19.	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

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

Level

Fair value determined using significant other observable inputs.

Level

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, 2019	Fair Value at October 31, 2018

Mortgage loans held for sale (1)	Level 2	$91,211	$130,709
Interest rate lock commitments	Level 2	17	(28	)
Forward contracts	Level 2	21	13
Total		$91,249	$130,694

(

) The aggregate unpaid principal balance was

$88.3

million and

$127.6

million at

April 30, 2019

and

October 31, 2018,

respectively.

We elected the fair value option for our loans held for sale, 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

$544.2

million at

April 30, 2019.

Loans in process for which interest rates were committed to the borrowers totaled

$47.2

million as of

April 30, 2019.

Substantially all of these commitments were for periods of

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, 2019,

the segment had open commitments amounting to

$18.0

million to sell MBS with varying settlement dates through

May 21, 2019.

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 Condensed Consolidated Financial Statements in “Revenues: Financial services.” The fair values that are included in income are shown, by financial instrument and financial statement line item, below:

	Three Months Ended April 30, 2019
(In thousands)	Mortgage Loans Held For Sale	Interest Rate Lock Commitments		Forward Contracts

Fair value included in net loss all reflected in financial services revenues	$946	$(208	)	$406

	Three Months Ended April 30, 2018
(In thousands)	Mortgage Loans Held For Sale	Interest Rate Lock Commitments	Forward Contracts

Fair value included in net loss all reflected in financial services revenues	$127	$178	$(143	)

	Six Months Ended April 30, 2019
(In thousands)	Mortgage Loans Held For Sale	Interest Rate Lock Commitments	Forward Contracts

Fair value included in net loss all reflected in financial services revenues	$2,942	$17	$21

	Six Months Ended April 30, 2018
(In thousands)	Mortgage Loans Held For Sale	Interest Rate Lock Commitments		Forward Contracts

Fair value included in net loss all reflected in financial services revenues	$2,541	$(70	)	$125

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

three

and

six

months ended

April 30, 2019

and

2018.

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, 2019

(In thousands)

Fair

Value

Hierarchy

Pre-Impairment

Amount

Total

Losses

Fair Value

Sold and unsold homes and lots under development

Level 3

$3,906

$(968

)

$2,938

Land and land options held for future development or sale

Level 3

Three Months Ended

April 30, 2018

(In thousands)

Fair

Value

Hierarchy

Pre-Impairment

Amount

Total

Losses

Fair Value

Sold and unsold homes and lots under development

Level 3

$11,170

$(2,117

)

$9,053

Land and land options held for future development or sale

Level 3

		Six Months Ended
		April 30, 2019
(In thousands)	Fair Value Hierarchy	Pre-Impairment Amount	Total Losses		Fair Value

Sold and unsold homes and lots under development	Level 3	$3,906	$(968	)	$2,938
Land and land options held for future development or sale	Level 3	$6,302	$(43	)	$6,259

Six Months Ended

April 30, 2018

(In thousands)

Fair

Value

Hierarchy

Pre-Impairment

Amount

Total

Losses

Fair Value

Sold and unsold homes and lots under development

Level 3

$11,170

$(2,117

)

$9,053

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

$1.0

million for both the

three

and

six

months ended

April 30, 2019,

and

$2.1

million for both the

three

and

six

months ended

April 30, 2018.

See Note

for further detail of the communities evaluated for impairment.

The fair value of our cash equivalents, restricted cash and cash equivalents and customer’s deposits approximates their carrying amount, based on Level

inputs.

The fair value of each series of our Notes are listed below. Level

measurements are 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. Level

measurements are estimated based on

third

-party broker quotes or management’s estimate of the fair value based on available trades for similar debt instruments.

Fair Value as of

April 30, 2019

(In thousands)	Level 1	Level 2	Level 3	Total
Senior Secured Notes:
9.5% Senior Secured Notes due November 15, 2020	$-	$-	$71,250	$71,250
2.0% Senior Secured Notes due November 1, 2021	-	-	46,978	46,978
5.0% Senior Secured Notes due November 1, 2021	-	129,780	-	129,780
10.0% Senior Secured Notes due July 15, 2022	-	387,200	-	387,200
10.5% Senior Secured Notes due July 15, 2024	-	347,438	-	347,438
Senior Notes:
13.5% Senior Notes due February 1, 2026	-	84,815	-	84,815
5.0% Senior Notes due February 1, 2040	-	35,485	-	35,485
Senior Unsecured Term Loan Credit Facility due February 1, 2027	-	-	110,389	110,389
Total fair value	$-	$984,718	$228,617	$1,213,335

Fair Value as of

October 31, 2018

(In thousands)	Level 1	Level 2	Level 3	Total
Senior Secured Notes:
9.5% Senior Secured Notes due November 15, 2020	$-	$-	$74,250	$74,250
2.0% Senior Secured Notes due November 1, 2021	-	-	40,434	40,434
5.0% Senior Secured Notes due November 1, 2021	-	124,781	-	124,781
10.0% Senior Secured Notes due July 15, 2022	-	424,670	-	424,670
10.5% Senior Secured Notes due July 15, 2024	-	366,720	-	366,720
Senior Notes:
13.5% Senior Notes due February 1, 2026	-	88,148	-	88,148
5.0% Senior Notes due February 1, 2040	-	35,628	-	35,628
Senior Unsecured Term Loan Credit Facility due February 1, 2027	-	-	114,328	114,328
Total fair value	$-	$1,039,947	$229,012	$1,268,959

The Senior Secured Revolving Credit Facility is

not

included in the above tables because there were

borrowings outstanding thereunder as of

April 30, 2019

and

October 31, 2018.