This Annual Report on Form 10-K contains or incorporates by reference certain forward-looking statements within the meaning of Section 27A of the 1933 Act and
Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. 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 assumptions, known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. 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 the section "Risk Factors," Item 1A of this Annual Report on Form 10-K.

Statements regarding the following subjects, among others, may be forward-looking: changes in interest rates and the market value of our mortgage-backed securities, or MBS; risks associated with investing in mortgage-related assets; changes in the yield curve; the availability of MBS for purchase; changes in the prepayment rates on the mortgage loans securing our MBS; our ability to borrow to finance our assets and, if available, the terms of any financing; implementation of or changes in government regulations or programs affecting our business; changes in business conditions and the general economy, including the consequences of actions by the U.S. government and other foreign governments to address the global financial crisis; our ability to maintain our qualification as a real estate investment trust, or REIT, for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; and our ability to manage our growth. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

The Company

We were incorporated in Maryland on October 20, 1997 and we commenced operations on March 17, 1998. We are in the business of investing primarily in United States, or U.S., agency mortgage-backed securities, or Agency MBS, which are securities representing obligations guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our principal business objective is to generate net income for distribution to our stockholders based upon the spread between the interest income on our mortgage assets and the costs of borrowing to finance our acquisition of those assets.

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, or the Code. As a REIT, we routinely distribute substantially all of the taxable income generated from our operations to our stockholders. As long as we retain our REIT status, we generally will not be subject to federal or state taxes on our income to the extent that we distribute our taxable net income to our stockholders. At December 31, 2012, our qualified REIT assets (real estate assets, as defined under the Code, cash and cash items and government securities) were greater than 99% 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 2012 revenue qualified for both the 75% source of income test and the 95% source of income test under the REIT rules. At December 31, 2012, we believe we met all REIT requirements regarding the ownership of our common stock and the distributions of our taxable net income. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.

Pursuant to a Management Agreement, or the Management Agreement, between us and Anworth Management, LLC, or the Manager, effective as of December 31, 2011, our day-to-day operations are conducted by the Manager. The Manager is supervised and directed by our board of directors and is responsible for (i) the selection, purchase and sale of our investment portfolio; (ii) our financing and hedging activities; and (iii) providing us with management services. The Manager will also perform such other services and activities relating to our assets and operations as may be appropriate. In exchange for these services, the Manager receives a management fee paid monthly in arrears in an amount equal to one-twelfth of 1.20% of our Equity (as defined in the Management Agreement). The initial term of the Management Agreement will expire on December 31, 2013 and will automatically renew for successive one-year terms unless either party elects not to renew. If we terminate the Management Agreement or elect not to renew without cause, then we will be required to pay a termination fee equal to three times the average annual management fee earned during the prior 24-month period.

On September 13, 2012, the Federal Reserve announced its intention to purchase additional Agency MBS at a pace of $40 billion per month. These purchases will be open-ended, meaning that they will continue until the Federal Reserve is satisfied that economic conditions, primarily in unemployment, improve. The Federal Reserve also announced its projection that the federal funds rate would likely remain at exceptionally low levels until at least mid-2015.

Although the U.S. government and other foreign governments have taken various actions (including placing Fannie Mae and Freddie Mac in conservatorship) intended to protect financial institutions, their respective economies and their respective housing and mortgage markets, 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 and, more specifically, the market for the securities we currently own in our portfolio. 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 condition. 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.

In August 2011, Standard & Poor's downgraded U.S. sovereign debt, Fannie Mae and Freddie Mac from AAA to AA+. We do not know what effect this will ultimately have on the U.S. economy, the value of our securities and the ability of Fannie Mae and Freddie Mac to satisfy its guarantees of Agency MBS. On January 2, 2013, the U.S. Congress passed the American Taxpayer Relief Act of 2012, or the Taxpayer Relief Act, which extended, for most Americans, tax cuts implemented during George H. Bush's administration. However, the Taxpayer Relief Act delayed the implementation of the budget sequestration provisions of the Budget Control Act of 2011, which provided for automatic federal spending cuts, from January 2, 2013 to March 1, 2013. Additionally, it is anticipated that the U.S. government may reach its debt ceiling sometime during 2013. At the end of January 2013, Congress temporarily increased the debt ceiling amount and deferred any further decision on how to resolve the debt ceiling impasse until May 19, 2013. A failure by the U.S. government to implement the sequestration, resolve the potential 2013 debt ceiling crisis, or reduce its budget deficit or a further downgrade of U.S. sovereign debt and government-sponsored agencies debt could have a material adverse effect on the U.S. economy and on the global economy. These events could have a material adverse effect on our borrowing costs, the availability of financing and the liquidity and valuation of securities in general and particularly the securities in our portfolio.

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. Essentially our entire portfolio is comprised of Agency MBS.



                                                             December 31,
                                                                 2012
                                                            (dollar amounts
                                                             in thousands)
     Total assets                                          $       9,285,105

     Fair value of Agency MBS                              $       9,244,333

     Adjustable-rate Agency MBS (less than 1 year reset)                  21 %
     Adjustable-rate Agency MBS (1-2 year reset)                           2 %
     Adjustable-rate Agency MBS (2-5 year reset)                          45 %
     Adjustable-rate Agency MBS (>5 year reset)                           10 %
     15-year fixed-rate Agency MBS                                        18 %
     30-year fixed-rate Agency MBS                                         4 %

                                                                         100 %

Stockholders' equity available to common stockholders at December 31, 2012 was approximately $1.014 billion, or $7.14 per share. The $1.014 billion equals total stockholders' equity of $1.062 billion less the Series A Preferred Stock liquidating value of $46.9 million and less the difference between the Series B Preferred Stock liquidating value of $26.7 million and the proceeds from its sale of $25.2 million.

Results of Operations

Years Ended December 31, 2012 and 2011

For the year ended December 31, 2012, our net income available to common stockholders was approximately $94.4 million, or $0.67 per diluted share, based on a weighted average of 142.5 million fully diluted shares outstanding. This includes net income of $100.2 million minus the payment of preferred dividends of $5.8 million. For the year ended December 31, 2011, our net income available to common stockholders was approximately $117 million, or $0.90 per diluted share, based on a weighted average of 132.8 million fully diluted shares outstanding. This included net income of $122.9 million minus the payment of preferred dividends of $5.9 million.

Net interest income for the year ended December 31, 2012 totaled $109.8 million, or 40.9% of gross income, compared to $134.9 million, or 47.7% of gross income, for the year ended December 31, 2011. Net interest income is comprised of the interest income earned on mortgage investments (net of premium amortization expense) less interest expense from borrowings. Interest income net of premium amortization expense for the year ended December 31, 2012 was $195.9 million, compared to $224.2 million for the year ended December 31, 2011, a decrease of 12.6%, due primarily to an increase in premium amortization expense of $14.2 million and a decrease in the weighted average coupons on Agency MBS (from 3.59% in 2011 to 3.10% in 2012), partially offset by an increase in the weighted average portfolio outstanding from approximately $7.9 billion in 2011 to approximately $8.7 billion in 2012. Interest expense for the year ended December 31, 2012 was $86.1 million, compared to $89.3 million for the year ended December 31, 2011, a decrease of 3.6%, which resulted from a decline in weighted average short-term interest rates, after giving effect to the swap agreements, from 1.24% in 2011 to 1.08% in 2012, partially offset by an increase in the average borrowings outstanding from $7.1 billion in 2011 to $7.88 billion in 2012.

Recoveries on Non-Agency MBS were approximately $1.4 million for the year ended December 31, 2012 compared to $2.2 million for the year ended December 31, 2011.

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, 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 value 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 year ended December 31, 2012, premium amortization expense increased $14.2 million, or 24.3%, from $58.6 million during the year ended December 31, 2011 to $72.8 million, due primarily to an increase in the amortization of unearned premium on securities acquired in 2012 and 2011 at higher premiums.

The table below shows the approximate constant prepayment rate of our Agency MBS and Non-Agency MBS:

                                                   Year Ended December 31, 2012                                          Year Ended December 31, 2011
                                    First            Second             Third           Fourth            First            Second             Third           Fourth
Portfolio                          Quarter           Quarter           Quarter          Quarter          Quarter           Quarter           Quarter          Quarter
Agency MBS and Non-Agency MBS            22 %              24 %              26 %             26 %             21 %              22 %              28 %             25 %

During the years ended December 31, 2012 and December 31, 2011, there was no gain or loss recognized in earnings due to hedge ineffectiveness. We have determined that our hedges are still considered "highly effective." There were no components of the derivative instruments' gain or loss excluded from the assessment of hedge effectiveness.

During the year ended December 31, 2012, we received proceeds of approximately $141 million on the sale of Agency MBS and recognized a gain on sales of approximately $4.4 million. During the year ended December 31, 2011, we did not sell any MBS.

Total expenses were approximately $15.4 million for the year ended December 31, 2012, compared to approximately $14.3 million for the year ended December 31, 2011. For the year ended December 31, 2012, we incurred management fees of approximately $11.6 million, which is based on a percentage of our equity (see Note 10 to the accompanying audited financial statements). For the year ended December 31, 2012, our average stockholders' equity (based on a simple average of the stockholders' equity at January 1 and December 31 of that year), excluding other comprehensive income, was approximately $957 million. In contrast, our average stockholders' equity for the year ended December 31, 2011 was approximately $889 million. This increase in average stockholders' equity of approximately $68 million had the effect of an increase in the management fee of approximately $816 thousand. Due to the externalization of our management function pursuant to the

Management Agreement, we no longer incur compensation costs; in contrast, we incurred compensation and related costs of approximately $10.98 million for the year ended December 31, 2011. "Other expenses" (as detailed in Note 14 to the accompanying audited financial statements) increased by $552 thousand.

Years Ended December 31, 2011 and 2010

For the year ended December 31, 2011, our net income available to common stockholders was approximately $117 million, or $0.90 per diluted share, based on a weighted average of 132.8 million fully diluted shares outstanding. This included net income of $122.9 million minus the payment of preferred dividends of $5.9 million. For the year ended December 31, 2010, our net income available to common stockholders was $104.7 million, or $0.87 per diluted share, based on a weighted average of 121.9 million fully diluted shares outstanding. This included net income of $110.5 million minus the payment of preferred dividends of $5.8 million.

Net interest income for the year ended December 31, 2011 totaled $134.9 million, or 47.7% of gross income, compared to $124.0 million, or 45.9% of gross income, for the year ended December 31, 2010. Net interest income is comprised of the interest income earned on mortgage investments (net of premium amortization expense) less interest expense from borrowings. Interest income net of premium amortization expense for the year ended December 31, 2011 was $224.2 million, compared to $219.8 million for the year ended December 31, 2010, an increase of 2%, due primarily to an increase in the weighted average portfolio outstanding of approximately $7.9 billion in 2011 from approximately $6.1 billion in 2010, partially offset by an increase in premium amortization expense of $8.2 million, and a decrease in the weighted average coupons on Agency MBS (from 4.42% in 2010 to 3.59% in 2011). Interest expense for the year ended December 31, 2011 was $89.3 million, compared to $95.8 million for the year ended December 31, 2010, a decrease of 6.9%, which resulted from a decline in weighted average short-term interest rates, after giving effect to the swap agreements, of 1.24% in 2011 vs. 1.76% in 2010, partially offset by an increase in the average borrowings outstanding of $7.1 billion in 2011 vs. $5.4 billion in 2010.

Recoveries on Non-Agency MBS were approximately $2.2 million for the year ended December 31, 2011 compared to $270 thousand for the year ended December 31, 2010.

During the year ended December 31, 2011, premium amortization expense increased $8.2 million, or 16.2%, from $50.4 million during the year ended December 31, 2010 to $58.6 million, due primarily to an increase in the amortization of unearned premium on securities acquired in 2011 and 2010 at higher premiums.

The table below shows the approximate constant prepayment rate of our Agency MBS and Non-Agency MBS:

                                                   Year Ended December 31, 2011                                          Year Ended December 31, 2010
                                    First            Second             Third           Fourth            First            Second             Third           Fourth
Portfolio                          Quarter           Quarter           Quarter          Quarter          Quarter           Quarter           Quarter          Quarter
Agency MBS and Non-Agency MBS            21 %              22 %              28 %             25 %             30 %              48 %              33 %             28 %

During the years ended December 31, 2011 and December 31, 2010, there was no gain or loss recognized in earnings due to hedge ineffectiveness. We have determined that our hedges are still considered "highly effective." There were no components of the derivative instruments' gain or loss excluded from the assessment of hedge effectiveness.

Total expenses were $14.3 million for the year ended December 31, 2011, compared to $13.75 million for the year ended December 31, 2010. The increase of $520 thousand in total expenses was due primarily to an increase in compensation costs of $909 thousand (due primarily to increased incentive compensation), an

increase in "Other expenses" (as detailed in Note 14 to the accompanying audited financial statements) of $285 thousand, partially offset by a decrease of $674 thousand in the amount written-off on the Lehman Brothers, Inc. receivable.

Financial Condition

Agency MBS Portfolio

At December 31, 2012, we held agency mortgage assets which had an amortized cost of approximately $9.02 billion, consisting primarily of approximately $7.07 billion of adjustable-rate Agency MBS and approximately $1.95 billion of fixed-rate Agency MBS. This amount represents an approximate 5.2% increase from the $8.57 billion held at December 31, 2011. Of the adjustable-rate Agency MBS owned by us, 26% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 74% consisted of hybrid adjustable-rate Agency MBS whose coupons will reset between one year and seven years. Hybrid adjustable-rate Agency MBS have an initial interest rate that is fixed for a certain period, usually three to seven 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 December 31, 2012 and December 31, 2011, classified by type of issuer (dollar amounts in thousands):

                               December 31, 2012                 December 31, 2011
                             Fair          Portfolio           Fair          Portfolio
    Agency                   Value         Percentage          Value         Percentage
    Fannie Mae (FNM)      $ 5,993,700             64.8 %    $ 6,008,951             68.6 %
    Freddie Mac (FHLMC)     3,235,166             35.0        2,735,842             31.2
    Ginnie Mae (GNMA)          15,467              0.2           17,101              0.2

    Total Agency MBS:     $ 9,244,333            100.0 %    $ 8,761,894            100.0 %

The following table classifies our portfolio of Agency MBS owned at December 31, 2012 and December 31, 2011 by type of interest rate index (dollar amounts in thousands):

                                               December 31, 2012                     December 31, 2011
                                            Fair            Portfolio             Fair            Portfolio
Agency                                      Value           Percentage            Value           Percentage
One-month LIBOR                          $     2,222                0.0 %      $     3,130                0.0 %
Six-month LIBOR                               63,100                0.7             73,345                0.8
One-year LIBOR                             6,882,732               74.5          6,699,300               76.5
Six-month certificate of deposit               1,100                0.0              1,177                0.0
Six-month constant maturity treasury             307                0.0                360                0.0
One-year constant maturity treasury          277,668                3.0            329,685                3.8
Cost of Funds Index                           20,798                0.2             24,968                0.3
15-year fixed-rate                         1,655,195               17.9          1,121,500               12.8
30-year fixed-rate                           341,211                3.7            508,429                5.8

Total Agency MBS:                        $ 9,244,333              100.0 %      $ 8,761,894              100.0 %

The fair values indicated do not include interest earned but not yet paid. With respect to our hybrid adjustable-rate Agency 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. For more detail on the fair value of our Agency MBS, see Note 6 to the accompanying audited financial statements.

The weighted average coupon and average amortized cost of our Agency MBS at December 31, 2012, September 30, 2012, June 30, 2012, March 31, 2012, and December 31, 2011 were as follows:

                                  December 31,          September 30,         June 30,          March 31,          December 31,
                                      2012                  2012                2012              2012                 2011
Weighted Average Coupon:
Adjustable-rate Agency MBS                 2.98 %                 3.14 %           3.23 %             3.22 %                3.27 %
Hybrid adjustable-rate
Agency MBS                                 2.82                   2.87             2.94               3.09                  3.22
15-year fixed-rate Agency
MBS                                        2.97                   3.16             3.35               3.65                  3.66
30-year fixed-rate Agency
MBS                                        5.56                   5.56             5.56               5.55                  5.55
CMOs                                       1.01                   1.03             1.05               1.05                  1.09

Total Agency MBS:                          2.98 %                 3.09 %           3.18 %             3.31 %                3.42 %

Average Amortized Cost:
Adjustable-rate and hybrid
adjustable-rate Agency MBS               103.08 %               102.99 %         102.89 %           102.86 %              102.83 %
15-year fixed-rate Agency
MBS                                      103.46                 103.11           103.04             103.36                103.29
30-year fixed-rate Agency
MBS                                      100.88                 100.86           100.84             100.83                100.82

Total Agency MBS:                        103.07 %               102.92 %         102.82 %           102.82 %              102.78 %
. . .