Other Assets

3 Months Ended

Mar. 31, 2020

The following table presents the components of the Company’s Other assets at March 31, 2020 and December 31, 2019:



(In Thousands)	March 31, 2020		December 31, 2019
REO (1)	$	411,473	$	411,659
Receivable for unsettled MBS sales	392,597		—
Capital contributions made to loan origination partners	113,923		147,992
Other interest-earning assets	73,443		70,468
Interest receivable	65,977		70,986
Other MBS and loan related receivables	55,789		43,842
Other	58,437		39,304
Total Other Assets	$	1,171,639	$	784,251

(1)

Includes $39.5 million and $27.3 million of REO that is held-for-investment at March 31, 2020 and December 31, 2019, respectively.

(a) Real Estate Owned

At March 31, 2020, the Company had 1,622 REO properties with an aggregate carrying value of $411.5 million. At December 31, 2019, the Company had 1,652 REO properties with an aggregate carrying value of $411.7 million.

At March 31, 2020, $406.9 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 $98.2 million of residential whole loans held at carrying value and $514.4 million of residential whole loans held at fair value at March 31, 2020.

The following table presents the activity in the Company’s REO for the three months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
(In Thousands)	2020			2019
Balance at beginning of period	$	411,659		$	249,413
Adjustments to record at lower of cost or fair value	(4,750		)	(4,072		)
Transfer from residential whole loans (1)	50,693			65,160
Purchases and capital improvements, net	5,606			5,923
Disposals (2)	(51,735		)	(25,837		)
Balance at end of period	$	411,473		$	290,587

Number of properties	1,622			1,233


(1)	Includes net gain recorded on transfer of approximately $3.0 million and $4.6 million for the three months ended March 31, 2020 and 2019, respectively.

(2)

During the three months ended March 31, 2020 and 2019, the Company sold 249 and 137 REO properties for consideration of $54.8 million and $27.8 million, realizing net gains of approximately $3.1 million and $1.4 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 $75.0 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. Following an evaluation of the anticipated impact of the COVID-19 pandemic on economic conditions for the short to medium term, the Company recorded impairment charges of $58.1 million on investments in certain loan origination partners during the three months ended March 31, 2020, which was included in “Impairment and other losses on securities available-for-sale and other assets” on the consolidated statements of operations. At March 31, 2020, approximately $2.0 billion of the Company’s Residential whole loans, at carrying value were serviced by entities in which the Company has an investment.

The Company’s derivative instruments have generally been 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.

In response to the turmoil in the financial markets resulting from the COVID-19 pandemic experienced during the three months ended March 31, 2020 and given that management no longer considered these transactions to be effective hedges in the prevailing interest rate environment, the Company unwound all of its approximately $4.1 billion of Swap hedging transactions late in the first quarter in order to recover previously posted margin. At March 31, 2020, losses of $71.2 million on unwound Swaps previously designated as hedges for accounting purposes continue to be included in AOCI. As the underlying hedged financing transactions are still considered probable of occurring, these losses will be amortized to interest expense over the remaining lives of the associated Swaps, which averaged 20 months at March 31, 2020.

The following table presents the fair value of the Company’s derivative instruments at March 31, 2020 and December 31, 2019:



		March 31, 2020				December 31, 2019
Derivative Instrument (1)	Designation	Notional Amount		Fair Value		Notional Amount		Fair Value
(In Thousands)
Swaps	Hedging	$	—	$	—	$	2,942,000	$	—
Swaps	Non-Hedging	$	—	$	—	$	230,000	$	—

(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 March 31, 2020 and December 31, 2019:



(In Thousands)	March 31, 2020		December 31, 2019
Agency MBS, at fair value	$	—	$	2,241
Restricted cash	—		16,777
Total assets pledged against Swaps	$	—	$	19,018

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.

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 LIBOR, on the notional amount of the Swap. During the three months ended March 31, 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.

The following table presents information about the Company’s Swaps at March 31, 2020 and December 31, 2019:



	March 31, 2020						December 31, 2019
	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)
Over 3 months to 6 months	$	—	—	%	—	%	$	200,000	2.05	%	1.70	%
Over 6 months to 12 months	—		—		—		1,430,000		2.30		1.77
Over 12 months to 24 months	—		—		—		1,300,000		2.11		1.86
Over 24 months to 36 months	—		—		—		20,000		1.38		1.90
Over 36 months to 48 months	—		—		—		222,000		2.88		1.84
Total Swaps	$	—	—	%	—	%	$	3,172,000	2.24	%	1.81	%

(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 months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
(Dollars in Thousands)	2020			2019
Interest (expense)/income attributable to Swaps	$	(3,359	)	$	1,191
Weighted average Swap rate paid	2.09		%	2.31		%
Weighted average Swap rate received	1.65		%	2.49		%

During the three months ended March 31, 2020 and 2019, the Company recorded net losses on Swaps not designated in hedging relationships of approximately $4.3 million and $8.9 million, respectively, which included $9.4 million and $7.8 million of losses realized on 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 months ended March 31, 2020 and 2019:



	Three Months Ended March 31,
(In Thousands)	2020			2019
AOCI from derivative hedging instruments:
Balance at beginning of period	$	(22,675	)	$	3,121
Net loss on Swaps	(50,127		)	(10,445		)
Amortization of de-designated hedging instruments, net	1,594			(341		)
Balance at end of period	$	(71,208	)	$	(7,665	)

The estimated net amount of the existing losses that are reported in AOCI as of March 31, 2020 that are expected to be reclassified into earnings within the next 12 months is $44.5 million.