TWO Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

Available-for-Sale Securities, at Fair Value

6 Months Ended

Jun. 30, 2021

Debt Securities, Available-for-sale [Abstract]

Available-for-Sale Securities, at Fair Value

Available-for-Sale Securities, at Fair ValueThe 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. 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. Since then, the Company has focused on the composition of its Agency RMBS portfolio, deploying risk as the market entered a period of stabilization and asset price recovery.

The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2021 and December 31, 2020:


(in thousands)	June 30, 2021		December 31, 2020
Agency:
Federal National Mortgage Association	$	6,190,275	$	11,486,658
Federal Home Loan Mortgage Corporation	1,390,345		2,837,103
Government National Mortgage Association	253,867		314,130
Non-Agency	5,559		13,031
Total available-for-sale securities	$	7,840,046	$	14,650,922

At June 30, 2021 and December 31, 2020, the Company pledged AFS securities with a carrying value of $7.8 billion and $14.6 billion, respectively, as collateral for repurchase agreements. See Note 11 - Repurchase Agreements.

At June 30, 2021 and December 31, 2020, 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, 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, 2021 and December 31, 2020, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $5.6 million and $13.0 million, respectively.

The following tables present the amortized cost and carrying value of AFS securities by collateral type as of June 30, 2021 and December 31, 2020:


	June 30, 2021
(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	$	6,812,303	$	305,809	$	(13)	$	7,118,099	$	—	$	291,473	$	(341)	$	7,409,231
Interest-only	4,274,783		419,475		—		419,475		(15,154)		30,561		(9,626)		425,256
Total Agency	11,087,086		725,284		(13)		7,537,574		(15,154)		322,034		(9,967)		7,834,487



Non-Agency	1,236,217		8,794		(32)		10,135		(2,611)		51		(2,016)		5,559
Total	$	12,323,303	$	734,078	$	(45)	$	7,547,709	$	(17,765)	$	322,085	$	(11,983)	$	7,840,046


	December 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	$	13,103,355	$	605,253	$	(14)	$	13,708,594	$	—	$	629,079	$	(420)	$	14,337,253
Interest-only	3,649,556		315,876		—		315,876		(17,889)		15,680		(13,029)		300,638
Total Agency	16,752,911		921,129		(14)		14,024,470		$	(17,889)	644,759		(13,449)		14,637,891



Non-Agency	2,095,365		16,408		(36)		18,705		(4,639)		109		(1,144)		13,031
Total	$	18,848,276	$	937,537	$	(50)	$	14,043,175	(22,528)		$	644,868	$	(14,593)	$	14,650,922

The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of June 30, 2021:


	June 30, 2021
(in thousands)	Agency		Non-Agency		Total
< 1 year	$	4,839	$	—	$	4,839
≥ 1 and < 3 years	117,835		5,559		123,394
≥ 3 and < 5 years	4,710,108		—		4,710,108
≥ 5 and < 10 years	3,000,643		—		3,000,643
≥ 10 years	1,062		—		1,062
Total	$	7,834,487	$	5,559	$	7,840,046

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, as detailed in Note 2 - Basis of Presentation and Significant Accounting Policies.

The following tables present the changes for the three and six months ended June 30, 2021 and 2020 in the allowance for credit losses on Agency and non-Agency AFS securities:


	Three Months Ended June 30, 2021						Six Months Ended June 30, 2021


(in thousands)	Agency		Non-Agency		Total		Agency		Non-Agency		Total
Allowance for credit losses at beginning of period	$	(16,699)	$	(1,471)	$	(18,170)	$	(17,889)	$	(4,639)	$	(22,528)

Additions on securities for which credit losses were not previously recorded	(11)		(3,850)		(3,861)		(31)		(3,850)		(3,881)




Decrease (increase) on securities with previously recorded credit losses	(297)		(3,234)		(3,531)		(2,137)		(239)		(2,376)
Write-offs	1,853		5,944		7,797		4,903		6,117		11,020

Allowance for credit losses at end of period	$	(15,154)	$	(2,611)	$	(17,765)	$	(15,154)	$	(2,611)	$	(17,765)


	Three Months Ended June 30, 2020						Six Months Ended June 30, 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)


Reductions for securities sold	—		—		—		—		246,792		246,792

Decrease (increase) on securities with previously recorded credit losses	2,162		(3,050)		(888)		2,162		(4,793)		(2,631)
Write-offs	—		—		—		—		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 tables present 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, 2021 and December 31, 2020 (subsequent to the adoption of Topic 326). At June 30, 2021 and December 31, 2020, the Company held 792 and 823 AFS securities, respectively; of the securities for which an allowance for credit losses has not been recorded, 21 and 13 were in an unrealized loss position for less than twelve consecutive months and 0 and 13 were in an unrealized loss position for more than twelve consecutive months, respectively.


	June 30, 2021
	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	$	78,403	$	(4,655)	$	—	$	—	$	78,403	$	(4,655)
Non-Agency	—		—		—		—		—		—
Total	$	78,403	$	(4,655)	$	—	$	—	$	78,403	$	(4,655)


	December 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	$	367,660	$	(1,705)	$	24,006	$	(4,454)	$	391,666	$	(6,159)
Non-Agency	—		—		—		—		—		—
Total	$	367,660	$	(1,705)	$	24,006	$	(4,454)	$	391,666	$	(6,159)

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) gain 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.

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. As of December 31, 2019, the Company’s cumulative credit losses related to OTTI totaled $17.0 million. During the three months ended March 31, 2020, the Company sold all securities for which OTTI had been recognized prior to January 1, 2020, reducing the Company’s cumulative credit losses related to OTTI to zero. As of December 31, 2020, the Company no longer held any of the securities for which OTTI had been recognized prior to January 1, 2020.

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 (loss) income. The following table presents details around sales of AFS securities during the three and six months ended June 30, 2021 and 2020:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2021		2020		2021		2020
Proceeds from sales of available-for-sale securities	$	2,549,602	$	1,383,118	$	4,600,545	$	16,969,870
Amortized cost of available-for-sale securities sold	(2,532,087)		(1,326,218)		(4,516,832)		(17,947,686)
Total realized gains (losses) on sales, net	$	17,515	$	56,900	$	83,713	$	(977,816)

Gross realized gains	$	46,768	$	57,414	$	112,985	$	280,885
Gross realized losses	(29,253)		(514)		(29,272)		(1,258,701)
Total realized gains (losses) on sales, net	$	17,515	$	56,900	$	83,713	$	(977,816)