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Fair Value of Financial Instruments | 6 Months Ended
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Jun. 30, 2022
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 – 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 residential loans held in Consolidated SLST based on the fair value of the CDOs issued by the securitization and its investment in the securitization (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 the securitization 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 weighted multiples of origination volume and 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.Collateralized Debt Obligations – CDOs issued by Consolidated SLST 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 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 June 30, 2022 and December 31, 2021, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):
| Measured at Fair Value on a Recurring Basis at
| June 30, 2022 |  | December 31, 2021
| Level 1 |  | Level 2 |  | Level 3 |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |  | Total
Assets carried at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential loans | $ | — |  |  | $ | — |  |  | $ | 2,193,319 |  |  | $ | 2,193,319 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,703,290 |  |  | $ | 1,703,290 |
Consolidated SLST | — |  |  | — |  |  | 920,778 |  |  | 920,778 |  |  | — |  |  | — |  |  | 1,070,882 |  |  | 1,070,882 |
Residential loans held in securitization trusts | — |  |  | — |  |  | 1,215,095 |  |  | 1,215,095 |  |  | — |  |  | — |  |  | 801,429 |  |  | 801,429 |
Multi-family loans | — |  |  | — |  |  | 106,825 |  |  | 106,825 |  |  | — |  |  | — |  |  | 120,021 |  |  | 120,021 |
Investment securities available for sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-Agency RMBS | — |  |  | 74,822 |  |  | — |  |  | 74,822 |  |  | — |  |  | 128,019 |  |  | — |  |  | 128,019 |
CMBS | — |  |  | 30,096 |  |  | — |  |  | 30,096 |  |  | — |  |  | 33,146 |  |  | — |  |  | 33,146 |
ABS | — |  |  | 35,588 |  |  | — |  |  | 35,588 |  |  | — |  |  | 39,679 |  |  | — |  |  | 39,679 |
Equity investments | — |  |  | — |  |  | 223,651 |  |  | 223,651 |  |  | — |  |  | — |  |  | 239,631 |  |  | 239,631 |
Total | $ | — |  |  | $ | 140,506 |  |  | $ | 4,659,668 |  |  | $ | 4,800,174 |  |  | $ | — |  |  | $ | 200,844 |  |  | $ | 3,935,253 |  |  | $ | 4,136,097 |
Liabilities carried at fair value |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated SLST CDOs | $ | — |  |  | $ | — |  |  | $ | 710,233 |  |  | $ | 710,233 |  |  | $ | — |  |  | $ | — |  |  | $ | 839,419 |  |  | $ | 839,419 |
Total | $ | — |  |  | $ | — |  |  | $ | 710,233 |  |  | $ | 710,233 |  |  | $ | — |  |  | $ | — |  |  | $ | 839,419 |  |  | $ | 839,419 |
The following tables detail changes in valuation for the Level 3 assets for the six months ended June 30, 2022 and 2021, respectively (dollar amounts in thousands): Level 3 Assets:
| Six Months Ended June 30, 2022
| Residential loans |  |  |  |  |
| Residential loans |  | Consolidated SLST |  | Residential loans held in securitization trusts |  | Multi-family loans |  | Equity investments |  | Total
Balance at beginning of period | $ | 1,703,290 |  |  | $ | 1,070,882 |  |  | $ | 801,429 |  |  | $ | 120,021 |  |  | $ | 239,631 |  |  | $ | 3,935,253 |
Total (losses)/gains (realized/unrealized) |  |  |  |  |  |  |  |  |  |  |
Included in earnings | (52,976) |  |  | (79,292) |  |  | (65,935) |  |  | 6,298 |  |  | 15,633 |  |  | (176,272) |
Transfers out (1) | (875) |  |  | — |  |  | (980) |  |  | — |  |  | — |  |  | (1,855) |
Transfer to securitization trust, net (2) | (676,560) |  |  | — |  |  | 676,560 |  |  | — |  |  | — |  |  | — |
Funding/Contributions | — |  |  | — |  |  | — |  |  | — |  |  | 19,191 |  |  | 19,191 |
Paydowns/Distributions | (293,564) |  |  | (70,812) |  |  | (237,712) |  |  | (19,494) |  |  | (50,804) |  |  | (672,386) |
Sales | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Purchases | 1,514,004 |  |  | — |  |  | 41,733 |  |  | — |  |  | — |  |  | 1,555,737 |
Balance at the end of period | $ | 2,193,319 |  |  | $ | 920,778 |  |  | $ | 1,215,095 |  |  | $ | 106,825 |  |  | $ | 223,651 |  |  | $ | 4,659,668 |
(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned. (2)During the six months ended June 30, 2022, the Company completed two securitizations of certain performing, re-performing and business purpose loans (see Note 7 for further discussion of the Company's residential loan securitizations).
| Six Months Ended June 30, 2021
| Residential loans |  |  |  |  |
| Residential loans |  | Consolidated SLST |  | Residential loans held in securitization trusts |  | Multi-family loans |  | Equity investments |  | Total
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 | 14,494 |  |  | (21,788) |  |  | 21,105 |  |  | 10,853 |  |  | 14,006 |  |  | 38,670 |
Transfers out (1) | (1,259) |  |  | — |  |  | (1,415) |  |  | — |  |  | — |  |  | (2,674) |
Transfer to securitization trust, net (2) | (160,623) |  |  | — |  |  | 160,623 |  |  | — |  |  | — |  |  | — |
Funding/Contributions | — |  |  | — |  |  | — |  |  | — |  |  | 320 |  |  | 320 |
Paydowns/Distributions | (306,209) |  |  | (68,458) |  |  | (70,025) |  |  | (47,727) |  |  | (68,724) |  |  | (561,143) |
Sales | (15,568) |  |  | — |  |  | (2,376) |  |  | — |  |  | — |  |  | (17,944) |
Purchases | 605,076 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 605,076 |
Balance at the end of period | $ | 1,226,841 |  |  | $ | 1,176,539 |  |  | $ | 799,363 |  |  | $ | 126,719 |  |  | $ | 204,697 |  |  | $ | 3,534,159 |
(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned. (2)During the six months ended June 30, 2021, the Company completed a securitization of certain business purpose loans (see Note 7 for further discussion of the Company's residential loan securitizations). The following table details changes in valuation for the Level 3 liabilities for the six months ended June 30, 2022 and 2021, respectively (dollar amounts in thousands): Level 3 Liabilities:
| Six Months Ended June 30,
| 2022 |  | 2021
| Consolidated SLST CDOs
Balance at beginning of period | $ | 839,419 |  |  | $ | 1,054,335 |
Total gains (realized/unrealized) |  |  |
Included in earnings | (57,532) |  |  | (37,931) |
Paydowns | (71,654) |  |  | (68,314) |
Balance at the end of period | $ | 710,233 |  |  | $ | 948,090 |
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):
June 30, 2022 |  | Fair Value |  | Valuation Technique |  | Unobservable Input |  | Weighted Average |  | Range
Assets |  |  |  |  |  |  |  |  |  |  |  |
Residential loans: |  |  |  |  |  |  |  |  |  |  |  |
Residential loans and residential loans held in securitization trusts (1) |  | $3,318,357 |  | Discounted cash flow |  | Lifetime CPR |  | 4.8% |  | — | - | 46.2%
|  |  |  |  |  | Lifetime CDR |  | 0.4% |  | — | - | 21.5%
|  |  |  |  |  | Loss severity |  | 6.7% |  | — | - | 96.5%
|  |  |  |  |  | Yield |  | 6.0% |  | 4.6% | - | 64.9%
|  | $90,057 |  | Liquidation model |  | Annual home price appreciation |  | 1.0% |  | — | - | 27.8%
|  |  |  |  |  | Liquidation timeline (months) |  | 26 |  | 9 | - | 50
|  |  |  |  |  | Property value |  | $801,412 |  | $17,000 | - | $4,300,000
|  |  |  |  |  | Yield |  | 7.8% |  | 7.5% | - | 29.6%
Consolidated SLST (3) |  | $920,778 |  |  |  | Liability price |  | N/A |  |  |  |
Total |  | $4,329,192 |  |  |  |  |  |  |  |  |  |
Multi-family loans (1) |  | $106,825 |  | Discounted cash flow |  | Discount rate |  | 11.3% |  | 10.0% | - | 19.5%
|  |  |  |  |  | Months to assumed redemption |  | 36 |  | 3 | - | 57
|  |  |  |  |  | Loss severity |  | — |  |  |  |
Equity investments (1) (2) |  | $189,773 |  | Discounted cash flow |  | Discount rate |  | 12.5% |  | 11.0% | - | 15.4%
|  |  |  |  |  | Months to assumed redemption |  | 24 |  | 1 | - | 51
|  |  |  |  |  | Loss severity |  | — |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Consolidated SLST CDOs (3) (4) |  | $710,233 |  | Discounted cash flow |  | Yield |  | 4.6% |  | 3.7% | - | 10.0%
|  |  |  |  |  | Collateral prepayment rate |  | 8.0% |  | 3.0% | - | 9.7%
|  |  |  |  |  | Collateral default rate |  | 1.7% |  | — | - | 9.4%
|  |  |  |  |  | Loss severity |  | 16.6% |  | — | - | 19.5%
(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 weighted multiples of origination volume and 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 June 30, 2022, the fair value of investment securities we own in Consolidated SLST amounts to $208.6 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 three and six months ended June 30, 2022 and 2021, respectively, for our Level 3 assets and liabilities held as of June 30, 2022 and 2021, respectively (dollar amounts in thousands):
| Three Months Ended June 30, |  | Six Months Ended June 30,
| 2022 |  | 2021 |  | 2022 |  | 2021
Assets |  |  |  |  |  |  |
Residential loans: |  |  |  |  |  |  |
Residential loans (1) | $ | (29,826) |  |  | $ | 3,752 |  |  | $ | (55,058) |  |  | $ | 12,192 |
Consolidated SLST (1) | (10,798) |  |  | 6,471 |  |  | (77,443) |  |  | (18,872) |
Residential loans held in securitization trusts (1) | (33,262) |  |  | 6,030 |  |  | (64,729) |  |  | 18,611 |
Multi-family loans (1) | 181 |  |  | 460 |  |  | 358 |  |  | 665 |
Equity investments (2) | 3,139 |  |  | 805 |  |  | 3,593 |  |  | 927 |
Liabilities |  |  |  |  |  |  |
Consolidated SLST CDOs (1) | 6,523 |  |  | 3,322 |  |  | 57,889 |  |  | 37,890 |
(1)Presented in unrealized gains (losses), net on the Company's condensed consolidated statements of operations. (2)Presented in income from equity investments on the Company's condensed consolidated statements of operations. The following table presents the carrying value and estimated fair value of the Company’s financial instruments at June 30, 2022 and December 31, 2021, respectively (dollar amounts in thousands):
|  |  | June 30, 2022 |  | December 31, 2021
| Fair Value Hierarchy Level |  | Carrying Value |  | Estimated Fair Value |  | Carrying Value |  | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents | Level 1 |  | $ | 407,104 |  |  | $ | 407,104 |  |  | $ | 289,602 |  |  | $ | 289,602 |
Residential loans | Level 3 |  | 4,329,192 |  |  | 4,329,192 |  |  | 3,575,601 |  |  | 3,575,601 |
Multi-family loans | Level 3 |  | 106,825 |  |  | 106,825 |  |  | 120,021 |  |  | 120,021 |
Investment securities available for sale | Level 2 |  | 140,506 |  |  | 140,506 |  |  | 200,844 |  |  | 200,844 |
Equity investments | Level 3 |  | 223,651 |  |  | 223,651 |  |  | 239,631 |  |  | 239,631 |
Financial Liabilities: |  |  |  |  |  |  |  |  |
Repurchase agreements | Level 2 |  | 1,693,876 |  |  | 1,693,876 |  |  | 554,259 |  |  | 554,259 |
Collateralized debt obligations: |  |  |  |  |  |  |  |  |
Residential loan securitizations at amortized cost, net | Level 3 |  | 1,107,091 |  |  | 1,050,939 |  |  | 682,802 |  |  | 686,027 |
Consolidated SLST | Level 3 |  | 710,233 |  |  | 710,233 |  |  | 839,419 |  |  | 839,419 |
Subordinated debentures | Level 3 |  | 45,000 |  |  | 38,674 |  |  | 45,000 |  |  | 44,388 |
Convertible notes | Level 2 |  | — |  |  | — |  |  | 137,898 |  |  | 138,011 |
Senior unsecured notes | Level 2 |  | 97,039 |  |  | 89,489 |  |  | 96,704 |  |  | 102,215 |
Mortgages payable on real estate | Level 3 |  | 1,251,059 |  |  | 1,227,040 |  |  | 709,356 |  |  | 712,112 |
In addition to the methodology to determine the fair value of the Company’s financial assets and liabilities reported at fair value, 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 – 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 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.

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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 https://asc.fasb.org/extlink&oid=126976982&loc=d3e19207-110258 + Details
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