MTGE Form 10-Q 3/31/2012

10-Q 1 mtgeform10-q3312012.htm MTGE Form 10-Q 3/31/2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-35260

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.



Maryland		45-0907772
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2 Bethesda Metro Center

14th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 968-9220

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter earlier period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	o		Accelerated filer	o

Non-accelerated filer	ý	(Do not check if a smaller reporting company)	Smaller Reporting Company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of May 1, 2012 was 23,612,100.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

Signatures

PART I

Item 1. Financial Statements

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



	March 31, 2012		December 31, 2011
	(unaudited)		(audited)
Assets:
Agency securities, at fair value (including pledged securities of $3,652,873 and $1,535,388, respectively)	$	3,844,747	$	1,740,091
Non-agency securities, at fair value (including pledged securities of $79,202 and $8,626, respectively)	128,941		25,561
Linked transactions, at fair value	16,241		13,671
Cash and cash equivalents	79,161		57,428
Restricted cash and cash equivalents	21,187		3,159
Interest receivable	11,103		5,566
Derivative assets, at fair value	6,178		1,845
Receivable for agency securities sold	73,251		271,849
Receivable under reverse repurchase agreements	122,994		50,563
Other assets	486		589
Total assets	$	4,304,289	$	2,170,322
Liabilities:
Repurchase agreements	$	3,567,398	$	1,706,281
Payable for agency securities purchased	111,404		189,042
Derivative liabilities, at fair value	12,266		5,669
Dividend payable	9,011		8,005
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	121,889		50,154
Accounts payable and other accrued liabilities	2,874		2,370
Total liabilities	3,824,842		1,961,521
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000 shares authorized, 0 shares issued and outstanding, respectively	—		—
Common stock, $0.01 par value; 300,000 shares authorized, 22,012 and 10,006 shares issued and outstanding, respectively	220		100
Additional paid-in capital	457,255		199,038
Retained earnings	21,972		9,663
Total stockholders’ equity	479,447		208,801
Total liabilities and stockholders’ equity	$	4,304,289	$	2,170,322

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(in thousands, except per share data)

(unaudited)



Interest income:
Agency securities	$	15,306
Non-agency securities	1,271
Other	25
Interest expense	(1,664		)
Net interest income	14,938

Other gains (losses):
Realized gain on agency securities, net	5,971
Realized loss on periodic settlements of interest rate swaps, net	(1,041		)
Realized gain on other derivatives and securities, net	562
Unrealized gain on agency securities, net	4,006
Unrealized gain on non-agency securities, net	2,411
Unrealized gain and net interest income on linked transactions, net	3,384
Unrealized loss on other derivatives and securities, net	(6,785		)
Total other gains, net	8,508

Expenses:
Management fees	1,082
General and administrative expenses	1,035
Total expenses	2,117

Income before excise tax	21,329
Excise tax	9
Net income	$	21,320

Net income per common share—basic and diluted	$	1.82

Weighted average number of common shares outstanding—basic and diluted	11,724

Dividends declared per common share	$	0.90

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)

(unaudited)



	Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings			Total
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Retained Earnings			Total
Balance, December 31, 2011	—	$	—	10,006	$	100	$	199,038	$	9,663		$	208,801
Net income	—	—		—	—		—		21,320			21,320
Issuance of common stock	—	—		12,000	120		258,201		—			258,321
Issuance of restricted stock	—	—		6	—		—		—			—
Stock-based compensation	—	—		—	—		16		—			16
Common dividends declared	—	—		—	—		—		(9,011		)	(9,011		)
Balance, March 31, 2012	—	$	—	22,012	$	220	$	457,255	$	21,972		$	479,447

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012

(in thousands, unaudited)



CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	21,320
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of premiums and discounts, net	1,238
Unrealized gain on securities and derivatives, net	(2,307		)
Realized gain on agency securities, net	(5,971		)
Realized gain on other derivatives and securities, net	(562		)
Increase in interest receivable	(5,537		)
Decrease in other assets	103
Increase in accounts payable and other accrued liabilities	504
Stock-based compensation	16
Net cash flows from operating activities	8,804
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of agency securities	(2,585,473		)
Purchases of non-agency securities	(96,074		)
Proceeds from sale of agency securities	571,428
Principal collections on agency securities	37,667
Principal collections on non-agency securities	2,151
Purchases of non-agency securities underlying linked transactions	(6,589		)
Principal collections on non-agency securities underlying linked transactions	1,987
Purchases of U.S. Treasury securities sold prior to purchase	(1,015,802		)
Proceeds from sale of U.S. Treasury securities sold prior to purchase	1,092,521
Payments of reverse repurchase agreements	(368,914		)
Proceeds from reverse repurchase agreements	296,483
Purchases of U.S. Treasury securities	(50,167		)
Proceeds from sale of U.S. Treasury securities	49,902
Payment of premiums for interest rate swaptions	(3,881		)
Increase in restricted cash and cash equivalents	(18,028		)
Net payments on other derivatives	(4,727		)
Net cash flows used in investing activities	(2,097,516		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	(8,005		)
Proceeds from common stock offerings, net of offering costs	258,321
Proceeds from repurchase agreements	4,225,558
Repayments on repurchase agreements	(2,368,087		)
Proceeds from repurchase agreements underlying linked transactions	91,735
Repayments of repurchase agreements underlying linked transactions	(89,077		)
Net cash flow from financing activities	2,110,445
Net increase in cash and cash equivalents	21,733
Cash and cash equivalent at beginning of the period	57,428
Cash and cash equivalents at end of period	$	79,161
Supplemental non-cash investing and financing activities:
Non-agency securities recorded upon de-linking of Linked Transactions	$	6,215
Repurchase agreements recorded upon de-linking of Linked Transactions	$	3,646

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Unaudited Interim Consolidated Financial Statements

The interim consolidated financial statements of American Capital Mortgage Investment Corp. (together with its consolidated subsidiary, American Capital Mortgage Investment TRS, LLC, is referred to throughout this report as the “Company”, “we”, “us” and “our”) are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Our interim unaudited consolidated financial statements include the accounts of our wholly-owned subsidiary, American Capital Mortgage Investment TRS, LLC. As of March 31, 2012, there has been no activity in American Capital Mortgage Investment TRS, LLC.

In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year.

Note 2. Organization

We were incorporated in Maryland on March 15, 2011 and commenced operations on August 9, 2011 following the completion of our initial public offering (“IPO”) of 8.0 million shares of common stock. Concurrent with our IPO, American Capital, Ltd. ("American Capital") purchased 2.0 million shares of our common stock in a private placement. We are externally managed by American Capital MTGE Management, LLC (our “Manager”), an affiliate of American Capital. We do not have any employees. Our common stock is traded on the NASDAQ Global Select Market under the symbol “MTGE.”

We invest in, finance and manage a leveraged portfolio of mortgage-related investments, which we define to include agency mortgage investments, non-agency mortgage investments and other mortgage-related investments. Agency mortgage investments include residential mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”) structured from residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsored entity (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae”). Non-agency mortgage investments include residential mortgage-backed securities (“RMBS”) backed by residential mortgages that are not guaranteed by a GSE or U.S. Government agency. Non-agency mortgage investments may also include prime and non-prime residential mortgage loans. Other mortgage-related investments may include commercial mortgage-backed securities (“CMBS”), commercial mortgage loans, mortgage-related derivatives and other mortgage-related investments.

Our objective is to provide attractive risk-adjusted returns to our stockholders over the long-term through a combination of dividends and net book value appreciation. In pursuing this objective, we rely on our Manager's expertise to construct and manage a diversified mortgage investment portfolio by identifying asset classes that, when properly financed and hedged, are designed to produce attractive returns across a variety of market conditions and economic cycles, considering the risks associated with owning such investments.

We will elect to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As such, we are required to distribute annually at least 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders. It is our intention to distribute 100% of our taxable income, after application of available tax attributes, within the time limits prescribed by the Internal Revenue Code, which may extend into the subsequent taxable year.

Note 3. Summary of Significant Accounting Policies

Fair Value of Financial Assets

We have elected the option to account for all of our financial assets, including all mortgage-related investments, at estimated fair value, with changes in fair value reflected in income during the period in which they occur. In management's view, this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of economic hedging instruments. See Note 8 - Fair Value Measurements.

Interest Income

Interest income is accrued based on the outstanding principal amount of the securities and their contractual terms. Premiums and discounts associated with the purchase of agency securities and non-agency securities of high credit quality are amortized or accreted into interest income over the projected lives of the securities, including contractual payments and estimated prepayments, using the effective interest method. We estimate long-term prepayment speeds using a third-party service and market data.

The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, current mortgage rates of the outstanding loans, loan age, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate the reasonableness of the prepayment speeds estimated by the third-party service, and based on our Manager’s judgment, we may make adjustments to their estimates. Actual and anticipated prepayment experience is reviewed at least quarterly and effective yields are recalculated when differences arise between the previously estimated future prepayments and the amounts actually received plus current anticipated future prepayments. If the actual and anticipated future prepayment experience differs from our prior estimate of prepayments, we are required to record an adjustment in the current period to the amortization or accretion of premiums and discounts for the cumulative difference in the effective yield through the reporting date.

At the time we purchase non-agency securities and loans that are not of high credit quality, we determine an effective interest rate based on our estimate of the timing and amount of future cash flows and our cost basis. Our initial cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. On at least a quarterly basis, we review the estimated cash flows and make appropriate adjustments, based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Any resulting changes in effective yield are recognized prospectively based on the current amortized cost of the investment as adjusted for credit impairment, if any.

Repurchase Agreements

We finance the acquisition of agency securities and certain non-agency securities for our investment portfolio through repurchase transactions under master repurchase agreements. Pursuant to Accounting Standards Codification ("ASC") Topic 860, Transfers and Servicing, we account for repurchase transactions, other than those treated as Linked Transactions (see Derivatives below), as collateralized financing transactions which are carried at their contractual amounts, including accrued interest, as specified in the respective transaction agreements. Repurchase agreements are carried at cost which approximates fair value due to their short-term nature.

Derivatives

We maintain a risk management strategy, under which we may use a variety of derivative instruments to economically hedge some of our exposure to market risks, including interest rate risk, prepayment risk and credit risk. The objective of our risk management strategy is to reduce fluctuations in net book value over a range of market conditions. The principal instruments that we currently use are interest rate swaps, to-be-announced forward contracts (“TBAs”), U.S. Treasury securities, and options to enter into interest rate swaps (“interest rate swaptions”). In the future, we may also use forward contracts for specified agency securities, U.S. Treasury futures contracts and put or call options on TBA securities. We may also invest in other types of mortgage derivatives, such as interest-only securities, credit default swaps and synthetic total return swaps.

We recognize all derivatives as either assets or liabilities on the balance sheet, measured at fair value. As we have not designated any derivatives as hedging instruments, all changes in fair value are reported in earnings in our consolidated statement of operations in unrealized loss on other derivatives and securities, net during the period in which they occur.

Derivatives in a gain position are reported as derivative assets at fair value and derivatives in a loss position are reported as derivative liabilities at fair value in our consolidated balance sheet.

Interest rate swap agreements

We use interest rate swaps to hedge the variable cash flows associated with short-term borrowings made under our repurchase agreement facilities. We estimate the fair value of interest rate swaps based on inputs from a third-party pricing model. The third-party pricing model incorporates such factors as the Treasury curve, LIBOR rates, and the pay rate on the interest rate swap. We also incorporate both our own and our counterparties’ nonperformance risk in estimating the fair value of our interest rate swap and swaption agreements. In considering the effect of nonperformance risk, we consider the impact of netting and credit enhancements, such as collateral postings and guarantees, and have concluded that our own and our counterparty risk is not significant to the overall valuation of these agreements. The payment of periodic settlements of net interest on interest rate swaps are reported in realized loss on periodic settlements of interest rate swaps, net in our consolidated statement of operations. Cash payments received or paid for the early termination of an interest rate swap agreement are recorded as realized gain on other derivatives and securities, net in our consolidated statement of operations. Changes in fair value of our interest rate swap agreements are reported in unrealized loss on other derivatives and securities, net in our consolidated statement of operations.

Interest rate swaptions

We purchase interest rate swaptions to help mitigate the potential impact of increases or decreases in interest rates on the performance of our investment portfolio (referred to as "convexity risk"). The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay and receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in unrealized loss on other derivatives and securities, net in our consolidated statement of operations. If a swaption expires unexercised, the loss on the swaption would be equal to the premium paid and reported in realized gain on other derivatives and securities, net in our consolidated statement of operations. If we exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the fair value of the underlying interest rate swap and the premium paid and reported in realized gain on other derivatives and securities, net in our consolidated statement of operations.

We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option.

TBA securities

A TBA security is a futures contract for the purchase or sale of agency securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed upon future date. The specific agency securities delivered under the contract on the settlement date, which is published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. Realized gains and losses associated with our TBA contracts are recognized on our consolidated statement of operations in the line item realized gain on other derivatives and securities, net, and unrealized gains and losses are recognized in unrealized loss on other derivatives and securities, net, in the period in which they occur. We estimate the fair value of TBA securities based on similar methods used to value agency securities.

Linked Transactions

If we finance the purchase of securities with repurchase agreements with the same counterparty from whom the securities are purchased and both transactions are entered into contemporaneously or in contemplation of each other, the transactions are presumed not to meet sale accounting criteria. We will account for the purchase of such securities and the repurchase agreement on a net basis and record a forward purchase commitment to purchase securities (each, a “Linked Transaction”) at fair value on our consolidated balance sheet in the line item Linked Transactions, at fair value. Changes in the fair value of the assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized gain and net interest income on linked transactions, net on our consolidated statement of operations.

Forward commitments to purchase or sell specified securities

We may enter into a forward commitment to purchase or sell specified securities as a means of acquiring assets or as a hedge against short-term changes in interest rates. Contracts for the purchase or sale of specified securities are accounted for as derivatives if the delivery of the specified security and settlement extends beyond the shortest period possible for that type of security. Realized gains and losses associated with forward commitments are recognized in the line item realized gain on other derivatives and securities, net and unrealized gains and losses are recognized in unrealized loss on other derivatives and securities, net on our consolidated statement of operations. We estimate the fair value of forward commitments to purchase or sell specified mortgage-backed securities based on similar methods used to value mortgage-backed securities, as well as the remaining length of time of the forward commitment.

U.S. Treasury securities

We may purchase or sell short U.S. Treasury securities and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our portfolio. We may borrow securities to cover short sales of U.S. Treasury securities under reverse repurchase agreements. We account for these as securities borrowing transactions and recognize an obligation to return the borrowed securities at fair value on our consolidated balance sheet based on the value of the underlying borrowed securities as of the reporting date. Realized gains and losses associated with purchases and short sales of U.S. Treasury securities are recognized in realized gain on other derivatives and securities, net, and unrealized gains and losses are recognized in unrealized loss on other derivatives and securities, net, on our consolidated statement of operations.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The update requires new disclosures about balance sheet offsetting and related arrangements. For derivatives and financial assets and liabilities, the amendments require disclosure of gross asset and liability amounts, amounts offset on the balance sheet, and amounts subject to the offsetting requirements but not offset on the balance sheet. The guidance is effective December 1, 2013 and is to be applied retrospectively. This guidance does not amend the existing guidance on when it is appropriate to offset. As a result, we do not expect this guidance to have a material effect on our financial statements.

Note 4. Agency Securities

The following table summarizes our investments in agency securities as of March 31, 2012 and December 31, 2011(dollars in thousands):



	As of March 31, 2012
	Fannie Mae			Freddie Mac			Total
Fixed-rate agency securities:
Agency securities, par	$	3,015,151		$	659,517		$	3,674,668
Unamortized premium	118,771			33,485			152,256
Amortized cost	3,133,922			693,002			3,826,924
Gross unrealized gains	16,257			4,876			21,133
Gross unrealized losses	(2,522		)	(788		)	(3,310		)
Fixed-rate agency securities, at fair value	$	3,147,657		$	697,090		$	3,844,747

Weighted average coupon as of March 31, 2012	3.56		%	3.79		%	3.60		%
Weighted average yield as of March 31, 2012	2.92		%	2.88		%	2.92		%
Weighted average yield for the three months ended March 31, 2012	3.09		%	3.19		%	3.11		%



	As of December 31, 2011
	Fannie Mae			Freddie Mac			Total
Fixed-rate agency securities:
Agency securities, par	$	1,240,435		$	396,625		$	1,637,060
Unamortized premium	64,700			24,514			89,214
Amortized cost	1,305,135			421,139			1,726,274
Gross unrealized gains	11,260			2,923			14,183
Gross unrealized losses	(120		)	(246		)	(366		)
Fixed-rate agency securities, at fair value	$	1,316,275		$	423,816		$	1,740,091

Weighted average coupon as of December 31, 2011	3.95		%	4.19		%	4.01		%
Weighted average yield as of December 31, 2011	2.85		%	2.91		%	2.87		%
Weighted average yield for the three months ended December 31, 2011	2.88		%	2.94		%	2.90		%

Actual maturities of agency securities are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments. The following table summarizes our agency securities as of March 31, 2012 and December 31, 2011 according to their estimated weighted average life classification (dollars in thousands):



	As of March 31, 2012						As of December 31, 2011
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Yield
Greater than one year and less than or equal to three years	—		—		—	%	55,582		55,260		2.17	%
Greater than three years and less than or equal to five years	282,266		277,754		2.56	%	425,251		422,406		2.49	%
Greater than five years	3,562,481		3,549,170		2.94	%	1,259,258		1,248,608		3.02	%
Total / weighted average	$	3,844,747	$	3,826,924	2.92	%	$	1,740,091	$	1,726,274	2.87	%

As of March 31, 2012 and December 31, 2011, the weighted average life of our agency security portfolio was 7.3 years and 5.9 years, respectively, which incorporates anticipated future prepayment assumptions. As of March 31, 2012 and December 31, 2011, our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency investment portfolio was 7% and 11%, respectively. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs. We estimate long-term prepayment assumptions for different securities using third-party services and market data. These third-party services estimate prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage rates of the outstanding loans, loan age, volatility and other factors. We review the prepayment speeds estimated by the third-party services and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate reasonableness. As market conditions may change rapidly, we use our judgment in developing our estimates for different securities. Prepayments are dependent on many factors and actual prepayments could differ materially from our estimates. Various market participants could use materially different assumptions. Furthermore, changes in market conditions such as interest rates, housing prices, and broad economic factors such as employment can materially impact prepayments. Additionally, modifications to GSE underwriting criteria or programs, GSE policies surrounding the buyouts or modifications of delinquent loans or other factors could significantly change the prepayment landscape.

Realized Gains and Losses

The following table is a summary of our net realized gain from the sale of agency securities for the three months ended March 31, 2012 (dollars in thousands):



Proceeds from agency securities sold	$	571,428
Less decrease in receivable for agency securities sold	(198,598		)
Less agency securities sold, at cost	(366,859		)
Net realized gains on sale of agency securities	$	5,971

Gross realized gains on sale of agency securities	$	5,971
Gross realized losses on sale of agency securities	—
Net realized gains on sale of agency securities	$	5,971

Pledged Assets

The following tables summarize our agency securities pledged as collateral under repurchase agreements and derivative agreements by type as of March 31, 2012 and December 31, 2011 (dollars in thousands):



	As of March 31, 2012
Agency Securities Pledged⁽¹⁾	Fannie Mae		Freddie Mac		Total
Under Repurchase Agreements
Fair value	$	3,024,019	$	621,370	$	3,645,389
Amortized cost	3,010,573		617,521		3,628,094
Accrued interest on pledged agency securities	8,582		1,892		10,474
Under Derivative Agreements
Fair value	2,315		5,169		7,484
Amortized cost	2,366		5,196		7,562
Accrued interest on pledged agency securities	8		16		24
Total Fair Value of Agency Securities Pledged and Accrued Interest	$	3,034,924	$	628,447	$	3,663,371



	As of December 31, 2011
Agency Securities Pledged⁽¹⁾	Fannie Mae		Freddie Mac		Total
Under Repurchase Agreements
Fair value	$	1,219,634	$	311,641	$	1,531,275
Amortized cost	1,208,426		309,958		1,518,384
Accrued interest on pledged agency securities	3,791		1,006		4,797
Under Derivative Agreements
Fair value	1,019		3,094		4,113
Amortized cost	1,006		3,072		4,078
Accrued interest on pledged agency securities	4		10		14
Total Fair Value of Agency Securities Pledged and Accrued Interest	$	1,224,448	$	315,751	$	1,540,199

——————


⁽¹⁾	Agency securities pledged do not include pledged amounts of $72.8 million and $269.5 million under repurchase agreements related to agency securities sold but not yet settled as of March 31, 2012 and December 31, 2011, respectively.

The following table summarizes our agency securities pledged as collateral under repurchase agreements by remaining maturity as of March 31, 2012 and December 31, 2011(dollars in thousands):



	As of March 31, 2012						As of December 31, 2011
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest on Pledged Agency Securities		Fair Value		Amortized Cost		Accrued Interest on Pledged Agency Securities
30 days or less	$	2,144,523	$	2,132,334	$	6,417	$	961,430	$	952,684	$	3,052
31 - 59 days	484,272		482,917		1,323		441,167		437,969		1,347
60 - 90 days	837,109		834,543		2,198		53,265		53,082		129
Greater than 90 days	179,485		178,300		536		75,413		74,649		269
Total	$	3,645,389	$	3,628,094	$	10,474	$	1,531,275	$	1,518,384	$	4,797

Note 5. Non-Agency Securities

The following tables summarize our non-agency security investments as of March 31, 2012 (dollars in thousands):



Non-Agency Securities
Category	Fair Value⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average Coupon ⁽²⁾		Weighted Average Yield
Prime / Alt-A	$	78,702	$	76,702	$	109,897	1.64	%	7.20	%
Subprime	16,173		16,463		42,229		0.45	%	9.85	%
Re-REMIC	8,523		8,328		8,878		5.12	%	5.22	%
Option-Arm	25,543		25,310		38,267		0.57	%	6.64	%
Total/ Weighted Average	$	128,941	$	126,803	$	199,271	1.33	%	7.30	%

Non-Agency Securities Underlying Linked Transactions⁽³⁾
Category	Fair Value⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average Coupon ⁽²⁾		Weighted Average Yield
Prime / Alt-A	$	21,381	$	21,328	$	26,116	3.63	%	6.65	%
Subprime	7,893		8,332		29,295		0.37	%	8.97	%
Re-REMIC	8,418		8,645		9,291		2.76	%	5.34	%
Option-Arm	14,153		12,884		22,256		0.55	%	9.09	%
Total/ Weighted Average	$	51,845	$	51,189	$	86,958	1.65	%	7.42	%

————————


⁽¹⁾	As of March 31, 2012, the unrealized net gain of $2.1 million on non-agency securities is comprised of $3.4 million gross unrealized gain and $1.3 million gross unrealized loss. As of March 31, 2012, the unrealized net gain of $0.7 million on non-agency securities underlying Linked Transactions is comprised of $1.5 million gross unrealized gain and $0.8 million gross unrealized loss.


⁽²⁾	Weighted average coupon rates are floating, except for $21.8 million fair value of prime / Alt-A non-agency securities and $8.1 million fair value of prime / Alt-A securities underlying Linked Transactions as of March 31, 2012.


⁽³⁾	See Note 7 - Derivatives for composition of Linked Transactions.

The following table summarizes our non-agency security investments as of December 31, 2011 (dollars in thousands):



Non-Agency Securities
Category	Fair Value⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average Coupon ⁽²⁾		Weighted Average Yield
Prime / Alt-A	$	10,966	$	10,788	$	17,090	3.75	%	8.44	%
Subprime	5,969		6,597		20,884		0.50	%	10.09	%
Re-REMIC	8,626		8,609		9,177		5.39	%	6.16	%
Total/ Weighted Average	$	25,561	$	25,994	$	47,151	2.63	%	8.10	%

Non-Agency Securities Underlying Linked Transactions⁽³⁾
Category	Fair Value⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average Coupon ⁽²⁾		Weighted Average Yield
Prime / Alt-A	$	27,488	$	28,084	$	36,934	3.38	%	6.04	%
Subprime	7,198		8,465		29,586		0.42	%	9.36	%
Re-REMIC	8,805		8,934		9,629		2.75	%	5.08	%
Option-Arm	6,702		6,567		12,522		0.66	%	11.31	%
Total/ Weighted Average	$	50,193	$	52,050	$	88,671	1.94	%	7.08	%

————————


⁽¹⁾	As of December 31, 2011, the unrealized net loss of $0.4 million on non-agency securities is comprised of $0.7 million gross unrealized loss and $0.3 million gross unrealized gain. As of December 31, 2011, the unrealized net loss of $1.9 million on non-agency securities underlying Linked Transactions is comprised of $2.2 million gross unrealized loss and $0.3 million gross unrealized gain.


⁽²⁾	Weighted average coupon rates are floating, except for $3.8 million fair value of prime / Alt-A non-agency securities and $8.4 million fair value for prime / Alt-A securities underlying Linked Transactions as of December 31, 2011.


⁽³⁾	See Note 7 - Derivatives for composition of Linked Transactions.

Prime / Alt-A non-agency securities as of March 31, 2012 and December 31, 2011 include senior tranches in securitization trusts issued between 2004 and 2006, and are collateralized by residential mortgages originated between 2002 and 2006. The loans were originally considered to be either prime or one tier below prime credit quality. Prime mortgage loans are residential mortgage loans that are considered to have the most stringent underwriting standards within the non-agency mortgage market, but do not carry any credit guarantee from either a U.S. government agency or GSE. These loans were originated during a period when underwriting standards were generally weak and housing prices have dropped significantly subsequent to their origination. As a result, there is still material credit risk embedded in these vintages. Alt-A, or alternative A-paper, mortgage loans are considered riskier than prime mortgage loans and less risky than sub-prime mortgage loans and are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-value ratios and a higher percentage of investment properties. The mortgages underlying our prime / Alt-A non-agency securities have both floating-rate and fixed-rate coupons, with weighted average coupons ranging from 3% to 6%. These securities are generally rated below investment grade as of March 31, 2012 and December 31, 2011.

Option ARM non-agency securities have origination and underwriting characteristics similar to Alt-A securities, with the added feature of providing underlying mortgage borrowers the option, within certain constraints, to make lower payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances. This additional feature can increase the credit risk of these securities. Our option ARM securities are rated below investment grade as of March 31, 2012 and December 31, 2011.

Re-REMIC non-agency securities as of March 31, 2012 and December 31, 2011 are resecuritizations of real estate mortgage investment conduits ("REMICs"), and are backed by non-agency securities originally issued between 2005 and 2007 that are generally backed by residential mortgage loans of poor credit quality, with floating rate coupons averaging 3% to 5%. The underlying REMIC non-agency securities were resecuritized during 2011 and 2012 to add an additional layer of credit enhancement. The Re-REMIC securities have not been rated by credit rating agencies as of March 31, 2012 and December 31, 2011.

Subprime non-agency securities as of March 31, 2012 and December 31, 2011include floating rate, senior tranches in securitization trusts that are currently rated below investment grade. These securities are collateralized by residential mortgages

originated during 2006 and 2007 that were originally considered to be of lower credit quality. The underlying residential mortgages have both floating-rate and fixed-rate weighted-average coupons ranging from 5% to 8% as of March 31, 2012 and December 31, 2011.

Pledged Assets

Non-agency securities with fair value of $79.2 million and $8.6 million were pledged as collateral under repurchase agreements with a remaining maturity of less than 30 days, as of March 31, 2012 and December 31, 2011, respectively. Additionally, as of March 31, 2012 and December 31, 2011, there are non-agency securities with a fair value of $51.8 million and $50.2 million, respectively, underlying Linked Transactions.

Note 6. Repurchase Agreements

We pledge certain of our securities as collateral under repurchase arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of March 31, 2012 and December 31, 2011, we have met all margin call requirements. Repurchase agreements are carried at cost, which approximates fair value due to their short-term nature.

The following tables summarize our borrowings under repurchase arrangements and weighted average interest rates classified by original maturities as of March 31, 2012 and December 31, 2011 (dollars in thousands):



	As of March 31, 2012					As of December 31, 2011
Original Maturity	Borrowings Outstanding		Weighted Average Interest Rate		Weighted Average Days to Maturity	Borrowings Outstanding		Weighted Average Interest Rate		Weighted Average Days to Maturity
Repurchase Agreements
30 days or less	$	809,081	0.43	%	18	$	77,073	0.40	%	10
31 - 60 days	704,460		0.38	%	23	346,201		0.43	%	19
61 - 90 days	703,285		0.37	%	42	372,217		0.39	%	31
91 - 180 days	1,057,375		0.36	%	57	774,594		0.34	%	37
Greater than 180 days	293,197		0.45	%	137	136,196		0.48	%	209
Total / Weighted Average	$	3,567,398	0.39	%	45	$	1,706,281	0.38	%	45

Repurchase Agreements Underlying Linked Transactions
30 days or less	$	11,176	2.17	%	16	$	9,509	2.04	%	$	14
31 - 60 days	18,224		1.96	%	12	13,397		1.98	%	8
61 - 90 days	6,165		2.25	%	45	2,857		2.36	%	18
91 - 180 days	—		—	%	—	10,791		2.07	%	47
Total / Weighted Average	$	35,565	2.06	%	19	$	36,554	2.05	%	$	22

As of March 31, 2012, we had repurchase agreements with 24 financial institutions. In addition, less than 8% of our equity at risk was with any one counterparty as of March 31, 2012 compared to 6% as of December 31, 2011, with the top five counterparties representing less than 22% of our equity at risk as of March 31, 2012 compared to 21% as of December 31, 2011.

We had agency securities with fair values of $3.7 billion and $1.5 billion and non-agency securities with fair values of $79.2 million and $8.6 million, respectively, as of March 31, 2012 and December 31, 2011, pledged as collateral against our repurchase agreements. Agency securities pledged do not include pledged amounts of $72.8 million and $269.5 million under repurchase agreements related to agency securities sold but not yet settled as of March 31, 2012 and December 31, 2011, respectively.

Note 7. Derivatives

In connection with our risk management strategy, we economically hedge a portion of our exposure to market risks, including interest rate risk and prepayment risk, by entering into derivative and other hedging instrument contracts. We may enter into agreements for interest rate swap agreements, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA and U.S. Treasury securities, purchase or write put or call options on TBA securities or we may invest in other types of derivative securities, including interest-only securities, synthetic total return swaps and credit default swaps. Our risk management strategy attempts to manage the overall risk of the portfolio and reduce fluctuations in book value. We do not use derivative or other hedging instruments for speculative purposes. Derivatives have not been designated as hedging instruments. We do not offset our derivatives and related cash collateral with the same counterparties under any master netting arrangements. For additional information regarding our derivative instruments and our overall risk management strategy, please refer to the discussion of derivatives in Note 3- Summary of Significant Accounting Policies.

The following table summarizes information about our outstanding derivatives as of March 31, 2012 (in thousands):



Derivatives	Beginning Notional Amount			Additions/ Long Positions		Expirations/ Terminations/ Short Positions		Ending Notional Amount			Unrealized Gain (Loss) on Other Derivatives and Securities, net			Realized Gain (Loss) on Other Derivatives and Securities, Net			Realized Loss on Periodic Settlements of Interest Rate Swaps			Unrealized Gain and Net Interest Income on Linked Transactions, net
Interest rate swaps	$	875,000		1,315,000		—		$	2,190,000		$	(5,271	)	$	—		$	(1,041	)	$	—
Interest rate swaptions	$	50,000		350,000		—		$	400,000		(413		)	—			—			—
TBA securities	$	(101,000	)	(1,397,000	)	1,135,600		$	(362,400	)	(2,056		)	(2,936		)	—			—
Short sales of U.S. Treasuries	$	(50,000	)	(1,101,000	)	1,028,000		$	(123,000	)	955			3,763			—			—
U.S. Treasuries	$	—		50,168		(50,168	)	$	—		—			(265		)	—			—
Linked Transactions⁽¹⁾	$	88,671		10,254		(11,967	)	$	86,958		—			—			—			3,384
											$	(6,785	)	$	562		$	(1,041	)	$	3,384

————————

⁽¹⁾ The notional amount of Linked Transaction is represented by the current face amount of the underlying securities.

The table below presents fair value information about our derivatives outstanding as of March 31, 2012 and December 31, 2011(in thousands):



Derivative Type	Location on the Balance Sheet	As of March 31, 2012		As of December 31, 2011
Interest rate swaps	Derivative assets, at fair value	$	1,043	$	348
Interest rate swaptions	Derivative assets, at fair value	4,224		828
TBA securities	Derivative assets, at fair value	911		669
Derivative assets, at fair value		$	6,178	$	1,845

Interest rate swaps	Derivative liabilities, at fair value	$	7,990	$	3,734
TBA securities	Derivative liabilities, at fair value	4,276		1,935
Derivative liabilities, at fair value		$	12,266	$	5,669

Interest Rate Swap Agreements

As of March 31, 2012 and December 31, 2011, our derivative and other hedging instruments included interest rate swaps, which have the effect of modifying the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our interest rate swaps are used to manage the interest rate risk created by our variable rate short-term repurchase agreements. Under our interest rate swaps, we typically pay a fixed-rate and receive a floating rate based on LIBOR with terms usually ranging up to ten years.

As of March 31, 2012 and December 31, 2011, we had interest rate swap agreements summarized in the tables below (dollars in thousands).



		As of March 31, 2012					As of December 31, 2011
Interest Rate Swaps	Balance Sheet Location	Notional Amount		Net Estimated Fair Value			Notional Amount		Net Estimated Fair Value
Interest rate swap assets	Derivative assets, at fair value	$	250,000	$	1,043		$	200,000	$	348
Interest rate swap liabilities	Derivative liabilities, at fair value	1,940,000		(7,990		)	675,000		(3,734		)
		$	2,190,000	$	(6,947	)	$	875,000	$	(3,386	)



As of March 31, 2012
Current Maturity Date for Interest Rate Swaps ⁽¹⁾	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Net Estimated Fair Value			Weighted Average Maturity (Years)
2014	$	100,000	0.64	%	0.49	%	$	(16	)	2.4
2015	450,000		0.85	%	0.49	%	(944		)	3.2
2016	250,000		1.23	%	0.50	%	(1,737		)	4.3
2017	990,000		1.39	%	0.47	%	(3,558		)	5.1
2018	25,000		1.73	%	0.55	%	(217		)	6.6
2019	350,000		1.81	%	0.47	%	(379		)	7.0
2021	25,000		2.30	%	0.47	%	(96		)	9.6
Total / weighted average	$	2,190,000	1.31	%	0.48	%	$	(6,947	)	4.9



As of December 31, 2011
Current Maturity Date for Interest Rate Swaps ⁽²⁾	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Net Estimated Fair Value			Weighted Average Maturity (Years)
2014	$	100,000	0.64	%	0.50	%	$	217		2.7
2015	450,000		0.85	%	0.48	%	(418		)	3.4
2016	250,000		1.23	%	0.47	%	(2,166		)	4.5
2018	25,000		1.73	%	0.43	%	(257		)	6.8
2019	25,000		1.83	%	0.58	%	(494		)	7.1
2021	25,000		2.30	%	0.58	%	(268		)	9.9
Total / weighted average	$	875,000	1.03	%	0.48	%	$	(3,386	)	4.0

————————


⁽¹⁾	Includes swaps with an aggregate notional of $1.3 billion, with deferred start dates ranging from one to two months from March 31, 2012.


⁽²⁾	Includes swaps with an aggregate notional of $50.0 million, with deferred start dates ranging from two to five months from December 31, 2011.

Interest Rate Swaption Agreements

Our interest rate swaption agreements provide us the option to enter into interest rate swap agreements in the future where we would pay a fixed rate and receive LIBOR. The following table presents certain information about our interest rate swaption agreements as of March 31, 2012 and December 31, 2011 (dollars in thousands):



	Option					Underlying Swap
	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Average Term (Years)
As of March 31, 2012	$	4,693	$	4,224	0.7	$	400,000	2.65	%	8.6
As of December 31, 2011	$	884	$	828	0.8	$	50,000	2.81	%	10.8

TBA Securities

As of March 31, 2012, and December 31, 2011, we had contracts to purchase (“long position”) and sell (“short position”) TBA securities on a forward basis. Following is a summary of our long and short TBA positions as of March 31, 2012 and December 31, 2011 (in thousands):



	As of March 31, 2012						As of December 31, 2011
Purchase and Sale Contracts for TBA Securities	Notional Amount			Fair Value			Notional Amount			Fair Value
Purchase of TBA securities	$	315,000		$	911		$	234,000		$	669
Sale of TBA securities	(677,400		)	(4,276		)	(335,000		)	(1,935		)
Total, net	$	(362,400	)	$	(3,365	)	$	(101,000	)	$	(1,266	)

Additionally, we had obligations to return treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions with fair values of $121.9 million and $50.2 million, as of March 31, 2012 and December 31, 2011, respectively. The borrowed securities were collateralized by cash payments of $123.0 million and $50.6 million as of March 31, 2012 and December 31, 2011, respectively, which are presented as receivables under reverse repurchase agreements on the consolidated balance sheet. The change in fair value of the borrowed securities is recorded in unrealized gain (loss) on other derivatives and securities, net in our consolidated statement of operations.

Linked Transactions

Our Linked Transactions are evaluated on a combined basis, reported as forward (derivative) instruments and are reported on our consolidated balance sheets at fair value. The fair value of Linked Transactions reflect the value of the underlying non-agency securities, net of repurchase agreement borrowings and accrued interest receivable and payable on such instruments. The change in the fair value of our Linked Transactions is reported as unrealized gain and net interest income on linked transactions, net, a component of other gains, net in our consolidated statements of operations.

The following table presents the non-agency securities and repurchase agreements underlying our Linked Transactions at March 31, 2012 and December 31, 2011 (in thousands):



	March 31, 2012			December 31, 2011
Linked non-agency securities⁽¹⁾	$	51,845		$	50,193
Linked repurchase agreements	(35,565		)	(36,554		)
Accrued interest (payable) receivable, net	(39		)	32
Linked Transactions, at fair value	$	16,241		$	13,671

————————


⁽¹⁾	See Note 5 - Non-Agency Securities for a description of the non-agency securities within Linked Transactions and Note 6- Repurchase Agreements for a description of the repurchase agreements within Linked Transactions.

The following table presents unrealized loss and net interest income on linked transactions for the three months ended March 31, 2012 (in thousands):



Coupon interest income	$	302
Discount accretion	590
Interest expense	(183		)
Unrealized gain, net ⁽¹⁾	2,675
Unrealized gain and net interest income on linked transactions, net	$	3,384

————————


⁽¹⁾	Unrealized net gain of $2.7 million on non-agency securities underlying Linked Transactions is comprised of $2.8 million gross unrealized gain and $0.1 million gross unrealized loss.

Credit Risk-Related Contingent Features

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In addition, we may be required to pledge assets as collateral for our derivatives, whose amounts vary over time based on the market value, notional amount and remaining term of the derivative contract. In the event of a default by a counterparty, we may not receive payments provided for under the terms of our derivative agreements, and may have difficulty obtaining our assets pledged as collateral for our derivatives. The cash and cash equivalents pledged as collateral for our derivative instruments is included in restricted cash and cash equivalents on our consolidated balance sheets.

Each of our ISDA Master Agreements contains provisions pursuant to which we are required to fully collateralize our obligations under the swap instrument if at any point the fair value of the swap represents a liability greater than the minimum transfer amount contained within our ISDA Master Agreements. We were also required to post initial collateral upon execution of certain of our swap transactions. If we breach any of these provisions, we will be required to settle our obligations under the agreements at their termination values.

Further, each of our ISDA Master Agreements also contains a cross default provision under which a default under certain of our other indebtedness in excess of a certain threshold causes an event of default under the agreement. Threshold amounts vary by lender. Following an event of default, we could be required to settle our obligations under the agreements at their termination values. Additionally, under certain of our ISDA Master Agreements, we could be required to settle our obligations under the agreements at their termination values if we fail to maintain either our REIT status or certain minimum stockholders’ equity thresholds, or comply with limits on our leverage above certain specified levels.

We had agency securities with fair values of $7.5 million and $4.1 million and restricted cash and cash equivalents of $7.8 million and $3.1 million pledged as collateral against our interest rate swaps as of March 31, 2012 and December 31, 2011, respectively.

Note 8. Fair Value Measurements

We have elected the option to account for all of our financial assets, including mortgage-backed securities, at fair value, with changes in fair value reflected in income during the period in which they occur. We have determined that this presentation will most appropriately represent our financial results and position. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the assumptions market participants would use when pricing an asset or liability.

We determine the fair value of our agency and non-agency securities including securities held as collateral, based upon fair value estimates obtained from multiple third party pricing services and dealers. In determining fair value, third party pricing sources use various valuation approaches, including market and income approaches. Factors used by third party sources in estimating the fair value of an instrument may include observable inputs such as recent trading activity, credit data, volatility statistics, and other market data that are current as of the measurement date. The availability of observable inputs can vary by instrument and is affected by a wide variety of factors, including the type of instrument, whether the instrument is new and not yet established in the marketplace and other characteristics particular to the instrument. Third party pricing sources may also use certain unobservable inputs, such as assumptions of future levels of prepayment, default and loss severity, especially when estimating fair values for securities with lower levels of recent trading activity. When possible, we hold conversations with third party pricing sources to understand their use of significant inputs and assumptions.

We review the various third party fair value estimates and perform procedures to validate their reasonableness, including an analysis of the range of third party estimates for each position, comparison to recent trade activity for similar securities, and our manager's review for consistency with market conditions observed as of the measurement date. While we do not adjust prices we obtain from third party pricing sources, we will exclude third party prices for securities from our determination of fair value if we determine (based on our validation procedures and our manager's market knowledge and expertise) that the price is significantly different than observable market data would indicate and we cannot obtain an understanding from the third party source as to the significant inputs used to determine the price.

We utilize a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. We use the results of the validation procedures described above as part of our determination of the appropriate fair value measurement hierarchy classification. The three levels of hierarchy are defined as follows:


•	Level 1 Inputs - Quoted prices (unadjusted) for identical unrestricted assets and liabilities in active markets that are accessible at the measurement date.


•	Level 2 Inputs - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.


•	Level 3 Inputs - Significant unobservable market inputs that are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities.

The following table presents our financial instruments carried at fair value as of March 31, 2012 and December 31, 2011, on the consolidated balance sheet by the valuation hierarchy, as described above (in thousands):



	As of March 31, 2012
	Level 1		Level 2		Level 3		Total
Assets
Agency securities	$	—	$	3,844,747	$	—	$	3,844,747
Non-agency securities	—		112,767		16,174		128,941
Linked transactions	—		13,841		2,400		16,241
Derivative assets	—		6,178		—		6,178
Total financial assets	$	—	$	3,977,533	$	18,574	$	3,996,107

Liabilities
Derivative liabilities	$	—	$	12,266	$	—	$	12,266
Total financial liabilities	$	—	$	12,266	$	—	$	12,266



	As of December 31, 2011
	Level 1		Level 2		Level 3		Total
Assets
Agency securities	$	—	$	1,740,091	$	—	$	1,740,091
Non-agency securities	—		19,592		5,969		25,561
Linked transactions	—		11,925		1,746		13,671
Derivative assets	—		1,845		—		1,845
Total financial assets	$	—	$	1,773,453	$	7,715	$	1,781,168

Liabilities
Derivative liabilities	$	—	$	5,669	$	—	$	5,669
Total financial liabilities	$	—	$	5,669	$	—	$	5,669

There were no transfers between hierarchy levels during the period ended March 31, 2012. The following table presents a summary of the changes in fair value for the three months ended March 31, 2012 of Level 3 assets carried at fair value as of March 31, 2012 (dollars in thousands):



	As of March 31, 2012
	Non-Agency Securities		Linked Transactions		Total
Balance as of December 31, 2011	$5,969		$1,746		$7,715

Unrealized gain	740		827		1,567
Unrealized loss	(401	)	—		(401	)
Total unrealized gain, net ⁽¹⁾	339		827		1,166

Purchases of securities	9,945		—		9,945
Principal repayments on securities	(345	)	(291	)	(636	)
Net change in borrowings on repurchase agreements underlying Linked Transactions	—		(48	)	(48	)
Discount accretion	266		159		425
Accrued interest on Linked Transactions	—		7		7
Balance as of March 31, 2012	$16,174		$2,400		$18,574

——————

⁽¹⁾All unrealized gains and (losses) are recorded on the consolidated statement of operations.

Our agency securities and prime / Alt-A, option ARM and re-remic non-agency securities are valued using the various market data described above, which include inputs determined to be observable or whose significant value drivers are observable. Accordingly, our agency securities and prime / Alt-A, option ARM and re-remic non-agency securities are classified as Level 2 in the fair value hierarchy. While our subprime non-agency securities are valued using the same process with similar inputs, a significant amount of inputs have been determined to be unobservable due to relatively low levels of market activity. Accordingly, our subprime non-agency securities are classified as Level 3 in the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of our level 3 assets include, prepayment rates, default rates, loss severities in the event of default, and discount rates. A change in any of these individual inputs could result in a change in fair value measurement of our level 3 assets. However, a change in an individual assumption is likely to be at least partially mitigated by offsetting changes in other assumptions.

The fair value of Linked Transactions is comprised of the fair value of the underlying securities, reduced by the repurchase agreement final settlement amount. The fair value of Linked Transactions also includes accrued interest receivable on the non-agency securities and accrued interest payable on the underlying repurchase agreement borrowings. The non-agency securities underlying our Linked Transactions are valued using similar techniques to those used for our other non-agency securities, and as such, Linked Transactions are classified in the fair value hierarchy, based on the classification of the underlying category of non-agency securities.

We determine the fair value of our interest rate swaps and other derivatives considering valuations obtained from a third party pricing service and such valuations are tested with internally developed models that apply readily observable market parameters. In valuing our derivatives, we consider both our counterparties' and our creditworthiness, along with collateral provisions contained in each derivative agreement. No credit valuation adjustments are made in determining the fair value for derivative agreements subject to bilateral collateral arrangements. Our interest rate swaps and other derivatives are classified as Level 2 in the fair value hierarchy.

Note 9. Stockholders’ Equity

Equity Offerings

During the three months ended March 31, 2012, we completed one follow-on public offering of shares of our common stock summarized in the table below (in thousands, except per share data):



Public Offering	Price Received per Share	Shares	Proceeds Net of Offering Costs
March 2012	$21.55	12,000	$258,321

In April 2012, our underwriters exercised their over-allotment option related to our March 2012 equity offering and we sold 1.6 million shares of our common stock for net proceeds of $34.5 million.

Dividends

During three months ended March 31, 2012, we declared dividends of $0.90 per share payable on April 27, 2012 to stockholders of record on March 15, 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) provides readers of American Capital Mortgage Investment Corp.’s ("MTGE", the “Company”, “we”, “us” and “our”) consolidated financial statements a narrative from the perspective of management, and should be read in conjunction with the consolidated financial statements and accompanying notes included in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2011. Our MD&A is presented in five sections:


•	Executive Overview


•	Financial Condition


•	Results of Operations


•	Liquidity and Capital Resources


•	Forward-Looking Statements

EXECUTIVE OVERVIEW

We were incorporated in Maryland on March 15, 2011 and commenced operations on August 9, 2011 following the completion of our IPO. We invest in, finance and manage a leveraged portfolio of mortgage-related investments, which we define to include agency mortgage investments, non-agency mortgage investments and other mortgage-related investments. Agency mortgage investments include residential mortgage pass-through certificates and collateralized mortgage obligations (“CMOs”) structured from residential mortgage pass-through certificates for which the principal and interest payments are guaranteed by a government-sponsored entity (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as the Government National Mortgage Association ("Ginnie Mae”). Non-agency mortgage investments include residential mortgage-backed securities (“RMBS”) backed by residential mortgages that are not guaranteed by a GSE or U.S. Government agency. Non-agency mortgage investments may also include prime and non-prime residential mortgage loans. Other mortgage-related investments may include commercial mortgage-backed securities (“CMBS”), commercial mortgage loans, mortgage-related derivatives and other mortgage-related investments.

We operate so as to qualify to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). As such, we will be required to distribute annually 90% of our taxable net income. As long as we qualify as a REIT, we will generally not be subject to U.S. federal or state corporate taxes on our taxable net income to the extent that we distribute all of our annual taxable net income to our stockholders.

We are externally managed by American Capital MTGE Management, LLC (our “Manager”), an affiliate of American Capital, Ltd. ("American Capital"). We do not have any employees.

Our Investment Strategy


•	manage a leveraged portfolio of mortgage-related investments to generate attractive risk-adjusted returns;


•	capitalize on discrepancies in the relative valuations in the mortgage-related investments market;


•	manage financing, interest, prepayment rate and credit risks;


•	preserve our net asset value within reasonable bands;


•	provide regular quarterly distributions to our stockholders;


•	qualify as a REIT; and


•	remain exempt from the requirements of the Investment Company Act.

The size and composition of our investment portfolio depends on investment strategies implemented by our Manager, the availability of investment capital and overall market conditions, including the availability of attractively priced investments

and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things, current levels of and expectations for future levels of, interest rates, mortgage prepayments, market liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, evolving regulations or legal settlements that impact servicing practices or other mortgage related activities.

Trends and Recent Market Impacts

Movements in interest rates impact the value of our securities and the amount of income we can generate from our portfolio of investments. Accordingly, one of the primary goals of our hedging activities is to protect our net asset value against significant fluctuations due to market risks, including interest rate and prepayment risk. We utilize a variety of strategies to aid us in this objective, which are summarized in Notes 3 and 7 of the accompanying consolidated financial statements.

The table below summarizes interest rates and prices of generic, fixed rate, agency securities as of March 31, 2012 and December 31, 2011.



Interest Rate/Security ⁽¹⁾	March 31, 2012	December 31, 2011	Change
LIBOR:
1-Month	0.24%	0.30%	(0.06)%
3-Month	0.47%	0.58%	(0.11)%
U.S. Treasury Securities:
2-Year U.S. Treasury	0.33%	0.24%	0.09%
5-Year U.S. Treasury	1.04%	0.83%	0.21%
10-Year U.S. Treasury	2.21%	1.88%	0.33%
Interest Rate Swap Rates:
2-Year Swap Rate	0.58%	0.73%	(0.15)%
5-Year Swap Rate	1.27%	1.22%	0.05%
10-Year Swap Rate	2.29%	2.03%	0.26%
30-Year Fixed Rate MBS Price
3.5%	102.72	102.88	(0.16)
4.0%	104.86	105.03	(0.17)
4.5%	106.38	106.42	(0.04)
15-Year Fixed Rate MBS Price
3.0%	103.56	103.28	0.28
3.5%	104.92	104.58	0.34
4.0%	106.00	105.50	0.50

________________________


⁽¹⁾	Price information is for generic instruments only and is not reflective of our specific portfolio holdings. Price information can vary by source. Prices in the table above obtained from a combination of Bloomberg and dealer indications. Interest rates obtained from Bloomberg.

Our Manager currently views maintaining a portfolio of securities with favorable prepayment characteristics (such as lower loan balance and HARP securities) and lower coupons as beneficial to returns in the current market and to maintaining reasonable performance in a variety of potential market scenarios. However, our Manager may reposition the portfolio if market conditions or valuations change. A summary of our MBS portfolio composition as of March 31, 2012 is included below under Financial Condition. As of March 31, 2012, our agency portfolio had a weighted average coupon of 3.60%, compared to 4.01% as of December 31, 2011. The table below summarizes the constant prepayment rates ("CPR") for our portfolio compared to the Fannie Mae and Freddie Mac fixed rate universe for the quarter ended March 31, 2012 and December 31, 2011.



Annualized Monthly Actual Constant Prepayment Rates	January 2012	February 2012	March 2012
Agency securities ⁽¹⁾	4%	6%	7%
Fannie Mae and Freddie Mac fixed rate universe ⁽²⁾	23%	22%	24%

________________________


⁽¹⁾	Weighted average actual one-month annualized CPR released at the beginning of the month based on securities held as of the preceding month-end.


⁽²⁾	Source: JP Morgan

As of March 31, 2012, the weighted average projected prepayment rate on our agency portfolio was 7%, a decrease from 11% as of December 31, 2011. This decrease was primarily due to a combination of an increase in interest rates during the three months ended March 31, 2012, changes in our portfolio composition during the period and changes in our underlying prepayment model assumptions to reflect prepayment behaviors observed in the current market.

The non-agency market environment showed significant signs of improvement with broad market participation during the three months ended March 31, 2012, as compared to the end of 2011. However, trading volumes remain below those experienced during the first half of 2011, and non-agency security liquidity remains a concern. While market sentiment concerning the general housing market has improved, we believe that any housing recovery will be uneven across the country and are cognizant that other events, such as additional U.S. regulatory actions or further economic weakness in Europe could have a material negative impact on the market for non-agency securities. As such, we will continue our selective approach to increasing our non-agency portfolio.

Summary of Critical Accounting Estimates

Our critical accounting estimates relate to the fair value of our investments, recognition of interest income, and derivatives. Certain of these items involve estimates that require management to make judgments that are subjective in nature. We rely on our Manager's experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. Under different conditions, we could report materially different amounts using these critical accounting policies. All of our critical accounting policies are fully described in our MD&A in our Annual Report on Form 10-K for the year ended December 31, 2011. Our significant accounting policies are described in Note 3 to the consolidated financial statements included under Item 1 of this Quarterly Report on Form 10-Q.

We have elected the option to account for all of our financial assets, including all mortgage-related investments, at fair value, with changes in fair value reflected in income during the period in which they occur. We believe this election more appropriately reflects the results of our operations for a particular reporting period, as financial asset fair value changes are presented in a manner consistent with the presentation and timing of the fair value changes of economic hedging instruments.

FINANCIAL CONDITION

The following analysis of our financial condition should be read in conjunction with our interim consolidated financial statements and the notes thereto. The table below presents our condensed consolidated balance sheet as of March 31, 2012 and December 31, 2011 (dollars in thousands, except per share amounts):



	March 31, 2012	December 31, 2011
Balance Sheet Data:
Total assets	4,304,289	2,170,322
Repurchase agreements	3,567,398	1,706,281
Total liabilities	3,824,842	1,961,521
Total stockholders’ equity	479,447	208,801
Net asset value per common share ⁽¹⁾	21.78	20.87

————————


⁽¹⁾	Net asset value per common share was calculated by dividing our total stockholders' equity by the number of our common shares outstanding.

The following table summarizes certain characteristics of our investment portfolio as of March 31, 2012 (dollars in thousands):



	As of March 31, 2012
	Par Value		Amortized Cost Basis		Fair Value		Weighted Average
	Par Value		Amortized Cost Basis		Fair Value		Coupon		Yield ⁽¹⁾
Fannie Mae	$	3,015,151	$	3,133,922	$	3,147,657	3.56	%	2.92	%
Freddie Mac	659,517		693,002		697,090		3.79	%	2.88	%
Total / weighted average	3,674,668		3,826,924		3,844,747		3.60	%	2.92	%
Non-agency securities	199,271		126,803		128,941		1.33	%	7.30	%
Total / weighted average	3,873,939		3,953,727		3,973,688		3.48	%	3.05	%
Non-agency securities underlying Linked Transactions	86,958		51,189		51,845		1.65	%	7.42	%
Total / weighted average	$	3,960,897	$	4,004,916	$	4,025,533	3.45	%	3.12	%

————————


⁽¹⁾	The weighted average agency security yield incorporates an average future constant prepayment rate assumption of 7% as of March 31, 2012 based on forward rates. For non-agency securities, the weighted average yield incorporates expected credit losses.

The following tables summarize certain characteristics of our agency securities portfolio as of March 31, 2012 (dollars in thousands):



	As of March 31, 2012
	Par Value		Amortized Cost Basis		Fair Value		Weighted Average
	Par Value		Amortized Cost Basis		Fair Value		Coupon		Yield		Projected CPR
HARP ⁽¹⁾	$	854,859	$	900,337	$	903,301	3.93	%	3.15	%	7	%
Lower Loan Balance ⁽²⁾	1,208,118		1,266,562		1,277,107		3.68	%	2.79	%	8	%
Other	1,611,691		1,660,025		1,664,339		3.37	%	2.92	%	7	%
Total	$	3,674,668	$	3,826,924	$	3,844,747	3.60	%	2.92	%	7	%

————————


⁽¹⁾	Home Affordable Refinance Program ("HARP") securities are defined as 100% refinance loans with original LTVs greater than or equal to 80% and less than or equal to 125%.


(2)	Lower loan balance securities represent pools with maximum original loan balances less than or equal to $150 thousand.



	As of March 31, 2012
	Par Value		Amortized Cost Basis		Fair Value		Weighted Average
	Par Value		Amortized Cost Basis		Fair Value		Yield		Projected CPR
15-Year
2.5%	$	231,991	$	236,205	$	235,616	2.13	%	7	%
3.0%	452,407		468,980		469,354		2.25	%	8	%
3.5%	333,340		348,094		353,182		2.52	%	9	%
4.0%	208,294		220,549		224,485		2.59	%	11	%
4.5%	23,159		24,870		25,256		2.78	%	10	%
Total	$	1,249,191	$	1,298,698	$	1,307,893	2.37	%	9	%
20-Year
3.5%	$	223,300	$	231,116	$	232,729	2.92	%	6	%
4.0%	55,012		57,555		58,396		3.06	%	10	%
5.0%	48,997		53,178		53,127		3.46	%	8	%
Total	$	327,309	$	341,849	$	344,252	3.03	%	7	%
30-Year
3.5%	$	1,165,121	$	1,196,171	$	1,198,325	3.17	%	6	%
4.0%	714,974		755,580		756,443		3.23	%	7	%
4.5%	140,750		150,600		152,852		3.45	%	8	%
5.0%	77,323		84,026		84,982		3.52	%	10	%
Total	$	2,098,168	$	2,186,377	$	2,192,602	3.22	%	6	%

The following table summarizes certain characteristics of our investment portfolio as of December 31, 2011 (dollars in thousands):



	As of December 31, 2011
	Par Value		Amortized Cost Basis		Fair Value		Weighted Average
	Par Value		Amortized Cost Basis		Fair Value		Coupon		Yield⁽¹⁾
Fannie Mae	$	1,240,435	$	1,305,135	$	1,316,275	3.95	%	2.85	%
Freddie Mac	396,625		421,139		423,816		4.19	%	2.91	%
Total / weighted average	1,637,060		1,726,274		1,740,091		4.01	%	2.87	%
Non-agency securities	47,151		25,994		25,561		2.63	%	8.10	%
Total / weighted average	1,684,211		1,752,268		1,765,652		3.97	%	2.94	%
Non-agency securities underlying Linked Transactions	88,671		52,050		50,193		1.94	%	7.08	%
Total / weighted average	$	1,772,882	$	1,804,318	$	1,815,845	3.87	%	3.06	%

————————


⁽¹⁾	The weighted average agency security yield incorporates an average future constant prepayment rate assumption of 11% as of December 31, 2011 based on forward rates. For non-agency securities, the weighted average yield incorporates expected credit losses.

The following tables summarize certain characteristics of our agency securities portfolio as of December 31, 2011 (dollars in thousands):



	As of December 31, 2011
	Par Value		Amortized Cost Basis		Fair Value		Weighted Average
	Par Value		Amortized Cost Basis		Fair Value		Coupon		Yield		Projected CPR
HARP	$	499,893	$	532,847	$	538,146	4.45	%	3.22	%	12	%
Lower Loan Balance	755,632		795,894		802,579		3.83	%	2.69	%	10	%
Other	381,535		397,533		399,366		3.79	%	2.74	%	13	%
Total	$	1,637,060	$	1,726,274	$	1,740,091	4.01	%	2.85	%	11	%



	As of December 31, 2011
	Par Value		Amortized Cost Basis		Fair Value		Weighted Average
	Par Value		Amortized Cost Basis		Fair Value		Yield		Projected CPR
15-Year
3.0%	$	51,448	$	53,082	$	53,265	2.35	%	8	%
3.5%	327,883		342,475		345,563		2.50	%	10	%
4.0%	230,404		244,080		245,936		2.48	%	13	%
4.5%	23,735		25,524		25,654		2.64	%	12	%
Total	$	633,470	$	665,161	$	670,418	2.48	%	11	%
20-Year
3.5%	$	180,216	$	186,333	$	187,075	2.88	%	8	%
4.0%	58,001		60,679		61,133		2.24	%	26	%
5.0%	50,174		54,427		54,421		2.95	%	15	%
Total	$	288,391	$	301,439	$	302,629	2.70	%	13	%
30-Year
4.0%	301,996		316,231		318,918		3.21	%	10	%
4.5%	303,853		324,686		328,106		3.33	%	11	%
5.0%	109,350		118,757		120,020		3.25	%	16	%
Total	$	715,199	$	759,674	$	767,044	3.22	%	11	%

Actual maturities of MBS are generally shorter than stated contractual maturities primarily as a result of prepayments of principal of the underlying mortgages. The stated contractual final maturity of the mortgage loans underlying our portfolio of securities ranges up to 40 years, but the expected maturity is subject to change based on the actual and expected future prepayments of the underlying loans.

In determining the estimated weighted average years to maturity and yields on our agency MBS, we estimate the percentage of outstanding principal that is prepaid over a period of time on an annualized basis, or constant prepayment rate (“CPR”), based on assumptions for each security using a combination of third-party services, market data and internal models. The third-party services estimate prepayment speeds using models that incorporate the forward yield curve, mortgage rates, current mortgage rates of the outstanding loans, loan age, volatility and other factors. We have estimated that the CPR over the remaining projected life of our aggregate agency investment portfolio is 7% and 11% as of March 31, 2012 and December 31, 2011, respectively. Based on these prepayment assumptions, the weighted average expected life of our agency securities was 7.3 years and 5.9 years as of March 31, 2012 and December 31, 2011, respectively. We amortize or accrete premiums and discounts associated with purchases of our agency MBS into interest income over the estimated life of our securities based on projected CPRs, using the effective yield method. Since the weighted average cost basis of our agency MBS portfolio was 104.1% of par value as of March 31, 2012, slower actual and projected prepayments can have a meaningful positive impact on our asset yields, while faster actual or projected prepayments can have a meaningful negative impact on our asset yields.

The following table summarizes our agency securities at fair value, according to their estimated weighted average life classifications as of March 31, 2012 and December 31, 2011 (dollars in thousands):



	As of March 31, 2012						As of December 31, 2011
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Yield
Greater than one year and less than or equal to three years	—		—		—	%	55,582		55,260		2.17	%
Greater than three years and less than or equal to five years	282,266		277,754		2.56	%	425,251		422,406		2.49	%
Greater than five years	3,562,481		3,549,170		2.94	%	1,259,258		1,248,608		3.02	%
Total / weighted average	$	3,844,747	$	3,826,924	2.92	%	$	1,740,091	$	1,726,274	2.87	%

Estimated weighted average yields on our non-agency MBS are based on our estimate of the timing and amount of future cash flows and our cost basis. Our cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses and other factors. The following table summarizes our non-agency securities (including those underlying Linked Transactions) at fair value, according to their estimated weighted average life classifications as of March 31, 2012 and December 31, 2011 (dollars in thousands):



	As of March 31, 2012						As of December 31, 2011
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Yield
Less than or equal to five years	$	24,321	$	23,405	7.49	%	$	12,394	$	12,423	6.25	%
Greater than five years and less than or equal to seven years	132,896		131,087		7.40	%	63,360		65,621		7.64	%
Greater than seven years	23,569		23,500		6.83	%	—		—		—	%
Total/ weighted average⁽¹⁾	$	180,786	$	177,992	7.34	%	$	75,754	$	78,044	7.42	%

————————


(1)	The fair value of non-agency securities as of March 31, 2012 and December 31, 2011includes $51.8 million and $50.2 million of non-agency securities that are stated net of $35.6 million and $36.6 million in repurchase agreement funding on the consolidated balance sheet as Linked Transactions, at fair value of $16.2 million and $13.7 million, respectively.

Our non-agency securities are subject to risk of loss with regard to principal and interest payments and as of March 31, 2012 and December 31, 2011 have generally either been assigned below investment grade ratings by rating agencies, or have not been rated. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on the ratings assigned by rating agencies. Our non-agency securities (including non-agency

securities underlying Linked Transactions) had weighted average credit enhancements of 19% and 14%, as of March 31, 2012 and December 31, 2011, respectively. These securities were collateralized by mortgages with weighted average amortized loan to value ratios of 73% and 71%, as of March 31, 2012 and December 31, 2011, respectively. However, as the home values associated with these mortgages have generally experienced significant price declines since origination and the loan to value ratios are calculated based on the original home values, we believe that current market-based loan to value ratios would be significantly higher. Additionally, 24% and 25% of the mortgages underlying these securities, as of March 31, 2012 and December 31, 2011, respectively, are either 60 or more days delinquent, undergoing foreclosure or bankruptcy processes, or held as real estate owned by the trusts.

As of March 31, 2012 and December 31, 2011, we had repurchase agreements with 24 and 22 financial institutions, respectively, including repurchase agreements within Linked Transactions. In addition, less than 8% of our equity at risk was with any one counterparty as of March 31, 2012 compared to 6% as of December 31, 2011, with the top five counterparties representing less than 22% of our equity at risk as of March 31, 2012 compared to 21% as of December 31, 2011.



	As of March 31, 2012					As of December 31, 2011
Original Maturity	Borrowings Outstanding		Weighted Average Interest Rate		Weighted Average Days to Maturity	Borrowings Outstanding		Weighted Average Interest Rate		Weighted Average Days to Maturity
Repurchase Agreements
30 days or less	$	809,081	0.43	%	18	$	77,073	0.40	%	10
31 - 60 days	704,460		0.38	%	23	346,201		0.43	%	19
61 - 90 days	703,285		0.37	%	42	372,217		0.39	%	31
91 - 180 days	1,057,375		0.36	%	57	774,594		0.34	%	37
Greater than 180 days	293,197		0.45	%	137	136,196		0.48	%	209
Total / Weighted Average	$	3,567,398	0.39	%	45	$	1,706,281	0.38	%	45

Repurchase Agreements Underlying Linked Transactions
30 days or less	$	11,176	2.17	%	16	$	9,509	2.04	%	14
31 - 60 days	18,224		1.96	%	12	13,397		1.98	%	8
61 - 90 days	6,165		2.25	%	45	2,857		2.36	%	18
91 - 180 days	—		—	%	—	10,791		2.07	%	47
Total / Weighted Average	$	35,565	2.06	%	19	$	36,554	2.05	%	22

As of March 31, 2012 and December 31, 2011, we had interest rate swap agreements outstanding where we pay a fixed rate and receive a floating rate based on LIBOR, summarized in the tables below (dollars in thousands):



As of March 31, 2012
Current Maturity Date for Interest Rate Swaps⁽¹⁾	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Net Estimated Fair Value			Weighted Average Maturity (Years)
2014	$	100,000	0.64	%	0.49	%	$	(16	)	2.4
2015	450,000		0.85	%	0.49	%	(944		)	3.2
2016	250,000		1.23	%	0.50	%	(1,737		)	4.3
2017	990,000		1.39	%	0.47	%	(3,558		)	5.1
2018	25,000		1.73	%	0.55	%	(217		)	6.6
2019	350,000		1.81	%	0.47	%	(379		)	7.0
2021	25,000		2.30	%	0.47	%	(96		)	9.6
Total / weighted average	$	2,190,000	1.31	%	0.48	%	$	(6,947	)	4.9

————————


⁽¹⁾	Includes swaps with an aggregate notional of $1.3 billion, with deferred start dates ranging from one month to two months from March 31, 2012.



As of December 31, 2011
Current Maturity Date for Interest Rate Swaps ⁽¹⁾	Notional Amount		Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Net Estimated Fair Value			Weighted Average Maturity (Years)
2014	$	100,000	0.64	%	0.50	%	$	217		2.7
2015	450,000		0.85	%	0.48	%	(418		)	3.4
2016	250,000		1.23	%	0.47	%	(2,166		)	4.5
2018	25,000		1.73	%	0.43	%	(257		)	6.8
2019	25,000		1.83	%	0.58	%	(494		)	7.1
2021	25,000		2.30	%	0.58	%	(268		)	9.9
Total / weighted average	$	875,000	1.03	%	0.48	%	$	(3,386	)	4.0

————————


⁽¹⁾	Includes swaps with an aggregate notional of $50.0 million, with deferred start dates ranging from two to five months from December 31, 2011.

The following table presents certain information about our interest rate swaption agreements at March 31, 2012 and December 31, 2011(dollars in thousands):



	Option					Underlying Swap
	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Average Term (Years)
As of March 31, 2012	$	4,693	$	4,224	0.7	$	400,000	2.65	%	8.6
As of December 31, 2011	$	884	$	828	0.8	$	50,000	2.81	%	10.8

RESULTS OF OPERATIONS

The following analysis of our results of operations should be read in conjunction with our interim consolidated financial statements and the notes thereto. The table below presents our consolidated statement of operations for the three months ended March 31, 2012 (dollars in thousands, except per share amounts):



Interest income:
Agency securities	$	15,306
Non-agency securities	1,271
Other	25
Interest expense	(1,664		)
Net interest income	14,938

Other gains (losses):
Realized gain on agency securities, net	5,971
Realized loss on periodic settlements of interest rate swaps, net	(1,041		)
Realized gain on other derivatives and securities, net	562
Unrealized gain on agency securities, net	4,006
Unrealized gain on non-agency securities, net	2,411
Unrealized gain and net interest income on linked transactions, net	3,384
Unrealized loss on other derivatives and securities, net	(6,785		)
Total other gains, net	8,508

Expenses:
Management fees	1,082
General and administrative expenses	1,035
Total expenses	2,117

Income before excise tax	21,329
Excise tax	9
Net income	$	21,320

Net income per common share—basic and diluted	$	1.82

Interest Income and Asset Yield

Interest income of $16.6 million for the three months ended March 31, 2012 was comprised of the following (dollars in thousands):



Agency securities	$	15,306
Non-agency securities ⁽¹⁾	1,271
Other	25
Interest income	$	16,602

————————


⁽¹⁾	Interest income from non-agency securities of $1.3 million does not include $0.9 million of interest income related to Linked Transactions which is included in unrealized loss and net interest income on linked transactions, net on the consolidated statement of operations.

Our aggregate average asset yield was 3.36% for the three months ended March 31, 2012. For our agency investment portfolio, our average asset yield and average coupon were 3.11% and 3.84%, respectively, for the three months ended March 31, 2012. For our non-agency investment portfolio, including non-agency securities recorded as Linked Transactions, our average asset yield and average coupon were 8.05% and 1.62%, respectively, for the three months ended March 31, 2012.

We amortize premiums and discounts associated with agency securities and non-agency securities of high credit quality into interest income over the life of such securities using the effective yield method. The effective yield (or asset yield) on our agency securities is based on actual CPRs realized for individual securities in our investment portfolio through the reporting date and assumes a CPR over the remaining projected life of our aggregate investment portfolio of 7% as of March 31, 2012. The actual CPR realized for individual agency securities in our investment portfolio was approximately 6% for the three months ended March 31, 2012.

Interest income from our agency securities for the three months ended March 31, 2012 is net of $2.7 million of net premium amortization expense. As of March 31, 2012, the amortized cost basis of our agency investments was 104.1% of par value and the unamortized premium balance of our aggregate agency portfolio was $152.3 million.

Leverage

Our leverage as of March 31, 2012 was 7.4x our stockholders’ equity. When adjusted for the net payables and receivables for unsettled securities and repurchase agreements underlying Linked Transactions, our leverage ratio was 7.6x our stockholders’ equity as of March 31, 2012. Our actual leverage will vary from time to time based on various factors, including our Manager’s opinion of the level of risk of our assets and liabilities, composition of our investment portfolio, our liquidity position, our level of unused borrowing capacity, over-collateralization levels required by lenders when we pledge securities to secure our borrowings and the current market value of our investment portfolio. In addition, certain of our master repurchase agreements and master swap agreements contain a restriction that prohibits our leverage from exceeding certain levels ranging from 10 to 12 times the amount of our stockholders' equity.

The table below presents our quarterly average and quarter end repurchase agreement balances outstanding and average leverage ratios for the three months ended March 31, 2012 and from commencement of operations on August 9, 2011 through December 31, 2011 (dollars in thousands):



	Repurchase Agreements⁽¹⁾						Average Daily Interest Rate on Amounts Outstanding		Average Interest Rate on Ending Amount Outstanding		Average Leverage ⁽²⁾	Leverage as of Period End ⁽³⁾	Adjusted Leverage as of Period End ⁽⁴⁾
Period Ended	Average Daily Amount Outstanding		Maximum Daily Amount Outstanding		Ending Amount Outstanding		Average Daily Interest Rate on Amounts Outstanding		Average Interest Rate on Ending Amount Outstanding		Average Leverage ⁽²⁾	Leverage as of Period End ⁽³⁾	Adjusted Leverage as of Period End ⁽⁴⁾
March 31, 2012	$	1,894,945	$	3,602,964	$	3,602,964	0.39	%	0.41	%	6.8x	7.4x	7.6x
December 31, 2011	$	1,516,506	$	1,743,886	$	1,742,835	0.40	%	0.42	%	7.5x	8.2x	8.0x
September 30, 2011	$	942,335	$	1,460,914	$	1,460,914	0.31	%	0.32	%	4.7x	7.3x	7.8x

————————


⁽¹⁾	Includes repurchase agreements within Linked Transactions, at fair value, on the consolidated balance sheet.


⁽²⁾	Average leverage for the period was calculated by dividing our daily weighted average repurchase agreements (including those within Linked Transactions) by our average month-ended stockholders’ equity for the period.


⁽³⁾	Leverage as of period end was calculated by dividing the amount outstanding under our repurchase agreements by our stockholders’ equity at period end.


⁽⁴⁾	Adjusted leverage as of period end was calculated by dividing the sum of the amounts outstanding under our repurchase agreements (including those within Linked Transactions) and net payables and receivables for unsettled securities by our total stockholders’ equity at period end.

Interest Expense and Cost of Funds

Interest expense of $1.7 million for the three months ended March 31, 2012 was comprised of interest expense on our repurchase agreements. We also incurred $0.2 million of expense for repurchase agreements reported as Linked Transactions, which is included in unrealized gain and net interest income on linked transactions, net on our consolidated statement of operations. In addition, we recorded $1.0 million of expense related to our interest rate swaps which is included in realized loss on periodic settlements of interest rate swaps, net, on our consolidated statement of operations.

For the three months ended March 31, 2012, including repurchase agreements underlying Linked Transactions, our average repurchase agreement balance outstanding was $1.9 billion with an average interest rate of 0.39%. Including the net impact of interest rate swaps, the cost of funds for the three months ended March 31, 2012 was 0.61%.

Realized Gain on Securities, Net

The following table is a summary of our net realized gain on securities for the three months ended March 31, 2012 (dollars in thousands):



Proceeds from agency securities sold	$	571,428
Less decrease in receivable for agency securities sold	(198,598		)
Less agency securities sold, at cost	(366,859		)
Net realized gains on sale of agency securities	$	5,971

Gross realized gains on sale of agency securities	$	5,971
Gross realized losses on sale of agency securities	—
Net realized gains on sale of agency securities	$	5,971

Sales of securities are driven by our Manager’s execution of our active portfolio management strategy. Our strategy for the period presented was largely focused on positioning our portfolio towards securities with attributes our Manager believes reduce the level of prepayment risk and overall exposure to interest rate risk in light of current and anticipated interest rates, federal government programs, general economic conditions and other factors.

Gain (Loss) on Derivatives and Other Securities, Net

The following table is a summary of our realized and unrealized gain (loss) on derivatives and other securities, net, for the three months ended March 31, 2012 (dollars in thousands):



Realized loss on periodic settlements of interest rate swaps, net	$	(1,041	)
Realized gain (loss) from other derivatives and securities:
TBA securities	$	(2,936	)
U.S Treasury securities sold short	3,763
U.S Treasury securities	(265		)
Total realized gain from other derivatives and securities, net	$	562
Unrealized gain (loss) from other derivatives and securities:
TBA securities	$	(2,056	)
Interest rate swaps	(5,271		)
Interest rate swaptions	(413		)
U.S Treasury securities sold short	955
Total unrealized loss from other derivatives and securities, net	$	(6,785	)
Unrealized gain and net interest income on Linked Transactions, net
Unrealized gain on Linked Transactions	$	2,675
Interest income on non-agency securities within Linked Transactions	892
Interest expense on repurchase agreements underlying Linked Transactions	(183		)
Total unrealized gain and net interest income on Linked Transactions, net	$	3,384

For further details regarding our derivatives and related hedging activity please refer to Notes 3 and 7 to our consolidated financial statements in this Quarterly Report on Form 10-Q.

Management Fees and General and Administrative Expenses

We pay our Manager a base management fee payable monthly in arrears in an amount equal to one twelfth of 1.50% of our Equity. Our Equity is defined as our month-end GAAP stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in retained earnings as computed in accordance with GAAP. There is no incentive compensation payable to our Manager pursuant to the management agreement. We incurred management fees of $1.1 million for the three months ended March 31, 2012.

General and administrative expenses were $1.0 million for the three months ended March 31, 2012. Our general and

administrative expenses primarily consist of prime brokerage fees, information technology costs, research and data service fees, audit fees, Board of Director fees and insurance expenses.

Our total management fee and general and administrative expenses as a percentage of our average stockholders’ equity on an annualized basis was 3.0% for the three months ended March 31, 2012.

Dividends

For the three months ended March 31, 2012, we declared dividends of $0.90 per share. As a REIT, we are required to distribute annually 90% of our taxable income to maintain our status as a REIT and all of our taxable income to avoid Federal, state and local corporate income taxes. For the REIT distribution requirement, we can treat dividends declared by September 15 and paid by December 31 of the subsequent year as having been a distribution of our taxable income for our prior tax year. For excise tax purposes, dividends declared by December 31 and paid by January 31 are treated as having been a distribution of our taxable income for the prior tax year. As of March 31, 2012, we had an estimated $11.7 million (or $0.53 per share) of undistributed taxable income related to our 2012 tax year, net of the dividend payable as of March 31, 2012 of $9.0 million. Income as determined under GAAP differs from income as determined under tax rules because of both temporary and permanent differences in income and expense recognition. Examples include temporary differences related to unrealized gains and losses on derivative instruments and investment securities that are recognized in income for GAAP but are excluded from taxable income until realized or settled and temporary differences in the CPR used to amortize premiums or accrete discounts.

Key Statistics

The table below presents key statistics for the three months ended March 31, 2012 (dollars in thousands, except per share amounts):



Ending agency securities, at fair value	$	3,844,747
Ending agency securities, at cost	$	3,826,924
Ending agency securities, at par	$	3,674,668
Average agency securities, at cost	$	1,967,996
Average agency securities, at par	$	1,872,616

Ending non-agency securities, at fair value ⁽¹⁾	$	180,786
Ending non-agency securities, at cost ⁽¹⁾	$	177,992
Ending non-agency securities, at par⁽¹⁾	$	286,229
Average non-agency securities, at cost ⁽¹⁾	$	107,491
Average non-agency securities, at par ⁽¹⁾	$	182,900

Average total assets, at fair value	$	2,269,192
Average repurchase agreements ⁽¹⁾	$	1,894,945
Average stockholders' equity	$	279,490

Average coupon ⁽²⁾	3.64		%
Average asset yield ⁽³⁾	3.36		%
Average cost of funds ⁽⁴⁾	0.61		%
Average net interest rate spread ⁽⁵⁾	2.75		%
Average actual CPR for agency securities held during the period	5.7		%
Average projected life CPR for agency securities as of period end	7.3		%
Leverage (average during the period) ⁽⁶⁾	6.8x
Leverage (as of period end) ⁽⁷⁾	7.6x
Expenses % of average total assets ⁽⁸⁾	0.37		%
Expenses % of average stockholders' equity ⁽⁹⁾	3.01		%
Net book value per common share as of period end ⁽¹⁰⁾	$	21.78
Dividends declared per common share	$	0.90
Net return on average stockholders' equity ⁽¹¹⁾	30.60		%

————————

⁽¹⁾

If the Company purchases investment securities and finances the purchase with a repurchase agreement with the same counterparty that is entered into simultaneously or in contemplation of the purchase, the purchase commitment and repurchase agreement are recorded net for GAAP purposes on the financial statements as a derivative (“Linked Transaction”). Fair value of non-agency securities includes $52 million and $50 million, respectively, of non-agency securities recorded as Linked Transactions as of March 31, 2012 and December 31, 2011. The repurchase agreement balances include repurchase agreement financing recorded as Linked Transactions of $36 million and $37 million, respectively, as of March 31, 2012 and December 31, 2011.


⁽²⁾	Weighted average coupon for the period was calculated by dividing the Company's total stated coupon on securities by the Company's daily weighted average securities held.


⁽³⁾	Weighted average asset yield for the period was calculated by dividing the Company's total interest income on securities including interest income of securities classified as Linked Transactions on the consolidated statement of operations by the Company's daily weighted average securities held including securities classified as Linked Transactions on the consolidated balance sheet.

⁽⁴⁾

Weighted average cost of funds for the period was calculated by dividing the sum of the Company's total interest expense, interest expense on repurchase agreements underlying Linked Transactions on the consolidated statement of operations and periodic settlements of interest rate swaps, by the Company's daily weighted average repurchase agreements for the period, including repurchase agreements classified as Linked Transactions on the consolidated balance sheet.


⁽⁵⁾	Average net interest rate spread for the period was calculated by subtracting the Company's weighted average cost of funds from the Company's weighted average asset yield.


⁽⁶⁾	Leverage during the period was calculated by dividing the Company's daily weighted average repurchase agreements (including those related to Linked Transactions), for the period by the Company's average month-ended stockholders' equity for the period.


⁽⁷⁾	Leverage at period end was calculated by dividing the sum of the amount outstanding under the Company's repurchase agreements, amount outstanding under repurchase agreements recorded as Linked Transactions and the net receivable/payable for unsettled securities at period end by the Company's stockholders' equity at period end.


⁽⁸⁾	Expenses as a percentage of average total assets was calculated by dividing the Company's total expenses by the Company's average total assets for the period.


⁽⁹⁾	Expenses as a percentage of average stockholders' equity was calculated by dividing the Company's total expenses by the Company's average month-ended stockholders' equity.


⁽¹⁰⁾	Net book value per share was calculated by dividing the Company's total stockholders' equity by the Company's number of shares outstanding.


⁽¹¹⁾	Annualized net return on average stockholders' equity for the period was calculated by dividing the Company's net income by the Company's average month-ended stockholders' equity on an annualized basis.

Net Spread Income

GAAP interest income does not include interest earned on non-agency securities underlying our Linked Transactions, and GAAP interest expense does not include either interest related to repurchase agreements underlying our Linked Transactions, or periodic settlements associated with undesignated interest rate swaps. Interest income and expense related to Linked Transactions is reported within unrealized gain and net interest income on linked transactions, net and periodic interest settlements associated with undesignated interest rate swaps are reported in realized loss on periodic settlements of interest rate swaps, net on our consolidated statement of operations. As we believe that these items are beneficial to the understanding of our investment performance, we provide a non-GAAP measure called adjusted net interest income, which is comprised of net interest income plus the net interest income related to Linked Transactions, less net periodic settlements of interest rate swaps. Additionally, we present net spread income as a measure of our operating performance. Net spread income is comprised of adjusted net interest income, less total operating expenses. Net spread income excludes all unrealized gains or losses due to changes in fair value, realized gains or losses on sales of securities, realized losses associated with derivative instruments and income taxes. Net spread income does not include any impact from other hedging activities, such as the use of swaptions, U.S Treasuries and TBA positions.

The table below presents a reconciliation from GAAP net interest income to adjusted net interest income and net spread income (dollars in thousands):



	For the Three Months Ended March 31, 2012
Interest income:
Agency securities	$	15,306
Non-agency securities and other	1,296
Interest expense	(1,664		)
Net interest income	14,938
Interest income on non-agency securities underlying Linked Transactions	891
Interest expense on repurchase agreements underlying Linked Transactions	(183		)
Realized loss on periodic settlements of interest rate swaps, net	(1,041		)
Adjusted net interest income	14,605
Operating expenses	(2,117		)
Net spread income	$	12,488

Weighted average number of common shares outstanding - basic and diluted	11,724

Net spread income per common share – basic and diluted	$	1.07

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of funds are borrowings under master repurchase agreements, equity offerings, asset sales and monthly principal and interest payments on our investment portfolio. Because the level of our borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on the balance sheet is significantly less important than the potential liquidity available under our borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, maintenance of any margin requirements and the payment of cash dividends as required for our continued qualification as a REIT. To qualify as a REIT, we must distribute annually at least 90% of our taxable income. To the extent that we annually distribute all of our taxable income in a timely manner, we will generally not be subject to federal and state income taxes. We currently expect to distribute all of our taxable income in a timely manner so that we are not subject to Federal and state income taxes. This distribution requirement limits our ability to retain earnings and thereby replenish or increase capital from operations.

Equity Offerings

During the three months ended March 31, 2012, we completed one follow-on public offering of shares of our common stock summarized in the table below (in thousands, except per share data):



Public Offering	Price Received per Share	Shares	Proceeds Net of Offering Costs
March 2012	$21.55	12,000	$258,321

In April 2012, our underwriters exercised their over-allotment option related to our March 2012 equity offering and we sold 1.6 million shares of our common stock for net proceeds of $34.5 million.

Debt Capital

As part of our investment strategy, we borrow against our investment portfolio pursuant to master repurchase agreements. We expect that our borrowings pursuant to repurchase transactions under such master repurchase agreements generally will have maturities of less than one year. When adjusted for net payables and receivables for unsettled securities and repurchase agreement financing recorded as Linked Transactions, our leverage ratio was 7.6x the amount of our stockholders’ equity as of March 31, 2012. Our cost of borrowings under master repurchase agreements generally corresponds to LIBOR plus or minus a margin. We have master repurchase agreements with 24 financial institutions, which are described below. As of March 31, 2012, borrowings under repurchase arrangements secured by agency and non-agency securities (including those underlying Linked Transactions) totaled $3.5 billion and $82.7 million, respectively, with weighted average days to maturity of 45 and 18, respectively. As of March 31, 2012, we did not have an amount at risk with any counterparty greater than 8% of our equity, with exposure to our top five counterparties representing less than 22% of our equity. The table below includes a summary of our repurchase agreement funding by number of counterparties and counterparty region as of March 31, 2012. Refer to Note 6 to our consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our borrowings under repurchase agreements and weighted average interest rates as of March 31, 2012.



	As of March 31, 2012
Counterparty Region	Number of Counterparties	Percent of Repurchase Agreement Funding
North America	13	57%
Asia	5	23%
Europe	6	20%
Total	24	100%

Amounts available to be borrowed under our repurchase agreements are dependent upon lender collateral requirements and the lender’s determination of the fair value of the securities pledged as collateral, based on recognized pricing sources agreed to by both parties to the agreement. Collateral fair value can fluctuate with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Our counterparties also apply a "haircut” to the fair value of our pledged collateral, which reflects the underlying risk of the specific collateral and protects our counterparties against a decrease in collateral value, but conversely subjects us to counterparty risk and limits the amount we can borrow against our investment securities. Our master repurchase agreements do not specify the haircut, rather haircuts are determined on an individual repurchase transaction basis. Weighted average counterparty haircuts to the value of our agency

securities and non-agency securities (including those underlying Linked Transactions) held as collateral as of March 31, 2012, were 5% and 28%, respectively. We did not experience significant volatility in the level of weighted average haircuts required by our lenders for the three months ended March 31, 2012.

In the event that the fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (a margin call), we may be required to pledge additional assets to the repurchase agreement counterparties (i.e., lenders) which may take the form of additional securities or cash. Similarly, if the estimated fair value of investment securities increases due to changes in the market interest rates, lenders may release collateral back to us. Specifically, margin calls would result from a decline in the value of the securities securing our repurchase agreements and prepayments on the mortgages securing such securities. As of March 31, 2012, we have met all margin requirements. We had unrestricted cash and cash equivalents of $79.2 million and unpledged securities of $133.2 million, excluding net unsettled purchases and sales of securities, available to meet margin calls on our repurchase agreements and derivative instruments as of March 31, 2012.

Although we believe that we will have adequate sources of liquidity available to us through repurchase agreement financing to execute our business strategy, there can be no assurances that repurchase agreement financing will be available to us upon the maturity of our current repurchase agreements to allow us to renew or replace our repurchase agreement financing on favorable terms or at all. If our repurchase agreement lenders default on their obligations to resell the underlying securities back to us at the end of the term, we could incur a loss equal to the difference between the value of the securities and the cash we originally received.

We maintain an interest rate risk management strategy under which we use derivative financial instruments to manage the adverse impact of interest rates changes on the value of our investment portfolio as well as our cash flows. In particular, we attempt to mitigate the risk of the cost of our short-term variable rate liabilities increasing at a faster rate than the earnings of our long-term assets during a period of rising interest rates. The principal derivative instruments that we use are interest rate swaps, supplemented with the use of TBA agency securities, interest rate swaptions, and other instruments.

We use interest rate swap agreements to effectively lock in fixed rates on a portion of our short-term borrowings because longer-term committed borrowings are not available at attractive terms. Refer to Note 7 to our consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our outstanding interest rate swaps as of March 31, 2012 and the related activity for the period ended March 31, 2012.

Asset Sales and TBA Eligible Securities

We maintain a portfolio of highly liquid agency MBS securities. We may sell our securities through the TBA market by delivering securities into TBA contracts for the sale of securities, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA"). We may alternatively sell securities that have more unique attributes on a specified basis when such securities trade at a premium over generic TBA securities or if the securities are not otherwise eligible for TBA delivery. Since the TBA market is the second most liquid market (second to the U.S. Treasury market), maintaining a significant level of securities eligible for TBA delivery enhances our liquidity profile and provides price support for our TBA eligible securities in a rising interest rate scenario at or above generic TBA prices. As of March 31, 2012, approximately 98% of our agency MBS portfolio was eligible for TBA delivery.

Off-Balance Sheet Arrangements

As of March 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. Further, as of March 31, 2012, we had not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

FORWARD-LOOKING STATEMENTS

This document contains "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995) that inherently involve risks and uncertainties. Our actual results and liquidity can differ materially from those anticipated in these forward-looking statements because of changes in the level and composition of our investments and other factors. These factors may include, but are not limited to, changes in general economic conditions, the availability of suitable investments from both an investment return and regulatory perspective, the availability of new investment capital, fluctuations in interest rates and levels of mortgage prepayments, deterioration in credit quality and ratings, the effectiveness of risk management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors. They also include, among other things, statements concerning anticipated revenues, income or loss,

dividends, capital structure, or other financial terms, as well as statements regarding subjects that are forward-looking by their nature, such as:


•	our business and financing strategy;


•	our ability to obtain future financing arrangements;


•	our understanding of our competition and our ability to compete effectively;


•	our projected operating results;


•	market and industry trends;


•	estimates relating to our future dividends;


•	our hedging activities;


•	interest rates; and


•	the impact of technology on our operations and business.

The forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. These beliefs, assumptions, and expectations may 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 when you make a decision concerning an investment in our common stock, along with the following factors, among others, that may cause actual results to vary from our forward-looking statements:


•	general volatility of the securities markets in which we invest and the market price of our common stock;


•	our lack of operating history;


•	changes in our business or investment strategy;


•	changes in interest rate spreads or the yield curve;


•	availability, terms and deployment of debt and equity capital;


•	availability of qualified personnel;


•	the degree and nature of our competition;


•	increased prepayments of the mortgage loans underlying our agency securities;


•	risks associated with our hedging activities;


•	changes in governmental regulations, tax rates and similar matters;


•	defaults on our investments;


•	changes in GAAP;


•	legislative and regulatory changes (including changes to laws governing the taxation of REITs);


•	availability of investment opportunities in mortgage-related investments;


•	our ability to qualify and maintain our qualification as a REIT for federal income tax purposes and limitations imposed on our business by our status as a REIT;


•	general volatility in capital markets;


•	the adequacy of our cash reserves and working capital;


•	the timing of cash flows, if any, from our investment portfolio; and


•	other risks associated with investing in agency securities, including changes in our industry, interest rates, the debt securities markets, the general economy or the finance and real estate markets specifically.

When we use words such as "will likely result," "plan," "may," "shall," "believe," "expect," "anticipate," "project," "intend," "estimate," "goal," "objective," or similar expressions, we intend to identify forward-looking statements. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statement to reflect new information, future events, or otherwise, except as required under U.S. federal securities laws.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in market factors such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risks that we are exposed to are interest rate risk, prepayment risk, spread risk, liquidity risk, credit risk, extension risk and inflation risk.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities, by affecting the spread between our interest-earning assets and interest bearing liabilities. Changes in the general level of interest rates can also affect our periodic settlements of interest rate swaps and the value of our interest rate swaps which impact our net income. Changes in the level of interest rates can also affect the rate of prepayments of our securities and the value of the securities that constitute our investment portfolio, which affects our net income and ability to realize gains from the sale of these assets and impacts our ability and the amount that we can borrow against these securities.

We may utilize a variety of financial instruments in order to limit the effects of changes in interest rates on our operations, including interest rate swap agreements, interest rate swaptions, interest rate cap or floor contracts and futures or forward contracts. We may also purchase or short TBA securities, U.S. Treasury securities and U.S. Treasury futures contracts, purchase or write put or call options on TBA securities or we may invest in other types of mortgage derivative securities, such as interest-only securities, and synthetic total return swaps. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.

Our profitability and the value of our investment portfolio (including derivatives used for economic hedging purposes) may be adversely affected during any period as a result of changing interest rates including changes in forward yield curves.

A primary measure of an instrument's price sensitivity to interest rate fluctuations is its duration. We estimate the duration of our portfolio using both a third-party risk management system and market data. We review the duration estimates from the third-party model and may make adjustments based on our Manager's judgment. These adjustments are intended to, in our Manager's opinion, better reflect the unique characteristics and market trading conventions associated with certain types of

securities. These adjustments generally result in shorter durations than what the unadjusted third-party model would otherwise

produce. Without these adjustments, in rising rate scenarios, the longer unadjusted durations may underestimate price projections on certain securities with slower prepayment characteristics, such as HARP and lower loan balance securities, to a level below those of generic or TBA securities. However, in our Manager's judgment, because these securities are typically deliverable into TBA contracts, the price of these securities is unlikely to drop below the TBA price in rising rate scenarios. The accuracy of the estimated duration of our portfolio and projected agency securities prices depends on our Manager's assumptions and judgments. Our Manager may discontinue making these duration adjustments in the future or may choose to make different adjustments. Other models could produce materially different results.

The following table quantifies the estimated changes in net interest income (including the net interest income on Linked Transactions and periodic settlements of interest rate swaps) and the fair value of the investment portfolio (including derivatives used for economic hedging purposes) should interest rates go up or down by 50 and 100 basis points, assuming the yield curves of the rate shocks will be parallel to each other and the current yield curve.

All changes in income and value are measured as percentage changes from the projected net interest income and investment portfolio value at the base interest rate scenario. The base interest rate scenario assumes interest rates as of March 31, 2012. Given the low level of interest rates, we also apply a floor of 0% for all anticipated interest rates included in our assumptions, such that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level. However, because estimated prepayment speeds are impacted to a lesser degree by this floor, it is expected that an increase in our prepayment speeds as a result of a hypothetical interest rate decrease would result in an acceleration of our premium amortization and could result in reinvestment of such prepaid principal into lower yielding assets.

Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover, if

different models were employed in the analysis, materially different projections could result. In addition, the table below also does not include the impact of leverage, which generally has the effect of increasing the impact of the percentage change in projected portfolio value on stockholders' equity by a factor of leverage plus one. Lastly, while the table below reflects the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our investment securities or reposition our economic hedges as a part of our overall management of our investment portfolio.



	Percentage Change in Projected
Change in Interest Rate	Net Interest Income ⁽¹⁾		Portfolio Value ⁽²⁾		Net Asset Value ⁽²⁾
+100 basis points	(12.0	)%	(1.0	)%	(8.3	)%
+50 basis points	(5.4	)%	(0.3	)%	(3.0	)%
-50 basis points	0.2	%	—	%	(0.4	)%
-100 basis points	(6.8	)%	(0.7	)%	(6.4	)%

————————

⁽¹⁾ Includes the effect on Linked Transactions and interest rate swaps.

⁽²⁾ Includes the effect of derivatives.

Prepayment Risk

Premiums and discounts associated with the purchase of agency securities and non-agency securities of higher credit quality are amortized or accreted into interest income over the projected lives of the securities, including contractual payments and estimated prepayments using the interest method. Changes to the GSEs' underwriting standards, further modifications to existing U.S. Government sponsored programs such as HARP, or the implementation of new programs could materially impact prepayment speeds. In addition, GSE buyouts of loans in imminent risk of default, loans that have been modified, or loans that have defaulted will generally be reflected as prepayments on agency securities and also increase the uncertainty around these estimates. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate published prepayment data for similar securities, market consensus and current market conditions. If the actual prepayment experienced differs from our estimate of prepayments, we will be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.

Spread Risk

Our investment securities are reflected at their estimated fair value with unrealized gains and losses reported in earnings. As of March 31, 2012, the fair value of these securities was $4.0 billion. When the market spread between the yield on our mortgage-backed securities and U.S. Treasury securities or swap rates widens, the value of our net assets could decline, creating what we refer to as spread risk. The spread risk associated with our securities and the resulting fluctuations in fair value of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets such as liquidity changes in required rates of return on different assets, or changes in risk premiums associated with different types of assets.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings in the form of repurchase agreements. Our assets that are pledged to secure repurchase agreements are mortgage-backed securities and cash. As of March 31, 2012, we had unrestricted cash and cash equivalents of $79.2 million and unpledged securities of $133.2 million, excluding net unsettled purchases and sales of securities, available to meet margin calls on our repurchase agreements, derivative instruments and for other corporate purposes. However, should the value of our securities pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. As such, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase agreements, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our investment portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

Credit Risk

We are exposed to credit risk related to our non-agency investments and certain derivative transactions. We accept credit exposure at levels we deem prudent as an integral part of our diversified investment strategy. Therefore, we may retain all or a portion of the credit risk on our non-agency investments. We seek to manage this risk through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, sale of assets where we have identified negative credit trends and the use of various types of credit enhancements. We may also use non-recourse financing, which limits our exposure to credit losses to the specific pool of mortgages subject to the non-recourse financing. Our overall management of credit exposure may also include the use of credit default swaps or other financial derivatives that we believe are appropriate. Additionally, we intend to vary the percentage mix of our non-agency mortgage investments and agency mortgage investments in an effort to actively adjust our credit exposure and to improve the risk/return profile of our investment portfolio. There is no guarantee our efforts to manage credit risk will be successful and we could suffer significant losses if credit performance is worse than our expectations or if economic conditions worsen.

Extension Risk

The projected weighted-average life and the duration (or interest rate sensitivity) of our investments is based on our Manager’s assumptions regarding the rate at which the borrowers will prepay the underlying mortgage loans or default on their loans. In general, we use interest rate swaps to help manage our funding cost on our investments in the event that interest rates rise. These swaps allow us to reduce our funding exposure on the notional amount of the swap for a specified period of time by establishing a fixed rate to pay in exchange for receiving a floating rate that generally tracks our financing costs under our repurchase agreements.

However, if prepayment rates decrease in a rising interest rate environment, the average life or duration of our fixed-rate assets generally extends. This could have a negative impact on our results from operations, as our interest rate swap maturities are fixed and will, therefore, cover a smaller percentage of our funding exposure on our mortgage assets to the extent that their average lives increase due to slower prepayments. This situation may also cause the market value of our securities collateralized by fixed rate mortgages to decline by more than otherwise would be the case while most of our hedging instruments (with the exception of short TBA mortgage positions, interest-only securities and certain other supplemental hedging instruments) would not receive any incremental offsetting gains. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur realized losses.

Inflation Risk

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Further, our consolidated financial statements are prepared in accordance with GAAP and our distributions are determined by our Board of Directors based primarily on our net income as calculated for income tax purposes. In each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act of 1934 (the "Exchange Act") reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" as promulgated under the Exchange Act and the rules and regulations thereunder. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect the internal controls over financial reporting during the quarter ended March 31, 2012.

PART II

Item 1. Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, 2012, we had no legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 9B. Other Information

None.

Item 6. Exhibits

(a) Exhibits:



Exhibit No.		Description
*3.1		American Capital Mortgage Investment Corp. Articles of Amendment and Restatement, incorporated herein by reference to Exhibit 3.1 of Form 10-Q for the quarter ended September 30, 2011 (File No. 001-35260, filed November 14, 2011.

*3.2		American Capital Mortgage Investment Corp. Amended and Restated Bylaws, as amended by Amendment No. 1, incorporated herein by reference to Exhibit 3.2 to Amendment No. 4 to Form S-11 (Registration Statement No. 333-173238), filed July 29, 2011.

*4.1		Form of Certificate for Common Stock, incorporated herein by reference to Exhibit 4.1 to Amendment No. 3 to Form S-11 (Registration Statement No. 333-173238), filed July 20, 2011.

*4.2		Instruments defining the rights of holders of securities: See Article VI of our Articles of Amendment and Restatement, incorporated herein by reference to Exhibit 3.1 of Form 10-Q for the quarter ended September 30, 2011 (File No. 001-35260), filed November 14, 2011.

*4.3		Instruments defining the rights of holders of securities: See Article VII of our Amended and Restated Bylaws, as amended by Amendment No. 1, incorporated herein by reference to Exhibit 3.2 to Amendment No. 4 to Form S-11 (Registration Statement No. 333-173238), filed July 29, 2011.

10.1		Underwriting Agreement, dated March 13, 2012, by and among American Capital Mortgage Investment Corp., American Capital MTGE Management, LLC and Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities, Inc., UBS Securities LLC and Wells Fargo Securities, LLC, as representatives of the several underwriters named in Schedule I thereto, filed herewith.

31.1		Certification of CEO Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.

32		Certification of CEO and CFO Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

* Fully or partly previously filed.


**	This exhibit is being furnished rather than filed, and shall not be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		American Capital Mortgage Investment Corp.

Date:	May 11, 2012	By:	/s/ MALON WILKUS
			Malon Wilkus Chair of the Board and Chief Executive Officer