Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value (Notes)

v2.4.0.8
Available-for-Sale Securities, at Fair Value (Notes)
 9 Months Ended
Sep. 30, 2013
Available for Sale Securities, at Fair Value [Abstract]  
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
Available-for-Sale Securities, at Fair Value
The following table presents the Company’s available-for-sale, or AFS, investment securities by collateral type, which were carried at their fair value as of September 30, 2013 and December 31, 2012:
(in thousands)
September 30,
2013
 
December 31,
2012
Mortgage-backed securities:
 
 
 
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
3,091,964

 
$
3,608,272

Federal National Mortgage Association
4,550,673

 
5,130,965

Government National Mortgage Association
2,075,301

 
2,272,866

Non-Agency
2,954,295

 
2,654,851

Total mortgage-backed securities
$
12,672,233

 
$
13,666,954



At September 30, 2013 and December 31, 2012, the Company pledged investment securities with a carrying value of $12.2 billion and $12.8 billion, respectively, as collateral for repurchase agreements. See Note 16 - Repurchase Agreements.
At September 30, 2013 and December 31, 2012, 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 following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of September 30, 2013 and December 31, 2012:
 
September 30, 2013
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
12,039,928

 
$
4,919,072

 
$
16,959,000

Unamortized premium
636,576

 
—

 
636,576

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(1,372,628
)
 
(1,372,628
)
Net, unamortized
(2,901,668
)
 
(1,161,821
)
 
(4,063,489
)
Amortized Cost
9,774,836

 
2,384,623

 
12,159,459

Gross unrealized gains
113,221

 
580,004

 
693,225

Gross unrealized losses
(170,119
)
 
(10,332
)
 
(180,451
)
Carrying Value
$
9,717,938

 
$
2,954,295

 
$
12,672,233

 
December 31, 2012
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
11,934,492

 
$
4,503,999

 
$
16,438,491

Unamortized premium
749,252

 
—

 
749,252

Unamortized discount
  

 
  

 
  

Designated credit reserve
—

 
(1,290,946
)
 
(1,290,946
)
Net, unamortized
(1,929,811
)
 
(996,490
)
 
(2,926,301
)
Amortized Cost
10,753,933

 
2,216,563

 
12,970,496

Gross unrealized gains
276,293

 
448,403

 
724,696

Gross unrealized losses
(18,123
)
 
(10,115
)
 
(28,238
)
Carrying Value
$
11,012,103

 
$
2,654,851

 
$
13,666,954



The following tables present the carrying value of the Company’s AFS investment securities by rate type as of September 30, 2013 and December 31, 2012:
 
September 30, 2013
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
1,007,715

 
$
2,527,240

 
$
3,534,955

Fixed Rate
8,710,223

 
427,055

 
9,137,278

Total
$
9,717,938

 
$
2,954,295

 
$
12,672,233

 
December 31, 2012
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
188,429

 
$
2,334,950

 
$
2,523,379

Fixed Rate
10,823,674

 
319,901

 
11,143,575

Total
$
11,012,103

 
$
2,654,851

 
$
13,666,954



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 it does not expect to collect it 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 nine months ended September 30, 2013 and 2012, of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Nine Months Ended September 30,
 
2013
 
2012
(in thousands)
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
 
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
Beginning balance at January 1
$
(1,290,946
)
 
$
(996,490
)
 
$
(2,287,436
)
 
$
(782,606
)
 
$
(540,969
)
 
$
(1,323,575
)
Acquisitions
(181,122
)
 
(390,269
)
 
(571,391
)
 
(590,090
)
 
(534,000
)
 
(1,124,090
)
Accretion of net discount
886

 
108,829

 
109,715

 
493

 
98,685

 
99,178

Realized credit losses
28,684

 
—

 
28,684

 
33,622

 
—

 
33,622

Reclassification adjustment for other-than-temporary impairments
(1,662
)
 
—

 
(1,662
)
 
(9,310
)
 
—

 
(9,310
)
Transfers from (to)
35,201

 
(35,201
)
 
—

 
—

 
—

 
—

Sales, calls, other
36,331

 
151,310

 
187,641

 
8,154

 
15,876

 
24,030

Ending balance at September 30
$
(1,372,628
)
 
$
(1,161,821
)
 
$
(2,534,449
)
 
$
(1,339,737
)
 
$
(960,408
)
 
$
(2,300,145
)


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 the securities had an unrealized loss position as of September 30, 2013 and December 31, 2012. At September 30, 2013, the Company held 1,453 AFS securities, of which 493 were in an unrealized loss position for less than twelve consecutive months and 64 were in an unrealized loss position for more than twelve consecutive months. Of the $4.8 billion and $2.5 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of September 30, 2013 and December 31, 2012, $4.5 billion, or 94.5%, and $2.4 billion, or 95.8%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by government sponsored entities, or GSEs. At December 31, 2012, the Company held 1,493 AFS securities, of which 250 were in an unrealized loss position for less than twelve months and 47 were in an unrealized loss position for more than twelve consecutive months.
 
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
September 30, 2013
$
4,784,704

 
$
(151,442
)
 
$
538,129

 
$
(29,009
)
 
$
5,322,833

 
$
(180,451
)
December 31, 2012
$
2,548,995

 
$
(18,610
)
 
$
52,689

 
$
(9,628
)
 
$
2,601,684

 
$
(28,238
)


Evaluating AFS Securities for Other-Than-Temporary Impairments
In order to evaluate 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 is not 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 other comprehensive income. 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.
The Company recorded a $1.7 million other-than-temporary credit impairment during the nine months ended September 30, 2013 on a total of four non-Agency RMBS where the future expected cash flows for each security was less than its amortized cost. No OTTI was recorded for the three months ended September 30, 2013. As of September 30, 2013, impaired securities had weighted average cumulative losses of 7.8%, weighted average three-month prepayment speed of 4.3%, weighted average 60+ day delinquency of 34.5% of the pool balance, and weighted average FICO score of 629. At September 30, 2013, 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. During the three and nine months ended September 30, 2012, the Company recorded a $0.6 million and an $9.3 million other-than-temporary credit impairment on a total of 31 non-Agency RMBS where the future expected cash flows for each security was less than its amortized cost.
The following table presents the changes in OTTI included in earnings for three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Cumulative credit loss at beginning of period
$
(15,046
)
 
$
(13,603
)
 
$
(15,561
)
 
$
(5,102
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
—

 
(315
)
 
—

 
(6,443
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
(244
)
 
(1,662
)
 
(2,867
)
Reductions:
 
 
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
1,446

 
—

 
1,677

 
250

Decreases related to other-than-temporary impairments on securities sold
406

 
243

 
2,352

 
243

Cumulative credit loss at end of period
$
(13,194
)
 
$
(13,919
)
 
$
(13,194
)
 
$
(13,919
)


Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, pay 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 condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2013, the Company sold AFS securities for $3.1 billion and $4.1 billion with an amortized cost of $3.3 billion and $4.2 billion, for net realized losses of $234.5 million and $163.2 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and nine months ended September 30, 2013 and 2012:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2013
 
2012
 
2013
 
2012
Gross realized gains
$
27,786

 
$
—

 
$
103,451

 
$
11,663

Gross realized losses
(262,323
)
 
(221
)
 
(266,620
)
 
(1,850
)
Total realized (losses) gains on sales, net
$
(234,537
)
 
$
(221
)
 
$
(163,169
)
 
$
9,813