We invest in real estate securities that we acquire from third parties or create and retain from our Sequoia securitizations. The following table presents the fair values of our real estate securities by type at December 31, 2019 and December 31, 2018.

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. Mezzanine securities are interests that are generally subordinate to senior securities in their rights to receive cash flows, and have subordinate securities below them that are first to absorb losses. Many of our mezzanine classified securities were initially rated AA through BBB- and issued in 2012 or later. Subordinate securities are all interests below mezzanine. Excluding our re-performing loan securities, nearly all of our residential securities are supported by collateral that was designated as prime at the time of issuance.

We elected the fair value option for certain securities and classify them as trading securities. Our trading securities include both residential and multifamily mortgage-backed securities, and our residential securities also include securities backed by re-performing loans ("RPL"). At December 31, 2019 and 2018, our senior trading securities included $64 million and $82 million of interest-only securities, respectively, for which there is no principal balance, and the unpaid principal balance of our remaining senior trading securities was $84 million and $78 million, respectively. Our interest-only securities included $36 million and $43 million of A-IO-S securities at December 31, 2019 and 2018, respectively, which are securities we retained from certain of our Sequoia securitizations that represent certificated servicing strips. At December 31, 2019 and 2018, our senior trading securities included $55 million and $48 million of RPL securities, respectively.

At December 31, 2019 and 2018, our mezzanine trading securities had an unpaid principal balance of $537 million and $646 million, respectively. At December 31, 2019 and 2018, the fair value of our mezzanine securities was $538 million and $611 million, respectively, and included $39 million and $68 million of Sequoia securities, respectively, $395 million and $429 million of multifamily securities, respectively, and $104 million and $114 million of other third party residential securities, respectively, including $30 million and $11 million of RPL securities, respectively.

At December 31, 2019 and 2018, our subordinate trading securities had an unpaid principal balance of $302 million and $476 million, respectively. At December 31, 2019 and 2018, the fair value of our subordinate securities was $172 million and $349 million, respectively, and included $90 million and $277 million of Agency residential mortgage CRT securities, respectively, and $82 million and $72 million of other third party residential securities, respectively, including $76 million and $63 million of RPL securities, respectively.

During the years ended December 31, 2019 and 2018, we acquired $367 million and $688 million (principal balance), respectively, of securities for which we elected the fair value option and classified as trading, and sold $593 million and $415 million, respectively, of such securities. During the years ended December 31, 2019 and 2018, we recorded a net market valuation gain of $56 million and a net market valuation loss of $8 million, respectively, on trading securities, included in Investment fair value changes, net on our consolidated statements of income.

At December 31, 2019, our available-for-sale securities were comprised of $230 million of residential mortgage-backed securities and $9 million of multifamily mortgage-backed securities. At December 31, 2018, our available-for-sale securities were comprised entirely of residential mortgage-backed securities. During the years ended December 31, 2019 and 2018, we purchased $27 million and $8 million of AFS securities, respectively, and sold $110 million and $144 million of AFS securities, respectively, which resulted in net realized gains of $18 million and $27 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 December 31, 2019, there were no AFS securities with contractual maturities less than five years, $8 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.



December 31, 2019
(In Thousands)	Senior			Mezzanine			Subordinate			Total
Principal balance	$	26,331		$	13,512		$	264,234		$	304,077
Credit reserve	(533		)	—			(32,407		)	(32,940		)
Unamortized discount, net	(10,427		)	(527		)	(113,301		)	(124,255		)
Amortized cost	15,371			12,985			118,526			146,882
Gross unrealized gains	10,450			702			81,329			92,481
Gross unrealized losses	(29		)	—			—			(29		)
Carrying Value	$	25,792		$	13,687		$	199,855		$	239,334



December 31, 2018
(In Thousands)	Senior			Mezzanine			Subordinate			Total
Principal balance	$	91,736		$	36,852		$	302,524		$	431,112
Credit reserve	(7,790		)	—			(33,580		)	(41,370		)
Unamortized discount, net	(18,460		)	(3,697		)	(129,043		)	(151,200		)
Amortized cost	65,486			33,155			139,901			238,542
Gross unrealized gains	22,178			3,252			70,458			95,888
Gross unrealized losses	(49		)	—			(499		)	(548		)
Carrying Value	$	87,615		$	36,407		$	209,860		$	333,882



	Year Ended December 31, 2019						Year Ended December 31, 2018
	Credit Reserve			Unamortized Discount, Net			Credit Reserve			Unamortized Discount, Net
(In Thousands)	Credit Reserve			Unamortized Discount, Net			Credit Reserve			Unamortized Discount, Net
Beginning balance	$	41,370		$	151,200		$	46,549		$	183,753
Amortization of net discount	—			(7,921		)	—			(14,098		)
Realized credit losses	(2,606		)	—			(2,165		)	—
Acquisitions	3,712			1,910			6,315			2,716
Sales, calls, other	(9,453		)	(21,017		)	(1,850		)	(28,739		)
Impairments	—			—			89			—
Transfers to (release of) credit reserves, net	(83		)	83			(7,568		)	7,568
Ending Balance	$	32,940		$	124,255		$	41,370		$	151,200



	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
December 31, 2019	$	—	$	—		$	—	$	5,830	$	(29	)	$	5,801
December 31, 2018	12,923		(499		)	12,424		7,464		(49		)	7,415

At December 31, 2019, after giving effect to purchases, sales, and extinguishment due to credit losses, our consolidated balance sheet included 107 AFS securities, of which one was in an unrealized loss position and one was in a continuous unrealized loss position for 12 consecutive months or longer. At December 31, 2018, our consolidated balance sheet included 128 AFS securities, of which seven were in an unrealized loss position and three were in a continuous unrealized loss position for 12 consecutive months or longer.

Gross unrealized losses on our AFS securities were less than $0.1 million at December 31, 2019. 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 December 31, 2019, 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 year ended December 31, 2019, there were no other-than-temporary impairments related to our AFS securities. 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 following table details the activity related to the credit loss component of OTTI (i.e., OTTI recognized through earnings) for AFS securities held at December 31, 2019, 2018, and 2017 for which a portion of an OTTI was recognized in other comprehensive income.



	Years Ended December 31,
(In Thousands)	2019			2018			2017
Balance at beginning of period	$	18,652		$	21,037		$	28,261
Additions
Initial credit impairments	—			76			178
Subsequent credit impairments	—			—			47
Reductions
Securities sold, or expected to sell	(77		)	(1,218		)	(4,898		)
Securities with no outstanding principal at period end	(4,417		)	(1,243		)	(2,551		)
Balance at End of Period	$	14,158		$	18,652		$	21,037

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 years ended December 31, 2019, 2018, and 2017.



	Years Ended December 31,
(In Thousands)	2019		2018			2017
Gross realized gains - sales	$	17,582	$	27,127		$	13,927
Gross realized gains - calls	6,239		43			677
Gross realized losses - sales	—		(129		)	—
Gross realized losses - calls	—		—			(497		)
Total Realized Gains on Sales and Calls of AFS Securities, net	$	23,821	$	27,041		$	14,107