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 Item 7A of our 2022 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 exposure to market risk since December 31, 2022.
The following table projects the potential impact on interest (in thousands) for a 12-month period, assuming a hypothetical instantaneous increase or decrease of both 50 and 100 basis points in LIBOR, SOFR, or other applicable index rate (collectively referred to as the “Index Rates” below).
Assets (Liabilities)
Subject to Interest
50 Basis Point
100 Basis Point
50 Basis Point
100 Basis Point
Rate Sensitivity (1)
Increase
Increase
Decrease
Decrease
Interest income from loans and investments
$
13,643,724
$
65,843
$
131,687
$
(65,360)
$
(129,746)
Interest expense from debt obligations
(12,647,155)
54,713
109,408
(54,676)
(109,371)
Impact to net interest income (2)
$
11,130
$
22,279
$
(10,684)
$
(20,375)
(1) Represents the UPB of our loan portfolio and the principal balance of our debt.
(2) The impact of hypothetical rate changes to net interest income are further benefited by interest income earned on our cash, restricted cash and escrow balances. At March 31, 2023, we had approximately $2.8 billion of cash, restricted cash and escrows, which is earning interest at a weighted average blended rate of approximately 4%, or approximately $100 million annually. Interest income earned on escrows is included as a component of servicing revenue, net and interest income earned on our cash and restricted cash is included as a component of interest income in the consolidated statements of income. The interest earned on our cash, restricted cash and escrows is based on an average daily balance and may be different from the end of period balance. Additionally, the interest rates on these balances are not indexed to an Index Rate and are negotiated periodically with each
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corresponding bank, therefore, the interest rates may change frequently and may not necessarily change in conjunction with changes in Index Rates.
We enter into interest rate swaps to hedge our exposure to changes in interest rates inherent in (1) our held-for-sale Agency Business Private Label loans from the time the loans are rate locked until sale and securitization, and (2) our Agency Business SFR – fixed rate loans from the time the loans are originated until the time they can be financed with match term fixed rate securitized debt. Our interest rate swaps are tied to the five-year and ten-year swap rates and hedge our exposure to Private Label loans, until the time they are securitized, and changes in the fair value of our held-for-sale Agency Business SFR – fixed rate loans. A 50 basis point and a 100 basis point increase to the five-year and ten-year swap rates on our interest rate swaps held at March 31, 2023 would have resulted in a gain of $1.0 million and $2.0 million, respectively, in the three months ended March 31, 2023, while a 50 basis point and a 100 basis point decrease in the rates would have resulted in a loss of $1.1 million and $2.2 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 $16.7 million at March 31, 2023, while a 100 basis point decrease would increase the fair value by $17.6 million.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.