Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2016

Schedule of financial instruments carried at fair value by valuation hierarchy

The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at June 30, 2016



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	4,307,882	$	—	$	4,307,882
Non-Agency MBS, including MBS transferred to consolidated VIEs	—		6,104,880		—		6,104,880
CRT securities	—		272,569		—		272,569
Securities obtained and pledged as collateral	512,059		—		—		512,059
Residential whole loans, at fair value	—		—		684,582		684,582
Total assets carried at fair value	$	512,059	$	10,685,331	$	684,582	$	11,881,972
Liabilities:
Swaps	$	—	$	131,971	$	—	$	131,971
Obligation to return securities obtained as collateral	512,059		—		—		512,059
Total liabilities carried at fair value	$	512,059	$	131,971	$	—	$	644,030

Fair Value at December 31, 2015



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	4,752,244	$	—	$	4,752,244
Non-Agency MBS, including MBS transferred to consolidated VIEs	—		6,420,817		—		6,420,817
CRT securities	—		183,582		—		183,582
Securities obtained and pledged as collateral	507,443		—		—		507,443
Residential whole loans, at fair value	—		—		623,276		623,276
Swaps	—		1,127		—		1,127
Total assets carried at fair value	$	507,443	$	11,357,770	$	623,276	$	12,488,489
Liabilities:
Swaps	$	—	$	70,526	$	—	$	70,526
Obligation to return securities obtained as collateral	507,443		—		—		507,443
Total liabilities carried at fair value	$	507,443	$	70,526	$	—	$	577,969

Schedule of significant unobservable inputs used in fair value measurement of residential whole loans

The following table presents additional information for the three and six months ended June 30, 2016 and 2015 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis.

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis



	Residential Whole Loans, at Fair Value
	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2016			2015			2016			2015
Balance at beginning of period	$	647,360		$	144,507		$	623,276		$	143,472
Purchases and capitalized advances	66,169			47,700			119,759			53,729
Changes in fair value recorded in Net gain on residential whole loans held at fair value	8,390			1,165			14,616			1,510
Collection of principal, net of liquidation gains/losses	(16,187		)	(6,394		)	(30,789		)	(8,570		)
Transfer to REO	(21,149		)	(3,117		)	(42,279		)	(6,280		)
Balance at end of period	$	684,583		$	183,861		$	684,583		$	183,861

Schedule of quantitative information about significant unobservable inputs

The following table presents a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of June 30, 2016 and December 31, 2015:

Fair Value Methodology for Level 3 Financial Instruments



	June 30, 2016
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	176,829	Discounted cash flow	Discount rate	6.6		%	5.0-7.6%
				Prepayment rate	7.2		%	0.3-12.1%
				Default rate	2.8		%	0.0-9.4%
				Loss severity	13.8		%	0.0-79.1%

	$	440,227	Liquidation model	Discount rate	7.7		%	6.8-42.0%
				Annual change in home prices	1.0		%	(4.4)-6.4%
				Liquidation timeline (in years)	1.5			0.1-4.4
				Current value of underlying properties	$	654		$14-$4,900
Total	$	617,056



	December 31, 2015
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	113,166	Discounted cash flow	Discount rate	7.0		%	6.0-8.7%
				Prepayment rate	6.6		%	0.3-11.1%
				Default rate	3.1		%	0.0-9.1%
				Loss severity	17.0		%	10.0-79.4%

	$	392,557	Liquidation model	Discount rate	6.9		%	6.8-10.0%
				Annual change in home prices	1.3		%	(5.5)-6.1%
				Liquidation timeline (in years)	1.6			0.7-4.4
				Current value of underlying properties	$	626		$14-$3,500
Total	$	505,723

(1) Excludes approximately $67.5 million and $117.6 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 2016 and December 31, 2015, respectively.

(2) Amounts are weighted based on the fair value of the underlying loan.

Schedule of residential whole loans, fair value and aggregate unpaid principal, fair value option elected

The following table presents the difference between the fair value and the aggregate unpaid principal balance of the Company’s residential whole loans for which the fair value option was elected, at June 30, 2016 and December 31, 2015:



	June 30, 2016							December 31, 2015
(In Thousands)	Fair Value		Unpaid Principal Balance		Difference			Fair Value		Unpaid Principal Balance		Difference
Residential whole loans, at fair value
Total loans	$	684,582	$	844,846	$	(160,264	)	$	623,276	$	786,330	$	(163,054	)
Loans 90 days or more past due	$	520,590	$	653,151	$	(132,561	)	$	493,640	$	637,459	$	(143,819	)

Schedule of carrying value and fair value of financial instruments

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2016 and December 31, 2015:



	June 30, 2016				December 31, 2015
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS	$	4,307,882	$	4,307,882	$	4,752,244	$	4,752,244
Non-Agency MBS, including MBS transferred to consolidated VIEs	6,104,880		6,104,880		6,420,817		6,420,817
CRT securities	272,569		272,569		183,582		183,582
Securities obtained and pledged as collateral	512,059		512,059		507,443		507,443
Residential whole loans, at carrying value	392,172		408,035		271,845		289,696
Residential whole loans, at fair value	684,582		684,582		623,276		623,276
Cash and cash equivalents	182,765		182,765		165,007		165,007
Restricted cash	143,084		143,084		71,538		71,538
Swaps	—		—		1,127		1,127
Financial Liabilities (1):
Repurchase agreements	8,493,087		8,493,080		7,887,622		7,828,115
FHLB advances	545,000		545,000		1,500,000		1,500,000
Securitized debt	—		—		21,868		22,057
Obligation to return securities obtained as collateral	512,059		512,059		507,443		507,443
Senior Notes	96,715		102,511		96,697		101,391
Swaps	131,971		131,971		70,526		70,526

(1) Carrying value of Senior Notes, Securitized debt and certain Repurchase agreements is net of associated debt issuance costs.

- Definition

Tabular disclosure of the application of the fair value option for measurement and reporting of eligible financial assets and liabilities (as defined), as well as certain other eligible items (as defined) included in the statement of financial position, whether such option is elected for a single eligible item or a group of similar eligible items and is in addition to other disclosures concerning fair value which the company may be required to provide. Such disclosure might be expected to include: (1) for items included in the statement of financial position: (a) the reasons for electing a fair value option for each eligible item or group of similar eligible items and (b) if the fair value option is elected for some but not all eligible items within a group of similar eligible items: (i) a description of those similar items and the reasons for partial election and (ii) information of how the group of similar items relates to individual balance sheet line items; (c) for each line item in the statement of financial position that includes an item or items for which the fair value option has been elected, information of how each line item in the statement of financial position relates to major categories of assets and liabilities presented in accordance with other fair value disclosures; (2) for items included in the income statement: (a) a description of how interest and dividends are measured and where they are reported in the income statement; (b) how the gains or losses attributable to changes in instrument-specific credit risk were determined; (c) for liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk: (i) qualitative information about the reasons for the changes and (ii) how the gains and losses attributable to changes in instrument-specific credit risk were determined; and (3) certain other disclosures as required or determined to be provided.

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