SECURITIES

The Company’s investments in securities include agency, credit risk transfer, non-agency and commercial mortgage-backed securities. All of the debt are classified as available-for-sale. Available-for-sale securities are carried at fair value with changes in fair value recognized in other comprehensive income unless the fair value option is elected. Transactions for securities are recorded on trade date, including TBA securities that meet the regular-way securities scope exception from derivative accounting. Gains and losses on disposals of securities are recorded on trade date based on the specific identification method.

The Company accounts for equity securities at fair value unless it is accounted for under the equity method of accounting or the measurement alternative for equity securities without readily determinable fair values.

Other-Than-Temporary Impairment - Management evaluates available-for-sale securities for other-than-temporary impairment at least quarterly, and more frequently when economic or market conditions warrant such evaluation.

When the fair value of an available-for-sale security is less than its amortized cost, the security is considered impaired. For securities that are impaired, the Company determines if it (1) has the intent to sell the security, (2) is more likely than not that it will be required to sell the security before recovery of its amortized cost basis, or (3) does not expect to recover the entire amortized cost basis of the security. Further, the security is analyzed for credit loss (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the Consolidated Statements of Comprehensive Income (Loss), while the balance of losses related to other factors will be recognized as a component of Other comprehensive income (loss). There was no other-than-temporary impairment recognized for the three or nine months ended September 30, 2018 and 2017.

Agency Mortgage-Backed Securities - The Company invests in mortgage pass-through certificates, collateralized mortgage obligations and other mortgage-backed securities representing interests in or obligations backed by pools of residential or multifamily mortgage loans and certificates. Many of the underlying loans and certificates are guaranteed by the Government National Mortgage Association (“Ginnie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”) or the Federal National Mortgage Association (“Fannie Mae”) (collectively, “Agency mortgage-backed securities”).

Agency mortgage-backed securities may include forward contracts for Agency mortgage-backed securities purchases or sales of a generic pool, on a to-be-announced basis (“TBA securities”). TBA securities without intent to accept delivery (“TBA derivatives”),

are accounted for as derivatives as discussed in the “Derivative Instruments” Note.

Credit Risk Transfer Securities - CRT securities are risk sharing instruments issued by Fannie Mae and Freddie Mac, and similarly structured transactions arranged by third party market participants. CRT securities are designed to synthetically transfer mortgage credit risk from Fannie Mae and Freddie Mac to private investors.

Non-Agency Mortgage-Backed Securities- The Company invests in non-Agency mortgage-backed securities such as those issued in non-performing loan (“NPL”) and re-performing loan (“RPL”) securitizations.

Commercial Mortgage-Backed Securities (“Commercial Securities”) - Certain commercial mortgage-backed securities are classified as available-for-sale and reported at fair value with unrealized gains and losses reported as a component of Other comprehensive income (loss). Management evaluates such Commercial Securities for other-than-temporary impairment at least quarterly. The Company elected the fair value option on certain Commercial Securities, including conduit commercial mortgage-backed securities, to simplify the accounting where the unrealized gains and losses on these financial instruments are recorded through earnings.

Agency mortgage-backed securities, non-agency mortgage-backed securities and CRT securities are referred to herein as “Residential Securities.” Although the Company generally intends to hold most of its Residential Securities until maturity, it may, from time to time, sell any of its Residential Securities as part of the overall management of its portfolio.

The following represents a rollforward of the activity for the Company’s securities:



	September 30, 2018
	Residential Securities			Commercial Securities			Total
	(dollars in thousands)
Beginning Balance January 1	$	92,300,821		$	262,751		$	92,563,572
Purchases	25,395,018			62,402			25,457,420
Sales	(14,532,225		)	(40,900		)	(14,573,125		)
Principal paydowns	(8,695,247		)	(96,397		)	(8,791,644		)
Amortization / accretion	(485,804		)	501			(485,303		)
Fair value adjustment	(2,830,447		)	(1,862		)	(2,832,309		)
Ending Balance September 30	$	91,152,116		$	186,495		$	91,338,611

The following tables present the Company’s securities that were carried at fair value at September 30, 2018 and December 31, 2017:



	September 30, 2018
	Principal / Notional		Remaining Premium		Remaining Discount			Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	80,917,596	$	4,376,927	$	(7,643	)	$	85,286,880	$	28,156	$	(3,664,420	)	$	81,650,616
Adjustable-rate pass-through	5,415,559		268,852		(1,568		)	5,682,843		9,098		(164,520		)	5,527,421
CMO	11,610		55		—			11,665		—		(124		)	11,541
Interest-only	6,248,885		1,226,033		—			1,226,033		2,500		(340,766		)	887,767
Multifamily	1,204,773		8,596		(8,242		)	1,205,127		306		(31,135		)	1,174,298
Reverse mortgages	34,552		4,272		—			38,824		—		(339		)	38,485
Total Agency Securities	$	93,832,975	$	5,884,735	$	(17,453	)	$	93,451,372	$	40,060	$	(4,201,304	)	$	89,290,128
Residential Credit
CRT	$	651,360	$	33,670	$	(14,996	)	$	670,034	$	18,537	$	(50	)	$	688,521
Alt-A	239,990		385		(36,910		)	203,465		12,730		(131		)	216,064
Prime	386,193		2,111		(25,419		)	362,885		15,341		(596		)	377,630
Subprime	449,425		1,973		(67,841		)	383,557		45,238		(109		)	428,686
NPL/RPL	3,431		—		(37		)	3,394		45		—			3,439
Prime Jumbo (>= 2010 Vintage)	137,953		587		(4,644		)	133,896		49		(3,977		)	129,968
Prime Jumbo (>= 2010 Vintage) Interest-Only	884,325		13,265		—			13,265		4,415		—			17,680
Total Residential Credit Securities	$	2,752,677	$	51,991	$	(149,847	)	$	1,770,496	$	96,355	$	(4,863	)	$	1,861,988
Total Residential Securities	$	96,585,652	$	5,936,726	$	(167,300	)	$	95,221,868	$	136,415	$	(4,206,167	)	$	91,152,116
Commercial
Commercial Securities	196,407		339		(9,903		)	186,843		575		(923		)	186,495
Total Securities	$	96,782,059	$	5,937,065	$	(177,203	)	$	95,408,711	$	136,990	$	(4,207,090	)	$	91,338,611

	December 31, 2017
	Principal / Notional		Remaining Premium		Remaining Discount			Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Agency	(dollars in thousands)
Fixed-rate pass-through	$	78,509,335	$	4,514,815	$	(1,750	)	$	83,022,400	$	140,115	$	(1,178,673	)	$	81,983,842
Adjustable-rate pass-through	6,760,991		277,212		(1,952		)	7,036,251		15,776		(103,121		)	6,948,906
Interest-only	6,804,715		1,326,761		—			1,326,761		1,863		(242,862		)	1,085,762
Multifamily	490,753		5,038		(341		)	495,450		84		(1,845		)	493,689
Reverse mortgages	35,000		4,527		—			39,527		37		—			39,564
Total Agency Securities	$	92,600,794	$	6,128,353	$	(4,043	)	$	91,920,389	$	157,875	$	(1,526,501	)	$	90,551,763
Residential Credit
CRT	$	593,027	$	25,463	$	(3,456	)	$	615,034	$	36,730	$	—		$	651,764
Alt-A	204,213		499		(34,000		)	170,712		13,976		(802		)	183,886
Prime	197,756		358		(24,158		)	173,956		18,804		—			192,760
Subprime	554,470		2,037		(78,561		)	477,946		56,024		(90		)	533,880
NPL/RPL	42,585		14		(117		)	42,482		506		—			42,988
Prime Jumbo (>= 2010 Vintage)	130,025		627		(3,956		)	126,696		1,038		(1,112		)	126,622
Prime Jumbo (>= 2010 Vintage) Interest-Only	989,052		15,287		—			15,287		1,871		—			17,158
Total Residential Credit Securities	2,711,128		44,285		(144,248		)	1,622,113		128,949		(2,004		)	1,749,058
Total Residential Securities	$	95,311,922	$	6,172,638	$	(148,291	)	$	93,542,502	$	286,824	$	(1,528,505	)	$	92,300,821
Commercial
Commercial Securities	$	270,288	$	680	$	(9,731	)	$	261,237	$	1,843	$	(329	)	$	262,751
Total Securities	$	95,582,210	$	6,173,318	$	(158,022	)	$	93,803,739	$	288,667	$	(1,528,834	)	$	92,563,572

The following table presents the Company’s Agency mortgage-backed securities portfolio concentration by issuing Agency at September 30, 2018 and December 31, 2017:



	September 30, 2018		December 31, 2017
Investment Type	(dollars in thousands)
Fannie Mae	$	59,568,293	$	63,361,415
Freddie Mac	29,636,443		27,091,978
Ginnie Mae	85,392		98,370
Total	$	89,290,128	$	90,551,763

Actual maturities of the Company’s Residential Securities portfolio are generally shorter than stated contractual maturities because actual maturities of the portfolio are generally affected by periodic payments and prepayments of principal on underlying mortgages.

The following table summarizes the Company’s available-for-sale Residential Securities at September 30, 2018 and December 31, 2017, according to their estimated weighted average life classifications:



	September 30, 2018				December 31, 2017
	Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost
Weighted Average Life	(dollars in thousands)
Less than one year	$	19,335	$	19,339	$	471,977	$	476,538
Greater than one year through five years	10,442,022		10,737,675		13,838,890		13,925,749
Greater than five years through ten years	79,260,878		83,003,720		77,273,833		78,431,852
Greater than ten years	1,429,881		1,461,134		716,121		708,363
Total	$	91,152,116	$	95,221,868	$	92,300,821	$	93,542,502

The weighted average lives of the Residential Securities at September 30, 2018 and December 31, 2017 in the table above are based upon projected principal prepayment rates. The actual weighted average lives of the Residential Securities could be longer or shorter than projected.

The following table presents the gross unrealized losses and estimated fair value of the Company’s Agency mortgage-backed securities, accounted for as available-for-sale where the fair value option has not been elected, by length of time that such securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017.



	September 30, 2018						December 31, 2017
	Estimated Fair Value ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Number of Securities ⁽¹⁾	Estimated Fair Value ⁽¹⁾		Gross Unrealized Losses ⁽¹⁾			Number of Securities ⁽¹⁾
	(dollars in thousands)
Less than 12 Months	$	46,457,384	$	(1,401,491	)	2,213	$	39,878,158	$	(272,234	)	1,114
12 Months or More	40,098,674		(2,458,708		)	1,233	39,491,238		(1,011,405		)	911
Total	$	86,556,058	$	(3,860,199	)	3,446	$	79,369,396	$	(1,283,639	)	2,025


⁽¹⁾	Excludes interest-only mortgage-backed securities and reverse mortgages.

The decline in value of these securities is solely due to market conditions and not the quality of the assets. Substantially all of the Agency mortgage-backed securities are “AAA” rated or carry an implied “AAA” rating. The investments are not considered to be other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments, and it is not more likely than not that the Company will be required to sell the investments before recovery of the amortized cost bases, which may be maturity.

During the three and nine months ended September 30, 2018, the Company disposed of $9.1 billion and $14.5 billion of Residential Securities, resulting in net realized (losses) of ($322.4) million and ($372.5) million, respectively. During the three and nine months ended September 30, 2017, the Company disposed of $6.8 billion and $11.4 billion of Residential Securities, resulting in net realized losses of ($10.2) million and ($14.3) million, respectively.