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Real Estate Securities | 9 Months Ended
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Sep. 30, 2016
Investments, Debt and Equity Securities [Abstract] |
Real Estate Securities | Real Estate Securities We invest in real estate securities. The following table presents the fair values of our real estate securities by type at September 30, 2016 and December 31, 2015. Table 8.1 – Fair Values of Real Estate Securities by Type
(In Thousands) |  | September 30, 2016 |  | December 31, 2015
Trading |  | $ | 341,269 |  |  | $ | 404,011 |
Available-for-sale |  | 595,641 |  |  | 829,245 |
Total Real Estate Securities |  | $ | 936,910 |  |  | $ | 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 September 30, 2016 and December 31, 2015. Table 8.2 – Trading Securities by Collateral Type
(In Thousands) |  | September 30, 2016 |  | December 31, 2015
Senior Securities |  |  |  |
Prime |  | $ | 19,098 |  |  | $ | 248,570 |
Non-prime |  | 5,394 |  |  | 5,781 |
Total Senior Securities |  | 24,492 |  |  | 254,351 |
Subordinate Securities |  |  |  |
Prime mezzanine |  | 194,832 |  |  | 136,140 |
Prime subordinate |  | 121,945 |  |  | 13,520 |
Total Subordinate Securities |  | 316,777 |  |  | 149,660 |
Total Trading Securities |  | $ | 341,269 |  |  | $ | 404,011 |
We elected the fair value option for certain securities and classify them as trading securities. Our trading securities are primarily comprised of residential mortgage backed securities. At September 30, 2016 and December 31, 2015, our senior trading securities included $24 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 $332 million and $168 million, respectively. At September 30, 2016 and December 31, 2015, subordinate trading securities included $134 million and $48 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $12 million and $259 million, respectively, of Sequoia securities, $98 million and $89 million, respectively, of other third party residential securities, and $73 million and $8 million, respectively, of third-party commercial mortgage backed securities. During the three and nine months ended September 30, 2016, we acquired $65 million and $198 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $2 million and $238 million, respectively, of such securities. During the three and nine months ended September 30, 2015, we acquired $9 million and $103 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $2 million and $81 million, respectively, of such securities. During the three and nine months ended September 30, 2016, we recorded net market valuation gains of $9 million and $5 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 three and nine months ended September 30, 2015, we recorded net market valuation losses of $9 million and $16 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income. At September 30, 2016, trading securities with a carrying value of $126 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 September 30, 2016 and December 31, 2015. Table 8.3 – Available-for-Sale Securities by Collateral Type
(In Thousands) |  | September 30, 2016 |  | December 31, 2015
Senior Securities |  |  |  |
Prime |  | $ | 63,469 |  |  | $ | 210,993 |
Non-prime |  | 7,821 |  |  | 68,258 |
Total Senior Securities |  | 71,290 |  |  | 279,251 |
Re-REMIC Securities |  | 161,234 |  |  | 165,064 |
Subordinate Securities |  |  |  |
Prime mezzanine |  | 177,468 |  |  | 224,624 |
Prime subordinate |  | 185,649 |  |  | 160,306 |
Total Subordinate Securities |  | 363,117 |  |  | 384,930 |
Total AFS Securities |  | $ | 595,641 |  |  | $ | 829,245 |
At September 30, 2016 and December 31, 2015, all of our available-for-sale securities were comprised of non-Agency residential mortgage backed securities. At September 30, 2016, AFS securities with a carrying value of $210 million were pledged as collateral under short-term borrowing agreements. See Note 12 for additional information on short-term debt. During the three and nine months ended September 30, 2016, we purchased $11 million and $29 million of AFS securities, respectively, and sold $26 million and $241 million of AFS securities, respectively, which resulted in net realized gains of $2 million and $20 million, respectively. During the three and nine months ended September 30, 2015, we purchased zero and $15 million of AFS securities, respectively, and sold $35 million and $237 million of AFS securities, respectively, which resulted in net realized gains of $4 million and $14 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 September 30, 2016, there were $1 million of AFS securities with contractual maturities less than five years, $1 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 September 30, 2016 and December 31, 2015. Table 8.4 – Carrying Value of AFS Securities
September 30, 2016 |  | Senior |  |  |  |  |  |
(In Thousands) |  | Prime |  | Non-prime |  | Re-REMIC |  | Subordinate |  | Total
Principal balance |  | $ | 68,288 |  |  | $ | 9,372 |  |  | $ | 180,754 |  |  | $ | 460,981 |  |  | $ | 719,395 |
Credit reserve |  | (1,483 | ) |  | (641 | ) |  | (10,452 | ) |  | (35,037 | ) |  | (47,613 | )
Unamortized discount, net |  | (6,116 | ) |  | (1,635 | ) |  | (59,146 | ) |  | (135,829 | ) |  | (202,726 | )
Amortized cost |  | 60,689 |  |  | 7,096 |  |  | 111,156 |  |  | 290,115 |  |  | 469,056 |
Gross unrealized gains |  | 4,860 |  |  | 725 |  |  | 50,078 |  |  | 74,041 |  |  | 129,704 |
Gross unrealized losses |  | (2,080 | ) |  | — |  |  | — |  |  | (1,039 | ) |  | (3,119 | )
Carrying Value |  | $ | 63,469 |  |  | $ | 7,821 |  |  | $ | 161,234 |  |  | $ | 363,117 |  |  | $ | 595,641 |
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 nine months ended September 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 September 30, 2016 |  | Nine Months Ended September 30, 2016
|  | Credit Reserve |  | Unamortized Discount, Net |  | Credit Reserve |  | Unamortized Discount, Net
(In Thousands) |  |  |  |
Beginning balance |  | $ | 44,943 |  |  | $ | 207,574 |  |  | $ | 48,869 |  |  | $ | 237,107 |
Amortization of net discount |  | — |  |  | (6,124 | ) |  | — |  |  | (20,531 | )
Realized credit losses |  | (329 | ) |  | — |  |  | (3,397 | ) |  | — |
Acquisitions |  | 2,136 |  |  | 2,982 |  |  | 7,381 |  |  | 9,018 |
Sales, calls, other |  | — |  |  | (843 | ) |  | (4,382 | ) |  | (24,031 | )
Impairments |  | — |  |  | — |  |  | 305 |  |  | — |
Transfers to (release of) credit reserves, net |  | 863 |  |  | (863 | ) |  | (1,163 | ) |  | 1,163 |
Ending Balance |  | $ | 47,613 |  |  | $ | 202,726 |  |  | $ | 47,613 |  |  | $ | 202,726 |
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 September 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) |  |  |  |  |  |
September 30, 2016 |  | $ | 3,117 |  |  | $ | (127 | ) |  | $ | 2,990 |  |  | $ | 67,091 |  |  | $ | (2,992 | ) |  | $ | 64,099 |
December 31, 2015 |  | 87,718 |  |  | (1,972 | ) |  | 85,746 |  |  | 77,539 |  |  | (3,035 | ) |  | 74,504 |
At September 30, 2016, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 184 AFS securities, of which 15 were in an unrealized loss position and 12 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 $3 million at September 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 September 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 the three months ended September 30, 2016, we recognized no OTTI losses related to our AFS securities. For the nine months ended September 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 September 30, 2016. Table 8.7 – Significant Valuation Assumptions
September 30, 2016 |  | Range for Securities
Prepayment rates |  | 8% | - | 20%
Projected losses |  | —% | - | 9%
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 September 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 September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2016 |  | 2015 |  | 2016 |  | 2015
Balance at beginning of period |  | $ | 28,198 |  |  | $ | 32,696 |  |  | $ | 28,277 |  |  | $ | 33,849 |
Additions |  |  |  |  |  |  |  |
Initial credit impairments |  | — |  |  | 226 |  |  | 291 |  |  | 226 |
Reductions |  |  |  |  |  |  |  |
Securities sold, or expected to sell |  | — |  |  | — |  |  | (261 | ) |  | (348 | )
Securities with no outstanding principal at period end |  | — |  |  | (446 | ) |  | (109 | ) |  | (1,251 | )
Balance at End of Period |  | $ | 28,198 |  |  | $ | 32,476 |  |  | $ | 28,198 |  |  | $ | 32,476 |
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 nine months ended September 30, 2016 and 2015. Table 8.9 – Gross Realized Gains and Losses on AFS Securities
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(In Thousands) |  | 2016 |  | 2015 |  | 2016 |  | 2015
Gross realized gains - sales |  | $ | 1,990 |  |  | $ | 4,053 |  |  | $ | 22,395 |  |  | $ | 14,315 |
Gross realized gains - calls |  | — |  |  | 1,607 |  |  | 1,210 |  |  | 1,967 |
Gross realized losses - sales |  | — |  |  | — |  |  | (2,293 | ) |  | — |
Gross realized losses - calls |  | — |  |  | (112 | ) |  | — |  |  | (112 | )
Total Realized Gains on Sales and Calls of AFS Securities, net |  | $ | 1,990 |  |  | $ | 5,548 |  |  | $ | 21,312 |  |  | $ | 16,170 |

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