Interest Expense and Cost of Funds
Our interest expense is comprised of interest expense on our mortgage borrowings and the reclassification of accumulated OCI into interest expense related to previously dedesignated interest rate swaps. Our mortgage borrowings primarily consist of agency repurchase agreements. Upon our election to discontinue hedge accounting under GAAP as of September 30, 2011, the net deferred loss related to our dedesignated interest rate swaps remained in accumulated OCI and is being reclassified from accumulated OCI into interest expense on a straightline basis over the remaining term of each interest rate swap.
Our "adjusted net interest expense," also referred to as our "cost of funds" when stated as a percentage of our mortgage borrowings outstanding, includes periodic interest costs on our interest rate swaps reported in gain/loss on derivative instruments and other securities, net in our consolidated statements of comprehensive income. Our cost of funds does not include swap termination fees, forward starting swaps and costs associated with our other supplemental hedges, such as swaptions and U.S. Treasury positions. Our cost of funds also does not include the implied financing cost/benefit of our net TBA dollar roll position, but does, however, include interest rate swap hedge costs related to our TBA dollar roll funded assets. Consequently, our cost of funds measured as a percentage of our outstanding mortgage borrowings is higher than if we allocated a portion of our swap hedge costs to our TBA dollar roll funded assets.
The table below presents a reconciliation of our interest expense (the most comparable GAAP financial measure) to our adjusted net interest expense and cost of funds (nonGAAP financial measures) for the three months ended March 31, 2016 and 2015 (dollars in millions):

              
  Three Months Ended March 31, 
  2016   2015 
Adjusted Net Interest Expense and Cost of Funds   Amount   % ^{1}   Amount   % ^{1} 
Interest expense:         
Interest expense on mortgage borrowings   $  80 
  0.70  %   $  57 
  0.43  % 
Periodic interest costs of interest rate swaps previously designated as hedges under GAAP, net   19 
  0.17  %   29 
  0.22  % 
Total interest expense   99 
  0.87  %   86 
  0.65  % 
Other periodic interest costs of interest rate swaps, net   89 
  0.77  %   84 
  0.63  % 
Total adjusted net interest expense and cost of funds   $  188 
  1.64  %   $  170 
  1.28  % 
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1.  Percent of our average mortgage borrowings outstanding for the period annualized. 
The principal elements impacting our adjusted net interest expense are the size of our average mortgage borrowings outstanding during the period, the size of our average interest rate swap balance outstanding (excluding forward starting swaps), the average interest rate on our borrowings and the average net pay rate on our payfixed receivefloating interest rate swaps. The size of our average borrowings declined 15% for the three months ended March 31, 2016, compared to the prior year period, while our average cost of funds increased 36 basis points due to the net effect of (i) higher average interest rates on our mortgage borrowings, (ii) a higher ratio of interest rate swaps outstanding to our average mortgage borrowings (excluding forward starting swaps) and (iii) an increase in the floating rate received on our interest rate swaps more than offsetting an increase in the average fixed rate paid.
The following is a summary of the estimated impact of the principal elements impacting the increase in our adjusted net interest expense for the three months ended March 31, 2016, compared to the prior year period (in millions):

           
Impact of Changes in the Principal Elements of Adjusted Net Interest Expense 
Three Months Ended March 31, 2016 and March 31, 2015 
   Due to Change in Average 
 Total Increase / (Decrease)   Borrowing / Swap Balance   Borrowing / Swap Rate 
Interest expense on mortgage borrowings  $  23 
  $  (8  )   $  31 

Periodic interest rate swap costs ^{1}  (5  )   10 
  (15  ) 
Total change in adjusted net interest expense  $  18 
  $  2 
  $  16 
