NOTE 3. MORTGAGE-BACKED SECURITIES (MBS)

The following tables summarize our Agency MBS and Non-Agency MBS at December 31, 2016 and December 31, 2015, which are carried at their fair value (in thousands):

December 31, 2016

By Agency	Ginnie Mae			Freddie Mac			Fannie Mae			Total Agency MBS			Non-Agency MBS			Total MBS

Amortized cost	$	8,601		$	1,709,839		$	2,164,171		$	3,882,611		$	639,703		$	4,522,314
Paydowns receivable⁽²⁾⁽³⁾		-			31,130			-			31,130			6			31,136
Unrealized gains		3			10,652			36,069			46,724			11,999			58,723
Unrealized losses		(130	)		(22,301	)		(12,841	)		(35,272	)		(10,462	)		(45,734	)
Fair value	$	8,474		$	1,729,320		$	2,187,399		$	3,925,193		$	641,246		$	4,566,439

By Security Type	ARMs			Hybrids			15-Year Fixed-Rate⁽¹⁾			20-Year and 30-Year Fixed-Rate			Total Agency MBS			Non-Agency MBS			Total MBS

Amortized cost	$	1,762,550		$	1,106,680		$	872,741		$	140,640		$	3,882,611		$	639,703		$	4,522,314
Paydowns receivable⁽²⁾⁽³⁾		16,164			14,966			-			-			31,130			6			31,136
Unrealized gains		40,066			1,096			1,142			4,420			46,724			11,999			58,723
Unrealized losses		(3,162	)		(12,156	)		(19,927	)		(27	)		(35,272	)		(10,462	)		(45,734	)
Fair value	$	1,815,618		$	1,110,586		$	853,956		$	145,033		$	3,925,193		$	641,246		$	4,566,439

(1)	Included in the fair value of the 15-year fixed-rate Agency MBS was approximately $483.2 million held as trading investments.

(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 15^th day of the following month.

(3)	Paydowns receivable on Non-Agency MBS represent when we receive notice of prepayments but do not receive the actual cash until the following month.

During the year ended December 31, 2016, we received proceeds of approximately $401 million from the sales of Agency MBS and recognized gross realized losses on sales of approximately $3.5 million and gross realized gains of approximately $1.4 million. During the year ended December 31, 2015, we received proceeds of approximately $720 million from the sales of Agency MBS and recognized gross realized losses on sales of approximately $7.5 million. During the year ended December 31, 2016, we had gross unrealized losses on trading investments of $13.8 million. We did not have any trading investments in 2015.

During the year ended December 31, 2016, we sold approximately $18.2 million of Non-Agency MBS and recognized a gross gain of approximately $137 thousand. During the year ended December 31, 2015, we sold approximately $27 million of Non-Agency MBS and recognized a loss of approximately $75 thousand.

December 31, 2015

By Agency	Ginnie Mae			Freddie Mac			Fannie Mae			Total Agency MBS			Non-Agency MBS			Total MBS

Amortized cost	$	10,118		$	1,976,155		$	2,858,659		$	4,844,932		$	679,584		$	5,524,516
Paydowns receivable⁽¹⁾⁽²⁾		-			24,707			-			24,707			112			24,819
Unrealized gains		3			12,922			48,480			61,405			7,895			69,300
Unrealized losses		(156	)		(23,689	)		(14,417	)		(38,262	)		(5,530	)		(43,792	)
Fair value	$	9,965		$	1,990,095		$	2,892,722		$	4,892,782		$	682,061		$	5,574,843

By Security Type	ARMs			Hybrids			15-Year Fixed-Rate			20-Year and 30-Year Fixed-Rate		Total Agency MBS			Non-Agency MBS			Total MBS

Amortized cost	$	2,086,487		$	1,926,775		$	653,246		$	178,424	$	4,844,932		$	679,584		$	5,524,516
Paydowns receivable⁽¹⁾⁽²⁾		7,760			16,947			-			-		24,707			112			24,819
Unrealized gains		49,866			2,812			1,920			6,807		61,405			7,895			69,300
Unrealized losses		(4,707	)		(25,347	)		(8,208	)		-		(38,262	)		(5,530	)		(43,792	)
Fair value	$	2,139,406		$	1,921,187		$	646,958		$	185,231	$	4,892,782		$	682,061		$	5,574,843

(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 15^th day of the following month.

(2)	Paydowns receivable on Non-Agency MBS represent when we receive notice of prepayments but do not receive the actual cash until the following month.

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, 2016 and cumulatively at December 31, 2016 and December 31, 2015:

	For the Year Ended			At			At
	December 31,			December 31,			December 31,
	2016			2016			2015
	(in thousands)
Non-Agency MBS acquired with credit deterioration:
Contractually required principal	$	(27,990	)	$	599,279		$	627,269
Contractual principal not expected to be collected (non-accretable yield)		(2,073	)		(223,291	)		(221,218	)
Expected cash flows to be collected		(30,063	)		375,988			406,051
Market yield adjustment		494			83,577			83,083
Unrealized (loss) gain, net		(1,850	)		3,600			5,450
Fair value		(31,419	)		463,165			494,584
Fair value of other Non-Agency MBS (without credit deterioration)		(9,396	)		178,081			187,477
Total fair value of Non-Agency MBS	$	(40,815	)	$	641,246		$	682,061

The following table presents the change for the years ended December 31, 2016 and December 31, 2015 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,
	2016						2015
	Market Yield Adjustment			Non- Accretable			Market Yield Adjustment			Non- Accretable
	(in thousands)
Balance at January 1, 2016	$	83,083		$	(221,218	)	$	(18,528	)	$	(18,123	)
Accretion of discount		(1,527	)		-			(1,022	)		-
Purchases		6,468			(28,072	)		99,416			(203,095	)
Realized credit losses, net of recoveries		-			23,188			-			-
Sales		(92	)		-			1,849			-
Impairment charge	-				(1,548	)	-			-
Other		(4,355	)		4,359			1,368			-
Balance at December 31, 2016	$	83,577		$	(223,291	)	$	83,083		$	(221,218	)