Annual report pursuant to Section 13 and 15(d)

Available-for-Sale Securities, at Fair Value

v3.8.0.1
Available-for-Sale Securities, at Fair Value
 12 Months Ended
Dec. 31, 2017
Available-for-sale Securities [Abstract]  
Available-for-Sale Securities, at Fair Value
Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the consolidated balance sheets. Balances as of December 31, 2016 exclude the retained interests from the Company’s previous on-balance sheet securitizations, as they were eliminated in consolidation in accordance with U.S. GAAP. As of December 31, 2017, the Company no longer consolidates the securitization trusts and includes the remaining retained securities within non-Agency AFS securities.
The following table presents the Company’s AFS investment securities by collateral type as of December 31, 2017 and December 31, 2016:
(in thousands)
December 31,
2017
 
December 31,
2016
Agency
 
 
 
Federal National Mortgage Association
$
13,920,721

 
$
8,274,507

Federal Home Loan Mortgage Corporation
3,616,967

 
2,742,630

Government National Mortgage Association
701,037

 
209,337

Non-Agency
2,982,094

 
1,889,697

Total available-for-sale securities
$
21,220,819

 
$
13,116,171



At December 31, 2017 and December 31, 2016, the Company pledged AFS securities with a carrying value of $21.0 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 December 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, 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 December 31, 2017 and December 31, 2016:
 
December 31, 2017
(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
$
17,081,849

 
$
1,079,246

 
$
(24,638
)
 
$
—

 
$
18,136,457

 
$
42,149

 
$
(134,969
)
 
$
18,043,637

Interest-only
2,941,772

 
223,289

 
—

 
—

 
223,289

 
10,955

 
(39,156
)
 
195,088

Total Agency
20,023,621

 
1,302,535

 
(24,638
)
 
—

 
18,359,746

 
53,104

 
(174,125
)
 
18,238,725

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
3,758,134

 
2,757

 
(676,033
)
 
(653,613
)
 
2,431,245

 
488,931

 
(3,166
)
 
2,917,010

Interest-only
5,614,925

 
65,667

 
—

 
—

 
65,667

 
2,163

 
(2,746
)
 
65,084

Total Non-Agency
9,373,059

 
68,424

 
(676,033
)
 
(653,613
)
 
2,496,912

 
491,094

 
(5,912
)
 
2,982,094

Total
$
29,396,680

 
$
1,370,959

 
$
(700,671
)
 
$
(653,613
)
 
$
20,856,658

 
$
544,198

 
$
(180,037
)
 
$
21,220,819


 
December 31, 2016
(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
$
10,609,522

 
$
571,749

 
$
(42,923
)
 
$
—

 
$
11,138,348

 
$
66,968

 
$
(208,190
)
 
$
10,997,126

Interest-only
2,961,895

 
246,373

 
—

 
—

 
246,373

 
12,072

 
(29,097
)
 
229,348

Total Agency
13,571,417

 
818,122

 
(42,923
)
 
—

 
11,384,721

 
79,040

 
(237,287
)
 
11,226,474

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
2,533,806

 
3,577

 
(631,380
)
 
(367,437
)
 
1,538,566

 
353,240

 
(6,386
)
 
1,885,420

Interest-only
185,535

 
4,363

 
—

 
—

 
4,363

 
118

 
(204
)
 
4,277

Total Non-Agency
2,719,341

 
7,940

 
(631,380
)
 
(367,437
)
 
1,542,929

 
353,358

 
(6,590
)
 
1,889,697

Total
$
16,290,758

 
$
826,062

 
$
(674,303
)
 
$
(367,437
)
 
$
12,927,650

 
$
432,398

 
$
(243,877
)
 
$
13,116,171



The following tables present the carrying value of the Company’s AFS securities by rate type as of December 31, 2017 and December 31, 2016:
 
December 31, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
23,220

 
$
2,622,710

 
$
2,645,930

Fixed Rate
18,215,505

 
359,384

 
18,574,889

Total
$
18,238,725

 
$
2,982,094

 
$
21,220,819

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

 
$
1,562,164

 
$
1,592,627

Fixed Rate
11,196,011

 
327,533

 
11,523,544

Total
$
11,226,474

 
$
1,889,697

 
$
13,116,171



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of December 31, 2017:
 
December 31, 2017
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
14,242

 
$
216,651

 
$
230,893

> 1 and ≤ 3 years
17,227,736

 
260,688

 
17,488,424

> 3 and ≤ 5 years
826,816

 
986,054

 
1,812,870

> 5 and ≤ 10 years
165,221

 
1,029,818

 
1,195,039

> 10 years
4,710

 
488,883

 
493,593

Total
$
18,238,725

 
$
2,982,094

 
$
21,220,819



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 years ended December 31, 2017 and 2016 of the net unamortized discount/premium and designated credit reserves on non-Agency AFS securities.
 
Year Ended December 31,
 
2017
 
2016
(in thousands)
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
 
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
Beginning balance at January 1
$
(367,437
)
 
$
(623,440
)
 
$
(990,877
)
 
$
(409,077
)
 
$
(477,176
)
 
$
(886,253
)
Acquisitions
(373,051
)
 
(57,732
)
 
(430,783
)
 
(70,108
)
 
(189,754
)
 
(259,862
)
Accretion of net discount
—

 
88,037

 
88,037

 
—

 
69,542

 
69,542

Realized credit losses
17,539

 
—

 
17,539

 
1,969

 
—

 
1,969

Reclassification adjustment for other-than-temporary impairments
(789
)
 
—

 
(789
)
 
914

 
—

 
914

Transfers from (to)
66,537

 
(66,537
)
 
—

 
74,972

 
(74,972
)
 
—

Sales, calls, other
3,588

 
52,063

 
55,651

 
33,893

 
48,920

 
82,813

Ending balance at December 31
$
(653,613
)
 
$
(607,609
)
 
$
(1,261,222
)
 
$
(367,437
)
 
$
(623,440
)
 
$
(990,877
)


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, 2017 and December 31, 2016. At December 31, 2017, the Company held 1,435 AFS securities, of which 253 were in an unrealized loss position for less than twelve consecutive months and 234 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2016, the Company held 1,238 AFS securities, of which 251 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 $12.2 billion and $6.4 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of December 31, 2017 and December 31, 2016, $12.0 billion, or 98.5%, and $6.1 billion, or 96.0%, 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
December 31, 2017
$
12,198,870

 
$
(65,313
)
 
$
2,464,544

 
$
(114,724
)
 
$
14,663,414

 
$
(180,037
)
December 31, 2016
$
6,404,134

 
$
(203,922
)
 
$
504,978

 
$
(39,955
)
 
$
6,909,112

 
$
(243,877
)


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 (loss), 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.
During the year ended December 31, 2017, the Company recorded $0.8 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. During the year ended December 31, 2016, the Company recorded $1.8 million in other-than-temporary credit impairments on a total of four non-Agency securities where the future expected cash flows for each security were less than its amortized cost. As of December 31, 2017, impaired securities with a carrying value of $117.5 million had actual weighted average cumulative losses of 5.5%, weighted average three-month prepayment speed of 6.1%, weighted average 60+ day delinquency of 22.3% of the pool balance, and weighted average FICO score of 658. At December 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 years ended December 31, 2017, 2016 and 2015:
 
Year Ended
 
December 31,
(in thousands)
2017
 
2016
 
2015
Cumulative credit loss at beginning of period
$
(5,606
)
 
$
(6,499
)
 
$
(8,241
)
Additions:
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(429
)
 
(1,307
)
 
(238
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
(360
)
 
(515
)
 
(297
)
Reductions:
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
1,387

 
—

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

 
1,328

 
2,277

Cumulative credit loss at end of period
$
(6,395
)
 
$
(5,606
)
 
$
(6,499
)


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 consolidated statements of comprehensive income (loss). For the years ended December 31, 2017, 2016 and 2015, the Company sold AFS securities for $8.7 billion, $14.4 billion and $7.0 billion with an amortized cost of $8.7 billion, $14.5 billion and $6.6 billion for net realized losses of $32.5 million and $126.2 million and net realized gains of $369.4 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the years ended December 31, 2017, 2016 and 2015:
 
Year Ended
 
December 31,
(in thousands)
2017
 
2016
 
2015
Gross realized gains
$
67,764

 
$
97,049

 
$
388,392

Gross realized losses
(100,255
)
 
(223,277
)
 
(19,040
)
Total realized (losses) gains on sales, net
$
(32,491
)
 
$
(126,228
)
 
$
369,352