FAIR VALUE MEASUREMENTS

The Company follows fair value guidance in accordance with GAAP to account for its financial instruments that are accounted for at fair value. The fair value of a financial instrument is the amount 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.

GAAP requires classification of financial instruments into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

Level 1– inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets.

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value.

The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis.

The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level.

Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities.

Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1.

Residential Securities, residential mortgage loans, interest rate swap and swaption markets and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy.

The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, Commercial real estate debt investments carried at fair value are classified as Level 2.

For the fair value of securitized debt of consolidated VIEs, refer to the Note titled “Variable Interest Entities” for additional information.

The Company classifies its investments in MSRs as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including prepayment rates, delinquency levels, costs to service and discount rates. Model valuations are then compared to valuations obtained from third-party pricing providers. Management reviews the valuations received from third-party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSRs requires significant judgment by management and the third-party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements.

The following tables present the estimated fair values of financial instruments measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.



	September 30, 2018
	Level 1		Level 2		Level 3		Total
Assets:	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	89,290,128	$	—	$	89,290,128
Credit risk transfer securities	—		688,521		—		688,521
Non-Agency mortgage-backed securities	—		1,173,467		—		1,173,467
Commercial mortgage-backed securities	—		186,495		—		186,495
Loans
Residential mortgage loans	—		1,217,139		—		1,217,139
Mortgage servicing rights	—		—		588,833		588,833
Assets transferred or pledged to securitization vehicles	—		4,287,821		—		4,287,821
Derivative assets
Interest rate swaps	—		97,002		—		97,002
Other derivatives	221,516		86,323		—		307,839
Total assets	$	221,516	$	97,026,896	$	588,833	$	97,837,245
Liabilities:
Debt issued by securitization vehicles	$	—	$	3,799,542	$	—	$	3,799,542
Derivative liabilities
Interest rate swaps	—		311,729		—		311,729
Other derivatives	482		67,583		—		68,065
Total liabilities	$	482	$	4,178,854	$	—	$	4,179,336

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:	(dollars in thousands)
Securities
Agency mortgage-backed securities	$	—	$	90,551,763	$	—	$	90,551,763
Credit risk transfer securities	—		651,764		—		651,764
Non-Agency mortgage-backed securities	—		1,097,294		—		1,097,294
Commercial mortgage-backed securities	—		262,751		—		262,751
Loans
Residential mortgage loans	—		958,546		—		958,546
Mortgage servicing rights	—		—		580,860		580,860
Assets transferred or pledged to securitization vehicles	—		3,306,133		—		3,306,133
Derivative assets
Interest rate swaps	—		30,272		—		30,272
Other derivatives	218,361		65,252		—		283,613
Total assets	$	218,361	$	96,923,775	$	580,860	$	97,722,996
Liabilities:
Debt issued by securitization vehicles	$	—	$	2,971,771	$	—	$	2,971,771
Derivative liabilities
Interest rate swaps	—		569,129		—		569,129
Other derivatives	12,285		26,440		—		38,725
Total liabilities	$	12,285	$	3,567,340	$	—	$	3,579,625

Quantitative Information about Level 3 Fair Value Measurements

The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSRs, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSRs, which in turn could result in a decline in the estimated fair value of MSRs. Refer to the Note titled “Mortgage Servicing Rights” for additional information.

The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSRs. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.



Valuation Technique	Unobservable Input ⁽¹⁾	September 30, 2018	December 31, 2017
Valuation Technique	Unobservable Input ⁽¹⁾	Range (Weighted Average)
Discounted cash flow	Discount rate	9.0% -12.0% (9.4%)	10.0% -15.0% (10.4%)
	Prepayment rate	4.5% - 11.3% (7.1%)	4.6% - 22.3% (9.4%)
	Delinquency rate	0.0% - 5.0% (2.3%)	0.0% - 13.0% (2.2%)
	Cost to service	$82 - $132 ($105)	$84 - $181 ($102)


⁽¹⁾	Represents rates, estimates and assumptions that the Company believes would be used by market participants when

valuing these assets.

The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at September 30, 2018 and December 31, 2017.



	Level in Fair Value Hierarchy	September 30, 2018				December 31, 2017
	Level in Fair Value Hierarchy	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:	(dollars in thousands)
Loans
Commercial real estate debt and preferred equity, held for investment	3	1,435,865		1,446,062		1,029,327		1,035,095
Commercial loans held for sale, net	3	42,325		43,055		—		—
Corporate debt	2	1,528,874		1,531,546		1,011,275		1,014,139
Financial liabilities:
Repurchase agreements	1,2	$	79,073,026	$	79,073,026	$	77,696,343	$	77,697,828
Other secured financing	1,2	4,108,547		4,108,801		3,837,528		3,837,595
Mortgages payable	3	511,588		494,690		309,686		310,218