Investment Securities

As of December 31, 2014 and 2013, our investment portfolio consisted of $56.7 billion and $65.9 billion of agency MBS, respectively, and a $14.8 billion and $2.3 billion net long TBA position, at fair value, respectively.

Our TBA positions are reported at their net carrying value of $192 million and $(5) million as of December 31, 2014 and 2013, respectively, in derivative assets/(liabilities) on our accompanying consolidated balance sheets. The net carrying value of our TBA position represents the difference between the fair value of the underlying agency security in the TBA contract and the cost basis or the forward price to be paid or received for the underlying agency security. (See Note 5 for further details of our net TBA position as of December 31, 2014 and 2013.)

As of December 31, 2014 and 2013, the net unamortized premium balance on our agency MBS was $2.5 billion and $3.0 billion, respectively, including interest and principal-only strips.

The following tables summarize our investments in agency MBS as of December 31, 2014 and 2013 (dollars in millions):



	December 31, 2014
Agency MBS	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed rate	$	53,945	$	715	$	(187	)	$	54,473
Adjustable rate	659		19		—			678
CMO	1,172		24		(1		)	1,195
Interest-only and principal-only strips	372		33		(3		)	402
Total agency MBS	$	56,148	$	791	$	(191	)	$	56,748



	December 31, 2013
Agency MBS	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
Fixed rate	$	64,057	$	242	$	(1,338	)	$	62,961
Adjustable rate	1,223		15		(3		)	1,235
CMO	1,313		3		(8		)	1,308
Interest-only and principal-only strips	432		16		(11		)	437
Total agency MBS	$	67,025	$	276	$	(1,360	)	$	65,941



	December 31, 2014
Agency MBS	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Available-for-sale agency MBS:
Agency MBS, par	$	42,749		$	10,566		$	107		$	53,422
Unamortized discount	(37		)	(5		)	—			(42		)
Unamortized premium	1,880			514			2			2,396
Amortized cost	44,592			11,075			109			55,776
Gross unrealized gains	610			145			3			758
Gross unrealized losses	(127		)	(61		)	—			(188		)
Total available-for-sale agency MBS, at fair value	45,075			11,159			112			56,346
Agency MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ¹	348			24			—			372
Gross unrealized gains	30			3			—			33
Gross unrealized losses	(2		)	(1		)	—			(3		)
Total agency MBS remeasured at fair value through earnings	376			26			—			402
Total agency MBS, at fair value	$	45,451		$	11,185		$	112		$	56,748
Weighted average coupon as of December 31, 2014 ²	3.63		%	3.70		%	3.52		%	3.65		%
Weighted average yield as of December 31, 2014 ³	2.75		%	2.73		%	1.87		%	2.74		%
Weighted average yield for the year ended December 31, 2014 ³	2.62		%	2.64		%	1.66		%	2.63		%

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1.	The underlying unamortized principal balance ("UPB" or "par value") of our interest-only agency MBS strips was $1.2 billion and the weighted average contractual interest we are entitled to receive was 5.46% of this amount as of December 31, 2014. The par value of our principal-only agency MBS strips was $242 million as of December 31, 2014.


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 December 31, 2014.


3.	Incorporates a weighted average future constant prepayment rate assumption of 9% based on forward rates as of December 31, 2014.



	December 31, 2013
Agency MBS	Fannie Mae			Freddie Mac			Ginnie Mae			Total
Available-for-sale agency MBS:
Agency MBS, par	$	50,914		$	12,640		$	223		$	63,777
Unamortized discount	(25		)	(7		)	—			(32		)
Unamortized premium	2,210			631			7			2,848
Amortized cost	53,099			13,264			230			66,593
Gross unrealized gains	181			74			5			260
Gross unrealized losses	(991		)	(358		)	—			(1,349		)
Total available-for-sale agency MBS, at fair value	52,289			12,980			235			65,504
Agency MBS remeasured at fair value through earnings:
Interest-only and principal-only strips, amortized cost ¹	400			32			—			432
Gross unrealized gains	13			3			—			16
Gross unrealized losses	(9		)	(2		)	—			(11		)
Total agency MBS remeasured at fair value through earnings	404			33			—			437
Total agency MBS, at fair value	$	52,693		$	13,013		$	235		$	65,941
Weighted average coupon as of December 31, 2013 ²	3.53		%	3.78		%	3.56		%	3.58		%
Weighted average yield as of December 31, 2013 ³	2.66		%	2.87		%	1.66		%	2.70		%
Weighted average yield for the year ended December 31, 2013 ³	2.74		%	2.87		%	1.79		%	2.77		%

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1.	The underlying UPB of our interest-only agency MBS strips was $1.4 billion and the weighted average contractual interest we are entitled to receive was 5.50% of this amount as of December 31, 2013. The par value of our principal-only agency MBS strips was $271 million as of December 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 December 31, 2013.


3.	Incorporates a weighted average future constant prepayment rate assumption of 7% based on forward rates as of December 31, 2013.

The actual maturities of our agency MBS 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 December 31, 2014 and 2013, our weighted average expected constant prepayment rate ("CPR") over the remaining life of our aggregate agency MBS portfolio was 9% and 7%, 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 December 31, 2014 and 2013 according to their estimated weighted average life classification (dollars in millions):



	December 31, 2014						December 31, 2013
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
≤ 1 year	$	—	$	—	—%	—%	$	129	$	129	3.07%	2.53%
> 1 year and ≤ 3 years	289		280		4.08%	2.62%	498		491		4.08%	2.25%
> 3 years and ≤ 5 years	22,153		21,820		3.26%	2.40%	24,471		24,342		3.59%	2.57%
> 5 years and ≤10 years	33,271		33,055		3.73%	2.92%	38,522		39,635		3.39%	2.73%
> 10 years	633		621		3.28%	3.15%	1,884		1,996		3.66%	2.96%
Total	$	56,346	$	55,776	3.54%	2.72%	$	65,504	$	66,593	3.47%	2.68%

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1.	Excludes interest and principal-only strips.

The weighted average life of our interest-only strips was 6.0 and 6.3 years as of December 31, 2014 and 2013, respectively. The weighted average life of our principal-only strips was 8.1 and 8.6 years as of December 31, 2014 and 2013, 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 fiscal years 2014, 2013 and 2012 (in millions):



Agency Securities Classified as Available-for-Sale	Beginning Accumulated OCI Balance			Unrealized Gains and (Losses), Net		Reversal of Unrealized (Gains) and Losses, Net on Realization		Ending Accumulated OCI Balance
Fiscal year 2014	$	(1,087	)	1,708		(51	)	$	570
Fiscal year 2013	$	2,040		(4,535	)	1,408		$	(1,087	)
Fiscal year 2012	$	1,001		2,235		(1,196	)	$	2,040

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 December 31, 2014 and 2013 (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
December 31, 2014	$	778	$	(2	)	$	11,679	$	(186	)	$	12,457	$	(188	)
December 31, 2013	$	42,853	$	(1,248	)	$	1,586	$	(101	)	$	44,439	$	(1,349	)

As of the end of each respective reporting period, a decision had not been made 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 GSE guarantees, but are rather due to changes in interest rates and prepayment expectations. Accordingly, we did not recognize any OTTI charges on our investment securities for fiscal years 2014 and 2013. However, as we continue to actively manage our portfolio, we may recognize additional realized losses on our agency securities upon selecting specific securities to sell.

Gains and Losses

The following table is a summary of our net gain (loss) from the sale of agency securities classified as available-for-sale for fiscal years 2014, 2013 and 2012 (in millions):



	Fiscal Year
Agency Securities Classified as Available-for-Sale	2014			2013			2012
Agency MBS sold, at cost	$	(30,123	)	$	(81,516	)	$	(63,610	)
Proceeds from agency MBS sold ¹	30,174			80,108			64,806
Net gain (loss) on sale of agency MBS	$	51		$	(1,408	)	$	1,196

Gross gain on sale of agency MBS	$	172		$	217		$	1,209
Gross loss on sale of agency MBS	(121		)	(1,625		)	(13		)
Net gain (loss) on sale of agency MBS	$	51		$	(1,408	)	$	1,196

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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 fiscal years 2014 and 2012, we recognized a net unrealized gain of $32 million and $17 million, respectively, for the change in value of investments in interest and principal-only strips in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. For fiscal year 2013, we did not recognize a net unrealized gain or loss on our interest and principal-only securities. Over the same periods, we did not recognize any realized gains or losses on our interest or principal-only securities.

Securitizations and Variable Interest Entities

As of December 31, 2014 and 2013, we held investments in CMO trusts, which are 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.

In connection with our consolidated CMO trusts, we recognized agency securities with a total fair value of $1.3 billion and $1.5 billion as of December 31, 2014 and 2013, respectively, and debt, at fair value, of $761 million and $910 million, respectively, in our accompanying consolidated balance sheets. As of December 31, 2014 and 2013, the agency securities had an aggregate unpaid principal balance of $1.2 billion and $1.4 billion, respectively, and the debt had an aggregate unpaid principal balance of $742 million and $900 million, respectively. We re-measure our consolidated debt at fair value through earnings in gain (loss) on derivative instruments and other securities, net in our consolidated statements of comprehensive income. For fiscal years 2014, 2013 and 2012, we recognized a net loss of $10 million, a net gain of $39 million and a net loss of $28 million, respectively, associated with our consolidated debt. 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.

As of December 31, 2014 and 2013, the fair value of our CMO securities and interest and principal-only securities was $1.6 billion and $1.7 billion, respectively, excluding the consolidated CMO trusts discussed above, or $2.1 billion and $2.3 billion, respectively, including the net asset value of our consolidated CMO trusts. Our maximum exposure to loss related to our CMO securities and interest and principal-only securities, including our consolidated CMO trusts, was $274 million and $246 million as of December 31, 2014 and 2013, respectively.