Valuation

3 Months Ended

Mar. 31, 2020

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

March 31, 2020:



(In thousands)
Description	Level 1			Level 2			Level 3		Total
Assets:
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed-rate mortgages	$	—		$	132,375		$	—	$	132,375
20-year fixed-rate mortgages	—			1,187			—		1,187
30-year fixed-rate mortgages	—			765,220			—		765,220
Adjustable rate mortgages	—			30,233			—		30,233
Reverse mortgages	—			98,357			—		98,357
Interest only securities	—			8,663			6,966		15,629
Non-Agency RMBS	—			4,519			3,001		7,520
Mortgage-backed securities, at fair value	—			1,040,554			9,967		1,050,521
Other investments, at fair value:
Preferred equity securities	355			—			—		355
Financial derivatives–assets, at fair value:
TBAs	—			782			—		782
Interest rate swaps	—			619			—		619
Futures	331			—			—		331
Total financial derivatives–assets, at fair value	331			1,401			—		1,732
Total mortgage-backed securities, other investments, and financial derivatives–assets, at fair value	$	686		$	1,041,955		$	9,967	$	1,052,608
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—		$	(2,154	)	$	—	$	(2,154	)
Financial derivatives–liabilities, at fair value:
TBAs	—			(3,582		)	—		(3,582		)
Interest rate swaps	—			(12,952		)	—		(12,952		)
Futures	(3,700		)	—			—		(3,700		)
Total financial derivatives–liabilities, at fair value	(3,700		)	(16,534		)	—		(20,234		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	(3,700	)	$	(18,688	)	$	—	$	(22,388	)

December 31, 2019:



(In thousands)
Description	Level 1			Level 2			Level 3		Total
Assets:
Mortgage-backed securities, at fair value:
Agency RMBS:
15-year fixed-rate mortgages	$	—		$	181,231		$	—	$	181,231
20-year fixed-rate mortgages	—			1,385			—		1,385
30-year fixed-rate mortgages	—			1,058,878			—		1,058,878
Adjustable rate mortgages	—			33,255			—		33,255
Reverse mortgages	—			99,934			—		99,934
Interest only securities	—			10,605			7,639		18,244
Non-Agency RMBS	—			5,578			3,273		8,851
Mortgage-backed securities, at fair value	—			1,390,866			10,912		1,401,778
Financial derivatives–assets, at fair value:
TBAs	—			122			—		122
Interest rate swaps	—			3,624			—		3,624
Futures	434			—			—		434
Total financial derivatives–assets, at fair value	434			3,746			—		4,180
Total mortgage-backed securities and financial derivatives–assets, at fair value	$	434		$	1,394,612		$	10,912	$	1,405,958
Liabilities:
U.S. Treasury securities sold short, at fair value	$	—		$	(2,070	)	$	—	$	(2,070	)
Financial derivatives–liabilities, at fair value:
TBAs	—			(304		)	—		(304		)
Interest rate swaps	—			(1,647		)	—		(1,647		)
Futures	(96		)	—			—		(96		)
Total financial derivatives–liabilities, at fair value	(96		)	(1,951		)	—		(2,047		)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value	$	(96	)	$	(4,021	)	$	—	$	(4,117	)

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, 2020:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2019	$	3,273		$	7,639
Purchases	—			77
Proceeds from sales	—			—
Principal repayments	(93		)	—
(Amortization)/accretion, net	91			(587		)
Net realized gains (losses)	—			(1		)
Change in net unrealized gains (losses)	(270		)	(461		)
Transfers:
Transfers into level 3	—			1,643
Transfers out of level 3	—			(1,344		)
Ending balance as of March 31, 2020	$	3,001		$	6,966

both Level 3 financial instruments held by the Company at March 31, 2020, as well as Level 3 financial instruments disposed of by the Company during the three-month period ended March 31, 2020. For Level 3 financial instruments held by the Company as of March 31, 2020, change in net unrealized gains (losses) of $(0.3) million and $(1.2) million, for the three-month period ended March 31, 2020 relate to non-Agency RMBS and Agency RMBS, respectively.

At March 31, 2020, the Company transferred $1.3 million of RMBS from Level 3 to Level 2 and $1.6 million of RMBS from Level 2 to Level 3. Transfers between hierarchy levels are 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, and is based on pricing information received from third party pricing sources.

Three-Month Period Ended March 31, 2019:



(In thousands)	Non-Agency RMBS			Agency RMBS
Beginning balance as of December 31, 2018	$	4,634		$	2,832
Purchases	—			—
Proceeds from sales	—			—
Principal repayments	(453		)	—
(Amortization)/accretion, net	85			(250		)
Net realized gains (losses)	—			(663		)
Change in net unrealized gains (losses)	344			535
Transfers:
Transfers into level 3	—			862
Transfers out of level 3	—			—
Ending balance as of March 31, 2019	$	4,610		$	3,316

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, 2019, as well as Level 3 financial instruments disposed of by the Company during the three-month period ended March 31, 2019. For Level 3 financial instruments held by the Company as of March 31, 2019, change in net unrealized gains (losses) of $0.3 million and $0.4 million, for the three-month period ended March 31, 2019 relate to non-Agency RMBS and Agency RMBS, respectively.

At March 31, 2019, the Company transferred $0.9 million of RMBS from Level 2 to Level 3. Transfers between these hierarchy levels are 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, and is based on pricing information received from third party pricing sources.

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, 2020 and December 31, 2019:

March 31, 2020:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	1,042	Market quotes	Non-Binding Third-Party Valuation	$	77.00		$	81.57		$	79.74
Agency RMBS–Interest Only Securities	4,641		Market quotes	Non-Binding Third-Party Valuation	5.71			19.18			11.05
Non-Agency RMBS	1,959		Discounted Cash Flows	Yield	2.5		%	9.8		%	7.3		%
				Projected Collateral Prepayments	48.4		%	61.1		%	55.6		%
				Projected Collateral Losses	3.1		%	8.7		%	7.1		%
				Projected Collateral Recoveries	8.1		%	13.1		%	11.1		%
				Projected Collateral Scheduled Amortization	18.1		%	40.4		%	26.2		%
											100.0		%
Agency RMBS–Interest Only Securities	2,325		Option Adjusted Spread ("OAS")	LIBOR OAS ⁽²⁾⁽³⁾	164			943			386
				Projected Collateral Prepayments	55.5		%	89.3		%	81.7		%
				Projected Collateral Scheduled Amortization	10.7		%	44.5		%	18.3		%
											100.0		%


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


(2)	Shown in basis points.


(3)	For the range minimum, the range maximum, and the weighted average of LIBOR OAS, excludes Agency interest only securities with a negative LIBOR OAS, with a total fair value of $0.5 million. Including these securities the weighted average was 55 basis points.

December 31, 2019:



					Range
Description	Fair Value		Valuation Technique	Significant Unobservable Input	Min			Max			Weighted Average⁽¹⁾
	(In thousands)
Non-Agency RMBS	$	1,558	Market quotes	Non-Binding Third-Party Valuation	$	64.56		$	89.04		$	81.56
Agency RMBS–Interest Only Securities	2,615		Market quotes	Non-Binding Third-Party Valuation	6.67			17.14			11.96
Non-Agency RMBS	1,715		Discounted Cash Flows	Yield	1.3		%	9.9		%	4.4		%
				Projected Collateral Prepayments	50.5		%	61.8		%	57.7		%
				Projected Collateral Losses	2.2		%	2.2		%	2.2		%
				Projected Collateral Recoveries	6.6		%	14.5		%	11.6		%
				Projected Collateral Scheduled Amortization	21.6		%	40.7		%	28.5		%
											100.0		%
Agency RMBS–Interest Only Securities	5,024		Option Adjusted Spread ("OAS")	LIBOR OAS ⁽²⁾	77			25,553			824
				Projected Collateral Prepayments	41.7		%	80.3		%	73.4		%
				Projected Collateral Scheduled Amortization	19.7		%	58.3		%	26.6		%
											100.0		%


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


(2)	Shown in basis points.

Third-party non-binding valuations are validated by comparing such valuations to internally generated prices based on the Company's models and, when available, to recent trading activity in the same or similar instruments. For those instruments valued using discounted cash flows, collateral prepayments, losses, recoveries, and scheduled amortization are projected over the remaining life of the collateral and expressed as a percentage of the collateral's current principal balance. For those assets valued using the LIBOR Option Adjusted Spread, or "OAS," valuation methodology, cash flows are projected using the Company's models over multiple interest rate scenarios, and these projected cash flows are then discounted using the LIBOR rates implied by each interest rate scenario. The LIBOR OAS of an asset is then computed as the unique constant yield spread that, when added to all LIBOR rates in each interest rate scenario generated by the model, will equate (a) the expected present value of the projected asset cash flows over all model scenarios to (b) the actual current market price of the asset. LIBOR OAS is therefore model-dependent. Generally speaking, LIBOR OAS measures the additional yield spread over LIBOR that an asset provides at its current market price after taking into account any interest rate options embedded in the asset.

Material changes in any of the inputs above in isolation could result in a significant change to reported fair value measurements. Fair value measurements are impacted by the interrelationships of these inputs. For example, a higher expectation of collateral prepayments will generally result in a lower expectation of collateral losses. Conversely, higher losses will generally result in lower prepayments.

The following table summarizes the estimated fair value of all other financial instruments not included in the disclosures above as of March 31, 2020 and December 31, 2019:



	March 31, 2020				December 31, 2019
(In thousands)	Fair Value		Carrying Value		Fair Value		Carrying Value
Assets:
Cash and cash equivalents	$	59,671	$	59,671	$	35,351	$	35,351
Due from brokers	49,966		49,966		34,596		34,596
Reverse repurchase agreements	2,218		2,218		2,084		2,084
Liabilities:
Repurchase agreements	1,109,342		1,109,342		1,296,272		1,296,272
Due to brokers	2,348		2,348		33		33

Cash and cash equivalents includes cash held in interest bearing overnight accounts, 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

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.

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