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Fair Value of Financial Instruments (Tables)
 12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Schedule of significant unobservable inputs used in fair value measurement
The following table presents additional information for the years ended December 31, 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
 
 
For the Year Ended December 31,
(In Thousands)
 
2019
 
2018 (1)
Balance at beginning of period
 
$
1,471,263

 
$
1,325,115

Purchases and capitalized advances (2)
 
234,979

 
500,004

Changes in fair value recorded in Net gain on residential whole
loans measured at fair value through earnings
 
47,848

 
36,725

Collection of principal, net of liquidation gains/(losses)
 
(152,011
)
 
(199,203
)
  Repurchases
 
(1,337
)
 
(1,807
)
  Transfer to REO
 
(219,159
)
 
(189,571
)
Balance at end of period
 
$
1,381,583

 
$
1,471,263


(1)
Excluded from the table above are approximately $194.7 million of residential whole loans held at fair value for which the closing of the purchase transaction had not occurred as of December 31, 2018.
(2)
Included in the activity presented for the year ended December 31, 2019 is an adjustment of $70.6 million for loans the Company committed to purchase during the year 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 years ended December 31, 2019 and 2018 about the Company’s investments in term notes backed by MSR-related collateral, which were classified as Level 3 prior to September 30, 2019 and measured at fair value on a recurring basis:

 
 
Term Notes Backed by MSR-Related Collateral
 
 
Year Ended December 31,
(In Thousands)
 
2019
 
2018
Balance at beginning of period
 
$
538,499

 
$
381,804

Purchases
 
573,137

 
548,404

  Collection of principal
 
(12,897
)
 
(390,898
)
Changes in unrealized gain/(losses)
 
5,391

 
(811
)
  Transfer to Level 2
 
(1,104,130
)
 
—

Balance at end of period
 
$
—

 
$
538,499
Schedule of quantitative information about significant unobservable inputs
The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2019 and 2018, on the consolidated balance sheets by the valuation hierarchy, as previously described:
 
Fair Value at December 31, 2019
 
(In Thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Agency MBS
 
$
—

 
$
1,664,582

 
$
—

 
$
1,664,582

Non-Agency MBS
 
—

 
2,063,529

 
—

 
2,063,529

CRT securities
 
—

 
255,408

 
—

 
255,408

Residential whole loans, at fair value
 
—

 
—

 
1,381,583

 
1,381,583

Term notes backed by MSR-related collateral
 
—

 
1,157,463

 
—

 
1,157,463

Total assets carried at fair value
 
$
—

 
$
5,140,982

 
$
1,381,583

 
$
6,522,565


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



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 December 31, 2019 and 2018:

 
 
December 31, 2019
 
 
(Dollars in Thousands)
 
Fair Value (1)
 
Valuation Technique
 
Unobservable Input
 
Weighted Average (2)
 
Range
 
 
 
 
 
 
 
 
 
 
 
Residential whole loans, at fair value
 
$
829,842

 
Discounted cash flow
 
Discount rate
 
4.2
%
 
3.8-8.0%
 
 
 
 
 
 
Prepayment rate
 
4.5
%
 
0.7-18.0%
 
 
 
 
 
 
Default rate
 
4.0
%
 
0.0-23.0%
 
 
 
 
 
 
Loss severity
 
12.9
%
 
0.0-100.0%
 
 
 
 
 
 
 
 
 
 
 
 
 
$
551,271

 
Liquidation model
 
Discount rate
 
8.0
%
 
6.2-50.0%
 
 
 
 
 
 
Annual change in home prices
 
3.7
%
 
2.4-8.0%
 
 
 
 
 
 
Liquidation timeline (in years)
 
1.8

 
0.1-4.5
 
 
 
 
 
 
Current value of underlying properties (3)
 
$
684

 
$10-$4,500
Total
 
$
1,381,113

 
 
 
 
 
 
 
 

 
 
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 $470,000 and $282.5 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at December 31, 2019 and 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 $365,000 and $400,000 as of December 31, 2019 and 2018, respectively.
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 December 31, 2019 and 2018:
 
 
 
Level in Fair Value Hierarchy
 
December 31, 2019
 
December 31, 2018
(In Thousands)
 
 
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets:
 
 
 
 
 
 
 
 
 
 
Agency MBS
 
2
 
$
1,664,582

 
$
1,664,582

 
$
2,698,213

 
$
2,698,213

Non-Agency MBS
 
2
 
2,063,529

 
2,063,529

 
3,318,299

 
3,318,299

CRT securities
 
2
 
255,408

 
255,408

 
492,821

 
492,821

Residential whole loans, at carrying value
 
3
 
6,066,345

 
6,248,745

 
3,016,715

 
3,104,401

Residential whole loans, at fair value
 
3
 
1,381,583

 
1,381,583

 
1,665,978

 
1,665,978

MSR-related assets (1)
 
2 and 3
 
1,217,002

 
1,217,002

 
611,807

 
611,807

Cash and cash equivalents
 
1
 
70,629

 
70,629

 
51,965

 
51,965

Restricted cash
 
1
 
64,035

 
64,035

 
36,744

 
36,744

Financial Liabilities (2):
 
 
 
 
 
 

 
 

 
 
Repurchase agreements
 
2
 
9,139,821

 
9,156,209

 
7,879,087

 
7,896,672

Securitized debt
 
2
 
570,952

 
575,353

 
684,420

 
680,209

Convertible Senior Notes
 
2
 
223,971

 
244,088

 
—

 
—

Senior Notes
 
1
 
96,862

 
103,231

 
96,816

 
99,951

 
(1)
Includes $59.5 million of MSR-related assets that are measured at fair value on a non-recurring basis that are classified as Level 3 in the fair value hierarchy.
(2)
Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs.