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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Note 13 — Fair Value Measurements Fair Value Determination ASC Topic 820, “Fair Value Measurement,” defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and requires disclosures about fair value measurements. Fair value is defined as the exchange 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 reflecting assumptions that a market participant would use when pricing an asset or liability. The hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
| • | Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets.
| • | Level 2 - Valuation is based on quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable and can be corroborated by market data.
| • | Level 3 - Valuation is based on significant unobservable inputs for determining the fair value of assets or liabilities. These significant unobservable inputs reflect assumptions that market participants may use in pricing the assets or liabilities.
Given the nature of some of the Company’s assets and liabilities, clearly determinable market-based valuation inputs are often not available; therefore, these assets and liabilities are valued using internal estimates. As subjectivity exists with respect to the valuation estimates used, the fair values disclosed may not equal prices that can ultimately be realized if the assets are sold or the liabilities are settled with third parties. Below is a description of the valuation methods for the assets and liabilities recorded at fair value on either a recurring or nonrecurring basis and for estimating fair value of financial instruments not recorded at fair value for disclosure purposes. While management believes the valuation methods are appropriate and consistent with other 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 measurement date. Cash and Cash Equivalents and Restricted Cash Cash and restricted cash are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and interest rates that approximate market, a Level 1 measurement. Loans Held for Investment Loans held for investment are recorded at their outstanding principal balance, net of purchase discounts, deferred loan origination fees/costs, and allowance for credit losses. The Company determined the fair value estimate of loans held for investment using a third-party loan valuation model, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment are discount rates, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs could result in a significant change to the loans’ fair value measurement. Collateral Dependent or Loans Individually Evaluated Nonaccrual loans held for investment are evaluated individually and are recorded at fair value on a nonrecurring basis. To the extent a loan is collateral dependent, the Company determines the allowance for credit losses based on the estimated fair value of the underlying collateral. The fair value of each loan’s collateral is generally based on appraisals or broker price opinions obtained, less estimated costs to sell, a Level 3 measurement. Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value, with fair value adjustments recorded on a nonrecurring basis. The Company uses a discounted cash flow model to estimate the fair value of loans held for sale, a Level 3 measurement. Interest-Only Strips The Company retains an interest-only strip on certain sales of held for sale loans. The interest-only strips are classified as trading securities under FASB ASC Topic 320, Investments-Debt Securities. The interest-only strips are measured based on their estimated fair values using a discounted cash flow model, a Level 3 measurement. Changes in fair value are reflected in income as they occur. Loans Held for Investment, at Fair Value The Company has elected to account for certain purchased distressed loans held for investment, at fair value (the FVO Loans) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans are measured based on their estimated fair values. Management identified all of these loans to be accounted for at estimated fair value at the instrument level. Changes in fair value are reflected in income as they occur. The Company uses a third-party loan valuation model to estimate the fair value at instrument level, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans held for investment, at fair value are discount rate, property values, prepayment speeds, loss severity, and default rates. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Real Estate Owned, Net (REO) Real estate owned, net is initially recorded at the property’s estimated fair value, based on appraisals or broker price opinions obtained, less estimated costs to sell, at the acquisition date, a Level 3 measurement. From time to time, nonrecurring fair value adjustments are made to real estate owned, net based on the current updated appraised value of the property, or management’s judgment and estimation of value based on recent market trends or negotiated sales prices with potential buyers. Secured Financing, Net (Corporate Debt) The Company determined the fair values estimate of the secured financing using the estimated cash flows discounted at an appropriate market rate, a Level 3 measurement. Warehouse Repurchase Facilities, Net Warehouse repurchase facilities are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities of one-year or less and interest rates that approximate market plus a spread, a Level 2 measurement. Securitizations, Net The fair value estimate of securities issued is determined by using estimated cash flows discounted at an appropriate market rate, a Level 3 measurement. Accrued Interest Receivable and Accrued Interest Payable The carrying amounts of accrued interest receivable and accrued interest payable approximate fair value due to the short-term nature of these instruments, a Level 1 measurement. The Company does not have any off-balance sheet financial instruments. Fair Value Disclosures The following tables present information on assets measured and recorded at fair value as of June 30, 2021 and December 31, 2020, by level, in the fair value hierarchy (in thousands):
|  | Fair value measurements using |  |  | Total at |
June 30, 2021 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | fair value |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, at fair value |  | $ | — |  |  | $ | — |  |  | $ | 1,370 |  |  | $ | 1,370 |
Interest-only strips |  |  | — |  |  |  | — |  |  |  | 81 |  |  |  | 81 |
Total recurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 1,451 |  |  |  | 1,451 |
Nonrecurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale, net |  |  | — |  |  |  | — |  |  |  | 1,280 |  |  |  | 1,280 |
Real estate owned, net |  |  | — |  |  |  | — |  |  |  | 15,743 |  |  |  | 15,743 |
Individually evaluated loans requiring specific allowance, net |  |  | — |  |  |  | — |  |  |  | 19,619 |  |  |  | 19,619 |
Total nonrecurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 36,642 |  |  |  | 36,642 |
Total assets |  | $ | — |  |  | $ | — |  |  | $ | 38,093 |  |  | $ | 38,093 |
|  | Fair value measurements using |  |  | Total at |
December 31, 2020 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | fair value |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, at fair value |  | $ | — |  |  | $ | — |  |  | $ | 1,539 |  |  | $ | 1,539 |
Interest-only strips |  |  | — |  |  |  | — |  |  |  | 238 |  |  |  | 238 |
Total recurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 1,777 |  |  |  | 1,777 |
Nonrecurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale, net |  |  | — |  |  |  | — |  |  |  | 13,106 |  |  |  | 13,106 |
Real estate owned, net |  |  | — |  |  |  | — |  |  |  | 15,767 |  |  |  | 15,767 |
Impaired loans requiring specific allowance, net |  |  | — |  |  |  | — |  |  |  | 19,340 |  |  |  | 19,340 |
Total nonrecurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 48,213 |  |  |  | 48,213 |
Total assets |  | $ | — |  |  | $ | — |  |  | $ | 49,990 |  |  | $ | 49,990 |
The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three and six months ended June 30, 2021 and 2020 (in thousands):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
Gain (loss) on assets measured on a nonrecurring basis |  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Loans held for sale, net |  | $ | (15 | ) |  | $ | (921 | ) |  | $ | 2 |  |  | $ | (961 | )
Real estate held for sale, net |  |  | (800 | ) |  |  | (648 | ) |  |  | (1,235 | ) |  |  | (1,216 | )
Individually evaluated loans requiring specific allowance, net |  |  | 1,029 |  |  |  | (431 | ) |  |  | 720 |  |  |  | (360 | )
Total net loss |  | $ | 214 |  |  | $ | (2,000 | ) |  | $ | (513 | ) |  | $ | (2,537 | )
The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of June 30, 2021 and December 31, 2020 (dollars in thousands):
|  | June 30, 2021 |
Asset category |  | Fair value |  |  | Primary valuation technique |  | Unobservable input |  | Range |  |  | Weighted average |
Individually evaluated loans requiring specific allowance, net |  | $ | 19,619 |  |  | Market comparables |  | Selling costs |  | 8.0% |  |  | 8.0% |
Real estate owned, net |  |  | 15,743 |  |  | Market comparables |  | Selling costs |  | 8.0% |  |  | 8.0% |
Loans held for investment, at fair value |  |  | 1,370 |  |  | Discounted cash flow |  | Discount rate |  | 6.2% |  |  | 6.2% |
|  |  |  |  |  |  |  | Collateral value (% of UPB) |  | 95.0% to 118.0% |  |  | 106.0% |
|  |  |  |  |  |  |  | Timing of resolution/payoff (months) |  | 1 to 36 |  |  |  | 33 |
|  |  |  |  |  |  |  | Prepayment rate |  | 21.8% to 50.0% |  |  | 21.8% to 50.0% |
|  |  |  |  |  |  |  | Default rate |  | 0.3% to 2.6% |  |  | 1.0% |
|  |  |  |  |  |  |  | Loss severity rate |  | 0.0% to 8.3% |  |  | 5.0% |
Loans held for sale |  |  | 1,280 |  |  | Discounted cash flow |  | Discount rate |  | 6.2% |  |  | 6.2% |
|  |  |  |  |  |  |  | Timing of resolution/payoff (months) |  |  | 3 |  |  |  | 3 |
Interest-only strips |  | 81 |  |  | Discounted cash flow |  | Discount rate |  | 15.0% |  |  | 15.0% |
|  |  |  |  |  |  |  | Timing of resolution/payoff (months) |  | 0 to 12 |  |  |  | 7 |
|  | December 31, 2020 |
Asset category |  | Fair value |  |  | Primary valuation technique |  | Unobservable input |  | Range |  |  | Weighted average |
Individually evaluated loans requiring specific allowance, net |  | $ | 19,340 |  |  | Market comparables |  | Selling costs |  | 8.0% |  |  | 8.0% |
Real estate owned, net |  |  | 15,767 |  |  | Market comparables |  | Selling costs |  | 8.0% |  |  | 8.0% |
Loans held for investment, at fair value |  |  | 1,539 |  |  | Discounted cash flow |  | Discount rate |  | 6.2% |  |  | 6.2% |
|  |  |  |  |  |  |  | Collateral value (% of UPB) |  | 94.0% to 104.0% |  |  | 100.0% |
|  |  |  |  |  |  |  | Timing of resolution/payoff (months) |  | 14 to 31 |  |  |  | 25.0 |
|  |  |  |  |  |  |  | Prepayment rate |  | 17.5% to 30.0% |  |  | 17.5% to 30.0% |
|  |  |  |  |  |  |  | Default rate |  | 5.0% to 15.0% |  |  | 12.0% |
|  |  |  |  |  |  |  | Loss severity rate |  | 1.0% |  |  | 1.0% |
Loans held for sale |  |  | 13,106 |  |  | Discounted cash flow |  | Discount rate |  | 6.2% |  |  | 6.2% |
|  |  |  |  |  |  |  | Timing of resolution/payoff (months) |  | 31 to 34 |  |  |  | 32.0 |
Interest-only strips |  | 238 |  |  | Discounted cash flow |  | Discount rate |  | 15.0% |  |  | 15.0% |
|  |  |  |  |  |  |  | Timing of resolution/payoff (months) |  | 0 to 12 |  |  |  | 1.5 |
The following is a rollforward of loans that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Beginning balance |  | $ | 1,364 |  |  | $ | 2,987 |  |  | $ | 1,539 |  |  | $ | 2,960 |
Loans liquidated |  |  | — |  |  |  | — |  |  |  | (163 | ) |  |  | — |
Principal paydowns |  |  | (14 | ) |  |  | (18 | ) |  |  | (24 | ) |  |  | (36 | )
Total unrealized gain (loss) included in net income |  |  | 20 |  |  |  | (13 | ) |  |  | 18 |  |  |  | 32 |
Ending balance |  | $ | 1,370 |  |  | $ | 2,956 |  |  | $ | 1,370 |  |  | $ | 2,956 |
The following is a rollforward of interest-only strips that are measured at estimated fair value on a recurring basis for the periods indicated (in thousands):
|  | Three Months Ended June 30, |  |  | Six Months Ended June 30, |
|  | 2021 |  |  | 2020 |  |  | 2021 |  |  | 2020 |
Beginning balance |  | $ | 125 |  |  | $ | 1,534 |  |  | $ | 238 |  |  | $ | 894 |
Interest-only strip additions |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 1,820 |
Interest-only strip write-offs |  |  | (44 | ) |  |  | (689 | ) |  |  | (157 | ) |  |  | (1,869 | )
Total unrealized loss included in net income |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Ending balance |  | $ | 81 |  |  | $ | 845 |  |  | $ | 81 |  |  | $ | 845 |
The Company estimates the fair value of certain financial instruments on a quarterly basis. These instruments are recorded at fair value through the use of a valuation allowance only if they are individually evaluated. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write-downs of individual assets. As of June 30, 2021 and December 31, 2020, the only financial assets measured at fair value, or lower of cost or fair value, were certain individually evaluated loans held for investment, loans held for sale, interest-only strips, REO and FVO loans, which were measured using unobservable inputs, including appraisals and broker price opinions on the values of the underlying collateral. Individually evaluated loans requiring an allowance were carried at approximately $19.6 million and $19.3 million as of June 30, 2021 and December 31, 2020, net of specific allowance for credit losses of approximately $1.9 million and $2.7 million, respectively. A financial instrument is cash, evidence of an ownership interest in an entity, or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable terms. The methods and assumptions used in estimating the fair values of the Company’s financial instruments are described above. The following tables present carrying amounts and estimated fair values of certain financial instruments as of the dates indicated (in thousands):
|  | June 30, 2021 |
|  | Carrying |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Estimated |
Asset category |  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |
Assets: |  |  |
Cash |  | $ | 27,741 |  |  | $ | 27,741 |  |  | $ | — |  |  | $ | — |  |  | $ | 27,741 |
Restricted cash |  |  | 7,921 |  |  |  | 7,921 |  |  |  | — |  |  |  | — |  |  |  | 7,921 |
Loans held for sale, net |  |  | 7,916 |  |  |  | — |  |  |  | — |  |  |  | 7,916 |  |  |  | 7,916 |
Loans held for investment, net |  |  | 2,083,753 |  |  |  | — |  |  |  | — |  |  |  | 2,186,434 |  |  |  | 2,186,434 |
Loans held for investment, at fair value |  |  | 1,370 |  |  |  | — |  |  |  | — |  |  |  | 1,370 |  |  |  | 1,370 |
Accrued interest receivables |  |  | 11,094 |  |  |  | 11,094 |  |  |  | — |  |  |  | — |  |  |  | 11,094 |
Interest-only strips |  |  | 81 |  |  |  | — |  |  |  | — |  |  |  | 81 |  |  |  | 81 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured financing, net |  | $ | 164,053 |  |  | $ | — |  |  | $ | — |  |  | $ | 173,031 |  |  | $ | 173,031 |
Warehouse repurchase facilities, net |  |  | 151,872 |  |  |  | — |  |  |  | 151,872 |  |  |  | — |  |  |  | 151,872 |
Securitizations, net |  |  | 1,558,163 |  |  |  | — |  |  |  | — |  |  |  | 1,642,834 |  |  |  | 1,642,834 |
Accrued interest payable |  |  | 5,506 |  |  |  | 5,506 |  |  |  | — |  |  |  | — |  |  |  | 5,506 |
|  | December 31, 2020 |
|  | Carrying |  |  |  |  |  |  |  |  |  |  |  |  |  |  | Estimated |
Asset category |  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |
Assets: |  |  |
Cash |  | $ | 13,273 |  |  | $ | 13,273 |  |  | $ | — |  |  | $ | — |  |  | $ | 13,273 |
Restricted cash |  |  | 7,020 |  |  |  | 7,020 |  |  |  | — |  |  |  | — |  |  |  | 7,020 |
Loans held for sale, net |  |  | 13,106 |  |  |  | — |  |  |  | — |  |  |  | 13,106 |  |  |  | 13,106 |
Loans held for investment, net |  |  | 1,948,089 |  |  |  | — |  |  |  | — |  |  |  | 2,003,301 |  |  |  | 2,003,301 |
Loans held for investment, at fair value |  |  | 1,539 |  |  |  | — |  |  |  | — |  |  |  | 1,539 |  |  |  | 1,539 |
Accrued interest receivable |  |  | 11,373 |  |  |  | 11,373 |  |  |  | — |  |  |  | — |  |  |  | 11,373 |
Interest-only strips |  | 238 |  |  |  | — |  |  |  | — |  |  | 238 |  |  |  | 238 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured financing, net |  | $ | 74,982 |  |  | $ | — |  |  | $ | — |  |  | $ | 78,000 |  |  | $ | 78,000 |
Warehouse repurchase facilities, net |  |  | 75,923 |  |  |  | — |  |  |  | 75,923 |  |  |  | — |  |  |  | 75,923 |
Securitizations, net |  |  | 1,579,019 |  |  |  | — |  |  |  | — |  |  |  | 1,616,222 |  |  |  | 1,616,222 |
Accrued interest payable |  |  | 5,503 |  |  |  | 5,503 |  |  |  | — |  |  |  | — |  |  |  | 5,503 |

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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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