Annual report pursuant to Section 13 and 15(d)

Available-for-Sale Securities, at Fair Value

v3.10.0.1
Available-for-Sale Securities, at Fair Value
 12 Months Ended
Dec. 31, 2018
Debt Securities, Available-for-sale [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. The following table presents the Company’s AFS investment securities by collateral type as of December 31, 2018 and December 31, 2017:
(in thousands)
December 31,
2018
 
December 31,
2017
Agency
 
 
 
Federal National Mortgage Association
$
15,812,696

 
$
13,920,721

Federal Home Loan Mortgage Corporation
4,930,963

 
3,616,967

Government National Mortgage Association
941,374

 
701,037

Non-Agency
3,867,571

 
2,982,094

Total available-for-sale securities
$
25,552,604

 
$
21,220,819



At December 31, 2018 and December 31, 2017, the Company pledged AFS securities with a carrying value of $25.2 billion and $21.0 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 10 - Repurchase Agreements and Note 12 - Federal Home Loan Bank of Des Moines Advances.
At December 31, 2018 and December 31, 2017, 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 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 consolidated balance sheets. As of December 31, 2018 and December 31, 2017, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $3.9 billion and $3.0 billion, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of December 31, 2018 and December 31, 2017:
 
December 31, 2018
(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
$
20,775,790

 
$
1,037,781

 
$
(25,085
)
 
$
—

 
$
21,788,486

 
$
61,128

 
$
(339,997
)
 
$
21,509,617

Interest-only
3,115,967

 
209,901

 
—

 
—

 
209,901

 
14,170

 
(48,655
)
 
175,416

Total Agency
23,891,757

 
1,247,682

 
(25,085
)
 
—

 
21,998,387

 
75,298

 
(388,652
)
 
21,685,033

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
5,360,124

 
6,682

 
(694,119
)
 
(1,322,762
)
 
3,349,925

 
478,095

 
(44,657
)
 
3,783,363

Interest-only
5,137,169

 
83,846

 
—

 
—

 
83,846

 
3,655

 
(3,293
)
 
84,208

Total Non-Agency
10,497,293

 
90,528

 
(694,119
)
 
(1,322,762
)
 
3,433,771

 
481,750

 
(47,950
)
 
3,867,571

Total
$
34,389,050

 
$
1,338,210

 
$
(719,204
)
 
$
(1,322,762
)
 
$
25,432,158

 
$
557,048

 
$
(436,602
)
 
$
25,552,604


 
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



The following tables present the carrying value of the Company’s AFS securities by rate type as of December 31, 2018 and December 31, 2017:
 
December 31, 2018
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
19,073

 
$
3,475,171

 
$
3,494,244

Fixed Rate
21,665,960

 
392,400

 
22,058,360

Total
$
21,685,033

 
$
3,867,571

 
$
25,552,604

 
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



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of December 31, 2018:
 
December 31, 2018
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
6,301

 
$
97,955

 
$
104,256

> 1 and ≤ 3 years
124,121

 
135,457

 
259,578

> 3 and ≤ 5 years
260,886

 
428,851

 
689,737

> 5 and ≤ 10 years
19,550,827

 
2,582,835

 
22,133,662

> 10 years
1,742,898

 
622,473

 
2,365,371

Total
$
21,685,033

 
$
3,867,571

 
$
25,552,604



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, 2018 and 2017 of the net unamortized discount/premium and designated credit reserves on non-Agency AFS securities.
 
Year Ended December 31,
 
2018
 
2017
(in thousands)
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
 
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
Beginning balance at January 1
$
(653,613
)
 
$
(607,609
)
 
$
(1,261,222
)
 
$
(367,437
)
 
$
(623,440
)
 
$
(990,877
)
Acquisitions
(737,765
)
 
(60,894
)
 
(798,659
)
 
(373,051
)
 
(57,732
)
 
(430,783
)
Accretion of net discount
—

 
89,111

 
89,111

 
—

 
88,037

 
88,037

Realized credit losses
26,457

 
—

 
26,457

 
17,539

 
—

 
17,539

Reclassification adjustment for other-than-temporary impairments
(470
)
 
—

 
(470
)
 
(789
)
 
—

 
(789
)
Transfers from (to)
42,629

 
(42,629
)
 
—

 
66,537

 
(66,537
)
 
—

Sales, calls, other
—

 
18,430

 
18,430

 
3,588

 
52,063

 
55,651

Ending balance at December 31
$
(1,322,762
)
 
$
(603,591
)
 
$
(1,926,353
)
 
$
(653,613
)
 
$
(607,609
)
 
$
(1,261,222
)


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, 2018 and December 31, 2017. At December 31, 2018, the Company held 1,550 AFS securities, of which 290 were in an unrealized loss position for less than twelve consecutive months and 489 were in an unrealized loss position for more than twelve consecutive months. 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. Of the $4.4 billion and $12.2 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of December 31, 2018 and December 31, 2017, $3.1 billion, or 71.1%, and $12.0 billion, or 98.5%, 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, 2018
$
4,386,946

 
$
(66,520
)
 
$
9,501,123

 
$
(370,082
)
 
$
13,888,069

 
$
(436,602
)
December 31, 2017
$
12,198,870

 
$
(65,313
)
 
$
2,464,544

 
$
(114,724
)
 
$
14,663,414

 
$
(180,037
)


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 (loss) income, net of tax, or loss 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 years ended December 31, 2018, 2017 and 2016, the Company recorded $0.5 million, $0.8 million and $1.8 million in other-than-temporary credit impairments on a total of three, two and four non-Agency securities, respectively, where the future expected cash flows for each security were less than its amortized cost. As of December 31, 2018, impaired securities with a carrying value of $135.5 million had actual weighted average cumulative losses of 8.8%, weighted average three-month prepayment speed of 5.8%, weighted average 60+ day delinquency of 18.6% of the pool balance, and weighted average FICO score of 667. At December 31, 2018, 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, 2018, 2017 and 2016:
 
Year Ended
 
December 31,
(in thousands)
2018
 
2017
 
2016
Cumulative credit loss at beginning of period
$
(6,395
)
 
$
(5,606
)
 
$
(6,499
)
Additions:
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(264
)
 
(429
)
 
(1,307
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
(206
)
 
(360
)
 
(515
)
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

Cumulative credit loss at end of period
$
(6,865
)
 
$
(6,395
)
 
$
(5,606
)


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 on investment securities in the Company’s consolidated statements of comprehensive (loss) income. For the years ended December 31, 2018, 2017 and 2016, the Company sold AFS securities for $15.2 billion, $8.7 billion and $14.4 billion with an amortized cost of $15.6 billion, $8.7 billion and $14.5 billion for net realized losses of $349.6 million, $32.5 million and $126.2 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the years ended December 31, 2018, 2017 and 2016:
 
Year Ended
 
December 31,
(in thousands)
2018
 
2017
 
2016
Gross realized gains
$
70,076

 
$
67,764

 
$
97,049

Gross realized losses
(419,638
)
 
(100,255
)
 
(223,277
)
Total realized losses on sales, net
$
(349,562
)
 
$
(32,491
)
 
$
(126,228
)