Other Assets

6 Months Ended

Jun. 30, 2019

Other Assets [Abstract]

Other Assets

Other Assets

The following table presents the components of the Company’s Other assets at June 30, 2019 and December 31, 2018:

(In Thousands)	June 30, 2019		December 31, 2018
REO	$	334,069	$	249,413
MBS and loan related receivables	98,027		130,964
Other interest earning assets	103,446		92,022
Other	72,203		55,386
Total Other Assets	$	607,745	$	527,785

(a) Real Estate Owned

At June 30, 2019, the Company had 1,362 REO properties with an aggregate carrying value of $334.1 million. At December 31, 2018, the Company had 1,093 REO properties with an aggregate carrying value of $249.4 million.

At June 30, 2019, $328.0 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, excluding unsettled residential whole loans, formal foreclosure proceedings were in process with respect to $58.6 million of residential whole loans held at carrying value and $654.0 million of residential whole loans held at fair value at June 30, 2019.

The following table presents the activity in the Company’s REO for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2019			2018			2019			2018
Balance at beginning of period	$	290,587		$	182,940		$	249,413		$	152,356
Adjustments to record at lower of cost or fair value	(1,315		)	(4,121		)	(5,388		)	(7,536		)
Transfer from residential whole loans (1)	66,483			48,699			131,644			103,521
Purchases and capital improvements, net	5,274			2,604			11,197			5,282
Disposals (2)	(26,960		)	(37,960		)	(52,797		)	(61,461		)
Balance at end of period	$	334,069		$	192,162		$	334,069		$	192,162
Number of properties	1,362			884			1,362			884

(1) Includes net gain recorded on transfer of approximately $6.5 million and $5.3 million, for the three months ended June 30, 2019 and 2018, respectively; and approximately $11.3 million and $11.7 million for the six months ended June 30, 2019 and 2018, respectively.

(2)

During the three and six months ended June 30, 2019, the Company sold 152 and 289 REO properties for consideration of $29.2 million and $57.0 million, realizing net gains of approximately $2.3 million and $3.7 million, respectively. 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. These amounts are included in Other Income, net on the Company’s consolidated statements of operations.

(b) Derivative Instruments

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 June 30, 2019 and December 31, 2018:

			June 30, 2019				December 31, 2018
Derivative Instrument (1)	Designation	Balance Sheet Location	Notional Amount		Fair Value		Notional Amount		Fair Value
(In Thousands)
Swaps	Hedging	Other assets	$	—	$	—	$	1,900,000	$	—
Swaps	Hedging	Other liabilities	$	2,422,000	$	—	$	722,000	$	—
Swaps	Non-Hedging	Other liabilities	$	305,000	$	—	$	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 June 30, 2019 and December 31, 2018:

(In Thousands)	June 30, 2019		December 31, 2018
Agency MBS, at fair value	$	2,603	$	2,735
Restricted cash	22,842		30,068
Total assets pledged against Swaps	$	25,445	$	32,803

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 if expected payments under the Swaps fail to adequately offset expected payments under the repurchase agreements.  At June 30, 2019, 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. During the six months ended June 30, 2019, the Company de-designated and re-designated any Swaps previously designated as a hedge in order to benefit from the simplified assessment requirements under ASU 2017-12. This de-designation and re-designation had no net impact on the Company’s financial condition or results of operations.

At June 30, 2019, the Company had Swaps with an aggregate notional amount of $2.7 billion and extended 22 months on average with a maximum term of approximately 53 months. 

The following table presents information about the Company’s Swaps at June 30, 2019 and December 31, 2018:

	June 30, 2019						December 31, 2018
	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	$	—	—	%	—	%	$	—	—	%	—	%
Over 30 days to 3 months	—		—		—		100,000		1.71		2.50
Over 3 months to 6 months	—		—		—		100,000		1.71		2.50
Over 6 months to 12 months	200,000		2.05		2.43		—		—		—
Over 12 months to 24 months	1,730,000		2.30		2.41		1,630,000		2.27		2.50
Over 24 months to 36 months	500,000		2.73		2.45		800,000		2.57		2.64
Over 48 months to 60 months	297,000		2.88		2.47		417,000		2.88		2.63
Over 84 months	—		—		—		170,000		3.00		2.66
Total Swaps	$	2,727,000	2.42	%	2.43	%	$	3,217,000	2.42	%	2.56	%

(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 net interest expense and the weighted average interest rate paid and received for such Swaps for the three and six months ended June 30, 2019 and 2018:

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in Thousands)	2019			2018			2019			2018
Interest income/(expense) attributable to Swaps	$	692		$	(808	)	$	1,883		$	(3,640	)
Weighted average Swap rate paid	2.35		%	2.05		%	2.33		%	2.04		%
Weighted average Swap rate received	2.46		%	1.92		%	2.48		%	1.76		%

During the three and six months ended June 30, 2019, the Company recorded net losses on Swaps not designated in hedging relationships of $7.4 million and $16.3 million, respectively, which included $6.3 million and $14.1 million of losses realized on the unwind of certain Swaps. During the three and six months ended June 30, 2018, the Company recorded a net gain on Swaps not designated in hedging relationships of $353,000, all which related to the unwind of certain Swaps. These amounts are included in Other income, net on the Company’s consolidated statements of operations.

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, 2019 and 2018:

	Three Months Ended June 30,					Six Months Ended June 30,
(In Thousands)	2019			2018		2019			2018
AOCI from derivative hedging instruments:
Balance at beginning of period	$	(7,665	)	$	8,245	$	3,121		$	(11,424	)
Net (loss)/gain on Swaps	(19,706		)	7,915		(30,151		)	27,584
Amortization of de-designated hedging instruments, net	(743		)	—		(1,084		)	—
Balance at end of period	$	(28,114	)	$	16,160	$	(28,114	)	$	16,160