Other Assets

6 Months Ended

Jun. 30, 2018

The following table presents the components of the Company’s Other assets at June 30, 2018 and December 31, 2017:



(In Thousands)	June 30, 2018		December 31, 2017

Securities obtained and pledged as collateral, at fair value	$	253,721	$	504,062
REO	192,162		152,356
Interest receivable	31,139		27,415
Swaps, at fair value	11,183		679
Goodwill	7,189		7,189
Prepaid and other assets	122,754		51,208
Total Other Assets	$	618,148	$	742,909

(a) Securities Obtained and Pledged as Collateral/Obligation to Return Securities Obtained as Collateral

The Company has obtained securities as collateral under collateralized financing arrangements in connection with its financing strategy for Non-Agency MBS. Securities obtained as collateral in connection with these transactions are recorded at fair value, with a liability, representing the obligation to return the collateral obtained, recorded in Other liabilities. While beneficial ownership of securities obtained remains with the counterparty, the Company has the right to transfer the collateral obtained or to pledge it as part of a subsequent collateralized financing transaction.

(b) Real Estate Owned

At June 30, 2018, the Company had 884 REO properties with an aggregate carrying value of $192.2 million. At December 31, 2017, the Company had 709 REO properties with an aggregate carrying value of $152.4 million.

During the three and six months ended June 30, 2018, the Company reclassified 251 and 555 mortgage loans to REO at an aggregate estimated fair value less estimated selling costs of $48.7 million and $103.5 million, respectively, at the time of transfer. During the three and six months ended June 30, 2017, the Company reclassified 168 and 347 mortgage loans to REO at an aggregate estimated fair value less estimated selling cost of $27.3 million and $58.4 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 June 30, 2018, $183.8 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 $46.4 million of residential whole loans held at carrying value and $780.6 million of residential whole loans held at fair value at June 30, 2018.

During the three and six months ended June 30, 2018, the Company sold 212 and 380 REO properties for consideration of $40.6 million and $66.1 million, realizing net gains of approximately $2.7 million and $4.7 million, respectively. During the three and six months ended June 30, 2017, the Company sold 145 and 229 REO properties for consideration of $21.8 million and $34.5 million, realizing net gain of approximately $1.2 million and $2.0 million, respectively. 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 the second quarters of 2018 and 2017, downward adjustments of approximately $4.1 million and $2.4 million were recorded to reflect certain REO properties at the lower of cost or estimated fair value as of June 30, 2018 and 2017, respectively.

The following table presents the activity in the Company’s REO for the three and six months ended June 30, 2018 and 2017:



(In Thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Balance at beginning of period	$	182,940		$	98,708		$	152,356		$	80,503
Adjustments to record at lower of cost or fair value	(4,121		)	(2,354		)	(7,536		)	(4,177		)
Transfer from residential whole loans (1)	48,699			27,345			103,521			58,444
Purchases and capital improvements	2,604			1,109			5,282			1,882
Disposals	(37,960		)	(20,365		)	(61,461		)	(32,209		)
Balance at end of period	$	192,162		$	104,443		$	192,162		$	104,443

(1) Includes net gain recorded on transfer of approximately $5.3 million and $1.1 million, for the three months ended June 30, 2018 and 2017, respectively; and approximately $11.7 million and $2.5 million for the six months ended June 30, 2018 and 2017, respectively.

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 June 30, 2018 and December 31, 2017:



			June 30, 2018				December 31, 2017
Derivative Instrument	Designation	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
(In Thousands)
Cleared Swaps (1)	Hedging	Assets	$	2,500,000	$	11,183	$	750,000	$	679
Cleared Swaps (1)	Hedging	Liabilities	$	100,000	$	—	$	1,800,000	$	—

(1) Cleared Swaps represent 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.

Swaps

The following table presents the assets pledged as collateral against the Company’s Swap contracts at June 30, 2018 and December 31, 2017:



(In Thousands)	June 30, 2018		December 31, 2017
Agency MBS, at fair value	$	3,097	$	21,756
Restricted cash	—		6,405
Total assets pledged against Swaps	$	3,097	$	28,161

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 June 30, 2018, all of the Company’s derivatives were deemed effective for hedging purposes.

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 the three and six months ended June 30, 2018 and 2017.

At June 30, 2018, the Company had Swaps (all of which were designated in hedging relationships) with an aggregate notional amount of $2.6 billion and extended 22 months on average with a maximum term of approximately 62 months.

The following table presents information about the Company’s Swaps at June 30, 2018 and December 31, 2017:



	June 30, 2018						December 31, 2017
	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)

Maturity (1)
(Dollars in Thousands)
Within 30 days	$	500,000	1.50	%	2.06	%	$	—	—	%	—	%
Over 30 days to 3 months	—		—		—		—		—		—
Over 3 months to 6 months	—		—		—		50,000		1.45		1.56
Over 6 months to 12 months	200,000		1.71		2.09		500,000		1.50		1.46
Over 12 months to 24 months	200,000		2.05		2.10		200,000		1.71		1.54
Over 24 months to 36 months	1,600,000		2.25		2.09		1,500,000		2.22		1.51
Over 36 months to 48 months	—		—		—		200,000		2.20		1.53
Over 48 months to 60 months	—		—		—		—		—		—
Over 60 months to 72 months (3)	100,000		2.75		2.09		100,000		2.75		1.50
Total Swaps	$	2,600,000	2.07	%	2.08	%	$	2,550,000	2.04	%	1.50	%

(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 three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in Thousands)	2018			2017			2018			2017
Interest expense attributable to Swaps	$	808		$	6,488		$	3,640		$	14,297
Weighted average Swap rate paid	2.05		%	1.98		%	2.04		%	1.93		%
Weighted average Swap rate received	1.92		%	1.01		%	1.76		%	0.90		%

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 three and six months ended June 30, 2018 and 2017:



	Three Months Ended June 30,					Six Months Ended June 30,
(In Thousands)	2018		2017			2018			2017
AOCI from derivative hedging instruments:
Balance at beginning of period	$	8,245	$	(34,824	)	$	(11,424	)	$	(46,721	)
Net gain/(loss) on Swaps	7,915		(1,017		)	27,584			10,880
Balance at end of period	$	16,160	$	(35,841	)	$	16,160		$	(35,841	)