Fair Value of Financial Instruments (Notes)

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

FAIR VALUE OF FINANCIAL INSTRUMENTS

ASC Topic 820 defines fair value as the 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. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing as asset or liability and also requires an entity to consider all aspects of nonperformance risk, including the entity's own credit standing, when measuring fair value of a liability. ASC Topic 820 established a valuation hierarchy of three levels as follows:

• Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities as of the measurement date. None of the Company's assets and liabilities that are measured at fair value are included in this category.

• Level 2 – Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs either directly observable or indirectly observable 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 MBS, and derivatives.

• Level 3 – Unobservable inputs are supported by little or no market activity. The unobservable inputs represent management’s best estimate of how market participants would price 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.  The Company’s fair valued assets and liabilities that are generally included in this category are certain non-Agency MBS and other investments.

The following table presents the fair value of the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012, segregated by the hierarchy level of the fair value estimate:

	March 31, 2013
	Fair Value		Level 1		Level 2		Level 3
Assets:
Agency MBS (including pending settlements)	$	3,848,434	$	—	$	3,848,434	$	—
Non-Agency MBS	617,261		—		496,292		120,969
Other investments	25		—		—		25
Total assets carried at fair value	$	4,465,720	$	—	$	4,344,726	$	120,994
Liabilities:
Derivative liabilities	$	37,687	$	—	$	37,687	$	—
Total liabilities carried at fair value	$	37,687	$	—	$	37,687	$	—

	December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Agency MBS	$	3,492,659	$	—	$	3,492,659	$	—
Non-Agency MBS	611,322		—		506,102		105,220
Other investments	25		—		—		25
Total assets carried at fair value	$	4,104,006	$	—	$	3,998,761	$	105,245
Liabilities:
Derivative liabilities	$	42,537	$	—	$	42,537	$	—
Total liabilities carried at fair value	$	42,537	$	—	$	42,537	$	—

The Company’s Agency MBS, as well a majority of its non-Agency MBS, 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 MBS 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 cash flow 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, and credit enhancement as well as certain other relevant information.  Significant changes in any of these inputs in isolation would result in a significantly different fair value measurement. Generally Level 3 assets are most sensitive to the default rate and severity assumptions.

The table below presents information about the significant unobservable inputs used in the fair value measurement for the Company's Level 3 non-Agency CMBS and RMBS as of March 31, 2013:

	Quantitative Information about Level 3 Fair Value Measurements(1)
	Prepayment Speed		Default Rate		Severity		Discount Rate
Non-Agency CMBS	20 CPY		2.5	%	35.0	%	5.1	%
Non-Agency RMBS	9	CPR	0.9	%	18.5	%	6.7	%

(1) Data presented are weighted averages.

The following table presents the activity of the instruments fair valued at Level 3 during the three months ended March 31, 2013:

	Level 3 Fair Values
	Non-Agency CMBS			Non-Agency RMBS			Other		Total assets
Balance as of beginning of the period	$	100,102		$	5,118		$	25	$	105,245
Purchases	19,516			—			—		19,516
Unrealized (loss) gain included in OCI	(444		)	(34		)	—		(478		)
Principal payments	(2,059		)	(1,345		)	—		(3,404		)
Amortization	104			11			—		115
Balance as of end of period	$	117,219		$	3,750		$	25	$	120,994

The following table presents a summary of the recorded basis and estimated fair values of the Company’s financial instruments as of March 31, 2013 and December 31, 2012:

	March 31, 2013				December 31, 2012
	Recorded Basis		Fair Value		Recorded Basis		Fair Value
Assets:
Agency MBS (including pending settlements)	$	3,848,434	$	3,848,434	$	3,492,659	$	3,492,659
Non-Agency MBS	617,261		617,261		611,322		611,322
Securitized mortgage loans, net	64,825		54,757		70,823		61,916
Other investments	822		775		858		810
Liabilities:
Repurchase agreements	$	3,708,255	$	3,708,811	$	3,564,128	$	3,564,787
Non-recourse collateralized financing	28,473		28,810		30,504		30,756
Derivative liabilities	37,687		37,687		42,537		42,537

There were no assets or liabilities which were measured at fair value on a non-recurring basis as of March 31, 2013 or December 31, 2012.