v3.25.4
Fair Value
 12 Months Ended
Dec. 31, 2025
Fair Value [Abstract]  
Fair Value
Note 9 — Fair Value
Fair Value Measurements

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.

ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels:


 •
Level 1 inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.


•
Level 2 inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.


•
Level 3 unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that management believes market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

Recurring Fair Value Measurements

The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 1, 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.



RMBS

The Company holds a portfolio of RMBS that are carried at fair value in the consolidated balance sheets. The Company determines the fair value of its RMBS based upon prices obtained from third-party pricing providers. The third-party pricing providers develop their pricing based on transaction prices of recent trades for similar financial instruments. If recent trades for similar financial instruments are unavailable, the third-party pricing providers use cash flow or other pricing models, which utilize observable inputs. As a result, the Company classified 100% of its RMBS as Level 2 fair value assets at December 31, 2025 and December 31, 2024.
 

MSRs

The Company, through its subsidiary Aurora, holds a portfolio of MSRs that are reported at fair value in the consolidated balance sheets. The Company uses a discounted cash flow model to estimate the fair value of these assets. Although MSR transactions are observable in the marketplace, the valuation includes unobservable market data inputs (prepayment speeds, costs to service and discount rates). As a result, the Company classified 100% of its MSRs as Level 3 fair value assets at December 31, 2025 and December 31, 2024.

Derivative Instruments

The Company enters into a variety of derivative instruments as part of its economic hedging strategies. The Company executes interest rate swaps, TBAs, Eris SOFR swap futures and U.S. Treasury futures. The Company utilizes third-party pricing providers to value its interest rate swaps and TBAs. The third-party pricing providers develop their pricing based on transaction prices of recent trades for similar financial instruments. If recent trades for similar financial instruments are unavailable, the third-party pricing providers use cash flow or other pricing models, which utilize observable inputs. As a result, the Company classified 100% of its interest rate swaps and TBAs as Level 2 fair value assets and liabilities at December 31, 2025 and December 31, 2024. The fair value of Eris SOFR swap futures is determined using quoted settlement prices published by the Eris Secured Overnight Financing Rate, which reflect observable market data. The Company has classified the characteristics used to determine the fair value of Eris SOFR swap futures as Level 2 fair value assets and liabilities at December 31, 2025 and December 31, 2024. U.S. Treasury futures are valued using market-based prices published by the U.S. Department of Treasury and classified as Level 1 fair value assets and liabilities at December 31, 2025 and December 31, 2024.

Both the Company and the derivative counterparties under their netting arrangements are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparties. Posting of cash collateral typically occurs daily, subject to certain dollar thresholds. Due to the existence of netting arrangements, as well as frequent cash collateral posting at low posting thresholds, credit exposure to the Company and/or counterparties is considered materially mitigated. The Company’s interest rate swaps and U.S. Treasury futures are required to be cleared on an exchange, which further mitigates, but does not eliminate, credit risk. Based on the Company’s assessment, there is no requirement for any additional adjustment to derivative valuations specifically for credit.

The following tables present the Company’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated (dollars in thousands):
Recurring Fair Value Measurements
As of December 31, 2025
   
Level 1
    
Level 2
    
Level 3
    
Carrying Value
  
Assets
                        
RMBS
                        
Fannie Mae
  
$
-
    
$
531,828
    
$
-
    
$
531,828
  
Freddie Mac
    
-
      
682,023
      
-
      
682,023
  
RMBS total
    
-
      
1,213,851
      
-
      
1,213,851
  
Derivative assets
                                
Interest rate swaps
    
-
      
13,353
      
-
      
13,353
  
U.S. treasury futures
     1,368       -       -       1,368  
Eris SOFR swap futures
     -
       36
       -
       36
  
Derivative assets total
    
1,368
      
13,389
      
-
      
14,757
  
Servicing related assets
    
-
      
-
      
214,831
      
214,831
  
Total Assets
  
$
1,368
    
$
1,227,240
    
$
214,831
    
$
1,443,439
  
Liabilities
                                
Derivative liabilities
                                
Interest rate swaps
  

-
    

1,199
   
-
    

1,199
TBAs, net
     -       1,076     -       1,076
Derivative liabilities total
    
-
      
2,275
   
-
      
2,275
Total Liabilities
  
$
-
    
$
2,275
 
$
-
    
$
2,275

As of December 31, 2024

 
Level 1
    
Level 2
    
Level 3
    
Carrying Value
  
Assets
                        
RMBS
                        
Fannie Mae
  
$
-
    
$
425,599
    
$
-
    
$
425,599
  
Freddie Mac
    
-
      
696,821
      
-
      
696,821
  
RMBS total
    
-
      
1,122,420
      
-
      
1,122,420
  
Derivative assets
                                
Interest rate swaps
    
-
      
17,244
      
-
      
17,244
  
TBAs, net
     -       10,434       -       10,434  
U.S. treasury futures
     2,337       -       -       2,337  
U.S. treasury futures options
     33       -       -       33  
Derivative assets total
    
2,370
      
27,678
      
-
      
30,048
  
Servicing related assets
    
-
      
-
      
233,658
      
233,658
  
Total Assets
  
$
2,370
    
$
1,150,098
    
$
233,658
    
$
1,386,126
  
Liabilities
                                
Derivative liabilities
                                
Interest rate swaps
    
-
      
3,869
      
-
      
3,869
  
Derivative liabilities total
    
-
      
3,869
      
-
      
3,869
  
Total Liabilities
  
$
-
    
$
3,869
    
$
-
    
$
3,869
  


The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of December 31, 2025 and December 31, 2024, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented.
Level 3 Assets and Liabilities

The valuation of Level 3 assets and liabilities requires significant judgment by management. The Company estimates the fair value of its Servicing Related Assets based on internal pricing models rather than quotations and compares the results of these internal models against the results from models generated by third-party pricing providers. The third-party pricing providers and management rely on inputs such as market price quotations from market makers (either market or indicative levels), original transaction price, recent transactions in the same or similar instruments, and changes in financial ratios or cash flows to determine fair value. Level 3 instruments may also be discounted to reflect illiquidity with the amount of such discount estimated by third-party pricing providers and management in the absence of market information. Assumptions used by third-party pricing providers and management due to lack of observable inputs may significantly impact the resulting fair value and, therefore, the Company’s consolidated financial statements. The Company’s management reviews all valuations that are based on pricing information received from third-party pricing providers. As part of this review, prices are compared against other pricing or input data points in the marketplace, along with internal valuation expertise, to ensure the pricing is reasonable.


Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant change to estimated fair values. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. It should be noted that minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of December 31, 2025 and December 31, 2024 and do not take into consideration the effects of subsequent changes in market or other factors.

The tables below present the reconciliation for the Company’s Level 3 assets (Servicing Related Assets) measured at fair value on a recurring basis as of the dates indicated (dollars in thousands):
Level 3 Fair Value Measurements

 
Year Ended December 31,
  
    2025    
2024
     2023  
Balance at beginning of period
   $ 233,658    
$
253,629
     $ 279,739  
Purchases, sales and other changes:
                        
Purchases
     -      
-
       5  
Sales (A)
     -       (12,804 )     -  
Other changes (B)
     (2 )    
(7
)
     (178 )
Purchases and sales:
  
(2 )  

(12,811
)
  
(173 )
Changes in Fair Value due to:
                        
Changes in valuation inputs or assumptions used in valuation model
     (4,590 )    
8,718
       (8,576 )
Other changes in fair value (C)
     (14,235 )    
(15,878
)
     (17,361 )
Unrealized gain (loss) included in Net Income
  
(18,825 )  

(7,160
)
  
(25,937 )
Balance at end of period
   $ 214,831    
$
233,658
     $ 253,629  

(A)
During the year ended December 31, 2024, the Company sold a portion of its MSRs to a third party for proceeds of $13.3 million and recognized a gain of $0.5 million on the sale.
(B)
Represents purchase price adjustments, principally contractual prepayment protection, and changes due to the Company’s repurchase of the underlying collateral.
(C)
Represents changes due to realization of expected cash flows and estimated MSR runoff.


The tables below present information about the significant unobservable inputs used in the fair value measurement of the Company’s Servicing Related Assets classified as Level 3 fair value assets as of the dates indicated (dollars in thousands):
Fair Value Measurements
As of December 31, 2025

 
Fair Value
  
Valuation Technique
  
Unobservable Input (A)
  
Range
  
Weighted
Average (B)
  
MSRs  
$
214,831
  
Discounted cash flow
  
Constant prepayment speed
    
4.0% - 13.3
%
  
6.5
%
         
       
  
Discount rate
          
9.2
%
                
Annual cost to service, per loan
        
$
87
  
TOTAL
  
$
214,831
                      

As of December 31, 2024

 
Fair Value
  
Valuation Technique
  
Unobservable Input (A)
    
Range
  
Weighted
Average (B)
  
MSRs  
$
233,658
  
Discounted cash flow
  
Constant prepayment speed
    
3.8% - 13.5
%
  
6.3
%
         
    
  
Discount rate
          
9.6
%
             
Annual cost to service, per loan
        
$
88
  
TOTAL
  
$
233,658
                      

(A)
Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurements. A change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of uncollected payments and a directionally opposite change in the assumption used for prepayment rates.
(B)
Weighted averages for unobservable inputs are calculated based on the unpaid principal balance of the portfolios.

Fair Value of Financial Assets and Liabilities

In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheets, for which fair value can be estimated. The following describes the Company’s methods for estimating the fair value for financial instruments.

•
RMBS available for sale securities, Servicing Related Assets, derivative assets and derivative liabilities are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the “Fair Value Measurements” section of this footnote.


•
Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments.


•
The carrying value of servicing receivables, repurchase agreements and corporate debt that mature in less than one year generally approximates fair value due to the short maturities. The Company does not hold any repurchase agreements that are considered long-term.


Corporate debt that matures in more than one year consists solely of financing secured by Aurora’s Servicing Related Assets. All of the Company’s debt is revolving and bears interest at adjustable rates. The Company considers that the amount of the corporate debt generally approximates fair value.