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FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

9 Months Ended

Sep. 30, 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 September 30, 2017 and December 31, 2016 are as follows ($ in thousands):

September 30, 2017



											Weighted Average
	Outstanding Face Amount			Amortized Cost Basis			Fair Value			Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	934,559		$	946,231		$	950,029		Internal model, third-party inputs	2.73	%	2.85
CMBS interest-only(1)	3,308,063		(2)	102,986			104,483			Internal model, third-party inputs	3.14	%	2.88
GNMA interest-only(3)	279,567		(2)	9,138			7,999			Internal model, third-party inputs	5.99	%	4.36
Agency securities(1)	731			754			742			Internal model, third-party inputs	1.82	%	3.08
GNMA permanent securities(1)	34,014			34,675			35,218			Internal model, third-party inputs	3.63	%	5.82
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	2,862,739			2,846,940			2,853,389			Discounted Cash Flow(4)	7.06	%	1.71
Mortgage loans transferred but not considered sold	600,222			598,525			610,829			Discounted Cash Flow(4)	4.92	%	8.38
Provision for loan losses	N/A			(4,000		)	(4,000		)	(5)	N/A		N/A
Mortgage loan receivables held for sale	526,085			522,961			540,510			Internal model, third-party inputs(6)	4.79	%	8.63
FHLB stock(7)	77,915			77,915			77,915			(7)	4.25	%	N/A
Nonhedge derivatives(1)(8)	616,200			N/A			568			Counterparty quotations	N/A		0.28

Liabilities:
Repurchase agreements - short-term	549,899			549,899			549,899			Discounted Cash Flow(9)	2.67	%	0.53
Repurchase agreements - long-term	363,238			363,238			363,238			Discounted Cash Flow(10)	2.98	%	2.64
Revolving credit facility	76,000			76,000			76,000			Discounted Cash Flow(11)	5.68	%	0.75
Mortgage loan financing	589,152			587,490			595,106			Discounted Cash Flow(10)	4.85	%	6.40
Participation Financing - Mortgage Loan Receivable	3,368			3,368			3,368			Discounted Cash Flow(12)	17.00	%	0.18
Borrowings from the FHLB	1,464,000			1,464,000			1,465,922			Discounted Cash Flow	1.50	%	2.52
Senior unsecured notes	1,166,201			1,152,552			787,191			Broker quotations, pricing services	5.39	%	5.53
Liability for transfers not considered sales	636,256			631,480			631,480			Discounted Cash Flow(13)	4.37	%	8.38
Nonhedge derivatives(1)(8)	88,700			N/A			2,711			Counterparty quotations	N/A		2.76


(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 is estimated to equal par value.


(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 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.


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


(9)	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.


(10)	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.


(11)	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.


(12)	Fair value for Participation Financing - Mortgage Loan Receivable approximates amortized cost as this is a loan participation to a third party.


(13)	Fair value for liability for transfers not considered sales approximates amortized cost basis which represents fair value on the latest pricing date.

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, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	2,011,309			2,000,095			2,018,973			Discounted Cash Flow(4)	7.17	%	1.66
Provision for loan losses	N/A			(4,000		)	(4,000		)	(5)	N/A		N/A
Mortgage loan receivables held for sale	360,518			357,882			359,897			Internal model, third-party inputs(6)	4.20	%	4.55
FHLB stock(7)	77,915			77,915			77,915			(7)	4.25	%	N/A
Nonhedge derivatives(1)(8)	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(9)	2.10	%	0.18
Repurchase agreements - long-term	477,756			477,756			477,756			Discounted Cash Flow(10)	2.00	%	1.70
Revolving credit facility	25,000			25,000			25,000			Discounted Cash Flow(11)	3.16	%	0.12
Mortgage loan financing	589,152			590,106			595,778			Discounted Cash Flow(10)	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)(8)	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 is estimated to equal par value.


(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 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.


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


(9)	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.


(10)	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.

(11)

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 September 30, 2017 and 2016 ($ in thousands):

September 30, 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)	$	934,559		$	—	$	—	$	950,029		$	950,029
CMBS interest-only(1)	3,308,063		(2)	—		—		104,483			104,483
GNMA interest-only(3)	279,567		(2)	—		—		7,999			7,999
Agency securities(1)	731			—		—		742			742
GNMA permanent securities(1)	34,014			—		—		35,218			35,218
Nonhedge derivatives(4)	616,200			—		568		—			568
				$	—	$	568	$	1,098,471		$	1,099,039
Liabilities:
Nonhedge derivatives(4)	88,700			$	—	$	2,711	$	—		$	2,711

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, net, at amortized cost:
Mortgage loans held by consolidated subsidiaries	$	2,862,739		$	—	$	—	$	2,853,389		$	2,853,389
Mortgage loans transferred but not considered sold	600,222			—		—		610,829			610,829
Provision for loan losses	N/A			—		—		(4,000		)	(4,000		)
Mortgage loan receivable held for sale	526,085			—		—		540,510			540,510
FHLB stock	77,915			—		—		77,915			77,915
				$	—	$	—	$	4,078,643		$	4,078,643
Liabilities:											0
Repurchase agreements - short-term	549,899			$	—	$	—	$	549,899		$	549,899
Repurchase agreements - long-term	363,238			—		—		363,238			363,238
Revolving credit facility	76,000			—		—		76,000			76,000
Mortgage loan financing	589,152			—		—		595,106			595,106
Participation Financing - Mortgage Loan Receivable	3,368			—		—		3,368			3,368
Borrowings from the FHLB	1,464,000			—		—		1,465,922			1,465,922
Senior unsecured notes	1,166,201			—		—		787,191			787,191
Liability for transfers not considered sales	636,256			—		—		631,480			631,480
				$	—	$	—	$	4,472,204		$	4,472,204


(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 receivable held for investment, net, at amortized cost:
Mortgage loans held by consolidated subsidiaries	$	2,011,309		$	—	$	—	$	2,018,973		$	2,018,973
Provision for loan losses	N/A			—		—		(4,000		)	(4,000		)
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
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 nine months ended September 30, 2017 and 2016 ($ in thousands):



Level 3	2017			2016

Balance at January 1,	$	2,100,947		$	2,407,217
Transfer from level 2	—			—
Purchases	108,894			853,341
Sales	(993,739		)	(308,429		)
Paydowns/maturities	(93,233		)	(307,847		)
Amortization of premium/discount	(48,315		)	(56,151		)
Unrealized gain/(loss)	4,735			53,304
Realized gain/(loss) on sale(1)	19,182			9,524
Balance at September 30,	$	1,098,471		$	2,650,959


(1)	Includes realized losses on securities recorded as other than temporary impairments.

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):

September 30, 2017



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

CMBS (1)	$	950,029		Discounted cash flow	Yield (4)	—	%	2.49	%	4.31	%
					Duration (years)(5)	0.00		3.43		9.52
CMBS interest-only (1)	104,483		(2)	Discounted cash flow	Yield (4)	1.35	%	2.56	%	4.59	%
					Duration (years)(5)	0.94		5.17		9.36
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (3)	7,999		(2)	Discounted cash flow	Yield (4)	—	%	9.38	%	10	%
					Duration (years)(5)	0.00		5.63		9.78
					Prepayment speed (CPJ)(5)	5.00		16.41		35.00
Agency securities (1)	742			Discounted cash flow	Yield (4)	2.26	%	2.39	%	2.66	%
					Duration (years)(5)	2.70		4.46		5.31
GNMA permanent securities (1)	35,218			Discounted cash flow	Yield (4)	2.64	%	3.34	%	6.59	%
					Duration (years)(5)	1.84		7.02		7.29
Total	$	1,098,471


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


(3)	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


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


(3)	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


(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.