Other Assets

9 Months Ended

Sep. 30, 2019

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



(In Thousands)	September 30, 2019		December 31, 2018
REO (1)	$	376,200	$	249,413
Capital contributions made to loan origination partners	122,903		23,210
Other interest-earning assets	87,896		92,022
MBS and loan related receivables	102,715		130,964
Other	45,495		32,176
Total Other Assets	$	735,209	$	527,785

(1)

Includes $19.6 million of REO that is held-for-investment at September 30, 2019.

(a) Real Estate Owned

At September 30, 2019, the Company had 1,508 REO properties with an aggregate carrying value of $376.2 million. At December 31, 2018, the Company had 1,093 REO properties with an aggregate carrying value of $249.4 million.

At September 30, 2019, $370.9 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 $41.2 million of residential whole loans held at carrying value and $656.4 million of residential whole loans held at fair value at September 30, 2019.

The following table presents the activity in the Company’s REO 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
Balance at beginning of period	$	334,069		$	192,162		$	249,413		$	152,356
Adjustments to record at lower of cost or fair value	(3,875		)	(4,056		)	(9,264		)	(11,592		)
Transfer from residential whole loans (1)	61,888			58,051			193,531			161,572
Purchases and capital improvements, net	5,108			4,897			16,307			10,179
Disposals (2)	(20,990		)	(27,949		)	(73,787		)	(89,410		)
Balance at end of period	$	376,200		$	223,105		$	376,200		$	223,105

Number of properties	1,508			979			1,508			979


(1)	Includes net gain recorded on transfer of approximately $5.0 million and $5.8 million, for the three months ended September 30, 2019 and 2018, respectively; and approximately $16.1 million and $17.0 million for the nine months ended September 30, 2019 and 2018, respectively.

(2)

During the three and nine months ended September 30, 2019, the Company sold 142 and 431 REO properties for consideration of $23.0 million and $80.0 million, realizing net gains of approximately $2.1 million and $5.8 million, respectively. During the three and nine months ended September 30, 2018, the Company sold 157 and 537 REO properties for consideration of $29.9 million and $96.0 million, realizing net gains of approximately $2.0 million and $6.6 million, respectively. These amounts are included in Other Income, net on the Company’s consolidated statements of operations.

(b) Capital Contributions Made to Loan Origination Partners

The Company has made investments in several loan originators as part of its strategy to be a reliable source of capital to select partners from whom it sources residential mortgage loans through both flow arrangements and bulk purchases. To date, such

contributions of capital have included the acquisition of approximately $28.5 million of common equity, $69.4 million of preferred equity and $25.0 million of convertible notes. In addition, for certain partners, options or warrants may have also been acquired that provide the Company the ability to increase the level of its investment if certain conditions are met. At the end of each reporting period, or earlier if circumstances warrant, the Company evaluates whether the nature of its interests and other involvement with the investee entity requires the Company to apply equity method accounting or consolidate the results of the investee entity with the Company’s financial results. To date, the nature of the Company’s interests and/or involvement with investee companies has not resulted in consolidation. Further, to the extent that the nature of the Company’s interests has resulted in the need for the Company to apply equity method accounting, the impact of such accounting on the Company’s results for periods subsequent to that in which the Company was determined to have significant influence over the investee company was not material for any period. As the interests acquired to date by the Company generally do not have a readily determinable fair value, the Company accounts for its non-equity method interests (including any acquired options and warrants) in loan originators initially at cost. The carrying value of these investments will be adjusted if it is determined that an impairment has occurred or if there has been a subsequent observable transaction in either the investee company’s equity securities or a similar security that provides evidence to support an adjustment to the carrying value. At September 30, 2019, approximately $1.1 billion of the Company’s Residential whole loans, at carrying value are serviced by entities in which the Company has an investment.

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 at September 30, 2019 and December 31, 2018:



		September 30, 2019				December 31, 2018
Derivative Instrument (1)	Designation	Notional Amount		Fair Value		Notional Amount		Fair Value
(In Thousands)
Swaps	Hedging	$	2,922,000	$	—	$	2,622,000	$	—
Swaps	Non-Hedging	$	230,000	$	—	$	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 September 30, 2019 and December 31, 2018:



(In Thousands)	September 30, 2019		December 31, 2018
Agency MBS, at fair value	$	2,333	$	2,735
Restricted cash	23,395		30,068
Total assets pledged against Swaps	$	25,728	$	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 September 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 nine months ended September 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 September 30, 2019, the Company had Swaps with an aggregate notional amount of $3.2 billion and extended 18 months on average with a maximum term of approximately 50 months.

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



	September 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	1,630,000		2.27		2.06		—		—		—
Over 12 months to 24 months	800,000		1.73		2.12		1,630,000		2.27		2.50
Over 24 months to 36 months	500,000		2.73		2.13		800,000		2.57		2.64
Over 36 months to 48 months	182,000		2.83		2.09		—		—		—
Over 48 months to 60 months	40,000		3.11		2.27		417,000		2.88		2.63
Over 84 months	—		—		—		170,000		3.00		2.66
Total Swaps	$	3,152,000	2.25	%	2.09	%	$	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 nine months ended September 30, 2019 and 2018:



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in Thousands)	2019			2018			2019			2018
Interest (expense)/income attributable to Swaps	$	(322	)	$	(547	)	$	1,561		$	(4,187	)
Weighted average Swap rate paid	2.29		%	2.19		%	2.32		%	2.09		%
Weighted average Swap rate received	2.24		%	2.09		%	2.40		%	1.86		%

During the three and nine months ended September 30, 2019, the Company recorded net losses on Swaps not designated in hedging relationships of approximately $929,000 and $17.3 million, respectively, which included $3.7 million and $17.7 million of losses realized on the unwind of certain Swaps. During the three and nine months ended September 30, 2018, the Company recorded net gains on Swaps not designated in hedging relationships of $4.0 million and $4.4 million, respectively. 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 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 derivative hedging instruments:
Balance at beginning of period	$	(28,114	)	$	16,160	$	3,121		$	(11,424	)
Net (loss)/gain on Swaps	(233		)	5,390		(30,384		)	32,974
Amortization of de-designated hedging instruments, net	(685		)	—		(1,769		)	—
Balance at end of period	$	(29,032	)	$	21,550	$	(29,032	)	$	21,550