v3.25.2
Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2025
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments Fair Value of Financial Instruments
 
GAAP requires the categorization of fair value measurements into three broad levels that form a hierarchy. 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 on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.
 
Residential Whole Loans, at Fair Value
 
The Company determines the fair value of its residential whole loans held at fair value after considering valuations obtained from third-parties that specialize in providing valuations of residential mortgage loans. The valuation approach applied generally depends on whether the loan is considered performing or non-performing at the date the valuation is performed. For performing loans, estimates of fair value are derived using a discounted cash flow approach, where estimates of cash flows are determined from the scheduled payments, adjusted using forecasted prepayment, default and loss given default rates. For non-performing loans, asset liquidation cash flows are derived based on the estimated time to liquidate the loan, the estimated value of the collateral, expected costs and estimated home price levels. 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’s residential whole loans held at fair value are classified as Level 3 in the fair value hierarchy; however, the Company determined that the market inputs used in valuing its Agency eligible investor loans were sufficiently observable to be classified as Level 2.

Securities, at Fair Value

Residential Mortgage Securities

In determining the fair value of the Company’s other residential mortgage securities, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants.  Valuations of TBA securities positions are based on executed levels for positions entered into and subsequently rolled forward, as well as prices obtained from pricing services for outstanding positions at each reporting date. These valuations are assessed for reasonableness by considering market TBA levels observed via Bloomberg for the same coupon and term to maturity. In valuing Non-Agency MBS, the Company understands that pricing services use observable inputs that include, in addition to trading activity observed in the marketplace, loan delinquency data, credit enhancement levels and vintage, which are taken into account to assign pricing factors such as spread and prepayment assumptions.  The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available.
 
The Company’s residential mortgage securities are valued using various market data points as described above, which management considers directly or indirectly observable parameters.  Accordingly, these securities are classified as Level 2 in the fair value hierarchy.

Term Notes Backed by MSR Collateral

The Company’s valuation process for term notes backed by MSR collateral is similar to that used for residential mortgage securities and considers a number of observable market data points, including prices obtained from pricing services, brokers and repurchase agreement counterparties, dialogue with market participants, as well as management’s observations of market activity. Other factors taken into consideration include estimated changes in fair value of the related underlying MSR collateral and, as applicable, the financial performance of the ultimate parent or sponsoring entity of the issuer, which has provided a guarantee that is
intended to provide for payment of interest and principal to the holders of the term notes if cash flows generated by the related underlying MSR collateral are insufficient. Based on its evaluation of the observability of the data used in its fair value estimation process, these assets are classified as Level 2 in the fair value hierarchy.

Financing Agreements, at Fair Value

Agreements with mark-to-market collateral provisions

These agreements are secured and subject to margin calls and their base interest rates reset frequently to market based rates. As a result, no credit valuation adjustment is required, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with mark-to-market collateral provisions held at fair value are classified as Level 2 in the fair value hierarchy if the credit spreads used to price the instrument reset frequently, which is typically the case with shorter term repurchase agreement contracts collateralized by securities. Financing agreements with mark-to-market collateral provisions that are typically longer term and are collateralized by residential whole loans where the credit spread paid over the base rate on the instrument is not reset frequently are classified as Level 3 in the fair value hierarchy.

Agreements with non-mark-to-market collateral provisions

These agreements are secured, but not subject to margin calls based on changes in the fair value of the financed residential whole loans. Such agreements may experience changes in advance rates or collateral eligibility as a result of factors such as changes in the delinquency status of the financed residential whole loans. As a result, a credit valuation adjustment would only be required if there were a significant decrease in collateral value, and the primary factor in determining their fair value is the credit spread paid over the base rate, which is a non-observable input as it is determined based on negotiations with the counterparty. The Company’s financing agreements with non-mark-to-market collateral provisions held at fair value are classified as Level 3 in the fair value hierarchy.

Securitized Debt

In determining the fair value of securitized debt, management considers a number of observable market data points, including prices obtained from pricing services and brokers as well as dialogue with market participants, consistent with the valuation methodology for residential mortgage securities. Accordingly, the Company’s securitized debt is classified as Level 2 in the fair value hierarchy.

Swaps

Variation margin payments on the Company’s Swaps are treated as a legal settlement of the exposure under the related Swap contract, the effect of which reduces what would have otherwise been reported as the fair value of the Swap, generally to zero. The Company receives prices from pricing services to validate the fair value of the Swaps.

Changes to the valuation methodologies used with respect to the Company’s financial instruments are reviewed by management to ensure any such changes result in appropriate exit price valuations.  The Company will refine its valuation methodologies as markets and products develop and pricing methodologies evolve.  The methods described above may produce fair value estimates 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 those used by 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 the measurement date, which may include periods of market dislocation, during which price transparency may be reduced.  The Company reviews the classification of its financial instruments within the fair value hierarchy on a quarterly basis, and management may conclude that its financial instruments should be reclassified to a different level in the future.
The following tables present the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2025 and December 31, 2024, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at June 30, 2025
(In Thousands)Level 1Level 2Level 3Total
Assets:
Residential whole loans, at fair value$— $51,458 $7,577,177 $7,628,635 
Securities, at fair value— 1,829,809 — 1,829,809 
Total assets carried at fair value$— $1,881,267 $7,577,177 $9,458,444 
Liabilities:
Agreements with non-mark-to-market collateral provisions$— $— $76,880 $76,880 
Agreements with mark-to-market collateral provisions— — 197,424 197,424 
Securitized debt— 5,374,319 — 5,374,319 
Total liabilities carried at fair value$— $5,374,319 $274,304 $5,648,623 

Fair Value at December 31, 2024
(In Thousands)Level 1Level 2Level 3Total
Assets:    
Residential whole loans, at fair value$— $52,073 $7,459,137 $7,511,210 
Securities, at fair value— 1,537,513 — 1,537,513 
Total assets carried at fair value$— $1,589,586 $7,459,137 $9,048,723 
Liabilities:
Agreements with non-mark-to-market collateral provisions— — 284,843 284,843 
Agreements with mark-to-market collateral provisions— — 19,782 19,782 
Securitized debt— 5,211,380 — 5,211,380 
Total liabilities carried at fair value$— $5,211,380 $304,625 $5,516,005 
 
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents additional information for the three and six months ended June 30, 2025 and 2024 about the Company’s Residential whole loans, at fair value, which are classified as Level 3 and measured at fair value on a recurring basis:

Residential Whole Loans, at Fair Value
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2025202420252024
Balance at beginning of period$7,478,930 $7,599,254 $7,459,137 $7,455,729 
Purchases and originations641,130 536,071 1,146,821 1,024,121 
Draws103,681 152,160 204,851 315,905 
Changes in fair value recorded in Net gain/(loss) on residential whole loans measured at fair value through earnings41,603 16,682 94,503 26,889 
Repayments(590,099)(555,099)(1,139,317)(901,662)
Loan sales and repurchases(68,497)(13,944)(138,849)(173,839)
Transfer to REO(29,570)(15,933)(49,968)(27,952)
Balance at end of period$7,577,178 $7,719,191 $7,577,178 $7,719,191 
The following table presents additional information for the three and six months ended June 30, 2025 and 2024 about the Company’s financing agreements with non-mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
Agreements with Non-mark-to-market Collateral Provisions
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2025202420252024
Balance at beginning of period$184,389 $399,049 $284,843 $469,424 
Issuances— 44,798 — 112,740 
Payment of principal(107,509)(66,595)(207,963)(204,912)
Changes in unrealized losses— — — — 
Balance at end of period$76,880 $377,252 $76,880 $377,252 

The following table presents additional information for the three and six months ended June 30, 2025 and 2024 about the Company’s financing agreements with mark-to-market collateral provisions, which are classified as Level 3 and measured at fair value on a recurring basis:
Agreements with Mark-to-market Collateral Provisions
Three Months Ended June 30,Six Months Ended June 30,
(In Thousands)2025202420252024
Balance at beginning of period$11,543 $176,759 $19,782 $178,864 
Issuances191,050 114,601 191,050 114,601 
Payment of principal(5,169)(1,132)(13,408)(3,237)
Changes in unrealized losses— — — — 
Balance at end of period$197,424 $290,228 $197,424 $290,228 
Fair Value Methodology for Level 3 Financial Instruments

Residential Whole Loans, at Fair Value

The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of the Company’s residential whole loans held at fair value for which it has utilized Level 3 inputs to determine fair value as of June 30, 2025 and December 31, 2024, dollars in thousands:

June 30, 2025
Fair Value (1)
Valuation TechniqueUnobservable Input
Weighted Average (2)
Range
Min
Max
$7,208,812 Discounted cash flowDiscount rate7.0 %5.8 %20.0 %
Prepayment rate15.7 %— %49.7 %
Default rate1.6 %— %63.1 %
Loss severity11.9 %0.5 %100.0 %
$308,927 Liquidation modelDiscount rate8.5 %8.0 %15.0 %
Annual change in home prices2.8 %— %9.2 %
Liquidation timeline (in years)
1.7
0.8
4.5
Current value of underlying properties (3)
$658$19$10,000
$7,517,739 
(1)Excludes approximately $59.4 million of Residential whole loans, at fair value, with a UPB of $96.2 million, which were marked-to-market, but not based on a model, at June 30, 2025.
(2)Amounts are weighted based on the fair value of the underlying loan.
(3)Amounts represent simple average values of the properties underlying residential whole loans held at fair value.

December 31, 2024
Fair Value (1)
Valuation TechniqueUnobservable Input
Weighted Average (2)
Range
Min
Max
$7,070,535 Discounted cash flowDiscount rate7.6 %6.2 %20.0 %
Prepayment rate13.7 %— %58.3 %
Default rate1.8 %— %54.3 %
Loss severity12.3 %— %100.0 %
$343,683 Liquidation modelDiscount rate8.8 %8.0 %20.0 %
Annual change in home prices3.2 %— %9.7 %
Liquidation timeline (in years)
1.7
0.1
4.5
Current value of underlying properties (3)
$618$21$8,500
$7,414,218 
(1)Excludes approximately $44.9 million of Residential whole loans, at fair value, with a UPB of $78.2 million, which were marked-to-market, but not based on a model at December 31, 2024.
(2)Amounts are weighted based on the fair value of the underlying loan.
(3)Amounts represent simple average values of the properties underlying residential whole loans held at fair value.
Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the fair value of residential whole loans. Loans valued using a discounted cash flow model are most sensitive to changes in the discount rate assumption, while loans valued using the liquidation model technique are most sensitive to changes in the current value of the underlying properties and the liquidation timeline. Increases in discount rates, default rates, loss severities, or liquidation timelines, either in isolation or collectively, would generally result in a lower fair value measurement, whereas increases in the current or expected value of the underlying properties, in isolation, would result in a higher fair value measurement. In practice, changes in valuation assumptions may not occur in isolation and the changes in any particular assumption may result in changes in other assumptions, which could offset or amplify the impact on the overall valuation.
The following table presents the carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2025 and December 31, 2024:
June 30, 2025June 30, 2025December 31, 2024
(In Thousands)Level in Fair Value HierarchyCarrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
Financial Assets:
Residential whole loans3$8,768,067 $8,769,883 $8,759,151 $8,743,881 
Residential whole loans251,458 51,458 52,073 52,073 
Securities, at fair value21,829,809 1,829,809 1,537,513 1,537,513 
Cash and cash equivalents1275,731 275,731 338,931 338,931 
Restricted cash1269,224 269,224 262,381 262,381 
Financial Liabilities (1):
Financing agreements with non-mark-to-market collateral provisions3256,813 257,002 576,774 577,231 
Financing agreements with mark-to-market collateral provisions31,558,199 1,558,800 1,321,041 1,321,584 
Financing agreements with mark-to-market collateral provisions21,602,493 1,602,493 1,279,007 1,279,007 
Securitized debt25,904,033 5,846,945 5,794,977 5,724,702 
8.875% Senior Notes
2111,646 113,006 111,270 115,720 
9.00% Senior Notes
272,618 74,648 72,390 75,218 
(1)Carrying value of securitized debt, Convertible Senior Notes, 8.875% Senior Notes, 9.00% Senior Notes, and certain repurchase agreements is net of associated debt issuance costs.

Other Assets Measured at Fair Value on a Nonrecurring Basis

The Company holds REO and Commercial REO (see Note 5) at the lower of the current carrying amount or fair value less estimated selling costs. The Company classifies fair value measurements of REO as Level 3 in the fair value hierarchy.

REO - During the six months ended June 30, 2025 and 2024, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $55.7 million and $45.0 million, respectively, at the time of foreclosure. During the six months ended June 30, 2025, the Company reclassified three REO properties originally classified as held for investment to held for sale status and marked them down to their estimated fair value, less estimated cost to sell, of $10.4 million.
Commercial REO - During the six months ended June 30, 2025 and 2024, the Company did not record any new Commercial REO. During the six months ended June 30, 2024, the Company recorded valuation adjustments on Commercial REO totaling $(0.7) million. During the six months ended June 30, 2025, the Company did not record any valuation adjustments on Commercial REO.