Investment Securities

As of March 31, 2013, we had agency MBS at fair value of $76.3 billion, with a total cost basis of $75.1 billion. The net unamortized premium balance on our investment portfolio as of March 31, 2013 was $3.8 billion, including interest-only and principal-only strips. The following tables summarize our investments in agency MBS as of March 31, 2013 (dollars in millions):



	March 31, 2013
Agency MBS	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Available-for-sale agency MBS:
Agency MBS, par	$	50,510		$	20,228		$	218		$	70,956
Unamortized discount	(20		)	—			—			(20		)
Unamortized premium	2,691			939			9			3,639
Amortized cost	53,181			21,167			227			74,575
Gross unrealized gains	1,044			330			6			1,380
Gross unrealized losses	(116		)	(60		)	—			(176		)
Total available-for-sale agency MBS, at fair value	54,109			21,437			233			75,779
Agency MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ⁽¹⁾	463			50			—			513
Gross unrealized gains	24			1			—			25
Gross unrealized losses	(11		)	(11		)	—			(22		)
Total agency MBS remeasured at fair value through earnings	476			40			—			516
Total agency MBS, at fair value	$	54,585		$	21,477		$	233		$	76,295
Weighted average coupon as of March 31, 2013⁽²⁾	3.75		%	3.67		%	3.76		%	3.73		%
Weighted average yield as of March 31, 2013⁽³⁾	2.74		%	2.80		%	1.59		%	2.75		%
Weighted average yield for the three months ended March 31, 2013⁽³⁾	2.79		%	2.83		%	1.56		%	2.80		%

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1.	The underlying unamortized principal balance (“UPB” or “par value”) of our interest-only agency MBS strips was $1.5 billion and the weighted average contractual interest we are entitled to receive was 5.78% of this amount as of March 31, 2013. The par value of our principal-only agency MBS strips was $295 million as of March 31, 2013.


2.	The weighted average coupon includes the interest cash flows from our interest-only agency MBS strips taken together with the interest cash flows from our fixed-rate, adjustable-rate and CMO agency MBS as a percentage of the par value of our agency MBS (excluding the UPB of our interest-only securities) as of March 31, 2013.


3.	Incorporates a weighted average future constant prepayment rate assumption of 9% based on forward rates as of March 31, 2013.



	March 31, 2013
Agency MBS	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed-Rate	$	73,649	$	1,355	$	(176	)	$	74,828
Adjustable-Rate	773		21		—			794
CMO	153		4		—			157
Interest-only and principal-only strips	513		25		(22		)	516
Total agency MBS	$	75,088	$	1,405	$	(198	)	$	76,295

As of December 31, 2012, we had agency MBS at fair value of $85.2 billion, with a total cost basis of $83.2 billion. The net unamortized premium balance on our investment portfolio as of December 31, 2012 was $4.4 billion, including interest-only and principal-only strips. The following tables summarize our investments in agency MBS as of December 31, 2012 (dollars in millions):



	December 31, 2012
Agency MBS	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Available-for-sale agency MBS:
Agency MBS, par	$	58,912		$	19,336		$	238		$	78,486
Unamortized premium	3,208			948			10			4,166
Amortized cost	62,120			20,284			248			82,652
Gross unrealized gains	1,585			481			6			2,072
Gross unrealized losses	(18		)	(7		)	—			(25		)
Available-for-sale agency MBS, at fair value	63,687			20,758			254			84,699
Agency MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ⁽¹⁾	486			55			—			541
Gross unrealized gains	26			1			—			27
Gross unrealized losses	(9		)	(13		)	—			(22		)
Agency MBS remeasured at fair value through earnings	503			43			—			546
Total agency MBS, at fair value	$	64,190		$	20,801		$	254		$	85,245
Weighted average coupon as of December 31, 2012 ⁽²⁾	3.70		%	3.67		%	3.77		%	3.69		%
Weighted average yield as of December 31, 2012 ⁽³⁾	2.62		%	2.61		%	1.60		%	2.61		%
Weighted average yield for the year ended December 31, 2012 ⁽³⁾	2.83		%	2.83		%	1.63		%	2.82		%

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1.	The UPB of our interest-only securities was $1.7 billion and the weighted average contractual interest we are entitled to receive was 5.78% of this amount as of December 31, 2012. The par value of our principal-only agency MBS strips was $302 million as of December 31, 2012.


2.	The weighted average coupon includes the interest cash flows from our interest-only securities taken together with the interest cash flows from our fixed-rate, adjustable-rate and CMO securities as a percentage of the par value of our agency securities (excluding the UPB of our interest-only securities) as of December 31, 2012.


3.	Incorporates a weighted average future constant prepayment rate assumption of 11% based on forward rates as of December 31, 2012.



	December 31, 2012
Agency MBS	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed-Rate	$	81,617	$	2,043	$	(25	)	$	83,635
Adjustable-Rate	865		26		—			891
CMO	170		3		—			173
Interest-only strips	541		27		(22		)	546
Total agency MBS	$	83,193	$	2,099	$	(47	)	$	85,245

As of March 31, 2013 and December 31, 2012, we did not have investments in agency debenture securities.

The actual maturities of our agency MBS securities are generally shorter than the stated contractual maturities. Actual maturities are affected by the contractual lives of the underlying mortgages, periodic contractual principal payments and principal prepayments. As of March 31, 2013 and December 31, 2012, our weighted average expected constant prepayment rate (“CPR”) over the remaining life of our aggregate agency MBS portfolio was 9% and 11%, respectively. Our estimates differ materially for different types of securities and thus individual holdings have a wide range of projected CPRs. We estimate long-term prepayment assumptions for different securities using a third-party service and market data. The third-party service estimates prepayment speeds using models that incorporate the forward yield curve, current mortgage rates and mortgage rates of the outstanding loans, age and size of the outstanding loans, loan-to-value ratios, volatility and other factors. We review the prepayment speeds estimated by the third-party service and compare the results to market consensus prepayment speeds, if available. We also consider historical prepayment speeds and current market conditions to validate reasonableness. As market conditions may change rapidly, we may make adjustments for different securities based on our Manager's judgment. Various market participants could use materially different assumptions.

The following table summarizes our agency MBS classified as available-for-sale as of March 31, 2013 and December 31, 2012 according to their estimated weighted average life classification (dollars in millions):



	March 31, 2013								December 31, 2012
Estimated Weighted Average Life of Agency MBS Classified as Available-for-Sale ⁽¹⁾	Fair Value		Amortized Cost		Weighted Average Coupon		Weighted Average Yield		Fair Value		Amortized Cost		Weighted Average Coupon		Weighted Average Yield
≤ 3 years	279		272		4.54	%	3.01	%	1,119		1,108		4.18	%	2.14	%
> 3 years and ≤ 5 years	17,428		16,835		3.76	%	2.67	%	27,448		26,750		3.36	%	2.29	%
> 5 years and ≤10 years	49,750		49,132		3.68	%	2.76	%	54,054		52,735		3.69	%	2.75	%
> 10 years	8,322		8,336		2.96	%	2.65	%	2,078		2,059		3.44	%	2.65	%
Total	$	75,779	$	74,575	3.62	%	2.73	%	$	84,699	$	82,652	3.59	%	2.59	%

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1.	Excludes interest and principal-only strips.

The weighted average life of our interest-only strips was 6.0 and 5.7 years as of March 31, 2013 and December 31, 2012, respectively. The weighted average life of our principal-only strips was 7.0 and 6.4 years as of March 31, 2013 and December 31, 2012, respectively.

Our agency securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated OCI. The following table summarizes changes in accumulated OCI, a separate component of stockholders equity, for our available-for-sale securities for the three months ended March 31, 2013 and 2012 (in millions):



Agency Securities Classified as Available-for-Sale	Beginning Accumulated OCI Balance		Unrealized Gains and (Losses), Net		Reversal of Prior Period Unrealized (Gains) and Losses, Net on Realization		Ending Accumulated OCI Balance
Three months ended March 31, 2013	$	2,041	(863	)	26		$	1,204
Three months ended March 31, 2012	$	1,002	110		(216	)	$	896

The following table presents the gross unrealized loss and fair values of our available-for-sale agency securities by length of time that such securities have been in a continuous unrealized loss position as of March 31, 2013 and December 31, 2012 (in millions):



	Unrealized Loss Position For
	Less than 12 Months					12 Months or More					Total
Agency Securities Classified as Available-for-Sale	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
March 31, 2013	$	25,963	$	(174	)	$	84	$	(2	)	$	26,047	$	(176	)
December 31, 2012	$	8,430	$	(25	)	$	—	$	—		$	8,430	$	(25	)

As of March 31, 2013, we did not intend to sell any of these agency securities and we do not believe it is more likely than not we will be required to sell the agency securities before recovery of their amortized cost basis. The unrealized losses on these agency securities are not due to credit losses given the government-sponsored entity or government guarantees, but are rather due to changes in interest rates and prepayment expectations.

Gains and Losses

The following table is a summary of our net (loss) gain from the sale of agency MBS for the three months ended March 31, 2013 and 2012 (in millions):



	Three Months Ended
Agency MBS	March 31, 2013			March 31, 2012
Agency MBS sold, at cost	$	(20,328	)	$	(9,243	)
Proceeds from agency MBS sold ⁽¹⁾	20,302			9,459
Net (loss) gain on sale of agency MBS	$	(26	)	$	216

Gross gain on sale of agency MBS	$	87		$	220
Gross loss on sale of agency MBS	(113		)	(4		)
Net (loss) gain on sale of agency MBS	$	(26	)	$	216

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1.	Proceeds include cash received during the period, plus receivable for agency MBS sold during the period as of period end.

For the three months ended March 31, 2013 and 2012, we recognized an unrealized loss of $1 million and an unrealized gain of $1 million, respectively, in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income for the change in value of investments in interest-only and principal-only strips, net of prior period reversals. For the three months ended March 31, 2013 and 2012, there were no sales of interest-only or principal-only securities.

Pledged Assets

The following tables summarize our assets pledged as collateral under repurchase agreements, debt of consolidated VIEs, derivative agreements and prime broker agreements by type, including securities pledged related to securities sold but not yet settled, as of March 31, 2013 and December 31, 2012 (in millions):



	March 31, 2013
Assets Pledged	Repurchase Agreements		Debt of Consolidated VIEs		Derivative Agreements		Prime Broker Agreements		Total
Agency MBS - fair value	$	69,537	$	1,421	$	812	$	229	$	71,999
Accrued interest on pledged securities	196		4		2				202
Restricted cash	—		—		116		383		499
Total	$	69,733	$	1,425	$	930	$	612	$	72,700



	December 31, 2012
Assets Pledged	Repurchase Agreements		Debt of Consolidated VIEs		Derivative Agreements		Prime Broker Agreements		Total
Agency MBS - fair value	$	78,400	$	1,535	$	1,065	$	501	$	81,501
Accrued interest on pledged securities	217		5		3		1		226
Restricted cash	—		—		249		150		399
Total	$	78,617	$	1,540	$	1,317	$	652	$	82,126

The following table summarizes our securities pledged as collateral under repurchase agreements and debt of consolidated VIEs by remaining maturity, including securities pledged related to sold but not yet settled securities, as of March 31, 2013 and December 31, 2012 (in millions):



	March 31, 2013						December 31, 2012
Securities Pledged by Remaining Maturity of Repurchase Agreements and Debt of Consolidated VIEs	Fair Value of Pledged Securities		Amortized Cost of Pledged Securities		Accrued Interest on Pledged Securities		Fair Value of Pledged Securities		Amortized Cost of Pledged Securities		Accrued Interest on Pledged Securities
Agency MBS:
Less than 30 days	$	28,076	$	27,572	$	80	$	29,284	$	28,525	$	82
31 - 59 days	14,020		13,774		39		21,716		21,251		58
60 - 90 days	7,321		7,241		21		16,188		15,780		45
Greater than 90 days	21,541		21,220		60		12,747		12,447		37
Total agency MBS	$	70,958	$	69,807	$	200	$	79,935	$	78,003	$	222

As of March 31, 2013 and December 31, 2012, none of our repurchase agreement borrowings backed by agency MBS were due on demand or mature overnight.

Securitizations and Variable Interest Entities

As of March 31, 2013 and December 31, 2012, we held investments in CMO trusts, which are variable interest entities ("VIEs"). We have consolidated certain of these CMO trusts in our consolidated financial statements where we have determined we are the primary beneficiary of the trusts. All of our CMO securities are backed by fixed or adjustable-rate agency MBS. Fannie Mae or Freddie Mac guarantees the payment of interest and principal and acts as the trustee and administrator of their respective securitization trusts. Accordingly, we are not required to provide the beneficial interest holders of the CMO securities any financial or other support. Our maximum exposure to loss related to our involvement with CMO trusts is the fair value of the CMO securities and interest and principal-only securities held by us, less principal amounts guaranteed by Fannie Mae and Freddie Mac.

As of March 31, 2013 and December 31, 2012, the fair value of our CMO securities and interest and principal-only securities, excluding the consolidated CMO trusts discussed below, was $673 million and $719 million, respectively, or $1.2 billion and $1.3 billion, respectively, including the net asset value of our consolidated CMO trusts discussed below. Our maximum exposure to loss related to our CMO securities and interest and principal-only securities, including our consolidated CMO trust, was $316 million and $343 million as of March 31, 2013 and December 31, 2012, respectively.

In connection with the consolidated trusts, as of March 31, 2013 and December 31, 2012, we recognized agency securities with a total fair value of $1.4 billion and $1.5 billion, respectively, and debt, at fair value of $862 million and $937 million, respectively, in our accompanying consolidated balance sheets. As of March 31, 2013 and December 31, 2012, such agency securities had an aggregate unpaid principal balance of $1.3 billion and $1.4 billion, respectively, and such debt had an aggregate unpaid principal balance of $844 million and $908 million, respectively. During the three months ended March 31, 2013 and 2012, we recognized a net gain of $13 million and $0, respectively, from debt of consolidated VIEs re-measured at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statement of comprehensive income. Our involvement with the consolidated trusts is limited to the agency securities transferred by us upon the formation of the trusts and the CMO securities subsequently held by us. There are no arrangements that could require us to provide financial support to the trusts.