4. Mortgage-Backed Securities

All of the Company’s MBS, other than GSE CRT bonds, are classified as available-for-sale and, as such, are reported at their estimated fair value. The GSE CRT bonds are accounted for under the fair value option as discussed in Note 2. The MBS market is primarily an over-the-counter market. As such, there are no standard, public market quotations for individual MBS. The Company estimates the fair value of its MBS based on a market approach by obtaining values for its securities from third-party pricing services. 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. The third-party pricing services also receive data from traders at broker-dealers 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 regularly reviews the prices obtained and the methods used to derive those prices. As part of this evaluation, the Company considers security-specific 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’s analysis of pricing information obtained also includes comparing the data received to other available information, such as 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.

In addition to agency securities, the Company’s MBS portfolio includes MBS not issued or guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity (“non-agency securities”) and GSE CRT bonds. The following table presents the composition of the Company’s MBS at September 30, 2015.

	Amortized Cost		Gross Unrealized Loss			Gross Unrealized Gain		Estimated Fair Value
Agency Securities
Fannie Mae Certificates
ARMs	$	7,946,906	$	(2,542	)	$	157,850	$	8,102,214
Fixed-Rate		1,034,126		-			7,023		1,041,149
Total Fannie Mae		8,981,032		(2,542	)		164,873		9,143,363

Freddie Mac Certificates
ARMs		6,076,068		(6,337	)		73,684		6,143,415
Fixed-Rate		131,775		-			1,642		133,417
Total Freddie Mac		6,207,843		(6,337	)		75,326		6,276,832

Total Agency Securities		15,188,875		(8,879	)		240,199		15,420,195

Total Available-for-Sale MBS		15,188,875		(8,879	)		240,199		15,420,195

GSE CRT Bonds		52,780		(395	)		-		52,385

Total MBS	$	15,241,655	$	(9,274	)	$	240,199	$	15,472,580

The following table presents the composition of the Company’s MBS at December 31, 2014.

	Amortized Cost		Gross Unrealized Loss			Gross Unrealized Gain		Estimated Fair Value
Agency Securities
Fannie Mae Certificates
ARMs	$	9,203,741	$	(13,737	)	$	183,889	$	9,373,893
Fixed-Rate		1,111,288		-			5,177		1,116,465
Total Fannie Mae		10,315,029		(13,737	)		189,066		10,490,358

Freddie Mac Certificates
ARMs		6,805,885		(21,794	)		76,790		6,860,881
Fixed-Rate		158,402		-			1,767		160,169
Total Freddie Mac		6,964,287		(21,794	)		78,557		7,021,050

Total Agency Securities		17,279,316		(35,531	)		267,623		17,511,408

Total Non-Agency ARMs		75,454		-			148		75,602

Total MBS	$	17,354,770	$	(35,531	)	$	267,771	$	17,587,010

The components of the carrying value of MBS at September 30, 2015 and December 31, 2014 are presented below:

	September 30,			December 31,
	2015			2014
Principal balance	$	14,824,999		$	16,864,583
Unamortized premium		418,148			490,187
Unamortized discount		(1,492	)		-
Gross unrealized gains		240,199			267,771
Gross unrealized losses		(9,274	)		(35,531	)
Carrying value/estimated fair value	$	15,472,580		$	17,587,010

The following table presents components of interest income on the Company’s MBS portfolio for the three and nine months ended September 30, 2015 and 2014.

	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Coupon interest	$	104,357		$	110,382		$	326,266		$	343,108
Net premium amortization		(33,483	)		(29,413	)		(92,760	)		(76,374	)
Interest income	$	70,874		$	80,969		$	233,506		$	266,734

Gross gains and losses from sales of MBS for the three and nine months ended September 30, 2015 and 2014 were as follows:

	Three Months Ended September 30					Nine Months Ended September 30
	2015			2014		2015			2014
Gross gains	$	4,831		$	237	$	21,329		$	13,713
Gross losses		(3,615	)		-		(3,969	)		(10,624	)
Net gain (loss)	$	1,216		$	237	$	17,360		$	3,089

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, 2015 and December 31, 2014, the Company had the following securities in a loss position as presented in the following two tables:

	As of September 30, 2015
	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	$	177,892	$	(329	)	$	539,176	$	(2,212	)	$	717,068	$	(2,541	)
Fixed-Rate		-		-			-		-			-		-
Freddie Mac Certificates
ARMs		206,857		(283	)		911,208		(6,055	)		1,118,065		(6,338	)
Fixed-Rate		-		-			-		-			-		-
Total temporarily impaired securities	$	384,749	$	(612	)	$	1,450,384	$	(8,267	)	$	1,835,133	$	(8,879	)
Number of securities in an unrealized loss position				23					52					75

	As of December 31, 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	$	806,600	$	(1,240	)	$	1,306,153	$	(12,497	)	$	2,112,753	$	(13,737	)
Fixed-Rate		-		-			-		-			-		-
Freddie Mac Certificates
ARMs		498,994		(792	)		1,737,760		(21,002	)		2,236,754		(21,794	)
Fixed-Rate		-		-			-		-			-		-
Total temporarily impaired securities	$	1,305,594	$	(2,032	)	$	3,043,913	$	(33,499	)	$	4,349,507	$	(35,531	)
Number of securities in an unrealized loss position				56					108					164

The Company did not make the decision to sell the above securities as of September 30, 2015 and December 31, 2014, 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. No impairment losses were recognized during the periods presented herein.

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.