Investments In Securities And Interest Rate Swap And Cap Contracts

12 Months Ended

Dec. 31, 2011

Investments In Securities And Interest Rate Swap And Cap Contracts [Abstract]

Investments In Securities And Interest Rate Swap And Cap Contracts

4. INVESTMENTS IN SECURITIES AND INTEREST RATE SWAP AND CAP CONTRACTS

The Company's valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company's market assumptions. ASC 820 classifies these inputs into the following hierarchy:

Level 1 Inputs—Quoted prices for identical instruments in active markets.

Level 2 Inputs—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs—Instruments with primarily unobservable value drivers.

The following tables provide a summary of the Company's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2011 and 2010:

December 31, 2011


	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Agency RMBS	$	—	$	9,372,454	$	—	$	9,372,454
U.S. Treasury Bills		74,999		—		—		74,999
CLOs		—		—		18,675		18,675
Interest rate cap contracts		—		5,966		—		5,966

Total	$	74,999	$	9,378,420	$	18,675	$	9,472,094

Liabilities
Interest rate swap contracts	$	—	$	79,476	$	—	$	79,476

December 31, 2010


	Fair Value Measurements Using
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Agency RMBS	$	—	$	6,310,570	$	—	$	6,310,570
CLOs		—		—		20,478		20,478
Interest rate cap contracts		—		30,984		—		30,984
Interest rate swap contracts ^(a)		—		9,113		—		9,113

Total	$	—	$	6,350,667	$	20,478	$	6,371,145

Liabilities
Interest rate swap contracts^(a)	$	—	$	9,757	$	—	$	9,757

^(a) Subject to master netting arrangements

The table below presents a reconciliation of changes in assets classified as Level 3 in the Company's financial statements for the years ended December 31, 2011 and 2010. A discussion of the method of fair valuing these assets is included above in"Investment Valuation." Net unrealized appreciation (depreciation) on the assets is included in net unrealized appreciation (depreciation) on investments in the statement of operations.

Fair Value Reconciliation, Level 3

(in thousands)


	Year Ended December 31,
	2011			2010
CLOs
Beginning balance Level 3 assets	$	20,478		$	—
Change in net unrealized appreciation (depreciation)		4,062			—
Sales, at cost		(995	)		—
Cash payments recorded as a reduction of cost basis		(4,870	)		—
Transfers into Level 3		—			20,478

Ending balance Level 3 assets	$	18,675		$	20,478

The Agency RMBS portfolio consisted of Agency RMBS as follows:

December 31, 2011


	Par Value		Fair Value		Weighted Average
Asset Type	Par Value		Fair Value		Cost/Par		Fair Value/Par		MTR⁽¹⁾			Coupon			CPR⁽²⁾
	(in thousands)
10 Year Fixed Rate	$	272,115	$	284,948	$	103.96	$	104.72		N/A			3.50	%		13.6	%
15 Year Fixed Rate		4,763,965		5,010,121		102.53		105.17		N/A			3.79	%		17.8	%
20 Year Fixed Rate		551,766		585,103		102.32		106.04		N/A			4.14	%		28.1	%
30 Year Fixed Rate		239,747		259,123		103.09		108.08		N/A			5.00	%		26.3	%
Hybrid ARMs		3,098,024		3,233,159		102.31		104.36		64.0			3.29	%		20.3	%

Total/Weighted Average	$	8,925,617	$	9,372,454	$	102.50	$	105.01		64.0	⁽ ³ ⁾		3.66	%		19.5	%

December 31, 2010


	Par Value		Fair Value		Weighted Average
Asset Type	Par Value		Fair Value		Cost/Par		Fair Value/Par		MTR⁽¹⁾			Coupon			CPR⁽²⁾
	(in thousands)
15 Year Fixed Rate	$	3,549,194	$	3,622,862	$	102.16	$	102.08		N/A			3.87	%		23.1	%
20 Year Fixed Rate		647,360		660,237		102.38		101.99		N/A			4.14	%		6.9	%
30 Year Fixed Rate		223,047		238,549		105.60		106.95		N/A			5.55	%		28.2	%
Hybrid ARMs		1,737,307		1,788,922		102.70		102.97		63.2			3.43	%		18.4	%

Total/Weighted Average	$	6,156,908	$	6,310,570	$	102.46	$	102.50		63.2	⁽ ³ ⁾		3.83	%		18.9	%

⁽¹⁾

MTR, or "Months to Reset" is the number of months remaining before the fixed rate on a hybrid ARM becomes a variable rate. At the end of the fixed period, the variable rate will be determined by the margin and the pre-specified caps of the ARM. After the fixed period, 100% of the hybrid ARMS in the portfolio reset annually.

⁽²⁾

CPR, or "Constant Prepayment Rate," is a method of expressing the prepayment rate for a mortgage pool that assumes that a constant fraction of the remaining principal is prepaid each month or year. Specifically, the constant prepayment rate is an annualized version of the prior three month prepayment rate. Securities with no prepayment history are excluded from this calculation.

⁽ ³ ⁾

Weighted average months to reset of our Hybrid ARM portfolio.

As of December 31, 2011 and 2010, the Company's Agency RMBS were purchased at a net premium to their par value due to the average interest rates on these investments being higher than prevailing market rates. As of December 31, 2011 and 2010, approximately $223.5 million and $152.7 million, respectively, of unamortized premium was included in the cost basis of the securities.

Actual maturities of Agency RMBS are generally shorter than stated contractual maturities (which range up to 30 years), as they are affected by the contractual lives of the underlying mortgages, periodic payments and prepayments of principal. As of December 31, 2011 and 2010, the average final contractual maturity of the Company's Agency RMBS portfolio is in year 2031. Based on current estimates, the Agency RMBS will have a weighted average expected life of less than five years. Interest income on Agency RMBS for the years ended December 31, 2011, 2010 and 2009 was $228.8 million, $72.7 million and $44.0 million, respectively.

In order to mitigate its interest rate exposure, the Company enters into interest rate swap and cap contracts. The Company had the following interest rate swap and cap transactions during the years ended December 31, 2011 and 2010 (dollars in thousands):


Year Ended December 31, 2011
Trade Date	Transaction	Notional
February 2011	Opened	$	500,000
March 2011	Opened		250,000
May 2011	Terminated		(300,000	)
May 2011	Opened		600,000
October 2011	Terminated		(250,000	)
December 2011	Opened		250,000

Net Increase		$	1,050,000


Year Ended December 31, 2011
Trade Date	Transaction	Notional
February 2011	Opened	$	500,000
March 2011	Opened		250,000
May 2011	Terminated		(300,000	)
May 2011	Opened		600,000
October 2011	Terminated		(250,000	)
December 2011	Opened		250,000

Net Increase		$	1,050,000


Year Ended December 31, 2010
Trade Date	Transaction	Notional
April 2010	Terminated	$	(640,000	)
April 2010	Opened		400,000
May 2010	Opened		740,000
May 2010	Terminated		(400,000	)
June 2010	Opened		400,000
June 2010	Terminated		(100,000	)

July 2010	Opened		750,000

August 2010	Opened		200,000
August 2010	Terminated		(200,000	)
September 2010	Opened		500,000
October 2010	Terminated		(240,000	)
October 2010	Opened		540,000
November 2010	Opened		200,000
November 2010	Terminated		(200,000	)
December 2010	Opened		1,700,000

Net Increase		$	3,650,000

As of December 31, 2011 and 2010, the Company had net pledged Agency RMBS and U.S Treasury securities with a fair value of $127.9 million and $4.3 million, respectively, as collateral on interest rate swap and cap contracts. Below is a summary of our interest rate swap and cap contracts open as of December 31, 2011 and 2010 (dollars in thousands):


Derivatives not designated as hedging instruments under ASC 815^(a)
Interest Rate Swaps	Notional Amount		Fair Value			Statement of Assets and Liabilities Location
December 31, 2011	$	4,740,000	$	(79,476	)	Liabilities
December 31, 2010		2,140,000		9,113		Assets
December 31, 2010		1,550,000		(9,757	)	Liabilities

Interest Rate Caps	Notional Amount		Fair Value			Statement of Assets and Liabilities Location
December 31, 2011	$	700,000	$	5,966		Assets
December 31, 2010		700,000		30,984		Assets


		Amount of Gain or (Loss) Recognized in Income on Derivative
		Year Ended December 31,
Derivatives not designated as hedging Instruments under ASC 815^(a)	Location of Gain or (Loss) Recognized in Income on Derivative	2011			2010			2009
Interest rate swap and cap contracts	Net gain (loss) from interest rate swap and cap contracts	$	(160,402	)	$	(38,915	)	$	(9,718	)

^(a)	See note 2 for additional information on the Company's purpose for entering into interest rate swaps and caps and the decision not to designate them as hedging instruments.

Credit Risk

At December 31, 2011 and 2010, the Company continued to minimize its exposure to credit losses on its mortgage assets by purchasing Agency RMBS. The payment of principal and interest on Agency RMBS is guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the United States government. While it is hoped that the conservatorship will help stabilize Freddie Mac's and Fannie Mae's losses and overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac or Fannie Mae will be able to satisfy their guarantees of Agency RMBS.

On August 5, 2011 Standard & Poor's downgraded the U.S.'s credit rating to AA+ for the first time. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, the implied credit rating of Agency RMBS guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae were also downgraded to AA+. While this downgrade did not have a significant impact on the fair value of the Agency RMBS in the Company's portfolio, it has increased the uncertainty regarding the credit risk of Agency RMBS.

The Company's CLOs do not have the backing of Fannie Mae, Freddie Mac or Ginnie Mae. Payment of principal and interest is dependent on the performance of the underlying loans, which are subject to borrower default and possible losses.

- Definition

Tabular disclosure of the fair value measurement of assets and liabilities which includes [financial] instruments measured at fair value that are classified in stockholders' equity. Such assets and liabilities may be measured on a recurring or nonrecurring basis. The disclosures which may be required or desired include: (1) for assets and liabilities measured on a recurring basis, disclosure may include: (a) the fair value measurements at the reporting date; (b) the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3); (c) for fair value measurements using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (i) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (ii) purchases, sales, issuances, and settlements (net); (iii) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs); (d) the amount of the total gains or losses for the period in subparagraph (c) (i) above included in earnings (or changes in net assets) that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date and a description of where those unrealized gains or losses are reported in the statement of income (or activities); (e) the valuation technique(s) used to measure fair value and a discussion of changes in valuation techniques, if any, during the period and (2) for assets and liabilities that are measured at fair value on a nonrecurring basis (for example, impaired assets) disclosure may include, in addition to (a) above: (a) the reasons for the fair value measurements recorded; (b) the same as (b) above; (c) for fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs; and (d) the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods. Where the quoted price in an active market for the identical liability is not available, the Level 1 input is the quoted price of an identical liability when traded as an asset.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 3

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19279-110258

Reference 2: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 32

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 3: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 33

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 4: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 107

-Paragraph 10

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 5: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 5

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19296-110258

Reference 6: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 2

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19207-110258

Reference 7: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Statement of Financial Accounting Standard (FAS)

-Number 157

-Paragraph 6

-Footnote 4

-LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy.

Reference 8: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 820

-SubTopic 10

-Section 50

-Paragraph 1

-URI http://asc.fasb.org/extlink&oid=6925170&loc=d3e19190-110258

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