Fair Value of Financial Instruments (Tables)

3 Months Ended

Mar. 31, 2017

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 March 31, 2017 and December 31, 2016, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at March 31, 2017



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	3,494,614	$	—	$	3,494,614
Non-Agency MBS	—		5,185,846		282,332		5,468,178
CRT securities	—		498,067		—		498,067
Securities obtained and pledged as collateral	371,333		—		—		371,333
Residential whole loans, at fair value	—		—		775,152		775,152
Swaps	—		119		—		119
Total assets carried at fair value	$	371,333	$	9,178,646	$	1,057,484	$	10,607,463
Liabilities:
Swaps	$	—	$	—	$	—	$	—
Obligation to return securities obtained as collateral	510,733		—		—		510,733
Total liabilities carried at fair value	$	510,733	$	—	$	—	$	510,733

Fair Value at December 31, 2016



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	3,738,497	$	—	$	3,738,497
Non-Agency MBS, including MBS transferred to consolidated VIEs	—		5,825,816		—		5,825,816
CRT securities	—		404,850		—		404,850
Securities obtained and pledged as collateral	510,767		—		—		510,767
Residential whole loans, at fair value	—		—		814,682		814,682
Swaps	—		233		—		233
Total assets carried at fair value	$	510,767	$	9,969,396	$	814,682	$	11,294,845
Liabilities:
Swaps	$	—	$	46,954	$	—	$	46,954
Obligation to return securities obtained as collateral	510,767		—		—		510,767
Total liabilities carried at fair value	$	510,767	$	46,954	$	—	$	557,721

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

The following table presents additional information for the three months ended March 31, 2017 and 2016 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:



	Residential Whole Loans, at Fair Value
	Three Months Ended March 31,
(In Thousands)	2017			2016
Balance at beginning of period	$	814,682		$	623,276
Purchases and capitalized advances	5,333			53,590
Changes in fair value recorded in Net gain on residential whole loans held at fair value	2,948			6,226
Collection of principal, net of liquidation gains/losses	(20,043		)	(14,602		)
Repurchases	(306		)	—
Transfer to REO	(27,462		)	(21,130		)
Balance at end of period	$	775,152		$	647,360

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 March 31, 2017 and December 31, 2016:



	March 31, 2017
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	267,878	Discounted cash flow	Discount rate	6.6		%	5.0-7.7%
				Prepayment rate	7.8		%	0.0-12.3%
				Default rate	3.2		%	0.0-10.1%
				Loss severity	12.8		%	0.0-100.0%

	$	507,274	Liquidation model	Discount rate	7.7		%	6.2-26.9%
				Annual change in home prices	1.9		%	(5.0)-10.7%
				Liquidation timeline (in years)	1.5			0.1-4.4
				Current value of underlying properties (3)	$	641		$15-$4,900
Total	$	775,152



	December 31, 2016
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	253,287	Discounted cash flow	Discount rate	6.6		%	5.0-7.7%
				Prepayment rate	7.6		%	0.0-12.0%
				Default rate	2.9		%	0.0-9.7%
				Loss severity	13.0		%	0.0-77.5%

	$	516,014	Liquidation model	Discount rate	7.7		%	6.8-26.9%
				Annual change in home prices	1.7		%	(9.2)-7.7%
				Liquidation timeline (in years)	1.6			0.1-4.4
				Current value of underlying properties (3)	$	634		$5-$4,900
Total	$	769,301

(1) Excludes approximately zero and $45.4 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at March 31, 2017 and December 31, 2016, respectively.

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

(3) The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately $340,000 and $320,000 as of March 31, 2017 and December 31, 2016, respectively.

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 March 31, 2017 and December 31, 2016:



	March 31, 2017							December 31, 2016
(In Thousands)	Fair Value		Unpaid Principal Balance		Difference			Fair Value		Unpaid Principal Balance		Difference
Residential whole loans, at fair value
Total loans	$	775,152	$	907,311	$	(132,159	)	$	814,682	$	966,174	$	(151,492	)
Loans 90 days or more past due	$	523,637	$	626,554	$	(102,917	)	$	570,025	$	695,282	$	(125,257	)

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 March 31, 2017 and December 31, 2016:



	March 31, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS	$	3,494,614	$	3,494,614	$	3,738,497	$	3,738,497
Non-Agency MBS, including MBS transferred to consolidated VIEs	5,468,178		5,468,178		5,825,816		5,825,816
CRT securities	498,067		498,067		404,850		404,850
Securities obtained and pledged as collateral	371,333		371,333		510,767		510,767
Residential whole loans, at carrying value	573,715		608,209		590,540		621,548
Residential whole loans, at fair value	775,152		775,152		814,682		814,682
Cash and cash equivalents	421,572		421,572		260,112		260,112
Restricted cash	10,980		10,980		58,463		58,463
Corporate loan	93,002		93,002		85,800		85,800
Swaps	119		119		233		233
Financial Liabilities (1):
Repurchase agreements	8,137,102		8,137,251		8,472,268		8,472,078
FHLB advances	—		—		215,000		215,000
Obligation to return securities obtained as collateral	510,733		510,733		510,767		510,767
Senior Notes	96,743		100,591		96,733		101,111
Swaps	—		—		46,954		46,954

(1) Carrying value of Senior Notes 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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