Derivatives

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Note 8 - Derivatives

    We enter into derivative transactions to manage our interest rate risk and agency mortgage rate exposures. We have agreements with our derivative counterparties that provide for the posting of collateral based on the fair values of our derivatives. Through this margin process, either we or our counterparties may be required to pledge cash or securities as collateral. Collateral requirements vary by counterparty and change over time based on the fair value, notional amount and remaining term of the contracts. Certain contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

    Interest rate swap contracts are designed to lock in funding costs for repurchase agreements associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg. Basis swap contracts allow us to exchange one floating interest rate basis for another, thereby allowing us to diversify our floating rate basis exposures.

    TBA Agency Securities are forward contracts for the purchase (“long position”) or sale (“short position”) of Agency Securities at a predetermined price, face amount, issuer, coupon and stated maturity on an agreed-upon future date. The specific Agency Securities delivered into the contract upon the settlement date, published each month by the Securities Industry and Financial Markets Association, are not known at the time of the transaction. We may enter into TBA Agency Securities as a means of hedging against short-term changes in interest rates. We may also enter into TBA Agency Securities as a means of acquiring or disposing of Agency Securities and we may from time to time utilize TBA dollar roll transactions to finance Agency Security purchases. We estimate the fair value of TBA Agency Securities based on similar methods used to value our Agency Securities.

    We have netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by ISDA. We are also required to post or hold cash collateral based upon the net underlying market value of our open positions with the counterparty. A decline in the value of the open positions with the counterparty could result in the counterparties demanding additional collateral pledges or liquidation of some of the existing collateral to reduce borrowing levels. We manage this risk by maintaining an adequate balance of available cash and unpledged securities. An event of default or termination event under the standard ISDA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately. In addition, certain of our ISDAs contain a restriction that prohibits our leverage from exceeding twelve times our stockholders’ equity as well as termination events in the case of significant reductions in equity capital. During the year ended December 31, 2020, we received waivers from certain ISDA counterparties related to significant reductions in equity capital that would have otherwise caused a default or termination event.

    The following tables present information about the potential effects of netting our derivatives if we were to offset the assets and liabilities on the accompanying consolidated balance sheets. We currently present these financial instruments at their gross amounts and they are included in derivatives, at fair value on the accompanying consolidated balance sheets at December 31, 2020 and December 31, 2019.

			Gross Amounts Not Offset
Assets	Gross Amounts(1)		Financial Instruments		Cash Collateral		Total Net
December 31, 2020
Interest rate swap contracts	$	34,588	$	(866)	$	(27,773)	$	5,949
TBA Agency Securities	20,098		(351)		(13,942)		5,805
Totals	$	54,686	$	(1,217)	$	(41,715)	$	11,754
December 31, 2019
Interest rate swap contracts	$	23,659	$	(70,290)	$	83,066	$	36,435
TBA Agency Securities	1,092		(1,092)		—		—
Totals	$	24,751	$	(71,382)	$	83,066	$	36,435

(1)See Note 5, “Fair Value of Financial Instruments” for additional discussion.

			Gross Amounts Not Offset
Liabilities	Gross Amounts(1)		Financial Instruments		Cash Collateral		Total Net
December 31, 2020
Interest rate swap contracts	$	(866)	$	866	$	—	$	—
TBA Agency Securities	(351)		351		—		—
Totals	$	(1,217)	$	1,217	$	—	$	—
December 31, 2019
Interest rate swap contracts	$	(70,290)	$	70,290	$	—	$	—
TBA Agency Securities	(1,684)		1,092		377		(215)
Totals	$	(71,974)	$	71,382	$	377	$	(215)

(1)See Note 5, “Fair Value of Financial Instruments” for additional discussion.

    The following table represents the location and information regarding our derivatives which are included in Other Income (Loss) in the accompanying consolidated statements of operations for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.

		Income (Loss) Recognized
		For the Years Ended
Derivatives	Location on consolidated statements of operations	December 31, 2020		December 31, 2019		December 31, 2018
Interest rate swap contracts:
Realized gain (loss)	Realized loss on derivatives	$	(461,374)	$	(237,725)	$	2,655
Interest income	Realized loss on derivatives	30,076		187,899		124,714
Interest expense	Realized loss on derivatives	(46,069)		(162,529)		(124,241)
Changes in fair value	Unrealized gain (loss) on derivatives	81,287		(132,303)		43,755
		$	(396,080)	$	(344,658)	$	46,883
TBA Agency Securities:
Realized gain (loss)	Realized loss on derivatives	99,159		(1,641)		(50,625)
Changes in fair value	Unrealized gain (loss) on derivatives	12,768		(3,824)		5,561
		$	111,927	$	(5,465)	$	(45,064)
Totals		$	(284,153)	$	(350,123)	$	1,819

    The following tables present information about our derivatives at December 31, 2020 and December 31, 2019.

Interest Rate Swaps (1)	Notional Amount		Weighted Average Remaining Term (Months)	Weighted Average Rate
December 31, 2020
< 3 years	$	2,230,000	12	0.06	%
≥ 3 years and < 5 years	463,000		45	0.14	%
≥ 5 years and < 7 years	942,000		72	0.28	%
≥ 7 years	1,702,000		113	0.50	%
Total or Weighted Average (2)	$	5,337,000	58	0.24	%
December 31, 2019
< 3 years	$	2,750,000	19	1.66	%
≥ 3 years and < 5 years	2,850,000		47	1.84	%
≥ 5 years and < 7 years	1,200,000		83	1.86	%
≥ 7 years	1,175,000		118	1.54	%
Total or Weighted Average (3)	$	7,975,000	53	1.74	%

(1)Pay Fixed/Receive Variable

(2)Of this amount, $2,230,000 notional are SOFR based swaps, the last of which matures in 2023; and $3,107,000 notional are Fed Funds based swaps, the last of which matures in 2030.

(3)Of this amount, $1,025,000 notional are LIBOR based swaps, the last of which matures in 2023; $375,000 notional are SOFR based swaps, the last of which matures in 2024; and $6,575,000 notional are Fed Funds based swaps, the last of which matures in 2029.

TBA Agency Securities	Notional Amount		Cost Basis		Fair Value
December 31, 2020
15 Year Long
1.5%	$	200,000	$	204,758	$	205,781
2.0%	1,200,000		1,248,015		1,253,354
30 Year Long
2.0%	600,000		619,031		622,934
2.5%	800,000		838,047		841,314
3.5%	(200,000)		(211,055)		(211,406)
Total (1)	$	2,600,000	$	2,698,796	$	2,711,977
December 31, 2019
15 Year Long
3.0%	$	500,000	$	511,055	$	511,885
30 Year Long
2.5%	500,000		494,813		494,395
Total (2)	$	1,000,000	$	1,005,868	$	1,006,280

(1)$1,250,000 notional are forward settling.

(2)$1,000,000 notional are forward settling.