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EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER, PURSUANT TO SECTION 906 - Ready Capital Corpexhibit32-1.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - Ready Capital Corpexhibit31-2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - Ready Capital Corpexhibit31-1.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER, PURSUANT TO SECTION 906 - Ready Capital Corpexhibit32-2.htm

Table of Contents



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

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2015
Commission File Number: 001-35808

ZAIS FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)

Maryland 90-0729143
(State or Other Jurisdiction of Incorporation or Organization) (IRS Employer Identification No.)

Two Bridge Avenue, Suite 322, Red Bank, New Jersey 07701-1106
(Address of Principal Executive Offices, Including Zip Code)

(732) 978-7518
(Registrant's Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 ☒ 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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐
    (Do not check if a smaller  
    reporting company)  

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

The Company has 7,970,886 shares of common stock, par value $0.0001 per share, outstanding as of May 8, 2015.





Table of Contents

ZAIS FINANCIAL CORP.
FORM 10-Q
TABLE OF CONTENTS

      Page
PART I. FINANCIAL INFORMATION       1
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 48
Item 3. Quantitative and Qualitative Disclosures about Market Risk 65
Item 4. Controls and Procedures 68
PART II. OTHER INFORMATION 70
Item 1. Legal Proceedings 70
Item 1A. Risk Factors 70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 70
Item 3. Defaults Upon Senior Securities 70
Item 4. Mine Safety Disclosures 70
Item 5. Other Information 70
Item 6. Exhibits 70
SIGNATURES 72
 
EXHIBITS
 
Exhibit 31.1 Certifications Exh. 31.1-1
Exhibit 31.2 Certifications Exh. 31.2-1
Exhibit 32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 10 U.S.C. Section 1350 Exh. 32.1-1
Exhibit 32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 10 U.S.C. Section 1350 Exh. 32.2-1

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZAIS Financial Corp. and Subsidiaries
Consolidated Balance Sheets

March 31, 2015
(unaudited)       December 31, 2014
      (Expressed in United States Dollars)
Assets
       Cash $           38,022,318 $           33,791,013
       Restricted cash 3,030,379 7,143,078
       Mortgage loans held for investment, at fair value – $410,224,841 and $415,814,067
              pledged as collateral, respectively 411,091,360 415,959,838
       Mortgage loans held for investment, at cost 991,092 1,338,935
       Mortgage loans held for sale, at fair value - $126,028,843 and $97,690,960 pledged as
              collateral 126,028,843 97,690,960
       Real estate securities, at fair value – $133,064,497 and $135,779,193 pledged as collateral,
              respectively 145,714,172 148,585,733
       Other investment securities, at fair value – $2,187,592 and $2,040,532 pledged as
              collateral, respectively 2,187,592 2,040,532
       Loans eligible for repurchase from Ginnie Mae 19,343,641 21,710,284
       Mortgage servicing rights, at fair value 33,363,963 33,378,978
       Derivative assets, at fair value 4,445,436 2,485,100
       Other assets 7,570,972 6,092,863
       Goodwill 16,127,070 16,512,680
       Intangible Assets 5,471,525 5,668,611
       Total assets $ 813,388,363 $ 792,398,605
Liabilities
       Warehouse lines of credit $ 116,886,558 $ 89,417,564
       Loan repurchase facilities 299,847,778 300,092,293
       Securities repurchase agreements 99,625,837 103,014,105
       Exchangeable Senior Notes 55,723,675 55,474,741
       Contingent consideration 11,953,838 11,430,413
       Derivative liabilities, at fair value 4,007,458 2,585,184
       Dividends and distributions payable 3,559,120 3,559,120
       Accounts payable and other liabilities 12,198,520 11,731,089
       Liability for loans eligible for repurchase from Ginnie Mae 19,343,641 21,710,284
       Total liabilities 623,146,425 599,014,793
Commitments and Contingencies (Note 21)
Stockholders' equity
              12.5% Series A cumulative non-voting preferred stock, $0.0001 par value;
              50,000,000 shares authorized; zero shares issued and outstanding
       Common stock, $0.0001 par value; 500,000,000 shares authorized; 7,970,886 shares issued
              and outstanding 798 798
       Additional paid-in capital 164,207,617 164,207,617
       Retained earnings 6,215,373 9,029,947
       Total ZAIS Financial Corp. stockholders' equity 170,423,788 173,238,362
Non-controlling interests in operating partnership 19,818,150 20,145,450
       Total stockholders' equity 190,241,938 193,383,812
       Total liabilities and stockholders' equity $ 813,388,363 $ 792,398,605

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

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ZAIS Financial Corp. and Subsidiaries
Consolidated Statements of Operations (unaudited)

Three Months Ended March 31,
2015 2014
(Expressed in United States Dollars)
Interest income            
Mortgage loans held for investment $       6,625,989 $       5,649,553
Mortgage loans held for sale 608,232
Real estate securities 2,420,633 3,740,615
Other investment securities 32,543 102,865
       Total interest income 9,687,397 9,493,033
Interest expense
Warehouse lines of credit 553,359
Loan repurchase facilities 2,352,936 1,830,907
Securities repurchase agreements 402,509 660,402
Exchangeable Senior Notes 1,436,673 1,412,643
       Total interest expense 4,745,477 3,903,952
       Net interest income 4,941,920 5,589,081
Non-interest income
Mortgage banking activities, net 11,152,389
Loan servicing fee income, net of direct costs 1,637,099
Change in fair value of mortgage servicing rights (3,424,914 )
Other income 11,856
       Total non-interest income 9,376,430
Other gains/(losses)
Change in unrealized gain or loss on mortgage loans held for investment (1,199,755 ) 689,604
Change in unrealized gain or loss on real estate securities (177,771 ) 2,736,058
Change in unrealized gain or loss on other investment securities 136,320 370,764
Change in unrealized gain or loss on real estate owned 101,780
Realized gain on mortgage loans held for investment 144,111 230,737
Realized gain/(loss) on real estate securities 73,619
Realized gain/(loss) on real estate owned 20,677
Gain/(loss) on derivative instruments related to investment portfolio (907,090 ) (3,108,681 )
       Total other gains/(losses) (1,881,728 ) 992,101
Expenses
Advisory fee - related party 710,800 702,755
Salaries, commissions and benefits 7,399,258
Operating expenses 2,919,648 2,231,866
Other expenses 1,135,199 1,163,702
       Total expenses 12,164,905 4,098,323
Net income before income taxes 271,717 2,482,859
Income tax benefit (145,529 )
Net income 417,246 2,482,859
Net income allocated to non-controlling interests 43,466 258,654
Net income attributable to ZAIS Financial Corp. common stockholders $ 373,780 $ 2,224,205
Net income per share applicable to common stockholders:
       Basic $ 0.05 $ 0.28
       Diluted $ 0.05 $ 0.28
Weighted average number of shares of common stock:
       Basic 7,970,886 7,970,886
       Diluted 8,897,800 8,897,800

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

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ZAIS Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity

Preferred Stock Common Stock Total ZAIS Non-
(Accumulated Financial controlling
Shares of Shares of Additional Deficit) Corp. Interests in
Preferred Preferred Common Common Paid-in /Retained Stockholders' Operating
      Stock       Stock at Par       Stock       Stock at Par       Capital       Earnings       Equity       Partnership       Total Equity
Three months ended March 31, 2014 (Expressed in United States Dollars)
Balance at December 31, 2013         $            7,970,886     $        798     $         164,207,617     $         (4,958,607 )     $         159,249,808     $        18,518,754     $        177,768,562
Distributions on OP units (370,766 ) (370,766 )
Dividends on common stock (3,188,354 ) (3,188,354 ) (3,188,354 )
Net income 2,224,205 2,224,205 258,654 2,482,859
Balance at March 31, 2014 (unaudited) $ 7,970,886 $ 798 $ 164,207,617 $ (5,922,756 ) $ 158,285,659 $ 18,406,642 $ 176,692,301
                                                           
Three months ended March 31, 2015
Balance at December 31, 2014 $ 7,970,886 798 164,207,617 9,029,947 173,238,362 20,145,450 193,383,812
Distributions on OP units (370,766 ) (370,766 )
Dividends on common stock (3,188,354 ) (3,188,354 ) (3,188,354 )
Net income 373,780 373,780 43,466 417,246
Balance at March 31, 2015 (unaudited) $ 7,970,886 $ 798 $ 164,207,617 $ 6,215,373 $ 170,423,788 $ 19,818,150 $ 190,241,938

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

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ZAIS Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)

Three Months Ended March 31,
2015 2014
(Expressed in United States Dollars)
Cash flows from operating activities
Net income       $       417,246       $       2,482,859
Adjustments to reconcile net (loss)/income to net cash provided by operating activities
       Net (accretion)/amortization of (discounts) premiums related to mortgage loans (2,012,281 ) (1,602,823 )
       Net (accretion)/amortization of (discounts)/premiums related to real estate securities (1,248,910 ) (1,266,177 )
       Net (accretion)/amortization of (discounts)/premiums related to other investment securities (10,740 ) (39,791 )
       Change in unrealized gain or loss on mortgage loans 1,199,755 (689,604 )
       Change in unrealized gain or loss on real estate securities 177,771 (2,736,058 )
       Change in unrealized gain or loss on other investment securities (136,320 ) (370,764 )
       Change in unrealized gain or loss on real estate owned (101,780 )
       Change in fair value of mortgage servicing rights 3,424,914
       Realized (gain)/loss on mortgage loans (144,111 ) (230,737 )
       Realized (gain)/loss on real estate securities (73,619 )
       Realized (gain)/loss on real estate owned (20,677 )
       Change in unrealized gain or loss on derivative instruments (538,062 ) 2,961,554
       Amortization of Exchangeable Senior Notes discount 248,934 224,939
       Depreciation and amortization expense 227,424
       Proceeds from sale and principal payments on mortgage loans held for sale 431,251,708
       Originations and purchases of mortgage loans held for sale (451,669,250 )
       Loss (gain) on sale of mortgage loans held for sale (7,920,341 )
       Capitalization of originated mortgage servicing rights (3,409,899 )
       Changes in operating assets and liabilities
              (Increase) decrease in other assets (810,733 ) 1,192,973
              Increase (decrease) in accounts payable and other liabilities 467,431 1,814,223
              Increase in contingent consideration 523,425
              Net cash (used in) provided by operating activities (30,084,496 ) 1,666,975
Cash flows from investing activities
Origination of mortgage loans held for investment (1,476,838 ) (84,795,975 )
Proceeds from principal repayments on mortgage loans 7,460,149 3,490,970
Acquisitions of real estate securities, net of change in payable for real estate securities purchased (11,720,695 )
Proceeds from principal repayments on real estate securities 3,942,700 8,034,673
Proceeds from sales of real estate securities, net of change in receivable for real estate securities sold 2,072,198
Acquisitions of other investment securities (10,676,953 )
Purchase of swaption (4,803,750 )
Restricted cash provided by/(used) in investment activities 4,112,699 (3,722,128 )
       Net cash used in investing activities 14,038,710 (102,121,660 )
Cash flows from financing activities
Net borrowings under warehouse lines of credit 27,468,994
Net borrowings under loan repurchase facility (244,515 ) 61,342,915
Borrowings from securities repurchase agreements 1,016,063 29,607,805
Repayments of securities repurchase agreements (4,404,331 ) (9,018,921 )
Dividends on common stock and distributions on OP units (net of change in dividends and
       distributions payable) (3,559,120 ) (8,452,910 )
       Net cash provided by financing activities 20,277,091 73,478,889
       Net increase (decrease) in cash 4,231,305 (26,975,796 )
Cash
Beginning of period 33,791,013 57,060,806
End of period $ 38,022,318 $ 30,085,010
Supplemental disclosure of cash flow information
       Interest paid on warehouse line of credit, loan repurchase facility, securities repurchase agreements
              and Exchangeable Senior Notes $ 3,147,960 $ 2,622,379
       Taxes paid $ $
Supplemental disclosure of noncash investing and financing activities
       Accrued dividends and distributions payable $ 3,559,120 $ 3,559,120
       Conversion of mortgage loans held for
       investment to real estate owned
  $ 189,648     $  

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

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ZAIS FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Formation and Organization

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

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

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

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

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

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") as contained within the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim reporting. In the opinion of management, all adjustments considered necessary for a fair statement of the Company's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for the interim period are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The information contained in the consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2014 should be referred to in connection with these unaudited interim consolidated financial statements. Professional fees, transaction costs, loan servicing fees and general and administrative expenses reported in the prior period have been reclassified to operating expenses and other expenses to conform to the current period's presentation. During the quarter the Company recorded an out of period adjustment, in the amount of $96,000, to Mortgage Banking activities, net, to reverse the reported unrealized gains relating to certain Mortgage loans held for sale, at fair value, that were previously sold. Management believes that previously issued financial statements are not materially misstated. The Company operates in the following two business segments: residential mortgage loan investments and residential mortgage banking.

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Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and all of the wholly owned subsidiaries of the Operating Partnership. All intercompany balances have been eliminated in consolidation.

The Company, which serves as the sole general partner of and conducts substantially all of its business through the Operating Partnership, holds approximately 89.6% of the operating partnership units ("OP units") in the Operating Partnership at March 31, 2015 and December 31, 2014. The Operating Partnership in turn holds directly or indirectly all of the equity interests in its subsidiaries. Changes in the Company's ownership interest (and transactions with non-controlling interest unit holders in its consolidated subsidiaries) while the Company retains its controlling interest in the subsidiary, are accounted for as equity transactions. The carrying amount of the non-controlling interest is adjusted to reflect the change in its ownership interest in the subsidiary, with the offset to equity attributable to the Company.

Variable Interest Entities

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

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

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

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

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Cash and Cash Equivalents

The Company considers highly liquid short-term interest bearing instruments with original maturities of three months or less and other instruments readily convertible into cash to be cash equivalents. The Company's deposits with financial institutions may exceed federally insurable limits of $250,000 per institution. The Company mitigates this risk by depositing funds with major financial institutions. At March 31, 2015, a portion of the Company's operating cash was held with two custodians and two other financial institutions. The Company also maintains separate cash accounts for each of its warehouse lines of credit and repurchase agreements related to the GMFS origination platform pursuant to such agreements.

Restricted Cash

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

Other Investment Securities

The Company held Freddie Mac Structured Agency Credit Risk Notes ("FMSA Notes") at and during the three months ended March 31, 2015 and at December 31, 2014. The Company held Fannie Mae's Risk Transfer Notes at and during the three months ended March 31, 2014 ("FMRT Notes" and together with the FMSA Notes, the "Other Investment Securities"). The Other Investment Securities represent unsecured general obligations of Fannie Mae and Freddie Mac and are structured to be subject to the performance of a certain pool of residential mortgage loans.

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

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

Determination of Fair Value Measurement

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

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

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

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

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

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

Quoted prices for similar assets or liabilities in active markets.
 
Quoted prices for identical or similar assets or liabilities in nonactive markets.
 
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
 
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.

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

ZAIS has established a valuation process that applies for all levels of investments in the valuation hierarchy to ensure that the valuation techniques are consistent and verifiable. The valuation process includes discussions between the valuation team, portfolio management team and the valuation committee (the “Valuation Committee”). The Valuation Committee consists of senior members of ZAIS and is co-chaired by the Chief Risk Officer and Chief Financial Officer of ZAIS. The Valuation Committee meets, not less frequently than semi-annually, to review the results of the valuation process and provides the ZAIS management committee with periodic reports. The Valuation Committee is responsible for oversight and review of the written valuation policies and procedures and ensuring that they are applied consistently.

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

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

Mortgage Loans Held for Investment

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

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At March 31, 2015 and December 31, 2014, approximately 9.6% and 10.3% in unpaid principal balance of the Company's mortgage loans carries mortgage insurance.

Mortgage Loans Held for Sale

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

Real Estate Securities and Other Investment Securities

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

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

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

MSRs

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

Derivative Instruments

Interest Rate Swaption Agreements

An interest rate swaption agreement represents an option that gives the Company the right, but not the obligation, to enter into a previously agreed upon interest rate swap agreement on a future date. If exercised the Company will enter into an interest rate swap agreement and is obligated to pay a fixed rate of interest and receive a floating rate of interest. The Company utilizes proprietary modeling analysis or industry standard third party analytics to support the counterparty valuations received for interest rate swaption agreements. These counterparty valuations are generally based on models with observable market inputs such as interest rates and contractual cash flows, and, as such, are classified as Level 2 on the fair value hierarchy. The Company's interest rate swaption agreements are governed by International Swap and Derivative Association trading agreements, which are separately negotiated agreements with dealer counterparties. At March 31, 2015 and December 31, 2014, no credit valuation adjustment was made in determining the fair value of the derivative. 

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Interest Rate Swap Agreements

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

Loan Purchase Commitments ("LPCs")

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

Interest Rate Lock Commitments ("IRLCs")

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

MBS Forward Sales Contracts and TBA Securities

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

Mortgage Loans Held for Investment, at Cost

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

Revenue Recognition

Mortgage Loans Held for Investment, at fair value

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

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

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

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

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

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

Real Estate Securities and Other Investment Securities

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

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

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

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

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

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

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

Mortgage Banking Activities

Gain on Sale of Mortgage Loans Held for Sale

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

Gains and losses from the sale of mortgages are recognized based upon the difference between the sales proceeds and carrying value of the related loans upon sale and is included in Mortgage banking activities, net in the consolidated statements of operations. The sales proceeds reflect the cash received and the initial fair value of the separately recognized MSRs less the fair value of the incurred liability for mortgage repurchases and indemnifications. Gains and losses also includes the unrealized gains and losses associated with the mortgage loans held for sale and the realized and unrealized gains and losses from MBS forward sales contracts and IRLCs.

Loan Origination Fee Income

Loan origination fee income represents revenue earned from originating mortgage loans and is included in Mortgage banking activities, net in the Company's consolidated statements of operations. Loan origination fees and related direct loan origination costs are reflected in Mortgage banking activities, net when loans are sold and deferred and amortized over the life of the loan as an adjustment of yield.

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Loan Servicing Fee Income

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

Expense Recognition

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

Servicing Advances

Servicing advances represent escrows and advances on behalf of borrowers and investors to cover delinquent balances for property taxes, insurance premiums and other out-of-pocket costs. Advances are made in accordance with the servicing agreements and are recoverable upon liquidation. The Company periodically reviews the advances for collectability and amounts are written off when they are deemed uncollectible. At March 31, 2015 and December 31, 2014, the Company had servicing advances of $1,875,628 and $1,987,073 million, respectively. Such amounts are included in other assets in the Company's consolidated balance sheets.

Repurchase Facilities

Loan Repurchase Facilities

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

The Company pledges cash and certain of its Trust Certificates as collateral under the Loan Repurchase Facilities. The amounts available to be borrowed are dependent upon the fair value of the Trust Certificates pledged as collateral, which fluctuates with changes in interest rates, type of underlying mortgage loans and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in the fair value of pledged Trust Certificates, the lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. At March 31, 2015 and December 31, 2014, the Company has met all margin call requirements related to any outstanding balances under its Loan Repurchase Facilities.

Securities Repurchase Agreements

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

The Company pledges cash and certain of its RMBS and Other Investment Securities as collateral under these securities repurchase agreements. The amounts available to be borrowed are dependent upon the fair value of the RMBS and Other Investment Securities pledged as collateral, which fluctuates with changes in interest rates, type of securities and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in the fair value of pledged RMBS and Other Investment Securities, the lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. At March 31, 2015 and December 31, 2014, the Company has met all margin call requirements under its securities repurchase agreements. 

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Derivatives and Hedging Activities

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

Real Estate Owned

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

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

Loans Eligible for Repurchase from Ginnie Mae

When the Company has the unilateral right to repurchase Ginnie Mae pool loans it has previously sold (generally loans that are more than 90 days past due), the Company then records the right to repurchase the loan as an asset and liability in its consolidated balance sheets. Such amounts reflect the unpaid principal balance of the loans. There were no actual repurchases of Ginnie Mae delinquent or defaulted mortgage loans during the three months ended March 31, 2015.

8% Exchangeable Senior Notes Due 2016

On November 25, 2013, the Operating Partnership issued $57.5 million aggregate principal amount of unsecured 8.00% Exchangeable Senior Notes due 2016 (the "Exchangeable Senior Notes"). The Exchangeable Senior Notes are carried at amortized cost. Interest expense on the Exchangeable Senior Notes is computed using the effective interest method. The conversion features of the Exchangeable Senior Notes are deemed to be an embedded derivative. Accordingly, the Company is required to bifurcate the embedded derivative related to the conversion features of the Exchangeable Senior Notes. The Company recognized the embedded derivative as a liability in its consolidated balance sheets at March 31, 2015 and December 31, 2014 and measured it at its estimated fair value and recognized changes in its estimated fair value in gain/(loss) on derivative instruments in the Company's consolidated statements of operations.

Liability for Loan Repurchases and Indemnifications

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

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

Escrow and Fiduciary Funds

The Company maintains segregated bank accounts in trust for mortgagor escrow balances. The balances of these accounts were $23,282,733 million and $25,619,979 million at March 31, 2015 and December 31, 2014, respectively and are excluded from the Company's consolidated balance sheets.

Net Income (Loss) Per Share

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

Income Taxes

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

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

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

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Goodwill and Intangible Assets

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

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

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

Contingent Consideration

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

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"). The objective of the guidance is to clarify the principles for recognizing revenue. ASU 2014-09 supersedes most current revenue recognition guidance, including industry-specific guidance, and also enhances disclosure requirements around revenue recognition and the related cash flows. The guidance is to be applied retrospectively to all prior periods presented or through a cumulative adjustment in the year of adoption, for interim and annual periods beginning after December 15, 2018. Early adoption is not permitted. The Company is currently evaluating the impact of adopting this new standard.

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

In February 2015, the FASB issued ASU 2015-02, "Consolidation: Amendments to the Consolidation Analysis" ("ASU 2015-02"). ASU 2015-02 makes changes to both the variable interest model and the voting model. The guidance is effective for annual and interim periods beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adopting this new standard.

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

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3. GMFS Transaction

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

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

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

Total consideration is as follows:      
       Cash paid to owners of GMFS $     62,847,452
       Contingent consideration 11,430,413
Total consideration $ 74,277,865

Contingent consideration represents the estimated present value of future earn-out payments as defined in the Merger Agreement. Contingent consideration was estimated based on future earnings projections of GMFS over the four year earn-out period and is re-measured to fair value at each reporting date until the contingency is resolved. The changes in fair value are recognized in earnings. The final consideration paid could be materially different from the estimate and the difference will be recorded through earnings in the consolidated statement of operations. For the three months ended March 31, 2015, the Company recorded an increase in contingent consideration of $523,425 due to the passage of time. Such amount is included in operating expenses in the consolidated statements of operations.

Under the acquisition method of accounting, the total purchase price allocated to the identifiable tangible and intangible assets acquired and the liabilities assumed is based on management's preliminary valuation of GMFS's tangible and intangible assets acquired by the Company and GMFS's liabilities assumed by the Company as of October 31, 2014, and a preliminary valuation of the net assets acquired is summarized as follows:

Fair value of Assets:      
       Cash and cash equivalents $     13,304,612
       Mortgage loans held for sale 92,512,390
       Mortgage loans held for investment 1,098,897
       Derivative assets 1,590,160
       Other assets 2,713,950
       MSRs 32,300,337
       Goodwill 16,512,680
       Intangible Assets 5,800,000
       Loans eligible for repurchase from Ginnie Mae 21,169,329
Total assets acquired $     187,002,355
 
Fair value of Liabilities:
       Warehouse lines of credit 85,840,705
       Accounts payable and other liabilities 5,714,456
       Liability for loans eligible for repurchase from Ginnie Mae 21,169,329
Total liabilities assumed 112,724,490
Fair value of net assets acquired $      74,277,865

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Goodwill represents the excess of the purchase price over the fair value of the net assets acquired and liabilities assumed and is primarily made up of expected synergies and the assembled workforce of GMFS. This determination of goodwill is preliminary, and is subject to change when the valuation is complete. A preliminary determination of the goodwill is as follows:

Total purchase price       $ 74,277,865
Less: Preliminary estimate of the fair value of the net assets acquired (57,765,185 )
Goodwill $      16,512,680

Goodwill has been allocated to the Company's mortgage banking segment. Additionally, goodwill is expected to be deductible for tax purposes over a 15-year life.

The Company recorded a reduction in goodwill of $385,610 during the three months ended March 31, 2015 liability recorded by GMFS at the date of acquisition. The adjustment was recorded based on information obtained subsequent to the acquisition date that related to information that existed as of the acquisition date.

The preliminary valuation above is based upon information available to the Company at October 31, 2014, and is subject to change. The Company continues to review the underlying assumptions and valuation techniques utilized to calculate the fair value of goodwill and intangible assets acquired. Additional adjustments may be recorded during the allocation period specified by U.S. GAAP as additional information becomes available.

The following table presents information about the intangible assets acquired by the Company:

Estimated Fair Estimated Useful
      Value       Life
Trade name $ 2.0 million 10 years
Customer relationships 1.3 million 10 years
Licenses 1.0 million 3 years
Favorable lease   1.5 million 12 years
Total Intangible assets $      5.8 million

Amortization expense related to the intangible assets acquired was $197,085 for the three months ended March 31, 2015, and is recorded as other expenses in the consolidated statements of operations. Amortization expense related to the intangible assets for the period April 1, 2015 to December 31, 2015 and for the five years subsequent to December 31, 2015 is as follows:

April 1, 2015 – December 31, 2015       $       591,255
2016 $ 788,340
2017 $ 732,776
2018 $ 455,004
2019 $ 455,004
2020 $ 455,004

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4. Fair Value

Fair Value Measurement

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

The following table sets forth the Company's financial instruments that were accounted for at fair value on a recurring basis at March 31, 2015, by level within the fair value hierarchy:

Assets and Liabilities at Fair Value
      Level 1       Level 2       Level 3       Total
Assets
Mortgage loans held for investment $                $                $     411,091,360 $     411,091,360
Mortgage loans held for sale 126,028,843 126,028,843
Non-Agency RMBS 145,714,172 145,714,172
Other Investment Securities 2,187,592 2,187,592
MSRs 33,363,963 33,363,963
Derivative assets   4,445,436 4,445,436
Total $               — $      126,028,843 $      596,802,523 $      722,831,366
Liabilities
Derivative liabilities $  — $ 4,007,458 $ $ 4,007,458
Total $ $ 4,007,458 $ $ 4,007,458

The following table sets forth the Company's financial instruments that were accounted for at fair value on a recurring basis at December 31, 2014, by level within the fair value hierarchy:

Assets and Liabilities at Fair Value
      Level 1       Level 2       Level 3       Total
Assets
Mortgage loans held for investment   $ $ $ 415,959,838 $ 415,959,838
Mortgage loans held for sale 97,690,960 97,690,960
Non-Agency RMBS   148,585,733 148,585,733
Other Investment Securities 2,040,532 2,040,532
MSRs 33,378,978 33,378,978
Derivative assets 2,485,100 2,485,100
Total $              $      97,690,960 $      602,450,181 $      700,141,141
Liabilities
Derivative liabilities $ $ 2,585,184 $ $ 2,585,184
Total $ $ 2,585,184 $ $ 2,585,184

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

Mortgage Loans Held for Investment, RMBS and Other Investment Securities

Three Months Ended March 31, 2015 Year Ended December 31, 2014
Mortgage Loans Mortgage Loans
Held for Non-Agency Other Investment held for Non-Agency Other Investment
    Investment     RMBS     Securities     investment     RMBS     Securities
Beginning balance $       415,959,838 $       148,585,733 $       2,040,532 $       331,785,542 $       226,155,221 $         
Total net transfers into/out
       of Level 3
Originations/acquisitions 1,476,838 85,579,169 47,034,327 12,926,953
Proceeds from sales (102,635,229 ) (11,067,378 )
Amortization of premiums (384 )
Net accretion of discounts 2,012,665 1,248,910 10,740 7,497,341 5,528,538 180,438
Proceeds from principal
       repayments (7,112,305 ) (3,942,700 ) (31,759,326 ) (28,197,740 )
Conversion of mortgage
       loans to REO (189,648 ) (1,796,028 )
Total losses
       (realized/unrealized)
       included in earnings (8,823,926 ) (1,028,489 ) (8,250,003 ) (6,694,487 ) (226,224 )
Total gains
       (realized/unrealized)
       included in earnings 7,768,282 850,718 136,320 32,903,143 7,395,103 226,743
Ending balance $ 411,091,360 $ 145,714,172 $ 2,187,592 $ 415,959,838 $ 148,585,733 $ 2,040,532

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Three Months Ended March 31, 2015 Year Ended December 31, 2014
Mortgage Loans Mortgage Loans
held for Non-Agency Other Investment held for Non-Agency   Other Investment
     investment      RMBS      Securities      investment      RMBS      Securities
The amount of total gains or
       (losses) for the period
       included in earnings
       attributable to the
       change in unrealized
       gains or losses relating  
       to assets or liabilities
       still held at the reporting
       date $       (1,204,068 ) $       (177,772 ) $       136,320 $       22,957,500 $       (1,039,499 ) $              (226,224 )

Derivative Instruments

Three Months Ended March 31, 2015 Year Ended December 31, 2014
      LPCs       IRLCs       LPCs       IRLCs
Beginning balance $            4,037 $          2,481,063 $            $         
Acquisition of GMFS 2,702,954
Change in unrealized gain or loss 23,822 1,936,514 4,037 (221,891 )
Ending balance $ 27,859 $ 4,417,577 $ 4,037 $ 2,481,063
  
Three Months Ended March 31, 2015 Year Ended December 31, 2014
LPCs IRLCs LPCs IRLCs
The amount of total gains or (losses) for the period
       included in earnings attributable to the change in
       unrealized gains or losses relating to assets or
       liabilities still held at the reporting date $ 23,822 $ 1,936,514 $ 4,037 $ (221,891 )

MSR

Three Months
Ended Year Ended
March 31, December 31,
      2015       2014
Beginning balance $       33,378,978 $      
Acquisition of MSRs in connection with purchase of GMFS 32,300,337
Additions due to loans sold, servicing retained 3,409,899 2,763,014
Fair value adjustment:(1)
       Changes in valuation inputs or assumptions used in valuation model(2) (2,710,478 ) (1,420,925 )
       Other changes(3) (714,436 ) (263,448 )
Ending balance $ 33,363,963 $ 33,378,978
 
The amount of total gains or (losses) for the period included in earnings attributable to the change in
       unrealized gains or losses relating to assets or liabilities still held at the reporting date $ (2,710,478 ) $ (1,420,925 )
____________________

(1) Included in change in fair value of MSRs on the consolidated statements of operations.
(2) Primarily reflects changes in prepayment assumptions due to changes in interest rates and discount rates.
(3) Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid down or paid off during the period.

There were no financial assets or liabilities that were accounted for at fair value on a nonrecurring basis at March 31, 2015 and December 31, 2014. During the three months ended March 31, 2015 and the year ended December 31, 2014, real estate owned was transferred out of Level 3. There were no other transfers into or out of Level 1, Level 2 or Level 3 during the three month period ended March 31, 2015 and year ended December 31, 2014.

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The following tables present quantitative information about the Company's mortgage loans held for investment, real estate securities and Other Investment Securities which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

Fair Value at
March 31, Valuation   Unobservable Weighted
      2015       Technique(s)       Input       Min/Max       Average
Discounted Constant
cash flow voluntary      
Mortgage loans held for investment $      411,091,360 model prepayment   1.6 % 4.7 % 3.0 %
Constant default
rate 0.6 % 4.4 % 3.1 %
Loss severity 7.6 % 39.0 % 24.4 %
Delinquency 4.1 % 14.5 %        11.7 %
Non-Agency RMBS(1)
Broker
quotes/ Constant
comparable voluntary
Alternative – A $ 60,381,985 trades prepayment 1.9 % 20.1 % 12.0 %
Constant default
rate 0.1 % 7.5 % 3.1 %
Loss severity 0.0 % 109.3 % 23.2 %
  Delinquency 1.3 % 25.9 % 10.4 %
Broker Constant
quotes/ voluntary
comparable prepayment
Pay option adjustable rate $ 44,599,847 trades 1.8 % 13.3 % 6.9 %
Constant default
rate 1.6 % 17.1 % 4.0 %
Loss severity 0.0 % 84.5 % 42.5 %
Delinquency 6.8 % 28.5 % 14.4 %
Broker
quotes/ Constant
comparable voluntary
Prime $ 37,920,362 trades prepayment 2.9 % 17.7 % 7.9 %
Constant default
rate 0.7 % 8.8 % 3.9 %
Loss severity 0.0 % 101.1 % 31.5 %
Delinquency 3.6 % 24.0 % 13.1 %
Broker
quotes/ Constant
comparable voluntary
Subprime $ 2,811,978 trades prepayment 2.6 % 5.0 % 3.8 %
Constant default
rate 6.0 % 8.0 % 7.7 %
Loss severity 78.0 % 102.0 % 85.3 %
Delinquency 24.5 % 27.8 % 26.9 %
Total Non-Agency RMBS $ 145,714,172
____________________

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

Fair Value at Valuation
      March 31, 2015       Technique(s)       Unobservable Input       Weighted Average
  Broker quotes/ Constant voluntary
Other Investment Securities(1) $       2,187,592 comparable trades prepayment 9.32%
____________________

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

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

Fair Value at Valuation Unobservable Weighted
      March 31, 2015       Technique(s)       Input       Min/Max       Average
Discounted Constant      
  cash flow voluntary
MSRs $       33,363,963 model prepayment 11.2 % 12.2 % 11.6 %
Cost of
servicing $      78 $      106 $       90
Discount rate 9.0 % 10.0 % 9.4 %

The following is a quantitative summary of key inputs used in the valuation of the Company's MSRs at March 31, 2015 and the effect on the estimated fair value from adverse changes in those assumptions (weighted averages are based upon unpaid principal balance):

March 31, 2015
Range
(Weighted average)
Fair value
Discount rate        9.0% - 10.0%
    9.4 %
       Effect on fair value of adverse change of:
              5% $     (620,091 )
              10% $ (1,218,195 )
              20% $ (2,352,781 )
 
Prepayment speed(1) 11.2% - 12.2%
  11.6 %
       Effect on fair value of adverse change of:
              5% $ (760,251 )
              10% $ (1,495,165 )
              20% $ (2,891,430 )
 
Per-loan annual cost of servicing $ 78 - 106
  ($90 )
       Effect on fair value of adverse change of:
              5% $ (382,626 )
              10% $ (765,251 )
              20% $ (1,530,529 )
____________________

(1) Prepayment speed is measured using CPR.

Derivative Financial Instruments

The Company estimates the fair value of IRLCs based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the mortgage loan will be purchased as a percentage of the commitments it has made (the "pull-through rate"). The Company categorizes IRLCs as a "Level 3" financial statement item.

The significant unobservable inputs used in the fair value measurement of the Company's IRLCs are the pull-through rate and the MSR component of the Company's estimate of the value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and the MSR component of the IRLCs, in isolation, may result in a significant change in fair value. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value.

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The following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:

Key inputs       March 31, 2015
Pull-through rate
       Range 52.6% - 100.0%
       Weighted average 83.9%
MSR value expressed as:
       Servicing fee multiple
              Range 0.1% - 5.6%
              Weighted average 4.2%
       Percentage of unpaid principal balance
              Range 0.1% - 1.9%
              Weighted average 1.1%

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

Fair Value Option

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

The following table presents the difference between the fair value and the aggregate unpaid principal amount and/or notional balance of assets for which the fair value option was elected at March 31, 2015 and December 31, 2014:

March 31, 2015 December 31, 2014
Unpaid Principal Unpaid Principal
and/or Notional and/or Notional
     Fair Value      Balance(1)      Difference      Fair Value      Balance(1)      Difference
Financial instruments, at
       fair value Assets
Mortgage loans held for
       investment $      411,091,360 $      458,719,051 $      (47,627,691 ) $      415,959,838 $      464,877,028 $      (48,917,190 )
Mortgage loans held for
       sale 126,028,843 120,890,389 5,138,454 97,690,960 92,917,659 4,773,301
Non-Agency RMBS 145,714,172 218,218,491 (72,504,319 ) 148,585,733 226,501,915 (77,916,182 )
Other Investment
       Securities 2,187,592 2,250,000 (62,408 ) 2,040,532 2,250,000 (209,468 )
MSRs 33,363,963 3,272,214,113 (3,238,850,150 ) 33,378,978 3,078,974,342 (3,045,595,364 )
____________________

(1) Non-Agency RMBS includes an IO with a notional balance of $44.9 million and $48.6 million at March 31, 2015 and December 31, 2014, respectively.

Fair Value of Other Financial Instruments

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

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The following table summarizes the estimated fair value for all other financial instruments at March 31, 2015 and December 31, 2014:

March 31, 2015 December 31, 2014
      Fair Value       Carrying Value       Fair Value       Carrying Value
Other financial instruments
Assets
       Cash $       38,022,318 $       38,022,318 $       33,791,013 $       33,791,013
       Restricted cash 3,030,379 3,030,379 7,143,078 7,143,078
Liabilities
       Warehouse lines of credit $ 116,886,558 $ 116,886,558 $ 89,417,564 $ 89,417,564
       Loan Repurchase Facilities 299,847,778 299,847,778 300,092,293 300,092,293
       Securities repurchase agreements 99,625,837 99,625,837 103,014,105 103,014,105
       Exchangeable Senior Notes 60,584,875 55,723,675 59,933,400 55,474,741
      Contingent consideration     11,953,838     11,953,838     11,430,413     11,430,413

Cash includes cash on hand for which fair value equals carrying value (a Level 1 measurement). Restricted cash represents the Company's cash held by counterparties as collateral against the Company's derivatives, Loan Repurchase Facilities and securities repurchase agreements. Due to the short-term nature of the restrictions, fair value approximates carrying value (a Level 1 measurement). The fair value of the Company's warehouse lines of credit and repurchase agreements related to the GMFS origination platform, Loan Repurchase Facilities and securities repurchase agreements is based on an expected present value technique using observable market interest rates. As such, the Company considers the estimated fair value to be a Level 2 measurement. This method discounts future estimated cash flows using rates the Company determined best reflect current market interest rates that would be offered for loans with similar characteristics and credit quality. The fair value of the Exchangeable Senior Notes is based on observable market prices (a Level 2 measurement). The fair value of the contingent consideration represents the estimated present value of future earn-out payments related to the GMFS acquisition. The estimated present value is determined based on future earnings projections and market discount rates (a Level 3 measurement).

5. Mortgage Loans Held for Investment, at Fair Value

Distressed and re-performing loans at the time of purchase

The Company did not acquire any mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase during the three months ended March 31, 2015.

During the three months ended March 31, 2014, the Company's acquisition of mortgage loans held for investment which showed evidence of credit deterioration at the time of purchase were as follows:

Aggregate Unpaid Loan Repurchase
Acquisition Date       Principal Balance       Facilities Used
(in millions)
Three months ended March 31, 2014
March 27, 2014 $      100.4 $      60.6

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

March 31, 2015

Unpaid
Principal Premium Amortized Gross Unrealized(1)   Weighted Average
       Balance      (Discount)      Cost      Gains      Losses      Fair Value      Coupon      Yield(2)
Mortgage Loans
       Held for
       Investment
Performing
       Fixed $      259,710,065 $      (50,365,479 ) $      209,344,586 $      28,581,225 $      (1,807,936 ) $      236,117,875      4.54 %    7.37 %
       ARM 160,940,111 (20,193,204 ) 140,746,907 8,160,682 (2,335,081 ) 146,572,508 3.55 7.11
Total performing 420,650,176 (70,558,683 ) 350,091,493 36,741,907 (4,143,017 ) 382,690,383 4.16 7.27
Non-performing(3) 35,857,812 (5,971,745 ) 29,886,067 740,002 (4,479,117 ) 26,146,952 5.24 7.32
Total Mortgage Loans
       Held for Investment $ 456,507,988 $ (76,530,428 ) $ 379,977,560 $ 37,481,909 $ (8,622,134 ) $ 408,837,335     4.25 % 7.27 %
____________________

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded a loss of $1.2 million and a gain of $0.7 million for the three months ended March 31, 2015 and March 31, 2014, respectively, as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations.
(2) Unleveraged yield.
(3) Loans that are delinquent for 60 days or more are considered non-performing.

December 31, 2014

Unpaid
Principal Premium Amortized Gross Unrealized(1)   Weighted Average
       Balance      (Discount)      Cost      Gains      Losses      Fair Value      Coupon      Yield(2)
Mortgage Loans Held for
       Investment
Performing
       Fixed $      265,306,697 $      (51,501,092 ) $      213,805,605 $      26,732,362 $      (1,383,524 ) $      239,154,443      4.50 %    7.28 %
       ARM 162,858,201 (21,343,046 ) 141,515,155 9,568,296 (1,441,035 ) 149,642,416 3.59 7.10
Total performing 428,164,898 (72,844,138 ) 355,320,760 36,300,658 (2,824,559 ) 388,796,859 4.15 7.21
Non-performing(3) 35,945,165 (6,039,073 ) 29,906,092 840,097 (4,369,886 ) 26,376,303 5.48 7.13
Total Mortgage Loans
       Held for Investment $ 464,110,063 $ (78,883,211 ) $ 385,226,852 $ 37,140,755 $ (7,194,445 ) $ 415,173,162     4.26 % 7.20 %
____________________

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment.
(2) Unleveraged yield.
(3) Loans that are delinquent for 60 days or more are considered non-performing.

The following table presents the difference between the fair value and the aggregate unpaid principal balance of the Company's mortgage loans held for investment at March 31, 2015 and December 31, 2014 which showed evidence of credit deterioration at the time of purchase:

March 31, 2015 December 31, 2014
Unpaid Principal Unpaid Principal
     Fair Value      Balance      Difference      Fair Value      Balance      Difference
Loan Type
Performing loans:
       Fixed $      236,117,875 $      259,710,065 $      (23,592,190 ) $      239,154,443 $      265,306,697 $      (26,152,254 )
       ARM 146,572,508 160,940,111 (14,367,603 ) 149,642,416 162,858,201 (13,215,785 )
Total performing loans 382,690,383 420,650,176 (37,959,793 ) 388,796,859 428,164,898 (39,368,039 )
Non-performing loans 26,146,952 35,857,812 (9,710,860 ) 26,376,303 35,945,165 (9,568,862 )
Total $ 408,837,335 $ 456,507,988 $ (47,670,653 ) $ 415,173,162 $ 464,110,063 $ (48,936,901 )

The following table presents the change in accretable yield for the Company's mortgages held for investment which had shown evidence of credit deterioration since origination at the time of purchase for the three month period ended March 31, 2015 and March 31, 2014.

March 31, March 31,
      2015       2014
Accretable yield, beginning of period $       267,509,905 $           223,401,697
       Acquisitions 55,532,098
       Accretion (6,605,967 ) (5,649,553 )
       Reclassifications from nonaccretable difference (1,686,736 ) 4,326,116
Accretable yield, end of period $ 259,217,202 $ 277,610,358

For loans acquired during the three months ended March 31, 2014, the contractually required payments and cash flows expected to be collected as of the acquisition date were approximately $187.5 million and $140.3 million, respectively. Additionally, the fair value of the loans acquired as of the acquisition date was equal to the purchase price. The Company did not purchase any loans during the three months ended March 31, 2015.

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Newly originated loans at the time of purchase

During the three month period ended March 31, 2015 and the year ended December 31, 2014, the Company's acquisition of mortgage loans held for investment which were newly originated at the time of purchase were as follows:

Aggregate Unpaid Loan Repurchase
Acquisition Date       Principal Balance       Facilities Used
(in millions)
Three months ended March 31, 2015 $ 1.4 $ 1.3
Year ended December 31, 2014 $ 0.8 $ 0.7

The following table sets forth certain information regarding the Company's mortgage loans held for investment at March 31, 2015 and December 31, 2014 which were newly originated at the time of purchase:

March 31, 2015

Unpaid
Principal Premium Amortized Gross Unrealized(1) Weighted Average
     Balance      (Discount)      Cost      Gains      Losses      Fair Value      Coupon      Yield(2)
Performing
       Fixed $      2,211,064 $      45,308 $      2,256,372 $      $      (2,347 ) $      2,254,025        4.51 %      4.21 %
Total Mortgage
       Loans Held for
       Investment $ 2,211,064 $ 45,308 $ 2,256,372 $ $ (2,347 ) $ 2,254,025 4.51 % 4.21 %
____________________

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment. The Company recorded a loss of $5,885 for the three months ended March 31, 2015 as change in unrealized gain or loss on mortgage loans held for investment in the consolidated statements of operations.
(2) Unleveraged yield.

December 31, 2014

Unpaid
Principal Premium Amortized Gross Unrealized(1) Weighted Average
      Balance       (Discount)       Cost       Gains       Losses       Fair Value       Coupon       Yield(2)
Performing
       Fixed $      766,965 $      16,173 $      783,138 $      3,538 $      $      786,676     4.38 %     4.20 %
Total Mortgage
       Loans Held for
       Investment $ 766,965 $ 16,173 $ 783,138 $ 3,538 $ $ 786,676 4.38 % 4.20 %
____________________

(1) The Company has elected the fair value option pursuant to ASC 825 for these mortgage loans held for investment.
(2) Unleveraged yield.

Concentrations

At March 31, 2015 and December 31, 2014, the Company's mortgage loans held for investment, at fair value consisted of mortgage loans on residential real estate located throughout the United States. The following is a summary of certain concentrations of credit risk in the mortgage loan portfolio at March 31, 2015 and December 31, 2014:

March 31, December 31,
      2015       2014
Concentration
Percentage of fair value of mortgage loans with unpaid principal balance to current property value in excess of 100%               54.5 %               55.7 %
Percentage of fair value of mortgage loans secured by properties in the following states:
Each representing 10% or more of fair value:
California 26.6 % 26.2 %
Florida 16.1 % 16.6 %
Additional state representing more than 5% of fair value:
Georgia 5.8 % 5.7 %
New York 5.0 % 5.1 %

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At March 31, 2015, the interest rates on the Company's mortgage loans held for investment ranged from 1.75% – 12.20% and the contractual maturities ranged from 1 – 45 years.

REO

At March 31, 2015 and December 31, 2014, the Company had REO of $1,514,307 and $1,282,669, respectively. Such amounts are included in other assets in the Company's consolidated balance sheets.

Additionally, at March 31, 2015 and December 31, 2014 the carrying amount of mortgage loans held for investment secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction is $6,881,795 and $4,762,509, respectively.

6. Mortgage Loans Held for Sale

During the three months ended March 31, 2015 and year ended December 31, 2014, the Company's mortgage loans held for sale activity was as follows:

Three Months Ended Year Ended
      March 31, 2015       December 31, 2014
Balance at beginning of period / year $              97,690,960 $        
Acquisition of GMFS 92,512,390
Loan originations 451,669,250 253,934,598
Sales (431,251,708 ) (245,140,671 )
Gain (loss) on sale 7,920,341 (3,615,357 )
Balance at end of period / year $ 126,028,843 $ 97,690,960

The following summarizes mortgage loans held for sale, at fair value at March 31, 2015 and December 31, 2014:

March 31, 2015 December 31, 2014
Unpaid Principal Unpaid Principal
      Balance       Fair Value       Balance       Fair Value
Conventional $         77,601,191 $      79,049,827 $           55,073,645 $     57,058,195
Governmental 23,619,075 25,941,763 13,407,781 14,601,797
Reverse mortgage 1,548,402 1,738,423 1,600,449 1,765,552
United States Department of Agriculture loans 10,001,501 10,504,855 16,105,088 17,069,138
United States Department of Veteran Affairs loan 8,120,220 8,793,975 6,730,696 7,196,278
Total $ 120,890,389 $ 126,028,843 $ 92,917,659 $ 97,690,960

At March 31, 2015 and December 31, 2014 all of the Company's mortgage loans held for sale were pledged to secure warehouse lines of credit and repurchase agreements related to the GMFS origination platform.

7. Real Estate Securities and Other Investment Securities

The Company's non-Agency RMBS portfolio is not issued or guaranteed by Fannie Mae, Freddie Mac or any other U.S. Government agency or a federally chartered corporation and is therefore subject to additional credit risks.

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The following table sets forth certain information regarding the Company's RMBS and Other Investment Securities at March 31, 2015 and December 31, 2014:

March 31, 2015

Principal or
Notional Premium Amortized Gross Unrealized(1) Weighted Average
   Balance    (Discount)    Cost    Gains    Losses    Fair Value    Coupon    Yield(2)
Real estate securities
Non-Agency RMBS
       Alternative – A(3) $      113,209,979 $      (54,273,068 ) $      58,936,911 $      1,982,569 $      (537,495 ) $      60,381,985      2.36 %      6.90 %
       Pay option adjustable
              rate 56,669,229 (10,789,139 ) 45,880,090 100,885 (1,381,128 ) 44,599,847      0.94      6.27
       Prime 42,427,216 (5,693,864 ) 36,733,352 1,322,235 (135,225 ) 37,920,362 3.59 6.62
              Subprime 5,912,067 (3,239,139 ) 2,672,928 139,050 - 2,811,978 0.33 8.41
Total RMBS $      218,218,491 $      (73,995,210 ) $      144,223,281 $      3,544,739 $      (2,053,848 ) $      145,714,172 2.18 % 6.66 %
Other Investment
       Securities $ 2,250,000 $ 27,497 $ 2,277,497 $ $ (89,905 ) $ 2,187,592 3.92 % 5.78 %
____________________

(1) The Company has elected the fair value option pursuant to ASC 825 for its real estate securities and Other Investment Securities. The Company recorded a loss of $0.2 million and $2.7 million for the three months ended March 31, 2015 and March 31, 2014, as change in unrealized gain or loss on real estate securities in the consolidated statements of operations. The Company also recorded a gain of $0.1 million and $0.4 million for the three months ended March 31, 2015 and March 31, 2014, as change in unrealized gain or loss on Other Investment Securities in the consolidated statements of operations.
(2)       Unleveraged yield.
(3)   Alternative – A RMBS includes an IO with a notional balance of $44.9 million.

December 31, 2014

Principal or
Notional Premium Amortized Gross Unrealized(1) Weighted Average
   Balance    (Discount)    Cost    Gains    Losses    Fair Value    Coupon    Yield(2)
Real estate securities
Non-Agency RMBS
       Alternative – A(3) $      118,547,109 $      (58,583,222 ) $      59,963,887 $      1,916,611 $      (583,958 ) $      61,296,540 3.44 % 7.03 %
       Pay option adjustable
              rate 58,122,808 (11,491,663 ) 46,631,145 80,848 (1,170,668 ) 45,541,325 0.93 6.12
       Prime 43,803,995 (6,219,091 ) 37,584,904 1,545,452 (65,280 ) 39,065,076 3.60 6.79
              Subprime 6,028,003 (3,290,867 ) 2,737,136 (54,344 ) 2,682,792      0.33      16.98
Total RMBS $ 226,501,915 $ (79,584,843 ) $ 146,917,072 $ 3,542,911 $ (1,874,250 ) $ 148,585,733 2.62 % 6.96 %
Other Investment
       Securities $ 2,250,000 $ 16,756 $ 2,266,756 $ $ (226,224 ) $ 2,040,532 3.92 % 5.90 %
____________________

(1)       The Company has elected the fair value option pursuant to ASC 825 for its real estate securities and Other Investment Securities.
(2)   Unleveraged yield.
(3)   Alternative – A RMBS includes an IO with a notional balance of $48.6 million.

Non-Agency RMBS

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

March 31, 2015

Non-Agency RMBS Weighted
      Fair Value       Amortized Cost       Average Yield
Weighted average life(1)
Greater than 5 years $      145,714,172 $      144,223,281                  6.66 %
$ 145,714,172 $ 144,225,281 6.66 %
____________________

(1)       Actual maturities of real estate securities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses.

December 31, 2014

Non-Agency RMBS Weighted Average
      Fair Value       Amortized Cost       Yield
Weighted average life(1)
Greater than 5 years $      148,585,733 $      146,917,072                         6.96 %
$ 148,585,733 $ 146,917,072 6.96 %
____________________

(1)       Actual maturities of real estate securities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses.

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      Non-Agency RMBS
March 31, 2015       December 31, 2014
Contractual maturities (range) 20.1 to 32.0 years 20.3 to 32.3 years
Weighted average maturity   24.6 years   24.9 years

All real estate securities held by the Company at March 31, 2015 and December 31, 2014 were issued by issuers based in the United States.

Other Investment Securities

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

March 31, 2015

Other Investment Securities   Weighted 
      Fair Value       Amortized Cost       Average Yield
Weighted average life(1)
Greater than 5 years $      2,187,592 $      2,277,497               5.78 %
  $ 2,187,592 $ 2,277,497 5.78 %
____________________

(1)       Actual maturities of Other Investment Securities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses.

December 31, 2014

Other Investment Securities Weighted
      Fair Value       Amortized Cost       Average Yield
Weighted average life(1)
Greater than 5 years $ 2,040,532 $ 2,266,756               5.90 %
  $ 2,040,532 $ 2,266,756 5.90 %
____________________

(1)       Actual maturities of Other Investment Securities are generally shorter than stated contractual maturities. Maturities are affected by the contractual lives of the associated mortgage collateral, periodic payments of principal, prepayments of principal and credit losses.

Other Investment Securities
      March 31,       December 31,
2015 2014
Contractual maturity        9.5 years 9.7 years
Weighted average maturity 9.5 years   9.7 years

All Other Investment Securities held by the Company at March 31, 2015 and December 31, 2014 were issued by issuers based in the United States.

The following table presents certain additional information regarding the Company's RMBS and Other Investment Securities:

Three Months Ended
      March 31, 2015       March 31, 2014
Proceeds from the sale of real estate securities   $ $ 2,072,198
Realized gain (loss) on the sale of real estate securities   73,619

The Company did not have any realized losses on real estate securities relating to OTTI for the three months ended March 31, 2015 and March 31, 2014.

8. Mortgage Servicing Rights

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

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The activity of MSRs for the three months ended March 31, 2015 and year ended December 31, 2014 is as follows:

March 31, December 31,
      2015       2014
Balance at beginning of period / year $      33,378,978   $     
Acquisition of MSRs in connection with purchase of GMFS 32,300,337
Additions due to loans sold, servicing retained 3,409,899 2,763,014  
Fair value adjustment:(1)        
       Changes in valuation inputs or assumptions used in valuation model(2) (2,710,478 ) (1,420,925 )
       Other changes(3) (714,436 ) (263,448 )
Balance at end of period / year $ 33,363,963 $ 33,378,978
____________________

(1)       Included in change in fair value of MSRs in the Company's consolidated statements of operations.
(2)   Primarily reflects changes in prepayment assumptions due to changes in interest rates and discount rates.
(3)   Represents decrease in value due to passage of time, including the impact from both regularly scheduled loan principal payments and loans that were paid off during the period.

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

March 31, 2015 December 31, 2014
Unpaid Principal Unpaid Principal
      Balance       Fair Value       Balance       Fair Value
Fannie Mae $      1,693,627,085 $      16,428,501 $      1,640,799,719 $      17,078,181
Ginnie Mae 1,184,404,965 12,938,954 1,146,234,768 13,102,076
Freddie Mac 394,182,063 3,996,508 291,939,855 3,198,721
Total $ 3,272,214,113 $ 33,363,963 $ 3,078,974,342 $ 33,378,978

The Company contracts with licensed sub-servicers to perform all servicing functions for these loans. The following table presents the loan servicing fee income, net of direct costs, for the three months ended March 31, 2015:

Income $      2,384,402
Late charges   35  
Cost of sub-servicer (747,338 )
Loan servicing fees, net of direct costs $ 1,637,099

The Company did not have any loan servicing fees, net of direct costs prior to the acquisition of GMFS on October 31, 2014.

9. Warehouse Lines of Credit

At March 31, 2015 and December 31, 2014, the Company has two warehouse lines of credit and two master repurchase agreements, each with different lenders, which provide financing for the Company’s origination of mortgage loans held for sale (the “Warehouse Line of Credit”).

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

The following tables present certain information regarding the Company's Warehouse Lines of Credit at March 31, 2015 and December 31, 2014:

      March 31, 2015       December 31, 2014
Availability $      165,000,000 $      130,000,000
Expiration date April 2015 – June 2016 January 2015 – June 2016
Outstanding balance $ 116,886,558   $ 89,417,564

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The agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth, maximum debt to net worth ratio and current ratio and limitations on capital expenditures, indebtedness, distributions, transactions with affiliates and maintenance of positive net income, as defined in the agreements. The Company was in compliance with all significant debt covenants for the three months ended March 31, 2015 and year ended December 31, 2014.

The following table presents certain information regarding the Company's warehouse lines of credit at March 31, 2015 and December 31, 2014 by remaining maturity:

March 31, 2015 December 31, 2014
Weighted Weighted
      Balance       Average Rate       Balance       Average Rate
Warehouse lines of credit maturing within
30 days or less $      32,510,738               2.48 % $      21,210,431               2.47 %
Greater than 180 days to 1 year 77,121,620 2.47 57,118,533 2.46
Greater than 1 year 7,254,200 2.93 11,088,600 2.92
Total balance/weighted average rate $ 116,886,558 2.50 % $ 89,417,564 2.52 %

10. Loan Repurchase Facilities

At March 31, 2015 and December 31, 2014 the Company had the following outstanding master repurchase agreements with Citibank, N.A. (the “Citi Loan Repurchase Facility”) and Credit Suisse First Boston Mortgage Capital LLC (the “Credit Suisse Loan Repurchase Facility”) used to fund the purchase of mortgage loans held for investments:

March 31, 2015

Credit Suisse First Boston
Lender       Citibank, N.A       Mortgage Capital LLC

 

Distressed and Re-
Collateral type funded by facility Performing Loans Newly Originated Loans
Availability $      325,000,000 $     100,000,000
Maturity date May 22, 2015(3)   August 13, 2015
Outstanding balance $ 297,854,922 $ 1,992,856

December 31, 2014

      Credit Suisse First Boston
Lender Citibank, N.A Mortgage Capital
      Distressed and Re-
Collateral type funded by facility Performing Loans Newly Originated Loans
Availability $      325,000,000 (1) $      100,000,000
Maturity date May 22, 2015(2) August 13, 2015
Outstanding balance $ 299,402,024 $ 690,269
____________________

(1)       The original borrowing capacity of $250.0 million was amended on March 27, 2014 to $325.0 million.
(2)   The original maturity date of May 29, 2014 was amended on May 23, 2014 to May 22, 2015.
(3)   The Company is in discussions with the lender and expects to renew the loan repurchase facility for an additional 364 day commitment period prior to the expiration of the initial commitment period. However, the renewal is subject to the finalization of definitive agreements and there can be no assurance that the renewal will occur.

Each of the facilities is collateralized by the underlying mortgages and related documents and instruments and the obligations are fully guaranteed by the Company.

The principal amount paid by the lenders under the Loan Repurchase Facilities for the Trust Certificates, which represent interests in residential mortgage loans, is based on (i) in the case of the Citi Loan Repurchase Facility, a percentage of the lesser of the market value or the unpaid principal balance of such mortgage loans backing the Trust Certificates and (ii) in the case of the Credit Suisse Loan Repurchase Facility, a percentage of the lesser of the market value, the unpaid principal balance or the acquisition price of such mortgage loans backing the Trust Certificates. Upon the Company's repurchase of a Trust Certificates sold to the lenders under the Loan Repurchase Facilities, the Company is required to repay the lenders a repurchase amount based on the purchase price plus accrued interest. The Company is also required to pay the lenders a commitment fee for the Loan Repurchase Facilities, as well as certain other administrative costs and expenses in connection with the lenders' structuring, management and ongoing administration of the Loan Repurchase Facilities. The commitment fees are included in interest expense in the consolidated statements of operations.

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The Loan Repurchase Facilities contain margin call provisions that provide the lenders with certain rights in the event of a decline in the market value of the mortgage loans backing the purchased Trust Certificates, subject to a floor amount. Under these provisions, the lenders may require the Company to transfer cash sufficient to eliminate any margin deficit resulting from such a decline. At March 31, 2015 and December 31, 2014, the Company has met all of its margin requirements.

The agreements contain covenants that include certain financial requirements, including maintenance of minimum liquidity, minimum tangible net worth and maximum debt to net worth ratio, as defined in the agreements. The Company was in compliance with all significant debt covenants for the three months ended March 31, 2015 and year ended December 31, 2014.

The following table presents certain information regarding the Company's Loan Repurchase Facilities at March 31, 2015 and December 31, 2014, by remaining maturity:

March 31, 2015 December 31, 2014
            Weighted             Weighted
Balance Average Rate Balance Average Rate
Loan Repurchase Facilities borrowings maturing within
31-60 days $      297,854,922               2.93 % $     
91-180 days 1,992,856 2.46 % 299,402,024               2.92 %
Greater than 180 days to 1 year 690,269 2.46 %
Total balance/weighted average rate $ 299,847,778 2.92 % $ 300,092,293 2.92 %

The following table presents information with respect to the Company's posting of mortgage loan collateral for the Loan Repurchase Facilities at March 31, 2015 and December 31, 2014:

March 31, December 31,
      2015       2014
Loan Repurchase Facilities $      299,847,778 $      300,092,293
Fair value of Trust Certificates pledged as collateral 410,224,841 415,814,067
Fair value of mortgage loans not pledged as collateral 866,519 145,771
Cash pledged as collateral 1,872
Unused Amount(1) 125,152,222 124,907,707
____________________

(1)       The amount the Company is able to borrow under the Loan Repurchase Facilities is tied to the fair value of unencumbered Trust Certificates eligible to secure those agreements and the Company's ability to fund the agreements' margin requirements relating to the collateral sold.

The following table presents additional information with respect to the Loan Repurchase Facilities:

Three Months Ended
March 31, 2015       March 31, 2014
Weighted average interest rate 3.13 % 2.91 %
Average unpaid principal balance of loans sold under agreements to repurchase $      723,660 $      192,380
Maximum daily amount outstanding 302,037,635 297,524,403
Interest expense 2,352,936 1,830,907

11. Securities Repurchase Agreements

Repurchase agreements related to real estate securities and Other Investment Securities involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." Repurchase agreements related to real estate securities and Other Investment Securities entered into by the Company are accounted for as financings and require the repurchase of the transferred securities at the end of each arrangement's term, typically 30 to 90 days. The Company maintains the beneficial interest in the specific securities pledged during the term of the repurchase arrangement and receives the related principal and interest payments. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the repurchase arrangement at which time the Company may enter into a new repurchase arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. In response to declines in fair value of pledged securities due to changes in market conditions or the publishing of monthly security paydown factors, the lender requires the Company to post additional securities as collateral, pay down borrowings or establish cash margin accounts with the counterparty in order to re-establish the agreed-upon collateral requirements, referred to as margin calls. Under the terms of the Company's master repurchase agreements related to real estate securities and Other Investment Securities, the counterparty may sell or re-hypothecate the pledged collateral.

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The following table presents certain information regarding the Company's securities repurchase agreements at March 31, 2015 and December 31, 2014 by remaining maturity and collateral type:

March 31, 2015
Non-Agency RMBS Other Investment Securities
Weighted Weighted
      Balance       Average Rate       Balance       Average Rate
Securities repurchase agreements maturing within
30 days or less $      98,141,400                       1.58 % $      1,484,437               1.68 %
Total balance/weighted average rate $ 98,141,400 1.58 % $ 1,484,437 1.68 %
 
December 31, 2014
Non-Agency RMBS Other Investment Securities
Weighted Average Weighted
Balance Rate Balance Average Rate
Securities repurchase agreements maturing within
30 days or less $ 101,553,292 1.57 % $ 1,460,813 1.66 %
Total balance/weighted average rate $ 101,553,292 1.57 % $ 1,460,813 1.66 %

Although securities repurchase agreements are committed borrowings until maturity, the lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or cash to fund margin calls.

The following table presents information with respect to the Company's posting of collateral under its securities repurchase agreements at March 31, 2015 and December 31, 2014:

      March 31,       December 31,
      2015       2014
Total outstanding under securities repurchase agreements secured by non-Agency RMBS $      98,141,400 $ 101,553,292
Total outstanding under securities repurchase agreements secured by Other Investment Securities 1,484,437 1,460,813
Fair value of non-Agency RMBS pledged as collateral 133,064,497     135,779,193
Fair value of Other Investment Securities pledged as collateral     2,187,592 2,040,532
Fair value of non-Agency RMBS not pledged as collateral 12,649,675 12,806,540
Fair value of Other Investment Securities not pledged as collateral
Cash pledged as collateral 878,401 684,256

12. 8.0% Exchangeable Senior Notes due 2016

On November 25, 2013, the Operating Partnership issued the Exchangeable Senior Notes with an aggregate principal amount of $57.5 million. The Exchangeable Senior Notes were issued pursuant to an Indenture, dated November 25, 2013, between the Company, as guarantor, the Operating Partnership and U.S. Bank National Association, as trustee. The sale of the Exchangeable Senior Notes generated net proceeds of approximately $55.3 million. Aggregate estimated offering expenses in connection with the transaction, including the initial purchasers' discount of approximately $1.7 million, were approximately $2.2 million.

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The Exchangeable Senior Notes bear interest at a rate of 8.0% per year, payable semiannually in arrears on May 15 and November 15 of each year, beginning on May 15, 2014. The effective interest rate of the Exchangeable Senior Notes, which is equal to the stated rate of 8.0% plus the amortization of the original issue discount and associated costs, is 10.2%.

The unamortized discount is as follows:

      March 31, December 31,
  2015       2014
Unamortized discount $      1,776,325 $       2,025,259

The Exchangeable Senior Notes will mature on November 15, 2016 (the "Maturity Date"), unless previously exchanged or repurchased in accordance with their terms. The Exchangeable Senior Notes are the Company's senior unsecured obligations and rank senior in right of payment to the Company's existing and future indebtedness that is expressly subordinated in right of payment to the Exchangeable Senior Notes; equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company's secured indebtedness (including existing unsecured indebtedness that the Company later secures) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by the Company's subsidiaries, financing vehicles or similar facilities.

The Exchangeable Senior Notes are exchangeable for shares of the Company's common stock or, to the extent necessary to satisfy NYSE listing requirements, cash, at the applicable exchange rate at any time prior to the close of business on the scheduled trading day prior to the Maturity Date. The Company may not elect to issue shares of common stock upon exchange of the Exchangeable Senior Notes to the extent such election would result in the issuance of 20% or more of the common stock outstanding immediately prior to the issuance of the Exchangeable Senior Notes (or 1,779,560 or more shares).

As a result of the NYSE related limitation on the use of share-settlement for the full conversion option, the embedded conversion option does not qualify for equity classification and instead is separately valued and accounted for as a derivative liability. The initial value allocated to the derivative liability was $1.3 million, which represents a discount to the debt to be amortized through interest expense using the effective interest method through the Maturity Date. During each reporting period, the derivative liability is marked to fair value through earnings. At March 31, 2015 and December 31, 2014, the fair value of the derivative liability was as follows:

        March 31, December 31,
2015       2014
Fair value of derivative liability $      1,501,721 $       1,022,248

The exchange rate was initially 52.5417 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes (equivalent to an initial exchange price of approximately $19.03 per share of common stock). The exchange rate will be subject to adjustment for certain events, including for regular quarterly dividends in excess of $0.50 per share, but will not be adjusted for any accrued and unpaid interest. In addition, if certain corporate events occur prior to the Maturity Date, the exchange rate will be increased but will in no event exceed 60.4229 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes. The exchange rate was adjusted on December 27, 2013 to 54.3103 shares of common stock per $1,000 principal amount of Exchangeable Senior Notes pursuant to the Company's special dividend of $0.55 per share of common stock and OP unit declared on December 19, 2013.

The Company does not have the right to redeem the Exchangeable Senior Notes prior to the Maturity Date, except to the extent necessary to preserve its qualification as a REIT for U.S. federal income tax purposes. No sinking fund is provided for the Exchangeable Senior Notes. In addition, if the Company undergoes certain corporate events that constitute a "fundamental change," the holders of the Exchangeable Senior Notes may require the Company to repurchase for cash all or part of their Exchangeable Senior Notes at a repurchase price equal to 100% of the principal amount of the Exchangeable Senior Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

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13. Derivative Instruments

Interest Rate Swap and Swaption Agreements

To help mitigate exposure to higher short-term interest rates, the Company uses currently-paying and forward-starting, three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. Additionally, the Company enters into interest rate swaption agreements which gives the Company the right, but not the obligation, to enter into a previously agreed upon swap contract on a future date. If exercised the Company will enter into an interest rate swap agreement and is obligated to pay a fixed rate of interest and receive a floating rate of interest. These swap agreements establish an economic fixed rate on related borrowings because the variable-rate payments received on the interest rate swap agreements largely offset interest accruing on the related borrowings, leaving the fixed-rate payments to be paid on the interest rate swap agreements as the Company's effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the interest rate swap agreements and actual borrowing rates.

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

LPCs

The Company enters into LPCs as a means to help mitigate interest rate risk. The LPCs are pursuant to Master Loan Purchase Agreements with approved, third party residential loan originators to purchase residential loans, which meet the guidelines established by the Company, at a future date. LPCs provide that loans acceptable to the Company be delivered if and when they close and are subject to "pair off" fees if the loans are not delivered by the seller.

IRLCs

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

MBS Forward Sales Contracts and TBA Securities

Residential Mortgage Banking Segment

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

Residential Mortgage Loans Held for Investment Segment

The Company may, and has in the past, enter into TBA contracts for this investment segment as a means of acquiring exposure to Agency RMBS and may, from time to time, utilize TBA dollar roll transactions to finance Agency RMBS purchases. The Company may also enter into TBA contracts as a means of hedging against short-term changes in interest rates. The Company may choose, prior to settlement, to move the settlement of these securities to a later date by entering into an offsetting position (referred to as a "pair off"), settling the paired off positions against each other for cash, and simultaneously entering into a similar TBA contract for a later settlement date, which is commonly and collectively referred to as a "dollar roll" transaction. The Company accounts for its TBA contracts as derivative instruments due to the fact that it does not intend to take physical delivery of the securities.

The Company had no exposure to TBA contracts for this segment at any time during the three months ended March 31, 2015 and March 31, 2014. At March 31, 2015 and December 31, 2014, the Company did not have any TBA contracts outstanding.

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Conversion Option – 8% Exchangeable Senior Notes Due 2016

Changes in the fair value of the conversion option derivative related to the Exchangeable Senior Notes are recorded through earnings.

Derivative Instruments

The following table summarizes information related to derivative instruments held at March 31, 2015 and December 31, 2014:

Non-hedge derivatives March 31, 2015 December 31, 2014
Notional amount of interest rate swaption       $       $ 225,000,000
Notional amount of interest rate swaps 17,200,000 17,200,000
LPCs (Principal balance of underlying loans) 5,094,500 1,905,700
IRLCs (Principal balance of underlying loans) 207,560,141 118,486,590
MBS forward sales contracts 219,000,000 154,000,000

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

The following table presents the fair value of the Company's derivative instruments and their balance sheet location at March 31, 2015 and December 31, 2014:

Derivative instruments       Designation       Balance Sheet Location       March 31, 2015       December 31, 2014
Interest rate swaption Non-hedge Derivative assets, at fair value $       $             
Interest rate swaps Non-hedge Derivative liabilities, at fair value (1,164,643 ) (860,553 )
Exchangeable Senior Notes conversion option Non-hedge Derivative liabilities, at fair value (1,501,721 ) (1,022,248 )
LPCs Non-hedge Derivative assets, at fair value 27,859 4,037
IRLCs Non-hedge Derivative assets, at fair value 4,417,577 2,481,063
MBS forward sales contracts Non-hedge Derivative liabilities, at fair value (1,341,094 ) (702,383 )

The following table summarizes gains and losses related to derivatives:

Three Months Ended
Non-hedge derivatives       Income Statement Location       March 31, 2015       March 31, 2014
Interest rate swaption Gain/(loss) on derivative instruments related to investment portfolio $          $        (2,542,292 )
Interest rate swaps Gain/(loss) on derivative instruments related to investment portfolio (451,439 ) (457,285 )
Exchangeable Senior Notes conversion option   Gain/(loss) on derivative instruments related to investment portfolio (479,473 ) (109,104 )
LPCs Gain/(loss) on derivative instruments related to investment portfolio 23,822
IRLCs Mortgage banking activities, net 1,936,514
MBS forward sales contracts Mortgage banking activities, net (638,711 )

The Company did not have any IRLCs or MBS forward sales contracts prior to the acquisition of GMFS on October 31, 2014.

Interest Rate Swaption

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

Swaption Expiration       Notional Amount       Strike Rate       Swap Maturity
January 15, 2015 $ 225,000,000             3.64 % 2025

The credit support annex provisions of the Company's interest rate swaption agreement allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral.

The interest rate swaption agreement expired in January 2015.

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Interest Rate Swaps

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

March 31, 2015

Weighted Average Pay Weighted Average Weighted Average
Maturity       Notional Amount       Rate       Receive Rate       Years to Maturity
2023 $ 17,200,000                              2.72 % 0.26 % 8.3
Total/Weighted average $ 17,200,000 2.72 % 0.26 % 8.3

December 31, 2014

Weighted Average Pay Weighted Average Weighted Average
Maturity       Notional Amount       Rate       Receive Rate       Years to Maturity
2023 $ 17,200,000                              2.72 % 0.23 % 8.6
Total/Weighted average $ 17,200,000 2.72 % 0.23 % 8.6

The Company's interest rate swap agreements contain legally enforceable provisions that allow for netting or setting off of all individual interest rate swap receivables and payables with each respective counterparty and, therefore, the fair value of those interest rate swap agreements are netted. The credit support annex provisions of the Company's interest rate swap agreements allow the parties to mitigate their credit risk by requiring the party which is out of the money to post collateral.

Collateral

At March 31, 2015 and December 31, 2014 all collateral provided under the interest rate swaption and interest rate swap agreements consisted of cash collateral.

Cash pledged as collateral against the Company's interest rate swaption agreement and interest rate swap agreements at March 31, 2015 and December 31, 2014 were as follows:

      March 31, 2015       December 31, 2014
Interest rate swaption agreements $ $ 4,886,011
Interest rate swap agreements 2,150,106 1,572,811

Such amounts are included in restricted cash in the Company's consolidated balance sheets.

14. Mortgage Banking Activities

The following table presents the components of mortgage banking activities, net, recorded in the Company's consolidated statements of operations for the three months ended March 31, 2015:

Gain on sale of mortgage loans held for sale, net of direct costs(1)       $      10,956,258
Provision for loan indemnification     (192,866 )
Loan origination fee income 388,997
Total $ 11,152,389
____________________

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

The Company did not have any mortgage banking activities prior to the acquisition of GMFS on October 31, 2014.

15. Loan Indemnification Reserve

The Company has established a liability for potential losses related to these representations and warranties with a corresponding provision recorded for loan losses. The liability is included in accounts payable and other liabilities in the Company's consolidated balance sheets and the provision is included in mortgage banking activities, net in the Company's consolidated statements of operations. In assessing the adequacy of the liability, management evaluates various factors including actual losses on repurchases and indemnifications during the period, historical loss experience, known delinquent and other problem loans, and economic trends and conditions in the industry. Actual losses incurred are reflected as charge-offs against the reserve liability.

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The activity in the loan indemnification reserve is as follows for the three months ended March 31, 2015 and for the year ended December 31, 2014 is as follows:

Three Months Ended Year Ended
      March 31, 2015       December 31, 2014
Balance at the beginning of period/year $                    2,662,162 $
Acquisition of GMFS 2,560,907
Loan losses incurred (42,356 )
Provision for losses 180,163 101,255
Balance at end of period/year $ 2,799,969 $ 2,662,162

Because of the uncertainty in the various estimates underlying the loan indemnification reserve, there is a range of losses in excess of the recorded loan indemnification reserve that is reasonably possible. The estimate of the range of possible losses for representations and warranties does not represent a probable loss, and is based on current available information, significant judgment, and a number of assumptions that are subject to change. At March 31, 2015 and December 31, 2014, the reasonably possible loss above our recorded loan indemnification reserve was not considered material.

16. Income Taxes

For the three months ended March 31, 2015 and years ended December 31, 2014, 2013, 2012 and 2011, the Company qualified to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders and does not engage in prohibited transactions. The majority of States also recognize the Company’s REIT status.

The Company has made separate joint elections with three of its subsidiaries, ZFC Funding, Inc., ZFC Trust TRS I, LLC and ZFC Honeybee TRS, LLC to treat such subsidiaries as taxable REIT subsidiaries (the "TRS entities"). The Company’s TRS entities file separate tax returns and are taxed as standalone C-Corporations for U.S. income tax purposes.

The following table summarizes the tax provision (benefit) recorded at the TRS entity level for the three months ended March 31, 2015 and March 31, 2014.

Provision for Income Taxes

  Three Months Ended March 31,
        2015       2014
Current provision for income taxes
       Federal $ - $ -
       State - -
Total current provision (benefit) for income taxes $ - $ -
 
  Three Months Ended March 31,
  2015 2014
Deferred provision for income taxes
       Federal $             (120,431 ) $  -
       State (25,098 )                          -
Total deferred provision (benefit) for income taxes (145,529 ) -
     
Total provision (benefit) for income taxes $ (145,529 ) $ -

The following is a reconciliation of the statutory federal and state rates to the effective rates for the three months ended March 31, 2015 and March 31, 2014.

Reconciliation of Statutory Tax Rate to Effective Tax Rate

Three Months Ended March 31,
            2015       2014
Tax expense (benefit) at statutory rate 35.00 % 35.00 %
State Tax (Net of Federal Benefit) (10.97 %) 0.00 %
Permanent differences 0.27 % 0.00 %
Valuation Allowance 31.82 % 0.00 %
Benefit of REIT Dividend paid deduction            (109.68 %)            (35.00 %)
Effective Tax Rate (53.56 %) 0.00 %

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The Company’s effective tax rate differs from its statutory tax rate primarily due to the deduction of dividend distributions required to be paid under Code section 857(a) partially offset by an increase in deferred tax asset valuation allowances.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting and tax purposes. We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” approach. Our estimate of net deferred tax assets could change in future periods to the extent that actual or revised estimates of future taxable income during the carryforward periods change from current expectations. The deferred tax assets and liabilities reported below relate solely to the TRS entities.

For the three months ended March 31, 2015, the Company had activity in the ZFC Honeybee TRS, LLC which resulted in a deferred tax asset of $996,526 related to net operating losses and future deductible amounts. The realization of the deferred tax asset related to ZFC Honeybee TRS, LLC is dependent on generating sufficient taxable income in the periods in which the temporary differences become deductible and prior to the expiration of NOL carryforwards. Based on historical performance and forecast of future taxable income, the Company believes that it is more likely than not ZFC Honeybee TRS, LLC will be able to utilize the net operating loss and other temporary differences in future.

The Company also had activity in ZFC Trust TRS I, LLC and ZFC Funding, Inc., which resulted in a deferred tax asset of $758,364. As of March 31, 2015, the Company established a full valuation allowance for the deferred tax asset related to net operating loss and other future deductible amounts of ZFC Trust TRS I, LLC and ZFC Funding, Inc., as these entities do not have a history of positive taxable income and are currently in a cumulative taxable loss position since inception.

For the three months ended March 31, 2014, the Company had activity in the ZFC Trust TRS I, LLC and ZFC Funding, Inc. which resulted in deferred tax asset of $43,473 related to net operating losses and future deductible amounts for tax purposes. A full valuation allowance had been established with respect to taxes at the date of the consolidated balance sheet for the quarter ended March 31, 2014 for the deferred tax asset.

Components of our net deferred tax assets and liabilities at March 31, 2015 and March 31, 2014 are presented in the following table:

Deferred Tax Assets (Liabilities)

      Three Months Ended March 31,
2015 2014
Deferred tax assets            
       Tax effect of unrealized losses and other temporary differences $ 1,273,154 $ -
         Net operating loss carryforward            1,817,134                43,473
Total deferred tax assets 3,090,288 43,473
 
Deferred tax liabilities
       Tax effect of unrealized gains and other temporary differences (1,335,398 )
Total deferred tax liabilities (1,335,398 ) -
 
Valuation allowance 758,364 43,473
 
Total Deferred Tax Assets, net of Valuation Allowance $ 996,526 $ -

The Company evaluates uncertain income tax positions when applicable. Based upon its analysis of income tax positions, the Company concluded that there are no significant uncertain tax positions that meet the recognition or measurement criteria at either March 31, 2015 or March 31, 2014. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these consolidated financial statements.

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17. Earnings Per Share

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share:

Three Months Ended
     March 31, 2015      March 31, 2014
Numerator:
Net income/(loss) attributable to ZAIS Financial Corp. common stockholders (Basic) $ 373,780 2,224,205
Effect of dilutive securities:
Net income allocated to non-controlling interests 43,466 258,654
Exchangeable Senior Notes  
       Interest expense
       Gain on derivative instruments
       Total – Exchangeable Senior Notes
Net income/(loss) available to stockholders, after effect of dilutive securities $ 417,246 $ 2,482,859
 
Denominator:
Weighted average number of shares of common stock 7,970,886 7,970,886
Effect of dilutive securities:
Weighted average number of OP units 926,914 926,914
Weighted average number of shares convertible under Exchangeable Senior Notes
Diluted weighted average shares outstanding $ 8,897,800 $ 8,897,800
Net income per share applicable to ZAIS Financial Corp. common stockholders – Basic $ 0.05 $ 0 .28
Net income per share applicable to ZAIS Financial Corp. common stockholders – Diluted $ 0.05 $ 0 .28

The dilutive effect of OP units, if any, is computed assuming all units are converted to common stock. The dilutive effect of the Exchangeable Senior Notes, if any, is computed assuming shares converted are limited to 1,779,560 pursuant to New York Stock Exchange ("NYSE") restrictions.

18. Related Party Transactions

ZAIS REIT Management, LLC

The Company is externally managed and advised by the Advisor, a subsidiary of ZAIS. Subject to certain restrictions and limitations, the Advisor is responsible for managing the Company's affairs on a day-to-day basis including, among other responsibilities, (i) the origination, selection, purchase and sale of the Company's portfolio of assets, (ii) arranging the Company's financing activities and (iii) providing the Company with advisory services.

The Company pays to its Advisor an advisory fee, calculated and payable quarterly in arrears, equal to 1.5% per annum of the Company's stockholders' equity, as defined in the amended and restated investment advisory agreement between the Company and the Advisor, as amended from time to time (the "Investment Advisory Agreement"). Prior to the Company's IPO, the advisory fee paid to the Advisor was calculated based on the Company's net asset value, as set forth in the Investment Advisory Agreement. The Advisor may be paid or reimbursed for the documented cost of its performing certain services for the Company, which may include legal, accounting, due diligence tasks and other services, that outside professionals or outside consultants otherwise would perform, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm's-length basis. In addition, the Company may be required to pay its portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Advisor and its affiliates required for the Company's operations. To date, the Advisor has not sought reimbursement for the services and expenses described in the two preceding sentences. The Company is also required to pay directly, or reimburse the Advisor for, products and services, including hardware and software, provided by third parties, other than those operating expenses required to be borne by the Advisor under the Investment Advisory Agreement. The Advisor has in the past also declined full reimbursement for the costs of such products and services. In the future, however, the Advisor may seek reimbursement for all of the services, cost and expenses described in this paragraph, as a result of which the total expenses and the expense ratio of the Company may increase.

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After an initial three-year term, the Advisor may be terminated annually upon the affirmative vote of at least two-thirds of the Company's independent directors or by a vote of the holders of at least two-thirds of the outstanding shares of the Company's common stock based upon (i) unsatisfactory performance by the Advisor that is materially detrimental to the Company or (ii) a determination that the advisory fees payable to the Advisor are not fair, subject to the Advisor's right to prevent such termination due to unfair fees by accepting a reduction of advisory fees agreed to by at least two-thirds of the Company's independent directors. Additionally, upon such a termination without cause, the Investment Advisory Agreement provides that the Company will pay the Advisor a termination fee equal to three times the average annual advisory fee earned by the Advisor during the prior 24-month period immediately preceding such termination, calculated as of the end of the most recently completed fiscal year before the date of termination.

On August 11, 2014, the Company amended its Investment Advisory Agreement to provide that the Company shall pay its Advisor a loan sourcing fee quarterly in arrears in lieu of any payments or reimbursements that would otherwise be due to the Advisor or its affiliates pursuant to Investment Advisory Agreement for loan sourcing services provided. The loan sourcing fee is equal to 0.50% of the principal balance of newly originated residential mortgage loans sourced by the Advisor or its affiliates through its conduit program and acquired by the Company's subsidiaries.

For the three month periods ended March 31, 2015 and March 31, 2014, the Company incurred the following fees pursuant to the Investment Advisory Agreement:

Three Months Ended
      March 31, 2015       March 31, 2014
Advisory fees $ 702,755 $ 702,755
Loan sourcing fees 8,045
Total – Advisory fees – related party $ 710,800 $ 702,755

Such amounts are included in Advisory fee – related party" in the Company's consolidated statements of operations. At March 31, 2015, $710,800 in advisory fee expense and loan sourcing fee expense was included in accounts payable and other liabilities in the Company's consolidated balance sheet. The fees were calculated and payable as set forth above.

During the normal course of business GMFS provides a variety of services to related parties including accounting, technology and due diligence services. For the three month periods ended March 31, 2015 and March 31, 2014, GMFS received $4,800, from the related parties, which are included in other income in the Company's consolidated statements of operations. GMFS has $1,281 due from related parties at March 31, 2015 which are included in other assets in the Company's consolidated balance sheets.

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

19. Stockholders' Equity

Common Stock

The holders of shares of the Company's common stock are entitled to one vote per share on all matters voted on by common stockholders, including election of the Company's directors. The Company's charter does not provide for cumulative voting in the election of directors.

Therefore, the holders of a majority of the outstanding shares of the Company's common stock can elect its entire board of directors. Subject to any preferential rights of any outstanding series of preferred stock, the holders of shares of the Company's common stock are entitled to such distributions as may be authorized from time to time by the Company's board of directors out of legally available funds and declared by the Company and, upon liquidation, are entitled to receive all assets available for distribution to stockholders. Holders of shares of the Company's common stock do not have preemptive rights. This means that stockholders do not have an automatic option to purchase any new shares of common stock that the Company issues. In addition, stockholders only have appraisal rights under circumstances specified by the Company's board of directors or where mandated by law. 

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Dividends and Distributions

During the year ended December 31, 2014 and the three months ended March 31, 2015 the Company declared the following dividends:

Declaration Date       Record Date       Payment Date       Amount per Share
Year ended December 31, 2014:
March 20, 2014 March 31, 2014 April 14, 2014 $ 0.40
June 18, 2014 June 30, 2014 July 15, 2014 $ 0.40
September 18, 2014 September 30, 2014 October 15, 2014 $ 0.40
December 19, 2014 December 31, 2014 January 15, 2015 $ 0.40
Three months ended March 31, 2015:
March 19, 2015 March 31, 2015 April 15, 2015 $ 0.40

Preferred Shares

The Company's charter authorizes its board of directors to classify and reclassify any unissued shares of its common stock and preferred stock into other classes or series of stock. Prior to issuance of shares of each class or series, the board of directors is required by the Company's charter to set, subject to the charter restrictions on transfer of its stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series. Thus, the board of directors could authorize the issuance of shares of common stock or preferred stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or change in control that might involve a premium price for holders of the Company's common stock or otherwise be in their best interest.

20. Non-controlling Interests

Non-controlling interests included in the Company's consolidated financial statements consist of the OP units in the Operating Partnership held by parties other than the Company.

Certain investors own OP units in the Operating Partnership. An OP unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. OP unit holders have the right to redeem their OP units, subject to certain restrictions. The redemption is required to be satisfied in shares of common stock or cash at the Company's option, calculated as follows: one share of the Company's common stock, or cash equal to the fair value of a share of the Company's common stock at the time of redemption, for each OP unit. When an OP unit holder redeems an OP unit, non-controlling interest in the Operating Partnership is reduced and the Company's equity is increased. At March 31, 2015 and December 31, 2014, the non-controlling interest OP unit holders owned 926,914 OP units, or 10.4% of the OP Units issued by the Operating Partnership.

21. Commitments and Contingencies

Advisor Services

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, origination, acquisition and disposition of investments; management of the daily operations of the Company's investment portfolio including determination of fair value; and other general and administrative responsibilities. In the event that the Advisor is unable to provide the respective services, the Company will be required to obtain such services from an alternative source.

Litigation

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business.

In late April 2015, the Company received a claim from a counterparty with whom a statute of limitations tolling agreement is in place relating to certain mortgage loans that were sold servicing released by GMFS prior to its acquisition by ZFC in 2014. The Company is currently evaluating this matter which is in its early stages and is unable to reasonably estimate the amount of probable losses or the range of losses that could potentially exist.

Management is not aware of any other contingencies that would require accrual or disclosure in the consolidated financial statements at March 31, 2015 or December 31, 2014.

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Commitments to Originate Loans

The Company enters into IRLCs with customers who have applied for residential mortgage loans and meet certain credit and underwriting criteria. These commitments expose the Company to market risk if interest rates change, and the loan is not economically hedged or committed to an investor. The Company is also exposed to credit loss if the loan is originated and not sold to an investor and the mortgagor does not perform. The collateral upon extension of credit typically consists of a first deed of trust in the mortgagor's residential property.

Commitments to originate loans do not necessarily reflect future cash requirements as some commitments are expected to expire without being drawn upon. Total commitments to originate loans approximated $296.7 million and $117.7 million at March 31, 2015 and December 31, 2014.

Leases

The Company leases office space for use in its mortgage banking operations in connection under a non-cancelable operating lease. The lease provides that the Company pays taxes, maintenance, insurance, and other occupancy expenses applicable to the leased premises. The lease contains three five-year renewal options at the then existing market rates. The Company also leases equipment under various short-term rental agreements. The Company incurred rent expense of $182,987 for the three months ended March 31, 2015. Such amount is included in operating expenses in the Company's consolidated statements of operations. The Company did not incur any rent expense prior to the acquisition of GMFS on October 31, 2014.

The Company sub-leases a portion of its office space and furniture and fixtures contained therein to two entities (one related and one unrelated). The Company received total sub-lease income for the three months ended March 31, 2015 of $8,256. Such amount is included in other income in the Company's consolidated statements of operations. The Company did not have any sublease income prior to the acquisition of GMFS on October 31, 2014.

At March 31, 2015, the future minimum rental payments for the period from April 1, 2015 to December 31, 2015 and the next five years and thereafter are as follows:

April 1, 2015 – December 31, 2015       $      533,333
2016 $      555,898
2017 $      469,790
2018 $      438,305
2019   $      151,985
2020 $     
Thereafter $

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22. Counterparty Risk and Concentration

Counterparty risk is the risk that counterparties may fail to fulfill their obligations, including their inability to post additional collateral in circumstances where their pledged collateral value becomes inadequate. The Company attempts to manage its exposure to counterparty risk through diversification, use of financial instruments and monitoring the creditworthiness of counterparties.

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

As explained in the notes above, while the Company engages in warehouse and repurchase financing activities with several financial institutions, the Company maintains custody accounts with two custodians which hold operating cash accounts and also maintains separate cash accounts with each of its warehouse lenders at March 31, 2015 and December 31, 2014. There is no guarantee that these custodians will not become insolvent. While there are certain regulations that seek to protect customer property in the event of a failure, insolvency or liquidation of a custodian, there is no certainty that the Company would not incur losses due to its assets being unavailable for a period of time in the event of a failure of a custodian that has custody of the Company's assets. Although management monitors the credit worthiness of its custodians, such losses could be significant and could materially impair the ability of the Company to achieve its investment objective.

In the normal course of business, companies in the mortgage banking industry encounter certain economic and regulatory risks. Economic risks include interest rate risk and credit risk. The Company is subject to interest rate risk to the extent that in a rising interest rate environment, the Company may experience a decrease in loan production, as well as decreases in the value of mortgage loans held for sale and in commitments to originate loans, which may negatively impact the Company's operations. Credit risk is the risk of default that may result from the borrowers' inability or unwillingness to make contractually required payments during the period in which loans are being held for sale.

The Company sells loans to investors without recourse. As such, the investors have assumed the risk of loss or default by the borrower. However, the Company is usually required by these investors to make certain standard representations and warranties relating to credit information, loan documentation and collateral. To the extent that the Company does not comply with such representations, or there are early payment defaults, the Company may be required to repurchase the loans or indemnify these investors for any losses from borrower defaults. In addition, if loans pay-off within a specified time frame, the Company may be required to refund a portion of the sales proceeds to the investors.

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The Company's business requires substantial cash to support its operating and investing activities. As a result, the Company is dependent on its warehouse lines of credit, repurchase facilities and other financing facilities in order to finance its continued operations and investments. If the Company's principal lenders decided to terminate or not to renew any of these credit facilities with the Company, the loss of borrowing capacity could have a material adverse impact on the Company's consolidated financial statements unless the Company found a suitable alternative source.

MSRs are subject to substantial interest rate risk and the value of MSRs generally tend to diminish in periods of declining interest rates as borrowers can prepay the mortgage notes underlying the MSRs. MSRs increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors that influence prepayments, including home prices, underwriting standards and product characteristics.

23. Offsetting Assets and Liabilities

The following table presents information about certain liabilities that are subject to master netting arrangements (or similar agreements) and can potentially be offset in the Company's consolidated balance sheets at March 31, 2015 and December 31, 2014:

Offsetting of Liabilities

Gross Amounts Not Offset in the
Consolidated Balance Sheets
Net Amounts of
Liabilities
Gross Amounts Presented in
Gross Amounts Offset in the the
of Recognized Consolidated Consolidated Financial Cash Collateral
      Liabilities       Balance Sheets       Balance Sheets       Instruments       Pledged       Net Amount
March 31, 2015
Loan Repurchase Facilities $       299,847,778 $ $       299,847,778 $       (299,845,906 ) $            (1,872 ) $      
Securities repurchase agreements 99,625,837 99,625,837 (98,747,436 ) (878,401 )
Warehouse lines of credit 116,886,558 116,886,558 (116,886,558 )
Interest rate swap agreements 1,164,643 1,164,643 (1,164,643 )
Total $ 517,524,816 $ $ 517,524,816 $ (516,644,543 ) $ (880,273 ) $
 
December 31, 2014
Loan Repurchase Facilities $ 300,092,293 $ $ 300,092,293 $ (300,092,293 ) $ $
Securities repurchase agreements 103,014,105 103,014,105 (102,329,849 ) (684,256 )
Warehouse lines of credit 89,417,564 89,417,564 (89,417,564 )
Interest rate swap agreements 860,553 860,553 (860,553 )
Total $ 493,384,515 $ $ 493,384,515 $ (492,700,259 ) $ (684,256 ) $

The Company did not have any assets that are subject to master netting arrangements which can potentially be offset in the Company's consolidated balance sheets at March 31, 2015.

24. Employee Benefit Plan

GMFS has a 401(k) profit sharing plan