General
We are a Maryland corporation focused on investing in, financing and managing residential mortgage-backed securities, or RMBS, residential mortgage loans, residential real properties and other financial assets. We operate as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code.
We are externally managed by PRCM Advisers LLC. PRCM Advisers is a wholly-owned subsidiary of Pine River Capital Management L.P., or Pine River, a global asset management firm providing solutions to qualified clients across three actively managed platforms: hedge funds, managed accounts and listed investment vehicles. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long term, primarily through dividends and secondarily through capital appreciation. We selectively acquire and manage an investment portfolio of our target assets, which we believe is constructed to generate attractive returns through market cycles. Our target assets include the following:

• Agency RMBS, meaning RMBS whose principal and interest payments are guaranteed by the Government National Mortgage Association (or Ginnie Mae), the Federal National Mortgage Association (or Fannie Mae), or the Federal Home Loan Mortgage Corporation (or Freddie Mac);

• Non-Agency RMBS, meaning RMBS that are not issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac;

• Residential mortgage loans;

• Residential real properties; and

• Other financial assets comprising approximately 5% to 10% of the portfolio.

We believe our hybrid Agency and non-Agency RMBS investment model allows management to focus on security selection and implement a relative value investment approach across various sectors within the residential mortgage market, which factors in the displaced pricing opportunities in the marketplace, cost of financing and cost of hedging interest rate, prepayment, credit and other portfolio risks. As a result, RMBS asset allocation reflects management's opportunistic approach to investing in the marketplace.
For the three months ended June 30, 2012, we did not significantly modify our RMBS asset allocation between Agency and non-Agency RMBS. The following table provides the RMBS asset allocation between Agency and non-Agency RMBS as of June 30, 2012 and the four immediately preceding period ends:

                                                As of
                June 30,    March 31,     December 31,     September 30,    June 30,
                  2012         2012           2011             2011           2011
Agency RMBS (1)    81.7 %       79.4 %         81.3 %            80.9 %        83.7 %
Non-Agency RMBS    18.3 %       20.6 %         18.7 %            19.1 %        16.3 %


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As our RMBS asset allocation shifts, our annualized yields and cost of financing shifts. As previously discussed, our investment decisions are not driven solely by annualized yields, but rather a multitude of macroeconomic drivers, including market environments and their respective impacts; for example, uncertainty of faster prepayments, extension risk and credit events.

For the three months ended June 30, 2012, our net interest spread realized on Agency and non-Agency RMBS was slightly lower than prior periods. Based on recent experience, we believe that yields and net interest spreads on Agency and non-Agency RMBS securities are generally lower than what we have historically realized in our portfolio. The following table provides the average annualized yield on our Agency and non-Agency RMBS for the three months ended June 30, 2012, and the four immediately preceding quarters:

                                                    Three Months Ended
                       June 30,        March 31,       December 31,     September 30,      June 30,
                         2012             2012             2011             2011             2011
Average annualized
yields (1)
Agency RMBS (2)             3.3 %           3.5 %            3.5 %            4.3 %             4.7 %
Non-Agency RMBS             9.6 %           9.7 %            9.7 %            9.8 %             8.8 %
Aggregate RMBS              4.6 %           4.9 %            4.8 %            5.5 %             5.4 %
Cost of financing
(3)                         1.0 %           1.0 %            1.0 %            1.3 %             1.3 %
Net interest spread         3.6 %           3.9 %            3.8 %            4.2 %             4.1 %


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(2) Agency RMBS includes inverse interest-only securities which are classified as derivatives under U.S. GAAP.

(3) Cost of financing includes swap interest rate spread.

The following table provides the average annualized yield on our Agency and non-Agency RMBS as of June 30, 2012, and the four immediately preceding period ends:

                                                           As of
                       June 30,        March 31,       December 31,     September 30,      June 30,
                         2012             2012             2011             2011             2011
Average annualized
yields (1)
Agency RMBS (2)             3.3 %           3.5 %            3.3 %            3.4 %             3.9 %
Non-Agency RMBS             9.6 %           9.7 %            9.7 %            9.6 %             9.2 %
Aggregate RMBS              4.5 %           4.7 %            4.7 %            4.7 %             4.8 %
Cost of financing
(3)                         1.0 %           1.0 %            1.0 %            1.3 %             1.3 %
Net interest spread         3.5 %           3.7 %            3.7 %            3.4 %             3.5 %


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(2) Agency RMBS includes inverse interest-only securities which are classified as derivatives for purposes of U.S. GAAP.

(3) Cost of financing includes swap interest rate spread.

We seek to deploy moderate leverage as part of our investment strategy. We generally finance our RMBS assets through short-term borrowings structured as repurchase agreements. Our Agency RMBS and Agency derivatives, given their liquidity and high credit quality, are eligible for higher levels of leverage, while non-Agency RMBS, with less liquidity and exposure to credit risk, utilize lower levels of leverage. We also finance our U.S. Treasuries, which we hold for trading purposes, and our mortgage loans. We believe the debt-to-equity ratio funding our RMBS, Agency derivatives and residential mortgage loans is the most meaningful leverage measure as U.S. Treasuries are viewed to be highly liquid in nature. As a result, our debt-to-equity ratio is determined by our RMBS portfolio mix as well as many additional factors, including the liquidity of our portfolio, the sustainability and price of our financing, diversification of our counterparties and their available capacity to finance our RMBS assets, and anticipated regulatory developments. Over the past several quarterly periods, we have generally maintained a debt-to-equity ratio range of 3.0 to 5.0 times to finance our RMBS, Agency derivatives and mortgage loans, on a fully deployed capital basis. Our debt-to-equity ratio is directly correlated to the make-up of our RMBS portfolio; specifically, the higher percentage of Agency RMBS we hold, the higher our debt-to-equity ratio is, and vice versa. We may alter the percentage allocation of our portfolio between Agency and non-Agency RMBS depending on the quality of the assets that are available to purchase from time to time, including at times when we are deploying proceeds from common stock offerings we conduct. The debt-to-equity ratio range has been driven by our relatively stable asset allocation between Agency and non-Agency RMBS, as disclosed above. See the

section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition -- Repurchase Agreements" for further discussion.
We compete with other investment vehicles for attractive investment opportunities. We rely on our management team and Pine River, who have developed strong relationships with a diverse group of financial intermediaries, to identify investment opportunities. In addition, we have benefited and expect to continue to benefit from Pine River's analytical and portfolio management expertise and infrastructure. We believe that our significant focus on the RMBS area, the extensive RMBS expertise of our investment team, our strong analytics and our disciplined relative value investment approach give us a competitive advantage versus our peers.
We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities, and we may form additional TRSs in the future. We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act.

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as "anticipate," "estimate," "will," "should," "expect," "target," "believe," "intend," "seek," "plan" and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in this Annual Report on Form 10-K under the caption "Risk Factors." Other risks, uncertainties, and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise. Important factors, among others, that may affect our actual results include:
• changes in interest rates and the market value of our target assets;

• changes in prepayment rates of mortgages underlying our target assets;

• the timing of credit losses within our portfolio;

• our exposure to adjustable-rate and negative amortization mortgage loans underlying our target assets;

• the state of the credit markets and other general economic conditions, particularly as they affect the price of earning assets and the credit status of borrowers;

• the concentration of the credit risks we are exposed to;

• legislative and regulatory actions affecting the mortgage and derivative industries or our business;

• the availability of target assets for purchase at attractive prices;

• the availability of financing for our portfolio, including the availability of repurchase agreement financing;

• declines in home prices;

• increases in payment delinquencies and defaults on the mortgages underlying our Non-Agency securities;

• changes in liquidity in the market for real estate securities, the re-pricing of credit risk in the capital markets, inaccurate ratings of securities by rating agencies, rating agency downgrades of securities, and increases in the supply of real estate securities available-for-sale;

• changes in the values of securities we own and the impact of adjustments reflecting those changes on our income statement and balance sheet, including our stockholders' equity;

• our ability to generate the amount of cash flow we expect from our investment portfolio;

• changes in our investment, financing, and hedging strategies and the new risks that those changes may expose us to;

• changes in the competitive landscape within our industry, including changes that may affect our ability to retain or attract personnel;

• our ability to build successful relationships with loan originators;

• our ability to acquire mortgage loans in connection with our securitization plans;

• our ability to securitize the mortgage loans that we acquire;

• our ability to acquire residential real properties at attractive prices and lease such properties on a profitable basis or to resell such properties at a gain;

• our ability to manage various operational risks associated with our business;

• our ability to maintain appropriate internal controls over financial reporting;

• our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio;

• our ability to maintain our REIT qualification for U.S. federal income tax purposes; and

• limitations imposed on our business due to our REIT status and our status as exempt from registration under the 1940 Act.

This Quarterly Report on Form 10-Q may contain statistics and other data that in some cases have been obtained or compiled from information made available by mortgage loan servicers and other third-party service providers.

Factors Affecting our Operating Results
Our net interest income includes income from our RMBS portfolio and will reflect the amortization of purchase premiums and accretion of purchase discounts. Net interest income will fluctuate primarily as a result of changes in market interest rates, our financing costs, and prepayment speeds on our assets. Interest rates, financing costs and prepayment rates 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. Our operating results will also be affected by default rates and credit losses with respect to the mortgage loans underlying our non-Agency RMBS.

Fair Value Measurement
ASC 820 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between willing market
participants at the measurement date. It also establishes three levels of input
to be used when measuring fair value:

Level 1        Inputs are quoted prices in active markets for identical assets or
               liabilities as of the measurement date under current market
               conditions. Additionally, the entity must have the ability to
               access the active market and the quoted prices cannot be adjusted
               by the entity.


Level 2        Inputs include quoted prices in active markets for similar assets
               or liabilities; quoted prices in inactive markets for identical or
               similar assets or liabilities; or inputs that are observable or
               can be corroborated by observable market data by correlation or
               other means for substantially the full-term of the assets or
               liabilities.


Level 3        Unobservable inputs are supported by little or no market activity.
               The unobservable inputs represent the assumptions that market
               participants would use to price the assets and liabilities,
               including risk. Generally, Level 3 assets and liabilities are
               valued using pricing models, discounted cash flow methodologies,
               or similar techniques that require significant judgment or
               estimation.

We follow the fair value hierarchy set forth above in order to prioritize the data utilized to measure fair value. We strive to obtain quoted market prices in active markets (Level 1 inputs). If Level 1 inputs are not available, we will attempt to obtain Level 2 inputs, observable market prices in inactive markets or derive the fair value measurement using observable market prices for similar assets or liabilities. When neither Level 1 nor Level 2 inputs are available, we use Level 3 inputs and independent pricing service models to estimate fair value measurements. At June 30, 2012, approximately 93.2% of total assets, or $12.1 billion, and approximately 0.8% of total liabilities, or $82.6 million, consisted of financial instruments recorded at fair value. As of June 30, 2012, we had no assets or liabilities reported at fair value using Level 3 inputs. See Note 10 - Fair Value to the Condensed Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.
A significant portion of our assets and liabilities are at fair value and, therefore, our condensed consolidated balance sheet and income statement are significantly affected by fluctuations in market prices. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility

caused by fluctuations in market prices. Starting in 2007, markets for asset-backed securities, including RMBS, have experienced severe dislocations. While these market disruptions continue, our assets and liabilities will be subject to valuation adjustment as well as changes in the inputs we use to measure fair value.
For the three and six months ended June 30, 2012, our unrealized fair value losses on interest rate swap and swaption agreements, which are accounted for as derivative trading instruments under GAAP, negatively affected our financial results. The change in fair value of the interest rate swaps was a result of changes to LIBOR, the swap curve, and corresponding counterparty borrowing rates during the three and six months ended June 30, 2012. Our financial results for the three months ended June 30, 2012 were positively affected by unrealized fair value gains on certain U.S. Treasuries classified as trading instruments due to their short-term investment objectives, while, for the six months ended June 30, 2012, our unrealized fair value losses on U.S. Treasuries classified as trading instruments negatively affected our financial results. For the three and six months ended June 30, 2011, our unrealized fair value losses on interest rate swap and swaption agreements, which are accounted for as derivative trading instruments under GAAP, negatively affected our financial results. The change in fair value of the interest rate swaps was a result of decreases in the swap curve during the three and six months ended June 30, 2011. Our financial results for the three and six months ended June 30, 2011 were positively affected by unrealized fair value gains on certain U.S. Treasuries classified as trading instruments. In addition, our financial results for the three and six months ended June 30, 2012 and 2011 were affected by the unrealized gains and losses of certain other derivative instruments that were accounted for as trading derivative instruments, i.e., credit default swaps, TBAs and inverse interest-only securities. Any temporary change in the fair value of our available-for-sale securities is recorded as a component of accumulated other comprehensive income and does not impact our earnings.
We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval. Our entire investment portfolio is priced by third-party brokers at the "bid side" of the market, and/or by independent pricing providers. We strive to obtain multiple market data points for each valuation. By utilizing "bid side" pricing, certain assets, especially the most recent purchases, may realize a markdown due to the "bid-offer" spread. To the extent that this occurs, any economic effect of this would be reflected in accumulated other comprehensive income. We back test the fair value measurements provided by the pricing providers against actual performance. We also monitor the market for recent trades, market surveys, or other market information that may be used to benchmark pricing provider inputs. Considerable judgment is used in forming conclusions and estimating inputs to our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayments speeds, credit losses and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets.

Market Conditions and Outlook
The first six months of 2012 continued to produce a number of regulatory actions in an effort to stabilize economic conditions and increase liquidity in the financial markets as well as other actions related to the fall-out from the financial and foreclosure crises. Regulatory actions that could impact the value of our RMBS, either positively or negatively, include attempts by the Obama Administration to streamline further the refinancing process to allow more borrowers to refinance into lower interest rate mortgage loans (see President Obama's address in early January); the announcement by the Federal Reserve of its intention to keep the Federal Funds Target Rate near zero through late-2014; the possibility of an REO-to-Rental program supported by the GSEs; an expansion of the HAMP refinancing program to include borrowers whose loans are not in GSE pools; and the Federal Reserve's Operation Twist. Additionally, the U.S. economy continues to be burdened by the European debt crisis, stagnating unemployment numbers and a struggling housing market, which, despite signs of an approaching recovery, remains weighted with backlogs of homes in the foreclosure process as servicers evaluate the impacts of the proposed settlement with State Attorneys General over improper foreclosure practices and the adoption by several states of various legislation aimed at curtailing or modifying the foreclosure process. Events such as these will continue to affect our portfolio.
We believe our blended Agency and non-Agency strategies and our investing expertise will allow us to better navigate the dynamic characteristics of the RMBS environment while GSE reform and any other future regulatory efforts take shape. Having a diversified portfolio allows us to mitigate risks, including the volatility and impacts generated by uncertainty in interest rates and changes in prepayments, home prices and homeowner default rates.
We expect that the majority of our assets will remain in whole-pool Agency RMBS in light of the long-term attractiveness of the asset class and in order to continue to satisfy the requirements of our exemption from registration under the 1940 Act. Interest-only Agency securities also provide a complementary investment and risk-management strategy to our principal and interest Agency RMBS investments. Risk-adjusted returns in our Agency RMBS portfolio may decline if we are required to pay higher purchase premiums due to lower interest rates or additional liquidity in the market.

The following table provides the carrying value of our RMBS portfolio by product type:

                                June 30,              December 31,
(dollars in thousands)            2012                    2011
Agency
Fixed Rate               $  8,490,634    79.2 %   $ 4,821,479    77.2 %
Hybrid ARMs                   221,568     2.1 %       231,678     3.7 %
Total Agency                8,712,202    81.3 %     5,053,157    80.9 %
Non-Agency
Senior                      1,591,438    14.8 %       932,867    14.9 %
Mezzanine                     416,439     3.9 %       262,633     4.2 %
Interest-only securities        4,070       - %           595       - %
Total Non-Agency            2,011,947    18.7 %     1,196,095    19.1 %
Total                    $ 10,724,149             $ 6,249,252

Prepayment speeds and volatility due to interest rates Our Agency RMBS portfolio is subject to inherent prepayment risk: generally, a decline in interest rates that leads to rising prepayment speeds will cause the market value of our interest-only securities to deteriorate, but will cause the market value of our fixed coupon Agency pools to increase. The inverse relationship occurs when interest rates increase and prepayments slow. We do not expect housing prices to fully stabilize in 2012 and this, combined with elevated unemployment rates and housing inventory increases, leads us to expect that there will not be a significant increase in prepayment speeds in 2012. However, given the low level of interest rates, the implementation of Operation Twist, and the announcement of HARP 2.0, the revamped Home Affordable Refinance Program, or other potential government programs, it is possible that prepayment speeds will increase on many RMBS, which could lead to less attractive reinvestment opportunities. Nonetheless, we believe our portfolio approach, including our security selection process, is well positioned to respond to a variety of market scenarios, including an overall faster prepayment environment. Although we are unable to predict the movement in interest rates for the remainder of 2012 and beyond, our blended Agency and non-Agency portfolio strategy is intended to generate attractive yields with a low level of sensitivity to yield curve, prepayments and interest rate cycles. Our portfolio includes Agency securities, which includes bonds with explicit prepayment protection, lower loan balances (securities collateralized by loans . . .