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Published on June 22, 2009
Chimera Investment Corporation
1211 Avenue of the Americas, Suite 2902
New York, NY 10036
June 22, 2009
VIA EDGAR
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Mr. Jorge Bonilla
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Chimera Investment Corporation
Form 10-K for the fiscal year ended December 31, 2008
Form 10-Q for the quarter ended March 31, 2009
2009 Proxy Statement
File No. 001-33796
Dear Mr. Bonilla:
On behalf of Chimera Investment Corporation, set forth below are our
responses to the comments of the staff of the Division of Corporation Finance of
the Securities and Exchange Commission, received by letter dated May 26, 2009
with respect to our Form 10-K for the fiscal year ended December 31, 2008, Form
10-Q for the quarter ended March 31, 2009, and 2009 Proxy Statement.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008
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Item 1A. Risk Factors
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We may be required to repurchase mortgage loans or indemnify investors if we
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breach representations and warranties, which could harm our earnings, page 31
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1. We note from the information on page 31 that you may be required to
repurchase loans that you have sold or securitized if certain
representation and warranties have been breached, or as a result of
borrower fraud or in the event of early payment default on a mortgage
loan. Please tell us what the your accounting policy is under FAS 140,
FIN 45 or SFAS 5 for recording a provision for the loss you would incur
upon the requirement to perform under this recourse obligation. Also,
please clarify whether you have been required to perform under this
recourse obligation in the past and if so, tell us the dollar amount of
loans required from these transactions or other payments made by you to
comply with these recourse provisions for each period in which you were
required to perform. In addition, tell us the difference between the
book value of the reacquired loans and the fair value of these loans
when reacquired.
Response
Pursuant to SFAS 140, we record a reduction in the proceeds from a sale
equal to fair value of the liability to repurchase assets due to early payment
default or borrower fraud at the time of the securitization or loan sale, if
such an obligation exists. Pursuant to FIN 45, we record a liability for the
guarantee of the recourse obligations in an amount equal to the present value of
expected cash flows related to the obligations. Pursuant to SFAS 5, we record a
provision for loss when it is deemed probable that a liability has been incurred
and the amount of the loss can be estimated.
In future filings, we will describe in more detail any recourse
obligations we may enter into in conjunction with securitization transactions
and whether we have recorded a loss provision in Note 4 of the Consolidated
Financial Statements. In addition, if we enter into recourse obligations in
conjunction with the sale of loans, we will describe in more detail those
obligations and any loss provision we have recorded in Note 3 of the
Consolidated Financial Statements.
During the year ended December 31, 2008, we sold a portion of our whole
mortgage loans and securitized the remaining whole mortgage loans held for
investment in two securitizations effected during the year. We applied SFAS 140,
FIN 45 and SFAS 5 to the whole mortgage loan sales and to the two
securitizations as follows.
The terms of the sale agreement for the whole mortgage loans contained
a covenant that would require us to repurchase loans that were subject to early
payment defaults. We analyzed this liability under SFAS 140 at the time of the
sale, but determined that we should not record a provision for a loss due to two
reasons. First, we believed the risk of being required to repurchase the
mortgage loans due to early payment default was remote. The 181 loans contained
in the pool we sold were newly originated high quality prime super jumbo and
jumbo loans. These loans had high quality characteristics. For example, the
weighted average loan to value of the pool was 71.15% and the weighted average
FICO score was 757. Almost 88% of the loans were full documentation loans and
more than 94% were owner occupied properties. The weighted average debt to
income ratio of the borrowers in the pool was 32.75%. All of these
characteristics led us to believe that this pool was made up of high quality
loans with a remote change of early payment default. Moreover, in the purchase
agreement pursuant to which we acquired the whole mortgage loans, we have
recourse to the loan originator for early payment default, which requires the
originator to repurchase any loan which incurred an early payment default. The
originator was a well capitalized leading mortgage loan originator with $1.5
billion in equity and a history of originating well performing, high quality
loans. We believed that this originator had the financial capability to meet its
obligations under the purchase agreement. As a result, under SFAS 140 and FIN
45, we determined the fair value of our liability to be insignificant and under
SFAS 5, we recorded no provision for contingent liabilities as we did not deem
loss probable.
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In applying SFAS 140 to our two 2008 securitizations, we did not record
any provision for losses associated with recourse obligations since we do not
have a repurchase obligation in these transactions. We purchased all our loans
from the same originator described above. All of the whole mortgage loans
securitized in these transactions were originated by an affiliate of the entity
that securitized the whole mortgage loans. Because of this, at the time of
securitization we assigned to the entity that served as depositor of the whole
loans into the securitization vehicles, our rights to require the mortgage loan
originator to repurchase loans in the event of early payment default and
borrower fraud. Since we do not have a repurchase obligation in these
securitizations, we did not record any liabilities.
Although to date we have determined that a provision for a liability
associated with repurchase obligations was not required, as discussed in the
risk factor, we may in the future have repurchase obligations in certain
securitizations or loan sales, typically if loans are securitized with
non-affiliates of the mortgage loan originator.
To date we have not been required to repurchase any mortgage loans.
Item 6. Selected Financial Data
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Taxable Income per Share, page 44
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2. We note that you use taxable income per share for assessing your
performance. Please tell us how your presentation meets all the
disclosure requirement of Question eight of the Frequently Asked
Questions Regarding the Use of Non- GAAP Financial Measures.
Response
Question eight of the Frequently Asked Questions Regarding the Use of
Non-GAAP Financial Measures discusses the prohibition of adjusting non-GAAP
financial performance measures to eliminate or smooth items that are reasonably
likely to recur or have occurred within the prior two years, unless the
exclusion can be demonstrated to be useful. More specifically, disclosure is
required that discusses how management uses the non-GAAP measure, the economic
substance behind the measure, limitations associated with the measure and how
management compensates for the limitations, and why management believes the
measure is useful to shareholders.
Our disclosure states that we are required to distribute taxable
earnings and enumerates the differences between GAAP earnings per share and
taxable earnings per share in a tabular format on page 44 of the Company's 10-K.
These tables include GAAP net income, realized gains (losses) on sales of
investments and unrealized gains (losses) on terminations of interest rate
swaps. We believe that this presentation provides the reader with information on
the purpose and economic substance of the non-GAAP measure. In future
disclosures we will more fully broaden our MD&A disclosure as described below:
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Reconciliation of non-GAAP financial measurements to GAAP financial
measurements
Taxable income per share
GAAP net income per share is the measure that is most directly related
to taxable earnings per share. Taxable income per share is a non-GAAP
measurement that adjusts GAAP net income per share for items excluded from
taxable REIT income. As a REIT, we are required to distribute to our
shareholders substantially all of our REIT taxable income in the form of
dividends. Since it relates to the dividends we are required to declare, we
believe taxable earnings per share is a meaningful financial measurement for
investors and management in assessing our performance. Items that are typically
included in GAAP net income that are excluded from REIT taxable income are
unrealized gains and losses included in net income, losses on sales of
investments to the extent they exceed gains on sales of investments, and book
versus tax amortization adjustments.
A reconciliation of REIT taxable income per share to GAAP EPS (basic)
follows:
The computation of realized gains and losses per share is the quotient
of realized gains and losses on sales of investments and the weighted average
number of shares outstanding - basic and diluted as presented in the
Consolidated Statements of Operations and Comprehensive Income.
The computation of unrealized gains and losses on interest rate swaps
per share is the quotient of unrealized gains and losses on interest rate swaps
and the weighted average number of shares outstanding - basic and diluted as
presented in the Consolidated Statements of Operations and Comprehensive Income.
The taxable earnings per share computation does not include the impact
of realized losses on sales of investments to the extent they exceed realized
gains on sales of investments. This exclusion may not fully represent the
results of all operations during the period.
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3. Tell us how you considered disclosing how you calculated the
adjustments to GAAP loss per share and whether they are derived from
your financial statements as presented.
Response
The calculation of the adjustments to GAAP loss per share is derived
directly from our financial statements. The computation of realized gains and
losses per share is the quotient of realized gains and losses on sales of
investments and the weighted average number of shares outstanding - basic and
diluted as presented in the Consolidated Statements of Operations and
Comprehensive Income. The computation of unrealized gains and losses on interest
rate swaps per share is the quotient of unrealized gains and losses on interest
rate swaps and the weighted average number of shares outstanding - basic and
diluted as presented in the Consolidated Statements of Operations and
Comprehensive Income. Please see the broader disclosure referenced in Response 2
above to be included in future filings.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operation, page 44
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Recent Developments, page 46
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4. On page 48, you state that in October 2008, you amended you management
agreement to eliminate the incentive fee. In future filings, please
disclose whether any incentive fees were paid in 2008.
Response
We have not paid any incentive fees since inception, and in future
filings will include this disclosure.
Financial Statements and Notes
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Note 1- Organization and Significant Accounting Policies
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Residential Mortgage-Backed Securities, page F-7
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5. We note that you validate your pricing model by comparing its results
to independent prices provided by dealers in the securities and/or
third party pricing services. Please tell us and disclose in future
filings, the impact if the third party valuation differs from the
pricing model. To the extent that you adjust your valuation based on
dealer quotes, consider adding the applicable disclosure suggested in
the Sample Letter Sent to Public Companies on MD&A Disclosure Regarding
the Application of SFAS 157 date September 2008.
Response
5
We apply our pricing policy to the quarterly valuation of our assets by
comparing our internally generated fair values to the average of dealer and/or
third party pricing service fair values. We utilize our internally generated
fair value to mark our assets at the reporting date on a security-by-security
basis. In the event the fair value generated by us on a particular security is
materially different than the fair value provided by external sources, we
reevaluate our internally generated fair value for potential flaws in our
assumptions. If we determine, that although materially different from the third
party prices obtained, our fair valuation is more reflective of the fair value
of the asset, our fair valuation is utilized for financial reporting. To date,
third party values have not materially differed from our internal pricing model.
In future filings, our disclosure regarding the valuation of our assets
will discuss the impact of material differences between our pricing model and
the independent prices we obtain to validate our model. In addition, if we
adjust our valuations due to the results of third party prices obtained, we will
expand our disclosures to encompass the items discussed in the Sample Letter
Sent to Public Companies on MD&A Disclosure Regarding the Application of SFAS
157 dated September 2008.
Mortgage Loans Sales and Securitizations, page F-9
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6. We note that you allocate the carrying value of the underlying mortgage
loans between securities or loans sold and the interests retained based
on their fair values to determine the gain or loss on sale and
presumably to calculate the value of the retained interests. Please
describe and disclose in future filings the methodologies and key
assumptions used to determine fair value. Reference is made to
paragraph B11(b)(3) of FSP-FAS 140-4. Additionally given that these
fair value assessments impact the amounts recorded in your financial
statements, please tell us what consideration was given including the
disclosures required by SFAS 157.
Response
We compute the fair value for allocation of carrying value on
securities and loan sales by utilizing the most closely correlated asset class
for valuation. Typically when we securitize mortgage loans, we compute the fair
value of each tranche in the securitized pool using our pricing model for
residential mortgage-backed securities. Our pricing model is discussed in Note 5
in our Consolidated Financial Statements and includes such key inputs and
assumptions as coupons, prepayment speeds, periodic and life caps, weighted
average lives, expected defaults, and credit enhancement. Gain or loss is
computed accordingly. Fair value of un-securitized mortgage loans is computed by
utilizing key inputs and assumptions such as expected future cash flows of the
mortgage, borrower characteristics, default expectations, coupons, current
spreads, geographic concentration, and available pricing of similar pools of
assets recently traded.
In accordance with FAS 157, we have provided in Note 5 key inputs and
assumptions used in our model to determine fair value. In future filings, we
will broaden our disclosure regarding our mortgage loan sales and
securitizations to indicate the methodologies we utilized at the time of the
transaction to determine fair values.
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Income Taxes, page F-10
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7. Please tell us how you considered the requirements under Rule 3-15(c)
of Regulation S-X regarding the tax status of your distributions as
ordinary income, capital gain or return of capital.
Response
In future filings we will include additional disclosure similar to the
disclosure set forth below in Note 9 of the Notes to Consolidated Financial
Statements.
In general, common stock cash dividends declared by the company will be
considered ordinary income to stockholders for income tax purposes. From time to
time, a portion of our dividends may be characterized as capital gains or return
of capital. During the year ended December 31, 2008, all of the income
distributed in the form of dividends was characterized as ordinary income.
Note 2 - Mortgage-Backed Securities, page F-13
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8. We note on page 46 that you realized a $144 million loss on the sale of
non- Agency RMBS and unsecured assets. Please tell us how these losses
impact the impairment analysis of your remaining RMBS portfolio as of
December 31, 2008.
Response
During 2008, at a time of unprecedented economic stresses on the
non-Agency RMBS market and the economy as a whole, we sold assets as a strategic
decision to protect our balance sheet by reducing our leverage and exposure to
the risk that our lending counterparties could reduce our credit lines and force
us to make asset sales at inopportune times. As a result, we sold approximately
$705 million in assets and realized $144 million in losses, predominantly during
the third quarter of 2008. At December 31, 2008 as well as each reporting period
during 2008, we evaluated our assets for other than temporary impairment
pursuant to the model provided by FSP FAS 115-1 and FAS 124-1. In evaluating the
impairment of the assets retained in our portfolio, we evaluated, concurrent
with other factors, characteristics such as the length of time and extent that
the fair value of the asset was less than its cost, the credit performance of
each investment and its expected future cash flows, and given the results of our
evaluations, the intent and ability to hold the assets until a recovery in fair
value. In this regard, the assets in an unrealized loss position had been in
this position for a period of time less than nine months. The impairment
approximated 15% of the carrying value of those securities and we expected no
credit impairment on any of these securities. Moreover, all of these assets were
cash-flowing as expected. Taking these factors into consideration, we determined
that the impairment of the assets was temporary, due to unprecedented market
dislocation, and we intended to hold the securities until recovery.
As noted above, the asset sales were undertaken to reduce our
counterparty exposure and in fact reduced our repurchase agreement borrowings
from $1.4 billion as of March 31, 2008 to $562.1 million as of December 31,
2008. In connection with our decision to protect our balance sheet from the
unprecedented market volatility, in October 2008, we raised an additional $300
million of capital in secondary offerings of common stock. Due to the reduction
in counterparty risk and the additional capital raised by the company we had
both the intent and ability to hold the assets in our portfolio until they
recovered in value precluding the recognition of an impairment charge.
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Note 5 - Fair Value Measurement, page F-15
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9. We note that you disclose the fair value of your securitized loans held
for investment and securitized debt as required by SFAS 107. Please
describe to us and disclose in future filings, the method and
significant assumptions used to estimate the fair values as require by
paragraph 10 of SFAS 107. Also tell us how you considered the
provisions of SFAS 157 with respect to these disclosures. Note the
paragraph 35 of SFAS 157 states that disclosures under SFAS 157 can be
combined with disclosures required by SFAS 107.
Response
We compute the fair value of securitized loans and securitized debt by
estimating the future cash flows of the securitized mortgage loans contained in
the pool. We utilize actual and expected delinquencies, defaults, CPRs, loss
severities, and borrower characteristics to determine the expected cash flow
over the life of the asset in its fair valuation. Using the results of the
asset's performance, we evaluate the ability of the pool to meet its debt
obligation for fair valuation of the securitized debt. The fair valuation of the
securitized loans and securitized debt takes into consideration the same key
assumptions and factors and yields the same fair value under both SFAS 107 and
SFAS 157.
In future filings we will restructure Notes 4, 5, and 7 to consolidate
and more fully disclose how we fair value both assets and liabilities included
in our financial statements to meet the requirements of paragraph 10 of SFAS 107
and paragraph 35 of SFAS 157.
Note 6 - Repurchase Agreements
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Residential Mortgage-Backed Securities, page F-17
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10. We note your tabular disclosure of the remaining maturities of your
repurchase agreements. Please tell us whether any of your repurchase
agreements mature overnight and confirm that your disclosure in future
filings will be consistent with the requirements of Rule 4-08(m) of
Regulation S-X.
Response
At December 31, 2008, none of our repurchase agreements matured
overnight. In all future filings we will include an additional row that
discloses repurchase agreements that mature overnight in addition to the current
classifications.
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Note 13 - Management Agreement and Related Party Transactions, page F-21
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11. We note that you entered into a repurchase agreement with Annaly during
2008. Please confirm that you will include the related party label on
your balance sheet for any material agreements with Annaly in future
filings. Refer to Rule 4-08(k) of Regulation S-X.
Response
We will provide labels that properly disclose all line items on our
balance sheet that are with related parties in all future filings.
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2009
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Financial Statements and Notes
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Note 2 - Mortgage-Backed Securities, page 14
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12. We note that you completed a re-securitization during March 2009 and
that you initially retained all of the securities issued by the
securitization trust. Please tell us your basis under SFAS 140 for
accounting for this transaction as a sale versus a financing. In
addition, for this re-securitization as well as the January 2009 re-
securitization, tell us the amount of gain or loss recognized in these
transactions and the basis and for your accounting.
Response
In March 2009, the Company sponsored a $281.9 million re-securitization
whereby it re-securitized certain residential mortgage-backed securities it
owned. To effect this transaction, the company isolated the assets in a QSPE.
The QSPE is a trust that is demonstrably distinct from the Company, bankruptcy
remote, established solely to hold the passive financial assets transferred to
the trust, and from which greater than 10% of the beneficial interests are held
by a third party, as enumerated by SFAS 140 paragraph 35. The trust permits
each holder of beneficial interests in the SPE the right to transfer or pledge
their beneficial interest and the Company retained no ability to control the
transferred assets. Upon settlement of the re-securitization transaction, the
Company maintained only the right to receive the cash flows associated with its
beneficial interest in the securitized assets.
We recorded a gain on sale of $2.9 million and a loss on sale of $118.7
thousand on the January 2009 and March 2009 re-securitizations, respectively.
Both re-securitizations were treated as sales pursuant to SFAS 140. Carrying
value in each transaction was allocated based on relative fair value of each
tranche created as the transferred assets were derecognized and the new asset
recognized. The difference between proceeds received on sales of beneficial
interests and their respective carrying value was recorded as gain or loss.
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PROXY STATEMENT
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Summary Compensation Table, page 20
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13. We note from your disclosure on page 18 that you do not use a specific
formula to calculate the number of equity awards and other awards given
to your executives. However, it is not clear from your current
disclosure how you determined the award amounts. Please provide us a
more detailed analysis of how the company determined the actual amounts
of stock awards and grants of plan-based awards received by your
executives in 2008. Please tell us the actual factors considered in
making the awards and explain how analysis of these factors translated
into actual grant amounts. Please include this disclosure in future
filings.
Response
As discussed in Compensation Discussion and Analysis contained our
proxy statement, in determining specific amounts of awards to be granted to an
individual, the compensation committee generally takes the following factors
into account: the individual's position, his or her contribution to our
performance, market practices as well as the recommendations of our investment
advisor. The compensation committee does not attribute any particular
quantitative significance to any of these factors, and the weight it gives to
these factors will vary.
The 2008 grants of restricted stock to our executive officers were made
during our initial public offering. During this process, and in consultation
with our investment advisor, the compensation committee determined that it was
appropriate to issue equity incentives in the form of restricted stock to each
of our investment advisor's employees as well as our independent directors. As a
result, the compensation committee awarded 1,301,000 shares of restricted stock
to our investment advisor's employees and our independent directors. The equity
incentives to our investment advisor's employees were designed to provide long
term incentives, and therefore vested over 10 years.
In making the awards, the compensation committee did not take into
account our performance since we had not commenced operations at the time of the
grant. The compensation committee took into account our investment advisor's
recommendations. Additionally, the compensation committee took into account the
individual's position, both within our investment advisor's organization and in
our organization, as well as his or her contribution in establishing us and his
or her expected role in our operations. The compensation committee determined it
was desirable that a significant percentage of the grants would be made to our
executive officers since, in their capacity as our executives, they should be
most directly affected by our long term performance. Therefore, the compensation
committee, in consultation with our investment advisor, determined it would
award approximately 25% of the total grants to our executive officers. The
compensation committee determined that for this initial grant, it did not want a
wide disparity of awards between our four executive officers, but that our chief
executive officer and head of investments should get slightly higher grants than
our two other executive officers. Accordingly, the compensation committee
awarded 90,000 shares each to two of our officers and 70,000 shares each to the
other two officers.
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As you have requested, in future filings we will revise the disclosure
to further explain the manner in which the annual incentive compensation awarded
to our executives was determined. In doing so, we will discuss the actual
factors considered in making the awards and provide an analysis of these factors
in making the actual grant amounts.
Financing Arrangements with Annaly, page 25
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14. We note from your risk factor disclosure on page 13 of your form 10-K
that the disruptions during the year ended December 31, 2008 resulted
in you not being in compliance with the net income covenant in one of
your whole loan repurchase agreements and the liquidity covenants in
your other whole loan repurchase agreement. We further note that your
current financing arrangements with Annaly contain "customary"
covenants. Please tell us whether you are currently in compliance with
those covenants and include this disclosure in future filings.
Response
The financing agreement currently in place with Annaly Capital
Management, Inc. is a Securities Industry and Financial Markets Association
standard preprinted form Master Repurchase Agreement. This agreement does not
contain any sort of liquidity, net worth or other similar types of positive or
negative covenants. Rather, the agreement contains covenants that require the
buyer and seller of securities to deliver collateral or securities, and similar
covenants which are customary in the form Master Repurchase Agreement. We are in
compliance with all covenants contained within that agreement.
In future filings we will revise the disclosure to indicate whether we
are in compliance with the covenants contained in that agreement.
* * *
The Company hereby acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the Form 10-K, Form 10-Q, and its Proxy Statement;
o Staff comments or changes to disclosure in response to Staff comments do
not foreclose the Commission from taking any action with respect to the
filings: and
o the Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
Please send any additional concerns or questions regarding your letter
dated May 26, 2009 to my attention at adenahan@annaly.com or feel free to call
me at 212-696-0100.
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Very truly yours,
/s/A. Alexandra Denahan
A. Alexandra Denahan
Chief Financial Officer
cc: R. Nicholas Singh, Esq.
Fixed Income Discount Advisory Company
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