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Fair Value of Financial Instruments | 9 Months Ended
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Sep. 30, 2017
Fair Value Disclosures [Abstract] |
Fair Value of Financial Instruments | Fair Value of Financial Instruments The Company has established and documented processes for determining fair values. Fair value is based upon quoted market prices, where available. If listed prices or quotes are not available, then fair value is based upon internally developed models that primarily use inputs that are market-based or independently-sourced market parameters, including interest rate yield curves. 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, as well as the general classification of such instruments pursuant to the valuation hierarchy.
a. | Investment Securities Available for Sale – Fair value for the investment securities in our portfolio, except the CMBS held in securitization trusts, are valued using a third-party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. Dealer valuations typically incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. If quoted prices for a security are not reasonably available from a dealer, the security will be classified as a Level 3 security and, as a result, management will determine fair value by modeling the security based on its specific characteristics and available market information. Management reviews all prices used in determining fair value to ensure they represent current market conditions. This review includes surveying similar market transactions, comparisons to interest pricing models as well as offerings of like securities by dealers. The Company's investment securities, except the CMBS held in securitization trusts, are valued based upon readily observable market parameters and are classified as Level 1 or 2 fair values.
The Company’s CMBS held in securitization trusts are comprised of securities for which there are not substantially similar securities that trade frequently. The Company classifies these securities as Level 3 fair values. Fair value of the Company’s CMBS investments held in securitization trusts is based on an internal valuation model that considers expected cash flows from the underlying loans and yields required by market participants. The significant unobservable inputs used in the measurement of these investments are projected losses of certain identified loans within the pool of loans and a discount rate. The discount rate used in determining fair value incorporates default rate, loss severity and current market interest rates. The discount rate ranges from 4.5% to 10.6%. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement.
b. | Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are carried at fair value as a result of a fair value election and classified as Level 3 fair values. The Company determines the fair value of multi-family loans held in securitization trusts based on the fair value of its Multi-Family CDOs and its retained interests from these securitizations (eliminated in consolidation in accordance with GAAP), as the fair value of these instruments is more observable.
c. | Derivative Instruments – The fair value of interest rate swaps, swaptions, options and TBAs are based on dealer quotes. The fair value of future contracts are based on exchange-traded prices. The Company’s derivatives are classified as Level 1 or Level 2 fair values.
d. | Multi-Family CDOs – Multi-Family CDOs are recorded at fair value and classified as Level 3 fair values. The fair value of Multi-Family CDOs is determined using a third party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. The dealers will consider contractual cash payments and yields expected by market participants. Dealers also incorporate common market pricing methods, including a spread measurement to the Treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security.
e. | Investment in Unconsolidated Entities – Fair value for investments in unconsolidated entities is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the unconsolidated entities and a discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 in the fair value hierarchy.
f. | Residential Mortgage Loans - Certain of the Company’s acquired residential mortgage loans, including distressed residential mortgage loans and second lien mortgages, are recorded at fair value and classified as Level 3 in the fair value hierarchy. The fair value for first lien mortgages is determined using prices obtained from a third party pricing service. The fair value is based upon cash flow models that primarily use market-based inputs such as current interest and discount rates but also include unobservable market data inputs such as prepayment speeds, default rates and loss severities. The fair value for second lien residential loans is based upon an internal cash flow model that considers current interest rates, prepayment speeds, default rates, and loss severities.
Any changes to the valuation methodology are reviewed by management to ensure the changes are appropriate. As markets and products develop and the pricing for certain products becomes more transparent, the Company continues to refine its valuation methodologies. The methods described above may produce a fair value calculation 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 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 reporting date. The Company uses inputs that are current as of each reporting date, which may include periods of market dislocation, during which time price transparency may be reduced. This condition could cause the Company’s financial instruments to be reclassified from Level 2 to Level 3 in future periods. The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):
| Measured at Fair Value on a Recurring Basis at
| September 30, 2017 |  | December 31, 2016
| Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets carried at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agency RMBS | $ | — |  |  | $ | 415,032 |  |  | $ | — |  |  | $ | 415,032 |  |  | $ | — |  |  | $ | 526,363 |  |  | $ | — |  |  | $ | 526,363 |
Non-Agency RMBS | — |  |  | 133,022 |  |  | — |  |  | 133,022 |  |  | — |  |  | 163,284 |  |  | — |  |  | 163,284 |
U.S. Treasury Securities | 2,924 |  |  | — |  |  | — |  |  | 2,924 |  |  | 2,887 |  |  | — |  |  | — |  |  | 2,887 |
CMBS | — |  |  | 76,560 |  |  | 46,623 |  |  | 123,183 |  |  | — |  |  | 82,545 |  |  | 43,897 |  |  | 126,442 |
Multi-family loans held in securitization trusts | — |  |  | — |  |  | 8,399,334 |  |  | 8,399,334 |  |  | — |  |  | — |  |  | 6,939,844 |  |  | 6,939,844 |
Residential mortgage loans, at fair value | — |  |  | — |  |  | 69,512 |  |  | 69,512 |  |  | — |  |  | — |  |  | 17,769 |  |  | 17,769 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
TBA Securities | — |  |  | 180,562 |  |  | — |  |  | 180,562 |  |  | — |  |  | 148,139 |  |  | — |  |  | 148,139 |
Interest rate swap futures | 1,228 |  |  | — |  |  | — |  |  | 1,228 |  |  | 444 |  |  | — |  |  | — |  |  | 444 |
Interest rate swaps | — |  |  | 18 |  |  | — |  |  | 18 |  |  | — |  |  | 108 |  |  | — |  |  | 108 |
Swaptions | — |  |  | 18 |  |  | — |  |  | 18 |  |  | — |  |  | 431 |  |  | — |  |  | 431 |
Eurodollar futures | 289 |  |  | — |  |  | — |  |  | 289 |  |  | 1,175 |  |  | — |  |  | — |  |  | 1,175 |
Investment in unconsolidated entities | — |  |  | — |  |  | 41,026 |  |  | 41,026 |  |  | — |  |  | — |  |  | 60,332 |  |  | 60,332 |
Total | $ | 4,441 |  |  | $ | 805,212 |  |  | $ | 8,556,495 |  |  | $ | 9,366,148 |  |  | $ | 4,506 |  |  | $ | 920,870 |  |  | $ | 7,061,842 |  |  | $ | 7,987,218 |
Liabilities carried at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Multi-family collateralized debt obligations | $ | — |  |  | $ | — |  |  | $ | 7,990,619 |  |  | $ | 7,990,619 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,624,896 |  |  | $ | 6,624,896 |
Derivative liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury futures | 193 |  |  | — |  |  | — |  |  | 193 |  |  | 107 |  |  | — |  |  | — |  |  | 107 |
Interest rate swaps | — |  |  | 274 |  |  | — |  |  | 274 |  |  | — |  |  | 391 |  |  | — |  |  | 391 |
Total | $ | 193 |  |  | $ | 274 |  |  | $ | 7,990,619 |  |  | $ | 7,991,086 |  |  | $ | 107 |  |  | $ | 391 |  |  | $ | 6,624,896 |  |  | $ | 6,625,394 |
The following table details changes in valuation for the Level 3 assets for the nine months ended September 30, 2017 and 2016, respectively (amounts in thousands): Level 3 Assets:
| Nine Months Ended September 30,
| 2017 |  | 2016
Balance at beginning of period | $ | 7,061,842 |  |  | $ | 7,214,587 |
Total gains/(losses) (realized/unrealized) |  |  |
Included in earnings (1) | 38,978 |  |  | 215,325 |
Included in other comprehensive income | 208 |  |  | 178 |
Purchases | 1,598,018 |  |  | 13,326 |
Transfers in (2) | — |  |  | 52,176 |
Transfers out (3) | — |  |  | (56,756 | )
Contributions | 1,300 |  |  | 2,000 |
Paydowns/Distributions | (139,751 | ) |  | (93,129 | )
Sales | (4,100 | ) |  | — |
Balance at the end of period | $ | 8,556,495 |  |  | $ | 7,340,018 |
(1) | Amounts included in interest income from multi-family loans held in securitization trusts, interest income from residential mortgage loans, realized gain on distressed residential mortgage loans, net gain on residential mortgage loans at fair value, unrealized gain on multi-family loans and debt held in securitization trusts, and other income.
(2) | Transfers into Level 3 include investments in unconsolidated entities held by RiverBanc and RBMI for which the Company accounts under the equity method of accounting with a fair value election. These transfers in are a result of the Company's acquisition of the outstanding membership interests in RiverBanc and RBMI that were not previously owned by the Company on May 16, 2016, which resulted in consolidation of these entities into the Company's financial statements (see Note 23).
(3) | Transfers out of Level 3 represent the Company's previously held membership interests in RBMI and RBDHC that were accounted for under the equity method of accounting with a fair value election. These transfers out are a result of the Company's acquisition of the outstanding membership interests in RBMI and RBDHC that were not previously owned by the Company on May 16, 2016, which resulted in consolidation of these entities into the Company's financial statements (see Note 23).
The following table details changes in valuation for the Level 3 liabilities for the nine months ended September 30, 2017 and 2016, respectively (amounts in thousands): Level 3 Liabilities:
| Nine Months Ended September 30,
| 2017 |  | 2016
Balance at beginning of period | $ | 6,624,896 |  |  | $ | 6,818,901 |
Total gains/(losses) (realized/unrealized) |  |  |
Included in earnings (1) | (1,389 | ) |  | 186,855 |
Purchases | 1,472,073 |  |  | — |
Paydowns | (104,961 | ) |  | (91,901 | )
Balance at the end of period | $ | 7,990,619 |  |  | $ | 6,913,855 |
(1) | Amounts included in interest expense on Multi-Family CDOs and unrealized gain on multi-family loans and debt held in securitization trusts.
The following table details the changes in unrealized gains (losses) included in earnings for our Level 3 multi-family loans and debt held in securitization trusts for the three and nine months ended September 30, 2017 and 2016, respectively (dollar amounts in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Change in unrealized (losses) gains – assets | $ | (19,767 | ) |  | $ | (17,722 | ) |  | $ | 56,995 |  |  | $ | 237,934 |
Change in unrealized gains (losses) – liabilities | 22,120 |  |  | 18,460 |  |  | (51,811 | ) |  | (235,594 | )
Net change in unrealized gains included in earnings for assets and liabilities | $ | 2,353 |  |  | $ | 738 |  |  | $ | 5,184 |  |  | $ | 2,340 |
The following table presents assets measured at fair value on a non-recurring basis as of September 30, 2017 and December 31, 2016, respectively, on the condensed consolidated balance sheets (dollar amounts in thousands):
| Assets Measured at Fair Value on a Non-Recurring Basis at
| September 30, 2017 |  | December 31, 2016
| Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Residential mortgage loans held in securitization trusts – impaired loans (net) | $ | — |  |  | $ | — |  |  | $ | 7,201 |  |  | $ | 7,201 |  |  | $ | — |  |  | $ | — |  |  | $ | 9,050 |  |  | $ | 9,050 |
Real estate owned held in residential securitization trusts | — |  |  | — |  |  | 742 |  |  | 742 |  |  | — |  |  | — |  |  | 150 |  |  | 150 |
The following table presents losses (gains) incurred for assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2017 and 2016, respectively, on the Company’s condensed consolidated statements of operations (dollar amounts in thousands):
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2017 |  | 2016 |  | 2017 |  | 2016
Residential mortgage loans held in securitization trusts – impaired loans (net) | $ | (199 | ) |  | $ | 102 |  |  | $ | 6 |  |  | $ | 534 |
Real estate owned held in residential securitization trusts | 297 |  |  | 46 |  |  | 303 |  |  | 23 |
Residential Mortgage Loans Held in Securitization Trusts – Impaired Loans (net) – Impaired residential mortgage loans held in securitization trusts are recorded at amortized cost less specific loan loss reserves. Impaired loan value is based on management’s estimate of the net realizable value taking into consideration local market conditions of the property, updated appraisal values of the property and estimated expenses required to remediate the impaired loan. Real Estate Owned Held in Residential Securitization Trusts – Real estate owned held in the residential securitization trusts are recorded at net realizable value. Any subsequent adjustment will result in the reduction in carrying value with the corresponding amount charged to earnings. Net realizable value is based on an estimate of disposal taking into consideration local market conditions of the property, updated appraisal values of the property and estimated expenses required to sell the property. The following table presents the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016, respectively (dollar amounts in thousands):
|  |  | September 30, 2017 |  | December 31, 2016
| Fair Value Hierarchy Level |  | Carrying Value |  | Estimated Fair Value |  | Carrying Value |  | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | Level 1 |  | $ | 101,904 |  |  | $ | 101,904 |  |  | $ | 83,554 |  |  | $ | 83,554 |
Investment securities available for sale (1) | Level 1, 2 or 3 |  | 674,161 |  |  | 674,161 |  |  | 818,976 |  |  | 818,976 |
Residential mortgage loans held in securitization trusts (net) | Level 3 |  | 79,875 |  |  | 77,412 |  |  | 95,144 |  |  | 88,718 |
Distressed residential mortgage loans, at carrying value (2) | Level 3 |  | 369,651 |  |  | 374,169 |  |  | 503,094 |  |  | 504,915 |
Residential mortgage loans, at fair value | Level 3 |  | 69,512 |  |  | 69,512 |  |  | 17,769 |  |  | 17,769 |
Multi-family loans held in securitization trusts | Level 3 |  | 8,399,334 |  |  | 8,399,334 |  |  | 6,939,844 |  |  | 6,939,844 |
Derivative assets | Level 1 or 2 |  | 182,115 |  |  | 182,115 |  |  | 150,296 |  |  | 150,296 |
Mortgage loans held for sale (net) (3) | Level 3 |  | 6,797 |  |  | 6,899 |  |  | 7,847 |  |  | 7,959 |
Mortgage loans held for investment (3) | Level 3 |  | 1,760 |  |  | 1,900 |  |  | 19,529 |  |  | 19,641 |
Mezzanine loan and preferred equity investments (4) | Level 3 |  | 122,578 |  |  | 124,436 |  |  | 100,150 |  |  | 101,408 |
Investment in unconsolidated entities (5) | Level 3 |  | 51,268 |  |  | 51,342 |  |  | 79,259 |  |  | 79,390 |
Receivable for securities sold | Level 1 |  | 1,261 |  |  | 1,261 |  |  | — |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |  |
Financing arrangements, portfolio investments | Level 2 |  | 608,304 |  |  | 608,304 |  |  | 773,142 |  |  | 773,142 |
Financing arrangements, residential mortgage loans | Level 2 |  | 160,562 |  |  | 160,562 |  |  | 192,419 |  |  | 192,419 |
Residential collateralized debt obligations | Level 3 |  | 76,867 |  |  | 72,428 |  |  | 91,663 |  |  | 85,568 |
Multi-family collateralized debt obligations | Level 3 |  | 7,990,619 |  |  | 7,990,619 |  |  | 6,624,896 |  |  | 6,624,896 |
Securitized debt | Level 3 |  | 98,371 |  |  | 105,768 |  |  | 158,867 |  |  | 163,884 |
Derivative liabilities | Level 1 or 2 |  | 467 |  |  | 467 |  |  | 498 |  |  | 498 |
Payable for securities purchased | Level 1 |  | 181,718 |  |  | 181,718 |  |  | 148,015 |  |  | 148,015 |
Subordinated debentures | Level 3 |  | 45,000 |  |  | 44,989 |  |  | 45,000 |  |  | 43,132 |
Convertible notes | Level 2 |  | 128,273 |  |  | 138,697 |  |  | — |  |  | — |
(1) | Includes $46.6 million and $43.9 million of investment securities for sale held in securitization trusts as of September 30, 2017 and December 31, 2016, respectively.
(2) | Includes distressed residential mortgage loans held in securitization trusts with a carrying value amounting to approximately $134.0 million and $195.3 million at September 30, 2017 and December 31, 2016, respectively, and distressed residential mortgage loans with a carrying value amounting to approximately $235.7 million and $307.7 million at September 30, 2017 and December 31, 2016, respectively.
(3) | Included in receivables and other assets in the accompanying condensed consolidated balance sheets.
(4) | Includes mezzanine loan and preferred equity investments accounted for as loans (see Note 9).
(5) | Includes investments in unconsolidated entities accounted for under the fair value option with a carrying value of $41.0 million and $60.3 million at September 30, 2017 and December 31, 2016, respectively (see Note 8).
In addition to the methodology to determine the fair value of the Company’s financial assets and liabilities reported at fair value on a recurring basis and non-recurring basis, as previously described, the following methods and assumptions were used by the Company in arriving at the fair value of the Company’s other financial instruments in the table immediately above:
a. | Cash and cash equivalents – Estimated fair value approximates the carrying value of such assets.
b. | Residential mortgage loans held in securitization trusts (net) – Residential mortgage loans held in the securitization trusts are recorded at amortized cost. Fair value is based on an internal valuation model that considers the aggregated characteristics of groups of loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed-rate period, life cap, periodic cap, underwriting standards, age and credit estimated using the estimated market prices for similar types of loans.
c. | Distressed residential mortgage loans (net) – Fair value is estimated using pricing models taking into consideration current interest rates, loan amount, payment status and property type, and forecasts of future interest rates, home prices and property values, prepayment speeds, default, loss severities, and actual purchases and sales of similar loans.
d. | Receivable for securities sold – Estimated fair value approximates the carrying value of such assets.
e. | Mortgage loans held for sale (net) – The fair value of mortgage loans held for sale (net) are estimated by the Company based on the price that would be received if the loans were sold as whole loans taking into consideration the aggregated characteristics of the loans such as, but not limited to, collateral type, index, interest rate, margin, length of fixed interest rate period, life time cap, periodic cap, underwriting standards, age and credit.
f. | Mezzanine loan and preferred equity investments – Estimated fair value is determined by both market comparable pricing and discounted cash flows. The discounted cash flows are based on the underlying contractual cash flows and estimated changes in market yields. The fair value also reflects consideration of changes in credit risk since the origination or time of initial investment.
g. | Financing arrangements – The fair value of these financing arrangements approximates cost as they are short term in nature.
h. | Residential collateralized debt obligations – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparable obligations.
i. | Securitized debt – The fair value of securitized debt is based on discounted cash flows using management’s estimate for market yields.
j. | Payable for securities purchased – Estimated fair value approximates the carrying value of such liabilities.
k. | Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate for market yields.
l. | Convertible notes – The fair value is based on quoted prices provided by dealers who make markets in similar financial instruments.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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