Fair Value Disclosures

12 Months Ended

Dec. 31, 2020

13. Fair Value Disclosures

Fair value measurements are used for the Company’s mortgage loans held for sale, mortgage loans held for investment, mortgage servicing rights, interest rate lock commitments and other derivative instruments on a recurring basis. We also utilize fair value measurements on a non-recurring basis for inventories, and intangible assets when events and circumstances indicate that the carrying value is not recoverable. The fair value hierarchy and its application to the Company’s assets and liabilities is as follows:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are inactive; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at measurement date.

Mortgage loans held for sale – Fair value is based on quoted market prices for committed mortgage loans.

Derivative assets and liabilities – Derivative assets and liabilities are related to our financial services segments and fair value is based on market prices for similar instruments.

Level 3 – Valuations derived from techniques where one or more significant inputs or significant value drivers are unobservable in active markets at measurement date.

Mortgage servicing rights - The fair value of the mortgage servicing rights is calculated using third-party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates.

Mortgage loans held for investment – The fair value of mortgage loans held for investment is calculated based on Level 3 analysis which incorporates information including the value of underlying collateral, from markets where there is little observable trading activity.

The following outlines the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020 and 2019, and the changes in the fair value of the Level 3 assets during the year ended December 31, 2020 and 2019:


			As of December 31,
	Balance Sheet Classification	Hierarchy	2020		2019
Mortgage loans held for sale	Mortgage loans held for sale	Level 2	$	282,639	$	185,246
Mortgage loans held for investment	Prepaid expenses and other assets	Level 3	$	8,727	$	3,385
Derivative assets	Prepaid expenses and other assets	Level 2	$	7,755	$	1,382
Mortgage servicing rights ⁽¹⁾	Prepaid expenses and other assets	Level 3	$	4,115	$	—
Derivative liabilities	Accrued expenses and other liabilities	Level 2	$	3,807	$	147

(1)The unobservable inputs used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates, which were 10.4%, 9.8%, and 0.6%, respectively.

The following table represents the reconciliation of the beginning and ending balance for the Level 3 recurring fair value measurements:


	Year Ended December 31,
Mortgage servicing rights:		2020		2019
Beginning of year	$	—	$	—
Originations		4,115		—
Disposals/settlements		—		—
Changes in fair value		—		—
End of year	$	4,115	$	—

	Year Ended December 31,
Mortgage loans held for investment		2020		2019
Beginning of year	$	3,385	$	954
Originations		7,050		3,104
Disposals/settlements		(1,525)		(555)
Reduction in unpaid principal balance		(111)		(39)
Changes in fair value		(72)		(79)
End of year	$	8,727	$	3,385

For the financial assets and liabilities that the Company does not reflect at fair value, the following present both their respective carrying value and fair value at December 31, 2020 and 2019.



		December 31, 2020				December 31, 2019

	Hierarchy	Carrying		Fair Value		Carrying		Fair Value
Cash and cash equivalents	Level 1	$	394,001	$	394,001	$	55,436	$	55,436
Secured notes receivable ⁽¹⁾	Level 2	$	2,434	$	2,448	$	2,602	$	2,545
5.875% senior notes ⁽²⁾⁽³⁾	Level 2	$	396,821	$	417,500	$	396,120	$	415,680
6.750% senior notes ⁽²⁾⁽³⁾	Level 2	$	494,768	$	533,750	$	494,307	$	537,500
Revolving line of credit⁽⁴⁾	Level 2	$	—	$	—	$	68,700	$	68,700
Other financing obligations⁽⁴⁾⁽⁵⁾	Level 3	$	3,286	$	3,286	$	6,277	$	6,277
Mortgage repurchase facilities⁽⁴⁾	Level 2	$	259,050	$	259,050	$	174,095	$	174,095


⁽¹⁾		Estimated fair value of the secured notes receivable was based on cash flow models discounted at market interest rates which considered the underlying risks of the note. In May 2020, the maturity of the secured note receivable was extended by one year to May of 2021.
⁽²⁾		Estimated fair value of the senior notes is based on recent trading activity in inactive markets.
⁽³⁾		Carrying amounts include any associated unamortized deferred financing costs, premiums and discounts. As of December 31, 2020, these amounts totaled $5.2 million and $3.2 million for the 6.750% senior notes and 5.875% senior notes, respectively. As of December 31, 2019, these amounts totaled $5.7 million and $3.9 million for the 6.875% senior notes and 5.875% senior notes, respectively.
⁽⁴⁾		Carrying amount approximates fair value due to short-term nature and interest rate terms.
⁽⁵⁾		Insurance premium notes included in other financing obligations bore interest rates ranging from 3.278% to 3.240% during the year ended December 31, 2020 and during the year ended December 31, 2019.

During the year ended December 31, 2020, we determined that inventory with a carrying value before impairment of $12.0 million within four communities across our Texas and Century Complete segments was not recoverable. Accordingly, we recognized

impairment charges of an aggregate $2.2 million to reflect the estimated fair value of the communities of $9.8 million. The estimated fair value of the communities was determined through a discounted cash flow approach utilizing Level 3 inputs. Changes in our cash flow projections may change our conclusions on the recoverability of inventory in future periods.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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