Derivative Instruments and Hedging Activities

v3.7.0.1

Derivative Instruments and Hedging Activities	6 Months Ended
	Jun. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]
Derivative Instruments and Hedging Activities	Derivative Instruments and Hedging Activities The Company enters into a variety of derivative and non-derivative instruments in connection with its risk management activities. The primary objective for executing these derivative and non-derivative instruments is to mitigate the Company’s economic exposure to future events that are outside its control, principally market risk and cash flow volatility associated with interest rate risk (including associated prepayment risk). Specifically, the Company enters into derivative and non-derivative instruments to economically hedge interest rate risk or “duration mismatch (or gap)” by adjusting the duration of its floating-rate borrowings into fixed-rate borrowings to more closely match the duration of its assets. This particularly applies to floating-rate borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (i.e., LIBOR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchase agreement or FHLB advance from floating to fixed. The objective is to manage the cash flows associated with current and anticipated interest payments on borrowings, as well as the ability to roll or refinance borrowings at the desired amount by adjusting the duration. To help manage the adverse impact of interest rate changes on the value of the Company’s portfolio as well as its cash flows, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps and total return swaps. In executing on the Company’s current risk management strategy, the Company has entered into interest rate swap and swaption agreements, TBAs, put and call options for TBAs, credit default swaps and total return swaps (based on the Markit IOS Index). The Company has also entered into a number of non-derivative instruments to manage interest rate risk, principally MSR and Agency interest-only securities (see discussion below). The following summarizes the Company’s significant asset and liability classes, the risk exposure for these classes, and the Company’s risk management activities used to mitigate these risks. The discussion includes both derivative and non-derivative instruments used as part of these risk management activities. Any of the Company’s derivative and non-derivative instruments may be entered into in conjunction with one another in order to mitigate risks. As a result, the following discussions of each type of instrument should be read as a collective representation of the Company’s risk mitigation efforts and should not be considered independent of one another. While the Company uses derivative and non-derivative instruments to achieve the Company’s risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company’s market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements. Balance Sheet Presentation In accordance with ASC 815, Derivatives and Hedging, or ASC 815, the Company records derivative financial instruments on its condensed consolidated balance sheets as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they qualify for hedge accounting treatment. Due to the volatility of the credit markets and difficulty in effectively matching pricing or cash flows, the Company has elected to treat all current derivative contracts as trading instruments. The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments treated as trading instruments as of June 30, 2017 and December 31, 2016. (in thousands)   June 30, 2017     Derivative Assets   Derivative Liabilities Trading instruments   Fair Value   Notional   Fair Value   Notional Inverse interest-only securities   $ 109,350   $ 659,768   $ —   $ — Interest rate swap agreements   119,321   13,714,719   (410 )   1,050,000 Swaptions, net   2,949   1,850,000   (815 )   500,000 TBAs   8,060   1,340,000   (463 )   200,000 Put and call options for TBAs, net   522   1,390,000   (892 )   105,000 Markit IOS total return swaps   300   68,629   —   — Total   $ 240,502   $ 19,023,116   $ (2,580 )   $ 1,855,000 (in thousands)   December 31, 2016     Derivative Assets   Derivative Liabilities Trading instruments   Fair Value   Notional   Fair Value   Notional Inverse interest-only securities   $ 127,843   $ 740,844   $ —   $ — Interest rate swap agreements   109,531   18,471,063   (495 )   1,900,000 Swaptions, net   39,881   825,000   (1,645 )   600,000 TBAs   4,294   536,000   (10,344 )   953,000 Put and call options for TBAs, net   42,633   1,136,000   —   — Markit IOS total return swaps   —   —   (17 )   90,593 Total   $ 324,182   $ 21,708,907   $ (12,501 )   $ 3,543,593 Comprehensive Income Statement Presentation The Company has not applied hedge accounting to its current derivative portfolio held to mitigate interest rate risk and credit risk. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its derivative instruments. The following table summarizes the location and amount of gains and losses on derivative instruments reported in the condensed consolidated statements of comprehensive income: Trading Instruments   Location of Gain (Loss) Recognized in Income on Derivatives   Amount of Gain (Loss) Recognized in Income on Derivatives (in thousands)       Three Months Ended June 30,   Six Months Ended June 30,         2017   2016   2017   2016 Interest rate risk management                     TBAs   Loss on other derivative instruments   $ (15,321 )   $ 1,562   $ (28,780 )   $ 26,891 Put and call options for TBAs   Loss on other derivative instruments   (7,822 )   (44,052 )   (19,062 )   (45,033 ) Interest rate swap agreements - Payers   Loss on interest rate swap and swaption agreements   (72,873 )   (72,132 )   (45,145 )   (294,035 ) Interest rate swap agreements - Receivers   Loss on interest rate swap and swaption agreements   25,527   37,172   28,093   149,846 Swaptions   Loss on interest rate swap and swaption agreements   (29,364 )   22,252   (49,731 )   5,997 Markit IOS total return swaps   Loss on other derivative instruments   (790 )   (13,267 )   (687 )   (34,991 ) Credit risk management                     Credit default swaps - Receive protection   Loss on other derivative instruments   —   (27 )   —   382 Non-risk management                     Inverse interest-only securities   Loss on other derivative instruments   4,393   7,733   1,125   20,715 Forward purchase commitments   Gain on residential mortgage loans held-for-sale   —   950   —   2,348 Total       $ (96,250 )   $ (59,809 )   $ (114,187 )   $ (167,880 ) For the three and six months ended June 30, 2017, the Company recognized $2.6 million and $10.5 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The expenses result from paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixed interest rate on an average $17.5 billion and $18.1 billion notional, respectively. For the three and six months ended June 30, 2016, the Company recognized $7.7 million and $13.8 million, respectively, of expenses for the accrual and/or settlement of the net interest expense associated with its interest rate swaps. The expenses result from paying either a fixed interest rate or LIBOR interest and receiving either LIBOR interest or a fixed interest rate on an average $14.8 billion and $14.9 billion notional, respectively. The following tables present information with respect to the volume of activity in the Company’s derivative instruments during the three and six months ended June 30, 2017 and 2016:   Three Months Ended June 30, 2017 (in thousands) Beginning of Period Notional Amount   Additions   Settlement, Termination, Expiration or Exercise   End of Period Notional Amount   Average Notional Amount   Realized Gain (Loss), net (1) Inverse interest-only securities $ 698,826   $ —   $ (39,058 )   $ 659,768   $ 681,216   $ — Interest rate swap agreements 18,252,440   4,476,986   (7,964,707 )   14,764,719   17,470,672   (39,626 ) Swaptions, net (3,880,000 )   (375,000 )   5,605,000   1,350,000   1,249,341   9,543 TBAs, net (993,000 )   (1,039,400 )   892,400   (1,140,000 )   (24,728 )   (31,021 ) Put and call options for TBAs, net 1,770,000   1,285,000   (1,770,000 )   1,285,000   96,319   (14,623 ) Markit IOS total return swaps 87,269   —   (18,640 )   68,629   75,282   (181 ) Total $ 15,935,535   $ 4,347,586   $ (3,295,005 )   $ 16,988,116   $ 19,548,102   $ (75,908 )   Three Months Ended June 30, 2016 (in thousands) Beginning of Period Notional Amount   Additions   Settlement, Termination, Expiration or Exercise   End of Period Notional Amount   Average Notional Amount   Realized Gain (Loss), net (1) Inverse interest-only securities $ 882,726   $ —   $ (47,860 )   $ 834,866   $ 860,864   $ — Interest rate swap agreements 15,425,513   5,264,513   (6,993,026 )   13,697,000   14,806,049   (26,297 ) Credit default swaps 125,000   —   (100,000 )   25,000   112,912   — Swaptions, net 5,200,000   600,000   (4,000,000 )   1,800,000   4,174,725   (28,819 ) TBAs, net 1,637,000   121,000   (2,095,000 )   (337,000 )   189,231   12,901 Put and call options for TBAs, net 2,000,000   8,897,000   (2,000,000 )   8,897,000   3,557,242   (1,348 ) Markit IOS total return swaps 868,145   —   (280,108 )   588,037   811,749   523 Forward purchase commitments 252,212   848,791   (464,536 )   636,467   395,617   692 Total $ 26,390,596   $ 15,731,304   $ (15,980,530 )   $ 26,141,370   $ 24,908,389   $ (42,348 )   Six Months Ended June 30, 2017 (in thousands) Beginning of Period Notional Amount   Additions   Settlement, Termination, Expiration or Exercise   End of Period Notional Amount   Average Notional Amount   Realized Gain (Loss), net (1) Inverse interest-only securities $ 740,844   $ —   $ (81,076 )   $ 659,768   $ 700,941   $ — Interest rate swap agreements 20,371,063   13,529,809   (19,136,153 )   14,764,719   18,085,752   11,520 Swaptions, net 225,000   (4,255,000 )   5,380,000   1,350,000   (98,923 )   24,428 TBAs, net (1,489,000 )   (4,125,400 )   4,474,400   (1,140,000 )   (12,431 )   (42,427 ) Put and call options for TBAs, net (1,136,000 )   2,555,000   (134,000 )   1,285,000   (63,387 )   24,146 Markit IOS total return swaps 90,593   —   (21,964 )   68,629   81,686   (181 ) Total $ 18,802,500   $ 7,704,409   $ (9,518,793 )   $ 16,988,116   $ 18,693,638   $ 17,486   Six Months Ended June 30, 2016 (in thousands) Beginning of Period Notional Amount   Additions   Settlement, Termination, Expiration or Exercise   End of Period Notional Amount   Average Notional Amount   Realized Gain (Loss), net (1) Inverse interest-only securities $ 932,037   $ —   $ (97,171 )   $ 834,866   $ 885,121   $ — Interest rate swap agreements 14,268,806   12,102,026   (12,673,832 )   13,697,000   14,880,324   6,302 Credit default swaps 125,000   10,000   (110,000 )   25,000   119,670   412 Swaptions, net 5,200,000   2,600,000   (6,000,000 )   1,800,000   4,695,604   (30,789 ) TBAs, net 297,000   4,436,000   (5,070,000 )   (337,000 )   171,220   31,751 Put and call options for TBAs, net —   10,897,000   (2,000,000 )   8,897,000   1,819,830   (1,348 ) Markit IOS total return swaps 889,418   —   (301,381 )   588,037   843,242   523 Forward purchase commitments 286,120   1,232,240   (881,893 )   636,467   326,671   1,258 Total $ 21,998,381   $ 31,277,266   $ (27,134,277 )   $ 26,141,370   $ 23,741,682   $ 8,109 ____________________ (1) Excludes net interest paid or received in full settlement of the net interest spread liability. Cash flow activity related to derivative instruments is reflected within the operating activities and investing activities sections of the condensed consolidated statements of cash flows. Derivative fair value adjustments are reflected within the unrealized loss on interest rate swaps and swaptions, unrealized loss on other derivative instruments, and gain on residential mortgage loans held-for-sale line items within the operating activities section of the condensed consolidated statements of cash flows. Realized gains and losses on interest rate swap and swaption agreements are reflected within the (gain) loss on termination and option expiration of interest rate swaps and swaptions line item within the operating activities section of the condensed consolidated statements of cash flows. The remaining cash flow activity related to derivative instruments is reflected within the (purchases) short sales of other derivative instruments, proceeds from sales (payments for termination) of other derivative instruments, net and (decrease) increase in due to counterparties, net line items within the investing activities section of the condensed consolidated statements of cash flows. Interest Rate Sensitive Assets/Liabilities The Company’s Agency RMBS portfolio is generally subject to change in value when mortgage rates decline or increase, depending on the type of investment. Rising mortgage rates generally result in a slowing of refinancing activity, which slows prepayments and results in a decline in the value of the Company’s fixed-rate Agency pools. To mitigate the impact of this risk on the Company’s fixed-rate Agency pool portfolio, the Company maintains a portfolio of fixed-rate interest-only securities and MSR, which increase in value when interest rates increase. As of June 30, 2017 and December 31, 2016, the Company had $65.4 million and $71.1 million, respectively, of interest-only securities, and $898.0 million and $693.8 million, respectively, of MSR in place to economically hedge its RMBS. Interest-only securities are included in AFS securities, at fair value, in the condensed consolidated balance sheets. The Company monitors its borrowings under repurchase agreements and FHLB advances, which are generally floating-rate debt, in relation to the rate profile of its portfolio. In connection with its risk management activities, the Company enters into a variety of derivative and non-derivative instruments to economically hedge interest rate risk or “duration mismatch (or gap)” by adjusting the duration of its floating-rate borrowings into fixed-rate borrowings to more closely match the duration of its assets. This particularly applies to borrowing agreements with maturities or interest rate resets of less than six months. Typically, the interest receivable terms (i.e., LIBOR) of certain derivatives match the terms of the underlying debt, resulting in an effective conversion of the rate of the related repurchase agreement or FHLB advance from floating to fixed. The objective is to manage the cash flows associated with current and anticipated interest payments on borrowings, as well as the ability to roll or refinance borrowings at the desired amount by adjusting the duration. To help manage the adverse impact of interest rate changes on the value of the Company’s portfolio as well as its cash flows, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, caps, credit default swaps and total return swaps. In executing on the Company’s current interest rate risk management strategy, the Company has entered into TBAs, put and call options for TBAs, interest rate swap and swaption agreements and Markit IOS total return swaps. TBAs. At times, the Company may use TBAs as a means of deploying capital until targeted investments are available and to take advantage of temporary displacements in the marketplace. Additionally, the Company may use TBAs independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. TBAs are forward contracts for the purchase (long notional positions) or sale (short notional positions) of Agency RMBS. The issuer, coupon and stated maturity of the Agency RMBS are predetermined as well as the trade price, face amount and future settle date (published each month by the Securities Industry and Financial Markets Association). However, the specific Agency RMBS to be delivered upon settlement is not known at the time of the TBA transaction. As a result, and because physical delivery of the Agency RMBS upon settlement cannot be assured, the Company accounts for TBAs as derivative instruments. As of June 30, 2017, $0.2 billion of the Company’s long notional TBA positions and $1.3 billion of the Company’s short notional TBA positions were held in order to economically hedge portfolio risk. As of December 31, 2016, $1.5 billion of the Company’s long notional TBA positions and $3.0 billion of the Company’s short notional TBA positions were held in order to economically hedge portfolio risk. The Company discloses these positions on a gross basis according to the unrealized gain or loss position of each TBA contract regardless of long or short notional position. The following tables present the notional amount, cost basis, market value and carrying value (which approximates fair value) of the Company’s TBA positions as of June 30, 2017 and December 31, 2016:   As of June 30, 2017               Net Carrying Value (4) (in thousands) Notional Amount (1)   Cost Basis (2)   Market Value (3)   Derivative Assets   Derivative Liabilities Purchase contracts $ 200,000   $ 205,502   $ 205,039   $ —   $ (463 ) Sale contracts (1,340,000 )   (1,384,492 )   (1,376,432 )   8,060   — TBAs, net $ (1,140,000 )   $ (1,178,990 )   $ (1,171,393 )   $ 8,060   $ (463 )   As of December 31, 2016               Net Carrying Value (4) (in thousands) Notional Amount (1)   Cost Basis (2)   Market Value (3)   Derivative Assets   Derivative Liabilities Purchase contracts $ 1,500,000   $ 1,576,270   $ 1,576,875   $ 605   $ — Sale contracts (2,989,000 )   (3,028,470 )   (3,035,125 )   3,689   (10,344 ) TBAs, net $ (1,489,000 )   $ (1,452,200 )   $ (1,458,250 )   $ 4,294   $ (10,344 ) ___________________ (1) Notional amount represents the face amount of the underlying Agency RMBS. (2) Cost basis represents the forward price to be paid (received) for the underlying Agency RMBS. (3) Market value represents the current market value of the TBA (or of the underlying Agency RMBS) as of period-end. (4) Net carrying value represents the difference between the market value of the TBA as of period-end and its cost basis, and is reported in derivative assets / (liabilities), at fair value, in the condensed consolidated balance sheets. Put and Call Options for TBAs. The Company may use put and call options for TBAs independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. As of June 30, 2017 and December 31, 2016, the Company had purchased put and call options for TBAs with a notional amount of $2.9 billion and $2.5 billion, and short sold put and call options for TBAs with a notional amount of $1.6 billion and $3.6 billion, respectively. As of June 30, 2017, the last of the options expires in August 2017. The put and call options had a fair market value of $0.5 million included in derivative assets, at fair value, and $0.9 million included in derivative liabilities, at fair value, on the condensed consolidated balance sheet as of June 30, 2017. As of December 31, 2016, put and call options for TBAs had a fair market value of $42.6 million included in derivative assets, at fair value, on the condensed consolidated balance sheet. Interest Rate Swap Agreements. The Company may use interest rate swaps independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. As of June 30, 2017 and December 31, 2016, the Company held the following interest rate swaps that were utilized as economic hedges of interest rate exposure (or duration) whereby the Company receives interest at a three-month LIBOR rate: (notional in thousands)             June 30, 2017 Swaps Maturities   Notional Amount (1)   Weighted Average Fixed Pay Rate (2)   Weighted Average Receive Rate (2)   Weighted Average Maturity (Years) (2) 2017   $ 1,525,000   0.771 %   1.220 %   0.29 2018   4,320,000   1.155 %   1.223 %   1.00 2019   350,000   1.283 %   1.165 %   1.94 2020   1,150,000   1.463 %   1.209 %   3.27 2021 and Thereafter   4,508,000   1.699 %   1.235 %   5.59 Total   $ 11,853,000   1.322 %   1.224 %   2.72 (notional in thousands)             December 31, 2016 Swaps Maturities   Notional Amount (1)   Weighted Average Fixed Pay Rate (2)   Weighted Average Receive Rate (2)   Weighted Average Maturity (Years) (2) 2017   $ 2,375,000   0.765 %   0.934 %   0.59 2018   5,340,000   1.232 %   0.945 %   1.59 2019   350,000   1.283 %   0.895 %   2.44 2020   1,460,000   1.481 %   0.920 %   3.74 2021 and Thereafter   5,782,063   1.984 %   0.955 %   6.17 Total   $ 15,307,063   1.441 %   0.943 %   3.24 ____________________ (1) Notional amount includes $778.0 million and $777.1 million in forward starting interest rate swaps as of June 30, 2017 and December 31, 2016, respectively. (2) Weighted averages exclude forward starting interest rate swaps. As of June 30, 2017 and December 31, 2016, the weighted average fixed pay rate on forward starting interest rate swaps was 2.4% and 2.0%, respectively. Additionally, as of June 30, 2017 and December 31, 2016, the Company held the following interest rate swaps in order to mitigate mortgage interest rate exposure (or duration) risk whereby the Company pays interest at a three-month LIBOR rate: (notional in thousands)             June 30, 2017 Swaps Maturities   Notional Amounts   Weighted Average Pay Rate   Weighted Average Fixed Receive Rate   Weighted Average Maturity (Years) 2020   $ 200,000   1.171 %   1.642 %   3.10 2021 and Thereafter   2,711,719   1.193 %   2.190 %   6.44 Total   $ 2,911,719   1.192 %   2.152 %   6.21 (notional in thousands)             December 31, 2016 Swaps Maturities   Notional Amounts   Weighted Average Pay Rate   Weighted Average Fixed Receive Rate   Weighted Average Maturity (Years) 2018   $ 575,000   0.911 %   1.440 %   1.89 2019   500,000   0.882 %   1.042 %   2.06 2020   510,000   0.881 %   1.580 %   3.59 2021 and Thereafter   3,479,000   0.963 %   2.137 %   5.52 Total   $ 5,064,000   0.941 %   1.894 %   4.57 Interest Rate Swaptions. The Company may use interest rate swaptions (agreements to enter into interest rate swaps in the future for which the Company would either pay or receive a fixed rate) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. As of June 30, 2017 and December 31, 2016, the Company had the following outstanding interest rate swaptions that were utilized as macro-economic hedges:     June 30, 2017 (notional and dollars in thousands)   Option   Underlying Swap Swaption   Expiration   Cost Basis   Fair Value   Average Months to Expiration   Notional Amount   Average Pay Rate   Average Receive Rate   Average Term (Years) Purchase contracts:                                 Payer   < 6 Months   $ 43,732   $ 7,698   2.85   $ 5,025,000   2.35 %   3M Libor   6.2 Total Payer       $ 43,732   $ 7,698   2.85   $ 5,025,000   2.35 %   3M Libor   6.2                                   Receiver   < 6 Months   $ 2,685   $ 2,144   3.23   $ 2,000,000   3M Libor   1.78 %   8.5 Receiver   ≥ 6 Months   —   5,924   10.80   250,000   3M Libor   2.35 %   10.0 Total Receiver       $ 2,685   $ 8,068   7.56   $ 2,250,000   3M Libor   1.84 %   8.7                                   Sale contracts:                                 Payer   < 6 Months   $ (35,543 )   $ (915 )   3.22   $ (2,300,000 )   2.92 %   3M Libor   8.7 Total Payer       $ (35,543 )   $ (915 )   3.22   $ (2,300,000 )   2.92 %   3M Libor   8.7                                   Receiver   < 6 Months   $ (9,650 )   $ (6,191 )   2.37   $ (3,000,000 )   3M Libor   2.02 %   10.0 Receiver   ≥ 6 Months   (1,400 )   (6,526 )   10.80   (625,000 )   3M Libor   1.95 %   10.0 Total Receiver       $ (11,050 )   $ (12,717 )   4.91   $ (3,625,000 )   3M Libor   2.00 %   10.0     December 31, 2016 (notional and dollars in thousands)   Option   Underlying Swap Swaption   Expiration   Cost   Fair Value   Average Months to Expiration   Notional Amount   Average Fixed Pay Rate   Average Receive Rate   Average Term (Years) Purchase contracts:                                 Payer   < 6 Months   $ 29,360   $ 42,149   1.22   $ 4,500,000   2.16 %   3M Libor   4.8 Payer   ≥ 6 Months   13,655   792   6.70   300,000   3.50 %   3M Libor   10.0 Total Payer       $ 43,015   $ 42,941   1.23   $ 4,800,000   2.24 %   3M Libor   5.1                                   Sale contracts:                                 Payer   < 6 Months   $ (51,355 )   $ (1,414 )   5.81   $ (500,000 )   3.40 %   3M Libor   10.0 Payer   ≥ 6 Months   (29,893 )   (938 )   6.77   (300,000 )   3.50 %   3M Libor   10.0 Total Payer       $ (81,248 )   $ (2,352 )   6.05   $ (800,000 )   3.44 %   3M Libor   10.0                                   Receiver   < 6 Months   $ —   $ (2,353 )   2.30   $ (3,775,000 )   3M Libor   1.19 %   4.9 Total Receiver       $ —   $ (2,353 )   2.30   $ (3,775,000 )   3M Libor   1.19 %   4.9 Markit IOS Total Return Swaps. The Company may use total return swaps (agreements whereby the Company receives or makes payments based on the total return of an underlying instrument or index, such as the Markit IOS Index, in exchange for fixed or floating rate interest payments) independently, or in conjunction with other derivative and non-derivative instruments, in order to mitigate risks. The Company enters into total return swaps to help mitigate the potential impact of larger increases or decreases in interest rates on the performance of our portfolio (referred to as “convexity risk”). Total return swaps based on the Markit IOS Index are intended to synthetically replicate the performance of interest-only securities. The Company had the following total return swap agreements in place at June 30, 2017 and December 31, 2016: (notional and dollars in thousands)           June 30, 2017 Maturity Date   Current Notional Amount   Fair Value   Cost Basis   Unrealized Gain (Loss) January 12, 2043   $ (26,309 )   $ 95   $ (201 )   $ (106 ) January 12, 2044   (42,320 )   205   (366 )   (161 ) Total   $ (68,629 )   $ 300   $ (567 )   $ (267 ) (notional and dollars in thousands)           December 31, 2016 Maturity Date   Current Notional Amount   Fair Value   Cost Basis   Unrealized Gain (Loss) January 12, 2043   $ (45,083 )   $ (5 )   $ (320 )   $ (325 ) January 12, 2044   (45,510 )   (12 )   (366 )   (378 ) Total   $ (90,593 )   $ (17 )   $ (686 )   $ (703 ) Credit Risk The Company’s exposure to credit losses on its Agency RMBS portfolio is limited due to implicit or explicit backing from the GSEs. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are guaranteed by those respective agencies, and the payment of principal and interest on the Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government. For non-Agency investment securities, residential mortgage loans and commercial real estate assets, the Company may enter into credit default swaps to hedge credit risk. In future periods, the Company could enhance its credit risk protection, enter into further paired derivative positions, including both long and short credit default swaps, and/or seek opportunistic trades in the event of a market disruption (see discussion under “Non-Risk Management Activities” below). The Company also has processes and controls in place to monitor, analyze, manage and mitigate its credit risk with respect to non-Agency RMBS, residential mortgage loans and commercial real estate assets. Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe the Company under such contracts completely fail to perform under the terms of these contracts, assuming there are no recoveries of underlying collateral, as measured by the market value of the derivative financial instruments. As of June 30, 2017, the fair value of derivative financial instruments as an asset and liability position was $240.5 million and $2.6 million, respectively. The Company attempts to mitigate its credit risk exposure on derivative financial instruments by limiting its counterparties to banks and financial institutions that meet established credit guidelines. The Company also seeks to spread its credit risk exposure across multiple counterparties in order to reduce its exposure to any single counterparty. Additionally, the Company reduces credit risk on the majority of its derivative instruments by entering into agreements that permit the closeout and netting of transactions with the same counterparty or clearing agency, in the case of centrally cleared interest rate swaps, upon the occurrence of certain events. To further mitigate the risk of counterparty default, the Company maintains collateral agreements with certain of its counterparties and clearing agencies, which require both parties to maintain cash deposits in the event the fair values of the derivative financial instruments exceed established thresholds. As of June 30, 2017, the Company had received cash deposits from counterparties of $35,000 and placed cash deposits of $152.8 million in accounts maintained by counterparties, of which the amounts are netted on a counterparty basis and classified within restricted cash, due from counterparties, or due to counterparties on the Company’s condensed consolidated balance sheets. Non-Risk Management Activities The Company has entered into certain financial instruments that are considered derivative contracts under ASC 815 that are not for purposes of hedging. These contracts are currently limited to inverse interest-only RMBS. Inverse Interest-Only Securities. As of June 30, 2017 and December 31, 2016, inverse interest-only securities with a carrying value of $109.3 million and $127.8 million, including accrued interest receivable of $1.0 million and $1.2 million, respectively, are accounted for as derivative financial instruments in the condensed consolidated financial statements. The following table presents the amortized cost and carrying value (which approximates fair value) of inverse interest-only securities as of June 30, 2017 and December 31, 2016: (in thousands) June 30, 2017   December 31, 2016 Face Value $ 659,768   $ 740,844 Unamortized premium —   — Unamortized discount       Designated credit reserve —   — Net, unamortized (562,240 )   (631,082 ) Amortized Cost 97,528   109,762 Gross unrealized gains 12,085   18,389 Gross unrealized losses (1,282 )   (1,552 ) Market Value $ 108,331   $ 126,599