Residential Mortgage Securities and MSR-Related Assets

9 Months Ended

Sep. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Residential Mortgage Securities and MSR-Related Assets

Residential Mortgage 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 generally 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 or sponsored 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 either a reference pool or an actual pool of loans. As the loans in the underlying pool are paid, the principal balance of the CRT securities is paid. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the 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 loan 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 residential mortgage securities at September 30, 2019 and December 31, 2018:

September 30, 2019

(In Thousands)	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and  OTTI (1)			Amortized Cost (2)		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)			Fair Value
Agency MBS: (3)
Fannie Mae	$	1,217,508	$	46,917	$	(23	)	$	—		$	1,264,402	$	10,896	$	(15,282	)	$	(4,386	)	$	1,260,016
Freddie Mac	526,173		21,303		—			—			548,441		5,159		(3,990		)	1,169			549,610
Ginnie Mae	4,118		76		—			—			4,194		53		—			53			4,247
Total Agency MBS	1,747,799		68,296		(23		)	—			1,817,037		16,108		(19,272		)	(3,164		)	1,813,873
Non-Agency MBS:
Expected to Recover Par (4)(5)	917,981		—		(14,176		)	—			903,805		17,905		(5		)	17,900			921,705
Expected to Recover Less than Par (4)	1,611,768		—		(88,121		)	(462,095		)	1,061,552		414,788		(256		)	414,532			1,476,084
Total Non-Agency MBS (6)	2,529,749		—		(102,297		)	(462,095		)	1,965,357		432,693		(261		)	432,432			2,397,789
Total MBS	4,277,548		68,296		(102,320		)	(462,095		)	3,782,394		448,801		(19,533		)	429,268			4,211,662
CRT securities (7)	364,284		5,882		(117		)	—			370,049		8,084		(241		)	7,843			377,892
Total MBS and CRT securities	$	4,641,832	$	74,178	$	(102,437	)	$	(462,095	)	$	4,152,443	$	456,885	$	(19,774	)	$	437,111		$	4,589,554

December 31, 2018

(In Thousands)	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and  OTTI (1)			Amortized Cost (2)		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)			Fair Value
Agency MBS: (3)
Fannie Mae	$	1,716,340	$	65,930	$	(24	)	$	—		$	1,782,246	$	12,107	$	(32,321	)	$	(20,214	)	$	1,762,032
Freddie Mac	909,561		36,991		—			—			947,588		907		(17,177		)	(16,270		)	931,318
Ginnie Mae	4,729		87		—			—			4,816		47		—			47			4,863
Total Agency MBS	2,630,630		103,008		(24		)	—			2,734,650		13,061		(49,498		)	(36,437		)	2,698,213
Non-Agency MBS:
Expected to Recover Par (4)(5)	1,536,485		40		(21,725		)	—			1,514,800		20,520		(7,620		)	12,900			1,527,700
Expected to Recover Less than Par (4)	2,002,319		—		(133,300		)	(516,116		)	1,352,903		438,465		(769		)	437,696			1,790,599
Total Non-Agency MBS (6)	3,538,804		40		(155,025		)	(516,116		)	2,867,703		458,985		(8,389		)	450,596			3,318,299
Total MBS	6,169,434		103,048		(155,049		)	(516,116		)	5,602,353		472,046		(57,887		)	414,159			6,016,512
CRT securities (7)	476,744		9,321		107			—			486,172		12,545		(5,896		)	6,649			492,821
Total MBS and CRT securities	$	6,646,178	$	112,369	$	(154,942	)	$	(516,116	)	$	6,088,525	$	484,591	$	(63,783	)	$	420,808		$	6,509,333

(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, 2019 reflect Credit Reserve of $451.1 million and OTTI of $11.0 million.  Amounts disclosed at December 31, 2018 reflect Credit Reserve of $503.3 million and OTTI of $12.8 million.

(2) Includes principal payments receivable of $965,000 and $1.0 million at September 30, 2019 and December 31, 2018, respectively, which are not included in the Principal/Current Face.

(3) Amounts disclosed at September 30, 2019 and December 31, 2018 include Agency MBS with a fair value of $312.5 million and $736.5 million, respectively, for which the fair value option has been elected. Such securities had gross unrealized gains of $4.1 million and no unrealized losses at September 30, 2019, and no unrealized gains and gross unrealized losses of approximately $3.3 million at December 31, 2018, respectively.

(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, 2019 had an $824.8 million Principal/Current face, $824.3 million amortized cost and $828.1 million fair value. At December 31, 2018, RPL/NPL MBS had a $1.4 billion Principal/Current face, $1.4 billion amortized cost and $1.4 billion fair value.

(6) At September 30, 2019 and December 31, 2018, the Company expected to recover approximately 82% and 85% of the then-current face amount of Non-Agency MBS, respectively.

(7) Amounts disclosed at September 30, 2019 includes CRT securities with a fair value of $351.4 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $7.8 million and gross unrealized losses of approximately $0.2 million at September 30, 2019. Amounts disclosed at December 31, 2018 includes CRT securities with a fair value of $477.4 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $12.5 million and gross unrealized losses of approximately $5.6 million at December 31, 2018.

Sales of Residential Mortgage Securities

The following tables present information about the Company’s sales of its residential mortgage securities for the three and nine months ended September 30, 2019 and 2018. The Company has no continuing involvement with any of the sold MBS.

	Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
(In Thousands)	Sales Proceeds		Gains/(Losses)		Sales Proceeds		Gains/(Losses)
Agency MBS	$	257,289	$	2,771	$	—	$	—
Non-Agency MBS	47,867		14,444		24,341		3,391
CRT Securities	28,969		493		118,855		13,024
Total	$	334,125	$	17,708	$	143,196	$	16,415

	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
(In Thousands)	Sales Proceeds		Gains/(Losses)		Sales Proceeds		Gains/(Losses)
Agency MBS	$	360,634	$	499	$	75,306	$	(3,787	)
Non-Agency MBS	244,778		41,420		43,703		12,208
CRT Securities	133,507		8,108		222,877		24,240
Total	$	738,919	$	50,027	$	341,886	$	32,661

Unrealized Losses on Residential Mortgage Securities

The following table presents information about the Company’s residential mortgage securities that were in an unrealized loss position at September 30, 2019:

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:
Fannie Mae	$	36,775	$	104	25	$	660,757	$	15,178	280	$	697,532	$	15,282
Freddie Mac	—		—		—	163,863		3,990		101	163,863		3,990
Ginnie Mae	—		—		—	172		—		1	172		—
Total Agency MBS	36,775		104		25	824,792		19,168		382	861,567		19,272
Non-Agency MBS:
Expected to Recover Par (1)	—		—		—	7,495		5		1	7,495		5
Expected to Recover Less than Par (1)	2,009		11		1	1,894		245		2	3,903		256
Total Non-Agency MBS	2,009		11		1	9,389		250		3	11,398		261
Total MBS	38,784		115		26	834,181		19,418		385	872,965		19,533
CRT securities (2)	7,189		41		2	24,966		200		7	32,155		241
Total MBS and CRT securities	$	45,973	$	156	28	$	859,147	$	19,618	392	$	905,120	$	19,774

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

(2) Amounts disclosed at September 30, 2019 include CRT securities with a fair value of $32.2 million for which the fair value option has been elected. Such securities had unrealized losses of $241,000 at September 30, 2019.

At September 30, 2019, 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 $19.3 million at September 30, 2019.  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, 2019 any unrealized losses on its Agency MBS were temporary.

Gross unrealized losses on the Company’s Non-Agency MBS were $261,000 at September 30, 2019. 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, 2019 and 2018. 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, 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 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, 2019		Nine months ended September 30, 2019
(In Thousands)
Credit loss component of OTTI at beginning of period	$	39,596	$	39,596
Additions for credit related OTTI not previously recognized	—		—
Subsequent additional credit related OTTI recorded	—		—
Credit loss component of OTTI at end of period	$	39,596	$	39,596

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, 2019 and 2018:

	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
(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	$	(479,566	)	$	(117,753	)	$	(553,596	)	$	(202,248	)
Impact of RMBS Issuer Settlement (2)	—			—			—			(2,734		)
Accretion of discount	—			10,357			—			20,115
Realized credit losses	4,062			—			12,042			—
Purchases	—			—			(1,975		)	1,368
Sales	12,479			6,029			1,552			1,974
Transfers/release of credit reserve	930			(930		)	10,220			(10,220		)
Balance at end of period	$	(462,095	)	$	(102,297	)	$	(531,757	)	$	(191,745	)

	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
(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	$	(516,116	)	$	(155,025	)	$	(593,227	)	$	(215,325	)
Impact of RMBS Issuer Settlement (2)(3)	—			(1,688		)	—			(14,822		)
Accretion of discount	—			38,215			—			54,860
Realized credit losses	21,482			—			31,443			—
Purchases	(624		)	291			(2,510		)	1,856
Sales	23,842			25,231			7,144			7,079
Transfers/release of credit reserve	9,321			(9,321		)	25,393			(25,393		)
Balance at end of period	$	(462,095	)	$	(102,297	)	$	(531,757	)	$	(191,745	)

(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 cash proceeds (a one-time payment) received by the Company 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 of approximately $1.7 million during the nine months ended September 30, 2019 and approximately $12.1 million during the nine months ended September 30, 2018.

MSR-Related Assets

(a) Term Notes Backed by MSR-Related Collateral

At September 30, 2019 and December 31, 2018, the Company had $1.1 billion and $538.5 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, 2019, these term notes had an amortized cost of $1.1 billion, gross unrealized gains of approximately $5.4 million, a weighted average yield of 4.99% and a weighted average term to maturity of 5.7 years. At December 31, 2018, the term notes had an amortized cost of $538.5 million, gross unrealized losses of $7,000, a weighted average yield of 5.32% and a weighted average term to maturity of 4.7 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 year ended December 31, 2018, the Company participated in a loan where the Company committed to lend $100.0 million of which approximately $60.2 million was drawn at September 30, 2019. At September 30, 2019, the coupon paid by the borrower on the drawn amount is 5.39%, the remaining term associated with the loan is 11 months and the remaining commitment period on any undrawn amount is 11 months. 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.

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, 2019 and 2018:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
AOCI from AFS securities:
Unrealized gain on AFS securities at beginning of period	$	439,898		$	548,551		$	417,167		$	620,648
Unrealized gain/(loss) on Agency MBS, net	603			(9,177		)	22,483			(27,507		)
Unrealized gain/(loss) on Non-Agency MBS, net	2,856			(25,101		)	22,211			(62,979		)
Unrealized gain on MSR term notes, net	2,024			—			5,391			236
Reclassification adjustment for MBS sales included in net income	(14,499		)	(9,455		)	(36,370		)	(25,580		)
Change in AOCI from AFS securities	(9,016		)	(43,733		)	13,715			(115,830		)
Balance at end of period	$	430,882		$	504,818		$	430,882		$	504,818

Interest Income on Residential Mortgage Securities and MSR-Related Assets

The following table presents the components of interest income on the Company’s residential mortgage securities and MSR- related assets for the three and nine months ended September 30, 2019 and 2018: 

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
Agency MBS
Coupon interest	$	18,994		$	21,549		$	66,560		$	62,546
Effective yield adjustment (1)	(7,188		)	(7,217		)	(21,039		)	(19,751		)
Interest income	$	11,806		$	14,332		$	45,521		$	42,795
Legacy Non-Agency MBS
Coupon interest	$	21,011		$	27,026		$	68,144		$	83,791
Effective yield adjustment (2)(3)	10,336			18,984			38,003			53,648
Interest income	$	31,347		$	46,010		$	106,147		$	137,439
RPL/NPL MBS
Coupon interest	$	13,227		$	11,526		$	44,305		$	31,167
Effective yield adjustment (1)(4)	8			1,131			158			1,206
Interest income	$	13,235		$	12,657		$	44,463		$	32,373
CRT securities
Coupon interest	$	5,174		$	7,257		$	16,769		$	23,484
Effective yield adjustment (2)	(923		)	491			(1,224		)	2,455
Interest income	$	4,251		$	7,748		$	15,545		$	25,939
MSR-related assets
Coupon interest	$	15,222		$	6,387		$	38,107		$	18,985
Effective yield adjustment (1)	52			20			125			1,264
Interest income	$	15,274		$	6,407		$	38,232		$	20,249

(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 purchased at a discount of approximately $2.3 million during the three months ended September 30, 2018, and $3.1 million and $2.3 million during the nine months ended September 30, 2019 and 2018, respectively.

(4) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a discount of approximately $4,000 and $1.1 million during the three months ended September 30, 2019 and 2018, respectively, and $152,000 and $1.2 million during the nine months ended September 30, 2019 and 2018, respectively.