Derivatives and Other Hedging Instruments (Tables)

3 Months Ended

Mar. 31, 2016

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 5.  The fair value of forward purchase commitments for whole loans was determined using the same methodologies as mortgage loans as described in Note 6.  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 March 31, 2016 and December 31, 2015, respectively.  

Derivative Instruments	Balance Sheet Location	March 31, 2016		December 31, 2015
Interest rate swaps and swaptions	Derivative assets	$	6	$	2,031
Futures Contracts	Derivative assets		-		693
Forward purchase commitments - MBS	Derivative assets		20,150		165
Forward purchase commitments - mortgage loans	Derivative assets		51		25
		$	20,207	$	2,914
Interest rate swaps	Derivative liabilities	$	11,440	$	6,802
Futures Contracts	Derivative liabilities		407,842		286,058
Forward purchase commitments - MBS	Derivative liabilities		-		32,373
		$	419,282	$	325,233

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
	2016			2015
Beginning of period	$	4,600,000		$	8,300,000
Expirations and terminations		(600,000	)		(1,000,000	)
End of period	$	4,000,000		$	7,300,000

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, 2016, the Company had four 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	$	6,813	$	6		4	$	2,000,000		3.35%	3 month LIBOR		6

As of December 31, 2015, the Company had six 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	$	10,813	$	727		6	$	3,065,000		3.23%	3 month LIBOR		6

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, 2016 and December 31, 2015, respectively.  

	Fair Value
	March 31, 2016			December 31, 2015
Futures Contracts designed to replicate swaps	$	(407,408	)	$	(285,711	)
Futures Contracts designed to hedge value changes in forward purchases		(434	)		346
Total fair value of Futures Contracts	$	(407,842	)	$	(285,365	)

Schedule of ARM Securities Forward Purchase Commitments with Brokers

The following table summarizes the Company’s forward purchase commitments as of March 31, 2016.

	Face / UPB		Cost		Fair Market Value		Net Asset (Liability)
ARMs - originators	$	173,605	$	177,117	$	178,699	$	1,582
Fixed-rate TBA dollar roll securities		3,617,000		3,739,204		3,757,772		18,568
Whole mortgage loans		14,010		14,003		14,054		51
Total purchase commitments	$	3,804,615	$	3,930,324	$	3,950,525	$	20,201

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

	Face / UPB		Cost		Fair Market Value		Net Asset (Liability)
ARMs - originators	$	145,246	$	147,749	$	147,914	$	165
Fixed-rate TBA dollar roll securities		2,655,000		2,736,748		2,704,375		(32,373	)
Whole mortgage loans		26,523		26,700		26,725		25
Total purchase commitments	$	2,826,769	$	2,911,197	$	2,879,014	$	(32,183	)

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, 2016.

	Assets/(Liabilities)			Cash Collateral Posted (Held)			Net Asset/(Liability)
Interest rate swaps	$	-		$	-		$	-
Interest rate swaptions		6			(25	)		(19	)
Futures contracts		-			-			-
Forward purchase commitments		20,201			-			20,201
Interest rate swaps	$	(11,440	)	$	16,518		$	5,078
Futures contracts		(407,842	)		447,624			39,782
Forward purchase commitments		-			5,148			5,148

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, 2015.

	Assets/(Liabilities)			Cash Collateral Posted (Held)			Net Asset/(Liability)
Interest rate swaps		1,304			-			1,304
Interest rate swaptions		727			(1,106	)		(379	)
Futures contracts		693			-			693
Forward purchase commitments		190			-			190
Interest rate swaps		(6,802	)		14,626			7,824
Futures contracts		(286,058	)		335,084			49,026
Forward purchase commitments		(32,373	)		25,687			(6,686	)

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, 2016 and 2015.  

	Three Months Ended March 31
	2016			2015
Interest rate swaps – net realized and    unrealized gains	$	(5,942	)	$	1,116
Interest rate swaptions – net realized    and unrealized losses		(721	)		(3,027	)
Interest rate swaps – monthly net settlements		(5,411	)		(21,423	)
Futures Contracts – fair value adjustments		(122,477	)		(94,016	)
Futures Contracts – losses from maturities		(18,630	)		(7,493	)
Futures Contracts – other realized losses		(9,884	)		(22,374	)
Mortgage loan purchase commitments -    fair value adjustments		(20	)		331
TBA dollar roll income		17,602			23,155
TBA dollar rolls – net realized and    unrealized gains (losses)		52,989			20,946
Net gain (loss) on derivative instruments	$	(92,494	)	$	(102,785	)

Interest Rate Swap

Schedule of Derivative Instruments Forecasted Transactions

Information regarding the Company’s interest rate swaps as of March 31, 2016 and December 31, 2015 follows.  

	March 31, 2016						December 31, 2015
			Wtd. Avg.						Wtd. Avg.
			Remaining		Wtd. Avg.				Remaining		Wtd. Avg.
	Notional		Term		Fixed Interest		Notional		Term		Fixed Interest
Maturity	Amount		in Months		Rate		Amount		in Months		Rate
12 months or less	$	2,400,000		6		0.95%	$	2,400,000		6		0.92%
Over 12 months to 24 months		1,600,000		17		0.87%		1,800,000		17		0.89%
Over 24 months to 36 months		-		-		-		400,000		26		0.96%
Total	$	4,000,000		11		0.92%	$	4,600,000		12		0.91%

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 months ended March 31, 2016 and 2015.  

	Three Months Ended March 31
	2016		2015
Beginning balance	$	673	$	(30,042	)
Reclassification of net losses to the income statement		1,376		13,438
Ending balance	$	2,049	$	(16,604	)

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
	2016			2015
Beginning of period		108,824			130,074
New positions opened		1,773			20,518
Early settlements		(5,427	)		(13,268	)
Settlements at maturity		(9,712	)		(8,611	)
End of period		95,458			128,713