9. 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, 2018 and December 31, 2017 are as follows ($ in thousands):

March 31, 2018



											Weighted Average
	Outstanding Face Amount			Amortized Cost Basis			Fair Value			Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	983,104		$	991,436		$	982,284		Internal model, third-party inputs	2.89	%	2.93
CMBS interest-only(1)	2,492,711		(2)	79,162			79,035			Internal model, third-party inputs	3.46	%	2.99
GNMA interest-only(3)	165,307		(2)	4,540			3,975			Internal model, third-party inputs	6.60	%	4.04
Agency securities(1)	706			727			698			Internal model, third-party inputs	1.77	%	2.78
GNMA permanent securities(1)	33,472			33,757			34,113			Internal model, third-party inputs	3.62	%	5.50
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	3,550,544			3,528,185			3,532,369			Discounted Cash Flow(4)	7.34	%	1.59
Provision for loan losses	N/A			(7,000		)	(7,000		)	(5)	N/A		N/A
Mortgage loan receivables held for sale	274,090			273,636			279,372			Internal model, third-party inputs(6)	5.09	%	9.71
FHLB stock(7)	77,915			77,915			77,915			(7)	4.25	%	N/A
Nonhedge derivatives(1)(8)	713,900			N/A			92			Counterparty quotations	N/A		0.25

Liabilities:
Repurchase agreements - short-term	491,939			491,939			491,939			Discounted Cash Flow(9)	3.25	%	0.23
Repurchase agreements - long-term	262,438			262,438			262,438			Discounted Cash Flow(10)	2.60	%	1.89
Mortgage loan financing	695,163			683,487			668,790			Discounted Cash Flow(10)	4.91	%	2.71
CLO debt	683,095			683,095			683,095			Discounted Cash Flow(9)	3.64	%	10.47
Participation Financing - Mortgage Loan Receivable	2,815			2,815			2,815			Discounted Cash Flow(11)	17.00	%	0.18
Borrowings from the FHLB	1,348,000			1,348,000			1,326,100			Discounted Cash Flow	1.82	%	2.44
Senior unsecured notes	1,166,201			1,152,834			1,150,860			Broker quotations, pricing services	5.39	%	5.03


(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 and CLO debt 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 Participation Financing - Mortgage Loan Receivable approximates amortized cost as this is a loan participation to a third party.

December 31, 2017



											Weighted Average
	Outstanding Face Amount			Amortized Cost Basis			Fair Value			Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	945,167		$	954,397		$	953,499		Internal model, third-party inputs	2.79	%	2.89
CMBS interest-only(1)	3,140,297		(2)	112,609			113,071			Internal model, third-party inputs	3.16	%	3.08
GNMA interest-only(3)	172,916		(2)	5,245			4,477			Internal model, third-party inputs	6.70	%	4.18
Agency securities(1)	720			743			728			Internal model, third-party inputs	1.80	%	2.94
GNMA permanent securities(1)	33,745			34,386			34,742			Internal model, third-party inputs	3.62	%	5.66
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	3,300,709			3,282,462			3,292,035			Discounted Cash Flow(4)	7.18	%	1.61
Provision for loan losses	N/A			(4,000		)	(4,000		)	(5)	N/A		N/A
Mortgage loan receivables held for sale	232,527			230,180			236,428			Internal model, third-party inputs(6)	4.88	%	8.17
FHLB stock(7)	77,915			77,915			77,915			(7)	4.25	%	N/A
Nonhedge derivatives(1)(8)	594,140			N/A			888			Counterparty quotations	N/A		0.24

Liabilities:
Repurchase agreements - short-term	371,427			371,427			371,427			Discounted Cash Flow(9)	3.19	%	0.35
Repurchase agreements - long-term	101,983			101,983			101,983			Discounted Cash Flow(10)	2.62	%	2.64
Mortgage loan financing	692,394			692,696			693,055			Discounted Cash Flow(10)	4.91	%	6.81
CLO debt	688,479			688,479			688,479			Discounted Cash Flow(9)	3.40	%	10.77
Participation Financing - Mortgage Loan Receivable	3,107			3,107			3,107			Discounted Cash Flow(11)	17.00	%	0.43
Borrowings from the FHLB	1,370,000			1,370,000			1,369,544			Discounted Cash Flow	1.61	%	2.49
Senior unsecured notes	1,166,201			1,152,134			1,187,187			Broker quotations, pricing services	5.39	%	5.28
Nonhedge derivatives(1)(8)	54,160			N/A			2,606			Counterparty quotations	N/A		2.44


(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)


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

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, 2018 and December 31, 2017 ($ in thousands):

March 31, 2018



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)	$	983,104		$	—	$	—	$	982,284		$	982,284
CMBS interest-only(1)	2,492,711		(2)	—		—		79,035			79,035
GNMA interest-only(3)	165,307		(2)	—		—		3,975			3,975
Agency securities(1)	706			—		—		698			698
GNMA permanent securities(1)	33,472			—		—		34,113			34,113
Nonhedge derivatives(4)	713,900			—		92		—			92
				$	—	$	92	$	1,100,105		$	1,100,197

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	$	3,550,544		$	—	$	—	$	3,532,369		$	3,532,369
Provision for loan losses	N/A			—		—		(7,000		)	(7,000		)
Mortgage loan receivable held for sale	274,090			—		—		279,372			279,372
FHLB stock	77,915			—		—		77,915			77,915
				$	—	$	—	$	3,882,656		$	3,882,656
Liabilities:											0
Repurchase agreements - short-term	491,939			$	—	$	—	$	491,939		$	491,939
Repurchase agreements - long-term	262,438			—		—		262,438			262,438
Mortgage loan financing	695,163			—		—		668,790			668,790
CLO debt	683,095			—		—		683,095			683,095
Participation Financing - Mortgage Loan Receivable	2,815			—		—		2,815			2,815
Borrowings from the FHLB	1,348,000			—		—		1,326,100			1,326,100
Senior unsecured notes	1,166,201			—		—		1,150,860			1,150,860
				$	—	$	—	$	4,586,037		$	4,586,037


(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, 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)	$	945,167		$	—	$	—	$	953,499		$	953,499
CMBS interest-only(1)	3,140,297		(2)	—		—		113,071			113,071
GNMA interest-only(3)	172,916		(2)	—		—		4,477			4,477
Agency securities(1)	720			—		—		728			728
GNMA permanent securities(1)	33,745			—		—		34,742			34,742
Nonhedge derivatives(4)	594,140			—		888		—			888
				$	—	$	888	$	1,106,517		$	1,107,405
Liabilities:
Nonhedge derivatives(4)	$	54,160		$	—	$	2,606	$	—		$	2,606


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	$	3,300,709		$	—	$	—	$	3,292,035		$	3,292,035
Provision for loan losses	N/A			—		—		(4,000		)	(4,000		)
Mortgage loan receivables held for sale	232,527			—		—		236,428			236,428
FHLB stock	77,915			—		—		77,915			77,915
				$	—	$	—	$	3,602,378		$	3,602,378
Liabilities:											0
Repurchase agreements - short-term	371,427			$	—	$	—	$	371,427		$	371,427
Repurchase agreements - long-term	101,983			—		—		101,983			101,983
Revolving credit facility	—			—		—		—			—
Mortgage loan financing	692,394			—		—		693,055			693,055
Participation Financing - Mortgage Loan Receivable	688,479			—		—		688,479			688,479
Liability for transfers not considered sales	3,107			—		—		3,107			3,107
Borrowings from the FHLB	1,370,000			—		—		1,369,544			1,369,544
Senior unsecured notes	1,166,201			—		—		1,187,187			1,187,187
				$	—	$	—	$	4,414,782		$	4,414,782


(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 consolidated statements of financial condition for the three months ended March 31, 2018 and 2017 ($ in thousands):



Level 3	2018			2017

Balance at January 1,	$	1,106,517		$	2,100,947
Transfer from level 2	—			—
Purchases	135,058			45,726
Sales	(122,356		)	(361,323		)
Paydowns/maturities	(2,954		)	(74,285		)
Amortization of premium/discount	(6,407		)	(19,357		)
Unrealized gain/(loss)	(8,654		)	4,911
Realized gain/(loss) on sale(1)	(1,099		)	5,361
Balance at March 31,	$	1,100,105		$	1,701,980


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

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, 2018



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

CMBS (1)	$	982,284		Discounted cash flow	Yield (4)	—	%	3.42	%	21.15	%
					Duration (years)(5)	0.00		3.20		8.04
CMBS interest-only (1)	79,035		(2)	Discounted cash flow	Yield (4)	2.66	%	3.78	%	6.71	%
					Duration (years)(5)	0.27		2.91		4.30
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (3)	3,975		(2)	Discounted cash flow	Yield (4)	—	%	12.90	%	80.84	%
					Duration (years)(5)	0.00		2.38		5.10
					Prepayment speed (CPJ)(5)	0.00		12.02		35.00
Agency securities (1)	698			Discounted cash flow	Yield (4)	1.4	%	2.48	%	2.95	%
					Duration (years)(5)	0		3.12		4.49
GNMA permanent securities (1)	34,113			Discounted cash flow	Yield (4)	4	%	81	%	6.91	%
					Duration (years)(5)	3.03		3.76		6.91
Total	$	1,100,105


(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, 2017



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

CMBS (1)	$	953,499		Discounted cash flow	Yield (3)	0.61	%	3	%	18.32	%
					Duration (years)(4)	0.12		3.19		7.84
CMBS interest-only (1)	113,072		(2)	Discounted cash flow	Yield (3)	2.7	%	3.52	%	6.31	%
					Duration (years)(4)	0.39		3.06		4.46
					Prepayment speed (CPY)(4)	100.00		100.00		100.00
GNMA interest-only (3)	4,476		(2)	Discounted cash flow	Yield (4)	4.46	%	11.85	%	71.88	%
					Duration (years)(5)	0.44		2.43		5.19
					Prepayment speed (CPJ)(5)	5.00		12.19		35.00
Agency securities (1)	728			Discounted cash flow	Yield (4)	1.4	%	2.16	%	2.52	%
					Duration (years)(5)	0.00		3.22		4.72
GNMA permanent securities (1)	34,742			Discounted cash flow	Yield (4)	2.62	%	3.44	%	6.93	%
					Duration (years)(5)	1.40		5.75		5.94
Total	$	1,106,517


(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.