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FAIR VALUE MEASUREMENTS | 9 Months Ended
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Sep. 30, 2022
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS |
12. FAIR VALUE MEASUREMENTS
The Company follows fair value guidance in accordance with GAAP to account for its financial instruments and MSR that are accounted for at fair value. The fair value of a financial instrument and MSR is the amount 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. GAAP requires classification of financial instruments and MSR into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instrument and MSR fall within different levels of the hierarchy, the categorization is based on the lowest priority input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows: Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and liabilities in active markets. Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – inputs to the valuation methodology are unobservable and significant to overall fair value. The Company designates its securities as trading, available-for-sale or held-to-maturity depending upon the type of security and the Company’s intent and ability to hold such security to maturity. Securities classified as available-for-sale and trading are reported at fair value on a recurring basis. The following is a description of the valuation methodologies used for instruments carried at fair value. These methodologies are applied to assets and liabilities across the three-level fair value hierarchy, with the observability of inputs determining the appropriate level. Futures contracts are valued using quoted prices for identical instruments in active markets and are classified as Level 1. Residential Securities, interest rate swaps, swaptions and other derivatives are valued using quoted prices or internally estimated prices for similar assets using internal models. The Company incorporates common market pricing methods, including a spread measurement to the Treasury curve as well as underlying characteristics of the particular security including coupon, prepayment speeds, periodic and life caps, rate reset period and expected life of the security in its estimates of fair value. Fair value estimates for residential mortgage loans are generated by a discounted cash flow model and are primarily based on observable market-based inputs including discount rates, prepayment speeds, delinquency levels, and credit losses. Management reviews and indirectly corroborates its estimates of the fair value derived using internal models by comparing its results to independent prices provided by dealers in the securities and/or third party pricing services. Certain liquid asset classes, such as Agency fixed-rate pass-throughs, may be priced using independent sources such as quoted prices for TBA securities. Residential Securities, residential mortgage loans, interest rate swap and swaption markets, TBA derivatives and MBS options are considered to be active markets such that participants transact with sufficient frequency and volume to provide transparent pricing information on an ongoing basis. The liquidity of the Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options markets and the similarity of the Company’s securities to those actively traded enable the Company to observe quoted prices in the market and utilize those prices as a basis for formulating fair value measurements. Consequently, the Company has classified Residential Securities, residential mortgage loans, interest rate swaps, swaptions, TBA derivatives and MBS options as Level 2 inputs in the fair value hierarchy. The fair value of commercial mortgage-backed securities classified as available-for-sale is determined based upon quoted prices of similar assets in recent market transactions and requires the application of judgment due to differences in the underlying collateral. Consequently, commercial real estate debt investments carried at fair value are classified as Level 2. For the fair value of debt issued by securitization vehicles, refer to the “Variable Interest Entities” Note for additional information. The Company classifies its investments in MSR and Interests in MSR as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including discount rates, prepayment rates, delinquency levels and costs to service. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of MSR and Interests in MSR require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s financial statements. The following tables present the estimated fair values of financial instruments and MSR measured at fair value on a recurring basis. There were no transfers between levels of the fair value hierarchy during the periods presented.
September 30, 2022
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets | (dollars in thousands)
Securities |  |  |  |  |  |  |
Agency mortgage-backed securities | $ | — |  |  | $ | 63,037,241 |  |  | $ | — |  |  | $ | 63,037,241 |
Credit risk transfer securities | — |  |  | 1,056,906 |  |  | — |  |  | 1,056,906 |
Non-Agency mortgage-backed securities | — |  |  | 2,156,706 |  |  | — |  |  | 2,156,706 |
Commercial mortgage-backed securities | — |  |  | 588,500 |  |  | — |  |  | 588,500 |
Loans |  |  |  |  |  |  |
Residential mortgage loans | — |  |  | 1,551,637 |  |  | — |  |  | 1,551,637 |
Residential mortgage loan warehouse facility | — |  |  | 70 |  |  | — |  |  | 70 |
Mortgage servicing rights | — |  |  | — |  |  | 1,705,254 |  |  | 1,705,254 |
Assets transferred or pledged to securitization vehicles | — |  |  | 9,202,014 |  |  | — |  |  | 9,202,014 |
Derivative assets |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 36,861 |  |  | — |  |  | 36,861 |
Other derivatives | 1,539,298 |  |  | 373,371 |  |  | — |  |  | 1,912,669 |
Total assets | $ | 1,539,298 |  |  | $ | 78,003,306 |  |  | $ | 1,705,254 |  |  | $ | 81,247,858 |
Liabilities |  |  |  |  |  |  |
Debt issued by securitization vehicles | — |  |  | 7,844,518 |  |  | — |  |  | 7,844,518 |
Participations issued | — |  |  | 745,729 |  |  | — |  |  | 745,729 |
Derivative liabilities |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 108,071 |  |  | — |  |  | 108,071 |
Other derivatives | 2,946 |  |  | 653,518 |  |  | — |  |  | 656,464 |
Total liabilities | $ | 2,946 |  |  | $ | 9,351,836 |  |  | $ | — |  |  | $ | 9,354,782 |
December 31, 2021
| Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets | (dollars in thousands)
Securities |  |  |  |  |  |  |
Agency mortgage-backed securities | $ | — |  |  | $ | 60,525,605 |  |  | $ | — |  |  | $ | 60,525,605 |
Credit risk transfer securities | — |  |  | 936,228 |  |  | — |  |  | 936,228 |
Non-Agency mortgage-backed securities | — |  |  | 1,663,336 |  |  | — |  |  | 1,663,336 |
Commercial mortgage-backed securities | — |  |  | 530,505 |  |  | — |  |  | 530,505 |
Loans |  |  |  |  |  |  |
Residential mortgage loans | — |  |  | 2,272,072 |  |  | — |  |  | 2,272,072 |
Residential mortgage loan warehouse facility | — |  |  | 980 |  |  | — |  |  | 980 |
Mortgage servicing rights | — |  |  | — |  |  | 544,562 |  |  | 544,562 |
Interests in MSR | — |  |  | — |  |  | 69,316 |  |  | 69,316 |
Assets transferred or pledged to securitization vehicles | — |  |  | 6,086,308 |  |  | — |  |  | 6,086,308 |
Derivative assets |  |  |  |  |  |  |
Other derivatives | 9,028 |  |  | 161,342 |  |  | — |  |  | 170,370 |
Total assets | $ | 9,028 |  |  | $ | 72,176,376 |  |  | $ | 613,878 |  |  | $ | 72,799,282 |
Liabilities |  |  |  |  |  |  |
Debt issued by securitization vehicles | $ | — |  |  | $ | 5,155,633 |  |  | $ | — |  |  | $ | 5,155,633 |
Participations issued | — |  |  | 1,049,066 |  |  | — |  |  | 1,049,066 |
Derivative liabilities |  |  |  |  |  |  |
Interest rate swaps | — |  |  | 747,036 |  |  | — |  |  | 747,036 |
Other derivatives | 129,134 |  |  | 5,367 |  |  | — |  |  | 134,501 |
Total liabilities | $ | 129,134 |  |  | $ | 6,957,102 |  |  | $ | — |  |  | $ | 7,086,236 |
Qualitative and Quantitative Information about Level 3 Fair Value Measurements The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For MSR and Interests in MSR, in general, increases in the discount, prepayment or delinquency rates or in annual servicing costs in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s investments in MSR and Interests in MSR, which in turn could result in a decline in the estimated fair value of MSR and Interests in MSR. Refer to the “Mortgage Servicing Rights” Note for additional information, including rollforwards. The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 MSR and Interests in MSR. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.
| September 30, 2022
| Unobservable Input (1) / Range (Weighted Average) (2)
| Discount rate |  | Prepayment rate |  | Delinquency rate |  | Cost to service
MSR held directly | 6.6% - 9.5% (8.7%) |  | 4.8% - 8.0% (5.3%) |  | 0.1% - 4.1% (0.9%) |  | $88 - $108 ($94)
| December 31, 2021
| Unobservable Input (1) / Range (Weighted Average) (2)
| Discount rate |  | Prepayment rate |  | Delinquency rate |  | Cost to service
MSR held directly | 3.3% - 11.1% (7.0%) |  | 7.3% - 15.9% (9.4%) |  | 0.2% - 2.5% (1.2%) |  | $90 - $103 ($96)
Interests in MSR | 8.4% - 8.4% (8.4%) |  | 5.0% - 14.4% (9.1%) |  | 0.0% - 0.2% (0.1%) |  | $78 - $84 ($81)
(1) Represents rates, estimates and assumptions that the Company believes would be used by market participants when valuing these assets. (2) Weighted average discount rate computed based on the fair value of MSR, weighted average prepayment rate, delinquency rate and cost to service based on unpaid principal balances of loans underlying the MSR.
The following table summarizes the estimated fair values for financial assets and liabilities that are not carried at fair value at September 30, 2022 and December 31, 2021.
|  |  | September 30, 2022 |  | December 31, 2021
|  |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial assets |  |  | (dollars in thousands)
Corporate debt, held for investment |  |  | $— |  | $— |  | $1,968,991 |  | $1,986,379
Financial liabilities |  |  |  |  |  |  |  |  |
Repurchase agreements |  |  | $54,160,731 |  | $54,160,731 |  | $54,769,643 |  | $54,769,643
Other secured financing |  |  | 250,000 |  | 250,000 |  | 903,255 |  | 903,255
Corporate debt, held for investment and corporate debt, held for sale are valued using Level 3 inputs. Refer to the “Sale of Middle Market Lending Portfolio” Note for additional information. The carrying values of repurchase agreements and short term other secured financing approximate fair value and are considered Level 2 fair value measurements. Long term other secured financing is valued using Level 2 inputs.

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- 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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