Fair Value Measurements

6 Months Ended

Jun. 30, 2024

Fair Value Measurements

Fair Value Measurements

Note 7. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP has a three-level hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). The Company’s valuation techniques for financial instruments use observable and unobservable inputs. Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.

Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

Level 3 — One or more pricing inputs is significant to the overall valuation and unobservable. Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of financial instruments. Fair value for these investments is determined using valuation methodologies that consider a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.

Valuation techniques of Level 3 investments vary by instrument type, but are generally based on an income, market or cost-based approach. The income approach predominantly considers discounted cash flows which is the measure of expected future cash flows in a default scenario, implied by the value of the underlying collateral, where applicable, and current performance whereas the market-based approach predominantly considers pull-through rates, industry multiples and the UPB. Fair value measurements of loans are sensitive to changes in assumptions regarding prepayments, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market.

The fair value of the contingent consideration in connection with mergers and acquisitions was determined using a Monte Carlo simulation model which considers various potential results based on Level 3 inputs, including management’s latest estimates of future operating results. Fair value measurements of the contingent consideration liability are sensitive to changes in assumptions related to earnings before tax, discount rate and risk-free rate of return. Contingent consideration also consists of CERs issued pursuant to the Mosaic Mergers. Pursuant to the CER agreement, if, as of the revaluation date, the sum of the updated fair value of the acquired portfolio less all advances made on such assets, plus all principal payments, return of capital and liquidation proceeds received on such assets exceeds the initial discounted fair value of the acquired portfolio, then the Company will issue to the CER holders, with respect to each CER, a number of shares of common stock equal to 90% of the lesser of the valuation excess and the discount amount, divided by the number of initially issued CERs divided by the Company share value, with cash being paid in lieu of any fractional shares of common stock otherwise due to such holder. In addition, each CER holder will be entitled to receive a number of additional shares of common stock equal to (i) the amount of any dividends or other distributions paid with respect to the number of whole shares of common stock received by such CER holder in respect of such holder’s CERs and having a record date on or after the closing of the Mosaic Mergers and a payment date prior to the issuance date of such shares of common stock, divided by (ii) the Company share value. The probability-weighted expected return method (“PWERM”) was utilized to estimate the return of capital and liquidation proceeds of the acquired asset portfolio, considering each possible outcome, including the economic and projected performance of each acquired asset, using a probability of 65%-100% return of

capital. The discounted cashflow technique was utilized by the Company to assess the updated value of the acquired portfolio as of the revaluation date. The fair value of dividend distributions to the CER holders was determined using a Monte Carlo simulation model which considers various potential results based on the CER payments, volatility of the Company’s share value and projected dividend distributions.

The final purchase price allocation associated with the closing of the Mosaic Mergers valued the CERs at approximately $25.0 million or $0.83 per CER. As of June 30, 2024, the CERs were valued at zero.

In certain cases, the inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The table below presents financial instruments carried at fair value on a recurring basis.

(in thousands)	Level 1		Level 2		Level 3		Total
June 30, 2024
Assets:
Money market funds (a)	$	72,499	$	—	$	—	$	72,499
Loans, held for sale		—		80,235		9,145		89,380
PPP loans (b)		—		230		—		230
MBS		—		30,174		—		30,174
Derivative instruments		—		14,382		—		14,382
Investment in unconsolidated joint ventures		—		—		6,974		6,974
Preferred equity investment (c)		—		—		108,423		108,423
Total assets	$	72,499	$	125,021	$	124,542	$	322,062
Liabilities:
Derivative instruments		—		2,638		—		2,638
Contingent consideration		—		—		3,926		3,926
Total liabilities	$	—	$	2,638	$	3,926	$	6,564
December 31, 2023
Assets:
Money market funds (a)	$	100,238	$	—	$	—	$	100,238
Loans, held for sale		—		81,599		—		81,599
Loans, net		—		—		9,348		9,348
PPP loans (b)		—		165		—		165
MBS		—		27,436		—		27,436
Derivative instruments		—		2,404		—		2,404
Investment in unconsolidated joint ventures		—		—		7,360		7,360
Preferred equity investment (c)		—		—		108,423		108,423
Total assets	$	100,238	$	111,604	$	125,131	$	336,973
Liabilities:
Derivative instruments		—		212		—		212
Contingent consideration		—		—		7,628		7,628
Total liabilities	$	—	$	212	$	7,628	$	7,840
(a) Money market funds are included in cash and cash equivalents on the consolidated balance sheets
(b) PPP loans are included in other assets on the consolidated balance sheets
(c) Preferred equity investment held through consolidated joint ventures are included in assets of consolidated VIEs on the consolidated balance sheets

The table below presents the valuation techniques and significant unobservable inputs used to value Level 3 financial instruments, using third party information without adjustment.

(in thousands)	Fair Value		Predominant Valuation Technique (a)		Type	Range		Weighted Average
June 30, 2024
Assets:
Investment in unconsolidated joint ventures	$	6,974		Income Approach	Discount rate		9.0%		9.0%
Preferred equity investment		108,423		Income Approach	Discount rate		11.0%		11.0%
Total assets	$	115,397
Liabilities:
Contingent consideration - Madison One		526		Monte Carlo Simulation Model	Net income volatility | Risk-adjusted discount rate		66.0% | 47.5%		66.0% | 47.5%
Total liabilities	$	526
December 31, 2023
Assets:
Investment in unconsolidated joint ventures	$	7,360		Income Approach	Discount rate		9.0%		9.0%
Preferred equity investment		108,423		Income Approach	Discount rate		10.0%		10.0%
Total assets	$	115,783
Liabilities:
Contingent consideration- Mosaic CER dividends		1,591		Monte Carlo Simulation Model	Equity volatility | Risk-free rate of return | Discount rate		30.0% | 4.7% | 11.5%		30% | 4.7% | 11.5%
Contingent consideration- Mosaic CER units		6,037		Income approach and PWERM Model	Revaluation discount rate | Discount rate		12.0% | 11.5%		12.0% | 11.5%
Total liabilities	$	7,628
(a)     Prices are weighted based on the UPB of the loans and securities included in the range for each class.

Included within Level 3 assets of $124.5 million as of June 30, 2024 and $125.1 million as of December 31, 2023, is $9.1 million and $9.3 million, respectively, of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value. Included within Level 3 liabilities of $3.9 million as of June 30, 2024 is $3.4 million of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value.

The table below presents a summary of changes in fair value for Level 3 assets and liabilities.

	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2024		2023		2024		2023
Assets:
Loans, net
Beginning balance	$	—	$	9,859	$	9,348	$	9,786
Unrealized gains (losses), net		—		(86)		680		(13)
Transfer to (from) Level 3		—		—		(10,028)		—
Ending balance	$	—	$	9,773	$	—	$	9,773
Loans, held for sale
Beginning balance		—		58,330		—		60,924
Sales / Principal payments		—		(11)		—		(22)
Unrealized gains (losses), net		—		(1,287)		—		(3,870)
Transfer to (from) Level 3		9,145		—		9,145		—
Ending balance	$	9,145	$	57,032	$	9,145	$	57,032
Investment in unconsolidated joint ventures
Beginning balance		7,169		7,913		7,360		8,094
Unrealized gains (losses), net		(195)		(182)		(386)		(363)
Ending balance	$	6,974	$	7,731	$	6,974	$	7,731
Preferred equity investment (1)
Beginning balance		106,548		108,423		108,423		108,423
Unrealized gains (losses), net		1,875		—		—		—
Ending balance	$	108,423	$	108,423	$	108,423	$	108,423
Total assets
Beginning balance		113,717		184,525		125,131		187,227
Sales / Principal payments		—		(11)		—		(22)
Unrealized gains (losses), net		1,680		(1,555)		294		(4,246)
Transfer to (from) Level 3		9,145		—		(883)		—
Ending balance	$	124,542	$	182,959	$	124,542	$	182,959
Liabilities:
Contingent consideration
Beginning balance		—		16,636		7,628		28,500
Sales / Principal payments		—		—		—		(9,000)
Realized losses (gains), net		—		—		(7,628)		—
Unrealized losses (gains), net		—		(1,070)		—		(3,934)
Merger (2)		3,926		—		3,926
Ending balance	$	3,926	$	15,566	$	3,926	$	15,566
(1) Preferred equity investment held through consolidated joint ventures are included in assets of consolidated VIEs on the consolidated balance sheets.
(2) Includes assets acquired and liabilities assumed as a result of the Madison One Acquisition. Refer to Note 5 for further details on assets acquired and liabilities assumed in connection with the Madison One Acquisition.

The Company’s policy is to recognize transfers in and transfers out as of the end of the period of the event or the date of the change in circumstances that caused the transfer. Transfers between Level 2 and Level 3 generally relate to whether there were changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments.

Financial instruments not carried at fair value

The table below presents the carrying value and estimated fair value of financial instruments that are not carried at fair value and are classified as Level 3.

	June 30, 2024				December 31, 2023
(in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Loans, net	$	9,446,288	$	9,255,383	$	10,622,137	$	10,380,893
Loans, held for sale		452,856		452,856		—		—
Servicing rights		119,768		129,471		102,837		113,715
Total assets	$	10,018,912	$	9,837,710	$	10,724,974	$	10,494,608
Liabilities:
Secured borrowings		2,311,969		2,311,969		2,102,075		2,102,075
Securitized debt obligations of consolidated VIEs, net		4,407,241		4,361,392		5,068,453		5,022,057
Senior secured notes, net		417,040		395,879		345,127		317,239
Guaranteed loan financing		782,345		828,902		844,540		889,744
Corporate debt, net		767,271		717,056		764,908		731,104
Total liabilities	$	8,685,866	$	8,615,198	$	9,125,103	$	9,062,219

As of both June 30, 2024 and December 31, 2023, other assets and accounts payable and accrued liabilities are not carried at fair value but generally approximate fair value. Further details are presented in Note 18 – Other Assets and Other Liabilities.