CHIMERA INVESTMENT CORPCIM
CHIMERA INVESTMENT CORP Fair Value Disclosure
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
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 December 31, 2025, one investment holding with an internally developed fair value of $5 million had a difference between the model generated price and third-party price provided in excess of the threshold for the period. The internally developed price was $701 thousand higher than the third-party price provided of $5 million. After review and discussion, the Company affirmed and valued the investments at the higher internally developed price. No other differences were noted at December 31, 2025 in excess of the thresholds for the period. At December 31, 2024, six investment holdings with internally developed fair values of $37 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 $6 million higher than the third-party prices provided of $31 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, 2024 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 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 include jumbo prime, investor owned and business purpose loans.
Loans consisting of seasoned reperforming residential mortgage loans, jumbo prime loans and investor loans:
The Company estimates the fair value of its Loans held for investment consisting of seasoned reperforming residential mortgage loans, jumbo prime loans and investor 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 that would impact the value of a loan. These loan factors include loan coupon, 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 coupon rate as compared to coupon rates currently available in the market and delinquency history.
The Company also monitors market activity to identify trades that may be used to compare internally developed prices. However, as the portfolio of loans held at fair value is a seasoned reperforming pool of residential 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 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 December 31, 2025, two loan pools with internally developed fair values of $272 million had differences between the model generated prices and the third-party prices provided in excess of the threshold for the period. The internally developed prices were $17 million higher than the third-party prices provided of $255 million. After review and discussion, the Company affirmed and valued the investment at the higher internally developed prices. No other differences were noted at December 31, 2025 in excess of the threshold for the period. At December 31, 2024, four loan pools with internally developed fair values of $440 million had differences between the model generated prices and third-party prices provided in excess of the threshold for the period. The internally developed prices were $28 million higher on a net basis than the third-party prices provided of $412 million. After review and discussion, the Company affirmed and valued the investment at the higher internally developed prices. No other differences were noted at December 31, 2024 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 that 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 with changes in fair value reflected in earnings. These loans tend to be short duration, often less than one year, and generally the coupon rate is higher than the Company's typical 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 $75 million and $338 million as of December 31, 2025 and December 31, 2024, respectively.
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.
Loans Held For Sale
LHFS are measured and reported at fair value. The Company’s fair value election for its LHFS is intended to more accurately reflect the underlying economics of the Company’s operations. With the election of the fair value option for LHFS, loan origination fees, and the related direct loan origination costs associated with the origination of LHFS, are earned and expensed as incurred, respectively.
Revenue derived from the Company’s mortgage lending activities includes certain fees collected at the time of origination and gain or loss from the sale of LHFS. Loan origination income reflects the fees earned, net of lender credits from originating the loans. These consist of fees related to loan origination, discount points, underwriting, processing and other fees. Lender credits typically are related to rebates or concessions for certain loan origination costs.
Gain or loss from the sale and mark-to-market of LHFS includes both realized and unrealized gains and losses and are included in Gain on origination and sale of loans, net, in the accompanying Consolidated Statements of Operations. The valuation of LHFS approximates a whole-loan sales value, which includes the value of the related mortgage servicing rights. When LHFS are sold, servicing rights are released.
The Company principally sells its LHFS to private investors. The Company evaluates its loan sales for sales treatment. To the extent the transfer of loans qualifies as a sale, the Company derecognizes the loans and records the gain or loss on the sale date. In the event the Company determines that the transfer of loans does not qualify as a sale, the transfer would be treated as a secured borrowing. Interest income from loans is recorded on the accrual basis. LHFS are placed on non-accrual status when any portion of the principal or interest is 90 days past due or earlier if factors indicate that the ultimate collectability of the principal or interest is not probable. Interest received from loans on non-accrual status is recorded as income when collected. Loans return to accrual status when the principal and interest become current, and it is probable that the amounts are fully collectible.
Loans held for sale are classified within Level 2 of the fair value hierarchy as their fair value is derived from quoted prices for similar instruments in active markets and other observable market-corroborated inputs.
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, delinquencies, 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 December 31, 2025, one securitized debt collateralized by Loans held for investment position with an internally developed fair value of $3 million had a difference between the model generated price and the third-party price provided in excess of the threshold for the period. The internally developed price was $183 thousand higher than the third-party price provided of $3 million. After review and discussion, the Company affirmed and valued the investment at the higher internally developed price. No other differences were noted at December 31, 2025 in excess of the threshold for the period. At December 31, 2024, two securitized debt collateralized by Loans held for investment positions with internally developed fair values of $3 million
had differences between the model generated prices and third-party prices provided in excess of the threshold for the period. The internally developed prices were $355 thousand higher on a net basis than the third-party prices provided of $3 million. After review and discussion, the Company affirmed and valued the securitized debt positions at the higher internally developed prices. No other differences were noted at December 31, 2024 in excess of the threshold for the period.
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 December 31, 2025 and December 31, 2024, respectively:
| December 31, 2025 | December 31, 2024 | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Unpaid Principal/ Notional | Fair Value | Unpaid Principal/ Notional | Fair Value | ||||||||||||||
| Assets: | |||||||||||||||||
| Non-Agency RMBS | |||||||||||||||||
| Senior | $ | — | $ | — | $ | 14,163 | $ | 13,036 | |||||||||
| Subordinated | 346,640 | 174,575 | 483,136 | 274,435 | |||||||||||||
| Interest-only | 2,428,976 | 78,961 | 2,644,741 | 73,335 | |||||||||||||
| Agency RMBS | |||||||||||||||||
| Pass-through | 3,096,299 | 3,081,573 | — | — | |||||||||||||
| CMO | 330,871 | 331,909 | 464,640 | 461,658 | |||||||||||||
| Interest-only | 367,866 | 14,867 | 380,311 | 16,784 | |||||||||||||
| Agency CMBS | |||||||||||||||||
| Project loans | 39,693 | 32,539 | 40,882 | 34,370 | |||||||||||||
| Interest-only | 123,375 | 2,597 | 449,437 | 6,408 | |||||||||||||
| Loans held for investment, at fair value | 9,988,601 | 9,803,615 | 11,659,420 | 11,196,678 | |||||||||||||
| Loans held for sale, at fair value | 871,787 | 896,117 | — | — | |||||||||||||
| Interests in MSR financing receivables | 40,886 | 37,294 | — | — | |||||||||||||
Liabilities (1): | |||||||||||||||||
| Secured Financing Agreements, at fair value | 305,817 | 298,663 | 337,245 | 319,456 | |||||||||||||
| Securitized debt at fair value, collateralized by Loans held for investment | 7,081,957 | 6,721,302 | 7,570,721 | 6,984,495 | |||||||||||||
(1) The Company recorded $2 million unrealized loss for contingent earn-out liability as of December 31, 2025. The contingent earn-out liability balance is included in Accounts payable and other liabilities on the Company’s Consolidated Statements of Financial Condition.
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 the Consolidated Statements of Operations for the years ended December 31, 2025 and 2024:
| For the Years Ended | ||||||||
| December 31, 2025 | December 31, 2024 | |||||||
| (dollars in thousands) | ||||||||
| Gain/(Loss) on Change in Fair Value | ||||||||
| Assets: | ||||||||
| Non-Agency RMBS | ||||||||
| Senior | $ | 1,284 | $ | 302 | ||||
| Subordinated | 12,201 | 11,448 | ||||||
| Interest-only | 12,736 | (13,141) | ||||||
| Agency RMBS | ||||||||
| Pass-through | 53,777 | — | ||||||
| CMO | 4,090 | (2,866) | ||||||
| Interest-only | (959) | 1,404 | ||||||
| Agency CMBS | ||||||||
| Project loans | (624) | 1,486 | ||||||
| Interest-only | (972) | (242) | ||||||
| Loans held for investment, at fair value | 265,772 | 202,665 | ||||||
| Loans held for sale, at fair value | 7,798 | N/A | ||||||
| Interests in MSR financing receivables | (3,592) | N/A | ||||||
Liabilities: (1) | ||||||||
| Secured Financing Agreements, at fair value | (10,636) | 5,813 | ||||||
| Securitized debt at fair value, collateralized by Loans held for investment | (249,197) | (196,058) | ||||||
(1) The Company recorded $2 million unrealized losses for contingent earn-out liability during the year ended December 31, 2025. The contingent earn-out liability balance is included in Accounts payable and other liabilities on the Company’s Consolidated Statements of Financial Condition.
Derivatives
Interest Rate Swaps and Swaptions
The Company uses clearing exchange market prices to determine the fair value of its exchange cleared interest rate swaps. For bilateral swaps, the Company determines the fair value based on the net present value of expected future cash flows on the swap. The Company uses an option-pricing model to determine the fair value of its swaptions. For bilateral swaps and swaptions, the Company compares its own estimate of fair value with counterparty prices to evaluate for reasonableness. Both the clearing exchange and counter-party pricing quotes incorporate common market pricing methods, including a spread measurement to the Treasury yield curve or interest rate swap curve as well as underlying characteristics of the particular contract. Interest rate swaps and swaptions are modeled by the Company by incorporating such factors as the term to maturity, swap curve, overnight index swap rates, and the payment rates on the fixed portion of the interest rate swaps. The Company has classified the characteristics used to determine the fair value of interest rate swaps and swaptions as Level 2 inputs in the fair value hierarchy.
Fair values of swaps with cancellable features are determined using valuation techniques appropriate for over‑the‑counter derivatives, including models incorporating observable market inputs (such as yield curves and volatility estimates) and, where observable inputs are not available, unobservable inputs, with resulting fair value measurements classified within the fair value hierarchy. This valuation is classified as Level 3 in the fair value hierarchy.
Treasury Futures
The fair value of Treasury futures is determined by quoted market prices in an active market. The Company has classified the characteristics used to determine the fair value of Treasury futures as Level 1 inputs in the fair value hierarchy.
Swap Futures
The fair value of Swap futures is determined using quoted settlement prices published by the ERIS Secured Overnight Financing Rate, which reflect observable market data for standardized CME-cleared contracts. The Company has classified the characteristics used to determine the fair value of Swap futures as Level 2 inputs in the fair value hierarchy.
Interest rate caps
The fair value of interest rate caps is determined using a discounted cash flow approach that considers the difference between the forward curve of the reference rate and the cap's strike rate. The expected future cash flows from each caplet are calculated and discounted to present value using observable market interest rates. The discounted cashflows contemplate both an intrinsic value based upon the strike rate in reference to the market reference rate as well as a time value based upon the implied volatility of the market reference rate forward curve projection. This valuation is based on market inputs and is classified as Level 2 in the fair value hierarchy.
Interest Rate Lock Commitments
The Company enters into interest rate lock commitments (“IRLCs”) with prospective borrowers to originate mortgage loans at a specified interest rate. These IRLCs are accounted for as derivative instruments. The fair values of IRLCs utilize current secondary market prices for the underlying loans and estimated servicing value with similar coupons, maturity and credit quality, estimated remaining direct expense and market adjusted investor discounts, subject to the anticipated loan funding probability (“Pull-through Rate”). The fair value of IRLCs is subject to change primarily due to changes in interest rates, credit spreads and the estimated Pull-through Rate. The Company reports IRLCs within Derivatives, at fair value, net, in the accompanying Consolidated Statements of Financial Condition with changes in fair value being recorded in the accompanying Consolidated Statements of Operations within Gain on origination and sale of loans, net.
The Company hedges the changes in fair value associated with changes in interest rates related to IRLCs and uncommitted LHFS by utilizing a combination of derivatives related to two-year and five-year U.S. Treasury futures for its Non-QM loans, and 30-year uniform mortgage-backed securities (“UMBS”) futures contracts for its FHA, VA, and Freddie Mac-insured loans (collectively the "Hedging Instruments") until committed to an investor. The Hedging Instruments are typically entered into at the time the IRLC is made. The fair value of Hedging Instruments is subject to change primarily due to changes in interest rates. The Company reports Hedging Instruments at fair value within Derivatives, at fair value, net, in the accompanying Consolidated Statements of Financial Condition with changes in fair value recorded in the accompanying Consolidated Statements of Operations within Gain on origination and sale of loans, net.
Secured Financing Agreements
Secured financing agreements for the investment portfolio are collateralized financing transactions utilized by the Company to acquire investment securities. For short term secured financing agreements and longer term floating rate secured financing agreements, the Company estimates fair value using the contractual obligation plus accrued interest payable. The Company has classified the characteristics used to determine the fair value of secured financing agreements as Level 2 inputs in the fair value hierarchy.
Secured Financing Agreements, at fair value
Fair value for certain secured financing agreements that are carried at fair value with changes in fair value reported in earnings are valued at the price that the Company would pay to transfer the liability to a market participant at the reporting date in an orderly transaction. The Company evaluates recent trades of financial liabilities made by the Company, which includes an element of non-performance risk, as well as changes in market interest rates to determine the fair value of the secured financing agreements. The primary factor in determining the fair value is the change in market interest rates from the transaction date of the secured financing agreements and the reporting date. As these rates are observable, the secured financing agreements are reported as Level 2 inputs in the fair value hierarchy.
Short-term Financial Instruments
The carrying value of cash and cash equivalents, accrued interest receivable, dividends payable, payable for investments purchased, and accrued interest payable are considered to be a reasonable estimate of fair value due to the short term nature and low credit risk of these short-term financial instruments.
Interests in MSR Financing Receivables
The Company classifies its Interests in MSR financing receivables as Level 3 in the fair value measurements hierarchy. Fair value estimates for these investments are obtained from models, which use significant unobservable inputs in their valuations. These valuations primarily utilize discounted cash flow models that incorporate unobservable market data inputs including interest rates, discount rates, and prepayment rates. Model valuations are then compared to valuations obtained from third party pricing providers. Management reviews the valuations received from third party pricing providers and uses them as a point of comparison to modeled values. The valuation of Interests in MSR financing receivables require significant judgment by management and the third party pricing providers. Assumptions used for which there is a lack of observable inputs may significantly impact the resulting fair value and therefore the Company’s consolidated financial statements.
The following tables set forth Interests in MSR financing receivables at fair value by level within the fair value hierarchy as of December 31, 2025.
| December 31, 2025 | ||||||||||||||
| (dollars in thousands) | ||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||
Interests in MSR financing receivables | — | — | 37,294 | 37,294 | ||||||||||
Qualitative and Quantitative Information about Level 3 Fair Value Measurements
The Company considers unobservable inputs to be those for which market data is not available and that are developed using the best information available to us about the assumptions that market participants would use when pricing the asset. Relevant inputs vary depending on the nature of the instrument being measured at fair value. The sensitivities of significant unobservable inputs along with interrelationships between and among the significant unobservable inputs and their impact on the fair value measurements are described below. The effect of a change in a particular assumption in the sensitivity analysis below is considered independently from changes in any other assumptions. In practice, simultaneous changes in assumptions may not always have a linear effect on the inputs discussed below. Interrelationships may also exist between observable and unobservable inputs. Such relationships have not been included in the discussion below. For each of the individual relationships described below, the inverse relationship would also generally apply. For Interests in MSR financing receivables, in general, increases in the discount rate or prepayment rate in isolation would result in a lower fair value measurement. A decline in interest rates could lead to higher-than-expected prepayments of mortgages underlying the Company’s Interests in MSR financing receivables, which in turn could result in a decline in the estimated fair value of Interests in MSR financing receivables.
The table below presents information about the significant unobservable inputs used for recurring fair value measurements for Level 3 Interests in MSR financing receivables. The table does not give effect to the Company’s risk management practices that might offset risks inherent in these Level 3 investments.
| December 31, 2025 | ||||||||||||||
Discount Rate | Prepayment Rate | |||||||||||||
| Range | Weighted Average | Range | Weighted Average | |||||||||||
| Interests in MSR financing receivables | 9% - 12% | 8.9% | 3% - 45% | 7.3% | ||||||||||
Long term debt
The fair value of the Company's Senior Unsecured Notes is based upon prices obtained from third-party pricing services or broker quotations and are classified as Level 2.
Equity Method Investments
The Company has made investments in entities or funds. For these investments where the Company has a non-controlling interest; but are deemed to be able to exert significant influence over the affairs of these entities or funds, the Company utilizes the equity method of accounting. These investments are not carried at fair value. The carrying value of the Company's equity method investments is determined using cost accumulation method. The Company adjusts the carrying value of its equity method investments for its share of earnings or losses, dividends or return of capital on a quarterly basis. The fair value of equity method investments is based on the fund valuation received from the manager of the fund. The Company has classified the characteristics used to determine the fair value of equity method investments as Level 3 inputs in the fair value hierarchy. The equity method investments are included in Other assets on the Consolidated Statements of Financial Condition.
The Company’s financial assets and liabilities carried at fair value on a recurring basis, including the level in the fair value hierarchy, at December 31, 2025 and December 31, 2024 are presented below.
| December 31, 2025 | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral, netting | Total | |||||||||||||
| Assets: | |||||||||||||||||
| Non-Agency RMBS, at fair value | $ | — | $ | — | $ | 817,280 | $ | — | $ | 817,280 | |||||||
| Agency MBS, at fair value | — | 3,463,485 | — | — | 3,463,485 | ||||||||||||
| Loans held for investment, at fair value | — | 75,351 | 9,728,264 | — | 9,803,615 | ||||||||||||
| Loans held-for-sale, at fair value | — | 896,117 | — | — | 896,117 | ||||||||||||
| Derivatives, at fair value | 57 | 25,340 | 3,855 | (4,065) | 25,187 | ||||||||||||
| Liabilities: | |||||||||||||||||
| Secured Financing Agreement, at fair value | — | 298,663 | — | — | 298,663 | ||||||||||||
| Securitized debt at fair value, collateralized by Loans held for investment | — | — | 6,721,302 | — | 6,721,302 | ||||||||||||
| Derivatives, at fair value | — | 1,759 | — | — | 1,759 | ||||||||||||
| December 31, 2024 | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Level 1 | Level 2 | Level 3 | Counterparty and Cash Collateral, netting | Total | |||||||||||||
| Assets: | |||||||||||||||||
| Non-Agency RMBS, at fair value | $ | — | $ | — | $ | 1,064,169 | $ | — | $ | 1,064,169 | |||||||
| Agency MBS, at fair value | — | 519,218 | — | — | 519,218 | ||||||||||||
| Loans held for investment, at fair value | — | 337,833 | 10,858,845 | — | 11,196,678 | ||||||||||||
| Derivatives, at fair value | 117 | 7,146 | — | (7,146) | 117 | ||||||||||||
| Liabilities: | |||||||||||||||||
| Secured Financing Agreement, at fair value | — | 319,456 | — | — | 319,456 | ||||||||||||
| Securitized debt at fair value, collateralized by Loans held for investment | — | — | 6,984,495 | — | 6,984,495 | ||||||||||||
| Derivatives, at fair value | — | — | — | — | — | ||||||||||||
The table below provides a summary of the changes in the fair value of financial instruments classified as Level 3 at December 31, 2025 and December 31, 2024.
| Fair Value Level 3 Rollforward - Assets | ||||||||||||||||||||
| For the Year Ended | For the Year Ended | |||||||||||||||||||
| December 31, 2025 | December 31, 2024 | |||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Non-Agency RMBS | Interests in MSR Financing Receivables | Loans held for investment | Derivatives | Non-Agency RMBS | Loans held for investment | |||||||||||||||
| Beginning balance Level 3 | $ | 1,064,169 | $ | — | $ | 10,858,845 | $ | — | $ | 1,043,806 | $ | 11,125,052 | ||||||||
| Transfers into Level 3 | — | — | — | — | — | — | ||||||||||||||
| Transfers out of Level 3 | — | — | — | — | — | — | ||||||||||||||
| Capital contribution | — | 38,221 | — | — | — | — | ||||||||||||||
| Purchases of assets | 1,289 | — | — | 5,073 | 97,646 | 759,900 | ||||||||||||||
| Principal payments | (92,195) | — | (1,198,667) | — | (74,091) | (1,184,167) | ||||||||||||||
| Sales and Settlements | (165,029) | — | (174,471) | — | — | (3,441) | ||||||||||||||
| Servicer advances | — | 2,145 | — | — | — | — | ||||||||||||||
| Net accretion (amortization) | 27,792 | — | (5,058) | — | 34,267 | (39,490) | ||||||||||||||
| Amortization of MSR loan pool | — | (3,930) | — | — | — | — | ||||||||||||||
| Gains (losses) included in net income | ||||||||||||||||||||
| (Increase) decrease in provision for credit losses | (15,705) | — | — | — | (9,869) | — | ||||||||||||||
| Realized gains (losses) on sales and settlements | (16,103) | — | (18,254) | — | — | — | ||||||||||||||
| Interest income from investment in MSR financing receivables | — | 4,451 | — | — | — | — | ||||||||||||||
| Net unrealized gains (losses) included in income | 26,221 | (3,592) | 265,868 | (1,218) | (1,391) | 200,991 | ||||||||||||||
| Total unrealized gains (losses) for the period | (13,152) | — | — | — | (26,199) | — | ||||||||||||||
| Ending balance Level 3 | $ | 817,287 | $ | 37,295 | $ | 9,728,264 | $ | 3,855 | $ | 1,064,169 | $ | 10,858,845 | ||||||||
| Fair Value Level 3 Rollforward - Liabilities | ||||||||
| For the Year Ended | For the Year Ended | |||||||
| December 31, 2025 | December 31, 2024 | |||||||
| (dollars in thousands) | ||||||||
| Securitized Debt | Securitized Debt | |||||||
| Beginning balance Level 3 | $ | 6,984,495 | $ | 7,601,881 | ||||
| Transfers into Level 3 | — | — | ||||||
| Transfers out of Level 3 | — | — | ||||||
| Transfer due to consolidation/deconsolidation | — | — | ||||||
| Issuance of debt | 1,011,244 | 340,096 | ||||||
| Principal payments | (1,161,220) | (1,170,579) | ||||||
| Sales and Settlements | (382,110) | — | ||||||
| Net (accretion) amortization | 21,837 | 17,039 | ||||||
| (Gains) losses included in net income | ||||||||
| Other than temporary credit impairment losses | — | — | ||||||
| Realized (gains) losses on sales and settlements | (2,142) | — | ||||||
| Net unrealized (gains) losses included in income | 249,197 | 196,058 | ||||||
| Total unrealized (gains) losses for the period | — | — | ||||||
| Ending balance Level 3 | $ | 6,721,302 | $ | 6,984,495 | ||||
There were no transfers in or out from Level 3 during the year ended December 31, 2025 and December 31, 2024, respectively.
The significant unobservable inputs used in the fair value measurement of the Company’s Non-Agency RMBS and securitized debt are the weighted average discount rates, prepayment rate, constant default rate, and the loss severity. The significant unobservable inputs used in the fair value measurement of the Company’s IRLC are the pull-through rates.
The fair value amounts have been estimated by management using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data to develop the estimates of fair value in both inactive and orderly markets. Accordingly, the estimates presented are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Discount Rate
The discount rate refers to the interest rate used in the discounted cash flow analysis to determine the present value of future cash flows. The discount rate takes into account not just the time value of money, but also the risk or uncertainty of future cash flows. An increased uncertainty of future cash flows results in a higher discount rate. The discount rate used to calculate the present value of the expected future cash flows is based on the discount rate implicit in the security as of the last measurement date. As discount rates move up, the values of the discounted cash flows are reduced.
The discount rates applied to the expected cash flows to determine fair value are derived from a range of observable prices on securities backed by similar collateral. As the market becomes more or less liquid, the availability of these observable inputs will change.
Prepayment Rate
The prepayment rate specifies the percentage of the collateral balance that is expected to prepay at each point in the future. The prepayment rate is based on factors such as interest rates, loan-to-value ratio, debt-to-income ratio, and is scaled up or down to reflect recent collateral-specific prepayment experience as obtained from remittance reports and market data services.
Constant Default Rate
Constant default rate represents an annualized rate of default on a group of mortgages. The constant default rate, or CDR, represents the percentage of outstanding principal balances in the pool that are in default, which typically equates to the home being past 60-day and 90-day notices and in the foreclosure process. When default rates increase, expected cash flows on the underlying collateral decreases. When default rates decrease, expected cash flows on the underlying collateral increases.
Default vectors are determined from the current “pipeline” of loans that are more than 30 days delinquent, in foreclosure, bankruptcy, or are REO. These delinquent loans determine the first 30 months of the default curve. Beyond month 30, the default curve transitions to a value that is reflective of a portion of the current delinquency pipeline.
Loss Severity
Loss severity rates reflect the amount of loss expected from a foreclosure and liquidation of the underlying collateral in the mortgage loan pool. When a mortgage loan is foreclosed, the collateral is sold and the resulting proceeds are used to settle the outstanding obligation. In many circumstances, the proceeds from the sale do not fully repay the outstanding obligation. In these cases, a loss is incurred by the lender. Loss severity is used to predict how costly future losses are likely to be. An increase in loss severity results in a decrease in expected future cash flows. A decrease in loss severity results in an increase in expected future cash flows.
The curve generated to reflect the Company’s expected loss severity is based on collateral-specific experience with consideration given to other mitigating collateral characteristics. Collateral characteristics such as loan size, loan-to-value, seasoning or loan age and geographic location of collateral also effect loss severity.
Sensitivity of Significant Inputs – Non-Agency RMBS and securitized debt, collateralized by Loans held for investment
Prepayment rates vary according to interest rates, the type of financial instrument, conditions in financial markets, and other factors, none of which can be predicted with any certainty. In general, when interest rates rise, it is relatively less attractive for borrowers to refinance their mortgage loans, and as a result, prepayment speeds tend to decrease. When interest rates fall, prepayment speeds tend to increase. For RMBS investments purchased at a premium, as prepayment rates increase, the amount of income the Company earns decreases as the purchase premium on the bonds amortizes faster than expected. Conversely, decreases in prepayment rates result in increased income and can extend the period over which the Company amortizes the purchase premium. For RMBS investments purchased at a discount, as prepayment rates increase, the amount of income the Company earns increases from the acceleration of the accretion of the purchase discount into interest income. Conversely, decreases in prepayment rates result in decreased income as the accretion of the purchase discount into interest income occurs over a longer period.
For securitized debt carried at fair value issued at a premium, as prepayment rates increase, the amount of interest expense the Company recognizes decreases as the issued premium on the debt amortizes faster than expected. Conversely, decreases in prepayment rates result in increased expense and can extend the period over which the Company amortizes the premium.
For debt issued at a discount, as prepayment rates increase, the amount of interest the Company expenses increases from the acceleration of the accretion of the discount into interest expense. Conversely, decreases in prepayment rates result in decreased expense as the accretion of the discount into interest expense occurs over a longer period.
A summary of the significant inputs used to estimate the fair value of Level 3 Non-Agency RMBS held for investment at fair value as of December 31, 2025 and December 31, 2024 follows. The weighted average discount rates are based on fair value.
| December 31, 2025 | ||||||||||||||||||||||||||
| Significant Inputs | ||||||||||||||||||||||||||
| Discount Rate | Prepay Rate | CDR | Loss Severity | |||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | |||||||||||||||||||
| Non-Agency RMBS | ||||||||||||||||||||||||||
| Senior | 5%-20% | 6.1% | 6%-25% | 6.8% | 0%-7% | 1.2% | 26%-54% | 29.0% | ||||||||||||||||||
| Subordinated | 0%-15% | 8.6% | 6%-24% | 9.1% | 0%-3% | 0.8% | 20%-50% | 32.0% | ||||||||||||||||||
| Interest-only | 9%-100% | 9.9% | 6%-25% | 7.0% | 0%-13% | 0.8% | 0%-84% | 28.4% | ||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
| Significant Inputs | ||||||||||||||||||||||||||
| Discount Rate | Prepay Rate | CDR | Loss Severity | |||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | |||||||||||||||||||
| Non-Agency RMBS | ||||||||||||||||||||||||||
| Senior | 5% -10% | 6.6% | 6% -20% | 6.6% | 0% -13% | 1.2% | 25% -86% | 30.0% | ||||||||||||||||||
| Subordinated | 0% -15% | 8.5% | 6% -20% | 8.1% | 0% -3% | 0.7% | 25% -50% | 33.1% | ||||||||||||||||||
| Interest-only | 9% -100% | 11.8% | 6% -25% | 7.0% | 0% -7% | 0.9% | 0% -83% | 29.4% | ||||||||||||||||||
A summary of the significant inputs used to estimate the fair value of securitized debt at fair value, collateralized by Loans held for investment, as of December 31, 2025 and December 31, 2024 follows:
| December 31, 2025 | ||||||||||||||||||||||||||
| Significant Inputs | ||||||||||||||||||||||||||
| Discount Rate | Prepay Rate | CDR | Loss Severity | |||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | |||||||||||||||||||
| Securitized debt at fair value, collateralized by Loans held for investment | 4%-8% | 5.4% | 6%-20% | 8.1% | 0%-4% | 0.5% | 20%-50% | 33.9% | ||||||||||||||||||
| December 31, 2024 | ||||||||||||||||||||||||||
| Significant Inputs | ||||||||||||||||||||||||||
| Discount Rate | Prepay Rate | CDR | Loss Severity | |||||||||||||||||||||||
| Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | Range | Weighted Average | |||||||||||||||||||
| Securitized debt at fair value, collateralized by Loans held for investment | 5%-9% | 6.0% | 6%-15% | 7.5% | 0%-5% | 0.6% | 20%-55% | 35.5% | ||||||||||||||||||
All of the significant inputs listed have some degree of market observability based on the Company’s knowledge of the market, information available to market participants, and use of common market data sources. Collateral default and loss severity projections are in the form of “curves” that are updated quarterly to reflect the Company’s collateral cash flow projections. Methods used to develop these projections conform to industry conventions. The Company uses assumptions it considers its best estimate of future cash flows for each security.
Sensitivity of Significant Inputs – Loans held for investment
The Loans held for investment are primarily comprised of loans collateralized by seasoned reperforming residential mortgages. Additionally, it includes non-conforming, single family, owner occupied, investor owned, and jumbo prime residential mortgages. The significant unobservable factors used to estimate the fair value of the Loans held for investment collateralized by seasoned reperforming residential mortgage loans, as of December 31, 2025 and December 31, 2024, include coupon, FICO score at origination, loan-to-value, or LTV ratios, owner occupancy status, and property type. A summary of the significant factors used to estimate the fair value of Loans held for investment collateralized primarily by seasoned reperforming residential mortgages at fair value as of December 31, 2025 and December 31, 2024 follows:
| December 31, 2025 | December 31, 2024 | ||||||||||
| Factor: | |||||||||||
| Coupon | |||||||||||
| Base Rate | 5.5% | 6.2% | |||||||||
| Actual | 5.9% | 5.9% | |||||||||
| FICO | |||||||||||
| Base Rate | 640 | 640 | |||||||||
| Actual | 665 | 665 | |||||||||
| Loan-to-value (LTV) | |||||||||||
| Base Rate | 86% | 86% | |||||||||
| Actual | 78% | 78% | |||||||||
| Loan Characteristics: | |||||||||||
| Occupancy | |||||||||||
| Owner Occupied | 86% | 86% | |||||||||
| Investor | 9% | 9% | |||||||||
| Secondary | 5% | 5% | |||||||||
| Property Type | |||||||||||
| Single family | 78% | 78% | |||||||||
| Manufactured housing | 3% | 3% | |||||||||
| Multi-family/mixed use/other | 19% | 19% | |||||||||
The loan factors are generally not observable for the individual loans and the base rates developed by the Company’s internal model are subjective and change as market conditions change. The impact of the loan coupon on the value of the loan is dependent on the loan history of delinquent payments. A loan with no history of delinquent payments would result in a higher overall value than a loan which has a history of delinquent payments. Similarly, a higher FICO score and a lower LTV ratio results in increases in the fair market value of the loan and a lower FICO score and a higher LTV ratio results in a lower value. See Note 4 for delinquency details for the Loans held for investment portfolio.
Property types also affect the overall loan values. Property types include single family, manufactured housing and multi-family/mixed use and other types of properties. Single family homes represent properties that house one to four family units. Manufactured homes include mobile homes and modular homes. Loan value for properties that are investor or secondary homes have a reduced value as compared to the baseline loan value. Additionally, single family homes will result in an increase to the loan value, whereas manufactured and multi-family/mixed use and other properties will result in a decrease to the loan value, as compared to the baseline.
Sensitivity of Significant Inputs for IRLC - Pull-through Rates
Interest rate lock commitments do not trade in an active market. Accordingly, the Company estimates the fair value of IRLCs based on the price an investor would be expected to pay to acquire such commitments, using current secondary market pricing for mortgage loans with similar characteristics.
The valuation incorporates observable market inputs, including loan type, underlying loan balance, borrower credit score, loan-to-value ratio, note rate, loan program, expected loan sale date, and prevailing market conditions. The estimated fair value is
adjusted at the individual loan level to reflect the servicing release premium, investor-specific pricing adjustments applicable to each loan, and the estimated direct costs required to convert the IRLC into a funded loan.
The resulting base value is further adjusted for the anticipated pull-through rate, which represents the probability that a locked loan will ultimately fund. The anticipated pull-through rate is an unobservable input derived from the Company’s historical funding experience and current pipeline characteristics. An increase in the anticipated pull-through rate results in an increase in the estimated fair value of IRLCs, while a decrease in the anticipated pull-through rate results in a decrease in estimated fair value. Due to the significance of this unobservable input, IRLCs are classified as Level 3 within the fair value hierarchy.
| December 31, 2025 | ||||||||||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| Financial Instrument | Estimated Fair Value | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | |||||||||||||||||||||||||||
| Derivative assets - IRLCs | $ | 3,855 | Market Pricing | Pull-through Rate | 10% - 95% | 70.0 | % | |||||||||||||||||||||||||
Financial instruments not carried at fair value
The following table presents the carrying value and fair value, as described above, of the Company’s financial instruments not carried at fair value on a recurring basis at December 31, 2025 and December 31, 2024.
| December 31, 2025 | |||||||||||
| (dollars in thousands) | |||||||||||
| Level in Fair Value Hierarchy | Carrying Amount | Fair Value | |||||||||
Equity method investments (1) | 3 | $ | 70,191 | $ | 70,191 | ||||||
| Secured financing agreements | 2 | 5,732,519 | 5,767,481 | ||||||||
| Securitized debt, collateralized by Non-Agency RMBS | 3 | 66,579 | 45,172 | ||||||||
| Long term debt | 2 | 251,528 | 262,239 | ||||||||
(1) Included in Other assets on the Consolidated Statements of Financial Condition
| December 31, 2024 | |||||||||||
| (dollars in thousands) | |||||||||||
| Level in Fair Value Hierarchy | Carrying Amount | Fair Value | |||||||||
Equity method investments (1) | 3 | $ | 63,947 | $ | 63,947 | ||||||
| Secured financing agreements | 2 | 2,504,915 | 2,534,652 | ||||||||
| Securitized debt, collateralized by Non-Agency RMBS | 3 | 71,247 | 49,022 | ||||||||
| Long term debt | 2 | 134,646 | 140,563 | ||||||||
(1) Included in Other assets on the Consolidated Statements of Financial Condition
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 18, 2026 | Showing above |
| 2024 | Feb 19, 2025 | |
| 2023 | Feb 29, 2024 | |
| 2022 | Feb 17, 2023 | |
| 2021 | Feb 17, 2022 | |
| 2020 | Feb 18, 2021 | |
| 2019 | Feb 24, 2020 | |
| 2018 | Feb 21, 2019 | |
| 2017 | Feb 20, 2018 | |
| 2016 | Feb 21, 2017 | |
| 2015 | Feb 25, 2016 | |
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.