- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the quarterly period ended September 30, 2012



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

Commission file number 001-35260

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

(Exact name of registrant as specified in its charter)



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

2 Bethesda Metro Center

14th Floor

Bethesda, Maryland 20814

(Address of principal executive offices)

(301) 968-9220

(Registrant's telephone number, including area code)

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

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

Yes ý No ¨

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



Large accelerated filer	o		Accelerated filer	o

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

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

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of November 1, 2012 was 36,262,100 .

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	50

Signatures

PART I

Item 1. Financial Statements

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



	September 30, 2012		December 31, 2011
	(unaudited)		(audited)
Assets:
Agency securities, at fair value (including pledged securities of $6,183,812 and $1,535,388, respectively)	$	6,337,238	$	1,740,091
Non-agency securities, at fair value (including pledged securities of $352,840 and $8,626, respectively)	552,787		25,561
Linked transactions, at fair value	—		13,671
Cash and cash equivalents	156,269		57,428
Restricted cash and cash equivalents	15,756		3,159
Interest receivable	17,792		5,566
Derivative assets, at fair value	15,030		1,845
Receivable for securities sold	106,606		271,849
Receivable under reverse repurchase agreements	344,075		50,563
Other assets	746		589
Total assets	$	7,546,299	$	2,170,322
Liabilities:
Repurchase agreements	$	6,117,783	$	1,706,281
Payable for securities purchased	50,663		189,042
Derivative liabilities, at fair value	76,437		5,669
Dividend payable	32,636		8,005
Obligation to return securities borrowed under reverse repurchase agreements, at fair value	347,367		50,154
Accounts payable and other accrued liabilities	7,073		2,370
Total liabilities	6,631,959		1,961,521
Stockholders’ equity:
Preferred stock, $0.01 par value; 50,000 shares authorized, 0 shares issued and outstanding, respectively	—		—
Common stock, $0.01 par value; 300,000 shares authorized, 36,262 and 10,006 shares issued and outstanding, respectively	363		100
Additional paid-in capital	778,804		199,038
Retained earnings	135,173		9,663
Total stockholders’ equity	914,340		208,801
Total liabilities and stockholders’ equity	$	7,546,299	$	2,170,322

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Interest income:
Agency securities	$	37,311		$	82,938		$	4,039
Non-agency securities	6,949			12,518			65
Other	95			196			24
Interest expense	(7,329		)	(13,779		)	(383		)
Net interest income	37,026			81,873			3,745

Other gains (losses):
Realized gain on agency securities, net	23,566			46,633			2,392
Realized gain on non-agency securities, net	952			952			—
Realized loss on periodic settlements of interest rate swaps, net	(6,855		)	(11,711		)	(577		)
Realized loss on other derivatives and securities, net	(29,132		)	(45,957		)	(3,342		)
Unrealized gain on agency securities, net	95,477			164,994			1,970
Unrealized gain (loss) on non-agency securities, net	33,118			34,506			(747		)
Unrealized gain (loss) and net interest income on Linked Transactions, net	—			3,384			(813		)
Unrealized gain (loss) on other derivatives and securities, net	(3,118		)	(64,300		)	819
Total other gain (loss), net	114,008			128,501			(298		)

Expenses:
Management fees	2,945			6,633			431
General and administrative expenses	1,415			3,509			550
Total expenses	4,360			10,142			981

Income before excise tax	146,674			200,232			2,466
Excise tax	432			441			—
Net income	$	146,242		$	199,791		$	2,466

Net income per common share—basic and diluted	$	4.03		$	7.86		$	0.25

Weighted average number of common shares outstanding—basic and diluted	36,262			25,411			10,006

Dividends declared per common share	$	0.90		$	2.70		$	0.20

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in thousands)



	Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings			Total
	Shares	Amount		Shares	Amount		Additional Paid-in Capital		Retained Earnings			Total
Balance, December 31, 2011 (audited)	—	$	—	10,006	$	100	$	199,038	$	9,663		$	208,801
Net income	—	—		—	—		—		199,791			199,791
Issuance of common stock	—	—		26,250	263		579,710		—			579,973
Issuance of restricted stock	—	—		6	—		—		—			—
Stock-based compensation	—	—		—	—		56		—			56
Common dividends declared	—	—		—	—		—		(74,281		)	(74,281		)
Balance, September 30, 2012 (unaudited)	—	$	—	36,262	$	363	$	778,804	$	135,173		$	914,340

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands, unaudited)



	For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	199,791		$	2,466
Adjustments to reconcile net income to net cash flows from operating activities:
Amortization of net premium on agency securities	23,816			1,316
Accretion of net discount on non-agency securities	(8,443		)	(97		)
Unrealized gain on securities and derivatives, net	(137,877		)	(1,074		)
Realized gain on agency securities, net	(46,633		)	(2,462		)
Realized gain on non-agency securities, net	(952		)	—
Realized loss on derivatives and securities, net	57,668			3,989
Stock-based compensation	56			5
Increase in interest receivable	(12,226		)	(5,133		)
Increase in other assets	(157		)	(634		)
Increase in accounts payable and other accrued liabilities	4,703			1,560
Net cash flows from (used in) operating activities	79,746			(64		)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of agency securities	(7,825,160		)	(1,836,738		)
Purchases of non-agency securities	(458,384		)	(27,461		)
Proceeds from sale of agency securities	2,639,053			308,897
Principal collections on agency securities	803,635			5,650
Principal collections on non-agency securities	27,956			801
Purchases of non-agency securities underlying Linked Transactions	(6,589		)	(34,628		)
Proceeds from sale of non-agency securities	4,575			—
Principal collections on non-agency securities underlying Linked Transactions	1,987			428
Purchases of U.S. Treasury securities to cover short sale	(3,065,223		)	(410,951		)
Proceeds from short sale of U.S. Treasury securities	3,354,453			434,885
Payments of reverse repurchase agreements	(3,812,305		)	(499,857		)
Proceeds from reverse repurchase agreements	3,518,793			473,982
Purchases of U.S. Treasury securities	(50,166		)	(75,441		)
Proceeds from sale of U.S. Treasury securities	49,902			75,511
Payment of premiums for interest rate swaptions	(10,352		)	—
Increase in restricted cash and cash equivalents	(12,597		)	(11,241		)
Net payments on other derivatives	(45,754		)	(2,570		)
Net cash flows used in investing activities	(4,886,176		)	(1,598,733		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	(49,650		)	—
Proceeds from common stock offerings, net of offering costs	579,973			199,280
Proceeds from repurchase agreements	23,592,190			1,816,664
Repayments on repurchase agreements	(19,219,900		)	(382,138		)
Proceeds from repurchase agreements underlying Linked Transactions	91,735			26,387
Repayments of repurchase agreements underlying Linked Transactions	(89,077		)	—
Net cash flow from financing activities	4,905,271			1,660,193
Net increase in cash and cash equivalents	98,841			61,396
Cash and cash equivalents at beginning of the period	57,428			—
Cash and cash equivalents at end of period	$	156,269		$	61,396
Supplemental non-cash investing and financing activities:
Non-agency securities recorded upon de-linking of Linked Transactions	$	58,061		$	—
Repurchase agreements recorded upon de-linking of Linked Transactions	$	39,212		$	—

See accompanying notes to consolidated financial statements.

AMERICAN CAPITAL MORTGAGE INVESTMENT CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Unaudited Interim Consolidated Financial Statements

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

Our interim unaudited consolidated financial statements include the accounts of our wholly-owned subsidiary, American Capital Mortgage Investment TRS, LLC. As of September 30, 2012 , there has been no activity in American Capital Mortgage Investment TRS, LLC.

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

Note 2. Organization

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

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

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

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

Note 3. Summary of Significant Accounting Policies

Fair Value of Financial Assets

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

Interest Income

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

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

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

Repurchase Agreements

We finance the acquisition of agency securities and certain non-agency securities for our investment portfolio through repurchase transactions under master repurchase agreements. We account for repurchase transactions, other than those treated as Linked Transactions (see Derivatives below), as collateralized financing transactions which are carried at their contractual amounts, including accrued interest, as specified in the respective transaction agreements. The contractual amounts approximate fair value due to their short-term nature.

Derivatives

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

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

derivative liabilities at fair value in our consolidated balance sheet. In our consolidated statements of cash flows, cash receipts and payments related to derivative instruments are classified according to the underlying nature or purpose of the derivative transaction, generally in the investing section for derivatives not designated in hedging relationships.

Our derivative agreements and repurchase agreements generally contain provisions that allow for netting or setting off receivables and payables with each counterparty. We report amounts in our consolidated balance sheets on a gross basis without regard for such rights of offset or master netting arrangements.

Interest rate swap agreements

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

Interest rate swaptions

We purchase interest rate swaptions to help mitigate the potential impact of increases or decreases in interest rates on the performance of our investment portfolio. The interest rate swaptions provide us the option to enter into an interest rate swap agreement for a predetermined notional amount, stated term and pay or receive interest rates in the future. The premium paid for interest rate swaptions is reported as a derivative asset in our consolidated balance sheets. We estimate the fair value of interest rate swaptions based on the fair value of the future interest rate swap that we have the option to enter into as well as the remaining length of time that we have to exercise the option. The difference between the premium and the fair value of the swaption is reported in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If a swaption expires unexercised, the loss on the swaption would be equal to the premium paid and reported in realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations. If we exercise a swaption, the realized gain or loss on the swaption would be equal to the difference between the fair value of the underlying interest rate swap and the premium paid and reported in realized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

TBA securities

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

Linked Transactions

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

assets and liabilities underlying the Linked Transactions and associated interest income and expense are reported as unrealized gain and net interest income on Linked Transactions, net on our consolidated statements of operations. If we subsequently finance the securities in a Linked Transaction with a different counterparty, we will regard it as an acquisition of a security and the repurchase financing as a collateralized financing transaction.

Forward commitments to purchase or sell specified securities

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

U.S. Treasury securities

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

Recent Accounting Pronouncements

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

Reclassifications

Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the current period presentation.

Note 4. Agency Securities

The following tables summarize our investments in agency securities as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012
	Fannie Mae			Freddie Mac			Total
Fixed-rate agency securities:
Agency securities, par	$	4,970,551		$	885,768		$	5,856,319
Unamortized premium	254,095			48,013			302,108
Amortized cost	5,224,646			933,781			6,158,427
Gross unrealized gains	152,375			26,650			179,025
Gross unrealized losses	(156		)	(58		)	(214		)
Fixed-rate agency securities, at fair value	$	5,376,865		$	960,373		$	6,337,238

Weighted average coupon as of September 30, 2012	3.45		%	3.60		%	3.47		%
Weighted average yield as of September 30, 2012	2.40		%	2.61		%	2.43		%
Weighted average yield for the three months ended September 30, 2012	2.49		%	2.46		%	2.48		%
Weighted average yield for the nine months ended September 30, 2012	2.66		%	2.68		%	2.66		%



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

Weighted average coupon as of December 31, 2011	3.95		%	4.19		%	4.01		%
Weighted average yield as of December 31, 2011	2.85		%	2.91		%	2.87		%

Actual maturities of agency securities are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic principal payments and principal prepayments. The following table summarizes our agency securities as of September 30, 2012 and December 31, 2011 according to their estimated weighted average life classification (dollars in thousands):



	As of September 30, 2012						As of December 31, 2011
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Yield
Greater than one year and less than or equal to three years	$	—	$	—	—	%	$	55,582	$	55,260	2.17	%
Greater than three years and less than or equal to five years	2,366,106		2,308,621		1.92	%	425,251		422,406		2.49	%
Greater than five years and less than or equal to 10 years	3,949,518		3,828,590		2.74	%	1,259,258		1,248,608		3.02	%
Greater than 10 years	21,614		21,216		2.75	%	—		—		—	%
Total / weighted average	$	6,337,238	$	6,158,427	2.43	%	$	1,740,091	$	1,726,274	2.87	%

As of September 30, 2012 and December 31, 2011 , the weighted average life of our agency security portfolio was 6.0 years and 5.9 years , respectively, which incorporates anticipated future prepayment assumptions. As of September 30, 2012 and December 31, 2011 , our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency investment portfolio was 12.7% and 11.5% , respectively. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs. We estimate long-term prepayment assumptions using a third-party service and market data. This third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates, mortgage rates of the outstanding loans, loan age, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate reasonableness. As market conditions may change rapidly, we use our judgment in developing our estimates for different securities. Prepayments are dependent on many factors and actual prepayments could differ materially from our estimates. Various market participants could use materially different assumptions. Furthermore, changes in market conditions such as interest rates, housing prices, and broad economic factors such as employment can materially impact prepayments. Additionally, modifications to GSE underwriting criteria or programs, GSE policies surrounding the buyouts or modifications of delinquent loans or other factors could significantly change the prepayment landscape.

Realized Gains and Losses

The following table summarizes our net realized gains and losses from the sale of agency securities for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 (dollars in thousands):



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Proceeds from agency securities sold	$	1,266,425		$	2,639,053		$	308,897
Increase (decrease) in receivable for agency securities sold	(328,216		)	(165,241		)	110,127
Less agency securities sold, at cost	(914,643		)	(2,427,179		)	(416,632		)
Net realized gains on sale of agency securities	$	23,566		$	46,633		$	2,392

Gross realized gains on sale of agency securities	$	31,223		$	54,309		$	2,481
Gross realized losses on sale of agency securities	(7,657		)	(7,676		)	(89		)
Net realized gains on sale of agency securities	$	23,566		$	46,633		$	2,392

Pledged Assets

The following tables summarize our agency securities pledged as collateral under repurchase agreements and derivative agreements by type as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012
Agency Securities Pledged ⁽¹⁾	Fannie Mae		Freddie Mac		Total
Under Repurchase Agreements
Fair value	$	5,803,430	$	308,759	$	6,112,189
Amortized cost	5,639,481		299,523		5,939,004
Accrued interest on pledged agency securities	15,540		839		16,379
Under Derivative Agreements
Fair value	67,278		4,345		71,623
Amortized cost	65,036		4,160		69,196
Accrued interest on pledged agency securities	178		14		192
Total Fair Value of Agency Securities Pledged and Accrued Interest	$	5,886,426	$	313,957	$	6,200,383

——————


⁽¹⁾	Agency securities pledged do not include pledged amounts of $82.8 million under repurchase agreements related to agency securities sold but not yet settled as of September 30, 2012 .



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

——————


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

The following table summarizes our agency securities pledged as collateral under repurchase agreements by remaining maturity as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012						As of December 31, 2011
Remaining Maturity	Fair Value		Amortized Cost		Accrued Interest on Pledged Agency Securities		Fair Value		Amortized Cost		Accrued Interest on Pledged Agency Securities
30 days or less	$	2,856,758	$	2,779,162	$	7,536	$	961,430	$	952,684	$	3,052
31 - 59 days	1,052,643		1,023,952		2,832		441,167		437,969		1,347
60 - 90 days	1,477,909		1,434,235		3,967		53,265		53,082		129
Greater than 90 days	724,879		701,655		2,044		75,413		74,649		269
Total	$	6,112,189	$	5,939,004	$	16,379	$	1,531,275	$	1,518,384	$	4,797

Note 5. Non-Agency Securities

The following table summarizes our non-agency security investments as of September 30, 2012 (dollars in thousands):



Non-Agency Securities
	Fair Value ⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average
Category	Fair Value ⁽¹⁾		Amortized Cost		Par/ Current Face		Coupon ⁽²⁾		Yield
Prime	$	120,826	$	115,256	$	151,684	3.38	%	6.41	%
Alt-A	287,906		275,576		459,468		2.08	%	7.28	%
Option-ARM	70,386		61,082		101,532		0.61	%	7.51	%
Subprime	73,669		65,982		166,358		0.38	%	8.32	%
Total/ Weighted Average	$	552,787	$	517,896	$	879,042	1.81	%	7.24	%

————————


⁽¹⁾	As of September 30, 2012 , the unrealized net gain of $34.9 million on non-agency securities is comprised of $36.4 million gross unrealized gain and $1.5 million gross unrealized loss.


⁽²⁾	Weighted average coupon rates are floating, except for $11.3 million and $19.0 million fair value of prime and Alt-A non-agency securities, respectively, as of September 30, 2012 .

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



Non-Agency Securities
	Fair Value ⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average
Category	Fair Value ⁽¹⁾		Amortized Cost		Par/ Current Face		Coupon ⁽²⁾		Yield
Prime	$	7,261	$	7,328	$	9,372	4.61	%	7.23	%
Alt-A	12,331		12,069		16,895		4.17	%	7.55	%
Subprime	5,969		6,597		20,884		0.50	%	10.09	%
Total/ Weighted Average	$	25,561	$	25,994	$	47,151	2.63	%	8.10	%

Non-Agency Securities Underlying Linked Transactions ⁽³⁾
	Fair Value ⁽¹⁾		Amortized Cost		Par/ Current Face		Weighted Average
Category	Fair Value ⁽¹⁾		Amortized Cost		Par/ Current Face		Coupon ⁽²⁾		Yield
Prime	$	21,273	$	22,030	$	26,954	3.62	%	5.51	%
Alt-A	15,020		14,988		19,609		2.73	%	6.27	%
Option-ARM	6,702		6,567		12,522		0.66	%	11.31	%
Subprime	7,198		8,465		29,586		0.42	%	9.35	%
Total/ Weighted Average	$	50,193	$	52,050	$	88,671	1.94	%	7.08	%

————————


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


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


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

Our Prime securities include senior tranches in securitization trusts issued between 2004 and 2007 and securities with underlying prime collateral that were re-securitized in 2009. Prime mortgage loans are residential mortgage loans that are considered to have the most stringent underwriting standards within the non-agency mortgage market, but do not carry any credit guarantee from either a U.S. government agency or GSE. These loans were originated during a period when underwriting standards were generally weak and housing prices have dropped significantly subsequent to their origination. As a result, there is still material credit risk embedded in these vintages. As of September 30, 2012 , our Prime securities have both floating-rate and fixed-rate coupons ranging from 2.5% to 6.5% , with weighted average coupons of underlying collateral ranging from 2.9% to 6.1% .

Our Alt-A securities include senior tranches in securitization trusts issued between 2004 and 2006 and securities with Alt-A collateral that were re-securitized in 2010 to add an additional layer of credit support. Alt-A, or alternative A-paper, mortgage loans are considered riskier than prime mortgage loans and less risky than sub-prime mortgage loans and are typically characterized by borrowers with less than full documentation, lower credit scores, higher loan-to-value ratios and a higher percentage of investment properties. As of September 30, 2012 , our Alt-A securities have both fixed and floating rate coupons ranging from 0.3% to 6.0% with weighted average coupons of underlying collateral ranging from 2.9% to 6.0% .

Our Option-ARM securities include senior tranches in securitization trusts that are collateralized by residential mortgages that have origination and underwriting characteristics similar to Alt-A mortgage loans, with the added feature of providing underlying mortgage borrowers the option, within certain constraints, to make lower payments than otherwise required by the stated interest rate for a number of years, leading to negative amortization and increased loan balances. This additional feature can increase the credit risk of these securities. As of September 30, 2012 , our Option-ARM securities have coupons ranging from 0.4% to 1.1% and have underlying collateral with weighted average coupons between 2.8% and 3.8% . The loans underlying our Option-ARM securities were originated between 2002 and 2007.

Subprime securities include floating rate, senior tranches in securitization trusts collateralized by residential mortgages originated during 2006 and 2007 that were originally considered to be of lower credit quality. As of September 30, 2012 , our Subprime securities have floating rate coupons ranging from 0.3% to 0.5% and have underlying collateral with weighted-average coupons ranging from 4.5% to 7.9% .

Our non-agency securities are generally rated below investment grade or have not been rated by credit agencies as of September 30, 2012 .

Pledged Assets

Non-agency securities with a fair value of $352.8 million and $8.6 million were pledged as collateral under repurchase agreements as of September 30, 2012 and December 31, 2011 , respectively. As of September 30, 2012 , there were no Linked Transactions. Additionally, as of December 31, 2011 , there were non-agency securities with a fair value of $50.2 million underlying Linked Transactions.

Note 6. Repurchase Agreements

We pledge certain of our securities as collateral under repurchase arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Interest rates on these borrowings are generally based on LIBOR plus or minus a margin and amounts available to be borrowed are dependent upon the fair value of the securities pledged as collateral, which fluctuates with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of pledged securities, lenders may require us to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of September 30, 2012 and December 31, 2011 , we have met all margin call requirements and had no repurchase agreements maturing overnight. Repurchase agreements are carried at cost, which approximates fair value due to their short-term nature.

The following tables summarize our borrowings under repurchase arrangements and weighted average interest rates classified by original maturities as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012					As of December 31, 2011
			Weighted Average					Weighted Average
Original Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Repurchase Agreements
30 days or less	$	304,154	0.68	%	19	$	77,073	0.40	%	10
31 - 60 days	725,974		0.56	%	22	346,201		0.43	%	19
61 - 90 days	1,218,770		0.45	%	42	372,217		0.39	%	31
91 - 180 days	2,882,307		0.51	%	55	774,594		0.34	%	37
Greater than 180 days	986,578		0.51	%	134	136,196		0.48	%	209
Total / Weighted Average	$	6,117,783	0.51	%	60	$	1,706,281	0.38	%	45

Repurchase Agreements Underlying Linked Transactions
30 days or less	$	—				$	9,509	2.04	%	14
31 - 60 days	—					13,397		1.98	%	8
61 - 90 days	—					2,857		2.36	%	18
91 - 180 days	—					10,791		2.07	%	47
Total / Weighted Average	$	—				$	36,554	2.05	%	22

As of September 30, 2012 and December 31, 2011 , we had repurchase agreements with 26 and 22 financial institutions, respectively. In addition, less than 7% and 6% of stockholders' equity was at risk with any one counterparty, with the top five counterparties representing less than 23% and 21% of our equity at risk as of September 30, 2012 and December 31, 2011 , respectively.

We had agency securities with fair values of $6.1 billion and $1.5 billion and non-agency securities with fair values of $352.8 million and $8.6 million pledged as collateral against repurchase agreements, as of September 30, 2012 and December 31, 2011 , respectively. Agency securities pledged do not include pledged amounts of $82.8 million and $269.5 million under repurchase agreements related to securities sold but not yet settled as of September 30, 2012 and December 31, 2011 , respectively.

Note 7. Derivatives

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

The following table summarizes information about our outstanding derivatives and other hedging instruments for the nine months ended September 30, 2012 (in thousands):



Derivatives	December 31, 2011 Notional Amount			Additions/ Long Positions	Expirations/ Terminations/ Short Positions		September 30, 2012 Notional Amount
Interest rate swaps	$	875,000		2,740,000	(675,000	)	$	2,940,000
Interest rate swaptions	$	50,000		675,000	(225,000	)	$	500,000
TBA securities	$	(101,000	)	6,033,220	(5,821,214	)	$	111,006
Short sales of U.S. Treasuries	$	(50,000	)	3,076,000	(3,376,000	)	$	(350,000	)
U.S. Treasuries	$	—		50,168	(50,168	)	$	—
Linked Transactions ⁽¹⁾	$	88,671		10,920	(99,591	)	$	—

————————

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

The table below presents the balance sheet location and fair value information for our derivatives outstanding as of September 30, 2012 and December 31, 2011 (in thousands):



Derivative Type	September 30, 2012		December 31, 2011
Interest rate swaps	$	—	$	348
Interest rate swaptions	4,607		828
TBA securities	10,423		669
Derivative assets, at fair value	$	15,030	$	1,845

Interest rate swaps	$	71,552	$	3,734
TBA securities	4,885		1,935
Derivative liabilities, at fair value	$	76,437	$	5,669

The following table summarizes the effect of our outstanding derivatives and other hedging instruments on our consolidated statements of operations for the three and nine months ended September 30, 2012 and the period from the commencement of operations on August 9, 2011 through September 30, 2011 (in thousands):



	For the Three Months Ended September 30, 2012											For the Nine Months Ended September 30, 2012
	Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain and Net Interest Income on Linked Transactions, net		Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain and Net Interest Income on Linked Transactions, net
Interest rate swaps	$	(6,855	)	$	(18,430	)	$	(8,996	)	$	—	$	(11,711	)	$	(18,430	)	$	(62,586	)	$	—
Interest rate swaptions	—			(1,454		)	137			—		—			(1,725		)	(4,792		)	—
TBA securities	—			(2,903		)	7,598			—		—			(19,250		)	6,848			—
Short sales of U.S. Treasuries	—			(6,567		)	(1,857		)	—		—			(6,497		)	(3,770		)	—
U.S. Treasuries	—			222			—			—		—			(55		)	—			—
Linked Transactions	—			—			—			—		—			—			—			3,384
Total	$	(6,855	)	$	(29,132	)	$	(3,118	)	$	—	$	(11,711	)	$	(45,957	)	$	(64,300	)	$	3,384



	For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
	Realized Loss on Periodic Settlements of Interest Rate Swaps, net			Realized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Gain (Loss) on Other Derivatives and Securities, net			Unrealized Loss and Net Interest Income on Linked Transactions, net
Interest rate swaps	$	(577	)	$	—		$	336		$	—
TBA securities	—			(1,844		)	521			—
Short sales of U.S. Treasuries	—			(1,568		)	(38		)	—
U.S. Treasuries	—			—			—			—
Linked Transactions	—			—			—			(813		)
Total	$	(577	)	$	(3,412	)	$	819		$	(813	)

Interest Rate Swap Agreements

As of September 30, 2012 and December 31, 2011 , our derivative and other hedging instruments included interest rate swaps, which have the effect of modifying the repricing characteristics of our repurchase agreements and cash flows on such liabilities. Our interest rate swaps are used to manage the interest rate risk created by our use of short-term repurchase agreements. Under our interest rate swaps, we typically pay a fixed rate and receive a floating rate based on LIBOR with terms usually ranging up to ten years.

As of September 30, 2012 and December 31, 2011 , we had interest rate swap agreements summarized in the tables below (dollars in thousands).



		September 30, 2012					December 31, 2011
Interest Rate Swaps	Balance Sheet Location	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate swap assets	Derivative assets, at fair value	$	—	$	—		$	200,000	$	348
Interest rate swap liabilities	Derivative liabilities, at fair value	2,940,000		(71,552		)	675,000		(3,734		)
		$	2,940,000	$	(71,552	)	$	875,000	$	(3,386	)



September 30, 2012
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps ⁽¹⁾	Notional Amount		Fair Value			Fixed Pay Rate		Receive Rate		Maturity (Years)
3 years or less	$	550,000	$	(6,048	)	0.81	%	0.47	%	2.5
Greater than 3 years and less than 5 years	940,000		(30,889		)	1.32	%	0.47	%	4.4
Greater than 5 years and less than 7 years	875,000		(18,500		)	1.30	%	0.42	%	6.1
Greater than 7 years	575,000		(16,115		)	1.90	%	0.46	%	9.7
Total / Weighted Average	$	2,940,000	$	(71,552	)	1.33	%	0.45	%	5.6



December 31, 2011
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps ⁽²⁾	Notional Amount		Fair Value			Fixed Pay Rate		Receive Rate		Maturity (Years)
3 years or less	$	100,000	$	217		0.64	%	0.50	%	2.7
Greater than 3 years and less than 5 years	700,000		(2,584		)	0.98	%	0.48	%	3.8
Greater than 5 years and less than 7 years	25,000		(257		)	1.73	%	0.47	%	6.8
Greater than 7 years	50,000		(762		)	2.07	%	0.53	%	8.5
Total / Weighted Average	$	875,000	$	(3,386	)	1.03	%	0.48	%	4.0

————————


⁽¹⁾	Includes swaps with an aggregate notional of $325.0 million with deferred start dates ranging from two to three months from September 30, 2012 .


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

Interest Rate Swaption Agreements

Our interest rate swaption agreements provide us the option to enter into interest rate swap agreements in the future where we would pay a fixed rate and receive LIBOR. The following table presents certain information about our interest rate swaption agreements as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	Option					Underlying Swap
	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
As of September 30, 2012	$	9,455	$	4,607	1.8	$	500,000	3.43	%	8.5
As of December 31, 2011	884		828		0.8	$	50,000	2.81	%	10.3

TBA Securities

As of September 30, 2012 , and December 31, 2011 , we had contracts to purchase (“long position”) and sell (“short position”) TBA securities on a forward basis. The following table presents a summary of our long and short TBA positions as of September 30, 2012 and December 31, 2011 (in thousands):



	As of September 30, 2012						As of December 31, 2011
Purchase and Sale Contracts for TBA Securities	Notional Amount			Fair Value			Notional Amount			Fair Value
Purchase of TBA securities
Assets	$	1,055,000		$	3,495		$	76,000		$	669
Liabilities	—			—			—			—
Sale of TBA securities
Assets	(164,848		)	6,928			—			—
Liabilities	(779,146		)	(4,885		)	(177,000		)	(1,935		)
Total, net	$	111,006		$	5,538		$	(101,000	)	$	(1,266	)

Linked Transactions

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

The following table presents the non-agency securities and repurchase agreements underlying our Linked Transactions as of September 30, 2012 and December 31, 2011 (in thousands):



	September 30, 2012		December 31, 2011
Linked non-agency securities ⁽¹⁾	$	—	$	50,193
Linked repurchase agreements	—		(36,554		)
Accrued interest (payable) receivable, net	—		32
Linked Transactions, at fair value	$	—	$	13,671

————


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

The following table presents the composition of unrealized gain (loss) and net interest income on Linked Transactions, net for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 (in thousands):



	For the Three Months Ended September 30, 2012		For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Coupon interest income	$	—	$	302		$	105
Discount accretion	—		590			91
Interest expense	—		(183		)	(40		)
Unrealized gain (loss), net	—		2,675			(969		)
Unrealized gain (loss) and net interest income on Linked Transactions, net	$	—	$	3,384		$	(813	)

Additionally, we had obligations to return treasury securities borrowed under reverse repurchase agreements accounted for as securities borrowing transactions with fair values of $347.4 million and $50.2 million as of September 30, 2012 and

December 31, 2011 , respectively. The borrowed securities were collateralized by cash payments of $344.1 million and $50.6 million as of September 30, 2012 and December 31, 2011 , respectively, which are presented as receivables under reverse repurchase agreements on the consolidated balance sheets. The change in fair value of the borrowed securities is recorded in unrealized gain (loss) on other derivatives and securities, net in our consolidated statements of operations.

Credit Risk-Related Contingent Features

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

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

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

We had agency securities with fair values of $71.6 million and $4.1 million and restricted cash and cash equivalents of $11.7 million and $3.1 million pledged as collateral against our interest rate swaps as of September 30, 2012 and December 31, 2011 , respectively.

Note 8. Fair Value Measurements

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

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

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

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


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


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


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

The following tables present our financial instruments carried at fair value as of September 30, 2012 and December 31, 2011 , on the consolidated balance sheets by the valuation hierarchy, as described above (in thousands):



	As of September 30, 2012
	Level 1		Level 2		Level 3		Total
Assets
Agency securities	$	—	$	6,337,238	$	—	$	6,337,238
Non-agency securities	—		479,118		73,669		552,787
Derivative assets	—		15,030		—		15,030
Total financial assets	$	—	$	6,831,386	$	73,669	$	6,905,055

Liabilities
Derivative liabilities	$	—	$	76,437	$	—	$	76,437
Obligation to return securities borrowed under repurchase agreements	347,367		—		—		347,367
Total financial liabilities	$	347,367	$	76,437	$	—	$	423,804



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

Liabilities
Derivative liabilities	$	—	$	5,669	$	—	$	5,669
Obligation to return securities borrowed under repurchase agreements	50,154		—		—		50,154
Total financial liabilities	$	50,154	$	5,669	$	—	$	55,823

There were no transfers between hierarchy levels during the nine months ended September 30, 2012 . The following table presents a summary of the changes in fair value for the three and nine months ended September 30, 2012 of Level 3 assets carried at fair value as of September 30, 2012 (dollars in thousands):



	For the Three Months Ended September 30, 2012
	Non-Agency Securities			Linked Transactions		Total
Balance as of June 30, 2012	$	33,362		$	—	$	33,362

Unrealized gain	8,177			—		8,177
Unrealized loss	—			—		—
Total unrealized gain, net ⁽¹⁾	8,177			—		8,177

Purchases of securities	36,645			—		36,645
Principal repayments on securities	(5,382		)	—		(5,382		)
Discount accretion	867			—		867
Balance as of September 30, 2012	$	73,669		$	—	$	73,669



	For the Nine Months Ended September 30, 2012
	Non-Agency Securities			Linked Transactions			Total
Balance as of December 31, 2011	$	5,969		$	1,746		$	7,715

Unrealized gain	9,479			827			10,306
Unrealized loss	(723		)	—			(723		)
Total unrealized gain, net ⁽¹⁾	8,756			827			9,583

Purchases of securities	56,124			—			56,124
Principal repayments on securities	(6,744		)	(291		)	(7,035		)
Securities recorded upon de-linking of Linked Transactions	7,893			(7,893		)	—
Net change in borrowings underlying Linked Transactions	—			5,445			5,445
Discount accretion	1,671			159			1,830
Accrued interest on Linked Transactions	—			7			7
Balance as of September 30, 2012	$	73,669		$	—		$	73,669

——————

⁽¹⁾ Unrealized gains and losses on non-agency securities are included in the consolidated statements of operations in the line item unrealized gain (loss) on non-agency securities, net and unrealized gains and losses on Linked Transactions are included on the consolidated statements of operations in the line item unrealized gain and net interest income on Linked Transactions, net.

Our agency securities and Prime, Alt-A and Option-ARM non-agency securities are valued using the various market data described above, which include inputs determined to be observable or whose significant value drivers are observable. Accordingly, our agency securities and prime, Alt-A and Option-ARM non-agency securities are classified as Level 2 in the fair value hierarchy. While our Subprime non-agency securities are valued using the same process with similar inputs, a significant amount of inputs have been determined to be unobservable due to relatively low levels of market activity and a wider range of external fair value estimates. Accordingly, our Subprime non-agency securities are classified as Level 3 in the fair value hierarchy.

The significant unobservable inputs used by external pricing sources in the fair value measurement of our Level 3 non-agency securities include assumptions for underlying loan collateral default rates and loss severities in the event of default, as well as discount rates. As discussed above, we review the various third-party fair value estimates used to determine the fair

value of our securities by performing procedures to validate their reasonableness. In reviewing the fair values of our Level 3 non-agency securities, we use internal models and our own estimates of cumulative defaults and loss severities on the loans underlying our Subprime securities to estimate the range of discount rates implied by third-party pricing. The following table presents the range of our estimates of cumulative default and loss severities, together with the discount rates implicit in our Level 3 non-agency security fair values totaling $73.7 million as of September 30, 2012 :



Unobservable Level 3 Input	Minimum	Weighted Average	Maximum
Cumulative default percentage	63%	69%	71%
Loss severity	48%	66%	72%
Discount rate	4.2%	6.1%	8.2%

An increase in any one of these individual inputs in isolation would likely result in a decrease in fair value measurement. However, given our use of a market-based approach to estimating fair values and the interrelationship between loss estimates and the discount rate, overall Subprime non-agency security market conditions would likely have a more significant impact on our Level 3 fair values than changes in any one unobservable input.

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

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

The fair value of our obligation to return securities borrowed under reverse repurchase agreements is based upon the value of the underlying borrowed U.S. Treasury securities as of the reporting date. Our obligation to return the borrowed securities is classified as Level 1 in the fair value hierarchy.

Note 9. Stockholders’ Equity

Equity Offerings

During the nine months ended September 30, 2012 , we issued the following shares of common stock (amounts in thousands except per share amounts):



Public Offering Date	Price Received Per Share ⁽¹⁾		Number of Shares	Net Proceeds ⁽²⁾
March 2012 ⁽³⁾	$	21.55	13,600	$	292,797
May 2012	$	22.74	12,650	$	287,176

——————

⁽¹⁾ Price received per share is net of underwriters' discount, if applicable.

⁽²⁾ Net Proceeds are net of any underwriters' discount and other offering costs.

⁽³⁾ Includes 1.6 million shares related to the over-allotment which was exercised in April 2012.

Dividends

During the nine months ended September 30, 2012 , we declared dividends of $2.70 per share.

Note 10. Subsequent Events

In October 2012, our Board of Directors adopted a plan that may provide for stock repurchases of up to $50 million of our outstanding shares of common stock through December 31, 2013. Shares of our common stock may be purchased in the open

market, including through block purchases, or through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. We intend to repurchase shares only when the purchase price is less than our estimate of our current net asset value per share of our common stock. Generally, when we repurchase our common stock at a discount to our net asset value, the net asset value of our remaining shares of common stock outstanding increases. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

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

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


•	Executive Overview


•	Financial Condition


•	Results of Operations


•	Liquidity and Capital Resources


•	Forward-Looking Statements

EXECUTIVE OVERVIEW

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

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

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

Our Investment Strategy

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


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


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


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


•	preserve our net asset value within reasonable bands;


•	provide regular quarterly distributions to our stockholders;


•	qualify as a REIT; and


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

The size and composition of our investment portfolio depends on investment strategies implemented by our Manager, the availability of investment capital and overall market conditions, including the availability of attractively priced investments and suitable financing to appropriately leverage our investment portfolio. Market conditions are influenced by, among other things,

current levels of and expectations for future levels of, interest rates, mortgage prepayments, market liquidity, housing prices, unemployment rates, general economic conditions, government participation in the mortgage market, evolving regulations or legal settlements that impact servicing practices or other mortgage related activities.

Trends and Recent Market Impacts

On September 13, 2012, the Federal Reserve announced their third quantitative easing program, commonly known as QE3, and extended their guidance to keep the federal funds rate at "exceptional low levels" through at least mid-2015. QE3 entails large-scale purchases of agency mortgage-backed securities ("MBS") at the pace of $40 billion per month in addition to the Federal Reserve's existing policy of reinvesting principal payments from its holdings of agency MBS into new agency MBS purchases. The program is open-ended in nature, and is intended to put downward pressure on longer-term interest rates, support mortgage markets, and help make the broader financial conditions more accommodative. The Federal Reserve plans to continue their purchases of agency MBS and employ other policy tools, as appropriate, until they foresee substantial improvement in the outlook for the U.S. labor market.

The Federal Reserve's purchases will likely be concentrated in newly-issued, fixed-rate agency MBS (i.e., the part of the mortgage market with the greatest impact on mortgage rates offered to borrowers). We expect that the combined total purchases of agency MBS by the Federal Reserve will be $65 billion to $75 billion per month, which will likely be more than 50% of the average gross agency MBS new issue volume during the fourth quarter of 2012. As of September 30, 2012, prices across the agency MBS spectrum had generally increased following the Federal Reserve's QE3 announcement, with the lowest coupon, 30-year and 15-year fixed-rate agency MBS outperforming higher coupon agency MBS. The table below summarizes interest rates and prices of generic fixed-rate agency MBS for the nine months ended September 30, 2012 .



Interest Rate/Security ⁽¹⁾	September 30, 2012			June 30, 2012			March 31, 2012			December 31, 2011			September 30, 2012 Versus June 30, 2012			September 30, 2012 Versus December 31, 2011
LIBOR:
1-Month	0.21		%	0.25		%	0.24		%	0.30		%	(0.04		)	(0.09		)
3-Month	0.36		%	0.46		%	0.47		%	0.58		%	(0.10		)	(0.22		)
U.S. Treasury Securities:
2-Year U.S. Treasury	0.23		%	0.30		%	0.33		%	0.24		%	(0.07		)	(0.01		)
5-Year U.S. Treasury	0.63		%	0.72		%	1.04		%	0.83		%	(0.09		)	(0.2		)
10-Year U.S. Treasury	1.63		%	1.65		%	2.21		%	1.88		%	(0.02		)	(0.25		)
Interest Rate Swap Rates:
2-Year Swap Rate	0.37		%	0.55		%	0.58		%	0.73		%	(0.18		)	(0.36		)
5-Year Swap Rate	0.76		%	0.97		%	1.27		%	1.22		%	(0.21		)	(0.46		)
10-Year Swap Rate	1.70		%	1.78		%	2.29		%	2.03		%	(0.08		)	(0.33		)
30-Year Fixed Rate MBS Price:
3.5%	$	107.25		$	105.11		$	102.72		$	102.88		$	2.14		$	4.37
4.0%	$	107.75		$	106.44		$	104.86		$	105.03		$	1.31		$	2.72
4.5%	$	108.25		$	107.28		$	106.38		$	106.42		$	0.97		$	1.83
15-Year Fixed Rate MBS Price:
2.5%	$	105.13		$	103.09		$	101.42		$	101.34		$	2.04		$	3.79
3.0%	$	106.00		$	104.77		$	103.56		$	103.28		$	1.23		$	2.72
3.5%	$	106.41		$	105.66		$	104.92		$	104.58		$	0.75		$	1.83

________________________


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

We expect during periods in which the Federal Reserve purchases significant volumes of mortgages, yields on agency MBS securities will be lower than yields would have been absent QE3 and that refinancing volumes will be higher than volumes would have been absent QE3. Since returns on agency MBS are highly sensitive to prepayment speeds, we have positioned our investment portfolio towards agency MBS that we believe have favorable prepayment attributes. As of September 30, 2012, 73% of our fixed-rate agency investment portfolio was comprised of agency securities backed by lower loan balance mortgages (pools backed by original loan balances of up to $150,000) and loans originated under the U.S. Government sponsored Home Affordable Refinance Program ("HARP") (pools backed by 100% refinance loans with original loan-to-values of ≥ 80%), which we believe have a lower risk of prepayment relative to generic agency securities. The remainder of our agency portfolio as of September 30, 2012 was primarily comprised of low coupon, new issuance fixed-rate agency securities. (See Financial Condition below for further details of our portfolio composition as of September 30, 2012 ) .

The following table illustrates the impact of favorable prepayment characteristics on constant prepayment rates (“CPR”), comparing the actual annualized monthly CPR for our agency portfolio to the Fannie Mae 2011 30-year 4.0% fixed-rate TBA for the nine months ended September 30, 2012.



Annualized Monthly Actual Constant Prepayment Rates	January 2012	February 2012	March 2012	April 2012	May 2012	June 2012	July 2012	August 2012	September 2012
Agency securities ⁽¹⁾	4%	6%	7%	5%	5%	5%	7%	8%	7%
Fannie Mae 2011 30-year 4.0% fixed rate universe ⁽²⁾	11%	13%	19%	21%	14%	15%	21%	29%	35%

_______________________


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


⁽²⁾	Source: JP Morgan

The non-agency market environment showed significant signs of improvement with broad market participation during the nine months ended September 30, 2012 , as compared to the end of 2011. However, trading volumes remain below those experienced during the first half of 2011, and non-agency security liquidity remains a concern. While market sentiment concerning the general housing market has improved, we believe that any housing recovery will be uneven across the country and are cognizant that other events, such as additional U.S. regulatory actions or further economic weakness in Europe, could have a material negative impact on the market for non-agency securities. As such, we will continue our selective approach to increasing our non-agency portfolio.

Summary of Critical Accounting Estimates

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

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

FINANCIAL CONDITION

The following analysis of our financial condition should be read in conjunction with our interim consolidated financial statements and the notes thereto. The table below presents our condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011 (dollars in thousands, except per share amounts):



	September 30, 2012		December 31, 2011
Balance Sheet Data:
Total assets	$	7,546,299	$	2,170,322
Repurchase agreements	$	6,117,783	$	1,706,281
Total liabilities	$	6,631,959	$	1,961,521
Total stockholders’ equity	$	914,340	$	208,801
Net asset value per common share ⁽¹⁾	$	25.21	$	20.87

————————


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

The following tables summarize certain characteristics of our investment portfolio by issuer and investment category as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield ⁽¹⁾
Fannie Mae	$	5,376,865	$	5,224,646	$	4,970,551	3.45	%	2.40	%
Freddie Mac	960,373		933,781		885,768		3.60	%	2.61	%
Agency total / weighted average	6,337,238		6,158,427		5,856,319		3.47	%	2.43	%
Non-agency securities ⁽²⁾	552,787		517,896		879,042		1.81	%	7.24	%
Total / weighted average	$	6,890,025	$	6,676,323	$	6,735,361	3.26	%	2.80	%

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

————————


⁽¹⁾	The weighted average agency security yield incorporates an average future constant prepayment rate assumption of 12.7% and 11.5% as of September 30, 2012 and December 31, 2011 based on forward rates. For non-agency securities, the weighted average yield incorporates expected credit losses.


⁽²⁾	As of September 30, 2012 , there are no non-agency securities accounted for as Linked Transactions.

The following tables summarize certain characteristics of our agency securities portfolio as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield		Projected CPR
HARP ⁽¹⁾	$	1,869,072	$	1,808,871	$	1,709,347	3.74	%	2.74	%	10	%
Lower Loan Balance ⁽²⁾	2,781,484		2,699,337		2,553,883		3.69	%	2.59	%	11	%
Other	1,686,682		1,650,220		1,593,088		2.84	%	1.84	%	18	%
Total	$	6,337,238	$	6,158,428	$	5,856,318	3.47	%	2.43	%	13	%



	As of December 31, 2011
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Coupon		Yield		Projected CPR
HARP ⁽¹⁾	$	538,146	$	532,847	$	499,893	4.45	%	3.22	%	12	%
Lower Loan Balance ⁽²⁾	802,579		795,894		755,632		3.83	%	2.69	%	10	%
Other	399,366		397,533		381,535		3.79	%	2.74	%	13	%
Total	$	1,740,091	$	1,726,274	$	1,637,060	4.01	%	2.87	%	11	%

————————


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


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

The following tables summarize certain characteristics of our agency securities portfolio by term and coupon as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Yield		Projected CPR
15-Year
2.5%	$	1,152,375	$	1,129,512	$	1,095,785	1.55	%	18	%
3.0%	280,276		272,157		262,412		2.10	%	12	%
3.5%	364,331		352,713		337,985		2.30	%	15	%
4.0%	340,223		334,249		312,906		2.03	%	16	%
4.5%	23,339		22,698		21,220		2.60	%	14	%
Total	$	2,160,544	$	2,111,329	$	2,030,308	1.83	%	16	%
20-Year
3.5%	$	88,676	$	85,527	$	82,120	2.53	%	14	%
4.0%	9,779		9,441		9,038		2.54	%	21	%
5.0%	4,252		4,310		3,917		2.40	%	17	%
Total	$	102,707	$	99,278	$	95,075	2.52	%	14	%
30-Year
3.5%	$	2,352,965	$	2,288,639	$	2,178,590	2.68	%	10	%
4.0%	1,539,826		1,485,615		1,390,355		2.82	%	11	%
4.5%	129,042		123,311		115,431		3.20	%	12	%
5.0%	52,154		50,256		46,559		3.04	%	17	%
Total	$	4,073,987	$	3,947,821	$	3,730,935	2.75	%	11	%



	As of December 31, 2011
	Fair Value		Amortized Cost Basis		Par Value		Weighted Average
	Fair Value		Amortized Cost Basis		Par Value		Yield		Projected CPR
15-Year
3.0%	$	53,265	$	53,082	$	51,448	2.35	%	8	%
3.5%	345,563		342,475		327,883		2.50	%	10	%
4.0%	245,936		244,080		230,404		2.48	%	13	%
4.5%	25,654		25,524		23,735		2.64	%	12	%
Total	$	670,418	$	665,161	$	633,470	2.48	%	11	%
20-Year
3.5%	$	187,075	$	186,333	$	180,216	2.78	%	8	%
4.0%	61,133		60,679		58,001		2.24	%	26	%
5.0%	54,421		54,427		50,174		2.95	%	15	%
Total	$	302,629	$	301,439	$	288,391	2.70	%	13	%
30-Year
4.0%	318,918		316,231		301,996		3.21	%	10	%
4.5%	328,106		324,686		303,853		3.33	%	11	%
5.0%	120,020		118,757		109,350		3.25	%	16	%
Total	$	767,044	$	759,674	$	715,199	3.27	%	11	%

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

In determining the estimated weighted average years to maturity and yields on our agency MBS, we estimate the percentage of outstanding principal that is prepaid over a period of time on an annualized basis, or CPR, based on assumptions for each security using a combination of a third-party service, market data and internal models. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, mortgage rates, current mortgage rates of the outstanding loans, loan age, volatility and other factors. We have estimated that the CPR over the remaining life of our aggregate agency investment portfolio is 12.7% and 11.5% as of September 30, 2012 and December 31, 2011 , respectively. Based on these prepayment assumptions, the weighted average expected life of our agency securities was 6.0 years and 5.9 years as of September 30, 2012 and December 31, 2011 , respectively. We amortize or accrete premiums and discounts associated with purchases of our agency MBS into interest income over the estimated life of our securities based on projected CPRs, using the effective yield method. Since the weighted average cost basis of our agency MBS portfolio was 105.2% of par value as of September 30, 2012 , slower actual and projected prepayments can have a meaningful positive impact on our asset yields, while faster actual or projected prepayments can have a meaningful negative impact on our asset yields.

The following table summarizes our agency securities at fair value, according to their estimated weighted average life classifications as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012						As of December 31, 2011
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Yield
Greater than one year and less than or equal to three years	$	—	$	—	—	%	$	55,582	$	55,260	2.17	%
Greater than three years and less than or equal to five years	2,366,106		2,308,621		1.92	%	425,251		422,406		2.49	%
Greater than five years and less than or equal to 10 years	3,949,518		3,828,590		2.74	%	1,259,258		1,248,608		3.02	%
Greater than 10 years	21,614		21,216		2.75	%	—		—		—	%
Total / weighted average	$	6,337,238	$	6,158,427	2.43	%	$	1,740,091	$	1,726,274	2.87	%

Non-agency MBS yields are based on our estimate of the timing and amount of future cash flows and our cost basis. Our cash flow estimates for these investments are based on our observations of current information and events and include assumptions related to interest rates, prepayment rates and the timing and amount of credit losses and other factors. The following table summarizes our non-agency securities (including those underlying Linked Transactions) at fair value, by their estimated weighted average life classifications as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012						As of December 31, 2011
Weighted Average Life	Fair Value		Amortized Cost		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Yield
Less than or equal to five years	$	77,542	$	74,166	6.46	%	$	12,394	$	12,423	6.25	%
Greater than five years and less than or equal to seven years	248,776		233,890		6.75	%	63,360		65,621		7.64	%
Greater than seven years	226,469		209,839		8.07	%	—		—		—	%
Total/ weighted average ⁽¹⁾	$	552,787	$	517,895	7.24	%	$	75,754	$	78,044	7.42	%

————————


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

Our non-agency securities are subject to risk of loss with regard to principal and interest payments and as of September 30, 2012 and December 31, 2011 have generally either been assigned below investment grade ratings by rating agencies, or have not been rated. We evaluate each investment based on the characteristics of the underlying collateral and securitization structure, rather than relying on rating agencies. Our non-agency securities (including non-agency securities underlying Linked Transactions) had weighted average credit enhancements of 7% and 14% as of September 30, 2012 and December 31, 2011 , respectively. These securities were collateralized by mortgages with original weighted average amortized loan to value ratios ("LTV's") of 73% and 71% as of September 30, 2012 and December 31, 2011 , respectively. However, as the home values associated with these mortgages have generally experienced significant price declines since origination and the LTV's are calculated based on the original home values, we believe that current market-based LTV's would be significantly higher. Additionally, 24% and 25% of the mortgages underlying these securities as of September 30, 2012 and December 31, 2011 , respectively, are either 60 or more days delinquent, undergoing foreclosure or bankruptcy processes, or held as real estate owned by the trusts.

As of September 30, 2012 and December 31, 2011 , we had repurchase agreements with 26 and 22 financial institutions, respectively. In addition, less than 7% and 6% of our equity at risk was with any one counterparty, with the top five counterparties representing less than 23% and 21% of our equity at risk as of September 30, 2012 and December 31, 2011 , respectively. The following tables summarize our borrowings under repurchase arrangements and weighted average interest rates classified by original maturities as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	As of September 30, 2012					As of December 31, 2011
			Weighted Average					Weighted Average
Original Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity	Borrowings Outstanding		Interest Rate		Days to Maturity
Repurchase Agreements
30 days or less	$	304,154	0.68	%	19	$	77,073	0.40	%	10
31 - 60 days	725,974		0.56	%	22	346,201		0.43	%	19
61 - 90 days	1,218,770		0.45	%	42	372,217		0.39	%	31
91 - 180 days	2,882,307		0.51	%	55	774,594		0.34	%	37
Greater than 180 days	986,578		0.51	%	134	136,196		0.48	%	209
Total / Weighted Average	$	6,117,783	0.51	%	60	$	1,706,281	0.38	%	45

Repurchase Agreements Underlying Linked Transactions
30 days or less	$	—				$	9,509	2.04	%	14
31 - 60 days	—					13,397		1.98	%	8
61 - 90 days	—					2,857		2.36	%	18
91 - 180 days	—					10,791		2.07	%	47
Total / Weighted Average	$	—				$	36,554	2.05	%	22

As of September 30, 2012 and December 31, 2011 , we had interest rate swap agreements outstanding where we pay a fixed rate and receive a floating rate based on LIBOR, summarized in the tables below (dollars in thousands):



September 30, 2012
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps ⁽¹⁾	Notional Amount		Fair Value			Fixed Pay Rate		Receive Rate		Maturity (Years)
3 years or less	$	550,000	$	(6,048	)	0.81	%	0.47	%	2.5
Greater than 3 years and less than 5 years	940,000		(30,889		)	1.32	%	0.47	%	4.4
Greater than 5 years and less than 7 years	875,000		(18,500		)	1.30	%	0.42	%	6.1
Greater than 7 years	575,000		(16,115		)	1.90	%	0.46	%	9.7
Total / Weighted Average	$	2,940,000	$	(71,552	)	1.33	%	0.45	%	5.6



December 31, 2011
	Notional Amount		Fair Value			Weighted Average
Current Maturity Date for Interest Rate Swaps ⁽²⁾	Notional Amount		Fair Value			Fixed Pay Rate		Receive Rate		Maturity (Years)
3 years or less	$	100,000	$	217		0.64	%	0.50	%	2.7
Greater than 3 years and less than 5 years	700,000		(2,584		)	0.98	%	0.48	%	3.8
Greater than 5 years and less than 7 years	25,000		(257		)	1.73	%	0.47	%	6.8
Greater than 7 years	50,000		(762		)	2.07	%	0.53	%	8.5
Total / Weighted Average	$	875,000	$	(3,386	)	1.03	%	0.48	%	4.0

————————


⁽¹⁾	Includes swaps with an aggregate notional of $325.0 million with deferred start dates ranging from two to three months from September 30, 2012 .


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

The following table presents certain information about our interest rate swaption agreements as of September 30, 2012 and December 31, 2011 (dollars in thousands):



	Option					Underlying Swap
	Cost		Fair Value		Weighted Average Years to Expiration	Notional Amount		Pay Rate		Weighted Average Term (Years)
As of September 30, 2012	$	9,455	$	4,607	1.8	$	500,000	3.43	%	8.5
As of December 31, 2011	$	884	$	828	0.8	$	50,000	2.81	%	10.3

RESULTS OF OPERATIONS

The following analysis of our results of operations should be read in conjunction with our interim consolidated financial statements and the notes thereto. The table below presents our consolidated statement of operations for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 (dollars in thousands, except per share amounts):



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Interest income:
Agency securities	$	37,311		$	82,938		$	4,039
Non-agency securities ⁽¹⁾	6,949			12,518			65
Other	95			196			24
Interest expense	(7,329		)	(13,779		)	(383		)
Net interest income	37,026			81,873			3,745

Other gains (losses):
Realized gain on agency securities, net	23,566			46,633			2,392
Realized gain on non-agency securities, net	952			952			—
Realized loss on periodic settlements of interest rate swaps, net	(6,855		)	(11,711		)	(577		)
Realized loss on other derivatives and securities, net	(29,132		)	(45,957		)	(3,342		)
Unrealized gain on agency securities, net	95,477			164,994			1,970
Unrealized gain (loss) on non-agency securities, net	33,118			34,506			(747		)
Unrealized gain (loss) and net interest income on Linked Transactions, net	—			3,384			(813		)
Unrealized gain (loss) on other derivatives and securities, net	(3,118		)	(64,300		)	819
Total other gain (loss), net	114,008			128,501			(298		)

Expenses:
Management fees	2,945			6,633			431
General and administrative expenses	1,415			3,509			550
Total expenses	4,360			10,142			981

Income before excise tax	146,674			200,232			2,466
Excise tax	432			441			—
Net income	$	146,242		$	199,791		$	2,466

Net income per common share—basic and diluted	$	4.03		$	7.86		$	0.25

————————

⁽¹⁾

Interest income from non-agency securities of $12.5 million for the nine months ended September 30, 2012 excludes $0.9 million related to Linked Transactions, which is included in unrealized loss and net interest income on Linked Transactions, net on the consolidated statement of operations. Interest income from non-agency securities of $0.1 million from the commencement of operations on August 9, 2011 through September 30, 2011 excludes $0.2 million related to Linked Transactions, which is included in unrealized loss and net interest income on Linked Transactions, net on the consolidated statement of operations.

The table below presents the weighted average yield and coupon for our agency and non-agency securities for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 :



	For the Three Months Ended September 30, 2012				For the Nine Months Ended September 30, 2012				For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
	Yield		Coupon		Yield		Coupon		Yield		Coupon
Agency securities	2.48	%	3.50	%	2.66	%	3.59	%	2.80	%	3.94	%
Non-agency securities	6.95	%	1.74	%	7.12	%	1.61	%	6.41	%	2.44	%
Total	2.76	%	3.32	%	2.91	%	3.40	%	2.86	%	3.86	%

We amortize premiums and discounts associated with agency securities and non-agency securities of high credit quality into interest income over the life of such securities using the effective yield method. The effective yield (or asset yield) on these securities is based on actual CPRs realized for individual securities in our investment portfolio through the reporting date and assumes a CPR over the remaining projected life of our aggregate investment portfolio. We estimate projected CPRs on these securities using a third-party service and market data. We update our estimates on at least a quarterly basis, and more frequently when economic or market conditions warrant. The effective yield on these securities is adjusted retrospectively for differences between actual and projected CPR estimates or for changes in our projected CPR estimates. Our projected CPR estimate for our agency securities was 12.7% as of September 30, 2012 compared to 10.0% as of September 30, 2011. The actual CPR realized for individual agency securities in our investment portfolio was approximately 6.7% for the three months ended September 30, 2012 and 4.0% from the commencement of operations on August 9, 2011 through September 30, 2011 .

Interest income from our agency securities is net of premium amortization expense of $12.8 million and $23.8 million for the three and nine months ended September 30, 2012 , respectively, and $1.3 million from the commencement of operations on August 9, 2011 through September 30, 2011 . As of September 30, 2012 and December 31, 2011 , the amortized cost basis of our agency investments was 105.2% and 105.4% of par value, and the net unamortized premium balance of our aggregate agency portfolio was $302.1 million and $89.2 million , respectively.

Interest income from our non-agency securities includes discount accretion of $4.1 million and $8.4 million for the three and nine months ended September 30, 2012 , respectively, and $0.1 million from the commencement of operations on August 9, 2011 through September 30, 2011 .

Leverage

Our leverage was 6.7x and 8.2x our stockholders’ equity as of September 30, 2012 and December 31, 2011 , respectively. When adjusted for the net payables and receivables for unsettled securities and repurchase agreements underlying Linked Transactions, our leverage ratio was 6.6x and 8.0x our stockholders’ equity as of September 30, 2012 and December 31, 2011 , respectively. Our actual leverage will vary from time to time based on various factors, including our Manager’s opinion of the level of risk of our assets and liabilities, composition of our investment portfolio, our liquidity position, our level of unused borrowing capacity, over-collateralization levels required by lenders when we pledge securities to secure our borrowings and the current market value of our investment portfolio. In addition, certain of our master repurchase agreements and master swap agreements contain a restriction that prohibits our leverage from exceeding certain levels ranging from 10 to 12 times the amount of our stockholders' equity.

The table below presents our quarterly average and quarter end repurchase agreement balances outstanding and average leverage ratios for the three months ended September 30, 2012 , June 30, 2012, March, 31, 2012 and December 31, 2011 (dollars in thousands):



	Repurchase Agreements ⁽¹⁾						Average Daily Interest Rate on Amounts Outstanding		Average Interest Rate on Ending Amount Outstanding		Average Leverage ⁽²⁾	Leverage as of Period End ⁽³⁾	Adjusted Leverage as of Period End ⁽⁴⁾
Quarter Ended	Average Daily Amount Outstanding		Maximum Daily Amount Outstanding		Ending Amount Outstanding		Average Daily Interest Rate on Amounts Outstanding		Average Interest Rate on Ending Amount Outstanding		Average Leverage ⁽²⁾	Leverage as of Period End ⁽³⁾	Adjusted Leverage as of Period End ⁽⁴⁾
September 30, 2012	$	5,834,747	$	6,117,783	$	6,117,783	0.50	%	0.51	%	6.9x	6.7x	6.6x
June 30, 2012	$	4,211,603	$	5,487,628	$	5,399,160	0.46	%	0.47	%	6.5x	6.7x	6.8x
March 31, 2012	$	1,894,945	$	3,602,964	$	3,602,964	0.39	%	0.41	%	6.8x	7.4x	7.6x
December 31, 2011	$	1,516,506	$	1,743,886	$	1,742,835	0.40	%	0.42	%	7.5x	8.2x	8.0x

————————


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


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


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


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

Our leverage included in the table above does not include the impact of TBA positions, which have the effect of increasing or decreasing our "at risk" leverage. A net long position increases our at risk leverage, while a net short position reduces our at risk leverage. As of September 30, 2012 , we had a net long TBA position of $111.0 million notional value and at risk leverage of 6.8 x, net of unsettled securities.

Interest Expense and Cost of Funds

Interest expense of $7.3 million and $13.8 million for the three and nine months ended September 30, 2012 , respectively, and $0.4 million from the commencement of operations on August 9, 2011 through September 30, 2011 was comprised of interest expense on our repurchase agreements. In addition, we recorded $6.9 million and $11.7 million of expense related to our interest rate swaps for the three and nine months ended September 30, 2012 , respectively, and $0.6 million from the commencement of operations on August 9, 2011 through September 30, 2011 which is included in realized loss on periodic settlements of interest rate swaps, net, on our consolidated statements of operations.

For the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 , our average repurchase agreement balance outstanding including repurchase agreements underlying Linked Transactions was $5.8 billion , $4.0 billion and $942.3 million , respectively, with an average interest rate of 0.50% , 0.44% and 0.31% , respectively. Including the net impact of interest rate swaps, the cost of funds for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 was 0.96% , 0.86% and 0.73% , respectively.

Realized Gain on Securities, Net

The following table is a summary of our net realized gains and losses on securities for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 (dollars in thousands):



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Proceeds from agency securities sold	$	1,266,425		$	2,639,053		$	308,897
Increase (decrease) in receivable for agency securities sold	(328,216		)	(165,241		)	110,127
Less agency securities sold, at cost	(914,643		)	(2,427,179		)	(416,632		)
Net realized gains on sale of agency securities	$	23,566		$	46,633		$	2,392

Gross realized gains on sale of agency securities	$	31,223		$	54,309		$	2,481
Gross realized losses on sale of agency securities	(7,657		)	(7,676		)	(89		)
Net realized gains on sale of agency securities	$	23,566		$	46,633		$	2,392

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

Gain (Loss) on Derivatives and Other Securities, Net

The following table is a summary of our realized and unrealized loss on derivatives and other securities, net, for the three and nine months ended September 30, 2012 and from the commencement of operations on August 9, 2011 through September 30, 2011 (dollars in thousands):



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Realized loss on periodic settlements of interest rate swaps, net	$	(6,855	)	$	(11,711	)	$	(577	)
Realized gain (loss) on other derivatives and securities:
Interest rate swaps	$	(18,430	)	$	(18,430	)	$	—
Interest rate swaptions	(1,454		)	(1,725		)	—
TBA securities	(2,903		)	(19,250		)	(1,844		)
U.S Treasury securities sold short	(6,567		)	(6,497		)	—
U.S Treasury securities	222			(55		)	(1,498		)
Total realized loss on other derivatives and securities, net	$	(29,132	)	$	(45,957	)	$	(3,342	)
Unrealized gain (loss) on other derivatives and securities:
TBA securities	$	7,598		$	6,848		$	521
Interest rate swaps	(8,996		)	(62,586		)	336
Interest rate swaptions	137			(4,792		)
U.S Treasury securities sold short	(1,857		)	(3,770		)	(38		)
Total unrealized gain (loss) on other derivatives and securities, net	$	(3,118	)	$	(64,300	)	$	819
Unrealized gain (loss) and net interest income on Linked Transactions, net
Unrealized gain (loss) on Linked Transactions	$	—		$	2,675		$	(969	)
Interest income on non-agency securities within Linked Transactions	—			892			196
Interest expense on repurchase agreements underlying Linked Transactions	—			(183		)	(40		)
Total unrealized gain (loss) and net interest income on Linked Transactions, net	$	—		$	3,384		$	(813	)

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

Management Fees and General and Administrative Expenses

We pay our Manager a base management fee payable monthly in arrears in an amount equal to one twelfth of 1.50% of our Equity. Our Equity is defined as our month-end GAAP stockholders’ equity, adjusted to exclude the effect of any unrealized gains or losses included in retained earnings as computed in accordance with GAAP. There is no incentive compensation payable to our Manager pursuant to the management agreement. We incurred management fees of $2.9 million and $6.6 million for the three and nine months ended September 30, 2012 , respectively, and $0.4 million from the commencement of operations on August 9, 2011 through September 30, 2011 .

General and administrative expenses were $1.4 million and $3.5 million for the three and nine months ended September 30, 2012 , respectively, and $0.6 million from the commencement of operations on August 9, 2011 through September 30, 2011 . Our general and administrative expenses primarily consist of prime brokerage fees, information technology costs, research and data service fees, audit fees, Board of Directors fees and insurance expenses.

Our general and administrative expenses as a percentage of our average stockholders’ equity on an annualized basis was 2.0% and 2.3% for the three and nine months ended September 30, 2012 , respectively, and 3.4% from the commencement of operations on August 9, 2011 through September 30, 2011 .

Dividends and Income Taxes

We had estimated taxable income of $48.1 million and $91.3 million (or $1.33 and $3.59 per common share) for the three and nine months ended September 30, 2012 , respectively, and $12.4 million (or $1.24 per common share) for the period from the commencement of operations on August 9, 2011 through September 30, 2011 .

As a REIT, we are required to distribute annually 90% of our taxable income to maintain our status as a REIT and all of our taxable income to avoid Federal and state corporate income taxes. We can treat dividends declared by September 15 and paid by December 31 as having been a distribution of our taxable income for our prior tax year ("spill-back provision"). Income as determined under GAAP differs from income as determined under tax rules because of both temporary and permanent differences in income and expense recognition. The primary differences are (i) unrealized gains and losses associated with interest rate swaps and other derivatives and securities marked-to-market in current income for GAAP purposes, but excluded from taxable income until realized or settled, (ii) temporary differences related to the amortization of premiums paid on investments, (iii) timing differences in the recognition of certain realized gains and losses and (iv) permanent differences for excise tax expense. Furthermore, our estimated taxable income is subject to potential adjustments up to the time of filing our appropriate tax returns, which occurs after the end of our fiscal year. The following is a reconciliation of our GAAP net income to our estimated taxable income for the three and nine months ended September 30, 2012 and for the period from the commencement of operations on August 9, 2011 through September 30, 2011 .



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Net income	$	146,242		$	199,791		$	19,669
Book to tax differences:
Unrealized (gains) and losses, net
Agency securities	(95,477		)	(164,994		)	(13,817		)
Non-agency securities	(33,118		)	(34,506		)	433
Non-agency securities underlying Linked Transactions	—			(2,676		)	1,858
Derivatives and other securities	3,118			64,300			2,405
Premium amortization, net	4,104			7,045			1,340
Realized (gains) losses, net	22,846			21,919			486
Other	373			416			54
Total book to tax difference	(98,154		)	(108,496		)	(7,241		)
Estimated taxable income	$	48,088		$	91,295		$	12,428

Weighted average number of common shares outstanding - basic and diluted	36,262			25,411			10,006

Net estimated taxable income per common share	$1.33			$3.59			$1.24

We declared dividends of $0.90 and $2.70 per share for the three and nine months ended September 30, 2012 , respectively, and $0.20 per share for the period from the commencement of operations on August 9, 2011 through September 30, 2011 . As of September 30, 2012 , we have distributed all of our taxable income for the 2011 tax year. We expect to distribute our remaining fiscal year 2012 taxable income during fiscal year 2012 and 2013, subject to the spill-back provision, so that we will not be subject to Federal or state corporate income tax. However, as a REIT, we are still subject to a nondeductible Federal excise tax of 4% to the extent that the sum of (i) 85% of our ordinary taxable income, (ii) 95% of our capital gains and (iii) any undistributed taxable income from the prior year exceeds our distributions paid in such year. As of September 30, 2012 , we had an estimated $19.4 million (or $0.54 per share) of undistributed taxable income related to our 2012 tax year, net of the dividend payable as of September 30, 2012 of $ 32.6 million .

Other Data



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Average agency securities, at cost	$	6,011,801		$	4,157,117		991,237
Average agency securities, at par	$	5,726,255		$	3,968,074		937,043

Average non-agency securities, at cost	$	399,704		$	250,984		28,020
Average non-agency securities, at par	$	664,628		$	412,127		46,406

Average total assets, at fair value	$	7,527,346		$	5,007,216		1,227,849
Average repurchase agreements	$	5,834,747		$	3,993,233		942,335
Average stockholders' equity	$	851,093		$	585,155		199,229

Average coupon ⁽¹⁾	3.32		%	3.40		%	4.13		%
Average asset yield ⁽²⁾	2.76		%	2.91		%	2.83		%
Average cost of funds ⁽³⁾	0.96		%	0.86		%	0.73		%
Average net interest rate spread ⁽⁴⁾	1.80		%	2.05		%	2.13		%
Annualized economic return on equity	72.4		%	45.0		%	8.11		%
Leverage (average during the period) ⁽⁵⁾	6.9x			6.8x			4.7x
Leverage (as of period end) ⁽⁶⁾	6.6x			6.6x			7.8x
Expenses % of average total assets	0.23		%	0.27		%	0.55		%
Expenses % of average stockholders' equity	2.03		%	2.31		%	3.39		%
Dividends declared per common share	$	0.90		$	2.70		$	0.20
Net return on average stockholders' equity	68.2		%	45.5		%	8.50		%

————————


⁽¹⁾	Weighted average coupon for the period was calculated by dividing the Company's total stated coupon on securities by the Company's daily weighted average securities held.


⁽²⁾	Weighted average asset yield for the period was calculated by dividing the Company's total interest income on securities including interest income of securities classified as Linked Transactions on the consolidated statement of operations by the Company's daily weighted average securities held including securities classified as Linked Transactions on the consolidated balance sheet.

⁽³⁾

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


⁽⁴⁾	Average net interest rate spread for the period was calculated by subtracting the Company's weighted average cost of funds from the Company's weighted average asset yield.


⁽⁵⁾	Leverage during the period was calculated by dividing the Company's daily weighted average repurchase agreements (including those related to Linked Transactions), for the period by the Company's average month-ended stockholders' equity for the period.


⁽⁶⁾	Leverage at period end was calculated by dividing the sum of the amount outstanding under the Company's repurchase agreements, amount outstanding under repurchase agreements recorded as Linked Transactions and the net receivable/payable for unsettled securities at period end by the Company's stockholders' equity at period end.

Net Spread Income

GAAP interest income does not include interest earned on non-agency securities underlying our Linked Transactions, and GAAP interest expense does not include either interest related to repurchase agreements underlying our Linked Transactions, or periodic settlements associated with undesignated interest rate swaps. Interest income and expense related to Linked Transactions is reported within unrealized gain and net interest income on Linked Transactions, net and periodic interest settlements associated with undesignated interest rate swaps are reported in realized loss on periodic settlements of interest rate swaps, net on our consolidated statement of operations. As we believe that these items are beneficial to the understanding of our investment performance, we provide a non-GAAP measure called adjusted net interest income, which is comprised of net

interest income plus the net interest income related to Linked Transactions, less net periodic settlements of interest rate swaps. Additionally, we present net spread income as a measure of our operating performance. Net spread income is comprised of adjusted net interest income, less total operating expenses. Net spread income excludes all unrealized gains or losses due to changes in fair value, realized gains or losses on sales of securities, realized losses associated with derivative instruments and income taxes. Net spread income does not include any impact from other hedging activities, such as the use of swaptions, U.S Treasuries and TBA positions.

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



	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2012			For the Period from August 9, 2011 (date operations commenced) through September 30, 2011
Interest income:
Agency securities	$	37,311		$	82,938		$	4,039
Non-agency securities and other	7,044			12,714			89
Interest expense	(7,329		)	(13,779		)	(383		)
Net interest income	37,026			81,873			3,745
Net interest income on non-agency securities underlying Linked Transactions	—			708			156
Realized loss on periodic settlements of interest rate swaps, net	(6,855		)	(11,711		)	(577		)
Adjusted net interest income	30,171			70,870			3,324
Operating expenses	(4,360		)	(10,142		)	(981		)
Net spread income	$	25,811		$	60,728		$	2,343

Weighted average number of common shares outstanding - basic and diluted	36,262			25,411			10,006

Net spread income per common share – basic and diluted	$	0.71		$	2.39		$	0.23

LIQUIDITY AND CAPITAL RESOURCES

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

Equity Capital

To the extent we raise additional equity capital through follow-on equity offerings, we currently anticipate using cash proceeds from such transactions to purchase additional investment securities, to make scheduled payments of principal and interest on our repurchase agreements and for other general corporate purposes. There can be no assurance, however, that we will be able to raise additional equity capital at any particular time or on any particular terms.

net asset value per share of our common stock. Generally, when we repurchase our common stock at a discount to our net asset value, the net asset value of our remaining shares of common stock outstanding increases. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with SEC Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

Common Stock Offerings

During the nine months ended September 30, 2012 , we completed two follow-on public offerings of shares of our common stock summarized in the table below (in thousands, except per share data):



Offering Date	Share Price		Number of Shares	Proceeds, Net of Offering Costs
March 2012 ⁽¹⁾	$	21.55	13,600	$	292,797
May 2012	$	22.74	12,650	$	287,176

——————

⁽¹⁾ Includes 1.6 million shares related to the over-allotment which was exercised in April 2012.

Debt Capital

As part of our investment strategy, we borrow against our investment portfolio pursuant to master repurchase agreements. We expect that our borrowings pursuant to repurchase transactions under such master repurchase agreements generally will have maturities of less than one year. When adjusted for net payables and receivables for unsettled securities and repurchase agreement financing recorded as Linked Transactions, our leverage ratio was 6.6x and 8.0x the amount of our stockholders’ equity as of September 30, 2012 and December 31, 2011 , respectively. Our cost of borrowings under master repurchase agreements generally corresponds to LIBOR plus or minus a margin. As of September 30, 2012 , we have master repurchase agreements with 26 financial institutions, which are described below. As of September 30, 2012 , borrowings under repurchase arrangements secured by agency and non-agency securities totaled $ 5.9 billion and $ 251.3 million , respectively, with weighted average remaining days to maturity of 60 and 39, respectively. As of September 30, 2012 , we did not have an amount at risk with any counterparty greater than 7% of our equity, with exposure to our top five counterparties representing less than 23% of our equity. The table below includes a summary of our repurchase agreement funding and number of counterparties by region as of September 30, 2012 . Refer to Note 6 to our consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our borrowings under repurchase agreements and weighted average interest rates as of September 30, 2012 .



	As of September 30, 2012
Counterparty Region	Number of Counterparties	Percent of Repurchase Agreement Funding
North America	15	62%
Asia	5	15%
Europe	6	23%
Total	26	100%

Amounts available to be borrowed under our repurchase agreements are dependent upon lender collateral requirements and the lender’s determination of the fair value of the securities pledged as collateral, based on recognized pricing sources agreed to by both parties to the agreement. Collateral fair value can fluctuate with changes in interest rates, credit quality and liquidity conditions within the investment banking, mortgage finance and real estate industries. Our counterparties also apply a "haircut” to the fair value of our pledged collateral, which reflects the underlying risk of the specific collateral and protects our counterparties against a decrease in collateral value, but conversely subjects us to counterparty risk and limits the amount we can borrow against our investment securities. Our master repurchase agreements do not specify the haircut, rather haircuts are determined on an individual repurchase transaction basis. Weighted average counterparty haircuts to the value of our agency securities and non-agency securities held as collateral as of September 30, 2012 , were 5% and 28%, respectively. We did not experience significant volatility in the level of weighted average haircuts required by our lenders for the three months ended September 30, 2012 .

Under our repurchase agreements, we may be required to pledge additional assets to repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such counterparties

demand additional collateral (a margin call), which may take the form of additional securities or cash. Specifically, margin calls would result from a decline in the value of our securities securing our repurchase agreements and prepayments on the mortgages securing such securities. Similarly, if the estimated fair value of our investment securities increases due to changes in interest rates or other factors, counterparties may release collateral back to us. Our repurchase agreements generally provide that the valuations for the securities securing our repurchase agreements are to be obtained from a generally recognized source agreed to by the parties. However, in certain circumstances and under certain of our repurchase agreements our lenders have the sole discretion to determine the value of the securities securing our repurchase agreements. In such instances, our lenders are required to act in good faith in making such valuation determinations. Our repurchase agreements generally provide that in the event of a margin call we must provide additional securities or cash on the same business day that a margin call is made if the lender provides us notice prior to the margin notice deadline on such day.

As of September 30, 2012 , we have met all margin requirements. We had unrestricted cash and cash equivalents of $ 156.3 million and unpledged securities of $ 302.7 million , excluding unsettled purchases of securities, available to meet margin calls on our repurchase agreements and derivative instruments as of September 30, 2012 .

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

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

We use interest rate swap agreements to effectively lock in fixed rates on a portion of our short-term borrowings because longer-term committed borrowings are not available at attractive terms. Refer to Note 7 to our consolidated financial statements in this Quarterly Report on Form 10-Q for further details regarding our outstanding interest rate swaps as of September 30, 2012 and the related activity for the period ended September 30, 2012 .

Asset Sales and TBA Eligible Securities

We maintain a portfolio of highly liquid agency MBS securities. We may sell our securities through the TBA market by delivering securities into TBA contracts for the sale of securities, subject to "good delivery" provisions promulgated by the Securities Industry and Financial Markets Association ("SIFMA"). We may alternatively sell securities that have more unique attributes on a specified basis when such securities trade at a premium over generic TBA securities or if the securities are not otherwise eligible for TBA delivery. Since the TBA market is the second most liquid market (second to the U.S. Treasury market), maintaining a significant level of securities eligible for TBA delivery enhances our liquidity profile and provides price support for our TBA eligible securities in a rising interest rate scenario at or above generic TBA prices. As of September 30, 2012 , approximately 96% of our agency MBS portfolio was eligible for TBA delivery.

Off-Balance Sheet Arrangements

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

FORWARD-LOOKING STATEMENTS

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

management strategies, the impact of leverage, liquidity of secondary markets and credit markets, increases in costs and other general competitive factors. They also include, among other things, statements concerning anticipated revenues, income or loss, dividends, capital structure, or other financial terms, as well as statements regarding subjects that are forward-looking by their nature, such as:


•	our business and financing strategy;


•	our ability to obtain future financing arrangements;


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


•	our projected operating results;


•	market and industry trends;


•	estimates relating to our future dividends;


•	our hedging activities;


•	interest rates; and


•	the impact of technology on our operations and business.

The forward-looking statements are based on our beliefs, assumptions, and expectations of our future performance, taking into account the information currently available to us. These beliefs, assumptions, and expectations may change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity, and results of operations may vary materially from those expressed in our forward looking statements. You should carefully consider these risks when you make a decision concerning an investment in our common stock, along with the following factors, among others, that may cause actual results to vary from our forward-looking statements:


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


•	our lack of operating history;


•	changes in our business or investment strategy;


•	changes in interest rate spreads or the yield curve;


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


•	availability of qualified personnel;


•	the degree and nature of our competition;


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


•	risks associated with our hedging activities;


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


•	defaults on our investments;


•	changes in GAAP;


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


•	availability of investment opportunities in mortgage-related investments;


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


•	general volatility in capital markets;


•	the adequacy of our cash reserves and working capital;


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


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

When we use words such as "will likely result," "plan," "may," "shall," "believe," "expect," "anticipate," "project," "intend," "estimate," "goal," "objective," or similar expressions, we intend to identify forward-looking statements. We do not

intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statement to reflect new information, future events, or otherwise, except as required under U.S. federal securities laws.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

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

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

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

Primary measures of an instrument's price sensitivity to interest rate fluctuations are its duration and convexity. The duration of our investment portfolio changes with interest rates and tends to increase when rates rise and decrease when rates fall. This "negative convexity" generally increases the interest rate exposure of our investment portfolio by more than what is measured by duration alone.

We estimate the duration and convexity of our portfolio using both a third-party risk management system and market data.

We review the duration estimates from the third-party model and may make adjustments based on our Manager's judgment. These adjustments are intended to, in our Manager's opinion, better reflect the unique characteristics and market trading conventions associated with certain types of securities. These adjustments generally result in shorter durations than what the unadjusted third party model would otherwise produce. Without these adjustments, in rising rate scenarios, the longer unadjusted durations may underestimate price projections on certain securities with slower prepayment characteristics, such as HARP and lower loan balance securities, to a level below those of generic or TBA securities. However, in our Manager's judgment, because these securities are typically deliverable into TBA contracts, the price of these securities is unlikely to drop below the TBA price in rising rate scenarios. The accuracy of the estimated duration of our portfolio and projected agency securities prices depends on our Manager's assumptions and judgments. Our Manager may discontinue making these duration adjustments in the future or may choose to make different adjustments. Other models could produce materially different results.

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

All changes in income and value are measured as percentage changes from the projected net interest income, investment

portfolio value and net asset value at the base interest rate scenario. The base interest rate scenario assumes interest rates as of

September 30, 2012 . Given the low level of interest rates, we also apply a floor of 0% for all anticipated interest rates included in our assumptions, such that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level. However, because estimated prepayment speeds are impacted to a lesser degree by this floor, it is expected that an increase in our prepayment speeds as a result of a hypothetical interest rate decrease would result in an

acceleration of our premium amortization and could result in reinvestment of such prepaid principal into lower yielding assets.

Actual results could differ materially from estimates, especially in the current market environment. To the extent that these estimates or other assumptions do not hold true, which is likely in a period of high price volatility, actual results will likely differ materially from projections and could be larger or smaller than the estimates in the table below. Moreover, if different models were employed in the analysis, materially different projections could result. Lastly, while the tables below reflect the estimated impact of interest rate increases and decreases on a static portfolio, we may from time to time sell any of our agency securities as a part of our overall management of our investment portfolio.



	Percentage Change in Projected
Change in Interest Rate	Net Interest Income ⁽¹⁾		Portfolio Value ^{(2) (3)}		Net Asset Value ^{(2) (4)}
+100 basis points	(12.9	)%	(0.6	)%	(4.4	)%
+50 basis points	(5.1	)%	—	%	(0.1	)%
-50 basis points	—	%	(0.5	)%	(4.1	)%
-100 basis points	(11.8	)%	(1.4	)%	(10.5	)%

————————

⁽¹⁾ Estimated dollar change in net interest income expressed as a percent of net interest income based on asset yields and cost of funds as of September 30,

2012. Includes the effect of periodic interest costs on our interest rate swaps, but excludes costs associated with other supplemental hedges, such as swaptions and short U.S. Treasury or TBA positions. Estimated dollar change in net interest income does not include the one time impact of retroactive "catch-up" premium amortization benefit/cost due to an increase/decrease in the projected CPR. Down rate scenarios assume a floor of 0% for anticipated interest rates.

⁽²⁾ Includes the effect of derivatives.

⁽³⁾ Estimated change in portfolio value expressed as a percent of the total market value of our investment portfolio as of September 30, 2012.


⁽⁴⁾	Estimated change in net asset value expressed as a percent of stockholders' equity as of September 30, 2012.

Prepayment Risk

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

Spread Risk

Our investment securities are reflected at their estimated fair value with unrealized gains and losses reported in earnings. As of September 30, 2012 , the fair value of these securities was $6.9 billion . When the market spread between the yield on our mortgage-backed securities and U.S. Treasury securities or swap rates widens, the value of our net assets could decline, creating what we refer to as spread risk. The spread risk associated with our securities and the resulting fluctuations in fair value of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets such as liquidity changes in required rates of return on different assets, or changes in risk premiums associated with different types of assets.

Liquidity Risk

The primary liquidity risk for us arises from financing long-term assets with shorter-term borrowings in the form of repurchase agreements. Our assets that are pledged to secure repurchase agreements are mortgage-backed securities and cash. As of September 30, 2012 , we had unrestricted cash and cash equivalents of $ 156.3 million and unpledged securities of $ 302.7 million , excluding unsettled purchases of securities, available to meet margin calls on our repurchase agreements, derivative instruments and for other corporate purposes. However, should the value of our securities pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. As such, there is no assurance that we will always be able to renew (or roll) our repurchase agreements. In addition, our counterparties have the option to increase our haircuts (margin requirements) on the assets we pledge against repurchase

agreements, thereby reducing the amount that can be borrowed against an asset even if they agree to renew or roll the repurchase agreement. Significantly higher haircuts can reduce our ability to leverage our investment portfolio or even force us to sell assets, especially if correlated with asset price declines or faster prepayment rates on our assets.

Credit Risk

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

Extension Risk

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

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

Inflation Risk

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

Item 4. Controls and Procedures

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

We, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2012 . Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting or in other factors that could significantly affect the internal controls over financial reporting during the quarter ended September 30, 2012 .

PART II

Item 1. Legal Proceedings

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2012 , we had no legal proceedings.

Item 1A. Risk Factors

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

You should carefully consider the risks described below and all other information contained in this interim report on Form

10-Q, including our interim consolidated financial statements and the related notes thereto before making a decision to purchase

our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not

presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the trading price of our securities could decline, and you may lose all or part of your investment.

Purchases and sales of agency securities by the Federal Reserve may adversely affect the price and return associated with agency mortgage-backed securities

On September 13, 2012, the Federal Reserve announced their third quantitative easing program, commonly known as QE3, and extended their guidance to keep the federal funds rate at "exceptional low levels" through at least mid-2015. QE3 entails large-scale purchases of agency MBS at the pace of $40 billion per month in addition to the Federal Reserve's existing policy of reinvesting principal payments from its holdings of agency MBS into new agency MBS purchases. While we cannot predict the impact of this programs or any future actions by the Federal Reserve on the prices and liquidity of agency MBS, we expect that during periods in which the Federal Reserve purchases significant volumes of agency MBS, yields on agency MBS securities will be lower and refinancing volumes will be higher than would have been absent their large scale purchases. As a result, returns on agency MBS may be adversely affected. There is also a risk that as the Federal Reserve reduces their purchases of agency MBS or if they decide to sell some or all of their holdings of agency MBS, the pricing of our agency MBS portfolio may be adversely affected.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



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

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

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

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

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

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

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

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

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema Document

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB**		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE**		XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF**		XBRL Taxonomy Extension Definition Linkbase Document

______________________

* Previously filed

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

SIGNATURES

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