Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2018

Schedule of fair value measurement inputs and valuation techniques

The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at June 30, 2018



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	2,362,897	$	—	$	2,362,897
Non-Agency MBS	—		3,242,967		—		3,242,967
CRT securities	—		571,955		—		571,955
Term notes backed by MSR related collateral	—		—		381,390		381,390
Residential whole loans, at fair value	—		—		1,502,986		1,502,986
Securities obtained and pledged as collateral	253,721		—		—		253,721
Swaps	—		11,183		—		11,183
Total assets carried at fair value	$	253,721	$	6,189,002	$	1,884,376	$	8,327,099
Liabilities:
Obligation to return securities obtained as collateral	$	253,721	$	—	$	—	$	253,721
Total liabilities carried at fair value	$	253,721	$	—	$	—	$	253,721

Fair Value at December 31, 2017



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	2,824,681	$	—	$	2,824,681
Non-Agency MBS	—		3,533,966		—		3,533,966
CRT securities	—		664,403		—		664,403
Term notes backed by MSR related collateral	—		—		381,804		381,804
Residential whole loans, at fair value	—		—		1,325,115		1,325,115
Securities obtained and pledged as collateral	504,062		—		—		504,062
Swaps	—		679		—		679
Total assets carried at fair value	$	504,062	$	7,023,729	$	1,706,919	$	9,234,710
Liabilities:
Obligation to return securities obtained as collateral	$	504,062	$	—	$	—	$	504,062
Total liabilities carried at fair value	$	504,062	$	—	$	—	$	504,062

The following tables present 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, 2018 and December 31, 2017:



	June 30, 2018
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	673,765	Discounted cash flow	Discount rate	5.5		%	4.5-8.2%
				Prepayment rate	3.9		%	0.9-13.5%
				Default rate	2.5		%	0.0-20.8%
				Loss severity	13.0		%	0.0-100.0%

	$	794,715	Liquidation model	Discount rate	8.2		%	6.1-50.0%
				Annual change in home prices	3.1		%	(0.6)-11.2%
				Liquidation timeline (in years)	1.8			0.1-4.5
				Current value of underlying properties (3)	$	829		$1-$12,400
Total	$	1,468,480



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

Residential whole loans, at fair value	$	358,871	Discounted cash flow	Discount rate	5.5		%	4.5-13.0%
				Prepayment rate	4.1		%	1.15-15.1%
				Default rate	2.9		%	0.0-6.5%
				Loss severity	13.8		%	0.0-100.0%

	$	592,940	Liquidation model	Discount rate	8.0		%	6.1-50.0%
				Annual change in home prices	2.5		%	(8.0)-8.8%
				Liquidation timeline (in years)	1.6			0.1-4.5
				Current value of underlying properties (3)	$	772		$0-$9,900
Total	$	951,811

(1) Excludes approximately $34.5 million and $373.3 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 2018 and December 31, 2017, 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$384,000 and $336,000 as of June 30, 2018 and December 31, 2017, respectively.

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, 2018 and 2017 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)	2018			2017			2018			2017
Balance at beginning of period	$	1,555,619		$	775,152		$	1,325,115		$	814,682
Purchases and capitalized advances	6,175			4,831			317,300			10,164
Changes in fair value recorded in Net gain on residential whole loans held at fair value	4,599			4,262			18,346			7,209
Collection of principal, net of liquidation gains/losses	(54,184		)	(15,652		)	(100,868		)	(35,695		)
Repurchases	(867		)	(450		)	(1,061		)	(756		)
Transfer to REO	(42,802		)	(24,071		)	(90,292		)	(51,532		)
Balance at end of period	$	1,468,540		$	744,072		$	1,468,540		$	744,072

(1) Excludes approximately $34.4 million and $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, 2018 and 2017, respectively.

The following table presents additional information for the three and six months ended June 30, 2018 and 2017 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)	2018		2017			2018			2017 (1)
Balance at beginning of period	$	332,040	$	282,332		$	381,804		$	—
Purchases	49,350		—			149,350			150,000
Collection of principal	—		(8,371		)	(150,000		)	(17,019		)
Changes in unrealized gain/losses	—		—			236			—
Transfers from Level 2 to Level 3 (1)	—		—			—			140,980
Balance at end of period	$	381,390	$	273,961		$	381,390		$	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 had 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 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, 2018 and December 31, 2017:



	June 30, 2018				December 31, 2017
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS	$	2,362,897	$	2,362,897	$	2,824,681	$	2,824,681
Non-Agency MBS	3,242,967		3,242,967		3,533,966		3,533,966
CRT securities	571,955		571,955		664,403		664,403
MSR related assets	381,390		381,390		492,080		493,026
Residential whole loans, at carrying value	1,906,242		1,987,218		908,516		988,688
Residential whole loans, at fair value	1,502,986		1,502,986		1,325,115		1,325,115
Securities obtained and pledged as collateral	253,721		253,721		504,062		504,062
Cash and cash equivalents	54,880		54,880		449,757		449,757
Restricted cash	3,298		3,298		13,307		13,307
Swaps	11,183		11,183		679		679
Financial Liabilities (1):
Repurchase agreements	5,892,228		5,900,049		6,614,701		6,623,255
Securitized debt	518,655		518,659		363,944		366,109
Obligation to return securities obtained as collateral	253,721		253,721		504,062		504,062
Senior Notes	96,794		102,231		96,773		103,729

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