FAIR VALUE OF FINANCIAL INSTRUMENTS (Tables)

6 Months Ended

Jun. 30, 2018

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

June 30, 2018



											Weighted Average
	Outstanding Face Amount			Amortized Cost Basis			Fair Value			Fair Value Method	Yield %		Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	999,461		$	1,005,795		$	994,297		Internal model, third-party inputs	2.92	%	2.85
CMBS interest-only(1)	2,466,340		(2)	74,383			74,546			Internal model, third-party inputs	3.25	%	2.87
GNMA interest-only(3)	143,738		(2)	3,651			3,196			Internal model, third-party inputs	7.19	%	4.10
Agency securities(1)	696			712			686			Internal model, third-party inputs	1.93	%	2.64
GNMA permanent securities(1)	33,196			33,471			33,633			Internal model, third-party inputs	3.77	%	5.35
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	3,788,546			3,764,172			3,766,295			Discounted Cash Flow(4)	7.70	%	1.48
Provision for loan losses	N/A			(7,300		)	(7,300		)	(5)	N/A		N/A
Mortgage loan receivables held for sale	108,340			107,744			110,582			Internal model, third-party inputs(6)	5.24	%	9.79
FHLB stock(7)	77,915			77,915			77,915			(7)	4.25	%	N/A
Nonhedge derivatives(1)(8)	579,800			N/A			660			Counterparty quotations	N/A		0.25

Liabilities:
Repurchase agreements - short-term	563,870			563,870			563,870			Discounted Cash Flow(9)	3.51	%	0.60
Repurchase agreements - long-term	256,093			256,093			256,093			Discounted Cash Flow(10)	2.72	%	1.69
Mortgage loan financing	784,366			770,880			752,120			Discounted Cash Flow(10)	5.01	%	2.86
CLO debt	685,416			685,416			685,416			Discounted Cash Flow(9)	3.95	%	10.24
Participation Financing - Mortgage Loan Receivable	2,647			2,647			2,647			Discounted Cash Flow(11)	17.00	%	0.44
Borrowings from the FHLB	1,270,000			1,270,000			1,253,440			Discounted Cash Flow	2.07	%	2.43
Senior unsecured notes	1,166,201			1,153,543			1,143,944			Broker quotations, pricing services	5.39	%	4.78
Nonhedge derivatives(1)(8)	96,471			N/A			—			Counterparty quotations	N/A		1.85


(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.

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 June 30, 2018 and December 31, 2017 ($ in thousands):

June 30, 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)	$	999,461		$	—	$	—	$	994,297		$	994,297
CMBS interest-only(1)	2,466,340		(2)	—		—		74,546			74,546
GNMA interest-only(3)	143,738		(2)	—		—		3,196			3,196
Agency securities(1)	696			—		—		686			686
GNMA permanent securities(1)	33,196			—		—		33,633			33,633
Nonhedge derivatives(4)	579,800			—		660		—			660
				$	—	$	660	$	1,106,358		$	1,107,018
Liabilities:
Nonhedge derivatives(4)	96,471			$	—	$	—	$	—		$	—

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	$	3,788,546		$	—	$	—	$	3,766,295		$	3,766,295
Provision for loan losses	N/A			—		—		(7,300		)	(7,300		)
Mortgage loan receivable held for sale	108,340			—		—		110,582			110,582
FHLB stock	77,915			—		—		77,915			77,915
				$	—	$	—	$	3,947,492		$	3,947,492
Liabilities:											0
Repurchase agreements - short-term	563,869			$	—	$	—	$	563,870		$	563,870
Repurchase agreements - long-term	256,093			—		—		256,093			256,093
Mortgage loan financing	784,366			—		—		752,120			752,120
CLO debt	685,416			—		—		685,416			685,416
Participation Financing - Mortgage Loan Receivable	2,647			—		—		2,647			2,647
Borrowings from the FHLB	1,270,000			—		—		1,253,440			1,253,440
Senior unsecured notes	1,166,201			—		—		1,143,944			1,143,944
				$	—	$	—	$	4,657,530		$	4,657,530


(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.

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 six months ended June 30, 2018 and 2017 ($ in thousands):



Level 3	2018			2017

Balance at January 1,	$	1,106,517		$	2,100,947
Transfer from level 2	—			—
Purchases	243,921			151,503
Sales	(161,518		)	(669,807		)
Paydowns/maturities	(56,707		)	(81,747		)
Amortization of premium/discount	(12,724		)	(36,677		)
Unrealized gain/(loss)	(10,789		)	5,638
Realized gain/(loss) on sale(1)	(2,342		)	12,494
Balance at June 30,	$	1,106,358		$	1,482,351


(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):

June 30, 2018



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

CMBS (1)	$	994,297		Discounted cash flow	Yield (4)	—	%	3.67	%	21.29	%
					Duration (years)(5)	0.00		3.08		7.97
CMBS interest-only (1)	74,546		(2)	Discounted cash flow	Yield (4)	2.24	%	3.88	%	6.73	%
					Duration (years)(5)	0.14		2.84		4.18
					Prepayment speed (CPY)(5)	100.00		100.00		100.00
GNMA interest-only (3)	3,196		(2)	Discounted cash flow	Yield (4)	—	%	12.76	%	45.61	%
					Duration (years)(5)	0.00		2.77		10.05
					Prepayment speed (CPJ)(5)	5.00		10.02		25.00
Agency securities (1)	686			Discounted cash flow	Yield (4)	—	%	2.16	%	3.06	%
					Duration (years)(5)	0.00		3.01		4.26
GNMA permanent securities (1)	33,633			Discounted cash flow	Yield (4)	3.70	%	6.43	%	19.00	%
					Duration (years)(5)	1.16		8.23		14.08
Total	$	1,106,358


(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.