Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

FAIR VALUE OF FINANCIAL INSTRUMENTS [Abstract]

Fair Value of Financial Instruments

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company utilizes fair value measurements at various levels within the hierarchy established by ASC Topic 820 for certain of its assets and liabilities.  The three levels of valuation hierarchy established by ASC Topic 820 are as follows:

• Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

• Level 2 – Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.  The Company’s fair valued assets and liabilities that are generally included in this category are Agency MBS, certain non-Agency CMBS, and derivatives.

• Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.  Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.  Generally, the Company’s assets and liabilities carried at fair value and included in this category are non-Agency MBS.

The following table presents the fair value of the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2011, segregated by the hierarchy level of the fair value estimate:

			Fair Value Measurements
	Fair Value		Level 1		Level 2		Level 3
Assets:
Agency MBS	$	2,072,110	$	—	$	2,072,110	$	—
Non-Agency MBS:
CMBS	390,784		—		255,823		134,961
RMBS	12,921		—		5,474		7,447
Other investments	25		—		—		25
Total assets carried at fair value	$	2,475,840	$	—	$	2,333,407	$	142,433
Liabilities:
Derivative liabilities	$	28,838	$	—	$	28,838	$	—
Total liabilities carried at fair value	$	28,838	$	—	$	28,838	$	—

The Company’s Agency MBS, as well a portion of its non-Agency CMBS, are substantially similar to securities that either are currently actively traded or have been recently traded in their respective market.  Their fair values are derived from an average of multiple dealer quotes and thus are considered Level 2 fair value measurements.

The Company’s remaining non-Agency CMBS and non-Agency RMBS are comprised of securities for which there are not substantially similar securities that trade frequently.  As such, the Company determines the fair value of those securities by discounting the estimated future cash flows derived from pricing models using assumptions that are confirmed to the extent possible by third party dealers or other pricing indicators.  Significant inputs into those pricing models are Level 3 in nature due to the lack of readily available market quotes.  Information utilized in those pricing models include the security’s credit rating, coupon rate, estimated prepayment speeds, expected weighted average life, collateral composition, estimated future interest rates, expected credit losses, credit enhancement, as well as certain other relevant information.  The following tables present the activity of the instruments fair valued at Level 3 for the three and nine months ended September 30, 2011:

	Level 3 Fair Values
	Non-Agency CMBS			Non-Agency RMBS			Other		Total assets
Balance as of June 30, 2011	$	136,761		$	4,722		$	25	$	141,508
Purchases	2,956			3,000			—		5,956
Sales	—			—			—		—
Total unrealized losses:
Included in other comprehensive income	(997		)	27			—		(970		)
Principal payments	(3,493		)	(311		)	—		(3,804		)
Amortization	(266		)	9			—		(257		)
Balance as of September 30, 2011	$	134,961		$	7,447		$	25	$	142,433

	Level 3 Fair Values
	Non-Agency CMBS			Non-Agency RMBS			Other		Total assets
Balance as of January 1, 2011	$	146,671		$	9,307		$	25	$	156,003
Purchases	3,054			3,000			—		6,054
Sales	—			(3,765		)	—		(3,765		)
Total unrealized losses:
Included in other comprehensive income	(431		)	37			—		(394		)
Principal payments	(13,526		)	(1,139		)	—		(14,665		)
Amortization	(807		)	7			—		(800		)
Balance as of September 30, 2011	$	134,961		$	7,447		$	25	$	142,433

The following table presents the recorded basis and estimated fair values of the Company’s financial instruments as of September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
	Recorded Basis		Fair Value		Recorded Basis		Fair Value
Assets:
Agency MBS	$	2,072,110	$	2,072,110	$	1,192,579	$	1,192,579
Non-Agency CMBS	390,784		390,784		251,948		251,948
Non-Agency RMBS	12,921		12,921		15,408		15,408
Securitized mortgage loans, net	118,700		108,030		152,962		142,177
Other investments	1,059		988		1,229		1,112
Derivative assets	—		—		692		692
Liabilities:
Repurchase agreements	$	2,053,686	$	2,053,686	$	1,234,183	$	1,234,183
Non-recourse collateralized financing	84,013		84,425		107,105		109,395
Derivative liabilities	28,838		28,838		3,532		3,532

There were no assets or liabilities which were measured at fair value on a non-recurring basis as of September 30, 2011 or December 31, 2010.

The following table presents certain information for Agency MBS and non-Agency MBS that were in an unrealized loss position as of September 30, 2011 and December 31, 2010:

	September 30, 2011				December 31, 2010
	FairValue		Unrealized Loss		FairValue		Unrealized Loss
Unrealized loss position for:
Less than one year:
Agency MBS	$	820,973	$	6,930	$	695,854	$	6,638
Non-Agency MBS	118,222		2,668		45,602		592
One year or more:
Agency MBS	72,573		1,124		—		—
Non-Agency MBS	3,084		371		3,494		337
	$	1,014,852	$	11,093	$	744,950	$	7,567

Because the principal and interest related to Agency MBS are guaranteed by issuers who have the implicit guarantee of the U.S. government, the Company does not consider any of the unrealized losses on its Agency MBS to be credit related.  The Company assesses its ability to hold an Agency MBS with an unrealized loss until the recovery in its value.  This assessment is based on the amount of the unrealized loss and significance of the related investment as well as the Company’s current leverage and anticipated liquidity.  Based on this analysis, the Company has determined that the unrealized losses on its Agency MBS as of September 30, 2011 are temporary.

The Company reviews any non-Agency MBS in an unrealized loss position to evaluate whether any decline in fair value represents an other-than-temporary impairment. The evaluation includes a review of the credit ratings of these MBS and the seasoning of the mortgage loans collateralizing these securities as well as the estimated future cash flows which include projected losses. The Company performed this evaluation for the non-Agency MBS in an unrealized loss position as of September 30, 2011 and has determined that there have not been any adverse changes in the timing or amount of estimated future cash flows that necessitate a recognition of other-than-temporary impairment amounts as of September 30, 2011.