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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2012
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.
• | 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 are 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.
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, 2012, segregated by the hierarchy level of the fair value estimate:
|  |  | Fair Value Measurements
| Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets: |  |  |  |  |  |  |
Agency MBS | $ | 3,650,672 |  |  | $ | — |  |  | $ | 3,650,672 |  |  | $ | — |
Non-Agency MBS: |  |  |  |  |  |  |  |  |  |  |
CMBS (including CMBS IO) | 572,690 |  |  | — |  |  | 472,374 |  |  | 100,316 |
RMBS | 14,241 |  |  | — |  |  | 5,640 |  |  | 8,601 |
Other investments | 25 |  |  | — |  |  | — |  |  | 25 |
Total assets carried at fair value | $ | 4,237,628 |  |  | $ | — |  |  | $ | 4,128,686 |  |  | $ | 108,942 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities | $ | 46,496 |  |  | $ | — |  |  | $ | 46,496 |  |  | $ | — |
Total liabilities carried at fair value | $ | 46,496 |  |  | $ | — |  |  | $ | 46,496 |  |  | $ | — |
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 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 increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. A change in the assumption used for the probability of default may be accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. The table below presents information about the significant unobservable inputs used in the fair value measurement for the Company's Level 3 non-Agency RMBS and CMBS during the three and nine months ended September 30, 2012:
| 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 | % |  | 4.4 | %
Non-Agency RMBS | 5 | CPR |  | 0.5 | % |  | 9.0 | % |  | 5.1 | %
(1) | Data presented are weighted averages.
The following tables present the activity of the instruments fair valued at Level 3 for the three and nine months ended September 30, 2012:
| For the Three Months Ended September 30, 2012
| Level 3 Fair Values
| Non-Agency CMBS |  | Non-Agency RMBS |  | Other |  | Total assets
Balance as of June 30, 2012 | $ | 104,515 |  |  | $ | 12,657 |  |  | $ | 25 |  |  | $ | 117,197 |
Total unrealized losses: |  |  |  |  |  |  |  |  |  |  |
Included in other comprehensive income | 90 |  |  | 41 |  |  | — |  |  | 131 |
Principal payments | (4,194 | ) |  | (4,108 | ) |  | — |  |  | (8,302 | )
Amortization | (95 | ) |  | 11 |  |  | — |  |  | (84 | )
Balance as of September 30, 2012 | $ | 100,316 |  |  | $ | 8,601 |  |  | $ | 25 |  |  | $ | 108,942 |
| For the Nine Months Ended September 30, 2012
| Level 3 Fair Values
| Non-Agency CMBS |  | Non-Agency RMBS |  | Other |  | Total assets
Balance as of December 31, 2011 | $ | 123,703 |  |  | $ | 10,296 |  |  | $ | 25 |  |  | $ | 134,024 |
Purchases | — |  |  | 7,500 |  |  | — |  |  | 7,500 |
Transfers out to Level 2 | (4,670 | ) |  | — |  |  | — |  |  | (4,670 | )
Total unrealized losses: |  |  |  |  |  |  |  |  |  |  |
Included in other comprehensive income | (1,934 | ) |  | 117 |  |  | — |  |  | (1,817 | )
Principal payments | (16,409 | ) |  | (9,349 | ) |  | — |  |  | (25,758 | )
Amortization | (374 | ) |  | 37 |  |  | — |  |  | (337 | )
Balance as of September 30, 2012 | $ | 100,316 |  |  | $ | 8,601 |  |  | $ | 25 |  |  | $ | 108,942 |
The Company evaluates the availability and quality of valuation inputs for its Level 3 securities on a monthly basis. When it determines that there are sufficient observable market inputs for the same or similar securities, the securities are transferred to Level 2 at the end of the reporting period in which that determination is made. As shown in the tables above for the nine months ended September 30, 2012, the Company transferred two of its non-Agency CMBS from Level 3 to Level 2 during the second quarter of 2012. The liquidity for securities similar to these non-Agency CMBS improved such that the Company was able to obtain market discount rates and prepayment speeds which it used in establishing the fair value of these two non-Agency CMBS. The following table presents the recorded basis and estimated fair values of the Company’s financial instruments as of September 30, 2012 and December 31, 2011:
| September 30, 2012 |  | December 31, 2011
| Recorded Basis |  | Fair Value |  | Recorded Basis |  | Fair Value
Assets: |  |  |  |  |  |  |
Agency MBS | $ | 3,650,672 |  |  | $ | 3,650,672 |  |  | $ | 1,965,159 |  |  | $ | 1,965,159 |
Non-Agency CMBS | 572,690 |  |  | 572,690 |  |  | 405,826 |  |  | 405,826 |
Non-Agency RMBS | 14,241 |  |  | 14,241 |  |  | 15,270 |  |  | 15,270 |
Securitized mortgage loans, net | 77,748 |  |  | 66,879 |  |  | 113,703 |  |  | 101,116 |
Other investments | 896 |  |  | 842 |  |  | 1,018 |  |  | 892 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Repurchase agreements | $ | 3,670,972 |  |  | $ | 3,670,972 |  |  | $ | 2,093,793 |  |  | $ | 2,093,793 |
Non-recourse collateralized financing | 31,295 |  |  | 31,013 |  |  | 70,895 |  |  | 69,752 |
Derivative liabilities | 46,496 |  |  | 46,496 |  |  | 27,997 |  |  | 27,997 |
There were no assets or liabilities which were measured at fair value on a non-recurring basis as of September 30, 2012 or December 31, 2011.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 + Details
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