Valuation (Tables)

9 Months Ended

Sep. 30, 2014

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



Description	Level 1		Level 2		Level 3		Total
Assets:	(In thousands)
Cash and cash equivalents	$	129,124	$	—	$	—	$	129,124
Investments, at fair value-
Agency residential mortgage-backed securities and U.S. Treasury securities	$	—	$	1,682,568	$	38,572	$	1,721,140
Private label residential mortgage-backed securities	—		—		502,070		502,070
Private label commercial mortgage-backed securities	—		—		46,317		46,317
Commercial mortgage loans	—		—		29,852		29,852
Residential mortgage loans	—		—		17,147		17,147
Other asset-backed securities and loans	—		—		109,152		109,152



Description	Level 1			Level 2			Level 3			Total
Investments, at fair value- (continued):	(In thousands)
Real estate owned	$	—		$	—		$	7,464		$	7,464
Private corporate investments	—			—			7,686			7,686
Total investments, at fair value	—			1,682,568			758,260			2,440,828
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	—			—			12,788			12,788
Credit default swaps on corporate bond indices	—			20,044			—			20,044
Credit default swaps on asset-backed indices	—			2,304			—			2,304
Interest rate swaps	—			19,964			—			19,964
Total return swaps	—			29			—			29
Swaptions	—			261			—			261
Options	—			31			—			31
Futures	549			—			—			549
Forwards	—			396			—			396
Total financial derivatives–assets, at fair value	549			43,029			12,788			56,366
Repurchase agreements	—			47,039			—			47,039
Total investments and financial derivatives–assets, at fair value and repurchase agreements	$	549		$	1,772,636		$	771,048		$	2,544,233
Liabilities:
Investments sold short, at fair value-
Agency residential mortgage-backed securities	$	—		$	(1,158,892	)	$	—		$	(1,158,892	)
Government debt	—			(43,646		)	—			(43,646		)
Common stock	(19,356		)	—			—			(19,356		)
Total investments sold short, at fair value	(19,356		)	(1,202,538		)	—			(1,221,894		)
Financial derivatives–liabilities, at fair value-
Credit default swaps on corporate bond indices	—			(23,629		)	—			(23,629		)
Credit default swaps on corporate bonds	—			(2,695		)	—			(2,695		)
Credit default swaps on asset-backed indices	—			(4,385		)	—			(4,385		)
Credit default swaps on asset-backed securities	—			—			(378		)	(378		)
Interest rate swaps	—			(15,766		)	—			(15,766		)
Total return swaps	—			(40		)	—			(40		)
Options	—			(164		)	—			(164		)
Swaptions	—			(213		)	—			(213		)
Futures	(61		)	—			—			(61		)
Forwards	—			—			—			—
Total financial derivatives–liabilities, at fair value	(61		)	(46,892		)	(378		)	(47,331		)
Securitized debt⁽¹⁾	—			—			(870		)	(870		)
Total investments sold short, financial derivatives–liabilities, and securitized debt, at fair value	$	(19,417	)	$	(1,249,430	)	$	(1,248	)	$	(1,270,095	)


(1)	The asset subject to the resecuritization had a fair value of $2.3 million as of September 30, 2014, 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 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.

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 September 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⁾	$	422,033	Market Quotes	Non Binding Indicative Price	$	1.96		$	109.91		$	76.65
Other asset-backed securities and loans	102,804		Market Quotes	Non Binding Indicative Price	48.00			162.00			102.08
Private label residential mortgage-backed securities	79,167		Discounted Cash Flows	Yield	3.6		%	16.1		%	7.3		%
				Projected Collateral Prepayments	7.6		%	83.6		%	40.1		%
				Projected Collateral Losses	3.0		%	45.2		%	13.1		%
				Projected Collateral Recoveries	0.0		%	25.5		%	8.3		%
				Projected Collateral Scheduled Amortization	0.0		%	79.5		%	38.5		%
											100.0		%
Private label commercial mortgage-backed securities	12,950		Discounted Cash Flows	Yield	14.5		%	28.4		%	22.7		%
				Projected Collateral Losses	0.2		%	1.1		%	0.8		%
				Projected Collateral Recoveries	2.8		%	14.1		%	8.4		%
				Projected Collateral Scheduled Amortization	84.9		%	97.0		%	90.8		%
											100.0		%
Other asset-backed securities and loans	6,348		Discounted Cash Flows	Yield	5.9		%	13.9		%	9.2		%
				Projected Collateral Prepayments	—		%	73.8		%	9.5		%
				Projected Collateral Losses	1.1		%	94.6		%	75.6		%
				Projected Collateral Recoveries	—		%	92.8		%	7.3		%
				Projected Collateral Scheduled Amortization	—		%	28.0		%	7.6		%
											100.0		%
Private label commercial mortgage-backed securities	33,367		Market Quotes	Non Binding Indicative Price	$	10.02		$	97.09		$	57.28
Performing commercial mortgage loans	19,108		Discounted Cash Flows	Yield	10.0		%	19.7		%	17.5		%
Non-performing commercial mortgage loans	10,744		Discounted Cash Flows	Yield	10.3		%	15.0		%	13.9		%
				Months to Resolution	3.0			28.0			7.9
Non-performing residential mortgage loan pools and real estate owned	24,611		Discounted Cash Flows	Yield	6.5		%	12.0		%	7.4		%
				Months to Resolution	4.0			26.0			12.7
Agency interest only residential mortgage-backed securities	35,069		Market Quotes	Non Binding Indicative Price	$	3.76		$	30.14		$	13.65
Agency interest only residential mortgage-backed securities	3,503		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	(44		)	1,401			671
				Projected Collateral Prepayments	57.2		%	100.0		%	77.0		%
				Projected Collateral Scheduled Amortization	0.0		%	42.8		%	23.0		%
											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	12,410	Net Discounted Cash Flows	Projected Collateral Prepayments	18.7	%	56.9	%	32.2	%
			Projected Collateral Losses	15.8	%	46.4	%	31.0	%
			Projected Collateral Recoveries	7.6	%	16.9	%	12.5	%
			Projected Collateral Scheduled Amortization	15.9	%	42.1	%	24.3	%
								100.0	%
Preferred equity investment in commercial mortgage-related private partnership	5,000	Discounted Cash Flows	Yield	10.7	%	10.7	%	10.7	%
			Expected Holding Period (Months)	47.9		47.9		47.9
Equity investment in mortgage originator	2,686	Recent Transactions	Transaction Price	N/A		N/A		N/A


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

Three Month Period Ended September 30, 2013



(In thousands)	Beginning Balance as of June 30, 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 September 30, 2013
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	27,397		$	(1,844	)	$	—		$	875		$	10,605	$	—		$	—	$	37,033
Private label residential mortgage-backed securities	694,510			7,289			11,187			(5,865		)	106,194		(161,333		)	—		651,982
Private label commercial mortgage-backed securities	23,906			161			647			139			21,760		(13,342		)	—		33,271
Commercial mortgage loans	7,563			31			—			411			6,931		—			—		14,936
Other asset-backed securities	39,840			(658		)	38			60			8,334		(2,359		)	—		45,255
Total investments, at fair value	793,216			4,979			11,872			(4,380		)	153,824		(177,034		)	—		782,477
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	21,134			—			(3,113		)	2,995			58		(3,459		)	—		17,615
Total financial derivatives– assets, at fair value	21,134			—			(3,113		)	2,995			58		(3,459		)	—		17,615
Total investments and financial derivatives–assets, at fair value	$	814,350		$	4,979		$	8,759		$	(1,385	)	$	153,882	$	(180,493	)	$	—	$	800,092
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(541	)	$	—		$	(2	)	$	222		$	—	$	2		$	—	$	(319	)
Total financial derivatives– liabilities, at fair value	(541		)	—			(2		)	222			—		2			—		(319		)
Securitized debt:
Securitized debt	(1,168		)	(10		)	—			30			110		—			—		(1,038		)
Total securitized debt	(1,168		)	(10		)	—			30			110		—			—		(1,038		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,709	)	$	(10	)	$	(2	)	$	252		$	110	$	2		$	—	$	(1,357	)

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Nine Month Period Ended September 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 September 30, 2014
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	40,504		$	(6,523	)	$	457		$	515		$	7,249	$	(3,630	)	$	—	$	38,572
Private label residential mortgage-backed securities	580,772			15,359			34,862			(14,366		)	233,654		(348,211		)	—		502,070
Private label commercial mortgage-backed securities	32,994			497			5,479			(842		)	95,665		(87,476		)	—		46,317
Commercial mortgage loans	23,887			1,916			1,901			(673		)	32,117		(29,296		)	—		29,852
Residential mortgage loans	24,062			878			878			823			1,148		(10,642		)	—		17,147
Other asset-backed securities and loans	38,069			(3,444		)	184			(581		)	97,539		(22,615		)	—		109,152
Real estate owned	—			—			7			212			7,792		(547		)	—		7,464
Private corporate investments	—			—			—			(239		)	7,925		—			—		7,686
Total investments, at fair value	740,288			8,683			43,768			(15,151		)	483,089		(502,417		)	—		758,260
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	16,646			—			(2,135		)	2,379			530		(4,632		)	—		12,788
Total financial derivatives– assets, at fair value	16,646			—			(2,135		)	2,379			530		(4,632		)	—		12,788
Total investments and financial derivatives–assets, at fair value	$	756,934		$	8,683		$	41,633		$	(12,772	)	$	483,619	$	(507,049	)	$	—	$	771,048
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(350	)	$	—		$	(59	)	$	(28	)	$	—	$	59		$	—	$	(378	)
Total financial derivatives– liabilities, at fair value	(350		)	—			(59		)	(28		)	—		59			—		(378		)
Securitized debt:
Securitized debt	(983		)	(14		)	—			(17		)	144		—			—		(870		)
Total securitized debt	(983		)	(14		)	—			(17		)	144		—			—		(870		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,333	)	$	(14	)	$	(59	)	$	(45	)	$	144	$	59		$	—	$	(1,248	)

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Nine Month Period Ended September 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 September 30, 2013
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	6,644		$	(3,846	)	$	—		$	1,180		$	33,055	$	—		$	—	$	37,033
Private label residential mortgage-backed securities	528,366			20,401			30,977			11,518			363,056		(302,336		)	—		651,982
Private label commercial mortgage-backed securities	19,327			258			(477		)	2,612			58,928		(47,377		)	—		33,271
Commercial mortgage loans	9,546			58			482			497			9,481		(5,128		)	—		14,936
Other asset-backed securities	—			(775		)	569			(866		)	56,435		(10,108		)	—		45,255
Total investments, at fair value	563,883			16,096			31,551			14,941			520,955		(364,949		)	—		782,477
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	36,031			—			(404		)	(1,497		)	149		(16,664		)	—		17,615
Total financial derivatives– assets, at fair value	36,031			—			(404		)	(1,497		)	149		(16,664		)	—		17,615
Total investments and financial derivatives–assets, at fair value	$	599,914		$	16,096		$	31,147		$	13,444		$	521,104	$	(381,613	)	$	—	$	800,092
Liabilities:
Financial derivatives– liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(1	)	$	—		$	(59	)	$	(318	)	$	—	$	59		$	—	$	(319	)
Total financial derivatives– liabilities, at fair value	(1		)	—			(59		)	(318		)	—		59			—		(319		)
Securitized debt:
Securitized debt	(1,335		)	(31		)	—			36			292		—			—		(1,038		)
Total securitized debt	(1,335		)	(31		)	—			36			292		—			—		(1,038		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,336	)	$	(31	)	$	(59	)	$	(282	)	$	292	$	59		$	—	$	(1,357	)

Level 3—Fair Value Measurement Using Significant Unobservable Inputs:

Three Month Period Ended September 30, 2014



(In thousands)	Ending Balance as of June 30, 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 September 30, 2014
Assets:
Investments, at fair value-
Agency residential mortgage-backed securities	$	36,240		$	(2,188	)	$	286		$	492		$	4,695		$	(953	)	$	—	$	38,572
Private label residential mortgage-backed securities	485,902			4,770			3,684			(5,030		)	79,431			(66,687		)	—		502,070
Private label commercial mortgage-backed securities	28,047			145			1,089			(378		)	29,496			(12,082		)	—		46,317
Commercial mortgage loans	37,415			832			1,029			(382		)	8,113			(17,155		)	—		29,852
Residential mortgage loans	23,371			878			501			(131		)	(547		)	(6,925		)	—		17,147
Other asset-backed securities and loans	81,315			(2,791		)	(170		)	(637		)	43,353			(11,918		)	—		109,152
Real estate owned	1,641			—			18			229			6,033			(457		)	—		7,464
Private corporate investments	—			—			—			(239		)	7,925			—			—		7,686
Total investments, at fair value	693,931			1,646			6,437			(6,076		)	178,499			(116,177		)	—		758,260
Financial derivatives–assets, at fair value-
Credit default swaps on asset-backed securities	14,162			—			(2,860		)	3,004			75			(1,593		)	—		12,788
Total financial derivatives– assets, at fair value	14,162			—			(2,860		)	3,004			75			(1,593		)	—		12,788
Total investments and financial derivatives–assets, at fair value	$	708,093		$	1,646		$	3,577		$	(3,072	)	$	178,574		$	(117,770	)	$	—	$	771,048
Liabilities:
Financial derivatives–liabilities, at fair value-
Credit default swaps on asset-backed securities	$	(350	)	$	—		$	(20	)	$	(28	)	$	—		$	20		$	—	$	(378	)
Total financial derivatives– liabilities, at fair value	(350		)	—			(20		)	(28		)	—			20			—		(378		)
Securitized debt:
Securitized debt	(925		)	(1		)	—			(2		)	58			—			—		(870		)
Total securitized debt	(925		)	(1		)	—			(2		)	58			—			—		(870		)
Total financial derivatives– liabilities and securitized debt, at fair value	$	(1,275	)	$	(1	)	$	(20	)	$	(30	)	$	58		$	20		$	—	$	(1,248	)

- 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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