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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: March 31, 2022
OR
             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NUMBER: 1-33796

CHIMERA INVESTMENT CORPORATION
(Exact name of Registrant as specified in its Charter) 
Maryland 26-0630461
(State or other jurisdiction of incorporation or organization)  (IRS Employer Identification No.)
                                                                                                                                             
630 Fifth Ave, Ste 2400
New York, New York
(Address of principal executive offices)
10111
(Zip Code)
(888) 895-6557
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
  
Common Stock, par value $0.01 per shareCIMNew York Stock Exchange
8.00% Series A Cumulative Redeemable Preferred StockCIM PRANew York Stock Exchange
8.00% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred StockCIM PRBNew York Stock Exchange
7.75% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred StockCIM PRCNew York Stock Exchange
8.00% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred StockCIM PRDNew York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Yes þ No ☐




Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes þ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ Accelerated filer Non-accelerated filer Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
ClassOutstanding at April 30, 2022
Common Stock, $0.01 par value237,047,539



CHIMERA INVESTMENT CORPORATION

FORM 10-Q

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Statements of Financial Condition as of March 31, 2022 (Unaudited) and December 31, 2021 (Derived from the audited consolidated financial statements as of December 31, 2021)
Consolidated Statements of Operations (Unaudited) for the quarters ended March 31, 2022 and 2021
Consolidated Statements of Comprehensive Income (Loss) (Unaudited) for the quarters ended March 31, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2022 and 2021
Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2022 and 2021
Notes to Consolidated Financial Statements (Unaudited)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
Part II.  OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
SIGNATURES
















1



Part I - Financial Information
Item 1. Consolidated Financial Statements

CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands, except share and per share data)
(Unaudited)
March 31, 2022December 31, 2021
Cash and cash equivalents$165,728 $385,741 
Non-Agency RMBS, at fair value (net of allowance for credit losses of $453 thousand and $213 thousand, respectively)
1,458,887 1,810,208 
Agency RMBS, at fair value74,104 60,487 
Agency CMBS, at fair value503,231 761,208 
Loans held for investment, at fair value12,905,280 12,261,926 
Accrued interest receivable72,418 69,513 
Other assets61,531 58,320 
Total assets (1)
$15,241,179 $15,407,403 
Liabilities:  
Secured financing agreements ($4.5 billion and $4.4 billion pledged as collateral, respectively)
$3,424,405 $3,261,613 
Securitized debt, collateralized by Non-Agency RMBS ($337 million and $365 million pledged as collateral, respectively)
84,188 87,999 
Securitized debt at fair value, collateralized by Loans held for investment ($11.4 billion and $11.0 billion pledged as collateral, respectively)
8,010,170 7,726,043 
Payable for investments purchased259,796 477,415 
Accrued interest payable21,422 20,416 
Dividends payable86,560 86,152 
Accounts payable and other liabilities17,910 11,574 
Total liabilities (1)
$11,904,451 $11,671,212 
Commitments and Contingencies (See Note 15)
Stockholders' Equity:  
Preferred Stock, par value of $0.01 per share, 100,000,000 shares authorized:
8.00% Series A cumulative redeemable: 5,800,000 shares issued and outstanding, respectively ($145,000 liquidation preference)
$58 $58 
8.00% Series B cumulative redeemable: 13,000,000 shares issued and outstanding, respectively ($325,000 liquidation preference)
130 130 
7.75% Series C cumulative redeemable: 10,400,000 shares issued and outstanding, respectively ($260,000 liquidation preference)
104 104 
8.00% Series D cumulative redeemable: 8,000,000 shares issued and outstanding, respectively ($200,000 liquidation preference)
80 80 
Common stock: par value $0.01 per share; 500,000,000 shares authorized, 237,044,792 and 236,951,266 shares issued and outstanding, respectively
2,370 2,370 
Additional paid-in-capital4,360,340 4,359,045 
Accumulated other comprehensive income364,099 405,054 
Cumulative earnings4,289,214 4,552,008 
Cumulative distributions to stockholders(5,679,667)(5,582,658)
Total stockholders' equity$3,336,728 $3,736,191 
Total liabilities and stockholders' equity$15,241,179 $15,407,403 
(1) The Company's consolidated statements of financial condition include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations and liabilities of the VIE for which creditors do not have recourse to the primary beneficiary (Chimera Investment Corporation). As of March 31, 2022, and December 31, 2021, total assets of consolidated VIEs were $11,025,170 and $10,666,591, respectively, and total liabilities of consolidated VIEs were $7,564,121 and $7,223,655, respectively. See Note 9 for further discussion.

See accompanying notes to consolidated financial statements.
2










CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
(Unaudited)
 For the Quarters Ended
March 31, 2022March 31, 2021
Net interest income:
Interest income (1)
$202,175 $243,127 
Interest expense (2)
64,473 108,066 
Net interest income137,702 135,061 
Increase/(decrease) in provision for credit losses240 (126)
Other investment gains (losses): 
Net unrealized gains (losses) on financial instruments at fair value(370,167)270,012 
Net realized gains (losses) on sales of investments— 37,796 
Gains (losses) on extinguishment of debt— (237,137)
Total other gains (losses)(370,167)70,671 
Other expenses: 
Compensation and benefits11,353 13,439 
General and administrative expenses5,711 5,198 
Servicing and asset manager fees9,291 9,281 
Transaction expenses3,804 16,437 
Total other expenses30,159 44,355 
Income (loss) before income taxes(262,864)161,503 
Income tax expense (benefit)(70)3,912 
Net income (loss)$(262,794)$157,591 
Dividends on preferred stock18,408 18,438 
Net income (loss) available to common shareholders$(281,202)$139,153 
Net income (loss) per share available to common shareholders:
Basic$(1.19)$0.60 
Diluted$(1.19)$0.54 
Weighted average number of common shares outstanding:
Basic237,012,702 230,567,231 
Diluted237,012,702 261,435,081 

(1) Includes interest income of consolidated VIEs of $131,066 and $158,100 for the quarters ended March 31, 2022 and 2021, respectively. See Note 9 to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $42,491 and $65,205 for the quarters ended March 31, 2022 and 2021, respectively. See Note 9 to consolidated financial statements for further discussion.

See accompanying notes to consolidated financial statements.








3










CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except share and per share data)
(Unaudited)
For the Quarters Ended
March 31, 2022March 31, 2021
Comprehensive income (loss): 
Net income (loss)$(262,794)$157,591 
Other comprehensive income: 
Unrealized gains (losses) on available-for-sale securities, net(40,955)(38,652)
Reclassification adjustment for net realized losses (gains) included in net income— (25,793)
Other comprehensive income (loss)(40,955)(64,445)
Comprehensive income (loss) before preferred stock dividends$(303,749)$93,146 
Dividends on preferred stock$18,408 $18,438 
Comprehensive income (loss) available to common stock shareholders$(322,157)$74,708 


See accompanying notes to consolidated financial statements.
4










CHIMERA INVESTMENT CORPORATION   
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share data)
(Unaudited)
For the Quarter Ended March 31, 2022
Series A Preferred Stock Par ValueSeries B Preferred Stock Par ValueSeries C Preferred Stock Par ValueSeries D Preferred Stock Par ValueCommon
Stock Par
Value
Additional Paid-in CapitalAccumulated Other Comprehensive IncomeCumulative EarningsCumulative Distributions to StockholdersTotal
Balance, December 31, 2021$58 $130 $104 $80 $2,370 $4,359,045 $405,054 $4,552,008 $(5,582,658)$3,736,191 
Net income (loss)— — — — — — — (262,794)— (262,794)
Other comprehensive income (loss)— — — — — — (40,955)— — (40,955)
Repurchase of common stock— — — — — — — — — — 
Stock based compensation— — — — — 1,295 — — — 1,295 
Common dividends declared— — — — — — — — (78,601)(78,601)
Preferred dividends declared— — — — — — — — (18,408)(18,408)
Balance, March 31, 2022$58 $130 $104 $80 $2,370 $4,360,340 $364,099 $4,289,214 $(5,679,667)$3,336,728 
For the Quarter Ended March 31, 2021
Series A Preferred Stock Par ValueSeries B Preferred Stock Par ValueSeries C Preferred Stock Par ValueSeries D Preferred Stock Par ValueCommon
Stock Par
Value
Additional Paid-in CapitalAccumulated Other Comprehensive IncomeCumulative EarningsCumulative Distributions to StockholdersTotal
Balance, December 31, 2020$58 $130 $104 $80 $2,306 $4,538,029 $558,096 $3,881,894 $(5,201,311)$3,779,386 
Net income (loss)— — — — — — — 157,591 — 157,591 
Other comprehensive income (loss)— — — — — — (64,445)— — (64,445)
Repurchase of common stock— — — — (2)(1,826)— — — (1,828)
Settlement of warrants— — — — — (219,840)— — — (219,840)
Stock based compensation— — — — 4,056 — — — 4,058 
Common dividends declared— — — — — — — — (69,986)(69,986)
Preferred dividends declared— — — — — — — — (18,438)(18,438)
Balance, March 31, 2021$58 $130 $104 $80 $2,306 $4,320,419 $493,651 $4,039,485 $(5,289,735)$3,566,498 

See accompanying notes to consolidated financial statements.
5










CHIMERA INVESTMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
 For the Quarters Ended
 March 31, 2022March 31, 2021
Cash Flows From Operating Activities:
Net income (loss)$(262,794)$157,591 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net25,897 13,260 
Accretion (amortization) of deferred financing costs, debt issuance costs, and securitized debt discounts/premiums, net(2,676)9,673 
Net unrealized losses (gains) on financial instruments at fair value370,167 (270,012)
Net realized losses (gains) on sales of investments— (37,796)
Net increase (decrease) in provision for credit losses240 (126)
(Gain) loss on extinguishment of debt— 237,137 
Equity-based compensation expense1,295 4,058 
Changes in operating assets:
Decrease (increase) in accrued interest receivable, net(2,904)3,593 
Decrease (increase) in other assets(1,160)12,042 
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities6,335 8,877 
Increase (decrease) in accrued interest payable, net1,518 (16,096)
Net cash provided by (used in) operating activities$135,918 $122,201 
Cash Flows From Investing Activities:
Agency MBS portfolio:  
Purchases$(44,627)$(28,856)
Sales— 201,037 
Principal payments230,321 147,859 
Non-Agency RMBS portfolio: 
Purchases(23,000)— 
Sales— 32,459 
Principal payments76,472 63,311 
Loans held for investment: 
Purchases(1,019,118)(1,069,554)
Sales— 903,358 
Principal payments592,603 564,559 
Net cash provided by (used in) investing activities$(187,349)$814,173 
Cash Flows From Financing Activities:
Proceeds from secured financing agreements$8,972,972 $14,021,592 
Payments on secured financing agreements(8,810,180)(14,615,709)
Net proceeds from preferred stock offerings— — 
Payments on repurchase of common stock— (1,828)
Proceeds from securitized debt borrowings, collateralized by Loans held for investment262,118 3,400,687 
Payments on securitized debt borrowings, collateralized by Loans held for investment(495,172)(3,379,096)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS(1,719)(5,499)
Settlement of warrants— (219,840)
Common dividends paid(78,194)(69,844)
Preferred dividends paid(18,407)(18,438)
Net cash provided by (used in) financing activities$(168,582)$(887,975)
Net increase (decrease) in cash and cash equivalents(220,013)48,399 
6










Cash and cash equivalents at beginning of period385,741 269,090 
Cash and cash equivalents at end of period$165,728 $317,489 
Supplemental disclosure of cash flow information:
Interest received$225,168 $259,981 
Interest paid$66,143 $114,490 
Non-cash investing activities: 
Payable for investments purchased$259,796 $76,534 
Net change in unrealized gain (loss) on available-for sale securities$(40,955)$(64,445)
Transfer of investments due to consolidation
Loans held for investment, at fair value$1,047,838 $— 
   Securitized debt at fair value, collateralized by loans held for investment$774,510 $— 
Non-Agency RMBS, at fair value$(218,276)$— 
Non-cash financing activities: 
   Dividends declared, not yet paid$86,560 $77,355 


See accompanying notes to consolidated financial statements.
7










CHIMERA INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Chimera Investment Corporation, or the Company, was organized in Maryland on June 1, 2007. The Company commenced operations on November 21, 2007 when it completed its initial public offering. The Company elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder, or the Code.

The Company is an internally managed REIT that is primarily engaged, through its subsidiaries, in the business of investing in a diversified portfolio of mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency RMBS, Agency CMBS, and other real estate-related assets. The following defines certain of the commonly used terms in this Quarterly Report on Form 10-Q: Agency refers to a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of the U.S. Government, such as Ginnie Mae; MBS refers to mortgage-backed securities secured by pools of residential or commercial mortgage loans; Agency RMBS and Agency CMBS refer to MBS that are secured by pools of residential and commercial mortgage loans, respectively, and are issued or guaranteed by an Agency; Agency MBS refers to MBS that are issued or guaranteed by an Agency and includes Agency RMBS and Agency CMBS collectively; Non-Agency RMBS refers to residential MBS that are not guaranteed by any agency of the U.S. Government or any Agency. IO refers to Interest-only securities.

The Company conducts its operations through various subsidiaries including subsidiaries it treats as taxable REIT subsidiaries, or TRSs. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate related business. The Company currently has twelve wholly-owned direct subsidiaries: Chimera RMBS Whole Pool LLC and Chimera RMBS LLC formed in June 2009; CIM Trading Company LLC, or CIM Trading, formed in July 2010; Chimera Funding TRS LLC, or CIM Funding TRS, a TRS formed in October 2013; Chimera CMBS Whole Pool LLC and Chimera RMBS Securities LLC formed in March 2015; Chimera RR Holding LLC formed in April 2016; Anacostia LLC, a TRS formed in June 2018; NYH Funding LLC, a TRS formed in May 2019; Kali 2020 Holdings LLC formed in May 2020; Varuna Capital Partners LLC formed in September 2020; and Aarna Holdings LLC formed in November 2020.

The Company holds a non-consolidated interest in Kah Capital Management, which is accounted for as an equity method investment in other assets on the Statement of Financial Condition. The Company paid $250 thousand and $346 thousand, during the quarters ended March 31, 2022 and 2021, respectively, in fees to Kah Capital Management for investment services provided, which are reported within Other Expenses on the Statement of Operations.

2. Summary of the Significant Accounting Policies

(a) Basis of Presentation and Consolidation

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of the Company, all normal and recurring adjustments considered necessary for a fair presentation of its financial position, results of operations and cash flows have been included. Investment transactions are recorded on the trade date.

The consolidated financial statements include the Company’s accounts, the accounts of its wholly-owned subsidiaries, and variable interest entities, or VIEs, in which the Company is the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.

The Company uses securitization trusts considered to be VIEs in its securitization transactions. VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly impact the VIEs’ economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design and structure of the VIE.

8










The trusts are structured as entities that receive principal and interest on the underlying collateral and distribute those payments to the security holders. The assets held by the securitization entities are restricted in that they can only be used to fulfill the obligations of the securitization entity. The Company’s risks associated with its involvement with these VIEs are limited to its risks and rights as a holder of the security it has retained as well as certain risks associated with being the sponsor and depositor of and the seller, directly or indirectly to, the securitizations entities.

Determining the primary beneficiary of a VIE requires judgment. The Company determined that for the securitizations it consolidates, its ownership provides the Company with the obligation to absorb losses or the right to receive benefits from the VIE that could be significant to the VIE. In addition, the Company has the power to direct the activities of the VIEs that most significantly impact the VIEs’ economic performance, or power, such as rights to replace the servicer without cause, or the Company was determined to have power in connection with its involvement with the structure and design of the VIE.
The Company’s interest in the assets held by these securitization vehicles, which are consolidated on the Company’s Consolidated Statements of Financial Condition, is restricted by the structural provisions of these trusts, and a recovery of the Company’s investment in the vehicles will be limited by each entity’s distribution provisions. Generally, the securities retained by the Company are the most subordinate in the capital structure, which means those securities receive distributions after the senior securities have been paid. The liabilities of the securitization vehicles, which are also consolidated on the Company’s Consolidated Statements of Financial Condition, are non-recourse to the Company, and can only be satisfied using proceeds from each securitization vehicle’s respective asset pool.
The assets of securitization entities are comprised of residential mortgage-backed securities, or RMBS, or residential mortgage loans. See Notes 3, 4 and 9 for further discussion of the characteristics of the securities and loans in the Company’s portfolio.
(b) Statements of Financial Condition Presentation
The Company’s Consolidated Statements of Financial Condition include both the Company’s direct assets and liabilities and the assets and liabilities of consolidated securitization vehicles. Retained beneficial interests of the consolidated securitization vehicles are eliminated on consolidation. Assets of each consolidated VIE can only be used to satisfy the obligations of that VIE, and the liabilities of consolidated VIEs are non-recourse to the Company. The Company is not obligated to provide, nor does it intend to provide, any financial support to these consolidated securitization vehicles. The notes to the consolidated financial statements describe the Company’s assets and liabilities including the assets and liabilities of consolidated securitization vehicles. See Note 9 for additional information related to the Company’s investments in consolidated securitization vehicles.

(c) Use of Estimates

The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be materially different than anticipated in those estimates, which could have a material adverse impact on the Company’s results of operations and its financial condition.

The Company has made significant estimates including in accounting for income recognition on Agency MBS, Non-Agency RMBS, IO MBS (Note 3) and residential mortgage loans (Note 4), valuation of Agency MBS and Non-Agency RMBS (Notes 3 and 5), residential mortgage loans (Notes 4 and 5) and securitized debt (Notes 5 and 7). Actual results could differ materially from those estimates.

d) Significant Accounting Policies

There have been no significant changes to the Company's accounting policies included in Note 2 to the consolidated financial statements of the Company’s Form 10-K for the year ended December 31, 2021, other than the significant accounting policies discussed below.

Fair Value Disclosure

A complete discussion of the methodology utilized by the Company to estimate the fair value of its financial instruments is included in Note 5 to these consolidated financial statements.



9










Income Taxes

The Company does not have any material unrecognized tax positions that would affect its financial statements or require disclosure. No accruals for penalties and interest were necessary as of March 31, 2022, or December 31, 2021.

(e) Recent Accounting Pronouncements

Reference Rate Reform (Topic 848)

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2020-4, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference London Inter Bank Offering Rate (or LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for contracts held by the Company subject to reference rate reform that fall within the scope of this update beginning immediately through December 31, 2022 at which time the transition is expected to be complete. The Company has not yet had any contracts modified to adopt reference rate reform. When a contract within the scope of this update is updated for reference rate reform, the Company will evaluate the impact in accordance with this update.

Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)

In August 2020, the FASB issued ASU No. 2020-6, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The FASB issued this update to simplify the current guidance for convertible instruments and the derivatives scope exception for contracts in an entity’s own equity. Additionally, the amendments affect the diluted earnings per share, or EPS, calculation for instruments that may be settled in cash or shares and for convertible instruments. The update also provides for expanded disclosure requirements to increase transparency. The Company adopted the guidance on January 1, 2022. The Company does not have convertible instruments and contracts in its own equity, therefore, the adoption of this guidance did not have any material impact on the Company's consolidated financial statements.

3. Mortgage-Backed Securities

The Company classifies its Non-Agency RMBS as senior, subordinated, or Interest-only. The Company also invests in Agency MBS which it classifies as Agency RMBS to include residential and residential interest-only MBS and Agency CMBS to include commercial and commercial interest-only MBS. Senior interests in Non-Agency RMBS are generally entitled to the first principal repayments in their pro-rata ownership interests at the acquisition date. The tables below present amortized cost, allowance for credit losses, fair value and unrealized gain/losses of the Company's MBS investments as of March 31, 2022 and December 31, 2021.
March 31, 2022
(dollars in thousands)
Principal or Notional ValueTotal PremiumTotal DiscountAmortized CostAllowance for credit lossesFair ValueGross Unrealized GainsGross Unrealized LossesNet Unrealized Gain/(Loss)
Non-Agency RMBS        
Senior$1,250,785 $4,613 $(664,447)$590,951 $(283)$929,028 $339,274 $(914)$338,360 
Subordinated512,981 4,781 (169,024)348,738 (170)394,387 51,853 (6,034)45,819 
Interest-only3,644,165 181,159 — 181,159 — 135,472 20,791 (66,478)(45,687)
Agency RMBS       
Interest-only1,501,720 122,163 — 122,163 — 74,104 (48,065)(48,059)
Agency CMBS
Project loans329,515 6,830 (205)336,140 — 356,200 20,060 — 20,060 
Interest-only2,779,083 154,135 — 154,135 — 147,031 2,299 (9,403)(7,104)
Total$10,018,249 $473,681 $(833,676)$1,733,286 $(453)$2,036,222 $434,283 $(130,894)$303,389 
10










December 31, 2021
(dollars in thousands)
Principal or Notional ValueTotal PremiumTotal DiscountAmortized CostAllowance for credit lossesFair ValueGross Unrealized GainsGross Unrealized LossesNet Unrealized Gain/(Loss)
Non-Agency RMBS        
Senior$1,283,788 $5,906 $(673,207)$616,487 $(212)$985,682 $369,913 $(506)$369,407 
Subordinated845,432 5,179 (274,843)575,768 (1)652,025 99,240 (22,982)76,258 
Interest-only3,904,665 191,230 — 191,230 — 172,501 36,512 (55,241)(18,729)
Agency RMBS        
Interest-only992,978 102,934 — 102,934 — 60,487 — (42,447)(42,447)
Agency CMBS
Project loans560,565 10,812 (879)570,498 — 614,419 43,921 — 43,921 
Interest-only2,578,640 147,024 — 147,024 — 146,789 3,044 (3,279)(235)
Total$10,166,068 $463,085 $(948,929)$2,203,941 $(213)$2,631,903 $552,630 $(124,455)$428,175 

The following tables present the gross unrealized losses and estimated fair value of the Company’s Agency and Non-Agency MBS by length of time that such securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021. All available for sale Non-Agency RMBS not accounted under the fair value option election in an unrealized loss position have been evaluated by the Company for current expected credit losses.
March 31, 2022
(dollars in thousands)
 Unrealized Loss Position for Less than 12 MonthsUnrealized Loss Position for 12 Months or MoreTotal
 Estimated Fair ValueUnrealized LossesNumber of PositionsEstimated Fair ValueUnrealized LossesNumber of PositionsEstimated Fair ValueUnrealized LossesNumber of Positions
Non-Agency RMBS         
Senior$33,061 $(914)$— $— — $33,061 $(914)
Subordinated82,823 (4,880)14 20,458 (1,154)8103,281 (6,034)22
Interest-only40,088 (9,890)5623,215 (56,588)5663,303 (66,478)112
Agency RMBS       
Interest-only24,695 (3,688)1449,215 (44,377)21 73,910 (48,065)35
Agency CMBS
Interest-only134,635 (9,218)444 (185)135,079 (9,403)10
Total$315,302 $(28,590)95$93,332 $(102,304)87$408,634 $(130,894)182 
11










December 31, 2021
(dollars in thousands)
 Unrealized Loss Position for Less than 12 MonthsUnrealized Loss Position for 12 Months or MoreTotal
 Estimated Fair ValueUnrealized LossesNumber of PositionsEstimated Fair ValueUnrealized LossesNumber of PositionsEstimated Fair ValueUnrealized LossesNumber of Positions
Non-Agency RMBS         
Senior$30,846 $(506)$— $— — $30,846 $(506)
Subordinated36,942 (657)28,371 (22,325)965,313 (22,982)16 
Interest-only11,872 (1,958)24 30,474 (53,283)5642,346 (55,241)80 
Agency RMBS         
Interest-only5,003 (1,215)55,486 (41,232)21 60,489 (42,447)25 
Agency CMBS
Interest-only131,551 (3,164)491 (115)1132,042 (3,279)
Total$216,214 $(7,500)44$114,822 $(116,955)87$331,036 $(124,455)131 

At March 31, 2022, the Company did not intend to sell any of its Agency and Non-Agency MBS that were in an unrealized loss position, and it was not more likely than not that the Company would be required to sell these MBS investments before recovery of their amortized cost basis, which may be at their maturity. With respect to RMBS held by consolidated VIEs, the ability of any entity to cause the sale by the VIE prior to the maturity of these RMBS is either expressly prohibited, not probable, or is limited to specified events of default, none of which have occurred as of March 31, 2022.

The Company did not have any gross unrealized losses on its Agency MBS (excluding Agency MBS which are reported at fair value with changes in fair value recorded in earnings) as of March 31, 2022 and December 31, 2021.

Gross unrealized losses on the Company’s Non-Agency RMBS (excluding Non-Agency RMBS which are reported at fair value with changes in fair value recorded in earnings), net of any allowance for credit losses, were $909 thousand and $506 thousand, at March 31, 2022 and December 31, 2021, respectively. After evaluating the securities and recording any allowance for credit losses, the Company concluded that the remaining unrealized losses reflected above were non-credit related and would be recovered from the securities' estimated future cash flows. The Company considered a number of factors in reaching this conclusion, including that it did not intend to sell the securities, it was not considered more likely than not that it would be forced to sell the securities prior to recovering the amortized cost, and there were no material credit events that would have caused the Company to otherwise conclude that it would not recover the amortized cost. The allowance for credit losses are calculated by comparing the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to the net amortized cost basis. Significant judgment is used in projecting cash flows for Non-Agency RMBS.

The Company has reviewed its Non-Agency RMBS that are in an unrealized loss position to identify those securities with losses that are credit related based on an assessment of changes in cash flows expected to be collected for such RMBS, which considers recent bond performance and expected future performance of the underlying collateral. A summary of the credit losses allowance on available-for-sale securities for the quarter ended March 31, 2022 and 2021 is presented below.

12










For the Quarter Ended
March 31, 2022March 31, 2021
(dollars in thousands)
Beginning allowance for credit losses$213 $180 
Additions to the allowance for credit losses on securities for which credit losses were not previously recorded339 — 
Allowance on purchased financial assets with credit deterioration— — 
Reductions for the securities sold during the period — — 
Increase/(decrease) on securities with an allowance in the prior period(41)(164)
Write-offs charged against the allowance(58)(62)
Recoveries of amounts previously written off— 100 
Ending allowance for credit losses$453 $54 

The following table presents significant credit quality indicators used for the credit loss allowance on our Non-Agency RMBS investments as of March 31, 2022 and December 31, 2021.
March 31, 2022
(dollars in thousands)
  Prepay RateCDRLoss Severity
  Amortized CostWeighted AverageWeighted AverageWeighted Average
Non-Agency RMBS
Senior29,392 14.1%3.3%50.8%
Subordinated11,013 15.0%0.5%45.0%

December 31, 2021
(dollars in thousands)
  Prepay RateCDRLoss Severity
  Amortized CostWeighted AverageWeighted AverageWeighted Average
Non-Agency RMBS
Senior6,941 2.4%5.1%60.9%
Subordinated10.0%0.3%30.0%

The increase in the allowance for credit losses for the quarter ended March 31, 2022 is primarily due to increases in expected losses and delinquencies as compared to the same period of 2021. In addition, certain Non-Agency RMBS positions, which had previously been in an unrealized gain position as of the prior year-end, are now in an unrealized loss position as of the end of the current period due to the decline in fair value. These Non-Agency RMBS positions now in an unrealized loss have resulted in the recognition of an allowance for credit losses which was previously limited by unrealized gains on these investments.

The following tables present a summary of unrealized gains and losses at March 31, 2022 and December 31, 2021.
13










March 31, 2022
(dollars in thousands) 
Gross Unrealized Gain Included in Accumulated Other Comprehensive IncomeGross Unrealized Gain Included in Cumulative EarningsTotal Gross Unrealized GainGross Unrealized Loss Included in Accumulated Other Comprehensive IncomeGross Unrealized Loss Included in Cumulative EarningsTotal Gross Unrealized Loss
Non-Agency RMBS      
Senior$339,274 $— $339,274 $(312)$(602)$(914)
Subordinated24,580 27,273 51,853 (597)(5,437)(6,034)
Interest-only— 20,791 20,791 — (66,478)(66,478)
Agency RMBS    
Interest-only— — (48,065)(48,065)
Agency CMBS
Project loans1,154 18,906 20,060 — — — 
Interest-only— 2,299 2,299 — (9,403)(9,403)
Total$365,008 $69,275 $434,283 $(909)$(129,985)$(130,894)
December 31, 2021
(dollars in thousands)  
Gross Unrealized Gain Included in Accumulated Other Comprehensive IncomeGross Unrealized Gain Included in Cumulative EarningsTotal Gross Unrealized GainGross Unrealized Loss Included in Accumulated Other Comprehensive IncomeGross Unrealized Loss Included in Cumulative EarningsTotal Gross Unrealized Loss
Non-Agency RMBS      
Senior$369,913 $— $369,913 $(506)$— $(506)
Subordinated33,587 65,653 99,240 — (22,982)(22,982)
Interest-only— 36,512 36,512 — (55,241)(55,241)
Agency RMBS      
Interest-only— — — — (42,447)(42,447)
Agency CMBS
Project loans2,060 41,861 43,921 — — — 
Interest-only— 3,044 3,044 — (3,279)(3,279)
Total$405,560 $147,070 $552,630 $(506)$(123,949)$(124,455)

Changes in prepayments, actual cash flows, and cash flows expected to be collected, among other items, are affected by the collateral characteristics of each asset class. The Company chooses assets for the portfolio after carefully evaluating each investment’s risk profile.

The following tables provide a summary of the Company’s MBS portfolio at March 31, 2022 and December 31, 2021.
 March 31, 2022
 Principal or Notional Value
at Period-End
(dollars in thousands)
Weighted Average Amortized
Cost Basis
Weighted Average Fair ValueWeighted Average
Coupon
Weighted Average Yield at Period-End (1)
Non-Agency RMBS    
Senior
$1,250,785 $47.25 74.28 4.5 %17.7 %
Subordinated
512,981 67.98 76.88 4.6 %7.1 %
Interest-only
3,644,165 4.97 3.72 1.7 %12.2 %
Agency RMBS     
Interest-only1,501,720 8.13 4.93 1.1 %1.3 %
Agency CMBS
Project loans
329,515 102.01 108.10 4.4 %4.2 %
Interest-only
2,779,083 5.55 5.29 0.7 %4.0 %
(1) Bond Equivalent Yield at period end.
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 December 31, 2021
 Principal or Notional Value at Period-End
(dollars in thousands)
Weighted Average Amortized
Cost Basis
Weighted Average Fair ValueWeighted Average
Coupon
Weighted Average Yield at Period-End (1)
Non-Agency RMBS    
Senior
$1,283,788 $48.02 $76.78 4.5 %18.0 %
Subordinated
845,432 68.10 77.12 3.8 %7.1 %
Interest-only
3,904,665 4.90 4.42 1.7 %13.2 %
Agency RMBS     
Interest-only
992,978 10.37 6.09 1.3 %0.3 %
Agency CMBS
Project loans
560,565 101.77 109.61 4.3 %4.1 %
Interest-only
2,578,640 5.70 5.69 0.7 %4.6 %
(1) Bond Equivalent Yield at period end.

Actual maturities of MBS are generally shorter than the stated contractual maturities. Actual maturities of the Company’s MBS are affected by the underlying mortgages, periodic payments of principal, realized losses and prepayments of principal. The following tables provide a summary of the fair value and amortized cost of the Company’s MBS at March 31, 2022 and December 31, 2021 according to their estimated weighted-average life classifications. The weighted-average lives of the MBS in the tables below are based on lifetime expected prepayment rates using the Company's prepayment assumptions for the Agency MBS and Non-Agency RMBS. The prepayment model considers current yield, forward yield, steepness of the interest rate curve, current mortgage rates, mortgage rates of the outstanding loan, loan age, margin, and volatility.
March 31, 2022
(dollars in thousands) 
 Weighted Average Life
Less than one yearGreater than one year and less
than five years
Greater than five years and less
than ten years
Greater than ten yearsTotal
Fair value     
Non-Agency RMBS     
Senior$36,524 $234,069 $290,550 $367,885 $929,028 
Subordinated6,252 119,940 32,735 235,460 394,387 
Interest-only2,761 82,374 47,967 2,370 135,472 
Agency RMBS     
Interest-only— 1,978 72,126 — 74,104 
Agency CMBS
Project loans8,320 — — 347,880 356,200 
Interest-only666 143,114 3,251 — 147,031 
Total fair value$54,523 $581,475 $446,629 $953,595 $2,036,222 
Amortized cost     
Non-Agency RMBS     
Senior$27,144 $166,158 $173,406 $224,243 $590,951 
Subordinated2,216 106,481 28,438 211,603 348,738 
Interest-only27,909 103,354 47,539 2,357 181,159 
Agency RMBS     
Interest-only— 2,249 119,914 — 122,163 
Agency CMBS
Project loans8,320 — — 327,820 336,140 
Interest-only1,248 149,771 3,116 — 154,135 
Total amortized cost$66,837 $528,013 $372,413 $766,023 $1,733,286 
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December 31, 2021
(dollars in thousands)
 Weighted Average Life
Less than one yearGreater than one year and less
than five years
Greater than five years and less
than ten years
Greater than ten yearsTotal
Fair value     
Non-Agency RMBS     
Senior$3,186 $279,222 $318,684 $384,590 $985,682 
Subordinated3,303 149,089 276,979 222,654 652,025 
Interest-only2,300 140,558 29,642 172,501 
Agency RMBS     
Interest-only— — 60,487 — 60,487 
Agency CMBS
Project loans8,388 — — 606,031 614,419 
Interest-only1,335 141,997 3,457 — 146,789 
Total fair value$18,512 $710,866 $689,249 $1,213,276 $2,631,903 
Amortized cost     
Non-Agency RMBS     
Senior$2,349 $194,506 $190,030 $229,602 $616,487 
Subordinated129,063 244,103 202,601 575,768 
Interest-only27,764 140,757 22,648 61 191,230 
Agency RMBS     
Interest-only— — 102,934 — 102,934 
Agency CMBS
Project loans8,388 — — 562,110 570,498 
Interest-only1,540 142,290 3,194 — 147,024 
Total amortized cost$40,042 $606,616 $562,909 $994,374 $2,203,941 

The Non-Agency RMBS investments are secured by pools of mortgage loans which are subject to credit risk. The following table summarizes the delinquency, bankruptcy, foreclosure and Real estate owned, or REO, total of the pools of mortgage loans securing the Company’s investments in Non-Agency RMBS at March 31, 2022 and December 31, 2021. When delinquency rates increase, it is expected that the Company will incur additional credit losses.

March 31, 202230 Days Delinquent60 Days Delinquent90+ Days DelinquentBankruptcyForeclosureREOTotal
% of Unpaid Principal Balance2.9 %1.0 %4.5 %1.3 %3.1 %0.5 %13.3 %


December 31, 202130 Days Delinquent60 Days Delinquent90+ Days DelinquentBankruptcyForeclosureREOTotal
% of Unpaid Principal Balance3.4 %1.3 %5.5 %1.3 %2.6 %0.4 %14.5 %


The Non-Agency RMBS in the Portfolio have the following collateral characteristics at March 31, 2022 and December 31, 2021.
 March 31, 2022December 31, 2021
Weighted average maturity (years) 20.1 21.4
Weighted average amortized loan to value (1)
 59.3 % 60.3 %
Weighted average FICO (2)
 713 706
Weighted average loan balance (in thousands) $262  $259 
Weighted average percentage owner-occupied 83.7 % 84.0 %
Weighted average percentage single family residence 61.4 % 62.7 %
Weighted average current credit enhancement 1.0 % 1.2 %
Weighted average geographic concentration of top four statesCA32.3 %CA31.2 %
NY10.7 %NY10.4 %
FL8.0 %FL8.0 %
NJ4.6 %NJ4.6 %
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(1) Value represents appraised value of the collateral at the time of loan origination.
(2) FICO as determined at the time of loan origination.

The table below presents the origination year of the underlying loans related to the Company’s portfolio of Non-Agency RMBS at March 31, 2022 and December 31, 2021.
Origination YearMarch 31, 2022December 31, 2021
2003 and prior1.4 %1.4 %
20041.2 %1.2 %
20059.5 %8.6 %
200645.4 %53.7 %
200730.9 %25.3 %
2008 and later11.6 %9.8 %
Total100.0 %100.0 %

Gross realized gains and losses are recorded in “Net realized gains (losses) on sales of investments” on the Company’s Consolidated Statements of Operations. The proceeds and gross realized gains and gross realized losses from sales of investments for the quarters ended March 31, 2022 and 2021 are as follows:
 For the Quarters Ended
 March 31, 2022March 31, 2021
 (dollars in thousands)
Proceeds from sales:
Non-Agency RMBS— 32,459 
Agency CMBS— 201,037 
Gross realized gains:
Non-Agency RMBS— 26,513 
Agency CMBS— 13,735 
Gross realized losses:
Non-Agency RMBS— (2,452)
Net realized gain (loss)$— $37,796 


4. Loans Held for Investment

The Loans held for investment are comprised primarily of loans collateralized by seasoned reperforming residential mortgages. Additionally, it includes business purpose loans.

At March 31, 2022 and December 31, 2021, all Loans held for investment are carried at fair value. See Note 5 for a discussion on how the Company determines the fair values of the Loans held for investment. As changes in the fair value of these loans are reflected in earnings, the Company does not estimate or record a loan loss provision. The total amortized cost of the Company's Loans held for investment was $12.7 billion and $11.4 billion as of March 31, 2022 and December 31, 2021, respectively.

The following table provides a summary of the changes in the carrying value of Loans held for investment at fair value at March 31, 2022 and December 31, 2021:
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For the Quarter EndedFor the Year Ended
March 31, 2022December 31, 2021
 (dollars in thousands)
Balance, beginning of period$12,261,926 $13,112,129 
Transfer due to consolidation1,047,838 — 
Purchases807,541 3,364,609 
Principal paydowns(592,603)(2,652,767)
Sales and settlements(2,540)(1,679,280)
Net periodic accretion (amortization)(18,586)(79,368)
Change in fair value(598,296)196,603 
Balance, end of period$12,905,280 $12,261,926 

The primary cause of the change in fair value is due to market demand, interest rates and changes in credit risk of mortgage loans. The Company did not retain any beneficial interests on loan sales during the quarter ended March 31, 2022. During the year ended December 31, 2021, the Company sold loans with a fair value of $450 million, with the Company retaining $25 million of beneficial interests in these loans.

Residential mortgage loans

The loan portfolio for all residential mortgages were originated during the following periods:

Origination Year
March 31, 2022 (1)
December 31, 2021 (1)
2002 and prior6.4 %6.6 %
20035.6 %5.7 %
200410.9 %11.7 %
200517.7 %18.6 %
200621.8 %22.7 %
200722.5 %22.6 %
20086.3 %6.2 %
20091.5 %1.2 %
2010 and later7.3 %4.7 %
Total100.0 %100.0 %
(1) The above table excludes approximately $238 million and $437 million of Loans held for investment for March 31, 2022 and December 31, 2021, respectively, which were purchased prior to the reporting dates and settled subsequent to the reporting periods.

The following table presents a summary of key characteristics of the residential loan portfolio at March 31, 2022 and December 31, 2021:
 
March 31, 2022 (1)
December 31, 2021 (1)
Number of loans 124,202 114,946
Weighted average maturity (years) 21.0 19.3
Weighted average loan to value 83.7 % 84.2 %
Weighted average FICO 651 656
Weighted average loan balance (in thousands) $101  $96 
Weighted average percentage owner occupied 87.7 % 88.8 %
Weighted average percentage single family residence 80.6 % 82.2 %
Weighted average geographic concentration of top five statesCA13.7 %CA13.9 %
NY8.5 %FL8.1 %
FL8.4 %NY8.0 %
PA4.7 %VA4.8 %
VA4.5 %PA4.8 %
(1) The above table excludes approximately $238 million and $437 million of Loans held for investment for March 31, 2022 and December 31, 2021, respectively, which were purchased prior to the reporting dates and settled subsequent to the reporting periods.

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The following table summarizes the outstanding principal balance of the residential loan portfolio which are 30 days delinquent and greater as reported by the servicers at March 31, 2022 and December 31, 2021, respectively.

 30 Days Delinquent60 Days Delinquent90+ Days DelinquentBankruptcyForeclosureREOTotalUnpaid Principal Balance
(dollars in thousands)
March 31, 2022 (1)
$805,856$251,822$639,956$230,734$314,231$30,686$2,273,285$12,561,998
% of Unpaid Principal Balance6.4 %2.0 %5.1 %1.8 %2.5 %0.2 %18.0 %
December 31, 2021 (1)
$959,481$227,593$582,311$215,669$260,888$27,712$2,273,654$11,082,096
% of Unpaid Principal Balance8.7 %2.1 %5.3 %1.9 %2.4 %0.3 %20.7 %
(1) The above table excludes approximately $238 million and $437 million of Loans held for investment for March 31, 2022 and December 31, 2021, respectively, which were purchased prior to the reporting dates and settled subsequent to the reporting periods.


The fair value of residential mortgage loans 90 days or more past due was $899 million and $830 million as of March 31, 2022 and December 31, 2021, respectively.

5. Fair Value Measurements

The Company applies fair value guidance in accordance with GAAP to account for its financial instruments. The Company categorizes its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities recorded at fair value on the Consolidated Statements of Financial Condition or disclosed in the related notes are categorized based on the inputs to the valuation techniques as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets and 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 fair value.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Any changes to the valuation methodology are reviewed by the Company to ensure the changes are appropriate. As markets and products evolve and the pricing for certain products becomes more transparent, the Company will continue to refine its valuation methodologies. The methodology utilized by the Company for the periods presented is unchanged. The methods used to produce a fair value calculation may not be indicative of net realizable value or reflective of future fair values. Furthermore, the Company believes its valuation methods are appropriate and consistent with other market participants. Using 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 determines the fair values of its investments using internally developed processes and validates them using a third-party pricing service. During times of market dislocation, the observability of prices and inputs can be difficult for certain investments. If the third-party pricing service is unable to provide a price for an asset, or if the price provided by them is deemed unreliable by the Company, then the asset will be valued at its fair value as determined by the Company without validation to third-party pricing. Illiquid investments typically experience greater price volatility as an active market does not exist. Observability of prices and inputs can vary significantly from period to period and may cause instruments to change classifications within the three level hierarchy.
19











A description of the methodologies utilized by the Company to estimate the fair value of its financial instruments by instrument class follows:
Agency MBS and Non-Agency RMBS

The Company determines the fair value of all of its investment securities based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, prepayment speeds, loan size, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, delinquency, expected losses, expected default severity, credit enhancement, and other pertinent factors. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, the Company compares the fair values generated by the model to non-binding independent prices provided by an independent third-party pricing service. For certain highly liquid asset classes, such as Agency fixed-rate pass-through bonds, the Company’s valuations are also compared to quoted prices for To-Be-Announced, or TBA, securities.

Each quarter the Company develops thresholds generally using market factors or other assumptions, as appropriate. If internally developed model prices differ from the independent third-party prices by greater than these thresholds for the period, the Company conducts a further review, both internally and with the third-party pricing service of the prices of such securities. First, the Company obtains the inputs used by the third-party pricing service and compares them to the Company’s inputs. The Company then updates its own inputs if the Company determines the third-party pricing inputs more accurately reflect the current market environment. If the Company believes that its internally developed inputs more accurately reflect the current market environment, it will request that the third-party pricing service review market factors that may not have been considered by the third-party pricing service and provide updated prices. The Company reconciles and resolves all pricing differences in excess of the thresholds before a final price is established. At March 31, 2022, twenty-one investment holdings with an internally developed fair value of $141 million had a difference between the model generated prices and third-party prices provided in excess of the thresholds for the period. The internally developed prices were $26 million higher, in the aggregate, than the third-party prices provided of $115 million. After review and discussion, the Company affirmed and valued the investments at the higher internally developed prices. No other differences were noted at March 31, 2022 in excess of the thresholds for the period. At December 31, 2021, seven investment holdings with an internally developed fair value of $50 million had a difference between the model generated prices and third-party prices provided in excess of the thresholds for the period. The internally developed prices were $8 million higher, in the aggregate, than the third-party prices provided of $42 million. After review and discussion, the Company affirmed and valued the investments at the higher internally developed prices. No other differences were noted at December 31, 2021 in excess of the thresholds for the period.

The Company’s estimate of prepayment, default and severity curves all involve judgment and assumptions that are deemed to be significant to the fair value measurement process. This subjective estimation process renders the majority of the Non-Agency RMBS fair value estimates as Level 3 in the fair value hierarchy. As the fair values of Agency MBS are more observable, these investments are classified as Level 2 in the fair value hierarchy.

Loans Held for Investment
Loans held for investment is comprised primarily of seasoned reperforming residential mortgage loans. Loans held for investment also includes business purpose loans.
Loans consisting of seasoned reperforming residential mortgage loans:
The Company estimates the fair value of its Loans held for investment consisting of seasoned reperforming residential mortgage loans on a loan by loan basis using an internally developed model which compares the loan held by the Company with a loan currently offered in the market. The loan price is adjusted in the model by considering the loan factors which would impact the value of a loan. These loan factors include loan coupon as compared to coupon currently available in the market, FICO, loan-to-value ratios, delinquency history, owner occupancy, and property type, among other factors. A baseline is developed for each significant loan factor and adjusts the price up or down depending on how that factor for each specific loan compares to the baseline rate. Generally, the most significant impact on loan value is the loan interest rate as compared to interest rates currently available in the market and delinquency history.

The Company also monitors market activity to identify trades which may be used to compare internally developed prices; however, as the portfolio of loans held at fair value is a seasoned reperforming pool of mortgage loans, comparable loan pools are not common or directly comparable. There are limited transactions in the marketplace to develop a comprehensive direct range of values.

20










The Company reviews the fair values generated by the model to determine whether prices are reflective of the current market by corroborating its estimates of fair value by comparing the results to non-binding independent prices provided by an independent third-party pricing service for the loan portfolio. Each quarter the Company develops thresholds generally using market factors or other assumptions as appropriate.

If the internally developed fair values of the loan pools differ from the independent third-party prices by greater than the threshold for the period, the Company highlights these differences for further review, both internally and with the third-party pricing service. The Company obtains certain inputs used by the third-party pricing service and evaluates them for reasonableness. Then the Company updates its own model if the Company determines the third-party pricing inputs more accurately reflect the current market environment or observed information from the third-party vendor. If the Company believes that its internally developed inputs more accurately reflect the current market environment, it will request that the third-party pricing service review market factors that may not have been considered by the third-party pricing service. The Company reconciles and resolves all pricing differences in excess of the thresholds before a final price is established.

At March 31, 2022, two loan pools with an internally developed fair value of $15 million had a difference between the model generated prices and third-party prices provided in excess of the threshold for the period. The internally developed prices were $1 million higher than the third-party prices provided of $14 million. After review and discussion, the Company affirmed and valued the investments at the higher internally developed prices. No other differences were noted at March 31, 2022 in excess of the threshold for the period. At December 31, 2021, three loan pools with an internally developed fair value of $3.5 billion had a difference between the model generated prices and third-party prices provided in excess of the threshold for the period. The internally developed prices were $97 million higher than the third-party prices provided of $3.4 billion. After review and discussion, the Company affirmed and valued the investments at the higher internally developed prices.. No other differences were noted at December 31, 2021 in excess of the threshold for the period.

The Company’s estimates of fair value of Loans held for investment involve judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates Level 3 inputs in the fair value hierarchy.

Business purpose loans:

Business purpose loans are loans to businesses that are secured by real property which will be renovated by the borrower. Upon completion of the renovation the property will be either sold by the borrower or refinanced by the borrower who may subsequently sell or rent the property. Most, but not all, of the properties securing these loans are residential and a portion of the loan is used to cover renovation costs. The business purpose loans are included as a part of the Company's Loans held for investment portfolio and are carried at fair value. These loans tend to be short duration, often less than one year, and generally the coupon rate is higher than the Company's residential mortgage loans. As these loans are generally short-term in nature and there is an active market for these loans, the Company estimates fair value of the business purpose loans based on the recent purchase price of the loan, adjusted for observable market activity for similar assets offered in the market. Business purpose loans have a fair value of $147 million at March 31, 2022.

As the fair value prices of the business purpose loans are based on the recent trades of similar assets in an active market, the Company has classified them as Level 2 in the fair value hierarchy.

Securitized Debt, collateralized by Loans Held for Investment

The process for determining the fair value of securitized debt, collateralized by Loans held for investment is based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, prepayment speeds, loan size, collateral composition, borrower characteristics, expected interest rates, life caps, periodic caps, reset dates, collateral seasoning, expected losses, expected default severity, credit enhancement, and other pertinent factors. This process, including the review process, is consistent with the process used for Agency MBS and Non-Agency RMBS using internal models. For further discussion of the valuation process and benchmarking process, see Agency MBS and Non-Agency RMBS discussion herein. The primary cause of the change in fair value is due to market demand and changes in credit risk of mortgage loans.

At March 31, 2022, four securitized debt collateralized by loans held for investment positions with an internally developed fair value of $13 million had a difference between the model generated prices and third-party prices provided in excess of the threshold for the period. The internally developed prices were $1 million lower than the third-party prices provided of $14 million. After review and discussion, the Company affirmed and valued the securitized debt positions at the lower internally developed prices. No other differences were noted at March 31, 2022 in excess of the threshold for the period. At December 31, 2021, there were no pricing differences in excess of the predetermined thresholds between the model generated prices and independent third-party prices
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The Company’s estimates of fair value of securitized debt, collateralized by Loans held for investment involve judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates Level 3 inputs in the fair value hierarchy.

Securitized Debt, collateralized by Non-Agency RMBS

The Company carries securitized debt, collateralized by Non-Agency RMBS at the principal balance outstanding plus unamortized premiums, less unaccreted discounts recorded in connection with the financing of the loans or RMBS with third parties. For disclosure purposes, the Company estimates the fair value of securitized debt, collateralized by Non-Agency RMBS by estimating the future cash flows associated with the underlying assets collateralizing the secured debt outstanding. The Company models the fair value of each underlying asset by considering, among other items, the structure of the underlying security, coupon, servicer, delinquency, actual and expected defaults, actual and expected default severities, reset indices, and prepayment speeds in conjunction with market research for similar collateral performance and the Company's expectations of general economic conditions in the sector and other economic factors. This process, including the review process, is consistent with the process used for Agency MBS and Non-Agency RMBS using internal models. For further discussion of the valuation process and benchmarking process, see Agency MBS and Non-Agency RMBS discussion herein.

The Company’s estimates of fair value of securitized debt, collateralized by Non-Agency RMBS involve judgment and assumptions that are deemed to be significant to the fair value measurement process, which renders the resulting fair value estimates Level 3 inputs in the fair value hierarchy.

Fair value option

The table below shows the unpaid principal and fair value of the financial instruments carried at fair value with changes in fair value reflected in earnings under the fair value option election as of March 31, 2022 and December 31, 2021, respectively:
 March 31, 2022December 31, 2021
 (dollars in thousands)
 Unpaid
Principal/
 Notional
Fair ValueUnpaid
Principal/
 Notional
Fair Value
Assets:  
Non-Agency RMBS
Senior21,878 21,281 — — 
Subordinated323,982 254,450 653,616 500,288 
Interest-only3,644,165 135,472 3,904,665 172,501 
Agency RMBS
Interest-only1,501,720 74,104 992,978 60,487 
Agency CMBS
Project loans294,455 319,236 499,186 549,529 
Interest-only2,779,083 147,031 2,578,640 146,789 
Loans held for investment, at fair value12,799,611 12,905,280 11,519,255 12,261,926 
Liabilities:  
Securitized debt at fair value, collateralized by Loans held for investment8,312,710 8,010,170 7,762,864 7,726,043 

The table below shows the impact of change in fair value on each of the financial instruments carried at fair value with changes in fair value reflected in earnings under the fair value option election in statement of operations as of March 31, 2022 and 2021, respectively:
22










For the Quarter Ended
March 31, 2022March 31, 2021
(dollars in thousands)
 Gain/(Loss) on Change in Fair Value
Assets: 
Non-Agency RMBS
Senior(601)— 
Subordinated(20,582)9,264 
Interest-only(26,959)(25,851)
Agency RMBS
Pass-through— — 
Interest-only(5,612)238 
Agency CMBS
Project loans(22,954)(40,550)