Re: | ARMOUR Residential REIT, Inc. Form 10-K for Fiscal Year Ended December 31, 2017 Filed February 14, 2018 |
File No. 001-34766 | |
1. | We note that at the beginning of the third quarter 2017, you determined that third party pricing services and or/dealer quotes available for Credit Risk and Non-Agency Securities meet the criteria for Level 2 classification. Please tell us what changed with the third party pricing services and/or dealer quotes in the third quarter of 2017. Your response should identify the specific facts and circumstances that have changed and describe how such changes support your fair value hierarchy categorization. |
• | In the first quarter of 2016, the Company commenced investing in Credit Risk and Non-Agency Securities. At this time when we began to invest in these securities the market for these securities was less active and hence there were fewer dealer quotes available and we did not |
• | During 2016 and the first half of 2017, we compared our estimates of fair value of our Credit Risk and Non-Agency Securities as calculated above with valuations obtained from third party pricing services, pricing indications received from dealers (dealer quotes) and recent purchase and financing transaction history where available to validate our assumptions of future cash flow and market yield allowing us to improve the calibration of our models. |
• | During 2016 and the first half of 2017, the level of activity for the markets for Credit Risk Transfer and Non-Agency Securities we invest in increased significantly and, by the beginning of the third quarter of 2017, we were satisfied that the valuations from the third party pricing services were reflective of market prices and, as a result, fair value for substantially all of our Credit Risk Transfer and Non-Agency Securities. |
• | During 2016 and the first half of 2017: |
◦ | There were a significant number of recent market transactions for Credit Risk and Non-Agency Securities including new issuances. |
◦ | We determined that valuations for Credit Risk and Non-Agency Securities by third party pricing services were being developed using current information and reflective of market transactions. |
◦ | The valuations for Credit Risk and Non-Agency Securities no longer varied substantially among issues within a particular class of securities. |
◦ | There was a significant increase in the liquidity for these securities with more observed transactions and actionable quoted prices based on market activity without significant adjustments required. |
◦ | There was a narrowing of bid-ask spreads for Credit Risk and Non-Agency Securities which increased the relevance of the valuations from third party pricing services. |
◦ | We reviewed the disclosures of peer mortgage REITs that also invest in Credit Risk and Non-Agency Securities and noted that they were valuing their similar securities using third party pricing services and /or dealer quotes and classifying them as level 2 securities. |
• | During the first half of 2017, we evaluated the valuations prepared by third party pricing services and/or dealer quotes whether it would be appropriate to use these valuations and quotes for our Credit Risk and Non-Agency Securities portfolio. We found those valuations and quotes to be more reliable and reflective of current market prices. |
• | Commencing in the third quarter of 2017, we were able to obtain a valuation from third party pricing services and/or dealer quotes for each Credit Risk and Non-Agency Security that we determined were reflective of fair value. As a result, at the beginning of the quarter ended September 30, 2017, we determined that third party pricing services and/or dealer quotes available for Credit Risk and Non-Agency Securities met the criteria for Level 2 classification |
• | We observed Credit Risk and Non-Agency Securities have transacted in the market at prices similar to those valuations from third party pricing services and/or dealer quotes. |
• | When using third party pricing services in determining the fair value of our Credit Risk and Non-Agency Securities we assessed whether the prices reflect market participant assumptions and current information and assumptions and inputs that are observable. |
• | As the market expanded for Credit Risk and Non-Agency Securities and we considered quoted prices in determining fair value and that beginning in the third quarter of 2017 the quoted prices did not require a significant adjustment when determining fair value. |
• | We determined that the methods the third party pricing services and brokers used to determine fair value are based on current information that reflects orderly transactions or valuation techniques that reflect observable market participant assumptions. |