Derivatives and Other Hedging Instruments (Tables)

9 Months Ended

Sep. 30, 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 September 30, 2015 and December 31, 2014, respectively.  

Derivative Instruments	Balance Sheet Location	September 30, 2015		December 31, 2014
Interest rate swaps and swaptions	Derivative assets	$	1,831	$	11,050
Forward purchase commitments - MBS	Derivative assets		2,109		16,101
Forward purchase commitments - mortgage loans	Derivative assets		425		-
		$	4,365	$	27,151
Interest rate swaps	Derivative liabilities	$	22,964	$	42,052
Futures contracts	Derivative liabilities		394,221		202,501
Forward purchase commitments - MBS	Derivative liabilities		1,736		36
Forward purchase commitments - mortgage loans	Derivative liabilities		-		2
		$	418,921	$	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 September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Beginning of period	$	5,100,000		$	9,900,000		$	8,300,000		$	10,500,000
Additions		-			-			-			-
Expirations and terminations		(300,000	)		(700,000	)		(3,500,000	)		(1,300,000	)
End of period	$	4,800,000		$	9,200,000		$	4,800,000		$	9,200,000

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 September 30, 2015, the Company had six interest rate swaptions outstanding, which were entered into during 2015:

	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	$	10,813	$	1,831		9	$	3,065,000		3.23%	3 month LIBOR		6

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 September 30, 2015 and December 31, 2014, respectively.  

	Fair Value
	September 30, 2015			December 31, 2014
Futures Contracts designed to replicate swaps	$	(386,267	)	$	(202,202	)
Futures Contracts designed to hedge value changes in forward purchases		(7,954	)		(299	)
Total fair value of Futures Contracts	$	(394,221	)	$	(202,501	)

Schedule of ARM Securities Forward Purchase Commitments with Brokers

The following table summarizes the Company’s forward purchase commitments as of September 30, 2015.

	Face / UPB		Cost		Fair Market Value		Net Asset (Liability)
ARMs - originators	$	205,275	$	209,881	$	211,990	$	2,109
15-year TBA dollar roll securities		2,655,000		2,736,748		2,735,012		(1,736	)
Whole mortgage loans		79,794		81,216		81,641		425
Total purchase commitments	$	2,940,069	$	3,027,845	$	3,028,643	$	798

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 September 30, 2015.

	Assets/(Liabilities)			Cash Collateral Posted (Held)			Net Asset/(Liability)
Interest rate swaptions	$	1,831		$	(886	)	$	945
Forward purchase commitments		2,534			-			2,534
Interest rate swaps	$	(22,964	)	$	31,626		$	8,662
Futures contracts		(394,221	)		458,178			63,957
Forward purchase commitments		(1,736	)		3,217			1,481

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
Futures contracts		-			-			-
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 “Net gain (loss) on derivative instruments” 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
Interest rate swaps – net realized and unrealized gains	$	(4,227	)	$	38,136		$	7,386		$	62,524
Interest rate swaptions – net realized and unrealized losses		(8,202	)		(1,304	)		(11,492	)		(3,983	)
Interest rate swaps – monthly net settlements		(9,510	)		(29,079	)		(46,150	)		(88,245	)
Futures Contracts – fair value adjustments		(130,060	)		37,405			(191,720	)		(69,982	)
Futures Contracts – losses from maturities		(13,989	)		(1,810	)		(32,556	)		(24,063	)
Futures Contracts – other realized losses		(2,721	)		-			(25,394	)		-
Mortgage loan purchase commitments - fair value adjustments		368			-			415			-
TBA dollar roll income		20,512			22,370			68,568			68,813
TBA dollar rolls – net realized and unrealized gains (losses)		17,528			(30,288	)		(21,558	)		(6,509	)
Net gain (loss) on derivative instruments	$	(130,301	)	$	35,430		$	(252,501	)	$	(61,445	)

Interest Rate Swap

Schedule of Derivative Instruments Forecasted Transactions

Information regarding the Company’s interest rate swaps as of September 30, 2015 and December 31, 2014 follows.  

	September 30, 2015						December 31, 2014
			Wtd. Avg.						Wtd. Avg.
			Remaining		Wtd. Avg.				Remaining		Wtd. Avg.
	Notional		Term		Fixed Interest		Notional		Term		Fixed Interest
Maturity	Amount		in Months		Rate in Contract		Amount		in Months		Rate in Contract
12 months or less	$	2,000,000		7		1.01%	$	3,700,000		6		1.73%
Over 12 months to 24 months		2,200,000		18		0.88%		2,400,000		18		0.92%
Over 24 months to 36 months		600,000		28		0.95%		1,800,000		29		0.89%
Total	$	4,800,000		15		0.94%	$	8,300,000		16		1.28%

Schedule of Derivative Instruments Loss, Net

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 and nine months ended September 30, 2015 and 2014.  

	Three Months Ended September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Beginning balance	$	(7,325	)	$	(63,567	)	$	(30,042	)	$	(111,174	)
Reclassification of net losses to the income statement		5,433			19,806			28,150			67,413
Ending balance	$	(1,892	)	$	(43,761	)	$	(1,892	)	$	(43,761	)

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 September 30						Nine Months Ended September 30
	2015			2014			2015			2014
Beginning of period		131,276			123,275			130,074			95,327
New positions opened		6,546			22,352			52,563			125,547
Early settlements		(5,220	)		(12,016	)		(32,369	)		(83,444	)
Settlements at maturity		(8,806	)		(2,479	)		(26,472	)		(6,298	)
End of period		123,796			131,132			123,796			131,132