NOTE 3. MORTGAGE-BACKED SECURITIES (MBS)

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

December 31, 2019


					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS(1)		MBS		MBS
	(in thousands)
Amortized cost	$	864,452	$	2,590,775	$	3,455,227	$	613,576	$	4,068,803
Paydowns receivable(2)		9,727		—		9,727		—		9,727
Unrealized gains		19,487		27,256		46,743		34,188		80,931
Unrealized losses		(699)		(947)		(1,646)		(4,154)		(5,800)
Fair value	$	892,967	$	2,617,084	$	3,510,051	$	643,610	$	4,153,661


					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	$	473,935	$	296,890	$	47,248	$	193,303	$	2,443,851	$	3,455,227	$	613,576	$	4,068,803
Paydowns receivable(2)		8,328		1,399		—		—		—		9,727		—		9,727
Unrealized gains		10,279		202		978		1,274		34,010		46,743		34,188		80,931
Unrealized losses		(69)		(1,496)		—		—		(81)		(1,646)		(4,154)		(5,800)
Fair value	$	492,473	$	296,995	$	48,226	$	194,577	$	2,477,780	$	3,510,051	$	643,610	$	4,153,661

(1)

Included in the 30-year fixed-rate MBS are Trading Agency MBS. These have an amortized cost of $655.8 million, an unrealized gain of $1.1 million, and a fair value of $656.9 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 year ended December 31, 2019, we received proceeds of approximately $2.95 billion from the sales of Agency MBS and recognized gross realized losses on sales of approximately $21.7 million and gross realized gains of approximately $11.8 million. During the year ended December 31, 2018, we received proceeds of approximately $781 million from the sales of Agency MBS and recognized gross realized losses on sales of approximately $24.2 million and gross realized gains of approximately $0.6 million. During the year ended December 31, 2019, we had gross unrealized gains on trading investments of $17.0 million, compared to gross unrealized losses on trading investments of $4.9 million during the year ended December 31, 2018.

During the year ended December 31, 2019, we sold (including calls) approximately $30 million of Non-Agency MBS and recognized gross gains of approximately $310 thousand and gross losses of approximately $234 thousand. During the year ended December 31, 2018, we sold approximately $6 million of Non-Agency MBS and recognized gross gains of approximately $217 thousand and gross losses of approximately $42 thousand.

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 year ended December 31, 2019 and cumulatively at December 31, 2019 and December 31, 2018:


	Change During the
	Year Ended		At		At
	December 31,		December 31,		December 31,
	2019		2019		2018
	(in thousands)
Non-Agency MBS acquired with credit deterioration:
Contractually required principal	$	(82,298)	$	738,310	$	820,608
Contractual principal not expected to be collected (non-accretable yield)		14,701		(318,185)		(332,886)
Expected cash flows to be collected		(67,597)		420,125		487,722
Market yield adjustment		(6,267)		130,970		137,237
Unrealized gain, net		16,965		27,393		10,428
Fair value		(56,899)		578,488		635,387
Fair value of other Non-Agency MBS (without credit deterioration)		(94,694)		65,122		159,816
Total fair value of Non-Agency MBS	$	(151,593)	$	643,610	$	795,203

The following table presents the change for the years ended December 31, 2019 and December 31, 2018 of the components of the Company’s purchase discount on its Non-Agency MBS between the amount designated as the market yield adjustments and the non-accretable difference:



	For the Year Ended December 31,
	2019				2018
	Market Yield		Non-		Market Yield		Non-
	Adjustment		Accretable		Adjustment		Accretable
	(in thousands)
Balance at beginning of period	$	137,237	$	(332,886)	$	147,198	$	(332,480)
Accretion of discount		(5,948)		—		(6,633)		(100)
Purchases		—		—		(777)		(23,419)
Realized credit losses		—		16,401		—		22,018
Sales		(319)		408		1,413		—
Impairment charge		—		(2,108)		—		(2,869)
Transfer		—		—		(3,964)		3,964
Balance at end of period	$	130,970	$	(318,185)	$	137,237	$	(332,886)

The following table shows the gross unrealized losses and fair value of those individual securities in our MBS portfolio that have been in a continuous unrealized loss position at December 31, 2019 and December 31, 2018, aggregated by investment category and length of time:

December 31, 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	10	$	270,737	$	(419)	38	$	168,095	$	(1,227)	48	$	438,832	$	(1,646)
Non-Agency MBS	18	$	49,281	$	(1,507)	12	$	75,926	$	(2,647)	30	$	125,207	$	(4,154)

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 U.S. government or government-sponsored agencies. Since September 2008, the government-sponsored agencies have been in the conservatorship of the U.S. government. At December 31, 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 December 31, 2019.

The unrealized losses on our investments in Non-Agency MBS were caused by fluctuations in interest rates. We purchased the Non-Agency MBS primarily at a discount relative to their face value. During the year ended December 31, 2019, there were several bonds that were impaired for a total of approximately $2.1 million, as the cash flow projections were less favorable than previously forecasted. On the remainder of the Non-Agency MBS, at December 31, 2019, we did not expect to sell these 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 the 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 December 31, 2019.