Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v2.3.0.15
Available-for-Sale Securities, at Fair Value
 9 Months Ended
Sep. 30, 2011
Available for Sale Securities at Fair Value [Abstract]  
Available-for-Sale Securities, at Fair Value
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, 2011 and December 31, 2010:

(in thousands)
September 30,
2011
 
December 31,
2010
Mortgage-backed securities:
 
 
 
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
1,656,815

 
$
396,888

Federal National Mortgage Association
2,460,994

 
556,609

Government National Mortgage Association
1,038,885

 
62,972

Non-Agency
1,256,201

 
337,936

Total mortgage-backed securities
$
6,412,895

 
$
1,354,405


At September 30, 2011 and December 31, 2010, the Company pledged investment securities with a carrying value of $6.3 billion and $1.1 billion, respectively, as collateral for repurchase agreements. See Note 9 - Repurchase Agreements.
At September 30, 2011 and December 31, 2010, 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, 2011 and December 31, 2010:

 
September 30, 2011
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
5,858,947

 
$
2,667,159

 
$
8,526,106

Unamortized premium
292,879

 
—

 
292,879

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(772,938
)
 
(772,938
)
Net, unamortized
(1,051,498
)
 
(555,329
)
 
(1,606,827
)
Amortized Cost
5,100,328

 
1,338,892

 
6,439,220

Gross unrealized gains
83,727

 
16,624

 
100,351

Gross unrealized losses
(27,361
)
 
(99,315
)
 
(126,676
)
Carrying Value
$
5,156,694

 
$
1,256,201

 
$
6,412,895


 
December 31, 2010
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
1,306,655

 
$
594,306

 
$
1,900,961

Unamortized premium
41,651

 
—

 
41,651

Unamortized discount
  

 
  

 
  

Designated credit reserve
—

 
(145,855
)
 
(145,855
)
Net, unamortized
(334,979
)
 
(129,992
)
 
(464,971
)
Amortized Cost
1,013,327

 
318,459

 
1,331,786

Gross unrealized gains
9,308

 
21,503

 
30,811

Gross unrealized losses
(6,166
)
 
(2,026
)
 
(8,192
)
Carrying Value
$
1,016,469

 
$
337,936

 
$
1,354,405


The following tables present the carrying value of the Company's AFS investment securities by rate type as of September 30, 2011 and December 31, 2010:

 
September 30, 2011
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
239,229

 
$
1,046,844

 
$
1,286,073

Fixed Rate
4,917,465

 
209,357

 
5,126,822

Total
$
5,156,694

 
$
1,256,201

 
$
6,412,895


 
December 31, 2010
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
269,512

 
$
245,517

 
$
515,029

Fixed Rate
746,957

 
92,419

 
839,376

Total
$
1,016,469

 
$
337,936

 
$
1,354,405


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 using the interest method in accordance with ASC 320.
The following table presents the changes for the nine months ended September 30, 2011 and September 30, 2010 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.

 
Nine Months Ended September 30,
 
2011
 
2010
(in thousands)
Designated credit reserve
 
Unamortized net discount
 
Total
 
Designated credit reserve
 
Unamortized net discount
 
Total
Beginning balance at January 1
$
(145,855
)
 
$
(129,992
)
 
$
(275,847
)
 
$
(50,187
)
 
$
(41,050
)
 
$
(91,237
)
Acquisitions
(640,451
)
 
(483,479
)
 
(1,123,930
)
 
(105,897
)
 
(98,264
)
 
(204,161
)
Accretion of net discount
—

 
32,305

 
32,305

 
—

 
6,654

 
6,654

Realized credit losses
3,011

 
—

 
3,011

 
1,409

 
8

 
1,417

Reclassification adjustment for other-than-temporary impairments
(3,665
)
 
—

 
(3,665
)
 
—

 
—

 
—

Transfers from (to)
579

 
(579
)
 
—

 
705

 
(705
)
 
—

Sales, calls, other
13,443

 
26,416

 
39,859

 
18,630

 
17,779

 
36,409

Ending balance at September 30
$
(772,938
)
 
$
(555,329
)
 
$
(1,328,267
)
 
$
(135,340
)
 
$
(115,578
)
 
$
(250,918
)

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, 2011 and December 31, 2010. At September 30, 2011, the Company held 1,081 AFS securities, of which 338 were in an unrealized loss position for less than twelve consecutive months and 15 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2010, the Company held 373 AFS securities, of which 108 were in an unrealized loss position for less than twelve months and 5 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, 2011
$
1,895,965

 
$
(125,479
)
 
$
3,103

$
(1,197
)
$
1,899,068

$
(126,676
)
December 31, 2010
$
310,445

 
$
(7,183
)
 
$
1,405

$
(1,009
)
$
311,850

$
(8,192
)


Evaluating AFS Securities for Other-than-Temporary Impairments
The Company has adopted the provisions of ASC 320 to evaluate AFS securities for OTTI. This evaluation requires us to determine 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, 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 (loss). 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 $3.4 million and a $3.7 million other-than-temporary credit impairment during the three and nine months ended September 30, 2011 on a total of eight non-Agency RMBS where the future expected cash flows for each security was less than its amortized cost. As of September 30, 2011, the impaired securities had weighted average cumulative losses of 5.2%, weighted average three-month prepayment speed of 4.54, weighted average 60+ day delinquency of 35.0% of the pool balance, and weighted average FICO score of 643.
The following table presents the OTTI included in earnings for the three and nine months ended September 30, 2011 and September 30, 2010:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2011
 
2010
 
2011
 
2010
Cumulative credit loss at beginning of period
$
(294
)
 
$
—

 
$
—

 
$
—

Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(3,371
)
 
—

 
(3,665
)
 
—

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

 
—

 
—

 
—

Cumulative credit loss at September 30
$
(3,665
)
 
$
—

 
$
(3,665
)
 
$
—


Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain on investment securities, net in the Company's condensed consolidated statements of income. For the three and nine months ended September 30, 2011, the Company sold AFS securities for $908.5 million and $1.0 billion with an amortized cost of $881.0 million and $975.1 million, for a net realized gain of $27.5 million and $29.2 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, 2011 and 2010:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2011
 
2010
 
2011
 
2010
Gross realized gains
$
27,472

 
$
2,276

 
$
29,422

 
$
4,582

Gross realized losses
—

 
(27
)
 
(265
)
 
(303
)
Total realized gains (losses) on sales, net
$
27,472

 
$
2,249

 
$
29,157

 
$
4,279