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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2019

Schedule of Financial Instruments Measured at Fair Value on a Recurring Basis

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):



	Measured at Fair Value on a Recurring Basis at
	September 30, 2019								December 31, 2018
	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	$	—	$	955,838	$	—	$	955,838	$	—	$	1,037,730	$	—	$	1,037,730
Non-Agency RMBS	—		621,528		—		621,528		—		214,037		—		214,037
CMBS	—		278,398		—		278,398		—		207,785		52,700		260,485
ABS	—		48,254		—		48,254		—		—		—		—
Multi-family loans held in securitization trusts	—		—		15,863,264		15,863,264		—		—		11,679,847		11,679,847
Distressed and other residential mortgage loans, at fair value	—		—		1,116,128		1,116,128		—		—		737,523		737,523
Derivative assets:
Interest rate swaps ⁽¹⁾	—		20,673		—		20,673		—		10,263		—		10,263
Investments in unconsolidated entities	—		—		76,249		76,249		—		—		32,994		32,994
Total	$	—	$	1,924,691	$	17,055,641	$	18,980,332	$	—	$	1,469,815	$	12,503,064	$	13,972,879
Liabilities carried at fair value
Multi-family collateralized debt obligations	$	—	$	—	$	14,978,199	$	14,978,199	$	—	$	—	$	11,022,248	$	11,022,248
Total	$	—	$	—	$	14,978,199	$	14,978,199	$	—	$	—	$	11,022,248	$	11,022,248

⁽¹⁾

All of the Company's interest rate swaps outstanding are cleared through a central clearing house. The Company exchanges variation margin for swaps based upon daily changes in fair value. Includes derivative liabilities of $40.4 million netted against a variation margin of $61.1 million at September 30, 2019. Includes derivative assets of $1.8 million and variation margin of $8.5 million at December 31, 2018.

Schedule of Changes in Valuation of Level 3 Assets

The following tables detail changes in valuation for the Level 3 assets for the nine months ended September 30, 2019 and 2018, respectively (amounts in thousands):

Level 3 Assets:



	Nine Months Ended September 30, 2019
	Multi-family loans held in securitization trusts			Distressed and other residential mortgage loans			Investments in unconsolidated entities			CMBS held in securitization trusts			Total
Balance at beginning of period	$	11,679,847		$	737,523		$	32,994		$	52,700		$	12,503,064
Total gains/(losses) (realized/unrealized)
Included in earnings	760,132			44,913			7,169			17,734			829,948
Included in other comprehensive income (loss)	—			—			—			(13,665		)	(13,665		)
Transfers in	—			—			—			—			—
Transfers out	—			(437		)	—			—			(437		)
Contributions	—			—			50,000			—			50,000
Paydowns/Distributions	(368,811		)	(106,113		)	(13,914		)	—			(488,838		)
Charge-off	(3,510		)	—			—			—			(3,510		)
Sales	—			(19,814		)	—			(56,769		)	(76,583		)
Purchases ⁽¹⁾	3,795,606			460,056			—			—			4,255,662
Balance at the end of period	$	15,863,264		$	1,116,128		$	76,249		$	—		$	17,055,641

⁽¹⁾

During the nine months ended September 30, 2019, the Company purchased first loss PO securities, and certain IOs and senior or mezzanine CMBS securities issued from securitizations that it determined to consolidate and included in the Consolidated K-Series. As a result, the Company consolidated assets of these securitizations in the amount of $3.8 billion during the nine months ended September 30, 2019 (see Notes 2 and 6)

Schedule of Changes in Valuation of Level 3 Liabilities



	Nine Months Ended September 30, 2018
	Multi-family loans held in securitization trusts			Distressed and other residential mortgage loans			Investments in unconsolidated entities			CMBS held in securitization trusts		Total
Balance at beginning of period	$	9,657,421		$	87,153		$	42,823		$	47,922	$	9,835,319
Total (losses)/gains (realized/unrealized)
Included in earnings	(289,797		)	(1,361		)	7,930			2,928		(280,300		)
Included in other comprehensive income (loss)	—			—			—			901		901
Transfers in	—			—			—			—		—
Transfers out	—			—			—			—		—
Contributions	—			—			—			—		—
Paydowns/Distributions	(101,953		)	(15,456		)	(15,692		)	—		(133,101		)
Sales	—			(7,105		)	—			—		(7,105		)
Purchases ⁽¹⁾	805,163			118,679			—			—		923,842
Balance at the end of period	$	10,070,834		$	181,910		$	35,061		$	51,751	$	10,339,556

⁽¹⁾

During the nine months ended September 30, 2018, the Company purchased first loss PO securities and certain IOs and mezzanine CMBS securities issued from securitizations that it determined to consolidate and included in the Consolidated K-Series. As a result, the Company consolidated assets of these securitizations in the amount of $0.8 billion during the nine months ended September 30, 2018 (see Notes 2 and 6).

The following table details changes in valuation for the Level 3 liabilities (Multi-family CDOs) for the nine months ended September 30, 2019 and 2018, respectively (amounts in thousands):

Level 3 Liabilities:



	Nine Months Ended September 30,
	2019			2018
Balance at beginning of period	$	11,022,248		$	9,189,459
Total losses (gains) (realized/unrealized)
Included in earnings	694,043			(350,674		)
Purchases ⁽¹⁾	3,633,525			767,477
Paydowns	(368,107		)	(101,949		)
Charge-off	(3,510		)	—
Balance at the end of period	$	14,978,199		$	9,504,313

⁽¹⁾

During the nine months ended September 30, 2019 and 2018, the Company purchased PO securities and certain IOs and senior or mezzanine CMBS securities issued from securitizations that it determined to consolidate and included in the Consolidated K-Series. As a result, the Company consolidated liabilities of these securitizations in the amount of $3.6 billion and $0.8 billion during the nine months ended September 30, 2019 and 2018, respectively (see Notes 2 and 6)

Schedule of Changes in Unrealized Gains (Losses) Included in Earnings for Level 3 Assets and Liabilities

The following table details the changes in unrealized gains (losses) included in earnings for the three and nine months ended September 30, 2019 and 2018 for our Level 3 assets and liabilities held as of September 30, 2019 and 2018, respectively (dollar amounts in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Assets
Multi-family loans held in securitization trusts ⁽¹⁾	$	197,837		$	(33,153	)	$	802,625		$	(252,899	)
Investments in unconsolidated entities ⁽²⁾	449			4,092			1,295			5,359
Distressed and other residential mortgage loans, at fair value ⁽¹⁾	17,413			(629		)	37,079			(754		)

Liabilities
Multi-family debt held in securitization trusts ⁽¹⁾	(190,207		)	45,456			(780,378		)	284,766


⁽¹⁾	Presented in unrealized gains (losses), net on the Company's condensed consolidated statements of operations.

⁽²⁾

Presented in other income on the Company's condensed consolidated statements of operations.

Schedule of Assets Measured at Fair Value on a Non-recurring Basis

The following table presents assets measured at fair value on a non-recurring basis as of September 30, 2019 and December 31, 2018, respectively, on the Company's condensed consolidated balance sheets (dollar amounts in thousands):



	Assets Measured at Fair Value on a Non-Recurring Basis at
	September 30, 2019						December 31, 2018
	Level 1	Level 2	Level 3		Total		Level 1	Level 2	Level 3		Total
Residential mortgage loans held in securitization trusts – impaired loans, net	—	—	$	5,350	$	5,350	—	—	$	5,921	$	5,921

Schedule of Gains (Losses) Incurred for Assets Measured at Fair Value on a Non-recurring Basis

The following table presents gains (losses) incurred for assets measured at fair value on a non-recurring basis for the three and nine months ended September 30, 2019 and 2018, respectively, on the Company’s condensed consolidated statements of operations (dollar amounts in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019			2018
Residential mortgage loans held in securitization trusts – impaired loans, net	$	13	$	(17	)	$	(24	)	$	93

Schedule of Carrying Value and Estimated Fair Value of Financial Instruments

The following table presents a summary of the assets and liabilities of the Residential CDOs, the Consolidated K-Series, and KRVI of as of September 30, 2019 (dollar amounts in thousands). Intercompany balances have been eliminated for purposes of this presentation.



	Financing VIE		Other VIEs
	Residential Mortgage Loan Securitization		Consolidated K-Series		Other		Total
Cash and cash equivalents	$	—	$	—	$	656	$	656
Residential mortgage loans held in securitization trusts, net	45,672		—		—		45,672
Multi-family loans held in securitization trusts, at fair value	—		15,863,264		—		15,863,264
Receivables and other assets	1,274		51,950		14,098		67,322
Total assets	$	46,946	$	15,915,214	$	14,754	$	15,976,914

Residential collateralized debt obligations	$	42,119	$	—	$	—	$	42,119
Multi-family collateralized debt obligations, at fair value	—		14,978,199		—		14,978,199
Mortgages and notes payable in consolidated variable interest entities	—		—		935		935
Accrued expenses and other liabilities	35		50,783		120		50,938
Total liabilities	$	42,154	$	15,028,982	$	1,055	$	15,072,191

The following table presents a summary of the assets and liabilities of the Financing VIEs, the Consolidated K-Series, KRVI, and The Clusters as of December 31, 2018 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re- securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitization ⁽²⁾		Residential Mortgage Loan Securitization		Consolidated K-Series ⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	708	$	708
Investment securities available for sale, at fair value held in securitization trusts	52,700		—		—		—		—		52,700
Residential mortgage loans held in securitization trusts, net	—		—		56,795		—		—		56,795
Distressed residential mortgage loans held in securitization trusts, net	—		88,096		—		—		—		88,096
Multi-family loans held in securitization trusts, at fair value	1,107,071		—		—		10,572,776		—		11,679,847
Real estate held for sale in consolidated variable interest entities	—		—		—		—		29,704		29,704
Receivables and other assets	4,243		10,287		1,061		37,679		23,254		76,524
Total assets	$	1,164,014	$	98,383	$	57,856	$	10,610,455	$	53,666	$	11,984,374

Residential collateralized debt obligations	$	—	$	—	$	53,040	$	—	$	—	$	53,040
Multi-family collateralized debt obligations, at fair value	1,036,604		—		—		9,985,644		—		11,022,248
Securitized debt	30,121		12,214		—		—		—		42,335
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		31,227		31,227
Accrued expenses and other liabilities	4,228		444		26		37,022		1,166		42,886
Total liabilities	$	1,070,953	$	12,658	$	53,066	$	10,022,666	$	32,393	$	11,191,736

⁽¹⁾

The Company classified the multi-family CMBS issued by two securitizations and held by this Financing VIE as available for sale securities. The Financing VIE consolidated one securitization included in the Consolidated K-Series that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 6).

⁽²⁾

The Company engaged in this transaction for the purpose of financing certain distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of re-performing and, to a lesser extent, non-performing and other delinquent mortgage loans secured by first liens on one- to four- family properties. Balances as of December 31, 2018 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company held 5% of the Class A Notes issued as part of the securitization transaction, which were eliminated in consolidation.


⁽³⁾	Eight of the securitizations included in the Consolidated K-Series were not held in a Financing VIE as of December 31, 2018.

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2019 and December 31, 2018, respectively (dollar amounts in thousands):



		September 30, 2019				December 31, 2018
	Fair Value Hierarchy Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	65,906	$	65,906	$	103,724	$	103,724
Investment securities, available for sale	Level 2 or 3	1,904,018		1,904,018		1,512,252		1,512,252
Distressed and other residential mortgage loans, at fair value	Level 3	1,116,128		1,116,128		737,523		737,523
Distressed and other residential mortgage loans, net	Level 3	210,466		213,398		285,261		289,376
Investments in unconsolidated entities	Level 3	168,933		170,150		73,466		73,833
Preferred equity and mezzanine loan investments	Level 3	178,997		181,626		165,555		167,739
Multi-family loans held in securitization trusts	Level 3	15,863,264		15,863,264		11,679,847		11,679,847
Derivative assets	Level 2	20,673		20,673		10,263		10,263
Mortgage loans held for sale, net ⁽¹⁾	Level 3	2,437		2,525		3,414		3,584
Mortgage loans held for investment ⁽¹⁾	Level 3	—		—		1,580		1,580
Financial Liabilities:
Repurchase agreements	Level 2	2,559,880		2,559,880		2,131,505		2,131,505
Residential collateralized debt obligations	Level 3	42,119		40,534		53,040		50,031
Multi-family collateralized debt obligations	Level 3	14,978,199		14,978,199		11,022,248		11,022,248
Securitized debt	Level 3	—		—		42,335		45,030
Subordinated debentures	Level 3	45,000		41,273		45,000		44,897
Convertible notes	Level 2	132,395		140,557		130,762		135,689


⁽¹⁾	Included in receivables and other assets in the accompanying condensed consolidated balance sheets.