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Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2021
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.Residential Loans Held in Consolidated SLST and Multi-Family Loans Held in the Consolidated K-Series –Residential loans held in Consolidated SLST and multi-family loans held in the Consolidated K-Series 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 residential loans held in Consolidated SLST and multi-family loans held in the Consolidated K-Series based on the fair value of the CDOs issued by these securitizations and its investment in these securitizations (eliminated in consolidation in accordance with GAAP), as the fair value of these instruments is more observable.

The investment securities (eliminated in consolidation in accordance with GAAP) that we own in these securitizations are generally illiquid and trade infrequently, as such they are classified as Level 3 in the fair value hierarchy. The fair valuation of these investment securities is determined 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 within the pool of loans and a discount rate. The discount rate used in determining fair value incorporates default rate, loss severity, prepayment rate and current market interest rates. Significant increases or decreases in these inputs would result in a significantly lower or higher fair value measurement.

b.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. Estimated cash flows for both performing and non-performing loans are discounted at yields considered appropriate to arrive at a reasonable exit price for the asset. Indications of loan value such as actual trades, bids, offers and generic market color may be used in determining the appropriate discount yield.

c.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 estimated 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.
d.Investment Securities Available for Sale – The Company determines the fair value of all of its investment securities available for sale based on discounted cash flows utilizing an internal pricing model. The methodology considers the characteristics of the particular security and its underlying collateral, which are observable inputs. These inputs include, but are not limited to, delinquency status, coupon, loan-to-value ("LTV"), historical performance, periodic and life caps, collateral type, rate reset period, seasoning, prepayment speeds and credit enhancement levels. The Company also considers several observable market data points, including prices obtained from third-party pricing services or dealers who make markets in similar financial instruments, trading activity, and dialogue with market participants. Third-party pricing services typically incorporate commonly used market pricing methods, trading activity observed in the marketplace and other data inputs similar to those used in the Company's internal pricing model. The Company has established thresholds to compare internally generated prices with independent third-party prices and any differences that exceed the thresholds are reviewed both internally and with the third-party pricing service. The Company reconciles and resolves all pricing differences in excess of the thresholds before a final price is established. The Company’s investment securities available for sale are valued based upon readily observable market parameters and are classified as Level 2 fair values.

e.Equity Investments – Fair value for equity investments is determined (i) by the valuation process for preferred equity and mezzanine loan investments as described in c. above, (ii) using a multiple of earnings before taxes, depreciation and amortization of the entity or (iii) using the net asset value ("NAV") of the equity investment entity as a practical expedient. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 in the fair value hierarchy.

f.Derivative Instruments – The Company’s derivative instruments 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 are presented net of variation margin payments pledged or received. The Company had no outstanding derivatives as of December 31, 2021 and 2020.

g.Collateralized Debt Obligations – CDOs issued by Consolidated SLST and the Consolidated K-Series are classified as Level 3 fair values for which fair value is determined by considering several market data points, including prices obtained from third-party pricing services or dealers who make markets in similar financial instruments. The third-party pricing service or dealers 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. They will also consider contractual cash payments and yields expected by market participants.

Refer to a. above for a description of the fair valuation of CDOs issued by Consolidated SLST and the Consolidated K-Series that are eliminated in consolidation.

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 December 31, 2021 and 2020, respectively, on the Company’s consolidated balance sheets (dollar amounts in thousands):
Measured at Fair Value on a Recurring Basis at
December 31, 2021December 31, 2020
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets carried at fair value
Residential loans:
Residential loans$— $— $1,703,290 $1,703,290 $— $— $1,090,930 $1,090,930 
Consolidated SLST— — 1,070,882 1,070,882 — — 1,266,785 1,266,785 
Residential loans held in securitization trusts— — 801,429 801,429 — — 691,451 691,451 
Multi-family loans— — 120,021 120,021 — — 163,593 163,593 
Investment securities available for sale:
Agency RMBS— — — — — 139,395 — 139,395 
Non-Agency RMBS
— 128,019 — 128,019 — 355,666 — 355,666 
CMBS— 33,146 — 33,146 — 186,440 — 186,440 
ABS— 39,679 — 39,679 — 43,225 — 43,225 
Equity investments— — 239,631 239,631 — — 259,095 259,095 
Total$— $200,844 $3,935,253 $4,136,097 $— $724,726 $3,471,854 $4,196,580 
Liabilities carried at fair value
        
Consolidated SLST CDOs$— $— $839,419 $839,419 $— $— $1,054,335 $1,054,335 
Total$— $— $839,419 $839,419 $— $— $1,054,335 $1,054,335 
The following tables detail changes in valuation for the Level 3 assets for the years ended December 31, 2021, 2020, and 2019, respectively (dollar amounts in thousands):

Level 3 Assets:
 Year Ended December 31, 2021
Residential loans
 Residential loansConsolidated SLSTResidential loans held in securitization trustsMulti-family loansEquity investmentsTotal
Balance at beginning of period$1,090,930 $1,266,785 $691,451 $163,593 $259,095 $3,471,854 
Total gains/(losses) (realized/unrealized)
Included in earnings
36,844 (35,953)43,001 18,795 36,729 99,416 
Transfers in — — — — — — 
Transfers out (1)
(2,080)— (2,053)— — (4,133)
Transfer to securitization trust, net (2)
(305,433)— 305,433 — — — 
Funding/Contributions— — — 37,678 107,465 145,143 
Paydowns/Distributions(618,790)(159,950)(239,436)(100,045)(163,658)(1,281,879)
Recovery of charge-off— — — — — — 
Sales(74,751)— (2,376)— — (77,127)
Purchases1,576,570 — 5,409 — — 1,581,979 
Balance at the end of period$1,703,290 $1,070,882 $801,429 $120,021 $239,631 $3,935,253 

(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned.
(2)In May 2021, the Company completed a securitization of certain business purpose loans. In August 2021, the Company redeemed a residential loan securitization and completed a new residential loan securitization of certain performing, re-performing and non-performing residential loans (see Note 7 for further discussion of the Company's residential loan securitizations).
 Year Ended December 31, 2020
Residential loansMulti-family loans
 Residential loansConsolidated SLSTResidential loans held in securitization trustsPreferred equity and mezzanine loan investmentsConsolidated K-SeriesEquity investmentsTotal
Balance at beginning of period$1,429,754 $1,328,886 $— $— $17,816,746 $83,882 $20,659,268 
Total (losses)/gains (realized/unrealized)
Included in earnings(9,240)27,898 31,402 20,454 41,795 26,670 138,979 
Transfers in (1)
164,279 — 46,572 182,465 — 107,477 500,793 
Transfers out (2) (3)
(6,017)— (2,492)(8,719)(237,297)— (254,525)
Transfer to securitization trust (4)
(651,911)— 651,911 — — — — 
Funding/Contributions— — — 14,164 — 66,336 80,500 
Paydowns/Distributions(308,600)(89,999)(35,942)(44,771)(239,796)(25,270)(744,378)
Recovery of charge-off— — — — 35 — 35 
Sales (3)
(96,892)— — — (17,381,483)— (17,478,375)
Purchases569,557 — — — — — 569,557 
Balance at the end of period$1,090,930 $1,266,785 $691,451 $163,593 $— $259,095 $3,471,854 

(1)As of January 1, 2020, the Company elected to account for all residential loans, residential loans held in securitization trusts, equity investments 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 and the consolidation of a preferred equity investment into the Company's consolidated financial statements (see Note 7).
(3)During the year ended December 31, 2020, the Company sold first loss PO securities included in the Consolidated K-Series and, as a result, de-consolidated the multi-family loans held in the Consolidated K-Series and transferred its remaining securities owned in the Consolidated K-Series to investment securities available for sale (see Note 7).
(4)During the year ended December 31, 2020, the Company completed two securitizations of certain performing, re-performing and non-performing residential loans (see Note 7).
 Year Ended December 31, 2019
Residential loans
 Residential loansConsolidated SLSTConsolidated K-SeriesCMBS held in re-securitization trustsEquity investmentsTotal
Balance at beginning of period$737,523 $— $11,679,847 $52,700 $32,994 $12,503,064 
Total gains/(losses) (realized/unrealized)
Included in earnings55,459 (445)533,094 17,734 15,100 620,942 
Included in other comprehensive income (loss)
— — — (13,665)— (13,665)
Transfers out (1)
(913)— — — — (913)
Funding/Contributions— — — — 50,000 50,000 
Paydowns/Distributions(171,909)(3,729)(992,912)— (14,212)(1,182,762)
Charge-off— — (3,257)— — (3,257)
Sales(19,814)— — (56,769)— (76,583)
Purchases (2)
829,408 1,333,060 6,599,974 — — 8,762,442 
Balance at the end of period$1,429,754 $1,328,886 $17,816,746 $— $83,882 $20,659,268 

(1)Transfers out of Level 3 assets include the transfer of residential loans to real estate owned.
(2)During the year ended December 31, 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. Also during the year ended December 31, 2019, the Company purchased first loss subordinated securities, IOs and senior RMBS securities issued from a securitization that it determined to consolidate as Consolidated SLST. As a result, the Company consolidated assets of the respective securitizations (see Note 7).

The following tables detail changes in valuation for the Level 3 liabilities for the years ended December 31, 2021, 2020 and 2019, respectively (dollar amounts in thousands):

Level 3 Liabilities:
Year Ended December 31, 2021
Consolidated SLST CDOs
Balance at beginning of period$1,054,335 
Total gains (realized/unrealized)
Included in earnings(54,154)
Paydowns(160,762)
Balance at the end of period$839,419 
Year Ended December 31, 2020
Collateralized debt obligations
Consolidated K-SeriesConsolidated SLSTTotal
Balance at beginning of period$16,724,451 $1,052,829 $17,777,280 
Total losses (realized/unrealized)
Included in earnings35,018 68,764 103,782 
Paydowns(147,376)(89,484)(236,860)
Sales (1)
(16,612,093)22,226 (16,589,867)
Balance at the end of period$— $1,054,335 $1,054,335 

(1)During the year ended December 31, 2020, the Company sold first loss PO securities included in the Consolidated K-Series, and, as a result, de-consolidated the Consolidated K-Series CDOs (see Note 7). Also includes the Company's net sales of senior securities issued by Consolidated SLST for the year ended December 31, 2020 (see Note 7).

Year Ended December 31, 2019
Collateralized debt obligations
Consolidated K-SeriesConsolidated SLSTTotal
Balance at beginning of period$11,022,248 $— $11,022,248 
Total losses (realized/unrealized)
Included in earnings443,796 27 443,823 
Purchases (1)
6,253,739 1,055,720 7,309,459 
Paydowns(992,075)(2,918)(994,993)
Charge-off(3,257)— (3,257)
Balance at the end of period$16,724,451 $1,052,829 $17,777,280 

(1)During the year ended December 31, 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. Also during the year ended December 31, 2019, the Company purchased first loss subordinated securities, IOs and senior RMBS securities issued from a securitization that it determined to consolidate as Consolidated SLST. As a result, the Company consolidated liabilities of the respective securitizations (see Note 7).
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):

December 31, 2021Fair ValueValuation Technique Unobservable InputWeighted Average Range
Assets
Residential loans:
Residential loans and residential loans held in securitization trusts (1)
$2,411,356Discounted cash flowLifetime CPR8.5%—-48.7%
Lifetime CDR0.5%—-29.0%
Loss severity9.2%—-100.0%
Yield4.6%2.3%-40.8%
$93,363Liquidation modelAnnual home price appreciation1.8%—-38.2%
Liquidation timeline (months)289-50
Property value$677,928$15,000-$6,500,000
Yield7.2%7.0%-26.1%
Consolidated SLST (3)
$1,070,882Liability priceN/A
Total$3,575,601
Multi-family loans (1)
$120,021Discounted cash flowDiscount rate11.3%10.0%-19.5%
Months to assumed redemption371-60
Loss severity—
Equity investments (1) (2)
$191,238Discounted cash flowDiscount rate12.4%11.0%-15.4%
Months to assumed redemption292-57
Loss severity—
Liabilities
Consolidated SLST CDOs (3) (4)
$839,419Discounted cash flowYield2.9%1.6%-17.0%
Collateral prepayment rate10.4%3.7%-13.0%
Collateral default rate1.9%—-8.1%
Loss severity16.4%—-23.0%
(1)Weighted average amounts are calculated based on the weighted average fair value of the assets.
(2)Equity investments does not include equity ownership interests in entities that invest in or originate residential properties and loans. The fair value of these investments is determined using a multiple of earnings before taxes, depreciation and amortization of the entity or the net asset value ("NAV") as a practical expedient.
(3)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 the CDOs issued by Consolidated SLST, including investment securities we own, as the fair value of these instruments is more observable. At December 31, 2021, the fair value of securities we own in Consolidated SLST amounts to $230.3 million.
(4)Weighted average yield calculated based on the weighted average fair value of the liabilities. Weighted average collateral prepayment rate, weighted average collateral default rate, and weighted average loss severity are calculated based on the weighted average unpaid balance of the liabilities.

The following table details the changes in unrealized gains (losses) included in earnings for the years ended December 31, 2021, 2020 and 2019, respectively, for our Level 3 assets and liabilities held as of December 31, 2021, 2020 and 2019, respectively (dollar amounts in thousands):
For the Years Ended December 31,
202120202019
Assets
Residential loans
Residential loans (1)
$31,222 $16,449 $44,470 
Consolidated SLST (1)
(31,128)33,479 300 
Residential loans held in securitization trust (1)
35,570 17,785 — 
Multi-family loans
Preferred equity and mezzanine loan investments (1)
1,924 (682)— 
Consolidated K-Series (1)
— — 586,993 
Equity investments (2)
3,990 256 5,374 
Liabilities
Collateralized debt obligations
Consolidated SLST (1)
$54,960 $(65,552)$(383)
Consolidated K-Series (1)
— — (563,031)

(1)Presented in unrealized gains (losses), net on the Company’s consolidated statements of operations.
(2)Presented in income from equity investments on the Company’s consolidated statements of operations.
The following table presents the carrying value and estimated fair value of the Company’s financial instruments at December 31, 2021 and 2020, respectively (dollar amounts in thousands):
  December 31, 2021December 31, 2020
 Fair Value
Hierarchy Level		Carrying
Value		Estimated
Fair Value		Carrying
Value		Estimated
Fair Value
Financial Assets:     
Cash and cash equivalentsLevel 1$289,602 $289,602 $293,183 $293,183 
Residential loansLevel 33,575,601 3,575,601 3,049,166 3,049,166 
Multi-family loansLevel 3120,021 120,021 163,593 163,593 
Investment securities available for saleLevel 2200,844 200,844 724,726 724,726 
Equity investmentsLevel 3239,631 239,631 259,095 259,095 
Financial Liabilities:     
Repurchase agreementsLevel 2554,259 554,259 405,531 405,531 
Collateralized debt obligations:
Residential loan securitizations at amortized cost, netLevel 3682,802 686,027 554,067 561,329 
Consolidated SLSTLevel 3839,419 839,419 1,054,335 1,054,335 
Non-Agency RMBS re-securitizationLevel 2— — 15,256 15,472 
Subordinated debenturesLevel 345,000 44,388 45,000 36,871 
Convertible notesLevel 2137,898 138,011 135,327 137,716 
Senior unsecured notesLevel 296,704 102,215 — — 
Mortgages payable on operating real estateLevel 3709,356 712,112 36,752 36,752 

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.Repurchase agreements – The fair value of these repurchase agreements approximates cost as they are short term in nature.

c.Residential loan securitizations at amortized cost, net and non-Agency RMBS re-securitization – The fair value of these CDOs is based on discounted cash flows as well as market pricing on comparable obligations.

d.Subordinated debentures – The fair value of these subordinated debentures is based on discounted cash flows using management’s estimate for market yields.

e.Convertible notes and senior unsecured notes – The fair value is based on quoted prices provided by dealers who make markets in similar financial instruments.

f.Mortgages payable on operating real estate – The fair value of consolidated variable-rate mortgages payable approximates the carrying value of such liabilities. The fair value of consolidated fixed-rate mortgages payable is estimated based upon discounted cash flows at current borrowing rates.