Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value (Notes)

v3.7.0.1
Available-for-Sale Securities, at Fair Value (Notes)
 3 Months Ended
Mar. 31, 2017
Available-for-sale Securities [Abstract]  
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of March 31, 2017 and December 31, 2016:
(in thousands)
March 31,
2017
 
December 31,
2016
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
10,880,230

 
$
2,742,630

Federal National Mortgage Association
4,023,228

 
8,274,507

Government National Mortgage Association
216,427

 
209,337

Non-Agency
2,198,812

 
1,902,383

Total available-for-sale securities
$
17,318,697

 
$
13,128,857



At March 31, 2017 and December 31, 2016, the Company pledged AFS securities with a carrying value of $17.1 billion and $13.1 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 15 - Repurchase Agreements and Note 17 - Federal Home Loan Bank of Des Moines Advances.
At March 31, 2017 and December 31, 2016, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, or ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
17,294,143

 
$
3,087,543

 
$
20,381,686

Unamortized premium
769,384

 
—

 
769,384

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(442,856
)
 
(442,856
)
Net, unamortized
(2,840,374
)
 
(836,341
)
 
(3,676,715
)
Amortized Cost
15,223,153

 
1,808,346

 
17,031,499

Gross unrealized gains
81,271

 
395,652

 
476,923

Gross unrealized losses
(184,539
)
 
(5,186
)
 
(189,725
)
Carrying Value
$
15,119,885

 
$
2,198,812

 
$
17,318,697

 
December 31, 2016
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
13,571,417


$
2,732,139

 
$
16,303,556

Unamortized premium
571,749


—

 
571,749

Unamortized discount
 
 
 
 
 
Designated credit reserve
—


(367,437
)
 
(367,437
)
Net, unamortized
(2,758,445
)

(808,975
)
 
(3,567,420
)
Amortized Cost
11,384,721


1,555,727

 
12,940,448

Gross unrealized gains
79,040


353,358

 
432,398

Gross unrealized losses
(237,287
)

(6,702
)
 
(243,989
)
Carrying Value
$
11,226,474

 
$
1,902,383

 
$
13,128,857



The following tables present the carrying value of the Company’s AFS securities by rate type as of March 31, 2017 and December 31, 2016:
 
March 31, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
28,422

 
$
1,898,693

 
$
1,927,115

Fixed Rate
15,091,463

 
300,119

 
15,391,582

Total
$
15,119,885

 
$
2,198,812

 
$
17,318,697

 
December 31, 2016
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
30,463

 
$
1,574,850

 
$
1,605,313

Fixed Rate
11,196,011

 
327,533

 
11,523,544

Total
$
11,226,474

 
$
1,902,383

 
$
13,128,857



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of March 31, 2017:
 
March 31, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
1,344

 
$
38,909

 
$
40,253

> 1 and ≤ 3 years
49,281

 
121,183

 
170,464

> 3 and ≤ 5 years
906,170

 
347,435

 
1,253,605

> 5 and ≤ 10 years
14,132,919

 
964,767

 
15,097,686

> 10 years
30,171

 
726,518

 
756,689

Total
$
15,119,885

 
$
2,198,812

 
$
17,318,697



When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the three months ended March 31, 2017 and 2016 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Three Months Ended March 31,
 
2017
 
2016
(in thousands)
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
 
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
Beginning balance at January 1
$
(367,437
)
 
$
(808,975
)
 
$
(1,176,412
)
 
$
(409,077
)
 
$
(707,021
)
 
$
(1,116,098
)
Acquisitions
(88,719
)
 
(71,471
)
 
(160,190
)
 
1,013

 
(25,222
)
 
(24,209
)
Accretion of net discount
—

 
22,183

 
22,183

 
—

 
16,760

 
16,760

Realized credit losses
4,546

 
—

 
4,546

 
3,093

 
—

 
3,093

Reclassification adjustment for other-than-temporary impairments
—

 
—

 
—

 
(121
)
 
—

 
(121
)
Transfers from (to)
8,754

 
(8,754
)
 
—

 
19,454

 
(19,454
)
 
—

Sales, calls, other
—

 
30,676

 
30,676

 
32,562

 
55,535

 
88,097

Ending balance at March 31
$
(442,856
)
 
$
(836,341
)
 
$
(1,279,197
)
 
$
(353,076
)
 
$
(679,402
)
 
$
(1,032,478
)


The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time that the securities had an unrealized loss position as of March 31, 2017 and December 31, 2016. At March 31, 2017, the Company held 1,295 AFS securities, of which 255 were in an unrealized loss position for less than twelve consecutive months and 125 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2016, the Company held 1,239 AFS securities, of which 252 were in an unrealized loss position for less than twelve consecutive months and 125 were in an unrealized loss position for more than twelve consecutive months. Of the $7.2 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of March 31, 2017 and December 31, 2016, $6.9 billion, or 96.3%, and $6.1 billion, or 95.8%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by the GSEs.
 
Unrealized Loss Position for
 
Less than 12 Months
 
12 Months or More
 
Total
(in thousands)
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
March 31, 2017
$
7,207,659

 
$
(148,297
)
 
$
483,937

 
$
(41,428
)
 
$
7,691,596

 
$
(189,725
)
December 31, 2016
$
6,416,820

 
$
(204,034
)
 
$
504,978

 
$
(39,955
)
 
$
6,921,798

 
$
(243,989
)


Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive income, net of tax, or (loss) gain on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
The Company did not record an other-than-temporary credit impairment during the three months ended March 31, 2017. During the three months ended March 31, 2016, the Company recorded $0.7 million in other-than-temporary credit impairments on three non-Agency RMBS where the future expected cash flows for each security were less than its amortized cost. As of March 31, 2017, impaired securities with a carrying value of $113.7 million had actual weighted average cumulative losses of 5.2%, weighted average three-month prepayment speed of 2.1%, weighted average 60+ day delinquency of 22.5% of the pool balance, and weighted average FICO score of 659. At March 31, 2017, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings.
The following table presents the changes in OTTI included in earnings for the three months ended March 31, 2017 and 2016:
 
Three Months Ended
 
March 31,
(in thousands)
2017
 
2016
Cumulative credit loss at beginning of period
$
(5,606
)
 
$
(6,499
)
Additions:
 
 
 
Other-than-temporary impairments not previously recognized
—

 
(292
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
(425
)
Reductions:
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
—

Decreases related to other-than-temporary impairments on securities sold
—

 
596

Cumulative credit loss at end of period
$
(5,606
)
 
$
(6,620
)


Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, are paid down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within (loss) gain on investment securities in the Company’s condensed consolidated statements of comprehensive income (loss). For the three months ended March 31, 2017 and 2016, the Company sold AFS securities for $2.4 billion and $2.3 billion with an amortized cost of $2.5 billion and $2.2 billion for net realized losses of $50.4 million and gains of $21.7 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three months ended March 31, 2017 and 2016:
 
Three Months Ended
 
March 31,
(in thousands)
2017
 
2016
Gross realized gains
$
8,731

 
$
35,194

Gross realized losses
(59,134
)
 
(13,493
)
Total realized (losses) gains on sales, net
$
(50,403
)
 
$
21,701