Fair Value Measurements

12 Months Ended

Dec. 31, 2014

3.	Fair Value Measurements

The Company’s valuation techniques for financial instruments are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect the Company’s market assumptions. The ASC Topic on Fair Value Measurements classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

Other than the Futures Contracts and mortgage loans held for investment and related purchase commitments, all of the Company’s MBS and other derivatives were valued using Level 2 inputs. The Futures Contracts were valued using Level 1 inputs. Mortgage loans held for investment (and related purchase commitments) were valued using Level 3 inputs. See Notes 4, 5 and 7, respectively, for a discussion of the valuation of MBS, mortgage loans and derivatives.

The carrying values and fair values of all the Company’s financial instruments as of December 31, 2014 and 2013 were as follows:

	December 31, 2014				December 31, 2013
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
MBS	$	17,587,010	$	17,587,010	$	17,642,532	$	17,642,532
Mortgage loans held for investment		31,460		31,460		-		-
Cash and cash equivalents		627,595		627,595		988,705		988,705
Unsettled purchased MBS		24,792		24,792		-		-
Receivable for securities sold		5,197		5,197		231,214		231,214
Accrued interest receivable		54,274		54,274		55,156		55,156
Principal payments receivable		111,439		111,439		95,021		95,021
Debt security, held-to-maturity ⁽¹⁾		15,000		14,853		15,000		14,307
Short-term investments ⁽¹⁾		20,252		20,252		19,910		19,910
Interest rate swaps and swaptions ⁽²⁾		11,050		11,050		15,841		15,841
Futures Contracts asset ⁽²⁾		-		-		11,148		11,148
Forward purchase commitments ⁽²⁾		16,101		16,101		-		-
Liabilities
Repurchase agreements	$	15,759,831		15,759,831	$	16,129,683	$	16,129,683
Dollar roll liability		-		-		351,826		351,826
Payable for unsettled securities		24,750		24,750		-		-
Accrued interest payable		6,968		6,968		8,279		8,279
Interest rate swap liability ⁽³⁾		42,052		42,052		125,133		125,133
Futures Contracts liability ⁽³⁾		202,501		202,501		36,733		36,733
Forward purchase commitments ⁽³⁾		38		38		5,741		5,741

(1)Included in other investments on the consolidated balance sheets.

(2)Included in derivative assets on the consolidated balance sheets.

(3)Included in derivative liabilities on the consolidated balance sheets.

- Definition

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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