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As filed with the Securities and Exchange Commission on February 21, 2012

Registration Statement No. 333-172672

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 7

Form S-11

FOR REGISTRATION

UNDER

THE SECURITIES ACT OF 1933

OF CERTAIN REAL ESTATE COMPANIES

Provident Mortgage Capital Associates, Inc.

(Exact name of registrant as specified in its governing instruments)

851 Traeger Avenue, Suite 380

San Bruno, California 94066

(855) 653-4300

(Address, including Zip Code, and Telephone Number, including Area Code, of Registrant’s Principal Executive Offices)

Jeremy Kelly

Chief Financial Officer

Provident Mortgage Capital Associates, Inc.

851 Traeger Avenue, Suite 380

San Bruno, California 94066

(855) 653-4300

(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)

Copies to:


Jay L. Bernstein, Esq. Andrew S. Epstein, Esq. Gary A. Brooks, Esq. Clifford Chance US LLP 31 West 52^nd Street New York, New York 10019 Tel (212) 878-8000 Fax (212) 878-8375		Valerie Ford Jacob, Esq. Paul D. Tropp, Esq. Fried, Frank, Harris, Shriver & Jacobson LLP One New York Plaza New York, New York 10004 Tel (212) 859-8000 Fax (212) 859-4000

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

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. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o

(Do not check if a smaller reporting company)

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


PRELIMINARY PROSPECTUS	SUBJECT TO COMPLETION	February 21, 2012

8,333,334 Shares

Provident Mortgage Capital Associates, Inc.

Common Stock

Provident Mortgage Capital Associates, Inc. is a newly formed real estate finance company that will acquire residential mortgage loans, including primarily jumbo loans (as defined herein), residential mortgage-backed securities and other mortgage-related assets. We will be externally managed and advised by PMF Advisors, LLC, a Delaware limited liability company, or our Manager, and an affiliate of Provident Funding Associates, L.P., or, collectively with its subsidiaries, Provident. Provident is a private, independent mortgage company that originates and services residential mortgage loans.

This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the shares of common stock offered by this prospectus. We expect the public offering price to be $15.00 per share.

Our common stock has been approved for listing on the New York Stock Exchange, subject to official notice of issuance, under the symbol “PMCA.”

Concurrently with the closing of this offering, we expect to sell shares of our common stock to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, in a separate private placement, at the initial public offering price per share, for a minimum aggregate investment of 4.5% of the gross proceeds of this offering, excluding the underwriters’ over-allotment option, up to $5.625 million.

We intend to elect and qualify to be taxed as a real estate investment trust for U.S. federal income tax purposes, or REIT, commencing with our taxable year ending December 31, 2012. To assist us in qualifying as a REIT, among other purposes, stockholders are generally restricted from owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of any class or series of preferred stock. In addition, our charter contains various other restrictions on the ownership and transfer of our stock, see “Description of Stock—Restrictions on Ownership and Transfer.”

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk Factors” beginning on page 23 of this prospectus.


•	We have no operating history and may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders.

•	We may change any of our strategies, policies or procedures without stockholder notice or consent, which could result in our making asset acquisitions or incurring borrowings that are different from, and possibly riskier than, those described in this prospectus.

•	We are dependent on our Manager and its affiliates for our success, and we may not find a suitable replacement if they become unavailable to us.

•	We generally may not terminate or elect not to renew our management agreement, even in the event of our Manager’s poor performance, without having to pay substantial termination fees.

•	There are conflicts of interest in our relationship with our Manager, Provident and their respective affiliates, which could result in decisions that are not in the best interests of our stockholders.

•	Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, and our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local tax, which would reduce the amount of cash available for distribution to our stockholders.

•	Maintenance of our exemption from registration under the Investment Company Act of 1940, as amended, imposes significant limits on our operations.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


	Per share	Total

Public offering price	$	$


Underwriting discounts and commissions⁽¹⁾	$	$


Proceeds, before expenses, to us	$	$


⁽¹⁾	Of the total underwriting discount, we will the pay the underwriters $ per share and our Manager will pay the underwriters $ per share at closing. See “Underwriting.”

The underwriters may also purchase up to an additional 1,250,000 shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions paid by us will be $ and paid by our Manager will be $ and our total proceeds, before expenses, will be $ .

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about , 2012.


UBS Investment Bank	Credit Suisse	Deutsche Bank Securities


Jefferies	RBC Capital Markets	Citi


Guggenheim Securities	JMP Securities

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by us or information to which we have referred you. We have not, and the underwriters have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of shares of our common stock.

TABLE OF CONTENTS


Glossary			ii
Prospectus summary			1
The offering			21
Risk factors			23
Forward-looking statements			60
Use of proceeds			62
Distribution policy			63
Capitalization			64
Management’s discussion and analysis of financial condition and results of operations			65
Business			79
Our Manager and our management agreement			112
Our strategic alliance agreement			128
Our management			131
Principal stockholders			140
Certain relationships and related transactions			141
Description of stock			144
Shares eligible for future sale			150
Certain provisions of the Maryland General Corporation Law and our charter and bylaws			152
Material U.S. federal income tax considerations			158
ERISA considerations			183
Underwriting			184
Legal matters			190
Experts			190
Where you can find more information			191
Appendix I			A-1
Index to financial statements			F-1
EX-3.1
EX-5.1
EX-10.3
EX-23.3

Through and including , 2012 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

Glossary

“ABS” means asset-backed securities.

“Agency” means a U.S. government agency, such as Ginnie Mae, or a federally chartered corporation, such as Fannie Mae or Freddie Mac, which guarantees payments of principal and interest on MBS.

“Agency RMBS” means government agency RMBS, which are mortgage pass-through certificates backed by pools of mortgage loans issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. The collateral for Agency RMBS consists of conforming loans. Our Agency RMBS may also consist of Agency CMOs, which are securities that are structured by a U.S. government agency, or federally chartered corporation-backed mortgage pass through certificates.

“Alt-A Mortgage Loans” means mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to Agency underwriting guidelines. Generally, Alt-A Mortgage Loans allow homeowners to qualify for a mortgage loan with reduced or alternate forms of documentation.

“CMO” means a collateralized mortgage obligation.

“conforming loans” means mortgage loans that conform to the Agency underwriting guidelines and meet the funding criteria of Fannie Mae and Freddie Mac.

“distressed loans” means performing or non-performing loans where (1) payments of principal and/or interest are or have been delinquent, (2) there has been a modification to their terms, or (3) such loans are in the process of foreclosure.

“Fannie Mae” means the Federal National Mortgage Association.

“FHA” means the Federal Housing Administration.

“Freddie Mac” means the Federal Home Loan Mortgage Corporation.

“Ginnie Mae” means the Government National Mortgage Association, a wholly owned corporate instrumentality of the United States of America within the U.S. Department of Housing and Urban Development.

“high quality” refers to pools of loans that have, or MBS, the underlying loans of which have, weighted average FICO scores of 750 or higher and weighted average loan-to-value ratios of 70% or lower.

“highly rated” tranches of RMBS refer to those tranches which we consider to be the more senior tranches of a given securitization.

“IO Strips” are a type of stripped security. Stripped securities are RMBS structured with two or more classes that receive different distributions of principal or interest on a pool of Agency certificates, whole loans or private pass-through RMBS.

“Jumbo loans” means residential mortgage loans with an original principal balance in excess of the maximum amount permitted by the Agency underwriting guidelines.

“MBS” means mortgage-backed securities.

“mortgage loans” means loans secured by real estate with a right to receive the payment of principal and interest on the loan (including servicing fees).

“MSR” means mortgage servicing rights.

“Non-Agency RMBS” means RMBS that are not issued or guaranteed by an Agency, including investment grade (AAA through BBB rated) and non-investment grade (BB rated through unrated) classes.

Glossary

“RMBS” means residential MBS.

“shorter duration” refers to loans that have, or MBS, the underlying loans of which have, (1) an interest rate that is fixed for an initial period of three, five or seven years, after which time the interest rate adjusts annually, or (2) a fixed interest rate and maturity date of either 10 or 15 years.

“Subprime Mortgage Loans” means mortgage loans that have been originated using underwriting standards that are less restrictive than those used in underwriting conforming loans and Alt-A Mortgage Loans.

“TBAs” means forward-settling Agency RMBS where the pool is “to-be-announced.” In a TBA, a buyer will agree 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.

“whole loans” means original mortgage loans which are sold in their entirety and are not securitized.

iii

Prospectus summary

This summary highlights some of the information in this prospectus. It does not contain all of the information that you should consider before investing in our common stock. You should read carefully the more detailed information set forth under “Risk Factors” and the other information included in this prospectus. Except where the context suggests otherwise, the terms “company,” “we,” “us” and “our” refer to Provident Mortgage Capital Associates, Inc., a Maryland corporation, together with its consolidated subsidiaries; references in this prospectus to “Provident” refer collectively to Provident Funding Associates, L.P., a California limited partnership, and its subsidiaries; and references in this prospectus to “our Manager” refer to PMF Advisors, LLC, a Delaware limited liability company. Unless indicated otherwise, the information in this prospectus assumes (1) the common stock to be sold in this offering is to be sold at $15.00 per share, (2) the sale of shares of common stock in a concurrent private placement to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, for a minimum aggregate investment of 4.5% of the gross proceeds raised in this offering, excluding the underwriters’ over-allotment option, up to $5.625 million, and (3) no exercise by the underwriters of their over-allotment option to purchase up to an additional 1,250,000 shares of our common stock.

OUR COMPANY

We are a newly formed real estate finance company that will acquire residential mortgage loans, including primarily Jumbo loans, residential mortgage-backed securities and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. We intend to achieve this objective by selectively constructing a diversified portfolio of high quality assets, many of which we expect to be of shorter duration, and by efficiently financing those assets primarily through repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. We will be externally managed and advised by our Manager, an affiliate of Provident. For the nine months ended September 30, 2011, according to Inside Mortgage Finance, Provident was the largest wholesale mortgage originator, representing mortgage loans sourced and submitted to Provident by independent mortgage brokers on behalf of borrowers, the third largest non-bank mortgage originator and the ninth largest mortgage originator in the United States, in each case in terms of loans funded directly to the borrower, with $13.8 billion in origination volume. In the nine months ended September 30, 2011, Provident’s origination volume totaled $14.9 billion. Provident’s business philosophy has been built around leveraging proprietary technology to create a standardized loan experience with a “no exceptions” mindset, which requires strict adherence to policies and procedures and does not allow for any transactions to be conducted outside of specified parameters. This approach has enabled Provident to maintain a low cost structure, which in turn allows it to offer its loan products at attractive prices in the marketplace. In return for lower prices in the marketplace, Provident attracts high quality mortgage loans. An indication of the high quality of these products is that, for the nine months ended September 30, 2011, the average FICO score of Provident’s originated mortgage loans was 773 and the average loan-to-value ratio at origination was 62%. Another indication of this quality is evidenced by the loss experience related to breaches of representations and warranties of 8.4 basis points, or bps (0.084%) on the approximately $208 billion of loans originated by Provident from 2001 through September 30, 2011. Additionally, as of September 30, 2011, Provident’s $51.5 billion mortgage servicing portfolio had a rate of delinquencies 30 days or greater or in foreclosure of 2.41% based on the total dollar volume of loans serviced, which Provident believes compares favorably to the rate reported by Inside Mortgage Finance Large Servicer Delinquency Index of 10.70%.

term view that the market for non-conforming residential mortgage loans including, in particular, Jumbo loans, will grow, we expect our portfolio to become increasingly focused on this asset class over time. We expect to source mortgage loans and securities primarily through Provident pursuant to the terms of a strategic alliance agreement that we will enter into with Provident, or our strategic alliance agreement. Under our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us.

We are a Maryland corporation, incorporated on March 2, 2011, and intend to elect and qualify to be taxed as a REIT commencing with our taxable year ending December 31, 2012. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, or the 1940 Act. As of the date of this prospectus, we have not commenced any operations other than organizing our company. We currently have no assets and will not commence operations until we have completed this offering and the concurrent private placement.

OUR MANAGER AND PROVIDENT

Our Manager

Pursuant to the terms of the management agreement that we will enter into with our Manager, or our management agreement, our Manager will manage our day-to-day operations. Our management agreement requires our Manager to manage our business affairs in conformity with the policies and the asset acquisition guidelines that are approved and monitored by our board of directors. Our Manager will provide us with all of the asset acquisition and financing management, as well as other management and support functions, that we will need to conduct our business. Our Manager’s senior management team will be led by Craig Pica, its Chief Executive Officer and President, Mark Lefanowicz, its Chief Financial Officer, Jeremy Kelly, its Corporate Secretary, John Kubiak, its Chief Investment Officer, and Michelle Blake, its Chief Administrative Officer and Chief Compliance Officer. Together, this senior management team has an average of 26 years of experience in the financial services industry, with a majority of that experience concentrated in mortgage banking-related activities. Our Manager’s senior management team is currently supported by a team of approximately 25 Provident finance, accounting and capital markets employees. We do not expect to have any employees. Our Manager will be subject to the supervision and oversight of our board of directors. Our Manager, an affiliate of Provident, is a newly organized Delaware limited liability company formed on March 29, 2011.

Provident

Provident has a long track record and deep experience originating both conforming residential mortgage loans and Jumbo loans. Since 2009, given the illiquidity of the Jumbo loan market, substantially all of Provident’s originated mortgage loans have been conforming residential mortgage loans and were originated for sale for Agency securitizations. Provident originated mortgages which exceeded the Agency conforming loan limit of $417,000 with associated origination volume of $3.5 billion, $3.7 billion and $3.0 billion in 2009, 2010 and the nine months ended September 30, 2011, respectively. These loans, classified as Agency super conforming loans, represent mortgages that otherwise would have been classified as Jumbo loans absent the current higher conforming loan limits authorized under Congressional resolution. Additionally, Provident originated $12.8 billion of Jumbo loans from 2001 through 2007. As the Jumbo mortgage market re-emerges, Provident expects to follow the same processes and adhere to similar underwriting guidelines as it once again originates Jumbo loans, much as it has more recently done with loans that are currently classified as super conforming loans. Thus, we believe that Provident will originate higher quality and marketable Jumbo loans, which we will have the opportunity to acquire pursuant to our strategic alliance agreement. Provident is under no obligation to provide us with access to its mortgage loan origination platform other than pursuant to our strategic alliance agreement.

Through our relationship with our Manager and Provident, we will have access to Provident’s leading mortgage loan origination platform with in-house origination, underwriting, structuring, financing, servicing, asset management, risk management and capital markets capabilities. We believe that our access to this leading mortgage loan origination platform, as well as the deep network of relationships that our Manager’s senior management team has established, will provide us with an ongoing source of asset acquisition and financing opportunities through which we can selectively construct and fund a diversified portfolio of high quality assets. Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of our strategic alliance agreement, such assets will be purchased at fair value.

Further, pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis (which means that the third party does not retain the servicing of such loan). In addition to its origination business, as of September 30, 2011, Provident had a servicing portfolio of $51.5 billion, which was almost exclusively sourced through Provident’s origination channel. As of September 30, 2011, the loans underlying Provident’s mortgage servicing portfolio had a weighted average coupon (the average of the gross interest rates of the mortgage loans for which Provident was servicer at such date, weighted by their then current unpaid principal balance) of 4.69%, weighted average FICO of 757 and a weighted average loan-to-value ratio of 61%. As of September 30, 2011, approximately 69% of the mortgage loans in Provident’s servicing portfolio were originated after January 1, 2009.

By engaging Provident to act as sub-servicer for our loans, we will have access to, and benefit from, the Provident servicing platform, including PFServicing, which is Provident’s proprietary all-in-one platform and database that allows Provident to conduct all aspects of loan servicing, including customer service, payment and payoff processing, investor reporting and accounting, escrow administration and default administration. We will also have access to Proviscan, which is Provident’s proprietary document imaging system which is used to create an electronic archive for all production, post-closing, audit and servicing documentation.

OUR STRATEGY

repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing.

We expect to opportunistically adjust our asset allocation across our target asset classes as market conditions change over time. We expect to diversify the characteristics of our portfolio of assets by acquiring various mortgage loan types, including adjustable-rate, hybrid and fixed-rate loans, by acquiring mortgage loans the underlying collateral for which consists of various property types, including properties located in differing geographic locations, and by acquiring both purchase and refinance mortgages. We believe that the diversification of our portfolio, our Manager’s expertise within our target asset classes and the flexibility of our strategy will position us to generate attractive risk-adjusted returns for our stockholders in a variety of market conditions and economic cycles.

INITIAL PORTFOLIO

Upon completion of this offering and the concurrent private placement, we will apply substantially all of the net proceeds of this offering, the concurrent private placement and borrowings under repurchase agreements to acquire an initial portfolio of assets from Provident and its affiliates consisting primarily of shorter duration Agency RMBS and IO Strips. These assets are expected to generate positive earnings immediately following the closing of this offering and the concurrent private placement. The following table sets forth information, as of February 16, 2012, regarding the assets that we expect will comprise the initial portfolio. If these assets were acquired on February 16, 2012, we would expect to purchase this initial portfolio for a price equal to 102.76% of the total unpaid principal balance, which price is determined in accordance with our strategic alliance agreement with Provident and is subject to change based on prevailing market prices at the actual time of purchase. There is no assurance that we will acquire all of these assets or that we will acquire other assets with substantially similar terms.

Agency RMBS

Super

Weighted

Total

Conforming

conforming

Weighted

average

unpaid

loans-unpaid

average

loan

Maximum

principal

Coupon

FICO

to value

maturity

Loan type

CUSIP

balance

rate⁽¹⁾

score⁽²⁾

ratio⁽³⁾

date

5/1 ARM

3128UG2J5

44,006,132

34,811,824

9,194,308

2.173

779

7/1/2041

5/1 ARM

3128UGP27

22,666,297

10,562,450

12,103,847

2.574

781

5/1/2041

5/1 ARM

3128UGPZ4

25,306,003

14,034,481

11,271,522

2.552

779

5/1/2041


								Super							Weighted
			Total		Conforming			conforming					Weighted		average
			unpaid		loans-unpaid			loans-unpaid					average		loan			Maximum
			principal		principal			principal			Coupon		FICO		to value			maturity
Loan type	CUSIP		balance		balance			balance			rate⁽¹⁾		score⁽²⁾		ratio⁽³⁾			date

5/1 ARM		3128UGRR0	$	26,322,026	$	15,247,114		$	11,074,912			2.553		782		59			5/1/2041
5/1 ARM		3128UGSR9		18,325,673		10,665,239			7,660,434			2.555		778		62			5/1/2041
5/1 ARM		3128UGRT6		28,782,145		19,518,870			9,263,275			2.529		780		59			5/1/2041
5/1 ARM		3128UGS73		35,269,508		24,603,266			10,666,242			2.582		772		59			6/1/2041
5/1 ARM		3128UGSF5		16,480,918		10,042,902			6,438,016			2.561		781		57			5/1/2041
5/1 ARM		3128UGSK4		13,302,513		7,670,725			5,631,788			2.581		780		58			5/1/2041
5/1 ARM		3128UGTA5		23,243,546		11,359,395			11,884,151			2.529		777		62			6/1/2041
5/1 ARM		3128UGTB3		12,794,917		8,145,753			4,649,164			2.638		779		61			6/1/2041
5/1 ARM		3128UGUD7		39,781,457		16,479,910			23,301,547			2.531		778		59			6/1/2041
5/1 ARM		3128UGUX3		19,992,208		12,677,203			7,315,005			2.453		781		61			6/1/2041
5/1 ARM		3128UGUZ8		18,453,014		15,967,483			2,485,531			2.468		773		60			6/1/2041
5/1 ARM		3128UHK38		18,957,043		9,814,931			9,142,112			2.573		780		60			11/1/2041
5/1 ARM		3128UHK46		24,208,399		12,774,054			11,434,345			2.551		772		59			10/1/2041
5/1 ARM		3128UHK53		28,898,896		16,217,174			12,681,722			2.573		771		63			10/1/2041
5/1 ARM		3128UHK61		34,705,561		20,417,720			14,287,841			2.577		776		64			11/1/2041
5/1 ARM		3128UHK79		39,633,392		28,416,310			11,217,082			2.540		777		63			11/1/2041
5/1 ARM		3128UHLD5		20,485,989		6,164,809			14,321,180			2.525		777		64			11/1/2041
5/1 ARM		3128UHLE3		26,378,857		10,146,995			16,231,862			2.521		778		66			11/1/2041
5/1 ARM		3128UHLF0		32,797,292		7,635,280			25,162,012			2.520		773		65			11/1/2041
5/1 ARM		3128UG7L5		28,442,924		13,081,529			15,361,395			2.420		778		62			9/1/2041
5/1 ARM		3128UG7M3		25,937,765		11,162,082			14,775,683			2.438		777		65			9/1/2041
5/1 ARM		3128LLHC3		22,239,533		17,903,533			4,336,000			2.271		776		55			2/1/2042
5/1 ARM		3128LLHD1		22,363,118		16,369,950			5,993,168			2.269		771		58			2/1/2042
5/1 ARM		3128LLHF6		9,393,745		3,565,252			5,828,493			2.369		772		62			2/1/2042
5/1 ARM Interest Only		3138A4WB7		4,905,300		4,905,300			—			2.572		773		48			1/1/2041
5/1 ARM Interest Only		3138AGH84		9,573,624		9,573,624			—			2.583		784		46			5/1/2041

5/1 ARM Subtotal			$	693,647,795	$	399,935,158		$	293,712,637			2.493		777		60	%		2/1/2042

						57.7	%		42.3	%
7/1 ARM		3128UG4KO		24,438,195		24,438,195			—			2.677		767		61			8/1/2041
7/1 ARM		3128UG4M6		23,814,976		23,200,437			614,539			2.707		770		63			8/1/2041
7/1 ARM		3128UG4N4		23,702,142		23,702,142			—			2.736		775		62			8/1/2041
7/1 ARM		3128UGGK7		9,651,724		9,651,724			—			2.828		784		57			1/1/2041
7/1 ARM		3128UGP43		5,867,592		5,867,592			—			2.793		782		65			5/1/2041
7/1 ARM		3128UGP84		19,139,763		19,139,763			—			3.177		769		66			5/1/2041
7/1 ARM		3128UGQA8		15,587,916		15,587,916			—			2.855		768		67			5/1/2041
7/1 ARM		3128UGSA6		12,004,252		12,004,252			—			2.782		779		66			5/1/2041
7/1 ARM		3128UGSM0		6,477,961		6,477,961			—			2.852		774		67			5/1/2041
7/1 ARM		3128UGSV0		6,269,756		6,269,756			—			2.831		767		64			5/1/2041
7/1 ARM		3128UGUE5		5,859,756		5,859,756			—			2.712		773		58			6/1/2041
7/1 ARM		3128LLHE9		10,808,307		10,808,307			—			2.533		778		58			2/1/2042
7/1 ARM		3128LLHG4		8,697,602		8,697,602			—			2.564		779		65			2/1/2042
7/1 ARM Interest Only		3138AGH92		17,614,255		17,614,255			—			2.804		782		54			5/1/2041
7/1 ARM Interest Only		3138AH2Z8		5,272,393		5,272,393			—			2.625		787		51			6/1/2041

7/1 ARM Subtotal			$	195,206,590	$	194,592,051		$	614,539			2.777		774		62	%		2/1/2042

						99.7	%		0.3	%
Total Agency RMBS Portfolio			$	888,854,385	$	594,527,209		$	294,327,176			2.556		776		61	%		2/1/2042

						66.9	%		33.1	%


(1)		(a) For each individual security, represents the interest rate of the security, (b) for the subtotal of each loan type, represents the weighted average coupon rate based on the weighting of the unpaid principal balance of each security in that loan type category, (c) for the adjustable rate portfolio, represents the weighted average coupon rate based on the weighting of the unpaid principal balance of each 5/1 ARM and 7/1 ARM security and (d) for the grand total, represents the weighted average coupon rate based on the weighting of the unpaid principal balance of each security listed in the table.

(2)		(a) For each individual security, represents the FICO decision score on each loan weighted by the loan amount, (b) for the subtotal of each loan type, represents the weighted average FICO decision score on each loan (based on the weighting of the unpaid principal balance of each loan security in that loan type category) weighted by the loan amount, (c) for the adjustable rate portfolio, represents the weighted average FICO decision score on each loan (based on the weighting of the unpaid principal balance of each 5/1 ARM and 7/1 ARM security) weighted by the loan amount and (d) for the grand total, represents the weighted average FICO decision score on each loan (based on the weighting of the unpaid principal balance of each security listed in the table) weighted by the loan amount.

(3)		(a) For each individual security, represents the loan amount divided by the appraised value at the time of origination weighted by the loan amount, (b) for the subtotal of each loan type, represents the weighted average loan amount (based on the weighting of the unpaid principal balance of each security in that loan type category) divided by the appraised value at the time of origination weighted by the loan amount, (c) for the adjustable rate portfolio, represents the weighted average loan amount (based on the weighting of the unpaid principal balance of each 5/1 ARM and 7/1 ARM security) divided by the appraised value at the time of origination weighted by the loan amount and (d) for the grand total, represents the weighted average loan amount (based on the weighting of the unpaid principal balance of each security listed in the table) divided by the appraised value at the time of origination weighted by the loan amount.

Additionally, we expect that our initial portfolio will consist of six IO Strips with a current notional principal balance of approximately $74.1 million, which have already been purchased by Provident. These IO Strips have a weighted average coupon of 3.851% as of February 16, 2012. As of February 16, 2012, securities underlying our portfolio of IO Strips consist of Fannie Mae fixed rate securities. Our purchase of these IO Strips from Provident will be subject to the terms of the strategic alliance agreement and we expect that these IO Strips will comprise less than one percent of the market value of the assets in our initial portfolio.

In the first nine months of 2011, Provident originated $9.4 billion of shorter duration agency conforming loans made up of $4.9 billion of 5/1 ARMS, $1.4 billion of 7/1 ARMS, $0.3 billion of 10 year fixed rate loans and $2.8 billion of 15 year fixed rate loans. These shorter duration agency conforming loans had a weighted average FICO of 775 and a weighted average loan-to-value ratio of 60%.

In April 2011, Provident began offering Jumbo loans and funded approximately $67.5 million of Jumbo loans through September 30, 2011. As of January 23, 2012, Provident had approved applications on approximately $7.4 million of additional Jumbo loans. To the extent that any of these additional loans are funded by Provident, we intend to purchase these additional loans from Provident shortly following the completion of this offering and the concurrent private placement. There is no assurance that Provident will fund any of these additional loans or that we will acquire any of these additional loans.

OUR TARGET ASSETS

Our target asset classes and the principal assets we expect to acquire in each are as follows:


Asset classes		Principal assets


Residential mortgage loans		Ø Primarily Jumbo loans, as well as other non-conforming residential mortgage loans, which may be adjustable-rate, hybrid or fixed-rate and will be first lien mortgages secured


		by residential single family one to four unit homes in the United States. In the future, some of these loans may be distressed and acquired at discounts.


MBS		Ø Agency RMBS.

		Ø Agency CMOs.

		Ø Non-Agency RMBS (primarily subordinated tranches backed by Jumbo loans, non-conforming loans and, to a lesser extent, Alt-A Mortgage Loans and Subprime Mortgage Loans).

Other mortgage-related assets		Ø IO Strips and MSRs (and/or participation interests in MSRs).

		Ø Debt and equity tranches of securitizations backed by various asset classes.

		Ø Securities (common stock, preferred stock and debt) of other real estate-related entities.

Our board of directors has adopted a set of asset acquisition guidelines that set out our target asset classes and other criteria to be used by our Manager to evaluate specific assets as well as our overall portfolio composition. However, our Manager will make determinations as to the percentage of our assets in each of our target asset classes. Our decisions will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments. We cannot predict the specific percentage of our assets that we will own in any of our target asset classes or whether we will invest in other asset classes. We may change our strategy and policies without a vote of our stockholders. We believe that the diversification of our portfolio of assets and flexibility of our strategy, combined with our Manager’s and its affiliates’ expertise among our target assets, will enable us to achieve attractive risk-adjusted returns under a variety of market conditions and economic cycles.

OUR COMPETITIVE ADVANTAGES

We believe that our competitive advantages include the following:

Access to Provident’s leading mortgage loan origination and servicing platform with an established track record

Pursuant to our strategic alliance agreement, we will have access to Provident’s leading mortgage loan origination and servicing platform which has an established track record. Provident is guided by discipline and consistency to create the highest quality product. Provident’s business philosophy has been built around leveraging proprietary technology to create a standardized loan experience with a “no exceptions” mindset to originating and servicing mortgage loans. We believe that our access to Provident’s leading mortgage loan origination and servicing platform will provide us with continuing access to a robust pipeline of high quality assets through which we can grow our business and increase value for our stockholders.

Access to Provident’s operational platform and infrastructure

Provident has created and maintains an established operational platform with proprietary technology and third-party analytical capabilities. Provident’s proprietary technology includes PFServicing and Proviscan, as well as PFNet, which is Provident’s all-in-one platform that allows Provident to control the submission, underwriting, loan document preparation and funding of loans. We and our Manager will have access to this vertically integrated, in-house operational platform, which has credit, underwriting, structuring, servicing, asset management and capital markets capabilities. In addition, we will have access to and will benefit from Provident’s infrastructure, including its professionals across production operations, capital markets, financial reporting, accounting, business development, marketing, human resources, compliance and information technology.

Visibility to Provident’s mortgage loan pipeline, servicing portfolio and loan-level data

Provident operates an integrated platform with free flow of information across all segments of its business. In addition to the market knowledge and real estate finance industry data that Provident obtains through its established platform, we expect to have visibility to Provident’s robust mortgage loan pipeline and servicing portfolio which will provide us with valuable insights to proprietary loan-level data. We believe that our access to this information will enable us to quickly and efficiently evaluate and execute on asset and market opportunities that we deem desirable. We expect to benefit from our access to Provident’s platform by selecting mortgage loans and creating securities which we believe will generate attractive risk-adjusted returns.

Strategic relationships and access to deal flow and financing

Our Manager’s senior management team has extensive long-term relationships with financial intermediaries that Provident receives financing from, sells to and trades and hedges with on a daily basis. These relationships are with primary traders, primary dealers, investment banks, brokerage firms, repurchase agreement counterparties and commercial banks, including Colorado Federal Savings Bank, or CFSB, a commercial bank that is an affiliate of Provident. We believe these relationships will enhance our ability to source and finance assets on attractive terms and access borrowings at attractive levels, which in turn will enable us to grow and consistently perform across various credit and interest rate environments and economic cycles.

Anticipated high quality initial portfolio

Significant experience of our Manager in the residential mortgage business

The senior management team of our Manager has a long track record and broad experience in originating, financing, trading, hedging, servicing and managing mortgage assets through a variety of credit and interest rate environments and economic cycles. Our Manager’s senior management has an average of approximately 26 years of experience in the financial services industry, with a majority of that experience concentrated in mortgage banking-related activities. This team has an in-depth understanding of real estate market fundamentals as well as the ability to analyze and set value parameters around residential mortgage loans, including the mortgage loans that collateralize Agency and Non-Agency RMBS, and has demonstrated the ability to generate attractive risk-adjusted returns under various market conditions and economic cycles. We expect that our Manager’s experience will allow us to identify, analyze, select, acquire and manage attractive assets across all of our target asset classes and to effectively structure and finance our portfolio.

Long-term alignment of interests among our stockholders, our Manager and Provident

from the date of this prospectus. In addition, we believe our Manager will be closely aligned with us because under the terms of our management agreement, any incentive fee payable to our Manager will be 100% paid in shares of our restricted common stock. In addition, the restricted common stock received by our Manager related to any incentive fee will vest over a three-year period, as described under “Our Management and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.”

FINANCING STRATEGY

We expect to use leverage to increase potential returns to our stockholders. Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, we expect to use a number of sources to finance our assets, including repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities). The amount of leverage we may employ for particular assets will depend upon the availability of particular types of financing and our Manager’s assessment of the credit, liquidity, price volatility and other risks of those assets and financing counterparties. Although we are not required to maintain any particular leverage ratio, including the maximum amount of leverage we may use, we expect initially, to deploy, on a debt-to-equity basis, up to 8:1 leverage on Agency RMBS, up to 5:1 leverage on residential mortgage loans and up to 3:1 leverage on IO Strips. We do not expect, initially, to deploy leverage on non-Agency RMBS or MSRs. We may, however, be limited or restricted in the amount of leverage we may employ by the terms and provisions of any financing or other agreements that we may enter into in the future, and we may be subject to margin calls as a result of our financing activity. In addition, we intend to rely on short-term financing such as repurchase transactions under master repurchase agreements, the duration of which is typically 30 to 60 days. To date, we have entered into master repurchase agreements with UBS Securities LLC, Deutsche Bank Securities Inc., Jefferies & Company, Inc. and Guggenheim Securities, LLC, each of which is an underwriter in this offering, and we have also entered into repurchase agreements with Barclays Capital Inc., J.P. Morgan Securities LLC, Nomura Securities International, Inc. and RBS Securities Inc., which we intend to use for the purchase of Agency RMBS and IO Strips. This financing is uncommitted and continuation of such financing cannot be assured. These agreements are subject to the successful completion of an equity raise by us of a minimum of $100 million.

HEDGING STRATEGY

Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, we may utilize hedging instruments, including interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, IO Strips or other financial instruments that we deem appropriate. Specifically, we expect to hedge our exposure to potential interest rate mismatches between the interest we earn on our assets and our borrowing costs caused by fluctuations in short-term interest rates. In utilizing leverage and interest rate hedges, our objectives will include locking in, on a long-term basis, a spread between the yield on our assets and the cost of our financing in an effort to improve returns to our stockholders.

SUMMARY RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully read and consider the following risk factors and under “Risk Factors,” as well as all other information contained in this prospectus before making a decision to purchase our common stock. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and could result in a partial or complete loss of your investment.


Ø	We have no operating history and may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders.


Ø	Difficult conditions in the mortgage and residential real estate markets may cause us to experience market losses related to our asset portfolio and there can be no assurance that we will be successful in implementing our business strategies amidst these conditions.

Ø	Actions of the U.S. government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies for the purpose of stabilizing or reforming the financial markets, or market response to those actions, may not achieve the intended effect or benefit our business, and may adversely affect our business.

Ø	The conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between Fannie Mae and Freddie Mac and the U.S. government, may adversely affect our business.

Ø	Many of our assets may be illiquid, which may adversely affect our business, including our ability to value and sell our assets.

Ø	Loss of our 1940 Act exemption would adversely affect us, the market price of shares of our common stock and our ability to make distributions to our stockholders, and could result in the termination of the management agreement with our Manager.

Ø	We expect to use leverage in executing our business strategy, which may adversely affect our return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.

Ø	We may depend on repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) to execute our business plan, and our inability to access funding could have a material adverse effect on our results of operations, financial condition and business. We intend to rely on short-term financing and thus are especially exposed to changes in the availability of financing.

Ø	The repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) that we may use to finance our asset acquisitions may require us to provide additional collateral and may restrict us from leveraging our assets as desired. We may be subject to margin calls as a result of our financing activity.

Ø	An increase in our borrowing costs relative to the interest we receive on our leveraged assets may adversely affect our profitability and our cash available for distributions to our stockholders.

Ø	We may change any of our strategies, policies or procedures without stockholder notice or consent, which could result in our making asset acquisitions or incurring borrowings that are different from, and possibly riskier than, those described in this prospectus.

Ø	We may enter into hedging transactions that could expose us to contingent liabilities in the future.

Ø	We are dependent on our Manager, Provident and their key personnel for our success, and we may not find a suitable replacement for our Manager if our management agreement is terminated, or if key personnel leave the employment of our Manager or Provident or otherwise become unavailable to us.

Ø	Our management agreement with our Manager and our strategic alliance agreement between us and Provident were not negotiated on an arm’s-length basis and may not be as favorable to us as if they had been negotiated with unaffiliated third parties. We generally may not terminate or elect not to renew our management agreement, even in the event of our Manager’s poor performance, without having to pay substantial termination fees.

Ø	There are conflicts of interest in our relationship with our Manager, Provident and their respective affiliates, which could result in decisions that are not in the best interests of our stockholders.

Ø	We operate in a highly competitive market and competition may limit our ability to acquire desirable assets and result in reduced risk-adjusted returns.

Ø	The mortgage loans that we will acquire, and the mortgage loans underlying the Non-Agency RMBS that we will acquire, are subject to delinquency, foreclosure and loss, which could result in losses to us.

Ø	We may face difficulties in acquiring, financing and selling Jumbo loans.

OUR STRUCTURE

We were formed as a Maryland corporation on March 2, 2011. The following chart shows our anticipated structure after giving effect to this offering and the concurrent private placement to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team:


(1)		Officers and directors consist of Craig Pica, Mark Lefanowicz, Jeremy Kelly, Michelle Blake and John Kubiak, who will own approximately 3.06%, 0.15%, 0.08%, 0.15% and 0.08%, respectively, of our common stock outstanding upon the completion of this offering and the concurrent private placement.


(2)		Percentage includes an aggregate of 0.30% of our common stock owned directly by certain members of Craig Pica’s family.


(3)		We expect PMCA Asset I, LLC to hold assets that will enable it to qualify for an exemption from registration under the 1940 Act as an investment company pursuant to Section 3(c)(5)(C) of the 1940 Act. As a result at least 55% of this subsidiary’s assets are expected to be comprised of mortgage loans and whole pool Agency RMBS and 25% of its assets are expected to be comprised of real estate or real estate related assets, such as Non-Agency RMBS. See “Business—Operating and Regulatory Structure—1940 Act Exemption.”

(4)		We expect PMCA Asset II, LLC to hold assets that will enable it to qualify for an exemption under the 1940 Act as an investment company pursuant to Section 3(c)(7) of the 1940 Act. We expect PMCA Asset II, LLC to hold assets that do not qualify for an exemption under the 1940 Act other than Section 3(c)(7). See “Business—Operating and Regulatory Structure—1940 Act Exemption.”

(5)		A taxable REIT subsidiary, or TRS, that we expect to form in the future, including in the event that we securitize assets.

(6)		PMF Advisors, LLC is substantially owned and controlled by the same individuals who own and control Provident Funding Associates, L.P.

MANAGEMENT AGREEMENT

We will be externally managed and advised by our Manager. We expect to benefit from the personnel, infrastructure, analytical capabilities, business relationships and management experience of our Manager and Provident. Each of our officers and non-independent directors is also an employee of our Manager and/or one of its affiliates, and most of them have responsibilities and commitments in addition to their responsibilities to us. We expect that our Chief Executive Officer and President, Chief Financial Officer and Treasurer, Chief Investment Officer, Executive Vice President, Strategy and Investor Relations, Chief Administrative Officer and Secretary and any other appropriate personnel of our Manager will devote such portion of their time to our affairs as is necessary to enable us to effectively operate our business. Our Manager is not obligated, however, to dedicate any of its personnel exclusively to us, nor is it or its personnel obligated to dedicate any specific portion of its or their time to our business. Our Manager maintains a contractual as opposed to a fiduciary relationship with us.

We will enter into a management agreement with our Manager effective upon the closing of this offering. Pursuant to our management agreement, our Manager will implement our business strategy and perform certain services for us, subject to oversight by our board of directors. Our Manager will be responsible for, among other duties: (1) performing all of our day-to-day functions, (2) determining investment criteria in conjunction with, and subject to the supervision of, our board of directors, (3) sourcing, analyzing and executing asset acquisitions, sales and securitizations, (4) performing asset and liability management duties, including hedging and financing, and (5) performing financial and accounting management. In addition, our Manager has an Investment Committee initially comprised of Craig Pica, Mark Lefanowicz, John Kubiak and Jeremy Kelly, that will oversee our asset acquisition and financing strategies as well as compliance with our investment guidelines.

The initial term of our management agreement will extend for three years from the closing of this offering, with automatic one-year renewal terms starting on the third anniversary of the closing of this offering. For a detailed description of our management agreement’s termination provisions, see “Our Manager and our Management Agreement—Management Agreement.”

The following table summarizes the base management fee and expense reimbursements that we will pay to our Manager:


Type	Description	Payment


Base management fee	We will pay our Manager a base management fee under our management agreement, calculated and payable quarterly in arrears, equal to 1.5% per annum of our stockholders’ equity. For purposes of calculating the base management fee, our stockholders’ equity means the sum of the net proceeds from all issuances of our equity securities since inception (allocated on a pro rata basis for such issuances during the fiscal quarter of any such issuance), plus our retained earnings at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount that we pay for repurchases of our common stock since inception, and excluding from stockholders’ equity any common stock issued to our Manager in respect of its incentive fee and any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income). This amount will be adjusted to exclude one-time events pursuant to changes in generally accepted accounting principles, or GAAP, and certain non-cash	Quarterly, in arrears in cash.


Type	Description	Payment


	items (such as depreciation and amortization) after discussions between our Manager and our independent directors and approved by a majority of our independent directors. Our stockholders’ equity, for purposes of calculating the base management fee, could be greater than or less than the amount of stockholders’ equity shown on our financial statements. We expect the base management fee to be earned by our Manager in the first full fiscal year to be approximately $2.2 million, assuming (i) the number of shares of common stock set forth on the front cover of this prospectus are sold in this offering and the concurrent private placement, (ii) we do not consummate any follow-on equity offerings during such period, (iii) that the underwriters’ over-allotment option is exercised in full and (iv) the exclusion of the partial waiver of the base management fee during the 12 month period following the completion of this offering and the concurrent private placement, as described below.

	For the 12 month period following the completion of this offering and the concurrent private placement, our Manager has waived its right to receive the base management fee in an amount equal to 50% of the operating expenses required to be paid by us during such 12 month period.

Incentive fee	As described in more detail below, we will pay a quarterly incentive fee to our Manager in an amount equal to 20.0% of the dollar amount by which Core Earnings (as described below) for the most recently completed fiscal quarter, or the Current Quarter, before the incentive fee received in relation to such fiscal quarter exceeds a quarterly hurdle (as described below). Quarterly Hurdle: The product of (1) the weighted average of the issue price per share of common stock in all of our offerings multiplied by the weighted average number of shares of common stock outstanding during the Current Quarter and (2) 8%, or the Hurdle, expressed on a quarterly basis. No incentive fee shall be accrued or earned by our Manager until the completion of the first four full fiscal quarters following the closing of this offering.	Quarterly, paid in restricted common stock, vesting over a three-year period following the quarter in which such fee was earned, with 60% vesting at the end of two years and the remaining 40% vesting at the end of three years. No incentive fee shall be accrued or earned by our Manager until the completion of the first four full fiscal quarters following the closing of this offering.

Reimbursement of expenses	We will pay, or reimburse our Manager for, expenses including legal and other advisory services, audit fees, securitizations, board of director fees and expenses, taxes, quarterly and annual SEC filing fees and expenses, director and officer insurance, transfer agent fees and exchange fees, Bloomberg Professional, or Bloomberg, and other market data information systems’ fees, organizational and start-up costs, selected investor relations costs and other services. See “Our Manager and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.” Other	Monthly in cash.


Type	Description	Payment



	than with respect to our Manager’s performance of certain legal, compliance, accounting, due diligence tasks and other services outside professionals or outside consultants otherwise would perform, we will not reimburse our Manager or its affiliates for the salaries and other compensation of their personnel.

Termination fee	Termination fee equal to three times the sum of (1) the average annual base management fee and (2) the average annual incentive fee earned by our Manager during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. Upon termination of our management agreement, the restricted shares of common stock issued to our Manager in respect of any incentive fee shall vest immediately to the extent such shares have not already vested. See “Our Manager and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.”	Upon termination of our management agreement by us without cause or by our Manager if we materially breach our management agreement.

Core Earnings is defined as GAAP net income (loss) excluding the incentive fee and non-cash equity compensation expense (but including any expense as a result of the base management fee), excluding any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income). This amount will be adjusted to exclude one-time events pursuant to changes in GAAP and certain non-cash items after discussions between our Manager and our independent directors and approved by a majority of our independent directors. Core Earnings is a non-GAAP financial measure. We believe that Core Earnings more appropriately reflects our Manager’s performance than GAAP net income and will be utilized by the investment community to assess our Manager’s performance and will more closely align our Manager’s incentives with the interests of our stockholders.

The shares of restricted stock payable to our Manager in respect of any incentive fee will vest over a three-year period following the quarter in which such fee was earned, with 60% vesting at the end of two years and the remaining 40% vesting at the end of three years. No incentive fee shall be accrued or earned by our Manager until the completion of the first four full fiscal quarters following the closing of this offering. See “Our Manager and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.”

To the extent that payment of the incentive fee to our Manager in shares of our common stock would result in a violation of the stock ownership limits set forth in our charter (and taking into account the 10.25% limit on ownership of common stock that our board of directors has established for the Manager), all or a portion of the incentive fee payable to our Manager will be paid in cash to the extent necessary to avoid such violation. In such a situation, our Manager will not receive the cash payment until such time as the shares of common stock that would have been issued would have vested as described above. For purposes of determining the common stock ownership of the Manager, as described above, any common stock owned by Craig Pica, Doug Pica, Ralph Pica, and any other members of the Pica family, whether directly or through certain other entities, will be attributed to the Manager.

OUR STRATEGIC ALLIANCE AGREEMENT

Upon the completion of this offering, we will enter into a strategic alliance agreement with Provident which will provide us with access to Provident’s leading mortgage loan origination and servicing platform. Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of our strategic alliance agreement, such assets will be purchased at fair value. Further, pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis or any MSR that we purchase from Provident or any other third party. Additionally, to the extent we seek to sell the servicing on a loan, Provident will have the first right to purchase the servicing on such loan. To the extent that we sell such servicing rights to Provident, under the terms of our strategic alliance agreement, such servicing rights will be sold at fair value, which will be determined at the time such agreement is entered into. See “Our Strategic Alliance Agreement.”

CONFLICTS OF INTEREST

We are dependent on our Manager for our day-to-day management, and we do not have any independent officers or employees. Each of our officers and non-independent directors is also an employee of our Manager and/or one of its affiliates. Our management agreement with our Manager and our strategic alliance agreement between us and Provident were, and any purchase and sale agreements and sub-servicing agreements that we may enter into with Provident pursuant to our strategic alliance agreement will be, negotiated between related parties and their respective terms, including fees and other amounts payable, may not be as favorable to us as if they were negotiated on an arm’s-length basis with unaffiliated third parties. In addition, the ability of our Manager and its officers and personnel to engage in other business activities, including the management of other entities, may reduce the time our Manager, its officers and personnel spend managing us. Furthermore, although our independent directors have the ability to terminate our management agreement in the case of a material breach of a term of the agreement by our Manager, because our officers and some of our directors are employed by our Manager and Provident, our independent directors may be less willing to enforce vigorously the provisions of our management agreement against our Manager because the loss of the key personnel provided to us pursuant to our management agreement would have an adverse effect on our operations. Furthermore, the termination of our strategic alliance agreement or the loss of any of the key personnel of Provident would have an adverse effect on certain aspects of our business.

Our Manager, an affiliate of Provident, is a newly formed Delaware limited liability company. While Provident’s business strategy focuses primarily on the origination of mortgage loans and the servicing of high-quality mortgage loans, we intend to focus on the acquisition of Agency RMBS, non-conforming residential mortgage loans, including Jumbo loans, Non-Agency RMBS and other mortgage-related assets. We also intend, subject to market conditions, to follow a predominantly long-term buy and hold strategy, whereas Provident generally seeks to sell the mortgage loans that it originates. Provident may, however, retain loans and other assets for investment and there may be situations where we compete, subject to the terms of our strategic alliance agreement, with affiliates of Provident for opportunities to acquire our target assets. Provident is under no obligation, under the terms of the strategic alliance agreement or otherwise, to offer assets to us in sufficient quantities and Provident may offer assets to third parties without offering such assets to us. To the extent that we have capacity to acquire assets, we will notify Provident of such capacity and desire for additional assets and we expect that Provident will offer assets to us, although it is under no obligation to do so upon our request. We expect to purchase all assets that Provident offers to us, subject to our asset acquisition guidelines, return parameters, available capacity and risk management profile.

We, our Manager and Provident have established certain policies and procedures that are designed to manage potential conflicts of interest between us and our Manager, Provident and their respective affiliates. Pursuant to our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. Currently, two such affiliates of Provident are Provident Mortgage Trust, Inc., or PMT, a private REIT that invests in Agency RMBS, Non-Agency RMBS, IO Strips and mortgage loans (primarily fixed-rate home equity term loans), 85% of the outstanding common stock of which is owned by Craig Pica, the Chairman of our board of directors, and CFSB, which is 89% owned by Craig Pica. Provident has a mortgage loan purchase and servicing agreement with PMT pursuant to which Provident may sell, subject to our strategic alliance agreement, mortgage loans to PMT, from time to time through specific commitments, and Provident retains all of the servicing rights and sub-services the mortgage loans. In addition, under a fulfillment agreement, or the fulfillment agreement, between Provident and CFSB, CFSB has the right to underwrite and fund loans where the borrower has locked their interest rate with Provident. Further, under the fulfillment agreement, Provident performs loan processing and secondary marketing services, including making the sole decision on the sale of such loans. Although CFSB owns the loans, under our strategic alliance agreement, Provident must first offer such loans to us before offering such loans to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. However, if CFSB decides to retain such loans for investment, then we will not be given the opportunity to purchase such loans. To the extent that we purchase assets from Provident, under the terms of our strategic alliance agreement, such assets will be purchased at fair value. In general, at the time Provident offers us an asset, Provident will be required to provide us with information, to the extent available, relating to any bids received or bids available on Bloomberg, Tradeweb Markets LLC’s Tradeweb platform, or Tradeweb, or a similar service. After reviewing any such information, we will make an offer to purchase such asset from Provident and Provident will decide whether to sell the asset to us. If Provident decides not to sell the asset to us, Provident may not sell the asset to another entity for equal to or less than the price offered by us without first re-offering the asset to us. To the extent such price quote is not available, the assets will be purchased by us at prices validated by an independent third party selected from time to time by a majority of our independent directors, which selection will be subject to Provident’s reasonable consent. There can be no assurance that the policies and procedures that have been established by us, our Manager and Provident will be effective in managing potential conflicts of interest. In addition, it is possible in the future that Provident, our Manager and their respective affiliates may have clients that compete directly with us for opportunities.

Our Manager is able to follow broad asset acquisition guidelines established by our board of directors and has significant latitude within those guidelines to determine the assets that are appropriate for us. Our board of directors will periodically review our asset acquisition guidelines and our portfolio of assets. However, our board of directors will not review every decision. Furthermore, in conducting its periodic reviews, our board of directors will rely primarily upon information provided to the board of directors by our Manager and its affiliates.

We have agreed to pay our Manager a base management fee that is not tied to our performance and an incentive fee that is based entirely on our performance. This compensation-based arrangement may cause our Manager to acquire assets with higher yield potential, which are generally riskier or more speculative. The base management fee component may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us. The performance-based incentive fee component may cause our Manager to place undue emphasis on the maximization of Core Earnings, including through the use of leverage, at the expense of other criteria, such as preservation of capital, to achieve higher incentive distributions. This could result in increased risk to the value of our portfolio of assets.

We do not have a policy that expressly prohibits our directors, officers, securityholders or affiliates from engaging for their own account in business activities of the types conducted by us. However, our code

of business conduct and ethics contains a conflicts of interest policy that prohibits our directors, officers and employees from engaging in any transaction that involves an actual conflict of interest with us.

OPERATING AND REGULATORY STRUCTURE

REIT qualification

In connection with this offering, we intend to elect to qualify as a REIT under the Internal Revenue Code, commencing with our taxable year ending December 31, 2012. We believe that we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and we intend to operate in a manner that will enable us to meet the requirements for qualification and taxation as a REIT. To qualify as a REIT, we must meet on a continuing basis, through organizational and actual investment and operating results, various requirements under the Internal Revenue Code relating to, among others, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of our shares. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we failed to qualify as a REIT. Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property. Any distributions paid by us generally will not be eligible for taxation at the preferred U.S. federal income tax rates that currently apply (through 2012) to certain distributions received by individuals from taxable corporations.

1940 Act exemption

We intend to conduct our operations so that neither we nor our subsidiaries are required to register as investment companies under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act. We intend to conduct our operations so that we do not come within the definition of an investment company because less than 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will consist of “investment securities.” The securities issued to us by any wholly owned or majority owned subsidiary that we may form in the future that is excepted from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940 Act or is an investment company, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We will monitor our holdings to ensure continuing and ongoing compliance with the 40% test. In addition, we believe we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because we will not engage primarily or hold ourself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our wholly owned and majority owned subsidiaries, we will be primarily engaged in the non investment company businesses of these subsidiaries.

If the value of our investments in our subsidiaries that are investment companies or are excepted from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, or if one or more of such subsidiaries fail to maintain their exceptions or exemptions from the 1940 Act, we may have to register under the 1940 Act and could become subject to substantial regulation with respect to our capital structure (including the ability to use leverage), management, operations, transactions with affiliated persons (as defined in

the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, and other matters.

We expect PMCA Asset I, LLC to qualify for an exemption from registration under the 1940 Act as an investment company pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for an entity “not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type or periodic payment plan certificates, and [which] . . .is primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” In addition, certain of our other subsidiaries that we may form in the future also may qualify for the Section 3(c)(5)(C) exemption. In a series of no-action letters and other guidance, the SEC staff has interpreted this exemption generally to require that at least 55% of the assets of a company relying on this exemption must be comprised of qualifying assets and at least 80% of a company’s assets must be comprised of qualifying assets and real estate related assets under the 1940 Act. Qualifying assets for this purpose include mortgage loans and other assets. We expect PMCA Asset I, LLC and each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff to determine which assets are qualifying assets and which assets are real estate-related under this exemption to the extent such guidance is available. The SEC staff has determined in various no action letters that whole pool Agency RMBS are the functional equivalent of mortgage loans, and are therefore qualifying assets, for purposes of Section 3(c)(5)(C). The SEC has not, however, published guidance with respect to some of our other target assets under Section 3(c)(5)(C). For assets for which the SEC staff has not published guidance, we intend to rely on our own analysis to determine which of such assets are qualifying assets and which of such assets are real estate related under this exemption. For example, we intend to treat as real estate related assets Non-Agency RMBS, debt and equity securities of companies primarily engaged in real estate businesses, agency partial pool certificates, securities issued by pass through entities of which substantially all of the assets consist of qualifying assets, MSRs and participation interests in MSRs. Although we intend to monitor our portfolio periodically and prior to each investment acquisition, there can be no assurance that we will be able to maintain this exemption from registration for each of these subsidiaries. The SEC recently 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 exemption and leverage used by mortgage related vehicles. To the extent that the SEC staff publishes new or different guidance with respect to these matters, we may be required to adjust our strategy accordingly. Although we intend to monitor the assets of PMCA Asset I, LLC and our other subsidiaries relying on the Section 3(c)(5)(C) exemption periodically and prior to each acquisition, there can be no assurance that we will be able to maintain this exemption for these subsidiaries. In addition, we may be limited in our ability to make certain investments and these limitations could result in these subsidiaries holding assets we might wish to sell or selling assets we might wish to hold. For example, these restrictions will limit the ability of such subsidiaries to invest directly in mortgage-backed securities that represent less than the entire ownership in a pool of mortgage loans, MSRs or in assets not related to real estate. This exemption also prohibits us from issuing redeemable securities.

To the extent we intend to acquire assets that are not appropriate to be included in PMCA Asset I, LLC or another subsidiary that would qualify for an exception or exemption from registration under the 1940 Act other than an exception pursuant to Section 3(c)(1) or 3(c)(7) of the 1940 Act, we would expect that we would acquire such assets through PMCA Asset II, LLC, which will qualify for an exemption from registration under the 1940 Act pursuant to Section 3(c)(7), which is available for entities whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which are not making and do not at that time propose to make a public offering of such securities. The value of our investments in PMCA Asset II, LLC, together with the value of our investments in any of our other subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or 3(c)(7) of the 1940 Act or that are investment companies and any other investment securities we own, may not exceed 40% of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.

Qualification for exemption from registration under the 1940 Act will limit our ability to make certain investments. For example, these restrictions will limit the ability of our subsidiaries to invest directly in mortgage backed securities that represent less than the entire ownership in a pool of mortgage loans,

debt and equity tranches of securitizations and certain ABS and real estate companies or in assets not related to real estate.

To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon such exclusions, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

RESTRICTIONS ON OWNERSHIP AND TRANSFER OF OUR COMMON STOCK

To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code, among other purposes, our charter prohibits, with certain exceptions, any person or entity from beneficially or constructively owning, applying certain attribution rules under the Internal Revenue Code, more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of any class or series of preferred stock. Subject to certain limitations, our board of directors may, in its sole discretion, waive the 9.8% ownership limit or establish a different limitation on ownership, or the excepted holder limit, with respect to a particular person if, among other requirements, it is presented with evidence satisfactory to it that such ownership will not then or in the future jeopardize our qualification as a REIT. Our board of directors has established an excepted holder limit for our Manager that allows our Manager to own up to 10.25% of the outstanding shares of our common stock, as described in “Description of Stock—Restrictions on Ownership and Transfer.” Our charter also prohibits any person from, among other things, beneficially or constructively owning shares of our capital stock that would result in our being “closely held” under Section 856(h) of the Internal Revenue Code (without regard to whether the ownership interest is held during the last half of a taxable year), or otherwise cause us to fail to qualify as a REIT.

Our charter provides that any ownership or purported transfer of our capital stock in violation of the foregoing restrictions will result in the shares so owned or transferred being automatically transferred to a charitable trust for the benefit of a charitable beneficiary, and the purported owner or transferee acquiring no rights in such shares. If a transfer of shares of our capital stock would result in our capital stock being beneficially owned by fewer than 100 persons or a transfer to a charitable trust as described above would be ineffective for any reason to prevent a violation of the other restrictions on ownership and transfer of our stock, the transfer resulting in such violation will be void from the time of such purported transfer.

The offering


Common stock offered by us		8,333,334 shares (plus up to an additional 1,250,000 shares of our common stock that we may issue and sell upon the exercise of the underwriters’ over-allotment option).


Common stock to be outstanding after this offering		8,708,334 shares.⁽¹⁾


Use of proceeds		We plan to use substantially all of the net proceeds of this initial public offering and the concurrent private placement to acquire an initial portfolio of assets from Provident and its affiliates consisting primarily of shorter duration Agency RMBS and IO Strips. See “Use of Proceeds.”


Offering expenses		Our obligation to pay for the expenses incurred in connection with this offering and the concurrent private placement will be capped at 1% of the total gross proceeds from this offering and the concurrent private placement (or approximately $1.3 million, and approximately $1.5 million if the underwriters exercise their over-allotment option in full). Our Manager will pay the expenses incurred above this 1% cap.


Distribution policy		We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We generally intend over time to pay quarterly dividends in an amount equal to our taxable income. We plan to pay our first dividend in respect of the period from the closing of this offering through June 30, 2012.


		Any distributions we make will be at the discretion of our board of directors and will depend upon, among other things, our actual results of operations. These results and our ability to pay distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. For more information, see “Distribution Policy.”

		We cannot assure you that we will make any distributions to our stockholders.


NYSE symbol		“PMCA”

⁽¹⁾ Includes 375,000 shares of our common stock to be sold to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team in a concurrent private placement. Excludes (A) 1,250,000 shares of our common stock that we may issue and sell upon the exercise of the underwriters’ over-allotment option; and (B) 298,750 shares of restricted common stock available for future issuance under our 2012 equity incentive plan in an aggregate amount of up to 3.0% of the issued and outstanding shares of our common stock (on a fully diluted basis and including shares to be issued in the concurrent private placement and shares to be sold pursuant to the underwriters’ exercise of their over-allotment option) at the time of the award, subject to a ceiling of 600,000 shares available for issuance under the plan. See “Our Management—2012 Equity Incentive Plan.”


Ownership and transfer restrictions		To assist us in complying with the limitations on the concentration of ownership of a REIT imposed by the Internal Revenue Code, among other purposes, our charter generally prohibits, among other prohibitions, any stockholder from beneficially or constructively owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of any class or series of preferred stock. Our board of directors has established an excepted holder limit for our Manager that allows our Manager to own up to 10.25% of the outstanding shares of our common stock. See “Description of Stock—Restrictions on Ownership and Transfer.”


Risk factors		Investing in our common stock involves a high degree of risk. You should carefully read and consider the information set forth under “Risk Factors” and all other information in this prospectus before investing in our common stock.

OUR CORPORATE INFORMATION

Our principal executive offices are located at 851 Traeger Avenue, Suite 380, San Bruno, California 94066. Our telephone number is (855) 653-4300. Our website is www.pmca-reit.com. The contents of our website are not a part of this prospectus. The information on the website is not intended to form a part of or be incorporated by reference into this prospectus.

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully read and consider the following risk factors and all other information contained in this prospectus before making a decision to purchase our common stock. If any of the following risks occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and could result in a partial or complete loss of your investment.

RISKS RELATED TO OUR BUSINESS

We have no operating history and may not be able to successfully operate our business or generate sufficient revenue to make or sustain distributions to our stockholders.

We were incorporated on March 2, 2011 and have no operating history. As of the date of this prospectus, we have not commenced any operations other than organizing our company. We currently have no assets and will not commence operations until we have completed this offering and the concurrent private placement. We cannot assure you that we will be able to successfully operate our business or implement our operating policies and strategies as described in this prospectus. There can be no assurance that we will be able to generate sufficient returns to pay our operating expenses and make satisfactory distributions to our stockholders or any distributions at all. The results of our operations and our ability to make or sustain distributions to our stockholders depend on several factors, including the availability of opportunities for the attractive acquisition of assets, the level and volatility of interest rates, the availability of adequate short and long-term financing, conditions in the real estate market, the financial markets and economic conditions.

Difficult and volatile conditions in the mortgage and residential real estate markets as well as the broader financial markets may cause us to experience market losses related to our asset portfolio and there can be no assurance that we will be successful in implementing our business strategies amidst these conditions.

Our results of operations may be materially affected by conditions in the market for mortgages and mortgage-related assets, including RMBS, as well as the residential real estate market, the financial markets and the economy generally. Continuing concerns about the mortgage market and a declining real estate market, as well as inflation, energy costs, geopolitical issues, unemployment and the availability and cost of credit, have contributed to increased volatility and diminished expectations for the economy and markets going forward. In particular, the U.S. residential mortgage market has been severely affected by changes in the lending landscape and has experienced defaults, credit losses and significant liquidity concerns, and there is no assurance that these conditions have stabilized or that they will not worsen. Certain commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the residential mortgage market. These factors have impacted investor perception of the risk associated with residential mortgage loans, RMBS, real estate-related securities and various other assets we may acquire. As a result, values for residential mortgage loans, RMBS, real estate-related securities and various other assets we may acquire have experienced volatility which could result in sudden declines in their value. Declines in the value of our asset portfolio, or perceived market uncertainty about the value of our assets, would likely make it difficult for us to obtain financing on favorable terms or at all. Our profitability may be materially adversely affected if we are unable to obtain cost-effective financing. A continuation or increase in the volatility and deterioration in the broader residential mortgage and RMBS markets as well as the broader financial markets may adversely affect the performance and market value of our assets, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

Risk factors

Actions of the U.S. government, including the U.S. Congress, Federal Reserve, U.S. Treasury and other governmental and regulatory bodies for the purpose of stabilizing or reforming the financial markets, or market response to those actions, may not achieve the intended effect or benefit our business, and may adversely affect our business.

In response to the financial issues affecting the banking system and financial markets and going concern threats to commercial banks, investment banks and other financial institutions, the Emergency Economic Stabilization Act, or EESA, was enacted by the U.S. Congress in 2008. There can be no assurance that the EESA or any other U.S. government actions will have a beneficial impact on the financial markets. To the extent the markets do not respond favorably to any such actions by the U.S. government or such actions do not function as intended, our business may not receive the anticipated positive impact from the legislation and such result may have broad adverse market implications.

In July 2010, the U.S. Congress enacted the Dodd Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, in part to impose significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial markets. For instance, the Dodd-Frank Act will impose significant restrictions on the proprietary trading activities of certain banking entities and subject other systemically significant organizations regulated by the U.S. Federal Reserve to increased capital requirements and quantitative limits for engaging in such activities. The Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the RMBS market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. Certain of the new requirements and restrictions exempt Agency RMBS, other government issued or guaranteed securities and other securities. Nonetheless, the Dodd-Frank Act also imposes significant regulatory restrictions on the origination of residential mortgage loans. While the full impact of the Dodd-Frank Act cannot be assessed until implementing regulations are released, 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 our lender counterparties and the availability or terms of RMBS, which may require greater retention of the securitization assets than initially anticipated, both of which may have an adverse effect on our business.

In addition, the U.S. government, the Federal Reserve, the U.S. Treasury and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. We cannot predict whether or when such actions may occur or what affect, if any, such actions could have on our business, results of operations and financial condition. We expect the U.S. government will gradually withdraw its support of the real estate markets, the overall U.S. economy, capital markets and mortgage markets, although we remain uncertain about the timing, process and implications of withdrawal. Until more information is available, it is difficult to accurately anticipate the timing of that withdrawal or anticipate the implications of that withdrawal. It is possible that our earnings, cash flows, dividends and liquidity will be negatively affected by actions taken to implement this withdrawal.

Mortgage loan modification and refinance programs, future legislative action, changes in the requirements necessary to qualify for refinancing mortgage loans with Fannie Mae, Freddie Mac or Ginnie Mae and other actions and changes may adversely affect the value of, and the returns on, the assets in which we intend to acquire.

The U.S. government, through the FHA, the Federal Deposit Insurance Corporation, or FDIC, and the U.S. Treasury, has commenced or proposed implementation of programs designed to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. These loan modification and refinance programs, future U.S. federal, state and/or local legislative or regulatory actions that result in the modification of outstanding 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, RMBS, real estate-related securities and various other asset classes in which we may invest. In addition to the foregoing, the U.S. Congress and/or various states and

Risk factors

local legislators may enact additional legislation or regulatory action designed to address the current economic crisis or for other purposes that could have a material adverse effect on our ability to execute our business strategies.

The conservatorship of Fannie Mae and Freddie Mac, their reliance on the U.S. government for solvency and any changes in laws and regulations affecting Fannie Mae and Freddie Mac and their relationship with the U.S. government may adversely affect our business.

Due to increased market concerns about Fannie Mae and Freddie Mac’s ability to withstand future credit losses associated with securities on which they provide guarantees and hold in their investment portfolios without the direct support of the U.S. government, on July 30, 2008, the U.S. Congress passed the Housing and Economic Recovery Act of 2008. On September 7, 2008, the Federal Housing Finance Agency, or the FHFA, placed Fannie Mae and Freddie Mac into conservatorship and, together with the U.S. Treasury, established a program designed to boost investor confidence in Fannie Mae and Freddie Mac by supporting the availability of mortgage financing and protecting taxpayers. The U.S. government program includes contracts between the U.S. Treasury and each Agency to seek to ensure that each enterprise maintains a positive net worth. Each contract provides for the provision of cash by the U.S. Treasury to the applicable Agency if FHFA determines that its liabilities exceed its assets. Both Fannie Mae and Freddie Mac have drawn down on these contracts and indicated that they believe they will need to request additional draws but it is possible that the draw requests will not be granted. Although the U.S. government has described some specific steps that it intends to take as part of the conservatorship process, efforts to stabilize these entities may not be successful and the outcome and impact of these events remain highly uncertain.

The placement of Fannie Mae and Freddie Mac into conservatorship has changed the relationship between Fannie Mae and Freddie Mac and the U.S. government. As a result of their agreements with the U.S. Treasury, Fannie Mae and Freddie Mac were permitted to increase their respective retained portfolios of mortgages and residential RMBS to $900 billion by December 31, 2009, but then must reduce their respective portfolios by at least 10% annually from the prior year’s maximum until each reaches $250 billion. Future legislation could further change the relationship between Fannie Mae and Freddie Mac and the U.S. government, and could also nationalize or eliminate such entities entirely. Several government officials have recommended abolishing Fannie Mae and Freddie Mac in their current form in favor of a whole new system of housing finance.

The problems faced by Fannie Mae and Freddie Mac resulting in their being placed into conservatorship have stirred debate among some U.S. federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans. On February 11, 2011, the U.S. Treasury issued a White Paper titled “Reforming America’s Housing Finance Market,” or the Housing Report, which lays out, among other things, proposals to limit or potentially wind down the role that Fannie Mae and Freddie Mac play in the mortgage market. Any such proposals, if enacted, may have broad adverse implications for the related mortgage and RMBS market and for our business, operations and financial condition. We expect such proposals to be the subject of significant discussion and it is not yet possible to determine whether or when such proposals may be enacted, what form any final legislation or policies might take and how proposals, legislation or policies emanating from the Housing Report may impact the mortgage and RMBS market and our business, operations and financial condition. We are evaluating, and will continue to evaluate, the potential impact of the proposals set forth in the Housing Report.

Any changes to the nature of their guarantee obligations could redefine what constitutes an Agency mortgage-backed security and could have broad adverse implications for the market and our business, operations and financial condition. If Fannie Mae or Freddie Mac are eliminated, or their structures change radically (i.e., limitation or removal of the guarantee obligation), we may be unable to acquire additional Agency RMBS. A reduction in the supply of Agency RMBS could negatively affect the pricing of Agency RMBS by reducing the spread between the interest we earn on our portfolio of Agency RMBS and our cost of financing that portfolio.

Risk factors

In December 2011, the U.S. Congress passed a law that increased the guarantee fees on mortgages sold to the Agencies by 10 bps. This increase will be effective on April 1, 2012 and will likely result in increased interest rates to borrowers. Additional guarantee increases could materially reduce mortgage origination volume, which could negatively impact our business.

Although the Treasury previously committed capital to Fannie Mae and Freddie Mac through 2012, and in the Housing Report the U.S. Treasury committed to providing sufficient capital to enable Fannie Mae and Freddie Mac to meet their current and future guarantee obligations, there can be no assurance that these actions will be adequate for their needs. If these actions are inadequate, Fannie Mae and Freddie Mac could continue to suffer losses and could fail to honor their guarantees and other obligations. Furthermore, the current credit support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest rates we expect to receive from RMBS, and tightening the spread between the interest we earn on our RMBS and the cost of financing those assets.

Future policies that change the relationship between Fannie Mae and Freddie Mac and the U.S. government, including those that result in their winding down, nationalization, privatization or elimination, may create market uncertainty and have the effect of reducing the actual or perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such policies could increase the risk of loss on investments in Agency RMBS guaranteed by Fannie Mae and/or Freddie Mac. It also is possible that such policies could adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially and adversely affect our business, operations and financial condition.

Many of our assets may be illiquid, which may adversely affect our business, including our ability to value and sell our assets.

We may acquire assets or other instruments that are not liquid, including mortgage loans, securities and other instruments that are not publicly traded. As a result, it may be difficult or impossible to obtain or validate third party pricing on the assets we purchase. Illiquid assets typically experience greater price volatility, as a ready market does not exist, and can be more difficult to value. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our assets. To the extent that we utilize leverage to finance our purchase of assets that are or become illiquid and then need to sell such assets in a short period of time for cash, the negative impact of those sales could be exacerbated. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could adversely affect our results of operations and financial condition.

Loss of our 1940 Act exemption would adversely affect us, the market price of shares of our common stock and our ability to distribute dividends, and could result in the termination of our management agreement with our Manager.

We intend to conduct our operations so neither we nor our subsidiaries become required to register as investment companies under the 1940 Act. Certain of our subsidiaries intend to rely upon the exemption from registration as an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act, which is available for an entity “not engaged in the business of issuing redeemable securities, face-amount certificates of the installment type of periodic payment plan certificates, and [which] ...is primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” In a series of no-action letters and other guidance, the SEC staff has interpreted this exemption generally to require that at least 55% of the assets of a company relying on this exemption must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets under the 1940 Act. Qualifying assets for this purpose include mortgage loans and other assets, such as whole pool Agency RMBS, that could be considered the functional equivalent of mortgage loans for the purposes of the 1940 Act. Specifically, we expect each of our subsidiaries relying on Section 3(c)(5)(C) to invest at least 55% of its assets in mortgage loans, RMBS that represent the entire ownership in a pool of mortgage loans and other interests in real estate that constitute

Risk factors

qualifying assets in accordance with the U.S. Securities and Exchange Commission, or the SEC, staff guidance and approximately an additional 25% of its assets in other types of mortgages, RMBS, securities of REITs, MSRs and participation interests in MSRs and other real estate-related assets. As a result of the foregoing restrictions, we will be limited in our ability to make certain investments.

The SEC recently 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 exemption and leverage used by mortgage related vehicles. There can be no assurance that the laws and regulations governing the 1940 Act status of companies primarily owning real estate related assets, including the SEC or its Staff providing more specific or different guidance regarding these exemptions, will not change in a manner that adversely affects our operations. To the extent that the SEC or its staff provides more specific or different guidance, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

Although we intend to monitor our portfolio, there can be no assurance that we will be able to maintain our exemption from registering as an investment company under the 1940 Act. If we or one or more of our subsidiaries fail to qualify for an exemption or exception from the 1940 Act in the future, we could be required to restructure our activities or the activities of our subsidiaries, including effecting sales of assets in a manner that, or at a time when, we would not otherwise choose to do so, which could negatively affect the value of our common stock, the sustainability of our business model, and our ability to make distributions. The sale could occur during adverse market conditions, and we could be forced to accept a price below that which we believe is appropriate. In addition, if we or one or more of our subsidiaries fail to maintain compliance with the applicable exemptions or exceptions and we do not have another basis available to us on which we may avoid registration, we may have to register under the 1940 Act. This could subject us to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification, industry concentration and other matters. The loss of our 1940 Act exemption would also permit our Manager to terminate our management agreement, which could result in a material adverse effect on our business and results of operations.

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

If the market value or income potential of our target assets declines as a result of increased interest rates, prepayment rates, general market conditions, government actions or other factors, we may need to increase our real estate assets and income or liquidate our non-qualifying assets to maintain our REIT qualification or our exemption from the 1940 Act. If the decline in real estate asset values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-real estate assets we may own. We may have to make decisions that we otherwise would not make absent the REIT and 1940 Act considerations.

We expect to use leverage in executing our business strategy, which may adversely affect our return on our assets and may reduce cash available for distribution to our stockholders, as well as increase losses when economic conditions are unfavorable.

We expect to use leverage to finance our assets through borrowings from a number of sources, including repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities). The level and sources of our leverage may vary based on the particular characteristics of our asset portfolio, the availability of applicable sources and on market conditions. The amount of leverage we may employ for particular assets will depend upon the availability of financing and our Manager’s assessment of the credit and other risks of those assets. The percentage of leverage will vary over time depending on our ability to enter into repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities), available credit limits and financing

Risk factors

rates, type and/or amount of collateral required to be pledged and our assessment of the appropriate amount of leverage for the particular assets we are funding.

The capital and credit markets have been experiencing volatility and disruption since 2008. Our access to capital depends upon a number of factors over which we have little or no control, including:


Ø	general market conditions;

Ø	the market’s view of the quality and liquidity of our assets;

Ø	the market’s perception of our growth potential;

Ø	our current and potential future earnings and cash distributions; and

Ø	the market price of shares of our common stock.

In addition, volatility and disruption in the financial markets, the residential mortgage markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

The return on our assets and cash available for distribution to our stockholders may be reduced to the extent that market conditions prevent us from leveraging our assets or increase the cost of our financing relative to the income that can be derived from the assets acquired. Our financing costs will reduce cash available for distributions to stockholders. We may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations.

We may depend on repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) to execute our business plan, and our inability to access funding could have a material adverse effect on our results of operations, financial condition and business. We intend to rely on short-term financing and thus are especially exposed to changes in the availability of financing.

We expect to use repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) as a strategy to increase the return on our assets. However, we may not be able to use such leverage for a number of reasons, including if our lenders do not make financing available to us at acceptable rates, our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do, certain of our lenders fail or are otherwise unable to or unwilling to provide financing to us or we determine that leverage would expose us to excessive risk.

Our ability to fund our asset acquisitions may be impacted by our ability to secure repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) on acceptable terms. We intend to rely on short-term financing and thus are especially exposed to changes in the availability of financing. For example, the term of a repurchase transaction under a master repurchase agreement is typically 30 to 60 days. To date, we have entered into master repurchase agreements with UBS Securities LLC, Deutsche Bank Securities Inc., Jefferies & Company, Inc. and Guggenheim Securities, LLC, each of which is an underwriter in this offering, and we have also entered into repurchase agreements with Barclays Capital Inc., J.P. Morgan Securities LLC, Nomura Securities International, Inc. and RBS Securities Inc., which we intend to use for the purchase of Agency RMBS and IO Strips. However, this financing is uncommitted and the continuation of such financing cannot be assured. Therefore, we can provide no assurance that lenders will be willing or able to provide us with sufficient financing. In addition, because repurchase agreements and warehouse facilities are short-term commitments of capital, lenders may respond to market conditions making it more difficult for us to secure continued financing. During certain periods of the credit cycle, lenders may curtail their willingness to provide financing. If we are not able to renew our then existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under any of these facilities, we may have to curtail our asset acquisition activities and/or dispose of assets.

Risk factors

It is possible that the lenders that will provide us with financing could experience changes in their ability to advance funds to us, independent of our performance or the performance of our portfolio of assets. Furthermore, if many of our potential lenders are unwilling or unable to provide us with financing, we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our 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 we will receive under our repurchase agreements and warehouse facilities will be directly related to the lenders’ valuation of the assets that secure the outstanding borrowings. Typically, repurchase agreements and warehouse facilities grant the respective lender the absolute right to reevaluate the market value of the assets that secure outstanding borrowings at any time.

The current dislocations in the residential mortgage sector 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 our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing on attractive terms or at all. This could increase our financing costs and reduce our access to liquidity. If one or more major market participants fails or otherwise experiences a major liquidity crisis, as was the case for Bear Stearns & Co. in March 2008 and Lehman Brothers Holdings Inc. in September 2008, and is currently the case with respect to certain lenders that have been impacted by the European sovereign debt crisis, it could negatively impact the marketability of all fixed income securities, including our target assets, and this could negatively impact the value of the assets we acquire, thus reducing our net book value. Furthermore, if many of our potential lenders are unwilling or unable to provide us with financing, we could be forced to sell our assets at an inopportune time when prices are depressed.

The repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) that we may use to finance our asset acquisitions may require us to provide additional collateral and may restrict us from leveraging our assets as desired. We may be subject to margin calls as a result of our financing activity.

We will use repurchase agreements, warehouse facilities, securitizations and bank credit facilities to finance our asset acquisitions. Our repurchase agreements are uncommitted and the counterparty may refuse to advance funds under the agreements to us. If the market value of the loans or securities pledged or sold by us to a funding source decline in value, the lending institution has the right to initiate a margin call in its sole discretion, which would require us to provide additional collateral or pay down a portion of the funds advanced, but we may not have the funds available to do so. Posting additional collateral will reduce our liquidity and our ability to make distributions to our stockholders and limit our ability to leverage our assets, which could adversely affect our business and could cause the value of our common stock to decline.

We may be forced to sell assets at significantly depressed prices to meet margin calls, post additional collateral and to maintain adequate liquidity, which could cause us to incur losses. Moreover, to the extent we are forced to sell assets at such time, given market conditions, we may be selling at the same time as others facing similar pressures, which could exacerbate a difficult market environment and which could result in our incurring significantly greater losses on our sale of such assets. In an extreme case of market duress, a market may not even be present for certain of our assets at any price. In the event we do not have sufficient liquidity to meet margin calls and post additional collateral, lending institutions can accelerate repayment of our indebtedness, increase our borrowing rates, liquidate our collateral or terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection under the U.S. Bankruptcy Code. In the event of our bankruptcy, our borrowings may qualify for special treatment under the U.S. Bankruptcy Code. This special treatment would allow the lenders under these agreements to avoid the automatic stay provisions of the U.S. Bankruptcy Code and to liquidate

Risk factors

the collateral under these agreements without delay. See “—Our rights under our repurchase agreements may be subject to the effects of the bankruptcy laws in the event of our or our lenders’ bankruptcy or insolvency under the repurchase agreements.” Further, financial institutions may require us to maintain a certain amount of cash that is not invested or to set aside non-levered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on equity. If we are unable to meet these collateral obligations, then, as described above, our financial condition could deteriorate rapidly.

We expect that certain of our financing facilities may contain covenants that restrict our operations and may inhibit our ability to grow our business and increase revenues.

We expect that certain of our financing facilities may contain restrictions, covenants and representations and warranties that, among other things, may require us to satisfy specified financial, asset quality, loan eligibility and loan performance tests. If we fail to meet or satisfy any of these covenants or representations and warranties, we would be in default under these agreements and our lenders could elect to declare all amounts outstanding under the agreements to be immediately due and payable, enforce their respective interests against collateral pledged under such agreements and restrict our ability to make additional borrowings. We also expect that some of our financing agreements will contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default.

The covenants and restrictions we expect in our financing facilities may restrict our ability to, among other things:


Ø	incur or guarantee additional debt;

Ø	make certain investments or acquisitions;

Ø	make distributions on or repurchase or redeem capital stock;

Ø	engage in mergers or consolidations;

Ø	finance mortgage loans with certain attributes;

Ø	reduce liquidity below certain levels;

Ø	grant liens or incur operating losses for more than a specified period;

Ø	enter into transactions with affiliates; and

Ø	hold mortgage loans for longer than established time periods.

These restrictions may interfere with our ability to obtain financing, including the financing needed to acquire assets necessary for our qualification as a REIT, or to engage in other business activities, which may significantly limit or harm our business, financial condition, liquidity and results of operations. A default and resulting repayment acceleration could significantly reduce our liquidity, which could require us to sell our assets to repay amounts due and outstanding. This could also significantly harm our business, financial condition, results of operations, and our ability to make distributions, which could cause the value of our common stock to decline. A default will also significantly limit our financing alternatives such that we will be unable to pursue our leverage strategy, which could curtail the returns on our assets.

We expect to be subject to the risks inherent in the use of repurchase agreements.

When we enter into repurchase agreements, we sell mortgage loans or securities to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same assets back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the assets to the lender is less than the value of those assets (this difference is referred to as the haircut), if the lender defaults on its obligation to resell the same assets back to us we could incur a loss on the transaction equal to the amount of the haircut (assuming there was no change in the value of the assets). We could also lose money on a repurchase agreement if the value of the underlying assets has

Risk factors

declined as of the end of the term of the agreement, as we would have to repurchase the assets for their initial value but would receive assets worth less than that amount. In addition, repurchase agreements generally allow the counterparties, to varying degrees, to determine a new market value of the collateral to reflect current market conditions. If such counterparties determine that the value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing. We may not have the funds available to satisfy any such margin calls and, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses. The satisfaction of such margin calls may reduce cash flow available for distribution to our stockholders. See “—The repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) that we may use to finance our asset acquisitions may require us to provide additional collateral and may restrict us from leveraging our assets as desired. We may be subject to margin calls as a result of our financing activity.” Further, if we default on one of our obligations under a repurchase agreement, the lender may be able to terminate the transaction and cease entering into any other repurchase transactions with us. Repurchase agreements may contain cross-default provisions, so that if a default occurs under any one agreement, the lenders under our other agreements could also declare a default. Any losses we incur on our repurchase agreements could adversely affect our earnings and thus our cash available for distribution to our stockholders. Any reduction in distributions to our stockholders may cause the value of our common stock to decline.

Our rights under our repurchase agreements may be subject to the effects of the bankruptcy laws in the event of our or our lenders’ bankruptcy or insolvency under the repurchase agreements.

In the event of our 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 our 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, our ability to exercise our rights to recover our securities 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 we actually incur.

An increase in our borrowing costs relative to the interest we receive on our leveraged assets may adversely affect our profitability and our cash available for distribution to our stockholders.

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

Our securitizations will expose us to additional risks.

We may securitize certain of our portfolio assets to generate cash for funding new assets. We expect to structure these transactions either as financing transactions or as sales for GAAP. In each such transaction, we expect to convey a pool of assets to a special purpose vehicle, the issuing entity, and the issuing entity will issue one or more classes of non-recourse notes pursuant to the terms of an indenture. The notes will be secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we will receive the

Risk factors

cash proceeds of the sale of non-recourse notes and a 100% interest in the equity of the issuing entity. The securitization of our portfolio assets might magnify our exposure to losses on those portfolio assets because any equity interest we retain in the issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses. Moreover, there can be no assurance that we will be able to access the securitization market, including with respect to our Jumbo and other non-conforming loans, or be able to do so at favorable rates. The inability to securitize our asset portfolio could hurt our performance and our ability to grow our business.

Rating agencies can affect our ability to execute a securitization transaction, or reduce the returns we would otherwise expect to earn from executing securitization transactions, not only by deciding not to publish ratings for our securitization transaction, but also by altering the criteria and process they follow in publishing ratings. Rating agencies could alter their ratings processes or criteria after we have accumulated loans for securitization in a manner that effectively reduces the value of those previously acquired loans or requires that we incur additional costs to comply with those processes and criteria.

Furthermore, other matters, such as (i) accounting standards applicable to securitization transactions and (ii) capital and leverage requirements applicable to banks and other regulated financial institutions holding RMBS, could result in less investor demand for securities issued through securitization transactions we execute or increased competition from other institutions that execute securitization transactions.

If we acquire and subsequently re-sell any mortgage loans, we may be required to repurchase such loans or indemnify investors if we breach representations and warranties.

If we acquire and subsequently re-sell any mortgage loans, we would generally be required to make customary representations and warranties about such loans to the loan purchaser. Residential mortgage loan sale agreements and terms of any securitizations into which we may sell loans will generally require us to repurchase or substitute loans in the event we breach a representation or warranty given to the loan purchaser. In addition, we may be required to repurchase loans as a result of borrower fraud or in the event of early payment default on a mortgage loan. The remedies available to a purchaser of mortgage loans are generally broader than those available to us against an originating broker or correspondent. A correspondent is a third party that originates correspondent loans, which represent loans originated and funded by a third party, which are subsequently underwritten and purchased by Provident generally within 60 days of funding by that third party. Repurchased loans are typically worth only a fraction of the original price. Significant repurchase activity could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

If we issue senior securities, we will be exposed to additional risks and holders of our senior securities will have more rights than our stockholders.

If we decide to issue senior debt securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Holders of senior debt securities may be granted specific rights, including the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any preferred stock or convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities.

Risk factors

We may change any of our strategies, policies or procedures without stockholder notice or consent, which could result in our making asset acquisitions or incurring borrowings that are different from, and possibly riskier than, those described in this prospectus.

We may change any of our strategies, policies or procedures with respect to asset acquisitions, asset allocation, growth, operations, indebtedness, financing strategy and distributions at any time without giving notice to, or the consent of, our stockholders, which could result in our making asset acquisitions or incurring borrowings that are different from, and possibly riskier than, those types described in this prospectus. A change in our asset acquisition or leverage strategies may increase our exposure to credit risk, interest rate risk, financing risk, margin risk, default risk, counterparty risk and real estate market fluctuations. Decisions to employ additional leverage could increase the risk inherent in our asset acquisition strategy. Furthermore, a change in our asset allocation could result in our making acquisitions in asset categories different from those described in this prospectus. In addition, our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without approval of our stockholders, if it determines that it is no longer in our best interests to qualify as a REIT. These changes could adversely affect our financial condition, results of operations, the market value of our common stock and our ability to make distributions to our stockholders.

We operate in a highly competitive market and competition may result in reduced risk-adjusted returns.

We operate in a highly competitive market. Our profitability depends, in large part, on Provident’s ability to produce, and our ability to acquire, our target assets at favorable prices. In acquiring our target assets, we will compete with other mortgage REITs, institutional investors, real estate finance companies, savings and loan associations, public, private and mutual funds, commercial and investment banks, commercial finance and insurance companies and other financial institutions. Many of our competitors are substantially larger and have considerably greater financial, technical, marketing and other resources than we do, giving them competitive advantages over us. Other REITs may raise significant amounts of capital, and may have investment objectives that overlap with ours, which may create additional competition for opportunities to acquire assets. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us. Many of our competitors are not subject to the operating constraints associated with REIT qualification compliance or maintenance of an exemption from the 1940 Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of assets and establish more relationships than us. Furthermore, competition for assets of the types and classes that we will seek to acquire may lead the price of such assets to increase, which may further limit our ability to generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations, resulting in fewer acquisitions of assets, higher prices, acceptance of greater risk, lower yields and a narrower spread of yields over our financing costs.

We are highly dependent on information systems and systems failures could significantly disrupt our business, which may negatively affect our operating results, which, in turn, could negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on the communications and information systems of our Manager and Provident. Any failure or interruption of the systems of our Manager or Provident could cause delays or other problems in our asset acquisitions, asset monitoring and securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders. In addition, if we lose access to the systems of our Manager or Provident because of a termination of our management agreement or otherwise, we would need to replace such systems or gain access to comparable systems, the cost of which may be significant.

Risk factors

We may enter into hedging transactions that could expose us to contingent liabilities in the future.

Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, part of our strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (e.g., the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities 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 our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

Hedging against interest rate exposure may materially adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates. Our 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. We may use interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, IO Strips or other financial instruments that we deem appropriate, including TBAs, as our hedging instruments. Interest rate hedging may fail to protect or could adversely affect us because, among other things:


Ø	interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

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

Ø	the duration of the hedge may not match the duration of the related liability;

Ø	the amount of income that a REIT may earn from certain hedging transactions (other than through TRSs) to offset interest rate losses is limited by U.S. federal tax provisions governing REITs;

Ø	the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

Ø	the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

Our hedging transactions, which are intended to limit losses, may actually adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying hedging transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in its default and we may risk the loss of any collateral we have pledged to secure our obligations under the hedge. Default by a party with whom we enter into a hedging transaction may also result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Risk factors

We will be subject to the requirements of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, which may be costly and challenging.

After we become a public company, our management will be required to deliver a report that assesses the effectiveness of our internal controls over financial reporting, pursuant to Section 302 of the Sarbanes-Oxley Act. Section 404 of the Sarbanes-Oxley Act requires our independent registered public accounting firm to deliver an attestation report on management’s assessment of, and the operating effectiveness of, our internal controls over financial reporting in conjunction with their opinion on our audited financial statements as of December 31 subsequent to the year in which our registration statement becomes effective. Substantial work on our part is required to implement appropriate processes, document the system of internal control over key processes, assess their design, remediate any deficiencies identified and test their operation. This process is expected to be both costly and challenging. We cannot give any assurances that material weaknesses will not be identified in the future in connection with our compliance with the provisions of Sections 302 and 404 of the Sarbanes-Oxley Act. The existence of any material weakness described above would preclude a conclusion by management and our independent auditors that we maintained effective internal control over financial reporting. Our management may be required to devote significant time and incur significant expense to remediate any material weaknesses that may be discovered and may not be able to remediate any material weaknesses in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our reported financial information, all of which could lead to a decline in the trading price of our common stock.

The increasing number of proposed U.S. federal, state and local laws may affect certain mortgage-related assets which we intend to acquire and could increase our cost of doing business.

Legislation has been proposed which, among other provisions, could hinder the ability of a servicer to foreclose promptly on defaulted mortgage loans or would permit limited assignee liability for certain violations in the mortgage loan origination process, which could result in Provident or us being held responsible for violations in the mortgage loan origination process. We cannot predict whether or in what form the U.S. Congress or the various state and local legislatures may enact legislation affecting our business. We will evaluate the potential impact of any initiatives which, if enacted, could affect our practices and results of operations. We are unable to predict whether U.S. federal, state or local authorities will enact laws, rules or regulations that will require changes in our practices in the future, and any such changes could adversely affect our cost of doing business and profitability.

Compliance with changing regulations relating to corporate governance and public disclosure will result in increased compliance costs and pose challenges for our management team.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Dodd-Frank Act and the rules and regulations promulgated thereunder, the Sarbanes-Oxley Act, SEC regulations and NYSE listed company rules, have created uncertainty for public companies and significantly increased the compliance requirements, costs and risks associated with accessing the U.S. public markets. Our management team will need to devote significant time and financial resources to comply with both existing and evolving standards for public companies, which will lead to increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us and, more generally, the financial services and mortgage industries. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect us, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any

Risk factors

additional laws or regulations could have a material adverse effect on our financial condition and results of operations.

Our risk management efforts may not be effective.

We could incur substantial losses and our business operations could be disrupted if we are unable to effectively identify, manage, monitor and mitigate financial risks, such as credit risk, interest rate risk, prepayment risk, liquidity risk and other market-related risks, as well as operational risks related to our business, assets and liabilities. Our risk management policies, procedures and techniques may not be sufficient to identify all of the risks we are exposed to, mitigate the risks we have identified or to identify additional risks to which we may become subject in the future.

We could be harmed by misconduct or fraud that is difficult to detect.

We are exposed to risks relating to misconduct by employees of our Manager or Provident, contractors used by our Manager or Provident or other third parties with whom we have relationships. For example, employees of our Manager or Provident could execute unauthorized transactions; use our assets improperly or without authorization; perform improper activities; use confidential information for improper purposes; or mis-record or otherwise try to hide improper activities from us. This type of misconduct can be difficult to detect and if not prevented or detected could result in claims or enforcement actions against us or losses. Accordingly, misconduct by employees, contractors or others could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Our controls may not be effective in detecting this type of activity.

Inadvertent errors could subject us to financial loss, litigation or regulatory action.

Employees of our Manager or Provident, contractors used by our Manager or Provident or other third parties with whom we have relationships may make inadvertent errors that could subject us to financial losses, claims or enforcement actions. These types of errors could include, but are not limited to, mistakes in executing, recording or reporting transactions we enter into. Inadvertent errors expose us to the risk of material losses until the errors are detected and remedied prior to the incurrence of any loss. The risk of errors may be greater for business activities that are new for us or have non-standardized terms.

Our business may be adversely affected if our reputation, the reputation of our Manager or Provident, or the reputation of counterparties with whom we associate is harmed.

Our business is subject to significant reputational risks. If we fail, or appear to fail, to address various issues that may affect our reputation, our business could be harmed. We may also be harmed by reputational issues facing our Manager or Provident. Issues could include real or perceived legal or regulatory violations or be the result of a failure in governance, risk-management, technology or operations. Similarly, market rumors and actual or perceived association with counterparties whose own reputation is under question could harm our business. Claims of employee misconduct, wrongful termination, adverse publicity, conflict of interests, ethical issues or failure to protect private information could also cause significant reputational damages. Such reputational damage could result not only in an immediate financial loss, but could also result in a loss of business relationships, the ability to raise capital and the ability to access liquidity through borrowing facilities.

RISKS ASSOCIATED WITH OUR MANAGEMENT AND OUR RELATIONSHIP WITH OUR MANAGER AND PROVIDENT

We are dependent on our Manager, Provident and their key personnel for our success, and we may not find a suitable replacement for our Manager if our management agreement is terminated, or if

Risk factors

key personnel leave the employment of our Manager or Provident or otherwise become unavailable to us.

We have no separate facilities and are completely reliant on our Manager for our day-to-day management. Our Manager has significant discretion as to the implementation of our acquisition and operating policies and strategies. Accordingly, we believe that our 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 our Manager and Provident. The executive officers and key personnel of our Manager will evaluate, negotiate, structure, close and monitor our acquisitions of assets, and our success will depend on their continued service. Neither our Manager nor Provident maintains employment agreements with its executive officers or key personnel, including Provident’s founder and the Chairman of our board of directors, Craig Pica. The departure of any of the executive officers or key personnel of our Manager or Provident or the failure of our Manager or Provident to attract and retain key personnel could have a material adverse effect on our performance. In addition, we offer no assurance that our Manager will remain our manager or that we will continue to have access to our Manager’s principals and professionals. It is possible that in the future our Manager could be internalized by another entity or by us. In the event of an internalization of our Manager, there can be no assurance that any of our Manager’s principals or personnel would remain with our Manager or that we would continue to have access to them. The initial term of our management agreement with our Manager only extends until the third anniversary of the closing of this offering, with automatic one-year renewal terms starting on the third anniversary of the closing of this offering. If our management agreement is terminated and no suitable replacement is found to manage us or we are unable to find a suitable replacement on a timely basis, we may not be able to execute our business plan. Initially, we will have no employees. Each of our officers and non-independent directors is also an employee of our Manager and/or one of its affiliates, and most of them have responsibilities and commitments in addition to their responsibilities to us. Our Manager is not obligated to dedicate any of its personnel exclusively to us, nor is it or its personnel obligated to dedicate any specific portion of its or their time to our business, and our Manager is not prohibited from serving as Manager to another entity. Our Manager maintains a contractual as opposed to fiduciary relationship with us. No assurances can be given that our Manager will act in our best interests with respect to the allocation of personnel, services and resources to our business. The failure of any of the key personnel of our Manager or Provident to service our business with the requisite time and dedication could materially and adversely affect our ability to execute our business plan.

In addition, we will rely on the resources of Provident in the implementation and execution of our business strategy. In particular, we and our Manager will depend on Provident’s established operational platform, including its mortgage-origination capabilities, mortgage servicing skills, diligence, risk monitoring abilities and technology platforms of Provident to execute our business strategy. Our Manager will also have access to, among other things, Provident’s information technology, office space, legal, marketing and other back office functions. Provident is not obligated to provide us or our Manager access to its resources, including its operational platform. We offer no assurance that we and our Manager will continue to have access to Provident’s operational platform and if this platform becomes unavailable to us, we may not be able to execute our business plan. All of these factors increase the uncertainty and risk of investing in our common stock.

There are conflicts of interest in our relationship with our Manager, Provident and their respective affiliates, which could result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationship with our Manager, Provident and their respective affiliates. Specifically, each of our officers and non-independent directors is also an employee of our Manager, Provident or one of their affiliates. Our Manager, Provident and our officers may have conflicts between their duties to us and their duties to, and interests in, our Manager, Provident and their respective affiliates, including PMT and CFSB. Our Manager is not required to devote a specific amount of time or the services of any particular individual to our operations, and our Manager is not prohibited from serving as

Risk factors

Manager to another entity. Our Manager’s officers and personnel engage in other business and provide services to other parties, and we will compete with these other parties for our Manager’s and Provident’s resources and support. During turbulent conditions in the mortgage industry, distress in the credit markets or other times when we will need focused support and assistance from our Manager’s personnel, entities for which they also act will likewise require greater focus and attention, placing their resources in high demand. In such situations, we may not receive the necessary support and assistance we require or would otherwise receive if we were internally managed or if our Manager’s personnel did not act for other entities. The ability of our Manager, Provident and their officers and personnel to engage in other business activities may reduce the time they spend advising us.

There may also be conflicts in allocating assets that are suitable for us and other entities advised by or affiliated with our Manager, Provident and their respective affiliates, including PMT and CFSB. Other clients of our Manager, Provident and their respective affiliates, including PMT and CFSB, may, subject to our strategic alliance agreement, compete with us with respect to certain assets which we may want to acquire and, as a result, we may either not be presented with that opportunity or have to compete with such other clients to acquire these assets. For example, two such affiliates of Provident are PMT, a private mortgage REIT that invests in Agency RMBS, Non-Agency RMBS, IO Strips and mortgage loans (primarily fixed-rate home equity term loans), 85% of the outstanding common stock of which is owned by Craig Pica, and CFSB, which is 89% owned by Mr. Pica. Provident has a mortgage loan purchase and servicing agreement with PMT pursuant to which Provident may sell, subject to our strategic alliance agreement, mortgage loans to PMT, from time to time through specific commitments, and Provident retains all of the servicing rights and services the mortgage loans. In addition, Provident has a fulfillment agreement with CFSB. Under this agreement, CFSB has the right to underwrite and fund loans where the borrower has locked their interest rate with Provident. In addition, under the fulfillment agreement, Provident performs loan processing and secondary marketing services, including making the sole decision on the sale of such loans. Although CFSB owns the loans, under our strategic alliance agreement, Provident must first offer such loans to us before offering such loans to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. However, if CFSB decides to retain such loans for investment, then we will not be given the opportunity to purchase such loans. In addition, it is possible in the future that Provident, our Manager and their respective affiliates, including PMT and CFSB, may compete directly with us for opportunities. There may be certain situations where our Manager or Provident allocates assets that may be suitable for us to PMT, CFSB or other entities advised by or affiliated with our Manager, Provident or their affiliates instead of to us.

We will pay our Manager substantial management fees regardless of the performance of our portfolio. Our Manager’s entitlement to a base management fee, which is not based upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking assets that provide attractive risk-adjusted returns for our portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our common stock. We may also pay our Manager incentive fees that are based, in part, on our Core Earnings. The opportunity to earn incentive fees based on Core Earnings may lead our Manager to place undue emphasis on the maximization of Core Earnings, including through the use of leverage, at the expense of other criteria, such as preservation of capital, to achieve higher incentive fees. Assets with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our portfolio of assets.

Concurrently with the closing of this offering, we expect that we will sell shares of our common stock to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, in a separate private placement, at the initial public offering price per share, for a minimum aggregate investment of 4.5% of the gross proceeds of this offering, excluding the underwriters’ over-allotment option, up to $5.625 million. To the extent that Provident and its affiliates, including members of our Manager’s senior management team, sell some of their shares, our Manager’s and Provident’s interests may be less aligned with our interests.

Risk factors

Our management agreement with our Manager and our strategic alliance agreement between us and Provident were not negotiated on an arm’s-length basis and may not be as favorable to us as if they had been negotiated with unaffiliated third parties. We generally may not terminate or elect not to renew our management agreement, even in the event of our Manager’s poor performance, without having to pay substantial termination fees.

Each of our officers and non-independent directors is also an employee of our Manager, Provident or one of their affiliates. Our management agreement with our Manager and our strategic alliance agreement with Provident, including the forms of agreements attached to the strategic alliance agreement, were negotiated between related parties and their terms, including fees payable, may not be as favorable to us as if they had been negotiated with unaffiliated third parties. We may also choose not to enforce, or to enforce less vigorously, certain of our rights under our management agreement, our strategic alliance agreement or other agreements we enter into with our Manager or Provident in an effort to maintain our ongoing relationship with our Manager or Provident, as the case may be.

Termination of our management agreement with our Manager without cause is difficult and costly. Our independent directors will review our Manager’s performance and the management fees annually and, following the initial term, our management agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of at least a majority of the outstanding shares of our common stock (other than shares held by members of our senior management team and affiliates of our Manager), based upon: (1) our Manager’s unsatisfactory performance that is materially detrimental to us, or (2) a determination that the management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent directors. We must provide our Manager with 180 days prior notice of any such termination. We generally may not terminate or elect not to renew our management agreement, even in the event of our Manager’s poor performance, without having to pay substantial termination fees. Upon a termination without cause, our management agreement provides that we will pay our Manager a termination fee equal to three times the sum of (1) the average annual base management fee and (2) the average annual incentive fee earned by our Manager during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal quarter before the date of termination. These provisions may increase the cost to us of terminating our management agreement and adversely affect our ability to terminate our Manager without cause.

Our Manager is only contractually committed to serve us until the third anniversary of the closing of this offering. Thereafter, our management agreement is automatically renewable on an annual basis; provided, however, that our Manager may terminate our management agreement annually upon 180 days prior notice. If our management agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan.

The term of our strategic alliance agreement will extend for the longer of three years from the closing of this offering or until the date that is twelve months after an affiliate of Provident is no longer serving as our manager.

Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of the strategic alliance agreement, such assets will be purchased at fair value. If Provident offers any such loan, security or right to a third party not affiliated with Provident instead or does not offer such loan, security or right at all, it will not be required to offer such loan, security or right to us. If Provident does not offer loans RMBS or MSRs (and/or participation

Risk factors

interests in MSRs) to us in sufficient quantities, we will be required to purchase such loans, securities and rights from third parties. If that is the case, there can be no assurance that we will be able to source and acquire any loan, RMBS or MSRs (and/or participation interests in MSRs) from third parties at attractive prices or at the level of quality we hope to receive from Provident in sufficient quantities. Further, pursuant to the terms of our strategic alliance agreement, Provident will also have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis or any MSR that we purchase from Provident or any other third party. See “Our Strategic Alliance Agreement.” If our strategic alliance agreement is terminated, it may adversely impact our ability to execute our business strategy, particularly our ability to source and acquire higher quality Jumbo loans.

Pursuant to our management agreement, our Manager will not assume any responsibility other than to render the services called for thereunder and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship with us which limits our Manager’s obligations to us to those specifically set forth in the Management Agreement (however, to the extent that officers of our Manager also serve as officers of our company, such officers will owe us fiduciary duties under Maryland law in their capacity as officers of our company). Under the terms of our management agreement, our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to our management agreement, except because of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under our management agreement, as determined by a final non-appealable order of a court of competent jurisdiction. In addition, we have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors, personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to our management agreement.

Our Manager and its affiliates have no prior experience operating a public company and therefore may have difficulty in successfully and profitably operating our business or complying with regulatory requirements, including the Sarbanes-Oxley Act, which may hinder their ability to achieve our objectives.

Prior to this offering, our Manager and its affiliates have no experience operating a public company or complying with regulatory requirements, including the Sarbanes-Oxley Act. We cannot assure you that our Manager, Provident or our management team will perform on our behalf as they have in their previous endeavors. The inexperience of our Manager and its affiliates described above may hinder our Manager’s ability to achieve our objectives and we cannot assure you that we will be able to successfully execute our business strategies as a public company, or comply with regulatory requirements applicable to public companies.

Our focus is different from that of Provident and its affiliates.

Provident and its affiliates pursue a business strategy which is related to but differentiated from our strategy. Provident’s business strategy focuses primarily on the origination of conforming mortgage loans and the servicing of high-quality mortgage loans. The historical returns of Provident and its affiliates are not indicative of our Manager’s or Provident’s performance using our strategy and we can provide no assurance that our Manager or Provident will replicate the historical performance of our Manager’s or Provident’s investment professionals in their previous endeavors.

Risk factors

Our board of directors will approve very broad asset acquisition guidelines for our Manager and will not approve each acquisition decision made by our Manager.

Our Manager will be authorized to follow very broad asset acquisition guidelines. Our board of directors will periodically review our compliance with our asset acquisition guidelines and our portfolio of assets but will not, and will not be required to, review all of our proposed acquisitions or any type or category of asset, and there are no limits on the amounts that our Manager may invest on our behalf without seeking the prior approval of our board of directors. Furthermore, our Manager may use complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the time they are reviewed by our board of directors. Our Manager will have great latitude within the broad parameters of our asset acquisition guidelines in determining the types of assets it may decide are proper for us, which could result in returns that are substantially below expectations or that result in losses, which would materially and adversely affect our business operations and results. Further, decisions and acquisitions made by our Manager may not fully reflect the best interests of our stockholders.

Our Manager’s failure to make investments on favorable terms that satisfy our asset acquisition strategy and otherwise generate attractive risk-adjusted returns initially and consistently from time to time in the future would materially and adversely affect us.

Our ability to achieve our asset acquisition objectives depends on our ability to grow, which depends, in turn, on the management team of our Manager and its ability to identify and to make asset acquisitions on favorable terms that meet our asset acquisition criteria as well as on our access to financing on acceptable terms. Our ability to grow is also dependent upon our Manager’s ability to successfully hire, train, supervise and manage new personnel. We may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Our Manager’s base management fee is payable regardless of our performance, and our incentive fee may induce our Manager to acquire certain assets, including speculative assets.

We will pay our Manager a base management fee regardless of the performance of our portfolio. The base management fee payable to our Manager will increase as a result of future issuances of our common stock, even if the issuances are dilutive to existing stockholders.

In addition to its management fee, our Manager is entitled to receive incentive fees based, in part, upon our Core Earnings. In evaluating asset acquisition and other management strategies, the opportunity to earn Core Earnings based on net income may lead our Manager to place undue emphasis on the maximization of Core Earnings, including through the use of leverage, at the expense of other criteria, such as preservation of capital, to achieve higher incentive fees. Assets with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our portfolio of assets.

RISKS RELATED TO OUR ASSETS

We may face difficulties in acquiring, financing and selling Jumbo loans.

The terms of our strategic alliance agreement with Provident require Provident to offer any loan, including Jumbo loans, or RMBS originated or owned by Provident to us before offering any such loan or security to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. However, Provident has recently focused on the origination of conforming residential mortgage loans and there can be no assurance that Provident will originate a sufficient number of Jumbo loans to meet our asset acquisition strategy. In the aftermath of the global credit crisis, the market for non-conforming loans, including Jumbo loans, has been and continues to be particularly negatively affected. For example, according to Inside Mortgage Finance, in 2010, excluding Agency super conforming loans, only $87 billion of Jumbo mortgage loans were originated, down from a 2003 peak of $650 billion (which includes mortgage loans that are

Risk factors

currently classified as Agency super conforming loans). Additionally, given current market conditions, it may be difficult and expensive to obtain financing for Jumbo loans. Furthermore, given the current illiquidity in the market for Jumbo loans, to the extent that we desire or are forced to sell Jumbo loans, we could incur significant losses on our sale of such loans or we may not even be able to sell such loans at any price.

Interest rate fluctuations may adversely affect the value of our assets, net income 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 our control. For example, the economic downturn and the significant government interventions into the financial markets and fiscal stimulus spending over the last several years have contributed to significantly increased U.S. budget deficits. This upward pressure on U.S. budget deficits has the potential to put upward pressure on U.S. interest rates. In addition, while market participants expect the Federal Reserve to abandon its low interest rate policy at some point, it is very difficult, if not impossible, to predict the timing or implications of the Federal Reserve’s rate hikes. 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 our income and the value of our common stock. It is possible that we will not accurately anticipate the future interest rate environment and our business may be harmed by our inability to accurately anticipate the developments on the interest rate front.

Prepayment rates may adversely affect the value of our portfolio of assets.

The value of our assets may be affected by prepayment rates on mortgage loans. If we acquire mortgage loans and mortgage-related securities, including IO Strips and MSRs, we anticipate that the mortgage loans or the underlying mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on the mortgage loans or mortgage-related securities, including IO Strips and MSRs, may reduce the expected yield on such loans or securities because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their mortgage loans more slowly than expected, the decrease in corresponding prepayments on the mortgage loans or mortgage-related securities, including IO Strips and MSRs, may reduce the expected yield on such loans or securities because we will not be able to accrete the related discount as quickly as originally anticipated. Prepayment rates on loans may be affected by a number of factors including, but not limited to, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, the servicing of the mortgage loans, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors and other factors beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks. In periods of declining interest rates, prepayment rates on mortgage loans generally increase. If general interest rates decline at the same time, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. In addition, the market value of the assets, including IO Strips and MSRs, may, because of the risk of prepayment, benefit less than other fixed income securities from declining interest rates.

Our Manager will compute the projected weighted average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when RMBS secured by hybrid or fixed rate loans are acquired with borrowings, we may, but are not required to, enter into interest rate swap agreements or other hedging instruments that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed rate portion of the RMBS. This strategy is designed to protect us from rising interest rates because the borrowing costs are fixed for the duration of the fixed rate portion of the RMBS. However, if prepayment rates decrease in a rising interest rate environment, the life of

Risk factors

the fixed rate portion of the related RMBS could extend beyond the term of the interest swap agreement or other hedging instrument. This could have a negative impact on our 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 or fixed rate RMBS would remain fixed. This situation may also cause the market value of our hybrid or fixed rate RMBS to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Interest rate mismatches between our assets and any borrowings used to fund purchases of our assets may reduce our income during periods of changing interest rates.

We expect that some of our assets will be fixed-rate securities or will have a fixed-rate component (such as hybrid mortgage loans and RMBS). This means that the interest we earn on these assets will not vary over time based upon changes in a short-term interest rate index. Although the interest we earn on our adjustable-rate mortgage loans and RMBS generally will adjust for changing interest rates, the interest rate adjustments may not occur as quickly as the interest rate adjustments contained in our borrowings. Therefore, to the extent we finance our assets, the interest rate indices and repricing terms of our assets and their funding sources will create an interest rate mismatch between our assets and liabilities. Additionally, our adjustable-rate RMBS will generally be subject to interest rate caps, which potentially could cause such RMBS to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue will be magnified to the extent we acquire adjustable-rate and hybrid mortgage assets that are not based on mortgages which are fully indexed. In addition, adjustable-rate and hybrid mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. The use of interest rate hedges also will introduce the risk of other interest rate mismatches and exposures, as will the use of other financing techniques. During periods of changing interest rates, these mismatches could cause our business, financial condition and results of operations and ability to make distributions to our stockholders to be materially adversely affected.

The mortgage loans that we will acquire, and the mortgage loans underlying the Non-Agency RMBS that we will acquire, are subject to delinquency, foreclosure and loss.

We plan to acquire Non-Agency residential mortgage loans, residential RMBS and other mortgage-related assets. Residential mortgage loans are secured by single-family residential property and are subject to risks of delinquency and foreclosure and risks of loss. The ability of a borrower to repay a loan secured by a residential property typically is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair borrowers’ abilities to repay their loans. In addition, we intend to acquire Non-Agency RMBS, which are backed by residential real property but, in contrast to Agency RMBS, their principal and interest are not guaranteed by federally chartered entities such as Fannie Mae and Freddie Mac and, in the case of Ginnie Mae, the U.S. government. We may also selectively acquire distressed loans in the future. Under current market conditions, it is likely that many of these loans will have current loan-to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate. Further, the borrowers on such loans may be in economic distress and/or may have become unemployed, bankrupt or otherwise unable to make payments when due. As a result, distressed loans generally have experienced increased rates of delinquency, foreclosure, bankruptcy and loss. If we are not able to mitigate the issues concerning these loans, we may incur losses.

In addition, rising interest rates may increase the credit risks associated with certain residential real estate loans, such as adjustable-rate and hybrid mortgage loans and RMBS. Accordingly, when short-term interest rates rise, required monthly payments from homeowners will rise under the terms of these mortgages, and this may increase borrowers’ delinquencies and defaults.

Risk factors

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

Our expected acquisition of residential mortgage loans, including Jumbo loans, and Non-Agency RMBS also subjects us to the risks of residential real estate and residential real estate-related investments, including, among others: (i) continued declines in the value of residential real estate; (ii) risks related to general and local economic conditions; (iii) possible lack of availability of mortgage funds for borrowers to refinance or sell their homes; (iv) overbuilding; (v) the general deterioration of the borrower’s ability to keep a rehabilitated sub-performing or non-performing mortgage loan current; (vi) increases in property taxes and operating expenses; (vii) changes in zoning laws; (viii) costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems, such as indoor mold; (ix) casualty or condemnation losses; (x) uninsured damages from floods, earthquakes or other natural disasters; (xi) limitations on and variations in rents; (xii) fluctuations in interest rates; (xiii) fraud by borrowers, originators and/or sellers of mortgage loans; (xiv) undetected deficiencies and/or inaccuracies in underlying mortgage loan documentation and calculations; and (xv) failure of the borrower to adequately maintain the property, particularly during times of financial difficulty. To the extent that assets underlying our acquisitions are concentrated geographically, by property type or in certain other respects, we may be subject to certain of the foregoing risks to a greater extent. Additionally, we may be required to foreclose on a mortgage loan and such actions would subject us to greater concentration of the risks of the residential real estate markets and risks related to the ownership and management of real property.

Our mortgage loans, including Jumbo loans, and Non-Agency RMBS are subject to risks particular to real property.

We expect to own assets secured by real estate and may own real estate directly in the future upon a default of mortgage loans. Real estate investments are subject to various risks, including:


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

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

Ø	adverse changes in national and local economic and market conditions, such as an oversupply of housing;

Ø	changes in demographics;

Ø	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;

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

Ø	the potential for uninsured or under-insured property losses.

If any of these or similar events occurs, it may reduce our return from an affected property or asset and reduce or eliminate our ability to make distributions to stockholders. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the underlying loans or loans, as the case may be, which could also cause us to suffer losses.

Risk factors

Our subordinated loans and subordinated RMBS assets may be in the “first loss” position, subjecting us to greater risk of losses.

We may invest in subordinated loans. In the event a borrower defaults on a subordinated loan and lacks sufficient assets to satisfy such loan, we may lose all or a significant part of our investment. In the event a borrower becomes subject to bankruptcy proceedings, we will not have any recourse to the assets, if any, of the borrower that are not pledged to secure our loan, and the unpledged assets of the borrower may not be sufficient to satisfy our loan. If a borrower defaults on our subordinated loan or on its senior debt (i.e., a first-lien loan), or in the event of a borrower bankruptcy, our subordinated loan will be satisfied only after all senior debt is paid in full. As a result, we may not recover all or even a significant part of our investment, which could result in repayment losses.

In general, losses on a mortgage loan included in a securitization will be borne first by the equity holder of the issuing trust, and then by the “first loss” subordinated security holder and then by the “second loss” mezzanine holder. In the event of default and the exhaustion of any classes of securities junior to those which we may acquire and there is any further loss, we will not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related RMBS, the securities which we may acquire may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated securities, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying RMBS to make principal and interest payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

We may acquire Non-Agency RMBS collateralized by Alt-A and Subprime Mortgage Loans, which are subject to increased risks.

We may acquire Non-Agency RMBS backed by collateral pools containing mortgage loans that have been originated using underwriting standards that are less strict than those used in underwriting conforming mortgage loans. These lower standards permit mortgage loans made to borrowers having 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 increased interest rates and lower home prices, as well as aggressive lending practices, Alt-A and Subprime Mortgage Loans have in recent periods 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 higher delinquency rates and losses associated with Alt-A and Subprime Mortgage Loans, the performance of Non-Agency RMBS backed by these types of loans that we may acquire could be correspondingly adversely affected, which could adversely impact our results of operations, financial condition and business.

Recent market conditions may upset the historical relationship between interest rate changes and prepayment trends, which would make it more difficult for us to analyze our portfolio of assets.

Our success depends on our ability to analyze the relationship of changing interest rates on prepayments of the mortgage loans, including the mortgage loans that underlie our assets. Changes in interest rates and prepayments affect the market price of the assets that we intend to purchase and any asset that we hold at a given time. As part of our overall portfolio risk management, we will analyze interest rate changes and

Risk factors

prepayment trends separately and collectively to assess their effects on our portfolio of assets. In conducting our analysis, we will depend on certain assumptions based upon historical trends with respect to the relationship between interest rates and prepayments under normal market conditions. If the recent dislocations in the residential mortgage market or other developments change the way that prepayment trends have historically responded to interest rate changes, our ability to (1) assess the market value of our portfolio of assets, (2) implement our hedging strategies and (3) implement techniques to reduce our prepayment rate volatility would be significantly affected, which could materially adversely affect our financial position and results of operations.

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

We expect to focus primarily on acquiring mortgage-related assets by purchasing residential mortgage loans, residential RMBS and other mortgage-related assets. In a normal yield curve environment, some of these types of assets will generally decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.

A significant risk associated with these assets is the risk that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these assets could decline, and the duration and weighted-average life of the assets could increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the repurchase agreements we may enter into to finance the purchase of these securities.

Market values of our assets may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, increases or expected increases in voluntary prepayments for those assets that are subject to prepayment risk or widening of credit spreads.

In addition, in a period of rising interest rates, our operating results will depend in large part on the difference between the income from our assets, net of credit losses, and financing costs. We anticipate that, in most cases, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and market value of our assets. The severity of any such decrease would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase.

The failure of Provident or any other servicer to effectively service our portfolio of mortgage loans would materially and adversely affect us.

Pursuant to our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to service any loans that we purchase from Provident or any other third party, to the extent the third party does not retain the servicing of such loans. We expect that Provident will provide us with mortgage servicing services, and its responsibilities will include all services and duties customary to servicing and sub-servicing mortgage loans in a diligent manner consistent with prevailing mortgage loan servicing standards, such as the collection and remittance of payments on our mortgage loans, administration of mortgage escrow accounts, collection of insurance claims and foreclosure. Should Provident experience financial or operational difficulties, it may not be able to perform these services or these services may be curtailed, including any obligation to advance payments of amounts due from delinquent loan obligors. For example, typically a servicer’s obligation to make advances on behalf of a delinquent loan obligor is limited to the extent that it does not expect to recover the advances from the ultimate disposition of the collateral pledged to secure the loan. In addition, as with any external service provider, we are subject to the risks associated with inadequate or untimely services for other reasons such as fraud, negligence, errors, miscalculations or other reasons. The

Risk factors

ability of Provident or any other servicer to effectively service our portfolio of mortgage loans is critical to our success, particularly given our strategy of maximizing the high-quality nature of our assets. The failure of Provident or any other servicer to effectively service our portfolio of mortgage loans would adversely impact our business, financial condition, liquidity, results of operations and our ability to make distributions to our stockholders.

Some of the assets in our portfolio will be recorded at fair value (as determined in accordance with our pricing policy as approved by our board of directors) and, as a result, there will be uncertainty as to the value of these assets.

Some of the assets in our portfolio will be in the form of securities that are not publicly traded. The fair value of securities and other assets that are not publicly traded may not be readily determinable. We will value these assets quarterly at fair value, as determined in accordance with GAAP, which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over short periods of time and our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these assets were materially higher than the values that we ultimately realize upon their disposal.

Additionally, our results of operations for a given period could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal. The valuation process has been particularly challenging recently as market events have made valuations of certain assets more difficult, unpredictable and volatile.

Our reported GAAP financial results are likely to differ from the taxable income results that drive our dividend distribution requirements and, therefore, our GAAP results may not be an accurate indicator of future taxable income and dividend distributions.

Our financial results are determined and reported in accordance with GAAP. The amount of dividends we are required to distribute is driven by the determination of our income in accordance with the Internal Revenue Code rather than GAAP. Generally, the cumulative income we report on an asset will be the same for GAAP and tax purposes, although the timing of this recognition over the life of the asset could be materially different. Furthermore, there are certain permanent differences in the recognition of certain expenses under the respective accounting principles applied for GAAP and tax, and these differences could be material. Thus, the amount of GAAP earnings reported in any given period may not be indicative of future dividend distributions.

Our minimum dividend distribution requirements are determined under REIT U.S. federal income tax laws and are based on our taxable income as calculated for tax purposes pursuant to the Internal Revenue Code. Note that our board of directors may also decide to distribute more than is required based on these determinations.

Our Manager will utilize analytical models and data in connection with the valuation of our assets, and any incorrect, misleading or incomplete information used in connection therewith would subject us to potential risks.

Given the complexity of our acquisitions and strategies, our Manager must rely heavily on analytical models (both proprietary models developed by Provident and those supplied by third parties) and information and data supplied by third parties, or models and data. Models and data will be used to value assets or potential assets and also in connection with hedging our acquisitions. In the event models and data prove to be incorrect, misleading or incomplete, any decisions made in reliance thereon expose us to potential risks. For example, by relying on incorrect models and data, especially valuation models, our Manager may be induced to buy certain assets at prices that are too high, to sell certain other assets at prices that are too low or to

Risk factors

miss favorable opportunities altogether. Similarly, any hedging based on faulty models and data may prove to be unsuccessful.

A prolonged economic slowdown, a lengthy or severe recession or declining real estate values could impair our assets and harm our operations.

We believe the risks associated with our business will be more severe during periods of economic slowdown or recession, especially if these periods are accomplished by declining real estate values. Our Non-Agency RMBS acquisitions will be particularly sensitive to these risks.

Declining real estate values will likely reduce the level of new mortgage loan originations since borrowers often use appreciation in the value of their existing properties to support the purchase of additional properties. Borrowers may also be less able to pay principal and interest on our loans if the value of real estate weakens. In addition, adverse changes in the real estate market increase the probability of default, as the incentive of the borrower to retain and protect equity in the property declines. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our cost on the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to acquire, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

We are subject to counterparty risk and may be unable to seek indemnity or require our counterparties to repurchase mortgage loans if they breach representations and warranties, which could cause us to suffer losses.

When we purchase loans, our counterparty will typically make customary representations and warranties about such loans to us. Our residential mortgage loan purchase agreements may entitle us to seek indemnity or demand repurchase or substitution of the loans in the event our counterparty breaches a representation or warranty given to us. However, there can be no assurance that our mortgage loan purchase agreements will contain appropriate representations and warranties, that we will be able to enforce our contractual right to repurchase or substitution, or that our counterparty will remain solvent or otherwise be able to honor its obligations under our mortgage loan purchase agreements. Our inability to obtain indemnity or require repurchase of a significant number of loans could harm our business, financial condition, liquidity, results of operations and our ability to make distributions to our stockholders.

We may be exposed to environmental liabilities with respect to properties to which we take title, which may in turn decrease the value of the underlying properties.

In the course of our business, we may take title to real estate, and, if we do take title, we could be subject to environmental liabilities with respect to these properties. In such a circumstance, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of operations could be materially and adversely affected. In addition, an owner or operator of real property may become liable under various federal, state and local laws, for the costs of removal of certain hazardous substances released on its property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of an underlying property becomes liable for removal costs, the ability of the owner to make debt payments may be reduced, which in turn may adversely affect the value of the relevant mortgage-related assets held by us.

Risk factors

RISKS RELATED TO OUR COMMON STOCK

There is no public market for our common stock and a market may never develop, which could result in holders of our common stock being unable to monetize their investment.

Shares of our common stock are newly issued securities for which there is no established trading market. Our common stock has been approved for listing on the NYSE, subject to official notice of issuance, but there can be no assurance that an active trading market for our common stock will develop. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.

Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations after this offering and may fall below the initial public offering price. Some of the factors that could negatively affect our share price include:


Ø	actual or anticipated variations in our quarterly operating results;

Ø	changes in our earnings estimates or publication of research reports about us or the real estate industry;

Ø	increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

Ø	changes in market valuations of similar companies;

Ø	adverse market reaction to any increased indebtedness we incur in the future;

Ø	changes in credit markets;

Ø	additions to or departures of our Manager’s or Provident’s key personnel;

Ø	actions by stockholders;

Ø	any hedging or arbitrage trading activity in shares of our common stock;

Ø	regulatory changes affect our industry generally or our business;

Ø	speculation in the press or investment community; and

Ø	general market and economic conditions.

Future issuances and sales of shares of our common stock may depress the market price of our common stock or have adverse consequences for our stockholders.

We are offering the shares of our common stock as described in this prospectus. In addition, we expect that we will sell shares of our common stock to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, in a concurrent private placement, at the initial public offering price per share, for a minimum aggregate investment of 4.5% of the gross proceeds of this offering, excluding the underwriters’ over-allotment option, up to $5.625 million. Our 2012 equity incentive plan provides for grants of restricted common stock and other equity-based awards up to an aggregate of 3% of the issued and outstanding shares of our common stock (on a fully diluted basis and including shares to be sold in the concurrent private placement and shares to be sold pursuant to the underwriters’ exercise of their over-allotment option) at the time of the award, subject to a ceiling of 298,750 shares available for issuance under the plan.

We, our executive officers and directors, our Manager and the purchasers in the concurrent private placement have entered into lock-up agreements with the underwriters. Under these agreements, we and each of these persons may not, without the prior written approval of UBS Securities LLC, offer, sell, offer to sell, contract or agree to sell, hypothecate, hedge, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, or warrants or other rights to purchase our common stock. These restrictions will be in effect for a period of 180 days after the date of this prospectus (subject to extension under certain circumstances). At any time and without public notice, UBS Securities LLC may in its

Risk factors

sole discretion release some or all of the securities from these lock-up agreements. Additionally, purchasers in the concurrent private placement have agreed with us to a further lock-up period relating only to the shares of our common stock purchased by them in the concurrent private placement. This lock-up period will expire on the date that is 18 months following the date of this prospectus.

We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale by certain of our stockholders lapse. Sales of substantial amounts of common stock or the perception that such sales could occur may adversely affect the prevailing market price for our common stock.

Also, we may issue additional shares in subsequent public offerings or private placements to acquire new assets or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future share issuances, which may dilute the existing stockholders’ interests in us.

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

We generally intend over time to pay quarterly dividends to our stockholders in an amount equal to our taxable income. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this prospectus. All distributions will be made at the discretion of our board of directors and will depend on our earnings, our financial condition, any debt covenants, maintenance of our REIT qualification and other factors as our board of directors may deem relevant from time to time. We believe that a change in any one of the following factors could adversely affect our results of operations and impair our ability to pay distributions to our stockholders:


Ø	the profitability of the assets acquired with of the net proceeds of this offering and the concurrent private placement;

Ø	our ability to make profitable acquisitions;

Ø	margin calls or other expenses that reduce our cash flow;

Ø	defaults in our asset portfolio or decreases in the value of our portfolio; and

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

We cannot assure you that we will achieve results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. Although we do not intend to do so, we may pay distributions from borrowings or the sale of assets to the extent distributions exceed our earnings or cash flow from operations. In addition, some of our distributions may include a return in capital.

RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE

Certain provisions in our charter and certain provisions of Maryland law could inhibit changes in control.

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

In order to maintain our qualification as a REIT, during the last half of each of our taxable years other than our initial taxable year, not more than 50% in value of our outstanding capital stock may be owned, actually or constructively, by five or fewer individuals (defined in the Internal Revenue Code to include certain

Risk factors

entities). In order to assist us in protecting against the risk of losing our qualification as a REIT due to concentration of ownership among our stockholders and for other reasons, our charter generally prohibits any person or entity from beneficially or constructively owning more than 9.8% of the outstanding shares of our common stock or any class or series of our preferred stock (except for our Manager, which is subject to a 10.25% excepted holder limit), unless our board of directors waives or modifies this ownership limit. These limits and the other restrictions on ownership and transfer of our stock set forth in our charter may have the effect of precluding an acquisition of control of us by a third party without the consent of our board of directors.

We are subject to the “business combination” provisions of the MGCL that, subject to limitations, prohibit certain business combinations (including a merger, consolidation, statutory share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us and an “interested stockholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of our then outstanding voting stock or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of our then outstanding voting 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 generally must be recommended by our board of directors and approved by the affirmative vote of at least (1) eighty percent of the votes entitled to be cast by holders of outstanding shares of our voting stock; and (2) 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, among other conditions, our common stockholders receive a minimum price, as defined under the MGCL, 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 also do not apply to business combinations that are approved or exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted (1) business combinations between us and Provident or our Manager or any of their affiliates or associates, (2) business combinations between us and any person, provided that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person) and (3) business combinations between us and any person acting in concert with any of the foregoing. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between us and any of them. As a result, any of these persons may be able to enter into business combinations with us that may not be in the best interest of our 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, subject to certain exceptions, holders of “control shares” of a Maryland corporation (defined as shares that, when aggregated with other shares owned or controlled by the stockholder, entitle the stockholder to direct (other than solely by virtue of a revocable proxy) 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 issued and outstanding “control shares”) are not entitled to vote with respect to the control shares except to the extent approved by the 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, our officers and our employees who are also our directors. Our bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this provision will not be amended or eliminated at any time in the future.

The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain measures, some of which (for example, a classified board) we do not currently have. These provisions may

Risk factors

have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then current market price. Our charter contains a provision whereby we elect, upon closing this offering, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Business Combinations,” “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Control Share Acquisitions” and “Certain Provisions of the Maryland General Corporation Law and Our Charter and Bylaws—Subtitle 8.”

Our authorized but unissued shares of common and preferred stock may prevent a change in our control.

Our charter permits our board of directors to authorize us to issue additional shares of our authorized but unissued common or preferred stock. In addition, a majority of our entire board of directors may, without stockholder approval, amend our charter to increase the aggregate number of shares of our stock or the number of shares of stock of any class or series that we have the authority to issue and classify or reclassify any authorized but unissued shares of common or preferred stock and set the terms of the classified or reclassified shares. As a result, our 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 our common stock or otherwise be in the best interest of our stockholders.

Our rights and your rights to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

As permitted by Maryland law, our charter limits the liability of our directors and officers for money damages in suits by us or on behalf of our stockholders, except for liability resulting from:


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

Ø	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, our charter authorizes us to obligate ourselves to indemnify our present and former directors and officers for actions taken by them in those and other capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, who is made, or threatened to be made, a party to any proceeding because of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers. See “Certain Provisions of Maryland General Corporation Law and Our Charter and Bylaws—Indemnification and Limitation of Liability of Directors and Officers.”

RISKS RELATED TO OUR TAXATION AS A REIT

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code, and our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local tax, which would reduce the amount of cash available for distribution to our stockholders.

We have been organized and we intend to operate in a manner that will enable us to qualify as a REIT commencing with our taxable year ending December 31, 2012. We have not requested and do not intend to request a ruling from the Internal Revenue Service, or the IRS, that we qualify 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. To qualify as a REIT, we must meet, on an ongoing basis, various tests regarding the nature and diversification of our assets and our income, the ownership of our outstanding shares, and the amount of our distributions. Even a technical or inadvertent

Risk factors

violation could jeopardize our REIT qualification. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, new legislation, court decisions or administrative guidance, in each case possibly with retroactive effect, may make it more difficult or impossible for us to qualify as a REIT. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes. Thus, while we intend to operate so that we 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 our circumstances, no assurance can be given that we will so qualify for any particular year.

If we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income, and distributions to our stockholders would not be deductible by us in determining our taxable income. In such a case, we might need to borrow money or sell assets in order to pay our taxes. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT, we no longer would be required to distribute substantially all of our taxable income to our stockholders. In addition, unless we were eligible for certain statutory relief provisions, we could not re-elect to qualify as a REIT for the subsequent four taxable years following the year in which we failed to qualify.

Complying with REIT requirements may force us to liquidate, limit or forego otherwise attractive investments.

To qualify as a REIT, we must ensure that we meet the REIT gross income tests annually and that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of cash, cash items, government securities, shares in REITs and other qualifying real estate assets, including certain mortgage loans and certain kinds of mortgage-backed securities. The remainder of our investment in securities (other than government securities and REIT qualified 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 our total assets (other than government securities, TRS securities and securities that are qualifying real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total assets can be represented by securities of one or more TRSs. See “Material U.S. Federal Income Tax Considerations—Asset Tests” If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio, or contribute to a TRS, otherwise attractive investments, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source of income or asset diversification requirements for qualifying as a REIT. As an example, our ability to acquire MSRs will be subject to the foregoing REIT requirements and to the extent such MSRs do not constitute real estate assets, we may be required to hold such interests through a TRS. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

REIT distribution requirements could adversely affect our ability to execute our business plan and may require us to incur debt or sell assets to make such distributions.

In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income (including certain items of non-cash income), determined without regard to the

Risk factors

deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than a minimum amount specified under U.S. federal income tax laws. We intend to distribute our taxable income to our stockholders in a manner intended to satisfy the REIT 90% distribution requirement and to avoid the 4% nondeductible excise tax.

In addition, our taxable income may substantially exceed our net income as determined by GAAP or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may be required to accrue interest and discount income on mortgage loans, RMBS, and other types of debt securities or interests in debt securities before we receive any payments of interest or principal on such assets. We may also acquire distressed debt instruments in the future that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable Treasury regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower, with gain recognized by us to the extent that the principal amount of the modified debt exceeds our cost of purchasing it prior to modification. We may be required under the terms of the indebtedness that we incur, whether to private lenders or pursuant to government programs, to use cash received from interest payments to make principal payment on that indebtedness, with the effect that we will recognize taxable income but will not have a corresponding amount of cash available for distribution to our stockholders.

As a result of the foregoing, we 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, we may be required to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, (iv) make a taxable distribution of our shares as part of a distribution in which stockholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash or (v) use cash reserves, in order to comply with the REIT distribution requirements and to avoid U.S. federal corporate income tax and the 4% nondeductible excise tax. Thus, compliance with the REIT distribution requirements may hinder our ability to grow, which could adversely affect the value of our common stock.

Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.

Even if we qualify for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, franchise, property and transfer taxes, including mortgage recording taxes. See “Material U.S. Federal Income Tax Considerations—Taxation of REITs in General.” In addition, any TRSs we own will be subject to U.S. federal, state and local corporate income or franchise 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, we may hold some of our assets through TRSs. Any taxes paid by such TRSs would decrease the cash available for distribution to our stockholders.

The failure of mortgage loans or RMBS subject to a repurchase agreement or a mezzanine loan to qualify as a real estate asset would adversely affect our ability to qualify as a REIT.

We intend to enter into repurchase agreements under which we will nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase the sold assets. We believe that we will be treated for U.S. federal income tax purposes as the owner of the assets that are the subject of any such 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

Risk factors

the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the repurchase agreement, in which case we could fail to qualify as a REIT.

In addition, although we have no plans to do so, we may acquire mezzanine loans, which are loans secured by equity interests in a partnership or limited liability company that directly or indirectly owns real property. In Revenue Procedure 2003-65, the IRS provided a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% gross income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. We may acquire mezzanine loans that may not meet all of the requirements for reliance on this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests, and if such a challenge were sustained, we could fail to qualify as a REIT.

We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

We may acquire debt instruments in the secondary market for less than their face amount. The amount of such discount will generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made, unless we elect to include accrued market discount in income as it accrues. Principal payments on certain loans are 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 we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.

Similarly, some of the RMBS that we acquire may have been issued with original issue discount. We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such RMBS will be made. If such RMBS turns out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectability is provable. Finally, in the event that any debt instruments or RMBS acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we 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, we may be required to accrue interest income with respect to subordinate mortgage-backed securities at its stated rate regardless of whether corresponding cash payments are received or are ultimately collectable. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter.

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. IRS Revenue Procedure 2011-16, interprets the “principal amount” of the loan to be the face amount of the loan, despite the Internal Revenue Code requiring taxpayers to treat any market discount, that 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.

Risk factors

The interest apportionment regulations apply only if the mortgage loan in question is secured by both real property and other property. We expect that all or most of the mortage loans that we will acquire will be secured only by real property and no other property value is taken into account in our underwriting process.

Accordingly, it is not contemplated that we will invest in mortgage loans to which the interest apportionment rules described above would apply. Nevertheless, if the IRS were to assert successfully that our mortgage loans were secured by property other than real estate, the interest apportionment rules applied for purposes of our REIT testing, and that the position taken in IRS Revenue Procedure 2011-16 should be applied to certain mortgage loans in our portfolio, then depending upon the value of the real property securing our mortgage loans and their face amount, and the sources of our gross income generally, we may fail to meet the 75% REIT gross income test discussed under “Material U.S. Federal Income Tax Considerations—Gross Income Tests.” If we do not meet this test, we could potentially lose our REIT qualification or be required to pay a penalty to the IRS.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Securitizations by us or our subsidiaries could result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a result, we could have “excess inclusion income.” Certain categories of stockholders, such as non-U.S. stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to any such excess inclusion income. In the case of a stockholder that is a REIT, a regulated investment company, or RIC, common trust fund or other pass-through entity, our allocable share of our excess inclusion income could be considered excess inclusion income of such entity. In addition, to the extent that our common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of any excess inclusion income. Because this tax generally would be imposed on us, all of our stockholders, including stockholders that are not disqualified organizations, generally will bear a portion of the tax cost associated with the classification of us or a portion of our assets as a taxable mortgage pool. A RIC, or other pass-through entity owning our common stock in record name will be subject to tax at the highest U.S. federal corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations. Moreover, we could face limitations in selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. Finally, if we were to fail to qualify as a REIT, any taxable mortgage pool securitizations would 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. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

Although our use of TRSs may be able to partially mitigate the impact of meeting the requirements necessary to maintain our qualification as a REIT, our ownership of and relationship with our TRSs is limited and a failure to comply with the limits would jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% of the value of a REIT’s total assets may consist of stock or securities of one or more TRSs. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also

Risk factors

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. TRSs that we may form will pay U.S. federal, state and local income or franchise tax on their taxable income, and their after-tax net income will be available for distribution to us but will not be required to be distributed to us, unless necessary to maintain our REIT qualification. While we will be monitoring the aggregate value of the securities of our TRSs and intend to conduct our affairs so that such securities will represent less than 25% of the value of our total assets, there can be no assurance that we will be able to comply with the TRS limitation in all market conditions.

Dividends payable by REITs generally do not qualify for the reduced tax rates on dividend income from regular corporations, which could adversely affect the value of our shares.

The maximum U.S. federal income tax rate for certain qualified dividends payable to U.S. stockholders that are individuals, trusts and estates is 15% (through 2012). Dividends payable by REITs, however, are generally not eligible for the reduced rates and therefore may be subject to a 35% 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 shares of our common stock.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our assets and operations. Under these provisions, any income that we generate from transactions intended to hedge our interest rate exposure will be excluded from gross income for purposes of the REIT 75% and 95% gross income tests if the instrument hedges interest rate risk on liabilities used to carry or acquire real estate assets, and such instrument is properly identified under applicable Treasury Regulations. Income from hedging transactions that do not meet these requirements will generally constitute nonqualifying income for purposes of both the REIT 75% and 95% gross income tests. See “Material U.S. Federal Income Tax Considerations—Gross Income Tests—Hedging Transactions.” As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or the limits on our use of hedging techniques could expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

In addition, losses in our TRS will generally not provide any tax benefit to us, although such losses may be carried forward to offset future taxable income of the TRS.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held as inventory or primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to sell or securitize loans in a manner that was treated as a sale of the loans as inventory for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans, other than through a TRS, and we may be required to limit the structures we use for our securitization transactions, even though such sales or structures might otherwise be beneficial for us.

Risk factors

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of shares of our 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 changed, possibly with retroactive effect. We cannot predict if or when 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 or whether any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

Your investment has various U.S. federal income tax risks.

Although the provisions of the Internal Revenue Code generally relevant to an investment in shares of our common stock are described in “Material U.S. Federal Income Tax Considerations,” we urge you to consult your tax advisor concerning the effects of U.S. federal, state, local and foreign tax laws to you with regard to an investment in shares of our common stock.

Liquidation of our assets may jeopardize our REIT qualification.

To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our assets to repay obligations to our lenders, we may be unable to comply with these requirements, thereby jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as inventory or property held primarily for sale to customers in the ordinary course of business.

Our 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 we acquire, and the inaccuracy of any such opinions, advice or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

When purchasing securities, we 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, we 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 our REIT qualification and result in significant corporate-level tax.

Our ability to invest in TBAs could be limited by our REIT qualification.

We may purchase forward-settling Agency RMBS through “to-be-announced” forward contracts. Pursuant to these TBAs, we will agree 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.

Accordingly, our ability to purchase Agency RMBS through TBAs or to dispose of TBAs through these transactions or otherwise, could be limited. We do not expect TBAs to comprise a significant portion of our assets and, therefore, do not expect TBAs to adversely affect our ability to meet the REIT assets tests. No

Risk factors

assurance can be given that the IRS would treat TBAs as qualifying assets and therefore, our ability to invest in such assets could be limited.

RISKS RELATED TO ACCOUNTING

Over time, accounting principles, conventions, rules, and interpretations may change, which could affect our reported GAAP and taxable earnings, and stockholders’ equity.

Accounting rules for the various aspects of our business change from time to time. Changes in GAAP, or the accepted interpretation of these accounting principles, can affect our reported income, earnings, and stockholders’ equity. In addition, changes in tax accounting rules or the interpretations thereof could affect our taxable income and our dividend distribution requirements.

Certain of our derivative and hedging transactions may fail to qualify for hedge accounting treatment.

We intend to record derivative and hedging transactions in accordance with GAAP. Under GAAP, we may fail to qualify for hedge accounting treatment for a number of reasons, including if we use instruments that do not meet the definition of a derivative, we fail to satisfy hedge documentation and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for hedge accounting treatment, our operating results may suffer because losses on the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction.

We have limited experience in making critical accounting estimates, and our financial statements may be materially affected if our estimates prove to be inaccurate.

Financial statements prepared in accordance with GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on our financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but will not be limited to (1) assessing the adequacy of the allowance for loan losses, and (2) determining the fair value of mortgage loans, RMBS, IO Strips and mortgage-related assets. These estimates, judgments and assumptions are inherently uncertain, and, if they prove to be wrong, we face the risk that charges to income will be required. In addition, because we have no operating history and limited experience in making these estimates, judgments and assumptions, the risk of future charge to income may be greater than if we had more experience in these areas. Any such charges could significantly harm our business, financial condition, results of operations and the price of our common stock. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Use of Estimates” for a discussion of the accounting estimates, judgments and assumptions that we believe are the most critical to an understanding of our business, financial condition and results of operations.

Forward-looking statements

We make forward-looking statements in this prospectus that are subject to risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may,” “will” or similar expressions, we intend to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking:


Ø	our business and asset acquisition strategy;

Ø	our projected financial and operating results;

Ø	the availability of attractive risk-adjusted assets in residential mortgage loans and mortgage-related assets that satisfy our objectives and asset acquisition strategy;

Ø	our ability to obtain and maintain financing arrangements, including repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities) and the terms of such arrangements;

Ø	our expected leverage levels;

Ø	market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy;

Ø	actions and initiatives of the U.S. government and changes to U.S. government policies and the execution and impact of those actions, initiatives and changes;

Ø	general volatility of the securities markets in which we participate;

Ø	our expected portfolio of high quality assets and changes in the composition of our portfolio of assets;

Ø	changes in the value of our assets;

Ø	interest rate mismatches between our target assets and any borrowings used to fund such assets;

Ø	changes in interest rates and the market value of our target assets;

Ø	changes in prepayment rates on our target assets;

Ø	prepayments of our residential mortgage loans and the residential mortgage loans underlying our RMBS;

Ø	the performance, financial condition and liquidity of borrowers;

Ø	rates of default or decreased recovery rates on our expected portfolio of high credit quality assets;

Ø	the degree to which our hedging strategies may or may not protect us from interest rate volatility;

Ø	effects of interest rate cap agreements on our adjustable-rate investments;

Ø	impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters;

Ø	our ability to qualify as a REIT;

Ø	our ability to maintain our exemption from registration under the 1940 Act;

Ø	availability of opportunities to acquire our target assets, including from Provident and its affiliates;

Ø	availability of qualified personnel;

Ø	estimates relating to our ability to make distributions to our stockholders in the future;

Ø	our understanding of our competition; and

Ø	use of the proceeds of this offering and the concurrent private placement.

Forward-looking statements

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described in this prospectus under the headings “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Use of proceeds

We estimate that our net proceeds from this initial public offering of our common stock, after deducting the underwriting discount paid by us and the estimated offering and organizational expenses paid by us, will be approximately $119.9 million (based on the offering price of $15.00 per share set forth on the cover of this prospectus). For a description of the underwriting discount paid by our Manager see “Underwriting.” We estimate that our net proceeds will be approximately $137.9 million if the underwriters exercise their over-allotment option in full. Our obligation to pay for the expenses incurred in connection with this offering and the concurrent private placement will be capped at 1% of the total gross proceeds from this offering and the concurrent private placement (or approximately $1.3 million, and approximately $1.5 million if the underwriters exercise their over-allotment option in full). Our Manager will pay the expenses incurred above this 1% cap.

In addition, we expect that we will sell shares of our common stock to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, in a separate private placement, at the initial public offering price per share, for a minimum aggregate investment of 4.5% of the gross proceeds of this offering, excluding the underwriters’ over-allotment option, up to $5.625 million, resulting in aggregate net proceeds of $125.6 million (or $143.6 million if the underwriters exercise their over-allotment option in full) after giving effect to the transactions described in this “Use of Proceeds.” No underwriting discount is payable in connection with the sale of shares to Provident and its affiliates, including Craig Pica and certain other members of our senior management team, in the concurrent private placement.

We intend to use substantially all of the net proceeds of this initial public offering, the concurrent private placement and borrowings under repurchase agreements to acquire an initial portfolio of assets from Provident and its affiliates consisting primarily of shorter duration Agency RMBS and IO Strips. See “Business—Initial Portfolio” for a description of the assets that we intend to acquire using the net proceeds of this offering, the concurrent private placement and borrowings under repurchase agreements. Following the acquisition of our initial portfolio, we intend to opportunistically supplement our portfolio of Agency RMBS and Jumbo loans with Non-Agency RMBS, other non-conforming residential mortgage loans and other mortgage-related assets, subject to our asset acquisition guidelines and to the extent consistent with maintaining our REIT qualification. In addition to the net proceeds of this initial public offering and the concurrent private placement, we expect to use what we believe to be prudent amounts of leverage to finance the acquisition of our target assets from a number of financing sources, including repurchase agreements, warehouse facilities, securitizations and bank credit facilities (including term loans and revolving facilities). See “Business—Our Financing Strategy.”

Distribution policy

U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We generally intend over time to pay quarterly dividends in an amount equal to our taxable income. We plan to pay our first dividend in respect of the period from the closing of this offering through June 30, 2012.

To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We will generally not be required to make distributions with respect to activities conducted through any domestic TRS that we form following the completion of this offering. For more information, see “Material U.S. Federal Income Tax Considerations—Taxation of our Company—General.” We will not use the net proceeds of this offering to fund distributions.

To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our taxable income to holders of our common stock out of assets legally available therefor. Any distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, any debt covenants, funding or margin requirements under repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) or other secured and unsecured borrowing agreements, maintenance of our REIT qualification, applicable provisions of the MGCL and such other factors as our board of directors deems relevant. Our earnings and financial condition will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. Any fees and expenses that we pay in cash to our Manager, pursuant to the terms of our management agreement, or Provident, pursuant to the terms of our strategic alliance agreement, will reduce the amount of cash available for distribution to stockholders like any expenses or compensation paid by a company that is not externally managed to third party vendors or service providers or to or on behalf of its officers and employees. We expect that reimbursements of expenses to our Manager will be paid by us in cash and that the compensation payable to our Manager will be paid in shares of our common stock, except to the extent such payment in stock would result in a violation of the restrictions on ownership and transfer of our common stock set forth in our charter. Any fees payable in common stock to our Manager, including any incentive fees paid in common stock, will be a non-cash expense, other than with respect to distributions payable on such shares at the time such shares vest and will reduce our taxable income at such time, but will not reduce the amount of cash available for distribution. Such shares of common stock will, upon issuance, participate pro rata with any other outstanding shares of common stock on distributions. For more information regarding risk factors that could materially adversely affect our earnings and financial condition, see “Risk Factors.”

We anticipate that, for U.S. federal income tax purposes, our distributions generally will be taxable as ordinary income to our stockholders, although a portion of the distributions may be designated by us as qualified dividend income or capital gain or may constitute a return of capital or excess inclusion income for such purposes. In addition, a portion of such distributions may be taxable stock dividends payable in our shares. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. For more information, see “Material U.S. Federal Income Tax Considerations—Taxation of Taxable U.S. Stockholders.”

We intend to make distributions based on our current estimate of taxable earnings per common share, but not GAAP earnings. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.

Capitalization

The following table sets forth (1) our actual capitalization at December 31, 2011 and (2) our capitalization as adjusted to reflect the effects of (A) the sale of our common stock in this offering at an assumed offering price of $15.00 per share after deducting the underwriting discount and estimated organizational and offering expenses payable by us and (B) the sale of shares of our common stock to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, in a separate private placement, at $15.00 per share, for an aggregate investment of 4.5% of the gross proceeds raised in this offering, excluding the underwriters’ over-allotment option. You should read this table together with “Use of Proceeds” included elsewhere in this prospectus.


	As of December 31, 2011
	Actual		As adjusted⁽¹⁾⁽²⁾


Stockholders’ equity:
Common stock, par value $0.01 per share; 1,000,000 shares authorized and 100 shares outstanding, actual, and 450,000,000 shares authorized and shares outstanding, as adjusted	$	1	$
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and no shares outstanding, actual and as adjusted		—		—
Capital in excess of par value		999

Total stockholders’ equity	$	1,000	$


(1)		Assumes 8,708,334 shares will be sold in this offering and the concurrent private placement at an initial public offering price of $15.00 per share for net proceeds of approximately $125.6 million after deducting the underwriting discount for this offering and estimated offering and organizational expenses payable by us of approximately $1.3 million. We will repurchase the 100 shares currently owned by Provident acquired in connection with our formation at a cost of $10.00 per share. The shares sold to Provident and its affiliates, including Craig Pica and certain other members of our senior management team, will be sold at the offering price without payment of any underwriting discount. See “Use of Proceeds.”


(2)		Does not include the underwriters’ over-allotment option to purchase up to 1,250,000 additional shares.

Management’s discussion and analysis of financial condition and results of operations

OVERVIEW

We are a newly formed real estate finance company that will acquire residential mortgage loans, including primarily Jumbo loans, residential mortgage-backed securities and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. We intend to achieve this objective by selectively constructing a diversified portfolio of high quality assets, many of which we expect to be of shorter duration, and by efficiently financing those assets primarily through repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. We will be externally managed and advised by our Manager, an affiliate of Provident. For the nine months ended September 30, 2011, according to Inside Mortgage Finance, Provident was the largest wholesale mortgage originator, the third largest non-bank mortgage originator and the ninth largest mortgage originator in the United States, in each case in terms of loans funded directly to the borrower, with $13.8 billion in origination volume. In the nine months ended September 30, 2011, Provident’s origination volume totaled $14.9 billion. Provident’s business philosophy has been built around leveraging proprietary technology to create a standardized loan experience with a “no exceptions” mindset to originating and servicing mortgage loans. This approach has enabled Provident to maintain a low cost structure, which in turn allows it to offer its loan products at attractive prices in the marketplace. In return for lower prices, Provident attracts high quality mortgage loans. An indication of the high quality of these products is that, for the nine months ended September 30, 2011, the average FICO score of Provident’s originated mortgage loans was 773 and the average loan-to-value ratio at origination was 62%. Another indication of this quality is evidenced by the loss experience related to breaches of representations and warranties of 8.4 bps (0.084%) on the approximately $208 billion of loans originated by Provident from 2001 through September 30, 2011. Additionally, as of September 30, 2011, Provident’s $51.5 billion mortgage servicing portfolio had a rate of delinquencies 30 days or greater or in foreclosure of 2.41% based on the total dollar volume of loans serviced, which Provident believes compares favorably to the rate reported by Inside Mortgage Finance Large Servicer Delinquency Index of 10.70%.

Our asset acquisition strategy will focus on acquiring a diversified portfolio of residential mortgage loans, RMBS and other mortgage-related assets that appropriately balances the risk and reward opportunities our Manager observes in the marketplace. Given the current state of the mortgage market, which is heavily dominated by the origination and securitization of conforming mortgage loans, we expect to initially focus on acquiring primarily Agency RMBS and, to a lesser extent, Jumbo loans. Given our long-term view that the market for non-conforming residential mortgage loans including, in particular, Jumbo loans, will grow, we expect our portfolio to become increasingly focused on this asset class over time. We expect to source mortgage loans and securities primarily through Provident. Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of our strategic alliance agreement, such assets will be purchased at fair value. In addition, pursuant to the terms of our strategic alliance agreement, Provident will also have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis or any MSR that we purchase from Provident or any other third party. See “Certain Relationships and Related Transactions—Our Strategic Alliance Agreement.”

Management’s discussion and analysis of financial condition and results of operations

As discussed below, we intend to use short-term leverage to increase potential returns to our stockholders. Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, we intend to hedge the interest rate risk associated with this short-term leverage by entering into hedging instruments, including interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, IO Strips or other financial instruments that we deem appropriate.

We expect to use what we believe to be prudent amounts of leverage to increase potential returns to our stockholders. Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, we expect to use a number of sources to finance our assets, including repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage.

We are a Maryland corporation, incorporated on March 2, 2011, and we intend to elect and qualify to be taxed as a REIT commencing with our taxable year ending December 31, 2012. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the 1940 Act. As of the date of this prospectus, we have not commenced any operations other than organizing our company. We currently have no assets and will not commence operations until we have completed this offering and the concurrent private placement.

FACTORS IMPACTING OUR OPERATING RESULTS

We expect that the results of our operations will be affected by a number of factors and will primarily depend on, among other things, the supply of, and demand for, Agency RMBS, Non-Agency RMBS, Jumbo loans and other mortgage-related assets in the marketplace, the level of our net interest income, the market value of our assets. Additionally, our operations will be impacted by the financing we obtain, the terms of such financing and the effectiveness of our hedges. Our asset portfolio may grow at an uneven pace as opportunities to acquire Agency RMBS and Jumbo loans may be irregularly timed, and the timing and extent of our Manager’s success in originating or identifying such loans and RMBS, and our success in acquiring such loans and RMBS, cannot be predicted. Therefore, our net income may become depressed if our capital is not fully deployed. Additionally, our net interest income, which reflects the amortization of purchase premiums and accretion of purchase discounts on our residential mortgage loans and mortgage-related assets, will vary primarily as a result of changes in the market value of our assets, the size of our asset portfolio, market interest rates, prepayment rates on our mortgage loans, prepayment speeds, on any RMBS assets we may have acquired, the payment performance of borrowers, market conditions, RMBS spreads and extension risks. Interest rates and prepayment rates vary according to the type of asset, conditions in the financial markets, competition, the size of our asset portfolio and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipated or unanticipated credit events experienced by borrowers whose mortgage loans we may acquire or which may be included in our Non-Agency RMBS. Many of these factors are beyond our control.

Changes in market value of our assets. It is our business strategy to hold our target assets as long-term investments. However, since we may from time to time sell those loans, we expect that our residential mortgage loans will be carried at fair value. Accordingly, changes in their fair value will impact the results of our operations for the period in which such change in value occurs.

Management’s discussion and analysis of financial condition and results of operations

We also expect to carry any mortgage-related assets we acquire as long-term investments, including RMBS, at their fair value. This means that any RMBS we may hold will be carried as available-for-sale, with changes in fair value recorded through accumulated other comprehensive income/(loss), a component of stockholders’ equity, rather than through earnings. As a result, and unlike residential mortgage loans, we do not expect that changes in the market value of this asset type will normally impact our operating results. However, at least on a quarterly basis, we will assess both our ability and intent to continue to hold such assets as long-term investments. As part of this process, we will monitor our target assets for other-than-temporary impairment. A change in our ability and/or intent to continue to hold any of our investment securities could result in our recognizing an impairment charge or realizing losses upon the sale of such securities.

Changes in market interest rates. With respect to our proposed business operations, general increases in interest rates over time may cause: (1) the interest expense associated with our borrowings to increase; (2) the value of our mortgage loans to decline; (3) the value of any RMBS we may hold to decrease; (4) coupons on any adjustable-rate and hybrid mortgage loans and RMBS to reset, although on a delayed basis, to higher interest rates; (5) prepayments on our mortgage loan portfolio and any RMBS to slow, thereby slowing the amortization of our purchase premiums and the accretion of our purchase discounts; and (6) to the extent we enter into hedging instruments, including interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, IO Strips or other financial instruments that we deem appropriate, as part of our hedging strategy, the value of these agreements to increase. Conversely, general decreases in interest rates over time may cause: (A) the interest expense associated with our borrowings to decrease; (B) the value of our mortgage loans to increase; (C) the value of any RMBS we may hold to increase; (D) coupons on any adjustable-rate and hybrid mortgage loans and RMBS to reset, although on a delayed basis, to lower interest rates; (E) prepayments on our mortgage loan portfolio and any RMBS to increase, thereby accelerating the amortization of our purchase premiums and the accretion of our purchase discounts, and (F) to the extent we enter into hedging instruments, including interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, IO Strips or other financial instruments that we deem appropriate, as part of our hedging strategy, the value of these agreements to decrease. Since changes in interest rates may significantly affect our activities, our operating results will depend, in large part, upon our ability to effectively manage interest rate risks and prepayment risks while maintaining our REIT qualification and our exclusion from the 1940 Act.

Size of portfolio. The size of our portfolio of assets, as measured by the aggregate unpaid principal balance of our mortgage loans and the aggregate principal balance of any mortgage-related securities and other assets we may acquire will also be a key revenue driver. Generally, as the size of our portfolio grows, the amount of interest income we receive will increase. A larger portfolio, however, may result in increased expenses as we may incur additional interest expense to finance the purchase of our assets.

Prepayment speeds. Prepayment speeds may be affected by a number of factors including, but not limited to, the type of investment, interest rates, the availability of mortgage credit, the relative economic vitality of the area in which the related properties are located, possible changes in tax laws, other opportunities for investment, homeowner mobility and other economic, social, geographic, demographic and legal factors, none of which can be predicted with any certainty. Generally, when interest rates rise, borrowers find it relatively less attractive to refinance their mortgage loans and, as a result, prepayment speeds tend to decrease. This may extend the period over which we earn interest income, while conversely, the period over which we earn interest income may decrease when interest rates fall and prepayment speeds tend to increase. We also expect that over time any adjustable-rate and hybrid mortgage loans and RMBS we may acquire will experience higher prepayment rates than do fixed-rate mortgage loans and RMBS, as we believe that homeowners with adjustable-rate and hybrid mortgage loans exhibit more rapid housing turnover levels or refinancing activity compared to fixed-rate borrowers. In addition, we anticipate that prepayments on adjustable-rate mortgage loans will tend to significantly accelerate as the coupon reset date approaches.

Credit risk. One of our strategic focuses is acquiring assets which we believe to be of high credit quality. We believe this strategy will generally keep our credit losses and financing costs low. Although we do not expect

Management’s discussion and analysis of financial condition and results of operations

to encounter credit risk in our Agency RMBS, we do expect to encounter credit risk related to Jumbo and other non-conforming residential mortgage loans we may acquire. Additionally, we do expect to be subject to varying degrees of credit risk in connection with our other target assets. Our Manager will seek to mitigate this risk by selectively acquiring higher quality assets at appropriate prices given anticipated and unanticipated losses, by deploying a comprehensive review and asset selection process and by careful ongoing monitoring of acquired assets. Nevertheless, unanticipated credit losses could occur which could adversely impact our operating results.

Market conditions. We believe that we will be presented with significant opportunities to acquire mortgage assets and grow our business over the next several years. Beginning in 2007, significant adverse changes in financial markets’ conditions resulted in a deleveraging of the entire global financial system and the failure or impairment of several major mortgage market participants. As a result of these adverse changes, the availability of credit to finance real estate-related assets became particularly constrained and there has been severe contraction in the secondary market for mortgage loans. While the availability of credit became constrained for all types of mortgage assets, financing for non-conforming loans, including loans in the Jumbo category, was and continues to be particularly negatively affected. According to the Department of the Treasury and Department of Housing and Urban Development’s Housing Report to Congress, in the aftermath of the global financial crisis, loans conforming to Agency guidelines have accounted for more than nine out of every ten new mortgages originated in the United States. We believe, and this view is supported by the Housing Report, that this level of government involvement in the mortgage market is not sustainable. Instead, private capital sources will emerge as the primary source of mortgage credit in the United States. We therefore anticipate an opportunity, through our relationship with our Manager and Provident, to acquire a growing volume of attractively priced mortgage assets over the next several years as the Agencies retreat from the primary role they have played in the U.S. mortgage market. We believe that market conditions will continue to impact our operating results and will cause us to adjust our acquisition and financing strategies over time as new opportunities emerge and risk profiles of our business change.

Spreads on RMBS versus U.S. Treasuries and our funding costs. The spread between U.S. Treasuries and RMBS has recently been volatile. Over the past several years spreads on non-treasury, fixed income assets including RMBS moved sharply wider due to the difficult credit conditions. The poor collateral performance of the subprime mortgage sector coupled with declining home prices had a negative impact on investor confidence. 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 our assets and our funding costs will affect the performance of our business. Wider spreads imply greater income on new asset purchases, but may have a negative impact on our stated book value. Wider spreads may also negatively impact asset prices. In an environment where spreads are widening, counterparties may require additional collateral to secure borrowings which may require us to reduce leverage by selling assets. Conversely, tighter spreads imply lower income on new asset purchases, but may have a positive impact on our stated book value. Tighter spreads may have a positive impact on asset prices. In this case, we may be able to reduce the amount of collateral required to secure borrowings.

Extension Risk. Our Manager will compute the projected weighted-average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, if we acquire an adjustable-rate, hybrid or fixed-rate RMBS, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our 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 us from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the related assets.

Management’s discussion and analysis of financial condition and results of operations

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 our results of operations, as borrowing costs would no longer be fixed after the end of the hedging instrument while the income earned on the adjustable-rate or hybrid RMBS would remain fixed. This situation may also cause the market value of adjustable-rate or hybrid RMBS to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES

Our financial statements will be prepared in accordance with GAAP, which requires the use of estimates, assumptions and the exercise of subjective judgment as to future uncertainties. In accordance with SEC guidance, the following discussion addresses the accounting policies that we will utilize, based on our expectation of our initial operations. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements will be based will be reasonable at the time made and based upon information available to us at that time. Our critical accounting policies and accounting estimates will be expanded over time as we fully implement our business and operating strategy. Those material accounting policies and estimates that we initially expect to be most critical to an investor’s understanding of our financial results and condition, as well as those that require complex judgment decisions by our management, are discussed below.

Fair Value Option—mortgage loans

GAAP permits entities to choose to measure many financial instruments and certain other items at fair value. Changes in fair value, along with transaction costs, would be reported through net income. We have selected the Fair Value Option for our mortgage loans. GAAP establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities.

Mortgage loans that are not committed to be sold will be recorded at fair value, which will be approximated using a discounted cash flow valuation model. Inputs to the model will be classified into directly and non-directly observable inputs. Directly observable inputs are inputs that can be taken directly from observable data or market sources such as current interest rates, loan amount, payment status and property type. Non-directly observable inputs are inputs that cannot be taken directly from observable data or market sources such as forecasts of future interest rates, home prices, prepayment speeds, defaults and loss severities. Loans which are committed to be sold will be valued at their quoted market price or market price equivalent.

Fair Value Option—mortgage-related assets

Any RMBS we may acquire will likely initially consist primarily of Agency RMBS and Non-Agency RMBS, as well as IO Strips that we will classify as available-for-sale. In addition to acquiring issued pools of Agency RMBS, we may also acquire forward-settling Agency RMBS where the pool is “to-be-announced,” subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT. Pursuant to these TBAs, we will agree 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. We expect to classify our TBA Agency RMBS as available-for-sale as well. As such, we expect that our RMBS and IO Strips classified as available-for-sale will be carried at their fair value, with changes in fair value recorded through accumulated other comprehensive income/(loss), a component of stockholders’ equity, rather than through earnings. We do not intend to hold any of our investment securities for trading purposes; however, if our securities were classified as trading securities, there could be substantially greater volatility in our earnings, as changes in the fair value of securities classified as trading are recorded through earnings.

Management’s discussion and analysis of financial condition and results of operations

When the estimated fair value of an available-for-sale security is less than amortized cost, we will consider whether there is an other-than-temporary impairment in the value of the security. Unrealized losses on securities considered to be other-than-temporary will be recognized in earnings. The determination of whether a security is other-than-temporarily impaired will involve judgments and assumptions based on subjective and objective factors. Consideration will be given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of recovery in fair value of the security, and (iii) our intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. Investments with unrealized losses will not be considered other-than-temporarily impaired if we have the ability and intent to hold the investments for a period of time, to maturity if necessary, sufficient for a forecasted market price recovery up to or beyond the cost of the investments.

Fair Value Option—mortgage servicing assets

We will measure mortgage servicing assets at fair value. Valuation changes in the mortgage servicing assets are recognized in our statements of operations. To determine the fair value of the mortgage servicing assets, we stratify our portfolio based on interest rate and product types, using a valuation model to calculate the present value of estimated future net servicing income. In using this valuation model, we incorporate assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost to service, the discount rate, inflation rate, ancillary income, prepayment speeds and default rates and losses.

Valuation of financial instruments

Accounting Standards Codification, or ASC 820, “Fair Value Measurements and Disclosures,” establishes a framework for measuring fair value of financial instruments and expands related disclosures. ASC 820 establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial instruments at fair values. Readily available unadjusted quoted prices in active markets for identical assets are considered the preferred source of values (Level 1 measurements), followed by prices determined using other significant observable inputs that fellow market participants would use in pricing a security, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk and other inputs (Level 2 measurements). Finally, valuation models using significant unobservable inputs are given lowest priority as sources of values (Level 3 measurements). These unobservable inputs include management assumptions in the absence of market input and are based on the best information available.

We expect that any RMBS and IO Strips we acquire and classify as available-for-sale will be valued using Level 2 measurements; however, some RMBS, IO Strips and other mortgage-related assets we may acquire may be valued using Level 3 measurements. The RMBS and IO Strips pricing model we intend to utilize will incorporate such factors as coupons, prepayment speeds, spread to the Treasury and swap curves, convexity, duration, periodic and life caps, credit losses and credit enhancement. Management will review the fair values determined by the pricing model and compare its results to dealer quotes received on each investment to validate the reasonableness of the valuations indicated by the pricing models. The dealer quotes will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, rate reset period, issuer, additional credit support and expected life of the security.

Additionally, we expect that the mortgage loans we acquire will be valued using either Level 2 or Level 3 measurements. The pricing model we intend to use will be similar to the RMBS and IO Strips model described above. We expect that any MSRs we acquire will be valued using Level 3 measurements.

Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, we will continue to refine our valuation methodologies. The methods used by us may produce a

Management’s discussion and analysis of financial condition and results of operations

fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods will be appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. We will use inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.

Mortgage loan sales and securitizations

We will periodically enter into transactions in which we sell financial assets, such as mortgage loans, RMBS and other assets. Upon a transfer of financial assets, we will sometimes retain or acquire senior or subordinated interests in the related assets. Gains and losses on such transactions will be recognized using GAAP, which is based on an approach that focuses on control. Under this approach, after a transfer of financial assets that meet the criteria for treatment as a sale—legal and effective transferred control—an entity recognizes the financial and servicing assets it acquired or retained and the liabilities it has incurred, derecognizes financial assets it has sold, and derecognizes liabilities when extinguished. If control is not transferred pursuant to GAAP, the transfer will be accounted for as a borrowing on our financial statements.

From time to time, we may securitize mortgage loans we hold if such financing is available. These transactions will be recorded in accordance with GAAP and will be accounted for as either a “sale” and the loans will be removed from our balance sheet or as a “financing” and will be classified as “securitized loans” on our balance sheet, depending upon the structure of the securitization transaction.

Interest income recognition

Interest income on our mortgage loans will be recognized over the life of the asset using the nominal interest rate. Income recognition will be suspended for loans when, in our opinion, a full recovery of income and principal becomes doubtful. Income recognition will be resumed when the loan becomes contractually current and future payments are reasonably assured.

Interest income on any Agency RMBS, IO Strips or Non-Agency RMBS we may acquire will be accrued based on the actual coupon rate and the outstanding principal balance of such securities. Premiums and discounts will be amortized or accreted into interest income over the lives of the securities using the retrospective income method. This method requires that prepayment rates be reviewed and reestimated as necessary.

Interest income on any securities we may acquire that are not of high credit quality, including unrated securities, will be recognized in accordance with GAAP. GAAP requires that cash flows from a security be estimated applying assumptions used to determine the fair value of such security and the excess of the future cash flows over the investment are recognized as interest income under the effective yield method. We will review and, if appropriate, make adjustments to our cash flow projections at least quarterly and monitor these projections based on input and analysis received from external sources, internal models, and our judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in interest income recognized on, or the carrying value of, such securities.

Hedging instruments and hedging activities

In the normal course of business, we may use a variety of hedging instruments to manage, or hedge, interest rate risk, subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT. The most common will be interest rate swap agreements, interest rate cap agreements and interest rate floor agreements. We will apply the provisions of GAAP to account for these hedging instruments. GAAP requires an entity to recognize all derivatives as either assets or liabilities in the balance sheets and to measure those instruments at fair value. Additionally, the fair value adjustments will affect other comprehensive

Management’s discussion and analysis of financial condition and results of operations

income in stockholders’ equity (until the hedged item is recognized in earnings or net income) if the derivative instrument qualifies as a hedge for accounting purposes. If the derivative instrument does not qualify as a hedge for accounting purposes, the fair value adjustment will be recorded in our statement of operations.

We expect to enter into hedging instruments, including interest rate swap agreements, interest rate cap agreements, interest rate floor agreements, IO Strips or other financial instruments that we deem appropriate, in order to mitigate our interest rate risk. These hedging instruments must be effective in reducing our interest rate risk exposure in order to qualify for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in our statement of operations for each period until the hedging instrument matures or is settled. As stated above, any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income.

Derivatives will be used for hedging purposes rather than speculation. We will rely on quotations from a third party to determine these fair values (Fair Value Level 1 measurements). If our hedging activities do not achieve our desired results, our reported earnings may be adversely affected.

Manager compensation

Our management agreement provides for the payment of a base management fee to our Manager and an incentive fee if our financial performance exceeds certain benchmarks. The base management fee and the incentive fee are accrued and expensed during the period for which they are calculated and earned. Since the incentive fee is paid quarterly in shares of our restricted common stock, an adjustment to the fee accrued may be needed based on changes in our stock price. For a more detailed discussion on the fees payable under our management agreement, see “Our Manager and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.”

Investment consolidation

For each Non-Agency RMBS we own, we will evaluate the underlying entity that issued the securities we acquired to determine the appropriate accounting. A similar analysis will be performed for each entity with which we enter into an agreement for management, servicing or related services. In performing our analysis, GAAP requires that we consider whether the equity investors do not have sufficient equity at risk for the legal entity to finance its activities without additional subordinated financial support or, as a group, the holders of the equity investment at risk lack: the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity’s economic performance; the obligation to absorb the expected losses of the legal entity or the right to receive the expected residual returns of the legal entity. The reporting entity with a variable interest or interests that provide the reporting entity with a controlling financial interest in a variable interest entity (VIE) will have both of the following characteristics: 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.

Income taxes

Our financial results are generally not expected to reflect provisions for current or deferred income taxes. We intend to operate in a manner that will allow us to qualify for taxation as a REIT. As a result of our expected REIT qualification, we do not generally expect to pay U.S. federal or state and local corporate level taxes. Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject to U.S. federal, state and local income and franchise taxes.

Management’s discussion and analysis of financial condition and results of operations

RECENT ACCOUNTING PRONOUNCEMENTS

Comprehensive income

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income. This guidance eliminates the option to present components of other comprehensive income in the statement of stockholders’ equity and requires entities to present all non-owner changes in stockholders’ equity either as a single continuous statement of comprehensive income or as two separate but consecutive statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with the exception of the requirement to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements, which has been deferred pending further deliberation by the FASB, and is not expected to have a material effect on our financial condition or results of operations, though it will change our financial statement presentation.

Fair value measurements and disclosures

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU converges fair value measurement and disclosure guidance in U.S. GAAP with the guidance concurrently issued by the International Accounting Standards Board. While the amendments in ASU 2011-04 do not modify the requirements for when fair value measurements apply, they do generally represent clarifications on how to measure and disclose fair value under ASC 820, Fair Value Measurement. This ASU is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. Early adoption is not permitted. ASU 2011-04 may increase our disclosures related to fair value measurements, but will not have an effect on our consolidated financial statements.

RESULTS OF OPERATIONS

As of the date of this prospectus, we have not commenced any significant operations because we are in our organizational stage. We will not commence any significant operations until we have completed this offering and the concurrent private placement. We are not aware of any material trends or uncertainties, other than national economic conditions affecting mortgage loans, mortgage-backed securities and real estate, generally, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the acquisition of real estate-related assets, other than those referred to in this prospectus.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders and other general business needs. We will use significant cash to purchase our target assets, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash will generally consist of the net proceeds from this offering and the concurrent private placement, payments of principal and interest we receive on our portfolio of assets, cash generated from our operating results and unused borrowing capacity under our financing sources. We expect that our primary sources of financing will be through repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. We plan to finance our assets with what we believe to be a prudent amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio, any restrictions placed upon us by our lenders and on market conditions. Although we are not required to maintain any particular leverage ratio, including the maximum amount of leverage we may use, we expect initially, to deploy, on a debt-to-equity basis, up to 8:1 leverage on Agency RMBS, up to 5:1 leverage on residential mortgage loans and up to 3:1 leverage on IO Strips. We do not expect, initially, to deploy leverage on non-Agency RMBS or MSRs. We may, however, be limited or restricted in the amount of leverage we may employ by the terms and provisions

Management’s discussion and analysis of financial condition and results of operations

of any financing or other agreements that we may enter into in the future, and we may be subject to margin calls as a result of our financing activity. In addition, we intend to rely on short-term financing such as repurchase transactions under master repurchase agreements, the duration of which is typically 30 to 60 days. To date, we have entered into master repurchase agreements with UBS Securities LLC, Deutsche Bank Securities Inc., Jefferies & Company, Inc. and Guggenheim Securities, LLC, each of which is an underwriter in this offering and we have also entered into repurchase agreements with Barclays Capital Inc., J.P. Morgan Securities LLC, Nomura Securities International, Inc. and RBS Securities Inc., which we intend to use for the purchase of Agency RMBS and IO Strips. This financing is uncommitted and continuation of such financing cannot be assured. These agreements are subject to the successful completion of an equity raise by us of a minimum of $100 million.

While we generally intend to hold our target assets as long-term investments, certain of our assets may be sold in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. The timing and impact of future sales of our assets, if any, cannot be predicted with any certainty. Since we expect that our assets will generally be financed with repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing, we expect that a significant portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization will be used to repay balances under these financing sources.

We generally need to distribute at least 90% of our REIT taxable income each year (subject to certain adjustments) to our stockholders in order to qualify as a REIT under the Internal Revenue Code. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for our business.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We had no contractual obligations as of February 21, 2012. Prior to the completion of this offering, we will enter into a management agreement with our Manager and a strategic alliance agreement with Provident. Pursuant to our management agreement, our Manager will be entitled to receive a base management fee, an incentive fee and the reimbursement of certain expenses. See “Our Manager and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.” Pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis or any MSR that we purchase from Provident or any other third party. For such services, we will pay Provident servicing fees in accordance with the terms of the sub-servicing agreement, which fees will be determined at the time we enter into such sub-servicing agreement and will be renewed and approved by a majority of our independent directors annually. See “Our Strategic Alliance Agreement.”

We expect to enter into certain contracts that may contain a variety of indemnification obligations, principally with brokers, underwriters and counterparties to repurchase agreements. The maximum potential future payment amount we could be required to pay under these indemnification obligations may be unlimited.

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this prospectus, we do not have off-balance sheet arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intend to provide additional funding to any such entities.

Management’s discussion and analysis of financial condition and results of operations

DIVIDENDS

We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to pay regular quarterly dividends to our stockholders in an amount equal to our taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

We make distributions based on our current estimate of taxable earnings per common share, but not GAAP earnings. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.

INFLATION

Virtually all of our assets and liabilities will be interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our distributions will be determined by our board of directors after considering, among other factors, the requirement that we distribute to our stockholders at least 90% of our REIT taxable income (without regard to deductions for dividends paid and excluding net capital gains) on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices, real estate values and other market-based risks. We anticipate that our primary market risks will be real estate risk, interest rate risk, market value risk, prepayment risk and risks related to the credit quality of our assets. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock.

Interest rate risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We will be subject to interest rate risk in connection with our assets and our related financing obligations. In general, we expect to finance the acquisition of our target assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. We may mitigate interest rate risk through utilization of hedging instruments, primarily interest rate swap agreements, interest rate cap agreements, IO Strips and interest rate floor agreements. Interest rate swap agreements are intended to serve as a hedge against future interest rate increases on our borrowings.

Management’s discussion and analysis of financial condition and results of operations

Interest rate effect on net interest income

Our operating results will depend in large part on differences between the income earned on our assets and our cost of borrowing and hedging activities. The cost of our borrowings will generally be based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase (1) while the yields earned on our leveraged fixed-rate mortgage assets will remain static and (2) at a faster pace than the yields earned on any leveraged adjustable-rate and hybrid mortgage assets we may have acquired, which could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our target assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

Hedging techniques are partly based on assumed levels of prepayments of our target assets. If prepayments are slower or faster than assumed, the life of the investment will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.

Real estate risk

Residential mortgage assets and residential property values are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as an oversupply of housing); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay the loans or underlying loans, as the case may be, which could also cause us to suffer losses.

Market value risk

Our mortgage loans, any available-for-sale securities, our MSRs and IO Strips will be reflected at their estimated fair value, with the difference between amortized cost and estimated fair value reflected in accumulated other comprehensive income. The estimated fair value of our mortgage loans, our RMBS portfolio, MSRs and IO Strips fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of our mortgage loans and our RMBS portfolio would be expected to decrease and our MSRs and IO Strips would be expected to increase. Conversely, in a decreasing interest rate environment, the estimated fair value of our mortgage loans and our RMBS portfolio would be expected to increase and our MSRs and IO Strips would be expected to decrease. As market volatility increases or liquidity decreases, the fair value of our assets may be adversely impacted. If we are unable to readily obtain independent pricing to validate our estimated fair value of our mortgage loans, RMBS, MSRs and IO Strips in our portfolio, the fair value gains or losses recorded in other comprehensive income may be adversely affected.

Prepayment risk

Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on an asset to be less than expected. As we receive prepayments of principal on our assets, premiums paid on such assets 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 assets. Conversely, discounts on such assets are accreted into interest income. In general, an increase in prepayment

Management’s discussion and analysis of financial condition and results of operations

rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the assets.

Credit risk

We expect to be subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency RMBS, we do expect to encounter credit risk related to Jumbo and other non-conforming residential mortgage loans we may acquire. Additionally, we do expect to be subject to varying degrees of credit risk in connection with our other target assets. We will also have exposure to credit risk on the underlying mortgage loans in any RMBS, including Non-Agency RMBS, we may acquire, as well as other mortgage-related assets, we may acquire.

Our Manager will seek to manage any credit risk relating to RMBS, conforming mortgage loans or Jumbo and other non-conforming residential mortgage loans we may acquire by focusing on higher-quality mortgage loans and by conducting due diligence that allows us to remove loans that do not meet our credit standards based on loan-to-value ratios, borrower’s credit scores, debt-to-income ratio, income and asset documentation, property valuation and other criteria that we believe to be important indications of credit risk. Our Manager’s analysis of residential mortgage loans will include borrower profiles, as well as valuation and appraisal data. Our Manager will seek to obtain representations and warranties from each seller stating that each loan was underwritten to our requirements or, in the event underwriting exceptions were made, informing us of the exceptions so that we may evaluate whether to accept or reject the loans. Credit risk on our residential mortgage loan portfolio will also be addressed through our Manager’s active asset surveillance.

Our Manager will seek to manage credit risk relating to any Non-Agency RMBS or other assets we may acquire by performing a credit analysis of potential assets. Our Manager will evaluate the credit characteristics of potential RMBS assets based on their underlying collateral profiles, including, but not limited to, loan balance distribution, documentation, geographic concentration, property type, periodic and lifetime interest rate caps, weighted-average loan-to-value and weighted-average credit score. Qualifying assets will then be analyzed based on expectations of prepayments, defaults, losses, vintage, as well as structural nuances. Base case scenarios will be stressed utilizing credit risk-based models. Credit risk will also be addressed through our Manager’s on-going surveillance, as securities will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a periodic basis.

Interest rate cap risk

We may acquire adjustable-rate and hybrid mortgage assets. These are assets in which the underlying mortgages are typically subject to periodic and lifetime interest rate caps and floors, which limit the amount by which the security’s interest yield may change during any given period. However, our borrowing costs pursuant to our financing agreements will not be subject to similar restrictions. Therefore, in a period of increasing interest rates, interest rate costs on our borrowings could increase without limitation by caps, while the interest-rate yields on our adjustable-rate and hybrid mortgage assets would effectively be limited. This issue will be magnified to the extent we acquire adjustable-rate and hybrid mortgage assets that are not based on mortgages which are fully indexed. In addition, adjustable-rate and hybrid mortgage assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. This could result in our receipt of less cash income on such assets than we would need to pay the interest cost on our related borrowings. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would harm our financial condition, cash flows and results of operations.

Management’s discussion and analysis of financial condition and results of operations

Interest rate mismatch risk

We may fund a portion of our acquisition of adjustable-rate and hybrid mortgages and RMBS assets with borrowings that are based on the London Interbank Offered Rate, or LIBOR, while the interest rates on these assets may be indexed to LIBOR or another index rate, such as the one-year Constant Maturity Treasury, or CMT, index, the Monthly Treasury Average, or MTA, index or the 11th District Cost of Funds Index, or COFI. Accordingly, any increase in LIBOR relative to one-year CMT rates, MTA or COFI will generally result in an increase in our borrowing costs that is not matched by a corresponding increase in the interest earnings on these assets. Any such interest rate index mismatch could adversely affect our profitability, which may negatively impact distributions to our stockholders. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above.

Our analysis of risks is based on our Manager’s experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or implementation of decisions by our management may produce results that differ significantly from the estimates and assumptions used in our models and the projected results shown in this prospectus.

Extension risk

Our Manager will compute the projected weighted-average life of our assets based on assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when RMBS secured by hybrid or fixed-rate loans are acquired with borrowings, we may, but are not required to, enter into interest rate swap agreements or other hedging instruments that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the RMBS. This strategy is designed to protect us from rising interest rates because the borrowing costs are fixed for the duration of the fixed-rate portion of the RMBS.

However, if prepayment rates decrease in a rising interest rate environment, the life of the fixed-rate portion of the related RMBS could extend beyond the term of the interest swap agreement or other hedging instrument. This could have a negative impact on our 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 or fixed-rate RMBS would remain fixed. This situation may also cause the market value of our hybrid or fixed-rate RMBS to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Business

OUR COMPANY

We are a newly formed real estate finance company that will acquire residential mortgage loans, including primarily Jumbo loans, residential mortgage-backed securities and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. We intend to achieve this objective by selectively constructing a diversified portfolio of high quality assets, many of which we expect to be of shorter duration, and by efficiently financing those assets primarily through repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. We will be externally managed and advised by our Manager, an affiliate of Provident. For the nine months ended September 30, 2011, according to Inside Mortgage Finance, Provident was the largest wholesale mortgage originator, the third largest non-bank mortgage originator and the ninth largest mortgage originator in the United States, in each case in terms of loans funded directly to the borrower, with $13.8 billion in origination volume. In the nine months ended September 30, 2011, Provident’s origination volume totaled $14.9 billion. Provident’s business philosophy has been built around leveraging proprietary technology to create a standardized loan experience with a “no exceptions” mindset to originating and servicing mortgage loans. This approach has enabled Provident to maintain a low cost structure, which in turn allows it to offer its loan products at attractive prices in the marketplace. In return for lower prices, Provident attracts high quality mortgage loans. An indication of the high quality of these products is that, for the nine months ended September 30, 2011, the average FICO score of Provident’s originated mortgage loans was 773 and the average loan-to-value ratio at origination was 62%. Another indication of this quality is evidenced by the loss experience related to breaches of representations and warranties of 8.4 bps (0.084%) on the approximately $208 billion of loans originated by Provident from 2001 through September 30, 2011. Additionally, as of September 30, 2011, Provident’s $51.5 billion mortgage servicing portfolio had a rate of delinquencies 30 days or greater or in foreclosure of 2.41% based on the total dollar volume of loans serviced, which Provident believes compares favorably to the rate reported by Inside Mortgage Finance Large Servicer Delinquency Index of 10.70%.

Our asset acquisition strategy will focus on acquiring a diversified portfolio of residential mortgage loans, RMBS and other mortgage-related assets that appropriately balances the risk and reward opportunities our Manager observes in the marketplace. Given the current state of the mortgage market, which is heavily dominated by the origination and securitization of conforming mortgage loans, we expect to initially focus on acquiring primarily Agency RMBS and, to a lesser extent, Jumbo loans. Given our long-term view that the market for non-conforming residential mortgage loans including, in particular, Jumbo loans, will grow, we expect our portfolio to become increasingly focused on this asset class over time. We expect to source mortgage loans and securities primarily through Provident. Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of our strategic alliance agreement, such assets will be purchased at fair value. In addition, pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis or any MSR that we purchase from Provident or any other third party. We are not required to purchase any assets from Provident under the terms of the strategic alliance agreement, and Provident may offer assets to unaffiliated entities before offering assets to us. See “Certain Relationships and Related Transactions—Our Strategic Alliance Agreement.”

Business

We expect to use what we believe to be prudent amounts of leverage to increase potential returns to our stockholders. Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, we expect to use a number of sources to finance our assets, including repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing. As market conditions change over time, in addition to these financings, we may use other forms of leverage.

OUR MANAGER AND PROVIDENT

Our Manager

Pursuant to the terms of our management agreement, our Manager will manage our day-to-day operations. Our management agreement requires our Manager to manage our business affairs in conformity with the policies and the asset acquisition guidelines that are approved and monitored by our board of directors. Our Manager will provide us with all of the asset acquisition and financing management, as well as other management and support functions that we will need to conduct our business. Our Manager’s senior management team will be led by Craig Pica, its Chief Executive Officer and President, Mark Lefanowicz, its Chief Financial Officer, Jeremy Kelly, its Corporate Secretary, John Kubiak, its Chief Investment Officer, and Michelle Blake, its Chief Administrative Officer and Chief Compliance Officer. Together, this senior management team has an average of 26 years of experience in the financial services industry, with a majority of that experience concentrated in mortgage banking-related activities. Our Manager’s senior management team is currently supported by a team of approximately 25 Provident finance, accounting and capital markets employees. See “Our Manager and our Management Agreement.” We do not expect to have any employees. Our Manager will be subject to the supervision and oversight of our board of directors. Our Manager, an affiliate of Provident, is a newly organized Delaware limited liability company formed on March 29, 2011.

Provident

Founded in 1992 by Craig Pica, the Chairman of our board of directors, Provident, with over 650 employees across over 70 nationwide branches, is a private, independent mortgage company that originates and services residential mortgage loans. For the nine months ended September 30, 2011, according to Inside Mortgage Finance, Provident was the largest wholesale mortgage originator, the third largest non-bank mortgage originator and the ninth largest mortgage originator in the United States, in each case in terms of loans funded directly to the borrower, with $13.8 billion in origination volume. Currently, Provident primarily originates mortgage loans through two channels: wholesale and retail. Wholesale originations represent mortgage loans sourced and submitted to Provident by independent mortgage brokers on behalf of borrowers. Wholesale originations represent the vast majority of Provident’s originations. Retail loan originations represent mortgage loans originated directly to the borrower, which Provident sources mainly from its servicing portfolio.

Business

Provident is highly focused on being one of the industry’s lowest cost producer and servicer. Provident originated its loans with an average cost to originate per loan of 17 bps, and an average annual cost to service of $42 per loan for the nine months ended September 30, 2011. The $42 per loan average annual cost to service equates to 2.0 bps on Provident’s average loan balance of approximately $206,000 in its $51.5 billion servicing portfolio as of September 30, 2011.

The tables below provides key unaudited and audited financial statistics for Provident as of and for the nine months ended September 30, 2011 and as of and for the year ended December 31, 2010. This information is a reflection of the past performance of Provident and is not intended to be indicative of, or a guarantee or prediction of, the results that we, Provident or our Manager may achieve in the future.


	As of		For the nine months ended
	September 30, 2011		September 30, 2011

	(unaudited)

Total revenue⁽¹⁾		—	$	130.2 million
Net income		—	$	23.5 million
Liquidity⁽²⁾	$	118.8 million		—
Long term debt⁽³⁾	$	606.2 million		—
Total partners’ capital	$	390.6 million		—


(1)		Includes $90.5 million of loan production revenue, net, $72.0 million of loan servicing revenue, net, $13.3 million of reinsurance premiums, net, $(36.4) million of interest, net, and $(9.3) million of trading securities, net.

(2)		Includes $55.4 million of cash and cash equivalents, $3.4 million of loans funded by Provident with no loan funding facility advances and $60 million of unrestricted cash collateral with U.S. Bank.

(3)		Includes $400 million of senior secured notes, $200 million of senior unsecured notes, $2.0 million of mortgage note payable, and $4.2 million of subordinated debt.


	As of		For the year ended
	December 31, 2010		December 31, 2010

	(audited)⁽⁴⁾

Total revenue⁽¹⁾		—	$	262.7 million
Net income		—	$	102.1 million
Liquidity⁽²⁾	$	199.9 million		—
Long term debt⁽³⁾	$	407.0 million		—
Total partners’ capital	$	408.6 million		—


(1)		Includes $335.3 million of loan production revenue, net, $(41.1) million of loan servicing revenue, net, $1.2 million of reinsurance premiums, net, and $(32.7) million of interest, net.

(2)		Includes $74.8 million of cash and cash equivalents, $29.5 million of loans funded by Provident with no loan funding facility advances and $95.6 million of unrestricted cash collateral with U.S. Bank.

(3)		Includes $400 million of senior secured notes, $2.8 million mortgage note payable, and $4.2 million of subordinated debt.

(4)		Information was derived from audited Financial Statements.

The information set forth above as of and for the year ended December 31, 2010 does not reflect Provident’s $200 million unsecured high yield debt offering in February 2011.

Business

loan limit of $417,000 with associated origination volume of $3.5 billion, $3.7 billion and $3.0 billion in 2009, 2010 and the nine months ended September 30, 2011, respectively. These loans, classified as Agency super conforming loans, represent mortgages that would otherwise have been classified as Jumbo loans absent the current higher conforming loan limits authorized under Congressional resolution. The FHFA announced on November 19, 2010, that in accordance with Congressional continuing resolution, Public Law Number 111-242, loans originated on or before September 30, 2011 will use the “temporary” high-cost area loan limits and will be the same as the 2010 high-cost area loan limits, up to a maximum of $729,750 for a one-unit property in the continental United States and loans originated on or after October 1, 2011 will use the “permanent” high-cost area loan limits established by the FHFA under a formula of 115% of the 2010 median home price, up to a maximum of $625,500 for a one-unit property in the continental United States. We believe that the end of the Agency super conforming loans will have a positive impact on our business as it will increase the pool of available Jumbo loans that we will seek to acquire as part of our business strategy. Additionally, Provident originated $12.8 billion of Jumbo loans from 2001 through 2007. As the Jumbo mortgage market re-emerges, Provident expects to follow the same processes and adhere to similar underwriting guidelines as it once again originates Jumbo loans, much as it has more recently done with loans that are currently classified as super conforming loans. Thus, we believe that Provident will originate higher quality and marketable Jumbo loans, which we will have the opportunity to acquire pursuant to our strategic alliance agreement.

The table below illustrates the historical composition of Provident’s loan originations and sales:


										Nine months ended			Nine months ended
	Year ended December 31,									September 30,			September 30,
	2008			2009			2010			2010			2011


Origination channel
Retail	$	483,352,700		$	1,133,846,750		$	1,493,463,250		$	888,255,750		$	988,341,000
Wholesale⁽¹⁾		14,001,416,100			36,690,880,050			25,362,184,950			16,526,004,350			12,787,011,000
Correspondent		44,905,730			0			5,393,950			—			1,120,240,000

Total loans originated	$	14,529,674,530		$	37,824,726,800		$	26,861,042,150		$	17,414,260,100		$	14,895,592,000

Average FICO score		750			765			770			770			773
Average loan-to-value ratio		68	%		64	%		62	%		63	%		62	%
Percentage of loans sold
To GSEs		22	%		56	%		67	%		62	%		92	%
To other counterparties		78	%		44	%		33	%		38	%		8	%
Servicing-retained		19	%		53	%		64	%		62	%		74	%
Servicing-released		81	%		47	%		36	%		38	%		26	%
Total loans sold⁽²⁾	$	14,522,410,780		$	37,381,587,350		$	26,419,803,200		$	16,433,674,800		$	14,874,919,671
Loan production revenue, net, as a percentage of total loans sold		0.56	%		1.59	%		1.27	%		1.23	%		0.61	%


(1)		Wholesale originations represent mortgage loans sourced and submitted to Provident by independent mortgage brokers on behalf of borrowers. Wholesale production amounts include amounts generated through the fulfillment agreement with CFSB of $1.8 billion for the year ended December 31, 2009, $3.9 billion for the year ended December 31, 2010, $2.8 billion for the nine months ended September 30, 2010 and $2.5 billion for the nine months ended September 30, 2011.

(2)		Loans sold include amounts sold on behalf of CFSB under the fulfillment agreement of $1.6 billion for the year ended December 31, 2009, $3.6 billion for the year ended December 31, 2010, $2.5 billion for the nine months ended September 30, 2010 and $2.7 billion for the nine months ended September 30, 2011.

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senior management team has established, will provide us with an ongoing source of asset acquisition and financing opportunities through which we can selectively construct and fund a diversified portfolio of high quality assets. Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of our strategic alliance agreement, such assets will be purchased at fair value.

Further, pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any other third party on a servicing-released basis (which means that the third party does not retain the servicing of such loan). See “Certain Relationships and Related Transactions—Our Strategic Alliance Agreement.” In addition to its origination business, as of September 30, 2011, Provident had a servicing portfolio of $51.5 billion, which was almost exclusively sourced through Provident’s origination channel. As of September 30, 2011, the loans underlying Provident’s mortgage servicing portfolio had a weighted average coupon of 4.69%, weighted average FICO of 757 and a weighted average loan-to-value ratio of 61%. As of September 30, 2011, approximately 69% of the mortgage loans in Provident’s servicing portfolio were originated after January 1, 2009.

By engaging Provident to act as sub-servicer for our loans, we will have access to, and benefit from, the Provident servicing platform, including PFServicing and Proviscan. These platforms provide loan servicing functions, including customer service, payment and payoff processing, investor reporting and accounting, escrow administration and default administration, as well as a document imaging system. If Provident sells an asset to us, together with the servicing rights, we expect that we will enter into a sub-servicing agreement with Provident. In addition, if we purchase a loan from a third party and acquire the servicing rights with respect to such asset, we expect that we will also enter into a sub-servicing agreement with Provident. We will pay Provident fees customary in the industry for acting as sub-servicer for our mortgage loans. The fees payable to Provident have been negotiated between us and Provident as part of our strategic alliance agreement, and are generally calculated based on a fixed dollar amount per loan per period, subject to certain adjustments in the event certain events occur, such as defaults or foreclosure. The fees payable by us to Provident for acting as sub-servicer are subject to change and will be reviewed and approved by a majority of our independent directors on an annual basis.

We believe that our access to Provident’s loan servicing capabilities and proprietary technology will enhance the quality and value of our assets. As of September 30, 2011, Provident’s mortgage servicing portfolio of $51.5 billion had a rate of delinquencies 30 days or greater or in foreclosure of 2.41% based on the total dollar volume of loans serviced, which Provident believes compares favorably to the rate reported by Inside Mortgage Finance Large Servicer Delinquency Index of 10.70%. Additionally, as of September 30, 2011, Provident’s Freddie Mac servicing portfolio (which represented 88.8% of Provident’s total mortgage loan servicing portfolio and was almost exclusively originated by Provident) had a rate of delinquencies 90 days or greater or in foreclosure of 1.04%, based upon the number of loans serviced, compared to the overall Freddie Mac over 90 days delinquency rate for mortgage loans on one- to four-unit residential properties of 3.14%. For the quarter ended September 30, 2011, Freddie Mac rated Provident as its number one servicer (and second ranked servicer for the quarter ended December 31, 2011 and its number one servicer for the month ended December 31, 2011), out of the country’s top 25 largest servicers, for default management. In addition, PFServicing’s technology-enabled platform and quick turnover rate enabled Provident to service loans with an average annual cost to service of $42 per loan for the nine months ended September 30, 2011. The $42 per loan average annual cost to service equates to 2.0 bps on Provident’s average loan balance of approximately $206,000 in its $51.5 billion servicing portfolio as of September 30, 2011.

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INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

According to the Board of Governors of the Federal Reserve System, or the Federal Reserve, the residential mortgage loan market is the largest consumer finance market in the United States. This market, the majority of which consists of conforming, Agency-eligible borrowers, has experienced significant long-term growth. According to the Federal Reserve, mortgage debt outstanding has grown from $1.5 trillion in 1980 to over $14.4 trillion in 2009. According to the Mortgage Bankers Association, or the MBA, there were over $1.5 trillion in one-to four-family mortgage loans originated in 2010 and $2.0 trillion in 2009. These levels are down from an industry high of over $3.9 trillion in 2003. The MBA estimates that residential mortgage loan volume for one to four-family mortgage loans will decrease to approximately $1.3 trillion in 2011 and approximately $1.0 trillion in 2012 and 2013. Within these figures, Agency-eligible product, purchased both by the Agencies themselves and the private sector secondary market, represents the largest component of this total volume. According to the National Association of Realtors, as recently as 2007, Jumbo loans comprised 10% of all mortgage loans for home purchases and 30% of mortgage originations in dollar volume.

The U.S. mortgage industry comprises four major participants: loan originators, loan servicers, portfolio lenders and investors. Originators generally take loan applications and process the required documentation for loan closings, regardless of whether they will have an ongoing relationship with the borrower. Loan servicers manage the collection and payment of principal and interest on behalf of investors in exchange for a service fee which is a component of the coupon rate of the underlying mortgage note. Portfolio lenders represent originators that retain the loan on their balance sheet for the duration of the asset. Investors purchase loans in the secondary market, seeking the principal and interest stream generated by individual loans or pools of loans which support the issuance of RMBS.

Companies organized as mortgage REITs are one of the primary investors in the secondary market. Mortgage REITs primarily invest in mortgage debt (both residential and commercial) and earn a spread between the yield on their assets and the cost of their liabilities. The majority of these REITs are focused on Agency RMBS, but others are focused primarily on Non-Agency RMBS. Mortgage REITs have played different roles in the mortgage sector over time. Historically, there were a number of mortgage REITs that were primarily mortgage banks structured as REITs, meaning that they operated as licensed lenders to originate the mortgages they were then securitizing.

Beginning in 2007, significant adverse changes in financial markets resulted in a deleveraging of the entire global financial system and the failure or impairment of several major mortgage market participants. As a result of these adverse changes, the availability of credit to finance real estate-related assets became particularly constrained and there has been severe contraction in the secondary market for mortgage loans. Many companies that chose a structure where they were mortgage banks structured as REITs eventually went out of business during the financial crisis, as did many other standalone mortgage banks. Recently, a new class of mortgage REITs, focused on Agency, Non-Agency and distressed mortgage assets, has entered the market.

Generally, mortgage REITs are considered to be well suited to be long-term investors of mortgage assets. We believe that differentiating factors in our success will be the alignment of interest with our stockholders, the expertise of our Manager and our strategic alliance agreement with Provident, which will open up a strong pipeline of selectively chosen mortgage assets to us without our needing to become a mortgage lender and incurring the related costs. We believe that we will be presented with significant opportunities to acquire attractive mortgage assets and grow our business.

While the availability of credit became constrained beginning in 2007 for all types of mortgage assets, financing for non-conforming loans, including Jumbo loans, was and continues to be particularly negatively affected. According to the Department of the Treasury and Department of Housing and Urban Development’s recently released Housing Report to Congress, in the aftermath of the global financial crisis, the Agencies have accounted for more than nine out of every ten new mortgages originated in the United States. We believe, and this view is supported by the Housing Report, that this level of government involvement in the

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mortgage market is not sustainable. Instead, we believe private capital sources will emerge as the primary source of mortgage credit in the United States. We therefore anticipate an opportunity, through our relationship with our Manager and Provident, to acquire a significant amount of attractively priced mortgage assets over the next several years, particularly if the Agencies retreat from the primary role they have played in the U.S. mortgage market.

OUR COMPETITIVE ADVANTAGES

We believe that our competitive advantages include the following:

Access to Provident’s leading mortgage loan origination and servicing platform with an established track record

Pursuant to our strategic alliance agreement, we will have access to Provident’s leading mortgage loan origination and servicing platform which has an established track record. Provident is guided by discipline and consistency to create the highest quality product. Provident’s business philosophy has been built around leveraging proprietary technology to create a standardized loan experience with a “no exceptions” mindset to originating and servicing mortgage loans. We believe that our access to Provident’s leading mortgage loan origination and servicing platform will provide us with continuing access to a robust pipeline of assets through which we can grow our business and increase value for our stockholders.

Access to Provident’s operational platform and infrastructure

Provident has created and maintains an established operational platform with proprietary technology and third-party analytical capabilities. Provident’s proprietary technology includes PFServicing, Proviscan and PFNet. We and our Manager will have access to this vertically integrated, in-house operational platform, which has credit, underwriting, structuring, servicing, asset management and capital markets capabilities. In addition, we will have access to and will benefit from Provident’s infrastructure, including its professionals across production operations, capital markets, financial reporting, accounting, business development, marketing, human resources, compliance and information technology.

Visibility to Provident’s mortgage loan pipeline, servicing portfolio and loan-level data

Strategic relationships and access to deal flow and financing

Our Manager’s senior management team has extensive long-term relationships with financial intermediaries that Provident receives financing from, sells to and trades and hedges with on a daily basis. These relationships are with primary traders, primary dealers, investment banks, brokerage firms, repurchase agreement counterparties and commercial banks, including CFSB. We believe these relationships will enhance our ability to source and finance assets on attractive terms and access borrowings at attractive levels, which in turn will enable us to grow and consistently perform across various credit and interest rate environments and economic cycles.

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Anticipated high quality initial portfolio

Upon completion of this offering and the concurrent private placement, we will apply a substantial portion of the net proceeds of this offering, the concurrent private placement and borrowings under our repurchase agreements to acquire an initial portfolio of assets from Provident and its affiliates consisting primarily of shorter duration Agency RMBS and IO Strips. See “Business — Initial Portfolio” for a description of the assets that we intend to acquire using the net proceeds of this offering, the concurrent private placement and borrowings under repurchase agreements. These assets are expected to generate positive earnings immediately following the closing of this offering and the concurrent private placement.

Significant experience of our Manager in the residential mortgage business

Long-term alignment of interests among our stockholders, our Manager and Provident

We have structured our relationship with our Manager and Provident so that our interests and the interests of our stockholders are closely aligned with those of both our Manager and Provident. Concurrently with the closing of this offering, we expect that we will sell shares of our common stock to Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, in a separate private placement, at the initial public offering price per share, for a minimum aggregate investment of 4.5% of the gross proceeds of this offering, excluding the underwriters’ over-allotment option, up to $5.625 million. The shares purchased in the concurrent private placement will be subject to an 18 month lock-up period from the date of this prospectus. In addition, we believe our Manager will be closely aligned with us because under the terms of our management agreement, any incentive fee payable to our Manager will be 100% paid in shares of our restricted common stock. In addition, the restricted common stock received by our Manager related to any incentive fee will vest over a three-year period, as described under “Our Management and our Management Agreement—Management Fees, Expense Reimbursements and Termination Fee.”

Furthermore, pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. Further, pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to act as sub-servicer with respect to any loan that we purchase from Provident or any third party on a servicing-released basis or any MSR that we purchase from Provident or any other third party. We believe that the significant investment in us by Provident and its affiliates, including Craig Pica, the Chairman of our board of directors, and certain other members of our senior management team, as well as the structure of the incentive fee and our strategic alliance agreement, will align our interests with those of Provident, its affiliates, and our Manager, which will create an incentive to maximize returns for our stockholders. See “Certain Relationships and Related Transactions—Our Strategic Alliance Agreement.”

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OUR STRATEGY

Our objective is to provide attractive risk-adjusted returns to our stockholders over the long term, primarily through dividend distributions and secondarily through capital appreciation. We intend to achieve this objective by selectively constructing a diversified portfolio of high quality assets, many of which we expect to be of shorter duration, and by efficiently financing those assets primarily through repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and other secured and unsecured forms of borrowing.

In the aftermath of the global financial crisis, the mortgage market has been heavily dominated by the origination and securitization of conforming mortgage loans with loans conforming to Agency guidelines accounting for more than nine out of every ten new mortgages originated in the United States, according to the Department of the Treasury and Department of Housing and Urban Development’s recently released Housing Report to Congress. Financing for non-conforming loans, including Jumbo loans, has been and continues to be particularly negatively affected. For example, according to Inside Mortgage Finance, in 2010, excluding Agency super conforming loans, only $87 billion of Jumbo mortgage loans were originated, down from a 2003 peak of $650 billion (which includes mortgage loans that are currently classified as Agency super conforming loans). Given the current state of the mortgage market, we expect to initially focus on acquiring primarily Agency RMBS and, to a lesser extent, Jumbo loans. Given our long-term view that the market for non-conforming residential mortgage loans including, in particular, Jumbo loans, will grow, we expect our portfolio to become increasingly focused on this asset class over time. We intend to opportunistically supplement our portfolio of Agency RMBS and Jumbo loans with Non-Agency RMBS, other non-conforming residential mortgage loans and other mortgage-related assets. As market conditions change over time, we expect to opportunistically adjust our asset allocation across our target asset classes. We expect to diversify the characteristics of our portfolio of assets by acquiring various mortgage loan types, including adjustable-rate, hybrid and fixed-rate loans, by acquiring mortgage loans the underlying collateral for which consists of various property types, including properties located in differing geographic locations, and by acquiring both purchase and refinance mortgages. We believe that the diversification of our portfolio, our Manager’s expertise within our target asset classes and the flexibility of our strategy will position us to generate attractive risk-adjusted returns for our stockholders in a variety of market conditions and economic cycles.

We will rely on our Manager’s and its affiliates’ expertise in identifying assets within our target assets and efficiently financing those assets. We expect that our Manager will make 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 our REIT qualification and our exemption from registration under the 1940 Act. We intend, subject to market conditions, to follow a predominantly long-term buy and hold strategy with respect to the assets that we acquire. Although we do not intend to acquire real property as part of our asset acquisition strategy, we may acquire property as a result of foreclosures on defaulted mortgage loans that we own. Provident, as a servicer of mortgage loans, has experience listing foreclosed properties for sale, marketing properties, completing the sale of properties and managing properties, to the extent necessary, prior to liquidation. We expect that Provident, as sub-servicer on our loans, would provide such services with respect to properties that we may acquire as a result of foreclosure. Provident acted as servicer for more than 250,000 mortgage loans as of September 30, 2011, and Provident liquidated 85 properties subsequent to foreclosure during the nine months ended September 30, 2011.

INITIAL PORTFOLIO

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price equal to 102.76% of the total unpaid principal balance, which price is determined in accordance with our strategic alliance agreement with Provident and is subject to change based on prevailing market prices at the actual time of purchase. There is no assurance that we will acquire all of these assets or that we will acquire other assets with substantially similar terms.

Agency RMBS


								Super							Weighted
			Total		Conforming			conforming					Weighted		average
			unpaid		loans-unpaid			loans-unpaid					average		loan			Maximum
			principal		principal			principal			Coupon		FICO		to value			maturity
Loan type	CUSIP		balance		balance			balance			rate⁽¹⁾		score⁽²⁾		ratio⁽³⁾			date

5/1 ARM		3128UG2J5	$	44,006,132	$	34,811,824		$	9,194,308			2.173		779		54			7/1/2041
5/1 ARM		3128UGP27	$	22,666,297	$	10,562,450		$	12,103,847			2.574		781		59			5/1/2041
5/1 ARM		3128UGPZ4	$	25,306,003	$	14,034,481		$	11,271,522			2.552		779		60			5/1/2041
5/1 ARM		3128UGRR0	$	26,322,026	$	15,247,114		$	11,074,912			2.553		782		59			5/1/2041
5/1 ARM		3128UGSR9	$	18,325,673	$	10,665,239		$	7,660,434			2.555		778		62			5/1/2041
5/1 ARM		3128UGRT6	$	28,782,145	$	19,518,870		$	9,263,275			2.529		780		59			5/1/2041
5/1 ARM		3128UGS73	$	35,269,508	$	24,603,266		$	10,666,242			2.582		772		59			6/1/2041
5/1 ARM		3128UGSF5	$	16,480,918	$	10,042,902		$	6,438,016			2.561		781		57			5/1/2041
5/1 ARM		3128UGSK4	$	13,302,513	$	7,670,725		$	5,631,788			2.581		780		58			5/1/2041
5/1 ARM		3128UGTA5	$	23,243,546	$	11,359,395		$	11,884,151			2.529		777		62			6/1/2041
5/1 ARM		3128UGTB3	$	12,794,917	$	8,145,753		$	4,649,164			2.638		779		61			6/1/2041
5/1 ARM		3128UGUD7	$	39,781,457	$	16,479,910		$	23,301,547			2.531		778		59			6/1/2041
5/1 ARM		3128UGUX3	$	19,992,208	$	12,677,203		$	7,315,005			2.453		781		61			6/1/2041
5/1 ARM		3128UGUZ8	$	18,453,014	$	15,967,483		$	2,485,531			2.468		773		60			6/1/2041
5/1 ARM		3128UHK38	$	18,957,043	$	9,814,931		$	9,142,112			2.573		780		60			11/1/2041
5/1 ARM		3128UHK46	$	24,208,399	$	12,774,054		$	11,434,345			2.551		772		59			10/1/2041
5/1 ARM		3128UHK53	$	28,898,896	$	16,217,174		$	12,681,722			2.573		771		63			10/1/2041
5/1 ARM		3128UHK61	$	34,705,561	$	20,417,720		$	14,287,841			2.577		776		64			11/1/2041
5/1 ARM		3128UHK79	$	39,633,392	$	28,416,310		$	11,217,082			2.540		777		63			11/1/2041
5/1 ARM		3128UHLD5	$	20,485,989	$	6,164,809		$	14,321,180			2.525		777		64			11/1/2041
5/1 ARM		3128UHLE3	$	26,378,857	$	10,146,995		$	16,231,862			2.521		778		66			11/1/2041
5/1 ARM		3128UHLF0	$	32,797,292	$	7,635,280		$	25,162,012			2.520		773		65			11/1/2041
5/1 ARM		3128UG7L5	$	28,442,924	$	13,081,529		$	15,361,395			2.420		778		62			9/1/2041
5/1 ARM		3128UG7M3	$	25,937,765	$	11,162,082		$	14,775,683			2.438		777		65			9/1/2041
5/1 ARM		3128LLHC3	$	22,239,533	$	17,903,533		$	4,336,000			2.271		776		55			2/1/2042
5/1 ARM		3128LLHD1	$	22,363,118	$	16,369,950		$	5,993,168			2.269		771		58			2/1/2042
5/1 ARM		3128LLHF6	$	9,393,745	$	3,565,252		$	5,828,493			2.369		772		62			2/1/2042
5/1 ARM Interest Only		3138A4WB7	$	4,905,300	$	4,905,300		$	—			2.572		773		48			1/1/2041
5/1 ARM Interest Only		3138AGH84	$	9,573,624	$	9,573,624		$	—			2.583		784		46			5/1/2041

5/1 ARM Subtotal			$	693,647,795	$	399,935,158		$	293,712,637			2.493		777		60	%		2/1/2042

						57.7	%		42.3	%
7/1 ARM		3128UG4KO	$	24,438,195	$	24,438,195		$	—			2.677		767		61			8/1/2041
7/1 ARM		3128UG4M6	$	23,814,976	$	23,200,437		$	614,539			2.707		770		63			8/1/2041
7/1 ARM		3128UG4N4	$	23,702,142	$	23,702,142		$	—			2.736		775		62			8/1/2041
7/1 ARM		3128UGGK7	$	9,651,724	$	9,651,724		$	—			2.828		784		57			1/1/2041
7/1 ARM		3128UGP43	$	5,867,592	$	5,867,592		$	—			2.793		782		65			5/1/2041
7/1 ARM		3128UGP84	$	19,139,763	$	19,139,763		$	—			3.177		769		66			5/1/2041
7/1 ARM		3128UGQA8	$	15,587,916	$	15,587,916		$	—			2.855		768		67			5/1/2041
7/1 ARM		3128UGSA6	$	12,004,252	$	12,004,252		$	—			2.782		779		66			5/1/2041
7/1 ARM		3128UGSM0	$	6,477,961	$	6,477,961		$	—			2.852		774		67			5/1/2041

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								Super							Weighted
			Total		Conforming			conforming					Weighted		average
			unpaid		loans-unpaid			loans-unpaid					average		loan			Maximum
			principal		principal			principal			Coupon		FICO		to value			maturity
Loan type	CUSIP		balance		balance			balance			rate⁽¹⁾		score⁽²⁾		ratio⁽³⁾			date

7/1 ARM		3128UGSV0	$	6,269,756	$	6,269,756		$	—			2.831		767		64			5/1/2041
7/1 ARM		3128UGUE5	$	5,859,756	$	5,859,756		$	—			2.712		773		58			6/1/2041
7/1 ARM		3128LLHE9	$	10,808,307	$	10,808,307		$	—			2.533		778		58			2/1/2042
7/1 ARM		3128LLHG4	$	8,697,602	$	8,697,602		$	—			2.564		779		65			2/1/2042
7/1 ARM Interest Only		3138AGH92	$	17,614,255	$	17,614,255		$	—			2.804		782		54			5/1/2041
7/1 ARM Interest Only		3138AH2Z8	$	5,272,393	$	5,272,393		$	—			2.625		787		51			6/1/2041

7/1 ARM Subtotal			$	195,206,590	$	194,592,051		$	614,539			2.777		774		62	%		2/1/2042

						99.7	%		0.3	%
Total Agency RMBS Portfolio			$	888,854,385	$	594,527,209		$	294,327,176			2.556		776		61	%		2/1/2042

						66.9	%		33.1	%


(1)		(a) For each individual security, represents the interest rate of the security, (b) for the subtotal of each loan type, represents the weighted average coupon rate based on the weighting of the unpaid principal balance of each security in that loan type category, (c) for the adjustable rate portfolio, represents the weighted average coupon rate based on the weighting of the unpaid principal balance of each 5/1 ARM and 7/1 ARM security and (d) for the grand total, represents the weighted average coupon rate based on the weighting of the unpaid principal balance of each security listed in the table.

(2)		(a) For each individual security, represents the FICO decision score on each loan weighted by the loan amount, (b) for the subtotal of each loan type, represents the weighted average FICO decision score on each loan (based on the weighting of the unpaid principal balance of each loan security in that loan type category) weighted by the loan amount, (c) for the adjustable rate portfolio, represents the weighted average FICO decision score on each loan (based on the weighting of the unpaid principal balance of each 5/1 ARM and 7/1 ARM security) weighted by the loan amount and (d) for the grand total, represents the weighted average FICO decision score on each loan (based on the weighting of the unpaid principal balance of each security listed in the table) weighted by the loan amount.


(3)		(a) For each individual security, represents the loan amount divided by the appraised value at the time of origination weighted by the loan amount, (b) for the subtotal of each loan type, represents the weighted average loan amount (based on the weighting of the unpaid principal balance of each security in that loan type category) divided by the appraised value at the time of origination weighted by the loan amount, (c) for the adjustable rate portfolio, represents the weighted average loan amount (based on the weighting of the unpaid principal balance of each 5/1 ARM and 7/1 ARM security) divided by the appraised value at the time of origination weighted by the loan amount and (d) for the grand total, represents the weighted average loan amount (based on the weighting of the unpaid principal balance of each security listed in the table) divided by the appraised value at the time of origination weighted by the loan amount.

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TARGET ASSETS

We anticipate that we will supplement our purchase of the initial portfolio with the following target assets:

Residential mortgage loans

We expect to acquire primarily Jumbo loans, as well as other non-conforming residential mortgage loans, which may be adjustable-rate, hybrid and/or fixed-rate residential mortgage loans. We expect that substantially all of our residential mortgage loans will be originated by Provident. However, we may purchase residential mortgage loans through other origination channels or on the secondary market. Provident has a long track record and deep experience originating both conforming residential mortgage loans and Jumbo loans. Since 2009, given the illiquidity of the Jumbo loan market, substantially all of Provident’s originated mortgage loans have been conforming residential mortgage loans and were originated for sale for Agency securitizations. Provident originated mortgages which exceeded the Agency conforming loan limit of $417,000 with associated origination volume of $3.5 billion, $3.7 billion and $3.0 billion in 2009, 2010 and the nine months ended September 30, 2011, respectively. These loans, classified as Agency super conforming loans, represent mortgages that otherwise would have been classified as Jumbo loans absent the current higher conforming loan limits authorized under Congressional resolution. Additionally, Provident originated $12.8 billion of Jumbo loans from 2001 through 2007. As the Jumbo mortgage market re-emerges, Provident expects to follow the same processes and adhere to similar underwriting guidelines as it once again originates Jumbo loans, much as it has more recently done with loans that are currently classified as super conforming loans.

We believe that if additional limitations are imposed on the Agency’s ability to purchase mortgages in the future, then conforming loan standards could be reduced. This would create an opportunity for us to capture loans that would no longer be Agency eligible due to their size. We expect that our Jumbo and other non-conforming loans will be comprised primarily of loans to prime borrowers that meet the same underwriting guidelines as those established by the Agencies, as well as additional underwriting restrictions that may be imposed by us, our Manager and Provident, except that they will exceed the maximum loan size allowed by the Agencies for one unit properties.

We expect that the residential mortgage loans that we will acquire will be first lien mortgages secured primarily by residential single family 1 to 4 unit homes in the United States, that can be owner occupied primary residences, second homes, or investment properties, that can be detached homes, condominiums or planned-unit-development properties. In the future, some of the loans we acquire may be distressed loans purchased at a discount. To the extent we purchase any distressed loans, the amount of such loans is currently not expected to be significant. We expect that the residential mortgage loans we acquire will be adjustable-rate, hybrid and/or fixed-rate loans with original terms to maturity of not more than 40 years (although we expect our portfolio to be primarily of shorter duration) and will be either fully amortizing or interest-only for up to ten years, and fully amortizing thereafter. Fixed-rate mortgage loans bear an interest rate that is fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgage loans generally adjust monthly (although some may adjust less frequently) to an increment over a specified interest rate index. Hybrid mortgage loans have interest rates that are fixed for a specified period of time (typically three to ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate and hybrid mortgage loans generally have periodic and lifetime constraints on how much the loan interest rate can change on any predetermined interest rate reset date. We further believe that as the

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government reduces the threshold for conforming mortgage loans, which was raised during the recent financial crisis, there will be an even greater need for lenders to provide credit in the non-conforming mortgage loan market.

We currently do not intend to originate mortgage loans or provide other types of financing directly to the owners of real estate. Instead, we will have access to Provident’s industry leading mortgage loan origination platform, without incurring the infrastructure costs necessary to be a direct lender, which we believe will provide us with continuing access to a robust pipeline of attractive assets. Pursuant to the terms of our strategic alliance agreement, Provident will be required to offer any loan, RMBS or MSRs (and/or participation interests in MSRs) originated or owned by Provident to us before offering any such loan, security or right to any other fund or investment vehicle managed or advised by Provident or one of its affiliates. In addition, Provident will not purchase any loan, RMBS or MSRs (and/or participation interests in MSRs) from any other fund or investment vehicle managed or advised by Provident or one of its affiliates, unless such loan, security or right is first offered to us. To the extent that we purchase assets from Provident or any such fund or investment vehicle, under the terms of our strategic alliance agreement, such assets will be purchased at fair value. See “Our Strategic Alliance Agreement.” We will not be required to purchase any loans offered to us by Provident, and we may purchase residential mortgage loans through other origination channels or on the secondary market. We intend to acquire residential mortgage loans that are underwritten to our specifications. To the extent that we purchase a residential mortgage loan from a party other than Provident, our Manager will perform financial, operational and legal due diligence to assess the risks of acquisition. Our Manager will analyze the loan pool and conduct follow-up due diligence and follow an approach to underwriting that is similar to the process followed by Provident in new loan originations. For pool purchases, our Manager will review documentation, debt-to-income ratio, loan-to-value ratios and property valuations. Consideration will also be given to other factors such as the price of the pool, geographic concentration and type of product. To the extent we purchase any distressed loans, our Manager will seek to manage the increased risk of these assets through prudent asset selection, pre-acquisition due diligence, post-acquisition performance monitoring, and sale of assets where we identify negative credit trends. We are not prohibited from buying distressed loans from Provident or its affiliates. We expect the geographic concentration of our portfolio of mortgage loans, MBS and other real estate-related assets to be varied among several states. No single state, except California, accounted for more than 10% of the mortgage loans originated by Provident for the year ended December 31, 2011. In addition, before purchasing a residential mortgage loan, including from Provident, we expect to obtain representations and warranties from each seller covering customary matters, including the following: compliance with our eligibility standards and with our underwriting guidelines; characteristics of the mortgage loans in each pool; compliance with applicable federal and state laws and regulations in the origination of the loans, including consumer protection laws and anti-predatory lending laws; compliance with all applicable laws and regulations related to authority to do business in the jurisdiction where a mortgaged property is located; our acquisition of loans free and clear of any liens other than the security instrument which secures the mortgage against the property; the validity and enforceability of the loan documents; and the lien position of the mortgage. A seller who breaches these representations and warranties in making a loan that we purchase may be obligated to repurchase the loan from us. In the future, however, we may decide to originate mortgage loans or other types of financing.

Pursuant to the terms of our strategic alliance agreement, Provident will have the right, subject to certain exceptions, to sub-service any loans that we purchase from Provident or any other third party, to the extent the third party does not retain the servicing of such loans. By engaging Provident to sub-service our loans, we will have access to, and benefit from, the PFServicing platform, which is Provident’s all-in-one platform and database that allows Provident to conduct all aspects of loan servicing, including customer service, payment and payoff processing, investor reporting and accounting, escrow administration and default administration. We will have the right to engage an alternative mortgage loan servicer for a specific portfolio of loans based on a determination of a majority of our independent directors that the initial appointment of Provident as mortgage loan sub-servicer for such portfolio will be materially adverse to us or to our business, such as

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when such appointment is prohibited by contractual, regulatory or other legal limitations applicable to the specific loan portfolio.

We may acquire residential mortgage loans for our portfolio with the intention of either holding them in our residential mortgage loan portfolio or securitizing them and retaining them in our portfolio as securitized mortgage loans. See “—Financing Strategy” below. Additionally, to the extent that we seek to sell the servicing on a loan, either through a security or otherwise, pursuant to the terms of our strategic alliance agreement, Provident will have the first right to purchase the servicing on such loan. To the extent that we sell such servicing rights to Provident, under the terms of our strategic alliance agreement, such servicing rights will be sold at a price determined at the time such agreement is entered into. See “Our Strategic Alliance Agreement.”

RMBS

We intend to acquire shorter duration RMBS, which are typically certificates created by the securitization of adjustable-rate, hybrid and/or fixed-rate mortgage loans that are collateralized by residential real estate properties. We expect that the majority of our RMBS acquisitions will be Agency RMBS, but we intend to opportunistically supplement our portfolio with other RMBS, including Non-Agency RMBS and Agency CMOs.

We expect our Manager to evaluate the credit characteristics of these types of securities based on their underlying collateral profiles, including, but not limited to, loan balance distribution, documentation, geographic concentration, property type, periodic and lifetime interest rate caps, weighted-average loan-to-value and weighted-average credit score. Qualifying securities will then be analyzed based on expectations of prepayments, defaults, losses, vintage, as well as structural nuances. Base case scenarios will be stressed utilizing credit risk-based models. Securities will be monitored for variance from expected prepayments, defaults, severities, losses and cash flow on a monthly basis.

Agency RMBS

We will acquire Agency RMBS, which are guaranteed as to the payment of principal and/or interest by an Agency. Whole pool Agency RMBS are considered qualifying assets for any of our subsidiaries that intend to qualify for an exemption from registration under the 1940 Act pursuant to Section 3(c)(5)(C). See “—Operating and Regulatory Structure—1940 Act Exemption.” In addition to acquiring issued pools of Agency RMBS, we may also acquire forward-settling Agency RMBS where the pool is TBA. Pursuant to these TBAs, we will agree 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.

Agency CMOs

Our Agency RMBS assets may include CMOs which are securities that are structured from U.S. government agency, or federally chartered corporation-backed mortgage pass-through certificates. CMOs receive monthly payments of principal and interest. CMOs divide the cash flows which come from the underlying mortgage pass-through certificates into different classes of securities, and can have different maturities and different weighted average lives than the underlying mortgage pass-through certificates. CMOs can re-distribute the risk characteristics of mortgage pass-through certificates to better satisfy the demands of various investor types. These risk characteristics would include average life variability, prepayments, volatility, floating versus fixed interest rate and payment and interest rate risk.

Non-Agency RMBS

Non-Agency RMBS may be AAA rated through unrated. We expect to acquire primarily subordinated tranches backed by Jumbo loans and non-conforming loans, although we may also retain subordinated tranches backed by Alt-A Mortgage Loans and Subprime Mortgage Loans, where we purchase loans and then

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securitize such loans. The collateral backing these subordinated tranches may be adjustable-rate, hybrid and/or fixed-rate loans. The rating, as determined by one or more of the rating agencies, including Fitch, Inc., or Fitch, Moody’s Investors Service, Inc., or Moody’s, and Standard & Poor’s Corporation, or S&P, and collectively, the Rating Agencies, indicates the creditworthiness of the investment (which is the obligor’s ability to meet its financial commitment on the obligation). The mortgage loan collateral for Non-Agency RMBS generally consists of residential mortgage loans that do not conform to the Agency underwriting guidelines due to certain factors including, but not limited to, mortgage balance in excess of such guidelines, and level of documentation.

Other financial assets

Subject to maintaining our exemption from registration under the 1940 Act and our qualification as a REIT, over time, we may acquire securities, including IO Strips, MSRs (and/or participation interests in MSRs), debt and equity tranches of securitizations backed by various asset classes and common stock, preferred stock and debt of other real estate-related entities. We will not acquire any MSRs (and/or participation interests in MSRs) until we obtain the necessary third party approvals and consents.

ACQUISITION PROCESS—RESIDENTIAL MORTGAGE LOANS

We will rely on the expertise of our Manager and Provident to source, screen, underwrite and acquire residential mortgage loans on our behalf. We believe that our access to Provident’s established operational platform provides us with a competitive advantage relative to our peers. Set forth below is a detailed description of Provident’s operational platform.

Provident mortgage loan origination

We expect that substantially all of our residential mortgage loans will be originated by Provident. However, we may purchase residential mortgage loans through other origination channels or on the secondary market. Provident has a long track record and deep experience originating both conforming residential mortgage loans and Jumbo loans. Since 2009, given the illiquidity of the Jumbo loan market, substantially all of Provident’s originated mortgage loans have been conforming residential mortgage loans and were originated for sale for Agency securitizations. Provident originated mortgages which exceeded the Agency conforming loan limit of $417,000 with associated origination volume of $3.5 billion, $3.7 billion and $3.0 billion in 2009, 2010 and the nine months ended September 30, 2011, respectively. These loans, classified as Agency super conforming loans, represent mortgages that otherwise would have been classified as Jumbo loans absent the current higher conforming loan limits authorized under Congressional resolution. Additionally, Provident originated $12.8 billion of Jumbo loans from 2001 through 2007, including $400 million in 2001, $1.9 billion in 2002, $2.2 billion in 2003, $3.3 billion in 2004, $2.6 billion in 2005, $1.4 billion in 2006 and $1.0 billion in 2007. As the Jumbo mortgage market re-emerges, Provident expects to follow the same processes and adhere to similar underwriting guidelines as it once again originates Jumbo loans, much as it has more recently done with loans that are currently classified as super conforming loans. Thus, we believe that Provident will originate higher quality and marketable Jumbo loans, which we will have the opportunity to acquire pursuant to our strategic alliance agreement.

Provident currently primarily originates mortgage loans through three channels: wholesale, retail and correspondent. Wholesale origination represents mortgage loans sourced and submitted to Provident by independent mortgage brokers on behalf of borrowers. Wholesale originations represent the vast majority of Provident’s originations. Retail loan originations represent mortgage loans originated directly to the borrower, which are largely sourced from Provident’s servicing portfolio. Provident also has recently begun originating mortgage loans through a correspondent channel (loans originated and funded by a third party, which are subsequently underwritten and purchased by Provident). In addition to these origination channels, since April 2008, pursuant to Provident’s fulfillment agreement with its affiliate, CFSB, CFSB underwrites and funds loans where the borrower has locked their interest rate with Provident. Further, under the fulfillment

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agreement, Provident performs loan processing and secondary marketing services, including making the sole decision on the sale of such loans.

Provident’s business philosophy has been built around leveraging proprietary technology to create a standardized loan experience with a “no exceptions” mindset to originating and servicing mortgage loans. Provident performs the same standardized loan processing and underwriting functions on all loans regardless of origination channel. Its strategy is to consistently underwrite high quality mortgage loans. Provident maintains its asset quality by employing a strict, rigorous and standardized underwriting process. An indication of Provident’s asset quality is evidenced by its loss experience of 0.048% on the approximately $208 billion of loans it originated from 2001 through September 30, 2011. Over this time period, Provident was only required to repurchase from non-affiliates approximately $99.6 million of originated loans that were sold, out of the approximately $208 billion that it originated during such time. Provident sustained losses of approximately $38.5 million in respect of such repurchase requirements. Additionally, Provident incurred losses of approximately $60.8 million on loans where it was required to “make-whole” investors on losses they sustained over this same time frame. Also, Provident has repurchased certain mortgage loans from an affiliated company which were related substantially to second-lien mortgages sold by it to the affiliate. Provident’s underwriting process is also enhanced by its proprietary IT system. Provident’s proprietary technology is built to ensure that each loan meets all internal, counterparty and regulatory requirements for documentation and verification of credit quality. Throughout the underwriting process, Provident tracks the loan and highlights its status, any issues and outstanding requirements. With this business philosophy, Provident sold all of the loans it originated in 2009, 2010 and the nine months ended September 30, 2011.

For the nine months ended September 30, 2011, Provident originated mortgage loans through a network of approximately 2,400 active independent brokers throughout the country. Mortgage loan applications are reviewed and verified in a Provident branch office by the underwriter. Provident underwrites every mortgage loan the same way, regardless of the broker or how long the broker has done business with Provident.

Provident maintains high standards for its approved brokers and, on a weekly basis, it terminates its relationship with those brokers who do not comply with its process or who produce loans that contain fraudulent information. Provident’s goal is to align itself with brokers who comply with the Provident business model, which allows Provident to efficiently approve loans and provide attractive pricing. Provident uses a tiering system for mortgage brokers based on the percentage of locked loans which never fund, or fall-out. The Provident management team has determined that fall-out is a meaningful and effective means of measuring the performance of brokers. Tier 1 brokers must maintain fall-out of less than 10% over a rolling six month period, Tier 2 brokers must maintain a fall-out of 10% to 25% and Tier 3 brokers fail to maintain a fall-out of 25% or less. Provident terminates Tier 3 brokers on a weekly basis.

In addition, loans determined to have fraud or borrower misrepresentation result in the immediate termination of the broker. Provident also audits early payment default loans and audits loans with findings identified by third party investors. Findings based on fraud, including borrower misrepresentation, result in the immediate termination of the broker without exception. Branch employees do not have authority over broker approval or termination.

Provident requests a copy of the license for each state in which a broker is licensed. Provident’s broker approval department verifies the license with the state prior to approval. Each broker is matched against its exclusionary lists, as well as those of the Agencies and Provident’s other investors. Each account


Ø	We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future. We may pay distributions from borrowings or the sale of assets to the extent distributions exceed our earnings or cash flow from operations.

Ø	Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code, and our failure to qualify or remain qualified as a REIT would subject us to U.S. federal income tax and applicable state and local tax, which would reduce the amount of cash available for distribution to our stockholders.

Ø	Complying with REIT requirements may force us to liquidate, limit or forego otherwise attractive investments.