Valuation (Tables)

6 Months Ended

Jun. 30, 2015

The following tables present the Company's financial instruments measured at fair value on:

June 30, 2015:



(In thousands)
Description	Level 1		Level 2			Level 3		Total
Assets:
Cash equivalents	$	20,000	$	—		$	—	$	20,000
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed rate mortgages	$	—	$	166,058		$	—	$	166,058
20-year fixed rate mortgages	—		9,934			—		9,934
30-year fixed rate mortgages	—		1,024,243			—		1,024,243
Adjustable rate mortgages	—		40,997			—		40,997
Reverse mortgages	—		56,233			—		56,233
Interest only securities	—		—			7,070		7,070
Non-Agency RMBS	—		24,732			5,556		30,288
Mortgage-backed securities, at fair value	—		1,322,197			12,626		1,334,823
Financial derivatives–assets, at fair value:
TBAs	—		906			—		906
Fixed payer interest rate swaps	—		3,635			—		3,635
Total financial derivatives–assets, at fair value	—		4,541			—		4,541
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	—	$	1,326,738		$	12,626	$	1,339,364
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—	$	(51,184	)	$	—	$	(51,184	)
Financial derivatives–liabilities, at fair value:
TBAs	—		(677		)	—		(677		)
Fixed payer interest rate swaps	—		(3,313		)	—		(3,313		)
Fixed payer swaptions	—		(17		)	—		(17		)
Total financial derivatives–liabilities, at fair value	—		(4,007		)	—		(4,007		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	—	$	(55,191	)	$	—	$	(55,191	)

There were no transfers of financial instruments between Levels 1 and 2 of the fair value hierarchy during the six month period ended June 30, 2015.

December 31, 2014:



(In thousands)
Description	Level 1		Level 2			Level 3		Total
Assets⁽¹⁾:
Cash equivalents	$	35,000	$	—		$	—	$	35,000
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed rate mortgages	$	—	$	138,028		$	—	$	138,028
20-year fixed rate mortgages	—		10,568			—		10,568
30-year fixed rate mortgages	—		1,122,254			—		1,122,254
Adjustable rate mortgages	—		44,283			—		44,283
Reverse mortgages	—		34,425			—		34,425
Interest only securities	—		—			11,244		11,244
Non-Agency RMBS	—		22,419			10,082		32,501
Mortgage-backed securities, at fair value	—		1,371,977			21,326		1,393,303
Financial derivatives–assets, at fair value:
TBAs	—		476			—		476
Fixed payer interest rate swaps	—		2,518			—		2,518
Fixed payer swaptions	—		78			—		78
Total financial derivatives–assets, at fair value	—		3,072			—		3,072
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	—	$	1,375,049		$	21,326	$	1,396,375
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—	$	(13,959	)	$	—	$	(13,959	)
Financial derivatives–liabilities, at fair value:
TBAs	—		(1,674		)	—		(1,674		)
Fixed payer interest rate swaps	—		(7,026		)	—		(7,026		)
Total financial derivatives–liabilities, at fair value	—		(8,700		)	—		(8,700		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	—	$	(22,659	)	$	—	$	(22,659	)

(1) Conformed to current period presentation.

There were no transfers of financial instruments between Levels 1 or 2 of the fair value hierarchy during the year ended December 31, 2014.

Unobservable Input Reconciliation

The following tables present additional information about the Company's investments which are measured at fair value for which the Company has utilized Level 3 inputs to determine fair value:

Three month period ended June 30, 2015:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of March 31, 2015	$	5,826		$	6,443
Purchases	—			602
Proceeds from sales	—			—
Principal repayments	(525		)	—
(Amortization)/accretion, net	285			(618		)
Net realized gains (losses)	—			—
Change in net unrealized gains (losses)	(30		)	643
Transfers:
Transfers into level 3	—			—
Transfers out of level 3	—			—
Ending balance as of June 30, 2015	$	5,556		$	7,070

All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at June 30, 2015, as well as Level 3 financial instruments disposed of by the Company during the three month period ended June 30, 2015. For Level 3 financial instruments held by the Company at June 30, 2015, change in net unrealized gains (losses) of $(30) thousand and $0.6 million, for the three month period ended June 30, 2015 relate to non-Agency RMBS and Agency RMBS, respectively.

Three month period ended June 30, 2014:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of March 31, 2014	$	32,045		$	15,924
Purchases	4,504			—
Proceeds from sales	(1,993		)	—
Principal repayments	(1,468		)	—
(Amortization)/accretion, net	468			(762		)
Net realized gains (losses)	168			—
Change in net unrealized gains (losses)	1,944			(886		)
Transfers:
Transfers into level 3	—			—
Transfers out of level 3	—			—
Ending balance as of June 30, 2014	$	35,668		$	14,276

All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at June 30, 2014, as well as Level 3 financial instruments disposed of by the Company during the three month period ended June 30, 2014. For Level 3 financial instruments held by the Company at June 30, 2014, change in net unrealized gains (losses) of $2.0 million and $(0.9) million, for the three month period ended June 30, 2014 relate to non-Agency RMBS and Agency RMBS, respectively.

Six month period ended June 30, 2015:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2014	$	10,082		$	11,244
Purchases	—			1,701
Proceeds from sales	(2,861		)	(4,538		)
Principal repayments	(935		)	—
(Amortization)/accretion, net	596			(1,274		)
Net realized gains	791			601
Change in net unrealized gains (losses)	(659		)	(664		)
Transfers:
Transfers into level 3	3,343			—
Transfers out of level 3	(4,801		)	—
Ending balance as of June 30, 2015	$	5,556		$	7,070

All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at June 30, 2015, as well as Level 3 financial instruments disposed of by the Company during the three month period ended June 30, 2015. For Level 3 financial instruments held by the Company at June 30, 2015, change in net unrealized gains (losses) of $54 thousand and $0.2 million, for the six month period ended June 30, 2015 relate to non-Agency RMBS and Agency RMBS, respectively.

At June 30, 2015, the Company transferred $4.8 million of non-Agency RMBS from Level 3 to Level 2. These assets were transferred from Level 3 to Level 2 based on an increased volume of observed trading of these and similar assets. This increase in observed trading activity has led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view. However, changes in the volume of observable inputs for these assets, such as a decrease in observed trading, could impact price transparency, and thereby cause a change in the level designation for these assets in future periods.

At June 30, 2015, the Company transferred $3.3 million of non-Agency RMBS from Level 2 to Level 3. Since year end, these securities have exhibited indications of a reduced level of price transparency. Examples of such indications include wider spreads and/or higher delinquencies relative to similar securities and a reduction in observable transactions or executable quotes involving these and similar securities. Changes in these indications could impact price transparency, and thereby cause a change in the level designation in future periods.

Six month period ended June 30, 2014:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2013	$	30,681		$	13,527
Purchases	12,168			4,096
Proceeds from sales	(7,416		)	(1,282		)
Principal repayments	(2,572		)	—
(Amortization)/accretion, net	857			(1,420		)
Net realized gains	373			358
Change in net unrealized gains (losses)	1,577			(1,003		)
Transfers:
Transfers into level 3	—			—
Transfers out of level 3	—			—
Ending balance as of June 30, 2014	$	35,668		$	14,276

All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at June 30, 2014, as well as Level 3 financial instruments disposed of by the Company during the six month period ended June 30, 2014. For Level 3 financial instruments held by the Company at June 30, 2014, change in net unrealized gains (losses) of $1.8 million and $(0.8) million, for the six month period ended June 30, 2014 relate to non-Agency RMBS and Agency RMBS, respectively.

Quantitative Information

The following tables identify the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of June 30, 2015 and December 31, 2014:

June 30, 2015:



				Range
Description	Fair Value	Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	3,343	Market quotes	Non-Binding Third-Party Valuation	$	53.75		$	61.34		$	56.37
Non-Agency RMBS	2,213	Discounted Cash Flows	Yield	11.4		%	21.4		%	15.7		%
			Projected Collateral Prepayments	31.4		%	41.1		%	36.9		%
			Projected Collateral Losses	3.1		%	3.3		%	3.2		%
			Projected Collateral Recoveries	4.4		%	8.8		%	6.3		%
			Projected Collateral Scheduled Amortization	51.2		%	56.8		%	53.6		%
										100.0		%
Agency RMBS–Interest Only Securities	4,845	Market quotes	Non-Binding Third-Party Valuation	$	4.27		$	21.63		$	11.41
Agency RMBS–Interest Only Securities	2,225	Option Adjusted Spread ("OAS")	LIBOR OAS ⁽²⁾	(1,289		)	635			(384		)
			Projected Collateral Prepayments	60.3		%	87.9		%	76.8		%
			Projected Collateral Scheduled Amortization	12.1		%	39.7		%	23.2		%
										100.0		%


(1)	Averages are weighted based on the fair value of the related instrument.


(2)	Shown in basis points.

December 31, 2014:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	7,819	Market quotes	Non-Binding Third-Party Valuation	$	21.38		$	84.91		$	54.11
Non-Agency RMBS	2,263		Discounted Cash Flows	Yield	6.3		%	6.3		%	6.3		%
				Projected Collateral Prepayments	35.9		%	35.9		%	35.9		%
				Projected Collateral Losses	7.5		%	7.5		%	7.5		%
				Projected Collateral Recoveries	11.0		%	11.0		%	11.0		%
				Projected Collateral Scheduled Amortization	45.6		%	45.6		%	45.6		%
											100.0		%
Agency RMBS–Interest Only Securities	7,006		Market quotes	Non-Binding Third-Party Valuation	$	4.74		$	20.38		$	13.35
Agency RMBS–Interest Only Securities	4,238		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	83			1,952			490
				Projected Collateral Prepayments	63.3		%	92.3		%	75.2		%
				Projected Collateral Scheduled Amortization	7.7		%	36.7		%	24.8		%
											100.0		%


(1)	Averages are weighted based on the fair value of the related instrument.


(2)	Shown in basis points.