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Derivatives and Other Hedging Instruments (Tables)
 3 Months Ended
Mar. 31, 2015
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 estimated based on the fair value of the underlying interest rate swaps that the Company has the option to enter, and are based on estimates 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 in order to adjust for 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 March 31, 2015 and December 31, 2014, respectively.  

Derivative Instruments

Balance Sheet Location

March 31, 2015

 

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and swaptions

Derivative assets

$

3,811

 

 

$

11,050

 

Forward purchase commitments - MBS

Derivative assets

 

31,145

 

 

 

16,101

 

Forward purchase commitments - mortgage loans

Derivative assets

 

329

 

 

 

-

 

 

 

$

35,285

 

 

$

27,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

Derivative liabilities

$

34,774

 

 

$

42,052

 

Futures contracts

Derivative liabilities

 

296,516

 

 

 

202,501

 

Forward purchase commitments - MBS

Derivative liabilities

 

-

 

 

 

36

 

Forward purchase commitments - mortgage loans

Derivative liabilities

 

-

 

 

 

2

 

 

 

$

331,290

 

 

$

244,591

 

 
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

 

 

Three Months Ended March 31

 

 

2015

 

 

2014

 

Beginning of period

$

8,300,000

 

 

$

10,700,000

 

Additions

 

-

 

 

 

-

 

Expirations and terminations

 

(1,000,000

)

 

 

(600,000

)

End of period

$

7,300,000

 

 

$

10,100,000

 

 

 
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 March 31, 2015, the Company had two 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

 

$

4,000

 

 

$

3,484

 

 

 

12

 

 

$

1,065,000

 

 

 

3.00%

 

 

3 month LIBOR

 

 

5

 

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 table presents the composition of the Company’s Futures Contracts as of March 31, 2015 and December 31, 2014, respectively.  

 

Fair Value

 

 

March 31, 2015

 

 

December 31, 2014

 

Futures Contracts designed to replicate swaps

$

(293,502

)

 

$

(202,202

)

Futures Contracts designed to hedge value changes in forward purchases

 

(3,014

)

 

 

(299

)

Total fair value of Futures Contracts

$

(296,516

)

 

$

(202,501

)

 
Schedule of ARM Securities Forward Purchase Commitments with Brokers

The following table summarizes the Company’s forward purchase commitments as of March 31, 2015.

 

Face / UPB

 

 

Cost

 

 

Fair Market Value

 

 

Net Asset (Liability)

 

ARMs - originators

$

349,377

 

 

$

357,082

 

 

$

360,836

 

 

$

3,754

 

ARMs - dealers

 

95,000

 

 

 

97,208

 

 

 

98,302

 

 

 

1,094

 

15-year TBA dollar roll securities

 

4,300,000

 

 

 

4,440,668

 

 

 

4,466,965

 

 

 

26,297

 

Whole mortgage loans

 

71,409

 

 

 

73,034

 

 

 

73,363

 

 

 

329

 

Total purchase commitments

$

4,815,786

 

 

$

4,967,992

 

 

$

4,999,466

 

 

$

31,474

 

The following table summarizes the Company’s forward purchase commitments as of December 31, 2014.

 

Face / UPB

 

 

Cost

 

 

Fair Market Value

 

 

Net Asset (Liability)

 

ARMs - originators

$

376,936

 

 

$

384,673

 

 

$

388,829

 

 

$

4,156

 

ARMs - dealers

 

20,095

 

 

 

20,553

 

 

 

20,517

 

 

 

(36

)

15-year TBA dollar roll securities

 

3,400,000

 

 

 

3,509,871

 

 

 

3,521,816

 

 

 

11,945

 

Whole mortgage loans

 

11,656

 

 

 

11,937

 

 

 

11,935

 

 

 

(2

)

Total purchase commitments

$

3,808,687

 

 

$

3,927,034

 

 

$

3,943,097

 

 

$

16,063

 

 
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 March 31, 2015.

 

Assets/(Liabilities)

 

 

Cash Collateral Posted (Held)

 

 

Net Asset/(Liability)

 

Interest rate swaps

$

327

 

 

$

-

 

 

$

327

 

Interest rate swaptions

 

3,484

 

 

 

-

 

 

 

3,484

 

Forward purchase commitments

 

31,474

 

 

 

-

 

 

 

31,474

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

$

(34,774

)

 

$

53,566

 

 

$

18,792

 

Forward purchase commitments

 

-

 

 

 

21,480

 

 

 

21,480

 

Futures contracts

 

(296,516

)

 

 

356,528

 

 

 

60,012

 

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

 

 
Schedule of Derivative Instruments Loss, Net

The following table shows the components of “Loss on derivative instruments, net” for the three months ended March 31, 2015 and 2014.  

 

Three Months Ended March 31

 

 

2015

 

 

2014

 

Interest rate swaps – fair value adjustments

$

1,116

 

 

$

15,863

 

Interest rate swaptions – realized and unrealized losses

 

(3,027

)

 

 

-

 

Interest rate swaps – monthly net settlements

 

(21,423

)

 

 

(29,412

)

Futures Contracts – fair value adjustments

 

(94,016

)

 

 

(17,382

)

Futures Contracts – losses from maturities

 

(7,493

)

 

 

-

 

Futures Contracts – other realized losses

 

(22,374

)

 

 

(18,606

)

Mortgage loan purchase commitments - fair value adjustments

 

331

 

 

 

-

 

TBA dollar roll income

 

23,155

 

 

 

20,821

 

TBA dollar rolls – realized and unrealized gains (losses)

 

20,946

 

 

 

(12,899

)

Loss on derivative instruments, net

$

(102,785

)

 

$

(41,615

)

 
Interest Rate Swap  
Schedule of Derivative Instruments Forecasted Transactions

     Information regarding the Company’s interest rate swaps as of March 31, 2015 follows.  

 

 

 

 

 

 

Wtd. Avg.

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Weighted Average

 

 

 

Notional

 

 

Term

 

 

Fixed Interest

 

Maturity

 

Amount

 

 

in Months

 

 

Rate in Contract

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12 months or less

 

$

3,300,000

 

 

 

5

 

 

 

1.53%

 

Over 12 months to 24 months

 

 

2,400,000

 

 

 

18

 

 

 

0.95%

 

Over 24 months to 36 months

 

 

1,600,000

 

 

 

29

 

 

 

0.87%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

7,300,000

 

 

 

15

 

 

 

1.20%

 

 
Schedule of Interest Rate Swap Agreements on Accumulated Other Comprehensive Income

The table below presents the effect of the interest rate swaps that were previously designated as cash flow hedges on the Company’s AOCI for the three months ended March 31, 2015 and the year ended December 31, 2014.  

 

Three Months Ended March 31

 

 

2015

 

 

2014

 

Beginning balance

$

(30,042

)

 

$

(111,174

)

Reclassification of net losses to the income statement

 

13,438

 

 

 

24,684

 

Ending balance

$

(16,604

)

 

$

(86,490

)

 
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

 

 

Three Months Ended March 31

 

 

2015

 

 

2014

 

Beginning of period

 

130,074

 

 

 

95,327

 

New positions opened

 

20,518

 

 

 

77,821

 

Early settlements

 

(13,268

)

 

 

(56,817

)

Settlements at maturity

 

(8,611

)

 

 

(2,006

)

End of period

 

128,713

 

 

 

114,325