DERIVATIVE INSTRUMENTS HEDGING AND NON-HEDGING ACTIVITIES

3 Months Ended

Mar. 31, 2015

Derivative Instrument Detail [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 11 – DERIVATIVE INSTRUMENTS HEDGING AND NON-HEDGING ACTIVITIES

With effect from January 1, 2015, ASU 2014-11 changes the basis on which we account for repurchase to maturity transactions and linked repurchase financings to be consistent with the basis on which we account for secured borrowings. Accordingly, the assets and repurchase agreements that encompass linked transactions that were previously accounted for on a net basis and recorded as a forward purchase (derivative) contract are now bifurcated, and the gross amounts are reported in available-for-sale securities and repurchase agreements separately. Consequently, our GAAP financial statements as of and for the period ended March 31, 2015 are not directly comparable to prior period GAAP financials. 

The Company enters into a variety of derivative instruments in connection with its risk management activities. The Company's primary objective for executing these derivatives and non-derivative instruments is to mitigate the Company's economic exposure to future events that are outside its control. The Company's derivative financial instruments are utilized principally to manage market risk and cash flow volatility associated with interest rate risk (including associated prepayment risk) related to certain assets and liabilities. As part of its risk management activities, the Company may, at times, enter into various forward contracts, including short securities, Agency to-be-announced securities, or TBAs, options, futures, swaps, swaption and caps. In executing on the Company's current risk management strategy, the Company has entered into interest rate swap, swaption agreements, TBA’s and futures contracts. Amounts receivable and payable under interest rate swap agreements are accounted for as unrealized gain (loss) on derivative contracts, net in the condensed consolidated statement of operations. Premiums on swaptions are amortized on a straight line basis between trade date and expiration date and are recognized in the condensed consolidated statement of operations as a realized loss on derivative contracts. In addition, as set out in Note 3, prior to ASU 2014-11, the Company recorded Linked Transactions as a forward purchase (derivative) contract at fair value on the condensed consolidated balance sheet. Although Linked Transactions were accounted for as derivative instruments, they were not entered into as part of the Company’s risk management activities and were not designated as hedging instruments.

The following summarizes the Company's significant asset and liability derivatives, the risk exposure for these derivatives and the Company's risk management activities used to mitigate certain of these risks. While the Company uses derivative instruments to achieve the Company's risk management activities, it is possible that these instruments will not effectively mitigate all or a substantial portion of the Company's market rate risk. In addition, the Company might elect, at times, not to enter into certain hedging arrangements in order to maintain compliance with REIT requirements.

Balance Sheet Presentation

The following tables present the gross fair value and notional amounts of the Company’s derivative financial instruments as of March 31, 2015 and December 31, 2014.

	March 31, 2015
	Derivative Assets			Derivative Liabilities
	Fair value		Notional	Fair value		Notional
Interest rate swaps	$	-	-	$	(3,627,780)	226,000,000
Futures		-	-		(474,766)	47,000,000
Total	$	-	-	$	(4,102,546)	273,000,000

	December 31, 2014
	Derivative Assets			Derivative Liabilities
	Fair value		Notional	Fair value		Notional
Interest rate swaps	$	-	-	$	(1,755,107)	226,000,000
Swaptions		21,550	25,000,000		-	-
Futures		-	-		(533,951)	98,000,000
Total	$	21,550	25,000,000	$	(2,289,058)	324,000,000

The following tables present the average fixed pay rate and average maturity for the Company’s interest rate swaps (excludes interest rate swaptions) as of March 31, 2015 and December 31, 2014:

	March 31, 2015
	Notional		Fair		Fixed Pay		Maturity	Forward
Current Maturity Date	Amount		Value		Rate		Years	Starting
3 years or less	$	35,000,000	$	(112,325)	0.66	%	0.8	0.0	%
Greater than 3 years and less than 5 years		191,000,000.0		(3,515,455)	1.66	%	3.5	0.0	%
Total	$	226,000,000	$	(3,627,780)	1.51	%	3.1	0.0	%

	December 31, 2014
	Notional		Fair		Fixed Pay		Maturity	Forward
Current Maturity Date	Amount		Value		Rate		Years	Starting
3 years or less	$	35,000,000	$	(124,591)	0.66	%	1.1	0.0	%
Greater than 3 years and less than 5 years		191,000,000		(1,630,516)	1.66	%	3.7	0.0	%
Total	$	226,000,000	$	(1,755,107)	1.51	%	3.3	0.0	%

Offsetting of Financial Assets and Liabilities

The Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default of either counterparty to the agreement. The Company also has in place with its counterparties ISDA Master Agreements (“Master Agreements”) for its derivative contracts. In accordance with the Master Agreements to each counterparty, if on any date amounts would otherwise be payable in the same currency and in respect of the same transaction by each party to the other, then, on such date, each party’s obligation to make payment of any such amount will be automatically satisfied and discharged and, if the aggregate amount that would otherwise have been payable by one party exceeds the aggregate amount that would otherwise have been payable by the other party, replaced by an obligation upon the party by whom the larger aggregate amount would have been payable to pay to the other party the excess of the larger aggregate amount over the smaller aggregate amount. The Company has pledged financial collateral as restricted cash to its counterparties for its derivative contracts and repurchase agreements. See Note 2 for specific details on the terms of restricted cash with counterparties and Note 6 for the amounts of restricted cash outstanding.

Under GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to Master Agreements or similar agreements on a gross basis, and derivative assets and liabilities subject to such arrangements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.

The below tables provide a reconciliation of these assets and liabilities that are subject to Master Agreements or similar agreements and can be potentially offset on the Company’s condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014:

	March 31, 2015
							Gross amounts not offset
							in the Balance Sheet (1)
					Net amounts
	Gross amounts		Gross amounts		of liabilities				Cash collateral
	of recognized		offset in the		presented in the		Financial		(Received)/		Net
Description	liabilities		Balance Sheet		Balance Sheet		instruments		Pledged		amount
Repurchase agreements and secured loans	$	745,847,853	$	-	$	745,847,853	$	-	$	-	$	745,847,853
Interest rate swaps		(3,627,780)		-		(3,627,780)		-		3,627,780		-
Futures		(474,766)		-		(474,766)		-		474,766		-
Total	$	741,745,307	$	-	$	741,745,307	$	-	$	4,102,546	$	745,847,853

	December 31, 2014
							Gross amounts not offset
							in the Balance Sheet (1)
					Net amounts
	Gross amounts		Gross amounts		of assets				Cash collateral
	of recognized		offset in the		presented in the		Financial		(Received)/		Net
Description	assets		Balance Sheet		Balance Sheet		instruments		Pledged		amount
Linked transactions(2)	$	210,402,629	$	(149,584,518)	$	60,818,111	$	(60,818,111)	$	-	$	-
Swaptions		21,550		-		21,550		-		-		21,550
Total	$	210,424,179	$	(149,584,518)	$	60,839,661	$	(60,818,111)	$	-	$	21,550

	December 31, 2014
							Gross amounts not offset
							in the Balance Sheet (1)
					Net amounts
	Gross amounts		Gross amounts		of liabilities				Cash collateral
	of recognized		offset in the		presented in the		Financial		(Received)/		Net
Description	liabilities		Balance Sheet		Balance Sheet		instruments		Pledged		amount
Repurchase agreements	$	594,877,852	$	-	$	594,877,852	$	-	$	-	$	594,877,852
Linked transactions(2)		(149,584,518)		149,584,518		-		-		-		-
Interest rate swaps		(1,755,107)		-		(1,755,107)		-		1,755,107		-
Futures		(533,951)		-		(533,951)		-		533,951		-
Total	$	443,004,276	$	149,584,518	$	592,588,794	$	-	$	2,289,058	$	594,877,852

(1) Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to Master Agreements or similar agreements, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the tables above.

(2) Non-Agency RMBS and Multi-Family MBS securities within a linked transaction serve as collateral for the linked transaction. See Note 3 “Non-Hedging Activity – Linked Transactions” for information on linked transaction arrangements.

Income Statement Presentation

The Company has not applied hedge accounting to its current derivative portfolio held to mitigate the interest rate risk associated with its debt portfolio. As a result, the Company is subject to volatility in its earnings due to movement in the unrealized gains and losses associated with its interest rate swaps, swaptions and any other derivative instruments.

The following table summarizes the underlying hedged risks and the amount of gains and losses on derivative instruments reported net in the condensed consolidated statement of operations as realized gain (loss) on derivative contracts, net and unrealized gain (loss) on derivative contracts, net for the three months ended March 31, 2015 and March 31, 2014:

	Three months ended March 31, 2015
	Amount of realized		Amount of unrealized
Primary underlying risk	gain (loss)		appreciation (depreciation)		Total
Interest rate:
Interest rate swaps	$	(520,922)	$	(1,872,674)	$	(2,393,596)
Swaptions		(84,000)		62,450		(21,550)
Futures		(2,225,564)		59,186		(2,166,378)
Total	$	(2,830,486)	$	(1,751,038)	$	(4,581,524)

	Three Months Ended March 31, 2014
	Amount of realized		Amount of unrealized
Primary underlying risk	gain (loss)		appreciation (depreciation)		Total
Interest rate:
Interest rate swaps	$	(376,314)	$	(4,229,298)	$	(4,605,612)
Swaptions		(84,000)		(680,405)		(764,405)
Futures		(191,047)		(154,265)		(345,312)
TBAs		(191,406)		(68,359)		(259,765)
Total	$	(842,767)	$	(5,132,327)	$	(5,975,094)

(1) In the three month period ended March 31, 2015, net swap interest expense totaled $712,406 comprised of $520,922 in interest expense paid (included in realized gain (loss) and $191,484 in accrued interest expense (included in unrealized appreciation (depreciation). In the three month period ended March 31, 2014 net swap interest expense totaled $637,015 comprised of $376,314 in interest expense paid (included in realized gain (loss) and $260,701 in accrued interest expense (included in unrealized appreciation (depreciation).