RESIDENTIAL MORTGAGE INVESTMENTS

9 Months Ended

Sep. 30, 2020

NOTE 4 — RESIDENTIAL mortgage investments

Residential mortgage investments classified by collateral type and interest rate characteristics as of the indicated dates were as follows (dollars in thousands):

	Unpaid Principal Balance		Investment Premiums		Amortized Cost Basis		Carrying Amount (a)		Net WAC ^(b)			Average Yield (c)
September 30, 2020
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	56	$	–	$	56	$	56		6.50	%		6.26	%
ARMs		7,209,369		245,134		7,454,503		7,540,104		2.86			1.82
Ginnie Mae ARMs		700,552		19,621		720,173		733,029		3.48			2.14
		7,909,977		264,755		8,174,732		8,273,189		2.91			1.85
Residential mortgage loans:
Fixed-rate		89	–			89		89		4.84			5.08
ARMs		395		3		398		398		4.16			3.68
		484		3		487		487		4.28			3.92
Collateral for structured financings		819		14		833		833		7.94			7.50
	$	7,911,280	$	264,772	$	8,176,052	$	8,274,509		2.91			1.85
December 31, 2019
Agency Securities:
Fannie Mae/Freddie Mac:
Fixed-rate	$	83	$	–	$	83	$	83		6.50	%		6.34	%
ARMs		8,628,656		262,293		8,890,949		8,931,789		3.45			2.66
Ginnie Mae ARMs		2,214,447		69,884		2,284,331		2,288,758		3.53			2.71
		10,843,186		332,177		11,175,363		11,220,630		3.46			2.67
Residential mortgage loans:
Fixed-rate		106		1		107		107		4.84			2.07
ARMs		527		3		530		530		4.15			3.11
		633		4		637		637		4.26			2.94
Collateral for structured financings		900		15		915		915		7.99			7.51
	$	10,844,719	$	332,196	$	11,176,915	$	11,222,182		3.46			2.67

(a)	Includes unrealized gains and losses for residential mortgage investments classified as available-for-sale.

(b)

Net WAC, or weighted average coupon, is the weighted average interest rate of the mortgage loans underlying the indicated investments net of servicing and other fees as of the indicated balance sheet date. Net WAC is expressed as a percentage calculated on an annualized basis on the unpaid principal balances of the mortgage loans underlying these investments.

(c)

Average yield is presented for the quarter then ended and is based on the cash component of interest income expressed as a percentage calculated on an annualized basis on average amortized cost basis (the “cash yield”) less the effects of amortizing investment premiums. Investment premium amortization is determined using the interest method and incorporates actual and anticipated future mortgage prepayments.

Agency Securities are considered to have limited, if any, credit risk because the timely payment of principal and interest is guaranteed by Fannie Mae and Freddie Mac, which are federally chartered corporations, or Ginnie Mae, which is an agency of the federal government. Residential mortgage loans held by Capstead were originated prior to 1995 when the Company operated a mortgage conduit and the related credit risk is borne by the Company. Collateral for structured financings consists of private residential mortgage securities that are backed by loans obtained through this mortgage conduit and are pledged to secure repayment of related structured financings. Credit risk for these securities is borne by

the related bondholders. The maturity of Residential mortgage investments is directly affected by prepayments of principal on the underlying mortgage loans. Consequently, actual maturities will be significantly shorter than the portfolio’s weighted average contractual maturity of 292 months.

Fixed-rate investments consist of residential mortgage loans and Agency Securities backed by residential mortgage loans with fixed rates of interest. ARMs are adjustable-rate Agency Securities backed by residential mortgage loans that have coupon interest rates that adjust at least annually to more current interest rates or begin doing so after an initial fixed-rate period. After the initial fixed-rate period, if applicable, mortgage loans underlying ARM securities typically adjust either annually, semiannually, monthly, or over a rolling twelve month average, based on specified margins over an underlying market index, and are usually subject to periodic and lifetime limits, or caps, on the amount of such adjustments during any single interest rate adjustment period and over the contractual term of the underlying loans.

Capstead classifies its ARM investments based on average number of months until coupon reset (“months to roll”). Months to roll is an indicator of asset duration which is a measure of market price sensitivity to interest rate movements. A shorter duration generally indicates less interest rate risk. Current-reset ARM investments have months to roll of less than 18 months while longer-to-reset ARM investments have months to roll of 18 months or greater. As of September 30, 2020, the average months to roll for the Company’s $3.01 billion (amortized cost basis) in current-reset ARM investments was approximately six months while the average months to roll for the Company’s $5.17 billion (amortized cost basis) in longer-to-reset ARM investments was approximately 55 months.

In March 2020, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $2.56 billion recognizing no gross realized gains and gross realized losses totaling $67.8 million. In May 2019, the Company sold available-for-sale securities using the specific identification method for proceeds totaling $304.7 million recognizing gross realized gains of $405,000 and gross realized losses of $1.8 million.