Real Estate Securities

We invest in real estate securities. The following table presents the fair values of our real estate securities by type at June 30, 2016 and December 31, 2015.

Table 8.1 – Fair Values of Real Estate Securities by Type



(In Thousands)	June 30, 2016		December 31, 2015
Trading	$	273,531	$	404,011
Available-for-sale	610,270		829,245
Total Real Estate Securities	$	883,801	$	1,233,256

Our real estate securities include mortgage backed securities, which are presented in accordance with their general position within a securitization structure based on their rights to cash flows. Senior securities are those interests in a securitization that generally have the first right to cash flows and are last in line to absorb losses. Re-REMIC securities, as presented herein, were created through the resecuritization of certain senior security interests to provide additional credit support to those interests. These re-REMIC securities are therefore subordinate to the remaining senior security interests, but senior to any subordinate tranches of the securitization from which they were created. Subordinate securities are all interests below senior and re-REMIC interests. We further separate our subordinate securities into mezzanine and subordinate, where mezzanine includes securities initially rated AA through BBB- and issued in 2012 or later.

Trading Securities

The following table presents the fair value of trading securities by collateral type at June 30, 2016 and December 31, 2015.

Table 8.2 – Trading Securities by Collateral Type



(In Thousands)	June 30, 2016		December 31, 2015
Senior Securities
Prime	$	17,710	$	248,570
Non-prime	5,422		5,781
Total Senior Securities	23,132		254,351
Subordinate Securities
Prime mezzanine	164,521		136,140
Prime subordinate	85,878		13,520
Total Subordinate Securities	250,399		149,660
Total Trading Securities	$	273,531	$	404,011

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities are primarily comprised of non-Agency residential mortgage backed securities. At June 30, 2016 and December 31, 2015, subordinate trading securities included $96 million and $48 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities. In addition, at June 30, 2016 and December 31, 2015, our trading securities included subordinate commercial mortgage backed securities with a carrying value of $48 million and $8 million, respectively.

At June 30, 2016 and December 31, 2015, our senior trading securities included $23 million and $37 million, respectively, of interest-only securities, for which there is no principal balance, and the remaining unpaid principal balance of our senior trading securities was zero and $217 million, respectively, and our subordinate trading securities had an unpaid principal balance of $273 million and $168 million, respectively.

During the three and six months ended June 30, 2016, we acquired $83 million and $133 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $18 million and $236 million, respectively, of such securities. During the three and six months ended June 30, 2015, we acquired $52 million and $75 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $16 million and $19 million, respectively, of such securities.

During the three months ended June 30, 2016 and 2015, we recorded net market valuation gains of $0.4 million and $7 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income. During the six months ended June 30, 2016 and 2015, we recorded net market valuation losses of $4 million and net market valuation losses of $7 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income.

At June 30, 2016, trading securities with a carrying value of $125 million were pledged as collateral under short-term borrowing agreements. See Note 12 for additional information on short-term debt.

AFS Securities

The following table presents the fair value of our available-for-sale securities by collateral type at June 30, 2016 and December 31, 2015.

Table 8.3 – Available-for-Sale Securities by Collateral Type



(In Thousands)	June 30, 2016		December 31, 2015
Senior Securities
Prime	$	65,195	$	210,993
Non-prime	8,129		68,258
Total Senior Securities	73,324		279,251
Re-REMIC Securities	165,707		165,064
Subordinate Securities
Prime mezzanine	202,268		224,624
Prime subordinate	168,971		160,306
Total Subordinate Securities	371,239		384,930
Total AFS Securities	$	610,270	$	829,245

At June 30, 2016 and December 31, 2015, all of our available for sale securities were comprised of non-Agency residential mortgage backed securities. At June 30, 2016, AFS securities with a carrying value of $321 million were pledged as collateral under short-term borrowing agreements. See Note 12 for additional information on short-term debt.

During the three and six months ended June 30, 2016, we purchased $2 million and $18 million of AFS securities, respectively, and sold $89 million and $215 million of AFS securities, respectively, which resulted in net realized gains of $9 million and $18 million, respectively. During the three and six months ended June 30, 2015, we purchased $5 million and $15 million of AFS securities, respectively, and sold $112 million and $202 million of AFS securities, respectively, which resulted in net realized gains of $6 million and $10 million, respectively.

We often purchase AFS securities at a discount to their outstanding principal balances. To the extent we purchase an AFS security that has a likelihood of incurring a loss, we do not amortize into income the portion of the purchase discount that we do not expect to collect due to the inherent credit risk of the security. We may also expense a portion of our investment in the security to the extent we believe that principal losses will exceed the purchase discount. We designate any amount of unpaid principal balance that we do not expect to receive and thus do not expect to earn or recover as a credit reserve on the security. Any remaining net unamortized discounts or premiums on the security are amortized into income over time using the effective yield method.

At June 30, 2016, there were $1 million of AFS securities with contractual maturities less than five years, $0.6 million with contractual maturities greater than five years but less than 10 years, and the remainder of our AFS securities had contractual maturities greater than 10 years.

The following table presents the components of carrying value (which equals fair value) of AFS securities at June 30, 2016 and December 31, 2015.

Table 8.4 – Carrying Value of AFS Securities



June 30, 2016	Senior
(In Thousands)	Prime			Non-prime			Re-REMIC			Subordinate			Total
Principal balance	$	70,717		$	10,137		$	188,404		$	474,487		$	743,745
Credit reserve	(987		)	(622		)	(9,352		)	(33,982		)	(44,943		)
Unamortized discount, net	(6,614		)	(1,813		)	(64,484		)	(134,663		)	(207,574		)
Amortized cost	63,116			7,702			114,568			305,842			491,228
Gross unrealized gains	4,503			426			51,139			67,242			123,310
Gross unrealized losses	(2,423		)	—			—			(1,845		)	(4,268		)
Carrying Value	$	65,196		$	8,128		$	165,707		$	371,239		$	610,270



December 31, 2015	Senior
(In Thousands)	Prime			Non-prime			Re-REMIC			Subordinate			Total
Principal balance	$	217,605		$	75,591		$	189,782		$	490,249		$	973,227
Credit reserve	(1,305		)	(5,101		)	(10,332		)	(32,131		)	(48,869		)
Unamortized discount, net	(22,079		)	(8,395		)	(71,670		)	(134,963		)	(237,107		)
Amortized cost	194,221			62,095			107,780			323,155			687,251
Gross unrealized gains	20,263			6,249			57,284			63,205			147,001
Gross unrealized losses	(3,491		)	(86		)	—			(1,430		)	(5,007		)
Carrying Value	$	210,993		$	68,258		$	165,064		$	384,930		$	829,245

The following table presents the changes for the three and six months ended June 30, 2016, in unamortized discount and designated credit reserves on residential AFS securities.

Table 8.5 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities



	Three Months Ended June 30, 2016						Six Months Ended June 30, 2016
	Credit Reserve			Unamortized Discount, Net			Credit Reserve			Unamortized Discount, Net
(In Thousands)	Credit Reserve			Unamortized Discount, Net			Credit Reserve			Unamortized Discount, Net
Beginning balance	$	48,547		$	219,630		$	48,869		$	237,107
Amortization of net discount	—			(6,339		)	—			(14,407		)
Realized credit losses	(1,113		)	—			(3,068		)	—
Acquisitions	862			926			5,245			6,036
Sales, calls, other	(130		)	(10,171		)	(4,382		)	(23,188		)
Transfers to (release of) credit reserves, net	(3,528		)	3,528			(2,026		)	2,026
Ending Balance	$	44,943		$	207,574		$	44,943		$	207,574

AFS Securities with Unrealized Losses

The following table presents the components comprising the total carrying value of residential AFS securities that were in a gross unrealized loss position at June 30, 2016 and December 31, 2015.

Table 8.6 – Components of Fair Value of Residential AFS Securities by Holding Periods



	Less Than 12 Consecutive Months							12 Consecutive Months or Longer
	Amortized Cost		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Losses			Fair Value
(In Thousands)	Amortized Cost		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Losses			Fair Value
June 30, 2016	$	14,148	$	(789	)	$	13,359	$	68,117	$	(3,479	)	$	64,638
December 31, 2015	87,718		(1,972		)	85,746		77,539		(3,035		)	74,504

At June 30, 2016, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 183 AFS securities, of which 17 were in an unrealized loss position and 10 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2015, our consolidated balance sheet included 224 AFS securities, of which 32 were in an unrealized loss position and 15 were in a continuous unrealized loss position for 12 consecutive months or longer.

Evaluating AFS Securities for Other-than-Temporary Impairments

Gross unrealized losses on our AFS securities were $4 million at June 30, 2016. We evaluate all securities in an unrealized loss position to determine if the impairment is temporary or other-than-temporary (resulting in an OTTI). At June 30, 2016, we did not intend to sell any of our AFS securities that were in an unrealized loss position, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity. We review our AFS securities 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 expected cash flows for such securities, which considers recent security performance and expected future performance of the underlying collateral.

For both the three and six months ended June 30, 2016, other-than-temporary impairments were $3 million, of which $0.3 million were recognized through our consolidated statements of income and $2 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. AFS securities for which OTTI is recognized have experienced, or are expected to experience, credit-related adverse cash flow changes. In determining our estimate of cash flows for AFS securities we may consider factors such as structural credit enhancement, past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, which are informed by prepayment rates, default rates, loss severities, delinquency rates, percentage of non-performing loans, FICO scores at loan origination, year of origination, loan-to-value ratios, and geographic concentrations, as well as general market assessments. Changes in our evaluation of these factors impacted the cash flows expected to be collected at the OTTI assessment date and were used to determine if there were credit-related adverse cash flows and if so, the amount of credit related losses. Significant judgment is used in both our analysis of the expected cash flows for our AFS securities and any determination of the credit loss component of OTTI.

The table below summarizes the significant valuation assumptions we used for our AFS securities in unrealized loss positions at June 30, 2016.

Table 8.7 – Significant Valuation Assumptions



	Range for Securities
June 30, 2016	Prime				Non-prime
Prepayment rates	8	-	15	%		N/A
Projected losses	0	-	9	%		N/A

The following table details the activity related to the credit loss component of OTTI (i.e., OTTI recognized through earnings) for AFS securities held at June 30, 2016 and 2015, for which a portion of an OTTI was recognized in other comprehensive income.

Table 8.8 – Activity of the Credit Component of Other-than-Temporary Impairments



	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2016			2015			2016			2015
Balance at beginning of period	$	27,942		$	32,949		$	28,277		$	33,849
Additions
Initial credit impairments	291			—			291			—
Reductions
Securities sold, or expected to sell	(35		)	(253		)	(261		)	(348		)
Securities with no outstanding principal at period end	—			—			(109		)	(805		)
Balance at End of Period	$	28,198		$	32,696		$	28,198		$	32,696

Gains and losses from the sale of AFS securities are recorded as Realized gains, net, in our consolidated statements of income. The following table presents the gross realized gains and losses on sales and calls of AFS securities for the three and six months ended June 30, 2016 and 2015.

Table 8.9 – Gross Realized Gains and Losses on AFS Securities



	Three Months Ended June 30,					Six Months Ended June 30,
(In Thousands)	2016			2015		2016			2015
Gross realized gains - sales	$	8,986		$	5,956	$	20,405		$	10,262
Gross realized gains - calls	1,210			360		1,210			360
Gross realized losses - sales	(120		)	—		(2,293		)	—
Total Realized Gains on Sales and Calls of AFS Securities, net	$	10,076		$	6,316	$	19,322		$	10,622