Other Assets

12 Months Ended

Dec. 31, 2018

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



(In Thousands)	December 31, 2018		December 31, 2017
Securities obtained and pledged as collateral, at fair value	$	—	$	504,062
REO	249,413		152,356
MBS and loan related receivables	127,154		54,640
Other interest earning assets	92,022		—
Goodwill	7,189		7,189
Other	52,007		23,983
Total Other Assets	$	527,785	$	742,230

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

In connection with its financing strategy for Non-Agency MBS, in prior periods the Company obtained securities as collateral under collateralized financing arrangements. 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 had the right to transfer the collateral obtained or to pledge it as part of a subsequent collateralized financing transaction. During the year ended December 31, 2018, these financing arrangements were unwound and the related securities obtained as collateral were returned to the counterparty.

Real Estate Owned

During the years ended December 31, 2018 and 2017, the Company reclassified 1,078 and 698 mortgage loans, respectively to REO at an aggregate estimated fair value less estimated selling costs of $215.0 million and $136.7 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, 2018, $242.0 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 $49.0 million of residential whole loans held at carrying value and $720.1 million of residential whole loans held at fair value at December 31, 2018.

During the year ended December 31, 2018, the Company sold 705 REO properties for consideration of $123.2 million, realizing net gains of approximately $7.7 million. 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. These amounts are included in Other Income, 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, 2018 and 2017, an aggregate downward adjustment of approximately $15.9 million and $11.0 million was recorded to reflect certain REO properties at the lower of cost or estimated fair value as of December 31, 2018 and 2017, respectively.

The following table presents the activity in the Company’s REO for the years ended December 31, 2018 and 2017:



	For the Year Ended December 31,
(Dollars In Thousands)	2018			2017
Balance at beginning of period	$	152,356		$	80,503
Adjustments to record at lower of cost or fair value	(15,929		)	(11,018		)
Transfer from residential whole loans (1)	215,038			136,734
Purchases and capital improvements	13,367			19,801
Disposals	(115,419		)	(73,664		)
Balance at end of period	$	249,413		$	152,356

Number of properties	1,093			709

(1) Includes net gain recorded on transfer of approximately $19.6 million and $10.2 million, respectively, for the years ended December 31, 2018 and 2017.

The Company’s derivative instruments are currently comprised of Swaps, the majority of which are designated as cash flow hedges against the interest rate risk associated with its borrowings. In addition, in connection with managing risks associated with purchases of longer duration Agency MBS, the Company has also entered into Swaps that are not designated as hedges for accounting purposes. The following table presents the fair value of the Company’s derivative instruments and their balance sheet location at December 31, 2018 and 2017:



			December 31,
			2018				2017
Derivative Instrument (1)	Designation	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
(In Thousands)
Swaps	Hedging	Other assets	$	1,900,000	$	—	$	750,000	$	—
Swaps	Hedging	Other liabilities	$	722,000	$	—	$	1,800,000	$	—
Swaps	Non-Hedging	Other liabilities	$	595,000	$	—	$	—	$	—

(1) Represents 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 December 31, 2018 and 2017:



	December 31,
(In Thousands)	2018		2017
Agency MBS, at fair value	$	2,735	$	21,756
Restricted cash	30,068		7,084
Total assets pledged against Swaps	$	32,803	$	28,840

Swaps designated as hedges, 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, 2018, all of the Company’s derivatives that were designated in a hedging relationship 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 any of the three years ended December 31, 2018.

At December 31, 2018, the Company had Swaps with an aggregate notional amount of $3.2 billion and extended 32 months on average with a maximum term of approximately 120 months.

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



	December 31, 2018						December 31, 2017
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	100,000		1.71		2.50		—		—		—
Over 3 months to 6 months	100,000		1.71		2.50		50,000		1.45		1.56
Over 6 months to 12 months	—		—		—		500,000		1.50		1.46
Over 12 months to 24 months	1,630,000		2.27		2.50		200,000		1.71		1.54
Over 24 months to 36 months	822,000		2.57		2.64		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	395,000		2.88		2.63		—		—		—
Over 60 months to 72 months	—		—		—		100,000		2.75		1.50
Over 72 months to 84 months	—		—		—		—		—		—
Over 84 months	170,000		3.00		2.66		—		—		—
Total Swaps	$	3,217,000	2.42	%	2.56	%	$	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.

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, 2018, 2017 and 2016:



	For the Year Ended December 31,
(Dollars in Thousands)	2018			2017			2016
Interest expense attributable to Swaps	$	3,780		$	24,524		$	40,898
Weighted average Swap rate paid	2.12		%	1.98		%	1.82		%
Weighted average Swap rate received	1.96		%	1.07		%	0.48		%

During the year ended December 31, 2018, the Company recorded net losses on Swaps not designated in hedging relationships of $9.6 million. This amount is included in Other income, net on the Company’s consolidated statements of operations. All of the Company’s Swaps were designated in hedging relationships during the years ended December 31, 2017 and 2016.

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, 2018, 2017 and 2016:



	For the Year Ended December 31,
(In Thousands)	2018			2017			2016
AOCI from derivative hedging instruments:
Balance at beginning of period	$	(11,424	)	$	(46,721	)	$	(69,399	)
Net gain on Swaps	14,545			35,297			22,678
Balance at end of period	$	3,121		$	(11,424	)	$	(46,721	)