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, 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 September 30, 2014 and December 31, 2013:
(in thousands)
September 30,
2014
 
December 31,
2013
Mortgage-backed securities:
 
 
 
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
2,086,057

 
$
2,977,291

Federal National Mortgage Association
5,477,888

 
4,435,820

Government National Mortgage Association
2,134,467

 
2,084,298

Non-Agency
2,999,496

 
2,759,318

Total mortgage-backed securities
$
12,697,908

 
$
12,256,727



At September 30, 2014 and December 31, 2013, the Company pledged AFS securities with a carrying value of $12.4 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 September 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 September 30, 2014 and December 31, 2013:
 
September 30, 2014
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
12,040,854

 
$
4,314,943

 
$
16,355,797

Unamortized premium
626,470

 
—

 
626,470

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(969,031
)
 
(969,031
)
Net, unamortized
(3,072,511
)
 
(1,019,465
)
 
(4,091,976
)
Amortized Cost
9,594,813

 
2,326,447

 
11,921,260

Gross unrealized gains
168,871

 
674,181

 
843,052

Gross unrealized losses
(65,272
)
 
(1,132
)
 
(66,404
)
Carrying Value
$
9,698,412

 
$
2,999,496

 
$
12,697,908

 
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 September 30, 2014 and December 31, 2013:
 
September 30, 2014
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
132,157

 
$
2,503,733

 
$
2,635,890

Fixed Rate
9,566,255

 
495,763

 
10,062,018

Total
$
9,698,412

 
$
2,999,496

 
$
12,697,908

 
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 nine months ended September 30, 2014 and 2013, of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Nine Months Ended September 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
(69,663
)
 
(57,174
)
 
(126,837
)
 
(181,122
)
 
(390,269
)
 
(571,391
)
Accretion of net discount
—

 
96,873

 
96,873

 
886

 
108,829

 
109,715

Realized credit losses
11,325

 
—

 
11,325

 
28,684

 
—

 
28,684

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

 
(212
)
 
(1,662
)
 
—

 
(1,662
)
Transfers from (to)
91,086

 
(91,086
)
 
—

 
35,201

 
(35,201
)
 
—

Sales, calls, other
232,881

 
103,481

 
336,362

 
36,331

 
151,310

 
187,641

Ending balance at September 30
$
(969,031
)
 
$
(1,019,465
)
 
$
(1,988,496
)
 
$
(1,372,628
)
 
$
(1,161,821
)
 
$
(2,534,449
)


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, 2014 and December 31, 2013. At September 30, 2014, the Company held 1,423 AFS securities, of which 89 were in an unrealized loss position for less than twelve consecutive months and 200 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 $1.4 billion and $4.9 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of September 30, 2014 and December 31, 2013, $1.3 billion, or 93.6%, 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
September 30, 2014
$
1,409,676

 
$
(5,261
)
 
$
1,605,423

 
$
(61,143
)
 
$
3,015,099

 
$
(66,404
)
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 (loss) 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 nine months ended September 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 credit impairments during the three months ended September 30, 2014. As of September 30, 2014, impaired securities with a carrying value of $162.6 million had actual weighted average cumulative losses of 10.6%, weighted average three-month prepayment speed of 3.8%, weighted average 60+ day delinquency of 29.5% of the pool balance, and weighted average FICO score of 664. At September 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 nine months ended September 30, 2013, the Company recorded 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 Company did not record any other-than-temporary impairments during the three months ended September 30, 2013.
The following table presents the changes in OTTI included in earnings for three and nine months ended September 30, 2014 and 2013:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Cumulative credit loss at beginning of period
$
(8,061
)
 
$
(15,046
)
 
$
(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
—

 
—

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

 
1,446

 
464

 
1,677

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

 
406

 
1,154

 
2,352

Cumulative credit loss at end of period
$
(8,061
)
 
$
(13,194
)
 
$
(8,061
)
 
$
(13,194
)


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 nine months ended September 30, 2014, the Company sold AFS securities for $1.9 billion and $3.2 billion with an amortized cost of $1.8 billion and $3.1 billion, for net realized gains of $62.7 million and $59.9 million, respectively. 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, 2014 and 2013:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2014
 
2013
 
2014
 
2013
Gross realized gains
$
87,842

 
$
27,786

 
$
131,005

 
$
103,451

Gross realized losses
(25,122
)
 
(262,323
)
 
(71,119
)
 
(266,620
)
Total realized (losses) gains on sales, net
$
62,720

 
$
(234,537
)
 
$
59,886

 
$
(163,169
)