Credit Risk and Interest Rate Risk

The Company’s primary components of market risk are credit risk and interest rate risk. The Company is subject to interest rate risk in connection with its investments in Agency MBS and Non-Agency RMBS, residential mortgage loans, and borrowings under repurchase agreements. When the Company assumes interest rate risk, it attempts to minimize interest rate risk through asset selection, hedging and matching the income earned on mortgage assets with the cost of related liabilities. The Company attempts to minimize credit risk through due diligence and asset selection by purchasing loans underwritten to agreed-upon specifications of selected originators as well as on-going portfolio monitoring. The Company has established a whole loan target market including prime and subprime borrowers, Alt-A documentation, geographic diversification, owner-occupied property, and moderate loan-to-value ratios. These factors are considered to be important indicators of credit risk.

By using derivative instruments and repurchase agreements, the Company is exposed to counterparty credit risk if counterparties to the contracts do not perform as expected. If a counterparty fails to perform on a derivative hedging instrument, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset on its balance sheet to the extent that amount exceeds collateral obtained from the counterparty or, if in a net liability position, the extent to which collateral posted exceeds the liability to the counterparty. The amounts reported as a derivative asset/(liability) are derivative contracts in a gain/(loss) position, and to the extent subject to master netting arrangements, net of derivatives in a loss/(gain) position with the same counterparty and collateral received/(pledged). If the counterparty fails to perform on a repurchase agreement, the Company is exposed to a loss to the extent that the fair value of collateral pledged exceeds the liability to the counterparty. The Company attempts to minimize counterparty credit risk by evaluating and monitoring the counterparty’s credit, executing master netting arrangements and obtaining collateral, and executing contracts and agreements with multiple counterparties to reduce exposure to a single counterparty, where appropriate.

Our repurchase agreements and derivative transactions are governed by underlying agreements that provide for a right of setoff under master netting arrangements, including in the event of default or in the event of bankruptcy of either party to the transactions. We present our assets and liabilities subject to such arrangements on a net basis in our consolidated statements of financial condition. The following table presents information about our liabilities that are subject to such arrangements and can potentially be offset on our consolidated statements of financial condition as of March 31, 2017 and December 31, 2016.



	March 31, 2017
	(dollars in thousands)
	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Consolidated Statements of Financial Position			Net Amounts Offset in the Consolidated Statements of Financial Position			Gross Amounts Not Offset with Financial Assets (Liabilities) in the Consolidated Statements of Financial Position
										Financial Instruments		Cash Collateral (Received) Pledged ⁽¹⁾		Net Amount
Repurchase Agreements	$	(5,851,204	)	$	—		$	(5,851,204	)	$	7,270,615	$	4,849	$	1,424,260
Interest Rate Swaps - Gross Assets	18,944			(13,068		)	5,876			—		32,375		38,251
Interest Rate Swaps - Gross Liabilities	(13,068		)	13,068			—			—		—		—
Treasury Futures - Gross Assets	136			(136		)	—			—		5,254		5,254
Treasury Futures - Gross Liabilities	(919		)	919			—			—		—		—
Swaptions - Gross Assets	5,013			—			5,013			—		—		5,013
Swaptions - Gross Liabilities	(1,627		)	—			(1,627		)	341		—		(1,286		)
Other Derivative Assets	—			—			—			—		—		—
Total Liabilities	$	(5,842,725	)	$	783		$	(5,841,942	)	$	7,270,956	$	42,478	$	1,471,492

(1) Included in other assets



	December 31, 2016
	(dollars in thousands)
	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in the Consolidated Statements of Financial Position			Net Amounts Offset in the Consolidated Statements of Financial Position			Gross Amounts Not Offset with Financial Assets (Liabilities) in the Consolidated Statements of Financial Position
										Financial Instruments		Cash Collateral (Received) Pledged⁽¹⁾		Net Amount
Repurchase Agreements	$	(5,600,903	)	$	—		$	(5,600,903	)	$	7,033,866	$	2,545	$	1,435,508
Interest Rate Swaps - Gross Assets	14,435			(14,435		)	—			—		—		—
Interest Rate Swaps - Gross Liabilities	(14,875		)	14,875			—			—		39,627		39,627
Treasury Futures - Gross Assets	1,785			—			1,785			—		3,320		5,105
Treasury Futures - Gross Liabilities	—			—			—			—		—		—
Swaptions - Gross Assets	7,892			—			7,892			—		—		7,892
Swaptions - Gross Liabilities	(2,350		)	—			(2,350		)	10,341		—		7,991
Other Derivative Assets	—			—			—			—		—		—
Total Liabilities	$	(5,594,016	)	$	440		$	(5,593,576	)	$	7,044,207	$	45,492	$	1,496,123

(1) Included in other assets