XML 16 R12.htm IDEA: XBRL DOCUMENT v3.20.1
Residential Mortgage Securities and MSR-Related Assets
 3 Months Ended
Mar. 31, 2020
Investments, Debt and Equity Securities [Abstract]  
Residential Mortgage Securities and MSR-Related Assets Residential Mortgage Securities and MSR-Related Assets
 
Agency and Non-Agency MBS

The Company’s MBS are comprised of Agency MBS and Non-Agency MBS which include MBS issued prior to 2008 (“Legacy Non-Agency MBS”). These MBS are secured by:  (i) hybrid mortgages (“Hybrids”), which have interest rates that are fixed for a specified period of time and, thereafter, generally adjust annually to an increment over a specified interest rate index; (ii) adjustable-rate mortgages (“ARMs”), which have interest rates that reset annually or more frequently (collectively, “ARM-MBS”); and (iii) 15 and 30 year fixed-rate mortgages for Agency MBS and, for Non-Agency MBS, 30-year and longer-term fixed rate mortgages. In addition, the Company’s MBS are also comprised of MBS backed by securitized re-performing/non-performing loans (“RPL/NPL MBS”), where the cash flows of the bond may not reflect the contractual cash flows of the underlying collateral. The Company’s RPL/NPL MBS are generally structured with a contractual coupon step-up feature where the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. The Company pledges a significant portion of its MBS as collateral against its borrowings under repurchase agreements and Swaps.  (See Note 7)
 
Agency MBS:  Agency MBS are guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae.  The payment of principal and/or interest on Ginnie Mae MBS is explicitly backed by the full faith and credit of the U.S. Government.  Since the third quarter of 2008, Fannie Mae and Freddie Mac have been under the conservatorship of the Federal Housing Finance Agency, which significantly strengthened the backing for these government-sponsored entities.
 
Non-Agency MBS:  The Company’s Non-Agency MBS are primarily secured by pools of residential mortgages, which are not guaranteed by an agency of the U.S. Government or any federally chartered corporation.  Credit risk associated with Non-Agency MBS is regularly assessed as new information regarding the underlying collateral becomes available and based on updated estimates of cash flows generated by the underlying collateral.
 
CRT Securities

CRT securities are debt obligations issued by or sponsored by Fannie Mae and Freddie Mac. The coupon payments on CRT securities are paid by the issuer and the principal payments received are dependent on the performance of loans in either a reference pool or an actual pool of loans. As an investor in a CRT security, the Company may incur a principal loss if the performance of the actual or reference pool loans results in either an actual or calculated loss that exceeds the credit enhancement of the security owned by the Company. The Company assesses the credit risk associated with its investments in CRT securities by assessing the current and expected future performance of the associated loan pool. The Company pledges a portion of its CRT securities as collateral against its borrowings under repurchase agreements. (See Note 7)


The following tables present certain information about the Company’s residential mortgage securities at March 31, 2020 and December 31, 2019:
 
March 31, 2020
(In Thousands)
 
Principal/ Current
Face
 
Purchase
Premiums
 
Accretable
Purchase
Discounts
 
Discount
Designated
as Credit Reserve (1)
 
Gross Amortized
Cost (2)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gain/(Loss)
 
Fair 
Value
Agency MBS: (3)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fannie Mae
 
$
433,397

 
$
15,384

 
$
(18
)
 
$
(4,747
)
 
$
444,016

 
$
4,242

 
$
—

 
$
4,242

 
$
448,258

Freddie Mac
 
95,759

 
3,468

 
—

 
(121
)
 
99,622

 
1,655

 
—

 
1,655

 
101,277

Ginnie Mae
 
3,749

 
69

 
—

 
—

 
3,818

 
60

 
—

 
60

 
3,878

Total Agency MBS
 
532,905

 
18,921

 
(18
)
 
(4,868
)
 
547,456

 
5,957

 
—

 
5,957

 
553,413

Non-Agency MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected to Recover Par (4)(5)
 
150,181

 
—

 
(13,191
)
 
—

 
136,990

 
6,175

 
(21,643
)
 
(15,468
)
 
121,522

Expected to Recover Less than Par (4)
 
1,305,667

 
—

 
(77,777
)
 
(389,472
)
 
838,418

 
160,000

 
—

 
160,000

 
998,418

Total Non-Agency MBS (6)
 
1,455,848

 
—

 
(90,968
)
 
(389,472
)
 
975,408

 
166,175

 
(21,643
)
 
144,532

 
1,119,940

Total MBS
 
1,988,753

 
18,921

 
(90,986
)
 
(394,340
)
 
1,522,864

 
172,132

 
(21,643
)
 
150,489

 
1,673,353

CRT securities (7)
 
365,762

 
3,263

 
(42
)
 
(47,137
)
 
321,846

 
—

 
(67,745
)
 
(67,745
)
 
254,101

Total MBS and CRT securities
 
$
2,354,515

 
$
22,184

 
$
(91,028
)
 
$
(441,477
)
 
$
1,844,710

 
$
172,132

 
$
(89,388
)
 
$
82,744

 
$
1,927,454


December 31, 2019
(In Thousands)
 
Principal/ Current
Face
 
Purchase
Premiums
 
Accretable
Purchase
Discounts
 
Discount
Designated
as Credit Reserve (1)
 
Gross Amortized
Cost (2)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Net
Unrealized
Gain/(Loss)
 
Fair Value
Agency MBS: (3)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fannie Mae
 
$
1,119,708

 
$
43,249

 
$
(22
)
 
$
—

 
$
1,162,935

 
$
9,799

 
$
(14,741
)
 
$
(4,942
)
 
$
1,157,993

Freddie Mac
 
480,879

 
19,468

 
—

 
—

 
500,961

 
5,475

 
(3,968
)
 
1,507

 
502,468

Ginnie Mae
 
3,996

 
73

 
—

 
—

 
4,069

 
52

 
—

 
52

 
4,121

Total Agency MBS
 
1,604,583

 
62,790

 
(22
)
 
—

 
1,667,965

 
15,326

 
(18,709
)
 
(3,383
)
 
1,664,582

Non-Agency MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expected to Recover Par (4)(5)
 
722,477

 
—

 
(16,661
)
 
—

 
705,816

 
19,861

 
(9
)
 
19,852

 
725,668

Expected to Recover Less than Par (4)
 
1,472,826

 
—

 
(73,956
)
 
(436,598
)
 
962,272

 
375,598

 
(9
)
 
375,589

 
1,337,861

Total Non-Agency MBS (6)
 
2,195,303

 
—

 
(90,617
)
 
(436,598
)
 
1,668,088

 
395,459

 
(18
)
 
395,441

 
2,063,529

Total MBS
 
3,799,886

 
62,790

 
(90,639
)
 
(436,598
)
 
3,336,053

 
410,785

 
(18,727
)
 
392,058

 
3,728,111

CRT securities (7)
 
244,932

 
4,318

 
(55
)
 
—

 
249,195

 
6,304

 
(91
)
 
6,213

 
255,408

Total MBS and CRT securities
 
$
4,044,818

 
$
67,108

 
$
(90,694
)
 
$
(436,598
)
 
$
3,585,248

 
$
417,089

 
$
(18,818
)
 
$
398,271

 
$
3,983,519

 
(1)
Discount designated as Credit Reserve is generally not expected to be accreted into interest income. 
(2)
Includes principal payments receivable of $516,000 and $614,000 at March 31, 2020 and December 31, 2019, respectively, which are not included in the Principal/Current Face.
(3)
Amounts disclosed at March 31, 2020 and December 31, 2019 include Agency MBS with a fair value of $14.5 million and $280.3 million, respectively, for which the fair value option has been elected. Such securities had $499,000 unrealized gains and no gross unrealized losses at March 31, 2020, and $4.5 million unrealized gains and no gross unrealized losses at December 31, 2019, respectively.
(4)
Based on management’s current estimates of future principal cash flows expected to be received.
(5)
Includes RPL/NPL MBS, which at March 31, 2020 had an $101.4 million Principal/Current face, $101.1 million amortized cost and $79.5 million fair value. At December 31, 2019, RPL/NPL MBS had a $632.3 million Principal/Current face, $631.8 million amortized cost and $635.0 million fair value.
(6)
At March 31, 2020 and December 31, 2019, the Company expected to recover approximately 73% and 80% of the then-current face amount of Non-Agency MBS, respectively.
(7)
Amounts disclosed at March 31, 2020 includes CRT securities with a fair value of $188.6 million for which the fair value option has been elected. Such securities had no gross unrealized gains and gross unrealized losses of approximately $67.7 million at March 31, 2020. Amounts disclosed at December 31, 2019 includes CRT securities with a fair value of $255.4 million for which the fair value option has been elected. Such securities had gross unrealized gains of approximately $6.3 million and gross unrealized losses of approximately $91,000 at December 31, 2019.

Sales of Residential Mortgage Securities
 
The following table presents information about the Company’s sales of its residential mortgage securities for the three months ended March 31, 2020 and 2019. The Company has no continuing involvement with any of the sold MBS.

 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
(In Thousands)
 
Sales Proceeds
 
Gains/(Losses)
 
Sales Proceeds
 
Gains/(Losses)
Agency MBS
 
$
965,132

 
$
(22,854
)
 
$
—

 
$
—

Non-Agency MBS
 
264,385

 
(43,124
)
 
126,094

 
18,153

CRT Securities
 
35,645

 
(2,017
)
 
83,368

 
6,456

Total
 
$
1,265,162

 
$
(67,995
)
 
$
209,462

 
$
24,609



Unrealized Losses on Residential Mortgage Securities

The following table presents information about the Company’s residential mortgage securities that were in an unrealized loss position at March 31, 2020, with respect to which no allowance for credit losses has been recorded:
 
Unrealized Loss Position For:
 
 
Less than 12 Months
 
12 Months or more
 
Total
 
Fair Value
 
Unrealized Losses
 
Number of Securities
Fair Value
 
Unrealized Losses
 
Number of Securities
Fair Value
 
Unrealized Losses
(Dollars in Thousands)
Agency MBS: 
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Fannie Mae
 
$
—

 
$
—

 
—

 
$
—

 
$
—

 
—

 
$
—

 
$
—

Freddie Mac
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Ginnie Mae
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Agency MBS
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Non-Agency MBS:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Expected to Recover Par (1)
 
79,464

 
21,643

 
7

 
—

 
—

 
—

 
79,464

 
21,643

Expected to Recover Less than Par (1)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Non-Agency MBS
 
79,464

 
21,643

 
7

 
—

 
—

 
—

 
79,464

 
21,643

Total MBS
 
79,464

 
21,643

 
7

 
—

 
—

 
—

 
79,464

 
21,643

CRT securities (2)
 
188,560

 
67,745

 
47

 
—

 
—

 
—

 
188,560

 
67,745

Total MBS and CRT securities
 
$
268,024

 
$
89,388

 
54

 
$
—

 
$
—

 
—

 
$
268,024

 
$
89,388



(1)
Based on management’s current estimates of future principal cash flows expected to be received.
(2)
Amounts disclosed at March 31, 2020 include CRT securities with a fair value of $188.6 million for which the fair value option has been elected. Such securities had unrealized losses of $67.7 million at March 31, 2020.

At March 31, 2020, as a result of the COVID-19 pandemic and its impact on the Company’s liquidity (see Note 6), the Company determined that it intended to sell, or was “more likely than not” going to be required to sell, the majority of its residential mortgage securities that were in an unrealized loss position, before recovery of their amortized cost basis.  As a result, those securities were written down to fair value through earnings and a new amortized cost basis was established. The write-down recorded in earnings aggregated $63.5 million for the three months ended March 31, 2020 and was included in “Impairment and other losses on securities available-for-sale and other assets” on the Consolidated Statement of Operations.
 
Subsequent to these write-downs, there were no gross unrealized losses on the Company’s Agency MBS at March 31, 2020.  Agency MBS are issued by Government Sponsored Entities (“GSEs”) and enjoy either the implicit or explicit backing of the full faith and credit of the U.S. Government. While the Company’s Agency MBS are not rated by any rating agency, they are currently perceived by market participants to be of high credit quality, with risk of default limited to the unlikely event that the U.S.
Government would not continue to support the GSEs. Based on these analyses, the Company determined that at March 31, 2020 no allowance for credit losses was required on its Agency MBS.

Gross unrealized losses on the Company’s Non-Agency MBS were $21.6 million at March 31, 2020. Based upon the most recent evaluation, the Company does not consider these unrealized losses to require an allowance for credit losses and does not believe that these unrealized losses are credit related, but are rather a reflection of current market yields and/or marketplace bid-ask spreads.  The Company has reviewed its Non-Agency MBS that are in an unrealized loss position to identify those securities that require an allowance for credit losses based on an assessment of changes in expected cash flows for such securities, which considers recent bond performance and, where possible, expected future performance of the underlying collateral.
  
The Company did not recognize an allowance for credit losses (or other than temporary impairment in prior periods) through earnings related to its Non-Agency MBS during the three months ended March 31, 2020 and 2019. Non-Agency MBS on which credit losses were recognized have experienced, or are expected to experience, credit-related adverse cash flow changes.  The Company’s estimate of cash flows for these Non-Agency MBS is based on its review of the underlying mortgage loans securing these MBS.  The Company considers information available about the structure of the securitization, including structural credit enhancement, if any, and the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, year of origination, LTVs, geographic concentrations, and dialogue with market participants.  Changes in the Company’s evaluation of each of these factors impacts the cash flows expected to be collected at the assessment date.

The following table presents a roll-forward of the allowance for credit losses on the Company’s Residential mortgage securities and MSR-related assets:

 
 
Three Months Ended March 31,
(Dollars In Thousands)
 
2020
 
2019
Allowance for credit losses at beginning of period
 
$
—

 
$
—

Current provision:
 
—

 
—

Securities with no prior loss allowance
 
332,756

 
—

Securities with a prior loss allowance
 
—

 
—

Write-offs, including allowance related to securities we intend to sell
 
(332,756
)
 
—

Allowance for credit losses at end of period
 
$
—

 
$
—



Purchase Discounts on Non-Agency MBS
 
The following table presents the changes in the components of the Company’s purchase discount on its Non-Agency MBS between purchase discount designated as Credit Reserve and accretable purchase discount for the three months ended March 31, 2020 and 2019:

 
 
Three Months Ended
March 31, 2020
 
Three Months Ended
March 31, 2019
(In Thousands)
 
Discount
Designated as
Credit Reserve
 
Accretable
Discount (1) 
Discount
Designated as
Credit Reserve
 
 Accretable Discount (1)
Balance at beginning of period
 
$
(436,598
)
 
$
(90,617
)
 
$
(516,116
)
 
$
(155,025
)
Impact of RMBS Issuer Settlement (2)
 
—

 
—

 
—

 
(855
)
Accretion of discount
 
—

 
9,889

 
—

 
13,307

Realized credit losses
 
4,459

 
—

 
7,504

 
—

Purchases
 
—

 
—

 
—

 
(118
)
Sales/Redemptions
 
49,491

 
(5,551
)
 
3,191

 
16,346

Net impairment losses recognized in earnings
 
(11,513
)
 
—

 
—

 
—

Transfers/release of credit reserve
 
4,689

 
(4,689
)
 
3,802

 
(3,802
)
Balance at end of period
 
$
(389,472
)
 
$
(90,968
)
 
$
(501,619
)
 
$
(130,147
)


(1)
Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security.
(2)
Includes the impact of $855,000 of cash proceeds (a one-time payment) received by the Company during the three months ended March 31, 2019 in connection with the settlement of litigation related to certain residential mortgage backed securitization trusts that were sponsored by JP Morgan Chase & Co. and affiliated entities.

MSR-Related Assets

(a) Term Notes Backed by MSR-Related Collateral

At March 31, 2020 and December 31, 2019, the Company had $706.6 million and $1.2 billion, respectively, of term notes issued by SPVs that have acquired rights to receive cash flows representing the servicing fees and/or excess servicing spread associated with certain MSRs. Payment of principal and interest on these term notes is considered to be largely dependent on cash flows generated by the underlying MSRs, as this impacts the cash flows available to the SPV that issued the term notes.

At March 31, 2020, these term notes had an amortized cost and fair value of $706.6 million, a weighted average yield of 4.74% and a weighted average term to maturity of 5.1 years. During three months ended March 31, 2020, the Company sold certain term notes for $136.8 million, realizing losses of $24.6 million. During the three months ended March 31, 2020, the Company recognized an impairment loss related to its term notes of $280.8 million based on its intent to sell, or the likelihood it will be required to sell, such notes. At December 31, 2019, the term notes had an amortized cost of $1.2 billion, gross unrealized gains of $5.2 million, a weighted average yield of 4.75% and a weighted average term to maturity of 5.3 years.

(b) Corporate Loans

The Company has made or participated in loans to provide financing to entities that originate residential mortgage loans and own the related MSRs. These corporate loans are secured by MSRs, as well as certain other unencumbered assets owned by the borrower.

During the year ended December 31, 2018, the Company participated in a loan where the Company committed to lend $100.0 million of which approximately $33.8 million was drawn at March 31, 2020. At March 31, 2020, the coupon paid by the borrower on the drawn amount is 3.93%, the remaining term associated with the loan is 5 months and the remaining commitment period on any undrawn amount is 5 months. During the remaining commitment period, the Company receives a commitment fee between 0.25% and 1.0% based on the undrawn amount of the loan.

Impact of AFS Securities on AOCI
 
The following table presents the impact of the Company’s AFS securities on its AOCI for the three months ended March 31, 2020 and 2019:
 
 
Three Months Ended March 31,
(In Thousands)
2020
 
2019
AOCI from AFS securities:
 
 

 
 

Unrealized gain on AFS securities at beginning of period
 
$
392,722

 
$
417,167

Unrealized gain on Agency MBS, net
 
4,876

 
9,315

Unrealized gain on Non-Agency MBS, net
 
124,700

 
12,276

Unrealized (loss)/gain on MSR term notes, net
 
(5,166
)
 
512

Reclassification adjustment for MBS sales included in net income
 
(23,953
)
 
(17,009
)
Reclassification adjustment for impairment included in net income
 
(344,269
)
 
—

Change in AOCI from AFS securities
 
(243,812
)
 
5,094

Balance at end of period
 
$
148,910

 
$
422,261


 
Interest Income on Residential Mortgage Securities and MSR-Related Assets
 
The following table presents the components of interest income on the Company’s residential mortgage securities and MSR- related assets for the three months ended March 31, 2020 and 2019: 
 
 
Three Months Ended March 31,
(In Thousands)
 
2020
 
2019
Agency MBS
 
 
 
 
Coupon interest
 
$
13,636

 
$
24,628

Effective yield adjustment (1)
 
(4,775
)
 
(6,187
)
Interest income
 
$
8,861

 
$
18,441

 
 
 
 
 
Legacy Non-Agency MBS
 
 
 
 
Coupon interest
 
$
17,282

 
$
24,272

Effective yield adjustment (2)
 
9,406

 
13,144

Interest income
 
$
26,688

 
$
37,416

 
 
 
 
 
RPL/NPL MBS
 
 
 
 
Coupon interest
 
$
5,583

 
$
16,443

Effective yield adjustment (1)(3)
 
280

 
142

Interest income
 
$
5,863

 
$
16,585

 
 
 
 
 
CRT securities
 
 
 
 
Coupon interest
 
$
3,485

 
$
6,118

Effective yield adjustment (2)
 
(523
)
 
82

Interest income
 
$
2,962

 
$
6,200

 
 
 
 
 
MSR-related assets
 
 
 
 
Coupon interest
 
$
14,207

 
$
10,619

Effective yield adjustment (1)
 
—

 
1

Interest income
 
$
14,207

 
$
10,620

 
(1)  Includes amortization of premium paid net of accretion of purchase discount.  For Agency MBS, RPL/NPL MBS and the corporate loan secured by MSRs, interest income is recorded at an effective yield, which reflects net premium amortization/accretion based on actual prepayment activity.
(2) The effective yield adjustment is the difference between the net income calculated using the net yield, which is based on management’s estimates of the amount and timing of future cash flows, less the current coupon yield.
(3) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a discount of approximately $277,000 and $148,000 during the three months ended March 31, 2020 and 2019, respectively.