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)
 6 Months Ended
Jun. 30, 2014
Available-for-sale Securities [Abstract]  
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
Available-for-Sale Securities, at Fair Value
The Company holds available-for-sale, or AFS, investment securities, which are carried at fair value. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2014 and December 31, 2013:
(in thousands)
June 30,
2014
 
December 31,
2013
Mortgage-backed securities:
 
 
 
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
2,948,930

 
$
2,977,291

Federal National Mortgage Association
4,985,142

 
4,435,820

Government National Mortgage Association
2,117,456

 
2,084,298

Non-Agency
3,056,723

 
2,759,318

Total mortgage-backed securities
$
13,108,251

 
$
12,256,727



At June 30, 2014 and December 31, 2013, the Company pledged AFS securities with a carrying value of $12.8 billion and $12.3 billion, respectively, as collateral for repurchase agreements and FHLB advances. See Note 16 - Repurchase Agreements and Note 18 - Federal Home Loan Bank of Des Moines Advances.
At June 30, 2014 and December 31, 2013, 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, or 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 June 30, 2014 and December 31, 2013:
 
June 30, 2014
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
12,285,416

 
$
4,575,302

 
$
16,860,718

Unamortized premium
656,843

 
—

 
656,843

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(1,162,457
)
 
(1,162,457
)
Net, unamortized
(3,008,183
)
 
(1,056,300
)
 
(4,064,483
)
Amortized Cost
9,934,076

 
2,356,545

 
12,290,621

Gross unrealized gains
194,613

 
702,430

 
897,043

Gross unrealized losses
(77,161
)
 
(2,252
)
 
(79,413
)
Carrying Value
$
10,051,528

 
$
3,056,723

 
$
13,108,251

 
December 31, 2013
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
11,919,590


$
4,474,353

 
$
16,393,943

Unamortized premium
621,279


—

 
621,279

Unamortized discount
 
 
 
 
 
Designated credit reserve
—


(1,234,449
)
 
(1,234,449
)
Net, unamortized
(2,897,222
)

(1,071,559
)
 
(3,968,781
)
Amortized Cost
9,643,647


2,168,345

 
11,811,992

Gross unrealized gains
102,600


595,179

 
697,779

Gross unrealized losses
(248,838
)

(4,206
)
 
(253,044
)
Carrying Value
$
9,497,409

 
$
2,759,318

 
$
12,256,727



The following tables present the carrying value of the Company’s AFS investment securities by rate type as of June 30, 2014 and December 31, 2013:
 
June 30, 2014
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
548,509

 
$
2,513,222

 
$
3,061,731

Fixed Rate
9,503,019

 
543,501

 
10,046,520

Total
$
10,051,528

 
$
3,056,723

 
$
13,108,251

 
December 31, 2013
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
1,006,621


$
2,403,078

 
$
3,409,699

Fixed Rate
8,490,788


356,240

 
8,847,028

Total
$
9,497,409


$
2,759,318

 
$
12,256,727



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 six months ended June 30, 2014 and 2013, of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Six Months Ended June 30,
 
2014
 
2013
(in thousands)
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
 
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
Beginning balance at January 1
$
(1,234,448
)
 
$
(1,071,559
)
 
$
(2,306,007
)
 
$
(1,290,946
)
 
$
(996,490
)
 
$
(2,287,436
)
Acquisitions
(62,752
)
 
(46,581
)
 
(109,333
)
 
(158,955
)
 
(365,348
)
 
(524,303
)
Accretion of net discount
—

 
64,084

 
64,084

 
886

 
71,625

 
72,511

Realized credit losses
6,607

 
—

 
6,607

 
22,658

 
—

 
22,658

Reclassification adjustment for other-than-temporary impairments
(212
)
 
—

 
(212
)
 
(1,662
)
 
—

 
(1,662
)
Transfers from (to)
47,495

 
(47,495
)
 
—

 
30,883

 
(30,883
)
 
—

Sales, calls, other
80,853

 
45,251

 
126,104

 
10,529

 
98,478

 
109,007

Ending balance at June 30
$
(1,162,457
)
 
$
(1,056,300
)
 
$
(2,218,757
)
 
$
(1,386,607
)
 
$
(1,222,618
)
 
$
(2,609,225
)


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 June 30, 2014 and December 31, 2013. At June 30, 2014, the Company held 1,498 AFS securities, of which 47 were in an unrealized loss position for less than twelve consecutive months and 287 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2013, the Company held 1,431 AFS securities, of which 447 were in an unrealized loss position for less than twelve months and 114 were in an unrealized loss position for more than twelve consecutive months. Of the $0.3 billion and $4.9 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of June 30, 2014 and December 31, 2013, $0.1 billion, or 42.4%, and $4.8 billion, or 96.9%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by government sponsored entities, or 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
June 30, 2014
$
293,662

 
$
(3,620
)
 
$
2,847,553

 
$
(75,793
)
 
$
3,141,215

 
$
(79,413
)
December 31, 2013
$
4,902,813

 
$
(171,651
)
 
$
1,186,692

 
$
(81,393
)
 
$
6,089,505

 
$
(253,044
)


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 $0.2 million other-than-temporary credit impairment during the six months ended June 30, 2014 on a total of three non-Agency RMBS where the future expected cash flows for each security were less than its amortized cost. The Company did not record any other-than-temporary impairments during the three months ended June 30, 2014. As of June 30, 2014, impaired securities had actual weighted average cumulative losses of 9.6%, weighted average three-month prepayment speed of 4.2%, weighted average 60+ day delinquency of 30.0% of the pool balance, and weighted average FICO score of 664. At June 30, 2014, 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 six months ended June 30, 2013, the Company recorded a $1.4 million and a $1.7 million other-than-temporary credit impairment on a total of four non-Agency RMBS where the future expected cash flows for the security were less than its amortized cost.
The following table presents the changes in OTTI included in earnings for three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Cumulative credit loss at beginning of period
$
(9,215
)
 
$
(15,142
)
 
$
(9,467
)
 
$
(15,561
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
—

 
—

 
(91
)
 
—

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

 
(1,426
)
 
(121
)
 
(1,662
)
Reductions:
 
 
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
231

 
464

 
231

Decreases related to other-than-temporary impairments on securities sold
1,154

 
1,291

 
1,154

 
1,946

Cumulative credit loss at end of period
$
(8,061
)
 
$
(15,046
)
 
$
(8,061
)
 
$
(15,046
)


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 gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income. For the three and six months ended June 30, 2014, the Company sold AFS securities for $459.4 million and $1.3 billion with an amortized cost of $423.4 million and $1.3 billion, for net realized gains of $36.0 million and losses of $2.8 million, respectively. For the three and six months ended June 30, 2013, the Company sold AFS securities for $189.7 million and $986.4 million with an amortized cost of $137.3 million and $915.0 million, for net realized gains of $52.4 million and $71.4 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and six months ended June 30, 2014 and 2013:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Gross realized gains
$
35,954

 
$
52,439

 
$
43,163

 
$
75,665

Gross realized losses
—

 
(1
)
 
(45,997
)
 
(4,297
)
Total realized (losses) gains on sales, net
$
35,954

 
$
52,438

 
$
(2,834
)
 
$
71,368