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 September 30, 2019 and December 31, 2018.

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. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. Most of our mezzanine classified securities were initially rated AA through BBB- and issued in 2012 or later. Subordinate securities are all interests below mezzanine. Nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities. At September 30, 2019, trading securities with a carrying value of $677 million as well as $113 million, $385 million, and $209 million of securities we owned that were issued by consolidated Sequoia Choice, Freddie Mac SLST, and Freddie Mac K-Series securitizations, respectively, were pledged as collateral under short-term borrowing agreements. See Note 13 for additional information on short-term debt. At September 30, 2019, trading securities with a carrying value of $4 million, as well as $126 million of securities we owned that were issued by consolidated Sequoia Choice securitizations, were pledged as collateral under our subordinate securities financing facility. In addition, at September 30, 2019, trading securities with a fair value of $41 million were pledged as collateral under a borrowing agreement with the FHLBC. See Note 15 for additional information on long-term debt.

At September 30, 2019 and December 31, 2018, our senior trading securities included $58 million and $82 million of interest-only securities, respectively, for which there is no principal balance, and the remaining unpaid principal balance of our senior trading securities was $88 million and $78 million, respectively. Our interest-only securities included $29 million and $43 million of A-IO-S securities at September 30, 2019 and December 31, 2018, respectively, which are securities we retained from certain of our Sequoia securitizations that represent certificated servicing strips.

At September 30, 2019 and December 31, 2018, our mezzanine and subordinate trading securities had an unpaid principal balance of $1.01 billion and $1.12 billion, respectively. At September 30, 2019 and December 31, 2018, the fair value of our mezzanine and subordinate securities was $864 million and $960 million, respectively, and included $128 million and $277 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $65 million and $68 million, respectively, of Sequoia securities, $207 million and $186 million, respectively, of other third-party residential securities, and $464 million and $429 million, respectively, of third-party commercial/multifamily securities.

During the three and nine months ended September 30, 2019, we acquired $66 million and $335 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $236 million and $397 million, respectively, of such securities. During the three and nine months ended September 30, 2018, we acquired $189 million and $567 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $79 million and $323 million, respectively, of such securities.

During the three and nine months ended September 30, 2019, we recorded net market valuation gains of $15 million and $56 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income. During the three and nine months ended September 30, 2018, we recorded net market valuation gains of $6 million and $2 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income.

At September 30, 2019 and December 31, 2018, all of our available-for-sale securities were primarily comprised of residential mortgage-backed securities. At September 30, 2019, AFS securities with a carrying value of $59 million were pledged as collateral under short-term borrowing agreements. See Note 13 for additional information on short-term debt. At September 30, 2019, AFS securities with a carrying value of $123 million were pledged as collateral under our subordinate securities financing facility. See Note 15 for additional information on long-term debt.

During the three and nine months ended September 30, 2019, we purchased $12 million and $21 million of AFS securities, respectively, and sold $15 million and $82 million of AFS securities, respectively, which resulted in net realized gains of $4 million and $13 million, respectively. During the three and nine months ended September 30, 2018, we purchased $1 million and $7 million of AFS securities, respectively, and sold $26 million and $118 million of AFS securities, respectively, which resulted in net realized gains of $7 million and $21 million, respectively.

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 September 30, 2019, there were no AFS securities with contractual maturities less than five years, $8 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.



September 30, 2019
(In Thousands)	Senior			Mezzanine			Subordinate			Total
Principal balance	$	34,272		$	13,729		$	291,207		$	339,208
Credit reserve	(588		)	—			(33,623		)	(34,211		)
Unamortized discount, net	(12,346		)	(552		)	(119,756		)	(132,654		)
Amortized cost	21,338			13,177			137,828			172,343
Gross unrealized gains	12,131			790			86,389			99,310
Gross unrealized losses	(12		)	—			—			(12		)
Carrying Value	$	33,457		$	13,967		$	224,217		$	271,641



December 31, 2018
(In Thousands)	Senior			Mezzanine			Subordinate			Total
Principal balance	$	91,736		$	36,852		$	302,524		$	431,112
Credit reserve	(7,790		)	—			(33,580		)	(41,370		)
Unamortized discount, net	(18,460		)	(3,697		)	(129,043		)	(151,200		)
Amortized cost	65,486			33,155			139,901			238,542
Gross unrealized gains	22,178			3,252			70,458			95,888
Gross unrealized losses	(49		)	—			(499		)	(548		)
Carrying Value	$	87,615		$	36,407		$	209,860		$	333,882



	Three Months Ended September 30, 2019						Nine Months Ended September 30, 2019
	Credit Reserve			Unamortized Discount, Net			Credit Reserve			Unamortized Discount, Net
(In Thousands)	Credit Reserve			Unamortized Discount, Net			Credit Reserve			Unamortized Discount, Net
Beginning balance	$	34,849		$	137,282		$	41,370		$	151,200
Amortization of net discount	—			(1,834		)	—			(5,823		)
Realized credit losses	(694		)	—			(1,874		)	—
Acquisitions	734			399			2,198			1,103
Sales, calls, other	(800		)	(3,071		)	(7,197		)	(14,112		)
(Release of) transfers to credit reserves, net	122			(122		)	(286		)	286
Ending Balance	$	34,211		$	132,654		$	34,211		$	132,654



	Less Than 12 Consecutive Months							12 Consecutive Months or Longer
	Amortized Cost		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Losses			Fair Value
(In Thousands)	Amortized Cost		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Losses			Fair Value
September 30, 2019	$	—	$	—		$	—	$	6,254	$	(12	)	$	6,242
December 31, 2018	12,923		(499		)	12,424		7,464		(49		)	7,415

At September 30, 2019, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 113 AFS securities, of which one was in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2018, our consolidated balance sheet included 128 AFS securities, of which seven were in an unrealized loss position and three were in a continuous unrealized loss position for 12 consecutive months or longer.

Gross unrealized losses on our AFS securities were less than $0.1 million at September 30, 2019. 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 September 30, 2019, 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 both the three and nine months ended September 30, 2019, there were no other-than-temporary impairments related to our AFS securities. 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 following table details the activity related to the credit loss component of OTTI (i.e., OTTI recognized through earnings) for AFS securities held at September 30, 2019 and 2018, for which a portion of an OTTI was recognized in other comprehensive income.



	Three Months Ended September 30,						Nine Months Ended September 30,
(In Thousands)	2019			2018			2019			2018
Balance at beginning of period	$	18,580		$	20,967		$	18,652		$	21,037
Additions
Initial credit impairments	—			33			—			76
Reductions
Securities sold, or expected to sell	(6		)	(927		)	(20		)	(1,026		)
Securities with no outstanding principal at period end	—			(1,229		)	(58		)	(1,243		)
Balance at End of Period	$	18,574		$	18,844		$	18,574		$	18,844

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 three and nine months ended September 30, 2019 and 2018.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In Thousands)	2019		2018		2019		2018
Gross realized gains - sales	$	3,656	$	7,275	$	13,143	$	21,312
Gross realized gains - calls	1,058		—		5,084		43
Gross realized losses - sales	—		—		—		(3		)
Total Realized Gains on Sales and Calls of AFS Securities, net	$	4,714	$	7,275	$	18,227	$	21,352