Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2020

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, 2020 and December 31, 2019:



	June 30, 2020
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	677,172	Discounted cash flow	Discount rate	4.7		%	4.2-8.0%
				Prepayment rate	3.8		%	0.0-8.0%
				Default rate	5.5		%	0.0-34.1%
				Loss severity	12.8		%	0.0-100.0%

	$	523,535	Liquidation model	Discount rate	8.1		%	6.6-50.0%
				Annual change in home prices	0.2		%	(4.0)-6.9%
				Liquidation timeline (in years)	2.0			0.8-4.8
				Current value of underlying properties (3)	$	698		$5-$4,500
Total	$	1,200,707



	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

(1) Excludes approximately $274,000 and $470,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 2020 and December 31, 2019, 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 $375,000 and $365,000 as of June 30, 2020 and December 31, 2019, respectively.

The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at June 30, 2020



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Residential whole loans, at fair value	$	—	$	—	$	1,200,981	$	1,200,981
Non-Agency MBS	—		54,237		—		54,237
CRT securities	—		94,106		—		94,106
Term notes backed by MSR-related collateral	—		224,782		—		224,782
Total assets carried at fair value	$	—	$	373,125	$	1,200,981	$	1,574,106
Liabilities:
Agreements with non-mark-to-market collateral provisions	$	—	$	2,036,597	$	—	$	2,036,597
Agreements with mark-to-market collateral provisions	—		1,656,248		—		1,656,248
Senior secured credit agreement	—		480,959		—		480,959
Other	—		20,520		—		20,520
Total liabilities carried at fair value	$	—	$	4,194,324	$	—	$	4,194,324

Fair Value at December 31, 2019



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Residential whole loans, at fair value	$	—	$	—	$	1,381,583	$	1,381,583
Non-Agency MBS	—		2,063,529		—		2,063,529
Agency MBS	—		1,664,582		—		1,664,582
CRT securities	—		255,408		—		255,408
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

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, 2020 and 2019 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,						Six Months Ended June 30,
(In Thousands)	2020			2019 (1)			2020			2019 (1)
Balance at beginning of period	$	1,243,792		$	1,512,337		$	1,381,583		$	1,471,263
Purchases and capitalized advances (2)	4,679			5,299			8,198			135,388
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings	2,010			21,188			(72,546		)	20,128
Collection of principal, net of liquidation gains/(losses)	(28,608		)	(43,072		)	(52,412		)	(74,823		)
Sales and repurchases	(18,225		)	(898		)	(18,530		)	(1,216		)
Transfer to REO	(2,667		)	(56,027		)	(45,312		)	(111,913		)
Balance at end of period	$	1,200,981		$	1,438,827		$	1,200,981		$	1,438,827


(1)	Excludes approximately $87.0 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.

(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 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
	Three Months Ended June 30,			Six Months Ended June 30,
(In Thousands)	2019			2019
Balance at beginning of period	$	753,594		$	538,499
Purchases	353,970			573,136
Collection of principal	(4,392		)	(8,976		)
Changes in unrealized gains	2,854			3,367
Balance at end of period	$	1,106,026		$	1,106,026

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, 2020 and December 31, 2019:



	June 30, 2020	June 30, 2020				December 31, 2019
	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Residential whole loans, at carrying value	3	$	4,676,530	$	4,651,188	$	6,069,370	$	6,248,745
Residential whole loans, at fair value	3	1,200,981		1,200,981		1,381,583		1,381,583
Non-Agency MBS	2	54,237		54,237		2,063,529		2,063,529
Agency MBS	2	—		—		1,664,582		1,664,582
CRT securities	2	94,106		94,106		255,408		255,408
MSR-related assets (1)	2 and 3	254,228		255,036		1,217,002		1,217,002
Cash and cash equivalents	1	666,172		666,172		70,629		70,629
Restricted cash	1	7,680		7,680		64,035		64,035
Financial Liabilities (2):
Financing agreements with non-mark-to-market collateral provisions	2	2,036,597		2,036,597		—		—
Financing agreements with mark-to-market collateral provisions	2	1,656,248		1,656,248		9,139,821		9,156,209
Senior secured credit agreement	2	480,959		480,959		—		—
Securitized debt	2	516,102		498,114		570,952		575,353
Convertible senior notes	2	224,563		202,465		223,971		244,088
Senior notes	1	96,887		89,551		96,862		103,231


(1)	Includes $29.4 million and $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 at June 30, 2020 and December 31, 2019, respectively.


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