Investment Securities

12 Months Ended

Dec. 31, 2011

Investment Securities [Abstract]

Investment Securities

Note 5 — Investment Securities

As of December 31, 2011 and 2010, investment securities were comprised of the following.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
December 31, 2011
Securities classified as trading:
U.S. Treasury bonds	$	291,809	$	21,574	$	—		$	313,383
Securities classified as available-for-sale:
Non-agencies collateralized mortgage obligations	$	401,273	$	—	$	(36,017	)	$	365,256
U.S. government sponsored agencies		113,885		2,211		—			116,096
Total securities classified as available-for-sale	$	515,158	$	2,211	$	(36,017	)	$	481,352
December 31, 2010
Securities classified as trading:
U.S. Treasury bonds	$	160,289	$	486	$	—		$	160,775
Securities classified as available-for-sale:
Non-agencies collateralized mortgage obligations	$	510,167	$	1,979	$	(44,658	)	$	467,488
U.S. government sponsored agencies		7,211		526		—			7,737
Total securities classified as available-for-sale	$	517,378	$	2,505	$	(44,658	)	$	475,225

Trading

Securities classified as trading are comprised of AAA-rated U.S. Treasury bonds. U.S. Treasury bonds held in trading are distinguished from available-for-sale based upon the intent of the Company to use them as an economic offset against changes in the valuation of the MSR portfolio; however, these securities do not qualify as a hedge.

For U.S. Treasury bonds held, the Company recognized an unrealized gain of $21.1 million during the year ended December 31, 2011. For the year ended December 31, 2010, the Company recognized a gain of $76.5 million of which $3.9 million was unrealized gain on U.S. Treasury bonds held at December 31, 2010.

Available-for-sale

At December 31, 2011 and December 31, 2010, the Company had $481.4 million and $475.2 million, respectively, in securities classified as available-for-sale which were comprised of U.S. government sponsored agency and non-agency collateralized mortgage obligations (“CMOs”). Securities available-for-sale are carried at fair value, with unrealized gains and losses reported as a component of other comprehensive loss to the extent they are temporary in nature or “other-than-temporary impairments” (“OTTI”) as to non-credit related issues. If unrealized losses are, at any time, deemed to have arisen from OTTI, then the credit related portion is reported as an expense for that period.

The following table summarizes by duration the unrealized loss positions, at December 31, 2011 and 2010, on securities.

	Unrealized Loss Position with Duration 12 Months and Over							Unrealized Loss Position with Duration Under 12 Months
Type of Security	Fair Value		Number of Securities		Unrealized Loss			Fair Value		Number of Securities		Unrealized Loss
	(Dollars in thousands)
December 31, 2011
Collateralized mortgage obligations	$	318,843		10	$	(34,046	)	$	46,413		2	$	(1,971	)
December 31, 2010
Collateralized mortgage obligations	$	432,577		11	$	(44,658	)	$	—		—	$	—

The unrealized losses on securities available-for-sale of $36.0 million on non-agency CMOs at December 31, 2011. The unrealized losses on securities-available-for-sale were $44.7 million on $432.6 million of CMOs at December 31, 2010. These CMOs consist of interests in investment vehicles backed by residential mortgage loans.

Generally, an investment impairment analysis is performed every three months. Before an analysis is performed, the Company reviews the general market conditions for the specific type of underlying collateral each of the CMOs; in this case, the mortgage market in general has suffered from significant losses in value. With the assistance of third party experts as deemed necessary, the Company models the expected cash flows of the underlying mortgage assets using historical factors such as default rates, current delinquency rates and estimated factors such as prepayment speed, default speed and severity speed. Next, the cash flows are modeled through the appropriate waterfall for each CMO tranche owned; the level of credit support provided by subordinated tranches is included in the waterfall analysis. The resulting cash flow of principal and interest is then utilized by management to determine the amount of credit losses by security.

The credit losses on the portfolio reflect the economic conditions present in the U.S. over the course of the last several years and the forecasted effect of changes in such conditions, including changes in the forecasted level of home prices. This includes high mortgage defaults, declines in collateral values and changes in homeowner behavior, such as intentionally defaulting on a note due to a home value worth less than the outstanding debt on the home (so-called “strategic defaults”).

During the year ended December 31, 2011, $24.0 million of OTTI, primarily due to forecasted credit losses, on CMOs, were recognized on 11 securities that had losses prior to December 31, 2011. At December 31, 2011, the cumulative amount of OTTI due to credit losses totaled $59.4 million. During the year ended December 31, 2010, additional OTTI due to credit losses on 10 collateralized mortgage obligations with existing other-than-temporary impairment credit losses totaled $5.0 million. During the year ended December 31, 2009, additional OTTI due to credit losses on three investments with existing other-than temporary impairment credit losses totaled $6.6 million while an additional $14.1 million OTTI due to credit loss was recognized on eight securities that did not already have such losses. All OTTI due to credit losses were recognized in current operations.

At December 31, 2011, the Company had total OTTI of $59.4 million on 11 securities in the available-for-sale portfolio with $6.4 million in net gain recognized in other comprehensive income. At December 31, 2010, the Company had total OTTI of $40.0 million on 10 securities in the available-for-sale portfolio with $48.6 million in total net gain recognized in other comprehensive income. The impairment losses arising from credit related matters were reported in the Consolidated Statements of Operations. The following table shows the activity for OTTI credit loss.

	For the Years Ended
	2011			2010			2009
	(Dollars in thousands)
Balance, beginning of period	$	(40,045	)	$	(35,272	)	$	(14,525	)
Additions on securities with no prior OTTI		—			—			(14,140	)
Reduction of principal on CMOs		4,708			218			—
Additions on securities with previous OTTI recognized		(24,039	)		(4,991	)		(6,607	)
Balance, December 31,	$	(59,376	)	$	(40,045	)	$	(35,272	)

Gains (losses) on the sale of U.S. government sponsored agency mortgage-backed securities available-for-sale that are recently created with underlying mortgage products originated by the Bank are reported within net gain on loan sale. Securities in this category have typically remained in the portfolio less than 90 days before sale. During the year ended December 31, 2011, there were $13.9 million in sales of U.S. government sponsored agency securities with underlying mortgage products recently originated by the Bank, resulting in $0.1 million of net gain on loan sales. During the year ended December 31, 2010, sales of agency securities with underlying mortgage products recently originated by the Bank were $187.7 million, resulting in $1.2 million of net gain on loan sales compared with a $13.0 million net gain on $653.0 million of sales during the year ended December 31, 2009.

Gain (losses) on sales for all other available-for-sale securities types are reported in “net gain on securities available-for-sale” in the Consolidated Statements of Operations. During the year ended December 31, 2011, the Company had no sales of agency and non-agency securities, compared to the same period ended December 31, 2010 in which the Company sold $251.0 million in U.S. government sponsored agency and non-agency securities available-for-sale resulting in a net gain on sale of $6.7 million and a $8.6 million net gain on $164.0 million of sales during the same period ended December 31, 2009.

As of December 31, 2011 and 2010, the aggregate amount of available-for-sale securities from each of the following non-agency issuers was greater than 10 percent of the Company’s stockholders’ equity.

	December 31, 2011				December 31, 2010
Name of Issuer	Amortized Cost		Fair Market Value		Amortized Cost		Fair Market Value
	(Dollars in thousands)
Countrywide Home Loans	$	134,993	$	124,313	$	173,860	$	159,910
Flagstar Home Equity Loan Trust 2006-1		123,251		110,328		149,717		136,707
	$	258,244	$	234,641	$	323,577	$	296,617

The amortized cost and estimated fair value of securities, excluding trading securities, at December 31, 2011 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.

	Available-for-Sale
	Amortized Cost		Estimated Fair Value
	(Dollars in thousands)
Due in one year or less	$	—	$	—
Due after one year through five years		465		469
Due after five years through ten years		46,356		46,728
Due after ten years		468,337		434,155
Total	$	515,158	$	481,352