Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2023

Summary of Significant Inputs to Fair Value Measurement

The following table presents the weighted-average of the significant inputs to the fair value measurement of the Company’s non-agency MBS secured by business purpose residential mortgage loans as of dates indicated:


	June 30, 2023			December 31, 2022
Probability of default		60.7	%		27.8	%
Loss-given-default		39.7	%		18.3	%

The following table presents the weighted-average of the significant inputs to the fair value measurement of the business purpose residential mortgage loans of the Company’s consolidated VIE as of the periods indicated:


	June 30, 2023			December 31, 2022
Probability of default		71.7	%		44.1	%
Loss-given-default		23.2	%		11.3	%

The following table presents the weighted-average of the significant inputs to the fair value measurement of the subordinate and excess interest-only debt obligations of its consolidated VIE of residential mortgage loans as of December 31, 2022:


	Subordinate Debt Obligation			Excess Interest-Only Debt Obligations
Annualized voluntary prepayment rate		10.0	%		10.0	%
Annualized default rate		0.5	%		0.5	%
Loss-given-default		17.5	%		17.5	%
Discount rate		7.8	%		17.7	%

Schedule of significant unobservable inputs to the fair value measurement

The following table presents the significant unobservable inputs to the fair value measurement of the MSRs underlying the Company’s MSR financing receivables as of the periods indicated:


	June 30, 2023			December 31, 2022
Discount rate		9.0	%		8.5	%
Annualized prepayment rate		6.3	%		7.0	%
Annual per-loan cost of servicing (current loans)	$	60.00		$	65.00

Financial Instruments Measured at Fair Value on a Recurring Basis

The following tables set forth financial instruments measured at fair value by level within the fair value hierarchy as of June 30, 2023 and December 31, 2022. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	June 30, 2023
	Total		Level 1		Level 2		Level 3
Financial assets:
Agency MBS	$	467,503	$	—	$	467,503	$	—
MSR financing receivables		195,893		—		—		195,893
Loans		25,992		—		—		25,992
Credit securities		102,203		—		99,657		2,546
Mortgage loans of consolidated VIEs		910		—		—		910
Derivative assets		1,857		—		1,857		—
Other assets		3,046		186		—		2,860
Financial liabilities:
Secured debt of consolidated VIEs		113		—		—		113
Derivative liabilities		356		—		356		—


	December 31, 2022
	Total		Level 1		Level 2		Level 3
Financial assets:
Agency MBS	$	443,540	$	—	$	443,540	$	—
MSR financing receivables		180,365		—		—		180,365
Loans		29,264		—		—		29,264
Credit securities		104,437		—		98,933		5,504
Mortgage loans of consolidated VIE		193,957		—		—		193,957
Derivative assets		5,660		—		5,660		—
Other assets		3,198		234		—		2,964
Financial liabilities:
Secured debt of consolidated VIE		169,345		—		159,464		9,881
Derivative liabilities		22		—		22		—

Change in Fair Value of Level 3 Financial Assets and Liabilities that are Measured at Fair Value on Recurring Basis

The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial assets that are measured at fair value on a recurring basis for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Beginning balance	$	218,830		$	463,318		$	412,054		$	195,767
Net gains (loss) included in "Investment and derivative gain (loss), net"		8,536			(13,599	)		4,240			1,616
Additions from consolidation of VIEs		—			—			—			276,594
Transfers to real estate owned by consolidated VIE		—			(199	)		(659	)		(199	)
Purchases		10,126			18,032			16,201			21,219
Sales		—			(12,406	)		—			(12,406	)
Payments, net		(14,071	)		(64,763	)		(26,907	)		(95,381	)
Subtractions from deconsolidation of VIEs		—			—			(185,820	)		—
Accretion of discount, net		4,780			3,118			9,092			6,291
Ending balance	$	228,201		$	393,501		$	228,201		$	393,501
Net unrealized gains (losses) included in earnings for the period for Level 3 assets still held at the reporting date	$	8,536		$	(13,037	)	$	4,927		$	2,647

The table below sets forth an attribution of the change in the fair value of the Company’s Level 3 financial liabilities that are measured at fair value on a recurring basis for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2023			2022			2023			2022
Beginning balance	$	160		$	13,615		$	9,881		$	508
Net (gain) loss included in "Investment and derivative gain (loss), net"		(20	)		(1,081	)		33			(1,332	)
Additions from consolidation of VIEs		—			—			—			14,278
Payments, net		(27	)		(936	)		(304	)		(1,796	)
Subtractions from deconsolidation of VIEs		—			—			(9,481	)		—
Amortization of premium, net		—			(77	)		(16	)		(137	)
Ending balance	$	113		$	11,521		$	113		$	11,521
Net unrealized (gains) losses included in earnings for the period for Level 3 liabilities still held at the reporting date	$	(20	)	$	(1,081	)	$	(19	)	$	(1,332	)

Arlington Asset Investment Corp. 10-Q