Note 5 - Derivatives and Other Hedging Instruments

3 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Text Block]

5.  Derivatives and Other Hedging Instruments

The following table presents the fair value of derivative instruments designated as hedging instruments and their location in the Company’s condensed consolidated balance sheets at June 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

Derivatives Designated as Hedging Instruments	Balance Sheet Location	June 30, 2011		December 31, 2010
Interest Rate Swaps	Derivative Liabilities	$	678	$	1,087

The following table presents the impact of the Company’s derivative instruments on the Company’s accumulated other comprehensive income (loss) for the six months ended June 30, 2011 and 2010, respectively (dollar amounts in thousands):

	Six Months Ended June 30,
Derivatives Designated as Hedging Instruments	2011			2010
Accumulated other comprehensive income (loss) for derivative instruments:
Balance at beginning of the period	$	(1,087	)	$	(2,905	)
Unrealized gain on interest rate caps		—			306
Unrealized gain on interest rate swaps		409			555
Reclassification adjustment for net gains (losses) included in net income for hedges		—			—
Balance at the end of the period	$	(678	)	$	(2,044	)

The Company estimates that over the next 12 months, approximately $0.5 million of the net unrealized losses on the interest rate swaps will be reclassified from accumulated other comprehensive income (loss) into earnings.

The following table presents the fair value of derivative instruments held in our Midway Residential Mortgage Portfolio that were not designated as hedging instruments and their location in the Company’s condensed consolidated balance sheets at June 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands):

Derivative Not Designated as Hedging Instruments	Balance Sheet Location	June 30, 2011		December 31, 2010
TBA security	Derivative Asset	$	14,361	$	—
U.S. Treasury futures	Derivative Asset		86		—
Eurodollar futures	Derivative Liabilities		1,766		—
Call options	Derivative Asset		224		—

The use of TBAs exposes the Company to market value risk, as the market value of the securities that the Company is required to purchase pursuant to a TBA transaction may decline below the agreed-upon purchase price. Conversely, the market value of the securities that the Company is required to sell pursuant to a TBA transaction may increase above the agreed upon sale price.

The Eurodollar futures swap equivalents in our Midway Residential Mortgage Portfolio are accounted for at fair value with both realized and unrealized gains and losses included in other income (expense) in our condensed consolidated statements of operations. For the three and six months ended June 30, 2011, respectively, we recorded net realized losses of $0.2 million and net unrealized losses of $1.8 million in our Eurodollar futures contracts. The Eurodollar futures consist of 2,746 contracts with expiration dates ranging between September 2011 and June 2014 and have a fair market value derivative liability of $1.8 million.

The following table details the impact of the Company’s interest rate swaps and interest rate caps included in interest expense for the three and six months ended June 30, 2011 and 2010, respectively (dollar amounts in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011			2010
Interest Rate Caps:
Interest expense-investment securities     and loans held in securitization trusts	$	—	$	94		$	—		$	217
Interest expense-subordinated debentures		—		—			—			92
Interest Rate Swaps:
Interest expense-investment securities     and loans held in securitization trusts		223		662			503			1,387

Interest Rate Swaps and Eurodollar Futures Contracts - The Company is required to pledge assets under a bi-lateral margin arrangement, including either cash or Agency RMBS, as collateral for its interest rate swaps and Eurodollar futures contracts (“Swaps”), whose collateral requirements vary by counterparty and change over time based on the market value, notional amount, and remaining term of the Swap.  In the event the Company is unable to meet a margin call under one of its Swap agreements, thereby causing an event of default or triggering an early termination event under one of its Swap agreements, the counterparty to such agreement may have the option to terminate all of such counterparty’s outstanding Swap transactions with the Company. In addition, under this scenario, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by the Company pursuant to the applicable agreement.  The Company believes it was in compliance with all margin requirements under its Swap agreements as of June 30, 2011 and December 31, 2010.  The Company had $3.6 million and $1.2 million of restricted cash related to margin posted for Swaps as of June 30, 2011 and December 31, 2010, respectively.  The restricted cash held by third parties is included in receivables and other assets in the accompanying condensed consolidated balance sheets.

The use of Swaps exposes the Company to counterparty credit risks in the event of a default by a Swap counterparty. If a counterparty defaults under the applicable Swap agreement, the Company may be unable to collect payments to which it is entitled under its Swap agreements, and may have difficulty collecting the assets it pledged as collateral against such Swaps.  The Company currently has in place with all outstanding Swap counterparties bi-lateral margin agreements thereby requiring a party to post collateral to the Company for any valuation deficit.  This arrangement is intended to limit the Company’s exposure to losses in the event of a counterparty default.

The following table presents information about the Company’s interest rate swaps as of June 30, 2011 and December 31, 2010, respectively (dollar amounts in thousands): 

	June 30, 2011					December 31, 2010
Maturity (1)	Notional Amount		Weighted Average Fixed Pay Interest Rate			Notional Amount		Weighted Average Fixed Pay Interest Rate
Within 30 Days	$	740		3.03	%	$	24,080		2.99	%
Over 30 days to 3 months		1,720		3.03			2,110		3.03
Over 3 months to 6 months		3,140		3.02			2,280		3.03
Over 6 months to 12 months		15,570		3.02			5,600		3.03
Over 12 months to 24 months		9,190		2.93			16,380		3.01
Over 24 months to 36 months		—		—			8,380		2.93
Over 36 months to 48 months		—		—			—		—
Total	$	30,360		2.99	%	$	58,830		3.00	%

(1) The Company enters into scheduled amortizing interest rate swap transactions whereby the Company pays a fixed rate of interest and receives one month LIBOR.

Interest Rate Caps – Interest rate caps are designated by the Company as cash flow hedges against interest rate risk associated with the Company’s CDOs and the subordinated debentures. The interest rate caps associated with the CDOs are amortizing contractual schedules determined at origination. The Company had $0 and $76.0 million of notional interest rate caps outstanding as of June 30, 2011 and December 31, 2010, respectively.  These interest rate caps are utilized to cap the interest rate on the CDOs at a fixed-rate when one month LIBOR exceeds a predetermined rate.  The interest rate caps expired on April 25, 2011.