Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2023

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

16. Fair Value of Financial Instruments

The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 - inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

a.Residential Loans Held in Consolidated SLST – Residential loans held in Consolidated SLST are carried at fair value and classified as Level 3 fair values. In accordance with the practical expedient in ASC 810, the Company determines the fair value of residential loans held in Consolidated SLST based on the fair value of the CDOs issued by the securitization and its investment in the securitization (eliminated in consolidation in accordance with GAAP), as the fair value of these instruments is more observable.

The investment securities (eliminated in consolidation in accordance with GAAP) that we own in the securitization are generally illiquid and trade infrequently. As such, they are classified as Level 3 in the fair value hierarchy. The fair valuation of these investment securities is determined based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significant unobservable inputs used in the measurement of these investments are projected losses within the pool of loans and a discount rate. The discount rate used in determining fair value incorporates default rate, loss severity, prepayment rate and current market interest rates. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement.

b.Residential Loans and Residential Loans Held in Securitization Trusts – The Company’s acquired residential loans are recorded at fair value and classified as Level 3 in the fair value hierarchy. The fair value for residential loans is determined using valuations obtained from a third party that specializes in providing valuations of residential loans. The valuation approach depends on whether the residential loan is considered performing, re-performing or non-performing at the date the valuation is performed.

For performing and re-performing loans, estimates of fair value are derived using a discounted cash flow model, where estimates of cash flows are determined from scheduled payments for each loan, adjusted using forecast prepayment rates, default rates and rates for loss upon default. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, expected liquidation costs and home price appreciation. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield.

c.Preferred Equity and Mezzanine Loan Investments – Fair value for preferred equity and mezzanine loan investments is determined by both market comparable pricing and discounted cash flows. The discounted cash flows are based on the underlying estimated cash flows and estimated changes in market yields. The fair value also reflects consideration of changes in credit risk since origination or time of initial investment. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 in the fair value hierarchy.

d.Investment Securities Available for Sale – The Company determines the fair value of all of its investment securities available for sale based on discounted cash flows utilizing an internal pricing model. The methodology considers the characteristics of the particular security and its underlying collateral, which are observable inputs. These inputs include, but are not limited to, delinquency status, coupon, loan-to-value ("LTV"), historical performance, periodic and life caps, collateral type, rate reset period, seasoning, prepayment speeds and credit enhancement levels. The Company also considers several observable market data points, including prices obtained from third-party pricing services or dealers who make markets in similar financial instruments, trading activity, and dialogue with market participants. Third-party pricing services typically incorporate commonly used market pricing methods, trading activity observed in the marketplace and other data inputs similar to those used in the Company's internal pricing model. The Company has established thresholds to compare internally generated prices with independent third-party prices and any differences that exceed the thresholds are reviewed both internally and with the third-party pricing service. The Company reconciles and resolves all pricing differences in excess of the thresholds before a final price is established. The Company’s investment securities available for sale are valued based upon readily observable market parameters and are classified as Level 2 fair values.

e.Equity Investments – Fair value for equity investments is determined (i) by the valuation process for preferred equity and mezzanine loan investments as described in c. above or (ii) using weighted multiples of origination volume and earnings before taxes, depreciation and amortization of the entity. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 in the fair value hierarchy.

f.Derivative Instruments – The fair values of the Company's interest rate cap agreements are measured using models developed by either third-party pricing providers or the respective counterparty that use the market-standard methodology of discounting the future expected cash receipts which would occur if floating interest rates rise above the strike rate of the caps. The floating interest rates used in the calculation of projected receipts on the interest rate caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The inputs used in the valuation of interest rate caps fall within Level 2 of the fair value hierarchy.

The Company's interest rate swaps are classified as Level 2 fair values and are measured using valuations reported by CME Clearing. The derivatives are presented net of variation margin payments pledged or received.

The Company's options are classified as Level 2 fair values and are measured using prices obtained from the counterparty.

g.Collateralized Debt Obligations – CDOs issued by Consolidated SLST are classified as Level 3 fair values for which fair value is determined by considering several market data points, including prices obtained from third-party pricing services or dealers who make markets in similar financial instruments. The third-party pricing service or dealers incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security. They will also consider contractual cash payments and yields expected by market participants.

Refer to a. above for a description of the fair valuation of CDOs issued by Consolidated SLST that are eliminated in consolidation.

Management reviews all prices used in determining fair value to ensure they represent current market conditions. This review includes surveying similar market transactions and comparisons to interest pricing models as well as offerings of like securities by dealers. Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company continues to refine its valuation methodologies. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of each reporting date, which may include periods of market dislocation, during which time price transparency may be reduced. This condition could cause the Company’s financial instruments to be reclassified from Level 2 to Level 3 in future periods.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):

	Measured at Fair Value on a Recurring Basis at
	March 31, 2023								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets carried at fair value
Residential loans:
Residential loans	$	—	$	—	$	921,000	$	921,000	$	—	$	—	$	1,081,384	$	1,081,384
Consolidated SLST	—		—		829,153		829,153		—		—		827,582		827,582
Residential loans held in securitization trusts	—		—		1,624,703		1,624,703		—		—		1,616,114		1,616,114
Multi-family loans	—		—		95,309		95,309		—		—		87,534		87,534
Investment securities available for sale:
Agency RMBS	—		107,200		—		107,200		—		—		—		—
Non-Agency RMBS	—		64,211		—		64,211		—		68,570		—		68,570
CMBS	—		30,668		—		30,668		—		30,133		—		30,133
ABS	—		492		—		492		—		856		—		856
Equity investments (1)	—		—		191,148		191,148		—		—		179,746		179,746
Derivative assets:
Interest rate caps (1) (2)	—		2,002		—		2,002		—		2,473		—		2,473
Options (2)	—		1,120		—		1,120		—		—		—		—
Assets of disposal group held for sale (3)	—		22,800		10,070		32,870		—		29,418		9,010		38,428
Total	$	—	$	228,493	$	3,671,383	$	3,899,876	$	—	$	131,450	$	3,801,370	$	3,932,820
Liabilities carried at fair value
Consolidated SLST CDOs	$	—	$	—	$	638,513	$	638,513	$	—	$	—	$	634,495	$	634,495
Derivative liabilities:
Interest rate swaps (2) (4)	—		—		—		—		—		—		—		—
Total	$	—	$	—	$	638,513	$	638,513	$	—	$	—	$	634,495	$	634,495

(1)Excludes assets of disposal group held for sale (see Note 9).

(2)Included in other assets in the condensed consolidated balance sheets.

(3)Includes derivative assets classified as Level 2 instruments in the amount of $22.8 million and $29.4 million as of March 31, 2023 and December 31, 2022, respectively, and equity investments classified as Level 3 instruments in the amount of $10.1 million and $9.0 million as of March 31, 2023 and December 31, 2022, respectively.

(4)All of the Company’s interest rate swaps outstanding are cleared through a central clearing house. The Company exchanges variation margin for swaps based upon daily changes in fair value. Includes derivative liabilities of $2.9 million and derivative assets of $0.4 million netted against a variation margin of $2.5 million at March 31, 2023.

The following tables detail changes in valuation for the Level 3 assets for the three months ended March 31, 2023 and 2022, respectively (dollar amounts in thousands):

Level 3 Assets:

	Three Months Ended March 31, 2023
	Residential loans
	Residential loans		Consolidated SLST		Residential loans held in securitization trusts		Multi-family loans		Equity investments		Equity investments in disposal group held for sale		Total
Balance at beginning of period	$	1,081,384	$	827,582	$	1,616,114	$	87,534	$	179,746	$	9,010	$	3,801,370
Total (losses)/gains (realized/unrealized)
Included in earnings	(599)		15,121		33,041		2,889		3,451		1,060		54,963
Transfers out (1)	(93)		—		(233)		—		—		—		(326)
Transfer to securitization trust, net (2)	(86,110)		—		86,110		—		—		—		—
Funding/Contributions	—		—		—		6,420		15,528		—		21,948
Paydowns/Distributions	(141,355)		(13,550)		(130,911)		(1,534)		(7,577)		—		(294,927)
Sales	(166)		—		—		—		—				(166)
Purchases	67,939		—		20,582		—		—		—		88,521
Balance at the end of period	$	921,000	$	829,153	$	1,624,703	$	95,309	$	191,148	$	10,070	$	3,671,383

(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned.

(2)During the three months ended March 31, 2023, the Company transferred certain business purpose loans into residential loan securitizations (see Note 7 for further discussion of the Company's residential loan securitizations).

	Three Months Ended March 31, 2022
	Residential loans
	Residential loans		Consolidated SLST		Residential loans held in securitization trusts		Multi-family loans		Equity investments		Total
Balance at beginning of period	$	1,703,290	$	1,070,882	$	801,429	$	120,021	$	239,631	$	3,935,253
Total (losses)/gains (realized/unrealized)
Included in earnings	(24,571)		(67,685)		(33,729)		3,258		6,793		(115,934)
Transfers out (1)	(90)		—		(789)		—		—		(879)
Transfer to securitization trust, net (2)	(598,430)		—		598,430		—		—		—
Funding/Contributions	—		—		—		—		19,191		19,191
Paydowns/Distributions	(126,575)		(33,344)		(117,548)		(13,071)		(40,315)		(330,853)
Sales	(320)		—		—		—		—		(320)
Purchases	767,914		—		14,563		—		—		782,477
Balance at the end of period	$	1,721,218	$	969,853	$	1,262,356	$	110,208	$	225,300	$	4,288,935

(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned.

(2)During the three months ended March 31, 2022, the Company completed two securitizations of certain performing, re-performing and business purpose loans (see Note 7 for further discussion of the Company's residential loan securitizations).

The following table details changes in valuation for the Level 3 liabilities for the three months ended March 31, 2023 and 2022, respectively (dollar amounts in thousands):

Level 3 Liabilities:

	Consolidated SLST CDOs
	Three Months Ended March 31,
	2023		2022
Balance at beginning of period	$	634,495	$	839,419
Total gains (realized/unrealized)
Included in earnings	14,511		(51,438)
Paydowns	(10,493)		(33,717)
Balance at the end of period	$	638,513	$	754,264

The following table discloses quantitative information regarding the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value (dollar amounts in thousands, except input values):

March 31, 2023	Fair Value	Valuation Technique	Unobservable Input	Weighted Average	Range
Assets
Residential loans:
Residential loans and residential loans held in securitization trusts (1)	$2,392,768	Discounted cash flow	Lifetime CPR	4.6%	—	-	34.9%
			Lifetime CDR	0.7%	—	-	26.9%
			Loss severity	7.9%	—	-	96.6%
			Yield	7.9%	5.3%	-	92.0%
	$152,935	Liquidation model	Annual home price appreciation/(depreciation)	0.1%	(1.0)%	-	5.2%
			Liquidation timeline (months)	20	9	-	50
			Property value	$1,931,405	$15,300	-	$13,800,000
			Yield	7.6%	7.5%	-	29.3%
Consolidated SLST (3)	$829,153		Liability price	N/A
Total	$3,374,856
Multi-family loans (1)	$95,309	Discounted cash flow	Discount rate	12.4%	11.0%	-	20.5%
			Months to assumed redemption	35	6	-	52
			Loss severity	—
Equity investments (1) (2)	$166,148	Discounted cash flow	Discount rate	13.5%	13.0%	-	15.5%
			Months to assumed redemption	20	1	-	59
			Loss severity	—
Equity investments in disposal group held for sale (2)	$10,070	Discounted cash flow	Discount rate	16.0%	16.0%	-	16.0%
			Months to assumed redemption	18	18	-	18
			Loss severity	—
Liabilities
Consolidated SLST CDOs (3) (4)	$638,513	Discounted cash flow	Yield	5.0%	4.3%	-	10.0%
			Collateral prepayment rate	5.8%	2.6%	-	6.7%
			Collateral default rate	1.5%	—	-	11.5%
			Loss severity	22.0%	2.3%	-	27.2%

(1)Weighted average amounts are calculated based on the weighted average fair value of the assets.

(2)Equity investments do not include equity ownership interests in an entity that originates residential loans. The fair value of this investment is determined using weighted multiples of origination volume and earnings before taxes, depreciation and amortization of the entity.

(3)In accordance with the practical expedient in ASC 810, the Company determines the fair value of the residential loans held in Consolidated SLST based on the fair value of the CDOs issued by Consolidated SLST, including investment securities we own, as the fair value of these instruments is more observable. At March 31, 2023, the fair value of investment securities we own in Consolidated SLST amounts to $188.5 million.

(4)Weighted average yield calculated based on the weighted average fair value of the CDOs issued by Consolidated SLST, including investment securities we own. Weighted average collateral prepayment rate, weighted average collateral default rate, and weighted average loss severity are calculated based on the weighted average unpaid balance of the CDOs issued by Consolidated SLST, including investment securities we own.

The following table details the changes in unrealized gains (losses) included in earnings for the three months ended March 31, 2023 and 2022, respectively, for our Level 3 assets and liabilities held as of March 31, 2023 and 2022, respectively (dollar amounts in thousands):

	Three Months Ended March 31,
	2023		2022
Assets
Residential loans:
Residential loans (1)	$	(3,320)	$	(25,440)
Consolidated SLST (1)	15,807		(66,645)
Residential loans held in securitization trusts (1)	30,077		(32,566)
Multi-family loans (1)	453		291
Equity investments (2)	(2,577)		1,115
Equity investments in disposal group held for sale (2)	1,060		—
Liabilities
Consolidated SLST CDOs (1)	(13,508)		51,366

(1)Presented in unrealized gains (losses), net on the Company's condensed consolidated statements of operations.

(2)Presented in income from equity investments on the Company's condensed consolidated statements of operations.

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2023 and December 31, 2022, respectively (dollar amounts in thousands):

		March 31, 2023				December 31, 2022
	Fair Value Hierarchy Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	227,753	$	227,753	$	244,718	$	244,718
Residential loans	Level 3	3,374,856		3,374,856		3,525,080		3,525,080
Multi-family loans	Level 3	95,309		95,309		87,534		87,534
Investment securities available for sale	Level 2	202,571		202,571		99,559		99,559
Equity investments	Level 3	191,148		191,148		179,746		179,746
Equity investments in disposal group held for sale	Level 3	10,070		10,070		9,010		9,010
Derivative assets	Level 2	3,122		3,122		2,473		2,473
Derivative assets in disposal group held for sale	Level 2	22,800		22,800		29,418		29,418
Financial Liabilities:
Repurchase agreements	Level 2	787,902		787,902		737,023		737,023
Collateralized debt obligations:
Residential loan securitizations at amortized cost, net	Level 3	1,390,991		1,321,342		1,468,222		1,383,715
Consolidated SLST	Level 3	638,513		638,513		634,495		634,495
Subordinated debentures	Level 3	45,000		33,500		45,000		32,721
Senior unsecured notes	Level 2	97,561		91,732		97,384		91,104
Mortgages payable on real estate	Level 3	397,316		374,605		394,707		377,327
Mortgages payable on real estate in disposal group held for sale	Level 3	878,060		877,360		865,414		864,758

In addition to the methodology to determine the fair value of the Company’s financial assets and liabilities reported at fair value, as previously described, the following methods and assumptions were used by the Company in arriving at the fair value of the Company’s other financial instruments in the table immediately above:

a.Cash and cash equivalents – Estimated fair value approximates the carrying value of such assets.

b.Repurchase agreements – The fair value of these repurchase agreements approximates cost as they are short term in nature.

c.Residential loan securitizations at amortized cost, net – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparable obligations.

d.Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate for market yields.

e.Senior unsecured notes – The fair value is based on quoted prices provided by dealers who make markets in similar financial instruments.

f.Mortgages payable on real estate – The fair value of consolidated variable-rate mortgages payable approximates the carrying value of such liabilities. The fair value of consolidated fixed-rate mortgages payable is estimated based upon discounted cash flows at current borrowing rates.