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:

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 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 are recorded at their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for credit losses.

The Company determined the fair value estimate of loans held for investment using a cash flow model incorporating the latest securitization execution prices as a proxy, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are interest rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement.

Nonaccrual loans held for investment are evaluated individually and are recorded at fair value on a nonrecurring basis. 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 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.

The Company retains an interest-only strip on certain sales of held for sale loans. The interest-only strips are classified as trading securities under FASB ASC Topic 320, Investments-Debt Securities. The interest-only strips are measured based on their estimated fair values using a discounted cash flow model, a Level 3 measurement. Changes in fair value are reflected in income as they occur.

The Company has elected to account for certain purchased distressed loans held for investment, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. 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.

The Company uses a modified discounted cash flow model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement.

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.

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 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.

The fair value estimate of securities issued is determined by using estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

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 following tables present information on assets measured and recorded at fair value as of June 30, 2020 and December 31, 2019, by level, in the fair value hierarchy (in thousands):

	Fair value measurements using						Total at
June 30, 2020	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	2,956	$	2,956
Interest-only strips		—		—		845		845
Total recurring fair value measurements		—		—		3,801		3,801
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		212,344		212,344
Real estate owned, net		—		—		15,648		15,648
Individually evaluated loans requiring specific allowance, net		—		—		269,499		269,499
Total nonrecurring fair value measurements		—		—		497,491		497,491
Total assets	$	—	$	—	$	501,292	$	501,292

	Fair value measurements using						Total at
December 31, 2019	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	2,960	$	2,960
Interest-only strips		—		—		894		894
Total recurring fair value measurements		—		—		3,854		3,854
Nonrecurring fair value measurements:
Loans held for sale, net		—		—		214,467		214,467
Real estate owned, net		—		—		13,068		13,068
Impaired loans requiring specific allowance, net		—		—		11,373		11,373
Total nonrecurring fair value measurements		—		—		238,908		238,908
Total assets	$	—	$	—	$	242,762	$	242,762

The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three and six months ended June 30, 2020 and 2019 (in thousands):

The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of June 30, 2020 and December 31, 2019 (dollars in thousands):

	June 30, 2020
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Individually evaluated loans requiring allowance, net	$	269,499	Market comparables	Selling costs	8.0%	8.0%
Real estate owned, net		15,648	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment, at fair value		2,956	Discounted cash flow	Discount rate	10.5%	10.5%
				Collateral value (% of UPB)	8.0% to 97.0%	88.0%
				Timing of resolution/payoff (months)	5 to 212		60.0
				Prepayment rate	15.0%	15.0%
				Default rate	1.0%	1.0%
				Loss severity rate	10.0%	10.0%
Loans held for sale		212,344	Discounted cash flow	Discount rate	12.0% to 15.0%	14.5%
				Timing of resolution/payoff (months)	0 to 13		7.6

Interest-only strips		845	Discounted cash flow	Discount rate	15.0%	15.0%
				Timing of resolution/payoff (months)	0 to 13.0		2.4

	December 31, 2019
Asset category	Fair value		Primary valuation technique	Unobservable input	Range	Weighted average
Collateral dependent impaired loans requiring specific allowance, net	$	11,373	Market comparables	Selling costs	8.0%	8.0%
Real estate owned, net		13,068	Market comparables	Selling costs	8.0%	8.0%
Loans held for investment, at fair value		2,960	Discounted cash flow	Discount rate	10.5%	10.5%
				Collateral value (% of UPB)	18.0% to 94.0%	87.0%
				Timing of resolution/payoff (months)	5 to 218		65.0
				Prepayment rate	15.0%	15.0%
				Default rate	1.0%	1.0%
				Loss severity rate	10.0%	10.0%
Loans held for sale		214,467	Discounted cash flow	Discount rate	12.0% to 15.0%	14.7%
				Timing of resolution/payoff (months)	0 to 12		7.0

Interest-only strips		894	Discounted cash flow	Discount rate	15.0%	15.0%
				Timing of resolution/payoff (months)	0 to 7.0		2.1

The following is a rollforward of loans that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Beginning balance	$	2,987		$	2,971		$	2,960		$	3,463
Loans liquidated		—			45			—			(421	)
Principal paydowns		(18	)		(17	)		(36	)		(34	)
Total unrealized gain (loss) included in net income		(13	)		(25	)		32			(34	)
Ending balance	$	2,956		$	2,974		$	2,956		$	2,974

The following is a rollforward of interest-only strips that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Beginning balance	$	1,534		$	1,609		$	894		$	812
Interest-only strip additions		—			330			1,820			1,634
Interest-only strip write-offs		(689	)		(661	)		(1,869	)		(1,131	)
Total unrealized loss included in net income		—			(85	)		—			(122	)
Ending balance	$	845		$	1,193		$	845		$	1,193

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, 2020 and December 31, 2019, the only financial assets measured at fair value were certain individually evaluated loans held for investment, loans held for sale, interest-only strips, REO and FVO loans, 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 $9.6 million and $11.4 million as of June 30, 2020 and December 31, 2019, net of specific allowance for credit losses of approximately $1.3 million and $0.9 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 (in thousands):

	June 30, 2020
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	9,803	$	9,803	$	—	$	—	$	9,803
Restricted cash		6,735		6,735		—		—		6,735
Loans held for sale, net		212,344		—		—		212,344		212,344
Loans held for investment, net		1,861,819		—		—		1,767,635		1,767,635
Loans held for investment, at fair value		2,956		—		—		2,956		2,956
Accrued interest receivables		17,793		17,793		—		—		17,793
Interest-only strips		845		—		—		845		845

Liabilities:
Secured financing, net	$	74,571	$	—	$	—	$	75,010	$	75,010
Warehouse repurchase facilities, net		160,796		—		160,796		—		160,796
Securitizations, net		1,599,719		—		—		1,617,114		1,617,114
Accrued interest payable		7,777		7,777		—		—		7,777

	December 31, 2019
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	21,465	$	21,465	$	—	$	—	$	21,465
Restricted cash		6,087		6,087		—		—		6,087
Loans held for sale, net		214,467		—		—		222,260		222,260
Loans held for investment, net		1,863,360		—		—		1,913,481		1,913,481
Loans held for investment, at fair value		2,960		—		—		2,960		2,960
Accrued interest receivable		13,295		13,295		—		—		13,295
Real estate owned, net		13,068		—		—		13,068		13,068
Interest-only strips	894			—		—	894		894

Liabilities:
Secured financing, net	$	145,599	$	—	$	—	$	153,000	$	153,000
Warehouse repurchase facilities, net		421,548		—		421,548		—		421,548
Securitizations, net		1,438,629		—		—		1,486,990		1,486,990
Accrued interest payable		7,190		7,190		—		—		7,190