AGENCY MBS

The following table presents the components of the Company’s investment in Agency MBS as of September 30, 2012 and December 31, 2011:



	September 30, 2012
	RMBS			CMBS			CMBS IO ⁽¹⁾			Total
Principal/par value	$	2,627,300		$	289,726		$	—		$	2,917,026
Unamortized premium	145,922			21,898			508,326			676,146
Unamortized discount	(14		)	—			—			(14		)
Amortized cost	2,773,208			311,624			508,326			3,593,158
Available for sale (recognized in statement of comprehensive income):
Gross unrealized gains	32,315			20,843			10,880			64,038
Gross unrealized losses	(5,428		)	(2		)	(3,693		)	(9,123		)
Trading (recognized in income statement):
Gross unrealized gains	—			2,599			—			2,599
Total Agency MBS fair value:	$	2,800,095		$	335,064		$	515,513		$	3,650,672
Weighted average coupon	3.73		%	5.20		%	0.96		%


(1)	The combined notional balance for the Agency CMBS IO securities is $9,251,338 as of September 30, 2012.



	December 31, 2011
	RMBS			CMBS			CMBS IO ⁽¹⁾			Total
Principal/par value	$	1,488,397		$	266,952		$	—		$	1,755,349
Unamortized premium	85,488			21,627			86,358			193,473
Unamortized discount	(17		)	—			—			(17		)
Amortized cost	1,573,868			288,579			86,358			1,948,805
Available for sale (recognized in statement of comprehensive income):
Gross unrealized gains	10,787			11,746			350			22,883
Gross unrealized losses	(7,405		)	—			(1,043		)	(8,448		)
Trading (recognized in income statement):
Gross unrealized gains	—			1,919			—			1,919
Total Agency MBS fair value:	$	1,577,250		$	302,244		$	85,665		$	1,965,159
Weighted average coupon	4.54		%	5.20		%	0.96		%


(1)	The combined notional balance for the Agency CMBS IO securities is $1,813,096 as of December 31, 2011.

The Company purchased $1,707,077 of Agency RMBS and $477,774 of Agency CMBS, consisting principally of CMBS IOs, since December 31, 2011. Agency CMBS IOs are secured by excess interest payments on pools of multifamily housing mortgage loans. As these securities have no principal associated with them, the interest payments received are based on the unpaid principal balance (often referred to as the notional amount) of the underlying pool of mortgage loans. The IO securities have prepayment protection in the form of lock-outs and/or yield maintenance associated with the underlying loans.

As of September 30, 2012 and December 31, 2011, the amortized cost of Agency CMBS designated as trading was $27,687 and $28,119, respectively. The Company recognized a net unrealized gain for the three and nine months ended September 30, 2012 of $283 and $716 compared to $744 and $1,819 for the three and nine ended September 30, 2011, respectively, related to changes in fair value, which is included within “fair value adjustments, net” in the Company's consolidated statements of income. The Company also has derivatives designated as trading instruments, and the changes in their fair value are also included within "fair value adjustments, net". Please refer to Note 7 for additional information on these derivatives designated as trading instruments.

The following table presents certain information for those Agency MBS in an unrealized loss position as of September 30, 2012 and December 31, 2011:



	September 30, 2012						December 31, 2011
	Fair Value		Unrealized Loss			# of Securities	Fair Value		Unrealized Loss			# of Securities
Unrealized loss position for:
Less than one year	$	392,903	$	(4,281	)	42	$	680,101	$	(6,765	)	54
One year or more	323,732		(4,832		)	35	160,544		(1,684		)	27
	$	716,635	$	(9,113	)	77	$	840,645	$	(8,449	)	81

Because the principal and interest related to Agency MBS are guaranteed by the government-sponsored entities Fannie Mae and Freddie Mac who have the implicit guarantee of the U.S. government, the Company does not consider any of the unrealized losses on its Agency MBS to be credit related. Although the unrealized losses are not credit related, the Company assesses its ability and intent to hold any Agency MBS with an unrealized loss until the recovery in its value. This assessment is based on the amount of the unrealized loss and significance of the related investment as well as the Company’s current leverage and anticipated liquidity. Based on this analysis, the Company has determined that the unrealized losses on its Agency MBS as of September 30, 2012 and December 31, 2011 were temporary.