Mortgage-Backed Securities

The Company classifies its Non-Agency RMBS as senior, senior IO, subordinated, or subordinated IO. The Company also invests in residential, commercial and IO Agency MBS. Senior interests in Non-Agency RMBS are considered to be entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, fair value and unrealized gain/losses of Company's MBS investments as of June 30, 2018 and December 31, 2017.



			June 30, 2018
			(dollars in thousands)
	Principal or Notional Value		Total Premium		Total Discount			Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	2,522,667	$	628	$	(1,180,560	)	$	1,342,735	$	2,063,786	$	721,524	$	(473	)	$	721,051
Senior, interest-only	5,282,885		302,960		—			302,960		252,324		26,074		(76,710		)	(50,636		)
Subordinated	365,499		9,842		(170,202		)	205,139		266,830		61,963		(272		)	61,691
Subordinated, interest-only	206,557		9,279		—			9,279		10,482		1,830		(627		)	1,203
Agency MBS
Residential	4,527,730		167,342		—			4,695,072		4,612,920		9,528		(91,680		)	(82,152		)
Commercial	2,300,891		52,422		(4,509		)	2,348,804		2,273,508		944		(76,240		)	(75,296		)
Interest-only	3,010,512		109,938		—			109,938		102,901		954		(7,991		)	(7,037		)
Total	$	18,216,741	$	652,411	$	(1,355,271	)	$	9,013,927	$	9,582,751	$	822,817	$	(253,993	)	$	568,824



			December 31, 2017
			(dollars in thousands)
	Principal or Notional Value		Total Premium		Total Discount			Amortized Cost		Fair Value		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gain/(Loss)
Non-Agency RMBS
Senior	$	2,733,926	$	540	$	(1,257,103	)	$	1,477,363	$	2,231,415	$	754,234	$	(182	)	$	754,052
Senior, interest-only	4,862,461		262,996		—			262,996		210,850		15,761		(67,907		)	(52,146		)
Subordinated	501,455		10,571		(177,206		)	334,820		401,225		66,704		(299		)	66,405
Subordinated, interest-only	201,378		7,369		—			7,369		7,826		902		(445		)	457
Agency MBS
Residential	2,227,128		123,245		—			2,350,373		2,322,180		5,706		(33,899		)	(28,193		)
Commercial	1,894,594		47,430		(4,685		)	1,937,339		1,938,281		17,041		(16,099		)	942
Interest-only	3,021,840		111,277		—			111,277		104,367		834		(7,744		)	(6,910		)
Total	$	15,442,782	$	563,428	$	(1,438,994	)	$	6,481,537	$	7,216,144	$	861,182	$	(126,575	)	$	734,607

The table below presents changes in accretable yield, or the excess of the security’s cash flows expected to be collected over the Company’s investment, solely as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.



	For the Quarters Ended						For the Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
	(dollars in thousands)						(dollars in thousands)
Balance at beginning of period	$	1,293,996		$	1,513,416		$	1,303,590		$	1,550,110
Purchases	5,734			1,969			5,734			10,185
Yield income earned	(57,786		)	(67,750		)	(117,517		)	(136,577		)
Reclassification (to) from non-accretable difference	31,471			(62,059		)	81,496			(38,107		)
Sales and deconsolidation	(6,775		)	(2,388		)	(6,663		)	(2,423		)
Balance at end of period	$	1,266,640		$	1,383,188		$	1,266,640		$	1,383,188

The table below presents the outstanding principal balance and related amortized cost at June 30, 2018 and December 31, 2017 as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.



	For the Six Months Ended		For the Year Ended
	June 30, 2018		December 31, 2017
	(dollars in thousands)
Outstanding principal balance:
Beginning of period	$	2,673,350	$	3,138,265
End of period	$	2,476,421	$	2,673,350
Amortized cost:
Beginning of period	$	1,381,839	$	1,695,079
End of period	$	1,249,140	$	1,381,839

The following tables present the gross unrealized losses and estimated fair value of the Company’s RMBS by length of time that such securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017. All securities in an unrealized loss position have been evaluated by the Company for OTTI as discussed in Note 2(d) of 2017, Form 10-K.



						June 30, 2018
						(dollars in thousands)
	Unrealized Loss Position for Less than 12 Months						Unrealized Loss Position for 12 Months or More						Total
	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities
Non-Agency RMBS
Senior	$	43,709	$	(473	)	3	$	—	$	—		—	$	43,709	$	(473	)	3
Senior, interest-only	25,400		(4,391		)	31	103,442		(72,319		)	104	128,842		(76,710		)	135
Subordinated	1,016		(272		)	5	—		—			6	1,016		(272		)	11
Subordinated, interest-only	112		(18		)	1	704		(609		)	3	816		(627		)	4
Agency MBS
Residential	1,618,829		(23,966		)	36	1,318,668		(67,714		)	94	2,937,497		(91,680		)	130
Commercial	1,713,531		(60,698		)	506	321,813		(15,542		)	114	2,035,344		(76,240		)	620
Interest-only	12,375		(689		)	7	48,211		(7,302		)	20	60,586		(7,991		)	27
Total	$	3,414,972	$	(90,507	)	589	$	1,792,838	$	(163,486	)	341	$	5,207,810	$	(253,993	)	930



						December 31, 2017
						(dollars in thousands)
	Unrealized Loss Position for Less than 12 Months						Unrealized Loss Position for 12 Months or More						Total
	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities	Estimated Fair Value		Unrealized Losses			Number of Securities
Non-Agency RMBS
Senior	$	35,229	$	(182	)	1	$	—	$	—		—	$	35,229	$	(182	)	1
Senior, interest-only	28,129		(1,724		)	27	120,120		(66,183		)	120	148,249		(67,907		)	147
Subordinated	235		(38		)	7	6,261		(261		)	5	6,496		(299		)	12
Subordinated, interest-only	—		—			—	945		(445		)	3	945		(445		)	3
Agency MBS
Residential	660,103		(5,197		)	21	1,471,464		(28,702		)	93	2,131,567		(33,899		)	114
Commercial	830,889		(11,695		)	176	161,980		(4,404		)	91	992,869		(16,099		)	267
Interest-only	15,142		(641		)	7	57,875		(7,103		)	24	73,017		(7,744		)	31
Total	$	1,569,727	$	(19,477	)	239	$	1,818,645	$	(107,098	)	336	$	3,388,372	$	(126,575	)	575

At June 30, 2018, the Company did not intend to sell any of its RMBS that were in an unrealized loss position, and it was not more likely than not that the Company would be required to sell these RMBS before recovery of their amortized cost basis, which may be at their maturity. With respect to RMBS held by consolidated VIEs, the ability of any entity to cause the sale by the VIE prior to the maturity of these RMBS is either expressly prohibited, not probable, or is limited to specified events of default, none of which have occurred as of June 30, 2018.

Gross unrealized losses on the Company’s Agency residential and commercial MBS (excluding Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $111 million and $41 million as of June 30, 2018 and December 31, 2017, respectively. Given the inherent credit quality of Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In evaluating 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 their maturity, the Company considers 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 June 30, 2018 and December 31, 2017, unrealized losses on its Agency MBS were temporary.

Gross unrealized losses on the Company’s Non-Agency RMBS (excluding Non-Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $745 thousand and $283 thousand at June 30, 2018 and December 31, 2017, respectively. 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 rather are due to other factors. The Company has reviewed its Non-Agency RMBS 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 cash flows expected to be collected for such RMBS, which considers recent bond performance and expected future performance of the underlying collateral.

A summary of the OTTI included in earnings for the quarters and six months ended June 30, 2018 and 2017 are presented below.



	For the Quarter Ended						For the Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
	(dollars in thousands)						(dollars in thousands)
Total other-than-temporary impairment losses	$	(805	)	$	(749	)	$	(1,099	)	$	(3,462	)
Portion of loss recognized in other comprehensive income (loss)	(8,326		)	(12,760		)	(9,190		)	(28,748		)
Net other-than-temporary credit impairment losses	$	(9,131	)	$	(13,509	)	$	(10,289	)	$	(32,210	)

The following table presents a roll forward of the credit loss component of OTTI on the Company’s Non-Agency RMBS for which a portion of loss was recognized in OCI. The table delineates between those securities that are recognizing OTTI for the first time as opposed to those that have previously recognized OTTI.



	For the Quarters Ended						For the Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
	(dollars in thousands)
Cumulative credit loss beginning balance	$	586,056		$	558,229		$	591,521		$	556,485
Additions:
Other-than-temporary impairments not previously recognized	—			12,399			1,140			12,399
Reductions for securities sold or deconsolidated during the period	(4,775		)	—			(4,948		)	(7,443		)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments	9,131			1,109			9,149			17,835
Reductions for increases in cash flows expected to be collected over the remaining life of the securities	(7,751		)	(99		)	(14,201		)	(7,638		)
Cumulative credit impairment loss ending balance	$	582,661		$	571,638		$	582,661		$	571,638

Cash flows generated to determine net other-than-temporary credit impairment losses recognized in earnings are estimated using significant unobservable inputs. The significant inputs used to measure the component of OTTI recognized in earnings for the Company’s Non-Agency RMBS for the periods reported are summarized as follows:



	For the Six Months Ended
	June 30, 2018	June 30, 2017
Loss Severity
Weighted Average	66%	62%
Range	34% - 132%	28% - 67%
60+ days delinquent
Weighted Average	23%	19%
Range	16% - 30%	11% - 25%
Credit Enhancement ⁽¹⁾
Weighted Average	32%	19%
Range	0% - 55%	0% - 38%
3 Month CPR
Weighted Average	10%	12%
Range	0% - 39%	2% - 24%
12 Month CPR
Weighted Average	8%	11%
Range	1% - 20%	4% - 19%

(1) Calculated as the combined credit enhancement to the Re-REMIC and underlying from each of their respective capital structures.

The following tables present a summary of unrealized gains and losses at June 30, 2018 and December 31, 2017.



			June 30, 2018
			(dollars in thousands)
	Gross Unrealized Gain Included in Accumulated Other Comprehensive Income		Gross Unrealized Gain Included in Cumulative Earnings		Total Gross Unrealized Gain		Gross Unrealized Loss Included in Accumulated Other Comprehensive Income			Gross Unrealized Loss Included in Cumulative Earnings			Total Gross Unrealized Loss
Non-Agency RMBS
Senior	$	721,524	$	—	$	721,524	$	(473	)	$	—		$	(473	)
Senior, interest-only	—		26,074		26,074		—			(76,710		)	(76,710		)
Subordinated	58,887		3,076		61,963		(272		)	—			(272		)
Subordinated, interest-only	—		1,830		1,830		—			(627		)	(627		)
Agency MBS
Residential	2,316		7,212		9,528		(70,382		)	(21,298		)	(91,680		)
Commercial	686		258		944		(40,635		)	(35,605		)	(76,240		)
Interest-only	—		954		954		—			(7,991		)	(7,991		)
Total	$	783,413	$	39,404	$	822,817	$	(111,762	)	$	(142,231	)	$	(253,993	)



			December 31, 2017
			(dollars in thousands)
	Gross Unrealized Gain Included in Accumulated Other Comprehensive Income		Gross Unrealized Gain Included in Cumulative Earnings		Total Gross Unrealized Gain		Gross Unrealized Loss Included in Accumulated Other Comprehensive Income			Gross Unrealized Loss Included in Cumulative Earnings			Total Gross Unrealized Loss
Non-Agency RMBS
Senior	$	754,234	$	—	$	754,234	$	(182	)	$	—		$	(182	)
Senior, interest-only	—		15,761		15,761		—			(67,907		)	(67,907		)
Subordinated	62,989		3,715		66,704		(102		)	(197		)	(299		)
Subordinated, interest-only	—		902		902		—			(445		)	(445		)
Agency MBS
Residential	5,706		—		5,706		(29,083		)	(4,816		)	(33,899		)
Commercial	15,462		1,579		17,041		(12,122		)	(3,977		)	(16,099		)
Interest-only	—		834		834		—			(7,744		)	(7,744		)
Total	$	838,391	$	22,791	$	861,182	$	(41,489	)	$	(85,086	)	$	(126,575	)

Changes in prepayments, actual cash flows, and cash flows expected to be collected, among other items, are affected by the collateral characteristics of each asset class. The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.

The following tables provide a summary of the Company’s MBS portfolio at June 30, 2018 and December 31, 2017.



	June 30, 2018
	Principal or Notional Value at Period-End (dollars in thousands)		Weighted Average Amortized Cost Basis		Weighted Average Fair Value		Weighted Average Coupon		Weighted Average Yield at Period-End ⁽¹⁾
Non-Agency RMBS
Senior	$	2,522,667	$	53.23	$	81.81	4.8	%	17.7	%
Senior, interest-only	5,282,885		5.73		4.78		1.4	%	9.1	%
Subordinated	365,499		56.13		73.00		4.0	%	10.8	%
Subordinated, interest-only	206,557		4.49		5.07		0.9	%	11.8	%
Agency MBS
Residential pass-through	4,527,730		103.70		101.88		4.0	%	3.4	%
Commercial pass-through	2,300,891		102.08		98.81		3.6	%	3.4	%
Interest-only	3,010,512		3.65		3.42		0.7	%	3.3	%

(1) Bond Equivalent Yield at period end.



	December 31, 2017
	Principal or Notional Value at Period-End (dollars in thousands)		Weighted Average Amortized Cost Basis		Weighted Average Fair Value		Weighted Average Coupon		Weighted Average Yield at Period-End ⁽¹⁾
Non-Agency RMBS
Senior	$	2,733,926	$	54.04	$	81.62	4.6	%	16.7	%
Senior, interest-only	4,862,461		5.41		4.34		1.3	%	8.0	%
Subordinated	501,455		66.77		80.01		4.1	%	9.6	%
Subordinated, interest-only	201,378		3.66		3.89		0.8	%	11.8	%
Agency MBS
Residential pass-through	2,227,128		105.53		104.27		3.8	%	2.9	%
Commercial pass-through	1,894,594		102.26		102.31		3.6	%	3.2	%
Interest-only	3,021,840		3.68		3.45		0.7	%	3.4	%

(1) Bond Equivalent Yield at period end.

The following table presents the weighted average credit rating of the Company’s Non-Agency RMBS portfolio at June 30, 2018 and December 31, 2017.



	June 30, 2018		December 31, 2017
AAA	0.3	%	0.3	%
AA	0.9	%	0.3	%
A	0.1	%	0.6	%
BBB	1.4	%	1.9	%
BB	2.0	%	2.5	%
B	2.1	%	2.3	%
Below B	57.8	%	59.6	%
Not Rated	35.4	%	32.5	%
Total	100.0	%	100.0	%

Actual maturities of MBS are generally shorter than the stated contractual maturities. Actual maturities of the Company’s MBS are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following tables provide a summary of the fair value and amortized cost of the Company’s MBS at June 30, 2018 and December 31, 2017 according to their estimated weighted-average life classifications. The weighted-average lives of the MBS in the tables below are based on lifetime expected prepayment rates using an industry prepayment model for the Agency MBS portfolio and the Company’s prepayment assumptions for the Non-Agency RMBS. The prepayment model considers current yield, forward yield, steepness of the interest rate curve, current mortgage rates, mortgage rates of the outstanding loan, loan age, margin, and volatility.



	June 30, 2018
	(dollars in thousands)
	Weighted Average Life
	Less than one year		Greater than one year and less than five years		Greater than five years and less than ten years		Greater than ten years		Total
Fair value
Non-Agency RMBS
Senior	$	5,461	$	536,951	$	816,498	$	704,876	$	2,063,786
Senior interest-only	6		47,491		95,502		109,325		252,324
Subordinated	3,891		44,590		126,300		92,049		266,830
Subordinated interest-only	—		7,954		333		2,195		10,482
Agency MBS
Residential	—		—		4,600,496		12,424		4,612,920
Commercial	—		15,663		19,123		2,238,722		2,273,508
Interest-only	11,313		64,338		22,794		4,456		102,901
Total fair value	$	20,671	$	716,987	$	5,681,046	$	3,164,047	$	9,582,751
Amortized cost
Non-Agency RMBS
Senior	$	5,347	$	387,067	$	489,371	$	460,950	$	1,342,735
Senior interest-only	102		60,821		120,956		121,081		302,960
Subordinated	3,838		34,758		88,839		77,704		205,139
Subordinated interest-only	—		6,270		838		2,171		9,279
Agency MBS
Residential	—		—		4,682,192		12,880		4,695,072
Commercial	—		15,769		20,374		2,312,661		2,348,804
Interest-only	11,264		69,648		24,895		4,131		109,938
Total amortized cost	$	20,551	$	574,333	$	5,427,465	$	2,991,578	$	9,013,927



	December 31, 2017
	(dollars in thousands)
	Weighted Average Life
	Less than one year		Greater than one year and less than five years		Greater than five years and less than ten years		Greater than ten years		Total
Fair value
Non-Agency RMBS
Senior	$	2,179	$	681,086	$	910,234	$	637,916	$	2,231,415
Senior interest-only	19		54,107		72,702		84,022		210,850
Subordinated	—		75,495		121,555		204,175		401,225
Subordinated interest-only	—		7,165		661		—		7,826
Agency MBS
Residential	—		21,777		2,300,403		—		2,322,180
Commercial	—		45,770		16,559		1,875,952		1,938,281
Interest-only	—		74,490		25,271		4,606		104,367
Total fair value	$	2,198	$	959,890	$	3,447,385	$	2,806,671	$	7,216,144
Amortized cost
Non-Agency RMBS
Senior	$	2,124	$	493,965	$	569,458	$	411,816	$	1,477,363
Senior interest-only	1,271		73,758		94,145		93,822		262,996
Subordinated	—		61,987		91,044		181,789		334,820
Subordinated interest-only	—		6,355		1,014		—		7,369
Agency MBS
Residential	—		22,069		2,328,304		—		2,350,373
Commercial	—		47,170		17,176		1,872,993		1,937,339
Interest-only	—		79,356		27,582		4,339		111,277
Total amortized cost	$	3,395	$	784,660	$	3,128,723	$	2,564,759	$	6,481,537

The Non-Agency RMBS portfolio is subject to credit risk. The Non-Agency RMBS portfolio is primarily collateralized by Alt-A first lien mortgages. An Alt-A mortgage is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or prime, and less risky than subprime, the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Typically, Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios. At origination of the loan, Alt-A mortgage securities are defined as Non-Agency RMBS where (i) the underlying collateral has weighted average FICO scores between 680 and 720 or (ii) the FICO scores are greater than 720 and RMBS have 30% or less of the underlying collateral composed of full documentation loans. At June 30, 2018 and December 31, 2017, 67% and 66% of the Non-Agency RMBS collateral was classified as Alt-A, respectively. At June 30, 2018 and December 31, 2017, 15% and 13% of the Non-Agency RMBS collateral was classified as prime, respectively. The remaining Non-Agency RMBS collateral is classified as subprime.

The Non-Agency RMBS in the Portfolio have the following collateral characteristics at June 30, 2018 and December 31, 2017.



	June 30, 2018				December 31, 2017
Weighted average maturity (years)		20.4				20.7
Weighted average amortized loan to value⁽¹⁾		63.3		%		64.4		%
Weighted average FICO⁽²⁾		703				697
Weighted average loan balance (in thousands)		$	324			$	314
Weighted average percentage owner occupied		84.5		%		84.4		%
Weighted average percentage single family residence		65.7		%		66.3		%
Weighted average current credit enhancement		1.5		%		2.2		%
Weighted average geographic concentration of top four states	CA	32.4		%	CA	31.7		%
	NY	8.4		%	NY	8.5		%
	FL	8.1		%	FL	8.3		%
	NJ	2.6		%	NJ	2.7		%

(1) Value represents appraised value of the collateral at the time of loan origination.

(2) FICO as determined at the time of loan origination.

The table below presents the origination year of the underlying loans related to the Company’s portfolio of Non-Agency RMBS at June 30, 2018 and December 31, 2017.



Origination Year	June 30, 2018		December 31, 2017
2003 and prior	4.8	%	3.6	%
2004	6.5	%	4.3	%
2005	20.1	%	20.8	%
2006	39.4	%	38.2	%
2007	23.6	%	30.4	%
2008	0.3	%	1.8	%
2009 and later	5.3	%	0.9	%
Total	100.0	%	100.0	%

Gross realized gains and losses are recorded in “Net realized gains (losses) on sales of investments” on the Company’s Consolidated Statements of Operations. The proceeds and gross realized gains and gross realized losses from sales of investments for the quarters and six months ended June 30, 2018 and 2017 are as follows:



	For the Quarter Ended						For the Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
	(dollars in thousands)
Proceeds from sales	$	32,551		$	153,681		$	32,551		$	173,743

Gross realized gains	4,383			5,380			4,383			10,566
Gross realized losses	(2,216		)	(839		)	(2,216		)	(858		)
Net realized gain (loss)	$	2,167		$	4,541		$	2,167		$	9,708

Included in the gross realized gains for the quarter and six months ended June 30, 2018 in the table above are exchanges of securities with a fair value of $22 million. The Company exchanged its investment in a re-remic security for the underlying collateral supporting the group related to the exchanged asset. These exchanges were treated as non-cash sales and purchases and resulted in a realized gain of $2 million, reflected in earnings for the quarter and six months ended June 30, 2018. For the quarter and six months ended June 30, 2017, the fair value of these exchanges of securities was $8 million and $28 million, and resulted in a realized gain of $256 thousand and $5 million, respectively.