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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

3 Months Ended

Mar. 31, 2017

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, 2017 and December 31, 2016 are as follows ($ in thousands):

March 31, 2017



									Weighted Average
	Outstanding Face Amount			Amortized Cost Basis		Fair Value		Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	1,306,653		$	1,323,369	$	1,325,250	Internal model, third-party inputs	2.72	%	3.38
CMBS interest-only(1)	7,801,370		(2)	316,486		320,865		Internal model, third-party inputs	3.58	%	3.04
GNMA interest-only(3)	457,597		(2)	17,640		15,625		Internal model, third-party inputs	4.47	%	4.37
Agency securities(1)	760			786		771		Internal model, third-party inputs	1.90	%	3.35
GNMA permanent securities(1)	38,029			38,836		39,469		Internal model, third-party inputs	3.69	%	5.81
Mortgage loan receivables held for investment, at amortized cost	2,317,221			2,300,093		2,321,245		Discounted Cash Flow(4)	6.93	%	1.70
Mortgage loan receivables held for sale	520,679			516,582		585,212		Internal model, third-party inputs(5)	5.06	%	7.71
FHLB stock(6)	77,915			77,915		77,915		(6)	4.25	%	N/A
Nonhedge derivatives(1)(7)	97,100			N/A		108		Counterparty quotations	N/A		0.44

Liabilities:
Repurchase agreements - short-term	549,892			549,892		549,892		Discounted Cash Flow(8)	2.28	%	0.12
Repurchase agreements - long-term	489,464			489,464		489,464		Discounted Cash Flow(9)	2.34	%	1.56
Revolving credit facility	168,000			168,000		168,000		Discounted Cash Flow(10)	6.50	%	1.87
Mortgage loan financing	589,152			589,217		594,012		Discounted Cash Flow(9)	4.85	%	6.90
Mortgage loan receivable financing	57,038			57,038		57,038		Sales Proceeds	N/A		N/A
Borrowings from the FHLB	1,475,500			1,475,500		1,476,686		Discounted Cash Flow	1.24	%	2.64
Senior unsecured notes	1,057,732			1,048,576		1,064,144		Broker quotations, pricing services	5.99	%	3.57
Nonhedge derivatives(1)(7)	1,001,200			N/A		4,207		Counterparty quotations	N/A		1.23


(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 repurchase agreements - long term and 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 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.

December 31, 2016



									Weighted Average
	Outstanding Face Amount			Amortized Cost Basis		Fair Value		Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	1,676,680		$	1,698,276	$	1,701,395	Internal model, third-party inputs	2.81	%	3.55
CMBS interest-only(1)	8,160,458		(2)	343,534		342,171		Internal model, third-party inputs	3.45	%	2.99
GNMA interest-only(3)	478,577		(2)	18,994		16,821		Internal model, third-party inputs	4.19	%	4.44
Agency securities(1)	774			802		780		Internal model, third-party inputs	1.29	%	3.27
GNMA permanent securities(1)	38,327			39,145		39,780		Internal model, third-party inputs	3.80	%	10.30
Mortgage loan receivables held for investment, at amortized cost	2,011,309			1,996,095		2,014,973		Discounted Cash Flow(4)	7.17	%	1.66
Mortgage loan receivables held for sale	360,518			357,882		359,897		Internal model, third-party inputs(5)	4.20	%	4.55
FHLB stock(6)	77,915			77,915		77,915		(6)	4.25	%	N/A
Nonhedge derivatives(1)(7)	847,000			N/A		5,018		Counterparty quotations	N/A		0.25

Liabilities:
Repurchase agreements - short-term	629,430			629,430		629,430		Discounted Cash Flow(8)	2.10	%	0.18
Repurchase agreements - long-term	477,756			477,756		477,756		Discounted Cash Flow(9)	2.00	%	1.70
Revolving credit facility	25,000			25,000		25,000		Discounted Cash Flow(10)	3.16	%	0.12
Mortgage loan financing	589,152			590,106		595,778		Discounted Cash Flow(9)	4.85	%	7.15
Borrowings from the FHLB	1,660,000			1,660,000		1,662,178		Discounted Cash Flow	1.12	%	2.42
Senior unsecured notes	563,872			559,847		550,562		Broker quotations, pricing services	6.67	%	2.81
Nonhedge derivatives(1)(7)	100,400			N/A		3,446		Counterparty quotations	N/A		3.21


(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 repurchase agreements - long term and 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 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.

Summary of financial assets and liabilities, both reported at fair value on a recurring basis or amortized cost/par

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, 2017 and 2016 ($ in thousands):

March 31, 2017



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

Assets:
CMBS(1)	$	1,306,653		$	—	$	—	$	1,325,250	$	1,325,250
CMBS interest-only(1)	7,801,370		(2)	—		—		320,865		320,865
GNMA interest-only(3)	457,597		(2)	—		—		15,625		15,625
Agency securities(1)	760			—		—		771		771
GNMA permanent securities(1)	38,029			—		—		39,469		39,469
Nonhedge derivatives(4)	97,100			—		108		—		108
				$	—	$	108	$	1,701,980	$	1,702,088
Liabilities:
Nonhedge derivatives(4)	1,001,200			$	—	$	4,207	$	—	$	4,207

Financial Instruments Not Reported at Fair Value on 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	$	2,317,221		$	—	$	—	$	2,321,245	$	2,321,245
Mortgage loan receivable held for sale	520,679			—		—		585,212		585,212
FHLB stock	77,915			—		—		77,915		77,915
				$	—	$	—	$	2,984,372	$	2,984,372
Liabilities:										0
Repurchase agreements - short-term	549,892			$	—	$	—	$	549,892	$	549,892
Repurchase agreements - long-term	489,464			—		—		489,464		489,464
Revolving credit facility	168,000			—		—		168,000		168,000
Mortgage loan financing	589,152			—		—		594,012		594,012
Mortgage loan receivable financing	57,038			—		—		57,038		57,038
Borrowings from the FHLB	1,475,500			—		—		1,476,686		1,476,686
Senior unsecured notes	1,057,732			—		—		1,064,144		1,064,144
				$	—	$	—	$	4,399,236	$	4,399,236


(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, 2016



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

Assets:
CMBS(1)	$	1,676,680		$	—	$	—	$	1,701,395	$	1,701,395
CMBS interest-only(1)	8,160,458		(2)	—		—		342,171		342,171
GNMA interest-only(3)	478,577		(2)	—		—		16,821		16,821
Agency securities(1)	774			—		—		780		780
GNMA permanent securities(1)	38,327			—		—		39,780		39,780
Nonhedge derivatives(4)	847,000			—		5,018		—		5,018
				$	—	$	5,018	$	2,100,947	$	2,105,965
Liabilities:
Nonhedge derivatives(4)	100,400			—		3,446		—		3,446


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

Assets:
Mortgage loan receivables held for investment, at amortized cost	2,011,309			—		—		2,014,973		2,014,973
Mortgage loan receivables held for sale	360,518			—		—		359,897		359,897
FHLB stock	77,915			—		—		77,915		77,915
				$	—	$	—	$	2,452,785	$	2,452,785
Liabilities:										0
Repurchase agreements - short-term	629,430			—				629,430		629,430
Repurchase agreements - long-term	477,756			—		—		477,756		477,756
Revolving credit facility	25,000			—		—		25,000		25,000
Mortgage loan financing	589,152			—		—		595,778		595,778
Mortgage loan receivable financing	—			—		—		—		—
Borrowings from the FHLB	1,660,000			—		—		1,662,178		1,662,178
Senior unsecured notes	563,872			—		—		550,562		550,562
				$	—	$	—	$	3,940,704	$	3,940,704


(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.

Schedule of changes in Level 3 of financial instruments

The following table summarizes changes in Level 3 financial instruments reported at fair value on the consolidated statements of financial condition for the three months ended March 31, 2017 and 2016 ($ in thousands):



Level 3	2017			2016

Balance at January 1,	$	2,100,947		$	2,407,217
Transfer from level 2	—			—
Purchases	45,726			227,758
Sales	(361,323		)	(15,477		)
Paydowns/maturities	(74,285		)	(36,136		)
Amortization of premium/discount	(19,357		)	(18,958		)
Unrealized gain/(loss)	4,911			34,459
Realized gain/(loss) on sale	5,361			11
Balance at March 31,	$	1,701,980		$	2,598,874

Schedule of quantitative information

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, 2017



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

CMBS (1)	$	1,325,250		Discounted cash flow	Yield (4)	1.41	%	2.79	%	8.62	%
					Duration (years)(5)	0.10		3.65		7.99
CMBS interest-only (1)	320,865		(2)	Discounted cash flow	Yield (4)	2.62	%	3.52	%	4.24	%
					Duration (years)(5)	0.75		3.03		4.22
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (3)	15,625		(2)	Discounted cash flow	Yield (4)	3.84	%	8.28	%	50.65	%
					Duration (years)(5)	0.26		2.35		5.21
					Prepayment speed (CPJ)(5)	5.00		13.33		35.00
Agency securities (1)	771			Discounted cash flow	Yield (4)	1.4	%	2.06	%	2.43	%
					Duration (years)(5)	0.00		3.47		5.38
GNMA permanent securities (1)	39,469			Discounted cash flow	Yield (4)	2.73	%	3.63	%	6.37	%
					Duration (years)(5)	1.74		6.12		6.47
Total	$	1,701,980


(1)	CMBS, CMBS interest-only securities, Agency 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, 2016



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

CMBS (1)	$	1,701,395		Discounted cash flow	Yield (3)	1.35	%	2.87	%	9.18	%
					Duration (years)(4)	0.04		3.55		9.01
CMBS interest-only (1)	342,171		(2)	Discounted cash flow	Yield (3)	2.84	%	4.04	%	4.8	%
					Duration (years)(4)	0.00		2.99		4.37
					Prepayment speed (CPY)(4)	100.00		100.00		100.00
GNMA interest-only (3)	16,821		(2)	Discounted cash flow	Yield (4)	0.87	%	7.22	%	48.64	%
					Duration (years)(5)	1.69		4.44		20.66
					Prepayment speed (CPJ)(5)	5.00		13.80		35.00
Agency securities (1)	780			Discounted cash flow	Yield (4)	1.4	%	2.17	%	2.63	%
					Duration (years)(5)	2.61		3.27		4.39
GNMA permanent securities (1)	39,780			Discounted cash flow	Yield (4)	2.63	%	3.65	%	6.92	%
					Duration (years)(5)	1.92		10.30		15.66
Total	$	2,100,947


(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.