Valuation (Tables)

3 Months Ended

Mar. 31, 2016

The following tables present the Company's financial instruments measured at fair value on:

March 31, 2016:



(In thousands)
Description	Level 1			Level 2			Level 3		Total
Assets:
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed rate mortgages	$	—		$	152,536		$	—	$	152,536
20-year fixed rate mortgages	—			19,488			—		19,488
30-year fixed rate mortgages	—			852,326			—		852,326
Adjustable rate mortgages	—			37,133			—		37,133
Reverse mortgages	—			77,548			—		77,548
Interest only securities	—			—			6,931		6,931
Non-Agency RMBS	—			25,487			2,144		27,631
Mortgage-backed securities, at fair value	—			1,164,518			9,075		1,173,593
Financial derivatives–assets, at fair value:
TBAs	—			365			—		365
Interest rate swaps	—			1,269			—		1,269
Futures	1			—			—		1
Total financial derivatives–assets, at fair value	1			1,634			—		1,635
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	1		$	1,166,152		$	9,075	$	1,175,228
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—		$	(69,607	)	$	—	$	(69,607	)
Financial derivatives–liabilities, at fair value:
TBAs	—			(1,157		)	—		(1,157		)
Interest rate swaps	—			(17,122		)	—		(17,122		)
Futures	(5		)	—			—		(5		)
Total financial derivatives–liabilities, at fair value	(5		)	(18,279		)	—		(18,284		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	(5	)	$	(87,886	)	$	—	$	(87,891	)

There were no transfers of financial instruments between Levels 1 and 2 of the fair value hierarchy during the three month period ended March 31, 2016.

December 31, 2015:



(In thousands)
Description	Level 1		Level 2			Level 3		Total
Assets:
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed rate mortgages	$	—	$	170,261		$	—	$	170,261
20-year fixed rate mortgages	—		19,830			—		19,830
30-year fixed rate mortgages	—		900,794			—		900,794
Adjustable rate mortgages	—		38,530			—		38,530
Reverse mortgages	—		73,692			—		73,692
Interest only securities	—		—			7,758		7,758
Non-Agency RMBS	—		27,381			4,020		31,401
Mortgage-backed securities, at fair value	—		1,230,488			11,778		1,242,266
Financial derivatives–assets, at fair value:
TBAs	—		417			—		417
Interest rate swaps	—		1,748			—		1,748
Futures	18		—			—		18
Total financial derivatives–assets, at fair value	18		2,165			—		2,183
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	18	$	1,232,653		$	11,778	$	1,244,449
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—	$	(78,447	)	$	—	$	(78,447	)
Financial derivatives–liabilities, at fair value:
TBAs	—		(364		)	—		(364		)
Interest rate swaps	—		(4,361		)	—		(4,361		)
Total financial derivatives–liabilities, at fair value	—		(4,725		)	—		(4,725		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	—	$	(83,172	)	$	—	$	(83,172	)

There were no transfers of financial instruments between Levels 1 or 2 of the fair value hierarchy during the year ended December 31, 2015.

Unobservable Input Reconciliation

The following tables present additional information about the Company's investments which are measured at fair value for which the Company has utilized Level 3 inputs to determine fair value:

Three month period ended March 31, 2016:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2015	$	4,020		$	7,758
Purchases	—			861
Proceeds from sales	—			—
Principal repayments	(351		)	—
(Amortization)/accretion, net	109			(691		)
Net realized gains (losses)	—			—
Change in net unrealized gains (losses)	214			(997		)
Transfers:
Transfers into level 3	—			—
Transfers out of level 3	(1,848		)	—
Ending balance as of March 31, 2016	$	2,144		$	6,931

All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company at March 31, 2016, as well as Level 3 financial instruments disposed of by the Company during the three month period ended March 31, 2016. For Level 3 financial instruments held by the Company as of March 31, 2016, change in net unrealized gains (losses) of $49.0 thousand and $(1.0) million, for the three month period ended March 31, 2016 relate to non-Agency RMBS and Agency RMBS, respectively.

For the three month period ended March 31, 2016, the Company transferred $1.8 million of non-Agency RMBS from Level 3 to Level 2. These assets were transferred from Level 3 to Level 2 based on an increased volume of observed trading of these and similar assets. This increase in observed trading activity has led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view. However, changes in the volume of observable inputs for these assets, such as a decrease in observed trading, could impact price transparency, and thereby cause a change in the level designation for these assets in future periods.

Three month period ended March 31, 2015:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2014	$	10,082		$	11,244
Purchases	—			1,099
Proceeds from sales	(2,861		)	(4,538		)
Principal repayments	(601		)	—
(Amortization)/accretion, net	309			(656		)
Net realized gains (losses)	791			601
Change in net unrealized gains (losses)	(276		)	(1,307		)
Transfers:
Transfers into level 3	3,359			—
Transfers out of level 3	(4,977		)	—
Ending balance as of March 31, 2015	$	5,826		$	6,443

All amounts of net realized and changes in net unrealized gains (losses) in the table above are reflected in the accompanying Consolidated Statement of Operations. The table above incorporates changes in net unrealized gains (losses) for both Level 3 financial instruments held by the Company as of March 31, 2015, as well as Level 3 financial instruments disposed of by the Company during the three month period ended March 31, 2015. For Level 3 financial instruments held by the Company as of March 31, 2015, change in net unrealized gains (losses) of $0.2 million and $(0.4) million, for the three month period ended March 31, 2015 relate to non-Agency RMBS and Agency RMBS, respectively.

At March 31, 2015, the Company transferred $5.0 million of non-Agency RMBS from Level 3 to Level 2. The decision to transfer these assets from Level 3 to Level 2 was based on observed market developments, including an increased volume of buying and selling of these and similar assets, greater consensus among market participants on price based on market quotes, and generally tighter credit spreads driven by improved performance in the underlying collateral as well as increased demand from investors seeking higher yielding assets. These factors have led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view. However, changes in observed market developments could impact future price transparency, and thereby cause a change in the level designation in subsequent periods.

At March 31, 2015, the Company transferred $3.4 million of non-Agency RMBS from Level 2 to Level 3. Since December 31, 2014, these securities have exhibited indications of a reduced level of price transparency. Examples of such indications include wider spreads and/or higher delinquencies relative to similar securities and a reduction in observable transactions or executable quotes involving these and similar securities. Changes in these indications could impact price transparency, and thereby cause a change in the level designation in future periods.

Quantitative Information

The following tables identify the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of March 31, 2016 and December 31, 2015:

March 31, 2016:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	2,144	Discounted Cash Flows	Yield	4.8		%	23.8		%	11.9		%
				Projected Collateral Prepayments	32.3		%	67.5		%	54.4		%
				Projected Collateral Losses	2.2		%	3.4		%	3.0		%
				Projected Collateral Recoveries	3.0		%	4.6		%	3.6		%
				Projected Collateral Scheduled Amortization	26.1		%	60.9		%	39.0		%
											100.0		%
Agency RMBS–Interest Only Securities	4,692		Market quotes	Non-Binding Third-Party Valuation	$	4.29		$	21.68		$	10.93
Agency RMBS–Interest Only Securities	2,239		Option Adjusted Spread ("OAS")	LIBOR OAS ⁽²⁾	510			2,219			777
				Projected Collateral Prepayments	61.5		%	83.8		%	77.4		%
				Projected Collateral Scheduled Amortization	16.2		%	38.5		%	22.6		%
											100.0		%


(1)	Averages are weighted based on the fair value of the related instrument.


(2)	Shown in basis points.

December 31, 2015:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	4,020	Discounted Cash Flows	Yield	8.8		%	25.7		%	13.4		%
				Projected Collateral Prepayments	32.5		%	68.7		%	60.5		%
				Projected Collateral Losses	1.3		%	9.0		%	5.3		%
				Projected Collateral Recoveries	3.4		%	9.2		%	6.4		%
				Projected Collateral Scheduled Amortization	13.1		%	60.1		%	27.8		%
											100.0		%
Agency RMBS–Interest Only Securities	5,645		Market quotes	Non-Binding Third-Party Valuation	$	4.39		$	21.63		$	11.88
Agency RMBS–Interest Only Securities	2,113		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	221			984			576
				Projected Collateral Prepayments	52.7		%	88.0		%	74.1		%
				Projected Collateral Scheduled Amortization	12.0		%	47.3		%	25.9		%
											100.0		%


(1)	Averages are weighted based on the fair value of the related instrument.


(2)	Shown in basis points.

Fair Value, Other Financial Instruments

The following table summarizes the estimated fair value of all other financial instruments not included in the disclosures above as of March 31, 2016 and December 31, 2015:



	March 31, 2016				December 31, 2015
(In thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Other financial instruments
Assets:
Cash and cash equivalents	$	41,242	$	41,242	$	40,166	$	40,166
Due from brokers	30,206		30,206		33,297		33,297
Reverse repurchase agreements	69,575		69,575		78,632		78,632
Liabilities:
Repurchase agreements	1,133,841		1,133,841		1,222,719		1,222,719
Due to brokers	127		127		439		439

Cash and cash equivalents includes cash held in an interest bearing overnight account for which fair value equals the carrying value and cash held in money market accounts which are liquid in nature and for which fair value equals the carrying value; such assets are considered Level 1 assets. Due from brokers and Due to brokers include collateral transferred to or received from counterparties, along with receivables and payables for open and/or closed derivative positions. These balances consist primarily of cash and are short term in nature; fair value approximates carrying value and such balances are considered Level 1 assets and liabilities. The Company's repurchase and reverse repurchase agreements are carried at cost, which approximates fair value due to their short term nature. Repurchase agreements and reverse repurchase agreements are classified as Level 2 assets and liabilities based on the adequacy of the collateral and their short term nature.