Fair Value

12 Months Ended

Dec. 31, 2012

Fair Value Disclosures [Abstract]

Fair Value

NOTE 15. FAIR VALUE

Authoritative accounting literature establishes a framework for using fair value to measure assets and liabilities and defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) as opposed to the price that would be paid to acquire the asset or received to assume the liability (an entry price). A fair value measure should reflect the assumptions that market participants would use in pricing the asset or liability, including the assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset and the risk of non-performance. Required disclosures include stratification of balance sheet amounts measured at fair value based on inputs the Company uses to derive fair value measurements. These stratifications are:

• Level 1 valuations, where the valuation is based on quoted market prices for identical assets or liabilities traded in active markets (which include exchanges and over-the-counter markets with sufficient volume),
• Level 2 valuations, where the valuation is based on quoted market prices for similar instruments traded in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market, and
• Level 3 valuations, where the valuation is generated from model-based techniques that use significant assumptions not observable in the market, but observable based on Company-specific data. These unobservable assumptions reflect the Company's own estimates for assumptions that market participants would use in pricing the asset or liability. Valuation techniques typically include option pricing models, discounted cash flow models and similar techniques, but may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability.

The Company's MBS are valued using Level 2 valuations, and such valuations currently are determined by the Company based on the average of third-party broker quotes and/or by independent pricing sources when available. Because the price estimates may vary, the Company must make certain judgments and assumptions about the appropriate price to use to calculate the fair values. Alternatively, the Company could opt to have the value of all of our MBS positions determined by either an independent third-party or do so internally.

Mortgage-backed securities, retained interests, Eurodollar futures contracts and mortgage loans held for sale were recorded at fair value on a recurring basis during the years ended December 31, 2012 and 2011. When determining fair value measurements, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets. Fair value measurements for the retained interests are generated by a model that requires management to make a significant number of assumptions.

The following table presents financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 and 2011:

(in thousands)
				Quoted Prices
				in Active		Significant
				Markets for		Other		Significant
				Identical		Observable		Unobservable
		Fair Value		Assets		Inputs		Inputs
		Measurements		(Level 1)		(Level 2)		(Level 3)
December 31, 2012
Mortgage-backed securities	$	168,155	$	-	$	168,155	$	-
Eurodollar futures contracts		227		227		-		-
Retained interests		3,336		-		-		3,336
December 31, 2011
Mortgage-backed securities	$	91,142	$	-	$	91,142	$	-
Eurodollar futures contracts		285		285		-		-
Mortgage loans held for sale		40		-		-		40
Retained interests		3,495		-		-		3,495

The following table illustrates a rollforward for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:

(in thousands)
		2012				2011
		Retained Interests		Mortgage Loans Held For Sale		Retained Interests		Mortgage Loans Held For Sale
Balances, January 1	$	3,495	$	40	$	3,928	$	40
Gain (loss) included in earnings		4,323		(18)		3,190		-
Collections		(4,482)		(22)		(3,623)		-
Balances, December 31	$	3,336	$	-	$	3,495	$	40

During the yearsended December 31, 2012 and 2011, there were no transfers of financial assets or liabilities between levels 1, 2 or 3.

Retained interests are valued based on a discounted cash flow approach. These values are sensitive to changes in unobservable inputs, including: estimated prepayment speeds, default rates and loss severity, weighted-average life, and discount rates. Significant increases or decreases in any of these inputs may result in significantly different fair value measurements.

The following table summarizes the significant quantitative information about our level 3 fair value measurements as of December 31, 2012.

Retained interest fair value (in thousands)			$	3,336
Prepayment Assumption		CPR Range (Weighted Average)
Constant Prepayment Rate		10% (10%)
Default Assumptions	Probability of Default	Severity Range (Weighted Average)		Range Of Loss Timing
Real Estate Owned	100%	35.2% - 52.23% (40.29%)		Next 10 Months
Loans in Foreclosure	100%	35.2% - 52.23% (40.29%)		Month 4 - 13
Loans 90 Day Delinquent	100%	45%		Month 13 - 30
Loans 60 Day Delinquent	85%	45%		Month 13 - 30
Loans 30 Day Delinquent	75%	45%		Month 13 - 30
Current Loans	2.5% - 4.4%	45%		Month 31 and Beyond
Cash Flow Recognition	Valuation Technique	Remaining Life Range (Weighted Average)		Discount Rate Range (Weighted Average)
Nominal Cashflows	Discounted Cash flow	0.5 - 8.0 years (5.0)		27.5% (27.5%)
Discounted Cashflows	Discounted Cash flow	0.5 - 6.9 years (2.0)		27.5% (27.5%)