portfolio in response to changes in economic and other conditions may be
relatively limited, which could adversely affect its results of operations and
financial condition.

The Company operates
in a highly competitive market for investment opportunities and competition may
limit its ability to acquire desirable investments in its target assets and
could also affect the pricing of these securities.

The Company
operates in a highly competitive market for investment opportunities. The
Companys profitability depends, in large part, on its ability to acquire its
target assets at attractive prices. In acquiring its target assets, the Company
will compete with a variety of institutional investors, including other REITs,
specialty finance companies, public and private funds (including other funds
managed by ZAIS), commercial and investment banks, commercial finance and
insurance companies and other financial institutions. Many of the Companys
competitors are substantially larger and have considerably greater financial,
technical, marketing and other resources compared to the Company. Several other
REITs have recently raised, or are expected to raise, significant amounts of
capital, and may have investment objectives that overlap with the Companys,
which may create additional competition for investment opportunities. Some
competitors may have a lower cost of funds and access to funding sources that
may not be available to the Company. Many of the Companys competitors are not
subject to the operating constraints associated with REIT tax compliance or
maintenance of an exemption from the 1940 Act. In addition, some of the
Companys competitors may have higher risk tolerances or different risk
assessments, which could allow them to consider a wider variety of investments
and establish more relationships than the Company. Furthermore, competition for
investments in the Companys target assets may lead to the price of such assets
increasing, which may further limit the Companys ability to generate desired
returns. The Company cannot provide assurance that the competitive pressures it
faces will not have a material adverse effect on its business, financial
condition and results of operations. Also, as a result of this competition,
desirable investments in the Companys target assets may be limited in the
future and the Company may not be able to take advantage of attractive
investment opportunities from time to time, as the Company can provide no
assurance that it will be able to identify and make investments that are
consistent with its investment objectives.

The Company is highly
dependent on information systems and communication systems; systems failures and
other operational disruptions could significantly affect its business, which
may, in turn, negatively affect its operating results and its ability to pay
dividends to its stockholders.

The Companys
business is highly dependent on the communications and information systems of
ZAIS which may interface with or depend on systems operated by third parties,
including market counterparties and other service providers. Any failure or
interruption of these systems could cause delays or other problems in the
Companys activities, including in its target asset acquisition activities,
which could have a material adverse effect on the Companys operating results
and negatively affect the value of its common stock and its ability to pay
dividends to its stockholders.

Additionally, the
Company relies heavily on financial, accounting and other data processing
systems and operational risks arising from mistakes made in the confirmation or
settlement of transactions, from transactions not being properly booked,
evaluated or accounted for or other similar disruption in the Companys
operations may cause it to suffer financial loss, the disruption of its
business, liability to third parties, regulatory intervention or reputational
damage.

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The Advisor will
utilize analytical models and data in connection with the valuation of the
Companys loans and securities, and any incorrect, misleading or incomplete
information used in connection therewith would subject the Company to potential
risks.

Given the complexity of the Companys investment strategies, the Advisor
must rely heavily on analytical models (both proprietary models developed by
ZAIS and those supplied by third parties) and information and data supplied by
third parties. Models and data will be used to value potential target assets and
also in connection with hedging the Companys acquisitions. In the event models
and data prove to be incorrect, misleading or incomplete, any decisions made in
reliance thereon expose the Company to potential risks. For example, by relying
on incorrect models and data, especially valuation models, the Advisor may be
induced to buy certain target assets at prices that are too high, to sell
certain other assets 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.

Difficult conditions
in the mortgage, residential and commercial real estate markets may cause the
Company to experience market losses related to its holdings, and there is no
assurance that these conditions will improve in the near future.

The Companys
results of operations are materially affected by conditions in the mortgage
market, the residential and commercial real estate markets, the financial
markets and the economy generally. The mortgage market 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. Disruption in the
mortgage market negatively impacts new demand for homes and home price
performance. There is a strong inverse correlation between home price growth
rates and mortgage loan delinquencies. A deterioration of the RMBS market may
cause the Company to experience losses related to its assets and to sell assets
at a loss. Declines in the fair market values of the Companys investments may
adversely affect its results of operations and credit availability, which may
reduce earnings and, in turn, cash available for distribution to its
stockholders.

Dramatic declines
in the residential and commercial real estate markets 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. Institutions from which the Company
may seek to obtain financing may have owned or financed residential or
commercial 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
financial crisis that began in 2007. 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 the Company to obtain financing on favorable
terms or at all. The Companys profitability may be adversely affected if the
Company is unable to obtain cost-effective financing for its assets.

Standard & Poors
downgrade of the U.S. Governments credit rating, and in the credit ratings of
instruments issued, insured or guaranteed by certain companies, institutions,
agencies and instrumentalities, or a further downgrade of the U.S. Governments
credit rating by Standard & Poors or the other credit ratings agencies
could result in economic uncertainty and a significant rise in interest rates,
either of which could have a material adverse effect on the Companys business,
financial condition, liquidity, results of operations and ability to make
distributions to its stockholders.

On August 2, 2011,
legislation was enacted to increase the federal debt ceiling and to reduce
future U.S. Government spending levels by as much as $2.4 trillion over the next
decade. Notwithstanding the passage of this legislation, there remains
uncertainty about whether the U.S. Government could default on its obligations
in the future. On August 5, 2011, Standard and Poors Ratings Services
(Standard & Poors) downgraded the long-term debt rating of the United
States from AAA to AA+ for the first time in history due to its belief that
legislative solutions have been inadequate to address the countrys growing debt
burden. Standard & Poors decision to further downgrade the U.S.
Governments credit rating could create broader financial and global banking
turmoil and uncertainty and could lead to a significant rise in interest rates.
On August 8, 2011, Standard & Poors downgraded the credit ratings of
certain long-term debt instruments issued by Fannie Mae and Freddie Mac and
other U.S. Government agencies linked to long-term U.S. debt. These downgrades
could adversely affect the fair market value of such instruments, and could
adversely impact the value of instruments that are collateralized by affected
instruments, thus impacting the Companys investment portfolio. Moreover, these
events could cause the interest rates on the Companys
borrowings and its cost of capital to increase significantly. As a result, these
events could materially and adversely affect the Companys interest expense and
other costs of borrowing and its ability to continue to acquire its target
assets on attractive terms. These consequences could be exacerbated if other
statistical rating agencies decide to downgrade the U.S. Governments credit
rating in the future, and/or Standard & Poors further downgrades the U.S.
Governments credit rating. Each of Moodys Investors Service, Inc. (Moodys)
and Fitch, Inc. (Fitch) has maintained its rating of U.S. debt at AAA, but has
warned of potential future downgrades if legislative solutions to address the
rising levels of U.S. Government debt are not found. Any of these outcomes could
have a material adverse effect on the Companys business, financial condition,
liquidity, results of operations and ability to make distributions to its
stockholders.

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The current financial
crisis in Europe, the recent downgrades of the credit ratings of certain
European countries and the risk that certain countries may default on their
sovereign debt, and the resulting impact on the financial markets, could have a
material adverse impact on the Companys business, financial condition, results
of operations and ability to make distributions to its stockholders.

The current financial crisis in Europe has created economic uncertainty
with respect to the ability of certain European countries to continue to service
their sovereign debt obligations. These conditions have adversely impacted
financial markets and have created substantial volatility and uncertainty, and
will likely continue to do so. The downgrades of the credit ratings of certain
European countries, including the recent downgrade of the U.K. Government by
Moodys from AAA status to AA1, have created broader financial turmoil and
uncertainty, which has recently weighed heavily on the global banking system.
Risks related to the current debt crisis in Europe have had, and are likely to
continue to have, a negative impact on global economic activity and the
financial markets. There can be no assurance that governmental or other measures
to aid economic recovery, including economic stimulus legislation, will be
effective. As these conditions persist, the Companys business, financial
condition, results of operations and ability to make distributions to its
stockholders could be materially adversely affected.

The federal
conservatorship of Fannie Mae and Freddie Mac and related efforts, along with
any changes in laws and regulations affecting the relationship between these
agencies and the U.S. Government, may adversely affect the Companys business.

The payments of
principal and interest the Company receives on its Agency RMBS, which depend
directly upon payments on the mortgages underlying such securities, are
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. Fannie Mae and Freddie Mac
are federally chartered corporations, but their guarantees are not backed by the
full faith and credit of the United States. Ginnie Mae is part of a U.S.
Government agency and its guarantees are backed by the full faith and credit of
the United States.

In September 2008,
the U.S. Treasury, the U.S. Federal Housing Finance Agency (the FHFA) and the
Board of Governors of the Federal Reserve System announced a comprehensive
action plan to help stabilize the financial markets, support the availability of
mortgage financing and protect taxpayers. Under this plan, among other things,
the FHFA was appointed as conservator of both Fannie Mae and Freddie Mac,
allowing the FHFA to control the actions of the two Agencies, without forcing
them to liquidate, which would be the case under receivership. Importantly, the
primary focus of the plan was to increase the availability of mortgage financing
by allowing these Agencies to continue to grow their guarantee business without
limit, while limiting the size of their retained mortgage and agency security
portfolios and requiring that these portfolios be reduced over time.

In an effort to
further stabilize the U.S. mortgage market, the U.S. Treasury pursued three
additional initiatives beginning in 2008. First, it entered into preferred stock
purchase agreements, which have been subsequently amended, with each of the
Agencies to ensure that they maintain a positive net worth. Second, it
established a new secured short-term credit facility, which was available to
Fannie Mae and Freddie Mac (as well as Federal Home Loan Banks) when other
funding sources were unavailable. Third, it established an agency security
purchase program under which the U.S. Treasury purchased Agency MBS in the open
market. The U.S. Federal Reserve also established a program of purchasing Agency
MBS.

Those efforts
resulted in significant U.S. Government financial support and increased control
of the Agencies. In December 2010, the FHFA reported that, from the time of
execution of the preferred stock purchase agreements through November 30, 2010,
funding provided to Fannie Mae and Freddie Mac under the preferred stock
purchase agreements amounted to $88.0 billion and $63.0 billion, respectively.
The U.S. Treasury's commitment to support the positive net
worth of Fannie Mae and Freddie Mac through preferred stock purchases continued
through the end of 2012. Those agreements, as amended, also require the
reduction of Fannie Maes and Freddie Macs mortgage and agency security
portfolios (they were limited to $900.0 billion as of December 31, 2009, and to
$810.0 billion as of December 31, 2010, and must be reduced each year until
their respective mortgage assets reach $250.0 billion). The U.S. Treasury
subsequently announced further steps to accelerate the reduction of the
portfolios, as described below.

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Both the
secured short-term credit facility and the agency security program initiated by
the U.S. Treasury expired on December 31, 2009. However, through that securities
purchase program (from September 2008 through December 2009), the U.S. Treasury
acquired $220.0 billion of Agency MBS. In addition, while the U.S. Federal
Reserves program of agency security purchases terminated in 2010, the FHFA
reported that through January 2010, the U.S. Federal Reserve had purchased $1.03
trillion net of Agency MBS. Subject to specified investment guidelines, the
portfolios of Agency MBS purchased through the programs established by the U.S.
Treasury and the U.S. Federal Reserve may be held to maturity and, based on
mortgage market conditions, adjustments may be made to these portfolios. This
flexibility may adversely affect the pricing and availability of Agency MBS that
the Company owns or seeks to acquire during the remaining term of these
portfolios.

Despite the steps taken by the U.S. Government, Fannie Mae and Freddie
Mac could default on their guarantee obligations which would materially and
adversely affect the value of the Companys Agency MBS. Accordingly, if these
government actions are inadequate and the Agencies continue to suffer losses or
cease to exist, the Companys business, operations and financial condition could
be materially and adversely affected.

In addition, the problems faced by Fannie Mae and Freddie Mac resulting
in their being placed into federal conservatorship and receiving significant
U.S. Government support have sparked serious debate among federal policy makers
regarding the continued role of the U.S. Government in providing liquidity for
mortgage loans. The future roles of Fannie Mae and Freddie Mac could be
significantly reduced and the nature of their guarantee obligations could be
considerably limited relative to historical measurements. Any such changes to
the nature of their guarantee obligations could redefine what constitutes an
agency security and could have broad adverse implications for the market and the
Companys business, operations and financial condition.

Alternatively, Fannie Mae and Freddie Mac could be dissolved or
privatized, and the U.S. Government could determine to stop providing liquidity
support of any kind to the mortgage market. In February 2011, the U.S. Treasury
and the Department of Housing and Urban Development released a report to
Congress entitled Reforming Americas Housing Finance Market in which they
proposed to reduce or eliminate the role of the Agencies in mortgage financing.
The report calls for phasing in increased pricing of Fannie Mae and Freddie Mac
guarantees to help level the playing field for the private sector to take back
market share, reducing conforming loan limits by allowing the temporary increase
in Fannie Maes and Freddie Macs conforming loan limits to reset as scheduled
on October 1, 2011 to the lower levels set in the Housing and Economic Recovery
Act of 2008 (HERA) and continuing to wind down Fannie Maes and Freddie Macs
investment portfolio at an annual rate of no less than 10% per year. It is not
yet possible to determine whether or when any of such proposals may be enacted,
what form any final legislation or policies might take and how proposals,
legislation or policies emanating from this report may impact the Companys
business, operations and financial condition. On August 17, 2012, the U.S.
Treasury announced further steps to expedite the wind-down of Fannie Mae and
Freddie Mac to an annual rate of 15% per year.

If Fannie Mae or Freddie Mac were eliminated, or their structures were to
change radically (i.e., limitation or removal of the guarantee obligation), or their
market share reduced because of required price increases or lower limits on the
loans they can guarantee, the Company could be unable to acquire additional
Agency MBS and its existing Agency MBS could be materially and adversely
impacted.

The Company could be negatively affected in a number of ways depending on
the manner in which related events unfold for Fannie Mae and Freddie Mac. The
Company relies on its Agency RMBS (as well as non-Agency RMBS) as collateral for
its financings under repurchase agreements. Any decline in their value, or
perceived market uncertainty about their value, would make it more difficult for
the Company to obtain financing on its Agency RMBS on acceptable terms or at
all, or to maintain the Companys compliance with the terms of any financing
transactions. Further, the current support provided by the U.S. Treasury to
Fannie Mae and Freddie Mac, and any additional support it may provide in the
future, could have the effect of lowering the interest rates the Company expects
to receive from Agency RMBS, thereby tightening the spread between the interest
the Company earns on its Agency RMBS and the cost of financing those assets. A
reduction in the supply of Agency RMBS could also negatively affect the pricing
of Agency RMBS by reducing the spread between the interest the Company earns on
its investment portfolio of Agency RMBS and its cost of financing that
portfolio.

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As indicated above, recent legislation has changed the relationship
between Fannie Mae and Freddie Mac and the U.S. Government. Future legislation
could further change the relationship between Fannie Mae and Freddie Mac and the
U.S. Government, and could also nationalize, privatize, or eliminate such
entities entirely. Any law affecting these Agencies may create market
uncertainty and have the effect of reducing the actual or perceived credit
quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a
result, such laws could increase the risk of loss on the Companys investments
in Agency RMBS guaranteed by Fannie Mae and/or Freddie Mac. It also is possible
that such laws could adversely impact the market for such securities and spreads
at which they trade. All of the foregoing could materially and adversely affect
the Companys financial condition and results of operations.

Actions of the U.S. Government,
including the U.S. Congress, Federal Reserve, U.S. Treasury and other
governmental and regulatory bodies, including the SEC, to stabilize or reform
the financial markets may not achieve the intended effect and may adversely
affect the Companys business.

In response to the financial issues affecting the banking system and
financial markets and going concern threats to commercial banks, investment
banks and other financial institutions, the Emergency Economic Stabilization Act
(EESA), was enacted by the U.S. Congress in 2008. There can be no assurance
that the EESA or any other U.S. Government actions will have a beneficial impact
on the financial markets. To the extent the markets do not respond favorably to
any such actions by the U.S. Government or such actions do not function as
intended, the Companys business may not receive the anticipated positive impact
from the legislation and such result may have broad, adverse market
implications.

In July 2010, the U.S. Congress enacted the Dodd-Frank Act in part to
impose significant investment restrictions and capital requirements on banking
entities and other organizations that are significant to U.S. financial markets.
For instance, the Dodd-Frank Act has imposed significant restrictions on the
proprietary trading activities of certain banking entities and has subjected
other systemically significant organizations regulated by the U.S. Federal
Reserve to increased capital requirements and quantitative limits for engaging
in such activities. The Dodd-Frank Act also seeks to reform the asset-backed
securitization market (including the mortgage-backed securities market) by
requiring the retention of a portion of the credit risk inherent in the pool of
securitized assets and by imposing additional registration and disclosure
requirements. Certain of the new requirements and restrictions exempt Agency
RMBS, other government issued or guaranteed securities, or other securities.
Nonetheless, the Dodd-Frank Act also imposes significant regulatory restrictions
on the origination and securitization of residential mortgage loans. The
Dodd-Frank Act also created a new regulator, the Consumer Financial Protection
Bureau (CFPB), which oversees many of the core laws which regulate the
mortgage industry, including among others the Real Estate Settlement Procedures
Act and the Truth in Lending Act. While the full impact of the Dodd-Frank Act
and the role of the CFPB cannot be assessed until all implementing regulations
are released, the Dodd-Frank Acts extensive requirements may have a significant
effect on the financial markets, and may affect the availability or terms of
financing from the Companys lender counterparties and the availability or terms
of mortgage-backed securities, both of which may have an adverse effect on the
Companys financial condition and results of operations.

On September 13, 2012, the Federal Reserve announced a third round of
quantitative easing (QE3), which is an open-ended program designed to expand
the U.S. Federal Reserves holdings of long-term securities by purchasing an
additional $40 billion of Agency RMBS per month until key economic indicators,
such as the unemployment rate, show signs of improvement. When combined with
existing programs to extend the average maturity of the U.S. Federal Reserves
holdings of securities, and reinvest principal and interest payments from the
Federal Reserves holdings of agency debt and Agency RMBS into newly acquired
Agency RMBS, QE3 is expected to increase the Federal Reserves holdings of long-term securities by $85 billion each month. The
Federal Reserve also announced that it will keep the target range for the
Federal Funds Rate between zero and 0.25% through at least mid-2015, which is
six months longer than previously expected. The Federal Reserve provided further
guidance to the market in December 2012 by stating that it intends to keep the
Federal Funds Rate close to zero for so long as the unemployment rate is above
6.5% and inflation does not rise above 2.5%. In March 2013, the Federal
Reserve announced that it would continue to purchase Agency MBS at a pace of $40
billion per monthandlong-term Treasury bonds at a pace of $45 billion each month and noted that
such amounts may increase in the future. This bond purchase program will replace
the existing program known as Operation Twist, in which the Federal Reserve
has been repurchasing approximately $45 billion of long-term Treasury bonds each
month and selling approximately the same amount of short-term Treasury bonds.
The Federal Reserve expects these measures to put downward pressure on long-term
interest rates. While the Federal Reserve hopes that QE3 and related measures
will expedite an economic recovery, stabilize prices, reduce unemployment and
accelerate business and household spending, there can be no assurance that the
Federal Reserve will continue this program, even if it is effective, and the
Company cannot predict the impact of this program or any future actions by the
Federal Reserve on the prices and liquidity of Agency RMBS or other assets in
which the Company invests, although the Federal Reserves action could increase
the prices of the Companys target assets and reduce the spread that the Company
earns on its investments.

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In addition, the U.S. Government, Federal Reserve, U.S. Treasury, the SEC
and other governmental and regulatory bodies have taken or are considering
taking other actions to address the financial crisis that began in 2007. The
Company cannot predict whether or when such actions may occur or what effect, if
any, such actions could have on its business, results of operations and
financial condition.

Mortgage loan modification and
refinance programs as well as future legislative action may adversely affect the
value of, and the returns on, the target assets in which the Company intends to
invest.

The U.S. Government, through the Federal Reserve, the FHA and the Federal
Deposit Insurance Corporation (the FDIC), commenced implementation of programs
designed to provide homeowners with assistance in avoiding residential or
commercial mortgage loan foreclosures, including the Home Affordable
Modification Program (HAMP), which provides homeowners with assistance in
avoiding residential mortgage loan foreclosures, the Hope for Homeowners Program
(H4H Program), which allows certain distressed borrowers to refinance their
mortgages into FHA-insured loans in order to avoid residential mortgage loan
foreclosures, and the Home Affordable Refinance Program (HARP), which allows
borrowers who are current on their mortgage payments to refinance and reduce
their monthly mortgage payments at loan-to-value ratios up to 125% without new
mortgage insurance. The programs may 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.

Loan modification and refinance programs may adversely affect the
performance of Agency RMBS and non-Agency RMBS. Especially with non-Agency RMBS,
a significant number of loan modifications with respect to a given security,
including those related to principal forgiveness and coupon reduction, could
negatively impact the realized yields and cash flows on such security. These
loan modification programs, future legislative or regulatory actions, including
possible amendments to the bankruptcy laws, which result in the modification of
outstanding residential mortgage loans, as well as changes in the requirements
necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac
or Ginnie Mae, may adversely affect the value of, and the returns on, Agency
RMBS and the Companys other target assets that it may purchase.

The increasing number of proposed
U.S. federal, state and local laws may increase the Companys risk of liability
with respect to certain mortgage loans and could increase the Companys cost of
doing business.

The U.S. Congress and various state and local legislatures are
considering, and in the future may consider, legislation which, among other
provisions, would permit limited assignee liability for certain violations in
the mortgage loan origination process. The Company cannot predict whether or in
what form the U.S. Congress or the various state and local legislatures may
enact legislation affecting its business. The Company will evaluate the
potential impact of any initiatives which, if enacted, could affect its
practices and results of operations. The Company is unable to predict whether
federal, state or local authorities will require changes in its practices in the
future. These changes, if required, could adversely affect its profitability,
particularly if the Company makes such changes in response to new or amended
laws, rules, regulations or ordinances in any state where the Company acquires a
significant portion of its mortgage loans, or if such changes result in the
Company being held responsible for any violations in the mortgage loan
origination process.

The Company faces counterparty risk in its prime broker relationships.

Some or all of the Companys assets, at any given time, may be held of record by one or more prime brokers. The business failure, insolvency or bankruptcy of any such prime broker could adversely impact the Companys access to its assets, including a delay in recovering assets that have been entrusted to its prime brokers, the Companys ability to finance its business and its financial condition and results of operation.

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Risks Associated with the Companys
Management and the Companys Relationship with its Advisor

The Company is dependent on its
Advisor and its Advisor's key personnel for its success, and the Company may not
find a suitable replacement for its Advisor if the Investment Advisory Agreement
is terminated, or if key personnel leave the employment of ZAIS or otherwise
become unavailable to the Company.

The Company is dependent on its Advisor for its day-to-day management, as
the Company does not have any independent officers or any employees. The Advisor
has significant discretion as to the implementation of the Companys asset
acquisition and operating policies and strategies. Accordingly, the Company
believes that its success will depend to a significant extent upon the efforts,
experience, diligence, skill and network of business contacts of the executive
officers and key personnel of its Advisor. The executive officers and key
personnel of the Advisor will evaluate, negotiate, structure, close and monitor
the Companys asset acquisitions, and the Companys success will depend on their
continued service. The departure of any of the executive officers or key
personnel of the Advisor could have a material adverse effect on the Companys
performance.

In addition, the Company offers no assurance that the Advisor will remain
the Companys advisor or that the Company will continue to have access to the
Advisors principals and professionals, including those of ZAIS. The initial
term of the Investment Advisory Agreement with the Advisor only extends until
the third anniversary of the Companys listing, with automatic one-year renewal
terms on each anniversary date thereafter unless previously terminated. If the
Investment Advisory Agreement is terminated and no suitable replacement is found
to advise the Company, the Company may not be able to execute its business plan.

The Company has no recourse to
ZAIS if it does not fulfill its obligations under the shared facilities and
services agreement.

Neither the Company nor its Advisor has any employees or separate
facilities. The Companys day-to-day operations will be conducted by employees
of ZAIS, the parent company of the Advisor, pursuant to a shared facilities and
services agreement between the Advisor and ZAIS. Under the shared facilities and
services agreement, the Advisor will also be provided with the services and
other resources necessary for the Advisor to perform its obligations and
responsibilities under the Investment Advisory Agreement in exchange for certain
fees payable by the Advisor. ZAIS may assign its rights and obligations
thereunder to any of its majority-owned and controlled affiliates. In addition,
because the Company will not be a party to the shared facilities and services
agreement, the Company does not have any recourse to ZAIS if it does not fulfill
its obligations under the shared facilities and services agreement or if it
elects to assign the agreement to one of its affiliates. Also, the Advisor only
has nominal assets and the Company will have limited recourse against the
Advisor under the Investment Advisory Agreement to remedy any liability to the
Company from a breach of contract or fiduciary duties.

There are conflicts of interest
in the Companys relationship with the Advisor and its affiliates, which could
result in decisions that are not in the best interests of the Companys
stockholders.

The Company is subject to conflicts of interest arising out of its
relationship with the Advisor and its affiliates, including ZAIS. Specifically,
each of the Companys officers and directors is also an employee of ZAIS or its
affiliates. ZAIS and the Companys officers may have conflicts between their
duties to the Company and their duties to, and interests in, the Advisor or its
affiliates. The Advisor is not required to devote a specific amount of time or
the services of any particular individual to the Companys operations. ZAIS
manages or provides services to its own accounts and certain other funds and
managed accounts for which ZAIS serves as the investment adviser (the Other
Clients) and the Company will compete with these Other Clients for ZAISs
resources and support through the Advisor. During turbulent conditions in the
mortgage industry, distress in the credit markets or other times when the
Company will need focused support and assistance from ZAIS through the Advisor,
entities for which ZAIS also acts as an investment advisor will likewise require
greater focus and attention, placing ZAISs resources in high demand. In such
situations, the Company may not receive the necessary support and assistance the
Company requires or would otherwise receive if the Company were internally
managed or if ZAIS did not act as an advisor for other entities. The ability of
ZAIS and its officers and personnel to engage in other business activities may
reduce the time they spend assisting the Advisor advising the
Company.

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The Company and certain of its
affiliates and ZAISs Other Clients and their affiliates may compete to acquire
the Companys targeted assets.

There may also be conflicts in allocating assets that are suitable for
the Company and Other Clients of ZAIS and its affiliates. Other Clients of ZAIS
and its affiliates may compete with the Company with respect to certain assets
which the Company may want to acquire and, as a result, the Company may either
not be presented with the opportunity or have to compete with such Other Clients
to acquire these assets. For example, the Company may compete directly with
other entities managed by ZAIS or one of its affiliates with respect to the
Companys target assets. Certain of these Other Clients have significant
uninvested capital and will likely compete with the Company. Additionally,
certain conflicts of interest may exist with respect to funds that have only
limited reinvestment capacity including circumstances where the Company may
purchase assets being disposed of by these funds as they begin to liquidate
various assets. In addition to the Other Clients, ZAIS may, in the future,
establish new funds or enter into new managed account arrangements with
investment strategies that are the same or substantially similar to the
Companys strategy, including funds and accounts investing primarily in the
Companys target assets, including RMBS and residential mortgage loans. Such
Other Clients may compete with the Company for it target assets. The Company may
also make investments in other entities which are managed by ZAIS or one of its
affiliates. The Company will not, however, purchase any assets from, or issued
by, any Other Client or any entity managed by the Advisor or its affiliates, or
sell any asset to any Other Client or any such other entity without the consent
of a majority of the Companys independent directors. A majority of the
Companys independent directors may amend this affiliated investment policy at
any time without stockholder consent. There may be certain situations where ZAIS
allocates assets that may be suitable for the Company to Other Clients managed
by ZAIS or its affiliates instead of to the Company. Further, the Company may
liquidate its investments at different times than Other Clients due to, among
other things, differences in investment strategies.

The Company will pay the Advisor substantial advisory fees regardless of
the performance of its portfolio. The Advisors entitlement to an advisory fee,
which is not based upon performance metrics or goals, might reduce its incentive
to devote its time and effort to seeking assets that provide attractive
risk-adjusted returns for the Companys portfolio. This in turn could hurt both
the Companys ability to make distributions to its stockholders and the value of
its common stock.

The Investment Advisory Agreement
with the Advisor was not negotiated on an arms-length basis and may not be as
favorable to the Company as if it had been negotiated with an unaffiliated third
party.

Because each of the Companys officers are employees of the Advisor or
its affiliates, and, at the time the Investment Advisory Agreement was executed,
all of the Companys directors were employees of the Advisor or its affiliates,
the Investment Advisory Agreement was not negotiated on an arms-length basis,
and the Company did not have the benefit of arms-length negotiations of the
type normally conducted with an unaffiliated third party. As a result, the
terms, including the fees payable, may not be as favorable to the Company as an
arms-length agreement. Furthermore, because each of the Companys officers and
directors is also an employee of the Advisor or its affiliates, the Company may
choose not to enforce, or to enforce less vigorously, the Companys rights under
the Investment Advisory Agreement because of its desire to maintain its ongoing
relationship with the Advisor.

Termination by the Company of the
Investment Advisory Agreement with the Advisor without cause is difficult and
costly.

Termination of the Investment Advisory Agreement with the Advisor without
cause is difficult and costly. The Companys board of directors will review the
Advisors performance and the advisory fees annually and, following the
three-year initial term, the Investment Advisory Agreement may be terminated
annually upon the affirmative vote of at least two-thirds of its independent
directors, or by a vote of the holders of at least two-thirds of the outstanding
shares of the Companys common stock (other than shares held by the ZAIS
Parties), based upon: (i) unsatisfactory performance by the Advisor that is
materially detrimental to the Company; or (ii) a determination that the advisory
fees payable to the Advisor are not fair, subject to the Advisors right to
prevent termination based on unfair fees by accepting a reduction of advisory
fees agreed to by at least two-thirds of the Companys independent directors.
The Company must provide the Advisor with 180 days prior notice of any such
termination. Additionally, upon such a termination without cause, the Investment
Advisory Agreement provides that the Company will pay the Advisor a termination
fee equal to three times the average annual advisory fee earned by the Advisor
during the prior 24-month period immediately preceding such termination,
calculated as of the end of the most recently completed fiscal year before the
date of termination. These provisions may increase the cost to the Company of
terminating the Investment Advisory Agreement and adversely affect the Companys
ability to terminate the Advisor without cause.

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The Advisor is only contractually committed to serve the Company until
the third anniversary of the Companys listing. Thereafter, the Investment
Advisory Agreement is automatically renewable on an annual basis; provided,
however, that the Advisor may terminate the Investment Advisory Agreement
annually upon 180 days prior notice. If the Investment Advisory Agreement is
terminated and no suitable replacement is found to advise the Company, the
Company may not be able to execute its business plan.

The Advisors liability is
limited under the Investment Advisory Agreement, and the Company has agreed to
indemnify the Advisor against certain liabilities.

Pursuant to the Investment Advisory Agreement, the Advisor will not
assume any responsibility other than to render the services called for
thereunder and will not be responsible for any action of the Companys board of
directors in following or declining to follow its advice or recommendations.
Under the terms of the Investment Advisory Agreement, the Advisor, its
principals, stockholders, members, managers, partners, directors and personnel,
any person controlling or controlled by the Advisor, including ZAIS, and any
person providing sub-advisory services to the Advisor will not be liable to the
Company, any subsidiary of the Company, the Companys directors, the Companys
stockholders or any of the Companys subsidiarys stockholders, members or
partners for acts or omissions performed in accordance with and pursuant to the
Investment Advisory Agreement, except acts or omissions constituting bad faith,
willful misconduct, gross negligence, or reckless disregard of their duties
under the Investment Advisory Agreement, as determined by a final non-appealable
order of a court of competent jurisdiction. In addition, the Company has agreed
to indemnify the Advisor, its principals, stockholders, members, managers,
partners, directors and personnel, any person controlling or controlled by the
Advisor and any person providing sub-advisory services to the Advisor with
respect to all expenses, losses, damages, liabilities, demands, charges and
claims arising from acts or omissions of the Advisor not constituting bad faith,
willful misconduct, gross negligence, or reckless disregard of duties, performed
in good faith in accordance with and pursuant to the Investment Advisory
Agreement.

The Advisor may have difficulty
in complying with regulatory requirements applicable to REITs, including the
REIT provisions of the Internal Revenue Code, which may hinder its ability to
achieve the Companys objectives or result in loss of the Companys
qualification as a REIT.

The Advisors management team has limited experience managing a REIT. The
REIT rules and regulations are highly technical and complex, and the failure to
comply with the income, asset, and other limitations imposed by these rules and
regulations could prevent the Company from qualifying as a REIT or could force
it to pay unexpected taxes and penalties. Failure to comply with the income,
asset and other limitations imposed by the REIT rules and regulations may hinder
the Companys ability to achieve its objectives or result in loss of the
Companys qualification as a REIT or payment of taxes and penalties. As a
result, the Company cannot provide assurance that it will be able to
successfully operate as a REIT or comply with regulatory requirements applicable
to REITs.

The Companys board of directors
has approved broad guidelines for the Advisor and will not approve each
acquisition decision made by the Advisor.

The Advisor is authorized to follow broad guidelines in pursuing the
Companys asset acquisition strategy. The Companys board of directors will
periodically review the Companys guidelines and the Companys portfolio of
assets but will not, and will not be required to, review all of the Companys
proposed acquisitions or any type or category of asset, except that an
acquisition of any security from, or issued by, an entity managed by the Advisor
or its affiliates, must be approved by a majority of the independent members of
the board of directors. In addition, in conducting periodic reviews, the
directors will rely primarily on information provided to them by the Advisor.
Furthermore, the Advisor may use complex strategies, and transactions entered
into by the Advisor may be costly, difficult or impossible to unwind by the time
they are reviewed by the Companys board of directors. The Advisor will have
great latitude within the broad parameters of the Companys guidelines in
determining the types of assets it may decide are proper for the Company, which
could result in returns that are substantially below expectations or that result
in losses, which would materially and adversely affect the Companys business
operations and results. Further, decisions and acquisitions made by the Advisor
may not fully reflect the best interests of the Companys
stockholders.

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The Company may change any of its
strategies, guidelines, policies or procedures without stockholder consent,
which could result in its making acquisitions that are different from, and
possibly riskier than, those described in this annual report on Form 10-K.

The Company may change any of its strategies, guidelines, policies or
procedures with respect to acquisitions, asset allocation, growth, operations,
indebtedness, financing strategy, hedging strategy and distributions at any time
without the consent of the Companys stockholders, which could result in the
Companys strategies becoming different from, and possibly riskier than,
strategies described in this annual report on Form 10-K. A change in the
Companys strategy may increase its exposure to interest rate risk, prepayment
risk, financing risk, credit risk, default risk and real estate market
fluctuations. Furthermore, a change in the Companys asset allocation could
result in the Company making acquisitions in asset categories different from
those described in this annual report on Form 10-K. In addition, the Companys
charter provides that its board of directors may revoke or otherwise terminate
the Companys REIT election, without the approval of its stockholders, if it
determines that it is no longer in the Companys best interests to qualify as a
REIT. These changes could adversely affect the Companys financial condition,
results of operations, the value of the Companys common stock and its ability
to make distributions to the Companys stockholders.

The Advisors advisory fee may
reduce its incentive to devote its time and effort to seeking attractive assets
for the Companys portfolio because the fee is payable regardless of the
performance of the Companys portfolio and there is no incentive fee associated
with the management of the Companys assets.

The Operating Partnership will pay to the Advisor an advisory fee,
calculated and payable (in cash) quarterly in arrears, equal to 1.5% per annum
of the Companys Stockholders Equity (as defined in the Investment Advisory
Agreement). The Company will pay the Advisor an advisory fee regardless of the
performance of the Companys portfolio and there is no incentive fee associated
with the management of the Companys assets. The Advisors entitlement to
nonperformance-based compensation might reduce its incentive to devote
sufficient time and effort to seeking assets that provide attractive
risk-adjusted returns for the Companys portfolio. This in turn could negatively
affect the Companys ability to make distributions to its stockholders and the
value of its common stock.

Risks Related to Financing and
Hedging

The Company uses leverage in
executing its business strategy, which may adversely affect the return on the
Companys assets and may reduce cash available for distribution to the Companys
stockholders, as well as increase losses when economic conditions are
unfavorable.

The Company leverages the acquisition of its target assets through
private funding sources, including borrowings structured as repurchase
agreements, securitizations, term financings and derivative contracts. Leverage
can enhance the Companys potential returns but can also exacerbate losses.
Although the Company is not required to maintain any particular assets-to-equity
leverage ratio, the amount of leverage the Company deploys for particular assets
depends upon the Advisors assessment of short-term interest rates, overall
market conditions and the particular risks of the assets being financed. The
Companys percentage of leverage varies over time depending on its ability to
enter into repurchase agreements, term financings and derivative contracts,
financing rates, type and/or amount of collateral required to be pledged, the
Companys assessment of the appropriate amount of leverage for the particular
assets the Company is funding and regulatory requirements limiting the
permissible amount of leverage to be utilized.

The return on the Companys assets and cash available for distribution to
its stockholders may be reduced to the extent that market conditions prevent the
Company from leveraging its assets or cause the cost of its financing to
increase relative to the income that can be derived from the assets acquired.
The Companys financing costs will reduce cash available for distribution to
stockholders. The Company may not be able to meet its financing obligations and,
to the extent that the Company cannot, the Company risks the loss of some or all
of the Companys assets to liquidation or sale to satisfy the obligations. A
decrease in the value of the Companys assets that are subject to repurchase
agreement financing may lead to margin calls which the Company will have to
satisfy. The Company may not have the funds available to satisfy any such margin
calls and may be forced to sell assets at significantly depressed prices due to
market conditions or otherwise, which may result in losses. The satisfaction of
any such margin calls may reduce cash flow available for distribution to the
Companys stockholders. Any reduction in distributions to the Companys
stockholders may cause the value of the Companys common stock to
decline.

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The Companys inability to access
funding could have a material adverse effect on the Companys results of
operations, financial condition and business.

The borrowings the Company used to fund the purchase of its portfolio
totaled approximately $116.1 million as of December 31, 2012 under master
repurchase agreements with three counterparties. The Companys ability to fund
its target asset acquisitions may be impacted by the Companys ability to secure
borrowings structured as repurchase agreements, securitizations, term financings
and derivative contracts on acceptable terms. Because repurchase agreements are
short-term commitments of capital, lenders may respond to market conditions
making it more difficult for the Company to renew or replace on a continuous
basis its maturing short-term borrowings. If the Company is not able to renew
its then existing facilities or arrange for new financing on terms acceptable to
the Company, or if the Company defaults on the Companys covenants or is
otherwise unable to access funds under the Companys repurchase agreements, the
Company may have to curtail the Companys asset acquisition activities and/or
dispose of assets. While the Company is in discussions with additional
counterparties to provide financing arrangements, the Company cannot provide
assurance that these discussions will result in additional financing capacity
for the Company.

It is possible that the lenders that will provide the Company with
financing could experience changes in their ability to advance funds to it,
independent of its performance or the performance of its portfolio of assets.
Furthermore, if many of the Companys potential lenders are unwilling or unable
to provide it with financing, the Company could be forced to sell its assets at
an inopportune time when prices are depressed. In addition, if the regulatory
capital requirements imposed on the Companys lenders change, they may be
required to significantly increase the cost of the financing that they provide
to the Company. The Companys lenders also may revise their eligibility
requirements for the types of assets 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. Moreover, the amount of financing the Company receives under its
repurchase agreements will be directly related to the lenders valuation of the
Companys target assets that cover the outstanding borrowings. Typically,
repurchase agreements grant the lender the absolute right to reevaluate the fair
market value of the assets that cover 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 the Company 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 the Companys results of operations, financial condition, business,
liquidity and ability to make distributions to the Companys stockholders, and
could cause the value of the Companys common stock to decline. The Company may
be forced to sell assets at significantly depressed prices to meet such margin
calls and to maintain adequate liquidity, which could cause it to incur losses.

The dislocations in the residential mortgage sector in the financial
crisis that began in 2007 have caused many lenders to tighten their lending
standards, reduce their lending capacity or exit the market altogether. Further
contraction among lenders, insolvency of lenders or other general market
disruptions could adversely affect one or more of the Companys potential
lenders and could cause one or more of the Companys potential lenders to be
unwilling or unable to provide the Company with financing on attractive terms or
at all. This could increase the Companys financing costs and reduce its access
to liquidity.

The repurchase agreements that
the Company uses to finance its assets may require the Company to provide
additional collateral and may restrict the Company from leveraging its assets as
fully as desired.

The Company uses borrowings structured as repurchase agreements to
finance certain of its assets. If the fair market value of the assets pledged or
sold by the Company to a financing institution declines, the Company may be
required by the financing institution to provide additional collateral or pay
down a portion of the funds advanced, but the Company may not have the funds
available to do so, which could result in defaults. Posting additional
collateral to support the Companys credit will reduce its liquidity and limit
its ability to leverage its assets, which could adversely affect its business.
In the event the Company does not have sufficient liquidity to meet such
requirements, financing institutions can accelerate repayment of the Companys
indebtedness, increase interest rates, liquidate its collateral or terminate its
ability to borrow. Such a situation would likely result in a rapid deterioration
of the Companys financial condition and possibly necessitate a filing for
bankruptcy protection.

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Further, financial institutions providing the repurchase facilities may
require the Company to maintain a certain amount of cash that is not invested or
to set aside non-leveraged assets sufficient to maintain a specified liquidity
position which would allow the Company to satisfy its collateral obligations. As
a result, the Company may not be able to leverage the Companys assets as fully
as the Company would choose, which could reduce its return on equity. If the
Company is unable to meet these collateral obligations, the Companys financial
condition could deteriorate rapidly.

If a counterparty to the
Companys repurchase transactions defaults on its obligation to resell the
underlying security back to the Company 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 the Company defaults on its obligations under the repurchase agreement,
the Company will lose money on its repurchase transactions.

Under the Companys repurchase transactions, the Company generally sells
securities to lenders (that is, repurchase agreement counterparties) and
receives cash from the lenders. The lenders are obligated to resell the same
securities back to the Company at the end of the term of the transaction, which
typically ranges from 30 to 90 days, but which may have terms of up to 364 days
or longer. Because the cash the Company will receive from the lender when the
Company initially sells the securities to the lender is less than the value of
those securities (this is referred to as the haircut), if the lender defaults on
its obligation to resell the same securities back to it the Company 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). The Company 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 the Company would have to repurchase
the securities for their initial value but would receive securities worth less
than that amount. Further, if the Company defaults on one of its obligations
under a repurchase transaction, the lender will be able to terminate the
transaction and cease entering into any other repurchase transactions with the
Company. The Companys repurchase agreements may contain cross-default
provisions, such that if a default occurs under any one agreement, the lenders
under the Companys other agreements could also declare a default. If a default
occurs under any of the Companys repurchase agreements and the lenders
terminate one or more of the Companys repurchase agreements, the Company may
need to enter into replacement repurchase agreements with different lenders.
There can be no assurance that the Company will be successful in entering into
such replacement repurchase agreements on the same terms as the repurchase
agreements that were terminated or at all. Any losses the Company incurs on its
repurchase transactions could adversely affect the Companys earnings and thus
the Companys cash available for distribution to its stockholders.

An increase in the Companys
borrowing costs relative to the interest it receives on its leveraged assets may
adversely affect the Companys profitability and the Companys cash available
for distribution to its stockholders.

As the Companys repurchase agreements and other short-term borrowings
mature, the Company will be required either to enter into new borrowings or to
sell certain of its assets. An increase in short-term interest rates at the time
that the Company seeks to enter into new borrowings would reduce the spread
between the returns on the Companys assets and the cost of the Companys
borrowings. This would adversely affect the returns on the Companys assets,
which might reduce earnings and, in turn, cash available for distribution to the
Companys stockholders.

The Companys rights under the
Companys repurchase agreements may be subject to the effects of the bankruptcy
laws in the event of the bankruptcy or insolvency of the Company or its lenders
under the repurchase agreements, which may allow the Companys lenders to
repudiate the Companys repurchase agreements.

In the event of the Companys 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 the Companys
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, the Companys ability to exercise
its rights to recover its 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 the
Company actually incurs.

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The Company enters into hedging
transactions that could expose it to contingent liabilities in the future and
adversely impact its financial condition.

Subject to maintaining the Companys qualification as a REIT, part of the
Companys strategy involves entering into hedging transactions that could
require it to fund cash payments in certain circumstances (such as the early
termination of a hedging instrument caused by an event of default or other early
termination event, or the decision by a counterparty to request margin
securities it is contractually owed under the terms of the hedging instrument).
The amount due would be equal to the unrealized loss of the open swap positions
with the respective counterparty and could also include other fees and charges.
These economic losses will be reflected in the Companys results of operations.
The Companys ability to fund these obligations will depend on the liquidity of
its assets and access to capital at the time. The need to fund these obligations
could adversely impact the Companys financial condition.

Hedging against interest rate
exposure may adversely affect the Companys earnings, which could reduce its
cash available for distribution to its stockholders.

Subject to maintaining its qualification as a REIT, the Company pursues
various hedging strategies to seek to reduce its exposure to adverse changes in
interest rates. The Companys 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 the Company because, among other things:

- interest rate hedging can be
  expensive, particularly during periods of volatile interest rates;
- available interest rate hedges may
  not correspond directly with the interest rate risk for which protection is
  sought;
- 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 earnings or stockholders equity;
- the amount of income that a REIT may
  earn from non-qualifying hedging transactions (other than through taxable REIT
  subsidiaries (TRSs)) to offset interest rate losses is limited by U.S.
  federal tax provisions governing REITs;
- the credit quality of the hedging
  counterparty owing money on the hedge may be downgraded to such an extent that
  it impairs the Companys ability to sell or assign the Companys side of the
  hedging transaction;
- the hedging counterparty owing money
  in the hedging transaction may default on its obligation to pay; and
- the duration of the hedge may not
  match the duration of the related liability.

In general, when the Company acquires a fixed-rate mortgage or hybrid ARM
security, the Company may, but is not required to, enter into an interest rate
swap agreement or other hedging instrument that effectively fixes the Companys
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
the Company from rising interest rates, because the borrowing costs are fixed
for the duration of the fixed-rate portion of the related RMBS.

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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 the Companys results of operations, as
borrowing costs would no longer be fixed after the end of the hedging instrument
while the income earned on the hybrid ARM security would remain fixed. This
situation may also cause the fair market value of the Companys hybrid ARM
security to decline, with little or no offsetting gain from the related hedging
transactions. In extreme situations, the Company may be forced to sell assets to
maintain adequate liquidity, which could cause the Company to incur losses.

In addition, the use of this swap hedging strategy effectively limits
increases in the Companys book value in a declining rate environment, due to
the effectively fixed nature of the Companys hedged borrowing costs. In an
extreme rate decline, prepayment rates on the Companys assets might actually
result in certain of the Companys assets being fully paid off while the
corresponding swap or other hedge instrument remains outstanding. In such a
situation, the Company may be forced to liquidate the swap or other hedge
instrument at a level that causes it to incur a loss.

The Companys hedging transactions, which are intended to limit losses,
may actually adversely affect the Companys earnings, which could reduce its
cash available for distribution to its stockholders.

The Companys use of derivatives
may expose it to counterparty and other risks.

The Company has entered into over-the-counter interest rate swap
agreements to hedge risks associated with movements in interest rates. Because
such interest rate swaps are not cleared through a central counterparty, the
counterpartys performance is not guaranteed by an exchange or its clearing
house. As a result, if a swap counterparty cannot perform under the terms of an
interest rate swap, the Company would not receive payments due under that
agreement, the Company may lose any unrealized gain associated with the interest
rate swap and the hedged liability would cease to be hedged by the interest rate
swap. The Company may also be at risk for any collateral the Company has pledged
to secure the Companys obligations under the interest rate swap if the
counterparty becomes insolvent or files for bankruptcy.

Derivative instruments are also subject to liquidity risk and may be
difficult or impossible to sell, close out or replace quickly and at the price
that reflects the fundamental value of the instrument. Although both
over-the-counter and exchange-traded markets may experience lack of liquidity,
over-the-counter non-standardized derivative transactions are generally less
liquid than exchange-traded instruments.

Furthermore, the enforceability of agreements underlying hedging
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. Recently, new regulation
has been promulgated by U.S. and foreign regulators attempting to strengthen
oversight of derivative contracts. Any actions taken by regulators could
constrain the Companys strategy and could increase its costs, either of which
could materially and adversely impact its results of operations. In particular,
the Dodd-Frank Act requires certain derivatives to be executed on a regulated
market and cleared through a central counterparty, which may result in increased
margin requirements and costs.

The business failure of a hedging counterparty with whom the Company
enters into a hedging transaction will most likely result in its default.
Default by a party with whom the Company enters into a hedging transaction may
result in the loss of unrealized profits and force the Company to cover its
commitments, if any, at the then current market price. Although generally the
Company will seek to reserve the right to terminate the Companys 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 the Company may not
be able to enter into an offsetting contract in order to cover the Companys
risk. The Company cannot provide any assurances that a liquid secondary market
will exist for hedging instruments purchased or sold, and the Company may be
required to maintain a position until exercise or expiration, which could result
in losses.

Regulation as a commodity pool
operator could subject the Company to additional regulation and compliance
requirements which could materially adversely affect the Companys business and
financial condition.

The Dodd-Frank Act extended the reach of commodity regulations for the
first time to include not just traditional futures contracts but also derivative
contracts referred to as swaps. As a consequence of this change, any
investment fund that trades in swaps may be considered a commodity pool, which
would cause its operator to be regulated as a commodity pool operator (CPO).
Under the new requirements, which became effective on December 31, 2012 for
those who become CPOs solely because of use of swaps by the relevant commodity
pool, CPOs must register with the U.S. Commodity Futures Trading Commission
(CFTC) and become subject to regulation by the CFTC, including with respect to
disclosure, recordkeeping and reporting.

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On December 7, 2012, the CFTC issued a No-Action Letter that provides
mortgage REITs relief from such registration (No-Action Letter) if they meet
certain conditions and submit a claim for such no-action relief by email to the
CFTC. The Company believes it meets the conditions set forth in the No-Action
Letter and it has filed its claim with the CFTC to perfect the use of the
no-action relief from registration. However, if in the future the Company does
not meet the conditions set forth in the No-Action Letter or the relief provided
by the No-Action Letter becomes unavailable for any other reason and the Company
is unable to obtain another exemption from registration, the Company may be
required to reduce or eliminate its use of interest rate swaps or vary the
manner in which it deploys interest rate swaps in its business and the Company
or its directors may be required to register with the CFTC as CPOs and the
Advisor may be required to register as a commodity trading advisor with the
CFTC, which will require compliance with CFTC rules and subject the Company, its
directors and the Advisor to regulation by the CFTC. In the event registration
for the Company, its directors or the Advisor is required but is not obtained,
the Company, its directors or the Advisor may be subject to fines, penalties and
other civil or governmental actions or proceedings, any of which could have a
material adverse effect on the Companys business, financial condition and
results of operations.

If the Company attempts to
qualify for hedge accounting treatment for its derivative instruments, but the
Company fails to so qualify, it may suffer because losses on the derivatives
that the Company enters into may not be offset by a change in the fair value of
the related hedged transaction.

If the Company attempts to qualify for hedge accounting treatment for the
Companys derivative instruments, but it fails to so qualify for a number of
reasons, including if the Company uses instruments that do not meet the
definition of a derivative (such as short sales), the Company fails to satisfy
hedge documentation and hedge effectiveness assessment requirements or the
Companys instruments are not highly effective, the Company may suffer because
losses on the derivatives the Company holds may not be offset by a change in the
fair value of the related hedged transaction.

Declines in the fair market
values of the Companys assets may adversely affect periodic reported results
and credit availability, which may reduce earnings and, in turn, cash available
for distribution to the Companys stockholders.

A portion of the Companys assets may be classified for accounting
purposes as available-for-sale. Other than in the instances of
other-than-temporary impairment, changes in the fair market values of most of
these assets will be directly charged or credited to stockholders equity. As a
result, a decline in values may reduce the book value of the Company. Moreover,
if the decline in value of an available-for-sale security is other than
temporary or if the Company elects the fair value option in respect of such
security, such decline will reduce earnings.

A decline in the fair market value of the Companys assets may adversely
affect it, particularly in instances where the Company has borrowed money based
on the fair market value of those assets. If the fair market value of those
assets declines, the lender may require the Company to post additional
collateral to support the loan. If the Company were unable to post the
additional collateral, it would have to sell the assets at a time when it might
not otherwise choose to do so. A reduction in credit available may reduce the
Companys earnings and, in turn, cash available for distribution to
stockholders.

Risks Related to the Companys
Assets and the Companys Target Assets

The Company may not realize gains
or income from its assets, which could cause the value of its common stock to
decline.

The Company seeks to generate both current income and capital
appreciation for its stockholders. However, the Companys assets may not
appreciate in value and, in fact, may decline in value, and the debt securities
the Company owns or acquires may default on interest and/or principal payments.
Accordingly, the Company may not be able to realize
gains or income from the Companys assets. Any gains that the Company does
realize may not be sufficient to offset any other losses the Company
experiences. Any income that the Company realizes may not be sufficient to
offset the Companys expenses.

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The Companys portfolio of assets
may be concentrated and will be subject to risk of default.

While the
Company intends to diversify its portfolio of assets in the manner described in
this annual report on Form 10-K, the Company is not required to observe specific
diversification criteria, except as may be set forth in the guidelines adopted
by the Companys board of directors. Therefore, the Companys portfolio of
assets may at times be concentrated in certain property types that are subject
to higher risk of foreclosure, or secured by properties concentrated in a
limited number of geographic locations. For example, as of December 31, 2012,
the five states that represented the largest portion of mortgage loans
underlying the Companys non-agency RMBS assets (measured by outstanding
principal balance) were: California (43.2%); Florida (7.9%); New York (7.0%);
Virginia (4.6%); and New Jersey (4.5%). To the extent that the Companys
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 its assets within a short time period, which may reduce the
Companys net income and the value of its common stock and accordingly reduce
its ability to pay dividends to its stockholders.

The spread between swap rates and
residential mortgage loans and non-Agency RMBS may widen due to difficult market
conditions, which may adversely affect lending terms for these assets and have a
negative impact on the Companys stated book value.

Since the onset of the financial crisis that began in 2007, the spread
between swap rates and residential mortgage loans and non-Agency RMBS has been
volatile. Spreads on these assets initially moved wider due to the difficult
credit conditions and have only recovered a portion of that widening. As the
prices of securitized assets declined, a number of investors and a number of
structured investment vehicles faced margin calls from dealers and were forced
to sell assets in order to reduce leverage. The price volatility of these assets
also impacted lending terms in the repurchase market, as counterparties raised
margin requirements to reflect the more difficult environment. The spread
between the yield on the Companys assets and its funding costs is an important
factor in the performance of this aspect of the Companys business. Wider
spreads imply greater income on new asset purchases but may have a negative
impact on the Companys stated book value. Wider spreads generally negatively
impact asset prices. In an environment where spreads are widening,
counterparties may require additional collateral to secure borrowings, which may
require the Company to reduce leverage by selling assets.

The Company holds and may acquire
additional non-Agency RMBS collateralized by subprime mortgage loans, which are
subject to increased risks.

The Company holds and may acquire additional non-Agency RMBS backed by
collateral pools of mortgage loans that have been originated using underwriting
standards that are less restrictive than those used in underwriting prime
mortgage loans and alternative-A mortgage loans. These lower standards
include mortgage loans made to borrowers having imperfect or impaired credit
histories, 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 lower home prices, as well as aggressive lending
practices, subprime mortgage loans have in recent years 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 non-Agency RMBS backed by subprime mortgage loans that the
Company holds and may acquire could be correspondingly adversely affected, which
could adversely impact the Companys results of operations, financial condition
and business.

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The residential mortgage loans
and the mortgage loans underlying the RMBS that the Company holds and intends to
acquire may be subject to defaults, foreclosure timeline extension, fraud and
residential price depreciation and unfavorable modification of loan principal
amount, interest rate and amortization of principal, which could result in
losses to the Company.

The
residential mortgage loans and the mortgage loans underlying the RMBS that the
Company holds and intends to acquire may be subject to the risks of defaults,
foreclosure timeline extension, fraud and home price depreciation and
unfavorable modification of loan principal amount, interest rate and
amortization of principal. The ability of a borrower to repay a mortgage loan
secured by a residential property is dependent upon the income or assets of the
borrower.

A number of factors may impair borrowers abilities to repay their loans,
including:

- 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;
- the potential for uninsured or under-insured
  property losses;
- acts of God, including earthquakes, floods and
  other natural disasters, which may result in uninsured losses;
  and
- acts of war or terrorism, including the
  consequences of terrorist attacks, such as those that occurred on September
  11, 2001.

In the event of defaults on the residential mortgage loans that the
Company holds or acquires or that underlie its investments in RMBS and the
exhaustion of any underlying or any additional credit support, the Company may
not realize its anticipated return on its investments and the Company may incur
a loss on these investments. In addition, the Companys investments in
non-Agency RMBS will be backed by residential real property but, in contrast to
Agency RMBS, their principal and interest will not be guaranteed by federally
chartered entities such as Fannie Mae and Freddie Mac and, in the case of Ginnie
Mae, the U.S. Government. The ability of a borrower to repay these loans or
other financial assets is dependent upon the income or assets of these
borrowers.

The Company may be affected by
alleged or actual deficiencies in foreclosure practices of third parties, as
well as related delays in the foreclosure process.

Allegations of deficiencies in servicing and foreclosure practices among
several large sellers and servicers of residential mortgage loans that surfaced
in 2010 raised various concerns relating to such practices, including the
improper execution of the documents used in foreclosure proceedings (robo
signing), inadequate documentation of transfers and registrations of mortgages
and assignments of loans, improper modifications of loans, violations of
representations and warranties at the date of securitization and failure to
enforce put-backs.

As a result of alleged deficiencies in foreclosure practices, a number of
servicers temporarily suspended foreclosure proceedings beginning in the second
half of 2010 while they evaluated their foreclosure practices. In late 2010, a
group of state attorneys general and state bank and mortgage regulators
representing nearly all 50 states and the District of Columbia, along with the
U.S. Justice Department and the Department of Housing and Urban Development,
began an investigation into foreclosure practices of banks and servicers. The
investigations and lawsuits by several state attorneys general led to a
settlement agreement in March 2012 with five of the nations largest banks,
pursuant to which the banks agreed to pay more than $25 billion to settle claims
relating to improper foreclosure practices. The settlement does not prohibit the
states, the federal government, individuals or investors in RMBS from pursuing
additional actions against the banks and servicers in the future.

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The integrity
of the servicing and foreclosure processes are critical to the value of the
mortgage loan portfolios underlying the RMBS in which the Company invests, and
the Companys financial results could be adversely affected by deficiencies in
the conduct of those processes. For example, delays in the foreclosure process
that have resulted from investigations into improper servicing practices may
adversely affect the values of, and the Companys losses on, the non-Agency RMBS
the Company owns or may acquire. Foreclosure delays may also increase the
administrative expenses of any securitization trusts that the Company may
sponsor for non-Agency RMBS, thereby reducing the amount of funds available for
distribution to the Companys stockholders. In addition, the subordinate classes
of securities issued by any such securitization trusts may continue to receive
interest payments while the defaulted loans remain in the trusts, rather than
absorbing the default losses. This may reduce the amount of credit support
available for the senior classes the Company may own, thus possibly adversely
affecting these securities.

While the Company believes that the sellers and servicers would be in
violation of their servicing contracts to the extent that they have improperly
serviced mortgage loans or improperly executed documents in foreclosure or
bankruptcy proceedings, or do not comply with the terms of servicing contracts
when deciding whether to apply principal reductions, it may be difficult,
expensive and time consuming for the Company to enforce its contractual rights.
The Company continues to monitor and review the issues raised by the alleged
improper foreclosure practices. While the Company cannot predict exactly how the
servicing and foreclosure matters or the resulting litigation or settlement
agreements will affect its business, there can be no assurance that these
matters will not have an adverse impact on the Companys results of operations
and financial condition.

The commercial mortgage loans
underlying the CMBS the Company may hold and acquire may be subject to defaults,
foreclosure timeline extension, fraud and commercial price depreciation and
unfavorable modification of loan principal amount, interest rate and
amortization of principal, which could result in losses to the Company.

CMBS are secured by a single commercial mortgage loan or a pool of
commercial mortgage loans. Commercial mortgage loans are secured by multifamily
or commercial property and may be subject to risks of delinquency and
foreclosure, and risks of loss that may be 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 expenses
  or limit rents that may be charged;
- any need to address environmental contamination at
  the property or the occurrence of any uninsured casualty at the
  property;
- changes in national, regional or local economic
  conditions and/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; and
- acts of God, terrorist attacks, social unrest and
  civil disturbances.

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The Companys investments may
include subordinated tranches of RMBS or CMBS, which are subordinate in right of
payment to more senior securities.

The Companys
investments may include subordinated tranches of RMBS or CMBS, which are
subordinated classes of securities in a structure of securities collateralized
by a pool of mortgage loans and, accordingly, are the first or among the first
to bear the loss upon a restructuring or liquidation of the underlying
collateral and the last to receive payment of interest and principal.
Additionally, estimated fair values of these subordinated interests tend to be
more sensitive to changes in economic conditions than more senior securities. As
a result, such subordinated interests generally are not actively traded and may
not provide holders thereof with liquid investments.

If the Advisor underestimates the
loss-adjusted yields of the Companys CMBS investments, the Company may
experience losses.

The Advisor expects to value any CMBS investments based on loss-adjusted
yields, taking into account estimated future losses on the mortgage loans
included in the securitizations pool of loans, and the estimated impact of
these losses on expected future cash flows. The Advisors loss estimates may not
prove accurate, as actual results may vary from estimates. In the event that the
Advisor underestimates the pool level losses relative to the price the Company
pays for a particular CMBS investment, the Company may experience losses with
respect to such investment.

The Company may not control the
special servicing of the mortgage loans included in the CMBS in which it may
invest and, in such cases, the special servicer may take actions that could
adversely affect the Companys interests.

With respect to CMBS in which the Company may invest, overall control
over the special servicing of the related underlying mortgage loans will be held
by a directing certificateholder or a controlling class representative,
which is appointed by the holders of the most subordinate class of CMBS in such
series. The Company may not have the right to appoint the directing
certificateholder. In connection with the servicing of the specially serviced
mortgage loans, the related special servicer may, at the direction of the
directing certificateholder, take actions with respect to the specially serviced
mortgage loans that could adversely affect the Companys interests.

The Company may purchase
interests in mortgage servicing rights, which will expose it to significant
risks.

MSRs are among the Companys target assets. Fannie Mae and Freddie Mac
generally require mortgage servicers to be paid a minimum servicing fee that
significantly exceeds the amount a servicer would charge in an arms-length
transaction. The minimum servicing fee required by the Agencies is therefore
made up of the normal arms-length servicing fee and the excess mortgage
servicing amount.

Any MSRs the Company acquires will be recorded at fair value on the
Companys balance sheet based upon significant estimates and assumptions, with
changes in fair value included in the Companys consolidated results of
operations. Such estimates and assumptions would include, without limitation,
estimates of future cash flows associated with MSRs based upon assumptions
involving interest rates as well as the prepayment rates, delinquencies and
foreclosure rates of the underlying serviced mortgage loans.

The ultimate realization of the value of MSRs, which are measured at fair
value on a recurring basis, may be materially different than the fair values of
such MSRs as may be reflected in the Companys balance sheet as of any
particular date. The use of different estimates or assumptions in connection
with the valuation of these assets could produce materially different fair
values for such assets, which could have a material adverse effect on the
Companys consolidated financial position, results of operations and cash flows.
Accordingly, there may be material uncertainty about the fair value of any MSRs
the Company acquires.

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Changes in
interest rates are a key driver of the performance of MSRs. Historically, the
value of MSRs has increased when interest rates rise and decreased when interest
rates decline due to the effect those changes in interest rates have on
prepayment estimates. The Company may pursue various hedging strategies to seek
to reduce its exposure to adverse changes in interest rates. The Companys
hedging activity will vary 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 the Company.
To the extent the Company does not utilize derivatives to hedge against changes
in the fair value of MSRs, the Companys balance sheet, results of operations
and cash flows would be susceptible to significant volatility due to changes in
the fair value of, or cash flows from, MSRs as interest rates change.

Prepayment speeds significantly affect excess mortgage servicing fees.
Prepayment speed is the measurement of how quickly borrowers pay down the unpaid
principal balance of their loans or how quickly loans are otherwise brought
current, modified, liquidated or charged off. The Company will base the price it
pays for MSRs and the rate of amortization of those assets on factors such as
the Companys projection of the cash flows from the related pool of mortgage
loans. The Companys expectation of prepayment speeds will be a significant
assumption underlying those cash flow projections. If prepayment speeds are
significantly greater than expected, the carrying value of MSRs could exceed
their estimated fair value. If the fair value of MSRs decreases, the Company
would be required to record a non-cash charge, which would have a negative
impact on its financial results. Furthermore, a significant increase in
prepayment speeds could materially reduce the ultimate cash flows the Company
receives from MSRs, and the Company could ultimately receive substantially less
than what it paid for such assets.

Moreover, delinquency rates have a significant impact on the valuation of
any excess mortgage servicing fees. An increase in delinquencies will generally
result in lower revenue because typically the Company will only collect
servicing fees from Agencies or mortgage owners for performing loans. If
delinquencies are significantly greater than the Company expects, the estimated
fair value of the MSRs could be diminished. When the estimated fair value of
MSRs is reduced, the Company could suffer a loss, which could have a negative
impact on the Companys financial results.

Furthermore, MSRs are subject to numerous U.S. federal, state and local
laws and regulations and may be subject to various judicial and administrative
decisions imposing various requirements and restrictions on the Companys
business. The Companys failure to comply, or the failure of the servicer to
comply, with the laws, rules or regulations to which the Company or the servicer
are subject by virtue of ownership of MSRs, whether actual or alleged, could
expose the Company to fines, penalties or potential litigation liabilities,
including costs, settlements and judgments, any of which could have a material
adverse effect on the Companys business, financial condition, results of
operations or cash flows.

The receivables underlying the
ABS the Company may acquire are subject to credit risks, liquidity risks,
interest rate risks, market risks, operations risks, structural risks and legal
risks, which could result in losses to the Company.

ABS are securities backed by various asset classes, including auto loans,
student loans, credit card loans, equipment loans, floor plan loans and small
business loans fully guaranteed as to principal and interest by the U.S. Small
Business Administration. A portion of the Companys target assets may be ABS.
The structure of an ABS, and the terms of the investors interest in the
underlying collateral, can vary widely depending on the type of collateral, the
desires of investors and the use of credit enhancements. Individual transactions
can differ markedly in both structure and execution. Important determinants of
the risk associated with issuing or holding ABS include (i) the relative
seniority or subordination of the class of ABS held by an investor, (ii) the
relative allocation of principal and interest payments in the priorities by
which such payments are made under the governing documents, (iii) the effect of
credit losses on both the issuing vehicle and investors returns, (iv) whether
the underlying collateral represents a fixed set of specific assets or accounts,
(v) whether the underlying collateral assets are revolving or closed-end, (vi)
the terms (including maturity of the ABS) under which any remaining balance in
the accounts may revert to the issuing vehicle and (vii) the extent to which the
entity that sold the underlying collateral to the issuing vehicle is obligated
to provide support to the issuing vehicle or to investors. With respect to some
types of ABS, the foregoing risks are more closely correlated with similar risks
on corporate bonds of similar terms and maturities than with the performance of
a pool of similar assets.

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In addition,
certain ABS (particularly subordinated ABS) provide that the non-payment of
interest thereon in cash will not constitute an event of default in certain
circumstances, and the holders of such ABS will not have available to them any
associated default remedies. Interest not paid in cash will generally be
capitalized and added to the outstanding principal balance of the related
security. Deferral of interest through such capitalization will reduce the yield
on such ABS.

Holders of ABS bear various risks, including credit risks, liquidity
risks, interest rate risks, market risks, operations risks, structural risks and
legal risks. Credit risk arises from (i) losses due to defaults by obligors
under the underlying collateral and (ii) the issuing vehicles or servicers
failure to perform its respective obligations under the transaction documents
governing the ABS. These two risks may be related, as, for example, in the case
of a servicer that does not provide adequate credit-review scrutiny to the
underlying collateral, leading to a higher incidence of defaults.

Market risk arises from the cash flow characteristics of the ABS, which
for most ABS tend to be predictable. The greatest variability in cash flows
comes from credit performance, including the presence of wind-down or
acceleration features designed to protect the investor in the event that credit
losses in the portfolio rise well above expected levels.

Interest rate risk arises for the issuer from (i) the pricing terms on
the underlying collateral, (ii) the terms of the interest rate paid to holders
of the ABS and (iii) the need to mark to market the excess servicing or spread
account proceeds carried on the issuing vehicles balance sheet. For the holder
of the security, interest rate risk depends on the expected life of the ABS,
which may depend on prepayments on the underlying assets or the occurrence of
wind-down or termination events. If the servicer becomes subject to financial
difficulty or otherwise ceases to be able to carry out its functions, it may be
difficult to find other acceptable substitute servicers and cash flow
disruptions or losses may occur, particularly with underlying collateral
comprised of non-standard receivables or receivables originated by private
retailers who collect many of the payments at their stores.

Structural and legal risks include the possibility that, in a bankruptcy
or similar proceeding involving the originator or the servicer (often the same
entity or affiliates), a court having jurisdiction over the proceeding could
determine that, because of the degree to which cash flows on the assets of the
issuing vehicle may have been commingled with cash flows on the originators
other assets (or similar reasons), (i) the assets of the issuing vehicle could
be treated as never having been truly sold by the originator to the issuing
vehicle and could be substantively consolidated with those of the originator, or
(ii) the transfer of such assets to the issuer could be voided as a fraudulent
transfer. The time and expense related to a challenge of such a determination
also could result in losses and/or delayed cash flows.

An increase in interest rates may
cause a decrease in the volume of certain of the Companys target assets, which
could adversely affect its ability to acquire target assets that satisfy its
investment objectives and to generate income and make distributions.

Rising interest rates generally reduce the demand for mortgage loans due
to the higher cost of borrowing. A reduction in the volume of mortgage loans
originated may affect the volume of the Companys target assets available to it,
which could adversely affect the Companys ability to acquire assets that
satisfy its investment objectives. Rising interest rates may also cause the
Companys target assets that were issued prior to an interest rate increase to
provide yields that are below prevailing market interest rates. If rising
interest rates cause the Company to be unable to acquire a sufficient volume of
its target assets with a yield that is above the Companys borrowing cost, the
Companys ability to satisfy its investment objectives and to generate income
and make distributions may be materially and adversely affected.

The relationship between short-term and longer-term interest rates is
often referred to as the yield curve. Ordinarily, short-term interest rates
are lower than longer-term interest rates. If short-term interest rates rise
disproportionately relative to longer-term interest rates (a flattening of the
yield curve), the Companys borrowing costs may increase more rapidly than the
interest income earned on the Companys assets. Because the Company expects its
investments, on average, generally will bear interest based on longer-term rates
than the Companys borrowings, a flattening of the yield curve would tend to
decrease the Companys net income and the fair market value of its net assets.
Additionally, to the extent cash flows from investments that return scheduled
and unscheduled principal are reinvested, the spread between the yields on the
new investments and available borrowing rates may decline, which would likely
decrease the Companys net income. It is also possible that short-term interest
rates may exceed longer-term interest rates (a yield curve inversion), in which
event the Companys borrowing costs may exceed its interest income and the
Company could incur operating losses.

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Increases in interest rates could
adversely affect the value of the Companys investments and cause its interest
expense to increase, which could result in reduced earnings or losses and
negatively affect the Companys profitability as well as the cash available for
distribution to the Companys stockholders.

The Company
seeks to invest in non-Agency RMBS, Agency RMBS, residential mortgage loans and
other real estate-related and financial assets, including MSRs, IOs, CMBS and
ABS. In a normal yield curve environment, an investment in such assets will
generally decline in value if long-term interest rates increase. Declines in
fair market value may ultimately reduce earnings or result in losses to the
Company, which may negatively affect cash available for distribution to the
Companys stockholders.

A significant risk associated with the Companys target assets is the
risk that both long-term and short-term interest rates will increase
significantly. If long-term rates increased significantly, the fair market value
of these investments would decline, and the duration and weighted average life
of the investments would increase. The Company could realize a loss if the
securities were sold. At the same time, an increase in short-term interest rates
would increase the amount of interest owed on the Companys repurchase
agreements.

Fair market values of the Companys investments may decline without any
general increase in interest rates for a number of reasons, such as increases or
expected increases in defaults, or increases or expected increases in voluntary
prepayments for those investments that are subject to prepayment risk or
widening of credit spreads.

In addition, in a period of rising interest rates, the Companys
operating results will depend in large part on the difference between the income
from the Companys assets and the Companys financing costs. The Company
anticipates that, in most cases, the income from such assets will respond more
slowly to interest rate fluctuations than the cost of its borrowings.
Consequently, changes in interest rates, particularly short-term interest rates,
may significantly influence the Companys net income. Increases in these rates
will tend to decrease the Companys net income and fair market value of its
assets.

Interest rate mismatches between
the Companys RMBS backed by ARMs or hybrid ARMs and the Companys borrowings
used to fund its purchases of these assets may cause it to suffer losses.

The Company funds its RMBS with borrowings that have interest rates that
adjust more frequently than the interest rate indices and repricing terms of
RMBS backed by ARMs or hybrid ARMs. Accordingly, if short-term interest rates
increase, the Companys borrowing costs may increase faster than the interest
rates on RMBS backed by ARMs or hybrid ARMs adjust. As a result, in a period of
rising interest rates, the Company could experience a decrease in net income or
a net loss.

In most cases, the interest rate indices and repricing terms of RMBS
backed by ARMs or hybrid ARMs and the Companys borrowings are not identical,
thereby potentially creating an interest rate mismatch between the Companys
investments and its borrowings. While the historical spread between relevant
short-term interest rate indices has been relatively stable, there have been
periods when the spread between these indices was volatile. During periods of
changing interest rates, these interest rate index mismatches could reduce the
Companys net income or produce a net loss, and adversely affect the level of
the Companys dividends and the market price of its common stock.

In addition, RMBS backed by ARMs or hybrid ARMs are typically subject to
lifetime interest rate caps that limit the amount an interest rate can increase
through the maturity of the RMBS. However, the Companys borrowings under
repurchase agreements typically are not subject to similar restrictions.
Accordingly, in a period of rapidly increasing interest rates, the interest
rates paid on the Companys borrowings could increase without limitation while
caps could limit the interest rates on these types of RMBS. This problem is
magnified for RMBS backed by ARMs or hybrid ARMs that are not fully indexed.
Further, some RMBS backed by ARMs or hybrid ARMs 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, the Company may receive less cash
income on these types of RMBS than the Company needs to pay interest on its
related borrowings. These factors could reduce the Companys net interest income
and cause it to suffer a loss during periods of rising interest rates.

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Interest rate fluctuations may
adversely affect the level of the Companys net income and the value of the
Companys assets and common stock.

Interest rates
are highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond the Companys control. Interest rate fluctuations present a
variety of risks, including the risk of a narrowing of the difference between
asset yields and borrowing rates, flattening or inversion of the yield curve and
fluctuating prepayment rates, and may adversely affect the Companys income and
the value of its assets and common stock.

Because the Company holds and may
acquire additional fixed-rate securities, an increase in interest rates on the
Companys borrowings may adversely affect its book value.

Increases in interest rates may negatively affect the fair market value
of the Companys assets. Any fixed-rate securities the Company holds or acquires
generally will be more negatively affected by these increases than
adjustable-rate securities. In accordance with accounting rules,
the Company will be required to reduce its earnings for any
decrease in the fair market value of its assets that are accounted for under the
fair value option. The Company will be required to evaluate its assets on a
quarterly basis to determine their fair value by using third-party bid price
indications provided by dealers who make markets in these securities or by
third-party pricing services. If the fair value of a security is not available
from a dealer or third-party pricing service, the Company will estimate the fair
value of the security using a variety of methods, including discounted cash flow
analysis, matrix pricing, option-adjusted spread models and fundamental
analysis. Aggregate characteristics taken into consideration include type of
collateral, index, margin, periodic cap, lifetime cap, underwriting standards,
age and delinquency experience. However, the fair value reflects estimates and
may not be indicative of the amounts the Company would receive in a current
market exchange. If the Company determines that an agency security is
other-than-temporarily impaired, the Company would be required to reduce the
value of such agency security on its balance sheet by recording an impairment
charge in its income statement and its stockholders equity would be
correspondingly reduced. Reductions in stockholders equity decrease the amounts
the Company may borrow to purchase additional target assets, which could
restrict the Companys ability to increase its net income.

Because the assets the Company
holds and expects to acquire may experience periods of illiquidity, the Company
may lose profits or be prevented from earning capital gains if the Company
cannot sell mortgage-related assets at an opportune time.

The Company bears the risk of being unable to dispose of its assets at
advantageous times or in a timely manner because mortgage-related assets
generally experience periods of illiquidity, including the recent period of
delinquencies and defaults with respect to residential mortgage loans. The lack
of liquidity may result from the absence of a willing buyer or an established
market for these assets, as well as legal or contractual restrictions on resale
or the unavailability of financing for these assets. As a result, the Companys
ability to vary its portfolio in response to changes in economic and other
conditions may be relatively limited, which may cause it to incur losses.

The Company may experience a
decline in the fair market value of its assets.

A decline in the fair market value of the Companys assets and the assets
which it intends to acquire may require the Company to recognize an
other-than-temporary impairment against such assets under U.S. GAAP, if the
Company were to determine that, with respect to any debt security in unrealized
loss positions, the Company does not have the ability and intent to hold such
assets to maturity or for a period of time sufficient to allow for recovery to
the amortized cost of such assets. If such a determination were to be made, the
Company would recognize unrealized losses through earnings and write down the
amortized cost of such assets to a new cost basis, based on the fair market
value of such assets on the date they are considered to be
other-than-temporarily impaired. Such impairment charges reflect non-cash losses
at the time of recognition; subsequent disposition or sale of such assets could
further affect the Companys future losses or gains, as they are based on the
difference between the sale price received and the adjusted amortized cost of
such assets at the time of sale. In addition, the Company has elected the fair
value option for its RMBS and future mortgage related assets may also be carried
at fair value. Accordingly, declines in the fair value of these assets will also
be recognized as unrealized losses through earnings and will adversely impact
the results of its operations for the period in which such change in value
occurs.

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Many of the assets in the
Companys portfolio will be recorded at fair value and, as a result, there will
be uncertainty as to the value of these assets.

Many of the
assets in the Companys portfolio are and will likely be in the form of
securities that are not publicly traded. The fair value of securities and other
assets that are not publicly traded may not be readily determinable. The Company
values these assets quarterly at fair value, as determined in accordance with
applicable accounting standards, which may include unobservable inputs. Because
such valuations are subjective, the fair value of certain of the Companys
assets may fluctuate over short periods of time and the Companys 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 the Companys common
stock could be adversely affected if its determinations regarding the fair value
of these assets were materially higher than the values that the Company
ultimately realizes upon their disposal.

Prepayment rates may adversely
affect the value of the Companys portfolio of assets.

Pools of residential mortgage loans underlie the RMBS that the Company
holds and will acquire. In the case of residential mortgage loans, there are
seldom any restrictions on borrowers abilities to prepay their loans. Declines
in interest rates may cause an increase in prepayment rates of mortgage loans.
In addition, both HARP and QE3 may also cause an increase in prepayment rates.
The Company generally receives distributions from principal payments that are
made on these underlying mortgage loans. When borrowers prepay their mortgage
loans faster than expected, this results in prepayments that are faster than
expected on the RMBS. Faster than expected prepayments could adversely affect
the Companys profitability, including in the following ways:

- The Company may purchase RMBS that
  have a higher interest rate than the market interest rate at the time. In
  exchange for this higher interest rate, the Company may pay a premium over the
  par value to acquire the security. In accordance with U.S. GAAP, the Company
  may amortize this premium over the estimated term of the RMBS. If the RMBS is
  prepaid in whole or in part prior to its maturity date, however, the Company
  may be required to expense the premium that was prepaid at the time of the
  prepayment.
- The Company also may acquire RMBS at
  a lower interest rate than the market interest rate at the time. This would
  adversely affect the Companys profitability. Slower-than-expected prepayments
  may also adversely affect the fair market value of discounted RMBS.
- The Company anticipates that a
  substantial portion of its adjustable-rate RMBS may bear interest rates that
  are lower than their fully indexed rates, which are equivalent to the
  applicable index rate plus a margin. If an adjustable-rate RMBS is prepaid
  prior to or soon after the time of adjustment to a fully-indexed rate, the
  Company will have held that RMBS while it was least profitable and lost the
  opportunity to receive interest at the fully indexed rate over the remainder
  of its expected life.
- If the Company is unable to acquire
  new RMBS similar to the prepaid RMBS, the Companys financial condition,
  results of operation and cash flow would suffer. Prepayment rates generally
  increase when interest rates fall and decrease when interest rates rise, but
  changes in prepayment rates are difficult to predict. Prepayment rates also
  may be affected by conditions in the housing and financial markets, general
  economic conditions, the relative interest rates on fixed-rate mortgages and
  ARMs, the credit rating of the borrower, the rate of home price appreciation
  or depreciation, and foreclosures and lender competition.

While the Company will seek to minimize prepayment risk to the extent
practical, in selecting assets it must balance prepayment risk against other
risks and the potential returns of each asset. No strategy can completely
insulate the Company from prepayment risk.

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Recent market conditions may
upset the historical relationship between interest rate changes and prepayment
trends, which would make it more difficult for the Company to analyze its
portfolio of assets. The Company is vulnerable to loss from prepayments if it
purchases assets above par, especially in the event of additional mortgage loan
modification and refinance programs or similar future legislative action.

The Companys
success depends in part on its ability to analyze the relationship of changing
interest rates on prepayments of the mortgage loans that underlie its RMBS.
Changes in interest rates and prepayments affect the market price of the RMBS
that the Company intends to purchase and any RMBS that the Company holds at a
given time. As part of the Companys overall portfolio risk management, the
Company will analyze interest rate changes and prepayment trends separately and
collectively to assess their effects on the Companys portfolio of assets. In
conducting this analysis, the Company will depend on certain assumptions based
upon historical trends with respect to the relationship between interest rates
and prepayments under normal market conditions. If dislocations in the
residential mortgage market or other developments change the way that prepayment
trends have historically responded to interest rate changes, the Companys
ability to (i) assess the fair market value of its portfolio of assets, (ii)
implement its hedging strategies and (iii) implement techniques to reduce its
prepayment rate volatility would be significantly affected, which could
materially adversely affect the Companys financial position and results of
operations. In particular, despite the historically low interest rates, recent
dislocations, including home price depreciation resulting in many borrowers
owing more on their mortgage than the values of their homes, have prevented many
such borrowers from refinancing their mortgage loans, which has impacted
prepayment rates and the value of RMBS assets. However, mortgage loan
modification and refinance programs or future legislative action may make
refinancing mortgage loans more accessible or attractive to such borrowers,
which could cause the rate of prepayments on RMBS assets to accelerate. For RMBS
assets, including some of the Companys RMBS assets, that were purchased or are
trading at premium to their par value, higher prepayment rates would adversely
affect the value of such assets or cause the holder to incur losses with respect
to such assets.

Risks Related to Owning The
Companys Common Stock

Common stock and preferred stock
eligible for future sale may have adverse effects on the Companys share price.

Subject to applicable law, the Companys board of directors has the
authority, without further stockholder approval, to authorize the Company to
issue additional authorized shares of common stock and preferred stock on the
terms and for the consideration it deems appropriate. The Company cannot predict
the effect, if any, of future sales of its common stock, or the availability of
shares for future sales, on the market price of its common stock. The market
price of the Companys common stock may decline significantly when the
restrictions on resale by certain of the Companys stockholders lapse or a
registration statement is filed pursuant to a registration rights agreement in
respect of shares of the Companys common stock that were purchased in
unregistered transactions. Sales of substantial amounts of common stock or the
perception that such sales could occur may adversely affect the prevailing
market price for the Companys common stock. As of March 25, 2013, the Company
had outstanding 7,970,886 shares of its common stock, and 926,914 Operating
Partnership units (OP units), which are exchangeable on a one-for-one basis
into shares of the Companys common stock. The Company has agreed with
stockholders and holders of OP units, which participated in the pre-IPO private
placements (as described below), to file a registration statement in respect of
these shares of common stock, including the shares of common stock issuable upon
exchange of the OP units. As of March 25, 2013, holders of approximately 33.7%
of the Companys outstanding shares of common stock and OP units have agreed
with ZAIS, as the managing member of the Advisor, not to, directly or
indirectly, sell, transfer, assign, mortgage, hypothecate, pledge or otherwise
dispose of or encumber or permit or suffer any encumbrance of all or any part of
the shares of the Companys common stock or OP units until November 5, 2013 (270
days following the Company's listing), without the prior written consent of
ZAIS, subject to certain exceptions relating to private re-sales where the
transferee continues to be bound by a lock-up agreement.

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For as long as the Company is an
emerging growth company, the Company will not be required to comply with certain
reporting requirements, including those relating to accounting standards and
disclosure about the Companys executive compensation, that apply to other
public companies.

Upon the
completion of its IPO, the Company became subject to reporting and other
obligations under the Exchange Act. In April 2012, the Jumpstart Our Business
Startups Act (the JOBS Act) was enacted into law. The JOBS Act contains
provisions that, among other things, relax certain reporting requirements for
emerging growth companies, including certain requirements relating to
accounting standards and compensation disclosure. The Company is an emerging
growth company as defined in the JOBS Act and may remain an emerging growth
company for up to five full fiscal years. Unlike other public companies, for as
long as the Company is an emerging growth company, the Company will not be
required to (i) provide an auditors attestation report on managements
assessment of the effectiveness of the Companys system of internal control over
financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
(the Sarbanes-Oxley Act), (ii) comply with any new requirements adopted by the
Public Company Accounting Oversight Board (PCAOB) requiring mandatory audit
firm rotation or a supplement to the auditors report in which the auditor would
be required to provide additional information about the audit and the financial
statements of the issuer, (iii) comply with any new audit rules adopted by the
PCAOB after April 5, 2012 unless the SEC determines otherwise, (iv) provide
certain disclosure regarding executive compensation required of larger public
companies or (v) hold shareholder advisory votes on executive compensation. The
Company cannot predict if investors will find its shares of common stock less
attractive if the Company chooses to rely on these exemptions.

Future offerings of debt or
equity securities, which may rank senior to the Companys common stock, may
adversely affect the market price of the Companys common stock.

If the Company decides to issue debt securities in the future which would
rank senior to the Companys common stock, it is likely that they will be
governed by an indenture or other instrument containing covenants restricting
the Companys operating flexibility. Additionally, any equity securities or
convertible or exchangeable securities that the Company issues in the future may
have rights, preferences and privileges more favorable than those of the
Companys common stock and may result in dilution to owners of the Companys
common stock. The Company and, indirectly, the Companys stockholders, will bear
the cost of issuing and servicing such securities. Because the Companys
decision to issue debt or equity securities in any future offering will depend
on market conditions and other factors beyond the Companys control, the Company
cannot predict or estimate the amount, timing or nature of the Companys future
offerings. Thus, holders of the Companys common stock will bear the risk of the
Companys future offerings, reducing the market price of the Companys common
stock and diluting the value of their stock holdings in the Company.

The Company has not established a
minimum distribution payment level and the Company cannot assure its ability to
pay distributions in the future.

To maintain the Companys qualification as a REIT and generally not be
subject to U.S. federal income and excise tax, the Company intends to make
regular quarterly distributions to holders of common stock out of legally
available funds. The Companys current policy is to pay quarterly distributions
which, on an annual basis, will equal all or substantially all of the Companys
net taxable income. The Company has not, however, established a minimum
distribution payment level and the Companys ability to pay distributions may be
adversely affected by a number of factors, including the risk factors described
in this annual report on Form 10-K. All distributions will be made at the
discretion of the Companys board of directors and will depend on the Companys
earnings, its financial condition, any debt covenants, maintenance of the
Companys REIT qualification, restrictions on making distributions under
Maryland law and other factors as the Companys board of directors may deem
relevant from time to time. The Company may not be able to make distributions in
the future and the Companys board of directors may change the Companys
distribution policy in the future. The Company believes that a change in any one
of the following factors, among others, could adversely affect its results of
operations and impair the Companys ability to pay distributions to its
stockholders:

- the profitability of the assets the Company holds
  or acquires;
- the Companys ability to make profitable
  acquisitions;
- margin calls or other expenses that reduce the
  Companys cash flow;
- defaults in the Companys asset portfolio or
  decreases in the value of the Companys portfolio; and
- the fact that anticipated operating expense levels
  may not prove accurate, as actual results may vary from
estimates.

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The Company
cannot provide any assurance that it will achieve results that will allow it to
make a specified level of cash distributions or year-to-year increases in cash
distributions in the future. In addition, some of the Companys distributions
may include a return of capital.

Risks Related to The Companys
Organization and Structure

Conflicts of interest could arise
as a result of the Companys UpREIT structure.

Conflicts of interest could arise in the future as a result of the
relationships between the Company and its affiliates, on the one hand, and the
Operating Partnership or any partner thereof, on the other. The Companys
directors and officers have duties to the Company under applicable Maryland law
in connection with their management of the Company. At the same time, the
Company, through the Operating Partnership subsidiary, has fiduciary duties, as
a general partner, to the Operating Partnership and to the limited partners
under Delaware law in connection with the management of the Operating
Partnership. The Companys duties, through the Operating Partnership subsidiary,
as a general partner to the Operating Partnership and its partners may come into
conflict with the duties of the Companys directors and officers.

Certain provisions of Maryland
law could inhibit changes in control and prevent the Companys stockholders from
realizing a premium over the then-prevailing market price of the Companys
common stock.

Certain provisions of the Maryland General Corporation Law (MGCL) may
have the effect of deterring a third party from making a proposal to acquire the
Company or of impeding a change in control under circumstances that otherwise
could provide the holders of shares of the Companys common stock with the
opportunity to realize a premium over the then-prevailing market price of such
shares.

The Company is subject to the business combination provisions of the
MGCL that, subject to limitations, prohibit certain business combinations
(including, generally, a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or
reclassification of equity securities) between the Company and an interested
stockholder (defined generally as any person who beneficially owns 10% or more
of the voting power of the Companys outstanding voting stock or an affiliate or
associate of the Company who, at any time within the two-year period immediately
prior to the date in question, was the beneficial owner of 10% or more of the
voting power of the Companys outstanding stock) or an affiliate thereof for
five years after the most recent date on which the stockholder becomes an
interested stockholder. After the five-year prohibition, any business
combination between the Company and an interested stockholder generally must be
recommended by the Companys board of directors and approved by the affirmative
vote of at least (i) eighty percent of the votes entitled to be cast by holders
of outstanding shares of the Companys voting stock; and (ii) 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 Company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. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by a board of directors prior to the
time that the stockholder would otherwise have become an interested stockholder.
Pursuant to the statute, the Companys board of directors will by resolution
exempt business combinations (i) between the Company and ZAIS or its affiliates
and (ii) between the Company and any person, provided that such business
combination is first approved by the Companys board of directors (including a
majority of the Companys directors who are not affiliates or associates of such
person). Consequently, the five-year prohibition and the super-majority vote
requirements will not apply to business combinations between the Company and any
of them. As a result, any person described above may be able to enter into
business combinations with the Company that may not be in the best interest of
the Companys stockholders, without compliance with the super-majority vote
requirements and the other provisions of the statute.

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The control share provisions of the MGCL provide that a holder of
control shares of a Maryland corporation (defined as voting shares of stock
which, when aggregated with all other shares of stock owned by the stockholder or in respect of which the
stockholder is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the stockholder to
exercise one of three increasing ranges of voting power in electing directors)
acquired in a control share acquisition (defined as the direct or indirect
acquisition of ownership of or the power to direct the exercise of voting power
with respect to control shares, subject to certain exceptions) have no voting
rights except to the extent approved by the Companys stockholders by the
affirmative vote of at least two-thirds of all the votes entitled to be cast on
the matter, excluding votes entitled to be cast by the acquirer of control
shares, the Companys officers and employees who are also the Companys
directors. The Companys bylaws contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of shares of
the Companys stock. There can be no assurance that this provision will not be
amended or eliminated at any time in the future.

The Companys ability to issue
additional shares of common and preferred stock may prevent a change in the
Companys control.

The Companys
charter authorizes it to issue additional authorized but unissued shares of
common or preferred stock. In addition, the Companys board of directors may,
without stockholder approval, amend the Companys charter to increase or
decrease the aggregate number of shares of the Companys stock or the number of
shares of stock of any class or series that the Company has the authority to
issue. As a result, the Companys board may establish a series of shares of
common or preferred stock that could delay or prevent a transaction or a change
in control that might involve a premium price for shares of the Companys common
stock or otherwise be in the best interest of the Companys stockholders.

The Companys rights and the
Companys stockholders rights to take action against the Companys directors
and officers are limited, which could limit the Companys stockholders recourse
in the event of actions not in the Companys stockholders best interests.

As permitted by Maryland law, the Companys charter limits the liability
of its directors and officers to the Company and its 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.

In addition, the Companys charter authorizes it, to the maximum extent
permitted by Maryland law, to obligate the Company to indemnify any present or
former director or officer or any individual who, while a director or officer of
the Company and at its request, serves or has served another corporation, real
estate investment trust, limited liability company, partnership, joint venture,
trust, employee benefit plan or other enterprise as a director, officer,
partner, trustee, member or manager from and against any claim or liability to
which that individual may become subject or which that individual may incur by
reason of his or her service in any of the foregoing capacities and to pay or
reimburse his or her reasonable expenses in advance of final disposition of a
proceeding. The Companys bylaws obligate it, to the maximum extent permitted by
Maryland law, to indemnify any present or former director or officer or any
individual who, while a director or officer of the Company and at its request,
serves or has served another corporation, real estate investment trust, limited
liability company, partnership, joint venture, trust, employee benefit plan or
other enterprise as a director, officer, partner, trustee, member or manager and
who is made or threatened to be made a party to the proceeding by reason of his
or her service in that capacity from and against any claim or liability to which
that individual may become subject or which that individual may incur by reason
of his or her service in any of the foregoing capacities and to pay or reimburse
his or her reasonable expenses in advance of final disposition of a proceeding.
The Companys charter and bylaws also permit it to indemnify and advance
expenses to any individual who served a predecessor of the Company in any of the
capacities described above and any employee or agent of the Company or a
predecessor of the Company.

Maintenance of the Companys 1940
Act exemption imposes limits on the Companys operations.

The Company conducts, and intends to continue to conduct, its operations
so as not to become regulated as an investment company under the 1940 Act.
Because the Company is a holding company and conducts its businesses primarily
through wholly-owned or majority-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 the Company may own, may not have a combined value
in excess of 40% of the value of the Companys total assets (exclusive of U.S.
Government securities and cash items) on an unconsolidated basis, which the
Company refers to as the 40% test. This requirement limits the types of
businesses in which the Company may engage through its subsidiaries.

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The determination of whether an entity is a majority-owned subsidiary of
the Company is made by the Company. The 1940 Act defines a majority-owned
subsidiary of a person as a company 50% or more of the outstanding voting
securities of which 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. The Company treats companies in
which it owns at least a majority of the outstanding voting securities as
majority-owned subsidiaries for purposes of the 40% test. The Company has not
requested the SEC, or its staff, to approve the Companys treatment of any
company as a majority-owned subsidiary and neither the SEC nor its staff has
done so. If the SEC, or its staff, were to disagree with the Companys treatment
of one of more companies as majority-owned subsidiaries, the Company would need
to adjust its strategy and its assets in order to continue to pass the 40% test.
Any such adjustment in the Companys strategy could have a material adverse
effect on it.

The Company believes that certain of its subsidiaries qualify to be
excluded from the definition of 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 exception
generally requires that at least 55% of such subsidiaries assets must be
comprised of qualifying assets and at least 80% of their total assets must be
comprised of qualifying assets and real estate-related assets under the 1940
Act. The Company will treat as qualifying assets for this purpose mortgage
loans, Agency RMBS in which it holds all the certificates issued by the pool and
other interests in real estate, in each case meeting certain other
qualifications based upon SEC staff no-action letters. Although SEC staff
no-action letters have not specifically addressed the categorization of these
types of assets, the Company will also treat as qualifying assets for this
purpose bridge loans wholly secured by first priority liens on real estate that
provide interim financing to borrowers seeking short-term capital (with terms of
generally up to three years), non-Agency RMBS representing ownership of an
entire pool of mortgage loans, and real estate owned properties. The Company
expects each of its subsidiaries relying on Section 3(c)(5)(C) to treat as real
estate-related assets other types of RMBS, CMBS, securities of REITs and other
real estate-related assets. The Company expects each of its subsidiaries relying
on Section 3(c)(5)(C) to rely on guidance published by the SEC, or its staff, or
on the Companys 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. However, neither the SEC nor its staff has published
guidance with respect to the treatment of some of these assets under Section
3(c)(5)(C). To the extent that the SEC, or its staff, publishes new or different
guidance with respect to these matters, the Company may be required to adjust
its strategy accordingly. Although the Company intends to monitor its portfolio
periodically and prior to each investment acquisition, there can be no assurance
that the Company will be able to maintain an exclusion for these subsidiaries.
In addition, the Company may be limited in its ability to make certain
investments and these limitations could result in the subsidiary holding assets
the Company might wish to sell or selling assets it might wish to hold.

In 2011, the SEC solicited public comment on a wide range of issues
relating to Section 3(c)(5)(C) of the 1940 Act, including the nature of the
assets that qualify for purposes of the exclusion and whether mortgage REITs
should be regulated in a manner similar to registered investment companies.
There can be no assurance that the laws and regulations or the interpretation of
such laws or regulations by the SEC or its staff, will not change in a manner
that adversely affects the Companys operations. If the Company or its
subsidiaries fail to maintain an exception or exclusion from the 1940 Act, the
Company could, among other things, be required either to (i) change the manner
in which it conducts its operations to avoid being required to register as an
investment company, (ii) effect sales of its assets in a manner that, or at a
time when, it would not otherwise choose to do so, or (iii) register as an
investment company, any of which would negatively affect the value of its shares
of common stock, the sustainability of its business model, and its ability to
make distributions, which would have an adverse effect on its business and the
value of its shares of common stock.

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Qualification for exemption from registration under the 1940 Act will
limit the Companys ability to make certain investments. For example, these
restrictions will limit the ability of the Companys subsidiaries to invest
directly in MBS that represent less than the entire ownership in a pool of
mortgage loans, debt and equity tranches of securitizations and ABS, and real
estate companies or in assets not related to real estate.

Certain of the Companys subsidiaries may rely on the exclusion from the
definition of investment company provided by Section 3(c)(6) to the extent that
they hold mortgage assets through majority-owned subsidiaries that rely on
Section 3(c)(5)(C). The SEC has issued little interpretive guidance with respect
to Section 3(c)(6) and any guidance published by the staff could require the
Company to adjust its strategy accordingly.

No assurance can be given that the SEC, or its staff, will concur with
the Companys classification of the Companys or the Companys subsidiaries
assets or that the SEC, or its staff, will not, in the future, issue further
guidance that may require it to reclassify those assets for purposes of
qualifying for an exception to the definition of investment company or an
exclusion from regulation under the 1940 Act. To the extent that the SEC, or its
staff, provides more specific guidance regarding any of the matters bearing upon
the definition of investment company and the exceptions to that definition, the
Company may be required to adjust its investment strategy accordingly.
Additional guidance from the SEC, or its staff, could provide additional
flexibility to the Company, or it could further inhibit the Companys ability to
pursue the investment strategy it has chosen. If the SEC or its staff takes a
position contrary to the Companys analysis with respect to the characterization
of any of the assets or securities the Company invests in, the Company may be
deemed an unregistered investment company. Therefore, in order not to be
required to register as an investment company, the Company may need to dispose
of a significant portion of its assets or securities or acquire significant
other additional assets which may have lower returns than its expected
portfolio, or the Company may need to modify its business to register as an
investment company, which would result in significantly increased operating
expenses and would likely entail significantly reducing the Companys
indebtedness, which could also require the Company to sell a significant portion
of its assets. The Company cannot provide assurance that it would be able to
complete these dispositions or acquisitions of assets, or deleveraging, on
favorable terms, or at all. Consequently, any modification of its business plan
could have a material adverse effect on the Company. Further, if the SEC
determined that the Company were an unregistered investment company, the Company
would be subject to monetary penalties and injunctive relief in an action
brought by the SEC, the Company would potentially be unable to enforce contracts
with third parties and third parties could seek to obtain rescission of
transactions undertaken during the period for which it was established that the
Company was an unregistered investment company. Any of these results would have
a material adverse effect on the Company.

Since the Company will not be registered as an investment company under
the 1940 Act, the Company will not be subject to its substantive provisions,
including provisions requiring diversification of investments, limiting leverage
and restricting investments in illiquid assets.

Rapid changes in the values of
the Companys target assets may make it more difficult for the Company to
maintain its qualification as a REIT or the Companys exemption from the 1940
Act.

If the fair market value or income potential of the Companys target
assets declines as a result of increased interest rates, prepayment rates,
general market conditions, government actions or other factors, the Company may
need to increase its real estate assets and income or liquidate its
non-qualifying assets to maintain its REIT qualification or its exemption from
the 1940 Act. If the decline in real estate asset values or income occurs
quickly, this may be especially difficult to accomplish. The Company may have to
make decisions that it otherwise would not make absent the REIT and 1940 Act
considerations.

The Companys taxable income is
calculated differently than net income based on U.S. GAAP.

The Companys taxable income may substantially differ from its net income
based on U.S. GAAP. For example, interest income on the Companys mortgage
related securities does not necessarily accrue under an identical schedule for
U.S. federal income tax purposes as for accounting purposes.

For U.S. GAAP purposes, interest income on the Companys mortgage related
securities is accrued based on the actual coupon rate and the outstanding
principal amount of the underlying mortgages. Premiums and discounts are
amortized or accreted into interest income over the estimated lives of the
securities using the effective yield method adjusted for the effects of
estimated prepayments. Adjustments are made using the retrospective method to
the effective interest computation each reporting period based on the actual
prepayment experiences to date, and the present expectation of future
prepayments of the underlying mortgages. If the Companys estimate of
prepayments is incorrect, the Company is required to make an adjustment to the
amortization or accretion of premiums and discounts that would have an impact on
future income.

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Management will estimate, at the time of purchase, the future expected
cash flows and determine the effective interest rate based on these estimated
cash flows and the Companys purchase price. As needed, these estimated cash
flows will be updated and a revised yield computed based on the current
amortized cost of the investment. In estimating these cash flows, the Company
will have to make assumptions regarding the rate and timing of principal
payments and coupon rates. These uncertainties and contingencies are difficult
to predict and are subject to future events that may impact managements
estimates and the Companys interest income.

In particular, interest income on mortgage related securities that were
purchased at a discount to par value will be recognized based on the securitys
effective interest rate. The effective interest rate on these securities will be
based on the projected cash flows from each security, which will be estimated
based on the Companys observation of current information and events and include
assumptions related to interest rates, prepayment rates and the timing and
amount of credit losses. Based on the projected cash flows from the Companys
mortgage related securities purchased at a discount to par value, a portion of
the purchase discount may be designated as credit protection against future
credit losses and, therefore, may not be accreted into interest income. The
amount designated as credit discount may be adjusted over time, based on the
actual performance of the security, its underlying collateral, actual and
projected cash flow from such collateral, economic conditions and other factors.
If the performance of a security with a credit discount is more favorable than
forecasted, a portion of the amount designated as credit discount may be
accreted into interest income over time. Conversely, if the performance of a
security with a credit discount is less favorable than forecasted, additional
amounts of the purchase discount may be designated as credit discount, or
impairment charges and write-downs of such securities to a new cost basis could
result.

For U.S. federal income tax purposes, if a debt instrument pays interest
currently, the Company is generally required to treat all such interest as
interest income. In addition, if the Company acquires RMBS or other debt
instruments at a discount in the secondary market, the discount at which such
debt instruments are acquired will generally be treated as market discount for
U.S. federal income tax purposes and will accrue over the term of the debt
instrument. Accrued market discount is reported as income when, and to the
extent that, the Company receives any payment of principal on the debt
instrument, unless the Company elects to include accrued market discount in
incomes as it accrues. As a result, the Company will be required to treat
principal payments on such a debt instrument as ordinary income for U.S. federal
income tax purposes to the extent of any accrued market discount regardless of
the Companys expected return on its investment in the debt instrument.
Similarly, if the Company acquires a debt instrument that is issued with
original issue discount (OID), the Company will generally be required to
accrue such OID regardless of whether the Company expects to receive the full
face amount of the debt instrument on its maturity. If the Company collects less
on a debt instrument than the Companys purchase price plus any market discount
it had previously reported as income, the Company may not be able to benefit
from any offsetting loss deductions in subsequent years. In certain cases, the
Company may be able to cease accruing interest income with respect to a debt
instrument, to the extent there is reasonable doubt as to the Companys ability
to collect such interest income. However, if the Company recognizes insufficient
interest income with respect to certain debt instruments that the Company
acquires, and the Internal Revenue Service (IRS) were to successfully assert
that the Company did not accrue the appropriate amount of income with respect to
such a debt instrument in a given taxable year, the Company may be required to
increase its taxable income with respect to such year, which could cause it to
be required to pay a deficiency dividend or a tax on undistributed income, or
fail to qualify as a REIT.

Tax Risks

Investment in the Companys
common stock has various tax risks.

This summary of certain tax risks is limited to the U.S. federal income
tax risks addressed below. Additional risks or issues may exist that are not
addressed in this annual report on Form 10-K and that could affect the U.S.
federal income tax treatment of the Company, the Operating Partnership or the
Companys stockholders.

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The Companys failure to qualify
as a REIT would subject it to U.S. federal income tax and applicable state and
local taxes, which would reduce the amount of cash available for distribution to
the Companys stockholders.

The Company is organized, operates (commencing with the Companys taxable
year ended December 31, 2011), and intends to continue to be organized and to
operate, in a manner that will allow it to qualify as a REIT for U.S. federal
income tax purposes. The Company has not requested and does not intend to
request a ruling from the IRS that the Company qualifies as a REIT. The U.S.
federal income tax laws governing REITs are complex, and judicial and
administrative interpretations of the U.S. federal income tax laws governing
REIT qualification are limited. The complexity of these provisions and of
applicable regulations promulgated by the U.S. Department of the Treasury
(Treasury Regulations) is greater in the case of a REIT that, like the
Company, holds its assets through a partnership. To qualify as a REIT, the
Company must meet, on an ongoing basis, various tests regarding the nature of
its assets and its income, the ownership of its outstanding shares, and the
amount of its distributions. The Companys ability to satisfy the asset tests
depends on its analysis of the characterization and fair market values of its
assets, some of which are not susceptible to a precise determination, and for
which the Company may not obtain independent appraisals. Moreover, new
legislation, court decisions or administrative guidance, in each case possibly
with retroactive effect, may make it more difficult or impossible for the
Company to qualify as a REIT. In addition, the Companys ability to satisfy the
requirements to qualify as a REIT depends in part on the actions of third
parties over which the Company has no control or only limited influence,
including in cases where the Company owns an equity interest in an entity that
is classified as a partnership for U.S. federal income tax purposes. Thus, while
the Company believes that it has operated and intends to continue to operate so
that the Company will qualify as a REIT, given the highly complex nature of the
rules governing REITs, the ongoing importance of factual determinations, and the
possibility of future changes in the Companys circumstances, no assurance can
be given that the Company has qualified or will so qualify for any particular
year. These considerations also might restrict the types of assets that the
Company can acquire in the future.

If the Company fails to qualify as a REIT in any taxable year, and does
not qualify for certain statutory relief provisions, the Company would be
required to pay U.S. federal income tax on its taxable income, and distributions
to its stockholders would not be deductible by the Company in determining its
taxable income. In such a case, the Company might need to borrow money or sell
assets in order to pay the Companys taxes. The Companys payment of income tax
would decrease the amount of its income available for distribution to its
stockholders. Furthermore, if the Company fails to maintain its qualification as
a REIT, the Company no longer would be required to distribute substantially all
of its net taxable income to its stockholders. In addition, unless the Company
were eligible for certain statutory relief provisions, the Company could not
re-elect to qualify as a REIT until the fifth calendar year following the year
in which it failed to qualify.

Complying with REIT requirements
may force the Company to liquidate or forego otherwise attractive investments,
which could reduce returns on the Companys assets and adversely affect returns
to the Companys stockholders.

To qualify as a REIT, the Company generally must ensure that at the end
of each calendar quarter at least 75% of the value of its total assets consists
of cash, cash items, government securities and qualified REIT real estate
assets, including certain mortgage loans and RMBS. The remainder of the
Companys 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 the Companys assets (other than government
securities and qualifying real estate assets) can consist of the securities of
any one issuer, and no more than 25% of the value of the Companys total
securities can be represented by stock and securities of one or more TRSs. If
the Company fails to comply with these requirements at the end of any quarter,
the Company must correct the failure within 30 days after the end of such
calendar quarter or qualify for certain statutory relief provisions to avoid
losing its REIT qualification and suffering adverse tax consequences. As a
result, the Company may be required to liquidate from its portfolio otherwise
attractive investments. These actions could have the effect of reducing the
Companys income and amounts available for distribution to its stockholders. In
addition, if the Company is compelled to liquidate its investments to repay
obligations to its lenders, the Company may be unable to comply with these
requirements, ultimately jeopardizing its qualification as a REIT. Furthermore,
the Company may be required to make distributions to stockholders at
disadvantageous times or when it does not have funds readily available for
distribution, and may be unable to pursue investments that would be otherwise
advantageous to the Company in order to satisfy the source of income or asset
diversification requirements for qualifying as a REIT.

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Distributions from the Company or
gain on the sale of its common stock may be treated as unrelated business
taxable income (UBTI) to U.S. tax exempt holders of common stock.

If (i) all or a portion of the Companys assets are subject to the rules
relating to taxable mortgage pools, (ii) a tax exempt U.S. person has incurred
debt to purchase or hold the Companys common stock, (iii) the Company purchases
residual real estate mortgage investment conduit (REMIC) interests that
generate excess inclusion income, or (iv) the Company is a pension held
REIT, then a portion of the distributions with respect to its common stock and,
in the case of a U.S. person described in (ii), gains realized on the sale of
such common stock by such U.S. person, may be subject to U.S. federal income tax
as UBTI under the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code).

The Company may lose its REIT
qualification or be subject to a penalty tax if it earns and the IRS
successfully challenges the Companys characterization of income from foreign
TRSs or other non-U.S. corporations in which the Company holds an equity
interest.

The Company may make investments in non-U.S. corporations some of which
may, together with the Company, make a TRS election. The Company likely will be
required to include in its income, even without the receipt of actual
distributions, earnings from any such foreign TRSs or other non-U.S.
corporations in which the Company holds an equity interest. Income inclusions
from equity investments in certain foreign corporations are technically neither
dividends nor any of the other enumerated categories of income specified in the
95% gross income test for U.S. federal income tax purposes. However, in recent
private letter rulings, the IRS exercised its authority under Internal Revenue
Code section 856(c)(5)(J)(ii) to treat such income as qualifying income for
purposes of the 95% gross income test notwithstanding the fact that the income
is not included in the enumerated categories of income qualifying for the 95%
gross income test. A private letter ruling may be relied upon only by the
taxpayer to whom it is issued, and the IRS may revoke a private letter ruling.
Consistent with the position adopted by the IRS in those private letter rulings
and based on advice of counsel concerning the classification of such income
inclusions for purposes of the REIT income tests, the Company intends to treat
such income inclusions that meet certain requirements as qualifying income for
purposes of the 95% gross income test. Notwithstanding the IRSs determination
in the private letter ruling described above, it is possible that the IRS could
successfully assert that such income does not qualify for purposes of the 95%
gross income test, which, if such income together with other income the Company
earns that does not qualify for the 95% gross income test exceeded 5% of the
Companys gross income, could cause the Company to be subject to a penalty tax
and could impact the Companys ability to qualify as a REIT.

The REIT distribution
requirements could adversely affect the Companys ability to execute its
business plan and may require it to incur debt, sell assets or take other
actions to make such distributions.

To qualify as a REIT, the Company must distribute to its stockholders
each calendar year at least 90% of its REIT taxable income (including certain
items of non-cash income), determined without regard to the deduction for
dividends paid and excluding net capital gain. To the extent that the Company
satisfies the 90% distribution requirement, but distributes less than 100% of
its taxable income, the Company will be subject to U.S. federal corporate income
tax on its undistributed income. In addition, the Company will incur a 4%
nondeductible excise tax on the amount, if any, by which the Companys
distributions in any calendar year are less than a minimum amount specified
under U.S. federal income tax laws. The Company intends to distribute its net
taxable income to its stockholders in a manner intended to satisfy the 90%
distribution requirement and to avoid both corporate income tax and the 4%
nondeductible excise tax.

The Companys taxable income may substantially exceed its net income as
determined based on U.S. GAAP, or differences in timing between the recognition
of taxable income and the actual receipt of cash may occur. For example, it is
likely that the Company will acquire assets, including RMBS requiring it to
accrue OID or recognize market discount income, that generate taxable income in
excess of economic income or in advance of the corresponding cash flow from the
assets referred to as phantom income. Finally, the Company may be required
under the terms of the indebtedness that it incurs to use cash received from
interest payments to make principal payments on that indebtedness, with the
effect that the Company will recognize income but will not have a corresponding
amount of cash available for distribution to its stockholders.

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As a result of the foregoing, the Company may generate less cash flow
than taxable income in a particular year and find it difficult or impossible to
meet the REIT distribution requirements in certain circumstances. In such
circumstances, the Company may be required to (i) sell assets in adverse market
conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that
would otherwise be used for future investment or used to repay debt, or (iv)
make a taxable distribution of shares of common stock as part of a distribution
in which stockholders may elect to receive shares of common stock or (subject to
a limit measured as a percentage of the total distribution) cash, in order to
comply with the REIT distribution requirements. Thus, compliance with the REIT
distribution requirements may hinder the Companys ability to grow, which could
adversely affect the value of its common stock.

The Company may be required to
report taxable income with respect to certain of the Companys investments in
excess of the economic income the Company ultimately realizes from them.

The Company may acquire mortgage backed securities or debt instruments in
the secondary market for less than their face amount. The discount at which such
securities are acquired may reflect doubts about their ultimate collectability
rather than current market interest rates. The amount of such discount will
nevertheless generally be treated as market discount for U.S. federal income
tax purposes. Market discount accrues on the basis of the constant yield to
maturity of the debt instrument based generally on the assumption that all
future payments on the debt instrument will be made. Accrued market discount is
reported as income when, and to the extent that, any payment of principal of the
debt instrument is made. If the Company collects less on a debt instrument than
the Companys purchase price plus the market discount the Company had previously
reported as income, the Company may not be able to benefit from any offsetting
loss deduction in a subsequent taxable year. In addition, the Company may
acquire distressed debt investments that are subsequently modified by agreement
with the borrower. If the amendments to the outstanding debt are significant
modifications under applicable Treasury regulations, the modified debt may be
considered to have been reissued to the Company at a gain in a debt-for-debt
exchange with the borrower. In that event, the Company may be required to
recognize taxable gain to the extent the principal amount of the modified debt
exceeds the Companys adjusted tax basis in the unmodified debt, even if the
value of the debt or the payment expectations have not changed.

Similarly, some of the RMBS that the Company purchases will likely have
been issued with OID. The Company will be required to report such OID based on a
constant yield method and income will accrue based on the assumption that all
future projected payments due on such mortgage backed securities will be made.
If such mortgage backed securities turn out not to be fully collectible, an
offsetting loss deduction will become available only in the later year in which
uncollectability is provable. Finally, in the event that any debt instruments or
RMBS acquired by the Company are delinquent as to mandatory principal and
interest payments, or in the event a borrower with respect to a particular debt
instrument acquired by the Company encounters financial difficulty rendering it
unable to pay stated interest as due, the Company may nonetheless be required to
continue to recognize the unpaid interest as taxable income as it accrues,
despite doubt as to its ultimate collectability. Similarly, the Company may be
required to accrue interest income with respect to subordinate RMBS at their
stated rate regardless of whether corresponding cash payments are received or
are ultimately collectible. In each case, while the Company would in general
ultimately have an offsetting loss deduction available to it when such interest
was determined to be uncollectible, the loss would likely be treated as a
capital loss, and the utility of that loss would therefore depend on the
Companys having capital gain in that later year or thereafter.

The Company may acquire excess MSRs, which means the portion of an MSR
that exceeds the arms-length fee for services performed by the mortgage
servicer. Based on IRS guidance concerning the classification of MSRs, the
Company intends to treat any excess MSRs the Company acquires as ownership
interests in the interest payments made on the underlying mortgage loans, akin
to an interest only strip. Under this treatment, for purposes of determining
the amount and timing of taxable income, each excess MSR is treated as a bond
that was issued with OID on the date the Company acquired such excess MSR. In
general, the Company will be required to accrue OID based on the constant yield
to maturity of each excess MSR, and to treat such OID as taxable income in
accordance with the applicable U.S. federal income tax rules. The constant yield
of an excess MSR will be determined, and the Company will be taxed, based on a
prepayment assumption regarding future payments due on the mortgage loans
underlying the excess MSR. If the mortgage loans underlying an excess MSR prepay
at a rate different than that under the prepayment assumption, the Companys
recognition of OID will be either increased or decreased depending on the
circumstances. Thus, in a particular taxable year, the Company may be required
to accrue an amount of income in respect of an excess MSR that exceeds the
amount of cash collected in respect of that excess MSR. Furthermore, it is
possible that, over the life of the investment in an excess MSR, the total
amount the Company pays for, and accrues with respect to, the excess MSR may
exceed the total amount the Company collects on such excess MSR. No assurance
can be given that the Company will be entitled to a deduction for such excess,
meaning that the Company may be required to recognize phantom income over the
life of an excess MSR.

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The interest apportionment rules
may affect the Companys ability to comply with the REIT asset and gross income
tests.

The interest apportionment rules under Treasury Regulation Section 1.856-5(c) provide that, if a mortgage is secured by both real property and other
property, a REIT is required to apportion its annual interest income to the real
property security based on a fraction, the numerator of which is the value of
the real property securing the loan, determined when the REIT commits to acquire
the loan, and the denominator of which is the highest principal amount of the
loan during the year. IRS Revenue Procedure 2011-16 interprets the principal
amount of the loan to be the face amount of the loan, despite the Codes
requirement that taxpayers treat any market discount, which is the difference
between the purchase price of the loan and its face amount, for all purposes
(other than certain withholding and information reporting purposes) as interest
rather than principal.

The interest apportionment regulations apply only if the mortgage loan in
question is secured by both real property and other property. The Company
expects that all or most of the mortgage loans that the Company acquires will be
secured only by real property and no other property value is taken into account
in the Companys underwriting process. Accordingly, it is not contemplated that
the Company will regularly invest in mortgage loans to which the interest
apportionment rules described above would apply. Nevertheless, if the IRS were
to assert successfully that the Companys mortgage loans were secured by
property other than real estate, that the interest apportionment rules applied
for purposes of the Companys REIT testing, and that the position taken in IRS
Revenue Procedure 2011-16 should be applied to certain mortgage loans in the
Companys portfolio, then depending upon the value of the real property securing
the Companys mortgage loans and their face amount, and the other sources of the
Companys gross income generally, the Company may fail to meet the 75% REIT
gross income test. If the Company does not meet this test, the Company could
potentially lose its REIT qualification or be required to pay a penalty to the
IRS.

In addition, the Code provides that a regular or a residual interest in a
REMIC is generally treated as a real estate asset for the purposes of the REIT
asset tests, and any amount includible in the Companys gross income with
respect to such an interest is generally treated as interest on an obligation
secured by a mortgage on real property for the purposes of the REIT gross income
tests. If, however, less than 95% of the assets of a REMIC in which the Company
holds an interest consist of real estate assets (determined as if the Company
held such assets), the Company will be treated as holding its proportionate
share of the assets of the REMIC for the purpose of the REIT asset tests and
receiving directly its proportionate share of the income of the REMIC for the
purpose of determining the amount of income from the REMIC that is treated as
interest on an obligation secured by a mortgage on real property. In connection
with the recently expanded HARP program, the IRS recently issued guidance
providing that, among other things, if a REIT holds a regular interest in an
eligible REMIC, or a residual interest in an eligible REMIC that informs the
REIT that at least 80% of the REMICs assets constitute real estate assets, then
(i) the REIT may treat 80% of the value of the interest in the REMIC as a real
estate asset for the purpose of the REIT asset tests and (ii) the REIT may treat
80% of the gross income received with respect to the interest in the REMIC as
interest on an obligation secured by a mortgage on real property for the purpose
of the 75% REIT gross income test. For this purpose, a REMIC is an eligible
REMIC if (i) the REMIC has received a guarantee from Fannie Mae or Freddie Mac
that will allow the REMIC to make any principal and interest payments on its
regular and residual interests and (ii) all of the REMICs mortgages and
pass-through certificates are secured by interests in single-family dwellings.
If the Company were to acquire an interest in an eligible REMIC less than 95% of
the assets of which constitute real estate assets, the IRS guidance described
above may generally allow the Company to treat 80% of its interest in such a
REMIC as a qualifying real estate asset for the purpose of the REIT asset tests
and 80% of the gross income derived from the interest as qualifying income for
the purpose of the 75% REIT gross income test. Although the portion of the
income from such a REMIC interest that does not qualify for the 75% REIT gross
income test would likely be qualifying income for the purpose of the 95% REIT
gross income test, the remaining 20% of the REMIC interest generally would not
qualify as a real estate asset, which could adversely affect the Companys
ability to satisfy the REIT asset tests. Accordingly, owning such a REMIC
interest could adversely affect the Companys ability to qualify as a
REIT.

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The Companys ownership of and
relationship with any TRS which the Company may form or acquire will be limited,
and a failure to comply with the limits would jeopardize the Companys REIT
qualification and the Companys transactions with its TRSs may result in the
application of a 100% excise tax if such transactions are not conducted on
arms-length terms.

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 a 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 and securities of one or more TRSs. A domestic TRS will pay U.S. 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.

The Company has elected, together with ZAIS I TRS, Inc. (ZAIS I TRS),
for ZAIS I TRS to be treated as a TRS, and the Company has elected, together
with ZFC Trust TRS I, LLC (ZFC Trust TRS) for ZFC Trust TRS to be treated as a
TRS. ZAIS I TRS, ZFC Trust TRS, and any other domestic TRS that the Company may
form would pay U.S. federal, state and local income tax on its taxable income,
and its after tax net income would be available for distribution to the Company
but would not be required to be distributed to it by such domestic TRS. The
Company anticipates that the aggregate value of the TRS stock and securities
owned by it will be less than 25% of the value of its total assets (including
the TRS stock and securities). Furthermore, the Company will monitor the value
of its investments in its TRSs to ensure compliance with the rule that no more
than 25% of the value of its assets may consist of TRS stock and securities
(which is applied at the end of each calendar quarter). In addition, the Company
will scrutinize all of the Companys transactions with TRSs 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 the Company will be
able to comply with the TRS limitations or to avoid application of the 100%
excise tax discussed above.

The ownership limits that apply
to REITs, as prescribed by the Internal Revenue Code and by the Companys
charter, may inhibit market activity in shares of the Companys common stock and
restrict its business combination opportunities.

In order for the Company to qualify as a REIT, not more than 50% in value
of its outstanding shares of stock may be owned, directly or indirectly, by five
or fewer individuals (as defined in the Internal Revenue Code to include certain
entities) at any time during the last half of each taxable year after the first
year for which the Company elects to qualify as a REIT. Additionally, at least
100 persons must beneficially own the Companys stock during at least 335 days
of a taxable year (other than the first taxable year for which the Company
elects to be taxed as a REIT). The Companys charter, with certain exceptions,
authorizes the Companys directors to take such actions as are necessary and
desirable to preserve its qualification as a REIT. The Companys charter also
provides that, unless exempted by the Companys board of directors, no person
may own more than 9.8% in value or in number, whichever is more restrictive, of
the outstanding shares of its common stock, or 9.8% in value or in number,
whichever is more restrictive, of the outstanding shares of all classes and
series of its capital stock. The Companys board of directors may, in its sole
discretion, subject to such conditions as it may determine and the receipt of
certain representations and undertakings, prospectively or retroactively, waive
the ownership limit or establish a different limit on ownership, or excepted
holder limit, for a particular stockholder if the stockholders ownership in
excess of the ownership limit would not result in the Company being closely
held under Section 856(h) of the Internal Revenue Code or otherwise failing to
qualify as a REIT. These ownership limits could delay or prevent a transaction
or a change in control of the Company that might involve a premium price for
shares of its common stock or otherwise be in the best interest of its
stockholders.

Certain financing activities may
subject the Company to U.S. federal income tax and increase the tax liability of
its stockholders.

The Company may enter into transactions that could result in it, the
Operating Partnership or a portion of the Operating Partnerships assets being
treated as a taxable mortgage pool for U.S. federal income tax purposes.
Specifically, the Company may securitize residential or commercial real estate
loans that the Company acquires and such securitizations, to the extent
structured in a manner other than a REMIC, would likely result in the Company
owning interests in a taxable mortgage pool. The Company would be precluded from
holding equity interests in such a taxable mortgage pool securitization through
the Operating Partnership. Accordingly, the Company would likely enter into such
transactions through a qualified REIT subsidiary of one or more subsidiary REITs
formed by the Operating Partnership, and will be precluded from selling to
outside investors equity interests in such securitizations or from selling any
debt securities issued in connection with such securitizations that might be
considered equity for U.S. federal income tax purposes. The Company will be
taxed at the highest U.S. federal corporate income tax rate on any excess
inclusion income arising from a taxable mortgage pool that is allocable to the
percentage of the Companys shares held in record name by disqualified
organizations, which are generally certain cooperatives, governmental entities
and tax-exempt organizations that are exempt from tax on unrelated business
taxable income. To the extent that common stock owned by disqualified
organizations is held in record name by a broker/dealer or other nominee, the
broker/dealer or other nominee would be liable for the U.S. federal corporate
income tax on the portion of the Companys excess inclusion income allocable to
the common stock held by the broker/dealer or other nominee on behalf of the
disqualified organizations. Disqualified organizations may own the Companys
stock. Because this tax would be imposed on the Company, all of the Companys
investors, including investors that are not disqualified organizations, will
bear a portion of the tax cost associated with the classification of the Company
or a portion of its assets as a taxable mortgage pool. A regulated investment
company (RIC) or other pass-through entity owning the Companys common stock
in record name will be subject to tax at the highest corporate tax rate on any
excess inclusion income allocated to their owners that are disqualified
organizations.

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In addition, if the Company realizes excess inclusion income and
allocates it to its stockholders, this income cannot be offset by net operating
losses of its stockholders. If the stockholder is a tax-exempt entity and not a
disqualified organization, then this income is fully taxable as unrelated
business taxable income under Section 512 of the Internal Revenue Code. If the
stockholder is a foreign person, it would be subject to U.S. federal income tax
withholding on this income without reduction or exemption pursuant to any
otherwise applicable income tax treaty. If the stockholder is a REIT, a RIC,
common trust fund or other pass-through entity, the Companys allocable share of
its excess inclusion income could be considered excess inclusion income of such
entity. Accordingly, such investors should be aware that a portion of the
Companys income may be considered excess inclusion income. Finally, if a
subsidiary REIT of the Operating Partnership through which the Company held
taxable mortgage pool securitizations were to fail to qualify as a REIT, the
Companys taxable mortgage pool securitizations will be treated as separate
taxable corporations for U.S. federal income tax purposes that could not be
included in any consolidated U.S. federal corporate income tax return and that
could prevent the Company from meeting the REIT asset tests.

The tax on prohibited
transactions will limit the Companys ability to engage in transactions,
including certain methods of securitizing mortgage loans, which would be treated
as prohibited transactions for U.S. federal income tax purposes.

Net income that the Company derives from a prohibited transaction is
subject to a 100% tax. The term prohibited transaction generally includes a
sale or other disposition of property (including mortgage loans, but other than
foreclosure property, as discussed below) that is held primarily for sale to
customers in the ordinary course of a trade or business by the Company or by a
borrower that has issued a shared appreciation mortgage or similar debt
instrument to the Company. The Company might be subject to this tax if it were
to dispose of or securitize loans, directly or through a subsidiary REIT, in a
manner that was treated as a prohibited transaction for U.S. federal income tax
purposes. The Company intends to conduct its operations so that no asset that
the Company or a subsidiary REIT owns (or is treated as owning) will be treated
as, or as having been, held for sale to customers, and that a sale of any such
asset will not be treated as having been in the ordinary course of the Companys
business or the business of a subsidiary REIT. As a result, the Company may
choose not to engage in certain sales of loans at the REIT level, and may limit
the structures the Company utilizes for its securitization transactions, even
though the sales or structures might otherwise be beneficial to the Company. In
addition, whether property is held primarily for sale to customers in the
ordinary course of a trade or business depends on the particular facts and
circumstances. No assurance can be given that any property that the Company
sells will not be treated as property held for sale to customers, or that the
Company can comply with certain safe-harbor provisions of the Internal Revenue
Code that would prevent such treatment. The 100% tax does not apply to gains
from the sale of property that is held through a TRS or other taxable
corporation, although such income will be subject to tax in the hands of the
corporation at regular corporate rates. The Company intends to structure its
activities to avoid prohibited transaction characterization.

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Characterization of the Companys
repurchase agreements entered into to finance its investments as sales for tax
purposes rather than as secured lending transactions would adversely affect the
Companys ability to qualify as a REIT.

The Company has entered into repurchase agreements with counterparties to
achieve its desired amount of leverage for the assets in which it intends to
invest. Under the Companys repurchase agreements, the Company generally sells
assets to its counterparty to the agreement and receives cash from the
counterparty. The counterparty is obligated to resell the assets back to the
Company at the end of the term of the transaction. The Company believes that for
U.S. federal income tax purposes the Company 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 agreements 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 the Company did not own these assets during the term of
the repurchase agreements, in which case the Company could fail to qualify as a
REIT.

If the Company were to make a
taxable distribution of shares of the Companys stock, stockholders may be
required to sell such shares or sell other assets owned by them in order to pay
any tax imposed on such distribution.

The Company may be able to distribute taxable dividends that are payable
in shares of its stock. If the Company were to make such a taxable distribution
of shares of its stock, stockholders would be required to include the full
amount of such distribution as income. As a result, a stockholder may be
required to pay tax with respect to such dividends in excess of cash received.
Accordingly, stockholders receiving a distribution of the Companys shares may
be required to sell shares received in such distribution or may be required to
sell other stock or assets owned by them, at a time that may be disadvantageous,
in order to satisfy any tax imposed on such distribution. If a stockholder sells
the shares it receives as a dividend in order to pay such tax, the sale proceeds
may be less than the amount included in income with respect to the dividend.
Moreover, in the case of a taxable distribution of shares of the Companys stock
with respect to which any withholding tax is imposed on a non-U.S. stockholder,
the Company may have to withhold or dispose of part of the shares in such
distribution and use such withheld shares or the proceeds of such disposition to
satisfy the withholding tax imposed.

While the IRS, in certain private letter rulings, has ruled that a
distribution of cash or shares at the election of a REITs stockholders may
qualify as a taxable stock dividend if certain requirements are met, it is
unclear whether and to what extent the Company will be able to pay taxable
dividends in cash and shares of common stock in any future period.

Complying with REIT requirements
may limit the Companys ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit the Companys
ability to hedge its assets and operations. Under these provisions, any income
that the Company generates from transactions intended to hedge its interest rate
and currency risks will generally be excluded from gross income for purposes of
the 75% and 95% gross income tests if (i) the instrument hedges interest rate
risk or foreign currency exposure on liabilities used to carry or acquire real
estate assets or hedges risk of currency fluctuations with respect to any item
of income or gain that would be qualifying income under the 75% or 95% gross
income tests, and (ii) such instrument is properly identified under applicable
Treasury Regulations. In addition, any income from other hedges would generally
constitute non-qualifying income for purposes of both the 75% and 95% gross
income tests. As a result of these rules, the Company may have to limit its use
of hedging techniques that might otherwise be advantageous or implement those
hedges through a TRS, which could increase the cost of the Companys hedging
activities or result in greater risks associated with interest rate or other
changes than the Company would otherwise incur.

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Even if the Company qualifies as
a REIT, the Company may face tax liabilities that reduce the Companys cash
flow.

Even if the Company qualifies as a REIT, the Company may be subject to
certain U.S. federal, state and local taxes on its income and assets, including
taxes on any undistributed income, tax on income from some activities conducted
as a result of foreclosures, and state or local income, franchise, property and
transfer taxes, including mortgage related taxes. In addition, ZAIS I TRS, ZFC
Trust TRS and any other domestic TRSs the Company owns will be subject to U.S.
federal, state, and local corporate taxes. In order to meet the REIT
qualification requirements, or to avoid the imposition of a 100% tax that
applies to certain gains derived by a REIT from sales of inventory or property
held primarily for sale to customers in the ordinary course of business, the
Company may hold some of its assets through taxable subsidiary corporations,
including domestic TRSs. Any taxes paid by such subsidiary corporations would
decrease the cash available for distribution to the Companys stockholders.
Furthermore, if the Company acquires appreciated assets from a subchapter C
corporation in a transaction in which the adjusted tax basis of the assets in
the Companys hands is determined by reference to the adjusted tax basis of the
assets in the hands of the C corporation, and if the Company subsequently
disposes of any such assets during the 10-year period following the acquisition
of the assets from the C corporation, the Company will be subject to tax at the
highest corporate tax rates on any gain from such assets to the extent of the
excess of the fair market value of the assets on the date that they were
contributed to the Company over the basis of such assets on such date, which the
Company refers to as built-in gains. A portion of the assets contributed to the
Company in connection with its formation may be subject to the built-in gains
tax. Although the Company expects that the built-in gains tax liability arising
from any such assets should bede
minimis, there is no assurance that this will
be the case.

The Companys qualification as a
REIT and exemption from U.S. federal income tax with respect to certain assets
may be dependent on the accuracy of legal opinions or advice rendered or given
or statements by the issuers of assets that the Company acquires, and the
inaccuracy of any such opinions, advice or statements may adversely affect the
Companys REIT qualification and result in significant corporate-level tax.

When purchasing securities, the Company may rely on opinions or advice of
counsel for the issuer of such securities, or statements made in related
offering documents, for purposes of determining whether such securities
represent debt or equity securities for U.S. federal income tax purposes, and
also to what extent those securities constitute REIT real estate assets for
purposes of the REIT asset tests and produce income which qualifies under the
75% REIT gross income test. In addition, when purchasing the equity tranche of a
securitization, the Company may rely on opinions or advice of counsel regarding
the qualification of the securitization for exemption from U.S. corporate income
tax and the qualification of interests in such securitization as debt for U.S.
federal income tax purposes. The inaccuracy of any such opinions, advice or
statements may adversely affect the Companys REIT qualification and result in
significant corporate-level tax.

The Company may be subject to
adverse legislative or regulatory tax changes that could reduce the value of the
Companys common stock.

At any time, the U.S. federal income tax laws or regulations governing
REITs or the administrative interpretations of those laws or regulations may be
amended, possibly with retroactive effect. The Company cannot predict when or if
any new U.S. federal income tax law, regulation or administrative
interpretation, or any amendment to any existing U.S. federal income tax law,
regulation or administrative interpretation, will be adopted, promulgated or
become effective, and any such law, regulation or interpretation may take effect
retroactively. The Company and its stockholders could be adversely affected by
any such change in, or any new, U.S. federal income tax law, regulation or
administrative interpretation.

Dividends payable by REITs do not
qualify for the reduced tax rates on dividend income from regular corporations,
which could adversely affect the value of the Companys common stock.

The maximum U.S. federal income tax rate for certain qualified dividends
payable to U.S. stockholders that are individuals, trusts and estates is 20%.
Dividends payable by REITs, however, are generally not eligible for the reduced
rates and therefore may be subject to up to a 39.6% maximum U.S. federal income
tax rate on ordinary income. Although the reduced U.S. federal income tax rate
applicable to dividend income from regular corporate dividends 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 the stocks of non-REIT corporations that pay dividends, which could adversely
affect the value of the shares of REITs, including the Companys common stock.

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Qualifying as a REIT involves
highly technical and complex provisions of the Internal Revenue Code.

Qualification
as a REIT involves the application of highly technical and complex Internal
Revenue Code provisions for which only limited judicial and administrative
authorities exist. Even a technical or inadvertent violation could jeopardize
the Companys REIT qualification. The Companys qualification as a REIT will
depend on its satisfaction of certain asset, income, organizational,
distribution, stockholder ownership and other requirements on a continuing
basis. In addition, the Companys ability to satisfy the requirements to qualify
as a REIT depends in part on the actions of third parties over which the Company
has no control or only limited influence, including in cases where the Company
owns an equity interest in an entity that is classified as a partnership for
U.S. federal income tax purposes.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company uses the offices of ZAIS located at Two Bridge Avenue, Suite
322, Red Bank, New Jersey 07701-1106, telephone (732) 978-7518.

Item 3. Legal Proceedings.

From time to time, the Company may be involved in various claims and
legal actions in the ordinary course of business. As of December 31, 2012, the
Company was not involved in any legal proceedings.

Item 4. Mine Safety Disclosures.

Not applicable.

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Table of Contents

PART II

Item 5. Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.

Market Information

The Companys
common stock began trading on the New York Stock Exchange on February 8, 2013
under the symbol ZFC. Prior to that time, there was no public trading market
for the common stock of the Company. The high and low per-share sale prices for
the common stock of the Company as reported by the New York Stock Exchange for
the period from February 8, 2013 to March 25, 2013 were $20.90
and $19.45, respectively, and the last reported sale price on March 25, 2013 was
$20.65 per share.

Holders

As of March 25, 2013, the Company had 43 registered
holders of its common stock. The 43 holders of record
include Cede & Co., which holds shares as nominee for The Depository Trust
Company, which itself holds shares on behalf of the beneficial owners of the
Companys common stock. Such information was obtained through the Companys
registrar and transfer agent.

Dividends

The Company has elected to be taxed as a REIT for U.S. federal income tax
purposes commencing with the Companys taxable year ended December 31, 2011.
U.S. federal income tax law requires that a REIT distribute annually at least
90% of its REIT taxable income, excluding net capital gains and determined
without regard to the dividends paid deduction, and that it pay tax at regular
corporate rates to the extent that it annually distributes less than 100% of its
net taxable income. To satisfy the requirements to qualify as a REIT and
generally not be subject to U.S. federal income and excise tax, the Company
intends to make regular quarterly distributions out of legally available funds.
Although the Company may borrow funds to make distributions, once the Companys
available capital is fully deployed, cash for such distributions is expected to
be largely generated from the Companys results of operations. Dividends are
declared and paid at the discretion of the Companys board of directors and
depend on cash available for distribution, financial condition, the Companys
ability to maintain its qualification as a REIT, and such other factors that the
Companys board of directors may deem relevant. See Item 1A, Risk Factors, and
Item 7, Managements Discussion and Analysis of Financial Conditions and
Results of Operations, of this annual report on Form 10-K, for information
regarding the sources of funds used for dividends and for a discussion of
factors, if any, which may adversely affect the Companys ability to pay
dividends.

During 2012, the Company declared the following dividends:

|                  |  |                   |  |                   |  | Amount
      per
|----------------- |  | ----------------- |  | ----------------- |  | ----------------
|Declaration Date  |  | Record Date       |  | Payment Date      |  | Share           
|May 1, 2012       |  | May 1, 2012       |  | May 15, 2012      |  | $               
|June 5, 2012      |  | June 5, 2012      |  | June 21, 2012     |  | $               
|October 22, 2012  |  | October 22, 2012  |  | October 29, 2012  |  | $               
|November 29, 2012 |  | November 29, 2012 |  | December 6, 2012  |  | $               
|December 19,
2012 |  | December 19,
2012 |  | December 26,
2012 |  | $               

Securities Authorized For Issuance
Under Equity Compensation Plans

During 2012, the Company adopted its 2012 equity incentive plan (the
2012 Plan). The 2012 Plan authorizes the Compensation Committee to approve
grants of equity-based awards to the Companys officers and directors and
officers and employees of the Advisor and its affiliates. The 2012 Plan provides
for grants of equity awards up to, in the aggregate, the equivalent of 5% of the
issued and outstanding shares of the Companys common stock from time to time
(on a fully diluted basis (assuming, if applicable, the exercise of all
outstanding options and the conversion of all warrants and convertible
securities into shares of common stock)) at the time of the award. At December
31, 2012, no awards had been granted under the 2012 Plan, and at March 25, 2013,
444,890 shares were available for future issuance under the 2012 Plan.

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Recent Sales of Unregistered
Securities; Use of Proceeds from Registered Securities

Recent Sales of Unregistered
Securities

On July 29,
2011, the Company completed a private placement whereby existing holders of
shares and limited partnership interests in two funds from the Matrix VI Funds
with a net asset value of $60.5 million (calculated as of July 29, 2011)
exchanged their shares and limited partnership interests for an aggregate of
3,022,617 shares of common stock of the Company, which equaled a value per share
of common stock as of July 29, 2011 of $20.00. The Company received $60.5
million in the private placement, including $8.65 million from the ZAIS Parties
and deployed the cash together with additional borrowings to build a diversified
portfolio of RMBS assets. The ZAIS Parties who participated in the formation
transactions received 432,328 shares of common stock of the Company in
connection therewith. Such issuances were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof or
Regulation D promulgated thereunder, or pursuant to Regulation S under the
Securities Act.

On October 11, 2012, the Company completed the closing of a private
offering in which it sold 195,458 shares of common stock and 22,492 OP units in
reliance on exemptions from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof or Regulation D promulgated thereunder, or
pursuant to Regulation S under the Securities Act, at an offering price of
$22.23 per share of common stock or OP unit, as applicable. Net proceeds from
the closing of this offering, after deducting offering expenses, were $4.4
million, which the Company used to repurchase shares of its common
stock.

On December 13, 2012, the Company completed the closing of a private
offering in which it sold 36,581 shares of common stock and 904,422 OP units in
reliance on exemptions from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof or Regulation D promulgated thereunder, or
pursuant to Regulation S under the Securities Act, at an offering price of
$22.39 per share of common stock or OP unit, as applicable. Net proceeds from
the closing of this offering, after deducting offering expenses, were $20.8
million, which the Company used to fund the repurchase of 265,245 shares of its
common stock in January 2013 and to purchase its target assets, focusing
primarily on Agency RMBS and non-Agency RMBS.

The Company did not pay any underwriting fees, discounts or commissions
in connection with these private placements. As of December 31, 2012, the
Company had invested substantially all of the net proceeds from the private
placements, other than the cash the Company retained to repurchase shares of
common stock held by one of its institutional stockholders in January 2013, as
described herein. For more information, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of OperationsResults of Operations
for the Year Ended December 31, 2012Investment Activity, of this annual report
on Form 10-K.

Information relating to compensation plans under which the Companys
equity securities are authorized for issuance is set forth under Part III, Item
12 of this annual report on Form 10-K and such information is incorporated by
reference herein.

Use of Proceeds from Registered
Securities

On February 7, 2013, the SEC declared effective the IPO registration
statement (File No. 333-185938), pursuant to which the Company registered
5,650,000 shares of its common stock. On February 13, 2013, the Company
consummated the IPO and sold 5,650,000 shares of its common stock to the public
at a price of $21.25 per share for an aggregate offering price of $120.1
million. The Company received net proceeds from the IPO of approximately $118.9
million after deducting offering expenses of $1.2 million. In connection with
the IPO, the Advisor paid $6.3 million in underwriting fees. The IPO is now
complete.

The IPO was underwritten by Deutsche Bank Securities Inc., Citigroup
Global Markets Inc., Barclays Capital Inc., and Credit Suisse Securities (USA)
LLC, acting as the representatives of Stifel, Nicolaus & Company,
Incorporated, Oppenheimer & Co., and Ladenburg Thalmann & Co.
Inc.

The Company initially invested the net proceeds of the IPO in
interest-bearing, short-term investments, including money market accounts and/or
funds. As of the date hereof, the Company has fully deployed the proceeds it
received in both Agency RMBS and non-Agency RMBS.

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Recent Purchases of Equity
Securities

|                              |  |                   |  |                              |       |                          |                            |                           | Maximum Number
      (or    
|----------------------------- |  | ----------------- |  | ---------------------------- | ----- | ------------------------ | -------------------------- | ------------------------- | ----------------------------
|                              |  |                   |  |                              |       |                          | Total Number
      of      |                           | Approximate
      Dollar    
|                              |  | Total
    number  |  |                              |       |                          | Shares (or OP
      units) |                           | Value) of Shares
      (or  
|                              |  | of shares
    (or |  |                              |       |                          | Purchased as Part
      of |                           | Units) that May Yet
      Be
|                              |  | OP units)         |  | Average price
      paid per |       | Publicly
      Announced |                            | Purchased Under
      the
|Period                        |  | purchased(1)      |  | share or (OP unit)           |       | Plans or Programs        |                            | Plans or Programs        
|October 1 to October
      31 |  | 668,525           |  | $                            | 21.21 |                          | --                         |                           | --                          
|Total                         |  | 668,525           |  | $                            | 21.21 |                          | --                         |                           | --                          

|(1) |  | On October 11, 2012, the Company repurchased
      668,525 shares of common stock from its existing stockholders at a
      purchase price per share of $21.21, which was the per share book value of
      the Company as of July 31, 2012.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On January 24,
2013, the Company also repurchased 265,245 shares of its common stock from one
of its institutional stockholders. The Company paid to such stockholder
approximately $5.1 million, which represented 90% of the repurchase amount based
on the estimated book value per share as of December 31, 2012; the remaining 10%
of the repurchase price will be paid following the completion of the Companys
December 31, 2012 year-end audit.

Item 6. Selected Financial
Data.

The Company derived its selected consolidated financial data (i) as of
December 31, 2012 and for the year ended December 31, 2012, and (ii) as of
December 31, 2011 and for the period from July 29, 2011 (the date of the
Companys inception) to December 31, 2011, from its audited consolidated
financial statements appearing in this annual report on Form 10-K.

This information should be read in conjunction with Item 1, Business,
Item 7, Managements Discussion and Analysis of Financial Condition and Results
of Operations, and the audited consolidated financial statements and notes
thereto included in Item 8, Financial Statements and Supplementary Data.

|                                                                                              |  |                                                               |           |                            |  | For the period from             
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | --------- | -------------------------- |  | --------------------------------
|                                                                                              |  |                                                               |           |                            |  | July 29, 2011 (the date of
  the
|                                                                                              |  | For the year ended                                            |           | Companys inception)      
|                                                                                              |  | December 31,
      2012                                       |           | to December
      31, 2011
|                                                                                              |  | (dollars in thousands, except share and
      per share data)
|Operating Data:                                                                               |  |                                                               |           |                            |  |                                 
|Interest income                                                                               |  | $                                                             | 9,398     |                            |  | $                               
|Interest expense                                                                              |  |                                                               | 1,387     |                            |  |                                 
|Net
      interest income                                                                     |  |                                                               | 8,011     |                            |  |                                 
|Operating expense                                                                             |  |                                                               | 2,355     |                            |  |                                 
|Interest on common stock repurchase liability                                                 |  |                                                               | 1,827     |                            |  |                                 
|Change in unrealized gain/(loss) on real
      estate securities                              |  |                                                               | 17,793    |                            |  |                                 
|Realized loss on real estate securities                                                       |  |                                                               | (186      | )                          |  |                                 
|Loss on derivative instruments                                                                |  |                                                               | (1,171    | )                          |  |                                 
|Net
      income allocated to non-controlling interests                                       |  |                                                               | 362       |                            |  |                                 
|Preferred dividends                                                                           |  |                                                               | 15        |                            |  |                                 
|Income allocated to common stock repurchase liability                                         |  |                                                               | 454       |                            |  |                                 
|Net income/(loss) applicable to common
      stockholders                                     |  | $                                                             | 19,434    |                            |  | $                               
|                                                                                             
|Net
      income/(loss) per share applicable to common stockholders  basic and
      diluted |  | $                                                             | 7.13      |                            |  | $                               
|Weighted average number of shares of common stock                                             |  |                                                               |           |                            |  |                                 
|outstanding                                                                                   |  |                                                               |           |                            |  |                                 
|Basic                                                                                         |  |                                                               | 2,724,252 |                            |  |                                 
|Diluted                                                                                       |  |                                                               | 2,773,845 |                            |  |                                 
|Dividends declared per share of common
      stock; based on 2,071,096 shares of              |  |                                                               |           |                            |  |                                 
|record on December 31, 2012 and 3,022,617
      shares of record on                           |  |                                                               |           |                            |  |                                 
|December 31, 2011                                                                             |  | $                                                             | 4.11      | (1)                        |  | $                               

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Table of Contents

|                                                                  |  | As
      of                                         |         | As
      of      
|----------------------------------------------------------------- |  | --------------------------------------------------- | ------- | -----------------
|                                                                  |  | December 31, 2012                                   |         | December 31, 2011
|                                                                  |  | (dollars in
      thousands, except per share data)
|Balance Sheet Data (at period end):                               |  |                                                     |         |                  
|Total assets                                                      |  | $                                                   | 201,648 |                  
|Total
liabilities                                                 |  | $                                                   | 136,507 | (2)              
|Total ZAIS Financial Corp. stockholders
      equity             |  | $                                                   | 45,042  |                  
|Total non-controlling
      interests in operating partnership    |  | $                                                   | 20,099  |                  
|Stockholders equity per share of common
      stock and OP Units |  | $                                                   | 21.68   | (3)              

|(1) |  | The Companys dividends declared
      per share of common stock include the following dividends: (1) on May 1,
      2012, the Company declared a dividend in respect of the period from July
      29, 2011 (the date of the Companys inception) to December 31, 2011 of
      $0.51 per share of common stock, payable to stockholders of record on May
      1, 2012, which was paid on May 15, 2012, (2) on June 5, 2012, the Company
      declared a dividend in respect of the first quarter of 2012 of $0.57 per
      share of common stock, payable to stockholders of record on June 5, 2012,
      which was paid on June 21, 2012, (3) on October 22, 2012, the Company
      declared a dividend in respect of the second quarter of 2012 of $0.89 per
      share of common stock and OP unit, payable to stockholders and OP unit
      holders of record on October 22, 2012, which was paid on October 29, 2012,
      (4) on November 29, 2012, the Company declared a dividend in respect of
      the third quarter of 2012 of $0.98 per share of common stock and OP unit,
      payable to stockholders and OP unit holders of record on November 29,
      2012, which was paid on December 6, 2012 and (5) on December 19, 2012, the
      Company declared a dividend in respect of the fourth quarter of 2012 of
      $1.16 per share of common stock and OP unit, payable to stockholders and
      OP unit holders of record on December 19, 2012, which was paid on December
      26, 2012.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes $11.2 million which, as
      of December 31, 2012, the Company had expected to pay in January 2013 for
      the repurchase of 515,035 shares of its common stock from one of the
      Companys institutional stockholders. In January 2013, the Company agreed
      with this institutional stockholder to repurchase only 265,245 of its
      shares (rather than 515,035 shares). On January 24, 2013, the Company paid
      to such stockholder approximately $5.1 million, which represents 90% of
      the repurchase amount based on the estimated book value per share as of
      December 31, 2012, the remaining 10% of the repurchase price will be paid
      following the completion of the Companys December 31, 2012 year-end
      audit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) |  | The shares of common stock
      outstanding for purposes of this stockholders equity per share
      calculation do not include 515,035 shares of its common stock that the
      Company agreed to repurchase from one of its institutional stockholders in
      January 2013 at a price per share equal to the book value per share as of
      December 31, 2012. In January 2013, the Company agreed with this
      institutional stockholder to repurchase only 265,245 of its shares (rather
      than 515,035 shares). On January 24, 2013, the Company paid to such
      stockholder approximately $5.1 million, which represents 90% of the
      repurchase amount based on the estimated book value per share as of
      December 31, 2012; the remaining 10% of the repurchase price will be paid
      following the completion of its December 31, 2012 year-end
  audit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations.

The following
discussion should be read in conjunction with the Companys financial statements
and accompanying notes included in Item 8, Financial Statements and
Supplementary Data, of this annual report on Form 10-K.

Overview

The Company is a Maryland corporation that invests in, finances and
manages a diversified portfolio of residential mortgage assets, other real
estate-related securities and financial assets. The Company currently primarily
invests in, finances and manages non-Agency RMBS and Agency RMBS. The Companys
RMBS strategy focuses on non-Agency RMBS with an emphasis on securities that,
when originally issued, were rated in the highest rating category by one or more
of the nationally recognized statistical rating organizations, as well as Agency
RMBS. The Companys strategy will also emphasize the purchase of performing and
re-performing residential whole loans. The Company will also have the discretion
to invest in other real estate-related and financial assets, MSRs, IOs, CMBS and
ABS. The Company refers collectively to the assets it targets for acquisition as
its target assets.

The Companys income is generated primarily by the net spread between the
income it earns on its assets and the cost of its financing and hedging
activities. The Companys objective is to provide attractive risk-adjusted
returns to its stockholders, primarily through quarterly distributions and
secondarily through capital appreciation.

The Company completed its formation transaction and commenced operations
on July 29, 2011. The formation transaction involved the exchange by investors
in two funds from the Matrix VI Funds of cash and RMBS assets for an aggregate
of 3,022,617 shares of its common stock. The Company received $60.5 million in
this transaction, including $8.65 million from ZAIS Parties and deployed the
cash together with additional borrowings to build a diversified portfolio of
RMBS assets.

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Table of Contents

On February
13, 2013, the Company successfully completed its IPO, pursuant to which the
Company sold 5,650,000 shares of its common stock to the public at a price of
$21.25 per share for gross proceeds of $120.1 million. In connection with the
IPO, the Advisor paid $6.3 million in underwriting fees. The Company did not pay
any underwriting fees, discounts or commissions in connection with the IPO. Net
proceeds after the payment of offering costs of approximately $1.2 million were
$118.9 million.

As of December 31, 2012, the Company held a diversified portfolio of RMBS
assets with an estimated fair market value of $170.7 million, consisting
primarily of senior tranches of non-Agency RMBS that were originally highly
rated but subsequently downgraded, and Agency RMBS collateralized by either
fixed rate loans or ARMs. The borrowings the Company used to fund the purchase
of its portfolio totaled approximately $116.1 million as of December 31, 2012
under master repurchase agreements with three counterparties. The Company is
also in discussions with other financial institutions to provide it with
additional borrowing capacity under various agreements, including repurchase
agreements and other types of financing arrangements.

The Company has elected to be taxed as a REIT for U.S. federal income tax
purposes commencing with its taxable year ended December 31, 2011. The Company
is organized in a format pursuant to which it serves as the general partner of,
and conducts substantially all of its business through, its Operating
Partnership subsidiary, ZAIS Financial Partners, L.P., a Delaware limited
partnership. The Company also expects to operate its business so that it is not
required to register as an investment company under the 1940 Act.

Results of Operations for the Year
Ended December 31, 2012

The following discussion of the Companys results of operations
highlights the Companys performance for the year ended December 31, 2012. The
Company does not believe that a comparison of the Companys results of
operations with the period ended December 31, 2011 is meaningful because the
Company commenced operations on July 29, 2011 and did not have a full calendar
year of operations during the calendar year ended December 31, 2011.

Investments

The following table sets forth certain information regarding the
Companys investments at December 31, 2012:

|                            |  | Current   |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         | Weighted |      | Weighted
|--------------------------- |  | --------- | ------- | ---------- | - | --------- | - | ----------------------- | - | ------- |  | ---------------- | ------- | ------ | ------- | -------- | - |  | - | ------- | -------- | ---- | --------
|(dollars in thousands)      |  | Principal |         | Premium    |   | Amortized |   | **Gross Unrealized(1)** |   |         |  |                  | Average |        | Average
|                            |  | Balance   |         | (Discount) |   | Cost      |   | Gains                   |   | Losses  |  | Fair
      Value |         | Coupon |         | Yield(2)
|Real Estate Securities      |  |           |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         |          |      |         
|Agency RMBS                 |  |           |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         |          |      |         
|30-year
      adjustable    |  | $         | 3,084   |            | $ | 351       |   |                         | $ | 3,435   |  | $                | -       |        | $       | (195     | ) |  | $ | 3,240   |          | 2.84 | %       
|mortgage                    |  |           |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         |          |      |         
|30-year fixed rate          |  |           | 61,034  |            |   | 3,057     |   |                         |   | 64,091  |  |                  | 2,443   |        |         | (14      | ) |  |   | 66,520  |          | 3.82 |         
|mortgage                    |  |           |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         |          |      |         
|Non-Agency RMBS             |  |           |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         |          |      |         
|Alternative-A               |  |           | 38,550  |            |   | (8,607    | ) |                         |   | 29,943  |  |                  | 3,437   |        |         | -        |   |  |   | 33,380  |          | 5.69 |         
|Pay
      option adjustable |  |           | 1,249   |            |   | (378      | ) |                         |   | 871     |  |                  | 95      |        |         | -        |   |  |   | 966     |          | 1.19 |         
|rate                        |  |           |         |            |   |           |   |                         |   |         |  |                  |         |        |         |          |   |  |   |         |          |      |         
|Prime                       |  |           | 64,979  |            |   | (8,075    | ) |                         |   | 56,904  |  |                  | 5,668   |        |         | (2       | ) |  |   | 62,570  |          | 5.79 |         
|Subprime                    |  |           | 4,420   |            |   | (825      | ) |                         |   | 3,595   |  |                  | 401     |        |         | -        |   |  |   | 3,996   |          | 0.98 |         
|**Real Estate Securities**  |  | $         | 173,316 |            | $ | (14,477   | ) |                         | $ | 158,839 |  | $                | 12,044  |        |         | (211     | ) |  | $ | 170,672 |          | 4.81 | %       

|(1) |  | The Company has
      elected the fair value option pursuant to ASC 825 for its RMBS. Net change
      in unrealized gain/loss of $17.8 million is recognized in earnings as
      change in unrealized gain/loss on real estate securities in the
      consolidated statement of operations for the year ended December 31,
      2012.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Unlevered
    yield.                                                                                                                                                                                                                                                                                                                     

Investment Activity

RMBS. During the year ended
December 31, 2012, the Company acquired Agency RMBS with a principal balance of
$34.0 million for $35.6 million and non-Agency RMBS with a principal balance of
$78.6 million for $68.7 million. During the same period,
the Company sold non-Agency RMBS for $42.6 million in net proceeds and Agency
RMBS for $31.6 million in net proceeds, and recognized a net realized loss of
$0.2 million. The fair market values of the Companys Agency RMBS and non-Agency
RMBS at December 31, 2012 were $69.8 million and $100.9 million, respectively.

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Financing
and Other Liabilities. As of December 31,
2012, the Company had 35 repurchase agreements outstanding with three
counterparties totalling $116.1 million, which was used to finance Agency RMBS
and non-Agency RMBS. These agreements are secured by a portion of the Companys
Agency RMBS and non-Agency RMBS and bear interest at rates that have
historically moved in close relationship to LIBOR. The Company is also in
discussions with other financial institutions to provide it with additional
borrowing capacity under various agreements, including repurchase agreements and
other types of financing arrangements.

The following table presents certain information regarding the Companys
repurchase agreements as of December 31, 2012 by remaining maturity and
collateral type:

|                                           |  | Agency Securities            |        | Non-Agency Securities
|------------------------------------------ |  | ---------------------------- | ------ | ---------------------
|                                           |  |                              |        |                      
|                                           |  | Balance                      |        | Average Rate         
|Repurchase agreements maturing
    within: |  |                             
|                                           |  | (dollars in
      thousands)
|30 days or less                            |  | $                            | 44,175 |                      
|31 - 60 days                               |  |                              | 10,866 |                      
|61 - 90 days                               |  |                              | 11,598 |                      
|Greater than 90 days                       |  |                              | -      |                      
|Total/Weighted
      average               |  | $                            | 66,639 |                      

Derivative
Instruments. As of December 31, 2012, the
Company had outstanding interest rate swap agreements designed to mitigate the
effects of increases in interest rates under a portion of its repurchase
agreements. These swap agreements provide for the Company to pay fixed interest
rates and receive floating interest rates indexed off of LIBOR, effectively
fixing the floating interest rates on $32.6 million of borrowings under its
repurchase agreements as of December 31, 2012.

The following table presents certain information about the Companys
interest rate swaps as of December 31, 2012:

|                            |  |                              |        |                   | Weighted |              | Weighted |                   | Weighted
|--------------------------- |  | ---------------------------- | ------ | ----------------- | -------- | ------------ | -------- | ----------------- | --------
|                            |  | Notional                     |        | Average
      Pay |          | Average      |          | Average
    Years
|                            |  | Amount                       |        | Rate              |          | Receive Rate |          | to Maturity      
|Swap agreements maturing in |  |                             
|                            |  | (dollars in
      thousands)
|2016                        |  | $                            | 12,102 |                   | 1.21     | %            |          | 0.31              | %       
|2017                        |  |                              | 11,050 |                   | 1.28     |              |          | 0.31              |         
|2021                        |  |                              | 9,448  |                   | 2.16     |              |          | 0.31              |         
|**Total/Weighted average**  |  | $                            | 32,600 |                   | 1.51     | %            |          | 0.31              | %       

Net Interest Income

The Company
earned interest income of $9.4 million for the year ended December 31, 2012,
representing interest earned on its assets. The Company incurred interest
expense of $1.4 million for this period related to borrowings from repurchase
agreements. As of December 31, 2012, the weighted average net interest spread
between the yield on the Companys assets and the cost of funds, including the
impact of interest rate hedging, was 2.28% for the Companys Agency RMBS and
5.47% for the Companys non-Agency RMBS.

Interest income is subject to interest rate risk. See Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, of this annual
report on Form 10-K, for more information relating to interest rate risk and its
impact on the Companys operating results.

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The Companys
net interest income is also impacted by prepayment speeds, as measured by the
weighted average Constant Prepayment Rate (CPR) on its assets. The three-month
average and the six-month average CPR for the period ended December 31, 2012 of
the Companys Agency RMBS were 5.7% and 5.6%, respectively, and were 18.8% and
18.6%, respectively, for the Companys non-Agency RMBS. The non-Agency RMBS CPR
includes both voluntary and involuntary amounts.

Expenses

*Professional Fees.*The Company
incurred professional fees of $1.2 million for the year ended December 31, 2012,
which primarily related to legal fees, audit fees and consulting fees.

*Advisory Fee Expense (Related Party).*Pursuant to the terms of the Investment Advisory Agreement, during the
year ended December 31, 2012, the Advisor was paid an advisory fee equal to 1.5%
per annum of the Companys Net Asset Value (as defined in the Investment
Advisory Agreement), calculated and payable (in cash) quarterly in arrears. This
fee (which was recorded as an advisory fee expense - related party) totaled $0.9
million for the year ended December 31, 2012.

*General and Administrative Expenses.*The Company incurred general and administrative expenses of $0.2 million
for the year ended December 31, 2012, which primarily related to insurance.

*Interest on Common Stock Repurchase Liability.*The Company incurred interest cost of $1.8 million for the
year ended December 31, 2012, which was due to dividends paid of $1.6 million on
515,035 shares of common stock, which were reported as a common stock repurchase
liability at December 31, 2012 and an increase in the liability of $0.2 million,
which was due to the increase in value of the common stock repurchase liability
from the initial measurement at September 30, 2012.

Realized and Unrealized Gain
(Loss)

During the year ended December 31, 2012, the Company sold certain of its
RMBS and recognized a net loss of $0.2 million. During this period, the
Companys change in unrealized gain/loss on its RMBS was $17.8 million due to
changes in the fair value of the Companys RMBS.

The Company has not designated its interest rate swaps as hedging
instruments. As a result, the Company recorded the change in estimated fair
value related to interest rate swaps held during the period in earnings as gain
or loss on derivative instruments. Included in gain or loss on derivative
instruments are the net swap payments for the derivative instruments.

The Company has elected to record the change in estimated fair value
related to its RMBS in earnings by electing the fair value option.

The following amounts related to realized gains and losses, as well as
changes in estimated fair value of the Companys RMBS portfolio and derivative
instruments, and are included in the Companys audited consolidated statement of
operations for the year ended December 31, 2012:

|Other
      gain/(loss)                                          |  | (dollars in
      thousands)
|---------------------------------------------------------------- |  | ----------------------------
|Change in unrealized
      gain/(loss) on real estate securities |  | $                           
|Realized loss on real estate
      securities                    |  |                             
|Loss on derivative
      instruments                             |  |                             
|Total other
      gain                                           |  | $                           

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Dividends

During the year ended December 31, 2012, the Company declared the
following dividends:

|                  |  |                   |  |                   |  | Amount
      per
|----------------- |  | ----------------- |  | ----------------- |  | ----------------
|Declaration Date  |  | Record Date       |  | Payment Date      |  | Share           
|May 1, 2012       |  | May 1, 2012       |  | May 15, 2012      |  | $               
|June 5, 2012      |  | June 5, 2012      |  | June 21, 2012     |  | $               
|October 22, 2012  |  | October 22, 2012  |  | October 29, 2012  |  | $               
|November 29, 2012 |  | November 29, 2012 |  | December 6, 2012  |  | $               
|December 19,
2012 |  | December 19,
2012 |  | December 26,
2012 |  | $               

Subsequent Events

On January 24,
2013, the Company repurchased 265,245 shares of its common stock from one of its
institutional stockholders. The Company paid to such stockholder approximately
$5.1 million, which represented 90% of the repurchase amount based on the
estimated book value per share as of December 31, 2012; the remaining 10% of the
repurchase price will be paid following the completion of the Companys December
31, 2012 year-end audit.

On February 13, 2013, the Company successfully completed its IPO,
pursuant to which the Company sold 5,650,000 shares of its common stock to the
public at a price of $21.25 per share for gross proceeds of $120.1 million. In
connection with the IPO, the Advisor paid $6.3 million in underwriting fees. The
Company did not pay any underwriting discounts or commissions in connection with
the IPO. Net proceeds after the payment of offering costs of approximately $1.2
million were $118.9 million.

On January 18, 2012, the Company completed a private placement of 133
shares of $0.0001 par value 12.5% Series A Cumulative Non-Voting Preferred Stock
(the Series A Preferred Stock). The Series A Preferred Stock carried a
liquidation preference of $1,000 per share and holders of the Series A Preferred
Stock were entitled to receive cumulative cash dividends at the rate of 12.5%
per annum of the liquidation preference. On February 15, 2013, the Company
redeemed the 133 outstanding shares of Series A Preferred Stock for an aggregate
redemption price of $146,300, plus the accrued and unpaid dividends. As of March
25, 2013, the Company did not have any Series A Preferred Stock outstanding.

Results of Operations for the Period
from July 29, 2011 (the Date of the Companys Inception) to December 31, 2011

Investments

The following table sets forth certain information regarding the
Companys assets at December 31, 2011:

|                                  |  | Current   |         |            |   |           |   |                         |   |         |  |                        |     |        |   |          |   |  |   |         |  |      |   |  |      
|--------------------------------- |  | --------- | ------- | ---------- | - | --------- | - | ----------------------- | - | ------- |  | ---------------------- | --- | ------ | - | -------- | - |  | - | ------- |  | ---- | - |  | -----
|                                  |  | Principal |         | Premium    |   | Amortized |   | **Gross Unrealized(1)** |   | Fair    |  | **Weighted
  Average**
|                                  |  | Balance   |         | (Discount) |   | Cost      |   | Gains                   |   | Losses  |  | Value                  |     | Coupon |   | Yield(2)
|(dollars in thousands)            |  |           |         |            |   |           |   |                         |   |         |  |                        |     |        |   |          |   |  |   |         |  |      |   |  |      
|Real estate securities:           |  |           |         |            |   |           |   |                         |   |         |  |                        |     |        |   |          |   |  |   |         |  |      |   |  |      
|Agency RMBS                       |  |           |         |            |   |           |   |                         |   |         |  |                        |     |        |   |          |   |  |   |         |  |      |   |  |      
|30-year
      adjustable rate     |  |           |         |            |   |           |   |                         |   |         |  |                        |     |        |   |          |   |  |   |         |  |      |   |  |      
|mortgage                          |  | $         | 12,904  |            | $ | 551       |   |                         | $ | 13,455  |  | $                      | 22  |        | $ | (1       | ) |  | $ | 13,476  |  | 3.16 | % |  | 2.34 
|30-year fixed rate
      mortgage |  |           | 52,681  |            |   | 3,116     |   |                         |   | 55,797  |  |                        | 384 |        |   | (159     | ) |  |   | 56,022  |  | 4.20 |   |  | 3.80 
|Non-agency RMBS                   |  |           |         |            |   |           |   |                         |   |         |  |                        |     |        |   |          |   |  |   |         |  |      |   |  |      
|AlternativeA/B                   |  |           | 51,687  |            |   | (14,542   | ) |                         |   | 37,145  |  |                        | 71  |        |   | (2,149   | ) |  |   | 35,067  |  | 4.92 |   |  | 7.88 
|Pay
      option adjustable rate  |  |           | 24,664  |            |   | (9,992    | ) |                         |   | 14,672  |  |                        | 34  |        |   | (1,915   | ) |  |   | 12,791  |  | 0.84 |   |  | 7.68 
|Prime                             |  |           | 24,633  |            |   | (4,361    | ) |                         |   | 20,272  |  |                        | 244 |        |   | (856     | ) |  |   | 19,660  |  | 4.55 |   |  | 7.22 
|Subprime                          |  |           | 20,624  |            |   | (10,034   | ) |                         |   | 10,590  |  |                        |    |        |   | (1,635   | ) |  |   | 8,955   |  | 0.87 |   |  | 15.04
|Real
      Estate Securities      |  | $         | 187,193 |            | $ | (35,262   | ) |                         | $ | 151,931 |  | $                      | 755 |        | $ | (6,715   | ) |  | $ | 145,971 |  | 3.76 | % |  | 6.14 

| | (1) |  | The Company has
      elected the fair value option pursuant to ASC 825 for its RMBS. Net change
      in unrealized gain/loss of $6.0 million is recognized for the period from
      July 29, 2011 (the date of the Companys inception) to December 31, 2011
      as change in unrealized gain/loss on real estate securities in the
      consolidated statement of operations.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) |  | Unlevered
    yield.                                                                                                                                                                                                                                                                                                                                                                

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Investment Activity

RMBS.During the period from July 29, 2011 (the
date of the Companys inception) to December 31, 2011, the Company acquired
Agency RMBS with a principal balance of $66.6 million for $70.4 million. During
the same period, the Company acquired non-Agency RMBS with a principal balance
of $120.1 million for $101.5 million, which includes the non-Agency RMBS the
Company received in connection with its formation transactions. During the same
period, the Company sold non-Agency RMBS for $7.2 million in net proceeds, and
recognized a net realized loss of $1.5 million. The Company did not sell any
Agency RMBS during the period from July 29, 2011 (the date of the Companys
inception) to December 31, 2011. The fair market values of the Companys Agency
RMBS and non-Agency RMBS at December 31, 2011 were $69.5 million and $76.5
million, respectively.

*Financing and Other Liabilities.*As of December 31, 2011, the Company had 65 repurchase agreements
outstanding with one counterparty totaling $97.6 million, which was used to
finance Agency RMBS and non-Agency RMBS. This agreement is secured by a portion
of the Companys Agency RMBS and non-Agency RMBS and bears interest at rates
that have historically moved in close relationship to LIBOR.

The following table presents certain information regarding the Companys
repurchase agreements as of December 31, 2011 by remaining maturity and
collateral type:

|                                           |  | Agency Securities            |        | Non-Agency Securities
|------------------------------------------ |  | ---------------------------- | ------ | ---------------------
|                                           |  |                              |        |                      
|                                           |  | Balance                      |        | Average Rate         
|Repurchase agreements maturing
    within: |  | (dollars in
      thousands)
|30 days or less                            |  | $                            | 25,733 |                      
|31 - 60 days                               |  |                              | 37,475 |                      
|61 - 90 days                               |  |                              | 3,431  |                      
|Greater than 90 days                       |  |                              |       |                      
|Total/Weighted average                     |  | $                            | 66,639 |                      

*Derivative Instruments.*As of
December 31, 2011, the Company had outstanding interest rate swap agreements
designed to mitigate the effects of increases in interest rates under a portion
of its repurchase agreements. These swap agreements provide for the Company to
pay fixed interest rates and receive floating interest rates indexed off of
LIBOR, effectively fixing the floating interest rates on $21.6 million of
borrowings under its repurchase agreements as of December 31, 2011.

The following table presents certain information about the Companys
interest rate swaps as of December 31, 2011:

|                             |  |                              |        |                  |          |      |                       | Weighted |                        | Weighted
|---------------------------- |  | ---------------------------- | ------ | ---------------- | -------- | ---- | --------------------- | -------- | ---------------------- | --------
|                             |  |                              |        |                  | Weighted |      | Average
      Receive |          | Average Years
      to
|                             |  | Notional Amount              |        | Average Pay Rate |          | Rate |                       | Maturity
|Swap agreements maturing in: |  | (dollars in
      thousands)
|2016                         |  | $                            | 12,102 |                  | 1.21     | %    |                       | 0.38     | %                      |         
|2021                         |  |                              | 9,448  |                  | 2.16     |      |                       | 0.38     |                        |         
|**Total/Weighted average**   |  | $                            | 21,550 |                  | 1.62     | %    |                       | 0.38     | %                      |         

Net Interest Income

The Company earned interest income of $3.6 million from July 29, 2011
(the date of the Companys inception) to December 31, 2011, representing
interest earned on its assets. The Company incurred interest expense of $0.3
million for this period related to borrowings from its repurchase agreement. As
of December 31, 2011, the weighted average net interest spread between the yield
on the Companys assets and the cost of funds, including the impact of interest
rate hedging, was 2.59% for the Companys Agency RMBS and 6.32% for its
non-Agency RMBS.

Interest income is subject to interest rate risk. See Item 7A,
Quantitative and Qualitative Disclosures about Market Risk, of this annual
report on Form 10-K, for more information relating to interest rate risk and its
impact on the Companys operating results.

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The Companys
net interest income is also impacted by prepayment speeds, as measured by the
CPR on the Companys assets. The three-month CPR for the period ended December
31, 2011 was 4.2% for the Companys Agency RMBS. The six-month average CPR for
the period ended December 31, 2011 for the Companys Agency RMBS could not be
calculated due to the age of the Companys loan pools. The three-month average
and the six-month average CPR for the periods ended December 31, 2011 were 14.3%
and 13.9%, respectively, for the Companys non-Agency RMBS. The non-Agency RMBS
CPR includes both voluntary and involuntary amounts.

Expenses

*Advisory Fee Expense (Related Party).*Pursuant to the terms of the Investment Advisory Agreement, during the
period from July 29, 2011 (the date of the Company's inception) to December 31,
2011, the Advisor was paid an advisory fee equal to 1.5% per annum of the
Companys Net Asset Value (as defined in the Investment Advisory Agreement),
calculated and payable (in cash) quarterly in arrears. This fee (which was
recorded as an advisory fee expense - related party) totaled $0.4 million for
the period from July 29, 2011 (the date of the Companys inception) to December
31, 2011.

*Professional Fees.*The Company
incurred professional fees of $0.4 million for the period from July 29, 2011
(the date of the Companys inception) to December 31, 2011, which primarily
represents consulting fees and insurance.

*General and Administrative Expenses.*The Company incurred general and administrative expenses of $0.1 million
for the period from July 29, 2011 (the date of the Companys inception) to
December 31, 2011, which represents accrued excise taxes.

Realized and Unrealized
Gain/(Loss)

During the period from July 29, 2011 (the date of the Companys
inception) to December 31, 2011, the Company sold certain of its RMBS and
recognized a net loss of $1.5 million. During this period, the Companys change
in unrealized loss on its RMBS was $6.0 million due to changes in the fair value
of its RMBS.

The Company has not designated its interest rate swaps as hedging
instruments. As a result, the Company recorded the change in estimated fair
value related to interest rate swaps held during the period in earnings as gain
or loss on derivative instruments. Included in gain or loss on derivative
instruments are the net swap payments for the derivative instruments.

The Company elected to record the change in estimated fair value related
to its RMBS in earnings by electing the fair value option.

The following amounts related to realized gains and losses, as well as
changes in estimated fair value of the Companys RMBS portfolio and derivative
instruments, and are included in the Companys consolidated statement of
operations for the period from July 29, 2011 (the date of the Companys
inception) to December 31, 2011:

|Other
      gain/(loss)                                   |  | (dollars in
      thousands)
|--------------------------------------------------------- |  | ----------------------------
|Change in unrealized loss
      on real estate securities |  | $                           
|Realized loss on real estate
      securities             |  |                             
|Loss on derivative
      instruments                      |  |                             
|Total other loss                                          |  | $                           

Factors Impacting Operating Results

The Company held a diversified portfolio of RMBS assets with a fair
market value of $170.7 million as of December 31, 2012, and $146.0 million as of
December 31, 2011. In addition, the Company anticipates having substantial
available borrowing capacity from which it expects to be able to acquire
additional assets. The Companys operating results will be impacted by the
Companys actual available borrowing capacity.

The Company expects that the results of its operations will also be
affected by a number of other factors, including the level of its net interest
income, the fair market value of its assets and the supply of, and demand for,
the target assets in which it may invest. The Companys net interest income,
which includes the amortization of purchase premiums and
accretion of purchase discounts, varies primarily as a result of changes in
market interest rates and prepayment speeds, as measured by CPR on the Companys
target assets. Interest rates and prepayment speeds vary according to the type
of investment, conditions in the financial markets, competition and other
factors, none of which can be predicted with any certainty. The Companys
operating results may also be impacted by credit losses in excess of initial
anticipations or unanticipated credit events experienced by borrowers whose
mortgage loans are held directly by the Company or included in its non-Agency
RMBS or in other assets it may acquire in the future.

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Changes in Fair Value of the
Companys Assets

The Companys
RMBS are carried at fair value and future mortgage related assets may also be
carried at fair value. Accordingly, changes in the fair value of the Companys
assets may impact the results of its operations for the period in which such
change in value occurs. The expectation of changes in real estate prices is a
major determinant of the value of mortgage loans and, therefore, of RMBS. This
factor is beyond the Companys control. For additional information relating to
the determination of fair value, see Determination of Fair Value and Market
Value Measurement.

Changes in Market Interest Rates

With respect to the Companys business operations, increases in interest
rates, in general, may over time cause: (i) the interest expense associated with
the Companys borrowings to increase; (ii) the value of its investment portfolio
to decline; (iii) coupons on its ARMs and hybrid ARMs (including RMBS secured by
such collateral) and on its other floating rate securities to reset, although on
a delayed basis, to higher interest rates; (iv) prepayments on its RMBS to slow,
thereby slowing the amortization of the Companys purchase premiums and the
accretion of its purchase discounts; and (v) the value of its interest rate swap
agreements to increase. Conversely, decreases in interest rates, in general, may
over time cause: (i) prepayments on the Companys RMBS to increase, thereby
accelerating the amortization of its purchase premiums and the accretion of its
purchase discounts; (ii) the interest expense associated with its borrowings to
decrease; (iii) the value of its investment portfolio to increase; (iv) the
value of its interest rate swap agreements to decrease; and (v) coupons on its
ARMs and hybrid ARMs (including RMBS secured by such collateral) and on its
other floating rate securities to reset, although on a delayed basis, to lower
interest rates. As of December 31, 2012 and December 31, 2011, 19.1% and 40.2%
of the Companys assets, respectively, as measured by fair market value,
consisted of RMBS assets with a variable interest rate component, including ARMs
and hybrid ARMs. For more information relating to the composition of the
Companys assets, including its variable interest rate assets, see Results of
Operations for the Year Ended December 31, 2012Investments and Results of
Operations for the Period from July 29, 2011 (the Date of the Companys
Inception) to December 31, 2011Investments.

Prepayment Speeds

Prepayment speeds on residential mortgage loans, and therefore, RMBS vary
according to interest rates, the type of investment, conditions in the financial
markets, competition, foreclosures and other factors that cannot 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. This can extend the period over which the
Company earns interest income. When interest rates fall, prepayment speeds on
residential mortgage loans, and therefore, RMBS tend to increase, thereby
decreasing the period over which the Company earns interest income.
Additionally, other factors such as the credit rating of the borrower, the rate
of home price appreciation or depreciation, financial market conditions,
foreclosures and lender competition, none of which can be predicted with any
certainty, may affect prepayment speeds on RMBS. In particular, despite the
historically low interest rates, recent severe dislocations in the housing
market, including home price depreciation resulting in many borrowers owing more
on their mortgage loans than the values of their homes have prevented many such
borrowers from refinancing their mortgage loans, which has impacted prepayment
rates and the value of RMBS assets. However, mortgage loan modification and
refinance programs or future legislative action may make refinancing mortgage
loans more accessible or attractive to such borrowers, which could cause the
rate of prepayments on RMBS assets to accelerate. For RMBS assets, including
some of the Companys RMBS assets, that were purchased or are trading at a
premium to their par value, higher prepayment rates would adversely affect the
value of such assets or cause the holder to incur losses with respect to such
assets. For more information related to the Companys assets trading at a
premium to their par value as of December 31, 2012, see Results of Operations
for the Year Ended December 31, 2012Investments and Results of
Operations for the Period from July 29, 2011 (the Date of the Companys
Inception) to December 31, 2011Investments.

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Spreads on Non-Guaranteed
Mortgage Loans and Securities

Since the
financial crisis that began in 2007, the spreads between swap rates and
residential mortgage loans and non-Agency RMBS have been volatile. Spreads on
these assets initially moved wider due to the difficult credit conditions and
have only recovered a portion of that widening. As the prices of securitized
assets declined, a number of investors and a number of structured investment
vehicles faced margin calls from dealers and were forced to sell assets in order
to reduce leverage. The price volatility of these assets also impacted lending
terms in the repurchase market, as counterparties raised margin requirements to
reflect the more difficult environment. The spread between the yield on the
Companys assets and its funding costs is an important factor in the performance
of this aspect of the Companys business. Wider spreads imply greater income on
new asset purchases but may have a negative impact on the Companys stated book
value. Wider spreads generally negatively impact asset prices. In an environment
where spreads are widening, counterparties may require additional collateral to
secure borrowings, which may require the Company to reduce leverage by selling
assets. Conversely, tighter spreads imply lower income on new asset purchases,
but may have a positive impact on the Companys stated book value. Tighter
spreads generally have a positive impact on asset prices. In this case, the
Company may be able to reduce the amount of collateral required to secure
borrowings.

Mortgage Extension Risk

The Advisor computes the projected weighted-average life of the Companys
investments based on assumptions regarding the rate at which the borrowers will
prepay the underlying mortgages. In general, when the Company acquires a
fixed-rate mortgage or hybrid ARM security, the Company may, but is not required
to, enter into an interest rate swap agreement or other hedging instrument that
effectively fixes the Companys 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 the Company from rising interest rates, because
the borrowing costs are fixed for the duration of the fixed-rate portion of the
related RMBS.

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 the Companys results of operations, as
borrowing costs would no longer be fixed after the end of the hedging instrument
while the income earned on the hybrid ARM security would remain fixed. This
situation may also cause the fair market value of the Companys hybrid ARM
security to decline, with little or no offsetting gain from the related hedging
transactions. In extreme situations, the Company may be forced to sell assets to
maintain adequate liquidity, which could cause the Company to incur losses.

In addition, the use of this swap hedging strategy effectively limits
increases in the Companys book value in a declining rate environment, due to
the effectively fixed nature of the Companys hedged borrowing costs. In an
extreme rate decline, prepayment rates on the Companys assets might actually
result in certain of its assets being fully paid off while the corresponding
swap or other hedge instrument remains outstanding. In such a situation, the
Company may be forced to liquidate the swap or other hedge instrument at a level
that causes it to incur a loss.

Credit Risk

The Company is subject to credit risk in connection with its investments.
Although the Company does not expect to encounter credit risk in its Agency
RMBS, it does expect to encounter credit risk related to its non-Agency RMBS,
whole loans and other target assets it may acquire in the future. Increases in
defaults and delinquencies will adversely impact the Companys operating
results, while declines in rates of default and delinquencies will improve the
Companys operating results from this aspect of its business.

Size of Investment Portfolio

The size of the Companys investment portfolio, as measured by the
aggregate principal balance of its mortgage-related securities and the other
assets the Company owns, is also a key revenue driver. Generally, as the size of
the Companys investment portfolio grows, the amount of interest income the
Company receives increases. A larger investment portfolio, however, drives
increased expenses, as the Company incurs additional interest expense to finance
the purchase of its assets.

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Critical Accounting Policies and Use
of Estimates

Basis of Presentation

The Companys
financial statements are prepared in accordance with U.S. GAAP, which requires
the use of estimates and assumptions that involve the exercise of judgment and
the use of assumptions as to future uncertainties. The Companys most critical
accounting policies involve decisions and assessments that affect its reported
assets and liabilities, as well as its reported revenues and expenses. The
Company believes that all of the decisions and assessments upon which its
financial statements will be based will be reasonable at the time made and based
upon information available to it at that time. The Companys critical accounting
policies and accounting estimates may be expanded over time as the Company fully
implements its strategy. Those accounting policies and estimates that the
Company expects to be most critical to an investors understanding of its
financial results and condition are discussed below:

Real Estate SecuritiesFair Value
Election

U.S. GAAP permits entities to choose to measure many financial
instruments and certain other items at fair value. The Company has elected the
fair value option for each of its RMBS at the date of purchase, including those
contributed in connection with its formation, which permits it to measure these
securities at estimated fair value with the change in estimated fair value
included as changes in unrealized gain/loss on real estate securities. The
Company believes that the election of the fair value option for its RMBS
portfolio more appropriately reflects the results of its operations for a
particular reporting period as all securities activities are recorded in a
similar manner.

Determination of Fair Value and
Market Value Measurement

The Fair Value Measurements and Disclosures Topic of the Financial
Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
defines fair value, establishes a framework for measuring fair value, and
requires certain disclosures about fair value measurements under U.S. GAAP.
Specifically, this guidance defines fair value based on exit price, or the price
that would be received upon the sale of an asset or the transfer of a liability
in an orderly transaction between market participants at the measurement date.

Fair value under U.S. GAAP represents an exit price in the normal course
of business, not a forced liquidation price. If the Company were forced to sell
assets in a short period to meet liquidity needs, the prices it receives could
be substantially less than their recorded fair values. Furthermore, the analysis
of whether it is more likely than not that the Company will be required to sell
securities in an unrealized loss position prior to an expected recovery in value
(if any), the amount of such expected required sales, and the projected
identification of which securities would be sold is also subject to significant
judgment.

Changes to the valuation methodology will be reviewed by the Advisor to
ensure the changes are appropriate. The fair value methodology may produce a
fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, the Company anticipates the
valuation methods will be 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 categorizes its financial instruments in accordance with U.S.
GAAP, based on the priority of the inputs to the valuation technique, into a
three-level fair value hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). If the
inputs used to measure the financial instruments fall within different levels of
the hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.

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Financial assets and liabilities
recorded on the Companys consolidated balance sheet are categorized based on
the inputs to the valuation techniques as follows:

|Level 1 | Quoted prices for identical assets or
      liabilities in an active market.   
|------- | -------------------------------------------------------------------------------
|        |                                                                                
|Level 2 | Financial assets and liabilities whose
      values are based on the following:

- Quoted prices for similar assets or liabilities in
  active markets.
- Quoted prices for identical or similar assets or
  liabilities in nonactive markets.
- Pricing models whose inputs are observable for
  substantially the full term of the asset or liability.
- Pricing models whose inputs are derived
  principally from or corroborated by observable market data for substantially
  the full term of the asset or liability.

|Level 3 | Prices or valuation techniques based on
      inputs that are both unobservable and significant to the overall fair
      value measurement.
|------- | --------------------------------------------------------------------------------------------------------------------------------------------

The Company
may use valuation techniques consistent with the market and income approaches to
measure the fair value of its assets and liabilities. The market approach uses
prices and other relevant information generated by market transactions involving
identical or comparable assets or liabilities. The income approach uses
valuation techniques to convert future projected cash flows to a single
discounted present value amount. When applying either approach, the Company
maximizes the use of observable inputs and minimizes the use of unobservable
inputs. The Companys assessment of the significance of a particular input to
the fair value measurement in its entirety requires significant judgment and
considers factors specific to the investment. The Company utilizes proprietary
modeling analysis to support the independent third party broker quotes selected
to determine the fair value of investments and derivative instruments.

The following is a description of the valuation techniques used to
measure fair value and the general classification of these instruments pursuant
to the fair value hierarchy.

Real Estate Securities

The fair value of the Companys RMBS considers the underlying
characteristics of each security including coupon, maturity date and collateral.
The Company estimates the fair value of its Agency RMBS and non-Agency RMBS
based upon a combination of observable prices in active markets, multiple
indicative quotes from brokers, and executable bids. In evaluating broker quotes
the Company also considers additional observable market data points including
recent observed trading activity for identical and similar securities,
back-testing, broker challenges and other interactions with market participants,
as well as yield levels generated by model-based valuation techniques. In the
absence of observable quotes, the Company utilizes model-based valuation
techniques that may contain unobservable valuation inputs.

When available, the fair value of RMBS is based on quoted prices in
active markets. If quoted prices are not available, fair values are obtained
from either broker quotes, observed traded levels or model-based valuation
techniques using observable inputs such as benchmark yields or issuer spreads.
The Companys Agency RMBS are valued using the market data described above,
which includes inputs determined to be observable or whose significant value
drivers are observable. Accordingly, Agency RMBS securities are classified as
Level 2 in the fair value hierarchy.

While the Companys non-Agency RMBS are valued using the same process
with similar inputs as the Agency RMBS, a significant amount of inputs are
unobservable due to relatively low levels of market activity. The fair value of
these securities is typically based on broker quotes or the Companys
model-based valuation. Accordingly, the Companys non-Agency RMBS are classified
as Level 3 in the fair value hierarchy. Model-based valuation consists primarily
of discounted cash flow and yield analyses. Significant model inputs and
assumptions include market-implied discount rates, default rates, expected loss
severity, weighted average life, collateral composition, borrower
characteristics and prepayment rates, and may also include general economic
conditions, home price index forecasts, servicing data and other relevant
information. Where possible, collateral-related assumptions are determined on an
individual loan level.

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Interest Income Recognition and
Impairment

Interest
income on Agency RMBS is accrued based on the outstanding principal balance and
contractual terms. Premiums and discounts associated with Agency RMBS at the
time of purchase are amortized into interest income over the life of such
securities using the effective yield method and adjusted for actual prepayments
in accordance with ASC 310-20 Nonrefundable Fees and Other Costs or ASC 325-40
Beneficial Interests in Securitized Financial Assets, as applicable. Total
interest income is recorded as Interest incomereal estate securities in the
consolidated statement of operations.

Interest income on the non-Agency RMBS that were purchased at a discount
to par value and/or were rated below AA at the time of purchase is recognized
based on the effective yield method. The effective yield on these securities is
based on the projected cash flows from each security, which are estimated based
on the Companys observation of current information and events and include
assumptions related to interest rates, prepayment rates and the timing and
amount of credit losses. On at least a quarterly basis, the Company reviews and,
if appropriate, makes adjustments to its cash flow projections based on input
and analysis received from external sources, internal models, and its judgment
about interest rates, prepayment rates, the timing and amount of credit losses,
and other factors. Changes in cash flows from those originally projected, or
from those estimated at the last evaluation, may result in a prospective change
in the yield/interest income recognized on such securities. Actual maturities of
the securities are affected by the contractual lives of the associated mortgage
collateral, periodic payments of principal, and prepayments of principal.
Therefore, the actual maturities of the securities are generally shorter than
stated contractual maturities.

Based on the projected cash flows from the Companys non-Agency RMBS
purchased at a discount to par value, a portion of the purchase discount may be
designated as credit protection against future credit losses and, therefore, not
accreted into interest income. The amount designated as credit discount is
determined and may be adjusted over time, based on the actual performance of the
security, its underlying collateral, actual and projected cash flow from such
collateral, economic conditions and other factors. If the performance of a
security with a credit discount is more favorable than forecasted, a portion of
the amount designated as credit discount may be accreted into interest income
prospectively.

RMBS are periodically evaluated for other-than-temporary impairment
(OTTI). A security where the fair value is less than amortized cost is
considered impaired. Impairment of a security is considered to be
other-than-temporary when: (i) the holder has the intent to sell the impaired
security; (ii) it is more likely than not the holder will be required to sell
the security; or (iii) the holder does not expect to recover the entire
amortized cost of the security. When a security has been deemed to be
other-than-temporarily impaired, the amount of OTTI is bifurcated into: (i) the
amount related to expected credit losses; and (ii) the amount related to fair
value adjustments in excess of expected credit losses. The portion of OTTI
related to expected credit losses is recognized in the consolidated statement of
operations as a realized loss. The remaining OTTI related to the valuation
adjustment is recognized as a component of unrealized loss in the consolidated
statement of operations. Realized gains and losses on sale of RMBS are
determined using the specific identification method. RMBS transactions are
recorded on the trade date.

Variable Interest Entities

A variable interest entity (VIE) is an entity that lacks one or more of
the characteristics of a voting interest entity. The Company evaluates each of
its investments to determine if each is a VIE based on: (i) the sufficiency of
the entitys equity investment at risk to finance its activities without
additional subordinated financial support provided by any parties, including the
equity holders; (ii) whether as a group the holders of the equity investment at
risk have (a) the power, through voting rights or similar rights, to direct the
activities of a legal entity that most significantly impact the entitys
economic performance, (b) the obligation to absorb the expected losses of the
legal entity and (c) the right to receive the expected residual returns of the
legal entity; and (iii) whether the voting rights of these investors are
proportional to their obligations to absorb the expected losses of the entity or
their rights to receive the expected returns of their equity, or both, and
whether substantially all of the entitys activities involve or are conducted on
behalf of an investor that has disproportionately fewer voting rights. An
investment that lacks one or more of the above three characteristics is
considered to be a VIE. The Company reassesses its initial evaluation of an
entity as a VIE upon the occurrence of certain reconsideration events.

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A VIE is
subject to consolidation if the equity investors either do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support, are unable to direct the entitys activities, or
are not exposed to the entitys losses or entitled to its residual returns. VIEs
are required to be consolidated by their primary beneficiary. The primary
beneficiary of a VIE is determined to be the party that has both the power to
direct the activities of a VIE that most significantly impact the VIEs economic
performance and the obligation to absorb losses of the VIE that could
potentially be significant to the VIE or the right to receive benefits from the
VIE that could potentially be significant to the VIE. This determination can
sometimes involve complex and subjective analyses.

Repurchase Agreements

The borrowings the Company used to fund the purchase of its portfolio
totaled approximately $116.1 million as of December 31, 2012 under master
repurchase agreements with three counterparties. The Company is also in
discussions with other financial institutions to provide it with additional
borrowing capacity under various agreements including repurchase agreements and
other types of financing arrangements. Repurchase agreements are treated as
collateralized financing transactions and are carried at their contractual
amounts, including accrued interest, as specified in the respective agreements.
Repurchase agreements are recorded on trade date at the contract amount.

The Company pledges cash and certain of its securities as collateral
under these repurchase arrangements. The amounts available to be borrowed are
dependent upon the fair value of the securities pledged as collateral, which
fluctuates with changes in interest rates, type of security and liquidity
conditions within the banking, mortgage finance and real estate industries. In
response to declines in fair value of pledged securities, the lenders may
require the Company to post additional collateral or pay down borrowings to
re-establish agreed upon collateral requirements, referred to as margin calls.
As of December 31, 2012, the Company had met all margin call requirements.

Derivative Instruments

Derivative instruments are valued using counterparty valuations. These
valuations are generally based on models with market observable inputs such as
interest rates and contractual cash flows, and as such, are classified as Level
2 in the fair value hierarchy. The Company reviews these valuations, including
considerations of counterparty risk and collateral provisions.

Derivatives and Hedging
Activities

The Company accounts for its derivative financial instruments in
accordance with derivative accounting guidance, which requires an entity to
recognize all derivatives as either assets or liabilities on its balance sheet
and to measure those instruments at fair value. The Company has not designated
any of its derivative contracts as hedging instruments for accounting purposes.
As a result, changes in the fair value of derivatives are recorded through
current period earnings.

The Companys derivative contracts contain provisions that allow for the
netting or setting off of all individual swap receivables and payables with the
counterparty and, therefore, the fair value of those swap contracts are netted.
The credit support annex provisions of the Companys interest rate swap
contracts allow the parties to mitigate their credit risk by requiring the party
which is out of the money to post collateral. At December 31, 2012, all
collateral provided under these contracts consists of cash
collateral.

Loans Held-for-Investment

Loans, which the Company may acquire, may be classified as
held-for-investment based upon managements intent and ability to hold the loans
for the foreseeable future or may be elected to be accounted for under the fair
value option of accounting. Loans held-for-investment will be recorded at
amortized cost, or the outstanding unpaid principal balance of the loan, net of
unamortized acquisition premiums or discounts and unamortized costs and fees
directly associated with the origination or acquisition of the loan. Net
deferred loan fees and origination and acquisition costs will be recognized in
interest income over the loan term as a yield adjustment using the interest
method or a method that approximates a level rate of return over the loan term.
The accounting guidance provides for the recognition of an allowance for loan
losses for groups of homogeneous loans. The Company will record a reserve for
loan losses reflecting managements estimate of loan losses inherent in the loan
portfolio as of the balance sheet date. The allowance for loan losses will be
managements best estimate of probable credit losses inherent in the loan
portfolio at the balance sheet date. The Company will record a reserve for
performing loans when (i) available information as of each balance sheet date
indicates that it is probable a loss has occurred in the portfolio and (ii) the
amount of the loss can be reasonably estimated. The reserve will be decreased by
charge offs when losses are confirmed.

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The Company
may also purchase loans held-for-investment at a discount to face value where
there has been a deterioration in credit quality since origination and, at the
acquisition date, the Company expects to collect less than the contractual
amounts due under the terms of the loan based, at least in part, on its
assessment of the credit quality of the borrower. Loans acquired in a transfer
will be initially measured at fair value (in the aggregate, presumptively the
price paid or advanced to the borrower if originated by the Company).

Interest IncomeLoans
Held-For-Investment

The Company expects that interest income on performing
held-for-investment mortgage loans, which it may acquire, will be accrued based
on the actual coupon rate and the outstanding principal balance of such assets
without estimating prepayments. Premiums and discounts will be amortized or
accreted into interest income over the lives of the assets using the effective
yield method, as adjusted for actual prepayments. Actual prepayments accelerate
the rate at which premiums and discounts are amortized or accreted into interest
income in order to maintain the original effective interest rate, based on
contractual cash flows.

The Company will place mortgage loans on nonaccrual status when any
portion of principal or interest is more than 90 days past due, or earlier when
concern exists as to the ultimate collection of principal or interest. When a
mortgage loan is placed on nonaccrual status, the Company will reverse the
accrual for unpaid interest and will not recognize interest income until the
cash is received or the mortgage loan returns to accrual status. A mortgage loan
may be returned to accrual status when all delinquent principal and interest
payments are brought current in accordance with the terms of the loan agreement
and certain performance criteria have been met by the borrower.

Interest IncomeLoans
Held-For-Investment with Deteriorated Credit Quality

For whole loans purchased that show evidence of a deterioration in credit
quality since origination where it is probable the Company will not collect all
contractual cash flows, the Company will apply the guidance which addresses
accounting for differences between contractual cash flows and cash flows
expected to be collected from its initial investment in loans or debt securities
(loans) acquired in a transfer. The yield that may be accreted (accretable
yield) will be limited to the excess of the Companys initial estimate of
undiscounted expected principal, interest, and other cash flows (cash flows
expected at acquisition to be collected) over the Companys initial investment
in the loan. Interest income will be recognized using the accretable yield on a
level-yield basis over the life of the loan as long as cash flows can be
reasonably estimated. On a quarterly basis, the Company updates its estimate of
the cash flows expected to be collected. The excess of contractual cash flows
over cash flows expected to be collected (nonaccretable difference) will not be
recognized as an adjustment of yield, loss accrual or valuation allowance.
Subsequent significant increases in cash flows expected to be collected
generally will be recognized first to reduce any previously recorded allowance
and any remaining increase will be recognized prospectively through adjustment
of the loans accretable yield over its remaining life. The amount of interest
income to be recognized cannot result in a carrying amount that exceeds the
payoff amount of the loan. Decreases in cash flows expected to be collected will
be recognized as an impairment when it is probable that the Company will no
longer be able to collect all amounts estimated to be collected at the time of
acquisition plus additional cash flows expected to be collected arising from
changes in estimate after acquisition and recognized in prior periods.

Loan Impairment

Loans classified as held-for-investment will be evaluated for impairment
on a quarterly basis. Loans held-for-investment will be considered impaired when
(i) it is deemed probable that the Company will not be able to collect all
amounts due according to the contractual terms of the loan or, (ii) for loans
acquired at a discount to face value, when it is probable that the Company will
no longer be able to collect all amounts estimated to be collected at the time
of acquisition plus additional cash flows expected to be collected arising from
changes in estimate after acquisition and recognized in prior periods.
Impairment will be measured by comparing the recorded amount of the loan to the
present value of expected future cash flows discounted at the loans effective
rate, or at the loans market price or the fair value of the collateral, if the
loan is collateral dependent. Upon measurement of impairment, the Company will
record an allowance to reduce the carrying value of the loan and record a
corresponding charge to net income. Significant judgments will be required in
determining impairment, including estimating future cash flows, making
assumptions regarding the value of the loan, the value of the underlying
collateral and other provisions such as guarantees.

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A loan is also
considered impaired if its terms are modified in a troubled debt restructuring
(TDR). A TDR occurs when a company grants a concession to a borrower in
financial difficulty by modifying the original terms of the loan. Impairments on
TDR loans are measured based on the present value of expected future cash flows
discounted at the effective interest rate of the original loan.

Loans Held-for-Sale

Loans classified as held-for-sale will be recorded at the lower of
amortized cost and fair value. The Company will determine fair value of loans
held-for-sale by using current secondary market information for loans with
similar terms and credit quality. If current secondary market information is not
available, the Company will consider other factors in estimating fair value,
including modeled valuations using assumptions management believes a reasonable
market participant would use in valuing similar assets (assumptions may include
loss rates, prepayment rates, interest rates and credit spreads). If fair value
is lower than the amortized cost basis of a loan classified as held-for-sale,
the Company will record a valuation allowance to write the loan down to fair
value, with a corresponding charge to net income.

Interest IncomeLoans
Held-For-Sale

Interest income on loans held-for-sale is accrued and recognized based on
the contractual rate of interest. Purchase price discounts or premiums are an
adjustment to the basis of the loan and are deferred until the related loan is
sold. The Company does not apply reserves to these loans as they are recognized
at the lower of cost or fair value.

Securitizations

The Company may periodically enter into transactions in which it sells
financial assets, such as RMBS, CMBS, residential mortgage loans and other
assets or it may securitize mortgage loans it holds if such financing is
available. These transactions will be accounted for as either a sale, and the
assets will be removed from the Companys balance sheet, or as a financing, and
will be classified as securitized assets on the Companys balance sheet,
depending upon the structure of the securitization transaction. The accounting
guidance is complex and may require the Company to exercise significant judgment
in determining whether a transaction should be recorded as a sale or a
financing.

To the extent such transfers qualify as sales to non-consolidated
entities, gains and losses on such transactions will be recognized based on a
financial components approach that focuses on control. Under this approach,
after a transfer of financial assets that meets the criteria for treatment as a
sale to a non-consolidated entitylegal isolation, ability of transferee to
pledge or exchange the transferred assets without constraint, and transferred
controlan entity recognizes the financial and servicing assets it acquired or
retained and the liabilities it has incurred, derecognizes financial assets it
has sold, and derecognizes liabilities when extinguished. The Company will
determine the gain or loss by allocating the carrying value 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.

Upon a transfer of financial assets, the Company will sometimes retain or
acquire senior or subordinated interests in securitization entities created in
connection with the sale. Such securitization entities will be evaluated to
determine whether they should be consolidated. Generally, a securitization
entity will be consolidated by the party that has the power to direct matters
that most significantly impact the activities of the entity and has an
obligation to absorb losses or a right to receive benefits of the entity that
could potentially be significant to the entity. This overall consolidation
assessment includes a review of, among other factors, which interests create or
absorb variability, contractual terms, key decision making powers, their impact
on the vehicles economic performance, and related party relationships both at
inception and on an ongoing basis.

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Income Taxes

The Company
has elected to be taxed as a REIT under the Internal Revenue Code commencing
with its taxable year ended December 31, 2011. To qualify as a REIT, the Company
must meet certain organizational and operational requirements, including a
requirement to distribute at least 90% of its annual REIT taxable income to its
stockholders (which is computed without regard to the dividends paid deduction
or net capital gain and which does not necessarily equal net income as
calculated in accordance with U.S. GAAP). As a REIT, the Company will not be
subject to federal income tax on its taxable income that it distributes to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, it
will be subject to federal income tax on its taxable income at regular corporate
income tax rates and generally will not be permitted to qualify for treatment as
a REIT for federal income tax purposes for the four taxable years following the
year during which qualification is lost unless the Internal Revenue Service
grants the Company relief under certain statutory provisions. Such an event
could materially adversely affect the Companys net income and net cash
available for distribution to stockholders.

Accounting Standards Applicable
To Emerging Growth Companies

The JOBS Act contains provisions that relax certain requirements for
emerging growth companies, which includes the Company. The Company is an
emerging growth company as defined in the JOBS Act and may remain an emerging
growth company for up to five full fiscal years. Unlike other public companies,
for as long as the Company is an emerging growth company, the Company will not
be required to (i) comply with any new or revised financial accounting standards
applicable to public companies until such standards are also applicable to
private companies under Section 102(b)(1) of the JOBS Act, (ii) provide an
auditors attestation report on managements assessment of the effectiveness of
its system of internal control over financial reporting pursuant to Section 404
of the Sarbanes-Oxley Act, (iii) comply with any new requirements adopted by the
PCAOB requiring mandatory audit firm rotation or a supplement to the auditors
report in which the auditor would be required to provide additional information
about the audit and the financial statements of the issuer, or (iv) comply with
any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC
determines otherwise. The Company has irrevocably opted-out of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for
complying with new or revised accounting standards. As a result, the Company
will comply with new or revised accounting standards on the same time frames as
other public companies that are not emerging growth companies.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (FASB)
issued ASU No. 2011-11:Disclosures about
Offsetting Assets and Liabilities(ASU
2011-11) which requires new disclosures about balance sheet offsetting and
related arrangements. For derivatives and financial assets and liabilities, the
amendment requires disclosure of gross asset and liability amounts, amounts
offset on the balance sheet, and amounts subject to the offsetting requirements
but not offset on the balance sheet. The guidance is effective for annual
reporting periods beginning on or after January 1, 2013, and interim periods
within those annual periods and is to be applied retrospectively for all
comparative periods presented. The Company does not believe the adoption of ASU
2011-11 will have a material impact on its consolidated financial statements.

Liquidity and Capital Resources

Liquidity is a measure of the Companys ability to turn non-cash assets
into cash and to meet potential cash requirements. The Company uses significant
cash to purchase securities, pay dividends, repay principal and interest on its
borrowings, fund its operations and meet other general business needs. The
Companys primary sources of liquidity are its existing cash balances,
borrowings under its repurchase agreements, the net proceeds of offerings of
equity and debt securities and net cash provided by operating activities,
private funding sources, including other borrowings structured as repurchase
agreements, securitizations, term financings and derivative contracts, and
future issuances of common equity, preferred equity, convertible securities,
trust preferred and/or debt securities. The Company does not currently have any
committed borrowing capacity, other than pursuant to the repurchase agreements
discussed below.

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The borrowings
the Company used to fund the purchase of its portfolio totaled approximately
$116.1 million as of December 31, 2012 under master repurchase agreements with
three counterparties. The Company is also in discussions with other financial
institutions to provide it with additional borrowing capacity under various
agreements including repurchase agreements and other types of financing
arrangements.

As of December 31, 2012, the Company had a total of $133.5 million in
fair market value of RMBS pledged against its repurchase agreement borrowings.

Under repurchase agreements, the Company may be required to pledge
additional assets to its repurchase agreement counterparties (lenders) in the
event that the estimated fair value of the existing pledged collateral under
such agreements declines and such lenders demand additional collateral, which
may take the form of additional securities or cash. Generally, the Companys
repurchase agreements contain a LIBOR-based financing rate, term and haircuts
depending on the types of collateral and the counterparties involved. Further,
as of December 31, 2012, the range of haircut provisions associated with the
Companys repurchase agreements was between 3% and 5% for Agency RMBS and
between 20% and 40% for non-Agency RMBS.

If the estimated fair value of the investment securities increases due to
changes in market interest rates or market factors, lenders may release
collateral back to the Company. Specifically, margin calls may result from a
decline in the value of the investments securing the Companys repurchase
agreements, prepayments on the mortgages securing such investments and from
changes in the estimated fair value of such investments generally due to
principal reduction of such investments from scheduled amortization and
resulting from changes in market interest rates and other market factors.
Counterparties also may choose to increase haircuts based on credit evaluations
of the Company and/or the performance of the bonds in question. The recent
disruptions in the financial and credit markets have resulted in increased
volatility in these levels, and this volatility could persist as market
conditions continue to change rapidly. Should prepayment speeds on the mortgages
underlying the Companys investments or market interest rates suddenly increase,
margin calls on the Companys repurchase agreements could result, causing an
adverse change in its liquidity position. To date, the Company has satisfied all
of its margin calls and has never sold assets in response to any margin call
under its repurchase agreement borrowings.

The Companys borrowings under repurchase agreements are renewable at the
discretion of its lenders and, as such, the Companys ability to roll-over such
borrowings is not guaranteed. The terms of the repurchase transaction borrowings
under the Companys repurchase agreements generally conform to the terms in the
standard master repurchase agreement as published by the Securities Industry and
Financial Markets Association (SIFMA), as to repayment, margin requirements
and the segregation of all securities the Company has initially sold under the
repurchase transaction. In addition, each lender typically requires that the
Company include supplemental terms and conditions to the standard master
repurchase agreement. Typical supplemental terms and conditions, which differ by
lender, may include changes to the margin maintenance requirements, required
haircuts and purchase price maintenance requirements, requirements that all
controversies related to the repurchase agreement be litigated in a particular
jurisdiction, and cross default and setoff provisions.

The Company maintains cash, unpledged Agency RMBS and non-Agency RMBS
(which may be subject to various haircuts if pledged as collateral to meet
margin requirements) and collateral in excess of margin requirements held by the
Companys counterparties (collectively, the Cushion) to meet routine margin
calls and protect against unforeseen reductions in the Companys borrowing
capabilities. The Companys ability to meet future margin calls will be impacted
by the Cushion, which varies based on the fair market value of its securities,
its cash position and margin requirements. The Companys cash position
fluctuates based on the timing of its operating, investing and financing
activities and is managed based on the Companys anticipated cash needs. As of
December 31, 2012, the Company had a Cushion of $34.8 million.

As of December 31, 2012, the Company had a total of $3.8 million of
restricted cash pledged against its swaps and repurchase agreements. As
described elsewhere in this annual report on Form 10-K, the Company repurchased
265,245 shares of its common stock from one of its institutional stockholders in
January 2013 at a purchase price per share equal to its book value per share as
of December 31, 2012, which reduced the Companys year-end liquidity by a total
of approximately $5.8 million.

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The Company
believes these identified sources of liquidity will be adequate for purposes of
meeting its short-term (within one year) liquidity and long-term liquidity
needs. However, the Companys ability to meet its long-term liquidity and
capital resource requirements may require additional financing. The Companys
short-term and long-term liquidity needs include funding future investments,
operating costs and distributions to its stockholders and OP unit holders.

To qualify as a REIT, the Company must distribute annually at least 90%
of its net taxable income excluding net capital gains. These distribution
requirements limit the Companys ability to retain earnings and thereby
replenish or increase capital for operations.

Cash Generated from Operating
Activities

The Companys operating activities provided net cash of $2.6 million for
the year ended December 31, 2012. The cash provided by operating activities is
primarily a result of income earned on the Companys assets, offset by interest
cost of $1.8 million which is primarily due to dividends paid on 515,035 shares
of common stock, which were reported as a common stock repurchase liability at
December 31, 2012.

The Companys operating activities provided net cash of $1.7 million for
the period from July 29, 2011 (the date of the Companys inception) to December
31, 2011. The cash provided by operating activities is primarily a result of
income earned on the Companys assets.

Cash Used in Investing Activities

The Companys investing activities used net cash of $8.9 million for the
year ended December 31, 2012. During the year ended December 31, 2012, the
Company utilized cash to purchase $104.3 million in RMBS and increased
restricted cash by $2.1 million in connection with swap agreements, which was
offset by proceeds from the sale of real estate securities of $74.2 million and
principal repayments on real estate securities of $23.3 million.

The Companys investing activities used net cash of $96.0 million for the
period from July 29, 2011 (the date of the Companys inception) to December 31,
2011. During the period from July 29, 2011 (the date of the Companys inception)
to December 31, 2011, the Company utilized cash to purchase $107.2 million in
RMBS, and $1.7 million became restricted cash in connection with swap
agreements, which was offset by proceeds from the sale of real estate securities
of $7.2 million and principal repayments of $5.7 million.

Cash Generated from Financing
Activities

The Companys financing activities provided cash of $19.0 million for the
year ended December 31, 2012, which was a result of net proceeds from the
issuance of common stock, OP units and preferred stock of $25.3 million and
borrowings from repurchase agreements of $79.1 million, offset by repayments of
repurchase agreements of $60.6 million, repurchases of common stock of $14.2
million and dividend payments of $10.6 million paid to the holders of common
stock, OP units and preferred stock.

The Companys financing activities provided cash of $100.6 million from
the period from July 29, 2011 (the date of the Companys inception) to December
31, 2011, which was the result of borrowings from repurchase agreements of
$108.0 million and cash received pursuant to the Companys formation
transactions of $3.0 million offset by repayments of repurchase agreements of
$10.4 million.

Contractual Obligations

The Company has entered into an Investment Advisory Agreement with the
Advisor. The Advisor is entitled to receive a quarterly advisory fee and the
reimbursement of certain expenses; however, those obligations do not have fixed
and determinable payments. Additionally, as discussed above under Liquidity
and Capital Resources, the borrowings the Company used to fund the purchase of
its portfolio totaled approximately $116.1 million as of December 31, 2012 under
master repurchase agreements with three counterparties. The Company is also in
discussions with other financial institutions to provide it with additional
borrowing capacity under various agreements including repurchase agreements and
other types of financing arrangements. These borrowings were all due within one
year. For more information relating to the Companys borrowings, see Item 1,
BusinessFinancing Strategy, of this annual report on Form 10-K.

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On January 24,
2013, the Company repurchased 265,245 shares of its common stock from one of its
institutional stockholders. The Company paid to such stockholder approximately
$5.1 million, which represented 90% of the repurchase amount based on the
estimated book value per share as of December 31, 2012. The remaining 10% of the
repurchase price will be paid following the completion of the Companys December
31, 2012 year-end audit. These amounts reduced the Companys year-end liquidity by a
total of approximately $5.8 million.

Off-Balance Sheet Arrangements

As of the date of this annual report on Form 10-K, the Company had no
off-balance sheet arrangements.

Inflation

Virtually all of the Companys assets and liabilities are and will be
interest rate sensitive in nature. As a result, interest rates and other factors
influence the Companys performance far more so than does inflation. Changes in
interest rates do not necessarily correlate with inflation rates or changes in
inflation rates. The Companys financial statements are prepared in accordance
with U.S. GAAP and the Companys activities and balance sheet shall be measured
with reference to historical cost and/or fair market value without considering
inflation.

Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.

The primary components of the Companys market risk are related to
interest rate risk, prepayment risk, credit risk and fair market value risk.
While the Company does not seek to avoid risk completely, the Company believes
that risk can be quantified from historical experience and the Company will seek
to actively manage that risk, to earn sufficient compensation to justify taking
risk and to maintain capital levels consistent with the risks the Company
undertakes.

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 the Companys control.

The Company is subject to interest rate risk in connection with any
floating or inverse floating rate investments and its repurchase agreements. The
Companys repurchase agreements may be of limited duration and are periodically
refinanced at current market rates. The Company intends to manage this risk
using interest rate derivative contracts. These instruments are intended to
serve as a hedge against future interest rate increases on the Companys
borrowings.

The Company primarily assesses its interest rate risk by estimating and
managing the duration of its assets relative to the duration of its liabilities.
Duration measures the change in the fair market value of an asset based on a
change in an interest rate. The Company generally calculates duration using
various financial models and empirical data. Different models and methodologies
can produce different duration numbers for the same securities.

The borrowings the Company used to fund the purchase of its portfolio
totaled approximately $116.1 million as of December 31, 2012 under master
repurchase agreements with three counterparties. The Company is also in
discussions with other financial institutions to provide it with additional
borrowing capacity under various agreements including repurchase agreements and
other types of financing arrangements. At December 31, 2012, the Company also
had interest rate swaps with an outstanding notional amount of $32.6 million,
resulting in variable rate debt of $83.5 million. A 50 basis point increase in
LIBOR would increase the quarterly interest expense related to the $83.5 million
in variable rate debt by $0.1 million. Such hypothetical impact of interest
rates on the Companys variable rate debt does not consider the effect of any
change in overall economic activity that could occur in a rising interest rate
environment. Further, in the event of such a change in interest rates, the
Company may take actions to further mitigate its exposure to such a change.
However, due to the uncertainty of the specific actions that would be taken and
their possible effects, this analysis assumes no changes in the Companys
financial structure.

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Net Interest Income

The Companys
operating results will depend in large part on differences between the income
from its investments and its borrowing costs. Most of the Companys repurchase
agreements provide financing based on a floating rate of interest calculated on
a fixed spread over LIBOR. During periods of rising interest rates, the
borrowing costs associated with the Companys investments tend to increase while
the income earned on the Companys 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 result in losses.

Hedging techniques are partly based on assumed levels of prepayments of
the Companys RMBS. If prepayments are slower or faster than assumed the
effectiveness of any hedging strategies the Company uses will be reduced and may
cause losses on such transactions. Hedging strategies involving the use of
derivative securities are complex and may produce volatile returns. For more
information, see Item 1, BusinessFinancing Strategy, of this annual report on
Form 10-K.

Fair Value

Changes in interest rates may also have an impact on the fair market
value of the assets the Company acquires.

Prepayment Risk

As the Company receives prepayments of principal on its investments,
premiums paid on such investments will be 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. In general, an increase in prepayment rates will accelerate the
accretion of purchase discounts, thereby increasing the interest income earned
on the investments.

Credit Risk

The Company is subject to credit risk in connection with its investments.
Although the Company does not expect to encounter credit risk in its Agency
RMBS, the Company does expect to encounter credit risk related to its non-Agency
RMBS and other target assets it may acquire in the future. The Company
anticipates that a portion of its assets will be comprised of residential
mortgage loans that are unrated. 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. The Company believes that residual loan
credit quality is primarily determined by the borrowers credit profiles and
loan characteristics.

Extension Risk

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 the Companys 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 fair market value of the Companys hybrid
adjustable-rate assets to decline, with little or no offsetting gain from the
related hedging transactions. In extreme situations, the Company may be forced
to sell assets to maintain adequate liquidity, which could cause it to incur
losses.

Fair Market Value Risk

The Company intends to elect the fair value option of accounting on most
of its securities investments and account for them at their estimated fair value
with unrealized gains and losses included in earnings pursuant to accounting
guidance. 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.

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Item 8. Financial Statements and
Supplementary Data.

|                                                                                                                                                                      | Page(s)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------
|Report of Independent Registered Public Accounting Firm                                                                                                               | 72     
|                                                                                                                                                                     
|Consolidated Financial Statements                                                                                                                                     |        
|                                                                                                                                                                     
|Consolidated Balance SheetsDecember 31, 2012 and 2011                                                                                                                 | 73     
|                                                                                                                                                                     
|Consolidated Statements of OperationsFor the Year Ended
      December 31, 2012 and for the Period FromJuly 29, 2011 (Inception) to
      December 31, 2011           | 74     
|                                                                                                                                                                     
|Consolidated Statements of Stockholders EquityFor the Period
      From July 29, 2011 (Inception) to December 31, 2011and for the Year
      Ended December 31, 2012 | 75     
|                                                                                                                                                                     
|Consolidated Statements of Cash FlowsFor the Year ended
      December 31, 2012 and for the Period FromJuly 29, 2011 (Inception) to
      December 31, 2011           | 76     
|                                                                                                                                                                     
|Notes to Consolidated Financial Statements                                                                                                                            | 77     

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders ofZAIS Financial Corp.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of ZAIS Financial Corp. and its subsidiaries at December 31, 2012 and December 31, 2011, and the results of their operations and their cash flows for the year ended December 31, 2012 and for the period from July 29, 2011 (inception) to December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements 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.  An audit includes 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.  We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
New York, NY
March 28, 2013

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesConsolidated Balance
Sheets December 31, 2012 and 2011

|(Expressed in
      United States Dollars)                                                                                    |                   |             |                   |   |             |  
|----------------------------------------------------------------------------------------------------------------------------- | ----------------- | ----------- | ----------------- | - | ----------- | -
|                                                                                                                              | December 31, 2012 |             | December 31, 2011
|Assets                                                                                                                        |                   |             |                   |   |             |  
|Cash                                                                                                                          | $                 | 19,061,110  |                   | $ | 6,326,724   |  
|Restricted cash                                                                                                               |                   | 3,768,151   |                   |   | 1,715,211   |  
|Real estate
      securities, at fair value - $133,538,998
      and $115,589,036 
       pledged as collateral, respectively |                   | 170,671,683 |                   |   | 145,971,111 |  
|Receivable for real estate securities sold                                                                                    |                   | 6,801,398   |                   |   | -           |  
|Other
      assets                                                                                                            |                   | 1,345,665   |                   |   | 92,148      |  
|Total assets                                                                                                                  | $                 | 201,648,007 |                   | $ | 154,105,194 |  
|                                                                                                                              |                   |             |                   |   |             |  
|Liabilities                                                                                                                   |                   |             |                   |   |             |  
|Repurchase agreements                                                                                                         | $                 | 116,080,467 |                   | $ | 97,597,010  |  
|Common stock repurchase liability (515,035 common shares)                                                                     |                   | 11,190,687  |                   |   | -           |  
|Payable for real estate securities purchased                                                                                  |                   | 6,195,767   |                   |   | -           |  
|Accounts payable and other liabilities                                                                                        |                   | 1,820,581   |                   |   | 871,060     |  
|Derivative instruments                                                                                                        |                   | 1,144,744   |                   |   | 254,302     |  
|Accrued interest payable                                                                                                      |                   | 74,966      |                   |   | 64,948      |  
|Total liabilities                                                                                                             |                   | 136,507,212 |                   |   | 98,787,320  |  
|                                                                                                                             
|Commitments and contingencies (Note 11)                                                                                       |                   |             |                   |   |             |  
|                                                                                                                              |                   |             |                   |   |             |  
|Stockholders equity                                                                                                          |                   |             |                   |   |             |  
|12.5% Series A
      cumulative non-voting preferred stock, $0.0001 par value;
    50,000,000                                 |                   |             |                   |   |             |  
|shares authorized; 133 shares
      and zero shares issued and outstanding, respectively                                      |                   | -           |                   |   | -           |  
|Common stock $0.0001 par value; 500,000,000 shares
      authorized;                                                          |                   |             |                   |   |             |  
|2,586,131 shares issued and
      2,071,096 shares outstanding, and                                                           |                   |             |                   |   |             |  
|3,022,617 shares issued and
      3,022,617 shares outstanding, respectively                                                  |                   | 207         |                   |   | 302         |  
|Additional
      paid-in capital                                                                                              |                   | 39,759,770  |                   |   | 60,452,038  |  
|Retained earnings / (accumulated deficit)                                                                                     |                   | 5,281,941   |                   |   | (5,134,466  | )
|Total ZAIS Financial Corp. stockholders' equity                                                                               |                   | 45,041,918  |                   |   | 55,317,874  |  
|Non-controlling interests in operating partnership                                                                            |                   | 20,098,877  |                   |   | -           |  
|Total stockholders' equity                                                                                                    |                   | 65,140,795  |                   |   | 55,317,874  |  
|Total liabilities and stockholders' equity                                                                                    | $                 | 201,648,007 |                   | $ | 154,105,194 |  

The accompanying notes are an integral
part of these consolidated financial statements.

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesConsolidated Statements
of OperationsFor the Year Ended
December 31, 2012 and for the Period From July 29, 2011 (Inception) to December
31, 2011

|(Expressed in
      United States Dollars)                          |                   |            | Period from              
|------------------------------------------------------------------- | ----------------- | ---------- | -------------------------
|                                                                    | Year Ended        |            | July 29, 2011 (Inception)
|                                                                    | December 31, 2012 |            | to December 31, 2011     
|Interest income                                                     |                   |            |                          
|Real estate
      securities                                        | $                 | 9,398,319  |                          
|Total interest income                                               |                   | 9,398,319  |                          
|                                                                    |                   |            |                          
|Interest expense                                                    |                   |            |                          
|Repurchase
      agreements                                         |                   | 1,387,451  |                          
|Total interest expense                                              |                   | 1,387,451  |                          
|Net interest income                                                 |                   | 8,010,868  |                          
|                                                                    |                   |            |                          
|Other gain / (loss)                                                 |                   |            |                          
|Change in
      unrealized gain/(loss) on real estate securities    |                   | 17,793,339 |                          
|Realized loss on real estate securities                             |                   | (186,487   | )                        
|Loss on
      derivative instruments                                |                   | (1,171,219 | )                        
|Total other gain/(loss)                                             |                   | 16,435,633 |                          
|                                                                    |                   |            |                          
|Expenses                                                            |                   |            |                          
|Professional
      fees                                             |                   | 1,247,370  |                          
|Advisory fee - related party                                        |                   | 877,825    |                          
|General and
      administrative expenses                           |                   | 228,359    |                          
|Interest on common stock repurchase liability                       |                   | 1,827,350  |                          
|Total expenses                                                      |                   | 4,180,904  |                          
|**Net income/(loss)**                                               |                   | 20,265,597 |                          
|Net income
      allocated to non-controlling interests             |                   | 362,324    |                          
|Preferred dividends                                                 |                   | 15,424     |                          
|**Net income/(loss) attributable to ZAIS Financial
      Corp.**    |                   |            |                          
|**common stockholders and common stock repurchase
      liability** |                   | 19,887,849 |                          
|Income allocated to common stock repurchase liability               |                   | 454,047    |                          
|**Net income/(loss) attributable to ZAIS Financial
      Corp.**    |                   |            |                          
|**common stockholders**                                             | $                 | 19,433,802 |                          
|Net income/(loss) per share applicable to common                    |                   |            |                          
|stockholders - basic and
      diluted                              | $                 | 7.13       |                          
|Weighted average
      number of shares of common stock:            |                   |            |                          
|Basic                                                               |                   | 2,724,252  |                          
|Diluted                                                             |                   | 2,773,845  |                          

The accompanying notes are an integral
part of these consolidated financial statements.

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Table of Contents

ZAISFinancialCorp. andSubsidiariesConsolidatedStatementsofStockholdersEquityFor the
Period From July 29, 2011(Inception)toDecember31, 2011 and
for the Year EndedDecember31, 2012

|(Expressed in United States Dollars)                                                          |  | Preferred
      Stock |  | Common
      Stock |   |               |           |              |  | (Accumulated |     | Total      |  | Non-controlling      |             |              |  |       
|--------------------------------------------------------------------------------------------- |  | --------------------- |  | ------------------ | - | ------------- | --------- | ------------ |  | ------------ | --- | ---------- |  | -------------------- | ----------- | ------------ |  | ------
|                                                                                              |  | Shares of             |  | Preferred          |   | **Shares of** |           | Common       |  | Additional   |     | Deficit) / |  | ZAIS Financial Corp. |             | Interests    |  |       
|                                                                                              |  | Preferred             |  | Stock              |   | **Common**    |           | Stock        |  | Paid-in      |     | Retained   |  | Stockholders'        |             | in Operating |  | Total 
|                                                                                              |  | Stock                 |  | at
      Par       |   | **Stock**     |           | at
      Par |  | Capital      |     | Earnings   |  | Equity               |             | Partnership  |  | Equity
|Balance at July 29, 2011
      (Inception)                                                    |  | -                     |  | $                  | - |               | -         |              |  | $            | -   |            |  | $                    | -           |              |  | $     
|                                                                                              |  |                       |  |                    |   |               |           |              |  |              |     |            |  |                      |             |              |  |       
|Exchange offer contribution                                                                   |  | -                     |  |                    | - |               | 3,022,617 |              |  |              | 302 |            |  |                      | 60,452,038  |              |  |       
|Net
      loss applicable to common stockholders                                              |  | -                     |  |                    | - |               | -         |              |  |              | -   |            |  |                      | -           |              |  |       
|Balance at December 31, 2011                                                                  |  | -                     |  |                    | - |               | 3,022,617 |              |  |              | 302 |            |  |                      | 60,452,038  |              |  |       
|                                                                                              |  |                       |  |                    |   |               |           |              |  |              |     |            |  |                      |             |              |  |       
|Net proceeds from offering of preferred
      stock                                           |  | 133                   |  |                    | - |               | -         |              |  |              | -   |            |  |                      | 115,499     |              |  |       
|Net proceeds from offering of OP
    units                                                    |  | -                     |  |                    | - |               | -         |              |  |              | -   |            |  |                      | -           |              |  |       
|Net proceeds from offering of common
      stock                                              |  | -                     |  |                    | - |               | 232,039   |              |  |              | 24  |            |  |                      | 4,757,446   |              |  |       
|Dividends on OP units                                                                         |  | -                     |  |                    | - |               | -         |              |  |              | -   |            |  |                      | -           |              |  |       
|Dividends on common stock                                                                     |  | -                     |  |                    | - |               | -         |              |  |              | -   |            |  |                      | -           |              |  |       
|Repurchase of common shares                                                                   |  | -                     |  |                    | - |               | (668,525  | )            |  |              | (67 | )          |  |                      | (14,181,192 | )            |  |       
|Common stock repurchase liability                                                             |  | -                     |  |                    | - |               | (515,035  | )            |  |              | (52 | )          |  |                      | (10,923,892 | )            |  |       
|Rebalancing
      of ownership percentage between the Company and operating
      partnership |  | -                     |  |                    | - |               | -         |              |  |              | -   |            |  |                      | (460,129    | )            |  |       
|Net income                                                                                    |  | -                     |  |                    | - |               | -         |              |  |              | -   |            |  |                      | -           |              |  |       
|Balance at December 31, 2012                                                                  |  | 133                   |  | $                  | - |               | 2,071,096 |              |  | $            | 207 |            |  | $                    | 39,759,770  |              |  | $     

Theaccompanyingnotes are anintegralpart of theseconsolidatedfinancialstatements.

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesConsolidated Statements
of Cash FlowsFor the Year ended
December 31, 2012 and for the Period From July 29, 2011 (Inception) to
December 31, 2011

|(Expressed in
      United States Dollars)                                                              |                   |              |                           |  | Period from
|------------------------------------------------------------------------------------------------------- | ----------------- | ------------ | ------------------------- |  | -----------
|                                                                                                        | Year Ended        |              | July 29, 2011 (Inception)
|                                                                                                        | December 31, 2012 |              | December 31, 2011        
|Cash flows from operating activities                                                                    |                   |              |                           |  |            
|Net
      income/(loss)                                                                                 | $                 | 20,265,597   |                           |  | $          
|Adjustments to reconcile net income/(loss) to net cash
      provided                                   |                   |              |                           |  |            
|by operating
    activities                                                                             |                   |              |                           |  |            
|Net (accretion)/amortization of (discounts)/premiums related to real
      estate securities            |                   | (893,792     | )                         |  |            
|Change in unrealized (gain)/loss on real estate securities                                              |                   | (17,793,339  | )                         |  |            
|Realized loss on real estate securities                                                                 |                   | 186,487      |                           |  |            
|Change in unrealized loss on derivative instruments                                                     |                   | 890,442      |                           |  |            
|Changes in operating assets and liabilities                                                             |                   |              |                           |  |            
|Increase in other assets                                                                                |                   | (1,253,517   | )                         |  |            
|Increase in accounts payable, other liabilities and interest on common
      stock repurchase liability |                   | 1,216,264    |                           |  |            
|Increase in accrued interest payable                                                                    |                   | 10,018       |                           |  |            
|Net cash provided by operating activities                                                               |                   | 2,628,160    |                           |  |            
|                                                                                                        |                   |              |                           |  |            
|Cash flows from investing activities                                                                    |                   |              |                           |  |            
|Acquisitions of
      real estate securities                                                            |                   | (104,299,838 | )                         |  |            
|Proceeds from principal repayments on real estate
    securities                                        |                   | 23,277,965   |                           |  |            
|Proceeds from
      sale of real estate securities                                                      |                   | 74,216,314   |                           |  |            
|Restricted cash used in investment activities                                                           |                   | (2,052,940   | )                         |  |            
|Net cash used in investing activities                                                                   |                   | (8,858,499   | )                         |  |            
|                                                                                                        |                   |              |                           |  |            
|Cash flows from financing activities                                                                    |                   |              |                           |  |            
|Proceeds from
      issuance of common stock upon exchange offer                                        |                   | -            |                           |  |            
|Proceeds from issuance of common stock, net                                                             |                   | 4,757,470    |                           |  |            
|Proceeds from
      issuance of OP units, net                                                           |                   | 20,393,704   |                           |  |            
|Proceeds from issuance of preferred stock, net                                                          |                   | 115,499      |                           |  |            
|Repurchase of
      common stock                                                                        |                   | (14,181,259  | )                         |  |            
|Borrowings from repurchase agreements                                                                   |                   | 79,129,751   |                           |  |            
|Repayments of
      repurchase agreements                                                               |                   | (60,646,294  | )                         |  |            
|Payment of preferred dividends                                                                          |                   | (15,424      | )                         |  |            
|Dividends on
      common stock and OP units                                                            |                   | (10,588,722  | )                         |  |            
|Net cash provided by financing activities                                                               |                   | 18,964,725   |                           |  |            
|Net increase in cash                                                                                    |                   | 12,734,386   |                           |  |            
|                                                                                                        |                   |              |                           |  |            
|Cash                                                                                                    |                   |              |                           |  |            
|Beginning of
      period                                                                               |                   | 6,326,724    |                           |  |            
|End of period                                                                                           | $                 | 19,061,110   |                           |  | $          
|                                                                                                        |                   |              |                           |  |            
|Supplemental disclosure of cash flow information                                                        |                   |              |                           |  |            
|Interest paid on
      repurchase agreements                                                            | $                 | 1,377,433    |                           |  | $          
|Taxes paid                                                                                              | $                 | -            |                           |  | $          
|                                                                                                        |                   |              |                           |  |            
|Supplemental disclosure of noncash investing                                                            |                   |              |                           |  |            
|**and financing
      activities**                                                                      |                   |              |                           |  |            
|Exchange offer
      contribution - debt securities                                                     | $                 | -            |                           |  | $          

The accompanying notes are an integral
part of these consolidated financial statements.

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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial Statements

|1. |  | Formation
      and Organization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 
|   |  | ZAIS Financial Corp. (the
      Company) was incorporated in Maryland on May 24, 2011, and has elected
      to be taxed and to qualify as a real estate investment trust (REIT)
      beginning with the taxable year ended December 31, 2011. The Company was
      initially capitalized and commenced operations on July 29, 2011, when it
      completed an exchange of a mutually agreed upon portion of the
      shareholders and limited partners interests in the ZAIS Matrix VI-A Ltd.
      and ZAIS Matrix VI-B L.P. funds (the Matrix Funds) managed by ZAIS
      Group, LLC (ZAIS), which included cash of $3,036,222 and real estate
      securities having a fair market value of $57,416,118, for 3,022,617 shares
      of the Companys common stock or operating partnership units (OP units),
      pursuant to an exchange offer statement dated May 25, 2011 and the related
      contribution agreements executed on July 29, 2011. All OP units were
      converted into shares of common stock upon issuance.
      The Company currently primarily
      invests in, finances and manages residential mortgage-backed securities
      (RMBS), including RMBS that are not issued or guaranteed by a federally
      chartered corporation, such as the Federal National Mortgage Association,
      or the Federal Home Loan Mortgage Corporation, or an agency of the U.S.
      Government, such as the Government National Mortgage Association
      (non-Agency RMBS), as well as RMBS that are issued or guaranteed by a
      federally chartered corporation or a U.S. Government agency (Agency
      RMBS). The Companys strategy will also emphasize the purchase of
      performing and re-performing residential whole loans. The Company will
      also have the discretion to invest in other real estate-related and
      financial assets, including mortgage servicing rights, interest only
      strips created from RMBS, commercial mortgage-backed securities and
      asset-backed securities. The Company is externally managed by ZAIS REIT
      Management, LLC (the Advisor), a subsidiary of ZAIS, and has no
      employees. Substantially all of the Companys business is conducted
      through ZAIS Financial Partners, L.P., the Companys consolidated
      operating partnership (the OP). The Company is the sole general partner
      of the OP.
      The Companys charter authorizes
      the issuance of up to 500,000,000 shares of common stock with a par value
      of $0.0001 per share, and 50,000,000 shares of preferred stock, with a par
      value of $0.0001 per share. The Companys board of directors is authorized
      to amend its charter, without the approval of the stockholders, to
      increase the aggregate number of authorized shares of capital stock or the
      number of shares of any class or series that the Company has authority to
      issue.

|2. |  | Summary
      of Significant Accounting Policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 
|   |  | Basis of
      PresentationThe accompanying
      consolidated financial statements have been prepared in accordance with
      U.S. generally accepted accounting principles (U.S. GAAP) as contained
      within the Financial Accounting Standards Board (FASB) Accounting
      Standards Codification (ASC) and the rules and regulations of the
      Securities and Exchange Commission.
      The Company currently operates as
      one business segment.
      EstimatesThe preparation of financial statements in conformity
      with U.S. GAAP requires management to make estimates and assumptions that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the consolidated
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results may ultimately differ from
      those estimates.
      Principles of ConsolidationThe consolidated financial
      statements include the accounts of the Company, the OP, and six wholly
      owned subsidiaries of the OP. The Company holds all voting interests in
      the OP and the OP holds all voting interests in the six subsidiaries. The
      Company formed one new subsidiary during the year ended December 31, 2012.
      The Company conducts its business through the OP. All significant
      intercompany balances have been eliminated in
  consolidation.

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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial Statements

| | Variable Interest EntitiesA variable interest entity (VIE)
      is an entity that lacks one or more of the characteristics of a voting
      interest entity. The Company evaluates each of its investments to
      determine if each is a VIE based on: (1) the sufficiency of the entitys
      equity investment at risk to finance its activities without additional
      subordinated financial support provided by any parties, including the
      equity holders; (2) whether as a group the holders of the equity
      investment at risk have (a) the power, through voting rights or similar
      rights, to direct the activities of a legal entity that most significantly
      impacts the entitys economic performance, (b) the obligation to absorb
      the expected losses of the legal entity and (c) the right to receive the
      expected residual returns of the legal entity; and (3) whether the voting
      rights of these investors are proportional to their obligations to absorb
      the expected losses of the entity, their rights to receive the expected
      returns of their equity, or both, and whether substantially all of the
      entitys activities involve or are conducted on behalf of an investor that
      has disproportionately fewer voting rights. An investment that lacks one
      or more of the above three characteristics is considered to be a VIE. The
      Company reassesses its initial evaluation of an entity as a VIE upon the
      occurrence of certain reconsideration events.
      A VIE is subject to consolidation
      if the equity investors either do not have sufficient equity at risk for
      the entity to finance its activities without additional subordinated
      financial support, are unable to direct the entitys activities, or are
      not exposed to the entitys losses or entitled to its residual returns.
      VIEs are required to be consolidated by their primary beneficiary. The
      primary beneficiary of a VIE is determined to be the party that has both
      the power to direct the activities of a VIE that most significantly impact
      the VIEs economic performance and the obligation to absorb losses of the
      VIE that could potentially be significant to the VIE or the right to
      receive benefits from the VIE that could potentially be significant to the
      VIE. This determination can sometimes involve complex and subjective
      analyses.
      The Company has evaluated its
      real estate securities investments to determine if each represents a
      variable interest in a VIE. The Company monitors these investments and
      analyzes them for potential consolidation. The Companys real estate
      securities investments represent variable interests in VIEs. At December
      31, 2012 and 2011, no VIEs required consolidation. At December 31, 2012
      and 2011, the maximum exposure of the Company to VIEs is limited to the
      fair value of its investments in real estate securities as disclosed in
      the consolidated balance sheets.
      Cash and Cash EquivalentsThe Company considers highly liquid
      short-term interest bearing instruments with original maturities of three
      months or less and other instruments readily convertible into cash to be
      cash and cash equivalents. The Companys deposits with financial
      institutions may exceed federally insurable limits of $250,000 per
      institution. The Company mitigates this risk by depositing funds with
      major financial institutions. At December 31, 2012, the Companys cash was
      held with one custodian.
      Restricted CashRestricted cash represents the
      Companys cash held by counterparties as collateral against the Companys
      derivatives and/or repurchase agreements. Cash held by counterparties as
      collateral is not available to the Company for general corporate purposes,
      but may be applied against amounts due to derivative or repurchase
      agreement counterparties or returned to the Company when the collateral
      requirements are exceeded or, at the maturity of the derivatives or
      repurchase agreements.
      Real Estate SecuritiesFair
      Value ElectionU.S. GAAP permits
      entities to choose to measure many financial instruments and certain other
      items at fair value. The Company has elected the fair value option for
      each of its real estate securities at the date of purchase, including
      those contributed in connection with the initial exchange offer
      contribution. The fair value option election permits the Company to
      measure these securities at estimated fair value with the change in
      estimated fair value included as changes in unrealized gain/loss on real
      estate securities in the Companys consolidated statements of operations.
      The Company believes that the election of the fair value option for its
      real estate securities portfolio more appropriately reflects the results
      of the Companys operations.
| | 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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial Statements

| | Determination of
      Fair Value and Market Value MeasurementThe Fair Value Measurements and
      Disclosures Topic of the FASB ASC defines fair value, establishes a
      framework for measuring fair value, and requires certain disclosures about
      fair value measurements under U.S. GAAP. Specifically, this guidance
      defines fair value based on exit price, or the price that would be
      received upon the sale of an asset or the transfer of a liability in an
      orderly transaction between market participants at the measurement date.
      Fair value under U.S.
      GAAP represents an exit price in the normal course of business, not a
      forced liquidation price. If the Company was forced to sell assets in a
      short period to meet liquidity needs, the prices it receives could be
      substantially less than their recorded fair values. Furthermore, the
      analysis of whether it is more likely than not that the Company will be
      required to sell securities in an unrealized loss position prior to an
      expected recovery in fair value (if any), the amount of such expected
      required sales, and the projected identification of which securities would
      be sold is also subject to significant judgment.
      Any proposed changes
      to the valuation methodology will be reviewed by the Advisor to ensure
      changes are consistent with the applicable accounting guidance and approved as appropriate. The fair
      value methodology may produce a fair value calculation that may not be
      indicative of net realizable value or reflective of future fair values.
      Furthermore, while the Company anticipates that the Advisors valuation
      methods will be appropriate and consistent with other market participants,
      the use of different methodologies, or assumptions by other market
      participants, to determine the fair value of certain financial instruments
      could result in a different estimate of fair value at the reporting date.
      The Company
      categorizes its financial instruments in accordance with U.S. GAAP, based
      on the priority of the inputs to the valuation technique, into a
      three-level fair value hierarchy. The fair value hierarchy gives the
      highest priority to quoted prices in active markets for identical assets
      or liabilities (Level 1) and the lowest priority to unobservable inputs
      (Level 3). If the inputs used to measure the financial instruments fall
      within different levels of the hierarchy, the categorization is based on
      the lowest level input that is significant to the fair value measurement
      of the instrument.
      Financial assets and
      liabilities recorded on the consolidated balance sheets are categorized
      based on the inputs to the valuation techniques as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Level 1 |  | Quoted prices for identical
      assets or liabilities in an active market.
| | ------- |  | ----------------------------------------------------------------------------

| | Level 2 |  | Financial assets and liabilities whose values
      are based on the following:
| | ------- |  | -------------------------------------------------------------------------------

- Quoted prices for similar assets or
  liabilities in active markets.
- Quoted prices for
  identical or similar assets or liabilities in nonactive markets.
- Pricing models whose
  inputs are observable for substantially the full term of the asset or
  liability.
- Pricing models whose
  inputs are derived principally from or corroborated by observable market data
  for substantially the full term of the asset or liability.

| | Level 3 |  | Prices or valuation
      techniques based on inputs that are both unobservable and significant to
      the overall fair value measurement.
| | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial Statements

| | The Company may use valuation
      techniques consistent with the market and income approaches to measure the
      fair value of its assets and liabilities. The market approach uses prices
      and other relevant information generated by market transactions involving
      identical or comparable assets or liabilities. The income approach uses
      valuation techniques to convert future projected cash flows to a single
      discounted present value amount. When applying either approach, the
      Company maximizes the use of observable inputs and minimizes the use of
      unobservable inputs. The Companys assessment of the significance of a
      particular input to the fair value measurement in its entirety requires
      significant judgment and considers factors specific to the investment. The
      Company utilizes proprietary modeling analysis to support the independent
      third party broker quotes selected to determine the fair value of
      investments and derivative instruments.

      The following is a description of
      the valuation techniques used to measure fair value and the general
      classification of these instruments pursuant to the fair value hierarchy.
      Real Estate SecuritiesThe fair value of the Companys
      real estate securities considers the underlying characteristics of each
      security including coupon, maturity date and collateral. The Company
      estimates the fair value of its Agency RMBS and non-Agency RMBS based upon
      a combination of observable prices in active markets, multiple indicative
      quotes from brokers, and executable bids. In evaluating broker quotes the
      Company also considers additional observable market data points including
      recent observed trading activity for identical and similar securities,
      back-testing, broker challenges and other interactions with market
      participants, as well as yield levels generated by model-based valuation
      techniques. In the absence of observable quotes, the Company utilizes
      model-based valuation techniques that may contain unobservable valuation
      inputs.
      When available, the fair value of
      real estate securities is based on quoted prices in active markets. If
      quoted prices are not available, fair values are obtained from either
      broker quotes, observed traded levels or model-based valuation techniques
      using observable inputs such as benchmark yields or issuer
      spreads.
      The Companys Agency RMBS are
      valued using the market data described above, which includes inputs
      determined to be observable or whose significant fair value drivers are
      observable. Accordingly, Agency RMBS securities are classified as Level 2
      in the fair value hierarchy.
      While the Companys non-Agency
      RMBS are valued using the same process with similar inputs as the Agency
      RMBS, a significant amount of inputs are unobservable due to relativity
      low levels of market activity. The fair value of these securities is
      typically based on broker quotes or the Companys model-based valuation.
      Accordingly, the Companys non-Agency RMBS are classified as Level 3 in
      the fair value hierarchy. Model-based valuation consists primarily of
      discounted cash flow and yield analyses. Significant model inputs and
      assumptions include constant voluntary prepayment rates, constant default
      rates, delinquency rates, loss severity, market-implied discount rates,
      default rates, expected loss severity, weighted average life, collateral
      composition, borrower characteristics and prepayment rates, and may also
      include general economic conditions, including home price index forecasts,
      servicing data and other relevant information. Where possible,
      collateral-related assumptions are determined on an individual loan level
      basis.
      Derivative InstrumentsDerivative instruments are
      valued using counterparty valuations. These valuations are generally based
      on models with market observable inputs such as interest rates and
      contractual cash flows, and as such, are classified as Level 2 of the fair
      value hierarchy. The Company reviews these valuations, including
      consideration of counterparty risk and collateral provisions. The
      Companys swap contracts are governed by International Swap and Derivative
      Association trading agreements, which are separately negotiated agreements
      with dealer counterparties. As of December 31, 2012 and 2011, no credit
      valuation adjustment was made in determining the fair value of
      derivatives.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial Statements

| | Interest Income Recognition
      and ImpairmentInterest income on
      Agency RMBS is accrued based on the outstanding principal balance and
      their contractual terms. Premiums and discounts associated with Agency
      RMBS at the time of purchase are amortized into interest income over the
      life of such securities using the effective yield method and adjusted for
      actual prepayments in accordance with ASC 310-20 Nonrefundable Fees and
      Other Costs or ASC 325-40 Beneficial Interests in Securitized Financial
      Assets, as applicable. Total interest income is recorded as Interest
      income-real estate securities in the consolidated statements of
      operations.
      Interest income on the non-Agency
      RMBS that were purchased at a discount to par value and/or were rated
      below AA at the time of purchase is recognized based on the effective
      yield method in accordance with ASC 325-40 Beneficial Interests in
      Securitized Financial Assets. The effective yield on these securities is
      based on the projected cash flows from each security, which are estimated
      based on the Companys observation of current information and events and
      include assumptions related to interest rates, prepayment rates and the
      timing and amount of credit losses. On at least a quarterly basis, the
      Company reviews and, if appropriate, makes adjustments to its cash flow
      projections based on input and analysis received from external sources,
      internal models, and its judgment about interest rates, prepayment rates,
      the timing and amount of credit losses, and other factors. Changes in cash
      flows from those originally projected, or from those estimated at the last
      evaluation, may result in a prospective change in the yield/interest
      income recognized on such securities. Actual maturities of the securities
      are affected by the contractual lives of the associated mortgage
      collateral, periodic payments of principal, and prepayments of principal.
      Therefore, actual maturities of the securities are generally shorter than
      stated contractual maturities.
      Based on the projected cash flows
      from the Companys non-Agency RMBS purchased at a discount to par value, a
      portion of the purchase discount may be designated as credit protection
      against future credit losses and, therefore, not accreted into interest
      income. The amount designated as credit discount is determined and may be
      adjusted over time, based on the actual performance of the security, its
      underlying collateral, actual and projected cash flow from such
      collateral, economic conditions and other factors. If the performance of a
      security with a credit discount is more favorable than forecasted, a
      portion of the amount designated as credit discount may be accreted into
      interest income prospectively.
      Real estate securities are
      periodically evaluated for other-than-temporary impairment (OTTI). A
      security where the fair value is less than amortized cost is considered
      impaired. Impairment of a security is considered to be
      other-than-temporary when: (i) the holder has the intent to sell the
      impaired security; (ii) it is more likely than not the holder will be
      required to sell the security; or (iii) the holder does not expect to
      recover the entire amortized cost of the security. When a security has
      been deemed to be other-than-temporarily impaired, the amount of OTTI is
      bifurcated into: (i) the amount related to expected credit losses; and
      (ii) the amount related to fair value adjustments in excess of expected
      credit losses. The portion of OTTI related to expected credit losses is
      recognized in the consolidated statement of operations as a realized loss.
      The remaining OTTI related to the valuation adjustment is recognized as a
      component of change in unrealized gain/loss in the consolidated statement
      of operations. The Company recognized $32,068 in OTTI for the year ended
      December 31, 2012 and $208,160 in OTTI for the period from July 29, 2011
      (Inception) to December 31, 2011. Realized gains and losses on sale of
      real estate securities are determined using the specific identification
      method. Real estate securities transactions are recorded on the trade
      date.
      Expense RecognitionExpenses are recognized when
      incurred. Expenses include, but are not limited to, professional fees for
      legal, accounting and consulting services, and general and administrative
      expenses such as insurance, custodial and miscellaneous fees.
      Offering CostsOffering costs are accounted for as
      a reduction of additional paid-in capital. Offering costs in connection
      with the Companys initial public offering (IPO) will be paid out of the
      proceeds of the IPO. Costs incurred to organize the Company are expensed
      as incurred. The Companys obligation to pay for organization and offering
      expenses directly related to the IPO is capped at $1,200,000 and the
      Advisor will pay for such expenses incurred above the cap. At December 31,
      2012, there are $1,200,000 of deferred offering costs and an additional
      $26,724 of related party receivables included within Other assets in the
      Companys consolidated balance sheet. Please see note 13 regarding
      subsequent events for details of the Companys
  IPO.
| | 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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial Statements

| | Repurchase AgreementsThe Company finances a portion of
      its investment portfolio through the use of repurchase agreements entered
      into under Master Repurchase Agreements with several financial
      institutions. Repurchase agreements are treated as collateralized
      financing transactions and are carried at their contractual amounts,
      including accrued interest, as specified in the respective agreements.
      Repurchase agreements are recorded on trade date at the contract amount.
      The Company pledges cash and
      certain of its securities as collateral under these repurchase agreements.
      The amounts available to be borrowed are dependent upon the fair value of
      the securities pledged as collateral, which fluctuates with changes in
      interest rates, type of security and liquidity conditions within the
      banking, mortgage finance and real estate industries. In response to
      declines in fair value of pledged securities, the lenders may require the
      Company to post additional collateral or pay down borrowings to
      re-establish agreed upon collateral requirements, referred to as margin
      calls. As of December 31, 2012 and 2011, the Company has met all margin
      call requirements.
      Derivatives and Hedging
      ActivitiesThe Company accounts for
      its derivative financial instruments in accordance with derivative
      accounting guidance, which requires an entity to recognize all derivatives
      as either assets or liabilities in the balance sheets and to measure those
      instruments at fair value. The Company has not designated any of its
      derivative contracts as hedging instruments for accounting purposes. As a
      result, changes in the fair value of derivatives are recorded through
      current period earnings.
      The Companys derivative
      contracts contain legally enforceable provisions that allow for netting or
      setting off of all individual swap receivables and payables with the
      counterparty and, therefore, the fair value of those swap contracts are
      netted. The credit support annex provisions of the Companys interest rate
      swap contracts allow the parties to mitigate their credit risk by
      requiring the party which is out of the money to post collateral. At
      December 31, 2012 and 2011, all collateral provided under these contracts
      consisted of cash collateral.
      Counterparty Risk and
      ConcentrationCounterparty risk is
      the risk that counterparties may fail to fulfill their obligations or that
      pledged collateral value becomes inadequate. The Company attempts to
      manage its exposure to counterparty risk through diversification, use of
      financial instruments, and monitoring the creditworthiness of
      counterparties.
      As explained in the note
      above, while the Company engages in repurchase financing activities with
      several different financial institutions, it maintains its custody account
      with one custodian. There is no guarantee that this custodian will not
      become insolvent. While there are certain regulations that seek to protect
      customer property in the event of a failure, insolvency or liquidation of
      a broker-dealer, there is no certainty that the Company would not incur
      losses due to its assets being unavailable for a period of time in the
      event of a failure of a broker-dealer that has custody of the Companys
      assets. Although management monitors its custodian, such losses could be
      significant and could materially impair the ability of the Company to
      achieve its investment objective.
      Net Income (Loss) Per ShareThe Company's basic earnings per
      share ("EPS") is computed by dividing net income (loss) attributable to
      common stockholders by the weighted average number of common shares
      outstanding. Diluted EPS reflects the potential dilution that could occur
      if outstanding OP units were converted to common stock, where such
      exercise or conversion would result in a lower EPS. The dilutive effect of
      partnership interests is computed assuming all units are converted to
      common stock.
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Table of Contents

ZAIS Financial Corp. and
Subsidiaries Notes to Consolidated Financial
Statements

|   | Income TaxesThe Company has elected to be taxed
      as a REIT for U.S. federal income tax purposes commencing with its taxable
      year ended December 31, 2011. The Company intends to be organized and
      operate in a manner that qualifies the Company to be taxed as a REIT under
      the Internal Revenue Code of 1986, as amended (the Code). To qualify as
      a REIT, the Company must meet certain organizational and operational
      requirements, including a requirement to distribute at least 90% of the
      Companys annual REIT taxable income to its stockholders (which is
      computed without regard to the dividends paid deduction or net capital
      gain and which does not necessarily equal net income as calculated in
      accordance with U.S. GAAP). As a REIT, the Company will not be subject to
      federal income tax on its taxable income that it distributes to its
      stockholders. If the Company fails to qualify as a REIT in any taxable
      year, it will be subject to federal income tax on its taxable income at
      regular corporate income tax rates and generally will not be permitted to
      qualify for treatment as a REIT for federal income tax purposes for the
      four taxable years following the year during which qualification is lost
      unless the Internal Revenue Service grants the Company relief under
      certain statutory provisions. Such an event could materially adversely
      affect the Companys net income and net cash available for distribution to
      stockholders. However, the Company intends to organize and operate in such
      a manner as to qualify for treatment as a REIT.
      The Company evaluates uncertain
      income tax positions when applicable. Based upon its analysis of income
      tax positions, the Company concluded that it does not have any uncertain
      tax positions that meet the recognition or measurement criteria as of
      December 31, 2012 and 2011.
      Repurchase LiabilityThe Company reflects agreements to
      repurchase shares of common stock as liabilities when these agreements
      require or may require the Company to settle the obligation by
      transferring assets. Pursuant to stock repurchase agreements, the Company
      was obligated to repurchase 668,525 shares in October 2012 and 515,035
      shares in January 2013. The Company repurchased and cancelled 668,525 of
      its shares of common stock in October 2012 at the per share book value as
      of July 31, 2012 for $14,181,259. The 515,035 shares to be repurchased in
      January 2013 were valued at $11,190,687 as of December 31,
2012.
      During the fourth quarter 2012,
      approximately $1.6 million of dividends paid and approximately $0.2
      million of increase in the value of the common stock repurchase liability
      for the 515,035 shares to be repurchased in January 2013 was recognized as
      interest on common stock repurchase liability in the consolidated
      statement of operations.
      Recent Accounting
      PronouncementsIn December 2011,
      FASB issued ASU No. 2011-11: Disclosures about Offsetting Assets and
      Liabilities (ASU 2011-11) which requires new disclosures about balance
      sheet offsetting and related arrangements. For derivatives and financial
      assets and liabilities, the amendment requires disclosure of gross asset
      and liability amounts, amounts offset on the balance sheet, and amounts
      subject to the offsetting requirements but not offset on the balance
      sheet. The guidance is effective for annual reporting periods beginning on
      or after January 1, 2013, and interim periods within those annual periods
      and is to be applied retrospectively for all comparative periods
      presented. The Company does not believe the adoption of ASU 2011-11 will
      have a material impact on its consolidated financial
    statements.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|3. | Fair
      Value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Fair Value MeasurementFinancial assets and liabilities
      recorded at fair value on a recurring basis are classified in their
      entirety based on the lowest level of input that is significant to the
      fair value measurement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements



| | The following table
      sets forth the Companys financial instruments that were accounted for at
      fair value on a recurring basis as of December 31, 2012, by level within
      the fair value hierarchy:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  |  | Assets and
      Liabilities at Fair Value
| | -------------------------------- |  | ------------------------------------------
| |                                  |  | Level
      1                             
| | Assets                           |  |                                           
| | Real
      estate securities     |  |                                           
| | Agency
      RMBS                |  |                                           
| | 30-year adjustable rate mortgage |  | $                                         
| | 30-year fixed rate mortgage      |  |                                           
| | Non-Agency RMBS                  |  |                                           
| | Total                            |  | $                                         
| |                                  |  |                                           
| | Liabilities                      |  |                                           
| | Derivative instruments           |  | $                                         
| | Total                            |  | $                                         

| | The following table
      sets forth the Companys financial instruments that were accounted for at
      fair value on a recurring basis as of December 31, 2011, by level within
      the fair value hierarchy:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                  |  | Assets and
      Liabilities at Fair Value
| | -------------------------------- |  | ------------------------------------------
| |                                  |  | Level
      1                             
| | Assets                           |  |                                           
| | Real
      estate securities     |  |                                           
| | Agency
      RMBS                |  |                                           
| | 30-year adjustable rate mortgage |  | $                                         
| | 30-year fixed rate mortgage      |  |                                           
| | Non-Agency RMBS                  |  |                                           
| | Total                            |  | $                                         
| |                                  |  |                                           
| | Liabilities                      |  |                                           
| | Derivative instruments           |  | $                                         
| | Total                            |  | $                                         

| | The following table
      presents additional information about the Companys real estate securities
      which are measured at fair value on a recurring basis for which the
      Company has utilized Level 3 inputs to determine fair value:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| |                                                                                                                                                                                                                   |  | December 31,
      2012 |             | December 31,
      2011
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------- | -----------------------
| | Beginning balance                                                                                                                                                                                                 |  | $                       | 76,473,092  |                        
| | Total net transfers into/out of Level 3                                                                                                                                                                           |  |                         | -           |                        
| | Exchange offer contribution - debt
      securities                                                                                                                                                               |  |                         | -           |                        
| | Acquisitions of real estate securities                                                                                                                                                                            |  |                         | 68,617,460  |                        
| | Proceeds from sale of real estate
      securities                                                                                                                                                                |  |                         | (43,379,205 | )                      
| | Net
      accretion of discounts related to real estate securities                                                                                                                                                |  |                         | 1,337,369   |                        
| | Proceeds from principal repayments on real
      estate securities                                                                                                                                                |  |                         | (16,938,626 | )                      
| | Total losses (realized / unrealized)                                                                                                                                                                              |  |                         |             |                        
| | included in
      earnings                                                                                                                                                                                        |  |                         | (2,579,401  | )                      
| | Total gains (realized /
unrealized)                                                                                                                                                                               |  |                         |             |                        
| | included in
      earnings                                                                                                                                                                                        |  |                         | 17,380,962  |                        
| | Ending balance                                                                                                                                                                                                    |  | $                       | 100,911,651 |                        
| | The amount of total gains or (losses) for the period included in
      earnings attributable to the change in unrealized gains or losses relating
      to assets or liabilities still held at the reporting date |  | $                       | 10,764,268  |                        

| | There were no
      financial assets or liabilities that were accounted for at fair value on a
      nonrecurring basis at December 31, 2012 and 2011. There were no transfers
      into or out of Level 1, Level 2, or Level 3 during the year ended December
      31, 2012 or for the period from July 29, 2011 (Inception) to December 31,
      2011.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                            
| | The following table
      presents quantitative information about the Companys real estate
      securities which are measured at fair value on a recurring basis for which
      the Company has utilized Level 3 inputs to determine fair value:                                                                                                        

| | Quantitative Information about Level 3 Fair
      Value Measurements
| | --------------------------------------------------------------------
| |                                                                     
| |                                                                     
| |                                                                     
| | Non-Agency RMBS(1)                                                  
| |                                                                     
| | Alternative - A                                                     
| |                                                                     
| |                                                                     
| |                                                                     
| |                                                                     
| | Pay option adjustable rate                                          
| |                                                                     
| |                                                                     
| |                                                                     
| |                                                                     
| | Prime                                                               
| |                                                                     
| |                                                                     
| |                                                                     
| |                                                                     
| | Subprime                                                            
| |                                                                     
| |                                                                     
| |                                                                     
| |                                                                     
| | **Total**                                                           
| | ____________________                                                

| | (1) |  | The
      Company uses third-party vendor prices and dealer quotes to estimate fair
      value of some of its financial assets. The Company verifies selected
      prices by using a variety of methods, including comparing prices to
      internally estimated prices and corroborating the prices by reference to
      other independent market data, such as relevant benchmark indices and
      prices of similar instruments. Where the Company has disclosed
      unobservable inputs for broker quotes or comparable trades, those inputs
      are based on the Companys validations performed at the security
      level.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| | The fair value
      measurements of these assets are sensitive to changes in assumptions
      regarding prepayment, probability of default, loss severity in the event
      of default, forecasts of home prices, or significant activity or
      developments in the non-Agency securities market. Significant changes in
      any of those inputs in isolation may result in significantly higher or
      lower fair value measurements. A change in the assumption used for
      forecasts of home price changes is accompanied by directionally opposite
      changes in the assumptions used for probability of default and loss
      severity. Significant increases (decreases) in any of these inputs in
      isolation would result in a significantly lower (higher) fair value
      measurement.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Fair Value
      OptionChanges in fair
      value for assets and liabilities for which the fair value election is made
      are recognized in income as they occur. The fair value option may be
      elected on an instrument-by-instrument basis at initial recognition of an
      asset or liability or upon an event that gives rise to a new basis of
      accounting for that instrument.
      The following table
      presents the difference between the fair value and the aggregate unpaid
      principal amount of assets for which the fair value option was elected:                                                                                                                                                                                                                            

| |                                            |  | December 31,
      2012 |             | December 31,
      2011
| | ------------------------------------------ |  | ----------------------- | ----------- | -----------------------
| |                                            |  |                         |             |                        
| |                                            |  |                         |             |                        
| |                                            |  | Fair
      Value        |             | Maturity               
| | Financial instruments, at fair
      value |  |                         |             |                        
| | Assets                                     |  |                         |             |                        
| | Real estate
      securities               |  |                         |             |                        
| | Agency
      RMBS                          |  |                         |             |                        
| | 30-year
      adjustable rate mortgage     |  | $                       | 3,240,330   |                        
| | 30-year
      fixed rate mortgage          |  |                         | 66,519,702  |                        
| | Non-Agency
      RMBS                      |  |                         | 100,911,651 |                        
| | Total                                      |  | $                       | 170,671,683 |                        

| | Fair Value of
      Other Financial InstrumentsIn addition to the above disclosures regarding assets or
      liabilities which are recorded at fair value, U.S. GAAP requires
      disclosure about the fair value of all other financial instruments.
      Estimated fair value of financial instruments was determined by the
      Company, using available market information and appropriate valuation
      methodologies. Considerable judgment is necessary to interpret market data
      and develop estimated fair values. The use of different market assumptions
      and/or estimation methodologies may have a material effect on estimated
      fair value.
      The following table
      summarizes the estimated fair value for all other financial instruments:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                         | December 31,
      2012 |             | December 31,
      2011
| | --------------------------------------- | ----------------------- | ----------- | -----------------------
| | Other financial instruments             |                         |             |                        
| | Assets                                  |                         |             |                        
| | Cash                                    | $                       | 19,061,110  |                        
| | Restricted Cash                         |                         | 3,768,151   |                        
| | Liabilities                             |                         |             |                        
| | Repurchase
      agreements             | $                       | 109,270,298 |                        
| | Common stock repurchase
      liability |                         | 11,190,687  |                        

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements



|   | Cash includes cash on
      hand. Fair value equals carrying value (a Level 1 measurement). Restricted
      cash represents the Companys cash held by counterparties as collateral
      against the Companys derivatives and/or repurchase
      agreements. Due to the short-term nature of the restrictions, fair value
      approximates carrying value (a Level 1 measurement). The fair value of
      repurchase agreements is based on an expected present value technique
      using observable market interest rates. As such, the Company considers the
      estimated fair value to be a Level 2 measurement. This method discounts
      future estimated cash flows using rates the Company determined best
      reflect current market interest rates that would be offered for loans with
      similar characteristics and credit quality. The fair value of the common
      stock repurchase liability is equal to the agreed upon purchase price. The
      Company considers the estimated fair value to be a Level 3
      measurement.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4. | Real Estate
      Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The following table
      presents the current principal balance, amortized cost, gross change in
      unrealized gains, gross change in unrealized losses, and estimated fair
      market value of the Companys real estate securities portfolio at December
      31, 2012. The Companys Agency RMBS are mortgage pass-through certificates
      representing interests in or obligations backed by pools of residential
      mortgage loans issued or guaranteed by Fannie Mae or Freddie Mac. The
      non-Agency RMBS portfolios are not issued or guaranteed by Fannie Mae,
      Freddie Mac or any other U.S. Government agency or a federally chartered
      corporation and are therefore subject to credit risk.                                                                                                                                                                                                                                                                                                                                 

| |                                        |  | Current                 |             | Premium    |   | Amortized   |   | Gross
      Unrealized(1) |   | Fair        |  | Weighted
      Average
| | -------------------------------------- |  | ----------------------- | ----------- | ---------- | - | ----------- | - | ------------------------- | - | ----------- |  | ----------------------
| |                                        |  | Principal
      Balance |             | (Discount) |   | Cost        |   | Gains                     |   | Losses      |  | Value                 
| | Real estate securities                 |  |                         |             |            |   |             |   |                           |   |             |  |                       
| | Agency RMBS                            |  |                         |             |            |   |             |   |                           |   |             |  |                       
| | 30-year
      adjustable rate mortgage |  | $                       | 3,083,892   |            | $ | 351,047     |   |                           | $ | 3,434,939   |  | $                     
| | 30-year fixed rate
      mortgage      |  |                         | 61,034,333  |            |   | 3,056,889   |   |                           |   | 64,091,222  |  |                       
| | Non-Agency RMBS                        |  |                         |             |            |   |             |   |                           |   |             |  |                       
| | Alternative - A                        |  |                         | 38,549,827  |            |   | (8,606,689  | ) |                           |   | 29,943,138  |  |                       
| | Pay
      option adjustable rate       |  |                         | 1,249,426   |            |   | (378,803    | ) |                           |   | 870,623     |  |                       
| | Prime                                  |  |                         | 64,978,647  |            |   | (8,074,525  | ) |                           |   | 56,904,122  |  |                       
| | Subprime                               |  |                         | 4,419,732   |            |   | (825,131    | ) |                           |   | 3,594,601   |  |                       
| | Total RMBS                             |  | $                       | 173,315,857 |            | $ | (14,477,212 | ) |                           | $ | 158,838,645 |  | $                     

| | ____________________
| | --------------------
| | (1)                 
| | (2)                 

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| | The following table
      presents the current principal balance, amortized cost, gross change in
      unrealized gains, gross change in unrealized losses, and estimated fair
      market value of the Companys real estate securities portfolio at December
      31, 2011:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                 
| | Real estate securities:                                                                                                                                                                                                                                                         
| | Agency RMBS                                                                                                                                                                                                                                                                     
| | 30-year
      adjustable rate mortgage                                                                                                                                                                                                                                          
| | 30-year
      fixed rate mortgage                                                                                                                                                                                                                                               
| | Non-agency RMBS                                                                                                                                                                                                                                                                 
| | Alternative
      - A/B                                                                                                                                                                                                                                                         
| | Pay
      option adjustable rate                                                                                                                                                                                                                                                
| | Prime                                                                                                                                                                                                                                                                           
| | Subprime                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                 
| | Total
      RMBS                                                                                                                                                                                                                                                                

| | ____________________                                                                                                                                                                                    
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)                                                                                                                                                                                                     
| | (2)                                                                                                                                                                                                     
| |                                                                                                                                                                                                         
| | The following table
      presents certain information regarding the Companys Agency and non-Agency
      securities as of December 31, 2012 by weighted average life and weighted
      average yield:

| |                          | Agency
      Securities |            | Non-Agency
      Securities
| | ------------------------ | ----------------------- | ---------- | ---------------------------
| |                          |                         |            |                            
| |                          | Fair                    |            | Amortized                  
| |                          | Value                   |            | Cost                       
| | Weighted average life(1) |                         |            |                            
| | Greater than 5 years     | $                       | 69,760,032 |                            
| |                          | $                       | 69,760,032 |                            

| | ____________________
| | --------------------
| | (1)                 
| |                     

| | At December 31, 2012,
      the contractual maturities of the real estate securities ranged from 8.6
      to 33.7 years, with a weighted average maturity of 26.1 years. All real
      estate securities held by the Company at December 31, 2012 are issued by
      issuers based in the United States of America.
      For the year ended
      December 31, 2012, proceeds from the sale of real estate securities were
      $74,216,314, realized losses on the sale of real estate securities were
      $154,419 and realized losses on other-than-temporary impairments were
      $32,068. For the period from July 29, 2011 (Inception) to December 31,
      2011, proceeds from the sale of real estate securities were $7,216,183,
      realized losses on the sale of real estate securities were $1,273,761 and
      realized losses on other-than-temporary impairments were
      $208,160.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| | The following table
      presents certain information regarding the Companys Agency and non-Agency
      securities as of December 31, 2011 by weighted average life and weighted
      average yield:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                         
| |                                                                                                                                                                                                         
| |                                                                                                                                                                                                         
| |                                                                                                                                                                                                         
| |                                                                                                                                                                                                         
| | Weighted average life(1)                                                                                                                                                                                
| | Greater than 5
      years                                                                                                                                                                              
| |                                                                                                                                                                                                         

| | ____________________
| | --------------------
| | (1)                 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | At December 31, 2011,
      the contractual maturities of the real estate securities ranged from 9.6
      to 35.0 years, with a weighted average maturity of 27.1 years. All real
      estate securities held by the Company at December 31, 2011 are issued by
      issuers based in the United States of America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|5. | Repurchase
      Agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Repurchase agreements
      involve the sale and a simultaneous agreement to repurchase the
      transferred assets or similar assets at a future date. The amount borrowed
      generally is equal to the fair value of the assets pledged less an
      agreed-upon discount, referred to as a haircut. Repurchase agreements
      entered into by the Company are accounted for as financings and require
      the repurchase of the transferred securities at the end of each
      arrangements term, typically 30 to 90 days. The Company maintains the
      beneficial interest in the specific securities pledged during the term of
      the repurchase arrangement and receives the related principal and interest
      payments. Interest rates on these borrowings are fixed based on prevailing
      rates corresponding to the terms of the borrowings, and interest is paid
      at the termination of the repurchase arrangement at which time the Company
      may enter into a new repurchase arrangement at prevailing market rates
      with the same counterparty or repay that counterparty and negotiate
      financing with a different counterparty. In response to declines in fair
      value of pledged securities due to changes in market conditions or the
      publishing of monthly security paydown factors, the lender requires the
      Company to post additional securities as collateral, pay down borrowings
      or establish cash margin accounts with the counterparty in order to
      re-establish the agreed-upon collateral requirements, referred to as
      margin calls. Under the terms of the Companys master repurchase
      agreements, the counterparty may sell or re-hypothecate the pledged
      collateral.
      The following table
      presents certain information regarding the Companys repurchase agreements
      as of December 31, 2012 by remaining maturity and collateral type:

| |                                             | Agency
      Securities |            | Non-Agency Securities
| | ------------------------------------------- | ----------------------- | ---------- | ---------------------
| |                                             |                         |            |                      
| |                                             |                         |            |                      
| |                                             | Balance                 |            | Rate                 
| | Repurchase agreements maturing
      within |                         |            |                      
| | 30
      days or less                       | $****                   | 44,174,600 |                      
| | 31-60 days                                  |                         | 10,866,170 |                      
| | 61-90 days                                  |                         | 11,598,320 |                      
| | Greater than 90 days                        |                         | -          |                      
| | ****Total /
      weighted average          | $                       | 66,639,090 |                      

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| | The following table
      presents certain information regarding the Companys repurchase agreements
      as of December 31, 2011 by remaining maturity and collateral type:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                              
| |                                                                                                                                                                              
| |                                                                                                                                                                              
| |                                                                                                                                                                              
| |                                                                                                                                                                              
| | Repurchase agreements maturing
      within                                                                                                                                  
| | 30
      days or less                                                                                                                                                        
| | 31-60 days                                                                                                                                                                   
| | 61-90 days                                                                                                                                                                   
| | Greater than 90 days                                                                                                                                                         
| | Total / weighted
    average                                                                                                                                                 

| | Although repurchase
      agreements are committed borrowings until maturity, the lender retains the
      right to mark the underlying collateral to fair value. A reduction in the
      value of pledged assets would require the Company to provide additional
      collateral or cash to fund margin calls.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                  
| | The following table
      presents information with respect to the Companys posting of collateral
      at December 31, 2012:                                                                                                                                                                                   

| | Repurchase agreements secured by Agency
      RMBS                                          | $ | 66,639,090
| | ------------------------------------------------------------------------------------------- | - | ----------
| | Fair
      value of Agency RMBS pledged as collateral under repurchase
      agreements     |   | 63,535,780
| | Repurchase agreements secured by non-Agency
      RMBS                                      |   | 49,441,377
| | Fair
      value of non-Agency RMBS pledged as collateral under repurchase
      agreements |   | 70,003,218
| | Cash pledged under repurchase
      agreements                                              |   | 1,335,305 

| | The following table
      presents information with respect to the Companys posting of collateral
      at December 31, 2011:
| | ------------------------------------------------------------------------------------------------------------------------------

| | Repurchase agreements secured by Agency
      RMBS                                          | $ | 66,638,940
| | ------------------------------------------------------------------------------------------- | - | ----------
| | Fair
      value of Agency RMBS pledged as collateral under repurchase
      agreements     |   | 69,498,019
| | Repurchase agreements secured by non-Agency
      RMBS                                      |   | 30,958,070
| | Fair
      value of non-Agency RMBS pledged as collateral under repurchase
      agreements |   | 46,091,017
| | Cash pledged under repurchase
      agreements                                              |   | 585,052   

|6. | Derivative
      Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Interest Rate
      SwapsTo help mitigate
      exposure to higher short-term interest rates, the Company uses
      currently-paying and forward-starting, three-month LIBOR-indexed,
      pay-fixed, receive-variable, interest rate swap agreements. These
      agreements establish an economic fixed rate on related borrowings because
      the variable-rate payments received on the swap agreements largely offset
      interest accruing on the related borrowings, leaving the fixed-rate
      payments to be paid on the swap agreements as the Companys effective
      borrowing rate, subject to certain adjustments including changes in
      spreads between variable rates on the swap agreements and actual borrowing
      rates.
      The Companys
      interest rate swap derivatives have not been designated as hedging
      instruments.

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| | The following table
      presents information about the Companys interest rate swaps as of
      December 31, 2012:
| | ---------------------------------------------------------------------------------------------------------------------
| |                                                                                                                      
| |                                                                                                                      
| |                                                                                                                      
| |                                                                                                                      
| | Maturity                                                                                                             
| | 2016                                                                                                                 
| | 2017                                                                                                                 
| | 2021                                                                                                                 
| | Total/Weighted average                                                                                               

| | The following table presents
      information about the Companys interest rate swaps as of December 31,
      2011:
| | ---------------------------------------------------------------------------------------------------------------------

| | Maturity               |  |   | Amount     |  | Pay Rate |   | Receive Rate |      | Maturity
| | ---------------------- |  | - | ---------- |  | -------- | - | ------------ | ---- | --------
| | 2016                   |  | $ | 12,102,000 |  | 1.21     | % |              | 0.38 | %       
| | 2021                   |  |   | 9,448,000  |  | 2.16     |   |              | 0.38 |         
| | Total/Weighted average |  | $ | 21,550,000 |  | 1.62     | % |              | 0.38 | %       

| | The following table presents the
      fair value of the Companys derivative instruments and their balance sheet
      location:
| | ---------------------------------------------------------------------------------------------------------------------------------

| |                                    |  |           |             | Balance
      Sheet    |          | December 31, |            | December
      31,
| | ---------------------------------- |  | --------- | ----------- | ---------------------- | -------- | ------------ | ---------- | ------------------
| | Derivative
instruments             |  |           | Designation |                        | Location |              | 2012       |                   
| | Interest rate swaps, at fair value |  | Non-hedge |             | Derivative instruments |          | $            | (1,144,744 | )                 

| | The following table
      summarizes losses related to derivatives:
| | -------------------------------------------------------------------

| |                                    |  | Income                 |          |            |                   |                           |                      | Period from
| | ---------------------------------- |  | ---------------------- | -------- | ---------- | ----------------- | ------------------------- | -------------------- | -----------
| |                                    |  | Statement              |          | Year Ended |                   | July 29, 2011 (Inception)
| | Non-hedge derivative
      losses  |  |                        | Location |            | December 31, 2012 |                           | to December 31, 2011
| | Interest rate swaps, at fair value |  | Loss on                |          |            |                   |                           |                      |            
| |                                    |  | derivative instruments |          | $          | (1,171,219        | )                         |                      | $          

| | The following table
      summarizes information related to derivative
  instruments:
| | -------------------------------------------------------------------------------------

| |                                        |  | December 31, |            | December 31,
| | -------------------------------------- |  | ------------ | ---------- | ------------
| | Non-hedge derivatives                  |  |              | 2012       |             
| | Notional amount of interest rate swaps |  | $            | 32,600,000 |             

| | Restricted
      cash at December 31, 2012 includes $2,432,846 of cash pledged as
      collateral against interest rate swaps. Restricted cash at December 31,
      2011 includes $1,130,159 of cash pledged as collateral against interest
      rate swaps.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

|7. | Earnings Per Share                                                                                                                 |                        
|-- | ---------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|   |                                                                                                                                    |                        
|   | The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share:
|   |                                                                                                                                    |                        
|   |                                                                                                                                    |                        
|   |                                                                                                                                    | Year Ended             
|   |                                                                                                                                    | December 31,
      2012
|   | Numerator:                                                                                                                         |                        
|   | Net
      income/(loss) applicable to ZAIS Financial Corp. common
    stockholders                                                 | $                      
|   | Effect of dilutive securities:                                                                                                     |                        
|   | Income (loss) allocated
      to Operating Partnership non-controlling interests                                                   |                        
|   | Dilutive net income (loss) available to
      stockholders                                                                         | $                      
|   |                                                                                                                                    |                        
|   | Denominator:                                                                                                                       |                        
|   | Weighted average number of shares of common stock                                                                                  |                        
|   | Effect of dilutive securities:                                                                                                     |                        
|   | Weighted average OP
      units                                                                                                    |                        
|   | Weighted average dilutive
    shares                                                                                               |                        
|   | Net
      income/(loss) per share applicable to ZAIS Financial Corp.                                                               |                        
|   | common stockholders -
      Basic/Diluted                                                                                          | $                      

|8. | Related Party
      Transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | ZAIS Group, LLCThe Company was
      initially capitalized and commenced operations on July 29, 2011, when it
      completed an exchange of a mutually agreed upon portion of the
      shareholders and limited partners interests in the Matrix Funds, which
      are managed by ZAIS.
      Subject to certain
      restrictions and limitations, the Advisor is responsible for managing the
      Companys affairs on a day-to-day basis and for, among other
      responsibilities, (i) the selection, purchase and sale of the Companys
      portfolio of assets (ii) the Companys financing activities, and (iii)
      providing the Company with advisory services.
      The Company pays to
      its Advisor an advisory fee, calculated and payable quarterly in arrears,
      equal to 1.5% per annum of (i) prior to an initial public offering of its
      common stock (IPO), the Companys net asset value and (ii) following the
      completion of an IPO, the Companys stockholders equity, as defined in
      the Investment Advisory Agreement.
      The Advisor will be
      paid or reimbursed for the documented cost of performing certain services,
      which may include legal, accounting, due diligence tasks and other
      services, that outside professionals or outside consultants otherwise
      would perform, provided that such costs and reimbursements are in amounts
      which are no greater than those which would be payable to outside
      professionals or consultants engaged to perform such services pursuant to
      agreements negotiated on an arms-length basis. The Company will also pay
      or reimburse all operating expenses incurred by the Advisor, except those
      specifically required to be borne by the Advisor under the Investment
      Advisory Agreement. In addition, the Company may be required to pay its
      portion of rent, telephone, utilities, office furniture, equipment,
      machinery and other office, internal and overhead expenses of the Advisor
      and its affiliates required for the Companys operations. The Company will
      not reimburse the Advisor or its affiliates for the salaries and other
      compensation of the Advisors personnel. The Advisor cannot be terminated
      prior to an IPO. Following an IPO and after an initial three-year term,
      the Advisor may be terminated annually upon the affirmative vote of at
      least two-thirds of the Companys independent directors or by a vote of
      the holders of at least two-thirds of the outstanding shares of the
      Companys common stock.
      For the year ended
      December 31, 2012, the Company incurred $877,825 in advisory fee expense,
      of which $405,247 was included in accounts payable and other liabilities
      in the consolidated balance sheet at December 31, 2012. For the period
      from July 29, 2011(Inception) to December 31, 2011, the Company incurred
      $361,890 in advisory fee expenses which was included in accounts payable
      and other liabilities in the consolidated balance sheet at December 31,
      2011.

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Table of Contents

ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements



|9. | Stockholders
      Equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | Common StockThe holders of shares
      of the Companys common stock are entitled to one vote per share on all
      matters voted on by stockholders, including election of the Companys
      directors. The Companys charter does not provide for cumulative voting in
      the election of directors. Therefore, the holders of a majority of the
      outstanding shares of the Companys common stock can elect its entire
      board of directors. Subject to any preferential rights of any outstanding
      series of preferred stock, the holders of shares of the Companys common
      stock are entitled to such distributions as may be authorized from time to
      time by its board of directors out of legally available funds and declared
      by the Company and, upon liquidation, are entitled to receive all assets
      available for distribution to stockholders. Holders of shares of the
      Companys common stock will not have preemptive rights. This means that
      stockholders will not have an automatic option to purchase any new shares
      of common stock that the Company issues, or have appraisal rights, unless
      the Companys board of directors determines that appraisal rights apply,
      with respect to all or any classes or series of its common stock, to one
      or more transactions occurring after the date of such determination in
      connection with which stockholders would otherwise be entitled to exercise
      such rights.
      The Company had
      2,071,096 and 3,022,617 shares of common stock outstanding as of December
      31, 2012 and 2011, respectively.
      In October of 2012,
      the Company completed a private placement in which it sold 195,458 shares
      of common stock and 22,492 OP units. In December of 2012, the Company
      completed a private placement in which it sold 36,581 shares of common
      stock and 904,422 OP units. Net proceeds from the two private placements
      were $25,151,174, net of approximately $763,000 in offering
      costs.
      On May 1, 2012, the
      Company declared a dividend of $0.51 per share of common stock. The common
      stock dividend was paid on May 15, 2012 to stockholders of record as of
      the close of business on May 1, 2012.
      On June 5, 2012, the
      Company declared a dividend of $0.57 per share of common stock. The common
      stock dividend was paid on June 21, 2012 to stockholders of record as of
      the close of business on June 5, 2012.
      On October 22, 2012,
      the Company declared a dividend of $0.89 per share of common stock and OP
      unit. The dividend was paid on October 29, 2012 to stockholders and OP
      unit holders of record as of the close of business on October 22, 2012.
      On November 29, 2012,
      the Company declared a dividend of $0.98 per share of common stock and OP
      unit. The dividend was paid on December 6, 2012 to stockholders and OP
      unit holders of record as of the close of business on November 29, 2012.
      On December 19, 2012,
      the Company declared a dividend of $1.16 per share of common stock and OP
      unit. The dividend was paid on December 26, 2012 to stockholders and OP
      unit holders of record as of the close of business on December 19, 2012.
      The Company has
      determined that the $4.11 dividend per common share paid during the year
      ended December 31, 2012 represented approximately 84.4% percent ordinary
      income and approximately 15.6% percent return of capital to its
      stockholders. No dividends were paid during the period from July 29, 2011
      (Inception) to December 31, 2011.

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ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements



|    | Preferred SharesThe Companys charter
      authorizes its board of directors to classify and reclassify any unissued
      shares of its common stock and preferred stock into other classes or
      series of stock. Prior to issuance of shares of each class or series, the
      board of directors is required by the Companys charter to set, subject to
      the charter restrictions on transfer of its stock, the terms, preferences,
      conversion or other rights, voting powers, restrictions, limitations as to
      dividends or other distributions, qualifications and terms or conditions
      of redemption for each class or series. Thus, the board of directors could
      authorize the issuance of shares of common stock or preferred stock with
      terms and conditions which could have the effect of delaying, deferring or
      preventing a transaction or change in control that might involve a premium
      price for holders of the Companys common stock or otherwise be in their
      best interest.
      On January 18, 2012
      the Company completed a private placement of 133 shares of its 12.5%
      Series A cumulative nonvoting preferred stock raising net proceeds of
      $115,499, net of $17,501 in offering fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|10. | Non-controlling
      Interests in Operating Partnership                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Non-controlling
      interests in operating partnership in the accompanying consolidated
      financial statements relate to OP units in the operating partnership, held
      by parties other than the Company.
      Certain individuals
      and entities own OP units in the operating partnership. An OP unit and a
      share of common stock of the Company have substantially the same economic
      characteristics in as much as they effectively share equally in the net
      income or loss of the operating partnership. OP unit holders have the
      right to redeem their OP units, subject to certain restrictions. The
      redemption is required to be satisfied in shares of common stock, cash, or
      a combination thereof, at the Companys option, calculated as follows: one
      share of the Companys common stock, or cash equal to the fair market
      value of a share of the Companys common stock at the time of redemption,
      for each OP unit. When an OP unit holder redeems an OP unit,
      non-controlling interest in the operating partnership is reduced and the
      Companys equity is increased. As of December 31, 2012, 926,914 OP units were issued and outstanding and the
      non-controlling interest OP unit holders owned 30.9 percent of the
      operating partnership.
      Pursuant to ASC 810,
      Consolidation, regarding the accounting and reporting for non-controlling
      interests and changes in ownership interests of a subsidiary, changes in a
      parents ownership interest (and transactions with non-controlling
      interest unit holders in the operating partnership) while the parent
      retains its controlling interest in its subsidiary, should be accounted
      for as equity transactions. The carrying amount of the non-controlling
      interest shall be adjusted to reflect the change in its ownership interest
      in the subsidiary, with the offset to equity attributable to the
      Company.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|11. | Commitments and
      Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | Advisor ServicesThe Company is
      dependent on the Advisor for certain services that are essential to the
      Company, including the identification, evaluation, negotiation,
      origination, acquisition and disposition of investments; management of the
      daily operations of the Companys investment portfolio including
      determination of fair value; and other general and administrative
      responsibilities. In the event that the Advisor is unable to provide the
      respective services, the Company will be required to obtain such services
      from an alternative source.
      LitigationFrom 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
      significant contingencies at December 31, 2012 and 2011 that would require
      accrual or disclosure in the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

|12. | Quarterly Results (Unaudited)                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                           
|    | The following is a presentation
      of the quarterly results of operations for the year ended December 31,
      2012 and for the period from July 29, 2011 (Inception) through December
      31, 2011:

|                                                                          | For the Three Months
    Ended
|------------------------------------------------------------------------- | ------------------------------
|                                                                          | December 31, 2012             
|Total interest income                                                     | $                             
|Total interest
      expense                                              |                               
|**Net interest income**                                                   |                               
|Total other
      gain/(loss)                                             |                               
|Total expenses                                                            |                               
|**Net income/(loss)**                                                     |                               
|**Net income/(loss) attributable to**                                     |                               
|**ZAIS Financial Corp.
      common**             
      **stockholders** | $                             
|Net
      income/(loss) per share applicable to common                    |                               
|stockholders - basic and
      diluted                                    | $                             
|Weighted average number of shares outstanding                             |                               
|Basic                                                                     |                               
|Diluted                                                                   |                               

|                                                                          | For the Three     |            | Period from              
|------------------------------------------------------------------------- | ----------------- | ---------- | -------------------------
|                                                                          | Months Ended      |            | July 29, 2011 (Inception)
|                                                                          | December 31, 2011 |            | to September 30,
2011    
|Total interest income                                                     | $                 | 2,502,623  |                          
|Total interest
      expense                                              |                   | 219,356    |                          
|**Net interest income**                                                   |                   | 2,283,267  |                          
|Total other
      gain/(loss)                                             |                   | (3,147,520 | )                        
|Total expenses                                                            |                   | 416,414    |                          
|**Net income/(loss)**                                                     |                   | (1,280,667 | )                        
|**Net income/(loss) attributable to**                                     |                   |            |                          
|**ZAIS Financial Corp.
      common**             
      **stockholders** | $                 | (1,280,667 | )                        
|Net
      income/(loss) per share applicable to
      common              |                   |            |                          
|stockholders - basic and
      diluted                                    | $                 | (.42       | )                        
|Weighted average number of shares outstanding                             |                   |            |                          
|Basic                                                                     |                   | 3,022,617  |                          
|Diluted                                                                   |                   | 3,022,617  |                          

|13. | Subsequent Events                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | Common Stock RepurchaseIn January 2013, the Companys
      common stock repurchase agreement to repurchase 515,035 common shares was
      revised to repurchase only 265,245 common shares. The revised repurchase
      amount was approximately $5.8 million, of which $5.1 million was paid to
      such stockholder in January 2013. The remaining repurchase amount is
      expected to be paid in April 2013.

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ZAIS Financial Corp. and
SubsidiariesNotes to Consolidated Financial Statements

| | The remaining 249,790 shares that
      were not repurchased in January 2013 were transferred to an affiliate of
      the stockholder. As a result, approximately $5.4 of the
      common stock repurchase liability was reclassified back to stockholders equity. The
      portion of the $1,827,350 recorded as interest on common stock repurchase
      liability in the consolidated statement of operations for the year ended
      December 31, 2012 that related to the 249,790 shares which were ultimately
      not repurchased was $866,258.
      Initial Public OfferingOn February 13, 2013, the Company
      completed its IPO by selling 5,650,000 shares of its common stock at
      $21.25 per share for proceeds, net of offering costs, of $118,862,500. As
      part of the IPO, the Companys Advisor paid the underwriters' fee of
      $6,303,281.
      Preferred StockOn February 15, 2013, the Company
      redeemed all 133 shares of its 12.5% Series A Cumulative Non-Voting
      Preferred Stock outstanding for an aggregate redemption price of $148,379,
      including accrued interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 9. Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and
Procedures.

A review and evaluation was performed by the Companys management,
including the Companys Chief Executive Officer (the CEO) and Chief Financial
Officer (the CFO), of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period
covered by this annual report on Form 10-K. Based on that review and evaluation,
the CEO and CFO have concluded that the Companys current disclosure controls
and procedures, as designed and implemented, were effective. Notwithstanding the
foregoing, a control system, no matter how well designed and operated, can
provide only reasonable, not absolute, assurance that it will detect or uncover
failures within the Company to disclose material information otherwise required
to be set forth in the Companys periodic reports.

Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f)
promulgated under the 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 U.S. GAAP 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 U.S. GAAP, 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. 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.

This annual report does not include a report of managements assessment
regarding internal control over financial reporting or an attestation report of
the Companys independent registered public accounting firm due to a transition
period established by the rules of the Securities and Exchange Commission for
newly public companies.

There have been no changes in the Companys internal control over
financial reporting that occurred during the quarter ended December 31, 2012
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive
Officers and Corporate Governance.

The Companys Board of Directors

The Companys
board of directors is comprised of seven members. The Companys board of
directors has determined that four of its members are independent directors
pursuant to the listing standards for independence of the NYSE. The Companys
bylaws provide that a majority of the entire board of directors may at any time
increase or decrease the number of directors. However, unless the Companys
bylaws are amended, the number of directors may never be less than the minimum
number required by the MGCL nor more than 15. In accordance with the Companys
articles of amendment and restatement and its bylaws, each director holds office
until the Companys next annual meeting of stockholders and until his or her
successor has been duly elected and qualifies, or until the directors earlier
resignation, death or removal.

The following sets forth certain information with respect to the
Companys directors:

|Name              |  | Age |  | Position Held with the
      Company                 
|----------------- |  | --- |  | -----------------------------------------------------
|Christian Zugel   |  | 52  |  | Chairman of the Board of
  Directors                 
|                  |  |     |  |                                                      
|Michael Szymanski |  | 46  |  | Chief Executive Officer, President and
      Director
|                  |  |     |  |                                                      
|Denise Crowley    |  | 39  |  | Director                                             
|                  |  |     |  |                                                      
|Daniel Mudge      |  | 63  |  | Independent Director                                 
|                  |  |     |  |                                                      
|Marran Ogilvie    |  | 44  |  | Independent Director                                 
|                  |  |     |  |                                                      
|Eric Reimer       |  | 51  |  | Independent Director                                 
|                  |  |     |  |                                                      
|James Zinn        |  | 61  |  | Independent
Director                                 

Christian Zugel

Mr. Zugel currently serves as Chairman of the Companys board of
directors. Mr. Zugel currently serves as Managing Member and Chief Investment
Officer (CIO) of ZAIS and is also Chairman of the Advisors investment
committee. Mr. Zugel is Chairman of the ZAIS Management Committee. Prior to
founding ZAIS in 1997, Mr. Zugel was a senior executive with J.P. Morgan
Securities Inc., where he led J.P. Morgans entry into many new trading
initiatives. At J.P. Morgan, Mr. Zugel also served on the Asia Pacific
management-wide and firm-wide market risk committees. Mr. Zugel received a
Masters in Economics from the University of Mannheim, Germany. Mr. Zugel was
selected to serve as Chairman of the Companys board of directors because of his
business acumen and real estate investment experience.

Michael Szymanski

Mr. Szymanski currently serves as the Companys Chief Executive Officer,
President and Director. Mr. Szymanski currently serves as President of ZAIS and
member of the ZAIS Management Committee, and as Chief Executive Officer of the
Advisor and a member of the Advisors investment committee. Prior to joining
ZAIS, Mr. Szymanski was Chief Executive Officer of XE Capital Management, LLC,
an investment management firm specializing in structured products, from 2003 to
2008. Prior to that, Mr. Szymanski was Chief Financial Officer of Zurich Capital
Markets (ZCM), a subsidiary of Zurich Financial Group, from 2000 to 2002. At
ZCM, Mr. Szymanski managed global finance, accounting, tax, treasury, and risk
management for a business specializing in structured products, including hedge
fund linked derivatives and principal investments. Prior to that, Mr. Szymanski
was a Vice President in the Bank and Insurance Strategies Group of Lehman
Brothers from 1997 to 2000, providing capital markets structuring and advisory
services to financial institutions and corporations. Prior to that, Mr.
Szymanski spent nine years at Ernst & Young LLP advising financial services
clients, leaving as a Senior Manager in the Capital Markets/M&A Advisory
Group in New York. Mr. Szymanski served in E&Ys National Office-Financial
Services Industries Group, providing internal consultation services to resolve
clients accounting and regulatory issues, specializing in financial
instruments. Mr. Szymanski is a CPA and received a B.A. in Business
Administration with a concentration in Accountancy from the University of Notre
Dame and an Executive M.B.A. with a concentration in Finance from New York
Universitys Stern School of Business. Mr. Szymanski serves on the Board of
Directors of the National Stock Exchange as Chairman of the Audit Committee. The
Company believes that Mr. Szymanskis industry experience will enhance the
breadth of experience of its board of directors.

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Denise Crowley

Ms. Crowley
currently serves on the Companys board of directors. Ms. Crowley currently
serves as Senior Portfolio Manager of ZAIS and is responsible for
custom/benchmark portfolios and funds. Ms. Crowley currently serves as a member
of the ZAIS Management Committee, and as a Senior Portfolio Manager of the
Advisor and a member of the Advisors investment committee. Ms. Crowley joined
ZAIS in 1997 and has been actively involved in the ABS and CDO security market
since 1999. Prior to that, Ms. Crowley managed a credit fund for ZAIS. Prior to
joining ZAIS, Ms. Crowley worked at J.P. Morgan in the High Yield Trading Group.
Prior to that, she worked for the Honorable Daniel P. Moynihan as an economic
research analyst. Ms. Crowley received a B.A. from Boston College and an M.B.A.
from New York Universitys Stern School of Business. Ms. Crowley was selected to
serve on the Companys board of directors due to her experience in the mortgage
securities sector.

Daniel Mudge

Mr. Mudge is one of the Companys independent directors. Mr. Mudge is
currently a Special Adviser to Promontory Financial Group, LLC, a risk
management and regulatory compliance consulting firm. From 2008 to 2011, Mr.
Mudge served as a founding Partner and the Chief Executive Officer of docGenix
L.P., a firm specializing in the conversion of legal documents into text and
data. From June 2011 to November 2011, Mr. Mudge served as a Senior Adviser to
Innodata docGenix LLC, the successor company to docGenix L.P. Prior to that,
from 2005 to 2008, Mr. Mudge served as the Group Managing Director of the
Operational Risk and Content Businesses of Algorithmics Inc., a risk advisory
and software firm. From 2002 to 2005, Mr. Mudge served as a Group Managing
Director of Fitch Risk Management, Inc. (Fitch Risk), a risk advisory firm
that was a predecessor to Algorithmics Inc. At Fitch Risk, Mr. Mudge led a
number of acquisitions and integrations of business segments purchased by Fitch
Risk and provided management services in the field of operational risk
management software. Prior to that, from 1997 to 2002, Mr. Mudge was the Chief
Executive Officer of OpVantage LLC and a founding partner of NetRisk Inc., both
of which were predecessors to Fitch Risk. Mr. Mudge also served in various roles
for Bankers Trust from 1973 to 1997, including Head of Global Risk Management
and was responsible for Corporate Risk & Insurance and Corporate Risk
Technology. Mr. Mudge received a B.S. in Economics from the University of
Pennsylvania and an M.B.A. from Harvard Business School. Mr. Mudge was selected
to serve on the Companys board of directors due to his extensive experience in
risk management.

Marran Ogilvie

Ms. Ogilvie is one of the Companys independent directors. Ms. Ogilvie
currently serves as an Advisor to the Creditors Committee for the Lehman
Brothers International (Europe) Administration, as a Director, member of the
Audit Committee and Chairman of the Governance Committee of Southwest Bankcorp,
Inc., a commercial bank with branches in Oklahoma, Texas and Kansas, and as a
Director of the Korea Fund, a non-diversified, closed-end investment company
which invests in Korean companies. Prior to that, Ms. Ogilvie was a founding
member of Ramius, LLC, an alternative investment management firm, where she
served in various capacities from 1994 to 2009 before the firms merger with
Cowen Group, Inc., a diversified financial services firm, including Chief
Operating Officer from 2007 to 2009 and General Counsel from 1997 to 2007.
Following the merger, Ms. Ogilvie became Chief of Staff at Cowen Group, Inc.
until 2010. Ms. Ogilvie received a B.A. from the University of Oklahoma and a
J.D. from St. Johns University. Ms. Ogilvie was selected to serve on the
Companys board of directors due to her legal expertise and experience in
investment management and the financial services industries.

Eric Reimer

Mr. Reimer is one of the Companys independent directors. Mr. Reimer has
served as a Partner and the Chairman of the Corporate Finance Group of OMelveny
& Myers LLP since 2010, where he provides strategic and legal counsel to
institutions and public and private companies on the structuring and execution
of financial transactions and investments. Mr. Reimer has also served as a Vice
Chair of the Board of Trustees of Childrens Burn Foundation since 2002. Mr.
Reimer previously served as a Partner and the Chairman of the Private Equity
Finance Group of Goodwin Procter LLP from 2008 to 2010. From 1999 to 2008, Mr.
Reimer served as a Partner of McDermott, Will & Emery, LLP, where he served
as Chairman of the Global Finance Group and a Member of the Management Committee
and was involved in strategic, budgeting and staffing decisions throughout his
tenure. Mr. Reimer received a B.S. in Business Administration from the
University of Southern California and a J.D. from the University of California,
Hastings College of the Law. Mr. Reimer was selected to serve on the Companys
board of directors due to his legal expertise and industry experience.

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James Zinn

Mr. Zinn is
one of the Companys independent directors. Since 2012, Mr. Zinn has been a
director of dwinQ, Inc, a company that offers an online social media platform.
Since 2010, Mr. Zinn has served as a Director and the Treasurer of a home owners
association representing over 5,000 residents. From 2008 through 2012, he also
maintained an on-call consultant role with ODIN Technologies, Inc., a
radio-frequency identification engineering firm, which he helped organize in
2003. From 2003 to 2009, Mr. Zinn served as a director of Vmeals, LLC, an online
food sales organization. During 2008, Mr. Zinn also served on the valuation
committee of XE Capital Management, LLC, a hedge fund based in New York City,
New York. Prior to that, Mr. Zinn co-founded and served as Chief Financial
Officer (until 2002) and a Director of ServerVault, Inc., a secure web-hosting
company, from 1999 to 2006. From 1994 to 1999, Mr. Zinn served as the Chief
Financial Officer and Senior Vice President of CapitalOne Financial Corporation,
where he was responsible for all financial management and related
communications. Prior to that, from 1977 to 1994, Mr. Zinn served in various
capacities from staff accountant to Regional Partner for Ernst & Young, LLP,
providing accounting and consultation advice on technical accounting matters to
financial services clients. Mr. Zinn received a B.S. in Business Administration
from The Ohio State University. Mr. Zinn was selected to serve on the Companys
board of directors due to his accounting expertise and industry experience.

The Companys Executive Officers

The following sets forth certain information with respect to the
Companys executive officers:

|Name              |  | Age |  | Position Held with the
      Company                 
|----------------- |  | --- |  | -----------------------------------------------------
|Christian Zugel   |  | 52  |  | Chairman of the Board of
  Directors                 
|                  |  |     |  |                                                      
|Michael Szymanski |  | 46  |  | Chief Executive Officer, President and
      Director
|                  |  |     |  |                                                      
|Paul McDade       |  | 48  |  | Chief Financial Officer and
    Treasurer            
|                  |  |     |  |                                                      
|Brian Hargrave    |  | 43  |  | Chief Investment Officer                             
|                  |  |     |  |                                                      
|Nisha Motani      |  | 41  |  | Chief Accounting
Officer                             

For biographies of Messrs.
Zugel and Szymanski, please see The Companys Board of Directors.

Paul McDade

Mr. McDade currently serves as the Companys Chief Financial Officer and
Treasurer. Mr. McDade currently serves as Chief Financial Officer of ZAIS and is
also a member of the ZAIS Management Committee. Mr. McDade also serves as Chief
Financial Officer of the Advisor. Prior to joining ZAIS in 2010, Mr. McDade was
the Chief Financial Officer and Chief Operating Officer for XE Capital
Management, LLC, an investment management firm specializing in structured
products, from 2004 to 2008. During his 25 year career, Mr. McDade has held
various financial roles at Zurich Capital Markets, J.P. Morgan Chase & Co.,
Reliance Group Holdings, Inc., and PricewaterhouseCoopers LLP. Mr. McDade is a
CPA and received a B.S. in Accounting from the University of Scranton.

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Brian Hargrave

Mr. Hargrave
currently serves as the Companys Chief Investment Officer. Mr. Hargrave
currently serves as Senior Portfolio Manager of ZAIS and is responsible for
whole loan investment and REIT platforms. Mr. Hargrave also serves as Chief
Investment Officer of the Advisor and a member of the Advisors investment
committee. He was previously responsible for Lehman Brothers whole loan trading
businesses including small balance commercial mortgages, student loans and
residential mortgages. Prior to that, Mr. Hargrave ran Lehman Brothers
adjustable rate mortgage trading desk, with responsibility for whole loan
acquisition, securitization and the firms agency and non-Agency secondary
trading activities. He joined Lehman Brothers in the mortgage research group
and has held several positions in research, structuring and trading. Mr.
Hargrave received an M.B.A. from Harvard Business School and a B.S. from Indiana
University.

Nisha Motani

Ms. Motani currently serves as the Companys Chief Accounting Officer.
Ms. Motani also currently serves as Director of Fund Reporting at ZAIS where she
oversees annual audits, monthly net asset value reporting, quarterly and annual
financial statement reporting, and informational requests from investors for all
ZAIS-managed entities. Ms. Motani is also responsible for setting internal
accounting policies and procedures, researching accounting issues, and serving
as a direct liaison to the auditors and tax preparers for ZAIS-managed entities.
Prior to joining ZAIS in October 2003, Ms. Motani worked as a senior manager in
the Financial Services audit practice of Deloitte & Touche where she
specialized in Investment Management. She is a CPA with a B.S. in Accounting
from Rutgers School of Business.

Section 16(a) Beneficial Ownership
Reporting Compliance

Section 16(a) of the Exchange Act requires the Companys directors,
executive officers and holders of more than 10% of the Companys outstanding
shares of common stock (10% Holders) to file with the SEC and the NYSE initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Directors, executive officers and 10%
Holders are required by the SECs regulations to furnish the Company with copies
of all Section 16(a) forms and amendments thereto filed during any given year.
The Company did not have a class of registered equity securities until February
2013, thus its directors, executive officers and 10% holders had no Section
16(a) filing obligation during the year ended December 31, 2012.

Code of Conduct and Ethics

The Companys board of directors has adopted a Code of Conduct and
Ethics. The Companys Code of Conduct and Ethics applies to its officers,
directors, employees, if any, and independent contractors, to its Advisor and
its Advisor's officers and employees, to ZAIS and ZAISs officers and employees,
and to any other affiliates of ZAIS or the Advisor, and such affiliates
officers and employees, who provide services to the Company or the Advisor in
respect of the Company. Among other matters, the Companys Code of Conduct and
Ethics is designed to deter wrongdoing and to promote:

- honest and ethical conduct, including the ethical
  handling of actual or apparent conflicts of interest between personal and
  professional relationships;
- full, fair, accurate, timely and understandable
  disclosure in the Companys public communications;
- compliance with applicable governmental laws,
  rules and regulations;
- prompt internal reporting of violations of the
  code to appropriate persons identified in the code; and
- accountability for adherence to the code.

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Any waiver of
the Code of Conduct and Ethics for the Companys executive officers or directors
may be made only by the Companys board of directors or one of its committees
and will be promptly disclosed if and to the extent required by law or stock
exchange regulations.

The Code of Conduct and Ethics is available for viewing on the Companys
website at www.zaisfinancial.com. The Company
will also provide the Code of Conduct and Ethics, free of charge, to
stockholders who request it. Requests should be directed to Scott Eckstein,
Financial Relations Board, an MWW Company, at 304 Park Avenue South, 8th Floor,
New York, New York 10010.

Board Governance and Committees

Identification of Director
Candidates

In accordance with the Companys corporate governance guidelines (the
Guidelines) and its written charter, the Nominating and Corporate Governance
Committee is responsible for identifying director candidates for the Companys
board of directors and for recommending director candidates to the board of
directors for consideration as nominees to stand for election at the Companys
annual meetings of stockholders. Director candidates are recommended for
nomination for election as directors in accordance with the procedures set forth
in the written charter of the Nominating and Corporate Governance
Committee.

The Company seeks highly qualified director candidates from diverse
business, professional and educational backgrounds who combine a broad spectrum
of experience and expertise with a reputation for the highest personal and
professional ethics, integrity and values. The Nominating and Corporate
Governance Committee periodically reviews the appropriate skills and
characteristics required of the Companys directors in the context of the
current composition of the Companys board of directors, operating requirements
and the long-term interests of the Companys stockholders. In accordance with
the Guidelines, directors should possess the highest personal and professional
ethics, integrity and values, exercise good business judgment and be committed
to representing the long-term interests of the Company and its stockholders and
have an inquisitive and objective perspective, practical wisdom and mature
judgment. The Nominating and Corporate Governance Committee reviews director
candidates with the objective of assembling a slate of directors that can best
fulfill and promote the Companys goals, regardless of gender, age or race, and
recommends director candidates based upon contributions they can make to the
Companys board of directors and management, and their ability to represent the
Companys long-term interests and those of its stockholders.

Upon determining the need for additional or replacement board members,
the Nominating and Corporate Governance Committee identifies director candidates
and assesses such director candidates based upon information it receives in
connection with the recommendation or otherwise possesses, which assessment may
be supplemented by additional inquiries. In conducting this assessment, the
Nominating and Corporate Governance Committee considers knowledge, experience,
skills, diversity and such other factors as it deems appropriate in light of the
Companys current needs and those of its board of directors. The Nominating and
Corporate Governance Committee may seek input on such director candidates from
other directors, including the Chairman of the board of directors, and
recommends director candidates to the board of directors for nomination. The
Nominating and Corporate Governance Committee does not solicit director
nominations, but it will consider recommendations by stockholders with respect
to elections to be held at an annual meeting, so long as such recommendations
are sent on a timely basis and in accordance with applicable law. The Nominating
and Corporate Governance Committee will evaluate nominees recommended by
stockholders against the same criteria that it uses to evaluate other nominees.
The Nominating and Corporate Governance Committee may, in its sole discretion,
engage one or more search firms or other consultants, experts or professionals
to assist in, among other things, identifying director candidates or gathering
information regarding the background and experience of director candidates. If
the Nominating and Corporate Governance Committee engages any such third party,
the Nominating and Corporate Governance Committee will have sole authority to
approve any fees or terms of retention relating to these services.

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The Companys
stockholders of record who comply with the advanced notice procedures set forth
in the Companys bylaws may nominate candidates for election as directors. The
Companys bylaws currently provide that stockholder nominations of director
candidates for an annual meeting of stockholders must be received no earlier
than the 150th day and not later than 5:00 p.m., Eastern Time, on the 120th day
prior to the first anniversary of the date of the proxy statement for the
immediately preceding annual meeting of stockholders; provided, however, that in
connection with the Companys first annual meeting or in the event that the
annual meeting with respect to which such notice is to be tendered is not held
within 30 days before or after the anniversary of the preceding years annual
meeting of stockholders, to be timely, notice by the stockholder must be so
delivered not earlier than the 150th day prior to the date of such annual
meeting and not later than 5:00 p.m., Eastern Time, on the later of the 120th
day prior to the date of such annual meeting, as originally convened, or the
tenth day following the day on which public announcement of the date of such
meeting is first made. The written notice must set forth the information and
include the materials required by the Companys bylaws. The advanced notice
procedures set forth in the Companys bylaws do not affect the right of
stockholders to request the inclusion of proposals in the Companys proxy
statement pursuant to SEC rules.

Any such nomination or proposal should be sent to Steven Haber, the
Companys Secretary, at ZAIS Financial Corp., Two Bridge Avenue, Suite 322, Red
Bank, New Jersey 07701-1106, and, to the extent applicable, must include the
information and other materials required by the Companys bylaws.

Board of Directors

The Companys board of directors is responsible for overseeing its
affairs. The Companys board of directors may conduct its business through
meetings and actions taken by written consent in lieu of meetings. The Companys
board of directors policy, as set forth in its Guidelines, is to encourage and
promote the attendance by each director at all scheduled meetings of the
Companys board of directors and all meetings of its stockholders.

Committees of the Board of
Directors

The Companys board of directors has three standing committees: the Audit
Committee, the Compensation Committee and the Nominating and Corporate
Governance Committee. Each of these committees has a written charter approved by
the board of directors. A copy of each charter can be found on the Companys
website at www.zaisfinancial.com. The independent
directors who serve on each committee and a description of the principal
responsibilities of each committee follows:

|               |  |                       |  |              |  | Nominating
    and
|-------------- |  | --------------------- |  | ------------ |  | ------------------
|               |  |                       |  |              |  | Corporate         
|               |  |                       |  | Compensation |  | Governance        
|Director       |  | Audit
      Committee |  | Committee    |  | Committee         
|James Zinn     |  | ü (Chair)             |  | ü            |  |                   
|Eric Reimer    |  | ü                     |  |              |  | ü (Chair)         
|Marran Ogilvie |  | ü                     |  | ü (Chair)    |  |                   
|Daniel Mudge   |  |                       |  | ü            |  | ü                 

Audit
Committee

Messrs. Zinn (Chair) and Reimer and Ms. Ogilvie are the current members
of the Audit Committee. The Companys board of directors has determined that all
of the members of the Audit Committee are independent as required by the NYSE
listing standards, SEC rules governing the qualifications of Audit Committee
members, the Guidelines, the independence standards adopted by the board of
directors, as permitted by the Guidelines (the Independence Standards) and the
written charter of the Audit Committee. The Companys board of directors has
also determined, based upon its qualitative assessment of their relevant levels
of knowledge and business experience (see The Companys Board of Directors
for a description of Messrs. Zinns and Reimers, and Ms. Ogilvies respective
backgrounds and experience), that Messrs. Zinn and Reimer and Ms. Ogilvie each
is financially literate as required by the NYSE listing standards. In
addition, the board of directors has determined that Mr. Zinn qualifies as an
Audit Committee financial expert for purposes of, and as defined by, the SEC
rules and has the requisite accounting or related financial management expertise
required by NYSE listing standards. The Audit Committee, among other things,
acts on behalf of the board of directors to discharge the board of directors
responsibilities relating to the Company and its subsidiaries corporate
accounting and reporting practices, the quality and integrity of the Companys
consolidated financial statements, its compliance with applicable legal and
regulatory requirements, the performance, qualifications and independence of the
Companys external auditors, the staffing, performance, budget, responsibilities
and qualifications of the Companys internal audit function and reviewing its
policies with respect to risk assessment and risk management. The Audit
Committee is also responsible for reviewing with management and external
auditors the Companys interim and audited annual financial statements, as well
as approving the filing of the Companys interim financial statements, meeting
with officers responsible for certifying the Companys annual report on Form
10-K or any quarterly report on Form 10-Q prior to any such certification and
reviewing with such officers disclosures related to any significant deficiencies
in the design or operation of internal controls. The Audit Committee is charged
with periodically discussing with the Companys external auditors such auditors
judgments about the quality, not just the acceptability, of the Companys
accounting principles as applied in its consolidated financial statements. The
specific responsibilities of the Audit Committee are set forth in its written
charter.

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Compensation
Committee

Ms. Ogilvie
(Chair) and Messrs. Mudge and Zinn are the current members of the Compensation
Committee. The Companys board of directors has determined that all of the
members of the Compensation Committee are independent as required by NYSE
listing standards, the Guidelines, the Independence Standards and the written
charter of the Compensation Committee. The Compensation Committee is responsible
for, among other things, evaluating the performance of the Advisor, reviewing
the compensation and fees payable to the Advisor under the Investment Advisory
Agreement, preparing Compensation Committee reports, overseeing the activities
of the individuals and committees responsible for administering the Companys
2012 Plan and determining the level of compensation, in consultation with the
executive officers of the Company, payable to the personnel of the Advisor
pursuant to such plan. Because the Investment Advisory Agreement provides that
the Advisor is responsible for managing the Companys affairs, the Companys
officers, who are employees of the Advisor, do not receive cash compensation
from the Company for serving as Companys officers. To the extent that the
Company is responsible for paying the compensation or any other employee
benefits of the Chief Executive Officer, the Compensation Committee will review
and approve corporate goals and objectives relevant to the compensation of the
Chief Executive Officer, evaluate the performance of the Chief Executive Officer
in light of those goals and objectives, and determine the Chief Executive
Officers compensation level based on this evaluation. Under the Investment
Advisory Agreement, the Company will reimburse the Advisor for operating
expenses related to the Company incurred by the Advisor, including legal,
accounting due diligence and other services. The Compensation Committee is
responsible for reviewing the information provided by the Advisor to support the
determination of the Companys share of such costs. The Compensation Committee
consults with the Advisor when recommending to the board of directors the level
of awards under the 2012 Plan to be payable to the personnel of the Advisor and
its affiliates The Compensation Committee may, in its discretion, delegate all
or a portion of its duties and responsibilities to a subcommittee. The specific
responsibilities of the Compensation Committee are set forth in its written
charter.

Nominating and Corporate
Governance Committee

Messrs. Reimer (Chair) and Mudge are the current members of the
Nominating and Corporate Governance Committee. The board of directors has
determined that all of the members of the Nominating and Corporate Governance
Committee are independent as required by NYSE listing standards, the Guidelines,
the Independence Standards and the written charter of the Nominating and
Corporate Governance Committee. The Nominating and Corporate Governance
Committee is responsible for, among other things, reviewing periodically and
making recommendations to the board of directors on the range of qualifications
that should be represented on the board of directors and eligibility criteria
for individual board membership, as well as seeking, considering and
recommending to the board of directors qualified candidates for election as
directors and approving and recommending to the full board of directors the
appointment of each of the Companys officers. For a discussion of the
consideration of diversity in the process by which candidates for director are
considered for nomination by the Nominating and Corporate Governance Committee,
and the process for identifying and evaluating nominees for director, including
nominees recommended by security holders, please see Board Governance and
CommitteesIdentification of Director Candidates. The Nominating and Corporate
Governance Committee reviews and makes recommendations on matters involving the
general operation of the board of directors and the Companys corporate
governance and annually recommends to the board of directors nominees for each
committee of the board of directors. In addition, the committee annually
facilitates the assessment of the board of directors performance as a whole and
that of the individual directors and reports thereon to the board of directors.
The specific responsibilities of the Nominating and Corporate Governance
Committee are set forth in its written charter.

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Item 11. Executive Compensation.

Compensation Discussion and
Analysis

Overview

The Company
has no employees. The Company is managed by the Advisor, pursuant to the
Investment Advisory Agreement. Under the Investment Advisory Agreement, the
Company pays its Advisor the advisory fees described in Item 13, Conflicts of
Interest and Related Party Transactions and Director IndependenceConflicts of
Interest and Related Party TransactionsInvestment Advisory Agreement, of this
annual report on Form 10-K. The Company does not have agreements with any of its
executive officers or any employees of its Advisor with respect to their cash
compensation. The Companys named executive officers, Messrs. Zugel, Szymanski,
McDade, and Hargrave, and Ms. Motani, are employees of the Advisor or one of its
affiliates and do not receive cash compensation from the Company for serving as
the Companys executive officers. The Company will reimburse the Advisor for
operating expenses related to the Company incurred by the Advisor, including
legal, accounting due diligence and other services. The Company will not
reimburse the Advisor or its affiliates for the salaries and other compensation
of the Advisors personnel. The Company does not determine the compensation
payable to its officers by the Advisor or its affiliates. The Advisor or its
affiliates, in their discretion, determine the levels of base salary and cash
incentive compensation earned by the Companys executive officers. The Advisor
or its affiliates also determine whether and to what extent the Companys
executive officers will be provided with pension, deferred compensation and
other employee benefit plans and programs.

Equity
Compensation

The Compensation Committee may, from time to time, grant equity-based
awards designed to align the interests of the Advisor and the personnel of the
Advisor and its affiliates who support the Advisor in providing services to the
Company under the Investment Advisory Agreement with those of its stockholders,
by allowing the Advisor and personnel of the Advisor and its affiliates to share
in the creation of value for its stockholders through stock appreciation and
dividends. These equity-based awards, when granted, will be generally subject to
time-based vesting requirements designed to promote retention and to achieve
strong performance for the Company. These awards further provide flexibility to
the Company to enable the Advisor to attract, motivate and retain talented
individuals. The Company has adopted the 2012 Plan, which provides for the
issuance of equity-based awards, including stock options, restricted shares of
common stock, phantom shares, dividend equivalent rights, restricted limited
partner profit interests (LTIP units) and other restricted limited partnership
units issued by the Companys Operating Partnership and other equity-based
awards.

The Companys board of directors has delegated its administrative
responsibilities under the 2012 Plan to the Compensation Committee. In its
capacity as plan administrator, the Compensation Committee has the authority to
make awards to the Advisor, the Companys directors and officers and the
employees and other personnel of the Advisor and its affiliates who support the
Advisor in providing services to the Company under the Investment Advisory
Agreement, and to determine what form the awards will take and the terms and
conditions of the awards. The Compensation Committee has not adopted a formal
equity incentive compensation program for 2013.

As of the date hereof, no awards have been made pursuant to the 2012
Plan.

For additional information about the 2012 Plan, see 2012 Equity
Incentive Plan and Other Matters.

Compensation of Executive
Officers

The Company does not have agreements with any of its executive officers
or any employees of the Advisor or its affiliates with respect to their cash
compensation. The Companys named executive officers, Messrs. Zugel, Szymanski,
McDade and Hargrave, and Ms. Motani, are employees of the Advisor or one of its
affiliates and do not receive cash compensation from the Company for serving as
the Companys executive officers.

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The Company
did not pay any compensation to its named executive officers during the 2012
fiscal year.

Grants of Plan-Based
Awards

The Company did not grant any plan-based awards to its named executive
officers during the 2012 fiscal year.

Outstanding Equity Award at
Fiscal Year-end

The Company did not grant
any plan-based awards to its named executive officers during the 2012 fiscal
year. Accordingly, there are no outstanding equity awards at fiscal
year-end.

Option Exercises and Stock Vested

The Company did not grant
any plan-based awards to its named executive officers during the 2012 fiscal
year. Accordingly, there have been no exercises of any option awards, and no
awards have vested at the fiscal year-end.

Pension
Benefits

The Companys named executive officers received no benefits in the 2012
fiscal year from the Company under defined pension or defined contribution
plans.

Nonqualified Defined Contribution
and other Nonqualified Deferred Compensation

The Company does not have a nonqualified deferred compensation plan that
provides for deferral of compensation on a basis that is not tax-qualified for
its named executive officers.

Potential Payments Upon
Termination or Change in Control

The Companys named executive officers are employees of the Advisor or
its affiliates and therefore the Company has no obligation to pay them any form
of compensation upon their termination of employment. See 2012 Equity
Incentive Plan and Other MattersChange in Control for a discussion of the
change in control provisions under the 2012 Plan.

Compensation of
Directors

The Company pays directors fees only to those directors who are
independent under the NYSE listing standards. The Company pays a $45,000 annual
base directors fee to each of its independent directors. Base independent
directors fees are paid 100% in cash, but the Company may in the future pay all
or a portion of this fee in equity-based awards. In addition, the chairs of the
Audit, Compensation and Nominating and Corporate Governance Committees receive
an additional annual cash retainer of $10,000. Each independent director also
receives a fee of $2,000 for attending each committee meeting. The Company
reimburses all members of its board of directors for their travel expenses
incurred in connection with their attendance at full meetings of the board of
directors and its committees.

The Companys independent directors are also generally eligible to
receive restricted common stock, options and other equity-based equity awards
under the Companys 2012 Plan.

As of December 31, 2012, the Company was not listed on the NYSE and had
not appointed any independent directors to its board of directors.

2012 Equity Incentive Plan and Other
Matters

The Company has adopted the 2012 Plan to provide incentive compensation
to attract and retain qualified directors, officers, advisors, consultants and
other personnel, including the Advisor and its affiliates and personnel of the
Advisor or its affiliates, and any joint venture affiliates of the Company. The
2012 Plan is administered by the Compensation Committee. The 2012 Plan permits
the granting of stock options, restricted shares of common stock, phantom
shares, dividend equivalent rights, restricted LTIP units and other restricted
limited partnership units issued by the Operating Partnership and other
equity-based awards. See also Item 5, Market for Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity SecuritiesSecurities
Authorized For Issuance Under Equity Compensation Plans, of this annual report
on Form 10-K.

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Administration

The
Compensation Committee has the full authority to administer and interpret the
2012 Plan, to authorize the granting of awards, to determine the eligibility of
directors, officers, advisors, consultants and other personnel, including the
Advisor and its affiliates and personnel of the Advisor or its affiliates, and
any joint venture affiliates of the Company to receive an award, to determine
the number of shares of common stock to be covered by each award (subject to the
individual participant limitations provided in the 2012 Plan), to determine the
terms, provisions and conditions of each award (which may not be inconsistent
with the terms of the 2012 Plan), to prescribe the form of instruments
evidencing awards and to take any other actions and make all other
determinations that it deems necessary or appropriate in connection with the
2012 Plan or the administration or interpretation thereof. In connection with
this authority, the committee may, among other things, establish performance
goals that must be met in order for awards to be granted or to vest, or for the
restrictions on any such awards to lapse. The 2012 Plan is administered by the
Compensation Committee, which consists of three non-employee directors, each of
whom is, to the extent required by Rule 16b-3 under the Exchange Act, a
non-employee director, and will, at such times as the Company is subject to
Section 162(m) of the Internal Revenue Code and intends that grants be exempt
from the restriction of Section 162(m), qualify as an outside director for
purposes of Section 162(m) of the Internal Revenue Code, or, if no committee
exists, the Companys board of directors. References below to the committee
include a reference to the board for those periods in which the board is
acting.

Available
shares

The 2012 Plan provides for grants of stock options, restricted shares of
common stock, phantom shares, restricted stock units, dividend equivalent
rights, LTIP units and other restricted limited partnership units issued by the
Companys Operating Partnership and other equity-based awards up to, in the
aggregate, the equivalent of 5% of the issued and outstanding shares of the
Companys common stock from time to time (on a fully diluted basis (assuming, if
applicable, the exercise of all outstanding options and the conversion of all
warrants and convertible securities into shares of common stock)) at the time of
the award. At December 31, 2012, no awards had been granted under the 2012 Plan.
If an option or other award granted under the 2012 Plan expires or terminates,
the shares subject to any portion of the award that expires, forfeits or
terminates without having been exercised or paid, as the case may be, will again
become available for the issuance of additional awards. Unless previously
terminated by the board of directors, no new award may be granted under the 2012
Plan after the tenth anniversary of the earlier of the date that such plan was
initially approved by (i) the board of directors or (ii) the Companys
stockholders. No award may be granted under the 2012 Plan to any person who,
assuming exercise of all options and payment of all awards held by such person
would own or be deemed to own more than 9.8% of the outstanding shares of the
Companys common stock.

Awards Under the
Plan

*Stock Options*. The terms of
specific options, including whether options shall constitute incentive stock
options for purposes of Section 422(b) of the Internal Revenue Code, shall be
determined by the Compensation Committee. The exercise price of an option shall
be determined by the Compensation Committee and reflected in the applicable
award agreement. The exercise price with respect to incentive stock options may
not be lower than 100% (110% in the case of an incentive stock option granted to
a 10% stockholder, if permitted under the plan) of the fair market value of the
Companys common stock on the date of grant. Each option will be exercisable
after the period or periods specified in the award agreement, which will
generally not exceed ten years from the date of grant (or five years in the case
of an incentive stock option granted to a 10% stockholder, if permitted under
the plan). Options will be exercisable at such times and subject to such terms
as determined by the Compensation Committee.

*Restricted Shares of Common Stock*. A restricted share award is an award of shares of common stock that is
subject to restrictions on transferability and such other restrictions, if any,
as the committee may impose at the date of grant. Grants of restricted shares of
common stock will be subject to vesting schedules as determined by the
Compensation Committee. The restrictions may lapse separately or in combination
at such times, under such circumstances, including, without limitation, a
specified period of employment or the satisfaction of pre established criteria,
in such installments or otherwise, as the Compensation Committee may determine.
Unless otherwise stated in the applicable award agreement, a participant granted
restricted shares of common stock has all of the rights of a stockholder,
including, without limitation, the right to vote and the right to receive
dividends on the restricted shares of common stock.

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Although
dividends may be paid on restricted shares of common stock, whether or not
vested, at the same rate and on the same date as on shares of the Companys
common stock, holders of restricted shares of common stock are prohibited from
selling such shares until they vest.

*Phantom Shares*. Phantom shares,
when issued, will reduce the number of shares available for grant under the 2012
Plan and will vest as provided in the applicable award agreement. A phantom
share represents a right to receive the fair market value of a share of common
stock, or, if provided by the Compensation Committee, the right to receive the
fair market value of a share of common stock in excess of a base value
established by the Compensation Committee at the time of grant. Phantom shares
may generally be settled in cash or by transfer of shares of common stock (as
may be elected by the participant or the committee, as may be provided by the
committee at grant). The committee may, in its discretion and under certain
circumstances, permit a participant to receive as settlement of the phantom
shares installments over a period not to exceed ten years.

*Dividend Equivalents*. A dividend
equivalent is a right to receive (or have credited) the equivalent value (in
cash or shares of common stock) of dividends paid on shares of common stock
otherwise subject to an award. The Compensation Committee may provide that
amounts payable with respect to dividend equivalents shall be converted into
cash or additional shares of common stock. The Compensation Committee will
establish all other limitations and conditions of awards of dividend equivalents
as it deems appropriate.

*Restricted Limited Partnership Units.*A restricted limited partnership unit represents OP units or may include
LTIP units that are structured as profit interests in the Operating Partnership,
providing distributions to the holder of the award based on the achievement of
specified levels of profitability by the Operating Partnership or the
achievement of certain goals or events. The restricted OP units may be
convertible into or exchangeable for other securities of the Operating
Partnership or into shares of the Companys capital stock. The Compensation
Committee will establish all other limitations and conditions of awards of
restricted OP units as it deems appropriate.

*Other share-based awards*. The
2012 Plan authorizes the granting of other awards based upon shares of the
Companys common stock (including the grant of securities convertible into
shares of common stock and share appreciation rights), subject to terms and
conditions established at the time of grant.

Change in
Control

The 2012 Plan provides that, in the event of a change in control (as
such term is defined in the 2012 Plan), the Compensation Committee shall take
any such action as in its discretion it shall consider necessary to maintain
each grantees rights under the 2012 Plan (including under each such grantees
applicable award agreement) so that such grantees rights are substantially
proportionate to the rights existing prior to such event, including, without
limitation, adjustments in the number of shares, options or other awards
granted, the number and kind of shares or other property to be distributed in
respect of any options or rights previously granted under the plan, and the
exercise price, purchase price, and performance-based criteria established in
connection with any grants (to the extent consistent with Section 162(m) of the
Internal Revenue Code, as applicable).

Other Changes

The Companys board of directors may amend, alter, suspend or discontinue
the 2012 Plan but cannot take any action that would materially impair the rights
of a participants existing grants without the participants consent, unless
necessary for compliance with applicable law or legislation or to meet the
requirements of any accounting standard or to correct an administrative error.
To the extent necessary and desirable (including, as required by law or any
stock exchange rules) the board of directors must obtain approval of the
Companys stockholders for any amendment that would:

- other than through adjustment as provided in the
  2012 Plan, increase the total number of shares of common stock reserved for
  issuance under the 2012 Plan; or
- change the class of officers, directors,
  employees, consultants and advisors eligible to participate in the 2012
  Plan.

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The
Compensation Committee or the Companys board of directors may amend the terms
of any award granted under the 2012 Plan, prospectively or retroactively, but,
generally may not impair the rights of any participant without his or her
consent.

Compensation Committee Interlocks
and Insider Participation

There are no Compensation Committee interlocks and no insider
participation in compensation decisions that are required to be reported under
the rules and regulations of the Exchange Act.

Compensation Committee
Report

The Compensation Committee evaluates and establishes equity award
compensation for the Advisor and personnel of the Advisor and its affiliates who
support the Advisor in providing services to the Company under its Investment
Advisory Agreement and administers the Companys 2012 Plan. The Compensation
Committee consults with the Company's executive officers when recommending to
the board of directors the level of grants under the 2012 Plan to be payable to
the personnel of the Advisor and its affiliates. While management has the
primary responsibility for the Companys financial reporting process, including
the disclosure of executive compensation, the Compensation Committee has
reviewed and discussed with management the Compensation Discussion and Analysis
set forth in this annual report on Form 10-K. The Compensation Committee is
satisfied that the Compensation Discussion and Analysis fairly represents the
philosophy, intent and actions of the Compensation Committee with regard to
executive compensation. The Compensation Committee recommended to the Companys
board of directors that the Compensation Discussion and Analysis be included in
this annual report on Form 10-K for filing with the SEC.

Marran Ogilvie, ChairpersonJames
ZinnDaniel Mudge

The foregoing Compensation Committee
Report shall not be deemed under the Securities Act or the Exchange Act to be
(i) soliciting material or filed or (ii) incorporated by reference by any
general statement into any filing made by the Company with the SEC, except to
the extent that the Company specifically incorporates such report by
reference.

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

The following table sets forth information as of March 25, 2013 regarding
the beneficial ownership of the Companys common stock by (i) each person known
to the Company to be the beneficial owner of 5% or more of the outstanding
common stock, (ii) the Companys named executive officers, (iii) the Companys
directors and (iv) all of the Companys directors and executive officers as a
group. Beneficial ownership includes any shares over which the beneficial owner
has sole or shared voting or investment power and also any shares that the
beneficial owner has the right to acquire within 60 days of such date through
the exercise of options or other rights. The percentages below are based on
7,970,886 shares of the Companys common stock outstanding as of March 25, 2013,
unless otherwise specified.

Unless otherwise indicated, all shares are owned directly, and the
indicated person has sole voting and investment power. Except as indicated in
the footnotes to the table below, the business address of the stockholders
listed below is the address of the Companys principal executive office, Two
Bridge Avenue, Suite 322, Red Bank, New Jersey 07701-1106.

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|                                                                   |  | Number of
      Shares |  | Percentage
      of
|------------------------------------------------------------------ |  | ---------------------- |  | -------------------
|Names and Business
      Address                                   |  | Beneficially Owned     |  | All Shares(1)      
|Christian
      Zugel(2)                                           |  | 129,481                |  | 1.62               
|                                                                   |  |                        |  |                    
|Michael
      Szymanski(3)                                         |  | 16,246                 |  | *                  
|                                                                   |  |                        |  |                    
|Denise
      Crowley(4)                                            |  | 11,437                 |  | *                  
|                                                                   |  |                        |  |                    
|Paul McDade                                                        |  | 900                    |  | *                  
|                                                                   |  |                        |  |                    
|Brian Hargrave                                                     |  | 5,499                  |  | *                  
|                                                                   |  |                        |  |                    
|Nisha
      Motani(5)                                              |  | 374                    |  | *                  
|                                                                   |  |                        |  |                    
|Daniel Mudge                                                       |  |                       |  |                   
|                                                                   |  |                        |  |                    
|Marran Ogilvie                                                     |  |                       |  |                   
|                                                                   |  |                        |  |                    
|Eric Reimer                                                        |  |                       |  |                   
|                                                                   |  |                        |  |                    
|James Zinn                                                         |  |                       |  |                   
|                                                                   |  |                        |  |                    
|All directors and
      executive officers as a group (10 persons) |  | 163,937                |  | 2.06               
|                                                                   |  |                        |  |                    
|5% or Greater Beneficial Owners                                    |  |                        |  |                    
|                                                                   |  |                        |  |                    
|Entities Affiliated with
      Jerome Kohlberg(6)                  |  | 422,562                |  | 5.30               
|                                                                   |  |                        |  |                    
|Entities Affiliated with
      OP-Pohjola Bank Group(7)            |  | 527,119                |  | 6.61               

|*   |  | Denotes less than 1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(1) |  | For purposes of
      calculating the percentage beneficially owned by Christian Zugel, OP units
      shown as beneficially owned by Mr. Zugel are considered to represent
      outstanding shares of common stock for Mr. Zugel, but not for other
      persons shown in the table. OP units may be exchanged for cash or, at the
      Companys option, shares of its common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2) |  | This amount is
      comprised of 95,823 shares of the Companys common stock and 33,658 OP
      units held by the individual, his or her spouse and through various
      trusts, and for which the individual has acted as the grantor and for
      which the trustees of each trust have sole voting and investment power
      with respect to the shares of the Companys common stock held by each
      trust.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(3) |  | The shares of common
      stock are held jointly by Mr. Szymanski and his spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(4) |  | This amount includes
      shares of common stock held through the accounts of DC DE LLC. Denise
      Crowley is the manager of DCDE LLC, and, as such, has sole voting and
      investment power with respect to the shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5) |  | Includes 80 shares of
      common stock held by Ms. Motani's spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|(6) |  | Includes 10,895 shares
      of common stock held of record by Kisco Tax Exempt Investors LLC, 329,954
      shares of common stock held of record by the Jerome Kohlberg Revocable
      Trust, and 81,713 shares of common stock held of record by Kohlberg
      Foundation Inc. Mr. Kohlberg exercises shared voting and dispositive
      control over these shares and, while he does not have a pecuniary interest
      in these shares, he may be deemed to be their beneficial owner. The
      business address of Jerome Kohlberg, Kisco Tax Exempt Investors LLC,
      Jerome Kohlberg Revocable Trust and Kohlberg Foundation Inc. is c/o Kisco
      Office Services Corp., 111 Radio Circle, Mt. Kisco, NY 10549.                                                                                                                                                                                                                                            
|(7) |  | Includes 39,619 shares
      of common stock held of record by OP Bank Group Mutual Insurance Company,
      162,500 shares of common stock held of record by OP Bank Group Pension
      Foundation, and 325,000 shares of common stock held of record by OP Bank
      Group Pension Fund. OP-Pohjola Bank Group has arranged its statutory and
      supplementary pension schemes through OP Bank Group Pension Fund and OP
      Bank Group Pension Foundation and may be deemed to be the beneficial owner
      of the shares of common stock held of record by them. OP Bank Group Mutual
      Insurance Company is OP-Pohjola Bank Group internal insurance company
      which forms part of the Groups internal risk management system. The
      business address of OP-Pohjola Bank Group, OP Bank Group Mutual Insurance
      Company, OP Bank Group Pension Foundation and OP Bank Group Pension Fund
      is Teollisuuskatu 1 aA, Helsinki, Finland
00510.

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Equity Compensation Plan
Information

The 2012 Plan
authorizes the Compensation Committee to approve grants of equity-based awards
to the Companys officers and directors and officers and employees of the
Advisor and its affiliates. The 2012 Planprovides for grants of equity awards up to, in the aggregate, the
equivalent of 5% of the issued and outstanding shares of the Companys common
stock from time to time (on a fully diluted basis (assuming, if applicable, the
exercise of all outstanding options and the conversion of all warrants and
convertible securities into shares of common stock)) at the time of the award.
At December 31, 2012, no awards had been granted under the 2012 Plan, and at
March 25, 2013, 444,890 shares were available for future issuance under the 2012
Plan.

|                                            |  |                            |  |                         |   |                                         | Number of
      securities          
|------------------------------------------- |  | -------------------------- |  | ----------------------- | - | --------------------------------------- | ------------------------------------
|                                            |  | Number of
      securities |  |                         |   |                                         | remaining available for
      future
|                                            |  | to be issued
      upon    |  | Weighted-average        |   | issuance under
      equity            
|                                            |  | exercise
of                |  | exercise price of       |   | compensation plans
      (excluding    
|                                            |  | outstanding
      options, |  | outstanding options,    |   | securities reflected in
      the first
|**Award**                                   |  | warrants and rights)       |  | warrants and
    rights |   | column of this table)(1)               
|Equity compensation plans
      approved by |  |                           |  | $                       |  |                                         |                                    
|stockholders                                |  |                            |  |                         |   |                                         |                                     
|                                           
|Equity compensation plans not
    approved  |  |                            |  |                         |   |                                         |                                     
|by stockholders(2)                          |  |                           |  |                         |  |                                         | 444,890                             
|                                           
|Total                                       |  |                           |  | $                       |  |                                         | 444,890                             

|(1) |  | The 2012 Plan provides
      for grants of equity awards up to, in the aggregate, the equivalent of 5%
      of the issued and outstanding shares of the Companys common stock from
      time to time (on a fully diluted basis (assuming, if applicable, the
      exercise of all outstanding options and the conversion of all warrants and
      convertible securities into shares of common stock)) at the time of the
      award. See Item 11, Executive Compensation2012 Equity Incentive Plan and
      Other Matters, of this annual report on Form 10-K.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The 2012 Plan was
      adopted in December 2012, prior to the completion of the Companys IPO. No
      awards have been granted pursuant to this plan.                                                                                                                                                                                                                                                                                                                                                                                                                 

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

Conflicts of Interest and Related
Party Transactions

Asset Allocations

The Company is dependent on its Advisor for its day-to-day management,
and the Company does not have any independent officers or employees. Each of the
Companys officers and non-independent directors is also an employee of its
Advisor or its affiliates. See also Item 11, Executive Compensation, of this
annual report on Form 10-K. The Investment Advisory Agreement between the
Company and the Advisor was negotiated between related parties and its terms,
including fees and other amounts payable, may not be as favorable to the Company
as if they had been negotiated on an arms-length basis with unaffiliated third
parties. In addition, the ability of the Advisor and its officers and personnel
to engage in other business activities, including the management of other
entities and separate accounts, may reduce the time its Advisor and its
Advisors affiliates and their respective officers and personnel spend managing
the Company.

Various potential and actual conflicts of interest may arise from the
overall investment activities of the Advisor, its affiliates, investment
management clients or investment funds managed by it. ZAIS has in the past
served, is currently serving and will in the future serve as the investment
adviser to a series of funds, dedicated funds and managed accounts, which also
invest in the Companys target assets.

Further, ZAIS and its affiliates may also invest for the Other Clients.
Certain of the Other Clients have significant uninvested capital and will likely
compete with the Company. Accordingly, the Company and the Other Clients may
co-invest in many of the same securities and issues. The Other Clients may also
invest in target assets that would be appropriate investments for the Company.
The Advisor intends to allocate investment opportunities to the Company and the
Other Clients in a fair and equitable manner, consistent with the Companys and
the Other Clients investment objectives and approaches. The Advisor allocates
investment opportunities to Other Clients which have a current strategy
allocation to a given sector (the Allocation Accounts). The allocation of
individual investments is specifically documented and retained on record. In
general, allocations are made on a pro-rata basis taking into account the
available cash and capital of the respective Allocation Accounts. Pro-rata
allocations may be modified for constraints unique to the Allocation Account
such as portfolio concentrations, tax consequences, regulatory restrictions or
liquidity requirements, among others. This policy does not require the Advisor
to act in a way that is favorable to the Company,
and such investments made on the Companys behalf may be different from those
made on behalf of the Other Clients.

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The Advisor,
its affiliates and/or the Other Clients may have economic interests in or other
relationships with issuers in whose obligations or securities the Company may
invest. In particular, such persons may make and/or hold an investment in an
issuers securities that may be pari passu, senior or junior in ranking to an
investment in such issuers securities made and/or held by the Company. In
particular, the Company and the Other Clients may also hold different tranches
of the same RMBS or CDO securities where the tranche of an RMBS or CDO security
held by the Company may be subordinate or senior to the tranche held by the
Other Clients. The Company may also invest in an issuers securities in which
its Advisor, its Advisors affiliates and/or the Other Clients serve on boards
of directors, or own an equity interest, have a financial interest or otherwise
have ongoing relationships. Each of such ownership and other relationships may
result in securities laws restrictions on transactions in such securities by the
Company and otherwise create conflicts of interest for the Company. In such
instances, the Advisor and its affiliates may in their discretion make
investment recommendations and decisions that may be the same as or different
from those made with respect to the Company. Additionally, the Company and the
Other Clients may take adverse positions in the same securities and issues and
the Company and the Other Clients may choose to liquidate positions at different
times.

In addition to the existing funds for which ZAIS acts as investment
advisor, ZAIS may, in the future, establish new funds or enter into new managed
account arrangements with investment strategies that are the same or
substantially similar to the Companys strategy, including funds and accounts
investing primarily in the Companys target assets, including RMBS and
residential mortgage loans. ZAIS will allocate investments between the Company
and such other funds in a fair and equitable manner, taking into account any
capacity or liquidity constraints.

Although the officers and employees of the Advisor and its affiliates
devote as much time to the Company as each of them deems appropriate, they may
have conflicts in allocating their time and services among the Company, their
affiliates, and the Other Clients. In the course of performing its duties to the
Company, the Advisor may consider its relationships with its affiliates and
their respective clients. The Advisor may decline to pursue a particular
investment opportunity on the Companys behalf in view of such relationships. In
providing services to Other Clients, the Advisor and its affiliates may
recommend activities that would compete with or otherwise adversely affect the
Company.

In addition, the Advisor, its affiliates, its investment management
clients and investment funds managed by it in connection with their other
business activities, may acquire material non-public confidential information
that may restrict them from purchasing securities or selling securities (or
recommending purchases or sales) for themselves or their clients or otherwise
using such information for the benefit of their clients or themselves.
Accordingly, during certain periods or in certain circumstances, the Advisor may
be unable as a result of such restrictions to buy or sell securities or to take
other actions that it might consider to be in the Companys best interests.

ZAIS and one or more of its affiliates may hold equity or other interests
in the collateral managers of issuers in whose securities the Company has
invested or may invest, or any reference entities referred to in credit default
swap contracts or asset-backed security indices, and receives and may continue
to receive such equity interests or distributions in respect thereof from such
collateral managers as a result of the Companys investment or other funds or
issuers for which ZAIS acts as investment advisor. Receipt of any such interests
or amounts will be solely the property of ZAIS or such affiliate(s), as the case
may be, without any credit to the Company or any reduction in the fees payable
by the Company to the Advisor. In addition, ZAIS may take a long (or short)
position for one or more Other Clients in an investment in which the Company is
short (or long). More particularly, ZAIS or its affiliates may serve as
collateral manager or investment adviser for an Other Client (including a CDO)
whose reference portfolio contains long positions in the same reference
obligation that the Company is short, or, alternatively, an Other Client
(including a CDO) whose reference portfolio contains short positions in the same
reference obligation that the Company is long.

Additionally, some of the target assets purchased by the Company may be
purchased from portfolios of investments held for the account(s) of one or more
of the Other Clients. The Company may purchase target assets from its Advisor,
its affiliates or any such Other Client only to the extent (i) such purchases
are made at fair market value (as determined in good faith by
the Advisor) and otherwise on arms-length terms and (ii) the Advisor determines
that such purchases are consistent with its investment guidelines and
objectives, the restrictions contained in the Investment Advisory Agreement and
applicable law. The Company may also invest in other companies or pooled
investment vehicles focused on investing in Agency RMBS and/or any class of its
targeted assets. The Company may make investments in such vehicles which are
managed by the Advisor or one of its affiliates. The Advisor and its affiliates
also may sell target assets initially purchased for the Company to Other
Clients.

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The Company
will not, however, purchase any assets from, or issued by, any Other Client or
any entity managed by the Advisor or its affiliates, or sell any asset to any
Other Client or any such other entity without the consent of a majority of the
Companys board of directors, including a majority of its independent directors.
A majority of its independent directors may amend this affiliated investment
policy at any time without stockholder consent.

Further, the Advisor may purchase on the Companys behalf securities in
one or more Other Clients so long as the underlying investments of such Other
Clients primarily consist of the Companys target assets. The Companys
investments in such Other Clients may include debt or equity interests that are
subordinate in right of payment to other securities or interests issued by such
Other Clients and generally will not be readily marketable. In certain cases,
the Company may sell assets to a Other Clients but repurchase a portion of the
credit risk of the assets through ownership of a subordinated debt or equity
interest in the Other Clients. ZAIS, or its affiliates, as applicable, shall
either cause the documentation for any such Other Clients to, or shall itself,
waive or rebate any applicable senior management fees, subordinated management
fees, incentive fees or residual interests of such Other Clients that would
otherwise payable by the Company. Instances may arise wherein funds sponsored or
managed by ZAIS and from which ZAIS receives substantial compensation could not
have been formed without the Companys participation as a seller of assets to or
a purchaser of securities issued by such Other Clients. The Advisor may have a
conflict of interest in causing the Company to participate in, as well as in
using its assets to help form, such funds. See also Item 1A, Risk
FactorsRisks Associated With the Companys Management and its Relationship With
its AdvisorThere are conflicts of interest in the Companys relationship with
ZAIS and its affiliates, which could result in decisions that are not in the
best interests of the Companys stockholders, of this annual report on Form
10-K.

Investment Advisory Agreement

The Company has entered into an Investment Advisory Agreement with its
Advisor, pursuant to which its Advisor provides the day-to-day management of its
operations. The Investment Advisory Agreement requires the Advisor to manage its
business affairs in conformity with the policies and the guidelines that are
approved and monitored by the Companys board of directors. The Investment
Advisory Agreement has an initial three-year term and will be renewed for
one-year terms thereafter unless terminated by either the Company or the
Advisor. The Advisor is entitled to receive a termination fee from the Company,
under certain circumstances. The Company is also obligated to reimburse certain
expenses incurred by its Advisor. The Advisor is entitled to receive, from the
Company, an advisory fee. The Operating Partnership will pay to the Advisor an
advisory fee, calculated and payable quarterly in arrears, equal to 1.5% per
annum, calculated and paid (in cash) quarterly in arrears, of the Companys
Stockholders Equity (as defined in the Investment Advisory Agreement). Prior to
the completion of the IPO, the fee was calculated based on the Companys Net
Asset Value as defined in the Investment Advisory Agreement (not its
Stockholders Equity). For the year ended December 31, 2012, the Advisor was
paid an advisory fee equal to 1.5% per annum of the Companys Net Asset Value
(as defined in the Investment Advisory Agreement), calculated and payable (in
cash) quarterly in arrears. This fee (which was recorded as an advisory fee
expense - related party) totaled $0.9 million for the year ended December 31,
2012.

The Companys officers and non-independent directors are also employees
of the Advisor or its affiliates. As a result, the Investment Advisory Agreement
between the Company and its Advisor was negotiated between related parties, and
its terms, including fees and other amounts payable, may not be as favorable to
the Company as if they had been negotiated with unaffiliated third parties. The
Company has agreed to pay its Advisor an advisory fee that is not tied to its
performance. Because of this, the advisory fee may not sufficiently incentivize
the Advisor to generate attractive risk-adjusted returns for the Company. See
Item 1A, Risk FactorsRisks Associated With the Companys Management and its
Relationship With its AdvisorThere are conflicts of interest in the Companys relationship with ZAIS and its
affiliates, which could result in decisions that are not in the best interests
of the Companys stockholders, of this annual report on Form 10-K.

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ZAIS License Agreement

The Company
has entered into a license agreement with ZAIS pursuant to which ZAIS has
granted to the Company a revocable, non-exclusive, royalty free license to use
the name ZAIS. Under this agreement, the Company has a right to use this
name and trademark for so long as the Advisor or another affiliate of ZAIS
serves as the Advisor pursuant to the Investment Advisory Agreement. In the
event the investment advisory agreement is terminated, the Company would be
required to change its name to eliminate the use of ZAIS.

Restricted Common Stock and Other
Equity Based Awards

The Companys 2012 Plan provides for grants of restricted common stock
and other equity based awards up to, in the aggregate, the equivalent of 5% of
the issued and outstanding shares of the Companys common stock from
time-to-time (on a fully diluted basis (assuming, if applicable, the exercise of
all outstanding options and the conversion of all warrants and convertible
securities into shares of common stock)) at the time of the award.

Purchases of Common Stock by
Affiliates

In connection with the capital raising and other transactions the Company
completed as described in this annual report on Form 10-K, the ZAIS Parties
acquired 510,047 net shares of the Companys common stock and 33,658 OP units
for a weighted average purchase price of $20.47 per share/OP unit. All of these
shares were acquired at a book value per share as of a month end prior to the
purchase. The ZAIS Parties are entitled to the benefits of a registration rights
agreement with respect to these shares of common stock and OP units.

Indemnification and Limitation of
Directors and Officers Liability

Maryland law permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (1) actual receipt of an improper benefit or profit in money,
property or services or (2) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Companys charter
contains such a provision which eliminates the liability of the Companys
directors and officers to the maximum extent permitted by Maryland law.

The Company has entered into indemnification agreements with each of its
directors and executive officers that provide for indemnification to the maximum
extent permitted by Maryland law.

Registration Rights Agreement

In connection with the capital raising and other transactions the Company
has completed in connection with its formation and the private placements of its
shares of common stock and OP units, the Company entered into registration
rights agreements with its existing stockholders and OP unitholders, including
the ZAIS Parties. Pursuant to these agreements, the Company has agreed for the
benefit of such holders that it will, at its own expense (i) use reasonable
efforts to file with the SEC a resale shelf registration statement (providing
for the resale of the shares of common stock issued in or in exchange for shares
of common stock or OP units), no later than 270 days after the IPO, subject to
extension if the Company is bound by a lock-up agreement that restricts the
filing of the registration statement, in which event the Company will be
required to use reasonable efforts to file the registration statement within 30
days after the expiration of such lock-up period, (ii) use commercially
reasonable efforts to cause the resale shelf registration statement to be
declared effective by the SEC under the Securities Act as promptly as
practicable after the filing, (iii) use commercially reasonable efforts to
maintain a listing for such shares of common stock registered on such resale
shelf registration statement for trading on the NYSE, and (iv) use commercially
reasonable efforts to maintain the resale shelf registration statements
effectiveness under the Securities Act until the first to occur of (A) such time
as all of such shares of common stock covered by the resale shelf registration
statement have been sold pursuant to the resale shelf registration statement or
pursuant to Rule 144 under the Securities Act and (B) the second anniversary
after the completion of the IPO.

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Review, Approval or Ratification of
Transactions with Related Persons

The Company
does not have a policy that expressly prohibits its directors, officers,
security holders and affiliates from engaging for their own account in business
activities of the types conducted by the Company. However, the Companys Code of
Conduct and Ethics contains a conflicts of interest policy that prohibits the
Companys directors, officers and employees, to the extent the Company has
employees in the future, from engaging in any transaction that involves an
actual conflict of interest with the Company as determined by a majority of the
Companys directors.

Director Independence

For information about the Companys board of directors, its committees,
and the independence of certain of its directors, see Item 10, Directors,
Executive Officers and Corporate Governance, of this annual report on Form
10-K.

Item 14. Principal Accountant Fees
and Services.

Audit Fees

From its inception, the Company has engaged the firm of
PricewaterhouseCoopers LLP as its independent registered public accounting firm.
The Companys Audit Committee has engaged PricewaterhouseCoopers LLP as its
auditors for the year ended December 31, 2012.

The following table sets forth the approximate aggregate fees billed or expected to be billed to
the Company during the year ended December 31, 2012 and for the period from July
29, 2011 (the date of the Company's inception) to December 31, 2011 by
PricewaterhouseCoopers LLP, categorized in accordance with SEC definitions and
rules:

|                      |                              |           | For the period
      from
|--------------------- | ---------------------------- | --------- | -------------------------
|                      |                              |           | July 29, 2011 (the       
|                      |                              |           | date of the              
|                      |                              |           | Company's                
|                      | **For the
      year ended** |           | inception) to            
|                      | **December 31, 2012**        |           | December 31,
      2011  
|Audit Fees(1)         | $                            | 1,908,705 |                          
|Audit Related Fees(2) |                              | -         |                          
|Tax Fees(3)           |                              | 140,575   |                          
|All
      Other Fees  |                              | 88,581    |                          
|Total Fees            | $                            | 2,137,861 |                          

|(1) |  | This category consists
      of fees billed or expected to be billed to the Company for professional
      services rendered for the audits of the Companys audited 2012 and 2011
      financial statements for each of the 2012 and 2011 fiscal years and other
      audit services.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | This category consists
      of fees billed or expected to be billed to the Company for audit-related
      services performed by PricewaterhouseCoopers LLP.                                                                                                                           
|(3) |  | This category consists
      of fees billed or expected to be billed to the Company by
      PricewaterhouseCoopers LLP for tax compliance and consultation
      services.                                                                                                             

Pre-Approval by Audit
Committee

The Audit Committees policy is to pre-approve all audit and permissible
non-audit services provided by the independent registered public accounting
firm. These services may include audit services, audit-related services, tax
services and other services. Pre-approval is generally provided for up to one
year and any pre-approval is detailed as to the particular service or category
of services. The independent registered public accounting firm and management
are required to periodically report to the Audit Committee regarding the extent
of services provided by the independent registered public accounting firm in
accordance with this pre-approval, and the fees for the services performed to
date. The Audit Committee may also pre-approve particular services on a
case-by-case basis.

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PART IV

Item 15. Exhibits.

Documents filed as part of the
report

The following documents are filed as
part of this annual report on Form 10-K:

|(1) | Financial Statements:
|--- | ---------------------
|    |                      

The
consolidated financial statements of the Company, together with the independent
registered public accounting firms report thereon, are set forth on pages 71
through 96 of this annual report on Form 10-K and are incorporated herein by
reference. See Item 8, Financial Statements and Supplementary Data, filed
herewith, for a list of financial statements.


|(2) | Financial Statement Schedule:
|--- | -----------------------------
|    |                              

All financial statement schedules have been omitted because the required
information is not applicable or deemed not material, or the required
information is presented in the consolidated financial statements and/or in the
notes to consolidated financial statements filed in response to Item 8 of this
annual report on Form 10-K.


|(3)       | Exhibits Files:                                                                                                                                                                                                                                                                                                                                                                                                           
|--------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**3.1***  | Articles of Amendment and Restatement of ZAIS Financial
      Corp., incorporated by reference to Exhibit 3.1 of the Registrants Form
      S-11, as amended (Registration No. 333-185938).                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**3.2***  | Articles Supplementary of ZAIS Financial Corp.,
      incorporated by reference to Exhibit 3.2 of the Registrants Form S-11, as
      amended (Registration No. 333-185938).                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**3.3***  | Bylaws of ZAIS Financial Corp., incorporated by reference
      to Exhibit 3.3 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                                                                                                                                                                                                             
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**4.1***  | Specimen Common Stock Certificate of ZAIS Financial
      Corp., incorporated by reference to Exhibit 4.1 of the Registrants Form
      S-11, as amended (Registration No. 333-185938).                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**10.1*** | Second Amended and Restated Investment Advisory
      Agreement, dated as of December 13, 2012, by and among ZAIS Financial
      Corp., ZAIS Financial Partners, L.P., ZAIS Asset I, LLC, ZAIS Asset II,
      LLC, ZAIS Asset III, LLC, ZAIS Asset IV, LLC and ZAIS REIT Management,
      LLC, incorporated by reference to Exhibit 10.1 of the Registrants Form
      S-11, as amended (Registration No. 333-185938).
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**10.2*** | Agreement of Limited Partnership, dated as of July 29,
      2011, of ZAIS Financial Partners, L.P., as amended on August 3, 2011,
      October 11, 2012, and December 13, 2012, incorporated by reference to
      Exhibit 10.2 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|10.3      | Amendment to Agreement of Limited
      Partnership, dated as of February 13, 2013, of ZAIS Financial Partners,
      L.P.                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**10.4*** | Registration Rights Agreement, dated August 3, 2011,
      among ZAIS Financial Corp., ZAIS Group, LLC and certain persons listed on
      Schedule I thereto, incorporated by reference to Exhibit 10.3 of the
      Registrants Form S-11, as amended (Registration No.
  333-185938).                                                                                                                                 
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**10.5*** | First Amended and Restated Registration Rights Agreement,
      dated October 11, 2012, among ZAIS Financial Corp., ZAIS Group, LLC and
      certain persons listed on Schedule I thereto, incorporated by reference to
      Exhibit 10.4 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                                                
|          |                                                                                                                                                                                                                                                                                                                                                                                                                           
|**10.6*** | First Amended and Restated Registration Rights Agreement,
      dated December 13, 2012, among ZAIS Financial Corp., ZAIS REIT Management,
      LLC and certain persons listed on Schedule I thereto, incorporated by
      reference to Exhibit 10.5 of the Registrants Form S-11, as amended
      (Registration No. 333-185938).                                                                                     

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|**10.7***  | Indemnification Agreement, dated August 3, 2011, between
      ZAIS Financial Corp. and Christian Zugel, incorporated by reference to
      Exhibit 10.6 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                    
|---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                                                                                                                                                                                                                                                                                                            
|**10.8***  | Indemnification Agreement, dated August 3, 2011, between
      ZAIS Financial Corp. and Michael Szymanski, incorporated by reference to
      Exhibit 10.7 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                  
|           |                                                                                                                                                                                                                                                                                                            
|**10.9***  | Indemnification Agreement, dated August 3, 2011, between
      ZAIS Financial Corp. and Denise Crowley, incorporated by reference to
      Exhibit 10.8 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                     
|           |                                                                                                                                                                                                                                                                                                            
|**10.10*** | Indemnification Agreement, dated August 3, 2011, between
      ZAIS Financial Corp. and Paul McDade, incorporated by reference to Exhibit
      10.9 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                        
|           |                                                                                                                                                                                                                                                                                                            
|**10.11*** | Indemnification Agreement, dated August 3, 2011, between
      ZAIS Financial Corp. and Brian Hargrave, incorporated by reference to
      Exhibit 10.10 of the Registrants Form S-11, as amended (Registration No.
      333-185938).                                                                    
|           |                                                                                                                                                                                                                                                                                                            
|**10.12*** | Indemnification Agreement, dated December 13, 2012,
      between ZAIS Financial Corp. and Steven Haber, incorporated by reference
      to Exhibit 10.11 of the Registrants Form S-11, as amended (Registration
      No. 333-185938).                                                                   
|           |                                                                                                                                                                                                                                                                                                            
|10.13      | Indemnification Agreement, dated
      February 7, 2013, between ZAIS Financial Corp. and Daniel
  Mudge                                                                                                                                                                                                   
|           |                                                                                                                                                                                                                                                                                                            
|10.14      | Indemnification Agreement, dated
      February 7, 2013, between ZAIS Financial Corp. and Marran
  Ogilvie                                                                                                                                                                                                 
|           |                                                                                                                                                                                                                                                                                                            
|10.15      | Indemnification Agreement, dated
      February 7, 2013, between ZAIS Financial Corp. and Eric
Reimer                                                                                                                                                                                                      
|           |                                                                                                                                                                                                                                                                                                            
|10.16      | Indemnification Agreement, dated
      February 7, 2013, between ZAIS Financial Corp. and James Zinn                                                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                            
|10.17      | Indemnification Agreement, dated
      March 20, 2013, between ZAIS Financial Corp. and Nisha Motani                                                                                                                                                                                                       
|           |                                                                                                                                                                                                                                                                                                            
|**10.18*** | ZAIS Financial Corp. 2012 Equity Incentive Plan
      incorporated by reference to Exhibit 10.13 of the Registrants Form S-11,
      as amended (Registration No. 333-185938).                                                                                                                            
|           |                                                                                                                                                                                                                                                                                                            
|10.19      | License Agreement, dated February 5,
      2013, between ZAIS Financial Corp. and ZAIS Group, LLC.                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                            
|**10.20*** | Forms of Irrevocable Exchange and Subscription Agreement
      between various contributors and ZAIS Financial Corp. (relating to the
      initial formation transactions) incorporated by reference to Exhibit 10.15
      of the Registrants Form S-11, as amended (Registration No.
      333-185938).
|           |                                                                                                                                                                                                                                                                                                            
|21.1       | List of Subsidiaries of ZAIS
      Financial Corp.                                                                                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                            
|31.1       | Certification of Chief Executive
      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                            
|31.2       | Certification of Chief Financial
      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                              
|           |                                                                                                                                                                                                                                                                                                            
|32.1       | Certification of the Chief Executive
      Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                            
|32.2       | Certification of the Chief Financial
      Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                         
|           |                                                                                                                                                                                                                                                                                                            
|*          | Previously filed                                                                                                                                                                                                                                                                                           

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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.

|                     |  |     | ZAIS Financial
      Corp.                           
|-------------------- |  | --- | -----------------------------------------------------
|                     |  |     |                                                      
|Date: March 28, 2013 |  | By: | /s/
      Michael Szymanski                          
|                     |  |     | Michael Szymanski                                    
|                     |  |     | Chief Executive Officer, President and
      Director
|                     |  |     | (principal executive officer)                        
|                    
|Date: March 28, 2013 |  | By: | /s/
      Paul McDade                                
|                     |  |     | Paul McDade                                          
|                     |  |     | Chief Financial Officer and
    Treasurer            
|                     |  |     | (principal financial officer)                        
|                    
|Date: March 28, 2013 |  | By: | /s/
      Christian Zugel                            
|                     |  |     | Christian Zugel                                      
|                     |  |     | Chairman of the Board                                
|                    
|Date: March 28, 2013 |  | By: | /s/
      Denise Crowley                             
|                     |  |     | Denise Crowley                                       
|                     |  |     | Director                                             
|                    
|Date: March 28, 2013 |  | By: | /s/
      Nisha Motani                               
|                     |  |     | Nisha Motani                                         
|                     |  |     | Chief Accounting Officer                             
|                     |  |     | (principal accounting officer)                       
|                    
|Date: March 28, 2013 |  | By: | /s/
      Daniel Mudge                               
|                     |  |     | Daniel Mudge                                         
|                     |  |     | Director                                             
|                    
|Date: March 28, 2013 |  | By: | /s/
      Marran Ogilvie                             
|                     |  |     | Marran Ogilvie                                       
|                     |  |     | Director                                             
|                    
|Date: March 28, 2013 |  | By: | /s/
      Eric Reimer                                
|                     |  |     | Eric Reimer                                          
|                     |  |     | Director                                             
|                    
|Date: March 28, 2013 |  | By: | /s/
      James Zinn                                 
|                     |  |     | James Zinn                                           
|                     |  |     | Director                                             

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