GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial instruments at fair values. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

Available-for-sale debt securities valued utilizing observable and unobservable market inputs. The observable market inputs include recent transactions, broker quotes and vendor prices ("market data"). However, given the implied price dispersion amongst the market data, the fair value determination for these securities has also significantly utilized unobservable inputs in discounted cash flow models including prepayments, default and severity estimates based on the recent performance of the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macro-economic events (e.g. housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs these securities have been classified within level 3.

The available-for-sale equity securities are publicly registered and traded in the United States and their prices are listed on the New York Stock Exchange.

The valuation of derivative contracts are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, spot and market forward points. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair value of the foreign currency forward contracts is based on interest differentials between the currencies being traded, spot and market forward points.

We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2011, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

We estimate the fair values of our loans by discounting their expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the financial statements.

Any changes to the valuation methodology will be reviewed by our management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our 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. We use inputs that are current as of the measurement date, which may fall within periods of market dislocation, during which price transparency may be reduced.

The following table presents our financial instruments carried at fair value on a recurring basis in the consolidated balance sheet as of December 31, 2011 (amounts in thousands):

	Fair Value at Reporting Date Using Inputs: December 31, 2011

	Total			Level I		Level II			Level III
Loans held-for-sale at fair value	$	128,593							$	128,593

Available-for-sale debt securities:
Residential-mortgage-backed securities		164,948								164,948
Commercial-mortgage-backed securities		176,786								176,786

Total available-for-sale debt securities		341,734			—		—			341,734

Available-for-sale equity securities:
Real estate industry		11,269		$	11,269		—			—

Total available-for-sale equity securities:		11,269			11,269		—			—

Total investments:		481,596			11,269		—			470,327

Derivative Assets:
Foreign exchange contracts		5,261				$	5,261
Interest rate contracts		7,555					7,555
Derivative Liabilities:
Interest rate contracts		(12,762	)				(12,762	)
Foreign exchange contracts		(6,890	)				(6,890	)

Total Derivatives:		(6,836	)				(6,836	)		—

Total:	$	474,760		$	11,269	$	(6,836	)	$	470,327

The changes in investments classified as Level III are as follows for the year ended December 31, 2011 (amounts in thousands):

	Loans held-for-sale, at fair value			MBS available-for-sale at fair value			Total

Beginning balance, January 1, 2011	$	144,163		$	—		$	144,163

Purchases		—			115,795			115,795
Originations		270,066			—			270,066
Transfer in		(7,000	)		282,763			275,763
Sales		(294,126	)		(3,600	)		(297,726	)
Maturities		—			(15,408	)		(15,408	)
Settlements		(252	)		(36,562	)		(36,814	)

Net increase on assets		(31,312	)		342,988			311,676

Gain (loss) on investments at fair value:
Unrealized gain (loss) on assets		5,760			(7,961	)		(2,201	)
Realized gain on assets		10,314			249			10,563
Accretion of discount		—			10,730			10,730
OTTI		—			(4,272	)		(4,272	)
Other		(332	)		—			(332	)

Net gain (loss) on assets		15,742			(1,254	)		14,488

Ending balance, as of December 31, 2011	$	128,593		$	341,734		$	470,327

The following table presents our financial instruments carried at fair value on a recurring basis in the consolidated balance sheet as of December 31, 2010 (amounts in thousands):

	Fair Value at Reporting Date Using Inputs: December 31, 2010

	Total			Level I		Level II			Level III
Available-for-sale debt securities:
Residential-mortgage-backed securities	$	122,525				$	122,525
Commercial-mortgage-backed securities		275,155					275,155
Loans held-for-sale at fair value		144,163							$	144,163

Total available-for-sale debt securities:		541,843			—		397,680			144,163

Available-for-sale equity securities:
Real estate industry		8,177		$	8,177		—			—

Total available-for-sale equity securities:		8,177			8,177		—			—

Total available-for-sale securities:		550,020			8,177		397,680			144,163

Derivative Assets:
Interest rate contracts		337					337
Derivative Liabilities:
Interest rate contracts		(2,017	)				(2,017	)
Foreign exchange contracts		(7,383	)				(7,383	)

Total Derivatives		(9,063	)		—		(9,063	)		—

Total:	$	540,957		$	8,177	$	388,617		$	144,163

The changes in investments classified as Level III are as follows for the year ended December 31, 2010 (amounts in thousands):

During the year ended December 31, 2011, we originated various loans that we intend to sell in the short-term. At the time of the origination, we elected to account for these loans at fair value. The associated interest rate and credit spread derivatives were not designated as hedging instruments for accounting purposes. As a result, changes in the fair value of these derivatives are reported in current earnings. It is expected that changes in the fair value of the held-for-sale loans, which will also be recorded through earnings as a result of our fair value election, will materially offset the changes in the fair value of the interest rate and credit spread derivatives. The unpaid principal balance on the loans was $122.8 million as of December 31, 2011.

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the financial statements, for which it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based upon the estimation of discount rates to estimated future cash flows using market yields or other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amount we could realize on disposition of the financial instruments. The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair value amounts.

The fair value of cash and cash equivalents, and cash collateral under treasury securities loan agreement accrued interest and accounts payable approximate to their carrying values due to their short-term nature. CMBS and RMBS securities are valued by averaging broker quotes from dealers in those securities as well as other available market data sources as deemed appropriate. Discounted cash flows, credit and tenant review as well as other quantitative and qualitative factors are evaluated to estimate the fair value of our loan portfolio.

The following table presents the fair value of our financial instruments, including loans held in securitization trust, not carried at fair value on the consolidated balance sheet (amounts in thousands):

	Carrying Value as of December 31, 2011		Fair Value as of December 31, 2011		Carrying Value as of December 31, 2010		Fair Value as of December 31, 2010

Financial Instruments not carried at Fair Value:
Loans	$	2,318,915	$	2,359,258	$	1,281,080	$	1,319,979
Other Investments	$	33,110	$	33,110	$	6,000	$	6,000
Financial Liabilities:
Secured financing agreements and collateralized debt obligation in securitization trust	$	1,156,716	$	1,157,811	$	633,745	$	637,499