Other Assets

12 Months Ended

Dec. 31, 2017

The following table presents the components of the Company’s Other assets at December 31, 2017 and 2016:



(In Thousands)	December 31, 2017		December 31, 2016
REO	$	152,356	$	80,503
Interest receivable	27,415		27,795
Swaps, at fair value	679		233
Goodwill	7,189		7,189
Prepaid and other assets	51,208		78,775
Total Other Assets	$	238,847	$	194,495

Real Estate Owned

At December 31, 2017, the Company had 709 REO properties with an aggregate carrying value of $152.4 million. At December 31, 2016, the Company had 447 REO properties with an aggregate carrying value of $80.5 million.

During the years ended December 31, 2017 and 2016, the Company reclassified 698 and 517 mortgage loans to REO at an aggregate estimated fair value less estimated selling costs of $136.7 million and $91.9 million, respectively at the time of transfer. Such transfers occur when the Company takes possession of the property by foreclosing on the borrower or completes a “deed-in-lieu of foreclosure” transaction. From time to time, the Company also acquires REO in connection with transactions to acquire residential whole loans.

At December 31, 2017, $140.4 million of residential real estate property was held by the Company that was acquired either through a completed foreclosure proceeding or from completion of a deed-in-lieu of foreclosure or similar legal agreement. In addition, formal foreclosure proceedings were in process with respect to $33.5 million of residential whole loans at carrying value and $689.6 million of residential whole loans at fair value at December 31, 2017.

During the year ended December 31, 2017, the Company sold 517 REO properties for consideration of $78.4 million, realizing net gains of approximately $4.5 million. During the year ended December 31, 2016, the Company sold 256 REO properties for consideration of $37.9 million, realizing net gains of approximately $3.2 million. During the year ended December 31, 2015, the Company sold 63 REO properties for consideration of $6.5 million, realizing net gains of approximately $76,000. These amounts are included in Other, net on the Company’s consolidated statements of operations. In addition, following an updated assessment of liquidation amounts expected to be realized that was performed on all REO held at the end of each quarter during the years ended December 31, 2017 and 2016, an aggregate downward adjustment of approximately $11.0 million and $7.5 million was recorded to reflect certain REO properties at the lower of cost or estimated fair value as of December 31, 2017 and 2016, respectively.

The following table presents the activity in the Company’s REO for the years ended December 31, 2017 and 2016:



	For the Year Ended December 31,
(In Thousands)	2017			2016
Balance at beginning of period	$	80,503		$	28,026
Adjustments to record at lower of cost or fair value	(11,018		)	(7,527		)
Transfer from residential whole loans (1)	136,734			91,896
Purchases and capital improvements	19,801			2,825
Disposals	(73,664		)	(34,717		)
Balance at end of period	$	152,356		$	80,503

(1) Includes net gain recorded on transfer of approximately $10.2 million and $2.9 million, respectively, for the years ended December 31, 2017 and 2016.

(b) Derivative Instruments

The Company’s derivative instruments are currently comprised of Swaps, which are designated as cash flow hedges against the interest rate risk associated with its borrowings. The following table presents the fair value of the Company’s derivative instruments and their balance sheet location at December 31, 2017 and 2016:



			December 31,
			2017				2016
Derivative Instrument	Designation	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
(In Thousands)
Non-cleared legacy Swaps (1)	Hedging	Assets	$	—	$	—	$	350,000	$	233
Cleared Swaps (2)	Hedging	Assets	$	750,000	$	679	$	—	$	—
Cleared Swaps (2)	Hedging	Liabilities	$	1,800,000	$	—	$	2,550,000	$	(46,954	)

(1) Non-cleared legacy Swaps include Swaps executed and settled bilaterally with counterparties without the use of an organized exchange or central clearing house. The Company’s final non-cleared legacy Swaps expired during the three months ended June 30, 2017.

(2) Cleared Swaps include Swaps executed bilaterally with a counterparty in the over-the-counter market but then novated to a central clearing house, whereby the central clearing house becomes the counterparty to both of the original counterparties. As of December 31, 2017, all of the Company’s Swaps have been novated to and are cleared by a central clearing house are subject to initial margin requirements. Beginning in January 2017, variation margin payments on the Company’s cleared swaps are treated as a legal settlement of the exposure under the Swap contract. Previously such payments were treated as collateral pledged against the exposure under the Swap contract. The effect of this change is to reduce what would have otherwise been reported as fair value of the Swap.

Swaps

The following table presents the assets pledged as collateral against the Company’s Swap contracts at December 31, 2017 and 2016:



	December 31,
(In Thousands)	2017		2016
Agency MBS, at fair value	$	21,756	$	32,468
Restricted cash	6,405		53,849
Total assets pledged against Swaps	$	28,161	$	86,317

The Company’s derivative hedging instruments, or a portion thereof, could become ineffective in the future if the associated repurchase agreements that such derivatives hedge fail to exist or fail to have terms that match those of the derivatives that hedge such borrowings. At December 31, 2017, all of the Company’s derivatives were deemed effective for hedging purposes and no derivatives were terminated during the years ended December 31, 2017 and 2016.

The Company’s Swaps designated as hedging transactions have the effect of modifying the repricing characteristics of the Company’s repurchase agreements and cash flows for such liabilities. To date, no cost has been incurred at the inception of a Swap (except for certain transaction fees related to entering into Swaps cleared though a central clearing house), pursuant to which the Company agrees to pay a fixed rate of interest and receive a variable interest rate, generally based on one-month or three-month London Interbank Offered Rate (“LIBOR”), on the notional amount of the Swap. The Company did not recognize any change in the value of its existing Swaps designated as hedges through earnings as a result of hedge ineffectiveness during any of the three years ended December 31, 2017.

At December 31, 2017, the Company had Swaps designated in hedging relationships with an aggregate notional amount of $2.6 billion and extended 27 months on average with a maximum term of approximately 68 months.

The following table presents certain information with respect to the Company’s Swap activity during the year ended December 31, 2017:



(Dollars in Thousands)	December 31, 2017
New Swaps:
Aggregate notional amount	$	—
Weighted average fixed-pay rate	—		%
Initial maturity date	N/A
Number of new Swaps	—
Swaps amortized/expired:
Aggregate notional amount	$	350,000
Weighted average fixed-pay rate	0.58		%

The following table presents information about the Company’s Swaps at December 31, 2017 and 2016:



	December 31, 2017						December 31, 2016
Maturity (1)	Notional Amount		Weighted Average Fixed-Pay Interest Rate		Weighted Average Variable Interest Rate (2)		Notional Amount		Weighted Average Fixed-Pay Interest Rate		Weighted Average Variable Interest Rate (2)
(Dollars in Thousands)
Within 30 days	$	—	—	%	—	%	$	—	—	%	—	%
Over 30 days to 3 months	—		—		—		50,000		0.67		0.64
Over 3 months to 6 months	50,000		1.45		1.56		300,000		0.57		0.66
Over 6 months to 12 months	500,000		1.50		1.46		—		—		—
Over 12 months to 24 months	200,000		1.71		1.54		550,000		1.49		0.71
Over 24 months to 36 months	1,500,000		2.22		1.51		200,000		1.71		0.76
Over 36 months to 48 months	200,000		2.20		1.53		1,500,000		2.22		0.74
Over 48 months to 60 months	—		—		—		200,000		2.20		0.75
Over 60 months to 72 months (3)	100,000		2.75		1.50		—		—		—
Over 72 months to 84 months (3)	—		—		—		100,000		2.75		0.74
Total Swaps	$	2,550,000	2.04	%	1.50	%	$	2,900,000	1.87	%	0.72	%

(1) Each maturity category reflects contractual amortization and/or maturity of notional amounts.

(2) Reflects the benchmark variable rate due from the counterparty at the date presented, which rate adjusts monthly or quarterly based on one-month or three-month LIBOR, respectively.

(3) Reflects one Swap with a maturity date of July 2023.

The following table presents the net impact of the Company’s derivative hedging instruments on its interest expense and the weighted average interest rate paid and received for such Swaps for the years ended December 31, 2017, 2016 and 2015:



	For the Year Ended December 31,
(Dollars in Thousands)	2017			2016			2015
Interest expense attributable to Swaps	$	24,524		$	40,898		$	53,759
Weighted average Swap rate paid	1.98		%	1.82		%	1.86		%
Weighted average Swap rate received	1.07		%	0.48		%	0.19		%

Impact of Derivative Hedging Instruments on AOCI

The following table presents the impact of the Company’s derivative hedging instruments on its AOCI for the years ended December 31, 2017, 2016 and 2015:



	For the Year Ended December 31,
(In Thousands)	2017			2016			2015
AOCI from derivative hedging instruments:
Balance at beginning of period	$	(46,721	)	$	(69,399	)	$	(59,062	)
Net gain/(loss) on Swaps	35,297			22,678			(10,337		)
Balance at end of period	$	(11,424	)	$	(46,721	)	$	(69,399	)