NOTE 3. MORTGAGE-BACKED SECURITIES

The following tables summarize our Agency MBS and Non-Agency MBS at June 30, 2018 and December 31, 2017, which are carried at their fair value:

June 30, 2018


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS(1)		MBS		MBS
	(in thousands)
Amortized cost	$	1,452,764	$	2,422,478	$	3,875,242	$	750,616	$	4,625,858
Paydowns receivable(2)		16,474		—		16,474		28		16,502
Unrealized gains		4,463		15,608		20,071		33,006		53,077
Unrealized losses		(32,606)		(44,837)		(77,443)		(3,655)		(81,098)
Fair value	$	1,441,095	$	2,393,249	$	3,834,344	$	779,995	$	4,614,339


							20-Year and
					15-Year		30-Year		Total		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate(1)		Fixed-Rate		Agency MBS		MBS		MBS
		(in thousands)
Amortized cost	$	997,383	$	831,084	$	1,167,834	$	878,941	$	3,875,242	$	750,616	$	4,625,858
Paydowns receivable(2)		7,611		8,863		—		—		16,474		28		16,502
Unrealized gains		17,647		246		134		2,044		20,071		33,006		53,077
Unrealized losses		(1,217)		(21,399)		(35,902)		(18,925)		(77,443)		(3,655)		(81,098)
Fair value	$	1,021,424	$	818,794	$	1,132,066	$	862,060	$	3,834,344	$	779,995	$	4,614,339

(1)

Included in the 15-year fixed-rate MBS are Trading Agency MBS. These have an amortized cost of $656.1 million, an unrealized loss of $22.6 million, and a fair value of $633.5 million.

(2)

Paydowns receivable on Agency MBS are generated when the Company receives notice from Freddie Mac of prepayments but does not receive the actual cash with respect to such prepayments until the 15th day of the following month.

During the three months ended June 30, 2018, we did not sell any Agency MBS. During the six months ended June 30, 2018, we sold approximately $583.2 million of Agency MBS and realized gross losses of approximately $19.3 million. During the three months ended June 30, 2017, we sold approximately $27.5 million of Agency MBS and realized gross gains of approximately $176 thousand. During the six months ended June 30, 2017, we sold approximately $35.7 million of Agency MBS and realized gross gains of approximately $176 thousand and realized gross losses of approximately $68 thousand. During the three months ended June 20, 2018, we did not sell any Non-Agency MBS. During the six months ended June 20, 2018, we sold approximately $5.8 million of Non-Agency MBS and recognized gross losses of approximately $42 thousand. We did not sell any Non-Agency MBS during the three or six months ended June 30, 2017.

During the three months ended June 30, 2018, we had gross unrealized losses on trading investments of $2.7 million. During the six months ended June 30, 2018, we had gross unrealized losses on trading investments of $11.6 million. During the three months ended June 30, 2017, we had gross unrealized gains on trading investments of approximately $4.1 million. During the six months ended June 30, 2017, we had gross unrealized gains on trading investments of approximately $4.2 million.

December 31, 2017


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS(1)		MBS		MBS
	(in thousands)
Amortized cost	$	1,678,835	$	2,594,496	$	4,273,331	$	730,624	$	5,003,955
Paydowns receivable(2)		13,873		—		13,873		—		13,873
Unrealized gains		6,597		21,348		27,945		33,355		61,300
Unrealized losses		(18,205)		(18,147)		(36,352)		(3,154)		(39,506)
Fair value	$	1,681,100	$	2,597,697	$	4,278,797	$	760,825	$	5,039,622


							20-Year and		Total
					15-Year		30-Year		Agency		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate(1)		Fixed-Rate		MBS		MBS		MBS
		(in thousands)
Amortized cost	$	1,249,366	$	863,762	$	1,277,570	$	882,633	$	4,273,331	$	730,624	$	5,003,955
Paydowns receivable(2)		5,943		7,930		—		—		13,873		—		13,873
Unrealized gains		23,425		833		595		3,092		27,945		33,355		61,300
Unrealized losses		(1,871)		(12,845)		(16,338)		(5,298)		(36,352)		(3,154)		(39,506)
Fair value	$	1,276,863	$	859,680	$	1,261,827	$	880,427	$	4,278,797	$	760,825	$	5,039,622

(1)

Included in the 15-year fixed-rate MBS are Trading Agency MBS. These have an amortized cost of $909.2 million, an unrealized loss of $11 million, and a fair value of $898.2 million.

(2)

The following table presents information regarding the estimates of the contractually required principal payments, cash flows expected to be collected, and estimated fair value, of the Non-Agency MBS held at carrying value acquired by the Company for the three and six months ended June 30, 2018 and cumulatively at June 30, 2018 and December 31, 2017:


	Change During the		Change During the
	Three Months Ended		Six Months Ended		At		At
	June 30,		June 30,		June 30,		December 31,
	2018		2018		2018		2017
	(in thousands)
Non-Agency MBS acquired with credit deterioration:
Contractually required principal	$	(14,654)	$	(14,595)	$	783,752	$	798,347
Contractual principal not expected to be collected (non-accretable yield)		5,233		622		(331,858)		(332,480)
Expected cash flows to be collected		(9,421)		(13,973)		451,894		465,867
Market yield adjustment		(5,007)		(7,806)		139,392		147,198
Unrealized gain, net		(1,253)		32		28,557		28,525
Fair value		(15,681)		(21,747)		619,843		641,590
Fair value of other Non-Agency MBS (without credit deterioration)		17,135		40,917		160,152		119,235
Total fair value of Non-Agency MBS	$	1,454	$	19,170	$	779,995	$	760,825

The following table presents the change for the three and six months ended June 30, 2018 of the components of the Company’s purchase discount on the Non-Agency MBS acquired with credit deterioration between the amount designated as the market yield adjustment and the non-accretable difference:


	Three Months Ended				Six Months Ended
	June 30,					June 30,
	2018				2018
	Market Yield		Non-		Market Yield		Non-
	Adjustment		Accretable		Adjustment		Accretable
	(in thousands)
Balance at beginning of period	$	144,399	$	(337,091)	$	147,198	$	(332,480)
Accretion of discount		(1,783)		—		(3,602)		(100)
Purchases		(820)		(4)		(3,213)		(9,907)
Realized credit losses, net of recoveries		—		4,590		—		9,982
Sales		—		—		1,413		—
Impairment charge		—		(1,757)		—		(1,757)
Transfer		(2,404)		2,404		(2,404)		2,404
Other		—		—		—		—
Balance at end of period	$	139,392	$	(331,858)	$	139,392	$	(331,858)