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Derivative Financial Instruments
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments
Derivative Financial Instruments
The following table presents the fair value and notional amount of our derivative financial instruments at December 31, 2015 and December 31, 2014.
Table 10.1 – Fair Value and Notional Amount of Derivative Financial Instruments
 
 
December 31, 2015
 
December 31, 2014
 
 
Fair
Value
 
Notional
Amount
 
Fair
Value
 
Notional
Amount
(In Thousands)
 
 
 
 
Assets - Risk Management Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
     
$
2,590

 
$
658,000

 
$
—

 
$
—

TBAs
 
2,734

 
1,028,500

 
6,654

 
1,074,000

Swaptions
 
5,191

 
925,000

 
7,006

 
575,000

Credit default index swaps
 
1,207

 
25,000

 
1,597

 
50,000

Assets - Other Derivatives
 
 
 
 
 
 
 
 
Loan purchase commitments
 
4,671

 
764,161

 
1,160

 
288,467

Total Assets
 
$
16,393

 
$
3,400,661

 
$
16,417

 
$
1,987,467

 
 
 
 
 
 
 
 
 
Liabilities - Cash Flow Hedges
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
(48,232
)
 
$
139,500

 
$
(46,845
)
 
$
139,500

Liabilities - Risk Management Derivatives
 
 
 
 
 
 
 
 
Interest rate swaps
 
(10,134
)
 
1,039,500

 
(1,328
)
 
206,000

TBAs
 
(2,519
)
 
1,450,500

 
(9,506
)
 
1,110,000

Futures
 
(445
)
 
78,000

 
(372
)
 
90,000

Liabilities - Other Derivatives
 
 
 
 
 
 
 
 
Loan purchase commitments
 
(1,464
)
 
375,815

 
(41
)
 
27,324

Loan forward sale commitments
 
—

 
—

 
(239
)
 
102,793

Total Liabilities
 
$
(62,794
)
 
$
3,083,315

 
$
(58,331
)
 
$
1,675,617

Total Derivative Financial Instruments, Net
 
$
(46,401
)
 
$
6,483,976

 
$
(41,914
)
 
$
3,663,084


Risk Management Derivatives
To manage, to varying degrees, risks associated with certain assets and liabilities on our consolidated balance sheet, we may enter into derivative contracts. At December 31, 2015, we were party to swaps and swaptions with an aggregate notional amount of $2.62 billion, TBA contracts sold with an aggregate notional amount of $2.48 billion, and financial futures contracts with an aggregate notional amount of $78 million. At December 31, 2014, we were party to swaps and swaptions with an aggregate notional amount of $920 million, TBA contracts sold with an aggregate notional amount of $2.18 billion, and financial futures contracts with an aggregate notional amount of $90 million. Net market valuation adjustments on risk management derivatives were negative $65 million, negative $39 million, and positive $51 million for the years ended December 31, 2015, 2014, and 2013, respectively. These net market valuation adjustments are recorded in mortgage banking and investment activities, net and MSR income (loss), net on our consolidated statements of income.
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 $50 million, positive $14 million, and less than negative $1 million for the years ended December 31, 2015, 2014, and 2013, respectively, and are recorded in mortgage banking and investment activities, net on our consolidated statements of income.
Derivatives Designated as Cash Flow Hedges
To manage the variability in interest expense related to our long-term debt, we designated certain interest rate swaps as cash flow hedges with an aggregate notional balance of $140 million.
For the years ended December 31, 2015, 2014, and 2013, changes in the values of designated cash flow hedges were negative $1 million, negative $30 million, and positive $32 million, respectively. For interest rate agreements currently or previously designated as cash flow hedges, our total unrealized loss reported in accumulated other comprehensive income was $47 million and $46 million at December 31, 2015 and December 31, 2014, respectively. For the years ended December 31, 2015, 2014, and 2013, we reclassified less than $1 million of unrealized losses on derivatives to interest expense. Accumulated other comprehensive loss of less than $1 million will be amortized into interest expense, a component of our consolidated income statements, over the remaining life of the hedge 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, 2015, 2014, and 2013.
Table 10.2 – Impact on Interest Expense of Interest Rate Agreements Accounted for as Cash Flow Hedges
 
 
Years Ended December 31,
(In Thousands)
 
2015
 
2014
 
2013
Net interest expense on cash flows hedges
 
$
(5,883
)
 
$
(5,951
)
 
$
(5,889
)
Realized expense due to ineffective portion of cash flow hedges
 
—

 
—

 
—

Realized net losses reclassified from other comprehensive income
 
(95
)
 
(164
)
 
(281
)
Total Interest Expense
 
$
(5,978
)
 
$
(6,115
)
 
$
(6,170
)

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, 2015, we assessed this risk as remote and did not record a specific valuation adjustment.
At December 31, 2015, we had outstanding derivative agreements with six counterparties (other than clearinghouses) and were in compliance with ISDA agreements governing our open derivative positions.