4. Mortgage-Backed Securities

All of the Company’s agency securities were classified as available-for-sale and, as such, are reported at their estimated fair value. The agency securities market is primarily an over-the-counter market. As such, there are no standard, public market quotations or published trading data for individual agency securities. The Company estimates the fair value of the Company’s agency securities based on a market approach obtaining values for its securities primarily from third-party pricing services and dealer quotes. To ensure the Company’s fair value determinations are consistent with the ASC Topic on Fair Value Measurements and Disclosures, the Company regularly reviews the prices obtained and the methods used to derive those prices. The Company evaluates the pricing information it receives taking into account factors such as coupon, prepayment experience, fixed/adjustable rate, annual and life caps, coupon index, time to next reset and issuing agency, among other factors to ensure that estimated fair values are appropriate. The Company reviews the methods and inputs used by providers of pricing data to determine that the fair value of its assets and liabilities are properly classified in the fair value hierarchy.

The third-party pricing services gather trade data and use pricing models that incorporate such factors as coupons, primary mortgage rates, prepayment speeds, spread to the U.S. Treasury and interest rate swap curves, periodic and life caps and other similar factors. Traders at broker-dealers function as market-makers for these securities, and these brokers have a direct view of the trading activity. Brokers do not receive compensation for providing pricing information to the Company. The broker prices received are non-binding offers to trade. The brokers receive data from traders that participate in the active markets for these securities and directly observe numerous trades of securities similar to the securities owned by the Company. The Company’s analysis of fair value for these includes comparing the data received to other information, if available, such as repurchase agreement pricing or internal pricing models.

If the fair value of a security is not available using the Level 2 inputs as described above, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including, but not limited to, other independent pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At December 31, 2012, all of the Company’s agency securities values were based on third-party sources.

The Company’s investment portfolio consists solely of agency securities, which are backed by a U.S. Government agency or a U.S. Government sponsored entity. The following table presents certain information about the Company’s agency securities at December 31, 2012.


	Agency Securities Amortized Cost		Gross Unrealized Loss			Gross Unrealized Gain		Estimated Fair Value
Agency Securities
Fannie Mae Certificates
ARMs	$	14,081,259	$	(100	)	$	329,780	$	14,410,939
Fixed Rate		743,299		—			9,296		752,595

Total Fannie Mae		14,824,558		(100	)		339,076		15,163,534


Freddie Mac Certificates
ARMs		7,850,630		(21	)		149,114		7,999,723
Fixed Rate		744,720		—			11,274		755,994

Total Freddie Mac		8,595,350		(21	)		160,388	$	8,755,717



Total Agency Securities	$	23,419,908	$	(121	)	$	499,464	$	23,919,251

The following table presents certain information about the Company’s agency securities at December 31, 2011.


	Amortized Cost		Unrealized Loss			Unrealized Gain		Estimated Fair Value
Agency Securities
Fannie Mae Certificates
ARMs	$	11,446,397	$	—		$	278,559	$	11,724,956
Fixed Rate		493,648		(132	)		1,076		494,592

Total Fannie Mae		11,940,045		(132	)		279,635		12,219,548


Freddie Mac Certificates
ARMs		4,925,438	$	—			103,540		5,028,978
Fixed Rate		491,289		(6	)		2,064		493,347

Total Freddie Mac		5,416,727		(6	)		105,604		5,522,325



Total Agency Securities	$	17,356,772	$	(138	)	$	385,239	$	17,741,873

The components of the carrying value of available-for-sale agency securities at December 31, 2012 and 2011 are presented below.


	December 31, 2012			December 31, 2011
Principal balance	$	22,771,731		$	16,938,710
Unamortized premium		648,181			418,071
Unamortized discount		(4	)		(9	)
Gross unrealized gains		499,464			385,239
Gross unrealized losses		(121	)		(138	)

Carrying value/estimated fair value	$	23,919,251		$	17,741,873

The Company monitors the performance and market value of its agency securities portfolio on an ongoing basis. At December 31, 2012 and 2011, the Company had the following securities in a loss position presented below:


	Less than 12 months as of December 31, 2012					Less than 12 months as of December 31, 2011
	Fair Market Value		Unrealized Loss			Fair Market Value		Unrealized Loss
Fannie Mae Certificates
ARMs	$	149,954	$	(100	)	$	—	$	—
Fixed Rate		—		—			210,743		(132	)
Freddie Mac Certificates
ARMs		41,625		(21	)		—		—
Fixed Rate		—		—			23,012		(6	)

Total temporarily impaired securities	$	191,579	$	(121	)	$	233,755	$	(138	)

The Company did not make the decision to sell the above securities as of December 31, 2012 and 2011, nor was it deemed more likely than not the Company would be required to sell these securities before recovery of their amortized cost basis.

The following table presents components of interest income on the Company’s agency securities portfolio for the years ended December 31, 2012, 2011 and 2010:


	Twelve Months Ended
	December 31, 2012			December 31, 2011			December 31, 2010
Coupon interest	$	667,644		$	518,048		$	305,529
Net premium amortization		(162,844	)		(93,335	)		(41,778	)

Interest income, net	$	504,800		$	424,713		$	263,751

The contractual maturity of the Company’s agency securities ranges from 15 to 30 years. Because of prepayments on the underlying mortgage loans, the actual weighted-average maturity is expected to be significantly less than the stated maturity. The following table presents certain information about the Company’s adjustable rate agency securities that will reprice or amortize based on contractual terms, which do not consider prepayment assumptions, at December 31, 2012 and 2011.


	December 31, 2012								December 31, 2011
Months to Coupon Reset	Fair Value		% of Total			Weighted Average Coupon			Fair Value		% of Total			Weighted Average Coupon
0—12 Months	$	914,832		4.10	%		4.03	%	$	691,226		4.00	%		4.56	%
13—24 Months		966,854		4.30	%		3.88	%		769,239		4.60	%		4.93	%
25—36 Months		2,274,763		10.20	%		3.60	%		992,880		5.90	%		3.93	%
37—48 Months		3,207,245		14.30	%		3.06	%		3,669,359		21.90	%		3.65	%
49—60 Months		3,616,891		16.10	%		2.76	%		4,439,416		26.50	%		3.06	%
61—72 Months		3,027,295		13.50	%		3.26	%		2,071,610		12.40	%		3.41	%
73—84 Months		7,607,359		33.90	%		2.44	%		3,965,045		23.70	%		3.28	%
85—96 Months		133,487		0.60	%		3.08	%		9,866		0.10	%		4.33	%
97—108 Months		—		—			—			145,293		0.90	%		3.93	%
109—120 Months		641,013		2.90	%		2.81	%		—		—			—
121—140 Months		20,923		0.10	%		2.69	%		—		—			—

Total ARMS	$	22,410,662		100.00	%		2.95	%	$	16,753,934		100.00	%		3.49	%

The following table presents certain information about the Company’s fixed rate agency securities that will reprice or amortize based on contractual terms, which do not consider prepayment assumptions, at December 31, 2012 and 2011.
	December 31, 2012								December 31, 2011
Wtd Average Months to Maturity	Fair Value		% of Total			Weighted Average Coupon			Fair Value		% of Total			Weighted Average Coupon
155-167		102,158		6.80	%		3.00	%		—		—			—
168-180		1,406,431		93.20	%		2.60	%		987,939		100.00	%		3.05	%

Total Fixed Rate Securities	$	1,508,589		100.00	%		2.62	%	$	987,939		100.00	%		3.05	%

Unsettled Agency Securities Purchases

While most of the Company’s purchases of agency securities are accounted for using trade date accounting, some forward purchases, such as certain TBA’s do not qualify for trade date accounting and are considered derivatives for financial statement purposes. Pursuant to ASC Topic 815, the Company accounts for these derivatives as all-in-one cash flow hedges. The net fair value of the forward commitment is reported on the balance sheet as an asset (or liability), with a corresponding unrealized gain (or loss) recognized in other comprehensive income. The following table shows the agency securities forward purchase commitments shown as a net asset in other assets on the balance sheets as of December 31, 2012.


	Face		Cost		Fair Market Value		Due to Brokers(1)		Net Asset
December 31, 2012	$	565,000	$	585,100	$	587,247	$	585,100	$	2,147

The following table shows the agency securities forward purchase commitments shown as a net asset on the balance sheet as of December 31, 2011.


	Face		Cost		Fair Market Value		Due to Brokers(1)		Net Asset
December 31, 2011	$	340,000	$	348,937	$	351,249	$	348,937	$	2,312

(1)	Amounts due to brokers are usually settled within 30-90 days after period end.

Since the Company purchases forward for the purposes of holding the securities for investment, the Company considers all its agency securities, settled or unsettled, as part of its portfolio for the purposes of cash flow and interest rate sensitivity, and consequently hedging, duration measurement, and other related investment management activity.

At December 31, 2012 and 2011, the Company also had other forward purchase commitments treated as derivatives in the amount of $3,305 and $4,015.