11. FAIR VALUE MEASUREMENTS

The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSRs that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

GAAP requires classification of financial instruments and MSRs into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

If the inputs used to measure the financial instruments and MSRs fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis.

The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level.

Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities.

Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2.

The Company classifies its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third-party pricing providers. Management reviews the valuations received from third-party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSRs requires significant judgment by management and the third-party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements.

The following tables present the estimated fair values of financial instruments and MSRs measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.



March 31, 2020
	Level 1		Level 2		Level 3		Total
Assets	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	78,456,846	$	—	$	78,456,846
Credit risk transfer securities	—		222,871		—		222,871
Non-Agency mortgage-backed securities	—		585,954		—		585,954
Commercial mortgage-backed securities	—		91,925		—		91,925
Loans
Residential mortgage loans	—		1,268,083		—		1,268,083
Mortgage servicing rights	—		—		280,558		280,558
Assets transferred or pledged to securitization vehicles	—		6,758,371		—		6,758,371
Derivative assets
Other derivatives	—		238,776		—		238,776
Total assets	$	—	$	87,622,826	$	280,558	$	87,903,384
Liabilities
Debt issued by securitization vehicles	—		6,364,949		—		6,364,949
Derivative liabilities
Interest rate swaps	—		1,244,309		—		1,244,309
Other derivatives	—		86,879		—		86,879
Total liabilities	$	—	$	7,696,137	$	—	$	7,696,137



December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	112,893,367	$	—	$	112,893,367
Credit risk transfer securities	—		531,322		—		531,322
Non-Agency mortgage-backed securities	—		1,135,868		—		1,135,868
Commercial mortgage-backed securities	—		273,023		—		273,023
Loans
Residential mortgage loans	—		1,647,787		—		1,647,787
Mortgage servicing rights	—		—		378,078		378,078
Assets transferred or pledged to securitization vehicles	—		6,066,082		—		6,066,082
Derivative assets
Interest rate swaps	—		1,199		—		1,199
Other derivatives	77,889		34,468		—		112,357
Total assets	$	77,889	$	122,583,116	$	378,078	$	123,039,083
Liabilities
Debt issued by securitization vehicles	$	—	$	5,622,801	$	—	$	5,622,801
Derivative liabilities
Interest rate swaps	—		706,862		—		706,862
Other derivatives	84,781		12,223		—		97,004
Total liabilities	$	84,781	$	6,341,886	$	—	$	6,426,667

The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered

independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSRs, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSRs, which in turn could result in a decline in the estimated fair value of MSRs. Refer to the Note titled “Mortgage Servicing Rights” for additional information.

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSRs. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.



	March 31, 2020		December 31, 2019
Valuation Technique	Unobservable Input ⁽¹⁾	Range (Weighted Average )⁽²⁾	Unobservable Input ⁽¹⁾	Range (Weighted Average ) ⁽²⁾
Discounted cash flow	Discount rate	9.0% -12.0% (9.3%)	Discount rate	9.0% -12.0% (9.3%)
	Prepayment rate	10.1% - 39.6% (24.9%)	Prepayment rate	6.3% - 26.6% (13.7%)
	Delinquency rate	0.0% - 4.0% (2.1%)	Delinquency rate	0.0% - 4.0% (2.2%)
	Cost to service	$81 - $134 ($108)	Cost to service	$81 - $135 ($107)
⁽¹⁾ Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets.
⁽²⁾ Weighted average discount rate computed based on the fair value of MSRs, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSRs.



	March 31, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets	(dollars in thousands)
Loans
Commercial real estate debt and preferred equity, held for investment⁽¹⁾	$	1,563,134	$	1,589,752	$	1,606,091	$	1,619,018
Corporate debt, held for investment	2,150,263		1,965,186		2,144,850		2,081,327
Financial liabilities
Repurchase agreements	$	72,580,183	$	72,580,183	$	101,740,728	$	101,740,728
Other secured financing	1,805,428		1,805,428		4,455,700		4,455,700
Mortgage payable	484,762		574,648		485,005		515,994
⁽¹⁾Includes assets of consolidated VIEs.

Commercial real estate debt and preferred equity, held for investment, corporate debt, held for investment and mortgage payable are valued using Level 3 inputs. The carrying values of short term repurchase agreements and other secured financing approximates fair value. Long term repurchase agreements and other secured financing are valued using Level 2 inputs.