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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2015

Schedule of financial instruments carried at fair value by valuation hierarchy

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of September 30, 2015, on the consolidated balance sheet by the valuation hierarchy, as previously described:



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	5,020,477	$	—	$	5,020,477
Non-Agency MBS, including MBS transferred to consolidated VIEs	—		6,524,222		—		6,524,222
CRT securities	—		149,968		—		149,968
Securities obtained and pledged as collateral	509,620		—		—		509,620
Residential whole loans, at fair value	—		—		531,537		531,537
Swaps	—		18		—		18
Total assets carried at fair value	$	509,620	$	11,694,685	$	531,537	$	12,735,842
Liabilities:
Swaps	$	—	$	105,473	$	—	$	105,473
Obligation to return securities obtained as collateral	509,620		—		—		509,620
Total liabilities carried at fair value	$	509,620	$	105,473	$	—	$	615,093

Schedule of significant unobservable inputs used in fair value measurement of residential whole loans

The following table presents additional information for the three and nine months ended September 30, 2015 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis. The Company did not own any residential whole loans held at fair value during the three and nine months ended September 30, 2014.

Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis



(In Thousands)	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015

Balance at beginning of period	$	183,861		$	143,472
Purchases and capitalized advances	357,258			410,981
Changes in fair value recorded in Net gain on residential whole loans held at fair value	2,362			3,872
Collection of principal, net of liquidation gains/losses	(7,152		)	(15,716		)
Transfer to REO	(4,792		)	(11,072		)
Balance at end of period	$	531,537		$	531,537

Schedule of quantitative information about significant unobservable inputs

The following table presents a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of September 30, 2015:

Fair Value Methodology for Level 3 Financial Instruments



	September 30, 2015
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Range	Weighted Average

Residential whole loans, at fair value	$	65,176	Discounted cash flow	Discount rate	6.00-7.83%	6.85		%
				Prepayment rate	0.25-10.60%	6.62		%
				Default rate	0.00-8.80%	3.23		%
				Loss severity	10.00-75.62%	19.02		%

	$	105,757	Liquidation model	Discount rate	6.75-9.56%	7.13		%
				Annual change in home prices	(6.75)-4.94%	1.56		%
				Liquidation timeline (in years)	0.92-4.67	1.86
				Current value of underlying properties	$29-$3,440		$475
Total	$	170,933

(1) Excludes approximately $360.6 million of loans for which the purchase transaction closed in September 2015 as management considers the purchase price continues to reflect the fair value of such loans at September 30, 2015.

Schedule of residential whole loans, fair value and aggregate unpaid principal, fair value option elected

The following table presents the difference between the fair value and the aggregate unpaid principal balance of the Company’s residential whole loans for which the fair value option was elected, at September 30, 2015 and December 31, 2014:



	September 30, 2015							December 31, 2014
(In Thousands)	Fair Value		Unpaid Principal Balance		Difference			Fair Value		Unpaid Principal Balance		Difference
Residential whole loans, at fair value
Total loans	$	531,537	$	670,068	$	(138,531	)	$	143,472	$	182,613	$	(39,141	)
Loans 90 days or more past due	$	432,974	$	555,861	$	(122,887	)	$	128,591	$	165,358	$	(36,767	)

Schedule of carrying value and fair value of financial instruments

The following table presents the carrying values and estimated fair values of the Company’s financial instruments at September 30, 2015 and December 31, 2014:



	September 30, 2015				December 31, 2014
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
(In Thousands)
Financial Assets:
Agency MBS	$	5,020,477	$	5,020,477	$	5,904,207	$	5,904,207
Non-Agency MBS, including MBS transferred to consolidated VIEs	6,524,222		6,524,222		4,755,432		4,755,432
CRT securities	149,968		149,968		102,983		102,983
Securities obtained and pledged as collateral	509,620		509,620		512,105		512,105
Residential whole loans, at carrying value	245,894		262,330		207,923		217,386
Residential whole loans, at fair value	531,537		531,537		143,472		143,472
Cash and cash equivalents	174,160		174,160		182,437		182,437
Restricted cash	109,997		109,997		67,255		67,255
Linked Transactions	—		—		398,336		398,336
Swaps	18		18		3,136		3,136
Financial Liabilities:
Repurchase agreements	9,210,834		9,210,989		8,267,388		8,266,699
FHLB advances	265,000		265,000		—		—
Securitized debt	32,217		32,298		110,574		110,791
Obligation to return securities obtained as collateral	509,620		509,620		512,105		512,105
Senior Notes	100,000		100,351		100,000		103,031
Swaps	105,473		105,473		62,198		62,198

- Definition

Tabular disclosure of the application of the fair value option for measurement and reporting of eligible financial assets and liabilities (as defined), as well as certain other eligible items (as defined) included in the statement of financial position, whether such option is elected for a single eligible item or a group of similar eligible items and is in addition to other disclosures concerning fair value which the company may be required to provide. Such disclosure might be expected to include: (1) for items included in the statement of financial position: (a) the reasons for electing a fair value option for each eligible item or group of similar eligible items and (b) if the fair value option is elected for some but not all eligible items within a group of similar eligible items: (i) a description of those similar items and the reasons for partial election and (ii) information of how the group of similar items relates to individual balance sheet line items; (c) for each line item in the statement of financial position that includes an item or items for which the fair value option has been elected, information of how each line item in the statement of financial position relates to major categories of assets and liabilities presented in accordance with other fair value disclosures; (2) for items included in the income statement: (a) a description of how interest and dividends are measured and where they are reported in the income statement; (b) how the gains or losses attributable to changes in instrument-specific credit risk were determined; (c) for liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk: (i) qualitative information about the reasons for the changes and (ii) how the gains and losses attributable to changes in instrument-specific credit risk were determined; and (3) certain other disclosures as required or determined to be provided.

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