Mortgage Backed Securities

3 Months Ended

Mar. 31, 2020

Mortgage Backed Securities

Mortgage Backed Securities

NOTE 3. MORTGAGE-BACKED SECURITIES

On March 31, 2020, we designated our Non-Agency MBS as trading securities and they are carried at fair value. See the section about Non-Agency MBS under the caption of MBS in the Significant Accounting Policies section in Note 1.

The following tables summarize our Agency MBS and Non-Agency MBS at March 31, 2020 and December 31, 2019, which are carried at their fair value:

March 31, 2020

					Total		Non-Agency		Total
By Agency	Freddie Mac		Fannie Mae		Agency MBS		MBS		MBS
	(in thousands)
Amortized cost/carrying value	$	786,583	$	1,533,055	$	2,319,638	$	281,686	$	2,601,324
Paydowns receivable(1)		7,545		—		7,545		—		7,545
Unrealized gains		30,701		43,149		73,850		—		73,850
Unrealized losses		(294)		(479)		(773)		—		(773)
Fair value	$	824,535	$	1,575,725	$	2,400,260	$	281,686	$	2,681,946

					15-Year		20-Year		30-Year		Total		Non-Agency		Total
By Security Type	ARMs		Hybrids		Fixed-Rate		Fixed-Rate		Fixed-Rate		Agency MBS		MBS		MBS
		(in thousands)
Amortized cost/carrying value	$	415,332	$	281,396	$	43,910	$	185,095	$	1,393,905	$	2,319,638	$	281,686	$	2,601,324
Paydowns receivable(1)		6,111		1,434		—		—		—		7,545		—		7,545
Unrealized gains		3,654		2,883		1,624		6,324		59,365		73,850		—		73,850
Unrealized losses		(621)		(152)		—		—		—		(773)		—		(773)
Fair value	$	424,476	$	285,561	$	45,534	$	191,419	$	1,453,270	$	2,400,260	$	281,686	$	2,681,946

(1) 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 March 31, 2020, we sold approximately $1.0 billion of Agency MBS, including Agency MBS trading securities, and realized gross and net gains of approximately $9.7 million. During the three months ended March 31, 2019, we sold approximately $903.8 million of AFS Agency MBS and realized a gross gain of approximately $2.6 million and gross losses of approximately $8.8 million. During the three months ended March 31, 2020, we sold approximately $0.2 billion of AFS Non-Agency MBS and realized a gross and net loss of approximately $55.4 million. During the three months ended March 31, 2019, AFS Non-Agency MBS of approximately $20 million were called and we realized a gross gain of approximately $22 thousand.

During the three months ended March 31, 2020, we had unrealized losses on Agency MBS trading investments of approximately $1.1 million. During the three months ended March 31, 2019, we had unrealized gains on trading investments of approximately $14.9 million. During the three months ended March 31, 2020, we had unrealized losses on Non-Agency MBS trading investments of approximately $60 million. At March 31, 2019, our Non-Agency MBS were designated as available-for-sale securities, and at March 31, 2020, they were designated as trading securities. At March 31, 2020, the balance on unrealized loss on Trading Agency MBS was zero. At March 31, 2020, we changed the designation of our Non-Agency MBS from available-for-sale to trading securities. Unrealized changes in the fair value of these securities are recorded in earnings. At December 31, 2019, we had an unrealized gain in other comprehensive income of approximately $30 million. This was reclassified out of other comprehensive income at March 31, 2020 and the balance of approximately $60 million of the unrealized loss at that time on these securities was recognized through earnings.

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

											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	$	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 15-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.

The following tables show 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 March 31, 2020 and December 31, 2019, aggregated by investment category and length of time:

March 31, 2020

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

54

$

102,580

$

(582)

19

$

28,061

$

(191)

73

$

130,641

$

(773)

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)

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 March 31, 2020, we did not expect to sell the AFS MBS at a price less than the amortized cost basis of our investments. The decline in market value of the AFS MBS was attributable to changes in interest rates and not the credit quality of the AFS MBS in our portfolio. 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. The payments of principal and interest on these securities are guaranteed by Fannie Mae and Freddie Mac, which are under the conservatorship of the U.S. government. Accordingly, there is currently zero loss expectation on these securities, and no allowance for credit loss has been recorded.

Upon the adoption of CECL on January 1, 2020, we determined that 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. At March 31, 2020, we designated these securities as trading securities. See the section on Non-Agency MBS under the caption, “Mortgage-Backed Securities,” in Significant Accounting Policies in Note 1.