MBS, CRT Securities and MSR Related Assets

9 Months Ended

Sep. 30, 2018

Investments, Debt and Equity Securities [Abstract]

MBS, CRT Securities and MSR Related Assets

MBS, CRT Securities and MSR Related Assets

Agency and Non-Agency MBS

The Company’s MBS are comprised of Agency MBS and Non-Agency MBS which include MBS issued prior to 2008 (“Legacy 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”), which have interest rates that reset annually or more frequently (collectively, “ARM-MBS”); and (iii) 15 and 30 year fixed-rate mortgages for Agency MBS and, for Non-Agency MBS, 30-year and longer-term fixed rate mortgages. In addition, the Company’s MBS are also comprised of MBS backed by securitized re-performing/non-performing loans (“RPL/NPL MBS”), where the cash flows of the bond may not reflect the contractual cash flows of the underlying collateral. The Company’s RPL/NPL MBS are primarily structured with a contractual coupon step-up feature where the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements and Swaps.  (See Note 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:  The Company’s Non-Agency MBS are primarily secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation.  Credit risk associated with Non-Agency MBS is regularly assessed as new information regarding the underlying collateral becomes available and based on updated estimates of cash flows generated by the underlying collateral.

CRT Securities

CRT securities are debt obligations issued by Fannie Mae and Freddie Mac. The payments of principal and interest on the CRT securities are paid by Fannie Mae or Freddie Mac, as the case may be, on a monthly basis, and are dependent on the performance of loans in a reference pool of Agency MBS securitized by the issuing entity. As an investor in a CRT security, the Company may incur a loss if losses on the mortgage loans in the reference pool exceed the credit enhancement on the underlying CRT security owned by the Company. The Company assesses the credit risk associated with CRT securities by assessing the current and expected future performance of the associated reference pool. The Company pledges a portion of its CRT securities as collateral against its borrowings under repurchase agreements.  (See Note 7)

The following tables present certain information about the Company’s MBS and CRT securities at September 30, 2018 and December 31, 2017:

September 30, 2018

(In Thousands)	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)
Agency MBS: (3)
Fannie Mae	$	1,851,447	$	70,882	$	(29	)	$	—		$	1,922,300	$	1,896,739	$	14,650	$	(40,211	)	$	(25,561	)
Freddie Mac	987,833		40,183		—			—			1,028,453		1,003,583		1,027		(25,897		)	(24,870		)
Ginnie Mae	5,028		92		—			—			5,120		5,168		48		—			48
Total Agency MBS	2,844,308		111,157		(29		)	—			2,955,873		2,905,490		15,725		(66,108		)	(50,383		)
Non-Agency MBS:
Expected to Recover Par (4)(5)	1,343,835		41		(23,835		)	—			1,320,041		1,343,272		25,146		(1,915		)	23,231
Expected to Recover Less than Par (4)	2,165,454		—		(167,910		)	(531,757		)	1,465,787		1,991,338		525,770		(219		)	525,551
Total Non-Agency MBS (6)	3,509,289		41		(191,745		)	(531,757		)	2,785,828		3,334,610		550,916		(2,134		)	548,782
Total MBS	6,353,597		111,198		(191,774		)	(531,757		)	5,741,701		6,240,100		566,641		(68,242		)	498,399
CRT securities (7)	495,018		9,936		(178		)	—			504,776		538,945		34,173		(4		)	34,169
Total MBS and CRT securities	$	6,848,615	$	121,134	$	(191,952	)	$	(531,757	)	$	6,246,477	$	6,779,045	$	600,814	$	(68,246	)	$	532,568

December 31, 2017

(In Thousands)	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)
Agency MBS: (3)
Fannie Mae	$	2,170,974	$	82,271	$	(40	)	$	—		$	2,253,205	$	2,246,600	$	21,736	$	(28,341	)	$	(6,605	)
Freddie Mac	561,346		21,683		—			—			584,920		571,748		1,624		(14,796		)	(13,172		)
Ginnie Mae	6,142		112		—			—			6,254		6,333		79		—			79
Total Agency MBS	2,738,462		104,066		(40		)	—			2,844,379		2,824,681		23,439		(43,137		)	(19,698		)
Non-Agency MBS:
Expected to Recover Par (4)(5)	1,128,808		50		(22,737		)	—			1,106,121		1,132,205		26,518		(434		)	26,084
Expected to Recover Less than Par (4)	2,589,935		—		(192,588		)	(593,227		)	1,804,120		2,401,761		597,660		(19		)	597,641
Total Non-Agency MBS (6)	3,718,743		50		(215,325		)	(593,227		)	2,910,241		3,533,966		624,178		(453		)	623,725
Total MBS	6,457,205		104,116		(215,365		)	(593,227		)	5,754,620		6,358,647		647,617		(43,590		)	604,027
CRT securities (7)	602,799		8,887		(3,550		)	—			608,136		664,403		56,290		(23		)	56,267
Total MBS and CRT securities	$	7,060,004	$	113,003	$	(218,915	)	$	(593,227	)	$	6,362,756	$	7,023,050	$	703,907	$	(43,613	)	$	660,294

(1) Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income.  Amounts disclosed at September 30, 2018 reflect Credit Reserve of $519.6 million and OTTI of $12.2 million.  Amounts disclosed at December 31, 2017 reflect Credit Reserve of $579.0 million and OTTI of $14.2 million.

(2) Includes principal payments receivable of $438,000 and $1.9 million at September 30, 2018 and December 31, 2017, respectively, which are not included in the Principal/Current Face.

(3) Amounts disclosed at September 30, 2018 include Agency MBS with a fair value of $746.7 million for which the fair value option has been elected. Such securities had no unrealized gains and gross unrealized losses of approximately $5.5 million at September 30, 2018. The Company did not have any Agency MBS for which the fair value option had been elected at December 31, 2017.

(4) Based on management’s current estimates of future principal cash flows expected to be received.

(5) Includes RPL/NPL MBS, which at September 30, 2018 had a $1.2 billion Principal/Current face, $1.2 billion amortized cost and $1.2 billion fair value. At December 31, 2017, RPL/NPL MBS had a $922.0 million Principal/Current face, $920.1 million amortized cost and $923.1 millionfair value.

(6) At September 30, 2018 and December 31, 2017, the Company expected to recover approximately 85% and 84% of the then-current face amount of Non-Agency MBS, respectively.

(7) Amounts disclosed at September 30, 2018 includes CRT securities with a fair value of $538.9 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $34.2 million and gross unrealized losses of approximately $4,000 at September 30, 2018. Amounts disclosed at December 31, 2017 includes CRT securities with a fair value of $528.9 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $40.5 million and gross unrealized losses of approximately $23,000 at December 31, 2017.

Sales of MBS and CRT Securities

During the nine months ended September 30, 2018, the Company sold certain Agency MBS for $75.3 million realizing losses of $3.8 million. The Company also sold certain CRT securities during the three and nine months ended September 30, 2018 for $118.9 million and $222.9 million, realizing gains of $13.0 million and $24.2 million, respectively. In addition, during the three and nine months ended September 30, 2018, the Company sold certain Non-Agency MBS for $24.3 million and $43.7 million, realizing gains of $3.4 million and $12.2 million, respectively. During the three and nine months ended September 30, 2017, the Company sold certain Non-Agency MBS for $44.5 million and $83.1 million, realizing gains of $14.9 million and $30.8 million, respectively. The Company has no continuing involvement with any of the sold MBS.

Unrealized Losses on MBS and CRT Securities

The following table presents information about the Company’s MBS and CRT securities that were in an unrealized loss position at September 30, 2018:

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
(Dollars in Thousands)
Agency MBS: (1)
Fannie Mae	$	438,980	$	4,293	105	$	838,566	$	35,918	251	$	1,277,546	$	40,211
Freddie Mac	668,566		6,020		37	298,083		19,877		103	966,649		25,897
Total Agency MBS	1,107,546		10,313		142	1,136,649		55,795		354	2,244,195		66,108
Non-Agency MBS:
Expected to Recover Par (2)	435,011		1,849		15	3,877		66		7	438,888		1,915
Expected to Recover Less than Par (2)	44,630		219		6	—		—		—	44,630		219
Total Non-Agency MBS	479,641		2,068		21	3,877		66		7	483,518		2,134
Total MBS	1,587,187		12,381		163	1,140,526		55,861		361	2,727,713		68,242
CRT securities (3)	15,754		4		4	—		—		—	15,754		4
Total MBS and CRT securities	$	1,602,941	$	12,385	167	$	1,140,526	$	55,861	361	$	2,743,467	$	68,246

(1) Amounts disclosed at September 30, 2018 include Agency MBS with a fair value of $746.7 million on which the fair value option has been elected. Such securities had unrealized losses of $5.5 million at September 30, 2018. 

(2) Based on management’s current estimates of future principal cash flows expected to be received.

(3) Amounts disclosed at September 30, 2018 represent CRT securities on which the fair value option has been elected.

At September 30, 2018, the Company did not intend to sell any of its investments that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. 

Gross unrealized losses on the Company’s Agency MBS were $66.1 million at September 30, 2018.  Agency MBS are issued by Government Sponsored Entities (“GSEs”) and enjoy either the implicit or explicit backing of the full faith and credit of the U.S. 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 U.S. 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 its 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 September 30, 2018 any unrealized losses on its Agency MBS were temporary.

Gross unrealized losses on the Company’s Non-Agency MBS were $2.1 million at September 30, 2018. 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 a reflection of current market yields and/or marketplace bid-ask spreads.  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 securities, which considers recent bond performance and, where possible, expected future performance of the underlying collateral.

The Company did not recognize any credit-related OTTI losses through earnings related to its Non-Agency MBS during the three and nine months ended September 30, 2018 and three months ended September 30, 2017. The Company recognized credit-related OTTI losses through earnings related to its Non-Agency MBS of $1.0 million during the nine months ended September 30, 2017.

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 these 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, year of origination, LTVs, 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 and had no OTTI recorded this period, 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 LTVs 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 relative to the Company’s assumptions for these MBS which also positively impacts the Company’s estimate of expected loss. Overall, the combination of higher voluntary prepayments and lower LTVs supports the Company’s assessment that such MBS are not other-than-temporarily impaired.

The following table presents the composition of OTTI charges recorded by the Company for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended   September 30,				Nine Months Ended   September 30,
(In Thousands)	2018		2017		2018		2017
Total OTTI losses	$	—	$	—	$	—	$	(63	)
OTTI reclassified from OCI	—		—		—		(969		)
OTTI recognized in earnings	$	—	$	—	$	—	$	(1,032	)

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   September 30,		Nine Months Ended   September 30,
(In Thousands)	2018		2018
Credit loss component of OTTI at beginning of period	$	38,337	$	38,337
Additions for credit related OTTI not previously recognized	—		—
Subsequent additional credit related OTTI recorded	—		—
Credit loss component of OTTI at end of period	$	38,337	$	38,337

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 nine months ended September 30, 2018 and 2017:

	Three Months Ended   September 30, 2018						Three Months Ended   September 30, 2017
(In Thousands)	Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)			Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)
Balance at beginning of period	$	(553,596	)	$	(202,248	)	$	(626,498	)	$	(257,967	)
Impact of RMBS Issuer Settlement (2)	—			(2,734		)	—			—
Accretion of discount	—			20,115			—			18,621
Realized credit losses	12,042			—			13,982			—
Purchases	(1,975		)	1,368			—			(1,929		)
Sales	1,552			1,974			4,620			11,244
Transfers/release of credit reserve	10,220			(10,220		)	14,762			(14,762		)
Balance at end of period	$	(531,757	)	$	(191,745	)	$	(593,134	)	$	(244,793	)

	Nine Months Ended   September 30, 2018						Nine Months Ended   September 30, 2017
(In Thousands)	Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)			Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)
Balance at beginning of period	$	(593,227	)	$	(215,325	)	$	(694,241	)	$	(278,191	)
Impact of RMBS Issuer Settlement (2)(3)	—			(14,822		)	—			—
Accretion of discount	—			54,860			—			60,461
Realized credit losses	31,443			—			39,445			—
Purchases	(2,510		)	1,856			(484		)	(3,449		)
Sales	7,144			7,079			29,398			10,166
Net impairment losses recognized in earnings	—			—			(1,032		)	—
Transfers/release of credit reserve	25,393			(25,393		)	33,780			(33,780		)
Balance at end of period	$	(531,757	)	$	(191,745	)	$	(593,134	)	$	(244,793	)

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

(2) Includes the impact of approximately $2.7 million of cash proceeds (a one-time payment) received by the Company during the three and nine months ended September 30, 2018 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by Lehman Brothers Holdings Inc.

(3) Includes the impact of approximately $12.1 million of cash proceeds (a one-time payment) received by the Company during the nine months ended September 30, 2018 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities.

MSR Related Assets

(a)Term Notes Backed by MSR Related Collateral

At September 30, 2018 and December 31, 2017, the Company had $505.2 million and $381.8 million, respectively, of term notes issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered to be largely dependent on cash flows generated by the underlying MSRs, as this impacts the cash flows available to the SPV that issued the term notes.

At September 30, 2018, these term notes had an amortized cost of $504.3 million, gross unrealized gains of approximately $922,000, a weighted average yield of 5.15% and a weighted average term to maturity of 4.5 years. At December 31, 2017, the term notes had an amortized cost of $381.0 million, unrealized gains of $804,000, a weighted average yield of 5.80% and a weighted average term to maturity of 3.4 years.

(b) Corporate Loans

The Company has made or participated in loans to provide financing to entities that originate residential mortgage loans and own the related MSRs. These corporate loans are secured by MSRs, as well as certain other unencumbered assets owned by the borrower.

During the three months ended September 30, 2018, the Company participated in a loan where the Company committed to lend $100.0 million of which approximately $60.1 million was drawn at September 30, 2018. At September 30, 2018, the coupon paid by the borrower on the drawn amount is 5.64%, the remaining term associated with the loan is 1.9 years and the remaining commitment period on any undrawn amount is 1.9 years. During the remaining commitment period, the Company receives a commitment fee between 0.25% and 1.0% based on the undrawn amount of the loan.

In December 2016, the Company entered into a loan agreement under the terms of which it had committed to lend $130.0 million, of which approximately $124.2 million was drawn at March 31, 2018. This loan was paid in full during the three months ended June 30, 2018, at which time any remaining commitment was extinguished.

For the three and nine months ended September 30, 2018, the Company recognized interest income on its corporate loans of $138,000 and $3.8 million including discount accretion and commitment fee income of $19,000 and $1.3 million, respectively. In addition, the Company recorded $136,000 of Other Income consisting of deferred commitment fees recognized upon repayment of a corporate loan during the nine months ended September 30, 2018. For the three and nine months ended September 30, 2017, the Company recognized interest income on its corporate loans of approximately $2.1 million and $5.7 million including discount accretion and commitment fee income of approximately $76,000 and $212,000, respectively.

Impact of AFS Securities on AOCI

The following table presents the impact of the Company’s AFS securities on its AOCI for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2018			2017			2018			2017
AOCI from AFS securities:
Unrealized gain on AFS securities at beginning of period	$	548,551		$	668,223		$	620,648		$	620,403
Unrealized loss on Agency MBS, net	(9,177		)	(3,032		)	(27,507		)	(22,241		)
Unrealized (loss)/gain on Non-Agency MBS, net	(25,101		)	10,020			(62,743		)	93,429
Reclassification adjustment for MBS sales included in net income	(9,455		)	(14,935		)	(25,580		)	(30,283		)
Reclassification adjustment for OTTI included in net income	—			—			—			(1,032		)
Change in AOCI from AFS securities	(43,733		)	(7,947		)	(115,830		)	39,873
Balance at end of period	$	504,818		$	660,276		$	504,818		$	660,276

Interest Income on MBS, CRT Securities and MSR Related Assets

The following table presents the components of interest income on the Company’s MBS, CRT securities and MSR related assets for the three and nine months ended September 30, 2018 and 2017: 

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2018			2017			2018			2017
Agency MBS
Coupon interest	$	21,549		$	23,473		$	62,546		$	74,589
Effective yield adjustment (1)	(7,217		)	(7,940		)	(19,751		)	(24,575		)
Interest income	$	14,332		$	15,533		$	42,795		$	50,014
Legacy Non-Agency MBS
Coupon interest	$	27,026		$	30,688		$	83,791		$	97,796
Effective yield adjustment (2)(3)	18,984			18,005			53,648			59,033
Interest income	$	46,010		$	48,693		$	137,439		$	156,829
RPL/NPL MBS
Coupon interest	$	11,526		$	13,947		$	31,167		$	54,475
Effective yield adjustment (1)(4)	1,131			612			1,206			1,424
Interest income	$	12,657		$	14,559		$	32,373		$	55,899
CRT securities
Coupon interest	$	7,257		$	7,868		$	23,484		$	19,712
Effective yield adjustment (2)	491			808			2,455			3,186
Interest income	$	7,748		$	8,676		$	25,939		$	22,898
MSR related assets
Coupon interest	$	6,407		$	7,117		$	19,005		$	17,621
Effective yield adjustment (1)	—			77			1,244			212
Interest income	$	6,407		$	7,194		$	20,249		$	17,833

(1)  Includes amortization of premium paid net of accretion of purchase discount.  For Agency MBS, RPL/NPL MBS and the corporate loan secured by MSRs, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity.

(2) The effective yield adjustment is the difference between the net income calculated using the net yield, which is based on management’s estimates of the amount and timing of future cash flows, less the current coupon yield.

(3) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously been purchased at a discount of $2.3 million during the three months ended September 30, 2018 and $2.3 million and $1.7 million during the nine months ended September 30, 2018 and 2017, respectively.

(4) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously been purchased at a discount of $1.1 million and $575,000 during the three months ended September 30, 2018 and 2017, respectively and $1.2 million during each of the nine months ended September 30, 2018 and 2017, respectively.