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:

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 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 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.

Nonaccrual loans held for investment are evaluated individually and are adjusted to the fair value of the collateral when the fair value of the collateral is below the carrying value of the loan. 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 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.

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 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.

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 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.

The fair value estimate of securities issued is determined by using estimated cash flows discounted at an appropriate market rate, a Level 3 measurement.

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 following tables present information on assets measured and recorded at fair value as of September 30, 2021 and December 31, 2020, by level, in the fair value hierarchy (in thousands):

	Fair value measurements using						Total at
September 30, 2021	Level 1		Level 2		Level 3		fair value
Recurring fair value measurements:
Loans held for investment, at fair value	$	—	$	—	$	1,360	$	1,360
Interest-only strips		—		—		16		16
Total recurring fair value measurements		—		—		1,376		1,376
Nonrecurring fair value measurements:
Real estate owned, net		—		—		13,113		13,113
Individually evaluated loans requiring specific allowance, net		—		—		19,096		19,096
Total nonrecurring fair value measurements		—		—		32,209		32,209
Total assets	$	—	$	—	$	33,585	$	33,585

	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 nine months ended September 30, 2021 and 2020 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
Gain (loss) on assets measured on a nonrecurring basis	2021			2020			2021			2020
Loans held for sale, net	$	15		$	1,307		$	17		$	345
Real estate held for sale, net		(384	)		(528	)		(1,619	)		(1,744	)
Individually evaluated loans requiring specific allowance, net		172			(1,109	)		893			(1,469	)
Total net loss	$	(197	)	$	(330	)	$	(709	)	$	(2,868	)

The following tables present the primary valuation techniques and unobservable inputs related to Level 3 assets as of September 30, 2021 and December 31, 2020 (dollars in thousands):

September 30, 2021

Asset category

Fair value

Primary

valuation

technique

Unobservable

input

Range

Weighted

average

Individually evaluated

loans requiring specific

allowance, net

19,096

Market comparables

Selling costs

8.0%

Real estate owned, net

13,113

Market comparables

Selling costs

8.0%

Loans held for investment,

at fair value

1,360

Discounted cash flow

Discount rate

6.3%

Collateral value (% of UPB)

94.0% to 124.0%

107.0%

Timing of resolution/payoff (months)

1 to 70

56.0

Prepayment rate

20.9% to 50.0%

Default rate

0.26% to 3.25%

1.0%

Loss severity rate

0.0% to 12.71%

3.0%

Interest-only strips

Discounted cash flow

Discount rate

15.0%

Timing of resolution/payoff (months)

0 to 12

1.0

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%

Real estate owned, net

15,767

Market comparables

Selling costs

8.0%

Loans held for investment,

at fair value

1,539

Discounted cash flow

Discount rate

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%

Default rate

5.0% to 15.0%

12.0%

Loss severity rate

1.0%

Loans held for sale

13,106

Discounted cash flow

Discount rate

6.2%

Timing of resolution/payoff (months)

31 to 34

32.0

Interest-only strips

238

Discounted cash flow

Discount rate

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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Beginning balance	$	1,370		$	2,956		$	1,539		$	2,960
Loans liquidated		—			—			(163	)		—
Principal paydowns		(10	)		(9	)		(34	)		(44	)
Total unrealized gain (loss) included in net income		—			380			18			411
Ending balance	$	1,360		$	3,327		$	1,360		$	3,327

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 September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Beginning balance	$	81		$	845		$	238		$	894
Interest-only strip additions		—			—			—			1,820
Interest-only strip write-offs		(65	)		(365	)		(222	)		(2,234	)
Total unrealized loss included in net income		—			(7	)		—			(7	)
Ending balance	$	16		$	473		$	16		$	473

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 September 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 $19.1 million and $19.3 million as of September 30, 2021 and December 31, 2020, net of specific allowance for credit losses of approximately $1.8 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):

	September 30, 2021
	Carrying								Estimated
Asset category	Value		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash	$	35,497	$	35,497	$	—	$	—	$	35,497
Restricted cash		9,586		9,586		—		—		9,586
Loans held for investment, net		2,295,697		—		—		2,437,824		2,437,824
Loans held for investment, at fair value		1,360		—		—		1,360		1,360
Accrued interest receivables		11,974		11,974		—		—		11,974
Interest-only strips		16		—		—		16		16

Liabilities:
Secured financing, net	$	163,449	$	—	$	—	$	171,938	$	171,938
Warehouse repurchase facilities, net		258,491		—		258,491		—		258,491
Securitizations, net		1,623,674		—		—		1,699,916		1,699,916
Accrued interest payable		5,577		5,577		—		—		5,577

	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