Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v3.20.2
Available-for-Sale Securities, at Fair Value
 6 Months Ended
Jun. 30, 2020
Debt Securities, Available-for-sale [Abstract]  
Available-for-Sale Securities, at Fair Value Available-for-Sale Securities, at Fair Value
The Company holds both Agency and non-Agency AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. In the first quarter of 2020, the Company experienced unprecedented market conditions as a result of the global COVID-19 pandemic, including unusually significant spread widening in both Agency RMBS and non-Agency securities. In response, the Company focused its efforts on raising excess liquidity and de-risking its portfolio. On March 25, 2020, the Company sold substantially all of its non-Agency securities in order to eliminate the risks posed by continued margin calls and ongoing funding concerns associated with the significant spread widening on these assets. During the first quarter, the Company also sold approximately one-third of its Agency RMBS in order to reduce risk and raise cash to establish a strong defensive liquidity position to weather potential ongoing economic and market instability.
The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2020 and December 31, 2019:
(in thousands) June 30,
2020		 December 31,
2019
Agency
Federal National Mortgage Association $ 14,483,151    $ 21,252,575   
Federal Home Loan Mortgage Corporation 2,781,441    6,070,500   
Government National Mortgage Association 385,517    454,980   
Non-Agency 23,180    3,628,273   
Total available-for-sale securities $ 17,673,289    $ 31,406,328   

At June 30, 2020 and December 31, 2019, the Company pledged AFS securities with a carrying value of $17.3 billion and $29.8 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 11 - Repurchase Agreements and Note 12 - Federal Home Loan Bank of Des Moines Advances.
At June 30, 2020 and December 31, 2019, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
The Company is not required to consolidate variable interest entities, or VIEs, for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include all non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of June 30, 2020 and December 31, 2019, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $23.2 million and $3.6 billion, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of June 30, 2020 and December 31, 2019:
June 30, 2020
(in thousands) Principal/ Current Face Un-amortized Premium Accretable Purchase Discount Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Carrying Value
Agency
Principal and interest
 $ 16,100,955    $ 742,801    $ (14)   $ 16,843,742    $ —    $ 688,432    $ (282)   $ 17,531,892   
Interest-only 2,344,129    148,131    —    148,131    (30,634)   14,474    (13,754)   118,217   
Total Agency 18,445,084    890,932    (14)   16,991,873    (30,634)   702,906    (14,036)   17,650,109   
Non-Agency
Principal and interest
 2,515    8    (40)   2,483    —    125    —    2,608   
Interest-only 3,307,699    36,049    —    36,049    (11,949)   179    (3,707)   20,572   
Total Non-Agency
 3,310,214    36,057    (40)   38,532    (11,949)   304    (3,707)   23,180   
Total $ 21,755,298    $ 926,989    $ (54)   $ 17,030,405    $ (42,583)   $ 703,210    $ (17,743)   $ 17,673,289   
December 31, 2019
(in thousands) Principal/ Current Face Un-amortized Premium Accretable Purchase Discount Credit Reserve Purchase Discount Amortized Cost Unrealized Gain Unrealized Loss Carrying Value
Agency
Principal and interest
 $ 26,239,544    $ 986,343    $ (19)   $ —    $ 27,225,868    $ 424,818    $ (8,815)   $ 27,641,871   
Interest-only 2,601,693    169,811    —    —    169,811    13,724    (47,351)   136,184   
Total Agency 28,841,237    1,156,154    (19)   —    27,395,679    438,542    (56,166)   27,778,055   
Non-Agency
Principal and interest
 5,498,654    8,980    (560,140)   (1,711,951)   3,235,543    341,583    (23,263)   3,553,863   
Interest-only 4,356,603    79,935    —    —    79,935    3,039    (8,564)   74,410   
Total Non-Agency
 9,855,257    88,915    (560,140)   (1,711,951)   3,315,478    344,622    (31,827)   3,628,273   
Total $ 38,696,494    $ 1,245,069    $ (560,159)   $ (1,711,951)   $ 30,711,157    $ 783,164    $ (87,993)   $ 31,406,328   

The following tables present the carrying value of the Company’s AFS securities by rate type as of June 30, 2020 and December 31, 2019:
June 30, 2020
(in thousands)  Agency  Non-Agency  Total
Adjustable Rate $ 12,904    $ 20,435    $ 33,339   
Fixed Rate 17,637,205    2,745    17,639,950   
Total $ 17,650,109    $ 23,180    $ 17,673,289   
December 31, 2019
(in thousands) Agency   Non-Agency   Total
Adjustable Rate $ 14,584    $ 3,344,287      $ 3,358,871   
Fixed Rate 27,763,471    283,986      28,047,457   
Total $ 27,778,055    $ 3,628,273      $ 31,406,328   
The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of June 30, 2020:
June 30, 2020
(in thousands)  Agency  Non-Agency  Total
< 1 year $ 186,336    $ 29    $ 186,365   
≥ 1 and < 3 years 53,093    12,864    65,957   
≥ 3 and < 5 years 7,828,825    4,444    7,833,269   
≥ 5 and < 10 years 9,581,083    5,843    9,586,926   
≥ 10 years 772    —    772   
Total $ 17,650,109    $ 23,180    $ 17,673,289   

Measurement of Allowances for Credit Losses on AFS Securities (Subsequent to the Adoption of Topic 326)
Following the adoption of Topic 326 on January 1, 2020, the Company uses a discounted cash flow method to estimate and recognize an allowance for credit losses on both Agency and non-Agency AFS securities that are not accounted for under the fair value option. The estimated allowance for credit losses is equal to the difference between the prepayment adjusted contractual cash flows with no credit losses and the prepayment adjusted expected cash flows with credit losses, discounted at the effective interest rate on the AFS security that was in effect upon adoption of the standard. The contractual cash flows and expected cash flows are based on management’s best estimate and take into consideration current prepayment assumptions, lifetime expected losses based on past loss experience, current market conditions, and reasonable and supportable forecasts of future conditions. The allowance for credit losses on Agency AFS securities relates to prepayment assumption changes on interest-only Agency RMBS. The allowance for credit losses causes an increase in the AFS security amortized cost and recognizes an allowance for credit losses in the same amount, with the provision for credit losses recognized in earnings (within gain (loss) on investment securities) and the balance of the unrealized loss recognized in either other comprehensive income (loss), net of tax, or gain (loss) on investment securities, depending on the accounting treatment.
The following table presents the changes for the three and six months ended June 30, 2020 in the allowance for credit losses on Agency and non-Agency AFS securities:
Three Months Ended Six Months Ended
June 30, June 30,
2020 2020
(in thousands) Agency Non-Agency Total Agency Non-Agency Total
Allowance for credit losses at beginning of period
 $ (32,786)   $ (8,604)   $ (41,390)   $ —    $ (244,876)   $ (244,876)  
Additions:
On securities for which credit losses were not previously recorded
 (10)   (295)   (305)   (32,796)   (11,404)   (44,200)  
Arising from purchases of securities accounted for as purchased credit deteriorated
 —    —    —    —    —    —   
Reductions:
For securities sold
 —    —    —    —    246,792    246,792   
Due to the intent to sell or more likely than not will be required to sell the security before recovery of its amortized cost
 —    —    —    —    —    —   
Increase (decrease) on securities with previously recorded credit losses
 2,162    (3,050)   (888)   2,162    (4,793)   (2,631)  
Writeoffs
 —    —    —    —    4,867    4,867   
Recoveries of amounts previously written off
 —    —    —    —    (2,535)   (2,535)  
Allowance for credit losses at end of period
 $ (30,634)   $ (11,949)   $ (42,583)   $ (30,634)   $ (11,949)   $ (42,583)  

The following table presents the components comprising the carrying value of AFS securities for which an allowance for credit losses has not been recorded by length of time that the securities had an unrealized loss position as of June 30, 2020 (subsequent to the adoption of Topic 326). At June 30, 2020, the Company held 835 AFS securities; of the securities for which an allowance for credit losses has not been recorded, 8 were in an unrealized loss position for less than twelve consecutive months and 13 were in an unrealized loss position for more than twelve consecutive months.
June 30, 2020
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
Agency $ 21,111    $ (4,367)   $ 15,043    $ (695)   $ 36,154    $ (5,062)  
Non-Agency —    —    —    —    —    —   
Total $ 21,111    $ (4,367)   $ 15,043    $ (695)   $ 36,154    $ (5,062)  
Evaluating AFS Securities for Other-Than-Temporary Impairments (Prior to the Adoption of Topic 326)
In evaluating AFS securities for OTTI prior to the adoption of Topic 326, the Company determined whether there had been a significant adverse quarterly change in the cash flow expectations for a security. The Company compared 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 considered whether there had been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security was greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment had occurred. If the Company did not intend to sell and would not be more likely than not required to sell the security, the credit loss was recognized in earnings and the balance of the unrealized loss was recognized in either other comprehensive income (loss), net of tax, or gain (loss) on investment securities, depending on the accounting treatment. If the Company intended to sell the security or would be more likely than not required to sell the security, the full unrealized loss was recognized in earnings.
During the three and six months ended June 30, 2019, the Company recorded $4.8 million and $5.1 million in other-than-temporary credit impairments on a total of seven non-Agency securities where the future expected cash flows for each security were less than its amortized cost. At June 30, 2019, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company would be required to sell the securities; therefore, only the projected credit loss was recognized in earnings. As of June 30, 2020, the Company no longer held any of the securities for which OTTI had been recognized prior to January 1, 2020.
The following table presents the changes in cumulative credit losses related to OTTI for the three and six months ended June 30, 2020 and 2019:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2019 2020 2019
Cumulative other-than-temporary credit losses at beginning of period $ —    $ (4,528)   $ (17,021)   $ (6,865)  
Additions:
Other-than-temporary impairments not previously recognized
 —    (4,304)   —    (4,403)  
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
 —    (544)   —    (651)  
Reductions:
Decreases related to other-than-temporary impairments on securities paid down
 —    —    —    1,703   
Decreases related to other-than-temporary impairments on securities sold
 —    —    17,021    840   
Cumulative other-than-temporary credit losses at end of period $ —    $ (9,376)   $ —    $ (9,376)  

Cumulative credit losses related to OTTI are 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.
Prior to the adoption of Topic 326 on January 1, 2020, when the Company purchased a credit-sensitive AFS security at a significant discount to its face value, the Company did not amortize into income a significant portion of this discount that the Company was entitled to earn because the Company did not expect to collect the entire discount due to the inherent credit risk of the security. The Company may have also recorded an OTTI for a portion of its investment in the security in an unrealized loss position to the extent the Company believed that the amortized cost would exceed the present value of expected future cash flows. The amount of principal that the Company did not amortize into income was 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 six months ended June 30, 2019 in the net unamortized discount/premium and designated credit reserve on non-Agency AFS securities:
Six Months Ended
June 30, 2019
(in thousands) Designated Credit Reserve Net Unamortized Discount/Premium Total
Beginning balance at January 1 $ (1,322,762)   $ (603,591)   $ (1,926,353)  
Acquisitions (336,914)   5,911    (331,003)  
Accretion of net discount —    23,822    23,822   
Realized credit losses
 12,353    —    12,353   
Reclassification adjustment for other-than-temporary impairments
 (2,511)   —    (2,511)  
Transfers from (to) 11,520    (11,520)   —   
Sales, calls, other (1,741)   90,669    88,928   
Ending balance at June 30 $ (1,640,055)   $ (494,709)   $ (2,134,764)  

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 December 31, 2019 (prior to the adoption of Topic 326). At December 31, 2019, the Company held 1,237 AFS securities, of which 122 were in an unrealized loss position for less than twelve consecutive months and 151 were in an unrealized loss position for more than twelve consecutive months.
December 31, 2019
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
Agency $ 3,322,894    $ (6,645)   $ 524,739    $ (49,521)   $ 3,847,633    $ (56,166)  
Non-Agency 647,849    (18,416)   210,988    (13,411)   858,837    (31,827)  
Total $ 3,970,743    $ (25,061)   $ 735,727    $ (62,932)   $ 4,706,470    $ (87,993)  

Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income (loss). The following table presents details around sales of AFS securities during the three and six months ended June 30, 2020 and 2019:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2020 2019 2020 2019
Proceeds from sales of available-for-sale securities $ 1,383,118    $ 3,100,487    $ 16,969,870    $ 7,953,676   
Amortized cost of available-for-sale securities sold (1,326,218)   (3,076,898)   (17,947,686)   (7,947,544)  
Total realized gains (losses) on sales, net $ 56,900    $ 23,589    $ (977,816)   $ 6,132   
Gross realized gains $ 57,414    $ 24,855    $ 280,885    $ 126,153   
Gross realized losses (514)   (1,266)   (1,258,701)   (120,021)  
Total realized gains (losses) on sales, net $ 56,900    $ 23,589    $ (977,816)   $ 6,132