Western Asset Mortgage Opportunity Fund Inc. (Form: N-CSRS, Received: 08/31/2020 07:27:47)

Date: August 26, 2020

/s/ Jane Trust

Jane Trust

Chief Executive Officer

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-22369

Western Asset Mortgage Opportunity Fund Inc.

(Exact name of registrant as specified in charter)

620 Eighth Avenue, 49^th Floor, New York, NY 10018

(Address of principal executive offices) (Zip code)

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

Registrant’s telephone number, including area code: (888) 777-0102

Date of fiscal year end: December 31

Date of reporting period: June 30, 2020

ITEM 1.

REPORT TO STOCKHOLDERS.

The Semi-Annual Report to Stockholders is filed herewith.

LOGO


Semi-Annual Report		June 30, 2020

WESTERN ASSET

MORTGAGE OPPORTUNITY FUND INC.

(DMO)

Beginning in January 2021, as permitted by regulations adopted by the Securities and Exchange Commission, the Fund intends to no longer mail paper copies of the Fund’s shareholder reports like this one, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary (such as a broker-dealer or bank). Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.

If you invest through a financial intermediary and you already elected to receive shareholder reports electronically (“e-delivery”), you will not be affected by this change and you need not take any action. If you have not already elected e-delivery, you may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary.

You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. That election will apply to all Legg Mason Funds held in your account at that financial intermediary. If you are a direct shareholder with the Fund, you can call the Fund at 1-888-888-0151, or write to the Fund by regular mail at P.O. Box 505000, Louisville, KY 40233 or by overnight delivery to Computershare, 462 South 4th Street, Suite 1600, Louisville, KY 40202 to let the Fund know you wish to continue receiving paper copies of your shareholder reports. That election will apply to all Legg Mason Funds held in your account held directly with the fund complex.

LOGO

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE


What’s inside
Letter from the chairman			III
Performance review			V
Fund at a glance			1
Schedule of investments			2
Statement of assets and liabilities			17
Statement of operations			18
Statements of changes in net assets			19
Statement of cash flows			20
Financial highlights			22
Notes to financial statements			24
Board approval of new management and new subadvisory agreements			43
Dividend reinvestment plan			53

Fund objectives

The Fund’s primary investment objective is to provide current income. As a secondary investment objective, the Fund will seek capital appreciation.

The Fund seeks to achieve its investment objectives by investing primarily in a diverse portfolio of mortgage-backed securities and mortgage whole loans. Investments in mortgage-backed securities consist primarily of non-agency residential mortgage-backed securities and commercial mortgage-backed securities.


II		Western Asset Mortgage Opportunity Fund Inc.

Letter from the chairman

LOGO

Dear Shareholder,

We are pleased to provide the semi-annual report of Western Asset Mortgage Opportunity Fund Inc. for the six-month reporting period ended June 30, 2020. Please read on for Fund performance information during the Fund’s reporting period.

Special shareholder notice

On July 31, 2020, Franklin Resources, Inc. (“Franklin Resources”) acquired Legg Mason, Inc. in an all-cash transaction. As a result of the transaction, Legg Mason Partners Fund Advisor, LLC (“LMPFA”), Western Asset Management Company, LLC and Western Asset Management Company Limited became indirect, wholly-owned subsidiaries of Franklin Resources. Under the Investment Company Act of 1940, as amended, consummation of the transaction automatically terminated the management and subadvisory agreements that were in place for the Fund prior to the transaction. The Fund’s manager and subadvisers continue to provide uninterrupted services with respect to the Fund pursuant to new management and subadvisory agreements that were approved by Fund stockholders.

Franklin Resources, whose principal executive offices are at One Franklin Parkway, San Mateo, California 94403, is a global investment management organization operating, together with its subsidiaries, as Franklin Templeton. As of June 30, 2020, after giving effect to the transaction described above, Franklin Templeton’s asset management operations had aggregate assets under management of approximately $1.4 trillion.


Western Asset Mortgage Opportunity Fund Inc.		III

Letter from the chairman

As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.lmcef.com. Here you can gain immediate access to market and investment information, including:

•

Fund prices and performance,

•

Market insights and commentaries from our portfolio managers, and

•

A host of educational resources.

We look forward to helping you meet your financial goals.

Sincerely,

LOGO

Jane Trust, CFA

Chairman, President and Chief Executive Officer

July 31, 2020


IV		Western Asset Mortgage Opportunity Fund Inc.

Performance review

For the six months ended June 30, 2020, Western Asset Mortgage Opportunity Fund Inc. returned -23.56% based on its net asset value (“NAV”)ⁱ and -23.47% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the ICE BofA U.S. Floating Rate Home Equity Loan Asset Backed Securities Indexⁱⁱ, returned -0.57% for the same period. The Lipper U.S. Mortgage Closed-End Funds Category Averageⁱⁱⁱreturned -10.40% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.

During this six-month period, the Fund made distributions to shareholders totaling $0.85 per share. As of June 30, 2020, the Fund estimates that 77% of the distributions were sourced from net investment income and 23% constituted a return of capital.* The performance table shows the Fund’s six-month total return based on its NAV and market price as of June 30, 2020. Past performance is no guarantee of future results.


Performance Snapshot as of June 30, 2020 (unaudited)
Price Per Share	6-Month Total Return**
$ 14.08 (NAV)		-23.56	%†
$ 14.67 (Market Price)		-23.47	%‡

All figures represent past performance and are not a guarantee of future results. Performance figures for periods shorter than one year represent cumulative figures and are not annualized.

** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.

† Total return assumes the reinvestment of all distributions, including returns of capital, if any, at NAV.

‡ Total return assumes the reinvestment of all distributions, including returns of capital, if any, in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

Looking for additional information?

The Fund is traded under the symbol “DMO” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol “XDMOX” on most financial websites. Barron’s and The Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.lmcef.com (click on the name of the Fund).

In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.

These estimates are not for tax purposes. The Fund will issue a Form 1099 with final composition of the distributions for tax purposes after year-end. A return of capital is not taxable and results in a reduction in the tax basis of a shareholder’s investment. For more information about a distribution’s composition, please refer to the Fund’s distribution press release or, if applicable, the Section 19 notice located in the press release section of our website, www.lmcef.com (click on the name of the Fund).


Western Asset Mortgage Opportunity Fund Inc.		V

Performance review (cont’d)

Thank you for your investment in Western Asset Mortgage Opportunity Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

Sincerely,

LOGO

Jane Trust, CFA

Chairman, President and Chief Executive Officer

July 31, 2020

RISKS: The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the Fund will achieve its investment objective. The Fund’s common stock is traded on the New York Stock Exchange. Similar to stocks, the Fund’s share price will fluctuate with market conditions and, at the time of sale, may be worth more or less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Because the Fund is non-diversified, it may be more susceptible to economic, political, or regulatory events than a diversified fund. The Fund’s investments are subject to a number of risks, including credit risk, inflation risk and interest rate risk. As interest rates rise, bond prices fall, reducing the value of the Fund’s fixed income holdings. The Fund may invest in lower-rated high-yield bonds (commonly known as “junk bonds”), which are subject to greater liquidity risk and credit risk (risk of default) than higher-rated obligations. MBS are subject to additional risks, including: (1) credit risk associated with the performance of the underlying mortgage properties and of the borrowers owning these properties; (2) adverse changes in economic conditions and circumstances, which are more likely to have an adverse impact on MBS secured by loans on certain types of commercial properties than on those secured by loans on residential properties; (3) prepayment risk, which can lead to significant fluctuations in value of the MBS and can limit the potential gains in a declining interest rate environment; (4) loss of all or part of the premium, if any, paid; and (5) decline in the market value of the security, whether resulting from changes in interest rates, prepayments on the underlying mortgage collateral or perceptions of the credit risk associated with the underlying mortgage collateral. To the extent the Fund invests in mortgage whole loans, certain of these risks may be magnified. In addition, risks associated with investments in whole loans include geographic concentration risk and risks relating to the reliance on third-party servicers to service and manage the mortgage whole loan. The Fund may invest in securities backed by subprime or distressed mortgages which involve a higher degree of risk and chance of loss. Leverage may result in greater volatility of NAV and the market price of common shares and increases a shareholder’s risk of loss. The Fund may make significant investments in derivative instruments. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund is not guaranteed by the U.S. government, the U.S. Treasury or any government agency. The Fund may also invest in money market funds, including funds affiliated with the Fund’s manager and subadvisers.


VI		Western Asset Mortgage Opportunity Fund Inc.

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

ⁱ

Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any), from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares.

ⁱⁱ

The ICE BofA U.S. Floating Rate Home Equity Loan Asset Backed Securities Index (formerly known as ICE BofAML U.S. Floating Rate Home Equity Loan Asset Backed Securities Index) tracks the performance of U.S. dollar-denominated investment grade floating-rate asset-backed securities collateralized by home equity loans publicly issued in the U.S. domestic market. Qualifying securities must have an investment grade rating, at least one year remaining to final stated maturity, a floating-rate coupon, and an original deal size for the collateral group of at least $250 million.

ⁱⁱⁱ

Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the six-month period ended June 30, 2020, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 8 funds in the Fund’s Lipper category.


Western Asset Mortgage Opportunity Fund Inc.		VII

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Fund at a glance^† (unaudited)

Investment breakdown (%) as a percent of total investments

LOGO

†

The bar graph above represents the composition of the Fund’s investments as of June 30, 2020 and December 31, 2019 and does not include derivatives, such as written options, futures contracts and swap contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time.

‡	Represents less than 0.01%.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		1

Schedule of investments (unaudited)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— 102.7%
Adjustable Rate Mortgage Trust, 2005-5 1A1		3.394	%		9/25/35	$	121,699	$	97,338	^(b)
Adjustable Rate Mortgage Trust, 2005-7 2A21		3.462	%		10/25/35		287,158		259,155	^(b)
Adjustable Rate Mortgage Trust, 2005-12 5A1 (1 mo. USD LIBOR + 0.500%)		0.685	%		3/25/36		234,090		117,344	^(b)
Aegis Asset Backed Securities Trust, 2005-3 M3 (1 mo. USD LIBOR + 0.490%)		0.675	%		8/25/35		3,460,000		2,689,042	^(b)
AFC Trust, 2000-3 1A (1 mo. USD LIBOR + 0.750%)		0.935	%		10/25/30		831,625		762,523	^(b)(c)
Alternative Loan Trust, 2005-11CB 3A3, IO (-1.000 x 1 mo. USD LIBOR + 5.000%)		4.816	%		6/25/35		1,544,583		246,233	^(b)
Alternative Loan Trust, 2005-14 3A1		2.701	%		5/25/35		166,498		122,974	^(b)
Alternative Loan Trust, 2005-36 4A1		3.299	%		8/25/35		289,828		271,233	^(b)
Alternative Loan Trust, 2005-J10 1A1 (1 mo. USD LIBOR + 0.500%)		0.685	%		10/25/35		802,573		583,539	^(b)
Alternative Loan Trust, 2006-HY10 1A1		3.075	%		5/25/36		268,123		229,858	^(b)
Alternative Loan Trust, 2006-J8 A5		6.000	%		2/25/37		93,135		60,310
Alternative Loan Trust, 2007-3T1 2A1		6.000	%		3/25/27		103,159		106,827
Alternative Loan Trust, 2007-23CB A8 (-4.000 x 1 mo. USD LIBOR + 28.400%)		27.662	%		9/25/37		493,449		737,096	^(b)
Alternative Loan Trust, 2007-OA8 1A1 (1 mo. USD LIBOR + 0.180%)		0.365	%		6/25/47		1,124,923		919,754	^(b)
American Home Mortgage Assets Trust, 2005-2 2A1A		3.260	%		1/25/36		833,568		641,176	^(b)
American Home Mortgage Investment Trust, 2007-2 2A (1 mo. USD LIBOR + 0.800%)		0.985	%		3/25/47		12,735,445		593,496	^(b)
American Home Mortgage Investment Trust, 2007-A 4A (1 mo. USD LIBOR + 0.900%)		1.085	%		7/25/46		1,869,943		875,987	^(b)(c)
Banc of America Alternative Loan Trust, 2005-9 1CB5, IO (-1.000 x 1 mo. USD LIBOR + 5.100%)		4.916	%		10/25/35		2,332,591		311,308	^(b)
Banc of America Funding Corp., 2015-R3 2A2		0.298	%		2/27/37		2,623,487		2,242,472	^(b)(c)
Banc of America Funding Trust, 2004-B 6A1		2.466	%		12/20/34		361,473		283,131	^(b)
Banc of America Funding Trust, 2004-C 3A1		3.915	%		12/20/34		317,363		295,827	^(b)
Banc of America Funding Trust, 2006-D 2A1		3.499	%		5/20/36		35,627		32,552	^(b)
Banc of America Funding Trust, 2006-F 1A1		4.049	%		7/20/36		136,040		131,296	^(b)
Banc of America Funding Trust, 2014-R5 1A2 (6 mo. USD LIBOR + 1.500%)		2.077	%		9/26/45		3,750,000		2,729,410	^(b)(c)
Banc of America Funding Trust, 2015-R2 9A2		0.446	%		3/27/36		4,511,405		3,783,425	^(b)(c)
Banc of America Funding Trust, 2015-R4 4A3		9.263	%		1/27/30		12,024,366		5,948,274	^(b)(c)

See Notes to Financial Statements.


2		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
Bayview Financial Asset Trust, 2007-SR1A M1 (1 mo. USD LIBOR + 0.800%)		1.747	%		3/25/37	$	2,047,551	$	1,876,414	^(b)(c)
Bayview Financial Asset Trust, 2007-SR1A M2 (1 mo. USD LIBOR + 0.900%)		2.561	%		3/25/37		2,492,812		2,341,678	^(b)(c)
Bayview Financial Asset Trust, 2007-SR1A M3 (1 mo. USD LIBOR + 1.150%)		2.811	%		3/25/37		1,129,403		1,075,130	^(b)(c)
BCAP LLC Trust, 2011-RR2 1A4		3.810	%		7/26/36		3,236,984		2,141,007	^(b)(c)
Bear Stearns ALT-A Trust, 2005-9 25A1		3.850	%		11/25/35		254,738		206,050	^(b)
Bear Stearns Asset Backed Securities I Trust, 2005-CL1 A1		0.500	%		9/25/34		52,742		50,520	^(b)
Bellemeade Re Ltd., 2017-1 B1 (1 mo. USD LIBOR + 4.750%)		4.935	%		10/25/27		1,070,000		961,954	^(b)(c)
Bellemeade Re Ltd., 2018-1A M2 (1 mo. USD LIBOR + 2.900%)		3.085	%		4/25/28		510,000		476,143	^(b)(c)
Chase Mortgage Finance Trust, 2006-S3 2A1		5.500	%		11/25/21		149,948		92,776
ChaseFlex Trust, 2005-2 3A3, IO (-1.000 x 1 mo. USD LIBOR + 5.500%)		5.316	%		6/25/35		7,756,798		1,814,439	^(b)
Chevy Chase Funding LLC Mortgage-Backed Certificates, 2006-2A A1 (1 mo. USD LIBOR + 0.130%)		0.315	%		4/25/47		99,235		94,512	^(b)(c)
CHL Mortgage Pass-Through Trust, 2005-2 2A1 (1 mo. USD LIBOR + 0.640%)		0.825	%		3/25/35		63,304		59,075	^(b)
CHL Mortgage Pass-Through Trust, 2005-9 1A1 (1 mo. USD LIBOR + 0.600%)		0.785	%		5/25/35		82,483		68,197	^(b)
CHL Mortgage Pass-Through Trust, 2005-11 3A3		2.762	%		4/25/35		337,003		265,102	^(b)
CHL Mortgage Pass-Through Trust, 2005-11 6A1 (1 mo. USD LIBOR + 0.600%)		0.785	%		3/25/35		55,595		45,265	^(b)
CHL Mortgage Pass-Through Trust, 2005-18 A7 (-2.750 x 1 mo. USD LIBOR +19.525%)		19.018	%		10/25/35		15,111		20,125	^(b)
CHL Mortgage Pass-Through Trust, 2005- HY10 1A1		4.095	%		2/20/36		69,967		59,534	^(b)
CHL Mortgage Pass-Through Trust, 2005- HYB9 1A1 (12 mo. USD LIBOR + 1.750%)		3.939	%		2/20/36		127,248		114,990	^(b)
Citicorp Mortgage Securities Trust, 2007-8 B1		5.977	%		9/25/37		2,819,142		1,819,739	^(b)
Citigroup Mortgage Loan Trust, 2006-AR5 2A1A		3.120	%		7/25/36		270,947		195,279	^(b)
Citigroup Mortgage Loan Trust, 2008-3 A3		6.100	%		4/25/37		5,707,126		3,059,396	^(c)
Citigroup Mortgage Loan Trust Inc., 2004- HYB3 1A		4.361	%		9/25/34		45,925		43,194	^(b)

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		3

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
Citigroup Mortgage Loan Trust Inc., 2004-UST1 A2		2.772	%		8/25/34	$	21,452	$	20,298	^(b)
Citigroup Mortgage Loan Trust Inc., 2005-5 1A5		2.856	%		8/25/35		133,176		110,333	^(b)
Countrywide Asset-Backed Certificates Trust, 2006-SD3 A1 (1 mo. USD LIBOR + 0.330%)		0.515	%		7/25/36		443,193		421,311	^(b)(c)
Countrywide Asset-Backed Certificates Trust, 2007-SEA1 1A1 (1 mo. USD LIBOR + 0.550%)		0.735	%		5/25/47		398,042		333,030	^(b)(c)
Credit-Based Asset Servicing & Securitization LLC, 2006-SL1 A3 (1 mo. USD LIBOR + 0.440%)		0.625	%		9/25/36		3,821,221		426,101	^(b)(c)
CSFB Mortgage-Backed Pass-Through Certificates, 2005-10 3A3		5.500	%		11/25/35		296,405		237,033
CSMC Resecuritization Trust, 2006-1R 1A2 (-2.750 x 1 mo. USD LIBOR + 19.525%)		19.020	%		7/27/36		443,254		595,221	^(b)(c)
CSMC Trust, 2010-18R 6A5		3.768	%		9/28/36		1,488,682		1,537,622	^(b)(c)
CSMC Trust, 2014-11R 9A2 (1 mo. USD LIBOR + 0.140%)		0.308	%		10/27/36		4,453,765		3,503,916	^(b)(c)
CSMC Trust, 2015-2R 7A2		3.482	%		8/27/36		3,436,725		2,636,472	^(b)(c)
CSMC Trust, 2017-RPL1 B1		3.069	%		7/25/57		3,052,442		2,302,799	^(b)(c)
CSMC Trust, 2017-RPL1 B2		3.069	%		7/25/57		3,501,991		2,388,057	^(b)(c)
CSMC Trust, 2017-RPL1 B3		3.069	%		7/25/57		2,977,486		1,639,642	^(b)(c)
CSMC Trust, 2017-RPL1 B4		3.069	%		7/25/57		3,358,042		560,088	^(b)(c)
CWABS Revolving Home Equity Loan Trust, 2004-L 2A (1 mo. USD LIBOR + 0.280%)		0.465	%		2/15/34		52,580		49,281	^(b)
Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 2PO, PO		0.000	%		4/15/36		22,195		16,406	^(c)
Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 4AS1, IO		9.045	%		4/15/36		237,360		50,374	^(b)(c)
Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 4AS2, IO		15.731	%		4/15/36		226,118		81,510	^(b)(c)
Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 5AS1, IO		10.622	%		4/15/36		75,226		25,361	^(b)(c)
Deutsche Mortgage Securities Inc. Mortgage Loan Trust, 2006-PR1 5AS3, IO		7.315	%		4/15/36		273,703		64,344	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2016-1 B, PO		0.000	%		9/25/55		12,302,721		1,041,999	^(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2016-1 BIO, IO		0.000	%		9/25/55		29,537,827		2,743,169	^(b)(c)

See Notes to Financial Statements.


4		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2016-1 XSIO, IO		0.075	%		9/25/55	$	205,297,117	$	803,738	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 B, PO		0.000	%		8/25/56		11,487,150		1,322,559	^(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 BIO, IO		0.000	%		8/25/56		19,497,203		1,934,210	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 M1		4.000	%		8/25/56		1,170,000		1,155,867	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2017-2 XSIO, IO		0.075	%		8/25/56		493,575,694		1,466,907	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2019-2 M		4.750	%		8/25/58		681,000		658,219	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Seasoned Credit Risk Transfer Trust, 2020-1 BXS		1.082	%		8/25/59		4,099,838		2,220,155	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2016-DNA2 B (1 mo. USD LIBOR + 10.500%)		10.685	%		10/25/28		495,188		529,550	^(b)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2016-DNA3 B (1 mo. USD LIBOR + 11.250%)		11.435	%		12/25/28		1,030,443		1,140,077	^(b)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2016-DNA4 B (1 mo. USD LIBOR + 8.600%)		8.785	%		3/25/29		1,579,657		1,564,913	^(b)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2017-DNA1 B2 (1 mo. USD LIBOR + 10.000%)		10.185	%		7/25/29		2,651,245		2,447,160	^(b)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2017-DNA2 B2 (1 mo. USD LIBOR + 11.250%)		11.435	%		10/25/29		1,776,335		1,698,876	^(b)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HQA2 B2 (1 mo. USD LIBOR + 11.000%)		11.185	%		10/25/48		3,000,000		2,993,083	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HRP1 B2 (1 mo. USD LIBOR + 11.750%)		11.935	%		4/25/43		5,606,229		5,367,830	^(b)(c)

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		5

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-HRP2 B2 (1 mo. USD LIBOR + 10.500%)		10.685	%		2/25/47	$	3,530,000	$	3,399,667	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2018-SPI4 B		4.466	%		11/25/48		4,865,652		2,732,724	^(b)(c)
Federal Home Loan Mortgage Corp. (FHLMC) Structured Agency Credit Risk Debt Notes, 2019-DNA1 B2 (1 mo. USD LIBOR + 10.750%)		10.935	%		1/25/49		1,500,000		1,476,175	^(b)(c)
Federal National Mortgage Association (FNMA), 2012-134 LS, IO (-1.000 x 1 mo. USD LIBOR + 6.150%)		5.966	%		12/25/42		2,693,502		518,533	^(b)
Federal National Mortgage Association (FNMA) — CAS, 2016-C01 1B (1 mo. USD LIBOR + 11.750%)		11.935	%		8/25/28		1,870,577		2,073,486	^(b)(c)
Federal National Mortgage Association (FNMA) — CAS, 2016-C02 1B (1 mo. USD LIBOR + 12.250%)		12.435	%		9/25/28		2,343,711		2,663,753	^(b)(c)
Federal National Mortgage Association (FNMA) — CAS, 2016-C03 1B (1 mo. USD LIBOR + 11.750%)		11.935	%		10/25/28		1,656,439		1,900,977	^(b)(c)
Federal National Mortgage Association (FNMA) — CAS, 2016-C04 1B (1 mo. USD LIBOR + 10.250%)		10.435	%		1/25/29		2,626,324		2,860,235	^(b)(c)
Federal National Mortgage Association (FNMA) — CAS, 2016-C06 1B (1 mo. USD LIBOR + 9.250%)		9.435	%		4/25/29		3,530,786		3,796,586	^(b)(c)
First Horizon Alternative Mortgage Securities Trust, 2005-AA6 3A1		3.329	%		8/25/35		520,443		461,773	^(b)
First Horizon Alternative Mortgage Securities Trust, 2006-FA6 2A1, PAC		6.250	%		11/25/36		86,835		52,514
GS Mortgage Securities Corp. II, 2000-1A A (1 mo. USD LIBOR + 0.350%)		2.465	%		3/20/23		26,438		26,486	^(b)(c)
GSAA Resecuritization Mortgage Trust, 2005-R1 1A2, IO (-1.000 x 1 mo. USD LIBOR + 5.000%)		4.816	%		4/25/35		2,121,250		379,990	^(b)(c)
GSMPS Mortgage Loan Trust, 2005-RP1 1A4		8.500	%		1/25/35		53,551		61,468	^(c)
GSMPS Mortgage Loan Trust, 2006-RP1 1A2		7.500	%		1/25/36		358,547		373,805	^(c)
HarborView Mortgage Loan Trust, 2006-2 1A		4.138	%		2/25/36		17,689		9,653	^(b)
Home Equity Mortgage Trust, 2006-1 A3 (1 mo. USD LIBOR + 0.500%)		0.685	%		5/25/36		3,500,000		1,374,480	^(b)

See Notes to Financial Statements.


6		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
HSI Asset Loan Obligation Trust, 2007-AR1 4A1		4.337	%		1/25/37	$	116,956	$	92,483	^(b)
Impac CMB Trust, 2004-8 1A (1 mo. USD LIBOR + 0.720%)		0.905	%		10/25/34		267,610		260,957	^(b)
IndyMac INDA Mortgage Loan Trust, 2005-AR2 1A1		3.244	%		1/25/36		70,962		60,346	^(b)
IndyMac INDX Mortgage Loan Trust, 2004-AR13 1A1		2.957	%		1/25/35		55,637		52,724	^(b)
IndyMac INDX Mortgage Loan Trust, 2005-AR15 A2		3.555	%		9/25/35		57,032		46,456	^(b)
IndyMac INDX Mortgage Loan Trust, 2006-AR7 5A1		3.501	%		5/25/36		229,484		189,945	^(b)
IndyMac INDX Mortgage Loan Trust, 2006-AR9 3A3		3.385	%		6/25/36		302,595		295,662	^(b)
IndyMac INDX Mortgage Loan Trust, 2006-AR11 1A1		3.575	%		6/25/36		373,247		323,852	^(b)
JPMorgan Alternative Loan Trust, 2007-A1 3A1		3.607	%		3/25/37		278,747		263,270	^(b)
JPMorgan Mortgage Trust, 2005-S3 1A1		6.500	%		1/25/36		767,859		629,273
JPMorgan Mortgage Trust, 2007-S2 3A2		6.000	%		6/25/37		48,925		50,158
JPMorgan Mortgage Trust, 2007-S2 3A3		6.500	%		6/25/37		19,868		20,378
JPMorgan Mortgage Trust, 2007-S3 1A18 (1 mo. USD LIBOR + 0.500%)		0.685	%		8/25/37		2,386,677		869,650	^(b)
Legacy Mortgage Asset Trust, 2019-GS2 A1		3.750	%		1/25/59		1,671,499		1,706,305	^(c)
Legacy Mortgage Asset Trust, 2019-GS2 A2		4.250	%		1/25/59		4,520,000		3,794,364	^(c)
Legacy Mortgage Asset Trust, 2019-GS3 A1		3.750	%		4/25/59		2,188,489		2,243,632	^(c)
Lehman Mortgage Trust, 2006-3 1A7, IO (-1.000 x 1 mo. USD LIBOR + 5.400%)		5.216	%		7/25/36		5,441,074		1,574,077	^(b)
Lehman Mortgage Trust, 2006-7 1A3, IO (-1.000 x 1 mo. USD LIBOR + 5.350%)		5.166	%		11/25/36		4,948,170		1,194,596	^(b)
Lehman Mortgage Trust, 2006-7 1A8 (1 mo. USD LIBOR + 0.180%)		0.365	%		11/25/36		3,617,712		1,951,196	^(b)
Lehman Mortgage Trust, 2006-7 3A2, IO (-1.000 x 1 mo. USD LIBOR + 7.150%)		6.966	%		11/25/36		5,360,114		1,840,828	^(b)
Lehman Mortgage Trust, 2007-5 2A3 (1 mo. USD LIBOR + 0.330%)		0.515	%		6/25/37		2,899,407		380,499	^(b)
Lehman XS Trust, 2006-19 A4 (1 mo. USD LIBOR + 0.170%)		0.355	%		12/25/36		556,932		466,981	^(b)
MASTR Adjustable Rate Mortgages Trust, 2004-12 5A1		4.582	%		10/25/34		52,707		52,136	^(b)

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		7

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
MASTR Adjustable Rate Mortgages Trust, 2006-2 4A1		4.422	%		2/25/36	$	9,660	$	9,521	^(b)
MASTR Adjustable Rate Mortgages Trust, 2006-OA1 1A1 (1 mo. USD LIBOR + 0.210%)		0.395	%		4/25/46		204,918		180,989	^(b)
MASTR Reperforming Loan Trust, 2005-1 1A4		7.500	%		8/25/34		58,432		54,003	^(c)
Merrill Lynch Mortgage Investors Trust, 2006-A1 2A1		3.663	%		3/25/36		529,489		352,993	^(b)
Morgan Stanley ABS Capital I Trust Inc., 2003-NC10 M2 (1 mo. USD LIBOR + 2.700%)		2.885	%		10/25/33		16,850		15,769	^(b)
Morgan Stanley Mortgage Loan Trust, 2006-8AR 1A2 (1 mo. USD LIBOR + 0.140%)		0.325	%		6/25/36		233,958		79,543	^(b)
Morgan Stanley Mortgage Loan Trust, 2007-5AX 2A3 (1 mo. USD LIBOR + 0.230%)		0.415	%		2/25/37		1,788,689		745,759	^(b)
Morgan Stanley Mortgage Loan Trust, 2007-15AR 4A1		3.343	%		11/25/37		467,134		416,639	^(b)
Morgan Stanley Re-REMIC Trust, 2015-R2 1B (Federal Reserve U.S. 12 mo. Cumulative Avg 1 Year CMT + 0.710%)		2.401	%		12/27/46		919,269		715,318	^(b)(c)
New Century Home Equity Loan Trust, 2004-3 M3 (1 mo. USD LIBOR + 1.065%)		1.250	%		11/25/34		494,659		489,603	^(b)
New Residential Mortgage Loan Trust, 2019-6A A1IB, IO		0.500	%		9/25/59		42,641,153		539,283	^(b)(c)
Nomura Resecuritization Trust, 2014-5R 1A9		6.870	%		6/26/35		1,759,430		1,806,500	^(b)(c)
PMT Credit Risk Transfer Trust, 2019-2R A (1 mo. USD LIBOR + 2.750%)		2.934	%		5/27/23		2,754,640		2,419,559	^(b)(c)
Popular ABS Mortgage Pass-Through Trust, 2005-5 MV2 (1 mo. USD LIBOR + 0.630%)		0.815	%		11/25/35		2,104,302		1,611,831	^(b)
Provident Home Equity Loan Trust, 2000-2 A1 (1 mo. USD LIBOR + 0.540%)		0.725	%		8/25/31		744,704		638,846	^(b)
RAAC Trust, 2006-RP3 A (1 mo. USD LIBOR + 0.270%)		0.455	%		5/25/36		269,673		266,003	^(b)(c)
Radnor RE Ltd., 2020-1 M2B (1 mo. USD LIBOR + 2.250%)		2.435	%		2/25/30		2,345,000		1,677,748	^(b)(c)
RALI Trust, 2005-QA3 CB4		4.040	%		3/25/35		1,480,986		850,878	^(b)
RALI Trust, 2006-QA1 A11		4.298	%		1/25/36		335,710		267,623	^(b)
RALI Trust, 2006-QA4 A (1 mo. USD LIBOR + 0.180%)		0.365	%		5/25/36		245,907		219,062	^(b)
RALI Trust, 2006-QO2 A1 (1 mo. USD LIBOR + 0.220%)		0.405	%		2/25/46		191,087		54,941	^(b)

See Notes to Financial Statements.


8		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
RALI Trust, 2007-QA2 A1 (1 mo. USD LIBOR + 0.130%)		0.315	%		2/25/37	$	123,120	$	121,914	^(b)
RAMP Trust, 2004-RS4 MII2 (1 mo. USD LIBOR + 2.025%)		2.210	%		4/25/34		941,604		787,244	^(b)
RAMP Trust, 2004-SL3 A3		7.500	%		12/25/31		295,943		288,296
RAMP Trust, 2005-SL2 A5		8.000	%		10/25/31		359,988		259,043
RBSGC Mortgage Loan Trust, 2007-A 3A1 (1 mo. USD LIBOR + 0.350%)		0.535	%		1/25/37		2,803,585		521,024	^(b)
Redwood Funding Trust, 2019-1 PT		4.213	%		9/27/24		2,936,253		2,985,864	^(c)
Renaissance Home Equity Loan Trust, 2006-1 AF5		6.166	%		5/25/36		539,486		377,478
Renaissance Home Equity Loan Trust, 2007-2 AF2		5.675	%		6/25/37		445,054		139,971
Renaissance Home Equity Loan Trust, 2007-3 AF3		7.238	%		9/25/37		1,697,273		928,684
Residential Asset Securitization Trust, 2005-A7 A2, IO (-1.000 x 1 mo. USD LIBOR + 7.250%)		7.066	%		6/25/35		1,709,842		581,638	^(b)
Residential Asset Securitization Trust, 2005- A13 1A3 (1 mo. USD LIBOR + 0.470%)		0.655	%		10/25/35		110,235		80,300	^(b)
Residential Asset Securitization Trust, 2006-A1 1A6 (1 mo. USD LIBOR + 0.500%)		0.685	%		4/25/36		1,522,416		501,584	^(b)
Residential Asset Securitization Trust, 2006-A1 1A7, IO (-1.000 x 1 mo. USD LIBOR + 5.500%)		5.316	%		4/25/36		3,155,266		804,146	^(b)
Residential Asset Securitization Trust, 2007-A2 1A1		6.000	%		4/25/37		238,382		191,050
RFMSI Trust, 2006-S8 A12, IO (-1.000 x 1 mo. USD LIBOR + 5.400%)		5.216	%		9/25/36		4,065,407		634,966	^(b)
RFMSI Trust, 2006-SA2 4A1		5.355	%		8/25/36		135,712		114,664	^(b)
RFMSI Trust, 2007-S6 1A6 (1 mo. USD LIBOR + 0.500%)		0.685	%		6/25/37		1,634,075		1,256,876	^(b)
RFMSI Trust, 2007-S6 1A13, IO (-1.000 x 1 mo. USD LIBOR + 5.500%)		5.316	%		6/25/37		1,634,075		269,417	^(b)
Structured Adjustable Rate Mortgage Loan Trust, 2004-18 1A2		3.434	%		12/25/34		264,536		249,719	^(b)
Structured Adjustable Rate Mortgage Loan Trust, 2005-4 1A1		3.617	%		3/25/35		130,633		117,300	^(b)
Structured Adjustable Rate Mortgage Loan Trust, 2005-4 5A		4.009	%		3/25/35		63,922		59,843	^(b)

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		9

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Residential Mortgage-Backed Securities ^(a)— continued
Structured Adjustable Rate Mortgage Loan Trust, 2005-7 1A3		3.661	%		4/25/35	$	59,557	$	56,560	^(b)
Structured Asset Investment Loan Trust, 2004-8 M9 (1 mo. USD LIBOR + 3.750%)		3.935	%		9/25/34		297,405		262,861	^(b)
Structured Asset Mortgage Investments II Trust, 2006-AR5 4A1 (1 mo. USD LIBOR + 0.220%)		0.405	%		5/25/46		571,530		292,275	^(b)
Wachovia Mortgage Loan Trust LLC, 2005-B 2A2		4.219	%		10/20/35		16,693		15,894	^(b)
WaMu Mortgage Pass-Through Certificates Trust, 2005-AR2 B1 (1 mo. USD LIBOR + 0.530%)		0.715	%		1/25/45		1,635,662		1,045,041	^(b)
WaMu Mortgage Pass-Through Certificates Trust, 2005-AR13 A1C3 (1 mo. USD LIBOR + 0.490%)		0.675	%		10/25/45		182,780		172,777	^(b)
WaMu Mortgage Pass-Through Certificates Trust, 2005-AR15 A1C4 (1 mo. USD LIBOR + 0.400%)		0.585	%		11/25/45		776,469		482,716	^(b)
WaMu Mortgage Pass-Through Certificates Trust, 2006-AR16 2A2		3.332	%		12/25/36		190,742		173,651	^(b)
Washington Mutual Mortgage Pass-Through Certificates Trust, 2005-8 1A6 (-3.667 x 1 mo. USD LIBOR + 23.283%)		22.607	%		10/25/35		186,976		271,207	^(b)
Washington Mutual Mortgage Pass-Through Certificates Trust, 2005-9 5A4 (-7.333 x 1 mo. USD LIBOR + 35.933%)		34.580	%		11/25/35		63,281		141,451	^(b)
Washington Mutual Mortgage Pass-Through Certificates Trust, 2005-10 2A3 (1 mo. USD LIBOR + 0.900%)		1.085	%		11/25/35		113,954		94,630	^(b)
Washington Mutual Mortgage Pass-Through Certificates Trust, 2006-AR10 A1 (1 mo. USD LIBOR + 0.100%)		0.285	%		12/25/36		385,546		255,525	^(b)
Wells Fargo Alternative Loan Trust, 2007-PA1 A12, IO (-1.000 x 1 mo. USD LIBOR +5.460%)		5.276	%		3/25/37		2,396,056		389,835	^(b)
Total Residential Mortgage-Backed Securities (Cost — $151,891,802)									158,899,538
Commercial Mortgage-Backed Securities ^(a)— 26.4%
BX Commercial Mortgage Trust, 2019-IMC F (1 mo. USD LIBOR + 2.900%)		3.085	%		4/15/34		2,000,000		1,683,909	^(b)(c)
Credit Suisse Commercial Mortgage Trust, 2006-C5 AJ		5.373	%		12/15/39		923,652		425,301
CSMC Trust, 2014-USA F		4.373	%		9/15/37		2,720,000		2,042,804	^(c)

See Notes to Financial Statements.


10		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Commercial Mortgage-Backed Securities ^(a)— continued
CSMC Trust, 2017-CHOP F (1 mo. USD LIBOR + 4.350%)		4.535	%		7/15/32	$	1,620,000	$	1,082,338	^(b)(c)
CSMC Trust, 2017-CHOP H (1 mo. USD LIBOR + 7.350%)		7.535	%		7/15/32		3,300,000		1,922,337	^(b)(c)
CSMC Trust, 2019-RIO B		6.889	%		12/15/21		3,000,000		2,734,023	^(c)
CSMC Trust, 2020-LOTS A		4.725	%		7/15/22		2,000,000		2,003,782	^(b)(c)
DBUBS Mortgage Trust, 2011-LC3A G		3.750	%		8/10/44		2,600,000		906,100	^(c)
FRESB Mortgage Trust, 2018-SB48 B		3.798	%		2/25/38		3,853,232		2,880,201	^(b)(c)
GMAC Commercial Mortgage Securities Inc., 2006-C1 AJ		5.349	%		11/10/45		103,118		87,110	^(b)
GS Mortgage Securities Trust, 2006-GG8 AJ		5.622	%		11/10/39		81,011		56,060
GS Mortgage Securities Trust, 2007-GG10 AJ		6.015	%		8/10/45		2,359,352		1,029,733	^(b)
GS Mortgage Securities Trust, 2019-SMP G (1 mo. USD LIBOR + 4.250%)		4.435	%		8/15/32		1,500,000		795,923	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2006-LDP7 AJ		6.273	%		4/17/45		296,676		150,500	^(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2007-CB19 AJ		6.074	%		2/12/49		544,047		217,880	^(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2007-LD12 AJ		6.710	%		2/15/51		79,727		75,677	^(b)
JPMorgan Chase Commercial Mortgage Securities Trust, 2018-PHMZ M (1 mo. USD LIBOR + 8.208%)		8.392	%		6/15/35		3,000,000		2,266,998	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2019-BOLT C (1 mo. USD LIBOR + 3.800%)		3.985	%		7/15/34		1,814,912		1,621,493	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2019-BOLT D (1 mo. USD LIBOR + 6.550%)		6.735	%		7/15/34		907,456		718,985	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2019-BOLT XCP, IO		2.052	%		7/15/34		13,611,838		286,880	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2020-MKST G (1 mo. USD LIBOR + 4.250%)		4.435	%		12/15/36		1,520,000		1,241,361	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2020-MKST H (1 mo. USD LIBOR + 6.750%)		6.935	%		12/15/36		1,520,000		1,170,403	^(b)(c)
JPMorgan Chase Commercial Mortgage Securities Trust, 2020-NNN GFL (1 mo. USD LIBOR + 3.000%)		3.195	%		1/16/37		760,000		637,270	^(b)(c)

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		11

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount		Value
Commercial Mortgage-Backed Securities ^(a)— continued
JPMorgan Chase Commercial Mortgage Securities Trust, 2020-NNN HFL (1 mo. USD LIBOR + 4.000%)		4.195	%		1/16/37	$	760,000	$	619,351	^(b)(c)
ML-CFC Commercial Mortgage Trust, 2007-5 AJ		5.450	%		8/12/48		76,504		45,393	^(b)
ML-CFC Commercial Mortgage Trust, 2007-9 AJ		6.155	%		9/12/49		219,374		84,826	^(b)
ML-CFC Commercial Mortgage Trust, 2007-9 AJA		6.155	%		9/12/49		51,115		19,760	^(b)
Morgan Stanley Capital I Trust, 2007-IQ13 AJ		5.438	%		3/15/44		5,545		5,543
Morgan Stanley Capital I Trust, 2007-IQ16 AJ		6.461	%		12/12/49		167,028		102,054	^(b)
Motel 6 Trust, 2017-MTL6 F (1 mo. USD LIBOR + 4.250%)		4.435	%		8/15/34		1,203,672		1,057,389	^(b)(c)
Multifamily CAS Trust, 2019-01 CE (1 mo. USD LIBOR + 8.750%)		8.935	%		10/15/49		2,500,000		1,962,502	^(b)(c)
Multifamily CAS Trust, 2020-01 CE (1 mo. USD LIBOR + 7.500%)		7.685	%		3/25/50		1,500,000		1,177,433	^(b)(c)
Natixis Commercial Mortgage Securities Trust, 2019-FAME D		4.544	%		8/15/36		1,900,000		1,647,669	^(b)(c)
Natixis Commercial Mortgage Securities Trust, 2019-FAME E		4.544	%		8/15/36		950,000		759,495	^(b)(c)
Natixis Commercial Mortgage Securities Trust, 2019-TRUE A (1 mo. USD LIBOR + 2.011%)		2.204	%		4/18/24		1,280,000		1,257,907	^(b)(c)
Starwood Retail Property Trust, 2014-STAR D (1 mo. USD LIBOR + 3.500%)		3.685	%		11/15/27		1,000,000		632,873	^(b)(c)
Starwood Retail Property Trust, 2014-STAR E (1 mo. USD LIBOR + 4.400%)		4.585	%		11/15/27		1,600,000		606,285	^(b)(c)
Tharaldson Hotel Portfolio Trust, 2018-THL E (1 mo. USD LIBOR + 3.180%)		3.355	%		11/11/34		1,012,600		850,621	^(b)(c)
Tharaldson Hotel Portfolio Trust, 2018-THL F (1 mo. USD LIBOR + 3.952%)		4.128	%		11/11/34		769,576		567,125	^(b)(c)
Tharaldson Hotel Portfolio Trust, 2018-THL G (1 mo. USD LIBOR + 6.350%)		6.525	%		11/11/34		2,430,241		1,771,189	^(b)(c)
Tharaldson Hotel Portfolio Trust, 2018-THL H (1 mo. USD LIBOR + 9.800%)		9.975	%		11/11/34		1,620,161		1,176,398	^(b)(c)
UBS-Barclays Commercial Mortgage Trust, 2012-C2 G		5.000	%		5/10/63		3,130,000		284,893	^(b)(c)
UBS-Barclays Commercial Mortgage Trust, 2012-C2 H		5.000	%		5/10/63		3,149,979		241,184	^(b)(c)
Total Commercial Mortgage-Backed Securities (Cost — $56,000,683)									40,906,958

See Notes to Financial Statements.


12		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Security‡	Rate			Maturity Date		Face Amount/ Units		Value
Asset-Backed Securities — 6.5%
AccessLex Institute, 2004-A B1 (28 day Auction Rate Security)		0.000	%		7/1/39	$	1,400,000	$	1,213,010	^(b)
Applebee’s Funding LLC/IHOP Funding LLC, 2019-1A A2II		4.723	%		6/7/49		2,000,000		1,723,280	^(c)
BankAmerica Manufactured Housing Contract Trust, 1996-1 B1		7.875	%		10/10/26		7,866,000		1,408,539
BCMSC Trust, 1998-B A		6.530	%		10/15/28		435,854		453,869	^(b)
BCMSC Trust, 1999-A A3		5.980	%		3/15/29		165,702		165,725	^(b)
Cascade MH Asset Trust, 2019-MH1 M		5.985	%		11/25/44		1,150,000		1,128,588	^(b)(c)
Firstfed Corp. Manufactured Housing Contract, 1997-2 B		8.110	%		5/15/24		165,417		56,522	^(c)
RBS Acceptance Inc., 1995-BA1 B2		9.000	%		8/10/20		2,191,561		11,781
SMB Private Education Loan Trust, 2014-A R		0.000	%		9/15/45		6,875		892,981	^(c)
SoFi Professional Loan Program LLC, 2017-F R1		0.000	%		1/25/41		34,000		1,272,668	^(c)
TES LLC, 2017-1A B		7.740	%		10/20/47		1,500,000		1,334,630	^(c)
VOYA CLO, 2017-2A D (3 mo. USD LIBOR + 6.020%)		7.239	%		6/7/30		400,000		328,020	^(b)(c)
Total Asset-Backed Securities (Cost — $13,932,375)									9,989,613

						Face Amount
Corporate Bonds & Notes — 0.3%
Consumer Staples — 0.3%
Food & Staples Retailing — 0.3%
CVS Pass-Through Trust (Cost — $486,914)		9.350	%		1/10/23		479,444		488,119	^(c)

Counterparty

Expiration
Date

Contracts

Notional
Amount

Purchased Options — 0.0%††

OTC Purchased Options — 0.0%††

Interest rate swaption, Put @ 188.00bps (Cost — $58,228)

Morgan Stanley
& Co. Inc.

7/30/20

2,300,000

Total Investments before Short-Term Investments (Cost — $222,370,002)

210,284,305

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		13

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.

Security‡

Rate

Value

Short-Term Investments — 3.0%

Dreyfus Government Cash Management, Institutional Shares (Cost — $4,552,267)

0.085

4,552,267

4,552,267

Total Investments — 138.9% (Cost — $226,922,269)

214,836,572

Liabilities in Excess of Other Assets — (38.9)%

(60,132,119

)

Total Net Assets — 100.0%

154,704,453

‡	Securities held by the Fund are subject to a lien, granted to the lender, to the extent of the borrowing outstanding and any additional expenses.

††	Represents less than 0.1%.

^(a)

Collateralized mortgage obligations are secured by an underlying pool of mortgages or mortgage pass-through certificates that are structured to direct payments on underlying collateral to different series or classes of the obligations. The interest rate may change positively or inversely in relation to one or more interest rates, financial indices or other financial indicators and may be subject to an upper and/or lower limit.

^(b)

Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.

^(c)

Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors.


Abbreviation(s) used in this schedule:

bps		— basis point spread (100 basis points = 1.00%)

CAS		— Connecticut Avenue Securities

CLO		— Collateralized Loan Obligation

CMT		— Constant Maturity Treasury

IO		— Interest Only

LIBOR		— London Interbank Offered Rate

PAC		— Planned Amortization Class

PO		— Principal Only

REMIC		— Real Estate Mortgage Investment Conduit

Re-REMIC		— Resecuritization of Real Estate Mortgage Investment Conduit

USD		— United States Dollar

Schedule of Written Options

OTC Written Options

Security

Counterparty

Expiration

Date

Strike

Price

Contracts

Notional

Amount

Value

Interest rate swaption, Put (Premiums received — $58,391)

Morgan Stanley
& Co. Inc.

7/30/20

155.00

^bps

12,700,000

^(a)

^(a)	Value is less than $1.

See Notes to Financial Statements.


14		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Western Asset Mortgage Opportunity Fund Inc.


Abbreviation(s) used in this schedule:

bps		— basis point spread (100 basis points = 1.00%)

At June 30, 2020, the Fund had the following open futures contracts:


	Number of Contracts		Expiration Date		Notional Amount		Market Value		Unrealized Appreciation (Depreciation)
Contracts to Buy:
U.S. Treasury 5-Year Notes		162		9/20	$	20,241,421	$	20,370,235	$	128,814
U.S. Treasury Ultra 10-Year Notes		18		9/20		2,775,190		2,834,719		59,529
U.S. Treasury Ultra Long- Term Bonds		36		9/20		7,501,923		7,853,625		351,702
										540,045

Contracts to Sell:
U.S. Treasury 2-Year Notes		35		9/20		7,717,986		7,728,984		(10,998)
U.S. Treasury Long-Term Bonds		65		9/20		11,251,059		11,606,562		(355,503)
										(366,501)
Net unrealized appreciation on open futures contracts									$	173,544

At June 30, 2020, the Fund had the following open swap contracts:


OTC CREDIT DEFAULT SWAPS ON CREDIT INDICES — SELL PROTECTION¹
Swap Counterparty (Reference Entity)	Notional Amount²		Termination Date		Periodic Payments Received by the Fund†	Market Value³		Upfront Premiums Paid (Received)		Unrealized Depreciation

Morgan Stanley & Co. Inc. (Markit CMBX.NA.BBB-.8 Index)	$	500,000		10/17/57	3.000% Monthly	$	(113,853)	$	(22,382)	$	(91,471)

OTC CREDIT DEFAULT SWAPS ON CREDIT INDICES — BUY PROTECTION⁴
Swap Counterparty (Reference Entity)	Notional Amount²		Termination Date		Periodic Payments Made by the Fund†	Market Value³		Upfront Premiums Paid (Received)		Unrealized Appreciation
Morgan Stanley & Co. Inc. (Markit CMBX.NA.BBB-.12 Index)	$	870,000		8/17/61	3.000% Monthly	$	176,426	$	72,906	$	103,520

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		15

Schedule of investments (unaudited) (cont’d)

June 30, 2020

Western Asset Mortgage Opportunity Fund Inc.

²	The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

The quoted market prices and resulting values for credit default swap agreements on asset-backed securities and credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected loss (or profit) for the credit derivative had the notional amount of the swap agreement been closed/sold as of the period end. Decreasing market values (sell protection) or increasing market values (buy protection) when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

⁴

If the Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or the underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or the underlying securities comprising the referenced index.

†	Percentage shown is an annual percentage rate.

See Notes to Financial Statements.


16		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Statement of assets and liabilities (unaudited)

June 30, 2020



Assets:
Investments, at value (Cost — $226,922,269)	$214,836,572
Interest receivable	733,197
Receivable for Fund shares sold	530,386
Deposits with brokers for open futures contracts	342,078
OTC swaps, at value (premiums paid — $72,906)	176,426
Receivable for open OTC swap contracts	250
Prepaid expenses	9,032
*Total Assets*	*216,627,941*

Liabilities:
Loan payable (Note 5)	60,000,000
Distributions payable	1,391,096
Investment management fee payable	142,291
OTC swaps, at value (premiums received — $22,382)	113,853
Interest expense payable	64,375
Payable to broker — net variation margin on open futures contracts	16,765
Due to custodian	10,827
Directors’ fees payable	5,728
Payable for open OTC swap contracts	435
Written options, at value (premiums received — $58,391)	0	*
Accrued expenses	178,118
*Total Liabilities*	*61,923,488*
Total Net Assets	$154,704,453

Net Assets:
Par value ($0.001 par value; 10,984,078 shares issued and outstanding; 100,000,000 shares authorized)	$10,984
Paid-in capital in excess of par value	203,427,467
Total distributable earnings (loss)	(48,733,998)
Total Net Assets	$154,704,453

Shares Outstanding	10,984,078

Net Asset Value	$14.08

*	Amount represents less than $1.

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		17

Statement of operations (unaudited)

For the Six Months Ended June 30, 2020



Investment Income:
*Interest*	$	*9,309,207*

Expenses:
Investment management fee (Note 2)		1,250,327
Interest expense (Notes 3 and 5)		1,072,067
Commitment fees (Note 5)		77,304
Audit and tax fees		68,337
Legal fees		63,972
Transfer agent fees		40,080
Directors’ fees		35,113
Fund accounting fees		15,989
Custody fees		11,061
Shareholder reports		10,489
Stock exchange listing fees		6,257
Insurance		1,888
Miscellaneous expenses		7,136
*Total Expenses*		*2,660,020*
Less: Fee waivers and/or expense reimbursements (Note 2)		(254,528)
*Net Expenses*		*2,405,492*
Net Investment Income		6,903,715

Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions (Notes 1, 3 and 4):
Net Realized Loss From:
Investment transactions		(15,757,801)
Futures contracts		(3,007,021)
Swap contracts		(741,337)
Forward foreign currency contracts		(1,776)
Foreign currency transactions		(589)
*Net Realized Loss*		*(19,508,524)*
Change in Net Unrealized Appreciation (Depreciation) From:
Investments		(34,863,160)
Futures contracts		(66,326)
Written options		58,391
Swap contracts		(54,693)
Forward foreign currency contracts		(839)
Foreign currencies		(380)
*Change in Net Unrealized Appreciation (Depreciation)*		*(34,927,007)*
Net Loss on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions		(54,435,531)
Decrease in Net Assets From Operations	$	(47,531,816)

See Notes to Financial Statements.


18		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Statements of changes in net assets


For the Six Months Ended June 30, 2020 (unaudited) and the Year Ended December 31, 2019	2020			2019

Operations:
Net investment income	$	6,903,715		$	15,892,494
Net realized loss		(19,508,524)			(1,553,304)
Change in net unrealized appreciation (depreciation)		(34,927,007)			8,217,931
*Increase (Decrease) in Net Assets From Operations*		*(47,531,816)*			*22,557,121*

Distributions to Shareholders From (Note 1):
Total distributable earnings		(8,976,147)			(20,068,443)
Return of capital		—			(441,518)
*Decrease in Net Assets From Distributions to Shareholders*		*(8,976,147)*			*(20,509,961)*

Fund Share Transactions:
Net proceeds from sale of shares (449,932 and 0 shares issued, respectively) (Note 8)		6,103,919	^†		—
Reinvestment of distributions (26,223 and 35,526 shares issued, respectively)		398,607			713,330
*Increase in Net Assets From Fund Share Transactions*		*6,502,526*			*713,330*
*Increase (Decrease) in Net Assets*		*(50,005,437)*			*2,760,490*

Net Assets:
Beginning of period		204,709,890			201,949,400
End of period	$	154,704,453		$	204,709,890

†	Net of shelf registration offering costs of $113,936 and sales charges of $60,527.

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		19

Statement of cash flows (unaudited)

For the Six Months Ended June 30, 2020



Increase (Decrease) in Cash:
Cash Flows from Operating Activities:
Net decrease in net assets resulting from operations	$	(47,531,816)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided (used) by operating activities:
Purchases of portfolio securities		(22,908,749)
Sales of portfolio securities		54,645,520
Net purchases, sales and maturities of short-term investments		3,457,658
Net amortization of premium (accretion of discount)		1,260,422
Decrease in interest receivable		356,857
Increase in prepaid expenses		(4,469)
Decrease in other receivables		53,500
Decrease in receivable for open OTC swap contracts		3,400
Decrease in net premiums received for OTC swap contracts		(292,895)
Decrease in receivable from broker — net variation margin on open futures contracts		20,718
Decrease in investment management fee payable		(115,484)
Decrease in Directors’ fees payable		(1,592)
Decrease in interest expense payable		(168,375)
Decrease in accrued expenses		(79,398)
Increase in premiums received from written options		58,391
Increase in payable to broker — net variation margin on open futures contracts		16,765
Decrease in payable for open OTC swap contracts		(2,065)
Net realized loss on investments		15,757,801
Change in net unrealized appreciation (depreciation) of investments, written options, OTC swap contracts and forward foreign currency contracts		34,860,301
Net Cash Provided in Operating Activities*		*39,386,490*

Cash Flows from Financing Activities:
Distributions paid on common stock (net of distributions payable)		(7,186,444)
Decrease in loan facility borrowings		(38,000,000)
Increase in due to custodian		10,827
Proceeds from sale of shares (net of receivable for Fund shares sold)		5,573,533
*Net Cash Used by Financing Activities*		*(39,602,084)*
Net Decrease in Cash and Restricted Cash		(215,594)
Cash and restricted cash at beginning of period		557,672
Cash and restricted cash at end of period	$	342,078

*	Included in operating expenses is cash of $1,297,618 paid for interest and commitment fees on borrowings.

See Notes to Financial Statements.


20		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows.


	June 30, 2020
Cash		—
Restricted cash		342,078
Total cash and restricted cash shown in the Statement of Cash Flows	$	342,078

Restricted cash consists of cash that has been segregated to cover the Fund’s collateral or margin obligations under derivative contracts. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.



Non-Cash Financing Activities:
Proceeds from reinvestment of distributions	$	398,607

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		21

Financial highlights


For a share of capital stock outstanding throughout each year ended December 31, unless otherwise noted:
	2020^1,2			2019¹			2018¹			2017¹			2016¹			2015¹

Net asset value, beginning of period		$19.48			$19.28			$21.27			$20.70			$22.76			$24.75

Income (loss) from operations:
Net investment income		0.65			1.51			1.65			1.57			1.47			2.13
Net realized and unrealized gain (loss)		(5.20)			0.65			0.22			2.28			(0.53)			(0.80)
*Total income (loss) from operations*		*(4.55)*			*2.16*			*1.87*			*3.85*			*0.94*			*1.33*

Less distributions from:
Net investment income		(0.85)	³		(1.92)			(3.03)			(2.69)			(2.95)			(2.33)
Net realized gains		—			—			(0.83)			(0.59)			(0.05)			(0.99)
Return of capital		—			(0.04)			—			—			—			—
*Total distributions*		*(0.85)*			*(1.96)*			*(3.86)*			*(3.28)*			*(3.00)*			*(3.32)*

Net asset value, end of period		$14.08			$19.48			$19.28			$21.27			$20.70			$22.76

Market price, end of period		$14.67			$20.30			$20.39			$24.67			$22.79			$23.55
*Total return, based on NAV^4,5*		*(23.56)*	%		*11.65*	%		*9.26*	%		*19.70*	%		*4.47*	%		*5.44*	%
*Total return, based on Market Price⁶*		*(23.47)*	%		*9.71*	%		*(1.16)*	%		*24.20*	%		*10.80*	%		*13.56*	%

Net assets, end of period (millions)		$155			$205			$202			$222			$216			$237

Ratios to average net assets:
Gross expenses		3.20	%⁷		3.56	%		3.15	%		2.68	%		2.97	%		2.39	%
Net expenses		2.89	^7,8		3.56			3.15			2.68			2.97			2.39
Net investment income		8.30	⁷		7.73			7.78			7.29			6.78			8.65

Portfolio turnover rate		9	%		17	%		33	%		35	%		23	%⁹		24	%

Supplemental data:
Loan Outstanding, End of Period (000s)		$60,000			$98,000			$99,250			$101,750			$101,750			$80,500
Asset Coverage Ratio for Loan Outstanding¹⁰		358	%		309	%		303	%		319	%		312	%		395	%
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding¹⁰		$3,578			$3,089			$3,035			$3,185			$3,124			$3,946
Weighted Average Loan (000s)		$77,210			$98,072			$101,743			$101,750			$90,984			$99,544
Weighted Average Interest Rate on Loan		2.39	%		3.46	%		3.06	%		2.06	%		1.50	%		1.06	%

¹	Per share amounts have been calculated using the average shares method.

See Notes to Financial Statements.


22		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

²	For the six months ended June 30, 2020 (unaudited).

³	The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year.

⁴

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁵	The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁶	The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

⁷	Annualized.

⁸	Reflects fee waivers and/or expense reimbursements.

⁹	Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 24%.

¹⁰	Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period.

See Notes to Financial Statements.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		23

Notes to financial statements (unaudited)

1. Organization and significant accounting policies

Western Asset Mortgage Opportunity Fund Inc. (the “Fund”) was incorporated in Maryland on December 11, 2009 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is to provide current income. As a secondary investment objective, the Fund will seek capital appreciation. The Fund seeks to achieve its investment objectives by investing primarily in a diverse portfolio of mortgage-backed securities (“MBS”) and mortgage whole loans. Investments in MBS consist primarily of non-agency residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”). At the Fund’s Special Meeting of Stockholders held on December 13, 2019, stockholders approved the proposal to convert the Fund to a perpetual fund by eliminating the Fund’s term, which was scheduled to end at the close of business on March 1, 2022. The conversion became effective on January 2, 2020. On April 1, 2020, the Board of Directors of the Fund approved amendments to the Fund’s bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange Commission’s website at www.sec.gov.

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has


24		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.

The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.

The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.

For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		25

Notes to financial statements (unaudited) (cont’d)

GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:

•

Level 1 — quoted prices in active markets for identical investments

•

Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

•

Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.

The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:


ASSETS
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Long-Term Investments†:
Residential Mortgage-Backed
Securities		—	$	158,899,538		—	$	158,899,538
Commercial Mortgage-Backed Securities		—		40,906,958		—		40,906,958
Asset-Backed Securities		—		9,989,613		—		9,989,613
Corporate Bonds & Notes		—		488,119		—		488,119
Purchased Options		—		77		—		77
Total Long-Term Investments		—		210,284,305		—		210,284,305
Short-Term Investments†	$	4,552,267		—		—		4,552,267
Total Investments	$	4,552,267	$	210,284,305		—	$	214,836,572
Other Financial Instruments:
Futures Contracts	$	540,045		—		—	$	540,045
OTC Credit Default Swaps on Credit Indices — Buy Protection‡		—	$	176,426		—		176,426
Total Other Financial Instruments	$	540,045	$	176,426		—	$	716,471
Total	$	5,092,312	$	210,460,731		—	$	215,553,043


26		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report


LIABILITIES
Description	Quoted Prices (Level 1)		Other Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Other Financial Instruments:
Written Options		—	$	0	*		—	$	0	*
Futures Contracts	$	366,501		—			—		366,501
OTC Credit Default Swaps on Credit Indices —Sell Protection‡		—		113,853			—		113,853
Total	$	366,501	$	113,853			—	$	480,354

†	See Schedule of Investments for additional detailed categorizations.

‡	Value includes any premium paid or received with respect to swap contracts.

*	Amount represents less than $1.

(b) Purchased options. When the Fund purchases an option, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market to reflect the current market value of the option purchased. If the purchased option expires, the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is added to the basis of the instrument acquired or deducted from the proceeds of the instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.

(c) Written options. When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.

The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		27

Notes to financial statements (unaudited) (cont’d)

is that the Fund is exposed to the risk of loss if the market price of the underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(d) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.

Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

(e) Forward foreign currency contracts. The Fund enters into a forward foreign currency contract to hedge against, or manage exposure to, foreign issuers or markets. The Fund may also enter into a forward foreign currency contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.

Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.

(f) Swap agreements. The Fund invests in swaps for the purpose of managing its exposure to interest rate, credit or market risk, or for other purposes, including to increase the Fund’s return. The use of swaps involves risks that are different from those associated


28		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

with other portfolio transactions. Swap agreements are privately negotiated in the over-the-counter market and may be entered into as a bilateral contract (“OTC Swaps”) or centrally cleared (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.

In a Centrally Cleared Swap, immediately following execution of the swap, the swap agreement is submitted to a clearinghouse or central counterparty (the “CCP”) and the CCP becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP through a broker, acting in an agency capacity. All payments are settled with the CCP through the broker. Upon entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.

Swap contracts are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any, is recorded as a net receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination of the swap agreement. Collateral, in the form of restricted cash or securities, may be required to be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.

OTC swap payments received or made at the beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.

The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of June 30, 2020, the total notional value of all credit default swaps to sell protection was $500,000. This amount would be offset by the value of the swap’s reference entity, upfront premiums received on the swap and any amounts received from the settlement of a credit default swap where the Fund bought protection for the same referenced security/entity.

For average notional amounts of swaps held during the six months ended June 30, 2020, see Note 4.

(g) Swaptions. The Fund may purchase or write swaption contracts to manage exposure to fluctuations in interest rates or to enhance yield. The Fund may also purchase and write swaption contracts to manage exposure to an underlying instrument. Swaption contracts


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		29

Notes to financial statements (unaudited) (cont’d)

written by the Fund represent an option that gives the purchaser the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date. Swaption contracts purchased by the Fund represent an option that gives the Fund the right, but not the obligation, to enter into a previously agreed upon swap contract at a future date.

When the Fund writes a swaption, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is marked-to-market daily to reflect the current market value of the swaption written. If the swaption expires, the Fund realizes a gain equal to the amount of the premium received.

When the Fund purchases a swaption, an amount equal to the premium paid by the Fund is recorded as an investment on the Statement of Assets and Liabilities, the value of which is marked-to-market daily to reflect the current market value of the swaption purchased. If the swaption expires, the Fund realizes a loss equal to the amount of the premium paid.

Swaptions are marked-to-market daily based upon quotations from market makers. Changes in the value of the swaption are reported as unrealized gains or losses in the Statement of Operations.

(h) Loan participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.

The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.

(i) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped Securities can be principal only securities (“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. The market value of Stripped Securities will fluctuate in response to changes in economic conditions, rates of prepayment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation may increase with a longer period of maturity.


30		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.

(j) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

(k) Reverse repurchase agreements. The Fund may enter into reverse repurchase agreements. Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed upon time and price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities. In entering into reverse repurchase agreements, the Fund will maintain cash, U.S. government securities or other liquid debt obligations at least equal in value to its obligations with respect to reverse repurchase agreements or will take other actions permitted by law to cover its obligations. If the market value of the collateral declines during the period, the Fund may be required to post additional collateral to cover its obligation. Cash collateral that has been pledged to cover obligations of the Fund under reverse repurchase agreements, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral are noted in the Schedule of Investments. Interest payments made on reverse repurchase agreements are recognized as a component of “Interest expense” on the Statement of Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		31

Notes to financial statements (unaudited) (cont’d)

(l) Mortgage-backed securities. Mortgage-Backed Securities (“MBS”) include CMBS and RMBS. These securities depend on payments (except for rights or other assets designed to assure the servicing or timely distribution of proceeds to holders of such securities) primarily from the cash flow from secured commercial or residential mortgage loans made to borrowers. Such loans are secured (on a first priority basis or second priority basis, subject to permitted liens, easements and other encumbrances) by commercial or residential real estate, the proceeds of which are used to purchase and or to construct commercial or residential real estate. The value of some mortgage-backed securities may be particularly sensitive to changes in prevailing interest rates. The value of these securities may fluctuate in response to the market’s perception of the creditworthiness of the issuers. Additionally, although certain mortgage-related securities are supported by some form of government or private guarantee and/or insurance, there is no assurance that private guarantors or insurers will meet their obligations.

(m) Leverage. The Fund may seek to enhance the level of its current distributions to holders of common stock through the use of leverage. The Fund may use leverage directly at the Fund level through borrowings, including loans from certain financial institutions or through a qualified government sponsored program, the use of reverse repurchase agreements and/or the issuance of debt securities (collectively, “Borrowings”), and possibly through the issuance of preferred stock (“Preferred Stock”), in an aggregate amount of up to approximately 33 1/3% of the Fund’s Total Assets immediately after such Borrowings and/or issuances of Preferred Stock. “Total Assets” means net assets of the Fund plus the amount of any Borrowings and assets attributable to Preferred Stock that may be outstanding. Currently, the Fund has no intention to issue notes or debt securities, or Preferred Stock. In addition, the Fund may enter into additional reverse repurchase agreements and/or use similar investment management techniques that may provide leverage, but which are not subject to the foregoing 33 1/3% limitation so long as the Fund has covered its commitment with respect to such techniques by segregating liquid assets, entering into offsetting transactions or owning positions covering related obligations.

(n) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Statement of Cash Flows.

(o) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.


32		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

(p) Credit and market risk. Investments in securities that are collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of these investments and may result in a lack of correlation between their credit ratings and values.

(q) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.

(r) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		33

Notes to financial statements (unaudited) (cont’d)

The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.

With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.

The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement, with certain of its derivative counterparties that govern over-the-counter derivatives and provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.

Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.

Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.


34		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

As of June 30, 2020, the Fund held OTC credit default swaps with credit related contingent features which had a liability position of $113,853. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties.

At June 30, 2020, the Fund held non-cash collateral from Morgan Stanley & Co. Inc. in the amount of $60,619. This amount could be used to reduce the Fund’s exposure to the counterparty in the event of default.

(s) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. The Fund accretes market discounts and amortizes market premiums on debt securities using the effective yield method. Accretion of market discounts and amortization of market premiums requires the application of several assumptions including, but not limited to, prepayment assumptions and default rate assumptions, which are reevaluated not less than semi-annually and require the use of a significant amount of judgment. Principal write-offs are generally treated as realized losses. The Fund’s accretion of discounts and amortization of premiums for U.S. federal and other tax purposes is likely to differ from the financial accounting treatment under GAAP of these items as described above. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.

(t) Partnership accounting policy. The Fund records its pro rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the Fund’s Statement of Operations.

(u) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		35

Notes to financial statements (unaudited) (cont’d)

(v) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.

(w) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of December 31, 2019, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

(x) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.

2. Investment management agreement and other transactions with affiliates

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company, LLC (“Western Asset”) and Western Asset Management Company Limited (“Western Asset Limited”) are the Fund’s subadvisers. LMPFA, Western Asset and Western Asset Limited are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”). As of July 31, 2020, LMPFA, Western Asset and Western Asset Limited are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (“Franklin Resources”).

Under the investment management agreement, the Fund pays an investment management fee, calculated daily and paid monthly, at an annual rate of 1.00% of the Fund’s average daily managed assets. Managed assets are net assets plus the proceeds of any outstanding borrowings used for leverage and assets attributable to preferred stock that may be outstanding.

LMPFA provides administrative and certain oversight services to the Fund. LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Limited provides certain subadvisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated debt securities. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives from the Fund. In turn, Western Asset pays Western Asset Limited a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that Western Asset allocates to Western Asset Limited to manage.


36		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Fund’s assets, including those investments purchased with leverage.

Effective January 2, 2020, LMPFA implemented an investment management fee waiver of 0.20% that will terminate on January 2, 2022.

During the six months ended June 30, 2020, fees waived and/or expenses reimbursed amounted to $254,528.

All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.

3. Investments

During the six months ended June 30, 2020, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S. Government & Agency Obligations were as follows:


	Investments		U.S. Government & Agency Obligations
Purchases	$	21,408,749	$	1,500,000
Sales		50,545,869		4,099,651

At June 30, 2020, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:


	Cost/Premiums Paid (Received)		Gross Unrealized Appreciation		Gross Unrealized Depreciation		Net Unrealized Appreciation (Depreciation)
Securities	$	226,922,269	$	17,367,386	$	(29,453,083)	$	(12,085,697)
Swap contracts		50,524		103,520		(91,471)		12,049
Written options		(58,391)		58,391		—		58,391
Futures contracts		—		540,045		(366,501)		173,544

Transactions in reverse repurchase agreements for the Fund during the six months ended June 30, 2020 were as follows:

Average Daily

Balance*

Weighted Average

Interest Rate*

Maximum Amount

Outstanding

$11,791,640

4.80%

$21,706,000

*	Averages based on the number of days that the Fund had reverse repurchase agreements outstanding.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		37

Notes to financial statements (unaudited) (cont’d)

Interest rates on reverse repurchase agreements ranged from 3.46% to 5.00% during the six months ended June 30, 2020. Interest expense incurred on reverse repurchase agreements totaled $154,664.

4. Derivative instruments and hedging activities

Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at June 30, 2020.


ASSET DERIVATIVES¹
	Interest Rate Risk		Credit Risk		Total
Purchased options²	$	77		—	$	77
Futures contracts³		540,045		—		540,045
OTC swap contracts⁴		—	$	176,426		176,426
Total	$	540,122	$	176,426	$	716,548


LIABILITY DERIVATIVES¹
	Interest Rate Risk			Credit Risk		Total
Written options	$	0	*		—	$	0	*
Futures contracts³		366,501			—		366,501
OTC swap contracts⁴		—		$	113,853		113,853
Total	$	366,501		$	113,853	$	480,354

*	Amount represents less than $1.

¹	Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized depreciation.

²	Market value of purchased options is reported in Investments at value in the Statement of Assets and Liabilities.

³	Includes cumulative appreciation (depreciation) of futures contracts as reported in the Schedule of Investments. Only variation margin is reported within the receivables and/or payables on the Statement of Assets and Liabilities.

⁴	Values include premiums paid (received) on swap contracts which are shown separately in the Statement of Assets and Liabilities.


38		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

The following tables provide information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the six months ended June 30, 2020. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.


AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Foreign Exchange Risk		Credit Risk		Total
Futures contracts	$	(3,007,021)		—		—	$	(3,007,021)
Swap contracts		—		—	$	(741,337)		(741,337)
Forward foreign currency contracts		—	$	(1,776)		—		(1,776)
Total	$	(3,007,021)	$	(1,776)	$	(741,337)	$	(3,750,134)


CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
	Interest Rate Risk		Foreign Exchange Risk		Credit Risk		Total
Purchased options	$	(58,151)		—		—	$	(58,151)
Written options		58,391		—		—		58,391
Futures contracts		(66,326)		—		—		(66,326)
Swap contracts		—		—	$	(54,693)		(54,693)
Forward foreign currency contracts		—	$	(839)		—		(839)
Total	$	(66,086)	$	(839)	$	(54,693)	$	(121,618)

During the six months ended June 30, 2020, the volume of derivative activity for the Fund was as follows:


	Average Market Value
Purchased options	$	12,499
Written options		10,693
Futures contracts (to buy)		5,778,098
Futures contracts (to sell)		18,625,886
Forward foreign currency contracts (to buy)†		35,166
Forward foreign currency contracts (to sell)†		8,725
	Average Notional Balance
Credit default swap contracts (to buy protection)	$	3,378,571
Credit default swap contracts (to sell protection)		4,504,286

†	At June 30, 2020, there were no open positions held in this derivative.


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		39

Notes to financial statements (unaudited) (cont’d)

The following table presents the Fund’s OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master Agreement and net of the related collateral pledged (received) by the Fund as of June 30, 2020.

Counterparty

Gross Assets

Subject to

Master

Agreements¹

Gross

Liabilities

Subject to

Master

Agreements¹

Net Assets

(Liabilities)

Subject to

Master

Agreements

Collateral

Pledged

(Received)^2,3

Net

Amount⁴

Morgan Stanley & Co. Inc.

176,503

(113,853)

$62,650

(60,619)

2,031

¹	Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.

²	Gross amounts are not offset in the Statement of Assets and Liabilities.

³	In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.

⁴	Represents the net amount receivable (payable) from (to) the counterparty in the event of default.

5. Loan

The Fund has a revolving credit agreement with Societe Generale (“Credit Agreement”) that allows the Fund to borrow up to an aggregate amount of $55,000,000 ($60,000,000 prior to August 13, 2020 and $105,000,000 prior to July 10, 2020). The Credit Agreement renews daily for a 150-day term unless notice to the contrary is given to the Fund and it has a scheduled maturity date of August 13, 2022. The Fund pays a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.90%, except that the commitment fee is 0.30% in the event that the aggregate outstanding principal balance of the loan is greater than 80% of the loan commitment amount. Prior to August 13, 2020, the Fund paid a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.60%, except that the commitment fee was 0.20% in the event that the aggregate outstanding principal balance of the loan was greater than 80% of the loan commitment amount. The interest on the loan is calculated at a variable rate based on the LIBOR, plus any applicable margin. Securities held by the Fund are subject to a lien, granted to Societe Generale, to the extent of the borrowing outstanding and any additional expenses. The Fund’s Credit Agreement contains customary covenants that, among other things, may limit the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement may be subject to early termination under certain conditions and may contain other provisions that could limit the Fund’s ability to utilize borrowing under the agreement. Interest expense related to the loan for the six months ended June 30, 2020 was $917,403. For the six months ended June 30, 2020, the Fund incurred commitment fees in the amount of $77,304. At June 30, 2020, the Fund had $60,000,000 of borrowings outstanding per this Credit Agreement. For the six months ended June 30, 2020, the Fund had an average loan balance outstanding of $77,209,890 and the weighted average interest rate was 2.39%.


40		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

6. Distributions subsequent to June 30, 2020

The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:


Record Date	Payable Date		Amount
6/23/2020		7/1/2020	$	0.1275
7/24/2020		8/3/2020	$	0.1275
8/24/2020		9/1/2020	$	0.1275
9/23/2020		10/1/2020	$	0.1125
10/23/2020		11/2/2020	$	0.1125
11/20/2020		12/1/2020	$	0.1125

7. Stock repurchase program

On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the six months ended June 30, 2020, the Fund did not repurchase any shares.

8. Capital shares

During the six months ended June 30, 2020, the Fund filed a registration statement with the Securities and Exchange Commission authorizing the Fund to offer and sell shares of common stock having an aggregate offering price of up to $50,000,000. Under the equity shelf offering program, the Fund, subject to market conditions, may raise additional equity capital from time to time in varying amounts and offering methods at a net price at or above the Fund’s then-current net asset value per common share. Costs incurred by the Fund in connection with the shelf offering are recorded as a charge to paid-in capital. For the six months ended June 30, 2020, the Fund sold 449,932 shares of common stock and the proceeds from such sales were $6,103,919, net of offering costs and sales charges of $113,936 and $60,527, respectively.

9. Deferred capital losses

As of December 31, 2019, the Fund had deferred capital losses of $3,236,039, which have no expiration date, that will be available to offset future taxable capital gains.

10. Other matters

The outbreak of the respiratory illness COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the


Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report		41

Notes to financial statements (unaudited) (cont’d)

global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.

* * *

The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. Plans are underway to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot yet be determined.

11. Subsequent event

On August 14, 2020, the Fund announced that it has elected, by resolution unanimously adopted by the Fund’s Board of Directors, to be subject to the Maryland Control Share Acquisition Act (the “MCSAA”), effective immediately. The MCSAA protects the interests of all stockholders of a Maryland corporation by providing that any holder of “control shares” acquired in a “control share acquisition” will not be entitled to vote its shares unless the other stockholders of the corporation reinstate those voting rights at a meeting of stockholders by a vote of two-thirds of the votes entitled to be cast on the matter, excluding the “acquiring person” (i.e., the holder or group of holders acting in concert that acquires, or proposes to acquire, “control shares”) and any other holders of “interested shares” as defined in the MCSAA. Generally, “control shares” are shares that, when aggregated with shares already owned by an acquiring person, would entitle the acquiring person to exercise 10% or more, 33 1/3% or more, or a majority of the total voting power of shares entitled to vote in the election of directors.

Application of the MCSAA seeks to limit the ability of an acquiring person to achieve a short-term gain at the expense of the Fund’s ability to pursue its investment objective and policies and seek long-term value for the rest of the Fund’s stockholders. The above description of the MCSAA is only a high-level summary and does not purport to be complete. Investors should refer to the actual provisions of the MCSAA and the Fund’s bylaws for more information, including definitions of key terms, various exclusions and exemptions from the statute’s scope, and the procedures by which stockholders may approve the reinstatement of voting rights to holders of “control shares.”


42		Western Asset Mortgage Opportunity Fund Inc. 2020 Semi-Annual Report

Board approval of new management and new subadvisory agreements (unaudited)

Background

On March 9, 2020, during a telephonic meeting of the Boards of Directors (each, a “Board” and each Board member, a “Director” or a “Board Member”) of the closed-end funds under the Board’s purview (each, a “Fund” and together, the “Funds”), Board Members discussed with management of Legg Mason, Inc. (“Legg Mason”) and certain representatives of Franklin Resources, Inc. and its subsidiaries (together, “Franklin Templeton”) the acquisition of Legg Mason by Franklin Templeton (the “Transaction”) and Franklin Templeton’s plans and intentions regarding the Funds and Legg Mason’s asset management business, including the preservation and continued investment autonomy of the investment advisory businesses conducted by Legg Mason’s separate investment advisory subsidiaries and the combination of Legg Mason’s and Franklin Templeton’s distribution resources. The Board of each Fund was advised that the Transaction, if completed, would constitute a change of control under the Investment Company Act of 1940, as amended (the “1940 Act”), that would result in the termination of the current management agreement between each Fund and Legg Mason Partners Fund Advisor, LLC (the “Manager”) (the “Current Management Agreements”) and the current subadvisory agreements with each Fund’s subadviser or subadvisers (each, a “Subadviser” and together, the “Subadvisers”) (the “Current Subadvisory Agreements”).

At meetings held on April 1, 2020 the Board of each Fund, including a majority of the Board Members who are not “interested persons” of the Fund or the Manager as defined in the 1940 Act (the “Independent Board Members”), approved the new management agreement between each Fund and the Manager (each, a “New Management Agreement”) and each new subadvisory agreement between each Fund’s Manager and its Subadviser or Subadvisers relating to the Fund (each, a “New Subadvisory Agreement”).¹ (The New Management Agreement for a Fund and the New Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the “New Agreements,” the Current Management Agreement for a Fund and the Current Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the “Current Agreements,” and the Manager and the Subadviser or Subadvisers for a Fund are referred to, collectively, as the “Advisers.”)

At these meetings, which included meetings of the full Board of each Fund and separate meetings of the Independent Board Members, the Board considered, among other things, whether it would be in the best interests of each Fund and its respective shareholders to approve the New Agreements, and the anticipated impacts of the Transaction on the Funds and their shareholders. To assist the Board of each Fund in its consideration of the New

This meeting was held telephonically in reliance on an exemptive order issued by the Securities and Exchange Commission on March 13, 2020. Reliance on the exemptive order is necessary and appropriate due to circumstances related to current or potential effects of COVID-19. All Board Members participating in the telephonic meeting were able to hear each other simultaneously during the meeting. Reliance on the exemptive order requires Board Members, including a majority of the Independent Board Members, to ratify actions taken pursuant to the exemptive order by vote cast at the next in-person meeting.


Western Asset Mortgage Opportunity Fund Inc.		43

Board approval of new management and new subadvisory agreements (unaudited) (cont’d)

Agreements, Franklin Templeton provided materials and information about Franklin Templeton, including its financial condition and asset management capabilities and organization, Legg Mason provided materials and information about Legg Mason, including performance and expense comparison data and profitability information by Fund and with respect to the Legg Mason fund complex as a whole, and Franklin Templeton and Legg Mason provided materials and information about the proposed Transaction between Legg Mason and Franklin Templeton.

Before and during the April 1, 2020 meetings, the Board of each Fund sought certain information as it deemed necessary and appropriate. In connection with their consideration of the New Agreements, the Independent Board Members worked with their independent legal counsel to prepare requests for additional information that were submitted to Franklin Templeton and Legg Mason. The requests for information of the Board of each Fund sought information relevant to the Board’s consideration of the New Agreements and other anticipated impacts of the Transaction on the Funds and their shareholders. Franklin Templeton and Legg Mason provided documents and information in response to these requests for information. Following their review of this information, the Independent Board Members requested additional information from Franklin Templeton and Legg Mason. Franklin Templeton and Legg Mason provided further information in response to these requests, which the Board of each Fund reviewed. Senior management representatives from Franklin Templeton and Legg Mason participated in a portion of each of these meetings and addressed various questions raised by the Board of each Fund.

At the April 1, 2020 meeting of the Board of each Fund, representatives of Legg Mason and Franklin Templeton made presentations to, and responded to questions from, the Board. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Agreements.

Board Approval of New Management Agreements and New Subadvisory Agreements

Each Fund’s Board’s evaluation of the New Agreements reflected the information provided specifically in connection with their review of the New Agreements, as well as, where relevant, information that was previously furnished to the Board in connection with the most recent renewal of the Current Agreements at in-person meetings held on November 14, 2019 and at other Board meetings throughout the prior year.

Among other things, the Board Members considered:

(i)	the reputation, experience, financial strength and resources of Franklin Templeton and its investment advisory subsidiaries;


44		Western Asset Mortgage Opportunity Fund Inc.

(ii)	that Franklin Templeton has informed the Board of each Fund that it intends to maintain the investment autonomy of the Legg Mason investment advisory subsidiaries;

(iii)

that Franklin Templeton and Legg Mason have informed the Board of each Fund that, following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and have represented that there are not expected to be any changes in the portfolio management personnel managing the Funds as a result of the Transaction;

(iv)

that Franklin Templeton and Legg Mason have informed the Board of each Fund regarding transition plans, including Legg Mason’s provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templeton’s provision of long-term retention mechanisms for certain personnel following the closing;

(v)	that there are not expected to be any changes to any Fund’s custodian or other service providers as a result of the Transaction;

(vi)

that Franklin Templeton has informed the Board of each Fund that it has no present intention to alter currently effective expense waivers and reimbursements after their expiration, and, while it reserves the right to do so in the future, it would consult with the applicable Fund’s Board before making any changes;

(vii)

that Franklin Templeton does not expect to propose any changes to the investment objective(s) of any Fund or any changes to the principal investment strategies of any Fund as a result of the Transaction;

(viii)

the potential benefits to Fund shareholders from being part of a combined fund family with Franklin Templeton-sponsored funds and access to a broader array of investment opportunities;

(ix)	that Franklin Templeton and Legg Mason will each derive benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;

(x)	the fact that each Fund’s contractual management fee rates will remain the same and will not increase by virtue of the New Agreements;

(xi)	the terms and conditions of the New Agreements, including that each New Agreement is identical to its corresponding Current Agreement except for their respective dates of execution, effectiveness and termination;


Western Asset Mortgage Opportunity Fund Inc.		45

Board approval of new management and new subadvisory agreements (unaudited) (cont’d)

(xii)

the support expressed by the current senior management team at Legg Mason for the Transaction and Legg Mason’s recommendation that the Board of each Fund approve the New Agreements;

(xiii)

that the Current Agreements, except in the case of newer Funds, are the product of multiple years of review and negotiation and information received and considered by the applicable Fund’s Board in the exercise of their business judgment during those years, and that within the past six-months the Board of each Fund had performed a full review of and approved the Current Agreements as required by the 1940 Act and had determined in the exercise of the Board Members’ business judgment that each applicable Adviser had the capabilities, resources and personnel necessary to provide the services provided to each Fund, and that the management and subadvisory fees paid by or in respect of the Fund, taking into account any applicable agreed-upon fee reductions, represented reasonable compensation to the applicable Adviser in light of the services provided, the costs to the Adviser of providing those services, the fees and other expenses paid by similar funds, and such other matters as the Board Members considered relevant in the exercise of their business judgment, and represented an appropriate sharing between Fund shareholders and the Advisers of any economies of scale in the management of the Fund at current and anticipated asset levels;

(xiv)

that the Current Agreements were considered and approved as recently as November 2019, except in the case of one Fund, which is currently in the initial term of its agreement;

(xv)	that the Funds will not bear the costs of obtaining shareholder approval of the New Agreements, including proxy solicitation costs, legal fees and the costs of printing and mailing the proxy statement, regardless of whether the Transaction is consummated; and

(xvi)

that under the a definitive agreement between Legg Mason and Franklin Templeton (the “Transaction Agreement”), Franklin Templeton has acknowledged that Legg Mason had entered into the Transaction Agreement in reliance upon the benefits and protections provided by Section 15(f) of the 1940 Act, and that, in furtherance of the foregoing, Franklin Templeton agreed to use reasonable best efforts to conduct its business so that (a) for a period of not less than three years after the closing of the Transaction no more than 25% of the members of the Board of any Fund shall be “interested persons” (as defined in the 1940 Act) of any investment adviser for a Fund, and (b) for a period of not less than two years after the closing, neither Franklin Templeton nor any of its affiliates shall impose an “unfair burden” (within the meaning of the 1940 Act, including any interpretations or no-action letters of the Securities and Exchange Commission) on any Fund as a result of the transactions contemplated by the Transaction Agreement or any express or implied terms, conditions or understandings applicable thereto.


46		Western Asset Mortgage Opportunity Fund Inc.

Certain of these considerations are discussed in more detail below.

In their deliberations, the Board Members considered information received in connection with the most recent approval or continuation of each Current Agreement in addition to information provided by Franklin Templeton and Legg Mason in connection with their evaluation of the terms and conditions of the New Agreements. In connection with the most recent approval or continuation of each Current Agreement, and in connection with their review of each New Agreement, the Board Members did not identify any particular information that was all-important or controlling, and each Board Member may have attributed different weights to the various factors. The Board Members evaluated all information available to them on a Fund-by-Fund basis with respect to their consideration of the Current Agreements and the New Agreements, and their determinations were made separately in respect of each Fund.

The information provided and presentations made to the Board of each Fund encompassed each Fund and all other Funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions rendered by the Manager for each Fund, both of which functions are encompassed by the New Management Agreement for the Fund, as well as the advisory functions rendered by the Subadviser(s) pursuant to the New Subadvisory Agreement(s) for the Fund. The Independent Board Members of each Fund considered the New Management Agreement and the New Subadvisory Agreement(s) separately in the course of their review. In doing so, they considered the respective roles and compensation of the Manager and the Subadviser(s) in providing services to the Fund.

The Independent Board Members were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Board Members of each Fund received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the New Agreements for the Fund. The Independent Board Members of each Fund, including Western Asset Mortgage Opportunity Fund Inc. (the “Western Asset Fund”), reviewed the proposed approval of the New Agreements for the Fund on multiple occasions with their independent legal counsel in private sessions at which no representatives of Franklin Templeton, Legg Mason, or the Manager or Subadviser(s) for the Fund were present.

Nature, Extent and Quality of the Services under the New Agreements

The Board of each Fund received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Subadviser(s) under the Current Agreements. In evaluating the nature, quality and extent of the services to be provided by the Advisers under the New Agreements, the Board Members considered,


Western Asset Mortgage Opportunity Fund Inc.		47

Board approval of new management and new subadvisory agreements (unaudited) (cont’d)

among other things, the expected impact, if any, of the Transaction on the operations, facilities, organization and personnel of each Adviser, and that Franklin Templeton and Legg Mason have advised the Board of each Fund that, following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and that there are not expected to be any changes in portfolio management personnel as a result of the Transaction. In this regard, the Board of each Fund took into account that Franklin Templeton and Legg Mason have informed the Board regarding Legg Mason’s provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templeton’s provision of long-term retention mechanisms for certain personnel following the closing. The Board of each Fund has received information at regular meetings throughout the past year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. Each Fund’s Board’s evaluation of the services provided by the Manager and the Subadviser(s) took into account the Board Members’ knowledge gained as Board Members of other Funds in the Legg Mason fund complex, including knowledge gained regarding the scope and quality of the investment management and other capabilities of the Manager and the Subadviser(s), and the quality of the Manager’s administrative and other services. The Board of each Fund observed that the scope of services provided by the Manager and the Subadviser(s), and the undertakings required of the Manager and Subadviser(s) in connection with those services, including maintaining and monitoring their own and the Fund’s compliance programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory, market and other developments. The Board of each Fund has received and reviewed on a regular basis information from the Manager and the Subadviser(s) regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act, and took that information into account in its evaluation of the New Agreements. The Board of each Fund also considered the risks associated with the Fund borne by the Advisers and their affiliates (such as entrepreneurial, operational, reputational, litigation and regulatory risk), as well as the risk management processes of the Manager and Subadviser(s).

The Board of each Fund considered information provided by Franklin Templeton regarding its business and operating structure, scale of operation, leadership and reputation, distribution capabilities, and financial condition (pre- and post-closing).

The Board of each Fund also reviewed the qualifications, backgrounds and responsibilities of the senior personnel of the Manager and the Subadviser(s) and the team of investment professionals primarily responsible for the day-to-day portfolio management of the Fund. The Board of each Fund noted in particular that following the Transaction, Franklin Templeton is expected to have resources that will provide it with substantial capacity to


48		Western Asset Mortgage Opportunity Fund Inc.

invest across the business. The Board of each Fund also considered the financial resources of Legg Mason and Franklin Templeton and the importance of having a Fund manager with, or with access to, significant organizational and financial resources.

The Board also considered the benefits to each Fund of being part of a larger combined organization with greater financial resources following the Transaction, particularly during periods of market disruptions and volatility. In addition, the Board also considered Franklin Templeton’s significant experience in dealing with issues unique to the management of closed-end funds.

The Board of each Fund also considered the policies and practices of the Manager and the Subadvisers regarding the selection of brokers and dealers and the execution of portfolio transactions for the Fund.

The Board of each Fund received performance information for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider of investment company data, based on classifications provided by Thomson Reuters Lipper (“Lipper”). The Board of each Fund was provided with a description of the methodology used to determine the similarity of the Fund with the funds included in the Performance Universe. It was noted that while the Board of each Fund has found the Broadridge data generally useful they recognized its limitations, including that the data may vary depending on the end date selected and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. It was also noted that the Board of each Fund has received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board of each Fund considered the Fund’s performance in light of overall financial market conditions. Where a Fund’s performance was below the median during one or more specified periods, the Fund’s Board noted the explanations from the Advisers concerning the Fund’s relative performance versus the peer group for the various periods

Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members of each Fund determined that the Transaction was not expected to affect adversely the nature, extent and quality of services provided by each Adviser and that the Transaction was not expected to have an adverse effect on the ability of the Advisers to provide those services, and the Board of each Fund, including the Western Asset Fund, concluded that, overall, the nature, extent and quality of services expected to be provided, including performance, under the New Agreements for the Fund were sufficient for approval.


Western Asset Mortgage Opportunity Fund Inc.		49

Board approval of new management and new subadvisory agreements (unaudited) (cont’d)

Management Fees and Expense Ratios

The Board of each Fund considered that it had reviewed the Fund’s management fee and total expense ratio at the November 2019 contract renewal meeting. The Board of each Fund considered that the New Management Agreement does not change any Fund’s management fee rate or the computation method for calculating such fees, and that there is no present intention to alter expense waiver and reimbursement arrangements that are currently in effect. The Board of each Fund noted that by their terms none of the current expense waiver and reimbursement arrangements would expire before December 2020 and that Franklin Templeton had indicated that it would consult with the applicable Fund’s Board before making any changes to the Fund’s current expense waiver and reimbursement arrangements.

The Board of each Fund reviewed and considered the contractual management fee and the actual management fees paid by the Fund to the Manager in light of the nature, extent and quality of the management and subadvisory services to be provided by the Manager and the Subadviser(s). The Board of each Fund also noted that the compensation paid to the Subadviser(s) is the responsibility and expense of the Manager, or in some cases another Subadviser, and not the Fund. In addition, the Board of each Fund received and considered information provided by Broadridge comparing the contractual management fee and the actual management fee for the Fund, as well as the total actual expenses for the Fund, with those of funds in both the relevant expense group and a broader group of funds, each selected by Broadridge based on classifications provided by Lipper. It was noted that, while the Board of each Fund has found the Broadridge data generally useful, it recognized its limitations, including that the data may vary depending on the selection of the peer group. The Board of each Fund also considered the overall management fee, the fees of each Subadviser and the portion of the management fee retained by the Manager after payment of the subadvisory fees, in each case in light of the services rendered for those amounts. The Board of each Fund also received an analysis of Legg Mason complex-wide management fees for Funds with a similar strategy provided by the Manager, which, among other things, set out a framework of fees based on asset classes.

The Board of each Fund reviewed information regarding fees charged by the Manager and/or the Subadviser(s) to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts. The Manager reviewed with the Board of each Fund the differences in services provided to these different types of accounts, including that the Fund is provided with certain administrative services, office facilities, and Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board of each Fund considered the fee comparisons in light of the differences in management of these different types of accounts and the differences in associated risks borne by the Advisers.


50		Western Asset Mortgage Opportunity Fund Inc.

In evaluating the costs of the services to be provided by the Advisers under the New Agreements, the Board Members considered, among other things, whether management fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members determined that the Transaction would not increase the total fees payable by any Fund for management services.

Taking all of the above into consideration, as well as the factors identified below, the Board of each Fund, including the Western Asset Fund, determined that the management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services to be provided to the Fund under the New Agreements.

Profitability and Economies of Scale

The Board of each Fund received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board of each Fund also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board of each Fund received information with respect to the Manager’s allocation methodologies used in preparing this profitability data. It was noted that the allocation methodologies had been previously reviewed by an outside consultant. The profitability of the Manager and its affiliates was considered by each Fund’s Board not to be excessive in light of the nature, extent and quality of the services provided to the Fund, including the Western Asset Fund.

The Board of each Fund received and considered information concerning whether the Advisers realize economies of scale as the Fund’s assets grow. In conjunction with their most recent or prior deliberations concerning the Current Agreements, the Board Members have noted that advisory or management fee reductions had been implemented for certain Funds, as well as expense limitations, and that after taking those reductions and expense limitations into account, the Board Members had determined that the total fees for management services, and administrative services for the applicable Funds, were reasonable in light of the services provided to the Funds, including the Western Asset Fund, and that any economies of scale were being shared appropriately.

The Board Members noted that Franklin Templeton and Legg Mason expected to realize cost savings from the Transaction based on synergies of operations, primarily at the holding company distribution level, as well as to benefit from possible growth of the Funds resulting from enhanced distribution capabilities. The Board of each Fund took into account that cost synergies were not the primary driver of the Transaction. However, they noted that other factors could also affect profitability and potential economies of scale, and that it was not possible to predict with any degree of certainty how the Transaction would affect the Advisers’ profitability from their relationship with the Funds, nor to quantify at this time any

possible future economies of scale. The Board Members noted they will have the opportunity to periodically re-examine such profitability and any economies of scale going forward.


Western Asset Mortgage Opportunity Fund Inc.		51

Board approval of new management and new subadvisory agreements (unaudited) (cont’d)

Other Benefits to the Advisers

The Board of each Fund considered other benefits received by the Manager, the Subadviser(s) and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders. In light of the costs of providing investment management and other services to the Funds and the ongoing commitment of the Manager and the Subadviser(s) to the Funds, the Board of each Fund considered that the ancillary benefits that the Manager, the Subadviser(s) and their affiliates received as a result of their relationship with the Fund, including the Western Asset Fund, were reasonable. In evaluating the fall-out benefits to be received by the Advisers under the New Agreements, the Board Members considered whether the Transaction would have an impact on the fall-out benefits received by virtue of the Current Agreements.

The Board of each Fund considered that Franklin Templeton may derive reputational and other benefits from its ability to use the Legg Mason investment affiliates’ names in connection with operating and marketing the Funds. The Board of each Fund considered that the Transaction, if completed, would significantly increase Franklin Templeton’s assets under management and expand Franklin Templeton’s investment capabilities.

Conclusion

After consideration of the factors described above as well as other factors, and in the exercise of their business judgment, the Board Members, including the Independent Board Members, concluded that the New Agreements, including the fees payable thereunder, were fair and reasonable to each Fund and that entering into the New Agreements for each Fund, including the Western Asset Fund, was in the best interests of the Fund’s shareholders, and they voted to approve the New Agreements for each Fund and to recommend that the Fund’s shareholders approve the New Agreements.


52		Western Asset Mortgage Opportunity Fund Inc.

Dividend reinvestment plan (unaudited)

Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust Company, N.A., as dividend paying agent.

If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:

(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.

(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.

Common Stock in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.


Western Asset Mortgage Opportunity Fund Inc.		53

Dividend reinvestment plan (unaudited) (cont’d)

Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.

Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.

The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.


54		Western Asset Mortgage Opportunity Fund Inc.

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Western Asset

Mortgage Opportunity Fund Inc.

Directors

Robert D. Agdern

Carol L. Colman

Daniel P. Cronin

Paolo M. Cucchi

William R. Hutchinson

Eileen A. Kamerick

Nisha Kumar

Jane Trust

Chairman

Officers

Jane Trust

President and Chief Executive Officer

Christopher Berarducci

Treasurer and Principal Financial Officer

Fred Jensen*

Chief Compliance Officer

Jenna Bailey

Identity Theft Prevention Officer

Robert I. Frenkel

Secretary and Chief Legal Officer

Thomas C. Mandia

Assistant Secretary

Jeanne M. Kelly

Senior Vice President

*	Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer.

Western Asset Mortgage Opportunity Fund Inc.

620 Eighth Avenue

49^th Floor

New York, NY 10018

Investment manager

Legg Mason Partners Fund Advisor, LLC

Subadvisers

Western Asset Management Company, LLC

Western Asset Management Company Limited

Custodian

The Bank of New York Mellon

Transfer agent

Computershare Inc.

462 South 4^th Street, Suite 1600

Louisville, KY 40202

Independent registered public accounting firm

PricewaterhouseCoopers LLP

Baltimore, MD

Legal counsel

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, NY 10017

New York Stock Exchange Symbol

DMO

Legg Mason Funds Privacy and Security Notice

Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds

This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.

The Type of Nonpublic Personal Information the Funds Collect About You

The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:

•

Personal information included on applications or other forms;

•

Account balances, transactions, and mutual fund holdings and positions;

•

Bank account information, legal documents, and identity verification documentation;

•

Online account access user IDs, passwords, security challenge question responses; and

•

Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.).

How the Funds Use Nonpublic Personal Information About You

The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:

•

Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to government regulators;

•

Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;

•

Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

•

The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;

•

Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.

NOT PART OF THE SEMI-ANNUAL REPORT

Legg Mason Funds Privacy and Security Notice (cont’d)

Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.

The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.

Keeping You Informed of the Funds’ Privacy and Security Practices

The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.

The Funds’ Security Practices

The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.

Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.

In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Funds at 1-888-777-0102.

Revised April 2018

NOT PART OF THE SEMI-ANNUAL REPORT

Western Asset Mortgage Opportunity Fund Inc.

Western Asset Mortgage Opportunity Fund Inc.

620 Eighth Avenue 49^th Floor

New York, NY 10018

Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.

The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.

This report is transmitted to the shareholders of Western Asset Mortgage Opportunity Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.

Computershare Inc.

462 South 4^th Street, Suite 1600

Louisville, KY 40202

WASX012835 8/20 SR20-3962

ITEM 2.

CODE OF ETHICS.

Not applicable.

ITEM 3.

AUDIT COMMITTEE FINANCIAL EXPERT.

Not applicable.

ITEM 4.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not applicable.

ITEM 5.

AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

ITEM 6.

SCHEDULE OF INVESTMENTS.

Included herein under Item 1.

ITEM 7.

DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 8.

INVESTMENT PROFESSIONALS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

ITEM 9.

PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

ITEM 10.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

ITEM 11.

CONTROLS AND PROCEDURES.

(a)

The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.

(b)

There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

ITEM 12.

DISCLOSURE OF SECURITIES LENDING ACTIVITIES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable

ITEM 13.

EXHIBITS.

(a) (1) Not applicable.

Exhibit 99.CODE ETH

(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.CERT

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.906CERT

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.


Western Asset Mortgage Opportunity Fund Inc.

By:		/s/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date:		August 26, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


By:		/s/ Jane Trust
		Jane Trust
		Chief Executive Officer

Date:		August 26, 2020

By:		/s/ Christopher Berarducci
		Christopher Berarducci
		Principal Financial Officer

Date:		August 26, 2020

CERTIFICATIONS PURSUANT TO SECTION 302

EX-99.CERT

CERTIFICATIONS

I, Jane Trust, certify that:

1.	I have reviewed this report on Form N-CSR of Western Asset Mortgage Opportunity Fund Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

CERTIFICATIONS

I, Christopher Berarducci, certify that:

1.	I have reviewed this report on Form N-CSR of Western Asset Mortgage Opportunity Fund Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial information included in this report, and the financial statements on which the financial information is based, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officers and I have disclosed to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

CERTIFICATIONS PURSUANT TO SECTION 906

EX-99.906CERT

CERTIFICATION

Jane Trust, Chief Executive Officer, and Christopher Berarducci, Principal Financial Officer of Western Asset Mortgage Opportunity Fund Inc. (the “Registrant”), each certify to the best of their knowledge that:

1. The Registrant’s periodic report on Form N-CSR for the period ended June 30, 2020 (the “Form N-CSR”) fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.


Chief Executive Officer				Principal Financial Officer
Western Asset Mortgage Opportunity Fund Inc.				Western Asset Mortgage Opportunity Fund Inc.

/s/ Jane Trust				/s/ Christopher Berarducci
Jane Trust				Christopher Berarducci
Date: August 26, 2020				Date: August 26, 2020

This certification is being furnished to the Securities and Exchange Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR with the Commission.