MFA FINANCIAL, INC. In this Quarterly Report on Form 10-Q, we refer to
The following discussion should be read in conjunction with our financial
statements and accompanying notes included in Item 1 of this Quarterly Report on
Form 10-Q as well as our Annual Report on Form 10-K for the year ended
Forward Looking Statements
When used in this Quarterly Report on Form 10-Q, in future filings with theSEC or in press releases or other written or oral communications, statements which are not historical in nature, including those containing words such as "will," "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "could," "would," "may," the negative of these words or similar expressions, are intended to identify "forward-looking statements" within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act and, as such, may involve known and unknown risks, uncertainties and assumptions. These forward-looking statements include information about possible or assumed future results with respect to our business, financial condition, liquidity, results of operations, plans and objectives. Statements regarding the following subjects, among others, may be forward-looking: risks related to the ongoing spread of the novel coronavirus and the COVID-19 pandemic, including its effects on the general economy and our business, financial position and results of operations; uncertainties related to our recently-announced financing arrangements, including without limitation uncertainties regarding the closing and funding of such arrangements and the anticipated benefits and uses of the proceeds therefrom; our ability to meet our ongoing obligations under our current forbearance agreement with our repurchase agreement counterparties and our expectations with respect to any exit from forbearance or the ability to extend such forbearance if needed; our ability to accurately estimate information related to our operations and financial condition subsequent to the end of the first quarter (particularly in light of the highly volatile and uncertain market conditions); payments of future dividends, including payments of accumulated but unpaid dividends on our Series B Preferred Stock and Series C Preferred Stock; changes in interest rates and the market (i.e., fair) value of our residential whole loans, MBS and other assets; changes in the prepayment rates on residential mortgage assets, an increase of which could result in a reduction of the yield on certain investments in its portfolio and could require us to reinvest the proceeds received by it as a result of such prepayments in investments with lower coupons, while a decrease in which could result in an increase in the interest rate duration of certain investments in our portfolio making their valuation more sensitive to changes in interest rates and could result in lower forecasted cash flows ; credit risks underlying our assets, including changes in the default rates and management's assumptions regarding default rates on the mortgage loans in our residential whole loan portfolio; our ability to borrow to finance our assets and the terms, including the cost, maturity and other terms, of any such borrowings; implementation of or changes in government regulations or programs affecting our business; our estimates regarding taxable income the actual amount of which is dependent on a number of factors, including, but not limited to, changes in the amount of interest income and financing costs, the method elected by us to accrete the market discount on residential whole loans and the extent of prepayments, realized losses and changes in the composition of our residential whole loan portfolios that may occur during the applicable tax period, including gain or loss on any MBS disposals and whole loan modifications, foreclosures and liquidations; the timing and amount of distributions to stockholders, which are declared and paid at the discretion of our Board and will depend on, among other things, our taxable income, our financial results and overall financial condition and liquidity, maintenance of our REIT qualification and such other factors as the Board deems relevant; our ability to maintain our qualification as a REIT for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended (or the Investment Company Act), including statements regarding the concept release issued by theSEC relating to interpretive issues under the Investment Company Act with respect to the status under the Investment Company Act of certain companies that are engaged in the business of acquiring mortgages and mortgage-related interests; our ability to continue growing our residential whole loan portfolio, which is dependent on, among other things, the supply of loans offered for sale in the market; expected returns on our investments in nonperforming residential whole loans (or NPLs), which are affected by, among other things, the length of time required to foreclose upon, sell, liquidate or otherwise reach a resolution of the property underlying the NPL, home price values, amounts advanced to carry the asset (e.g., taxes, insurance, maintenance expenses, etc. on the underlying property) and the amount ultimately realized upon resolution of the asset; targeted or expected returns on our investments in recently-originated loans, the performance of which is, similar to our other mortgage loan investments, subject to, among other things, differences in prepayment risk, credit risk and financing cost associated with such investments; risks associated with our investments in MSR-related assets, including servicing, regulatory and economic risks, and risks associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we file with theSEC , could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements are based on beliefs, assumptions and 58
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expectations of our future performance, taking into account all information currently available. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Business/General We are an internally-managed REIT primarily engaged in the business of investing, on a leveraged basis, in residential mortgage assets, including residential whole loans, residential mortgage securities and MSR-related assets. Our principal business objective is to deliver shareholder value through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return. As discussed below under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Portfolio sales and composition changes and impact on our liquidity" and in Note 16 to our consolidated financial statements, since the end of the first quarter we have engaged in asset sales and taken other actions that significantly changed our asset composition subsequent toMarch 31, 2020 . In particular, subsequent to the end of the first quarter, we sold the vast majority of our remaining Agency MBS and Legacy Non-Agency MBS portfolios, and substantially reduced our investments in MSR-related assets and CRT securities. As a result of these actions, our primary investment asset as of the date hereof is our residential whole loan portfolio. Any discussion herein of our assets atMarch 31, 2020 should be read in conjunction with the description of these asset sales and other actions. AtMarch 31, 2020 , we had total assets of approximately$11.1 billion , of which$7.0 billion , or 63%, represented residential whole loans acquired through interests in certain trusts established to acquire the loans. Our Purchased Performing Loans, which as ofMarch 31, 2020 comprised approximately 72% of our residential whole loans, include: (i) loans to finance (or refinance) one-to-four family residential properties that are not considered to meet the definition of a "Qualified Mortgage" in accordance with guidelines adopted by theConsumer Financial Protection Bureau (or Non-QM loans), (ii) short-term business purpose loans collateralized by residential properties made to non-occupant borrowers who intend to rehabilitate and sell the property for a profit (or Rehabilitation loans or Fix and Flip loans), (iii) loans to finance (or refinance) non-owner occupied one-to-four family residential properties that are rented to one or more tenants (or Single-family rental loans), and (iv) previously originated loans secured by residential real estate that is generally owner occupied (or Seasoned performing loans). In addition, atMarch 31, 2020 , we had approximately$1.9 billion in investments in residential mortgage securities, which represented approximately 17% of our total assets. At such date, our portfolio includes$553.4 million of Agency MBS,$1.1 billion of Non-Agency MBS and$254.1 million of CRT securities. Non-Agency MBS is comprised of$1.0 billion of Legacy Non-Agency MBS and$79.5 million of RPL/NPL MBS. These RPL/NPL MBS are backed by securitized re-performing and non-performing loans and are generally structured with a contractual coupon step-up feature where the coupon increases from 300 - 400 basis points at 36 - 48 months from issuance or sooner. AtMarch 31, 2020 , our investments in MSR-related assets were$738.1 million , or 7% of our total assets. Our MSR-related assets include term notes whose cash flows are considered to be largely dependent on MSR collateral and loan participations to provide financing to mortgage originators that own MSRs. Our remaining investment-related assets, which represent approximately 6% of our total assets atMarch 31, 2020 , were primarily comprised of REO, capital contributions made to loan origination partners, other interest-earning assets and MBS and loan-related receivables. The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income and the market value of our assets, which is driven by numerous factors, including the supply and demand for residential mortgage assets in the marketplace, the terms and availability of adequate financing, general economic and real estate conditions (both on a national and local level), the impact of government actions in the real estate and mortgage sector, and the credit performance of our credit sensitive residential mortgage assets. Changes in these factors, or uncertainty in the market regarding the potential for changes in these factors, can result in significant changes in the value and/or performance of our investment portfolio. Further, our GAAP results may be impacted by market volatility, resulting in changes in market values of certain financial instruments for which changes in fair value are recorded in net income each period, such as CRT securities, certain residential whole loans, Agency MBS, and Swaps not designated as hedges. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds, the behavior of which involves various risks and uncertainties. Interest rates and conditional prepayment rates (or CPRs) (which measure the amount of unscheduled principal prepayment on an asset as a percentage of the asset balance), vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. With the adoption inJanuary 2020 of new accounting standards for the measurement and recognition of credit losses, and given 59
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the extent of current and anticipated future investments in residential whole loans, our financial results are impacted by estimates of credit losses that are required to be recorded when loans that are not accounted for at fair value through net income are acquired or originated, as well as changes in these credit loss estimates that will be required to be made periodically. With respect to our business operations, increases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to increase; (ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders' equity to decline; (iii) coupons on our adjustable-rate assets to reset, on a delayed basis, to higher interest rates; (iv) prepayments on our assets to decline, thereby slowing the amortization of purchase premiums and the accretion of our purchase discounts, and slowing our ability to redeploy capital to generally higher yielding investments; and (v) the value of our derivative hedging instruments and, correspondingly, our stockholders' equity to increase. Conversely, decreases in interest rates, in general, may over time cause: (i) the interest expense associated with our borrowings to decrease; (ii) the value of certain of our residential mortgage assets and, correspondingly, our stockholders' equity to increase; (iii) coupons on our adjustable-rate assets, on a delayed basis, to lower interest rates; (iv) prepayments on our assets to increase, thereby accelerating the amortization of purchase premiums and the accretion of our purchase discounts, and accelerating the redeployment of our capital to generally lower yielding investments; and (v) the value of our derivative hedging instruments and, correspondingly, our stockholders' equity to decrease. In addition, our borrowing costs and credit lines are further affected by the type of collateral we pledge and general conditions in the credit market. Our investments in residential mortgage assets, particularly investments in residential mortgage loans and Non-Agency MBS, expose us to credit risk, meaning that we are generally subject to credit losses due to the risk of delinquency, default and foreclosure on the underlying real estate collateral. Our investment process for credit sensitive assets focuses primarily on quantifying and pricing credit risk. With respect to investments in Purchased Performing Loans, we believe that sound underwriting standards, including low LTVs at origination, significantly mitigate our risk of loss. Further, we believe the discounted purchase prices paid on certain non performing and Purchased Credit Deteriorated Loans mitigate our risk of loss in the event that, as we expect on most such investments, we receive less than 100% of the par value of these investments. Premiums arise when we acquire an MBS at a price in excess of the aggregate principal balance of the mortgages securing the MBS (i.e., par value) or when we acquire residential whole loans at a price in excess of their aggregate principal balance. Conversely, discounts arise when we acquire an MBS at a price below the aggregate principal balance of the mortgages securing the MBS or when we acquire residential whole loans at a price below their aggregate principal balance. Accretable purchase discounts on these investments are accreted to interest income. Purchase premiums, which are primarily carried on our Agency MBS, certain CRT securities and Non-QM loans, are amortized against interest income over the life of the investment using the effective yield method, adjusted for actual prepayment activity. An increase in the prepayment rate, as measured by the CPR, will typically accelerate the amortization of purchase premiums, thereby reducing the interest income earned on these assets. CPR levels are impacted by, among other things, conditions in the housing market, new regulations, government and private sector initiatives, interest rates, availability of credit to home borrowers, underwriting standards and the economy in general. In particular, CPR reflects the conditional repayment rate (or CRR), which measures voluntary prepayments of a loan, and the conditional default rate (or CDR), which measures involuntary prepayments resulting from defaults. CPRs on our residential mortgage securities and whole loans may differ significantly. For the three months endedMarch 31, 2020 , our Agency MBS portfolio experienced a weighted average CPR of 12.6%, and our Legacy Non-Agency MBS portfolio experienced a weighted average CPR of 13.6%. Over the last consecutive eight quarters, ending withMarch 31, 2020 , the monthly weighted average CPR on our Agency and Legacy Non-Agency MBS portfolios ranged from a high of 18.6% experienced during the month endedSeptember 30, 2019 to a low of 8.8%, experienced during the month endedMarch 31, 2020 , with an average CPR over such quarters of 15.4%. In addition, for the three months endedMarch 31, 2020 , the weighted average CPR on our Non-QM loan portfolio was 22.2%. Our method of accounting for Non-Agency MBS purchased at significant discounts to par value requires us to make assumptions with respect to each security. These assumptions include, but are not limited to, future interest rates, voluntary prepayment rates, default rates, mortgage modifications and loss severities. As part of our Non-Agency MBS surveillance process, we track and compare each security's actual performance over time to the performance expected at the time of purchase or, if we have modified our original purchase assumptions, to our revised performance expectations. To the extent that actual performance or our expectation of future performance of our Non-Agency MBS deviates materially from our expected performance parameters, we may revise our performance expectations, so that the amount of purchase discount that reflects principal that is not expected to be collected may increase or decrease over time, which could require us to record (or reverse) loss allowances. Credit losses greater than those anticipated or in excess of the recorded purchase discount could occur, which could materially adversely impact our operating results. 60
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It is generally our business strategy to hold our residential mortgage assets as long-term investments. On at least a quarterly basis, excluding investments for which the fair value option has been elected or for which specialized loan accounting is otherwise applied, we assess our ability and intent to continue to hold each asset and, as part of this process, we monitor our residential mortgage securities and MSR-related assets that are designated as AFS for impairment. A change in our ability and/or intent to continue to hold any of these securities that are in an unrealized loss position, or a deterioration in the underlying characteristics of these securities, could result in our recognizing future impairment charges or a loss upon the sale of any such security. AtMarch 31, 2020 , we had net unrealized gains on our Non-Agency MBS of$144.5 million , comprised of gross unrealized gains of$166.2 million and gross unrealized losses of$21.6 million and gross unrealized gains of$6.0 million on our Agency MBS. We rely heavily on borrowings under repurchase agreements to finance our residential mortgage assets, although, as discussed below, we entered into agreements to obtain significant non-repurchase agreement financing inJune 2020 . Our residential mortgage investments have longer-term contractual maturities than our borrowings under repurchase agreements. Even though the majority of our investments have interest rates that adjust over time based on short-term changes in corresponding interest rate indices (typically following an initial fixed-rate period for our Hybrids), the interest rates we pay on our borrowings will typically change at a faster pace than the interest rates we earn on our investments. In order to reduce this interest rate risk exposure, we may enter into derivative instruments, which have generally been comprised of Swaps. The majority of our Swap derivative instruments have generally been designated as cash-flow hedges against a portion of our then current and forecasted LIBOR-based repurchase agreements. While these Swaps did not extend the maturities of the associated repurchase agreements being hedged, they did, however, lock in a fixed rate of interest over their term (while they were outstanding) for the notional amount of the Swap corresponding to the hedged item. Following the significant interest rate decreases that occurred late in the first quarter of 2020, we did not consider that these Swaps continued to be an effective economic hedge of our portfolio. Consequently, we unwound all of our Swap transactions at the end of the quarter.
Recent Market Conditions and Our Strategy
COVID-19 impact on first quarter 2020 Portfolio Activity and impact on financial results:
AtMarch 31, 2020 , our residential mortgage asset portfolio, which includes residential whole loans and REO, residential mortgage securities and MSR-related assets, was approximately$10.0 billion compared to$13.1 billion atDecember 31, 2019 . Beginning inmid-March 2020 , conditions related to the COVID-19 pandemic created unprecedented market volatility, widening of spreads and related liquidity pressure as counterparties sought higher margin requirements. As a result, and as pricing dislocations in markets for residential mortgage assets accelerated in the last two weeks ofMarch 2020 , we sold approximately$2.1 billion of residential mortgage securities and residential whole loans to generate liquidity, satisfy margin calls and reduce our financial leverage, which resulted in realized losses of$238.4 million for the three months endedMarch 31, 2020 . In addition, overall asset prices declined materially during this period, resulting in significant unrealized losses and impairment charges in the amount of$496.9 million for the quarter relating to investments in residential mortgage securities and residential whole loans. Prior to the onset of the COVID-19 pandemic, we had acquired approximately$1.0 billion of residential whole loans during the quarter. 61
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The following table presents the activity for our residential mortgage asset
portfolio for the three months ended
December 31, 2019 Runoff (1) Acquisitions Sales Other (2) March 31, 2020 Change
Residential whole
loans and REO (3) $ 7,860 $ (541 ) $ 1,091 $ (806 ) $ (233 ) $ 7,371 $ (489 )
RPL/NPL MBS 635 (320 ) - (211 ) (24 ) 80 (555 )
MSR-related assets 1,217 (33 ) 4 (161 ) (289 ) 738 (479 )
CRT securities 255 (1 ) 159 (38 ) (121 ) 254 (1 )
Legacy Non-Agency MBS 1,429 (68 ) - (96 ) (225 ) 1,040 (389 )
Agency MBS 1,665 (123 ) - (988 ) (1 ) 553 (1,112 )
Totals $ 13,061 $ (1,086 ) $ 1,254 $ (2,300 ) $ (893 ) $ 10,036 $ (3,025 )
* As discussed below under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Portfolio sales and composition changes
and impact on our liquidity" and in Note 16 to our consolidated financial
statements, since the end of the first quarter, we have engaged in asset sales
and taken other actions that have significantly changed the asset composition of
our balance sheet. In particular, subsequent to the end of the first quarter, we
sold the vast majority of our remaining Agency MBS and Legacy Non-Agency MBS
portfolios and substantially reduced our investments in MSR-related assets and
CRT securities. As a result of these actions, our primary investment asset as of
the date hereof is our residential whole loan portfolio. Any discussion herein,
including the table above, of our assets at March 31, 2020 , should be read in
conjunction with the description of these asset sales and other actions.
(1) Primarily includes principal repayments, cash collections on Purchased Credit
Deteriorated Loans and sales of REO.
(2) Primarily includes changes in fair value, net premium amortization/discount
accretion and adjustments to record lower of cost or estimated fair value
adjustments on REO and loans held-for-sale.
(3) Includes Non-QM loans held-for-sale with a net carrying value of
million at
AtMarch 31, 2020 , our total recorded investment in residential whole loans and REO was$7.4 billion , or 73.4% of our residential mortgage asset portfolio. Of this amount, (i)$5.7 billion is presented as Residential whole loans, at carrying value (of which$5.0 billion were Purchased Performing Loans (including$895.3 million of Non-QM loans that were designated as held-for-sale) and$673.5 million were Purchased Credit Deteriorated Loans, and (ii)$1.2 billion is presented as Residential whole loans, at fair value, in our consolidated balance sheets. For the three months endedMarch 31, 2020 , we recognized approximately$83.5 million of income on Residential whole loans, at carrying value in Interest Income on our consolidated statements of operations, representing an effective yield of 5.07% (excluding servicing costs), with Purchased Performing Loans generating an effective yield of 5.10% and Purchased Credit Impaired Loans generating an effective yield of 4.84%. In addition, we recorded a net loss on residential whole loans measured at fair value through earnings of$52.8 million in Other Income, net in our consolidated statements of operations for the three months endedMarch 31, 2020 . AtMarch 31, 2020 andDecember 31, 2019 , we had REO with an aggregate carrying value of$411.5 million and$411.7 million , respectively, which is included in Other assets on our consolidated balance sheets. As ofMarch 31, 2020 , our Agency MBS portfolio totaled$553.4 million . Following the onset of COVID-19-related market disruptions in March, we sold$965.1 million of Agency MBS, realizing a loss of$22.9 million . The coupon yield on our Agency MBS portfolio decreased to 3.57% for the three months endedMarch 31, 2020 , from 3.69% for the three months endedMarch 31, 2019 , and the net Agency MBS yield decreased to 2.32% for the three months endedMarch 31, 2020 from 2.77% for the three months endedMarch 31, 2019 . Our Legacy Non-Agency MBS had a face amount of$1.4 billion with an amortized cost of$874.3 million and a net purchase discount of$480.1 million atMarch 31, 2020 . This discount consists of a$389.5 million credit reserve (reflecting principal not expected to be recovered) and a$90.7 million net accretable discount. During the three months endedMarch 31, 2020 , we disposed of approximately$100.7 million of Legacy Non-Agency, MBS, realizing net gains of$4.4 million . The net yield on our Legacy Non-Agency MBS portfolio was 10.55% for the three months endedMarch 31, 2020 , compared to 10.45% for the three months endedMarch 31, 2019 . Subsequent to the end of the first quarter, we sold the vast majority of our remaining Agency MBS and Legacy Non-Agency MBS portfolios. As ofMarch 31, 2020 , our RPL/NPL MBS portfolio totaled$80.0 million . During the three months endedMarch 31, 2020 , we sold$163.7 million of these securities, realizing a loss of$47.5 million . The net yield on our RPL/NPL MBS portfolio was 5.21% for the three months endedMarch 31, 2020 , compared to 4.90% for the three months endedMarch 31, 2019 . The increase in the net yield reflects an increase in the average coupon yield to 4.96% for the three months endedMarch 31, 2020 from 4.86% for the three months endedMarch 31, 2019 . In addition, our investments in MSR-related assets atMarch 31, 2020 totaled$738.1 million . During the three months endedMarch 31, 2020 , we sold$136.8 million of term notes backed by MSR-related collateral, realizing a loss of$24.6 million . Our investments in CRT securities totaled$254.1 million atMarch 31, 2020 . During the quarter 62
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we sold
Our first quarter results also include impairment and other charges totaling$419.7 million on securities available-for-sale and Other assets. Of this amount,$280.8 million is related to unrealized losses on term notes backed by MSR-related collateral and$63.5 million is related to residential mortgage securities (primarily CRT securities), as a lack of liquidity resulted in pricing dislocations in the markets for these assets in the last two weeks of March. As we had determined atMarch 31, 2020 , that we committed to dispose of our investments in these asset classes, GAAP requires that these unrealized losses be recorded in net income for the period and reduce the amortized cost basis of the associated assets. We adopted a new accounting standard addressing the measurement of credit losses on financial instruments (CECL) onJanuary 1, 2020 . With respect to our residential whole loans held at carrying value, CECL requires that reserves for credit losses be estimated at the reporting date based on life of loan expected cash flows, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions. While the adjustments recorded at the transition date to adopt CECL did not have a material impact on our financial position, in light of the anticipated impact of the COVID-19 pandemic on expected economic conditions for the short- to medium-term, estimates of credit losses recorded under CECL for the first quarter are significantly higher than would have been recorded under prior accounting standards, where reserves for credit losses were recorded only when assessed as being incurred. For the first quarter, a provision for credit losses of$74.9 million was recorded on residential whole loans held at carrying value. In addition, a valuation allowance to reduce the carrying value of Non-QM loans designated as held-for-sale at quarter-end of$70.2 million was recorded. This valuation allowance is included, along with CECL credit loss estimates, in the provision for credit losses in our income statement. The total allowance for credit and valuation losses recorded on residential whole loans held at carrying value atMarch 31, 2020 was$218.0 million . In addition, as ofMarch 31, 2020 , CECL reserves for credit losses totaling approximately$5.9 million were recorded related to undrawn commitments on loans held at carrying value as well as certain other interest earning assets. In addition, following an evaluation of the anticipated impact of the COVID-19 pandemic on economic conditions for the short- to medium-term, impairment charges of$58.1 million were recorded on investments in certain loan originators. As these investments include equity and debt investments in several private entities for which limited pricing transparency exists, particularly in light of the anticipated economic disruption associated with the COVID-19 pandemic, valuation and associated impairment considerations for these investments require significant judgment. Further, in light of the prevailing market and economic conditions that existed atMarch 31, 2020 , management determined that it was appropriate to record an impairment charge against our goodwill intangible asset of$7.2 million , reducing the carrying value of that asset to zero. The unprecedented market conditions that affected our first quarter 2020 results are also reflected in our book value per common share. Our GAAP book value per common share decreased to$4.34 as ofMarch 31, 2020 from$7.04 as ofDecember 31, 2019 . Economic book value per common share, a non-GAAP financial measure of our financial position that adjusts GAAP book value by the amount of unrealized mark to market gains on our residential whole loans held at carrying value, was$4.09 atMarch 31, 2020 , a decrease from$7.44 as ofDecember 31, 2019 . For additional information regarding the calculation of Economic book value per share including a reconciliation to GAAP book value per share, refer to page 82 under the heading "Economic Book Value".
Senior Secured Financing and Exit from Forbearance
OnMarch 24, 2020 , we announced that due to turmoil in the financial markets resulting from the spread of the novel coronavirus and the global COVID-19 pandemic, we had received an unusually high number of margin calls starting approximately in mid-March. In our announcement, we stated that, onMarch 23, 2020 , we did not meet our margin calls and had notified our financing counterparties that we did not expect to be in a position to fund the anticipated volume of margin calls under our financing arrangements in the near term. As a result of these events, we initiated forbearance discussions with our financing counterparties with regard to entering into forbearance agreements pursuant to which each counterparty would agree to forbear from exercising its rights and remedies with respect to an event of default under its applicable financing arrangement(s) with the Company for an agreed upon period, including refraining from selling collateral to enforce margin calls. Following these discussions, we entered into a series of Forbearance Agreements: an initial Forbearance Agreement, or Initial FBA, onApril 10, 2020 ; a second Forbearance Agreement onApril 27, 2020 , or Second FBA, that extended the Initial FBA; and a third Forbearance Agreement onJune 1, 2020 , or Third FBA, which is set to expire onJune 26, 2020 . Pursuant to these Forbearance Agreements, which are substantially similar to one another, certain of our repurchase agreement counterparties agreed to forbear from exercising their rights and remedies with respect to an event of default, including refraining from selling collateral to enforce margin calls. The primary purpose of the Forbearance Agreements was to permit us to seek, in an orderly manner, mutually beneficial solutions with our counterparties in light of the liquidity issues we faced following the onset of the COVID-19 pandemic. 63
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During the forbearance period discussed above, we explored other potential transactions to further reduce our obligations under our existing repurchase agreements, source financing that is generally more durable than our existing funding alternatives and raise cash to bolster our liquidity. Following various discussions with potential financing sources, onJune 15, 2020 , we and certain of our wholly owned subsidiaries entered into a credit agreement for a$500 million senior secured term loan facility (or Term Loan Facility) to be funded by certain funds and accounts managed by subsidiaries of Apollo Global Management, Inc. (together with such funds and accounts, "Apollo"), including subsidiaries of Athene Holding Ltd. ("Athene"), to which Apollo provides asset management and advisory services. In connection with, and conditioned on, the funding of the Term Loan Facility, the Company also executed onJune 15, 2020 , a letter with Barclays and affiliates of Athene (the "Asset Level Lenders"), pursuant to which the Asset Level Lenders have committed, subject to satisfaction of customary conditions precedent, to a non-mark-to-market term loan facility with one or more subsidiaries of the Company to provide, severally and not jointly, financing in an aggregate amount of up to$1,650,000,000 (the "Asset Level Debt Facility"). Further details related to the Term Loan Facility and the Asset Level Debt Facility are discussed in "Note 16. Subsequent Events" in our interim financial statements as of and for the three months endedMarch 31, 2020 . In connection with the Term Loan Facility and the Asset Level Debt Facility, the Company also entered into an Investment Agreement with Apollo and Athene (together the "Purchasers"), under which. the Company agreed to issue to the Purchasers warrants (the "Warrants") to purchase, in the aggregate, 37,039,106 shares (subject to adjustment in accordance with their terms) of the Company's common stock. In addition, the Purchasers or one or more of their affiliates have agreed to purchase, prior to the first anniversary date of the Investment Agreement, in one or a series of open market or privately negotiated transactions, a number of shares of the Company's common stock equal to the lesser of (a) such number of shares representing 4.9% of the outstanding shares of common stock as of the Funding Date or (b) such number of shares as the Purchasers may purchase for an aggregate gross purchase price of$50 million . The issuance of the Warrants is subject to satisfaction of certain terms and conditions set forth in the Investment Agreement, but is expected to occur on the Funding Date. Following the closing and funding of the Term Loan Facility and the Asset Level Debt Facility, we expect to be in position to exit forbearance. This will be facilitated via execution of a reinstatement agreement with all counterparties to the Third FBA, pursuant to which we will exit forbearance and terminate the Third FBA. Under the Reinstatement Agreement, if completed as expected, counterparties will waive any past defaults under the applicable repurchase agreements, terminate the Third FBA, release any security interest in our assets held by the counterparties, and reinstate the repurchase agreements on a go forward basis (subject to certain modifications, that will be agreed with these counterparties). The completion of the transactions contemplated by the Term Loan Facility, the Asset Level Debt Facility and the Investment Agreement are subject to and conditioned on, among other things, the completion of definitive documentation relating to the Asset Level Debt Facility, completion of documentation relating to the Company's exit from the Third FBA and other customary closing conditions. Following completion of the transactions discussed above, we expect to be in compliance with the terms and conditions of all of our material financing arrangements, including all of our repurchase agreements, and expect to have resolved all issues with our counterparties related to the events inMarch 2020 , including our failure to satisfy margin calls.
Portfolio sales and composition changes and impact on our liquidity
Since the end of the first quarter throughMay 31, 2020 , we have taken further steps to reduce the leverage on our portfolio, generate liquidity and reduce repurchase agreement balances with our counterparties. Actions taken by us include the sale of residential mortgage assets, generating proceeds of approximately$3.2 billion , which along with portfolio run-off and other payments to counterparties has resulted in an overall reduction in repurchase agreement balances of approximately$3.9 billion . Details of sales that have occurred in the second quarter throughMay 31, 2020 include:
• We have disposed of approximately
securities, including $533.1 million of Agency MBS, $1.1 billion of
Non-Agency MBS and $207.4 million of CRT securities. In addition, we sold
$574.9 million of term notes backed by MSR-related collateral and $15.6 million of other interest earning assets. Improvement in market pricing
since the end of the first quarter resulted in us recording realized gains
of approximately
addition, we recorded
(primarily CRT securities) on which we had previously elected the fair
value option.
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• We also disposed of approximately$845.2 million of residential whole loans, resulting in realized losses of approximately$128.4 million . However, after the reversal of the valuation allowance associated with loans that were designated as held-for-sale at the end of the first quarter, the net impact on second quarter results is a loss of approximately$58.2 million .
We have now sold substantially all of our Agency MBS and Legacy Non-Agency MBS
portfolios and greatly reduced our holdings of MSR-related assets and CRT
securities. As of
As of
Information About Our Assets The table below presents certain information about our asset allocation atMarch 31, 2020 : ASSET ALLOCATION* Residential Whole Loans, at Carrying Residential Whole Legacy Credit Risk Transfer Other,
(Dollars in Millions) Value (1) Loans, at Fair Value Agency MBS Non-Agency MBS RPL/NPL MBS (2) Securities
MSR-Related Assets net (3) Total
Fair Value/Carrying
Value $ 5,716 $ 1,244 $ 553 $ 1,040 $ 80 $ 254 $ 738 $ 1,019 $ 10,644
Plus Receivable for
Unsettled Sales 27 - 28 53 164 11 137 - 420
Less Repurchase
Agreements (4,092 ) (609 ) (522 ) (1,003 ) (255 ) (298 ) (930 ) (59 ) (7,768 )
Less Securitized Debt (123 ) (411 ) - - - - - - (534 )
Less Convertible
Senior Notes - - - - - - - (224 ) (224 )
Less Senior Notes - - - - - - - (97 ) (97 )
Net Equity Allocated $ 1,528 $ 224 $ 59 $ 90 $ (11 ) $ (33 ) $
(55 ) $ 639 $ 2,441
Debt/Net Equity Ratio
(4) 2.7 x 4.6 x 8.4 x 10.6 x N/M N/M N/M 3.4 x
* As discussed above under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Portfolio sales and composition changes
and impact on our liquidity" and in Note 16 to our consolidated financial
statements, since the end of the first quarter we have engaged in asset sales
and taken other actions that significantly changed our asset composition
subsequent to March 31, 2020 . In particular, subsequent to the end of the first
quarter, we sold the vast majority of our remaining Agency MBS and Legacy
Non-Agency MBS portfolios and substantially reduced our investments in
MSR-related assets and CRT securities. As a result of these actions, our primary
investment asset as of the date hereof is our residential whole loan portfolio.
Any discussion herein, including the table above, of our assets at March 31,
2020 should be read in conjunction with the description of these asset sales and
other actions.
(1) Includes
held-for-sale),
Single-family rental loans,
total fair value of these loans is estimated to be approximately
billion.
(2) RPL/NPL MBS are backed primarily by securitized re-performing and
non-performing loans. The securities are generally structured such that the
coupon increases from 300 - 400 basis points at 36 - 48 months from issuance
or sooner. Included with the balance of Non-Agency MBS reported on our
consolidated balance sheets.
(3) Includes cash and cash equivalents and restricted cash, other assets and
other liabilities.
(4) Represents the sum of borrowings under repurchase agreements and securitized
debt as a multiple of net equity allocated. The numerator of our Total
Debt/Net Equity Ratio also includes Convertible Senior Notes and Senior
Notes.
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Residential Whole Loans
The following table presents the contractual maturities of our residential whole loan portfolios atMarch 31, 2020 . Amounts presented do not reflect estimates of prepayments or scheduled amortization. Purchased Purchased Credit Residential Whole (In Thousands) Performing Loans (1) Deteriorated Loans (2) Loans, at Fair Value Amount due: Within one year $ 780,632 $ 737 $ 4,212 After one year: Over one to five years 239,496 4,302 5,687 Over five years 4,169,506 739,369 1,233,893 Total due after one year $ 4,409,002 $ 743,671 $ 1,239,580 Total residential whole loans $ 5,189,634 $ 744,408 $ 1,243,792
(1) Excludes an allowance for credit and valuation losses of
(2) Excludes an allowance for credit losses of
The following table presents, atMarch 31, 2020 , the dollar amount of certain of our residential whole loans, contractually maturing after one year, and indicates whether the loans have fixed interest rates or adjustable interest rates: Purchased Credit Purchased Deteriorated Loans Residential Whole Loans, (In Thousands) Performing Loans (1)(2) (1)(3) at Fair Value (1) Interest rates: Fixed $ 1,434,688 $ 501,139 $ 879,535 Adjustable 2,974,314 242,532 360,045 Total $ 4,409,002 $ 743,671 $ 1,239,580
(1) Includes loans on which borrowers have defaulted and are not making payments
of principal and/or interest as of
(2) Excludes an allowance for credit and valuation losses of
(3) Excludes an allowance for credit losses of
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Agency MBS
The following tables present certain information regarding the composition of our Agency MBS portfolio as ofMarch 31, 2020 andDecember 31, 2019 . Subsequent toMarch 31, 2020 , we disposed of the vast majority of our investments in Agency MBS: March 31, 2020 Weighted Weighted Weighted Average Average Average Weighted 3 Month Current Purchase Market Fair Loan Age Average Average (Dollars in Thousands) Face Price Price Value (1) (Months) (2) Coupon (2) CPR 15-Year Fixed Rate: Low Loan Balance (3)$ 125,543 103.8 % 105.3 %$ 132,204 110 3.90 % 8.6 % Generic 36,157 104.0 105.3 38,086 113 4.10 7.2 Total 15-Year Fixed Rate$ 161,700 103.8 % 105.3 %$ 170,290 111 3.95 % 8.3 % 30-Year Fixed Rate: Generic$ 13,461 104.0 % 107.7 %$ 14,499 21 4.50 % 25.1 % Total 30-Year Fixed Rate$ 13,461 104.0 % 107.7 %$ 14,499 21 4.50 % 25.1 % Hybrid$ 315,351 103.5 % 102.8 %$ 324,197 120 3.67 % 11.4 % CMO/Other$ 42,393 102.6 % 103.6 %$ 43,911 215 4.03 % 13.5 % Total Portfolio$ 532,905 103.5 % 103.8 %$ 552,897 122 3.80 % 12.6 % December 31, 2019 Weighted Weighted Weighted Average Average Average Weighted 3 Month Current Purchase Market Fair Loan Age Average Average (Dollars in Thousands) Face Price Price Value (1) (Months) (2) Coupon (2) CPR 15-Year Fixed Rate: Low Loan Balance (3)$ 460,094 104.5 % 102.4 %$ 471,123 93 3.04 % 10.5 % Generic 100,886 104.5 103.1 104,060 99 3.45 10.7 Total 15-Year Fixed Rate$ 560,980 104.5 % 102.5 %$ 575,183 94 3.11 % 10.6 % 30-Year Fixed Rate: Generic$ 264,760 104.2 % 105.9 %$ 280,303 18 4.50 % 34.4 % Total 30-Year Fixed Rate$ 264,760 104.2 % 105.9 %$ 280,303 18 4.50 % 34.4 % Hybrid$ 732,968 103.5 % 103.8 %$ 760,836 121 4.11 % 18.3 % CMO/Other$ 45,875 102.6 % 103.9 %$ 47,646 211 4.23 % 11.7 % Total Portfolio$ 1,604,583 103.9 % 103.7 %$ 1,663,968 97 3.83 % 18.1 %
(1) Does not include principal payments receivable of
(2) Weighted average is based on MBS current face at
(3) Low loan balance represents MBS collateralized by mortgages with an original
loan balance of less than or equal to $175,000 .
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The following tables present certain information regarding our fixed-rate Agency MBS as ofMarch 31, 2020 andDecember 31, 2019 . Subsequent toMarch 31, 2020 , we disposed of the vast majority of our investments in Agency MBS: March 31, 2020 Weighted Weighted Weighted Low Loan Average Average Average Weighted Balance 3 Month Current Purchase Market Fair Loan Age Average and/or Average Coupon Face Price Price Value (1) (Months) (2) Loan Rate HARP (3) CPR
(Dollars in Thousands) 15-Year Fixed Rate: 2.5%$ 4,319 104.8 % 104.1 %$ 4,497 88 3.08 % 100 % 6.8 % 3.0% 8,509 105.5 104.8 8,919 92 3.61 100 6.5 3.5% 2,525 103.5 105.3 2,658 113 4.19 100 15.3 4.0% 131,275 103.5 105.4 138,325 112 4.40 82 12.6 4.5% 15,072 105.3 105.4 15,891 117 4.89 52 9.1 Total 15-Year Fixed Rate$ 161,700 103.8 % 105.3 %$ 170,290 111 4.37 % 81 % 8.3 % 30-Year Fixed Rate: 4.5%$ 13,461 104.0 % 107.7 %$ 14,499 21 4.86 % - % 25.1 % Total 30-Year Fixed Rate$ 13,461 104.0 % 107.7 %$ 14,499 21 4.86 % - % 25.1 % Total Fixed Rate Portfolio$ 175,161 103.9 % 105.5 %$ 184,789 104 4.41 % 75 % 13.6 % December 31, 2019 Weighted Weighted Weighted Low Loan Average Average Average Weighted Balance 3 Month Current Purchase Market Fair Loan Age Average and/or Average Coupon Face Price Price Value (1) (Months) (2) Loan Rate HARP (3) CPR
(Dollars in Thousands) 15-Year Fixed Rate: 2.5%$ 241,045 104.1 % 101.2 %$ 243,946 85 3.06 % 100 % 9.3 % 3.0% 147,665 105.9 102.6 151,470 89 3.49 100 10.0 3.5% 2,761 103.5 103.6 2,862 110 4.19 100 7.5 4.0% 145,910 103.5 104.3 152,234 109 4.40 81 13.0 4.5% 23,599 105.3 104.5 24,671 113 4.89 36 11.2 Total 15-Year Fixed Rate$ 560,980 104.5 % 102.5 %$ 575,183 94 3.60 % 92 % 10.6 % 30-Year Fixed Rate: 4.5%$ 264,760 104.2 % 105.9 %$ 280,303 18 5.16 % - % 34.4 % Total 30-Year Fixed Rate$ 264,760 104.2 % 105.9 %$ 280,303 18 5.16 % - % 34.4 %
Total Fixed Rate Portfolio
4.10 % 63 % 18.3 %
(1) Does not include principal payments receivable of
(2) Weighted average is based on MBS current face at
(3) Low Loan Balance represents MBS collateralized by mortgages with an original
loan balance less than or equal to
Program (or HARP) MBS are backed by refinanced loans with LTVs greater than
or equal to 80% at origination.
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The following tables present certain information regarding our Hybrid Agency MBS as ofMarch 31, 2020 andDecember 31, 2019 . Subsequent toMarch 31, 2020 , we disposed of the vast majority of our investments in Agency MBS: March 31, 2020 Weighted Weighted Weighted Weighted Average Average Weighted Average Average 3 Month Current Purchase Market Fair Average Loan Age Months to Interest Average (Dollars in Thousands) Face Price Price Value (1) Coupon (2) (Months) (2) Reset (3) Only (4) CPR Hybrid Agency 3/1$ 43,650 102.6 % 103.7 %$ 45,277 4.13 % 168 5 - % 8.0 % Agency 5/1 70,169 102.7 102.8 72,142 4.10 140 3 41 11.0 Agency 7/1 74,565 103.6 102.8 76,645 3.89 105 9 55 12.7 Agency 10/1 126,967 104.2 102.5 130,133 3.12 101 23 61 11.6 Total Hybrids$ 315,351 103.5 % 102.8 %$ 324,197 3.67 % 120 13 47 % 11.4 % December 31, 2019 Weighted Weighted Weighted Weighted Average Average Weighted Average Average 3 Month Current Purchase Market Fair Average Loan Age Months to Interest Average (Dollars in Thousands) Face Price Price Value (1) Coupon (2) (Months) (2) Reset (3) Only (4) CPR Hybrid Agency 3/1$ 46,530 102.5 % 104.6 %$ 48,686 4.28 % 165 6 - % 16.6 % Agency 5/1 318,843 103.3 104.2 332,234 4.35 131 5 15 20.1 Agency 7/1 232,565 103.5 103.9 241,552 4.29 111 6 20 18.6 Agency 10/1 135,030 104.2 102.5 138,364 3.17 98 25 60 14.2 Total Hybrids$ 732,968 103.5 % 103.8 %$ 760,836 4.11 % 121 9 24 % 18.3 %
(1) Does not include principal payments receivable of
(2) Weighted average is based on MBS current face at
(3) Weighted average months to reset is the number of months remaining before the
coupon interest rate resets. At reset, the MBS coupon will adjust based upon
the underlying benchmark interest rate index, margin and periodic or lifetime
caps. The months to reset do not reflect scheduled amortization or
prepayments.
(4) Interest only represents MBS backed by mortgages currently in their
interest-only period. Percentage is based on MBS current face at
2020 and December 31, 2019 , respectively.
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Non-Agency MBS
The following table presents information with respect to our Non-Agency MBS atMarch 31, 2020 andDecember 31, 2019 . Subsequent toMarch 31, 2020 , we disposed of the vast majority of our investments in Legacy Non-Agency MBS: (In Thousands) March 31, 2020 December 31, 2019 Non-Agency MBS Face/Par$ 1,455,848 $ 2,195,303 Fair Value 1,119,940 2,063,529 Amortized Cost 975,408 1,668,088 Purchase Discount Designated as Credit Reserve (389,472 ) (436,598 ) Purchase Discount Designated as Accretable (90,968 ) (90,617 ) Purchase Premiums - -
Purchase Discounts on Non-Agency MBS
The following table presents the changes in the components of purchase discount on our Non-Agency MBS between purchase discount designated as Credit Reserve and accretable purchase discount for the three months endedMarch 31, 2020 and 2019: Three Months Ended Three Months Ended March 31, 2020 March 31, 2019 Discount Discount Designated as Accretable Designated as Accretable (In Thousands) Credit Reserve Discount (1) Credit Reserve Discount (1) Balance at beginning of period$ (436,598 ) $ (90,617 ) $ (516,116 ) $ (155,025 ) Impact of RMBS Issuer Settlement (2) - - - (855 ) Accretion of discount - 9,889 - 13,307 Realized credit losses 4,459 - 7,504 - Purchases - - - (118 ) Sales/Redemptions 49,491 (5,551 ) 3,191 16,346 Net impairment losses recognized in earnings (11,513 ) - - - Transfers/release of credit reserve 4,689 (4,689 ) 3,802 (3,802 ) Balance at end of period$ (389,472 ) $ (90,968 )
(1) Together with coupon interest, accretable purchase discount is recognized as
interest income over the life of the security.
(2) Includes the impact of
received by the Company during the three months ended
connection with the settlement of litigation related to certain residential
mortgage backed securitization trusts that were sponsored by JP Morgan Chase
& Co. and affiliated entities.
The following table presents information with respect to the yield components of
our Non-Agency MBS for the three months ended
Three Months Ended March 31, 2020 Three Months Ended
Legacy Legacy
Non-Agency MBS RPL/NPL MBS Non-Agency MBS RPL/NPL MBS
Non-Agency MBS
Coupon Yield (1) 6.83 % 4.96 % 6.78 % 4.86 %
Effective Yield Adjustment (2) 3.72 0.25 3.67 0.04
Net Yield 10.55 % 5.21 % 10.45 % 4.90 %
(1) Reflects the annualized coupon interest income divided by the average
amortized cost. The discounted purchase price on Legacy Non-Agency MBS
causes the coupon yield to be higher than the pass-through coupon interest
rate.
(2) The effective yield adjustment is the difference between the net yield,
calculated utilizing management's estimates of timing and amount of future
cash flows for Legacy Non-Agency MBS and RPL/NPL MBS, less the current coupon
yield.
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Actual maturities of MBS are generally shorter than stated contractual
maturities because actual maturities of MBS are affected by the contractual
lives of the underlying mortgage loans, periodic payments of principal and
prepayments of principal. The following table presents certain information
regarding the amortized costs, weighted average yields and contractual
maturities of our MBS at
Within One Year One to Five Years Five to Ten Years Over Ten Years Total MBS
Weighted Weighted Weighted Weighted Total Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Total Fair Average
(Dollars in Thousands) Cost Yield Cost Yield Cost Yield Cost Yield Cost Value Yield
Agency MBS:
Fannie Mae $ - - % $ 5,449 1.63 % $ 105,646 2.87 % $ 332,921 2.77 % $ 444,016 $ 448,258 2.78 %
Freddie Mac - - 5,903 - 54,725 2.34 38,994 3.90 99,622 101,277 2.95
Ginnie Mae - - - - 65 3.91 3,753 3.09 3,818 3,878 3.10
Total Agency MBS $ - - % $ 11,352 2.00 % $ 160,436 2.69 % $ 375,668 2.89 % $ 547,456 $ 553,413 2.81 %
Non-Agency MBS $ - - % $ 50,116 4.81 % $ 1,701 5.36 % $ 923,591 11.09 % $ 975,408 $ 1,119,940 10.76 %
Total MBS $ - - % $ 61,468 4.29 % $ 162,137 2.72 % $ 1,299,259 8.72 % $ 1,522,864 $ 1,673,353 7.90 %
CRT Securities
At March 31, 2020 , our total investment in CRT securities was $254.1 million ,
with a gross unrealized losses of $67.7 million , a weighted average yield of
3.86% and a weighted average time to maturity of 14.3 years. At December 31,
2019 , our total investment in CRT securities was $255.4 million , with a net
unrealized gain of $6.2 million , a weighted average yield of 5.85% and weighted
average time to maturity of 11.1 years.
During three months ended March 31, 2020 , we sold certain CRT securities for
$35.6 million , realizing losses of $2.0 million . The net income impact of these
sales, after reversal of previously unrealized gains on CRT securities on which
we had elected the fair value option, was a loss of approximately $2.5 million .
Subsequent to March 31, 2020 we significantly reduced our holdings of CRT
securities.
MSR-Related Assets
At March 31, 2020 and December 31, 2019 , we had $706.6 million and $1.2 billion ,
respectively, of term notes issued by SPVs that have acquired the rights to
receive cash flows representing the servicing fees and/or excess servicing
spread associated with certain MSRs. At March 31, 2020 , these term notes had an
amortized cost and fair value of $706.6 million , a weighted average yield of
4.74% and a weighted average term to maturity of 5.1 years. During three months
ended March 31, 2020 , we sold certain term notes for $136.8 million , realizing
losses of $24.6 million . During the last two weeks in March, market values of
our investments in these term notes fell significantly, primarily due to a lack
of liquidity driven by concerns related to the impact of the COVID-19 pandemic
on economic conditions generally and residential mortgage markets specifically.
This resulted in a number of our investments being in an unrealized loss
position at quarter end. As we had committed to a plan to sell these
investments, we were required to recognize an impairment charge in first quarter
2020 net income of approximately $280.8 million . Subsequent to March 31, 2020 we
significantly reduced our holdings of MSR-related assets.
At December 31, 2019 , these term notes had an amortized cost of $1.2 billion ,
gross unrealized losses of approximately $5.2 million , a weighted average yield
of 4.75% and a weighted average term to maturity of 5.3 years.
During the year ended December 31, 2019 , we participated in a loan where we
committed to lend $100.0 million of which approximately $33.8 million was drawn
at March 31, 2020 . At March 31, 2020 , the coupon paid by the borrower on the
drawn amount is 3.93%, the remaining term associated with the loan is 5 months
and the remaining commitment period on any undrawn amount is 5 months.
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Tax Considerations
Current period estimated taxable income
We estimate that for the three months endedMarch 31, 2020 , our taxable income was approximately$47.1 million . We have undistributed taxable income of approximately$64.7 million , or$0.14 per share. We have until the filing of our 2019 tax return (due not later thanOctober 15, 2020 ) to declare the distribution of any 2019 REIT taxable income not previously distributed.
Key differences between GAAP net income and REIT Taxable Income for
Our total Non-Agency MBS portfolio for tax differs from our portfolio reported for GAAP primarily due to the fact that for tax purposes: (i) certain of the MBS contributed to the VIEs used to facilitate MBS resecuritization transactions were deemed to be sold; and (ii) the tax basis of underlying MBS considered to be reacquired in connection with the unwind of such transactions became the fair value of such securities at the time of the unwind. For GAAP reporting purposes the underlying MBS that were included in these MBS resecuritization transactions were not considered to be sold. Similarly, for tax purposes the residential whole loans contributed to the VIE used to facilitate our second quarter 2017 loan securitization transaction were deemed to be sold for tax purposes, but not for GAAP reporting purposes. In addition, for our Non-Agency MBS and residential whole loan tax portfolios, potential timing differences arise with respect to the accretion of discount and amortization of premium into income as well as the recognition of realized losses for tax purposes as compared to GAAP. Further, use of fair value accounting for certain residential mortgage securities and residential whole loans for GAAP, but not for tax, also gives rise to potential timing differences. Consequently, our REIT taxable income calculated in a given period may differ significantly from our GAAP net income. The determination of taxable income attributable to Non-Agency MBS and residential whole loans is dependent on a number of factors, including principal payments, defaults, loss mitigation efforts and loss severities. In estimating taxable income for Non-Agency MBS and residential whole loans during the year, management considers estimates of the amount of discount expected to be accreted. Such estimates require significant judgment and actual results may differ from these estimates. Moreover, the deductibility of realized losses from Non-Agency MBS and residential whole loans and their effect on discount accretion and premium amortization are analyzed on an asset-by-asset basis and, while they will result in a reduction of taxable income, this reduction tends to occur gradually and, primarily for Non-Agency MBS, in periods after the realized losses are reported. In addition, for securitization and resecuritization transactions that were treated as a sale of the underlying MBS or residential whole loans for tax purposes, taxable gain or loss, if any, resulting from the unwind of such transactions is not recognized in GAAP net income.
Securitization transactions result in differences between GAAP net income and REIT Taxable Income
For tax purposes, depending on the transaction structure, a securitization and/or resecuritization transaction may be treated either as a sale or a financing of the underlying collateral. Income recognized from securitization and resecuritization transactions will differ for tax and GAAP purposes. For tax purposes, we own and may in the future acquire interests in securitization and/or resecuritization trusts, in which several of the classes of securities are or will be issued with original issue discount (or OID). As the holder of the retained interests in the trust, we generally will be required to include OID in our current gross interest income over the term of the applicable securities as the OID accrues. The rate at which the OID is recognized into taxable income is calculated using a constant rate of yield to maturity, with realized losses impacting the amount of OID recognized in REIT taxable income once they are actually incurred. For tax purposes, REIT taxable income may be recognized in excess of economic income (i.e., OID) or in advance of the corresponding cash flow from these assets, thereby affecting our dividend distribution requirement to stockholders. In addition, for securitization and/or resecuritization transactions that were treated as a sale of the underlying collateral for tax purposes, the unwinding of any such transaction will likely result in a taxable gain or loss that is likely not recognized in GAAP net income since securitization and resecuritization transactions are typically accounted for as financing transactions for GAAP purposes. The tax basis of underlying residential whole loans or MBS re-acquired in connection with the unwind of such transactions becomes the fair market value of such assets at the time of the unwind. Taxable income of consolidated TRS subsidiaries is included in GAAP income, but may not be included in REIT Taxable Income Net income generated by our TRS subsidiaries is included in consolidated GAAP net income, but may not be included in REIT taxable income in the same period. Net income ofU.S. domiciled TRS subsidiaries is included in REIT taxable income when distributed by the TRS. Net income of foreign domiciled TRS subsidiaries is included in REIT taxable income as if distributed to the REIT in the taxable year it is earned by the foreign domiciled TRS. 72
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Regulatory Developments
The U.S. Congress ,Federal Reserve ,U.S. Treasury ,Federal Deposit Insurance Corporation ,SEC and other governmental and regulatory bodies have taken and continue to consider additional actions in response to the 2007-2008 financial crisis. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act (or the Dodd-Frank Act) created a new regulator, an independent bureau housed within theFederal Reserve System known as theConsumer Financial Protection Bureau (or theCFPB ). TheCFPB has broad authority over a wide range of consumer financial products and services, including mortgage lending and servicing. One portion of the Dodd-Frank Act, the Mortgage Reform and Anti-Predatory Lending Act (or Mortgage Reform Act), contains underwriting and servicing standards for the mortgage industry, restrictions on compensation for mortgage loan originators, and various other requirements related to mortgage origination and servicing. In addition, the Dodd-Frank Act grants enforcement authority and broad discretionary regulatory authority to theCFPB to prohibit or condition terms, acts or practices relating to residential mortgage loans that theCFPB finds abusive, unfair, deceptive or predatory, as well as to take other actions that theCFPB finds are necessary or proper to ensure responsible affordable mortgage credit remains available to consumers. The Dodd-Frank Act also affects the securitization of mortgages (and other assets) with requirements for risk retention by securitizers and requirements for regulating rating agencies. Numerous regulations have been issued pursuant to the Dodd-Frank Act, including regulations regarding mortgage loan servicing, underwriting and loan originator compensation and others could be issued in the future. As a result, we are unable to fully predict at this time how the Dodd-Frank Act, as well as other laws or regulations that may be adopted in the future, will affect our business, results of operations and financial condition, or the environment for repurchase financing and other forms of borrowing, the investing environment for Agency MBS, Non-Agency MBS and/or residential mortgage loans, the securitization industry, Swaps and other derivatives. We believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to continue to increase the economic and compliance costs for participants in the mortgage and securitization industries, including us. In addition to the regulatory actions being implemented under the Dodd-Frank Act, onAugust 31, 2011 , theSEC issued a concept release under which it is reviewing interpretive issues related to Section 3(c)(5)(C) of the Investment Company Act. Section 3(c)(5)(C) excludes from the definition of "investment company" entities that are primarily engaged in, among other things, "purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." Many companies that engage in the business of acquiring mortgages and mortgage-related instruments seek to rely on existing interpretations of theSEC Staff with respect to Section 3(c)(5)(C) so as not to be deemed an investment company for the purpose of regulation under the Investment Company Act. In connection with the concept release, theSEC requested comments on, among other things, whether it should reconsider its existing interpretation of Section 3(c)(5)(C). To date the SEC has not taken or otherwise announced any further action in connection with the concept release. TheFederal Housing Finance Agency (or FHFA) and both houses ofCongress have discussed and considered separate measures intended to restructure theU.S. housing finance system and the operations of Fannie Mae and Freddie Mac.Congress may continue to consider legislation that would significantly reform the country's mortgage finance system, including, among other things, eliminating Freddie Mac and Fannie Mae and replacing them with a single new MBS insurance agency. Many details remain unsettled, including the scope and costs of the agencies' guarantee and their affordable housing mission, some of which could be addressed even in the absence of large-scale reform. OnMarch 27, 2019 ,President Trump issued a memorandum on federal housing finance reform that directed the Secretary of theTreasury to develop a plan for administrative and legislative reforms as soon as practicable to achieve the following housing reform goals: 1) ending the conservatorships of the Government-sponsored enterprises (or GSEs) upon the completion of specified reforms; 2) facilitating competition in the housing finance market; 3) establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability ofthe United States ; and 4) providing that the federal government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market. OnSeptember 5, 2019 , in response toPresident Trump's memorandum, theU.S. Department of the Treasury released a plan, developed in conjunction with the FHFA, theDepartment of Housing and Urban Development , and other government agencies, which includes legislative and administrative reforms to achieve each of these reform goals. At this point, it remains unclear whether any of these legislative or regulatory reforms will be enacted or implemented. The prospects for passage of any of these plans are uncertain, but the proposals underscore the potential for change to Fannie Mae and Freddie Mac. OnMay 20, 2020 , in connection with its stated intention to responsibly end the conservatorship of the GSEs, the FHFA issued a notice of proposed rulemaking and request for comments ("Proposed Rule") on a new regulatory capital framework for Fannie Mae and Freddie Mac. The Proposed Rule is a re-proposal of the regulatory capital framework originally proposed in 2018 that would have established new risk-based capital requirements for the GSEs and updated the minimum leverage requirements. The re-proposal contains enhancements to establish a post-conservatorship regulatory capital framework that ensures that each Enterprise operates in a safe and sound manner and is positioned to fulfill its statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle, in particular during periods of financial stress. Comments on the Proposed Rule are due 60 days after publication in in theFederal Register . 73
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While the likelihood of enactment of major mortgage finance system reform in the short term remains uncertain, it is possible that the adoption of any such reforms could adversely affect the types of assets we can buy, the costs of these assets and our business operations. As the FHFA and both houses ofCongress continue to consider various measures intended to dramatically restructure theU.S. housing finance system and the operations of Fannie Mae and Freddie Mac, we expect debate and discussion on the topic to continue throughout 2020, and we cannot be certain whether alternative plans may be proposed by theTrump Administration , if any housing and/or mortgage-related legislation will emerge from committee or be approved byCongress , or the extent to which administrative reforms may be implemented, and if so, what the effect would be on our business. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law. Among the provisions in this wide-ranging law are protections for homeowners experiencing financial difficulties due to the COVID-19 pandemic, including forbearance provisions and procedures. Borrowers with federally backed mortgage loans, regardless of delinquency status, may request loan forbearance for a six-month period, which could be extended for another six-month period if necessary. Federally backed mortgage loans are loans secured by first- or subordinate-liens on 1-4 family residential real property, including individual units of condominiums and cooperatives, which are insured or guaranteed pursuant to certain government housing programs, such as by theFederal Housing Administration ,Federal Housing Administration , orU.S. Department of Agriculture , or are purchased or securitized by Fannie Mae or Freddie Mac. The CARES Act also includes a temporary 60 day foreclosure moratorium that applies to federally backed mortgage loans, which lasted untilMay 17, 2020 . However, the moratorium has been extended toJune 30, 2020 by Fannie Mae,Federal Housing Administration ,Federal Housing Administration and theU.S. Department of Agriculture . Some states and local jurisdictions have also implemented moratoriums on foreclosures. 74
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Results of Operations
Quarter Ended
General
Unprecedented disruption in residential mortgage markets, due to concerns related to the COVID-19 pandemic, resulted in us generating a net loss available to our common stock and participating securities for the first quarter of 2020 of$914.2 million , or$2.02 per basic and diluted common share, compared to net income available to common stock and participating securities of$85.1 million , or$0.19 per basic and diluted common share, for the first quarter of 2019. The decrease in net income available to common stock and participating securities primarily reflects lower Other income, which was driven by impairment losses on securities available-for-sale , net realized losses on sales of residential mortgage securities and residential whole loans, unrealized losses on residential mortgage securities measured at fair value through earnings, net losses on our residential whole loans measured at fair value through earnings and impairments charges recorded on certain other assets. In addition, under the new accounting standard for estimating credit losses that we were required to adopt during the first quarter of 2020, we recorded a provision for credit losses on residential whole loans held at carrying value of$74.9 million . We also recorded a valuation allowance of$70.2 million to adjust the carrying value of certain residential whole loans to their estimated fair value as these loans were designated as being held-for-sale atMarch 31, 2020 .
Net Interest Income
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income depends primarily upon the volume of interest-earning assets and interest-bearing liabilities and the corresponding interest rates earned or paid. Our net interest income varies primarily as a result of changes in interest rates, the slope of the yield curve (i.e., the differential between long-term and short-term interest rates), borrowing costs (i.e., our interest expense) and prepayment speeds on our investments. Interest rates and CPRs (which measure the amount of unscheduled principal prepayment on a bond or loan as a percentage of its unpaid balance) vary according to the type of investment, conditions in the financial markets and other factors, none of which can be predicted with any certainty.
The changes in average interest-earning assets and average interest-bearing liabilities and their related yields and costs are discussed in greater detail below under "Interest Income" and "Interest Expense."
For the first quarter of 2020, our net interest spread and margin were 1.82% and 2.20%, respectively, compared to a net interest spread and margin of 1.98% and 2.41%, respectively, for the first quarter of 2019. Our net interest income of$61.7 million for the first quarter of 2020 was largely unchanged from the first quarter of 2019. For the first quarter of 2020, net interest income for our residential mortgage securities portfolio decreased by approximately$16.9 million compared to the first quarter of 2019, primarily due to lower average amounts invested in these securities due primarily to portfolio runoff and sales, lower yields earned on our Agency MBS and CRT securities, partially offset by lower funding costs and higher yields earned on our RPL/NPL MBS and Legacy Agency MBS portfolios. In addition, we incurred approximately$3.9 million interest expense on our Convertible Senior Notes issued during the first quarter of 2020. The decrease in net interest income was offset by higher net interest income from residential whole loans held at carrying value, MSR-related assets and other interest-earning assets of approximately$19.6 million compared to the first quarter of 2019, primarily due to higher average amounts invested in these assets. In addition, net interest income also includes$9.7 million of interest expense associated with residential whole loans held at fair value, reflecting a$1.2 million decrease in borrowing costs related to these investments compared to the first quarter of 2019. Coupon interest income received from residential whole loans held at fair value is presented as a component of the total income earned on these investments and therefore is included in Other Income, net rather than net interest income. 75
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Analysis of Net Interest Income
The following table sets forth certain information about the average balances of our assets and liabilities and their related yields and costs for the three months endedMarch 31, 2020 and 2019. Average yields are derived by dividing annualized interest income by the average amortized cost of the related assets, and average costs are derived by dividing annualized interest expense by the daily average balance of the related liabilities, for the periods shown. The yields and costs include premium amortization and purchase discount accretion which are considered adjustments to interest rates. Three Months Ended March 31, 2020 2019 Average Average (Dollars in Thousands) Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Assets: Interest-earning assets: Residential whole loans, at carrying value (1)$ 6,584,538 $ 83,486 5.07 %$ 3,369,301 $ 49,620 5.89 % Agency MBS (2) 1,527,036 8,861 2.32 2,667,573 18,441 2.77 Legacy Non-Agency MBS (2) 1,011,810 26,688 10.55 1,432,014 37,416 10.45 RPL/NPL MBS (2) 449,789 5,863 5.21 1,353,954 16,585 4.90 Total MBS 2,988,635 41,412 5.54 5,453,541 72,442 5.31 CRT securities (2) 300,069 2,962 3.95 441,528 6,200 5.62 MSR-related assets (2) 1,197,956 14,207 4.74 788,705 10,620 5.39 Cash and cash equivalents (3) 206,899 486 0.94 156,306 764 1.96 Other interest-earning assets 129,947 2,907 8.95 89,648 1,306 5.83 Total interest-earning assets 11,408,044 145,460 5.10 10,299,029 140,952 5.47 Total non-interest-earning assets 2,277,842 2,493,634 Total assets$ 13,685,886 $ 12,792,663 Liabilities and stockholders' equity: Interest-bearing liabilities: Total repurchase agreements (4)$ 9,233,808 $ 72,698 3.11 %$ 8,282,621 $ 70,809 3.42 % Securitized debt 558,007 5,161 3.66 675,678 6,206 3.67 Convertible Senior Notes 224,071 3,888 6.94 - - - Senior Notes 96,866 2,012 8.31 96,819 2,011 8.31 Total interest-bearing liabilities 10,112,752 83,759 3.28 9,055,118 79,026 3.49 Total non-interest-bearing liabilities 152,941 320,586 Total liabilities 10,265,693 9,375,704 Stockholders' equity 3,420,193 3,416,959 Total liabilities and stockholders' equity$ 13,685,886 $ 12,792,663 Net interest income/net interest rate spread (5)$ 61,701 1.82 %$ 61,926 1.98 % Net interest-earning assets/net interest margin (6)$ 1,295,292 2.20 %$ 1,243,911 2.41 %
(1) Excludes residential whole loans held at fair value that are reported as a
component of total non-interest-earning assets. Includes Non-QM loans
held-for-sale with a net carrying value of
(2) Yields presented throughout this Quarterly Report on Form 10-Q are calculated
using average amortized cost data for securities which excludes unrealized
gains and losses and includes principal payments receivable on securities.
For GAAP reporting purposes, purchases and sales are reported on the trade
date. Average amortized cost data used to determine yields is calculated
based on the settlement date of the associated purchase or sale as interest
income is not earned on purchased assets and continues to be earned on sold
assets until settlement date.
(3) Includes average interest-earning cash, cash equivalents and restricted cash.
(4) Average cost of repurchase agreements includes the cost of Swaps allocated
based on the proportionate share of the overall estimated weighted average
portfolio duration.
(5) Net interest rate spread reflects the difference between the yield on average
interest-earning assets and average cost of funds.
(6) Net interest margin reflects annualized net interest income divided by
average interest-earning assets.
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Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
(yield/cost) and changes in the volume (average balance) of interest-earning
assets and interest-bearing liabilities have affected our interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) the changes attributable to changes in volume
(changes in average balance multiplied by prior rate); (ii) the changes
attributable to changes in rate (changes in rate multiplied by prior average
balance); and (iii) the net change. The changes attributable to the combined
impact of volume and rate have been allocated proportionately, based on absolute
values, to the changes due to rate and volume.
Three Months Ended March 31, 2020
Compared to
Three Months Ended March 31, 2019
Total Net
Increase/(Decrease) due to Change in
Interest
(In Thousands) Volume Rate Income/Expense
Interest-earning assets:
Residential whole loans, at carrying value (1) $ 41,604 $ (7,738 ) $ 33,866
Agency MBS (6,960 ) (2,620 ) (9,580 )
Legacy Non-Agency MBS (11,078 ) 350 (10,728 )
RPL/NPL MBS (11,712 ) 990 (10,722 )
CRT securities (1,680 ) (1,558 ) (3,238 )
MSR-related assets 4,976 (1,389 ) 3,587
Cash and cash equivalents 198 (476 ) (278 )
Other interest-earning assets 730 871 1,601
Total net change in income from
interest-earning assets $ 16,078 $ (11,570 ) $ 4,508
Interest-bearing liabilities: Residential whole loan at carrying value repurchase agreements$ 23,874 $ (4,722 ) $ 19,152 Residential whole loan at fair value repurchase agreements 905 (1,286 ) (381 ) Agency repurchase agreements (6,096 ) (126 ) (6,222 ) Legacy Non-Agency repurchase agreements (2,242 ) (543 ) (2,785 ) RPL/NPL MBS repurchase agreements (4,958 ) (1,908 ) (6,866 ) CRT securities repurchase agreements (820 ) (721 ) (1,541 ) MSR-related assets repurchase agreements 2,494 (1,818 ) 676 Other repurchase agreements (136 ) (8 ) (144 ) Securitized debt (1,021 ) (24 ) (1,045 ) Convertible Senior Notes 3,888 - 3,888 Senior Notes 1 - 1 Total net change in expense from interest-bearing liabilities$ 15,889 $ (11,156 ) $ 4,733 Net change in net interest income $ 189 $
(414 ) $ (225 )
(1) Excludes residential whole loans held at fair value which are reported as a
component of non-interest-earning assets. Includes Non-QM loans held-for-sale
with a net carrying value of $895.3 million at March 31, 2020 .
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The following table presents certain quarterly information regarding our net
interest spread and net interest margin for the quarterly periods presented:
Total Interest-Earning Assets and Interest-
Bearing Liabilities
Net Interest Net Interest
Quarter Ended Spread (1) Margin (2)
March 31, 2020 1.82 % 2.20 %
December 31, 2019 2.33 2.68
September 30, 2019 1.82 2.19
June 30, 2019 1.90 2.29
March 31, 2019 1.98 2.41
(1) Reflects the difference between the yield on average interest-earning assets
and average cost of funds.
(2) Reflects annualized net interest income divided by average interest-earning
assets.
The following table presents the components of the net interest spread earned on
our Residential whole loans, at carrying value for the quarterly periods
presented:
Total Residential Whole Loans, at Carrying
Purchased Performing Loans Purchased Credit Deteriorated Loans Value
Net Net Cost of Net
Net Cost of Interest Net Cost of Interest Net Funding Interest
Quarter Ended Yield (1) Funding (2) Spread (3) Yield (1) Funding (2) Spread (3) Yield (1) (2) Spread (3)
March 31, 2020 5.10 % 3.44 % 1.66 % 4.84 % 3.39 % 1.45 % 5.07 % 3.43 % 1.64 %
December 31, 2019 5.24 3.61 1.63 5.79 3.51 2.28 5.31 3.59 1.72
September 30, 2019 5.55 3.92 1.63 5.76 3.79 1.97 5.58 3.90 1.68
June 30, 2019 5.71 4.22 1.49 5.75 3.98 1.77 5.72 4.17 1.55
March 31, 2019 5.93 4.27 1.66 5.77 4.06 1.71 5.89 4.21 1.68
(1) Reflects annualized interest income on Residential whole loans, at carrying
value divided by average amortized cost of Residential whole loans, at
carrying value. Excludes servicing costs.
(2) Reflects annualized interest expense divided by average balance of repurchase
agreements and securitized debt. Total Residential whole loans, at carrying
value cost of funding includes 3, 5, 3, 5, and 6 basis points associated with
Swaps to hedge interest rate sensitivity on these assets for the quarters
ended
and
(3) Reflects the difference between the net yield on average Residential whole
loans, at carrying value and average cost of funds on Residential whole
loans, at carrying value.
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The following table presents the components of the net interest spread earned on
our Agency MBS, Legacy Non-Agency MBS and RPL/NPL MBS for the quarterly periods
presented:
Agency MBS Legacy Non-Agency MBS RPL/NPL MBS Total MBS
Net Net Interest Net Net Interest Net Net Interest Net Net Interest
Yield Cost of Rate Yield Cost of Rate Yield Cost of Rate Yield Cost of Rate
Quarter Ended (1) Funding (2) Spread (3) (1) Funding (2) Spread (3) (1) Funding (2) Spread (3) (1) Funding (2) Spread (3)
March 31, 2020 2.32 % 2.51 % (0.19 )% 10.55 % 3.13 % 7.42 % 5.21 % 2.56 % 2.65 % 5.54 % 2.78 % 2.76 %
December 31, 2019 2.38 2.33 0.05 14.76 3.18 11.58 5.17 2.78 2.39 6.76 2.70 4.06
September 30, 2019 2.32 2.47 (0.15 ) 10.32 3.24 7.08 5.18 3.18 2.00 5.28 2.86 2.42
June 30, 2019 2.50 2.56 (0.06 ) 11.30 3.30 8.00 4.98 3.39 1.59 5.45 2.95 2.50
March 31, 2019 2.77 2.53 0.24 10.45 3.30 7.15 4.90 3.43 1.47 5.31 2.95 2.36
(1) Reflects annualized interest income on MBS divided by average amortized cost
of MBS.
(2) Reflects annualized interest expense divided by average balance of repurchase
agreements, including the cost of Swaps allocated based on the proportionate
share of the overall estimated weighted average portfolio duration and
securitized debt. Agency MBS cost of funding includes 78, 36, 1, (9), and
(13) basis points and Legacy Non-Agency MBS cost of funding includes 52, 24,
1, (14), and (20) basis points associated with Swaps to hedge interest rate
sensitivity on these assets for the quarters ended
31, 2019,
(3) Reflects the difference between the net yield on average MBS and average cost
of funds on MBS.
Interest Income
Interest income on our residential whole loans held at carrying value increased
by $33.9 million , or 68.3%, for the first quarter of 2020, to $83.5 million
compared to $49.6 million for the first quarter of 2019. This increase primarily
reflects a $3.2 billion increase in the average balance of this portfolio to
$6.6 billion for the first quarter of 2020 from $3.4 billion for the first
quarter of 2019 partially offset by a decrease in the yield (excluding servicing
costs) to 5.07% for the first quarter of 2020 from 5.89% for the first quarter
of 2019.
Interest income on our Agency MBS for the first quarter of 2020 decreased by
$9.6 million , or 51.9%, to $8.9 million from $18.4 million for the first quarter
of 2019. This decrease primarily reflects a $1.1 billion decrease in the
average amortized cost of our Agency MBS portfolio, due primarily to portfolio
sales and run-off, to $1.5 billion for the first quarter of 2020 from $2.7
billion for the first quarter of 2019 and a decrease in the net yield on our
Agency MBS to 2.32% for the first quarter of 2020 from 2.77% for the first
quarter of 2019. In addition, for the first quarter of 2020, our Agency MBS
portfolio experienced a 12.6% CPR and we recognized $4.8 million of net premium
amortization compared to a CPR of 13.6% and $6.2 million of net premium
amortization for the first quarter of 2019. At March 31, 2020 , we had net
purchase premiums on our Agency MBS of $18.9 million , or 3.5% of current par
value, compared to net purchase premiums of $62.8 million , or 3.9% of par value,
at December 31, 2019 .
Interest income on our Non-Agency MBS decreased $21.5 million , or 39.7%, for the
first quarter of 2020 to $32.6 million compared to $54.0 million for the first
quarter of 2019. This decrease is primarily due to portfolio run-off and sales
and resulted in a decrease in the average amortized cost of our Non-Agency MBS
portfolio of $1.3 billion , or 47.5%, to $1.5 billion for the first quarter of
2020 from $2.8 billion for the first quarter of 2019.
Interest income on our Legacy Non-Agency MBS for the first quarter of 2020
decreased $10.7 million to $26.7 million from $37.4 million for the first
quarter of 2019. This decrease primarily reflects a $420.2 million decrease in
the average amortized cost of our Legacy Non-Agency MBS portfolio, due primarily
to portfolio sales and run-off, to $1.0 billion for the first quarter of 2020
from $1.4 billion for the first quarter of 2019. This decrease more than offset
the higher yields generated on our Legacy Non-Agency portfolio, which were
10.55% for the first quarter of 2020 compared to 10.45% for the first quarter of
2019.
Interest income on our RPL/NPL MBS portfolio decreased $10.7 million to $5.9
million for the first quarter of 2020 from $16.6 million for the first quarter
of 2019. This decrease primarily reflects a $904.2 million decrease in the
average amortized cost of this portfolio, due primarily to portfolio runoff and
sales, to $449.8 million for the first quarter of 2020 from $1.4 billion the
first quarter of 2019, partially offset by an increase in the net yield on our
RPL/NPL MBS portfolio to 5.21% for the first quarter of 2020 compared to 4.90%
for the first quarter of 2019. The increase in the net yield primarily reflects
an increase in the average coupon yield to 4.96% for the first quarter of 2020
from 4.86% for the first quarter of 2019.
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The following table presents the coupon yield and net yields earned on our Agency MBS, Legacy Non-Agency MBS and RPL/NPL MBS and weighted average CPRs experienced for such MBS for the quarterly periods presented:
Agency MBS Legacy Non-Agency MBS RPL/NPL MBS
3 Month 3 Month 3 Month
Average CPR Average CPR Average BondQuarter Ended Coupon Yield (1) Net Yield (2) (3) Coupon Yield (1) Net Yield (2) (3) Coupon Yield (1) Net Yield (2) CPR (4) March 31, 2020 3.57 % 2.32 % 12.6 % 6.83 % 10.55 % 13.6 % 4.96 % 5.21 % 34.4 % December 31, 2019 3.63 2.38 18.1 6.88 14.76 16.4 5.07 5.17 18.8 September 30, 2019 3.73 2.32 18.6 6.92 10.32 14.9 5.18 5.18 18.2 June 30, 2019 3.76 2.50 18.3 6.91 11.30 15.7 4.98 4.98 16.1 March 31, 2019 3.69 2.77 13.6 6.78 10.45 12.7 4.86 4.90 11.6
(1) Reflects the annualized coupon interest income divided by the average
amortized cost. The discounted purchase price on Legacy Non-Agency MBS causes
the coupon yield to be higher than the pass-through coupon interest rate.
(2) Reflects annualized interest income on MBS divided by average amortized cost
of MBS.
(3) 3 month average CPR weighted by positions as of the beginning of each month
in the quarter.
(4) All principal payments are considered to be prepayments for CPR purposes.
Interest income on our MSR-related assets increased by$3.6 million to$14.2 million for the first quarter of 2020 compared to$10.6 million for the first quarter of 2019. This increase primarily reflects a$409.3 million increase in the average balance of these investments for the first quarter of 2020 to$1.2 billion compared to$788.7 million for the first quarter of 2019 partially offset by a decrease in the yield to 4.74% for the first quarter of 2020 from 5.39% for the first quarter of 2019.
Interest Expense
Our interest expense for the first quarter of 2020 increased by$4.7 million , or 6.0%, to$83.8 million from$79.0 million for the first quarter of 2019. This increase primarily reflects an increase in our average borrowings to finance our residential whole loans held at carrying value and MSR-related assets. In addition we incurred interest expense of$3.9 million on our Convertible Senior Notes issued during the first quarter of 2020. The impact of these items on our interest expense was partially offset by a decrease in our average repurchase agreement borrowings to finance our residential mortgage securities portfolio and a decrease in financing rates on our repurchase agreement financings. The effective interest rate paid on our borrowings decreased to 3.28% for the quarter endedMarch 31, 2020 from 3.49% for the quarter endedMarch 31, 2019 . Payments made and/or received on our Swaps designated as hedges for accounting purposes are a component of our borrowing costs and resulted in interest expense of$3.4 million , or 31 basis points, for the first quarter of 2020, as compared to interest income of$1.2 million , or 5 basis points, for the first quarter of 2019. The weighted average fixed-pay rate on our Swaps designated as hedges decreased to 2.09% for the quarter endedMarch 31, 2020 from 2.31% for the quarter ended andMarch 31, 2019 . The weighted average variable interest rate received on our Swaps designated as hedges decreased to 1.65% for the quarter endedMarch 31, 2020 from 2.49% for the quarter endedMarch 31, 2019 .
Provision for Credit and Valuation Losses on Residential Whole Loans Held at Carrying Value and Held-for-Sale
For the first quarter of 2020, we recorded a provision for credit and valuation losses on residential whole loans held at carrying value and held-for-sale of$150.8 million compared to$805,000 for the first quarter of 2019. As previously discussed, onJanuary 1, 2020 , we adopted the new accounting standard addressing the measurement of credit losses on financial instruments (CECL). With respect to our residential whole loans held at carrying value, CECL requires that reserves for credit losses are estimated at the reporting date based on life of loan expected cash flows, including anticipated prepayments and reasonable and supportable forecasts of future economic conditions. While the adjustments recorded at the transition date to adopt CECL did not have a material impact on our financial position, given the anticipated impact of the COVID-19 pandemic on expected economic conditions for the short to medium term, estimates of credit losses recorded under CECL for the first quarter of 2020 are significantly higher than would have been recorded under prior accounting standards, where reserves for credit losses were recorded only when assessed as being incurred. For the first quarter of 2020, a provision for credit losses of$74.9 million was recorded on residential whole loans held at carrying value. In addition, a valuation allowance to reduce the carrying value of Non-QM loans designated as held-for-sale at quarter-end of$70.2 million was recorded. This valuation allowance is included, along with CECL credit loss estimates, in the provision for credit losses in our income statement. 80
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Table of Contents Other (Loss)/Income, net For the first quarter of 2020, Other Loss, net was$790.8 million compared to Other Income, net of$51.2 million for the first quarter of 2019. The components of Other (Loss)/Income, net for the first quarter of 2020 and 2019 are summarized in the table below: Quarter EndedMarch 31 , (In Thousands) 2020
2019
Impairment and other losses on securities available-for-sale and other assets $ (419,651
) $ - Net realized (loss)/gain on sales of residential mortgage securities and residential whole loans
(238,380 ) 24,609 Net unrealized (loss)/gain on residential mortgage securities measured at fair value through earnings
(77,961 ) 8,672 Net (loss)/gain on residential whole loans measured at fair value through earnings
(52,760 ) 25,267 Net loss on Swaps not designated as hedges for accounting purposes
(4,239 ) (8,944 ) Liquidations gains on Purchased Credit Deteriorated Loans and other loan related income
1,429 2,807
Other 799 (1,242 ) Total Other (Loss)/Income, net$ (790,763 ) $ 51,169 Operating and Other Expense For the first quarter of 2020, we had compensation and benefits and other general and administrative expenses of$13.5 million , or 1.58% of average equity, compared to$13.2 million , or 1.55% of average equity, for the first quarter of 2019. Compensation and benefits expense increased by approximately$345,000 to$8.9 million for the first quarter of 2020, compared to$8.6 million for the first quarter of 2019, primarily reflecting higher expense in connection with long term incentive awards in the current year period. Our other general and administrative expenses were essentially flat, decreasing by$70,000 to$4.6 million for the quarter endedMarch 31, 2020 . In addition, professional services and other costs of$4.5 million were incurred during the quarter related to negotiating forbearance arrangements with our lenders, which was required due to the impact of the market disruptions caused by concerns associated with the COVID-19 pandemic. Operating and Other Expense for the first quarter of 2020 also includes$11.2 million of loan servicing and other related operating expenses related to our residential whole loan activities. These expenses increased compared to the prior year period by approximately$930,000 , or 9.1%, primarily due to increases in non-recoverable advances related to our REO portfolio, partially offset by lower servicing fees across all of our residential whole loan portfolios. 81
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Selected Financial Ratios
The following table presents information regarding certain of our financial ratios at or for the dates presented:
Return on Total Average Book Value Economic Book
Return on Average Total Stockholders' Dividend Leverage per Share Value per Share
Average Total Stockholders' Equity to Total Payout Multiple of Common of Common
At or for the Quarter Ended Assets (1) Equity (2) Average Assets (3) Ratio (4) (5) Stock (6) Stock (7)
March 31, 2020 (26.72 )% (106.31 )% 24.99 % 0.00 3.4 $ 4.34 $ 4.09
December 31, 2019 2.92 11.90 25.48 0.95 3.0 7.04 7.44
September 30, 2019 2.79 11.24 25.80 1.00 2.8 7.09 7.41
June 30, 2019 2.74 10.91 26.13 1.00 2.8 7.11 7.40
March 31, 2019 2.66 10.40 26.71 1.05 2.7 7.11 7.32
(1) Reflects annualized net income available to common stock and participating
securities divided by average total assets.
(2) Reflects annualized net income divided by average total stockholders' equity.
(3) Reflects total average stockholders' equity divided by total average assets.
(4) Reflects dividends declared per share of common stock divided by earnings per
share.
(5) Represents the sum of borrowings under repurchase agreements, securitized
debt, payable for unsettled purchases, Convertible Senior Notes and Senior
Notes divided by stockholders' equity.
(6) Reflects total stockholders' equity less the preferred stock liquidation
preference divided by total shares of common stock outstanding.
(7) "Economic book value" is a non-GAAP financial measure of our financial
position. To calculate our Economic book value, our portfolios of Residential
whole loans at carrying value are adjusted to their fair value, rather than
the carrying value that is required to be reported under the GAAP accounting
model applied to these loans. For additional information please refer to page
82 under the heading "Economic Book Value".
Reconciliation of GAAP and Non-GAAP Financial Measures
Economic Book Value
"Economic book value" is a non-GAAP financial measure of our financial position.
To calculate our Economic book value, our portfolios of Residential whole loans
at carrying value are adjusted to their fair value, rather than the carrying
value that is required to be reported under the GAAP accounting model applied to
these loans. This adjustment is also reflected in the table below in our end of
period stockholders' equity. Management considers that Economic book value
provides investors with a useful supplemental measure to evaluate our financial
position as it reflects the impact of fair value changes for all of our
residential mortgage investments, irrespective of the accounting model applied
for GAAP reporting purposes. Economic book value does not represent and should
not be considered as a substitute for Stockholders' Equity, as determined in
accordance with GAAP, and our calculation of this measure may not be comparable
to similarly titled measures reported by other companies.
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The following table provides a reconciliation of our GAAP book value per common share to our non-GAAP Economic book value per common share as of the quarterly periods below: (In Thousands, Except Per September 30, Share Amounts) March 31, 2020 December 31, 2019 2019 June 30, 2019 March 31, 2019 GAAP Total Stockholders' Equity$ 2,440.7 $ 3,384.0$ 3,403.4 $ 3,403.4 $ 3,404.5 Preferred Stock, liquidation preference (475.0 ) (200.0 ) (200.0 ) (200.0 ) (200.0 ) GAAP Stockholders' Equity for book value per common share 1,965.7 3,184.0 3,203.4 3,203.4 3,204.5
Adjustments:
Fair value adjustment to Residential whole loans, at carrying value (113.5 ) 182.4 145.8 131.2 92.1 Stockholders' Equity including fair value adjustment to Residential whole loans, at carrying value (Economic book value)$ 1,852.2 $ 3,366.4 $
3,349.2
GAAP book value per common share $ 4.34 $ 7.04$ 7.09 $ 7.11 $ 7.11 Economic book value per common share $ 4.09 $ 7.44$ 7.41 $ 7.40 $ 7.32 Number of shares of common stock outstanding 453.1 452.4 451.7 450.6 450.5
Liquidity and Capital Resources
General
Our principal sources of cash generally consist of borrowings under repurchase agreements and other collateralized financings, payments of principal and interest we receive on our investment portfolio, cash generated from our operating results and, to the extent such transactions are entered into, proceeds from capital market and structured financing transactions. Our most significant uses of cash are generally to pay principal and interest on our financing transactions, to purchase residential mortgage assets, to make dividend payments on our capital stock, to fund our operations, to meet margin calls and to make other investments that we consider appropriate. We seek to employ a diverse capital raising strategy under which we may issue capital stock and other types of securities. To the extent we raise additional funds through capital market transactions, we currently anticipate using the net proceeds from such transactions to acquire additional residential mortgage-related assets, consistent with our investment policy, and for working capital, which may include, among other things, the repayment of our financing transactions. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have available for issuance an unlimited amount (subject to the terms and limitations of our charter) of common stock, preferred stock, depositary shares representing preferred stock, warrants, debt securities, rights and/or units pursuant to our automatic shelf registration statement and, atMarch 31, 2020 , we had approximately 8.8 million shares of common stock available for issuance pursuant to our DRSPP shelf registration statement. During the three months endedMarch 31, 2020 , we issued 106,949 shares of common stock through our DRSPP, raising net proceeds of approximately$691,979 . During the three months endedMarch 31, 2020 , we did not sell any shares of common stock through the ATM Program. OnMarch 2, 2020 , we completed the issuance of 11.0 million shares of our Series C Preferred Stock with a par value of$0.01 per share, and a liquidation preference of$25.00 per share plus accrued and unpaid dividends, in an underwritten public offering. The total net proceeds we received from the offering were approximately$266.0 million , after deducting offering expenses and the underwriting discount. 83
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Impact of COVID-19 Pandemic; Repurchase Obligations
As discussed above under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Senior Secured Financing and Exit from Forbearance", due to the severe market volatility and price dislocations resulting from concerns driven by the COVID-19 pandemic, inMarch 2020 we were unable to meet all of our margin call obligations with respect to our repurchase obligations. As a result of these events, we initiated forbearance discussions with our financing counterparties and entered into a series of Forbearance Agreements (the Initial FBA, the Second FBA and the Third FBA) whereby certain of our counterparties agreed to forbear from exercising their rights and remedies with respect to an event of default under the applicable financing arrangement for an agreed upon period, including selling collateral to enforce margin calls. The Third FBA was set to expire onJune 26, 2020 . OnJune 15, 2020 , we and certain of our wholly owned subsidiaries entered into a credit agreement for a$500 million Term Loan Facility. In connection with, and conditioned on, the funding of the Term Loan Facility, the Company also executed onJune 15, 2020 a commitment letter to enter into a non-mark-to-market term loan facility for an aggregate amount of up to$1,650,000,000 (the "Asset Level Debt Facility"). Further details related to the Term Loan Facility and the Asset Level Debt Facility are discussed in "Note 16. Subsequent Events" in our interim financial statements as of and for the three months endedMarch 31, 2020 . Following closing and funding of these transactions, we expect to execute a Reinstatement Agreement with our repurchase agreement counterparties that will terminate the Third FBA and provide for our exit from forbearance. Our borrowings under repurchase agreements are uncommitted and renewable at the discretion of our lenders and, as such, our lenders could determine to reduce or terminate our access to future borrowings at virtually any time. The terms of the repurchase transaction borrowings under our master repurchase agreements, as such terms relate to repayment, margin requirements and the segregation of all securities that are the subject of repurchase transactions, generally conform to the terms contained in the standard master repurchase agreement published by theSecurities Industry and Financial Markets Association (orSIFMA ) or the global master repurchase agreement published bySIFMA and theInternational Capital Market Association . In addition, each lender typically requires that we include supplemental terms and conditions to the standard master repurchase agreement. Typical supplemental terms and conditions, which differ by lender, may include changes to the margin maintenance requirements, required haircuts (as defined below), purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default and setoff provisions. With respect to margin maintenance requirements for repurchase agreements secured by harder to value assets, such as residential whole loans, Non-Agency MBS and MSR-related assets, margin calls are typically determined by our counterparties based on their assessment of changes in the fair value of the underlying collateral and in accordance with the agreed upon haircuts specified in the transaction confirmation with the counterparty. We address margin call requests in accordance with the required terms specified in the applicable repurchase agreement and such requests are typically satisfied by posting additional cash or collateral on the same business day. We review margin calls made by counterparties and assess them for reasonableness by comparing the counterparty valuation against our valuation determination. When we believe that a margin call is unnecessary because our assessment of collateral value differs from the counterparty valuation, we typically hold discussions with the counterparty and are able to resolve the matter. In the unlikely event that resolution cannot be reached, we will look to resolve the dispute based on the remedies available to us under the terms of the repurchase agreement, which in some instances may include the engagement of a third-party to review collateral valuations. For certain other agreements that do not include such provisions, we could resolve the matter by substituting collateral as permitted in accordance with the agreement or otherwise request the counterparty to return the collateral in exchange for cash to unwind the financing. 84
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The following tables present information regarding the margin requirements, or the percentage amount by which the collateral value is contractually required to exceed the loan amount (this difference is referred to as the "haircut"), on our repurchase agreements atMarch 31, 2020 andDecember 31, 2019 : Weighted Average At March 31, 2020 Haircut Low High Repurchase agreement borrowings secured by: Residential whole loans (1) 19.17 % 8.00 % 50.00 % Agency MBS 4.99 4.00 6.00 Legacy Non-Agency MBS 21.60 15.00 50.00 RPL/NPL MBS 20.30 15.00 25.00 CRT securities 20.89 12.50 35.00 MSR-related assets 22.11 20.00 30.00 Other 21.88 20.00 35.00 Weighted Average At December 31, 2019 Haircut Low High Repurchase agreement borrowings secured by: Residential whole loans (2) 20.07 % 8.00 % 50.00 % Agency MBS 4.46 3.00 5.00 Legacy Non-Agency MBS 20.27 15.00 35.00 RPL/NPL MBS 21.52 15.00 30.00 CRT securities 18.84 12.50 25.00 MSR-related assets 21.18 20.00 30.00 Other 22.01 20.00 35.00
(1) At
of
securitization transactions that are eliminated in consolidation. Such
repurchase agreements had a weighted average haircut of 29.7%, a minimum
haircut of 15.0%, and a maximum haircut of 50.0%.
(2) At
balance of
our loan securitization transactions that are eliminated in consolidation.
Such repurchase agreements had a weighted average haircut of 29.7%, a minimum
haircut of 15.0%, and a maximum haircut of 50.0%.
During the first three months of 2020, the weighted average haircut requirements
for the respective underlying collateral types for our repurchase agreements
have remained fairly consistent compared to the end of 2019.
Prior to the onset of COVID-19-related market disruptions and entry into the
several forbearance agreements with our repurchase agreement counterparties,
funding for our residential mortgage investments was available to us at
generally attractive market terms from multiple counterparties. Typically, due
to the risks inherent in credit sensitive residential mortgage investments,
repurchase agreement funding involving such investments is available at terms
requiring higher collateralization and higher interest rates than repurchase
agreement funding secured by Agency MBS. In connection with our preparing for an
exit from forbearance we are currently renegotiating the terms of our financing
arrangements with certain of our existing repurchase agreement counterparties.
While the final terms of any renegotiated agreements are not yet known and there
can be no assurance that we will be able to reach definitive agreements with our
counterparties through such ongoing negotiations, the revised terms will likely
include changes to terms that exist in our current financing agreements,
including increasing the term to maturity, higher haircut levels (and
consequently lower advance rates) and higher interest rate charged and changes
to the types of collateral accepted and the operation of margin requirements,
including collateral mark-to-market provisions.
We expect that we will continue to pledge residential mortgage assets as part of
certain of our ongoing financing arrangements. Our current financing
agreements, and we anticipate that certain of our future arrangements, will
require us to pledge additional collateral in the event the market value of the
assets pledged decreases in order maintain the lenders' contractually specified
collateral cushion, which is measured as the difference between the loan amount
and the market value of the asset pledged as collateral. As we experienced in
the first quarter of 2020, when the value of our residential mortgage assets
pledged as collateral experienced rapid decreases, margin calls under our
repurchase agreement financing arrangements could increase, causing an
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adverse change in our liquidity position. Additionally, if one or more of our financing counterparties chose not to provide ongoing funding, our ability to finance our long-maturity assets would decline or otherwise become available on possibly less advantageous terms. Further, when liquidity tightens, our repurchase agreement counterparties may increase their required collateral cushion (or margin) requirements on new financings, including repurchase agreement financings that we roll with the same counterparty, thereby reducing our ability to use leverage. Access to financing may also be negatively impacted by the ongoing volatility in financial markets, thereby potentially adversely impacting our current or future lenders' ability or willingness to provide us with financing. In addition, there is no assurance that favorable market conditions will exist to permit us to consummate additional securitization transactions if we determine to seek that form of financing. Our ability to meet future margin calls will be affected by our ability to use cash or obtain financing from unpledged collateral, the amount of which can vary based on the market value of such collateral, our cash position and margin requirements. Our cash position fluctuates based on the timing of our operating, investing and financing activities and is managed based on our anticipated cash needs. (See our Consolidated Statements of Cash Flows, included under Item 1 of this Quarterly Report on Form 10-Q and "Interest Rate Risk" included under Item 3 of this Quarterly Report on Form 10-Q.) AtMarch 31, 2020 , we had a total of$8.8 billion of residential whole loans, MBS, CRT securities, MSR-related assets and other interest-earning assets and$216.9 million of restricted cash pledged against our repurchase agreements and/or Swaps. AtMarch 31, 2020 , we had access to various sources of liquidity which we estimated exceeded$176.1 million . This amount includes (i)$116.5 million of cash and cash equivalents; (ii)$56.1 million in estimated financing available from unpledged Agency MBS and other Agency MBS collateral that was pledged in excess of contractual requirements; and (iii)$3.5 million in estimated financing available from unpledged Non-Agency MBS and from other Non-Agency MBS and CRT collateral that was pledged in excess of contractual requirements. Our sources of liquidity do not include restricted cash. In addition, we have$682.7 million of unencumbered residential whole loans. We are evaluating potential opportunities to finance our residential whole loans, including loan securitization.
The table below presents certain information about our borrowings under repurchase agreements and securitized debt:
Repurchase Agreements Securitized Debt
Quarterly Maximum Quarterly Maximum
Average End of Period Balance at Any Average End of Period Balance at Any
Quarter Ended (1) Balance Balance Month-End Balance Balance Month-End
(In Thousands)
March 31, 2020 $ 9,233,808 $ 7,768,180 $
9,486,555
8,781,646 9,139,821 9,139,821 590,813 570,952 594,458
September 30, 2019 8,654,350 8,571,422 8,833,159 617,689 605,712 621,071
June 30, 2019 8,621,895 8,630,642 8,639,311 645,972 627,487 649,405
March 31, 2019 7,672,309 7,879,087 7,879,087 699,207 684,420 702,377
(1) The information presented in the table above excludes
Convertible Senior Notes issued in
Notes issued in
Senior Notes and Senior Notes have been unchanged since issuance.
Cash Flows and Liquidity for the Three Months Ended
Our cash, cash equivalents and restricted cash increased by
AtMarch 31, 2020 , our debt-to-equity multiple was 3.4 times compared to 3.0 times atDecember 31, 2019 . AtMarch 31, 2020 , we had borrowings under repurchase agreements of$7.8 billion , of which$4.7 billion were secured by residential whole loans,$522.2 million were secured by Agency MBS,$1.0 billion were secured by Legacy Non-Agency MBS,$255.4 million were secured by RPL/NPL MBS,$297.6 million were secured by CRT securities,$929.9 million were secured by MSR-related assets and$59.8 million were secured by other interest-earning assets. In addition, atMarch 31, 2020 , we had securitized debt of$533.7 million in connection with our loan securitization transactions. AtDecember 31, 2019 , we had borrowings under repurchase agreements of$9.1 billion , of which$4.7 billion were secured by residential whole loans,$1.6 billion were secured by Agency MBS,$1.1 billion were secured by Legacy Non-Agency MBS,$495.1 million were secured by RPL/NPL MBS,$203.6 million were secured by CRT securities,$962.5 million were secured by MSR-related assets and$57.2 million were secured by other 86
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interest-earning assets. In addition, at
During the three months endedMarch 31, 2020 ,$822.2 million was provided by our investing activities. We paid$1.1 billion for purchases of residential whole loans, loan related investments and capitalized advances, and purchased$3.9 million of MSR-related assets and$158.7 million of CRT securities funded with cash and repurchase agreement borrowings. In addition, during the three months endedMarch 31, 2020 , we received cash of$539.9 million from prepayments and scheduled amortization on our MBS, CRT securities and MSR-related assets, of which$122.9 million was attributable to Agency MBS,$383.1 million was from Non-Agency MBS,$33.2 million was attributable to MSR-related assets, and approximately$700,000 was attributable to CRT securities, and we sold certain of our investment securities and MSR-related assets for$1.0 billion , realizing net losses of$92.6 million . While we generally intend to hold our MBS and CRT securities as long-term investments, we may sell certain of our securities in order to manage our interest rate risk and liquidity needs, meet other operating objectives and adapt to market conditions. In particular, subsequent to the end of the first quarter, we sold the vast majority of our remaining Agency MBS and Legacy Non-Agency MBS portfolios and substantially reduced our investments in MSR-related assets and CRT securities. During the three months endedMarch 31, 2020 we received$508.9 million of principal payments on residential whole loans and$52.0 million of proceeds on sales of REO. In connection with our repurchase agreement financings and Swaps, we routinely receive margin calls/reverse margin calls from our counterparties and make margin calls to our counterparties. Margin calls and reverse margin calls, which requirements vary over time, may occur daily between us and any of our counterparties when the value of collateral pledged changes from the amount contractually required. The value of securities pledged as collateral fluctuates reflecting changes in: (i) the face (or par) value of our assets; (ii) market interest rates and/or other market conditions; and (iii) the market value of our Swaps. Margin calls/reverse margin calls are satisfied when we pledge/receive additional collateral in the form of additional assets and/or cash. The table below summarizes our margin activity with respect to our repurchase agreement financings and derivative hedging instruments for the quarterly periods presented: Collateral Pledged to Meet Margin Calls Cash and Securities Received Fair Value of Aggregate Assets for Net Assets Securities Pledged For Reverse Margin Received/(Pledged) for For the Quarter Ended (1) Pledged Cash Pledged Margin Calls Calls Margin Activity (In Thousands) March 31, 2020$ 30,187 $ 213,392 $ 243,579 $ 67,343 $ (176,236 ) December 31, 2019 - 26,972 26,972 18,311 (8,661 ) September 30, 2019 77,214 35,271 112,485 129,132 16,647 June 30, 2019 26,037 1,019 27,056 7,295 (19,761 ) March 31, 2019 49,139 - 49,139 65,461 16,322
(1) Excludes variation margin payments on the Company's cleared Swaps which are treated as a legal settlement of the exposure under the Swap contract.
We are subject to various financial covenants under our repurchase agreements and derivative contracts, which include minimum net worth requirements, net worth decline limitations and maximum debt-to-equity ratios.
As a result of the turmoil in the financial markets resulting from the spread of the novel coronavirus and the global COVID-19 virus pandemic, onMarch 25, 2020 , in order to preserve liquidity, we revoked the previously announced first quarter 2020 quarterly cash dividends on each of our common stock and Series B Preferred Stock. The quarterly cash dividend of$0.20 per share on our common stock had been declared onMarch 11, 2020 , and was to be paid onApril 30, 2020 , to stockholders of record as of the close of businessMarch 31, 2020 . The Series B Preferred Stock dividend of$0.46875 per share had been declared onFebruary 14, 2020 , and was to be paid onMarch 31, 2020 , to stockholders of record as of the close of businessMarch 2, 2020 . OnJune 1, 2020 , we announced that we were suspending the second quarter 2020 dividends on the Series B Preferred Stock and on our 6.50% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock. Our payment of dividends is, with limited exceptions, prohibited under the terms of the Forbearance Agreement currently in place with our repurchase agreement counterparties. Unpaid dividends on our Series B Preferred Stock and Series C Preferred Stock will accumulate without interest. No dividends may be paid or set apart on shares of our common stock unless full cumulative dividends on the Series B Preferred 87
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Stock and Series C Preferred Stock for all past dividend periods that have ended have been or contemporaneously are paid in cash, or a sum sufficient for such payment is set apart for payment. In connection with our anticipated exit from forbearance, we expect to pay all accumulated unpaid dividends on our Series B Preferred Stock and Series C Preferred Stock. We will continue to monitor market conditions and the potential impact the ongoing volatility and uncertainty may have on our business. Related thereto, our Board of Directors will continue to evaluate liquidity and the payment of dividends as market conditions evolve, including as related to dividends on common stock.
Off-Balance Sheet Arrangements
We have not participated in transactions that create relationships with unconsolidated entities or financial partnerships which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Inflation
Substantially all of our assets and liabilities are financial in nature. As a
result, changes in interest rates and other factors impact our performance far
more than does inflation. Our results of operations and reported assets,
liabilities and equity are measured with reference to historical cost or fair
value without considering inflation.
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