FAIR VALUE OF FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is based upon market quotations, broker quotations, counterparty quotations or pricing services quotations, which provide valuation estimates based upon reasonable market order indications and are subject to significant variability based on market conditions, such as interest rates, credit spreads and market liquidity.  The fair value of the mortgage loan receivables held for sale is based upon a securitization model utilizing market data from recent securitization spreads and pricing.

Fair Value Summary Table

The carrying values and estimated fair values of the Company’s financial instruments, which are both reported at fair value on a recurring basis (as indicated) or amortized cost/par, at September 30, 2015 and December 31, 2014 are as follows ($ in thousands):

September 30, 2015

									Weighted Average
	Outstanding Face Amount			Amortized Cost Basis		Fair Value		Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	1,936,316		$	1,960,371	$	1,985,195	Internal model, third-party inputs	2.63	%	3.35
CMBS interest-only(1)	7,246,777		(9)	356,204		356,928		Internal model, third-party inputs	3.74	%	3.46
GNMA interest-only(2)	662,161		(9)	30,109		28,603		Internal model, third-party inputs	4.27	%	5.48
GN construction securities(1)	26,730			27,223		27,849		Internal model, third-party inputs	3.86	%	9.46
GN permanent securities(1)	16,435			16,950		16,807		Internal model, third-party inputs	4.00	%	6.09
Mortgage loan receivable held for investment, at amortized cost	1,811,216			1,794,812		1,820,999		Discounted Cash Flow(5)	7.61	%	1.58
Mortgage loan receivable held for sale	333,488			333,531		342,611		Discounted Cash Flow(6)	4.15	%	7.60
FHLB stock(7)	77,915			77,915		77,915		(7)	3.50	%	N/A
Nonhedge derivatives(1)(8)	10,009			N/A		299		Counterparty quotations	N/A		5.59
Liabilities:
Repurchase agreements - short-term	793,933			793,933		793,933		Discounted Cash Flow(3)	1.83	%	0.32
Repurchase agreements - long-term	397,393			397,393		397,393		Discounted Cash Flow(4)	1.30	%	1.12
Borrowings under credit agreement	20,400			20,400		20,400		Discounted Cash Flow(10)	2.95	%	0.32
Revolving credit facility	50,000			50,000		50,000		Discounted Cash Flow(10)	3.69	%	1.37
Mortgage loan financing	562,035			555,786		590,265		Discounted Cash Flow(4)	4.87	%	7.96
Borrowings from the FHLB	1,786,000			1,786,000		1,857,923		Discounted Cash Flow	0.83	%	1.62
Senior unsecured notes	619,555			619,555		603,251		Broker quotations, pricing services	6.65	%	3.86
Nonhedge derivatives(1)(8)	130,051			N/A		21,942		Counterparty quotations	N/A		0.99

December 31, 2014

									Weighted Average
	Outstanding Face Amount			Amortized Cost Basis		Fair Value		Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	2,247,565		$	2,277,995	$	2,305,409	Internal model, third-party inputs	2.60	%	4.23
CMBS interest-only(1)	7,239,503		(9)	376,085		378,335		Internal model, third-party inputs	4.88	%	3.45
GNMA interest-only(2)	1,400,141		(9)	67,543		66,642		Internal model, third-party inputs	5.90	%	4.50
GN construction securities(1)	27,538			28,178		28,406		Internal model, third-party inputs	3.56	%	9.42
GN permanent securities(1)	36,232			36,515		36,773		Internal model, third-party inputs	4.94	%	1.32
Mortgage loan receivable held for investment, at amortized cost	1,536,923			1,521,053		1,540,388		Discounted Cash Flow(5)	7.33	%	1.96
Mortgage loan receivable held for sale	417,955			417,955		421,991		Discounted Cash Flow(6)	4.31	%	9.72
FHLB stock(7)	72,340			72,340		72,340		(7)	3.50	%	N/A
Nonhedge derivatives(1)(8)	125,050			N/A		424		Counterparty quotations	N/A		3.45
Liabilities:
Repurchase agreements - short-term	1,331,603			1,331,603		1,331,603		Discounted Cash Flow(3)	1.32	%	0.23
Repurchase agreements - long-term	100,062			100,062		100,062		Discounted Cash Flow(3)	1.89	%	1.59
Borrowings under credit agreement	11,000			11,000		11,000		Discounted Cash Flow(10)	2.91	%	1.07
Borrowings under credit and security agreement	46,750			46,750		46,750		Discounted Cash Flow(10)	2.01	%	1.77
Revolving credit facility	25,000			25,000		25,000		Discounted Cash Flow(10)	3.66	%	2.12
Mortgage loan financing	442,753			447,410		455,846		Discounted Cash Flow(4)	4.85	%	8.47
Borrowings from the FHLB	1,611,000			1,611,000		1,616,373		Discounted Cash Flow	0.79	%	2.05
Senior unsecured notes	619,555			619,555		611,745		Broker quotations, pricing services	6.65	%	4.61
Nonhedge derivatives(1)(8)	1,428,700			N/A		13,446		Counterparty quotations	N/A		1.41

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity

(2) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings

(3) Fair value for repurchase agreement liabilities is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. If the collateral is determined to be impaired, the related financing would be revalued accordingly.  There are no impairments on any positions.

(4) For the mortgage loan financing, the carrying value approximates the fair value discounting the expected cash flows at current market rates.  If the collateral is determined to be impaired, the related financing would be revalued accordingly.  There are no impairments on any positions.

(5) Fair value for floating rate mortgage loan receivables, held for investment is estimated to approximate the outstanding face amount given the short interest rate reset risk (30 days) and no significant change in credit risk. Fair value for fixed rate mortgage loan receivables, held for investment is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.

(6) Fair value for mortgage loan receivables, held for sale is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.

(7) Fair value of the FHLB stock approximates outstanding face amount as the Company’s wholly-owned subsidiary is restricted from trading the stock and can only put the stock back to the FHLB, at the FHLB’s discretion, at par.

(8) The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

(9) Represents notional outstanding balance of underlying collateral

(10) Fair value for borrowings under credit agreement, credit and security agreement and revolving credit facility is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. 

The following table summarizes the Company’s financial assets and liabilities, which are both reported at fair value on a recurring basis (as indicated) or amortized cost/par, at September 30, 2015 and December 31, 2014 ($ in thousands):

September 30, 2015

Financial Instruments Reported at Fair Value on Combined Consolidated Statements of Financial Condition	Outstanding Face Amount			Fair Value
				Level 1		Level 2		Level 3		Total
Assets:
CMBS(1)	$	1,936,316		$	—	$	—	$	1,985,195	$	1,985,195
CMBS interest-only(1)	7,246,777		(3)	—		—		356,928		356,928
GNMA interest-only(2)	662,161		(3)	—		—		28,603		28,603
GN construction securities(1)	26,730			—		—		27,849		27,849
GN permanent securities(1)	16,435			—		—		16,807		16,807
Nonhedge derivatives(4)	10,009			—		299		—		299
				$	—	$	299	$	2,415,382	$	2,415,681
Liabilities:
Nonhedge derivatives(4)	130,051			$	—	$	21,942	$	—	$	21,942
Financial Instruments Not Reported at Fair Value on Combined Consolidated Statements of Financial Condition	Outstanding Face Amount			Fair Value
				Level 1		Level 2		Level 3		Total
Assets:
Mortgage loan receivable held for investment	$	1,811,216		$	—	$	—	$	1,820,999	$	1,820,999
Mortgage loan receivable held for sale	333,488			—		—		342,611		342,611
FHLB stock	77,915			—		—		77,915		77,915
				$	—	$	—	$	2,241,525	$	2,241,525
Liabilities:										0
Repurchase agreements (short-term)	793,933			$	—	$	37,421	$	756,512	$	793,933
Repurchase agreements (long-term)	397,393			—		—		397,393		397,393
Borrowings under credit agreement	20,400			—		—		20,400		20,400
Revolving credit facility	50,000			—		—		50,000		50,000
Mortgage loan financing	562,035			—		—		590,265		590,265
Borrowings from the FHLB	1,786,000			—		—		1,857,923		1,857,923
Senior unsecured notes	619,555			—		—		603,251		603,251
				$	—	$	37,421	$	4,275,744	$	4,313,165

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity. 

(2) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. 

(3)  Represents notional outstanding balance of underlying collateral. 

(4)  Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.  The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

December 31, 2014

Financial Instruments Reported at Fair Value on Combined Consolidated Statements of Financial Condition	Outstanding Face Amount			Fair Value
				Level 1		Level 2		Level 3		Total
Assets:
CMBS(1)	$	2,247,565		$	—	$	—	$	2,305,409	$	2,305,409
CMBS interest-only(1)	7,239,503		(3)	—		—		378,335		378,335
GNMA interest-only(2)	1,400,141		(3)	—		66,642		—		66,642
GN construction securities(1)	27,538			—		28,406		—		28,406
GN permanent securities(1)	36,232			—		36,773		—		36,773
Nonhedge derivatives(4)	125,050			—		424		—		424
				$	—	$	132,245	$	2,683,744	$	2,815,989
Liabilities:
Nonhedge derivatives(4)	1,428,700			—		13,446		—		13,446
Financial Instruments Not Reported at Fair Value on Combined Consolidated Statements of Financial Condition	Outstanding Face Amount			Fair Value
				Level 1		Level 2		Level 3		Total
Assets:
Mortgage loan receivable held for investment	1,536,923			—		—		1,540,388		1,540,388
Mortgage loan receivable held for sale	417,955			—		—		421,991		421,991
FHLB stock	72,340			—		—		72,340		72,340
				$	—	$	—	$	2,034,719	$	2,034,719
Liabilities:										0
Repurchase agreements (short-term)	1,331,603			—		68,357		1,263,246		1,331,603
Repurchase agreements (long-term)	100,062			—		—		100,062		100,062
Borrowings under credit agreement	11,000			—		—		11,000		11,000
Borrowings under credit and security agreement	46,750			—		—		46,750		46,750
Revolving credit facility	25,000			—		—		25,000		25,000
Mortgage loan financing	442,753			—		—		455,846		455,846
Borrowings from the FHLB	1,611,000			—		—		1,616,373		1,616,373
Senior unsecured notes	619,555			—		—		611,745		611,745
				$	—	$	68,357	$	4,130,022	$	4,198,379

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity. 

(2) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. 

(3)  Represents notional outstanding balance of underlying collateral. 

(4)  Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.  The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

The following table summarizes changes in level 3 financial instruments reported at fair value on the combined consolidated statements of financial condition for the nine months ended September 30, 2015 ($ in thousands):

	Level 3
Balance at December 31, 2014	$	2,683,744
Transfer from level 2	86,577
Purchases	574,433
Sales	(783,189		)
Paydowns/maturities	(116,390		)
Amortization of premium/discount	(50,630		)
Unrealized gain/(loss)	(3,575		)
Realized gain/(loss) on sale	24,412
Balance at September 30, 2015	$	2,415,382

The following table summarizes changes in level 3 financial instruments reported at fair value on the combined consolidated statements of financial condition for the year ended December 31, 2014 ($ in thousands):

	Level 3
Balance at December 31, 2013	$	—
Transfer from level 2	1,422,995
Purchases	2,121,503
Sales	(692,306		)
Paydowns/maturities	(155,525		)
Amortization of premium/discount	(60,992		)
Unrealized gain/(loss)	19,769
Realized gain/(loss) on sale	28,300
Balance at December 31, 2014	$	2,683,744

The following is quantitative information about significant unobservable inputs in our Level 3 measurements for those assets and liabilities measured at fair value on a recurring basis ($ in thousands):

September 30, 2015

Financial Instrument	Carrying Value			Valuation Technique	Unobservable Input	Minimum		Weighted Average		Maximum
CMBS (1)	$	1,985,195		Discounted cash flow	Yield (4)	(23.7	)%	1.51	%	5.27	%
					Duration (years)(5)	—		4.23		8.11
CMBS interest-only (1)	356,928		(3)	Discounted cash flow	Yield (4)	2.06	%	3.65	%	14.84	%
					Duration (years)(5)	0.12		3.42		4.36
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (2)	28,603		(3)	Discounted cash flow	Yield (4)	(3.64	)%	4.82	%	82.81	%
					Duration (years)(5)	0.47		5.48		34.52
					Prepayment speed (CPJ)(5)	5.00		14.43		35.00
GN construction securities (1)	27,849			Discounted cash flow	Yield (4)	0.32	%	3.62	%	3.67	%
					Duration (years)(5)	1.91		9.46		9.57
GN permanent securities (1)	16,807			Discounted cash flow	Yield (4)	2.53	%	3.76	%	6.35	%
					Duration (years)(5)	1.85		6.09		9.28
Total	$	2,415,382

December 31, 2014

Financial Instrument	Carrying Value			Valuation Technique	Unobservable Input	Minimum		Weighted Average		Maximum
CMBS (1)	$	2,305,409		Discounted cash flow	Yield (4)	(13.06	)%	2.36	%	5.49	%
					Duration (years)(5)	—		4.68		8.26
CMBS interest-only (1)	378,335		(3)	Discounted cash flow	Yield (4)	(27.49	)%	(4.93	)%	23.32	%
					Duration (years)(5)	0.49		3.50		4.73
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (2)	66,642		(3)	Discounted cash flow	Yield (4)	(0.85	)%	5.9	%	54.24	%
					Duration (years)(5)	—		4.50		6.28
					Prepayment speed (CPJ)(5)	5.00		14.99		35.00
GN construction securities (1)	28,406			Discounted cash flow	Yield (4)	0.33	%	3.54	%	3.7	%
					Duration (years)(5)	1.95		9.42		10.02
GN permanent securities (1)	36,773			Discounted cash flow	Yield (4)	—	%	1.28	%	6.43	%
					Duration (years)(5)	0.04		1.32		9.27
Total	$	2,815,565

(1) CMBS, CMBS interest-only securities, GN construction securities, and GN permanent securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income.

(2) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period earnings.

(3) The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the interest-only securities participate.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

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

(5) 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.