XML 33 R22.htm IDEA: XBRL DOCUMENT
v3.21.2

Fair Value of Financial Instruments | 6 Months Ended
--- | ---
Jun. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows: Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or 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 the fair value measurement. The following describes the valuation methodologies used for the Company’s financial instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy. Residential Whole Loans, at Fair Value The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from a third-party that specializes in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield. The Company’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy. Securities, at Fair Value Term Notes Backed by MSR-Related Collateral The Company’s valuation process for term notes backed by MSR-related collateral is similar to that used for other residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is intended to provide for payment of interest and principal to the holders of the term notes should cash flows generated by the related underlying MSR collateral be insufficient. Based on its evaluation of the observability of the data used in its fair value estimation process, these assets are classified as Level 2 in the fair value hierarchy. Other Residential Mortgage Securities (including short positions in TBA securities) In determining the fair value of the Company’s other residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Valuation of TBA securities positions are based on executed levels for positions entered into and subsequently rolled forward, as well as prices obtained from pricing services for outstanding positions at each reporting date . These valuations are assessed for reasonableness by considering market TBA levels observed via Bloomberg for the same coupon and term to maturity. In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available. The Company’s residential mortgage securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters. Accordingly, these securities are classified as Level 2 in the fair value hierarchy. Financing Agreements, at Fair Value Agreements with mark-to-market collateral provisions These agreements are secured and subject to margin calls and their base interest rates reset frequently to market based rates. As a result, no credit valuation adjustment is required, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with mark-to-market collateral provisions held at fair value are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are typically longer term and are collateralized by residential whole loans where the credit spread paid over the base rate on the instrument is not reset frequently are classified as Level 3 in the fair value hierarchy. Agreements with non-mark-to-market collateral provisions These agreements are secured, but not subject to margin calls, and their base interest rates reset frequently to market based rates. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy. Securitized Debt In determining the fair value of securitized debt, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants. Accordingly, the Company’s securitized debt is classified as Level 2 in the fair value hierarchy. Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations. The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve. The methods described above may produce fair value estimates that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those used by market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The Company uses inputs that are current as of the measurement date, which may include periods of market dislocation, during which price transparency may be reduced. The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future. The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2021 and December 31, 2020, on the consolidated balance sheets by the valuation hierarchy, as previously described: Fair Value at June 30, 2021
(In Thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |
Residential whole loans, at fair value |  | $ | — |  |  | $ | — |  |  | $ | 2,134,855 |  |  | $ | 2,134,855 |
Securities, at fair value |  | — |  |  | 302,835 |  |  | — |  |  | 302,835 |
Total assets carried at fair value |  | $ | — |  |  | $ | 302,835 |  |  | $ | 2,134,855 |  |  | $ | 2,437,690 |
Liabilities: |  |  |  |  |  |  |  |
Agreements with non-mark-to-market collateral provisions |  | $ | — |  |  | $ | — |  |  | $ | 795,341 |  |  | $ | 795,341 |
Agreements with mark-to-market collateral provisions |  | — |  |  | — |  |  | 858,066 |  |  | 858,066 |
Securitized debt |  | — |  |  | 640,696 |  |  | — |  |  | 640,696 |
Total liabilities carried at fair value |  | $ | — |  |  | $ | 640,696 |  |  | $ | 1,653,407 |  |  | $ | 2,294,103 |
Fair Value at December 31, 2020
(In Thousands) |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets: |  |  |  |  |  |  |  |
Residential whole loans, at fair value |  | $ | — |  |  | $ | — |  |  | $ | 1,216,902 |  |  | $ | 1,216,902 |
Securities, at fair value |  | — |  |  | 399,999 |  |  | — |  |  | 399,999 |
Total assets carried at fair value |  | $ | — |  |  | $ | 399,999 |  |  | $ | 1,216,902 |  |  | $ | 1,616,901 |
Liabilities: |  |  |  |  |  |  |  |
Agreements with non-mark-to-market collateral provisions |  | $ | — |  |  | $ | — |  |  | $ | 1,159,213 |  |  | $ | 1,159,213 |
Agreements with mark-to-market collateral provisions |  | — |  |  | 213,915 |  |  | 1,124,162 |  |  | 1,338,077 |
Securitized debt |  | — |  |  | 869,482 |  |  | — |  |  | 869,482 |
Total liabilities carried at fair value |  | $ | — |  |  | $ | 1,083,397 |  |  | $ | 2,283,375 |  |  | $ | 3,366,772 |
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents additional information for the three and six months ended June 30, 2021 and 2020 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:
|  | Residential Whole Loans, at Fair Value
|  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In Thousands) |  | 2021 (1) |  | 2020 |  | 2021 |  | 2020
Balance at beginning of period |  | $ | 1,207,997 |  |  | $ | 1,243,792 |  |  | $ | 1,216,902 |  |  | $ | 1,381,583 |
Purchases |  | 837,859 |  |  | 4,679 |  |  | 837,859 |  |  | 8,198 |
Originations and draws |  | 423 |  |  | — |  |  | 423 |  |  | — |
Changes in fair value recorded in Net gain on residential whole loans measured at fair value through earnings |  | 6,226 |  |  | 2,010 |  |  | 38,313 |  |  | (72,546) |
Repayments |  | (38,932) |  |  | (28,608) |  |  | (64,502) |  |  | (52,412) |
Sales and repurchases |  | 430 |  |  | (18,225) |  |  | 430 |  |  | (18,530) |
Transfer to REO |  | (10,423) |  |  | (2,667) |  |  | (25,845) |  |  | (45,312) |
Balance at end of period |  | $ | 2,003,580 |  |  | $ | 1,200,981 |  |  | $ | 2,003,580 |  |  | $ | 1,200,981 |
(1) Excluded from the table above are approximately $131.3 million of Residential whole loans, at fair value for which the closing of the purchase transaction had not occurred as of June 30, 2021. The following table presents additional information for the three and six months ended June 30, 2021 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
|  | Agreements with Non-mark-to-market Collateral Provisions
(In Thousands) |  | Three Months Ended June 30, 2021 |  | Six Months Ended June 30, 2021
Balance at beginning of period |  | $ | 1,041,283 |  |  | $ | 1,159,213 |
Issuances |  | — |  |  | — |
Payment of principal |  | (245,451) |  |  | (363,146) |
Changes in unrealized losses |  | (491) |  |  | (726) |
Balance at end of period |  | $ | 795,341 |  |  | $ | 795,341 |
The following table presents additional information for the three and six months ended June 30, 2021 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
|  | Agreements with Mark-to-market Collateral Provisions
(In Thousands) |  | Three Months Ended June 30, 2021 |  | Six Months Ended June 30, 2021
Balance at beginning of period |  | $ | 979,541 |  |  | $ | 1,124,162 |
Issuances |  | 299,650 |  |  | 391,647 |
Payment of principal |  | (421,125) |  |  | (657,743) |
Changes in unrealized losses |  | — |  |  | — |
Balance at end of period |  | $ | 858,066 |  |  | $ | 858,066 |
At June 30, 2020, the Company’s financing agreements with non-mark-to-market collateral provisions and the Company’s financing agreements with mark-to-market collateral provisions had just been issued and were therefore classified as Level 2 since their values were based on market transactions. However, market information for similar financings was not available at June 30, 2021 and the Company valued these financing instruments based on unobservable inputs. Fair Value Methodology for Level 3 Financial Instruments Residential Whole Loans, at Fair Value The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of June 30, 2021 and December 31, 2020:
|  | June 30, 2021
(Dollars in Thousands) |  | Fair Value (1) |  | Valuation Technique |  | Unobservable Input |  | Weighted Average (2) |  | Range
Purchased Non-Performing Loans |  | $ | 773,449 |  |  | Discounted cash flow |  | Discount rate |  | 3.5 | % |  | 2.5-11.8%
|  |  |  |  |  | Prepayment rate |  | 14.0 | % |  | 0.0-43.9%
|  |  |  |  |  | Default rate |  | 4.1 | % |  | 0.0-49.1%
|  |  |  |  |  | Loss severity |  | 12.0 | % |  | 0.0-100.0%
|  | $ | 394,736 |  |  | Liquidation model |  | Discount rate |  | 8.0 | % |  | 6.7-50.0%
|  |  |  |  |  | Annual change in home prices |  | 7.0 | % |  | 4.3-12.1%
|  |  |  |  |  | Liquidation timeline (in years) |  | 1.8 |  | 0.7-4.8
|  |  |  |  |  | Current value of underlying properties (3) |  | $ | 765 |  |  | $5-$3,704
Total |  | $ | 1,168,185 |  |  |  |  |  |  |  |  |
|  | December 31, 2020
(Dollars in Thousands) |  | Fair Value (1) |  | Valuation Technique |  | Unobservable Input |  | Weighted Average (2) |  | Range
Purchased Non-Performing Loans |  | $ | 789,576 |  |  | Discounted cash flow |  | Discount rate |  | 3.9 | % |  | 3.3-8.0%
|  |  |  |  |  | Prepayment rate |  | 5.4 | % |  | 0.0-17.6%
|  |  |  |  |  | Default rate |  | 4.1 | % |  | 0.0-47.7%
|  |  |  |  |  | Loss severity |  | 12.7 | % |  | 0.0-100.0%
|  | $ | 427,061 |  |  | Liquidation model |  | Discount rate |  | 8.1 | % |  | 6.7-50.0%
|  |  |  |  |  | Annual change in home prices |  | 3.6 | % |  | 1.8-6.5%
|  |  |  |  |  | Liquidation timeline (in years) |  | 1.8 |  | 0.8-4.8
|  |  |  |  |  | Current value of underlying properties (3) |  | $ | 729 |  |  | $12-$4,500
Total |  | $ | 1,216,637 |  |  |  |  |  |  |  |  |
(1) Excludes approximately $266,000 and $265,000 of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 2021 and December 31, 2020, respectively. (2) Amounts are weighted based on the fair value of the underlying loan. (3) The simple average value of the properties underlying residential whole loans held at fair value valued via a liquidation model was approximately $410,000 and $380,000 as of June 30, 2021 and December 31, 2020, respectively.
|  | June 30, 2021
(Dollars in Thousands) |  | Fair Value (1) |  | Valuation Technique |  | Unobservable Input |  | Weighted Average (2) |  | Range
Purchased Performing Loans |  | $ | 832,928 |  |  | Discounted cash flow |  | Discount rate |  | 3.1 | % |  | 0.8-7.3%
|  |  |  |  |  | Prepayment rate |  | 20.2 | % |  | 0.0-46.1%
|  |  |  |  |  | Default rate |  | 0.4 | % |  | 0.0-22.1%
|  |  |  |  |  | Loss severity |  | 9.2 | % |  | 0.0-10.0%
|  | $ | 2,249 |  |  | Liquidation model |  | Discount rate |  | 7.5 | % |  | 7.5-7.5%
|  |  |  |  |  | Annual change in home prices |  | 8.1 | % |  | 6.8-8.7%
|  |  |  |  |  | Liquidation timeline (in years) |  | 2.5 |  | 2.0-3.3
|  |  |  |  |  | Current value of underlying properties (3) |  | $ | 1,048 |  |  | $124-$1,750
Total |  | $ | 835,177 |  |  |  |  |  |  |  |  |
(1) Excludes approximately $131.3 million of loans for which management considers the purchase price continues to reflect the fair value of such loans at June 30, 2021. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans. Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a lower fair value measurement, whereas increases in the current or expected value of the underlying properties, in isolation, would result in a higher fair value measurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on the overall valuation. The following table presents the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2021 and December 31, 2020:
|  | June 30, 2021 |  | June 30, 2021 |  | December 31, 2020
Level in Fair Value Hierarchy | Carrying Value |  | Estimated Fair Value | Carrying Value |  | Estimated Fair Value
(In Thousands)
Financial Assets: |  |  |  |  |  |  |  |  |  |
Residential whole loans |  | 3 |  | $ | 5,550,979 |  |  | $ | 5,757,133 |  |  | $ | 5,325,401 |  |  | $ | 5,499,303 |
Securities, at fair value |  | 2 |  | 302,835 |  |  | 302,835 |  |  | 399,999 |  |  | 399,999 |
Cash and cash equivalents |  | 1 |  | 906,409 |  |  | 906,409 |  |  | 814,354 |  |  | 814,354 |
Restricted cash |  | 1 |  | 8,839 |  |  | 8,839 |  |  | 7,165 |  |  | 7,165 |
Financial Liabilities (1): |  |  |  |  |  |  |  |  |  |
Financing agreements with non-mark-to-market collateral provisions |  | 3 |  | 795,341 |  |  | 795,341 |  |  | 1,159,213 |  |  | 1,159,213 |
Financing agreements with mark-to-market collateral provisions |  | 3 |  | 1,182,900 |  |  | 1,183,012 |  |  | 1,124,162 |  |  | 1,124,162 |
Financing agreements with mark-to-market collateral provisions |  | 2 |  | 178,357 |  |  | 178,357 |  |  | 213,915 |  |  | 213,915 |
Securitized debt (2) |  | 2 |  | 2,046,381 |  |  | 2,055,295 |  |  | 1,514,509 |  |  | 1,519,567 |
Convertible senior notes |  | 2 |  | 225,812 |  |  | 236,053 |  |  | 225,177 |  |  | 228,287 |
Senior notes (3) |  | 1 |  | — |  |  | — |  |  | 100,000 |  |  | 100,031 |
(1)Carrying value of securitized debt, Convertible Senior Notes, Senior Notes and certain repurchase agreements is net of associated debt issuance costs. (2)Includes Securitized debt that is carried at amortized cost basis and fair value. (3)On January 6, 2021, the Company redeemed all of its outstanding Senior Notes (see Note 6). Other Assets Measured at Fair Value on a Nonrecurring Basis The Company holds REO at the lower of the current carrying amount or fair value less estimated selling costs. During the six months ended June 30, 2021 and 2020, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $38.4 million and $59.2 million, respectively, at the time of foreclosure. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.

X
- References No definition available. + Details
Name: | us-gaap_FairValueDisclosuresAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- 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=123874694&loc=d3e19207-110258 + Details
Name: | us-gaap_FairValueDisclosuresTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration