6.	Mortgage Loans

The Company classifies its mortgage loans held for investment and mortgage loans held for investment in securitization trusts as Level 3 in the fair value hierarchy. Prices for these instruments are obtained from third party pricing providers which use significant unobservable inputs in their valuations. These valuations are prepared on an instrument-by-instrument basis and primarily use discounted cash flow models that include unobservable market data inputs including prepayment speeds, delinquency levels, and credit losses. Model valuations are then compared to external indicators such as market price quotations from market makers for similar instruments and recent transactions in the same or similar instruments. These valuations may also be discounted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the third-party pricing provider in the absence of market information. The valuation of these mortgage loans requires significant judgment by the third-party pricing provider and management. Assumptions used by the third-party pricing provider due to lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. Management reviews the valuations received from the third-party pricing provider. As part of this review, prices are compared against other pricing along with internal valuation expertise to ensure assumptions and pricing is reasonable.

Mortgage Loans Held for Investment, at Fair Value

The Company purchases individual jumbo whole mortgage loans with the intention of securitizing them. These loans are considered held for investment because the Company expects to consolidate the securitization trusts and are accounted for under the fair value option. See Note 2 for further discussion. As of December 31, 2015, the unpaid principal balance and the fair value of the Company’s mortgage loans held for investment were $114,997 and $116,857, respectively. As of December 31, 2014, the unpaid principal balance and the fair value of the Company’s mortgage loans held for investment were $30,792 and $31,460, respectively. The following table provides the geographic distribution of mortgage loans held for investment at December 31, 2015 and December 31, 2014, based on the unpaid principal balance.

	December 31, 2015			December 31, 2014
California		68	%		82	%
Washington		6	%		2	%
Texas		5	%		3	%
Illinois		3	%		2	%
All other		18	%		11	%
Total		100	%		100	%

The following table provides additional data on the Company’s mortgage loan portfolio at December 31, 2015 and 2014.

	December 31, 2015			December 31, 2014
		Portfolio			Portfolio
	Portfolio Range	Weighted Average		Portfolio Range	Weighted Average
Unpaid principal balance	$116 to $1,987	$	804	$447 to $1,332	$	790
Interest rate	2.63% to 4.00%		3.48%	2.75% to 3.75%		3.43%
Maturity	11/2044 to 2/2046	10/2045		6/2044 to 12/2044	9/2044
FICO score at loan origination	701 to 811	763		705 to 813	762
Loan-to-value ratio at loan origination	20% to 80%		71%	28% to 80%		65%

No loans were 90 days or more past due and none were on nonaccrual status at December 31, 2015 or December 31, 2014.

The following table presents the rollforward of mortgage loans held for investment for the periods presented. The Company did not invest in mortgage loans prior to 2014.

	Twelve Months Ended December 31
	2015			2014			2013
Fair value, beginning of period	$	31,460		$	-		$	-
Purchased		357,996			31,463			-
Repaid		(42,286	)		-			-
Sold to securitization trust		(223,278	)		-			-
Change in fair value		(7,035	)		(3	)		-
Fair value, end of period	$	116,857		$	31,460		$	-

None of the change in the fair value of the mortgage loans was attributable to changes in credit risk. The portion of the change in fair value included in the Company’s consolidated statements of income that were attributable to mortgage loan held for investment that were held at December 31, 2015 and 2014 was ($106) and ($3), respectively.

The following table provides information about the significant unobservable inputs used in the Level 3 valuation of the Company’s mortgage loans held for investment at December 31, 2015 and 2014.

	December 31, 2015				December 31, 2014
		Weighted-				Weighted-
Unobservable Input	Range	Average			Range	Average
Discount rate	3.0% - 3.5%		3.3	%	3.6% - 3.9%		3.8	%
Conditional refinance rate	13.6% - 21.7%		16.4	%	12.4% - 19.3%		15.3	%
Default rate	0% - 2.1%		0.7	%	0% - 1.5%		0.4	%
Loss severity	10.5% - 22.2%		14.9	%	10.2% - 19.9%		13.8	%

A significant increase or decrease in any of the above unobservable inputs, in isolation, would likely result in a significantly lower or higher fair value measurement.

Mortgage Loans Held for Investment in Securitization Trusts, at Fair Value

As discussed in Notes 2 and 3, the Company consolidates a CFE that owns whole mortgage loans it purchased from a subsidiary of the Company. These securitized mortgage loans are legally isolated from the Company, are beyond the reach of the Company’s creditors, and may only be used to settle obligations of the CFE. These loans are carried at fair value as a result of a fair value option election. As of December 31, 2015, the unpaid principal balance and the fair value of the Company’s mortgage loans held for investment in securitization trusts was $223,205 and $226,908, respectively. The following table provides the geographic distribution of mortgage loans held for investment in securitization trusts at December 31, 2015 based on the unpaid principal balance.

	December 31, 2015
California		49	%
Texas		10	%
Illinois		6	%
Washington		5	%
All other		30	%
Total		100	%

The following table provides additional data on mortgage loans held for investment in in securitization trusts at December 31, 2015.

	December 31, 2015
		Portfolio
	Portfolio Range	Weighted Average
Unpaid principal balance	$291 to $1,933	$	742
Interest rate	2.50% to 4.13%		3.38%
Maturity	6/2044 to 11/2045	3/2045
FICO score at loan origination	700 to 815	769
Loan-to-value ratio at loan origination	24% to 80%		69%

No loans were 90 days or more past due and none were on nonaccrual status at December 31, 2015.

The following table presents the rollforward of mortgage loans held for investment in securitization trusts for the period presented.

	2015
Fair value, beginning of period	$	-
Purchased		223,278
Repaid		(1,822	)
Change in fair value		5,452
Fair value, end of period	$	226,908

None of the change in the fair value of these mortgage loans was attributable to changes in credit risk. The portion of the change in fair value included in the Company’s consolidated statements of income that were attributable to mortgage loan held for investment in securitization trusts that were held at December 31, 2015 was ($1,079), adjusted for the effects of the transfer of these loans into the CFE.

The following table provides information about the significant unobservable inputs used in the Level 3 valuation of the Company’s mortgage loans held for investment in securitization trusts at December 31, 2015.

	December 31, 2015
		Weighted-
Unobservable Input	Range	Average
Discount rate	2.2% - 3.6%		3.3	%
Conditional refinance rate	0.0% - 21.3%		16.4	%
Default rate	0.0% - 2.0%		0.5	%
Loss severity	0.0% - 22.9%		14.4	%

Mortgage Loans Held for Sale, at Fair Value

The Company purchases individual whole mortgage loans with the intention of selling them to Ginnie Mae for inclusion in securitizations. As of December 31, 2015, the unpaid principal balance and the fair value of the Company’s mortgage loans held for sale were $16,629 and $17,542, respectively. The Company did not invest in mortgage loans held for sale prior to the acquisition of Pingora on August 31, 2015.

The Company classifies its mortgage loans held for sale as Level 2 in the fair value hierarchy. Prices for these instruments are obtained from third-party pricing providers and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon cash flow models that are primarily based on observable market-based inputs but may also include unobservable market data inputs, including prepayment speeds, delinquency levels, and credit losses. No unobservable inputs were significant to the December 31, 2015 valuation.