NOTE 3. MORTGAGE-BACKED SECURITIES

The following tables summarize our Agency MBS and Non-Agency MBS at September 30, 2018 and December 31, 2017, which are carried at their fair value:

September 30, 2018


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS(1)		MBS		MBS
	(in thousands)
Amortized cost	$	1,536,977	$	2,353,770	$	3,890,747	$	760,555	$	4,651,302
Paydowns receivable(2)		11,286		—		11,286		—		11,286
Unrealized gains		3,862		13,088		16,950		28,207		45,157
Unrealized losses		(39,567)		(54,447)		(94,014)		(4,860)		(98,874)
Fair value	$	1,512,558	$	2,312,411	$	3,824,969	$	783,902	$	4,608,871


							20-Year and
					15-Year		30-Year		Total		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate(1)		Fixed-Rate		Agency MBS		MBS		MBS
		(in thousands)
Amortized cost	$	917,282	$	757,110	$	1,106,344	$	1,110,011	$	3,890,747	$	760,555	$	4,651,302
Paydowns receivable(2)		4,919		6,367		—		—		11,286		—		11,286
Unrealized gains		14,841		245		37		1,827		16,950		28,207		45,157
Unrealized losses		(1,547)		(22,784)		(41,529)		(28,154)		(94,014)		(4,860)		(98,874)
Fair value	$	935,495	$	740,938	$	1,064,852	$	1,083,684	$	3,824,969	$	783,902	$	4,608,871

(1)

Included in the 15-year fixed-rate MBS are Trading Agency MBS. These have an amortized cost of $618.8 million, an unrealized loss of $25.6 million, and a fair value of $593.2 million.

(2)

Paydowns receivable on Agency MBS are generated when the Company receives notice from Freddie Mac of prepayments but does not receive the actual cash with respect to such prepayments until the 15th day of the following month.

During the three months ended September 30, 2018, we sold approximately $35.3 million of Agency MBS and realized gross gains of approximately $0.6 million and gross losses of approximately $0.2 million. During the nine months ended September 30, 2018, we sold approximately $618.5 million of Agency MBS and realized gross losses of approximately $19.5 million and gross gains of approximately $0.6 million. During the three months ended September 30, 2017, we sold approximately $680 million of Agency MBS and realized gross gains of approximately $1.9 million and gross losses of approximately $4.2 million. During the nine months ended September 30, 2017, we sold approximately $716 million of Agency MBS and realized gross gains of approximately $2.1 million and realized gross losses of approximately $4.3 million. During the three months ended September 30, 2018, several Non-Agency bonds of approximately $36.1 million were called and we realized a gross gain of approximately $0.2 million. During the nine months ended September 30, 2018, we sold (including calls) approximately $41.9 million of Non-Agency MBS and recognized gross gains of approximately $217 thousand and gross losses of approximately $42 thousand. During the nine months ended September 30, 2017, we sold approximately $21.3 million of Non-Agency MBS and realized gross gains of approximately $65 thousand.

During the three months ended September 30, 2018, we had unrealized losses on trading investments of $3.0 million. During the nine months ended September 30, 2018, we had unrealized losses on trading investments of $14.6 million. During the three months ended September 30, 2017, we had unrealized gains on trading investments of approximately $5.8 million. During the nine months ended September 30, 2017, we had unrealized gains on trading investments of approximately $10.1 million.

December 31, 2017


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS(1)		MBS		MBS
	(in thousands)
Amortized cost	$	1,678,835	$	2,594,496	$	4,273,331	$	730,624	$	5,003,955
Paydowns receivable(2)		13,873		—		13,873		—		13,873
Unrealized gains		6,597		21,348		27,945		33,355		61,300
Unrealized losses		(18,205)		(18,147)		(36,352)		(3,154)		(39,506)
Fair value	$	1,681,100	$	2,597,697	$	4,278,797	$	760,825	$	5,039,622


							20-Year and		Total
					15-Year		30-Year		Agency		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate(1)		Fixed-Rate		MBS		MBS		MBS
		(in thousands)
Amortized cost	$	1,249,366	$	863,762	$	1,277,570	$	882,633	$	4,273,331	$	730,624	$	5,003,955
Paydowns receivable(2)		5,943		7,930		—		—		13,873		—		13,873
Unrealized gains		23,425		833		595		3,092		27,945		33,355		61,300
Unrealized losses		(1,871)		(12,845)		(16,338)		(5,298)		(36,352)		(3,154)		(39,506)
Fair value	$	1,276,863	$	859,680	$	1,261,827	$	880,427	$	4,278,797	$	760,825	$	5,039,622

(1)

Included in the 15-year fixed-rate MBS are Trading Agency MBS. These have an amortized cost of $909.2 million, an unrealized loss of $11 million, and a fair value of $898.2 million.

(2)

The following table presents information regarding the estimates of the contractually required principal payments, cash flows expected to be collected, and estimated fair value, of the Non-Agency MBS held at carrying value acquired by the Company for the three and nine months ended September 30, 2018 and cumulatively at September 30, 2018 and December 31, 2017:


	Change During the		Change During the
	Three Months Ended		Nine Months Ended		At		At
	September 30,		September 30,		September 30,		December 31,
	2018		2018		2018		2017
	(in thousands)
Non-Agency MBS acquired with credit deterioration:
Contractually required principal	$	15,800	$	1,205	$	799,552	$	798,347
Contractual principal not expected to be collected (non-accretable yield)		(8,008)		(7,386)		(339,866)		(332,480)
Expected cash flows to be collected		7,792		(6,181)		459,686		465,867
Market yield adjustment		5,452		(2,354)		144,844		147,198
Unrealized gain, net		(5,437)		(5,405)		23,120		28,525
Fair value		7,807		(13,940)		627,650		641,590
Fair value of other Non-Agency MBS (without credit deterioration)		(3,900)		37,017		156,252		119,235
Total fair value of Non-Agency MBS	$	3,907	$	23,077	$	783,902	$	760,825

The following table presents the change for the three and nine months ended September 30, 2018 of the components of the Company’s purchase discount on the Non-Agency MBS acquired with credit deterioration between the amount designated as the market yield adjustment and the non-accretable difference:


	Three Months Ended				Nine Months Ended
	September 30,					September 30,
	2018				2018
	Market Yield		Non-		Market Yield		Non-
	Adjustment		Accretable		Adjustment		Accretable
	(in thousands)
Balance at beginning of period	$	139,392	$	(331,858)	$	147,198	$	(332,480)
Accretion of discount		(1,617)		—		(5,219)		(100)
Purchases		7,069		(13,512)		3,856		(23,419)
Realized credit losses, net of recoveries		—		5,645		—		15,627
Sales		—		—		1,413		—
Impairment charge		—		(141)		—		(1,898)
Transfer		—		—		(2,404)		2,404
Other		—		—		—		—
Balance at end of period	$	144,844	$	(339,866)	$	144,844	$	(339,866)

The following tables show the gross unrealized losses and fair value of those individual securities in our available-for-sale MBS portfolio that are in a continuous unrealized loss position at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time:

September 30, 2018


	Less Than 12 Months					12 Months or More					Total
Description	Number					Number					Number
of	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
Securities	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
			(in thousands)					(in thousands)					(in thousands)
Agency MBS	77	$	1,345,205	$	(26,339)	176	$	1,031,368	$	(42,106)	253	$	2,376,573	$	(68,445)
Non-Agency MBS	26	$	151,651	$	(1,645)	12	$	76,542	$	(3,215)	38	$	228,193	$	(4,860)

December 31, 2017


	Less Than 12 Months					12 Months or More					Total
Description	Number					Number					Number
of	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
Securities	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
			(in thousands)					(in thousands)					(in thousands)
Agency MBS	73	$	1,171,947	$	(7,770)	192	$	884,897	$	(17,598)	265	$	2,056,844	$	(25,368)
Non-Agency MBS	9	$	63,568	$	(774)	14	$	85,569	$	(2,380)	23	$	149,137	$	(3,154)

We do not consider those available-for-sale Agency MBS, or AFS MBS, that have been in a continuous loss position for 12 months or more to be other-than-temporarily impaired. The unrealized losses on our investments in AFS MBS were caused by fluctuations in interest rates. We purchased the AFS MBS primarily at a premium relative to their face value and the contractual cash flows of those investments are guaranteed by the GSEs. Since September 2008, the GSEs have been in the conservatorship of the U.S. government. At September 30, 2018, we did not expect to sell the AFS MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of the AFS MBS is attributable to changes in interest rates and not the credit quality of the AFS MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2018. At September 30, 2018, there was an aggregate of approximately $25.6 million in unrealized losses on Trading Agency MBS that was not included in the table above, as this is recognized on our statements of operations. At December 31, 2017, there was an aggregate of approximately $11 million in unrealized losses on Trading Agency MBS that was not included in the table above, as they were previously recognized on our statements of operations.

The unrealized losses on our investments in Non-Agency MBS were primarily caused by fluctuations in interest rates. We purchased the Non-Agency MBS primarily at a discount relative to their face value. During the three months ended September 30, 2018, there were two bonds that were impaired for a total of approximately $141 thousand, as the cash flow projections were less favorable than previously forecasted. With respect to the remainder of the Non-Agency MBS, at September 30, 2018, we did not expect to sell these Non-Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of these Non-Agency MBS is attributable to changes in interest rates and not the credit quality of these Non-Agency MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2018.