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Real Estate Securities
 12 Months Ended
Dec. 31, 2017
Investments, Debt and Equity Securities [Abstract]  
Real Estate Securities
Real Estate Securities
We invest in real estate securities that we acquire from third parties or create and retain from our Sequoia securitizations. The following table presents the fair values of our real estate securities by type at December 31, 2017 and December 31, 2016.
Table 7.1 – Fair Values of Real Estate Securities by Type
(In Thousands)
 
December 31, 2017
 
December 31, 2016
Trading
 
$
968,844

 
$
445,687

Available-for-sale
 
507,666

 
572,752

Total Real Estate Securities
 
$
1,476,510

 
$
1,018,439


Our real estate securities include mortgage backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Re-REMIC securities, as presented herein, were created through the resecuritization of certain senior security interests to provide additional credit support to those interests. These re-REMIC securities are therefore subordinate to the remaining senior security interests, but senior to any subordinate tranches of the securitization from which they were created. Subordinate securities are all interests below senior and re-REMIC interests. We further separate our subordinate securities into mezzanine and subordinate, where mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later. Nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.
Trading Securities
The following table presents the fair value of trading securities by position and collateral type at December 31, 2017 and December 31, 2016.
Table 7.2 – Trading Securities by Position and Collateral Type
(In Thousands)
 
December 31, 2017
 
December 31, 2016
Senior Securities
 
$
69,975

 
$
37,067

Subordinate Securities
 
 
 
 
Mezzanine
 
563,474

 
256,226

Subordinate
 
335,395

 
152,394

Total Subordinate Securities
 
898,869

 
408,620

Total Trading Securities
 
$
968,844

 
$
445,687


We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and commercial/multifamily securities. At December 31, 2017, trading securities with a carrying value of $593 million were pledged as collateral under short-term borrowing agreements. See Note 11 for additional information on short-term debt.
At December 31, 2017 and 2016, our senior trading securities were comprised of interest-only securities, for which there is no principal balance, and our subordinate trading securities had an unpaid principal balance of $943 million and $434 million, respectively.
At December 31, 2017 and 2016, subordinate trading securities included $301 million and $152 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $68 million and $15 million, respectively, of Sequoia securities, $206 million and $149 million, respectively, of other third party residential securities, and $324 million and $92 million, respectively, of third-party commercial/multifamily securities.
During the years ended December 31, 2017 and 2016, we acquired $661 million and $307 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $132 million and $241 million, respectively, of such securities. During the years ended December 31, 2017 and 2016, we recorded net market valuation gains of $40 million and $11 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income.
AFS Securities
The following table presents the fair value of our available-for-sale securities by position and collateral type at December 31, 2017 and December 31, 2016.
Table 7.3 – Available-for-Sale Securities by Position and Collateral Type
(In Thousands)
 
December 31, 2017
 
December 31, 2016
Senior Securities
 
$
140,989

 
$
136,546

Re-REMIC Securities
 
38,875

 
85,479

Subordinate Securities
 
 
 
 
Mezzanine
 
92,002

 
163,715

Subordinate
 
235,800

 
187,012

Total Subordinate Securities
 
327,802

 
350,727

Total AFS Securities
 
$
507,666

 
$
572,752


At December 31, 2017 and December 31, 2016, all of our available-for-sale securities were comprised of residential mortgage backed securities. At December 31, 2017, AFS securities with a carrying value of $195 million were pledged as collateral under short-term borrowing agreements. See Note 11 for additional information on short-term debt.
During the years ended December 31, 2017 and 2016, we purchased $40 million and $35 million of AFS securities, respectively, and sold $90 million and $253 million of AFS securities, respectively, which resulted in net realized gains of $14 million and $21 million, respectively. In addition, during 2017 we exchanged our interests in three Re-REMICs, which together had a fair value of $47 million, for the senior securities underlying the Re-REMICs, and reclassified our interests from Re-REMIC to Senior.
We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive, and thus do not expect to earn or recover, as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.
At December 31, 2017, there were $0.1 million of AFS securities with contractual maturities less than five years, $5 million with contractual maturities greater than five years but less than 10 years, and the remainder of our AFS securities had contractual maturities greater than 10 years.
The following table presents the components of carrying value (which equals fair value) of AFS securities at December 31, 2017 and December 31, 2016.
Table 7.4 – Carrying Value of AFS Securities
December 31, 2017
 
 
 
 
 
 
 
 
(In Thousands)
 
Senior
 
Re-REMIC
 
Subordinate
 
Total
Principal balance
 
$
144,512

 
$
44,613

 
$
419,020

 
$
608,145

Credit reserve
 
(2,936
)
 
(5,820
)
 
(37,793
)
 
(46,549
)
Unamortized discount, net
 
(34,379
)
 
(9,662
)
 
(139,712
)
 
(183,753
)
Amortized cost
 
107,197

 
29,131

 
241,515

 
377,843

Gross unrealized gains
 
35,027

 
9,744

 
86,419

 
131,190

Gross unrealized losses
 
(1,235
)
 
—

 
(132
)
 
(1,367
)
Carrying Value
 
$
140,989

 
$
38,875

 
$
327,802

 
$
507,666

December 31, 2016
 
 
 
 
 
 
 
 
(In Thousands)
 
Senior
 
Re-REMIC
 
Subordinate
 
Total
Principal balance
 
$
148,862

 
$
95,608

 
$
456,359

 
$
700,829

Credit reserve
 
(4,814
)
 
(6,857
)
 
(35,802
)
 
(47,473
)
Unamortized discount, net
 
(41,877
)
 
(19,613
)
 
(136,622
)
 
(198,112
)
Amortized cost
 
102,171

 
69,138

 
283,935

 
455,244

Gross unrealized gains
 
36,304

 
16,341

 
68,032

 
120,677

Gross unrealized losses
 
(1,929
)
 
—

 
(1,240
)
 
(3,169
)
Carrying Value
 
$
136,546

 
$
85,479

 
$
350,727

 
$
572,752


The following table presents the changes for the years ended December 31, 2017 and 2016, in unamortized discount and designated credit reserves on residential AFS securities.
Table 7.5 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities
 
 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
 
Credit
Reserve
 
Unamortized
Discount, Net
 
Credit
Reserve
 
Unamortized
Discount, Net
(In Thousands)
 
 
 
 
Beginning balance
 
$
47,473

 
$
198,112

 
$
48,869

 
$
237,107

Amortization of net discount
 
—

 
(18,795
)
 
—

 
(26,253
)
Realized credit losses
 
(4,187
)
 
—

 
(5,830
)
 
—

Acquisitions
 
9,118

 
13,080

 
9,311

 
11,461

Sales, calls, other
 
(3,404
)
 
(12,106
)
 
(4,968
)
 
(24,480
)
Impairments
 
1,011

 
—

 
368

 
—

Transfers to (release of) credit reserves, net
 
(3,462
)
 
3,462

 
(277
)
 
277

Ending Balance
 
$
46,549

 
$
183,753

 
$
47,473

 
$
198,112


AFS Securities with Unrealized Losses
The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at December 31, 2017 and December 31, 2016.
Table 7.6 – Components of Fair Value of Residential AFS Securities by Holding Periods
 
 
Less Than 12 Consecutive Months
 
12 Consecutive Months or Longer
 
 
Amortized
Cost
 
Unrealized
Losses
 
Fair
Value
 
Amortized
Cost
 
Unrealized
Losses
 
Fair
Value
(In Thousands)
 
 
 
 
 
 
December 31, 2017
 
$
8,637

 
$
(132
)
 
$
8,505

 
$
28,557

 
$
(1,235
)
 
$
27,322

December 31, 2016
 
15,772

 
(330
)
 
15,442

 
60,035

 
(2,839
)
 
57,196


At December 31, 2017, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 167 AFS securities, of which nine were in an unrealized loss position and three were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2016, our consolidated balance sheet included 186 AFS securities, of which 19 were in an unrealized loss position and 10 were in a continuous unrealized loss position for 12 consecutive months or longer.
Evaluating AFS Securities for Other-than-Temporary Impairments
Gross unrealized losses on our AFS securities were $1 million at December 31, 2017. We evaluate all securities in an unrealized loss position to determine if the impairment is temporary or other-than-temporary (resulting in an OTTI). At December 31, 2017, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities that are in an unrealized loss position to identify those securities with losses that are other-than-temporary based on an assessment of changes in expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.
For the year ended December 31, 2017, other-than-temporary impairments related to our AFS securities were $1 million, of which $1 million were recognized through our consolidated statements of income and $0.4 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. AFS securities for which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the OTTI assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of the credit loss component of OTTI.
The table below summarizes the significant valuation assumptions we used for our AFS securities in unrealized loss positions at December 31, 2017.
Table 7.7 – Significant Valuation Assumptions
December 31, 2017
 
Range for Securities
Prepayment rates
 
8
%
-
20%
Projected losses
 
0.22
%
-
5%

The following table details the activity related to the credit loss component of OTTI (i.e., OTTI recognized through earnings) for AFS securities held at December 31, 2017, 2016, and 2015 for which a portion of an OTTI was recognized in other comprehensive income.
Table 7.8 – Activity of the Credit Component of Other-than-Temporary Impairments
 
 
Years Ended December 31,
(In Thousands)
 
2017
 
2016
 
2015
Balance at beginning of period
 
$
28,261

 
$
28,277

 
$
33,849

Additions
 
 
 
 
 
 
Initial credit impairments
 
178

 
346

 
246

Subsequent credit impairments
 
47

 
8

 
—

Reductions
 
 
 
 
 
 
Securities sold, or expected to sell
 
(4,898
)
 
(261
)
 
(4,567
)
Securities with no outstanding principal at period end
 
(2,551
)
 
(109
)
 
(1,251
)
Balance at End of Period
 
$
21,037

 
$
28,261

 
$
28,277


Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the years ended December 31, 2017, 2016, and 2015.
Table 7.9 – Gross Realized Gains and Losses on AFS Securities
 
 
Years Ended December 31,
(In Thousands)
 
2017
 
2016
 
2015
Gross realized gains - sales
 
$
13,927

 
$
23,598

 
$
34,922

Gross realized gains - calls
 
677

 
1,210

 
2,167

Gross realized losses - sales
 
—

 
(2,293
)
 
(608
)
Gross realized losses - calls
 
(497
)
 
—

 
(112
)
Total Realized Gains on Sales and Calls of AFS Securities, net
 
$
14,107

 
$
22,515

 
$
36,369