Mortgage-Backed Securities

6 Months Ended

Jun. 30, 2013

Mortgage-Backed Securities

Note 4 – Mortgage-Backed Securities

All of the Company’s MBS are classified as available-for-sale and, as such, are reported at fair value, which is determined by obtaining valuations from an independent source. If the fair value of a security is not available from a dealer or third-party pricing service, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including other pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At June 30, 2013 and December 31, 2012, all of the Company’s MBS values were based on values obtained from third-party pricing services. The following tables present certain information about the Company’s investment portfolio as of June 30, 2013 and December 31, 2012.

June 30, 2013

$ in thousands	Principal Balance		Unamortized Premium (Discount)			Amortized Cost		Unrealized Gain/ (Loss), net			Fair Value		Net Weighted Average Coupon (1)			Period- end Weighted Average Yield (2)			Quarterly Weighted Average Yield (3)
Agency RMBS:
15 year fixed-rate		1,838,463		95,923			1,934,386		22,062			1,956,448		4.03	%		2.23	%		2.17	%
30 year fixed-rate		10,181,259		674,996			10,856,255		(294,830	)		10,561,425		3.92	%		2.76	%		2.77	%
ARM		66,156		1,995			68,151		618			68,769		3.33	%		2.38	%		2.39	%
Hybrid ARM		425,550		9,778			435,328		4,842			440,170		3.15	%		2.40	%		2.41	%
Total Agency pass-through		12,511,428		782,692			13,294,120		(267,308	)		13,026,812		3.91	%		2.67	%		2.67	%
Agency-CMO(4)		1,549,436		(1,042,298	)		507,138		4,338			511,476		2.83	%		2.91	%		1.84	%
Non-Agency RMBS(5)		4,376,621		(629,749	)		3,746,872		3,556			3,750,428		3.85	%		3.71	%		4.54	%
CMBS(6)		4,536,954		(2,021,524	)		2,515,430		2,012			2,517,442		3.44	%		4.64	%		4.72	%
Total		22,974,439		(2,910,879	)		20,063,560		(257,402	)		19,806,158		3.73	%		3.12	%		3.25	%

(1) Net weighted average coupon (“WAC”) as of June 30, 2013 is presented net of servicing and other fees.

(2) Average yield is based on amortized costs as of June 30, 2013 and incorporates future prepayment and loss assumptions.

(3) Average yield is based on average amortized costs for the three months ended June 30, 2013 and incorporates future prepayment and loss assumptions.

(4) Included in the Agency-CMO are interest-only securities which represent 17.6% of the balance based on fair value.

(5) The non-Agency RMBS held by the Company is 62.1% variable rate, 34.2% fixed rate, and 3.7% floating rate based on fair value.

(6) Included in the CMBS are interest-only securities and commercial real estate mezzanine loan pass-through certificates which represent 8.5% and 1.9% of the balance based on fair value, respectively.

December 31, 2012

$ in thousands	Principal Balance		Unamortized Premium (Discount)			Amortized Cost		Unrealized Gain/ (Loss), net		Fair Value		Net Weighted Average Coupon  (1)			Period- end Weighted Average Yield (2)			Quarterly Weighted Average Yield (3)
Agency RMBS:
15 year fixed-rate		1,964,999		102,058			2,067,057		63,839		2,130,896		4.09	%		2.37	%		2.37	%
30 year fixed-rate		9,168,196		601,592			9,769,788		238,949		10,008,737		4.21	%		2.89	%		2.88	%
ARM		109,937		3,464			113,401		2,365		115,766		3.15	%		2.06	%		2.02	%
Hybrid ARM		556,790		13,493			570,283		16,885		587,168		3.19	%		2.18	%		2.22	%
Total Agency pass-through		11,799,922		720,607			12,520,529		322,038		12,842,567		4.13	%		2.77	%		2.75	%
Agency-CMO(4)		1,322,043		(819,530	)		502,513		1,926		504,439		2.89	%		2.35	%		1.51	%
Non-Agency RMBS(5)		3,339,683		(308,885	)		3,030,798		48,238		3,079,036		4.20	%		4.61	%		4.80	%
CMBS		1,868,928		24,070			1,892,998		151,523		2,044,521		5.27	%		4.96	%		4.82	%
Total		18,330,576		(383,738	)		17,946,838		523,725		18,470,563		4.17	%		3.30	%		3.27	%

(1) Net weighted average coupon as of December 31, 2012 (“WAC”) is presented net of servicing and other fees.

(2) Average yield based on amortized cost as of December 31, 2012 incorporates future prepayment and loss assumptions.

(3) Average yield based on average amortized cost for the three months ended December 31, 2012 incorporates future prepayment and loss assumptions.

(4) Included in Agency-CMO are interest-only securities which represent 14.1% of the balance based on fair value.

(5) The non-Agency RMBS held by the Company is 79.2% variable rate, 15.5% fixed rate, and 5.3% floating rate based on fair value.

The following table summarizes our non-Agency RMBS portfolio by asset type as of June 30, 2013 and December 31, 2012, respectively:

$ in thousands	June 30, 2013		% of Non-Agency			December 31, 2012		% of Non-Agency
Re-REMIC Senior		1,580,196		42.1	%		1,844,209		59.9	%
Prime		1,346,748		35.9	%		754,161		24.5	%
Alt-A		793,868		21.2	%		468,181		15.2	%
Subprime		29,616		0.8	%		12,485		0.4	%
Total Non-Agency		3,750,428		100.0	%		3,079,036		100.0	%

The following table summarizes certain characteristics of our senior Re-REMIC holdings as of June 30, 2013 and December 31, 2012:

	Percentage of Re-REMIC holdings at Fair  Value
Re-REMIC Subordination(1)	June 30, 2013			December 31, 2012
0-10		3.4	%		2.1	%
10-20		3.4	%		3.2	%
20-30		14.3	%		15.0	%
30-40		26.1	%		27.0	%
40-50		39.7	%		40.4	%
50-60		8.4	%		7.6	%
60-70		4.7	%		4.7	%
Total		100.0	%		100.0	%

(1) Subordination refers to the credit enhancement provided to the senior Re-REMIC tranche by the junior Re-REMIC tranche or tranches in a resecuritization. This figure reflects the percentage of the balance of the underlying security represented by the junior tranche or tranches at the time of resecuritization. Generally, principal losses on the underlying security in excess of the subordination amount would result in principal losses on the senior Re-REMIC tranche.

The components of the carrying value of the Company’s investment portfolio at June 30, 2013 and December 31, 2012 are presented below:

$ in thousands	June 30, 2013			December 31, 2012
Principal balance		22,974,439			18,330,576
Unamortized premium		866,592			788,716
Unamortized discount		(3,777,471	)		(1,172,454	)
Gross unrealized gains		277,273			563,093
Gross unrealized losses		(534,675	)		(39,368	)
Fair value		19,806,158			18,470,563

The following table summarizes certain characteristics of the Company’s investment portfolio, at fair value, according to estimated weighted average life classifications as of June 30, 2013 and December 31, 2012:

$ in thousands	June 30, 2013		December 31, 2012
Less than one year		82,496		70,044
Greater than one year and less than five years		5,496,854		13,146,577
Greater than or equal to five years		14,226,808		5,253,942
Total		19,806,158		18,470,563

The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS by length of time that such securities have been in a continuous unrealized loss position at June 30, 2013 and December 31, 2012, respectively:

June 30, 2013

	Less than 12 Months					12 Months or More					Total
$ in thousands	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Agency RMBS:
15 year fixed-rate		471,398		(5,069	)		12,035		(452	)		483,433		(5,521	)
30 year fixed-rate		7,456,237		(368,049	)		85,523		(1,010	)		7,541,760		(369,059	)
ARM		36,557		(227	)		—		—			36,557		(227	)
Hybrid ARM		190,714		(1,334	)		—		—			190,714		(1,334	)
Total Agency pass-through		8,154,906		(374,679	)		97,558		(1,462	)		8,252,464		(376,141	)
Agency-CMO		101,883		(7,584	)		10,277		(1,524	)		112,160		(9,108	)
Non-Agency RMBS		1,746,341		(57,858	)		397,715		(13,735	)		2,144,056		(71,593	)
CMBS		1,133,905		(77,833	)		—		—			1,133,905		(77,833	)
Total		11,137,035		(517,954	)		505,550		(16,721	)		11,642,585		(534,675	)

December 31, 2012

	Less than 12 Months					12 Months or More					Total
$ in thousands	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Agency RMBS:
15 year fixed-rate		31,269		(279	)		—		—			31,269		(279	)
30 year fixed-rate		1,763,113		(6,469	)		78,640		(832	)		1,841,753		(7,301	)
Total Agency pass-through		1,794,382		(6,748	)		78,640		(832	)		1,873,022		(7,580	)
Agency-CMO		31,719		(7,796	)		10,770		(2,812	)		42,489		(10,608	)
Non-Agency RMBS		516,744		(6,005	)		490,503		(12,895	)		1,007,247		(18,900	)
CMBS		187,349		(1,267	)		52,813		(1,013	)		240,162		(2,280	)
Total		2,530,194		(21,816	)		632,726		(17,552	)		3,162,920		(39,368	)

Gross unrealized losses on the Company’s Agency RMBS were $376.1 million at June 30, 2013. Due to the inherent credit quality of Agency RMBS, the Company determined that at June 30, 2013, any unrealized losses on its Agency RMBS portfolio are temporary.

Gross unrealized losses on the Company’s MBS-CMO, non-Agency RMBS, and CMBS were $158.5 million at June 30, 2013. The Company does not consider these unrealized losses to be credit related, but rather due to non-credit related factors such as interest rate spreads, prepayment speeds, and market fluctuations. These investment securities are included in the Company’s assessment for other-than-temporary impairment on at least a quarterly basis.

The following table presents the impact of the Company’s MBS on its accumulated other comprehensive income for the three and six months ended June 30, 2013 and 2012.

$ in thousands	Three Months ended June 30, 2013			Three Months ended June 30, 2012		Six Months ended June 30, 2013			Six Months ended June 30, 2012
Accumulated other comprehensive income from investment securities:
Unrealized gain on MBS at beginning of period		453,590			207,856		523,725			(1,217	)
Unrealized gain (loss) on MBS, net		(710,992	)		60,413		(781,127	)		269,486
Balance at the end of period		(257,402	)		268,269		(257,402	)		268,269

During the three months ended June 30, 2013 and 2012, the Company reclassified $39.4 million of net unrealized losses and $8.4 million of net unrealized gains, respectively from other comprehensive income into gain (loss) on sale of investments as a result of the Company selling certain investments.

During the six months ended June 30, 2013 and 2012, the Company reclassified $54.4 million of net unrealized losses and $11.6 million of net unrealized gains, respectively from other comprehensive income into gain on sale of investments as a result of the Company selling certain investments.

The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than-temporary.” In deciding whether a security is other-than-temporarily impaired, the Company considers several factors, including the nature of the investment, the severity and duration of the impairment, the cause of the impairment, and the Company’s intent that it is more likely than not that the Company can hold the security until recovery of its cost basis.

The Company did not have other-than-temporary impairments for the three and six months ended June 30, 2013 and 2012.

The following table presents components of interest income on the Company’s MBS portfolio for the three and six months ended June 30, 2013 and 2012.

For the three months ended June 30, 2013

$ in thousands	Coupon Interest		Net (Premium Amortization)/Discount Accretion			Interest Income
Agency		142,846		(46,956	)		95,890
Non-Agency		41,325		2,001			43,326
CMBS		35,670		(6,252	)		29,418
Other		102		—			102
Total		219,943		(51,207	)		168,736

For the six months ended June 30, 2013

			Net (Premium
	Coupon		Amortization)/Discount			Interest
$ in thousands	Interest		Accretion			Income
Agency		286,259		(92,069	)		194,190
Non-Agency		77,737		3,142			80,879
CMBS		62,320		(8,452	)		53,868
Other		143		—			143
Total		426,459		(97,379	)		329,080

For the three months ended June 30, 2012

				Net (Premium
	Coupon			Amortization)/Discount			Interest
$ in thousands	Interest			Accretion			Income
Agency		127,392			(35,741	)		91,651
Non-Agency		25,143			5,126			30,269
CMBS		17,005			100			17,105
Other		(21	)		—			(21	)
Total		169,519			(30,515	)		139,004

For the six months ended June 30, 2012

				Net (Premium
	Coupon			Amortization)/Discount			Interest
$ in thousands	Interest			Accretion			Income
Agency		249,706			(67,238	)		182,468
Non-Agency		53,426			11,054			64,480
CMBS		33,816			268			34,084
Other		(68	)		—			(68	)
Total		336,880			(55,916	)		280,964