Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value

v3.19.3
Available-for-Sale Securities, at Fair Value
 9 Months Ended
Sep. 30, 2019
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 condensed consolidated balance sheets. The following table presents the Company’s AFS investment securities by collateral type as of September 30, 2019 and December 31, 2018:
(in thousands)
September 30,
2019
 
December 31,
2018
Agency
 
 
 
Federal National Mortgage Association
$
19,445,245

 
$
15,812,696

Federal Home Loan Mortgage Corporation
4,835,146

 
4,930,963

Government National Mortgage Association
485,792

 
941,374

Non-Agency
3,552,375

 
3,867,571

Total available-for-sale securities
$
28,318,558

 
$
25,552,604



At September 30, 2019 and December 31, 2018, the Company pledged AFS securities with a carrying value of $26.4 billion and $25.2 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 September 30, 2019 and December 31, 2018, 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 variable interest entities, or 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 condensed consolidated balance sheets. As of September 30, 2019 and December 31, 2018, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $3.6 billion and $3.9 billion, respectively.
The following tables present the amortized cost and carrying value of AFS securities by collateral type as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
(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
$
23,255,819

 
$
935,781

 
$
(21
)
 
$
—

 
$
24,191,579

 
$
431,492

 
$
(5,701
)
 
$
24,617,370

Interest-only
2,757,909

 
179,769

 
—

 
—

 
179,769

 
15,881

 
(46,837
)
 
148,813

Total Agency
26,013,728

 
1,115,550

 
(21
)
 
—

 
24,371,348

 
447,373

 
(52,538
)
 
24,766,183

Non-Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal and interest
5,289,767

 
7,417

 
(462,973
)
 
(1,723,638
)
 
3,110,573

 
380,236

 
(17,526
)
 
3,473,283

Interest-only
4,664,358

 
83,037

 
—

 
—

 
83,037

 
4,393

 
(8,338
)
 
79,092

Total Non-Agency
9,954,125

 
90,454

 
(462,973
)
 
(1,723,638
)
 
3,193,610

 
384,629

 
(25,864
)
 
3,552,375

Total
$
35,967,853

 
$
1,206,004

 
$
(462,994
)
 
$
(1,723,638
)
 
$
27,564,958

 
$
832,002

 
$
(78,402
)
 
$
28,318,558


 
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



The following tables present the carrying value of the Company’s AFS securities by rate type as of September 30, 2019 and December 31, 2018:
 
September 30, 2019
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
15,662

 
$
3,263,875

 
$
3,279,537

Fixed Rate
24,750,521

 
288,500

 
25,039,021

Total
$
24,766,183

 
$
3,552,375

 
$
28,318,558

 
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



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of September 30, 2019:
 
September 30, 2019
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
666

 
$
42,933

 
$
43,599

> 1 and ≤ 3 years
59,293

 
180,489

 
239,782

> 3 and ≤ 5 years
4,800,249

 
195,007

 
4,995,256

> 5 and ≤ 10 years
19,904,761

 
2,761,214

 
22,665,975

> 10 years
1,214

 
372,732

 
373,946

Total
$
24,766,183

 
$
3,552,375

 
$
28,318,558



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 three and nine months ended September 30, 2019 and 2018 of the net unamortized discount/premium and designated credit reserves on non-Agency AFS securities.
 
Nine Months Ended September 30,
 
2019
 
2018
(in thousands)
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
 
Designated Credit Reserve
 
Net Unamortized Discount/Premium
 
Total
Beginning balance at January 1
$
(1,322,762
)
 
$
(603,591
)
 
$
(1,926,353
)
 
$
(653,613
)
 
$
(607,609
)
 
$
(1,261,222
)
Acquisitions
(471,746
)
 
10,524

 
(461,222
)
 
(606,728
)
 
(37,924
)
 
(644,652
)
Accretion of net discount
—

 
27,782

 
27,782

 
—

 
64,538

 
64,538

Realized credit losses
18,668

 
—

 
18,668

 
20,983

 
—

 
20,983

Reclassification adjustment for other-than-temporary impairments
(6,847
)
 
—

 
(6,847
)
 
(363
)
 
—

 
(363
)
Transfers from (to)
34,157

 
(34,157
)
 
—

 
44,972

 
(44,972
)
 
—

Sales, calls, other
24,892

 
226,923

 
251,815

 
—

 
18,430

 
18,430

Ending balance at September 30
$
(1,723,638
)
 
$
(372,519
)
 
$
(2,096,157
)
 
$
(1,194,749
)
 
$
(607,537
)
 
$
(1,802,286
)


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 September 30, 2019 and December 31, 2018. At September 30, 2019, the Company held 1,209 AFS securities, of which 89 were in an unrealized loss position for less than twelve consecutive months and 145 were in an unrealized loss position for more than twelve consecutive months. 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.
 
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, 2019
$
1,456,511

 
$
(22,884
)
 
$
751,426

 
$
(55,518
)
 
$
2,207,937

 
$
(78,402
)
December 31, 2018
$
4,386,946

 
$
(66,520
)
 
$
9,501,123

 
$
(370,082
)
 
$
13,888,069

 
$
(436,602
)


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 gain (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 three and nine months ended September 30, 2019, the Company recorded $5.9 million and $11.0 million in other-than-temporary credit impairments on a total of 16 non-Agency securities where the future expected cash flows for each security were less than its amortized cost. During the three and nine months ended September 30, 2018, the Company recorded $0.1 million and $0.4 million in other-than-temporary credit impairments on a total of three non-Agency securities where the future expected cash flows for each security were less than its amortized cost. As of September 30, 2019, impaired securities with a carrying value of $310.6 million had actual weighted average cumulative losses of 3.3%, weighted average three-month prepayment speed of 7.4%, weighted average 60+ day delinquency of 16.5% of the pool balance, and weighted average FICO score of 638. At September 30, 2019, 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 three and nine months ended September 30, 2019 and 2018:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Cumulative credit loss at beginning of period
$
(9,376
)
 
$
(6,663
)
 
$
(6,865
)
 
$
(6,395
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(5,950
)
 
(72
)
 
(10,353
)
 
(157
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
(23
)
 
(651
)
 
(206
)
Reductions:
 
 
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
—

 
1,703

 
—

Decreases related to other-than-temporary impairments on securities sold
1,613

 
—

 
2,453

 
—

Cumulative credit loss at end of period
$
(13,713
)
 
$
(6,758
)
 
$
(13,713
)
 
$
(6,758
)


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 gain (loss) on investment securities in the Company’s condensed consolidated statements of comprehensive income (loss). For the three and nine months ended September 30, 2019, the Company sold AFS securities for $6.1 billion and $14.1 billion with an amortized cost of $5.9 billion and $13.8 billion for net realized gains of $250.3 million and $256.4 million, respectively. For the three and nine months ended September 30, 2018, the Company sold AFS securities for $5.4 billion and $9.2 billion with an amortized cost of $5.5 billion and $9.3 billion for net realized losses of $42.2 million and $100.7 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, 2019 and 2018:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2019
 
2018
 
2019
 
2018
Gross realized gains
$
254,655

 
$
6,603

 
$
380,808

 
$
16,357

Gross realized losses
(4,388
)
 
(48,758
)
 
(124,409
)
 
(117,075
)
Total realized gains (losses) on sales, net
$
250,267

 
$
(42,155
)
 
$
256,399

 
$
(100,718
)