Valuation (Tables)

3 Months Ended

Mar. 31, 2018

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

March 31, 2018:



(In thousands)
Description	Level 1			Level 2			Level 3		Total
Assets:
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed-rate mortgages	$	—		$	154,850		$	—	$	154,850
20-year fixed-rate mortgages	—			8,773			—		8,773
30-year fixed-rate mortgages	—			1,341,220			—		1,341,220
Adjustable rate mortgages	—			23,382			—		23,382
Reverse mortgages	—			75,382			—		75,382
Interest only securities	—			9,388			5,138		14,526
Non-Agency RMBS	—			7,087			5,355		12,442
Mortgage-backed securities, at fair value	—			1,620,082			10,493		1,630,575
Financial derivatives–assets, at fair value:
TBAs	—			296			—		296
Interest rate swaps	—			12,846			—		12,846
Swaptions	—			386			—		386
Total financial derivatives–assets, at fair value	—			13,528			—		13,528
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	—		$	1,633,610		$	10,493	$	1,644,103
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—		$	(44,377	)	$	—	$	(44,377	)
Financial derivatives–liabilities, at fair value:
TBAs	—			(2,572		)	—		(2,572		)
Interest rate swaps	—			(1,192		)	—		(1,192		)
Futures	(2,112		)	—			—		(2,112		)
Total financial derivatives–liabilities, at fair value	(2,112		)	(3,764		)	—		(5,876		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	(2,112	)	$	(48,141	)	$	—	$	(50,253	)

December 31, 2017:



(In thousands)
Description	Level 1		Level 2			Level 3		Total
Assets:
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed-rate mortgages	$	—	$	176,774		$	—	$	176,774
20-year fixed-rate mortgages	—		9,230			—		9,230
30-year fixed-rate mortgages	—		1,369,589			—		1,369,589
Adjustable rate mortgages	—		29,558			—		29,558
Reverse mortgages	—		70,617			—		70,617
Interest only securities	—		9,951			2,254		12,205
Non-Agency RMBS	—		9,193			8,832		18,025
Mortgage-backed securities, at fair value	—		1,674,912			11,086		1,685,998
Financial derivatives–assets, at fair value:
TBAs	—		402			—		402
Interest rate swaps	—		8,038			—		8,038
Swaptions	—		181			—		181
Futures	171		—			—		171
Total financial derivatives–assets, at fair value	171		8,621			—		8,792
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	171	$	1,683,533		$	11,086	$	1,694,790
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—	$	(81,289	)	$	—	$	(81,289	)
Financial derivatives–liabilities, at fair value:
TBAs	—		(735		)	—		(735		)
Interest rate swaps	—		(1,128		)	—		(1,128		)
Total financial derivatives–liabilities, at fair value	—		(1,863		)	—		(1,863		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	—	$	(83,152	)	$	—	$	(83,152	)

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, 2018:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2017	$	8,832		$	2,254
Purchases	—			1,529
Proceeds from sales	(3,638		)	—
Principal repayments	(230		)	—
(Amortization)/accretion, net	46			(442		)
Net realized gains (losses)	1,138			(125		)
Change in net unrealized gains (losses)	(793		)	358
Transfers:
Transfers into level 3	—			1,564
Transfers out of level 3	—			—
Ending balance as of March 31, 2018	$	5,355		$	5,138

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, 2018, as well as Level 3 financial instruments disposed of by the Company during the three month period ended March 31, 2018. For Level 3 financial instruments held by the Company as of March 31, 2018, change in net unrealized gains (losses) of $0.2 million and $0.5 million, for the three month period ended March 31, 2018 relate to non-Agency RMBS and Agency RMBS, respectively.

As of June 30, 2017, the Company modified its procedures to determine the level within the hierarchy for certain financial instruments. Under the revised procedures, the Company examines financial instruments individually rather than in cohorts of like instruments as it had previously. At March 31, 2018, the Company transferred $1.6 million of RMBS from Level 2 to Level 3. Transfers between these hierarchy levels were based on the availability of sufficient observable inputs to meet Level 2 versus Level 3 criteria. The level designation of each financial instrument is reassessed at the end of each period.

Three month period ended March 31, 2017:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2016	$	6,498		$	12,347
Purchases	—			1,287
Proceeds from sales	(2,850		)	—
Principal repayments	(167		)	—
(Amortization)/accretion, net	44			(835		)
Net realized gains (losses)	163			(37		)
Change in net unrealized gains (losses)	332			(220		)
Transfers:
Transfers into level 3	1,819			—
Transfers out of level 3	(3,337		)	—
Ending balance as of March 31, 2017	$	2,502		$	12,542

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, 2017, as well as Level 3 financial instruments disposed of by the Company during the three month period ended March 31, 2017. For Level 3 financial instruments held by the Company as of March 31, 2017, change in net unrealized gains (losses) of $0.2 million and $(0.2) million, for the three month period ended March 31, 2017 relate to non-Agency RMBS and Agency RMBS, respectively.

At March 31, 2017, the Company transferred $3.3 million of 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/or similar assets. This increase in observed trading activity led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view.

At March 31, 2017, the Company transferred $1.8 million of RMBS from Level 2 to Level 3. Since December 31, 2016, these securities 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.

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, 2018 and December 31, 2017:

March 31, 2018:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	1,461	Market quotes	Non-Binding Third-Party Valuation	$	87.47		$	90.07		$	88.77
Agency RMBS–Interest Only Securities	2,152		Market quotes	Non-Binding Third-Party Valuation	12.19			19.13			16.83
Non-Agency RMBS	3,894		Discounted Cash Flows	Yield	4.4		%	12.3		%	6.3		%
				Projected Collateral Prepayments	19.4		%	47.0		%	27.9		%
				Projected Collateral Losses	4.8		%	20.1		%	15.7		%
				Projected Collateral Recoveries	6.4		%	13.3		%	11.5		%
				Projected Collateral Scheduled Amortization	31.1		%	47.8		%	44.9		%
											100.0		%
Agency RMBS–Interest Only Securities	2,986		Option Adjusted Spread ("OAS")	LIBOR OAS ⁽²⁾	435			1,282			678
				Projected Collateral Prepayments	35.7		%	78.4		%	68.0		%
				Projected Collateral Scheduled Amortization	21.6		%	64.3		%	32.0		%
											100.0		%


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


(2)	Shown in basis points.

December 31, 2017:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	2,258	Market quotes	Non-Binding Third-Party Valuation	$	57.84		$	87.45		$	78.02
Non-Agency RMBS	6,574		Discounted Cash Flows	Yield	4.6		%	5.1		%	4.8		%
				Projected Collateral Prepayments	19.2		%	44.9		%	26.5		%
				Projected Collateral Losses	0.9		%	20.1		%	9.2		%
				Projected Collateral Recoveries	8.8		%	31.5		%	22.5		%
				Projected Collateral Scheduled Amortization	33.1		%	47.5		%	41.8		%
											100.0		%
Agency RMBS–Interest Only Securities	2,254		Option Adjusted Spread ("OAS")	LIBOR OAS⁽²⁾	627			1,408			781
				Projected Collateral Prepayments	43.8		%	88.1		%	71.2		%
				Projected Collateral Scheduled Amortization	11.9		%	56.2		%	28.8		%
											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, 2018 and December 31, 2017:



	March 31, 2018				December 31, 2017
(In thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Other financial instruments
Assets:
Cash and cash equivalents	$	46,025	$	46,025	$	56,117	$	56,117
Due from brokers	32,061		32,061		26,754		26,754
Reverse repurchase agreements	44,617		44,617		81,461		81,461
Liabilities:
Repurchase agreements	1,589,319		1,589,319		1,597,206		1,597,206
Due to brokers	1,025		1,025		489		489

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 receivables and payables are short term in nature and any collateral transferred consists primarily of cash; fair value of these items approximates carrying value and such items 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.

- Definition

Tabular disclosure of financial instruments measured at fair value, including those classified in shareholders' equity measured on a recurring or nonrecurring basis. Disclosures include, but are not limited to, fair value measurements recorded and the reasons for the measurements, level within the fair value hierarchy in which the fair value measurements are categorized and transfers between levels 1 and 2. Nonrecurring fair value measurements are those that are required or permitted in the statement of financial position in particular circumstances.

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