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Fair Value of Financial Instruments (Notes) | 6 Months Ended
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Jun. 30, 2014
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 an 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 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.
• | 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 following table presents the fair value of the Company’s assets and liabilities presented on its consolidated balance sheets, segregated by the hierarchy level of the fair value estimate, that are measured at fair value on a recurring basis as of the dates indicated:
| June 30, 2014
| Fair Value |  | Level 1 - Unadjusted Quoted Prices in Active Markets |  | Level 2 - Observable Inputs |  | Level 3 - Unobservable Inputs
Assets: |  |  |  |  |  |  |
Mortgage-backed securities | $ | 3,949,965 |  |  | $ | — |  |  | $ | 3,884,723 |  |  | $ | 65,242 |
Derivative assets | 5,237 |  |  | — |  |  | 5,237 |  |  | — |
Total assets carried at fair value | $ | 3,955,202 |  |  | $ | — |  |  | $ | 3,889,960 |  |  | $ | 65,242 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities | $ | 23,974 |  |  | $ | 21,139 |  |  | $ | 2,835 |  |  | $ | — |
Total liabilities carried at fair value | $ | 23,974 |  |  | $ | 21,139 |  |  | $ | 2,835 |  |  | $ | — |
| December 31, 2013
| Fair Value |  | Level 1 - Unadjusted Quoted Prices in Active Markets |  | Level 2 - Observable Inputs |  | Level 3 - Unobservable Inputs
Assets: |  |  |  |  |  |  |
Mortgage-backed securities | $ | 4,018,161 |  |  | $ | — |  |  | $ | 3,944,681 |  |  | $ | 73,480 |
Derivative assets | 18,488 |  |  | — |  |  | 18,488 |  |  | — |
Total assets carried at fair value | $ | 4,036,649 |  |  | $ | — |  |  | $ | 3,963,169 |  |  | $ | 73,480 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Derivative liabilities | $ | 6,681 |  |  | $ | 5,345 |  |  | $ | 1,336 |  |  | $ | — |
Total liabilities carried at fair value | $ | 6,681 |  |  | $ | 5,345 |  |  | $ | 1,336 |  |  | $ | — |
The Company did not have assets or liabilities measured at fair value on a non-recurring basis as of June 30, 2014 or December 31, 2013. The Company's derivative assets and liabilities include interest rate swaps and Eurodollar futures. Interest rate swaps are valued using the income approach with the primary input being the forward interest rate swap curve, which is considered an observable input and thus their fair values are considered Level 2 measurements. Eurodollar futures are valued based on closing exchange prices on these contracts. Accordingly, these financial futures are classified as Level 1. Agency MBS, as well a majority of 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, and their fair values are therefore considered Level 3 measurements. The Company determines the fair value of its Level 3 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 June 30, 2014:
| 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 | % |  | 8.9 | %
Non-Agency RMBS | 10 CPR |  | 1.0 | % |  | 20.0 | % |  | 6.8 | %
(1) | Data presented are weighted averages.
The following table presents the activity of the instruments fair valued at Level 3 during the three and six months ended June 30, 2014:
| Level 3 Fair Values
| Three Months Ended |  | Six Months Ended
| June 30, 2014 |  | June 30, 2014
| Non-Agency CMBS |  | Non-Agency RMBS |  | Total assets |  | Non-Agency CMBS |  | Non-Agency RMBS |  | Total assets
Balance as of beginning of period | $ | 63,832 |  |  | $ | 2,555 |  |  | $ | 66,387 |  |  | $ | 70,733 |  |  | $ | 2,747 |  |  | $ | 73,480 |
Unrealized gain (loss) included in OCI | 173 |  |  | 3 |  |  | 176 |  |  | 200 |  |  | (123 | ) |  | 77 |
Principal payments | (1,315 | ) |  | (60 | ) |  | (1,375 | ) |  | (8,308 | ) |  | (456 | ) |  | (8,764 | )
Accretion | 54 |  |  | — |  |  | 54 |  |  | 119 |  |  | 330 |  |  | 449 |
Balance as of end of period | $ | 62,744 |  |  | $ | 2,498 |  |  | $ | 65,242 |  |  | $ | 62,744 |  |  | $ | 2,498 |  |  | $ | 65,242 |
The following table presents a summary of the recorded basis and estimated fair values of the Company’s financial instruments as of the dates indicated:
| June 30, 2014 |  | December 31, 2013
| Recorded Basis |  | Fair Value |  | Recorded Basis |  | Fair Value
Assets: |  |  |  |  |  |  |
Mortgage-backed securities | $ | 3,949,965 |  |  | $ | 3,949,965 |  |  | $ | 4,018,161 |  |  | $ | 4,018,161 |
Mortgage loans held for investment, net (1) | 52,564 |  |  | 44,252 |  |  | 55,423 |  |  | 46,383 |
Derivative assets | 5,237 |  |  | 5,237 |  |  | 18,488 |  |  | 18,488 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |
Repurchase agreements (2) | $ | 3,447,050 |  |  | $ | 3,447,085 |  |  | $ | 3,580,754 |  |  | $ | 3,580,997 |
Non-recourse collateralized financing (1) | 12,073 |  |  | 11,603 |  |  | 12,914 |  |  | 12,414 |
Derivative liabilities | 23,974 |  |  | 23,974 |  |  | 6,681 |  |  | 6,681 |
(1) The Company determines the fair value of its mortgage loans held for investment, net and its non-recourse collateralized financing using internally developed cash flow models with inputs similar to those used to estimate fair value of the Company's Level 3 non-Agency MBS. (2) The difference between the recorded basis of repurchase agreements and their fair value is the deferred cost of the 2-year repurchase facility.

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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 21 -URI http://asc.fasb.org/extlink&oid=28364263&loc=d3e13537-108611 Reference 2: 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=28364263&loc=d3e13433-108611 Reference 3: 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 4: 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=25499696&loc=d3e19207-110258 Reference 5: 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 Reference 6: 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=28364263&loc=d3e13504-108611 + Details
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