Fair Value Measurements

12 Months Ended

Dec. 31, 2023

Note 28 — Fair Value Measurements

Fair Value Determination

ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

•

Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets.

•

Level 2 - Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.

•

Level 3 - Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.

Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties.

Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the measurement date.

Cash and Cash Equivalents and Restricted Cash

Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement.

Loans Held for Investment, Net, and Loans Held for Investment, at Fair Value

The Company uses a third-party loan valuation model to estimate the fair value of its nonperforming mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s nonperforming mortgage loans are interest rates, market yield requirements, the probability of default, loss given default, voluntary prepayment speed and loss timing. The Company uses an in-house loan valuation model to estimate the fair value of its performing mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s performing mortgage loans are discount rate, constant prepayment rate, constant default rate, and loss severity rate. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement.

Collateral Dependent or Loans Individually Evaluated

Nonaccrual loans held for investment are evaluated individually and are adjusted to the fair value of the collateral when the fair value of the collateral is below the carrying value of the loan. To the extent such a loan is collateral dependent, the Company determines the allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The Company uses a discounted cash flow model to estimate the fair value of loans held for sale, a Level 3 measurement.

Loans Held for Sale, at Fair Value

The Company has elected to account for certain loans originated with the intent to sell at fair value (the FVO Loans held for sale) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans held for sale are measured based a discounted cash flow model, or on the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value, including the value attributable to mortgage servicing and credit risk, and current commitments to purchase loans, a Level 2 measurement. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur.

Real Estate Owned, Net (REO)

Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers.

Mortgage Servicing Rights

The Company determined the fair values based on a third-party valuation model that calculates the present value of estimated future net servicing income, a Level 3 measurement.

Derivative Instruments

Derivative financial instruments are measured at fair value using readily observable market inputs and the overall fair value measurement is classified as Level 2.

Secured Financing, Net (Corporate Debt)

The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

Warehouse Repurchase Facilities, Net

Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement.

Securitized Debt, Net and Securitized Debt, at Fair Value

Due to the fair value option accounting election on securitized debt in the first quarter of 2023, the Company changed the valuation technique to estimate the fair value of securitized debt. Prior to the first quarter of 2023, the fair value estimate of securitized debt was based on a third-party valuation model that calculate estimated cash flows discounted at an appropriate market rate, a Level 3 measurement. Starting the first quarter of 2023, the Company obtains the fair value estimates at instrument level from a third-party broker dealer based on trader input on benchmark securities, bond structure and collateral characteristics and performance and pricing factors such as yield, spread, average life, prepayment speeds, default rate and severity, a Level 2 measurement. Significant changes in any of those inputs in isolation could result in a significant change to securitized debt’s fair value measurement.

Accrued Interest Receivable and Accrued Interest Payable

The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

The Company does not have any off-balance sheet financial instruments.

Receivables Due From Servicers

The carrying amounts of receivables due from servicers approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

Fair Value Disclosures

The following tables present information on assets measured and recorded at fair value as of December 31, 2023 and 2022, by level, in the fair value hierarchy (in thousands):


	Fair value measurements using						Total at
December 31, 2023	Level 1		Level 2		Level 3		fair value
Assets:
Nonrecurring fair value measurements:
Individually evaluated loans requiring specific allowance, net	$	—	$	—	$	8,475	$	8,475
Real estate owned, net		—		—		44,268		44,268
Total nonrecurring fair value measurements		—		—		52,743		44,268
Recurring fair value measurements:
Loans held for sale, at fair value		—		17,590		—		17,590
Loans held for investment, at fair value		—		—		1,306,072		1,306,072
Mortgage servicing rights		—		—		8,578		8,578
Total recurring fair value measurements		—		17,590		1,314,650		1,332,240
Total assets	$	—	$	17,590	$	1,367,393	$	1,376,508

Liabilities:
Recurring fair value measurements:
Securitized debt, at fair value	$	—	$	877,417	$	—	$	877,417
Derivative liabilities		—		3,665		—		3,665
Total recurring fair value measurements		—		881,082		—		881,082
Total liabilities	$	—	$	881,082	$	—	$	881,082


	Fair value measurements using						Total at
December 31, 2022	Level 1		Level 2		Level 3		fair value
Assets:
Nonrecurring fair value measurements:
Individually evaluated loans requiring specific allowance, net	$	—	$	—	$	11,466	$	11,466
Real estate owned, net		—		—		13,325		13,325
Total nonrecurring fair value measurements		—		—		24,791		24,791
Recurring fair value measurements:
Loans held for investment, at fair value		—		—		276,095		276,095
Mortgage servicing rights		—		—		9,238		9,238
Total recurring fair value measurements		—		—		285,333		285,333
Total assets	$	—	$	—	$	310,124	$	310,124

The following table presents gain (losses) recognized on assets measured on a nonrecurring basis for the years indicated (in thousands):


	December 31,
Gain (loss) on assets measured on a nonrecurring basis	2023			2022			2021
Loans held for sale, net	$	—		$	—		$	17
Real estate held for sale, net		(3,903	)		(363	)		(1,759	)
Individually evaluated loans requiring specific allowance, net		122			310			1,262
Total net loss	$	(3,781	)	$	(53	)	$	(480	)

The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of December 31, 2023 and 2022 ($ in thousands):

         
        December 31, 2023

        Asset category

        Fair value

        Primary
valuation
technique

        Unobservable
input

        Range

        Weighted
average

        Nonrecurring:

Individually evaluated loans 
   requiring allowance, net

8,475

Market comparables

Selling costs

8.0%

8.0%

Real estate owned, net

44,268

Market comparables

Selling costs

8.0%

8.0%

        Recurring:

Loans held for investment, at fair value

1,306,072

Discounted cash flow

Discount rate

9.3%

9.3%

         
        Prepayment rate

        0.7% to 50.0%

        5.8%

         
        Default rate

        0.0% to 1.7%

        0.7%

         
        Loss severity rate

        0.0% to 14.8%

        2.1%

Mortgage servicing rights

8,578

Discounted cash flow

Discount rate

8.0%

8.0%

         
        Prepayment rate

        5.3% to 16.0%

        6.5%

         
        December 31, 2022

        Asset category

        Fair value

        Primary
valuation
technique

        Unobservable
input

        Range

        Weighted
average

        Nonrecurring:

Individually evaluated loans 
   requiring allowance, net

11,466

Market comparables

Selling costs

8.0%

8.0%

Real estate owned, net

13,325

Market comparables

Selling costs

8.0%

8.0%

        Recurring:

Loans held for investment, at fair value

276,095

Discounted cash flow

Discount rate

8.35% to 9.35%

8.9%

         
        Prepayment rate

        1.0% to 30.0%

        15.1%

         
        Default rate

        0.12% to 6.99%

        0.6%

         
        Loss severity rate

        0.0% to 18.45%

        3.5%

Mortgage servicing rights

9,238

Discounted cash flow

Discount rate

8.0% to 12.0%

8.1%

         
        Prepayment rate

        5.6% to 16.8%

        6.3%

The following is a roll-forward of loans held for investment that are measured at estimated fair value on a recurring basis for the years indicated (in thousands):


	December 31,
	2023			2022			2021
Beginning balance	$	276,095		$	1,359		$	1,539
Originations		1,079,811			267,278			—
Loans liquidated		(73,623	)		(765	)		(163	)
Principal paydowns		(9,940	)		(261	)		(46	)
Total unrealized gain included in net income		47,214			7,436			29
Loans transferred to held for sale		(25,783	)		—			—
REO transfer		(777	)		—			—
Loans repurchased		13,075			1,048			—
Ending balance	$	1,306,072		$	276,095		$	1,359

The following is a roll-forward of loans held for sale that are measured at estimated fair value on a recurring basis for the years indicated (in thousands):


	December 31,
	2023			2022			2021
Beginning balance	$	—		$	—		$	—
Originations		38,036			31,328			—
Loans liquidated		(46,843	)		(31,328	)		—
Principal paydowns		(22	)		—			—
Total unrealized gain included in net income		636			—			—
Loans transferred from held for investment		25,783			—			—
Ending balance	$	17,590		$	—		$	—

The following is a roll-forward of mortgage servicing rights that are measured at estimated fair value on a recurring basis for the years indicated (in thousands):


	December 31,
	2023			2022		2021
Beginning balance	$	9,238		$	7,152	$	—
Additions		—			—		7,152
Total unrealized (loss) gain included in net income		(660	)		2,086		—
Ending balance	$	8,578		$	9,238	$	7,152

The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are individually evaluated. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of December 31, 2023 and 2022, financial assets and liabilities measured at fair value include loans held for investment at fair value, loans held for sale at fair value, mortgage servicing rights, derivative instruments, and securitized debt at fair value. Financial assets measured at the lower of cost or estimated fair value include certain individually evaluated loans held for investment and REO, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximately $8.5 million and $11.5 million as of December 31, 2023 and 2022, net of specific allowance for loan losses of approximately $1.0 million and $1.1 million, respectively.

A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above.

The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated. The estimated fair value of loans held for sale, at fair value; loans held for investment, at fair value; mortgage servicing rights; securitized debt, at fair value; are also presented in Notes 5, 6, 11, and 17, respectively.


	December 31, 2023
(in thousands)	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	40,566	$	40,566	$	—	$	—	$	40,566
Restricted cash		21,361		21,361		—		—		21,361
Loans held for sale, at fair value		17,590		—		17,590		—		17,590
Loans held for investment, net		2,828,123		—		—		2,672,705		2,672,705
Loans held for investment, at fair value		1,306,072		—		—		1,306,072		1,306,072
Accrued interest receivables		27,028		27,028		—		—		27,028
Mortgage servicing rights		8,578		—		—		8,578		8,578

Liabilities:
Secured financing, net	$	211,083	$	—	$	—	$	212,625	$	212,625
Warehouse and repurchase facilities, net		334,755		—		334,755		—		334,755
Securitized debt, net		2,418,811		—		2,155,718		—		2,155,718
Securitized debt, at fair value		877,417		—		877,417		—		877,417
Accrued interest payable		20,473		20,473		—		—		20,473
Derivative liability		3,665		3,665		—		—		3,665


	December 31, 2022
(in thousands)	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	45,248	$	45,248	$	—	$	—	$	45,248
Restricted cash		16,808		16,808		—		—		16,808
Loans held for sale, net		—		—		—		—		—
Loans held for investment, net		3,272,390		—		—		3,201,850		3,201,850
Loans held for investment, at fair value		276,095		—		—		276,095		276,095
Accrued interest receivable		20,463		20,463		—		—		20,463
Mortgage servicing rights		9,238		—		—		9,238		9,238

Liabilities:
Secured financing, net	$	209,846	$	—	$	—	$	211,854	$	211,854
Warehouse repurchase facilities, net		330,814		—		330,814		—		330,814
Securitizations, net		2,736,290		—		—		2,522,010		2,522,010
Accrued interest payable		16,369		16,369		—		—		16,369

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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