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.

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.

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 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 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 based on a third-party valuation model that calculates the present value of estimated future net servicing income, a Level 3 measurement.

Derivative financial instruments are measured at fair value using readily observable market inputs and the overall fair value measurement is classified as Level 2.

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 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.

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 carrying amounts of receivables due from servicers approximate fair value due to the short-term nature of these instruments, a Level 1 measurement.

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 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 approximately $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