4. Mortgage-Backed Securities

All of the Company’s MBS were classified as available-for-sale and, as such, are reported at their estimated fair value. The MBS market is primarily an over-the-counter market. As such, there are no standard, public market quotations or published trading data for individual MBS. The Company estimates the fair value of the Company’s MBS based on a market approach by 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 the appropriate classification 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 bids 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 September 30, 2014 and December 31, 2013, all of the Company’s MBS values were based on third-party sources.

The Company’s investment portfolio consists of MBS, including agency securities and non-agency securities (MBS not issued or guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity). The following table presents certain information about the Company’s MBS at September 30, 2014.

	Amortized Cost		Gross Unrealized Loss			Gross Unrealized Gain		Estimated Fair Value
Agency Securities
Fannie Mae Certificates
ARMs	$	9,217,059	$	(20,004	)	$	175,699	$	9,372,754
Fixed-Rate		569,736		(615	)		2,380		571,501
Total Fannie Mae		9,786,795		(20,619	)		178,079		9,944,255

Freddie Mac Certificates
ARMs		6,667,896		(31,236	)		66,537		6,703,197
Fixed-Rate		166,394		(30	)		858		167,222
Total Freddie Mac		6,834,290		(31,266	)		67,395		6,870,419

Total Agency Securities		16,621,085		(51,885	)		245,474		16,814,674

Total Non-Agency ARMs		76,200		(450	)		-		75,750

Total Mortgage-Backed Securities	$	16,697,285	$	(52,335	)	$	245,474	$	16,890,424

The following table presents certain information about the Company’s MBS at December 31, 2013.

	Amortized Cost		Gross Unrealized Loss			Gross Unrealized Gain		Estimated Fair Value
Agency Securities
Fannie Mae Certificates
ARMs	$	9,620,743	$	(44,871	)	$	167,848	$	9,743,720
Fixed-Rate		806,312		(1,798	)		3,832		808,346
Total Fannie Mae		10,427,055		(46,669	)		171,680		10,552,066

Freddie Mac Certificates
ARMs		6,671,013		(70,752	)		57,808		6,658,069
Fixed-Rate		338,738		(1,600	)		21		337,159
Total Freddie Mac		7,009,751		(72,352	)		57,829		6,995,228

Ginnie Mae Certificates
ARMs		-		-			-		-
Fixed-Rate		96,236		(998	)		-		95,238
Total Ginnie Mae		96,236		(998	)		-		95,238

Total Mortgage-Backed Securities	$	17,533,042	$	(120,019	)	$	229,509	$	17,642,532

The components of the carrying value of available-for-sale MBS at September 30, 2014 and December 31, 2013 are presented below:

	September 30, 2014			December 31, 2013
Principal balance	$	16,236,142		$	17,044,190
Unamortized premium		461,143			488,854
Unamortized discount		-			(2	)
Gross unrealized gains		245,474			229,509
Gross unrealized losses		(52,335	)		(120,019	)
Carrying value/estimated fair value	$	16,890,424		$	17,642,532

The following table presents components of interest income on the Company’s MBS portfolio for the three months and nine months ended September 30, 2014 and 2013.

	Three Months Ended September 30						Nine Months Ended September 30
	2014			2013			2014			2013
Coupon interest	$	110,382		$	154,203		$	343,108		$	485,601
Net premium amortization		(29,413	)		(47,163	)		(76,374	)		(139,205	)
Interest income	$	80,969		$	107,040		$	266,734		$	346,396

Gross gains and losses from sales of MBS for the three months and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended September 30					Nine Months Ended September 30
	2014		2013			2014			2013
Gross gains	$	237	$	7,327		$	13,713		$	18,629
Gross losses		-		(232,962	)		(10,624	)		(232,962	)
Net gain (loss)	$	237	$	(225,635	)	$	3,089		$	(214,333	)

The Company monitors the performance and market value of its MBS portfolio on an ongoing basis, and on a quarterly basis reviews its MBS for impairment. At September 30, 2014 and December 31, 2013, the Company had the following securities in a loss position presented below:

	As of September 30, 2014
	Less than 12 Months					Greater than 12 Months					Total
	Fair Market		Unrealized			Fair Market		Unrealized			Fair Market		Unrealized
	Value		Loss			Value		Loss			Value		Loss
Fannie Mae Certificates
ARMs	$	966,859	$	(2,084	)	$	1,467,791	$	(17,920	)	$	2,434,650	$	(20,004	)
Fixed-Rate		295,297		(615	)		-		-			295,297		(615	)
Freddie Mac Certificates
ARMs		875,078		(2,419	)		2,007,443		(28,817	)		2,882,521		(31,236	)
Fixed-Rate		8,692		(30	)		-		-			8,692		(30	)
Non-Agency ARMs		75,750		(450	)		-		-			75,750		(450	)
Total temporarily impaired securities	$	2,221,676	$	(5,598	)	$	3,475,234	$	(46,737	)	$	5,696,910	$	(52,335	)
Number of securities in an unrealized loss position				70					128					198

	As of December 31, 2013
	Less than 12 Months					Greater than 12 Months				Total
	Fair Market		Unrealized			Fair Market		Unrealized		Fair Market		Unrealized
	Value		Loss			Value		Loss		Value		Loss
Fannie Mae Certificates
ARMs	$	3,233,274	$	(44,871	)	$	-	$	-	$	3,233,274	$	(44,871	)
Fixed-Rate		281,760		(1,798	)		-		-		281,760		(1,798	)
Freddie Mac Certificates
ARMs		4,046,473		(70,752	)		-		-		4,046,473		(70,752	)
Fixed-Rate		316,835		(1,600	)		-		-		316,835		(1,600	)
Ginnie Mae Certificates
ARMs		-		-			-		-		-		-
Fixed-Rate		95,238		(998	)		-		-		95,238		(998	)
Total temporarily impaired securities	$	7,973,580	$	(120,019	)	$	-	$	-	$	7,973,580	$	(120,019	)
Number of securities in an unrealized loss position				279					-				279

The Company did not make the decision to sell the above securities as of September 30, 2014 and December 31, 2013, 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 unrealized losses on the above securities are the result of market interest rates and are not considered to be credit related.

The contractual maturity of the Company’s MBS ranges from 15 to 30 years. Because of prepayments on the underlying mortgage loans, the actual weighted-average life is expected to be significantly less than the stated maturity.