Fair value measurements

9 Months Ended

Sep. 30, 2024

Fair Value Disclosures [Abstract]

Fair value measurements

Fair value measurements

The fair value of the Company's financial instruments is determined in accordance with the provisions of ASC 820, "Fair Value Measurements and Disclosures." When possible, the Company determines fair value using third-party data sources. ASC 820 establishes a hierarchy that prioritizes the inputs to valuation techniques. Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets. Level 2 inputs are observable inputs other than quoted prices and may include quoted prices for similar assets and liabilities in active markets. Level 3 inputs are significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used and reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available. In certain cases, inputs used to measure fair value fall into different levels of the fair value hierarchy. In such cases, the level at which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.

The following tables present the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 (in thousands).

	Fair Value at September 30, 2024
	Level 1		Level 2		Level 3		Total
Assets:
Securitized residential mortgage loans	$	—	$	—	$	6,226,698	$	6,226,698
Residential mortgage loans	—		1,967		263,080		265,047
Legacy WMC Commercial Loans	—		—		66,875		66,875
Non-Agency RMBS	—		12,467		111,171		123,638
Legacy WMC CMBS	—		52,049		636		52,685
Legacy WMC Other Securities	—		—		998		998
Agency RMBS	—		20,237		—		20,237
Derivative assets (1)	—		5,192		149		5,341
Cash equivalents (2)	101,676		—		—		101,676
AG Arc (3)	—		—		30,967		30,967
Total Assets Measured at Fair Value	$	101,676	$	91,912	$	6,700,574	$	6,894,162
Liabilities:
Securitized debt	$	—	$	—	$	(5,497,552)	$	(5,497,552)
Derivative liabilities (1)	—		(2,957)		(25)		(2,982)
Total Liabilities Measured at Fair Value	$	—	$	(2,957)	$	(5,497,577)	$	(5,500,534)
	Fair value at December 31, 2023
	Level 1		Level 2		Level 3		Total
Assets:
Securitized residential mortgage loans	$	—	$	—	$	5,358,281	$	5,358,281
Residential mortgage loans	—		777		316,854		317,631
Legacy WMC Commercial loans	—		—		66,303		66,303
Non-Agency RMBS	—		52,089		37,533		89,622
Legacy WMC CMBS	—		50,553		5,796		56,349
Legacy WMC Other Securities	—		—		1,156		1,156
Agency RMBS	—		15,694		—		15,694
Derivative assets (1)	—		9,433		1,172		10,605
Cash equivalents (2)	95,749		—		—		95,749
AG Arc (3)	—		—		33,574		33,574
Total Assets Measured at Fair Value	$	95,749	$	128,546	$	5,820,669	$	6,044,964
Liabilities:
Securitized debt	$	—	$	—	$	(4,711,623)	$	(4,711,623)
Derivative liabilities (1)	—		(7,783)		(7)		(7,790)
Total Liabilities Measured at Fair Value	$	—	$	(7,783)	$	(4,711,630)	$	(4,719,413)

(1)As of September 30, 2024, the Company applied a reduction in fair value of $5.2 million and $2.9 million to its interest rate swap assets and liabilities, respectively, related to variation margin with a corresponding increase or decrease in restricted cash. As of December 31, 2023, the Company applied a reduction in fair value of $9.3 million and $7.7 million to its interest rate swap assets and liabilities, respectively, related to variation margin with a corresponding increase or decrease in restricted cash. Derivative assets and liabilities are included in the "Other assets" and "Other liabilities" line items on the consolidated balance sheets, respectively. Refer to Note 7 for more information on the Company's derivatives.

(2)The Company classifies highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. Cash equivalents may include cash invested in money market funds and are carried at cost, which approximates fair value.

(3)The table above includes the Company's investment in AG Arc, which is included in its "Investments in debt and equity of affiliates" line item on the consolidated balance sheets, as the Company has chosen to elect the fair value option with respect to its investment pursuant to ASC 825.

The valuation of the Company’s residential mortgage loans, securitized debt relating to the Non-Agency VIEs and RPL/NPL VIEs, commercial loans, certain securities, and forward purchase commitments is determined by the Manager using third-party

pricing services where available, valuation analyses from third-party pricing service providers, or model-based pricing. Third-party pricing service providers conduct independent valuation analyses based on a review of source documents, available market data, and comparable investments. The analyses provided by valuation service providers are reviewed and considered by the Manager. The evaluation considers the underlying characteristics of each loan, which are observable inputs, including: coupon, maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. The Company also considers loan servicing data, as available, forward interest rates, general economic conditions, home price index forecasts, and valuations of the underlying properties. The variables considered most significant to the determination of the fair value of the Company's residential mortgage loans, securitized debt, commercial loans, certain securities, and forward purchase commitments include market-implied discount rates, projections of default rates, delinquency rates, prepayment rates, loss severity, loan-to-value ratios, recovery rates, reperformance rates, timeline to liquidation, and, for forward purchase commitments, pull-through rates. The Company and third-party pricing service providers use loan level data and macro-economic inputs to generate loss adjusted cash flows and other information in determining the fair value. Because of the inherent uncertainty of such valuation, the fair value established for mortgage loans, securitized debt, commercial loans, certain securities, and forward purchase commitments held by the Company may differ from the fair value that would have been established if a ready market existed for these mortgage loans.

The valuation of the Company’s securities and derivatives may be based upon prices obtained from third-party pricing services or broker quotations. The valuation methodology of the Company’s third-party pricing services incorporates commonly used market pricing methods, including a spread measurement to various indices, which are observable inputs. The evaluation also considers the underlying characteristics of each investment, which are also observable inputs, including: coupon, maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available. As part of the Company’s risk management process, the Company reviews and analyzes all prices obtained by comparing prices to recently completed transactions involving the same or similar investments on or near the reporting date. If, in the opinion of the Manager, one or more prices reported to the Company are not reliable or unavailable, the Manager reviews the fair value based on characteristics of the investment it receives from the issuer and available market information.

The Company's investment in Arc Home is evaluated on a periodic basis using a market approach. In applying the market approach, fair value is determined by multiplying Arc Home's book value by a relevant valuation multiple observed based on a range of comparable public entities or transactions, adjusted by management as appropriate for differences between the investment and the referenced comparables. The evaluation also considers the underlying financial performance of Arc Home, general economic conditions, and relevant trends within the mortgage banking industry.

Changes in the market environment and other events that may occur over the life of these investments may cause the gains or losses ultimately realized to be different than the valuations currently estimated. The significant unobservable inputs used in the fair value measurement of the Company’s loans and securities are yields, prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. The significant unobservable input used in the fair value measurement of the Company’s investment in Arc Home is the book value multiple. Significant increases (decreases) in the multiple applied would result in a significantly higher (lower) fair value measurement.

The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three and nine months ended September 30, 2024 and 2023.

The Company transferred $1.6 million of residential mortgage loans from Level 3 to Level 2 of the fair value hierarchy during the nine months ended September 30, 2024. The Company did not have any transfers between the Levels 2 and 3 of the fair value hierarchy during the three and nine months ended September 30, 2023. Transfers into the Level 3 category of the fair value hierarchy occur due to instruments exhibiting indications of reduced levels of market transparency. Transfers out of the Level 3 category of the fair value hierarchy occur due to instruments exhibiting indications of increased levels of market transparency. Indications of increases or decreases in levels of market transparency include a change in observable transactions or executable quotes involving these instruments or similar instruments. Changes in these indications could impact price transparency, and thereby cause a change in level designations in future periods.

The following tables present additional information about the Company’s assets and liabilities which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands).

Three Months Ended September 30, 2024
	Residential Mortgage Loans (1)		Legacy WMC Commercial Loans		Non-Agency RMBS		Legacy WMC CMBS		Legacy WMC Other Securities		Derivative Assets (2)		AG Arc		Securitized Debt		Derivative Liabilities (2)
Beginning balance	$	6,092,516	$	66,753	$	57,392	$	727	$	1,208	$	446	$	34,954	$	(5,117,189)	$	(560)
Transfers (3):
Transfers out of level 3	(1,329)		—		—		—		—		—		—		—		—
Purchases	524,709		—		51,047		—		—		—		—		—		—
Issuances of Securitized Debt	—		—		—		—		—		—		—		(355,794)		—
Capital distributions	—		—		—		—		—		—		(4,561)		—		—
Proceeds from sales or settlements	(159,963)		—		—		—		—		(802)		—		—		460
Principal repayments	(163,020)		—		(524)		—		—		—		—		155,186		—
Principal funding	171		—		—		—		—		—		—		—		—
Included in net income:
Net premium and discount amortization (4)	2,679		50		41		—		(51)		—		—		(7,334)		—
Net realized gain/(loss)	1,144		—		—		—		—		802		—		—		(460)
Net unrealized gain/(loss)	193,094		72		3,215		(91)		(159)		(297)		—		(172,421)		535
Equity in earnings/(loss) from affiliates	—		—		—		—		—		—		574		—		—
Other (5)	(223)		—		—		—		—		—		—		—		—
Ending Balance	$	6,489,778	$	66,875	$	111,171	$	636	$	998	$	149	$	30,967	$	(5,497,552)	$	(25)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2024
Net premium and discount amortization (4)	2,719		50		41		—		(51)		—		—		(7,334)		—
Net unrealized gain/(loss)	194,100		72		3,215		(91)		(159)		146		—		(172,421)		(25)
Equity in earnings/(loss) from affiliates	—		—		—		—		—		—		574		—		—

Three Months Ended September 30, 2023
	Residential Mortgage Loans (1)		Non-Agency RMBS		Derivative assets (2)		AG Arc		Securitized debt		Derivative liabilities (2)
Beginning balance	$	4,103,610	$	14,667	$	926	$	37,447	$	(3,402,060)	$	(1,235)
Purchases	704,680		—		—		—		—		—
Issuances of Securitized Debt	—		—		—		—		(639,653)		—
Capital distributions	—		—		—		(224)		—		—
Proceeds from sales or settlements	(142,471)		—		(1,675)		—		—		1,871
Principal repayments	(89,023)		—		—		—		127,404		—
Included in net income:
Net premium and discount amortization (4)	511		(101)		—		—		(2,999)		—
Net realized gain/(loss)	(895)		—		1,675		—		—		(1,871)
Net unrealized gain/(loss)	(92,367)		(70)		(286)		—		85,793		(423)
Equity in earnings/(loss) from affiliates	—		—		—		(2,020)		—		—
Other (5)	(2,176)		—		—		—		—		—
Ending Balance	$	4,481,869	$	14,496	$	640	$	35,203	$	(3,831,515)	$	(1,658)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2023
Net premium and discount amortization (4)	368		(101)		—		—		(2,999)		—
Net unrealized gain/(loss)	(93,712)		(70)		640		—		85,794		(1,658)
Equity in earnings/(loss) from affiliates	—		—		—		(2,020)		—		—

(1)Includes Securitized residential mortgage loans and Residential mortgage loans.

(2)Derivative assets and derivative liabilities are included in the "Other assets" and "Other liabilities" line items, respectively, on the consolidated balance sheets.

(3)Transfers are assumed to occur at the beginning of the period.

(4)Included in the "Interest income" and "Interest expense" line items on the consolidated statement of operations for assets and liabilities, respectively.

(5)Includes transfers of residential mortgage loans to real estate owned as well as activity related to advances.

Nine Months Ended September 30, 2024
	Residential Mortgage Loans (1)		Legacy WMC Commercial Loans		Non-Agency RMBS		Legacy WMC CMBS		Legacy WMC Other Securities		Derivative Assets (2)		AG Arc		Securitized Debt		Derivative Liabilities (2)
Beginning balance	$	5,675,135	$	66,303	$	37,533	$	5,796	$	1,156	$	1,172	$	33,574	$	(4,711,623)	$	(7)
Transfers (3):
Transfers out of level 3	(1,629)		—		—		—		—		—		—		—		—
Purchases	1,234,906		—		69,098		—		—		—		—		—		—
Issuances of Securitized Debt	—		—		—		—		—		—		—		(1,014,049)		—
Capital distributions	—		—		—		—		—		—		(5,042)		—		—
Proceeds from sales or settlements	(159,963)		—		—		—		—		(2,530)		—		—		1,217
Principal repayments	(474,879)		—		(524)		—		—		—		—		439,549		—
Principal funding	171		—		—		—		—		—		—		—		—
Included in net income:
Net premium and discount amortization (4)	10,842		250		74		(63)		(148)		—		—		(22,650)		—
Net realized gain/(loss)	1,200		—		—		—		—		2,530		—		—		(1,217)
Net unrealized gain/(loss)	207,574		322		4,990		(5,097)		(10)		(1,023)		—		(188,779)		(18)
Equity in earnings/(loss) from affiliates	—		—		—		—		—		—		2,435		—		—
Other (5)	(3,579)		—		—		—		—		—		—		—		—
Ending Balance	$	6,489,778	$	66,875	$	111,171	$	636	$	998	$	149	$	30,967	$	(5,497,552)	$	(25)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2024
Net premium and discount amortization (4)	11,071		250		74		(63)		(148)		—		—		(22,650)		—
Net unrealized gain/(loss)	208,835		322		4,990		(5,097)		(10)		149		—		(188,779)		(25)
Equity in earnings/(loss) from affiliates	—		—		—		—		—		—		2,435		—		—

Nine Months Ended September 30, 2023
	Residential Mortgage Loans (1)		Non-Agency RMBS		Derivative assets (2)		AG Arc		Securitized debt		Derivative liabilities (2)
Beginning balance	$	4,127,843	$	14,917	$	98	$	39,680	$	(3,262,352)	$	(9)
Purchases	948,164		—		—		—		—		—
Issuances of Securitized Debt	—		—		—		—		(874,407)		—
Capital distributions	—		—		—		(626)		—		—
Proceeds from sales or settlements	(307,725)		—		(4,232)		—		—		2,505
Principal repayments	(260,367)		—		—		—		288,760		—
Included in net income:
Net premium and discount amortization (4)	2,014		(274)		—		—		(8,862)		—
Net realized gain/(loss)	(11,109)		—		4,232		—		—		(2,505)
Net unrealized gain/(loss)	(13,286)		(147)		542		—		25,346		(1,649)
Equity in earnings/(loss) from affiliates	—		—		—		(3,851)		—		—
Other (5)	(3,665)		—		—		—		—		—
Ending Balance	$	4,481,869	$	14,496	$	640	$	35,203	$	(3,831,515)	$	(1,658)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2023
Net premium and discount amortization (4)	1,166		(274)		—		—		(8,862)		—
Net unrealized gain/(loss)	(23,891)		(147)		640		—		27,137		(1,658)
Equity in earnings/(loss) from affiliates	—		—		—		(3,851)		—		—

(1)Includes Securitized residential mortgage loans and Residential mortgage loans.

(2)Derivative assets and derivative liabilities are included in the "Other assets" and "Other liabilities" line items, respectively, on the consolidated balance sheets.

(3)Transfers are assumed to occur at the beginning of the period.

(4)Included in the "Interest income" and "Interest expense" line items on the consolidated statement of operations for assets and liabilities, respectively.

(5)Includes transfers of residential mortgage loans to real estate owned as well as activity related to advances.

The following table presents a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of investments for which the Company has utilized Level 3 inputs to determine fair value as of September 30, 2024 and December 31, 2023 ($ in thousands).

		September 30, 2024			December 31, 2023
Valuation Technique	Unobservable Input	Fair Value		Range (Weighted Average) (1)	Fair Value		Range (Weighted Average) (1)
Securitized Residential Mortgage Loans
	Yield			5.21% - 10.15% (5.71%)			5.67% - 9.47% (6.23%)
Discounted Cash Flow	Projected Collateral Prepayments	$	6,226,698	4.13% - 11.00% (6.26%)	$	5,358,281	3.02% - 10.47% (4.72%)
	Projected Collateral Losses			0.02% - 1.95% (0.15%)			0.02% - 1.88% (0.16%)
	Projected Collateral Severities			-13.27% - 26.00% (18.99%)			-13.44% - 26.00% (17.38%)
Residential Mortgage Loans
	Yield			5.81% - 12.55% (7.85%)			6.13% - 18.75% (6.64%)
Discounted Cash Flow	Projected Collateral Prepayments	$	263,080	5.71% - 32.75% (20.19%)	$	316,854	3.89% - 34.35% (24.88%)
	Projected Collateral Losses			0.00% - 25.16% (1.17%)			0.00% - 12.72% (0.15%)
	Projected Collateral Severities			-25.00% - 55.40% (17.35%)			-38.75% - 44.01% (9.62%)
Legacy WMC Commercial Loans
	Yield			7.64% - 9.44% (8.85%)			8.16% - 10.13% (9.47%)
Discounted Cash Flow	Credit Spread	$	66,875	377 bps - 517 bps (471 bps)	$	66,303	377 bps - 556 bps (496 bps)
	Recovery Percentage (2)			100.00% - 100.00% (100.00%)			100.00% - 100.00% (100.00%)
	Loan-to-Value			42.50% - 77.22% (63.68%)			42.50% - 77.22% (63.61%)
Non-Agency RMBS
	Yield			5.37% - 35.00% (7.32%)			6.23% - 14.00% (9.70%)
Discounted Cash Flow	Projected Collateral Prepayments	$	111,171	4.60% - 12.75% (8.94%)	$	37,533	4.55% - 5.26% (4.93%)
	Projected Collateral Losses			0.01% - 0.41% (0.12%)			0.17% - 0.28% (0.25%)
	Projected Collateral Severities			10.00% - 25.00% (19.48%)			10.00% - 10.00% (10.00%)
Legacy WMC CMBS
Consensus Pricing	Offered Quotes	$	636	6.06 - 6.06 (6.06)	$	5,796	55.20 - 55.20 (55.20)
Legacy WMC Other Securities
Consensus Pricing	Offered Quotes	$	998	5,883.06 - 5,883.06 (5,883.06)	$	1,156	6,821.32 - 6,821.32 (6,821.32)
Derivative Assets (3)
	Yield			6.04% - 7.34% (6.23%)			6.29% - 8.32% (6.81%)
Discounted Cash Flow	Projected Collateral Prepayments	$	149	12.69% - 28.58% (21.61%)	$	1,172	18.20% - 33.78% (27.00%)
	Projected Collateral Losses			0.02% - 3.47% (0.88%)			0.00% - 0.82% (0.14%)
	Projected Collateral Severities			10.00% - 10.00% (10.00%)			10.00% - 10.00% (10.00%)
	Pull Through Percentages			60.00% - 100.00% (74.29%)			60.00% - 100.00% (92.21%)
AG Arc
Comparable Multiple	Book Value Multiple	$	30,967	0.95x - 0.95x (0.95x)	$	33,574	0.89x - 0.89x (0.89x)
Securitized Debt
	Yield			4.43% - 25.00% (5.28%)			4.92% - 15.00% (5.72%)
Discounted Cash Flow	Projected Collateral Prepayments	$	(5,497,552)	4.13% - 11.00% (6.22%)	$	(4,711,623)	3.02% - 10.47% (4.66%)
	Projected Collateral Losses			0.02% - 0.50% (0.14%)			0.02% - 0.40% (0.15%)
	Projected Collateral Severities			10.00% - 26.00% (19.29%)			3.71% - 26.00% (17.76%)
Derivative Liabilities (3)
	Yield			6.04% - 6.54% (6.06%)			6.47% - 7.00% (6.51%)
Discounted Cash Flow	Projected Collateral Prepayments	$	(25)	16.91% - 27.25% (24.09%)	$	(7)	27.36% - 34.44% (34.30%)
	Projected Collateral Losses			0.01% - 1.66% (0.09%)			0.00% - 0.02% (0.00%)
	Projected Collateral Severities			10.00% - 10.00% (10.00%)			10.00% - 10.00% (10.00%)
	Pull Through Percentages			60.00% - 100.00% (75.97%)			60.00% - 100.00% (99.22%)

(1)Amounts are weighted based on fair value.

(2)Represents the proportion of the principal expected to be collected relative to the loan balances as of September 30, 2024 and December 31, 2023.

(3)Derivative assets and derivative liabilities are included in the "Other assets" and "Other liabilities" line items, respectively, on the consolidated balance sheets.

Other Fair Value Disclosures

Short-term financing arrangements

The fair value of certain of the Company's financing arrangements approximates the carrying value due to the floating interest rates that are based on an index plus a spread, which is typically consistent with those demanded in the market, and the short-term maturities of generally one year or less. These financing agreements are classified as Level 2.

Legacy WMC Convertible Notes, Senior Unsecured Notes, and fixed-rate long-term financing arrangements

The following table presents the carrying value and estimated fair value of the Company's Legacy WMC Convertible Notes, Senior Unsecured Notes, and fixed-rate financing arrangements with original contractual maturities of greater than one year as of September 30, 2024 and December 31, 2023 (in thousands). The fair value of the Company's Legacy WMC Convertibles Notes and Senior Unsecured Notes is based upon prices obtained from third-party pricing services or broker quotations and are classified as Level 2. The fair value of the Company's fixed-rate long-term financing arrangements is based on a discounted cash flow valuation approach using valuation analyses of the underlying collateral sourced from third-party pricing service providers and is classified as Level 3.

	September 30, 2024				December 31, 2023
	Carrying Value (1)		Estimated Fair Value		Carrying Value (1)		Estimated Fair Value
Legacy WMC Convertible Notes (2)	$	—	$	—	$	85,266	$	84,525
Senior Unsecured Notes	95,548		120,536		—		—
Financing arrangements	53,335		53,964		62,972		63,175

(1)The Legacy WMC Convertible Notes, Senior Unsecured Notes, and fixed-rate long-term financing arrangements are recorded at amortized cost in the Company's consolidated balance sheets.

(2)The Company paid off the remaining principal amount outstanding of the Legacy WMC Convertible Notes at maturity in September 2024.