MBS and CRT Securities

9 Months Ended

Sep. 30, 2016

Investments, Debt and Equity Securities [Abstract]

MBS and CRT Securities

MBS and CRT Securities

Agency and Non-Agency MBS

The Company’s MBS are comprised of Agency MBS and Non-Agency MBS which include MBS issued prior to 2008 (“Legacy Non-Agency MBS”). These MBS are secured by:  (i) hybrid mortgages (“Hybrids”), which have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index; (ii) adjustable-rate mortgages (“ARMs”); (iii) mortgages that have interest rates that reset more frequently (collectively, “ARM-MBS”); and (iv) 15 year and longer-term fixed rate mortgages. In addition, the Company also holds MBS that are structured with a contractual coupon step-up feature where the coupon steps-up 300 basis points at 36 months from issuance or sooner (“3 Year Step-up securities”). The Company’s 3 Year Step-up securities are secured by re-performing and non-performing loans and the cash flows of the bond may not reflect the contractual cash flows of the underlying collateral. The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements, FHLB advances and Swaps.  (See Note 7)

Agency MBS: Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae.  The payment of principal and/or interest on Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. Government.  Since the third quarter of 2008, Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency, which significantly strengthened the backing for these government-sponsored entities.

Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs):  The Company’s Non-Agency MBS are secured by pools of residential mortgages which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation.  Credit risk associated with Non-Agency MBS is regularly assessed as new information regarding the underlying collateral becomes available and based on updated estimates of cash flows generated by the underlying collateral.

CRT Securities

CRT securities are debt obligations issued by Fannie Mae and Freddie Mac. While the coupon payments are paid by Fannie Mae or Freddie Mac on a monthly basis, the payment of principal is dependent on the performance of loans in a reference pool of MBS securitized by Fannie Mae or Freddie Mac. As principal on loans in the reference pool are paid, principal payments on the securities are made and the principal balances of the securities are reduced. Consequently, CRT securities mirror the payment and prepayment behavior of the mortgage loans in the reference pool. As an investor in a CRT security, the Company may incur a loss if certain defined credit events occur, including, for certain CRT securities, if the loans in the reference pool experience delinquencies exceeding specified thresholds. The Company assesses the credit risk associated with CRT securities by assessing the current and expected future performance of the associated reference pool. The Company pledges a significant portion of its CRT securities as collateral against its borrowings under repurchase agreements.  (See Note 7)

The following tables present certain information about the Company’s MBS and CRT securities at September 30, 2016 and December 31, 2015:

September 30, 2016

(In Thousands)	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and  OTTI (1)			Amortized Cost (2)		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain
Agency MBS:
Fannie Mae	$	3,084,420	$	115,925	$	(53	)	$	—		$	3,200,292	$	3,242,427	$	49,871	$	(7,736	)	$	42,135
Freddie Mac	736,602		28,298		—			—			766,664		771,016		6,649		(2,297		)	4,352
Ginnie Mae	7,800		140		—			—			7,940		8,092		152		—			152
Total Agency MBS	3,828,822		144,363		(53		)	—			3,974,896		4,021,535		56,672		(10,033		)	46,639
Non-Agency MBS:
Expected to Recover Par (3)(4)	2,799,010		63		(37,438		)	—			2,761,635		2,801,189		41,460		(1,906		)	39,554
Expected to Recover Less than Par (3)	3,493,180		—		(258,343		)	(714,958		)	2,519,879		3,107,626		590,709		(2,962		)	587,747
Total Non-Agency MBS (5)	6,292,190		63		(295,781		)	(714,958		)	5,281,514		5,908,815		632,169		(4,868		)	627,301
Total MBS	10,121,012		144,426		(295,834		)	(714,958		)	9,256,410		9,930,350		688,841		(14,901		)	673,940
CRT securities (6)	331,728		—		(3,806		)	—			327,922		347,640		19,718		—			19,718
Total MBS and CRT securities	$	10,452,740	$	144,426	$	(299,640	)	$	(714,958	)	$	9,584,332	$	10,277,990	$	708,559	$	(14,901	)	$	693,658

December 31, 2015

(In Thousands)	Principal/ Current Face		Purchase Premiums		Accretable Purchase Discounts			Discount Designated as Credit Reserve and  OTTI (1)			Amortized Cost (2)		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Agency MBS:
Fannie Mae	$	3,690,020	$	139,243	$	(59	)	$	—		$	3,829,204	$	3,865,485	$	62,111	$	(25,830	)	$	36,281
Freddie Mac	851,087		32,680		—			—			884,798		877,109		6,906		(14,595		)	(7,689		)
Ginnie Mae	9,296		164		—			—			9,460		9,650		190		—			190
Total Agency MBS	4,550,403		172,087		(59		)	—			4,723,462		4,752,244		69,207		(40,425		)	28,782
Non-Agency MBS:
Expected to Recover Par (3)(4)	2,906,878		73		(31,576		)	—			2,875,375		2,878,532		23,300		(20,143		)	3,157
Expected to Recover Less than Par (3)	4,054,615		—		(280,606		)	(787,541		)	2,986,468		3,542,285		564,031		(8,214		)	555,817
Total Non-Agency MBS (5)	6,961,493		73		(312,182		)	(787,541		)	5,861,843		6,420,817		587,331		(28,357		)	558,974
Total MBS	11,511,896		172,160		(312,241		)	(787,541		)	10,585,305		11,173,061		656,538		(68,782		)	587,756
CRT securities (6)	192,000		—		(5,689		)	—			186,311		183,582		418		(3,147		)	(2,729		)
Total MBS and CRT securities	$	11,703,896	$	172,160	$	(317,930	)	$	(787,541	)	$	10,771,616	$	11,356,643	$	656,956	$	(71,929	)	$	585,027

(1) Discount designated as Credit Reserve and amounts related to OTTI are generally not expected to be accreted into interest income.  Amounts disclosed at September 30, 2016 reflect Credit Reserve of $694.0 million and OTTI of $20.9 million.  Amounts disclosed at December 31, 2015 reflect Credit Reserve of $766.0 million and OTTI of $21.5 million.

(2) Includes principal payments receivable of $1.8 million and $1.0 million at September 30, 2016 and December 31, 2015, respectively, which are not included in the Principal/Current Face.

(3) Based on management’s current estimates of future principal cash flows expected to be received.

(4) At September 30, 2016 3Year Step-up securities had a $2.5 billion Principal/Current face, $2.5 billion amortized cost and $2.5 billion fair value. At December 31, 2015, 3Year Step-up securities had a $2.6 billion Principal/Current face, $2.6 billion amortized cost and $2.6 billion fair value.

(5) At September 30, 2016 and December 31, 2015, the Company expected to recover approximately 89% and 89%, respectively, of the then-current face amount of Non-Agency MBS.

(6) Amounts disclosed at September 30, 2016 includes CRT securities with a fair value of $214.6 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $10.9 million at September 30, 2016. Amounts disclosed at December 31, 2015 includes CRT securities with a fair value of $62.2 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $332,000, gross unrealized losses of approximately $555,000 and net unrealized losses of approximately $223,000 at December 31, 2015.

Unrealized Losses on MBS and CRT Securities

The following table presents information about the Company’s MBS and CRT securities that were in an unrealized loss position at September 30, 2016:

Unrealized Loss Position For:

	Less than 12 Months					12 Months or more					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses
(Dollars in Thousands)
Agency MBS:
Fannie Mae	$	362,752	$	1,335	75	$	911,163	$	6,401	137	$	1,273,915	$	7,736
Freddie Mac	135,315		185		12	267,233		2,112		65	402,548		2,297
Total Agency MBS	498,067		1,520		87	1,178,396		8,513		202	1,676,463		10,033
Non-Agency MBS:
Expected to Recover Par (1)	57,534		102		4	525,183		1,804		20	582,717		1,906
Expected to Recover Less than Par (1)	4,069		7		1	90,362		2,955		18	94,431		2,962
Total Non-Agency MBS	61,603		109		5	615,545		4,759		38	677,148		4,868
Total MBS	559,670		1,629		92	1,793,941		13,272		240	2,353,611		14,901
CRT securities	—		—		—	—		—		—	—		—
Total MBS and CRT securities	$	559,670	$	1,629	92	$	1,793,941	$	13,272	240	$	2,353,611	$	14,901

(1) Based on management’s current estimates of future principal cash flows expected to be received.  

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At September 30, 2016, the Company did not intend to sell any of its investments that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. 

Gross unrealized losses on the Company’s Agency MBS were $10.0 million at September 30, 2016.  Agency MBS are issued by Government Sponsored Entities (“GSEs”) and enjoy either the implicit or explicit backing of the full faith and credit of the U.S. Government. While the Company’s Agency MBS are not rated by any rating agency, they are currently perceived by market participants to be of high credit quality, with risk of default limited to the unlikely event that the U.S. Government would not continue to support the GSEs. Given the credit quality inherent in Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In assessing whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at its maturity, the Company considers for each impaired security, the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at September 30, 2016 any unrealized losses on its Agency MBS were temporary.

Gross unrealized losses on the Company’s Non-Agency MBS (including Non-Agency MBS transferred to consolidated VIEs) were $4.9 million at September 30, 2016. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI and does not believe that these unrealized losses are credit related, but are rather a reflection of current market yields and/or market place bid-ask spreads.  The Company has reviewed its Non-Agency MBS that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent bond performance and, where possible, expected future performance of the underlying collateral.

The Company recognized credit-related OTTI losses through earnings related to its Non-Agency MBS of $485,000 during three and nine months ended September 30, 2016 and $705,000 during the nine months ended September 30, 2015. The Company did not recognize any credit-related OTTI losses through earnings related to its MBS during the three months ended September 30, 2015.

Non-Agency MBS on which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes.  The Company’s estimate of cash flows for these Non-Agency MBS is based on its review of the underlying mortgage loans securing these MBS.  The Company considers information available about the structure of the securitization, including structural credit enhancement, if any, and the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, LTVs, geographic concentrations, as well as Rating Agency reports, general market assessments, and dialogue with market participants.  Changes in the Company’s evaluation of each of these factors impacts the cash flows expected to be collected at the OTTI assessment date. For Non-Agency MBS purchased at a discount to par that were assessed for and had no OTTI recorded this period, such cash flow estimates indicated that the amount of expected losses decreased compared to the previous OTTI assessment date. These positive cash flow changes are primarily driven by recent improvements in LTVs due to loan amortization and home price appreciation, which, in turn, positively impacts the Company’s estimates of default rates and loss severities for the underlying collateral. In addition, voluntary prepayments (i.e., loans that prepay in full with no loss) have generally trended higher for these MBS which also positively impacts the Company’s estimate of expected loss. Overall, the combination of higher voluntary prepayments and lower LTVs supports the Company’s assessment that such MBS are not other-than-temporarily impaired.

The following table presents the composition of OTTI charges recorded by the Company for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended   September 30,					Nine Months Ended   September 30,
(In Thousands)	2016			2015		2016			2015
Total OTTI losses	$	(1,255	)	$	—	$	(1,255	)	$	(525	)
OTTI recognized in/(reclassified from) OCI	770			—		770			(180		)
OTTI recognized in earnings	$	(485	)	$	—	$	(485	)	$	(705	)

The following table presents a roll-forward of the credit loss component of OTTI on the Company’s Non-Agency MBS for which a non-credit component of OTTI was previously recognized in OCI.  Changes in the credit loss component of OTTI are presented based upon whether the current period is the first time OTTI was recorded on a security or a subsequent OTTI charge was recorded.

(In Thousands)	Three Months Ended   September 30, 2016		Nine Months Ended   September 30, 2016
Credit loss component of OTTI at beginning of period	$	36,820	$	36,820
Additions for credit related OTTI not previously recognized	314		314
Subsequent additional credit related OTTI recorded	171		171
Credit loss component of OTTI at end of period	$	37,305	$	37,305

Purchase Discounts on Non-Agency MBS

The following tables present the changes in the components of the Company’s purchase discount on its Non-Agency MBS between purchase discount designated as Credit Reserve and OTTI and accretable purchase discount for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended   September 30, 2016						Three Months Ended   September 30, 2015
(In Thousands)	Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)			Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)
Balance at beginning of period	$	(724,198	)	$	(325,548	)	$	(847,017	)	$	(362,946	)
Accretion of discount	—			20,236			—			22,805
Realized credit losses	15,629			—			21,527			—
Purchases	(15,124		)	9,830			(455		)	113
Sales	2,398			6,523			3,676			11,193
Net impairment losses recognized in earnings	(485		)	—			—			—
Transfers/release of credit reserve	6,822			(6,822		)	6,872			(6,872		)
Balance at end of period	$	(714,958	)	$	(295,781	)	$	(815,397	)	$	(335,707	)

	Nine Months Ended   September 30, 2016						Nine Months Ended   September 30, 2015
(In Thousands)	Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)			Discount Designated as Credit Reserve and OTTI			Accretable Discount (1)
Balance at beginning of period	$	(787,541	)	$	(312,182	)	$	(900,557	)	$	(399,564	)
Cumulative effect adjustment on adoption of revised accounting standard for repurchase agreement financing	—			—			(15,543		)	1,832
Impact of RMBS Issuer settlement (2)	—			(52,881		)	—			—
Accretion of discount	—			61,153			—			71,700
Realized credit losses	49,408			—			62,377			—
Purchases	(25,999		)	13,210			(1,200		)	(4,012		)
Sales	16,281			28,297			5,573			28,995
Net impairment losses recognized in earnings	(485		)	—			(705		)	—
Transfers/release of credit reserve	33,378			(33,378		)	34,658			(34,658		)
Balance at end of period	$	(714,958	)	$	(295,781	)	$	(815,397	)	$	(335,707	)

(1)  Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.

(2) Includes the impact of approximately $61.8 million of cash proceeds (a one-time payment) received by the Company during the nine months ended September 30, 2016 in connection with the settlement of litigation related to certain Countrywide Residential Mortgage Backed Securitization Trusts.

Impact of AFS Securities on AOCI

The following table presents the impact of the Company’s AFS securities on its AOCI for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2016			2015			2016			2015
AOCI from AFS securities:
Unrealized gain on AFS securities at beginning of period	$	625,697		$	759,151		$	585,250		$	813,515
Unrealized (loss)/gain on Agency MBS, net	(6,941		)	(2,028		)	17,857			(14,393		)
Unrealized gain/(loss) on Non-Agency MBS, net	71,291			(42,011		)	106,906			(72,791		)
Cumulative effect adjustment on adoption of revised accounting standard for repurchase agreement financing	—			—			—			4,537
Reclassification adjustment for MBS sales included in net income	(6,829		)	(11,363		)	(26,795		)	(26,414		)
Reclassification adjustment for OTTI included in net income	(485		)	—			(485		)	(705		)
Change in AOCI from AFS securities	57,036			(55,402		)	97,483			(109,766		)
Balance at end of period	$	682,733		$	703,749		$	682,733		$	703,749

Sales of MBS

During the three and nine months ended September 30, 2016, the Company sold certain Non-Agency MBS for $13.2 million and $65.1 million, realizing gross gains of $7.1 million and $26.1 million, respectively.  During the three and nine months ended September 30, 2015, the Company sold certain Non-Agency MBS for $23.5 million and $50.7 million, realizing gross gains of $11.2 million and $25.2 million, respectively. The Company has no continuing involvement with any of the sold MBS.

 Interest Income on MBS and CRT Securities

The following table presents the components of interest income on the Company’s MBS and CRT securities for the three and nine months ended September 30, 2016 and 2015: 

	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2016			2015			2016			2015
Agency MBS
Coupon interest	$	29,283		$	35,154		$	92,263		$	113,543
Effective yield adjustment (1)	(10,326		)	(11,536		)	(27,717		)	(32,513		)
Interest income	$	18,957		$	23,618		$	64,546		$	81,030
Legacy Non-Agency MBS
Coupon interest	$	37,763		$	44,824		$	117,620		$	141,152
Effective yield adjustment (2)	20,055			21,955			59,270			69,816
Interest income	$	57,818		$	66,779		$	176,890		$	210,968
3 Year Step-up securities
Coupon interest	$	25,630		$	22,898		$	74,773		$	63,602
Effective yield adjustment (1)	190			753			1,892			1,662
Interest income	$	25,820		$	23,651		$	76,665		$	65,264
CRT securities
Coupon interest	$	3,562		$	1,432		$	8,725		$	4,000
Effective yield adjustment (2)	421			161			1,172			477
Interest income	$	3,983		$	1,593		$	9,897		$	4,477

(1)  Includes amortization of premium paid net of accretion of purchase discount.  For Agency MBS and 3 Year Step-up securities, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity.

(2)  The effective yield adjustment is the difference between the net income calculated using the net yield, which is based on management’s estimates of the amount and timing of future cash flows, less the current coupon yield.