Fair Value

Fair Value Measurement
Financial assets and liabilities recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The following table sets forth the Company's financial instruments that were accounted for at fair value on a recurring basis as of March 31, 2013, by level within the fair value hierarchy:

	Assets and Liabilities at Fair Value
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans	$	-	$	-	$	10,839,809	$	10,839,809
Real estate securities
Agency RMBS
30-year adjustable rate mortgage		-		3,078,408		-		3,078,408
30-year fixed rate mortgage		-		179,210,281		-		179,210,281
Non-Agency RMBS		-		-		273,639,784		273,639,784
Derivative assets		-		436,876		-		436,876
Total	$	-	$	182,725,565	$	284,479,593	$	467,205,158
Liabilities
Derivative liabilities	$	-	$	1,086,340	$	-	$	1,086,340
Total	$	-	$	1,086,340	$	-	$	1,086,340

The following table sets forth the Company's financial instruments that were accounted for at fair value on a recurring basis as of December 31, 2012, by level within the fair value hierarchy:

	Assets and Liabilities at Fair Value
	Level 1		Level 2		Level 3		Total
Assets
Real estate securities
Agency RMBS
30-year adjustable rate mortgage	$	-	$	3,240,330	$	-	$	3,240,330
30-year fixed rate mortgage		-		66,519,702		-		66,519,702
Non-Agency RMBS		-		-		100,911,651		100,911,651
Total	$	-	$	69,760,032	$	100,911,651	$	170,671,683
Liabilities
Derivative liabilities	$	-	$	1,144,744	$	-	$	1,144,744
Total	$	-	$	1,144,744	$	-	$	1,144,744

The following table presents additional information about the Company's financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

	March 31, 2013						December 31, 2012
	RMBS			Mortgage loans			RMBS			Mortgage loans
Beginning balance	$	100,911,651		$	-		$	76,473,092		$	-
Total net transfers into/out of Level 3		-			-			-			-
Acquisitions		175,559,950			10,839,809			68,617,460			-
Proceeds from sales		-			-			(43,379,205	)		-
Net accretion of discounts		960,203			28,906			1,337,369			-
Proceeds from principal repayments		(5,938,134	)		-			(16,938,626	)		-
Total losses (realized / unrealized)
included in earnings		(271,607	)		(28,906	)		(2,579,401	)		-
Total gains (realized / unrealized)
included in earnings		2,417,721			-			17,380,962			-
Ending balance	$	273,639,784		$	10,839,809		$	100,911,651		$	-
The amount of total gains or (losses) for the period included
in earnings attributable to the change in unrealized gains or
losses relating to assets or liabilities still held at the reporting date	$	2,146,115		$	(28,906	)	$	10,764,268		$	-

There were no financial assets or liabilities that were accounted for at fair value on a nonrecurring basis at March 31, 2013 and December 31, 2012. There were no transfers into or out of Level 1, Level 2, or Level 3 during the three months ended March 31, 2013.

The following table presents quantitative information about the Company's financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

	Fair Value as of		Valuation				Weighted
	March 31, 2013		Technique(s)	Unobservable Input	Min / Max		Average
Non-Agency RMBS ⁽¹⁾
Alternative - A	$	97,364,228	Broker quotes/comparable trades	Constant voluntary prepayment	1.5%	12.0%	7.0	%
				Constant default rate	1.4%	10.6%	6.7	%
				Loss severity	2.5%	70.8%	45.5	%
				Delinquency	4.0%	30.1%	16.8	%

Pay option adjustable rate		31,608,908	Broker quotes/comparable trades	Constant voluntary prepayment	1.0%	20.3%	7.8	%
				Constant default rate	3.3%	14.0%	6.3	%
				Loss severity	3.4%	72.7%	55.5	%
				Delinquency	4.1%	32.5%	14.6	%

Prime		110,237,355	Broker quotes/comparable trades	Constant voluntary prepayment	1.2%	20.0%	9.7	%
				Constant default rate	2.4%	10.3%	6.4	%
				Loss severity	5.5%	63.0%	43.7	%
				Delinquency	2.8%	27.8%	15.0	%

Subprime		34,429,293	Broker quotes/comparable trades	Constant voluntary prepayment	0.9%	10.2%	3.6	%
				Constant default rate	3.4%	14.7%	6.3	%
				Loss severity	10.9%	81.0%	56.8	%
				Delinquency	4.4%	29.1%	13.9	%

Total	$	273,639,784

____________________

(1)

The Company uses third-party vendor prices and dealer quotes to estimate fair value of some of its financial assets. The Company verifies selected prices by using a variety of methods, including comparing prices to internally estimated prices and corroborating the prices by reference to other independent market data, such as relevant benchmark indices and prices of similar instruments. Where the Company has disclosed unobservable inputs for broker quotes or comparable trades, those inputs are based on the Company's validations performed at the security level.

The fair value measurements of these assets are sensitive to changes in assumptions regarding prepayment, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the non-Agency securities market. Significant changes in any of those inputs in isolation may result in significantly higher or lower fair value measurements. A change in the assumption used for forecasts of home price changes is accompanied by directionally opposite changes in the assumptions used for probability of default and loss severity. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.

The fair value of the mortgage loans is based on the March 22, 2013 purchase price without any adjustments as the Company believes this to be the most reasonable presentation of fair value at March 31, 2013. For the three months ended March 31, 2013, the Company purchased mortgage loans having an unpaid principal balance of $17.7 million for $10.8 million. The Company determined the accretable yield on this portfolio to be $14.2 million as of March 31, 2013.

Fair Value Option
Changes in fair value for assets and liabilities for which the fair value election is made are recognized in income as they occur. The fair value option may be elected on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

The following table presents the difference between the fair value and the aggregate unpaid principal amount of assets for which the fair value option was elected:

	March 31, 2013							December 31, 2012
			Amount							Amount
			Due Upon							Due Upon
	Fair Value		Maturity		Difference			Fair Value		Maturity		Difference
Financial instruments, at fair value
Assets
Real estate securities
Agency RMBS
30-year adjustable rate mortgage	$	3,078,408	$	2,939,138	$	139,270		$	3,240,330	$	3,083,892	$	156,438
30-year fixed rate mortgage		179,210,281		170,322,090		8,888,191			66,519,702		61,034,333		5,485,369
Non-Agency RMBS		273,639,784		319,366,757		(45,726,973	)		100,911,651		109,197,632		(8,285,981	)
Total RMBS		455,928,473		492,627,985		(36,699,512	)		170,671,683		173,315,857		(2,644,174	)
Mortgage loans		10,839,809		17,693,990		(6,854,181	)		-		-		-
Total financial instruments, at fair value	$	466,768,282	$	510,321,975	$	(43,553,693	)	$	170,671,683	$	173,315,857	$	(2,644,174	)

Fair Value of Other Financial Instruments
In addition to the above disclosures regarding assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure about the fair value of all other financial instruments. Estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.

The following table summarizes the estimated fair value for all other financial instruments:

	March 31, 2013		December 31, 2012
Other financial instruments
Assets
Cash	$	12,808,368	$	19,061,110
Restricted Cash		9,860,556		3,768,151
Liabilities
Repurchase agreements	$	280,321,921	$	109,270,298
Common stock repurchase liability		-		11,190,687

Cash includes cash on hand for which fair value equals carrying value (a Level 1 measurement). Restricted cash represents the Company's cash held by counterparties as collateral against the Company's derivatives and/or repurchase agreements. Due to the short-term nature of the restrictions, fair value approximates carrying value (a Level 1 measurement). The fair value of repurchase agreements is based on an expected present value technique using observable market interest rates. As such, the Company considers the estimated fair value to be a Level 2 measurement. This method discounts future estimated cash flows using rates the Company determined best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. The fair value of the common stock repurchase liability is equal to the agreed upon purchase price. The Company considers the estimated fair value to be a Level 3 measurement.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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