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Fair Value Measurements | 9 Months Ended
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Sep. 30, 2023
Fair Value Disclosures [Abstract] |
Fair Value Measurements | Note 18 — 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: o Level 1 - Valuation is based on quoted prices for identical instruments traded in active markets. o 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. o 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, Net, and Loans Held for Investment, at Fair Value The Company uses a third-party loan valuation model to estimate the fair value of its nonperforming mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s nonperforming mortgage loans are yield, voluntary prepayments, severity, and foreclosure frequency. The Company uses an in-house loan valuation model to estimate the fair value of its performing mortgage loans, a Level 3 measurement. The significant unobservable inputs used in the fair value measurement of the Company’s performing mortgage loans are discount rate, constant prepayment rate, and constant default rate. Significant changes in any of those inputs in isolation could result in a significant change to the mortgage loans’ fair value measurement. Collateral Dependent or Loans Individually Evaluated 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 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. Loans Held for Sale, at Fair Value The Company has elected to account for certain loans originated with the intent to sell at fair value (the FVO Loans held for sale) using FASB ASC Topic 825, Financial Instruments (ASC 825). The FVO loans held for sale are measured based a discounted cash flow model, or on the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value, including the value attributable to mortgage servicing and credit risk, and current commitments to purchase loans, a Level 2 measurement. 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. 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. Mortgage Servicing Rights The Company determined the fair values based on a third-party valuation model that calculates the present value of estimated future net servicing income, a Level 3 measurement. Derivative Instruments Derivative financial instruments are measured at fair value using readily observable market inputs and the overall fair value measurement is classified as Level 2. 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. Securitized Debt, Net, and Securitized Debt, at Fair Value The Company obtains the fair value estimates at instrument level from a third-party broker dealer based on trader input on benchmark securities, bond structure and collateral characteristics and performance and pricing factors such as yield, spread, average life, prepayment speeds, default rate and severity, a Level 2 measurement. Significant changes in any of those inputs in isolation could result in a significant change to securitized debt’s fair value 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. Receivables Due From Servicers The carrying amounts of receivables due from servicers approximate fair value due to the short-term nature of these instruments, a Level 1 measurement. Fair Value Disclosures The following tables present information on assets and liabilities measured and recorded at fair value as of September 30, 2023 and December 31, 2022, by level, in the fair value hierarchy (in thousands):
|  | Fair value measurements using |  |  | Total at |
September 30, 2023 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | fair value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale, at fair value |  | $ | — |  |  | $ | 19,536 |  |  | $ | — |  |  | $ | 19,536 |
Loans held for investment, at fair value |  |  | — |  |  |  | — |  |  |  | 951,990 |  |  |  | 951,990 |
Mortgage servicing rights |  |  | — |  |  |  | — |  |  |  | 9,786 |  |  |  | 9,786 |
Derivative assets |  |  | — |  |  |  | 1,261 |  |  |  | — |  |  |  | 1,261 |
Total recurring fair value measurements |  |  | — |  |  |  | 20,797 |  |  |  | 961,776 |  |  |  | 982,573 |
Nonrecurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Real estate owned, net |  |  | — |  |  |  | — |  |  |  | 29,299 |  |  |  | 29,299 |
Individually evaluated loans requiring specific allowance, net |  |  | — |  |  |  | — |  |  |  | 7,859 |  |  |  | 7,859 |
Total nonrecurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 37,158 |  |  |  | 37,158 |
Total assets |  | $ | — |  |  | $ | 20,797 |  |  | $ | 998,934 |  |  | $ | 1,019,731 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Securitized debt, at fair value |  | $ | — |  |  | $ | 669,139 |  |  | $ | — |  |  | $ | 669,139 |
Total recurring fair value measurements |  |  | — |  |  |  | 669,139 |  |  |  | — |  |  |  | 669,139 |
Total liabilities |  | $ | — |  |  | $ | 669,139 |  |  | $ | — |  |  | $ | 669,139 |
|  | Fair value measurements using |  |  | Total at |
December 31, 2022 |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | fair value |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Recurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, at fair value |  | $ | — |  |  | $ | — |  |  | $ | 276,095 |  |  | $ | 276,095 |
Mortgage servicing rights |  |  | — |  |  |  | — |  |  |  | 9,238 |  |  |  | 9,238 |
Total recurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 285,333 |  |  |  | 285,333 |
Nonrecurring fair value measurements: |  |  |  |  |  |  |  |  |  |  |  |
Real estate owned, net |  |  | — |  |  |  | — |  |  |  | 13,325 |  |  |  | 13,325 |
Individually evaluated loans requiring specific allowance, net |  |  | — |  |  |  | — |  |  |  | 11,466 |  |  |  | 11,466 |
Total nonrecurring fair value measurements |  |  | — |  |  |  | — |  |  |  | 24,791 |  |  |  | 24,791 |
Total assets |  | $ | — |  |  | $ | — |  |  | $ | 310,124 |  |  | $ | 310,124 |
The following table presents gains and losses recognized on assets measured on a nonrecurring basis for the three and nine months ended September 30, 2023 and 2022 (in thousands):
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |  |
Gain (loss) on assets measured on a nonrecurring basis |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |  |
Real estate held for sale, net |  | $ | (817 | ) |  | $ | (369 | ) |  | $ | (2,486 | ) |  | $ | (276 | ) |
Individually evaluated loans requiring specific allowance, net |  |  | 189 |  |  |  | 290 |  |  |  | 242 |  |  |  | 532 |  |
Total net (loss) gain |  | $ | (628 | ) |  | $ | (79 | ) |  | $ | (2,244 | ) |  | $ | 256 |  |
The following table presents the primary valuation techniques and unobservable inputs related to Level 3 assets that are recorded on a recurring and nonrecurring basis as of September 30, 2023 ($ in thousands):
|  | September 30, 2023
Asset category |  | Fair value |  |  | Primary valuation technique |  | Unobservable input |  | Range |  | Weighted average
Recurring: |  |  |  |  |  |  |  |  |  |  |
Loans held for investment, at fair value |  | $ | 951,990 |  |  | Discounted cash flow |  | Discount rate |  | 10.1% |  | 10.1%
|  |  |  |  |  |  | Prepayment rate |  | 0.7% to 30.0% |  | 19.0%
|  |  |  |  |  |  | Default rate |  | 0.0% to 1.7% |  | 0.4%
|  |  |  |  |  |  | Loss severity rate |  | 0.0% to 15.0% |  | 3.3%
|  |  |  |  |  |  | Recovery lag (performing loans, in months) |  | 17 |  | 17
Mortgage servicing rights |  |  | 9,786 |  |  | Discounted cash flow |  | Discount rate |  | 8.0% |  | 8.0%
|  |  |  |  |  |  | Prepayment rate |  | 5.8% to 12.5% |  | 6.4%
Nonrecurring: |  |  |  |  |  |  |  |  |  |  |
Individually evaluated loans requiring specific allowance, net |  | $ | 7,859 |  |  | Market comparables |  | Selling costs |  | 8.0% |  | 8.0%
Real estate owned, net |  |  | 29,299 |  |  | Market comparables |  | Selling costs |  | 8.0% |  | 8.0%
The following table presents the primary valuation techniques and unobservable inputs related to Level 3 assets as of December 31, 2022 ($ in thousands):
|  | December 31, 2022
Asset category |  | Fair value |  |  | Primary valuation technique |  | Unobservable input |  | Range |  | Weighted average
Individually evaluated loans requiring specific allowance, net |  | $ | 11,466 |  |  | Market comparables |  | Selling costs |  | 8.0% |  | 8.0%
Real estate owned, net |  |  | 13,325 |  |  | Market comparables |  | Selling costs |  | 8.0% |  | 8.0%
Loans held for investment, at fair value |  |  | 276,095 |  |  | Discounted cash flow |  | Discount rate |  | 8.35% to 9.35% |  | 8.9%
|  |  |  |  |  |  | Prepayment rate |  | 1.0% to 30.0% |  | 15.1%
|  |  |  |  |  |  | Default rate |  | 0.12% to 6.99% |  | 0.6%
|  |  |  |  |  |  | Loss severity rate |  | 0.00% to 18.45% |  | 3.5%
Mortgage servicing rights |  |  | 9,238 |  |  | Discounted cash flow |  | Discount rate |  | 8.0% to 12.0% |  | 8.1%
|  |  |  |  |  |  | Prepayment rate |  | 5.6% to 16.8% |  | 6.3%
The following is a roll-forward of loans held for investment 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, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Beginning balance |  | $ | 705,330 |  |  | $ | 1,351 |  |  | $ | 276,095 |  |  | $ | 1,359 |
Originations |  |  | 271,633 |  |  |  | — |  |  |  | 728,167 |  |  |  | — |
Loans liquidated |  |  | (22,527 | ) |  |  | (12 | ) |  |  | (44,012 | ) |  |  | (36 | )
Principal paydowns |  |  | (2,479 | ) |  |  | (416 | ) |  |  | (5,275 | ) |  |  | (416 | )
Total unrealized (loss) gain included in net income |  |  | (1,872 | ) |  |  | 3 |  |  |  | 7,895 |  |  |  | 19 |
Loans transferred to held for sale |  |  | — |  |  |  | — |  |  |  | (20,857 | ) |  |  | — |
REO transfer |  |  | (362 | ) |  |  | — |  |  |  | (362 | ) |  |  | — |
Loans repurchased |  |  | 2,267 |  |  |  | — |  |  |  | 10,339 |  |  |  | — |
Ending balance |  | $ | 951,990 |  |  | $ | 926 |  |  | $ | 951,990 |  |  | $ | 926 |
The following is a roll-forward of loans held for sale 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, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Beginning balance |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Originations |  |  | 18,948 |  |  |  | 16,119 |  |  |  | 38,036 |  |  |  | 16,119 |
Loans liquidated |  |  | — |  |  |  | — |  |  |  | (39,945 | ) |  |  | — |
Total unrealized gain included in net income |  |  | 588 |  |  |  | 450 |  |  |  | 588 |  |  |  | 450 |
Loans transferred from held for investment |  |  | — |  |  |  | — |  |  |  | 20,857 |  |  |  | — |
Ending balance |  | $ | 19,536 |  |  | $ | 16,569 |  |  | $ | 19,536 |  |  | $ | 16,569 |
The following is a roll-forward of mortgage servicing rights 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, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Beginning balance |  | $ | 9,445 |  |  | $ | 8,438 |  |  | $ | 9,238 |  |  | $ | 7,152 |
Additions |  |  | — |  |  |  | — |  |  |  | 250 |  |  |  | — |
Total unrealized gain included in net income |  |  | 341 |  |  |  | 1,430 |  |  |  | 298 |  |  |  | 2,716 |
Ending balance |  | $ | 9,786 |  |  | $ | 9,868 |  |  | $ | 9,786 |  |  | $ | 9,868 |
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, 2023 and December 31, 2022, financial assets and liabilities measured at fair value include loans held for investment at fair value, loans held for sale, mortgage servicing rights, derivative instruments, and securitized debt at fair value. Financial assets measured at the lower of cost or fair value include certain individually evaluated loans held for investment and REO, 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 approximatel y $7.9 million and $11.5 million as of September 30, 2023 and December 31, 2022, net of specific allowance for credit losses of approximately $0.9 million and $1.1 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, 2023 |
|  | Carrying |  |  |  |  |  |  |  |  |  |  |  | Estimated |
Asset category |  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |
Assets: |  |  |
Cash |  | $ | 29,393 |  |  | $ | 29,393 |  |  | $ | — |  |  | $ | — |  |  | $ | 29,393 |
Restricted cash |  |  | 17,703 |  |  |  | 17,703 |  |  |  | — |  |  |  | — |  |  |  | 17,703 |
Loans held for sale, at fair value |  |  | 19,536 |  |  |  | — |  |  |  | 19,536 |  |  |  | — |  |  |  | 19,536 |
Loans held for investment, net |  |  | 2,945,840 |  |  |  | — |  |  |  | — |  |  |  | 2,720,452 |  |  |  | 2,720,452 |
Loans held for investment, at fair value |  |  | 951,990 |  |  |  | — |  |  |  | — |  |  |  | 951,990 |  |  |  | 951,990 |
Accrued interest receivables |  |  | 24,756 |  |  |  | 24,756 |  |  |  | — |  |  |  | — |  |  |  | 24,756 |
Mortgage servicing rights |  |  | 9,786 |  |  |  | — |  |  |  | — |  |  |  | 9,786 |  |  |  | 9,786 |
Derivative assets |  |  | 1,261 |  |  |  | — |  |  |  | 1,261 |  |  |  | — |  |  |  | 1,261 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured financing, net |  | $ | 210,774 |  |  | $ | — |  |  | $ | — |  |  | $ | 211,655 |  |  | $ | 211,655 |
Warehouse repurchase facilities, net |  |  | 215,176 |  |  |  | — |  |  |  | 215,176 |  |  |  | — |  |  |  | 215,176 |
Securitized debt, net |  |  | 2,504,334 |  |  |  | — |  |  |  | 2,167,848 |  |  |  | — |  |  |  | 2,167,848 |
Securitized debt, at fair value |  |  | 669,139 |  |  |  | — |  |  |  | 669,139 |  |  |  | — |  |  |  | 669,139 |
Accrued interest payable |  |  | 14,627 |  |  |  | 14,627 |  |  |  | — |  |  |  | — |  |  |  | 14,627 |
|  | December 31, 2022 |
|  | Carrying |  |  |  |  |  |  |  |  |  |  |  | Estimated |
Asset category |  | Value |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |
Assets: |  |  |
Cash |  | $ | 45,248 |  |  | $ | 45,248 |  |  | $ | — |  |  | $ | — |  |  | $ | 45,248 |
Restricted cash |  |  | 16,808 |  |  |  | 16,808 |  |  |  | — |  |  |  | — |  |  |  | 16,808 |
Loans held for investment, net |  |  | 3,272,390 |  |  |  | — |  |  |  | — |  |  |  | 3,201,850 |  |  |  | 3,201,850 |
Loans held for investment, at fair value |  |  | 276,095 |  |  |  | — |  |  |  | — |  |  |  | 276,095 |  |  |  | 276,095 |
Accrued interest receivable |  |  | 20,463 |  |  |  | 20,463 |  |  |  | — |  |  |  | — |  |  |  | 20,463 |
Mortgage servicing rights |  |  | 9,238 |  |  |  | — |  |  |  | — |  |  |  | 9,238 |  |  |  | 9,238 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Secured financing, net |  | $ | 209,846 |  |  | $ | — |  |  | $ | — |  |  | $ | 211,854 |  |  | $ | 211,854 |
Warehouse repurchase facilities, net |  |  | 330,814 |  |  |  | — |  |  |  | 330,814 |  |  |  | — |  |  |  | 330,814 |
Securitized debt net |  |  | 2,736,290 |  |  |  | — |  |  |  | — |  |  |  | 2,522,010 |  |  |  | 2,522,010 |
Accrued interest payable |  |  | 16,369 |  |  |  | 16,369 |  |  |  | — |  |  |  | — |  |  |  | 16,369 |

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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 -Topic 820 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 2 -Publisher FASB -URI https://asc.fasb.org//1943274/2147482106/820-10-50-2 + Details
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