Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v3.20.1
Available-for-Sale Securities, at Fair Value
 3 Months Ended
Mar. 31, 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. As a result of the global COVID-19 pandemic, the Company experienced unprecedented market conditions during the quarter ended March 31, 2020, 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 outsized margin calls and ongoing funding concerns associated with the significant spread widening on these assets. 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 March 31, 2020 and December 31, 2019:
(in thousands)
March 31,
2020
 
December 31,
2019
Agency
 
 
 
Federal National Mortgage Association
$
14,362,782

 
$
21,252,575

Federal Home Loan Mortgage Corporation
2,907,220

 
6,070,500

Government National Mortgage Association
436,657

 
454,980

Non-Agency
26,400

 
3,628,273

Total available-for-sale securities
$
17,733,059

 
$
31,406,328



At March 31, 2020 and December 31, 2019, the Company pledged AFS securities with a carrying value of $17.7 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 March 31, 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 March 31, 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 $26.4 million and $3.6 billion, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of March 31, 2020 and December 31, 2019:
 
March 31, 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
$
16,316,075

 
$
764,966

 
$
(17
)
 
$
17,081,024

 
$
—

 
$
505,055

 
$
(1,091
)
 
$
17,584,988

Interest-only
2,461,579

 
158,209

 
—

 
158,209

 
(32,786
)
 
14,194

 
(17,946
)
 
121,671

Total Agency
18,777,654

 
923,175

 
(17
)
 
17,239,233

 
(32,786
)
 
519,249

 
(19,037
)
 
17,706,659

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
2,591

 
8

 
(41
)
 
2,558

 
—

 
44

 
(9
)
 
2,593

Interest-only
3,770,437

 
37,781

 
—

 
37,781

 
(8,604
)
 
279

 
(5,649
)
 
23,807

Total Non-Agency
3,773,028

 
37,789

 
(41
)
 
40,339

 
(8,604
)
 
323

 
(5,658
)
 
26,400

Total
$
22,550,682

 
$
960,964

 
$
(58
)
 
$
17,279,572

 
$
(41,390
)
 
$
519,572

 
$
(24,695
)
 
$
17,733,059


 
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 March 31, 2020 and December 31, 2019:
 
March 31, 2020
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
13,820

 
$
23,297

 
$
37,117

Fixed Rate
17,692,839

 
3,103

 
17,695,942

Total
$
17,706,659

 
$
26,400

 
$
17,733,059

 
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 March 31, 2020:
 
March 31, 2020
(in thousands)
 Agency
 
 Non-Agency
 
 Total
< 1 year
$
718

 
$
85

 
$
803

≥ 1 and < 3 years
51,049

 
10,134

 
61,183

≥ 3 and < 5 years
3,793,934

 
9,313

 
3,803,247

≥ 5 and < 10 years
13,859,832

 
6,868

 
13,866,700

≥ 10 years
1,126

 
—

 
1,126

Total
$
17,706,659

 
$
26,400

 
$
17,733,059



Measurement of Allowances for Credit Losses on AFS Securities (Subsequent to the Adoption of Topic 326)
Subsequent to 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 AFS securities. 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 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 loss on investment securities) and the balance of the unrealized loss recognized in either other comprehensive (loss) income, net of tax, or loss on investment securities, depending on the accounting treatment.
The following table presents the changes for the three months ended March 31, 2020 in the allowance for credit losses on Agency and non-Agency AFS securities.
 
Three Months Ended
 
March 31,
 
2020
(in thousands)
Agency
 
Non-Agency
 
Total
Allowance for credit losses at beginning of period
$
—

 
$
(244,876
)
 
$
(244,876
)
Additions:
 
 
 
 
 
On securities for which credit losses were not previously recorded
(32,786
)
 
(11,109
)
 
(43,895
)
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
—

 
(1,743
)
 
(1,743
)
Writeoffs
—

 
4,867

 
4,867

Recoveries of amounts previously written off
—

 
(2,535
)
 
(2,535
)
Allowance for credit losses at end of period
$
(32,786
)
 
$
(8,604
)
 
$
(41,390
)


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 March 31, 2020 (subsequent to the adoption of Topic 326). At March 31, 2020, the Company held 875 AFS securities; of the securities for which an allowance for credit losses has not been recorded, 20 were in an unrealized loss position for less than twelve consecutive months and 18 were in an unrealized loss position for more than twelve consecutive months.
 
March 31, 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
$
249,040

 
$
(5,425
)
 
$
16,057

 
$
(807
)
 
$
265,097

 
$
(6,232
)
Non-Agency
2,094

 
(1,176
)
 
307

 
(10
)
 
2,401

 
(1,186
)
Total
$
251,134

 
$
(6,601
)
 
$
16,364

 
$
(817
)
 
$
267,498

 
$
(7,418
)


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 (loss) income, net of tax, or 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 months ended March 31, 2019, the Company recorded $0.2 million in other-than-temporary credit impairments on a total of two non-Agency securities where the future expected cash flows for each security were less than its amortized cost. At March 31, 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 March 31, 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 months ended March 31, 2020 and 2019:
 
Three Months Ended
 
March 31,
(in thousands)
2020
 
2019
Cumulative other-than-temporary credit losses at beginning of period
$
(17,021
)
 
$
(6,865
)
Additions:
 
 
 
Other-than-temporary impairments not previously recognized
—

 
(99
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
(107
)
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
$
—

 
$
(4,528
)


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 three months ended March 31, 2019 in the net unamortized discount/premium and designated credit reserve on non-Agency AFS securities.
 
Three Months Ended
 
March 31, 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
(80,128
)
 
16,434

 
(63,694
)
Accretion of net discount
—

 
14,225

 
14,225

Realized credit losses
4,827

 
—

 
4,827

Reclassification adjustment for other-than-temporary impairments
2,337

 
—

 
2,337

Transfers from (to)
3,732

 
(3,732
)
 
—

Sales, calls, other
(1,741
)
 
90,669

 
88,928

Ending balance at March 31
$
(1,393,735
)
 
$
(485,995
)
 
$
(1,879,730
)


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 loss on investment securities in the Company’s condensed consolidated statements of comprehensive (loss) income. The following table presents details around sales of AFS securities during the three months ended March 31, 2020 and 2019:
 
Three Months Ended
 
March 31,
(in thousands)
2020
 
2019
Proceeds from sales of available-for-sale securities
$
15,586,752

 
$
4,853,189

Amortized cost of available-for-sale securities sold
(16,622,767
)
 
(4,870,646
)
Total realized losses on sales, net
$
(1,036,015
)
 
$
(17,457
)
 
 
 
 
Gross realized gains
$
223,471

 
$
101,298

Gross realized losses
(1,259,486
)
 
(118,755
)
Total realized losses on sales, net
$
(1,036,015
)
 
$
(17,457
)