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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2019

Schedule of fair value measurement inputs and valuation techniques

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, 2019 and December 31, 2018:



	June 30, 2019
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	787,259	Discounted cash flow	Discount rate	4.7		%	4.1-8.0%
				Prepayment rate	4.4		%	0.7-18.0%
				Default rate	4.6		%	0.0-23.5%
				Loss severity	13.0		%	0.0-100.0%

	$	648,108	Liquidation model	Discount rate	8.2		%	5.7-50.0%
				Annual change in home prices	3.5		%	0.9-8.3%
				Liquidation timeline (in years)	1.8			0.1-4.5
				Current value of underlying properties (3)	$	689		$4-$4,500
Total	$	1,435,367



	December 31, 2018
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	700,250	Discounted cash flow	Discount rate	5.2		%	4.5-8.0%
				Prepayment rate	4.8		%	0.9-15.9%
				Default rate	4.1		%	0.0-24.1%
				Loss severity	12.9		%	0.0-100.0%

	$	683,252	Liquidation model	Discount rate	8.0		%	6.1-50.0%
				Annual change in home prices	3.5		%	(0.5)-12.2%
				Liquidation timeline (in years)	1.8			0.1-4.5
				Current value of underlying properties (3)	$	802		$2-$7,950
Total	$	1,383,502

(1) Excludes approximately $90.4 million and $282.5 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 2019 and December 31, 2018, 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 $363,000 and $400,000 as of June 30, 2019 and December 31, 2018, respectively.

The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2019 and December 31, 2018, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at June 30, 2019



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	2,257,375	$	—	$	2,257,375
Non-Agency MBS	—		2,728,270		—		2,728,270
CRT securities	—		407,316		—		407,316
Residential whole loans, at fair value	—		—		1,525,814		1,525,814
Term notes backed by MSR-related collateral	—		—		1,106,026		1,106,026
Total assets carried at fair value	$	—	$	5,392,961	$	2,631,840	$	8,024,801

Fair Value at December 31, 2018



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	2,698,213	$	—	$	2,698,213
Non-Agency MBS	—		3,318,299		—		3,318,299
CRT securities	—		492,821		—		492,821
Residential whole loans, at fair value	—		—		1,665,978		1,665,978
Term notes backed by MSR-related collateral	—		—		538,499		538,499
Total assets carried at fair value	$	—	$	6,509,333	$	2,204,477	$	8,713,810

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, 2019 and 2018 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 June 30, (1)						Six Months Ended June 30, (1)
(In Thousands)	2019			2018			2019			2018
Balance at beginning of period	$	1,512,337		$	1,555,619		$	1,471,263		$	1,325,115
Purchases and capitalized advances (2)	5,299			6,175			135,388			317,300
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings	21,188			4,599			20,128			18,346
Collection of principal, net of liquidation gains/losses	(43,072		)	(54,184		)	(74,823		)	(100,868		)
Repurchases	(898		)	(867		)	(1,216		)	(1,061		)
Transfer to REO	(56,027		)	(42,802		)	(111,913		)	(90,292		)
Balance at end of period	$	1,438,827		$	1,468,540		$	1,438,827		$	1,468,540


(1)	Excludes approximately $87.0 million and $34.4 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of June 30, 2019 and 2018, respectively.

(2)

Included in the activity presented for the six months ended June 30, 2019 is an adjustment of $70.6 million for loans the Company committed to purchase during the three months ended December 31, 2018, but for which the closing of the purchase transaction occurred during the three months ended March 31, 2019. The adjustment was required following the finalization of due diligence performed prior to the closing of the purchase transaction and resulted in a downward revision to the prior estimate of the loan purchase amount.

The following table presents additional information for the three and six months ended June 30, 2019 and 2018 about the Company’s investments in term notes backed by MSR-related collateral, 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)	2019			2018		2019			2018
Balance at beginning of period	$	753,594		$	332,040	$	538,499		$	381,804
Purchases	353,970			49,350		573,136			149,350
Collection of principal	(4,392		)	—		(8,976		)	(150,000		)
Changes in unrealized gain/losses	2,854			—		3,367			236
Balance at end of period	$	1,106,026		$	381,390	$	1,106,026		$	381,390

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, 2019 and December 31, 2018:



	June 30, 2019				December 31, 2018
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS	$	2,257,375	$	2,257,375	$	2,698,213	$	2,698,213
Non-Agency MBS	2,728,270		2,728,270		3,318,299		3,318,299
CRT securities	407,316		407,316		492,821		492,821
Residential whole loans, at carrying value	4,391,983		4,523,198		3,016,715		3,104,401
Residential whole loans, at fair value	1,525,814		1,525,814		1,665,978		1,665,978
MSR-related assets	1,169,872		1,169,872		611,807		611,807
Cash and cash equivalents	88,661		88,661		51,965		51,965
Restricted cash	31,056		31,056		36,744		36,744
Financial Liabilities (1):
Repurchase agreements	8,630,642		8,647,800		7,879,087		7,896,672
Securitized debt	627,487		631,202		684,420		680,209
Convertible Senior Notes	223,399		232,013		—		—
Senior Notes	96,838		102,111		96,816		99,951

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