Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 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 December 31, 2015 and 2014, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at December 31, 2015



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	4,752,244	$	—	$	4,752,244
Non-Agency MBS, including MBS transferred to consolidated VIEs	—		6,420,817		—		6,420,817
CRT securities	—		183,582		—		183,582
Securities obtained and pledged as collateral	507,443		—		—		507,443
Residential whole loans, at fair value	—		—		623,276		623,276
Swaps	—		1,127		—		1,127
Total assets carried at fair value	$	507,443	$	11,357,770	$	623,276	$	12,488,489
Liabilities:
Swaps	$	—	$	70,526	$	—	$	70,526
Obligation to return securities obtained as collateral	507,443		—		—		507,443
Total liabilities carried at fair value	$	507,443	$	70,526	$	—	$	577,969

Fair Value at December 31, 2014



(In Thousands)	Level 1		Level 2		Level 3		Total
Assets:
Agency MBS	$	—	$	5,904,207	$	—	$	5,904,207
Non-Agency MBS, including MBS transferred to consolidated VIEs	—		4,755,432		—		4,755,432
CRT securities	—		102,983		—		102,983
Securities obtained and pledged as collateral	512,105		—		—		512,105
Residential whole loans, at fair value	—		—		143,472		143,472
Linked Transactions	—		398,336		—		398,336
Swaps	—		3,136		—		3,136
Total assets carried at fair value	$	512,105	$	11,164,094	$	143,472	$	11,819,671
Liabilities:
Swaps	$	—	$	62,198	$	—	$	62,198
Obligation to return securities obtained as collateral	512,105		—		—		512,105
Total liabilities carried at fair value	$	512,105	$	62,198	$	—	$	574,303

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

The following table presents additional information for the years ended December 31, 2015 and 2014 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.

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



	Residential Whole Loans, at Fair Value
	For the Year Ended December 31,
(In Thousands)	2015			2014
Balance at beginning of period	$	143,472		$	—
Purchases and capitalized advances	534,574			147,471
Changes in fair value recorded in Net gain on residential whole loans held at fair value	6,539			(388		)
Collection of principal, net of liquidation gains/losses	(34,767		)	(1,038		)
Transfer to REO	(26,542		)	(2,573		)
Balance at end of period	$	623,276		$	143,472

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 December 31, 2015 and 2014:

Fair Value Methodology for Level 3 Financial Instruments



	December 31, 2015
(Dollars in Thousands)	Fair Value (1)		Valuation Technique	Unobservable Input	Range	Weighted Average

Residential whole loans, at fair value	$	113,166	Discounted cash flow	Discount rate	6.00-8.70%	7.00		%
				Prepayment rate	0.25-11.10%	6.59		%
				Default rate	0.00-9.10%	3.10		%
				Loss severity	10.00-79.40%	17.03		%

	$	392,557	Liquidation model	Discount rate	6.75-10.02%	6.85		%
				Annual change in home prices	(5.51)-6.08%	1.28		%
				Liquidation timeline (in years)	0.67-4.42	1.56
				Current value of underlying properties	$14-$3,500		$626
Total	$	505,723

(1) Excludes approximately $117.6 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at December 31, 2015.



	December 31, 2014
(Dollars in Thousands)	Fair Value		Valuation Technique	Unobservable Input	Range	Weighted Average

Residential whole loans, at fair value	$	36,101	Discounted cash flow	Discount rate	6.00-8.00%	7.52		%
				Prepayment rate	0.25-8.20%	4.79		%
				Default rate	0.00-20.30%	7.01		%
				Loss severity	10.00-61.69%	18.88		%

	$	107,371	Liquidation model	Discount rate	7.00-7.00%	7.00		%
				Annual change in home prices	(4.73)-3.56%	0.26		%
				Liquidation timeline (in years)	0.83-4.42	1.94
				Current value of underlying properties	$29-$4,000		$397
Total	$	143,472

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 December 31, 2015 and 2014:



	December 31, 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	$	623,276	$	786,330	$	(163,054	)	$	143,472	$	182,613	$	(39,141	)
Loans 90 days or more past due	$	493,640	$	637,459	$	(143,819	)	$	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 December 31, 2015 and 2014:



	December 31, 2015				December 31, 2014
(In Thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Agency MBS	$	4,752,244	$	4,752,244	$	5,904,207	$	5,904,207
Non-Agency MBS, including MBS transferred to consolidated VIEs	6,420,817		6,420,817		4,755,432		4,755,432
CRT securities	183,582		183,582		102,983		102,983
Securities obtained and pledged as collateral	507,443		507,443		512,105		512,105
Residential whole loans, at carrying value	271,845		289,696		207,923		217,386
Residential whole loans, at fair value	623,276		623,276		143,472		143,472
Cash and cash equivalents	165,007		165,007		182,437		182,437
Restricted cash	71,538		71,538		67,255		67,255
Linked Transactions	—		—		398,336		398,336
Swaps	1,127		1,127		3,136		3,136
Financial Liabilities:
Repurchase agreements	7,888,902		7,828,115		8,267,388		8,266,699
FHLB advances	1,500,000		1,500,000		—		—
Securitized debt	22,057		22,057		110,574		110,791
Obligation to return securities obtained as collateral	507,443		507,443		512,105		512,105
Senior Notes	100,000		99,391		100,000		103,031
Swaps	70,526		70,526		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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