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FAIR VALUE OF FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2016
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
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 March 31, 2016 and December 31, 2015 are as follows ($ in thousands):
 
March 31, 2016
 
 
 
 
 
 
 
 
 
Weighted Average
 
Outstanding
Face Amount
 
Amortized
Cost Basis
 
Fair Value
 
Fair Value Method
 
Yield
%
 
Remaining
Maturity/Duration (years)
Assets:
 

 
 

 
 

 
 
 
 

 
 
CMBS(1)
$
2,139,819

 
$
2,160,286

 
$
2,192,154

 
Internal model, third-party inputs
 
2.86
%
 
3.15
CMBS interest-only(1)
7,216,114

(8)
344,809

 
340,127

 
Internal model, third-party inputs
 
3.76
%
 
3.28
GNMA interest-only(3)
600,054

(8)
25,194

 
23,738

 
Internal model, third-party inputs
 
4.28
%
 
5.13
GN permanent securities(1)
41,148

 
42,051

 
42,855

 
Internal model, third-party inputs
 
3.49
%
 
7.02
Mortgage loan receivables held for investment, at amortized cost
1,582,358

 
1,572,833

 
1,593,676

 
Discounted Cash Flow(4)
 
7.61
%
 
1.47
Mortgage loan receivables held for sale
353,273

 
353,331

 
361,915

 
Internal model, third-party inputs(5)
 
4.33
%
 
5.71
FHLB stock(6)
77,915

 
77,915

 
77,915

 
(6)
 
3.50
%
 
 N/A
Nonhedge derivatives(1)(7)
11,100

 
 N/A

 
215

 
Counterparty quotations
 
N/A

 
5.17
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 

 
 

 
 

 
 
 
 

 
 
Repurchase agreements - short-term
1,082,656

 
1,082,656

 
1,082,656

 
Discounted Cash Flow(8)
 
1.73
%
 
0.34
Repurchase agreements - long-term
21,683

 
21,683

 
21,683

 
Discounted Cash Flow(9)
 
2.59
%
 
1.15
Borrowings under credit agreement
—

 
—

 
—

 
Discounted Cash Flow(10)
 


 

Revolving credit facility
—

 
—

 
—

 
Discounted Cash Flow(10)
 


 

Mortgage loan financing
544,527

 
547,776

 
579,054

 
Discounted Cash Flow(9)
 
4.86
%
 
7.69
Borrowings from the FHLB
1,881,200

 
1,881,200

 
1,892,923

 
Discounted Cash Flow
 
0.97
%
 
2.53
Senior unsecured notes
563,872

 
558,134

 
528,736

 
Broker quotations, pricing services
 
6.67
%
 
3.31
Nonhedge derivatives(1)(7)
1,026,800

 
 N/A

 
12,743

 
Counterparty quotations
 
N/A

 
1.96
 
(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, 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 receivables 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 receivables 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
35,813

 
35,813

 
35,813

 
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.
(10)
Fair value for borrowings under the Credit 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 March 31, 2016 and December 31, 2015 ($ in thousands):
 
March 31, 2016
 
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)
 
$
2,139,819

 
$
—

 
$
—

 
$
2,192,154

 
$
2,192,154

CMBS interest-only(1)
 
7,216,114

(2)
—

 
—

 
340,127

 
340,127

GNMA interest-only(3)
 
600,054

(2)
—

 
—

 
23,738

 
23,738

GN permanent securities(1)
 
41,148

 
—

 
—

 
42,855

 
42,855

Nonhedge derivatives(4)
 
11,100

 
—

 
215

 
—

 
215

 
 
 
 
$
—

 
$
215

 
$
2,598,874

 
$
2,599,089

Liabilities:
 
 
 
 
 
 
 
 
 
 
Nonhedge derivatives(4)
 
1,026,800

 
$
—

 
$
12,743

 
$
—

 
$
12,743

 
 
 
 
 
 
 
 
 
 
 
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
 
$
1,582,358

 
$
—

 
$
—

 
$
1,593,676

 
$
1,593,676

Mortgage loan receivable held for sale
 
353,273

 
—

 
—

 
361,915

 
361,915

FHLB stock
 
77,915

 
—

 
—

 
77,915

 
77,915

 
 
 
 
$
—

 
$
—

 
$
2,033,506

 
$
2,033,506

Liabilities:
 
 

 
 

 
 

 
 

 
0

Repurchase agreements - short-term
 
1,082,656

 
$
—

 
$
—

 
$
1,082,656

 
$
1,082,656

Repurchase agreements - long-term
 
21,683

 
—

 
—

 
21,683

 
21,683

Mortgage loan financing
 
544,527

 
—

 
—

 
579,054

 
579,054

Borrowings from the FHLB
 
1,881,200

 
—

 
—

 
1,892,923

 
1,892,923

Senior unsecured notes
 
563,872

 
—

 
—

 
528,736

 
528,736

 
 
 
 
$
—

 
$
—

 
$
4,105,052

 
$
4,105,052

 
(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, 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)
 
$
1,972,492

 
$
—

 
$
—

 
$
1,991,506

 
$
1,991,506

CMBS interest-only(1)
 
7,436,379

(3)
—

 
—

 
344,423

 
344,423

GNMA interest-only(2)
 
632,175

(3)
—

 
—

 
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
 
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
 
35,813

 
—

 
—

 
35,813

 
35,813

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

 
 
 
 
$
—

 
$
—

 
$
4,271,537

 
$
4,271,537

 
 

(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 three months ended March 31, 2016 and 2015 ($ in thousands):

Level 3
 
2016
 
2015
 
 
 
 
 
Balance at January 1,
 
$
2,407,217

 
$
2,683,744

Transfer from level 2
 
—

 
—

Purchases
 
227,758

 
241,286

Sales
 
(15,477
)
 
(370,337
)
Paydowns/maturities
 
(36,136
)
 
(46,891
)
Amortization of premium/discount
 
(18,958
)
 
(15,015
)
Unrealized gain/(loss)
 
34,459

 
18,970

Realized gain/(loss) on sale
 
11

 
12,693

Balance at March 31,
 
$
2,598,874

 
$
2,524,450


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):

March 31, 2016
Financial Instrument
 
Carrying Value
 
Valuation Technique
 
Unobservable Input
 
Minimum
 
Weighted Average
 
Maximum
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS (1)
 
$
2,192,154

 
Discounted cash flow
 
Yield (4)
 
—
%
 
2.74
%
 
12.09
%
 
 
 
 
 
 
Duration (years)(5)
 
0.00

 
3.95

 
8.28

CMBS interest-only (1)
 
340,127

(2)
Discounted cash flow
 
Yield (4)
 
—
%
 
4.04
%
 
4.66
%
 
 
 
 
 
 
Duration (years)(5)
 
1.82

 
3.23

 
4.34

 
 
 
 
 
 
Prepayment speed (CPY)(5)
 
100.00

 
100.00

 
100.00

GNMA interest-only (3)
 
23,738

(2)
Discounted cash flow
 
Yield (4)
 
—
%
 
9.06
%
 
10
%
 
 
 
 
 
 
Duration (years)(5)
 
0.00

 
2.41

 
5.30

 
 
 
 
 
 
Prepayment speed (CPJ)(5)
 
5.00

 
14.03

 
35.00

GN permanent securities (1)
 
42,855

 
Discounted cash flow
 
Yield (4)
 
0.63
%
 
3.45
%
 
6.6
%
 
 
 
 
 
 
Duration (years)(5)
 
0.00

 
8.66

 
10.29

Total
 
$
2,598,874

 
 
 
 
 
 
 
 
 
 
 
(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, 2015
Financial Instrument
 
Carrying Value
 
Valuation Technique
 
Unobservable Input
 
Minimum
 
Weighted Average
 
Maximum
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS (1)
 
$
1,991,506

 
Discounted cash flow
 
Yield (3)
 
—
%
 
2.19
%
 
9.21
%
 
 
 
 
 
 
Duration (years)(4)
 
0.00

 
4.06

 
7.91

CMBS interest-only (1)
 
344,423

(2)
Discounted cash flow
 
Yield (3)
 
0.09
%
 
4.13
%
 
4.51
%
 
 
 
 
 
 
Duration (years)(4)
 
1.90

 
3.30

 
4.24

 
 
 
 
 
 
Prepayment speed (CPY)(4)
 
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.

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.