Cautionary Statement

You should read the following discussion and analysis in conjunction with the unaudited consolidated financial statements and related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q, or Report. The information contained in this Report is not a complete description of our business or the risks associated with an investment in our stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the United States Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, that discuss our business and financial results in greater detail.

This Report contains forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "will," "believe," "expect," "anticipate," "intend," "estimate," "assume" or other similar expressions. You should not rely on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. These forward-looking statements are subject to assumptions and to various risks and uncertainties. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under Item 1A, "Risk Factors," in our 2008 Annual Report on Form 10-K and under Item 1A, "Risk Factors," in this Report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

As used in this Report, "company," "we," "us," "our," and "Anworth" refer to Anworth Mortgage Asset Corporation.

General

We were formed in October 1997 and commenced operations on March 17, 1998. We are in the business of investing primarily in U.S. agency mortgage-backed securities, or MBS, which are obligations guaranteed by the U.S. government, such as Ginnie Mae, or federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our principal business objective is to generate net income for distribution to stockholders based upon the spread between the interest income on our mortgage-related assets and the costs of borrowing to finance our acquisition of these assets.

We are organized for tax purposes as a real estate investment trust, or REIT. Accordingly, we generally distribute substantially all of our earnings to stockholders without paying federal or state income tax at the corporate level on the distributed earnings. At March 31, 2009, our qualified REIT assets (real estate assets, as defined under the Internal Revenue Code of 1986, or the Code, cash and cash items and government securities) were greater than 90% of our total assets, as compared to the Code requirement that at least 75% of our total assets must be qualified REIT assets. Greater than 99% of our 2008 revenue qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. We believe we met all REIT requirements regarding the ownership of our common stock and the distributions of our net income. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.

During 2008, the credit and liquidity problems surrounding the mortgage markets generally and impacting the U.S. economy deepened, placing severe pressure on liquidity and asset values. This, along with other factors, has created great uncertainty in the financial markets in general and the related general economic recession. General downward economic trends, reduced availability of credit, increased unemployment and concerns over

the stability of the financial markets and the economy have continued during the first quarter of 2009. The Federal Reserve's own survey on the economy anticipates that these conditions may last well into 2009 or even 2010.

During the third and fourth quarters of 2008, the U.S. government and foreign governments took various actions in response to the global economic problems. The U.S. government placed Fannie Mae and Freddie Mac under its conservatorship, as part of the Housing and Economic Recovery Act of 2008. The Emergency Economic Stabilization Act of 2008, or EESA, was also enacted. The EESA provides the U.S. Secretary of the Treasury with various authority including to establish a Troubled Asset Relief Program, or TARP, to purchase from financial institutions up to $700 billion of residential and commercial mortgage loans. Under the TARP, the U.S. government has invested approximately $350 billion into hundreds of the country's banks. In addition, the EESA increased FDIC deposit insurance temporarily (until December 2009), from $100 thousand to $250 thousand. Other global governments have injected capital into troubled institutions in their countries, made loans, made promises of continued liquidity funding and have also worked with large institutions to acquire troubled institutions. The U.S. government, many European governments and other governments of more economically developed countries (such as New Zealand, Australia, Japan and Saudi Arabia) all instituted interest rate cuts to help stimulate their economies.

In January 2009, Congress approved the remaining $350 billion under the TARP fund to be released to the U.S. Treasury, although further legislation on the use of those funds and the conditions imposed upon the recipients of those funds may yet be proposed and enacted. On February 10, 2009, the U.S. Treasury Secretary announced a new Financial Stability Plan which would include additional capital support for banks under a Capital Assistance Program; a public-private investment fund to address existing bank loan portfolios; and expanded funding for the Federal Reserve Bank's Term Asset-Backed Securities Loan Facility to restart lending and the securitization markets. On February 17, 2009, President Obama signed into law the almost $800 billion economic stimulus package, entitled "the American Recovery and Reinvestment Act of 2009", or "ARRA." Among other provisions, ARRA will impose various conditions upon recipients of additional TARP funds, as well as, certain new requirements of financial institutions which have already received TARP funds, including additional restrictions on executive compensation. In mid-March 2009, the U.S. Treasury Secretary announced a plan to remove seriously delinquent, or troubled, assets from financial institutions. On March 18, 2009, in order to provide greater support to mortgage lending and housing markets, the Federal Reserve Bank Open Market Committee, or FOMC, announced that it would increase the size of the Federal Reserve Bank's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchase of these securities up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of $200 billion. Additionally, to help improve conditions in private credit markets, the FOMC decided to purchase up to $300 billion of longer term Treasury securities over the next six months. On March 26, 2009, the U.S. Treasury Security unveiled sweeping new rules seeking dramatically expanded federal powers to regulate almost the entire financial industry including hedge funds, derivatives trading and money-market funds.

Although these various actions by both the U.S. government and other governments are intended to protect the mortgage market, financial institutions and their respective economies, we continue to operate under very difficult market conditions. There can be no assurance that these various actions will have a beneficial impact on the global financial markets. We cannot predict what, if any, impact these actions or future actions by either the U.S government or foreign governments could have on our business, results of operations and financial conditions. These events may impact the availability of financing generally in the marketplace and also may impact the market value of MBS generally, including the securities we currently own in our portfolio.

Our operations consist of the following portfolios: Agency mortgage-backed securities, or Agency MBS, and Non-Agency mortgage-backed securities, or Non-Agency MBS. Approximately 99.9% of our total portfolio is Agency MBS.

At March 31, 2009, we had total assets of $5.73 billion. Our Agency MBS portfolio, consisting of $5.6 billion, was distributed as follows: 16% agency adjustable-rate MBS, 66% agency hybrid adjustable-rate MBS, 18% agency fixed-rate MBS and less than 1% agency floating-rate collateralized mortgage obligations, or CMOs. Our Non-Agency MBS portfolio consisted of approximately $6.7 million of floating-rate CMOs. Stockholders' equity available to common stockholders at March 31, 2009 was approximately $668.7 million, or $6.66 per share. The $668.7 million equals total stockholders' equity of $717.6 million less the Series A Cumulative Preferred Stock, or Series A Preferred Stock, liquidating value of $46.9 million and less the difference between the Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, liquidating value of $30.1 million and the proceeds from its sale of $28.1 million. For the three months ended March 31, 2009, we reported net income of $30.8 million and net income to common stockholders was $29.3 million. Net income to common stockholders consists of net income of $30.8 million minus payment of preferred dividends of approximately $1.5 million.

Results of Operations

Three Months Ended March 31, 2009 Compared to March 31, 2008

For the three months ended March 31, 2009, our net income was $30.8 million and our net income available to common stockholders was $29.3 million. This includes net income of $30.8 million and the payment of preferred stock dividends of approximately $1.5 million. For the three months ended March 31, 2008, our net income was $16.6 million and our net income available to common stockholders was $15.1 million.

Net interest income for the three months ended March 31, 2009 was $34.5 million, or 48% of gross income, compared to $19.3 million, or 26.8% of gross income, for the three months ended March 31, 2008. Net interest income is comprised of the interest income earned on mortgage investments less interest expense from borrowings. Interest income net of premium amortization expense for the three months ended March 31, 2009 was $67.0 million, compared to $68.4 million for the three months ended March 31, 2008, a decrease of 2.0%, due primarily to an increase of approximately $1 million in premium amortization expense. Interest expense for the three months ended March 31, 2009 was $32.5 million, compared to $49.1 million for the three months ended March 31, 2008, a decrease of 34%. This decrease was due primarily to the decrease in short-term interest rates.

The results of our operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our MBS, the supply of, and demand for, MBS in the marketplace, and the terms and availability of financing. Our net interest income varies primarily as a result from changes in interest rates, the slope of the yield curve (the differential between long-term and short-term interest rates), borrowing costs (our interest expense) and prepayment speeds on our MBS portfolios, the behavior of which involves various risks and uncertainties. Interest rates and prepayment speeds, as measured by the constant prepayment rate, or CPR, 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. With respect to our business operations, increases in interest rates, in general, may, over time, cause:
(i) the interest expense associated with our borrowings, which are primarily comprised of repurchase agreements, to increase; (ii) the value of our MBS portfolios and, correspondingly, our stockholders' equity to decline;
(iii) coupons on our MBS to reset, although on a delayed basis, to higher interest rates; (iv) prepayments on our MBS portfolios to slow, thereby slowing the amortization of our MBS purchase premiums; and (v) the value of our interest rate swap agreements and, correspondingly, our stockholders' equity to increase. Conversely, decreases in interest rates, in general, may, over time, cause:
(i) prepayments on our MBS portfolios to increase, thereby accelerating the amortization of our MBS purchase premiums; (ii) the interest expense associated with our borrowings to decrease; (iii) the value of our MBS portfolios and, correspondingly, our stockholders' equity to increase; (iv) the vale of our interest rate swap agreements and, correspondingly, our stockholders' equity to decrease; and (v) coupons on our MBS to reset, although on a delayed basis, to lower interest rates. In addition, our borrowing costs and credit lines are further affected by the type of collateral pledged and general conditions in the credit markets.

During the three months ended March 31, 2009, premium amortization expense increased $1.0 million, or 29%, from $3.5 million during the three months ended March 31, 2008 to $4.5 million.

For the three months ended March 31, 2009, there was a net gain on derivative instruments of approximately $107 thousand due to hedge ineffectiveness, compared to a net loss on derivative instruments of approximately $280 thousand for the three months ended March 31, 2008.

Total expenses were $3.9 million for the three months ended March 31, 2009, compared to $2.5 million for the three months ended March 31, 2008. The increase of $1.4 million in total expenses was due to an increase in compensation and benefits of $1.37 million (due primarily to an increase of $1.2 million in the accrual for year-end 2009 additional compensation over the 2008 additional compensation accrued through March 2008) and an increase in "Other expenses" of $52 thousand.

Financial Condition

Agency MBS Portfolio

At March 31, 2009, we held agency MBS whose amortized cost was approximately $5.5 billion, consisting primarily of $4.5 billion of adjustable-rate MBS, $1.0 billion of fixed-rate MBS and $7 million of floating-rate CMOs. This amount represents an approximate 4% increase from the $5.26 billion held at December 31, 2008. Of the adjustable-rate Agency MBS owned by us, 20% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 80% consisted of hybrid adjustable-rate MBS whose coupons will reset between one year and five years. Hybrid adjustable-rate MBS have an initial interest rate that is fixed for a certain period, usually three to five years, and thereafter adjust annually for the remainder of the term of the loan.

The following table presents a schedule of our Agency MBS at fair value owned at March 31, 2009 and December 31, 2008, classified by type of issuer (dollar amounts in thousands):

                                  March 31, 2009             December 31, 2008
                                           Portfolio                    Portfolio
       Agency                Fair Value    Percentage     Fair Value    Percentage
       Fannie Mae (FNM)      $ 4,315,446         77.0 %   $ 3,971,748         74.8 %
       Freddie Mac (FHLMC)     1,260,966         22.5       1,309,149         24.7
       Ginnie Mae (GNMA)          25,614          0.5          26,543          0.5

       Total Agency MBS:     $ 5,602,026        100.0 %   $ 5,307,440        100.0 %

The following table classifies our portfolio of Agency MBS owned at March 31, 2009 and December 31, 2008 by type of interest rate index (dollar amounts in thousands):

                                               March 31, 2009                 December 31, 2008
                                                         Portfolio                        Portfolio
Index                                    Fair Value      Percentage       Fair Value      Percentage
One-month LIBOR                          $     7,358            0.1 %     $     7,669            0.2 %
Six-month LIBOR                              107,406            1.9            43,192            0.8
One-year LIBOR                             3,976,651           71.0         3,690,221           69.5
Six-month certificate of deposit               1,613             -              1,653            0.1
Six-month constant maturity treasury             655             -                671             -
One-year constant maturity treasury          463,514            8.3           478,422            9.0
Cost of Funds Index                           37,595            0.7            38,972            0.7
Fixed-rate                                 1,007,234           18.0         1,046,640           19.7

Total Agency MBS:                        $ 5,602,026          100.0 %     $ 5,307,440          100.0 %

The fair values indicated do not include interest earned but not yet paid. With respect to our hybrid adjustable-rate MBS, the fair value of these securities appears on the line associated with the index based on which the security will eventually reset once the initial fixed interest rate period has expired. The fair value of our Agency MBS is reported to us independently from dealers who are major financial institutions and are considered to be market makers for these types of instruments.

At March 31, 2009, our total Agency MBS portfolio had a weighted average coupon of 5.47%. The average coupon of the adjustable-rate securities was 4.82%, the hybrid securities average coupon was 5.55%, the fixed-rate securities average coupon was 5.79% and the CMO floaters average coupon was 1.37%. At December 31, 2008, our total Agency MBS portfolio had a weighted average coupon of 5.54%. The average coupon of the adjustable-rate securities was 5.19%, the hybrid securities average coupon was 5.56%, the fixed-rate securities average coupon was 5.79% and the CMO floaters average coupon was 2.01%.

At March 31, 2009, the average amortized cost of our agency MBS was 101.36%, the average amortized cost of our adjustable-rate securities was 101.50% and the average amortized cost of our fixed-rate securities was 100.68%. Relative to our Agency MBS portfolio at March 31, 2009, the average interest rate on outstanding repurchase agreements was 0.92% and the average days to maturity was 38 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding repurchase agreements was 2.56% and the weighted average term to next rate adjustment was 370 days.

At December 31, 2008, the average amortized cost of our agency MBS was 101.22%, the average amortized cost of our adjustable-rate securities was 101.35% and the average amortized cost of our fixed-rate securities was 100.68%. Relative to our Agency MBS portfolio at December 31, 2008, the average interest rate on outstanding repurchase agreements was 2.07% and the average days to maturity was 34 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding repurchase agreements was 3.25% and the weighted average term to next rate adjustment was 422 days.

At March 31, 2009 and December 31, 2008, the unamortized net premium paid for our Agency MBS was $71.5 million and $63 million, respectively.

At March 31, 2009, the current yield on our Agency MBS portfolio was 5.40%, based on a weighted average coupon of 5.47% divided by the average amortized cost of 101.36%. At December 31, 2008, the current yield on our Agency MBS portfolio was 5.47%, based on a weighted average coupon of 5.54% divided by the average amortized cost of 101.22%.

We analyze our MBS and the extent to which prepayments impact the yield of the securities. When the rate of prepayments exceeds expectations, we amortize the premiums paid on mortgage assets over a shorter time period, resulting in a reduced yield to maturity on our mortgage assets. Conversely, if actual prepayments are less than the assumed CPR, the premium would be amortized over a longer time period, resulting in a higher yield to maturity.

Non-Agency MBS Portfolio

At March 31, 2009, our Non-Agency MBS portfolio consisted of a fair value of $6.7 million of floating-rate CMOs with an average coupon of 0.77%, which were acquired at par value. At December 31, 2008, our Non-Agency MBS portfolio consisted of $7.3 million of floating-rate CMOs with an average coupon of 0.72% which were acquired at par value. Non-Agency MBS are securities not issued by the government or government-sponsored enterprises and are secured primarily by first-lien residential mortgage loans.

At March 31, 2009, the fair value of our Non-Agency MBS portfolio declined to approximately $6.7 million from a fair value of approximately $7.3 million at December 31, 2008 due to principal reductions of approximately $0.5 million, and unrealized losses (net of unrealized gains) of approximately $140 thousand.

At March 31, 2009, a security representing approximately 33% of the principal balance of our Non-Agency MBS portfolio was rated BB by Standard & Poor's and a security representing approximately 67% of the principal balance of our Non-Agency MBS portfolio was rated B by Standard & Poor's. As of March 31, 2009,

the ratings from Standard & Poor's remained the same. On March 4, 2009, Moody's Investors Service downgraded both of these securities from AAA to Ca. As of March 31, 2009, Moody's Investors Service did not change from the March 4, 2009 ratings.

We received valuations at December 31, 2008 for the Non-Agency MBS from an independent third party pricing service whose methodologies are based on broker-provided pricing as well as indirect observation of market activity. Generally, we would consider this to be a Level 2 input. However, given the severely reduced trading activity surrounding the Non-Agency MBS, which limited the observability of significant inputs utilized in valuing these securities, we reduced the fair value measurement to a Level 3 input at December 31, 2008 and it is a Level 3 input at March 31, 2009.

The table below provides additional details regarding our Non-Agency MBS portfolio at March 31, 2009 and December 31, 2008:

                                                         March 31,           December 31,
                                                            2009                 2008
Non-Agency MBS at fair value                           $  6.7 million       $  7.34 million
Principal balance of Non-Agency MBS                    $ 44.3 million       $ 44.87 million
Original principal balance on Non-Agency MBS           $   60 million       $    60 million
Original FICO (credit score)                                      730                   730

Information on Loan Collateral of Non-Agency MBS
Securitizations
Loan principal as percentage of original loan
principal                                                        74.9 %                76.3 %

Weighted average original loan-to-value (LTV)                      69 %                  69 %
Weighted average original LTV adjusted for
negative loan amortization                                         74 %                  73 %

California loans(1)                                                68 %                  68 %
Pay-option ARM loans(1)                                           100 %                 100 %
2006 loan originations(1)                                          99 %                  99 %

3-month CPR                                                       8.1 %                 7.4 %

Loans in foreclosure(1)                                          10.8 %                 6.0 %
Real estate owned (REO)(1)(2)                                     1.9 %                 2.4 %
Total seriously delinquent(1)(3)                                 17.4 %                12.3 %
Realized losses (as percentage of original
collateral balance)                                               1.0 %                 0.5 %

Information on Subordination Levels of Non-Agency
MBS Securitizations(4)
Average securitization principal subordinate to
Anworth-owned tranches                                            9.0 %                 9.5 %
Average securitization principal of Anworth-owned
tranches                                                         15.6 %                15.5 %
Average securitization principal senior to
Anworth-owned tranches                                           75.4 %                75.0 %

(1) As a percentage of collateral loan principal.

(2) Represents the amount of collateral loan principal where the properties are now REO.

(3) Includes 90+ days delinquent plus foreclosures plus bankruptcy plus REO.

(4) Weighted average as percentage of collateral loan principal at March 31, 2009 and December 31, 2008.

Hedging

We periodically enter into derivative transactions, in the form of forward purchase commitments and interest rate swaps, which are intended to hedge our exposure to rising rates on funds borrowed to finance our investments in securities. We designate interest rate swap transactions as cash flow hedges. We also periodically enter into derivative transactions, in the form of forward purchase commitments, which are not designated as hedges. To the extent that we enter into hedging transactions to reduce our interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income or gain from the disposition of hedging transactions

should be qualifying income under the REIT rules for purposes of the 95% gross income test. Under recently enacted legislation, the hedging rules that exclude certain hedging income from the computation of the 95% income test have been extended to exclusion under the 75% income test as well. To qualify for this exclusion, the hedging transaction must be clearly identified as such before the close of the day on which it was acquired, originated or entered into. The transaction must hedge indebtedness incurred or to be incurred by us to acquire or carry real estate assets. This provision became effective for transactions entered into after July 30, 2008.

As part of our asset/liability management policy, we may enter into hedging agreements such as interest rate caps, floors or swaps. These agreements are entered into to try to reduce interest rate risk and are designed to provide us with income and capital appreciation in the event of certain changes in interest rates. We review the need for hedging agreements on a regular basis consistent with our capital investment policy. At March 31, 2009, we were a counter-party to swap agreements, which are derivative instruments as defined by the Financial Accounting Standards Board in SFAS 133 and SFAS 138, with an aggregate notional amount of $2.58 billion and an average maturity of 1.9 years. We utilize swap . . .