v3.26.1
Fair Value of Financial Instruments
 3 Months Ended
Mar. 31, 2026
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 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 either settled or subsequently rolled forward at a future date, 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.

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 March 31, 2026 and December 31, 2025, on the consolidated balance sheets by the valuation hierarchy, as previously described:

Fair Value at March 31, 2026
(In Thousands)Level 1Level 2Level 3Total
Assets:
Residential whole loans, at fair value$— $50,383 $7,689,431 $7,739,814 
Securities, at fair value— 3,585,879 — 3,585,879 
Total assets carried at fair value$— $3,636,262 $7,689,431 $11,325,693 
Liabilities:
Agreements with non-mark-to-market collateral provisions$— $— $32,368 $32,368 
Agreements with mark-to-market collateral provisions— — 82,144 82,144 
Securitized debt— 5,805,738 — 5,805,738 
Total liabilities carried at fair value$— $5,805,738 $114,512 $5,920,250 

Fair Value at December 31, 2025
(In Thousands)Level 1Level 2Level 3Total
Assets:    
Residential whole loans, at fair value$— $51,022 $7,665,985 $7,717,007 
Securities, at fair value— 3,360,280 — 3,360,280 
Total assets carried at fair value$— $3,411,302 $7,665,985 $11,077,287 
Liabilities:
Agreements with non-mark-to-market collateral provisions— — 48,245 48,245 
Agreements with mark-to-market collateral provisions— — 61,068 61,068 
Securitized debt— 5,846,744 — 5,846,744 
Total liabilities carried at fair value$— $5,846,744 $109,313 $5,956,057 
 
Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents additional information for the three months ended March 31, 2026 and 2025 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 March 31,
(In Thousands)20262025
Balance at beginning of period$7,665,985 $7,459,137 
Purchases and originations600,772 505,691 
Draws70,362 101,170 
Changes in fair value recorded in Net gain/(loss) on residential whole loans measured at fair value through earnings(34,483)52,900 
Repayments(506,305)(549,218)
Loan sales and repurchases(83,188)(70,352)
Transfer to REO(23,712)(20,398)
Balance at end of period$7,689,431 $7,478,930 
The following table presents additional information for the three months ended March 31, 2026 and 2025 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 March 31,
(In Thousands)20262025
Balance at beginning of period$48,245 $284,843 
Issuances— — 
Payment of principal(15,877)(100,454)
Changes in unrealized losses— — 
Balance at end of period$32,368 $184,389 

The following table presents additional information for the three months ended March 31, 2026 and 2025 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 March 31,
(In Thousands)20262025
Balance at beginning of period$61,068 $19,782 
Issuances25,681 — 
Payment of principal(4,605)(8,239)
Changes in unrealized losses— — 
Balance at end of period$82,144 $11,543 
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 March 31, 2026 and December 31, 2025, dollars in thousands:

March 31, 2026
Fair Value (1)
Valuation TechniqueUnobservable Input
Weighted Average (2)
Range
Min
Max
$7,312,494 Discounted cash flowDiscount rate6.5 %5.6 %20.0 %
Prepayment rate17.7 %— %49.9 %
Default rate1.6 %— %64.3 %
Loss severity11.3 %— %100.0 %
$317,410 Liquidation modelDiscount rate9.3 %8.0 %20.0 %
Annual change in home prices1.7 %— %6.7 %
Liquidation timeline (in years)
1.7
0.8
4.5
Current value of underlying properties (3)
$772$50$13,250
$7,629,904 
(1)Excludes approximately $59.5 million of Residential whole loans, at fair value, with a UPB of $100.0 million, which were marked-to-market, but not based on a model, at March 31, 2026.
(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, 2025
Fair Value (1)
Valuation TechniqueUnobservable Input
Weighted Average (2)
Range
Min
Max
$7,196,955 Discounted cash flowDiscount rate6.5 %5.5 %20.0 %
Prepayment rate17.1 %— %50.5 %
Default rate1.6 %— %68.2 %
Loss severity11.4 %— %100.0 %
$330,295 Liquidation modelDiscount rate9.1 %8.0 %20.0 %
Annual change in home prices1.9 %(0.9)%8.7 %
Liquidation timeline (in years)
1.7
0.1
4.5
Current value of underlying properties (3)
$748$19$11,400
$7,527,250 
(1)Excludes approximately $138.7 million of Residential whole loans, at fair value, with a UPB of $170.8 million, which were marked-to-market, but not based on a model at December 31, 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.
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 March 31, 2026 and December 31, 2025:
March 31, 2026March 31, 2026December 31, 2025
(In Thousands)Level in Fair Value HierarchyCarrying ValueEstimated Fair ValueCarrying ValueEstimated Fair Value
Financial Assets:
Residential whole loans3$8,733,317 $8,740,953 $8,759,332 $8,769,457 
Residential whole loans250,383 50,383 51,022 51,022 
Securities, at fair value23,585,879 3,585,879 3,360,280 3,360,280 
Cash and cash equivalents1221,573 221,573 213,211 213,211 
Restricted cash1189,238 189,238 173,457 173,457 
Financial Liabilities (1):
Financing agreements with non-mark-to-market collateral provisions364,569 64,575 82,016 82,019 
Financing agreements with mark-to-market collateral provisions31,432,213 1,432,643 1,331,968 1,332,593 
Financing agreements with mark-to-market collateral provisions23,140,730 3,140,730 2,980,762 2,980,762 
Securitized debt26,271,123 6,225,890 6,336,462 6,290,788 
Other secured financing323,713 23,713 23,908 23,908 
8.875% Senior Notes
2112,246 113,466 112,041 114,616 
9.00% Senior Notes
272,982 73,808 72,858 75,338 
(1)Carrying value of securitized debt, 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 three months ended March 31, 2026 and 2025, the Company recorded REO with an aggregate estimated fair value, less estimated cost to sell, of $25.3 million and $25.4 million, respectively, at the time of foreclosure. During the three months ended March 31, 2026, the Company reclassified one REO property originally classified as held for investment to held for sale status and marked it down to its estimated fair value, less estimated cost to sell, of $2.1 million.

Commercial REO - During the three months ended March 31, 2026 and 2025, the Company did not record any new Commercial REO, and did not record any valuation adjustments on Commercial REO.