JAVELIN MORTGAGE INVESTMENT CORP. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

 The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report.    

References to "we," "us," "our," "JAVELIN" or the "Company" are to JAVELIN Mortgage Investment Corp. References to "ARRM" are to ARMOUR Residential Management LLC, a Delaware limited liability company.

   Overview    We are a Maryland corporation formed to invest in and manage a leveraged portfolio of mortgage backed securities and mortgage loans. Some of these securities are issued or guaranteed by a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), or guaranteed by the Government National Mortgage Administration (Ginnie Mae), (collectively, "Agency Securities"), and other securities backed by residential and/or commercial mortgages, for which the payment of principal and interest is not guaranteed by a GSE or government agency (collectively, "Non-Agency Securities" and, together with Agency Securities, ("MBS")), which we refer to as our target assets. We also may invest in collateralized commercial mortgage backed securities ("CMBS") and other mortgage related investments, including mortgage loans, mortgage related derivatives and mortgage servicing rights. From time to time, a portion of our assets may be invested in unsecured notes and bonds issued by GSEs (collectively, "Agency Debt"), United States ("U.S.") Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a real estate investment trust ("REIT"). Our charter permits us to invest in Agency Securities and Non-Agency Securities. As of June 30, 2013 investments in Agency Securities accounted for 92.5% of our MBS portfolio and 89.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions. As of June 30, 2013, investments in Non-Agency Securities accounted for 7.5% of our MBS portfolio and 11.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions (see Note 6 to the condensed financial statements).    We are externally managed by ARRM, pursuant to a management agreement (the "Management Agreement"). ARRM is an investment advisor registered with the Securities and Exchange Commission ("SEC"). ARRM is also the external manager of ARMOUR Residential REIT, Inc. ("ARMOUR"), a publicly traded REIT, which invests in and manages a leveraged portfolio of hybrid adjustable rate, adjustable rate and fixed rate Agency Securities. Our executive officers also serve as the executive officers of ARMOUR.    We seek attractive long-term investment returns by investing our equity capital and borrowed funds in our targeted asset class. We earn returns on the spread between the yield on our assets and our costs, including the cost of the funds we borrow, after giving effect to our hedges. We identify and acquire our target assets, finance our acquisitions with borrowings under a series of short-term repurchase agreements at the most competitive interest rates available to us and then cost-effectively hedge our interest rate and other risks based on our entire portfolio of assets, liabilities and derivatives and our management's view of the market. Successful implementation of this approach requires us to address interest rate risk, maintain adequate liquidity and effectively hedge interest rate risks. We believe that the residential mortgage market will undergo significant changes in the coming years as the role of GSEs, such as Fannie Mae and Freddie Mac, is diminished, which we expect will create attractive investment opportunities for us. We execute our business plan in a manner consistent with our intention of qualifying as a REIT under the Internal Revenue Code, (the "Code") and avoid regulation as an investment company under the Investment Company Act of 1940 (the "1940 Act").    We have elected to be taxed as a REIT under the Code. We will generally not be subject to federal income tax to the extent that we distribute our taxable income to our stockholders and as long as we satisfy the ongoing REIT requirements under the Code including meeting certain asset, income and stock ownership tests.   

Factors that Affect our Results of Operations and Financial Condition

    Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our target assets and the supply of, and demand for, such assets. We invest in financial assets and markets and recent events, such as those discussed below, may affect our business in ways that are difficult to predict. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. We invest across the spectrum of mortgage investments, from Agency Securities, for which the principal and interest payments are guaranteed by a GSE, to Non-Agency Securities, non-prime mortgage loans and unrated equity tranches of CMBS. As such, we expect our investments to be subject to risks arising from delinquencies and foreclosures, thereby exposing our investment portfolio to potential losses. We are exposed to changing credit spreads which could result in declines in the fair value of our investments. We believe ARRM's in-depth investment expertise across multiple sectors of the mortgage market, prudent asset selection and our hedging strategy enable us to minimize our credit losses, our market value losses and financing costs. Prepayment rates, as reflected by the rate of principal pay downs, and interest rates vary according to the type of investment, conditions in financial markets, government actions, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment rates on our target assets purchased at a premium increase, related purchase premium amortization will increase, thereby reducing the net yield on such assets. Because changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to manage interest rate risks and prepayment risks effectively while maintaining our status as a REIT. In addition, since we have not elected to use cash flow hedge accounting, earnings reported in accordance with generally accepted accounting principles in the U.S. ("GAAP") will fluctuate even in situations where our derivatives are operating as intended. As a result of this mark-to-market accounting treatment, our results of operations are likely to fluctuate far more than if we were to designate our derivative activities as cash flow hedges. Comparisons with companies that use cash flow hedge accounting for all or part of their derivative activities may not be meaningful.                                            28

--------------------------------------------------------------------------------     For any period during which changes in the interest rates earned on our target assets do not coincide with interest rate changes on our borrowings, such assets will tend to reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. Interest rate increases tend to decrease our net interest income and the market value of our target assets and therefore, our book value. Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our stockholders.    Prepayments on our target assets are influenced by changes in market interest rates and a variety of economic and geographic factors, policy decisions by regulators, as well as other factors beyond our control. Consequently, prepayment rates cannot be predicted with certainty. To the extent we hold assets acquired at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our target assets increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may decline. The recent climate of government intervention in the housing finance markets significantly increases the risk associated with prepayments.    While we use strategies to economically hedge some of our interest rate risk, we do not hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our MBS portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that allows us to seek attractive net spreads on our MBS portfolio.    

In addition, a variety of other factors relating to our business may also impact our financial condition and operating performance; these factors include,

     ? our degree of leverage;     ? our access to funding and borrowing capacity;     ? our use of derivatives to hedge interest rate risk;     ? the REIT requirements under the Code; and  

? the requirements to qualify for an exemption under the 1940 Act and other

    regulatory and accounting policies related to our business.     Our Manager    We are externally managed by ARRM, pursuant to the Management Agreement. All of our executive officers are also employees of ARRM (see Note 16 to the condensed financial statements). ARRM manages our day-to-day operations, subject to the direction and oversight of the Board of Directors ("Board"). The Management Agreement expires after an initial term of five years on October 5, 2017 and is thereafter automatically renewed for additional one-year terms unless terminated under certain circumstances. Either party must provide 180 days prior written notice of any such termination.    Pursuant to the Management Agreement, ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of (a) 1.5% of gross equity raised (including equity from our initial public offering and concurrent private placement) up to $1 billion, plus (b) 1.0% of gross equity raised in excess of $1 billion. We are also obligated to reimburse certain expenses incurred by ARRM and its affiliates. ARRM is further entitled to receive a termination fee from us under certain circumstances. ARRM is entitled to receive a monthly management fee regardless of the performance of our assets. Accordingly, the payment of our monthly management fee may not decline in the event of a decline in our earnings and may cause us to incur losses. For the quarter and six months ended June 30, 2013, we reimbursed ARRM $27,000 and $37,000, respectively, for other expenses incurred on our behalf. For the period from June 21, 2012 through June 30, 2012 we did not reimburse ARRM for any expenses.    Also, JAVELIN and ARRM entered into a sub-management agreement with Staton Bell Blank Check LLC ("SBBC"), an entity jointly owned by Daniel C. Staton and Marc H. Bell, each of whom is a member of our board of directors. Pursuant to the sub-management agreement, ARRM is responsible for paying a sub-management fee to the Sub-Manager in an amount equal to a monthly retainer of $115,000 and a sub-management fee of 25% of the net management fee earned by ARRM under the Management Agreement. The sub-management agreement continues in effect until it is terminated in accordance with its terms. SBBC is also the sub-manager of ARMOUR.                                            29

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Market and Interest Rate Trends and the Effect on our MBS Portfolio

Developments at Fannie Mae and Freddie Mac

    Payments of principal and interest on the Agency Securities in which we invest are guaranteed by Fannie Mae and Freddie Mac. Because of the guarantee and the underwriting standards associated with mortgages underlying Agency Securities, Agency Securities historically have had high stability in value and been considered to present low credit risk.    In February 2011, the U.S. Treasury along with the U.S. Department of Housing and Urban Development released a report entitled, "Reforming America's Housing Finance Market" to the U.S. Congress outlining recommendations for reforming the U.S. housing system, specifically Fannie Mae and Freddie Mac and transforming the U.S. Government's involvement in the housing market. It is unclear how future legislation may impact the housing finance market and the investing environment for Agency Securities as the method of reform is undecided and has not yet been defined by the regulators. Without U.S. Government support for residential mortgages, we may not be able to execute our current business model in an efficient manner.    In March 2011, the U.S. Treasury announced that it would begin the orderly wind down of Agency Securities it had purchased from Fannie Mae, Freddie Mac and Ginnie Mae to stabilize the housing market, with sales up to $10.0 billion per month, subject to market conditions.  We are unable to predict the timing or manner in which the U.S. Treasury or the U.S. Federal Reserve ("the Fed") will liquidate their holdings or make further interventions in the Agency Securities markets, or what impact, if any, such action could have on the Agency Securities market, the Agency Securities we hold, our business, results of operations and financial condition.    On June 25, 2013, a bipartisan group of U.S. senators introduced a draft bill titled, "Housing Finance Reform and Taxpayer Protection Act of 2013" to the U.S. Senate, which would wind down Fannie Mae and Freddie Mac over a period of five years and replace the public securitization market used by the GSEs with a public-private alternative market. On July 11, 2013, members of the U.S. House Committee on Financial Services introduced a similar draft bill titled, "Protecting American Taxpayers and Homeowners Act" to the U.S. House of Representatives. While distinguishable in some respects from the Senate version, the House bill would also eliminate Fannie Mae and Freddie Mac and seek to increase the opportunities for private capital to participate in, and consequently bear the risk of loss in connection with, government-guaranteed MBS.    The passage of any new legislation affecting Fannie Mae and Freddie Mac may create market uncertainty and reduce the actual or perceived credit quality of securities issued or guaranteed by the U.S. government through a new or existing successor entity to Fannie Mae and Freddie Mac. If Fannie Mae and Freddie Mac were reformed or wound down, it is unclear what effect, if any, this would have on the value of the existing Fannie Mae and Freddie Mac Agency Securities. It is also possible that the above-referenced proposed legislation, if made law, could adversely impact the market for securities issued or guaranteed by the U.S. government and the spreads at which they trade. The foregoing could materially adversely affect the pricing, supply, liquidity and value of the Agency Securities in which we invest and otherwise materially adversely affect our business, operations and financial condition.    

See the risk factor under Part II, Item 1A - Risk Factors in this Quarterly Report on Form 10-Q for additional information regarding these bills.

    We cannot predict whether or when new actions may occur, the timing and pace of current actions already implemented, or what impact if any, such actions, or future actions, could have on our business, results of operations and financial condition.   

U.S. Government Mortgage Related Securities Market Intervention

     In September 2012, the Fed announced a third "quantitative easing" program, popularly referred to as "QE3," to purchase an additional $40 billion of Agency Securities per month until the unemployment rate and other economic indicators improve. QE3 plus its existing investment programs are expected to grow the Fed's Agency Securities holding by approximately $85 billion per month at least through the end of 2012. On December 12, 2012, the Fed also announced that it will keep the target range for the Federal Funds Rate between zero and 0.25% for at least as long as the unemployment rate remains above 6.5%, inflation between one and two years ahead is projected to be no more than 0.5% above the Fed's 2% longer-run goal, and longer-term inflation expectations continue to be well anchored. On May 22, 2013, Chairman Bernanke, responding to a question, stated "If we see continued improvement and we have confidence that that's going to be sustained then we could in the next few meetings take a step down in our pace of purchases." At the June 18-19, 2013 Federal Open Market Committee ("FOMC") meeting, all but a few of the Committee members agreed to continue purchases of Agency securities at their current pace.                                            30 --------------------------------------------------------------------------------     On June 19, 2013, at the FOMC Press Conference, Chairman Bernanke, responding to a journalist's question referring to a hypothetically optimistic economy, stated "In that case, we would expect probably to slow or moderate purchases some time later this year, and then through the middle of-through the early part of next year, and ending, in that scenario, somewhere in the middle of the year."    The markets have become particularly sensitive to statements by and about the Fed and its officials. For example, during the period from May 21, 2013 to June 28, 2013 the 10-Year Treasury Rate rose 56 basis points from 1.93% to 2.49% (with a high of 2.61% on June 25, 2013) while the Primary Mortgage Rate rose 74 basis points from 3.65% to 4.39% (with a high of 4.58% on June 25, 2013). On July 5, 2013, the release of regularly scheduled monthly unemployment data by the Bureau of Labor Statistics caused the 10-Year Treasury Rate to temporarily spike to 2.74% over concerns about possible reactions from the Fed.    The Fed continues to maintain its position that the timing and scope of tapering its securities purchases is dependent upon improving economic indicators. More recently, in a press conference on July 12, 2013, Chairman Bernanke stated that "highly accommodative monetary policy for the foreseeable future is what's needed in the U.S. economy." Despite this statement, the markets appear to have priced in the expectation that tapering will occur in the near term as reflected in higher Treasury rates and lower Agency Securities values. Lower prices of Agency Securities reduces our book value and the amounts that we can borrow under repurchase agreements.    

Financial Regulatory Reform Bill and Other Government Activity

    We believe that we conduct our business in a manner that allows us to avoid being regulated as an investment company pursuant to the exclusion provided by Section 3(c)(5)(C) of the 1940 Act for entities that are primarily engaged in the business of purchasing or otherwise acquiring "mortgages and other liens on and interests in real estate." On August 31, 2011, the SEC issued a concept release (No. IC-29778; File No. SW7-34-11, Companies Engaged in the Business of Acquiring Mortgages and Mortgage Related Instruments) pursuant to which it is reviewing whether certain companies that invest in MBS and rely on the exclusion from registration under Section 3(c)(5)(C) of the 1940 Act (such as us) should continue to be allowed to rely on such exclusion from registration. If we fail to continue to qualify for this exclusion from registration as an investment company, or the SEC determines that companies that invest in MBS are no longer able to rely on this exclusion, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as planned, or we may be required to register as an investment company under the 1940 Act, either of which could negatively affect the value of shares of our stock and our ability to make distributions to our stockholders.    Certain programs initiated by the U.S. Government, through the Federal Housing Administration and the Federal Deposit Insurance Corporation ("FDIC"), to provide homeowners with assistance in avoiding residential mortgage loan foreclosures are currently in effect. 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. While the effect of these programs has not been as extensive as originally expected, the effect of such programs for holders of Agency Securities could be that such holders would experience changes in the anticipated yields of their Agency Securities due to (i) increased prepayment rates and/or (ii) lower interest and principal payments.    In March 2009, the Home Affordable Modification Program ("HAMP") was introduced to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. HAMP is designed to help at risk homeowners, both those who are in default and those who are at imminent risk of default, by providing the borrower with affordable and sustainable monthly payments.    On July 21, 2010, President Obama signed the Dodd-Frank Act into law. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts practically all aspects of banking, and a significant overhaul of many aspects of the regulation of the financial services industry. Although many provisions remain subject to further rulemaking, the Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including our company, and other banks and institutions which are important to our business model. Certain notable rules are, among other things:    

? Requiring regulation and oversight of large, systemically important financial

institutions by establishing an interagency council on systemic risk and

implementation of heightened prudential standards and regulation by the Board

of Governors of the Fed for systemically important financial institutions

(including nonbank financial companies), as well as the implementation of the

FDIC resolution procedures for liquidation of large financial companies to

avoid market disruption;

? Applying the same leverage and risk-based capital requirements that apply to

insured depository institutions to most bank holding companies, savings and

loan holding companies and systemically important nonbank financial companies;

? Limiting the Fed's emergency authority to lend to nondepository institutions

to facilities with broad-based eligibility, and authorizing the FDIC to

establish an emergency financial stabilization fund for solvent depository

institutions and their holding companies, subject to the approval of Congress,

    the Secretary of the U.S. Treasury and the Fed;     ? Creating regimes for regulation of over-the-counter derivatives and     non-admitted property and casualty insurers and reinsurers;  

? Implementing regulation of hedge fund and private equity advisers by requiring

such advisers to register with the SEC;

? Providing for the implementation of corporate governance provisions for all

public companies concerning proxy access and executive compensation; and

    ? Reforming regulation of credit rating agencies.                                             31

--------------------------------------------------------------------------------     Many of the provisions of the Dodd-Frank Act, including certain provisions described above are subject to further study, rulemaking, and the discretion of regulatory bodies. As the hundreds of regulations called for by the Dodd-Frank Act are promulgated, we will continue to evaluate the impact of any such regulations. It is unclear how this legislation may impact the borrowing environment, investing environment for Agency Securities and interest rate swap contracts as much of the bill's implementation has not yet been defined by the regulators.    In addition, in 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its "calibrated" capital standards for major banking institutions ("Basel III"). Under these standards, when fully phased in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a "capital conservation buffer." Beginning with the Tier 1 common equity and Tier 1 capital ratio requirements, Basel III will be phased in incrementally between January 1, 2013 and January 1, 2019. The final package of Basel III reforms were approved by the Group of Twenty Finance Ministers and Central Bank Governors in November 2010 and are subject to individual adoption by member nations, including the U.S.    In October 2011, the Federal Housing Finance Agency announced changes to the Home Affordable Refinance Program ("HARP") to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the HARP loan to value ratio above 125%. However, this would only apply to mortgages guaranteed by the GSEs. There are many challenging issues to this proposal, notably the question as to whether a loan with a loan to value ratio of 125% qualifies as a mortgage or an unsecured consumer loan. The chances of this initiative's success have created additional uncertainty in the Agency Securities market, particularly with respect to possible increases in prepayment rates.    On January 4, 2012, the Fed issued a white paper outlining additional ideas with regard to refinancings and loan modifications. It is likely that loan modifications would result in increased prepayments on some Agency Securities. These loan modification programs, as well as future legislative or regulatory actions, including amendments to the bankruptcy laws, that result in the modification of outstanding mortgage loans may adversely affect the value of, and the returns on, the Agency Securities in which we invest.    

In an effort to continue to provide meaningful solutions to the housing crisis, effective June 1, 2012, the Obama administration expanded the population of homeowners that may be eligible for HAMP.

    On September 28, 2012, the United Kingdom Financial Services Authority ("FSA") released the results of its review of the process for setting the London Interbank Offered Rate ("LIBOR") interest rate for various currencies and maturities ("Wheatley Review"). Some of our derivative positions use various maturities of U.S. dollar LIBOR. Our borrowings in the repurchase market have also historically tracked these LIBOR rates. The Wheatley Review found, among other things, that potential conflicts of interests coupled with insufficient oversight and accountability resulted in some reported LIBOR rates that did not reflect the true cost of inter-bank borrowings they were meant to represent.    

The Wheatley Review also proposes a number of remedial actions, including:

     ? New statutory authority for the FSA to supervise and regulate the LIBOR     setting process;  

? Establishing a new independent oversight body to administer the LIBOR setting

process;

? Eliminating LIBOR rates for certain currencies and maturities where markets

are not sufficiently deep and liquid;

? Ceasing immediate reporting of rates submitted by individual participating

    banks; and     ? Establishing controls to ensure that submitted rates represent actual     transactions.     There can be no assurance whether or when the Wheatley Review recommendations will be implemented in whole or in part. Our derivative and repurchase borrowings are conducted in U.S. dollars for maturities with historically deep and liquid markets. However, there can be no assurance whether the implementation of any Wheatley Review recommendations would have a material impact on the future reported levels of LIBOR rates relevant to our derivative or repurchase borrowings.                                            32

--------------------------------------------------------------------------------     On July 2, 2013, the Fed, in coordination with the FDIC and the Office of the Comptroller of the Currency (the "OCC"), approved a final rule that enhances bank regulatory capital requirements and implements certain elements of the Basel III capital reforms in the U.S. On July 9, 2013, the OCC approved the final rule and the FDIC approved the final rule as an interim rule. The final rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5 percent and a common equity Tier 1 capital conservation buffer of 2.5 percent of risk-weighted assets that will apply to all supervised U.S. financial institutions. The final rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4 percent to 6 percent and includes a minimum leverage ratio of 4 percent for all U.S. banking organizations. The final rule will continue to apply existing risk-based capital standards with respect to residential loans, including a 50 percent risk weight for safely underwritten first-lien mortgages that are not past due. "Advanced approaches banking organizations," those with $250 billion or more in total consolidated assets or $10 billion or more in foreign exposures, will be required to comply with the final rule starting on January 1, 2014. Other banking organizations will be required to comply with the final rule starting January 1, 2015.    Also, on July 9, 2013, the Fed, the FDIC, and the OCC proposed a rule to change the leverage ratio standards for the largest U.S. banking organizations. Under the proposed rule, bank-holding companies with more than $700 billion in consolidated total assets or $10 trillion in assets under custody would be required to maintain a Tier 1 capital leverage buffer of at least 5 percent, which is 2 percent above the minimum supplementary leverage ratio requirement of 3 percent adopted by these three agencies in their Basel III capital reform rules on July 2, 2013. In addition to the leverage buffer, the proposed rule would require insured depository institutions of such large bank-holding companies to meet a 6 percent supplementary leverage ratio to be considered "well capitalized." The proposed rule would apply starting January 1, 2018. It is presently unclear how or whether the adoption of the above-mentioned reforms will affect our business, but it is expected that banking organizations will be better able to withstand periods of financial stress, thus contributing to the overall health of the U.S. economy.    

Credit Market Disruption and Current Conditions

    During the past few years, the residential housing and mortgage markets in the U.S. have experienced a variety of difficulties and changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the value of the MBS we purchase and an increase in the average collateral requirements under our repurchase agreements we have obtained. While these markets have recovered significantly, further increased volatility and deterioration in the broader residential mortgage and residential mortgage backed securities ("RMBS") markets may adversely affect the performance and market value of the Agency Securities and other high quality RMBS.    

Short-term Interest Rates and Funding Costs

    In December 2008, the Fed stated that it was adopting a policy of "quantitative easing" and would target keeping the Federal Funds Rate between 0.00% and 0.25%. To date, the Fed has maintained that target range. Our funding costs, which traditionally have tracked the 30-day LIBOR have generally benefited by this easing of monetary policy, although to a somewhat lesser extent. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility, which will likely affect our financial results since our cost of funds is largely dependent on short-term rates.    Historically, 30-day LIBOR has closely tracked movements in the Federal Funds Rate and the Effective Federal Funds Rate. The Effective Federal Funds Rate can differ from the Federal Funds Rate in that the Effective index represents the volume weighted average of interest rates at which depository institutions lend balances at the Fed to other depository institutions overnight (actual transactions, rather than target rate).     Our borrowings in the repurchase market have also historically closely tracked the Federal Funds Rate and LIBOR. Traditionally, a lower Federal Funds rate has indicated a time of increased net interest margin and higher asset values.  However, for the past several years, LIBOR and repurchase market rates have varied greatly, and often have been significantly higher than the target Federal Funds Rate. The difference between 30-day LIBOR and the Federal Funds rate has also been quite volatile, with the spread alternately returning to more normal levels and then widening out again. The continued volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our MBS portfolio. If this were to occur, our net interest margin and the value of our MBS portfolio might suffer as a result.    

The following table shows 30-day LIBOR as compared to the Effective Federal Funds Rate at June 30, 2013 and June 30, 2012.

                                Effective                 30-Day        Federal                  LIBOR      Funds Rate June 30, 2013      0.19 %          0.07 % June 30, 2012      0.25 %          0.09 %                                             33

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    Results of Operations    As a result of our continued equity raising efforts, our earnings as reported in our condensed financial statements, particularly on a per share basis, may take time to reach a level in which we consider to be indicative of a full run-rate. Some period over period comparisons in the discussion below may not be meaningful.    Net Income Summary    Our primary source of income is the interest income we earn on our MBS portfolio. As of June 30, 2013 and December 31, 2012, our Agency Securities were carried at a net premium to par value with a weighted average amortized cost, of 105.56% and 105.83%, respectively, because the average interest rates on these securities are higher than prevailing market rates. As of June 30, 2013 and December 31, 2012, our Non-Agency Securities were carried at a net discount to par value with a weighted average amortized cost of 86.56% and 80.94%, respectively, because the average interest rates on these securities are lower than prevailing market rates.    The following table presents the components of the yield earned on our MBS portfolio and Linked Transactions for the quarter ended June 30, 2013. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history. See Note 7 to the condensed financial statements for additional discussion of Linked Transactions.                                                                                                     Interest                                                                                                 Expense on                                                             Cost of        Net Interest         Repurchase                  MBS                     Asset Yield         Funds            Margin            Agreements Agency Securities                                2.76 %          1.10 %             1.65 %               0.42 % Non-Agency Securities (including Linked Transactions)                             4.50            2.46               2.04                 2.06 Total portfolio                                  2.95 %          1.20 %             1.75 %               0.53 %     The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. Our rate of portfolio repayment for the quarter ended June 30, 2013 was 4.8% on a constant prepayment basis. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history. Interest rates on Non-Agency Securities repurchase agreements are generally higher than those for Agency Securities repurchase agreements reflecting the relatively higher perceived risk.    The Federal Funds Rate was 0.07% and LIBOR was 0.19% at June 30, 2013. We increased our total interest rate swap contracts aggregate notional balance from $325.0 million at December 31, 2012 to $801.3 million at June 30, 2013. Our interest rate swap contracts had a weighted average swap rate of 1.7% and a weighted average term of 109 months at June 30, 2013. As of June 30, 2013, our total interest rate swaptions aggregate notional balance did not change from $130.0 million at December 31, 2012. Our swaptions had an underlying weighted average swap rate of 1.8% and a weighted average term of 3 months at June 30, 2013.    Net Interest Income    Our net interest income for the quarter and six months ended June 30, 2013 was $11.2 million and $20.2 million, respectively. We did not have any interest income for the period from June 21, 2012 through June 30, 2012. As of June 30, 2013, our MBS portfolio consisted of $1.8 billion current face amount of Agency Securities and $149.0 million current face amount of Non-Agency Securities.    

Gains and Losses on Sale of MBS

During the quarter and six months ended June 30, 2013, and for the period from June 21, 2012 through June 30, 2012, we did not sell any MBS.

Gains and Losses on U.S. Treasury Securities

    During the quarter and six months ended June 30, 2013, we sold short $302.9 million of U.S. Treasury Securities. We purchased $70.1 million resulting in a realized loss of $0.4 million. The outstanding balance resulted in a net unrealized loss of $2.7 million. For the period from June 21, 2012 through June 30, 2012, we did not purchase or sell any U.S. Treasury Securities.                                            34 --------------------------------------------------------------------------------

    Expenses    Our total expenses for the quarter and six months ended June 30, 2013, were $1.2 million and $2.2 million, respectively. We did not have any expenses for the period from June 21, 2012 through June 30, 2012.    Taxable Income    We have elected to be taxed as a REIT under the Code. We will generally not be subject to federal income tax to the extent that we distribute our taxable income to our stockholders and as long as we satisfy the ongoing REIT requirements under the Code including meeting certain asset, income and stock ownership tests.    The following table reconciles our GAAP net income to estimated REIT taxable income for the quarter and six months ended June 30, 2013. We did not have any income for the period from June 21, 2012 through June 30, 2012.                                                              For the           For the Six                                                           Quarter             Months                                                            Ended               Ended                                                           June 30,           June 30,                                                             2013               2013                                                                  (in thousands)  GAAP Net income                                        $       38,237$        49,213 Book to tax differences: Net book/tax differences on Non-Agency Securities and Linked Transactions                                                    8,359       

6,634

 Unrealized gain on derivatives                                (43,181 )           (46,626 ) Unrealized loss on U.S. Treasury Securities                     2,716       

2,716

 Realized capital loss on sale of U.S. Treasury Securities                                                        390                 390 Income tax expense                                                  -                   2 Estimated taxable income                               $        6,521$        12,329

The aggregate tax basis of our assets and liabilities is greater than our total Stockholders' Equity at June 30, 2013 by approximately $60.4 million, or approximately $4.47 per share (based on the 13,500,050 shares then outstanding).

    We are required and intend to timely distribute substantially all of our REIT taxable income in order to maintain our REIT status under the Code. For the quarter ended June 30, 2013, we paid dividends of $0.23 per outstanding share of common stock for each month of the first and second quarter, resulting in total payments to stockholders of $7.9 million and $13.1 million for the quarter and six months ended June 30, 2013. Our estimated REIT taxable income available to pay dividends was $6.5 million and $12.3 million for the quarter and six months ended June 30, 2013. For tax purposes, capital losses do not affect the amount of our ordinary taxable income. Our REIT dividend requirements are based on the amount of our ordinary taxable income. These capital losses will generally be available to offset capital gains realized in the years 2013 through 2018. See Note 18 to the condensed financial statements for additional discussion.    As of June 30, 2013, undistributed retained earnings totaled $38.7 million or approximately $2.87 per share and under distributed estimated REIT taxable income was $1.2 million, or approximately $0.09 per share (per share amounts are based on the 13,500,050 shares then outstanding).    Our management is responsible for determining whether tax positions taken by us are more likely than not to be sustained on their merits. We have no material unrecognized tax benefits or material uncertain tax positions.    Financial Condition    Agency Securities    We typically purchase Agency Securities at premium prices. The premium price paid over par value on those assets is expensed as the underlying mortgages experience repayment or prepayment. The lower the constant prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset and earnings, are higher. If prepayment rates increase, the amount of amortization expense for a particular period will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.                                            35

--------------------------------------------------------------------------------     The tables below summarize certain characteristics of our Agency Securities as of June 30, 2013 and December 31, 2012 (dollars in thousands). All of our Agency Securities were fixed rate securities as of June 30, 2013 and December 31, 2012.    Agency Securities:                                                                                               Amortized                        Fair Value                                                                                               Cost                           divided          Weighted                                Principal        Net Unamortized                            divided by                           by            Average            As of                 Amount             Premium          

Amortized Cost       Principal       Fair Value       Principal          Coupon June 30, 2013                 $  1,828,296     $         101,577     $      1,929,873           105.56 %   $ 1,831,970           100.20 %           3.30 % December 31, 2012             $  1,055,456     $          61,504     $      1,116,960           105.83 %   $ 1,112,358           105.39 %           3.14 %    

Fixed Rate Agency Securities:

                                                                                Weighted                                                                              Average        Percentage of                                        Principal          Weighted          Months to        Total Agency                As of                    Amount         Average Coupon        Maturity         Securities June 30, 2013                         $ 1,828,296                 3.30 %            345              100.0 % December 31, 2012                     $ 1,055,456                 3.14 %            342              100.0 %    

                       Average                    Quarterly                    Principal Quarter ended    Repayment Rate June 30, 2013                4.8 %     As of June 30, 2013, our MBS portfolio consisted of approximately $1.8 billion in market value of Agency Securities with fixed-interest rate periods of fifteen, twenty, twenty-five and thirty years. As of June 30, 2013, investments in Agency Securities accounted for 92.5% of our MBS portfolio and 89.0% of our total MBS portfolio inclusive of the Non-Agency Securities underlying our Linked Transactions (see Note 7 to the condensed financial statements for additional discussion of Non-Agency Securities that are accounted for as a component of Linked Transactions).    Our net income is primarily a function of the difference between the yield on our assets and the financing cost of owning those assets. Since we tend to purchase Agency Securities at a premium to par, the main item that can affect the yield on our Agency Securities after they are purchased is the rate at which the mortgage borrowers repay the loan. While the scheduled repayments, which are the principal portion of the homeowners' regular monthly payments, are fairly predictable, the unscheduled repayments, which are generally refinancing of the mortgage but can also result from repurchases of delinquent, defaulted, or modified loans, are less so. Being able to accurately estimate and manage these repayment rates is a critical portion of the management of our MBS portfolio, not only for estimating current yield but also for considering the rate of reinvestment of those proceeds into new securities, the yields which those new securities may add to our MBS portfolio and our hedging strategy. We expect that prepayment rates will be elevated due to repurchases of loans that reach 120 day or more delinquency by Fannie Mae and Freddie Mac on a continuing basis.     We evaluated our Agency Securities with unrealized losses and determined that there was no other than temporary impairments as of June 30, 2013 or December 31, 2012. As of those dates, we did not intend to sell Agency Securities and believed it was more likely than not that we could meet our liquidity requirements and contractual obligations without selling Agency Securities. The decline in value of these Agency Securities is solely due to market conditions and not the credit quality of the assets. All of our Agency Securities are issued by the GSEs. The GSEs have a rating of AA+.    

    We purchase Non-Agency Securities at prices which incorporate our expectations for prepayment speeds, defaults, delinquencies and severities. These expectations determine the yields we receive on our assets. If actual prepayment speeds, defaults, delinquencies and severities are different from our expectations; our actual yields could be higher or lower.                                            36 --------------------------------------------------------------------------------

                                                                                                                  Fair                                                                               Amortized                        Value                                                  Net                             Cost                         divided        Weighted                              Principal       Unamortized      Amortized       divided by        Fair            by           Average As of                          Amount         Discount           Cost         Principal         Value        Principal        Coupon June 30, 2013                $  262,614$     (35,290 )$  227,324            86.56 %   $ 226,734           86.34 %         4.41 % December 31, 2012            $  156,957$     (29,920 )$  127,037            80.94 %   $ 129,946           82.79 %         5.29 %     As of June 30, 2013, our overall investment in Non-Agency Securities (including those underlying Linked Transactions) represents 11.0% of our total investment in MBS.    Liabilities    We have entered into repurchase agreements to finance most of our MBS. Our repurchase agreements are secured by our MBS and bear interest at rates that have historically moved in close relationship to the Federal Funds Rate and LIBOR. We have established borrowing relationships with several investment banking firms and other lenders, 22 of which we had done repurchase trades with as of June 30, 2013 and 18 of which we had done repurchase trades with as of December 31, 2012. We had outstanding balances under our repurchase agreements, net as of June 30, 2013 of $1.7 billion (net of reverse repurchase agreements of $237.0 million). Our outstanding repurchase agreements balance at December 31, 2012 was $1.1 billion. We had obligations to return securities received as collateral associated with our reverse repurchase agreements as of June 30, 2013 of $234.5 million. We did not have such obligations as of December 31, 2012.    Derivative Instruments    We generally hedge our interest rate risk as ARRM deems prudent in light of market conditions and the associated costs. We generally pay a fixed rate and receive a floating rate with the objective of fixing a portion of our borrowing costs and hedging the change in our book value to some degree. The floating rate we receive is generally the Federal Funds Rate or LIBOR. While our policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge, we maintain an overall target of hedging at least 40% of our non-adjustable rate mortgages. For interest rate risk mitigation purposes, we consider Agency Securities to be adjustable rate mortgages ("ARMs") if their interest rate is either currently subject to adjustment according to prevailing rates or if they are within 18 months of the period where such adjustments will occur. No assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition. We have not elected cash flow hedge accounting treatment as allowed by GAAP. Since we do not designate our derivative activities as cash flow hedges, realized as well as unrealized gains/losses from these transactions will impact our earnings.   

    for which protection is sought (e.g., the difference in interest rate     movements for long term U.S. Treasury Securities compared to Agency     Securities);  

     As of June 30, 2013 and December 31, 2012, we had interest rate swap contracts with an aggregate notional balance of $801.3 million and $325.0 million, respectively. As of June 30, 2013, our total interest rate swaptions aggregate notional balance did not change from the aggregate notional balance of $130.0 million at December 31, 2012. These derivative transactions are designed to lock in some funding costs for financing activities associated with our assets in such a way as to help assure the realization of attractive net interest margins and to vary inversely in value with our Agency Securities. Such contracts are based on assumptions about prepayments which, if not realized, will cause results to differ from expectations.                                            37 --------------------------------------------------------------------------------     Although we attempt to structure our derivatives to offset the changes in asset prices, they are not perfectly correlated and depend on the corresponding durations and sections of the yield curve that moves to offset each other. For the quarter and six months ended June 30, 2013, we recognized net gains of $41.2 million and $43.7 million, respectively, related to our derivatives. The net unrealized loss on Agency Securities for the quarter and six months ended June 30, 2013 was $77.5 million and $93.3 million, respectively. There is no comparable data for the period from June 21, 2012 through June 30, 2012 due to our limited operating history.    As required by the Dodd-Frank Act, the Commodity Futures Trading Commission has adopted rules requiring certain interest rate swap contracts to be cleared through a derivatives clearing organization. We are required to clear certain new interest rate swap contracts as of June 2013. There can be no assurances as to what effects, if any, these interest rate swap clearing requirements will have on the availability, pricing, liquidity or margin requirements associated with cleared or un-cleared interest rate swap contracts that we might enter into in the future.   

    Our primary sources of funds are borrowings under repurchase arrangements, monthly principal and interest payments on our investments and cash generated from our operating results. Other sources of funds may include proceeds from equity and debt offerings and asset sales. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of our borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our balance sheet is significantly less important than our potential liquidity available under our borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available to support our investments, repayments on borrowings and the payment of cash dividends as required for qualification as a REIT.    In addition to the repurchase agreement financing discussed above, we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities back in the future. We then sell such U.S. Treasury Securities to third parties and recognize a liability to return the securities to the original borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement ("MRA"), settlement through the same brokerage or clearing account and maturing on the same day. The practical effect of these transactions is to replace a portion of our repurchase agreement financing of our MBS portfolio with short positions in U.S. Treasury Securities. We believe that this helps to reduce interest rate risk, and therefore counterparty credit and liquidity risk.   

    We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on repurchase borrowings, reacquisition of securities to be returned to borrowers and the payment of cash dividends as required for continued qualification as a REIT.    Our primary uses of cash are to purchase MBS, pay interest and principal on our borrowings, fund our operations and pay dividends. During the six months ended June 30, 2013, we purchased $891.8 million of MBS using proceeds from our equity raise, repurchase agreements and principal repayments. During the six months ended June 30, 2013, we received cash of $53.3 million from prepayments and scheduled principal payments on our MBS. We received net proceeds of $113.2 million from a common equity issuance during the six months ended June 30, 2013. Our total repurchase indebtedness was approximately $1.7 billion at June 30, 2013, and we made cash interest payments of approximately $3.6 million on our liabilities for the six months ended June 30, 2013. Part of funding our operations includes providing margin cash to offset liability balances on our derivatives. We recovered $51.8 million of cash collateral posted with counterparties and increased our liability by $43.0 million for cash collateral held as of June 30, 2013.    In response to the growth of our MBS portfolio and to the relatively weak financing market, we have continued to pursue additional lending counterparties in order to help increase our financial flexibility and ability to withstand periods of contracting liquidity in the credit markets.    

    As of June 30, 2013, we had MRAs with 27 counterparties and had $1.7 billion, net in outstanding borrowings with 22 of those counterparties. As of December 31, 2012, we had MRAs with 26 counterparties and had $1.1 billion in outstanding borrowings with 18 of those counterparties.                                            38 --------------------------------------------------------------------------------     The following tables represent the contractual repricing and other information regarding our repurchase agreements, reverse repurchase agreements and Linked Transactions (see Notes 7 and 8 to the condensed financial statements for additional discussion of Linked Transactions).    June 30, 2013                                             Repurchase                                Weighted                                          Agreements            Weighted             Average            Haircut                                              (in               Average            Maturity in      for Repurchase                                          thousands)        Contractual Rate          days          Agreements (1) Agency Securities, net with reverse repurchase agreements                   $   1,552,180                   0.40 %              41                4.87 % Non-Agency Securities and Linked transactions                                  175,827                   1.48                51               19.95 Total                                   $   1,728,007                   0.49 %              42                6.45 %    

    Obligations to return securities received as collateral associated with the reverse repurchase agreements of $234.5 million at June 30, 2013 are all due within 30 days.    December 31, 2012                                           Repurchase                                Weighted                                        Agreements            Weighted             Average            Haircut                                            (in               Average            Maturity in      for Repurchase                                        thousands)        Contractual Rate          days          Agreements (1) Agency Securities                     $   1,033,496                   0.48 %              43                4.83 % Non-Agency Securities                       102,334                   2.07                25               22.35 Total                                 $   1,135,830                   0.62 %              41                 6.4 %     (1) The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.                                                           June 30,         December 31, Maturing or Repricing                                    2013               2012                                                               (in thousands) Within 30 days (net of reverse repurchase agreements of $237.0    million at June 30, 2013)                        $      400,823$       280,435 31 days to 60 days                                         940,113             629,311 61 days to 90 days                                         387,071             226,084 Greater than 90 days                                             -                   - Total                                               $    1,728,007$     1,135,830     Declines in the value of our MBS portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event under the standard MRA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately.   

    RMBS markets; and     ? significant disruption in financing of RMBS.     While conditions have improved, should there be a reoccurrence of difficulties in the residential mortgage market, our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards, or increase the amount of required equity capital or haircut, any of which could make it more difficult or costly for us to obtain financing.    

                                            39 --------------------------------------------------------------------------------     The following graph represents the month-end outstanding balances of our repurchase agreements (before the effect of netting reverse repurchase agreements and Linked Transactions), which finance most of our MBS. The balance of repurchase agreements outstanding will fluctuate within any given month based on changes in the market value of the particular MBS pledged as collateral (including the effects of principal paydowns) and the level and timing of investment and reinvestment activity.                                    [[Image Removed]]

    Our MBS have values that fluctuate according to market conditions and, as discussed above, the market value of our MBS will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities, our lenders have full discretion to determine the value of the MBS we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled principal repayments are announced monthly.    We experience margin calls in the ordinary course of our business and under certain conditions, such as during a period of declining market value for MBS and we may experience margin calls monthly or as frequently as daily. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline and we may experience margin calls. We will use our liquidity to meet such margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. If we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. In addition, certain of our MRAs contain a restriction that prohibits our leverage from exceeding twelve times our stockholders' equity as well as termination events in the case of significant reductions in equity capital.    We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in MBS. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to involuntarily liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.    We generally seek to borrow (on a recourse basis) between six and ten times the amount of our total stockholders' equity to finance the Agency Securities in which we invest and between one and three times the amount of our stockholders' equity to finance the Non-Agency Securities in which we invest, but we are not limited to those ranges. At June 30, 2013 and December 31, 2012, our total net borrowings were approximately $1.7 billion and $1.1 billion (excluding accrued interest), respectively, which represented a debt to equity ratio of approximately 9.28:1 and 7.67:1, respectively.                                            40 --------------------------------------------------------------------------------

    Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our cash flow from operations and our ability to make timely portfolio adjustments, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, meet our financing obligations, pay fees under the Management Agreement, fund our distributions to stockholders and pay general corporate expenses.    We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, including classes of preferred stock, common stock and senior or subordinated notes to meet our long-term (greater than one year) liquidity. Such financing will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain any such financing.    Stockholders' Equity    Dividends   

                                                                   Aggregate                                                              amount paid to                                            Rate per         holders of record    Record Date        Payment Date       common share        (in thousands) January 15, 2013    January 30, 2013    $      0.23$        1,725 February 15, 2013   February 27, 2013   $      0.23$        1,725 March 15, 2013      March 27, 2013      $      0.23$        1,725 April 15, 2013      April 29, 2013      $      0.23$        1,725 May 15, 2013        May 30, 2013        $      0.23$        3,105 June 14, 2013       June 27, 2013       $      0.23$        3,105

    The following table presents our equity transactions for the six months ended June 30, 2013.                                                     Number of       Per Share         Net Proceeds      Transaction Type        Completion Date      Shares           price          (in thousands) Common stock follow-on public offering              May 13, 2013         6,000,000     $      18.93$        113,217

    As of June 30, 2013 and December 31, 2012, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Furthermore, as of June 30, 2013 and December 31, 2012, we had not guaranteed any obligations of any unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.    

    Our financial statements are prepared in conformity with GAAP. In preparing the financial statements, management is required to make various judgments, estimates and assumptions that affect the reported amounts. Changes in these estimates and assumptions could have a material effect on our financial statements. The following is a summary of our policies most affected by management's judgments, estimates and assumptions.    Revenue Recognition    Agency Securities. Interest income is accrued based on the unpaid principal amount of the target assets we purchase and their contractual terms. Premiums and discounts associated with the purchase of our target assets are amortized or accreted into interest income over the actual lives of the securities.                                            41 --------------------------------------------------------------------------------     Non-Agency Securities. Non-Agency Securities are carried at their estimated fair value and changes in those fair values are recognized in earnings in the periods in which they occur. The portion of those changes in fair value recognized as interest income are determined on an effective yield method based on estimates of future cash flows revised quarterly. Other than temporary impairments, which establish a new cost basis in the security for purposes of calculating effective yields, are recognized when the fair value of a security is less than its cost basis and there has been an adverse change in the future cash flows expected to be received. Other changes in future cash flows expected to be received are recognized prospectively over the remaining life of the security.    Fair Value of MBS    We invest in target assets representing interests in or obligations backed by pools of single-family adjustable rate, hybrid adjustable rate and fixed rate mortgage loans. The authoritative literature requires us to classify our investments as either trading, available for sale or held to maturity securities. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. We classify all of our Agency Securities as available for sale securities. All assets that are classified as available for sale securities are carried at fair value with unrealized gains and losses excluded from earnings and reported in net unrealized loss on available for sale securities in the statement of comprehensive income. We classify all of our Non-Agency Securities as trading assets. All assets that are classified as available for trading will be carried at fair value and unrealized gains and losses are included in other (loss) income as a component of the statements of operations.    The fair values for the securities in our MBS portfolio are based on obtaining a valuation for each MBS from third-party pricing services, dealer quotes and our estimates as described below. The third-party pricing services use common market pricing methods that may include pricing models that may incorporate such factors as coupons, prepayment speeds, spread to the Treasury curves and interest rate swap curves, duration, periodic and life caps and credit enhancement, as applicable. The dealer quotes and our estimates incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security, as applicable. Below is a description of the processes we use to value our MBS portfolio.    Agency Securities: We obtain pricing data from a third-party pricing service for each Agency Security and validate such data by obtaining pricing data from a second third-party pricing service. If the difference between pricing data obtained for an Agency Security from the two third-party pricing services exceeds a certain threshold, or pricing data is unavailable from the third-party pricing services, we obtain valuations from dealers who make markets in similar financial instruments.    Non-Agency Securities: The fair value for the Non-Agency Securities in our MBS portfolio is based on estimates prepared by our Portfolio Management group, which organizationally reports to our Chief Investment Officer.  In preparing the estimates, the Portfolio Management group uses commercially available and proprietary models and data as well as market intelligence gained from discussions with and transactions by other market participants.  We also periodically compare our estimates of fair value with those of our financing counterparties. We estimate the fair value of our Non-Agency Securities by estimating the future cash flows for each Non-Agency Security and then discounting those cash flows based on our estimates of current market yield for each individual security. Our estimates for future cash flows and current market yields incorporate such factors as collateral type, bond structure and priority of payments, coupons, prepayment speeds, defaults, delinquencies and severities.    We review all pricing of our MBS used to ensure that current market conditions are properly reflected. This review includes, but is not limited to, comparisons of similar market transactions or alternative third-party pricing services, dealer quotes and comparisons to a pricing model. We classify values obtained from the third-party pricing service for similar instruments as Level 2 securities if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the pricing service, but dealer quotes are, we classify the security as a Level 2 security. If neither is available, we determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information received from dealers and classify it as a Level 3 security.    Security purchase and sale transactions, including purchase of when issued securities, are recorded on the trade date. Gains or losses realized from the sale of securities are included in income and are determined using the specific identification method.    Linked Transactions: The initial purchase of Non-Agency Securities and the related contemporaneous repurchase financing of such MBS with the same counterparty are considered part of the same arrangement, or a "Linked Transaction," when certain criteria are met. The components of a Linked Transaction are evaluated on a combined basis and in totality, accounted for as a forward contract and reported as Linked Transactions on our condensed balance sheets. Changes in the fair value of the assets and liabilities underlying Linked Transactions and associated interest income and expense are reported as "unrealized net gains/(losses) and net interest income from Linked Transactions" on our condensed statements of operations and are not included in other comprehensive income. When certain criteria are met, the initial transfer (i.e., the purchase of a security) and repurchase financing will no longer be treated as a Linked Transaction and will be evaluated and reported separately, as a MBS purchase and repurchase financing.                                            42 --------------------------------------------------------------------------------     Repurchase Agreements, net: We finance the acquisition of our MBS through the use of repurchase agreements. Our repurchase agreements are secured by our MBS and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and the LIBOR. Under these repurchase agreements, we sell MBS to a lender and agree to repurchase the same MBS in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender. A repurchase agreement operates as a financing arrangement under which we pledge our MBS as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing interest rate. The repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.    In addition to the repurchase agreement financing discussed above, we have entered into reverse repurchase agreements with certain of our repurchase agreement counterparties. Under a typical reverse repurchase agreement, we purchase U.S. Treasury Securities from a borrower in exchange for cash and agree to sell the same securities in the future in exchange for a price that is higher than the original purchase price. The difference between the purchase price originally paid and the sale price represents interest received from the borrower. Reverse repurchase agreement receivables and repurchase agreement liabilities are presented net when they meet certain criteria, including being with the same counterparty, being governed by the same master repurchase agreement, settlement through the same brokerage or clearing account and maturing on the same day.    Obligations to Return Securities Received as Collateral at Fair Value: We also sell to third parties the U.S. Treasury Securities received as collateral for reverse repurchase agreements and recognize the resulting obligation to return said U.S. Treasury Securities as a liability on our condensed balance sheet. Interest is recorded on the repurchase agreements, reverse repurchase agreements and U.S. Treasury Securities on an accrual basis and presented as net interest expense. Both parties to the transaction have the right to make daily margin calls based on changes in the fair value of the collateral received and/or pledged.    Impairment of Assets: We evaluate MBS for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We consider an impairment to be other than temporary if we (1) have the intent to sell the Agency Securities, (2) believe it is more likely than not that we will be required to sell the securities before recovery (for example, because of liquidity requirements or contractual obligations) or (3) a credit loss exists. In the case of Non-Agency Securities, we also consider whether there have been adverse changes in the estimates of future cash flows.    Derivative Instruments:  We recognize all derivative instruments as either assets or liabilities at fair value on our balance sheets. We do not designate our derivative activities as cash flow hedges, which, among other factors, would require us to match the pricing dates of both derivative transactions and repurchase agreements. Operational issues and credit market volatility make such matching impractical for us. Since we have not elected cash flow hedge accounting treatment as allowed by GAAP, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on derivatives may not be offset by changes in the fair value or cash flows of the transaction within the same accounting period or ever. Consequently, any declines in the fair value of our derivatives result in a charge to earnings. We continue to designate derivative activities as hedges for tax purposes and any unrealized gains or losses would not affect our distributable net taxable income.    Inflation    Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and any distributions we may make will be determined by our Board based in part on our REIT taxable income as calculated according to the requirements of the Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.    Subsequent Events   

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                  CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS    This report contains various "forward-looking statements." Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "would," "could," "should," "seeks," "approximately," "intends," "plans," "projects," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases. All forward-looking statements may be impacted by a number of risks and uncertainties, including statements regarding the following subjects:      ? our business and investment strategy;     ? our anticipated results of operations;     ? statements about future dividends;     ? our ability to obtain financing arrangements;  

    ? market, industry and economic trends; and     ? interest rates.     The forward-looking statements in this report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our stock, along with the following factors that could cause actual results to vary from our forward-looking statements:      ? our limited operating history;  

    current reports on Form 8-K;     ? mortgage loan modification programs and future legislative action;  

    could materially adversely affect our business, financial condition and     results of operations and our ability to pay distributions to our     stockholders;     ? availability, terms and deployment of capital;     ? changes in economic conditions generally;     ? changes in interest rates, interest rate spreads, the yield curve or     prepayment rates;     ? general volatility of the financial markets, including markets for MBS;  

    countries' credit ratings may materially adversely affect our business,     financial condition and results of operations;     ? inflation or deflation;  

    passed legislation reforming or winding down Fannie Mae or Freddie Mac;     ? availability of suitable investment opportunities;  

    ? changes in our business and investment strategy;     ? our limited operating history;  

    1940 Act and possible consequences of losing that exemption;     ? changes in GAAP, including interpretations thereof; and     ? changes in applicable laws and regulations.                                             44

     We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements, which apply only as of the date of this report. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements set forth in this report to reflect new information, future events or otherwise, except as required under the U.S. Federal securities laws.