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Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2024
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
16. 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 respective securitizations and its investment in the 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 the 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.

The Company independently calculates valuations for residential loans based on discounted cash flows using an internal pricing model to validate all third party valuations of residential loans. 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.
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 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 or (ii) using weighted multiples of origination volume and earnings before taxes, depreciation and amortization of the entity and the net asset value ("NAV") 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.Derivative Instruments – The fair values of the Company's interest rate cap agreements are measured using models developed by either third-party pricing providers or the respective counterparty that use the market-standard methodology of discounting the future expected cash receipts which would occur if floating interest rates rise above the strike rate of the caps. The floating interest rates used in the calculation of projected receipts on the interest rate caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The inputs used in the valuation of interest rate caps fall within Level 2 of the fair value hierarchy.

The Company's interest rate swaps, credit default swaps and U.S. Treasury futures are classified as Level 2 fair values and are measured using valuations reported by the respective central clearing houses. The derivatives are presented net of variation margin payments pledged or received.

The Company's options are classified as Level 2 fair values and are measured using prices obtained from the counterparty.

The Company obtains additional third-party valuations for interest rate swaps, credit default swaps, U.S. Treasury futures, interest rate cap agreements and option contracts. The Company has established thresholds to compare different independent third-party prices and any differences that exceed the thresholds are reviewed both internally and with the third-party pricing services. The Company reconciles and resolves all pricing differences in excess of the thresholds before a final price is established.
g.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.

Fair value for CDOs issued by the Company's residential loan securitizations is determined by the valuation process for investment securities available for sale as described in d. above and, as such, are classified as Level 2 fair values.

h.Senior unsecured notes – The Company's 9.125% Senior Notes were issued at par in an underwritten public offering on June 28, 2024. Accordingly, the Company concluded that gross proceeds received from issuance approximate fair market value as of June 30, 2024. The Company’s 9.125% Senior Notes are classified as Level 2 fair values.

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, 2024 and December 31, 2023, respectively, on the Company’s condensed consolidated balance sheets (dollar amounts in thousands):
Measured at Fair Value on a Recurring Basis at
June 30, 2024December 31, 2023
Level 1Level 2Level 3TotalLevel 1Level 2Level 3Total
Assets carried at fair value
        
Residential loans:
Residential loans
$— $— $667,218 $667,218 $— $— $827,535 $827,535 
Consolidated SLST
— — 1,004,944 1,004,944 — — 754,860 754,860 
Residential loans held in securitization trusts
— — 1,831,029 1,831,029 — — 1,501,908 1,501,908 
Investment securities available for sale:        
Agency RMBS
— 2,613,842 — 2,613,842 — 1,989,324 — 1,989,324 
Non-Agency RMBS
— 58,237 — 58,237 — 24,493 — 24,493 
Multi-family loans— — 92,997 92,997 — — 95,792 95,792 
Equity investments
— — 142,915 142,915 — — 147,116 147,116 
Derivative assets:      
Interest rate caps (1) (2)
— 3,049 — 3,049 — 6,510 — 6,510 
Options (2)
— 779 — 779 — — — — 
Interest rate swaps (2) (4)
— — — — — — — — 
Assets of disposal group held for sale (3)
— 2,560 — 2,560 — 2,960 — 2,960 
Total
$— $2,678,467 $3,739,103 $6,417,570 $— $2,023,287 $3,327,211 $5,350,498 
Liabilities carried at fair value
        
CDOs:
Consolidated SLST
$— $— $844,032 $844,032 $— $— $593,737 $593,737 
Residential loan securitizations
— 733,079 — 733,079 — — — — 
Senior unsecured notes
— 60,000 — 60,000 — — — — 
Derivative liabilities:
U.S. Treasury futures (2) (4)
— — — — — — — — 
Credit default swaps (2) (4)
— — — — — — — — 
Total
$— $793,079 $844,032 $1,637,111 $— $— $593,737 $593,737 
    
(1)Excludes assets of disposal group held for sale (see Note 9).
(2)Included in other assets or other liabilities, respectively, in the condensed consolidated balance sheets.
(3)Includes interest rate caps classified as Level 2 instruments in the amount of $2.6 million and $3.0 million as of June 30, 2024 and December 31, 2023, respectively.
(4)All of the Company’s interest rate swaps, credit default swaps and U.S. Treasury futures outstanding are cleared through central clearing houses. The Company exchanges variation margin for the derivative instruments based upon daily changes in fair value. Includes derivative assets of $28.8 million netted against derivative liabilities of $17.2 million and a net variation margin of $11.6 million as of June 30, 2024. Includes derivative liabilities of $40.5 million netted against derivative assets of $13.1 million and a variation margin of $27.4 million as of December 31, 2023. See Note 10 for additional information.
The following tables detail changes in valuation for the Level 3 assets for the three and six months ended June 30, 2024 and 2023, respectively (dollar amounts in thousands):

Level 3 Assets:
Three Months Ended June 30, 2024
Residential loans
Residential loansConsolidated SLSTResidential loans held in securitization trustsMulti-family loansEquity investmentsTotal
Balance at beginning of period$640,729 $738,126 $1,724,250 $91,905 $137,943 $3,332,953 
Total gains/(losses) (realized/unrealized)
Included in earnings4,081 (2,551)(3,465)2,654 6,108 6,827 
Transfers out (1)
(22,821)— (884)— — (23,705)
Transfer to securitization trust, net (2)
(262,479)— 262,479 — — — 
Paydowns/Distributions(83,738)(15,688)(177,567)(1,562)(1,136)(279,691)
Sales(3,006)— — — — (3,006)
Purchases (3)
394,452 285,057 26,216 — — 705,725 
Balance at the end of period$667,218 $1,004,944 $1,831,029 $92,997 $142,915 $3,739,103 

(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned, single-family rental properties and other assets.
(2)During the three months ended June 30, 2024, the Company transferred certain residential loans into residential loan securitizations (see Note 7 for further discussion of the Company's residential loan securitizations).
(3)During the three months ended June 30, 2024, the Company purchased first loss subordinated securities issued from a securitization that it determined to consolidate as Consolidated SLST. As a result, the Company consolidated assets of the securitization (see Note 7).


Three Months Ended June 30, 2023
Residential loans
Residential loansConsolidated SLSTResidential loans held in securitization trustsMulti-family loansEquity investmentsEquity investments in disposal group held for saleTotal
Balance at beginning of period$921,000 $829,153 $1,624,703 $95,309 $191,148 $10,070 $3,671,383 
Total gains/(losses) (realized/unrealized)
Included in earnings772 (24,154)(5,139)3,440 5,032 (2,375)(22,424)
Transfers out (1)
(2,664)— (1,504)— — — (4,168)
Transfer to securitization trust, net (2)
(103,972)— 103,972 — — — — 
Funding/Contributions— — — 8,985 — — 8,985 
Paydowns/Distributions(144,017)(15,030)(152,133)(10,312)(27,425)— (348,917)
Sales— — (441)— — — (441)
Purchases86,145 — 20,121 — — — 106,266 
Balance at the end of period$757,264 $789,969 $1,589,579 $97,422 $168,755 $7,695 $3,410,684 
(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned.
(2)During the three months ended June 30, 2023, the Company transferred certain residential loans into residential loan securitizations (see Note 7 for further discussion of the Company's residential loan securitizations).

Six Months Ended June 30, 2024
Residential loans
Residential loansConsolidated SLSTResidential loans held in securitization trustsMulti-family loansEquity investmentsTotal
Balance at beginning of period$827,535 $754,860 $1,501,908 $95,792 $147,116 $3,327,211 
Total gains/(losses) (realized/unrealized)
Included in earnings1,157 (2,689)(5,238)517 4,071 (2,182)
Transfers out (1)
(41,001)— (3,770)— — (44,771)
Transfer to securitization trust, net (2)
(633,283)— 633,283 — — — 
Paydowns/Distributions(146,456)(32,284)(330,373)(3,312)(8,272)(520,697)
Sales(25,210)— (6,708)— — (31,918)
Purchases (3)
684,476 285,057 41,927 — — 1,011,460 
Balance at the end of period$667,218 $1,004,944 $1,831,029 $92,997 $142,915 $3,739,103 

(1)Transfers out of Level 3 assets represents the transfer of residential loans to real estate owned, single-family rental properties and other assets.
(2)During the six months ended June 30, 2024, the Company transferred certain residential loans into residential loan securitizations (see Note 7 for further discussion of the Company's residential loan securitizations).
(3)During the six months ended June 30, 2024, the Company purchased first loss subordinated securities issued from a securitization that it determined to consolidate as Consolidated SLST. As a result, the Company consolidated assets of the securitization (see Note 7).


Six Months Ended June 30, 2023
Residential loans
Residential loansConsolidated SLSTResidential loans held in securitization trustsMulti-family loansEquity investmentsEquity investments in disposal group held for saleTotal
Balance at beginning of period$1,081,384 $827,582 $1,616,114 $87,534 $179,746 $9,010 $3,801,370 
Total gains/(losses) (realized/unrealized)
Included in earnings173 (9,033)27,902 6,329 8,483 (1,315)32,539 
Transfers out (1)
(2,757)— (1,737)— — — (4,494)
Transfer to securitization trust, net (2)
(190,082)— 190,082 — — — — 
Funding/Contributions— — — 15,405 15,528 — 30,933 
Paydowns/Distributions(285,372)(28,580)(283,044)(11,846)(35,002)— (643,844)
Sales(166)— (441)— — — (607)
Purchases154,084 — 40,703 — — — 194,787 
Balance at the end of period$757,264 $789,969 $1,589,579 $97,422 $168,755 $7,695 $3,410,684 
(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, 2023, the Company transferred certain residential loans into residential loan securitizations (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 three and six months ended June 30, 2024 and 2023, respectively (dollar amounts in thousands):

Level 3 Liabilities:
Consolidated SLST CDOs
 Three Months Ended June 30,
 20242023
Balance at beginning of period$582,627 $638,513 
Total gains (realized/unrealized)
Included in earnings (1,536)(10,266)
Purchases (1)
275,200 — 
Paydowns(12,259)(11,079)
Balance at the end of period$844,032 $617,168 

(1)During the three months ended June 30, 2024, the Company purchased first loss subordinated securities issued from a securitization that it determined to consolidate as Consolidated SLST. As a result, the Company consolidated liabilities of the securitization (see Note 7).


Consolidated SLST CDOs
 Six Months Ended June 30,
 20242023
Balance at beginning of period$593,737 $634,495 
Total (losses)/gains (realized/unrealized)
Included in earnings (140)4,245 
Purchases (1)
275,200 — 
Paydowns(24,765)(21,572)
Balance at the end of period$844,032 $617,168 


(1)During the six months ended June 30, 2024, the Company purchased first loss subordinated securities issued from a securitization that it determined to consolidate as Consolidated SLST. As a result, the Company consolidated liabilities of the securitization (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):

June 30, 2024Fair ValueValuation Technique Unobservable InputWeighted Average Range
Assets
Residential loans:
Residential loans and residential loans held in securitization trusts (1)
$2,307,581Discounted cash flowLifetime CPR5.2%—-58.7%
Lifetime CDR0.8%—-23.7%
Loss severity11.4%—-100.0%
Yield7.8%5.2%-43.3%
$190,666Liquidation modelAnnual home price appreciation/(depreciation)0.3%—-10.7%
Liquidation timeline (months)189-54
Property value$2,078,581$14,000-$12,750,000
Yield7.6%7.5%-26.5%
Consolidated SLST (3)
$1,004,944Liability priceN/A
Total$3,503,191
Multi-family loans (1)
$92,997Discounted cash flowDiscount rate12.5%11.0%-20.5%
Months to assumed redemption291-52
Loss severity—
Equity investments (1) (2)
$104,071Discounted cash flowDiscount rate15.0%13.0%-17.5%
Months to assumed redemption112-37
Loss severity—
Liabilities
Consolidated SLST CDOs (3) (4)
$844,032Discounted cash flowYield5.8%4.8%-16.8%
Collateral prepayment rate5.9%2.6%-7.1%
Collateral default rate1.3%—-9.7%
Loss severity19.8%12.2%-51.2%

(1)Weighted average amounts are calculated based on the weighted average fair value of the assets.
(2)Equity investments do not include equity ownership interests in an entity that originates residential loans. The fair value of this investment is determined using weighted multiples of origination volume and earnings before taxes, depreciation and amortization and NAV of the entity.
(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, 2024, the fair value of investment securities we own in Consolidated SLST amounts to $156.0 million.
(4)Weighted average yield calculated based on the weighted average fair value of the CDOs issued by Consolidated SLST, including investment securities we own. 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 CDOs issued by Consolidated SLST, including investment securities we own.

The following table details the changes in unrealized gains (losses) included in earnings for the three and six months ended June 30, 2024 and 2023, respectively, for our Level 3 assets and liabilities held as of June 30, 2024 and 2023, respectively (dollar amounts in thousands):

 Three Months Ended June 30,Six Months Ended June 30,
 2024202320242023
Assets
Residential loans:
Residential loans (1)
$(1,912)$(449)$(10,592)$(4,344)
Consolidated SLST (1)
(1,306)(23,332)(800)(7,525)
Residential loans held in securitization trusts (1)
(6,359)(8,169)(7,156)21,497 
Multi-family loans (1)
(16)334 (4,794)779 
Equity investments (2)
(419)(1,083)(6,581)(3,675)
Equity investments in disposal group held for sale (2)
— (2,375)— (1,315)
Liabilities
Consolidated SLST CDOs (1)
1,848 11,004 1,306 (2,504)

(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, 2024 and December 31, 2023, respectively (dollar amounts in thousands):
  June 30, 2024December 31, 2023
 Fair Value
Hierarchy Level		Carrying
Value		Estimated
Fair Value		Carrying
Value		Estimated
Fair Value
Financial Assets:     
Cash and cash equivalentsLevel 1$235,514 $235,514 $187,107 $187,107 
Residential loansLevel 33,503,191 3,503,191 3,084,303 3,084,303 
Investment securities available for saleLevel 22,672,079 2,672,079 2,013,817 2,013,817 
Multi-family loansLevel 392,997 92,997 95,792 95,792 
Equity investmentsLevel 3142,915 142,915 147,116 147,116 
Derivative assetsLevel 23,828 3,828 6,510 6,510 
Derivative assets in disposal group held for saleLevel 22,560 2,560 2,960 2,960 
Financial Liabilities:     
Repurchase agreementsLevel 22,952,289 2,952,289 2,471,113 2,471,113 
Collateralized debt obligations:
Residential loan securitizations at amortized cost, netLevel 3972,389 939,527 1,276,780 1,237,531 
Residential loan securitizations at fair value
Level 2
733,079 733,079 — — 
Consolidated SLSTLevel 3844,032 844,032 593,737 593,737 
Subordinated debenturesLevel 345,000 36,682 45,000 32,137 
Senior unsecured notes:
Senior unsecured notes at amortized cost, net
Level 298,492 96,197 98,111 94,952 
Senior unsecured notes at fair value
Level 260,000 60,000 — — 
Mortgages payable on real estateLevel 3592,919 565,929 784,421 761,194 
Mortgages payable on real estate in disposal group held for saleLevel 3330,400 329,336 378,386 377,735 
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.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.