| Derivative Instruments |
9. Derivative Instruments
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company enters into derivative instruments in connection with its risk management activities. These derivative instruments may include interest rate swaps, interest rate caps, TBAs, credit default swaps, U.S. Treasury, commodity and index futures and options contracts such as options on credit default swap indices, equity index options, swaptions and options on futures. The Company may also purchase options on U.S. Treasury futures or invest in other types of mortgage derivative securities. Additionally, Constructive may enter into interest rate lock commitments ("IRLCs") related to the origination of business purpose loans. The Company elected not to apply hedge accounting for its derivative instruments. The following table summarizes the Company's derivative instruments as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value | | Type of Derivative Instrument | | Consolidated Balance Sheet Location | | September 30, 2026 | | December 31, 2025 | Interest rate caps | | Other assets | | $ | 1,021 | | | $ | 31 | | | Options | | Other assets | | 386 | | | — | | IRLCs | | Other assets | | 279 | | | 691 | | TBAs | | Other assets | | 9,707 | | | — | | | Interest rate swaps | | Other assets | | — | | | — | | U.S. Treasury futures | | Other assets | | — | | | — | | Commodity futures | | Other assets | | — | | | — | | Total derivative assets | | | | $ | 11,393 | | | $ | 722 | | | | | | | | | | | | | | | | TBAs | | Other liabilities | | $ | (14,039) | | | $ | — | | | Commodity futures | | Other liabilities | | — | | | — | | Credit default swaps | | Other liabilities | | — | | | — | | | Interest rate swaps | | Other liabilities | | — | | | — | | Total derivative liabilities | | | | $ | (14,039) | | | $ | — | | | | | | | | | | | | | | | | | | | | | | |
The Company elects to net the fair value of its derivative contracts by counterparty when appropriate and accounts for the receipt or payment of variation margin as a direct reduction of or increase in the carrying value of the related asset or liability. The following tables present a reconciliation of gross derivative assets and liabilities to net amounts presented in the accompanying condensed consolidated balance sheets as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2026 | | Gross Amount of Recognized Assets (Liabilities) | | Gross Amounts Offset in Balance Sheets | | Variation Margin | | Net Amounts of Assets (Liabilities) Presented in Balance Sheets | | Derivative assets | | | | | | | | | Interest rate caps | $ | 1,021 | | | $ | — | | | $ | — | | | $ | 1,021 | | | Options | 386 | | | — | | | — | | | 386 | | IRLCs | 279 | | | — | | | — | | | 279 | | TBAs | 27,227 | | | (17,520) | | | — | | | 9,707 | | | Interest rate swaps | 257,276 | | | (4,153) | | | (253,123) | | | — | | U.S. Treasury futures | 121,231 | | | (21,948) | | | (99,283) | | | — | | | Commodity futures | 47 | | | (47) | | | — | | | — | | | Total derivative assets | $ | 407,467 | | | $ | (43,668) | | | $ | (352,406) | | | $ | 11,393 | | | | | | | | | | | Derivative liabilities | | | | | | | | Credit default swaps | $ | (2,980) | | | $ | — | | | $ | 2,980 | | | $ | — | | TBAs | (31,559) | | | 17,520 | | | — | | | (14,039) | | | Interest rate swaps | (4,153) | | | 4,153 | | | — | | | — | | U.S. Treasury futures | (21,948) | | | 21,948 | | | — | | | — | | | Commodity futures | (4,936) | | | 47 | | | 4,889 | | | — | | | Total derivative liabilities | $ | (65,576) | | | $ | 43,668 | | | $ | 7,869 | | | $ | (14,039) | |
| | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2025 | | Gross Amount of Recognized Assets (Liabilities) | | Gross Amounts Offset in Balance Sheets | | Variation Margin | | Net Amounts of Assets (Liabilities) Presented in Balance Sheets | | Derivative assets | | | | | | | | | Interest rate caps | $ | 31 | | | $ | — | | | $ | — | | | $ | 31 | | IRLCs | 691 | | | — | | | — | | | 691 | | | Interest rate swaps | 8,769 | | | (8,769) | | | — | | | — | | U.S. Treasury futures | 4,759 | | | (148) | | | (4,611) | | | — | | Commodity futures | 9,748 | | | (1,733) | | | (8,015) | | | — | | | Total derivative assets | $ | 23,998 | | | $ | (10,650) | | | $ | (12,626) | | | $ | 722 | | | | | | | | | | | Derivative liabilities | | | | | | | | Credit default swaps | $ | (9,890) | | | $ | — | | | $ | 9,890 | | | $ | — | | | Interest rate swaps | (47,638) | | | 8,769 | | | 38,869 | | | — | | U.S. Treasury futures | (148) | | | 148 | | | — | | | — | | Commodity futures | (1,733) | | | 1,733 | | | — | | | — | | | Total derivative liabilities | $ | (59,409) | | | $ | 10,650 | | | $ | 48,759 | | | $ | — | |
The use of derivatives exposes the Company to counterparty credit risks in the event of a default by a counterparty. If a counterparty defaults under the applicable derivative agreement, the Company may be unable to collect payments to which it is entitled under its derivative agreements and may have difficulty collecting the assets it pledged as collateral against such derivatives.
The Company is required to post an initial margin amount for its interest rate swaps, credit default swaps and U.S. Treasury and commodity futures determined by the respective central clearing houses, which is generally intended to be set at a level sufficient to protect the exchange from the derivative instrument’s maximum estimated single-day price movement. The following table summarizes assets pledged as initial margin as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | Initial Margin Collateral | | Consolidated Balance Sheet Location | | September 30, 2026 | | December 31, 2025 | Agency RMBS | | Investment securities available for sale, at fair value | | $ | 158,365 | | | $ | 68,458 | | Restricted cash | | Other assets | | 74,902 | | | 82,222 | | Total initial margin collateral | | | | $ | 233,267 | | | $ | 150,680 | |
Margin excess related to settlement of variation margin in the amount of approximately $53.3 million and $16.2 million as of September 30, 2026 and December 31, 2025, respectively, is included in other assets on the accompanying condensed consolidated balance sheets. Margin deficit related to settlement of variation margin in the amount of approximately $41.2 million and $24.3 million as of September 30, 2026 and December 31, 2025, respectively, is included in other liabilities on the accompanying condensed consolidated balance sheets.
The tables below summarize the notional activity of derivative instruments for the three and nine months ended September 30, 2026 and 2025, respectively (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional Amount For the Three Months Ended September 30, 2026 | | Type of Derivative Instrument | | June 30, 2026 | | Additions/ Long (Short) (1) | | Terminations/Pair-Offs | | September 30, 2026 | | Interest rate caps | | $ | 45,142 | | | $ | 26,500 | | | $ | — | | | $ | 71,642 | | | Options | | — | | | 2,801 | | | (1,900) | | | 901 | | TBAs | | 650,000 | | | 650,000 | | | (3,150,000) | | | (1,850,000) | | | Interest rate swaps | | 6,300,563 | | | 349,056 | | | — | | | 6,649,619 | | Credit default swaps | | 150,000 | | | — | | | — | | | 150,000 | | | U.S. Treasury futures | | (886,500) | | | (7,687,100) | | | 4,589,900 | | | (3,983,700) | | Commodity futures | | 13,758 | | | 194,647 | | | (99,809) | | | 108,596 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional Amount For the Three Months Ended September 30, 2025 | | Type of Derivative Instrument | | June 30, 2025 | | Additions/ Long (Short) (1) | | Terminations/Pair-Offs | | September 30, 2025 | | Interest rate caps | | $ | 45,142 | | | $ | — | | | $ | — | | | $ | 45,142 | | | Options | | — | | | — | | | — | | | — | | | TBAs | | 10,000 | | | 130,000 | | | (110,000) | | | 30,000 | | | Interest rate swaps | | 4,867,217 | | | 1,117,681 | | | (1,205,090) | | | 4,779,808 | | | Credit default swaps | | 475,000 | | | — | | | — | | | 475,000 | | | U.S. Treasury futures | | (247,500) | | | (1,051,700) | | | 673,500 | | | (625,700) | | | Commodity futures | | — | | | 100,060 | | | — | | | 100,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional Amount For the Nine Months Ended September 30, 2026 | | Type of Derivative Instrument | | December 31, 2025 | | Additions/ Long (Short) (1) | | Terminations/Pair-Offs | | September 30, 2026 | | Interest rate caps | | $ | 45,142 | | | $ | 71,642 | | | $ | (45,142) | | | $ | 71,642 | | | Options | | — | | | 2,801 | | | (1,900) | | | 901 | | TBAs | | — | | | 2,800,000 | | | (4,650,000) | | | (1,850,000) | | | Interest rate swaps | | 4,919,398 | | | 2,498,091 | | | (767,870) | | | 6,649,619 | | Credit default swaps | | 475,000 | | | 150,000 | | | (475,000) | | | 150,000 | | U.S. Treasury futures | | (901,200) | | | (11,894,500) | | | 8,812,000 | | | (3,983,700) | | | Commodity futures | | 199,676 | | | 976,284 | | | (1,067,364) | | | 108,596 | | Index futures | | — | | | 384 | | | (384) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional Amount For the Nine Months Ended September 30, 2025 | | Type of Derivative Instrument | | December 31, 2024 | | Additions/ Long (Short) (1) | | Terminations/Pair-Offs | | September 30, 2025 | | Interest rate caps | | $ | 45,142 | | | $ | 45,142 | | | $ | (45,142) | | | $ | 45,142 | | | Options | | — | | | — | | | — | | | — | | TBAs | | — | | | 150,000 | | | (120,000) | | | 30,000 | | | Interest rate swaps | | 4,134,267 | | | 3,373,016 | | | (2,727,475) | | | 4,779,808 | | Credit default swaps | | 400,000 | | | 75,000 | | | — | | | 475,000 | | | U.S. Treasury futures | | (406,100) | | | (1,521,100) | | | 1,301,500 | | | (625,700) | | | Commodity futures | | — | | | 100,060 | | | — | | | 100,060 | |
(1)Additions are presented on a net basis and reflect the initiation of long positions offset by the initiation of short positions.
The following table presents the components of realized gains (losses), net and unrealized gains (losses), net related to derivative instruments, which are included in gains (losses) on derivative instruments, net and mortgage banking activities, net in the condensed consolidated statements of operations for the three and nine months ended September 30, 2026 and 2025, respectively (dollar amounts in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | | 2026 | | 2025 | | 2026 | | 2025 | | Type of Derivative Instrument | | Realized Gains (Losses) | | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Unrealized Gains (Losses) | | Realized Gains (Losses) | | Unrealized Gains (Losses) | Interest rate caps | | $ | — | | | $ | 147 | | | $ | — | | | $ | 9 | | | $ | — | | | $ | 479 | | | $ | — | | | $ | 54 | | | Options | | (968) | | | 173 | | | (517) | | | (408) | | | (2,068) | | | (223) | | | 2,125 | | | (408) | | IRLCs | | — | | | (641) | | | — | | | (1,919) | | | — | | | (412) | | | — | | | (1,919) | | TBAs | | (7,566) | | | (5,742) | | | 484 | | | (226) | | | (10,295) | | | (4,332) | | | 480 | | | (121) | | | Interest rate swaps | | 3,342 | | | 218,856 | | | 1,804 | | | (5,868) | | | 11,053 | | | 291,992 | | | 33,219 | | | (106,470) | | Credit default swaps | | (379) | | | 346 | | | (1,240) | | | 210 | | | (1,041) | | | 624 | | | (3,454) | | | (542) | | U.S. Treasury futures | | 3,555 | | | 97,247 | | | (10,145) | | | 1,476 | | | 26,872 | | | 94,671 | | | (8,213) | | | (4,859) | | Commodity futures | | (4,835) | | | (5,203) | | | — | | | 3,355 | | | 40,922 | | | (12,904) | | | — | | | 3,355 | | | Index futures | | — | | | — | | | — | | | — | | | (27) | | | — | | | — | | | — | | | Total | | $ | (6,851) | | | $ | 305,183 | | | $ | (9,614) | | | $ | (3,371) | | | $ | 65,416 | | | $ | 369,895 | | | $ | 24,157 | | | $ | (110,910) | |
The following tables present information about our interest rate cap contracts related to variable-rate mortgages payable on real estate as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2026 | Financing Type | | Weighted Average SOFR Strike Price | | SOFR Strike Price Range | | Notional Amount | | Expiration Date Range | | Mortgages payable on real estate | | 3.05 | % | | 2.50% - 4.00% | | $ | 71,642 | | | August 1, 2027 - January 1, 2028 |
| | | | | | | | | | | | | | | | | | | | | | December 31, 2025 | Financing Type | | SOFR Strike Price | | Notional Amount | | Expiration Date | Mortgage payable on real estate | | 3.22% | | $ | 45,142 | | | January 1, 2026 |
The following table presents information about the Company's TBAs as of September 30, 2026 (dollar amounts in thousands). The Company did not own TBAs as of December 31, 2025.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | TBAs by Coupon | | Notional Amount Long (Short) (1) | | Cost Basis (2) | | Fair Value (3) | | Net Carrying Value (4) | | 30-Year TBAs | | | | | | | | | | 5.50% | | $ | 50,000 | | | $ | 56,156 | | | $ | 47,703 | | | $ | (8,453) | | | 6.00% | | (800,000) | | | (788,746) | | | (784,625) | | | 4,121 | | | 6.50% | | (1,100,000) | | | (1,106,703) | | | (1,106,703) | | | — | | | Total TBAs, net | | $ | (1,850,000) | | | $ | (1,839,293) | | | $ | (1,843,625) | | | $ | (4,332) | |
(1)Notional amount represents the par value (or principal balance) of the underlying Agency RMBS. (2)Cost basis represents the forward price to be paid for the underlying Agency RMBS. (3)Fair value represents the current fair value of the underlying Agency RMBS as of period end. (4)Net carrying value represents the difference between the fair value and the cost basis as of period end.
The following tables present information about the Company's interest rate swaps whereby it receives floating rate payments in exchange for fixed rate payments as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2026 | | Years to Maturity | | Notional Amount | | Weighted Average Fixed Interest Rate | | Weighted Average Variable Interest Rate | | Less than 1 year | | $ | 226,214 | | | 4.26 | % | | 3.69 | % | | 1-3 years | | 2,788,107 | | | 3.75 | % | | 3.71 | % | | 3-5 years | | 1,535,870 | | | 3.75 | % | | 3.69 | % | | 5-7 years | | 127,720 | | | 3.57 | % | | 3.69 | % | | 7-10 years | | 1,092,643 | | | 3.90 | % | | 3.68 | % | | 10-15 years | | 475,934 | | | 4.30 | % | | 3.70 | % | | Greater than 15 years | | 343,207 | | | 4.22 | % | | 3.69 | % | | Total | | $ | 6,589,695 | | | 3.85 | % | | 3.70 | % |
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2025 | | Years to Maturity | | Notional Amount | | Weighted Average Fixed Interest Rate | | Weighted Average Variable Interest Rate | | Less than 1 year | | $ | 30,660 | | | 4.37 | % | | 3.85 | % | | 1-3 years | | 2,473,639 | | | 3.79 | % | | 4.13 | % | | 3-5 years | | 1,492,347 | | | 3.76 | % | | 4.19 | % | | | | | | | | | 7-10 years | | 678,692 | | | 3.88 | % | | 4.19 | % | | | | | | | | | Greater than 15 years | | 191,010 | | | 3.99 | % | | 4.13 | % | | Total | | $ | 4,866,348 | | | 3.80 | % | | 4.16 | % |
The following tables present information about the Company's interest rate swaps whereby it receives fixed rate payments in exchange for floating rate payments as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | September 30, 2026 | | Years to Maturity | | Notional Amount | | Weighted Average Fixed Interest Rate | | Weighted Average Variable Interest Rate | | 1-3 years | | $ | 9,550 | | | 3.48 | % | | 3.68 | % | | 3-5 years | | 6,874 | | | 3.23 | % | | 3.68 | % | | 5-7 years | | 43,500 | | | 3.64 | % | | 3.70 | % | | Total | | $ | 59,924 | | | 3.57 | % | | 3.70 | % |
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2025 | | Years to Maturity | | Notional Amount | | Weighted Average Fixed Interest Rate | | Weighted Average Variable Interest Rate | | 1-3 years | | $ | 9,550 | | | 3.48 | % | | 4.26 | % | | 7-10 years | | 43,500 | | | 3.64 | % | | 4.19 | % | | Total | | $ | 53,050 | | | 3.61 | % | | 4.21 | % |
The following table presents information about the Company's U.S. Treasury futures as of September 30, 2026 and December 31, 2025, respectively (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2026 | | December 31, 2025 | | Description | | Notional Amount | | Fair Value (1) | | Notional Amount | | Fair Value (1) | | U.S. Treasury bond futures | | $ | 308,700 | | | $ | (21,948) | | | $ | — | | | $ | — | | | U.S. Treasury futures - 2 year | | (647,000) | | | 6,902 | | | (328,200) | | | 98 | | | U.S. Treasury futures - 5 year | | (1,924,500) | | | 38,121 | | | (122,800) | | | 340 | | | U.S. Treasury futures - 10 year and greater | | (1,720,900) | | | 76,208 | | | (450,200) | | | 4,173 | | | Total U.S. Treasury futures, net | | $ | (3,983,700) | | | $ | 99,283 | | | $ | (901,200) | | | $ | 4,611 | |
(1)The fair value of U.S. Treasury futures is fully offset by variation margin, which is accounted for as a direct reduction of the net carrying value of the related derivative asset, resulting in a net carrying value of zero. Certain of the Company’s derivative contracts are subject to International Swaps and Derivatives Association Master Agreements or other similar agreements which may contain provisions that grant counterparties certain rights with respect to the applicable agreement upon the occurrence of certain events, including a decline in the Company's stockholders’ equity (as defined in the respective agreements) in excess of specified thresholds or dollar amounts over set periods of time, the Company’s failure to maintain its REIT status, the Company’s failure to comply with limits on the amount of leverage and the Company’s stock being delisted from Nasdaq.
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