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Residential Mortgage Securities and MSR-Related Assets | 9 Months Ended
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Sep. 30, 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 MBS investments held as of September 30, 2020 or in prior periods include 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 (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. The Company sold its remaining holdings of Agency MBS during the quarter ended June 30, 2020. 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. During the quarter ended June 30, 2020, the Company had sold substantially all of its holdings of Legacy Non-Agency MBS and substantially reduced its holdings of other Non-Agency MBS. The Company sold its remaining Legacy Non-Agency MBS during the quarter ended September 30, 2020. 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 September 30, 2020 and December 31, 2019: September 30, 2020
(In Thousands) |  | Principal/ Current Face |  | Purchase Premiums |  | Accretable Purchase Discounts |  | Discount Designated as Credit Reserve (1) |  | Gross Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Net Unrealized Gain/(Loss) |  | Fair Value
Non-Agency MBS (2)(3)(4) |  | $ | 60,295 |  |  | $ | — |  |  | $ | (8,246) |  |  | $ | (669) |  |  | $ | 51,380 |  |  | $ | 8,015 |  |  | $ | (2,965) |  |  | $ | 5,050 |  |  | $ | 56,430 |
CRT securities (5) |  | 104,163 |  |  | 2,414 |  |  | (69) |  |  | (20,768) |  |  | 85,740 |  |  | 13,722 |  |  | (3,127) |  |  | 10,595 |  |  | 96,335 |
Total residential mortgage securities |  | $ | 164,458 |  |  | $ | 2,414 |  |  | $ | (8,315) |  |  | $ | (21,437) |  |  | $ | 137,120 |  |  | $ | 21,737 |  |  | $ | (6,092) |  |  | $ | 15,645 |  |  | $ | 152,765 |
December 31, 2019
(In Thousands) |  | Principal/ Current Face |  | Purchase Premiums |  | Accretable Purchase Discounts |  | Discount Designated as Credit Reserve (1) |  | Gross Amortized Cost (6) |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Net Unrealized Gain/(Loss) |  | Fair Value
Agency MBS: (7) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 (2)(3) |  | 722,477 |  |  | — |  |  | (16,661) |  |  | — |  |  | 705,816 |  |  | 19,861 |  |  | (9) |  |  | 19,852 |  |  | 725,668 |
Expected to Recover Less than Par (2) |  | 1,472,826 |  |  | — |  |  | (73,956) |  |  | (436,598) |  |  | 962,272 |  |  | 375,598 |  |  | (9) |  |  | 375,589 |  |  | 1,337,861 |
Total Non-Agency MBS (4) |  | 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 (5) |  | 244,932 |  |  | 4,318 |  |  | (55) |  |  | — |  |  | 249,195 |  |  | 6,304 |  |  | (91) |  |  | 6,213 |  |  | 255,408 |
Total residential mortgage 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)Based on management’s current estimates of future principal cash flows expected to be received. (3)Includes RPL/NPL MBS, which at September 30, 2020 had an $57.4 million Principal/Current face, $49.2 million amortized cost and $53.8 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. (4)At September 30, 2020 and December 31, 2019, the Company expected to recover approximately 99% and 80% of the then-current face amount of Non-Agency MBS, respectively. (5)Amounts disclosed at September 30, 2020 includes CRT securities with a fair value of $63.3 million for which the fair value option has been elected. Such securities had $410,000 gross unrealized gains and gross unrealized losses of approximately $3.1 million at September 30, 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. (6)Includes principal payments receivable of $614,000 at December 31, 2019, which is not included in the Principal/Current Face. (7)Amounts disclosed at December 31, 2019 include Agency MBS with a fair value of $280.3 million, for which the fair value option has been elected. Such securities had $4.5 million unrealized gains and no gross unrealized losses at December 31, 2019, respectively. Sales of Residential Mortgage Securities The following table presents information about the Company’s sales of its residential mortgage securities for the three and nine months ended September 30, 2020 and 2019. The Company has no continuing involvement with any of the sold securities.
|  | Three Months Ended September 30, 2020 |  | Three Months Ended September 30, 2019
(In Thousands) |  | Sales Proceeds |  | Gains/(Losses) |  | Sales Proceeds |  | Gains/(Losses)
Agency MBS |  | $ | — |  |  | $ | — |  |  | $ | 257,289 |  |  | $ | 2,771 |
Non-Agency MBS |  | 116 |  |  | 48 |  |  | 47,867 |  |  | 14,444 |
CRT Securities |  | — |  |  | — |  |  | 28,969 |  |  | 493 |
Total |  | $ | 116 |  |  | $ | 48 |  |  | $ | 334,125 |  |  | $ | 17,708 |
|  | Nine Months Ended September 30, 2020 |  | Nine Months Ended September 30, 2019
(In Thousands) |  | Sales Proceeds |  | Gains/(Losses) |  | Sales Proceeds |  | Gains/(Losses)
Agency MBS |  | $ | 1,500,875 |  |  | $ | (19,291) |  |  | $ | 360,634 |  |  | $ | 499 |
Non-Agency MBS |  | 1,318,958 |  |  | 107,999 |  |  | 244,778 |  |  | 41,420 |
CRT Securities |  | 243,025 |  |  | (27,011) |  |  | 133,507 |  |  | 8,108 |
Total |  | $ | 3,062,858 |  |  | $ | 61,697 |  |  | $ | 738,919 |  |  | $ | 50,027 |
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 September 30, 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)
Non-Agency MBS (1) |  | $ | 44,927 |  |  | $ | 2,965 |  |  | 5 |  |  | $ | — |  |  | $ | — |  |  | — |  |  | $ | 44,927 |  |  | $ | 2,965 |
CRT securities (2) |  | 59,553 |  |  | 3,127 |  |  | 8 |  |  | — |  |  | — |  |  | — |  |  | 59,553 |  |  | 3,127 |
Total residential mortgage securities |  | $ | 104,480 |  |  | $ | 6,092 |  |  | 13 |  |  | $ | — |  |  | $ | — |  |  | — |  |  | $ | 104,480 |  |  | $ | 6,092 |
(1)Based on management’s current estimates of future principal cash flows expected to be received. (2)Amounts disclosed at September 30, 2020 include CRT securities with a fair value of $59.6 million for which the fair value option has been elected. Such securities had unrealized losses of $3.1 million at September 30, 2020. During the three months ended March 31, 2020, the Company recognized an impairment loss related to its Non-Agency MBS of $63.5 million based on its intent to sell, or the likelihood it will be required to sell, its remaining securities. Gross unrealized losses on the Company’s Non-Agency MBS were $3.0 million at September 30, 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 year periods) through earnings related to its Non-Agency MBS during the three and nine months ended September 30, 2020 and 2019. 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 September 30, |  | Nine Months Ended September 30,
(Dollars In Thousands) |  | 2020 |  | 2019 |  | 2020 |  | 2019
Allowance for credit losses at beginning of period |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Current provision: |  | — |  |  | — |  |  | — |  |  | — |
Securities with no prior loss allowance |  | — |  |  | — |  |  | 344,269 |  |  | — |
Securities with a prior loss allowance |  | — |  |  | — |  |  | — |  |  | — |
Write-offs, including allowance related to securities the Company intends to sell |  | — |  |  | — |  |  | (344,269) |  |  | — |
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 and nine months ended September 30, 2020 and 2019:
|  | Three Months Ended September 30, 2020 |  | Three Months Ended September 30, 2019
(In Thousands) |  | Discount Designated as Credit Reserve |  | Accretable Discount (1) | Discount Designated as Credit Reserve |  | Accretable Discount (1)
Balance at beginning of period |  | $ | (669) |  |  | $ | (8,430) |  |  | $ | (479,566) |  |  | $ | (117,753) |
Accretion of discount |  | — |  |  | 7 |  |  | — |  |  | 10,357 |
Realized credit losses |  | — |  |  | — |  |  | 4,062 |  |  | — |
Sales/Redemptions |  | — |  |  | 177 |  |  | 12,479 |  |  | 6,029 |
Transfers/release of credit reserve |  | — |  |  | — |  |  | 930 |  |  | (930) |
Balance at end of period |  | $ | (669) |  |  | $ | (8,246) |  |  | $ | (462,095) |  |  | $ | (102,297) |
|  | Nine Months Ended September 30, 2020 |  | Nine Months Ended September 30, 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) |  | — |  |  | — |  |  | — |  |  | (1,688) |
Accretion of discount |  | — |  |  | 10,827 |  |  | — |  |  | 38,215 |
Realized credit losses |  | 5,868 |  |  | — |  |  | 21,482 |  |  | — |
Purchases |  | — |  |  | — |  |  | (624) |  |  | 291 |
Sales/Redemptions |  | 436,885 |  |  | 76,233 |  |  | 23,842 |  |  | 25,231 |
Net impairment losses recognized in earnings |  | (11,513) |  |  | — |  |  | — |  |  | — |
Transfers/release of credit reserve |  | 4,689 |  |  | (4,689) |  |  | 9,321 |  |  | (9,321) |
Balance at end of period |  | $ | (669) |  |  | $ | (8,246) |  |  | $ | (462,095) |  |  | $ | (102,297) |
(1)Together with coupon interest, accretable purchase discount is recognized as interest income over the life of the security. (2)Includes the impact of $1.7 million of cash proceeds (a one-time payment) received by the Company during the nine months ended September 30, 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 September 30, 2020 and December 31, 2019, the Company had $234.1 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 September 30, 2020, these term notes had an amortized cost of $184.5 million, gross unrealized gains of $49.5 million, a weighted average yield of 12.1% and a weighted average term to maturity of 9.5 years. During the nine months ended September 30, 2020, the Company sold certain term notes for $711.7 million, realizing gains of $28.7 million, respectively. 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. The Company has participated in a loan where the Company committed to lend $32.6 million of which approximately $18.1 million was drawn at September 30, 2020. At September 30, 2020, the coupon paid by the borrower on the drawn amount is 5.52%. The facility expires in 11 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 and nine months ended September 30, 2020 and 2019:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) | 2020 |  | 2019 |  | 2020 |  | 2019
AOCI from AFS securities: |  |  |  |  |  |  |  |
Unrealized gain on AFS securities at beginning of period |  | $ | 52,889 |  |  | $ | 439,898 |  |  | $ | 392,722 |  |  | $ | 417,167 |
Unrealized gain/(loss) on Agency MBS, net |  | — |  |  | 603 |  |  | (161) |  |  | 22,483 |
Unrealized gain on Non-Agency MBS, net |  | 5,998 |  |  | 2,856 |  |  | 360,315 |  |  | 22,211 |
Unrealized gain on MSR term notes, net |  | 9,084 |  |  | 2,024 |  |  | 48,431 |  |  | 5,391 |
Reclassification adjustment for MBS sales included in net income |  | (60) |  |  | (14,499) |  |  | (389,127) |  |  | (36,370) |
Reclassification adjustment for impairment included in net income |  | — |  |  | — |  |  | (344,269) |  |  | — |
Change in AOCI from AFS securities |  | 15,022 |  |  | (9,016) |  |  | (324,811) |  |  | 13,715 |
Balance at end of period |  | $ | 67,911 |  |  | $ | 430,882 |  |  | $ | 67,911 |  |  | $ | 430,882 |
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 and nine months ended September 30, 2020 and 2019:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2020 |  | 2019 |  | 2020 |  | 2019
Agency MBS |  |  |  |  |  |  |  |
Coupon interest |  | $ | — |  |  | $ | 18,994 |  |  | $ | 14,038 |  |  | $ | 66,560 |
Effective yield adjustment (1) |  | — |  |  | (7,188) |  |  | (5,186) |  |  | (21,039) |
Interest income |  | $ | — |  |  | $ | 11,806 |  |  | $ | 8,852 |  |  | $ | 45,521 |
Legacy Non-Agency MBS |  |  |  |  |  |  |  |
Coupon interest |  | $ | 42 |  |  | $ | 21,011 |  |  | $ | 18,222 |  |  | $ | 68,144 |
Effective yield adjustment (2)(3) |  | 6 |  |  | 10,336 |  |  | 10,564 |  |  | 38,003 |
Interest income |  | $ | 48 |  |  | $ | 31,347 |  |  | $ | 28,786 |  |  | $ | 106,147 |
RPL/NPL MBS |  |  |  |  |  |  |  |
Coupon interest |  | $ | 811 |  |  | $ | 13,227 |  |  | $ | 7,622 |  |  | $ | 44,305 |
Effective yield adjustment (1)(4) |  | 94 |  |  | 8 |  |  | 449 |  |  | 158 |
Interest income |  | $ | 905 |  |  | $ | 13,235 |  |  | $ | 8,071 |  |  | $ | 44,463 |
CRT securities |  |  |  |  |  |  |  |
Coupon interest |  | $ | 956 |  |  | $ | 5,174 |  |  | $ | 6,063 |  |  | $ | 16,769 |
Effective yield adjustment (2) |  | 420 |  |  | (923) |  |  | (94) |  |  | (1,224) |
Interest income |  | $ | 1,376 |  |  | $ | 4,251 |  |  | $ | 5,969 |  |  | $ | 15,545 |
MSR-related assets |  |  |  |  |  |  |  |
Coupon interest |  | $ | 2,991 |  |  | $ | 15,273 |  |  | $ | 23,332 |  |  | $ | 38,230 |
Effective yield adjustment (1)(2) |  | 3,250 |  |  | 1 |  |  | 6,857 |  |  | 2 |
Interest income |  | $ | 6,241 |  |  | $ | 15,274 |  |  | $ | 30,189 |  |  | $ | 38,232 |
(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 less the current coupon yield. The net yield may be based on management’s estimates of the amount and timing of future cash flows or on the instrument’s contractual cash flows, depending on the relevant accounting standard. (3) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a discount of approximately $3.1 million during the nine months ended September 30, 2019. (4) Includes accretion income recognized due to the impact of redemptions of certain securities that had been previously purchased at a discount of approximately $4,000 during the three months ended September 30, 2019 and $277,000 and $152,000 during the nine months ended September 30, 2020 and 2019, respectively.

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