Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 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 June 30, 2017 and December 31, 2016, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at June 30, 2017



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	3,248,007	$	—	$	3,248,007
Non-Agency MBS	—		4,318,314		273,961		4,592,275
CRT securities	—		636,315		—		636,315
Securities obtained and pledged as collateral	370,837		—		—		370,837
Residential whole loans, at fair value	—		—		983,270		983,270
Total assets carried at fair value	$	370,837	$	8,202,636	$	1,257,231	$	9,830,704
Liabilities:
Swaps	$	—	$	—	$	—	$	—
Obligation to return securities obtained as collateral	510,237		—		—		510,237
Total liabilities carried at fair value	$	510,237	$	—	$	—	$	510,237

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 and six months ended June 30, 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 (1)
	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2017			2016			2017			2016
Balance at beginning of period	$	775,152		$	647,360		$	814,682		$	623,276
Purchases and capitalized advances	4,831			66,169			10,164			119,759
Changes in fair value recorded in Net gain on residential whole loans held at fair value	4,262			8,390			7,209			14,616
Collection of principal, net of liquidation gains/losses	(15,652		)	(16,187		)	(35,695		)	(30,789		)
Repurchases	(450		)	—			(756		)	—
Transfer to REO	(24,071		)	(21,149		)	(51,532		)	(42,279		)
Balance at end of period	$	744,072		$	684,583		$	744,072		$	684,583

(1) Excludes approximately $239.2 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of June 30, 2017.

The following table presents additional information for the three and six months ended June 30, 2017 and 2016 about the Company’s investments in term notes backed by MSR-related collateral held at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:



	Term Notes Backed by MSR-Related Collateral
	Three Months Ended June 30,					Six Months Ended June 30,
(In Thousands)	2017			2016		2017 (1)			2016
Balance at beginning of period	$	282,332		$	—	$	—		$	—
Purchases	—			—		150,000			—
Collection of principal	(8,371		)	—		(17,019		)	—
Transfers from Level 2 to Level 3 (1)	—			—		140,980			—
Balance at end of period	$	273,961		$	—	$	273,961		$	—

(1) Investments in term notes backed by MSR-related collateral were transferred from Level 2 to Level 3 during the six months ended June 30, 2017 as there has been very limited secondary market trading in these securities since issuance. Transfers between levels are deemed to take place on the first day of the reporting period in which the transfer has taken place.

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, 2017 and December 31, 2016:



	June 30, 2017
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	286,039	Discounted cash flow	Discount rate	6.2		%	5.0-7.1%
				Prepayment rate	7.9		%	0.0-13.2%
				Default rate	3.8		%	0.0-9.4%
				Loss severity	12.5		%	0.0-77.0%

	$	458,033	Liquidation model	Discount rate	7.7		%	6.8-26.9%
				Annual change in home prices	1.8		%	(1.8)-9.8%
				Liquidation timeline (in years)	1.5			0.1-4.4
				Current value of underlying properties (3)	$	660		$15-$4,900
Total	$	744,072



	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 $239.2 million and $45.4 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 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 $354,000 and $320,000 as of June 30, 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 June 30, 2017 and December 31, 2016:



	June 30, 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	$	744,072	$	860,902	$	(116,830	)	$	814,682	$	966,174	$	(151,492	)
Loans 90 days or more past due	$	481,310	$	571,791	$	(90,481	)	$	570,025	$	695,282	$	(125,257	)

(1) Excludes approximately $239.2 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of June 30, 2017.

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, 2017 and December 31, 2016:



	June 30, 2017				December 31, 2016
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS	$	3,248,007	$	3,248,007	$	3,738,497	$	3,738,497
Non-Agency MBS, including MBS transferred to consolidated VIEs	4,592,275		4,592,275		5,825,816		5,825,816
CRT securities	636,315		636,315		404,850		404,850
Securities obtained and pledged as collateral	370,837		370,837		510,767		510,767
Residential whole loans, at carrying value	661,319		711,044		590,540		621,548
Residential whole loans, at fair value	983,270		983,270		814,682		814,682
Cash and cash equivalents	745,480		745,480		260,112		260,112
Restricted cash	11,843		11,843		58,463		58,463
Corporate loan	100,201		100,201		85,800		85,800
Swaps	—		—		233		233
Financial Liabilities (1):
Repurchase agreements	7,040,844		7,041,043		8,472,268		8,472,078
FHLB advances	—		—		215,000		215,000
Obligation to return securities obtained as collateral	510,237		510,237		510,767		510,767
Securitized debt	143,698		145,193		—		—
Senior Notes	96,753		100,315		96,733		101,111
Swaps	—		—		46,954		46,954

(1) Carrying value of securitized debt, 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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