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Fair Value of Financial Instruments (Tables) | 9 Months Ended
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Sep. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Disclosures | FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is defined 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. Fair value is based on the assumptions market participants would use when pricing an asset or liability and also considers 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 Company’s financial instruments that are measured at fair value on the Company’s consolidated balance sheet by their valuation hierarchy levels as of the dates indicated:
| September 30, 2021 |  | December 31, 2020
| Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
MBS | $ | 2,858,166 |  |  | $ | — |  |  | $ | 2,857,260 |  |  | $ | 906 |  |  | $ | 2,596,255 |  |  | $ | — |  |  | $ | 2,594,980 |  |  | $ | 1,275 |
Mortgage loans held for investment | 4,717 |  |  | — |  |  | — |  |  | 4,717 |  |  | 6,264 |  |  | — |  |  | — |  |  | 6,264 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury futures | $ | 60,159 |  | $ | 60,159 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Options on U.S. Treasury futures | — |  |  | — |  |  | — |  |  | — |  |  | 1,094 |  |  | 1,094 |  |  | — |  |  | — |
Interest rate swaptions | 9,939 |  |  | — |  |  | 9,939 |  |  | — |  |  | 1,360 |  |  | — |  |  | 1,360 |  |  | — |
TBA securities-long position | — |  |  | — |  |  | — |  |  | — |  |  | 8,888 |  |  | — |  |  | 8,888 |  |  | — |
Total assets carried at fair value | $ | 2,932,981 |  |  | $ | 60,159 |  |  | $ | 2,867,199 |  |  | $ | 5,623 |  |  | $ | 2,613,861 |  |  | $ | 1,094 |  |  | $ | 2,605,228 |  |  | $ | 7,539 |
Liabilities carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury futures | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,527 |  |  | $ | 1,527 |  |  | $ | — |  |  | $ | — |
Interest rate swaptions | — |  |  | — |  |  | — |  |  | — |  |  | 107 |  |  | — |  |  | 107 |  |  | — |
TBA securities-long position | 12,584 |  |  | — |  |  | 12,584 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total liabilities carried at fair value | $ | 12,584 |  |  | $ | — |  |  | $ | 12,584 |  |  | $ | — |  |  | $ | 1,634 |  |  | $ | 1,527 |  |  | $ | 107 |  |  | $ | — |
The fair value measurements for the Company's MBS are considered Level 2 when there are substantially similar securities actively trading or for which there has been recent trading activity in their respective markets and are based on prices received from pricing services and quotes from brokers. In valuing a security, the pricing service uses either a market approach, which uses observable prices and other relevant information that is generated by market transactions of identical or similar securities, or an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount. The Company reviews the prices it receives from its pricing sources as well as the assumptions and inputs utilized by its pricing sources for reasonableness. Examples of these observable inputs and assumptions include market interest rates, credit spreads, and projected prepayment speeds, among other things. The Company owns other non-Agency MBS and mortgage loans that are considered Level 3 assets because there has been no recent trading activity of similar instruments upon which their fair value can be measured. The fair value for these Level 3 assets is measured by discounting the estimated future cash flows derived from cash flow models using significant inputs which are determined by the Company when market observable inputs are not available. 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. The Company used a constant prepayment rate assumption of 10%, default rate of 2%, loss severity of 20%, and a discount rate of 7.0% in measuring the fair value of its Level 3 assets as of September 30, 2021. Significant changes in any of these inputs in isolation may result in a significantly different fair value measurement. Level 3 assets are generally most sensitive to the default rate and severity assumptions. The activity of the Company’s Level 3 assets during the three and nine months ended September 30, 2021 is presented in the following table:
| Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | September 30, 2021
| Other Non-Agency MBS |  | Mortgage Loans |  | Other Non-Agency MBS |  | Mortgage Loans
Balance as of beginning of period | $ | 1,002 |  |  | $ | 5,146 |  |  | $ | 1,275 |  |  | $ | 6,264 |
Change in fair value (1) | (47) |  |  | 34 |  |  | (151) |  |  | 102 |
Principal payments | (109) |  |  | (457) |  |  | (412) |  |  | (1,629) |
Accretion (amortization) | 60 |  |  | (6) |  |  | 194 |  |  | (20) |
Balance as of end of period | $ | 906 |  |  | $ | 4,717 |  |  | $ | 906 |  |  | $ | 4,717 |
(1) Change in fair value for mortgage loans is recorded within “unrealized gain (loss) on investments, net” in net income and change in fair value for other non-Agency MBS is recorded as unrealized gain (loss) in “other comprehensive income”. U.S. Treasury futures and options on U.S. Treasury futures are valued based on closing exchange prices on these contracts and are classified accordingly as Level 1 measurements. The fair value of interest rate swaptions is based on the fair value of the underlying interest rate swap and time remaining until its expiration and is carried on the balance sheet net of any deferred premium to be paid upon expiration. The fair value of TBA securities is estimated using methods similar those used to fair value the Company’s Level 2 MBS.
Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis | The following table presents the Company’s financial instruments that are measured at fair value on the Company’s consolidated balance sheet by their valuation hierarchy levels as of the dates indicated:
| September 30, 2021 |  | December 31, 2020
| Fair Value |  | Level 1 |  | Level 2 |  | Level 3 |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
MBS | $ | 2,858,166 |  |  | $ | — |  |  | $ | 2,857,260 |  |  | $ | 906 |  |  | $ | 2,596,255 |  |  | $ | — |  |  | $ | 2,594,980 |  |  | $ | 1,275 |
Mortgage loans held for investment | 4,717 |  |  | — |  |  | — |  |  | 4,717 |  |  | 6,264 |  |  | — |  |  | — |  |  | 6,264 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury futures | $ | 60,159 |  | $ | 60,159 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Options on U.S. Treasury futures | — |  |  | — |  |  | — |  |  | — |  |  | 1,094 |  |  | 1,094 |  |  | — |  |  | — |
Interest rate swaptions | 9,939 |  |  | — |  |  | 9,939 |  |  | — |  |  | 1,360 |  |  | — |  |  | 1,360 |  |  | — |
TBA securities-long position | — |  |  | — |  |  | — |  |  | — |  |  | 8,888 |  |  | — |  |  | 8,888 |  |  | — |
Total assets carried at fair value | $ | 2,932,981 |  |  | $ | 60,159 |  |  | $ | 2,867,199 |  |  | $ | 5,623 |  |  | $ | 2,613,861 |  |  | $ | 1,094 |  |  | $ | 2,605,228 |  |  | $ | 7,539 |
Liabilities carried at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury futures | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 1,527 |  |  | $ | 1,527 |  |  | $ | — |  |  | $ | — |
Interest rate swaptions | — |  |  | — |  |  | — |  |  | — |  |  | 107 |  |  | — |  |  | 107 |  |  | — |
TBA securities-long position | 12,584 |  |  | — |  |  | 12,584 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total liabilities carried at fair value | $ | 12,584 |  |  | $ | — |  |  | $ | 12,584 |  |  | $ | — |  |  | $ | 1,634 |  |  | $ | 1,527 |  |  | $ | 107 |  |  | $ | — |
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation | The activity of the Company’s Level 3 assets during the three and nine months ended September 30, 2021 is presented in the following table:
| Three Months Ended |  | Nine Months Ended
| September 30, 2021 |  | September 30, 2021
| Other Non-Agency MBS |  | Mortgage Loans |  | Other Non-Agency MBS |  | Mortgage Loans
Balance as of beginning of period | $ | 1,002 |  |  | $ | 5,146 |  |  | $ | 1,275 |  |  | $ | 6,264 |
Change in fair value (1) | (47) |  |  | 34 |  |  | (151) |  |  | 102 |
Principal payments | (109) |  |  | (457) |  |  | (412) |  |  | (1,629) |
Accretion (amortization) | 60 |  |  | (6) |  |  | 194 |  |  | (20) |
Balance as of end of period | $ | 906 |  |  | $ | 4,717 |  |  | $ | 906 |  |  | $ | 4,717 |

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- Definition Tabular disclosure of the fair value measurement of assets using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances, separately presenting changes during the period attributable to the following: (1) total gains or losses for the period (realized and unrealized), segregating those gains or losses included in earnings (or changes in net assets) and gains or losses recognized in other comprehensive income (loss), and a description of where those gains or losses included in earnings (or changes in net assets) are reported in the statement of income (or activities); (2) purchases, sales, issues, and settlements (each type disclosed separately); and (3) transfers in and transfers out of Level 3 (for example, transfers due to changes in the observability of significant inputs), by class of asset. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19279-110258 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -Subparagraph (c) -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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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 http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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- Definition Tabular disclosure of assets and liabilities, including [financial] instruments measured at fair value that are classified in stockholders' equity, if any, that are measured at fair value on a recurring basis. The disclosures contemplated herein include the fair value measurements at the reporting date by the level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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