Note 4 — Investments in RMBS

RMBS on which the payment of principal and interest is guaranteed by a U.S. government agency or a U.S. government sponsored enterprise are referred to as “Agency RMBS.” RMBS also includes collateralized mortgage obligations (“CMOs”) which are either loss share securities issued by Fannie Mae or Freddie Mac or non-Agency RMBS, sometimes called “private label MBS,” which are structured debt instruments representing interests in specified pools of mortgage loans subdivided into multiple classes, or tranches, of securities, with each tranche having different maturities or risk profiles and different ratings by one or more nationally recognized statistical rating organizations (“NRSRO”). All of the Company’s RMBS are classified as available for sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income (loss) except for securities that are OTTI (dollars in thousands):

Summary of RMBS Assets

As of September 30, 2019

	Original				Gross Unrealized									Weighted Average
Asset Type	Face Value		Book Value		Gains		Losses			Carrying Value^(A)		Number of Securities		Rating	Coupon			Yield^(C)			Maturity (Years)^(D)
RMBS
Fannie Mae	$	1,835,342	$	1,598,859	$	20,154	$	(1,668	)	$	1,617,345		200	(B)		3.82	%		3.67	%		26
Freddie Mac		799,247		692,286		10,328		(478	)		702,136		86	(B)		3.74	%		3.60	%		27
CMOs		171,229		157,306		6,450		-			163,756		39	(B)		5.15	%		5.45	%		16
Total/Weighted Average	$	2,805,818	$	2,448,451	$	36,932	$	(2,146	)	$	2,483,237		325			3.89	%		3.77	%		26

As of December 31, 2018

	Original				Gross Unrealized							Number		Weighted Average
Asset Type	Face Value		Book Value		Gains		Losses			Carrying Value^(A)		of Securities		Rating	Coupon			Yield^(C)			Maturity (Years)^(D)
RMBS
Fannie Mae	$	1,362,606	$	1,208,854	$	224	$	(30,914	)	$	1,178,164		154	(B)		3.87	%		3.70	%		25
Freddie Mac		548,862		471,148		246		(12,386	)		459,008		63	(B)		3.75	%		3.60	%		27
CMOs		130,629		128,418		5,136		(616	)		132,938		30	(B)		5.79	%		5.78	%		15
Total/Weighted Average	$	2,042,097	$	1,808,420	$	5,606	$	(43,916	)	$	1,770,110		247			3.98	%		3.82	%		25

(A)	See Note 9 regarding the estimation of fair value, which approximates carrying value for all securities.

(B)

The Company used an implied AAA rating for the Agency RMBS. CMOs issued by Fannie Mae or Freddie Mac consist of loss share securities, the majority of which, by unpaid principal balance (“UPB”), are unrated or rated below investment grade at September 30, 2019 by at least one NRSRO. The Company’s private label securities are rated investment grade by at least one NRSRO as of September 30, 2019.

(C)	The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.

(D)	The weighted average maturity is based on the timing of expected principal reduction on the assets.

Summary of RMBS Assets by Maturity

As of September 30, 2019

	Original				Gross Unrealized							Number		Weighted Average
Years to Maturity	Face Value		Book Value		Gains		Losses			Carrying Value^(A)		of Securities		Rating	Coupon			Yield^(C)			Maturity (Years)^(D)
5-10 Years	$	54,918	$	47,742	$	2,287	$	-		$	50,029		14	(B)		5.78	%		6.14	%		09
Over 10 Years		2,750,900		2,400,709		34,645		(2,146	)		2,433,208		311	(B)		3.85	%		3.72	%		26
Total/Weighted Average	$	2,805,818	$	2,448,451	$	36,932	$	(2,146	)	$	2,483,237		325			3.89	%		3.77	%		26

As of December 31, 2018

	Original				Gross Unrealized							Number		Weighted Average
Years to Maturity	Face Value		Book Value		Gains		Losses			Carrying Value^(A)		of Securities		Rating	Coupon			Yield^(C)			Maturity (Years)^(D)
5-10 Years	$	24,377	$	15,100	$	731	$	(134	)	$	15,697		7	(B)		4.97	%		4.93	%		09
Over 10 Years		2,017,720		1,793,320		4,875		(43,782	)		1,754,413		240	(B)		3.97	%		3.81	%		25
Total/Weighted Average	$	2,042,097	$	1,808,420	$	5,606	$	(43,916	)	$	1,770,110		247			3.98	%		3.82	%		25

(A)	See Note 9 regarding the estimation of fair value, which approximates carrying value for all securities.

(B)

The Company used an implied AAA rating for the Agency RMBS. CMOs issued by Fannie Mae or Freddie Mac consist of loss share securities, the majority of which, by UPB, are unrated or rated below investment grade at September 30, 2019 by at least one NRSRO. The Company’s private label securities are rated investment grade by at least one NRSRO as of September 30, 2019.

(C)	The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.

(D)	The weighted average maturity is based on the timing of expected principal reduction on the assets.

At September 30, 2019 and December 31, 2018, the Company pledged Agency RMBS with a carrying value of approximately $2,363.2 million and $1,698.7 million, respectively, as collateral for borrowings under repurchase agreements. At September 30, 2019 and December 31, 2018, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, to be considered linked transactions and, therefore, classified as derivatives.

Based on management’s analysis of the Company’s securities, the performance of the underlying loans and changes in market factors, management determined that unrealized losses as of the balance sheet date on the Company’s securities were primarily the result of changes in market factors, rather than issuer-specific credit impairment, and such losses were considered temporary. The Company performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding periods. Such market factors include changes in market interest rates and credit spreads and certain macroeconomic events, none of which will directly impact the Company’s ability to collect amounts contractually due. Management continually evaluates the credit status of each of the Company’s securities and the collateral supporting those securities. This evaluation includes a review of the credit of the issuer of the security (if applicable), the credit rating of the security (if applicable), the key terms of the security (including credit support), debt service coverage and loan to value ratios, the performance of the pool of underlying loans and the estimated value of the collateral supporting such loans, including the effect of local, industry and broader economic trends and factors. Significant judgment is required in this analysis. In connection with the above, the Company weighs the fact that a substantial majority of its investments in RMBS are guaranteed by U.S. government agencies or U.S. government sponsored enterprises.

Unrealized losses that are considered other than temporary are recognized in earnings. The Company did not record any OTTI charges during the three and nine-month periods ended September 30, 2019. The Company did not record any OTTI charges during the three-month period ended September 30, 2018. The Company recorded approximately $45,000 of OTTI charges during the nine-month period ended September 30, 2018.

The following tables summarize the Company’s securities in an unrealized loss position as of the dates indicated (dollars in thousands):

RMBS Unrealized Loss Positions

As of September 30, 2019

	Original				Gross							Weighted Average
Duration in Loss Position	Face Value		Book Value		Unrealized Losses			Carrying Value^(A)		Number of Securities		Rating	Coupon			Yield^(C)			Maturity (Years)^(D)
Less than Twelve Months	$	197,867	$	183,984	$	(355	)	$	183,629		22	(B)		3.70	%		3.52	%		28
Twelve or More Months		233,284		185,355		(1,791	)		183,564		33	(B)		3.72	%		3.50	%		24
Total/Weighted Average	$	431,151	$	369,339	$	(2,146	)	$	367,193		55			3.71	%		3.51	%		26

As of December 31, 2018

	Original				Gross							Weighted Average
Duration in Loss Position	Face Value		Book Value		Unrealized Losses			Carrying Value^(A)		Number of Securities		Rating	Coupon			Yield^(C)			Maturity (Years)^(D)
Less than Twelve Months	$	256,937	$	224,617	$	(1,563	)	$	223,054		28	(B)		4.26	%		4.14	%		24
Twelve or More Months		1,512,169		1,321,115		(42,353	)		1,278,762		181	(B)		3.78	%		3.60	%		25
Total/Weighted Average	$	1,769,106	$	1,545,732	$	(43,916	)	$	1,501,816		209			3.85	%		3.68	%		25

(A)	See Note 9 regarding the estimation of fair value, which approximates carrying value for all securities.

(B)

(C)	The weighted average yield is based on the most recent gross monthly interest income, which is then annualized and divided by the book value of settled securities.

(D)

The weighted average maturity is based on the timing of expected principal reduction on the assets. Except for the security for which the Company has recognized OTTI, the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases which may be maturity.