8. 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 December 31, 2015 and 2014 are as follows ($ in thousands):

December 31, 2015



									Weighted Average
	Outstanding Face Amount			Amortized Cost Basis		Fair Value		Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	1,972,492		$	1,994,928	$	1,991,506	Internal model, third-party inputs	2.59	%	3.15
CMBS interest-only(1)	7,436,379		(2)	348,222		344,423		Internal model, third-party inputs	3.81	%	3.34
GNMA interest-only(3)	632,175		(2)	28,311		26,194		Internal model, third-party inputs	4.26	%	5.22
GN construction securities(1)	27,091			27,581		28,639		Internal model, third-party inputs	3.86	%	9.33
GN permanent securities(1)	16,249			16,685		16,455		Internal model, third-party inputs	3.94	%	5.43
Mortgage loan receivable held for investment, at amortized cost	1,749,556			1,738,645		1,756,774		Discounted Cash Flow(4)	7.56	%	1.38
Mortgage loan receivable held for sale	571,638			571,764		582,277		Internal model, third-party inputs(5)	4.56	%	6.20
FHLB stock(6)	77,915			77,915		77,915		(6)	3.50	%	N/A
Nonhedge derivatives(1)(7)	868,700			N/A		2,821		Counterparty quotations	N/A		0.69

Liabilities:
Repurchase agreements - short-term	1,224,942			1,224,942		1,224,942		Discounted Cash Flow(8)	1.67	%	0.43
Repurchase agreements - long-term	35,814			35,813		35,814		Discounted Cash Flow(9)	1.87	%	1.40
Mortgage loan financing	540,764			544,663		557,841		Discounted Cash Flow(9)	4.86	%	7.93
Borrowings from the FHLB	1,856,700			1,856,700		1,861,584		Discounted Cash Flow	0.84	%	1.42
Senior unsecured notes	619,555			612,605		591,357		Broker quotations, pricing services	6.65	%	3.61
Nonhedge derivatives(1)(7)	374,200			N/A		5,504		Counterparty quotations	N/A		3.42


(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)	Represents notional outstanding balance of underlying collateral.


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

(4)

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.


(5)	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.


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


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


(8)	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.


(9)	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.

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	$	2,305,410	Internal model, third-party inputs	2.60	%	4.23
CMBS interest-only(1)	7,239,503		(2)	376,085		378,335		Internal model, third-party inputs	4.88	%	3.45
GNMA interest-only(3)	1,400,141		(2)	67,544		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(4)	7.33	%	1.96
Mortgage loan receivable held for sale	417,955			417,955		421,991		Internal model, third-party inputs(5)	4.31	%	9.72
FHLB stock(6)	72,340			72,340		72,340		(6)	3.50	%	N/A
Nonhedge derivatives(1)(7)	125,050			N/A		423		Counterparty quotations	N/A		3.45

Liabilities:
Repurchase agreements - short-term	1,331,603			1,331,603		1,331,603		Discounted Cash Flow(8)	1.32	%	0.23
Repurchase agreements - long-term	100,062			100,062		100,062		Discounted Cash Flow(9)	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(9)	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			610,129		611,745		Broker quotations, pricing services	6.65	%	4.61
Nonhedge derivatives(1)(7)	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)	Represents notional outstanding balance of underlying collateral.


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

(4)


(5)	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.


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


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


(8)	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.


(9)	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.


(10)	Fair value for borrowings under the Credit Agreement, the Credit and Security Agreement and the Revolving Credit Facility are estimated to approximate their 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 December 31, 2015 and 2014 ($ in thousands):

December 31, 2015



Financial Instruments Reported at Fair Value on Combined Consolidated Statements of Financial Condition	Outstanding Face Amount			Fair Value
	Outstanding Face Amount			Level 1		Level 2		Level 3		Total

Assets:
CMBS(1)	$	1,972,492		$	—	$	—	$	1,991,506	$	1,991,506
CMBS interest-only(1)	7,436,379		(2)	—		—		344,423		344,423
GNMA interest-only(3)	632,175		(2)	—		—		26,194		26,194
GN construction securities(1)	27,091			—		—		28,639		28,639
GN permanent securities(1)	16,249			—		—		16,455		16,455
Nonhedge derivatives(4)	868,700			—		2,821		—		2,821
				$	—	$	2,821	$	2,407,217	$	2,410,038
Liabilities:
Nonhedge derivatives(4)	374,200			$	—	$	5,504	$	—	$	5,504

Financial Instruments Not Reported at Fair Value on Combined Consolidated Statements of Financial Condition	Outstanding Face Amount			Fair Value
	Outstanding Face Amount			Level 1		Level 2		Level 3		Total

Assets:
Mortgage loan receivable held for investment	$	1,749,556		$	—	$	—	$	1,756,774	$	1,756,774
Mortgage loan receivable held for sale	571,638			—		—		582,277		582,277
FHLB stock	77,915			—		—		77,915		77,915
				$	—	$	—	$	2,416,966	$	2,416,966
Liabilities:										0
Repurchase agreements - short-term	1,224,942			$	—	$	—	$	1,224,942	$	1,224,942
Repurchase agreements - long-term	35,814			—		—		35,814		35,814
Mortgage loan financing	540,764			—		—		557,841		557,841
Borrowings from the FHLB	1,856,700			—		—		1,861,584		1,861,584
Senior unsecured notes	619,555			—		—		591,357		591,357
				$	—	$	—	$	4,271,538	$	4,271,538


(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)	Represents notional outstanding balance of underlying collateral.


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


(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
	Outstanding Face Amount			Level 1		Level 2		Level 3		Total

Assets:
CMBS(1)	$	2,247,565		$	—	$	—	$	2,305,410	$	2,305,410
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			—		423		—		423
				$	—	$	132,244	$	2,683,745	$	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
	Outstanding Face Amount			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)	Represents notional outstanding balance of underlying collateral.


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


(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 years ended December 31, 2015 and 2014 ($ in thousands):



Level 3	2015			2014

Balance at January 1,	$	2,683,745		$	—
Transfer from level 2	86,576			1,422,996
Purchases	720,010			2,121,503
Sales	(839,868		)	(692,306		)
Paydowns/maturities	(160,612		)	(155,525		)
Amortization of premium/discount	(70,763		)	(60,992		)
Unrealized gain/(loss)	(36,610		)	19,769
Realized gain/(loss) on sale	24,739			28,300
Balance at December 31,	$	2,407,217		$	2,683,745

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):

December 31, 2015



Financial Instrument	Carrying Value			Valuation Technique	Unobservable Input	Minimum		Weighted Average		Maximum

CMBS (1)	$	1,991,506		Discounted cash flow	Yield (4)	—	%	2.19	%	9.21	%
					Duration (years)(5)	0.00		4.06		7.91
CMBS interest-only (1)	344,423		(2)	Discounted cash flow	Yield (4)	0.09	%	4.13	%	4.51	%
					Duration (years)(5)	1.90		3.30		4.24
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (3)	26,194		(2)	Discounted cash flow	Yield (4)	—	%	9.21	%	10	%
					Duration (years)(5)	0.32		2.41		5.18
					Prepayment speed (CPJ)(5)	5.00		14.57		35.00
GN construction securities (1)	28,639			Discounted cash flow	Yield (4)	0.58	%	3.47	%	3.51	%
					Duration (years)(5)	0.00		10.34		10.48
GN permanent securities (1)	16,455			Discounted cash flow	Yield (4)	—	%	3.25	%	6.62	%
					Duration (years)(5)	1.66		5.72		7.21
Total	$	2,407,217


(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.

December 31, 2014



Financial Instrument	Carrying Value			Valuation Technique	Unobservable Input	Minimum		Weighted Average		Maximum

CMBS (1)	$	2,305,410		Discounted cash flow	Yield (3)	(13.06	)%	2.36	%	5.49	%
					Duration (years)(4)	0.00		4.68		8.26
CMBS interest-only (1)	378,335		(2)	Discounted cash flow	Yield (3)	(27.49	)%	(4.93	)%	23.32	%
					Duration (years)(4)	0.49		3.50		4.73
					Prepayment speed (CPY)(4)	100.00		100.00		100.00
Total	$	2,683,745


(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.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs


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


(4)	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.