Valuation
 12 Months Ended
Dec. 31, 2015
Fair Value Disclosures [Abstract]  
Valuation
Valuation
The following tables present the Company's financial instruments measured at fair value on:
December 31, 2015:
(In thousands)
 
 
 
 
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Mortgage-backed securities, at fair value:
 
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
 
15-year fixed rate mortgages
 
$
—

 
$
170,261

 
$
—

 
$
170,261

20-year fixed rate mortgages
 
—

 
19,830

 
—

 
19,830

30-year fixed rate mortgages
 
—

 
900,794

 
—

 
900,794

Adjustable rate mortgages
 
—

 
38,530

 
—

 
38,530

Reverse mortgages
 
—

 
73,692

 
—

 
73,692

Interest only securities
 
—

 
—

 
7,758

 
7,758

Non-Agency RMBS
 
—

 
27,381

 
4,020

 
31,401

Mortgage-backed securities, at fair value
 
—

 
1,230,488

 
11,778

 
1,242,266

Financial derivatives–assets, at fair value:
 
 
 
 
 
 
 
 
TBAs
 
—

 
417

 
—

 
417

Interest rate swaps
 
—

 
1,748

 
—

 
1,748

Futures
 
18

 
—

 
—

 
18

Total financial derivatives–assets, at fair value
 
18

 
2,165

 
—

 
2,183

Total mortgage-backed securities and financial derivatives–assets, at fair value
 
$
18

 
$
1,232,653

 
$
11,778

 
$
1,244,449

Liabilities:
 
 
 
 
 
 
 
 
U.S. Treasury securities sold short, at fair value
 
$
—

 
$
(78,447
)
 
$
—

 
$
(78,447
)
Financial derivatives–liabilities, at fair value:
 
 
 
 
 
 
 
 
TBAs
 
—

 
(364
)
 
—

 
(364
)
Interest rate swaps
 
—

 
(4,361
)
 
—

 
(4,361
)
Total financial derivatives–liabilities, at fair value
 
—

 
(4,725
)
 
—

 
(4,725
)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value
 
$
—

 
$
(83,172
)
 
$
—

 
$
(83,172
)
There were no transfers of financial instruments between Levels 1 and 2 of the fair value hierarchy during the year ended December 31, 2015.
December 31, 2014:
(In thousands)
 
 
 
 
 
 
 
 
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
Mortgage-backed securities, at fair value:
 
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
 
15-year fixed rate mortgages
 
$
—

 
$
138,028

 
$
—

 
$
138,028

20-year fixed rate mortgages
 
—

 
10,568

 
—

 
10,568

30-year fixed rate mortgages
 
—

 
1,122,254

 
—

 
1,122,254

Adjustable rate mortgages
 
—

 
44,283

 
—

 
44,283

Reverse mortgages
 
—

 
34,425

 
—

 
34,425

Interest only securities
 
—

 
—

 
11,244

 
11,244

Non-Agency RMBS
 
—

 
22,419

 
10,082

 
32,501

Mortgage-backed securities, at fair value
 
—

 
1,371,977

 
21,326

 
1,393,303

Financial derivatives–assets, at fair value:
 
 
 
 
 
 
 
 
TBAs
 
—

 
476

 
—

 
476

Interest rate swaps
 
—

 
2,518

 
—

 
2,518

Fixed payer swaptions
 
—

 
78

 
—

 
78

Total financial derivatives–assets, at fair value
 
—

 
3,072

 
—

 
3,072

Total mortgage-backed securities and financial derivatives–assets, at fair value
 
$
—

 
$
1,375,049

 
$
21,326

 
$
1,396,375

Liabilities:
 
 
 
 
 
 
 
 
U.S. Treasury securities sold short, at fair value
 
$
—

 
$
(13,959
)
 
$
—

 
$
(13,959
)
Financial derivatives–liabilities, at fair value:
 
 
 
 
 
 
 
 
TBAs
 
—

 
(1,674
)
 
—

 
(1,674
)
Interest rate swaps
 
—

 
(7,026
)
 
—

 
(7,026
)
Total financial derivatives–liabilities, at fair value
 
—

 
(8,700
)
 
—

 
(8,700
)
Total U.S. Treasury securities sold short and financial derivatives–liabilities, at fair value
 
$
—

 
$
(22,659
)
 
$
—

 
$
(22,659
)

There were no transfers of financial instruments between Levels 1 or 2 of the fair value hierarchy during the year ended December 31, 2014.
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:
Year ended December 31, 2015:
(In thousands)
Non-Agency RMBS
 
Agency RMBS
Beginning balance as of December 31, 2014
$
10,082

 
$
11,244

Purchases
—

 
4,360

Proceeds from sales
(2,861
)
 
(4,538
)
Principal repayments
(1,765
)
 
—

(Amortization)/accretion, net
1,371

 
(2,714
)
Net realized gains (losses)
791

 
602

Change in net unrealized gains (losses)
(496
)
 
(1,196
)
Transfers:
 
 
 
Transfers into level 3
1,681

 
—

Transfers out of level 3
(4,783
)
 
—

Ending balance as of December 31, 2015
$
4,020

 
$
7,758

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 at December 31, 2015, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2015. For Level 3 financial instruments held by the Company as of December 31, 2015, change in net unrealized gains (losses) of $(0.3) million and $(0.3) million, for the year ended December 31, 2015 relate to non-Agency RMBS and Agency RMBS, respectively.
For the year ended December 31, 2015, the Company transferred $4.8 million of non-Agency RMBS from Level 3 to Level 2. These assets were transferred from Level 3 to Level 2 based on an increased volume of observed trading of these and similar assets. This increase in observed trading activity has led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view. However, changes in the volume of observable inputs for these assets, such as a decrease in observed trading, could impact price transparency, and thereby cause a change in the level designation for these assets in future periods.
For the year ended December 31, 2015, the Company transferred $1.7 million of non-Agency RMBS from Level 2 to Level 3. Since December 31, 2014, these securities have exhibited indications of a reduced level of price transparency. Examples of such indications include wider spreads and/or higher delinquencies relative to similar securities and a reduction in observable transactions or executable quotes involving these and similar securities. Changes in these indications could impact price transparency, and thereby cause a change in the level designation in future periods.
Year ended December 31, 2014:
(In thousands)
Non-Agency RMBS
 
Agency RMBS
Beginning balance as of December 31, 2013
$
30,681

 
$
13,527

Purchases
14,712

 
4,853

Proceeds from sales
(11,104
)
 
(2,330
)
Principal repayments
(5,443
)
 
—

(Amortization)/accretion, net
1,930

 
(3,136
)
Net realized gains (losses)
1,518

 
676

Change in net unrealized gains (losses)
207

 
(2,346
)
Transfers:
 
 
 
Transfers into level 3
—

 
—

Transfers out of level 3
(22,419
)
 
—

Ending balance as of December 31, 2014
$
10,082

 
$
11,244


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 December 31, 2014, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2014. For Level 3 financial instruments held by the Company as of December 31, 2014, change in net unrealized gains (losses) of $0.7 million and $(2.0) million, for the year ended December 31, 2014 relate to non-Agency RMBS and Agency RMBS, respectively.
At December 31, 2014, the Company transferred $22.4 million of non-Agency RMBS from Level 3 to Level 2. The decision to transfer these assets from Level 3 to Level 2 was based on observed market developments, including an increased volume of buying and selling of these and similar assets, greater consensus among market participants on price based on market quotes, and generally tighter credit spreads driven by improved performance in the underlying collateral as well as increased demand from investors seeking higher yielding assets. These factors have led to greater price transparency for these assets, thereby making a Level 2 designation appropriate in the Company's view. However, changes in observed market developments could impact future price transparency, and thereby cause a change in the level designation in subsequent periods.
Year ended December 31, 2013:
(In thousands)
Non-Agency RMBS
 
Agency RMBS
Beginning balance as of December 31, 2012
$
13,596

 
$
—

Purchases
41,734

 
12,167

Proceeds from sales
(23,007
)
 
—

Principal repayments
(5,923
)
 
—

(Amortization)/accretion, net
952

 
(1,449
)
Net realized gains (losses)
1,433

 
—

Change in net unrealized gains (losses)
1,896

 
2,809

Transfers:
 
 
 
Transfers into level 3
—

 
—

Transfers out of level 3
—

 
—

Ending balance as of December 31, 2013
$
30,681

 
$
13,527

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 at December 31, 2013, as well as Level 3 financial instruments disposed of by the Company during the year ended December 31, 2013. For Level 3 financial instruments held by the Company at December 31, 2013, change in net unrealized gains (losses) of $2.0 million and $2.8 million, for the year ended December 31, 2013 relate to non-Agency RMBS and Agency RMBS, respectively.
The following tables identify the significant unobservable inputs that affect the valuation of the Company's Level 3 assets and liabilities as of December 31, 2015 and 2014:
December 31, 2015:
 
 
Range
 
 
Description
 
Fair Value
 
Valuation Technique
 
Significant
Unobservable Input
 
Min
 
Max
 
Weighted Average(1)
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Non-Agency RMBS
 
4,020

 
Discounted Cash Flows
 
Yield
 
8.8
%
 
25.7
%
 
13.4
%
 
 
 
 
 
 
Projected Collateral Prepayments
 
32.5
%
 
68.7
%
 
60.5
%
 
 
 
 
 
 
Projected Collateral Losses
 
1.3
%
 
9.0
%
 
5.3
%
 
 
 
 
 
 
Projected Collateral Recoveries
 
3.4
%
 
9.2
%
 
6.4
%
 
 
 
 
 
 
Projected Collateral Scheduled Amortization
 
13.1
%
 
60.1
%
 
27.8
%
 
 
 
 
 
 
 
 
 
 
 
 
100.0
%
Agency RMBS–Interest Only Securities
 
5,645

 
Market quotes
 
Non-Binding Third-Party Valuation
 
$
4.39

 
$
21.63

 
$
11.88

Agency RMBS–Interest Only Securities
 
2,113

 
Option Adjusted Spread ("OAS")
 
LIBOR OAS (2)
 
221

 
984

 
576

 
 
 
 
 
 
Projected Collateral Prepayments
 
52.7
%
 
88.0
%
 
74.1
%
 
 
 
 
 
 
Projected Collateral Scheduled Amortization
 
12.0
%
 
47.3
%
 
25.9
%
 
 
 
 
 
 
 
 
 
 
 
 
100.0
%
(1)
Averages are weighted based on the fair value of the related instrument.
(2)
Shown in basis points.
December 31, 2014:
 
 
Range
 
 
Description
 
Fair Value
 
Valuation Technique
 
Significant
Unobservable Input
 
Min
 
Max
 
Weighted Average(1)
 
 
(In thousands)
 
 
 
 
 
 
 
 
 
 
Non-Agency RMBS
 
$
7,819

 
Market quotes
 
Non-Binding Third-Party Valuation
 
$
21.38

 
$
84.91

 
$
54.11

Non-Agency RMBS
 
2,263

 
Discounted Cash Flows
 
Yield
 
6.3
%
 
6.3
%
 
6.3
%
 
 
 
 
 
 
Projected Collateral Prepayments
 
35.9
%
 
35.9
%
 
35.9
%
 
 
 
 
 
 
Projected Collateral Losses
 
7.5
%
 
7.5
%
 
7.5
%
 
 
 
 
 
 
Projected Collateral Recoveries
 
11.0
%
 
11.0
%
 
11.0
%
 
 
 
 
 
 
Projected Collateral Scheduled Amortization
 
45.6
%
 
45.6
%
 
45.6
%
 
 
 
 
 
 
 
 
 
 
 
 
100.0
%
Agency RMBS–Interest Only Securities
 
7,006

 
Market quotes
 
Non-Binding Third-Party Valuation
 
$
4.74

 
$
20.38

 
$
13.35

Agency RMBS–Interest Only Securities
 
4,238

 
Option Adjusted Spread ("OAS")
 
LIBOR OAS(2)
 
83

 
1,952

 
490

 
 
 
 
 
 
Projected Collateral Prepayments
 
63.3
%
 
92.3
%
 
75.2
%
 
 
 
 
 
 
Projected Collateral Scheduled Amortization
 
7.7
%
 
36.7
%
 
24.8
%
 
 
 
 
 
 
 
 
 
 
 
 
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 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 December 31, 2015 and 2014:
 
 
December 31, 2015
 
December 31, 2014
(In thousands)
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Other financial instruments
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
40,166

 
$
40,166

 
$
45,237

 
$
45,237

Due from brokers
 
33,297

 
33,297

 
18,531

 
18,531

Reverse repurchase agreements
 
78,632

 
78,632

 
13,987

 
13,987

Liabilities:
 
 
 
 
 
 
 
 
Repurchase agreements
 
1,222,719

 
1,222,719

 
1,323,080

 
1,323,080

Due to brokers
 
439

 
439

 
583

 
583

Cash and cash equivalents includes cash held in an interest bearing overnight account 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 balances consist primarily of cash and are short term in nature; fair value approximates carrying value and such balances 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.