20.	Fair Value of Financial Instruments

ASC 820, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value, expands disclosures about fair-value measurements and establishes a fair-value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

Level 1: Fair value determined based on quoted prices in active markets for identical assets.

Level 2: Fair value determined using significant other observable inputs.

Level 3: Fair value determined using significant unobservable inputs.

Our financial instruments measured at fair value on a recurring basis are summarized below:

(In thousands)	Fair Value Hierarchy	Fair Value at April 30, 2016			Fair Value at October 31, 2015

Mortgage loans held for sale (1)	Level 2		$130,017			$129,818
Interest rate lock commitments	Level 2		23			(7	)
Forward contracts	Level 2		(41	)		509
Total			$129,999			$130,320

(1) The aggregate unpaid principal balance was $118.4 million and $122.7 million at April 30, 2016 and October 31, 2015, respectively.

We elected the fair value option for our loans held for sale for mortgage loans originated subsequent to October 31, 2008, in accordance with ASC 825, “Financial Instruments,” which permits us to measure financial instruments at fair value on a contract-by-contract basis. Management believes that the election of the fair value option for loans held for sale improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Fair value of loans held for sale is based on independent quoted market prices, where available, or the prices for other mortgage loans with similar characteristics.

The Financial Services segment had a pipeline of loan applications in process of $798.5 million at April 30, 2016. Loans in process for which interest rates were committed to the borrowers totaled $60.1 million as of April 30, 2016. Substantially all of these commitments were for periods of 60 days or less. Since a portion of these commitments is expected to expire without being exercised by the borrowers, the total commitments do not necessarily represent future cash requirements.

The Financial Services segment uses investor commitments and forward sales of mandatory MBS to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk is managed by entering into MBS forward commitments, option contracts with investment banks, federally regulated bank affiliates and loan sales transactions with permanent investors meeting the segment’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At April 30, 2016, the segment had open commitments amounting to $27.5 million to sell MBS with varying settlement dates through May 23, 2016.

The assets accounted for using the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in the Financial Services segment’s income. The changes in fair values that are included in income are shown, by financial instrument and financial statement line item, below:

	Three Months Ended April 30, 2016
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments			Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues		$(1,178	)		$(377	)		$593

	Three Months Ended April 30, 2015
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments			Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues		$(233	)		$(325	)		$880

	Six Months Ended April 30, 2016
(In thousands)	Mortgage Loans Held For Sale		Interest Rate Lock Commitments		Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues		$3,829		$30		$(550	)

	Six Months Ended April 30, 2015
(In thousands)	Mortgage Loans Held For Sale			Interest Rate Lock Commitments			Forward Contracts

Changes in fair value included in net loss all reflected in financial services revenues		$(173	)		$(59	)		$498

The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs during the periods presented. The assets measured at fair value on a nonrecurring basis are all within the Company’s Homebuilding operations and are summarized below:

Nonfinancial Assets

		Three Months Ended
		April 30, 2016
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount		Total Losses			Fair Value

Sold and unsold homes and lots under development	Level 3		$15,710		$(4,730	)		$10,980
Land and land options held for future development or sale	Level 3		$1,012		$(646	)		$366

Three Months Ended

April 30, 2015

(In thousands)

Fair Value

Hierarchy

Pre-Impairment Amount

Total

Losses

Fair Value

Sold and unsold homes and lots under development

Level 3

$11,055

$(3,543

)

$7,512

Land and land options held for future development or sale

Level 3

		Six Months Ended
		April 30, 2016
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount		Total Losses			Fair Value

Sold and unsold homes and lots under development	Level 3		$44,238		$(14,399	)		$29,839
Land and land options held for future development or sale	Level 3		$1,169		$(694	)		$475

Six Months Ended

April 30, 2015

(In thousands)

Fair Value

Hierarchy

Pre-Impairment Amount

Total Losses

Fair Value

Sold and unsold homes and lots under development

Level 3

$16,756

$(4,466

)

$12,290

Land and land options held for future development or sale

Level 3

We record impairment losses on inventories related to communities under development and held for future development when events and circumstances indicate that they may be impaired and the undiscounted cash flows estimated to be generated by those assets are less than their related carrying amounts. If the expected undiscounted cash flows are less than the carrying amount, then the community is written down to its fair value. We estimate the fair value of each impaired community by determining the present value of its estimated future cash flows at a discount rate commensurate with the risk of the respective community. Should the estimates or expectations used in determining cash flows or fair value decrease or differ from current estimates in the future, we may be required to recognize additional impairments. We recorded inventory impairments, which are included in the Condensed Consolidated Statements of Operations as “Inventory impairment loss and land option write-offs” and deducted from Inventory of $5.4 million and $15.1 million for the three and six months ended April 30, 2016, respectively, and $3.5 million and $4.4 million for the three and six months ended April 30, 2015, respectively.

The fair value of our cash equivalents, restricted cash and cash equivalents and borrowings under the revolving credit facility approximates their carrying amount, based on Level 1 inputs.

The fair value of each series of the senior unsecured notes (other than the senior exchangeable notes and the senior amortizing notes) is estimated based on recent trades or quoted market prices for the same issues or based on recent trades or quoted market prices for our debt of similar security and maturity to achieve comparable yields, which are Level 2 measurements. The fair value of the senior unsecured notes (all series in the aggregate), other than the senior exchangeable notes and senior amortizing notes, was estimated at $487.5 million and $689.6 million as of April 30, 2016 and October 31, 2015, respectively.

The fair value of each of the senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes is estimated based on third party broker quotes, a Level 3 measurement. The fair value of the senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes were estimated at $809.2 million, $10.5 million and $64.0 million, respectively, as of April 30, 2016. As of October 31, 2015, the fair value of the senior secured notes (all series in the aggregate), the senior amortizing notes and the senior exchangeable notes were estimated at $869.4 million, $12.8 million and $69.0 million, respectively.