NOTE 3. MORTGAGE-BACKED SECURITIES

The following tables summarize our Agency MBS and Non-Agency MBS at September 30, 2019 and December 31, 2018, which are carried at their fair value:

September 30, 2019


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS		MBS		MBS
	(in thousands)
Amortized cost	$	1,224,120	$	1,822,424	$	3,046,544	$	652,196	$	3,698,740
Paydowns receivable(1)		15,126		—		15,126		—		15,126
Unrealized gains		21,400		27,128		48,528		37,879		86,407
Unrealized losses		(3,093)		(1,467)		(4,560)		(4,046)		(8,606)
Fair value	$	1,257,553	$	1,848,085	$	3,105,638	$	686,029	$	3,791,667


					15-Year		20-Year		30-Year		Total		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate		Fixed-Rate		Fixed-Rate(1)		Agency MBS		MBS		MBS
		(in thousands)
Amortized cost	$	575,161	$	412,913	$	51,454	$	202,245	$	1,804,771	$	3,046,544	$	652,196	$	3,698,740
Paydowns receivable(2)		10,196		4,930		—		—		—		15,126		—		15,126
Unrealized gains		9,570		1,044		935		1,592		35,387		48,528		37,879		86,407
Unrealized losses		(1,131)		(3,429)		—		—		—		(4,560)		(4,046)		(8,606)
Fair value	$	593,796	$	415,458	$	52,389	$	203,837	$	1,840,158	$	3,105,638	$	686,029	$	3,791,667

(1)

Included in the 30-year fixed-rate Agency MBS are trading investments. These have an amortized cost of $302.7 million and a fair value of $304.6 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 September 30, 2019, we sold approximately $59.6 million of Agency MBS and realized gross gains of approximately $448 thousand and gross losses of approximately $3 thousand. During the nine months ended September 30, 2019, we sold approximately $2.3 billion of Agency MBS and realized gross gains of approximately $8.1 million and gross losses of approximately $20.5 million. During the three months ended September 30, 2018, we sold approximately $35.3 million of Agency MBS and realized gross gains of approximately $0.6 million and gross losses of approximately $0.2 million. During the nine months ended September 30, 2018, we sold approximately $618.5 million of Agency MBS and realized gross gains of approximately $0.6 million and gross losses of approximately $19.5 million. During the three months ended September 30, 2019, we sold approximately $3.7 million of Non-Agency MBS and realized a gross and net loss of approximately $231 thousand. During the three months ended September 30, 2018, Non-Agency bonds of approximately $36.1 million were called and we realized a gross gain of approximately $0.2 million. During the nine months ended September 30, 2019, Non-Agency bonds of approximately $23.7 million were called or sold and we realized a gross gain of approximately $22 thousand and a gross loss of approximately $231 thousand. During the nine months ended September 30, 2018, we sold (including calls) approximately $41.9 million of Non-Agency MBS and realized gross gains of approximately $217 thousand and gross losses of approximately $42 thousand.

During the three months ended September 30, 2019, we had unrealized gains on trading investments of approximately $1.9 million. During the nine months ended September 30, 2019, we had unrealized gains on trading investments of approximately $17.8 million. During the three months ended September 30, 2018, we had gross unrealized losses on trading investments of approximately $3.0 million. During the nine months ended September 30, 2018, we had gross unrealized losses on trading investments of approximately $14.6 million.

December 31, 2018


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS(1)		MBS		MBS
	(in thousands)
Amortized cost	$	1,457,552	$	2,127,655	$	3,585,207	$	785,640	$	4,370,847
Paydowns receivable(2)		7,831		—		7,831		—		7,831
Unrealized gains		4,169		10,827		14,996		20,753		35,749
Unrealized losses		(25,155)		(34,160)		(59,315)		(11,190)		(70,505)
Fair value	$	1,444,397	$	2,104,322	$	3,548,719	$	795,203	$	4,343,922


											Total
					15-Year		20-Year		30-Year		Agency		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate(1)		Fixed-Rate		Fixed-Rate		MBS		MBS		MBS
		(in thousands)
Amortized cost	$	854,733	$	689,694	$	917,780	$	374,792	$	748,208	$	3,585,207	$	785,640	$	4,370,847
Paydowns receivable(2)		4,065		3,766		—		—		—		7,831		—		7,831
Unrealized gains		11,920		263		60		—		2,753		14,996		20,753		35,749
Unrealized losses		(1,250)		(15,786)		(25,389)		(8,290)		(8,600)		(59,315)		(11,190)		(70,505)
Fair value	$	869,468	$	677,937	$	892,451	$	366,502	$	742,361	$	3,548,719	$	795,203	$	4,343,922

(1)

Included in the 15-year fixed-rate MBS are Trading Agency MBS. These have an amortized cost of $496.7 million, an unrealized loss of $15.9 million, and a fair value of $480.8 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 nine months ended September 30, 2019 and cumulatively at September 30, 2019 and December 31, 2018:


	Change During the		Change During the
	Three Months Ended		Nine Months Ended	At		At
	September 30,		September 30,	September 30,		December 31,
	2019		2019	2019		2018
	(in thousands)
Non-Agency MBS acquired with credit deterioration:
Contractually required principal	$	(23,632)	(63,466)	$	757,142	$	820,608
Contractual principal not expected to be collected (non-accretable yield)		2,235	11,297		(321,589)		(332,886)
Expected cash flows to be collected		(21,397)	(52,169)		435,553		487,722
Market yield adjustment		(1,553)	(4,739)		132,498		137,237
Unrealized gain, net		5,476	20,842		31,270		10,428
Fair value		(17,474)	(36,066)		599,321		635,387
Fair value of other Non-Agency MBS (without credit deterioration)		(14,606)	(73,108)		86,708		159,816
Total fair value of Non-Agency MBS	$	(32,080)	(109,174)	$	686,029	$	795,203

The following table presents the change for the three and nine months ended September 30, 2019 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				Nine Months Ended
	September 30,					September 30,
	2019				2019
	Market Yield		Non-		Market Yield		Non-
	Adjustment		Accretable		Adjustment		Accretable
	(in thousands)
Balance at beginning of period	$	134,051	$	(323,824)	$	137,237	$	(332,886)
Accretion of discount		(1,234)		—		(4,420)		—
Purchases		—		—		—		—
Realized credit losses		—		2,972		—		12,640
Sales		(319)		408		(319)		408
Impairment charge		—		(1,145)		—		(1,751)
Transfer		—		—		—		—
Other		—		—		—		—
Balance at end of period	$	132,498	$	(321,589)	$	132,498	$	(321,589)

The following tables show the gross unrealized losses and fair value of those individual securities in our available-for-sale MBS portfolio that were in a continuous unrealized loss position at September 30, 2019 and December 31, 2018, aggregated by investment category and length of time:

September 30, 2019


	Less Than 12 Months					12 Months or More					Total
Description	Number					Number					Number
of	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
Securities	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
			(in thousands)					(in thousands)					(in thousands)
Agency MBS	4	$	27,716	$	(50)	64	$	386,835	$	(4,510)	68	$	414,551	$	(4,560)
Non-Agency MBS	10	$	41,092	$	(607)	10	$	67,689	$	(3,439)	20	$	108,781	$	(4,046)

December 31, 2018


	Less Than 12 Months					12 Months or More					Total
Description	Number					Number					Number
of	of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
Securities	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
			(in thousands)					(in thousands)					(in thousands)
Agency MBS	47	$	859,060	$	(6,484)	166	$	1,301,348	$	(36,937)	213	$	2,160,408	$	(43,421)
Non-Agency MBS	56	$	329,108	$	(5,886)	12	$	72,514	$	(5,304)	68	$	401,622	$	(11,190)

We do not consider those available-for-sale Agency MBS, or AFS MBS, that have been in a continuous loss position for 12 months or more to be other-than-temporarily impaired. The unrealized losses on our investments in AFS MBS were caused by fluctuations in interest rates. We purchased the AFS MBS primarily at a premium relative to their face value and the contractual cash flows of those investments are guaranteed by the GSEs. Since September 2008, the GSEs have been in the conservatorship of the U.S. government. At September 30, 2019, we did not expect to sell the AFS MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of the AFS MBS is attributable to changes in interest rates and not the credit quality of the AFS MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2019. At September 30, 2019, we had approximately $1.9 million in unrealized gains on Trading Agency MBS. At December 31, 2018, there was an aggregate of approximately $15.9 million in unrealized losses on Trading Agency MBS that was not included in the table above, as they were previously recognized on our consolidated statements of operations.

The unrealized losses on our investments in Non-Agency MBS were primarily caused by fluctuations in interest rates. We purchased the Non-Agency MBS primarily at a discount relative to their face value. During the three months ended September 30, 2019, five bonds were impaired for approximately $1.1 million. At September 30, 2019, we did not expect to sell the remaining Non-Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of these Non-Agency MBS is attributable to changes in interest rates and not the credit quality of these Non-Agency MBS in our portfolio, and because we did not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2019.