DERIVATIVE INSTRUMENTS HEDGING AND NON-HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2014

Derivative Instrument Detail [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

NOTE 11 – DERIVATIVE INSTRUMENTS HEDGING AND NON-HEDGING ACTIVITIES

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 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 consolidated statement of operations as a realized loss on derivative contracts. In addition, as set out in Note 3, the Company records Linked Transactions as a forward purchase (derivative) contract at fair value on the consolidated balance sheet. Although Linked Transactions are accounted for as derivative instruments, they are not entered into as part of the Company’s risk management activities and are 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 December 31, 2014 and December 31, 2013. The Company’s Linked Transactions are evaluated on a combined basis.

	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
Linked transactions		60,818,111		-		-		-
Total	$	60,839,661		25,000,000	$	(2,289,058)		324,000,000

	December 31, 2013
	Derivative Assets				Derivative Liabilities
	Fair value		Notional		Fair value		Notional
Interest rate swaps	$	237,989		57,000,000	$	(1,231,667)		281,000,000
Swaptions		1,770,795		25,000,000		-		-
Futures		154,265		10,000,000		-		-
TBAs		68,359		25,000,000		-		-
Linked transactions		33,352,562		-		-		-
Total	$	35,583,970		117,000,000	$	(1,231,667)		281,000,000

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 December 31, 2014 and December 31, 2013:

	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	%

	December 31, 2013
	Notional		Fair		Fixed Pay			Maturity		Forward
Current Maturity Date	Amount		Value		Rate			Years		Starting
3 years or less	$	35,000,000	$	(166,619)		0.66	%		2.1		0.0	%
Greater than 3 years and less than 5 years		151,000,000		(764,807)		1.66	%		4.6		0.0	%
Greater than 7 years and less than 10 years		95,000,000		(300,242)		2.85	%		7.6		100.0	%
Greater than 10 years		57,000,000		237,990		3.29	%		10.7		100.0	%
Total	$	338,000,000	$	(993,678)		2.17	%		6.2		45.0	%

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 9 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 consolidated balance sheets. Separately, the company presents cash collateral subject to such arrangements on a net basis, based on counterparty, in its consolidated balance sheets. However, the Company does not offset financial assets and liabilities with the associated cash collateral on its 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 consolidated balance sheets as of December 31, 2014 and December 31, 2013:

	December 31, 2014
							Gross amounts not offset
					Net amounts		in the Balance Sheet (1)
					of assets
	Gross amounts of recognized		Gross amounts offset in the		presented in the		Financial		Cash collateral (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)
	Gross amounts		Gross amounts		Net 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

	December 31, 2013
							Gross amounts not offset
					Net amounts		in the Balance Sheet (1)
	Gross amounts		Gross amounts		of assets presented in				Cash collateral
	of recognized		offset in the		the		Financial		(Received)/		Net
Description	assets		Balance Sheet		Balance Sheet		instruments		Pledged		amount
Linked transactions (2)	$	94,645,860	$	(61,293,298)	$	33,352,562	$	(33,352,562)	$	-	$	-
TBAs		68,359		-		68,359		-		-		68,359
Swaptions		1,770,795		-		1,770,795		-		-		1,770,795
Interest rate swaps		237,989		(237,989)		-		-		-		-
Futures		154,265		(154,265)		-		-		-		-
Total	$	96,877,268	$	(61,685,552)	$	35,191,716	$	(33,352,562)	$	-	$	1,839,154

	December 31, 2013
							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	$	(412,172,000)	$	-	$	(412,172,000)	$	412,172,000	$	-	$	-
Linked transactions (2)		(61,293,298)		61,293,298		-		-		-		-
Interest rate swaps		(1,231,667)		237,989		(993,678)		-		993,678		-
Futures		-		154,265		154,265		-		(154,265)		-
Total	$	(474,696,965)	$	61,685,552	$	(413,011,413)	$	412,172,000	$	839,413	$	-

(1) Amounts presented are limited in total to the net amount of assets or liabilities presented in the 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.

Linked Transactions

The Company’s Linked Transactions are accounted for on a net basis and recorded as forward purchase (derivative) contracts at fair value on the Company’s consolidated balance sheets. The fair value of Linked Transactions reflects the value of the underlying Non-Agency RMBS, Multi-Family MBS, the linked repurchase borrowings and accrued interest receivable/payable on such instruments. The Company’s Linked Transactions are not designated as hedging instruments and, as a result, the change in fair value and net interest income is reported as “Unrealized gain (loss) and net interest income from Linked Transactions” in other income on the Company’s consolidated statement of operations.

The following tables present certain information concerning the Non-Agency RMBS, Multi-Family MBS and repurchase financings underlying the Company’s Linked Transactions as of December 31, 2014 and December 31, 2013:

	December 31, 2014
	Non-Agency		Multi-Family		Total
Face Value	$	186,532,050	$	102,968,560	$	289,500,610
Unamortized premium		-		-		-
Unamortized discount
Designated credit reserve		(36,627,428)		-		(36,627,428)
Net, unamortized		(28,768,448)		(18,323,619)		(47,092,067)
Amortized Cost		121,136,174		84,644,941		205,781,115
Gross unrealized gain		5,733,793		1,770,361		7,504,154
Gross unrealized loss		(2,441,655)		(604,957)		(3,046,612)
Fair Value	$	124,428,312	$	85,810,345	$	210,238,657

	December 31, 2013
	Non-Agency		Multi-Family		Total
Face Value	$	148,864,823	$	-	$	148,864,823
Unamortized premium		-		-		-
Unamortized discount
Designated credit reserve		(29,857,597)		-		(29,857,597)
Net, unamortized		(30,770,386)		-		(30,770,386)
Amortized Cost		88,236,840		-		88,236,840
Gross unrealized gain		6,859,625		-		6,859,625
Gross unrealized loss		(473,672)				(473,672)
Fair Value	$	94,622,793	$	-	$	94,622,793

The following tables present the changes for the years ended December 31, 2014 and December 31, 2013, and the period May 16, 2012 (commencement of operations) to December 31, 2012 of the unamortized net discount and designated credit reserves on Non-Agency RMBS and Multi-Family MBS underlying Linked Transactions:

	December 31, 2014
	Designated		Unamortized
	credit reserve		net discount		Total
Beginning Balance as at January 1, 2014	$	(29,857,597)	$	(30,770,386)	$	(60,627,983)
Acquisitions		(19,384,939)		(47,651,628)		(67,036,567)
Dispositions		9,468,964		15,465,093		24,934,057
Accretion of net discount		-		12,122,919		12,122,919
Realized credit losses		3,146,144		-		3,146,144
Release of credit reserves		-		3,741,935		3,741,935
Ending balance at December 31, 2014	$	(36,627,428)	$	(47,092,067)	$	(83,719,495)

	December 31, 2013
	Designated		Unamortized
	credit reserve		net discount		Total
Acquisitions	$	(37,793,143)	$	(29,569,939)	$	(67,363,082)
Accretion of net discount		-		3,647,915		3,647,915
Realized credit losses		3,087,184		-		3,087,184
Release of credit reserves		4,848,362		(4,848,362)		-
Ending balance at December 31, 2013	$	(29,857,597)	$	(30,770,386)	$	(60,627,983)

	December 31, 2012
	Designated		Unamortized
	credit reserve		net discount		Total
Acquisitions	$	(13,934,657)	$	(7,592,017)	$	(21,526,674)
Accretion of net discount		-		870,268		870,268
Realized credit losses		1,005,426		-		1,005,426
Ending balance at December 31, 2012	$	(12,929,231)	$	(6,721,749)	$	(19,650,980)

Linked Repurchase Agreements

	December 31, 2014
Repurchase Agreement Counterparties	Amount Outstanding		Percent of total amount outstanding			Weighted average days to maturity		Company RMBS held as collateral
North America		86,985,000		58.26	%		33		124,620,916
Europe (1)		46,381,000		31.07	%		15		62,487,229
Asia (1)		15,927,000		10.67	%		9		23,130,512
Total	$	149,293,000		100.00	%		25	$	210,238,657

(1) Counterparties domiciled in Europe and Asia, or their U.S. subsidiaries.

	December 31, 2013
Repurchase Agreement Counterparties	Amount Outstanding		Percent of total amount outstanding			Weighted average days to maturity		Company RMBS held as collateral
North America		52,871,000		86.42	%		21		79,528,540
Asia (1)		4,987,000		8.15	%		7		8,790,416
Europe (1)		3,323,000		5.43	%		43		6,303,837
Total	$	61,181,000		100.00	%		21	$	94,622,793

(1) Counterparties domiciled in Europe and Asia, or their U.S. subsidiaries.

At December 31, 2014, Linked Transactions also included $163,972 of associated accrued interest receivable and $291,518 of accrued interest payable. 

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 consolidated statement of operations as realized gain (loss) on derivative contracts, net and unrealized gain (loss) on derivative contracts, net for the years ended December 31, 2014 and December 31, 2013, and for the period May 16, 2012 (commencement of operations) to December 31, 2012:

	Year Ended December 31, 2014
	Amount of		Amount of  unrealized
Primary underlying risk	realized gain (loss)		appreciation  (depreciation)(1)		Total
Interest rate:
Interest rate swaps	$	(9,705,847)	$	(761,429)	$	(10,467,276)
Swaptions		(336,000)		(1,413,244)		(1,749,244)
Futures		(8,621,211)		(688,217)		(9,309,428)
TBAs		448,598		(68,359)		380,239
Total	$	(18,214,460)	$	(2,931,249)	$	(21,145,709)

	Year Ended December 31, 2013
	Amount of		Amount of  unrealized
Primary underlying risk	realized gain (loss)		appreciation  (depreciation)(1)		Total
Interest rate:
Interest rate swaps	$	19,283,710	$	(709,923)	$	18,573,787
Swaptions		(278,667)		1,365,399		1,086,732
Futures		(8,595)		154,265		145,670
TBAs		(183,594)		68,359		(115,235)
Total	$	18,812,854	$	878,100	$	19,690,954

 

	Period May 16, 2012 to December 31, 2012
Primary underlying risk	Amount of realized gain (loss)		Amount of unrealized appreciation (depreciation)		Total
Interest rate:
Interest rate swaps	$	(38,218)	$	(283,754)	$	(321,972)
Swaptions		(37,333)		(14,605)		(51,938)
Total	$	(75,551)	$	(298,159)	$	(373,910)

(1) In the year ended December 31, 2014, net swap interest expense totaled $3,495,232 comprised of $3,329,219 in interest expense paid (included in realized gain (loss))and $166,013 in accrued interest expense (included in unrealized appreciation (depreciation)). In the year ended December 31, 2013 net swap interest expense totaled $1,724,725 comprised of $1,414,578 in interest expense paid (included in realized gain (loss)) and $310,147 in accrued interest expense (included in unrealized appreciation (depreciation)). For the period May 16, 2012 (commencement of operations) to December 31, 2012, net swap interest expense totaled $68,358 comprised of $38,218 in interest expense paid (included in realized gain (loss)) and $30,140 in accrued interest expense (included in unrealized appreciation (depreciation)).

The following table presents certain information about the components of the unrealized net gain (loss) and net interest income from Linked Transactions included in the Company’s consolidated statement of operations for the years ended December 31, 2014 and December 31, 2013, and the period May 16, 2012 (commencement of operations) to December 31, 2012:

	Year Ended		Year Ended
	December 31,  2014		December 31,  2013		Period May 16, 2012 to December 31, 2012
Interest income attributable to AFS underlying Linked Transactions	$	15,427,632	$	4,025,456	$	1,020,437
Interest expense attributable to linked repurchase agreement borrowings underlying Linked Transactions		(2,893,375)		(622,942)		(147,867)
Change in fair value of Linked Transactions included in earnings		(1,928,409)		2,435,795		3,950,157
Unrealized gain (loss) and net interest income from Linked Transactions	$	10,605,848	$	5,838,309	$	4,822,727