INTEREST INCOME AND INTEREST EXPENSE

Net Interest Income

The Company recognizes coupon income, which is a component of interest income, based upon the outstanding principal amounts of the Residential Securities and their contractual terms. In addition, the Company amortizes or accretes premiums or discounts into interest income for its Agency mortgage-backed securities (other than multifamily securities), taking into account estimates of future principal prepayments in the calculation of the effective yield. The Company recalculates the effective yield as differences between anticipated and actual prepayments occur. Using third-party model and market information to project future cash flows and expected remaining lives of securities, the effective interest rate determined for each security is applied as if it had been in place from the date of the security’s acquisition. The amortized cost of the security is then adjusted to the amount that would have existed had the new effective yield been applied since the acquisition date, which results in a cumulative premium amortization adjustment in each period. The adjustment to amortized cost is offset with a charge or credit to interest income. Changes in interest rates and other market factors will impact prepayment speed projections and the amount of premium amortization recognized in any given period.

Premiums or discounts associated with the purchase of Agency interest-only securities, reverse mortgages and residential credit securities are amortized or accreted into interest income based upon current expected future cash flows with any adjustment to yield made on a prospective basis.

The following table summarizes the interest income recognition methodology for Residential Securities:



	Interest Income Methodology
Agency
Fixed-rate pass-through ⁽¹⁾	Effective yield ⁽³⁾
Adjustable-rate pass-through ⁽¹⁾	Effective yield ⁽³⁾
Multifamily ⁽¹⁾	Contractual Cash Flows
Collateralized Mortgage Obligation (“CMO”) ⁽¹⁾	Effective yield ⁽³⁾
Reverse mortgages ⁽²⁾	Prospective
Interest-only ⁽²⁾	Prospective
Residential Credit
CRT ⁽²⁾	Prospective
Alt-A ⁽²⁾	Prospective
Prime ⁽²⁾	Prospective
Subprime ⁽²⁾	Prospective
NPL/RPL ⁽²⁾	Prospective
Prime Jumbo ⁽²⁾	Prospective
Prime Jumbo interest-only ⁽²⁾	Prospective


⁽¹⁾	Changes in fair value are recognized in Other comprehensive income (loss) on the accompanying

Consolidated Statements of Comprehensive Income (Loss).


⁽²⁾	Changes in fair value are recognized in Net unrealized gains (losses) on instruments measured at fair

value through earnings on the accompanying Consolidated Statements of Comprehensive Income (Loss).


⁽³⁾	Effective yield is recalculated for differences between estimated and actual prepayments and the

amortized cost is adjusted as if the new effective yield had been applied since inception.

The following table presents the components of the Company’s interest income and interest expense for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended				Nine Months Ended
	September 30, 2018		September 30, 2017		September 30, 2018		September 30, 2017
Interest income:	(dollars in thousands)
Residential Securities	$	680,037	$	540,436	$	2,122,375	$	1,515,654
Residential mortgage loans	21,184		8,509		55,557		19,790
Commercial investment portfolio ⁽¹⁾	97,531		67,790		249,331		200,288
U.S. Treasury securities	160		—		160		—
Reverse repurchase agreements	17,684		5,815		45,466		11,971
Total interest income	816,596		622,550		2,472,889		1,747,703
Interest expense:
Repurchase agreements	445,535		237,669		1,177,384		607,910
Debt issued by securitization vehicles	29,391		16,072		63,244		42,899
Participation sold	—		—		—		195
Other	26,047		15,196		70,458		38,639
Total interest expense	500,973		268,937		1,311,086		689,643
Net interest income	315,623		353,613		$	1,161,803	$	1,058,060


⁽¹⁾	Includes commercial real estate debt and preferred equity, corporate debt and assets transferred or pledged to securitization vehicles.