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Fair value of financial instruments

6 Months Ended

Jun. 30, 2015

Note 5 — Fair value of financial instruments

The following tables set forth the fair value of financial assets and liabilities by level within the fair value hierarchy as of June 30, 2015 and December 31, 2014 ($ in thousands):

			Level 1		Level 2		Level 3
June 30, 2015	Carrying Value		Quoted prices in active markers		Observable inputs other than Level 1 prices		Unobservable inputs
Not recognized on consolidated balance sheet at fair value (assets)
Mortgage loans	$	444,408		—		—	$	501,369
Not recognized on consolidated balance sheet at fair value (liabilities)
Borrowings under repurchase agreement		153,804		—	$	153,804		—
Secured borrowings		116,349		—		116,349		—

			Level 1		Level 2		Level 3
December 31, 2014	Carrying Value		Quoted prices in active markers		Observable inputs other than Level 1 prices		Unobservable inputs
Not recognized on consolidated balance sheet at fair value (assets)
Mortgage loans	$	211,159		—		—	$	235,623
Not recognized on consolidated balance sheet at fair value (liabilities)
Borrowings under repurchase agreement		15,249		—	$	15,249		—
Secured borrowings		84,679		—		84,679		—

The Company has not transferred any assets from one level to another level during the three or six months ended June 30, 2015.

The carrying values of its cash and cash equivalents, related party receivables, accounts payable and accrued liabilities, related party payables and investments in the Manager and affiliate are equal to or approximate fair value. Property held-for-sale is measured at cost at acquisition and subsequently measured at the lower of cost or fair value less cost to sell on a nonrecurring basis. The fair value of property held-for-sale is generally based on estimated market prices from an independently prepared appraisal, an independent BPO, or management’s judgment as to the selling price of similar properties. No properties held-for-sale were measured at fair value at June 30, 2015.

The fair value of mortgage loans is estimated using the Manager’s proprietary pricing model which estimates expected cash flows with the discount rate used in the present value calculation representing the estimated effective yield of the loan. The value of transfers of mortgage loans to real estate owned is estimated using BPOs.

The significant unobservable inputs used in the fair value measurement of the Company’s mortgage loans are the same as those used to calculate the acquisition price, including discount rates and loan resolution timelines. Significant changes to any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. An increase in the loan resolution timeline in isolation would decrease the fair value. The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of the Company’s mortgage loans as of June 30, 2015:

Input		Range of Values
Equity discount rate – Re-performing loans		8% - 14%
Equity discount rate – Non-performing loans		10% - 18%
Cost of debt		4.25%
Loan resolution timelines – Re-performing loans (in years)		4 - 7
Loan resolution timelines – Non-performing loans (in years)		1.4 - 4

- 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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