7. MORTGAGE SERVICING RIGHTS MSR represent the rights and obligations associated with servicing pools of residential mortgage loans. The Company and its subsidiaries do not originate or directly service residential mortgage loans. Rather, these activities are carried out by duly licensed subservicers who perform substantially all servicing functions for the loans underlying the MSR. The Company generally intends to hold the MSR as investments and elected to account for all of its investments in MSR at fair value. As such, they are recognized at fair value on the accompanying Consolidated Statements of Financial Condition with changes in the estimated fair value presented as a component of Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Interests in MSR represent agreements to purchase all, or a component of, net servicing cash flows. A third party acted as a master servicer for the loans providing the net servicing cash flows represented by the Interests in MSR. The Company accounts for its Interests in MSR at fair value with change in fair value presented in Net gains (losses) on investments and other in the Consolidated Statements of Comprehensive Income (Loss). Cash flows received for Interests in MSR are recorded in Other, net in the Consolidated Statements of Comprehensive Income (Loss). The following tables present activity related to MSR and Interests in MSR for the years ended December 31, 2023 and 2022: Mortgage Servicing Rights December 31, 2023 December 31, 2022 (dollars in thousands) Fair value, beginning of period $ 1,748,209 $ 544,562 Purchases (1) 397,585 1,009,351 Transfers — 82,650 Sales — (9,084) Change in fair value due to Changes in valuation inputs or assumptions (2) 92,374 205,463 Other changes, including realization of expected cash flows (115,972) (84,733) Fair value, end of period $ 2,122,196 $ 1,748,209 (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. (2) Principally represents changes in discount rates and prepayment speed inputs used in valuation model, primarily due to changes in interest rates. Interests in MSR December 31, 2022 (dollars in thousands) Beginning balance $ 69,316 Purchases (1) 4,860 Transfers (82,650) Gain (loss) included in net income 8,474 Ending balance $ — (1) Includes adjustments to original purchase price from early payoffs, defaults, or loans that were delivered but were deemed to not be acceptable. 8. VARIABLE INTEREST ENTITIES The Company’s exposure to the obligations of its VIEs is generally limited to the Company’s investment in the VIEs of $1.4 billion at December 31, 2023. Assets of the VIEs may only be used to settle obligations of the VIEs. Creditors of the VIEs have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the VIEs. No gains or losses were recognized upon consolidation of existing VIEs. Interest income and expense are recognized using the effective interest method. Multifamily Securitization In March 2020, the Company repackaged Fannie Mae guaranteed multifamily mortgage-backed securities with a principal cutoff balance of $0.5 billion and retained interest-only securities with a notional balance of $0.5 billion. At the inception of this arrangement, the Company determined that it was the primary beneficiary based upon its involvement in the design of this VIE and through the retention of a significant variable interest in the VIE. The Company elected the fair value option for the financial liabilities of this VIE in order to simplify the accounting; however, the financial assets were not eligible for the fair value option as it was not elected at purchase. ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES Financial Statements F-17
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