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: September 30, 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) 

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:

Class	Outstanding at September 30, 2018
Common Stock, $0.01 par value	187,006,943

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CHIMERA INVESTMENT CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition as of September 30, 2018 (Unaudited) and December 31, 2017 (Derived from the audited consolidated financial statements as of December 31, 2017)	2
Consolidated Statements of Operations (Unaudited) for the quarters and nine months ended September 30, 2018 and 2017	3
Consolidated Statements of Comprehensive Income (Unaudited) for the quarters and nine months ended September 30, 2018 and 2017	4
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the nine months ended September 30, 2018 and 2017	5
Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018 and 2017	6
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3. Quantitative and Qualitative Disclosures about Market Risk	65
Item 4. Controls and Procedures	69
Part II.  OTHER INFORMATION
Item 1. Legal Proceedings	69
Item 1A. Risk Factors	70
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 6. Exhibits	71
SIGNATURES	73

1

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Part I

Item 1. Consolidated Financial Statements

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share and per share data)
(Unaudited)
	September 30, 2018			December 31, 2017
Assets:
Cash and cash equivalents	$	121,046		$	63,569
Non-Agency RMBS, at fair value	2,507,707			2,851,316
Agency MBS, at fair value	9,406,092			4,364,828
Loans held for investment, at fair value	12,729,559			13,678,263
Accrued interest receivable	114,798			100,789
Other assets	145,655			114,391
Derivatives, at fair value, net	155,069			48,914
Total assets (1)	$	25,179,926		$	21,222,070
Liabilities:
Repurchase agreements ($12.6 billion and $8.8 billion, pledged as collateral, respectively)	$	11,143,102		$	7,250,452
Securitized debt, collateralized by Non-Agency RMBS ($1.1 billion and $1.6 billion pledged as collateral, respectively)	167,718			205,780
Securitized debt at fair value, collateralized by loans held for investment ($12.5 billion and $13.3 billion pledged as collateral, respectively)	8,826,879			9,388,657
Payable for investments purchased	903,424			567,440
Accrued interest payable	110,228			61,888
Dividends payable	96,809			95,365
Accounts payable and other liabilities	18,585			17,191
Derivatives, at fair value, net	—			320
Total liabilities (1)	$	21,266,745		$	17,587,093
Commitments and Contingencies (See Note 15)
Stockholders' Equity:
Preferred Stock, par value of $0.01 per share, 100,000,000 shares authorized:
8.00% Series A cumulative redeemable: 5,800,000 shares issued and outstanding, respectively ($145,000 liquidation preference)	$	58		$	58
8.00% Series B cumulative redeemable: 13,000,000 shares issued and outstanding, respectively ($325,000 liquidation preference)	130			130
7.75% Series C cumulative redeemable: 10,400,000 and 0 shares issued and outstanding, respectively ($260,000 liquidation preference)	104			—
Common stock: par value $0.01 per share; 300,000,000 shares authorized, 187,006,943 and 187,809,288 shares issued and outstanding, respectively	1,870			1,878
Additional paid-in-capital	4,069,868			3,826,691
Accumulated other comprehensive income	627,936			796,902
Cumulative earnings	3,482,287			2,967,852
Cumulative distributions to stockholders	(4,269,072		)	(3,958,534		)
Total stockholders' equity	$	3,913,181		$	3,634,977
Total liabilities and stockholders' equity	$	25,179,926		$	21,222,070

(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 September 30, 2018 and December 31, 2017, total assets of consolidated VIEs were $13,703,646 and $14,987,464, respectively, and total liabilities of consolidated VIEs were $9,032,119 and $9,631,820, respectively. See Note 8 for further discussion.

See accompanying notes to consolidated financial statements.

2

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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							For the Nine Months Ended
	September 30, 2018			September 30, 2017				September 30, 2018			September 30, 2017
Net interest income:
Interest income (1)	$	321,715		$	296,813			$	925,282		$	836,801
Interest expense (2)	174,671			140,358				485,189			388,544
Net interest income	147,044			156,455				440,093			448,257
Other-than-temporary impairments:
Total other-than-temporary impairment losses	(772		)	(784		)		(1,871		)	(4,245		)
Portion of loss recognized in other comprehensive income	(6,461		)	(10,684		)		(15,651		)	(39,431		)
Net other-than-temporary credit impairment losses	(7,233		)	(11,468		)		(17,522		)	(43,676		)
Other investment gains (losses):
Net unrealized gains (losses) on derivatives	71,197			9,204				178,511			19,902
Realized gains (losses) on terminations of interest rate swaps	—			—				—			(16,143		)
Net realized gains (losses) on derivatives	2,881			(7,841		)		14,573			(28,680		)
Net gains (losses) on derivatives	74,078			1,363				193,084			(24,921		)
Net unrealized gains (losses) on financial instruments at fair value	(34,306		)	19,042				(38,204		)	159,047
Net realized gains (losses) on sales of investments	(6,123		)	1				(3,956		)	9,709
Gains (losses) on extinguishment of debt	9,263			(1		)		19,320			(48,016		)
Total other gains (losses)	42,912			20,405				170,244			95,819
Other expenses:
Compensation and benefits	8,642			7,533				25,741			22,759
General and administrative expenses	5,615			4,537				16,964			13,162
Servicing fees	9,766			10,715				31,044			31,193
Deal expenses	1,372			3,357				4,555			16,054
Total other expenses	25,395			26,142				78,304			83,168
Income (loss) before income taxes	157,328			139,250				514,511			417,232
Income taxes	7			18				76			172
Net income (loss)	$	157,321		$	139,232			$	514,435		$	417,060
Dividend on preferred stock	9,960			9,400				28,760			24,083
Net income (loss) available to common shareholders	$	147,361		$	129,832			$	485,675		$	392,977
Net income (loss) per share available to common shareholders:
Basic	$	0.79		$	0.69			$	2.59		$	2.09
Diluted	$	0.79		$	0.69			$	2.59		$	2.09
Weighted average number of common shares outstanding:
Basic	187,006,777			187,779,794				187,182,932			187,773,715
Diluted	187,584,958			188,192,111				187,705,831			188,176,757
Dividends declared per share of common stock	$	0.50		$	0.50			$	1.50		$	1.50

(1) Includes interest income of consolidated VIEs of $223,948 and $241,195 for the quarters ended September 30, 2018 and 2017, respectively and interest income of consolidated VIEs of $688,720 and $668,621 for the nine months ended September 30, 2018 and 2017. See Note 8 to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $99,622 and $101,856 for the quarters ended September 30, 2018 and 2017, respectively and interest expense of consolidated VIEs of $298,744 and $290,264 for the nine months ended September 30, 2018 and 2017. 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)
	For the Quarters Ended						For the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Comprehensive income (loss):
Net income (loss)	$	157,321		$	139,232		$	514,435		$	417,060
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities, net	(50,728		)	21,370			(181,885		)	59,114
Reclassification adjustment for net losses included in net income for other-than-temporary credit impairment losses	7,233			11,468			17,522			43,676
Reclassification adjustment for net realized losses (gains) included in net income	(220		)	(1		)	(4,603		)	(7,778		)
Other comprehensive income (loss)	(43,715		)	32,837			(168,966		)	95,012
Comprehensive income (loss) before preferred stock dividends	$	113,606		$	172,069		$	345,469		$	512,072
Dividends on preferred stock	$	9,960		$	9,400		$	28,760		$	24,083
Comprehensive income (loss) available to common stock shareholders	$	103,646		$	162,669		$	316,709		$	487,989

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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			Series C Preferred Stock Par Value			Common Stock Par Value			Additional Paid-in Capital			Accumulated Other Comprehensive Income			Cumulative Earnings			Cumulative Distributions to Stockholders			Total
Balance, December 31, 2016	$	58		$	—		$	—		$	1,877		$	3,508,779		$	718,106		$	2,443,184		$	(3,548,471	)	$	3,123,533
Net income (loss)	—			—			—			—			—			—			417,060			—			417,060
Other comprehensive income (loss)	—			—			—			—			—			95,012			—			—			95,012
Stock based compensation	—			—			—			1			2,754			—			—			—			2,755
Common dividends declared	—			—			—			—			—			—			—			(282,275		)	(282,275		)
Preferred dividends declared	—			—			—			—			—			—			—			(24,083		)	(24,083		)
Issuance of preferred stock	—			130			—			—			314,299			—			—			—			314,429
Balance, September 30, 2017	$	58		$	130		$	—		$	1,878		$	3,825,832		$	813,118		$	2,860,244		$	(3,854,829	)	$	3,646,431
Balance, December 31, 2017	$	58		$	130		$	—		$	1,878		$	3,826,691		$	796,902		$	2,967,852		$	(3,958,534	)	$	3,634,977
Net income (loss)	—			—			—			—			—			—			514,435			—			514,435
Other comprehensive income (loss)	—			—			—			—			—			(168,966		)	—			—			(168,966		)
Repurchase of common stock	—			—			—			(8		)	(14,826		)	—			—			—			(14,834		)
Stock based compensation	—			—			—			—			6,571			—			—			—			6,571
Common dividends declared	—			—			—			—			—			—			—			(281,778		)	(281,778		)
Preferred dividends declared	—			—			—			—			—			—			—			(28,760		)	(28,760		)
Issuance of preferred stock	—			—			104			—			251,432			—			—			—			251,536
Balance, September 30, 2018	$	58		$	130		$	104		$	1,870		$	4,069,868		$	627,936		$	3,482,287		$	(4,269,072	)	$	3,913,181

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 Nine Months Ended
	September 30, 2018			September 30, 2017
Cash Flows From Operating Activities:
Net income	$	514,435		$	417,060
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net	22,421			(17,269		)
Accretion (amortization) of deferred financing costs and securitized debt discounts/premiums, net	(9,957		)	6,649
Amortization of swaption premium	1,316			5,468
Net unrealized losses (gains) on derivatives	(178,511		)	(19,902		)
Margin (paid) received on derivatives	27,653			(3,948		)
Net unrealized losses (gains) on financial instruments at fair value	38,204			(159,047		)
Net realized losses (gains) on sales of investments	3,956			(9,709		)
Net other-than-temporary credit impairment losses	17,522			43,676
(Gain) loss on extinguishment of debt	(19,320		)	48,016
Equity-based compensation expense	6,571			2,755
Changes in operating assets:
Decrease (increase) in accrued interest receivable, net	(14,009		)	(19,738		)
Decrease (increase) in other assets	24,568			(5,076		)
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities	6,468			4,635
Increase (decrease) in accrued interest payable, net	48,426			15,631
Net cash provided by (used in) operating activities	$	489,743		$	309,201
Cash Flows From Investing Activities:
Agency MBS portfolio:
Purchases	$	(5,319,958	)	$	(1,000,336	)
Sales	16,184			693,207
Principal payments	346,476			332,140
Non-Agency RMBS portfolio:
Purchases	(73,149		)	(7,978		)
Sales	19,928			5,045
Principal payments	440,722			459,854
Loans held for investment:
Purchases	(1,339,514		)	(5,835,799		)
Sales	754,806			—
Principal payments	1,430,802			1,298,855
Net cash provided by (used in) investing activities	$	(3,723,703	)	$	(4,055,012	)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements	$	49,599,400		$	29,079,905
Payments on repurchase agreements	(45,705,850		)	(27,970,987		)
Net proceeds from preferred stock offerings	251,536			314,429
Payments on repurchase of common stock	(14,834		)	—
Proceeds from securitized debt borrowings, collateralized by loans held for investment	1,434,765			4,159,073
Payments on securitized debt borrowings, collateralized by loans held for investment	(1,927,854		)	(1,564,489		)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS	(36,633		)	(103,415		)
Common dividends paid	(280,893		)	(281,832		)
Preferred dividends paid	(28,200		)	(26,532		)
Net cash provided by (used in) financing activities	$	3,291,437		$	3,606,152

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Net increase (decrease) in cash and cash equivalents	57,477			(139,659		)
Cash and cash equivalents at beginning of period	63,569			177,714
Cash and cash equivalents at end of period	$	121,046		$	38,055
Supplemental disclosure of cash flow information:
Interest received	$	933,693		$	799,808
Interest paid	$	446,806		$	366,284
Non-cash investing activities:
Payable for investments purchased	$	903,424		$	733,142
Receivable for investments sold	$	—		$	11,235
Net change in unrealized gain (loss) on available-for sale securities	$	(168,966	)	$	95,012
Retained beneficial interests	$	39,844		$	—
Non-cash financing activities:
Dividends declared, not yet paid	$	96,809		$	95,000

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 nine 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; Chimera RR Holding LLC formed in April 2016, and Anacostia LLC, a TRS formed in June 2018.

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 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.

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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 September 30, 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

Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. It eliminates disclosure requirements for transfers between Level 1 and Level 2 of the fair value hierarchy and policies related to valuation processes and the timing of transfers between levels of the fair value hierarchy. It adds the following disclosure requirements, but it exempts nonpublic entities from these requirements: i) The changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and ii) For recurring and nonrecurring Level 3 fair value measurements, the range and weighted averages used to develop significant unobservable inputs and how the weighted average was calculated, with certain exceptions. 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.

Income Statement - Reporting Comprehensive Income - (Topic 220)

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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.

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 not planning to early adopt and is currently evaluating what impact this update will have on the 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 September 30, 2018 and December 31, 2017.

10

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				September 30, 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	$	2,413,931		$	566		$	(1,148,263	)	$	1,266,234		$	1,974,805		$	708,877		$	(306	)	$	708,571
Senior, interest-only	5,844,053			297,221			—			297,221			242,244			22,612			(77,589		)	(54,977		)
Subordinated	379,077			8,985			(169,497		)	218,565			278,022			59,949			(492		)	59,457
Subordinated, interest-only	244,298			10,648			—			10,648			12,636			2,081			(93		)	1,988
Agency MBS
Residential	6,730,675			214,066			—			6,944,741			6,811,047			1,029			(134,723		)	(133,694		)
Commercial	2,532,460			55,295			(4,542		)	2,583,213			2,475,531			216			(107,898		)	(107,682		)
Interest-only	2,865,073			123,635			—			123,635			119,514			862			(4,983		)	(4,121		)
Total	$	21,009,567		$	710,416		$	(1,322,302	)	$	11,444,257		$	11,913,799		$	795,626		$	(326,084	)	$	469,542

				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						For the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(dollars in thousands)						(dollars in thousands)
Balance at beginning of period	$	1,266,640		$	1,383,188		$	1,303,590		$	1,550,110
Purchases	4,444			8,196			10,178			18,380
Yield income earned	(57,078		)	(66,042		)	(174,595		)	(202,618		)
Reclassification (to) from non-accretable difference	32,022			53,884			113,517			15,777
Sales and deconsolidation	(1,733		)	(17,755		)	(8,395		)	(20,178		)
Balance at end of period	$	1,244,295		$	1,361,471		$	1,244,295		$	1,361,471

The table below presents the outstanding principal balance and related amortized cost at September 30, 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.

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	For the Nine Months Ended			For the Year Ended
	September 30, 2018			December 31, 2017
	(dollars in thousands)
Outstanding principal balance:
Beginning of period	$	2,673,350		$	3,138,265
End of period	$	2,378,436		$	2,673,350
Amortized cost:
Beginning of period	$	1,381,839		$	1,695,079
End of period	$	1,180,207		$	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 September 30, 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.

							September 30, 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 Positions			Estimated Fair Value			Unrealized Losses			Number of Positions			Estimated Fair Value			Unrealized Losses			Number of Positions
Non-Agency RMBS
Senior	$	37,480		$	(306	)	2			$	—		$	—		—			$	37,480		$	(306	)	2
Senior, interest-only	33,026			(5,155		)	34			87,805			(72,434		)	93			120,831			(77,589		)	127
Subordinated	16,590			(492		)	10			—			—			6			16,590			(492		)	16
Subordinated, interest-only	408			(31		)	2			386			(62		)	1			794			(93		)	3
Agency MBS
Residential	4,889,446			(30,727		)	68			1,794,683			(103,996		)	106			6,684,129			(134,723		)	174
Commercial	2,033,817			(82,812		)	608			414,565			(25,086		)	150			2,448,382			(107,898		)	758
Interest-only	8,472			(197		)	4			41,016			(4,786		)	14			49,488			(4,983		)	18
Total	$	7,019,239		$	(119,720	)	728			$	2,338,455		$	(206,364	)	370			$	9,357,694		$	(326,084	)	1,098

							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 Positions			Estimated Fair Value			Unrealized Losses			Number of Positions			Estimated Fair Value			Unrealized Losses			Number of Positions
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 September 30, 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

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basis, which may be at their maturity. 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 September 30, 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 $138 million and $41 million as of September 30, 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 September 30, 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 $596 thousand and $283 thousand at September 30, 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 and nine months ended September 30, 2018 and 2017 are presented below.

	For the Quarters Ended							For the Nine Months Ended
	September 30, 2018			September 30, 2017				September 30, 2018			September 30, 2017
	(dollars in thousands)							(dollars in thousands)
Total other-than-temporary impairment losses	$	(772	)	$	(784	)		$	(1,871	)	$	(4,245	)
Portion of loss recognized in other comprehensive income (loss)	(6,461		)	(10,684		)		(15,651		)	(39,431		)
Net other-than-temporary credit impairment losses	$	(7,233	)	$	(11,468	)		$	(17,522	)	$	(43,676	)

 

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						For the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(dollars in thousands)
Cumulative credit loss beginning balance	$	582,661		$	571,639		$	591,521		$	556,485
Additions:
Other-than-temporary impairments not previously recognized	4,929			—			6,069			12,399
Reductions for securities sold or deconsolidated during the period	(1,032		)	(4,965		)	(5,980		)	(12,405		)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments	2,304			11,468			11,453			29,302
Reductions for increases in cash flows expected to be collected over the remaining life of the securities	(2,237		)	(3,241		)	(16,438		)	(10,880		)
Cumulative credit impairment loss ending balance	$	586,625		$	574,901		$	586,625		$	574,901

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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 Nine Months Ended
	September 30, 2018	September 30, 2017
Loss Severity
Weighted Average	63%	67%
Range	34% - 132%	28% - 89%
60+ days delinquent
Weighted Average	21%	21%
Range	13% - 30%	11% - 27%
Credit Enhancement (1)
Weighted Average	24%	15%
Range	0% - 55%	0% - 50%
3 Month CPR
Weighted Average	12%	13%
Range	0% - 39%	2% - 24%
12 Month CPR
Weighted Average	12%	13%
Range	1% - 28%	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 September 30, 2018 and December 31, 2017.

				September 30, 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	$	708,877		$	—		$	708,877		$	(306	)	$	—		$	(306	)
Senior, interest-only	—			22,612			22,612			—			(77,589		)	(77,589		)
Subordinated	56,780			3,169			59,949			(290		)	(202		)	(492		)
Subordinated, interest-only	—			2,081			2,081			—			(93		)	(93		)
Agency MBS
Residential	1,029			—			1,029			(82,889		)	(51,834		)	(134,723		)
Commercial	24			192			216			(55,289		)	(52,609		)	(107,898		)
Interest-only	—			862			862			—			(4,983		)	(4,983		)
Total	$	766,710		$	28,916		$	795,626		$	(138,774	)	$	(187,310	)	$	(326,084	)

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				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 September 30, 2018 and December 31, 2017.

	September 30, 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	$	2,413,931		$	52.46		$	81.81		4.9	%	18.8	%
Senior, interest-only	5,844,053			5.09			4.15			1.2	%	9.1	%
Subordinated	379,077			57.66			73.34			4.3	%	11.0	%
Subordinated, interest-only	244,298			4.36			5.17			1.2	%	16.1	%
Agency MBS
Residential pass-through	6,730,675			103.18			101.19			4.0	%	3.5	%
Commercial pass-through	2,532,460			102.00			97.75			3.6	%	3.4	%
Interest-only	2,865,073			4.32			4.17			0.8	%	4.1	%

(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.

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The following table presents the weighted average credit rating of the Company’s Non-Agency RMBS portfolio at September 30, 2018 and December 31, 2017 based on fair value. Previously issued financial statement filings were based on unpaid principal balances. We believe fair value provides an improved representation of the credit rating distribution of the Company's Non-Agency RMBS portfolio.

	September 30, 2018		December 31, 2017
AAA	0.6	%	—	%
AA	—	%	—	%
A	0.3	%	—	%
BBB	0.5	%	0.5	%
BB	0.9	%	0.7	%
B	0.5	%	0.6	%
Below B	60.7	%	63.1	%
Not Rated	36.5	%	35.1	%
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 September 30, 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.

	September 30, 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	$	8,436		$	546,137		$	755,517		$	664,715		$	1,974,805
Senior interest-only	1,028			37,826			91,620			111,770			242,244
Subordinated	—			42,800			119,021			116,201			278,022
Subordinated interest-only	—			8,464			1,877			2,295			12,636
Agency MBS
Residential	—			358,386			6,437,979			14,682			6,811,047
Commercial	—			15,565			27,791			2,432,175			2,475,531
Interest-only	48,247			51,701			19,566			—			119,514
Total fair value	$	57,711		$	1,060,879		$	7,453,371		$	3,341,838		$	11,913,799
Amortized cost
Non-Agency RMBS
Senior	$	8,295		$	399,944		$	437,177		$	420,818		$	1,266,234
Senior interest-only	2,821			49,856			114,891			129,653			297,221
Subordinated	—			31,679			86,181			100,705			218,565
Subordinated interest-only	—			6,790			1,710			2,148			10,648
Agency MBS
Residential	—			361,065			6,568,266			15,410			6,944,741
Commercial	—			15,649			29,525			2,538,039			2,583,213
Interest-only	48,086			56,265			19,284			—			123,635
Total amortized cost	$	59,202		$	921,248		$	7,257,034		$	3,206,773		$	11,444,257

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	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 September 30, 2018 and December 31, 2017, 59% and 66% of the Non-Agency RMBS collateral was classified as Alt-A, respectively. At September 30, 2018 and December 31, 2017, 25% 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 September 30, 2018 and December 31, 2017.

	September 30, 2018				December 31, 2017
Weighted average maturity (years)		21.3				20.7
Weighted average amortized loan to value (1)		63.3		%		64.4		%
Weighted average FICO (2)		712				697
Weighted average loan balance (in thousands)		$	315			$	314
Weighted average percentage owner occupied		84.3		%		84.4		%
Weighted average percentage single family residence		62.6		%		66.3		%
Weighted average current credit enhancement		1.4		%		2.2		%
Weighted average geographic concentration of top four states	CA	33.5		%	CA	31.7		%
	FL	7.8		%	NY	8.5		%
	NY	7.4		%	FL	8.3		%
	NJ	2.2		%	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.

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The table below presents the origination year of the underlying loans related to the Company’s portfolio of Non-Agency RMBS at September 30, 2018 and December 31, 2017 based on fair value. Previously issued financial statement filings were based on unpaid principal balances. We believe fair value provides an improved representation of the origination years of the Company's Non-Agency RMBS portfolio.

Origination Year	September 30, 2018		December 31, 2017
2003 and prior	1.4	%	1.6	%
2004	1.6	%	0.9	%
2005	13.2	%	12.5	%
2006	48.3	%	46.4	%
2007	32.2	%	36.5	%
2008	—	%	0.6	%
2009 and later	3.3	%	1.5	%
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 and nine months ended September 30, 2018 and 2017 are as follows:

	For the Quarters Ended						For the Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
	(dollars in thousands)
Proceeds from sales	$	32,050		$	598,752		$	64,601		$	772,496
Gross realized gains	1,489			6,902			5,872			17,468
Gross realized losses	(7,713		)	(6,901		)	(9,929		)	(7,759		)
Net realized gain (loss)	$	(6,224	)	$	1		$	(4,057	)	$	9,709

Included in the gross realized gains for the quarter and nine months ended September 30, 2018 in the table above are exchanges of securities with a fair value of $7 million and $28 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 $114 thousand and $2 million, respectively, reflected in earnings for the quarter and nine months ended September 30, 2018. For the quarter and nine months ended September 30, 2017, the fair value of these exchanges of securities was $36 million and $63 million, and resulted in a realized gain of $4 million and $9 million, respectively.

4. Loans Held for Investment

The Loans held for investment are comprised primarily of loans collateralized by seasoned subprime residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, jumbo, prime residential mortgages.

At September 30, 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 $12.4 billion and $13.3 billion as of September 30, 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 September 30, 2018 and December 31, 2017:

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	For the Nine Months Ended			For the Year Ended
	September 30, 2018			December 31, 2017
	(dollars in thousands)
Balance, beginning of period	$	13,678,263		$	8,753,653
Purchases	1,339,514			6,539,765
Principal paydowns	(1,430,802		)	(1,788,409		)
Sales and settlements	(808,314		)	2,876
Net periodic accretion (amortization)	(66,254		)	(35,803		)
Realized gains (losses) on sales and settlements	101			—
Change in fair value	17,051			206,181
Balance, end of period	$	12,729,559		$	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. During the nine months ended September 30, 2018, the Company purchased $415 million of loans which were subsequently sold to a trust and securitized, with the Company retaining $39 million of beneficial interests. There were no gains or losses incurred from the sale of these assets.

Residential mortgage loans

The loan portfolio for all residential mortgages were originated during the following years:

Origination Year	September 30, 2018		December 31, 2017
2002 and prior	7.4	%	7.5	%
2003	6.6	%	6.7	%
2004	13.9	%	14.6	%
2005	19.9	%	20.4	%
2006	23.0	%	23.1	%
2007	19.5	%	19.0	%
2008	6.1	%	6.0	%
2009	0.9	%	0.7