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Fair Value of Financial Instruments | 3 Months Ended
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Mar. 31, 2020
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 – The Company determines the fair value of the investment securities available for sale in our portfolio using a third-party pricing service or 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. The Company’s investment securities available for sale are valued based upon readily observable market parameters and are classified as Level 2 fair values.
b. | Multi-Family Loans Held in Securitization Trusts and Residential Loans Held in Consolidated SLST – Multi-family loans held in securitization trusts and residential loans held in Consolidated SLST are carried at fair value and classified as Level 3 fair values. In accordance with the practical expedient in ASC 810, the Company determines the fair value of multi-family loans held in securitization trusts and residential loans held in Consolidated SLST based on the fair value of its Multi-Family CDOs and SLST 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. | Residential Loans and Residential Loans Held in Securitization Trusts – The Company’s acquired residential loans are recorded at fair value and classified as Level 3 in the fair value hierarchy. The fair value for residential loans is determined using valuations obtained from a third party that specializes in providing valuations of residential loans. The valuation approach depends on whether the residential loan is considered performing, re-performing or non-performing at the date the valuation is performed.
For performing and re-performing loans, estimates of fair value are derived using a discounted cash flow model, where estimates of cash flows are determined from scheduled payments for each loan, adjusted using forecast prepayment rates, default rates and rates for loss upon default. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, expected liquidation costs and home price appreciation.
d. | Derivative Instruments – The Company’s derivative instruments as of December 31, 2019 were classified as Level 2 fair values and were measured using valuations reported by the clearing house, CME Clearing, through which these instruments were cleared. The derivatives were presented net of variation margin payments pledged or received.
e. | Investments in Unconsolidated Entities – Fair value for investments in unconsolidated entities is determined by (i) the valuation process for residential loans as described in c. above, (ii) the valuation process for preferred equity and mezzanine loan investments as described in f. below or (iii) provided by the general partner of the equity investment entity. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 in the fair value hierarchy.
f. | Preferred Equity and Mezzanine Loan Investments – Fair value for preferred equity and mezzanine loan investments 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. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 in the fair value hierarchy.
g. | Multi-Family and Residential Collateral Debt Obligations, at fair value – Multi-Family CDOs and SLST CDOs are classified as Level 3 fair values. The fair value of Multi-Family CDOs and SLST 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.
Management reviews all prices used in determining fair value to ensure they represent current market conditions. This review includes surveying similar market transactions and comparisons to interest pricing models as well as offerings of like securities by dealers. 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 March 31, 2020 and December 31, 2019, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):
| Measured at Fair Value on a Recurring Basis at
| March 31, 2020 |  | December 31, 2019
| Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets carried at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Investment securities available for sale, at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Agency RMBS | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 922,877 |  |  | $ | — |  |  | $ | 922,877 |
Agency CMBS | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 50,958 |  |  | — |  |  | 50,958 |
Non-Agency RMBS | — |  |  | 576,108 |  |  | — |  |  | 576,108 |  |  | — |  |  | 715,314 |  |  | — |  |  | 715,314 |
CMBS | — |  |  | 268,856 |  |  | — |  |  | 268,856 |  |  | — |  |  | 267,777 |  |  | — |  |  | 267,777 |
ABS | — |  |  | 42,344 |  |  | — |  |  | 42,344 |  |  | — |  |  | 49,214 |  |  | — |  |  | 49,214 |
Residential loans, at fair value: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential loans | — |  |  | — |  |  | 1,515,347 |  |  | 1,515,347 |  |  | — |  |  | — |  |  | 1,429,754 |  |  | 1,429,754 |
Consolidated SLST | — |  |  | — |  |  | 1,218,299 |  |  | 1,218,299 |  |  | — |  |  | — |  |  | 1,328,886 |  |  | 1,328,886 |
Residential loans held in securitization trusts | — |  |  | — |  |  | 42,984 |  |  | 42,984 |  |  | — |  |  | — |  |  | — |  |  | — |
Investments in unconsolidated entities | — |  |  | — |  |  | 211,965 |  |  | 211,965 |  |  | — |  |  | — |  |  | 83,882 |  |  | 83,882 |
Preferred equity and mezzanine loan investments | — |  |  | — |  |  | 179,292 |  |  | 179,292 |  |  | — |  |  | — |  |  | — |  |  | — |
Multi-family loans held in securitization trusts, at fair value | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 17,816,746 |  |  | 17,816,746 |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps (1) | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 15,878 |  |  | — |  |  | 15,878 |
Total | $ | — |  |  | $ | 887,308 |  |  | $ | 3,167,887 |  |  | $ | 4,055,195 |  |  | $ | — |  |  | $ | 2,022,018 |  |  | $ | 20,659,268 |  |  | $ | 22,681,286 |
Liabilities carried at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Multi-family collateralized debt obligations, at fair value | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 16,724,451 |  |  | $ | 16,724,451 |
Residential collateralized debt obligations, at fair value | — |  |  | — |  |  | 1,034,992 |  |  | 1,034,992 |  |  | — |  |  | — |  |  | 1,052,829 |  |  | 1,052,829 |
Total | $ | — |  |  | $ | — |  |  | $ | 1,034,992 |  |  | $ | 1,034,992 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,777,280 |  |  | $ | 17,777,280 |
(1) | All of the Company's interest rate swaps were cleared through a central clearing house. The Company exchanged variation margin for swaps based upon daily changes in fair value. Included derivative liabilities of $29.0 million netted against a variation margin of $44.8 million at December 31, 2019.
The following tables detail changes in valuation for the Level 3 assets for the three months ended March 31, 2020 and 2019, respectively (amounts in thousands): Level 3 Assets:
| Three Months Ended March 31, 2020
| Residential loans |  | Consolidated SLST |  | Residential loans held in securitization trusts |  | Investments in unconsolidated entities |  | Preferred equity and mezzanine loan investments |  | Multi-family loans held in securitization trusts |  | Total
Balance at beginning of period | $ | 1,429,754 |  |  | $ | 1,328,886 |  |  | $ | — |  |  | $ | 83,882 |  |  | $ | — |  |  | $ | 17,816,746 |  |  | $ | 20,659,268 |
Total (losses)/gains (realized/unrealized) |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings | (94,418 | ) |  | (89,087 | ) |  | (1,739 | ) |  | 494 |  |  | (209 | ) |  | 41,795 |  |  | (143,164 | )
Transfers in (1) | 164,035 |  |  | — |  |  | 46,572 |  |  | 107,477 |  |  | 182,465 |  |  | — |  |  | 500,549 |
Transfers out (2) (3) | (3,166 | ) |  | — |  |  | (349 | ) |  | — |  |  | — |  |  | (237,297 | ) |  | (240,812 | )
Contributions | — |  |  | — |  |  | — |  |  | 22,106 |  |  | 8,440 |  |  | — |  |  | 30,546 |
Paydowns/Distributions | (84,719 | ) |  | (21,500 | ) |  | (1,500 | ) |  | (1,994 | ) |  | (11,404 | ) |  | (239,796 | ) |  | (360,913 | )
Recovery of charge-off | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 35 |  |  | 35 |
Sales (3) | (49,960 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (17,381,483 | ) |  | (17,431,443 | )
Purchases | 153,821 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 153,821 |
Balance at the end of period | $ | 1,515,347 |  |  | $ | 1,218,299 |  |  | $ | 42,984 |  |  | $ | 211,965 |  |  | $ | 179,292 |  |  | $ | — |  |  | $ | 3,167,887 |
(1) | As of January 1, 2020, the Company has elected to account for all residential loans, residential loans held in securitization trusts, investments in unconsolidated entities and preferred equity and mezzanine loan investments using the fair value option (see Note 2).
(2) | Transfers out of Level 3 assets include the transfer of residential loans to real estate owned.
(3) | During the three months ended March 31, 2020, the Company sold first loss PO securities included in the Consolidated K-Series and, as a result, de-consolidated multi-family loans held in securitization trusts and transferred its remaining securities owned in the Consolidated K-Series to investment securities available for sale (see Notes 2 and 6).
| Three Months Ended March 31, 2019
| Residential loans |  | Investments in unconsolidated entities |  | Multi-family loans held in securitization trusts |  | CMBS held in securitization trusts |  | Total
Balance at beginning of period | $ | 737,523 |  |  | $ | 32,994 |  |  | $ | 11,679,847 |  |  | $ | 52,700 |  |  | $ | 12,503,064 |
Total gains/(losses) (realized/unrealized) |  |  |  |  |  |  |  |  |
Included in earnings | 9,945 |  |  | 3,892 |  |  | 259,764 |  |  | 17,734 |  |  | 291,335 |
Included in other comprehensive income (loss) | — |  |  | — |  |  | — |  |  | (13,665 | ) |  | (13,665 | )
Transfers in | — |  |  | — |  |  | — |  |  | — |  |  | — |
Transfers out | (182 | ) |  | — |  |  | — |  |  | — |  |  | (182 | )
Contributions | — |  |  | — |  |  | — |  |  | — |  |  | — |
Paydowns/Distributions | (24,930 | ) |  | (311 | ) |  | (37,485 | ) |  | — |  |  | (62,726 | )
Sales | (6,448 | ) |  | — |  |  | — |  |  | (56,769 | ) |  | (63,217 | )
Purchases (1) | 159,658 |  |  | — |  |  | 2,426,210 |  |  | — |  |  | 2,585,868 |
Balance at the end of period | $ | 875,566 |  |  | $ | 36,575 |  |  | $ | 14,328,336 |  |  | $ | — |  |  | $ | 15,240,477 |
(1) | During the three months ended March 31, 2019, 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 $2.4 billion during the three months ended March 31, 2019 (see Notes 2 and 6).
The following tables detail changes in valuation for the Level 3 liabilities for the three months ended March 31, 2020 and 2019, respectively (amounts in thousands): Level 3 Liabilities:
| Three Months Ended March 31, 2020
| Multi-Family CDOs |  | SLST CDOs |  | Total
Balance at beginning of period | $ | 16,724,451 |  |  | $ | 1,052,829 |  |  | $ | 17,777,280 |
Total losses/(gains) (realized/unrealized) |  |  |  |  |
Included in earnings | 35,018 |  |  | (18,855 | ) |  | 16,163 |
Paydowns | (147,376 | ) |  | (21,208 | ) |  | (168,584 | )
Sales (1) | (16,612,093 | ) |  | 22,226 |  |  | (16,589,867 | )
Transfers out | — |  |  | — |  |  | — |
Balance at the end of period | $ | — |  |  | $ | 1,034,992 |  |  | $ | 1,034,992 |
(1) | During the three months ended March 31, 2020, the Company sold first loss PO securities included in the Consolidated K-Series and, as a result, de-consolidated the Multi-Family CDOs (see Notes 2 and 6). Also includes the Company's net sales of senior securities issued by Consolidated SLST during the three months ended March 31, 2020 (see Note 4).
| Three Months Ended March 31, 2019
| Multi-Family CDOs
Balance at beginning of period | $ | 11,022,248 |
Total losses (realized/unrealized) |
Included in earnings | 237,789 |
Purchases (1) | 2,324,639 |
Paydowns | (37,481 | )
Balance at the end of period | $ | 13,547,195 |
(1) | During the three months ended March 31, 2019, 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 liabilities of these securitizations in the amount of $2.3 billion during the three months ended March 31, 2019 (see Notes 2 and 6).
The following table discloses quantitative information regarding the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value (dollar amounts in thousands, except input values):
March 31, 2020 |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Weighted Average |  | Range
Assets |  |  |  |  |  |  |  |  |  |  |  |
Residential loans, at fair value: |  |  |  |  |  |  |  |  |  |  |  |
Residential loans and residential loans held in securitization trusts |  | $1,390,197 |  | Discounted cash flow |  | Lifetime CPR |  | 9.6% |  | — | - | 55.3%
|  |  |  |  |  | Lifetime CDR |  | 1.5% |  | — | - | 23.0%
|  |  |  |  |  | Loss severity |  | 16.4% |  | — | - | 100.0%
|  |  |  |  |  | Yield |  | 6.1% |  | 2.8% | - | 17.0%
|  | $168,134 |  | Liquidation model |  | Annual home price appreciation |  | 0.2% |  | — | - | 5.6%
|  |  |  |  |  | Liquidation timeline (months) |  | 28 |  | 1 | - | 57
|  |  |  |  |  | Property value |  | $482,658 |  | $2,500 | - | $3,400,000
|  |  |  |  |  | Yield |  | 7.5% |  | 7.5% | - | 15.0%
Residential loans held in Consolidated SLST (1) |  | $1,218,299 |  |  |  | Liability price |  | N/A |  |  |  |
Total |  | $2,776,630 |  |  |  |  |  |  |  |  |  |
Investments in unconsolidated entities |  | $126,865 |  | Discounted cash flow |  | Discount rate |  | 12.4% |  | 12.0% | - | 13.5%
|  |  |  |  |  | Months to assumed redemption |  | 46 |  | 21 | - | 59
|  |  |  |  |  | Loss severity |  | — |  |  |  |
Preferred equity and mezzanine loan investments |  | $179,292 |  | Discounted cash flow |  | Discount rate |  | 12.2% |  | 11.5% | - | 13.5%
|  |  |  |  |  | Months to assumed redemption |  | 48 |  | 10 | - | 189
|  |  |  |  |  | Loss severity |  | — |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Residential collateralized debt obligations, at fair value |  |  |  |  |  |  |  |  |  |  |  |
SLST CDOs (1) |  | $1,034,992 |  | Discounted cash flow |  | Yield |  | 4.0% |  | 2.7% | - | 14.9%
|  |  |  |  |  | Collateral prepayment rate |  | 5.7% |  | 3.8% | - | 6.2%
|  |  |  |  |  | Collateral default rate |  | 2.0% |  | — | - | 2.7%
|  |  |  |  |  | Loss severity |  | 22.2% |  | 0.1% | - | 24.4%
(1) | In accordance with the practical expedient in ASC 810, the Company determines the fair value of the residential loans held in Consolidated SLST based on the fair value of SLST CDOs, including securities we own, as the fair value of these instruments is more observable. At March 31, 2020, the fair value of securities we owned in Consolidated SLST was $182.8 million.
The following table details the changes in unrealized gains (losses) included in earnings for the three months ended March 31, 2020 and 2019 for our Level 3 assets and liabilities held as of March 31, 2020 and 2019, respectively (dollar amounts in thousands):
| Three Months Ended March 31,
| 2020 |  | 2019
Assets |  |  |
Residential loans, at fair value |  |  |
Residential loans (1) | $ | (76,295 | ) |  | $ | 9,337 |
Consolidated SLST (1) | (88,100 | ) |  | — |
Residential loans held in securitization trusts (1) | (1,700 | ) |  | — |
Investments in unconsolidated entities (2) | (4,023 | ) |  | 3,661 |
Preferred equity and mezzanine loan investments (1) | (5,559 | ) |  | — |
Multi-family loans held in securitization trusts, at fair value (1) | — |  |  | 274,683 |
Liabilities |  |  |
Multi-family collateralized debt obligations, at fair value (1) | — |  |  | (265,273 | )
Residential collateralized debt obligations, at fair value (1) | 21,966 |  |  | — |
(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.
The following table presents assets measured at fair value on a non-recurring basis as of December 31, 2019, on the Company's condensed consolidated balance sheets (dollar amounts in thousands):
|  | December 31, 2019
|  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Residential loans held in securitization trusts – impaired loans, net |  | — |  |  | — |  |  | $ | 5,256 |  |  | $ | 5,256 |
The following table presents gains (losses) incurred for assets measured at fair value on a non-recurring basis for the three months ended March 31, 2019, on the Company’s condensed consolidated statements of operations (dollar amounts in thousands):
| Three Months Ended March 31, 2019
Residential loans held in securitization trusts – impaired loans, net | $ | (38 | )
Residential Loans Held in Securitization Trusts – Impaired Loans, net – Impaired residential loans held in securitization trusts, net were recorded at amortized cost less specific loan loss reserves. Impaired loan value was 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. The following table presents the carrying value and estimated fair value of the Company’s financial instruments at March 31, 2020 and December 31, 2019, respectively (dollar amounts in thousands):
|  |  | March 31, 2020 |  | December 31, 2019
| Fair Value Hierarchy Level |  | Carrying Value |  | Estimated Fair Value |  | Carrying Value |  | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | Level 1 |  | $ | 172,513 |  |  | $ | 172,513 |  |  | $ | 118,763 |  |  | $ | 118,763 |
Cash margin (1) | Level 1 |  | 169,484 |  |  | 169,484 |  |  | — |  |  | — |
Receivable for securities sold | Level 1 |  | 213,585 |  |  | 213,585 |  |  | — |  |  | — |
Investment securities available for sale, at fair value | Level 2 |  | 887,308 |  |  | 887,308 |  |  | 2,006,140 |  |  | 2,006,140 |
Residential loans, at fair value |  |  |  |  |  |  |  |  |
Residential loans | Level 3 |  | 1,515,347 |  |  | 1,515,347 |  |  | 1,429,754 |  |  | 1,429,754 |
Consolidated SLST | Level 3 |  | 1,218,299 |  |  | 1,218,299 |  |  | 1,328,886 |  |  | 1,328,886 |
Residential loans held in securitization trusts | Level 3 |  | 42,984 |  |  | 42,984 |  |  | — |  |  | — |
Residential loans, net | Level 3 |  | — |  |  | — |  |  | 202,756 |  |  | 208,471 |
Investments in unconsolidated entities | Level 3 |  | 211,965 |  |  | 211,965 |  |  | 189,965 |  |  | 191,359 |
Preferred equity and mezzanine loan investments | Level 3 |  | 179,292 |  |  | 179,292 |  |  | 180,045 |  |  | 182,465 |
Multi-family loans held in securitization trusts, at fair value | Level 3 |  | — |  |  | — |  |  | 17,816,746 |  |  | 17,816,746 |
Derivative assets | Level 2 |  | — |  |  | — |  |  | 15,878 |  |  | 15,878 |
Loans held for sale, net (1) | Level 3 |  | — |  |  | — |  |  | 2,406 |  |  | 2,482 |
Financial Liabilities: |  |  |  |  |  |  |  |  |
Repurchase agreements | Level 2 |  | 1,428,124 |  |  | 1,428,124 |  |  | 3,105,416 |  |  | 3,105,416 |
Residential collateralized debt obligations | Level 3 |  | 38,959 |  |  | 35,029 |  |  | 40,429 |  |  | 38,888 |
Multi-family collateralized debt obligations, at fair value | Level 3 |  | — |  |  | — |  |  | 16,724,451 |  |  | 16,724,451 |
Residential collateralized debt obligations, at fair value | Level 3 |  | 1,034,992 |  |  | 1,034,992 |  |  | 1,052,829 |  |  | 1,052,829 |
Subordinated debentures | Level 3 |  | 45,000 |  |  | 12,451 |  |  | 45,000 |  |  | 41,592 |
Convertible notes | Level 2 |  | 133,534 |  |  | 76,794 |  |  | 132,955 |  |  | 140,865 |
(1) | Included in receivables and other assets in the accompanying condensed consolidated balance sheets.
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. | Cash margin – Estimated fair value approximates the carrying value of such assets.
c. | Receivable for securities sold – Estimated fair value approximates the carrying value of such assets.
d. | Repurchase agreements – The fair value of these repurchase agreements approximates cost as they are short term in nature.
e. | Residential collateralized debt obligations – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparable obligations.
f. | Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate for market yields.
g. 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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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