Fair Value Measurements

6 Months Ended

Jun. 30, 2024

Note 18 — 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.

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 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, at Fair Value

The Company has elected to account for certain loans originated with the intent to sell at fair value 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

The Company obtains the fair value estimates at instrument level from a third-party broker dealer based on trader input on benchmark securities. The fair values take into consideration input factors such as bond structure and collateral characteristics and performance and pricing factors such as yield, spread, average life, prepayment speeds, default rate, and severity. The fair values are considered a Level 2 measurement. Significant changes in any of the input factors 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 and liabilities measured and recorded at fair value as of June 30, 2024 and December 31, 2023, by level, in the fair value hierarchy:


	Fair Value Measurements Using						Total at
June 30, 2024	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets:
Nonrecurring fair value measurements:
Individually evaluated loans requiring specific allowance, net	$	—	$	—	$	16,273	$	16,273
Real estate owned, net		—		—		50,757		50,757
Total nonrecurring fair value measurements		—		—		67,030		67,030
Recurring fair value measurements:
Loans held for investment, at fair value		—		—		1,971,683		1,971,683
Mortgage servicing rights		—		—		12,229		12,229
Total recurring fair value measurements		—		—		1,983,912		1,983,912
Total assets	$	—	$	—	$	2,050,942	$	2,050,942

Liabilities:
Recurring fair value measurements:
Securitized debt, at fair value	$	—	$	1,509,952	$	—	$	1,509,952
Derivative liability		—		374		—		374
Total recurring fair value measurements		—		1,510,326		—		1,510,326
Total liabilities	$	—	$	1,510,326	$	—	$	1,510,326


	Fair Value Measurements Using						Total at
December 31, 2023	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
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		52,743
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	$	1,384,983

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

The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three and six months ended June 30, 2024 and 2023:


	Three Months Ended June 30,						Six Months Ended June 30,
Gain (Loss) on Assets Measured on a Nonrecurring Basis	2024			2023			2024			2023
	(In thousands)
Real estate owned, net	$	(540	)	$	(492	)	$	(2,261	)	$	(1,670	)
Individually evaluated loans requiring specific allowance, net		(183	)		(48	)		(640	)		53
Total net loss	$	(723	)	$	(540	)	$	(2,901	)	$	(1,617	)

The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets that are recorded on a recurring and nonrecurring basis as of June 30, 2024 and December 31, 2023:

         
        June 30, 2024

        Asset Category

        Fair Value

        Primary
Valuation
Technique

        Unobservable
Input

        Range

        Weighted
Average (1)

         
        ($ in thousands)

        Nonrecurring:

Individually evaluated
   loans requiring specific
   allowance, net

16,273

Market comparables

Selling costs

8.0%

8.0%

Real estate owned, net

50,757

Market comparables

Selling costs

8.0%

8.0%

        Recurring:

Loans held for investment,
   at fair value

1,971,683

Discounted cash flow

Discount rate

9.0%

9.0%

         
        Prepayment rate

        0.7% to 50.0%

        7.0%

         
        Default rate

        0.1% to 2.0%

        0.8%

         
        Loss severity rate

        0.0% to 13.0%

        2.0%

Mortgage servicing rights

12,229

Discounted cash flow

Discount rate

8.0%

8.0%

         
        Prepayment rate

        2.2% to 13.3%

        4.7%

(1)

Individually evaluated loans requiring specific allowance, net is weighted by collateral value; real estate owned, net is weighted by selling price; loans held for investment at fair value and mortgage servicing rights are weighted by UPB.

         
        December 31, 2023

        Asset Category

        Fair Value

        Primary
Valuation
Technique

        Unobservable
Input

        Range

        Weighted
Average (1)

         
        ($ in thousands)

        Nonrecurring:

Individually evaluated
   loans requiring specific
   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%

(1)

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
	(In thousands)
Beginning balance	$	1,649,540		$	450,732		$	1,306,072		$	276,095
Originations		422,226			258,646			800,896			456,534
Loans liquidated		(77,798	)		(13,464	)		(139,550	)		(21,485	)
Acquisition		3,399			—			14,990			—
Principal paydowns		(7,732	)		(1,764	)		(13,801	)		(2,796	)
Total unrealized gain included in net income		17,285			3,108			36,757			9,767
Loans transferred to held for sale		(34,059	)		—			(31,578	)		(20,857	)
REO transfer		(1,296	)		—			(2,221	)		—
Loans repurchased		118			8,072			118			8,072
Ending balance	$	1,971,683		$	705,330		$	1,971,683		$	705,330

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2024			2023			2024			2023
	(In thousands)
Beginning balance	$	—		$	18,080		$	17,590		$	—
Originations		—			—			—			19,088
Loans liquidated		(33,895	)		(17,385	)		(48,429	)		(39,945	)
Principal paydowns		(2	)		—			(31	)		—
Total unrealized loss included in net income		(162	)		(695	)		(708	)		—
Loans transferred from held for investment		34,059			—			31,578			20,857
Ending balance	$	—		$	—		$	—		$	—

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 June 30, 2024 and December 31, 2023, 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 are 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 $16.3 million and $8.5 million as of June 30, 2024 and December 31, 2023, respectively, net of specific allowance for credit losses of approximately $1.6 million and $1.0 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:


	June 30, 2024
	Carrying								Estimated
Asset Category	Value		Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets:
Cash	$	47,366	$	47,366	$	—	$	—	$	47,366
Restricted cash		32,293		32,293		—		—		32,293
Loans held for investment, net		2,619,619		—		—		2,483,332		2,483,332
Loans held for investment, at fair value		1,971,683		—		—		1,971,683		1,971,683
Accrued interest receivables		31,124		31,124		—		—		31,124
Mortgage servicing rights		12,229		—		—		12,229		12,229

Liabilities:
Secured financing, net	$	283,909	$	—	$	—	$	287,435	$	287,435
Warehouse repurchase facilities, net		237,437		—		237,437		—		237,437
Securitized debt, net		2,228,941		—		2,014,525		—		2,014,525
Securitized debt, at fair value		1,509,952		—		1,509,952		—		1,509,952
Derivative liability		374		—		374		—		374
Accrued interest payable		24,559		24,559		—		—		24,559


	December 31, 2023
	Carrying								Estimated
Asset Category	Value		Level 1		Level 2		Level 3		Fair Value
	(In thousands)
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 receivable		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 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

- 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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