UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: March 31, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-33796
CHIMERA INVESTMENT CORPORATION
(Exact name of Registrant as specified in its Charter)
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MARYLAND | | 26-0630461 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
520 Madison Avenue 32nd Floor
NEW YORK, NEW YORK
(Address of principal executive offices)
10022
(Zip Code)
(212) 626-2300
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No þ
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
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Class | Outstanding at April 30, 2018 |
Common Stock, $0.01 par value | 186,970,122 |
CHIMERA INVESTMENT CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
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Part I
Item 1. Consolidated Financial Statements
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CHIMERA INVESTMENT CORPORATION |
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |
(dollars in thousands, except share and per share data) |
(Unaudited) |
| March 31, 2018 | December 31, 2017 |
Assets: | | |
Cash and cash equivalents | $ | 100,752 |
| $ | 63,569 |
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Non-Agency RMBS, at fair value | 2,760,711 |
| 2,851,316 |
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Agency MBS, at fair value | 4,557,799 |
| 4,364,828 |
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Loans held for investment, at fair value | 13,619,995 |
| 13,678,263 |
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Accrued interest receivable | 98,669 |
| 100,789 |
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Other assets | 99,631 |
| 114,391 |
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Derivatives, at fair value, net | 93,171 |
| 48,914 |
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Total assets (1) | $ | 21,330,728 |
| $ | 21,222,070 |
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Liabilities: | |
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Repurchase agreements ($8.7 billion and $8.8 billion, pledged as collateral, respectively) | $ | 7,202,924 |
| $ | 7,250,452 |
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Securitized debt, collateralized by Non-Agency RMBS ($1.5 billion and $1.6 billion pledged as collateral, respectively) | 194,967 |
| 205,780 |
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Securitized debt at fair value, collateralized by loans held for investment ($13.2 billion and $13.3 billion pledged as collateral, respectively) | 9,321,154 |
| 9,388,657 |
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Payable for investments purchased | 766,250 |
| 567,440 |
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Accrued interest payable | 69,929 |
| 61,888 |
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Dividends payable | 95,335 |
| 95,365 |
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Accounts payable and other liabilities | 9,426 |
| 17,191 |
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Derivatives, at fair value, net | — |
| 320 |
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Total liabilities (1) | $ | 17,659,985 |
| $ | 17,587,093 |
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Commitments and Contingencies (See Note 15) |
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Stockholders' Equity: | |
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Preferred Stock, par value of $0.01 per share, 100,000,000 shares authorized: |
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8.00% Series A cumulative redeemable: 5,800,000 shares issued and outstanding, respectively ($145,000 liquidation preference) | $ | 58 |
| $ | 58 |
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8.00% Series B cumulative redeemable: 13,000,000 shares issued and outstanding, respectively ($325,000 liquidation preference) | 130 |
| 130 |
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Common stock: par value $0.01 per share; 300,000,000 shares authorized, 186,969,715 and 187,809,288 shares issued and outstanding, respectively | 1,870 |
| 1,878 |
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Additional paid-in-capital | 3,814,391 |
| 3,826,691 |
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Accumulated other comprehensive income | 709,244 |
| 796,902 |
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Cumulative earnings | 3,206,859 |
| 2,967,852 |
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Cumulative distributions to stockholders | (4,061,809 | ) | (3,958,534 | ) |
Total stockholders' equity | $ | 3,670,743 |
| $ | 3,634,977 |
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Total liabilities and stockholders' equity | $ | 21,330,728 |
| $ | 21,222,070 |
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(1) The Company's consolidated statements of financial condition include assets of consolidated variable interest entities (“VIEs”) that can only be used to settle obligations and liabilities of the VIE for which creditors do not have recourse to the primary beneficiary (Chimera Investment Corporation). As of March 31, 2018 and December 31, 2017, total assets of consolidated VIEs were $14,878,283 and $14,987,464, respectively, and total liabilities of consolidated VIEs were $9,553,852 and $9,631,820, respectively. See Note 8 for further discussion.
See accompanying notes to consolidated financial statements.
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CHIMERA INVESTMENT CORPORATION |
CONSOLIDATED STATEMENTS OF OPERATIONS |
(dollars in thousands, except share and per share data) |
(Unaudited) |
| For the Quarters Ended |
| March 31, 2018 | March 31, 2017 |
Net interest income: |
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Interest income (1) | $ | 297,132 |
| $ | 251,344 |
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Interest expense (2) | 149,251 |
| 110,231 |
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Net interest income | 147,881 |
| 141,113 |
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Other-than-temporary impairments: | |
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Total other-than-temporary impairment losses | (294 | ) | (2,713 | ) |
Portion of loss recognized in other comprehensive income | (864 | ) | (15,988 | ) |
Net other-than-temporary credit impairment losses | (1,158 | ) | (18,701 | ) |
Other investment gains (losses): | |
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Net unrealized gains (losses) on derivatives | 81,419 |
| 4,896 |
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Net realized gains (losses) on derivatives | 13,085 |
| (9,358 | ) |
Net gains (losses) on derivatives | 94,504 |
| (4,462 | ) |
Net unrealized gains (losses) on financial instruments at fair value | 14,466 |
| 72,243 |
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Net realized gains (losses) on sales of investments | — |
| 5,167 |
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Gains (losses) on extinguishment of debt | 9,670 |
| — |
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Total other gains (losses) | 118,640 |
| 72,948 |
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Other expenses: | |
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Compensation and benefits | 8,411 |
| 7,556 |
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General and administrative expenses | 5,489 |
| 4,040 |
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Servicing fees | 11,334 |
| 9,588 |
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Deal expenses | 1,088 |
| 11,353 |
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Total other expenses | 26,322 |
| 32,537 |
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Income (loss) before income taxes | 239,041 |
| 162,823 |
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Income taxes | 34 |
| 16 |
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Net income (loss) | $ | 239,007 |
| $ | 162,807 |
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Dividend on preferred stock | 9,400 |
| 5,283 |
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Net income (loss) available to common shareholders | $ | 229,607 |
| $ | 157,524 |
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Net income (loss) per share available to common shareholders: |
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Basic | $ | 1.22 |
| $ | 0.84 |
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Diluted | $ | 1.22 |
| $ | 0.84 |
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Weighted average number of common shares outstanding: | |
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Basic | 187,553,281 |
| 187,761,748 |
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Diluted | 188,176,753 |
| 188,195,061 |
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Dividends declared per share of common stock | $ | 0.50 |
| $ | 0.50 |
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(1) Includes interest income of consolidated VIEs of $235,026 and $192,989 for the quarters ended March 31, 2018 and 2017, respectively. See Note 8 to consolidated financial statements for further discussion.
(2) Includes interest expense of consolidated VIEs of $99,614 and $82,684 for the quarters ended March 31, 2018 and 2017, respectively. See Note 8 to consolidated financial statements for further discussion.
See accompanying notes to consolidated financial statements.
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CHIMERA INVESTMENT CORPORATION |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) |
(dollars in thousands, except share and per share data) |
(Unaudited) |
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| For the Quarters Ended |
| March 31, 2018 | March 31, 2017 |
Comprehensive income (loss): | |
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Net income (loss) | $ | 239,007 |
| $ | 162,807 |
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Other comprehensive income: | |
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Unrealized gains (losses) on available-for-sale securities, net | (88,816 | ) | (3,910 | ) |
Reclassification adjustment for net losses included in net income for other-than-temporary credit impairment losses | 1,158 |
| 18,701 |
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Reclassification adjustment for net realized losses (gains) included in net income | — |
| (5,186 | ) |
Other comprehensive income (loss) | (87,658 | ) | 9,605 |
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Comprehensive income (loss) before preferred stock dividends | $ | 151,349 |
| $ | 172,412 |
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Dividends on preferred stock | $ | 9,400 |
| $ | 5,283 |
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Comprehensive income (loss) available to common stock shareholders | $ | 141,949 |
| $ | 167,129 |
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CHIMERA INVESTMENT CORPORATION |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY |
(dollars in thousands, except per share data) |
(Unaudited) |
| Series A Preferred Stock Par Value | Series B Preferred Stock Par Value | Common
Stock Par
Value | Additional Paid-in Capital | Accumulated Other Comprehensive Income | Cumulative Earnings | Cumulative Distributions to Stockholders | Total |
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Balance, December 31, 2016 | $ | 58 |
| $ | — |
| $ | 1,877 |
| $ | 3,508,779 |
| $ | 718,106 |
| $ | 2,443,184 |
| $ | (3,548,471 | ) | $ | 3,123,533 |
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Net income (loss) | — |
| — |
| — |
| — |
| — |
| 162,807 |
| — |
| 162,807 |
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Other comprehensive income (loss) | — |
| — |
| — |
| — |
| 9,605 |
| — |
| — |
| 9,605 |
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Stock based compensation | — |
| — |
| 1 |
| 1,119 |
| — |
| — |
| — |
| 1,120 |
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Common dividends declared | — |
| — |
| — |
| — |
| — |
| — |
| (94,123 | ) | (94,123 | ) |
Preferred dividends declared | — |
| — |
| — |
| — |
| — |
| — |
| (5,283 | ) | (5,283 | ) |
Issuance of preferred stock | — |
| 130 |
| — |
| 314,299 |
| — |
| — |
| — |
| 314,429 |
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Balance, March 31, 2017 | $ | 58 |
| $ | 130 |
| $ | 1,878 |
| $ | 3,824,197 |
| $ | 727,711 |
| $ | 2,605,991 |
| $ | (3,647,877 | ) | $ | 3,512,088 |
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Balance, December 31, 2017 | $ | 58 |
| $ | 130 |
| $ | 1,878 |
| $ | 3,826,691 |
| $ | 796,902 |
| $ | 2,967,852 |
| $ | (3,958,534 | ) | $ | 3,634,977 |
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Net income (loss) | — |
| — |
| — |
| — |
| — |
| 239,007 |
| — |
| 239,007 |
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Other comprehensive income (loss) | — |
| — |
| — |
| — |
| (87,658 | ) | — |
| — |
| (87,658 | ) |
Repurchase of common stock | — |
| — |
| (8 | ) | (14,826 | ) | — |
| — |
| — |
| (14,834 | ) |
Stock based compensation | — |
| — |
| — |
| 2,526 |
| — |
| — |
| — |
| 2,526 |
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Common dividends declared | — |
| — |
| — |
| — |
| — |
| — |
| (93,875 | ) | (93,875 | ) |
Preferred dividends declared | — |
| — |
| — |
| — |
| — |
| — |
| (9,400 | ) | (9,400 | ) |
Balance, March 31, 2018 | $ | 58 |
| $ | 130 |
| $ | 1,870 |
| $ | 3,814,391 |
| $ | 709,244 |
| $ | 3,206,859 |
| $ | (4,061,809 | ) | $ | 3,670,743 |
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See accompanying notes to consolidated financial statements.
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CHIMERA INVESTMENT CORPORATION |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(dollars in thousands) |
(Unaudited) |
| For the Quarters Ended |
| March 31, 2018 | March 31, 2017 |
Cash Flows From Operating Activities: |
Net income | $ | 239,007 |
| $ | 162,807 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
(Accretion) amortization of investment discounts/premiums, net | 2,521 |
| (13,712 | ) |
Accretion (amortization) of deferred financing costs and securitized debt discounts/premiums, net | (693 | ) | 5,109 |
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Amortization of swaption premium | 727 |
| 3,303 |
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Net unrealized losses (gains) on derivatives | (81,419 | ) | (4,896 | ) |
Margin (paid) received on derivatives | 43,891 |
| 4,974 |
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Net unrealized losses (gains) on financial instruments at fair value | (14,466 | ) | (72,243 | ) |
Net realized losses (gains) on sales of investments | — |
| (5,167 | ) |
Net other-than-temporary credit impairment losses | 1,158 |
| 18,701 |
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(Gain) loss on extinguishment of debt | (9,670 | ) | — |
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Equity-based compensation expense | 2,526 |
| 1,119 |
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Changes in operating assets: |
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Decrease (increase) in accrued interest receivable, net | 2,120 |
| (19,972 | ) |
Decrease (increase) in other assets | 12,501 |
| (30,275 | ) |
Changes in operating liabilities: |
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Increase (decrease) in accounts payable and other liabilities | (7,766 | ) | (7,517 | ) |
Increase (decrease) in accrued interest payable, net | 8,041 |
| 18,929 |
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Net cash provided by (used in) operating activities | $ | 198,478 |
| $ | 61,160 |
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Cash Flows From Investing Activities: |
Agency MBS portfolio: | |
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Purchases | $ | (217,579 | ) | $ | (113,599 | ) |
Principal payments | 109,645 |
| 115,237 |
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Non-Agency RMBS portfolio: | |
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Purchases | — |
| (5,663 | ) |
Principal payments | 96,988 |
| 127,929 |
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Loans held for investment: | |
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Purchases | (369,583 | ) | (4,165,322 | ) |
Principal payments | 443,755 |
| 324,851 |
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Net cash provided by (used in) investing activities | $ | 63,226 |
| $ | (3,716,567 | ) |
Cash Flows From Financing Activities: |
Proceeds from repurchase agreements | $ | 13,951,070 |
| $ | 6,551,098 |
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Payments on repurchase agreements | (13,997,248 | ) | (6,300,798 | ) |
Net proceeds from preferred stock offerings | — |
| 314,429 |
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Payments on repurchase of common stock | (14,834 | ) | — |
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Proceeds from securitized debt borrowings, collateralized by loans held for investment | 509,066 |
| 3,457,535 |
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Payments on securitized debt borrowings, collateralized by loans held for investment | (558,917 | ) | (331,290 | ) |
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS | (10,353 | ) | (31,320 | ) |
Common dividends paid | (93,905 | ) | (94,056 | ) |
Preferred dividends paid | (9,400 | ) | (5,349 | ) |
Net cash provided by (used in) financing activities | $ | (224,521 | ) | $ | 3,560,249 |
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Net increase (decrease) in cash and cash equivalents | 37,183 |
| (95,158 | ) |
Cash and cash equivalents at beginning of period | 63,569 |
| 177,714 |
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Cash and cash equivalents at end of period | $ | 100,752 |
| $ | 82,556 |
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Supplemental disclosure of cash flow information: |
Interest received | $ | 301,772 |
| $ | 217,660 |
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Interest paid | $ | 141,903 |
| $ | 86,193 |
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Non-cash investing activities: | |
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Payable for investments purchased | $ | 766,250 |
| $ | 473,269 |
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Net change in unrealized gain (loss) on available-for sale securities | $ | (87,658 | ) | $ | 9,605 |
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Non-cash financing activities: | |
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Common dividends declared, not yet paid | $ | 95,335 |
| $ | 94,625 |
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See accompanying notes to consolidated financial statements.
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CHIMERA INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
1. Organization
Chimera Investment Corporation (the “Company”) was organized in Maryland on June 1, 2007. The Company commenced operations on November 21, 2007 when it completed its initial public offering. The Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder (the “Code”).
The Company conducts its operations through various subsidiaries including subsidiaries it treats as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. The Company currently has eight wholly owned direct subsidiaries: Chimera RMBS Whole Pool LLC, and Chimera RMBS LLC formed in June 2009; CIM Trading Company LLC (“CIM Trading”), formed in July 2010; Chimera Funding TRS LLC (“CIM Funding TRS”), a TRS formed in October 2013, Chimera CMBS Whole Pool LLC and Chimera RMBS Securities LLC formed in March 2015; Chimera Insurance Company, LLC formed in July 2015 and Chimera RR Holdings LLC formed in April 2016.
2. Summary of the Significant Accounting Policies
(a) Basis of Presentation and Consolidation
The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included. Certain prior period amounts have been reclassified to conform to the current period's presentation.
The consolidated financial statements include, the Company’s accounts, the accounts of its wholly-owned subsidiaries, and variable interest entities (“VIEs”) in which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The Company uses securitization trusts considered to be VIEs in its securitization and re-securitization transactions. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIEs’ economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design and structure of the VIE.
The trusts are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained.
Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance (“power”) such as rights to direct servicer activity or the Company was determined to have power in connection with its involvement with the structure and design of the VIE.
The Company’s interest in the assets held by these securitization vehicles, which are consolidated on the Company’s Statements of Financial Condition, is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on the Company’s Statements of Financial Condition, are non-recourse to the Company, and can only be satisfied from each securitization vehicle’s respective asset pool.
The assets of securitization entities are comprised of residential mortgage backed securities (“RMBS”) or residential mortgage loans. See Notes 3, 4 and 8 for further discussion of the characteristics of the securities and loans in the Company’s portfolio.
(b) Statements of Financial Condition Presentation
The Company’s Consolidated Statements of Financial Condition include both the Company’s direct assets and liabilities and the assets and liabilities of consolidated securitization vehicles. Assets of each consolidated VIE can only be used to satisfy the obligations of that VIE, and the liabilities of consolidated VIEs are non-recourse to the Company. The Company is not obligated to provide, nor does it intend to provide, any financial support to these consolidated securitization vehicles. The notes to the consolidated financial statements describe the Company’s assets and liabilities including the assets and liabilities of consolidated securitization vehicles. See Note 8 for additional information related to the Company’s investments in consolidated securitization vehicles.
(c) Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be materially different than anticipated in those estimates, which could have a material adverse impact on the Company’s results of operations and its financial condition. Management has made significant estimates including in accounting for income recognition and OTTI on Agency and Non-Agency RMBS and IO MBS (Note 3), valuation of Agency MBS and Non-Agency RMBS (Notes 3 and 5), residential mortgage loans (Note 4), securitized debt (Note 7) and derivative instruments (Notes 5 and 9). Actual results could differ materially from those estimates.
(d) Significant Accounting Policies
There have been no significant changes to the Company's accounting policies included in Note 2 to the consolidated financial statements of the Company’s Form 10-K for the year ended December 31, 2017, other than the significant accounting policies disclosed below.
Income Taxes
The Company does not have any unrecognized tax positions that would affect its financial statements or require disclosure. No accruals for penalties and interest were necessary as of March 31, 2018 or December 31, 2017.
Fair Value Disclosure
A complete discussion of the methodology utilized by the Company to estimate the fair value of its financial instruments is included in Note 5 to these consolidated financial statements.
(e) Recent Accounting Pronouncements
Income Statement - Reporting Comprehensive Income - (Topic 220)
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The guidance in the ASU is effective for the Company as of January 1, 2019. Early adoption is allowed. The Company is not planning to early adopt and is currently evaluating what impact this update will have on the consolidated financial statements.
Derivatives and Hedging - Targeted improvements to Accounting for Hedging Activities (Topic 815)
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging - Targeted improvements to Accounting for Hedging Activities. This update is issued with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments in this update make certain targeted improvements to simplify the application of the hedge accounting guidance in
current GAAP. The guidance in the ASU is effective for the Company as of January 1, 2019. Early adoption is allowed. The Company is not planning to early adopt and is currently evaluating what impact this update will have on the consolidated financial statements.
Business Combinations - (Topic 805)
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations - Clarifying the Definition of a Business. This
update clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation
guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present.
The amendments in this update provide a screen to determine when a set is not a business. The screen requires that when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a
group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be
further evaluated. The Company has adopted this guidance as of January 1, 2018. The adoption of this guidance did not have a
significant impact on the Company's consolidated financial statements.
Statement of Cash Flows - Restricted Cash - (Topic 230)
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows - Restricted Cash. This update requires that a
statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition
of restricted cash or restricted cash equivalents. The Company has adopted this guidance as of January 1, 2018. The adoption of
this guidance did not have a significant impact on the Company's consolidated financial statements.
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments - (Topic 230)
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and
Cash Payments. This update provides guidance on eight specific cash flow issues. The guidance is intended to reduce diversity
in practice on those issues across all industries. The Company has adopted this guidance as of January 1, 2018. The adoption of
this guidance did not have a significant impact on the Company's consolidated Statements of Cash Flows.
Financial Instruments - Credit Losses - (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This update replaces the current model for recognizing credit losses from an incurred credit loss model to a current expected credit loss (CECL) model for instruments measured at amortized cost and requires entities to record allowances for available-for-sale (AFS) debt securities when the fair value of an AFS debt security is below the amortized cost of the asset rather than reduce the carrying amount, as the Company does under the current OTTI model. This update also simplifies the accounting model for purchased credit-impaired debt securities and loans. The changes in the allowances created in accordance with this update will be recorded in earnings. The update also expands the disclosure requirements regarding the Company's assumptions, models, and methods for estimating the expected credit losses. In addition, the Company will disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The guidance in the ASU is effective for the Company as of January 1, 2020. Early adoption is allowed, beginning January 1, 2019. The standard requires entities to record a cumulative-effect adjustment to the statement of financial position as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating what impact this update will have on the consolidated financial statements.
Financial Instruments-Overall (Subtopic 825-10)
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial
Liabilities. This update changes how the Company will present changes in the fair value of financial liabilities measured under
the fair value option that are attributable to our own credit. Under the updated guidance, the Company will record changes in
instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. The
update also requires fair value measurement for equity investments that do not result in consolidation and are not accounted for
under the equity method to be measured at fair value with any changes in fair value recognized in net income. The update also
eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value of financial
instruments measured at amortized cost. In addition, the Company will have to use the exit price notion when measuring the
fair value of financial instruments measured at amortized cost for disclosure purposes. The Company has adopted this guidance
as of January 1, 2018. The adoption of this guidance did not have a significant impact on the Company's consolidated financial
statements.
3. Mortgage-Backed Securities
The Company classifies its Non-Agency RMBS as senior, senior IO, subordinated, or subordinated IO. The Company also invests in residential, commercial and IO Agency MBS. Senior interests in Non-Agency RMBS are considered to be entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, fair value and unrealized gain/losses of Company's MBS investments as of March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | | | |
| | (dollars in thousands) | | | | |
| Principal or Notional Value | Total Premium | Total Discount | Amortized Cost | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Net Unrealized Gain/(Loss) |
Non-Agency RMBS | | | | | | | | |
Senior | $ | 2,627,375 |
| $ | 867 |
| $ | (1,210,583 | ) | $ | 1,417,659 |
| $ | 2,153,327 |
| $ | 736,149 |
| $ | (481 | ) | $ | 735,668 |
|
Senior, interest-only | 4,646,297 |
| 251,692 |
| — |
| 251,692 |
| 197,593 |
| 16,197 |
| (70,296 | ) | (54,099 | ) |
Subordinated | 495,128 |
| 10,319 |
| (172,024 | ) | 333,423 |
| 401,699 |
| 68,452 |
| (176 | ) | 68,276 |
|
Subordinated, interest-only | 196,208 |
| 7,225 |
| — |
| 7,225 |
| 8,092 |
| 1,388 |
| (521 | ) | 867 |
|
Agency MBS | |
| |
| |
| |
| |
| |
| |
|
|
|
Residential | 2,265,632 |
| 125,940 |
| — |
| 2,391,572 |
| 2,312,635 |
| 3,201 |
| (82,138 | ) | (78,937 | ) |
Commercial | 2,153,980 |
| 50,889 |
| (4,600 | ) | 2,200,269 |
| 2,147,644 |
| 3,042 |
| (55,667 | ) | (52,625 | ) |
Interest-only | 2,960,181 |
| 104,603 |
| — |
| 104,603 |
| 97,520 |
| 827 |
| (7,910 | ) | (7,083 | ) |
Total | $ | 15,344,801 |
| $ | 551,535 |
| $ | (1,387,207 | ) | $ | 6,706,443 |
| $ | 7,318,510 |
| $ | 829,256 |
| $ | (217,189 | ) | $ | 612,067 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | | | |
| | (dollars in thousands) | | | | |
| Principal or Notional Value | Total Premium | Total Discount | Amortized Cost | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Net Unrealized Gain/(Loss) |
Non-Agency RMBS | | | | | | | | |
Senior | $ | 2,733,926 |
| $ | 540 |
| $ | (1,257,103 | ) | $ | 1,477,363 |
| $ | 2,231,415 |
| $ | 754,234 |
| $ | (182 | ) | $ | 754,052 |
|
Senior, interest-only | 4,862,461 |
| 262,996 |
| — |
| 262,996 |
| 210,850 |
| 15,761 |
| (67,907 | ) | (52,146 | ) |
Subordinated | 501,455 |
| 10,571 |
| (177,206 | ) | 334,820 |
| 401,225 |
| 66,704 |
| (299 | ) | 66,405 |
|
Subordinated, interest-only | 201,378 |
| 7,369 |
| — |
| 7,369 |
| 7,826 |
| 902 |
| (445 | ) | 457 |
|
Agency MBS | |
| |
| |
| |
| |
| |
| |
| |
|
Residential | 2,227,128 |
| 123,245 |
| — |
| 2,350,373 |
| 2,322,180 |
| 5,706 |
| (33,899 | ) | (28,193 | ) |
Commercial | 1,894,594 |
| 47,430 |
| (4,685 | ) | 1,937,339 |
| 1,938,281 |
| 17,041 |
| (16,099 | ) | 942 |
|
Interest-only | 3,021,840 |
| 111,277 |
| — |
| 111,277 |
| 104,367 |
| 834 |
| (7,744 | ) | (6,910 | ) |
Total | $ | 15,442,782 |
| $ | 563,428 |
| $ | (1,438,994 | ) | $ | 6,481,537 |
| $ | 7,216,144 |
| $ | 861,182 |
| $ | (126,575 | ) | $ | 734,607 |
|
The table below presents changes in accretable yield, or the excess of the security’s cash flows expected to be collected over the Company’s investment, solely as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.
|
| | | | | | |
| For the Quarters Ended |
| March 31, 2018 | March 31, 2017 |
| (dollars in thousands) |
Balance at beginning of period | $ | 1,303,590 |
| $ | 1,550,110 |
|
Purchases | — |
| 8,216 |
|
Yield income earned | (59,732 | ) | (68,827 | ) |
Reclassification (to) from non-accretable difference | 50,026 |
| 23,952 |
|
Sales and deconsolidation | 112 |
| (35 | ) |
Balance at end of period | $ | 1,293,996 |
| $ | 1,513,416 |
|
The table below presents the outstanding principal balance and related amortized cost at March 31, 2018 and December 31, 2017 as it pertains to the Company’s Non-Agency RMBS portfolio accounted for according to the provisions of ASC 310-30.
|
| | | | | | |
| For the Quarter Ended | For the Year Ended |
| March 31, 2018 | December 31, 2017 |
| (dollars in thousands) |
Outstanding principal balance: | | |
Beginning of period | $ | 2,673,350 |
| $ | 3,138,265 |
|
End of period | $ | 2,581,229 |
| $ | 2,673,350 |
|
Amortized cost: | |
| |
|
Beginning of period | $ | 1,381,839 |
| $ | 1,695,079 |
|
End of period | $ | 1,334,327 |
| $ | 1,381,839 |
|
The following tables present the gross unrealized losses and estimated fair value of the Company’s RMBS by length of time that such securities have been in a continuous unrealized loss position at March 31, 2018 and December 31, 2017. All securities in an unrealized loss position have been evaluated by the Company for OTTI as discussed in Note 2(d) of 2017, Form 10-K.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2018 | | | | | | |
|
| (dollars in thousands) | | | | | | |
| Unrealized Loss Position for Less than 12 Months | | Unrealized Loss Position for 12 Months or More | | Total |
| Estimated Fair Value | Unrealized Losses | Number of Securities | | Estimated Fair Value | Unrealized Losses | Number of Securities | | Estimated Fair Value | Unrealized Losses | Number of Securities |
Non-Agency RMBS | | | | | | | | | | | |
Senior | $ | 35,069 |
| $ | (481 | ) | 1 |
| | $ | — |
| $ | — |
| — |
| | $ | 35,069 |
| $ | (481 | ) | 1 |
|
Senior, interest-only | 27,994 |
| (2,206 | ) | 20 |
| | 109,181 |
| (68,090 | ) | 118 |
| | 137,175 |
| (70,296 | ) | 138 |
|
Subordinated | 1,857 |
| (85 | ) | 11 |
| | 4,186 |
| (91 | ) | 3 |
| | 6,043 |
| (176 | ) | 14 |
|
Subordinated, interest-only | — |
| — |
| — |
| | 819 |
| (521 | ) | 3 |
| | 819 |
| (521 | ) | 3 |
|
Agency MBS | |
| |
|
|
| |
|
| |
| |
| | |
| |
| |
|
Residential | 746,346 |
| (19,528 | ) | 32 |
| | 1,383,334 |
| (62,610 | ) | 94 |
| | 2,129,680 |
| (82,138 | ) | 126 |
|
Commercial | 1,584,221 |
| (50,604 | ) | 402 |
| | 113,327 |
| (5,063 | ) | 55 |
| | 1,697,548 |
| (55,667 | ) | 457 |
|
Interest-only | 13,338 |
| (683 | ) | 7 |
| | 52,347 |
| (7,227 | ) | 23 |
| | 65,685 |
| (7,910 | ) | 30 |
|
Total | $ | 2,408,825 |
| $ | (73,587 | ) | 473 |
| | $ | 1,663,194 |
| $ | (143,602 | ) | 296 |
| | $ | 4,072,019 |
| $ | (217,189 | ) | 769 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 | | | | | | |
| | (dollars in thousands) | | | | | | |
| Unrealized Loss Position for Less than 12 Months | | Unrealized Loss Position for 12 Months or More | | Total |
| Estimated Fair Value | Unrealized Losses | Number of Securities | | Estimated Fair Value | Unrealized Losses | Number of Securities | | Estimated Fair Value | Unrealized Losses | Number of Securities |
Non-Agency RMBS | | | | | | | | | | | |
Senior | $ | 35,229 |
| $ | (182 | ) | 1 |
| | $ | — |
| $ | — |
| — |
| | $ | 35,229 |
| $ | (182 | ) | 1 |
|
Senior, interest-only | 28,129 |
| (1,724 | ) | 27 |
| | 120,120 |
| (66,183 | ) | 120 |
| | 148,249 |
| (67,907 | ) | 147 |
|
Subordinated | 235 |
| (38 | ) | 7 |
| | 6,261 |
| (261 | ) | 5 |
| | 6,496 |
| (299 | ) | 12 |
|
Subordinated, interest-only | — |
| — |
| — |
| | 945 |
| (445 | ) | 3 |
| | 945 |
| (445 | ) | 3 |
|
Agency MBS | |
| |
| |
| | |
| |
| |
| | |
| |
| |
|
Residential | 660,103 |
| (5,197 | ) | 21 |
| | 1,471,464 |
| (28,702 | ) | 93 |
| | 2,131,567 |
| (33,899 | ) | 114 |
|
Commercial | 830,889 |
| (11,695 | ) | 176 |
| | 161,980 |
| (4,404 | ) | 91 |
| | 992,869 |
| (16,099 | ) | 267 |
|
Interest-only | 15,142 |
| (641 | ) | 7 |
| | 57,875 |
| (7,103 | ) | 24 |
| | 73,017 |
| (7,744 | ) | 31 |
|
Total | $ | 1,569,727 |
| $ | (19,477 | ) | 239 |
| | $ | 1,818,645 |
| $ | (107,098 | ) | 336 |
| | $ | 3,388,372 |
| $ | (126,575 | ) | 575 |
|
At March 31, 2018, the Company did not intend to sell any of its RMBS that were in an unrealized loss position, and it was not more likely than not that the Company would be required to sell these RMBS before recovery of their amortized cost basis, which may be at their maturity. At March 31, 2017, the Company had the intent to sell ten Agency MBS positions collateralized by commercial property which were in an unrealized loss position. These Commercial Agency MBS positions had an unrealized loss of $2 million at March 31, 2017. Therefore, the Company recorded an other-than-temporary impairment loss for this amount at the quarter ended March 31, 2017. With respect to RMBS held by consolidated VIEs, the ability of any entity to cause the sale by the VIE prior to the maturity of these RMBS is either expressly prohibited, not probable, or is limited to specified events of default, none of which have occurred as of March 31, 2018.
Gross unrealized losses on the Company’s Agency residential and commercial MBS (excluding Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $97 million and $41 million as of March 31, 2018 and December 31, 2017, respectively. Given the inherent credit quality of Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In evaluating whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, the Company considers the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at March 31, 2018 and December 31, 2017, unrealized losses on its Agency MBS were temporary.
Gross unrealized losses on the Company’s Non-Agency RMBS (excluding Non-Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $572 thousand and $283 thousand at March 31, 2018 and December 31, 2017, respectively. Based upon the most recent evaluation, the Company does not consider these unrealized losses to be indicative of OTTI and does not believe that these unrealized losses are credit related, but rather are due to other factors. The Company has reviewed its Non-Agency RMBS 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 cash flows expected to be collected for such RMBS, which considers recent bond performance and expected future performance of the underlying collateral.
A summary of the OTTI included in earnings for the quarters ended March 31, 2018 and 2017 are presented below.
|
| | | | | | |
| For the Quarter Ended |
| March 31, 2018 | March 31, 2017 |
| (dollars in thousands) |
Total other-than-temporary impairment losses | $ | (294 | ) | $ | (2,713 | ) |
Portion of loss recognized in other comprehensive income (loss) | (864 | ) | (15,988 | ) |
Net other-than-temporary credit impairment losses | $ | (1,158 | ) | $ | (18,701 | ) |
The following table presents a roll forward of the credit loss component of OTTI on the Company’s Non-Agency RMBS for which a portion of loss was recognized in OCI. The table delineates between those securities that are recognizing OTTI for the first time as opposed to those that have previously recognized OTTI.
|
| | | | | | |
| For the Quarters Ended |
| March 31, 2018 | March 31, 2017 |
| (dollars in thousands) |
Cumulative credit loss beginning balance | $ | 591,521 |
| $ | 556,485 |
|
Additions: | |
| |
|
Other-than-temporary impairments not previously recognized | 1,140 |
| — |
|
Reductions for securities sold or deconsolidated during the period | (173 | ) | (7,443 | ) |
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments | 18 |
| 16,726 |
|
Reductions for increases in cash flows expected to be collected over the remaining life of the securities | (6,450 | ) | (7,539 | ) |
Cumulative credit impairment loss ending balance | $ | 586,056 |
| $ | 558,229 |
|
Cash flows generated to determine net other-than-temporary credit impairment losses recognized in earnings are estimated using significant unobservable inputs. The significant inputs used to measure the component of OTTI recognized in earnings for the Company’s Non-Agency RMBS for the periods reported are summarized as follows:
|
| | |
| For the Quarter Ended |
| March 31, 2018 | March 31, 2017 |
Loss Severity | | |
Weighted Average | 100% | 64% |
Range | 34% - 132% | 63% - 64% |
60+ days delinquent | | |
Weighted Average | 18% | 19% |
Range | 16% - 19% | 11% - 25% |
Credit Enhancement (1) |
| |
Weighted Average | 17% | 22% |
Range | 0% - 51% | 0% - 37% |
3 Month CPR | | |
Weighted Average | 27% | 12% |
Range | 3% - 39% | 4% - 24% |
12 Month CPR | | |
Weighted Average | 15% | 10% |
Range | 3% - 20% | 4% - 19% |
(1) Calculated as the combined credit enhancement to the Re-REMIC and underlying from each of their respective capital structures.
The following tables present a summary of unrealized gains and losses at March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | | |
| | (dollars in thousands) | | | |
| Gross Unrealized Gain Included in Accumulated Other Comprehensive Income | Gross Unrealized Gain Included in Cumulative Earnings | Total Gross Unrealized Gain | Gross Unrealized Loss Included in Accumulated Other Comprehensive Income | Gross Unrealized Loss Included in Cumulative Earnings | Total Gross Unrealized Loss |
Non-Agency RMBS | | | | | | |
Senior | $ | 736,149 |
| $ | — |
| $ | 736,149 |
| $ | (481 | ) | $ | — |
| $ | (481 | ) |
Senior, interest-only | — |
| 16,197 |
| 16,197 |
| — |
| (70,296 | ) | (70,296 | ) |
Subordinated | 65,248 |
| 3,204 |
| 68,452 |
| (91 | ) | (85 | ) | (176 | ) |
Subordinated, interest-only | — |
| 1,388 |
| 1,388 |
| — |
| (521 | ) | (521 | ) |
Agency MBS | |
| |
| | |
| |
| |
Residential | 3,142 |
| 59 |
| 3,201 |
| (64,913 | ) | (17,225 | ) | (82,138 | ) |
Commercial | 2,762 |
| 280 |
| 3,042 |
| (32,572 | ) | (23,095 | ) | (55,667 | ) |
Interest-only | — |
| 827 |
| 827 |
| — |
| (7,910 | ) | (7,910 | ) |
Total | $ | 807,301 |
| $ | 21,955 |
| $ | 829,256 |
| $ | (98,057 | ) | $ | (119,132 | ) | $ | (217,189 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | | |
| | (dollars in thousands) | | | |
| Gross Unrealized Gain Included in Accumulated Other Comprehensive Income | Gross Unrealized Gain Included in Cumulative Earnings | Total Gross Unrealized Gain | Gross Unrealized Loss Included in Accumulated Other Comprehensive Income | Gross Unrealized Loss Included in Cumulative Earnings | Total Gross Unrealized Loss |
Non-Agency RMBS | | | | | | |
Senior | $ | 754,234 |
| $ | — |
| $ | 754,234 |
| $ | (182 | ) | $ | — |
| $ | (182 | ) |
Senior, interest-only | — |
| 15,761 |
| 15,761 |
| — |
| (67,907 | ) | (67,907 | ) |
Subordinated | 62,989 |
| 3,715 |
| 66,704 |
| (102 | ) | (197 | ) | (299 | ) |
Subordinated, interest-only | — |
| 902 |
| 902 |
| — |
| (445 | ) | (445 | ) |
Agency MBS | |
| |
| |
| |
| |
| |
|
Residential | 5,706 |
| — |
| 5,706 |
| (29,083 | ) | (4,816 | ) | (33,899 | ) |
Commercial | 15,462 |
| 1,579 |
| 17,041 |
| (12,122 | ) | (3,977 | ) | (16,099 | ) |
Interest-only | — |
| 834 |
| 834 |
| — |
| (7,744 | ) | (7,744 | ) |
Total | $ | 838,391 |
| $ | 22,791 |
| $ | 861,182 |
| $ | (41,489 | ) | $ | (85,086 | ) | $ | (126,575 | ) |
Changes in prepayments, actual cash flows, and cash flows expected to be collected, among other items, are affected by the collateral characteristics of each asset class. The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.
The following tables provide a summary of the Company’s MBS portfolio at March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | |
| March 31, 2018 |
| Principal or Notional Value
at Period-End
(dollars in thousands) | Weighted Average Amortized
Cost Basis | Weighted Average Fair Value | Weighted Average
Coupon | Weighted Average Yield at Period-End (1) |
Non-Agency RMBS | | | | |
Senior | $ | 2,627,375 |
| $ | 53.96 |
| $ | 81.96 |
| 4.6 | % | 17.1 | % |
Senior, interest-only | 4,646,297 |
| 5.42 |
| 4.25 |
| 1.3 | % | 7.0 | % |
Subordinated | 495,128 |
| 67.34 |
| 81.13 |
| 4.1 | % | 9.3 | % |
Subordinated, interest-only | 196,208 |
| 3.68 |
| 4.12 |
| 0.8 | % | 12.4 | % |
Agency MBS | |
| |
| |
| |
| |
|
Residential pass-through | 2,265,632 |
| 105.56 |
| 102.07 |
| 3.9 | % | 3.0 | % |
Commercial pass-through | 2,153,980 |
| 102.15 |
| 99.71 |
| 3.6 | % | 3.3 | % |
Interest-only | 2,960,181 |
| 3.53 |
| 3.29 |
| 0.7 | % | 3.2 | % |
(1) Bond Equivalent Yield at period end.
|
| | | | | | | | | | | | | |
| December 31, 2017 |
| Principal or Notional Value at Period-End
(dollars in thousands) | Weighted Average Amortized
Cost Basis | Weighted Average Fair Value | Weighted Average
Coupon | Weighted Average Yield at Period-End (1) |
Non-Agency RMBS | | | | |
Senior | $ | 2,733,926 |
| $ | 54.04 |
| $ | 81.62 |
| 4.6 | % | 16.7 | % |
Senior, interest-only | 4,862,461 |
| 5.41 |
| 4.34 |
| 1.3 | % | 8.0 | % |
Subordinated | 501,455 |
| 66.77 |
| 80.01 |
| 4.1 | % | 9.6 | % |
Subordinated, interest-only | 201,378 |
| 3.66 |
| 3.89 |
| 0.8 | % | 11.8 | % |
Agency MBS | |
| |
| |
| |
| |
|
Residential pass-through | 2,227,128 |
| 105.53 |
| 104.27 |
| 3.8 | % | 2.9 | % |
Commercial pass-through | 1,894,594 |
| 102.26 |
| 102.31 |
| 3.6 | % | 3.2 | % |
Interest-only | 3,021,840 |
| 3.68 |
| 3.45 |
| 0.7 | % | 3.4 | % |
(1) Bond Equivalent Yield at period end.
The following table presents the weighted average credit rating of the Company’s Non-Agency RMBS portfolio at March 31, 2018 and December 31, 2017.
|
| | | | |
| March 31, 2018 | December 31, 2017 |
|
AAA | 0.3 | % | 0.3 | % |
AA | 0.5 | % | 0.3 | % |
A | 0.5 | % | 0.6 | % |
BBB | 1.7 | % | 1.9 | % |
BB | 2.2 | % | 2.5 | % |
B | 2.3 | % | 2.3 | % |
Below B | 58.2 | % | 59.6 | % |
Not Rated | 34.3 | % | 32.5 | % |
Total | 100.0 | % | 100.0 | % |
Actual maturities of MBS are generally shorter than the stated contractual maturities. Actual maturities of the Company’s MBS are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal. The following tables provide a summary of the fair value and amortized cost of the Company’s MBS at March 31, 2018 and December 31, 2017 according to their estimated weighted-average life classifications. The weighted-average lives of the MBS in the tables below are based on lifetime expected prepayment rates using an industry prepayment model for the Agency MBS portfolio and the Company’s prepayment assumptions for the Non-Agency RMBS. The prepayment model considers current yield, forward yield, steepness of the interest rate curve, current mortgage rates, mortgage rates of the outstanding loan, loan age, margin, and volatility.
|
| | | | | | | | | | | | | | | |
| March 31, 2018 |
| (dollars in thousands) |
| Weighted Average Life |
| Less than one year | Greater than one year and less than five years | Greater than five years and less than ten years | Greater than ten years | Total |
Fair value | | | | | |
Non-Agency RMBS | | | | | |
Senior | $ | 164 |
| $ | 545,119 |
| $ | 979,210 |
| $ | 628,834 |
| $ | 2,153,327 |
|
Senior interest-only | 28 |
| 32,448 |
| 84,826 |
| 80,291 |
| 197,593 |
|
Subordinated | — |
| 70,172 |
| 128,691 |
| 202,836 |
| 401,699 |
|
Subordinated interest-only | — |
| 408 |
| 7,684 |
| — |
| 8,092 |
|
Agency MBS | |
| |
| |
| |
| |
|
Residential | — |
| — |
| 2,288,702 |
| 23,933 |
| 2,312,635 |
|
Commercial | — |
| 15,764 |
| 19,377 |
| 2,112,503 |
| 2,147,644 |
|
Interest-only | — |
| 68,737 |
| 24,227 |
| 4,556 |
| 97,520 |
|
Total fair value | $ | 192 |
| $ | 732,648 |
| $ | 3,532,717 |
| $ | 3,052,953 |
| $ | 7,318,510 |
|
Amortized cost | |
| |
| |
| |
| |
|
Non-Agency RMBS | | |
| |
| |
| |
|
Senior | $ | 162 |
| $ | 400,387 |
| $ | 613,201 |
| $ | 403,909 |
| $ | 1,417,659 |
|
Senior interest-only | 243 |
| 45,734 |
| 113,981 |
| 91,734 |
| 251,692 |
|
Subordinated | — |
| 57,559 |
| 97,904 |
| 177,960 |
| 333,423 |
|
Subordinated interest-only | — |
| 493 |
| 6,732 |
| — |
| 7,225 |
|
Agency MBS | |
| |
| |
| |
| |
|
Residential | — |
| — |
| 2,366,843 |
| 24,729 |
| 2,391,572 |
|
Commercial | — |
| 15,887 |
| 20,490 |
| 2,163,892 |
| 2,200,269 |
|
Interest-only | — |
| 74,005 |
| 26,341 |
| 4,257 |
| 104,603 |
|
Total amortized cost | $ | 405 |
| $ | 594,065 |
| $ | 3,245,492 |
| $ | 2,866,481 |
| $ | 6,706,443 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| (dollars in thousands) |
| Weighted Average Life |
| Less than one year | Greater than one year and less than five years | Greater than five years and less than ten years | Greater than ten years | Total |
Fair value | | | | | |
Non-Agency RMBS | | | | | |
Senior | $ | 2,179 |
| $ | 681,086 |
| $ | 910,234 |
| $ | 637,916 |
| $ | 2,231,415 |
|
Senior interest-only | 19 |
| 54,107 |
| 72,702 |
| 84,022 |
| 210,850 |
|
Subordinated | — |
| 75,495 |
| 121,555 |
| 204,175 |
| 401,225 |
|
Subordinated interest-only | — |
| 7,165 |
| 661 |
| — |
| 7,826 |
|
Agency MBS | |
| |
| |
| |
| |
|
Residential | — |
| 21,777 |
| 2,300,403 |
| — |
| 2,322,180 |
|
Commercial | — |
| 45,770 |
| 16,559 |
| 1,875,952 |
| 1,938,281 |
|
Interest-only | — |
| 74,490 |
| 25,271 |
| 4,606 |
| 104,367 |
|
Total fair value | $ | 2,198 |
| $ | 959,890 |
| $ | 3,447,385 |
| $ | 2,806,671 |
| $ | 7,216,144 |
|
Amortized cost | |
| |
| |
| |
| |
|
Non-Agency RMBS | | |
| |
| |
| |
|
Senior | $ | 2,124 |
| $ | 493,965 |
| $ | 569,458 |
| $ | 411,816 |
| $ | 1,477,363 |
|
Senior interest-only | 1,271 |
| 73,758 |
| 94,145 |
| 93,822 |
| 262,996 |
|
Subordinated | — |
| 61,987 |
| 91,044 |
| 181,789 |
| 334,820 |
|
Subordinated interest-only | — |
| 6,355 |
| 1,014 |
| — |
| 7,369 |
|
Agency MBS | |
| |
| |
| |
| |
|
Residential | — |
| 22,069 |
| 2,328,304 |
| — |
| 2,350,373 |
|
Commercial | — |
| 47,170 |
| 17,176 |
| 1,872,993 |
| 1,937,339 |
|
Interest-only | — |
| 79,356 |
| 27,582 |
| 4,339 |
| 111,277 |
|
Total amortized cost | $ | 3,395 |
| $ | 784,660 |
| $ | 3,128,723 |
| $ | 2,564,759 |
| $ | 6,481,537 |
|
The Non-Agency RMBS portfolio is subject to credit risk. The Non-Agency RMBS portfolio is primarily collateralized by Alt-A first lien mortgages. An Alt-A mortgage is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or prime, and less risky than subprime, the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans. Typically, Alt-A mortgages are characterized by borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios. At origination of the loan, Alt-A mortgage securities are defined as Non-Agency RMBS where (i) the underlying collateral has weighted average FICO scores between 680 and 720 or (ii) the FICO scores are greater than 720 and RMBS have 30% or less of the underlying collateral composed of full documentation loans. At March 31, 2018 and December 31, 2017, 67% and 66% of the Non-Agency RMBS collateral was classified as Alt-A, respectively. At March 31, 2018 and December 31, 2017, 11% and 13% of the Non-Agency RMBS collateral was classified as prime, respectively. The remaining Non-Agency RMBS collateral is classified as subprime.
The Non-Agency RMBS in the Portfolio have the following collateral characteristics at March 31, 2018 and December 31, 2017. |
| | | | | | | | |
| March 31, 2018 | December 31, 2017 |
Weighted average maturity (years) | | 20.5 |
| | 20.7 |
|
Weighted average amortized loan to value (1) | | 64.3 | % | | 64.4 | % |
Weighted average FICO (2) | | 697 |
| | 697 |
|
Weighted average loan balance (in thousands) | | $ | 316 |
| | $ | 314 |
|
Weighted average percentage owner occupied | | 83.9 | % | | 84.4 | % |
Weighted average percentage single family residence | | 65.6 | % | | 66.3 | % |
Weighted average current credit enhancement | | 2.3 | % | | 2.2 | % |
Weighted average geographic concentration of top four states | CA | 31.6 | % | CA | 31.7 | % |
| NY | 8.8 | % | NY | 8.5 | % |
| FL | 8.4 | % | FL | 8.3 | % |
| NJ | 2.7 | % | NJ | 2.7 | % |
(1) Value represents appraised value of the collateral at the time of loan origination.
(2) FICO as determined at the time of loan origination.
The table below presents the origination year of the underlying loans related to the Company’s portfolio of Non-Agency RMBS at March 31, 2018 and December 31, 2017.
|
| | | | |
Origination Year | March 31, 2018 | December 31, 2017 |
|
2003 and prior | 5.1 | % | 3.6 | % |
2004 | 5.8 | % | 4.3 | % |
2005 | 18.9 | % | 20.8 | % |
2006 | 43.1 | % | 38.2 | % |
2007 | 25.8 | % | 30.4 | % |
2008 | 0.4 | % | 1.8 | % |
2009 and later | 0.9 | % | 0.9 | % |
Total | 100.0 | % | 100.0 | % |
Gross realized gains and losses are recorded in “Net realized gains (losses) on sales of investments” on the Company’s Consolidated Statements of Operations. The proceeds and gross realized gains and gross realized losses from sales of investments for the quarters ended March 31, 2018 and 2017 are as follows:
|
| | | | | | |
| For the Quarter Ended |
| March 31, 2018 | March 31, 2017 |
| (dollars in thousands) |
Proceeds from sales | $ | — |
| $ | 20,063 |
|
| | |
Gross realized gains | — |
| 5,187 |
|
Gross realized losses | — |
| (20 | ) |
Net realized gain (loss) | $ | — |
| $ | 5,167 |
|
Included in the gross realized gains for the quarter ended March 31, 2017 in the table above are exchanges of securities with a fair value of $20 million. The Company exchanged its investment in a re-remic security for the underlying collateral supporting the group related to the exchanged asset. These exchanges were treated as non-cash sales and purchases and resulted in a realized gain of $5 million, reflected in earnings for the quarter ended March 31, 2017. There were no such exchanges for the quarter ended March 31, 2018.
4. Loans Held for Investment
The Loans held for investment is comprised primarily of loans collateralized by seasoned subprime residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, jumbo, prime residential mortgages.
At March 31, 2018, all Loans held for investment are carried at fair value. See Note 5 for a discussion on how the Company determines the fair values of the Loans held for investment. As changes in the fair value of these loans are reflected in earnings, the Company does not estimate or record a loan loss provision. The total amortized cost of our Loans held for investment was $13.2 billion and $13.3 billion as of March 31, 2018 and December 31, 2017, respectively.
The following table provides a summary of the changes in the carrying value of Loans held for investment at fair value at March 31, 2018 and December 31, 2017:
|
| | | | | | |
| For the Quarter Ended | For the Year Ended |
| March 31, 2018 | December 31, 2017 |
| (dollars in thousands) |
Balance, beginning of period | $ | 13,678,263 |
| $ | 8,753,653 |
|
Purchases | 369,583 |
| 6,539,765 |
|
Principal paydowns | (443,755 | ) | (1,788,409 | ) |
Sales and settlements | (6,865 | ) | 2,876 |
|
Net periodic accretion (amortization) | (18,826 | ) | (35,803 | ) |
Change in fair value | 41,595 |
| 206,181 |
|
Balance, end of period | $ | 13,619,995 |
| $ | 13,678,263 |
|
The primary cause of the change in fair value is due to market demand and changes in credit risk of mortgage loans.
Residential mortgage loans
The loan portfolio for all residential mortgages were originated during the following years:
|
| | | | |
Origination Year | March 31, 2018 | December 31, 2017 |
|
2002 and prior | 7.4 | % | 7.5 | % |
2003 | 6.7 | % | 6.7 | % |
2004 | 14.5 | % | 14.6 | % |
2005 | 20.1 | % | 20.4 | % |
2006 | 23.1 | % | 23.1 | % |
2007 | 18.8 | % | 19.0 | % |
2008 | 6.0 | % | 6.0 | % |
2009 | 0.8 | % | 0.7 | % |
2010 and later | 2.6 | % | 2.0 | % |
Total | 100.0 | % | 100.0 | % |
The following table presents a summary of key characteristics of the residential loan portfolio at March 31, 2018 and December 31, 2017:
|
| | | | | | | | |
| March 31, 2018 | December 31, 2017 |
Number of loans | | 147,720 |
| | 149,172 |
|
Weighted average maturity (years) | | 19.2 |
| | 18.8 |
|
Weighted average loan to value (1) | | 87.7 | % | | 88.0 | % |
Weighted average FICO (1) | | 631 |
| | 631 |
|
Weighted average loan balance (in thousands) | | $ | 91 |
| | $ | 91 |
|
Weighted average percentage owner occupied | | 94.2 | % | | 95.0 | % |
Weighted average percentage single family residence | | 86.2 | % | | 86.0 | % |
Weighted average geographic concentration of top five states | CA | 9.1 | % | CA | 9.0 | % |
| FL | 7.2 | % | FL | 7.2 | % |
| OH | 6.0 | % | OH | 6.1 | % |
| PA | 5.6 | % | PA | 5.6 | % |
| NY | 5.6 | % | VA | 5.5 | % |
(1) As provided by the Trustee.
The following table summarizes the outstanding principal balance of the residential loan portfolio which are 30 days delinquent and greater as reported by the servicer at March 31, 2018 and December 31, 2017.
|
| | | | | | | | |
| 30 Days Delinquent | 60 Days Delinquent | 90+ Days Delinquent | Bankruptcy | Foreclosure | REO | Total | Unpaid Principal/Notional |
| (dollars in thousands) | |
March 31, 2018 | $957,935 | $327,238 | $443,963 | $280,238 | $225,306 | $31,888 | $2,266,568 | $13,424,680 |
% of Unpaid Principal Balance | 7.1% | 2.4% | 3.3% | 2.1% | 1.7% | 0.2% | 16.9% |
|
| | | | | | | | |
December 31, 2017 | $888,535 | $353,810 | $435,876 | $272,778 | $200,376 | $31,008 | $2,182,383 | $13,525,820 |
% of Unpaid Principal Balance | 6.6% | 2.6% | 3.2% | 2.0% | 1.5% | 0.2% | 16.1% |
|
The fair value of residential mortgage loans 90 days or more past due was $585 million and $577 million as of March 31, 2018 and December 31, 2017, respectively.
Real estate owned
Real estate owned (“REO”) represents properties which the Company has received the legal title of the property to satisfy the outstanding loan. REO is re-categorized from loan to REO when the Company takes legal title of the property. REO assets are measured and reported at the estimated fair value less the estimated cost to sell at the end of each reporting period. At the time the asset is re-categorized, any difference between the previously recorded loan balance and the carrying value of the REO at the time the Company takes legal title of the property, is recognized as a loss. All REO assets of the Company are held-for-sale and it is the Company’s intention to sell the property in the shortest time possible to maximize their return and recovery on the previously recorded loan. The carrying value of REO assets at March 31, 2018 and December 31, 2017 was $12 million and $10 million, respectively, and were recorded in Other Assets on the Company’s consolidated statements of financial condition.
5. Fair Value Measurements
The Company applies fair value guidance in accordance with GAAP to account for its financial instruments. The Company categorizes its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to fair value.
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products evolve and the pricing for certain products becomes more transparent, the Company will continue to refine its valuation methodologies. The methodology utilized by the Company for the periods presented is unchanged. The methods used to produce a fair value calculation may not be indicative of net realizable value or reflective of future fair values. Furthermore, the Company believes its valuation methods are appropriate and consistent with other market participants. Using different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.
During times of market dislocation, the observability of prices and inputs can be difficult for certain investments. If third party pricing services are unable to provide a price for an asset, or if the price provided by them is deemed unreliable by the Company, then the asset will be valued at its fair value as determined by the Company without validation to third-party pricing. Illiquid investments typically experience greater price volatility as an active market does not exist. Observability of prices and inputs can vary significantly from period to period and may cause instruments to change classifications within the three level hierarchy.
A description of the methodologies utilized by the Company to estimate the fair value of its financial instruments by instrument class follows:
Agency MBS and Non-Agency RMBS
The Company determines the fair value of all of its investment securities based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, prepayment speeds, loan size, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, delinquency, expected losses, expected default severity, credit enhancement, and other pertinent factors. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, the Company compares the fair values generated by the model to non-binding independent prices provided by two independent third party pricing services. For certain highly liquid asset classes, such as Agency fixed-rate pass-through bonds, the Company’s valuations are also compared to quoted prices for To-Be-Announced (“TBA”) securities.
Each quarter the Company develops thresholds which are determined utilizing current bid/ask spreads, liquidity, price volatility and other factors as appropriate. If internally developed model prices differ from the independent prices provided by greater than a market derived predetermined threshold for the period, the Company highlights these differences for further review, both internally and with the third party pricing service. The Company obtains the inputs used by the third party pricing services and compares them to the Company’s inputs. The Company updates its own inputs if the Company determines the third party pricing inputs more accurately reflect the current market environment. If the Company believes that its internally developed inputs more accurately reflect the current market environment, it will request that the third party pricing service review market factors that may not have been considered by the third party pricing service and provide updated prices. The Company reconciles and resolves all pricing differences in excess of the predetermined thresholds before a final price is established. At March 31, 2018, fourteen investment holdings with an internally developed fair value of $177 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $6 million lower than the third party prices provided of $183 million. After review and discussion, the Company affirmed and valued the investments at the lower internally developed prices. No other differences were noted at March 31, 2018 in excess of the derived predetermined threshold for the period. At December 31, 2017, four investment holdings with an internally developed fair value of $25 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $3 million lower than the third party prices provided of $28 million. After review and discussion, the Company affirmed and valued the investments at the lower internally developed prices.
The Company’s estimate of prepayment, default and severity curves all involve judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting Non-Agency RMBS fair value estimates Level 3 inputs in the fair value hierarchy. As the fair values of Agency MBS are more observable, these investments are classified as level 2 in the fair value hierarchy.
Loans Held for Investment
Loans consisting of seasoned subprime residential mortgage loans:
The Company estimates the fair value of its Loans held for investment consisting of seasoned subprime residential mortgage loans on a loan by loan basis using an internally developed model which compares the loan held by the Company with a loan currently offered in the market. The loan price is adjusted in the model by considering the loan factors which would impact the value of a loan. These loan factors include: loan coupon as compared to coupon currently available in the market, FICO, loan-to-value ratios, delinquency history, owner occupancy, and property type, among other factors. A baseline is developed for each significant loan factor and adjusts the price up or down depending on how that factor for each specific loan compares to the baseline rate. Generally, the most significant impact on loan value is the loan interest rate as compared to interest rates currently available in the market and delinquency history. These two factors are based on relevant observable inputs.
The Company also monitors market activity to identify trades which may be used to compare internally developed prices; however, as the portfolio of loans held at fair value is a seasoned subprime pool of mortgage loans, comparable loan pools are not common or directly comparable. There are limited transactions in the market place to develop a comprehensive direct range of values.
The Company reviews the fair values generated by the model to determine whether prices are reflective of the current market by corroborating its estimates of fair value by comparing the results to non-binding independent prices provided by two independent third party pricing services for the loan portfolio. Each quarter the Company develops thresholds which are determined utilizing the securitization market.
If the internally developed fair values of the loan pools differ from the independent prices provided by greater than a predetermined threshold for the period, the Company highlights these differences for further review, both internally and with the third party pricing service. The Company obtains certain inputs used by the third party pricing services and evaluates them for reasonableness. The Company updates its own model if the Company determines the third party pricing inputs more accurately reflect the current market environment or observed information from the third party vendors. If the Company believes that its internally developed inputs more accurately reflect the current market environment, it will request that the third party pricing service review market factors that may not have been considered by the third party pricing service. The Company reconciles and resolves all pricing differences in excess of the predetermined thresholds before a final price is established.
At March 31, 2018, the internally developed fair values of loan pools of $753 million had a difference between the model generated prices and third party prices provided in excess of the derived predetermined threshold for the period. The internally developed prices were $23 million lower than the third party prices provided of $776 million. After review and discussion, the
Company affirmed and valued the investments at the lower internally developed prices. At December 31, 2017, there were no pricing differences in excess of the predetermined thresholds between the model generated prices and third party prices.
The Company’s estimates of fair value of Loans held for investment involve management judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates level 3 inputs in the fair value hierarchy.
Loans collateralized by jumbo, prime residential mortgages:
The loans collateralized by jumbo, prime residential mortgages are carried at fair value. The loans are held as part of a consolidated Collateralized Financing Entity (“CFE”). A CFE is a variable interest entity that holds financial assets, issues beneficial interests in those assets and has no more than nominal equity and the beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance for CFEs allow the Company to elect to measure the CFE’s financial assets using the fair value of the CFE’s financial liabilities as the fair values of the financial liabilities of the CFE are more observable. Therefore, the fair value of the loans collateralized by jumbo, prime residential mortgages is based on the fair value of the financial liabilities. See discussion of the fair value of Securitized Debt, collateralized by Loans Held for Investment at fair value below.
As the more observable financial liabilities are considered level 3 in the fair value hierarchy, the Loans collateralized by jumbo, prime residential mortgages are also level 3 in the fair value hierarchy.
Securitized Debt, collateralized by Non-Agency RMBS
The Company carries securitized debt, collateralized by Non-Agency RMBS at the principal balance outstanding plus unamortized premiums, less unaccreted discounts recorded in connection with the financing of the loans or RMBS with third parties. The Company estimates the fair value of securitized debt, collateralized by Non-Agency RMBS by estimating the future cash flows associated with the underlying assets collateralizing the secured debt outstanding. The Company models the fair value of each underlying asset by considering, among other items, the structure of the underlying security, coupon, servicer, delinquency, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and management’s expectations of general economic conditions in the sector and other economic factors. This process, including the review process, is consistent with the process used for Agency MBS and Non-Agency RMBS using internal models. For further discussion of the valuation process and benchmarking process, see Agency MBS and Non-Agency RMBS discussion herein.
The Company’s estimates of fair value of securitized debt, collateralized by Non-Agency RMBS involve management’s judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates level 3 inputs in the fair value hierarchy.
Securitized Debt, collateralized by Loans Held for Investment
The process for determining the fair value of securitized debt, collateralized by loans held for investment is based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, prepayment speeds, loan size, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, expected losses, expected default severity, credit enhancement, and other pertinent factors. This process, including the review process, is consistent with the process used for Agency MBS and Non-Agency RMBS using internal models. For further discussion of the valuation process and benchmarking process, see Agency MBS and Non-Agency RMBS discussion herein.
The Company’s estimates of fair value of securitized debt, collateralized by loans held for investment involve management’s judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates level 3 inputs in the fair value hierarchy.
Fair value option
The table below shows the unpaid principal, fair value and impact of change in fair value on each of the financial instruments carried with fair value option as of March 31, 2018 and December 31, 2017 respectively:
|
| | | | | | | | | |
| March 31, 2018 |
| (dollars in thousands) |
| Unpaid
Principal/
Notional | Fair Value | | Quarter to Date Gain/(Loss) on Change in Fair Value |
Assets: | | | | |
Non-agency RMBS | | | | |
Subordinated | N/A |
| $ | 13,330 |
| | $ | (398 | ) |
Senior, interest-only | 4,646,297 |
| 197,593 |
| | (1,953 | ) |
Subordinated, interest-only | 196,208 |
| 8,092 |
| | 411 |
|
Agency MBS | | | | |
Residential Pass-through | 683,046 |
| 698,410 |
| | (12,351 | ) |
Commercial Pass-through | 855,065 |
| 845,779 |
| | (20,415 | ) |
Interest-only | 2,960,181 |
| 97,520 |
| | (173 | ) |
Loans held for investment, at fair value | 13,424,680 |
| 13,619,995 |
| | 41,596 |
|
Liabilities: | |
| |
| | |
|
Securitized debt at fair value, collateralized by loans held for investment | 9,345,920 |
| 9,321,154 |
| | 7,749 |
|
|
| | | | | | | | | | | | |
| December 31, 2017 |
| (dollars in thousands) |
| Unpaid
Principal/
Notional | Fair Value | | Quarter to Date Gain/(Loss) on Change in Fair Value | Year to Date Gain/(Loss) on Change in Fair Value |
Assets: | | | | | |
Non-agency RMBS | | | | | |
Subordinated | N/A |
| $ | 13,993 |
| | $ | (545 | ) | $ | 1,246 |
|
Senior, interest-only | 4,862,461 |
| 210,850 |
| | 3,156 |
| (13,290 | ) |
Subordinated, interest-only | 201,378 |
| 7,826 |
| | 1,836 |
| 2,311 |
|
Agency MBS | | | | | |
|