ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.

Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurement date.

Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

Loans held for investment are recorded at their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for credit losses.

The Company determined the fair value estimate of loans held for investment using a third-party loan valuation model, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are discount rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement.

Nonaccrual loans held for investment are evaluated individually and are adjusted to the fair value of the collateral when the fair value of the collateral is below the carrying value of the loan. To the extent a loan is collateral dependent, the Company determines the allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The Company uses a discounted cash flow model to estimate the fair value of loans held for sale, a Level 3 measurement.

The Company has elected to account for certain loans originated with the intent to sell to Ginnie Mae at fair value (the FVO Loans held for sale) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans held for sale are measured based on the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value, including the value attributable to mortgage servicing and credit risk, and current commitments to purchase loans, a Level 2 measurement. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

The Company retains an interest-only strip on certain sales of held for sale loans. The interest-only strips are classified as trading securities under FASB ASC Topic 320, Investments-Debt Securities. The interest-only strips are measured based on their estimated fair values using a discounted cash flow model, a Level 3 measurement. Changes in fair value are reflected in income as they occur.

The Company has elected to account for certain purchased distressed loans held for investment, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

The Company uses a third-party loan valuation model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.

The Company determined the fair values based on a third-party valuation model that calculates the present value of estimated future net servicing income, a Level 3 measurement.

The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement.

The fair value estimate of securities issued is based on third-party valuation models that calculate estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

The carrying amounts of receivables due from servicers approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

The following tables present information on assets measured and recorded at fair value as of September 30, 2022 and December 31, 2021, by level, in the fair value hierarchy (in thousands):


	Fair value measurements using						Total at
September 30, 2022	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for sale, at fair value	$	—	$	16,569	$	—	$	16,569
Loans held for investment, at fair value		—		—		926		926
Mortgage servicing rights		—		—		9,868		9,868
Total recurring fair value measurements		—		16,569		10,794		27,363
Nonrecurring fair value measurements:
Real estate owned, net		—		—		13,188		13,188
Individually evaluated loans requiring specific allowance, net		—		—		10,347		10,347
Total nonrecurring fair value measurements		—		—		23,535		23,535
Total assets	$	—	$	16,569	$	34,329	$	50,898


	Fair value measurements using						Total at
December 31, 2021	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	1,359	$	1,359
Mortgage servicing rights		—		—		7,152		7,152
Total recurring fair value measurements		—		—		8,511		8,511
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		87,422		87,422
Real estate owned, net		—		—		17,557		17,557
Impaired loans requiring specific allowance, net		—		—		11,987		11,987
Total nonrecurring fair value measurements		—		—		116,966		116,966
Total assets	$	—	$	—	$	125,477	$	125,477

The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of September 30, 2022 and December 31, 2021 ($ in thousands):

September 30, 2022

Asset category

Fair value

Primary
valuation
technique

Unobservable
input

Range

Weighted
average

Individually evaluated
   loans requiring specific
   allowance, net

10,347

Market comparables

Selling costs

8.0%

8.0%

Real estate owned, net

13,188

Market comparables

Selling costs

8.0%

8.0%

Loans held for investment,
   at fair value

926

Discounted cash flow

Discount rate

7.2%

7.2%

Collateral value (% of UPB)

96.3% to 119.5%

107.0%

Timing of resolution/payoff (months)

1 to 40

37.0

Prepayment rate

1.0% to 30.0%

30.0%

Default rate

0.1% to 6.5%

0.6%

Loss severity rate

0.0% to 20.9%

4.0%

Mortgage servicing rights

9,868

Discounted cash flow

Discount rate

8.0% to 8.2%

8.1%

Prepayment rate

3.5% to 10.5%

5.3%

Interest rate multiples

0.4 to 35.6

9.9

December 31, 2021

Asset category

Fair value

Primary
valuation
technique

Unobservable
input

Range

Weighted
average

Individually evaluated
   loans requiring specific
   allowance, net

11,987

Market comparables

Selling costs

8.0%

8.0%

Real estate owned, net

17,557

Market comparables

Selling costs

8.0%

8.0%

Loans held for investment,
   at fair value

1,359

Discounted cash flow

Discount rate

5.8%

5.8%

Collateral value (% of UPB)

95.0% to 120.0%

106.0%

Timing of resolution/payoff (months)

1 to 38

34.8

Prepayment rate

19.2% to 50%

30.0%

Default rate

0.0% to 6.7%

1.0%

Loss severity rate

0.0% to 13.4%

3.0%

Loans held for sale

87,422

Discounted cash flow

Discount rate

5.8%

5.8%

Timing of resolution/payoff (months)

3 to 37

13.0

Mortgage servicing rights

7,152

Discounted cash flow

Discount rate

8.0% to 12.0%

8.0%

Prepayment rate

2.4% to 3.5%

3.2%

The following is a rollforward of loans held for investment that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Beginning balance	$	1,351		$	1,370		$	1,359		$	1,539
Loans liquidated		(12	)		—			(36	)		(163	)
Principal paydowns		(416	)		(10	)		(416	)		(34	)
Total unrealized gain included in net income		3			—			19			18
Ending balance	$	926		$	1,360		$	926		$	1,360

The following is a rollforward of loans held for sale that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning balance	$	—	$	—	$	—	$	—
Loans originated		16,119		—		16,119		—
Total unrealized gain included in net income		450		—		450		—
Ending balance	$	16,569	$	—	$	16,569	$	—

The following is a rollforward of interest-only strips that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2022		2021			2022		2021
Beginning balance	$	—	$	81		$	—	$	238
Interest-only strip additions		—		—			—		—
Interest-only strip write-offs		—		(65	)		—		(222	)
Total unrealized loss included in net income		—		—			—		—
Ending balance	$	—	$	16		$	—	$	16

The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are individually evaluated. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of September 30, 2022 and December 31, 2021, the only financial assets measured at fair value, or lower of cost or fair value, were certain individually evaluated loans held for investment, loans held for sale, mortgage servicing rights, interest-only strips, REO and FVO loans, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximately $10.3 million and $12.0 million as of September 30, 2022 and December 31, 2021, net of specific allowance for credit losses of approximately $0.9 million and $1.4 million, respectively.

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above.

The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated (in thousands):


	September 30, 2022
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	26,372	$	26,372	$	—	$	—	$	26,372
Restricted cash		14,533		14,533		—		—		14,533
Loans held for sale, at fair value		16,569		—		16,569		—		16,569
Loans held for investment, net		3,445,563		—		—		3,538,544		3,538,544
Loans held for investment, at fair value		926		—		—		926		926
Accrued interest receivables		18,333		18,333		—		—		18,333
Mortgage servicing rights		9,868		—		—		9,868		9,868

Liabilities:
Secured financing, net	$	209,537	$	—	$	—	$	211,123	$	211,123
Warehouse repurchase facilities, net		340,050		—		340,050		—		340,050
Securitizations, net		2,651,895		—		—		2,451,412		2,451,412
Accrued interest payable		10,917		10,917		—		—		10,917


	December 31, 2021
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	35,965	$	35,965	$	—	$	—	$	35,965
Restricted cash		11,639		11,639		—		—		11,639
Loans held for sale, net		87,908		—		—		87,908		87,908
Loans held for investment, net		2,527,564		—		—		2,655,357		2,655,357
Loans held for investment, at fair value		1,359		—		—		1,359		1,359
Accrued interest receivable		13,159		13,159		—		—		13,159
Mortgage servicing rights		7,152		—		—		7,152		7,152

Liabilities:
Secured financing, net	$	162,845	$	—	$	—	$	170,843	$	170,843
Warehouse repurchase facilities, net		301,069		—		301,069		—		301,069
Securitizations, net		1,911,879		—		—		1,931,002		1,931,002
Accrued interest payable		6,254		6,254		—		—		6,254