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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, 2021
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.)
                                                                                                                                             

520 Madison Avenue 32nd Floor
New York, New York
(Address of principal executive offices)
10022
(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 Class Trading Symbol(s) Name of Each Exchange on Which Registered
   
Common Stock, par value $0.01 per share CIM New York Stock Exchange
8.00% Series A Cumulative Redeemable Preferred Stock CIM PRA New York Stock Exchange
8.00% Series B Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock CIM PRB New York Stock Exchange
7.75% Series C Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock CIM PRC New York Stock Exchange
8.00% Series D Cumulative Fixed-to-Floating Rate Redeemable Preferred Stock CIM PRD New 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 and post such files).
Yes þ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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:
Class Outstanding at April 30, 2021
Common Stock, $0.01 par value 230,555,167





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, 2021 (Unaudited) and December 31, 2020 (Derived from the audited consolidated financial statements as of December 31, 2020)
2
Consolidated Statements of Operations (Unaudited) for the quarters ended March 31, 2021 and 2020
3
Consolidated Statements of Comprehensive Income (Unaudited) for the quarters ended March 31, 2021 and 2020
4
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the quarters ended March 31, 2021 and 2020
5
Consolidated Statements of Cash Flows (Unaudited) for the quarters ended March 31, 2021 and 2020
6
Notes to Consolidated Financial Statements (Unaudited)
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
41
Item 3. Quantitative and Qualitative Disclosures about Market Risk
60
Item 4. Controls and Procedures
66
Part II.  OTHER INFORMATION
Item 1. Legal Proceedings
66
Item 1A. Risk Factors
66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
66
Item 6. Exhibits
67
SIGNATURES
69




1


Part I
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, 2021 December 31, 2020
Cash and cash equivalents $ 317,489  $ 269,090 
Non-Agency RMBS, at fair value (net of allowance for credit losses of $54 thousand and $180 thousand, respectively)
2,013,478  2,150,714 
Agency RMBS, at fair value 86,354  90,738 
Agency CMBS, at fair value 1,355,289  1,740,368 
Loans held for investment, at fair value 12,808,012  13,112,129 
Accrued interest receivable 77,562  81,158 
Other assets 41,078  78,822 
Total assets (1)
$ 16,699,262  $ 17,523,019 
Liabilities:    
Secured financing agreements ($5.7 billion and $6.7 billion pledged as collateral, respectively)
$ 4,045,912  $ 4,636,847 
Securitized debt, collateralized by Non-Agency RMBS ($479 million and $505 million pledged as collateral, respectively)
107,367  113,433 
Securitized debt at fair value, collateralized by loans held for investment ($12.1 billion and $12.4 billion pledged as collateral, respectively)
8,734,372  8,711,677 
Long term debt 51,772  51,623 
Payable for investments purchased 76,534  106,169 
Accrued interest payable 24,855  40,950 
Dividends payable 77,355  77,213 
Accounts payable and other liabilities 14,597  5,721 
Total liabilities (1)
$ 13,132,764  $ 13,743,633 
Commitments and Contingencies (See Note 16)
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, 230,553,340 and 230,556,760 shares issued and outstanding, respectively
2,306  2,306 
Additional paid-in-capital 4,320,419  4,538,029 
Accumulated other comprehensive income 493,651  558,096 
Cumulative earnings 4,039,485  3,881,894 
Cumulative distributions to stockholders (5,289,735) (5,201,311)
Total stockholders' equity $ 3,566,498  $ 3,779,386 
Total liabilities and stockholders' equity $ 16,699,262  $ 17,523,019 
(1) The Company's consolidated statements of financial condition include assets of consolidated variable interest entities (“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, 2021, and December 31, 2020, total assets of consolidated VIEs were $11,736,522 and $12,165,017, respectively, and total liabilities of consolidated VIEs were $8,113,248 and $8,063,110, 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, 2021 March 31, 2020
Net interest income:
Interest income (1)
$ 243,127  $ 300,266 
Interest expense (2)
108,066  142,083 
Net interest income 135,061  158,183 
Increase/(decrease) in provision for credit losses (126) 6,314 
Other investment gains (losses):  
Net unrealized gains (losses) on derivatives —  201,000 
Realized gains (losses) on terminations of interest rate swaps —  (463,966)
Net realized gains (losses) on derivatives —  (41,086)
Net gains (losses) on derivatives —  (304,052)
Net unrealized gains (losses) on financial instruments at fair value 270,012  (260,887)
Net realized gains (losses) on sales of investments 37,796  75,854 
Gains (losses) on extinguishment of debt (237,137) — 
Total other gains (losses) 70,671  (489,085)
Other expenses:    
Compensation and benefits 13,439  12,934 
General and administrative expenses 5,198  5,137 
Servicing and asset manager fees 9,281  10,530 
Transaction expenses 16,437  4,906 
Total other expenses 44,355  33,507 
Income (loss) before income taxes 161,503  (370,723)
Income taxes 3,912  32 
Net income (loss) $ 157,591  $ (370,755)
Dividends on preferred stock 18,438  18,438 
Net income (loss) available to common shareholders $ 139,153  $ (389,193)
Net income (loss) per share available to common shareholders:
Basic $ 0.60  $ (2.08)
Diluted $ 0.54  $ (2.08)
Weighted average number of common shares outstanding:
Basic 230,567,231  187,018,602 
Diluted 261,435,081  187,018,602 

(1) Includes interest income of consolidated VIEs of $158,100 and $174,681 for the quarters ended March 31, 2021 and 2020, respectively. See Note 9 to consolidated financial statements for further discussion.

(2) Includes interest expense of consolidated VIEs of $65,205 and $64,629 for the quarters ended March 31, 2021 and 2020, 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, 2021 March 31, 2020
Comprehensive income (loss):  
Net income (loss) $ 157,591  $ (370,755)
Other comprehensive income:  
Unrealized gains (losses) on available-for-sale securities, net (38,652) (199,204)
Reclassification adjustment for net realized losses (gains) included in net income (25,793) (6,641)
Other comprehensive income (loss) (64,445) (205,845)
Comprehensive income (loss) before preferred stock dividends $ 93,146  $ (576,600)
Dividends on preferred stock $ 18,438  $ 18,438 
Comprehensive income (loss) available to common stock shareholders $ 74,708  $ (595,038)


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, 2021
  Series A Preferred Stock Par Value Series B Preferred Stock Par Value Series C Preferred Stock Par Value Series D Preferred Stock Par Value Common
Stock Par
Value
Additional Paid-in Capital Accumulated Other Comprehensive Income Cumulative Earnings Cumulative Distributions to Stockholders Total
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 
For the Quarter Ended March 31, 2020
  Series A Preferred Stock Par Value Series B Preferred Stock Par Value Series C Preferred Stock Par Value Series D Preferred Stock Par Value Common
Stock Par
Value
Additional Paid-in Capital Accumulated Other Comprehensive Income Cumulative Earnings Cumulative Distributions to Stockholders Total
Balance, December 31, 2019 $ 58  $ 130  $ 104  $ 80  $ 1,873  $ 4,275,963  $ 708,336  $ 3,793,040  $ (4,826,291) $ 3,953,293 
Net income (loss) —  —  —  —  —  —  —  (370,755) —  (370,755)
Other comprehensive income (loss) —  —  —  —  —  —  (205,845) —  —  (205,845)
Repurchase of common stock —  —  —  —  (14) (22,051) —  —  —  (22,065)
Stock based compensation —  —  —  —  1,142  —  —  —  1,143 
Common dividends declared —  —  —  —  —  —  —  —  (93,479) (93,479)
Preferred dividends declared —  —  —  —  —  —  —  —  (18,438) (18,438)
Balance, March 31, 2020 $ 58  $ 130  $ 104  $ 80  $ 1,860  $ 4,255,054  $ 502,491  $ 3,422,285  $ (4,938,208) $ 3,243,854 

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, 2021 March 31, 2020
Cash Flows From Operating Activities:
Net income (loss) $ 157,591  $ (370,755)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
(Accretion) amortization of investment discounts/premiums, net 13,260  36,319 
Accretion (amortization) of deferred financing costs, debt issuance costs, and securitized debt discounts/premiums, net 9,673  (18,318)
Net unrealized losses (gains) on derivatives —  (201,000)
Margin (paid) received on derivatives —  325,594 
Net unrealized losses (gains) on financial instruments at fair value (270,012) 260,887 
Net realized losses (gains) on sales of investments (37,796) (75,854)
Net increase (decrease) in provision for credit losses (126) 6,314 
(Gain) loss on extinguishment of debt 237,137  — 
Equity-based compensation expense 4,058  1,143 
Changes in operating assets:
Decrease (increase) in accrued interest receivable, net 3,593  23,763 
Decrease (increase) in other assets 12,042  (394,817)
Changes in operating liabilities:
Increase (decrease) in accounts payable and other liabilities 8,877  6,417 
Increase (decrease) in accrued interest payable, net (16,096) (19,156)
Net cash provided by (used in) operating activities $ 122,201  $ (419,463)
Cash Flows From Investing Activities:
Agency MBS portfolio:    
Purchases $ (28,856) $ (160,516)
Sales 201,037  6,244,850 
Principal payments 147,859  593,341 
Non-Agency RMBS portfolio:  
Purchases —  (19,503)
Sales 32,459  33,797 
Principal payments 63,311  67,518 
Loans held for investment:  
Purchases (1,069,554) (575,541)
Sales 903,358  — 
Principal payments 564,559  461,594 
Net cash provided by (used in) investing activities $ 814,173  $ 6,645,540 
Cash Flows From Financing Activities:
Proceeds from secured financing agreements $ 14,021,592  $ 38,210,544 
Payments on secured financing agreements (14,615,709) (44,491,093)
Payments on repurchase of common stock (1,828) (22,066)
Proceeds from securitized debt borrowings, collateralized by loans held for investment 3,400,687  731,013 
Payments on securitized debt borrowings, collateralized by loans held for investment (3,379,096) (386,362)
Payments on securitized debt borrowings, collateralized by Non-Agency RMBS (5,499) (4,449)
Settlement of warrants (219,840) — 
Common dividends paid (69,844) (93,613)
Preferred dividends paid (18,438) (18,438)
Net cash provided by (used in) financing activities $ (887,975) $ (6,074,464)
6










Net increase (decrease) in cash and cash equivalents 48,399  151,613 
Cash and cash equivalents at beginning of period 269,090  109,878 
Cash and cash equivalents at end of period $ 317,489  $ 261,491 
Supplemental disclosure of cash flow information:
Interest received $ 259,981  $ 359,664 
Interest paid $ 114,490  $ 178,292 
Non-cash investing activities:  
Payable for investments purchased $ 76,534  $ 699,164 
Net change in unrealized gain (loss) on available-for sale securities $ (64,445) $ (205,845)
Non-cash financing activities:  
   Dividends declared, not yet paid $ 77,355  $ 98,434 


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 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 thirteen 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 Insurance Company, LLC formed in July 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 significant, non-consolidated interest in Kah Capital Management, which is treated as an equity method investment. The Company paid $346 thousand and $250 thousand in fees to Kah Capital Management for investment services provided during the quarters ended March 31, 2021 and 2020, respectively.

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 securities transactions are recorded on the trade date. Certain prior period amounts have been reclassified to conform to the current period's presentation.

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.

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.
8










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 (Note 4 and 5), securitized debt (Note 5 and 7) and derivative instruments (Notes 5 and 10). 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, 2020, 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.

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, 2021 or December 31, 2020.

(e) Recent Accounting Pronouncements

Reference Rate Reform (Topic 848)

In March 2020, the FASB issued 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 generally accepted accounting principles (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
9










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, we 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 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 amendments in this update are effective for the Company on January 1, 2022. The Company has not yet adopted this guidance and is currently evaluating what impact this update will have on the 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 Company's MBS investments as of March 31, 2021 and December 31, 2020.
March 31, 2021
(dollars in thousands)
Principal or Notional Value Total Premium Total Discount Amortized Cost Allowance for credit losses Fair Value Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gain/(Loss)
Non-Agency RMBS                
Senior $ 1,498,212  $ 3,923  $ (748,648) $ 753,487  $ (54) $ 1,202,495  $ 449,362  $ (300) $ 449,062 
Subordinated 857,925  6,902  (301,842) 562,985  —  594,221  65,882  (34,646) 31,236 
Interest-only 4,850,934  229,963  —  229,963  —  216,762  43,519  (56,720) (13,201)
Agency RMBS              
Interest-only 1,199,688  114,244  —  114,244  —  86,354  355  (28,245) (27,890)
Agency CMBS
Project loans 1,196,682  21,438  (845) 1,217,275  —  1,333,102  115,835  (8) 115,827 
Interest-only 1,114,212  19,952  —  19,952  —  22,187  2,681  (446) 2,235 
Total $ 10,717,653  $ 396,422  $ (1,051,335) $ 2,897,906  $ (54) $ 3,455,121  $ 677,634  $ (120,365) $ 557,269 
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December 31, 2020
(dollars in thousands)
Principal or Notional Value Total Premium Total Discount Amortized Cost Allowance for credit losses Fair Value Gross Unrealized Gains Gross Unrealized Losses Net Unrealized Gain/(Loss)
Non-Agency RMBS                
Senior $ 1,560,135  $ 3,934  $ (773,804) $ 790,265  $ (180) $ 1,277,800  $ 487,963  $ (248) $ 487,715 
Subordinated 905,674  7,059  (347,056) 565,677  —  610,655  83,007  (38,029) 44,978 
Interest-only 5,628,240  249,610  —  249,610  —  262,259  67,868  (55,219) 12,649 
Agency RMBS                
Interest-only 1,262,963  118,867  —  118,867  —  90,738  270  (28,399) (28,129)
Agency CMBS
Project loans 1,527,621  28,559  (861) 1,555,319  —  1,714,483  159,233  (69) 159,164 
Interest-only 1,326,665  23,572  —  23,572  —  25,885  2,659  (346) 2,313 
Total $ 12,211,298  $ 431,601  $ (1,121,721) $ 3,303,310  $ (180) $ 3,981,820  $ 801,000  $ (122,310) $ 678,690 

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, 2021 and December 31, 2020. All available for sale Non-Agency RMBS in an unrealized loss position have been evaluated by the Company for current expected credit losses.
March 31, 2021
(dollars in thousands)
  Unrealized Loss Position for Less than 12 Months Unrealized Loss Position for 12 Months or More Total
  Estimated Fair Value Unrealized Losses Number of Positions Estimated Fair Value Unrealized Losses Number of Positions Estimated Fair Value Unrealized Losses Number of Positions
Non-Agency RMBS                  
Senior $ 3,567  $ (41) $ 10,472  $ (259) $ 14,039  $ (300)
Subordinated 19,468  (201) 68,894  (34,445) 17 88,362  (34,646) 19
Interest-only 43,940  (10,693) 38 23,269  (46,027) 46 67,209  (56,720) 84
Agency RMBS              
Interest-only 18,473  (1,065) 3 62,515  (27,180) 19  80,988  (28,245) 22
Agency CMBS
Project loans —  —  —  8,578  (8) 1 8,578  (8) 1
Interest-only 3,146  (446) —  —  —  3,146  (446) 4
Total $ 88,594  $ (12,446) 48 $ 173,728  $ (107,919) 84 $ 262,322  $ (120,365) 132 
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December 31, 2020
(dollars in thousands)
  Unrealized Loss Position for Less than 12 Months Unrealized Loss Position for 12 Months or More Total
  Estimated Fair Value Unrealized Losses Number of Positions Estimated Fair Value Unrealized Losses Number of Positions Estimated Fair Value Unrealized Losses Number of Positions
Non-Agency RMBS                  
Senior $ 11,985  $ (248) $ —  $ —  —  $ 11,985  $ (248)
Subordinated 253,822  (8,711) 34,697  (29,318) 15 288,519  (38,029) 20 
Interest-only 38,604  (8,682) 34  22,761  (46,537) 43 61,365  (55,219) 77 
Agency RMBS                  
Interest-only 31,059  (4,938) 54,153  (23,461) 16  85,212  (28,399) 22 
Agency CMBS
Project loans —  —  —  8,581  (69) 1 8,581  (69)
Interest-only 4,052  (346) —  —  4,052  (346)
Total $ 339,522  $ (22,925) 53 $ 120,192  $ (99,385) 75 $ 459,714  $ (122,310) 128 

At March 31, 2021, 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, 2021.

Gross unrealized losses on the Company’s Agency MBS (excluding Agency MBS which are reported at fair value with changes in fair value recorded in earnings) were $8 thousand and $69 thousand as of March 31, 2021 and December 31, 2020, respectively. Given the inherent credit quality of Agency MBS, the Company does not consider any of the current impairments on its Agency MBS to be credit related. In evaluating whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at their maturity, the Company considers the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at March 31, 2021 and December 31, 2020, unrealized losses on its Agency MBS were temporary.

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 $300 thousand and $248 thousand, at March 31, 2021 and December 31, 2020, respectively. After evaluating the securities and recording the allowance for credit losses, we 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 we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior to recovering the amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we 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 loss allowance on available-for-sale securities at March 31, 2021 and December 31, 2020 is presented below.
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For the Quarter Ended
March 31, 2021 March 31, 2020
(dollars in thousands)
Beginning allowance for credit losses $ 180  $ — 
Additions to the allowance for credit losses on securities for which credit losses were not previously recorded —  6,314 
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 (164) — 
Write-offs charged against the allowance (62) — 
Recoveries of amounts previously written off 100  — 
Ending allowance for credit losses $ 54  $ 6,314 

The following table presents significant credit quality indicators used for the credit loss allowance on our Non-Agency RMBS investments as of March 31, 2021 and December 31, 2020.
March 31, 2021
(dollars in thousands)
   Prepay Rate CDR Loss Severity
   Amortized Cost Weighted Average Weighted Average Weighted Average
Non-Agency RMBS
Senior 3,741,047 1.0% 5.3% 62.6%

December 31, 2020
(dollars in thousands)
   Prepay Rate CDR Loss Severity
   Amortized Cost Weighted Average Weighted Average Weighted Average
Non-Agency RMBS
Senior 46,500,000 9.2% 3.5% 58.3%

The decrease in the allowance for credit losses for the quarter ended March 31, 2021 is primarily due to a reduction in expected losses and delinquencies as compared to the year ended December 31, 2020. 

The following tables present a summary of unrealized gains and losses at March 31, 2021 and December 31, 2020.
March 31, 2021
(dollars in thousands) 
Gross Unrealized Gain Included in Accumulated Other Comprehensive Income Gross Unrealized Gain Included in Cumulative Earnings Total Gross Unrealized Gain Gross Unrealized Loss Included in Accumulated Other Comprehensive Income Gross Unrealized Loss Included in Cumulative Earnings Total Gross Unrealized Loss
Non-Agency RMBS            
Senior $ 449,362  $ —  $ 449,362  $ (300) $ —  $ (300)
Subordinated 42,036  23,846  65,882  —  (34,646) (34,646)
Interest-only —  43,519  43,519  —  (56,720) (56,720)
Agency RMBS        
Interest-only —  355  355  —  (28,245) (28,245)
Agency CMBS
Project loans 2,561  113,274  115,835  (8) —  (8)
Interest-only —  2,681  2,681  —  (446) (446)
Total $ 493,959  $ 183,675  $ 677,634  $ (308) $ (120,057) $ (120,365)
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December 31, 2020
(dollars in thousands)  
Gross Unrealized Gain Included in Accumulated Other Comprehensive Income Gross Unrealized Gain Included in Cumulative Earnings Total Gross Unrealized Gain Gross Unrealized Loss Included in Accumulated Other Comprehensive Income Gross Unrealized Loss Included in Cumulative Earnings Total Gross Unrealized Loss
Non-Agency RMBS            
Senior $ 487,963  $ —  $ 487,963  $ (248) $ —  $ (248)
Subordinated 65,043  17,964  83,007  —  (38,029) (38,029)
Interest-only —  67,868  67,868  —  (55,219) (55,219)
Agency RMBS            
Interest-only —  270  270  —  (28,399) (28,399)
Agency CMBS
Project loans 5,407  153,826  159,233  (69) —  (69)
Interest-only —  2,659  2,659  —  (346) (346)
Total $ 558,413  $ 242,587  $ 801,000  $ (317) $ (121,993) $ (122,310)

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, 2021 and December 31, 2020.
  March 31, 2021
  Principal or Notional Value
at Period-End
(dollars in thousands)
Weighted Average Amortized
Cost Basis
Weighted Average Fair Value Weighted Average
Coupon
Weighted Average Yield at Period-End (1)
Non-Agency RMBS        
Senior
$ 1,498,212  $ 50.29  80.26  4.5  % 17.1  %
Subordinated
857,925  65.62  69.26  3.8  % 6.5  %
Interest-only
4,850,934  4.74  4.47  1.6  % 14.7  %
Agency RMBS          
Interest-only 1,199,688  9.52  7.20  1.6  % 1.1  %
Agency CMBS
Project loans
1,196,682  101.72  111.40  4.2  % 4.1  %
Interest-only
1,114,212  1.79  1.99  0.6  % 7.8  %
(1) Bond Equivalent Yield at period end.
  December 31, 2020
  Principal or Notional Value at Period-End
(dollars in thousands)
Weighted Average Amortized
Cost Basis
Weighted Average Fair Value Weighted Average
Coupon
Weighted Average Yield at Period-End (1)
Non-Agency RMBS        
Senior
$ 1,560,135  $ 50.65  $ 81.90  4.5  % 16.9  %
Subordinated
905,674  62.46  67.43  3.8  % 6.3  %
Interest-only
5,628,240  4.43  4.66  1.5  % 16.2  %
Agency RMBS          
Interest-only
1,262,963  9.41  7.18  1.7  % 1.6  %
Agency CMBS
Project loans
1,527,621  101.81  112.23  4.1  % 3.8  %
Interest-only
1,326,665  1.78  1.95  0.6  % 8.4  %
(1) Bond Equivalent Yield at period end.
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The following table presents the weighted average credit rating of the Company’s Non-Agency RMBS portfolio at March 31, 2021 and December 31, 2020.
  March 31, 2021 December 31, 2020
AAA 0.1  % 0.2  %
AA 0.1  % 0.1  %
A 1.3  % 1.2  %
BBB 2.0  % 1.9  %
BB 4.6  % 4.3  %
B 2.0  % 2.0  %
Below B 28.4  % 31.9  %
Not Rated 61.5  % 58.4  %
Total 100.0  % 100.0  %

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, 2021 and December 31, 2020 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, 2021
(dollars in thousands) 
  Weighted Average Life
Less than one year Greater than one year and less
than five years
Greater than five years and less
than ten years
Greater than ten years Total
Fair value          
Non-Agency RMBS          
Senior $ 9,803  $ 335,992  $ 439,608  $ 417,092  $ 1,202,495 
Subordinated 115,897  62,987  415,330  594,221 
Interest-only 7,605  158,444  48,216  2,497  216,762 
Agency RMBS          
Interest-only —  563  85,791  —  86,354 
Agency CMBS
Project loans 8,578  —  —  1,324,524  1,333,102 
Interest-only 2,277  16,311  3,599  —  22,187 
Total fair value $ 28,270  $ 627,207  $ 640,201  $ 2,159,443  $ 3,455,121 
Amortized cost          
Non-Agency RMBS          
Senior $ 7,694  $ 237,243  $ 245,927  $ 262,623  $ 753,487 
Subordinated —  102,298  53,483  407,204  562,985 
Interest-only 32,073  154,626  41,012  2,252  229,963 
Agency RMBS          
Interest-only —  1,827  112,417  —  114,244 
Agency CMBS
Project loans 8,586  —  —  1,208,689  1,217,275 
Interest-only 2,629  13,892  3,431  —  19,952 
Total amortized cost $ 50,982  $ 509,886  $ 456,270  $ 1,880,768  $ 2,897,906 
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December 31, 2020
(dollars in thousands)
  Weighted Average Life
Less than one year Greater than one year and less
than five years
Greater than five years and less
than ten years
Greater than ten years Total
Fair value          
Non-Agency RMBS          
Senior $ 7,850  $ 366,218  $ 467,336  $ 436,396  $ 1,277,800 
Subordinated 105,272  102,805  402,573  610,655 
Interest-only 5,780  143,631  110,468  2,380  262,259 
Agency RMBS          
Interest-only —  864  89,874  —  90,738 
Agency CMBS
Project loans 8,581  —  —  1,705,902  1,714,483 
Interest-only 620  21,500  3,765  —  25,885 
Total fair value $ 22,836  $ 637,485  $ 774,248  $ 2,547,251  $ 3,981,820 
Amortized cost          
Non-Agency RMBS          
Senior $ 4,691  $ 256,935  $ 257,188  $ 271,451  $ 790,265 
Subordinated —  83,188  78,435  404,054  565,677 
Interest-only 26,286  138,150  82,368  2,806  249,610 
Agency RMBS          
Interest-only —  1,898  116,969  —  118,867 
Agency CMBS
Project loans 8,650  —  —  1,546,669  1,555,319 
Interest-only 788  19,273  3,511  —  23,572 
Total amortized cost $ 40,415  $ 499,444  $ 538,471  $ 2,224,980  $ 3,303,310 

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 REO total of the pools of mortgage loans securing the Company’s investments in Non-Agency RMBS at March 31, 2021 and December 31, 2020. When delinquency rates increase, it is expected that the Company will incur additional credit losses.

March 31, 2021 30 Days Delinquent 60 Days Delinquent 90+ Days Delinquent Bankruptcy Foreclosure REO Total
% of Unpaid Principal Balance 3.5  % 1.5  % 7.2  % 1.4  % 2.8  % 0.3  % 16.7  %


December 31, 2020 30 Days Delinquent 60 Days Delinquent 90+ Days Delinquent Bankruptcy Foreclosure REO Total
% of Unpaid Principal Balance 3.1  % 1.4  % 7.2  % 1.3  % 2.9  % 0.4  % 16.3  %


The Non-Agency RMBS in the Portfolio have the following collateral characteristics at March 31, 2021 and December 31, 2020.
  March 31, 2021 December 31, 2020
Weighted average maturity (years)   21.8   22.2
Weighted average amortized loan to value (1)
  61.1  %   61.4  %
Weighted average FICO (2)
  710   714
Weighted average loan balance (in thousands)   $ 278    $ 291 
Weighted average percentage owner occupied   82.3  %   81.8  %
Weighted average percentage single family residence   61.8  %   61.7  %
Weighted average current credit enhancement   1.0  %   0.9  %
Weighted average geographic concentration of top four states CA 32.4  % CA 33.8  %
NY 9.5  % NY 8.7  %
FL 8.0  % FL 7.9  %
NJ 4.5  % NJ 4.3  %
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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, 2021 and December 31, 2020.
Origination Year March 31, 2021 December 31, 2020
2003 and prior 1.5  % 1.7  %
2004 1.4  % 1.4  %
2005 9.7  % 10.3  %
2006 53.3  % 52.1  %
2007 26.5  % 27.2  %
2008 and later 7.6  % 7.3  %
Total 100.0  % 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, 2021 and 2020 are as follows:
  For the Quarters
  March 31, 2021 March 31, 2020
  (dollars in thousands)
Proceeds from sales:
Non-Agency RMBS 32,459  33,797 
Agency RMBS —  5,710,134 
Agency CMBS 201,037  105,017 
Gross realized gains:
Non-Agency RMBS 26,513  1,256 
Agency RMBS —  74,264 
Agency CMBS 13,735  6,150 
Gross realized losses:
Non-Agency RMBS (2,452) — 
Agency RMBS —  (5,816)
Agency CMBS —  — 
Net realized gain (loss) $ 37,796  $ 75,854 

During the first quarter of 2020, the Company transferred Non-Agency RMBS investments with a market value of $135 million to a third party. As part of the transfer, the Company purchased an option to re-acquire these assets for a fixed price at a future date. This transfer was accounted for as a secured borrowing within the Secured financing agreements on the Statement of Financial Condition. There were no such transfers during the first quarter of 2021..

4. Loans Held for Investment

The Loans held for investment are comprised primarily of loans collateralized by seasoned reperforming residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, jumbo, prime residential mortgages.

At March 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 our Loans held for investment was $12.1 billion and $12.5 billion as of March 31, 2021 and December 31, 2020, 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, 2021 and December 31, 2020:
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For the Quarter Ended For the Year Ended
March 31, 2021 December 31, 2020
  (dollars in thousands)
Balance, beginning of period $ 13,112,129  $ 14,292,815 
Purchases 1,096,528  1,860,998 
Principal paydowns (564,558) (1,966,590)
Sales and settlements (904,630) (1,053,943)
Net periodic accretion (amortization) (15,504) (85,794)
Realized gains (losses) on sales and settlements —  — 
Change in fair value 84,047  64,643 
Balance, end of period $ 12,808,012  $ 13,112,129 

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, 2021. During the year ended December 31, 2020, the Company sold $1.1 billion of loans, with the Company retaining $22 million of beneficial interests.

Residential mortgage loans

The loan portfolio for all residential mortgages were originated during the following periods:
Origination Year March 31, 2021 December 31, 2020
2002 and prior 6.7  % 6.9  %
2003 5.8  % 5.9  %
2004 11.8  % 12.0  %
2005 18.0  % 18.2  %
2006 22.5  % 22.7  %
2007 22.3  % 22.4  %
2008 6.4  % 6.4  %
2009 1.3  % 1.3  %
2010 and later 5.2  % 4.2  %
Total 100.0  % 100.0  %

The following table presents a summary of key characteristics of the residential loan portfolio at March 31, 2021 and December 31, 2020:
  March 31, 2021 December 31, 2020
Number of loans   127,622   132,134
Weighted average maturity (years)   19.5   19.6
Weighted average loan to value   86.2  %   86.1  %
Weighted average FICO   649   630
Weighted average loan balance (in thousands)   $ 96    $ 96 
Weighted average percentage owner occupied   86.7  %   87.7  %
Weighted average percentage single family residence   82.8  %   83.3  %
Weighted average geographic concentration of top five states CA 12.8  % CA 12.4  %
FL 8.0  % FL 8.0  %
NY 7.5  % NY 7.3  %
PA 5.0  % PA 5.0  %
VA 4.9  % VA 4.9  %


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, 2021 and December 31, 2020, respectively.
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  30 Days Delinquent 60 Days Delinquent 90+ Days Delinquent Bankruptcy Foreclosure REO Total Unpaid Principal Balance
(dollars in thousands)
March 31, 2021 $788,017 $254,294 $701,757 $261,818 $338,649 $26,828 $2,371,363 $12,222,214
% of Unpaid Principal Balance 6.5  % 2.1  % 5.7  % 2.1  % 2.8  % 0.2  % 19.4  %
December 31, 2020 $727,012 $289,966 $729,713 $277,098 $297,509 $29,852 $2,351,150 12,640,193
% of Unpaid Principal Balance 5.8  % 2.3  % 5.8  % 2.2  % 2.4  % 0.2  % 18.6  %

The fair value of residential mortgage loans 90 days or more past due was $964 million and $910 million as of March 31, 2021 and December 31, 2020, 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.

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
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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 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. After the review for the period ended March 31, 2021, 14 investment holdings with an internally developed fair value of $138 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 $1 million higher , in the aggregate, than the third-party prices provided of $137 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, 2021 in excess of the thresholds for the period. At December 31, 2020, 23 investment holdings with an internally developed fair value of $389 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 $3 million lower, in the aggregate, than the third-party prices provided of $392 million. After review and discussion, the Company affirmed and valued the investments at the lower internally developed prices. No other differences were noted at December 31, 2020 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 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 subprime 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.

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 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
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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.

After the review for the period ended March 31, 2021, 5 loan pools with an internally developed fair value of $1.1 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 $128 million higher than the third-party prices provided of $1.0 billion. 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, 2021 in excess of the threshold for the period. At December 31, 2020, 3 loan pools with an internally developed fair value of $503 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 $55 million higher than the third-party prices provided of $448 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, 2020 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.