MBS

6 Months Ended

Jun. 30, 2013

Investments, Debt and Equity Securities [Abstract]

MBS

MBS

The Company’s MBS are comprised of Agency MBS and Non-Agency MBS.  These MBS are secured by:  (i) hybrid mortgages (“Hybrids”), which have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index; (ii) adjustable-rate mortgages (“ARMs”); (iii) mortgages that have interest rates that reset more frequently (collectively, “ARM-MBS”); and (iv) 15 year and longer-term fixed rate mortgages.  MBS do not have a single maturity date, and further, the mortgage loans underlying ARM-MBS do not all reset at the same time.

The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements and Swaps.  Non-Agency MBS that are accounted for as components of Linked Transactions are not reflected in the tables set forth in this note, as they are accounted for as derivatives.  (See Notes 5 and 7)

Agency MBS:  Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae.  The payment of principal and/or interest on Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. Government.  Since the third quarter of 2008, Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency, which significantly strengthened the backing for these government-sponsored entities.

Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs):  The Company’s Non-Agency MBS are secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation.  Non-Agency MBS may be rated by one or more Rating Agencies or may be unrated (i.e., not assigned a rating by any Rating Agency).  The rating indicates the opinion of the Rating Agency as to the creditworthiness of the investment, indicating the obligor’s ability to meet its full financial commitment on the obligation.  A rating of “D” is assigned when a security has defaulted on any of its contractual terms.

The following tables present certain information about the Company’s MBS at June 30, 2013 and December 31, 2012:

June 30, 2013

	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and OTTI (1)			Amortized Cost (2)		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
(In Thousands)
Agency MBS:
Fannie Mae	$	5,388,034	$	184,066	$	(83	)	$	—		$	5,572,017	$	5,620,499	$	102,540	$	(54,058	)	$	48,482
Freddie Mac	1,266,355		48,203		—			—			1,318,884		1,303,143		11,096		(26,837		)	(15,741		)
Ginnie Mae	13,604		234		—			—			13,838		14,269		431		—			431
Total Agency MBS	6,667,993		232,503		(83		)	—			6,904,739		6,937,911		114,067		(80,895		)	33,172
Non-Agency MBS (3)
Rated AAA	19,831		107		(191		)	—			19,747		20,192		445		—			445
Rated A	961		20		—			—			981		933		—		(48		)	(48		)
Rated BBB	48,809		563		(1,266		)	—			48,106		48,694		1,547		(959		)	588
Rated BB	107,733		47		(8,395		)	(884		)	98,501		103,346		5,097		(252		)	4,845
Rated B	281,447		—		(30,377		)	(12,437		)	238,633		263,172		24,593		(54		)	24,539
Rated CCC	1,161,319		12		(111,764		)	(178,567		)	871,000		1,010,131		141,672		(2,541		)	139,131
Rated CC	420,330		—		(28,895		)	(96,002		)	295,433		339,948		44,546		(31		)	44,515
Rated C	463,562		—		(45,691		)	(72,795		)	345,076		398,050		53,512		(538		)	52,974
Unrated and D-rated (4)	3,784,765		—		(170,002		)	(904,286		)	2,710,477		3,111,187		404,677		(3,967		)	400,710
Total Non-Agency MBS	6,288,757		749		(396,581		)	(1,264,971		)	4,627,954		5,295,653		676,089		(8,390		)	667,699
Total MBS	$	12,956,750	$	233,252	$	(396,664	)	$	(1,264,971	)	$	11,532,693	$	12,233,564	$	790,156	$	(89,285	)	$	700,871

December 31, 2012

	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and OTTI (1)			Amortized Cost (2)		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
(In Thousands)
Agency MBS:
Fannie Mae	$	5,977,388	$	196,686	$	(58	)	$	—		$	6,174,016	$	6,351,621	$	178,970	$	(1,365	)	$	177,605
Freddie Mac	800,854		30,447		—			—			835,724		858,560		22,925		(89		)	22,836
Ginnie Mae	14,526		251		—			—			14,777		15,279		502		—			502
Total Agency MBS	6,792,768		227,384		(58		)	—			7,024,517		7,225,460		202,397		(1,454		)	200,943
Non-Agency MBS (3)
Rated AAA	25,209		158		(219		)	—			25,148		25,905		757		—			757
Rated A	1,147		24		—			—			1,171		1,086		—		(85		)	(85		)
Rated BBB	49,301		637		(1,741		)	(378		)	47,819		48,563		1,806		(1,062		)	744
Rated BB	118,031		39		(8,892		)	(853		)	108,325		112,905		4,937		(357		)	4,580
Rated B	247,532		—		(31,133		)	(12,462		)	203,937		225,281		21,452		(108		)	21,344
Rated CCC	1,235,638		14		(107,618		)	(201,126		)	926,908		1,055,757		131,826		(2,977		)	128,849
Rated CC	579,632		—		(41,191		)	(132,061		)	406,380		468,017		61,739		(102		)	61,637
Rated C	952,984		—		(55,294		)	(166,529		)	731,161		812,523		81,850		(488		)	81,362
Unrated and D-rated (4)	3,300,086		—		(125,538		)	(867,097		)	2,307,451		2,632,128		325,796		(1,119		)	324,677
Total Non-Agency MBS	6,509,560		872		(371,626		)	(1,380,506		)	4,758,300		5,382,165		630,163		(6,298		)	623,865
Total MBS	$	13,302,328	$	228,256	$	(371,684	)	$	(1,380,506	)	$	11,782,817	$	12,607,625	$	832,560	$	(7,752	)	$	824,808

(1)  Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income.  Amounts disclosed at June 30, 2013 reflect Credit Reserve of $1.219 billion and OTTI of $45.7 million.  Amounts disclosed at December 31, 2012 reflect Credit Reserve of $1.332 billion and OTTI of $48.7 million.

(2)  Includes principal payments receivable of $4.3 million and $4.4 million at June 30, 2013 and December 31, 2012, respectively, which are not included in the Principal/Current Face.

(3)  Non-Agency MBS, including Non-Agency MBS transferred to consolidated VIEs, are reported based on the lowest rating issued by a Rating Agency, if more than one rating is issued on the security, at the date presented. 

(4)  Includes 312 Non-Agency MBS that were D-rated and had an aggregate amortized cost and fair value of $2.662 billion and $3.055 billion, respectively, at June 30, 2013 and 246 Non-Agency MBS that were D-rated and had an aggregate amortized cost and fair value of $2.252 billion and $2.573 billion, respectively, at December 31, 2012.

Unrealized Losses on MBS and Impairments

The following table presents information about the Company’s MBS that were in an unrealized loss position at June 30, 2013:

Unrealized Loss Position For:

	Less than 12 Months					12 Months or more					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
(In Thousands)
Agency MBS:
Fannie Mae	$	2,211,844	$	53,388	197	$	38,484	$	670	10	$	2,250,328	$	54,058
Freddie Mac	866,186		26,830		109	2,542		7		1	868,728		26,837
Total Agency MBS	3,078,030		80,218		306	41,026		677		11	3,119,056		80,895
Non-Agency MBS:
Rated A	—		—		—	933		49		2	933		49
Rated BBB	7,300		41		1	19,205		917		2	26,505		958
Rated BB	—		—		—	2,025		252		3	2,025		252
Rated B	6,924		54		1	—		—		—	6,924		54
Rated CCC	55,054		790		6	22,482		1,751		4	77,536		2,541
Rated CC	1,187		31		1	—		—		—	1,187		31
Rated C	32,029		538		6	—		—		—	32,029		538
Unrated and other	223,264		3,935		30	1		32		1	223,265		3,967
Total Non-Agency MBS	325,758		5,389		45	44,646		3,001		12	370,404		8,390
Total MBS	$	3,403,788	$	85,607	351	$	85,672	$	3,678	23	$	3,489,460	$	89,285

At June 30, 2013, the Company did not intend to sell any of its MBS that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these MBS before recovery of their amortized cost basis, which may be at their maturity.  With respect to Non-Agency MBS held by consolidated VIEs, the ability of any entity to cause the sale by the VIE prior to the maturity of these Non-Agency MBS is either specifically precluded, or is limited to specified events of default, none of which have occurred to date.

Gross unrealized losses on the Company’s Agency MBS were $80.9 million at June 30, 2013.  Agency MBS are issued by Government Sponsored Entities (“GSEs”) that enjoy either the implicit or explicit backing of the full faith and credit of the United States Government. While the Company's Agency MBS are not rated by any rating agency, they are currently perceived by market participants to be of high credit quality, with risk of default limited to the unlikely event that the United States Government would not continue to support the GSEs. Given the credit quality inherent in Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In assessing whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, the Company considers for each impaired security, the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company's current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at June 30, 2013 any unrealized losses on its Agency MBS were temporary.

Unrealized losses on the Company’s Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs) were $8.4 million at June 30, 2013.  Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI and does not believe that these unrealized losses are credit related, but are rather due to non-credit related factors.  The Company has reviewed its Non-Agency MBS that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such MBS, which considers recent bond performance and expected future performance of the underlying collateral.

The Company did not recognize any credit-related OTTI losses through earnings during the three and six months ended June 30, 2013.  The Company recognized credit-related OTTI losses through earnings of approximately $280,000 and $1.2 million on Non-Agency MBS during the three and six months ended June 30, 2012.

Non-Agency MBS on which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes.  The Company’s estimate of cash flows for its Non-Agency MBS is based on its review of the underlying mortgage loans securing these MBS.  The Company considers information available about the structure of the securitization, including structural credit enhancement, if any, and the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, geographic concentrations, as well as Rating Agency reports, general market assessments, and dialogue with market participants.  Changes in the Company's evaluation of each of these factors impacts the cash flows expected to be collected at the OTTI assessment date. For Non-Agency MBS purchased at a discount to par that were assessed for OTTI during the quarter, such cash flow estimates indicated that the amount of expected losses decreased compared to the previous OTTI assessment date. These positive cash flow changes are primarily driven by recent improvements in loan-to-value ratios due to loan amortization and home price appreciation, which, in turn, positively impacts the Company's estimates of default rates and loss severities for the underlying collateral. In addition, voluntary prepayments (i.e. loans that prepay in full with no loss) have generally trended higher for these MBS which also positively impacts the Company's estimate of expected loss. Overall, the combination of higher voluntary prepayments and lower loan-to-value ratios supports the Company's assessment that such MBS are not other-than-temporarily impaired. Significant judgment is used in both the Company’s analysis of the expected cash flows for its Non-Agency MBS and any determination of the credit component of OTTI.

The following table presents the composition of OTTI charges recorded by the Company for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,					Six Months Ended June 30,
(In Thousands)	2013		2012			2013		2012
Total OTTI losses	$	—	$	—		$	—	$	(879	)
OTTI reclassified from OCI	—		(280		)	—		(321		)
OTTI recognized in earnings	$	—	$	(280	)	$	—	$	(1,200	)

The following table presents a roll-forward of the credit loss component of OTTI on the Company’s Non-Agency MBS for which a non-credit component of OTTI was previously recognized in OCI.  Changes in the credit loss component of OTTI are presented based upon whether the current period is the first time OTTI was recorded on a security or a subsequent OTTI charge was recorded.

	Three Months Ended June 30, 2013		Six Months Ended June 30, 2013
(In Thousands)
Credit loss component of OTTI at beginning of period	$	36,115	$	36,115
Additions for credit related OTTI not previously recognized	—		—
Subsequent additional credit related OTTI recorded	—		—
Credit loss component of OTTI at end of period	$	36,115	$	36,115

The significant inputs considered and assumptions made at time of impairment in determining the measurement of the component of OTTI recorded in earnings for the Company’s Non-Agency MBS for the three and six months ended June 30, 2013 and 2012 are summarized as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2013	2012	2013	2012
Credit enhancement (1)(2)
Weighted average (3)	—	4.00%	—	3.26%
Range (4)	—	0.00-12.10%	—	0.00-16.50%
Projected CPR (2)(5)
Weighted average (3)	—	9.80%	—	9.90%
Range (4)	—	9.10-11.00%	—	9.10-13.30%
Projected Loss Severity (2)(6)
Weighted average (3)	—	52.20%	—	55.50%
Range (4)	—	45.70-55.40%	—	45.90-60.00%
60+ days delinquent (2)(7)
Weighted average (3)	—	28.60%	—	24.40%
Range (4)	—	21.00-32.40%	—	18.20-32.40%

(1) Represents a level of protection for these securities, expressed as a percentage of total current underlying loan balance.

(2)  Information provided is based on loans for all groups that provide credit enhancement for MBS with credit enhancement.  If an MBS no longer has credit enhancement, information provided is based on loans for the individual group owned by the Company.

(3) Calculated by weighting the relevant input/assumptions for each individual security by current outstanding face of the security.

(4) Represents the range of inputs/assumptions based on individual securities.

(5) CPR - conditional prepayment rate.

(6)  Projected loss severity represents the projected amount of loss realized on liquidated properties as a percentage of the principal balance.

(7) Includes, for each security, underlying loans 60 or more days delinquent, foreclosed loans and other real estate owned.

Purchase Discounts on Non-Agency MBS

The following tables present the changes in the components of the Company’s purchase discount on its Non-Agency MBS between purchase discount designated as Credit Reserve and OTTI and accretable purchase discount for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30, 2013						Three Months Ended June 30, 2012
	Discount Designated as Credit Reserve and OTTI (1)			Accretable Discount (1)(2)			Discount Designated as Credit Reserve and OTTI (1)			Accretable Discount (1)(2)
(In Thousands)
Balance at beginning of period	$	(1,312,952	)	$	(381,913	)	$	(1,344,718	)	$	(264,182	)
Accretion of discount	—			16,698			—			9,881
Realized credit losses	38,375			—			35,521			—
Purchases	(49,852		)	18,425			(139,934		)	(1,004		)
Sales	4,689			4,978			—			—
Reclass discount for OTTI	—			—			182			(182		)
Net impairment losses recognized in earnings	—			—			(280		)	—
Unlinking of Linked Transactions	—			—			(83		)	(1,090		)
Transfers/release of credit reserve	54,769			(54,769		)	8,560			(8,560		)
Balance at end of period	$	(1,264,971	)	$	(396,581	)	$	(1,440,752	)	$	(265,137	)

	Six Months Ended June 30, 2013						Six Months Ended June 30, 2012
	Discount Designated as Credit Reserve and OTTI (3)			Accretable Discount (2)(3)			Discount Designated as Credit Reserve and OTTI (3)			Accretable Discount (2)(3)
(In Thousands)
Balance at beginning of period	$	(1,380,506	)	$	(371,626	)	$	(1,228,766	)	$	(250,479	)
Accretion of discount	—			28,749			—			19,291
Realized credit losses	88,682			—			57,915			—
Purchases	(73,387		)	29,654			(248,383		)	(8,437		)
Sales	10,972			5,910			—			—
Reclass discount for OTTI	—			—			866			(866		)
Net impairment losses recognized in earnings	—			—			(1,200		)	—
Unlinking of Linked Transactions	—			—			(38,662		)	(7,168		)
Transfers/release of credit reserve	89,268			(89,268		)	17,478			(17,478		)
Balance at end of period	$	(1,264,971	)	$	(396,581	)	$	(1,440,752	)	$	(265,137	)

(1)  During the three months ended June 30, 2013, the Company reallocated $116,000 of purchase discount designated as Credit Reserve to accretable purchase discount on Non-Agency MBS underlying Linked Transactions. The Company did not reallocate purchase discount designated as accretable purchase discount to Credit Reserve on Non-Agency MBS underlying Linked Transactions during the three months ended June 30, 2012.

(2)  Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.

(3)  During the six months ended June 30, 2013, the Company reallocated $129,000 of purchase discount designated as Credit Reserve to accretable purchase discount on Non-Agency MBS underlying Linked Transactions. In addition, the Company reallocated $629,000 of purchase discount designated as accretable purchase discount to Credit Reserve on Non-Agency MBS underlying Linked Transactions during the six months ended June 30, 2012, all of which occurred during the three months ended June 30, 2012.

Impact of MBS on AOCI

The following table presents the impact of the Company’s MBS on its AOCI for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2013			2012			2013			2012
AOCI from MBS:
Unrealized gain on MBS at beginning of period	$	942,887		$	312,954		$	824,808		$	55,491
Unrealized loss on Agency MBS, net	(140,480		)	(11,170		)	(167,771		)	(14,328		)
Unrealized (loss)/gain on Non-Agency MBS, net	(98,282		)	(6,057		)	48,388			256,545
Reclassification adjustment for MBS sales included in net income	(3,254		)	—			(4,554		)	(2,901		)
Reclassification adjustment for OTTI included in net income	—			280			—			1,200
Change in AOCI from MBS	$	(242,016	)	$	(16,947	)	$	(123,937	)	$	240,516
Balance at end of period	$	700,871		$	296,007		$	700,871		$	296,007

Sales of MBS

During the three and six months ended June 30, 2013, the Company sold certain Non-Agency MBS for $9.9 million and $16.0 million, realizing gross gains of $4.4 million and $6.0 million, respectively.  During the first six months of 2012, the Company sold certain Agency MBS for $71.1 million, realizing gross gains of $3.0 million; all of these sales occurred during the first quarter of 2012.  The Company has no continuing involvement with any of the sold MBS.

MBS Interest Income

The following table presents the components of interest income on the Company’s Agency MBS for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2013			2012			2013			2012
Coupon interest	$	54,485		$	61,976		$	111,989		$	125,984
Effective yield adjustment (1)	(16,448		)	(12,426		)	(31,165		)	(23,134		)
Agency MBS interest income	$	38,037		$	49,550		$	80,824		$	102,850

(1)  Includes amortization of premium paid net of accretion of purchase discount.  For Agency MBS, interest income is recorded at an effective yield, which reflects net premium amortization based on actual prepayment activity.

The following table presents components of interest income for the Company’s Non-Agency MBS (including MBS transferred to consolidated VIEs) for the three and six months ended June 30, 2013 and 2012:

	Three Months Ended June 30,				Six Months Ended June 30,
(In Thousands)	2013		2012		2013		2012
Coupon interest	$	65,954	$	66,144	$	133,887	$	127,004
Effective yield adjustment (1)	16,644		9,810		28,626		19,154
Non-Agency MBS interest income	$	82,598	$	75,954	$	162,513	$	146,158

(1)  The effective yield adjustment is the difference between the net income calculated using the net yield, which is based on management’s estimates of future cash flows for Non-Agency MBS, less the current coupon yield.