Valuation (Tables)

6 Months Ended

Jun. 30, 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⁽¹⁾	—			—			(983		)	(983		)
Total investments sold short, financial derivatives–liabilities, and securitized debt, at fair value	$	(8,742	)	$	(881,313	)	$	(1,333	)	$	(891,388	)


(1)	The asset subject to the resecuritization had a fair value of $2.3 million as of December 31, 2013, which is included on the Consolidated Schedule of Investments under Principal and Interest Private – Label Securities.

The table below reflects the value of the Company's Level 1, Level 2, and Level 3 financial instruments at June 30, 2014:



Description	Level 1			Level 2			Level 3			Total
Assets:	(In thousands)
Cash and cash equivalents	$	145,032		$	—		$	—		$	145,032
Investments, at fair value-
Agency residential mortgage-backed securities	$	—		$	1,059,901		$	36,240		$	1,096,141
Private label residential mortgage-backed securities	—			—			485,902			485,902
Private label commercial mortgage-backed securities	—			—			28,047			28,047
Commercial mortgage loans	—			—			37,415			37,415
Residential mortgage loans	—			—			23,371			23,371
Other asset-backed securities	—			—			81,315			81,315
Real estate owned	—			—			1,641			1,641
Total investments, at fair value	—			1,059,901			693,931			1,753,832
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	—			—			14,162			14,162
Credit default swaps on corporate bond indices	—			21,682			—			21,682
Credit default swaps on asset-backed indices	—			3,264			—			3,264
Interest rate swaps	—			19,422			—			19,422
Total return swaps	—			24			—			24
Swaptions	—			662			—			662
Futures	202			—			—			202
Forwards	—			52			—			52
Total financial derivatives–assets, at fair value	202			45,106			14,162			59,470
Repurchase agreements	—			30,537			—			30,537
Total investments and financial derivatives–assets, at fair value and repurchase agreements	$	202		$	1,135,544		$	708,093		$	1,843,839
Liabilities:
Investments sold short, at fair value-
Agency residential mortgage-backed securities	$	—		$	(802,666	)	$	—		$	(802,666	)
Government debt	—			(24,457		)	—			(24,457		)
Common stock	(25,723		)	—			—			(25,723		)
Total investments sold short, at fair value	(25,723		)	(827,123		)	—			(852,846		)
Financial derivatives–liabilities, at fair value-
Credit default swaps on corporate bond indices	—			(26,883		)	—			(26,883		)
Credit default swaps on corporate bonds	—			(2,287		)	—			(2,287		)
Credit default swaps on asset-backed indices	—			(4,680		)	—			(4,680		)
Credit default swaps on asset-backed securities	—			—			(350		)	(350		)
Interest rate swaps	—			(12,776		)	—			(12,776		)
Total return swaps	—			(44		)	—			(44		)
Options	—			(76		)	—			(76		)
Swaptions	—			(630		)	—			(630		)
Futures	(338		)	—			—			(338		)
Forwards	—			(314		)	—			(314		)
Total financial derivatives–liabilities, at fair value	(338		)	(47,690		)	(350		)	(48,378		)
Securitized debt⁽¹⁾	—			—			(925		)	(925		)
Total investments sold short, financial derivatives–liabilities, and securitized debt, at fair value	$	(26,061	)	$	(874,813	)	$	(1,275	)	$	(902,149	)


(1)	The asset subject to the resecuritization had a fair value of $2.3 million as of June 30, 2014, which is included on the Consolidated Schedule of Investments under Principal and Interest Private – Label Securities.

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 June 30, 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 ⁽¹⁾	$	423,562	Market Quotes	Non Binding Indicative Price	$	1.88		$	128.12		$	77.52
Other asset-backed securities	78,864		Market Quotes	Non Binding Indicative Price	46.69			151.00			96.10
Private label residential mortgage-backed securities	61,415		Discounted Cash Flows	Yield	4.1		%	16.6		%	8.0		%
				Projected Collateral Prepayments	7.1		%	65.9		%	31.9		%
				Projected Collateral Losses	5.0		%	45.4		%	14.0		%
				Projected Collateral Recoveries	0.3		%	22.0		%	8.8		%
				Projected Collateral Scheduled Amortization	14.2		%	85.4		%	45.3		%
											100.0		%
Private label commercial mortgage-backed securities	9,710		Discounted Cash Flows	Yield	12.5		%	36.6		%	20.0		%
				Projected Collateral Losses	0.5		%	3.0		%	1.3		%
				Projected Collateral Recoveries	5.4		%	14.6		%	8.6		%
				Projected Collateral Scheduled Amortization	84.1		%	94.1		%	90.1		%
											100.0		%
Other asset-backed securities	2,451		Discounted Cash Flows	Projected Collateral Prepayments	69.4		%	69.4		%	69.4		%
				Projected Collateral Losses	0.2		%	0.2		%	0.2		%
				Projected Collateral Recoveries	1.0		%	1.0		%	1.0		%
				Projected Collateral Scheduled Amortization	29.4		%	29.4		%	29.4		%
											100.0		%
Private label commercial mortgage-backed securities	18,337		Market Quotes	Non Binding Indicative Price	$	14.25		$	89.00		$	59.26
Performing commercial mortgage loans	20,332		Discounted Cash Flows	Yield	12.7		%	18.1		%	14.6		%
Non-performing commercial mortgage loans	17,083		Discounted Cash Flows	Yield	10.3		%	19.7		%	15.5		%
				Months to Resolution	7			14			10
Non-performing residential mortgage loan pools and real estate owned	25,012		Discounted Cash Flows	Yield	6.7		%	7.2		%	6.9		%
				Months to Resolution	7.0			29.0			14.3
Agency interest only residential mortgage-backed securities	32,922		Market Quotes	Non Binding Indicative Price	$	5.88		$	22.12		$	13.61
Agency interest only residential mortgage-backed securities	3,318		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	441			887			555
				Projected Collateral Prepayments	59.6		%	77.4		%	69.7		%
				Projected Collateral Scheduled Amortization	22.6		%	40.4		%	30.3		%
											100.0		%



(continued)
	Fair Value	Valuation Technique	Unobservable Input	Range				Weighted Average
Description	Fair Value	Valuation Technique	Unobservable Input	Min		Max		Weighted Average
	(In thousands)
Credit default swaps on asset-backed securities	13,812	Net Discounted Cash Flows	Projected Collateral Prepayments	19.1	%	56.3	%	31.1	%
			Projected Collateral Losses	16.1	%	48.1	%	32.7	%
			Projected Collateral Recoveries	7.4	%	16.0	%	12.4	%
			Projected Collateral Scheduled Amortization	16.1	%	42.2	%	23.8	%
								100.0	%


(1)	Includes securitized debt with a fair value of $0.9 million as of June 30, 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:

Six Month Period Ended June 30, 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 June 30, 2014
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	40,504		$	(4,334	)	$	170		$	23		$	2,554	$	(2,677	)	$	—	$	36,240
Private label residential mortgage-backed securities	580,772			10,589			31,178			(9,336		)	154,223		(281,524		)	—		485,902
Private label commercial mortgage-backed securities	32,994			352			4,391			(464		)	66,169		(75,395		)	—		28,047
Commercial mortgage loans	23,887			1,084			872			(291		)	24,004		(12,141		)	—		37,415
Residential mortgage loans	24,062			—			377			954			1,695		(3,717		)	—		23,371
Other asset-backed securities	38,069			(654		)	354			56			54,187		(10,697		)	—		81,315
Real estate owned	—			—			(10		)	(17		)	1,759		(91		)	—		1,641
Total investments, at fair value	740,288			7,037			37,332			(9,075		)	304,591		(386,242		)	—		693,931
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	16,646			—			724			(625		)	456		(3,039		)	—		14,162
Total financial derivatives– assets, at fair value	16,646			—			724			(625		)	456		(3,039		)	—		14,162
Total investments and financial derivatives–assets, at fair value	$	756,934		$	7,037		$	38,056		$	(9,700	)	$	305,047	$	(389,281	)	$	—	$	708,093
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(350	)	$	—		$	(39	)	$	—		$	—	$	39		$	—	$	(350	)
Total financial derivatives– liabilities, at fair value	(350		)	—			(39		)	—			—		39			—		(350		)
Securitized debt:
Securitized debt	(983		)	(12		)	—			(16		)	86		—			—		(925		)
Total securitized debt	(983		)	(12		)	—			(16		)	86		—			—		(925		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,333	)	$	(12	)	$	(39	)	$	(16	)	$	86	$	39		$	—	$	(1,275	)

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Six Month Period Ended June 30, 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 June 30, 2013
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	6,644		$	(2,003	)	$	—		$	306		$	22,450	$	—		$	—	$	27,397
Private label residential mortgage-backed securities	528,366			13,112			19,790			17,383			256,862		(141,003		)	—		694,510
Private label commercial mortgage-backed securities	19,327			98			(1,124		)	2,473			37,168		(34,036		)	—		23,906
Commercial mortgage loans	9,546			27			482			86			2,551		(5,129		)	—		7,563
Other asset-backed securities	—			(117		)	531			(927		)	48,101		(7,748		)	—		39,840
Total investments, at fair value	563,883			11,117			19,679			19,321			367,132		(187,916		)	—		793,216
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	36,031			—			2,709			(4,492		)	91		(13,205		)	—		21,134
Total financial derivatives– assets, at fair value	36,031			—			2,709			(4,492		)	91		(13,205		)	—		21,134
Total investments and financial derivatives–assets, at fair value	$	599,914		$	11,117		$	22,388		$	14,829		$	367,223	$	(201,121	)	$	—	$	814,350
Liabilities:
Financial derivatives– liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(1	)	$	—		$	(57	)	$	(540	)	$	—	$	57		$	—	$	(541	)
Total financial derivatives– liabilities, at fair value	(1		)	—			(57		)	(540		)	—		57			—		(541		)
Securitized debt:
Securitized debt	(1,335		)	(20		)	—			5			182		—			—		(1,168		)
Total securitized debt	(1,335		)	(20		)	—			5			182		—			—		(1,168		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,336	)	$	(20	)	$	(57	)	$	(535	)	$	182	$	57		$	—	$	(1,709	)

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended June 30, 2013



(In thousands)	Beginning Balance as of March 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 June 30, 2013
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	16,228		$	(1,132	)	$	—		$	68		$	12,233	$	—		$	—	$	27,397
Private label residential mortgage-backed securities	557,820			6,471			4,189			(6,636		)	184,029		(51,363		)	—		694,510
Private label commercial mortgage-backed securities	5,778			41			324			(771		)	24,826		(6,292		)	—		23,906
Commercial mortgage loans	9,713			19			482			(73		)	2,550		(5,128		)	—		7,563
Other asset-backed securities	11,638			(68		)	531			(820		)	36,307		(7,748		)	—		39,840
Total investments, at fair value	601,177			5,331			5,526			(8,232		)	259,945		(70,531		)	—		793,216
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	26,398			—			(542		)	1,107			42		(5,871		)	—		21,134
Total financial derivatives– assets, at fair value	26,398			—			(542		)	1,107			42		(5,871		)	—		21,134
Total investments and financial derivatives–assets, at fair value	$	627,575		$	5,331		$	4,984		$	(7,125	)	$	259,987	$	(76,402	)	$	—	$	814,350
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(2	)	$	—		$	(29	)	$	(540	)	$	—	$	30		$	—	$	(541	)
Total financial derivatives– liabilities, at fair value	(2		)	—			(29		)	(540		)	—		30			—		(541		)
Securitized debt:
Securitized debt	(1,205		)	(11		)	—			(63		)	111		—			—		(1,168		)
Total securitized debt	(1,205		)	(11		)	—			(63		)	111		—			—		(1,168		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,207	)	$	(11	)	$	(29	)	$	(603	)	$	111	$	30		$	—	$	(1,709	)

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended June 30, 2014



(In thousands)	Ending Balance as of March 31, 2014			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 June 30, 2014
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	41,375		$	(2,045	)	$	135		$	(728	)	$	—	$	(2,497	)	$	—	$	36,240
Private label residential mortgage-backed securities	490,083			5,203			7,718			3,516			64,639		(85,257		)	—		485,902
Private label commercial mortgage-backed securities	32,645			147			3,518			(1,979		)	28,400		(34,684		)	—		28,047
Commercial mortgage loans	44,005			521			871			169			3,980		(12,131		)	—		37,415
Residential mortgage loans	23,566			—			359			1,214			1,695		(3,463		)	—		23,371
Other asset-backed securities	47,458			(812		)	450			(492		)	40,300		(5,589		)	—		81,315
Real estate owned	97			—			(10		)	(13		)	1,658		(91		)	—		1,641
Total investments, at fair value	679,229			3,014			13,041			1,687			140,672		(143,712		)	—		693,931
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	15,174			—			(467		)	586			417		(1,548		)	—		14,162
Total financial derivatives– assets, at fair value	15,174			—			(467		)	586			417		(1,548		)	—		14,162
Total investments and financial derivatives–assets, at fair value	$	694,403		$	3,014		$	12,574		$	2,273		$	141,089	$	(145,260	)	$	—	$	708,093
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(350	)	$	—		$	(20	)	$	—		$	—	$	20		$	—	$	(350	)
Total financial derivatives– liabilities, at fair value	(350		)	—			(20		)	—			—		20			—		(350		)
Securitized debt:
Securitized debt	(983		)	(5		)	—			1			62		—			—		(925		)
Total securitized debt	(983		)	(5		)	—			1			62		—			—		(925		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,333	)	$	(5	)	$	(20	)	$	1		$	62	$	20		$	—	$	(1,275	)

- 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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