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 June 30, 2016 and December 31, 2015 are as follows ($ in thousands):

June 30, 2016



									Weighted Average
	Outstanding Face Amount			Amortized Cost Basis		Fair Value		Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	2,221,936		$	2,248,289	$	2,302,280	Internal model, third-party inputs	2.82	%	3.01
CMBS interest-only(1)	7,676,007		(8)	333,958		334,613		Internal model, third-party inputs	3.47	%	3.21
GNMA interest-only(3)	538,877		(8)	22,873		20,833		Internal model, third-party inputs	3.71	%	4.67
GNMA permanent securities(1)	40,787			41,673		42,484		Internal model, third-party inputs	3.84	%	10.08
Mortgage loan receivables held for investment, at amortized cost	1,553,562			1,543,883		1,565,966		Discounted Cash Flow(4)	7.38	%	1.51
Mortgage loan receivables held for sale	583,089			583,453		605,702		Internal model, third-party inputs(5)	4.39	%	7.38
FHLB stock(6)	77,915			77,915		77,915		(6)	3.50	%	N/A
Nonhedge derivatives(1)(7)	15,011			N/A		218		Counterparty quotations	N/A		4.15

Liabilities:
Repurchase agreements - short-term	1,139,615			1,139,615		1,139,615		Discounted Cash Flow(8)	1.65	%	0.32
Revolving credit facility	100,000			100,000		100,000		Discounted Cash Flow(10)	3.69	%	0.62
Mortgage loan financing	544,527			546,953		587,333		Discounted Cash Flow(9)	4.86	%	7.45
Borrowings from the FHLB	2,049,700			2,049,701		2,064,247		Discounted Cash Flow	0.97	%	2.37
Senior unsecured notes	563,872			558,700		539,642		Broker quotations, pricing services	6.67	%	3.06
Nonhedge derivatives(1)(7)	1,181,500			N/A		26,494		Counterparty quotations	N/A		1.02


(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
GNMA construction securities(1)	27,091			27,581		28,639		Internal model, third-party inputs	3.86	%	9.33
GNMA 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)


(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 June 30, 2016 and December 31, 2015 ($ in thousands):

June 30, 2016



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)	$	2,221,936		$	—	$	—	$	2,302,280	$	2,302,280
CMBS interest-only(1)	7,676,007		(2)	—		—		334,613		334,613
GNMA interest-only(3)	538,877		(2)	—		—		20,833		20,833
GNMA permanent securities(1)	40,787			—		—		42,484		42,484
Nonhedge derivatives(4)	15,011			—		218		—		218
				$	—	$	218	$	2,700,210	$	2,700,428
Liabilities:
Nonhedge derivatives(4)	1,181,500			$	—	$	26,494	$	—	$	26,494

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	$	1,553,562		$	—	$	—	$	1,565,966	$	1,565,966
Mortgage loan receivable held for sale	583,089			—		—		605,702		605,702
FHLB stock	77,915			—		—		77,915		77,915
				$	—	$	—	$	2,249,583	$	2,249,583
Liabilities:										0
Repurchase agreements - short-term	1,139,615			$	—	$	—	$	1,139,615	$	1,139,615
Repurchase agreements - long-term	—			—		—		—		—
Revolving credit facility	100,000			—		—		100,000		100,000
Mortgage loan financing	544,527			—		—		587,333		587,333
Borrowings from the FHLB	2,049,700			—		—		2,064,247		2,064,247
Senior unsecured notes	563,872			—		—		539,642		539,642
				$	—	$	—	$	4,430,837	$	4,430,837


(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
	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		(3)	—		—		344,423		344,423
GNMA interest-only(2)	632,175		(3)	—		—		26,194		26,194
GNMA construction securities(1)	27,091			—		—		28,639		28,639
GNMA 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	35,813			—		—		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 six months ended June 30, 2016 and 2015 ($ in thousands):



Level 3	2016			2015

Balance at January 1,	$	2,407,217		$	2,683,744
Transfer from level 2	—			—
Purchases	530,506			365,848
Sales	(129,633		)	(721,210		)
Paydowns/maturities	(135,614		)	(88,559		)
Amortization of premium/discount	(36,591		)	(30,666		)
Unrealized gain/(loss)	61,927			(20,144		)
Realized gain/(loss) on sale	2,398			23,745
Balance at June 30,	$	2,700,210		$	2,212,758

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):

June 30, 2016



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

CMBS (1)	$	2,302,280		Discounted cash flow	Yield (4)	—	%	2.5	%	13.16	%
					Duration (years)(5)	0.00		3.82		9.29
CMBS interest-only (1)	334,613		(2)	Discounted cash flow	Yield (4)	—	%	3.74	%	4.19	%
					Duration (years)(5)	0.00		3.18		4.28
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (3)	20,833		(2)	Discounted cash flow	Yield (4)	(7.16	)%	5.98	%	36.33	%
					Duration (years)(5)	0.00		2.33		5.47
					Prepayment speed (CPJ)(5)	5.00		14.11		35.00
GNMA permanent securities (1)	42,484			Discounted cash flow	Yield (4)	1.4	%	3.69	%	6.77	%
					Duration (years)(5)	0.00		8.61		10.24
Total	$	2,700,210


(1)	CMBS, CMBS interest-only securities, GNMA construction securities, and GNMA 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
GNMA 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
GNMA 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, GNMA construction securities, and GNMA 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.