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Note 13 - Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

13. Fair Value of Financial Instruments

The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or 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 the fair value measurement.

The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

a.

Investment Securities Available for Sale (RMBS and CLOs) – Fair value for the RMBS in our portfolio are valued using a third-party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. The dealers will incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. If quoted prices for a security are not reasonably available from a dealer, the security will be re-classified as a Level 3 security and, as a result, management will determine the fair value based on characteristics of the security that the Company receives from the issuer and based on available market information. Management reviews all prices used in determining valuation to ensure they represent current market conditions. This review includes surveying similar market transactions, comparisons to interest pricing models as well as offerings of like securities by dealers. The Company's investment securities that are comprised of RMBS and CLOs are valued based upon readily observable market parameters and are classified as Level 2 fair values.

b.

Investment Securities Available for Sale (CMBS) – As the Company’s CMBS investments are comprised of securities for which there are not substantially similar securities that trade frequently, the Company classifies these securities as Level 3 fair values. Fair value of the Company’s CMBS investments is based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significant unobservable inputs used in the measurement of these investments are projected losses of certain identified loans within the pool of loans and a discount rate. The discount rate used in determining fair value incorporates default rate, loss severity and current market interest rates. The discount rate ranges from 4.1% to 11.8%. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement.

c.

Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are recorded at fair value and classified as Level 3 fair values. Fair value is based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significant unobservable inputs used in the measurement of these investments are discount rates. The discount rate used in determining fair value incorporates default rate, loss severity and current market interest rates. The discount rate ranges from 3.13% to 5.80%. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement.

d.

Derivative Instruments – The fair value of interest rate swaps, swaptions, options and TBAs are based on dealer quotes. The fair value of future contracts are based on exchange-traded prices. The Company’s derivatives are classified as Level 1 or Level 2 fair values.

e.

Multi-Family CDOs – The fair value of multi-family CDOs is determined using a third party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. The dealers will consider contractual cash payments and yields expected by market participants. Dealers also incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security.

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):

		Measured at Fair Value on a Recurring Basis at
		September 30, 2014																December 31, 2013

		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Assets carried at fair value
Investment securities available for sale:
Agency RMBS		$	—			$	809,137			$	—			$	809,137			$	—			$	876,874			$	—			$	876,874
Non-Agency RMBS			—				2,040				—				2,040				—				2,361				—				2,361
CMBS			—				—				45,953				45,953
CLOs			—				35,121				—				35,121				—				33,208				—				33,208
Investment securities available for sale held in securitization trusts:
CMBS			—				—				38,379				38,379				—				—				92,578				92,578
Multi-family loans held in securitization trusts			—				—				8,303,169				8,303,169				—				—				8,111,022				8,111,022
Derivative assets:
TBA Securities			—				214,711				—				214,711				—				190,742				—				190,742
Options on U.S. Treasury futures			—				—				—				—				7				—				—				7
U.S. Treasury futures			—				—				—				—				3,257				—				—				3,257
Interest rate swap futures			476				—				—				476				238				—				—				238
Interest rate swaps			—				1,892				—				1,892				—				2,041				—				2,041
Swaptions			—				245				—				245				—				1,305				—				1,305
Total		$	476			$	1,063,146			$	8,387,501			$	9,451,123			$	3,502			$	1,106,531			$	8,203,600			$	9,313,633
Liabilities carried at fair value
Multi-family collateralized debt obligations		$	—			$	—			$	8,005,013			$	8,005,013			$	—			$	—			$	7,871,020			$	7,871,020
Derivative liabilities:
U.S. Treasury futures			49				—				—				49
Eurodollar futures			370				—				—				370				1,432				—				—				1,432
Total		$	419			$	—			$	8,005,013			$	8,005,432			$	1,432			$	—			$	7,871,020			$	7,872,452

The following table details changes in valuation for the Level 3 assets for the nine months ended September 30, 2014 and 2013, respectively (amounts in thousands):

Level 3 Assets:

		Nine Months Ended September 30,
		2014				2013
Balance at beginning of period		$	8,203,600			$	5,514,065
Total gains/(losses) (realized/unrealized)
Included in earnings ⁽¹⁾			267,236				(411,494	)
Included in other comprehensive income			11,653				11,227
Purchases/(Sales)			(41,442	)			1,700,865
Paydowns			(50,195	)			(59,341	)
Sale of real estate owned			(3,351	)			—
Balance at the end of period		$	8,387,501			$	6,755,322

⁽¹⁾

Amounts included in interest income from multi-family loans held in securitization trusts, unrealized gain on multi-family loans and debt held in securitization trusts, net and realized gain (loss) on investment securities and related hedges, net.

The following table details changes in valuation for the Level 3 liabilities for the nine months ended September 30, 2014 and 2013, respectively (amounts in thousands):

Level 3 Liabilities:

		Nine Months Ended September 30,
		2014				2013
Balance at beginning of period		$	7,871,020			$	5,319,573
Total realized and unrealized gains/(losses)
Included in earnings ⁽¹⁾			187,536				(447,558	)
Included in other comprehensive income			—				—
Purchases			—				1,659,630
Paydowns			(53,543	)			(59,367	)
Balance at the end of period		$	8,005,013			$	6,472,278

⁽¹⁾

Amounts included in interest expense on multi-family collaterized debt obligations and unrealized gain on multi-family loans and debt held in securitization trusts, net.

The following table details the changes in unrealized gains (losses) included in earnings for our Level 3 assets and liabilities for the three and nine months ended September 30, 2014 and 2013, respectively (dollar amounts in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,

		2014				2013				2014				2013
Change in unrealized (losses)gains – assets		$	(56,122	)		$	(48,522	)		$	284,568			$	(377,169	)
Change in unrealized gains(losses) – liabilities			74,237				54,860				(241,508	)			399,539
Net change in unrealized gains included in earnings for assets and liabilities		$	18,115			$	6,338			$	43,060			$	22,370

Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company continues to refine its valuation methodologies. The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its 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 reporting date. The Company uses inputs that are current as of each reporting date, which may include periods of market dislocation, during which time price transparency may be reduced. This condition could cause the Company’s financial instruments to be reclassified from Level 2 to Level 3 in future periods.

The following table presents assets measured at fair value on a non-recurring basis as of September 30, 2014 and December 31, 2013, respectively, on the condensed consolidated balance sheets (dollar amounts in thousands):

		Assets Measured at Fair Value on a Non-Recurring Basis at
		September 30, 2014																December 31, 2013
		Level 1				Level 2				Level 3				Total				Level 1				Level 2				Level 3				Total
Residential Mortgage loans held in securitization trusts – impaired loans (net)		$	—			$	—			$	8,971			$	8,971			$	—			$	—			$	6,591			$	6,591
Real estate owned held in residential securitization trusts			—				—				669				669				—				—				1,108				1,108

The following table presents losses incurred for assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2014 and 2013, respectively, on the Company’s condensed consolidated statements of operations (dollar amounts in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2014				2013				2014				2013
Residential mortgage loans held in securitization trusts – impaired loans (net)		$	(287	)		$	(39	)		$	(654	)		$	(568	)
Real estate owned held in residential securitization trusts			(50	)			(199	)			(103	)			(209	)

Residential Mortgage Loans Held in Securitization Trusts – Impaired Loans (net) – Impaired residential mortgage loans held in securitization trusts are recorded at amortized cost less specific loan loss reserves. Impaired loan value is based on management’s estimate of the net realizable value taking into consideration local market conditions of the property, updated appraisal values of the property and estimated expenses required to remediate the impaired loan.

Real Estate Owned Held in Residential Securitization Trusts – Real estate owned held in the residential securitization trusts are recorded at net realizable value. Any subsequent adjustment will result in the reduction in carrying value with the corresponding amount charged to earnings. Net realizable value based on an estimate of disposal taking into consideration local market conditions of the property, updated appraisal values of the property and estimated expenses required to sell the property.

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2014 and December 31, 2013, respectively, (dollar amounts in thousands):

			September 30, 2014								December 31, 2013
	Fair Value Hierarchy Level		Carrying Value				Estimated Fair Value				Carrying Value				Estimated Fair Value
Financial Assets:
Cash and cash equivalents	Level 1		$	28,513			$	28,513			$	31,798			$	31,798
Investment securities available for sale ⁽³⁾	Level 2 or 3			892,251				892,251				912,443				912,443
Investment securities available for sale, at fair value held in securitization trusts	Level 3			38,379				38,379				92,578				92,578
Residential mortgage loans held in securitization trusts (net)	Level 3			152,902				139,936				163,237				152,104
Distressed residential mortgage loans (net) ⁽¹⁾	Level 3			262,980				280,055				264,434				254,543
Multi-family loans held in securitization trusts	Level 3			8,303,169				8,303,169				8,111,022				8,111,022
Derivative assets	Level 1 or 2			217,234				217,324				197,590				197,590
Mortgage loans held for sale (net) ⁽²⁾	Level 3			2,486				2,481				2,496				2,595
First mortgage loans ⁽²⁾	Level 3			9,529				9,745				8,249				8,318
Mezzanine loan and equity investments ⁽²⁾	Level 3			29,557				29,786				21,568				21,812

Financial Liabilities:
Financing arrangements, portfolio investments	Level 2		$	627,881			$	627,881			$	791,125			$	791,125
Residential collateralized debt obligations	Level 3			148,298				136,937				158,410				151,910
Multi-family collateralized debt obligations	Level 3			8,005,013				8,005,013				7,871,020				7,871,020
Securitized debt	Level 3			237,413				247,658				304,964				311,535
Derivative liabilities	Level 1 or 2			419				419				1,432				1,432
Payable for securities purchased	Level 1			215,417				215,417				191,592				191,592
Subordinated debentures	Level 3			45,000				37,342				45,000				39,310

⁽¹⁾	Includes distressed residential mortgage loans held in securitization trusts with a carrying value amounting to approximately $247.2 million and $254.7 million at September 30, 2014 and December 31, 2013, respectively. Distressed residential mortgage loans with a carrying value amounting to approximately $15.8 million and $9.7 million are included in receivables and other assets in the accompanying condensed consolidated balance sheets at September 30, 2014 and December 31, 2013, respectively.
⁽²⁾	Included in receivables and other assets in the accompanying condensed consolidated balance sheets.
⁽³⁾	Includes $46.0 million of CMBS securities classified as level 3.

In addition to the methodology to determine the fair value of the Company’s financial assets and liabilities reported at fair value on a recurring basis and non-recurring basis, as previously described, the following methods and assumptions were used by the Company in arriving at the fair value of the Company’s other financial instruments in the table immediately above:

	a.	Cash and cash equivalents – Estimated fair value approximates the carrying value of such assets.

	b.	Residential mortgage loans held in securitization trusts (net) – Residential mortgage loans held in the securitization trusts are recorded at amortized cost. Fair value is based on an internal valuation model that considers the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the estimated market prices for similar types of loans.

	c.	Distressed residential mortgage loans (net) – Fair value is estimated using pricing models taking into consideration current interest rates, loan amount, payment status and property type, and forecasts of future interest rates, home prices and property values, prepayment speeds, default, loss severities, and actual purchases and sales of similar loans.

	d.	Mortgage loans held for sale (net) – The fair value of mortgage loans held for sale (net) are estimated by the Company based on the price that would be received if the loans were sold as whole loans taking into consideration the aggregated characteristics of the loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed interest rate period, life time cap, periodic cap, underwriting standards, age and credit.

	e.	First mortgage loan and mezzanine loan and equity investments – Estimated fair value is determined by both market comparable pricing and discounted cash flows. The discounted cash flows are based on the underlying contractual cash flows and estimated changes in market yields. The fair value also reflects consideration of changes in credit risk since the origination or time of initial investment.

	f.	Financing arrangements – The fair value of these financing arrangements approximates cost as they are short term in nature.

	g.	Residential collateralized debt obligations – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparable obligations.

	h.	Securitized debt – The fair value of securitized debt is based on discounted cash flows using management’s estimate for market yields.

	i.	Payable for securities purchased – Estimated fair value approximates the carrying value of such liabilities.

	j.	Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate for market yields.

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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