UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
For the fiscal year ended December 31, 2009
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 001-32958

Crystal River Capital, Inc.
(Exact name of registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		20-2230150 (I.R.S. Employer Identification No.)
Three World Financial Center, 200 Vesey Street, 10th Floor New York, New York (Address of principal executive offices)		10281-1010 (Zip Code)

Registrant's telephone number, including area code: (212) 549-8400

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class		Name of each exchange on which registered
Common Stock, $0.001 par value		None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No ý

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 ý No o

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 o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer o Accelerated filer ýo Non-accelerated filer o ~~(Do not check if a smaller reporting company)~~ Smaller reporting company oý

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

MARKET VALUE

The aggregate market value of the outstanding common stock held by non-affiliates of the registrant as of June 30, ~~2008~~2009 was approximately $8339.35 million (based on the closing sale price of $31.6676 per share as reported by the ~~New~~Over-the-Counter ~~York~~Bulletin ~~Stock~~Board ~~Exchange~~ on that date).

OUTSTANDING STOCK

As of ~~February~~March 2623, ~~2009~~2010, there were 24,~~905~~909,~~253~~256 outstanding shares of common stock. The common stock is traded on the Over-the-Counter Bulletin Board and on Pink Sheets under the trading symbol "CYRV".

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission (the "Commission") within 120 days after the close of the registrant's fiscal year.

CRYSTAL RIVER CAPITAL, INC.

PART I		3
Item 1.	Business.	3
Item 1A.	Risk Factors.	2224
Item 1B.	Unresolved Staff Comments.	5154
Item 2.	Properties.	5154
Item 3.	Legal Proceedings.	5154
Item 4.	Submission of Matters to a Vote of Security Holders.	5155
PART II		5256
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	5256
Item 6.	Selected Financial Data.	5357
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	5559
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	~~112~~118
Item 8.	Financial Statements and Supplementary Data.	~~112~~118
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	~~112~~118
Item 9A.	Controls and Procedures.	~~112~~119
Item 9B.	Other Information.	~~113~~119
PART III		~~114~~120
Item 10.	Directors, Executive Officers and Corporate Governance.	~~114~~120
Item 11.	Executive Compensation.	~~114~~120
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	~~114~~120
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	~~114~~120
Item 14.	Principal Accounting Fees and Services.	~~114~~120
PART IV		~~115~~121
Item 15.	Exhibits, Financial Statement Schedules.	~~115~~121
Signatures		~~116~~122
Index to Consolidated Financial Statements		F-1

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EXPLANATORY NOTE

Except where the context suggests otherwise in this report, the terms "Crystal River," "we," "us" and "our" refer to Crystal River Capital, Inc. and its subsidiaries; "our Manager" refers to our external manager, ~~Hyperion Brookfield~~ Crystal River Capital Advisors, LLC and in certain contexts, may refer to our external manager and its affiliates that provide advisory services to us, including our sub-advisors; "~~Hyperion Brookfield~~BIM" refers to ~~Hyperion~~ Brookfield ~~Asset~~Investment Management, Inc., a sub-advisor that has been retained by us and our Manager; "Brookfield Sub-Advisor" refers to Brookfield Crystal River Capital L.P., a sub-advisor that has been retained by us and our Manager; and "Brookfield" refers to Brookfield Asset Management Inc., the indirect parent company of our Manager, ~~Hyperion~~BIM ~~Brookfield~~ and Brookfield Sub-Advisor, together with its subsidiaries. References in this report to the rating of a debt security reflects the lowest of the credit ratings for such security issued by each of Fitch, Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc.

FORWARD-LOOKING INFORMATION

Some of the statements under "Risk Factors," "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Annual Report on Form 10-K constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "goal," "objective," "potential," "project," "should," "will" and "would" or the negative of these terms or other comparable terminology.

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

•: the factors referenced in this report, including those set forth below in Item 1A and in "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations;"
•: the impending maturity of our senior revolving credit facility, our lack of access to additional financing and our current financial condition raise substantial doubt regarding our ability to continue as a going concern;
•: recent adverse developments in the mortgage finance and credit markets and our current inability to make new investments;
•: risks relating to our proposed merger with Brookfield, as well as risks relating to our failure to complete the merger;
•: changes in our business strategy;
•: availability of qualified personnel;
•: conflicts of interest with our Manager;
•: terrorist attacks;
•: our reliance on a single tenant for all three of our commercial real estate properties;

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•: increased rates of default and/or decreased recovery rates on our investments;
•: increased prepayments of the mortgage and other loans underlying our mortgage-backed or other asset-backed securities;
•: changes in governmental regulations, tax law and rates and similar matters;
•: changes in generally accepted accounting principles by standard-setting bodies;
•: to the extent we have investable cash, availability of investment opportunities in real estate-related and other securities; and
•: the degree and nature of our competition.

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PART I

Item 1. Business.

Crystal River is a Maryland corporation that ~~invests~~has invested in commercial real estate, real estate loans and instruments, real estate-related securities, such as commercial and residential mortgage-backed securities, and various other asset classes. ~~Our~~We ~~objective~~have isinvested ~~to generate sustainable current income and long-term capital appreciation to our investors. To achieve this objective, we currently are investing~~ primarily in commercial real estate, whole mortgage loans, mezzanine loans, commercial mortgage-backed securities, or CMBS, and non-Agency residential mortgage-backed securities, or non-Agency RMBS. We also have invested in ~~and may in the future invest in~~ junior interests in mortgage loans known as B Notes, mortgage-backed securities issued by U.S. Government sponsored agencies, or Agency MBS, diversified asset-backed securities, or ABS, including consumer obligations, and collateralized debt obligations, or CDOs. Finally, we have made ~~and intend to continue to make~~ selective debt and/or equity investments in certain alternative assets, ~~which may include power generating facilities, timber and private equity funds managed by certain of our affiliates that invest in such assets,~~ to diversify our portfolio and enhance our risk adjusted returns. We are ~~externally~~ externally managed and advised by wholly-owned subsidiaries of Brookfield. We have elected and qualified to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code since the 2005 tax year. To maintain our tax status as a REIT, we ~~have~~are ~~distributed,~~required ~~and intend~~ to ~~continue to~~ distribute, at least 90% of our taxable income, ~~and~~to ~~have~~the ~~tailored~~extent ~~our~~that ~~balance~~we ~~sheet~~have ~~investment program~~any, toand ~~originate~~we orare ~~acquire~~monitoring ~~loans~~our ~~and~~balance sheet investments to meet ~~produce a portfolio that meets~~ the asset and income tests necessary to maintain qualification as a REIT.

We were organized on January 25, 2005 by ~~Hyperion Brookfield~~BIM, which may be deemed to be our promoter, and completed a private offering of our common stock, par value $0.001 per share, which we refer to as our common stock, in March 2005, in which we raised net proceeds of approximately $405.6 million. In August 2006, we completed our initial public offering, in which we sold 7.5 million shares of our stock and raised net proceeds of $158.6 million.

We currently own a portfolio consisting of commercial mortgage backed securities, residential mortgage backed securities, commercial mortgage loan products and three commercial real ~~estate~~ estate office buildings that are net-leased on a long-term basis to JPMorgan Chase. In the current market, it is very difficult to obtain or refinance leverage against our portfolio of assets~~. Consequently,~~ and we ~~are~~currently indo ~~the~~not ~~process~~have ofany ~~paying~~investable ~~down our short-term debt~~cash. We ~~actively manage our portfolio of assets with a goal of maximizing the cash flow that is produced from the assets. We~~ make portfolio allocation decisions based on various factors, including expected cash yield, relative value, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost and availability of financing and hedging activities, as well as maintaining our REIT qualification and our exclusion from regulation under the Investment Company Act of 1940, which we refer to as the Investment Company Act. These factors place significant limits on the amount of certain of our targeted investments such as private equity funds, non-real estate loans and consumer ABS, non-real estate-related CDOs and other equity investments that wemight ~~may~~be ~~include~~included in our portfolio.

Our common stock, ~~par value $0.001 per share, which we refer to as the Common Stock,~~ is traded on the Over-the-Counter Bulletin Board and on Pink Sheets under the symbol "CYRV". ~~Our~~Historically, ~~Board~~our board of ~~Directors~~directors ~~establishes~~established our dividend by analyzing the long-term sustainability of earnings given existing market conditions and the current composition of our portfolio and by analyzing our distribution obligations as a REIT. This ~~includes~~included an analysis of our credit loss assumptions, general level of interest rates and projected hedging costs. In November 2009, our board of directors announced that it had elected to suspend our quarterly dividend to stockholders to preserve liquidity in consideration of the large increase in the delinquency rate on our CMBS portfolio and the resulting uncertainty regarding our operating cash flows. In addition, we are prohibited from paying any dividends under the merger agreement described in "Business—Recent Developments—Possible Acquisition of Crystal River", which we refer to as the merger agreement.

We are managed by our Manager, a subsidiary of Brookfield Asset Management Inc., a publicly traded (NYSE:BAM) asset management company with approximately $80100 billion of assets under ~~management at December 31, 2008. Our Manager provides an operating platform that incorporates significant asset origination, risk management, and operational capabilities.~~

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~~Beginning~~management inat ~~2007~~December 31, we2009. ~~determined~~Our ~~that~~Manager weprovides ~~operate~~an inoperating ~~two~~platform ~~reportable~~that ~~segments:~~incorporates asignificant ~~Commercial~~asset ~~Real~~origination, ~~Estate~~risk ~~segment and a Securities~~management, ~~Loans~~ and ~~Other~~operational ~~segment~~capabilities. ~~See Note 18 to our consolidated financial statements contained elsewhere herein for certain financial information relating to our segments for the year ended December 31, 2008.~~

~~Current~~Beginning ~~market conditions continue to remain challenging. Assets within our portfolio continued to decline~~ in ~~market value throughout 2008. Specifically~~2007, ~~CMBS~~we ~~and~~determined ~~RMBS assets, which make up the bulk of our securities portfolio, are valued by the marketplace as if they were "interest-only" securities~~ that ~~will~~we ~~only~~operate ~~pay~~in ~~interest for another one to~~ two ~~years,~~reportable ~~with~~segments: ~~no principal~~a ~~being~~Commercial ~~paid~~Real atEstate ~~maturity.~~segment Weand ~~actively~~a ~~monitor~~Securities, ~~the~~Loans ~~cash flow that is produced from this portfolio~~ and ~~use~~Other ~~the~~segment. ~~cash~~See ~~flow~~Note 17 ~~that is produced~~ to ~~pay down~~ our consolidated ~~short~~financial ~~term~~statements ~~debt,~~contained ~~including~~elsewhere ~~indebtedness under~~herein ~~our~~for ~~secured~~certain ~~revolving~~financial ~~credit~~information ~~facility,~~relating ~~which we continue~~ to ~~believe~~our issegments infor the ~~best~~year ~~interest~~ended ofDecember 31, ~~the shareholders~~2009.

~~During~~Current ~~2008,~~market weconditions ~~were~~continue ~~focused~~to onremain ~~executing~~challenging. ~~our~~Assets ~~stated~~within ~~goal of reducing~~ our ~~short-term~~portfolio ~~debt.~~continued ~~The~~to ~~first~~decline ~~step~~in ~~toward~~market ~~that~~value ~~goal~~throughout ~~was~~2008 ~~the~~and ~~sale of our $1~~2009.~~2 billion~~ ~~Agency~~Specifically, ~~MBS portfolio~~CMBS inand ~~the~~RMBS ~~first half of 2008~~assets, which ~~significantly~~make ~~decreased~~up the ~~size~~bulk of our ~~balance~~securities ~~sheet.~~portfolio, ~~Our~~are ~~short-term~~valued ~~debt~~by ~~totaled~~the ~~$1.3 billion~~marketplace ~~at December 31, 2007 and~~ as ~~of December 31,~~if ~~2008,~~they itwere ~~stood~~"interest-only" atsecurities ~~$32.9 million. Our view is~~ that inwill ~~order~~only topay ~~run~~interest ~~our~~for ~~business~~another ~~effectively~~one into ~~the~~two ~~face of current market conditions~~years, ~~our fundamental focus needs to be on~~with ~~maximizing~~no ~~the~~principal ~~current~~being ~~and~~paid ~~expected~~at ~~cash flows of the Company~~maturity. ToWe ~~this~~actively ~~end,~~monitor ~~our board of directors prudently reduced~~ the ~~Company's~~cash ~~dividend,~~flow ~~beginning~~that inis ~~the~~produced ~~second~~from ~~quarter~~this ~~of 2008. This dividend decrease~~portfolio, ~~together~~which ~~with~~also ~~our management of our cash flows~~ has ~~resulted~~experienced insignificant ~~our~~declines ~~cash~~as ~~flows~~a ~~from~~result ~~operations for the last six months~~ of ~~2008~~defaults ~~being~~and delinquencies in ~~excess of three times~~ the ~~quarterly~~underlying ~~dividend~~loans.

During 2008 and 2009, we were focused on executing our stated goal of reducing our short-term debt. The first step toward that goal was the sale of our $1.2 billion Agency MBS portfolio in the first half of 2008 and the application of the sales proceeds to repay our short-term debt, which significantly decreased the size of our balance sheet. Our short-term ~~Manager~~ debt totaled $1.3 billion at December 31, 2007 and as of December 31, 2009, it stood at $28.9 million. Our current view is that in order to run our business effectively in the face of current market conditions, our fundamental focus needs to be on maximizing our current and expected cash flows. To this end, our board of directors reduced our dividend, beginning in the second quarter of 2008, and suspended our dividend, beginning in the fourth quarter of 2009.

We ~~are~~Recent externally managed and advised by our Manager, a wholly-owned subsidiary of Brookfield that was formed on January 25, 2005 solely for the purpose of serving as our manager, whose officers consist of investment professionals and employees of Brookfield or one or more of its affiliates. As of December 31, 2008, our Manager had no employees and we and our Manager had no independent officers and were entirely dependent on Brookfield and its affiliates for the day-to-day management of our operations. While our directors periodically review our investment guidelines and our investment portfolio, other than any investments involving our affiliates or our sub-advisors' affiliates or investments proposed by Brookfield Sub-Advisor, which they are required to review and approve prior to such investments being made, they do not review all of our proposed investments. Our officers, as employees of Brookfield or one of its affiliates, have been delegated the responsibility to review and make investments consistent with our investment strategy and to provide direction and oversight to our sub-advisors. Our Manager did not have any experience managing a REIT prior to its entering into a management agreement with us and it currently does not provide management or other services to entities other than us. Developments

~~We and~~ ~~our~~Going Manager believe that the most significant opportunity for out-performance in the current market is to maximize the cash flow of the Company's assets and to reduce the Company's short-term debt. We and our Manager believe that, on a long-term basis, this approach will be most beneficial to our stockholders. Concern

We held cash and cash equivalents of approximately $3.3 million as of December 31, 2009, which excludes restricted cash ~~believe~~of approximately $16.5 million that is used to collateralize our ~~relationship~~credit ~~with~~default ~~Brookfield,~~swap ~~Hyperion~~and ~~Brookfield~~certain other commercial real estate and financing obligations. As of December 31, 2009, we owed $28.9 million to an affiliate of our Manager ~~and~~under our ~~sub-advisors~~secured ~~provides~~credit usfacility. ~~with~~Unless ~~substantial~~earlier ~~benefits~~terminated as provided in ~~sourcing,~~the ~~underwriting~~credit ~~and managing~~agreement governing the terms of our ~~investments~~secured credit facility, our credit facility terminates on August 31, 2010. ~~Our~~If ~~Manager~~the merger with Brookfield discussed below under "—Possible Acquisition of Crystal River" is ~~responsible~~not ~~for~~consummated, ~~administering~~this ~~our~~facility ~~business~~is not ~~activities~~extended and ~~day-to-day~~we ~~operations~~cannot ~~and~~obtain ~~uses~~alternative ~~the~~financing, ~~resources~~we ofdo ~~Brookfield~~not expect to ~~support~~have ~~our~~ sufficient cash on hand or to generate sufficient cash flow from operations to repay such indebtedness. WeGiven ~~believe~~the current ~~that~~lack ~~our~~of ~~management~~liquidity ~~agreement~~in the credit markets and ~~sub-advisory~~the ~~agreements~~current ~~provide~~economic usclimate, ~~access~~we expect to ~~broad~~have ~~referral~~difficulty ~~networks,~~obtaining ~~experience~~alternative infinancing ~~capital~~if ~~markets,~~our credit ~~analysis,~~facility ~~debt~~is not extended. If we cannot ~~structuring,~~obtain ~~hedging~~alternative ~~and~~financing ~~asset~~or ~~management~~extend our credit facility, asit ~~well~~increases asthe ~~corporate~~risk ~~operations~~that ~~and~~we ~~governance~~will be unable to continue as a going concern. Our ~~Manager,~~independent ~~together~~registered ~~with~~public ~~our~~accounting ~~sub-advisors~~firm, Ernst & Young LLP, has ~~well-respected,~~issued ~~established portfolio~~an ~~management~~opinion ~~resources~~on ~~for~~our ~~each~~consolidated offinancial statements which states that our ~~targeted~~inability ~~asset~~to ~~classes~~refinance ~~and~~or anextend ~~extensive,~~the ~~mature~~maturity ~~infrastructure~~of ~~supporting~~indebtedness ~~those~~maturing ~~resources.~~in ~~Our~~the ~~Manager's~~next 12 months ~~and~~raises substantial doubt about our ~~sub-advisors'~~ability to continue as a going concern.

Our consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

Completion of the Exchange and Discharge of our Trust Preferred Securities

On January 29, 2010, we entered into an exchange agreement, which we refer to as the Exchange Agreement, with Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., which

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~~portfolio~~we ~~management~~collectively ~~resources~~refer ~~and~~to ~~infrastructure~~as ~~are~~Taberna, ~~fully~~pursuant ~~scalable~~ to ~~service~~which ~~our~~we ~~company's~~exchanged ~~activities.~~certain Weof ~~also~~our ~~expect~~assets todescribed ~~benefit~~below ~~from~~for ~~our~~the ~~Manager's~~outstanding ~~comprehensive~~$50.0 million ~~risk~~aggregate ~~management,~~liquidation ~~which~~preference ~~addresses~~of trust preferred ~~not~~securities ~~only~~issued ~~the~~by ~~risks~~Crystal ofRiver ~~portfolio~~Preferred ~~loss,~~Trust ~~such~~I asand ~~risks~~backed ~~relating~~by to$51.6 million ~~price~~aggregate ~~volatility,~~principal ~~position~~amount ~~sizing~~of ~~and~~our ~~leverage,~~junior ~~but~~subordinated ~~also~~notes ~~the~~due ~~operational~~2037. ~~risks~~Immediately ~~such~~following asthe ~~execution~~closing of ~~transactions,~~the transaction ~~clearing~~contemplated ~~of transactions~~by the Exchange Agreement, ~~recording~~the ofjunior ~~transactions~~subordinated notes were cancelled, ~~and~~the ~~monitoring~~indenture ofunder ~~positions~~which ~~that~~the ~~can~~notes ~~have~~were ~~major~~issued ~~adverse~~was ~~impacts~~discharged onand ~~investment~~Crystal ~~programs~~River Preferred Trust I was dissolved.

~~Our~~Pursuant ~~Manager~~to ~~and~~the ~~our~~Exchange ~~sub-advisors~~Agreement, ~~have~~we ~~senior~~transferred ~~management~~and ~~teams~~assigned ~~with~~to ~~extensive~~Taberna ~~experience~~two inreal ~~identifying~~estate loans and ~~financing~~a CMBS bond, ~~hedging~~which ~~and~~collectively ~~managing~~had ~~commercial~~an ~~real~~aggregate ~~estate,~~carrying ~~real~~value ~~estate~~for accounting ~~loans~~purposes ~~and~~on ~~instruments~~our balance sheet as of December 31, 2009 of $6.0 million, and ~~real~~we ~~estate-related~~also ~~securities,~~paid ~~such~~to asTaberna ~~CMBS~~a $1.0 million exchange fee. We also paid $0.5 million to cover all costs and expenses that were incurred by the collateral manager for Taberna, ~~Agency~~the ~~MBS~~indenture trustee and ~~RMBS~~their respective advisors.

~~Our Manager~~ isPossible ~~not~~Acquisition ~~obligated to dedicate certain~~ of ~~its~~Crystal employees exclusively to us nor is it obligated to dedicate any specific portion of its time to our business. Moreover, none of our Manager's employees are contractually dedicated to our Manager's obligations to us under our management agreement. River

On ~~Our~~February 24, ~~Business~~2010, ~~Strengths~~ we announced that we had concluded our previously-announced review of strategic alternatives and that we had entered into a definitive merger agreement with Brookfield pursuant to which Brookfield is expected to acquire all the shares of our outstanding common stock that Brookfield does not already own for cash at a price of $0.60 per share, which we refer to as the Merger.

The Merger ~~Our~~was ~~Investment~~unanimously ~~Strategy~~ approved by the independent members of our board of directors, and by the Special Committee formed to oversee our strategic review process. The transaction is subject to approval by our stockholders holding a majority of the shares entitled to vote at a special meeting of stockholders, as well as other customary closing conditions. Consummation of the Merger is not subject to a financing condition and Brookfield has consented to the transaction in its capacity as our senior lender. The merger agreement does not prohibit us from receiving and evaluating competing bids prior to completion of the Merger and does not require the payment of a termination fee if we accept a superior bid. We will be obligated to reimburse Brookfield for all of its transaction expenses if the merger agreement is terminated other than as result of a breach by Brookfield (subject to a cap in certain circumstances). The Merger currently is expected to close in the second quarter of 2010.

~~Our~~ ~~Manager's~~Amendment ~~investment strategy is consistent with Brookfield's investment philosophy, which is predicated on the concept~~ of ~~producing~~ ~~stable~~Credit cash flows and absolute returns. We and Brookfield believe that the most significant opportunities for out-performance exist between and within sectors, as well as among individual investments. The investment process begins with a macroeconomic assessment of the market. Included in the market assessment is the analysis of the interest rate environment, the phase of the real estate cycle, consumer credit trends, supply and demand relationships, as well as a review of any recently released or pending economic data. Our Manager seeks to determine the relative merits of sectors by combining the analysis of historical relationships with the firm's anticipated outlook for the market. Portfolio managers evaluate fundamental and technical developments in each sector, along with current offerings, recent transactions and market clearing levels and yield spread levels to provide a relative value outlook. This analysis is utilized to determine optimal areas to allocate credit risk in the portfolio across sectors and maturities and to maximize yield and total return expectations. Agreement

~~The most~~Concurrently ~~important~~with ~~component~~entering ofinto ~~our~~the ~~Manager's~~merger ~~relative~~agreement ~~value~~with ~~investment strategy is security selection~~Brookfield, awe ~~process~~amended ~~that is~~ the ~~result~~terms of ~~both~~our ~~quantitative~~revolving ~~and~~credit ~~qualitative~~facility ~~inputs, as well~~with asBrookfield ~~the~~US ~~experience~~Corporation, ofan ~~the~~affiliate ~~portfolio managers. Members~~ of ~~the investment team, utilizing~~ our Manager's, ~~proprietary~~pursuant ~~analytics,~~to ~~determine~~which the ~~relative~~maturity ~~strengths~~date of ~~various~~the ~~securities~~credit ~~based~~facility onwas ~~applicable criteria~~extended ~~such~~to ~~as issuer~~August 31, ~~issue~~2010, ~~vintage,~~unless ~~credit~~sooner ~~rating,~~terminated ~~structure,~~as ~~and~~provided ~~geographic~~in ~~exposure.~~the credit ~~The~~agreement; ~~security~~provided, ~~selection~~however, ~~process~~that, ~~focuses~~notwithstanding onthe ~~four~~foregoing, ~~primary areas:~~ the ~~analysis~~term of ~~credit strength,~~ the ~~analysis~~credit offacility ~~security~~will ~~structure,~~expire upon the ~~determination~~latest of ~~relative~~(i) May 25, ~~value~~2010, ~~and~~(ii) the aeffective ~~surveillance~~time ~~function. The analysis~~ of ~~credit strength entails~~ the ~~assessment~~Merger ofand ~~loan~~(iii) thirty ~~level~~(30) calendar ~~attributes~~days ~~such~~following asthe atermination ~~security's~~of the ~~loan-to-value~~merger ~~ratio~~agreement, ~~ratios~~but ~~like~~in ~~borrower's~~no ~~debt~~event tolater ~~income,~~than ~~or debt coverage~~August 31, ~~and~~2010. ~~loan~~In ~~features and location~~addition, asBrookfield ~~well~~US asCorporation ~~trend~~consented ~~level~~to ~~attributes~~the ~~such~~Merger ~~as vintage~~ and ~~issuer. Security~~to ~~structure~~the ~~involves~~separate ~~the~~sale ~~comprehensive~~by ~~examination~~us of acertain ~~security's~~of ~~structural~~our ~~attributes~~assets ~~such~~(described below) as ~~credit~~contemplated ~~support,~~by ~~triggers,~~the ~~single~~merger ~~asset, conduit, large loan, as well as its yield maintenance provisions and prepayment lock-outs~~agreement. ~~After these first two analyses, the relative value of a~~

Binding Letter of Intent for Asset Sale

As contemplated by the merger agreement, on March 9, 2010, we entered into a binding letter of intent, which we refer to as the Asset Sale LOI, with Ranieri Partners Management LLC, which we refer to as Ranieri, pursuant to which Ranieri (either directly or through an affiliate) agreed to purchase five CMBS bonds from us, which we refer to as the CMBS Purchase. The five CMBS bonds

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~~security~~had ~~versus~~a ~~other~~carrying ~~candidates~~value ~~is determined through the evaluation~~ of ~~such~~approximately ~~aspects~~$0.9 million as ~~yield~~of ~~spread~~December 31, ~~and liquidity~~2009. ~~Finally,~~In ~~after purchase~~addition, aunder ~~surveillance~~the ~~function~~Asset ~~begins~~Sale ~~that~~LOI, ~~uses~~Ranieri ~~our~~(either ~~Manager's analytical~~directly ~~tools~~or tothrough ~~determine~~an ~~whether~~affiliate) aagreed ~~security continues~~ to ~~perform~~acquire asthe rights ~~expected.~~to:

•: (i) (a) direct us to use commercially reasonable efforts to advocate for the appointment of Ranieri or another person designated by Ranieri (in this context, we refer to Ranieri in this context or such other person designated by Ranieri as the Specified Manager) as the collateral manager for Crystal River CDO 2005-1, Ltd., which we refer to as CDO1 and (b) exercise, from and after the final consummation of the CMBS Purchase, any and all of our rights, in our capacity as the sole holder of the preferred shares of CDO1, to direct the appointment of a replacement collateral manager for CDO1 (subject to any fiduciary or other legal obligations that we have) (clauses (a) and (b) of this subparagraph (i) are collectively referred to herein as the CDO1 Rights Purchase); and
•: (ii) (a) direct us, in our capacity as the sole holder of the preferred shares of Crystal River Resecuritization 2006-1 Ltd., which we refer to as CDO2, to direct CDO2 to appoint the Specified Manager as the replacement collateral manager for CDO2, following the resignation of our Manager as the CDO2 collateral manager under the collateral management agreement for CDO2 and (b) exercise, from and after the final consummation of the CMBS Purchase, any and all of our rights, in our capacity as the sole holder of the preferred shares of CDO2, to direct the appointment of a replacement collateral manager for CDO2 (subject to any fiduciary or other legal obligations that we have) (clauses (a) and (b) of this subparagraph (ii) are collectively referred to herein as the CDO2 Rights Purchase).

~~Our~~Ranieri ~~objective~~has isagreed to ~~provide~~pay ~~attractive~~us ~~returns to our investors through~~ a ~~combination~~total of ~~dividends and capital appreciation~~$8.0 million Tofor ~~achieve~~the ~~this~~CMBS ~~objective~~Purchase, wethe ~~opportunistically~~CDO1 ~~invest~~Rights inPurchase ~~a diversified~~and ~~investment~~the ~~portfolio~~CDO2 ofRights ~~real estate securities~~Purchase, ~~real~~which ~~estate~~we ~~and~~refer ~~various~~to ~~other~~collectively ~~asset~~as ~~classes~~the Transaction. WeThe ~~believe~~following ~~that~~table ~~this~~provides ~~strategy~~information ~~permits~~with usrespect to bethe ~~opportunistic~~purchase ~~and~~price ~~invest in those assets that generate attractive risk-adjusted returns, subject~~ to ~~maintaining~~be ~~our~~paid ~~REIT~~by ~~status~~Ranieri ~~and~~(either ~~exclusion~~directly ~~from regulation under the Investment Company Act. Accordingly, we have not adopted policies~~or ~~that~~through ~~require~~one ~~us to establish~~ or ~~maintain~~more ~~any~~of ~~specific~~its ~~asset~~affiliates) ~~allocations,~~ and ~~our~~the ~~targeted~~estimated ~~allocations~~closing ~~will~~date ~~vary~~for ~~from time~~each tocomponent ~~time~~of ~~as determined by our management team, subject to~~ the ~~oversight~~Transaction: ~~of our board of directors.~~

We benefit from the full range of experience and depth of resources developed by our Manager and its affiliates in managing approximately $80 billion of assets as of December 31, 2008. We rely on our Manager's expertise in identifying assets within our target asset classes. We expect to make portfolio allocation decisions based on various factors, including expected cash yield, relative value, risk-adjusted returns, current and projected credit fundamentals, current and projected macroeconomic considerations, current and projected supply and demand, credit and market risk concentration limits, liquidity, cost of financing and financing availability, as well as maintaining our REIT qualification and exclusion from regulation under the Investment Company Act.

Component of Transaction	Purchase Price	Estimated Closing Date

CMBS Purchase	$2,500,000 (plus accrued and unpaid interest through the closing date of this portion of the Transaction)	Closed on March 15, 2010
CDO1 Rights Purchase	$3,500,000	Third Quarter/Fourth Quarter 2010 (90 days after obtaining approval of Class A Notes to appoint the Specified Manager)
CDO2 Rights Purchase	$2,000,000	June/July 2010

In connection ~~Our~~with ~~Target~~the execution of the Asset ~~Classes~~ Sale LOI, one of Ranieri's affiliates paid $1.6 million (20% of the total purchase price) as a deposit on the Transaction. A ratable portion of the escrowed funds (based on the purchase prices specified above) will be applied to each component of the Transaction upon the closing of that component. The CMBS Purchase closed on March 15, 2010 and $0.5 million of the deposit was applied against the $2.5 million purchase price for the CMBS bonds. An affiliate of Brookfield is a lender to the Ranieri affiliate that purchased the CMBS bonds, which such Ranieri affiliate we refer to as the Purchaser, and proceeds from such loan have been used to fund the deposit referenced above and the remainder of the purchase price for the CMBS bonds and an additional $1.9 million available under the loan may be used to fund a portion of the purchase price for the CDO1 Rights Purchase and the CDO2 Rights Purchase. In addition, an affiliate of Brookfield, which we refer to as the Co-Investor, is a co-investor with the Purchaser in the entity, which we refer to as the Servicer, that acts as the special servicer for several of the CMBS

Our targeted asset classes and the principal investments we may make in each, whether directly or indirectly through investments in funds that focus on these asset classes, are as follows:

Asset Class		Principal Investments
Commercial Real Estate		•	Direct Property Ownership
		•	REIT Common and Preferred Stock investment
		•	Preferred Equity Investments
		•	Joint Ventures
Mortgages and Other Real Estate Debt		•	Mortgage Loans
		•	Bridge Loans
		•	B Notes
		•	Mezzanine Loans
		•	Land Loans
		•	Construction Loans
		•	Construction Mezzanine Loans
MBS
	—CMBS	•	Investment Grade CMBS (Senior and Subordinated)
		•	Below-Investment Grade CMBS (Rated and Non-Rated)
	—Agency MBS	•	Agency Adjustable Rate Mortgages ("ARMs")
	—RMBS	•	Non-Agency ARMs
		•	Investment Grade RMBS
		•	Below-Investment Grade RMBS
		•	Non-Conforming Loans
		•	Other RMBS
Other asset-backed securities		•	CDOs
		•	Consumer ABS
		•	Aircraft ABS

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Asset Class	Principal Investments
Alternative Assets	•	Hydroelectric, Gas- and Coal-Fired Power Generating Facilities
	•	Timber
	•	Other Equity Investments

securitizations in which we have invested, including all of the securitizations in which the bonds that were the subject of the CMBS Purchase are a part. Brookfield and/or its affiliates have, or prior to the CMBS Purchase had, the ability to designate the special servicer for the securitizations in which the bonds that were the subject of the CMBS Purchase are a part and had designated the Servicer as the special servicer for those securitizations. The Co-Investor and the Purchaser own approximately 8.5% and 32.3%, respectively, of the Servicer.

~~Our~~We ~~net~~also ~~investment~~agreed ~~income~~to isgrant ~~generated~~to ~~primarily~~Ranieri ~~from~~a ~~the~~right ~~net~~of ~~spread,~~first orrefusal ~~difference,~~to ~~between~~purchase ~~the~~all ~~interest~~or ~~income~~any ~~and~~portion ~~rental income we earn on our investment portfolio and the cost~~ of our ~~borrowings~~ ~~and hedging activities. Our net investment income will vary based upon, among other things, the difference between the~~ interest ~~rates~~in ~~earned~~two onCMBS ~~our~~securitizations ~~various~~if ~~interest-earning~~we ~~assets~~sell ~~and~~those ~~the borrowing~~securities ~~costs~~in of the ~~liabilities used to finance those investments~~future.

~~Although~~The weCMBS ~~intend~~Purchase toclosed ~~focus~~ on ~~the~~March 15, ~~investments~~2010. ~~described~~The ~~above,~~completion ~~our~~of ~~investment~~the ~~decisions~~CDO1 ~~depend~~Rights onPurchase ~~prevailing~~and ~~market~~the ~~conditions.~~CDO2 WeRight ~~have~~Purchase ~~not~~are ~~adopted~~subject ~~any~~to ~~policy~~various ~~that~~customary ~~establishes~~closing ~~specific asset~~conditions ~~allocations~~as ~~among~~well ~~our~~as the ~~targeted~~execution ~~asset~~of ~~classes~~definitive documentation. AsThe aAsset ~~result,~~Sale weLOI ~~cannot~~and ~~predict~~ the ~~percentage~~Transaction ofwere ~~our~~approved ~~assets~~by ~~that~~a ~~will~~special becommittee ~~invested~~of inour ~~each~~board ~~asset~~of ~~class~~directors, orwhich ~~whether~~is wecomprised ~~will~~entirely ~~invest~~of inthe ~~other~~independent ~~classes or~~members ~~investments.~~of ~~Our~~our board of directors, ~~does~~which ~~not~~we ~~and~~refer ~~will~~to ~~not~~as ~~review~~the ~~all~~Special ofCommittee. ~~our~~The ~~proposed~~Special ~~investments~~Committee, ~~but~~with ~~will~~the ~~review~~assistance ~~our~~of ~~portfolio~~Broadpoint.Gleacher, atthe ~~least~~Special ~~quarterly~~Committee's ~~and~~financial ~~will~~advisor, ~~review~~solicited ~~our investment strategy~~ and ~~policies~~ atreceived ~~least~~several ~~annually.~~bids Weon ~~may~~the ~~change~~assets ~~our~~that ~~investment~~are ~~strategy and policies and~~ the ~~percentage~~subject of ~~assets~~the ~~that~~Transaction. ~~may~~The beSpecial ~~invested~~Committee inselected ~~each~~the ~~asset~~Ranieri ~~class,~~bid orbased inon the ~~case~~combination of ~~securities,~~price inand aother ~~single issuer~~terms, ~~without~~in aparticular those ~~vote~~providing ofgreater ~~our~~certainty ~~stockholders~~of closing.

~~The following~~ ~~discusses~~Our the principal investments we have made and that we may make in the future and our general leverage targets for each type of principal investment. Generally, we attempt to match fund our investments by matching the maturity of the financing source with the expected maturity of the investment. Accordingly, where appropriate and available, we will use direct mortgage borrowing and CDO issuances or other long-term borrowings to finance long-term assets. Manager

~~Direct~~ We ~~Real~~are ~~Property~~externally ~~Ownership. We~~managed ~~have~~and ~~made,~~advised ~~and~~by ~~expect~~our toManager, ~~continue~~a towholly-owned ~~make,~~subsidiary ~~direct~~of ~~investments~~Brookfield inthat ~~income-producing~~was ~~commercial~~formed ~~real estate~~on ~~either~~January 25, ~~within~~2005 orsolely ~~outside~~for the ~~United~~purpose ~~States.~~of ~~Such~~serving ~~investments~~as ~~may~~our ~~include office~~manager, ~~multi-family~~whose ~~residential,~~officers ~~retail~~consist of investment professionals and ~~industrial~~employees ~~properties.~~of WeBrookfield ~~may~~or ~~acquire~~one ~~ownership~~or more of ~~commercial~~its ~~property~~affiliates. ~~that~~As weof ~~will~~December 31, ~~own~~2009, ~~and~~our ~~operate~~Manager orhad ~~otherwise~~no ~~acquire~~employees ~~controlling~~other than our President and ~~non-controlling~~Chief ~~interests~~Executive inOfficer, ~~commercial~~and ~~property~~we ~~through~~and ~~joint~~our ~~ventures~~Manager had no other independent officers and ~~similar~~were ~~arrangements.~~entirely Wedependent ~~currently~~on ~~expect~~Brookfield and its affiliates for the day-to-day ~~leverage~~management of our ~~direct~~ ~~real~~operations. ~~estate~~In ~~investments~~August in2009, ~~the~~our ~~range~~current ofChairman, ~~three~~President toand ~~eight~~Chief ~~times~~Executive ~~the~~Officer ~~amount~~was appointed Chairman of our ~~equity~~Board ~~allocated~~of toDirectors, President and Interim Chief Executive Officer in connection with the ~~asset~~commencement ~~class~~of our strategic review process. AsWhile ofour ~~December 31,~~directors ~~2008,~~periodically wereview ~~had~~our ~~$228.3 million~~investment ofguidelines ~~direct~~and our investment ~~investments~~portfolio, inother ~~real~~than ~~property.~~any Ininvestments ~~connection~~involving ~~with~~our affiliates or our ~~direct~~sub-advisors' ~~real~~affiliates ~~property~~or ~~ownership~~investments proposed by Brookfield Sub-Advisor, wewhich ~~have~~they ~~recorded~~are ~~rent~~required ~~enhancement~~to review ~~receivables~~and ~~totaling~~approve ~~$13.8 million~~prior asto ofsuch ~~December 31~~investments being made, ~~2008~~they do not review all of our proposed investments. ~~Intangible~~ ~~assets~~Our ~~and~~officers ~~liabilities~~have ~~recorded~~been indelegated ~~connection~~the responsibility to review and make investments consistent with our ~~direct~~investment ~~real~~strategy ~~property~~and ~~ownership~~to ~~totaled~~provide ~~$75.5 million~~direction and ~~$72~~oversight to our sub-advisors.~~3 million,~~ ~~respectively,~~Our asManager ofdid ~~December 31,~~not ~~2008~~have any experience managing a REIT prior to its entering into a management agreement with us and it currently does not provide management or other services to entities other than us.

~~Whole~~ We believe ~~Mortgage~~our ~~Loans~~relationship ~~and~~with ~~Bridge~~Brookfield, ~~Loans. We~~BIM, ~~have~~our ~~originated~~Manager and ~~purchased,~~our ~~and~~sub-advisors ~~may~~has inprovided ~~the~~us ~~future~~with ~~originate~~substantial orbenefits ~~purchase~~in sourcing, ~~direct~~underwriting ~~or indirect~~and ~~interests~~managing inour ~~whole~~investments. ~~loans~~Our ~~secured~~Manager byis ~~first~~responsible ~~mortgages~~for ~~which~~administering ~~provide~~our ~~long-term~~business ~~mortgage~~activities ~~financing~~and day-to-day ~~commercial~~operations ~~property developers~~ and ~~owners~~uses ~~that~~the ~~generally~~resources ~~have~~of ~~maturity~~Brookfield ~~dates~~to ~~ranging~~support ~~from~~our ~~three to ten years~~operations. We believe ~~also~~that ~~may~~our ~~originate~~management oragreement ~~purchase~~and ~~first~~sub-advisory ~~mortgage~~agreements ~~loans~~provide ~~that~~us ~~provide~~access ~~interim~~to orbroad ~~bridge~~referral ~~financing~~networks, ~~until~~experience ~~permanent~~in ~~mortgage~~capital ~~financing~~markets, ~~can~~credit beanalysis, ~~obtained.~~debt ~~The~~structuring, ~~maturity~~hedging and ~~dates~~asset onmanagement, ~~bridge~~as ~~loans~~well ~~are generally~~as ~~less~~corporate ~~than~~operations ~~five~~and ~~years~~governance. InOur ~~some cases~~Manager, wetogether ~~may~~with ~~originate~~our ~~and~~sub-advisors, ~~fund~~has awell-respected, ~~first~~established ~~mortgage~~portfolio ~~loan~~management resources ~~with~~for ~~the~~each ~~intention~~ of ~~selling~~our ~~the~~targeted ~~senior~~asset ~~tranche~~classes and ~~retaining~~ ~~the~~an Bextensive, ~~Note~~mature orinfrastructure ~~mezzanine~~supporting ~~loan~~those ~~tranche~~resources. AsOur ofManager's ~~December 31,~~and ~~2008,~~our wesub-advisors' ~~had~~portfolio management ~~originated~~resources ~~100%~~and ofinfrastructure ~~the~~are ~~aggregate~~fully ~~principal~~scalable ~~amount~~to ofservice ~~whole~~our ~~mortgage~~company's ~~loans and bridge loans that we held~~activities. We ~~currently,~~ ~~and~~also expect to ~~continue~~benefit ~~to,~~from ~~leverage~~ our ~~investments~~Manager's incomprehensive ~~whole~~risk ~~mortgage~~management, ~~loans~~which ~~and~~addresses ~~bridge~~not ~~loans~~only in the risks ~~range~~ of ~~zero~~portfolio toloss, ~~eight~~such ~~times~~as ~~the~~risks ~~amount~~relating ofto ~~our~~price ~~equity~~volatility, ~~allocated~~position tosizing and leverage, but also the ~~asset~~operational ~~class.~~risks Assuch as execution of ~~December 31~~ transactions, ~~2008~~clearing of transactions, werecording of ~~had~~transactions, ~~approximately~~and ~~$2.5 million~~monitoring inof ~~whole~~positions ~~loans~~that ~~with~~can ahave ~~weighted~~major ~~average~~adverse ~~coupon~~impacts ~~rate~~on ofinvestment 3programs.~~73%.~~

Commercial Real Estate Subordinated Loans. We have invested in, and may in the future invest in, direct or indirect interests in commercial real estate subordinated loans, which we refer to as B Notes, that may be rated by at least one nationally recognized rating agency. The subordination of a B Note

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~~typically~~ Our isManager ~~evidenced~~and byour ~~an inter~~sub-~~creditor~~advisors ~~agreement~~have ~~with~~senior ~~the~~management ~~holder~~teams ~~of the related A Note. B Notes share certain credit characteristics~~ with ~~subordinated~~extensive ~~CMBS,~~experience in ~~that~~identifying ~~both~~and ~~reflect~~financing, anhedging ~~interest in a first mortgage~~ and ~~are~~managing ~~subject~~commercial toreal ~~more credit risk with respect to the underlying mortgage collateral than the corresponding senior securities or the A Notes~~estate, asreal ~~the case may be. As opposed to a~~estate ~~typical CMBS secured by a large pool of mortgage~~ loans, Band ~~Notes typically are secured by a single property~~instruments, and ~~the~~real ~~associated~~estate-related ~~credit risk is concentrated in that single property. B Notes also share certain credit characteristics with second mortgages~~securities, insuch ~~that both are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or the A Note,~~ as ~~the case may be. We may continue to acquire B Notes in negotiated transactions with the originators~~CMBS, asAgency ~~well~~MBS asand ~~in the secondary market~~RMBS. We currently expect to leverage our investments in B Notes in the range of zero to four times the amount of our equity allocated to the asset class. As of December 31, 2008, we had $0 of investments in B Notes.

~~Mezzanine Loans. We have originated and purchased, and may in the future originate or purchase, direct or indirect interests in~~ Our ~~mezzanine~~Manager ~~loans~~is ~~that are~~not ~~subordinated~~obligated to adedicate ~~first~~certain ~~mortgage~~of ~~loan~~its onemployees aexclusively ~~property and are senior~~ to ~~the~~us ~~borrower's~~nor ~~equity~~is init ~~the~~obligated ~~property. These loans are made~~ to ~~the~~dedicate ~~owner~~any ofspecific ~~the~~portion ~~property and are secured by pledges~~ of ~~ownership~~ ~~interests~~its intime ~~the property and/or the property owner. The mezzanine lender can foreclose on the pledge interests and thereby succeed~~ to ~~ownership~~our ~~of the property subject to the lien of the first mortgage~~business. ~~As of December 31~~Moreover, ~~2008,~~none ~~we had purchased 100%~~ of our ~~the~~Manager's ~~aggregate~~employees ~~principal~~are ~~amount~~contractually ofdedicated ~~mezzanine loans that we held. We currently expect~~ to ~~continue to leverage~~ our ~~investments~~Manager's ~~in mezzanine~~obligations ~~loans in the range of zero~~ to ~~three~~us ~~times~~under ~~the amount of~~ our ~~equity~~management ~~allocated to the asset class~~agreement. ~~As of December 31, 2008, we had $11.2 million in mezzanine loans with a weighted average coupon rate of 10.06%.~~

~~Construction~~ ~~Loans~~Our ~~and~~Business Construction Mezzanine Loans. We have originated or acquired participations in, and may in the future originate or acquire participations in, direct or indirect interests in construction or rehabilitation loans on commercial properties that generally provide 85% to 90% of total project costs and are secured by first lien mortgages. Alternatively, we may make mezzanine loans to finance construction or rehabilitation where our security is subordinate to the first lien mortgage. Construction loans generally would provide us with fees and interest income at risk adjusted rates and potentially a percentage of net operating income or gross revenues from the property, payable to us on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan. As of December 31, 2008, we had originated 100% of the aggregate principal amount of construction loans and construction mezzanine loans that we held, which includes those loans in which we participated in the original syndication. We currently expect to continue to leverage our investments in construction loans and construction mezzanine loans in the range of zero to four times the amount of our equity allocated to the asset class. As of December 31, 2008, we had approximately $0.4 million in construction loans with a weighted average coupon rate of 16.00% (this loan currently is in default and is not paying cash interest). Strengths

~~Commercial~~ To ~~Mortgage~~the ~~Backed~~extent ~~Securities. We~~we have ~~invested~~investable incash, ~~and~~we ~~may~~believe in the ~~future~~following ~~invest in, CMBS that~~ are secured by, or evidence ownership interests in, a single commercial mortgage loan, or a partial or entire pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We currently, and intend to continue to, acquire CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, finance companies, investment banks and other entities. We expect to enter into interest rate swaps, futures, options or other strategies to reduce the impact of changes in interest and financing rates for these investments. We currently leverage our ~~investments~~business in CMBS in the range of zero to five times the amount of our equity allocated to the asset class. As of December 31, 2008, we had approximately $58.1 million in CMBS with a weighted average coupon rate of 5.19%. strengths:

•: Access to Complementary Investment Skills of Sub-Advisors
•: Experienced Professionals and Senior Management Team
•: Diversified Investment Strategy
•: Access to Brookfield's Investment Management Infrastructure
•: Relationships and Deal Flow of Brookfield and Our Sub-Advisors
•: Alignment of Interests of Our Manager and Our Stockholders

Our Investment Strategy

Currently, we do not have investable capital that would allow us to pursue investment opportunities and, in light of our financial condition, we do not anticipate having any investable capital in the future.

Our historic investment strategy is consistent with Brookfield's investment philosophy, which is predicated on the concept of producing stable cash flows and absolute returns. We and Brookfield believe that the most significant opportunities for out-performance exist between and within sectors, as well as among individual investments. Although we are unable to take advantage of future investment opportunities, our historic investment strategy and process is further described below.

The investment process begins with a macroeconomic assessment of the market. Included in the market assessment is the analysis of the interest rate environment, the phase of the real estate cycle, consumer credit trends, supply and demand relationships, as well as a review of any recently released or pending economic data. Our Manager seeks to determine the relative merits of sectors by combining the analysis of historical relationships with our Manager's anticipated outlook for the market. Portfolio managers evaluate fundamental and technical developments in each sector, along with current offerings, recent transactions and market clearing levels and yield spread levels to provide a relative value outlook. This analysis is utilized to determine optimal areas to allocate credit risk in the portfolio across sectors and maturities and to maximize yield and total return expectations.

The most important component of our Manager's relative value investment strategy is security selection, a process that is the result of both quantitative and qualitative inputs, as well as the experience of the portfolio managers. Members of the investment team, utilizing our Manager's proprietary analytics, determine the relative strengths of various securities based on applicable criteria such as issuer, issue, vintage, credit rating, structure, and geographic exposure. The security selection process focuses on four primary areas: the analysis of credit strength, the analysis of security structure, the determination of relative value, and a surveillance function. The analysis of credit strength entails the assessment of loan level attributes such as a security's loan-to-value ratio, ratios like borrower's debt to income, or debt coverage, and loan features and location, as well as trend level attributes such as vintage and issuer. Security structure involves the comprehensive examination of a security's

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~~Agency Mortgage Backed Securities. We have invested in, and may in the future invest in, Agency MBS. Agency MBS are securities that~~structural ~~represent participations~~attributes ~~in,~~such ~~are~~as ~~secured~~credit ~~by or payable from~~support, ~~mortgage loans secured by residential real property~~triggers, ~~which~~single ~~include agency mortgage pass-through certificates and agency collateralized mortgage obligations~~asset, ~~or CMOs. We have entered into~~conduit, ~~and~~large ~~may in the future enter into~~loan, ~~interest~~as ~~rate~~well ~~swaps,~~as ~~futures,~~its ~~options~~yield ormaintenance ~~other~~provisions ~~strategies to reduce the impact of changes in interest~~ and ~~financing~~ ~~rates~~prepayment ~~for these investments~~lock-outs. ~~Adjustable~~After ~~rate~~these ~~mortgages,~~first ~~or ARMS~~two analyses, ~~have interest rates that reset periodically, typically every six or 12 months. Because~~ the ~~interest~~relative ~~rates~~value onof ARMS adjust periodically based on market conditions, ARMS tend to have interest rates that do not significantly deviate from current market rates. This, in turn, can cause ARMS to have less price sensitivity to interest rates. Hybrid ARMS have interest rates that have an initial fixed period (typically two, three, five, seven or ten years) and thereafter reset at regular intervals in a ~~manner similar~~security toversus ~~traditional~~other ~~ARMS.~~candidates ~~The~~is ~~investment~~determined ~~characteristics of pass-~~through ~~MBS differ from those of traditional fixed-income securities. Mortgage prepayments are affected by factors including~~ the ~~level~~evaluation of ~~interest~~such ~~rates,~~aspects ~~general~~as ~~economic~~yield ~~conditions,~~spread ~~the location~~ and ~~age~~liquidity. ~~of the mortgage~~Finally, ~~and~~after ~~other social and demographic conditions. Generally~~purchase, ~~prepayments~~a ~~on pass-through~~surveillance ~~MBS increase~~function ~~during~~begins ~~periods~~that ofuses falling mortgage interest rates and decrease during periods of stable or rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our ~~portfolio.~~Manager's Weanalytical ~~currently~~tools ~~expect~~ to ~~leverage~~determine ~~investments~~whether ina ~~Agency~~security ~~MBS~~continues ~~in the range of up~~ to 15perform ~~times~~as ~~the amount of our equity allocated to this asset class~~expected. ~~As of December 31, 2008, we had $0 of investments in Agency MBS.~~

~~Residential Mortgage Backed Securities.~~ We opportunistically ~~currently~~invested ~~own, and~~ in ~~the~~a ~~future~~diversified ~~may~~investment ~~invest~~portfolio in, Non-Agency RMBS. Non-Agency RMBS are debt obligations issued by special purpose vehicles that are backed by residential mortgage loans that generally are not eligible for agency purchase. Non-Agency RMBS generally are issued as CMOs and are backed by pools of ~~whole~~real ~~mortgage~~estate ~~loans. Non-Agency RMBS generally are securitized in senior and subordinated structures~~securities, orreal ~~structured~~estate ~~with one or more of the types of credit enhancement. We have entered into,~~ and ~~expect~~various toother ~~continue~~asset ~~to enter into~~classes, ~~interest~~subject ~~rate swaps, futures, options or other strategies~~ to ~~reduce~~maintaining ~~the~~our ~~impact~~REIT ofstatus ~~changes in interest~~ and ~~financing~~ ~~rates~~exclusion ~~for~~from ~~these~~regulation ~~investments.~~under ~~Adjustable~~the ~~rate~~Investment ~~mortgages,~~Company ~~or ARMS, have interest rates that reset periodically, typically every six or 12 months~~Act. ~~Because the interest rates on ARMS adjust periodically based on market conditions~~Accordingly, ~~ARMS~~we ~~tend to~~ have ~~interest rates that do~~ not ~~significantly~~adopted ~~deviate~~policies ~~from~~that ~~current~~require ~~market~~us ~~rates. This, in turn, can cause ARMS~~ to ~~have~~establish ~~less~~or ~~price~~maintain ~~sensitivity~~any ~~to interest~~specific ~~rates.~~asset ~~Hybrid ARMS have interest rates that have an initial fixed period (typically two~~allocations, ~~three, five, seven or ten years)~~ and ~~thereafter~~our ~~reset at regular intervals in a manner similar to~~targeted ~~traditional~~allocations ~~ARMS.~~will ~~The~~vary ~~investment characteristics of pass-through RMBS differ~~ from ~~those~~time ofto ~~traditional~~time ~~fixed-income~~as ~~securities.~~determined ~~Mortgage prepayments are affected~~ by ~~factors~~our ~~including~~management ~~the level of interest rates~~team, ~~general~~subject economic conditions, the location and age of the mortgage, and other social and demographic conditions. Generally, prepayments on pass-through RMBS increase during periods of falling mortgage interest rates and decrease during periods of stable or rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our portfolio. We leverage our RMBS investments in the range of zero to ~~five times~~ the ~~amount~~oversight of our ~~equity~~board ~~allocated to the asset class. As~~ of ~~December 31, 2008, we had approximately $14~~directors.~~8 million~~ ~~in RMBS with a weighted average coupon rate of 3.70%.~~

~~Preferred Equity Investments.~~ We benefit ~~may~~from ~~make~~the ~~preferred~~full ~~equity~~range ~~investments~~of inexperience ~~entities~~and ~~that~~depth ~~directly~~of orresources ~~indirectly~~developed ~~own~~by ~~income-producing commercial~~our ~~real estate.~~Manager ~~These~~and ~~preferred~~its ~~equity~~affiliates ~~investments~~in ~~are~~managing ~~not~~approximately ~~secured,~~$100 billion ~~but~~of ~~holders~~assets ~~have~~as ~~priority~~of December 31, ~~relative~~2009. toWe ~~common~~rely ~~equity~~on ~~holders~~our onManager's ~~cash~~expertise ~~flow~~in ~~distributions~~identifying ~~and~~assets ~~proceeds~~within ofour ~~capital~~target ~~events~~asset classes. InPortfolio ~~addition, preferred~~allocation ~~holders~~decisions ~~can~~have ~~often~~been ~~enhance~~based ~~their~~on ~~position~~various ~~and~~factors, ~~protect~~including expected ~~their~~cash ~~equity~~yield, ~~position~~relative ~~with~~value, ~~lender~~risk-~~type~~adjusted ~~covenants~~returns, ~~that~~current ~~limit the entity's activities~~ and ~~grant~~projected uscredit ~~the~~fundamentals, ~~right~~current toand ~~control~~projected ~~the property~~macroeconomic ~~after~~considerations, ~~default~~current ~~subject~~and toprojected ~~the~~supply ~~lien~~and demand, ofcredit ~~the~~and ~~first~~market ~~mortgage.~~risk Weconcentration ~~currently~~limits, ~~expect~~liquidity, tocost ~~leverage~~of ~~our~~financing ~~preferred~~and ~~equity~~financing ~~investments~~availability, inas ~~the~~well ~~range~~as ofmaintaining ~~zero~~our toREIT ~~five~~qualification ~~times~~and ~~the~~exclusion ~~amount~~from ofregulation ~~our~~under ~~equity allocated~~the toInvestment ~~the~~Company ~~asset class~~Act. ~~As of December 31, 2008, we had $0 in preferred equity investments.~~

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~~REIT~~ ~~Common~~Our ~~and~~Target ~~Preferred~~Asset Stock Investments. We may invest in public and private issuances of common and preferred stock issued by REITs. We currently expect to leverage our investments in REIT preferred stock in the range of zero to three times the amount of our equity allocated to the asset class, subject to applicable margin requirements. As of December 31, 2008, we had $0 of investments in REIT common stock and REIT preferred stock. Classes

~~Other~~ While ~~Equity~~currently ~~Investments. Subject to maintaining our qualification as a REIT,~~ we ~~also~~have ~~may~~no ~~invest~~investable ~~from time to time in equity securities~~capital, which may or may not be related to real estate. These investments may include direct purchases of private equity as well as purchases of interests in private equity funds, which may be managed by affiliates of our ~~Manager.~~ Wetargeted ~~will~~asset ~~follow~~classes ~~a value-oriented investment approach~~ and ~~focus on~~ the ~~anticipated~~principal ~~future~~investments ~~cash~~that ~~flows~~we ~~generated~~have bymade ~~the underlying business, discounted by an appropriate rate~~ to ~~reflect~~date ~~both the~~in ~~risk of achieving those cash flows and the alternative uses for the capital to be invested. We also will consider other factors such as the strength of management~~each, ~~the~~whether ~~liquidity~~directly ~~of the investment, the underlying value of the assets owned by the issuer, and prices of similar~~ or ~~comparable~~indirectly ~~securities. We currently expect that we may hold all, or at least a significant portion, of our other equity investments~~ through ~~our taxable REIT subsidiary, or TRS. To the extent that we do so, the income from such~~ investments ~~will be subject to corporate income tax. We currently expect to leverage our other equity investments~~ in ~~the~~funds ~~range~~that offocus ~~zero~~on tothese ~~three times the amount of our equity allocated to the~~ asset ~~class. As of December 31~~classes, ~~2008,~~are weas ~~had~~follows: ~~$0 of other equity investments.~~

Consumer Asset-Backed Securities. We have invested in, and may in the future continue to invest in, investment grade and non-investment grade consumer ABS. Consumer ABS are generally securities for which the underlying collateral consists of assets such as home equity loans, credit card receivables and auto loans. Aircraft ABS are generally collateralized by aircraft leases. Issuers of consumer and aircraft ABS generally are special purpose entities owned or sponsored by banks and finance companies, captive finance subsidiaries of non-financial corporations or specialized originators such as credit card lenders. We expect that a significant amount of the consumer and aircraft ABS that we hold at any time will be rated between A1/A and B1/B+ and will have an explicit rating from at least one nationally-recognized statistical rating agency. We currently expect to leverage our investments in consumer ABS in the range of zero to 15 times the amount of our equity allocated to the asset class. As of December 31, 2008, we had $0 of investments in consumer ABS.

Asset Class		Principal Investments

Commercial Real Estate		• Direct Property Ownership • Preferred Equity Investments
Mortgages and Other Real Estate Debt		• Mortgage Loans • B Notes • Mezzanine Loans • Land Loans • Construction Loans • Construction Mezzanine Loans
MBS
	—CMBS	• Investment Grade CMBS (Senior and Subordinated) • Below-Investment Grade CMBS (Rated and Non-Rated)
	—Agency MBS	• Agency Adjustable Rate Mortgages ("ARMs")
	—RMBS	• Non-Agency ARMs • Investment Grade RMBS • Below-Investment Grade RMBS • Non-Conforming Loans • Other RMBS
Other asset-backed securities		• CDOs • Consumer ABS • Aircraft ABS
Alternative Assets		• Other Equity Investments

~~Collateralized~~ Our net ~~Debt~~investment ~~Obligations. We~~income ~~have~~is ~~invested~~generated ~~in,~~primarily ~~and~~from ~~may in~~ the ~~future~~net ~~invest in~~spread, ~~the~~or ~~debt and equity tranches of CDOs to gain exposure to corporate bonds~~difference, ~~ABS~~between ~~and~~the ~~other~~interest ~~instruments.~~income ~~Because of our Manager's experience in structuring~~ and ~~managing~~rental ~~CDOs,~~income we ~~believe~~earn weon ~~have~~our ~~a competitive advantage in analyzing~~ investment ~~opportunities in CDOs. In general, CDOs are issued by special purpose vehicles that hold a~~ portfolio ~~of debt obligation securities. The CDO vehicle issues tranches of debt securities of different seniority~~ and ~~equity to fund~~ the ~~purchase~~cost of ~~the~~our borrowings ~~portfolio. The debt tranches are typically rated based on collateral quality, diversification~~ and ~~structural~~hedging ~~subordination~~activities. ~~The~~Our ~~equity~~net ~~securities~~investment ~~issued~~income bywill ~~the~~vary ~~CDO~~based ~~vehicle are the "first loss" piece of the CDO vehicle's capital structure~~upon, ~~but~~among ~~they~~other ~~are also generally entitled to all residual amounts available for payment after the CDO vehicle's obligations to the debt holders have been satisfied. Some CDO vehicles are "synthetic~~things," ~~in which~~ the ~~credit~~difference ~~risk~~between to the ~~collateral~~interest ~~pool~~rates isearned ~~transferred~~on ~~to the CDO vehicle by means of a credit derivative such as a credit default swap. We currently expect to leverage~~ our ~~investments~~various ininterest-earning ~~CDOs~~assets inand the borrowing ~~range~~costs of ~~one to three times~~ the ~~amount~~liabilities ofused ~~our equity allocated~~ to ~~the~~finance ~~asset~~those ~~class~~investments. ~~As of December 31, 2008, we had $0 in preferred equity of CDOs.~~

~~Power~~ Although we have focused on the investments described above, our investment decisions depend on prevailing market conditions and ~~Timber~~the availability of investable capital. We ~~may~~have ~~make~~not adopted ~~investments~~any inpolicy ~~income-producing~~that ~~timber~~establishes ~~and~~specific ~~power~~asset ~~generation~~allocations ~~assets~~among our targeted asset classes. ~~These~~As ~~investments~~a ~~may~~result, bewe incannot predict the ~~form~~ percentage of ~~either~~our ~~debt~~assets that will be invested in each asset class or ~~equity~~whether ~~interests.~~we Wewill ~~may~~invest ~~acquire~~in ~~these~~other classes or investments. ~~directly~~Our orboard ~~participate~~of ~~with~~directors ~~others~~does ~~through~~not ~~the~~and ~~syndication~~will not review all of ~~debt~~our ~~positions~~proposed investments, orbut inreviews ~~partnerships~~our ~~with~~portfolio ~~other~~at ~~investors~~least inquarterly ~~equity~~and ~~ownership~~reviews our investment strategy and policies at least annually. ~~These investments~~We may change our investment strategy and policies and the percentage of assets that may be ~~made~~invested in ~~Brookfield's~~each ~~major~~asset ~~geographic focus~~class, ~~namely,~~or in the ~~United~~case ~~States~~of securities, ~~and~~in ~~Canada~~a single issuer, orwithout ~~elsewhere.~~a ~~Investments~~vote inof ~~power~~our stockholders.

The following discusses the principal investments we have made and our general leverage targets for each type of principal investment. Generally, we attempt to match fund our investments by matching the maturity of the financing source with the expected maturity of the investment.

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~~generation may relate to electricity generating facilities~~Accordingly, ~~such as hydroelectric, gas- or coal-fired power generating facilities. Investments in timber may be through freehold~~ orwhere ~~leasehold~~appropriate ~~interests,~~ and ~~will vary with respect to timber type~~available, ~~including~~we ~~hardwood~~have ~~and~~used ~~softwood,~~direct ~~and~~mortgage ~~age~~borrowing ~~distribution. We currently expect to leverage our power~~ and ~~timber~~CDO ~~investments~~issuances inor ~~the~~other ~~range of zero~~long-term toborrowings ~~eight times the amount of our equity allocated~~ to ~~the~~finance ~~asset~~long-term ~~class~~assets. ~~As of December 31, 2008, we had $0 of investments in power or timber.~~

~~Other~~Direct ~~Investments~~Real Property Ownership. AsWe ~~discussed~~have ~~above,~~made wedirect ~~may~~investments ~~invest~~in ~~opportunistically~~income-producing commercial real estate office properties within the United States. We currently leverage our direct real estate investments in ~~other~~the ~~types~~range of three to eight times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our direct investments ~~within~~in real property totaled $221.8 million. In connection with our ~~Manager's~~direct ~~core~~real property ownership, we have recorded rent enhancement receivables totaling ~~competencies~~$11.4 million as of December 31, 2009. Intangible assets and liabilities recorded in connection with our direct real property ownership totaled $69.9 million and ~~including~~$66.8 million, ~~those~~respectively, ~~discussed~~as ~~below~~of December 31, 2009.

~~High~~ Whole ~~Yield~~Mortgage ~~Corporate~~Loans ~~Bonds,~~and ~~Investment~~Bridge ~~Grade~~Loans. We ~~Corporate~~have ~~Bonds~~originated and ~~Related~~purchased ~~Derivatives. High~~direct ~~yield~~or ~~corporate bonds~~indirect ~~are~~interests ~~debt~~in ~~obligations of~~whole ~~corporations~~loans ~~and~~secured ~~other~~by ~~non~~first mortgages which provide long-~~governmental~~term ~~entities~~mortgage ~~rated~~financing ~~below~~to ~~Baa~~commercial orproperty ~~BBB.~~developers ~~Investment~~and ~~grade~~owners ~~corporate~~that ~~bonds~~generally ~~are~~have ~~debt~~maturity ~~obligations~~dates ofranging ~~corporations~~from ~~and~~three ~~other~~to ~~non-governmental entities~~ten ~~rated~~years. ~~Baa/BBB~~As orof ~~higher.~~December 31, To2009, we had originated 100% of the ~~extent~~aggregate weprincipal ~~invest~~amount inof ~~these~~whole ~~bonds,~~mortgage weloans ~~expect~~and ~~that~~bridge aloans ~~material~~that ~~amount~~we ofheld. ~~the~~We ~~holdings~~currently ~~will~~leverage ~~not~~our beinvestments ~~secured~~in bywhole ~~mortgages~~mortgage orloans ~~liens~~and onbridge ~~assets.~~loans Ain ~~substantial~~the ~~portion~~range of zero to eight times the ~~investment~~amount ~~grade~~of ~~corporate~~our ~~bonds~~equity weallocated ~~hold~~to ~~may~~the ~~have~~asset anclass. ~~interest-only~~As ~~payment~~of ~~schedule~~December 31, ~~with~~2009, the ~~principal~~carrying ~~amount~~value ~~staying~~of ~~outstanding~~our ~~and~~investments atin ~~risk~~whole ~~until~~loans ~~the~~was ~~bond's~~approximately ~~maturity~~$1.2 million, with a weighted average coupon rate of 3.48%.

~~Government~~ Commercial ~~Bonds~~Real ~~and~~Estate ~~Related~~Subordinated ~~Derivatives~~Loans. We ~~may~~have ~~invest~~invested in ~~bonds~~direct ~~issued~~ or ~~guaranteed~~indirect byinterests ~~the~~in ~~U.S.~~commercial ~~government~~real ~~or any~~estate ~~instrumentality~~subordinated ~~thereof~~loans, aswhich ~~well~~we refer to as ~~bonds~~B Notes, that may be rated by at least one nationally recognized rating agency. The subordination of ~~major~~a ~~non~~B Note typically is evidenced by an inter-~~U.S.~~creditor ~~governments~~agreement ~~and~~with ~~their~~the ~~instrumentalities~~holder of the related A Note. WeB ~~may~~Notes ~~invest~~share incertain ~~these~~credit ~~bonds~~characteristics with subordinated CMBS, in that both ~~for~~reflect ~~cash~~an ~~management~~interest ~~purposes~~in a first mortgage and are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding senior securities or the A Notes, as ~~part~~the case may be. As opposed to a typical CMBS secured by a large pool of ~~hedging~~mortgage ~~and~~loans, ~~arbitrage~~B Notes typically ~~strategies~~are ~~that~~secured ~~involve~~by a single property, and the ~~use~~associated ofcredit ~~interest~~risk ~~rate~~is ~~derivatives~~concentrated in that single property. B Notes also share certain credit characteristics with second mortgages, ~~such~~in asthat ~~swaps~~both are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or the A Note, ~~options~~as the case may be. As of December 31, ~~caps~~2009, ~~floors~~we ~~and~~did ~~futures~~not have any investments in B Notes.

~~Other~~ Mezzanine ~~Fixed Income-Related Instruments~~Loans. We ~~may~~have ~~engage~~originated and purchased direct or indirect interests in mezzanine loans that are subordinated to a first mortgage loan on a property and are senior to the ~~purchase~~borrower's equity in the property. These loans are made to the owner of the property and ~~sale~~are secured by pledges of ~~derivative~~ownership ~~instruments,~~interests ~~such as~~in ~~exchange-listed~~the property and/or the ~~over-~~property owner. The mezzanine lender can foreclose on the~~-counter~~ ~~put~~pledge interests and ~~call~~thereby ~~options~~succeed onto ~~securities,~~ownership ~~financial~~of ~~futures~~the property subject to the lien of the first mortgage. As of December 31, 2009, we had purchased 100% of the aggregate principal amount of mezzanine loans that we held. We currently leverage our investments in mezzanine loans in the range of zero to four times the amount of our equity ~~indices,~~allocated ~~and~~to ~~other~~the ~~financial~~asset ~~instruments~~class. As of December 31, ~~either~~2009, asthe ~~outright~~carrying value of our investments in mezzanine loans was $4.7 million, ~~for~~with ~~hedging~~a ~~purposes~~weighted oraverage coupon rate of 7.32%, inwhich ~~connection~~excludes ~~with~~the ~~other~~15.00% ~~strategies~~fixed rate coupon for the one mezzanine loan that has been placed on non-accrual status.

~~We likely~~Construction ~~will~~Loans ~~hold~~and atConstruction ~~least~~Mezzanine ~~some~~Loans. We ofhave ~~the~~originated ~~corporate~~or ~~bonds,~~acquired ~~government~~participations ~~bonds~~in ~~and~~direct ~~derivative~~or ~~instruments~~indirect interests in construction ~~which~~or rehabilitation weloans ~~invest~~on ~~for~~commercial ~~strategic~~properties ~~purposes~~that ~~through~~generally ~~our~~provide ~~TRS~~85% to 90% of total project costs and are secured by first lien mortgages. ToConstruction ~~the~~loans ~~extent~~generally ~~that~~would weprovide dous with fees ~~so,~~and ~~the~~interest income ~~from~~at ~~such~~risk ~~bonds~~adjusted rates and ~~instruments~~potentially ~~will~~a bepercentage ~~subject~~of tonet ~~corporate~~operating income ~~tax~~or gross revenues from the property, payable to us on an ongoing basis, and a percentage of any increase in value of the property, payable upon maturity or refinancing of the loan. As of December 31, ~~2008~~2009, we had ~~approximately~~originated ~~$1.6 million~~100% inof ~~other~~the ~~investments.~~

Investment Sourcing

We recognize that investing in our targeted asset classes is highly competitive, and that our Manager will compete with many other investment managers for profitable investment opportunities in these areas. Accordingly, we believe the ability to identify and source such opportunities is very important to our success. We think that the combined and complementary strengths of Brookfield, Hyperion Brookfield and Brookfield Sub-Advisor in this regard give us a competitive advantage over such REITs.

Our Manager and its affiliates currently source many of their clients' and our investments through their close relationships with a large and diverse group of financial intermediaries, ranging from major investment banks and brokerage firms to specialty dealers and financial sponsors. On a combined basis, these firms extensively cover our targeted asset classes. Our Manager also sources many investments from traditional sources, using proprietary deal screening procedures and credit analytics.

Brookfield has over 25 years of experience operating and investing in real estate, hydroelectric, gas- and coal-fired power generating facilities and timber assets. Based on its long history of ownership within these asset classes and its high transaction volume, we believe that Brookfield, as an owner/operator, has developed the specialized internal resources and expertise to properly evaluate opportunities in these asset classes and to manage them. We expect that Brookfield will, from time to time, through Brookfield Sub-Advisor, provide us with the opportunity to acquire assets from its

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~~extensive~~aggregate ~~portfolio,~~principal toamount ~~finance~~of ~~Brookfield's~~construction loans and ~~its~~construction ~~affiliates'~~mezzanine ~~portfolio~~loans ~~assets~~that we held, which includes those loans in which we participated in the original syndication. We currently leverage our investments in construction loans and construction mezzanine loans in the range of zero to ~~co-invest~~four times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in construction loans was $0, with ~~Brookfield~~a ~~and~~weighted ~~its~~average ~~affiliates~~coupon rate of 16.00% (this loan currently is in ~~assets~~default ~~that~~and ~~meet~~is ~~our~~not ~~investment~~paying ~~objective~~cash interest).

Commercial ~~Investment~~Mortgage ~~Process~~ Backed Securities. We have invested in CMBS that are secured by, or evidence ownership interests in, a single commercial mortgage loan, or a partial or entire pool of mortgage loans secured by commercial properties. These securities may be senior, subordinated, investment grade or non-investment grade. We have acquired CMBS from private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial banks, finance companies, investment banks and other entities. We have entered into interest rate swaps, futures, options or other strategies to reduce the impact of changes in interest and financing rates for these investments. We currently leverage our investments in CMBS in the range of zero to five times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in CMBS was approximately $38.1 million, with a weighted average coupon rate of 5.21%.

To Agency ~~evaluate,~~Mortgage ~~invest~~Backed ~~and~~Securities. We ~~manage~~have ~~our~~invested ~~investments~~in Agency MBS. Agency MBS are securities that represent participations in, ~~commercial~~are secured ~~real~~by ~~estate~~or payable from, ~~CMBS~~mortgage loans secured by residential real property, ~~RMBS~~which include agency mortgage pass-through certificates and ~~other~~agency ~~ABS~~collateralized mortgage obligations, ~~our~~or ~~Manager~~CMOs. ~~utilizes~~We ~~Brookfield's~~have ~~and~~entered ~~Hyperion~~into ~~Brookfield's~~interest ~~proprietary~~rate ~~analytical~~swaps ~~methods~~to reduce the impact of changes in ~~performing~~interest ~~scenario~~and ~~analysis~~financing torates ~~forecast~~for ~~cash~~these ~~flows~~investments. ~~and~~Adjustable ~~expected~~rate ~~total~~mortgages, ~~returns~~or ~~under~~ARMS, ~~different~~have interest ~~rate~~rates ~~and~~that ~~credit~~reset ~~assumptions.~~periodically, ~~Simulation~~typically ~~analysis~~every issix ~~also~~or ~~performed~~12 months. toBecause ~~provide~~the ainterest ~~broader~~rates ~~array~~on ofARMS ~~potential~~adjust ~~patterns~~periodically ofbased ~~return~~on ~~over~~market ~~different~~conditions, ARMS tend to have interest ~~rate~~rates ~~and~~that ~~credit~~do ~~scenarios~~not significantly deviate from current market rates. ~~Such~~This, ~~analysis~~in ~~may~~turn, becan ~~applied~~cause ARMS to ~~individual securities~~have orless price sensitivity to interest rates. Hybrid ARMS have interest rates that have an ~~entire~~initial ~~portfolio~~fixed period (typically two, three, five, seven or ten years) and thereafter reset at regular intervals in a manner similar to traditional ARMS. ~~Our~~The ~~Manager~~investment ~~also~~characteristics ~~performs~~of ~~relative~~pass-through ~~value~~MBS ~~analyses~~differ from those of ~~individual~~traditional fixed-income securities. ~~based~~Mortgage onprepayments ~~yield,~~are ~~credit~~affected ~~rating~~by factors including the level of interest rates, ~~average~~general ~~life~~economic conditions, ~~expected~~the ~~duration~~location and ~~option-adjusted~~age of the mortgage, and other social and ~~spreads~~demographic conditions. ~~Other~~Generally, ~~considerations~~prepayments inon ~~our~~pass-through ~~Manager's~~MBS ~~investment~~increase during periods of falling mortgage interest rates and decrease during periods of stable or rising mortgage ~~process~~interest ~~include~~rates. ~~analysis~~Reinvestment of ~~fundamental~~prepayments ~~economic~~may ~~trends,~~occur ~~suitability~~at ~~for~~higher ~~investment~~or bylower ainterest ~~REIT~~rates than the original investment, ~~consumer~~thus ~~borrowing~~affecting ~~trends~~the yield on our portfolio. As of December 31, ~~home~~2009, ~~price~~we ~~appreciation~~had no ~~and~~investments ~~relevant~~in ~~regulatory~~Agency ~~developments~~MBS.

Our investments in real estate assets and other alternative asset classes will be recommended, closed and managed by our Manager, or by one of its affiliates, which may include Brookfield Sub-Advisor. To evaluate, invest and manage investments in real estate, Brookfield Sub-Advisor, through its affiliates, will utilize its experience and strong track record as an operator of commercial properties. Relying on Brookfield's local presence in offices in the United States, Canada, Brazil and the United Kingdom, we expect that Brookfield Sub-Advisor is well positioned to underwrite and analyze real estate investments throughout North America, including the analysis of market conditions and building specific issues (including lease and structural analysis). Other considerations in the investment process will include valuation and analyses of economic conditions and demographic trends as well as supply and demand considerations.

To evaluate, invest and manage investments in hydroelectric, gas- and coal-fired power generating facilities, Brookfield Sub-Advisor, through its affiliates, will utilize its experience as an owner and operator of hydroelectric, gas- and coal-fired power generating facilities. With Brookfield's operations in Canada, the United States and Brazil, we expect that Brookfield Sub-Advisor is well-positioned to underwrite and analyze investment opportunities in these regions including an analysis of current market conditions and property specific issues, such as in the case of hydro-electric generating facilities, structural assessments of dams and generating facilities, water flows and water storage capability, water use agreements, and turbines. Other considerations in the investment process include, but are not limited to, an analysis of market supply and demand, and an evaluation of the relative competitiveness of the sources of supply in the market, including but not limited to, as applicable, nuclear, coal-fired, gas-fired, hydroelectric, wind and emerging alternative forms of electricity generation.

Brookfield, through its affiliates, owns and manages timber operations in Canada, the United States and Brazil. Relying on Brookfield's presence in these markets, we believe that Brookfield Sub-Advisor has the capability to underwrite and analyze investment opportunities for us. Considerations in the investment process include but are not limited to, the forest density, age and anticipated harvesting and silviculture costs.

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Residential ~~Our~~Mortgage ~~Portfolio~~ Backed Securities. We currently own Non-Agency RMBS. Non-Agency RMBS are debt obligations issued by special purpose vehicles that are backed by residential mortgage loans that generally are not eligible for agency purchase. Non-Agency RMBS generally are issued as CMOs and are backed by pools of whole mortgage loans. Non-Agency RMBS generally are securitized in senior and subordinated structures, or structured with one or more of the types of credit enhancement. We have entered into interest rate swaps to reduce the impact of changes in interest and financing rates for these investments. Adjustable rate mortgages, or ARMS, have interest rates that reset periodically, typically every six or 12 months. Because the interest rates on ARMS adjust periodically based on market conditions, ARMS tend to have interest rates that do not significantly deviate from current market rates. This, in turn, can cause ARMS to have less price sensitivity to interest rates. Hybrid ARMS have interest rates that have an initial fixed period (typically two, three, five, seven or ten years) and thereafter reset at regular intervals in a manner similar to traditional ARMS. The investment characteristics of pass-through RMBS differ from those of traditional fixed-income securities. Mortgage prepayments are affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage, and other social and demographic conditions. Generally, prepayments on pass-through RMBS increase during periods of falling mortgage interest rates and decrease during periods of stable or rising mortgage interest rates. Reinvestment of prepayments may occur at higher or lower interest rates than the original investment, thus affecting the yield on our portfolio. We leverage our RMBS investments in the range of zero to five times the amount of our equity allocated to the asset class. As of December 31, 2009, the carrying value of our investments in RMBS was approximately $4.7 million, with a weighted average coupon rate of 3.77%.

As Other ofEquity ~~December 31~~Investments. We have invested in equity securities, ~~2008~~which may or may not be related to real estate. These investments may include direct purchases of private equity as well as purchases of interests in private equity funds, wewhich ~~had~~may abe ~~portfolio~~managed by affiliates of ~~approximately~~our ~~$316~~Manager.~~8 million~~ ~~consisting~~We ~~primarily~~follow a value-oriented investment approach and focus on the anticipated future cash flows generated by the underlying business, discounted by an appropriate rate to reflect both the risk of ~~commercial~~achieving ~~real~~those cash flows and the alternative uses for the ~~estate~~capital to be invested. We also consider other factors such as the strength of management, ~~CMBS~~the liquidity of the investment, the underlying value of the assets owned by the issuer, and ~~RMBS~~prices of similar or comparable securities. To the extent that we hold any of these equity investments through our taxable REIT subsidiary, asor ~~shown~~TRS, the income from such investments will be subject to corporate income tax. We currently expect to leverage our other equity investments in the ~~following~~range ~~chart:~~of zero to three times the amount of our equity allocated to the asset class. As of December 31, 2009, we had no other equity investments.

										Weighted Average
					Carrying Value		Percent of Total Investments			Coupon			Months to Reset(1)		Yield to Maturity(2)			Constant Prepayment Rate(3)
					(In thousands)
Commercial MBS:
	Investment grade CMBS				$	17,892		5.6	%		5.50	%				61.60	%
	Below investment grade CMBS					40,201		12.7			5.12					106.10
		Total Commercial MBS				58,093		18.3			5.19					92.40
Non-Agency Residential MBS:
	Non-Agency Prime MBS:
		Investment grade				233		0.1			5.30			21.00		79.29			12.32
		Below investment grade				8,947		2.8			4.26			7.93		7,026.67			14.63
			Total Non-Agency Prime MBS			9,180		2.9			4.28			8.07		6,850.60			14.61
	Non-Agency Sub-prime MBS:
		Investment grade				2,376		0.7			1.92			0.00		1,243.49			17.86
		Below investment grade				3,267		1.1			2.86			0.49		28,267.94			27.55
			Total Non-Agency Sub-prime MBS			5,643		1.8			2.82			0.46		16,888.28			27.11
				Total RMBS		14,823		4.7			3.70			5.05		10,671.87			19.57
CDO Preferred Stock						—		—			—					—
				Total Securities		72,916		23.0			4.79					2,243.12
Real estate loans, net						14,092		4.4			9.25	(4)				15.41
Commercial real estate, net						228,259		72.1
Other investments						1,550		0.5			7.68					40.13
Total investments					$	316,817		100.0	%

Consumer Asset-Backed Securities. We have invested in investment grade and non-investment grade consumer ABS. Consumer ABS are generally securities for which the underlying collateral consists of assets such as home equity loans, credit card receivables and auto loans. Aircraft ABS are generally collateralized by aircraft leases. Issuers of consumer and aircraft ABS generally are special purpose entities owned or sponsored by banks and finance companies, captive finance subsidiaries of non-financial corporations or specialized originators such as credit card lenders. We expect that a significant amount of the consumer and aircraft ABS that we hold at any time will be rated between A1/A and B1/B+ and will have an explicit rating from at least one nationally-recognized statistical rating agency. As of December 31, 2009, we had no investments in consumer ABS.

~~Our~~ Collateralized ~~portfolio~~Debt inObligations. We ~~its~~have ~~current~~invested ~~form~~in ~~does not fully balance~~ the ~~interest~~debt ~~rate or mark-to-market risks inherent in our MBS investments,~~ and weequity ~~will~~tranches ~~not~~of beCDOs ~~able~~ to ~~eliminate~~gain ~~all~~exposure ofto ~~our~~corporate ~~portfolio~~bonds, ~~risk~~ABS ~~through asset allocation. Future dividends~~ and ~~capital appreciation are not guaranteed. Our investments will depend on~~ ~~prevailing market conditions and trends~~other instruments. WeBecause ~~have~~of ~~not adopted any policy that establishes specific asset allocations among~~ our ~~targeted~~Manager's ~~asset~~experience ~~classes,~~in structuring and ~~our~~managing ~~targeted allocations will vary from time to time. As a result~~CDOs, we ~~cannot~~believe ~~predict~~we ~~the~~have ~~percentage~~a ofcompetitive ~~our~~advantage ~~assets that will be invested~~ in ~~each~~analyzing ~~asset~~investment ~~class~~opportunities ~~or whether we will invest~~ in ~~other classes or investments~~CDOs. WeIn ~~currently~~general, ~~and~~CDOs ~~generally~~are issued ~~expect~~by tospecial ~~continue~~purpose ~~to,~~vehicles ~~incur~~that ~~total~~hold ~~leverage~~a ~~under~~portfolio ~~normal~~of ~~market~~debt ~~conditions~~obligation ofsecurities. upThe toCDO ~~five~~vehicle ~~times~~issues ~~the~~tranches ~~amount~~ of ~~our~~debt ~~equity~~securities ~~for~~of ~~most~~different ~~investments~~seniority ~~other~~and ~~than~~equity ~~Agency MBS, which we anticipate we generally may lever up~~ to 15fund ~~times~~ the ~~amount~~purchase of ~~our equity allocated to this asset class. Our overall long-term average portfolio leverage in normal market conditions is four to six times~~ the ~~amount of~~ ~~our equity~~portfolio. WeThe ~~may~~debt ~~change~~tranches ~~our~~are ~~investment~~typically ~~strategy~~rated ~~and~~based ~~policies~~on ~~and~~collateral ~~the~~quality, ~~percentage~~diversification ofand ~~assets~~structural ~~that~~subordination. ~~may~~The beequity ~~invested~~securities inissued ~~each~~by ~~asset class, or in~~ the ~~case~~CDO ofvehicle ~~securities,~~are ~~in a single issuer, without a vote of our stockholders.~~

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Asthe of"first ~~December 31,~~loss" ~~2008,~~piece weof ~~had~~the ~~entered~~CDO ~~into~~vehicle's ~~master~~capital ~~repurchase~~structure, ~~agreements~~but ~~with~~they ~~various~~are ~~counterparties~~also ~~and~~generally asentitled ofto ~~such~~all ~~date,~~residual weamounts ~~had~~available nofor ~~outstanding~~payment ~~obligations~~after ~~under~~the ~~repurchase agreements~~CDO ~~with~~vehicle's ~~our~~obligations ~~counterparties. In addition~~ to ~~repurchase~~the ~~agreements,~~debt holders wehave ~~rely~~been ~~on a $50~~satisfied.~~0 million~~ ~~secured~~Some ~~credit~~CDO ~~facility~~vehicles ~~with~~are an"synthetic," ~~affiliate of our Manager that expires~~ in ~~May~~which ~~2010~~the ~~for capital~~credit ~~needed~~risk to ~~fund~~the ~~our~~collateral ~~other~~pool ~~investments.~~is Intransferred ~~November~~to ~~2005,~~the weCDO ~~closed~~vehicle ~~our~~by ~~first~~means ~~CDO~~of ~~financing~~a ~~transaction,~~credit ~~which~~derivative wesuch ~~refer to~~ as ~~CDO~~a ~~2005-1,~~credit default ~~and~~swap. inAs ~~January~~of ~~2007~~December 31, ~~we closed our second CDO financing transaction~~2009, ~~which~~the wecarrying ~~refer~~value toof asour ~~CDO~~investments ~~2006-1.~~in ~~We have no restriction on~~ the ~~amount~~preferred equity of ~~leverage~~CDOs ~~that~~was ~~we may use~~$0.

~~As of~~ ~~December 31,~~Investment 2008, we had hedged a portion of the CDO liabilities financing our investment portfolio by entering into two interest rate swaps with maturity dates in 2013 and 2018. These interest rate swaps are both contained within a CDO trust, have similar maturity profiles to the originally projected cash flows for the respective CDO liabilities and are not subject to margin calls. The total notional par value of such swaps was approximately $285.0 million. Sourcing

We recognize that investing in our targeted asset classes is highly competitive, and that our Manager competes with many other investment managers for profitable investment opportunities in these areas. Accordingly, to the extent we have investable cash, we believe the ability to identify and source such opportunities is very important to our success. We think that the combined and complementary strengths of Brookfield, BIM and Brookfield Sub-Advisor in this regard give us a competitive advantage over such REITs.

Investment Process

To evaluate, invest and manage our investments in commercial real estate, CMBS, RMBS and other ABS, our Manager utilizes Brookfield's and BIM's proprietary analytical methods in performing scenario analysis to forecast cash flows and expected total returns under different interest rate and credit assumptions. Simulation analysis is also performed to provide a broader array of potential patterns of return over different interest rate and credit scenarios. Such analysis may be applied to individual securities or to an entire portfolio. Our Manager also performs relative value analyses of individual securities based on yield, credit rating, average life, expected duration and option-adjusted spreads. Other considerations in our Manager's investment process include analysis of fundamental economic trends, suitability for investment by a REIT, consumer borrowing trends, home price appreciation and relevant regulatory developments.

Our investments in real estate assets and other alternative asset classes are recommended, closed and managed by our Manager, or by one of its affiliates, which includes Brookfield Sub-Advisor. To evaluate, invest and manage investments in real estate, Brookfield Sub-Advisor, through its affiliates, utilizes its experience and strong track record as an operator of commercial properties. Relying on Brookfield's local presence in offices in the United States, Canada, Brazil and the United Kingdom, we expect that Brookfield Sub-Advisor is well positioned to underwrite and analyze real estate investments throughout North America, including the analysis of market conditions and building specific issues (including lease and structural analysis). Other considerations in the investment process include valuation and analyses of economic conditions and demographic trends as well as supply and demand considerations.

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Our Portfolio

As of December 31, 2009, we had a portfolio of approximately $272.0 million consisting primarily of commercial real estate, CMBS and RMBS, as shown in the following chart:

										Weighted Average

					Carrying Value		Percent of Total Investments			Coupon			Months to Reset(1)		Yield to Maturity(2)			Constant Prepayment Rate(3)
					(In thousands)
Commercial MBS:
	Investment grade CMBS				$	3,724		1.4	%		5.20	%				44.67	%
	Below investment grade CMBS					34,389		12.6			5.21					379.75

		Total Commercial MBS				38,113		14.0			5.21					347.01
Non-Agency Residential MBS:
	Non-Agency Prime MBS:
		Investment grade				—		0.0			0.00			0.00		0.00			0.00
		Below investment grade				3,194		1.2			4.29			6.55		2,927.99			12.72

			Total Non-Agency Prime MBS			3,194		1.2			4.29			6.55		2,927.99			12.72
	Non-Agency Sub-prime MBS:
		Investment grade				—		0.0			0.00			0.00		0.00			0.00
		Below investment grade				1,519		0.6			2.76			0.00		22,401.07			16.94

			Total Non-Agency Sub-prime MBS			1,519		0.6			2.76			0.00		22,401.07			16.94

				Total RMBS		4,713		1.8			3.77			4.30		9,204.46			14.17
CDO Preferred Stock						—		—			—					—

				Total Securities		42,826		15.8			4.99					1,321.77

Real estate loans, net						5,903		2.1			9.58	(4)				25.05
Commercial real estate, net						221,754		81.5
Other investments						1,550		0.6			7.68					48.53

Total investments					$	272,033		100.0	%

(1): Represents number of months before conversion to floating rate.
(2): Non-loss adjusted yield, which is the yield to par based on the current market price and does not take into account any assumed defaults.
(3): Represents the estimated percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns.
(4): Excludes one of our construction loans and one of our mezzanine loans that are in default and on which no interest is being accrued.

Our portfolio in its current form does not fully balance the interest rate or mark-to-market risks inherent in our MBS investments, and we are not be able to eliminate all of our portfolio risk through asset allocation. Future dividends and capital appreciation are not guaranteed. Our investments depend on prevailing market conditions and trends. We have not adopted any policy that establishes specific asset allocations among our targeted asset classes, and our targeted allocations will vary from time to time. As a result, we cannot predict the percentage of our assets that will be invested in each asset class or whether we will invest in other classes or investments. When we have investable capital, we generally have incurred total leverage under normal market conditions of up to five times the amount of our equity for most investments other than Agency MBS, which we generally have levered up to 15 times the amount of our equity allocated to this asset class. Our overall long-term average portfolio leverage in normal market conditions is four to six times the amount of our equity. We may change our

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investment strategy and policies and the percentage of assets that may be invested in each asset class, or in the case of securities, in a single issuer, without a vote of our stockholders.

As of December 31, 2009, we had entered into master repurchase agreements with various counterparties and as of such date, we had no outstanding obligations under repurchase agreements with our counterparties. In addition to repurchase agreements, we rely on a $50.0 million secured credit facility with an affiliate of our Manager that expires on August 31, 2010 (unless sooner terminated as provided in the credit agreement) for capital needed to fund our other investments. In November 2005, we closed our first CDO financing transaction, which we refer to as CDO 2005-1, and in January 2007, we closed our second CDO financing transaction, which we refer to as CDO 2006-1. We have no restriction on the amount of leverage that we may use.

As of December 31, 2009, we had hedged a portion of the CDO liabilities financing our investment portfolio by entering into two interest rate swaps with maturity dates in 2013 and 2018. Each of these interest rate swaps is both contained within a CDO trust, has similar maturity profiles to the originally projected cash flows for the respective CDO liabilities and is not subject to margin calls. The total notional par value of such swaps was approximately $281.0 million.

Risk Management

Risk management is a cornerstone of our Manager's portfolio management system and we believe these risk management capabilities distinguish us from many of our competitors. Through our management agreement with our Manager, we benefit from our Manager's comprehensive risk management program, which addresses not only the risks of portfolio loss, such as risks relating to price volatility, position sizing and leverage, but also the operational risks that can have major adverse impacts on investment programs. Operational risks include execution of transactions, clearing of transactions, recording of transactions, position monitoring, supervision of traders, portfolio valuation, counterparty credit and approval, custodian relationships, trader authorization, accounting and regulatory. We also face risks relating to the counterparties on our interest rate and credit default swaps. In addition, we manage our liquidity risk and our exposure to changing interest rate environments and we continually monitor the credit risks within our investment portfolio.

Our Financing Strategy

Leverage Strategy. In the past, we actively used leverage to increase the potential returns to our stockholders. Currently, there is little to no leverage available on favorable economic terms to us. ~~Consequently, our stated goal is to eliminate all of our short-term leverage.~~ While we currently have ~~four~~three types of leverage; a secured financing line, mortgage financing, and CDO debt ~~and~~(our a subordinated TRUPs issuance was repurchased in January 2010), we do not believe that leverage of this nature will be available in order to leverage future investments, if any.

Repurchase Agreements. We have financed, ~~and to the extent available in the markets, may in the future finance,~~ certain of our MBS through the use of repurchase agreements. These agreements allow us to borrow against MBS that we own. We sell our MBS to a counterparty and agree to repurchase the same MBS from the counterparty at a price equal to the original sales price plus an interest factor. These agreements are accounted for as debt, secured by the underlying assets. During the term of a repurchase agreement, we earn the principal and interest on the related MBS and pay interest to the counterparty.

WeAs ~~intend to continue to maintain formal relationships with multiple repurchase financing counterparties for the purpose~~ of obtaining financing on favorable terms, when available. Our repurchase agreement counterparties are commercial and investment banks with whom we have agreements in place that cover the terms of our transactions. As of December 31, ~~2008~~2009, we had ~~entered into master repurchase agreements with various counterparties and as of such date, we had~~ no outstanding obligations under repurchase agreements with any of our counterparties.

Warehouse Facilities. In addition to repurchase agreements, we rely on credit facilities for capital needed to fund our other investments. These facilities, referred to as warehouse lines or warehouse facilities, are typically lines of credit from other financial institutions that we can draw from to fund our investments. Warehouse lines are typically collateralized loans made to investors who invest in securities

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~~investments.~~and ~~Warehouse lines are typically collateralized~~ loans ~~made to investors who invest in securities and loans~~ that in turn pledge the resulting securities and loans to the warehouse lender. Third party custodians, usually large banks, typically hold the securities and loans funded with the warehouse facility borrowings, including the securities, loans, notes, mortgages and other important loan documentation, for the benefit of the lender, who is deemed to own the securities and loans and, if there is a default under the warehouse line, for the benefit of the warehouse lender.

The pool of assets in a warehouse facility typically must meet certain requirements, including term, average life, investment rating, agency rating and sector diversity requirements. There are also certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs. Failure to comply with these requirements could result in either the need to post additional collateral or cancellation of the financing facility. As of December 31, 2009, we had no outstanding borrowings under warehouse lines.

We Credit Facilities. In August 2007, we entered into a $100.0 million secured revolving credit facility with an affiliate of our ~~intend~~Manager, in order to ~~continue~~provide tous ~~maintain~~with ~~formal~~additional ~~relationships~~liquidity. ~~with~~In ~~multiple~~February ~~counterparties~~2009, ~~for~~we extended the ~~purpose~~maturity of ~~obtaining~~our ~~warehouse~~secured ~~lines~~revolving oncredit ~~favorable~~facility ~~terms~~ to May 2010, decreased the ~~extent~~borrowing ~~such~~capacity ~~financing~~thereunder isto ~~available~~$50.0 million and, effective as of December 31, 2008, deleted the financial covenants contained in the ~~market~~facility. As of December 31, ~~2008~~2009, we ~~had~~owed no$28.9 million ~~outstanding~~under ~~borrowings~~our secured ~~under~~revolving ~~warehouse~~credit ~~lines~~facility.

~~Credit~~ Concurrently with ~~Facilities. In~~entering ~~August~~into ~~2007~~the merger agreement with Brookfield, we ~~entered~~amended ~~into~~the aterms ~~$100.0 million~~of ~~secured~~our revolving credit facility with Brookfield US Corporation, an affiliate of our Manager, in ~~order~~pursuant to ~~provide~~which usthe ~~with~~maturity ~~additional~~date ~~liquidity.~~of Inthe ~~February~~credit ~~2009,~~facility wewas extended ~~the~~to ~~maturity~~August 31, of2010, ~~our~~unless ~~secured~~sooner ~~revolving~~terminated as provided in the credit ~~facility~~agreement; provided, tohowever, ~~May~~that, ~~2010~~notwithstanding the foregoing, ~~decreased~~the term of the ~~borrowing~~credit ~~capacity~~facility ~~thereunder~~will toexpire upon ~~$50.0~~the latest of (i) ~~million~~May 25, ~~and~~2010, (ii) the effective astime of ~~December~~the Merger and (iii) ~~31,~~thirty ~~2008,~~(30) calendar ~~deleted~~days following the ~~financial~~termination ~~covenants contained~~of in the ~~facility.~~merger Asagreement, ofbut ~~December~~in no event later than August 31, ~~2008~~2010. In addition, weBrookfield ~~owed~~US ~~$32.9 million~~Corporation ~~under~~consented to the Merger and to the separate sale by us of certain of our ~~secured~~assets ~~revolving~~as ~~credit~~contemplated ~~facility~~by the merger agreement.

Term Financing—CDOs. We have in the past financed certain of our assets using term financing strategies, including CDOs and other match-funded financing structures. CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as mortgage-backed securities and corporate debt. Unlike typical securitization structures, the underlying assets may be sold, subject to certain limitations, without a corresponding pay-down of the CDO provided the proceeds are reinvested in qualifying assets. As a result, CDOs enable the sponsor to actively manage, subject to certain limitations, the pool of assets. We believe CDO financing structures, when available, may be an appropriate financing vehicle for our targeted non-residential real estate asset classes, because they will enable us to obtain long-term cost of funds and minimize the risk that we have to refinance our liabilities prior to the maturities of our investments while giving us the flexibility to manage credit risk and, subject to certain limitations, to take advantage of profit opportunities.

As of December 31, ~~2008~~2009, other than as discussed below with respect to our CDO 2005-1 and our CDO 2006-1 transactions, we had no outstanding borrowings under term financing structures.

On November 30, 2005, we closed a $295.3 million private placement of CDOs, our first sponsored CDO financing. These CDOs mature in 2046. We invested the net proceeds from the financing in accordance with our investment objectives and strategies described in this report. From the date of that issuance through December 31, ~~2008~~2009, we have repaid an aggregate of $8595.32 million of floating rate CDOs issued in the CDO 2005-1 transaction from the proceeds of real estate loans owned by CDO 2005-1 that were prepaid by the borrower and cash flow from the underlying collateral that was required to pay down senior CDO liabilities as a result of the CDO trust failing certain over-collateralization triggers. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Liabilities—CDO Liabilities". As of December 31, 2009, the outstanding principal amount of CDOs that were issued by CDO 2005-1 to third parties was approximately $132.3 million and they had a fair value of approximately $5.7 million.

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On January 17, 2007, we closed a $339.6 million private placement of CDOs, our second sponsored CDO financing. These CDOs mature in 2047. We invested the net proceeds from the financing in accordance with our investment objectives and strategies described in this report. From the date of that issuance through December 31, ~~2008~~2009, we have repaid $02.10 million of CDOs issued in the CDO 2006-1 transaction from certain cash flow streams that were required to amortize the CDOs under the terms of the indenture governing those securities. As of December 31, 2009, the outstanding principal amount of CDOs that were issued by CDO 2006-1 to third parties was approximately $323.0 million and they had a fair value of approximately $27.9 million.

Total Return Swaps. Subject to maintaining our REIT qualification, to the extent available in the markets, we may finance certain of our investments using total return swaps, which are swaps in which the non-floating rate side is based on the total return of an equity or fixed income instrument with a life longer than the swap. Total return swaps allow an investor to gain exposure to an underlying loan without actually owning the loan. In these swaps, the total return (interest, fees and capital gains/losses on an underlying loan) is paid to an investor in exchange for a floating rate payment. The investor pays a fraction of the value of the total amount of the loan that is referenced in the swap as collateral posted with the swap counterparty. The total return swap, therefore, is a leveraged investment in the underlying loan.

We generally would enter into total return swaps with one-, two- or three-year maturities. Because swap maturities may not correspond with the maturities of the assets underlying the swap, we may wish to renew many of the swaps as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers would choose to renew the swaps, and, if they did not renew them, that we would be able to obtain suitable replacement providers.

Total return swaps will not be qualifying assets or produce qualifying income for purposes of the REIT asset and income tests. We may enter into total return swaps through a TRS, which may cause the income from such swaps to be subject to corporate income tax. As of December 31, 2008, we had not entered into any total return swaps.

Our Hedging and Interest Rate Risk Management Strategy

Repurchase agreements generally have maturities of 30 to 90 days and our secured revolving credit facility has a maturity of ~~May~~ August 2010 (unless sooner terminated as provided in the credit agreement), while the weighted average lives of the CMBS, RMBS and commercial real estate loans that we own and generally finance with these types of borrowings are generally longer. The difference in maturities, in addition to reset dates and reference indices, creates potential interest rate risk.

We ~~expect~~have toutilized ~~utilize~~ derivative financial instruments to hedge all or a portion of the interest rate risk associated with certain types of our borrowings. Under the federal income tax ~~laws~~ laws applicable to REITs, we generally will be able to enter into certain transactions to hedge indebtedness that we may incur, or plan to incur, to acquire or carry real estate assets, provided that ~~our~~ our total gross income from such hedges and other non-qualifying sources must not exceed 25% of our total gross income.

We engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or potentially other influences on the values of our assets. Because of the tax rules applicable to REITs, we may be required to implement certain of these techniques through a TRS that is fully subject to corporate income taxation. However, no assurances can be given that these investment and leverage strategies can successfully be implemented. Our interest rate management techniques may include:

•: puts and calls on securities or indices of securities;
•: interest rate swaps and/or swaptions; and
•: other similar transactions.

16 These techniques also may be used in an attempt to protect us against declines in the market value of our assets that result from general trends in debt markets.

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These techniques may also be used in an attempt to protect us against declines in the market value of our assets that result from general trends in debt markets.

We may, from time to time, enter into interest rate swap agreements to offset the potential adverse effects of rising interest rates under certain short-term repurchase agreements. The interest rate swap agreements have historically been structured such that we receive payments based on a variable interest rate and make payments based on a fixed interest rate. The cost of such swap agreements is de minimis as these swaps often trade in a very liquid market and are based on the yield curve, and as the yield curve flattens, the swap agreements become accretive to our results from operations. The variable interest rate on which payments are received is calculated based on various reset mechanisms for LIBOR. The repurchase agreements generally have maturities of 30 to 90 days and carry interest rates that correspond to LIBOR rates for those same periods. The swap agreements effectively fix our borrowing cost and are not held for speculative or trading purposes. Interest rate management techniques do not eliminate risk but seek to mitigate interest rate risk.

As of December 31, ~~2008~~2009, we had hedged a portion of the CDO liabilities financing our investment portfolio by entering into two interest rate swaps with maturity dates in 2013 and 2018. ~~These~~Each of these interest rate swaps ~~are~~is ~~both~~ contained within a CDO trust, and ~~have~~has similar maturity profiles to ~~the originally projected cash flows for the respective CDO liabilities. The total notional par value of such swaps was approximately $285.0 million.~~

Resolution of Potential Conflicts of Interest in Allocation of Investment Opportunities

Hyperion Brookfield, in its management of our securities portfolio pursuant to our sub-advisory agreement, will abide by its conflicts of interest policy and thus will offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies and other relevant factors, subject to the exception that, in accordance with Hyperion Brookfield's conflict of interest policy described below, we might not participate in each such opportunity but will on an overall basis equitably participate with Hyperion Brookfield's other clients in all such opportunities. Hyperion Brookfield allocates investments to eligible accounts, including Crystal River, based on current demand according to the market value of the account (which is the amount of available capital that, consistent with such account's investment parameters, may be invested in a proposed investment). An account has current demand if it has positive market value. If the investment cannot fulfill the pro rata allocation or be allocated in marketable portions, the investment is allocated on a rotational basis to accounts with current demand, with an emphasis placed on those accounts that were excluded in prior allocations, but without any preference given to accounts based on their market value. The rotational system is determined by Hyperion Brookfield's investment committee and is overseen by its chief compliance officer to ensure fair and equitable investment allocation to all accounts in accordance with the Investment Advisers Act. As of December 31, 2008, Hyperion Brookfield managed approximately 25 client accounts that had investment strategies that overlapped our investment strategy.

Unlike Hyperion Brookfield, our Manager and Brookfield Sub-Advisor are not bound by Hyperion Brookfield's conflict of interest policy and thus are not obligated to offer us any specific investment opportunities. Any decision to do so will be entirely within our Manager's and Brookfield Sub-Advisor's discretion, and it can be expected that some investments that are appropriate for us in view of our investment criteria will not be offered to us and will be made by affiliates of Brookfield without our participation.

Hyperion Brookfield historically has managed accounts with similar or overlapping investment strategies and has a conflict-resolution system in place so that we may share equitably with other Hyperion Brookfield client accounts in all investment opportunities, particularly those involving a security with limited supply, that may be suitable for our company and such other client accounts.

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The chairman of Hyperion Brookfield's investment committee oversees its conflict-resolution system, and Hyperion Brookfield's chief compliance officer regularly monitors the procedural aspects of the program. The program places particular emphasis on the equitable allocation of scarce investment opportunities, which are situations where Hyperion Brookfield is unable to obtain the full amount of the securities that it wishes to purchase for the relevant client accounts, such as newly-issued debt instruments.

In these situations, Hyperion Brookfield's policy is to first determine and document the amount of the security it wishes to purchase for each of the participating accounts, based on the size, objectives of the accounts, current client demand and other relevant factors. Hyperion Brookfield then places an order for the total of these amounts. If Hyperion Brookfield is able to obtain only partial execution of the order, its policy calls for the allocation of the purchased securities in the same proportion that it would have allocated a full execution of the order. The policy permits departure from such proportional allocation only if the allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the policy provides for a "rotational" protocol of allocating subsequent partial executions so that, on an overall basis, each account is treated equitably.

Other conflict-resolution policies of Hyperion Brookfield and the terms of our management agreement with Hyperion Brookfield Crystal River that will apply to the management of our company include controls for:

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~~rates~~the ~~with~~originally ~~standard~~projected ~~market~~cash ~~terms~~flows ~~and,~~for in the ~~case~~respective ofCDO aliabilities. ~~sub-advisor~~The ortotal annotional ~~affiliate~~par ofvalue ~~either our Manager or a sub-advisor, the party providing the services has sufficient qualifications and experience to perform the services at a level~~ of ~~quality comparable to non-affiliated service providers in the area, the cost to our Manager is no less favorable than can be obtained from an unrelated third party on an arm's length basis and any~~ such ~~arrangements~~swaps ~~are~~was ~~approved~~approximately ~~in advance by a majority of our independent directors~~$281.0 million.

Resolution of Potential Conflicts of Interest in Allocation of Investment Opportunities

BIM, in its management of our securities portfolio pursuant to our sub-advisory agreement, will abide by its conflicts of interest policy and thus will offer us the right to participate in all investment opportunities that it determines are appropriate for us in view of our investment objectives, policies and strategies and other relevant factors, subject to the exception that, in accordance with BIM's conflict of interest policy described below, we might not participate in each such opportunity but will on an overall basis equitably participate with BIM's other clients in all such opportunities. BIM allocates investments to eligible accounts, including Crystal River, based on current demand according to the market value of the account (which is the amount of available capital that, consistent with such account's investment parameters, may be invested in a proposed investment). An account has current demand if it has positive market value. If the investment cannot fulfill the pro rata allocation or be allocated in marketable portions, the investment generally is allocated on a rotational basis to accounts with current demand, with an emphasis placed on those accounts that were excluded in prior allocations, but without any preference given to accounts based on their market value. The rotational system is determined by BIM's investment committee and is overseen by its chief compliance officer to ensure fair and equitable investment allocation to all accounts in accordance with the Investment Advisers Act. As of December 31, 2009, BIM managed more than 20 client accounts that had investment strategies that overlapped our investment strategy.

Unlike BIM, our Manager and Brookfield Sub-Advisor are not bound by BIM's conflict of interest policy and thus are not obligated to offer us any specific investment opportunities. Any decision to do so will be entirely within our Manager's and Brookfield Sub-Advisor's discretion, and it can be expected that some investments that are appropriate for us in view of our investment criteria will not be offered to us and will be made by affiliates of Brookfield without our participation.

BIM historically has managed accounts with similar or overlapping investment strategies and has a conflict-resolution system in place so that we may share equitably with other BIM client accounts in all investment opportunities, particularly those involving a security with limited supply, that may be suitable for our company and such other client accounts.

The chairman of BIM's investment committee (or his designee) oversees its conflict-resolution system, and BIM's chief compliance officer regularly monitors the procedural aspects of the program. The program places particular emphasis on the equitable allocation of scarce investment opportunities, which are situations where BIM is unable to obtain the full amount of the securities that it wishes to purchase for the relevant client accounts, such as newly-issued debt instruments.

In these situations, BIM's policy is to first determine and document the amount of the security it wishes to purchase for each of the participating accounts, based on the size, objectives of the accounts, current client demand and other relevant factors. BIM then places an order for the total of these amounts. If BIM is able to obtain only partial execution of the order, its policy calls for the allocation of the purchased securities in the same proportion that it would have allocated a full execution of the order. The policy permits departure from such proportional allocation only if the allocation would result in an inefficiently small amount of the security being purchased for an account. In that case, the policy provides for a "rotational" protocol of allocating subsequent partial executions so that, on an overall basis, each account is treated equitably.

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Other conflict-resolution policies of BIM and the terms of our management agreement with our Manager that will apply to the management of our company include controls for:

•: Split price executions—These are situations where BIM places an order for multiple clients and the order is executed at different prices. BIM's policy is that the executions are to be allocated to the participating accounts so that each account receives the same average price.
•: Cross trades—These are trades where BIM places an order for a client account to buy (or sell) a particular security and places a simultaneous or virtually simultaneous order for another client account to sell (or buy) the same security. In such case, under BIM's policies, the pair of transactions must be approved by the chairman of the investment committee and executed at the prevailing market price as determined by an independent broker-dealer such that the price is fair to BIM's clients on both sides of the transaction. Neither BIM nor any of its affiliates may receive compensation for effecting such a transaction.
•: Principal transactions—Under the terms of our management agreement with our Manager, we have agreed not to acquire an investment from, sell an investment to or make any co-investment with any proprietary account of Brookfield, BIM or any of their respective affiliates, which we refer to as related persons, or any account advised by any related person, or borrow funds from or lend funds to any related person or invest in any investment vehicle advised by any related person unless the transaction is on terms no less favorable than can be obtained on an arm's length basis from unrelated third parties based on prevailing market prices, other reliable indicators of fair market value or an independent valuation or appraisal and has been approved in advance by a majority of our independent directors. If we invest in an investment vehicle advised by a related person, including, for example, a private investment fund managed by an affiliate of Brookfield, and the asset class of such investment is one that we are professionally staffed to underwrite, we expect, although no assurance can be given, that our Manager and/or such affiliate would waive any base and incentive management fees relating to such investment in excess of the base and incentive management fees that we would owe our Manager in respect of such investment had we made the investment directly and not through such affiliate.

Our Manager may engage other parties, including its affiliates or any of our sub-advisors and/or any of their respective affiliates, to provide services to us or our subsidiaries, including asset management, property management, leasing, financing and disposition and/or similar services customarily provided to a business similar to ours, provided that, such services are provided at market rates with standard market terms and, in the case of a sub-advisor or an affiliate of either our Manager or a sub-advisor, the party providing the services has sufficient qualifications and experience to perform the services at a level of quality comparable to non-affiliated service providers in the area, the cost to our Manager is no less favorable than can be obtained from an unrelated third party on an arm's length basis and any such arrangements are approved in advance by a majority of our independent directors.

Policies with Respect to Certain Other Activities

If our board of directors determines that additional funding is required, to the extent that conditions in the financial markets permit, we may raise such funds through additional offerings of equity or debt securities, or through the retention of cash flow (subject to provisions in the Internal Revenue Code concerning distribution requirements and the taxability of undistributed REIT taxable income) or a combination of these methods. In the event that our board of directors determines to raise additional equity capital, it has the authority, without stockholder approval, to issue additional common stock or preferred stock in any manner and on such terms and for such consideration as it deems appropriate, at any time.

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We have not in the past but may in the future, if market conditions permit, offer equity or debt securities in exchange for property and to repurchase or otherwise reacquire our shares and may engage in such activities in the future.

In addition, we have in the past and may in the future, if market conditions permit, borrow money to finance the acquisition of investments. We intend to use traditional forms of financing, such as credit lines, mortgage financing and warehouse facilities. To the extent available, we also ~~may~~might utilize structured financing techniques, such as CDOs, or repurchase agreement financing to create attractively priced non-recourse financing at an all-in borrowing cost that is lower than that provided by traditional sources of financing and that provide long-term, floating rate financing. Our investment guidelines and our portfolio and leverage are periodically reviewed by our board of directors as part of their oversight of our Manager.

We have in the past and may in the future, subject to gross income and asset tests necessary for REIT qualification, invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers. We have not made in the past but to the extent we have any investable cash may in the future make such investments for the purpose of exercising control over such entities.

We engage in the purchase and sale of investments. We have in the past and may in the future make loans to third parties in the ordinary course of business for investment purposes. We will not underwrite the securities of other issuers.

Our board of directors may change any of these policies without prior notice to you or a vote of our stockholders.

We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent registered public accounting firm, and we expect to file quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year with the Commission.

Operating and Regulatory Structure

We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we were organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

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concentration of ownership of our capital stock. We believe that we were organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT.

As a REIT, we generally will not be subject to federal income tax on the REIT taxable income that we distribute currently to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax at regular corporate rates for that year and for the next four tax years (unless we satisfy the IRS that certain limited cure provisions apply). Even if we qualify for federal taxation as a REIT, we may be subject to some federal, state and local taxes on our income or property. Crystal River Capital TRS Holdings, Inc., our TRS, is a regular taxable corporation that is subject to federal, state and local income tax on its income.

Our investment activities are managed by our Manager and supervised by our board of directors. In exchange for those management services, we incur an annual base management fee determined by our stockholders' equity but not by our performance, as well as an incentive management fee based on our performance.

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We and our Manager have retained Brookfield Sub-Advisor as a sub-advisor with respect to investments in mortgages and other real estate debt, real estate and other real estate-related, yield-oriented assets. Each sub-advisor evaluates potential investments, recommends suitable investments and, on our behalf, closes each investment approved by us and, in the case of certain transactions, the independent members of our board of directors.

Exclusion from Regulation Under the Investment Company Act

We intend to continue to operate our business so that we do not become subject to regulation as an "investment company" under the Investment Company Act. Because we conduct our business directly and through wholly-owned subsidiaries, we must ensure not only that we, but also each of our subsidiaries, are not subject to regulation as an "investment company" under the Investment Company Act. For purposes of the ensuing discussion "we" and "our" refer to Crystal River Capital, Inc. alone and not its subsidiaries.

We are not an "investment company," as defined in Section 3(a)(1)(C) of the Investment Company Act. We are not engaged in the business of investing, reinvesting, owning, holding or trading securities, and we do not own "investment securities" having a value that exceeds 40% of the value of our total assets (exclusive of cash items and ~~Government~~government securities) on an unconsolidated basis. In addition, we are not an "investment company," as defined in Section 3(a)(1)(A) of the Investment Company Act, because we are not, nor do we hold ourselves out as being, primarily engaged in the business of investing, reinvesting or trading in securities.

If at any time in the future we are considered an "investment company" as defined in Section 3(a)(1)(C) of the Investment Company Act, we intend to qualify for the exclusion from regulation provided by Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C) is designed for companies that do not issue redeemable securities and are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. To qualify for this exemption, we will need to ensure that at least 55% of our assets consist of mortgage loans and other assets that are considered the functional equivalent of mortgage loans for purposes of the Investment Company Act, which we refer to as qualifying real estate assets, and that at least 80% of our assets consist of qualifying real estate assets and real estate-related assets. We do not intend to issue redeemable securities. We also may rely on an exclusion from regulation provided by Section 3(c)(6) of the Investment Company Act if, from time to time, we engage in our business through one or more majority-owned subsidiaries.

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Competition

In the past, our results from operations depended, in large part, on our ability to acquire assets at favorable spreads or with favorable returns over our borrowing costs. Currently, we, and many of our peers, do not have available capital to make new investments. Additionally, we and many of our peers do not have access to attractive financing with which to leverage our investments, thus we are less exposed to competition at this time. ~~Our focus remains on maximizing the cash flows that we derive from our investment portfolio in order to pay our dividend and to reduce borrowings under our secured credit facility.~~

WeWhen we have investable capital, we face competition when attempting to make real estate investments, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, partnerships and individual investors. The leasing of real estate is highly competitive. Because we purchased our buildings with long-term leases in place (the earliest expires in 2021), we generally have not faced competition in attracting tenants to date. If our current leases were to terminate early or we acquired other buildings that did not have long-term leases (to the extent we had investable capital), our properties would compete for tenants with similar properties primarily on the basis of location, total occupancy costs (including base rent and operating expenses), services provided and the design and condition of the improvements.

We have had and expect to continue to have access to Brookfield's and our Manager's and our sub-advisors' professionals and their industry expertise, which we believe provides us with a competitive advantage and helps us assess investment risks and determine appropriate strategies for certain potential investments. In addition, in the event that the ability to obtain acceptable leverage returns to our marketplace, we expect that these relationships will enable us to learn about, and compete more effectively for, financing opportunities with attractive companies in the industries in which we seek to invest. For additional information concerning the competitive risks we face, see "Item 1A. Risk Factors—Risks Related To Our Business and Investment Strategy—We operate in a highly competitive market for investment opportunities." 22

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We have had and expect to continue to have access to Brookfield's and our Manager's and our sub-advisors' professionals and their industry expertise, which we believe provides us with a competitive advantage and helps us assess investment risks and determine appropriate strategies for our current investments and, to the extent we have investable cash, any future investments. In addition, in the event that the ability to obtain acceptable leverage returns to our marketplace, we expect that these relationships will enable us to learn about, and compete more effectively for, financing opportunities with attractive companies in the industries in which we have invested. For additional information concerning the competitive risks we face, see "Item 1A. Risk Factors—Risks Related To Our Business and Investment Strategy—We operate in a highly competitive market for investment opportunities, and we may not be able to identify and make investments that are consistent with our investment objectives."

Government Regulation

Our activities, including the financing of our operations, are subject to a variety of federal and state regulations. In addition, a majority of states have ceilings on interest rates chargeable to certain customers in financing transactions.

Employees

WeOther than our President and Chief Executive Officer, we have no other employees asand all of our investment operations are overseen and undertaken by our Manager. In accordance with Maryland law, we do have certain officers who administer Crystal River's operations. ~~These~~Other than our President and Chief Executive Officer, whom we compensate directly, all of our others officers are employees of, and are compensated by, ~~the~~affiliates ~~Manager~~of ~~and~~our ~~its affiliates~~Manager.

Code of Business Conduct and Ethics and Corporate Governance Documents

We have adopted a code of business conduct and ethics that applies to all of our officers, including our principal executive officer and principal financial and accounting officer, and all of the employees of our Manager. This code of business conduct and ethics is designed to comply with SEC regulations and NASDAQ corporate governance rules related to codes of conduct and ethics and is posted on our corporate website at http://www.crystalriverreit.com. In addition, our corporate governance guidelines and charters for our audit, compensation and corporate governance committees of the board of directors are posted on our corporate website. Copies of our code of business conduct and ethics, our corporate governance guidelines and our committee charters also are available free of charge, upon request directed to Investor Relations, Crystal River Capital, Inc., Three World Financial Center, 200 Vesey Street, 10th Floor, New York, NY 10281-1010.

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Website Access to Reports

We maintain a website at http://www.crystalriverreit.com. Through our website, we make available, free of charge, our annual proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Commission. The Commission maintains a website that contains these reports at http://www.sec.gov.

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Item 1A. Risk Factors.

Risks Related to Our Business and Investment Strategy

The impending maturity of our senior revolving credit facility and our current financial condition raise substantial doubt regarding our ability to continue as a going concern. However, our consolidated financial statements are presented on a going concern basis.

Our consolidated financial statements are presented in this report on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As of December 31, 2009, we owed $28.9 million to an affiliate of our Manager under our secured credit facility. Unless terminated earlier as provided in the credit agreement, our credit facility terminates on August 31, 2010. As a result of our possible inability to extend, refinance or repay this indebtedness, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial statements on a going concern basis, if the Merger is not consummated and we are unable to successfully extend the maturity date of our credit facility or receive additional funding, our ability to continue as a going concern will be in doubt. In such event, we may have to recapitalize, refinance our obligations, sell some or all of our assets or seek to reorganize under Chapter 11 of the United States Bankruptcy Code. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business, adversely impacting amounts actually realized relative to our financial statements. In addition, our ability to continue as a going concern will be dependent upon our ongoing asset performance and our ability to generate positive operating cash flow. No assurance can be given that we will be successful in achieving any of these steps or restructuring these arrangements on acceptable terms. Our consolidated financial statements included in this report do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

The occurrence of recent adverse developments in the mortgage finance and credit markets may adversely affect our business, our liquidity and our stock price.

In recent ~~quarters~~years, the mortgage industry has come under enormous pressure due to numerous economic and industry-related factors. Many companies operating or investing in the mortgage sector have failed and others are facing serious operating and financial challenges. At the same time, many MBS have been downgraded and delinquencies and credit performance of mortgage loans in the industry have deteriorated. We have faced significant challenges beginning in the second half of 2007 due to these adverse conditions in the mortgage industry and the difficulties we experienced in pricing and financing some of our MBS, and we expect these challenges to continue. Recent adverse changes in the mortgage finance and credit markets have eliminated or reduced the availability, or increased the cost, of significant sources of funding for us. Beginning in August 2007 and continuing through the current date, the fair value of our RMBS and CMBS assets as well as our derivative instruments have decreased, while our margin requirements on our financings and derivatives have increased. The price of our common stock has declined significantly as a result of these events and there has been a significant impact on our results of our operations. There is no assurance that our stock price will not decline further if, among other things, MBS prices continue to decline. In addition, significant decreases in the prices of our MBS have and may continue to decrease the carrying value of those investments, which could ~~reduce~~further increase our stockholders' ~~equity~~deficit below the levels required to be maintained pursuant to some of the instruments governing our borrowing arrangements with third parties. If this occurs, and we are not successful in obtaining amendments to or waivers of those covenants, we could default under those agreements. An event of default or termination event under these agreements would give the lender/counterparty the option to accelerate our indebtedness to them. If we are required to repay outstanding borrowings and were unable to negotiate favorable terms of replacement financing, cash will be negatively affected. This may ~~reduce the amount of capital available for investing and/or may~~ negatively affect our ability to ~~distribute dividends. In addition, we may have to sell assets at a time when we might not otherwise choose to do so.~~

~~Periods of adverse market volatility could adversely affect our liquidity.~~ 24

During periods of increased adverse market volatility, such as the current extended disruption in the global liquidity markets, we are exposed to the risk that the availability under our funding sources may decline and/or we may have to post additional margin collateral, which may have a material adverse impact on our available liquidity. As a result, our contingent liquidity reserves may not be sufficient in the event of a material adverse change in the credit markets and related market price market volatility. For example, as of December 31, 2008, we were required to post cash margin collateral of $20.7 million relating to our use of CDS. Additionally, demands on liquidity may result in further deleveraging of the portfolio, which could adversely impact our earnings.

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continue as a going concern. In addition, we may have to sell assets at a time when we might not otherwise choose to do so.

We are currently not making new investments and it is uncertain whether we will be able to make additional investments in the future, which increases the risk that we will be unable to continue as a going concern.

We have observed a number of IPO filings by recently formed entities with investment strategies focused on commercial and residential real estate debt markets. Given current market conditions and our lack of investable cash, currently, we are unable to take advantage of new investment opportunities.

In the event that negative market conditions persist or deteriorate further, and we are not able to achieve a successful disposition of assets or increase our liquidity through alternative channels, then the risk increases as to whether we can continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, our consolidated financial statements do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

We have suspended the payment of dividends on our common stock.

For business reasons, in November 2009, our board of directors suspended payment of dividends on shares of our common stock. We can provide no assurance as to when we will resume paying dividends on our common stock, if at all. In the merger agreement, we have agreed not to pay any dividends to our stockholders.

Periods of adverse market volatility could adversely affect our liquidity.

During periods of increased adverse market volatility, such as the current extended disruption in the global liquidity markets, we are exposed to the risk that the availability under our funding sources may decline and/or we may have to post additional margin collateral, which may have a material adverse impact on our available liquidity. As a result, our contingent liquidity reserves may not be sufficient in the event of a material adverse change in the credit markets and related market price market volatility. For example, as of December 31, 2009, we were required to post cash margin collateral of $10.5 million relating to our use of CDS. Additionally, demands on liquidity may result in further deleveraging of the portfolio, which could adversely impact our earnings.

The weakness in the mortgage market has caused us to expect increased losses related to our holdings.

The sub-prime market has been severely affected by changes in the lending landscape. Access to mortgages for sub-prime borrowers has been and is expected to remain substantially limited for the foreseeable future. This limitation on financing generally has had a negative impact on sub-prime borrowers, especially those whose interest rates on loans are resetting, and has resulted in increased default rates. The severity of the liquidity limitation was largely unanticipated by the markets. As well, the liquidity issues also affect prime and Alt-A Non-Agency lending, with mortgage rates remaining much higher and many product types being severely curtailed. At the margin, this has an impact on new demand for homes, which has compressed the home ownership rates and is expected to weigh heavily on future home price performance. There is a strong correlation between home price growth rates and mortgage loan delinquencies. This comes in addition to the delinquency pressures in the sub-prime market resulting from weaker underwriting, which put many sub-prime lenders out of business in 2006 and 2007. The market deterioration has caused us to expect increased losses related to our holdings and has resulted in a lower market value for our holdings. We believe that, at this time, the underlying losses in the sub-prime market have not fully manifested themselves in the ~~securitizations. For the year ended December 31, 2008, we had impairments on RMBS totaling $62.7 million, which included impairments on sub-prime RMBS totaling $16.4 million.~~

As commercial real estate fundamentals have started to weaken, prices on CMBS have declined and yield spreads on CMBS have widened significantly. This widening has forced interest rates on commercial real estate mortgages wider and the higher mortgage rate environment could depress prices on commercial real estate properties that require financing over the near term. Prices also are suffering from poor technicals as balance sheet deleveraging caused by the credit crisis is causing forced selling into the market. For the year ended December 31, 2008, we had impairments on CMBS totaling $79.1 million, of which $40.4 million is related generally to wider yield spreads affecting market values of the CMBS, and we had realized losses on sales of CMBS of $1.9 million. 25

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securitizations. For the year ended December 31, 2009, we had impairments on RMBS totaling $15.3 million, which included impairments on sub-prime RMBS totaling $6.2 million.

As commercial real estate fundamentals have started to weaken, prices on CMBS have declined and yield spreads on CMBS have widened significantly. This widening has forced interest rates on commercial real estate mortgages wider and the higher mortgage rate environment could depress prices on commercial real estate properties that require financing over the near term. Prices also are suffering from poor technicals as balance sheet deleveraging caused by the credit crisis is causing forced selling into the market. For the year ended December 31, 2009, we had impairments on CMBS totaling $62.6 million.

We leverage our investments, which may negatively affect our return on our investments and may reduce cash available for distribution.

WeTo the extent available, we intend to continue to leverage our investments through borrowings, generally through the use of warehouse facilities, bank credit facilities, secured loans, securitizations (including the issuance of CDOs, when possible), loans to entities in which we hold, directly or indirectly, interests in pools of assets, and other borrowings, in each case, when markets permit. We are not limited in the amount of leverage we may use other than by general market conditions. The percentage of leverage varies depending on our ability to obtain credit facilities and the lenders' and rating agencies' estimate of the stability of the investments' cash flow. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the assets acquired. Our debt service payments will reduce cash flow available for distributions to stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy the obligations. We have in the past leveraged and may in the future leverage certain of our assets through repurchase agreements. A decrease in the value of these assets may lead to margin calls, which we will have to satisfy. We may not have the funds available to satisfy any such margin calls and may have to sell assets at a time when we might not otherwise choose to do so.

Further, credit facility providers and warehouse facility providers may require us to maintain a certain amount of uninvested cash or to set aside unlevered assets sufficient to maintain a specified liquidity position, which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly and we could be forced to sell additional investments at a loss.

23 Recently adopted amendments to accounting standards will require us to consolidate previous and any potential future securitization transactions, which will have a significant impact on our consolidated financial statements and net worth.

In June 2009, the Financial Accounting Standards Board, or the FASB, issued FASB ASC 860-10-65-3 (previously SFAS 166) and FASB ASC 810-10-65-2 (previously SFAS 167), which significantly change the accounting for transfers of financial assets and the criteria for determining whether to consolidate a variable interest entity, or a VIE. FASB ASC 860-10-65-3 eliminates the qualifying special purpose entity, or the QSPE, concept, establishes conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies the financial asset derecognition criteria, revises how interests retained by the transferor in a sale of financial assets initially are measured, and removes the guaranteed mortgage securitization recharacterization provisions. FASB ASC 810-10-65-2 requires reporting entities to evaluate former QSPEs for consolidation, changes the approach to determining a VIE's primary beneficiary from a mainly quantitative assessment to an exclusively qualitative assessment designed to identify a controlling financial interest, and increases the frequency of required

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reassessments to determine whether a company is the primary beneficiary of a VIE. We have evaluated the provisions of these two statements and believe that their application will result in the consolidation of six of the QSPEs, or more specifically the underlying trusts for certain of the subordinate CMBS, that we owned as of December 31, 2009, which may result in our balance sheet and statement of operations not being comparable from period to period. Implementation of these standards requires us to make major operational and system changes to incorporate the additional financial reporting requirements.

Although we are still assessing the impact of these new accounting standards, we currently expect that the adoption of these accounting standards will require that we consolidate onto our balance sheet all assets and liabilities and onto our statement of operations all revenues and expenses of the underlying trusts for certain of the subordinate CMBS that we owned after December 31, 2009. Because of the magnitude and complexity of the operational and system changes that we are making and the limited amount of time available to complete and test our systems development, there is a risk that unexpected developments could make it difficult for us to implement all of the necessary system changes and internal control processes by the January 1, 2010 effective date. Failure to make these changes by the effective date could have a material adverse impact on us, including on our ability to produce financial reports on a timely basis or to remain in compliance with the financial covenants in our credit agreement. In addition, making the necessary operational and system changes in a compressed time frame diverts resources from our other business requirements and corporate initiatives and could result in significantly increased operating costs, which could have a material adverse impact on our operations.

We may be required to post significant amounts of cash collateral at any time to satisfy our margin requirements under many of our financing arrangements, which could adversely affect our liquidity, results of operations and financial condition.

We invest in derivatives and when available in the future, may finance certain of our investments with debt, such as repurchase agreements, in each case that are subject to margin calls. Under the terms of these agreements, the value of the derivative contract or the value of the assets underlying the debt is marked-to-market by the counterparty or the lender at the counterparty's or lender's discretion, including on a daily basis. If the value of the underlying derivative or asset declines, the counterparty or lender has the ability to require us to post additional margin—cash or other liquid collateral—to compensate for the decline in value of the derivative or asset. Conversely, if the value of the underlying derivative or asset increases, a portion of the margin we previously posted may be returned to us. We typically are required to post additional margin in response to any margin call within 24 hours in order to avoid defaulting under the terms of the instrument governing the derivative transaction or financing arrangement.

We are subject to margin calls at any time, and being forced to post additional margin could adversely affect our business in a number of ways. Posting additional margin decreases our cash available to make other, higher yielding investments (thereby decreasing our return on equity) or to satisfy other obligations, including future margin calls. If we do not have the funds available, or otherwise elect not, to satisfy any future margin calls, we could be forced to sell one or more investments at a loss. Moreover, we may be unable, in light of market conditions or other factors, to sell sufficient assets to satisfy the margin requirements within the timeframe required by counterparties or lenders, which in the case of lenders, would entitle them to seize the underlying asset and seek payment from us for any shortfall between the value of our obligation to the lender and the value of the asset surrendered. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection under the United States Bankruptcy Code. As of December 31, ~~2008~~ 2009, we had ~~restricted~~exposure ~~cash~~to ofmargin calls of $200.74 million ~~representing additional margin~~.

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We are dependent on our Manager and our sub-advisors and may not find suitable replacements if our Manager terminates the management agreement.

We are externally managed by our Manager. ~~All~~Other than our President and Chief Executive Officer, all of our officers and all of our Manager's officers are employees of Brookfield, ~~Hyperion~~BIM ~~Brookfield~~ or certain of their respective affiliates. We have no separate facilities and are completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies. We are subject to the risk that our Manager will terminate the management agreement, thereby triggering a termination of our sub-advisors, and that no suitable replacements will be found to manage us. We believe that our success depends to a significant extent upon the experience of our Manager's executive officers, whose continued service is not guaranteed. Although we have renewed our management agreement with our Manager for the ~~2009~~2010 year, if our Manager terminates the management agreement, we may not be able to execute our business plan and may suffer additional losses, which could materially decrease cash available for distribution to our stockholders.

Our Manager has limited prior experience managing a REIT and we cannot assure you that our Manager's past experience will be sufficient to successfully manage our business as a REIT.

The federal income tax laws impose numerous constraints on the operations of REITs. Our Manager's and its employees' limited experience in managing a portfolio of assets under REIT and Investment Company Act ~~of 1940, or the Investment Company Act,~~ constraints may hinder their ability to achieve our investment objective. In addition, maintaining our REIT qualification limits the types of investments we are able to make. We can offer no assurance that our Manager will replicate its historical success or its management team's success in its previous endeavors, and we caution you that our investment returns could be substantially lower than the returns achieved by funds managed by our Manager and its affiliates and their other endeavors.

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our investment returns could be substantially lower than the returns achieved by funds managed by our Manager and its affiliates and their other endeavors.

We are dependent upon our Manager's key personnel and the resources of our sub-advisors for our success and the departure of any of these key personnel or the elimination of resources of our sub-advisors could negatively affect our performance.

We depend on the diligence, skill and network of business contacts of the senior management of our Manager and its affiliates, who direct the management activities of our Manager. The senior management of our Manager evaluates, negotiates, structures, closes and monitors our investments. Our continued success will depend on the continued service of the senior management team of our Manager and its affiliates. The departure of any of the senior managers of our Manager, or of a significant number of the investment professionals or principals of our Manager and its affiliates, could have a material adverse effect on our performance. In addition, we can offer no assurance that our Manager will remain as our manager or that we will continue to have access to our Manager's and its affiliates' respective principals and professionals or their information and deal flow. We also depend on the resources of our sub-advisors in connection with sourcing and managing our investments and executing our investment strategy.

Our Manager's incentive fee may ~~induce~~have induced it to make certain investments, including speculative investments, that increase the risk of our investment portfolio.

Our Manager's entitlement to an incentive fee may ~~cause~~have caused it to invest in high-risk investments. In addition to its ~~base~~ base management fee, our Manager is entitled to receive incentive compensation based entirely upon our achievement of targeted levels of net income. In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on net income may ~~lead~~have led our Manager to place undue emphasis on the maximization of net income at the expense of other criteria, such as as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential generally are riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

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Our Manager manages our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment decision made by our Manager, which may result in our making riskier investments with which you do not agree and which could cause our operating results and the value of our common stock to decline.

Our Manager is authorized to follow very broad investment guidelines. Although our directors periodically review our investment guidelines and our investment portfolio, other than any investments involving our affiliates or our sub-advisors' affiliates or investments proposed by Brookfield Sub-Advisor, which our audit committee is required to review and approve prior to such investments being made, our directors do not review all of our proposed investments. In addition, in conducting periodic reviews, our directors may rely primarily on information provided to them by our Manager or Brookfield Sub-Advisor. Furthermore, our Manager and Brookfield Sub-Advisor may use complex strategies in structuring transactions for us and those transactions may be difficult or impossible to unwind. Subject to maintaining our REIT qualification and our exemption from regulation under the Investment Company Act, our Manager has great latitude within the broad investment guidelines in determining the types of investments it makes for us.

The failure of our management and our Manager to deploy our capital effectively could result in unfavorable returns, could have a material negative impact on our business, financial condition, liquidity and results of operations, could materially decrease cash available for distribution to our stockholders and could cause the value of our common stock to decline.

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We may change our investment strategy and asset allocation without stockholder consent, which may result in riskier investments or in lower distributions to you.

We have not adopted a policy as to the amounts to be invested in each of our intended investments, including securities rated below investment grade. Subject to our intention to invest in a portfolio that allows us to qualify as a REIT and remain eligible for an exclusion from regulation as an investment company under the Investment Company Act, we may change our investment strategy or asset allocation, including the percentage of assets that may be invested in each class, or in the case of securities, in a single issuer, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this report. A change in our investment strategy may increase our exposure to interest rate risk, default risk, real estate market fluctuations and liquidity risk, all of which could negatively affect the market price of our common stock and our ability to make distributions to you.

There are conflicts of interest in our relationship with our Manager, which could result in decisions that are not in the best interests of our stockholders and our financial condition could make it difficult to terminate our management agreement with our Manager.

We are ~~entirely~~ dependent on our Manager for our day-to-day management ~~and have no independent officers~~. Our ~~chairman~~ ~~of the board, president and~~ chief ~~executive officer, chief~~ financial officer and vice president and general counsel also serve as officers and/or directors of Brookfield, ~~Hyperion~~BIM ~~Brookfield~~ or certain of their respective affiliates. As a result, our management agreement with our Manager was negotiated between related parties, and its terms, including fees payable, may not be as favorable to us as if it had been negotiated with an unaffiliated third party.

Termination of the management agreement with our Manager without cause is difficult and costly. The management agreement provides that it may only be terminated without cause ~~following~~ (a) at the expiration of the current term expiring on December 31, ~~2009~~2010 by notice given at least six months prior to the end of the term, or (b) annually upon the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of at least a majority of the outstanding shares of our common stock, based upon:

•: unsatisfactory performance by our Manager that is materially detrimental to us or

Our Manager will be provided 180 days' prior notice of any such termination and will be paid a termination fee equal to the amount of two times the sum of the average annual base management fee and the average annual incentive compensation earned by our Manager during the two 12-month periods immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. These provisions may increase the effective cost to us of terminating the management agreement, thereby restricting our ability to terminate our Manager without cause. In addition, if we do not have sufficient liquidity to generate cash to pay a termination fee, we could effectively be precluded from terminating the management agreement absent concessions from our Manager. 29

The ability of Brookfield and Hyperion Brookfield and their respective officers and employees to engage in other business activities may reduce the time our Manager spends managing us.

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•: a determination that the management fee payable to our Manager is not fair, subject to our Manager's right to prevent such a termination by accepting a mutually acceptable reduction of management fees.

~~based~~ In ~~entirely~~addition, ontermination ~~our~~by ~~performance.~~Crystal ~~The~~River ~~risk~~relating ofto ~~the~~unsatisfactory ~~base~~performance ~~management~~by ~~fee~~our ~~component~~Manager isor a determination that itthe ~~may~~management ~~not~~fee ~~provide~~is ~~sufficient~~not ~~incentive~~fair (subject to our Manager's toright ~~generate attractive risk-adjusted returns~~to ~~for~~reduce ~~us.~~its ~~The~~fee ~~risk~~to ofa ~~the~~mutually ~~incentive~~acceptable ~~fee~~level) ~~component~~also isrequire that ~~it may cause~~ our Manager tobe ~~place~~provided ~~undue emphasis~~180 days' onprior ~~the~~notice ~~maximization~~ of ~~GAAP~~any ~~net~~such ~~income~~termination atand ~~the~~be ~~expense~~paid ofa ~~other~~termination ~~criteria,~~fee ~~such~~equal asto ~~preservation~~the amount of ~~capital,~~two times inthe ~~order~~sum toof ~~achieve~~the aaverage ~~higher~~annual ~~incentive~~base management fee. ~~This~~and ~~could~~the ~~result~~average inannual ~~increased~~incentive ~~risk~~compensation ~~to the~~earned ~~value~~by of our ~~investment~~Manager ~~portfolio.~~during ~~Subject~~the totwo ~~certain~~12-month ~~limitations,~~periods ~~our~~immediately ~~Manager~~preceding ~~will~~the ~~receive~~date of attermination, ~~least~~calculated ~~10%~~as of ~~its~~the ~~incentive~~end ~~fee~~of in the ~~form~~most ofrecently ~~shares~~completed offiscal ~~our~~quarter ~~common~~prior ~~stock,~~to ~~and,~~the atdate ~~our~~of ~~Manager's~~termination. ~~option,~~These provisions may ~~receive~~increase upthe effective cost to ~~100%~~us of ~~its~~terminating ~~incentive fee in~~ the ~~form~~management ofagreement, ~~shares~~thereby ofrestricting our ~~common~~ability ~~stock. Our Manager has agreed not~~ to ~~sell~~terminate ~~such~~our ~~shares~~Manager ~~prior~~without tocause. ~~one~~In ~~year~~addition, ~~after~~if ~~the~~we ~~date~~do ~~such~~not ~~shares are issued.~~have ~~Our~~sufficient ~~Manager~~liquidity ~~has~~to ~~the~~generate ~~right~~cash ~~in its discretion~~ to ~~allocate~~pay ~~these~~a ~~shares~~termination ~~to its officers~~fee, ~~employees~~we ~~and~~could ~~other~~effectively ~~individuals~~be ~~who~~precluded ~~provide~~from ~~services~~terminating tothe ~~us.~~management ~~However,~~agreement ~~any~~absent ofconcessions ~~these~~from ~~shares that~~ our Manager. soThe ability of ~~allocates~~Brookfield ~~will~~and beBIM ~~subject~~and totheir ~~the~~respective ~~same~~officers ~~one-year~~and ~~restriction~~employees onto ~~sale.~~engage ~~Any~~in ~~such~~other ~~shares~~business ~~received~~activities ~~would~~may ~~have~~reduce the ~~benefit~~time ~~of registration rights. In addition,~~ our Manager ~~took~~spends ~~its~~managing ~~entire base management fee for 2008 in shares of our common stock~~us.

The management compensation structure that we have agreed to with our Manager may cause our Manager to invest in potentially higher yielding investments. Investments with higher yield potential generally are riskier or more speculative. The compensation we pay our Manager consists of both a base management fee that is not tied to our performance and an incentive management fee that is based entirely on our performance. The risk of the base management fee component is that it may not provide sufficient incentive to our Manager to generate attractive risk-adjusted returns for us. The risk of the incentive fee component is that it may cause our Manager to place undue emphasis on the maximization of GAAP net income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive fee. This could result in increased risk to the value of our investment portfolio. Subject to certain limitations, our Manager will receive at least 10% of its incentive fee in the form of shares of our common stock, and, at our Manager's option, may receive up to 100% of its incentive fee in the form of shares of our common stock. Our Manager has agreed not to sell such shares prior to one year after the date such shares are issued. Our Manager has the right in its discretion to allocate these shares to its officers, employees and other individuals who provide services to us. However, any of these shares that our Manager so allocates will be subject to the same one-year restriction on sale. Any such shares received would have the benefit of registration rights.

Our Manager and our sub-advisors are not contractually obligated to dedicate their time to us and may engage in other activities that compete with us, which may result in conflicts of interest that could cause our results of operations to be lower or result in increased risk to the value of our investment portfolio.

The ability of our sub-advisors and their respective officers and employees to engage in other business activities may result in conflicts of interest and may reduce the time they spend acting as a sub-advisor to us. In addition, the management compensation structure that we and our Manager have agreed to with Brookfield Sub-Advisor may cause Brookfield Sub-Advisor to source potentially higher yielding investments. Investments with higher yield potential generally are riskier or more speculative. The compensation our Manager pays Brookfield Sub-Advisor is equal to 20% of the base management fee and incentive management fees we pay to our Manager. The base management fee is not tied to our performance and the incentive management fee is based entirely on our performance. The risk of the base management fee component is that it may not provide sufficient incentive to Brookfield Sub-Advisor to generate attractive risk-adjusted returns for us in the investments that they source for us. The risk of the incentive fee component is that it may cause Brookfield Sub-Advisor to place undue emphasis on the maximization of GAAP net income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive fee. This could result in increased risk to the value of our investment portfolio.

We may compete with existing and future investment vehicles for access to Brookfield, Hyperion Brookfield and our sub-advisors and their affiliates, which may reduce investment opportunities available to us. 30

Brookfield currently sponsors several investment vehicles with investment focuses that overlap our investment focus. In addition, at December 31, 2008, Hyperion Brookfield managed approximately 30 client accounts and mutual funds with investment focuses that overlap our investment focus, and each of Brookfield and Hyperion Brookfield may in the future sponsor or manage other investment vehicles that have overlapping focuses with our investment focus. Accordingly, we compete for access to the benefits that we expect our relationship with our Manager and our sub-advisors and their affiliates to provide and to the time of their investment professionals to carry out and facilitate our investment activities. Our rights to participate in investment opportunities with respect to assets managed by Hyperion Brookfield are subject to Hyperion Brookfield's conflict of interest policy. Brookfield and Brookfield Sub-Advisor are not subject to Hyperion Brookfield's conflict of interest policy and are not obligated to offer us any investment opportunities and any decision to do so will be entirely within their discretion. In addition, we may make investments that are senior or junior to participations in, or have rights and interests different from or adverse to, the investments made by other vehicles or accounts managed by Brookfield or Hyperion Brookfield. Our interests in such investments may conflict with the interests of such other vehicles or accounts in related investments at the time of origination or in the event of a default or restructuring of the investment. If a default occurs with respect to such an

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~~investment, our~~ ~~Manager~~We ~~will~~may ~~advise~~compete ~~our~~with ~~independent~~existing ~~directors,~~and ~~who~~future ~~will~~investment ~~direct~~vehicles ~~our~~for ~~Manager~~access ~~with~~to ~~respect~~Brookfield, toBIM ~~the~~and ~~resolution~~our orsub-advisors ~~disposition~~and oftheir ~~the~~affiliates, which may reduce investment. opportunities available to us.

Brookfield currently sponsors several investment vehicles with investment focuses that overlap our investment focus. In addition, at December 31, 2009, BIM managed more than 20 client accounts and closed-end funds with an investment focus that overlapped our investment focus, and each of Brookfield and BIM may in the future sponsor or manage other investment vehicles that have overlapping focuses with our investment focus. Accordingly, we compete for access to the benefits that we expect our relationship with our Manager and our sub-advisors and their affiliates to provide and to the time of their investment professionals to carry out and facilitate our investment activities. Our ~~failure~~rights to participate ~~manage~~in ~~future~~investment ~~growth~~opportunities ~~effectively~~with respect to assets managed by BIM are subject to BIM's conflict of interest policy. Brookfield and Brookfield Sub-Advisor are not subject to BIM's conflict of interest policy and are not obligated to offer us any investment opportunities and any decision to do so will be entirely within their discretion. In addition, we may make investments that are senior or junior to participations in, or have rights and interests different from or adverse to, the investments made by other vehicles or accounts managed by Brookfield or BIM. Our interests in such investments may conflict with the interests of such other vehicles or accounts in related investments at the time of origination or in the event of a ~~material~~default ~~negative~~or ~~impact~~restructuring onof the investment. If a default occurs with respect to such an investment, our ~~business~~Manager will advise our independent directors, ~~financial~~who ~~condition~~will ~~and~~direct our ~~results~~Manager with respect to the resolution or disposition of ~~operations~~the investment.

~~Our~~ ~~ability~~We tomay ~~achieve~~acquire ~~our~~investments ~~investment~~from ~~objective~~Brookfield ~~depends~~and onBIM ~~our~~or ~~ability~~their toaffiliates ~~grow,~~or ~~which~~otherwise ~~depends,~~participate in ~~turn,~~investments onin ~~our~~which ~~ability~~they tohave ~~pay~~an ~~down borrowings~~interest ~~under our secured credit facility and our ability to raise capital. In the current market environment, this is extremely difficult. We may not be able to manage growth effectively~~ or ~~to achieve~~for ~~growth~~which atthey ~~all. Any failure to manage our future growth effectively could~~ have a related ~~material negative impact on our business~~investment, ~~financial~~which ~~condition~~could ~~and~~result ~~results~~in conflicts of ~~operations~~interest.

~~When~~ If we ~~obtain~~have ~~financing~~investable cash, ~~lenders~~we ~~can~~might ~~impose~~continue ~~restrictions~~to onacquire usinvestments from Brookfield and BIM or their affiliates, make investments that finance ~~affect~~their ~~our~~investments ~~ability~~or tomake ~~incur~~co-investments ~~additional~~with ~~debt~~them. These transactions are not at arm's length, ~~our~~will ~~capability~~not tobe ~~make~~the ~~distributions~~result toof ~~stockholders~~arm's length negotiations and ~~our~~will ~~flexibility~~involve conflicts tobetween ~~determine~~ our ~~operating~~interests ~~policies.~~and Wethe ~~may~~interest ~~enter~~of ~~into~~Brookfield, ~~loan~~BIM ~~agreements~~and their affiliates in ~~the~~obtaining ~~future~~favorable ~~that~~terms ~~contain~~and ~~negative~~conditions. ~~covenants~~There can be no assurance that ~~limit~~any procedural protections, ~~among~~such ~~other~~as ~~things~~obtaining market prices, ~~our~~other ~~ability~~reliable toindicators ~~repurchase~~of ~~stock~~fair market value, ~~distribute~~independent ~~more than~~valuations aor ~~certain~~appraisals ~~amount~~and the prior approval of our ~~funds~~independent ~~from operations~~directors, ~~and~~will ~~employ~~be ~~leverage~~sufficient ~~beyond~~to ~~certain~~ensure ~~amounts~~that the consideration we pay for these investments will not exceed their fair market value.

We may acquire investments from Brookfield and Hyperion Brookfield or their affiliates or otherwise participate in investments in which they have an interest or for which they have a related investment, which could result in conflicts of interest.

We expect that we will continue to acquire investments from Brookfield and Hyperion Brookfield or their affiliates, make investments that finance their investments or make co-investments with them. These transactions are not at arm's length, will not be the result of arm's length negotiations and will involve conflicts between our interests and the interest of Brookfield, Hyperion Brookfield and their affiliates in obtaining favorable terms and conditions. There can be no assurance that any procedural protections, such as obtaining market prices, other reliable indicators of fair market value, independent valuations or appraisals and the prior approval of our independent directors, will be sufficient to ensure that the consideration we pay for these investments will not exceed their fair market value.

We operate in a highly competitive market for investment opportunities, and we may not be able to identify and make investments that are consistent with our investment objectives.

A number of entities compete with us to make the types of investments that we plan to make. We compete with other REITs, public and private funds, commercial and investment banks and commercial finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We cannot assure you that the competitive pressures we face will not have a material negative impact on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

Failure to procure adequate capital and funding would negatively affect our results and may, in turn, negatively affect the market price of shares of our common stock and our ability to distribute dividends.

We depend upon the availability of adequate funding and capital for our operations. As a REIT, we are required to distribute annually at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain significant amounts of our earnings for new investments. However, Crystal River Capital TRS Holdings, Inc., our TRS, is able to retain earnings for investment in new capital,

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~~subject~~regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain significant amounts of our earnings for new investments. However, Crystal River Capital TRS Holdings, Inc., our TRS, is able to retain earnings for investment in new capital, subject to the REIT requirements that place a limitation on the relative value of TRS stock and securities owned by a REIT. The failure to secure acceptable financing could reduce our taxable income, as our investments would no longer generate the same level of net interest income due to the lack of funding or increase in funding costs. The reduction in our taxable income in recent quarters has, and future reductions would, reduce our liquidity and our ability to make distributions to our stockholders. The global credit crisis has significantly limited our ability to access capital, and we cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. Therefore, in the event that we cannot obtain sufficient funding on acceptable terms, there may be further declines in the market price of our common stock and our ability to make distributions.

If we issue senior securities, we will be subject to additional restrictive covenants and limitations on our operating flexibility, which could materially decrease cash available for distribution to our stockholders.

If we decide to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants that will restrict our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities.

We may not be able to successfully complete securitization transactions, which could inhibit our ability to grow our business and could negatively affect our results of operations.

In addition to issuing senior securities to raise capital as described above, we may, to the extent consistent with the REIT requirements, seek to securitize certain of our portfolio investments to generate cash for funding new investments. This would involve creating a special-purpose vehicle, contributing a pool of our assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers (whom we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools). We would expect to retain all or a portion of the equity in the securitized pool of portfolio investments. In the past, we have initially financed our investments with relatively short-term credit facilities and reverse repurchase arrangements. We used these short-term facilities to finance the acquisition of securities until a sufficient quantity of securities had been accumulated, at which time we would refinance these facilities through a securitization, such as a CDO issuance, or other long-term financing. When we employed this strategy, we were subject to the risk that we would not be able to acquire, during the period that our short-term facilities were available, a sufficient amount of eligible securities to maximize the efficiency of a CDO issuance. We also were subject to the risk that we would not be able to obtain short-term credit facilities or would not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a long-term financing. While we are not currently acquiring investments for the purpose of securitizing them through a CDO issuance for the reasons stated below, the inability to renew our short-term credit facilities may require us to seek more costly financing for our current investments or to liquidate assets.

Conditions in the capital markets have caused the CDO market to completely shut down. In this regard, as discussed in the "Trends; Current Market Environment; Current Portfolio Considerations" section of Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K, (which we refer to as our "MD&A"), our Manager has determined that we should lower our amount of leverage. Downgrades of structured securities by the rating agencies are likely to continue through at least 2009. Large-scale downgrades and other factors have caused a liquidity crisis, as the downgrades have triggered forced sales of MBS by structured investment vehicles, or SIVs, asset-

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~~backed~~should lower our amount of leverage. Downgrades of structured securities by the rating agencies are likely to continue through at least 2010. Large-scale downgrades and other factors have caused a liquidity crisis, as the downgrades have triggered forced sales of MBS by structured investment vehicles, or SIVs, asset-backed commercial paper issuers, or ABCPs, and financial institutions. The inability to securitize our portfolio has, and may continue to, hurt our performance and our ability to grow our business. At the same time, the securitization of our portfolio investments might expose us to losses, as the residual portfolio investments in which we do not sell interests will tend to be riskier and more likely to generate losses.

The use of CDO financings with over-collateralization requirements may continue to have a negative impact on our cash flow.

The terms of our initial CDO financing, CDO 2005-1, required that the principal amount of assets must exceed the principal balance of the related bonds by a certain amount, which is commonly referred to as "over-collateralization." In this regard, see "Financial Condition—Liabilities—CDO Liabilities" in our MD&A for a discussion regarding CDO 2005-1's failure to comply with certain cash flow tests and the resulting diversion of cash flow from lower-rated debt securities of CDO 2005-1 that we hold to amortize senior debt securities issued by CDO 2005-1 that are held by others. We cannot assure you that the performance tests will be satisfied. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our CDO financings will increase.

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

As our short-term borrowings mature, we will be required either to enter into new borrowings or to sell certain of our investments at times when we might not otherwise choose to do so. An increase in short-term interest rates at the time that we seek to enter into new borrowings would reduce the spread between our returns on our assets and the cost of our borrowings. This would negatively affect our returns on our assets that are subject to prepayment risk, including our commercial loans and our MBS, which might reduce earnings and, in turn, cash available for distribution to our stockholders.

We may not be able to renew the total return swaps that we enter into, which could adversely affect our leveraging strategy.

In the future, we may leverage certain of our investments through the use of total return swaps, which are swaps in which the non-floating rate side is based on the total return of an equity instrument or a fixed income instrument with a life longer than the swap. We may wish to renew ~~many~~these ~~of the~~ swaps, which are for specified terms, as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers ~~will~~would choose to renew the swaps, and, if they do ~~not~~ not renew, that we would be able to obtain suitable replacement providers. Providers may choose not to renew our total return swaps for a number of reasons, including:

•: increases in the provider's cost of funding;
•: insufficient volume of business with a particular provider;
•: our desire to invest in a type of swap that the provider does not view as economically attractive due to changes in interest rates or other market factors; or
•: our inability to agree with a provider on terms.

Furthermore, our ability to invest in total return swaps, other than through a TRS, may be severely limited by the REIT qualification requirements because total return swaps are not qualifying assets and do not produce qualifying income for purposes of the REIT asset and income tests.

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

Subject to maintaining our qualification as a REIT and our exemption from regulation under the Investment Company Act, we often pursue various hedging strategies to seek to reduce our exposure to losses from adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

•: interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;
•: available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;
•: the duration of the hedge may not match the duration of the related liability;
•: the amount of income that a REIT may earn from hedging transactions (other than through TRSs) to offset interest rate losses is limited by federal tax provisions governing REITs;
•: the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and
•: the party owing money in the hedging transaction may default on its obligation to pay.

Our hedging activity may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders. We have utilized and in the future may utilize instruments such as forward contracts and interest rate swaps, caps, collars and floors and credit default swaps to seek to hedge against mismatches between the cash flows on our assets and the interest payments on our liabilities or fluctuations in the relative values of our portfolio positions, in each case resulting from changes in market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

Although we may enter into hedging transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

In addition, by entering into derivative contracts in connection with hedging transactions, we could be required to fund cash payments in certain circumstances. These potential payments will be contingent liabilities and therefore may not appear on our balance sheet. Our ability to fund these contingent liabilities will depend on the liquidity of our assets and access to capital at the time, and the need to fund these contingent liabilities could adversely affect our financial condition.

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Our failure to achieve adequate operating cash flow could reduce our cash available for distribution to our stockholders.

As a REIT, we must distribute annually at least 90% of our REIT taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gain. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, operating expense levels and certain restrictions imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends, which may also have a negative impact on our stock price. No assurance can be given as to our ability to pay distributions.

Loss of Investment Company Act exclusion would adversely affect us and could cause a decline in the market price of our common stock and limit our ability to distribute dividends.

Because registration as an investment company would significantly affect our ability to engage in certain transactions or to organize ourselves in the manner we are currently organized, we intend to maintain our qualification for certain exclusions from registration under the Investment Company Act. Because we conduct our business directly and through wholly-owned subsidiaries, we must ensure not only that we, but also that each of our subsidiaries, qualify for an exclusion or exemption from regulation under the Investment Company Act.

If we fail to satisfy the requirements provided in the Investment Company Act to preserve our exclusion from regulation under the Investment Company Act, we could be required to materially restructure our activities and to register as an investment company under the Investment Company Act, which could have a material adverse effect on our operating results. Further, if it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the Commission, that we would be unable to enforce contracts with third parties, and that third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company.

Rapid changes in the values of our MBS and other real estate related investments may make it more difficult for us to maintain our qualification as a REIT or exclusion from regulation under the Investment Company Act, which may cause us to change our mix of portfolio investments which may not produce optimal returns consistent with our investment strategy.

If the market value or income potential of our MBS and other real estate related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exclusion from regulation under the Investment Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated if the assets that we need to sell to comply with the requirements for qualification as a REIT or to qualify for an exclusion from regulations under the Investment Company Act have no pre-existing trading market and cannot easily be sold. To the extent that the assets we need to sell are composed of subordinated MBS, individually-negotiated loans, loan participations or mezzanine loans for which there is no established trading market, we may have difficulty selling such investments quickly for their fair value. Accordingly, we may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations.

32 We are highly dependent on communications and information systems operated by Brookfield and BIM or by third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on communications and information systems, including all of BIM's proprietary analytical systems and models and certain third-party systems and models. Any failure or interruption of our systems or the systems operated by Brookfield or BIM or by third parties on which we rely, as many experienced as part of system-wide interruptions following the September 11, 2001 terrorist attacks and the East Coast electrical power blackout in August 2003, could cause delays or other problems in our securities trading activities, including MBS trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends.

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We are highly dependent on communications and information systems operated by Brookfield and Hyperion Brookfield or by third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on communications and information systems, including all of Hyperion Brookfield's proprietary analytical systems and models and certain third-party systems and models. Any failure or interruption of our systems or the systems operated by Brookfield or Hyperion Brookfield or by third parties on which we rely, as we experienced as part of system-wide interruptions following the September 11, 2001 terrorist attacks and the East Coast electrical power blackout in August 2003, could cause delays or other problems in our securities trading activities, including MBS trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends.

Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate capital markets, and negatively affected the U.S. economy in general. Any future terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the U.S. and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. The economic impact of these events could also adversely affect the credit quality of some of our loans and investments and the property underlying our MBS. Some of our loans and investments are more susceptible to the adverse effects discussed above than others, such as hotel loans, which may experience a significant reduction in occupancy rates following any future attacks. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely affect our performance and revenues and may result in volatility of the value of our securities. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments and harm our financial condition, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We cannot assure you that there will not be further terrorist attacks against the United States or U.S. businesses, and we cannot predict the severity of the effect that such future events would have on the U.S. financial markets, the economy or our business. The types of losses described above resulting from these types of events are uninsurable.

In addition, the events of September 11 created significant uncertainty regarding the ability of real estate owners of high-profile assets to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Insurance Act of 2002 (TRIA), and the subsequent enactment of the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Revision and Extension Act of 2007, which extended TRIA through the end of 2017, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may adversely affect the general real estate lending market, lending volume and the market's overall liquidity and it may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties in which we invest are unable to obtain affordable insurance coverage, the value of those investments could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.

33 Risks Related to the Merger

Completion of the Merger is subject to various conditions, and the Merger may not occur even if we obtain stockholder approval. Completion of the Merger is subject to various risks, including, but not limited to:

•: the failure of stockholders holding a majority of the shares of our outstanding common stock to approve the merger proposal;
•: Brookfield's right to terminate the merger agreement if a material adverse effect has occurred to Crystal River, as that term is defined in the merger agreement;
•: the enactment of a law or issuance of an order by a governmental authority prohibiting the completion of the Merger;
•: the failure of any other conditions in the merger agreement; and
•: the failure of the Merger to close for any other reason.

As a result of these risks, there can be no assurance that the Merger will be completed even if we obtain stockholder approval. If our stockholders do not approve the merger proposal or if the Merger

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is not completed for any other reason, we expect that our current external manager, under the direction of our board of directors, will continue to serve as our Manager.

Failure to complete the Merger could negatively impact the market price of our common stock. If the Merger is not completed for any reason, we will be subject to a number of material risks, including the following:

•: the market price of our common stock may decline to the extent that investors believe that the Merger is our best alternative;
•: we will face liquidity and other risks discussed below; and
•: we must pay certain costs related to the Merger even if the Merger is not completed, such as legal fees and certain investment banking fees, and, subject to certain exceptions and limitations, the expenses of Brookfield, in connection with the Merger and the merger agreement.

If the merger agreement is terminated and our board of directors seeks another merger or business combination, we cannot offer any assurance that we will be able to find an acquirer willing to pay an equivalent or better price than the price to be paid under the merger agreement.

If the Merger is not completed, we may be required to seek protection from our creditors by filing under the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy may be filed against us.

It is likely that if the Merger is not consummated and no superior bid is received, we may be required to seek protection from our creditors by filing under the U.S. Bankruptcy Code, or an involuntary petition for bankruptcy may be filed against us in light of our financial condition.

As stated above, unless extended, our credit agreement will expire upon the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty (30) calendar days following the termination of the merger agreement, but in no event later than August 31, 2010. Accordingly, if the merger agreement is terminated, it may cause our credit agreement to terminate earlier than it otherwise would, which will cast substantial doubt on our ability to continue as a going concern.

If the Merger is not consummated and no superior bid is received, or if the credit agreement is terminated and we are unable to replace our existing credit facility, we may not have sufficient liquidity for our operations and may be forced to file for bankruptcy protection, or an involuntary petition for bankruptcy may be filed against us, which could eliminate any value for our equity.

Several lawsuits have been filed against us, the members of our board of directors, Brookfield and B Acquisition Sub Inc. challenging the Merger, and an adverse judgment in such lawsuits may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

We, the members of our board of directors, and in some instances Brookfield and B Acquisition Sub Inc. have been named as defendants in purported class action lawsuits brought by our stockholders challenging the proposed Merger, seeking, among other things, to enjoin the defendants from consummating the Merger on the agreed-upon terms. If the plaintiffs are successful in obtaining an injunction prohibiting the parties from completing the Merger on the agreed-upon terms, the injunction may prevent the completion of the Merger in the expected timeframe (or altogether). See "Item 3. Litigation" for more information about the putative class action lawsuits related to the Merger that have been filed.

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Risks Related to Our Investments

Our real estate investments are subject to risks particular to real property, any of which could reduce our returns on such investments and limit our cash available for distribution to our stockholders.

We own assets secured by real estate and also own real estate directly. Real estate investments will be subject to various risks, including:

•: acts of God, including hurricanes, earthquakes, floods and other natural disasters, which may result in uninsured losses;
•: acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;
•: adverse changes in national and local economic and market conditions;
•: changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;
•: the financial condition of JPMorgan Chase, the sole tenant at our triple net lease properties;
•: costs of remediation and liabilities associated with environmental conditions such as indoor mold; and
•: the potential for uninsured or underinsured property losses.

If any of these or similar events occurs, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

The mortgage loans in which we invest and the mortgage loans underlying the MBS and asset-backed securities in which we invest are subject to delinquency, foreclosure and loss, which could result in losses to us.

Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss that are greater than similar risks associated with loans secured by single-family residential properties. The ability of a borrower to repay a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things: tenant mix, success of tenant businesses, property management decisions, property location and condition, competition from comparable types of properties, changes in laws that increase operating expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty at the property, changes in national, regional or local economic conditions and/or specific industry segments, declines in regional or local real estate values, declines in regional or local rental or occupancy rates, increases in interest rates, real estate tax rates and other operating expenses, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

Residential mortgage loans are secured by single-family residential property or 2-4 family residential property and are subject to risks of delinquency, foreclosure, and loss. The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, payment increases under the terms of the loan, acts of God, terrorism, social unrest and civil disturbances, may impair a borrower's ability to repay its loans. ABS are bonds or notes backed by loans and/or other consumer financial assets. The ability to repay these loans or other financial assets is ~~dependant~~dependent upon the income or assets of the borrower, or revenue produced by the assets in the case of commercial assets.

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

Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. RMBS evidence interests in, or are secured by, pools of residential mortgage loans and CMBS evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the MBS in which we invest are subject to all of the risks of the underlying mortgage loans.

In addition, residential mortgage borrowers may not be prevented by the terms of their mortgage loans from prepaying their loans in whole or in part at any time. Borrowers prepay their mortgages for many reasons, but typically, when interest rates decline or when home prices rise, borrowers tend to prepay at faster rates. To the extent that the underlying mortgage borrowers in any of our mortgage loan pools or the pools underlying any of our mortgage-backed securities prepay their loans, we will likely receive funds that will have to be reinvested, and we may need to reinvest those funds at less desirable rates of return.

Approximately 10.86% of our investment portfolio as of December 31, ~~2008~~2009 was comprised of mortgage-backed securities collateralized by sub-prime residential mortgages. Sub-prime residential mortgage loans generally are loans to credit impaired borrowers and borrowers that are ineligible to qualify for loans from conventional mortgage sources due to credit characteristics, higher debt-to-income ratios or less than full documentation standards. Loans to lower credit grade borrowers generally experience higher-than-average default rates than do conforming mortgage loans. Material differences in expected default rates, loss severities and/or prepayments on the sub-prime mortgage loans from what was estimated in connection with the original underwriting of such loans could cause reductions in our income and adversely affect our operating results, with respect to our investments in mortgage-backed securities. If we underestimate the extent of losses that our investments in mortgage-backed securities will incur, then our business, financial condition, liquidity and results of operations could be adversely affected. For a description of the recent weakness in the sub-prime market, see "Part I. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Trends; Current Market Environment; Current Portfolio Considerations."

An increase in the yield spread of our assets may cause the market price of our common stock to drop.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is the relative yield spread differential between the assets that we own and their valuation relative to comparable duration Treasuries. Increases in the yield spread differential have lowered the book value of our assets, which has contributed to the decline in the value of our common stock. Additional increases in the yield spread differential could have a similar effect. Over the last 1224 months, yield spreads on our assets have dramatically widened and the price of our common stock has declined from $14.44 on December 31, 2007 to $0.8472 on ~~February~~March 2623, ~~2009~~2010.

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Our investments in CMBS generally are subordinated and could subject us to increased risk of losses.

In general, losses on an asset securing a mortgage loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or letter of credit provided by the borrower, if any, then by the "first loss" subordinated security holder and then by the "second loss" subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we may not be able to recover all of our investment in the securities we purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the related MBS, the securities in which we invest may effectively become the "first loss" position behind the more senior securities, which may result in significant losses to us and may be in excess of our underwriting assumptions.

The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying MBS to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

As of December 31, ~~2008~~2009, wethere ~~had~~were $741.51 million of principal writedowns due to losses on underlying loans within the securitizations of which our CMBS Primary Asset is a part.

Although we seek to match fund our investments to limit refinance risk and lock in net spreads, we do not employ this strategy with respect to certain of our investments, which increases the risks related to refinancing these investments.

A key to our investment strategy is to finance our investments using match funded financing structures, which match assets and liabilities with respect to maturities and interest rates. This limits our refinance risk, including the risk of being able to refinance an investment or refinance on favorable terms. We generally use match funded financing structures, such as CDOs, to finance our investments in real estate securities and loans, and long term mortgage financings to finance our owned commercial real estate properties. However, our Manager may elect for us to bear a level of refinancing risk on a short term or longer term basis, such as is the case with investments financed with repurchase agreements, when, based on all of the relevant factors, bearing such risk is advisable or when match funded financing structures or other long term financing is not available. The decision not to match fund certain investments exposes us to additional refinancing risks that may not apply to our other investments. As noted above, the issuance of CDOs has come to a halt.

In addition, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with respect to maturity, the income from such assets may respond more slowly to interest rate fluctuations than the cost of our borrowings. Because of this dynamic, interest income from such investments may rise more slowly than the related interest expense, with a consequent decrease in our net income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses for us from these investments.

Accordingly, if we do not or are unable to match fund our investments with respect to maturities and interest rates, we will be exposed to the risk that we may not be able to finance or refinance our investments on economically favorable terms or may have to liquidate assets at a loss.

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We may not be able to finance our investments on a long term basis on attractive terms, including by means of securitization, which may require us to seek more costly financing for our investments or to liquidate assets.

When we acquire a portfolio of loans and securities that we finance on a short term basis with a view to securitization or other long term financing, we bear the risk of being unable to securitize the assets or otherwise finance them on a long term basis at attractive prices or in a timely matter, or at all. If it is not possible or economical for us to securitize or otherwise finance such assets on a long term basis, we may be unable to pay down our short term borrowings, or be required to liquidate the assets at a loss in order to do so.

As of December 31, ~~2008~~2009, we had approximately $3228.9 million of indebtedness maturing in the next 12 months. When this indebtedness becomes due, any inability to refinance or extend the maturity of this indebtedness on similar terms could have a material impact on our liquidity, our ability to pay future dividends and our ability to maintain our REIT status. Some of our investments securing these obligations are illiquid and this lack of liquidity could significantly impede our ability to realize the value at which such investments are carried if we are required to sell them to satisfy debt maturities.

Our assets may include high yield and subordinated corporate securities that have greater risks of loss than secured senior loans and if those losses are realized, they could negatively affect our earnings, which could materially decrease cash available for distribution to our stockholders.

Our assets may include high yield and subordinated securities that involve a higher degree of risk than long-term senior secured loans. First, the high yield securities may not be secured by mortgages or liens on assets. Even if secured, these high yield securities may have higher loan-to-value ratios than a senior secured loan. Furthermore, our right to payment and the security interest may be subordinated to the payment rights and security interests of the senior lender. Therefore, we may be limited in our ability to enforce our rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

Certain of these high yield and subordinated securities may have an interest only payment schedule, with the principal amount remaining outstanding and at risk until the maturity of the obligation. In this case, a borrower's ability to repay its obligation may be dependent upon a liquidity event that will enable the repayment of the obligation.

In addition to the above, numerous other factors may affect a company's ability to repay its obligation, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. Deterioration in a company's financial condition and prospects may be accompanied by deterioration in the collateral securing the obligation. Losses in our high yield and subordinated securities could negatively affect our earnings, which could materially decrease cash available for distribution to our stockholders.

High yield and subordinated securities from highly leveraged companies may have a greater risk of loss which, in turn, could materially decrease cash available for distribution to our stockholders.

Leverage may have material adverse consequences to companies in which we will hold investments. These companies may be subject to restrictive financial and operating covenants. The leverage may impair the ability of these companies to finance their future operations and capital needs. As a result, these companies may have limited flexibility to respond to changing business and economic conditions and to business opportunities. A leveraged company's income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. As a result, leveraged companies have a greater risk of loss. Losses on our investments could negatively affect our earnings, which could materially decrease cash available for distribution to our stockholders.

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We ~~may~~have ~~continue~~invested ~~to invest~~ in the equity securities of CDOs, and such investments involve various significant risks, including that CDO equity receives distributions from the CDO only if the CDO generates enough income to first pay the holders of its debt securities and its expenses.

We ~~may~~have ~~continue~~invested ~~to invest~~ in the equity securities of CDOs. A CDO is a special-purpose vehicle that purchases collateral (such as ABS or MBS) that is expected to generate a stream of interest or other income. The CDO issues various classes of securities that participate in that income stream, typically one or more classes of debt instruments and a class of equity securities. The equity is usually entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the debt securities and its expenses. However, there will be little or no income available to the CDO equity if there are defaults by the issuers of the underlying collateral and those defaults exceed a certain amount. In that event, the value of our investment in the CDO's equity could decrease substantially. In addition, the equity securities of CDOs are generally illiquid, and because they represent a leveraged investment in the CDO's assets, the value of the equity securities will generally have greater fluctuations than the values of the underlying collateral.

We may enter into warehouse agreements in connection with investments in the equity securities of CDOs structured for us and, if the investment in a CDO is not consummated, the warehoused collateral would be sold and we might be required to bear any loss resulting from the purchase price of the collateral exceeding the sale price.

In connection with any future investment in CDOs that Brookfield or Hyperion Brookfield structures for us, we would expect to enter into warehouse agreements with investment banks or other financial institutions, pursuant to which the institution initially would finance the purchase of the collateral that is to be transferred to the CDO. Brookfield or Hyperion Brookfield would select the collateral. If the CDO transaction is not consummated, the institution would liquidate the warehoused collateral and we might have to pay any amount by which the original purchase price of the collateral exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the CDO transaction is consummated, if any of the warehoused collateral is sold before the consummation, we might have to bear the resulting loss on the sale. The amount at risk in connection with the warehouse agreements supporting our investments in CDOs generally would be the amount that we agreed to invest in the equity securities of the CDOs. Although we would expect to complete a CDO transaction within about three to nine months after a warehouse agreement is signed, we cannot assure you that we would in fact be able to complete any such transaction or complete it within the expected time period.

We may lose money on our repurchase transactions if the counterparty to the transaction defaults on its obligation to resell the underlying security back to us at the end of the transaction term, or if the value of the underlying security has declined as of the end of that term or if we default on our obligations under the repurchase agreement.

When we engage in a repurchase transaction, we generally sell securities to the transaction counterparty and receive cash from the counterparty. The counterparty is obligated to resell the securities back to us at the end of the term of the transaction, which is typically 30-90 days. Because the cash we receive from the counterparty when we initially sell the securities to the counterparty is less than the value of those securities (typically between 90-97% of that value), if the counterparty defaults on its obligation to resell the securities back to us, we would incur a loss on the transaction equal to between 3-10% of the value of the securities (assuming there was no change in the value of the securities). We would also lose money on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount. Any losses we

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incur on our repurchase transactions would negatively affect our earnings, and thus decrease our cash available for distribution to our stockholders.

If we default on one of our obligations under a repurchase transaction, the counterparty can terminate the transaction and cease entering into any other repurchase transactions with us. In that case, we would likely need to establish a replacement repurchase facility with another repurchase dealer to continue to leverage our portfolio and carry out our investment strategy. There is no assurance we would be able to establish a suitable replacement facility.

Investments in mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties.

Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the property owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. In this regard, we have had to write down a construction mezzanine loan by $14.26 million and a mezzanine loan by $6.4 million to date due to cost overruns and/or a deteriorating housing market in the locale where the project is located. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Assets—Commercial Real Estate Loan Investments—Mezzanine Loans, Construction Loans and Whole Loans."

Increases in interest rates and shifts in the yield curve could negatively affect the value of our investments, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders.

We invest indirectly in mortgage loans by purchasing MBS. Under a normal yield curve, an investment in MBS will decline in value if long-term interest rates increase. Despite Fannie Mae, Freddie Mac or Ginnie Mae guarantees of certain of the MBS we have owned in the past and may own in the future, those guarantees do not protect us from declines in market value caused by changes in interest rates. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.

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

Market values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases in defaults, increases in voluntary prepayments for those investments that are subject to prepayment risk, and widening of credit spreads. 42

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Some of our portfolio investments are recorded at fair value as estimated by management and reviewed by our board of directors and, as a result, there is uncertainty as to the value of these investments.

Some of our portfolio investments are in the form of securities or loans that are not publicly traded. The fair value of securities and other investments that are not publicly traded is not readily determinable. We value these investments quarterly at fair value as determined under policies approved by our board of directors. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments are materially higher than the values that we ultimately realize upon their disposal.

The value of investments denominated or quoted in international currencies may decrease due to fluctuations in the relative rates of exchange among the currencies of different nations and by exchange control regulations.

If we make investments denominated or quoted in foreign currencies, our investment performance may be negatively affected by a devaluation of that currency. Further, our investment performance may be negatively affected by currency exchange rates because the U.S. dollar value of investments denominated or quoted in another currency may increase or decrease in response to changes in the value of the currency in relation to the U.S. dollar.

Declines in the market values of our investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

A substantial portion of our assets are classified for accounting purposes as "available-for-sale." Changes in the market values of those assets are directly charged or credited to stockholders' equity. As a result, a decline in values may reduce the book value of our assets. Moreover, if we determine the decline in value of an available-for-sale security to be other than temporary, such decline will reduce earnings. ~~In this regard, during the year ended December 31, 2008, we recorded an impairment charge on 143 RMBS, 89 CMBS and two preferred stock investments.~~ The total impairment charge for the year ended December 31, ~~2008~~2009 was $~~142~~77.9 million. The impairment of 81 of the 143 RMBS and 45 of the 89 CMBS, totaling $42.5 million and $38.7 million, respectively, for that period is attributed to the decline in the projected yields related to changes in the cash flow assumptions, such as timing and prepayments, on the underlying assets. The impairment of the remaining 62 of the 143 RMBS, 44 of the 89 CMBS and both of the preferred stock investments, totaling $20.2 million, $40.4 million and $1.1 million, respectively, for that period is attributed to other than temporary declines in market values and is primarily a consequence of wider spreads affecting market values of the securities.

All of our repurchase agreements are subject to bilateral margin calls in the event that the collateral securing our obligations under those facilities exceeds or does not meet our collateralization requirements. The analysis of sufficiency of collateralization is undertaken daily, and the thresholds for adjustment range from $100,000 to $500,000. Since the summer of 2007, due to the deterioration in the market value of our assets, we received margin calls under several of our repurchase agreements, which resulted in our having to tap our financing sources to post additional collateral. We did not have any borrowings under repurchase agreements as of December 31, ~~2008~~2009.

A further decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. A reduction in ~~credit~~ available credit may reduce our earnings and, in turn, cash available for distribution to stockholders.

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The lack of liquidity in our investments may harm our business.

We have made investments ~~and, subject to maintaining our REIT qualification and our exemption from regulation under the Investment Company Act, expect to make additional investments~~ in assets and securities that are not publicly traded. A portion of these securities may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments, such as commercial real estate, subordinated MBS or investments in timber or power generating assets, may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Moreover, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be attributed with material nonpublic information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited.

~~Failure to comply with negative covenants contained in our credit agreement, our repurchase facilities and other funding agreements will limit available financing under these agreements.~~ 43

Certain of our repurchase facility agreements include negative covenants that, if breached, may cause transactions to be terminated early. Except as noted below, the repurchase facility agreements do not include negative covenants other than those contained in the standard master repurchase agreement as published by the Bond Market Association. Two of our master repurchase agreements, which did not account for any of our liabilities as of December 31, 2008, provide that they may be terminated if, among other things, certain material decreases in net asset value occur, we lose our REIT status or our Manager is terminated. An event of default or termination event under the standard master repurchase agreement or the additional provisions explained above would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the counterparty payable immediately. If we are required to terminate outstanding repurchase transactions and are unable to negotiate favorable terms of replacement financing, cash will be negatively affected. This may reduce the amount of capital available for investing and/or may negatively affect our ability to distribute dividends. In addition, we may have to sell assets at a time when we might not otherwise choose to do so.

A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments and harm our operating results.

Many of our investments may be susceptible to economic slowdowns or recessions, which could lead to financial losses in our investments and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and have a negative impact on our operating results. In this regard, the U.S. economy is in the midst of a recession, with consumer spending on the decline, credit tightening and unemployment rising. Many financial and economic analysts are predicting that the world economy may be in a prolonged recession characterized by high unemployment, limited availability of credit and decreased consumer and business spending. This economic downturn is expected to adversely affect many of the individuals and businesses that have borrowed money to purchase real estate and to continue to exert downward pressure on real estate prices. Accordingly, we may continue to experience a downturn in the market value of our investments.

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sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Moreover, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or our Manager has or could be attributed with material nonpublic information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited.

Failure to comply with negative covenants contained in our credit agreement, our repurchase facilities and other funding agreements will limit available financing under these agreements.

Certain of our repurchase facility agreements include negative covenants that, if breached, may cause transactions to be terminated early. Except as noted below, the repurchase facility agreements do not include negative covenants other than those contained in the standard master repurchase agreement as published by the Bond Market Association. Two of our master repurchase agreements, which did not account for any of our liabilities as of December 31, 2009, provide that they may be terminated if, among other things, certain material decreases in net asset value occur, we lose our REIT status or our Manager is terminated. An event of default or termination event under the standard master repurchase agreement or the additional provisions explained above would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the counterparty payable immediately. If we are required to terminate repurchase transactions, to the extent that we had any outstanding, and were unable to negotiate favorable terms of replacement financing, our cash and our earnings would be negatively affected. This may reduce the amount of capital available for investing and/or may negatively affect our ability to distribute dividends. In addition, we may have to sell assets at a time when we might not otherwise choose to do so.

The continuation of the current economic slowdown and further declines in real estate values could further impair the performance of our investments and harm our operating results.

Many of our investments are susceptible to the current economic slowdown, which has led to financial losses in our investments and a decrease in revenues, net income and assets. Continued unfavorable economic conditions have increased our funding costs and effectively blocked our access to the capital markets. These events are preventing us from increasing investments and have had a negative impact on our operating results. In this regard, the U.S. economy is in the midst of a recession, with consumer spending on the decline, credit tightening and unemployment rising. Many financial and economic analysts have predicted that the world economy is in a prolonged recession characterized by high unemployment, limited availability of credit and decreased consumer and business spending. This economic downturn is expected to adversely affect many of the individuals and businesses that have borrowed money to purchase real estate and to continue to exert downward pressure on real estate prices. Accordingly, we expect to continue to experience a downturn in the market value of our investments.

We may be exposed to environmental liabilities with respect to properties to which we take title, which could impair the performance of our investments and harm our operating results.

In the course of our business, we have and may continue to take title to real estate, and, we could be subject to environmental liabilities with respect to these properties. In these circumstances, we may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

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Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could expose us to unexpected economic losses in the future.

The cost of using hedging instruments increases as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased. We expect that from time to time, in addition to the interest rate swaps and credit default swaps into which we had entered as of December 31, ~~2008~~2009, we could ~~may~~ in the future enter into forward contracts, currency swaps and cash flow swaps as part of our hedging strategy.

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

Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future under certain circumstances, e.g., the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time. The need to fund these obligations could negatively affect our financial condition.

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Prepayment rates could negatively affect the value of our MBS, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders.

In the case of residential mortgage loans, there are seldom any restrictions on borrowers' abilities to prepay their loans. Homeowners tend to prepay mortgage loans faster when interest rates decline. Consequently, owners of the loans have to reinvest the money received from the prepayments at the lower prevailing interest rates. Conversely, homeowners tend not to prepay mortgage loans when interest rates increase. Consequently, owners of the loans are unable to reinvest money that would have otherwise been received from prepayments at the higher prevailing interest rates. This volatility in prepayment rates may affect our ability to maintain targeted amounts of leverage on our mortgage-backed securities portfolio and may result in reduced earnings or losses for us and negatively affect the cash available for distribution to our stockholders.

Our Manager's due diligence may not reveal all of an entity's liabilities and may not reveal other weaknesses in its business, which could lead to investment losses.

Before investing in a company, our Manager assesses the strength and skills of the company's management and other factors that our Manager believes are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, our Manager relies on the resources available to it and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our Manager's due diligence processes will uncover all relevant facts or that any current or future investment will be successful and not result in investment losses.

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investment. In making the assessment and otherwise conducting customary due diligence, our Manager relies on the resources available to it and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our Manager's due diligence processes will uncover all relevant facts or that any current or future investment will be successful and not result in investment losses.

We, or other owners of income-producing real property, may not be able to relet or renew leases of properties on favorable terms.

We are subject to the risk that upon expiration of leases for space located at any income-producing property that we purchase or that serves as collateral for MBS securities that we purchase, the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than the expiring lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. If we, or the other owners of such properties, are unable to relet or renew leases for all or substantially all of the space at any such properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if reserves for these purposes prove inadequate, we may be required to reduce or eliminate distributions to our stockholders.

Our reliance on one tenant at all three of our commercial real estate properties and the insolvency or bankruptcy of this tenant could adversely affect our results of operations.

As of December 31, ~~2008~~2009, we had one tenant, JPMorgan Chase, that accounted for all of our rental income, which was 1542.97% of our total revenues for the year. Our business would be adversely affected if this tenant became insolvent, declared bankruptcy or otherwise refused to pay rent in a timely fashion or at all.

Uninsured losses or a loss in excess of insured limits on commercial real estate may not cover all losses and could adversely affect our financial condition.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. We carry, or we require our tenants to carry, comprehensive general liability, fire, extended coverage and loss of rent insurance on our properties, with policy specifications and insured limits customarily carried for similar properties. However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain loss of rent insurance. In addition, there are certain types of losses, such as losses resulting from wars, terrorism or acts of God, that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these types would adversely affect our financial condition.

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similar properties. However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain loss of rent insurance. In addition, there are certain types of losses, such as losses resulting from wars, terrorism or acts of God, that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a property, as well as the anticipated future revenues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these types would adversely affect our financial condition.

Any investments in timber assets will expose us to special risks.

We may invest in timber assets. The demand for and supply of standing timber continually fluctuates, which leads to significant volatility in timber prices. Availability of timber supplies is influenced by many factors, including changes in weather patterns and harvest strategies of industry participants, pest infestations and forest fires. Such factors will affect the volume of any timber assets we may harvest and, as is typical in the industry, we will not maintain insurance for any loss of standing timber as a result of natural disasters. The timber industry is subject to extensive environmental regulation, including protected species regulation, which may restrict timber harvesting from time to time and may lead to increased costs of harvesting, all of which will affect the performance of any timber assets in which we invest.

Any investments in power generation assets will expose us to special risks.

We may invest in power generation assets. The demand for and supply of electricity continually fluctuates, which leads to significant volatility in electricity prices both intra-day and seasonally. Availability of electricity is influenced by many factors, including production strategies of industry participants that take into account the cost and volume of energy inputs such as coal, uranium or gas required to generate electricity relative to the market price of electricity, adverse weather variations that affect primarily hydroelectric facilities, equipment failures, and the current regulatory environment and availability of transmission, all of which will affect the performance of any power generation assets in which we invest.

Risks Related to Our Organization and Structure

Our charter and bylaws contain provisions that may inhibit potential takeover bids that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.

Our charter and bylaws contain provisions that may have an anti-takeover effect, inhibit a change in our board of directors and prevent stockholders from receiving a premium on their shares. These provisions include the following:

•: There are ownership limits and restrictions on transferability and ownership in our charter. In order to qualify as a REIT for each taxable year after 2005, not more than 50% of the value of our outstanding stock may be owned, directly or constructively, by five or fewer individuals during

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the second half of any calendar year and our shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. To assist us in satisfying these tests, our charter generally prohibits any person from beneficially or constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of any class or series of our outstanding capital stock, subject to important exceptions. These restrictions may:

•: discourage a tender offer or other transactions or a change in the composition of our board of directors or control that might involve a premium price for our shares or otherwise be in the best interests of our stockholders; or
•: result in shares issued or transferred in violation of such restrictions being automatically transferred to a trust for a charitable beneficiary and thereby resulting in a forfeiture of ownership of the additional shares.

•: Our charter permits our board of directors to issue stock with terms that may discourage a third party from acquiring us. Our charter permits our board of directors to amend the charter without stockholder approval to increase the total number of authorized shares of stock or the number of shares of any class or series and to issue common or preferred stock having preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our board of directors. Thus, our board of directors could authorize the issuance of stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares.
•: Maryland Control Share Acquisition Act. Maryland law provides that "control shares" of a corporation acquired in a "control share acquisition" will have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to be cast on the matter under the Maryland Control Share Acquisition Act. "Control shares" means voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: one-tenth or more but less than one-third, one-third or more but less than a majority, or a majority or more of all voting power. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions.

If voting rights or control shares acquired in a control share acquisition are not approved at a stockholders' meeting or if the acquiring person does not deliver an acquiring person statement as required by the Maryland Control Share Acquisition Act, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a stockholders' meeting and the acquiror becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights. Our bylaws contain a provision exempting acquisitions of our shares from the Maryland Control Share Acquisition Act. However, our board of directors may amend our bylaws in the future to repeal or modify this exemption, in which case any control shares of our company acquired in a control share acquisition will be subject to the Maryland Control Share Acquisition Act.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which such person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by our board of directors. 47

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•

Business combinations. Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

•: any person who beneficially owns 10% or more of the voting power of the corporation's shares; or
•: an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

•: 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
•: two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution that provides that any business combination between us and any other person is exempted from the provisions of the Act, provided that the business combination is first approved by the board of directors. This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

•: Staggered board. Our board of directors is divided into three classes of directors. The current terms of the directors expire in 2010, 2011 and 2012. Directors of each class are chosen for three-year terms upon the expiration of their current terms, and each year one class of directors is elected by the stockholders. The staggered terms of our directors may reduce the possibility of a tender offer or an attempt at a change in control, even though a tender offer or change in control might be in the best interests of our stockholders.
•: Our charter and bylaws contain other possible anti-takeover provisions. Our charter and bylaws contain other provisions that may have the effect of delaying, deferring or preventing a change

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in control of us or the removal of existing directors and, as a result, could prevent our stockholders from being paid a premium for their common stock over the then-prevailing market price.

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

Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

•: actual receipt of an improper benefit or profit in money, property or services; or
•: a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter permits us to agree to indemnify our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

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threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

Our access to confidential information may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect the potential return to stockholders.

We, directly or through Brookfield, ~~Hyperion~~BIM ~~Brookfield~~ or our Manager may obtain confidential information about the companies in which we have invested or may invest. If we do possess confidential information about such companies, there may be restrictions on our ability to dispose of, increase the amount of, or otherwise take action ~~with~~ with respect to an investment in those companies. Our management of investment funds could create a conflict of interest to the extent our Manager is aware of inside information concerning potential investment targets. We have implemented compliance procedures and practices designed to ensure that inside information is not used for making investment decisions on behalf of the funds and to monitor funds invested. We cannot assure you, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of our Manager to make potentially profitable investments, which could negatively affect our operations. These limitations imposed by access to confidential information could therefore negatively affect the potential market price of our common stock and the ability to distribute dividends.

Tax Risks

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. To meet these tests, we may be required to forego investments we might otherwise make. This difficulty may be exacerbated by the illiquid nature of many of our non-real estate assets. Thus, compliance with the REIT requirements may hinder our investment performance.

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

Certain of our securitizations have resulted in the creation of taxable mortgage pools for federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as non-U.S. persons eligible for treaty benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us attributable to the taxable mortgage pool that is characterized as "excess inclusion income." In addition, to the extent that our stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on the excess inclusion income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. The Internal Revenue Service has not given clear guidance as to the appropriate method for the calculation of excess inclusion income and, absent such clear guidance, we have calculated excess inclusion income based upon what we believe to be a reasonable method. Our estimation of excess inclusion income is disclosed in our year end financial statements. In addition, pursuant to recently issued guidance from the Internal Revenue Service, we are required to allocate excess inclusion income to our shareholders in proportion to dividends paid and to inform our shareholders of the amount and character of the excess inclusion

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pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as non-U.S. persons eligible for treaty benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us attributable to the taxable mortgage pool that is characterized as "excess inclusion income." In addition, to the extent that our stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on the excess inclusion income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. The Internal Revenue Service has not given clear guidance as to the appropriate method for the calculation of excess inclusion income and, absent such clear guidance, we have calculated excess inclusion income based upon what we believe to be a reasonable method. Our estimation of excess inclusion income is disclosed in our year end financial statements. In addition, pursuant to recently issued guidance from the Internal Revenue Service, we are required to allocate excess inclusion income to our shareholders in proportion to dividends paid and to inform our shareholders of the amount and character of the excess inclusion income allocated to them. Given the lack of guidance, there can be no assurances that we have calculated excess inclusion income in a manner satisfactory to the Internal Revenue Service.

We are effectively precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions. In certain instances, we have pledged our equity interests in these taxable mortgage pools as collateral under our repurchase agreements, subjecting the pools to the potential loss of their tax-exempt status in the event that we were forced to sell our interests or our interests were foreclosed upon by a third party that was not afforded the same exemption as us.

Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders.

We operate in a manner that is intended to cause us to qualify as a REIT for federal income tax purposes. However, the federal income tax laws governing REITs are extremely complex, and administrative interpretations of the federal income tax laws governing qualification as a REIT are limited. Qualifying as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. Although we operate in such a manner so as to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year.

If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our REIT taxable income to our stockholders. Unless our failure to qualify as a REIT were excused under federal tax laws, we could not re-elect REIT status until the fifth calendar year following the year in which we failed to qualify.

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Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders and could adversely affect our ability to execute our business plan.

In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:

•: 85% of our ordinary taxable income for that year;
•: 95% of our capital gain net income for that year; and
•: 100% our undistributed taxable income from prior years.

We intend to continue to distribute our net taxable income to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. However, there is no requirement that domestic TRSs distribute their after-tax net income to their parent REIT or their stockholders and Crystal River Capital TRS Holdings, Inc., our TRS, may determine not to make any distributions to us.

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after-tax net income to their parent REIT or their stockholders and Crystal River Capital TRS Holdings, Inc., our TRS, may determine not to make any distributions to us.

Our taxable income may substantially differ from our net income as determined based on accounting principles generally accepted in the United States, or U.S. GAAP, because, for example, realized capital losses will be deducted in determining our U.S. GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, which we refer to as phantom income. Although some types of phantom income are excluded to the extent they exceed 5% of our REIT taxable income in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any phantom income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event, we may be required to use cash reserves, incur debt on a short-term or long-term basis, or liquidate non-cash assets at rates or times that we regard as unfavorable to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year. Because certain of our assets may generate substantial mismatches between taxable income and available cash, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms or (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with REIT requirements.

In the event CDO I is liquidated, the tax consequences may be materially adverse to us and could significantly reduce our liquidity if we are required to make material distributions to our stockholders in connection with such liquidation.

In November 2005, we issued collateralized debt obligations through two newly-formed financing subsidiaries, Crystal River CDO 2005-1, Ltd. and Crystal River CDO 2005-1 LLC, which we collectively refer to as CDO I. In January 2007, we issued collateralized debt obligations through two newly-formed financing subsidiaries, Crystal River Capital Resecuritization 2006-1 Ltd. and Crystal River Capital Resecuritization 2006-1 LLC, which we collectively refer to as CDO II. CDO I and CDO II represent VIEs with respect to which we have determined we are the primary beneficiary and accordingly, we have consolidated them in our consolidated financial statements. We determined that we are the primary beneficiary of both CDO I and CDO II as we have the highest level of variability of return due

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to the credit risk of the underlying assets. For additional information relating to the consolidated assets and liabilities of CDO I and CDO II, see Note 9 to our consolidated financial statements.

On September 2, 2009, the trustee of CDO 1 issued a Notice of Event of Default to the collateral manager for CDO I because of a failure by CDO I to pay interest on the Class D notes. This event of default entitles noteholders of the senior class of notes, the Class A notes, to direct the trustee to take particular actions with respect to the collateral owned by CDO I and the CDO notes issued by CDO I. The event of default did not trigger a reconsideration event under FASB ASC 810-10-25-39 through 25-41 (previously FIN 46R) and has no impact on our consolidated financial statements during the third quarter.

In light of these events, it is possible that CDO I may be liquidated. A liquidation under these circumstances likely would result in a capital loss on our investment in the assets of CDO I and income from the cancellation of indebtedness with respect to the notes issued by CDO I. The tax consequences of these items may be materially adverse to us and could significantly reduce our liquidity if we are required to make material distributions to our stockholders in connection with such liquidation in order to maintain our REIT qualification because of the amount of taxable income (but not cash income) received.

Dividends payable by REITs do not qualify for the reduced tax rates.

Legislation enacted in 2003 generally reduces the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates to 15% (through 2010). Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

Our ownership of and relationship with our TRS will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 20% of the value of a REIT's assets may consist of stock or securities of one or more TRSs. A TRS will pay federal, state and local income tax at regular corporate rates on any income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm's length basis.

Our TRS, Crystal River Capital TRS Holdings, Inc., as a domestic TRS, will pay federal, state and local income tax on its taxable income, and its after-tax net income is available for distribution to us but is not required to be distributed to us. The aggregate value of the TRS stock and securities owned by us should be less than 20% of the value of our total assets (including the TRS stock and securities). Furthermore, we monitor the value of our investments in TRSs for the purpose of ensuring compliance with the rule that no more than 20% of the value of our assets may consist of TRS stock and securities (which is applied at the end of each calendar quarter). In addition, we scrutinize all of our transactions with TRSs for the purpose of ensuring that they are entered into on arm's length terms in order to avoid incurring the 100% excise tax described above. There can be no complete assurance, however,

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~~(which is applied at the end of each calendar quarter). In addition, we scrutinize all of our transactions with TRSs for the purpose of ensuring~~ that ~~they are entered into on arm's length terms in~~ ~~order to avoid incurring the 100% excise tax described above. There can be no complete assurance, however, that~~ we will be able to comply with the 20% limitation discussed above or to avoid application of the 100% excise tax discussed above.

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

The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge MBS and related borrowings. Under these provisions, our annual gross income from qualifying and non-qualifying hedges, together with any other income not generated from qualifying real estate assets, cannot exceed 25% of our gross income. In addition, our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through Crystal River Capital TRS Holdings, Inc. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

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

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

It may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests by conducting certain activities, holding non-qualifying REIT assets or engaging in CDO transactions through our TRSs, subject to certain limitations. To the extent that we engage in such activities through TRSs, the income associated with such activities may be subject to full corporate income tax.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the federal, state or local income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new tax law, regulation or administrative interpretation, or any amendment to any existing tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, tax law, regulation or administrative interpretation.

If we make distributions in excess of our current and accumulated earnings and profits, those distributions will be treated as a return of capital, which will reduce the adjusted basis of your stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain.

Unless you are a tax-exempt entity, distributions that we make to you generally will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits as determined for federal income tax purposes. If the amount we distribute to you exceeds your allocable share of our current and accumulated earnings and profits, the excess will be treated as a return of capital to the extent of your adjusted basis in your stock, which will reduce your basis in your stock but will not be subject to tax. To the extent the amount we distribute to you exceeds both your allocable

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share of our current and accumulated earnings and profits, the excess will be treated as a return of capital to the extent of your adjusted basis in your stock, which will reduce your basis in your stock but will not be subject to tax. To the extent the amount we distribute to you exceeds both your allocable share of our current and ~~accumulated earnings and profits and~~ your adjusted basis, this excess amount will be treated as a gain from the sale or exchange of a capital asset.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our investments in real estate assets as of December 31, ~~2008~~2009 consist of our interests in properties that are consolidated in our consolidated financial statements. JPMorgan Chase is the tenant for all these properties. The following table sets forth the information with respect to our real estate assets as of December 31, ~~2008~~2009:


Property Name	Chase Tower Phoenix	1111 Fannin	JPM Chase Call Center
Location	Phoenix, AZ	Houston, TX	Arlington, TX
Type	Office	Office	Office
% Owned	100.0%	100.0%	100.0%
Year Built	1973	1971	2000
Date Acquired	March 20, 2007	March 20, 2007	September 25, 2007
Net Rentable Square Feet	724,000	428,600	171,500
Percentage Leased	100.0%	100.0%	100.0%
Lease Expiration(1)	2021	2021	2027
Extension Periods	Four 5-year extensions	Four 5-year extensions	Four 10-year extensions
Debt on Property—Interest Rate	5.509%	5.509%	6.290%
Debt on Property—Maturity Date	April 1, 2017	April 1, 2017	October 1, 2017
Debt on Property—Principal Balance	$145,087,300	$53,412,700	$20,880,000

(1): Assumes tenant does not exercise any extension options.

See "Schedule III—Real Estate and Accumulated Depreciation" to our consolidated financial statements for information relating to depreciation of these properties.

Although we believe our investments are currently adequately covered by insurance consistent with the level of coverage that is standard in our industry, we cannot predict at this time if we will be able to obtain adequate coverage at a reasonable cost in the future.

Principal Executive and Administrative Offices

Our principal executive and administrative offices are located in office space leased at Three World Financial Center, 200 Vesey Street, 10th Floor, New York, New York 10281-1010 and are provided by our Manager in accordance with the Management Agreement. Our telephone number is (212) 549-8400 and our website address is http://www.crystalriverreit.com.

Item 3. Legal Proceedings.

WeCrystal ~~are~~River ~~not~~is ~~party~~aware toof ~~any~~three ~~material~~lawsuits ~~litigation~~that orhave ~~legal~~been ~~proceedings,~~filed orby toalleged ~~the~~Crystal ~~best~~River ofshareholders challenging our ~~knowledge,~~proposed ~~any~~merger with ~~threatened~~Brookfield ~~litigation~~and ornaming ~~legal proceedings~~as defendants Crystal River, ~~which~~our Board of Directors, and in ~~our~~some ~~opinion~~instances, ~~individually~~Brookfield orand B Merger Sub, Inc. Additional lawsuits pertaining to the Merger could be filed in the ~~aggregate~~future. On or around March 2, ~~would~~2010, ~~have~~plaintiff Fazal Mahmood filed a ~~material~~complaint ~~adverse~~in ~~effect~~the onCircuit Court for Baltimore City, Maryland against Crystal River and our ~~results~~Board of ~~operations~~Directors asserting orclaims ~~financial~~on ~~condition~~behalf of a putative class of Company shareholders. On March 2, 2010, plaintiffs Milton P. Silva and Shaher Tadros filed a complaint in the Supreme Court of the State of

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New York, County of New York, against Crystal River, our Board of Directors, Brookfield, and B Merger Sub, Inc. asserting claims on behalf of a putative class of Crystal River shareholders as well as derivative claims ostensibly on behalf of Crystal River. On March 5, 2010, plaintiff Gary P. Klahr filed a complaint in the Circuit Court for Baltimore City, Maryland against Crystal River, our Board of Directors, Brookfield, and B Merger Sub, Inc. asserting claims on behalf of a putative class of Crystal River shareholders. In each of these lawsuits, the plaintiffs generally allege, among other things, that the members of our Board of Directors breached their fiduciary duties towards the plaintiffs and the other public stockholders of Crystal River in connection with the proposed sale of Crystal River to Brookfield and Merger Sub. Plaintiffs in these lawsuits seek, among other relief, certification of the lawsuits as class actions, an injunction preventing the Merger from closing, an award of unspecified damages to the plaintiffs and the class, and an award of attorneys' fees and expenses, along with such other relief as the courts deem just and proper. We intend to vigorously defend these lawsuits.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The New York Stock Exchange, or NYSE, notified us that it was delisting our common stock prior to the opening of the market on December 2, 2008. On December 2, 2008, our common stock commenced trading on the Pink Sheets, and, on December 9, 2008, commenced trading on the Over-the-Counter Bulletin Board, in addition to the Pink Sheets. Our common stock trades on the over-the-counter market under the symbol "CYRV."

The following table sets forth the high and low sale price per share of our common stock as reported on the NYSE Composite Transactions Tape from January 1, 2008 to December 1, 2008 ~~and January 1~~, ~~2007 to December 31, 2007,~~ and on the over-the-counter market from December 2, 2008 to December 31, ~~2008~~2009. The stock price information is based on published financial sources. Over-the-counter market quotations reflect inter-deal prices, without retail mark-up, mark-down or commissions, and may not necessarily reflect actual transactions.

	High		Low		Dividend
2009
Fourth Quarter	$	1.40	$	0.31	$	0.00
Third Quarter		2.47		0.90		0.10
Second Quarter		2.25		1.19		0.10
First Quarter		1.47		0.54		0.10
2008
Fourth Quarter	$	2.00	$	0.36	$	0.10
Third Quarter		3.66		1.45		0.10
Second Quarter		9.86		3.55		0.30
First Quarter		15.10		8.08		0.68
2007
Fourth Quarter	$	18.20	$	12.56	$	0.68
Third Quarter		25.58		9.71		0.68
Second Quarter		29.48		24.25		0.68
First Quarter		29.24		23.72		0.68

The last reported sale price of our common stock on ~~February~~March 2623, ~~2009~~2010 as reported on the over-the-counter market was $0.8472. As of ~~February~~March 2623, ~~2009~~2010, ~~there~~ there were 1516 holders of record of our common stock. Cede & Co. is the holder of record for 24,674,697 shares of our common stock, and it holds such shares as nominee for The Depository ~~Trust~~ Trust Company.

We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with generally accepted accounting principles) to our shareholders so as to comply with the REIT provisions of the Internal Revenue Code. We intend to make dividend distributions quarterly and, if necessary for REIT qualification purposes, we may need to distribute any taxable income remaining after the distribution of the final regular quarterly dividend each year, together with the first regular quarterly dividend payment of the following taxable year or, at our discretion, in a special dividend distributed prior thereto. Furthermore, we seek to set our recurring dividend at a level that we believe is comfortably sustainable.

Our dividend policy is subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend upon our taxable income, our financial condition, our maintenance of REIT status and other factors as our board of directors deems relevant. In the merger agreement, we have agreed not to pay any dividends to our stockholders.

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Information relating to the dividends we declared in ~~2007~~2008 and ~~2008~~2009 is as follows:

Fiscal Period	Dividend Amount per Share					Total Distribution (in millions)		Dividend Type
First quarter 2007	$	0.68	03/19/2007	03/30/2007	04/27/2007	$	17.0	Regular
First quarter 2008	$	0.68	03/06/2008	03/31/2008	04/29/2008	$	16.8	Regular
Second quarter 2007		0.68	06/13/2007	06/29/2007	07/27/2007		17.0	Regular
Third quarter 2007		0.68	09/10/2007	09/28/2007	10/26/2007		16.9	Regular
Fourth quarter 2007		0.68	12/12/2007	12/31/2007	01/28/2008		16.8	Regular
First quarter 2008		0.68	03/06/2008	03/31/2008	04/29/2008		16.8	Regular
Second quarter 2008		0.30	06/17/2008	06/30/2008	07/28/2008		7.4	Regular
Third quarter 2008		0.10	08/11/2008	09/30/2008	10/28/2008		2.5	Regular
Fourth quarter 2008		0.10	11/03/2008	12/31/2008	01/30/2009		2.5	Regular
First quarter 2009		0.10	02/25/2009	03/31/2009	04/30/2009		2.5	Regular
Second quarter 2009		0.10	05/06/2009	06/30/2009	07/31/2009		2.5	Regular
Third quarter 2009		0.10	08/10/2009	09/30/2009	10/30/2009		2.5	Regular
Fourth quarter 2009		0.00	n/a	n/a	n/a		0.0	Regular

For the year ended December 31, ~~2008~~2009, we declared dividends of $10.1830 per share, all of which represented ~~distributions~~a return of ~~taxable earnings and profits~~capital. For the year ended December 31, ~~2007~~2008, we declared dividends of $21.7218 per share, all of which ~~$2.59~~ represented distributions of taxable earnings and profits ~~and $0~~.13 ~~represented a return of capital.~~ We cannot assure ~~you~~ you that we will have sufficient cash available for future quarterly distributions in an amount consistent with ~~our~~historical ~~most recent~~ distributions, or at all. See "Item 1A. Risk Factors."

Equity Compensation Plan Information

The following table provides information about the securities authorized for issuance under our equity compensation plans as of December 31, ~~2008~~2009:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights(1)		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))(2)

	(a)		(b)		(c)
Equity compensation plans approved by stockholders		130,000		25.00		2,266,680
Equity compensation plans not approved by stockholders(3)		—		—		—

Total		130,000		25.00		2,266,680

We ~~did~~ ~~not~~ (1)There are ~~repurchase,~~no outstanding warrants or ~~purchase~~rights. (2)Amounts exclude onany ~~behalf~~securities to be issued upon exercise of ~~any~~outstanding ~~affiliated~~options. ~~purchaser~~Includes 450,562 ~~any~~ shares of ~~our~~ common stock ~~during~~to ~~the~~be ~~year~~issued ~~ended~~in ~~December 31,~~respect ~~2008~~of deferred stock units and restricted stock units issued to certain of our independent directors. (3)We do not have any equity compensation plans that have not been approved by stockholders.

We did not repurchase, or purchase on behalf of any affiliated purchaser, any shares of our common stock during the year ended December 31, 2009.

Item 6. Selected Financial Data.

The following table sets forth selected consolidated financial data, which was derived from our historical consolidated financial statements included in this Annual Report on Form 10-K for the periods then ended.

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You should read the following information together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto, which begins on Page F-1 of this Form 10-K.

				Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006			March 15, 2005 (commencement of operations) to December 31, 2005
					Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006			March 15, 2005 (commencement of operations) to December 31, 2005
				~~(In thousands except share and per share data)~~	(In thousands except share and per share data)
Consolidated Operating Data:
Revenues:
	Interest and dividend income			$	~~117,216~~$	29,124	$	~~219,919~~$	117,216	$	~~201,224~~$	219,919	$	~~79,601~~$	201,224		$	79,601
	Rental income, net				~~22,225~~	21,671		~~16,210~~	22,225		—	16,210		—	—			—
		Total revenues			~~139,441~~	50,795		~~236,129~~	139,441		~~201,224~~	236,129		~~79,601~~	201,224			79,601
Expenses:
	Interest expense				~~53,543~~	24,443		~~156,797~~	53,543		~~139,601~~	156,797		~~48,425~~	139,601			48,425
	Management and incentive fees, related party(1)				~~1,226~~	—		~~6,502~~	1,226		~~7,922~~	6,502		~~5,448~~	7,922			5,448
	Professional fees				~~2,681~~	2,919		~~3,904~~	2,681		~~2,722~~	3,904		~~2,205~~	2,722			2,205
	Depreciation and amortization				~~12,088~~	12,088		~~8,948~~	12,088		—	8,948		—	—			—
	Commercial real estate expenses				~~1,541~~	1,590		~~1,011~~	1,541		—	1,011		—	—			—
	Provision for loss on real estate loans				~~27,073~~	7,571		~~4,500~~	27,073		—	4,500		—	—			—
	Insurance expense				~~1,662~~	1,883		~~936~~	1,662		~~413~~	936		~~250~~	413			250
	Other general and administrative expenses(2)				~~2,404~~	1,643		~~1,917~~	2,404		~~1,153~~	1,917		~~533~~	1,153			533
		Total expenses			~~102,218~~	52,137		~~184,515~~	102,218		~~151,811~~	184,515		~~56,861~~	151,811			56,861
		Income before other revenues (expenses)			37,223			51,614			49,413			22,740
		Income (loss) before other revenues (expenses)				(1,342	)		37,223			51,614			49,413			22,740
Other revenues (expenses):
	Realized net loss on sale of available-for-sale securities, real estate loans and other investments				(5,166	)		(1,698	)		(2,128	)		(521	)
	Realized net gain (loss) on sale of available-for-sale securities, real estate loans and other investments					790			(5,166	)		(1,698	)		(2,128	)		(521	)
	Realized and unrealized gain (loss) on derivatives				~~(70,679~~	)(412	)	~~(84,951~~	)(70,679	)	~~10,330~~	(84,951	)	~~(2,497~~	)10,330			(2,497	)
	Impairment of available-for-sale securities				~~(142,916~~	)(77,947	)	~~(317,931~~	)(142,916	)	~~(10,389~~	)(317,931	)	~~(5,782~~	)(10,389	)		(5,782	)
	Net change in value of assets and liabilities valued under fair value option				~~(123,708~~	)(4,085	)	—	(123,708	)	—	—		—	—			—
	Foreign currency exchange gain				—	—		~~4,292~~	—		~~580~~	4,292		—	580			—
	Income (loss) from equity investments				~~(40~~	)—		~~2,610~~	(40	)	—	2,610		—	—			—
	Other				~~(1,806~~	)(5,284	)	~~186~~	(1,806	)	~~(889~~	)186		8	(889	)		8
		Total other expenses			~~(344,315~~	)(86,938	)	~~(397,492~~	)(344,315	)	~~(2,496~~	)(397,492	)	~~(8,792~~	)(2,496	)		(8,792	)
Net income (loss)				$	~~(307,092~~$	)(88,280	$)	~~(345,878~~$	)(307,092	$)	~~46,917~~$	(345,878	$)	~~13,948~~$	46,917		$	13,948
Per share information:
	~~Net income (loss) per share of common stock~~	Net income (loss) per share of common stock
		~~Basic~~	Basic	$	~~(12.35~~$	)(3.50	$)	~~(13.86~~$	)(12.35	$)	~~2.27~~$	(13.86	$)	~~0.80~~$	2.27		$	0.80
		~~Diluted~~	Diluted	$	~~(12.35~~$	)(3.50	$)	~~(13.86~~$	)(12.35	$)	~~2.27~~$	(13.86	$)	~~0.80~~$	2.27		$	0.80
	~~Dividends declared per share of common stock~~	Dividends declared per share of common stock		$	~~1.18~~$	0.30	$	~~2.72~~$	1.18	$	~~2.71~~$	2.72	$	~~1.55~~$	2.71		$	1.55
	~~Weighted average shares of common stock outstanding~~	Weighted average shares of common stock outstanding
		~~Basic~~	Basic		~~24,866,206~~	25,211,260		~~24,962,708~~	24,866,206		~~20,646,637~~	24,962,708		~~17,487,500~~	20,646,637			17,487,500
		~~Diluted~~	Diluted		~~24,866,206~~	25,211,260		~~24,962,708~~	24,866,206		~~20,646,637~~	24,962,708		~~17,487,500~~	20,646,637			17,487,500

5458

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				As of December 31,
				2008			2007			2006		2005
				2009			2008			2007		2006		2005
Consolidated Balance Sheet Data:
	Total assets			$	~~448~~381,~~301~~953		$	2448,~~479,438~~301		$	32,~~774~~479,~~645~~438	$	23,~~669~~774,~~769~~645	$	2,669,769
	Short-term obligations:
		Debt—repurchase agreements			—			~~1,276,121~~—			21,~~723~~276,~~643~~121		12,~~977~~723,~~858~~643		1,977,858
		Debt—repurchase agreements, related party			—			—			~~144,806~~—		16144,~~429~~806		16,429
			Total short-term obligations		—			~~1,276,121~~—			21,~~868~~276,~~449~~121		12,~~994~~868,~~287~~449		1,994,287
	Secured revolving credit facility, related party				3228,920			6732,~~319~~920			—67,319		—		—
	Long-term obligations:
		Debt—collateralized debt obligations(3)			4533,~~429~~617			~~486~~45,~~608~~429			~~194~~486,~~396~~608		~~227~~194,~~500~~396		227,500
		Debt—notes payable, related party			—			—			—		~~35,000~~—		35,000
		Debt—junior subordinated notes			51,550			51,550			—51,550		—		—
		Debt—mortgages payable			219,380			219,380			—219,380		—		—
		Debt—senior mortgage-backed notes, related party			—			~~99,815~~—			—99,815		—		—
			Total long-term obligations		~~316~~304,~~359~~547			~~857~~316,~~353~~359			~~194~~857,~~396~~353		~~262~~194,~~500~~396		262,500
	Stockholders' equity (deficit)				(3758,~~409~~127	)		~~110~~(37,~~592~~409	)		~~556~~110,~~314~~592		~~381~~556,~~429~~314		381,429

(1): Includes $0, $(27), $555, $1,024 and $627, respectively, of stock based compensation.
(2): Includes $176, $367, $584, $324 and $81, respectively, of stock based compensation.
(3): Fair value as of December 31, 2009 and 2008; cost as of December 31, 2007, 2006 and 2005. Cost as of December 31, 2009 and 2008 is $455,262 and $467,027, respectively.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. Historical results set forth are not necessarily indicative of our future financial position and results of operations.

Recent Developments

Going Concern

We held cash and cash equivalents of approximately $3.3 million as of December 31, 2009, which excludes restricted cash of approximately $16.5 million that is used to collateralize our credit default swap and certain other commercial real estate and financing obligations. As of December 31, 2009, we owed $28.9 million to an affiliate of our Manager under our secured credit facility. Unless earlier terminated as provided in the credit agreement governing the terms of our secured credit facility, our credit facility terminates on August 31, 2010. If the Merger is not consummated, this facility is not extended and we cannot obtain alternative financing, we do not expect to have sufficient cash on hand or to generate sufficient cash flow from operations to repay such indebtedness. Given the current lack of liquidity in the credit markets and the current economic climate, we expect to have difficulty obtaining alternative financing if our credit facility is not extended. If we cannot obtain alternative financing or extend our credit facility, it increases the risk that we will be unable to continue as a going concern. Our independent registered public accounting firm, Ernst & Young LLP, has issued an opinion on our consolidated financial statements which states that our inability to refinance or extend the maturity of indebtedness maturing in the next 12 months raises substantial doubt about our ability to continue as a going concern.

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Completion of the Exchange and Discharge of our Trust Preferred Securities

On January 29, 2010, we entered into the Exchange Agreement with Taberna, pursuant to which we exchanged certain of our assets described below for the outstanding $50.0 million aggregate liquidation preference of trust preferred securities issued by Crystal River Preferred Trust I and backed by $51.6 million aggregate principal amount of our junior subordinated notes due 2037. Immediately following the closing of the transaction contemplated by the Exchange Agreement, the junior subordinated notes were cancelled, the indenture under which the notes were issued was discharged and Crystal River Preferred Trust I was dissolved.

Pursuant to the Exchange Agreement, we transferred and assigned to Taberna two real estate loans and a CMBS bond, which collectively had an aggregate carrying value for accounting purposes on our balance sheet as of December 31, 2009 of $6.0 million, and we also paid to Taberna a $1.0 million exchange fee. We also paid $0.5 million to cover all costs and expenses that were incurred by the collateral manager for Taberna, the indenture trustee and their respective advisors. For more information on this transaction, see Note 19 to our consolidated financial statements contained elsewhere herein.

Possible Acquisition of Crystal River

On February 24, 2010, we announced that we had concluded our previously-announced review of strategic alternatives and that we had entered into a definitive merger agreement with Brookfield pursuant to which Brookfield is expected to acquire all the shares of our outstanding common stock that Brookfield does not already own for cash at a price of $0.60 per share.

The Merger was unanimously approved by the independent members of our board of directors, and by the Special Committee formed to oversee our strategic review process. The transaction is subject to approval by our stockholders holding a majority of the shares entitled to vote at a special meeting of stockholders, as well as other customary closing conditions. Consummation of the Merger is not subject to a financing condition and Brookfield has consented to the transaction in its capacity as our senior lender. The merger agreement does not prohibit us from receiving and evaluating competing bids prior to completion of the Merger and does not require the payment of a termination fee if we accept a superior bid. We will be obligated to reimburse Brookfield for all of its transaction expenses if the merger agreement is terminated other than as result of a breach by Brookfield (subject to a cap in certain circumstances). The Merger currently is expected to close in the second quarter of 2010. For more information on this transaction, see Note 19 to our consolidated financial statements contained elsewhere herein.

Amendment of Credit Agreement

Concurrently with entering into the merger agreement with Brookfield, we amended the terms of our revolving credit facility with Brookfield US Corporation, an affiliate of our Manager, pursuant to which the maturity date of the credit facility was extended to August 31, 2010, unless sooner terminated as provided in the credit agreement; provided, however, that, notwithstanding the foregoing, the term of the credit facility will expire upon the latest of (i) May 25, 2010, (ii) the effective time of the Merger and (iii) thirty (30) calendar days following the termination of the merger agreement, but in no event later than August 31, 2010. In addition, Brookfield US Corporation consented to the Merger and to the separate sale by us of certain of our assets as contemplated by the merger agreement. For more information on this transaction, see Note 19 to our consolidated financial statements contained elsewhere herein.

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Binding Letter of Intent for Asset Sale

As contemplated by the merger agreement, on March 9, 2010, we entered into the Asset Sale LOI with Ranieri, pursuant to which Ranieri (either directly or through an affiliate) agreed to purchase five CMBS bonds from us. The five CMBS bonds had a carrying value of approximately $0.9 million as of December 31, 2009. In addition, under the Asset Sale LOI, Ranieri (either directly or through an affiliate) agreed to acquire the rights to:

•: (i) (a) direct us to use commercially reasonable efforts to advocate for the appointment of the Specified Manager as the collateral manager for CDO1 and (b) exercise, from and after the final consummation of the CMBS Purchase, any and all of our rights, in our capacity as the sole holder of the preferred shares of CDO1, to direct the appointment of a replacement collateral manager for CDO1 (subject to any fiduciary or other legal obligations that we have); and
•: (ii) (a) direct us, in our capacity as the sole holder of the preferred shares of CDO2, to direct CDO2 to appoint the Specified Manager as the replacement collateral manager for CDO2, following the resignation of our Manager as the CDO2 collateral manager under the collateral management agreement for CDO2 and (b) exercise, from and after the final consummation of the CMBS Purchase, any and all of our rights, in our capacity as the sole holder of the preferred shares of CDO2, to direct the appointment of a replacement collateral manager for CDO2 (subject to any fiduciary or other legal obligations that we have).

Ranieri has agreed to pay us a total of $8.0 million for the CMBS Purchase, the CDO1 Rights Purchase and the CDO2 Rights Purchase, which we refer to collectively as the Transaction. The following table provides information with respect to the purchase price to be paid by Ranieri (either directly or through one or more of its affiliates) and the estimated closing date for each component of the Transaction:

Component of Transaction	Purchase Price	Estimated Closing Date

CMBS Purchase	$2,500,000 (plus accrued and unpaid interest through the closing date of this portion of the Transaction)	Closed on March 15, 2010
CDO1 Rights Purchase	$3,500,000	Third Quarter/Fourth Quarter 2010 (90 days after obtaining approval of Class A Notes to appoint the Specified Manager)
CDO2 Rights Purchase	$2,000,000	June/July 2010

In connection with the execution of the Asset Sale LOI, one of Ranieri's affiliates paid $1.6 million (20% of the total purchase price) as a deposit on the Transaction. A ratable portion of the escrowed funds (based on the purchase prices specified above) will be applied to each component of the Transaction upon the closing of that component. The CMBS Purchase closed on March 15, 2010 and $0.5 million of the deposit was applied against the $2.5 million purchase price for the CMBS bonds. An affiliate of Brookfield is a lender to the Purchaser, and proceeds from such loan have been used to fund the deposit referenced above and the remainder of the purchase price for the CMBS bonds and an additional $1.9 million available under the loan may be used to fund a portion of the purchase price for the CDO1 Rights Purchase and the CDO2 Rights Purchase. In addition, the Co-Investor is a co-investor with the Purchaser in the Servicer, which acts as the special servicer for several of the CMBS securitizations in which we have invested, including all of the securitizations in which the bonds that were the subject of the CMBS Purchase are a part. Brookfield and/or its affiliates have, or prior the CMBS Purchase had, the ability to designate the special servicer for the securitizations in which the bonds that were the subject of the CMBS Purchase are a part and had

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designated the Servicer as the special servicer for those securitizations. The Co-Investor and the Purchaser own approximately 8.5% and 32.3%, respectively, of the Servicer.

We also agreed to grant to Ranieri a right of first refusal to purchase all or any portion of our interest in two CMBS securitizations if we sell those securities in the future.

The CMBS Purchase closed on March 15, 2010. The completion of the CDO1 Rights Purchase and the CDO2 Right Purchase are subject to various customary closing conditions as well as the execution of definitive documentation. The Asset Sale LOI and the Transaction were approved by a special committee of our board of directors, which is comprised entirely of the independent members of our board of directors, which we refer to as the Special Committee. The Special Committee, with the assistance of Broadpoint.Gleacher, the Special Committee's financial advisor, solicited and received several bids on the assets that are the subject of the Transaction. The Special Committee selected the Ranieri bid based on the combination of price and other terms, in particular those providing greater certainty of closing.

Suspension of Dividends

In November 2009, our board of directors announced that it had elected to suspend the quarterly dividend to holders of shares of our common stock to preserve liquidity in consideration of the large increase in the delinquency rate on our CMBS portfolio and the resulting uncertainty regarding our operating cash flows. Based on our current forecasts, we would not be required to make any further distributions in 2009 in order to maintain our REIT status through 2009. The elimination of the common dividend for the remainder of 2009, assuming the same $0.10 quarterly dividend per share that was paid in October 2009, equates to approximately $2.5 million in cash flow savings each quarter. Our board of directors will continue to evaluate our dividend policy in light of our portfolio performance and relevant provisions of the Internal Revenue Code; however, we are prohibited from paying any dividends under the merger agreement and do not anticipate having adequate liquidity to pay a dividend in any event.

Overview

We are a specialty finance company formed on January 25, 2005 by ~~Hyperion~~BIM ~~Brookfield~~ to invest in commercial real estate, real estate loans, real estate related securities, such as commercial and residential mortgage-backed securities, and various other asset classes. We commenced operations in March 2005. We have elected and qualified to be taxed as a REIT for federal income tax purposes commencing with our taxable year ended December 31, 2005 and expect to qualify as a REIT in subsequent tax years. We manage the composition of our portfolio so that we will qualify for an exclusion from regulation under the Investment Company Act ~~of 1940, which we refer to as the Investment Company Act~~. We are externally managed by our Manager, a wholly-owned subsidiary of Brookfield.

~~Since~~During wethe ~~commenced~~third ~~operations~~quarter inof ~~March 2005~~2009, we ~~have~~observed ~~invested~~a innumber ~~Agency~~of ~~mortgage-backed~~IPO ~~securities,~~filings ~~non-agency~~by ~~residential~~recently ~~mortgage-backed~~formed ~~securities,~~entities ~~commercial mortgage-backed~~with ~~securities,~~investment ~~other~~strategies focused on commercial ~~mortgage~~and ~~loan~~residential ~~products,~~real ~~including~~estate ~~whole~~debt markets. ~~loans,~~As Apermitted ~~Notes,~~by Bour ~~Notes,~~management ~~mezzanine~~agreement ~~loans,~~(which ~~and~~contains ~~investments~~policies into ~~funds~~ensure that ~~invest~~potential inconflicts ~~whole~~of ~~loans,~~interest Aare ~~Notes~~managed appropriately), Bour ~~Notes, and~~Manager's ~~mezzanine~~parent ~~loans,~~company ~~and~~is ~~purchased~~pursuing opportunities ~~commercial~~to ~~real~~sponsor ~~estate~~new ~~properties.~~ventures Weand ~~also~~raise ~~have~~investment ~~taken~~capital ~~positions~~to be deployed in ~~various~~the ~~credit~~real ~~default~~estate ~~swaps~~debt ~~relating~~sector. toOur ~~commercial~~Board ~~mortgage-backed~~of ~~securities~~Directors ~~and~~will ~~residential mortgage-backed~~continue ~~securities~~to ~~and~~exercise ~~have~~oversight ~~entered~~of ~~into~~our ~~interest~~Manager ~~rate~~and ~~swaps~~our Manager will continue to ~~hedge~~have the same ~~basis~~obligation ~~risk~~to ofmanage our ~~floating~~portfolio ~~rate~~as ~~liabilities.~~set Weforth ~~have~~in ~~leveraged~~ our ~~portfolio~~management inagreement ~~order~~(which tocontains ~~achieve~~policies ~~attractive risk-adjusted~~to ~~returns.~~ensure Wethat ~~have~~potential ~~issued~~conflicts ~~four~~of ~~types~~interest ofare ~~liabilities:~~managed appropriately).

55 Given current market conditions and our lack of investable cash, currently, we are unable to take advantage of new investment opportunities and we do not believe we will be able to take advantage of new investment opportunities in the future.

Since we commenced operations in March 2005, we have invested in Agency mortgage-backed securities, non-agency residential mortgage-backed securities, commercial mortgage-backed securities,

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Weother ~~completed~~commercial amortgage ~~private~~loan ~~offering~~products, ofincluding 17whole loans,~~400~~ A Notes,~~000~~ ~~shares~~B ofNotes, ~~our~~mezzanine ~~common~~loans, ~~stock~~and investments in ~~March~~funds ~~2005~~that invest in ~~which~~whole weloans, ~~raised~~A ~~net~~Notes, ~~proceeds~~B ofNotes, ~~approximately~~and ~~$405.6 million.~~mezzanine Weloans, ~~completed~~and purchased ~~our~~commercial ~~initial public~~real ~~offering~~estate ofproperties. ~~7,500,000~~A ~~shares~~large portion of our ~~common~~investments ~~stock~~ in ~~August~~MBS ~~2006~~hold ina ~~which~~deeply wesubordinated ~~raised~~position ~~net~~in ~~proceeds~~the ofunderlying ~~approximately~~trust ~~$158~~structure.~~6 million.~~ ~~Between~~We ~~August~~also ~~2007~~have ~~and~~taken ~~November~~positions ~~2007,~~in ~~we purchased~~various ~~299,300~~credit ~~shares~~default ofswaps ~~our~~relating ~~common~~to ~~stock in open market purchases. As of December 31, 2008, our portfolio was comprised of~~ commercial mortgage-backed securities ~~(CMBS),~~and ~~commercial real estate loan investments,~~ residential mortgage-backed securities ~~(RMBS), operating real estate~~ and ~~other investments of approximately $316.8 million, and~~ have ~~issued~~entered ~~debt~~into ~~with~~interest ~~carrying~~rate ~~value~~swaps ~~totaling approximately~~to ~~$349.3 million.~~hedge ~~The resulting~~the ~~GAAP-reported~~basis ~~stockholders'~~risk ~~deficit~~ of ~~$37.4 million~~our ~~represents~~floating ~~a reduction of $601~~rate liabilities.~~6 million~~ ofWe ~~the~~have ~~net~~leveraged ~~amounts~~our ~~raised~~portfolio in ~~2005~~order ~~and~~to ~~2006.~~achieve ~~This~~attractive ~~reduction~~risk-adjusted ~~in stockholders'~~returns. ~~equity~~We ~~can~~have beissued ~~attributed~~four totypes ~~the~~of ~~following general areas~~liabilities:

•: trust preferred securities;
•: CDO liabilities;
•: secured mortgage debt; and
•: short-term liabilities.

We ~~earn~~completed ~~revenues~~a ~~and~~private ~~generate~~offering ~~cash~~of ~~through our investments. These revenues are~~17, ~~in turn~~400,000 ~~used~~shares ~~to pay the interest and other costs~~ of our ~~financings~~common ~~(including~~stock ~~payments~~in ~~due~~March on2005 ~~interest rate~~in ~~hedges),~~which towe ~~pay~~raised ~~for~~net ~~our~~proceeds ~~overhead~~of ~~costs~~approximately ~~and to pay the management fee~~$405.6 million. ~~The~~We ~~net~~completed ~~earnings~~our ~~after~~initial public ~~these~~offering ~~payments~~of ~~are~~7,500,000 ~~used~~shares toof ~~pay~~our ~~dividends~~common tostock ~~our~~in ~~stockholders,~~August to2006 ~~further~~in ~~reduce~~which ~~our~~we ~~liabilities~~raised ornet toproceeds of ~~re-invest~~approximately ~~into targeted assets~~$158.6 million. InBetween ~~order~~August to2007 ~~maintain~~and ~~compliance~~November ~~with the REIT regulations~~2007, we ~~are~~purchased ~~required~~299,300 toshares ~~pay out at least 90%~~ of our ~~taxable~~common ~~income~~stock asin ~~dividends.~~open ~~Typically~~market ~~there are mismatches between taxable income and GAAP income~~purchases. ~~Due~~As toof ~~realized~~December 31, ~~losses~~2009, ~~that~~our weportfolio ~~have~~was comprised ~~incurred to date and the projected decline in cash flows~~ of ~~some~~commercial ofmortgage-backed ~~our~~securities ~~assets~~(CMBS), wecommercial ~~currently~~real ~~expect~~estate aloan ~~portion~~investments, ~~of our~~residential ~~portfolio~~mortgage-backed tosecurities ~~generate~~(RMBS) ~~substantial~~and ~~tax~~ operating ~~losses~~real inestate ~~2009~~of ~~and in future periods~~approximately $272. ~~Thus~~0 million, ~~our~~and ~~net~~we ~~earnings~~have ~~may~~issued bedebt inwith ~~excess~~a ofcarrying ~~our~~value ~~taxable~~totaling ~~income~~approximately ~~for~~$333.5 million. ~~the~~The ~~next~~resulting ~~several~~GAAP-reported ~~years.~~stockholders' ~~This~~deficit ~~mismatch~~of ~~may~~$58.1 million ~~permit~~represents ~~us to use~~ a ~~certain~~reduction ~~amount~~of $622.3 million of ~~our~~the net ~~earnings~~amounts toraised ~~further~~in ~~reduce~~2005 ~~our~~and ~~liabilities~~2006. orThis toreduction ~~re-invest,~~in ~~rather~~stockholders' ~~than~~equity ~~pay~~can ~~these~~be ~~net~~attributed ~~earnings~~ to ~~stockholders~~the asfollowing ageneral areas: ~~dividend.~~

•: realized losses on disposition of assets, credit default swaps and interest rate swaps;
•: dividends paid in excess of GAAP earnings;
•: impairment of loans and other decreases in market values on CMBS and RMBS assets for which we have projected a decline in future cash flows; and
•: decreases in market values on CMBS and RMBS assets that are solely attributable to spread widening.

We earn revenues and generate cash through our investments. These revenues are, in turn, used to pay the interest and other costs of our financings (including payments due on interest rate hedges), to pay for our overhead costs and, when applicable, to pay the management fee. The net earnings after these payments, if any, are used to pay dividends to our stockholders, to further reduce our liabilities or, when we have investable capital, to re-invest into targeted assets. In order to maintain compliance with the REIT regulations, we are required to pay out at least 90% of our taxable income as dividends. Typically there are mismatches between taxable income and GAAP income. Due to realized losses that we have incurred to date and the projected decline in cash flows of some of our assets, we currently expect a portion of our portfolio to generate substantial tax operating losses in 2010 and in future periods.

Trends; Current Market Environment; Current Portfolio Considerations

In July 2007, the commercial real estate finance sector began to show serious signs of liquidity-related distress. This was in addition to the distress that had already begun in the securitized residential products markets. Now, ~~well~~almost ~~into~~three ~~the~~years ~~20th month~~into of the world-wide financial crisis, commercial real estate credit markets have begun to experience a second layer of stress, as adverse credit events at the underlying loan level have begun to increase, and, in the residential sector, many of the long-awaited losses from the high delinquency levels have percolated through the various ~~structures.~~securitizations ~~The dual factors of diminishing liquidity and increasing incurrence of adverse credit events place a lot of stress on commercial and residential real estate credit investors. We believe~~ that ~~the~~own entities that are successful in navigating through these conditions will be the entities that have the foresight to reduce their liabilities while at the same time being successful in managing their respective credit risk.

~~The U.S. Federal Government has recently enacted several programs with the intent of stabilizing the financing markets. These programs include the Troubled Assets Relief Program (TARP) and the~~ 63

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~~Troubled~~these loans. The dual factors of diminishing liquidity and increasing incurrence of adverse credit events place a lot of stress on commercial and residential real estate credit investors. The diminished liquidity negatively impacts the market value of the respective investments whereas the adverse credit events negatively impact the prospective cash flow of the respective investments. The U.S. federal government enacted several programs with the intent of stabilizing the financing markets. These programs include the Troubled Assets Relief Program (TARP), the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP), among others. While we are cautiously optimistic that ~~the~~such ~~recently enacted~~ governmental programs will have some positive impact on the housing markets and the lending environment, we do not believe that the overall market will stabilize until (a) home prices firm up and the impact of these lower home prices works through the various real estate financing markets, and (b) commercial lending markets become functional and the borrowers in these markets readjust their valuations and expectations to reflect a much less aggressive lending environment.

Performance for CMBS investors, including us, is highly dependent upon the credit performance of existing securitized portfolios. We expect that loans that do not have near-term maturities that were underwritten with the related secured properties having stabilized cash flow in place will tend to perform better during this difficult period. By contrast, we believe that loans made on transitional, or other value-creating, projects or that have near-term maturities will suffer the greatest. The markets will be greatly impacted by these loans with near-term maturities; causing the existing credit spread environment to last until the consequences of these near-term loan maturities are better understood. Through our CMBS portfolio and our commercial real estate loan portfolio, we have exposure to each of these loan types. ~~Specifically,~~Our ~~our~~CMBS ~~commercial~~portfolio, ~~real~~which ~~estate~~is ~~loan~~comprised ~~portfolio~~solely ~~has~~of ~~one~~fixed ~~loan~~rate ~~that~~conduit ~~was~~deals, ~~due~~will instart ~~2008, two~~to ~~loan~~have material maturities in ~~2009~~the ~~and~~underlying ~~our~~collateral ~~remaining~~pools ~~loan,~~in ~~which~~2010; isin ~~held for sale~~addition, ~~matures~~the indelinquency ~~2016.~~rate ~~Our~~for our CMBS portfolio, ~~which~~increased isdramatically ~~comprised~~during ~~solely~~the second quarter of ~~fixed~~2009, ~~rate~~and ~~conduit~~continued ~~deals,~~to increase ~~which~~during ~~generally~~the dothird ~~not~~and ~~have near-term~~fourth ~~maturities,~~quarters ~~will~~of ~~not~~2009. ~~start~~As todelinquencies have ~~material~~increased, ~~maturities~~our inprospective ~~the~~cash ~~underlying~~flows ~~collateral~~have ~~pools~~been ~~until~~materially ~~2010~~lowered.

As discussed in Note 3 to our consolidated financial statements, "Fair Value Hierarchy", we value our ~~available-for-sale~~investment securities ~~and held for sale securities~~ using current market pricing. The spreads that have been utilized to value our assets are extremely wide from a historical perspective. These spreads are wide due to the market's view of the risks contained within these types of investments within the current market environment. These risks include the market's expectation of increasing delinquencies and losses within residential and commercial mortgage loans, and consequently, in the securitized pools that own these loans. The market's expectation is also that commercial and residential loans originated in the period from 2005 to 2007 will under-perform prior vintages. These market expectations become embodied in the modeling assumptions that are used to value securities such as the RMBS and CMBS that we own. The valuation of these assets is extremely sensitive to these assumptions. Additionally, there are many factors for which there is no relevant comparable data to use in order to help judge that particular factor's impact on future performance. For instance, many of the underlying residential and commercial mortgages originated during the 2005 to 2007 era have very low interest rate coupons. These low coupons may prove to dampen credit losses that otherwise are expected by the market, although there can be no assurance of this. As these origination vintages age, performance tiering may become evident; meaning that the 2005 vintage may exhibit stronger performance than the 2006 or 2007 vintages. In the current marketplace, there is no evidence of any meaningful tiering among these three vintages. Additionally, the ~~recently~~governmental ~~enacted~~programs ~~Governmental~~discussed ~~programs~~above may have a positive impact on certain sub-prime borrowers and sub-prime loan pools. Conversely, consumer retail weakness, job losses and a weak economy may result in credit losses exceeding the market's expectations. ~~It is the use of these assumptions that causes there to be both upside potential as well as downside risk to the current market value of our assets.~~

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We believe the following trends may also affect our business:

Uncertain interest rate environment—The credit market disruption that has persisted since the summer of 2007 continues to have a dramatic effect on the economy. The distress in the financial markets has led to significant changes in Federal Reserve ~~Monetary~~monetary ~~Policy~~policy, in the form of lower rates and through direct financing to primary dealers ~~and lending to facilitate~~ through the ~~buy-out~~TALF ofand aother ~~major broker-dealer~~programs. However, pressure from a pull -back in lending and credit provision still weighs heavily on the consumer and on the residential housing markets. Continued weakness in the residential real estate markets and in both the commercial and residential lending environment is likely to persist, and in general should result in slower U.S. economic growth. Additionally, lower rates have not resulted in dramatically increased prepayment speeds, largely given the constraints around lending, which have even impacted the U.S. government-sponsored entities, such as Fannie Mae and Freddie Mac.

57 Normally, we would expect that our fixed-rate assets would decline in value in a rising interest rate environment. We have engaged in interest rate swaps to hedge a portion of the risk associated with increases in interest rates. However, because we do not always hedge 100% of our outstanding financing, increases in interest rates could result in a decline in the value of our portfolio, net of hedges. Similarly, decreases in interest rates could result in an increase in the value of our portfolio. Given the substantial dislocation in asset prices, however, these traditional relationships between levels of interest rates and yield spread or price changes, may not exist. In addition, interest rates remain, and are likely to remain for the foreseeable future, at consistent and low levels.

Prepayment rates—Typically, as interest rates fall, prepayment rates on residential mortgages rise. However, given the global credit crisis, this cycle could be different as the decline in housing market activity and home price depreciation could keep prepayment rates low as refinancing becomes less accessible. As noted above, lower rates have not dramatically increased prepayment speeds during the current recession, as more constraints have been placed on lending. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, general economic conditions and the relative interest rates on mortgage loans.

Liquidity—Managing liquidity has become a priority for our company. Whereas most of our assets, such as the commercial real estate properties and the assets held by our CDOs, have been financed with long-term liabilities, some of our assets are financed on a short-term basis while they are in transition toward longer-term financing solutions. In the current marketplace, however, that long-term financing is not available. These short-term financings are collateralized borrowings under our revolving credit facility, which will mature on August 31, 2010 or earlier in accordance with its terms. As asset values decline, margin calls from our financing counterparties place demands on our cash and other liquidity sources. This can force us to sell assets and de-leverage the balance sheet, which could negatively impact earnings and negatively impact our ability to make distributions to our stockholders. As of December 31, 2009, we had reduced our exposure to margin calls to $0.4 million on our credit default swaps, and we had unencumbered assets at such date that provided us with $2.5 million of additional borrowing capacity under our secured financing facility.

Weakness of mortgage market—The sub-prime market has been severely affected by changes in the lending landscape; for now and for the foreseeable future, access to mortgages for sub-prime borrowers has been substantially limited. This limitation on financing is expected to have an impact on all mortgage loans that are resetting and is expected to result in increased default rates. The severity of the liquidity limitation was largely unanticipated by the markets. The liquidity issues also affect prime and Alt-A Non-Agency lending, with the origination of many product types being completely curtailed and lenders requiring high loan-to-value ratios when providing refinancing to borrowers. At the margin, this has an impact on new demand for homes, which will compress the home ownership rates and weigh heavily on future home price performance. There is a strong correlation between home price growth rates and mortgage loan delinquencies. This comes in addition to the delinquency pressures in

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~~speeds,~~the ~~largely~~sub-prime ~~given~~market ~~the~~resulting ~~constraints~~from ~~around~~weaker ~~lending~~underwriting, which ~~have~~put many sub-prime lenders out of business in 2006 and 2007. The market deterioration has caused us to expect increased ~~even~~losses onrelated to our holdings over time, and in the ~~part~~immediate ofperiod, has resulted in a significant decline in the USmarket ~~Government-sponsored~~values ~~entities~~of our assets as well as a significant decrease in anticipated cash flows from our investments. We continually monitor and adjust our cash flow assumptions in light of current and projected market conditions, and we believe that results in an accurate representation of value on our balance sheet.

~~Normally,~~We webelieve ~~would~~that, ~~expect~~at ~~that~~this ~~our~~time, ~~fixed~~the underlying losses in the sub-~~rate~~prime ~~assets~~market ~~would~~have ~~decline~~not infully ~~value~~manifested themselves in athe ~~rising~~securitizations, ~~interest~~including ~~rate~~those ~~environment~~in which we own MBS. Accordingly, Wethere ~~have~~are ~~engaged~~a innumber ~~interest~~of ~~rate~~factors ~~swaps~~that can help to ~~hedge~~mitigate issues before they fully impact the market. The government does have a ~~portion~~ number of ~~the~~programs ~~risk~~that ~~associated~~it ~~with~~can ~~increases~~utilize to help the conditions in ~~interest~~the ~~rates~~residential mortgage industry. ~~However~~Currently, ~~because~~the welending dolimits ~~not~~for ~~always~~Federal ~~hedge~~National ~~100%~~Mortgage ofAssociation, ~~our~~Federal ~~outstanding~~Home ~~financing,~~Loan ~~increases~~Mortgage inCorporation ~~interest~~and ~~rates~~Government ~~could~~National ~~result~~Mortgage Association inhave abeen ~~decline~~raised. inAs well, recent legislation has expanded and modernized the ~~value of~~FHA ~~our~~programs ~~portfolio,~~to ~~net~~make offinancing ~~hedges.~~available ~~Similarly,~~at ~~decreases~~affordable interms ~~interest~~to ~~rates~~delinquent ~~could~~borrowers. ~~result~~At inthe anmargin, ~~increase~~programs that inwill have the ~~value~~effect of ~~our~~reducing ~~portfolio.~~foreclosure ~~Given~~inventory will be helpful to the ~~substantial~~resolution ~~dislocation~~of inhome ~~asset~~price ~~prices,~~declines. ~~however~~In addition, ~~these traditional~~given ~~relationships~~the ~~between~~current ~~levels~~interest ofrate ~~interest~~environment, ~~rates~~the ~~and~~U.S. ~~yield~~government ~~spread~~has little orroom ~~price~~to ~~changes,~~further ~~may~~decrease ~~not~~the ~~exist~~Fed Funds rate.

Prepayment rates—Typically, as interest rates fall, prepayment rates on residential mortgages rise. However, given the global credit crisis, this cycle could be different as the decline in housing market activity and home price depreciation could keep prepayment rates low as refinancing becomes less accessible. Prepayment rates also may be affected by other factors, including, without limitation, conditions in the housing and financial markets, general economic conditions and the relative interest rates on mortgage loans.

Liquidity—Managing liquidity has become a priority for our company. Whereas most of our assets, such as the commercial real estate properties and the assets held by our CDOs, have been financed with long-term liabilities, some of our assets are financed short-term while they are in transition toward longer-term financing solutions. In the current economic environment, these short-term financings typically are collateralized borrowings under our revolving credit facility or, when available and when we deem appropriate, borrowings under collateralized reverse repurchase agreements. As asset values decline, margin calls from our financing counterparties place demands on our cash and other liquidity sources. This can force us to sell assets and de-leverage the balance sheet, which could negatively impact earnings and negatively impact our ability to make distributions to our stockholders. As of December 31, 2008, we had reduced our exposure to margin calls to $1.1 million on our credit default swaps, and we had unencumbered assets at such date that provided us with $13.3 million of additional borrowing capacity under our secured financing facility.

Weakness of mortgage market—The sub-prime market has been severely affected by changes in the lending landscape; for now and for the foreseeable future, access to mortgages for sub-prime borrowers has been substantially limited. This limitation on financing is expected to have an impact on all mortgage loans that are resetting and is expected to result in increased default rates. The severity of the liquidity limitation was largely unanticipated by the markets. As well, the liquidity issues also affect prime and Alt-A Non-Agency lending, with the origination of many product types being completely curtailed and lenders requiring high loan-to-value ratios when providing refinancing to borrowers. At the margin, this has an impact on new demand for homes, which will compress the home ownership rates and weigh heavily on future home price performance. There is a strong correlation between home price growth rates and mortgage loan delinquencies. This comes in addition to the delinquency pressures in the sub-prime market resulting from weaker underwriting, which put many sub-prime lenders out of business in 2006 and 2007. The market deterioration has caused us to expect increased losses related to our holdings over time, and in the immediate period, has resulted in a significant decline in the market values of our assets. We continually monitor and adjust our cash flow assumptions in light of current and projected market conditions, and we believe that results in an accurate representation of value on our balance sheet.

We believe that, at this time, the underlying losses in the sub-prime market have not fully manifested themselves in the securitizations. Accordingly, there are a number of factors that can help to mitigate issues before they fully impact the market. The government does have a number of programs that it can utilize to help the conditions in the mortgage industry. Currently, the lending limits for Federal National Mortgage Association, Federal Home Loan Mortgage Corporation and

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Government National Mortgage Association have been raised. As well, recent legislation has expanded and modernized the FHA programs to make financing available at affordable terms to delinquent borrowers. At the margin, programs that will have the effect of reducing foreclosure inventory will be helpful to the resolution of home price declines. In addition, given the current interest rate environment, the U.S. government has little room to further decrease the Fed Funds rate.

Other markets, such as the Alt-A and Option ARM market have also come under more significant delinquency and pricing pressure beginning in the first quarter of 2008. As a result of large forced sales and rising delinquency rates on these programs, price declines have been significant even for AAA-rated securities. These price dislocations have also been felt in the prime markets on both fixed-rate and hybrid arm Non-Agency securities, across most vintages. Performance remains stronger for loans underwritten prior to 2005, and for fixed rate loans; however, the magnitude of the price declines currently exceeds the expectations of loss for these sectors.

Structured finance transactions—The dislocations in the sub-prime market have rippled throughout the structured finance markets. Yield spreads on CMBS and prime Non-Agency RMBS have widened dramatically ~~during~~since ~~2007~~the ~~and~~beginning ~~2008~~of 2007, resulting in significant negative market value adjustments to our assets. The issuance of CDOs, which had been a key financing tool for us and for our peers, has come to a halt, cutting off an attractive financing alternative for the foreseeable future.

For a discussion of additional risks relating to our business see the risk factors disclosed under Part I, Item 1A, "Risk Factors".

Our Business Model

Our interest, dividend and rental income net of interest expense, which we refer to as our net investment income, is generated primarily from the net spread, or difference, between the interest, dividend and rental income we earn on our investment portfolio and the cost of our borrowings and hedging activities. Our net investment income will vary based upon, among other things, the difference between the interest rates earned on our various interest-earning assets, the borrowing costs of the liabilities used to finance those investments and the credit performance of the assets.

Certain of our investments, including RMBS and subordinate CMBS, currently generate substantial mismatches between taxable income and available cash. In order to meet the requirement to distribute a substantial portion of our net taxable income, we may need to borrow, sell assets or raise additional equity capital~~. Conversely~~, ~~cash~~to ~~income~~the ~~may~~extent ~~exceed~~possible, ~~taxable~~although ~~income,~~our ~~which~~current ~~could~~financial ~~allow~~condition may preclude us tofrom ~~lower~~obtaining ~~our~~new ~~dividend~~borrowing or raising additional equity capital.

Our Manager is entitled to receive a base management fee that is based on the amount of our equity (as defined in the management agreement), regardless of the performance of our portfolio. Accordingly, the payment of our base management fee is not primarily dependent on our profitability (except to the extent that our equity is affected) and may provide us with an incentive to incur losses. We and our Manager agreed that during 2008, we would pay our base management fee to our Manager in shares of our common stock valued at the weighted average closing price during the last five trading days of the applicable fiscal quarter. Additionally, our Manager is entitled to receive an incentive management fee that is dependant upon the amount of our GAAP earnings.

Our ability to maintain our dividends and grow our business is dependent on our ability to invest our capital on a timely basis at yields which exceed our cost of capital. The primary market factor that bears on this is credit spreads. 66

Generally speaking, compression of credit spreads can increase the unrealized gains on our current investments and reduce our net investment income, but also reduce the yields available on potential new investments, while widening credit spreads reduce the realized and unrealized gains on our current

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~~investments~~ (orexcept to ~~cause~~the ~~realized~~extent that our equity is affected) and ~~unrealized~~may provide us with an incentive to incur losses). We and ~~can~~our ~~increase~~Manager agreed that during 2008, we would pay our base management fee to our Manager in shares of our common stock valued at the ~~net~~weighted ~~investment~~average ~~income~~closing ~~available~~price onduring ~~potential~~the ~~new~~last ~~investments~~five trading days of the applicable fiscal quarter. Additionally, our Manager is entitled to receive an incentive management fee that is dependent upon the amount of our GAAP earnings. As a result of our having negative equity (as defined in the management agreement), we did not pay a management fee to our Manager for the three months ended December 31, 2008 or for the year ended December 31, 2009.

~~During~~Generally ~~2007 and 2008~~speaking, ~~credit~~compression ~~spreads widened. The widening~~ of credit spreads ~~and~~can ~~increasing interest rates caused a significant~~ increase in the ~~net~~ unrealized ~~losses~~gains on our ~~available-for-sale~~ ~~securities.~~current ~~Net~~investments ~~unrealized~~and ~~losses~~reduce ~~initially~~our ~~are~~net ~~recorded~~investment inincome, ~~accumulated~~while ~~other~~widening ~~comprehensive~~credit ~~loss.~~spreads ~~We periodically evaluate our portfolio of~~reduce ~~available-for-sale~~the ~~securities~~realized ~~for impairment~~ and ~~reclassify such~~ unrealized ~~losses~~gains ~~to impairments~~ on ~~available-for-sale securities in~~ our ~~statement~~current ~~of operations~~investments ~~when~~(or ~~appropriate,~~cause ~~which~~realized ~~in the second half of 2007~~ and ~~throughout~~unrealized ~~2008 caused our book value per share to decrease~~losses). ~~One of the key drivers for the widening of credit spreads has been the recent disruption in the securitized products sectors.~~

InSince ~~addition~~2007, ~~to widening~~ credit spreads, ~~the~~have ~~recent~~widened ~~disruption~~significantly. inThe ~~the~~widening ~~securitized~~of ~~products~~credit ~~markets~~spreads ~~has~~and ~~adversely~~increasing ~~affected~~interest ~~the~~rates ~~market~~caused ina ~~which~~significant weincrease ~~operate~~ in ~~a number of other ways. For example,~~ the ~~market~~net ~~disruption~~unrealized ~~has~~losses ~~reduced~~on ~~the trading activity~~ our available-for-sale ~~many~~ securities~~, resulting in less liquid markets for those securities~~. AsNet ~~the~~unrealized ~~securities~~losses weinitially ~~hold~~ are ~~marked~~recorded ~~to market at the end of each quarter, the decreased liquidity and concern over market conditions have resulted~~ in ~~significantly~~accumulated ~~lower~~other ~~valuations~~comprehensive ofloss. ~~substantially~~We ~~all~~periodically ofevaluate our ~~CMBS,~~portfolio ~~RMBS and preferred equity investments since~~of ~~mid~~available-~~2007.~~for-sale ~~These~~securities ~~lower~~for ~~valuations~~impairment ~~have affected us by, among other things, decreasing our net book value~~ and inreclassify ~~contributing~~such tounrealized ~~our~~losses ~~decision~~ to ~~record~~impairments ~~other~~on ~~than temporary non~~available-~~cash~~for-sale ~~impairments~~securities ~~(discussed below~~ in ~~"—Critical~~our ~~Accounting~~statement ~~Policies—Valuation~~ of operations ~~Financial~~when ~~Instruments"). In addition~~appropriate, ~~Standard &~~which ~~Poor's,~~since ~~Moody's~~the ~~and Fitch~~second ~~recently~~half ~~have~~of ~~issued~~2007 ahas ~~series~~caused ofour ~~credit~~book ~~rating~~value ~~downgrades~~per onshare ~~various~~to ~~real estate securities~~decrease. ~~Through~~One ~~February 26, 2009, six~~ of the ~~sub-prime~~key ~~RMBS~~drivers ~~that~~for wethe ~~owned~~widening ~~at December 31, 2008, which had an aggregate carrying value~~ of ~~$0.2 million~~credit atspreads ~~December 31,~~has ~~2008, had~~ been ~~downgraded below their lowest rating at December 31, 2008; four of~~ the ~~prime RMBS that we owned at December 31, 2008, which had an aggregate carrying value of $0.1 million at December 31, 2008, had been downgraded below their lowest rating at~~recent ~~December 31,~~disruption ~~2008~~in ~~and 62 of~~ the ~~CMBS~~securitized ~~that~~products ~~we owned at December 31, 2008, which had an aggregate carrying value of $17~~sectors.~~8 million~~ ~~at December 31, 2008, had been downgraded below their lowest rating at December 31, 2008.~~

WeIn doaddition ~~not~~to ~~currently~~widening ~~know~~credit spreads, the ~~full~~disruption ~~extent~~in tothe ~~which~~securitized ~~this~~products ~~recent~~markets ~~disruption~~over ~~will~~the ~~affect~~past usthree oryears has adversely affected the ~~markets~~market in which we operate in a number of other ways. IfFor example, the market disruption ~~continues~~has reduced the trading activity for many securities, resulting in less liquid markets for those securities. As the securities we ~~may~~hold ~~experience~~are ~~continued~~marked to ~~tightening~~market at the end of ~~liquidity~~each quarter, ~~additional~~the ~~impairment~~decreased ~~charges~~liquidity and ~~challenges~~concern inover ~~raising~~market ~~additional~~conditions ~~capital~~have ~~and~~resulted ~~obtaining~~in ~~investment~~significantly ~~financing~~lower onvaluations ~~attractive~~of ~~terms.~~substantially ~~Future~~all ~~market~~of ~~developments~~our ~~may~~CMBS, ~~continue~~RMBS toand preferred equity investments since mid-2007. These lower valuations have aaffected ~~materially~~us ~~negative~~by, ~~impact~~among onother things, decreasing our ~~business~~net orbook ~~results~~value ofand ~~operations.~~in ~~Based~~contributing onto our decision to record other than temporary non-cash ~~balances~~impairments (discussed below in "—Critical Accounting Policies—Valuation of Financial Instruments"). In addition, Standard & Poor's, Moody's and ~~available~~Fitch ~~financing~~recently ~~under~~have ~~our~~issued ~~secured~~a ~~revolving~~series of credit ~~facility~~rating downgrades on various real estate securities. Through March 16, we2010, ~~believe~~one of the sub-prime RMBS that we ~~have~~owned at ~~sufficient~~December 31, ~~liquidity~~2009, inwhich ~~the~~had ~~current~~a ~~market~~carrying ~~environment~~value of $0.0 million ~~Moreover~~at December 31, ~~these~~2009, ~~developments~~had ~~may~~been ~~produce~~downgraded abelow ~~number~~its lowest rating at December 31, 2009; three of ~~attractive~~the ~~investment~~prime RMBS ~~opportunities~~that towe usowned inat December 31, 2009, which had an aggregate carrying value of $0.1 million at December 31, 2009, had been downgraded below their lowest rating at December 31, 2009 and 20 of the ~~future~~CMBS that we owned at December 31, 2009, which had an aggregate carrying value of $13.1 million at December 31, 2009, had been downgraded below their lowest rating at December 31, 2009.

We do not currently know the full extent to which this market disruption will affect us or the markets in which we operate. If the disruption continues, we may experience continued tightening of liquidity, additional impairment charges and further challenges in raising additional capital and obtaining investment financing on attractive terms. Future market developments may continue to have a materially negative impact on our business or results of operations. As discussed below under "—Liquidity and Capital Resources", if the Merger is not consummated and we are unable to successfully restructure our borrowing arrangements and we do not receive additional funding, our ability to continue as a going concern will be in doubt.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. These accounting principles require us to make some complex and subjective decisions and assessments. These include the fair market value of certain ~~investment~~investments, debt obligations and derivative asset and liabilities, amount and timing of credit losses, prepayment assumptions and other items that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., market values change due to changes in supply and demand, credit performance, prepayments, interest rates or other reasons; yields change due to changes in credit outlook and loan prepayments) will occur in the near future. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time

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~~made~~obligations and derivative assets and liabilities, the amount and timing of credit losses, prepayment assumptions and other items that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., market values change due to changes in supply and demand, credit performance, prepayments, interest rates or other reasons; yields change due to changes in credit outlook and loan prepayments) will occur in the near future. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made based upon information available to us at that time. We rely on the experience of Brookfield's, ~~Hyperion Brookfield~~BIM's and our management, along with their analysis of historical and current market data, in order to arrive at what we believe to be reasonable estimates. See Note 2 to our consolidated financial statements contained elsewhere herein for a complete discussion of our accounting policies. Other than the adoption of FASB ASC 320-10-65-1 (previously FSP FAS 115-2), as defined below, there have been no material changes to our accounting policies in 2009. Our estimates are inherently subjective in nature and actual results could differ from our estimates and differences may be material. We have identified our most critical accounting estimates to be the following:

Going Concern

A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate or have no other alternative but to liquidate. As of December 31, 2009, we owed $28.9 million to an affiliate of our Manager under our secured credit facility. Unless earlier terminated as provided in the credit agreement, our credit facility terminates on August 31, 2010. As a result of our possible inability to extend, refinance or repay this indebtedness, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial statements on a going concern basis, if the Merger is not consummated and we are unable to successfully restructure our borrowing arrangements or we do not receive additional funding, our ability to continue as a going concern will be in doubt. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business. Our consolidated financial statements included in this report do not reflect any adjustments related to the recoverability of assets and satisfaction of liabilities that might be necessary should we be unable to continue as a going concern.

Investment Consolidation

For each investment we make, we evaluate the underlying entity that issued the securities we acquired or to which we made a loan in order to determine the appropriate accounting. We refer to guidance in ~~Statement~~FASB ofASC ~~Financial~~860-10-50-3 ~~Accounting Standards~~ (~~"SFAS")~~previously ~~No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities ("~~SFAS 140"), and FASB ~~Interpretation No. (FIN) 46R, Consolidation of Variable~~ASC ~~Interest~~810-10-05-8 ~~Entities~~ ("previously FIN 46R"), in performing our analysis. ~~FIN 46R~~FASB ASC 810-10-05-8 addresses the application of ~~Accounting~~FASB ~~Research~~ASC 810-10-15-10 ~~Bulletin~~(previously ~~No.~~ ARB 51), ~~Consolidated~~ ~~Financial Statements,~~ to certain entities in which voting rights are not effective in identifying an investor with a controlling financial interest. An entity is subject to consolidation under ~~FIN 46R~~FASB ASC 810-10-05-8 if the 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 ("variable interest entities" or "VIEs"). Variable interest entities within the scope of ~~FIN 46R~~FASB ASC 810-10-05-8 are required to be consolidated by their primary beneficiary. The primary beneficiary of a VIE is determined to be ~~the party that absorbs a majority of the VIE's expected losses, receives the majority of the VIE's expected returns, or both.~~

Our ownership of the subordinated classes of CMBS and RMBS from a single issuer may provide us with the right to control the foreclosure/workout process on the underlying loans, which we refer to as the Controlling Class CMBS and RMBS. There are certain exceptions to the scope of FIN 46R, one of which provides that an investor that holds a variable interest in a qualifying special-purpose entity ("QSPE") is not required to consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate. SFAS 140 sets forth the requirements for an entity to qualify as a QSPE. To maintain the QSPE exception, the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity's QSPE status can be impacted in future periods by activities undertaken by its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we follow the guidance set forth in FIN 46R as the special-purpose entities would be determined to be VIEs. 68

We have analyzed the pooling and servicing agreements governing each of our Controlling Class CMBS and RMBS investments and we believe that the terms of those agreements are industry standard and are consistent with the QSPE criteria. However, there is uncertainty with respect to QSPE treatment for those special-purpose entities due to ongoing review by regulators and accounting standard setters (including the project of the Financial Accounting Standards Board ("FASB") to amend SFAS 140 and the recently added FASB project on servicer discretion in a QSPE), potential actions by various parties involved with the QSPE (discussed in the paragraph above) and varying and evolving interpretations of the QSPE criteria under SFAS 140. We also have evaluated each of our Controlling Class CMBS and RMBS investments for which we own a greater than 50% interest in the subordinated class as if the special-purpose entities that issued such securities are not QSPEs. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose entities. Additionally, the

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~~standard setters continue to review~~ the ~~FIN 46R provisions related to the computations used to determine the primary beneficiary of VIEs. Future guidance from regulators and standard setters~~ ~~may~~party ~~require us to consolidate the special-purpose entities~~ that ~~issued~~absorbs ~~the~~a ~~CMBS~~majority ~~and~~of ~~RMBS in which we have invested as described in~~ the ~~section~~VIE's ~~titled~~expected ~~"Variable~~losses, ~~Interest~~receives ~~Entities" in Note 2 to our consolidated financial statements included elsewhere herein. To~~ the ~~extent~~majority ~~that there are subsequent changes in the structure~~ of ~~these special-purpose entities (which we believe occur infrequently), we would have to reconsider whether we are~~ the ~~primary~~VIE's ~~beneficiary.~~expected ~~If we are deemed to be the primary beneficiary~~returns, weor ~~would have to consolidate the assets, liabilities and operations of the respective securitization trust~~both.

Our ~~maximum~~ownership ~~exposure~~of the subordinated classes of CMBS and RMBS from a single issuer may provide us with the right to ~~loss~~appoint the special servicer for the applicable trust (that special servicer will control the foreclosure/workout process on the underlying loans), which we refer to as athe ~~result~~Controlling Class CMBS and RMBS. Currently, there are certain exceptions to the scope of ~~our~~FASB ASC ~~investment~~810-10-50-18, one of which provides that an investor that holds a variable interest in ~~these~~a qualifying special-purpose ~~entities~~entity ~~totaled~~("QSPE") ~~$20~~is not required to consolidate that entity unless the investor has the unilateral ability to cause the entity to liquidate.0 FASB ASC 860-10-50-3 (previously SFAS ~~million~~140) sets forth the requirements for an entity to qualify as ofa ~~December 31~~QSPE. To maintain the QSPE exception, ~~2008~~the special-purpose entity must initially meet the QSPE criteria and must continue to satisfy such criteria in subsequent periods. A special-purpose entity's QSPE status can be impacted in future periods by activities undertaken by its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent that our CMBS or RMBS investments were issued by a special-purpose entity that meets the QSPE requirements, we record those investments at the purchase price paid. To the extent the underlying special-purpose entities do not satisfy the QSPE requirements, we follow the guidance set forth in FASB ASC 810-10-05-8 as the special-purpose entities would be determined to be VIEs.

We have analyzed the pooling and servicing agreements governing each of our Controlling Class CMBS and RMBS investments and we believe that the terms of those agreements are industry standard and are consistent with the QSPE criteria. We also have evaluated each of our Controlling Class CMBS and RMBS investments for which we own a greater than 50% interest in the subordinated class as if the special-purpose entities that issued such securities are not QSPEs. Using the fair value approach to calculate expected losses or residual returns, we have concluded that we would not be the primary beneficiary of any of the underlying special-purpose entities. Our maximum exposure to loss as a result of our investment in these special-purpose entities totaled $3.8 million as of December 31, 2009.

In June 2009, the FASB issued FASB ASC 810-10-65-2 (previously SFAS 167), which amends the consolidation guidance applicable to VIEs. We currently are evaluating the impact that this new guidance will have on our investment portfolio. See Note 2 to our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K for a further discussion of the impact of FASB ASC 810-10-65-2 on our consolidated financial statements.

Revenue Recognition

The most significant source of our revenue comes from interest income on our securities and loan investments. Interest income on loans and securities investments is recognized over the life of the investment using the effective interest method. Mortgage loans ~~will~~ generally will be originated or purchased at or near par value and interest income will be recognized based on the contractual terms of the debt instrument. Any loan fees or acquisition costs on originated loans will be deferred and recognized over the term of the loan as an adjustment to the yield. Interest income on mortgage-backed securities, which we refer to as MBS, is recognized on the effective interest method as required by ~~Emerging~~FASB ~~Issues~~ASC 325-40-65-1 ~~Task Force~~ (~~"EITF")~~previously ~~99-20,~~FSP ~~Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("~~EITF 99-20"-1). Under ~~EITF 99~~ FASB ASC 325-2040-65-1, management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and our purchase prices. Subsequent to the purchase and on a quarterly basis, these estimated cash flows are updated and a revised yield is calculated based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies. These include the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls have to be estimated due to delinquencies on the underlying mortgage loans and the timing and magnitude of credit losses on the mortgage loans underlying the securities. These uncertainties and contingencies are difficult to predict and are subject to future events that may affect management's estimates and our interest income. When current period cash flow estimates are lower than the previous period and fair value is less than an asset's carrying value, we will write down the asset to fair market value and record an impairment charge in current period earnings.

Through its extensive experience in investing in MBS, Hyperion Brookfield has developed models based on historical data in order to estimate the lifetime prepayment speeds and lifetime credit losses for pools of mortgage loans. The models are based primarily on loan characteristics, such as loan-to-value ratios ("LTV"), borrower credit scores, loan type, loan rate, property type, etc., and also include other qualitative factors such as the loan originator and servicer. Once the models have been used to project the base case prepayment speeds and to project the base case cumulative loss, those outputs are used to create yield estimates and to project cash flows. 69

Because mortgage assets amortize over long periods of time (i.e., 25 to 30 years in the case of RMBS assets or 10 years in the case of CMBS assets), the expected lifetime prepayment experience and the expected lifetime credit losses projected by the models are subject to modification in light of actual experience assessed from time to time. For each of the purchased mortgage pools, our Manager tracks the actual monthly prepayment experience and the monthly loss experience, if any. To the extent that the actual performance trend over a 6-12 month period of time does not reasonably approximate

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on the mortgage loans underlying the securities. These uncertainties and contingencies are difficult to predict and are subject to future events that may affect management's estimates and our interest ~~expected~~income. ~~lifetime~~When ~~trend,~~current inperiod ~~consideration~~cash offlow ~~the~~estimates ~~seasoning~~are oflower than the previous period and fair value is less than an asset's carrying value, ~~our~~we ~~Manager~~will ~~may~~write ~~make~~down ~~adjustments~~the asset to ~~the~~fair ~~assumptions~~market value and ~~revise~~record an ~~yield~~impairment ~~estimates~~charge ~~and~~in ~~projected~~current ~~cash~~period ~~flows~~earnings.

Through its extensive experience in investing in MBS, BIM has developed models based on historical data in order to estimate the lifetime prepayment speeds and lifetime credit losses for pools of mortgage loans. The models are based primarily on loan characteristics, such as loan-to-value ratios ("LTV"), borrower credit scores, loan type, loan rate, property type, etc., and also include other qualitative factors such as the loan originator and servicer. Once the models have been used to project the base case prepayment speeds and to project the base case cumulative loss, those outputs are used to create yield estimates and to project cash flows.

Because mortgage assets amortize over long periods of time (i.e., 25 to 30 years in the case of RMBS assets or 10 years in the case of CMBS assets), the expected lifetime prepayment experience and the expected lifetime credit losses projected by the models are subject to modification in light of actual experience assessed from time to time. For each of the purchased mortgage pools, our Manager tracks the actual monthly prepayment experience and the monthly loss experience, if any. To the extent that the actual performance trend over a 6-12 month period of time does not reasonably approximate the expected lifetime trend, in consideration of the seasoning of the asset, our Manager may make adjustments to the assumptions and revise yield estimates and projected cash flows.

The following hypothetical example reflects the impact of a change in the historical prepayment experience:

Assumptions:
Price = 101.75% of par
Current Face = $1,000,000
Investment at cost = $1,017,500

Constant Prepayment Rate			Annual Income

6%	5.54	%	$	57,129.30	14	%
15%	5.09	%	$	52,481.09	5	%
20%	4.85	%	$	49,978.37	0	%
40%	3.97	%	$	40,754.16	(18	)%
60%	3.06	%	$	31,394.35	(37	)%

We have retained substantially all of the risks and benefits of ownership of our rental properties and therefore we account for leases with our tenants as operating leases. The total amount of contractual rent that we receive from operating leases is recognized on a straight-line basis over the term of the lease; and a straight-line or free rent receivable, as applicable, is recorded for the difference between the rental revenue recorded and the contractual amount received. In addition to base rent, the tenants in our commercial real estate properties also pay substantially all operating costs.

Expense reimbursement income arising from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate expenses of the respective property is accrued in the same period as the related expenses are incurred. These recoverable expenses are included in expenses as commercial real estate expenses.

Income arising from the operation of parking garages is recognized when the parking spaces are occupied. Expenses related to the operation of parking garages are included in expenses as commercial real estate expenses.

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Loan Loss Provisions

We ~~purchase~~have purchased and ~~originate~~originated mezzanine loans and commercial mortgage loans to be held as long-term investments. We ~~evaluate~~ evaluate each of these loans for possible impairment on a quarterly basis. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. In our evaluation of these loans for possible impairment, we develop significant assumptions which include, but are not limited to, the value of the real estate of partnership or membership interests that secure the mortgage loans, the expected sale period for such real estate, the appropriate discount rate, the fair value of any collateral being used to secure any guarantees from the borrower and the estimated costs incurred to dispose of such guarantee collateral. Upon a determination of impairment, we will establish a reserve for loan losses and a corresponding charge to earnings through the provision for loan losses.

Valuation of Financial Instruments

We measure financial instruments, derivatives and our collateralized debt obligations at fair value. We account for real estate loans held for sale at the lower of their carrying amount or fair value less estimated cost to sell. Realized and unrealized gains or losses from our ~~available-for-sale~~investment securities and collateralized debt obligations within our CDO entities for which we elected the fair value option are recorded in our statements of operations. Unrealized gains or losses from our investment securities for which we did not elect the fair value option are recorded through other comprehensive income or loss. Impairments on our available-for-sale securities are recorded in our consolidated statements of operations. Changes in the carrying amount or fair value of our real estate loans held for sale are recorded in our consolidated statements of operations.

63 We adopted FASB ASC 820-10-50-8 (previously SFAS 157), in the first quarter of 2008. FASB ASC 820-10-50-8 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Additionally and also in the first quarter of 2008, we adopted FASB ASC 825-10-45-1 (previously SFAS 159), and applied this option to the investment securities and collateralized debt obligations within our CDO legal entities.

FASB ASC 820-10-05-1 defines "fair value" as the price that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more judgment. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions generally.

The overall valuation process for financial instruments may include adjustments to valuations derived from pricing models. These adjustments may be made when, in management's judgment, either the size of the position in the financial instrument or other features of the financial instrument such as its complexity, or the market in which the financial instrument is traded (such as counterparty, credit, concentration or liquidity), require that an adjustment be made to the value derived from the pricing models. An adjustment may be made if a trade of a financial instrument is subject to sales restrictions that would result in a price less than the computed fair value measurement from a quoted market price. Additionally, an adjustment from the price derived from a model typically reflects management's

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~~securities~~judgment ~~for~~that ~~which~~other weparticipants ~~did~~in ~~not elect~~ the ~~fair~~market ~~value option are recorded through other comprehensive income or loss. Impairments on our available-~~for~~-sale~~ ~~securities for which we did not elect~~ the ~~fair~~financial ~~value~~instrument ~~option~~being ~~are~~measured ~~recorded~~at ~~in our consolidated statements of operations. Changes in the carrying amount or~~ fair value ofwould ~~our~~also ~~real~~consider ~~estate~~such ~~loans~~an ~~held~~adjustment ~~for sale are recorded~~ in ~~our~~ ~~consolidated~~pricing ~~statements~~that ofsame ~~operations~~financial instrument.

We ~~adopted~~have ~~SFAS~~categorized ~~No. 157,~~our ~~Fair~~financial ~~Value~~instruments ~~Measurements~~measured ~~("SFAS 157"),~~at infair ~~the~~value ~~first~~into ~~quarter~~a ofthree-level ~~2008.~~classification ~~SFAS 157~~in ~~defines~~accordance ~~fair~~with FASB ASC 820-10-50-2. Fair value, ~~establishes~~measurements aof ~~framework~~financial ~~for~~instruments ~~measuring~~that ~~fair~~use ~~value,~~quoted ~~establishes~~prices ain ~~fair~~active ~~value~~markets ~~hierarchy~~for ~~based~~identical onassets ~~the~~or ~~inputs~~liabilities ~~used~~generally toare ~~measure~~categorized ~~fair~~as ~~value~~Level 1, and ~~enhances~~fair ~~disclosure~~value ~~requirements~~measurements ~~for~~of financial ~~fair~~instruments ~~value~~that ~~measurements~~have no direct observable levels generally are categorized as Level 3. ~~Additionally~~The ~~and~~lowest ~~also~~level ininput that is significant to the ~~first~~fair ~~quarter~~value measurement of ~~2008,~~a wefinancial ~~adopted~~instrument ~~SFAS 159,~~is ~~and~~used ~~applied~~to ~~this~~categorize the ~~option~~instrument toand reflects the ~~available-for-sale~~judgment ~~securities~~of management. Financial assets and ~~collateralized debt~~liabilities ~~obligations~~presented ~~within~~at fair value in our ~~CDO~~Balance ~~legal~~Sheet ~~entities.~~generally are categorized as follows:

SFAS 157 defines "fair value" as the price that would be received on the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date, or an exit price. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment to be utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted have less observability and are measured at fair value using valuation models that require more judgment. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market and not yet established, the characteristics specific to the transaction and overall market conditions generally.

We have categorized our financial instruments measured at fair value into a three-level classification in accordance with SFAS 157. Fair value measurements of financial instruments that use quoted prices in active markets for identical assets or liabilities are generally categorized as Level 1, and fair value measurements of financial instruments that have no direct observable levels are generally categorized as Level 3. The lowest level input that is significant to the fair value measurement of a financial instrument is used to categorize the instrument and reflects the judgment of management. Financial assets and liabilities presented at fair value in our Balance Sheet generally are categorized as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

The types of assets and liabilities carried at Level 1 fair value generally are G-7 government and agency securities, equities listed in active markets, investments in publicly traded mutual funds or closed-end funds with quoted market prices and listed derivatives.

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Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.

Fair valued assets and liabilities that ~~are~~ generally are included in this category are non-G-7 government securities, municipal bonds, certain hybrid financial instruments, certain mortgage and asset backed securities, certain corporate debt, certain commitments and guarantees, certain private equity investments and certain derivatives for which observable market inputs can be obtained.

Level 3—Inputs that are not observable through correlation with market data (non-binding quotes from dealers in securities and independent pricing services without observable inputs) and inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Generally, assets and liabilities carried at fair value and included in this category are certain mortgage and asset-backed securities, certain corporate debt (excluding CDO liabilities), certain private equity investments, certain commitments and guarantees and certain derivatives.

Fair value of our CDO liabilities is determined based on relevant characteristics of the structure, which include:

•: the respective credit rating and subordination of each tranche within the CDO;
•: the cross-collateralization of the individual assets owned by the CDO; and
•: the nature of any cash flow triggers that could divert cash flows to senior tranches within the structure.

Generally, a secondary market participant would analyze the collateral supporting CDO liabilities as a pool of assets, and adjust its valuation to incorporate the credit enhancement attributes of the senior liabilities when determining their fair value. These loss adjusted cash flows and resulting yields are related to (but not entirely dependent upon) the yields and prices of the assets owned by the CDO trust.

Financial assets and liabilities presented at fair value and categorized as Level 3 are generally financial instruments that relate to quotes from dealers and prices obtained from independent pricing services that do not have observable inputs with market data. For financial instruments that are priced using broker quotes, we generally obtain only one quote. The criteria we use to determine whether an illiquid market exists include a lack of binding broker quotes, significant spread widening between bid prices and ask prices and lack of observable trades for comparable assets. In addition, Level 3 also includes financial instruments with those that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models' inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. Our valuation models are calibrated to the market on a frequent basis. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements. Valuations are independently reviewed by employees of our manager and, where applicable, valuations are back tested comparing instruments sold to where they were marked. Different judgments and assumptions used in pricing could result in different estimates of value. 72

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InFinancial assets ~~accordance~~and ~~with~~liabilities ~~SFAS~~presented at fair value and categorized as Level ~~157~~3 generally are financial instruments that are valued based on quotes from dealers and prices obtained from independent pricing services that do not have observable inputs with market data. For financial instruments that are priced using broker quotes, ~~valuation~~we ~~techniques~~generally ~~used~~obtain ~~for~~only ~~assets~~one quote. The criteria we use to determine whether an illiquid market exists include a lack of binding broker quotes, significant spread widening between bid prices and ~~liabilities~~ask ~~accounted~~prices and lack of observable trades for comparable atassets. In addition, Level 3 also includes financial instruments that are marked to model using relevant empirical data to extrapolate an estimated fair value. The models' inputs reflect assumptions that market participants would use in pricing the instrument in a current period transaction and outcomes from the models represent an exit price and expected future cash flows. Our valuation models are ~~generally~~calibrated ~~categorized~~to ~~into~~the ~~three~~market ~~types:~~on a frequent basis. The parameters and inputs are adjusted for assumptions about risk and current market conditions. Changes to inputs in valuation models are not changes to valuation methodologies; rather, the inputs are modified to reflect direct or indirect impacts on asset classes from changes in market conditions. Accordingly, results from valuation models in one period may not be indicative of future period measurements. Valuations are independently reviewed by employees of our Manager and, where applicable, valuations are back tested comparing instruments sold to where they were marked. Different judgments and assumptions used in pricing could result in different estimates of value.

In accordance with FASB ASC 820-10-50-1, valuation techniques used for assets and liabilities accounted for at fair value are generally categorized into three types:

Market Approach—Market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. Valuation techniques consistent with the market approach include comparables and matrix pricing. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.

Income Approach—Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single present amount, or a discounted amount. These techniques rely on current market expectations of future amounts.

Cost Approach—Cost approach valuation techniques are based upon the amount that, at present, would be required to replace the service capacity of an asset, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.

The three approaches described within ~~SFAS 157~~FASB ASC 820-10-50-1 are consistent with generally accepted valuation methodologies. While all three approaches are not applicable to all assets or liabilities accounted for at fair value, where appropriate and possible, one or more valuation techniques may be used. The selection of the valuation method(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. For assets and liabilities accounted for at fair value, valuation techniques ~~are~~ generally are a combination of the market and income approaches. For the year ended December 31, ~~2008~~2009, the application of valuation techniques applied to similar assets and liabilities has been consistent.

During 2008, our assets measured at fair value on a recurring basis reflected as Level 3 decreased largely as a result of the sale of CMBS totaling $2.2 million, principal repayments of CMBS and Non-Agency RMBS totaling $8.6 million and spread widening on our CMBS and Non-Agency RMBS. The significant amount of our available-for-sale securities reflected as Level 3 is a result of the reduction of liquidity in the capital markets that resulted in a decrease in the observability of the significant inputs used in determining fair value. Management determined the classification level of each security based upon a review of the pricing source used (non-binding broker quotes, pricing services or fair value determinations by management). 73

During 2008, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased by $253.6 million, largely as a result of spread widening on our collateralized debt obligations. The significant amount of our collateralized debt obligations reflected as Level 3 is a result of the reduction of liquidity in the capital markets that resulted in a decrease in the observability of the significant inputs used in determining fair value.

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~~The following~~During ~~table~~the ~~summarizes~~year ~~the~~ended ~~sources~~December 31, ~~from~~2009, ~~which~~our assets measured at fair value ~~was~~on ~~determined~~a recurring basis reflected as Level 3 decreased largely as a result of principal repayments and write-offs on ~~our~~CMBS ~~assets~~and Non-Agency RMBS and ~~liabilities~~declines ~~measured~~in atthe ~~fair~~projected ~~value~~cash flow on aour ~~recurring~~CMBS ~~basis~~and ~~that~~Non-Agency ~~were~~RMBS. ~~classified~~The assignificant amount of our investment securities reflected as Level 3 asis a result of ~~December 31~~the reduction of liquidity in the capital markets that resulted in a decrease in the observability of the significant inputs used in determining fair value. Management determined the classification level of each security based upon a review of the pricing source used (non-binding broker quotes, ~~2008~~pricing services or fair value determinations by management).

		Available-for- Sale Securities				Derivative Liabilities				Collateralized Debt Obligations
		($ in millions)
Non-binding quote(s) from dealers in securities		$	38.8	53.3	%	$	56.8	99.1	%	$	45.4	100	%
Independent pricing service			29.4	40.3	%		—	0.0	%		—	0	%
Fair Value determinations by management			4.7	6.4	%		0.5	0.9	%		—	0	%
	Total	$	72.9	100.0	%	$	57.3	100.0	%	$	45.4	100	%

During the year ended December 31, 2009, our liabilities measured at fair value on a recurring basis reflected as Level 3 decreased by $34.2 million, as a result of the derivative liabilities that we closed out during the year and the principal repayments on our CDO obligations. In addition, the decrease in valuation of our derivatives liabilities and our CDO obligations, which are based on non-binding broker quotes, contributed to the decrease. The significant amount of our collateralized debt obligations reflected as Level 3 is a result of the reduction of liquidity in the capital markets that resulted in a decrease in the observability of the significant inputs used in determining fair value.

The following table summarizes the sources from which fair value was determined on our assets and liabilities measured at fair value on a recurring basis that were classified as Level 3 as of December 31, 2009.

		Investment Securities				Derivative Liabilities				Collateralized Debt Obligations

		($ in millions)
Non-binding quote(s) from dealers in securities		$	8.7	20.3	%	$	34.9	100	%	$	33.6	100	%
Independent pricing service			31.4	73.4	%		—	0	%		—	0	%
Fair Value determinations by management			2.7	6.3	%		—	0	%		—	0	%

	Total	$	42.8	100.0	%	$	34.9	100	%	$	33.6	100	%

Other-than Temporary Impairments

When the fair value of an available-for-sale security is less than its amortized cost for an extended period, we consider whether there is an other -than -temporary impairment in the value of the security. ~~If,~~ in ~~our~~accordance ~~judgment~~with FASB ASC 320-10-50-8A (previously FSP FAS 115-2, EITF 99-20 and FSP EITF 99-20-1). An impairment that is an "other -than -temporary impairment" ~~exists,~~is a decline in the ~~cost~~fair ~~basis~~value of an investment below its amortized cost attributable to factors that indicate that the ~~security~~decline iswill ~~written~~not ~~down~~be recovered. Under the guidance of FASB ASC 320-10-50-8A, should an other-than-temporary impairment be deemed to have occurred, the ~~then~~total other-~~current~~than-temporary impairment ~~fair~~is ~~value~~bifurcated into (i) the amount related to credit losses, and (ii) the ~~unrealized~~amount ~~loss~~related isto ~~transferred~~all ~~from~~other ~~accumulated~~factors. ~~other~~The ~~comprehensive~~portion ~~loss~~of asthe another-than-temporary ~~immediate~~impairment ~~reduction~~related ofto ~~current~~credit ~~earnings~~losses ~~(as~~is ifcalculated by comparing the ~~loss~~amortized ~~had~~cost ~~been~~of ~~realized~~the insecurity to the ~~period~~present value of ~~other~~cash ~~than~~flows ~~temporary~~expected ~~impairment)~~to be collected, discounted at the security's current yield, and is recognized through earnings on the consolidated statement of operations. The ~~determination~~portion of ~~other~~the other-than -temporary impairment related to all other factors is recognized as a ~~subjective~~component of other comprehensive income (loss) on the consolidated balance sheet. Other-than-temporary impairments result in reducing the security's carrying ~~process~~value to its fair value, ~~and~~which ~~different~~creates a new carrying value for the investment. We compute a revised yield based on the future estimated cash flows as described in "—Revenue Recognition" above. Significant judgments ~~and~~are ~~assumptions~~required ~~could~~in ~~affect~~determining impairments, which include making assumptions regarding the ~~timing~~estimated ofprepayments, loss ~~realization~~assumptions and the changes in interest rates that are based on current market conditions.

~~We consider the following factors when determining an other-than-temporary impairment for a security or investment:~~ 74

Periodically, all available-for-sale securities are evaluated for other than temporary impairment in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115"), Emerging Issues Task Force No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets ("EITF 99-20"), FASB Position No. EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 ("FSP EITF 99-20-1") and SEC Staff Accounting Bulletin No. 59, which has been codified as SAB Topic 5.M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities ("SAB 59"). An impairment that is an "other than temporary impairment" is a decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the investment's remaining life. Other than temporary impairments result in reducing the security's carrying value to its fair value through the statement of operations, which also creates a new carrying value for the investment. We compute a revised yield based on the future estimated cash flows as described in "—Revenue Recognition" above. Significant judgments are required in determining impairment, which include making assumptions regarding the estimated prepayments, loss assumptions and the changes in interest rates that are based on current market conditions.

The determination of other-than-temporary impairment is made at least quarterly. If we determine an impairment to be other than temporary we will need to realize a loss that would have an impact on

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~~future~~ Quarterly, ~~income.~~we ~~Under~~reevaluate ~~the~~our ~~guidance~~securities ~~provided~~portfolio byto ~~SFAS 115,~~determine aif ~~security~~there ishas ~~impaired~~been ~~when~~an ~~its fair value is less~~ other-than-temporary ~~its~~impairment ~~amortized~~based ~~cost~~upon ~~and~~expected wefuture docash ~~not intend to hold that security until we recover~~flows. ~~its~~As ~~amortized~~a ~~cost~~result orof ~~until~~this ~~its~~evaluation, ~~maturity.~~under ~~For~~ the ~~year~~guidance ~~ended~~of ~~December 31,~~FASB ~~2008~~ASC 320-10-50-8A, we ~~recorded~~believe anthat ~~impairment~~there ~~charge~~has onbeen 81an ~~RMBS~~adverse ~~and~~change 45in ~~CMBS~~expected ~~totaling~~cash ~~$81.2 million.~~flows Wefor ~~determined these~~the securities toin beour ~~impaired~~portfolio ~~because~~and, oftherefore, ~~the~~recognized ~~decline~~an inaggregate ~~the~~other-than-temporary ~~projected~~impairment ~~yields~~of $69.8 million related to ~~changes~~credit inlosses, ~~the~~as ~~cash~~defined ~~flow~~under ~~assumptions~~FASB ASC 320-10-50-8A, ~~such as timing~~ and ~~prepayments,~~has onbeen ~~the~~recorded ~~underlying~~through ~~assets~~earnings. ~~Accordingly,~~An ~~we recognized~~additional ~~impairments~~impairment ~~totaling~~of $618.71 million onrelated ~~62 RMBS, 44 CMBS and two preferred stock investments during the year ended December 31, 2008. These impairments are attributed~~ to other ~~than~~ ~~temporary~~factors ~~declines~~also inhas ~~market~~been ~~values~~recorded ~~and~~through earnings ~~are~~based ~~primarily~~on aour ~~consequence~~assessment ofthat ~~the~~it ~~severity~~is ofmore ~~the~~likely ~~decline~~than innot ~~market~~that ~~values~~these ~~resulting~~securities ~~from~~will ~~wider~~be ~~spreads.~~required Asto ofbe ~~December 31,~~sold ~~2008,~~before we ~~still~~recover ~~owned 121~~their ofamortized ~~the~~cost ~~securities that we impaired during 2008~~basis.

Net Changes in Assets and Liabilities ~~Under~~under Fair Value Option

In February 2007, the FASB issued ~~SFAS~~FASB ~~No. 159,~~ASC ~~The~~825-10-45-1 ~~Fair Value Option for Financial Assets and Financial Liabilities~~ ("previously SFAS 159"). ~~SFAS 159~~FASB ASC 825 permits entities to choose to measure many financial instruments and certain other items at fair value to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. ~~SFAS 159~~FASB ASC 825-10-50-28 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. ~~SFAS 159~~FASB ASC 825-10-50-28 is effective for financial statements issued for fiscal periods beginning after November 15, 2007. ~~SFAS 159~~FASB ASC 825-10-50-28 was effective for us beginning January 1, 2008, and had the following effect at adoption (dollars in thousands):

	Historical cost as of December 31, 2007		Fair value at date of adoption		Cumulative effect adjustment

CDOs	$	486,608	$	299,034	$	187,574
Deferred financing costs on CDOs, net of accumulated amortization		8,152		—		(8,152	)
Net unrealized holding gains on available-for-sale securities within our CDO entities reclassified to accumulated deficit						1,670

Total cumulative effect adjustment					$	181,092

In addition, we had $290.9 million of notional interest rate positions relating to our CDOs that no longer qualify for hedge accounting at the date of adoption. Starting in 2008, changes in fair value and net cash settlements are recorded in our statement of operations.

Commercial Real Estate

Commercial properties held for investment are carried at cost less accumulated depreciation. In accordance with ~~SFAS~~FASB ~~No.~~ASC 805-10-05-2 (previously SFAS 141~~, Business Combinations,~~(R)) upon acquisition, we allocate the purchase price to the components of the commercial properties acquired: the amount allocated to land is based on its estimated fair value; buildings and existing tenant improvements are recorded at depreciated replacement cost; above- and below-market in-place operating leases are determined based on the present value of the difference between the rents payable under the contractual terms of the leases and estimated market rents; lease origination costs for in-place operating leases are determined based on the estimated costs that would be incurred to put the existing leases in place under the same terms and conditions; and tenant relationships are measured based on the present value of the estimated avoided net costs if a tenant were to renew its lease at expiry, discounted by the probability of such renewal. Based on these estimates, we allocate the initial purchase price to the applicable assets and liabilities. As final information regarding fair value of the assets acquired and liabilities assumed is

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Asreceived ~~final information regarding fair value of the assets acquired~~ and ~~liabilities assumed is received and~~ estimates are refined, appropriate adjustments are made to the purchase price allocation. The allocations are finalized within twelve months of the acquisition date.

Depreciation on buildings is provided on a straight-line basis over the useful lives of the properties to a maximum of 40 years. Depreciation is determined with reference to each rental property's carried value, remaining estimated useful life and residual value. Acquired tenant improvements, above- and below-market in-place operating leases and lease origination costs are amortized on a straight-line basis over the remaining terms of the leases. The value associated with acquired tenant relationships is amortized on a straight-line basis over the expected term of the relationships. All other tenant improvements and re-leasing costs are deferred and amortized on a straight-line basis over the terms of the leases to which they relate. Depreciation on buildings and amortization of deferred leasing costs and tenant improvements that are determined to be assets of the company are recorded in depreciation and amortization expense. All above- and below-market tenant leases and tenant relationships are amortized to revenue. Above- and below-market ground leases are amortized to commercial real estate expenses.

Properties are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. For commercial properties, an impairment loss is recognized when a property's carrying value exceeds its undiscounted future net cash flow. The impairment is measured as the amount by which the carrying value exceeds the estimated fair value. Projections of future cash flow take into account the specific business plan for each property and management's best estimate of the most probable set of economic conditions anticipated to prevail in the market.

We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

Accounting For Derivative Financial Instruments and Hedging Activities

Our policies permit us to enter into derivative contracts, including interest rate swaps, currency swaps, interest rate caps and interest rate swap forwards, as a means of mitigating our interest rate risk on forecasted interest expense associated with the benchmark rate on forecasted rollover/reissuance of repurchase agreements, or hedged items, for a specified future time period. We currently ~~intend~~are tousing ~~use~~ interest rate derivative instruments to mitigate interest rate risk rather than to enhance returns.

In the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an anticipated transaction. In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost, counterparty default risk and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

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In the normal course of business, we are exposed to the effect of interest rate changes and limit these risks by following established risk management policies and procedures including the use of derivatives. To address exposure to interest rates, we use derivatives primarily to hedge the mark-to-market risk of our liabilities with respect to certain of our assets.

~~SFAS~~FASB ~~No. 133,~~ASC ~~Accounting~~815-10-05-4 ~~for Derivative Instruments and Hedging Activities, as amended~~ ("previously SFAS 133"), requires us to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. ~~SFAS 133~~FASB ASC 815-10-50-4A may increase or decrease reported net income and stockholders' equity prospectively, depending on future changes in fair value.

At December 31, ~~2008~~2009, we were a party to two interest rate swaps with a notional par value of approximately $~~285~~281.0 million; the fair value of our net liability relating to interest rate swaps was approximately $3725.73 million, which is included in our derivative ~~assets and derivative~~ liabilities, and we had accrued interest payable of approximately $0.4 million on our interest rate swaps at such date. We entered into these interest rate swaps to seek to mitigate our interest rate risk for the specified future time period, which is defined as the term of the swap contracts. These ~~Based~~two ~~upon~~interest ~~the~~rate ~~market~~swaps ~~value~~were ofentered ~~these~~into ~~interest~~by ~~rate~~our ~~swap~~two ~~contracts~~CDOs and accordingly, our counterparties may not request additional margin collateral ~~or we may request additional collateral~~ from ~~our~~us ~~counterparties~~with respect to ~~ensure~~these ~~that an appropriate margin account balance is maintained at all times through the expiration of the~~ contracts.

As of December 31, ~~2008~~2009 and December 31, ~~2007~~2008, respectively, we had ~~two~~one and ~~eight~~two credit default swaps ("CDS") with a notional par ~~value~~values (our maximum exposure to loss) of $2010.0 million and $7520.0 million that are reflected on our balance sheet as a derivative liability at their fair value of approximately $199.16 million and $3219.91 million, respectively. The fair value of the CDS depends on a number of factors, primarily premium levels, which are dependent on interest rate spreads. The CDS contracts are valued either by an independent third party pricing service or by using internally developed and tested market-standard pricing models that calculate the net present value of differences between future premiums on currently quoted market CDS and the contractual future premiums on our CDS contracts. ~~During the first quarter of 2008, we closed out six CDS on single names in an aggregate notional amount of $55.0 million, with a realized loss of approximately $30.2 million.~~

We account for derivative and hedging activities in accordance with ~~SFAS 133~~FASB ASC 815-10-05-4. ~~SFAS 133~~FASB ASC 815-10-05-4 requires recognizing all derivative instruments as either assets or liabilities in the balance sheet at their fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. We have no fair value hedges or hedges of a net investment in foreign operations.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in "interest expense" when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain (loss) on the derivative instrument in excess of the cumulative changes in the present value of future cash flows of the hedged item, if any, is recognized in the realized and unrealized gain (loss) on derivatives in current earnings during the period of change. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the

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~~recognized in the realized and unrealized gain (loss) on derivatives in current earnings during the~~ period ~~of change. For derivative instruments not designated as hedging instruments, the gain or loss~~ ~~is recognized in realized and unrealized gain (loss) on derivatives in the current earnings during the period~~ of change. Income and/or expense from interest rate swaps are recognized as a net adjustment to ~~interest~~realized ~~expense~~and unrealized gain (loss) on derivative. We account for income and expense from interest rate swaps on an accrual basis over the period to which the payment and/or receipt relates.

Use of Estimates

The preparation of financial statements in conformity with ~~U.S.~~ GAAP requires us to make a significant number of estimates in ~~the~~ the preparation of the financial statements. These estimates include determining the fair market value of certain investments, debt obligations and derivative assets and liabilities, amount and timing of of credit losses, prepayment assumptions, allocation of purchase price to tangible and intangible assets on property acquisitions, and other items that affect the reported amounts of certain assets ~~and~~ and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these ~~estimates~~ estimates (e.g., market values change due to changes in supply and demand, credit performance, prepayments, interest rates or other reasons; yields change due to changes in credit outlook and loan prepayments) will occur in the near future. Our estimates are inherently subjective in nature and actual results could differ from our estimates and differences may be material.

Income Taxes

We operate in a manner that we believe will allow us to be taxed as a REIT and, as a result, we do not expect to pay substantial corporate-level income taxes. Many of the requirements for REIT qualification, however, are highly technical and complex. If we were to fail to meet these requirements and do not qualify for certain statutory relief provisions, we would be subject to federal income tax, which could have a material adverse impact on our results of operations and amounts available for distributions to our stockholders. In addition, Crystal River TRS Holdings, Inc., our TRS, is subject to corporate-level income taxes.

Our policy for interest and penalties on material uncertain tax positions recognized in our consolidated financial statements is to classify these as interest expense and operating expense, respectively. However, in accordance with ~~Financial~~FASB ~~Interpretation~~ASC ~~Number 48,~~740-10-05-6 ~~Accounting for Uncertainty in Income Taxes~~ ("previously FIN 48"), we assessed our tax positions for all open tax years (Federal, years 2005 through ~~2007~~2009 and State, years 2005 through ~~2007~~2009) as of December 31, ~~2008~~2009 and concluded that we have no material ~~FIN 48~~FASB ~~liabilities~~ASC 740-10-05-6 liabilities to be recognized at this time.

Financial Condition

Assets

Our current portfolio consists of commercial mortgage-backed securities, residential mortgage-backed securities, commercial real estate loan investments, credit default swaps and operating real estate. All of our assets at December 31, ~~2008~~2009 were acquired with the net proceeds of approximately $405.6 million from our March 2005 private offering of 17,400,000 shares of our common stock, the net proceeds of approximately $158.6 million from our August 2006 initial public offering of 7,500,000 shares of our common stock, the net proceeds of approximately $48.6 million from our March 2007 issuance of trust preferred securities and our use of leverage.

Mortgage-Backed Securities

Our commercial mortgage-backed securities and residential mortgage-backed securities comprise 100% of our ~~available-for-sale~~ ~~securities~~investment securities portfolio. We own these securities either directly on our balance sheet or in one of our two CDOs. We own the equity of each of the CDOs and it is through this equity investment that we participate in the investment performance of the portion of the investment securities portfolio that is owned by the CDOs. The commercial mortgage-backed securities and

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~~balance~~residential sheet or in one of our two CDOs. We own the equity of each of the CDOs and it is through this equity investment that we participate in the investment performance of the portion of the available-for-sale securities portfolio that is owned by the CDOs. The commercial mortgage-backed securities ~~and residential mortgage-backed securities~~ segment of our portfolio at December 31, ~~2008~~2009 is summarized below:

	CMBS		RMBS
	(In thousands)
Amortized cost	$	5726,~~309~~193	$	144,~~709~~708
Unrealized gains		~~784~~11,920		~~114~~5
Unrealized losses		—		—
Fair value	$	5838,~~093~~113	$	144,~~823~~713

As of December 31, ~~2008~~2009, the CMBS and RMBS in our portfolio purchased at a net premium or discount relative to their par value and our portfolio had a weighted average amortized cost of 73.04% and 43.84% of face amount, respectively. The CMBS and RMBS were valued below par at December 31, ~~2008~~2009 because we ~~are~~invested ~~investing~~ in lower-rated (i.e., deeply subordinated) bonds in the credit structure. ~~There~~and ~~are no~~those ~~securities~~bonds ~~held~~have atbeen ~~December 31,~~adversely ~~2008~~impacted ~~that~~by ~~are~~changes ~~valued~~in ~~below~~yield ~~their~~spreads ~~amortized~~and ~~cost,~~increased ~~which~~actual losses ison athe ~~security's~~underlying ~~original cost~~collateral, as ~~adjusted~~well ~~for~~as ~~the~~increasing ~~amortization~~delinquency ~~of any discount or premium on the security~~rates, ~~principal~~which ~~paydowns~~generally ~~and~~portend ~~any~~higher ~~impairments~~actual orlosses ~~principal~~in ~~write-offs on~~ the ~~security~~future.

Our MBS holdings were as follows at December 31, ~~2008~~2009 ($ in millions):

	Outstanding Face Amount at December 31, 2008		Amortized Cost Basis Before Impairments/ Adjustments(1)
	Outstanding Face Amount at December 31, 2009		Amortized Cost Basis Before Impairments/ Adjustments(1)
											Weighted Average
					Fair Value at December 31, 2008		Number of Securities(2)		Number of Trusts(3)
					Fair Value at December 31, 2009		Number of Securities(2)		Number of Trusts(3)
											Rating(4)	Coupon			Yield(5)		WAL(6)
CMBS	$	~~819~~778.58	$	575.2	$	5838.1		~~134~~131		43	CCC+		5.1921	%		7936.9396		73.1793
Non-Agency RMBS—Prime		183.2		160.2		9.2		88		39	CCC-		4.28			652.34		4.93
Non-Agency RMBS-Prime		90.7		160.2		3.2		51		28	CC+		4.29			194.81		2.12
Non-Agency RMBS—Sub Prime		120.5		135.0		5.6		39		24	CC		2.82			293.01		4.61
Non-Agency RMBS-Sub Prime		47.6		135.0		1.5		24		14	CCC-		2.76			132.21		5.12
Preferred Stock		4.9		4.8		—		2		2	—		—			—		—
Total	$	~~1,128~~922.10	$	875.2	$	7242.98		~~263~~208		~~108~~87	CCC		4.6797			~~168~~52.4911		63.6985
REIT ONLY (NON-CDOs)
REIT ONLY (non-CDOs)
CMBS	$	~~295~~270.75	$	149.2	$	145.62		4744		20	CC+		5.1014	%		~~106~~48.1851		52.2420
Non-Agency RMBS—Prime		94.7		77.3		4.6		57		31	CC		4.98			720.32		5.63
Non-Agency RMBS-Prime		35.5		77.3		1.2		23		16	C-		5.67			195.76		1.31
Non-Agency RMBS—Sub Prime		58.2		60.0		2.7		21		15	C		2.69			183.31		4.95
Non-Agency RMBS-Sub Prime		13.6		60.0		0.9		11		8	CCC+		3.44			80.22		6.87
Preferred Stock		4.9		4.8		—		2		2	—		—			—		—
Total	$	~~453~~324.5	$	291.3	$	217.93		~~127~~80		6846	CC+		45.4905			~~242~~76.6239		52.2864
CDOs ONLY
CMBS	$	~~523~~508.83	$	426.0	$	4332.59		94		33	BCCC+		5.2425	%		7135.1413		74.8220
Non-Agency RMBS—Prime		88.5		82.9		4.6		32		21	CCC+		3.52			586.63		4.25
Non-Agency RMBS-Prime		55.2		82.9		2.0		28		20	CCC-		3.41			194.24		2.60
Non-Agency RMBS—Sub Prime		62.3		75.0		2.9		19		10	CCC-		2.94			400.01		4.28
Non-Agency RMBS-Sub Prime		34.0		75.0		0.6		13		7	C-		2.49			209.08		2.54
Preferred Stock		—		—		—		—		—	—		—			—		—
Total	$	~~674~~597.65	$	583.9	$	5135.05		~~145~~135		6460	BCCC		4.8092			~~136~~47.7013		74.3008

72 (1)As of December 31, 2006. (2)Note that some securities are owned both by one or more of our CDOs and by the REIT. (3)Note that securities issued by some trusts are owned both by one or more of our CDOs and by the REIT. (4)Lowest rating of Moody's, S&P or Fitch; weighted average based on fair value. (5)Yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows (i.e., taking into account assumed defaults) and the fair value of the security. (6)Loss-adjusted weighted average remaining life in years.

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The estimated weighted average lives of the MBS in the tables above are based upon our prepayment expectations, which are based on both proprietary and subscription-based financial models.

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Our prepayment projections consider current and expected trends in interest rates, interest rate volatility, steepness of the yield curve, the mortgage rate of the outstanding loan, time to reset and the spread margin of the reset.

The table below summarizes the credit ratings of our MBS investments at December 31, ~~2008~~2009:

	CMBS		Prime RMBS		Subprime RMBS		Total
	(In thousands)
AAA	$	—	$	—	$	—	$	—
AA		—		—		—		—
A		—		—		—		—
BBB		173,~~892~~724		~~233~~—		~~2,376~~—		203,~~501~~724
BB		165,~~204~~451		~~2,143~~—		~~169~~—		185,~~516~~451
B		1014,~~409~~659		~~2,495~~—		~~307~~847		1315,~~211~~506
Below B		1314,~~588~~279		43,~~309~~194		~~2,791~~672		2018,~~688~~145
Total	$	5838,~~093~~113	$	93,~~180~~194	$	51,~~643~~519	$	7242,~~916~~826

Actual maturities of MBS are generally shorter than stated contractual maturities, as they are affected by the contractual lives of the underlying mortgages, periodic payments of principal, and prepayments of principal. The stated contractual final maturity of the mortgage loans underlying our portfolio of MBS ranges up to 2827 years, but the expected maturity is subject to change based on the prepayments of the underlying loans. As of December 31, ~~2008~~2009, the average final contractual maturity of the mortgage portfolio iswas ~~2037~~2036.

The constant prepayment rate, or CPR, attempts to predict the percentage of principal that will be prepaid over the next 12 months based on historical principal paydowns. As interest rates rise, the rate of refinancings typically declines, which we believe may result in lower rates of prepayment and, as a result, a lower portfolio CPR.

The following table summarizes our CMBS and RMBS according to their estimated weighted average life classifications as of December 31, ~~2008~~2009:

		CMBS				RMBS
Weighted Average Life		Fair Value		Amortized Cost		Fair Value		Amortized Cost
		(In thousands)
Less than one year		$	—	$	—	$	~~1,602~~268	$	~~1,599~~268
Greater than one year and less than five years			~~493~~882		~~493~~882		41,~~836~~125		41,~~836~~121
Greater than five years			5737,~~600~~231		5625,~~816~~311		83,~~385~~320		83,~~274~~319
	Total	$	5838,~~093~~113	$	5726,~~309~~193	$	144,~~823~~713	$	144,~~709~~708

The estimated weighted-average lives of the MBS in the tables above are based upon a prepayment ~~models~~model obtained through a subscription-based financial information service ~~providers~~provider. The prepayment model considers the current yield, forward yield, steepness of the yield curve, current mortgage rates, ~~the~~ mortgage rate of the outstanding loan, loan age, margin and volatility.

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The actual weighted average lives of the MBS in our investment portfolio could be longer or shorter than the estimates in the table above depending on the actual prepayment rates experienced over the lives of the applicable securities and are sensitive to changes in both prepayment rates and interest rates.

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Commercial Mortgage-Backed Securities

Our CMBS portfolio consists of CMBS that we own directly (i.e., outside of our CDOs) and CMBS that are owned by our CDOs. We directly own approximately $145.62 million in fair value of CMBS. These securities have a weighted average rating of CC+, are priced at a weighted average price to par of 41.9%, and are projected to yield ~~106~~48.251% of their current fair value on a loss-adjusted basis. Approximately 7978.50% of the CMBS that we own directly is part of a portfolio that we refer to as the "CMBS Primary Asset." The CMBS Primary Asset is a sub-portfolio that consists of our holdings in 11 CMBS securitizations in which we, either directly or through our CDOs, own a portion of the first loss tranche. The CMBS Primary Asset is further illustrated below.

Within our two CDOs, we own approximately $4332.59 million in fair value of CMBS. These securities have a weighted average rating of BCCC+, are priced at a weighted average price to ~~par~~ par of 86.35%, and are projected to yield 7135.113% of their current fair value on a loss-adjusted basis. However, the receipt of cash flows from this portion of our CMBS portfolio is governed by the waterfalls within the respective CDO indentures, which are further described below. Approximately 5444.09% of the CMBS that we own within our two CDOs are part of the CMBS Primary Asset.

Class Type	~~REIT~~Directly Owned(1)		Owned by our CDOs		Total		Average Rating
	(In thousands)
Primary Asset	$	114,~~596~~057	$	2314,~~505~~785	$	3518,~~101~~842	CCC-
Non-Primary Asset		21,~~990~~142		2018,~~002~~129		2219,~~992~~271	BBB
Total / Weighted Average	$	145,~~586~~199	$	4332,~~507~~914	$	5838,~~093~~113	CCC+

74 (1)Either by us directly or by one of our non-CDO subsidiaries.

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CMBS Primary Asset

The following table sets forth some relevant characteristics as of December 31, 2009 of our CMBS Primary Asset.

Deal Name	Number of Tranches Currently Outstanding		Current Size of Securitization				Original Face Amount of Our Current Holdings(2)		Outstanding Face Amount of Our Holdings at December 31, ~~2008~~2009		Fair Value of Our Holdings at December 31, ~~2008~~2009		Original Rating Range of Our Holdings			Cumulative Losses to Date(23)
	($ in thousands)
BACM 2006-2		7	$	2,~~656~~626,~~161~~774	3.3003	%	$	32,330	$	3228,~~330~~249	$	~~1,725~~697	BB+ – NR	04.5990	%	$	—8,329	5.48	%
BACM 2007-2		7		3,~~160~~148,~~024~~905	3.1415			35,330		35,330		~~986~~473	BB+ – NR	26.3112			—	5.37
BSCMS 2005-PWR9		9		2,~~081~~053,~~251~~405	5.4351			83,001		83,001		62,~~743~~485	BBB – NR	08.2673			—	4.82
BSCMS 2006-PW13		8		2,~~856~~830,~~905~~861	4.2024			55,816		55,816		4,~~040~~176	BBB- – NR	04.5403			—	5.46
COMM 2007-C9		7		3,~~053~~049,~~177~~048	3.84			50,658		50,658		21,~~904~~838	BB+ – NR	12.0315			—	5.24
CSMC 2006-C1		8		2,~~935~~892,~~377~~659	4.2329			82,833		82,833		4,~~991~~784	BBB- – NR	02.6089			—	5.29
CSMC 2006-C4		8		4,~~245~~220,~~319~~699	4.1508			77,931		7775,~~931~~921		41,~~264~~393	BBB- – NR	112.1896			—4,103	5.5354
GMACC 2005-C1		75		21,~~090~~227,~~756~~362	32.0406			5327,~~928~~963		4625,~~398~~310		~~3,576~~120	BB+ – NR	17.4155			728,~~530~~618	4.48
WBCMT 2005-C18		8		1,~~355~~314,~~845~~540	5.4562			39,196		39,196		21,~~380~~532	BBB – NR	08.7880			—	4.74
WBCMT 2006-C29		7		3,~~366~~363,~~840~~120	2.63			32,600		32,600		~~1,639~~338	BB+ – NR	15.0339			—	5.07
WBCMT 2007-C31		9		5,~~825~~812,~~418~~655	3.2627			42,503		42,503		1,~~853~~006	BB+ – NR	06.2384			—	5.13
Total/Weighted Average		8583	$	3332,~~627~~540,~~073~~028	3.7370	%	$	~~586~~560,~~126~~161	$	~~578~~551,~~596~~417	$	3518,~~101~~842	BBB – NR	06.8845	%	$	741,~~530~~050	5.1618	%

75 (1)A deal's detachment point is the senior limit to our credit exposure within that securitization. (2)We owned two tranches of the GMACC 2005-C1 deal with an original face amount of $25,965 that have experienced a total loss and accordingly, the number set forth in this column for that deal does not include an amount in respect of those tranches. (3)Actual losses based on securities we currently own. For GMACC 2005-C1, this includes two tranches with an original face amount of $25,965 that have experienced a total loss.

~~The following table sets forth some relevant characteristics of our CMBS portfolio by vintage. We did not purchase any CMBS from the 2008 vintage.~~ 82

	Vintage
													Total/ Weighted Average
CMBS Characteristics as of December 31, 2008	2002			2005			2006			2007
	($ in millions)
Weighted Average Rating		B			B-			CCC+			CCC			CCC+
Number of Securities		3			40			60			31			134
Original Face Amount	$	2.8		$	295.6		$	367.9		$	160.7		$	827.0
Outstanding Face Amount	$	2.8		$	288.1		$	367.9		$	160.7		$	819.5
Amortized Cost Basis	$	0.5		$	24.8		$	24.2		$	7.8		$	57.3
Fair Value	$	0.5		$	25.6		$	24.2		$	7.8		$	58.1
Percentage of Total Fair Value(1)		0.86	%		44.06	%		41.65	%		13.43	%		100.0	%
Coupon		4.94	%		4.89	%		5.45	%		5.15	%		5.19	%
Market Yield(2)		67.18	%		51.80	%		94.67	%		127.12	%		79.93	%
Expected Principal Return(3)		100.00	%		46.96	%		65.53	%		52.23	%		56.51	%
WAL(4)		3.88			6.94			7.49			7.16			7.17
Principal Subordination(5)		3.61	%		2.25	%		1.74	%		1.45	%		1.87	%
Delinquency Rate 60+(6)		1.54	%		0.81	%		0.48	%		0.36	%		0.58	%
Collateral Cumulative Losses to Date		0.00	%		0.06	%		0.00	%		0.00	%		0.02	%
Cumulative Losses to Date(7)		0.00	%		2.23	%		0.00	%		0.00	%		0.90	%

Table of Contents

The following table sets forth some relevant characteristics of our CMBS portfolio by vintage.

	Vintage

	Vintage												Total/ Weighted Average
CMBS Characteristics as of December 31, 2009	2002			2005			2006			2007			Total/ Weighted Average
	($ in millions)
Weighted Average Rating		B			B-			CCC			CCC-			CCC+
Number of Securities		3			37			60			31			131
Original Face Amount	$	2.8		$	269.7		$	367.9		$	160.7		$	801.1
Outstanding Face Amount	$	2.8		$	253.5		$	361.8		$	160.7		$	778.8
Amortized Cost Basis	$	0.9		$	11.3		$	10.0		$	4.0		$	26.2
Fair Value	$	0.9		$	16.6		$	15.5		$	5.1		$	38.1
Percentage of Total Fair Value(1)		2.36	%		43.57	%		40.68	%		13.39	%		100.0	%
Coupon		4.94	%		4.92	%		5.45	%		5.15	%		5.21	%
Market Yield(2)		55.10	%		19.94	%		48.79	%		52.95	%		36.96	%
Expected Principal Return(3)		100.00	%		10.08	%		3.38	%		0.00	%		5.21	%
WAL(4)		2.88			4.91			3.29			2.89			3.93
Principal Subordination(5)		3.86	%		1.95	%		1.74	%		1.44	%		1.76	%
Delinquency Rate 60+(6)		1.81	%		6.51	%		6.06	%		3.94	%		5.76	%
Collateral Cumulative Losses to Date		0.00	%		0.46	%		0.07	%		0.01	%		0.19	%
Cumulative Losses to Date(7)		0.00	%		5.98	%		1.64	%		0.00	%		2.78	%

(1): The proportion of our CMBS portfolio comprised of the respective vintage; based on fair value of our CMBS portfolio as of December 31, 2009.
(2): Market yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows (i.e., taking into account assumed defaults) and the fair value of the security.
(3): Percent of outstanding face amount that we currently project to be returned as principal.
(4): Weighted average life.
(5): Weighted average determined based on outstanding face amounts owned.
(6): Delinquencies in the securitization; weighted average determined based on outstanding face amounts owned.
(7): Write-offs of par on the securities we own; weighted average determined based on original face amounts owned.

Residential Mortgage-Backed Securities

Our RMBS portfolio consists of RMBS that we own directly (i.e., outside of our CDOs) and RMBS that are owned by one of our CDOs. We directly own approximately $72.31 million in fair value of RMBS, which consists of $41.62 million of prime RMBS and $20.79 million of sub-prime RMBS. The prime bonds have a weighted average rating of CC C-, are priced at a weighted average price to par of 43.94% and are projected to yield ~~720~~195.376% of their current fair value on a loss-adjusted basis. The sub-prime bonds have a weighted average rating of CCCC+, are priced at a weighted average price to par of 46.6% and are projected to yield ~~183~~80.322% of their current fair value on a loss-adjusted basis.

Within our two CDOs, we own approximately $72.56 million in value of RMBS, which consists of $42.60 million of prime RMBS and $20.96 million of sub-prime RMBS. The prime bonds have a weighted average rating of CCC+-, are priced at a weighted average price to par of 53.26%, and are projected to yield ~~586~~194.624% of their current fair value on a loss-adjusted basis. The sub-prime bonds have a weighted average rating of ~~CCC~~C-, are priced at a weighted average price to par of 41.78%, and are projected to yield ~~400~~ 209.008% of their current fair value on a loss-adjusted basis. However, the receipt of cash flows from

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~~loss-adjusted basis.~~Table ~~However, the receipt~~ of ~~cash flows from this portion of our RMBS portfolio is governed by the waterfalls within the respective CDO indentures, which are further described below.~~ Contents

~~The~~this ~~following~~portion ~~table sets forth some relevant characteristics~~ of our ~~prime~~ RMBS portfolio is governed by ~~vintage.~~the Wewaterfalls ~~did~~within ~~not~~the ~~purchase~~respective ~~any~~CDO ~~prime~~indentures, ~~RMBS~~which ~~from~~are ~~the~~further ~~2008~~described ~~vintage~~below.

	Vintage
																Total/ Weighted Average
Prime RMBS Characteristics as of December 31, 2008	2003			2004			2005			2006			2007
	($ in millions)
Weighted Average Rating		CC			CCC			CCC-			CC			CC			CCC-
Number of Securities		4			10			59			4			11			88
Outstanding Face Amount	$	3.5		$	14.6		$	143.7		$	4.3		$	17.1		$	183.2
Amortized Cost Basis	$	0.8		$	1.0		$	6.4		$	0.2		$	0.7		$	9.1
Fair Value	$	0.8		$	1.0		$	6.5		$	0.2		$	0.7		$	9.2
Percentage of Total Fair Value(1)		8.70	%		10.87	%		70.65	%		2.17	%		7.61	%		100.0	%
Coupon		5.17	%		3.70	%		3.99	%		8.27	%		6.00	%		4.28	%
Market Yield(2)		64.90	%		236.63	%		852.08	%		342.78	%		163.57	%		652.34	%
Expected Principal Return(3)		74.40	%		16.77	%		22.30	%		22.37	%		0.50	%		20.83	%
WAL (4)		4.76			2.06			5.67			5.67			2.33			4.93
Principal Subordination(5)		0.11	%		1.46	%		0.90	%		0.63	%		0.16	%		0.85	%
Collateral Factor(6)		61.08	%		34.57	%		48.20	%		70.34	%		90.50	%		51.85	%
Bond Factor(7)		93.26	%		71.00	%		83.46	%		96.27	%		94.43	%		83.99	%
One Month CPR(8)		5.54			11.93			8.50			8.83			4.75			8.37
Delinquency Rate 60+(9)		0.37	%		8.72	%		9.19	%		1.91	%		1.83	%		8.12	%
Collateral Cumulative Losses to Date		0.00	%		0.26	%		0.19	%		0.08	%		0.04	%		0.18	%
Cumulative Losses to Date(10)		0.34	%		2.19	%		6.39	%		0.16	%		11.36	%		6.00	%

The following table sets forth some relevant characteristics of our prime RMBS portfolio by vintage.

	Vintage

	Vintage															Total/ Weighted Average
Prime RMBS Characteristics as of December 31, 2009	2003			2004			2005			2006			2007			Total/ Weighted Average
	($ in millions)
Weighted Average Rating		DDD+			DDD+			CC+			C			NR			CC+
Number of Securities		4			8			35			3			1			51
Outstanding Face Amount	$	3.0		$	8.6		$	75.2		$	3.8		$	0.1		$	90.7
Amortized Cost Basis	$	0.3		$	0.2		$	2.6		$	0.1		$	0.0		$	3.2
Fair Value	$	0.3		$	0.2		$	2.6		$	0.1		$	0.0		$	3.2
Percentage of Total Fair Value(1)		9.38	%		6.25	%		81.25	%		3.12	%		0.0	%		100.0	%
Coupon		5.19	%		2.77	%		4.25	%		7.91	%		6.00	%		4.29	%
Market Yield(2)		257.55	%		383.06	%		165.95	%		339.60	%		0.00	%		194.81	%
Expected Principal Return(3)		64.19	%		14.15	%		4.43	%		0.63	%		0.00	%		7.12	%
WAL(4)		3.57			1.85			2.02			0.89			0.23			2.12
Principal Subordination(5)		0.12	%		0.35	%		0.66	%		0.60	%		0.00	%		0.61	%
Collateral Factor(6)		47.82	%		23.49	%		42.13	%		56.06	%		77.37	%		41.16	%
Bond Factor(7)		79.81	%		56.27	%		79.44	%		95.82	%		11.39	%		77.86	%
One Month CPR(8)		14.16			15.40			15.29			27.14			15.38			15.76
Delinquency Rate 60+(9)		0.58	%		20.66	%		14.96	%		5.17	%		11.10	%		14.62	%
Collateral Cumulative Losses to Date		0.03	%		0.71	%		0.51	%		0.23	%		0.28	%		0.50	%
Cumulative Losses to Date(10)		9.96	%		9.32	%		12.54	%		0.00	%		87.91	%		11.63	%

(1)The ~~following~~proportion ~~table~~of ~~sets~~our ~~forth~~prime ~~some~~RMBS ~~relevant~~portfolio ~~characteristics~~comprised of the respective vintage; based on fair value of our ~~sub-~~prime RMBS portfolio byas ~~vintage~~of December 31, 2009. (2)Market yield Weas ~~did~~reflected ~~not~~above ~~purchase~~is ~~any~~the ~~sub~~implied loss-~~prime~~adjusted ~~RMBS~~yield ~~from~~based on our expectation of future cash flows (i.e., taking into account assumed defaults) and the ~~2008~~fair value of the security. ~~vintage~~(3)Percent of outstanding face amount that we currently project to be returned as principal. (4)Weighted average life. (5)Weighted average determined based on outstanding face amount owned. (6)Collateral factor is the ratio of the current deal balance to the original deal balance. (7)Bond factor is the ratio of the current bond balance to the original bond balance. (8)Constant prepayment rate. (9)Delinquencies in the securitization, weighted average determined based on outstanding face amounts owned. (10)Write-offs of par on the securities we own; weighted average determined based on original face amounts owned.

	Vintage
										Total/ Weighted Average
Sub-prime RMBS Characteristics as of December 31, 2008	2005			2006			2007
	($ in millions)
Weighted Average Rating		CC			CC			CC			CC
Number of Securities		24			13			2			39
Outstanding Face Amount	$	87.0		$	24.4		$	9.1		$	120.5
Amortized Cost Basis	$	3.8		$	1.3		$	0.5		$	5.6
Fair Value	$	3.8		$	1.3		$	0.5		$	5.6
Percentage of Total Fair Value(1)		67.86	%		23.21	%		8.93	%		100.0	%
Coupon		3.07	%		1.89	%		2.92	%		2.82	%
Market Yield(2)		348.33	%		94.33	%		361.77	%		293.01	%
Expected Principal Return(3)		11.32	%		22.54	%		0.00	%		12.74	%
WAL(4)		4.19			7.63			1.00			4.61
Principal Subordination(5)		3.60	%		4.20	%		2.06	%		3.60	%
Current Overcollateralization		0.86	%		0.85	%		2.70	%		1.00	%
Excess Spread(6)		0.27	%		0.35	%		0.31	%		0.29	%
Collateral Factor(7)		23.71	%		45.09	%		82.46	%		32.49	%
Bond Factor(8)		91.83	%		98.02	%		100.00	%		93.70	%
One Month CPR(9)		26.43			27.14			14.24			25.65
Delinquency Rate 60+(10)		30.02	%		30.36	%		26.42	%		29.82	%
Collateral Cumulative Losses to Date		4.62	%		5.42	%		3.39	%		4.69	%
Cumulative Losses to Date(11)		1.39	%		0.00	%		0.00	%		0.87	%

78Table of Contents

The following table sets forth some relevant characteristics of our sub-prime RMBS portfolio by vintage.

	Vintage

	Vintage									Total/ Weighted Average
Sub-prime RMBS Characteristics as of December 31, 2009	2005			2006			2007			Total/ Weighted Average
	($ in millions)
Weighted Average Rating		CCC-			B-			NR			CCC-
Number of Securities		17			6			1			24
Outstanding Face Amount	$	39.4		$	8.2		$	0.0		$	47.6
Amortized Cost Basis	$	0.9		$	0.6		$	0.0		$	1.5
Fair Value	$	0.9		$	0.6		$	0.0		$	1.5
Percentage of Total Fair Value(1)		60.00	%		40.00	%		0.00	%		100.0	%
Coupon		2.98	%		1.74	%		2.34	%		2.76	%
Market Yield(2)		164.04	%		80.51	%		0.00	%		132.21	%
Expected Principal Return(3)		10.41	%		52.19	%		0.00	%		17.60	%
WAL(4)		3.48			7.81			0.07			5.12
Principal Subordination(5)		2.93	%		3.76	%		0.00	%		3.07	%
Current Overcollateralization		0.44	%		1.92	%		0.00	%		0.69	%
Excess Spread(6)		0.44	%		0.45	%		0.27	%		0.44	%
Collateral Factor(7)		21.57	%		40.32	%		72.45	%		24.85	%
Bond Factor(8)		73.37	%		93.55	%		52.29	%		76.83	%
One Month CPR(9)		12.83			14.17			16.11			13.06
Delinquency Rate 60+(10)		36.42	%		23.73	%		40.19	%		34.23	%
Collateral Cumulative Losses to Date		6.56	%		6.48	%		10.54	%		6.55	%
Cumulative Losses to Date(11)		9.12	%		1.16	%		96.20	%		29.16	%

(1): The proportion of our sub-prime RMBS portfolio comprised of the respective vintage; based on fair value of our sub-prime RMBS portfolio as of December 31, 2009.
(2): Market yield as reflected above is the implied loss-adjusted yield based on our expectation of future cash flows (i.e., taking into account assumed defaults) and the fair value of the security.
(3): Percent of outstanding face amount that we currently project to be returned as principal.
(4): Weighted average life.
(5): Weighted average determined based on outstanding face amount owned.
(6): Represents the weighted average excess spread over the applicable liability coupon for the month of December 2009, weighted by par amount.
(7): Collateral factor is the ratio of the current deal balance to the original deal balance.
(8): Bond factor is the ratio of the current bond balance to the original bond balance.
(9): Constant prepayment rate.
(10): Delinquencies in the securitization, weighted average determined based on outstanding face amounts owned.
(11): Write-offs of par on the securities we own; weighted average determined based on original face amounts owned.

Table of Contents

Equity Securities

Our investment policies allow us to acquire equity securities, including common and preferred shares issued by other real estate investment trusts. At December 31, ~~2008~~2009, we held two investments in equity securities, each with a fair value of $0. These ~~investments~~investment securities are classified as available for sale and thus carried at fair value on our balance sheet with changes in fair value recognized in accumulated other comprehensive income until realized or determined to be other than temporarily impaired.

Changes in Carrying Value of ~~Available-for-Sale~~Investment Securities

The following sets forth information regarding the changes in the carrying value of our ~~available-for-sale~~ investment securities during the year ended December 31, ~~2008~~2009:

			Activity During Year Ended December 31, 2009

Security Description	December 31, 2008 Estimated Fair Value		Sales		Principal Paydowns/ Write-offs			Discount/ (Premium) Amortization			Impairments			Mark-to- Market Adjustments		December 31, 2009 Estimated Fair Value
	(In millions)
CMBS	$	58.1	$	—	$	(0.2	)	$	(11.8	)	$	(62.6	)	$	54.6	$	38.1
Non-Agency RMBS		14.8		—		(6.3	)		(3.3	)		(15.3	)		14.8		4.7
Preferred stock		0.0		—		—			—			—			—		—

Total	$	72.9	$	—	$	(6.5	)	$	(15.1	)	$	(77.9	)	$	69.4	$	42.8

The following sets forth information regarding the changes in the carrying value of our investment securities during the year ended December 31, 2008:

			Activity During Year Ended December 31, 2008

Security Description	December 31, 2007 Estimated Fair Value		Sales			Principal Paydowns			Discount/ (Premium) Amortization			Impairments			Mark-to- Market Adjustments			December 31, 2008 Estimated Fair Value
	(In millions)
CMBS	$	399.4	$	(4.2	)	$	(0.3	)	$	8.6		$	(79.1	)	$	(266.3	)	$	58.1
Agency MBS		1,246.7		(1,178.0	)		(60.4	)		(0.4	)		—			(7.9	)		—
Non-Agency RMBS		168.4		—			(10.1	)		10.4			(62.7	)		(91.2	)		14.8
Preferred stock		0.7		—			—			—			(1.1	)		0.4			0.0

Total	$	1,815.2	$	(1,182.2	)	$	(70.8	)	$	18.6		$	(142.9	)	$	(365.0	)	$	72.9

The following sets forth information regarding the changes in the carrying value of our available-for-sale securities during the year ended December 31, 2007:

			Activity During Year Ended December 31, 2007
Security Description	December 31, 2006 Estimated Fair Value		Net Purchases/ (Sales)			Principal Paydowns			Discount/ (Premium) Amortization			Impairments			Mark-to- Market Adjustments			December 31, 2007 Estimated Fair Value
	(In millions)
CMBS	$	472.6	$	99.3		$	(1.1	)	$	6.0		$	(174.9	)	$	(2.5	)	$	399.4
Agency MBS		2,532.1		(931.5	)		(353.9	)		(3.9	)		(10.6	)		14.5			1,246.7
Non-Agency RMBS		287.2		20.8			(23.2	)		16.5			(128.7	)		(4.2	)		168.4
ABS		46.1		(34.8	)		(10.8	)		0.9			—			(1.4	)		—
Preferred stock		4.6		—			—			—			(3.7	)		(0.2	)		0.7
Total	$	3,342.6	$	(846.2	)	$	(389.0	)	$	19.5		$	(317.9	)	$	6.2		$	1,815.2

Commercial Real Estate Loan Investments

At December 31, ~~2008~~2009, our commercial real estate loan investments are reported as held for investment (carried at amortized cost) and held for sale (carried at fair value). Real estate loans that are held for investment are periodically reviewed for impairment. As of December 31, ~~2008~~2009, we reported loans held for sale totaling $5.19 million and loans held for investment totaling $9.0 ~~million~~. AsDuring ofthe year ended December 31, ~~2008~~2009, we had a loan loss ~~reserve~~reserves of $6.8 million on ~~one~~our real estate loans held for investment and valuation allowances of $0.8 million on our real estate loans held for sale. Our commercial real estate ~~loans~~loan investments as of December 31, 2009 are summarized ~~$14~~below.~~2 million~~ In connection with the repurchase and discharge of our junior subordinated notes in January 2010, we ~~had~~exchanged aone ~~valuation~~mezzanine ~~allowance~~loan and one whole loan with carrying values of $64.7 million and $1.2 million, onrespectively, ~~our~~as ~~mezzanine~~part ~~loan~~of ~~held~~the ~~for~~consideration. ~~sale at~~

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such date. Our commercial real estate loan investments as of December 31, 2008 are summarized below:

Mezzanine Loans, Construction Loans and Whole Loans

	Mezzanine Loans(1)						Construction Loans(2)						Whole Loans						Total/ Weighted Average
	Fixed Rate			Floating Rate			Fixed Rate			Floating Rate			Fixed Rate			Floating Rate			Fixed Rate			Floating Rate
	(In millions)
Outstanding Face Amount	$	17.2		$	—		$	14.6		$	—		$	—		$	2.5		$	31.8		$	2.5
Carrying Value		11.2			—			0.4			—			—			2.5			11.6			2.5
Amortized Cost		17.2			—			14.6			—			—			2.5			31.8			2.5
Fair Value		11.0			—			0.4			—			—			2.2			11.4			2.2
Number of Loans		2			—			1			—			—			1			3			1
Number of loans that are delinquent		—			—			1			—			—			—			1			—
Weighted average interest rate		10.06	%		—	%		16.00	%(3)		—	%		—	%		n/a			10.06	%(4)		n/a
Weighted average spread over LIBOR		n/a			—	%		n/a			—	%		—	%		3.25	%		n/a			3.25	%

In 2005, we originated a $9.5 million mezzanine construction loan to develop luxury residential condominiums in Portland, Oregon. In September 2007, we entered into an agreement with the borrower and the senior lender to increase both the mezzanine construction loan and the senior loan that required additional capital contributions from the project equity holder to cover the remaining costs to complete the project. The mezzanine construction loan bears interest at an annual rate of 16% and had a maturity date of November 2007, which was subsequently extended until May 2008. Under the amended agreement governing the terms of the loan, interest on the loan was paid in cash through March 2006, was capitalized through September 2007, and was contracted to be paid in cash through May 2008 under the terms of the amendment. The loan was in technical default as of January 1, 2008 and was placed on non-accrual status at such date, and we did not receive any interest payments during the year ended December 31, 2008 on the loan. We made additional advances during the year ended December 31, 2008 of $0.9 million.

In May 2008, the senior and mezzanine construction loans were further amended to further extend the maturity date to November 1, 2008 and to limit the borrower's exposure under a personal guaranty established in connection with the original loan agreements if the borrower made additional equity contributions totaling $1.5 million and finished construction of the remaining townhome units, which it did not do. In addition, the borrower surrendered all decision-making authority (including the authority to establish the prices at which the remaining units are marketed and sold) to the senior and mezzanine lenders. In January 2009, the senior lender declared the borrower to be in default under the senior construction loan, which triggered a standstill period during which we, as the mezzanine lender, are precluded from exercising our rights under the mezzanine construction loan while the senior lender pursues remedies available to it. As we already have written down the value of this loan to $0.4 million as of December 31, 2008, our remaining exposure to loss under this agreement as of December 31, 2008 is $0.4 million.

The financing structures that we offer to the borrowers on certain of our loans involve the creation of entities that could be deemed VIEs and therefore, could be subject to FIN 46R. The September 2007 agreement to provide additional financing discussed above triggered a reconsideration event under FIN 46R. This loan was determined to be a VIE upon entering into the first amendment in September 2007; however, we concluded that we are not the primary beneficiary. Upon executing the May 2008 amendment, we accounted for this loan as a troubled debt restructuring under SFAS 15 and SFAS 114.

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We ~~have~~Mezzanine evaluated the financial merits of the project by reviewing the projected unit sales and estimated construction costs and evaluating other collateral available to us (and the expected cost of realizing any recovery on that collateral) under the terms of the loan. We believe that it is probable that we will not recover the entire loan balanceLoans, ~~including~~ ~~the~~Construction ~~capitalized~~Loans ~~interest, through the satisfaction of future cash flows from sales~~ and ~~other~~Whole available collateral. Accordingly, based on our analysis, we recorded a provision for loan loss of $4.5 million related to this loan during the year ended December 31, 2007 and an additional provision for loan loss of $9.7 million related to this loan during the year ended December 31, 2008 due to the failure of the closure of pending condominium sales, combined with currently declining condominium sale prices in the Portland, Oregon area. We will continue to monitor the status of this loan. However, housing prices, in particular condominium prices, may continue to fall, unit sales may continue to lag projections and construction costs may continue to increase, all of which may increase the risk that we will realize additional losses on this loan. No assurance can be given that we will not be required to record additional loan loss reserves with respect to this loan in the future depending on the borrower's ability to complete the project without additional cost overruns. In addition, no assurance can be given that the borrower will be able to repay or refinance the senior loan, in which case, the senior lender may pursue any of its available remedies, including foreclosure, which could cause us to incur additional losses on our loan. In the event that we determine that it is probable that we will not be able to recover the current carrying value of this loan, additional loan loss reserves will be recorded. As of December 31, 2008, of the 70 units initially available, 41 units have been sold. Loans

As of December 31, 2008, we have the intent and ability to sell in the near future one of our mezzanine loans with a carrying value of $5.1 million. In connection with our classifying that mezzanine loan as available for sale, we recorded a valuation allowance of $6.1 million during the year ended December 31, 2008.

	Mezzanine Loans(1)						Construction Loans(2)						Whole Loans(3)						Total/ Weighted Average

	Fixed Rate			Floating Rate			Fixed Rate			Floating Rate			Fixed Rate			Floating Rate			Fixed Rate			Floating Rate
	(In millions)
Outstanding Face Amount	$	17.4		$	—		$	14.6		$	—		$	—		$	1.7		$	32.0		$	1.7
Carrying Value		4.7			—			—			—			—			1.2			4.7			1.2
Amortized Cost		17.4			—			14.6			—			—			1.7			32.0			1.7
Fair Value		4.7			—			—			—			—			1.2			4.7			1.2
Number of Loans		2			—			1			—			—			1			3			1
Number of loans that are delinquent		1			—			1			—			—			—			2			—
Weighted average interest rate		7.32	%(4)		—	%		—	%(5)		—	%		—	%		n/a			7.32	%(6)		n/a
Weighted average spread over LIBOR		n/a			—	%		n/a			—	%		—	%		3.25	%		n/a			3.25	%

(1): Mezzanine loans amount excludes $6.4 million of valuation allowance and $6.4 million of loan loss allowance.
(2): Construction loans amount excludes $14.6 million of loan loss allowance.
(3): Whole loans amount excludes $0.4 million of valuation allowance.
(4): One mezzanine loan has been placed on non-accrual status.
(5): This construction loan has been placed on non-accrual status.
(6): Excludes 15.00% fixed rate for the mezzanine loan on non-accrual status and 16.00% fixed rate for the construction loan on non-accrual.

Operating Real Estate

At December 31, ~~2008~~2009, our commercial real estate portfolio is reported at cost of approximately $~~228~~221.38 million, net of accumulated depreciation of approximately $1117.27 million. The commercial real estate portfolio consists of three high-quality office buildings that are 100% leased on a triple-net basis to JPMorgan Chase. The buildings are financed with long-term fixed-rate mortgage loans.

The tables below summarize our commercial real estate investments at December 31, ~~2008~~2009, all of which were office properties:

	Total
	(In millions)
Land	$	17.4
Buildings and improvements		222.1
Commercial real estate, at cost	$	239.5
Accumulated depreciation		(1117.27	)
Commercial real estate, net of depreciation	$	~~228~~221.38

Location	Tenant		Total Area		Book Value per sq. ft.		Book Value(2)		Mortgage Debt		Net Book Equity

			(000s sq. ft.)				($ in millions)
Houston, Texas	JPMorgan Chase	2021		428.6	$	136.5	$	58.5	$	53.4	$	5.1
Arlington, Texas	JPMorgan Chase	2027		171.5		121.9		20.9		20.9		0.0
Phoenix, Arizona	JPMorgan Chase	2021		724.0		201.0		145.5		145.1		0.4

Total				1,324.1		169.9	$	224.9	$	219.4	$	5.5

(1): Does not assume the exercise of any extension options.
(2): Book value includes intangible assets and intangible liabilities, but excludes rent-enhancement and straight-line rent receivables.

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Location	Tenant		Total Area		Book Value(1)		Mortgage Debt		Net Book Equity
			(000s sq. ft.)		($ in millions)
Houston, Texas	JPMorgan Chase	2021		428.6	$	60.3	$	53.4	$	6.9
Arlington, Texas	JPMorgan Chase	2027		171.5		21.4		20.9		0.5
Phoenix, Arizona	JPMorgan Chase	2021		724.0		149.8		145.1		4.7
Total				1,324.1	$	231.5	$	219.4	$	12.1

During the years ended December 31, 2009, 2008 and 2007, we received $3.4 million, $3.7 million and $1.6 million, respectively, in net cash receipts pursuant to our ownership of our commercial real estate portfolio, as illustrated below:

Interest and Principal Paydown Receivable

		Year Ended December 31,

		2009			2008			2007
		(In millions)
Rental revenue		$	11.4		$	11.1		$	7.6
Rent enhancement			3.1			3.4			1.8
Parking garage revenue, net			1.8			2.1			1.6
Mortgage interest expense			(12.4	)		(12.5	)		(9.1	)
Real estate tax			(0.4	)		(0.3	)		(0.2	)
Miscellaneous expenses			(0.1	)		(0.1	)		(0.1	)

	Net cash receipts	$	3.4		$	3.7		$	1.6

At December 31, 2008, we had interest and principal paydown receivables of approximately $4.2 million. The total interest and principal paydown receivable amount consisted of approximately $4.1 million relating to our MBS and approximately $0.1 million relating to other investments.

Rent Enhancement Receivable, Related Party

At December 31, ~~2008~~2009, we had rent enhancement receivables from related parties totaling $1311.84 million. The rent enhancements were negotiated as part of our purchase of our commercial real estate properties and reflect the below-market nature of the leases on those properties at the time we purchased them. We have pledged these rent enhancement receivables as collateral to the lenders under the mortgages that we used to finance the purchase of our commercial real estate properties. While the affiliates of our Manager that are obligated to make these rent enhancement payments have made all required payments to date, there can be no assurance that they will not default on such payments in the future and the obligors have limited resources against which we could enforce our rights.

Interest Receivable

At December 31, 2009, we had interest receivable of approximately $2.0 million relating to our MBS investments.

Credit Default Swaps, Hedging Instruments and Other Derivative Activities

Credit Default Swaps

As of December 31, ~~2008~~2009, we had engaged in credit default swaps, or CDS, which are accounted for as derivatives. CDS are derivative securities that attempt to replicate the credit risk involved with owning a particular unrelated third party security, which we refer to as a reference obligation. We enter into CDS on three types of securities: RMBS, CMBS and the CMBX and ABX indices. Investing in assets through CDS subjects us to additional risks. When we enter into a CDS with respect to an asset, we do not have any legal or beneficial interest in the reference obligation but have only a contractual relationship with the counterparty, typically a broker-dealer or other financial institution, and do not have the benefit of any collateral or other security or remedies that would be available to holders of the reference obligation or the right to receive information regarding the underlying obligors or issuers of the reference obligation. In addition, in the event of insolvency of a CDS counterparty, we would be treated as a general creditor of the counterparty to the extent the counterparty does not post collateral and, therefore, we may be subject to significant counterparty credit risk. As of December 31, ~~2008~~2009, we were party to CDS with one counterparty. CDS are relatively new instruments, the terms of which may contain ambiguous provisions that are subject to interpretation, with consequences that could be adverse to us.

Currently, we are the seller of protection. The seller of protection through CDS is exposed to those risks associated with owning the underlying reference obligation. The seller, however, does not receive periodic interest payments, but instead it receives periodic premium payments for assuming the credit risk of the reference obligation. These risks are called "credit events" and generally consist of failure to pay principal, failure to pay interest, write-downs, implied write-downs and distressed ratings downgrades of the reference obligation. 88

For some CDS, upon the occurrence of a credit event with respect to a reference obligation, the buyer of protection may have the option to deliver the reference obligation to the seller of protection

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in Currently, ~~part~~we orare inthe ~~whole~~seller atof ~~par or to elect cash settlement~~protection. InThe ~~this~~seller ~~event, should the buyer~~ of protection ~~elect~~through ~~cash~~CDS ~~settlement~~is ~~for~~exposed ato ~~credit~~those ~~event~~risks ~~that~~associated ~~has~~with ~~occurred,~~owning itthe ~~will~~underlying ~~trigger~~reference aobligation. ~~payment,~~The ~~the amount~~seller, ofhowever, ~~which~~does isnot ~~based~~receive onperiodic ~~the~~interest ~~proportional~~payments, ~~amount~~but ofinstead ~~failure~~it orreceives ~~write-down.~~periodic Inpremium ~~the~~payments ~~case~~for ofassuming ~~a distressed ratings downgrade,~~ the ~~buyer~~credit risk of ~~protection must deliver~~ the reference obligation. toThese ~~the seller~~risks ofare ~~protection,~~called "credit events" and ~~there~~generally isconsist noof ~~cash~~failure ~~settlement~~to ~~option.~~pay ~~In most cases~~principal, ~~however,~~failure ~~the~~to ~~CDS is a PAUG (~~pay ~~as you go) CDS~~interest, ~~in which case~~write-downs, atimplied ~~the point a~~ write-~~down~~downs ~~or an interest shortfall occurs, the protection seller pays the protection buyer a cash amount,~~ and ~~the~~distressed ~~contract~~ratings ~~remains~~downgrades ~~outstanding~~of ~~until such time as~~ the reference obligation ~~has a factor of zero~~. ~~In most of these instances, it will create a loss for the protection seller.~~

AsFor ofsome ~~December 31~~CDS, ~~2008,~~upon wethe ~~were~~occurrence of a ~~party~~credit toevent ~~two CDS~~ with ~~maturities~~respect ofto ~~June~~a ~~2035~~reference ~~and~~obligation, ~~October~~the ~~2042~~buyer ~~with~~of anprotection ~~aggregate~~may ~~notional~~have ~~par~~the ~~amount~~option ~~(maximum exposure~~ to ~~loss)~~deliver ~~of $20.0 million.~~the Atreference ~~December 31,~~obligation ~~2008,~~to the ~~fair~~seller of ~~value~~protection ofin ~~our~~part ~~net~~or ~~liability~~in ~~relating~~whole toat ~~credit~~par ~~default~~or ~~swap~~to ~~contracts~~elect ~~was~~cash ~~$19~~settlement.~~1 million,~~ ~~compared~~In tothis aevent, ~~net~~should ~~liability~~the buyer of ~~$32.9 million~~ atprotection ~~December 31,~~elect ~~2007,~~cash ~~primarily~~settlement asfor a ~~result~~credit ofevent ~~our~~that ~~closing~~has ~~out~~occurred, ~~six~~it ~~credit~~will ~~default~~trigger ~~swaps~~a payment, ~~with~~the aamount ~~notional~~of ~~par~~which is based on the proportional amount of ~~$55~~failure or write-down.~~0 million~~ ~~during~~In the ~~first~~case ~~quarter~~ of ~~2008~~a distressed ratings downgrade, ~~offset~~ inthe ~~part~~buyer byof anprotection ~~increase~~must indeliver the ~~credit~~reference obligation ~~spreads~~to the seller of ~~the~~protection, ~~CDS.~~and ~~During~~there ~~the~~is ~~first~~no ~~quarter~~cash ofsettlement ~~2008,~~option. weIn ~~closed~~most ~~out~~cases, ~~six~~however, the CDS onis ~~single~~a ~~names~~pay inas anyou ~~aggregate~~go ~~notional~~CDS, ~~amount~~in ofwhich ~~$55.0 million~~case, ~~with~~at ~~a realized~~the ~~loss~~point ofa ~~approximately~~write-down ~~$30.2 million,~~or ofan interest ~~which~~shortfall ~~$19.8 million~~occurs, ~~had~~the ~~been~~protection ~~accrued~~seller atpays ~~December 31,~~the ~~2007.~~protection Asbuyer ofa ~~December 31,~~cash ~~2008~~amount, weand ~~had~~the ~~approximately $20.7 million~~contract ofremains ~~margin~~outstanding ~~cash~~until ~~posted~~such time as ~~collateral~~the onreference ~~$20.0 million~~obligation has a factor of ~~notional~~zero. ~~CDS~~In ~~and~~most of wethese ~~were~~instances, ~~subject~~it towill ~~additional~~create ~~potential~~a ~~margin~~loss ~~calls~~for ~~totaling~~the $1protection seller.~~1 million.~~

As of December 31, 2009, we were a party to one CDS with a maturity of June 2035 with an aggregate notional par amount (maximum exposure to loss) of $10.0 million. At December 31, 2009, the fair value of our net liability relating to credit default swap contracts was $9.6 million, compared to a net liability of $19.1 million at December 31, 2008, primarily as a result of the occurrence of a credit event on the reference obligation underlying one of our CDS on which we sold protection, which required us to make payments on that CDS in the amount of $10 million during the year ended December 31, 2009. As of December 31, 2009, we had approximately $10.5 million of margin cash posted as collateral on $10.0 million of notional CDS and we were subject to additional potential margin calls totaling $0.4 million.

Interest Rate Swaps

As of December 31, ~~2008~~2009, we had engaged in interest rate swaps as a means of mitigating our interest rate risk on forecasted interest expense associated with ~~repurchase~~borrowings ~~agreements~~ for a specified future time period, which is the term of the ~~swap~~applicable ~~contract~~borrowing. An interest rate swap is a contractual agreement entered into by two counterparties under which each agrees to make periodic payments to the other for an agreed period of time based upon a notional amount of principal. Under the most common form of interest rate swap, a series of payments calculated by applying a fixed rate of interest to a notional amount of principal is exchanged for a stream of payments similarly calculated but using a floating rate of interest. This is a fixed-floating interest rate swap. We hedge our floating rate debt by entering into fixed-floating interest rate swap agreements whereby we swap the floating rate of interest on the liability we are hedging for a fixed rate of interest. An interest rate swap forward is an interest rate swap based on an interest rate to be set at an agreed future date. As of December 31, ~~2008~~2009, we were a party to interest rate swaps with maturities ranging from December 2013 to June 2018 with a notional par amount of approximately $~~285~~281.0 million. Under the swap agreements in place at December 31, ~~2008~~2009, we receive interest at rates that reset periodically, generally every three months, and pay a rate fixed at the initiation of, and for the life of, the swap agreements.

The valuation of our interest rate swaps is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). ~~The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.~~

To comply with the provisions of SFAS 157, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any 89

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~~applicable~~The ~~credit~~variable ~~enhancements,~~cash ~~such~~payments as(or ~~collateral~~receipts) ~~posting,~~are ~~thresholds,~~based ~~mutual~~on ~~puts~~an ~~and~~expectation ~~guarantees.~~of ~~For~~future ~~the~~interest ~~year~~rates ~~ended December 31, 2008, we recorded $11.4 million into earnings as a gain, which is reflected in realized and unrealized gain~~ (~~loss~~forward curves) onderived ~~derivatives~~from onobservable ~~our~~market ~~consolidated~~interest ~~statement~~rate ~~of operations, relating to our nonperformance risk~~curves.

~~The~~To ~~current~~comply ~~market~~with ~~value~~the provisions of ~~interest~~FASB ~~rate~~ASC ~~swaps~~820-10-50-9 is(previously ~~heavily dependent on the current market fixed rate~~SFAS 157), ~~the~~we incorporate credit ~~value~~valuation ~~adjustment~~adjustments ~~for~~to ~~non-performance by our counterparties, the credit~~appropriately ~~value~~reflect ~~adjustment~~both ~~for~~ our ~~non-performance,~~own ~~the~~nonperformance ~~corresponding~~risk ~~term~~and ~~structure of floating rates (known as~~ the ~~yield~~respective ~~curve)~~counterparty's asnonperformance ~~well~~risk ~~as the expectation of changes~~ in ~~future floating rates. As expectations of future floating rates change,~~ the ~~market~~fair value ~~of interest rate swaps changes~~measurements. ~~Based~~In onadjusting the ~~daily~~fair ~~market~~ value of ~~those~~our ~~interest~~derivative ~~rate swaps and interest rate swap forward~~ contracts, ~~our~~for ~~counterparties~~the ~~may~~effect ~~request~~of ~~additional~~nonperformance ~~margin~~risk, ~~collateral or~~ we ~~may~~have ~~request~~considered ~~additional~~the ~~collateral~~impact ~~from~~of ~~our~~netting ~~counterparties~~and toany ~~ensure~~applicable ~~that~~credit anenhancements, ~~appropriate~~such ~~margin~~as ~~account~~collateral ~~balance~~posting, isthresholds, ~~maintained~~mutual atputs ~~all~~and ~~times~~guarantees. ~~through~~For the ~~maturity~~year ~~of the~~ended ~~contracts. At~~ December 31, ~~2008~~2009, ~~the~~we ~~net~~recorded ~~realized~~$8.9 million ~~and~~into ~~unrealized~~earnings ~~loss~~as ona ~~interest~~gain, ~~rate~~which ~~swap~~is ~~contracts~~reflected ~~recorded~~ in ~~accumulated~~realized ~~other~~and ~~comprehensive~~unrealized gain (loss) ~~was~~on ~~$10.5 million~~derivatives ~~due~~on toour ~~an increase~~consolidated instatement ~~prevailing market interest rates, and the fair value~~ of ~~our liability~~ operations, relating to ~~those~~our ~~swaps~~nonperformance ~~was $37~~risk.~~7 million.~~

~~There~~The ~~can~~current bemarket novalue ~~assurance~~of ~~that~~interest ~~our~~rate ~~hedging~~swaps ~~activities~~is ~~will~~heavily ~~have~~dependent on the ~~desired~~current ~~beneficial~~market ~~impact~~fixed onrate, ~~our~~the ~~results~~credit ofvalue ~~operations~~adjustment orfor ~~financial~~non-performance ~~condition.~~by ~~Moreover~~our counterparties, the nocredit ~~hedging activity can~~value ~~completely~~adjustment ~~insulate~~for usour ~~from~~non-performance, the ~~risks~~corresponding ~~associated~~term ~~with~~structure ~~changes~~of infloating ~~interest~~ rates ~~and~~(known ~~prepayment rates. We generally intend to hedge~~ as ~~much of~~ the ~~interest~~yield ~~rate~~curve) ~~risk~~ as ~~Hyperion~~well ~~Brookfield~~as ~~Crystal River determines is in~~ the ~~best~~expectation ~~interests~~ of ~~our~~changes ~~stockholders,~~in ~~after~~future ~~considering~~floating ~~the~~rates. ~~cost~~As expectations of ~~such~~future ~~hedging~~floating ~~transactions~~rates ~~and~~change, ~~our~~the ~~desire~~market tovalue ~~maintain~~of ~~our~~interest ~~status~~rate asswaps ~~a REIT~~changes. ~~Our~~At ~~policies~~December 31, do2009, ~~not contain specific requirements as to~~ the ~~percentages~~fair orvalue ~~amount~~ of ~~interest rate risk that~~ our ~~Manager~~liability isrelating ~~required~~ to ~~hedge~~those swaps was $25.3 million.

There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. Moreover, no hedging activity can completely insulate us from the risks associated with changes in interest rates and prepayment rates. We generally intend to hedge as much of the interest rate risk as our Manager determines is in the best interests of our stockholders, after considering the cost of such hedging transactions and our desire to maintain our status as a REIT. Our policies do not contain specific requirements as to the percentages or amount of interest rate risk that our Manager is required to hedge.

Liabilities

Our liabilities as of December 31, ~~2008~~2009 consist of $64.5 million of accounts payable, accrued expenses and interest and dividends payable, $5735.64 million of derivative liabilities, $7266.38 million of intangible liabilities, $3228.9 million in short-term liabilities ~~(the maturity of which we subsequently extended for one year until May 2010)~~ and $~~316~~304.46 million in long-term liabilities that are matched to the assets that the liabilities finance. Of our long-term liabilities, $4533.46 million is the fair value of the rated notes that were issued in conjunction with our two CDOs. The remainder of the $271.0 million of our long-term liabilities consists of $219.4 million of mortgages payable used to finance our commercial real estate properties and $51.6 million of junior subordinated notes issued to a trust that sold trust preferred securities. ~~Our~~(the ~~$32.9 million~~junior ofsubordinated ~~short~~notes ~~term~~were repurchased ~~liabilities~~and ~~consists~~discharged ofin ~~borrowings~~January ~~under~~2010). ~~our~~During ~~secured~~2009, ~~revolving~~we ~~funding~~reduced ~~line.~~the ~~After~~amount anof ~~extension~~our ~~that~~liabilities, ~~we signed~~as illustrated in ~~February 2009,~~ the ~~revolving~~following ~~funding~~table: ~~line~~

				Activity During 2009

Type of Liability		Balance as of December 31, 2008		Net Paydowns			Mark-to- Market Adjustments		Balance as of December 31, 2009
		(In millions)
Collateralized debt obligations		$	45.4	$	(11.8	)	$	—	$	33.6
Junior subordinated notes(1)			51.6		—			—		51.6
Mortgages payable			219.4		—			—		219.4
Secured revolving credit facility, related party			32.9		(4.0	)		—		28.9

	Total	$	349.3	$	(15.8	)	$	—	$	333.5

(1): Repurchased and discharged in January 2010.

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~~now~~ We ~~matures~~previously have entered into repurchase agreements to finance some of our purchases of investment securities and real estate loans. Borrowings under these agreements were secured by our investment securities and real estate loans and bore interest rates that have historically moved in ~~May~~close ~~2010~~relationship to LIBOR. ~~During~~As ~~2008~~of December 31, 2009, we ~~reduced~~were ~~the~~not ~~amount~~utilizing any of ~~our liabilities~~those arrangements, aswe ~~illustrated~~had inno ~~the~~outstanding ~~following~~obligations ~~chart:~~under repurchase agreements and all collateral pledged against repurchase borrowings had been returned to us.

			Activity During 2008
Type of Liability	Balance as of December 31, 2007		Cumulative Effect Adjustment(1)			Net Paydowns			Mark-to- Market Adjustments			Balance as of December 31, 2008
	(In millions)
Repurchase agreements	$	1,276.1	$	—		$	(1,276.1	)	$	—		$	—
Collateralized debt obligations		486.6		(187.6	)		(19.6	)		(234.0	)		45.4
Junior subordinated notes		51.6		—			—			—			51.6
Mortgages payable		219.4		—			—			—			219.4
Senior mortgage-backed notes, related party		99.8		—			(99.8	)		—			—
Secured revolving credit facility, related party		67.3		—			(34.4	)		—			32.9
Total	$	2,200.8	$	(187.6	)	$	(1,429.9	)	$	(234.0	)	$	349.3

At December 31, 2009, we had $51.6 million of junior subordinated notes outstanding. The junior subordinated notes are the sole assets owned by our subsidiary trust, Crystal River Preferred Trust I, and mature in April 2037. We have the right to redeem these notes at par on or after April 2012. Interest is payable quarterly at a fixed rate of 7.68% (ten-year LIBOR plus 2.75%) through April 2012 and thereafter at a floating rate equal to three-month LIBOR plus 2.75%. In January 2010, our junior subordinated notes were repurchased and discharged in exchange for certain of our assets. See note 19 to our consolidated financial statements elsewhere in this Annual Report on form 10-K for more information on that transaction.

WeAt ~~previously~~December 31, ~~have~~2009, ~~entered~~we ~~into~~had ~~repurchase~~$219.4 million ~~agreements~~of tomortgage ~~finance~~loans ~~some~~outstanding ofwith ~~our~~a ~~purchases~~weighted-average borrowing rate of ~~available-for-sale~~5.58% ~~securities~~that ~~and~~are ~~real~~secured ~~estate~~by ~~loans.~~our ~~Borrowings~~commercial ~~under~~properties ~~these~~located ~~agreements~~in ~~were~~Houston, ~~secured~~Texas; byPhoenix, ~~our~~Arizona; ~~available-for-sale~~and ~~securities~~Arlington, Texas and ~~real~~by ~~estate~~the ~~loans~~rent ~~and~~enhancement ~~bore~~receivables ~~interest~~from ~~rates~~affiliates ~~that~~of our Manager relating to those properties. We have ~~historically~~guaranteed ~~moved~~a inportion ~~close~~of this ~~relationship~~indebtedness to ~~LIBOR.~~our As lenders in respect of ~~December 31~~the rent enhancement receivables, ~~2008~~related party, weand ~~were~~the ~~not~~amount ~~utilizing~~of ~~any~~this guarantee decreases each month as payments are made to us in respect of ~~those~~the ~~arrangements~~rent enhancement receivables, related party. The total amount of such indebtedness that we ~~had~~guaranteed noas ~~outstanding~~of ~~obligations~~December 31, ~~under~~2009 ~~repurchase~~was ~~agreements~~approximately $9.4 million, and ~~all~~as ~~collateral~~of ~~pledged~~March 15, ~~against~~2010, the ~~repurchase~~total ~~borrowings~~

Filing Compare · Crystal River Capital, Inc.