Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We disclosed a quantitative and qualitative analysis regarding market risk in the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Annual Report. That information is supplemented by the information included above in Item 2 of this report. Other than the developments described thereunder, there have been no material changes in our quantitative and qualitative exposure to market risk since December 31, 2019. The following table projects the potential impact on interest income and interest expense for a 12-month period, assuming an instantaneous increase or decrease of 15 basis points and an increase of 25 basis points in LIBOR (in thousands). As a result of LIBOR rates being close to zero as of June 30, 2020, we have excluded the impact of a 25 basis point decrease in LIBOR.
Assets (Liabilities)
15 Basis
15 Basis
25 Basis
Subject to Interest
Point
Point
Point
Rate Sensitivity (1)
Increase
Decrease
Increase
Interest income from loans and investments
$
4,972,138
$
308
$
(298)
$
543
Interest expense from debt obligations
(4,542,357)
5,352
(5,352)
8,920
Total net interest income
$
(5,044)
$
5,054
$
(8,377)
(1) Represents the UPB of our loan portfolio and the principal balance of our debt.
Based on our structured loans and investments and corresponding debt as of June 30, 2020, increases in LIBOR of 0.15% and 0.25% would decrease our annual net interest income as a result of LIBOR floors on a portion of our loan portfolio that are above LIBOR as of June 30, 2020, which would limit the effect of an increase on interest income. Conversely, these LIBOR floors would reduce the impact on interest income from decreases in LIBOR, which would result in increases to net interest income.
We also receive interest on cash, restricted cash and escrow balances. While the interest rates on these balances are not indexed to LIBOR, they are negotiated periodically with each corresponding bank based on certain benchmark rates. Based on our balances as of June 30, 2020 , a 25 basis point and a 50 basis point increase in rates would result in an increase in our annual interest received of $3.8 million and $7.5 million, respectively. Conversely, a 25 basis point and a 50 basis point decrease in rate would result in a decrease of our annual interest received by the same amounts.
We enter into Swap Futures to hedge our exposure to changes in interest rates inherent in (1) our Structured Business SFR loans from the time the loans are originated until the time they can be financed with match term fixed rate securitized debt, and (2) our held-for-sale Agency Business Private Label loans from the time the loans are rate locked until sale and securitization. Our Swap Futures are tied to the five-year and ten-year swap rates and hedge our exposure to changes in the fair value of our Structured Business SFR loans and held-for-sale Agency Business Private Label loans until the time they are securitized. A 25 basis point and a 50 basis point increase to the five-year and ten-year swap rates on our Swap Futures held at June 30, 2020 would have resulted in a gain of $0.7 million and $1.5 million, respectively, in the six months ended June 30, 2020, while a 25 basis point and a 50 basis point decrease in the rates would have resulted in a loss of $0.8 million and $1.5 million, respectively.
Our Agency Business originates, sells and services a range of multifamily finance products with Fannie Mae, Freddie Mac and HUD. Our loans held-for-sale to these agencies are not currently exposed to interest rate risk during the loan commitment, closing and delivery process. The sale or placement of each loan to an investor is negotiated prior to closing on the loan with the borrower, and the sale or placement is generally effectuated within 60 days of closing. The coupon rate for the loan is set after we establish the interest rate with the investor.
In addition, the fair value of our MSRs is subject to market risk since a significant driver of the fair value of these assets is the discount rates. A 100 basis point increase in the weighted average discount rate would decrease the fair value of our MSRs by $10.9 million as of June 30, 2020, while a 100 basis point decrease would increase the fair value by $11.5 million.
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The COVID-19 pandemic has impacted the global economy in an unprecedented way, swiftly halting activity across many industries, and causing significant disruption and liquidity constraints in many market segments, including the commercial real estate markets, causing requests from tenants for rent deferral or abatement and delays in construction and development projects currently planned or underway. These negative conditions may persist into the future and impair our borrowers' ability to pay principal and interest due to us under our loan agreements. We maintain a robust asset management relationship with our borrowers and are utilizing these relationships to address any potential impacts of the COVID-19 pandemic on our loans.
Although we have modified some loans that have resulted in interest rate concessions, and may continue to do so during the COVID-19 pandemic, we are encouraged by conversations with our borrowers and their responses to the pandemic’s impacts on their properties. Our senior management team has over 30 years of industry experience with a track record of navigating and operating through all market cycles.
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