Derivative Financial Instruments

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The following table presents the fair value and notional amount of our derivative financial instruments at December 31, 2016 and December 31, 2015.

Table 10.1 – Fair Value and Notional Amount of Derivative Financial Instruments

	December 31, 2016					December 31, 2015
	Fair Value			Notional Amount		Fair Value			Notional Amount
(In Thousands)
Assets - Risk Management Derivatives
Interest rate swaps	$	19,859		$	1,009,000	$	2,590		$	658,000
TBAs	8,300			850,000		2,734			1,028,500
Swaptions	5,121			345,000		5,191			925,000
Credit default index swaps	—			—		1,207			25,000
Assets - Other Derivatives
Loan purchase commitments	3,315			352,981		4,671			764,161
Total Assets	$	36,595		$	2,556,981	$	16,393		$	3,400,661
Liabilities - Cash Flow Hedges
Interest rate swaps	$	(44,822	)	$	139,500	$	(48,232	)	$	139,500
Liabilities - Risk Management Derivatives
Interest rate swaps	(12,097		)	1,101,500		(10,134		)	1,039,500
TBAs	(4,681		)	510,000		(2,519		)	1,450,500
Futures	(928		)	87,500		(445		)	78,000
Liabilities - Other Derivatives
Loan purchase commitments	(3,801		)	584,862		(1,464		)	375,815
Total Liabilities	$	(66,329	)	$	2,423,362	$	(62,794	)	$	3,083,315
Total Derivative Financial Instruments, Net	$	(29,734	)	$	4,980,343	$	(46,401	)	$	6,483,976

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At December 31, 2016, we were party to swaps and swaptions with an aggregate notional amount of $2.46 billion, TBA agreements sold with an aggregate notional amount of $1.36 billion, and financial futures contracts with an aggregate notional amount of $88 million. At December 31, 2015, we were party to swaps and swaptions with an aggregate notional amount of $2.62 billion, TBA agreements sold with an aggregate notional amount of $2.48 billion, and financial futures contracts with an aggregate notional amount of $78 million.

For the years ended December 31, 2016, 2015, and 2014, risk management derivatives had net market valuation gains of $10 million and net market valuation losses of $65 million and $39 million, respectively. These market valuation gains and losses are recorded in Mortgage banking activities, net, Investment fair value changes, net and MSR income (loss), net on our consolidated statements of income.

Loan Purchase and Forward Sale Commitments

LPCs and FSCs that qualify as derivatives are recorded at their estimated fair values. Net market valuation gains on LPCs and FSCs were $26 million, $50 million, and $14 million for the years ended December 31, 2016, 2015, and 2014, respectively, and were recorded in Mortgage banking activities, net on our consolidated statements of income.

Derivatives Designated as Cash Flow Hedges

To manage the variability in interest expense related to our long-term debt and certain adjustable-rate securitization entity liabilities that are included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges with an aggregate notional balance of $140 million.

For the years ended December 31, 2016, 2015, and 2014, changes in the values of designated cash flow hedges were positive $3 million, negative $1 million, and negative $30 million, respectively, and were recorded in Accumulated other comprehensive income, a component of equity. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in Accumulated other comprehensive income was $44 million and $47 million at December 31, 2016 and December 31, 2015, respectively. Accumulated other comprehensive loss of less than $0.1 million will be amortized into interest expense, a component of our consolidated income statements, over the remaining life of the hedge liabilities.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the years ended December 31, 2016, 2015, and 2014.

Table 10.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges

	Years Ended December 31,
(In Thousands)	2016			2015			2014
Net interest expense on cash flows hedges	$	(5,317	)	$	(5,883	)	$	(5,951	)
Realized net losses reclassified from other comprehensive income	(72		)	(95		)	(164		)
Total Interest Expense	$	(5,389	)	$	(5,978	)	$	(6,115	)

Derivative Counterparty Credit Risk

We incur credit risk to the extent that counterparties to our derivative financial instruments do not perform their obligations under specified contractual agreements. If a derivative counterparty does not perform, we may not receive the proceeds to which we may be entitled under these agreements. Each of our derivative counterparties that is not a clearinghouse must maintain compliance with International Swaps and Derivatives Association (“ISDA”) agreements or other similar agreements (or receive a waiver of non-compliance after a specific assessment) in order to conduct derivative transactions with us. Additionally, we review non-clearinghouse derivative counterparty credit standings, and in the case of a deterioration of creditworthiness, appropriate remedial action is taken. To further mitigate counterparty risk, we exit derivatives contracts with counterparties that (i) do not maintain compliance with (or obtain a waiver from) the terms of their ISDA or other agreements with us; or (ii) do not meet internally established guidelines regarding creditworthiness. Our ISDA and similar agreements currently require full bilateral collateralization of unrealized loss exposures with our derivative counterparties. Through a margin posting process, our positions are revalued with counterparties each business day and cash margin is generally transferred to either us or our derivative counterparties as collateral based upon the directional changes in fair value of the positions. We also attempt to transact with several different counterparties in order to reduce our specific counterparty exposure. With respect to certain of our derivatives, clearing and settlement is through one or more clearinghouses, which may be substituted as a counterparty. Clearing and settlement of derivative transactions through a clearinghouse is also intended to reduce specific counterparty exposure. We consider counterparty risk as part of our fair value assessments of all derivative financial instruments. At December 31, 2016, we assessed this risk as remote and did not record a specific valuation adjustment.

At December 31, 2016, we had outstanding derivative agreements with three counterparties (other than clearinghouses) and were in compliance with ISDA agreements governing our open derivative positions.