Derivatives and Other Hedging Instruments (Tables)

12 Months Ended

Dec. 31, 2014

Schedule of Location of Derivatives Instruments on Consolidated Balance Sheet

The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair values of interest rate swaptions are based on the fair value of the underlying interest rate swaps that the Company has the option to enter, and are based on inputs from the counterparty and pricing models.  The fair value of Futures Contracts is based on quoted prices from the exchange on which they trade.  The fair value of MBS forward purchase commitments was determined using the same methodology as MBS as described in Note 4.  The fair value of forward purchase commitments for whole loans was determined using the same methodology as mortgage loans held for investment as described in Note 5.  The Company applies fallout assumptions to the third-party pricing of forward purchase commitments regarding loans that the counterparties may not successfully issue.  The table below presents the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of December 31, 2014 and 2013, respectively.

Derivative Instruments	Balance Sheet Location	December 31, 2014		December 31, 2013
Interest rate swaps and swaptions	Derivative assets	$	11,050	$	15,841
Futures contracts	Derivative assets		-		11,148
Forward purchase commitments - MBS	Derivative assets		16,101		-
		$	27,151	$	26,989
Interest rate swaps	Derivative liabilities	$	42,052	$	125,133
Futures contracts	Derivative liabilities		202,501		36,733
Forward purchase commitments - MBS	Derivative liabilities		36		5,741
Forward purchase commitments - mortgage loans	Derivative liabilities		2
		$	244,591	$	167,607

Volume of Activity for the Company's Interest Rate Derivative Instruments

The volume of activity for the Company’s interest rate swap instruments is shown in the table below.  

	Notional Value
	Years Ended December 31
	2014			2013
Beginning of period	$	10,500,000		$	10,700,000
Additions		-			800,000
Expirations and terminations		(2,200,000	)		(1,000,000	)
End of period	$	8,300,000		$	10,500,000

Schedule of Outstanding Interest Rate Swaptions

A swaption is a derivative instrument that gives the holder the option to enter into a pay-fixed interest rate swap in the future, if it so desires.  As of December 31, 2014, the Company had four interest rate swaptions outstanding:

Options

Underlying Swaps

Swaptions

Original Cost

Fair Value

Wtd. Avg. Months to Expiration

Notional

Wtd. Avg. Fixed Pay Rate

Receive Rate

Wtd. Avg. Term (Years)

Fixed payer

20,080

4,561

6

992,300

2.74%

3 month LIBOR

7

Schedule of Composition of Futures Contracts

The Company uses Futures Contracts to 1) synthetically replicate an interest rate swap, or 2) offset the changes in value of its forward purchases of certain MBS and mortgage loans.  The following tables presents the composition of the Company’s Futures Contracts as of December 31, 2014 and 2013, respectively.

	Fair Value
	December 31, 2014			December 31, 2013
Futures Contracts designed to replicate swaps	$	(202,202	)	$	(27,881	)
Futures Contracts designed to hedge value changes in forward purchases		(299	)		2,296
Total fair value of Futures Contracts	$	(202,501	)	$	(25,585	)

Schedule of ARM Securities Forward Purchase Commitments with Brokers

The Company had the following ARM securities forward purchase commitments with brokers as of December 31, 2014 and 2013.

	Face		Cost		Fair Market Value		Net Asset (Liability)
December 31, 2014	$	20,095	$	20,553	$	20,517	$	(36	)
December 31, 2013	$	-	$	-	$	-	$	-

Schedule of Mortgage Backed Securities

At December 31, 2014 and 2013, the Company had the following 15-year TBA dollar roll securities:

	Face		Cost		Fair Market Value		Net Asset (Liability)
December 31, 2014	$	3,400,000	$	3,509,871	$	3,521,816	$	11,945
December 31, 2013	$	600,000	$	632,270	$	627,187	$	(5,083	)

Gross Amounts Associated with Derivative Financial Instruments

The Company does not use either offsetting or netting to present any of its derivative assets or liabilities.  The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of December 31, 2014.

	Assets/(Liabilities)			Cash Collateral Posted (Held)			Net Asset/(Liability)
Interest rate swaps	$	6,489		$	-		$	6,489
Interest rate swaptions		4,561			(1,558	)		3,003
Forward purchase commitments		16,101			-			16,101
Interest rate swaps	$	(42,052	)	$	66,653		$	24,601
Forward purchase commitments		(38	)		5,585			5,547
Futures contracts		(202,501	)		251,553			49,052

The following table shows the gross amounts associated with the Company’s derivative financial instruments and the impact if netting were used as of December 31, 2013.

	Assets/(Liabilities)			Cash Collateral Posted		Net Asset/(Liability)
Interest rate swaps	$	15,841		$	-	$	15,841
Futures contracts		11,148			-		11,148
Interest rate swaps	$	(125,133	)	$	133,661	$	8,528
Futures contracts		(36,733	)		77,713		40,980
Forward purchase commitments		(5,741	)		14,005		8,264

Schedule of Derivative Instruments Loss, Net

The following table shows the components of “Loss on derivative instruments, net” for the three years ended December 31, 2014, 2013 and 2012.  Impacts from the Company’s interest rate swaps subsequent to the September 30, 2013 hedge de-designation are included herein.

	Years Ended December 31
	2014			2013			2012
Interest rate swaps – fair value adjustments	$	73,729		$	25,036		$	-
Interest rate swaptions – fair value adjustments		(15,520	)		-			-
Interest rate swaps – monthly net settlements		(113,919	)		(30,985	)		-
Futures Contracts – fair value adjustments		(176,916	)		(25,585	)		-
Futures Contracts – realized losses		(29,423	)		(33,298	)		-
Mortgage loan purchase commitments - fair value adjustments		(2	)		-			-
TBA dollar roll income		92,008			5,605			-
Net realized and unrealized gains (losses) on TBA dollar rolls		28,610			(10,488	)		-
Loss on derivative instruments, net	$	(141,433	)	$	(69,715	)	$	-

Schedule of Location of Derivatives on Net Income and Other Comprehensive Statement

As discussed above, effective September 30, 2013, the Company discontinued cash flow hedge accounting for its interest rate swaps.  The table below presents the effect of the interest rate swaps that were previously designated as cash flow hedges on the Company’s net income and other comprehensive income for the years ended December 31, 2014, 2013 and 2012.

	Years Ended December 31
	2014			2013			2012
Amount of gain (loss) recognized in OCI (effective     portion)	$	-		$	15,030		$	(141,392	)
Amount of loss reclassified from OCI into net income     as interest expense (effective portion)		(81,132	)		(116,847	)		(116,792	)
Amount of loss recognized in net income as     interest expense (ineffective portion)		-			(205	)		(178	)

Interest Rate Swap

Schedule of Derivative Instruments Forecasted Transactions

As of December 31, 2014, the weighted-average remaining term of the Company’s interest rate swaps is 16 months.  Additional information regarding the Company’s interest rate swaps as of December 31, 2014 follows.

			Wtd. Avg.
			Remaining		Weighted Average
	Notional		Term		Fixed Interest
Maturity	Amount		in Months		Rate in Contract
12 months or less	$	3,700,000		6		1.73%
Over 12 months to 24 months		2,400,000		18		0.92%
Over 24 months to 36 months		1,800,000		29		0.89%
Over 36 months to 48 months		400,000		38		0.96%
Total	$	8,300,000		16		1.28%

Schedule of Interest Rate Swap Agreements on Accumulated Other Comprehensive Income

The following table presents the impact of the Company’s interest rate swap agreements on the Company’s AOCI for the years ended December 31, 2014 and 2013.

	Years Ended December 31
	2014			2013
Beginning balance	$	(111,174	)	$	(243,051	)
Unrealized gain on interest rate swaps		-			15,030
Reclassification of net losses included in income statement		81,132			116,847
Ending balance	$	(30,042	)	$	(111,174	)

Eurodollar Futures Contracts

Schedule of Derivative Instruments Forecasted Transactions

The volume of activity for the Company’s Futures Contracts is shown in the table below.

	Number of Contracts
	Years Ended December 31
	2014			2013
Beginning of period		95,327			-
New positions opened		136,610			125,860
Early settlements		(93,053	)		(28,164	)
Settlements at maturity		(8,810	)		(2,369	)
End of period		130,074			95,327