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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2020

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, 2020 and 2019, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at December 31, 2020


(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Residential whole loans, at fair value	$	—	$	—	$	1,216,902	$	1,216,902
Non-Agency MBS	—		56,766		—		56,766
CRT securities	—		104,234		—		104,234
Term notes backed by MSR-related collateral	—		238,999		—		238,999
Total assets carried at fair value	$	—	$	399,999	$	1,216,902	$	1,616,901
Liabilities:
Agreements with non-mark-to-market collateral provisions	$	—	$	—	$	1,159,213	$	1,159,213
Agreements with mark-to-market collateral provisions	—		213,915		1,124,162		1,338,077
Securitized debt	—		869,482		—		869,482
Total liabilities carried at fair value	$	—	$	1,083,397	$	2,283,375	$	3,366,772

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

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, 2020 and 2019:


	December 31, 2020
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Weighted Average (2)			Range

Residential whole loans, at fair value	$	789,576	Discounted cash flow	Discount rate	3.9		%	3.3-8.0%
				Prepayment rate	4.8		%	0.0-9.9%
				Default rate	3.8		%	0.0-18.9%
				Loss severity	12.7		%	0.0-100.0%

	$	427,061	Liquidation model	Discount rate	8.1		%	6.7-50.0%
				Annual change in home prices	3.6		%	0.0-6.5%
				Liquidation timeline (in years)	1.8			0.8-4.8
				Current value of underlying properties (3)	$	729		$12-$4,500
Total	$	1,216,637


	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		%	0.0-23.0%
				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 $265,000 and $470,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at December 31, 2020 and 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 $380,000 and $365,000 as of December 31, 2020 and 2019, respectively.

Schedule of significant unobservable inputs used in fair value measurement

The following table presents additional information for the years ended December 31, 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
	For the Year Ended December 31,
(In Thousands)	2020		2019
Balance at beginning of period	$	1,381,583	$	1,471,263
Purchases (1)	—		210,031

Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings	17,204		47,849
Repayments	(92,733)		(127,063)
Sales and repurchases	(18,530)		(1,338)
Transfer to REO	(70,622)		(219,159)
Balance at end of period	$	1,216,902	$	1,381,583

(1)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, 2020 and 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
	Year Ended December 31,
(In Thousands)	2020		2019
Balance at beginning of period	$	—	$	538,499
Purchases	—		573,137
Collection of principal	—		(12,897)
Changes in unrealized gains	—		5,391
Transfer to Level 2	—		(1,104,130)
Balance at end of period	$	—	$	—

The following table presents additional information for the year ended December 31, 2020 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:


	Agreements with Non-mark-to-market Collateral Provisions
	Year Ended December 31,
(In Thousands)	2020
Balance at beginning of period	$	—
Transfer from Level 2	2,036,597
Issuances	—
Payment of principal	(879,698)
Changes in unrealized losses	2,314
Balance at end of period	$	1,159,213

The following table presents additional information for the year ended December 31, 2020 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:


	Agreements with Mark-to-market Collateral Provisions
	Year Ended December 31,
(In Thousands)	2020
Balance at beginning of period	$	—
Transfer from Level 2	1,386,592
Issuances	258,322
Payment of principal	(520,752)
Changes in unrealized losses	—
Balance at end of period	$	1,124,162

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, 2020 and 2019:


	December 31, 2020	December 31, 2020				December 31, 2019
	Level in Fair Value Hierarchy	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Residential whole loans, at carrying value	3	$	4,108,499	$	4,282,401	$	6,069,370	$	6,248,745
Residential whole loans, at fair value	3	1,216,902		1,216,902		1,381,583		1,381,583
Non-Agency MBS	2	56,766		56,766		2,063,529		2,063,529
Agency MBS	2	—		—		1,664,582		1,664,582
CRT securities	2	104,234		104,234		255,408		255,408
MSR-related assets (1)	2 and 3	238,999		238,999		1,217,002		1,217,002
Cash and cash equivalents	1	814,354		814,354		70,629		70,629
Restricted cash	1	7,165		7,165		64,035		64,035
Financial Liabilities (2):
Financing agreements with non-mark-to-market collateral provisions	3	1,159,213		1,159,213		—		—
Financing agreements with mark-to-market collateral provisions	3	1,124,162		1,124,162		4,741,971		4,753,070
Financing agreements with mark-to-market collateral provisions	2	213,915		213,915		4,397,850		4,403,139
Securitized debt (3)	2	1,514,509		1,519,567		570,952		575,353
Convertible senior notes	2	225,177		228,287		223,971		244,088
Senior notes (4)	1	100,000		100,031		96,862		103,231

(1)Includes $59.5 million of MSR-related assets that are measured at fair value on a non-recurring basis that were classified as Level 3 in the fair value hierarchy at December 31, 2019.

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

(3)Includes Securitized debt that is carried at amortized cost basis and fair value.

(4)On January 6, 2021, the Company redeemed all of its outstanding Senior Notes (see Note 17).

Other Assets Measured at Fair Value on a Nonrecurring Basis

The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. During the years ended December 31, 2020 and 2019, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $96.8 million and $257.7 million, respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.