Non Agency RMBS & Associated Call Rights

We acquire and manage a diversified portfolio of credit sensitive real estate securities, including non-Agency RMBS, which we believe complement our Excess MSR investments.

Residential mortgage backed securities (“RMBS”) are securities created through the securitization of a pool of residential mortgage loans. As of the fourth quarter of 2014, approximately $7 trillion of the $10 trillion of residential mortgage loans outstanding was securitized.

Since the onset of the financial crisis in 2007, there has been significant volatility in the prices for non-Agency RMBS. This has resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have recovered from their lows, from time to time there may be opportunities to acquire non-Agency RMBS at attractive risk-adjusted yields, with the potential for upside if the U.S. economy and housing market continue to strengthen. Furthermore, we believe that in many non-Agency RMBS vehicles there is a discrepancy between the value of the non-Agency RMBS and the recovery value of the underlying collateral. We intend to pursue opportunities to structure transactions that would enable us to realize this difference, particularly through the exercise of call rights.

We hold call rights on non-Agency residential mortgage securitizations which become exercisable once the current collateral balance reduces below a certain threshold of the original balance. We believe a call right is profitable when aggregate loan value is greater than the sum of par on the loans minus any discount from acquired bonds, plus expenses related to such exercise. Profit with respect to our call rights is generated by selectively retaining loans that meet our return thresholds or re-securitizing or selling performing loans for a gain and, prior to exercise, purchasing certain underlying tranches at a discount to par. Upon exercise, we are able to realize any remaining accretion to par.