Real Estate Securities

We invest in real estate securities. The following table presents the fair values of our real estate securities by type at March 31, 2017 and December 31, 2016.

Table 7.1 – Fair Values of Real Estate Securities by Type



(In Thousands)	March 31, 2017		December 31, 2016
Trading	$	591,152	$	445,687
Available-for-sale	574,788		572,752
Total Real Estate Securities	$	1,165,940	$	1,018,439

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. Nearly all of our securities are supported by collateral that was designated as prime as of issuance.

Trading Securities

The following table presents the fair value of trading securities by position and collateral type at March 31, 2017 and December 31, 2016.

Table 7.2 – Trading Securities by Position and Collateral Type



(In Thousands)	March 31, 2017		December 31, 2016
Senior Securities	$	38,890	$	37,067
Subordinate Securities
Mezzanine	353,823		256,226
Subordinate	198,439		152,394
Total Subordinate Securities	552,262		408,620
Total Trading Securities	$	591,152	$	445,687

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and commercial mortgage-backed securities.

At March 31, 2017 and December 31, 2016, our senior trading securities were comprised of interest-only securities, for which there is no principal balance, and our subordinate trading securities had an unpaid principal balance of $576 million and $434 million, respectively.

At March 31, 2017 and December 31, 2016, subordinate trading securities included $198 million and $152 million, respectively, of Agency residential mortgage credit risk transfer (or "CRT") securities, $33 million and $15 million, respectively, of Sequoia securities, $183 million and $149 million, respectively, of other third-party residential securities, and $139 million and $92 million, respectively, of third-party commercial mortgage-backed securities.

During the three months ended March 31, 2017 and 2016, we acquired $154 million and $50 million (principal balance), respectively, of senior and subordinate securities for which we elected the fair value option and classified as trading, and sold $9 million and $218 million, respectively, of such securities. During the three months ended March 31, 2017 and 2016, we recorded a net market valuation gain of $11 million and a net market valuation loss of $4 million, respectively, on trading securities, included in Investment fair value changes, net and Mortgage banking activities, net on our consolidated statements of income.

At March 31, 2017, trading securities with a carrying value of $191 million were pledged as collateral under short-term borrowing agreements. See Note 11 for additional information on short-term debt.

AFS Securities

The following table presents the fair value of our available-for-sale securities by position and collateral type at March 31, 2017 and December 31, 2016.

Table 7.3 – Available-for-Sale Securities by Position and Collateral Type



(In Thousands)	March 31, 2017		December 31, 2016
Senior Securities	$	137,209	$	136,546
Re-REMIC Securities	73,730		85,479
Subordinate Securities
Mezzanine	153,777		163,715
Subordinate	210,072		187,012
Total Subordinate Securities	363,849		350,727
Total AFS Securities	$	574,788	$	572,752

At March 31, 2017 and December 31, 2016, all of our available-for-sale securities were comprised of residential mortgage-backed securities. At March 31, 2017, AFS securities with a carrying value of $195 million were pledged as collateral under short-term borrowing agreements. See Note 11 for additional information on short-term debt.

During the three months ended March 31, 2017 and 2016, we purchased $25 million and $16 million of AFS securities, respectively, and sold $19 million and $126 million of AFS securities, respectively, which resulted in net realized gains of $5 million and $9 million, respectively. In addition, during the first quarter of 2017, we exchanged our interests in two Re-REMICs, which together had a fair value of $12 million, for the senior securities underlying the Re-REMICs, and reclassified our interests from Re-REMIC to Senior.

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 March 31, 2017, there were $0.1 million of AFS securities with contractual maturities less than five years, $0.5 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 March 31, 2017 and December 31, 2016.

Table 7.4 – Carrying Value of AFS Securities



March 31, 2017
(In Thousands)	Senior			Re-REMIC			Subordinate			Total
Principal balance	$	144,676		$	81,935		$	477,706		$	704,317
Credit reserve	(4,521		)	(5,609		)	(39,096		)	(49,226		)
Unamortized discount, net	(38,156		)	(16,507		)	(142,268		)	(196,931		)
Amortized cost	101,999			59,819			296,342			458,160
Gross unrealized gains	37,078			13,911			68,319			119,308
Gross unrealized losses	(1,868		)	—			(812		)	(2,680		)
Carrying Value	$	137,209		$	73,730		$	363,849		$	574,788



December 31, 2016
(In Thousands)	Senior			Re-REMIC			Subordinate			Total
Principal balance	$	148,862		$	95,608		$	456,359		$	700,829
Credit reserve	(4,814		)	(6,857		)	(35,802		)	(47,473		)
Unamortized discount, net	(41,877		)	(19,613		)	(136,622		)	(198,112		)
Amortized cost	102,171			69,138			283,935			455,244
Gross unrealized gains	36,304			16,341			68,032			120,677
Gross unrealized losses	(1,929		)	—			(1,240		)	(3,169		)
Carrying Value	$	136,546		$	85,479		$	350,727		$	572,752

The following table presents the changes for the three months ended March 31, 2017, in unamortized discount and designated credit reserves on residential AFS securities.

Table 7.5 – Changes in Unamortized Discount and Designated Credit Reserves on AFS Securities



	Three Months Ended March 31, 2017
	Credit Reserve			Unamortized Discount, Net
(In Thousands)	Credit Reserve			Unamortized Discount, Net
Beginning balance	$	47,473		$	198,112
Amortization of net discount	—			(5,261		)
Realized credit losses	(916		)	—
Acquisitions	5,719			7,759
Sales, calls, other	(2,160		)	(4,686		)
Impairments	117			—
Transfers to (release of) credit reserves, net	(1,007		)	1,007
Ending Balance	$	49,226		$	196,931

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 March 31, 2017 and December 31, 2016.

Table 7.6 – 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
March 31, 2017	$	25,900	$	(322	)	$	25,578	$	58,656	$	(2,358	)	$	56,298
December 31, 2016	15,772		(330		)	15,442		60,035		(2,839		)	57,196

At March 31, 2017, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 186 AFS securities, of which 22 were in an unrealized loss position and 10 were in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2016, our consolidated balance sheet included 186 AFS securities, of which 19 were in an unrealized loss position and 10 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 March 31, 2017. 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 March 31, 2017, 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 March 31, 2017, other-than-temporary impairments related to our AFS securities were $0.2 million, of which $0.1 million were recognized through our consolidated statements of income and $0.1 million were recognized in Accumulated other comprehensive income, a component of our consolidated balance sheet. For the three months ended March 31, 2016, there were no other-than-temporary impairments. 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 March 31, 2017.

Table 7.7 – Significant Valuation Assumptions



March 31, 2017	Range for Securities
Prepayment rates	8%	-	18%
Projected losses	—%	-	8%

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 March 31, 2017 and 2016, for which a portion of an OTTI was recognized in other comprehensive income.

Table 7.8 – Activity of the Credit Component of Other-than-Temporary Impairments



	Three Months Ended March 31,
(In Thousands)	2017			2016
Balance at beginning of period	$	28,261		$	28,277
Additions
Initial credit impairments	97			—
Reductions
Securities sold, or expected to sell	(1,566		)	(226		)
Securities with no outstanding principal at period end	(402		)	(109		)
Balance at End of Period	$	26,390		$	27,942

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 months ended March 31, 2017 and 2016.

Table 7.9 – Gross Realized Gains and Losses on AFS Securities



	Three Months Ended March 31,
(In Thousands)	2017		2016
Gross realized gains - sales	$	5,092	$	11,419
Gross realized gains - calls	611		—
Gross realized losses - sales	—		(2,173		)
Total Realized Gains on Sales and Calls of AFS Securities, net	$	5,703	$	9,246