Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value (Notes)

v2.4.0.6
Available-for-Sale Securities, at Fair Value (Notes)
 9 Months Ended
Sep. 30, 2012
Available for Sale Securities at Fair Value [Abstract]  
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
Available-for-Sale Securities, at Fair Value
The following table presents the Company's available-for-sale, or AFS, investment securities by collateral type, which were carried at their fair value as of September 30, 2012 and December 31, 2011:
(in thousands)
September 30,
2012
 
December 31,
2011
Mortgage-backed securities:
 
 
 
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
3,699,453

 
$
1,609,003

Federal National Mortgage Association
6,704,798

 
2,414,637

Government National Mortgage Association
2,064,812

 
1,029,517

Non-Agency
2,500,796

 
1,196,095

Total mortgage-backed securities
$
14,969,859

 
$
6,249,252



At September 30, 2012 and December 31, 2011, the Company pledged investment securities with a carrying value of $14.5 billion and $6.2 billion, respectively, as collateral for repurchase agreements. See Note 12 - Repurchase Agreements.
At September 30, 2012 and December 31, 2011, 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.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of September 30, 2012 and December 31, 2011:
 
September 30, 2012
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
13,101,209

 
$
4,471,572

 
$
17,572,781

Unamortized premium
850,721

 
—

 
850,721

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(1,339,737
)
 
(1,339,737
)
Net, unamortized
(1,853,894
)
 
(960,408
)
 
(2,814,302
)
Amortized Cost
12,098,036

 
2,171,427

 
14,269,463

Gross unrealized gains
384,523

 
345,980

 
730,503

Gross unrealized losses
(13,496
)
 
(16,611
)
 
(30,107
)
Carrying Value
$
12,469,063

 
$
2,500,796

 
$
14,969,859

 
December 31, 2011
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
5,692,754

 
$
2,667,929

 
$
8,360,683

Unamortized premium
279,640

 
—

 
279,640

Unamortized discount
  

 
  

 
  

Designated credit reserve
—

 
(782,606
)
 
(782,606
)
Net, unamortized
(1,008,780
)
 
(540,969
)
 
(1,549,749
)
Amortized Cost
4,963,614

 
1,344,354

 
6,307,968

Gross unrealized gains
108,864

 
11,881

 
120,745

Gross unrealized losses
(19,321
)
 
(160,140
)
 
(179,461
)
Carrying Value
$
5,053,157

 
$
1,196,095

 
$
6,249,252



The following tables present the carrying value of the Company's AFS investment securities by rate type as of September 30, 2012 and December 31, 2011:
 
September 30, 2012
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
200,556

 
$
2,207,347

 
$
2,407,903

Fixed Rate
12,268,507

 
293,449

 
12,561,956

Total
$
12,469,063

 
$
2,500,796

 
$
14,969,859

 
December 31, 2011
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
231,678

 
$
995,014

 
$
1,226,692

Fixed Rate
4,821,479

 
201,081

 
5,022,560

Total
$
5,053,157

 
$
1,196,095

 
$
6,249,252



When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because it does not expect to collect it due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as an off balance sheet credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the nine months ended September 30, 2012 and 2011 of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Nine Months Ended September 30,
 
2012
 
2011
(in thousands)
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
 
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
Beginning balance at January 1
$
(782,606
)
 
$
(540,969
)
 
$
(1,323,575
)
 
$
(145,855
)
 
$
(129,992
)
 
$
(275,847
)
Acquisitions
(590,090
)
 
(534,000
)
 
(1,124,090
)
 
(640,451
)
 
(483,479
)
 
(1,123,930
)
Accretion of net discount
493

 
98,685

 
99,178

 
—

 
32,305

 
32,305

Realized credit losses
33,622

 
—

 
33,622

 
3,011

 
—

 
3,011

Reclassification adjustment for other-than-temporary impairments
(9,310
)
 
—

 
(9,310
)
 
(3,665
)
 
—

 
(3,665
)
Transfers from (to)
—

 
—

 
—

 
579

 
(579
)
 
—

Sales, calls, other
8,154

 
15,876

 
24,030

 
13,443

 
26,416

 
39,859

Ending balance at September 30
$
(1,339,737
)
 
$
(960,408
)
 
$
(2,300,145
)
 
$
(772,938
)
 
$
(555,329
)
 
$
(1,328,267
)


The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time the securities had an unrealized loss position as of September 30, 2012 and December 31, 2011. At September 30, 2012, the Company held 1,490 AFS securities, of which 76 were in an unrealized loss position for less than twelve consecutive months and 70 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2011, the Company held 854 AFS securities, of which 264 were in an unrealized loss position for less than twelve months and 20 were in an unrealized loss position for more than twelve consecutive months.
 
Unrealized Loss Position for
 
Less than 12 Months
 
12 Months or More
 
Total
(in thousands)
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
September 30, 2012
$
301,709

 
$
(11,682
)
 
$
181,019

 
$
(18,425
)
 
$
482,728

 
$
(30,107
)
December 31, 2011
$
1,277,120

 
$
(175,348
)
 
$
15,608

 
$
(4,113
)
 
$
1,292,728

 
$
(179,461
)


Evaluating AFS Securities for Other-Than-Temporary Impairments
In order to evaluate AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and is not more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in other comprehensive income. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
The Company recorded a $0.6 million and a $9.3 million other-than-temporary credit impairment during the three and nine months ended September 30, 2012, respectively, on a total of 37 non-Agency RMBS where the future expected cash flows for each security was less than its amortized cost. As of September 30, 2012, the impaired securities had weighted average cumulative losses of 1.7%, weighted average three-month prepayment speed of 3.04, weighted average 60+ day delinquency of 36.6% of the pool balance, and weighted average FICO score of 650. At September 30, 2012, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities, therefore, only the projected credit loss was recognized in earnings. During the three and nine months ended September 30, 2011, the Company recorded a $3.4 million and a $3.7 million other-than-temporary credit impairment, respectively, on eight non-Agency RMBS where the future expected cash flows for each security was less than its amortized cost.
The following table presents the changes in OTTI included in earnings for nine months ended September 30, 2012 and 2011:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Cumulative credit loss at beginning of period
$
(13,603
)
 
$
(294
)
 
$
(5,102
)
 
$
—

Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(315
)
 
(3,371
)
 
(6,443
)
 
(3,665
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
(244
)
 
—

 
(2,867
)
 
—

Reductions:
 
 
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
—

 
250

 
—

Decreases related to other-than-temporary impairments on securities sold
243

 
—

 
243

 
—

Cumulative credit loss at end of period
$
(13,919
)
 
$
(3,665
)
 
$
(13,919
)
 
$
(3,665
)


Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, pay down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain on investment securities, net in the Company's condensed consolidated statements of comprehensive income. For the three and nine months ended September 30, 2012, the Company sold AFS securities for $9.4 million and $207.1 million with an amortized cost of $9.6 million and $197.3 million, for a net realized loss of $0.2 million and a net realized gain of $9.8 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and nine months ended September 30, 2012 and 2011:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2012
 
2011
 
2012
 
2011
Gross realized gains
$
—

 
$
27,472

 
$
11,663

 
$
29,422

Gross realized losses
(221
)
 
—

 
(1,850
)
 
(265
)
Total realized gains on sales, net
$
(221
)
 
$
27,472

 
$
9,813

 
$
29,157