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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2014
Derivative Financial Instruments

Note 10. Derivative Financial Instruments

The following table presents the fair value and notional amount of derivative financial instruments held by us at December 31, 2014 and 2013.

 

     December 31, 2014      December 31, 2013  

(In Thousands)

    Fair
Value		     Notional
Amount		      Fair
Value		     Notional
Amount		  

Assets - Cash Flow Hedges

          

Interest rate swaps

      —          —           —          —     

Assets - Risk Management Derivatives

          

Interest rate swaps

    $ —        $ —         $ 5,972      $ 268,000   

TBAs

      6,654        1,074,000         1,138        241,000   

Futures

      —          —           —          —     

Swaptions

      7,006        575,000         595        340,000   

Credit default index swaps

      1,597        50,000         —          —     

Assets - Other Derivatives

          

Loan purchase commitments

      1,160        288,467         —          360   

Loan forward sale commitments

      —          —           81        10,000   
  

 

 

    

 

 

     

 

 

    

 

 

  

Total Assets

 $ 16,417    $ 1,987,467    $ 7,786    $ 859,360   
  

 

 

    

 

 

     

 

 

    

 

 

  

Liabilities - Cash Flow Hedges

Interest rate swaps

 $ (46,845 )  $ 139,500    $ (16,519 )  $ 139,500   

Liabilities - Risk Management Derivatives

Interest rate swaps

   (1,328 )    206,000      (80 )    50,500   

TBAs

   (9,506 )    1,110,000      (661 )    235,000   

Futures

   (372 )    90,000      (528 )    162,000   

Liabilities - Other Derivatives

Loan purchase commitments

   (41 )    27,324      (379 )    42,562   

Loan forward sale commitments

   (239 )    102,793      —        —     
  

 

 

    

 

 

     

 

 

    

 

 

  

Total Liabilities

 $ (58,331 )  $ 1,675,617    $ (18,167 )  $ 629,562   
  

 

 

    

 

 

     

 

 

    

 

 

  

Total Derivative Financial Instruments, Net

 $ (41,914 )  $ 3,663,084    $ (10,381 )  $ 1,488,922   
  

 

 

    

 

 

     

 

 

    

 

 

  

Risk Management Derivatives

To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheets, we may enter into derivative contracts. At December 31, 2014, we were party to interest rate agreements with an aggregate notional amount of $920 million, TBA contracts sold with an aggregate notional amount of $2.2 billion and financial futures contracts with an aggregate notional amount of $90 million. Net market valuation adjustments on risk management derivatives related to unsecuritized loans we own or plan to acquire were negative $31 million, positive $51 million, and negative $11 million for the years ended December 31, 2014, 2013, and 2012, respectively. Net market valuation adjustments on risk management derivatives related to other investments, including MSR’s and certain real estate securities, were negative $7.8 million, positive $0.2 million, and negative $12.6 million for the years ending December 31, 2104, 2013, and 2012 respectively.

Loan Purchase and Forward Sale Commitments

LPCs and FSCs that qualify as derivatives are recorded at their estimated fair values. Net valuation adjustments on LPCs and FSCs were positive $14 million and negative $1 million for the years ended December 31, 2014 and 2013, respectively, and are reported on our consolidated statements of income in mortgage banking activities.

 

Derivatives Designated as Cash Flow Hedges

To manage the variability in interest expense related to our long-term debt and certain adjustable-rate securitization entity liabilities that are included in our consolidated balance sheets for financial reporting purposes, we designated certain interest rate swaps as cash flow hedges with an aggregate notional balance of $140 million.

For the years December 31, 2014, 2013, and 2012, these cash flow hedges changed in value by negative $30 million, positive $32 million, and positive $4 million, respectively, which was recorded in accumulated other comprehensive income, a component of equity. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in accumulated other comprehensive income was $30 million and $16 million at December 31, 2014 and 2013, respectively. For the years ended December 31, 2014, 2013, and 2012, we reclassified less than $1 million, less than $1 million, and $15 million, respectively, of unrealized losses on derivatives to interest expense. Concurrent with the derecognition of Acacia assets and liabilities in 2012, we accelerated our amortization of net unrealized losses on interest rate agreements and recognized interest expense of $11 million. Accumulated other comprehensive loss of less than $1 million will be amortized into interest expense, a component of our consolidated statements of income, over the remaining life of the hedged liabilities.

The following table illustrates the impact on interest expense of our interest rate agreements accounted for as cash flow hedges for the years ended December 31, 2014, 2013, and 2012.

Impact on Interest Expense of Our Interest Rate Agreements Accounted for as Cash Flow Hedges

 

     Year Ended December 31,  

(In Thousands)

    2014     2013     2012  

Net interest expense on cash interest rate agreements

    $ (5,951 )    $ (5,889 )    $ (5,805 ) 

Realized expense due to ineffective portion of cash flow hedges

      —          —          (34 ) 

Realized net losses reclassified from other comprehensive income

      (164 )      (281 )      (14,820 ) 
  

 

 

    

 

 

    

 

 

  

Total Interest Expense

 $ (6,115 )  $ (6,170 )  $ (20,659 ) 
  

 

 

    

 

 

    

 

 

  

Derivative Counterparty Credit Risk

We incur credit risk to the extent that counterparties to our derivative financial instruments do not perform their obligations under specified contractual agreements. If a derivative counterparty does not perform, we may not receive the proceeds to which we may be entitled under these agreements. Each of our derivative counterparties that is not a clearinghouse must maintain compliance with International Swaps and Derivatives Association (“ISDA”) agreements or other similar agreements (or receive a waiver of non-compliance after a specific assessment) in order to conduct derivative transactions with us. Additionally, we review non-clearinghouse derivative counterparty credit standings, and in the case of a deterioration of creditworthiness, appropriate remedial action is taken. To further mitigate counterparty risk, we exit derivatives contracts with counterparties that (i) do not maintain compliance with (or obtain a waiver from) the terms of their ISDA or other agreements with us; or (ii) do not meet internally established guidelines regarding creditworthiness. Our ISDA and similar agreements currently require full bilateral collateralization of unrealized loss exposures with our derivative counterparties. Through a margin posting process, our positions are revalued with counterparties each business day and cash margin is generally transferred to either us or our derivative counterparties as collateral based upon the directional changes in fair value of the positions. We also attempt to transact with several different counterparties in order to reduce our specific counterparty exposure. With respect to certain of our derivatives, clearing and settlement is through one or more clearinghouses, which may be substituted as a counterparty. Clearing and settlement of derivative transactions through a clearinghouse is also intended to reduce specific counterparty exposure. We consider counterparty risk as part of our fair value assessments of all derivative financial instruments. At December 31, 2014, we assessed this risk as remote and did not record a specific valuation adjustment.

At December 31, 2014, we had outstanding derivative agreements with six counterparties (other than clearinghouses) and were in compliance with ISDA agreements governing our open derivative positions.