Fair value of financial instruments

6 Months Ended

Jun. 30, 2016

The following table sets forth the fair value of financial assets and liabilities by level within the fair value hierarchy as of June 30, 2016 and December 31, 2015 ($ in thousands):



	Level 1		Level 2		Level 3
	Quoted Prices in Active Markets		Observable Inputs Other Than Level 1 Prices		Unobservable Inputs
June 30, 2016
Recurring basis (assets)
Mortgage loans at fair value	$	—	$	—	$	707,445
Nonrecurring basis (assets)
Real estate assets held for sale	—		—		225,682
Not recognized on consolidated balance sheets at fair value (assets)
Mortgage loans held for sale	—		—		4,058
Not recognized on consolidated balance sheets at fair value (liabilities)
Repurchase agreements at fair value	—		746,757		—
Other secured borrowings	—		161,496		—

December 31, 2015
Recurring basis (assets)
Mortgage loans at fair value	$	—	$	—	$	960,534
Nonrecurring basis (assets)
Real estate assets held for sale	—		—		250,557
Not recognized on consolidated balance sheets at fair value (assets)
Mortgage loans held for sale	—		—		317,336
Not recognized on consolidated balance sheets at fair value (liabilities)
Repurchase agreements at fair value	—		767,513		—
Other secured borrowings	—		502,268		—

We have not transferred any assets from one level to another level during the three or six months ended June 30, 2016 or during the year ended December 31, 2015.

The carrying values of our cash and cash equivalents, restricted cash, related party receivables, accounts payable and accrued liabilities and related party payables are equal to or approximate fair value. The fair values of mortgage loans at fair value and NPLs held for sale are estimated using our asset manager's proprietary pricing model. The fair value of re-performing mortgage loans held for sale is estimated using the present value of the future estimated principal and interest payments of the loan, with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The fair value of the repurchase agreements is estimated using the income approach based on credit spreads available to us currently in the market for similar floating rate debt. The fair value of other secured borrowings is estimated using observable market data.

The following table sets forth the changes in our level 3 assets that are measured at fair value on a recurring basis ($ in thousands):



	Three months ended June 30, 2016			Three months ended June 30, 2015			Six months ended June 30, 2016			Six months ended June 30, 2015
Mortgage loans at fair value
Beginning balance	$	924,543		$	1,853,495		$	960,534		$	1,959,044
Change in unrealized gain on mortgage loans at fair value	2,372			42,209			28,628			103,343
Net realized gain on mortgage loans at fair value	8,180			19,272			20,912			34,654
Transfers of mortgage loans at fair value to mortgage loans held for sale, net	(137,144		)	—			(103,115		)	—
Mortgage loans at fair value resolutions and payments	(34,896		)	(82,070		)	(84,827		)	(147,238		)
Real estate tax advances to borrowers	1,652			4,264			5,094			11,391
Reclassification of realized gains on real estate sold from unrealized gains	—			13,175			—			23,977
Transfer of mortgage loans at fair value to real estate owned, net	(57,262		)	(133,856		)	(119,781		)	(268,682		)
Ending balance at June 30	$	707,445		$	1,716,489		$	707,445		$	1,716,489

Change in unrealized gain on mortgage loans at fair value held at the end of the period	$	(10,924	)	$	29,784		$	9,718		$	80,852

The significant unobservable inputs used in the fair value measurement of our mortgage loans are discount rates, forecasts of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics such as location and value of underlying collateral affect the loan resolution probabilities and timelines. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value.

The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of our mortgage loans as of the dates indicated:



Input	June 30, 2016	December 31, 2015
Equity discount rate	15.0%	15.0%
Debt to asset ratio	65.0%	65.0%
Cost of funds	3.5% over 1 month LIBOR	3.5% over 1 month LIBOR
Annual change in home pricing index	-18.6% to 25.1%	0.0% to 10.2%
Loan resolution probabilities — modification	0% to 44.7%	0% to 44.7%
Loan resolution probabilities — rental	0% to 100.0%	0% to 100.0%
Loan resolution probabilities — liquidation	0% to 100.0%	0% to 100.0%
Loan resolution timelines (in years)	0.1 - 4.4	0.1 - 5.6
Value of underlying properties	$3,000 - $4,250,000	$3,000 - $4,500,000

- 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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