Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows:

•Level 1 Inputs – Quoted prices for identical instruments in active markets.

•Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•Level 3 Inputs – Instruments with primarily unobservable value drivers.

The following tables present our assets and liabilities measured at fair value on a recurring basis.

	December 31, 2021
	Fair Value Measurements Using:
$ in thousands	Level 1	Level 2	Level 3	NAV as a practical expedient (2)	Total at Fair Value
Assets:
Mortgage-backed securities (1)	—	7,804,259	—	—	7,804,259
Derivative assets	—	270	—	—	270
Other assets (3)	—	—	23,515	12,476	35,991
Total assets	—	7,804,529	23,515	12,476	7,840,520
Liabilities:
Derivative liabilities	—	14,356	—	—	14,356
Total liabilities	—	14,356	—	—	14,356

 

	December 31, 2020
	Fair Value Measurements Using:
$ in thousands	Level 1	Level 2	Level 3	NAV as a practical expedient (2)	Total at Fair Value
Assets:
Mortgage-backed securities (1)	—	8,172,182	—	—	8,172,182
Derivative assets	—	10,004	—	—	10,004
Other assets(3)	—	—	23,098	16,408	39,506
Total assets	—	8,182,186	23,098	16,408	8,221,692
Liabilities:
Derivative liabilities	—	6,344	—	—	6,344
Total liabilities	—	6,344	—	—	6,344

(1)For more detail about the fair value of our MBS, refer to Note 4 - “Mortgage-Backed and Credit Risk Transfer Securities.”

(2)Investments in unconsolidated ventures are valued using the net asset value (“NAV”) as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of December 31, 2021, both of the unconsolidated ventures are in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.

(3)Includes $23.5 million and $23.1 million of a commercial loan investment as of December 31, 2021 and 2020, respectively. We elected the fair value option for our commercial loan investment as of January 1, 2020 and valued the loan based on a third party appraisal as of December 31, 2021 and 2020.

The following table shows a reconciliation of the beginning and ending fair value measurements of our GSE CRT embedded derivatives which we valued utilizing Level 3 inputs:

	Year Ended
$ in thousands	December 31, 2020
Beginning balance	10,281
Sales and settlements	31,354
Total net credit derivative gains (losses) included in net income:
Realized credit derivative gains (losses), net	(31,354)
Unrealized credit derivative gains (losses), net	(10,281)
Ending balance	—

The following table shows a reconciliation of the beginning and ending fair value measurements of our loan participation interest which we valued utilizing Level 3 inputs:

	Year Ended
$ in thousands	December 31, 2020
Beginning balance	44,654
Purchases/Advances	—
Repayments	(19,269)
Sales	(21,577)
Total net gains (losses) included in net income:
Realized losses	(3,808)
Ending balance	—

Realized losses on our loan participation interest were included in gain (loss) on investments, net in our consolidated statements of operations.

The following table shows a reconciliation of the beginning and ending balance of our commercial loan investment which we have valued utilizing Level 3 inputs:

	Years Ended
$ in thousands	December 31, 2021	December 31, 2020
Beginning balance	23,098	24,055
Cumulative effect of adoption of new accounting principle	—	342
Repayments	—	(136)
Total net unrealized gains (losses) included in net income:
Unrealized gain (loss)	417	(1,163)
Ending balance	23,515	23,098

Unrealized gain (loss) on our commercial loan investment are included in gain (loss) on investments, net in our consolidated statements of operations. We elected the fair value option for this loan on January 1, 2020 when we implemented the new accounting guidance for how entities report credit losses for assets measured at amortized cost.

The following table summarizes the significant unobservable input used in the fair value measurement of our commercial loan investment:

	Fair Value at	Valuation	Unobservable
$ in thousands	December 31, 2021	Technique	Input	Rate
Commercial Loan	23,515	Discounted Cash Flow	Discount rate	18.8	%

	Fair Value at	Valuation	Unobservable
$ in thousands	December 31, 2020	Technique	Input	Rate
Commercial Loan	23,098	Discounted Cash Flow	Discount rate	29.9	%

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the consolidated balance sheets at December 31, 2021 and December 31, 2020:

	December 31, 2021		December 31, 2020
$ in thousands	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value
Financial Liabilities:
Repurchase agreements	6,987,834	6,987,806	7,228,699	7,228,719
Total	6,987,834	6,987,806	7,228,699	7,228,719

The following describes our methods for estimating the fair value for financial instruments not carried at fair value on the consolidated balance sheets.

•The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality.