Valuation (Tables)

3 Months Ended

Mar. 31, 2014

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at December 31, 2013:



(In thousands)
Description	Level 1			Level 2			Level 3			Total
Assets:
Cash and cash equivalents	$	183,489		$	—		$	—		$	183,489
Investments, at fair value-
Agency residential mortgage-backed securities	$	—		$	989,842		$	40,504		$	1,030,346
Private label residential mortgage-backed securities	—			—			580,772			580,772
Private label commercial mortgage-backed securities	—			—			32,994			32,994
Commercial mortgage loans	—			—			23,887			23,887
Residential mortgage loans	—			—			24,062			24,062
Other asset-backed securities	—			—			38,069			38,069
Total investments, at fair value	—			989,842			740,288			1,730,130
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	—			—			16,646			16,646
Credit default swaps on corporate bond indices	—			14,273			—			14,273
Credit default swaps on asset-backed indices	—			4,937			—			4,937
Interest rate swaps	—			23,553			—			23,553
Total return swaps	—			4			—			4
Options	—			251			—			251
Total financial derivatives–assets, at fair value	—			43,018			16,646			59,664
Repurchase agreements	—			27,962			—			27,962
Total investments and financial derivatives–assets, at fair value and repurchase agreements	$	—		$	1,060,822		$	756,934		$	1,817,756
Liabilities:
Investments sold short, at fair value-
Agency residential mortgage-backed securities	$	—		$	(811,957	)	$	—		$	(811,957	)
Government debt	—			(27,288		)	—			(27,288		)
Common stock	(6,369		)	—			—			(6,369		)
Total investments sold short, at fair value	(6,369		)	(839,245		)	—			(845,614		)
Financial derivatives–liabilities, at fair value-
Credit default swaps on corporate bond indices	—			(24,949		)	—			(24,949		)
Credit default swaps on asset-backed indices	—			(11,866		)	—			(11,866		)
Credit default swaps on asset-backed securities	—			—			(350		)	(350		)
Interest rate swaps	—			(5,064		)	—			(5,064		)
Total return swaps	—			(67		)	—			(67		)
Options	—			(84		)	—			(84		)
Futures	(2,373		)	—			—			(2,373		)
Forwards	—			(38		)	—			(38		)
Total financial derivatives–liabilities, at fair value	(2,373		)	(42,068		)	(350		)	(44,791		)
Securitized debt	—			—			(983		)	(983		)
Total investments sold short, financial derivatives–liabilities, and securitized debt, at fair value	$	(8,742	)	$	(881,313	)	$	(1,333	)	$	(891,388	)

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at March 31, 2014:



Description	Level 1			Level 2			Level 3			Total
Assets:	(In thousands)
Cash and cash equivalents	$	170,362		$	—		$	—		$	170,362
Investments, at fair value-
Agency residential mortgage-backed securities	$	—		$	1,076,782		$	41,375		$	1,118,157
Private label residential mortgage-backed securities	—			—			490,083			490,083
Private label commercial mortgage-backed securities	—			—			32,645			32,645
Commercial mortgage loans	—			—			44,005			44,005
Residential mortgage loans	—			—			23,566			23,566
Other asset-backed securities	—			—			47,458			47,458
Real estate owned	—			—			97			97
Total investments, at fair value	—			1,076,782			679,229			1,756,011
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	—			—			15,174			15,174
Credit default swaps on corporate bond indices	—			19,176			—			19,176
Credit default swaps on asset-backed indices	—			5,097			—			5,097
Interest rate swaps	—			17,473			—			17,473
Total return swaps	—			15			—			15
Options	—			393			—			393
Futures	65			—			—			65
Forwards	—			167			—			167
Total financial derivatives–assets, at fair value	65			42,321			15,174			57,560
Repurchase agreements	—			29,875			—			29,875
Total investments and financial derivatives–assets, at fair value and repurchase agreements	$	65		$	1,148,978		$	694,403		$	1,843,446
Liabilities:
Investments sold short, at fair value-
Agency residential mortgage-backed securities	$	—		$	(787,667	)	$	—		$	(787,667	)
Government debt	—			(24,195		)	—			(24,195		)
Common stock	(6,903		)	—			—			(6,903		)
Total investments sold short, at fair value	(6,903		)	(811,862		)	—			(818,765		)
Financial derivatives–liabilities, at fair value-
Credit default swaps on corporate bond indices	—			(15,984		)	—			(15,984		)
Credit default swaps on asset-backed indices	—			(7,095		)	—			(7,095		)
Credit default swaps on asset-backed securities	—			—			(350		)	(350		)
Interest rate swaps	—			(5,532		)	—			(5,532		)
Total return swaps	—			(31		)	—			(31		)
Options	—			(328		)	—			(328		)
Futures	(142		)	—			—			(142		)
Forwards	—			(42		)	—			(42		)
Total financial derivatives–liabilities, at fair value	(142		)	(29,012		)	(350		)	(29,504		)
Securitized debt	—			—			(983		)	(983		)
Total investments sold short, financial derivatives–liabilities, and securitized debt, at fair value	$	(7,045	)	$	(840,874	)	$	(1,333	)	$	(849,252	)

Schedule Of Significant Unobservable Inputs, Qualitative Information

The following table identifies the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of March 31, 2014:



	Fair Value		Valuation Technique	Unobservable Input	Range						Weighted Average
Description	Fair Value		Valuation Technique	Unobservable Input	Min			Max			Weighted Average
	(In thousands)
Private label residential mortgage-backed securities and Other asset-backed securities⁽¹⁾	$	475,211	Market Quotes	Non Binding Indicative Price	$	1.79		$	110.11		$	77.94
Private label residential mortgage-backed securities	61,348		Discounted Cash Flows	Yield	3.5		%	23.9		%	7.9		%
				Projected Collateral Prepayments	7.4		%	86.8		%	34.4		%
				Projected Collateral Losses	1.4		%	44.2		%	14.5		%
				Projected Collateral Recoveries	0.0		%	24.8		%	7.6		%
				Projected Collateral Scheduled Amortization	0.0		%	84.8		%	43.5		%
											100.0		%
Private label commercial mortgage-backed securities	4,405		Discounted Cash Flows	Yield	9.7		%	24.9		%	14.7		%
				Projected Collateral Losses	0.2		%	2.4		%	1.2		%
				Projected Collateral Recoveries	1.9		%	12.0		%	6.6		%
				Projected Collateral Scheduled Amortization	85.6		%	97.8		%	92.2		%
											100.0		%
Private label commercial mortgage-backed securities and commercial mortgage loans	33,214		Market Quotes	Non Binding Indicative Price	$	14.25		$	99.50		$	68.31
Performing commercial mortgage loans	19,000		Discounted Cash Flows	Yield	12.7		%	15.0		%	13.9		%
Non-performing commercial mortgage loans	20,030		Discounted Cash Flows	Yield	10.4		%	19.7		%	17.7		%
				Months to Resolution	7			17			10
Non-performing residential mortgage loan pools	23,663		Discounted Cash Flows	Yield	6.8		%	7.1		%	7.1		%
				Months to Resolution	4.8			16.1			9.2
Agency interest only residential mortgage-backed securities	40,018		Market Quotes	Non Binding Indicative Price	$	6.13		$	22.65		$	14.19
Agency interest only residential mortgage-backed securities	1,357		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	754			1,032			917
				Projected Collateral Prepayments	60.1		%	75.9		%	66.6		%
				Projected Collateral Scheduled Amortization	24.1		%	39.9		%	33.4		%
											100.0		%
Credit default swaps on asset-backed securities	14,824		Net Discounted Cash Flows	Projected Collateral Prepayments	19.2		%	56.8		%	29.6		%
				Projected Collateral Losses	16.1		%	49.4		%	34.2		%
				Projected Collateral Recoveries	8.3		%	15.4		%	13.3		%
				Projected Collateral Scheduled Amortization	15.4		%	41.7		%	22.9		%
											100.0		%


(1)	Includes securitized debt with a fair value of $1.0 million as of March 31, 2014.


(2)	Shown in basis points.

The following table identifies the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of December 31, 2013:



	Fair Value		Valuation Technique	Unobservable Input	Range						Weighted Average
Description	Fair Value		Valuation Technique	Unobservable Input	Min			Max			Weighted Average
	(In thousands)
Private label residential mortgage-backed securities and Other asset-backed securities⁽¹⁾	$	550,701	Market Quotes	Non Binding Indicative Price	$	1.80		$	110.35		$	78.09
Private label residential mortgage-backed securities	67,158		Discounted Cash Flows	Yield	3.8		%	20.5		%	8.0		%
				Projected Collateral Prepayments	6.9		%	64.5		%	29.7		%
				Projected Collateral Losses	4.3		%	35.2		%	17.4		%
				Projected Collateral Recoveries	0.3		%	17.1		%	9.1		%
				Projected Collateral Scheduled Amortization	14.1		%	87.3		%	43.8		%
											100.0		%
Private label commercial mortgage-backed securities	3,480		Discounted Cash Flows	Yield	9.2		%	18.2		%	13.5		%
				Projected Collateral Losses	0.2		%	0.2		%	0.2		%
				Projected Collateral Recoveries	15.4		%	15.4		%	15.4		%
				Projected Collateral Scheduled Amortization	84.4		%	84.4		%	84.4		%
											100.0		%
Private label commercial mortgage-backed securities and commercial mortgage loans	34,489		Market Quotes	Non Binding Indicative Price	$	14.25		$	102.89		$	74.24
Performing commercial mortgage loans	8,788		Discounted Cash Flows	Yield	12.7		%	12.8		%	12.7		%
Non-performing commercial mortgage loans	10,123		Discounted Cash Flows	Yield	15.0		%	15.0		%	15.0		%
				Months to Resolution	5			7			6
Non-performing residential mortgage loan pools	24,062		Discounted Cash Flows	Yield	7.4		%	7.4		%	7.4		%
				Months to Resolution	16.3			16.3			16.3
Agency interest only residential mortgage-backed securities	38,783		Market Quotes	Non Binding Indicative Price	$	6.26		$	33.77		$	14.53
Agency interest only residential mortgage-backed securities	1,721		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	349			645			422
				Projected Collateral Prepayments	49.0		%	58.1		%	51.2		%
				Projected Collateral Scheduled Amortization	41.9		%	51.0		%	48.8		%
											100.0		%
Credit default swaps on asset-backed securities	16,296		Net Discounted Cash Flows	Projected Collateral Prepayments	19.3		%	59.0		%	29.9		%
				Projected Collateral Losses	15.5		%	47.8		%	34.8		%
				Projected Collateral Recoveries	8.2		%	15.2		%	13.1		%
				Projected Collateral Scheduled Amortization	15.7		%	41.2		%	22.2		%
											100.0		%


(1)	Includes securitized debt with a fair value of $1.0 million as of December 31, 2013.


(2)	Shown in basis points.

Fair Value Measurement Using Significant Unobservable Inputs

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended March 31, 2013



(In thousands)	Ending Balance as of December 31, 2012			Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers In and/or Out of Level 3		Ending Balance as of March, 31, 2013
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	6,644		$	(870	)	$	—		$	238		$	10,216	$	—		$	—	$	16,228
Private label residential mortgage-backed securities	528,366			6,640			15,602			24,020			72,832		(89,640		)	—		557,820
Private label commercial mortgage-backed securities	19,327			57			(1,449		)	3,244			12,344		(27,745		)	—		5,778
Commercial mortgage loans	9,546			8			—			159			—		—			—		9,713
Other asset-backed securities	—			(49		)	—			(107		)	11,794		—			—		11,638
Total investments, at fair value	563,883			5,786			14,153			27,554			107,186		(117,385		)	—		601,177
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	36,031			—			3,251			(5,599		)	49		(7,334		)	—		26,398
Total financial derivatives– assets, at fair value	36,031			—			3,251			(5,599		)	49		(7,334		)	—		26,398
Total investments and financial derivatives–assets, at fair value	$	599,914		$	5,786		$	17,404		$	21,955		$	107,235	$	(124,719	)	$	—	$	627,575
Liabilities:
Financial derivatives– liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(1	)	$	—		$	(28	)	$	(1	)	$	—	$	28		$	—	$	(2	)
Total financial derivatives– liabilities, at fair value	(1		)	—			(28		)	(1		)	—		28			—		(2		)
Securitized debt:
Securitized debt	(1,335		)	(9		)	—			69			70		—			—		(1,205		)
Total securitized debt	(1,335		)	(9		)	—			69			70		—			—		(1,205		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,336	)	$	(9	)	$	(28	)	$	68		$	70	$	28		$	—	$	(1,207	)

The tables below include a roll-forward of the Company's financial instruments for the three month periods ended March 31, 2014 and 2013 (including the change in fair value), for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended March 31, 2014



(In thousands)	Beginning Balance as of December 31, 2013			Accreted Discounts / (Amortized Premiums)			Net Realized Gain/ (Loss)			Change in Net Unrealized Gain/(Loss)			Purchases/ Payments		Sales/ Issuances			Transfers In and/or Out of Level 3		Ending Balance as of March 31, 2014
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	40,504		$	(2,289	)	$	35		$	751		$	2,554	$	(180	)	$	—	$	41,375
Private label residential mortgage-backed securities	580,772			5,385			23,460			(12,852		)	89,585		(196,267		)	—		490,083
Private label commercial mortgage-backed securities	32,994			205			872			1,515			37,769		(40,710		)	—		32,645
Commercial mortgage loans	23,887			563			2			(460		)	20,023		(10		)	—		44,005
Residential mortgage loans	24,062			—			18			(260		)	—		(254		)	—		23,566
Other asset-backed securities	38,069			159			(97		)	548			13,887		(5,108		)	—		47,458
Real estate owned	—			—			—			(4		)	101		—			—		97
Total investments, at fair value	740,288			4,023			24,290			(10,762		)	163,919		(242,529		)	—		679,229
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	16,646			—			1,190			(1,210		)	39		(1,491		)	—		15,174
Total financial derivatives– assets, at fair value	16,646			—			1,190			(1,210		)	39		(1,491		)	—		15,174
Total investments and financial derivatives–assets, at fair value	$	756,934		$	4,023		$	25,480		$	(11,972	)	$	163,958	$	(244,020	)	$	—	$	694,403
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(350	)	$	—		$	(19	)	$	—		$	—	$	19		$	—	$	(350	)
Total financial derivatives– liabilities, at fair value	(350		)	—			(19		)	—			—		19			—		(350		)
Securitized debt:
Securitized debt	(983		)	(7		)	—			(17		)	24		—			—		(983		)
Total securitized debt	(983		)	(7		)	—			(17		)	24		—			—		(983		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,333	)	$	(7	)	$	(19	)	$	(17	)	$	24	$	19		$	—	$	(1,333	)

- Definition

Tabular disclosure of financial instruments measured at fair value, including those classified in shareholders' equity measured on a recurring or nonrecurring basis. Disclosures include, but are not limited to, fair value measurements recorded and the reasons for the measurements, level within the fair value hierarchy in which the fair value measurements are categorized and transfers between levels 1 and 2. Nonrecurring fair value measurements are those that are required or permitted in the statement of financial position in particular circumstances.

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- Definition

Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset.

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