19. Fair Value

GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. 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:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Valuation Process

We have valuation control processes in place to validate the fair value of the Company’s financial assets and liabilities measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. Refer to Note 20 to the consolidated financial statements included in our Form 10-K for further discussion of our valuation process.

We determine the fair value of our assets and liabilities measured at fair value on a recurring and nonrecurring basis in accordance with the methodology described in our Form 10-K.

Fair Value Disclosures

The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of June 30, 2016 and December 31, 2015 (amounts in thousands):


	June 30, 2016
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	237,106	$	—	$	—	$	237,106
RMBS		251,260		—		—		251,260
CMBS		114,340		—		—		114,340
Equity security		12,861		12,861		—		—
Domestic servicing rights		83,301		—		—		83,301
Derivative assets		42,692		—		42,692		—
VIE assets		80,076,117		—		—		80,076,117
Total	$	80,817,677	$	12,861	$	42,692	$	80,762,124
Financial Liabilities:
Derivative liabilities	$	17,870	$	—	$	17,870	$	—
VIE liabilities		79,087,142		—		75,546,490		3,540,652
Total	$	79,105,012	$	—	$	75,564,360	$	3,540,652


	December 31, 2015
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	203,865	$	—	$	—	$	203,865
RMBS		176,224		—		—		176,224
CMBS		212,981		—		—		212,981
Equity security		14,498		14,498		—		—
Domestic servicing rights		119,698				—		119,698
Derivative assets		45,091		—		45,091		—
VIE assets		76,675,689		—		—		76,675,689
Total	$	77,448,046	$	14,498	$	45,091	$	77,388,457
Financial Liabilities:
Derivative liabilities	$	5,196	$	—	$	5,196	$	—
VIE liabilities		75,817,014		—		73,264,566		2,552,448
Total	$	75,822,210	$	—	$	73,269,762	$	2,552,448

The changes in financial assets and liabilities classified as Level III are as follows for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):


							Domestic
	Loans						Servicing				VIE
Three Months Ended June 30, 2016	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
April 1, 2016 balance	$	154,225	$	210,898	$	96,724	$	95,492	$	85,115,662	$	(3,038,534)	$	82,634,467
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		13,235		—		1,349		(12,191)		(4,250,779)		57,477		(4,190,909)
OTTI		—		—		—		—		—		—		—
Net accretion		—		3,742		—		—		—		—		3,742
Included in OCI		—		5,951		—		—		—		—		5,951
Purchases / Originations		288,186		46,866		24,403		—		—		—		359,455
Sales		(218,369)		—		(1,269)		—		—		—		(219,638)
Issuances		—		—		—		—		—		—		—
Cash repayments / receipts		(171)		(16,197)		(7,142)		—		—		14,922		(8,588)
Transfers into Level III		—		—		—		—		—		(557,543)		(557,543)
Transfers out of Level III		—		—		—		—		—		35,759		35,759
Consolidation of VIEs		—		—		—		—		1,746,946		(53,252)		1,693,694
Deconsolidation of VIEs		—		—		275		—		(2,535,712)		519		(2,534,918)
June 30, 2016 balance	$	237,106	$	251,260	$	114,340	$	83,301	$	80,076,117	$	(3,540,652)	$	77,221,472
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2016	$	1,810	$	3,742	$	2,208	$	(12,191)	$	(4,250,779)	$	57,477	$	(4,197,733)


							Domestic
	Loans						Servicing				VIE
Three Months Ended June 30, 2015	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
April 1, 2015 balance	$	343,770	$	197,385	$	308,195	$	130,761	$	103,363,978	$	(2,145,458)	$	102,198,631
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		10,831		—		936		(2,652)		(8,425,383)		490,913		(7,925,355)
Net accretion		—		4,042		—		—		—		—		4,042
Included in OCI		—		(1,150)		5,019		—		—		—		3,869
Purchases / Originations		476,699		—		250		—		—		—		476,949
Sales		(551,634)		—		(385)		—		—		—		(552,019)
Issuances		—		—		—		—		—		(750)		(750)
Cash repayments / receipts		(314)		(7,127)		—		—		—		27,051		19,610
Transfers into Level III		—		—		—		—		—		(623,538)		(623,538)
Transfers out of Level III		—		—		—		—		—		174,376		174,376
Consolidation of VIEs		—		—		—		—		1,244,019		(34,133)		1,209,886
Deconsolidation of VIEs		—		—		137		—		(3,463,522)		528		(3,462,857)
June 30, 2015 balance	$	279,352	$	193,150	$	314,152	$	128,109	$	92,719,092	$	(2,111,011)	$	91,522,844
Amount of total (losses) gains included in earnings attributable to assets still held at June 30, 2015	$	(2,382)	$	4,042	$	1,097	$	(2,652)	$	(8,425,383)	$	490,913	$	(7,934,365)


							Domestic
	Loans						Servicing				VIE
Six Months Ended June 30, 2016	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2016 balance	$	203,865	$	176,224	$	212,981	$	119,698	$	76,675,689	$	(2,552,448)	$	74,836,009
Impact of ASU 2015-02 Adoption (1)		—		—		—		(17,467)		17,467		—		—
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		20,126		—		2,316		(18,930)		(8,340,280)		293,600		(8,043,168)
OTTI		—		—		—		—		—		—		—
Net accretion		—		7,157		—		—		—		—		7,157
Included in OCI		—		2,551		—		—		—		—		2,551
Purchases / Originations		488,756		88,336		57,576		—		—		—		634,668
Sales		(475,333)		—		(1,269)		—		—		—		(476,602)
Issuances		—		—		—		—		—		(596)		(596)
Cash repayments / receipts		(308)		(23,008)		(19,445)		—		—		20,772		(21,989)
Transfers into Level III		—		—		—		—		—		(972,587)		(972,587)
Transfers out of Level III		—		—		—		—		—		146,724		146,724
Consolidation of VIEs		—		—		(138,342)		—		16,850,221		(483,905)		16,227,974
Deconsolidation of VIEs		—		—		523		—		(5,126,980)		7,788		(5,118,669)
June 30, 2016 balance	$	237,106	$	251,260	$	114,340	$	83,301	$	80,076,117	$	(3,540,652)	$	77,221,472
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2016	$	1,810	$	7,157	$	3,778	$	(18,930)	$	(8,340,280)	$	293,600	$	(8,052,865)

(1)

As discussed in Notes 2 and 14, our implementation of ASU 2015-02 resulted in the consolidation of certain CMBS trusts effective January 1, 2016, which required the elimination of $17.5 million of domestic servicing rights associated with these newly consolidated trusts.


							Domestic
	Loans						Servicing				VIE
Six Months Ended June 30, 2015	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2015 balance	$	391,620	$	207,053	$	334,080	$	132,303	$	107,816,065	$	(4,893,120)	$	103,988,001
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		31,962		—		776		(4,194)		(17,273,237)		2,951,583		(14,293,110)
Net accretion		—		13,487		—		—		—		—		13,487
Included in OCI		—		(8,776)		(198)		—		—		—		(8,974)
Purchases / Originations		889,919		—		8,988		—		—		—		898,907
Sales		(1,033,644)		—		(5,098)		—		—		—		(1,038,742)
Issuances		—		—		—		—		—		(7,513)		(7,513)
Cash repayments / receipts		(505)		(18,614)		(223)		—		—		74,988		55,646
Transfers into Level III		—		—		—		—		—		(816,018)		(816,018)
Transfers out of Level III		—		—		—		—		—		723,746		723,746
Consolidation of VIEs		—		—		(24,310)		—		5,657,627		(145,205)		5,488,112
Deconsolidation of VIEs		—		—		137		—		(3,481,363)		528		(3,480,698)
June 30, 2015 balance	$	279,352	$	193,150	$	314,152	$	128,109	$	92,719,092	$	(2,111,011)	$	91,522,844
Amount of total (losses) gains included in earnings attributable to assets still held at June 30, 2015	$	(2,382)	$	7,994	$	981	$	(4,194)	$	(17,273,237)	$	2,951,583	$	(14,319,255)

Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.

The following table presents the fair values, all of which are classified in Level III of the fair value hierarchy, of our financial instruments not carried at fair value on the condensed consolidated balance sheets (amounts in thousands):


	June 30, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets not carried at fair value:
Loans held-for-investment and loans transferred as secured borrowings	$	5,786,720	$	5,813,816	$	6,059,652	$	6,125,881
HTM securities		520,342		505,648		321,244		315,255
European servicing rights		1,589		4,406		2,626		5,302
Financial liabilities not carried at fair value:
Secured financing agreements and secured borrowings on transferred loans	$	4,570,889	$	4,564,186	$	4,068,699	$	4,092,264
Convertible senior notes		1,334,424		1,347,889		1,323,795		1,331,979

The following is quantitative information about significant unobservable inputs in our Level III measurements for those assets and liabilities measured at fair value on a recurring basis (dollars in thousands):


	Carrying Value at		Valuation	Unobservable	Range as of (1)
	June 30, 2016		Technique	Input	June 30, 2016	December 31, 2015
Loans held-for-sale, fair value option	$	237,106	Discounted cash flow	Yield (b)	4.2% - 6.2%	4.8% - 5.3%
				Duration (c)	5.0 - 10.7 years	5.0 - 10.0 years
RMBS		251,260	Discounted cash flow	Constant prepayment rate (a)	2.9% - 15.6%	2.6% - 17.8%
				Constant default rate (b)	0.9% - 8.8%	1.0% - 8.9%
				Loss severity (b)	7% - 79% (e)	10% - 79% (e)
				Delinquency rate (c)	2% - 28%	2% - 29%
				Servicer advances (a)	18% - 94%	30% - 94%
				Annual coupon deterioration (b)	0% - 0.6%	0% - 0.5%
				Putback amount per projected total collateral loss (d)	0% - 15%	0% - 11%
CMBS		114,340	Discounted cash flow	Yield (b)	0% - 332.8%	0% - 435.8%
				Duration (c)	0 - 9.5 years	0 - 18.5 years
Domestic servicing rights		83,301	Discounted cash flow	Debt yield (a)	8.00%	8.25%
				Discount rate (b)	15%	15%
				Control migration (b)	0% - 80%	0% - 80%
VIE assets		80,076,117	Discounted cash flow	Yield (b)	0% - 779.7%	0% - 920.2%
				Duration (c)	0 - 14.3 years	0 - 17.5 years
VIE liabilities		3,540,652	Discounted cash flow	Yield (b)	0% - 779.7%	0% - 920.2%
				Duration (c)	0 - 14.3 years	0 - 17.5 years

(1)

The ranges of significant unobservable inputs are represented in percentages and years.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

(a)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.

(b)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.

(c)

Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (lower or higher) fair value measurement depending on the structural features of the security in question.

(d)

Any delay in the putback recovery date leads to a decrease in fair value, for the majority of securities in our RMBS portfolio.

(e)

66% and 76% of the portfolio falls within a range of 45%-80% as of June 30, 2016 and December 31, 2015, respectively.