UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015

OR

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

For the transition period from              to

Commission File Number: 001-35808

ZAIS FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of incorporation or organization) 90-0729143
(I.R.S. Employer Identification No.)

Two Bridge Avenue, Suite 322
Red Bank, New Jersey
(Address of principal executive offices) 07701-1106
(Zip Code)

(732) 978-7518

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.0001 par value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o   No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o   No x

Indicate by check mark whether the registrant (1) has filed all reports required 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 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 x   No o

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 x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o	(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  o   No x

As of June 30, 2015, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $125,460,507 based on the closing sales price of the registrant’s common stock on Tuesday, June 30, 2015 as reported on the New York Stock Exchange.

On March 8, 2016, the registrant had a total of 7,970,886 shares of common stock, $0.0001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the 2016 annual meeting of stockholders are incorporated by reference into Part III of this annual report on Form 10-K.

TABLE OF CONTENTS

	Page
PART I
Item 1. Business	5
Item 1A. Risk Factors	12
Item 1B. Unresolved Staff Comments	47
Item 2. Properties	47
Item 3. Legal Proceedings	47
Item 4. Mine Safety Disclosures	47
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	48
Item 6. Selected Financial Data	51
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	77
Item 8. Financial Statements and Supplementary Data	80
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	132
Item 9A. Controls and Procedures	132
Item 9B. Other Information	132
PART III
Item 10. Directors, Executive Officers and Corporate Governance	133
Item 11. Executive Compensation	133
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	133
Item 13. Certain Relationships and Related Transactions and Director Independence	133
Item 14. Principal Accountant Fees and Services	133
PART IV
Item 15. Exhibits and Financial Statement Schedules	134
SIGNATURES

2

FORWARD-LOOKING STATEMENTS

ZAIS Financial Corp. (the “Company”) makes forward-looking statements in this annual report on Form 10-K within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such Sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control. These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “could,” “would,” “may,” “potential” or the negative of these terms or other comparable terminology, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:

• the Company’s investment objectives and business strategy;

• the outcome of the Company’s strategic alternatives;  

• the Company’s ability to obtain future financing arrangements;

• the Company’s expected leverage;

• the Company’s expected investments;

• the GMFS, LLC (“GMFS”) transaction;

• the HF2 Financial Management Inc. (“HF2 Financial”) transaction;

• estimates or statements relating to, and the Company’s ability to make, future distributions;

• the Company’s ability to compete in the marketplace;

• the Company’s ability to originate or acquire the assets it targets and achieve risk-adjusted returns;

• the Company’s ability to borrow funds at favorable rates;

• market, industry and economic trends;

• recent market developments and actions taken and to be taken by the U.S. Government, the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System, the Federal Depositary Insurance Corporation, the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), the Government National Mortgage Association (“Ginnie Mae”) and the U.S. Securities and Exchange Commission (“SEC”);

• mortgage loan modification programs and future legislative actions;

• the Company’s ability to maintain its qualification as a real estate investment trust (“REIT”);

• the Company’s ability to maintain its exemption from qualification under the Investment Company Act of 1940, as amended (the “1940 Act”);

• projected capital and operating expenditures;

• availability of qualified personnel;

• prepayment rates; and

• projected default rates.

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The Company’s beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company or are within its control, including:

• the factors referenced in this annual report on Form 10-K, including those set forth under Item 1, “Business” and Item 1A, “Risk Factors”

• general volatility of the capital markets;

• changes in the Company’s investment objectives and business strategy;

• the availability, terms and deployment of capital;

• the availability of suitable investment opportunities;

• the Company’s dependence on its external advisor, ZAIS REIT Management, LLC (the “Advisor”), and the Company’s ability to find a suitable replacement if the Company or the Advisor were to terminate the investment advisory agreement the Company has entered into with the Advisor;

• changes in the Company’s assets, interest rates or the general economy;

• increased rates of default and/or decreased recovery rates on the Company’s investments;

• changes in interest rates, interest rate spreads, the yield curve or prepayment rates; changes in prepayments of the Company’s assets;

• limitations on the Company’s business as a result of its qualification as a REIT; and

• the degree and nature of the Company’s competition, including competition for residential mortgage-backed securities (“RMBS”), loans or its other target assets.

Upon the occurrence of these or other factors, the Company’s business, financial condition, liquidity and consolidated results of operations may vary materially from those expressed in, or implied by, any such forward-looking statements.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements apply only as of the date of this annual report on Form 10-K. The Company is not obligated, and does not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. See Item 1A, “Risk Factors” of this annual report on Form 10-K.

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PART I

In this annual report on Form 10-K, references to the “Company” refer to ZAIS Financial Corp., a Maryland corporation, together with its consolidated subsidiaries; references to the Advisor refer to ZAIS REIT Management, LLC, a Delaware limited liability company; references to the “Operating Partnership” refer to ZAIS Financial Partners, L.P., a Delaware limited partnership; in each case unless specifically stated otherwise or the context otherwise indicates, and references to “risk-adjusted returns” refer to the profile of expected asset returns across a range of potential macroeconomic scenarios.

Item 1. Business.

GENERAL

The Company is a Maryland corporation that invests in residential mortgage loans. GMFS, a mortgage banking platform the Company acquired in October 2014, originates, sells and services residential mortgage loans and the Company acquires performing, re-performing and newly originated loans through other channels. The Company also invests in, finances and manages RMBS that are not issued or guaranteed by a federally chartered corporation, such as Fannie Mae, Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae ("non-Agency RMBS"), with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations and mortgage servicing rights (“MSRs”). The Company also has the discretion to invest in RMBS that are issued or guaranteed by a federally chartered corporation or a U.S. Government agency ("Agency RMBS"), including through To-Be-Announced ("TBA") contracts, and in other real estate-related and financial assets, such as interest only strips created from RMBS ("IOs"). The Company refers collectively to its assets as its “target assets”.

The Company's income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. The Company's objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly dividend distributions and secondarily through capital appreciation.

 The Company was incorporated in Maryland on May 24, 2011, and has elected to be taxed and to qualify as a real estate investment trust ("REIT") for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2011. The Company is organized in a format pursuant to which it serves as the sole general partner of, and conducts substantially all of its business through, its Operating Partnership subsidiary, ZAIS Financial Partners, L.P., a Delaware limited partnership. The Company also expects to operate its business so that it is not required to register as an investment company under the 1940 Act. The Company is externally managed by the Advisor, a subsidiary of ZAIS Group, LLC ("ZAIS"), and has no employees other than those employed by GMFS, its wholly-owned subsidiary. GMFS had 246 employees at December 31, 2015.

As announced on November 4, 2015, the Company has engaged a financial advisor to assist it in evaluating potential strategic alternatives to enhance stockholder value. The continuing strategic review includes the exploration of merger or sale transactions involving the Company or a liquidation of the Company's assets. The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurance that the discussions will lead to a definitive merger or sale transaction, which would be subject to approval by the Company’s Board of Directors and its stockholders. In the event that the Company does not reach a definitive agreement with respect to a merger or sale transaction, management of the Company intends to present to the Company’s Board of Directors for its consideration a plan of liquidation. There is no assurance that the Company’s board of directors will approve any plan of liquidation and recommend its acceptance by the Company’s stockholders. In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company’s investment income and may therefore result in a decision to curtail dividends in the future. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit purchase program and will begin the unwinding of the Company’s mortgage conduit business. Consistent with these changes to the Company’s strategy, on March 9, 2016, Brian Hargrave resigned as the Company’s Chief Investment Officer and will be succeeded by Christian Zugel, the current Chairman of the Company’s board of directors. The Company does not intend to disclose further developments until the review is complete and the Company’s board of directors has taken action with respect to the strategic review.

5

Acquisition of GMFS

On August 5, 2014, the Company entered into a merger agreement with GMFS (the “GMFS Merger Agreement”). Pursuant to the terms of the GMFS Merger Agreement among ZFC Honeybee TRS, LLC ("Honeybee TRS"), an indirect subsidiary of the Company, ZFC Honeybee Acquisitions, LLC ("Honeybee Acquisitions"), a wholly owned subsidiary of Honeybee TRS, GMFS, and Honeyrep, LLC, solely in its capacity as the security holder representative, Honeybee Acquisitions merged with and into GMFS on October 31, 2014, with GMFS continuing as the surviving entity and an indirect subsidiary of the Company. GMFS is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, Department of Housing and Urban Development ("HUD") / Federal Housing Administration ("FHA") Mortgagee, U.S. Department of Agriculture ("USDA") approved originator and U.S. Department of Veterans Affairs ("VA") Lender. GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, USDA and VA through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.

The final purchase price was approximately $61.2 million, net of approximately $1.7 million received from an escrow account pursuant to the GMFS Merger Agreement, based on the final reconciliation of GMFS's net tangible assets. The net tangible assets at closing were comprised of the estimated fair value of GMFS's MSR portfolio, the estimated value of GMFS's net tangible assets and a purchase price premium. In addition to cash paid at closing, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits will be payable over a four-year period if certain conditions are met (the “Production and Profitability Earn-Out”). The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The estimated present value of the total contingent consideration at October 31, 2014 was $11.4 million based on the future production and earnings projections of GMFS over the four-year earn-out period (at December 31, 2015 the contingent consideration liability was $11.3 million). The Company funded the closing cash payment through a combination of available cash and the sale of a portion of its non-Agency RMBS portfolio. As discussed above, pursuant to the GMFS Merger Agreement, based on the final reconciliation of the October 31, 2014 values, the Company received approximately $1.7 million in June 2015 from an escrow account established at the time of the closing. The Company recorded a reduction to goodwill in the consolidated balance sheets that included this amount, along with other final closing adjustments.

The Company is externally managed by the Advisor, a subsidiary of ZAIS. On March 17, 2015, a business combination was completed between HF2 Financial, a special purpose acquisition company, and ZAIS Group Parent, LLC ("ZGP"), which wholly owns ZAIS, pursuant to a definitive agreement dated September 16, 2014. The current owners of ZGP did not receive any proceeds at the closing of the transaction and retained a significant equity stake in ZGP. Following the close of the transaction, ZAIS's management team has remained in place to continue to lead the combined organization.

At December 31, 2015, the Company held a diversified portfolio of mortgage loans, RMBS assets and MSRs with an aggregate fair value of $671.2 million, comprised of:

Residential Mortgage Investments

• Performing, re-performing and newly originated loans held for investment with a fair value of $397.7 million,

• RMBS assets with a fair value of $109.3 million, consisting primarily of senior tranches of non-Agency RMBS that were originally highly rated but subsequently downgraded,

Residential Mortgage Banking

• Mortgage loans originated by the GMFS mortgage banking platform and held for sale with a fair value of $116.0 million, and

• MSRs with a fair value of $48.2 million.

The borrowings the Company used to fund its portfolio held for investment totaled $426.6 million at December 31, 2015, under: (i) a master repurchase agreement with Citibank, N.A. (the "Citi Loan Repurchase Facility") to fund its distressed and re-performing loan portfolio, (ii) a master repurchase facility with Credit Suisse First Boston Mortgage Capital LLC (the "Credit Suisse Loan Repurchase Facility", and together with the Citi Loan Repurchase Facility, the "Loan Repurchase Facilities") to fund its newly originated loan portfolio, (iii) master securities repurchase agreements with four counterparties and (iv) the 8.0% Exchangeable Senior Notes due 2016 (the "Exchangeable Senior Notes"). Additionally, the borrowings the Company used to fund the origination of its mortgage loans held for sale portfolio totaled $100.8 million at December 31, 2015 under warehouse lines of credit and repurchase agreements with four lenders with an aggregate borrowing capacity of $185.0 million.

 The Company’s principal place of business is Two Bridge Avenue, Suite 322, Red Bank, New Jersey 07701-1106. The Company’s telephone number is (732) 978-7518. The Company’s website address is www.zaisfinancial.com. The information found on, or otherwise accessible through, the Company’s website is not incorporated into, and does not form a part of, this report.

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INVESTMENT STRATEGY

The Company’s objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly distributions and secondarily through capital appreciation. The Company uses the experience and relationships developed in managing the whole loan investment platform of funds managed by ZAIS. The Company’s whole loan strategy has included secondary market purchases of seasoned mortgage loans, a newly originated non-agency loan purchase program and an origination platform. The Company believes that its target assets have presented attractive risk-adjusted return profiles. As market conditions have changed over time, the Company has adjusted its strategy by shifting its asset allocations across its target asset classes to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions. See “Item 1. Business-General” included in this annual report on Form 10-K for a discussion on the Company’s recent strategic review.

The Company relies on the Advisor’s investment expertise in identifying and efficiently financing its assets. The Advisor makes investment decisions based on a variety of factors, including expected risk-adjusted returns, credit fundamentals, liquidity, availability of adequate financing, borrowing costs and macroeconomic conditions, as well as maintaining the Company’s REIT qualification and its exemption from registration as an investment company under the 1940 Act. The Company has followed a predominantly long-term buy and hold strategy with respect to many of the assets that it has acquired outside its mortgage banking operations. The Company’s target assets are as follows:

Residential Mortgage Loans. Prime, subprime and alternative-A and alternative-B mortgage loans, which may be adjustable-rate, hybrid and/or fixed-rate residential mortgage loans, and pay option adjustable rate mortgage loans (“ARMs”). The Company acquires seasoned residential mortgage loans that are primarily, but not exclusively, performing and re-performing at the time of acquisition. The Company also acquires newly originated non-agency loans through its loan purchase program, which provides approved sellers a web-based platform for the pricing, locking and funding of individual loans which must adhere to loan eligibility criteria and underwriting guidelines. The Company also originates and services agency and government guaranteed residential mortgage loans through GMFS.

Non - Agency RMBS. RMBS that are not issued or guaranteed by a U.S. Government agency or federally chartered corporation, with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations.

The mortgage loan collateral for non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by Fannie Mae, Freddie Mac or Ginnie Mae, due to certain factors, including mortgage balances in excess of agency underwriting guidelines, borrower characteristics, loan characteristics and level of documentation, and therefore are not issued or guaranteed by an agency of the U.S Government. The mortgage loan collateral may be classified as prime, subprime and alternative-A and alternative-B mortgage loans, which may be adjustable-rate, hybrid and/or fixed-rate residential mortgage loans, and pay option ARMs.

MSRs. MSRs provide a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages.

Agency RMBS. RMBS that are issued or guaranteed by a federally chartered corporation or a U.S. Government agency. The Agency RMBS the Company targets can be collateralized by either fixed rate loans or ARMs. The Company has the discretion to invest in Agency RMBS through TBA contracts, which are forward contracts for the purchase of Agency RMBS at a predetermined price with a stated face amount, coupon and stated maturity at an agreed upon future date.

Other Real Estate-Related and Financial Assets. IOs created from RMBS are mortgage-backed securities structured with two or more classes that receive different distributions of interest on a pool of Agency RMBS or non-Agency RMBS or whole loans. Subject to maintaining its REIT status pursuant to the Internal Revenue Code, the Company may acquire debt and equity tranches of securitizations backed by various asset classes, including small balance commercial mortgages, manufactured housing, aircraft, automobiles, credit cards, equipment, franchises, recreational vehicles and student loans.

7

Asset Allocations. At December 31, 2015, the Company held a diversified portfolio of mortgage loans, RMBS assets and MSRs with an aggregate fair value of $671.2 million, comprised of: (i) performing, re-performing and newly originated loans held for investment with a fair value of $397.7 million, (ii) mortgage loans originated by the GMFS mortgage banking platform and held for sale with a fair value of $116.0 million, (iii) RMBS assets with a fair value of $109.3 million, and (iv) MSRs with a fair value of $48.2 million. As market conditions have changed, the Company has adjusted its strategy by shifting its asset allocations across its target asset classes. The Company has relied on the Advisor’s expertise in identifying assets within the target assets described above and, to the extent that leverage was employed, efficiently financing those assets. The Company’s allocation decisions have been based on a variety of factors, including expected risk-adjusted returns, credit fundamentals liquidity and the availability of certain assets.

FINANCING STRATEGY

The Company uses leverage primarily for the purposes of financing its portfolio and increasing potential returns to stockholders rather than for the purpose of speculating on changes in interest rates. The Company funds the origination and acquisition of its target assets through the use of prudent amounts of leverage. The borrowings the Company used to fund its portfolio totaled approximately $527.4 million as of December 31, 2015 under the warehouse lines of credit and repurchase agreements with four counterparties, Loan Repurchase Facilities and master securities repurchase agreements with four counterparties. Additionally, $57.5 million aggregate principal amount of the Exchangeable Senior Notes were outstanding as of December 31, 2015.

The Company’s income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. Although the Company is not required to maintain any particular leverage ratio, the amount of leverage it deploys for particular investments in its target assets depends upon the Advisor’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the assets in its investment portfolio, the gap between the duration of its assets and liabilities, including hedges, the availability and cost of financing assets, its opinion of the creditworthiness of its financing counterparties, the health of the U.S. economy and residential and commercial mortgage-related markets, its outlook for the level, slope, and volatility of interest rates, the credit quality of collateral underlying the Company’s residential mortgage loans, non-Agency RMBS and other target assets, its outlook for asset spreads relative to the LIBOR curve and regulatory requirements limiting the permissible amount of leverage to be utilized. Based on market conditions, the Company has deployed, on a debt-to-equity basis, up to four to one leverage on its seasoned residential whole loans and up to three to one leverage on its non-Agency RMBS assets. Any leverage on newly originated loans may have been significantly greater than the leverage used on its seasoned loan portfolio depending on the characteristics of the newly originated loans. Additionally, to the extent the Company securitizes any residential mortgage loans in the future, it expects that the leverage obtained through such structures will vary considerably depending on the characteristics of the underlying loans.

The Company is restricted in the amount of leverage it may employ by the terms and provisions of its existing borrowings as well as other financing agreements that it may enter into in the future. The Company may also be subject to margin calls as a result of its financing activities. In addition, the Company intends to rely on short-term financing such as warehouse lines of credit, the duration of which may be less than 1 year, and repurchase transactions under master repurchase agreements, the duration of which may be 30 days for its securities repurchase agreements and 364 days for its Loan Repurchase Facilities.

See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this annual report on Form 10-K, for a discussion of the Company’s borrowings under the warehouse lines of credit and repurchase agreements, Loan Repurchase Facilities and securities repurchase agreements as of December 31, 2015 and the terms of the Exchangeable Senior Notes.

The Company utilizes derivative financial instruments to hedge the interest rate risk associated with its borrowings. Subject to maintaining its qualification as a REIT and exemption from registration as an investment company under the 1940 Act, the Company may also engage in a variety of interest rate management techniques that seek on one hand to mitigate the influence of interest rate changes on the values of some of its assets and on the other hand help the Company achieve its risk management objectives. The Company’s interest rate management techniques may include: interest rate swap agreements, interest rate cap agreements, MBS forward sales, exchange-traded derivatives and swaptions; puts and calls on securities or indices of securities; U.S. Department of the Treasury securities and options on U.S. Department of the Treasury securities; IOs and MSRs; and other similar transactions and financial instruments.

CORPORATE GOVERNANCE

The Company strives to maintain an ethical workplace in which the highest standards of professional conduct are practiced.

• The Company’s board of directors is composed of a majority of independent directors. The Audit, Nominating and Corporate Governance and Compensation Committees are composed exclusively of independent directors.

8

• In order to foster the highest standards of ethics and conduct in all business relationships, the Company has adopted a Code of Conduct and Ethics policy, which covers a wide range of business practices and procedures, that applies to its officers, directors, employees, if any, and independent contractors, to its Advisor and its Advisor’s officers and employees, to ZAIS and ZAIS’ officers and employees, and to any other affiliates of ZAIS or the Advisor, and such affiliates’ officers and employees, who provide services to the Company or the Advisor in respect of the Company. In addition, the Company has implemented Whistleblowing Procedures for Accounting and Auditing Matters and Code of Conduct and Ethics Violations (the “Whistleblower Policy”) that set forth procedures by which any Covered Persons (as defined in the Whistleblower Policy) may raise, on a confidential basis, concerns regarding, among other things, any questionable or unethical accounting, internal accounting controls or auditing matters and any potential violations of the Code of Conduct and Ethics with the Audit Committee of the Company or the Chief Compliance Officer of ZAIS. 

• The Company has adopted an Insider Trading Policy for Trading in the Securities of the Company (the “Insider Trading Policy”), that governs the purchase or sale of the Company’s securities by any of directors, officers, and associates (as defined in the Insider Trading Policy) of the Company, if any, and independent contractors, as well as officers and employees of the Advisor and officers, employees and affiliates of ZAIS, and that prohibits any such persons from buying or selling the Company’s securities on the basis of material nonpublic information.

9

COMPETITION

The Company’s earnings depend, in large part, on its ability to originate or acquire assets at favorable spreads over its borrowing costs and its ability to efficiently manage its portfolio risks. In originating or acquiring its target assets and establishing hedge positions, the Company competes with other existing mortgage REITs (both internally and externally managed), mortgage finance and specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, hedge funds (including those managed by ZAIS), ZAIS, to the extent that ZAIS holds assets directly on its own behalf or indirectly through one or more of its subsidiaries, affiliates or other newly formed entities, mutual funds, institutional investors, investment banking firms, governmental bodies and other companies with similar asset acquisition objectives. It is likely that the Company will also compete with other entities which may be organized in the future. Some of the Company’s competitors may have greater financial resources and access to lower cost of capital. These competitors may not be subject to the same regulatory constraints (such as REIT compliance or maintaining an exemption under the 1940 Act) as the Company. The effect of the existence of additional REITs and other market participants may be to increase competition for the available supply of mortgage assets suitable for origination or purchase, as well as the amount of financing available to the Company through warehouse lines of credit, repurchase agreements and other financing arrangements.

EMPLOYEES; STAFFING

The Company is managed by the Advisor, a subsidiary of ZAIS, pursuant to an amended and restated investment advisory agreement between the Company and the Advisor, dated as of August 11, 2014, as amended from time to time (the “Investment Advisory Agreement”). The Company’s GMFS mortgage banking platform employed a total of 246 people as of December 31, 2015. The Company has no employees other than those employed in connection with its GMFS mortgage banking platform. ZAIS was established in 1997 and is an investment adviser registered with the SEC specializing in structured credit, including residential whole loans, RMBS and ABS. As of December 31, 2015, ZAIS had approximately $4.2 billion of assets under management (comprised primarily of (i) total assets for mark-to-market funds and separately managed accounts; (ii) uncalled capital commitments, if any, for funds that are not in liquidation; and (iii) for issued structured vehicles, all assets being managed calculated per the management fee basis methodology defined in the respective vehicles’ indenture, although in certain circumstances some or all of the referenced management fees may be waived.  Assets under management also includes assets in the warehouse phase for new structured credit vehicles and is based on actual assets managed without reductions for leverage and most other liabilities and includes all assets regardless of whether management fees are being earned. ZAIS possesses a comprehensive analytics and technology infrastructure, credit modeling, loan and securities valuation, loan data management and servicing oversight capabilities and significant structuring and securitization experience. As of December 31, 2015, ZAIS’ team included 95 professionals in the United States and London. ZAIS is the managing member of the Advisor and ZAIS and its employees support the Advisor in providing services to the Company pursuant to the terms of a shared facilities and services agreement between ZAIS and the Advisor. The Company relies on the Advisor and ZAIS to provide or obtain, on the Company’s behalf, the personnel and services necessary for the Company to conduct its business.

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EXECUTIVE OFFICERS OF THE COMPANY

The Company is externally managed and advised by its Advisor, a subsidiary of ZAIS. The Company relies on its Advisor and ZAIS to provide or obtain, on its behalf, the personnel and services necessary for it to conduct its business because the Company has no employees of its own, other than those employed in connection with its GMFS mortgage banking platform. Pursuant to the terms of the Investment Advisory Agreement, the Advisor and its affiliates provide the Company with its management team, including its Chief Executive Officer, Chief Financial Officer, Chief Investment Officer and Chief Accounting Officer, along with appropriate support personnel. All of the Company’s officers and non-independent directors are also employees of ZAIS and its affiliates.

The following sets forth certain information with respect to the Company’s executive officers:

Michael Szymanski, 49, currently serves as a director and as the Company’s Chief Executive Officer and President. Mr. Szymanski currently serves as President of ZAIS and member of the ZAIS Management Committee, and as Chief Executive Officer of the Advisor and a member of the Advisor’s investment committee. Mr. Szymanski also serves as Chief Executive Officer, President and director of ZAIS Group Holdings, Inc. (“ZGH”), the parent company of ZAIS. Prior to joining ZAIS, Mr. Szymanski was Chief Executive Officer of XE Capital Management, LLC, an investment management firm specializing in structured products, from 2003 to 2008. Prior to that, Mr. Szymanski was Chief Financial Officer of Zurich Capital Markets (“ZCM”), a subsidiary of Zurich Financial Group, from 2000 to 2002. At ZCM, Mr. Szymanski managed global finance, accounting, tax, treasury, and risk management for a business specializing in structured products, including hedge fund linked derivatives and principal investments. Prior to that, Mr. Szymanski was a Vice President in the Bank and Insurance Strategies Group of Lehman Brothers from 1997 to 2000, providing capital markets structuring and advisory services to financial institutions and corporations. Prior to that, Mr. Szymanski spent nine years at Ernst & Young LLP advising financial services clients, leaving as a Senior Manager in the Capital Markets/M&A Advisory Group in New York. Mr. Szymanski served in E&Y’s National Office-Financial Services Industries Group, providing internal consultation services to resolve clients’ accounting and regulatory issues, specializing in financial instruments. Mr. Szymanski is a CPA and received a B.A. in Business Administration with a concentration in Accountancy from the University of Notre Dame and an Executive M.B.A. with a concentration in Finance from New York University’s Stern School of Business.

Donna Blank, 55, currently serves as the Company’s Chief Financial Officer and also serves as Chief Financial Officer at ZAIS and ZGH. Prior to joining the Company, Ms. Blank served as the Executive Vice President and Chief Financial Officer of National Financial Partners from 2008 to 2013. From 2003 to 2008, Ms. Blank was the Chief Financial Officer of Financial Guaranty Insurance Company. Ms. Blank received a B.A. from the University of Michigan. She holds an MBA in Finance, and a Master in International Affairs, both from Columbia University.

Christian M. Zugel, 55, founded ZAIS in 1997 and currently serves as the Chairman of the Company’s board of directors and its Chief Investment Officer. Mr. Zugel also serves as Chairman of the board of directors of ZGH and as Chief Investment Officer of ZGH. Prior to founding ZAIS Group, Mr. Zugel was a senior executive with J.P. Morgan Securities Inc., where he led J.P. Morgan’s entry into many new trading initiatives. At J.P. Morgan, Mr. Zugel also served on the Asia Pacific management-wide and firm-wide market risk committees. Mr. Zugel received a Masters in Economics from the University of Mannheim, Germany.

Nisha Motani, 44, currently serves as the Company’s Chief Accounting Officer and Chief Accounting Officer of ZGH. She also serves as and Director of Fund Reporting at ZAIS where she oversees annual audits, monthly net asset value reporting, quarterly and annual financial statement reporting, and informational requests from investors for all entities managed by ZAIS. Ms. Motani is also responsible for setting internal accounting policies and procedures, researching accounting issues, and serving as a direct liaison to the auditors and tax preparers for entities managed by ZAIS. Prior to joining ZAIS in October 2003, Ms. Motani worked as a senior manager in the Financial Services audit practice of Deloitte & Touche where she specialized in investment management. She is a CPA with a B.S. in Accounting from Rutgers School of Business.

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AVAILABLE INFORMATION

The Company maintains a website at www.zaisfinancial.com and will make available, free of charge, on its website (a) its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (including any amendments thereto), proxy statements and other information (collectively, “Company Documents”) filed with, or furnished to, the SEC, as soon as reasonably practicable after such documents are so filed or furnished, (b) Corporate Governance Guidelines, (c) director independence standards, (d) Code of Conduct and Ethics and (e) written charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee of the board of directors. Company Documents filed with, or furnished to, the SEC are also available for review and copying by the public at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549 and at the SEC’s website at www.sec.gov. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The Company provides copies of its Corporate Governance Guidelines and Code of Conduct and Ethics, free of charge, to stockholders who request such documents. Requests should be directed to Marilyn Meek, Financial Relations Board, an MWW Company at 304 Park Avenue South, 8 ^th Floor, New York, New York 10010.

Item 1A. Risk Factors.

The Company's business and operations are subject to a number of risks and uncertainties, the occurrence of which could adversely affect its business, financial condition, consolidated results of operations and ability to make distributions to stockholders and could cause the value of the Company's capital stock to decline. Please refer to the section entitled "Forward-Looking Statements."

Risks Relating to the Company's Business

If the Company is unable to consummate a strategic transaction, its financial condition and results of operations may be adversely affected.

As described elsewhere in this annual report on Form 10-K, the Company has engaged a financial advisor to assist it in evaluating potential strategic alternatives to enhance stockholder value. The continuing strategic review includes the exploration of merger or sale transactions involving the Company or a liquidation of Company's assets. The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurance that the potential strategic alternatives will lead to a definitive merger or sale transaction, which would be subject to approval by the Company's board of directors and its stockholders. The Company does not intend to disclose further developments until the review is complete and the Company’s board of directors has taken action with respect to the strategic review.  If the Company is unable to consummate such a strategic transaction, or if there is any significant delay in closing such a transaction, the Company may not be able to re-establish a mortgage related portfolio in its residential mortgage investments segment with equally attractive return and credit risk characteristics and its financial condition and results of operations may be adversely affected.

The lack of liquidity in the Company's assets may adversely affect its business.

A portion of the assets the Company owns, originates or acquires may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit program and will begin the unwinding of the Company’s mortgage conduit business. The illiquidity of the Company's assets may make it difficult for it to sell such assets. In addition, if the Company is required to liquidate its remaining portfolio quickly, it may realize significantly less than the value at which it has previously recorded its assets. As a result, the Company's ability to vary its portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect its consolidated results of operations and financial condition.

The Company operates in a highly competitive market for investment opportunities and competition may limit its ability to originate or acquire desirable investments in its target assets and could also affect the pricing of these assets.

The Company operates in a highly competitive market for investment opportunities. The Company's profitability depends, in large part, on its ability to originate or acquire its target assets at attractive prices. In originating or acquiring its target assets, the Company will compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds (including other funds managed by ZAIS), ZAIS, to the extent that ZAIS holds assets directly on its own behalf or indirectly through one or more of its subsidiaries, affiliates or other newly formed entities, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of the Company's competitors are substantially larger and have considerably greater financial, technical, marketing and other resources compared to the Company. Some competitors may have a lower cost of funds and access to funding sources that may not be available to the Company. Many of the Company's competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exemption from the 1940 Act. In addition, some of the Company's competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than the Company. Furthermore, competition for investments in the Company's target assets may lead to the price of such assets increasing, which may further limit the Company's ability to generate desired returns. The Company cannot provide assurance that the competitive pressures it faces will not have a material adverse effect on its business, financial condition and consolidated results of operations. Also, as a result of this competition, desirable investments in the Company's target assets may be limited in the future and the Company may not be able to take advantage of attractive investment opportunities from time to time, as the Company can provide no assurance that it will be able to identify and make investments that are consistent with its investment objectives.

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The Company is highly dependent on information systems and communication systems; systems failures and other operational disruptions could significantly affect its business, which may, in turn, negatively affect its operating results and its ability to pay dividends to its stockholders.

The Company's business is highly dependent on the communications and information systems of ZAIS and GMFS, which may interface with or depend on systems operated by third parties, including market counterparties, loan originators and other service providers. Any failure or interruption of these systems could cause delays or other problems in the Company's activities, including in its target asset origination or acquisition activities, which could have a material adverse effect on the Company's operating results and negatively affect the value of its common stock and its ability to pay dividends to its stockholders.

Additionally, the Company relies heavily on financial, accounting and other data processing systems and operational risks arising from mistakes made in the confirmation or settlement of transactions, from transactions not being properly booked, evaluated or accounted for or other similar disruption in the Company's operations may cause it to suffer financial loss, the disruption of its business, liability to third parties, regulatory intervention or reputational damage.

Cybersecurity risk and cyber incidents may adversely affect the Company's business by causing a disruption to its operations, a compromise or corruption of its confidential information and/or damage to its business relationships, all of which could negatively impact its financial results.

A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the Company's information resources. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access to the Company's information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. The result of these incidents may include disrupted operations, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance cost, litigation and damage to the Company's investor relationships. As the Company's reliance on technology has increased, so have the risks posed to both its information systems, both internal and those provided by ZAIS, the Advisor and third-party service providers. ZAIS has implemented processes, procedures and internal controls to help mitigate cybersecurity risks and cyber intrusions, but these measures, as well as the Company's increased awareness of the nature and extent of a risk of a cyber incident, do not guarantee that the Company's financial results, operations or confidential information will not be negatively impacted by such an incident.

The Advisor will utilize analytical models and data in connection with the valuation of the Company's loans and securities, and any incorrect, misleading or incomplete information used in connection therewith would subject the Company to potential risks.

Given the complexity of the Company's investment strategies, the Advisor must rely heavily on analytical models (both proprietary models developed by ZAIS and those supplied by third parties) and information and data supplied by third parties. Models and data will be used to value origination opportunities and potential target assets and also in connection with hedging the Company's acquisitions. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose the Company to potential risks. For example, by relying on incorrect models and data, especially valuation models, the Advisor may be induced to buy certain target assets at prices that are too high, to sell certain other assets at prices that are too low or to miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.

Difficult conditions in the mortgage, residential and commercial real estate markets, the financial markets and the economy generally may cause the Company to experience market losses related to its holdings, and there is no assurance that these conditions will improve in the near future.

The Company's consolidated results of operations are materially affected by conditions in the mortgage market, the residential and commercial real estate markets, the financial markets and the economy generally. The mortgage market has been severely affected by changes in the lending landscape, and there is no assurance that these conditions have fully stabilized or that they will not worsen. Disruption in the mortgage market negatively impacts new demand for homes and home price performance. There is a strong inverse correlation between home price growth rates and mortgage loan delinquencies. A deterioration of the RMBS market may cause the Company to experience losses related to its assets and to sell assets at a loss. Declines in the fair market values of the Company's residential mortgage loans or RMBS may adversely affect its consolidated results of operations and credit availability, which may reduce earnings and, in turn, cash available for distribution to its stockholders.

Dramatic declines in the residential and commercial real estate markets during the financial crisis resulted in significant asset write-downs by financial institutions, which caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. Institutions from which the Company may seek to obtain financing may have owned or financed residential or commercial mortgage loans, real estate-related securities and real estate loans, which declined in value and caused them to suffer losses during the financial crisis. Many lenders and institutional investors reduced and, in some cases, ceased to provide funding to borrowers, including other financial institutions. If these conditions exist, these institutions may become insolvent or tighten their lending standards, which could make it more difficult for the Company to obtain financing on favorable terms or at all.

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The Company's profitability may be adversely affected if the Company is unable to obtain cost-effective financing for its assets. These consequences could be exacerbated in the event of potential future credit rating downgrades of the U.S. and certain European countries and the failure to resolve issues related to the "fiscal cliff" and the U.S. debt ceiling, which could create broader financial and global banking turmoil and lead to a significant rise in interest rates and a decrease in the fair market value of the Company's assets.

The diminished level of Agency participation in, and other changes in the role of the Agencies in, the mortgage market may adversely affect the Company's business.

If Agency participation in the mortgage market were reduced or eliminated, or their structures were to change radically (i.e., limitation or removal of the guarantee obligation), or their market share reduced because of required price increases or lower limits on the loans they can guarantee, the Company could be unable to acquire Agency RMBS or unable to originate Agency and government guaranteed mortgage loans on attractive terms or at all. The Company could be negatively affected in a number of ways depending on the manner in which related events unfold for Fannie Mae, Freddie Mac and other such agencies. GMFS, its mortgage banking platform, is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, Department of Housing and Urban Development ("HUD") / Federal Housing Administration ("FHA") Mortgagee, U.S. Department of Agriculture ("USDA") approved originator and U.S. Department of Veterans Affairs ("VA") Lender, and any diminished participation by the Agencies may result in GMFS becoming unable to sell its originated mortgage loans to the Agencies on attractive terms or at all. Additionally, although the Company does not own any Agency RMBS as of December 31, 2015, it may rely on Agency RMBS it may acquire (as well as residential mortgage loans and non Agency RMBS that it owns) as collateral for its financings under securities repurchase agreements. Any decline in the value of Agency RMBS, or perceived market uncertainty about their value or their structures, would make it more difficult for the Company to obtain financing on acceptable terms or at all. Further, the current support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional support it may provide in the future, could have the effect of lowering the interest rates the Company expects to receive from Agency RMBS it may acquire, thereby tightening the spread between the interest the Company may earn on Agency RMBS and the cost of financing such assets. A reduction in the supply of Agency RMBS could also negatively affect the pricing of Agency RMBS by reducing the spread between the interest the Company may earn on an investment portfolio of Agency RMBS and its cost of financing such a portfolio. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. Government, and could also nationalize, privatize, or eliminate such entities entirely In March 2013, the Federal Housing Finance Agency announced that it would establish a new institutional body, which later became known as the Federal Mortgage Insurance Corporation (the "FMIC"), to replace Fannie Mae and Freddie Mac once they wind down operations. In 2013 and 2014, members of Congress proposed draft bills that would phase out Fannie Mae and Freddie Mac over a specified period of time, including one proposal where the FMIC would be modeled after the Federal Deposit Insurance Corporation (the "FDIC") and provide catastrophic reinsurance in the secondary market for MBS, and also take over multi-family guarantees. While prospects for passage are uncertain, these legislative measures underscore the potential for change to the Agencies. Any law affecting these Agencies may create market uncertainty and have the effect of reducing the actual or perceived credit quality of RMBS and may make it more expensive for GMFS to originate Agency related mortgage loans or impact its ability to sell its originated mortgage loans to the Agencies on attractive terms or at all. As a result, such laws could increase the risk of loss on RMBS the Company may acquire and loans GMFS originates. It also is possible that such laws could adversely impact the market for such securities and loans and spreads at which they trade. All of the foregoing could materially and adversely affect the Company's financial condition and consolidated results of operations.

Actions of the U.S. Government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, including the SEC, to stabilize or reform the financial markets may not achieve the intended effect and may adversely affect the Company's business.

In July 2010, the U.S. Congress enacted the Dodd-Frank Act, which includes extensive changes to the laws regulating financial services firm. Among other things, the Dodd-Frank Act imposes significant restrictions on the proprietary trading activities of certain banking entities and has subjected other systemically significant organizations regulated by the U.S. Federal Reserve to increased capital requirements and quantitative limits for engaging in such activities. The new law includes significant changes to the regulation of financial institutions including the creation of (1) the CFPB within the Federal Reserve to regulate consumer financial services and products and (2) the Financial Stability Oversight Council to identify, monitor and address emerging systemic risks posed by the activities of financial services firms and make recommendations to the Federal Reserve to alleviate those risks. The CFPB has sole rulemaking and interpretive authority under existing and future consumer financial services laws and supervisory, examination and enforcement authority over institutions subject to its jurisdiction. The Dodd-Frank Act also provides for enhanced regulation of derivatives and securitization transactions (including the addition of risk retention requirements, third-party due diligence disclosure requirements, expanded asset-level data requirements and new standards relating to eligibility of securities as "mortgage-related securities" under the Exchange Act), restrictions on executive compensation and enhanced oversight of credit rating agencies. In addition, the Dodd-Frank Act provides for the elimination of prepayment penalties for mortgage loans and expanded consumer protection in respect of high-cost loans. In many cases the provisions of the statute will take effect only after regulations are adopted by the applicable Federal agencies.

The Dodd-Frank Act also prohibits lenders from originating residential mortgage loans unless the lender determines that the borrower has a reasonable ability to repay the loan. Under the Dodd-Frank Act, a lender and its assignees will not have liability under this prohibition with respect to any "qualified mortgage." The CFPB has issued a final rule amending Regulation Z promulgated under the Federal Truth-in-Lending Act (“TILA”), which became effective on January 10, 2014, specifying the ability-to-repay requirements and the characteristics of a qualified mortgage (the "ATR/Qualified Mortgage Rule"). Interest-only loans, hybrid mortgage loans and certain balloon loans, as well as loans with a debt-to-income ratio exceeding 43%, will not meet the requirements for a qualified mortgage. With respect to qualified mortgages, the ATR/Qualified Mortgage Rule provides a safe harbor from liability if certain requirements are satisfied, or a rebuttable presumption from such liability if only certain of these requirements are satisfied. To the extent that a mortgage loan originated by the Company does not satisfy the requirements of a "qualified mortgage" under either set of requirements, the Company and its assignees could be liable for actual damages suffered by the borrower, litigation costs, statutory damages and special statutory damages. Various state and local legislatures may adopt similar or more onerous provisions in the future.

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One of the CFPB's areas of focus has been on whether mortgage originators take appropriate steps to ensure that business arrangements with service providers do not present risks to consumers. The sub-servicer the Company may retain to directly service residential mortgage loans (when the Company owns the associated MSRs) is one of the Company's most significant service providers with respect to the Company's residential mortgage loan business and the Company's failure to take steps to ensure that this sub-servicer is servicing these residential mortgage loans in accordance with applicable law and regulation could result in enforcement action by the CFPB against the Company that could restrict the Company's business and expose it to penalties or other claims. The Company generally uses a small number of sub-servicers on its residential whole loan portfolio and, as a result, the risks associated with the Company's use of sub-servicers are concentrated around a small number of sub-servicer counterparties. On January 17, 2013, the CFPB promulgated final rules implementing the Dodd-Frank Act's amendments to TILA and the Real Estate Settlement Procedures Act (“RESPA”) (the "Servicing Rules"), which became effective on January 10, 2014. The Servicing Rules are part of a broader effort to establish minimum national standards for mortgage servicing. Among other things, the Servicing Rules incorporate many of the provisions of a settlement reached by federal regulators and state attorneys general representing 49 states and five large mortgage servicers in 2012, target early intervention with borrowers following initial delinquency and impose detailed requirements applicable in each step of a servicer's loss mitigation process. In particular, the Servicing Rules restrict so-called "dual tracking," in which a servicer simultaneously evaluates a mortgagor for a loan modification or other loss mitigation alternatives at the same time that it prepares to foreclose on the mortgaged property. In addition, the State of California recently enacted the Homeowner's Bill of Rights, which requires similar changes in delinquent loan servicing and foreclosure procedures and creates a private right of action permitting borrowers to bring legal actions against lenders that violate the law. The Servicing Rules and the similar state regulations therefore could result in increased delays in foreclosure or the inability to foreclose, which could in turn result in losses with respect to the Company's residential whole loan portfolio.

In October 2014, the FDIC, the Federal Housing Finance Agency, the Office of the Comptroller of the Currency (the "OCC"), the SEC, the Federal Reserve and the HUD adopted a final rule implementing the credit risk retention requirements of Section 941 of the Dodd-Frank Act for asset-backed securities (the "Risk Retention Rules"). As required by the Dodd-Frank Act, the Risk Retention Rules generally require "securitizers" to retain not less than 5% of the credit risk of the mortgage loans securitized (the "Required Risk") for a certain period of time (not to exceed seven years). The Risk Retention Rules prohibit hedging Required Risk if payments on the hedge instrument are materially related to the Required Risk and the hedge position would limit the financial exposure of the securitizer to the Required Risk. A securitizer may not pledge its interest in any Required Risk as collateral for any financing unless such financing is full recourse to the securitizer. However, the Risk Retention Rules do not apply to RMBS backed solely by qualified mortgages. The Risk Retention Rules applicable to RMBS became effective on December 24, 2015, and to the extent that the Company sponsors a securitization of non-qualified mortgages after such date, the Company will be required to comply with the Risk Retention Rules, which could subject the Company to losses in respect of the related RMBS. The Company would be subject to various enforcement options by the regulators for the failure to comply with the Risk Retention Rules.

In addition to the ATR/Qualified Mortgage Rule and the servicing rules described above, the Company cannot predict what actions, if any, that the CFPB will take in the mortgage markets, nor what the impact of such actions will be on the mortgage markets or the Company's results of operations, financial condition and business. In addition to the foregoing, the U.S. Government, Federal Reserve, U.S. Department of the Treasury and other governmental and regulatory bodies such as the Financial Stability Oversight Council, a panel comprising top U.S. financial regulators, may scrutinize or seek to implement changes to regulation which could in recent years negatively impact mortgage REITs, such as the Company. For example, in recent years, a number of local governmental authorities have considered eminent domain as one of several potential alternatives to help resolve housing finance challenges. This type of legislation and action could have a severe negative impact on the mortgage markets and may introduce risks that are difficult, if not impossible, to quantify. There is no certainty as to whether any governmental bodies will take steps to acquire any mortgage loans under such programs, or ultimately pass other legislation that will affect the mortgage markets. Such eminent domain programs would authorize governmental authorities to acquire certain mortgage loans by voluntary purchase or eminent domain and to modify those mortgage loans to allow homeowners to continue to own and occupy their homes, irrespective of whether the mortgage loans are actually in default or foreclosure. No such eminent domain programs have become operational, but there can be no assurance that jurisdictions will not take steps to acquire mortgage loans under an eminent domain program (or other programs or initiatives) in the future and what purchase price would be paid for any such mortgage loans.

The Dodd-Frank Act's extensive requirements may have a significant effect on the financial markets, and may affect the availability or terms of financing from the Company's lender counterparties and the availability or terms of residential mortgage loans and RMBS, both of which may have an adverse effect on the Company's financial condition and consolidated results of operations.

In addition, the U.S. Government, Federal Reserve, U.S. Treasury, the SEC and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis that began in 2007. The Company cannot predict whether or when such actions may occur or what effect, if any, such actions could have on its business, consolidated results of operations and financial condition.

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The elimination or reduction of the mortgage-interest tax deduction could negatively affect the U.S. housing market

Various tax reform proposals continue to circulate in Congress, some of which would change the manner in which home interest deductions are treated. It is unclear whether any of the pending tax reform proposals will be enacted, either piecemeal as revenue raisers or as part of a more comprehensive package of tax reforms. Elimination or further restrictions on the mortgage-interest tax deduction could negatively affect the U.S. housing market or the market value of mortgage loans.

The Company may be subject to liability in connection with its residential mortgage loans for potential violations of consumer protection laws and regulations.

Federal consumer protection laws and regulations have been enacted and promulgated that are designed to regulate residential mortgage loan underwriting and originators' lending processes, standards, and disclosures to borrowers. These laws and regulations include the ATR/Qualified Mortgage Rule and the Servicing Rules. In addition, there are various other federal, state, and local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators. For example, the federal Home Ownership and Equity Protection Act of 1994 prohibits inclusion of certain provisions in residential mortgage loans that have mortgage rates or origination costs in excess of prescribed levels and requires that borrowers be given certain disclosures prior to origination. Some states have enacted, or may enact, similar laws or regulations, which in some cases may impose restrictions and requirements greater than those in place under federal laws and regulations. In addition, under the anti-predatory lending laws of some states, the origination of certain residential mortgage loans, including loans that are not classified as "high cost" loans under applicable law, must satisfy a net tangible benefits test with respect to the borrower. This test, as well as certain standards set forth in the ATR/Qualified Mortgage Rule, may be highly subjective and open to interpretation. As a result, a court may determine that a residential mortgage loan did not meet the standard or test even if the originator reasonably believed such standard or test had been satisfied.

Mortgage loans also are subject to various other federal laws, including:

· the Equal Credit Opportunity Act of 1974, as amended (the "ECOA") and Regulation B promulgated under the ECOA, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act of 1968, as amended, in the extension of credit;

· the TILA and Regulation Z promulgated under TILA, which both require certain disclosures to the mortgagors regarding the terms of residential loans;

· the RESPA and Regulation X promulgated under RESPA, which (among other things) prohibit the payment of referral fees for real estate settlement services (including mortgage lending and brokerage services) and regulate escrow accounts for taxes and insurance and billing inquiries made by mortgagors;

· the Americans with Disabilities Act of 1990, as amended which, among other things, prohibits discrimination on the basis of disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages or accommodations of any place of public accommodation;

· the Fair Credit Reporting Act of 1970, as amended, which regulates the use and reporting of information related to the borrower's credit experience;

· the Consumer Financial Protection Act, enacted as part of the Dodd-Frank Act, which (among other things) created the CFPB and gave it broad rulemaking, supervisory and enforcement jurisdiction over mortgage lenders and servicers, and proscribes any unfair, deceptive or abusive acts or practices in connection with any consumer financial product or service;

· the Home Equity Loan Consumer Protection Act of 1988, which requires additional disclosures and limits changes that may be made to the loan documents without the mortgagor's consent, and restricts a mortgagee's ability to declare a default or to suspend or reduce a mortgagor's credit limit to certain enumerated events;

· the Depository Institutions Deregulation and Monetary Control Act of 1980, which preempts certain state usury laws;

· the Dodd-Frank Act, including as described above under "—Actions of the U.S. Government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies, including the SEC, to stabilize or reform the financial markets may not achieve the intended effect and may adversely affect the Company's business"; and

· the Service members Civil Relief Act, as amended, which provides relief to borrowers who enter into active military service or who were on reserve status but are called to active duty after the origination of their mortgage loans; and

· the Alternative Mortgage Transaction Parity Act of 1982, which preempts certain state lending laws which regulate alternative mortgage transactions.

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Failure of the Company, residential mortgage loan originators, mortgage brokers or servicers to comply with these laws and regulations, could subject the Company to monetary penalties and defenses to foreclosure, including by recoupment or setoff of finance charges and fees collected, and could result in rescission of the affected residential mortgage loans, which could adversely impact the Company's business and financial results.

GMFS is a seller/servicer approved to sell residential mortgage loans to Freddie Mac and Fannie Mae and failure to maintain its status as an approved seller/servicer could harm the Company's business.

GMFS is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, HUD / FHA Mortgagee, USDA approved originator and VA Lender. As an approved seller/servicer, GMFS is required to conduct certain aspects of its operations in accordance with applicable policies and guidelines published by these entities and GMFS is required to pledge a certain amount of cash to them to collateralize potential obligations to these entities. Failure to maintain GMFS's status as an approved seller/servicer would mean it would not be able to sell mortgage loans to these entities, could result in it being required to re-purchase loans previously sold to these entities, or could otherwise restrict the its business and investment options and could harm its business and expose it to losses or other claims. Fannie Mae, Freddie Mac or these other entities may, in the future, require GMFS to hold additional capital or pledge additional cash or assets in order to maintain approved seller/servicer status, which, if required, would adversely impact the Company's financial results.

GMFS operates within a highly regulated industry on a federal, state and local level and the business results of GMFS are significantly impacted by the laws and regulations to which GMFS is subject.

As a mortgage loan originator, GMFS is subject to extensive and comprehensive regulation under federal, state and local laws in the United States. These laws and regulations significantly affect the way that GMFS conducts its business and restrict the scope of the existing business of GMFS and limit the ability of GMFS to expand its product offerings or can make the cost to originate and service mortgage loans higher, which could impact the Company’s financial results.

The CFPB issued proposed changes to its Servicing Rules in November 2014. The proposed changes, if adopted, may increase the costs of loss mitigation and increase foreclosure timelines. Other new regulatory requirements or changes to existing requirements that the CFPB may promulgate could require changes in the business of GMFS, result in increased compliance costs and impair the profitability of such business. In addition, as a result of the Dodd-Frank Act's potential expansion of the authority of state attorneys general to bring actions to enforce federal consumer protection legislation, GMFS could be subject to state lawsuits and enforcement actions, thereby further increasing the legal and compliance costs relating to GMFS. The proposed amendments to the Servicing Rules will increase the complexity of the loss mitigation and foreclosure processes and an inadvertent failure to comply with these rules could lead to losses in the value of the mortgage loans, be an event of default under various servicing agreements or subject GMFS to fines and penalties. The cumulative effect of these changes could result in a material impact on the Company’s earnings.

Additionally, the Dodd-Frank Act directed the CFPB to integrate certain mortgage loan disclosures under the TILA and RESPA, and effective October 3, 2015, new disclosure rules went into effect for newly originated residential mortgage loans.   These rules include new consumer disclosure document forms, new processes for determining when disclosures must be updated and new timelines for providing disclosure documents to borrowers.  These new rules have created the need for substantial system and process changes at GMFS and new training for its employees. Failure to comply with these new requirements may result in penalties for disclosure violations under the TILA and RESPA.

GMFS could be subject to additional regulatory requirements or changes under the Dodd Frank Act beyond those currently proposed, adopted or contemplated, particularly given the ongoing heightened regulatory environment in which financial institutions operate. The ongoing implementation of the Dodd Frank Act, including the implementation of the Servicing Rules and the rules related to mortgage loan disclosures by the CFPB, could increase the regulatory compliance burden and associated costs of GMFS and place restrictions on the operations of GMFS, which could in turn adversely affect the Company’s, financial condition and results of operations.

Mortgage loan modification and refinance programs as well as future legislative action may adversely affect the value of, and the returns on, the target assets in which the Company invests.

The U.S. Government, through the Federal Reserve, the FHA and the FDIC, commenced implementation of programs designed to provide homeowners with assistance in avoiding residential or commercial mortgage loan foreclosures, including the Home Affordable Modification Program ("HAMP"), which provides homeowners with assistance in avoiding residential mortgage loan foreclosures, and the Home Affordable Refinance Program ("HARP"), which allows borrowers who are current on their mortgage payments to refinance and reduce their monthly mortgage payments at loan-to-value ratios without new mortgage insurance. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans.

Loan modification and refinance programs may adversely affect the performance of residential mortgage loans, Agency RMBS and non-Agency RMBS. Especially with non-Agency RMBS, a significant number of loan modifications with respect to a given security, including those related to principal forgiveness and coupon reduction, could negatively impact the realized yields and cash flows on such security. These loan modification programs, future legislative or regulatory actions, including possible amendments to the bankruptcy laws, which result in the modification of outstanding residential mortgage loans, as well as changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae, may adversely affect the value of, and the returns on, residential mortgage loans, non-Agency RMBS, Agency RMBS and the Company's other target assets that it may purchase.

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The increasing number of proposed U.S. federal, state and local laws and licensing requirements may increase the Company's risk of liability with respect to certain mortgage loans and could increase the Company's cost of doing business.

The U.S. Congress and various state and local legislatures are considering, and in the future may consider, legislation which, among other provisions, would permit limited assignee liability for certain violations in the mortgage loan origination process. The Company cannot predict whether or in what form the U.S. Congress or the various state and local legislatures may enact legislation affecting its business. The Company will evaluate the potential impact of any initiatives which, if enacted, could affect its practices and consolidated results of operations. The Company is unable to predict whether federal, state or local authorities will require changes in its practices in the future. These changes, if required, could adversely affect its profitability, particularly if the Company makes such changes in response to new or amended laws, rules, regulations or ordinances in any state where the Company originates or acquires a significant portion of its mortgage loans, or if such changes result in the Company being held responsible for any violations in the mortgage loan origination process.

While the Company is not required to obtain licenses to purchase RMBS, the origination of residential mortgage loans requires and, the purchase of performing, re-performing and newly originated residential mortgage loans in the secondary market may, in some circumstances, require it to maintain various state licenses. Acquiring the right to service residential mortgage loans may also, in some circumstances, require the Company to maintain various state licenses. As a result, the Company could be delayed in conducting certain business if it were first required to obtain a state license. There can be no assurance that the Company will be able to obtain all of the licenses it needs or that it will not experience significant delays in obtaining these licenses. Furthermore, once licenses are issued, the Company is required to comply with various information reporting and other regulatory requirements to maintain those licenses, and there is no assurance that it will be able to satisfy those requirements or other regulatory requirements applicable to the Company's business of originating or acquiring performing, re-performing and newly originated residential mortgage loans on an ongoing basis. The Company's failure to obtain or maintain required licenses or the Company's failure to comply with regulatory requirements that are applicable to the Company's business of originating or acquiring residential mortgage loans may restrict the Company's business and investment options and could harm the Company's business and expose the Company to penalties or other claims.

In addition, environmental protection laws that apply to properties that secure or underlie the Company's residential mortgage loans could result in losses to the Company. The Company may also be exposed to environmental liabilities with respect to properties of which it becomes a direct or indirect owner or to which it takes title, which could adversely affect the Company's business and financial results.

Risks Associated with the Company's Management and the Company's Relationship with its Advisor

The Company is dependent on certain key personnel for its success, and the Company may not find a suitable replacement for its Advisor if the Investment Advisory Agreement is terminated, or if key personnel leave the employment of ZAIS or GMFS or otherwise become unavailable to the Company.

The Company is dependent on its Advisor for its day-to-day management, as the Company does not have any independent officers or any employees, other than those employed in connection with its GMFS mortgage banking platform. The Advisor has significant discretion as to the implementation of the Company's asset acquisition and operating policies and strategies. The Company believes that its success will depend to a significant extent upon the efforts, experience, diligence, skill and network of business contacts of the executive officers and key personnel of its Advisor and the key personnel of its GMFS mortgage banking platform, as they will evaluate, negotiate, structure, close and monitor the Company's originations and asset acquisitions, and the Company's success will depend on their continued service. The departure of any of the executive officers or key personnel of the Advisor or GMFS could have a material adverse effect on the Company's performance.

In addition, the Company offers no assurance that the Advisor will remain the Company's advisor or that the Company will continue to have access to the Advisor's principals and professionals, including those of ZAIS. The initial term of the Investment Advisory Agreement with the Advisor only extends until the third anniversary of the Company's listing, with automatic one-year renewal terms on each anniversary date thereafter unless previously terminated. If the Investment Advisory Agreement is terminated and no suitable replacement is found to advise the Company, the Company may not be able to execute its business plan.

Termination by the Company of the Investment Advisory Agreement with the Advisor without cause is difficult and costly.

Termination of the Investment Advisory Agreement with the Advisor without cause is difficult and costly. The Company's board of directors will review the Advisor's performance and the advisory fees annually and, following the three-year initial term, the Investment Advisory Agreement may be terminated annually upon the affirmative vote of at least two-thirds of its independent directors, or by a vote of the holders of at least two-thirds of the outstanding shares of the Company's common stock (other than shares held by the ZAIS Parties), based upon: (i) unsatisfactory performance by the Advisor that is materially detrimental to the Company; or (ii) a determination that the advisory fees payable to the Advisor are not fair, subject to the Advisor's right to prevent termination based on unfair fees by accepting a reduction of advisory fees agreed to by at least two-thirds of the Company's independent directors. The Company must provide the Advisor with 180 days' prior notice of any such termination. Additionally, upon such a termination without cause, the Investment Advisory Agreement provides that the Company will pay the Advisor a termination fee equal to three times the average annual advisory fee earned by the Advisor during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal year before the date of termination. These provisions may increase the cost to the Company of terminating the Investment Advisory Agreement and adversely affect the Company's ability to terminate the Advisor without cause.

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The Advisor is only contractually committed to serve the Company until the third anniversary of the Company's listing. Thereafter, the Investment Advisory Agreement is automatically renewable on an annual basis; provided, however, that the Advisor may terminate the Investment Advisory Agreement annually upon 180 days' prior notice. If the Investment Advisory Agreement is terminated and no suitable replacement is found to advise the Company, the Company may not be able to execute its business plan.

The Company has no recourse to ZAIS if it does not fulfill its obligations under the shared facilities and services agreement.

Neither the Company nor its Advisor has any employees or separate facilities, other than those employed in connection with the Company's GMFS mortgage banking platform. The Company's day-to-day operations outside of its mortgage banking platform will be conducted by employees of ZAIS, the parent company of the Advisor, pursuant to a shared facilities and services agreement between the Advisor and ZAIS. Under the shared facilities and services agreement, the Advisor will also be provided with the services and other resources necessary for the Advisor to perform its obligations and responsibilities under the Investment Advisory Agreement in exchange for certain fees payable by the Advisor. ZAIS may assign its rights and obligations thereunder to any of its majority-owned and controlled affiliates. In addition, because the Company will not be a party to the shared facilities and services agreement, the Company does not have any recourse to ZAIS if it does not fulfill its obligations under the shared facilities and services agreement or if it elects to assign the agreement to one of its affiliates. Also, the Advisor only has nominal assets and the Company will have limited recourse against the Advisor under the Investment Advisory Agreement to remedy any liability to the Company from a breach of contract or fiduciary duties.

There are conflicts of interest in the Company's relationship with the Advisor and its affiliates, which could result in decisions that are not in the best interests of the Company's stockholders.

The Company is subject to conflicts of interest arising out of its relationship with the Advisor and its affiliates, including ZAIS. Specifically, each of the Company's officers and directors is also an employee of ZAIS or its affiliates. ZAIS and the Company's officers may have conflicts between their duties to the Company and their duties to, and interests in, the Advisor or its affiliates. The Advisor is not required to devote a specific amount of time or the services of any particular individual to the Company's operations. ZAIS manages or provides services to its own accounts and certain other funds and managed accounts for which ZAIS serves as the investment adviser and ZAIS may in the future hold assets directly on its own behalf or indirectly through one or more of its subsidiaries, affiliates or other newly formed entities (collectively the "Other Accounts") and the Company will compete with these Other Accounts for ZAIS' resources and support through the Advisor. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when the Company will need focused support and assistance from ZAIS through the Advisor, entities for which ZAIS also acts as an investment advisor will likewise require greater focus and attention, placing ZAIS' resources in high demand. In such situations, the Company may not receive the necessary support and assistance the Company requires or would otherwise receive if the Company were internally managed or if ZAIS did not act as an advisor for other entities or hold assets directly or indirectly for its own account. The ability of ZAIS and its officers and personnel to engage in other business activities may reduce the time they spend assisting the Advisor advising the Company.

The Company and certain of its affiliates and ZAIS' Other Accounts and their affiliates may compete to acquire the Company's target assets.

There may be conflicts in allocating assets that are suitable for the Company and Other Accounts of ZAIS and its affiliates. Other Accounts of ZAIS and its affiliates may compete with the Company with respect to certain assets which the Company may want to acquire and, as a result, the Company may either not be presented with the opportunity or have to compete with such Other Accounts to acquire these assets. Certain of these Other Accounts may have significant uninvested capital and will likely compete with the Company. Additionally, certain conflicts of interest may exist with respect to funds that have only limited reinvestment capacity including circumstances where the Company may purchase assets being disposed of by certain Other Accounts as they begin to liquidate various assets. In addition to the Other Accounts, ZAIS may, in the future, establish new funds or enter into new managed account arrangements with investment strategies that are the same or substantially similar to the Company's strategy, including funds and accounts investing primarily in the Company's target assets, including residential mortgage loans and RMBS. Such Other Accounts may compete with the Company for its target assets. The Company may also make investments in other entities which are managed by ZAIS or one of its affiliates. The Company will not, however, purchase any assets from, or issued by, any Other Account or any entity managed by the Advisor or its affiliates, or sell any asset to any Other Account or any such other entity without the consent of a majority of the Company's independent directors. A majority of the Company's independent directors may amend this affiliated investment policy at any time without stockholder consent. There may be certain situations where ZAIS allocates assets that may be suitable for the Company to Other Accounts managed by ZAIS or its affiliates instead of to the Company. Further, the Company may liquidate its investments at different times than Other Accounts due to, among other things, differences in investment strategies.

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The Investment Advisory Agreement with the Advisor was not negotiated on an arm's-length basis and may not be as favorable to the Company as if it had been negotiated with an unaffiliated third party.

Because each of the Company's officers are employees of the Advisor or its affiliates, and, at the time the Investment Advisory Agreement was executed, all of the Company's directors were employees of the Advisor or its affiliates, the Investment Advisory Agreement was not negotiated on an arm's-length basis, and the Company did not have the benefit of arm's-length negotiations of the type normally conducted with an unaffiliated third party. As a result, the terms, including the fees payable, may not be as favorable to the Company as an arm's-length agreement. Furthermore, because each of the Company's officers and non-independent directors is also an employee of the Advisor or its affiliates, the Company may choose not to enforce, or to enforce less vigorously, the Company's rights under the Investment Advisory Agreement because of its desire to maintain its ongoing relationship with the Advisor.

The Advisor's liability is limited under the Investment Advisory Agreement, and the Company has agreed to indemnify the Advisor against certain liabilities.

Pursuant to the Investment Advisory Agreement, the Advisor will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of the Company's board of directors in following or declining to follow its advice or recommendations. Under the terms of the Investment Advisory Agreement, the Advisor, its principals, stockholders, members, managers, partners, directors and personnel, any person controlling or controlled by the Advisor, including ZAIS, and any person providing sub-advisory services to the Advisor will not be liable to the Company, any subsidiary of the Company, the Company's directors, the Company's stockholders or any of the Company's subsidiary's stockholders, members or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except acts or omissions constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the Investment Advisory Agreement, as determined by a final non-appealable order of a court of competent jurisdiction. In addition, the Company has agreed to indemnify the Advisor, its principals, stockholders, members, managers, partners, directors and personnel, any person controlling or controlled by the Advisor and any person providing sub-advisory services to the Advisor with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of the Advisor not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the Investment Advisory Agreement.

The Advisor may have difficulty in complying with regulatory requirements applicable to REITs, including the REIT provisions of the Internal Revenue Code, which may hinder its ability to achieve the Company's objectives or result in loss of the Company's qualification as a REIT.

The Advisor's management team has limited experience managing a REIT. The REIT rules and regulations are highly technical and complex, and the failure to comply with the income, asset, and other limitations imposed by these rules and regulations could prevent the Company from qualifying as a REIT or could force it to pay unexpected taxes and penalties. Failure to comply with the income, asset and other limitations imposed by the REIT rules and regulations may hinder the Company's ability to achieve its objectives or result in loss of the Company's qualification as a REIT or payment of taxes and penalties. As a result, the Company cannot provide assurance that it will be able to successfully operate as a REIT or comply with regulatory requirements applicable to REITs.

The Company's board of directors has approved broad guidelines for the Advisor and will not approve each origination or acquisition decision made by the Advisor.

The Advisor is authorized to follow broad guidelines in pursuing the Company's origination and asset acquisition strategies. The Company's board of directors will periodically review the Company's guidelines and the Company's portfolio of assets but will not, and will not be required to, review all of the Company's proposed originations, acquisitions or any type or category of asset, except that an acquisition of any security from, or issued by, an entity managed by the Advisor or its affiliates, must be approved by a majority of the independent members of the board of directors. In addition, in conducting periodic reviews, the directors will rely primarily on information provided to them by the Advisor. Furthermore, the Advisor may use complex strategies, and transactions entered into by the Advisor may be costly, difficult or impossible to unwind by the time they are reviewed by the Company's board of directors. The Advisor will have great latitude within the broad parameters of the Company's guidelines in determining the types of assets it may decide are proper for the Company, which could result in returns that are substantially below expectations or that result in losses, which would materially and adversely affect the Company's business operations and results. Further, decisions and acquisitions made by the Advisor may not fully reflect the best interests of the Company's stockholders.

The Company may change any of its strategies, guidelines, policies or procedures without stockholder consent, which could result in its making originations and acquisitions that are different from, and possibly riskier than, those described in this annual report on Form 10-K.

The Company may change any of its strategies, guidelines, policies or procedures with respect to originations, acquisitions, asset allocation, growth, operations, indebtedness, financing strategy, hedging strategy and distributions at any time without the consent of the Company's stockholders, which could result in the Company's strategies becoming different from, and possibly riskier than, strategies described in this annual report on Form 10-K. A change in the Company's strategy may increase its exposure to interest rate risk, prepayment risk, financing risk, credit risk, default risk and real estate market fluctuations. Furthermore, a change in the Company's asset allocation could result in the Company making originations and acquisitions in asset categories different from those described in this annual report on Form 10-K. In addition, the Company's charter provides that its board of directors may revoke or otherwise terminate the Company's REIT election, without the approval of its stockholders, if it determines that it is no longer in the Company's best interests to qualify as a REIT. These changes could adversely affect the Company's financial condition, consolidated results of operations, the value of the Company's common stock and its ability to make distributions to the Company's stockholders.

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The Advisor's advisory fee may reduce its incentive to devote its time and effort to seeking attractive assets for the Company's portfolio because the fee is payable regardless of the performance of the Company's portfolio and there is no incentive fee associated with the management of the Company's assets.

The Company pays to the Advisor an advisory fee, calculated and payable (in cash) quarterly in arrears, equal to 1.5% per annum of the Company's Stockholders' Equity (as defined in the Investment Advisory Agreement). The Company will pay the Advisor an advisory fee regardless of the performance of the Company's portfolio and there is no incentive fee associated with the management of the Company's assets. The Advisor's entitlement to nonperformance-based compensation might reduce its incentive to devote sufficient time and effort to seeking assets that provide attractive risk-adjusted returns for the Company's portfolio. This in turn could negatively affect the Company's ability to make distributions to its stockholders and the value of its common stock.

The Advisor's loan sourcing fee is payable regardless of the future performance of the newly originated residential mortgage loans which might encourage the Advisor to source and acquire a higher volume of loans, including loans with potentially lower yields or underwritten pursuant to lesser standards.

Pursuant to the Investment Advisory Agreement, the Company pays the Advisor a loan sourcing fee quarterly in arrears in lieu of any payments or reimbursements that would otherwise be due to the Advisor or its affiliates pursuant to Investment Advisory Agreement for loan sourcing services provided. The loan sourcing fee is equal to 0.50% of the principal balance of newly originated residential mortgage loans sourced by the Advisor or its affiliates through its conduit program and acquired by the Company's subsidiaries. The Company will pay the Advisor a loan servicing fee regardless of the future performance of the newly originated residential mortgage loans. The Advisor's entitlement to nonperformance-based compensation might encourage it to source and acquire a higher volume of loans, including loans with potentially lower yields or underwritten pursuant to lesser standards. This in turn could negatively affect the Company's ability to make distributions to its stockholders and the value of its common stock.

Risks Related to Financing and Hedging

The Company uses leverage in executing its business strategy, which may adversely affect the return on the Company's assets and may reduce cash available for distribution to the Company's stockholders, as well as increase losses when economic conditions are unfavorable.

The Company leverages the origination and acquisition of its target assets through private funding sources, including borrowings structured as repurchase agreements, warehouse facilities, notes issued by the Operating Partnership, securitizations, term financings and derivative contracts. Leverage can enhance the Company's potential returns but can also exacerbate losses. Although the Company is not required to maintain any particular assets-to-equity leverage ratio, the amount of leverage the Company deploys for particular assets depends upon the Advisor's assessment of short-term interest rates, overall market conditions and the particular risks of the assets being financed. The Company's percentage of leverage varies over time depending on its ability to enter into or issue repurchase agreements, warehouse facilities, notes issued by the Operating Partnership, term financings and derivative contracts, financing rates, type and/or amount of collateral required to be pledged, the Company's assessment of the appropriate amount of leverage for the particular assets the Company is funding and regulatory requirements limiting the permissible amount of leverage to be utilized.

The return on the Company's assets and cash available for distribution to its stockholders may be reduced to the extent that market conditions prevent the Company from leveraging its assets or cause the cost of its financing to increase relative to the income that can be derived from the assets originated or acquired. The Company's financing costs will reduce cash available for distribution to stockholders. The Company may not be able to meet its financing obligations and, to the extent that the Company cannot, the Company risks the loss of some or all of the Company's assets to liquidation or sale to satisfy the obligations. A decrease in the value of the Company's assets that are subject to repurchase agreement and certain warehouse financings may lead to margin calls which the Company will have to satisfy. The Company may not have the funds available to satisfy any such margin calls and may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses. The satisfaction of any such margin calls may reduce cash flow available for distribution to the Company's stockholders. Any reduction in distributions to the Company's stockholders may cause the value of the Company's common stock to decline.

The Company's inability to access funding could have a material adverse effect on the Company's consolidated results of operations, financial condition and business.

The borrowings the Company used to fund its portfolio totaled approximately $527.4 million as of December 31, 2015 under the Loan Repurchase Facilities, master securities repurchase agreements with four counterparties, warehouse and repurchase agreement facilities related to its GMFS mortgage banking platform with four counterparties and notes issued by the Operating Partnership. The Company's ability to fund its target asset originations and acquisitions may be impacted by the Company's ability to secure further such borrowings as well as securitizations, term financings and derivative contracts on acceptable terms. Because repurchase agreements and warehouse facilities are short-term commitments of capital, lenders may respond to market conditions making it more difficult for the Company to renew or replace on a continuous basis its maturing short-term borrowings. If the Company is not able to renew its then existing facilities or arrange for new financing on terms acceptable to the Company, or if the Company defaults on the Company's covenants or is otherwise unable to access funds under the Company's financing facilities, the Company may have to curtail the Company's origination and asset acquisition activities and/or dispose of assets.

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It is possible that the lenders that will provide the Company with financing could experience changes in their ability to advance funds to it, independent of its performance or the performance of its portfolio of assets. Furthermore, if many of the Company's potential lenders are unwilling or unable to provide it with financing, the Company could be forced to sell its assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on the Company's lenders change, they may be required to significantly increase the cost of the financing that they provide to the Company. The Company's lenders also may revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, based on, among other factors, the regulatory environment and their management of perceived risk, particularly with respect to assignee liability. Moreover, the amount of financing the Company receives under its repurchase agreements will be directly related to the lenders' valuation of the Company's target assets that cover the outstanding borrowings. Typically, repurchase agreements grant the lender the absolute right to reevaluate the fair market value of the assets that cover outstanding borrowings at any time. If a lender determines in its sole discretion that the value of the assets has decreased, it has the right to initiate a margin call. A margin call would require the Company to transfer additional assets to such lender without any advance of funds from the lender for such transfer or to repay a portion of the outstanding borrowings. Any such margin call could have a material adverse effect on the Company's consolidated results of operations, financial condition, business, liquidity and ability to make distributions to the Company's stockholders, and could cause the value of the Company's common stock to decline. The Company may be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity, which could cause it to incur losses.

The dislocations in the residential mortgage sector in the financial crisis that began in 2007 have caused many lenders to tighten their lending standards, reduce their lending capacity or exit the market altogether. Further contraction among lenders, insolvency of lenders or other general market disruptions could adversely affect one or more of the Company's potential lenders and could cause one or more of the Company's potential lenders to be unwilling or unable to provide the Company with financing on attractive terms or at all. This could increase the Company's financing costs and reduce its access to liquidity.

The Exchangeable Senior Notes are recourse obligations to the Company and the indenture governing the Exchangeable Senior Notes contains cross-default provisions.

As of December 31, 2015, $57.5 million of principal balance of the Exchangeable Senior Notes were outstanding. These amounts are full recourse obligations of the Company.

If the Company undergoes certain corporate events, that constitute a "fundamental change," the holders of the Exchangeable Senior Notes may require the Company to repurchase for cash all or part of their Exchangeable Senior Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. If the Company is not able to extend, refinance or repurchase these borrowings, the Company may not have the ability to repay these amounts when they come due. The Company’s inability to repay any of the Exchangeable senior Notes could cause the acceleration of its borrowings which would have a material adverse effect on its business.

The indenture governing the Exchangeable Senior Notes contains cross-default provisions whereby a default under one agreement could result in a default and acceleration of borrowings under other agreements. If a cross-default occurred, the Company may not be able to pay its liabilities or access capital from external sources in order to refinance its borrowings. If some or all of the Company's borrowings default and it causes a default under other borrowings, the Company's business, financial condition and consolidated results of operations could be materially and adversely affected.

The accounting for the Exchangeable Senior Notes has resulted in the Company having to recognize interest expense in excess of the stated interest rate of the Exchangeable Senior Notes and may result in volatility to Company's consolidated statement of operations.

The Operating Partnership will deliver cash in respect of any shares that would otherwise be deliverable in excess of the "aggregate share cap" based on a daily exchange value calculated on a proportionate basis for each trading day of the 40 trading day averaging period. The conversion option that is part of the Exchangeable Senior Notes is accounted for as a derivative under ASC 815 "Derivatives and Hedging" ("ASC 815"). In general, this has resulted in an initial valuation of the conversion option, which has been bifurcated from the debt component of the Exchangeable Senior Notes resulting in an original issue discount. The original issue discount is accreted to interest expense over the term of the Exchangeable Senior Notes, which resulted in an effective interest rate reported in Company's consolidated statement of operations in excess of the stated coupon rate of the Exchangeable Senior Notes. This reduced the Company's earnings and could adversely affect the price at which Company's common stock trades, but will have no effect on the amount of cash interest paid to holders or on the Operating Partnership's or the Company's cash flows.

For each financial statement period after issuance of the Exchangeable Senior Notes, a change in unrealized gain (or loss) may be reported in the Company's consolidated statement of operations to the extent the valuation of the conversion option changes from the previous period, which may result in volatility to the Company's consolidated statement of operations.

The repurchase agreements that the Company uses to finance its assets may require the Company to provide additional collateral and may restrict the Company from leveraging its assets as fully as desired.

The Company uses borrowings structured as repurchase agreements to finance certain of its assets. If the fair market value of the assets pledged or sold by the Company to a financing institution declines, the Company may be required by the financing institution to provide additional collateral or pay down a portion of the funds advanced, but the Company may not have the funds available to do so, which could result in defaults. Posting additional collateral to support the Company's credit will reduce its liquidity and limit its ability to leverage its assets, which could adversely affect its business. In the event the Company does not have sufficient liquidity to meet such requirements, financing institutions can accelerate repayment of the Company's indebtedness, increase interest rates, liquidate its collateral or terminate its ability to borrow. Such a situation would likely result in a rapid deterioration of the Company's financial condition and possibly necessitate a filing for bankruptcy protection.

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Further, financial institutions providing the repurchase facilities may require the Company to maintain a certain amount of cash that is not invested or to set aside non-leveraged assets sufficient to maintain a specified liquidity position which would allow the Company to satisfy its collateral obligations. As a result, the Company may not be able to leverage the Company's assets as fully as the Company would choose, which could reduce its return on equity. If the Company is unable to meet these collateral obligations, the Company's financial condition could deteriorate rapidly.

If a counterparty to the Company's repurchase transactions defaults on its obligation to resell the underlying asset back to the Company at the end of the transaction term, or if the value of the underlying asset has declined as of the end of that term, or if the Company defaults on its obligations under the repurchase agreement, the Company will lose money on its repurchase transactions.

Under the Company's repurchase transactions, the Company generally sells assets to lenders (that is, repurchase agreement counterparties) and receives cash from the lenders. The lenders are obligated to resell the same assets back to the Company at the end of the term of the transaction, which typically ranges from 30 to 90 days for RMBS related repurchase agreements, and up to 364 days or longer for residential loan related repurchase agreements. Because the cash the Company will receive from the lender when the Company initially sells the assets to the lender is less than the value of those assets (this is referred to as the haircut), if the lender defaults on its obligation to resell the same assets back to it the Company would incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the assets). The Company would also lose money on a repurchase transaction if the value of the underlying assets has declined as of the end of the transaction term, as the Company would have to repurchase the assets for their initial value but would receive assets worth less than that amount. Further, if the Company defaults on one of its obligations under a repurchase transaction, the lender will be able to terminate the transaction and cease entering into any other repurchase transactions with the Company. The Company's repurchase agreements may contain cross-default provisions, such that if a default occurs under any one agreement, the lenders under the Company's other agreements could also declare a default. If a default occurs under any of the Company's repurchase agreements and the lenders terminate one or more of the Company's repurchase agreements, the Company may need to enter into replacement repurchase agreements with different lenders. There can be no assurance that the Company will be successful in entering into such replacement repurchase agreements on the same terms as the repurchase agreements that were terminated or at all. Any losses the Company incurs on its repurchase transactions could adversely affect the Company's earnings and thus the Company's cash available for distribution to its stockholders.

An increase in the Company's borrowing costs relative to the interest it receives on its leveraged assets may adversely affect the Company's profitability and the Company's cash available for distribution to its stockholders.

As the Company's repurchase agreements, warehouse facilities and other short-term borrowings mature, the Company will be required either to enter into new borrowings or to sell certain of its assets. An increase in short-term interest rates at the time that the Company seeks to enter into new borrowings would reduce the spread between the returns on the Company's assets and the cost of the Company's borrowings. This would adversely affect the returns on the Company's assets, which might reduce earnings and, in turn, cash available for distribution to the Company's stockholders.

The Company's rights under the Company's repurchase agreements may be subject to the effects of the bankruptcy laws in the event of the bankruptcy or insolvency of the Company or its lenders under the repurchase agreements, which may allow the Company's lenders to repudiate the Company's repurchase agreements.

In the event of the Company's insolvency or bankruptcy, certain repurchase agreements may qualify for special treatment under the U.S. Bankruptcy Code, the effect of which, among other things, would be to allow the lender under the applicable repurchase agreement to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to foreclose on the collateral agreement without delay. In the event of the insolvency or bankruptcy of a lender during the term of a repurchase agreement, the lender may be permitted, under applicable insolvency laws, to repudiate the contract, and the Company's claim against the lender for damages may be treated simply as an unsecured creditor. In addition, if the lender is a broker or dealer subject to the Securities Investor Protection Act of 1970, or an insured depository institution subject to the Federal Deposit Insurance Act, the Company's ability to exercise its rights to recover its assets under a repurchase agreement or to be compensated for any damages resulting from the lender's insolvency may be further limited by those statutes. These claims would be subject to significant delay and, if and when received, may be substantially less than the damages the Company actually incurs.

Through certain of its subsidiaries the Company may engage in securitization transactions relating to residential mortgage loans, which would expose it to potentially material risks.

Through certain of its subsidiaries the Company may engage in securitization transactions relating to residential mortgage loans, which generally would require the Company to prepare marketing and disclosure documentation, including term sheets and prospectuses, that include disclosures regarding the securitization transactions and the assets being securitized. If the Company's marketing and disclosure documentation are alleged or found to contain inaccuracies or omissions, the Company may be liable under federal and state securities laws (or under other laws) for damages to third parties that invest in these securitization transactions, including in circumstances where the Company relied on a third party in preparing accurate disclosures, or the Company may incur other expenses and costs in connection with disputing these allegations or settling claims.

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In recent years there has also been debate as to whether there are defects in the legal process and legal documents governing transactions in which securitization trusts and other secondary purchasers take legal ownership of residential mortgage loans and establish their rights as first priority lien holders on underlying mortgaged property. To the extent there are problems with the manner in which title and lien priority rights were established or transferred, securitization transactions that the Company may sponsor and third-party sponsored securitizations that the Company holds investments in may experience losses, which could expose the Company to losses and could damage its ability to engage in future securitization transactions.

The Company's potential securitization activities could expose it to litigation, which may adversely affect its business and financial results.

Through certain of its subsidiaries the Company may engage in or participate in securitization transactions relating to residential mortgage loans. As a result of declining property values, increasing defaults, changes in interest rates, or other factors, the aggregate cash flows from the loans held by any securitization entity that the Company may sponsor and the securities and other assets held by these entities may be insufficient to repay in full the principal amount of ABS issued by these securitization entities. The Company does not expect to be directly liable for any of the ABS issued by these entities. Nonetheless, third parties who hold the ABS issued by these entities may try to hold the Company liable for any losses they experience, including through claims under federal and state securities laws or claims for breaches of representations and warranties the Company would make in connection with engaging in these securitization transactions.

Defending a lawsuit can consume significant resources and may divert management's attention from the Company's operations. The Company may be required to establish reserves for potential losses from litigation, which could be material. To the extent the Company is unsuccessful in its defense of any lawsuit, the Company could suffer losses which could be in excess of any reserves established relating to that lawsuit and these losses could be material.

The Company enters into hedging transactions that could expose it to contingent liabilities in the future and adversely impact its financial condition.

Subject to maintaining the Company's qualification as a REIT, part of the Company's strategy involves entering into hedging transactions that could require it to fund cash payments in certain circumstances (such as the early termination of a hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin assets it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in the Company's consolidated results of operations. The Company's ability to fund these obligations will depend on the liquidity of its assets and access to capital at the time. The need to fund these obligations could adversely impact the Company's financial condition.

Hedging against interest rate exposure may adversely affect the Company's earnings, which could reduce its cash available for distribution to its stockholders.

Subject to maintaining its qualification as a REIT, the Company pursues various hedging strategies to seek to reduce its exposure to adverse changes in interest rates. The Company's hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect the Company because, among other things:

· interest rate hedging can be expensive, particularly during periods of volatile interest rates;

· available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

· the value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments or "mark to market" losses would reduce earnings or stockholders' equity;

· the amount of income that a REIT may earn from non-qualifying hedging transactions (other than through taxable REIT subsidiaries (“TRSs”) to offset interest rate losses is limited by U.S. federal tax provisions governing REITs;

· the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs the Company's ability to sell or assign the Company's side of the hedging transaction;

· the hedging counterparty owing money in the hedging transaction may default on its obligation to pay; and

· the duration of the hedge may not match the duration of the related liability.

In general, when the Company originates or acquires a fixed-rate mortgage loan or hybrid ARM or a RMBS collateralized by such asset, the Company may, but is not required to, enter into an interest rate swap agreement, MBS forward sales contract, or other hedging instrument that effectively fixes the Company's borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect the Company from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related asset.

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However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on the Company's consolidated results of operations, as borrowing costs would no longer be fixed after the end of the hedging instrument while the income earned on the asset would remain fixed. This situation may also cause the fair market value of the Company's asset to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause the Company to incur losses.

In addition, the use of this swap hedging strategy effectively limits increases in the Company's book value in a declining rate environment, due to the effectively fixed nature of the Company's hedged borrowing costs. In an extreme rate decline, prepayment rates on the Company's assets might actually result in certain of the Company's assets being fully paid off while the corresponding swap or other hedge instrument remains outstanding. In such a situation, the Company may be forced to liquidate the swap or other hedge instrument at a level that causes it to incur a loss.

The Company's hedging transactions, which are intended to limit losses, may actually adversely affect the Company's earnings, which could reduce its cash available for distribution to its stockholders.

The Company's use of derivatives may expose it to counterparty and other risks.

Certain of the Company's subsidiaries have entered into over-the-counter interest rate swap agreements to hedge risks associated with movements in interest rates. Because interest rate swaps were not cleared through a central counterparty, the Company remains exposed to the counterparty's ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an over-the-counter swap counterparty cannot perform under the terms of an interest rate swap, the Company's subsidiary would not receive payments due under that agreement, the Company may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While the Company would seek to terminate the relevant over-the-counter swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that the Company would be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, the Company could be forced to cover its unhedged liabilities at the then current market price. The Company may also be at risk for any collateral the Company has pledged to secure the Company's obligations under the over-the-counter interest rate swap if the counterparty becomes insolvent or files for bankruptcy.

Furthermore, the Company's swap transactions are subject to increasing statutory and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. Recently, new regulations have been promulgated by U.S. and foreign regulators attempting to strengthen oversight of derivative contracts. Any actions taken by regulators could constrain the Company's strategy and could increase its costs, either of which could materially and adversely impact its consolidated results of operations.

In particular, the Dodd-Frank Act requires certain derivatives, including certain interest rate swaps, to be executed on a regulated market and cleared through a central counterparty. Unlike uncleared swaps, the counterparty for the cleared swaps is the clearing house, which reduces counterparty risk. However, cleared swaps require the Company to appoint clearing brokers and to post margin in accordance with the clearing house's rules, which has resulted in increased costs for cleared swaps over uncleared swaps. Margin requirements for uncleared swaps have recently been issued by certain regulators. Starting March 1, 2017, these rules will require the Company to post margin for uncleared swaps with swap dealers. The margin for both cleared and uncleared swaps will generally be limited to cash and certain types of securities. These requirements may increase the costs of hedging and induce the Company to change or reduce its use of hedging transactions.

Derivative instruments are also subject to liquidity risk and may be difficult or impossible to sell, close out or replace quickly and at the price that reflects the fundamental value of the instrument. Although both over-the-counter and exchange-traded markets may experience lack of liquidity, over-the-counter non-standardized derivative transactions are generally less liquid than exchange-traded instruments.

Regulation as a commodity pool operator could subject the Company to additional regulation and compliance requirements which could materially adversely affect the Company's business and financial condition.

The Dodd-Frank Act extended the reach of commodity regulations for the first time to include not just traditional futures and options contracts but also derivative contracts referred to as "swaps." As a consequence of this change, any investment fund that trades in swaps may be considered a "commodity pool" under regulations issued by the relevant regulator, the U.S. Commodity Futures Trading Commission ("CFTC"). If the Company is a commodity pool, unless an exemption applies, its operator will be regulated as a commodity pool operator ("CPO"). Under revised requirements issued by the CFTC, CPOs must register or file for an exemption from registration with the National Futures Association, the self-regulatory organization for CFTC-regulated swaps and other financial instruments, and become subject to regulation by the CFTC, including with respect to disclosure, recordkeeping and reporting.

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On December 7, 2012, the CFTC issued a No-Action Letter that provides mortgage REITs relief from such registration ("No-Action Letter") if they meet certain conditions and submit a claim for such no-action relief by email to the CFTC. The Company believes it meets the conditions set forth in the No-Action Letter and it has filed its claim with the CFTC to permit the use of the no-action relief from registration. However, if in the future the Company does not meet the conditions set forth in the No-Action Letter or the relief provided by the No-Action Letter becomes unavailable for any other reason and the Company is unable to obtain another exemption from registration, the Company may be required to reduce or eliminate its use of interest rate swaps or vary the manner in which it deploys interest rate swaps in its business in order to mitigate the cost of compliance with the commodity pool regulations. Further, the Company or its directors may be required to register with the CFTC as CPOs and the Advisor may be required to register as a "commodity trading advisor" with the CFTC in order to execute or maintain the Company's hedging strategy. This will subject the Company, its directors and the Advisor to regulation by the CFTC and require compliance with the CFTC's swap rules. In the event registration for the Company, its directors or the Advisor is required but is not obtained, the Company, its directors or the Advisor may be subject to fines, penalties and other civil or governmental actions or proceedings. The costs of compliance with the CFTC regulations, or the changes to the Company's hedging strategy necessary to avoid their application, could have a material adverse effect on the Company's business, financial condition and consolidated results of operations.

If the Company attempts to qualify for hedge accounting treatment for its derivative instruments, but the Company fails to so qualify, it may suffer because losses on the derivatives that the Company enters into may not be offset by a change in the fair value of the related hedged transaction.

If the Company attempts to qualify for hedge accounting treatment for the Company's derivative instruments, but it fails to so qualify for a number of reasons, including if the Company uses instruments that do not meet the definition of a derivative (such as short sales), the Company fails to satisfy hedge documentation and hedge effectiveness assessment requirements or the Company's instruments are not highly effective, the Company may suffer because losses on the derivatives the Company holds may not be offset by a change in the fair value of the related hedged transaction.

Declines in the fair market values of the Company's assets may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to the Company's stockholders.

Changes in the fair market values of most of the Company's assets will be directly charged or credited to stockholders' equity. As a result, a decline in values may reduce the book value of the Company. Moreover, if the decline in value of an available-for-sale security is other than temporary or if the Company elects the fair value option in respect of such security, such decline will reduce earnings.

A decline in the fair market value of the Company's assets may adversely affect it, particularly in instances where the Company has borrowed money based on the fair market value of those assets. If the fair market value of those assets declines, the lender may require the Company to post additional collateral to support the loan. If the Company were unable to post the additional collateral, it would have to sell the assets at a time when it might not otherwise choose to do so. A reduction in credit available may reduce the Company's earnings and, in turn, cash available for distribution to stockholders.

Risks Related to the Company's Assets and the Company's Target Assets

The Company may not realize gains or income from its assets, which could cause the value of its common stock to decline.

The Company seeks to generate both current income and capital appreciation for its stockholders. However, the Company's assets may not appreciate in value and, in fact, may decline in value, and the debt assets the Company owns, originates or acquires may default on interest and/or principal payments. Accordingly, the Company may not be able to realize gains or income from the Company's assets. Any gains that the Company does realize may not be sufficient to offset any other losses the Company experiences. Any income that the Company realizes may not be sufficient to offset the Company's expenses.

The Company's portfolio of assets may be concentrated and will be subject to risk of default.

While the Company has diversified its portfolio of assets in the manner described in this annual report on Form 10-K, the Company is not required to observe specific diversification criteria, except as may be set forth in the guidelines adopted by the Company's board of directors. Therefore, the Company's portfolio of assets may at times have been concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. For example, as of December 31, 2015, the five states that represented the largest portion of mortgage loans held for investment (measured by outstanding principal balance) were: California (26.2%); Florida (16.1%); Georgia (6.1%); New York (4.8%); and New Jersey (4.3%). To the extent that the Company's portfolio is concentrated in any one region or type of security, downturns relating generally to such region or type of security may result in defaults on a number of its assets within a short time period, which may reduce the Company's net income and the value of its common stock and accordingly reduce its ability to pay dividends to its stockholders.

The spread between swap rates and residential mortgage loans and non-Agency RMBS may widen due to difficult market conditions, which may adversely affect lending terms for these assets and have a negative impact on the Company's stated book value.

Since the onset of the financial crisis that began in 2007, the spread between swap rates and residential mortgage loans and non-Agency RMBS has been volatile. Spreads on these assets initially moved wider due to the difficult credit conditions and have only recovered a portion of that widening. As the prices of securitized assets declined, a number of investors and a number of structured investment vehicles faced margin calls from dealers and were forced to sell assets in order to reduce leverage. The price volatility of these assets also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment. The spread between the yield on the Company's assets and its funding costs is an important factor in the performance of this aspect of the Company's business. Wider spreads imply greater income on new asset purchases but may have a negative impact on the Company's stated book value. Wider spreads generally negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings, which may require the Company to reduce leverage by selling assets.

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GMFS originates residential mortgage loans which have risks of losses due to mortgage loan defaults or fraud.

GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, VA and USDA through retail, correspondent and broker channels. The Company also expects GMFS to originate loans that are not guaranteed or insured by such agencies or channels, and the origination of these residential mortgage loans have risks of losses due to mortgage loan defaults or fraud. The ability of borrowers to make timely principal and interest payments could be adversely affected by changes in their personal circumstances, a rise in interest rates, a recession, declining real estate property values or other economic events, resulting in losses. Moreover, if a borrower defaults on a mortgage loan that GMFS or the Company owns and if the liquidation proceeds from the sale of the property do not cover the loan amount and the legal, broker and selling costs, GMFS or the Company would experience a loss. The Company could experience losses if it fails to detect fraud, where a borrower or lending partner has misrepresented its financial situation or purpose for obtaining the loan, or an appraisal misrepresented the value of the property collateralizing its loan.

Currently, and in the future, some of the loans the Company may originate may be insured in part by mortgage insurers or financial guarantors. Mortgage insurance protects the lender or other holder of a loan up to a specified amount, in the event the borrower defaults on the loan. Mortgage insurance is generally obtained only when the principal amount of the loan at the time of origination is greater than 80% of the value of the property (loan-to-value), although it may not always be obtained in these circumstances. Any inability of the mortgage insurers to pay in full the insured portion of the loans that the Company holds would adversely affect the value of its loans, which could increase its credit risk, reduce its cash flows, or otherwise adversely affect its business.

The Company holds and may originate or acquire additional residential mortgage loans and non-Agency RMBS collateralized by subprime mortgage loans, which are subject to increased risks.

The Company, through GMFS and other subsidiaries, holds and may originate or acquire additional subprime residential mortgage loans and non Agency RMBS backed by collateral pools of subprime mortgage loans that have been originated using underwriting standards that are less restrictive than those used in underwriting other higher quality mortgage loans. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Due to economic conditions, including lower home prices, as well as aggressive lending practices, subprime mortgage loans have in recent years experienced increased rates of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans, the performance of subprime mortgage loans and non Agency RMBS backed by subprime mortgage loans that the Company holds and may originate or acquire could be correspondingly adversely affected, which could adversely impact the Company's consolidated results of operations, financial condition and business.

Deficiencies in the underwriting of newly originated residential mortgage loans may result in an increase in the severity of losses on the Company's residential mortgage loans.

The underwriting of newly originated residential mortgage loans is different than the underwriting and investment process related to seasoned mortgage loans and RMBS, which focuses, in part, on performance history.

Prior to originating or acquiring residential mortgage loans or other assets, GMFS or other Company subsidiaries may undertake underwriting and due diligence efforts with respect to various aspects of the loan or asset. When underwriting or conducting due diligence, GMFS or other Company subsidiaries rely on available resources and data, which may be limited, and on investigations by third parties. The mortgage loan originator may also only conduct due diligence on a sample of a pool of loans or assets it is acquiring and assume that the sample is representative of the entire pool. These underwriting and due diligence efforts may not reveal matters which could lead to losses. If the underwriting process is not robust enough or if it does not conduct adequate due diligence, or the scope of the underwriting or due diligence is limited, the Company may incur losses.

During the mortgage loan underwriting process, appraisals are generally obtained on the collateral underlying each prospective mortgage. The quality of these appraisals may vary widely in accuracy and consistency. The appraiser may feel pressure from the broker or lender to provide an appraisal in the amount necessary to enable the originator to make the loan, whether or not the value of the property justifies such an appraised value. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the residential mortgage loans.

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Although mortgage originators generally underwrite mortgage loans in accordance with their predetermined loan underwriting guidelines, from time to time and in the ordinary course of business, originators may make exceptions to these guidelines. On a case by case basis, underwriters may determine that a prospective borrower that does not strictly qualify under the underwriting guidelines warrants an underwriting exception, based upon compensating factors. Compensating factors may include a lower loan-to-value ratio, a higher debt coverage ratio, experience as an owner or investor, higher borrower net worth or liquidity, stable employment, longer length of time in business and length of time owning the property. Loans originated with exceptions may result in a higher number of delinquencies and defaults.

Losses could occur due to a counterparty that sold loans to GMFS or other Company subsidiaries refusing to or being unable to repurchase that loan or pay damages related to breaches of representations made by the seller.

Losses could occur due to a counterparty that sold loans or other assets to GMFS or other Company subsidiaries refusing to or being unable to (e.g., due to its financial condition) repurchase loans or pay damages if it is determined subsequent to purchase that one or more of the representations or warranties made to GMFS or other Company subsidiaries in connection with the sale was inaccurate.

Even if GMFS or another Company subsidiary obtains representations and warranties from the loan seller counterparties they may not parallel the representations and warranties GMFS or other Company subsidiaries make to subsequent purchasers of the loans or may otherwise not protect the seller from losses, including, for example, due to the counterparty being insolvent or otherwise unable to make payments arising out of damages for a breach of representation or warranty. Furthermore, to the extent the counterparties from which loans were acquired have breached their representations and warranties, such breaches may adversely impact the Company's business relationship with those counterparties, including by reducing the volume of business Company subsidiaries conduct with those counterparties, which could negatively impact their ability to acquire loans and the larger mortgage origination business. To the extent Company subsidiaries have significant exposure to representations and warranties made to it by one or more counterparties, the Company may determine, as a matter of risk management, to reduce or discontinue loan acquisitions from those counterparties, which could reduce the volume of mortgage loans available for acquisition and negatively impact the Company's business and financial results.

The Company and GMFS are subject to risks and can be exposed to significant losses relating to inaccurate representations made in connection with loan sales to third parties.

When selling loans (including sales to Agencies and into a securitization trust), GMFS has historically made and GMFS and other Company subsidiaries will in the future continue to make representations and warranties to the purchaser regarding characteristics of the mortgage loans, information about the mortgage borrower and the completeness of records and documentation relating to the mortgage loans. Similarly, in light of the strategic review and in order to reduce current market risk in its investment portfolio, as discussed elsewhere in this annual report on Form 10-K, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit program and will begin the unwinding of the Company’s mortgage conduit business. The Company has made and will be required to make representations and warranties to the purchaser regarding the characteristics of whole loan assets included in any such sales. If the representations and warranties are inaccurate with respect to any mortgage loan, the seller of that loan may be obligated to repurchase the mortgage loan or pay damages, which may result in a loss.

In the aftermath of the financial crisis that began in 2007, a significant amount of litigation has been commenced by mortgage loan purchasers and their successors against mortgage loan originators and sellers, seeking to recover damages for losses incurred when purchased or securitized loans eventually defaulted. GMFS, which has been originating and selling mortgage loans to a range of different counterparties, including during periods prior to and leading up to the 2007 financial crisis, faces risks that counterparties that had purchased mortgage loans from GMFS will assert claims against GMFS for breach of representations and warranties arising out these historical mortgage loan sales. As disclosed in the Company's prior filings, GMFS had executed a statute of limitations tolling agreement with at least one counterparty with respect to mortgage loans that were sold by GMFS to the predecessor to this counterparty. This tolling agreement extends the time period by which this counterparty could bring claims against GMFS.

 The initial tolling agreement was executed by GMFS on December 12, 2013 and then further amended to extend the expiration date. Based on communications received in April 2015 from this counterparty, the Company believes that when this tolling agreement expires, absent further extension of the tolling agreement or settlement of the counterparty's claims, it is probable that the counterparty will initiate litigation against GMFS seeking substantial damages based on alleged breaches of representations and warranties made by GMFS. The most recent amendment of the tolling agreement extended the expiration date to June 2, 2016 and can be further extended by agreement of the parties. The Company also understands that this counterparty has commenced or threatened litigation arising out of historical mortgage loan purchases by its predecessor against a number of other mortgage loan originators. The Company estimates that dating back to a period that began approximately 17 years ago in 1999 and ended in 2006, approximately $1 billion of mortgage loans were sold servicing released by GMFS to the predecessor to this counterparty. While the historical claims experience of GMFS with respect to purchasers of mortgage loans from GMFS over the 1999 to 2006 period has not resulted in material damages claimed against or paid by GMFS, claims brought by this counterparty or other parties could expose GMFS to substantial damages that may be material, cause the Company and GMFS to devote significant management time and attention and other resources to resolving or defending these claims, require GMFS, the Company or its other subsidiaries to incur significant costs, or cause significant losses that may be material.

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Although the Company has established a loan indemnification reserve for potential losses related to loan sale representations and warranties with a corresponding provision recorded for loan losses due to the early stage of this matter and the limited information available, the Company is not able to determine the likelihood of the outcome. Losses in excess of the loan indemnification reserve will be recovered by the Company as either a reduction of the total contingent consideration owed under the GMFS Merger Agreement given the indemnification provisions in the GMFS Merger Agreement or by withdrawing funds from an escrow account established by the sellers at the time of the acquisition (as of December 31, 2015, the balance of the escrow account was $4,004,424). The Company has delayed the first year installment payment of the contingent consideration. The Company believes that losses in excess of the loan indemnification reserve, total contingent consideration and the escrow account could have a material adverse impact on the Company's results of operations, financial position or cash flows. In the event of litigation or settlement with the counterparty, the Company intends to pursue claims against the sellers of GMFS seeking indemnification for any losses or any amounts paid in settlement, although there can be no assurance that such claims would be successful or that any amounts available for indemnification would be adequate.

The residential mortgage loans and the mortgage loans underlying the RMBS that the Company holds and intends to originate or acquire may be subject to defaults, foreclosure timeline extension, fraud and residential price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal, which could result in losses to the Company.

The residential mortgage loans and the mortgage loans underlying the RMBS that the Company holds and intends to originate or acquire may be subject to the risks of defaults, foreclosure timeline extension, fraud and home price depreciation and unfavorable modification of loan principal amount, interest rate and amortization of principal. The ability of a borrower to repay a mortgage loan secured by a residential property is dependent upon the income or assets of the borrower.

A number of factors may impair borrowers' abilities to repay their loans, including:

· adverse changes in national and local economic and market conditions;

· changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

· costs of remediation and liabilities associated with environmental conditions such as indoor mold;

· the potential for uninsured or under-insured property losses;

· acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses; and

· acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001.

In the event of defaults on the residential mortgage loans that the Company holds, originates or acquires or that underlie its investments in RMBS and the exhaustion of any underlying or any additional credit support, the Company may not realize its anticipated return on its investments and the Company may incur a loss on these investments. In addition, the Company's investments in non-Agency RMBS will be backed by residential real property but, in contrast to Agency RMBS, their principal and interest will not be guaranteed by federally chartered entities such as Fannie Mae and Freddie Mac and, in the case of Ginnie Mae, the U.S. Government. The ability of a borrower to repay these loans or other financial assets is dependent upon the income or assets of these borrowers.

Reverse mortgages have payment terms which are different from traditional forward mortgages, and if the actual rate and timing of payoffs of these loans differ significantly from the Company's expectations, the market value of its reverse mortgage loans may be materially adversely affected.

In addition to traditional forward mortgage loans, GMFS also originates and acquires home equity conversion mortgage loans ("HECM loans"), which are reverse mortgage loans that are insured by the FHA. With a reverse mortgage loan, unlike a traditional forward mortgage loan, the borrower does not make ongoing cash payments of principal or interest. Rather, with a reverse mortgage loan, payment of interest and repayment of principal is not triggered until a maturity event—such as death, non-occupancy, sale of the property or other conveyance of title to the property, or a failure to perform certain obligations which remain uncured under the loan. The loan balance of a reverse mortgage loan accrues at a fixed or floating rate of interest and, similar to a traditional forward mortgage loan, the borrower continues to own and live in the home and remains responsible only for maintaining the home in good repair and paying real estate taxes and property insurance premiums for the life of the loan.

HECM loans are generally assignable to the FHA at par when the loan balance reaches 98% of its maximum claim amount. The maximum claim amount is the maximum dollar amount that the FHA will pay on a claim for insurance benefits with respect to a HECM loan or on assignment of a HECM loan to the FHA. This amount is the lowest of the appraised value of the property at the time of loan origination, the sale price of the property being purchased or the national mortgage limit as determined by FHA guidelines, which is currently $625,500.

The timing of any payment of principal and interest is uncertain and will be made in respect of the Company's HECM loans only upon (i) a maturity event, (ii) a borrower voluntary prepayment event which can occur at any time or (iii) the assignment of a HECM loan to the FHA when the loan balance reaches 98% of its maximum claim amount. The rate of principal payments (including prepayments or partial payments) of the HECM loans depends on a variety of economic, social, geographic, demographic, legal and other factors, including changes in home prices, prevailing market interest rates, borrower mortality, and FHA guidelines regarding the HECM loans, and will affect the weighted average lives and the yields the Company realizes on its HECM loans. HECM loans may respond differently than traditional forward mortgage loans to the factors that influence prepayment. There is variability when any amounts might be paid on HECM loans because it is uncertain: (i) when any maturity event might occur, (ii) whether a HECM loan borrower will choose to prepay amounts advanced in whole or in part and (iii) in the case of an adjustable-rate HECM loan, when amounts owed on a HECM loan will equal or exceed 98% of the maximum claim amount. If the actual rate and timing of maturity events, borrower prepayments and assignments to the FHA differ significantly from the Company's expectations, the market value of its HECM loans may be materially adversely affected.

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The Company may be affected by alleged or actual deficiencies in servicing and foreclosure practices of third parties, as well as related delays in the foreclosure process.

Allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents used in foreclosure proceedings ("robo signing"), inadequate documentation of transfers and registrations of mortgages and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization and failure to enforce put-backs.

As a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. In late 2010, a group of state attorneys general and state bank and mortgage regulators representing nearly all 50 states and the District of Columbia, along with the U.S. Justice Department and HUD, began an investigation into foreclosure practices of banks and servicers. The investigations and lawsuits by several state attorneys general led to a settlement agreement in March 2012 with five of the nation's largest banks, pursuant to which the banks agreed to pay more than $25 billion to settle claims relating to improper foreclosure practices. The settlement does not prohibit the states, the federal government, individuals or investors in RMBS from pursuing additional actions against the banks and servicers in the future.

The integrity of the servicing and foreclosure processes are critical to the value of the residential mortgage loans and the RMBS collateralized by residential mortgage loans in which the Company invests, and the Company's financial results could be adversely affected by deficiencies in the conduct of those processes. For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and the Company's losses on, the residential mortgage loans and non-Agency RMBS the Company owns or may originate or acquire. Foreclosure delays may also increase the administrative expenses of any securitization trusts that the Company may sponsor for non-Agency RMBS, thereby reducing the amount of funds available for distribution to the Company's stockholders. In addition, the subordinate classes of securities issued by any such securitization trusts may continue to receive interest payments while the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of credit support available for the senior classes the Company may own, thus possibly adversely affecting these securities.

In addition, in these circumstances, the Company may be obligated to fund any obligation of the servicer to make advances on behalf of a delinquent loan obligor. To the extent that there are significant amounts of advances that need to be funded in respect of loans where the Company owns the servicing right, it could have a material adverse effect on the Company's business and financial results.

While the Company believes that the sellers and servicers would be in violation of their servicing contracts to the extent that they have improperly serviced mortgage loans or improperly executed documents in foreclosure or bankruptcy proceedings, or do not comply with the terms of servicing contracts when deciding whether to apply principal reductions, it may be difficult, expensive and time consuming for the Company to enforce its contractual rights.

The Company continues to monitor and review the issues raised by the alleged improper foreclosure practices. While the Company cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect its business, there can be no assurance that these matters will not have an adverse impact on the Company's consolidated results of operations and financial condition.

Homeowner association super priority liens, special assessments and energy efficiency liens may take priority over the mortgage lien.

Homeowner association super priority liens may take priority over the mortgage lien. In some jurisdictions it is possible that the first lien of a mortgage may be extinguished by super priority liens of homeowners associations ("HOAs"), potentially resulting in a loss of the outstanding principal balance of the mortgage loan. In a number of states, HOA or condominium association assessment liens can take priority over first lien mortgages in certain circumstances. The number of these so called superlien jurisdictions has increased in the past few decades and may increase further. Recent rulings by the highest courts in Nevada and the District of Columbia have held that the superlien statute provides the HOA or condominium association with a true lien priority rather than a payment priority from the proceeds of the sale, creating the ability to extinguish the existing senior mortgage and greatly increasing the risk of losses on mortgage loans secured by homes whose owners fail to pay HOA or condominium fees. If an HOA, or a purchaser of an HOA superlien, completes a foreclosure in respect of an HOA superlien on a mortgaged property, the related mortgage loan may be extinguished. In those circumstances, a loan owner could suffer a loss of the entire principal balance of such mortgage loan. A servicer might be able to attempt to recover, on an unsecured basis, by suing the related mortgagor personally for the balance, but recovery in these circumstances will be problematic if the related mortgagor has no meaningful assets against which to recover. Special assessments and energy efficiency liens may take priority over the mortgage lien. Mortgaged properties securing mortgage loans may be subject to the lien of special property taxes and/or special assessments. These liens may be superior to the liens securing the mortgage loans, irrespective of the date of the mortgage. In some instances, individual mortgagors may be able to elect to enter into contracts with governmental agencies for property assessed clean energy ("PACE") or similar assessments that are intended to secure the payment of energy and water efficiency and distributed energy generation improvements that are permanently affixed to their properties, possibly without notice to or the consent of the mortgagee. These assessments may also have lien priority over the mortgages securing mortgage loans. No assurance can be given that a mortgaged property so assessed will increase in value to the extent of the assessment lien. Additional indebtedness secured by the assessment lien would reduce the amount of the value of a mortgaged property available to satisfy the affected mortgage loan. Such actions could have a dramatic impact on the Company's business, results of operations and financial condition, and the cost of complying with any additional laws and regulations could have a material adverse effect on the Company's business, financial condition, results of operations, the market price of its common stock and its ability to pay dividends to its stockholders.

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The Company's investments may include subordinated tranches of RMBS, which are subordinate in right of payment to more senior securities.

The Company's investments may include subordinated tranches of RMBS, which are subordinated classes of securities in a structure of securities collateralized by a pool of mortgage loans and, accordingly, are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Additionally, estimated fair values of these subordinated interests tend to be more sensitive to changes in economic conditions than more senior securities. As a result, such subordinated interests generally are not actively traded and may not provide holders thereof with liquid investments.

The Company's MSRs expose it to significant risks.

Fannie Mae and Freddie Mac generally require mortgage servicers to be paid a minimum servicing fee that significantly exceeds the amount a servicer would charge in an arm's-length transaction. The minimum servicing fee required by the Agencies is therefore made up of the normal arm's-length servicing fee and the excess mortgage servicing amount.

The Company's MSRs are recorded at fair value on the Company's balance sheet based upon significant estimates and assumptions, with changes in fair value included in the Company's consolidated results of operations. Such estimates and assumptions would include, without limitation, estimates of future cash flows associated with MSRs based upon assumptions involving interest rates as well as the prepayment rates, delinquencies and foreclosure rates of the underlying serviced mortgage loans.

The ultimate realization of the value of MSRs, which are measured at fair value on a recurring basis, may be materially different than the fair values of such MSRs as may be reflected in the Company's balance sheet as of any particular date. The use of different estimates or assumptions in connection with the valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect on the Company's consolidated financial position, results of operations and cash flows. Accordingly, there may be material uncertainty about the fair value of the Company's MSRs.

Changes in interest rates are a key driver of the performance of MSRs. Historically, the value of MSRs has increased when interest rates rise and decreased when interest rates decline due to the effect those changes in interest rates have on prepayment estimates. The Company may pursue various hedging strategies to seek to reduce its exposure to adverse changes in interest rates. The Company's hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect the Company. To the extent the Company does not utilize derivatives to hedge against changes in the fair value of MSRs, the Company's balance sheet, consolidated results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, MSRs as interest rates change.

Prepayment speeds significantly affect excess mortgage servicing fees. Prepayment speed is the measurement of how quickly borrowers pay down the unpaid principal balance of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. The Company will base the price it pays for MSRs and the rate of amortization of those assets on factors such as the Company's projection of the cash flows from the related pool of mortgage loans. The Company's expectation of prepayment speeds will be a significant assumption underlying those cash flow projections. If prepayment speeds are significantly greater than expected, the carrying value of MSRs could exceed their estimated fair value. If the fair value of MSRs decreases, the Company would be required to record a non-cash charge, which would have a negative impact on its financial results. Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows the Company receives from MSRs, and the Company could ultimately receive substantially less than what it paid for such assets.

Moreover, delinquency rates have a significant impact on the valuation of any excess mortgage servicing fees. An increase in delinquencies will generally result in lower revenue because typically the Company will only collect servicing fees from Agencies or mortgage owners for performing loans. If delinquencies are significantly greater than the Company expects, the estimated fair value of the MSRs could be diminished. When the estimated fair value of MSRs is reduced, the Company could suffer a loss, which could have a negative impact on the Company's financial results.

Furthermore, MSRs are subject to numerous U.S. federal, state and local laws and regulations and may be subject to various judicial and administrative decisions imposing various requirements and restrictions on the Company's business. The Company's failure to comply, or the failure of the servicer to comply, with the laws, rules or regulations to which the Company or the servicer are subject by virtue of ownership of MSRs, whether actual or alleged, could expose the Company to fines, penalties or potential litigation liabilities, including costs, settlements and judgments, any of which could have a material adverse effect on the Company's business, financial condition, consolidated results of operations or cash flows.

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An increase in interest rates may cause a decrease in the volume of certain of the Company's target assets, which could adversely affect its ability to originate or acquire target assets that satisfy its investment objectives and to generate income and make distributions.

Rising interest rates generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of the Company's target assets available to it, which could adversely affect the Company's ability to originate or acquire assets that satisfy its investment objectives. Rising interest rates may also cause the Company's target assets that were issued prior to an interest rate increase to provide yields that are below prevailing market interest rates. If rising interest rates cause the Company to be unable to originate or acquire a sufficient volume of its target assets with a yield that is above the Company's borrowing cost, the Company's ability to satisfy its investment objectives and to generate income and make distributions may be materially and adversely affected.

The relationship between short-term and longer-term interest rates is often referred to as the "yield curve." Ordinarily, short-term interest rates are lower than longer-term interest rates. If short-term interest rates rise disproportionately relative to longer-term interest rates (a flattening of the yield curve), the Company's borrowing costs may increase more rapidly than the interest income earned on the Company's assets. Because the Company expects its investments, on average, generally will bear interest based on longer-term rates than the Company's borrowings, a flattening of the yield curve would tend to decrease the Company's net income and the fair market value of its net assets. Additionally, to the extent cash flows from investments that return scheduled and unscheduled principal are reinvested, the spread between the yields on the new investments and available borrowing rates may decline, which would likely decrease the Company's net income. It is also possible that short-term interest rates may exceed longer-term interest rates (a yield curve inversion), in which event the Company's borrowing costs may exceed its interest income and the Company could incur operating losses.

Increases in interest rates could adversely affect the value of the Company's investments and cause its interest expense to increase, which could result in reduced earnings or losses and negatively affect the Company's profitability as well as the cash available for distribution to the Company's stockholders.

The Company invests in residential mortgage loans, non-Agency RMBS, MSRs, Agency RMBS and other real estate-related and financial assets, including IOs. In a normal yield curve environment, an investment in such assets will generally decline in value if long-term interest rates increase. Declines in fair market value may ultimately reduce earnings or result in losses to the Company, which may negatively affect cash available for distribution to the Company's stockholders.

A significant risk associated with the Company's target assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the fair market value of these investments would decline, and the duration and weighted average life of the investments would increase. The Company could realize a loss if the investments were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the Company's repurchase agreements.

Fair market values of the Company's investments may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those investments that are subject to prepayment risk or widening of credit spreads.

In addition, in a period of rising interest rates, the Company's operating results will depend in large part on the difference between the income from the Company's assets and the Company's financing costs. The Company anticipates that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of its borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence the Company's net income. Increases in these rates will tend to decrease the Company's net income and fair market value of its assets.

Interest rate mismatches between the Company's ARMs and RMBS backed by ARMs or hybrid ARMs and the Company's borrowings used to fund its purchases of these assets may cause it to suffer losses.

The Company funds its residential mortgage loans and RMBS with borrowings that have interest rates that adjust more frequently than the interest rate indices and repricing terms of ARMs and RMBS backed by ARMs or hybrid ARMs. Accordingly, if short-term interest rates increase, the Company's borrowing costs may increase faster than the interest rates on its ARMs and RMBS backed by ARMs or hybrid ARMs adjust. As a result, in a period of rising interest rates, the Company could experience a decrease in net income or a net loss.

In most cases, the interest rate indices and repricing terms of ARMs and RMBS backed by ARMs or hybrid ARMs and the Company's borrowings are not identical, thereby potentially creating an interest rate mismatch between the Company's investments and its borrowings. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing interest rates, these interest rate index mismatches could reduce the Company's net income or produce a net loss, and adversely affect the level of the Company's dividends and the market price of its common stock.

In addition, ARMs and RMBS backed by ARMs or hybrid ARMs are typically subject to lifetime interest rate caps that limit the amount an interest rate can increase through the maturity of the ARMs. However, the Company's borrowings under repurchase agreements typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on the Company's borrowings could increase without limitation while caps could limit the interest rates on these types of assets. This problem is magnified for ARMs and RMBS backed by ARMs or hybrid ARMs that are not fully indexed. Further, some ARMs and RMBS backed by ARMs or hybrid ARMs may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, the Company may receive less cash income on these types of assets than the Company needs to pay interest on its related borrowings. These factors could reduce the Company's net interest income and cause it to suffer a loss during periods of rising interest rates.

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Interest rate fluctuations may adversely affect the level of the Company's net income and the value of the Company's assets and common stock.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond the Company's control. Interest rate fluctuations present a variety of risks, including the risk of a narrowing of the difference between asset yields and borrowing rates, flattening or inversion of the yield curve and fluctuating prepayment rates, and may adversely affect the Company's income and the value of its assets and common stock.

Because the Company holds and may originate additional fixed-rate assets, an increase in interest rates on the Company's borrowings may adversely affect its book value.

Increases in interest rates may negatively affect the fair market value of the Company's assets. Any fixed-rate assets the Company holds or originates generally will be more negatively affected by these increases than adjustable-rate assets. In accordance with accounting rules, the Company will be required to reduce its earnings for any decrease in the fair market value of its assets that are accounted for under the fair value option. The Company will be required to evaluate its assets on a quarterly basis to determine their fair value by using third-party bid price indications provided by dealers who make markets in these assets or by third-party pricing services. If the fair value of an asset is not available from a dealer or third-party pricing service, the Company will estimate the fair value of the asset using a variety of methods, including discounted cash flow analysis, matrix pricing, option-adjusted spread models and fundamental analysis. Aggregate characteristics taken into consideration include type of collateral, index, margin, periodic cap, lifetime cap, underwriting standards, age and delinquency experience. However, the fair value reflects estimates and may not be indicative of the amounts the Company would receive in a current market exchange. If the Company determines that a security is other-than-temporarily impaired, the Company would be required to reduce the value of such security on its balance sheet by recording an impairment charge in its income statement and its stockholders' equity would be correspondingly reduced. Reductions in stockholders' equity decrease the amounts the Company may borrow to originate or purchase additional target assets, which could restrict the Company's ability to increase its net income.

Because the assets the Company holds and expects to originate may experience periods of illiquidity, the Company may lose profits or be prevented from earning capital gains if the Company cannot sell mortgage-related assets at an opportune time.

The Company bears the risk of being unable to dispose of its assets at advantageous times or in a timely manner because mortgage-related assets generally experience periods of illiquidity, including the recent period of delinquencies and defaults with respect to residential mortgage loans. The lack of liquidity may result from the absence of a willing buyer or an established market for these assets, as well as legal or contractual restrictions on resale or the unavailability of financing for these assets. As a result, the Company's ability to vary its portfolio in response to changes in economic and other conditions may be relatively limited, which may cause it to incur losses.

The Company may experience a decline in the fair market value of its assets.

A decline in the fair market value of the Company's assets and the assets which it intends to originate or acquire may require the Company to recognize an "other-than-temporary" impairment against such assets under accounting principles generally accepted in the United States (“U.S. GAAP”), if the Company were to determine that, with respect to any debt security in unrealized loss positions, the Company does not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the amortized cost of such assets. If such a determination were to be made, the Company would recognize realized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair market value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition; subsequent disposition or sale of such assets could further affect the Company's future losses or gains, as they are based on the difference between the sale price received and the adjusted amortized cost of such assets at the time of sale. In addition, the Company has elected the fair value option for its residential mortgage loans and RMBS and future mortgage related assets may also be carried at fair value. Accordingly, declines in the fair value of these assets will also be recognized as unrealized losses through earnings and will adversely impact the results of its operations for the period in which such change in value occurs.

Goodwill and other intangible assets are also measured for impairment. If the Company determines that it is more likely than not that the carrying amount of these assets are not recoverable and the carrying amount of the assets are less than their fair value, an impairment loss will be recorded by the Company under U.S. GAAP. The impairment is recognized as an expense in the period in which it occurs and would adversely impact the results of operations for such period.

Many of the assets in the Company's portfolio will be recorded at fair value and, as a result, there will be uncertainty as to the value of these assets.

Many of the assets in the Company's portfolio are and will likely be in the form of assets that are not publicly traded. The fair value of residential mortgage loans, RMBS and other mortgage-related assets that are not publicly traded may not be readily determinable. The Company values these assets quarterly at fair value, as determined in accordance with applicable accounting standards, which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of the Company's assets may fluctuate over short periods of time and the Company's determinations of fair value may differ materially from the values that would have been used if a ready market for these assets existed. The value of the Company's common stock could be adversely affected if its determinations regarding the fair value of these assets were materially higher than the values that the Company ultimately realizes upon their disposal.

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Prepayment rates may adversely affect the value of the Company's portfolio of assets.

There are seldom any restrictions on borrowers' abilities to prepay their residential mortgage loans. Declines in interest rates may cause an increase in prepayment rates of mortgage loans. In addition, both HARP and actions by the U.S. Federal Reserve intended to lower interest rates may also cause an increase in prepayment rates. The Company generally receives distributions from principal payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster than expected, this results in prepayments that are faster than expected on the RMBS. Faster than expected prepayments could adversely affect the Company's profitability, including in the following ways:

· The Company may purchase residential mortgage loans and RMBS that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest rate, the Company may pay a premium over the par value to acquire the asset. In accordance with U.S. GAAP, the Company may amortize this premium over the estimated term of the residential mortgage loans or RMBS. If the asset is prepaid in whole or in part prior to its maturity date, however, the Company may be required to expense the premium that was prepaid at the time of the prepayment.

· The Company also may acquire residential mortgage loans and RMBS at a lower interest rate than the market interest rate at the time. This would adversely affect the Company's profitability.

· Slower-than-expected prepayments may also adversely affect the fair market value of discounted residential mortgage loans and RMBS.

· The Company anticipates that a substantial portion of its ARMs and adjustable-rate RMBS may bear interest rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If an ARM or adjustable-rate RMBS is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, the Company will have held that ARM or RMBS while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.

· If the Company is unable to originate new residential mortgage loans similar to the prepaid assets, the Company's financial condition, results of operation and cash flow would suffer. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general economic conditions, the relative interest rates on fixed-rate mortgages and ARMs, the credit rating of the borrower, the rate of home price appreciation or depreciation, and foreclosures and lender competition.

While the Company will seek to minimize prepayment risk to the extent practical, it must balance prepayment risk against other risks and the potential returns of each asset. No strategy can completely insulate the Company from prepayment risk.

Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for the Company to analyze its portfolio of assets. The Company is vulnerable to loss from prepayments if it purchased assets above par, especially in the event of additional mortgage loan modification and refinance programs or similar future legislative action.

The Company's success depends in part on its ability to analyze the relationship of changing interest rates on prepayments of mortgage loans. Changes in interest rates and prepayments affect the market price of the residential mortgage loans and RMBS that the Company intends to originate or purchase and any residential mortgage loans and RMBS that the Company holds at a given time. As part of the Company's overall portfolio risk management, the Company will analyze interest rate changes and prepayment trends separately and collectively to assess their effects on the Company's portfolio of assets. In conducting this analysis, the Company will depend on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. If dislocations in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, the Company's ability to (i) assess the fair market value of its portfolio of assets, (ii) implement its hedging strategies and (iii) implement techniques to reduce its prepayment rate volatility would be significantly affected, which could materially adversely affect the Company's financial position and consolidated results of operations. In particular, despite the historically low interest rates, recent dislocations, including home price depreciation resulting in many borrowers owing more on their mortgage than the values of their homes, have prevented many such borrowers from refinancing their mortgage loans, which has impacted prepayment rates and the value of residential mortgage loans and RMBS assets. However, mortgage loan modification and refinance programs or future legislative action may make refinancing mortgage loans more accessible or attractive to such borrowers, which could cause the rate of prepayments on residential mortgage loans and RMBS assets to accelerate. For residential mortgage loans and RMBS assets, including some of the Company's RMBS assets, that were purchased or are trading at premium to their par value, higher prepayment rates would adversely affect the value of such assets or cause the holder to incur losses with respect to such assets.

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Risks Related to Owning the Company's Common Stock

Common stock and preferred stock eligible for future sale may have adverse effects on the Company's share price.

Subject to applicable law, the Company's board of directors has the authority, without further stockholder approval, to authorize the Company to issue additional authorized shares of common stock and preferred stock on the terms and for the consideration it deems appropriate, including shares of common stock issuable upon exchange of the Exchangeable Senior Notes. The Company cannot predict the effect, if any, of future sales of its common stock, or the availability of shares for future sales, on the market price of its common stock. As of March 8, 2016, the Company had 8,897,800 shares of common stock outstanding which are comprised of (i) 7,970,886 shares of common stock, and (ii) 926,914 Operating Partnership units ("OP Units"), which are exchangeable, on a one-for-one basis, into cash or, at the Company's option, for shares of the Company's common stock. In addition, the Exchangeable Senior Notes are exchangeable for shares of the Company's common stock or, to the extent necessary to satisfy New York Stock Exchange (“NYSE”) listing requirements, cash, at an exchange rate of 54.3103 shares of common stock for each $1,000 aggregate principal amount of the Exchangeable Senior Notes, subject to adjustment and other limitations under certain circumstances. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" of this annual report on Form 10-K, for a discussion of the terms of the Exchangeable Senior Notes. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for the Company's common stock.

For as long as the Company is an emerging growth company, the Company will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about the Company's executive compensation, that apply to other public companies.

Upon the completion of its initial public offering (“IPO”), the Company became subject to reporting and other obligations under the Exchange Act. In April 2012, the Jumpstart Our Business Startups Act (the "JOBS Act") was enacted into law. The JOBS Act contains provisions that, among other things, relax certain reporting requirements for "emerging growth companies," including certain requirements relating to accounting standards and compensation disclosure. The Company is an "emerging growth company" as defined in the JOBS Act and may remain an emerging growth company for up to five full fiscal years. Unlike public companies that are not "emerging growth companies," for as long as the Company is an emerging growth company, the Company will not be required to (i) provide an auditor's attestation report on internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), (ii) comply with any new requirements adopted by the Public Company Accounting Oversight Board ("PCAOB") requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, (iii) comply with any new audit rules adopted by the PCAOB after April 5, 2012 unless the SEC determines otherwise, (iv) provide certain disclosure regarding executive compensation required of larger public companies or (v) hold shareholder advisory votes on executive compensation. The Company cannot predict if investors will find its shares of common stock less attractive if the Company chooses to rely on these exemptions.

Future offerings of debt or equity securities or notes exchangeable for shares of common stock, which may rank senior to the Company's common stock, may adversely affect the market price of the Company's common stock.

If the Company issues debt securities, including issuances of notes by the Operating Partnership which are exchangeable for shares of common stock of the Company, which rank senior to the Company's common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting the Company's operating flexibility. Additionally, any equity securities or convertible or exchangeable securities that the Company issues in the future may have rights, preferences and privileges more favorable than those of the Company's common stock and may result in dilution to owners of the Company's common stock. The Company and, indirectly, the Company's stockholders, will bear the cost of issuing and servicing such securities. Because the Company's decision to issue debt, exchangeable notes or equity securities in any future offering will depend on market conditions and other factors beyond the Company's control, the Company cannot predict or estimate the amount, timing or nature of the Company's future offerings. Thus, holders of the Company's common stock will bear the risk of the Company's future offerings, reducing the market price of the Company's common stock and diluting the value of their stock holdings in the Company.

The Company has not established a minimum distribution payment level and the Company cannot assure stockholders of its ability to pay distributions in the future.

The Company's current policy is to pay distributions which will allow the Company to satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax on its undistributed income. The Company has not, however, established a minimum distribution payment level and the Company's ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this annual report on Form 10-K. All distributions will be made at the discretion of the Company's board of directors and will depend on the Company's earnings, its financial condition, any debt covenants, maintenance of the Company's REIT qualification, restrictions on making distributions under Maryland law and other factors as the Company's board of directors may deem relevant from time to time. The Company may not be able to make distributions in the future and the Company's board of directors may change the Company's distribution policy in the future. The Company believes that a change in any one of the following factors, among others, could adversely affect its consolidated results of operations and impair the Company's ability to pay distributions to its stockholders:

· the profitability of the assets the Company holds, originates or acquires;

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· the Company's ability to make profitable acquisitions;

· margin calls or other expenses that reduce the Company's cash flow;

· defaults in the Company's asset portfolio or decreases in the value of the Company's portfolio; and

· the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

The Company cannot provide any assurance that it will achieve results that will allow it to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. In addition, some of the Company's distributions may include a return of capital.

As discussed elsewhere in this annual report on Form 10-K, in light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit program and will begin the unwinding of the Company’s mortgage conduit business. These transactions are likely to result in a reduction of the Company’s investment income and may therefore result in a decision to curtail distributions in the future. If the Company is unable to close any such sale or similar transaction, the Company may not be able to re-establish a mortgage related portfolio in its residential mortgage investments segment which could impair the Company's ability to pay distributions to its stockholders.

Risks Related to the Company's Organization and Structure

Conflicts of interest could arise as a result of the Company's UpREIT structure.

Conflicts of interest could arise in the future as a result of the relationships between the Company and its affiliates, on the one hand, and the Operating Partnership or any partner thereof, on the other. The Company's directors and officers have duties to the Company under applicable Maryland law in connection with their management of the Company. At the same time, the Company, through the Operating Partnership subsidiary, has fiduciary duties, as a general partner, to the Operating Partnership and to the limited partners under Delaware law in connection with the management of the Operating Partnership. The Company's duties, through the Operating Partnership subsidiary, as a general partner to the Operating Partnership and its partners may come into conflict with the duties of the Company's directors and officers.

Certain provisions of Maryland law could inhibit changes in control and prevent the Company's stockholders from realizing a premium over the then-prevailing market price of the Company's common stock.

Certain provisions of the Maryland General Corporation Law ("MGCL") may have the effect of deterring a third party from making a proposal to acquire the Company or of impeding a change in control under circumstances that otherwise could provide the holders of shares of the Company's common stock with the opportunity to realize a premium over the then-prevailing market price of such shares.

The Company is subject to the "business combination" provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including, generally, a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between the Company and an "interested stockholder" (defined generally as any person who beneficially owns 10% or more of the voting power of the Company's outstanding voting stock or an affiliate or associate of the Company who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the Company's outstanding stock) or an affiliate thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the five-year prohibition, any business combination between the Company and an interested stockholder generally must be recommended by the Company's board of directors and approved by the affirmative vote of at least (i) eighty percent of the votes entitled to be cast by holders of outstanding shares of the Company's voting stock; and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the Company's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the stockholder would otherwise have become an interested stockholder. Pursuant to the statute, the Company's board of directors will by resolution exempt business combinations (i) between the Company and ZAIS or its affiliates and (ii) between the Company and any person, provided that such business combination is first approved by the Company's board of directors (including a majority of the Company's directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between the Company and any of them. As a result, any person described above may be able to enter into business combinations with the Company that may not be in the best interest of the Company's stockholders, without compliance with the super-majority vote requirements and the other provisions of the statute.

The "control share" provisions of the MGCL provide that a holder of "control shares" of a Maryland corporation (defined as voting shares of stock which, when aggregated with all other shares of stock owned by the stockholder or in respect of which the stockholder is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a "control share acquisition" (defined as the direct or indirect acquisition of ownership of or the power to direct the exercise of voting power with respect to "control shares," subject to certain exceptions) have no voting rights except to the extent approved by the Company's stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, the Company's officers and employees who are also the Company's directors. The Company's bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of the Company's stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

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The Company's ability to issue additional shares of common and preferred stock may prevent a change in the Company's control.

The Company's charter authorizes it to issue additional authorized but unissued shares of common or preferred stock. In addition, the Company's board of directors may, without stockholder approval, amend the Company's charter to increase or decrease the aggregate number of shares of the Company's stock or the number of shares of stock of any class or series that the Company has the authority to issue. As a result, the Company's board may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares of the Company's common stock or otherwise be in the best interest of the Company's stockholders.

The Company's rights and the Company's stockholders' rights to take action against the Company's directors and officers are limited, which could limit the Company's stockholders' recourse in the event of actions not in the Company's stockholders' best interests.

As permitted by Maryland law, the Company's charter limits the liability of its directors and officers to the Company and its stockholders for money damages, except for liability resulting from:

· actual receipt of an improper benefit or profit in money, property or services; or

· a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, the Company's charter authorizes it, to the maximum extent permitted by Maryland law, to obligate the Company to indemnify any present or former director or officer or any individual who, while a director or officer of the Company and at its request, serves or has served another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, trustee, member or manager from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any of the foregoing capacities and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The Company's bylaws obligate it, to the maximum extent permitted by Maryland law, to indemnify any present or former director or officer or any individual who, while a director or officer of the Company and at its request, serves or has served another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise as a director, officer, partner, trustee, member or manager and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity from and against any claim or liability to which that individual may become subject or which that individual may incur by reason of his or her service in any of the foregoing capacities and to pay or reimburse his or her reasonable expenses in advance of final disposition of a proceeding. The Company's charter and bylaws also permit it to indemnify and advance expenses to any individual who served a predecessor of the Company in any of the capacities described above and any employee or agent of the Company or a predecessor of the Company.

The Company's amended and restated bylaws designates the Circuit Court for Baltimore City, Maryland as the sole and exclusive forum for some litigation, which could limit the ability of stockholders of the Company to obtain a favorable judicial forum for disputes with the Company.

On March 11, 2014, the board of directors of the Company approved an amendment to its bylaws which, unless the Company consents in writing to the selection of an alternative forum, makes the Circuit Court for Baltimore City, Maryland, or, if that Court does not have jurisdiction, the United States District Court for the District of Maryland, Baltimore Division the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of any duty owed by any director or officer or other employee of the Company to the Company or to the stockholders of the Company, (iii) any action asserting a claim against the Company or any director or officer or other employee of the Company arising pursuant to any provision of the MGCL or the Company's charter or bylaws, or (iv) any action asserting a claim against the Company or any director or officer or other employee of the Company that is governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of the Company's capital stock shall be deemed to have notice of and to have consented to the provisions described above. This forum selection provision may limit the ability of stockholders of the Company to obtain a judicial forum that they find favorable for disputes with the Company or its directors, officers, employees, if any, or other stockholders.

Maintenance of the Company's 1940 Act exemption imposes limits on the Company's operations.

The Company conducts, and intends to continue to conduct, its operations so as not to become regulated as an investment company under the 1940 Act. Because the Company is a holding company and conducts its businesses primarily through wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Company may own, may not have a combined value in excess of 40% of the value of the Company's total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, which the Company refers to as the 40% test. This requirement limits the types of businesses in which the Company may engage through its subsidiaries.

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The determination of whether an entity is a majority-owned subsidiary of the Company is made by the Company. The 1940 Act defines a majority-owned subsidiary of a person as a company 50% or more of the outstanding voting securities of which are owned by such person, or by another company which is a majority-owned subsidiary of such person. The 1940 Act further defines voting securities as any security presently entitling the owner or holder thereof to vote for the election of directors of a company. The Company treats companies in which it owns at least a majority of the outstanding voting securities as majority-owned subsidiaries for purposes of the 40% test. The Company has not requested the SEC, or its staff, to approve the Company's treatment of any company as a majority-owned subsidiary and neither the SEC nor its staff has done so. If the SEC, or its staff, were to disagree with the Company's treatment of one of more companies as majority-owned subsidiaries, the Company would need to adjust its strategy and its assets in order to continue to pass the 40% test. Any such adjustment in the Company's strategy could have a material adverse effect on it.

The Company believes that certain of its subsidiaries qualify to be excluded from the definition of investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exception generally requires that at least 55% of such subsidiaries' assets must be comprised of qualifying assets and at least 80% of their total assets must be comprised of qualifying assets and real estate-related assets under the 1940 Act. The Company will treat as qualifying assets for this purpose mortgage loans, Agency RMBS in which it holds all the certificates issued by the pool and other interests in real estate, in each case meeting certain other qualifications based upon SEC staff no-action letters. Although SEC staff no-action letters have not specifically addressed the categorization of these types of assets, the Company will also treat as qualifying assets for this purpose bridge loans wholly secured by first priority liens on real estate that provide interim financing to borrowers seeking short-term capital (with terms of generally up to three years), non-Agency RMBS representing ownership of an entire pool of mortgage loans, and real estate owned properties. The Company expects each of its subsidiaries relying on Section 3(c)(5)(C) to treat as real estate-related assets other types of RMBS, CMBS, securities of REITs and other real estate-related assets. The Company expects each of its subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC, or its staff, or on the Company's analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. However, neither the SEC nor its staff has published guidance with respect to the treatment of some of these assets under Section 3(c)(5)(C). To the extent that the SEC, or its staff, publishes new or different guidance with respect to these matters, the Company may be required to adjust its strategy accordingly. Although the Company intends to monitor its portfolio periodically and prior to each investment acquisition, there can be no assurance that the Company will be able to maintain an exclusion for these subsidiaries. In addition, the Company may be limited in its ability to make certain investments and these limitations could result in the subsidiary holding assets the Company might wish to sell or selling assets it might wish to hold.

In 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of the 1940 Act, including the nature of the assets that qualify for purposes of the exclusion and whether mortgage REITs should be regulated in a manner similar to registered investment companies. There can be no assurance that the laws and regulations or the interpretation of such laws or regulations by the SEC or its staff, will not change in a manner that adversely affects the Company's operations. If the Company or its subsidiaries fail to maintain an exception or exclusion from the 1940 Act, the Company could, among other things, be required either to (i) change the manner in which it conducts its operations to avoid being required to register as an investment company, (ii) effect sales of its assets in a manner that, or at a time when, it would not otherwise choose to do so, or (iii) register as an investment company, any of which would negatively affect the value of its shares of common stock, the sustainability of its business model, and its ability to make distributions, which would have an adverse effect on its business and the value of its shares of common stock.

Qualification for exemption from registration under the 1940 Act will limit the Company's ability to make certain investments. For example, these restrictions will limit the ability of the Company's subsidiaries to invest directly in mortgage back securities that represent less than the entire ownership in a pool of mortgage loans, debt and equity tranches of securitizations and ABS, and real estate companies or in assets not related to real estate.

Certain of the Company's subsidiaries may rely on the exclusion from the definition of investment company provided by Section 3(c)(6) to the extent that they hold mortgage assets through majority-owned subsidiaries that rely on Section 3(c)(5)(C). The SEC has issued little interpretive guidance with respect to Section 3(c)(6) and any guidance published by the staff could require the Company to adjust its strategy accordingly.

No assurance can be given that the SEC, or its staff, will concur with the Company's classification of the Company's or the Company's subsidiaries' assets or that the SEC, or its staff, will not, in the future, issue further guidance that may require it to reclassify those assets for purposes of qualifying for an exception to the definition of investment company or an exclusion from regulation under the 1940 Act. To the extent that the SEC, or its staff, provides more specific guidance regarding any of the matters bearing upon the definition of investment company and the exceptions to that definition, the Company may be required to adjust its investment strategy accordingly. Additional guidance from the SEC, or its staff, could provide additional flexibility to the Company, or it could further inhibit the Company's ability to pursue the investment strategy it has chosen. If the SEC or its staff takes a position contrary to the Company's analysis with respect to the characterization of any of the assets or securities the Company invests in, the Company may be deemed an unregistered investment company. Therefore, in order not to be required to register as an investment company, the Company may need to dispose of a significant portion of its assets or securities or originate or acquire significant other additional assets which may have lower returns than its expected portfolio, or the Company may need to modify its business to register as an investment company, which would result in significantly increased operating expenses and would likely entail significantly reducing the Company's indebtedness, which could also require the Company to sell a significant portion of its assets. The Company cannot provide assurance that it would be able to complete these dispositions or acquisitions of assets, or deleveraging, on favorable terms, or at all. Consequently, any modification of its business plan could have a material adverse effect on the Company. Further, if the SEC determined that the Company were an unregistered investment company, the Company would be subject to monetary penalties and injunctive relief in an action brought by the SEC, the Company would potentially be unable to enforce contracts with third parties and third parties could seek to obtain rescission of transactions undertaken during the period for which it was established that the Company was an unregistered investment company. Any of these results would have a material adverse effect on the Company.

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Since the Company will not be registered as an investment company under the 1940 Act, the Company will not be subject to its substantive provisions, including provisions requiring diversification of investments, limiting leverage and restricting investments in illiquid assets.

Rapid changes in the values of the Company's target assets may make it more difficult for the Company to maintain its qualification as a REIT or the Company's exemption from the 1940 Act.

If the fair market value or income potential of the Company's target assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, the Company may need to increase its real estate assets and income or liquidate its non-qualifying assets to maintain its REIT qualification or its exemption from the 1940 Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. The Company may have to make decisions that it otherwise would not make absent the REIT and 1940 Act considerations.

Tax Risks

The Company's taxable income is calculated differently than net income based on U.S. GAAP.

The Company's taxable income may substantially differ from its net income based on U.S. GAAP. For example, interest income on the Company's mortgage loans and other mortgage related assets does not necessarily accrue under an identical schedule for U.S. federal income tax purposes as for accounting purposes.

For U.S. GAAP purposes, interest income on the Company's mortgage related securities is accrued based on the actual coupon rate and the outstanding principal amount of the underlying mortgages. Premiums and discounts are amortized or accreted into interest income over the estimated lives of the securities using the effective yield method adjusted for the effects of estimated prepayments. Adjustments are made using the retrospective method to the effective interest computation each reporting period based on the actual prepayment experiences to date, and the present expectation of future prepayments of the underlying mortgages. If the Company's estimate of prepayments is incorrect, the Company is required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.

Management will estimate, at the time of purchase, the future expected cash flows and determine the effective interest rate based on these estimated cash flows and the Company's purchase price. As needed, these estimated cash flows will be updated and a revised yield computed based on the current amortized cost of the investment. In estimating these cash flows, the Company will have to make assumptions regarding the rate and timing of principal payments and coupon rates. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management's estimates and the Company's interest income.

In particular, interest income on mortgage related securities that were purchased at a discount to par value will be recognized based on the security's effective interest rate. The effective interest rate on these securities will be based on the projected cash flows from each security, which will be estimated based on the Company's observation of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. Based on the projected cash flows from the Company's mortgage related securities purchased at a discount to par value, a portion of the purchase discount may be designated as credit protection against future credit losses and, therefore, may not be accreted into interest income. The amount designated as credit discount may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit discount is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income over time. Conversely, if the performance of a security with a credit discount is less favorable than forecasted, additional amounts of the purchase discount may be designated as credit discount, or impairment charges and write-downs of such securities to a new cost basis could result.

When the Company purchases mortgage loans that have shown evidence of credit deterioration since origination and management determines that it is probable the Company will not collect all contractual cash flows on those assets, the Company will apply the guidance that addresses accounting for differences between contractual cash flows and cash flows expected to be collected if those differences are attributable to, at least in part, credit quality. Interest income will be recognized on a level-yield basis over the life of the loan as long as cash flows can be reasonably estimated. The level-yield is determined by the excess of the Company's initial estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the Company's initial investment in the mortgage loan (accretable yield). The amount of interest income to be recognized cannot result in a carrying amount that exceeds the payoff amount of the loan. The excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) will not be recognized as an adjustment of yield.

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For U.S. federal income tax purposes, if a debt instrument pays interest currently, the Company is generally required to treat all such interest as interest income. In addition, if the Company acquires mortgage loans, RMBS or other debt instruments at a discount in the secondary market, the discount at which such debt instruments are acquired will generally be treated as "market discount" for U.S. federal income tax purposes and will accrue over the term of the debt instrument. Accrued market discount is reported as income when, and to the extent that, the Company receives any payment of principal on the debt instrument, unless the Company elects to include accrued market discount in incomes as it accrues. As a result, the Company will be required to treat principal payments on such a debt instrument as ordinary income for U.S. federal income tax purposes to the extent of any accrued market discount regardless of the Company's expected return on its investment in the debt instrument. In particular, payments on residential mortgage loans are ordinarily made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. Similarly, if the Company acquires a debt instrument that is issued with original issue discount ("OID"), the Company will generally be required to accrue such OID regardless of whether the Company expects to receive the full face amount of the debt instrument on its maturity. If the Company collects less on a debt instrument than the Company's purchase price plus any market discount it had previously reported as income, the Company may not be able to benefit from any offsetting loss deductions in subsequent years. In certain cases, the Company may be able to cease accruing interest income with respect to a debt instrument, to the extent there is reasonable doubt as to the Company's ability to collect such interest income. However, if the Company recognizes insufficient interest income with respect to certain debt instruments that the Company acquires, and the Internal Revenue Service ("IRS") were to successfully assert that the Company did not accrue the appropriate amount of income with respect to such a debt instrument in a given taxable year, the Company may be required to increase its taxable income with respect to such year, which could cause it to be required to pay a deficiency dividend or a tax on undistributed income, or fail to qualify as a REIT.

Investment in the Company's common stock has various tax risks.

This summary of certain tax risks is limited to the U.S. federal income tax risks addressed below. Additional risks or issues may exist that are not addressed in this annual report on Form 10-K and that could affect the U.S. federal income tax treatment of the Company, the Operating Partnership or the Company's stockholders.

The Company's failure to qualify as a REIT would subject it to U.S. federal income tax and applicable state and local taxes, which would reduce the amount of cash available for distribution to the Company's stockholders.

The Company is organized, operates (commencing with the Company's taxable year ended December 31, 2011), and intends to continue to be organized and to operate, in a manner that will allow it to qualify as a REIT for U.S. federal income tax purposes. The Company has not requested and does not intend to request a ruling from the IRS that the Company qualifies as a REIT. The U.S. federal income tax laws governing REITs are complex, and judicial and administrative interpretations of the U.S. federal income tax laws governing REIT qualification are limited. The complexity of these provisions and of applicable regulations promulgated by the U.S. Department of the Treasury ("Treasury Regulations") is greater in the case of a REIT that, like the Company, holds its assets through a partnership. To qualify as a REIT, the Company must meet, on an ongoing basis, various tests regarding the nature of its assets and its income, the ownership of its outstanding shares, and the amount of its distributions. The Company's ability to satisfy the asset tests depends on its analysis of the characterization and fair market values of its assets, some of which are not susceptible to a precise determination, and for which the Company may not obtain independent appraisals. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for the Company to qualify as a REIT. In addition, the Company's ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes. Thus, while the Company believes that it has operated and intends to continue to operate so that the Company will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the Company's circumstances, no assurance can be given that the Company has qualified or will so qualify for any particular year. These considerations also might restrict the types of assets that the Company can acquire in the future.

If the Company fails to qualify as a REIT in any taxable year, and does not qualify for certain statutory relief provisions, the Company would be required to pay U.S. federal income tax on its taxable income, and distributions to its stockholders would not be deductible by the Company in determining its taxable income. In such a case, the Company might need to borrow money or sell assets in order to pay the Company's taxes. The Company's payment of income tax would decrease the amount of its income available for distribution to its stockholders. Furthermore, if the Company fails to maintain its qualification as a REIT, the Company no longer would be required to distribute substantially all of its net taxable income to its stockholders. In addition, unless the Company were eligible for certain statutory relief provisions, the Company could not re-elect to qualify as a REIT until the fifth calendar year following the year in which it failed to qualify.

In the context of the on-going strategic review discussed elsewhere in this Form 10-K, the Company may liquidate its assets. The results of any such sale or liquidation could cause the Company to fail to qualify as a REIT.

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Complying with REIT requirements may force the Company to liquidate or forego otherwise attractive investments, which could reduce returns on the Company's assets and adversely affect returns to the Company's stockholders.

To qualify as a REIT, the Company generally must ensure that at the end of each calendar quarter at least 75% of the value of its total assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and RMBS. The remainder of the Company's investment in securities (other than government securities and qualifying real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of the Company's assets (other than government securities and qualifying real estate assets) can consist of the securities of any one issuer, and no more than 25% (20% beginning in 2018) of the value of the Company's total assets can be represented by stock and securities of one or more TRSs. If the Company fails to comply with these requirements at the end of any quarter, the Company must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing its REIT qualification and suffering adverse tax consequences. As a result, the Company may be required to liquidate from its portfolio otherwise attractive investments. These actions could have the effect of reducing the Company's income and amounts available for distribution to its stockholders. In addition, if the Company is compelled to liquidate its investments to repay obligations to its lenders, the Company may be unable to comply with these requirements, ultimately jeopardizing its qualification as a REIT. The REIT requirements described above may also restrict the Company’s ability to sell REIT-qualifying assets, including asset sales made in connection with a disposition of certain segments of the Company’s business or in connection with a liquidation of the Company, without adversely impacting the Company’s qualifications as a REIT. Furthermore, the Company may be required to make distributions to stockholders at disadvantageous times or when it does not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to the Company in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT.

Distributions from the Company or gain on the sale of its common stock may be treated as unrelated business taxable income ("UBTI") to U.S. tax exempt holders of common stock.

If (i) all or a portion of the Company's assets are subject to the rules relating to taxable mortgage pools, (ii) a tax exempt U.S. person has incurred debt to purchase or hold the Company's common stock, (iii) the Company purchases residual real estate mortgage investment conduit ("REMIC") interests that generate "excess inclusion income," or (iv) the Company is a "pension held REIT," then a portion of the distributions with respect to its common stock and, in the case of a U.S. person described in (ii), gains realized on the sale of such common stock by such U.S. person, may be subject to U.S. federal income tax as UBTI under the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code").

The Company may lose its REIT qualification or be subject to a penalty tax if it earns and the IRS successfully challenges the Company's characterization of income from foreign TRSs or other non-U.S. corporations in which the Company holds an equity interest.

The Company may make investments in non-U.S. corporations some of which may, together with the Company, make a TRS election. The Company likely will be required to include in its income, even without the receipt of actual distributions, earnings from any such foreign TRSs or other non-U.S. corporations in which the Company holds an equity interest. Income inclusions from equity investments in certain foreign corporations are technically neither dividends nor any of the other enumerated categories of income specified in the 95% gross income test for U.S. federal income tax purposes. However, in recent private letter rulings, the IRS exercised its authority under Internal Revenue Code section 856(c)(5)(J)(ii) to treat such income as qualifying income for purposes of the 95% gross income test notwithstanding the fact that the income is not included in the enumerated categories of income qualifying for the 95% gross income test. A private letter ruling may be relied upon only by the taxpayer to whom it is issued, and the IRS may revoke a private letter ruling. Consistent with the position adopted by the IRS in those private letter rulings and based on advice of counsel concerning the classification of such income inclusions for purposes of the REIT income tests, the Company intends to treat such income inclusions that meet certain requirements as qualifying income for purposes of the 95% gross income test. Notwithstanding the IRS's determination in the private letter ruling described above, it is possible that the IRS could successfully assert that such income does not qualify for purposes of the 95% gross income test, which, if such income together with other income the Company earns that does not qualify for the 95% gross income test exceeded 5% of the Company's gross income, could cause the Company to be subject to a penalty tax and could impact the Company's ability to qualify as a REIT.

The REIT distribution requirements could adversely affect the Company's ability to execute its business plan and may require it to incur debt, sell assets or take other actions to make such distributions.

To qualify as a REIT, the Company must distribute to its stockholders each calendar year at least 90% of its REIT taxable income (including certain items of non-cash income), determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that the Company satisfies the 90% distribution requirement, but distributes less than 100% of its taxable income, the Company will be subject to U.S. federal corporate income tax on its undistributed income. In addition, the Company will incur a 4% nondeductible excise tax on the amount, if any, by which the Company's distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. The Company's current policy is to pay distributions which will allow the Company to satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax on its undistributed income.

The Company's taxable income may substantially exceed its net income as determined based on U.S. GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, it is likely that the Company will acquire assets, including RMBS requiring it to accrue OID or recognize market discount income, that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets referred to as "phantom income." Finally, the Company may be required under the terms of the indebtedness that it incurs to use cash received from interest payments to make principal payments on that indebtedness, with the effect that the Company will recognize income but will not have a corresponding amount of cash available for distribution to its stockholders.

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As a result of the foregoing, the Company may generate less cash flow than taxable income in a particular year and find it difficult or impossible to meet the REIT distribution requirements in certain circumstances. In such circumstances, the Company may be required to (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be used for future investment or used to repay debt, or (iv) make a taxable distribution of shares of common stock as part of a distribution in which stockholders may elect to receive shares of common stock or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with the REIT distribution requirements. Thus, compliance with the REIT distribution requirements may hinder the Company's ability to grow, which could adversely affect the value of its common stock.

The Company may be required to report taxable income with respect to certain of the Company's investments in excess of the economic income the Company ultimately realizes from them.

The Company may acquire mortgage loans, RMBS or other debt instruments in the secondary market for less than their face amount. The discount at which such securities are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as "market discount" for U.S. federal income tax purposes. Market discount accrues on the basis of the constant yield to maturity of the debt instrument based generally on the assumption that all future payments on the debt instrument will be made. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. In particular, payments on residential mortgage loans are ordinarily made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If the Company collects less on a debt instrument than the Company's purchase price plus the market discount the Company had previously reported as income, the Company may not be able to benefit from any offsetting loss deduction in a subsequent taxable year. In addition, the Company may acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are "significant modifications" under applicable Treasury regulations, the modified debt may be considered to have been reissued to the Company at a gain in a debt-for-debt exchange with the borrower. In that event, the Company may be required to recognize taxable gain to the extent the principal amount of the modified debt exceeds the Company's adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed.

Similarly, some of the RMBS that the Company purchases will likely have been issued with OID. The Company will be required to report such OID based on a constant yield method and income will accrue based on the assumption that all future projected payments due on such mortgage backed securities ("MBSs") will be made. If such MBSs turn out not to be fully collectible, an offsetting loss deduction will become available only in the later year in which uncollectability is provable. Finally, in the event that any mortgage loans, RMBS or other debt instruments acquired by the Company are delinquent as to mandatory principal and interest payments, or in the event a borrower with respect to a particular debt instrument acquired by the Company encounters financial difficulty rendering it unable to pay stated interest as due, the Company may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, the Company may be required to accrue interest income with respect to subordinate RMBS at their stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while the Company would in general ultimately have an offsetting loss deduction available to it when such interest was determined to be uncollectible, the loss would likely be treated as a capital loss, and the utility of that loss would therefore depend on the Company's having capital gain in that later year or thereafter.

The Company may acquire excess MSRs, which means the portion of an MSR that exceeds the arm's-length fee for services performed by the mortgage servicer. Based on IRS guidance concerning the classification of MSRs, the Company intends to treat any excess MSRs the Company acquires as ownership interests in the interest payments made on the underlying mortgage loans, akin to an "interest only" strip. Under this treatment, for purposes of determining the amount and timing of taxable income, each excess MSR is treated as a bond that was issued with OID on the date the Company acquired such excess MSR. In general, the Company will be required to accrue OID based on the constant yield to maturity of each excess MSR, and to treat such OID as taxable income in accordance with the applicable U.S. federal income tax rules. The constant yield of an excess MSR will be determined, and the Company will be taxed, based on a prepayment assumption regarding future payments due on the mortgage loans underlying the excess MSR. If the mortgage loans underlying an excess MSR prepay at a rate different than that under the prepayment assumption, the Company's recognition of OID will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, the Company may be required to accrue an amount of income in respect of an excess MSR that exceeds the amount of cash collected in respect of that excess MSR. Furthermore, it is possible that, over the life of the investment in an excess MSR, the total amount the Company pays for, and accrues with respect to, the excess MSR may exceed the total amount the Company collects on such excess MSR. No assurance can be given that the Company will be entitled to a deduction for such excess, meaning that the Company may be required to recognize phantom income over the life of an excess MSR.

The interest apportionment rules may affect the Company's ability to comply with the REIT asset and gross income tests.

The interest apportionment rules under Treasury Regulation Section 1.856-5(c) provide that, if a mortgage is secured by both real property and other property, a REIT is required to apportion its annual interest income to the real property security based on a fraction, the numerator of which is the value of the real property securing the loan, determined when the REIT commits to acquire the loan, and the denominator of which is the highest "principal amount" of the loan during the year. Beginning in 2016, if a mortgage is secured by both real property and personal property and the value of the personal property does not exceed 15% of the aggregate value of the property securing the mortgage, the mortgage is treated as secured solely by real property for this purpose. IRS Revenue procedure 2014-51 interprets the "principal amount" of the loan to be the face amount of the loan, despite the Code's requirement that taxpayers treat any market discount, which is the difference between the purchase price of the loan and its face amount, for all purposes (other than certain withholding and information reporting purposes) as interest rather than principal.

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The interest apportionment regulations apply only if the mortgage loan in question is secured by both real property and other property and, beginning in 2016, the value of personal property securing the mortgage exceeds 15% of the aggregate value of the property securing the mortgage. The Company expects that all or most of the mortgage loans that the Company acquires will be secured only by real property and no other property value is taken into account in the Company's underwriting process. Accordingly, it is not contemplated that the Company will regularly invest in mortgage loans to which the interest apportionment rules described above would apply. Nevertheless, if the IRS were to assert successfully that the Company's mortgage loans were secured by property other than real estate, that the interest apportionment rules applied for purposes of the Company's REIT testing, and that the position taken in IRS Revenue Procedure 2014-51 should be applied to certain mortgage loans in the Company's portfolio, then depending upon the value of the real property securing the Company's mortgage loans and their face amount, and the other sources of the Company's gross income generally, the Company may fail to meet the 75% REIT gross income test. If the Company does not meet this test, the Company could potentially lose its REIT qualification or be required to pay a penalty to the IRS.

In addition, the Code provides that a regular or a residual interest in a REMIC is generally treated as a real estate asset for the purposes of the REIT asset tests, and any amount includible in the Company's gross income with respect to such an interest is generally treated as interest on an obligation secured by a mortgage on real property for the purposes of the REIT gross income tests. If, however, less than 95% of the assets of a REMIC in which the Company holds an interest consist of real estate assets (determined as if the Company held such assets), the Company will be treated as holding its proportionate share of the assets of the REMIC for the purpose of the REIT asset tests and receiving directly its proportionate share of the income of the REMIC for the purpose of determining the amount of income from the REMIC that is treated as interest on an obligation secured by a mortgage on real property. In connection with the recently expanded HARP program, the IRS recently issued guidance providing that, among other things, if a REIT holds a regular interest in an "eligible REMIC," or a residual interest in an "eligible REMIC" that informs the REIT that at least 80% of the REMIC's assets constitute real estate assets, then (i) the REIT may treat 80% of the value of the interest in the REMIC as a real estate asset for the purpose of the REIT asset tests and (ii) the REIT may treat 80% of the gross income received with respect to the interest in the REMIC as interest on an obligation secured by a mortgage on real property for the purpose of the 75% REIT gross income test. For this purpose, a REMIC is an "eligible REMIC" if (i) the REMIC has received a guarantee from Fannie Mae or Freddie Mac that will allow the REMIC to make any principal and interest payments on its regular and residual interests and (ii) all of the REMIC's mortgages and pass-through certificates are secured by interests in single-family dwellings. If the Company were to acquire an interest in an eligible REMIC less than 95% of the assets of which constitute real estate assets, the IRS guidance described above may generally allow the Company to treat 80% of its interest in such a REMIC as a qualifying real estate asset for the purpose of the REIT asset tests and 80% of the gross income derived from the interest as qualifying income for the purpose of the 75% REIT gross income test. Although the portion of the income from such a REMIC interest that does not qualify for the 75% REIT gross income test would likely be qualifying income for the purpose of the 95% REIT gross income test, the remaining 20% of the REMIC interest generally would not qualify as a real estate asset, which could adversely affect the Company's ability to satisfy the REIT asset tests. Accordingly, owning such a REMIC interest could adversely affect the Company's ability to qualify as a REIT.

The Company's ownership of and relationship with any TRS which the Company may form or acquire will be limited, and a failure to comply with the limits would jeopardize the Company's REIT qualification and the Company's transactions with its TRSs may result in the application of a 100% excise tax if such transactions are not conducted on arm's-length terms.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. Overall, no more than 25% (20% beginning in 2018) of the value of a REIT's assets may consist of stock and securities of one or more TRSs. A domestic TRS will pay U.S. federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's-length basis.

The Company has elected, together with ZFC Funding Inc. ("ZFC Funding TRS") (formerly known as ZAIS I TRS, Inc.), for ZFC Funding TRS to be treated as a TRS, the Company has elected, together with ZFC Trust TRS I, LLC ("ZFC Trust TRS") for ZFC Trust TRS to be treated as a TRS, and the Company has elected, together with ZFC Honeybee TRS, LLC ("Honeybee TRS"), for Honeybee TRS to be treated as a TRS. ZFC Funding TRS, ZFC Trust TRS, Honeybee TRS and any other domestic TRS that the Company may form would pay U.S. federal, state and local income tax on its taxable income, and its after tax net income would be available for distribution to the Company but would not be required to be distributed to it by such domestic TRS. The Company anticipates that the aggregate value of the TRS stock and securities owned by it will be less than 25% (20% beginning in 2018) of the value of its total assets (including the TRS stock and securities). Furthermore, the Company will monitor the value of its investments in its TRSs to ensure compliance with the rule that no more than 25% (20% beginning in 2018) of the value of its assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). In addition, the Company will scrutinize all of the Company's transactions with TRSs to ensure that they are entered into on arm's-length terms to avoid incurring the 100% excise tax described above. There can be no assurance, however, that the Company will be able to comply with the TRS limitations or to avoid application of the 100% excise tax discussed above.

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The ownership limits that apply to REITs, as prescribed by the Internal Revenue Code and by the Company's charter, may inhibit market activity in shares of the Company's common stock and restrict its business combination opportunities.

In order for the Company to qualify as a REIT, not more than 50% in value of its outstanding shares of stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year after the first year for which the Company elects to qualify as a REIT. Additionally, at least 100 persons must beneficially own the Company's stock during at least 335 days of a taxable year (other than the first taxable year for which the Company elects to be taxed as a REIT). The Company's charter, with certain exceptions, authorizes the Company's directors to take such actions as are necessary and desirable to preserve its qualification as a REIT. The Company's charter also provides that, unless exempted by the Company's board of directors, no person may own more than 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of its common stock, or 9.8% in value or in number, whichever is more restrictive, of the outstanding shares of all classes and series of its capital stock. The Company's board of directors may, in its sole discretion, subject to such conditions as it may determine and the receipt of certain representations and undertakings, prospectively or retroactively, waive the ownership limit or establish a different limit on ownership, or excepted holder limit, for a particular stockholder if the stockholder's ownership in excess of the ownership limit would not result in the Company being "closely held" under Section 856(h) of the Internal Revenue Code or otherwise failing to qualify as a REIT. These ownership limits could delay or prevent a transaction or a change in control of the Company that might involve a premium price for shares of its common stock or otherwise be in the best interest of its stockholders.

Certain financing activities may subject the Company to U.S. federal income tax and increase the tax liability of its stockholders.

The Company may enter into transactions that could result in it, the Operating Partnership or a portion of the Operating Partnership's assets being treated as a "taxable mortgage pool" for U.S. federal income tax purposes. Specifically, the Company may securitize residential or commercial real estate loans that the Company originates or acquires and such securitizations, to the extent structured in a manner other than a REMIC, would likely result in the Company owning interests in a taxable mortgage pool. The Company would be precluded from holding equity interests in such a taxable mortgage pool securitization through the Operating Partnership. Accordingly, the Company would likely enter into such transactions through a qualified REIT subsidiary of one or more subsidiary REITs formed by the Operating Partnership, and will be precluded from selling to outside investors equity interests in such securitizations or from selling any debt securities issued in connection with such securitizations that might be considered equity for U.S. federal income tax purposes. The Company will be taxed at the highest U.S. federal corporate income tax rate on any "excess inclusion income" arising from a taxable mortgage pool that is allocable to the percentage of the Company's shares held in record name by "disqualified organizations," which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on unrelated business taxable income. To the extent that common stock owned by "disqualified organizations" is held in record name by a broker/dealer or other nominee, the broker/dealer or other nominee would be liable for the U.S. federal corporate income tax on the portion of the Company's excess inclusion income allocable to the common stock held by the broker/dealer or other nominee on behalf of the disqualified organizations. Disqualified organizations may own the Company's stock. Because this tax would be imposed on the Company, all of the Company's investors, including investors that are not disqualified organizations, will bear a portion of the tax cost associated with the classification of the Company or a portion of its assets as a taxable mortgage pool. A regulated investment company ("RIC") or other pass-through entity owning the Company's common stock in record name will be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations.

In addition, if the Company realizes excess inclusion income and allocates it to its stockholders, this income cannot be offset by net operating losses of its stockholders. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income is fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code. If the stockholder is a foreign person, it would be subject to U.S. federal income tax withholding on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty. If the stockholder is a REIT, a RIC, common trust fund or other pass-through entity, the Company's allocable share of its excess inclusion income could be considered excess inclusion income of such entity. Accordingly, such investors should be aware that a portion of the Company's income may be considered excess inclusion income. Finally, if a subsidiary REIT of the Operating Partnership through which the Company held taxable mortgage pool securitizations were to fail to qualify as a REIT, the Company's taxable mortgage pool securitizations will be treated as separate taxable corporations for U.S. federal income tax purposes that could not be included in any consolidated U.S. federal corporate income tax return and that could prevent the Company from meeting the REIT asset tests.

The tax on prohibited transactions will limit the Company's ability to engage in transactions, including certain methods of securitizing mortgage loans, which would be treated as prohibited transactions for U.S. federal income tax purposes.

Net income that the Company derives from a prohibited transaction is subject to a 100% tax. The term "prohibited transaction" generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of a trade or business by the Company or by a borrower that has issued a shared appreciation mortgage or similar debt instrument to the Company. The Company might be subject to this tax if it were to dispose of or securitize loans, directly or through a subsidiary REIT, in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes. The Company might also be subject to this tax if it were to sell assets in connection with a disposition of certain segments of the Company’s business or in connection with a liquidation of the Company. The Company intends to conduct its operations so that no asset that the Company or a subsidiary REIT owns (or is treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of the Company's business or the business of a subsidiary REIT. As a result, the Company may choose not to engage in certain sales of loans at the REIT level, and may limit the structures the Company utilizes for its securitization transactions, even though the sales or structures might otherwise be beneficial to the Company. In addition, whether property is held "primarily for sale to customers in the ordinary course of a trade or business" depends on the particular facts and circumstances. No assurance can be given that any property that the Company sells will not be treated as property held for sale to customers, or that the Company can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such treatment. The 100% tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. The Company intends to structure its activities to avoid prohibited transaction characterization.

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Characterization of the Company's repurchase agreements entered into to finance its investments as sales for tax purposes rather than as secured lending transactions would adversely affect the Company's ability to qualify as a REIT.

The Company has entered into repurchase agreements with counterparties to achieve its desired amount of leverage for the assets in which it intends to invest. Under the Company's repurchase agreements, the Company generally sells assets to its counterparty to the agreement and receives cash from the counterparty. The counterparty is obligated to resell the assets back to the Company at the end of the term of the transaction. The Company believes that for U.S. federal income tax purposes the Company will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured lending transactions notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could successfully assert that the Company did not own these assets during the term of the repurchase agreements, in which case the Company could fail to qualify as a REIT.

The Company's ability to invest in TBAs could be limited by the Company's REIT qualification.

The Company may have exposure to Agency RMBS through TBAs. Pursuant to these TBAs, the Company agrees to purchase, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered is not identified until shortly before the TBA settlement date. As with any forward purchase contract, the value of the underlying Agency RMBS may decrease between the contract date and the settlement date, which may result in the recognition of income, gain or loss. The law is unclear regarding whether TBAs are qualifying assets for the REIT 75% asset test and whether income or gains from the dispositions of TBAs, through "dollar roll" transactions or otherwise, constitute qualifying income for purposes of the REIT 75% gross income test. Accordingly, the Company's ability to purchase Agency RMBS through TBAs or to dispose of TBAs through these transactions or otherwise, could be limited. The Company does not expect TBAs to adversely affect its ability to meet the REIT gross income and assets tests. No assurance can be given that the IRS would treat TBAs as qualifying assets or treat income and gains from the disposition of TBAs as qualifying income for these purposes, and therefore, the Company's ability to invest in such assets could be limited.

The failure of excess MSRs held by the Company to qualify as real estate assets, or the failure of the income from excess MSRs to qualify as interest from mortgages, could adversely affect the Company's ability to qualify as a REIT.

The Company may acquire excess MSRs. In recent private letter rulings, the IRS ruled that excess MSRs meeting certain requirements would be treated as an interest in mortgages on real property and thus a real estate asset for purposes of the 75% REIT asset test, and interest received by a REIT from such excess MSRs will be considered interest on obligations secured by mortgages on real property for purposes of the 75% REIT gross income test. A private letter ruling may be relied upon only by the taxpayer to whom it is issued, and the IRS may revoke a private letter ruling. Consistent with the analysis adopted by the IRS in such private letter rulings and based on advice of counsel, the Company intends to treat any excess MSRs that it acquires that meet the requirements provided in the private letter rulings as qualifying assets for purposes of the 75% REIT gross asset test and the Company intends to treat income from such excess MSRs as qualifying income for purposes of the 75% and 95% gross income tests. Notwithstanding the IRS's determination in the private letter rulings described above, it is possible that the IRS could successfully assert that any excess MSRs that the Company acquires do not qualify for purposes of the 75% REIT gross asset test and income from such MSRs does not qualify for purposes of the 75% and/or 95% gross income tests, which could cause the Company to be subject to a penalty tax and could adversely impact the Company's ability to qualify as a REIT.

If the Company were to make a taxable distribution of shares of the Company's stock, stockholders may be required to sell such shares or sell other assets owned by them in order to pay any tax imposed on such distribution.

The Company may be able to distribute taxable dividends that are payable in shares of its stock. If the Company were to make such a taxable distribution of shares of its stock, stockholders would be required to include the full amount of such distribution as income. As a result, a stockholder may be required to pay tax with respect to such dividends in excess of cash received. Accordingly, stockholders receiving a distribution of the Company's shares may be required to sell shares received in such distribution or may be required to sell other stock or assets owned by them, at a time that may be disadvantageous, in order to satisfy any tax imposed on such distribution. If a stockholder sells the shares it receives as a dividend in order to pay such tax, the sale proceeds may be less than the amount included in income with respect to the dividend. Moreover, in the case of a taxable distribution of shares of the Company's stock with respect to which any withholding tax is imposed on a non-U.S. stockholder, the Company may have to withhold or dispose of part of the shares in such distribution and use such withheld shares or the proceeds of such disposition to satisfy the withholding tax imposed.

While the IRS, in certain private letter rulings, has ruled that a distribution of cash or shares at the election of a REIT's stockholders may qualify as a taxable stock dividend if certain requirements are met, it is unclear whether and to what extent the Company will be able to pay taxable dividends in cash and shares of common stock in any future period.

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Complying with REIT requirements may limit the Company's ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit the Company's ability to hedge its assets and operations. Under these provisions, any income that the Company generates from transactions intended to hedge its interest rate risks will generally be excluded from gross income for purposes of the 75% and 95% gross income tests if (i) the instrument (A) hedges interest rate risk or foreign currency exposure on liabilities used to carry or acquire real estate assets or (B) hedges risk of currency fluctuations with respect to any item of income or gain that would be qualifying income under the 75% or 95% gross income tests, (C ) hedges an instrument described in clause (A) or (B) for a period following the extinguishment of the liability or the disposition of the asset that was previously hedged by the hedged instrument, and (ii) such instrument is properly identified under applicable Treasury Regulations. In addition, any income from other hedges would generally constitute non-qualifying income for purposes of both the 75% and 95% gross income tests. As a result of these rules, the Company may have to limit its use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS, which could increase the cost of the Company's hedging activities or result in greater risks associated with interest rate or other changes than the Company would otherwise incur.

Even if the Company qualifies as a REIT, the Company may face tax liabilities that reduce the Company's cash flow.

Even if the Company qualifies as a REIT, the Company may be subject to certain U.S. federal, state and local taxes on its income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of foreclosures, and state or local income, franchise, property and transfer taxes, including mortgage related taxes. In addition, ZFC Funding TRS, ZFC Trust TRS, Honeybee TRS and any other domestic TRSs the Company owns will be subject to U.S. federal, state, and local corporate taxes. In order to meet the REIT qualification requirements, or to avoid the imposition of a 100% tax that applies to certain gains derived by a REIT from sales of inventory or property held primarily for sale to customers in the ordinary course of business, the Company may hold some of its assets through taxable subsidiary corporations, including domestic TRSs. Any taxes paid by such subsidiary corporations would decrease the cash available for distribution to the Company's stockholders. Furthermore, if the Company acquires appreciated assets from a subchapter C corporation in a transaction in which the adjusted tax basis of the assets in the Company's hands is determined by reference to the adjusted tax basis of the assets in the hands of the C corporation, and if the Company subsequently disposes of any such assets during the 10-year period following the acquisition of the assets from the C corporation, the Company will be subject to tax at the highest corporate tax rates on any gain from such assets to the extent of the excess of the fair market value of the assets on the date that they were contributed to the Company over the basis of such assets on such date, which the Company refers to as built-in gains. A portion of the assets contributed to the Company in connection with its formation may be subject to the built-in gains tax. Although the Company expects that the built-in gains tax liability arising from any such assets should be de minimis, there is no assurance that this will be the case.

The Company's qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions or advice rendered or given or statements by the issuers of assets that the Company acquires, and the inaccuracy of any such opinions, advice or statements may adversely affect the Company's REIT qualification and result in significant corporate-level tax.

When purchasing securities, the Company may rely on opinions or advice of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, and also to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies under the 75% REIT gross income test. In addition, when purchasing the equity tranche of a securitization, the Company may rely on opinions or advice of counsel regarding the qualification of the securitization for exemption from U.S. corporate income tax and the qualification of interests in such securitization as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions, advice or statements may adversely affect the Company's REIT qualification and result in significant corporate-level tax.

The Company may be subject to adverse legislative or regulatory tax changes that could reduce the value of the Company's common stock.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended, possibly with retroactive effect. The Company cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective, and any such law, regulation or interpretation may take effect retroactively. The Company and its stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of the Company's common stock.

The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 20%. Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to up to a 39.6% maximum U.S. federal income tax rate on ordinary income. Although the reduced U.S. federal income tax rate applicable to dividend income from regular corporate dividends does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the Company's common stock.

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Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize the Company's REIT qualification. The Company's qualification as a REIT will depend on its satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, the Company's ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

The Company uses the offices of ZAIS located at Two Bridge Avenue, Suite 322, Red Bank, New Jersey 07701-1106, telephone (732) 978-7518 in connection with its residential mortgage investments strategy and the offices of GMFS located at 7389 Florida Blvd, Suite 200A, Baton Rouge, Louisiana, 70806 for its residential mortgage banking operations. GMFS also has various branch locations which are located primarily throughout the southeastern United States.

Item 3. Legal Proceedings.

From time to time, the Company may be involved in various claims and legal actions in the ordinary course of business. As of December 31, 2015, the Company was not involved in any legal proceedings. Also, see “Liquidity and Capital Resources – GMFS Transaction” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this annual report on Form 10-K for a discussion relating to the tolling agreement executed by GMFS.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The Company’s common stock is listed and traded on the NYSE under the symbol “ZFC.” On March 8, 2016 the last sales price for the Company’s common stock on the NYSE was $14.66 per share. The following table presents the high and low sales prices per share of the Company’s common stock during each calendar quarter for the years ended December 31, 2015 and December 31, 2014:

Period	High		Low
October 1, 2015 through December 31, 2015	$	15.92	$	13.13
July 1, 2015 through September 30, 2015		16.70		13.08
April 1, 2015 through June 30, 2015		19.00		16.10
January 1, 2015 through March 31, 2015		18.40		17.05

Period	High		Low
October 1, 2014 through December 31, 2014	$	18.51	$	17.01
July 1, 2014 through September 30, 2014		19.48		15.93
April 1, 2014 through June 30, 2014		16.82		16.00
January 1, 2014 through March 31, 2014		18.09		15.83

 Holders

As of March 8, 2016, the Company had 13 registered holders of its common stock. The 13 holders of record include Cede & Co., which holds shares as nominee for The Depository Trust Company, which itself holds shares on behalf of the beneficial owners of the Company’s common stock. Such information was obtained through the Company’s registrar and transfer agent.

Dividends

The Company has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with the Company’s taxable year ended December 31, 2011. U.S. federal income tax law requires that a REIT distribute annually at least 90% of its REIT taxable income, excluding net capital gains and determined without regard to the dividends paid deduction, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. The Company’s current policy is to pay distributions which will allow it to satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income tax on its undistributed income. Although the Company may borrow funds to make distributions, cash for such distributions is expected to be largely generated from the Company’s consolidated results of operations. Dividends are declared and paid at the discretion of the Company’s board of directors and depend on cash available for distribution, financial condition, the Company’s ability to maintain its qualification as a REIT, and such other factors that the Company’s board of directors may deem relevant. See Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” of this annual report on Form 10-K, for information regarding the sources of funds used for dividends and for a discussion of factors, if any, which may adversely affect the Company’s ability to pay dividends.

During 2015, the Company declared the following dividends:

Declaration Date	Record Date	Payment Date	Amount per Share and OP Unit
March 19, 2015	March 31, 2015	April 15, 2015	$	0.40
June 18, 2015	June 30, 2015	July 15, 2015	$	0.40
September 17, 2015	September 30, 2015	October 15, 2015	$	0.40
December 17, 2015	December 31, 2015	January 15, 2016	$	0.40

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During 2014, the Company declared the following dividends:

Declaration Date	Record Date	Payment Date	Amount per Share and OP Unit
March 19, 2014	March 31, 2014	April 14, 2014	$	0.40
June 17, 2014	June 30, 2014	July 15, 2014	$	0.40
September 17, 2014	September 30, 2014	October 15, 2014	$	0.40
December 18, 2014	December 31, 2014	January 15, 2015	$	0.40

A portion of the dividends paid for 2015 and 2014 were characterized as a return of capital for U.S. federal income tax purposes.

Stockholder Return Performance

The stock performance graph and table below shall not be deemed, under the Securities Act or the Exchange Act, to be (i) “soliciting material” or “filed” or (ii) incorporated by reference by any general statement into any filing made by the Company with the SEC, except to the extent that the Company specifically incorporates such stock performance graph and table by reference.

The following graph is a comparison of the cumulative total stockholder return on the Company’s shares of common stock, the Standard & Poor’s 500 Index (the “S&P 500 Index”), the Russell 2000 Index (the “Russell 2000”) and the SNL Finance REIT Index, a peer group index from February 8, 2013 (commencement of trading on the NYSE) to December 31, 2015. The graph assumes that $100 was invested on February 8, 2013 in the Company’s shares of common stock, the S&P 500 Index, the Russell 2000 and the SNL Finance REIT Index and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of the Company’s common stock will continue in line with the same or similar trends depicted in the graph below.

	Period Ending
Index	02/08/13		06/30/13		12/31/13		06/30/14		12/31/14		06/30/15		12/31/15
ZAIS Financial Corp.		100.00		92.09		90.80		98.78		107.27		105.31		103.82
S&P 500		100.00		106.73		124.14		133.00		141.13		142.87		143.09
Russell 2000		100.00		107.63		128.97		133.08		135.28		141.71		129.31
SNL US Finance REIT		100.00		89.06		88.15		101.98		100.95		96.79		92.57

Source: SNL Financial LC, Charlottesville, VA © 2015

49

Securities Authorized For Issuance Under Equity Compensation Plans

During 2012, the Company adopted its 2012 equity incentive plan (the “2012 Plan”). The 2012 Plan authorizes the Compensation Committee to approve grants of equity-based awards to the Company’s officers and directors and officers and employees of the Advisor and its affiliates. The 2012 Plan provides for grants of equity awards up to, in the aggregate, the equivalent of 5% of the issued and outstanding shares of the Company’s common stock from time to time (on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities into shares of common stock)) at the time of the award. As of March 8, 2016, the Company had 8,897,800 shares of common stock outstanding, which are comprised of (i) 7,970,886 shares of common stock and (ii) 926,914 OP Units, which are exchangeable, on a one-for-one basis, into cash or, at the Company’s option, for shares of the Company’s common stock. In addition, the Exchangeable Senior Notes are exchangeable for shares of the Company’s common stock or, to the extent necessary to satisfy NYSE listing requirements, cash, at an exchange rate of 54.3103 shares of common stock for each $1,000 aggregate principal amount of the Exchangeable Senior Notes, subject to adjustment and other limitations under certain circumstances. At December 31, 2015, no awards had been granted under the 2012 Plan, and at March 8, 2016, 533,868 shares were available for future issuance under the 2012 Plan, based on a total of 10,677,360 shares of common stock outstanding on a diluted basis, comprised of 7,970,886 shares of common stock, 926,914 OP Units and 1,779,560 shares of common stock issuable upon exchange of the Exchangeable Senior Notes without stockholder approval for issuances above this threshold.

The following table presents certain information about the Company’s equity compensation plan as of December 31, 2015:

Award	Number of securities to be issued upon exercise of outstanding options warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column of this table) (1)
Equity compensation plans approved by stockholders	—		$	—	—
Equity compensation plans not approved by stockholders (2)		—		—		533,868
Total		—	$	—		533,868

(1)	The 2012 Plan provides for grants of equity awards up to, in the aggregate, the equivalent of 5% of the issued and outstanding shares of the Company’s common stock from time to time (on a fully diluted basis (assuming, if applicable, the exercise of all outstanding options and the conversion of all warrants and convertible securities into shares of common stock)) at the time of the award.
(2)	The 2012 Plan was adopted in December 2012, prior to the completion of the Company’s IPO. No awards have been granted pursuant to this plan.

Recent Sales of Unregistered Equity Securities; Use of Proceeds from Registered Securities

None.

Recent Purchases of Equity Securities

The Company did not purchase equity securities in 2015 or 2014.

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Item 6. Selected Financial Data.

The Company derived its selected consolidated financial data (i) as of December 31, 2015 and for the year ended December 31, 2015; (ii) as of December 31, 2014 and for the year ended December 31, 2014; and (iii) as of December 31, 2013 and for the year ended December 31, 2013 from its audited consolidated financial statements appearing in this annual report on Form 10-K. The Company derived its selected consolidated financial data as of December 31, 2012 and for the year ended December 31, 2012; and as of December 31, 2011 and for the period from July 29, 2011 (the date of the Company’s inception) to December 31, 2011, from its audited consolidated financial statements not appearing in this annual report on Form 10-K.

This information should be read in conjunction with Item 1, “Business,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the audited consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” included in this annual report on Form 10-K.

	Year Ended December 31, 2015			Year Ended December 31, 2014 (1)			Year Ended December 31, 2013			Year Ended December 31, 2012			For the period July 29, 2011 (date of the Company’s inception) to December 31, 2011
	(dollars in thousands, except share and per share data)
Operating Data:
Total interest income	$	37,803		$	41,593		$	26,418		$	9,398		$	3,618
Total interest expense		18,850			17,260			7,095			1,387			296
Net interest income		18,953			24,333			19,323			8,011			3,322
Mortgage banking activities, net		45,857			5,439			—			—			—
Loan servicing fee income, net of direct costs		7,092			930			—			—			—
Change in fair value of mortgage servicing rights		(4,128	)		(1,684	)		—			—			—
Other (losses)/gains		(13,978	)		18,931			(2,166	)		16,436			(7,678	)
Total expenses		50,855			18,994			9,604			4,181	(2)		779
Net (loss)/income attributable to ZAIS Financial Corp. common stockholders		(1,261	)		26,742			6,658			19,434			(5,134	)
Net (loss)/income per share applicable to common stockholders:
Basic	$	(0.16	)	$	3.35		$	0.92		$	7.13		$	(1.70	)
Diluted	$	(0.16	)	$	3.08		$	0.92		$	7.13		$	(1.70	)
Weighted average number of shares of common stock outstanding:
Basic		7,970,886			7,970,886			7,273,366			2,724,252			3,022,617
Diluted		8,897,800			10,677,360			8,200,280			2,773,845			3,022,617
Dividends declared per share of common stock	$	1.60		$	1.60		$	2.12		$	4.11		$	—

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	As of December 31, 2015		As of December 31, 2014		As of December 31, 2013		As of December 31, 2012			As of December 31, 2011
	(dollars in thousands, except per share data)
Balance Sheet Data:
Total assets	$	775,139	$	792,399	$	620,081	$	201,648		$	154,105
Total liabilities		597,361		599,015		442,312		136,507	(3)		98,787
Total ZAIS Financial Corp. stockholders’ equity		159,224		173,238		159,250		45,042			55,318
Total non-controlling interests		18,554		20,145		18,519		20,099			—
Stockholders’ equity per share of common stock and OP Units		19.98		21.73		19.98		21.68	(4)		18.30

(1)	On October 31, 2014 the Company completed the acquisition of GMFS. The Company has recognized the revenues and earnings related to its investment in GMFS for the period from the acquisition date to December 31, 2014 in its consolidated statements of operations.
(2)	Includes interest on common stock repurchase liability of $1.8 million.
(3)	Includes $11.2 million in common stock repurchase liability which, as of December 31, 2012, the Company had expected to pay in January 2013 for the repurchase of 515,035 shares of its common stock from one of the Company’s institutional stockholders. In January 2013, the Company agreed with this institutional stockholder to repurchase only 265,245 of its shares (rather than 515,035 shares).
(4)	The shares of common stock outstanding for purposes of this stockholders’ equity per share calculation do not include 515,035 shares of common stock that the Company agreed to repurchase from one of its institutional stockholders in January 2013 at a price per share equal to the book value per share as of December 31, 2012. In January 2013, the Company agreed with this institutional stockholder to repurchase only 265,245 of its shares (rather than 515,035 shares).

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying Notes included in Item 8, “Financial Statements and Supplementary Data,” of this annual report on Form 10-K.

Overview

 The Company invests in residential mortgage loans. GMFS, a mortgage banking platform the Company acquired in October 2014, originates, sells and services mortgage loans and the Company acquires performing, re-performing and newly originated loans through other channels. The Company also invests in, finances and manages non-Agency RMBS with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations and MSRs. The Company also has the discretion to invest in Agency RMBS, including through TBA contracts, and in other real estate-related and financial assets, such as IOs. The Company refers collectively to its assets as its ’target assets’.

As announced on November 4, 2015, the Company has engaged a financial advisor to assist in evaluating potential strategic alternatives to enhance stockholder value. The continuing strategic review includes the exploration of merger or sale transactions involving the Company or a liquidation of the Company's assets. The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurance that the discussions will lead to a definitive merger or sale transaction, which would be subject to approval by the Company’s board of directors and its stockholders. In the event that the Company does not reach a definitive agreement with respect to a merger or sale transaction, management of the Company intends to present to the Company’s board of directors for its consideration a plan of liquidation. There is no assurance that the Company’s board of directors will approve any plan of liquidation and recommend its acceptance by the Company’s stockholders. In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. If completed, these mortgage loan sales are likely to result in a reduction of the Company’s investment income and may therefore result in a decision to curtail dividends in the future. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit purchase program and will begin the unwinding of the Company’s mortgage conduit business. Consistent with these changes to the Company’s strategy, on March 9, 2016, Brian Hargrave resigned as the Company’s Chief Investment Officer and will be succeeded by Christian Zugel, the current Chairman of the Company’s board of directors. The Company does not intend to disclose further developments until the review is complete and the Company’s board of directors has taken action with respect to the strategic review.

The Company's income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. The Company's objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly distributions and secondarily through capital appreciation.

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The Company was incorporated in Maryland on May 24, 2011 and has elected to be taxed as a REIT for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2011. The Company is organized in a format pursuant to which it serves as the general partner of, and conducts substantially all of its business through, its Operating Partnership subsidiary, ZAIS Financial Partners, L.P., a Delaware limited partnership. The Company is externally managed by the Advisor, a subsidiary of ZAIS, and has no employees except for those employed by GMFS, its wholly-owned subsidiary. GMFS had 246 employees at December 31, 2015. The Company also expects to operate its business so that it is not required to register as an investment company under the 1940 Act.

Pursuant to the terms of the GMFS Merger Agreement among Honeybee TRS, Honeybee Acquisitions, GMFS, and Honeyrep, LLC, solely in its capacity as the security holder representative, Honeybee Acquisitions merged with and into GMFS on October 31, 2014, with GMFS continuing as the surviving entity and an indirect subsidiary of the Company. GMFS is an approved Fannie Mae Seller-Servicer, Freddie Mac Seller-Servicer, Ginnie Mae issuer, HUD/FHA Mortgagee, USDA approved originator and VA Lender. GMFS currently originates loans that are eligible to be purchased, guaranteed or insured by Fannie Mae, Freddie Mac, FHA, VA and USDA through retail, correspondent and broker channels. GMFS also originates and sells reverse mortgage loans as part of its existing operations.

The final purchase price was approximately $61.2 million, net of approximately $1.7 million received from an escrow account pursuant to the GMFS Merger Agreement, based on the final reconciliation of GMFS's net tangible assets. The net tangible assets at closing were comprised of the estimated fair value of GMFS's MSR portfolio, the estimated value of GMFS's net tangible assets and a purchase price premium. In addition to cash paid at closing, two contingent $1 million deferred premium payments payable in cash over two years, plus the Production and Profitability Earn-Out. The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The estimated present value of the total contingent consideration at October 31, 2014 was $11.4 million based on the future production and earnings projections of GMFS over the four-year earn-out period (at December 31, 2015 the contingent consideration liability was $11.3 million). The Company funded the closing cash payment through a combination of available cash and the sale of a portion of its non-Agency RMBS portfolio. As discussed above, pursuant to the GMFS Merger Agreement, based on the final reconciliation of the October 31, 2014 values, the Company received $1,684,263 in June 2015 from an escrow account established at the time of the closing. The Company recorded a reduction to goodwill in the consolidated balance sheets that included this amount, along with other final closing adjustments. Additionally, in 2015 the goodwill and other intangible assets were measured for impairment. The Company determined that it is more likely than not that the carrying amount of these assets are recoverable and therefore, the Company did not recognize any impairment of these assets under U.S. GAAP.

The Company is externally managed by the Advisor, a subsidiary of ZAIS. On March 17, 2015, a business combination was completed between HF2 Financial, a special purpose acquisition company, and ZGP, which wholly owns ZAIS, pursuant to a definitive agreement dated September 16, 2014. The current owners of ZGP did not receive any proceeds at the closing of the transaction and retained a significant equity stake in ZGP. Following the close of the transaction, ZAIS's management team has remained in place to continue to lead the combined organization.

The Company operated as one operating segment prior to the acquisition of GMFS on October 31, 2014. Subsequent to the acquisition of GMFS on October 31, 2014, the Company operates in two operating segments: residential mortgage investments and residential mortgage banking. These operating segments have been identified based on the Company's organizational and management structure. These segments are based on an internally-aligned segment structure, which is how the Company's results are monitored and performance is assessed.

The residential mortgage investments segment includes a portfolio of mortgage loans which were either distressed, re-performing or newly originated at the time of purchase. The residential mortgage banking segment includes the operations of GMFS, which originates mortgage loans for subsequent sale as either servicing retained or released, and expenses incurred by ZFC Honeybee TRS, LLC.

At December 31, 2015, the Company held a diversified portfolio of mortgage loans, RMBS and MSRs with an aggregate fair value of $671.2 million, comprised of the following:

Residential Mortgage Investments

· Performing, re-performing and newly originated loans with a fair value of $397.7 million;

· RMBS assets with a fair value of $109.3 million, consisting primarily of senior tranches of non-Agency RMBS that were originally highly rated but subsequently downgraded and,

Residential Mortgage Banking

· Mortgage loans originated by the GMFS mortgage banking platform and held for sale with a fair value of $116.0 million; and

· MSRs with a fair value of $48.2 million.

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Factors Impacting Operating Results

The Company’s results of operations for the year ended December 31, 2015 were impacted by a number of factors. Home prices, which are a significant correlating factor to the Company’s performance, rose 5.25% for the 12 months ended November 2015 according to Case Shiller (20 City Index, seasonally adjusted). In addition, as the housing markets continue to recover from the credit crisis, most housing metrics continue to improve including: the level of distressed homes for sale, delinquencies and foreclosures. Interest rates moved modestly higher during the year, and in December the Federal Reserve initiated its first increase in the federal funds target rate since the financial crisis.  This served to raise short-term borrowing costs and was largely in line with market expectations.  Fixed income market volatility increased during the second half of the year, in particular in the high yield corporate debt markets.  This caused some spread widening in most fixed income credit sectors, including non-Agency RMBS.  The market for residential mortgage loans was also somewhat negatively impacted by these market dynamics. Labor market conditions showed improvement and a benign inflation environment continued, all of which are supportive of mortgage credit performance. The RMBS and whole loan portfolios saw a decline in market value during the year.

The Company expects that the results of its operations will also be affected by a number of other factors, including the level of its net interest income, the fair value of its assets and the supply of, and demand for, the target assets in which it may invest. The Company's net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies, primarily as a result of changes in market interest rates and prepayment speeds, as measured by Constant Prepayment Rates (“CPR”) on the Company's target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. The Company's operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by borrowers whose mortgage loans are held directly by the Company or included in its non-Agency RMBS or Other Investment Securities or in other assets it may originate or acquire.

At December 31, 2015, the Company held a diversified portfolio of mortgage loans held for investment with a fair value of $397.7 million, mortgage loans held for sale with a fair value of $116.0 million, RMBS assets with a fair value of $109.3 million and MSRs with a fair value of $48.2 million.

Changes in Fair Value of the Company’s Assets

The Company's mortgage loans held for investment, mortgage loans held for sale, RMBS and Other Investment Securities are carried at fair value and future mortgage-related assets may also be carried at fair value. Accordingly, changes in the fair value of the Company's assets may impact the results of its operations for the period in which such change in value occurs. The expectation of changes in real estate prices is a major determinant of the value of mortgage loans and, therefore, of RMBS and Other Investment Securities. This factor is beyond the Company's control.

Changes in Market Interest Rates

With respect to the Company's business operations, increases in interest rates, in general, may, over time, cause: (i) the interest expense associated with the Company's borrowings to increase; (ii) the value of its fixed-rate portfolio to decline; (iii) coupons on its ARMs and hybrid ARMs (including RMBS secured by such collateral) and on its residential mortgage loans and other floating rate securities to reset, although on a delayed basis, to higher interest rates; (iv) prepayments on its residential mortgage investments and RMBS to slow, thereby slowing the amortization of the Company's purchase premiums and the accretion of its purchase discounts; (v) a decrease in the Company's mortgage banking origination volume and operating activities; (vi) the value of its interest rate swap agreements to increase; and (vii) the value of its MSRs to increase.

Conversely, decreases in interest rates, in general, may, over time, cause: (i) prepayments on the Company's residential mortgage investments and RMBS to increase, thereby accelerating the amortization of its purchase premiums and the accretion of its purchase discounts; (ii) the interest expense associated with its borrowings to decrease; (iii) the value of its fixed-rate portfolio to increase; (iv) the value of its interest rate swap agreements to decrease; (v) coupons on its ARMs and hybrid ARMs held for investment (including RMBS secured by such collateral) and other floating rate securities to reset, although on a delayed basis, to lower interest rates; (vi) an increase in the Company's mortgage banking origination volume and operating activities; and (vii) the value of its MSRs to decrease. At December 31, 2015, 36.4% of the Company's performing mortgage loans held for investment, as measured by fair value consisted of mortgage loans with a variable interest rate component, including ARMs and hybrid ARMs. At December 31, 2015, 36.7% of the Company's RMBS assets, as measured by fair value, consisted of RMBS assets with a variable interest rate component, including ARMs and hybrid ARMs. Additionally, at December 31, 2015, 100.0 % of the Company's Other Investment Securities, as measured by fair value, consisted of the Fannie Mae Risk Transfer Notes (“FMSA Notes”) and the Freddie Mac Structured Agency Credit Risk Notes (“FMRT Notes”) with a variable interest rate component.

Prepayment Speeds

Prepayment speeds on residential mortgage loans, and therefore, RMBS and MSRs vary according to interest rates, the type of investment, conditions in the financial markets, competition, defaults, foreclosures and other factors that cannot be predicted with any certainty. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their mortgage loans and, as a result, prepayment speeds tend to decrease. This can extend the period over which the Company earns interest income. When interest rates fall, prepayment speeds on residential mortgage loans, and therefore, RMBS and MSRs tend to increase, thereby decreasing the period over which the Company earns interest income. Additionally, other factors such as the credit rating of the borrower, the rate of home price appreciation or depreciation, financial market conditions, foreclosures and lender competition, none of which can be predicted with any certainty, may affect prepayment speeds on residential mortgage loans, RMBS and MSRs.

54

Spreads on Non-Guaranteed Mortgage Loans Held for Investment and Securities

Since the financial crisis that began in 2007, the spreads between swap rates and residential mortgage loans and non-Agency RMBS have been volatile. Spreads on these assets initially moved wider due to the difficult credit conditions and have only recovered a portion of that widening. As the prices of securitized assets declined, a number of investors and a number of structured investment vehicles faced margin calls from dealers and were forced to sell assets in order to reduce leverage. The price volatility of these assets also impacted lending terms in the repurchase market, as counterparties raised margin requirements to reflect the more difficult environment. The spread between the yield on the Company's assets and its funding costs is an important factor in the performance of this aspect of the Company's business. Wider spreads imply greater income on new asset purchases but may have a negative impact on the Company's stated book value. Wider spreads generally negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings, which may require the Company to reduce leverage by selling assets. Conversely, tighter spreads imply lower income on new asset purchases, but may have a positive impact on the Company's stated book value. Tighter spreads generally have a positive impact on asset prices. In this case, the Company may be able to reduce the amount of collateral required to secure borrowings.

Mortgage Extension Risk

The Advisor computes the projected weighted-average life of the Company's investments based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages and the rate at which defaults, foreclosures and recoveries will occur. In general, when the Company originates or acquires a fixed-rate mortgage or hybrid ARM asset, the Company may, but is not required to, enter into an interest rate swap agreement, MBS forward sales contract or other hedging instrument that effectively fixes the Company's borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect the Company from rising interest rates, because the borrowing costs are effectively fixed for the duration of the fixed-rate portion of the related RMBS.

However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on the Company's consolidated results of operations, as borrowing costs would no longer be fixed after the maturity or termination of hedging instruments while the income earned on the assets would remain fixed. This situation may also cause the fair value of the Company's assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause the Company to incur losses.

In addition, the use of this swap hedging strategy effectively limits increases in the Company's book value in a declining rate environment, due to the effectively fixed nature of the Company's hedged borrowing costs. In an extreme rate decline, prepayment rates on the Company's assets might actually result in certain of its assets being fully paid off while the corresponding swap or other hedge instrument remains outstanding. In such a situation, the Company may be forced to liquidate the swap or other hedge instrument at a level that causes it to incur a loss.

Credit Risk

The Company is subject to credit risk in connection with its investments. Although the Company does not expect to encounter credit risk in its Agency RMBS, if any, it does expect to encounter credit risk related to its non-Agency RMBS, mortgage loans and other target assets, including assets it may originate or acquire. Increases in defaults and delinquencies will adversely impact the Company's operating results, while declines in rates of default and delinquencies may improve the Company's operating results from this aspect of its business. The Company is subject to counterparty risk under the FMSA Notes and FMRT Notes if Freddie Mac or Fannie Mae, respectively, is unable to perform its obligations under the respective notes.

A large portion of the mortgage loans held for investment that the Company acquired was current in their payment status at the time of acquisition. The Company calculates delinquency roll rates for its mortgage loan portfolio which represent the percentage of loans, as measured by unpaid principal balance that were in current payment status in the prior month but became delinquent in the measured month. The Company's delinquency roll rates have generally outperformed its model projections from late 2013 when the whole loan portfolio achieved scale through December 31, 2015.

Size of Investment Portfolio

The size of the Company's investment portfolio, as measured by the aggregate principal balance of its mortgage-related securities and the other assets the Company owns, is a key driver of revenues and expenses. The amount of interest income the Company receives and the amount of interest expense to finance these assets is generally dependent on the size of the investment portfolio.

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Regulatory Update

The Dodd-Frank Act directed the CFPB to integrate certain mortgage loan disclosures under the TILA and the RESPA, and effective October 3, 2015, new disclosure rules went into effect for newly originated residential mortgage loans.   These rules include RESPA new consumer disclosure forms, new processes for determining when disclosures must be updated and new timelines for providing disclosure documents to borrowers.  The new rules have created the need for substantial system and process changes and new training within the mortgage loan origination industry.

Under the direction and guidance of the Federal Housing Finance Agency, Freddie Mac and Fannie Mae ("GSEs" or "Agencies") are developing a common securitization platform ("CSP") for their single-family mortgage securitization activities, including the issuance by both GSEs of a single MBS. The CSP is expected to be a common information technology platform that will use industry-standard software, systems and data requirements and will be adaptable for use by other market participants in the future. The CSP is being developed by a joint venture owned by the GSEs and will leverage the GSEs’ existing security structures and would encompass many of the pooling features of the current Fannie Mae MBS and more of the disclosure framework of the current Freddie Mac participation certificate. The Federal Housing Finance Agency is expected to make an announcement in 2016 as to the date that Freddie Mac is expected to begin using the CSP as part of its first phase, with Fannie Mae to begin using the CSP at a later time.

In October 2014, the Federal Housing Finance Agency announced a plan that could ease credit, enabling more people to qualify for mortgages by further relaxing agreements that determine when Fannie Mae and Freddie Mac can require lenders to buy back bad loans and permitting borrowers to qualify for certain mortgage loans with smaller down payments than are now required. In October 2015, Fannie Mae and Freddie Mac further modified their buy back policies (which took effect on January 1, 2016) to provide potential alternatives to repurchase in respect of certain categories of loan defects. These plans and policy changes are designed to provide lenders with more clarity and transparency and to offer reassurances to lenders that fear they could suffer unpredictable losses on the loans that they securitize through the GSEs. It remains unclear which, if any, of the currently proposed legislation or initiatives will be enacted, and, if any legislation or initiatives are enacted, what the impact of such legislation or initiatives will be. For a discussion of additional risks relating to the Company's business, see Item 1A, “Risk Factors” of this annual report on Form 10-K.

Recent U.S. Federal Income Tax Legislation

On December 18, 2015, President Obama signed into law the Consolidated Appropriations Act of 2016, an omnibus spending bill, with a division referred to as the Protecting Americans From Tax Hikes Act of 2015 (the “PATH Act”). The PATH Act changes certain of the rules affecting REIT qualification and taxation of REITs and REIT shareholders, which are briefly summarized below.

· For taxable years beginning after 2017, the percentage of a REIT's total assets that may be represented by securities of one or more Taxable REIT subsidiaries (“TRSs”) is reduced from 25% to 20%.

· “Publicly offered REITs” (which generally include any REIT required to file annual and periodic reports with the SEC, including the Company) are no longer subject to the preferential dividend rules for taxable years beginning after 2014.

· For taxable years beginning after 2015, debt instruments issued by publicly offered REITs are qualifying assets for purposes of the 75% REIT asset test. However, no more than 25% of the value of a REIT's assets may consist of debt instruments that are issued by publicly offered REITs that are not otherwise treated as real estate assets, and interest on debt of a publicly offered REIT will not be qualifying income under the 75% REIT gross income test unless the debt is secured by real property.

· For taxable years beginning after 2015, to the extent rent attributable to personal property is treated as rents from real property (because rent attributable to the personal property for the taxable year does not exceed 15% of the total rent for the taxable year for such real and personal property), the personal property will be treated as a real estate asset for purposes of the 75% REIT asset test. Similarly, debt obligation secured by a mortgage on both real and personal property will be treated as a real estate asset for purposes of the 75% asset test, and interest thereon will be treated as interest on an obligation secured by real property, if the fair market value of the personal property does not exceed 15% of the fair market value of all property securing the debt.

· For taxable years beginning after 2014, the period during which dispositions of properties with net built-in gains from C corporations in carry-over basis transactions will trigger the built-in gains tax is reduced from ten years to five years.

· For taxable years beginning after 2015, a 100% excise tax will apply to “redetermined services income, ” i.e., non-arm’s-length income of a REIT’s TRS attributable to services provided to, or on behalf of, the REIT (other than services provided to REIT tenants, which are potentially taxed as redetermined rents).

· The rate of withholding tax applicable under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) to certain sales and other dispositions of U.S. real property interests (“USRPIs”) by non-U.S. persons, and certain distributions from corporations whose stock may constitute a USRPI, is increased from 10% to 15% for dispositions and distributions occurring after February 16, 2016.

· For dispositions and distributions on or after December 18, 2015, the stock ownership thresholds for exemption from FIRPTA taxation on sale of stock of a publicly traded REIT and for recharacterizing capital gain dividends received from a publicly traded REIT as ordinary dividends is increased from not more than 5% to not more than 10%.

· Effective December 18, 2015, certain look-through presumption, and other rules will apply for purposes of determining if the Company qualifies as domestically controlled.

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· For dispositions and distributions after December 18, 2015, certain “qualified foreign pension funds” satisfying certain requirements, as well as entities that are wholly owned by a qualified foreign pension fund, are exempt from income and withholding taxes applicable under FIRPTA. In addition, new FIRPTA rules apply to ownership of REIT shares by “qualified shareholders,” which generally include publicly traded non-U.S. stockholders meeting certain requirements.

Selected Financial Highlights

 A summary of the Company’s results for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 is below, followed by an overview of the market conditions that impacted the Company’s results during the year:

	Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
U.S. GAAP net (loss)/income	$	(1.4) million		$	29.9 million		$	7.6 million
U.S. GAAP net (loss)/income per diluted weighted average share outstanding	$	(0.16	)	$	3.08		$	0.92
Core Earnings	$	13.5 million		$	11.9 million		$	9.7 million
Core Earnings per diluted weighted average share outstanding	$	1.52		$	1. 33		$	1.19
Book value per share of common stock and OP Unit, at end of year	$	19.98		$	21.73		$	19.98
Leverage ratio, at end of year		2.97	x		2.84	x		2.42	x

Non-U.S. GAAP Financial Measures

The Company believes that providing investors with Core Earnings, a non-U.S. GAAP financial measure, in addition to the related U.S. GAAP measures, gives investors greater transparency to the information used by management in its financial and operational decision-making. The Company defines Core Earnings as net interest income, plus non-interest income from its mortgage banking platform (excluding the after tax change in fair value of MSRs resulting from changes in values of market related inputs or assumptions used in a valuation model) less total operating expenses (excluding the after tax effect of depreciation and amortization, changes in contingent consideration, amortization of deferred premiums, production and profitability earn-outs and certain non-recurring adjustments) plus/(less) the income tax benefit/(expense) related to the Company's TRSs using the applicable effective tax rate for the period. The Company's mortgage banking platform is primarily comprised of income related to originating, selling, and servicing mortgage loans.

Core Earnings is an incomplete measure of the Company's financial performance and involves differences from net income computed in accordance with U.S. GAAP. Therefore it should be considered along with, but not as an alternative to, the Company's net income computed in accordance with U.S. GAAP as a measure of the Company's financial performance. In addition, because not all companies use identical calculations, the Company's presentation of Core Earnings may not be comparable to other similarly-titled measures of other companies.

The following table reconciles net (loss)/income computed in accordance with U.S. GAAP to Core Earnings:

	Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
	(dollars in thousands, except per share data)
Net (loss)/income after income taxes– U.S. GAAP	$	(1,419	)	$	29,852		$	7,553
Recurring adjustments for non-core earnings:
Change in unrealized gain or loss on mortgage loans held for investment		9,369			(22,814	)		(7,136	)
Change in unrealized gain or loss on real estate securities		4,851			2,994			7,171
Change in unrealized gain or loss on Other Investment Securities		334			226			—
Change in unrealized gain or loss on real estate owned		435			504			—
Realized gain on mortgage loans held for investment		(1,479	)		(1,839	)		(1,299	)
Realized (gain)/loss on real estate securities		(19	)		(3,694	)		9,046
Realized loss/(gain) on other investment securities		155			(227	)		—
Realized loss/(gain) on real estate owned		160			(2	)		—
Loss/(gain) on derivative instruments related to investment portfolio		172			5,922			(5,615	)
Change in fair value of MSRs resulting from changes in values of market related inputs or assumptions used in a valuation model, net of tax		(18	)		852			—
Change in contingent consideration, net of tax		(87	)		—			—
Amortization of deferred premiums, production and profitability earn-outs, net of tax		514			—			—
Depreciation and amortization, net of tax		561			92			—
Non-controlling interests		12			—			—
Core Earnings – non-U.S. GAAP	$	13,541		$	11,866		$	9,720
Core Earnings – per diluted weighted average share outstanding – non-U.S. GAAP	$	1.52		$	1.33		$	1.19	(1)

⁽¹⁾ Calculation has been revised to conform with current period’s methodology.

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Core Earnings was $13.5 million for the year ended December 31, 2015 compared to $11.9 million for the year ended December 31, 2014. The increase in Core Earnings was primarily due to an increase of $6.3 million (net of income taxes) due to the acquisition of GMFS on October 31, 2014, offset by a decrease of $4.7 million related to the Company’s residential mortgage investment portfolio due to the sale of RMBS to fund the acquisition of GMFS.

Core Earnings was $11.9 million for the year ended December 31, 2014 compared to $9.7 million for the year ended December 31, 2013. The increase in Core Earnings was primarily due to an increase of $2.2 million (net of income taxes) due to the acquisition of GMFS on October 31, 2014.

Financial Overview

The Company reported GAAP net loss for the year ended December 31, 2015 of $1.4 million or $0.16 per diluted weighted average share outstanding, compared with net income of $29.9 million or $3.08 per diluted weighted average share outstanding for the same period in 2014.  For the year ended December 31, 2015, the Company recognized unrealized and realized losses of $14.0 million related to its investment portfolio compared to unrealized and realized gains of $18.9 million for the same period in 2014. The unrealized losses in 2015 were primarily attributable to the market dynamics discussed in Item 1, “Business” of this annual report on Form 10-K as well as principal amortization from scheduled paydowns. These results include GMFS operations, which contributed $13.5 million of net income before income taxes for the year ended December 31, 2015 compared to $583,000 of net income for the same period in 2014. The 2014 results include GMFS for the period from October 31, 2014 (the date of acquisition) to December 31, 2014.

GMFS

Highlights of the GMFS operating activity (which is included in the Company’s residential mortgage banking segment) for the year ended December 31, 2015 are as follows:

Mortgage originations (1)
Unpaid principal balance	$	1.8 billion
Percentage of originations
Purchases		65.1	%
Refinancing		34.9	%
Interest rate locks entered into	$	2.3 billion
Mortgage loans sold (1)
Unpaid principal balance	$	1.8 billion
Percentage of unpaid principal balance
Fannie Mae or Freddie Mac securitizations		58.0	%
Ginnie Mae securitizations		30.2	%
Other investors		11.8	%
Core Earnings (2)(3)	$	13.5 million
Other (primarily the change in the fair value of the MSR portfolio due to changes in values of market related inputs or assumptions used in a valuation model)	$	—	(4)
Net income before income taxes (3)	$	13.5 million

58

⁽¹⁾ Excludes reverse mortgages.

⁽²⁾ See definition of Core Earnings in the “Non-U.S. GAAP Financial Measures” section included in this annual report on Form 10-K.

⁽³⁾ Excludes operating and other expenses and income taxes incurred in the residential mortgage banking segment by ZFC Honeybee TRS, LLC, the parent company of GMFS.

⁽⁴⁾ Amount is less than $100,000

Highlights of the GMFS MSRs at December 31, 2015 are as follows:

MSR
Unpaid principal balance	$	4.2 billion
Fair market value	$	48.2 million
Percentage of unpaid principal balance serviced
Fannie Mae or Freddie Mac securitizations		64.3	%
Ginnie Mae securitizations		35.7	%
Weighted average gross coupon		3.9	%

Investment activity during the years ended, December 31, 2015, December 31, 2014 and December 31, 2013 and as of December 31, 2015 and December 31, 2014

Mortgage Loans Held for Investment, at fair value

The Company’s mortgage loans held for investment, at fair value consist of (i) loans which were distressed and re-performing and showed evidence of credit deterioration at the time of purchase and (ii) newly originated at the time of purchase:

Distressed and re-performing loans at the time of purchase

During the year ended December 31, 2015, the Company did not acquire any mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase.

During the years ended December 31, 2014 and December 31, 2013, the Company's acquisition of mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase was as follows:

	Year Ended
	December 31, 2014		December 31, 2013
	(dollars in thousands)
Aggregate Unpaid Principal Balance	$	100,422	$	412,865
Loan Repurchase Facilities Used		60,557		231,981

The Company did not sell any mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase in during the years ended December 31, 2015, December 31, 2014 or December 31, 2013.

The following table sets forth certain information regarding the Company’s mortgage loan portfolio held for investment at December 31, 2015 and December 31, 2014 which showed evidence of credit deterioration at the time of purchase:

December 31, 2015

								Gross Unrealized (1)							Difference Between Fair Value and Aggregate			Weighted Average
	Unpaid  Principal Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair  Value		Unpaid  Principal Balance			Coupon			Unleveraged Yield
	(dollars in thousands)
Mortgage Loans Held for Investment
Performing
Fixed	$	240,031	$	(44,651	)	$	195,380	$	23,627	$	(2,522	)	$	216,485	$	(23,546	)		4.70	%		7.59	%
ARM		143,626		(15,598	)		128,028		5,918		(3,127	)		130,819		(12,807	)		3.63			7.15
Total performing		383,657		(60,249	)		323,408		29,545		(5,649	)		347,304		(36,353	)		4.30			7.41
Non-performing (2)		40,101		(7,515	)		32,586		991		(4,246	)		29,331		(10,770	)		4.65			7.78
Total Mortgage Loans Held for Investment	$	423,758	$	(67,764	)	$	355,994	$	30,536	$	(9,895	)	$	376,635	$	(47,123	)		4.34	%		7.45	%

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December 31, 2014

								Gross Unrealized (1)							Difference Between Fair Value and Aggregate			Weighted Average
	Unpaid Principal Balance		Premium (Discount)			Amortized  Cost		Gains		Losses			Fair  Value		Unpaid Principal Balance			Coupon			Unleveraged Yield
	(dollars in thousands)
Mortgage Loans Held for Investment
Performing
Fixed	$	265,307	$	(51,501	)	$	213,806	$	26,732	$	(1,384	)	$	239,154	$	(26,153	)		4.50	%		7.28	%
ARM		162,858		(21,343	)		141,515		9,569		(1,441	)		149,643		(13,215	)		3.59			7.10
Total performing		428,165		(72,844	)		355,321		36,301		(2,825	)		388,797		(39,368	)		4.15			7.21
Non-performing (2)		35,945		(6,039	)		29,906		840		(4,370	)		26,376		(9,569	)		5.48			7.13
Total Mortgage Loans Held for Investment	$	464,110	$	(78,883	)	$	385,227	$	37,141	$	(7,195	)	$	415,173	$	(48,937	)		4.26	%		7.20	%

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded the following as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations:

Year Ended
December 31, 2015			December 31,  2014
(dollars in thousands)
$	(9,413	)	$	22,811

(2) Loans that are delinquent for 60 days or more are considered non-performing.

Newly originated loans at the time of purchase

During the years ended December 31, 2015 and December 31, 2014, the Company's acquisition of mortgage loans held for investment which were newly originated at the time of purchase and sourced through its loan purchase program was as follows:

	Year Ended
	December 31, 2015		December 31, 2014
	(dollars in thousands)
Aggregate Unpaid Principal Balance	$	21,336	$	767
Loan Repurchase Facilities Used		18,129		690

During the year ended December 31, 2013, the Company did not acquire any mortgage loans held for investment which were newly originated at the time of purchase. The Company did not sell any mortgage loans held for investment which were newly originated at the time of purchase during the years ended December 31, 2015, December 31, 2014 or December 31, 2013.

The following tables present certain information regarding the Company's mortgage loans held for investment at December 31, 2015 and December 31, 2014 which were newly originated at the time of purchase and sourced through its loan purchase program:

December 31, 2015

							Gross Unrealized (1)							Weighted Average
	Unpaid  Principal Balance		Premium		Amortized  Cost		Gains		Losses			Fair Value		Coupon			Unleveraged  Yield
	(dollars in thousands)
Performing
Fixed	$	17,674	$	316	$	17,990	$	58	$	(99	)	$	17,949		5.05	%		4.89	%
ARM		3,068		45		3,113		—		(18	)		3,095		4.37			4.25
Total - Mortgage Loans Held for Investment	$	20,742	$	361	$	21,103	$	58	$	(117	)	$	21,044		4.95	%		4.79	%

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December 31, 2014

							Gross Unrealized (1)						Weighted Average
	Unpaid Principal Balance		Premium (Discount)		Amortized Cost		Gains		Losses		Fair Value		Coupon			Unleveraged Yield
	(dollars in thousands)
Performing
Fixed	$	767	$	16	$	783	$	4	$	—	$	787		4.38	%		4.20	%
Total - Mortgage Loans Held for Investment	$	767	$	16	$	783	$	4	$	—	$	787		4.38	%		4.20	%

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded the following as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations:

Year Ended
December 31, 2015			December 31, 2014
(dollars in thousands)
$	(63	)	$	4

Mortgage Loans Held for Sale, at Fair Value

The Company’s mortgage loans held for sale, at fair value consists of loans originated by its residential mortgage banking platform.

For the years ended December 31, 2015 and December 31, 2014, the Company's mortgage loans held for sale activity was as follows:

	Year Ended
	December 31, 2015			December 31, 2014
	(dollars in thousands)
Balance at beginning of year	$	97,691		$	—
Acquisition of GMFS		—			92,512
Originations and repurchases		1,851,207			253,935
Proceeds from sales and principal payments		(1,893,834	)		(245,141	)
Transfers to mortgage loans held for investment, at cost, net		(444	)		—
Gain on sale		61,322			(3,615	)
Balance at end of year	$	115,942		$	97,691

The following table sets forth certain information regarding the Company’s mortgage loans held for sale at December 31, 2015 and December 31, 2014:

	December 31, 2015				December 31, 2014
	Unpaid Principal Balance		Fair Value		Unpaid Principal Balance		Fair Value
	(dollars in thousands)
Conventional	$	54,963	$	56,587	$	55,074	$	57,058
Governmental		30,531		32,131		13,408		14,602
United States Department of Agriculture loans		16,222		17,060		16,105		17,069
United States Department of Veteran Affairs loans		8,923		9,314		6,731		7,196
Reverse mortgages		754		850		1,600		1,766
Total – Mortgage loans held for sale	$	111,393	$	115,942	$	92,918	$	97,691

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RMBS and Other Investment Securities

The Company’s RMBS consist of RMBS that are not issued or guaranteed by a federally chartered corporation, such as Fannie Mae, Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae, with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations.

Other Investment Securities consist of FMRT Notes and FMSA Notes at December 31, 2015. Other Investment Securities at December 31, 2014 consist of FMSA Notes.

During the years ended December 31, 2015, December 31, 2014 and December 31, 2013, the principal balance of the Company’s purchases and sales of RMBS and Other Investment Securities were as follows:

	Year Ended
	December 31,  2015		December 31, 2014		December 31, 2013
	(dollars in thousands)
Purchases:
Agency	$	—	$	—	$	159,209
Non-Agency		7,428		63,015		375,435
Other Investment Securities		17,344		—		—
Sales:
Agency	$	—	$	—	$	215,516
Non-Agency		31,344		113,929		89,540
Other Investment Securities		6,193		—		—

During the year ended December 31, 2013, the Company acquired non-Agency RMBS with a principal balance of $17.4 million from a fund managed by ZAIS.

The following tables present certain information regarding the Company's non-Agency RMBS and Other Investment Securities at December 31, 2015 and December 31, 2014:

December 31, 2015

	Principal or							Gross Unrealized (2)							Weighted Average
	Notional Balance		Premium (Discount)			Amortized  Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
	(dollars in thousands)
Real estate securities
Non-Agency RMBS:
Alternative – A	$	76,328	$	(40,150	)	$	36,178	$	846	$	(1,026	)	$	35.998		2.01	%		6.18	%
Pay option adjustable rate		42,563		(7,481	)		35,082		7		(2,879	)		32,210		1.10			5.31
Prime		37,366		(4,733	)		32,633		564		(714	)		32,483		3.62			5.95
Subprime		12,668		(4,040	)		8,628		112		(91	)		8,649		0.93			6.63
Total non-Agency RMBS	$	168,925	$	(56,404	)	$	112,521	$	1,529	$	(4,710	)	$	109,340		2.05	%		5.87	%
Other Investment Securities (1)	$	13,399	$	(34	)	$	13,365	$	1	$	(562	)	$	12,804		4.94	%		6.65	%

December 31, 2014

	Principal or							Gross Unrealized (2)							Weighted Average
	Notional Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
			(dollars in thousands)
Real estate securities
Non-Agency RMBS:
Alternative – A	$	118,547	$	(58,583	)	$	59,964	$	1,917	$	(584	)	$	61,297		3.44	%		7.03	%
Pay option adjustable rate		58,123		(11,492	)		46,631		81		(1,171	)		45,541		0.93			6.12
Prime		43,804		(6,219	)		37,585		1,545		(65	)		39,065		3.60			6.79
Subprime		6,028		(3,291	)		2,737		—		(54	)		2,683		0.33			16.98
Total non-Agency RMBS	$	226,502	$	(79,585	)	$	146,917	$	3,543	$	(1,874	)	$	148,586		2.62	%		6.96	%
Other Investment Securities (1)	$	2,250	$	17		$	2,267	$	—	$	(226	)	$	2,041		3.92	%		5.90	%

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At December 31, 2015 and December 31, 2014, Alternative-A non-Agency RMBS includes an IO with a notional balance of $35.0 million and $48.6 million, respectively.

⁽¹⁾ See Note 2 – Summary of Significant Accounting Policies, “Other Investment Securities".

⁽²⁾ The Company has elected the fair value option pursuant to ASC 825 for real estate securities and Other Investment Securities. The Company recorded the changes in unrealized gain or loss in the consolidated statements of operations.

MSRs

The Company's MSRs consist of conforming conventional loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. Similarly, the government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against losses by the FHA or partially guaranteed against loss by the VA.

The activity of MSRs for the years ended December 31, 2015 and December 31, 2014 is as follows:

	Year Ended
	December 31, 2015			December 31, 2014
	(dollars in thousands)
Balance at beginning of year	$	33,378		$	—
Acquisition of MSRs in connection with purchase of GMFS		—			32,300
Additions due to loans sold, servicing retained		18,959			2,763
Change in fair value of MSRs (1)
Changes in values of market related inputs or assumptions used in a valuation model (2)		29			(1,421	)
Other changes (3)		(4,157	)		(263	)
Total - Change in fair value of MSRs		(4,128	)		(1,684	)
Balance at end of year	$	48,209		$	33,379

(1) Included in change in fair value of MSRs in the Company's consolidated statements of operations.

(2) Primarily reflects changes in values of prepayment assumptions due to changes in interest rates.

(3) Represents change in value primarily due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid off or paid down during the year.

The Company's MSR portfolio at December 31, 2015 and December 31, 2014 is as follows:

	December 31, 2015				December 31, 2014
	Unpaid Principal Balance		Fair Value		Unpaid Principal Balance		Fair Value
	(dollars in thousands)
Fannie Mae	$	1,880,178	$	20,752	$	1,640,799	$	17,078
Ginnie Mae		1,488,160		18,232		1,146,235		13,102
Freddie Mac		805,590		9,225		291,940		3,199
Total - MSRs	$	4,173,928	$	48,209	$	3,078,974	$	33,379

The following analysis focuses on the results generated during the years ended December 31, 2015 and December 31, 2014

Net Interest Income

The Company’s interest income is comprised of interest income generated from the Company’s mortgage loans held for investment, mortgage loans held for sale, non-Agency RMBS and Other Investment Securities. The Company’s interest expense is related to the Company’s warehouse lines of credit, the Loan Repurchase Facilities, securities repurchase agreements and the Exchangeable Senior Notes.

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 The Company’s net interest income for the years ended December 31, 2015 and December 31, 2014 was as follows:

	Year Ended
	December 31, 2015		December 31, 2014
	(dollars in thousands)
Interest income	$	37,803	$	41,593
Interest expense		18,850		17,260
Net interest income	$	18,953	$	24,333

The decrease in interest income was due to (i) a decrease in interest income of $0.2 million related to mortgage loans held for investment due to scheduled pay downs and payoffs and (ii) a decrease in interest income of $6.1 million related to RMBS; offset by an increase in interest income on mortgage loans held for sale of $2.6 million due to the acquisition of GMFS on October 31, 2014. The reduction in interest income from the RMBS portfolio is primarily due to the reallocation of capital to whole loans in 2014 consistent with the Company’s investment strategy and the sales of RMBS during the three months ended December 31, 2014 to fund the acquisition of GMFS.

The increase in interest expense was due to (i) an increase in interest expense of $2.0 million related to an increase in borrowings on the warehouse lines of credit and repurchase agreements used to finance the Company’s mortgage loans held for sale; (ii) an increase in interest expense of $0.5 million related to an increase in borrowings on the Company’s Loan Repurchase Facilities used to finance the Company’s residential mortgage loans held for investment; and (iii) an increase in interest expense of $0.1 million related to the issuance of the Exchangeable Senior Notes, offset by a decrease in interest expense of $1.1 million related to a decrease in borrowings on the securities repurchase agreements.

Net interest income is subject to interest rate risk. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of this annual report on Form 10-K, for more information relating to interest rate risk and its impact on the Company’s operating results.

The weighted average net interest spreads between the yield on the Company’s assets and the cost of funds, including the impact of interest rate hedging, for the Company’s mortgage loans held for investment, non-Agency RMBS and Other Investment Securities at December 31, 2015 and December 31, 2014 were as follows:

	December 31, 2015			December 31, 2014
Mortgage Loans Held for Investment		4.09	%		4.02	%
Non-Agency RMBS and Other Investment Securities		4.05	%		5.18	%

The Company’s net interest income is also impacted by prepayment speeds, as measured by the weighted average CPR on its assets. The three-month average and the six-month average CPR for the periods ended December 31, 2015 for the Company’s mortgage loans, non-Agency RMBS and Other Investment Securities were as follows:

	Three-Month Average			Six-Month Average
Mortgage loans held for investment		1.7	%		2.1	%
Non-Agency RMBS (1)		9.9	%		13.3	%
Other Investment Securities		10.1	%		11.2	%

(1) CPR includes both voluntary and involuntary amounts.

Non-interest income

The Company’s non-interest income relates to the Company’s residential mortgage banking segment. The primary components of the Company’s non-interest income are its mortgage banking activities net, loan servicing income, net of direct costs and change in fair value of MSRs. For the years ended December 31, 2015 and December 31, 2014 the Company’s non-interest income included the following:

	Year Ended
	December 31, 2015			December 31, 2014
	(dollars in thousands)
Gain on sale of mortgage loans held for sale, net of direct costs (1)	$	44,848		$	5,344
Loan expenses, including provision for loan indemnification		(762	)		(119	)
Loan origination fees		1,772			214
Total - mortgage banking activities, net	$	45,858		$	5,439

(1) Includes the change in fair value related to IRLCs and MBS forward sales contracts held during the year ended December 31, 2015.

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	Year Ended
	December 31, 2015			December 31, 2014
	(dollars in thousands)
Loan servicing fee income	$	10,641		$	1,413
Sub-servicing costs		(3,549	)		(483	)
Total loan servicing fee income, net of direct costs	$	7,092		$	930
Change in fair value of MSRs	$	(4,128	)		(1,684	)

Non-interest income for the year ended December 31, 2014 reflects the income recognized from October 31, 2014 (the date the Company acquired GMFS) to December 31, 2014.

Expenses

Advisory Fee Expense (Related Party). Pursuant to the terms of the Investment Advisory Agreement, the Company incurred advisory fee expense and loan sourcing fees of $3.0 million for the year ended December 31, 2015 and $2.9 million for the year ended December 31, 2014. The increase of $0.1 million is due to an increase in loan sourcing fees due to the increased activity during 2015.

Salaries, commissions and benefits. For the year ended December 31, 2015, the Company incurred salaries, commissions and benefits of $30.9, as compared to $3.8 million for the year ended December 31, 2014. These expenses are directly attributable to the mortgage banking operations of GMFS. The amount for 2014 reflects the expenses recognized from October 31, 2014 (the date the Company acquired GMFS) to December 31, 2014.

Operating Expenses

Professional Fees. For the year ended December 31, 2015, the Company incurred professional fees (primarily related to legal fees, audit fees and consulting fees) of $4.1 million as compared to $4.8 million for the year ended December 31, 2014. The decrease in professional fees was primarily due to legal and audit fees incurred for the GMFS transaction and legal fees incurred in conjunction with the launch of the loan conduit program in 2014.

General and Administrative Expense. For the year ended December 31, 2015, general and administrative expenses were $8.2 million as compared to $3.2 million for the year ended December 31, 2014. The increase in general and administrative expenses was primarily due to an increase of $4.0 million of GMFS expenses, an increase in research fees of $0.5 million; offset by a decrease in the contingent consideration liability of $0.1 million. The amounts relating to GMFS primarily relate to (i) rent and related occupancy expenses, (ii) marketing and advertising costs and (iii) other miscellaneous expenses. The expenses related to GMFS in 2014 reflect the expenses recognized from October 31, 2014 (the date the Company acquired GMFS) to December 31, 2014.

Other Expenses

Loan Servicing Fees. For the year ended December 31, 2015, loan servicing fees were $2.6 million, as compared to $2.2 million for the year ended December 31, 2014. The increase in loan servicing fees was due to a full year of servicing fees incurred in 2015 related to the acquisition of additional whole loans in March 2014 and increased servicing advances.

Transaction Costs. For the year ended December 31, 2015, transaction costs were $1.2 million as compared to $2.2 million for the year ended December 31, 2014. The decrease in transaction costs was largely attributable to due diligence costs and professional fees of $2.2 million related to the Company’s acquisition of GMFS incurred in 2014, which were partially offset by an increase in transaction costs in 2015 relating to the strategic alternatives being considered by the Company.

Amortization Expense. For the year ended December 31, 2015, amortization expense was $0.8 million as compared to $0.1 million for the year ended December 31, 2014. The increase is due to the amortization of the other intangible assets relating to the Company’s acquisition of GMFS on October 31, 2014.

Realized and Change in Unrealized Gain or Loss

The following amounts related to realized gains and losses, as well as changes in the estimated fair value of the Company’s investment portfolio, which consists of mortgage loans, RMBS, Other Investment Securities, real estate owned and derivative instruments, are included in the Company’s consolidated statements of operations.

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	Year Ended
	December 31,			December 31,
	2015			2014
	(dollars in thousands)
Change in unrealized gain or loss on mortgage loans held for investment	$	(9,369	)	$	22,814
Change in unrealized gain or loss on real estate securities		(4,851	)		(2,994	)
Change in unrealized gain or loss on Other Investment Securities		(334	)		(226	)
Change in unrealized gain or loss on real estate owned		(435	)		(504	)
Realized gain on mortgage loans held for investment		1,479			1,839
Realized gain on real estate securities		19			3,694
Realized (loss)/gain on Other Investment Securities		(155	)		227
Realized (loss)/gain on real estate owned		(160	)		2
Loss on derivative instruments related to investment portfolio		(172	)		(5,921	)
Total other (losses)/gains	$	(13,978	)	$	18,931

There was no other than temporary impairment (“OTTI”) for RMBS for the years ended December 31, 2015 or December 31, 2014.

The Company’s interest rate swap agreements and interest rate swaption agreement have not been designated as hedging instruments.

The Company recorded in earnings as loss on derivative instruments the change in fair value related to (i) an interest rate swaption agreement held during the year ended December 31, 2014 (ii) interest rate swap agreements held during the years ended December 31, 2015 and December 31, 2014 (iii) LPCs held during the years ended December 31, 2015 and December 31, 2014 and (iv) the conversion option related to the Exchangeable Senior Notes held during the years ended December 31, 2015 and December 31, 2014. The loss on derivative instruments also includes the net interest rate swap payments for the derivative instruments.

The Company has elected to record the change in fair value related to certain mortgage loans held for investment, mortgage loans held for sale, RMBS, Other Investment Securities and MSRs in earnings by electing the fair value option.

Dividends

During 2015, the Company declared the following dividends:

Declaration Date	Record Date	Payment Date	Amount per Share and OP Unit
March 19, 2015	March 31, 2015	April 15, 2015	$	0.40
June 18, 2015	June 30, 2015	July 15, 2015	$	0.40
September 17, 2015	September 30, 2015	October 15, 2015	$	0.40
December 17, 2015	December 31, 2015	January 15, 2016	$	0.40

The following analysis focuses on the results generated during the years ended December 31, 2014 and December 31, 2013

Net Interest Income

The Company’s interest income is comprised of interest income generated from the Company’s mortgage loans held for investment, mortgage loans held for sale, non-Agency RMBS and Other Investment Securities. The Company’s interest expense is related to the Company’s warehouse lines of credit, the Loan Repurchase Facilities, securities repurchase agreements and the Exchangeable Senior Notes.

The Company’s net interest income for the years ended December 31, 2014 and December 31, 2013 was as follows:

	Year Ended
	December 31, 2014		December 31, 2013
	(dollars in thousands)
Interest income	$	41,593	$	26,418
Interest expense		17,260		7,094
Net interest income	$	24,333	$	19,324

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The increase in interest income was due to having a fully levered portfolio primarily allocated to residential mortgage loans during the year ended December 31, 2014, compared to the first half of the prior year when the Company had more of its equity allocated to RMBS. The purchase of whole loans into the portfolio resulted in a $16.3 million increase in interest income in the year ended December 31, 2014, compared to the prior year. This increase was partially offset by a reduction in interest income from the RMBS portfolio of $1.1 million primarily due to the reallocation of capital to whole loans consistent with the Company’s investment strategy and the sales of RMBS during the three months ended December 31, 2014 to fund the acquisition of GMFS.

The increase in interest expense was due to (i) an increase in interest expense of $0.1 million related to an increase in borrowings on the warehouse lines of credit and repurchase agreements used to finance the Company’s mortgage loans held for sale; (ii) an increase in interest expense of $5.3 million related to an increase in borrowings on the Company’s Loan Repurchase Facilities used to finance the Company’s residential mortgage loans held for investment; and (iii) an increase in interest expense of $5.1 million related to the issuance of the Exchangeable Senior Notes, offset by a decrease in interest expense of $0.4 million related to a decrease in borrowings on the securities repurchase agreements.

Net interest income is subject to interest rate risk. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of this annual report on Form 10-K, for more information relating to interest rate risk and its impact on the Company’s operating results.

The weighted average net interest spreads between the yield on the Company’s assets and the cost of funds, including the impact of interest rate hedging, for the Company’s mortgage loans held for investment, non-Agency RMBS and Other Investment Securities at December 31, 2014 and December 31, 2013 were as follows:

	December 31, 2014			December 31, 2013
Mortgage loans Held for Investment		4.02	%		3.91	%
Non-Agency RMBS and Other Investment Securities		5.18	%		4.61	%

The Company’s net interest income is also impacted by prepayment speeds, as measured by the weighted average CPR on its assets. The three-month average and the six-month average CPR for the periods ended December 31, 2014 for the Company’s mortgage loans, non-Agency RMBS and Other Investment Securities were as follows:

	Three-Month Average			Six-Month Average
Mortgage loans held for investment		10.30	%		6.85	%
Non-Agency RMBS (1)		13.23	%		12.97	%
Other Investment Securities		9.69	%		—

(1) CPR includes both voluntary and involuntary amounts.

Non-interest income

The Company’s non-interest income relates to the Company’s residential mortgage banking segment. The primary components of the Company’s non-interest income are its mortgage banking activities, loan servicing income, net of direct costs and change in fair value of MSR. For the year ended December 31, 2014 the Company’s non-interest income included the following:

	(dollars in thousands)
Gain on sale of mortgage loans held for sale, net of direct costs (1)	$	5,344
Loan expenses, including provision for loan indemnification		(119	)
Loan origination fees		214
Total - mortgage banking activities, net	$	5,439

(1) Includes the change in fair value related to IRLCs and MBS forward sales contracts held during the year ended December 31, 2014.

	(dollars in thousands)
Loan servicing fee income	$	1,413
Sub-servicing cost		(483	)
Total loan servicing fee income, net of direct costs	$	930
Change in fair value of MSRs	$	(1,684	)

Non-interest income for the year ended December 31, 2014 reflects the income recognized from October 31, 2014 (the date the Company acquired GMFS) to December 31, 2014. The Company did not have any noninterest income during the year ended December 31, 2013.

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Expenses

Advisory Fee Expense (Related Party). Pursuant to the terms of the Investment Advisory Agreement, the Company incurred advisory fee expense of $2.9 million for the year ended December 31, 2014, as compared to $2.6 million for the year ended December 31, 2013. The increase in advisory fee expense was due to an increase in stockholders’ equity resulting from the Company’s February 2013 IPO.

Salaries, commissions and benefits. For the year ended December 31, 2014, salaries, commissions and benefits were $3.8 million and were directly attributable to the mortgage banking operations of GMFS. The Company did not incur salaries, commissions and benefits expense for the year ended December 31, 2013. The amount for 2014 reflects the expenses recognized from October 31, 2014 (the date the Company acquired GMFS) to December 31, 2014.

Operating Expenses

Professional Fees . For the year ended December 31, 2014, the Company incurred professional fees (primarily related to legal fees, audit fees and consulting fees) of $4.8 million as compared to $3.5 million for the year ended December 31, 2013. The increase in professional fees was primarily due to legal and audit fees incurred for the GMFS transaction and legal fees incurred in conjunction with the launch of the loan conduit program.

General and Administrative Expenses . For the year ended December 31, 2014, general and administrative expenses were $3.2 million as compared to $2.0 million for the year ended December 31, 2013. The increase in general and administrative expenses was primarily due to $0.8 million of GMFS expenses and an increase in research fees and insurance costs, partially offset by a decrease in public company expenses. The amounts relating to GMFS for 2014 reflects the expenses recognized from October 31, 2014 (the date the Company acquired GMFS) to December 31, 2014.

Other Expenses

Loan Servicing Fees. For the year ended December 31, 2014, loan servicing fees were $2.2 million, as compared to $0.9 million for the year ended December 31, 2013. The increase in loan servicing fees was due to the acquisition of additional whole loans and increased servicing advances.

Transaction Costs. For the year ended December 31, 2014, transaction costs were 2.2 million as compared to $0.6 million for the year ended December 31, 2013. The increase in transaction costs was largely attributable to due diligence costs and professional fees of $2.2 million related to the Company’s acquisition of GMFS, which were partially offset by a decrease in whole loan transaction costs.

Realized and Change in Unrealized Gain or Loss

The following amounts related to realized gains and losses, as well as changes in estimated fair value of the Company’s investment portfolio which consists of mortgage loans, RMBS, Other Investment Securities, real estate owned and derivative instruments are included in the Company’s consolidated statements of operations.

	Year Ended
	December 31,			December 31,
	2014			2013
	(dollars in thousands)
Change in unrealized gain or loss on mortgage loans held for investment	$	22,814		$	7,136
Change in unrealized gain or loss on real estate securities		(2,994	)		(7,171	)
Change in unrealized gain or loss on Other Investment Securities		(226	)		—
Change in unrealized gain or loss on real estate owned		(504	)		—
Realized gain on mortgage loans held for investment		1,839			1,299
Realized gain/(loss) on real estate securities		3,694			(9,046	)
Realized gain on Other Investment Securities		227			—
Realized gain on real estate owned		2			—
(Loss)/gain on derivative instruments related to investment portfolio		(5,921	)		5,615
Total other gains/(losses)	$	18,931		$	(2,167	)

There was no other than temporary impairment (“OTTI”) for RMBS for the year ended December 31, 2014. Realized gain on real estate securities includes realized losses relating to OTTI of $1.1 million for the year ended December 31, 2013.

The Company’s interest rate swap agreements and interest rate swaption agreement have not been designated as hedging instruments.

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The Company recorded the change in fair value related to (i) an interest rate swaption agreement held during the year ended December 31, 2014, (ii) interest rate swap agreements held during the years ended December 31, 2014 and December 31, 2013, (iii) TBAs held during the year ended December 31, 2013 and (iv) LPCs held during the year ended December 31, 2014 in earnings as (loss)/gain on derivative instruments. Included in (loss)/gain on derivative instruments are the net interest rate swap payments and net TBA payments for the derivative instruments.

The Company has elected to record the change in fair value related to certain mortgage loans held for investment, mortgage loans held for sale, RMBS, Other Investment Securities and MSRs in earnings by electing the fair value option.

Dividends

During 2014, the Company declared the following dividends:

Declaration Date	Record Date	Payment Date	Amount per Share and OP Unit
March 19, 2014	March 31, 2014	April 14, 2014	$	0.40
June 17, 2014	June 30, 2014	July 15, 2014	$	0.40
September 17, 2014	September 30, 2014	October 15, 2014	$	0.40
December 18, 2014	December 31, 2014	January 15, 2015	$	0.40

Critical Accounting Policies and Use of Estimates

See “Notes to Consolidated Financial Statements, Note 2 – Summary of Significant Accounting Policies” included in Item 8, “Financial Statements and Supplementary Data,” in this annual report on Form 10-K for the Company’s Critical Accounting Policies and Use of Estimates.

Liquidity and Capital Resources

Liquidity is a measure of the Company's ability to turn non-cash assets into cash and to meet potential cash requirements. The Company uses significant cash to purchase assets, pay dividends, repay principal and interest on its borrowings, fund its operations and meet other general business needs. The Company's primary sources of liquidity are its existing cash balances, borrowings under warehouse lines of credit and repurchase agreements related to the GMFS mortgage banking platform, the Loan Repurchase Facilities, securities repurchase agreements, the net proceeds from offerings of equity and debt securities, notes issued by the Operating Partnership, net cash provided by operating activities, additional private funding sources, including other borrowings structured as repurchase agreements, term financings and derivative agreements, and future issuances of common equity, preferred equity, convertible securities, exchangeable notes, trust preferred and/or debt securities.

The borrowings the Company used to fund the purchase of its mortgage loans held for investment and RMBS totaled $426.6 million, at December 31, 2015 under the Loan Repurchase Facilities, master securities repurchase agreements with four counterparties and the Exchangeable Senior Notes. Additionally, the borrowings GMFS used to fund its origination platform totaled $100.8 million at December 31, 2015 under its warehouse lines of credit and repurchase agreements with four lenders.

Loan Repurchase Facilities and Securities Repurchase Facilities

At December 31, 2015, the Company had a total of $394.9 million in fair value of trust certificates representing interests in residential mortgage loans (the "Trust Certificates") pledged against its borrowings under the Loan Repurchase Facilities, $95.6 million in fair value of RMBS and $2.0 million of Other Investment Securities pledged against its securities repurchase agreement borrowings, and GMFS had $116.0 million in fair value of mortgage loans held for sale pledged against its repurchase agreement borrowings and warehouse lines of credit.

Under the repurchase agreements, the Company may be required to pledge additional assets to its counterparties (lenders) in the event that the fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral, which may take the form of additional assets or cash. Generally, the Company's repurchase agreements contain a LIBOR-based financing rate, term and haircuts depending on the types of collateral and the counterparties involved. Further, at December 31, 2015, the range of haircut provisions associated with the Company's repurchase agreements was between 10% and 28% for pledged Trust Certificates, 15% and 35% for pledged non-Agency RMBS, and 0% and 5% for pledged mortgage loans held for sale. The haircut provision associated with the Company’s repurchase agreements for Other Investment Securities was 30%.

The Loan Repurchase Facilities contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth and maximum debt to net worth ratio, as defined in the agreements. Additionally, the repurchase agreements used to finance the Company’s mortgages held for sale contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants as of and for the years ended December 31, 2015 and December 31, 2014.

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If the fair value of the assets increases due to changes in market interest rates or market factors, lenders may release collateral back to the Company. Specifically, margin calls may result from a decline in the value of the investments securing the Company's repurchase agreements, prepayments on the mortgages securing such investments and from changes in the fair value of such investments generally due to principal reduction of such investments from scheduled amortization and resulting from changes in market interest rates and other market factors. Counterparties also may choose to increase haircuts based on credit evaluations of the Company and/or the performance of the assets in question. Historically disruptions in the financial and credit markets have resulted in increased volatility in these levels, and this volatility could persist as market conditions continue to change rapidly. Should prepayment speeds on the mortgages underlying the Company's investments or market interest rates suddenly increase, margin calls on the Company's repurchase agreements could result, causing an adverse change in its liquidity position. To date, the Company has satisfied all of its margin calls and has never sold assets in response to any margin call under these borrowings.

The Loan Repurchase Facilities are used to fund purchases of the Company's mortgage loans held for investment. The Citi Loan Repurchase Facility closed on May 30, 2013 with a borrowing capacity of $250.0 million, of which $150.0 million was committed for a period of 364 days from inception. On March 27, 2014, the Company entered into an amendment of the Citi Loan Repurchase Facility providing it with an additional $75.0 million of uncommitted borrowing capacity. On May 22, 2015 the Company entered into an amendment with Citi extending the termination date of the facility to May 20, 2016. The obligations are fully guaranteed by the Company. The Company is required to pay Citi a commitment fee, as well as certain other administrative costs and expenses in connection with Citi's structuring, management and ongoing administration of the Citi Loan Repurchase Facility.

On August 14, 2014, the Company entered into the Credit Suisse Loan Repurchase Facility, pursuant to which the Company may sell, and later repurchase, a trust certificate representing ownership interests in a trust holding residential mortgage loans in aggregate principal amount of up to $100 million, all of which was committed. The Credit Suisse Loan Repurchase Facility was committed for a period of 364 days from inception and the obligations are fully guaranteed by the Company. On June 29, 2015, the Company entered into an amendment with Credit Suisse to reduce the committed amount to $25.0 million and extend the maturity date to June 27, 2016. The Company is required to pay Credit Suisse a commitment fee, as well as certain other administrative costs and expenses in connection with Credit Suisse's structuring, management and ongoing administration of the Credit Suisse Loan Repurchase Facility.

The Company's borrowings under repurchase agreements are renewable at the discretion of its lenders and, as such, the Company's ability to roll-over such borrowings is not guaranteed. The terms of the repurchase transaction borrowings under the Company's repurchase agreements generally conform to the terms in the standard master repurchase agreement as published by SIFMA, as to repayment, margin requirements and the segregation of all assets the Company has initially sold under the repurchase transaction. In addition, each lender typically requires that the Company include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts and purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction, and cross default and setoff provisions.

Loan Repurchase Facilities

The following tables present certain information regarding the Loan Repurchase Facilities in the Company’s residential mortgage investments segment at December 31, 2015 and December 31, 2014:

	December 31, 2015		December 31, 2014
	(dollars in thousands)
Total facility size	$	425,000	$	425,000
Counterparties		2		2

	December 31, 2015					December 31, 2014
	(dollars in thousands)
	Balance		Weighted Average Rate			Balance		Weighted  Average Rate
Maturity
91-180 days	$	296,789		3.14	%	$	299,402		2.92	%
181 days to 1 year		—		—			690		2.46	%
Total balance and weighted average rate	$	296,789		3.14	%	$	300,092		2.92	%

The Loan Repurchase Facilities are secured by a portion of the Company’s mortgage loan portfolio and bear interest at a rate that has historically moved in close relationship to LIBOR.

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Securities Repurchase Agreements

The following tables present certain information regarding the Company’s securities repurchase agreements in its residential mortgage investments segment at December 31, 2015 and December 31, 2014:

	December 31,  2015		December 31,  2014
Repurchase agreements		31		32
Counterparties		4		4

	December 31, 2015
	Non-Agency RMBS					Other Investment  Securities
	Balance		Weighted Average Rate			Balance		Weighted Average Rate
	(dollars in thousands)
Maturity
30 days or less	$	71,911		1.80	%	$	1,389		2.17	%
Total balance/weighted average rate	$	71,911		1.80	%	$	1,389		2.17	%

	December 31, 2014
	Non-Agency RMBS					Other Investment  Securities
	Balance		Weighted Average Rate			Balance		Weighted Average Rate
	(dollars in thousands)
Maturity
30 days or less	$	101,553		1.57	%	$	1,461		1.66	%
Total balance/weighted average rate	$	101,553		1.57	%	$	1,461		1.66	%

The securities repurchase agreements are secured by cash collateral and a portion of the Company’s RMBS and Other Investment Securities and bear interest at rates that have historically moved in close relationship to LIBOR.

Warehouse Lines of Credit

The borrowings GMFS used to fund its origination platform totaled $100.8 million at December 31, 2015, which includes borrowings under repurchase agreements with two lenders totaling $42.7 million. GMFS has a master repurchase agreement in aggregate principal amount of up to $65.0 million, of which the entire $65.0 million is committed, expiring on November 25, 2016. GMFS also has a master repurchase agreement in aggregate principal amount of up to $20.0 million, of which the entire $20.0 million is committed, expiring on June 30, 2016.

In addition to the repurchase agreements described above, GMFS funds its origination platform through warehouse lines of credit with two counterparties with total borrowings outstanding of $58.1 million at December 31, 2015. GMFS has a $60.0 million committed warehouse line of credit agreement expiring on September 26, 2016 and a $40.0 committed warehouse line of credit expiring on August 13, 2016. The lines are collateralized by the underlying mortgages and related documents and instruments and contain a LIBOR-based financing rate and term, haircut and collateral posting provisions which depend on the types of collateral and the counterparties involved. These agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants for the years ended December 31, 2015 and at December 31, 2014.

The following tables present certain information regarding the Company's warehouse lines of credit and repurchase agreements in its residential mortgage banking segment at December 31, 2015 and December 31, 2014:

	December 31, 2015		December 31, 2014
	(dollars in thousands)
Availability	$	185,000	$	130,000
Counterparties		4		4

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	December 31, 2015					December 31, 2014
	Balance		Weighted Average Rate			Balance		Weighted Average Rate
Maturity	(dollars in thousands)
30 days or less	$	—		—	%	$	21,210		2.47	%
31 – 90 days		—		—			—		—
181 days to 1 year		100,768		2.72			57,119		2.46
Greater than 1 year		—		—			11,089		2.92
Total balance and weighted average rate	$	100,768		2.72	%	$	89,418		2.52	%

The warehouse lines of credit and repurchase agreements are secured by the Company’s mortgage loans held for sale and bear interest at a rate that has historically moved in close relationship to LIBOR.

Exchangeable Senior Notes

 On November 25, 2013, the Operating Partnership issued the Exchangeable Senior Notes, which may be exchanged for shares of the Company's common stock or, to the extent necessary to satisfy NYSE listing requirements, cash, at the applicable exchange rate at any time prior to the close of business on the scheduled trading day prior to November 15, 2016 (the “Maturity Date”). The Company may not elect to issue shares of common stock upon exchange of the Exchangeable Senior Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the Exchangeable Senior Notes (or 1,779,560 or more shares). The initial exchange rate for each $1,000 aggregate principal amount of the Exchangeable Senior Notes was 52.5417 shares of common stock, equivalent to an exchange price of approximately $19.03 per share, representing an approximate 15% premium to the last reported sale price of the common stock on November 19, 2013 (the date of the initial sale of the Exchangeable Senior Notes), which was $16.55 per share. The exchange rate will be subject to adjustment for certain events, including for regular quarterly dividends in excess of $0.50 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the exchange rate will be increased but will in no event exceed 60.4229 shares of common stock per $1,000 principal amount of the Exchangeable Senior Notes due in 2016. The exchange rate was adjusted on December 27, 2013 to 54.3103 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes pursuant to the Company's special dividend of $0.55 per common share and OP Unit declared on December 19, 2013. Pursuant to a registration rights agreement, the Company agreed to file with the SEC within 120 days from the issue date, and to use its commercially reasonable efforts to cause to become effective within 180 days, a shelf registration statement with respect to the resales of the Company's common stock that may be issued upon exchange of the Exchangeable Senior Notes. The Company filed this shelf registration statement with the SEC on March 14, 2014, and the SEC declared it effective on May 23, 2014. If the Company fails to comply with certain of its obligations under the registration rights agreement, the Company will be required to pay liquidated damages to holders of the Exchangeable Senior Notes. The Company will increase the exchange rate by 3% for holders that exchange the Exchangeable Senior Notes when a registration default exists with respect to shares of the Company's common stock.

 At December 31, 2015 and December 31, 2014, the Company had Exchangeable Senior Notes outstanding totaling $57.5 million of aggregate principal balance which matures on the Maturity Date. The Exchangeable Senior Notes bear interest at a rate of 8.0% per year payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2014. The effective interest rate of the Exchangeable Senior Notes, which is equal to the stated rate of 8.0% plus the amortization of the original issue discount and associated costs, is 10.2%.

The Exchangeable Senior Notes will mature on the Maturity Date, unless previously exchanged or repurchased in accordance with their terms. If the Company undergoes certain corporate events, that constitute a "fundamental change," the holders of the Exchangeable Senior Notes may require the Company to repurchase for cash all or part of their Exchangeable Senior Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company is currently evaluating alternatives to settle the obligation at maturity in light of the pending strategic review.

For additional information related to the Exchangeable Senior Notes, see "Notes to Consolidated Financial Statements—8.0% Exchangeable Senior Notes due 2016."

Derivative Instruments

Residential Mortgage Investments Segment

At December 31, 2015 and December 31, 2014, the Company had outstanding interest rate swap agreements designed to mitigate the effects of increases in interest rates under a portion of its repurchase agreements. These interest rate swap agreements provide for the Company to pay fixed interest rates and receive floating interest rates indexed to LIBOR. The swap agreements effectively fixed the floating interest rates on a portion of the borrowings under the Company’s repurchase agreements. At December 31, 2014, the Company also had an interest rate swaption agreement outstanding which gave the Company the right, but not the obligation, to enter into a previously agreed upon interest rate swap contract on a future date which would obligate the Company to pay a fixed rate of interest and receive a floating rate of interest. The swaption matured in January 2015.

The following table presents information about the Company’s interest rate swaption agreement at December 31, 2014:

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Swaption Expiration	Notional Amount		Strike Rate			Swap Maturity
	(dollars in thousands)
2015	$	225,000		3.64	%		2025

The following table presents information about the Company's interest rate swap agreements at December 31, 2015 and December 31, 2014:

	December 31, 2015			December 31, 2014
	(dollars in thousands)
Maturity	2023			2023
Notional Amount	$	17,200		$	17,200
Weighted Average Pay Rate		2.72	%		2.72	%
Weighted Average Receive Rate		0.33	%		0.23	%
Weighted Average Years to Maturity		7.6			8.6

At December 31, 2015 and December 31, 2014, the Company also had outstanding loan purchase commitments (“LPCs”), interest rate lock commitments (“IRLCs”) and MBS forward sales contracts.

The Company enters into LPCs as a means to avoid interest rate risk. The LPCs are pursuant to Master Loan Purchase Agreements with approved, third party residential loan originators to purchase residential loans, which meet the guidelines established by the Company, at a future date. These “best efforts” contracts provide that the loan be delivered if and when it closes and are subject to “pair off” fees if the loan is not delivered by the seller.

The Company had no exposure to TBA contracts at any time during the years ended December 31, 2015 and December 31, 2014. At December 31, 2015 and December 31, 2014 the Company did not have any TBA contracts outstanding.

Residential Mortgage Banking Segment

The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria.

The Company manages the interest rate price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as MBS forward sales contracts. The Company expects these derivatives will experience changes in fair value opposite to changes in the fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the IRLCs and mortgage loans held for sale it wants to economically hedge.

The following table summarizes information related to the Company’s LPCs, IRLCs and MBS forward sales contracts at December 31, 2015 and December 31, 2014:

Non-hedge derivatives	December 31, 2015		December 31, 2014
	(dollar amounts in thousands)
LPCs (Principal balance of underlying loans)	$	18,494	$	1,905
IRLCs (Principal balance of underlying loans)	$	190,933	$	118,486
Notional amount of MBS forward sales contracts	$	179,417	$	154,000

The notional amount is not representative of the maximum exposure to the Company.

See “Note to Consolidated Financial Statements, Note 24 – Offsetting Assets and Liabilities” included in Item 8, “Financial Statements and Supplementary Data” in this annual report on Form 10-K for discussion about the Company’s master netting arrangements.

Leverage Ratio

At December 31, 2015, the Company had a leverage ratio of 2.97x. The leverage ratio is the ratio of the warehouse lines of credit, Loan Repurchase Facilities, securities repurchase agreements and Exchangeable Senior Notes (including the conversion option which is part of the notes) to the Company’s stockholders equity.

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Restricted Cash

The Company maintains certain assets, which, from time to time, may include cash, unpledged mortgage loans, non-Agency RMBS and Other Investment Securities (which may be subject to various haircuts if pledged as collateral to meet margin requirements) and collateral in excess of margin requirements held by the Company's counterparties (collectively, the "Cushion") to meet routine margin calls and protect against unforeseen reductions in the Company's borrowing capabilities. The Company's ability to meet future margin calls will be impacted by the Cushion, which varies based on the fair value of its assets, its cash position and margin requirements. The Company's cash position fluctuates based on the timing of its operating, investing and financing activities and is managed based on the Company's anticipated cash needs. At December 31, 2015, the Company had a Cushion of $25.0 million in addition to certain reserves held with respect to the Loan Repurchase Facilities. The Company's calculation of its Cushion excludes GMFS's warehouse lines of credit and repurchase agreements.

At December 31, 2015, the Company had a total of $4.4 million of restricted cash pledged against its interest rate swaps and repurchase agreements related to its mortgage loans held for investment and RMBS portfolios.

The Company believes these identified sources of liquidity will be adequate for purposes of meeting its short-term (within one year) liquidity and long-term liquidity needs. However, the Company's ability to meet its long-term liquidity and capital resource requirements may require additional financing.

The Company's short-term and long-term liquidity needs include funding future investments and operating costs. In addition, to qualify as a REIT, the Company must distribute annually at least 90% of its net taxable income, excluding net capital gains. These distribution requirements limit the Company's ability to retain earnings and thereby replenish or increase capital for operations.

GMFS Transaction

Pursuant to the GMFS Merger Agreement the Company merged with and into GMFS, with GMFS surviving the merger as an indirect subsidiary of the Company (see Item 1, “Business,” of this annual report on Form 10-K). The transaction closed on October 31, 2014. The final purchase price was approximately $61.2 million which was comprised of (i) the fair market value of GMFS's MSR portfolio, (ii) the fair market value of GMFS's net tangible assets and (iii) a purchase price premium. In addition to cash paid at closing, the total consideration included two contingent $1 million deferred premium payments payable in cash over two years, plus the Production and Profitability Earn-Out. The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out is dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The estimated present value of the total contingent consideration at October 31, 2014 and December 31, 2015 was $11.4 million and $11.3 million, respectively, based on the future production and earnings projections of GMFS over the four-year earn-out period. The Company funded the closing cash payment through a combination of available cash and the liquidation of a portion of its non-Agency RMBS portfolio.

As disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2014 and the Company’s quarterly reports on Form 10-Q filed in 2015, GMFS had executed a statute of limitations tolling agreement with at least one counterparty with respect to mortgage loans that were sold by GMFS to this counterparty’s predecessor. This tolling agreement extends the time period which this counterparty could bring claim against GMFS.

The initial tolling agreement was executed by GMFS on December 12, 2013 and then further amended to extend the expiration date. Based on communications received in April 2015 from this counterparty, the Company believes that when this tolling agreement expires, absent further extension of the tolling agreement or settlement of the counterparty's claims, it is probable that the counterparty will initiate litigation against GMFS seeking substantial damages based on alleged breaches of representations and warranties made by GMFS. The most recent amendment of the tolling agreement extended the expiration date to June 2, 2016 and can be further extended by agreement of the parties. The Company also understands that this counterparty has commenced or threatened litigation arising out of historical mortgage loan purchases by its predecessor against a number of other mortgage loan originators. The Company estimates that dating back to a period that began approximately 16 years ago in 1999 and ended in 2006, approximately $1 billion of mortgage loans were sold servicing released by GMFS to the predecessor to this counterparty. While the historical claims experience of GMFS with respect to purchasers of mortgage loans from GMFS over the 1999 to 2006 period has not resulted in material damages claimed against or paid by GMFS, as further disclosed in the Company's Form 10-K for the year ended December 31, 2014 and the Company's quarterly reports on Form 10-Q filed in 2015, claims brought by this counterparty could expose GMFS to substantial damages that may be material, cause the Company and GMFS to devote significant management time and attention and other resources to resolving or defending these claims, require GMFS, the Company or its other subsidiaries to incur significant costs, or cause significant losses that may be material.

Although the Company has established a loan indemnification reserve for potential losses related to loan sale representations and warranties with a corresponding provision recorded for loan losses due to the early stage of this matter and the limited information available the Company is not able to determine the likelihood of the outcome. The Company believes that losses in excess of the loan indemnification reserve will be recovered by the Company as either a reduction of the total contingent consideration owed under the GMFS Merger Agreement given the indemnification provisions in the GMFS Merger Agreement or by withdrawing funds from an escrow account established by the sellers at the time of the acquisition (as of December 31, 2015, the balance in the escrow account was $4,004,424). Additionally, the Company has delayed the first year installment payment of the contingent consideration. Losses in excess of the loan indemnification reserve, total contingent consideration and the escrow account could have a material adverse impact on the Company's results of operations, financial position or cash flows. In the event of litigation or settlement with the counterparty, the Company intends to pursue claims against the sellers of GMFS seeking indemnification for any losses or any amounts paid in settlement, although there can be no assurance that such claims would be successful or that any amounts available for indemnification would be adequate.

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Dividends

The Company's current policy is to pay quarterly distributions which will allow it to qualify as a REIT and generally not be subject to U.S. federal income tax on its undistributed income. Taxable and U.S. GAAP earnings will typically differ due to differences in premium amortization and discount accretion, certain non-taxable unrealized and realized gains and losses, and non-deductible general and administrative expenses.

In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit program and will begin the unwinding of the Company’s mortgage conduit business. If completed, these transactions are likely to result in a reduction of the Company’s investment income and may therefore result in a decision to curtail dividends in the future.

Cash (Used In) Provided by Operating Activities

The Company’s cash flows (used in) provided by operating activities for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 were as follows:

Year Ended
December 31,  2015			December 31,  2014			December 31,  2013
(dollars in thousands)
$	(23,081	)	$	(4,690	)	$	8,131

The cash flows (used in)/provided by operating activities for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 are primarily a result of income earned on the Company’s assets, partially offset by interest expense on the Company’s borrowings and operating expenses. Additionally, as a result of the acquisition of GMFS, cash flows from operating activities for the years ended December 31, 2015 and December 31, 2014 are also impacted by the origination of mortgage loans held for sale and an increase in MSRs offset by non-interest income and proceeds from the sale of these mortgage loans.

Cash Provided By (Used in) Investing Activities

The cash flows provided by/(used in) the Company's investing activities for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 are as follows:

	Year Ended
	December 31,  2015			December 31, 2014			December 31, 2013
	(dollars in thousands)
Cash paid for the acquisition of GMFS, net of cash acquired	$	—		$	(49,543	)	$	—
Origination of mortgage loans held for investment		(6,201	)		—			—
Acquisitions of mortgage loans held for investment		(16,353	)		(85,579	)		(334,162	)
Proceeds from sales and principal repayments on mortgage loans held for investment		36,798			31,519			13,871
Acquisitions of real estate securities, net of changes in payable for real estate securities purchased		(6,362	)		(47,034	)		(406,264	)
Proceeds from principal repayments on real estate securities		17,888			28,198			46,753
Proceeds from sales of real estate securities, net of changes in receivable for real estate securities sold		26,771			102,635			291,349
Acquisitions of other investment securities		(17,031	)		(12,927	)		—
Proceeds from principal repayments on Other Investment Securities		10			—			—
Proceeds from sales of Other Investment Securities		5,962			11,067			—
Purchase of swaption		—			(4,804	)		—
Proceeds received for the final reconciliation of purchase price relating to the acquisition of GMFS		1,684			—			—
Restricted cash provided by/(used in) investment activities		2,771			(5,015	)		1,640
Net cash provided by/(used in) investing activities	$	45,937		$	(31,483	)	$	(386,813	)

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Cash Provided by Financing Activities

The cash flows (used in)/ provided by the Company's financing activities for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 are as follows:

	Year Ended
	December 31,  2015			December 31, 2014			December 31, 2013
	(dollars in thousands)
Proceeds from issuance of common stock, net	$	—		$	—		$	118,863
Payment of common stock repurchase liability		—			—			(5,751	)
Net borrowings under warehouse lines of credit		11,351			3,577			—
Net (repayments)/borrowings under loan repurchase facilities		(3,303	)		64,033			236,059
Borrowings from securities repurchase agreements		5,243			138,210			366,104
Repayments of securities repurchase agreements		(34,957	)		(173,788	)		(343,593	)
Proceeds from issuance of Exchangeable Senior Notes		—			—			54,451
Allocation of proceeds to conversion option on Exchangeable Senior Notes		—			—			1,324
Dividends on common stock and distributions on OP Units (net of change in dividends and distributions payable)		(14,236	)		(19,130	)		(10,410	)
Repurchase of preferred stock including dividend		—			—			(148	)
Equity raise payments		—			—			(217	)
Contributions from non-controlling interests		50			—			—
Net cash (used in)/provided by financing activities	$	(35,852	)	$	12,902		$	416,682

Contractual Obligations

The Company has entered into an Investment Advisory Agreement with the Advisor. The Advisor is entitled to receive a quarterly advisory fee, loan sourcing fee and the reimbursement of certain expenses; however, these obligations do not have fixed and determinable payments.

The following table presents contractual obligations and commitments at December 31, 2015, as discussed above under “Liquidity and Capital Resources”:

Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(dollars in thousands)
Warehouse lines of credit	$	100,768	$	100,768	$	—	$	—	$	—
Interest on warehouse lines of credit (1)		2,105		2,105		—		—		—
Loan repurchase facilities		296,789		296,789		—		—		—
Interest on loan repurchase facilities (1)		4,152		4,152		—		—		—
Repurchase agreements		73,300		73,300		—		—		—
Interest on securities repurchase agreements (1)		278		278		—		—		—
Exchangeable Senior Notes		57,500		57,500		—		—		—
Interest on Exchangeable Senior Notes		4,600		4,600		—		—		—
Operating leases		2,602		982		1,490		130		—
Total	$	542,094	$	540,474	$	1,490	$	130	$	—

(1) Interest is calculated based on the interest rates in effect at December 31, 2015 and includes all interest expense incurred and expected to be incurred in the future through the contractual maturity of the associated borrowings.

Off-Balance Sheet Arrangements

As of the date of this annual report on Form 10-K, the Company had no off-balance sheet arrangements.

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Inflation

Virtually all of the Company's assets and liabilities are and will be interest rate sensitive in nature. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. The Company's financial statements are prepared in accordance with U.S. GAAP and the Company's activities and balance sheet shall be measured with reference to historical cost and/or fair value without considering an independent inflation factor.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The primary components of the Company’s market risk are related to interest rate risk, prepayment risk, credit risk and fair value risk. While the Company does not seek to avoid risk completely, the Company believes that risk can be quantified from historical experience and the Company will seek to actively manage that risk, to earn sufficient compensation to justify taking risk and to maintain capital levels consistent with the risks the Company undertakes.

Credit Risk

The Company expects to encounter credit risk related to its non-Agency RMBS and mortgage loans, including assets it may originate or acquire. A portion of the Company's assets are comprised of residential mortgage loans that are unrated. The credit risk related to these investments pertains to the ability and willingness of borrowers to pay the mortgage loan payments, the ability of which is assessed before credit is granted or renewed and periodically reviewed throughout the loan or security term. The Company believes that residual loan credit quality is primarily determined by the borrowers' credit profiles and loan characteristics. Changes in home price appreciation have a significant impact on the performance of non-Agency RMBS and mortgage loans.

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 the Company's control.

The Company is subject to interest rate risk in connection with any floating or inverse floating rate investments and its repurchase agreements. The Company's repurchase agreements may be of limited duration and are periodically refinanced at current market rates. The Company intends to manage this risk using interest rate derivative agreements. These instruments are intended to serve as a hedge against future interest rate increases on the Company's borrowings. The Company primarily assesses its interest rate risk by estimating and managing the duration of its assets relative to the duration of its liabilities. Duration measures the change in the fair value of an asset based on a change in an interest rate. The Company generally calculates duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.

The borrowings the Company used to fund its portfolio included $527.4 million at December 31, 2015 under the warehouse lines of credit and repurchase agreements with four lenders, Loan Repurchase Facilities, master securities repurchase agreements with four counterparties and the Exchangeable Senior Notes. At December 31, 2015, the Company also had interest rate swaps with an outstanding notional amount of $17.2 million, resulting in variable rate debt of $453.7 million. A 50 basis point increase in LIBOR would increase the annual interest expense related to the $453.7 million in variable rate debt by $2.3 million. Such hypothetical impact of interest rates on the Company's variable rate debt does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, the Company may take actions to further mitigate its exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company's financial structure.

Net Interest Income

The Company's operating results will depend in part on differences between the income from its investments and its borrowing costs. Most of the Company's Loan Repurchase Facilities, securities repurchase agreements and warehouse lines of credit and repurchase agreements related to the GMFS mortgage banking platform, provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. If the federal funds rate is increased above its existing target range, the Company would ordinarily expect LIBOR to also increase. If this unfolds, the Company would expect the borrowing costs associated with the Company's investments to increase while the income earned by the Company on its fixed interest rate investments to remain substantially unchanged. This will result in a narrowing of the net interest spread between existing assets and borrowings and may result in a decline in asset value or otherwise result in losses. In addition, an increase in the federal funds rate, if accompanied by broader increase in interest rates, may also cause other challenges for the Company's business by, for example, reducing the demand for newly originated mortgage loans due to the higher cost of borrowing, which could adversely impact loan production from GMFS.

Hedging techniques are partly based on assumed levels of prepayments of the Company's residential mortgage loans and RMBS. If prepayments are slower or faster than assumed, the effectiveness of any hedging strategies the Company uses will be reduced and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are complex and may produce volatile returns. The Company is considering a variety of steps to address the impact on the Company’s business of a rising interest rate environment, including the sale of existing assets that may be sensitive to higher interest rates, changes to the Company’s asset and liability hedging strategy, acquiring new assets that may be less sensitive to rising rates or reducing the amount of leverage the Company uses in its business. There can be no assurance that such steps or others which the Company may implement in the near to medium term will be effective in mitigating the impact of a rising rate environment.

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Prepayment Risk

As the Company receives prepayments of principal on its investments, premiums paid on such investments will be amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.

Extension Risk

If prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on the Company's results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the fair market value of the Company's hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, the Company may be forced to sell assets to maintain adequate liquidity, which could cause it to incur losses.

Fair Value Risk

The Company intends to elect the fair value option of accounting on most of its residential mortgage investments and loans held for sale, MSRs and securities investments and account for them at their estimated fair value with unrealized gains and losses included in earnings pursuant to accounting guidance. The estimated fair value of these residential mortgage loans, MSRs and securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these residential mortgage loans and securities would be expected to decrease and MSRs would be expected to increase, conversely, in a decreasing interest rate environment, the estimated fair value of these residential mortgage loans, and securities would be expected to increase and MSRs would be expected to decrease.

Counterparty Risk

The Company finances the acquisition of a significant portion of its residential mortgage loans, RMBS and Other Investment Securities with its repurchase agreements and warehouse lines of credit. In connection with these financing arrangements, the Company pledges its residential mortgage loans and securities as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings ( i.e. the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.

Certain of the Company's subsidiaries have entered into over-the-counter interest rate swap agreements to hedge risks associated with movements in interest rates. Because interest rate swaps were not cleared through a central counterparty, the Company remains exposed to the counterparty's ability to perform its obligations under each such swap and cannot look to the creditworthiness of a central counterparty for performance. As a result, if an over-the-counter swap counterparty cannot perform under the terms of an interest rate swap, the Company's subsidiary would not receive payments due under that agreement, the Company may lose any unrealized gain associated with the interest rate swap and the hedged liability would cease to be hedged by the interest rate swap. While the Company would seek to terminate the relevant over-the-counter swap transaction and may have a claim against the defaulting counterparty for any losses, including unrealized gains, there is no assurance that the Company would be able to recover such amounts or to replace the relevant swap on economically viable terms or at all. In such case, the Company could be forced to cover its unhedged liabilities at the then current market price. The Company may also be at risk for any collateral the Company has pledged to secure the Company's obligations under the over-the-counter interest rate swap if the counterparty becomes insolvent or files for bankruptcy. Therefore, upon a default by an interest rate swap agreement counterparty, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended.

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During the past several years, certain repurchase agreement and interest rate swap counterparties in the United States and Europe have experienced financial difficulty and have been either rescued by government assistance or otherwise benefited from accommodative monetary policy of their respective central banks.

The following table summarizes the Company’s exposure to its repurchase agreements, warehouse lines of credit and derivative counterparties at December 31, 2015:

	Number of Counterparties		Repurchase Agreement Borrowings  (1)		Warehouse Lines of Credit		Swaps & Swaption at Fair Value			Exposure  (2)		Exposure as a Percentage of Total Assets
	(dollars in thousands)
North America:
U.S.		4	$	285,379	$	62,360	$	—		$	109,067		14.1	%
Canada (3)		1		54,167		—		—			17,145		2.2
		5		339,546		62,360		—			126,212		16.3	%
Europe: (3)
United Kingdom		1		11,077		—		(1,009	)		6,359		0.8	%
Switzerland		2		19,746		38,408		—			8,248		1.1
		3		30,823		38,408		(1,009	)		14,607		1.9	%
Total Counterparty Exposure		8	$	370,369	$	100,768	$	(1,009	)	$	140,819		18.2	%

(1)	Includes accrued interest payable.
(2)	The exposure reflects the difference between (a) the amount loaned to the Company through repurchase agreements and warehouse lines of credit, including interest payable, plus the derivative liability and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such assets, plus derivative assets.
(3)	Includes foreign based counterparties as well as U.S. domiciled subsidiaries of such counterparties, as such transactions are generally entered into with a U.S. domiciled subsidiary of such counterparties.

The following table presents information with respect to any counterparty for repurchase agreements for which the Company had greater than 5% of stockholders’ equity at risk in the aggregate at December 31, 2015:

Counterparty	Counterparty Rating (1)	Amount of Risk (2)		Weighted Average Months to Maturity for Repurchase Agreements		Percentage of Stockholders’ Equity
	(dollars in thousands)
Citigroup Inc .(3)	A/A1	$	97,688		5		55.4	%
RBC Capital Markets, LLC	AA-/A2	$	17,145		<1		9.7	%

(1)	The counterparty rating presented is the long-term issuer credit rating as rated at December 31, 2015 by S&P and Moody’s, respectively.
(2)	The amount at risk reflects the difference between (a) the amount loaned to the Company through repurchase agreements, including interest payable, plus the net unrealized gain on swaps including collateral pledged and (b) the cash and the fair value of the assets pledged by the Company as collateral, including accrued interest receivable on such securities.
(3)	Includes amounts at risk with Citibank, N.A. and Citigroup Global Markets Inc. Counterparty rating is for Citibank, N.A. which represents $94.9 million of the total exposure. The remaining exposure is to Citigroup Global Markets Inc. which was rated A/Baa2 by S&P and Moody’s, respectively at December 31, 2015.

79

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets December 31, 2015 and 2014	82
Consolidated Statements of Operations For the Years Ended December 31, 2015, December, 31, 2014 and December 31, 2013	83
Consolidated Statements of Equity For the Years Ended December 31, 2015, December 31, 2014, and December 31, 2013	84
Consolidated Statements of Cash Flows For the Years ended December 31, 2015, December 31, 2014 and December 31, 2013	85
Notes to Consolidated Financial Statements	86 - 131

80

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

ZAIS Financial Corp. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, equity and cash flows present fairly, in all material respects, the financial position of ZAIS Financial Corp. and its subsidiaries (the “Company”) at December 31, 2015 and December 31, 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

New York, NY

March 10, 2016

81

ZAIS Financial Corp. and Subsidiaries
Consolidated Balance Sheets

	December 31, 2015			December 31, 2014
	(Expressed in United States Dollars, except share data)
Assets
Cash	$	20,793,716		$	33,791,013
Restricted cash		4,371,725			7,143,078
Mortgage loans held for investment, at fair value – $394,942,512 and $415,814,067 pledged as collateral, respectively		397,678,140			415,959,838
Mortgage loans held for investment, at cost		1,886,642			1,338,935
Mortgage loans held for sale, at fair value - $115,942,230 and $97,690,960 pledged as collateral, respectively		115,942,230			97,690,960
Real estate securities, at fair value – $95,627,850 and $135,779,193 pledged as collateral, respectively		109,339,281			148,585,733
Other Investment Securities, at fair value – $1,989,174 and $2,040,532 pledged as collateral, respectively		12,804,196			2,040,532
Loans eligible for repurchase from Ginnie Mae		34,745,103			21,710,284
Mortgage servicing rights, at fair value		48,209,016			33,378,978
Derivative assets, at fair value		2,376,187			2,485,100
Other assets		7,928,878			6,092,863
Goodwill		14,183,537			16,512,680
Intangible Assets		4,880,270			5,668,611
Total assets	$	775,138,921		$	792,398,605
Liabilities
Warehouse lines of credit	$	100,768,428		$	89,417,564
Loan repurchase facilities		296,789,330			300,092,293
Securities repurchase agreements		73,300,159			103,014,105
Exchangeable Senior Notes		56,509,046			55,474,741
Contingent consideration		11,285,100			11,430,413
Derivative liabilities, at fair value		1,831,967			2,585,184
Dividends and distributions payable		3,559,120			3,559,120
Accounts payable and other liabilities		18,572,613			11,731,089
Liability for loans eligible for repurchase from Ginnie Mae		34,745,103			21,710,284
Total liabilities		597,360,866			599,014,793
Commitments and Contingencies (Note 22)
Equity
12.5% Series A cumulative non-voting preferred stock, $0.0001 par value; 50,000,000 shares authorized; zero shares issued and outstanding		—			—
Common stock, $0.0001 par value; 500,000,000 shares authorized; 7,970,886 shares issued and outstanding		798			798
Additional paid-in capital		164,207,617			164,207,617
(Accumulated deficit)/retained earnings		(4,984,178	)		9,029,947
Total ZAIS Financial Corp. stockholders’ equity		159,224,237			173,238,362
Non-controlling interests in operating partnership		18,553,818			20,145,450
Total equity		177,778,055			193,383,812
Total liabilities and equity	$	775,138,921		$	792,398,605

The accompanying notes are an integral part of these consolidated financial statements.

82

ZAIS Financial Corp. and Subsidiaries
Consolidated Statements of Operations

	Year Ended December 31, 2015			Year Ended December 31, 2014			Year Ended December 31, 2013
	(Expressed in United States Dollars, except share data)
Interest income
Mortgage loans held for investment	$	25,930,901		$	26,140,679		$	10,470,435
Mortgage loans held for sale		3,144,345			594,217			—
Real estate securities		8,166,961			14,313,293			15,947,892
Other investment securities		560,349			544,558			—
Total interest income		37,802,556			41,592,747			26,418,327
Interest expense
Warehouse lines of credit		2,151,690			121,194			—
Loan repurchase facilities		9,432,335			8,906,849			3,612,167
Securities repurchase agreements		1,480,616			2,544,838			2,918,813
Exchangeable Senior Notes		5,785,264			5,686,664			563,539
Total interest expense		18,849,905			17,259,545			7,094,519
Net interest income		18,952,651			24,333,202			19,323,808
Non-interest income
Mortgage banking activities, net		45,857,462			5,439,006			—
Loan servicing fee income, net of direct costs		7,092,431			929,718			—
Change in fair value of mortgage servicing rights		(4,128,476	)		(1,684,373	)		—
Other income		54,857			45,861			—
Total non-interest income		48,876,274			4,730,212			—
Other (losses)/gains
Change in unrealized gain or loss on mortgage loans held for investment		(9,368,719	)		22,814,340			7,136,482
Change in unrealized gain or loss on real estate securities		(4,851,240	)		(2,993,640	)		(7,170,706	)
Change in unrealized gain or loss on Other Investment Securities		(334,167	)		(226,224	)		—
Change in unrealized gain or loss on real estate owned		(435,282	)		(503,956	)		—
Realized gain on mortgage loans held for investment		1,479,145			1,838,800			1,298,844
Realized gain/(loss) on real estate securities		18,833			3,694,256			(9,045,689	)
Realized (loss)/gain on Other Investment Securities		(154,554	)		226,743			—
Realized (loss)/gain on real estate owned		(160,341	)		2,455			—
(Loss)/gain on derivative instruments related to investment portfolio		(171,859	)		(5,921,725	)		5,614,815
Total other (losses)/gains		(13,978,184	)		18,931,049			(2,166,254	)
Expenses
Advisory fee - related party		2,953,115			2,853,896			2,629,815
Salaries, commissions and benefits		30,934,727			3,765,784			—
Operating expenses		12,294,334			7,862,308			5,473,915
Other expenses		4,672,368			4,511,741			1,500,359
Total expenses		50,854,544			18,993,729			9,604,089
Net income before income taxes		2,996,197			29,000,734			7,553,465
Income tax expense/(benefit)		4,415,474			(850,996	)		—
Net (loss)/income after income taxes		(1,419,277	)		29,851,730			7,553,465
Net (loss)/income allocated to non-controlling interests		(158,568	)		3,109,760			880,358
Preferred dividends		—			—			15,379
Net (loss)/income attributable to ZAIS Financial Corp. common stockholders	$	(1,260,709	)	$	26,741,970		$	6,657,728
Net (loss)/income per share applicable to common stockholders:
Basic	$	(0.16	)	$	3.35		$	0.92
Diluted	$	(0.16	)	$	3.08		$	0.92
Weighted average number of shares of common stock:
Basic		7,970,886			7,970,886			7,273,366
Diluted		8,897,800			10,677,360			8,200,280

The accompanying notes are an integral part of these consolidated financial statements.

83

ZAIS Financial Corp. and Subsidiaries
Consolidated Statements of Equity

(Expressed in United States Dollars, except share data)

	Preferred Stock					Common Stock										Total ZAIS			Non-
	Shares of Preferred Stock			Preferred Stock at Par		Shares of Common Stock		Common Stock at Par		Additional Paid-in Capital			Retained Earnings/ (Accumulated Deficit)			Financial Corp. Stockholders’ Equity			controlling Interests in Operating Partnership			Total Equity
Balance at December 31, 2012		133		$	—		2,071,096	$	207	$	39,759,770		$	5,281,941		$	45,041,918		$	20,098,877		$	65,140,795
Reversal of common stock repurchase liability		—			—		249,790		25		5,440,150			—			5,440,175			—			5,440,175
Repurchase of preferred shares		(133	)		—		—		—		(133,000	)		—			(133,000	)		—			(133,000	)
Net proceeds from initial public offering		—			—		5,650,000		566		118,861,934			—			118,862,500			—			118,862,500
Equity raise payments		—			—		—		—		(216,658	)		—			(216,658	)		—			(216,658	)
Distributions on OP units		—			—		—		—		—			—			—			(1,965,060	)		(1,965,060	)
Dividends on common stock		—			—		—		—		—			(16,898,276	)		(16,898,276	)		—			(16,898,276	)
Rebalancing of ownership percentage between the Company and operating partnership		—			—		—		—		495,421			—			495,421			(495,421	)		—
Net income		—			—		—		—		—			6,657,728			6,657,728			880,358			7,538,086
Balance at December 31, 2013		—		$	—		7,970,886	$	798	$	164,207,617		$	(4,958,607	)	$	159,249,808		$	18,518,754		$	177,768,562
Distributions on OP units		—			—		—		—		—			—			—			(1,483,064	)		(1,483,064	)
Dividends on common stock		—			—		—		—		—			(12,753,416	)		(12,753,416	)		—			(12,753,416	)
Net income		—			—		—		—		—			26,741,970			26,741,970			3,109,760			29,851,730
Balance at December 31, 2014		—		$	—		7,970,886	$	798	$	164,207,617		$	9,029,947		$	173,238,362		$	20,145,450		$	193,383,812
Distributions on OP units		—			—		—		—		—			—			—			(1,483,064	)		(1,483,064	)
Dividends on common stock		—			—		—		—		—			(12,753,416	)		(12,753,416	)		—			(12,753,416	)
Contributions		—			—		—		—		—			—			—			50,000			50,000
Net loss		—			—		—		—		—			(1,260,709	)		(1,260,709	)		(158,568	)		(1,419,277	)
Balance at December 31, 2015		—		$	—		7,970,886	$	798	$	164,207,617		$	(4,984,178	)	$	159,224,237		$	18,553,818		$	177,778,055

The accompanying notes are an integral part of these consolidated financial statements.

84

ZAIS Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows

	Year Ended December 31, 2015			Year Ended December 31, 2014			Year Ended December 31, 2013
	(Expressed in United States Dollars)
Cash flows from operating activities
Net (loss) income	$	(1,419,277	)	$	29,851,730		$	7,553,465
Adjustments to reconcile net (loss)/income to net cash (used in)/provided by operating activities
Net (accretion)/amortization of (discounts) premiums related to mortgage loans held for investment		(7,761,432	)		(7,497,341	)		(3,059,231	)
Net (accretion)/amortization of (discounts)/premiums related to real estate securities		(3,882,887	)		(5,528,538	)		(2,932,089	)
Net (accretion)/amortization of (discounts)/premiums related to other investment securities		(192,476	)		(180,438	)		—
Change in unrealized gain or loss on mortgage loans held for investment		9,368,719			(22,814,340	)		(7,136,482	)
Change in unrealized gain or loss on real estate securities		4,851,240			2,993,640			7,170,706
Change in unrealized gain or loss on other investment securities		334,167			226,224			—
Change in unrealized gain or loss on real estate owned		435,282			503,956			—
Change in fair value of mortgage servicing rights		4,128,476			1,684,373			—
Realized gain on mortgage loans held for investment		(1,479,145	)		(1,838,800	)		(1,298,844	)
Realized (gain)/ loss on real estate securities		(18,833	)		(3,694,256	)		9,045,689
Realized loss/(gain) on other investment securities		154,554			(226,743	)		—
Realized loss/(gain) on real estate owned		160,341			(2,455	)		—
Change in unrealized gain or loss on derivative instruments related to investment portfolio		(644,304	)		5,306,841			(1,281,997	)
Amortization of Exchangeable Senior Notes discount		1,034,305			935,690			88,457
Depreciation and amortization expense		933,812			154,010			—
Proceeds from sale and principal payments on mortgages held for sale		1,893,833,985			245,140,671			—
Originations and purchases of mortgage loans held for sale		(1,851,206,995	)		(253,934,598	)		—
Gain on sale of mortgages held for sale		(61,322,192	)		3,615,357			—
Capitalization of originated mortgage servicing rights		(18,958,514	)		(2,763,014	)		—
Changes in operating assets and liabilities:
(Increase) /decrease in other assets		1,614,564			559,791			(1,321,134	)
Increase /(decrease) in accounts payable and other liabilities		7,100,795			2,818,360			1,302,727
Decrease in contingent consideration		(145,313	)		—			—
Net cash (used in)/ provided by operating activities		(23,081,128	)		(4,689,880	)		8,131,267
Cash flows from investing activities
Cash paid for the acquisition of GMFS, net of cash acquired		—			(49,542,840	)		—
Origination of mortgage loans held for investment		(6,201,147	)		—			—
Acquisitions of mortgage loans held for investment		(16,353,410	)		(85,579,169	)		(334,162,044	)
Proceeds from sales and principal repayments on mortgage loans held for investment		36,798,274			31,519,288			13,871,059
Acquisitions of real estate securities, net of change in payable for real estate securities purchased		(6,362,138	)		(47,034,327	)		(406,263,789	)
Proceeds from principal repayments on real estate securities		17,888,188			28,197,740			46,752,670
Proceeds from sales of real estate securities, net of changes in receivable for real estate securities sold		26,770,882			102,635,229			291,348,906
Acquisitions of Other Investment Securities		(17,031,330	)		(12,926,953	)		—
Proceeds from sales of Other Investment Securities		5,961,506			11,067,378			—
Proceeds from principal repayments on other investment securities		9,915			—			—
Purchase of swaption		—			(4,803,750	)		—
Proceeds received for the final reconciliation of purchase price relating to the acquisition of GMFS		1,684,263			—			—
Restricted cash provided by/(used) in investment activities		2,771,353			(5,014,842	)		1,639,915
Net cash provided by /(used in) investing activities		45,936,356			(31,482,246	)		(386,813,283	)
Cash flows from financing activities
Proceeds from issuance of common stock, net					—			118,862,500
Payment of common stock repurchase liability					—			(5,750,512	)
Net borrowings under warehouse lines of credit		11,350,864			3,576,859			—
Net (repayments)/borrowings under loan repurchase facilities		(3,302,963	)		64,033,317			236,058,976
Borrowings from securities repurchase agreements		5,243,481			138,210,170			366,103,785
Repayments of securities repurchase agreements		(34,957,427	)		(173,787,743	)		(343,592,574	)
Proceeds from issuance of Exchangeable Senior Notes		—			—			54,450,594
Allocation of proceeds to conversion option on Exchangeable Senior Notes		—			—			1,324,406
Dividends on common stock and distributions on OP units (net of dividends and distributions payable)		(14,236,480	)		(19,130,270	)		(10,410,426	)
Repurchase of preferred stock including dividend		—			—			(148,379	)
Equity raise payments		—			—			(216,658	)
Contributions from non-controlling interests		50,000			—			—
Net cash (used in)/provided by financing activities		(35,852,525	)		12,902,333			416,681,712
Net (decrease)/ increase in cash		(12,997,297	)		(23,269,793	)		37,999,696
Cash
Beginning of year		33,791,013			57,060,806			19,061,110
End of year	$	20,793,716		$	33,791,013		$	57,060,806
Supplemental disclosure of cash flow information
Interest paid on warehouse lines of credit, loan repurchase facilities, securities repurchase agreements and Exchangeable Senior Notes	$	17,536,164		$	18,666,057		$	5,696,619
Taxes paid	$	—		$	—		$	—
Supplemental disclosure of noncash investing and financing activities
Accrued dividends and distributions payable	$	3,559,120		$	3,559,120		$	8,452,910
Conversion of mortgage loans held for investment to real estate owned	$	3,806,064		$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

85

ZAIS FINANCIAL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Formation and Organization

ZAIS Financial Corp. and subsidiaries (the "Company") is a Maryland corporation invests in residential mortgage loans. GMFS, LLC (“GMFS”), a mortgage banking platform the Company acquired in October 2014, originates, sells and services mortgage loans and the Company acquires performing, re-performing and newly originated loans through other channels. The Company also invests in, finances and manages residential mortgage-backed securities ("RMBS") that are not issued or guaranteed by a federally chartered corporation, such as the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), or an agency of the U.S. Government, such as Government National Mortgage Association ("Ginnie Mae") ("non-Agency RMBS"), with an emphasis on securities that, when originally issued, were rated in the highest rating category by one or more of the nationally recognized statistical rating organizations. The Company also has the discretion to invest in RMBS that are issued or guaranteed by a federally chartered corporation or a U.S. Government agency ("Agency RMBS"), including through To-Be-Announced ("TBA") contracts, and in other real estate-related and financial assets.

As announced on November 4, 2015, the Company has engaged a financial advisor to assist it in evaluating potential strategic alternatives to enhance stockholder value. The continuing strategic review includes the exploration of merger or sale transactions involving the Company or a liquidation of Company's assets. In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. Additionally, as part of the strategic review, the Company has made the recent decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit purchase program and will begin the unwinding of the Company’s mortgage conduit business.

The Company and its financial advisor have engaged in preliminary discussions with several potential counterparties. While the Company is currently engaged in discussions with a potential counterparty about a potential merger or sale transaction, there is no assurance that the discussions will lead to a definitive merger or sale transaction, which would be subject to approval by the Company’s board of directors and its stockholders. In the event that the Company does not reach a definitive agreement with respect to a merger or sale transaction, management of the Company intends to present to the Company’s board of directors for its consideration a plan of liquidation. There is no assurance that the Company’s board of directors will approve any plan of liquidation and recommend its acceptance by the Company’s stockholders.

The Company's income is generated primarily by the net spread between the income it earns on its assets and the cost of its financing and hedging activities in its residential mortgage investments segment, and the origination, sale and servicing of residential mortgage loans in its residential mortgage banking segment. The Company's objective is to provide attractive risk-adjusted returns to its stockholders, primarily through quarterly dividend distributions and secondarily through capital appreciation.

The Company was incorporated in Maryland on May 24, 2011, and has elected to be taxed and to qualify as a real estate investment trust ("REIT") beginning with the taxable year ended December 31, 2011. The Company completed its formation transaction and commenced operations on July 29, 2011. On February 13, 2013, the Company completed its initial public offering ("IPO"), pursuant to which the Company sold 5,650,000 shares of its common stock at a price of $21.25 per share for gross proceeds of $120.1 million. Net proceeds, after the payment of offering costs of $1.2 million, were $118.9 million.

The Company's charter authorizes the issuance of up to 500,000,000 shares of common stock with a par value of $0.0001 per share, and 50,000,000 shares of preferred stock, with a par value of $0.0001 per share. The Company's board of directors is authorized to amend its charter, without the approval of stockholders, to increase the aggregate number of authorized shares of capital stock or the number of shares of any class or series of capital stock or to classify and reclassify any unissued shares of its capital stock into other classes or series of stock that the Company has the authority to issue.

The Company is the sole general partner of, and conducts substantially all of its business through, ZAIS Financial Partners, L.P., the Company's consolidated operating partnership subsidiary (the "Operating Partnership"). The Company is externally managed by ZAIS REIT Management, LLC (the "Advisor"), a subsidiary of ZAIS Group, LLC ("ZAIS"), and has no employees except for those employed by GMFS. GMFS had 246 employees at December 31, 2015.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the U.S. Securities and Exchange Commission.

86

The Company operates in the following two business segments: residential mortgage investments and residential mortgage banking.

Estimates

The preparation of financial statements in conformity with U.S. 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Operating Partnership, all of the wholly owned subsidiaries of the Operating Partnership, including its taxable REIT subsidiaries (“TRS”), and a joint venture in which the Company has a controlling financial interest. All intercompany balances have been eliminated in consolidation.

The Company, which serves as the sole general partner of and conducts substantially all of its business through the Operating Partnership, holds approximately 89.6% of the operating partnership units ("OP Units") in the Operating Partnership at December 31, 2015 and December 31, 2014. The Operating Partnership in turn holds directly or indirectly all of the equity interests in its subsidiaries.

Changes in the Company's ownership interest (and transactions with non-controlling interests in its consolidated subsidiaries) while the Company retains its controlling interest in the subsidiaries, are accounted for as equity transactions. The carrying amount of the non-controlling interest is adjusted to reflect the change in its ownership interest in the subsidiaries, with the offset to equity attributable to the Company.

Variable Interest Entities

A variable interest entity ("VIE") is an entity that lacks one or more of the characteristics of a voting interest entity. The Company evaluates each of its investments to determine whether it is a VIE based on: (1) the sufficiency of the entity's equity investment at risk to finance its activities without additional subordinated financial support provided by any parties, including the equity holders; (2) whether as a group the holders of the equity investment at risk have (a) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impacts the entity's economic performance, (b) the obligation to absorb the expected losses of the legal entity or the right to receive the expected residual returns of the legal entity; and (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both, and whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. An investment that lacks one or more of the above three characteristics is considered to be a VIE. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

A VIE is subject to consolidation if the equity investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity's activities, or are not exposed to the entity's losses or entitled to its residual returns. VIEs are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This determination can sometimes involve complex and subjective analyses.

The Company's mortgage loans held for sale are sold predominantly to Fannie Mae and Freddie Mac, which are government sponsored enterprises ("GSEs" or "Agencies"). The Company also issues Ginnie Mae securities by pooling eligible loans through a pool custodian and assigning rights to the loans to Ginnie Mae. Fannie Mae, Freddie Mac and Ginnie Mae provide credit enhancement of the loans through certain guarantee provisions. The Company also purchases RMBS from securitization trusts or similar vehicles. These securitizations involve VIEs as the trusts or similar vehicles, by design, have the characteristics of a VIE.

The Company has evaluated its interests in its real estate investment securities and its interests in the securitizations discussed in the preceding paragraph to determine if each represents a variable interest in a VIE. The Company monitors these investments and its investment in the securities and analyzes them for potential consolidation. The Company determined that it was not the primary beneficiary of the VIEs and therefore none of the VIEs were consolidated at December 31, 2015 or December 31, 2014. The maximum exposure of the Company to VIEs is limited to the fair value of its investments in real estate securities and MSRs as disclosed in the Company's consolidated balance sheets.

Cash and Cash Equivalents

The Company considers highly liquid short-term interest bearing instruments with original maturities of three months or less and other instruments readily convertible into cash to be cash equivalents.

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 Restricted Cash

Restricted cash represents the Company's cash held by counterparties as collateral against the Company's derivatives and/or securities repurchase agreements. Cash held by counterparties as collateral is not available to the Company for general corporate purposes, but may be applied against amounts due to derivative or securities repurchase agreement counterparties or returned to the Company when the collateral requirements are exceeded or at the maturity of the derivatives or securities repurchase agreements.

Other Investment Securities

The Company held Freddie Mac Structured Agency Credit Risk Notes at December 31, 2015 and December 31, 2014 and Fannie Mae's Risk Transfer Notes at December 31, 2015 (collectively, the “Other Investment Securities”). The Other Investment Securities represent unsecured general obligations of Fannie Mae and Freddie Mac and are structured to be subject to the performance of a certain pool of residential mortgage loans.

Mortgage Loans Held for Investment, Mortgage Loans Held for Sale, Real Estate Securities, Other Investment Securities and MSRs — Fair Value Election

U.S. GAAP permits entities to choose to measure certain eligible financial instruments at fair value. The Company has elected the fair value option for some of its mortgage loans held for investment, and each of its real estate securities, Other Investment Securities and MSRs at the date of purchase. The fair value option election is irrevocable and requires the Company to measure these mortgage loans, real estate securities, Other Investment Securities and MSRs at estimated fair value with the change in estimated fair value recognized through earnings. The Company has established a policy for its mortgage loans held for investment, real estate securities and Other Investment Securities to separate interest income from the full change in fair value in the consolidated statements of operations. The interest income component is presented as interest income on mortgage loans held for investment, mortgage loans held for sale, real estate securities and Other Investment Securities and the remainder of the change in fair value is presented separately as change in unrealized gain or loss in the Company's consolidated statements of operations.

Determination of Fair Value Measurement

The "Fair Value Measurements and Disclosures" Topic of the FASB ASC defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements under U.S. GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value under U.S. GAAP represents an exit price in the normal course of business, not a forced liquidation price. If the Company was forced to sell assets in a short period to meet liquidity needs, the prices it receives could be substantially less than their recorded fair values.

The Company follows the fair value measurement and disclosure guidance under U.S. GAAP, which establishes a hierarchical disclosure framework. This framework prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. In all cases, an instrument's level within the hierarchy is based upon the market pricing transparency of the instrument and does not necessarily correspond to the Company's perceived risk or liquidity of the instrument.

The Company considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires significant judgment and considers factors specific to the investment.

Assets and liabilities that are measured and reported at fair value are classified and disclosed in one of the following categories:

Level 1 — Fair value is determined based on quoted prices for identical assets or liabilities in an active market. Assets and liabilities included in Level 1 include listed securities. As required in the fair value measurement and disclosure guidance under U.S. GAAP, the Company does not adjust the quoted price for these investments. The hierarchy gives highest priority to Level 1.

Level 2 — Fair value is determined based on inputs other than quoted prices that are observable for the asset or liability either directly or indirectly as of the reporting date. Assets and liabilities which are generally included in this category include corporate bonds and loans, less liquid and restricted equity securities and certain over-the-counter derivatives, including foreign exchange forward contracts whose values are based on the following:

· Quoted prices for similar assets or liabilities in active markets.

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· Quoted prices for identical or similar assets or liabilities in nonactive markets.

· Pricing models whose inputs are observable for substantially the full term of the asset or liability.

· Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 — Fair value is determined based on inputs that are unobservable for the investment and includes situations where there is little, if any, market activity for the asset or liability. The inputs into the determination of fair value require significant management judgment or estimation and the Company may use models or other valuation methodologies to arrive at fair value. Investments that are included in this category generally include MSRs, distressed debt, less liquid corporate debt securities, non-investment grade residual interests in securitizations, collateralized debt obligations and certain derivative contracts. The hierarchy gives the lowest priority to Level 3.

ZAIS has established a valuation process that applies for all levels of investments in the valuation hierarchy to ensure that the valuation techniques are consistent and verifiable. The valuation process includes discussions between the valuation team, portfolio management team and the valuation committee (the “Valuation Committee”). The Valuation Committee consists of senior members of ZAIS Group and is co-chaired by the Chief Risk Officer and Chief Financial Officer of ZAIS. The Valuation Committee meets to review and approve the results of the valuation process which are used in connection with the preparation of quarterly and annual financial statements. The Valuation Committee is responsible for oversight and review of the written valuation policies and procedures and ensuring that they are applied consistently.

The lack of an established, liquid secondary market for some of the Company’s holdings may have an adverse effect on the market value of those holdings and on the Company’s ability to dispose of them. Additionally, the public markets for the Company’s holdings may experience periods of volatility and periods of reduced liquidity and the Company’s holdings may be subject to certain other transfer restrictions that may further contribute to illiquidity. Such illiquidity may adversely affect the price and timing of liquidations of the Company’s holdings.

The following is a description of the valuation techniques used to measure fair value and the classification of these instruments pursuant to the fair value hierarchy:

Mortgage Loans Held for Investment, at Fair Value

The fair value of the Company's mortgage loans held for investment considers data such as loan origination information and additional updated borrower and loan servicing data, as available, forward interest rates, general economic conditions, home price index forecasts and valuations of the underlying properties. The variables considered most significant to the determination of the fair value of the Company's mortgage loans held for investment include market-implied discount rates, projections of default rates, delinquency rates, loss severity (considering mortgage insurance) and prepayment rates. ZAIS uses loan level data, macro-economic inputs and forward interest rates to generate loss adjusted cash flows and other information in determining the fair value of its mortgage loans. Because of the inherent uncertainty of such valuation, the fair values established for mortgage loans held for investment by the Company may differ from the fair values that would have been established if a ready market existed for these mortgage loans held for investment. Accordingly, mortgage loans held for investment are classified as Level 3 in the fair value hierarchy.

Mortgage Loans Held for Sale, at Fair Value

The fair value of mortgage loans held for sale is determined, when possible, using quoted secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. Accordingly, mortgage loans held for sale are classified as Level 2 in the fair value hierarchy.

Real Estate Securities and Other Investment Securities, at Fair Value

ZAIS determines the fair value of the Company’s investments in RMBS generally using third party valuation services. ZAIS verifies that the quotes received from the valuation services are reflective of fair value as defined in U.S. GAAP, generally by comparing to trading activity for similar asset classes, pricing research provided by banks and brokers, the indicative broker quotes and results from ZAIS’ proprietary models.

If the values from the third party valuation services are insufficient or unavailable, fair value is determined using observable market data, indicative broker quotes or proprietary models that incorporate market based inputs but also include unobservable inputs. Some of the significant unobservable inputs used are constant prepayment rates, constant default rates, delinquency rates, security ratings, discount rates, credit spreads, and yields. The proprietary models convert future projected cash flows to a single discounted present value. ZAIS’ assessment of the significance of a particular input to the fair value measurement in its entirety requires significant judgment and considers factors specific to the investment.

The Company's Agency RMBS, if any, are valued using the market data described above, which includes inputs determined to be observable or whose significant fair value drivers are observable. Accordingly, Agency RMBS securities are classified as Level 2 in the fair value hierarchy.

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MSRs, at Fair Value

The Company uses a third party vendor to assist management in estimating the fair value of MSRs. The third party vendor uses a discounted cash flow approach which consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of fair value. The key assumptions used in the estimation of the fair value of MSRs include prepayment speeds, discount rates, default rates, cost to service, contractual servicing fees, escrow earnings and ancillary income. MSRs are classified as Level 3 in the fair value hierarchy. 

Derivative Instruments

Interest Rate Swaption Agreements

An interest rate swaption agreement represents an option that gives the Company the right, but not the obligation, to enter into a previously agreed upon interest rate swap agreement on a future date. If exercised the Company will enter into an interest rate swap agreement and is obligated to pay a fixed rate of interest and receive a floating rate of interest. The Company utilizes proprietary modeling analysis or industry standard third party analytics to support the counterparty valuations received for interest rate swaption agreements. These counterparty valuations are generally based on models with observable market inputs such as interest rates and contractual cash flows, and, as such, are classified as Level 2 on the fair value hierarchy. The Company's interest rate swaption agreements are governed by International Swap and Derivative Association trading agreements, which are separately negotiated agreements with dealer counterparties.

Interest Rate Swap Agreements

An interest rate swap is an agreement between two counterparties to exchange periodic interest payments where one party to the contract makes a fixed rate payment in exchange for a floating rate payment from the other party. The dollar amount each party pays is an agreed-upon periodic interest rate multiplied by some predetermined dollar principal (notional amount). No principal (notional amount) is exchanged between the two parties at trade initiation date. Only interest payments are exchanged. ZAIS utilize proprietary modeling analysis or industry standard third party analytics to support the counterparty valuations received for interest rate swap agreements. These counterparty valuations are generally based on models with observable market inputs such as interest rates and contractual cash flows, and, as such, are classified as Level 2 on the fair value hierarchy. The Company’s interest rate swap agreements are governed by International Swap and Derivative Association trading agreements, which are separately negotiated agreements with dealer counterparties. At December 31, 2015 and December 31, 2014, no credit valuation adjustment was made in determining the fair value of the derivative. Changes in the value of the contract are reported in gain (loss) on derivative instruments related to investment portfolio in the consolidated statements of operations.

Loan Purchase Commitments ("LPCs")

LPCs are agreements with approved third-party residential loan originators to purchase residential loans at a future date. LPCs that qualify as derivatives are recorded at their estimated fair values in the Company's consolidated balance sheets. The fair value of the Company's LPCs are based on the prices the underlying loans can be purchased for in the secondary market, adjusted for an estimated pull through rate. Changes in fair value are reported in the consolidated statements of operations. LPCs are classified as Level 3 in the fair value hierarchy.

Interest Rate Lock Commitments ("IRLCs")

IRLCs are agreements under which the Company agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Unrealized gains and losses on the IRLCs, reflected as derivative assets and derivative liabilities, respectively, are measured based on the value of the underlying mortgage loan, quoted GSE mortgage backed security ("MBS") prices, estimates of the fair value of the MSRs and the probability that the mortgage loan will fund within the terms of the IRLC, net of commission expense and broker fees. IRLCs are classified as Level 3 in the fair value hierarchy.

MBS Forward Sales Contracts and TBA Securities

MBS forward sales contracts and TBA securities are forward contracts for the purchase or sale of MBS at a predetermined price with a stated face amount, coupon and stated maturity at a agreed upon future date. The specific MBS delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association ("SIFMA"), are not known at the time of the transaction. The Company estimates the fair value of MBS forward sales contracts and TBA securities based on third party vendor prices and quoted MBS prices. MBS forward sales contracts and TBA securities are classified as Level 2 in the fair value hierarchy.

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Mortgage Loans Held for Investment, at Cost

Mortgage loans held for investment related to the Company's mortgage banking activities includes loans which, due to various reasons, are unable to be sold to a third party. Such loans are performing loans which the Company carries at amortized cost, less a valuation allowance for estimated credit losses, if applicable. 

Revenue Recognition

Mortgage Loans Held for Investment, at Fair Value

Pursuant to the Company's policy for separately presenting interest income on mortgage loans, the Company follows acceptable methods under U.S. GAAP for allocating a portion of the change in fair value of certain mortgage loans held for investment to interest income.

When the Company purchases mortgage loans which are held for investment and which have shown evidence of credit deterioration since origination and management determines that it is probable the Company will not collect all contractual cash flows on those loans, the Company applies the guidance that addresses accounting for differences between contractual cash flows and cash flows expected to be collected if those differences are attributable to, at least in part, credit quality.

Interest income is recognized on a level-yield basis over the life of the loan as long as cash flows can be reasonably estimated. The level-yield is determined by the excess of the Company's initial estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the Company's initial investment in the mortgage loan (accretable yield). The amount of interest income to be recognized cannot result in a carrying amount that exceeds the payoff amount of the loan. The excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) will not be recognized as an adjustment of yield.

On a quarterly basis, the Company updates its estimate of the cash flows expected to be collected. For purposes of interest income recognition, any subsequent increases in cash flows expected to be collected are generally recognized as prospective yield adjustments (which establishes a new level-yield) and any subsequent decreases in cash flows expected to be collected are recognized as an impairment to be recorded through change in unrealized gain or loss in the consolidated statements of operations.

Income recognition is suspended for a loan when cash flows cannot be reasonably estimated.

Interest income on newly originated mortgage loans which are purchased by the Company and held for investment, is accrued based on the effective yield method on the outstanding principal balance and their contractual terms. Premiums and discounts associated with these mortgage loans at the time of purchase are amortized into interest income over the life of such loan using the effective yield method and adjusted for actual prepayments.

Real Estate Securities and Other Investment Securities, at Fair Value

Pursuant to the Company's policy for separately presenting interest income on real estate securities and Other Investment Securities, the Company follows acceptable methods under U.S. GAAP for allocating a portion of the change in fair value of real estate securities and Other Investment Securities to interest income.

Interest income on Agency RMBS, if any, is accrued based on the effective yield method on the outstanding principal balance and their contractual terms. Premiums and discounts associated with Agency RMBS at the time of purchase are amortized into interest income over the life of such securities using the effective yield method and adjusted for actual prepayments.

Interest income on the non-Agency RMBS and Other Investment Securities, which were purchased at a discount to par value and/or were rated below AA at the time of purchase, is recognized based on the effective yield method. The effective yield on these securities is based on the projected cash flows from each security, which are estimated based on the Company's observation of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses. On a monthly basis, the Company reviews and, if appropriate, makes adjustments to its cash flow projections based on input and analysis received from external sources, internal models and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield/interest income recognized on such securities. Actual maturities of the securities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses. Therefore, actual maturities of the securities are generally shorter than stated contractual maturities.

Based on the projected cash flows from the Company's non-Agency RMBS purchased at a discount to par value, a portion of the purchase discount may be designated as credit protection against future credit losses and, therefore, not accreted into interest income. The amount designated as credit discount is determined, and may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit discount is more favorable than forecasted, a portion of the amount designated as credit discount may be accreted into interest income prospectively.

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RMBS and Other Investment Securities are evaluated for other-than-temporary impairment ("OTTI") each quarter. A security with a fair value that is less than amortized cost is considered impaired. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a security has been deemed to be other-than-temporarily impaired, the amount of OTTI is bifurcated into: (i) the amount related to expected credit losses; and (ii) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in the consolidated statements of operations as a realized loss on real estate securities and realized loss on Other Investment Securities. The remaining OTTI related to the valuation adjustment is recognized as a component of change in unrealized gain or loss in the consolidated statements of operations. Realized gains and losses on sale of real estate securities and Other Investment Securities are determined using the specific identification method. Real estate securities and Other Investment Securities transactions are recorded on the trade date.

Mortgage Loans Held for Investment, at Cost and Mortgage Loans Held for Sale, at Fair Value

Interest income on mortgage loans is accrued to income based upon the principal amount outstanding and contractual interest rates and is included in interest income on mortgage loans held for sale in the consolidated statements of operations. Income recognition is discontinued when loans become 90 days delinquent or when in management's opinion, the collectability of principal and income becomes doubtful and the mortgage loans held for sale or investment are put on nonaccrual status.

Mortgage Banking Activities, net

Gain on Sale of Mortgage Loans Held for Sale, net of direct costs

Mortgage loans held for sale are considered sold when the Company surrenders control over the financial assets. Control is considered to have been surrendered when the transferred assets have been isolated from the Company, beyond the reach of the Company and its creditors; the purchaser obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and the Company does not maintain effective control over the transferred assets through an agreement that both entitles and obligates the Company to repurchase or redeem the transferred assets before their maturity or the ability to unilaterally cause the holder to return specific assets. Such transfers may involve securitizations, participation agreements or repurchase agreements. If the criteria above are not met, such transfers are accounted for as secured borrowings, in which the assets remain on the consolidated balance sheets, the proceeds from the transaction are recognized as a liability and no MSRs are recorded for the transferred loans.

Gains and losses from the sale of mortgage loans held for sale are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and is included in mortgage banking activities, net in the consolidated statements of operations. The sales proceeds reflect the cash received and the initial fair value of the separately recognized MSRs. Gains and losses also includes the unrealized gains and losses associated with the mortgage loans held for sale and the realized and unrealized gains and losses from MBS forward sales contracts and IRLCs. Loan origination costs directly attributable to the processing, underwriting, and closing of a loan are offset against gain on sale of mortgage loans held for sale when loans are sold.

Loan Expenses, including Provision for Loan Indemnification

Loan expenses include indirect costs related to loan origination activities and are expensed as incurred and are included in mortgage banking activities, net in the Company’s consolidated statements of operations. The provision for loan indemnification includes the fair value of the incurred liability for mortgage repurchases and indemnifications recognized at the time of loan sale and any other provisions recorded against the loan indemnification reserve and are included in mortgage banking activities, net in the Company’s consolidated statements of operations.

Loan Origination Fee Income

Loan origination fee income represents revenue earned from originating mortgage loans and is included in mortgage banking activities, net in the Company's consolidated statements of operations. Loan origination fees relating to mortgage loans held for sale are reflected in mortgage banking activities, net when loans are sold.

Loan Servicing Fee Income, Net of Direct Costs

Loan servicing fee income represents revenue earned for servicing loans for various investors and is included in the consolidated statements of operations. The servicing fees are based on a contractual percentage of the outstanding principal balance and recognized into revenue as the related mortgage payments are received. Direct costs consist of sub-servicing costs which are offset against loan servicing fee income as incurred.

Expense Recognition

Expenses are recognized when incurred. Expenses include, but are not limited to, loan servicing fees, advisory fees, professional fees for legal, accounting and consulting services, and general and administrative expenses such as insurance, custodial and miscellaneous fees.

Servicing Advances

Servicing advances represent escrow and other advances on behalf of borrowers and investors to cover delinquent balances for property taxes, insurance premiums and other out-of-pocket costs. Advances are made in accordance with the servicing agreements and are recoverable upon liquidation. The Company periodically reviews the advances for collectability and amounts are written off when they are deemed uncollectible.

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Offering Costs

Offering costs are accounted for as a reduction of additional paid-in capital. Offering costs in connection with the Company’s IPO were paid out of the proceeds of the IPO. Costs incurred to organize the Company were expensed as incurred. The Company’s obligation to pay for organization and offering expenses directly related to the IPO was capped at $1.2 million and the Advisor paid for expenses incurred above the cap.

Repurchase Facilities

Loan Repurchase Facilities

The Company finances a portion of its mortgage loans held for investment, at fair value through the use of repurchase agreements entered into under master repurchase agreements with certain lenders (the "Loan Repurchase Facilities"). Under the Loan Repurchase Facilities, the Company may sell, and later repurchase trust certificates representing interests in residential mortgage loans (the "Trust Certificates"). The borrowings under the Loan Repurchase Facilities are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreement. The borrowings under the Loan Repurchase Facilities are recorded on the trade date at the contract amount.

Securities Repurchase Agreements

The Company finances a portion of its RMBS portfolio and Other Investment Securities through the use of securities repurchase agreements entered into under master repurchase agreements. The Company has master repurchase agreements with four financial institutions at December 31, 2015. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Repurchase agreements are recorded on trade date at the contract amount.

Derivatives and Hedging Activities

The Company accounts for its derivative financial instruments in accordance with derivative accounting guidance, which requires an entity to recognize all derivatives as either assets or liabilities in the consolidated balance sheets and to measure those instruments at fair value. The Company has not designated any of its derivative agreements as hedging instruments for accounting purposes. As a result, changes in the fair value of derivatives are recorded through current period earnings. 

The Company generally records its derivatives on a gross basis prior to the application of the impact of the fair value and collateral netting in the consolidated balance sheets. Derivative instruments that are subject to an enforceable master netting arrangement or similar agreement are netted in the consolidated balance sheets.

Real Estate Owned

The Company records real estate owned ("REO") assets when it is considered to have received physical possession (resulting from an in substance repossession or foreclosure) of residential real estate property collateralizing mortgage loans. The Company is considered to have received physical possession of the property upon the occurrence of either (i) obtaining legal title to the residential real estate property upon completion of a foreclosure (the Company may obtain legal title to the residential real estate property even if the borrower has redemption rights that provide the borrower with a legal right for a period of time after a foreclosure to reclaim the real estate property by paying certain amounts specified by law) or (ii) the borrower conveying all interest in the residential real estate property to the Company to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The deed in lieu of foreclosure or similar legal agreement is completed when agreed-upon terms and conditions have been satisfied by both the borrower and the creditor.

The Company records its REO at fair value, less costs to sell. All legal fees and direct costs relating to real estate owned are expensed as incurred. The excess of the Company's investment in the mortgage loan satisfied over the fair value of the foreclosed property (less cost to sell) is reported as a realized loss in the Company's statements of operations.

Loans Eligible for Repurchase from Ginnie Mae

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company then records the right to repurchase the loan as an asset and liability in its consolidated balance sheets. Such amounts reflect the unpaid principal balance of the loans. 

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8% Exchangeable Senior Notes Due 2016

On November 25, 2013, the Operating Partnership issued $57.5 million aggregate principal amount of unsecured 8.0% Exchangeable Senior Notes due 2016 (the "Exchangeable Senior Notes"). The Exchangeable Senior Notes are carried at amortized cost. Interest expense on the Exchangeable Senior Notes is computed using the effective interest method. The conversion features of the Exchangeable Senior Notes are deemed to be an embedded derivative. Accordingly, the Company is required to bifurcate the embedded derivative related to the conversion features of the Exchangeable Senior Notes. The Company recognized the embedded derivative as a liability in its consolidated balance sheets and measured it at its estimated fair value and recognized changes in its estimated fair value in gain/(loss) on derivative instruments in the Company's consolidated statements of operations.

Liability for Loan Repurchases and Indemnifications

Loans sold to investors by the Company and which met investor and agency underwriting guidelines at the time of sale may be subject to repurchase or indemnification in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, agree to repurchase the loans or indemnify the investor against future losses on such loans. In such cases, the Company bears any subsequent credit loss on the loans. The Company has established a liability for potential losses related to these representations and warranties with a corresponding provision recorded for loan indemnification losses. The liability is included in accounts payable and other liabilities in the Company's consolidated balance sheets and the provision for loan indemnification is included in mortgage banking activities, net in the Company's consolidated statements of operations. In assessing the adequacy of the liability, management evaluates various factors including historical repurchases and indemnifications, historical loss experience, known delinquent and other problem loans, outstanding repurchase demands, historical rescission rates and economic trends and conditions in the industry. Actual losses incurred are reflected as charge-offs against the reserve liability.

Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change.

Loss Contingencies

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief available, sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable, would be disclosed.

Legal costs are recorded on an accrual basis as incurred.

Escrow and Fiduciary Funds

The Company maintains segregated bank accounts in trust for mortgagor escrow balances. Such amounts are excluded from the Company's consolidated balance sheets.

Net Income (Loss) Per Share

The Company's basic earnings per share ("EPS") is computed by dividing net income or loss attributable to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS reflects the potential dilution that could occur if outstanding OP Units and Exchangeable Senior Notes were converted to common stock, where such exercise or conversion would result in a lower EPS.

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2011. The Company was organized and has operated and intends to continue to operate in a manner that will enable it to qualify to be taxed as a REIT. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company's annual REIT taxable income to its stockholders (which is computed without regard to the dividends paid deduction or net capital gains and which does not necessarily equal net income as calculated in accordance with U.S. GAAP). As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders and does not engage in prohibited transactions. The majority of States also recognize the Company's REIT status. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost unless the Internal Revenue Service ("IRS") grants the Company relief under certain statutory provisions. Such an event could materially adversely affect the Company's net income under U.S. GAAP and net cash available for distribution to stockholders. However, it is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements.

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The Company has separately made joint elections with three of its subsidiaries, ZFC Funding Inc., ZFC Trust TRS I, LLC and ZFC Honeybee TRS, LLC, to treat such subsidiaries as taxable REIT subsidiaries (the "TRS entities"). The Company may perform certain activities through these TRS entities that could adversely impact the Company's REIT qualification if performed other than through a TRS entity. The Company's TRS entities file separate tax returns and are taxed as standalone U.S. C-Corporations irrespective of the dividends-paid deduction available to REITs for federal income tax purposes.

The Company assesses its tax positions for all open tax years and records tax benefits only if tax positions meet a more-likely-than-not threshold in accordance with U.S. GAAP for guidance on accounting for uncertainty in income taxes.

Goodwill and Intangible Assets

The purchase price of GMFS was allocated to the assets acquired, including identifiable intangible assets (trade name, customer relationships, licenses and favorable leases), and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of purchase price over the fair value of the net assets acquired was recognized as goodwill. Goodwill is carried at cost, net of impairment charges, and reflected on the Company's consolidated balance sheets.

The Company does not amortize intangible assets with indefinite lives. The Company amortizes intangible assets with identified estimated useful lives on a straight-line basis over their estimated useful lives.

Goodwill is not amortized but is tested for impairment on October 31st of each calendar year, or more frequently if events or changes in circumstances indicate that a potential impairment may have occurred. The testing of goodwill for impairment is initially based on a qualitative assessment to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the facts indicate that it is more likely than not that that an impairment may exist, a two-step quantitative assessment is conducted to (a) calculate the fair value of the reporting unit and compare to its carrying value including goodwill and (b) if the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss equal to the amount by which the carrying value of the goodwill exceeds the implied fair value of that goodwill. The impairment is recognized as an expense in the period in which the impairment occurs.

The Company periodically reviews the carrying amounts of its finite-lived intangible assets to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. The assessment of recoverability is based on management’s estimates by comparing the sum of the estimated undiscounted cash flows generated by the underlying asset, or other appropriate grouping of assets, to its carrying value to determine whether an impairment existed at its lowest level of identifiable cash flows. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment is recognized to the extent the carrying value of such asset exceeds its fair value.

Contingent Consideration

Contingent consideration represent future payments of cash or equity interests to the former owners of GMFS which was acquired on October 31, 2014. The contingent consideration was initially recorded on the date of acquisition at fair value in the consolidated balance sheet and is subsequently remeasured each reporting period at fair value with the change in the fair value recorded in operating expenses in the Company’s consolidated statements of operations.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). The objective of the guidance is to clarify the principles for recognizing revenue. ASU 2014-09 supersedes most current revenue recognition guidance, including industry-specific guidance, and also enhances disclosure requirements around revenue recognition and the related cash flows. The guidance is to be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, for interim and annual periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact of adopting this new standard.

In August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements – Going Concern (Subtopic 205-04) Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern" ("ASU 2014-15"), which requires management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date the financial statements are issued. If conditions or events indicate it is probable that an entity will be unable to meet its obligations as they become due within one year after the financial statements are issued, the update requires additional disclosures. The update is effective for periods beginning after December 15, 2016 with early adoption permitted. Adoption of ASU 2014-15 is not expected to have a material effect on the Company's consolidated financial statements.

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In February 2015, the FASB issued ASU 2015-02, "Consolidation: Amendments to the Consolidation Analysis" ("ASU 2015-02"). ASU 2015-02 makes changes to both the variable interest model and the voting model. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. Adoption of ASU 2015-02 on January 1, 2016 is not expected to have a material effect on the Company’s consolidated financial statements.

In April 2015 the FASB issued ASU 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. Adoption of ASU 2015-03 on January 1, 2016 is not expected to have a material effect on the Company's consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805)” (“ASU 2015-16”). The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. Adoption of ASU 2015-16 on January 1, 2016 is not expected to have a material effect on the Company’s consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments─Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). 'The amendments in ASU 2016-01, among other things: (i) requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (iii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) and (iii) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. The Company is currently evaluating the impact of adopting this new standard.

3. GMFS Transaction

On August 5, 2014, the Company, in its capacity as guarantor, entered into an agreement and plan of merger (the "GMFS Merger Agreement") among ZFC Honeybee TRS, LLC, an indirect subsidiary of the Company, ZFC Honeybee Acquisitions, LLC ("Honeybee Acquisitions"), a wholly owned subsidiary of ZFC Honeybee TRS, LLC, GMFS and Honeyrep, LLC, solely in its capacity as the security holder representative. GMFS is a mortgage banking platform that primarily originates and services agency and government guaranteed residential mortgage loans in the southern United States. On October 31, 2014, the Company completed its acquisition of GMFS. Honeybee Acquisitions was merged with and into GMFS (the "Merger"), with GMFS surviving the Merger as an indirect subsidiary of the Company. The final purchase price was approximately $61.2 million.

The GMFS Merger Agreement contained customary representations and warranties by the parties, as well as customary covenants, including non-competition and non-solicitation covenants by GMFS's key managers and indemnification covenants by both parties, subject to stated thresholds and limitations.

The preliminary purchase price was approximately $62.8 million at closing which was comprised of (i) the estimated fair market value of GMFS's MSR portfolio, (ii) the estimated value of GMFS's net tangible assets at October 31, 2014 and (iii) a purchase price premium. In addition to cash paid at closing, two contingent $1 million deferred premium payments payable in cash over two years, plus potential additional consideration based on future loan production and profits will be payable over a four-year period if certain conditions are met (the “Production and Profitability Earn-Out”). The $2 million of deferred premium payments is contingent on GMFS remaining profitable and retaining certain key employees. The Production and Profitability Earn-Out are dependent on GMFS achieving certain profitability and loan production goals and is capped at $20 million. Up to 50% of the Production and Profitability Earn-Out may be paid in common stock of the Company, at the Company's option. The Company funded the closing cash payment through a combination of available cash and the liquidation of a portion of its non-Agency RMBS portfolio.

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Total consideration at closing was as follows:

Cash paid to owners of GMFS	$	62,847,452
Contingent consideration		11,430,413
Total consideration at closing	$	74,277,865

Contingent consideration represents the estimated present value of deferred premiums and the Production and Profitability Earn-Out. Contingent consideration was estimated at closing based on future production and earnings projections of GMFS over the four year earn-out period and is re-measured to fair value at each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings. The final consideration paid could be materially different from the estimate and the difference will be recorded through earnings in the consolidated statements of operations. For the year ended December 31, 2015, the Company recorded a decrease in the contingent consideration liability of $145,313. The net decrease in the estimated liability resulted from (i) an increase due to the impact of the passage of time and (ii) a decrease due to the impact of the refinement of the expected case estimate to incorporate market based volatility assumptions and changes to the market discount rates. The change in the contingent consideration liability is included in operating expenses in the consolidated statements of operations.

Under the acquisition method of accounting, the total purchase price allocated to the identifiable tangible and intangible assets acquired and the liabilities assumed is based on management's preliminary valuation of GMFS's tangible and intangible assets acquired by the Company and GMFS's liabilities assumed by the Company as of October 31, 2014. The valuation of the net assets acquired is summarized as follows (the final purchase price allocation in June 2015 did not result in material changes):

Fair value of Assets:
Cash and cash equivalents	$	13,304,612
Mortgage loans held for sale		92,512,390
Mortgage loans held for investment, at cost		1,098,897
Derivative assets		1,590,160
Other assets		2,713,950
MSRs		32,300,337
Goodwill		16,512,680
Intangible Assets		5,800,000
Loans eligible for repurchase from Ginnie Mae		21,169,329
Total assets acquired	$	187,002,355
Fair value of Liabilities:
Warehouse lines of credit	$	85,840,705
Accounts payable and other liabilities		5,714,456
Liability for loans eligible for repurchase from Ginnie Mae		21,169,329
Total liabilities assumed	$	112,724,490
Fair value of net assets acquired	$	74,277,865

For the years ended December 31, 2015 and December 31, 2014, the Company incurred acquisition related costs of $120,852 and $2,177,617, respectively related to the acquisition of GMFS. Such amounts are included in other expenses in the Company’s consolidated statements of operations.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities. The determination of goodwill at the time of closing was as follows:

Total purchase price	$	74,277,865
Less: Preliminary estimate of the fair value of the net assets acquired		(57,765,185	)
Goodwill	$	16,512,680

Pursuant to the terms of the GMFS Merger Agreement, based on the final reconciliation of the October 31, 2014 values, the Company received a net settlement of $1,684,263 in June 2015 from an escrow account established at the time of the closing and updated its allocation of the purchase price to the assets and liabilities acquired. The final purchase price of the acquisition (before contingent consideration) was $61,163,189 as a result of this net settlement. The updated allocation, combined with the receipt of escrow funds resulted in a reduction of goodwill of $1,943,533 and a reduction of accrued expenses of $259,269. Additionally, goodwill was reduced by $385,610 relating to the reversal of a liability existing as of the date of the acquisition. These adjustments were recorded based on information obtained subsequent to the acquisition date that related to information that existed as of the acquisition date.

The changes in the carrying amount of the goodwill for the period from October 31, 2014 through December 31, 2014 and the year ended December 31, 2015 is as follows:

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Acquisition of GMFS	$	16,512,680
Balance at December 31, 2014		16,512,680
Reversal of a liability existing as of the date of acquisition		(385,610	)
Finalization of purchase price based upon final reconciliation		(1,943,533	)
Balance at December 31, 2015	$	14,183,537

Goodwill has been allocated to the Company's residential mortgage banking segment and was established as a result of the acquisition of GMFS on October 31, 2014. Goodwill is not amortized but is tested for impairment on the anniversary date of the acquisition or more frequently if events or changes in circumstances indicate that a potential impairment may have occurred. As of October 31, 2015, the Company’s common stock had been trading below its book value for several quarters which is an indicator of potential impairment of the goodwill. The Company, therefore, conducted a valuation analysis of the mortgage banking unit using both a discounted cash flow analysis and market comparables. This valuation analysis supported the current carrying value of the mortgage banking segment, and indicated that the discount in the Company’s stock price was attributable to the residential mortgage investments and corporate segments. No impairment losses relating to goodwill were recorded for the period from October 31, 2014 to December 31, 2014 or the year ended December 31, 2015.

Additionally, goodwill is expected to be deductible for tax purposes over a 15-year life.

Other Intangible Assets

The following table presents information about the intangible assets acquired by the Company:

		Estimated Fair Value	Estimated Useful Life
Trade name	$	2.0 million	10 years
Customer relationships		1.3 million	10 years
Licenses		1.0 million	3 years
Favorable lease		1.5 million	12 years
Total Intangible assets	$	5.8 million

Amortization expense related to the intangible assets acquired for the year ended December 31, 2015 and period from October 31, 2014 to December 31, 2014 was as follows:

	Year Ended  December 31, 2015		October 31, 2014 to December 31, 2014
Amortization expense	$	788,341	$	131,389

Such amounts are recorded as other expenses in the consolidated statements of operations.

At December 31, 2015 and December 31, 2014, accumulated amortization is as follows:

	December 31, 2015		December 31 2014
Trade name	$	233,338	$	33,333
Customer relationships		151,662		21,666
Licenses		388,892		55,556
Favorable lease		145,838		20,834
Total accumulated amortization	$	919,730	$	131,389

Amortization expense related to the intangible assets for the five years subsequent to December 31, 2015 is as follows:

2016	$	788,340
2017	$	732,776
2018	$	455,004
2019	$	455,004
2020	$	455,004

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No impairment losses relating to intangible assets were recorded for the period from October 31, 2014 to December 31, 2014 or the year ended December 31, 2015. The Company did not have any intangible assets prior to the acquisition of GMFS on October 31, 2014.

Results of Operations and Pro-Forma Results

The Company has recognized the following revenues and earnings related to its investment in GMFS for the period from October 31, 2014 (the date of acquisition) to December 31, 2014 which are reflected in the Company’s consolidated statements of operations:

Interest income – mortgage loans held for sale	$	594,217
Mortgage banking activities, net:
Gain on sale of mortgage loans, net of direct costs		5,344,361
Loan origination fee income		213,540
Provision for loan indemnification		(118,895	)
		5,439,006
Loan servicing fee income, net of direct costs		929,718
Change in fair value of mortgage servicing rights		(1,684,373	)
Other income		45,861
Total non-interest income		4,730,212
Net income before expenses and taxes relating to Honeybee TRS		583,073
Expenses of Honeybee TRS		(2,710,564	)(1)
Net loss after expenses of Honeybee TRS, before tax		(2,127,491	)
Tax benefit		850,996
Net loss after expenses of Honeybee TRS, after tax	$	(1,276,495	)

⁽¹⁾ These expenses are included in other expenses in the Company’s consolidated statements of operations.

The results of GMFS are included in the Company’s results beginning October 31, 2014. The unaudited pro forma revenues and net income of the consolidated entity for the year ended December 31, 2014, assuming the business combination was consummated on January 1, 2013, are as follows:

	Year Ended December 31, 2014		Year Ended December 31, 2013
Net interest income	$	21,623,473	$	15,737,131
Non-interest Income
Mortgage banking activities, net		41,047,510		46,354,596
Loan servicing fees, net of direct costs		5,239,010		3,022,447
Other income		673,270		709,369
Net income		35,213,626		11,465,008

The pro forma results are presented for illustrative purposes only and are not intended to represent or be indicative of the actual consolidated results of operations of the Company that would have been achieved had the business combination occurred on January 1, 2013, nor are they intended to represent or be indicative of future results of operations.

4. Fair Value

Fair Value Measurement

Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

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The following tables present the Company’s financial instruments that were accounted for at fair value on a recurring basis at December 31, 2015 and December 31, 2014, by level within the fair value hierarchy:

December 31, 2015

	Assets and Liabilities at Fair Value
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans held for investment	$	—	$	—	$	397,678,140	$	397,678,140
Mortgage loans held for sale		—		115,942,230		—		115,942,230
Non-Agency RMBS		—		—		109,339,281		109,339,281
Other Investment Securities		—		—		12,804,196		12,804,196
MSRs		—		—		48,209,016		48,209,016
Derivative assets		—		—		2,376,187		2,376,187
Total	$	—	$	115,942,230	$	570,406,820	$	686,349,050
Liabilities
Contingent consideration	$	—	$	—	$	11,285,100	$	11,285,100
Derivative liabilities		—		1,822,096		9,871		1,831,967
Total	$	—	$	1,822,096	$	11,294,971	$	13,117,067

December 31, 2014

	Assets and Liabilities at Fair Value
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans held for investment	$	—	$	—	$	415,959,838	$	415,959,838
Mortgage loans held for sale		—		97,690,960		—		97,690,960
Non-Agency RMBS		—		—		148,585,733		148,585,733
Other Investment Securities		—		—		2,040,532		2,040,532
MSRs		—		—		33,378,978		33,378,978
Derivative assets		—		—		2,485,100		2,485,100
Total	$	—	$	97,690,960	$	602,450,181	$	700,141,141
Liabilities
Contingent consideration	$	—	$	—	$	11,430,413	$	11,430,413
Derivative liabilities		—		2,585,184		—		2,585,184
Total	$	—	$	2,585,184	$	11,430,413	$	14,015,597

The following table presents additional information about the Company’s financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

Mortgage Loans Held for Investment, RMBS and Other Investment Securities

	Year Ended December 31, 2015									Year Ended December 31, 2014
	Mortgage Loans Held for Investment			Non-Agency RMBS			Other Investment Securities			Mortgage Loans Held for Investment			Non-Agency RMBS			Other Investment Securities
Beginning balance	$	415,959,838		$	148,585,733		$	2,040,532		$	331,785,542		$	226,155,221		$	—
Originations/acquisitions		21,709,387			6,362,138			17,031,330			85,579,169			47,034,327			12,926,953
Proceeds from sales		—			(26,770,882	)		(5,961,506	)		—			(102,635,229	)		(11,067,378	)
Amortization of premiums		(6,422	)		—			—			—			—			—
Net accretion of discounts		7,767,854			3,882,887			192,476			7,497,341			5,528,538			180,438
Proceeds from principal repayments		(36,056,879	)		(17,888,188	)		(9,915	)		(31,759,326	)		(28,197,740	)		—
Conversion of mortgage loans to REO		(3,806,064	)		—			—			(1,796,028	)		—			—
Total losses (realized/unrealized) included in earnings		(19,504,275	)		(6,105,642	)		(723,638	)		(8,250,003	)		(6,694,487	)		(226,224	)
Total gains (realized/unrealized) included in earnings		11,614,701			1,273,235			234,917			32,903,143			7,395,103			226,743
Ending balance	$	397,678,140		$	109,339,281		$	12,804,196		$	415,959,838		$	148,585,733		$	2,040,532
The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date	$	(9,639,808	)	$	(4,098,040	)	$	(567,589	)	$	22,957,500		$	(1,039,499	)	$	(226,224	)

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Derivative Instruments

	Year Ended  December 31, 2015						Year Ended  December 31, 2014
	Loan Purchase Commitments			Interest Rate Lock Commitments			Loan Purchase Commitments		Interest Rate Lock Commitments
Beginning balance	$	4,037		$	2,481,063		$	—	$	—
Acquisition of GMFS		—			—			—		2,702,954
Change in unrealized gain or loss		(13,908	)		(104,876	)		4,037		(221,891	)
Ending balance	$	(9,871	)	$	2,376,187		$	4,037	$	2,481,063
The amount of total gains or (losses) for the year included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date	$	(13,908	)	$	(104,876	)	$	4.037	$	(221,891	)

MSRs

See Note 8 – "Mortgage Servicing Rights, at fair value" for additional information about the Company's MSRs.

Contingent Consideration

	Year Ended
	December 31, 2015			December 31, 2014
Beginning balance	$	11,430,413		$	—
Acquisition of GMFS		—			11,430,413
Change in fair value		(145,313	)		—
Ending balance	$	11,285,100		$	11,430,413

 There were no financial assets or liabilities that were accounted for at fair value on a nonrecurring basis at December 31, 2015 or December 31, 2014. During the years ended December 31, 2015 and December 31, 2014, mortgage loans held for investment were transferred out of Level 3 when the properties were foreclosed and were classified as real estate owned. There were no other transfers into or out of Level 1, Level 2 or Level 3 during the years ended December 31, 2015 or December 31, 2014.

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The following tables present quantitative information about the Company's assets which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

	Fair Value at December 31, 2015		Valuation Technique(s)	Unobservable Input	Min			Max			Weighted Average
Mortgage loans held for Investment	$	397,678,140	Discounted cash flow model	Constant voluntary prepayment		1.9	%		5.0	%		3.2	%
				Constant default rate		1.4	%		5.0	%		3.1	%
				Loss severity		5.9	%		37.2	%		22.1	%
				Delinquency		6.3	%		13.2	%		10.9	%
Non-Agency RMBS
Alternative – A	$	35,998,175	Broker quotes/comparable trades	Constant voluntary prepayment		2.7	%		18.9	%		12.9	%
				Constant default rate		0.2	%		7.8	%		2.8	%
				Loss severity		0.0	%		85.0	%		21.0	%
				Delinquency		1.4	%		22.2	%		8.9	%
Pay option adjustable rate		32,209,538	Broker quotes/comparable trades	Constant voluntary prepayment		2.2	%		13.5	%		7.5	%
				Constant default rate		0.5	%		13.0	%		3.5	%
				Loss severity		0.0	%		95.6	%		40.0	%
				Delinquency		5.3	%		21.9	%		12.3	%
Prime		32,482,521	Broker quotes/comparable trades	Constant voluntary prepayment		3.6	%		21.0	%		8.0	%
				Constant default rate		0.5	%		9.4	%		3.7	%
				Loss severity		0.0	%		85.1	%		28.9	%
				Delinquency		4.4	%		25.5	%		12.0	%
Subprime		8,649,047	Broker quotes/comparable trades	Constant voluntary prepayment		1.2	%		7.7	%		3.9	%
				Constant default rate		3.0	%		8.0	%		6.2	%
				Loss severity		11.1	%		128.5	%		54.0	%
				Delinquency		18.3	%		28.0	%		22.2	%
Total Non-Agency RMBS	$	109,339,281
Other Investment Securities	$	12,804,196	Broker quotes/comparable trades	Constant voluntary prepayment		4.0	%		18.4	%		6.9	%
MSRs	$	48,209,016	Discounted cash flow model	Constant voluntary prepayment		8.5	%		10.5	%		9.3	%
				Cost of servicing	$	77		$	110		$	92
				Discount rate		9.0	%		10.0	%		9.4	%
Contingent consideration	$	11,285,100	Option pricing model	Discount rate		10.2	%		10.8	%		10.5	%
				Production volatility		—			—			20.0	%
				Profitability volatility		—			—			50.0	%

102

	Fair Value at December 31, 2014		Valuation Technique(s)	Unobservable Input	Min/Max						Weighted Average
Mortgage loans held for investment	$	415,959,838	Discounted cash flow model	Constant voluntary prepayment		1.4	%		27.1	%		3.9	%
				Constant default rate		0.0	%		4.0	%		2.9	%
				Loss severity		0.0	%		40.5	%		23.8	%
				Delinquency		0.1	%		13.6	%		10.6	%
Non-Agency RMBS
Alternative – A	$	61,296,540	Broker quotes/ comparable trades	Constant voluntary prepayment		1.6	%		24.8	%		13.6	%
				Constant default rate		0.1	%		8.4	%		3.1	%
				Loss severity		0.0	%		81.1	%		20.5	%
				Delinquency		1.3	%		25.9	%		10.1	%
Pay option adjustable rate	$	45,541,325	Broker quotes/ comparable trades	Constant voluntary prepayment		1.7	%		20.1	%		8.9	%
				Constant default rate		1.6	%		19.4	%		4.3	%
				Loss severity		0.0	%		66.2	%		38.0	%
				Delinquency		6.8	%		29.1	%		15.2	%
Prime	$	39,065,076	Broker quotes/ comparable trades	Constant voluntary prepayment		2.6	%		17.3	%		9.2	%
				Constant default rate		0.2	%		9.2	%		4.1	%
				Loss severity		0.0	%		78.3	%		28.2	%
				Delinquency		5.0	%		24.8	%		13.0	%
Subprime	$	2,682,792	Broker quotes/ comparable trades	Constant voluntary prepayment		2.4	%		7.4	%		4.7	%
				Constant default rate		6.0	%		8.0	%		7.7	%
				Loss severity		65.0	%		85.0	%		72.0	%
				Delinquency		25.5	%		27.7	%		26.8	%
Total Non-Agency RMBS	$	148,585,733
Other Investment Securities	$	2,040,532	Broker quotes/ comparable trades	Constant voluntary prepayment								7.5	%
MSRs	$	33,378,978	Discounted cash flow model	Constant prepayment rate		7.6	%		58.2	%		10.6	%
				Cost of servicing	$	76		$	533		$	91
				Discount rate		9.0	%		10.0	%		9.4	%
Contingent consideration	$	11,430,413	Discounted cash flow model	Cost of equity		—			—			6.4	%
				Cost of capital		—			—			16.9	%

The valuation methodology for the contingent consideration changed from 2014 to 2015. The contingent consideration recorded at December 31, 2014 was based on a discount cash flow in connection with the acquisition of GMFS on October 31, 2014. The Company used an option pricing model to reassess the fair value of the contingent consideration at December 31, 2015. 

Derivative Financial Instruments

The Company estimates the fair value of interest rate lock commitments ("IRLC") based on quoted Agency MBS prices, the expected net future cash flows related to servicing the mortgage loan, adjusted for: (i) estimated costs to complete and originate the loan and (ii) an adjustment to reflect the estimated percentage of IRLCs that will result in a closed mortgage loan under the original terms of the agreement (or “pullthrough rate”). The Company categorizes IRLCs as a "Level 3" financial statement item.

The significant unobservable inputs used in the fair value measurement of the Company's IRLCs are the pull-through rate and the expected net future cash flows related to servicing the MSRs component of the Company's estimate of the value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and expected net future cash flows related to servicing the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value. 

103

The following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs at December 31, 2015 and December 31, 2014:

Pull-through rate
Range	62.4% – 100.0%	55.7% - 100.0%
Weighted average	87.6%	85.0%
MSR value expressed as:
Servicing fee multiple
Range	0.8% - 5.9%	0.4% - 6.0%
Weighted average	4.3%	4.4%
Percentage of unpaid principal balance
Range	0.3% - 1.7%	0.2% - 1.9%
Weighted average	1.1%	1.1%

The fair value measurements of these assets are sensitive to changes in assumptions regarding prepayment, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Significant changes in any of those inputs in isolation may result in significantly higher or lower fair value measurements. Generally, an increase in the probability of default and loss severity in the event of default would result in a lower fair value measurement. A decrease in these assumptions would have the opposite effect. Conversely, an assumption that the home prices will increase would result in a higher fair value measurement. A decrease in the assumption for home prices would have the opposite effect.

Fair Value Option

Changes in fair value for assets and liabilities for which the fair value option was elected are recognized in earnings as they occur. The fair value option may be elected on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

 The following table presents the difference between the fair value and the aggregate unpaid principal amount and/or notional balance of assets for which the fair value option was elected at December 31, 2015 and December 31, 2014:

104

	December 31, 2015							December 31, 2014
	Fair Value		Unpaid Principal and/or Notional Balance (2)		Difference			Fair Value		Unpaid Principal and/or Notional Balance (2)		Difference
Financial instruments, at fair value
Mortgage loans held for investment (1)	$	397,678,140	$	444,500,063	$	(46,821,923	)	$	415,959,838	$	464,877,028	$	(48,917,190	)
Mortgage loans held for sale		115,942,230		111,393,424		4,548,804			97,690,960		92,917,659		4,773,301
Non-Agency RMBS		109,339,281		168,925,162		(59,585,881	)		148,585,733		226,501,915		(77,916,182	)
Other Investment Securities		12,804,196		13,398,851		(594,655	)		2,040,532		2,250,000		(209,468	)
MSRs		48,209,016		4,173,927,393		N/A	(3)		33,378,978		3,078,974,342		N/A	(3)

(1)	Balance comprised of loans that are (i) distressed and re-performing at the time of purchase and (ii) newly originated at the time of purchase.
(2)	Non-Agency RMBS includes an IO with a notional balance of $35.0 million and $48.6 million at December 31, 2015 and December 31, 2014, respectively.
(3)	Amounts not presented. Unpaid principal balance of MSRs are generally significantly greater than their fair value.

Fair Value of Other Financial Instruments

In addition to the above disclosures regarding assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure about the fair value of all other financial instruments. Estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair values.

The following table summarizes the estimated fair value and carrying value for all other financial instruments at December 31, 2015 and December 31, 2014:

	December 31, 2015				December 31, 2014
	Fair Value		Carrying Value		Fair Value		Carrying Value
Other financial instruments
Assets
Cash	$	20,793,716	$	20,793,716	$	33,791,013	$	33,791,013
Restricted cash		4,371,725		4,371,725		7,143,078		7,143,078
Mortgage loans held for investment, at cost		1,886,642		1,886,642		1,310,544		1,338,935
Liabilities
Warehouse lines of credit	$	100,768,428	$	100,768,428	$	89,417,564	$	89,417,564
Loan repurchase facilities		296,789,330		296,789,330		300,092,293		300,092,293
Securities repurchase agreements		73,300,159		73,300,159		103,014,105		103,014,105
Exchangeable Senior Notes		56,775,500		56,509,046		59,933,400		55,474,741

Cash includes cash on hand for which fair value equals carrying value (a Level 1 measurement). Restricted cash represents the Company's cash held by counterparties as collateral against the Company's derivatives, loan repurchase facilities and securities repurchase agreements. Due to the short-term nature of the restrictions, fair value approximates carrying value (a Level 1 measurement). The fair value of the mortgage loans held for investment is determined, where possible using secondary-market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. Accordingly, mortgage loans held for investment, at cost are classified as Level 2 in the fair value hierarchy. The fair value of the Company's warehouse lines of credit and repurchase agreements related to the GMFS mortgage banking platform, loan repurchase facilities and securities repurchase agreements is based on an expected present value technique using observable market interest rates. As such, the Company considers the estimated fair value to be a Level 2 measurement. This method discounts future estimated cash flows using rates the Company determined best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. The fair value of the Exchangeable Senior Notes (see Note 12) is based on observable market prices (a Level 2 measurement).

The differences reflected in the table for mortgage loans held for investment are not necessarily indicative of cumulative gains or losses related to loans because it does not take into account the fair value of the loans at the date of acquisition.

105

5. Mortgage Loans Held for Investment, at Fair Value

Distressed and re-performing loans at the time of purchase

During the year ended December 31, 2015, the Company did not acquire any mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase.

During the years ended December 31, 2014 and December 31, 2013, the Company's acquisition of mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase was as follows:

	Year Ended
	December 31 2014		December 31, 2013
Aggregate Unpaid Principal Balance	$	100,422,418	$	412,865,280
Loan Repurchase Facilities Used		60,557,196		231,981,549

The following tables present certain information regarding the Company's mortgage loans held for investment at December 31, 2015 and December 31, 2014 which showed evidence of credit deterioration at the time of purchase:

December 31, 2015

	Unpaid							Gross Unrealized (1)							Difference Between Fair Value and Aggregate Unpaid			Weighted Average
	Principal Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair  Value		Principal Balance			Coupon			Unleveraged Yield
Mortgage Loans Held for Investment
Performing
Fixed	$	240,031,119	$	(44,650,666	)	$	195,380,453	$	23,626,555	$	(2,521,921	)	$	216,485,087	$	(23,546,032	)		4.70	%		7.59	%
ARM		143,625,653		(15,597,990	)		128,027,663		5.918,004		(3,126,826	)		130,818,841		(12,806,812	)		3.63			7.15
Total performing		383,656,772		(60,248,656	)		323,408,116		29,544,559		(5,648,747	)		347,303,928		(36,352,844	)		4.30			7.41
Non-performing (2)		40,100,775		(7,515,130	)		32,585,645		990,974		(4,245,960	)		29,330,659		(10,770,116	)		4.65			7.78
Total Mortgage Loans Held for Investment	$	423,757,547	$	(67,763,786	)	$	355,993,761	$	30,535,533	$	(9,894,707	)	$	376,634,587	$	(47,122,960	)		4.34	%		7.45	%

December 31, 2014

	Unpaid							Gross Unrealized (1)							Difference Between Fair Value and Aggregate Unpaid			Weighted Average
	Principal Balance		Premium (Discount)			Amortized  Cost		Gains		Losses			Fair  Value		Principal Balance			Coupon			Unleveraged Yield
Mortgage Loans Held for Investment
Performing
Fixed	$	265,306,697	$	(51,501,092	)	$	213,805,605	$	26,732,362	$	(1,383,524	)	$	239,154,443	$	(26,152,254	)		4.50	%		7.28	%
ARM		162,858,201		(21,343,046	)		141,515,155		9,568,296		(1,441,035	)		149,642,416		(13,215,785	)		3.59			7.10
Total performing		428,164,898		(72,844,138	)		355,320,760		36,300,658		(2,824,559	)		388,796,859		(39,368,039	)		4.15			7.21
Non-performing (2)		35,945,165		(6,039,073	)		29,906,092		840,097		(4,369,886	)		26,376,303		(9,568,862	)		5.48			7.13
Total Mortgage Loans Held for Investment	$	464,110,063	$	(78,883,211	)	$	385,226,852	$	37,140,755	$	(7,194,445	)	$	415,173,162	$	(48,936,901	)		4.26	%		7.20	%

⁽¹⁾ The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded the following as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations:

Year Ended
December 31, 2015			December 31, 2014		December 31, 2013
$	(9,305,484	)	$	22,810,802	$	7,136,482

⁽²⁾ Loans that are delinquent for 60 days or more are considered non-performing.

106

The change in accretable yield for the Company's mortgages held for investment which had shown evidence of credit deterioration since origination at the time of purchase for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 is as follows:

	Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
Accretable yield, beginning of year	$	267,509,905		$	223,401,697		$	—
Acquisitions		—			55,532,098			222,899,189
Accretion		(25,582,964	)		(26,137,006	)		(10,470,435	)
Reclassifications from nonaccretable difference		5,825,003			14,713,116			10,972,942
Accretable yield, end of year	$	247,751,944		$	267,509,905		$	223,401,696

Newly originated loans at the time of purchase

During the years ended December 31, 2015 and December 31, 2014, the Company's acquisition of mortgage loans held for investment which were newly originated at the time of purchase was as follows:

	Year Ended
	December 31, 2015		December 31, 2014
Aggregate Unpaid Principal Balance	$	21,336,404	$	766,965
Loan Repurchase Facilities Used		18,129,422		690,268

During the year ended December 31, 2013, the Company did not acquire any mortgage loans held for investment which were newly originated at the time of purchase.

The following tables present certain information regarding the Company's mortgage loans held for investment, at fair value, at December 31, 2015 and December 31, 2014 which were newly originated at the time of purchase and sourced through the Company’s loan purchase program:

December 31, 2015

	Unpaid						Gross Unrealized (1)							Weighted Average
	Principal Balance		Premium		Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Performing
Fixed	$	17,674,257	$	315,860	$	17,990,117	$	58,069	$	(99,486	)	$	17,948,700		5,05	%		4.89	%
ARM		3,068,259		44,875		3,113,134		—		(18,280	)		3,094,854		4.37			4.25
Total Mortgage Loans Held for Investment	$	20,742,516	$	360,735	$	21,103,251	$	58,069	$	(117,766	)	$	21,043,554		4.95	%		4.79	%

December 31, 2014

	Unpaid						Gross Unrealized (1)						Weighted Average
	Principal Balance		Premium (Discount)		Amortized Cost		Gains		Losses		Fair Value		Coupon			Unleveraged Yield
Performing
Fixed	$	766,965	$	16,173	$	783,138	$	3,538	$	—	$	786,676		4.38	%		4.20	%
Total Mortgage Loans Held for Investment	$	766,965	$	16,173	$	783,138	$	3,538	$	—	$	786,676		4.38	%		4.20	%

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded the following as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations:

Year Ended
December 31, 2015			December 31, 2014
$	(63,235	)	$	3,538

107

Concentrations

The Company's mortgage loans held for investment, at fair value consists of mortgage loans on residential real estate located throughout the United States. The following is a summary of certain concentrations of credit risk in the mortgage loan portfolio at December 31, 2015 and December 31, 2014:

	December 31, 2015			December 31, 2014
Percentage of fair value of mortgage loans with unpaid principal balance to current property value in excess of 100%		44.1	%		55.7	%
Percentage of fair value of mortgage loans secured by properties in the following states:
Each representing 10% or more of fair value:
California		26.2	%		26.2	%
Florida		16.1	%		16.6	%
Additional state representing more than 5% of fair value:
Georgia		6.1	%		5.7	%
New York		4.8	%		5.1	%
Percentage of unpaid principal balance of mortgage loans carrying mortgage insurance		8.2	%		10.3	%

The range of interest rates and contractual maturities of the Company's mortgage loans held for investment at December 31, 2015 and December 31, 2014 were as follows:

	December 31, 2015	December 31,  2014
Interest rates	1.75% - 12.20%	1.75% - 12.20%
Contractual maturities	1 - 45 years	1 - 46 years

REO

Additional information about the Company’s REO assets at December 31, 2015 and December 31, 2014, are as follows:

	December 31, 2015		December 31,  2014
Net realizable value (included in other assets in the Company's consolidated balance sheets)	$	1,784,670	$	1,282,669
Carrying amount of mortgage loans held for investment, at fair value secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction		5,597,611		4,762,509

6. Mortgage Loans Held for Sale, at Fair Value

During the year ended December 31, 2015 and December 31, 2014, the Company's mortgage loans held for sale activity was as follows:

	Year Ended
	December 31, 2015			December 31, 2014
Balance at beginning of year	$	97,690,960		$	—
Acquisition of GMFS		—			92,512,390
Originations and repurchases		1,851,206,995			253,934,598
Proceeds from sales and principal payments		(1,893,833,985	)		(245,140,671	)
Transfers to mortgage loans held for investment, at cost, net		(443,932	)		—
Gain on sale		61,322,192			(3,615,357	)
Balance at end of year	$	115,942,230		$	97,690,960

108

Mortgage loans held for sale, at fair value at December 31, 2015 and December 31, 2014 is as follows:

	December 31, 2015				December 31, 2014
	Unpaid Principal Balance		Fair Value		Unpaid Principal Balance		Fair Value
Conventional	$	54,962,904	$	56,586,717	$	55,073,645	$	57,058,195
Governmental		30,531,301		32,131,354		13,407,781		14,601,797
United States Department of Agriculture loans		16,222,152		17,059,982		16,105,088		17,069,138
United States Department of Veteran Affairs loan		8,922,978		9,314,255		6,730,696		7,196,278
Reverse mortgage		754,089		849,922		1,600,449		1,765,552
Total	$	111,393,424	$	115,942,230	$	92,917,659	$	97,690,960

The Company did not have mortgage loans held for sale prior to the acquisition of GMFS on October 31, 2014.

7. Real Estate Securities and Other Investment Securities, at Fair Value

The Company's non-Agency RMBS portfolio is not issued or guaranteed by Fannie Mae, Freddie Mac or any other U.S. Government agency or a federally chartered corporation and is therefore subject to additional credit risks.

The following tables present certain information regarding the Company's non-Agency RMBS and Other Investment Securities at December 31, 2015 and December 31, 2014:

December 31, 2015

	Principal or							Gross Unrealized (2)							Weighted Average
	Notional Balance		Premium (Discount)			Amortized  Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Real estate securities
Non-Agency RMBS:
Alternative – A	$	76,328,172	$	(40,150,416	)	$	36,177,756	$	846,318	$	(1,025,899	)	$	35,998,175		2.01	%		6.18	%
Pay option adjustable rate		42,562,819		(7,480,996	)		35,081,823		6,863		(2,879,148	)		32,209,538		1.10			5.31
Prime		37,366,079		(4,732,637	)		32,633,442		563,311		(714,232	)		32,482,521		3.62			5.95
Subprime		12,668,092		(4,039,253	)		8,628,839		111,651		(91,443	)		8,649,047		0.93			6.63
Total non-Agency RMBS	$	168,925,162	$	(56,403,302	)	$	112,521,860	$	1,528,143	$	(4,710,722	)	$	109,339,281		2.05	%		5.87	%
Other Investment Securities (1)	$	13,398,851	$	(34,264	)	$	13,364,587	$	897	$	(561,288	)	$	12,804,196		4.94	%		6.65	%

 December 31, 2014

	Principal or							Gross Unrealized (2)							Weighted Average
	Notional Balance		Premium (Discount)			Amortized Cost		Gains		Losses			Fair Value		Coupon			Unleveraged Yield
Real estate securities
Non-Agency RMBS:
Alternative – A	$	118,547,109	$	(58,583,222	)	$	59,963,887	$	1,916,611	$	(583,958	)	$	61,296,540		3.44	%		7.03	%
Pay option adjustable rate		58,122,808		(11,491,663	)		46,631,145		80,848		(1,170,668	)		45,541,325		0.93			6.12
Prime		43,803,995		(6,219,091	)		37,584,904		1,545,452		(65,280	)		39,065,076		3.60			6.79
Subprime		6,028,003		(3,290,867	)		2,737,136		—		(54,344	)		2,682,792		0.33			16.98
Total non-Agency RMBS	$	226,501,915	$	(79,584,843	)	$	146,917,072	$	3,542,911	$	(1,874,250	)	$	148,585,733		2.62	%		6.96	%
Other Investment Securities (1)	$	2,250,000	$	16,756		$	2,266,756	$	—	$	(226,224	)	$	2,040,532		3.92	%		5.90	%

(1) See Note 2 – Summary of Significant Accounting Policies , “Other Investment Securities".

(2) The Company has elected the fair value option pursuant to ASC 825 for real estate securities. The Company recorded the changes in unrealized gain or loss in the consolidated statements of operations.

109

	December 31, 2015				December 31, 2014
	Non-Agency RMBS		Other Investment Securities		Non-Agency RMBS		Other Investment Securities
Notional balance of IO included in Alternative A	$	35,042,860		—	$	48,569,424		—
Contractual maturities (range)		18.1 to 31.3 years		8.4 to 12.3 years		20.3 to 32.3 years		9.7 years
Weighted average maturity		24.4 years		10.1 years		24.9 years		9.7 years

Actual maturities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses.

All real estate securities and Other Investment Securities held by the Company at December 31, 2015 and December 31, 2014 were issued by issuers based in the United States.

Realized losses from OTTI on non-Agency RMBS or Other Investment Securities for the years ended December 31, 2015, December 31, 2014 and December 31, 2013 are as follows:

Year Ended
December 31, 2015		December 31, 2014		December 31, 2013
$	—	$	—	$	1,108,024

8. Mortgage Servicing Rights, at Fair Value

The Company's MSRs consist of conforming conventional loans sold to Fannie Mae and Freddie Mac or loans securitized in Ginnie Mae securities. Similarly, the government loans serviced by the Company are securitized through Ginnie Mae, whereby the Company is insured against loss by the FHA or partially guaranteed against loss by the VA.

The activity of MSRs for the years ended December 31, 2015 and December 31, 2014 is as follows:

	Year Ended
	December 31, 2015			December 31, 2014
Balance at beginning of year	$	33,378,978		$	—
Acquisition of MSRs in connection with purchase of GMFS on October 31, 2014		—			32,300,337
Additions due to loans sold, servicing retained		18,958,514			2,763,014
Change in fair value of MSRs (1)
Changes in values of market related inputs or assumptions used in a valuation model (2)		29,378			(1,420,925	)
Other changes (3)		(4,157,854	)		(263,448	)
Total - change in fair value of MSRs		(4,128,476	)		(1,684,373	)
Balance at end of year	$	48,209,016		$	33,378,978

⁽¹⁾ Included in change in fair value of MSRs in the Company's consolidated statements of operations.

⁽²⁾ Primarily reflects changes in values of prepayment assumptions due to changes in interest rates.

⁽³⁾ Represents change in value primarily due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid off or paid down during the year.

The Company did not have MSRs prior to the acquisition of GMFS on October 31, 2014.

110

The Company's MSR portfolio at December 31, 2015 and December 31, 2014 is as follows:

	December 31, 2015				December 31, 2014
	Unpaid Principal Balance		Fair Value		Unpaid Principal Balance		Fair Value
Fannie Mae	$	1,880,177,827	$	20,751,648	$	1,640,799,719	$	17,078,181
Ginnie Mae		1,488,159,758		18,231,527		1,146,234,768		13,102,076
Freddie Mac		805,589,808		9,225,841		291,939,855		3,198,721
Total	$	4,173,927,393	$	48,209,016	$	3,078,974,342	$	33,378,978

The following is a quantitative summary of key input assumptions and their related impact on the estimated fair value of the MSRs from adverse changes in those assumptions (weighted averages are based upon unpaid principal balance) at December 31, 2015:

Discount rate:
Range		6.6%-12.2	%
Weighted average		9.4	%
Effect on fair value of adverse change of:
5%	$	(958,786	)
10%	$	(1,881,870	)
20%	$	(3,628,281	)
Prepayment speed (1) :
Range		7.0%-12.0	%
Weighted average		9.3	%
Effect on fair value of adverse change of:
5%	$	(938,584	)
10%	$	(1,756,195	)
20%	$	(3,428,890	)
Per-loan annual cost of servicing:
Range		$64-$119
Weighted average		$92
Effect on fair value of adverse change of:
5%	$	(547,228	)
10%	$	(1,094,455	)
20%	$	(2,188,910	)

⁽¹⁾ Prepayment speed is measured using CPR.

	Year Ended
	December 31, 2015		December 31, 2014
The amount of total gains or (losses) for the year included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	29,378	$	(1,420,925	)

The Company contracts with licensed sub-servicers to perform all servicing functions for these loans. The following table presents the loan servicing fee income, net of direct costs, for the years ended December 31, 2015 and December 31, 2014:

	Year Ended
	December 31, 2015			December 31, 2014
Loan servicing fee income	$	10,641,288		$	1,412,583
Late fee income		64			60
Sub-servicing costs		(3,548,921	)		(482,925	)
Loan servicing fee income, net of direct costs	$	7,092,431		$	929,718

111

The Company did not have any MSRs or loan servicing fees, net of direct costs prior to the acquisition of GMFS on October 31, 2014.

9. Warehouse Lines of Credit

At December 31, 2015 and December 31, 2014, the Company had two warehouse lines of credit and two master repurchase agreements, each with different lenders, which provide financing for the Company's origination of mortgage loans held for sale in its residential mortgage banking segment.

The warehouse lines of credit and repurchase agreements bear interest at a rate that has historically moved in close relationship to LIBOR. The agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants at December 31, 2015 and December 31, 2014 and for the years ended December 31, 2015 and December 31, 2014.The Company did not have any warehouse lines of credit prior to the acquisition of GMFS on October 31, 2014.

The following tables present certain information regarding the Company's warehouse lines of credit and repurchase agreements in its residential mortgage banking segment at December 31, 2015 and December 31, 2014:

	December 31, 2015		December 31, 2014
Availability	$	185,000,000	$	130,000,000
Maturity dates		June 2016 – November 2016		January 2015 – June 2016

	December 31, 2015					December 31, 2014
Maturity Dates	Balance		Weighted Average Rate			Balance		Weighted Average Rate
30 days or less	$	—		—	%	$	21,210,431		2.47	%
181 days to 1 year		100,768,428		2.72			57,118,533		2.46
Greater than 1 year		—		—			11,088,600		2.92
Total balance and weighted average rate	$	100,768,428		2.72	%	$	89,417,564		2.52	%

Collateral

	December 31, 2015		December 31, 2014
Mortgage loans held for sale pledged as collateral to secure the warehouse lines of credit and repurchase agreements related to the GMFS mortgage banking platform	$	115,942,230	$	97,690,960

These obligations are also fully guaranteed by the Company.

10. Loan Repurchase Facilities

At December 31, 2015 and December 31, 2014, the Company had the following outstanding master repurchase agreements with Citibank, N.A. (the "Citi Loan Repurchase Facility") and Credit Suisse First Boston Mortgage Capital LLC (the "Credit Suisse Loan Repurchase Facility") (collectively, the "Loan Repurchase Facilities") used to fund the purchase of mortgage loans held for investment in its residential mortgage investments segment:

	December 31, 2015				December 31, 2014
	Citibank, N.A Distressed and		Credit Suisse First Boston Mortgage Capital LLC		Citibank, N.A Distressed and		Credit Suisse First Boston Mortgage Capital LLC
Lender Collateral type funded by facility	Re- Performing Loans		Newly Originated Loans		Re- Performing Loans		Newly Originated Loans
Total facility size	$	325,000,000	$	100,000,000	$	325,000,000	$	100,000,000
Amount committed	$	150,000,000	$	25,000,000	$	150,000,000	$	100,000,000
Maturity date		May 20, 2016		June 27, 2016		May 22, 2015		August 13, 2015
Outstanding balance	$	279,467,573	$	17,321,757	$	299,402,024	$	690,269

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Each of the Loan Repurchase Facilities is collateralized by the underlying mortgages and related documents and instruments in the residential mortgage investments segment and the obligations are fully guaranteed by the Company.

Under the Loan Repurchase Facilities, the Company may sell, and later repurchase trust certificates representing interests in residential mortgage loans (the "Trust Certificates"). The principal amount paid by the lenders under the Loan Repurchase Facilities for the Trust Certificates, which represent interests in residential mortgage loans, is based on (i) in the case of the Citi Loan Repurchase Facility, a percentage of the lesser of the market value or the unpaid principal balance of such mortgage loans backing the Trust Certificates and (ii) in the case of the Credit Suisse Loan Repurchase Facility, a percentage of the lesser of the market value, the unpaid principal balance or the acquisition price of such mortgage loans backing the Trust Certificates. Upon the Company's repurchase of a Trust Certificate sold to the lenders under the Loan Repurchase Facilities, the Company is required to repay the lenders a repurchase amount based on the purchase price plus accrued interest. The Company is also required to pay the lenders a commitment fee for the Loan Repurchase Facilities, as well as certain other administrative costs and expenses in connection with the lenders' structuring, management and ongoing administration of the Loan Repurchase Facilities. The commitment fees are included in interest expense in the consolidated statements of operations.

The Company pledges cash and certain of its Trust Certificates as collateral under the Loan Repurchase Facilities. The amounts available to be borrowed are dependent upon the fair value of the Trust Certificates pledged as collateral, which fluctuates with changes in interest rates, type of underlying mortgage loans and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in the fair value of pledged Trust Certificates, the lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. During the years ended December 31, 2015, December 31, 2014 and December 31, 2013 and at December 31, 2015 and December 31, 2014, the Company has met all margin call requirements related to any outstanding balances under its Loan Repurchase Facilities.

 The agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth and maximum debt to net worth ratio, as defined in the agreements. The Company was in compliance with all significant debt covenants for the years ended December 31, 2015 and December 31, 2014, and at December 31, 2015.

The following tables present certain information regarding the Company's Loan Repurchase Facilities at December 31, 2015 and December 31, 2014:

	December 31, 2015					December 31, 2014
	Balance		Weighted  Average Rate			Balance		Weighted  Average Rate
Loan Repurchase Facilities borrowings maturing within		—		—
91-180 days	$	296,789,330		3.14	%	$	299,402,024		2.92	%
181 days to 1 year		—		—			690,269		2.46	%
Total balance and weighted average rate	$	296,789,330		3.14	%	$	300,092,293		2.92	%

	December 31, 2015		December 31, 2014
Fair value of Trust Certificates pledged as collateral	$	394,942,512	$	415,814,067
Fair value of mortgage loans not pledged as collateral		2,735,628		145,771
Cash pledged as collateral		375,579		—
Unused Amount (1)		128,210,670		124,907,707

⁽¹⁾ The amount the Company is able to borrow under the Loan Repurchase Facilities is tied to the fair value of unencumbered Trust Certificates eligible to secure those agreements and the Company's ability to fund the agreements' margin requirements relating to the collateral sold.

	Year Ended
	December 31, 2015			December 31, 2014
Weighted average interest rate (1)		3.16	%		3.11	%
Average unpaid principal balance of loans sold under agreements to repurchase	$	688,271		$	193,332
Maximum daily amount outstanding	$	302,037,635		$	310,575,669

⁽¹⁾ Includes commitment fees.

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11. Securities Repurchase Agreements

Securities repurchase agreements related to real estate securities and Other Investment Securities involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." Repurchase agreements related to real estate securities and Other Investment Securities entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the end of each arrangement's term, typically 30 to 90 days. The Company maintains the beneficial interest in the specific securities pledged during the term of the repurchase arrangement and receives the related principal and interest payments. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase arrangement at which time the Company may enter into a new repurchase arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. In response to declines in the fair value of pledged securities due to changes in market conditions or the publishing of monthly security paydown factors, the lender requires the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparty in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Under the terms of the Company's master repurchase agreements related to real estate securities and Other Investment Securities, the counterparty may sell or re-hypothecate the pledged collateral.

The Company has master repurchase agreements with four financial institutions at December 31, 2015 and December 31, 2014.

The following tables present certain information regarding the Company's securities repurchase agreements at December 31, 2015 and December 31, 2014 by remaining maturity and collateral type:

	December 31, 2015
	Non-Agency RMBS					Other Investment Securities
	Balance		Weighted Average Rate			Balance		Weighted Average Rate
Securities repurchase agreements maturing within
30 days or less	$	71,910,849		1.80	%	$	1,389,310		2.17	%
Total balance/weighted average rate	$	71,910,849		1.80	%	$	1,389,310		2.17	%

	December 31, 2014
	Non-Agency RMBS					Other Investment Securities
	Balance		Weighted Average Rate			Balance		Weighted Average Rate
Securities repurchase agreements maturing within
30 days or less	$	101,553,292		1.57	%	$	1,460,813		1.66	%
Total balance/weighted average rate	$	101,553,292		1.57	%	$	1,460,813		1.66	%

Although securities repurchase agreements are committed borrowings until maturity, the lender retains the right to mark the underlying collateral to fair value. A reduction in the fair value of pledged assets would require the Company to provide additional collateral or cash to fund margin calls.

The Company pledges cash and certain of its non-Agency RMBS and Other Investment Securities as collateral under these securities repurchase agreements. The amounts available to be borrowed are dependent upon the fair value of the RMBS and Other Investment Securities pledged as collateral, which fluctuates with changes in interest rates, type of securities and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in the fair value of pledged RMBS and Other Investment Securities, the lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. During the years ended December 31, 2015, December 31, 2014 and December 31, 2013 and at December 31, 2015 and December 31, 2014, the Company has met all margin call requirements under its securities repurchase agreements.

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The following table presents information with respect to the Company's posting of collateral under its securities repurchase agreements at December 31, 2015 and December 31, 2014:

	December 31, 2015		December 31, 2014
Fair value of non-Agency RMBS pledged as collateral	$	95,627,850	$	135,779,193
Fair value of Other Investment Securities pledged as collateral		1,989,174		2,040,532
Fair value of non-Agency RMBS not pledged as collateral		13,711,431		12,806,540
Fair value of Other Investment Securities not pledged as collateral		10,815,022		—
Cash pledged as collateral		2,029,581		684,256

12. 8.0% Exchangeable Senior Notes due 2016

On November 25, 2013, the Operating Partnership issued the Exchangeable Senior Notes with a stated rate of 8.0% and an aggregate principal amount of $57.5 million (the "Exchangeable Senior Notes"). The Exchangeable Senior Notes were issued pursuant to an Indenture, dated November 25, 2013, between the Company, as guarantor, the Operating Partnership and U.S. Bank National Association, as trustee. The sale of the Exchangeable Senior Notes generated net proceeds of approximately $55.3 million. Aggregate estimated offering expenses in connection with the transaction, including the initial purchasers' discount of approximately $1.7 million, were approximately $2.2 million.

The Exchangeable Senior Notes are the Company's senior unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the Exchangeable Senior Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries, financing vehicles or similar facilities.

The Exchangeable Senior Notes are exchangeable for shares of the Company's common stock or, to the extent necessary to satisfy NYSE listing requirements, cash, at the applicable exchange rate at any time prior to the close of business on the scheduled trading day prior to November 15, 2016 (the "Maturity Date"). The Company may not elect to issue shares of common stock upon exchange of the Exchangeable Senior Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the Exchangeable Senior Notes (or 1,779,560 or more shares).

As a result of the NYSE related limitation on the use of share-settlement for the full conversion option, the embedded conversion option does not qualify for equity classification and instead is separately valued and accounted for as a derivative liability. The initial value allocated to the derivative liability was $1.3 million, which represents a discount to the debt to be amortized through interest expense using the effective interest method through the Maturity Date. During each reporting period, the conversion option derivative liability is marked to fair value through earnings.

The exchange rate was initially 52.5417 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes (equivalent to an initial exchange price of approximately $19.03 per share of common stock). The exchange rate will be subject to adjustment for certain events, including for regular quarterly dividends in excess of $0.50 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the exchange rate will be increased but will in no event exceed 60.4229 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes. The exchange rate was adjusted on December 27, 2013 to 54.3103 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes pursuant to the Company's special dividend of $0.55 per share of common stock and OP Unit declared on December 19, 2013.

115

The Company does not have the right to redeem the Exchangeable Senior Notes prior to the Maturity Date, except to the extent necessary to preserve its qualification as a REIT for U.S. federal income tax purposes. No sinking fund is provided for the Exchangeable Senior Notes. In addition, if the Company undergoes certain corporate events that constitute a "fundamental change," the holders of the Exchangeable Senior Notes may require the Company to repurchase for cash all or part of their Exchangeable Senior Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The Company is currently evaluating alternatives to settle the obligation at maturity in light of the pending strategic review.

The Exchangeable Senior Notes bear interest at a rate of 8.0% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2014. The effective interest rate of the Exchangeable Senior Notes, which is equal to the stated rate of 8.0% plus the amortization of the original issue discount and associated costs, is 10.2%.

The following table presents information with respect to the Exchangeable Senior Notes at December 31, 2015 and December 31, 2014:

	December 31, 2015		December 31, 2014
Fair value of conversion option derivative liability	$	612,878	$	1,022,248
Unamortized discount		990,954		2,025,259

13. Derivative Instruments

The Company’s derivative instruments, by segment, are as follows:

Residential Mortgage Investments Segment

Interest Rate Swap and Swaption Agreements

To help mitigate exposure to higher short-term interest rates, the Company uses currently-paying and forward-starting, three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. Additionally, the Company enters into interest rate swaption agreements which gives the Company the right, but not the obligation, to enter into a previously agreed upon swap contract on a future date. If exercised, the Company will enter into an interest rate swap agreement and will be obligated to pay a fixed rate of interest and receive a floating rate of interest. These swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company's effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates.

The Company's interest rate swap agreements and interest rate swaption agreement have not been designated as hedging instruments.

LPCs

The Company enters into LPCs as a means to help mitigate interest rate risk. The LPCs are pursuant to Master Loan Purchase Agreements with approved, third party residential loan originators to purchase residential loans, which meet the guidelines established by the Company, at a future date. LPCs provide that loans acceptable to the Company be delivered if and when they close and are subject to "pair off" fees if the loans are not delivered by the seller.

TBA Securities

The Company may, as it has in the past, enter into TBA contracts for this segment as a means of acquiring exposure to Agency RMBS and may, from time to time, utilize TBA dollar roll transactions to finance Agency RMBS purchases. The Company may also enter into TBA contracts as a means of hedging against short-term changes in interest rates. The Company may choose, prior to settlement, to move the settlement of these securities to a later date by entering into an offsetting position (referred to as a "pair off"), settling the paired off positions against each other for cash, and simultaneously entering into a similar TBA contract for a later settlement date, which is commonly and collectively referred to as a "dollar roll" transaction. The Company accounts for its TBA contracts as derivative instruments due to the fact that it does not intend to take physical delivery of the securities.

 The Company had no exposure to TBA contracts for this segment at any time during the years ended December 31, 2015 and December 31, 2014. During the year ended December 31, 2013, the Company paired off purchases of TBA securities with a combined notional amount of $643.0 million by entering into simultaneous sales of TBA securities and realized losses of $4.2 million and recognized a change in unrealized gains or losses of $0.5 million as a result. At December 31, 2015 and December 31, 2014 the Company did not have any TBA contracts outstanding relating to this segment.

116

Residential Mortgage Banking Segment

IRLCs

The Company enters into IRLCs to originate residential mortgage loans held for sale, at specified interest rates and within a specified period of time (generally between 30 and 90 days), with customers who have applied for a loan and meet certain credit and underwriting criteria.

MBS Forward Sales Contracts and TBA Securities

The Company manages the interest rate price risk associated with its outstanding IRLCs and mortgage loans held for sale by entering into derivative instruments such as MBS forward sales contracts, some of which are TBA securities. The Company expects these derivatives will experience changes in fair value opposite to changes in the fair value of the IRLCs and mortgage loans held for sale, thereby reducing earnings volatility. The Company takes into account various factors and strategies in determining the portion of the IRLCs and mortgage loans held for sale it wants to economically hedge.

The Company did not have any IRLCs, MBS Forward Sales Contracts or TBA Securities related to the residential mortgage banking segment prior to the acquisition of GMFS on October 31, 2014.

Other

Conversion Option – Exchangeable Senior Notes

Changes in the fair value of the conversion option derivative related to the Exchangeable Senior Notes are recorded through earnings.

Derivative Instruments

The following table presents certain information related to derivative instruments held at December 31, 2015 and December 31, 2014:

Non-hedge derivatives	December 31, 2015		December 31, 2014
Notional amount of interest rate swaption	$	—	$	225,000,000
Notional amount of interest rate swaps		17,200,000		17,200,000
LPCs (Principal balance of underlying loans)		18,494,332		1,905,700
IRLCs (Principal balance of underlying loans)		190,933,017		118,486,590
Notional amount of MBS forward sales contracts		179,417,280		154,000,000

The notional amount is not representative of the maximum exposure to the Company.

The following table presents the fair value of the Company's derivative instruments and their balance sheet location at December 31, 2015 and December 31, 2014: 

Derivative instruments	Designation	Balance Sheet Location	December 31, 2015			December 31, 2014
Interest rate swaps	Non-hedge	Derivative liabilities, at fair value	$	(1,009,014	)	$	(860,553	)
Interest rate swaption	Non-hedge	Derivative assets, at fair value		—			—
LPCs	Non-hedge	Derivative (liabilities) assets, at fair value		(9,871	)		4,037
IRLCs	Non-hedge	Derivative assets, at fair value		2,376,187			2,481,063
MBS forward sales contracts	Non-hedge	Derivative liabilities, at fair value		(200,204	)		(702,383	)
Conversion Option - Exchangeable Senior Notes	Non-hedge	Derivative liabilities, at fair value		(612,878	)		(1,022,248	)

At December 31, 2015 and December 31, 2014, no credit valuation adjustment was made in determining the fair value of the interest rate swaption or interest rate swaps.

117

The following table presents the gains and (losses) related to Company's derivative instruments:

		Year Ended
Non-hedge derivatives	Income Statement  Location	December 31, 2015			December 31, 2014			December 31, 2013
Interest rate swaps	Gain/(loss) on derivative instruments related to investment portfolio	$	(567,321	)	$	(1,571,371	)	$	10,548,012
Interest rate swaption	Gain/(loss) on derivative instruments related to investment portfolio		—			(4,803,750	)		—
LPCs	Gain/(loss) on derivative instruments related to investment portfolio		(13,908	)		4,037			—
IRLCs	Mortgage banking activities, net		(104,876	)		(221,891	)		—
MBS forward sales contracts	Mortgage banking activities, net		502,179			410,411			—
Conversion Option - Exchangeable Senior Notes	Gain/(loss) on derivative instruments related to investment portfolio		409,370			449,359			(147,201	)
TBAs	Gain/(loss) on derivative instruments related to investment portfolio		—			—			(4,785,996	)

Interest Rate Swaption

The following table presents information about the Company's interest rate swaption agreement at December 31, 2014:

Swaption Expiration	Notional Amount		Strike Rate			Swap Maturity		Cash Pledged as Collateral (1)
January 15, 2015	$	225,000,000		3.64	%		2025	$	4,886,011

⁽¹⁾ At December 31, 2014 all collateral provided under the interest rate swaption agreement consisted of cash collateral which is included in restricted cash in the Company's consolidated balance sheets. The interest rate swaption agreement expired in January 2015.

The credit support annex provisions of the Company's interest rate swaption agreement allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral.  

Interest Rate Swaps

 The following table presents information about the Company's interest rate swap agreements at December 31, 2015 and December 31, 2014:

	December 31, 2015			December 31, 2014
Maturity		2023			2023
Notional Amount	$	17,200,000		$	17,200,000
Weighted Average Pay Rate		2.72	%		2.72	%
Weighted Average Receive Rate		0.33	%		0.23	%
Weighted Average Years to Maturity		7.6			8.6
Cash Pledged as Collateral (1)	$	1,966,565		$	1,572,811

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⁽¹⁾ At December 31, 2015 and December 31, 2014 all collateral provided under the interest rate swap agreements consisted of cash collateral which is included in restricted cash in the Company's consolidated balance sheets.

The Company's interest rate swap agreements contain legally enforceable provisions that allow for netting or setting off of all individual interest rate swap receivables and payables with each respective counterparty and, therefore, the fair value of those interest rate swap agreements are netted. The credit support annex provisions of the Company's interest rate swap agreements allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral.

14. Mortgage Banking Activities

The following table presents the components of mortgage banking activities, net, recorded in the Company's consolidated statements of operations for the years ended December 31, 2015 and December 31, 2014:

	December 31,  2015			December 31,  2014
Gain on sale of mortgage loans held for sale, net of direct costs (1)	$	44,847,548		$	5,344,361
Loan expenses, including provision for loan indemnification		(762,239	)		(118,895	)
Loan origination fee income		1,772,153			213,540
Total	$	45,857,462		$	5,439,006

⁽¹⁾ Includes the change in fair value related to IRLCs and MBS forward sales contracts held during the year.

15. Loan Indemnification Reserve

A liability has been established for potential losses related to representations and warranties made by GMFS for loans sold with a corresponding provision recorded for loan indemnification losses. The liability is included in accounts payable and other liabilities in the Company's consolidated balance sheets and the provision for loan indemnification losses is included in mortgage banking activities, net in the Company's consolidated statements of operations. In assessing the adequacy of the liability, management evaluates various factors including historical repurchases and indemnifications, historical loss experience, known delinquent and other problem loans, outstanding repurchase demand, historical rescission rates and economic trends and conditions in the industry. Actual losses incurred are reflected as a reduction of the reserve liability.

The activity for the loan indemnification reserve for the years ended December 31, 2015 and December 31, 2014 is as follows:

	Year Ended
	December 31, 2015			December 31, 2014
Balance at the beginning of year	$	2,662,162		$	—
Balance at the date of acquisition		—			2,560,907
Loan indemnification losses incurred		(198,834	)		—
Provision for loan indemnification losses		737,672			101,255
Total	$	3,201,000		$	2,662,162

 Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change. At December 31, 2015 and December 31, 2014, the reasonably possible loss above the recorded loan indemnification reserve was not considered material.

16. Income Taxes

For the years ended December 31, 2015, December 31, 2014, and December 31, 2013 and at December 31, 2015 and December 31, 2014, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders and does not engage in prohibited transactions. The majority of states also recognize the Company's REIT status.

The Company has separately made joint elections with three of its subsidiaries, ZFC Funding, Inc., ZFC Trust TRS I, LLC and ZFC Honeybee TRS, LLC to treat such subsidiaries as taxable REIT subsidiaries (the "TRS entities"). The Company's TRS entities file separate tax returns and are taxed as standalone C-Corporations for U.S. income tax purposes.

119

The following table summarizes the tax provision (benefit) recorded at the TRS entity level for the years ended December 31, 2015, December 31, 2014 and December 31, 2013:

Provision for Income Taxes

	Year Ended
	December 31, 2015		December 31, 2014			December 31, 2013
Current tax expense (benefit)
Federal	$	—	$	—		$	—
State		—		—			—
Total current tax (benefit) expense		—		—			—
Deferred tax expense (benefit)
Federal		3,547,809		(677,780	)		—
State		867,665		(173,216	)		—
Total deferred tax expense (benefit)	$	4,415,474	$	(850,996	)		—
Total expense (benefit) for income taxes	$	4,415,474	$	(850,996	)	$	—

The following is a reconciliation of the statutory federal and state rate to the effective rate for the years ended December 31, 2015, December 31, 2014 and December 31, 2013:

Reconciliation of Statutory Tax Rate to Effective Tax Rate

	Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
Tax expense/(benefit) at statutory rate		34.00	%		35.00	%		35.00	%
State and local taxes, net of Federal Benefit		13.61	%		(0.82	)%		0.00	%
Impact of REIT election (1)		58.88	%		(39.46	)%		(35.00	)%
Change in valuation allowance (2)		37.11	%		2.31	%		0.00	%
Other non-deductible/non-taxable items (3)		2.42	%		0.03	%		0.00	%
Adjustment of tax rate used to value deferred taxes (4)		1.35	%		0.00	%		0.00	%
Effective Tax Rate		147.37	%		(2.94	)%		0.00	%

(1) For all tax years, the Company’s effective tax rate differs from its statutory tax rate due to the deduction for dividend distributions required to be paid under Code section 857(a).

(2) For the years ended December 31, 2015 and December 31, 2014, the change in valuation allowance relates to the change in reserve related to net operating losses and other future deductible items for ZFC Trust TRS, LLC and ZFC Funding, Inc.

(3) For the years ended December 31, 2015 and December 31, 2014, the amount primarily relates to non-deductible meals and entertainment expenses.

(4) For the year ended December 31, 2015, the amount primarily relates to the change in U.S. Federal statutory income tax rate used to value deferred tax assets and liabilities from 35% to 34%.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. The Company assesses whether a valuation allowance should be established against its deferred tax assets based on the consideration of all available evidence using a "more likely than not" approach. The Company's estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations. The deferred tax assets and liabilities reported below relate solely to the TRS entities.

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For the year ended December 31, 2015, the Company had activity in the ZFC Honeybee TRS, LLC which resulted in gross deferred tax assets of $3.9 million and gross deferred tax liabilities of $7.5 million and net deferred tax liability of $3.6 million. Based on ZFC Honeybee TRS, LLC’s earnings forecast and the availability of deferred tax liabilities, the Company feels that it is more likely than not that the Company will be able to utilize these deferred tax assets . The Company also had activity in ZFC Trust TRS I, LLC and ZFC Funding, Inc., which resulted in deferred tax assets of $1.8 million. As of December 31, 2015, the Company has established a full valuation allowance for deferred tax assets related to net operating loss and other future deductible amounts of ZFC Trust TRS I, LLC and ZFC Funding, Inc., as these entities do not have a history of earnings and are currently in a cumulative taxable loss position since inception. At December 31, 2014, the Company had activity in the TRS entities, which resulted in a deferred tax asset of $0.8 million after establishing a partial valuation allowance related to net operating losses and other future deductible amounts for tax purposes. The Company is allowed to carryforward its net operating losses for 20 years under U.S. Federal Income tax law and between 12 and 20 years in the majority of states which it operates in. The Company's net operating losses will expire between the years 2026-2035.

Components of the Company's net deferred tax asset and liability at December 31, 2015 and December 31, 2014 are presented in the following table:

	December 31, 2015			December 31, 2014
Deferred tax assets:
Tax effect of unrealized losses and other temporary differences	$	519,503		$	1,207,520
Accrued compensation		333,946			—
Loan loss reserves		249,745			—
Goodwill and intangible assets		634,491			—
Capital loss carryforward		364,803			—
Net operating loss carryforward		3,586,676			673,052
Total deferred tax assets		5,689,164			1,880,572
Valuation allowance		(1,762,628	)		(671,913	)
Total deferred tax assets less valuation allowance		3,926,536			1,208,659
Deferred tax liabilities:
MSRs		(7,187,289	)
Tax effect of unrealized gains and other temporary differences		(303,725	)		(357,663	)
Total deferred tax liabilities		(7,491,014	)		(357,663	)
Total Deferred Tax (Liability) Asset, net of Valuation Allowance	$	(3,564,478	)	$	850,996

The Company evaluates uncertain income tax positions each period. Based upon its analysis of income tax positions, the Company concluded that there are no significant uncertain tax positions that meet the recognition or measurement criteria at either December 31, 2015 or December 31, 2014. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in the Company's consolidated financial statements.

17. Other Assets and Liabilities

Servicing Advances

Servicing advances represent escrows and other advances on behalf of borrowers and investors to cover delinquent balances for property taxes, insurance premiums and other out-of-pocket costs. Advances are made in accordance with the Company's servicing agreements and are recoverable upon liquidation. At December 31, 2015 and December 31, 2014, the Company had servicing advances of $3,546,186 and $1,987,073, respectively. Such amounts are included in other assets in the Company's consolidated balance sheets.

Loans Eligible for Repurchase from Ginnie Mae

The Company has recorded an asset and liability in its consolidated balance sheets representing the unilateral right it has to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due).

There were no actual repurchases of Ginnie Mae delinquent or defaulted mortgage loans during the year ended December 31, 2015 and for the period from November 1, 2014 to December 31, 2014. The Company did not have any loans eligible for repurchase from Ginnie Mae prior to the acquisition of GMFS on October 31, 2014.

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Escrow and Fiduciary Funds

Escrow and fiduciary funds are $24,985,730 and $25,619,979 at December 31, 2015 and December 31, 2014, respectively, and are excluded from the Company's consolidated balance sheets.

Real Estate Owned

At December 31, 2015 and December 31, 2014, the Company held REO (see Note 5) which are included in other assets in the Company's consolidated balance sheets.

Accounts Payable and Other Liabilities

At December 31, 2015 and December 31, 2014, the Company’s accounts payable and accrued expenses consisted of the following:

	December 31, 2015		December 31, 2014
Accrued compensation and benefits	$	5,692,244	$	1,466,899
Accounts payable and accrued expenses		4,714,192		5,220,346
Loan indemnification reserve		3,201,000		2,662,162
Deferred tax liability		3,564,478		—
Accrued interest expense		985,310		856,834
Other liabilities		415,389		1,524,848
Total	$	18,572,613	$	11,731,089

18. Earnings Per Share

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share:

	Year Ended
	December 31, 2015			December 31, 2014			December 31, 2013
Numerator:
Net (loss) income attributable to ZAIS Financial Corp. common stockholders (Basic)	$	(1,260,709	)	$	26,741,970		$	6,657,728
Effect of dilutive securities:
Net (loss) income allocated to non-controlling interests relating to OP Units exchangeable for shares of common stock of the Company		(158,568	)		3,109,760			880,358
Exchangeable Senior Notes:
Interest expense		—			3,240,561			—
Gain on conversion option derivative liability		—			(256,068	)		—
Total – Exchangeable Senior Notes		—			2,984,493			—
Net (loss) income available to stockholders, after effect of dilutive securities	$	(1,419,277	)	$	32,836,223		$	7,538,086
Denominator:
Weighted average number of shares of common stock		7,970,886			7,970,886			7,273,366
Effect of dilutive securities:
Weighted average number of OP Units		926,914			926,914			926,914
Weighted average number of shares convertible under Exchangeable Senior Notes		—			1,779,560			—
Diluted weighted average shares outstanding		8,897,800			10,677,360			8,200,280
Net (loss) income per share applicable to ZAIS Financial Corp. common stockholders – Basic	$	(.16	)	$	3.35		$	0.92
Net (loss) income per share applicable to ZAIS Financial Corp. common stockholders – Diluted	$	(.16	)	$	3.08		$	0.92

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For purposes of computing diluted earnings per share, the Company assumes the conversion of OP Units and the Exchangeable Senior Notes to shares of common stock unless the effect is anti-dilutive. The dilutive effect of OP Units, if any, is computed assuming all units are converted to common stock. The dilutive effect of the Exchangeable Senior Notes, if any, is computed assuming shares converted are limited to 1,779,560 pursuant to New York Stock Exchange ("NYSE") restrictions.

19. Related Party Transactions

ZAIS REIT Management, LLC

The Company is externally managed and advised by the Advisor, a subsidiary of ZAIS. Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company's affairs on a day-to-day basis including, among other responsibilities, (i) the origination, selection, purchase and sale of the Company's portfolio of assets, (ii) arranging the Company's financing activities and (iii) providing the Company with advisory services.

The Company pays to its Advisor an advisory fee, calculated and payable quarterly in arrears, equal to 1.5% per annum of the Company's stockholders' equity, as defined in the amended and restated investment advisory agreement between the Company and the Advisor, as amended from time to time (the "Investment Advisory Agreement"). Prior to the Company's IPO, the advisory fee paid to the Advisor was calculated based on the Company's net asset value, as set forth in the Investment Advisory Agreement. The Advisor may be paid or reimbursed for the documented cost of its performing certain services for the Company, which may include legal, accounting, due diligence tasks and other services, that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm's-length basis. In addition, the Company may be required to pay its portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Advisor and its affiliates required for the Company's operations. To date, the Advisor has not sought reimbursement for the services and expenses described in the two preceding sentences. In the future, however, the Advisor may seek reimbursement for all such services, costs and expenses, as a result of which the total expense ratio of the Company may increase. The Company is also required to pay directly, or reimburse the Advisor for, products and services, including hardware and software, research and market data provided by third parties, other than those operating expenses required to be borne by the Advisor under the Investment Advisory Agreement (the "Expense Reimbursements").

 After an initial three-year term, the Advisor may be terminated annually upon the affirmative vote of at least two-thirds of the Company's independent directors or by a vote of the holders of at least two-thirds of the outstanding shares of the Company's common stock based upon (i) unsatisfactory performance by the Advisor that is materially detrimental to the Company or (ii) a determination that the advisory fees payable to the Advisor are not fair, subject to the Advisor's right to prevent such termination due to unfair fees by accepting a reduction of advisory fees agreed to by at least two-thirds of the Company's independent directors. Additionally, upon such a termination without cause, the Investment Advisory Agreement provides that the Company will pay the Advisor a termination fee equal to three times the average annual advisory fee earned by the Advisor during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal year before the date of termination.

On August 11, 2014, the Company amended its Investment Advisory Agreement to provide that the Company shall pay its Advisor a loan sourcing fee quarterly in arrears in lieu of any payments or reimbursements that would otherwise be due to the Advisor or its affiliates pursuant to Investment Advisory Agreement for loan sourcing services provided. The loan sourcing fee is equal to 0.50% of the principal balance of newly originated residential mortgage loans sourced by the Advisor or its affiliates through its loan conduit program and acquired by the Company's subsidiaries.

On March 17, 2015, a business combination was completed between HF2 Financial Management Inc. ("HF2 Financial"), a special purpose acquisition company, and ZAIS Group Parent, LLC ("ZGP"), which wholly owns ZAIS, pursuant to a definitive agreement dated September 16, 2014. The current owners of ZGP did not receive any proceeds at the closing of the transaction and retained a significant equity stake in ZGP. Following the close of the transaction, ZAIS's management team has remained in place to continue to lead the combined organization.

The Company incurred the following fees pursuant to the Investment Advisory Agreement:

	Year Ended
	December 31, 2015		December 31, 2014		December 31, 2013
Advisory fees	$	2,850,062	$	2,850,062	$	2,629,815
Loan sourcing fees		103,053		3,834		—
Total – Advisory fees – related party	$	2,953,115	$	2,853,896	$	2,629,815

Such amounts are included in "Advisory fee – related party" in the Company's consolidated statements of operations.

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The Company incurred the following Expense Reimbursements for amounts incurred by the Advisor for research and market data (including the amortization expense related to amounts prepaid to the Advisor):

	Year Ended
	December 31, 2015		December 31, 2014		December 31, 2013
Expense Reimbursements	$	880,551	$	463,086	$	199,694

Such amounts are included in operating expenses in the Company's consolidated statements of operations.

Amounts payable to the Advisor for advisory fees, loan sourcing fees and Expense Reimbursements at December 31, 2015 and December 31, 2014 are as follows:

December 31, 2015		December 31, 2014
$	867,415	$	984,603

Such amounts were included in accounts payable and other liabilities in the Company's consolidated balance sheets.

Other

GMFS received the following sub-lease income related to a portion of its office space (see Note 22) from a related party:

Year Ended
December 31, 2015		December 31, 2014		December 31, 2013
$	38,960	$	7,200	$	—

Such amounts are included in other income in the Company's consolidated statements of operations. The Company did not have any sub-lease income prior to the acquisition of GMFS on October 31, 2014.

20. Equity

Common Stock

The holders of shares of the Company's common stock are entitled to one vote per share on all matters voted on by common stockholders, including election of the Company's directors. The Company's charter does not provide for cumulative voting in the election of directors.

Therefore, the holders of a majority of the outstanding shares of the Company's common stock can elect its entire board of directors. Subject to any preferential rights of any outstanding series of preferred stock, the holders of shares of the Company's common stock are entitled to such distributions as may be authorized from time to time by the Company's board of directors out of legally available funds and declared by the Company and, upon liquidation, are entitled to receive all assets available for distribution to stockholders. Holders of shares of the Company's common stock do not have preemptive rights. This means that stockholders do not have an automatic option to purchase any new shares of common stock that the Company issues. In addition, stockholders only have appraisal rights under circumstances specified by the Company's board of directors or where mandated by law.

Initial Public Offering

On February 13, 2013, the Company completed its IPO, pursuant to which the Company sold 5,650,000 shares of its common stock to the public at a price of $21.25 per share for gross proceeds of $120.1 million. Net proceeds after the payment of offering costs of approximately $1.2 million were $118.9 million. In connection with the IPO, the Advisor paid $6.3 million in underwriting fees. The Company did not pay any underwriting fees, discounts or commissions in connection with the IPO above those paid by the Advisor.

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Common Stock Repurchase

In January 2013, the Company’s agreement with one of its stockholders to repurchase 515,035 shares of common stock was amended to require the Company to repurchase only 265,245 shares of the Company’s common stock. The amended repurchase amount was approximately $5.8 million which was predominantly paid to such stockholder during the three months ended March 31, 2013 with the remaining amount paid during the three months ended June 30, 2013.

Dividends and Distributions

During the years ended December 31, 2015, December 31, 2014 and December 31, 2013 the Company declared the following dividends:

Declaration Date	Record Date	Payment Date	Amount per Share and OP Unit
Year ended December 31, 2015:
March 19, 2015	March 31, 2015	April 15, 2015	$	0.40
June 18, 2015	June 30, 2015	July 15, 2015	$	0.40
September 17, 2015	September 30, 2015	October 15, 2015	$	0.40
December 17, 2015	December 31, 2015	January 15, 2016	$	0.40
Year ended December 31, 2014:
March 19, 2014	March 31, 2014	April 14, 2014	$	0.40
June 17, 2014	June 30, 2014	July 15, 2014	$	0.40
September 17, 2014	September 30, 2014	October 15, 2014	$	0.40
December 18, 2014	December 31, 2014	January 15, 2015	$	0.40
Year ended December 31, 2013:
May 14, 2013	May 24, 2013	May 31, 2013	$	0.22
June 25, 2013	July 9, 2013	July 23, 2013	$	0.45
September 18, 2013	September 30, 2013	October 11, 2013	$	0.50
December 19, 2013 (1)	December 31, 2013	January 15, 2014	$	0.95

⁽¹⁾ Comprised of a regular cash dividend of $0.40 per share of common stock and OP Unit for the quarter ending December 31, 2013, and an additional special cash dividend of $0.55 per share of its common stock and OP Unit. The Company declared the special cash dividend to distribute taxable income from 2013 attributable to the termination of interest rate swap contracts.

Other

The Company's charter authorizes its board of directors to classify and reclassify any unissued shares of its common stock and preferred stock into other classes or series of stock. Prior to issuance of shares of each class or series, the board of directors is required by the Company's charter to set, subject to the charter restrictions on transfer of its stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the board of directors could authorize the issuance of shares of common stock or preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or change in control that might involve a premium price for holders of the Company's common stock or otherwise be in their best interest.

21. Non-controlling Interests

Non-controlling interests included in the Company's consolidated financial statements consist of the OP Units in the Operating Partnership held by parties other than the Company and an interest in a joint venture of GMFS held by parties other than the Company.

Certain investors own OP Units in the Operating Partnership. An OP Unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. OP unit holders have the right to redeem their OP Units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company's option, calculated as follows: one share of the Company's common stock, or cash equal to the fair value of a share of the Company's common stock at the time of redemption, for each OP Unit. When an OP unit holder redeems an OP Unit, non-controlling interests in the Operating Partnership is reduced and the Company's equity is increased. At December 31, 2015 and December 31, 2014, the non-controlling interest OP unit holders owned 926,914 OP units, or 10.4% of the OP Units issued by the Operating Partnership.

GMFS has a 50% controlling interest in a joint venture which performs mortgage brokerage activities and has been consolidated by the Company at December 31, 2015 and December 31, 2014. 

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22. Commitments and Contingencies

Advisor Services

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company's investment portfolio including determination of fair value; and other general and administrative responsibilities. In the event that the Advisor is unable to provide the respective services, the Company will be required to obtain such services from an alternative source.

Litigation

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.

In April 2015, GMFS received a claim from a counterparty of GMFS with respect to residential mortgage loans that were sold servicing released by GMFS to this counterparty’s predecessor prior to its acquisition by the Company on October 31, 2014. GMFS has since executed statute of limitations tolling agreements with this counterparty which have been extended to expire on June 2, 2016 but can be further extended by agreement of the parties (the initial tolling agreement was executed by GMFS on December 12, 2013).

Although the Company has established a loan indemnification reserve for potential losses related to loan sale representations and warranties with a corresponding provision recorded for loan losses (see Note 15), due to the early stage of this matter and the limited information available the Company is not able to determine the likelihood of the outcome.

The Company believes that any losses in excess of the loan indemnification reserve will be recovered by the Company as either a reduction of total contingent consideration owed under the GMFS Merger Agreement given the indemnification provisions in the GMFS Merger Agreement or by withdrawing funds from an escrow account established by the sellers at the time of the acquisition (as of December 31, 2015, the balance in the escrow account was $4,004,424). The Company has delayed the first year installment payment of the contingent consideration.

Losses in excess of the loan indemnification reserve, total contingent consideration and the escrow account could have a material adverse impact on the Company's results of operations, financial position or cash flows. In the event of litigation or settlement with the counterparty, the Company intends to pursue claims against the sellers of GMFS seeking indemnification for any losses or any amounts paid in settlement, although there can be no assurance that such claims would be successful or that any amounts available for indemnification would be adequate.

Management is not aware of any other contingencies that would require accrual or disclosure in the consolidated financial statements at December 31, 2015 or December 31, 2014.

Commitments to Originate Loans

GMFS enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose GMFS to market risk if interest rates change, and the loan is not economically hedged or committed to an investor. GMFS is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. Upon extension of credit typically consists of a first deed of trust in the mortgagor's residential property.

Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon.

Total commitments to originate loans are as follows at December 31, 2015 and December 31, 2014:

December 31, 2015		December 31, 2014
$	216,072,457	$	117,678,075

Leases

GMFS leases office space in Baton Rouge, LA for its corporate headquarters under a non-cancelable operating lease. The lease provides that GMFS pays taxes, maintenance, insurance, and other occupancy expenses applicable to the leased premises and contains three five-year renewal options at pre-determined amounts specified by the original lease agreement. GMFS also leases space in various states for its branch offices and equipment under various short-term rental agreements. GMFS incurred rent expense as follows:

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Year Ended
December 31, 2015		December 31, 2014
$	797,981	$	122,986

Such amounts are included in operating expenses in the Company's consolidated statements of operations. The Company did not incur any rent expense prior to the acquisition of GMFS on October 31, 2014.

GMFS sub-leases a portion of its office space and furniture and fixtures contained therein to a related party (see Note 19).

At December 31, 2015, the future minimum rental payments for the five years subsequent to December 31, 2015 and thereafter are as follows:

2016	$	981,775
2017	$	807,361
2018	$	682,321
2019	$	130,080
2020	$	—
Thereafter	$	—

23. Counterparty Risk and Concentration

Counterparty risk is the risk that counterparties may fail to fulfill their obligations, including their inability to post additional collateral in circumstances where their pledged collateral value becomes inadequate. The Company attempts to manage its exposure to counterparty risk through diversification, use of financial instruments and monitoring the creditworthiness of counterparties.

The Company finances the acquisition of a significant portion of its mortgage loans held for investment, RMBS and Other Investment Securities with repurchase agreements. Additionally, the Company finances a significant portion of its mortgages held for sale with its warehouse lines of credit and repurchase agreements. In connection with these financing arrangements, the Company pledges its residential mortgage loans, securities and cash as collateral to secure the borrowings. The amount of collateral pledged will typically exceed the amount of the borrowings (i.e. , the haircut) such that the borrowings will be over-collateralized. As a result, the Company is exposed to the counterparty if, during the term of the repurchase agreement financing, a lender should default on its obligation and the Company is not able to recover its pledged assets. The amount of this exposure is the difference between the amount loaned to the Company plus interest due to the counterparty and the fair value of the collateral pledged by the Company to the lender including accrued interest receivable on such collateral.

The Company's deposits with financial institutions may exceed federally insurable limits of $250,000 per institution. The Company mitigates this risk by depositing funds with major financial institutions. At December 31, 2015 and December 31, 2014, a portion of the Company's operating cash was held with two custodians and three other financial institutions. The Company also maintains separate cash accounts with each of its warehouse lenders at December 31, 2015 and December 31, 2014. There is no guarantee that these custodians or other financial institutions will not become insolvent. While there are certain regulations that seek to protect customer property in the event of a failure, insolvency or liquidation of a custodian, there is no certainty that the Company would not incur losses due to its assets being unavailable for a period of time in the event of a failure of a custodian that has custody of the Company's assets. Although management monitors the credit worthiness of its custodians, such losses could be significant and could materially impair the ability of the Company to achieve its investment objective.

In the normal course of business, companies in the mortgage banking industry encounter certain economic and regulatory risks. Economic risks include interest rate risk and credit risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company may experience a decrease in loan production, as well as decreases in the value of mortgage loans held for sale and in commitments to originate loans, which may negatively impact the Company's operations. Credit risk is the risk of default that may result from the borrowers' inability or unwillingness to make contractually required payments during the period in which loans are being held for sale.

GMFS sells loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, GMFS is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that GMFS does not comply with such representations, or there are early payment defaults, GMFS may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay-off within a specified time frame, GMFS may be required to refund a portion of the sales proceeds to the investors.

The Company's business requires substantial cash to support its operating and investing activities. As a result, the Company is dependent on its warehouse lines of credit and repurchase facilities in order to finance its continued operations and investments. If the Company's principal lenders decided to terminate or not to renew any of these credit facilities with the Company, the loss of borrowing capacity could have a material adverse impact on the Company's consolidated financial statements unless the Company found a suitable alternative source.

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MSRs are subject to substantial interest rate risk and the value of MSRs generally tend to diminish in periods of declining interest rates as borrowers can prepay the mortgage notes underlying the MSRs. MSRs increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards and product characteristics.

24. Offsetting Assets and Liabilities

The following table presents information about certain liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset in the Company's consolidated balance sheets at December 31, 2015 and December 31, 2014:

					Net Amounts of
					Liabilities
			Gross Amounts		Presented in		Gross Amounts Not Offset in the
	Gross Amounts		Offset in the		the		Consolidated Balance Sheets
	of Recognized		Consolidated		Consolidated		Financial			Cash Collateral
	Liabilities		Balance Sheets		Balance Sheets		Instruments			Pledged			Net Amount
December 31, 2015
Warehouse lines of credit	$	100,768,428	$	—	$	100,768,428	$	(100,768,428	)	$	—		$	—
Loan Repurchase Facilities		296,789,330		—		296,789,330		(296,413,751	)		(375,579	)		—
Securities repurchase agreements		73,300,159		—		73,300,159		(71,270,578	)		(2,029,581	)		—
Interest rate swap agreements		1,009,014		—		1,009,014		—			(1,009,014	)		—
Total	$	471,866,931	$	—	$	471,866,931	$	(468,452,757	)	$	(3,414,174	)	$	—
December 31, 2014
Warehouse lines of credit	$	89,417,564	$	—	$	89,417,564	$	(89,417,564	)	$	—		$	—
Loan Repurchase Facilities		300,092,293		—		300,092,293		(300,092,293	)		—			—
Securities repurchase agreements		103,014,105		—		103,014,105		(102,329,849	)		(684,256	)		—
Interest rate swap agreements		860,553		—		860,553		—			(860,553	)		—
Total	$	493,384,515	$	—	$	493,384,515	$	(491,839,706	)	$	(1,544,809	)	$	—

The Company did not have any assets that are subject to master netting arrangements which can potentially be offset in the Company's consolidated balance sheets at December 31, 2015 or December 31, 2014.

25. Employee Benefit Plan

GMFS has a 401(k) profit sharing plan covering substantially all GMFS employees. The employees may contribute amounts as allowable by IRS and plan limitations. GMFS may make discretionary matching and non-elective contributions. GMFS contributions to the plan were as follows:

Year Ended
December 31, 2015		December 31, 2014		December 31, 2013
$	399,970	$	69,719	$	—

Such amounts are included in salaries, commissions and benefits in the Company's consolidated statements of operations. The Company did not have a 401(k) profit sharing plan prior to the acquisition of GMFS on October 31, 2014.

128

26. Segment Information

The Company operated as one operating segment prior to the acquisition of GMFS on October 31, 2014. Subsequent to the acquisition of GMFS on October 31, 2014, the Company operates in two operating segments: residential mortgage investments and residential mortgage banking. These operating segments have been identified based on the Company's organizational and management structure. These segments are based on an internally-aligned segment structure, which is how the Company's results are monitored and performance is assessed.

The residential mortgage investments segment includes a portfolio of mortgage loans which were either distressed, re-performing or newly originated at the time of purchase. The residential mortgage investments segment's profit and loss consist primarily of net interest income from whole loans and RMBS, changes in unrealized gains and losses from the valuation of the portfolio and realized gains and losses recognized upon the paydowns of mortgage loans and sales of RMBS.

Since the operations of GMFS are conducted in ZFC Honeybee TRS, LLC, a wholly owned TRS of the Company, the residential mortgage banking segment includes the operations of GMFS, which originates mortgage loans for subsequent sale as either servicing retained or released, and expenses incurred by ZFC Honeybee TRS, LLC.

Each segment includes the operating and other expenses associated with the respective activities.

Segment contribution represents the measure of profit that management uses to assess the performance of its business segments and make resource allocation and operating decisions. Certain expenses not directly assigned or allocated to one of the two primary segments are included in the Corporate/Other column. These unallocated expenses primarily include interest expense on the Company's Exchangeable Senior Notes and corporate operating expenses such as insurance, public company expenses, advisory fees, transaction costs and general and administrative expenses. All amounts are before amounts allocated to non-controlling interests.

The Company's segment profit and loss information is as follows:

Year Ended December 31, 2015:	Residential  Mortgage Investments			Residential  Mortgage Banking		Corporate/Other			Total
Interest income	$	34,658,211		$	3,144,345	$	—		$	37,802,556
Interest expense		10,912,951			2,151,690		5,785,264			18,849,905
Net interest income (expense)		23,745,260			992,655		(5,785,264	)		18,952,651
Non-interest income		—			48,876,274		—			48,876,274
Change in unrealized gain or loss		(14,989,408	)		—		—			(14,989,408	)
Realized gain		1,183,083			—		—			1,183,083
Gain or (loss) on derivative instruments		(171,859	)		—		—			(171,859	)
Advisory fee – related party		1,536,078			542,842		874,195			2,953,115
Salaries, commissions and benefits		—			30,934,727		—			30,940,727
Operating expenses		342,243			6,337,911		5,614,180			12,294,334
Other Expenses
Expenses		2,693,489			64,652		980,418			3,738,559
Depreciation and amortization		—			933,811		—			933,811
Total other expenses		2,693,489			998,463		980,416			4,672,368
Net income (loss) before income taxes		5,195,266			11,054,986		(13,254,057	)		2,996,197
Income tax expense		—			4,415,474		—			4,415,474
Segment net income (loss)	$	5,195,266		$	6,639,512	$	(13,254,057	)	$	(1,419,277	)

Year Ended December 31, 2014	Residential  Mortgage Investments			Residential  Mortgage Banking			Corporate/Other			Total
Interest income	$	40,998,530		$	594,217		$	—		$	41,592,747
Interest expense		11,451,687			121,194			5,686,664			17,259,545
Net interest income (expense)		29,546,843			473,023			(5,686,664	)		24,333,202
Non-interest income		—			4,730,212			—			4,730,212
Change in unrealized gain or loss		19,090,520			—			—			19,090,520
Realized gain		5,762,254			—			—			5,762,254
Gain or (loss) on derivative instruments		(5,921,725	)		—			—			(5,921,725	)
Advisory fee – related party		3,835			143,674			2,706,387			2,853,896
Salaries, commissions and benefits		—			3,765,784			—			3,765,784
Operating expenses		251,305			1,089,640			6,521,363			7,862,308
Other Expenses:
Expenses		2,180,113			—			—			2,180,113
Transaction costs relating to the acquisition of GMFS		—			2,177,617			—			2,177,617
Depreciation and amortization		—			154,011			—			154,011
Total other expenses		2,180,113			2,331,628			—			4,511,741
Net income/(loss) before income taxes		46,042,639			(2,127,491	)		(14,914,414	)		29,000,734
Income tax (benefit)		—			(850,996	)		—			(850,996	)
Segment net income (loss)	$	46,042,639		$	(1,276,495	)	$	(14,914,414	)	$	29,851,730

129

The following table is a reconciliation of the net income of the residential mortgage banking segment to the operations of GMFS:

	Year Ended
	December 31, 2015		December 31, 2014
Net income (loss) of the residential mortgage banking segment	$	6,639,512	$	(1,276,495	)
Add back (deduct) expenses incurred by ZFC
Honeybee TRS, LLC:
Advisory fee – related party		542,842		143,674
Amortization of deferred premiums, production and profitability earn-outs included in salaries, commission and benefits		855,900		—
Operating expenses (including change in contingent consideration)		237,279		257,883
Other expenses		852,992		131,390
Transaction costs relating to the acquisition of GMFS		—		2,177,617
Income tax expense (benefit)		4,415,474		(850,996	)
Net income of GMFS	$	13,543,999	$	583,073

Supplemental Disclosures

 Selected segment balance sheet information is as follows:

	Residential Mortgage Investments		Residential Mortgage Banking		Corporate/Other		Total
December 31, 2015
Mortgage loans held for investment, at fair value	$	397,678,140	$	—	$	—	$	397,678,140
Mortgage loans held for investment, at cost		—		1,886,642		—		1,886,642
Mortgage loans held for sale		—		115,942,230		—		115,942,230
Real estate securities		109,339,281		—		—		109,339,281
Other investment securities		12,804,196		—		—		12,804,196
Mortgage servicing rights		—		48,209,016		—		48,209,016
Goodwill		—		14,183,537		—		14,183,537
Intangible assets		—		4,880,270		—		4,880,270
Total assets		543,337,289		227,689,257		4,112,375		775,138,921
December 31, 2014
Mortgage loans held for investment, at fair value	$	415,959,838	$	—	$	—	$	415,959,838
Mortgage loans held for investment, at cost		—		1,338,935		—		1,338,935
Mortgage loans held for sale		—		97,690,960		—		97,690,960
Real estate securities		148,585,733		—		—		148,585,733
Other investment securities		2,040,532		—		—		2,040,532
Mortgage servicing rights		—		33,378,978		—		33,378,978
Goodwill		—		16,512,680		—		16,512,680
Intangible assets		—		5,668,611		—		5,668,611
Total assets		596,553,227		194,700,643		1,144,735		792,398,605

130

27. Quarterly Results (Unaudited)

The following is a presentation of the quarterly results of operations for the years ended December 31, 2015 and December 31, 2014:

	For the Three Months Ended
	December 31, 2015			September 30, 2015			June 30, 2015		March 31, 2015
Total interest income	$	8,902,859		$	9,650,952		$	9,561,348	$	9,687,397
Total interest expense		4,664,825			4,711,854			4,727,749		4,745,477
Net interest income		4,238,034			4,939,098			4,833,599		4,941,920
Non-interest income		13,126,246			8,943,047			17,430,551		9,376,430
Total other gain/(loss)		(5,192,110	)		(7,986,942	)		1,082,596		(1,881,728	)
Total expenses		12,095,213			12,857,112			13,737,314		12,164,905
Income tax expense (benefit)		1,911,578			(250,491	)		2,899,916		(145,529	)
Net (loss)/income		(1,834,621	)		(6,711,418	)		6,709,516		417,246
Net (loss)/income attributable to ZAIS Financial Corp. common stockholders	$	(1,647,554	)	$	(6,040,746	)	$	6,053,811	$	373,780
Net income/(loss) per share applicable to common stockholders – basic	$	(0.21	)	$	(0.76	)	$	0.76	$	0.05
Net income/(loss) per share applicable to common stockholders – diluted	$	(0.21	)	$	(0.76	)	$	0.65	$	0.05
Weighted average number of shares:
Basic		7,970,886			7,970,886			7,970,886		7,970,886
Diluted		8,897,800			8,897,800			10,677,360		8,897,800

	For the Three Months Ended
	December 31, 2014 (1)			September 30, 2014			June 30, 2014		March 31, 2014
Total interest income	$	10,267,875		$	11,000,619		$	10,831,220	$	9,493,033
Total interest expense		4,447,530			4,491,678			4,416,385		3,903,952
Net interest income		5,820,345			6,508,941			6,414,835		5,589,081
Non-interest income		4,730,212			—			—		—
Total other gain/(loss)		(2,944,631	)		(1,805,117	)		22,688,696		992,101
Total expenses		8,239,984			3,424,026			3,231,396		4,098,323
Income tax (benefit)		(850,996	)		—			—		—
Net income/(loss)		216,938			1,279,798			25,872,135		2,482,859
Net income/(loss) attributable to ZAIS Financial Corp. common stockholders	$	194,337		$	1,149,497		$	23,173,931	$	2,224,205
Net income/(loss) per share applicable to common stockholders – basic	$	0.02		$	.14		$	2.91	$	.28
Net income/(loss) per share applicable to common stockholders – diluted	$	0.02		$	.14		$	2.47	$	.28
Weighted average number of shares:
Basic		7,970,886			7,970,886			7,970,886		7,970,886
Diluted		8,897,800			8,897,800			10,677,360		8,897,800

⁽¹⁾ On October 31, 2014 the Company, completed the acquisition of GMFS. The Company has recognized the revenues and earnings related to its investment in GMFS for the period from the acquisition date to December 31, 2014 in its consolidated statements of operations.

28. Subsequent Events

In light of the strategic review and in order to reduce current market risk in its investment portfolio, the Company has recently begun the process of selling its seasoned, re-performing mortgage loans from its residential mortgage investments segment. A sale of these assets is expected to be completed early in the second quarter of 2016. Additionally, as part of the strategic review, the Company has made the decision to cease the purchase of newly originated residential mortgage loans as part of its mortgage conduit program and will begin the unwinding of the Company’s mortgage conduit business. Also, See Note 1 - Formation and Organization.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

A review and evaluation was performed by the Company’s management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this annual report on Form 10-K. Based on that review and evaluation, the CEO and CFO have concluded that the Company’s current disclosure controls and procedures, as designed and implemented, were effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, the Company’s management used criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

Based on its assessment, the Company’s management believes that, as of December 31, 2015, the Company’s internal control over financial reporting was effective based on those criteria.

There have been no changes to the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.

Item 9B. Other Information.

None.

132

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information regarding the Company’s executive officers required by Item 401 of Regulation S-K is located under Part I, Item 1 within the caption “Executive Officers of the Company” of this Form 10-K.

The information regarding the Company’s directors and certain other matters required by Item 401 of Regulation S-K is incorporated herein by reference to the Company’s definitive proxy statement relating to its annual meeting of stockholders to be held on or about May 5, 2016 (the “Proxy Statement”), to be filed with the SEC within 120 days after December 31, 2015.

The information regarding compliance with Section 16(a) of the Exchange Act required by Item 405 of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

The information regarding the Company’s Code of Business Conduct and Ethics required by Item 406 of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

The information regarding certain matters pertaining to the Company’s corporate governance required by Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is incorporated by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

Item 11. Executive Compensation.

The information regarding executive compensation and other compensation related matters required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The tables on equity compensation plan information and beneficial ownership of the Company required by Items 201(d) and 403 of Regulation S-K are incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information regarding transactions with related persons, promoters and certain control persons and director independence required by Items 404 and 407(a) of Regulation S-K is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

Item 14. Principal Accountant Fees and Services.

The information concerning principal accounting fees and services and the Audit Committee’s pre-approval policies and procedures required by Item 14 is incorporated herein by reference to the Proxy Statement to be filed with the SEC within 120 days after December 31, 2015.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

Documents filed as part of the report

The following documents are filed as part of this annual report on Form 10-K:

(1) Financial Statements:

The consolidated financial statements of the Company, together with the independent registered public accounting firm’s report thereon, are set forth on pages 82 through 131 of this annual report on Form 10-K and are incorporated herein by reference. See Item 8, “Financial Statements and Supplementary Data,” filed herewith, for a list of financial statements.

(2) Financial Statement Schedule:

All financial statement schedules have been omitted because the required information is not applicable or deemed not material, or the required information is presented in the consolidated financial statements and/or in the notes to consolidated financial statements filed in response to Item 8 of this annual report on Form 10-K.

(3)	Exhibits Files:
3.1 *	Articles of Amendment and Restatement of ZAIS Financial Corp., incorporated by reference to Exhibit 3.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
3.2 *	Articles Supplementary of ZAIS Financial Corp., incorporated by reference to Exhibit 3.2 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
3.3 *	Bylaws of ZAIS Financial Corp., incorporated by reference to Exhibit 3.3 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
4.1 *	Specimen Common Stock Certificate of ZAIS Financial Corp., incorporated by reference to Exhibit 4.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
4.2 *	Indenture, dated November 25, 2013, by and among ZAIS Financial Partners, L.P., ZAIS Financial Corp. and U.S. Bank National Association, including the form of 8.0% Exchangeable Senior Notes due 2016 and the related guarantee, incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed November 25, 2013.
10.1 *	Second Amended and Restated Investment Advisory Agreement, dated as of December 13, 2012, by and among ZAIS Financial Corp., ZAIS Financial Partners, L.P., ZAIS Asset I, LLC, ZAIS Asset II, LLC, ZAIS Asset III, LLC, ZAIS Asset IV, LLC and ZAIS REIT Management, LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
10.2 *	Agreement of Limited Partnership, dated as of July 29, 2011, of ZAIS Financial Partners, L.P., as amended on August 3, 2011, October 11, 2012, and December 13, 2012, incorporated by reference to Exhibit 10.2 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
10.3 *	Amendment to Agreement of Limited Partnership, dated as of February 13, 2013, of ZAIS Financial Partners, L.P., incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-K, filed March 28, 2013.
10.4 *	Registration Rights Agreement, dated August 3, 2011, among ZAIS Financial Corp., ZAIS Group, LLC and certain persons listed on Schedule I thereto, incorporated by reference to Exhibit 10.3 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
10.5 *	First Amended and Restated Registration Rights Agreement, dated October 11, 2012, among ZAIS Financial Corp., ZAIS Group, LLC and certain persons listed on Schedule I thereto, incorporated by reference to Exhibit 10.4 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).

134

10.6 *	First Amended and Restated Registration Rights Agreement, dated December 13, 2012, among ZAIS Financial Corp., ZAIS REIT Management, LLC and certain persons listed on Schedule I thereto, incorporated by reference to Exhibit 10.5 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
10.7 *	Form of Indemnification Agreement, incorporated by reference to Exhibit 10.12 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
10.8 *	ZAIS Financial Corp. 2012 Equity Incentive Plan incorporated by reference to Exhibit 10.13 of the Registrant’s Form S-11, as amended (Registration No. 333-185938).
10.9 *	License Agreement, dated February 5, 2013, between ZAIS Financial Corp. and ZAIS Group, LLC.

10.10 *	Master Repurchase Agreement, dated as of May 30, 2013, between Citibank, N.A. and ZFC Trust, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K, filed on June 4, 2013.
10.11 *	Guaranty, dated as of May 30, 2013, by ZAIS Financial Corp. in favor of Citibank, N.A., incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K, filed on June 4, 2013.
10.12 *	Master Mortgage Loan Sale Agreement (“MMLSA”), dated as of May 31, 2013, between Citigroup Global Markets Realty Corp. and ZFC Trust, incorporated by reference to Exhibit 10.5 of the Registrant’s Form 10-Q, filed on August 13, 2013.
10.13 *	Trade Confirmation pursuant to the MMLSA, dated as of May 31, 2013, between Citigroup Global Markets Realty Corp. and ZFC Trust, incorporated by reference to Exhibit 10.6 of the Registrant’s Form 10-Q, filed on August 13, 2013.
10.14 *	Trade Confirmation pursuant to the MMLSA, dated as of July 29, 2013, between Citigroup Global Markets Realty Corp. and ZFC Trust, incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q, filed on November 12, 2013.
10.15 *	Trade Confirmation pursuant to the MMLSA, dated as of August 29, 2013, between Citigroup Global Markets Realty Corp. and ZFC Trust, incorporated by reference to Exhibit 10.4 of the Registrant’s Form 10-Q, filed on November 12, 2013.
10.16 *	Registration Rights Agreement, dated November 25, 2013, among ZAIS Financial Partners, L.P., ZAIS Financial Corp. and Credit Suisse Securities (USA) LLC, incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K, filed on November 25, 2013.
10.17 *	Purchase Agreement, dated November 19, 2013, by and among ZAIS Financial Partners, L.P., ZAIS Financial Corp., ZAIS REIT Management, LLC and Credit Suisse Securities (USA) LLC, incorporated by reference to Exhibit 10.28 of the Registrant’s Form S-11, filed on December 12, 2013.
10.18*	Trade Confirmation, dated March 27, 2014, pursuant to the MMLSA, dated as of May 31, 2013, between Citigroup Global Markets Realty Corp. and ZFC Trust, incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q, filed May 14, 2014.
10.19*	Amendment Number One, dated March 27, 2014, to the Pricing Side Letter, dated as of May 30, 2013, between Citibank, N.A. and ZFC Trust, incorporated by reference to Exhibit 10.4 of the Registrant’s Form 10-Q, filed May 14, 2014.
10.20*	Amendment Number One, dated May 23, 2014, to the Master Loan Repurchase Agreement dated as of May 30, 2013 among ZFC Trust and Citibank, N.A., incorporated by reference to Exhibit 10.3 of the Registrant’s Form 10-Q, filed August 12, 2014.
10.21*	Agreement and Plan of Merger dated August 5, 2014, by and among ZFC Honeybee TRS, LLC, ZFC Honeybee Acquisitions, LLC, GMFS LLC, Honeyrep, LLC, solely in its capacity as the Securityholder Representative and ZAIS Financial Corp., as guarantor, incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K (No. 001-35808), filed on August 6, 2014.
10.22*	Master Repurchase Agreement, dated as of August 14, 2014, by and among Credit Suisse First Boston Mortgage Capital LLC, ZFC Funding, Inc., U.S. Bank National Association, not in its individual capacity but solely as trustee for ZFC Funding Pass-Through Trust I, as pass-through trust, and ZAIS Financial Corp., incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (No. 001-35808), filed on August 15, 2014.
10.23*	Guaranty, dated as of August 14, 2014, by ZAIS Financial Corp. in favor of Credit Suisse First Boston Mortgage Capital LLC, incorporated by reference to Exhibit 10.2 to the Registrant’s Form 8-K (No. 001-35808), filed on August 15, 2014.

135

10.24* Amendment No. 1 to Master Repurchase Agreement, dated as of June 29, 2015, incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K (No. 001-35808), filed on June 30, 2015.

21.1	List of Subsidiaries of ZAIS Financial Corp.
23.1	Consent of PricewaterhouseCoopers LLP.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of the Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Scheme Document
101.CAL	XBRL Taxonomy Calculation Linkbase Document
101.DEF	XBRL Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Linkbase Document
101.PRE	XBRL Taxonomy Presentation Linkbase Document
*	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.

136

SIGNATURES

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

ZAIS Financial Corp.

Date: March 10, 2016	By:	/s/ Michael Szymanski
		Michael Szymanski
		Chief Executive Officer, President and Director
		(principal executive officer)
Date: March 10, 2016	By:	/s/ Donna Blank
		Donna Blank
		Chief Financial Officer and Treasurer
		(principal financial officer)
Date: March 10, 2016	By:	/s/ Christian Zugel
		Christian Zugel
		Chairman of the Board
Date: March 10, 2016	By:	/s/ Nisha Motani
		Nisha Motani
		Chief Accounting Officer
		(principal accounting officer)
Date: March 10, 2016	By:	/s/ Daniel Mudge
		Daniel Mudge
		Director
Date: March 10, 2016	By:	/s/ Marran Ogilvie
		Marran Ogilvie
		Director
Date: March 10, 2016	By:	/s/ David Holman
		David Holman
		Director

137