Fair Value Of Financial Instruments

3 Months Ended

Mar. 31, 2015

Note 6: Fair Value of Financial Instruments

Fair Value Measurement

Fair value is a market-based measurement considered from the perspective of a market participant. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those which it believes market participants would use in pricing an asset or liability at the measurement date. The fair value measurement of financial instruments held or issued by the Company are determined through the use of observable market data when available. Market data is obtained from a variety of third-party sources, including dealer quotes. If dealer quotes are not available for an instrument that is infrequently traded, the Company uses alternate valuation methods, including either dealer quotes for similar instruments or modeling using market data inputs. The use of alternate valuation methods generally requires considerable judgment in the application of estimates and assumptions and changes to such estimates and assumptions may produce materially different fair values.

The accounting guidance for fair value measurement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available and reliable. Observable inputs are those the Company believes that market participants would use in pricing an asset or liability based on available market data. Unobservable inputs are those that reflect the Company’s beliefs about the assumptions market participants would use in pricing an asset or liability based on available information. The fair value hierarchy is categorized into three levels based on the observability and reliability of inputs, as follows:

Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company can access. Valuations are based on quoted prices that are readily and regularly available in an active market, with significant trading volumes.
Level 2—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly. Level 2 assets include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, securities which are priced using observable inputs and derivative contracts whose values are determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data.
Level 3—Valuations based on inputs that are unobservable and supported by little or no market activity and that are significant to the overall fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques where significant inputs are unobservable, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The availability of observable inputs can vary from financial instrument to financial instrument and period to period and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the product. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the Company assigns the level in the fair value hierarchy for which the fair value measurement in its entirety falls, based on the least observable input that is significant to the fair value measurement.

Financial Assets (excluding derivative assets)

Financial assets, excluding derivative assets, held by the Company primarily consist of investments in debt securities. Substantially all of the Company’s investments are priced by independent third parties, including pricing services and brokers. Typically, the Company receives one pricing service value or broker quote for each instrument, which represents a non-binding indication of value. The Company reviews the assumptions, inputs and methodologies used by pricing services and brokers to obtain reasonable assurance that the prices used in its valuations reflect fair value. When the Company believes a third-party quotation differs significantly from its internally developed expectation of fair value, whether higher or lower, the Company reviews its data or assumptions with the provider. This review includes comparing significant assumptions such as prepayment speeds, default ratios, forward yield curves, credit spreads and other significant quantitative inputs to internal assumptions, and working with the price provider to reconcile the differences. The price provider may subsequently provide an updated price. In the event that the price provider does not update its price, and the Company still does not agree with the price provided, the Company will obtain a price from another third-party provider or use an internally developed price which it believes represents the fair value of the investment. The fair values of investments for which internal prices were used were not significant to the aggregate fair value of the Company’s investment portfolio as of March 31, 2015 or December 31, 2014. All challenges to third-party prices are reviewed by staff of the Company with relevant expertise to ensure reasonableness of assumptions.

Financial Liabilities (excluding derivative liabilities)

Financial liabilities, excluding derivative liabilities, issued by the Company primarily consist of investment agreements, medium-term notes (“MTNs”) and debt issued for general corporate purposes within its corporate segment, debt issued by consolidated VIEs and warrants. Investment agreements, MTNs, and corporate debt are typically recorded at face value adjusted for premiums or discounts. The majority of the financial liabilities that the Company has elected to fair value or that require fair value reporting or disclosures are valued based on the estimated value of the underlying collateral, the Company’s or a third-party’s estimate of discounted cash flow model estimates, or quoted market values for similar products. These valuations include adjustments for expected nonperformance risk of the Company.

Derivative Liabilities

The Company’s derivative liabilities are primarily insured credit derivatives that reference structured pools of cash securities and CDS. The Company generally insured the most senior liabilities of such transactions, and at the inception of transactions its exposure generally had more subordination than needed to achieve triple-A ratings from credit rating agencies. The types of collateral underlying its insured derivatives consist of cash securities and CDS referencing primarily corporate obligations, asset-backed securities (“ABS”), RMBS, CMBS, CRE loans, and CDOs.

The Company’s insured credit derivative contracts are non-traded structured credit derivative transactions. Since insured derivatives are highly customized and there is generally no observable market for these derivatives, the Company estimates their fair values in a hypothetical market based on internal and third-party models simulating what a similar company would charge to assume the Company’s position in the transaction at the measurement date. This pricing would be based on the expected loss of the exposure. The Company reviews its valuation model results on a quarterly basis to assess the appropriateness of the assumptions and results in light of current market activity and conditions. This review is performed by internal staff with relevant expertise. If live market spreads or securities prices are observable for similar transactions, those spreads are an integral part of the analysis. New insured transactions that resemble existing (previously insured) transactions, if any, would be considered, as well as negotiated settlements of existing transactions.

The Company may from time to time make changes in its valuation techniques if the change results in a measurement that it believes is equally or more representative of fair value under current circumstances.

Internal Review Process

All significant financial assets and liabilities are reviewed by a committee created by the Company to ensure compliance with the Company’s policies and risk procedures in the development of fair values of financial assets and liabilities. This valuation committee review, among other things, key assumptions used for internally developed prices, significant changes in sources and uses of inputs, including changes in model approaches, and any adjustments from third-party inputs or prices to internally developed inputs or prices. The committee also reviews any significant impairment or improvements in fair values of the financial instruments from prior periods. Occasionally, the committee will consult with the Company’s valuation experts to better understand key methods and assumptions used for the determination of fair value, including understanding significant changes in fair values. The committee is comprised of senior finance team members with the relevant experience in the financial instruments their committee is responsible for. For each quarter, the committee documents their agreement with the fair values developed by management of the Company as reported in the quarterly and annual financial statements.

Valuation Techniques

Valuation techniques for financial instruments measured at fair value or disclosed at fair value are described below.

Fixed-Maturity Securities (including short-term investments) Held as Available-For-Sale, Investments Carried at Fair Value, Investments Pledged as Collateral, Investments Held-to-Maturity, and Other Investments

These investments include investments in U.S. Treasury and government agencies, state and municipal bonds, foreign governments, corporate obligations, mortgage-backed securities (“MBS”), ABS, money market securities, and perpetual debt and equity securities.

These investments are generally valued based on recently executed transaction prices or quoted market prices. When quoted market prices are not available, fair value is generally determined using quoted prices of similar investments or a valuation model based on observable and unobservable inputs. Inputs vary depending on the type of investment. Observable inputs include contractual cash flows, interest rate yield curves, CDS spreads, prepayment and volatility scores, diversity scores, cross-currency basis index spreads, and credit spreads for structures similar to the financial instrument in terms of issuer, maturity and seniority. Unobservable inputs include cash flow projections and the value of any credit enhancement.

The fair value of the held-to-maturity (“HTM”) investments is determined using discounted cash flow models. Key inputs include unobservable cash flows projected over the expected term of the investment discounted using observable interest rate yield curves of similar securities.

Investments based on quoted market prices of identical investments in active markets are classified as Level 1 of the fair value hierarchy. Level 1 investments generally consist of U.S. Treasury and government agency, foreign government, money market securities and perpetual debt and equity securities. Quoted market prices of investments in less active markets, as well as investments which are valued based on other than quoted prices for which the inputs are observable, such as interest rate yield curves, are categorized in Level 2 of the fair value hierarchy. Investments that contain significant inputs that are not observable are categorized as Level 3.

Cash and Cash Equivalents, Receivable for Investments Sold, Investments Payable, Payable for Investments Purchased, and Accrued Investment Income

The carrying amounts of cash and cash equivalents, receivable for investments sold, investments payable, payable for investments purchased, and accrued investment income approximate fair values due to the short-term nature and credit worthiness of these instruments. These items are categorized in Level 1 or Level 2 of the fair value hierarchy.

Loans Receivable at Fair Value

Loans receivable at fair value are comprised of loans held by consolidated VIEs consisting of corporate and residential mortgage loans. Fair values of commercial loans are obtained from a pricing service and determined using actively quoted prices obtained from multiple market participants. Fair values of residential mortgage loans are determined using quoted prices for mortgage-backed securities (“MBS”) issued by the respective VIE and adjusted for the fair values of the financial guarantees provided by MBIA Corp. on the related MBS. Loans receivable at fair value are categorized in Level 2 or Level 3 of the fair value hierarchy based on the input that is significant to the fair value measurement in its entirety.

Loan Repurchase Commitments

Loan repurchase commitments are obligations owed by the sellers/servicers of mortgage loans to either MBIA as reimbursement of paid claims or to the RMBS trusts as defined in the transaction documents. Loan repurchase commitments are assets of the consolidated VIEs. This asset represents the rights of MBIA against the sellers/servicers for breaches of representations and warranties that the securitized residential mortgage loans sold to the trust to comply with stated underwriting guidelines and for the sellers/servicers to cure, replace, or repurchase mortgage loans. Fair value measurements of loan repurchase commitments represent the amounts owed by the sellers/servicers to MBIA as reimbursement of paid claims. Loan repurchase commitments are not securities and no quoted prices or comparable market transaction information are observable or available. Loan repurchase commitments at fair value are categorized in Level 3 of the fair value hierarchy. Fair values of loan repurchase commitments are determined using discounted cash flow techniques based on inputs including:

• breach rates representing the rate at which the sellers/servicers failed to comply with stated representations and warranties;

• recovery rates representing the estimates of future cash flows for the asset, including estimates about possible variations in the amount of cash flows expected to be collected;

• expectations about possible variations in the timing of collections of the cash flows; and

• time value of money, represented by the rate on risk-free monetary assets.

Investment Agreements

The fair values of investment agreements are determined using discounted cash flow techniques based on contractual cash flows and observable interest rates currently being offered for similar agreements with comparable maturity dates. Investment agreements contain collateralization and termination agreements that substantially mitigate the nonperformance risk of the Company. As the terms of the notes are private, and the timing and amount of contractual cash flows are not observable, these investment agreements are categorized as Level 3 of the fair value hierarchy.

Medium-Term Notes

The fair values of certain MTNs are based on quoted market prices provided by third-party sources, where available. When quoted market prices are not available, the Company applies a matrix pricing grid based on the quoted market prices received and the MTNs’ stated maturity and interest rate to determine fair value. Nonperformance risk is included in the quoted market prices and the matrix pricing grid. The Company has elected to record these MTNs at fair value as they contain embedded derivatives which cannot accurately be separated from the host debt instrument and fair valued separately, therefore, these MTNs are carried at fair value with changes in fair value reflected in earnings. The remaining MTNs, which are not carried at fair value, do not contain embedded derivatives. As these MTNs are illiquid and the prices reflect significant unobservable inputs, they are categorized as Level 3 of the fair value hierarchy.

Long-term Debt

Long-term debt consists of notes, debentures, surplus notes and accrued interest on this debt. The fair value of long-term notes, debentures and surplus notes are estimated based on quoted prices for the identical or similar securities. The fair value of the accrued interest expense on the surplus notes due in 2033 is determined based on the scheduled interest payments discounted by the market’s perception of the credit risk related to the repayment of the surplus notes. The credit risk related to the repayment of the surplus notes is based on recent trades of the surplus notes. The deferred interest payment will be due on the first business day on or after which the Company obtains approval to make such payment.

The carrying amounts of accrued interest expense on all other long-term debt approximate fair value due to the short-term nature of these instruments. Long-term debt is categorized as Level 2 of the fair value hierarchy.

Variable Interest Entity Notes

The fair values of VIE notes are determined based on recently executed transaction prices or quoted prices where observable. When position-specific quoted prices are not observable, fair values are based on quoted prices of similar securities. Fair values based on quoted prices of similar securities may be adjusted for factors unique to the securities, including any credit enhancement. When observable quoted prices are not available, fair value is determined based on discounted cash flow techniques of the underlying collateral using observable and unobservable inputs. Observable inputs include interest rate yield curves and bond spreads of similar securities. Unobservable inputs include the value of any credit enhancement. VIE notes are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

Variable Interest Entity Derivatives

The VIEs have entered into derivative transactions consisting of cross currency swaps, interest rate derivatives and interest rate caps. Fair values of over-the-counter (“OTC”) derivatives are determined using valuation models based on observable and/or unobservable inputs. These observable and market-based inputs include interest rates and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the input that is significant to the fair value measurement in its entirety.

Derivatives

The corporate segment has entered into derivative transactions primarily consisting of interest rate swaps. Fair values of OTC derivatives are determined using valuation models based on observable inputs, nonperformance risk of the Company’s own credit and nonperformance risk of the counterparties. Observable and market-based inputs include interest rate yields, credit spreads and volatilities. These derivatives are categorized in Level 2 or Level 3 of the fair value hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company has policies and procedures in place regarding counterparties, including review and approval of the counterparty and the Company’s exposure limit, collateral posting requirements, collateral monitoring and margin calls on collateral. The Company manages counterparty credit risk on an individual counterparty basis through master netting agreements covering derivative transactions in the corporate segment as of March 31, 2015. These agreements allow the Company to contractually net amounts due from a counterparty with those amounts due to such counterparty when certain triggering events occur. The Company only executes swaps under master netting agreements, which typically contain mutual credit downgrade provisions that generally provide the ability to require assignment or termination in the event either the Company or the counterparty is downgraded below a specified credit rating. The netting agreements minimize the potential for losses related to credit exposure and thus serve to mitigate the Company’s nonperformance risk under these derivatives.

In certain cases, the Company also manages credit risk through collateral agreements that give the Company the right to hold or the obligation to provide collateral when the current market value of derivative contracts exceeds an exposure threshold. Under these agreements, the Company may provide U.S. Treasury and other highly rated securities or cash to secure the derivative. The delivery of high-quality collateral can minimize credit exposure and mitigate the potential for nonperformance risk impacting the fair values of the derivatives.

Derivatives—Insurance

The derivative contracts insured by the Company cannot be legally traded and generally do not have observable market prices. The Company determines the fair values of insured credit derivatives using valuation models. The valuation models are consistently applied from period to period, with refinements to the fair value estimation approach being applied as and when the information becomes available. Negotiated settlements are also considered when determining fair value to validate the fair value estimates determined by the valuation models and to determine the best available estimate of fair value from the perspective of a market participant.

Approximately 93% of the balance sheet fair value of insured credit derivatives as of March 31, 2015 was valued based on the Binomial Expansion Technique (“BET”) Model. Approximately 7% of the balance sheet fair value of insured credit derivatives as of March 31, 2015 was valued based on the internally developed Direct Price Model and the Dual Default model. The valuation of insured derivatives includes the impact of its credit standing. All of these derivatives are categorized as Level 3 of the fair value hierarchy as their fair value is derived using significant unobservable inputs.

The Company has also entered into a derivative contract as a result of a commutation. The fair value of the derivative is determined using a discounted cash flow model. Key inputs include unobservable cash flows projected over the expected term of the derivative, discounted using observable discount rates and CDS spreads.

Description of the BET Model

Valuation Model Overview

The Company uses the BET Model to estimate what a bond insurer would charge to guarantee a transaction at the measurement date, based on the market-implied default risk of the underlying collateral and the remaining structural protection in a deductible or subordination.

Inputs to the process of determining fair value for structured transactions using the BET Model include estimates of collateral loss, allocation of loss to separate tranches of the capital structure, and calculation of the change in value.

BET Model Inputs

a. Credit spreads

The average spread of collateral is a key input as the Company assumes credit spreads reflect the market’s assessment of default probability. Collateral assets are generally considered on an average basis rather than being modeled on an individual basis. Spreads are obtained from market data sources published by third parties (e.g., dealer spread tables for assets most closely resembling collateral within the Company’s transactions) as well as collateral-specific spreads on the underlying reference obligations provided by trustees or market sources. The Company also calculates spreads based on quoted prices and on internal assumptions about expected life, when pricing information is available and spread information is not.

Over time, the data inputs change as new sources become available, existing sources are discontinued or are no longer considered to be reliable or the most appropriate. It is the Company’s preference to use more observable spread inputs defined above. However, the Company may on occasion move to less observable spread inputs due to the discontinuation of data sources or due to the Company considering certain spread inputs no longer representative of market spreads.

b. Diversity Scores

Diversity scores are a means of estimating the diversification in a portfolio. The diversity score estimates the number of uncorrelated assets that are assumed to have the same loss distribution as the actual portfolio of correlated assets. While diversity score is a required input into the BET model, due to current high levels of default within the collateral of the structures, diversity score does not have a significant impact on valuation.

c. Recovery Rate

The recovery rate represents the percentage of par expected to be recovered after an asset defaults, indicating the severity of a potential loss. MBIA generally uses rating agency recovery assumptions which may be adjusted to account for differences between the collateral used by the rating agencies and the actual collateral in MBIA-insured transactions. The Company may also adjust rating agency assumptions based on the performance of the collateral manager and on empirical market data.

d. Nonperformance Risk

The Company’s valuation methodology for insured credit derivative liabilities incorporates MBIA Corp.’s own nonperformance risk. The Company calculates the fair value by discounting the market value loss estimated through the BET Model at discount rates which include MBIA Corp.’s CDS spreads as of March 31, 2015. The CDS spreads assigned to each deal are based on the weighted average life of the deal. The Company limits the nonperformance impact so that the derivative liability could not be lower than MBIA Corp.’s recovery derivative price multiplied by the unadjusted derivative liability.

Overall Model Results

As of March 31, 2015 and December 31, 2014, the Company’s net insured CDS derivative liability was $207 million and $244 million, respectively, based on the results of the aforementioned models. A significant driver of changes in fair value is MBIA Corp.’s nonperformance risk. In aggregate, the nonperformance calculation resulted in a pre-tax net insured derivative liability that was $89 million and $92 million lower than the net liability that would have been estimated if MBIA Corp. excluded nonperformance risk in its valuation as of March 31, 2015 and December 31, 2014, respectively. Nonperformance risk is a fair value concept and does not contradict MBIA Corp.’s internal view, based on fundamental credit analysis of MBIA Corp.’s economic condition, that MBIA Corp. will be able to pay all claims when due.

Warrants

Stock warrants issued by the Company are valued using the Black-Scholes model and are recorded at fair value. Inputs into the warrant valuation include the Company’s stock price, a volatility parameter, interest rates, and dividend data. As all significant inputs are market-based and observable, warrants are categorized as Level 2 of the fair value hierarchy.

Facility

In the fourth quarter of 2013, the Company approved and initiated a plan to sell its Armonk, New York facility and classified it as held for sale as of March 31, 2015 and December 31, 2014. In May of 2015, the Company completed the sale of this facility. As of March 31, 2015, the fair value was the sales price less costs to sell. As of December 31, 2014, fair market value was estimated based on an independent third-party appraisal. This item is categorized as Level 2 of the fair value hierarchy.

Financial Guarantees

Gross Financial Guarantees —The fair value of gross financial guarantees is determined using discounted cash flow techniques based on inputs that include (i) assumptions of expected losses on financial guarantee policies where loss reserves have not been recognized, (ii) amount of losses expected on financial guarantee policies where loss reserves have been established, net of expected recoveries, (iii) the cost of capital reserves required to support the financial guarantee liability, (iv) operating expenses, and (v) discount rates. The MBIA Corp. CDS spread and recovery rate are used as the discount rate for MBIA Corp., while the CDS spread and recovery rate of a similar municipal bond insurance company are used as the discount rate for National, as National does not have a published CDS spread and recovery rate.

The carrying value of the Company’s gross financial guarantees consists of unearned premium revenue and loss and LAE reserves, net of the insurance loss recoverable as reported on MBIA’s consolidated balance sheets.

Ceded Financial Guarantees — The fair value of ceded financial guarantees is determined by applying the percentage ceded to reinsurers to the related fair value of the gross financial guarantees. The carrying value of ceded financial guarantees consists of prepaid reinsurance premiums and reinsurance recoverable on paid and unpaid losses as reported within “Other assets” on the Company’s consolidated balance sheets.

Significant Unobservable Inputs

The following tables provide quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014. These tables exclude inputs used to measure fair value that are not developed by the Company, such as broker prices and other third-party pricing service valuations.

		Fair Value
		as of				Range
		March 31,				(Weighted
In millions		2015		Valuation Techniques	Unobservable Input	Average)
Assets of consolidated VIEs:
	Loans receivable at fair value	$	1,480	Market prices adjusted for financial	Impact of financial guarantee	0% - 6% (2%)
				guarantees provided to VIE obligations
	Loan repurchase commitments		385	Discounted cash flow	Recovery rates⁽¹⁾
					Breach rates⁽¹⁾

Liabilities of consolidated VIEs:
	Variable interest entity notes		1,387	Market prices of VIE assets	Impact of financial guarantee	0% - 39% (9%)
				adjusted for financial guarantees provided

Credit derivative liabilities, net:
	CMBS		191	BET Model	Recovery rates	25% - 90% (61%)
					Nonperformance risk	19% - 32% (28%)
					Weighted average life (in years)	1.0 - 2.0 (1.6)
					CMBS spreads	0% - 57% (22%)
	Multi-sector CDO		6	Direct Price Model	Nonperformance risk	50% - 50% (50%)
	Other		10	BET Model and Dual Default	Recovery rates	42% - 45% (45%)
					Nonperformance risk	50% - 50% (50%)
					Weighted average life (in years)	0.5 - 7.8 (1.0)
Other derivative liabilities			21	Discounted cash flow	Cash flows	$0 - $83 ($42)⁽²⁾

____________
(1) - Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.
(2) - Midpoint of cash flows are used for the weighted average.

		Fair Value
		as of				Range
		December 31,				(Weighted
In millions		2014		Valuation Techniques	Unobservable Input	Average)
Assets of consolidated VIEs:
	Loans receivable at fair value	$	1,431	Market prices adjusted for financial	Impact of financial guarantee	0% - 10% (2%)
				guarantees provided to VIE obligations
	Loan repurchase commitments		379	Discounted cash flow	Recovery rates⁽¹⁾
					Breach rates⁽¹⁾

Liabilities of consolidated VIEs:
	Variable interest entity notes		735	Market prices of VIE assets	Impact of financial guarantee	0% - 35% (16%)
				adjusted for financial guarantees provided

Credit derivative liabilities, net:
	CMBS		224	BET Model	Recovery rates	25% - 90% (59%)
					Nonperformance risk	12% - 29% (25%)
					Weighted average life (in years)	1.3 - 3.2 (2.3)
					CMBS spreads	0% - 41% (19%)
	Multi-sector CDO		9	Direct Price Model	Nonperformance risk	53% - 53% (53%)
	Other		11	BET Model and Dual Default	Recovery rates	42% - 45% (45%)
					Nonperformance risk	41% - 51% (50%)
					Weighted average life (in years)	0.2 - 7.9 (1.1)
Other derivative liabilities			24	Discounted cash flow	Cash flows	$0 - $83 ($42)⁽²⁾
	____________
	(1) - Recovery rates and breach rates include estimates about potential variations in the outcome of litigation with a counterparty.
	(2) - Midpoint of cash flows are used for the weighted average.

Sensitivity of Significant Unobservable Inputs

The significant unobservable input used in the fair value measurement of the Company’s loans receivable at fair value of consolidated VIEs is the impact of the financial guarantee. The fair value of loans receivable is calculated by subtracting the value of the financial guarantee from the market value of VIE liabilities. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As expected cash payments provided by the Company under the insurance policy increase, there is a lower expected cash flow on the underlying loans receivable of the VIE. This results in a lower fair value of the loans receivable in relation to the obligations of the VIE.

The significant unobservable inputs used in the fair value measurement of the Company’s loan repurchase commitments of consolidated VIEs are the recovery rates and breach rates. Recovery rates reflect the estimates of future cash flows reduced for litigation delays and risks and/or potential financial distress of the sellers/servicers. The estimated recoveries of the loan repurchase commitments may differ from the actual recoveries that may be received in the future. Breach rates represent the rate at which mortgages fail to comply with stated representations and warranties of the sellers/servicers. Significant increases or decreases in the recovery rates and the breach rates would result in significantly higher or lower fair values of the loan repurchase commitments, respectively. Additionally, changes in the legal environment and the ability of the counterparties to pay would impact the recovery rate assumptions, which could significantly impact the fair value measurement. Any significant challenges by the counterparties to the Company’s determination of breaches of representations and warranties could significantly adversely impact the fair value measurement. Recovery rates and breach rates are determined independently. Changes in one input will not necessarily have any impact on the other input.

The significant unobservable input used in the fair value measurement of the Company’s VIE notes of consolidated VIEs is the impact of the financial guarantee. The fair value of VIE notes is calculated by adding the value of the financial guarantee to the market value of VIE assets. The value of a financial guarantee is estimated by the Company as the present value of expected cash payments under the policy. As the value of the guarantee provided by the Company to the obligations issued by the VIE increases, the credit support adds value to the liabilities of the VIE. This results in an increase in the fair value of the liabilities of the VIE.

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s CMBS credit derivatives, which are valued using the BET Model, are CMBS spreads, recovery rates, nonperformance risk and weighted average life. The CMBS spread is an indicator of credit risk of the collateral securities. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Weighted average life is based on the Company’s estimate of when the principal of the underlying collateral of the CMBS structure will be repaid. A significant increase or decrease in CMBS spreads would result in an increase or decrease in the fair value of the derivative liability, respectively. A significant increase in weighted average life can result in an increase or decrease in the fair value of the derivative liability, depending on the discount rate and the timing of significant losses. Any significant increase or decrease in recovery rates, or MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. CMBS spreads, recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s multi-sector CDO credit derivatives, which are valued using the Direct Price Model, is nonperformance risk. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Any significant increase or decrease in MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively.

The significant unobservable inputs used in the fair value measurement of MBIA Corp.’s other credit derivatives, which are valued using the BET Model and Dual Default, are recovery rates, nonperformance risk and weighted average life. The recovery rate represents the percentage of notional expected to be recovered after an asset defaults, indicating the severity of a potential loss. The nonperformance risk is an assumption of MBIA Corp.’s own ability to pay and whether MBIA Corp. will have the necessary resources to pay the obligations as they come due. Weighted average life is based on MBIA Corp.’s estimate of when the principal of the underlying collateral will be repaid. A significant increase in weighted average life can result in an increase or decrease in the fair value of the derivative liability, depending on the discount rate and the timing of significant losses. Any significant increase or decrease in recovery rates or MBIA Corp.’s nonperformance risk would result in a decrease or increase in the fair value of the derivative liabilities, respectively. Recovery rates, nonperformance risk and weighted average lives are determined independently. Changes in one input will not necessarily have any impact on the other inputs.

The significant unobservable input used in the fair value measurement of MBIA Corp.’s other derivatives, which are valued using a discounted cash flow model, is the estimates of future cash flows discounted using market rates and CDS spreads. Any significant increase or decrease in future cash flows would result in an increase or decrease in the fair value of the derivative liability, respectively.

Fair Value Measurements

The following tables present the fair value of the Company’s assets (including short-term investments) and liabilities measured and reported at fair value on a recurring basis as of March 31, 2015 and December 31, 2014:

				Fair Value Measurements at Reporting Date Using
				Quoted Prices in		Significant
				Active Markets		Other		Significant			Counterparty
				for Identical		Observable		Unobservable			and Cash		Balance as of
				Assets		Inputs		Inputs			Collateral		March 31,
In millions				(Level 1)		(Level 2)		(Level 3)			Netting		2015
Assets:
Fixed-maturity investments:
	U.S. Treasury and government agency			$	624	$	120	$	-		$	-	$	744
	State and municipal bonds				-		1,750		6	⁽¹⁾		-		1,756
	Foreign governments				210		80		6	⁽¹⁾		-		296
	Corporate obligations				-		2,088		10	⁽¹⁾		-		2,098
	Mortgage-backed securities:
		Residential mortgage-backed agency			-		1,129		-			-		1,129
		Residential mortgage-backed non-agency			-		52		-			-		52
		Commercial mortgage-backed			-		22		1	⁽¹⁾		-		23
	Asset-backed securities:
		Collateralized debt obligations			-		1		74	⁽¹⁾		-		75
		Other asset-backed			-		271		74	⁽¹⁾		-		345
			Total fixed-maturity investments		834		5,513		171			-		6,518
Money market securities					240		-		-			-		240
Perpetual debt and equity securities					24		27		-			-		51
Cash and cash equivalents					596		-		-			-		596
Derivative assets:
	Non-insured derivative assets:
		Interest rate derivatives			-		2		-			(1)		1

				Fair Value Measurements at Reporting Date Using
				Quoted Prices in		Significant
				Active Markets		Other		Significant			Counterparty
				for Identical		Observable		Unobservable			and Cash		Balance as of
				Assets		Inputs		Inputs			Collateral		March 31,
In millions				(Level 1)		(Level 2)		(Level 3)			Netting		2015
Assets of consolidated VIEs:
	Corporate obligations				-		10		53	⁽¹⁾		-		63
	Mortgage-backed securities:
		Residential mortgage-backed non-agency			-		189		3	⁽¹⁾		-		192
		Commercial mortgage-backed			-		737		-			-		737
	Asset-backed securities:
		Collateralized debt obligations			-		2		4	⁽¹⁾		-		6
		Other asset-backed			-		42		21	⁽¹⁾		-		63
	Cash				31		-		-			-		31
	Loans receivable at fair value:
		Residential loans receivable			-		-		1,372			-		1,372
		Other loans receivable			-		-		108			-		108
	Loan repurchase commitments				-		-		385			-		385
	Derivative assets:
		Currency derivatives			-		-		5	⁽¹⁾		-		5
Total assets				$	1,725	$	6,522	$	2,122		$	(1)	$	10,368
Liabilities:
Medium-term notes				$	-	$	-	$	180	⁽¹⁾	$	-	$	180
Derivative liabilities:
	Insured derivatives:
		Credit derivatives			-		3		207			-		210
	Non-insured derivatives:
		Interest rate derivatives			-		269		-			(109)		160
		Other			-		-		21			-		21
Other liabilities:
	Warrants				-		33		-			-		33
	Investments payable				36		-		-			-		36
Liabilities of consolidated VIEs:
	Variable interest entity notes				-		1,266		1,387			-		2,653
	Derivative liabilities:
		Interest rate derivatives			-		76		-			-		76
Total liabilities				$	36	$	1,647	$	1,795		$	(109)	$	3,369
____________
(1) - Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.

				Fair Value Measurements at Reporting Date Using
				Quoted Prices in		Significant
				Active Markets		Other		Significant			Counterparty
				for Identical		Observable		Unobservable			and Cash		Balance as of
				Assets		Inputs		Inputs			Collateral		December 31,
In millions				(Level 1)		(Level 2)		(Level 3)			Netting		2014
Assets:
Fixed-maturity investments:
	U.S. Treasury and government agency			$	573	$	118	$	-		$	-	$	691
	State and municipal bonds				-		1,724		8	⁽¹⁾		-		1,732
	Foreign governments				221		63		6	⁽¹⁾		-		290
	Corporate obligations				-		2,048		10	⁽¹⁾		-		2,058
	Mortgage-backed securities:
		Residential mortgage-backed agency			-		1,162		-			-		1,162
		Residential mortgage-backed non-agency			-		56		-			-		56
		Commercial mortgage-backed			-		20		2	⁽¹⁾		-		22
	Asset-backed securities:
		Collateralized debt obligations			-		6		87	⁽¹⁾		-		93
		Other asset-backed			-		156		85	⁽¹⁾		-		241
			Total fixed-maturity investments		794		5,353		198			-		6,345
Money market securities					428		-		-			-		428
Perpetual debt and equity securities					22		31		-			-		53
Cash and cash equivalents					729		-		-			-		729
Derivative assets:
	Non-insured derivative assets:
		Interest rate derivatives			-		83		-			(81)		2
Assets held for sale:
	Equity securities				6		-		-			-		6
	Loans receivable at fair value				-		711		-			-		711
	Cash and cash equivalents				55		-		-			-		55

				Fair Value Measurements at Reporting Date Using
				Quoted Prices in		Significant
				Active Markets		Other		Significant			Counterparty
				for Identical		Observable		Unobservable			and Cash		Balance as of
				Assets		Inputs		Inputs			Collateral		December 31,
In millions				(Level 1)		(Level 2)		(Level 3)			Netting		2014
Assets of consolidated VIEs:
	Corporate obligations				-		10		55	⁽¹⁾		-		65
	Mortgage-backed securities:
		Residential mortgage-backed non-agency			-		194		3	⁽¹⁾		-		197
		Commercial mortgage-backed			-		86		-			-		86
	Asset-backed securities:
		Collateralized debt obligations			-		7		5	⁽¹⁾		-		12
		Other asset-backed			-		35		26	⁽¹⁾		-		61
	Cash				53		-		-			-		53
	Loans receivable at fair value:
		Residential loans receivable			-		-		1,431			-		1,431
	Loan repurchase commitments				-		-		379			-		379
Total assets				$	2,087	$	6,510	$	2,097		$	(81)	$	10,613
Liabilities:
Medium-term notes				$	-	$	-	$	197	⁽¹⁾	$	-	$	197
Derivative liabilities:
	Insured derivatives:
		Credit derivatives			-		2		244			-		246
	Non-insured derivatives:
		Interest rate derivatives			-		248		-			(81)		167
		Other			-		-		24			-		24
Liabilities held for sale:
	Variable interest entity notes				-		431		-			-		431
	Payable for loans purchased				-		323		-			-		323
Other liabilities:
	Warrants				-		28		-			-		28
Liabilities of consolidated VIEs:
	Variable interest entity notes				-		1,312		735			-		2,047
Total liabilities				$	-	$	2,344	$	1,200		$	(81)	$	3,463
____________
(1) - Unobservable inputs are either not developed by the Company or do not significantly impact the overall fair values of the aggregate financial assets and liabilities.

Level 3 assets at fair value as of March 31, 2015 and December 31, 2014 represented approximately 20% of total assets measured at fair value. Level 3 liabilities at fair value as of March 31, 2015 and December 31, 2014 represented approximately 53% and 35%, respectively, of total liabilities measured at fair value.

The following tables present the fair values and carrying values of the Company’s assets and liabilities that are disclosed at fair value but not reported at fair value on the Company’s consolidated balance sheets as of March 31, 2015 and December 31, 2014:

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in		Significant		Significant		Fair Value		Carry Value
		Active Markets for		Other Observable		Unobservable		Balance as of		Balance as of
		Identical Assets		Inputs		Inputs		March 31,		March 31,
In millions		(Level 1)		(Level 2)		(Level 3)		2015		2015
Assets:
	Other investments	$	-	$	-	$	4	$	4	$	4
	Accrued investment income⁽¹⁾		-		43		-		43		43
	Receivable for investments sold⁽¹⁾		-		67		-		67		67
Assets held for sale:
	Facility		-		22		-		22		22
Assets of consolidated VIEs:
	Investments held-to-maturity		-		-		2,635		2,635		2,742
Total assets		$	-	$	132	$	2,639	$	2,771	$	2,878
Liabilities:
	Investment agreements	$	-	$	-	$	711	$	711	$	538
	Medium-term notes		-		-		753		753		928
	Long-term debt		-		1,113		-		1,113		1,828
	Payable for investments purchased⁽²⁾		-		71		-		71		71
Liabilities of consolidated VIEs:
	Variable interest entity notes		-		-		2,776		2,776		2,742
Total liabilities		$	-	$	1,184	$	4,240	$	5,424	$	6,107
Financial Guarantees:
	Gross	$	-	$	-	$	3,874	$	3,874	$	1,846
	Ceded		-		-		103		103		61
__________
(1) - Reported within "Other assets" on MBIA's consolidated balance sheets.
(2) - Reported within "Other liabilities" on MBIA's consolidated balance sheets.

		Fair Value Measurements at Reporting Date Using
		Quoted Prices in		Significant		Significant		Fair Value		Carry Value
		Active Markets for		Other Observable		Unobservable		Balance as of		Balance as of
		Identical Assets		Inputs		Inputs		December 31,		December 31,
In millions		(Level 1)		(Level 2)		(Level 3)		2014		2014
Assets:
	Other investments	$	-	$	-	$	4	$	4	$	4
	Accrued investment income⁽¹⁾		-		43		-		43		43
	Receivable for investments sold⁽¹⁾		-		69		-		69		69
Assets held for sale
	Facility		-		26		-		26		26
Assets of consolidated VIEs:
	Investments held-to-maturity		-		-		2,632		2,632		2,757
Total assets		$	-	$	138	$	2,636	$	2,774	$	2,899
Liabilities:
	Investment agreements	$	-	$	-	$	705	$	705	$	547
	Medium-term notes		-		-		801		801		1,004
	Long-term debt		-		1,172		-		1,172		1,810
	Payable for investments purchased⁽²⁾		-		42		-		42		42
Liabilities of consolidated VIEs:
	Variable interest entity notes		-		-		2,779		2,779		2,757
Total liabilities		$	-	$	1,214	$	4,285	$	5,499	$	6,160
Financial Guarantees:
	Gross	$	-	$	-	$	4,051	$	4,051	$	1,959
	Ceded		-		-		109		109		65
__________
(1) - Reported within "Other assets" on MBIA's consolidated balance sheets.
(2) - Reported within "Other liabilities" on MBIA's consolidated balance sheets.

The following tables present information about changes in Level 3 assets (including short-term investments) and liabilities measured at fair value on a recurring basis for the three months ended March 31, 2015 and 2014:

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2015
																									Change in
																									Unrealized
																									Gains
																									(Losses) for
																									the Period
																									Included in
					Unrealized																				Earnings
					Gains /		Unrealized		Foreign																for Assets
					(Losses)		Gains /		Exchange																still held
	Balance,		Realized		Included		(Losses)		Recognized										Transfers		Transfers				as of
	Beginning		Gains /		in		Included		in OCI or										into		out of		Ending		March 31,
In millions	of Period		(Losses)		Earnings		in OCI		Earnings		Purchases		Issuances		Settlements		Sales		Level 3⁽¹⁾		Level 3⁽¹⁾		Balance		2015
Assets:
Foreign governments	$	6	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	6	$	-
Corporate obligations		10		-		-		-		-		-		-		-		-		-		-		10		-
Commercial
mortgage-backed		2		-		-		-		-		-		-		-		-		-		(1)		1		-
Collateralized debt
obligations		87		-		-		-		-		-		-		(5)		(8)		-		-		74		-
Other asset-backed		85		(2)		-		(1)		-		4		-		(2)		(8)		-		(2)		74		-
State and municipal
bonds		8		-		-		-		-		-		-		-		-		-		(2)		6		-
Assets of
consolidated VIEs:
Corporate obligations		55		-		-		-		-		-		-		(2)		-		-		-		53		-
Residential mortgage-
backed non-agency		3		-		1		-		-		-		-		(1)		-		-		-		3		1
Collateralized debt
obligations		5		-		(1)		-		-		-		-		-		-		-		-		4		-
Other asset-backed		26		-		3		-		-		-		-		(2)		-		-		(6)		21		3
Loans receivable-
residential		1,431		-		(3)		-		-		-		-		(56)		-		-		-		1,372		(3)
Loans receivable- Other		-		-		-		-		-		108		-		-		-		-		-		108		-
Loan repurchase
commitments		379		-		6		-		-		-		-		-		-		-		-		385		6
Currency
derivatives, net		-		-		4		-		1		-		-		-		-		-		-		5		5
Total assets	$	2,097	$	(2)	$	10	$	(1)	$	1	$	112	$	-	$	(68)	$	(16)	$	-	$	(11)	$	2,122	$	12

																									Change in
																									Unrealized
																									(Gains)
																									Losses for
																									the Period
																									Included in
					Unrealized																				Earnings for
					(Gains) /		Unrealized		Foreign																Liabilities
					Losses		(Gains) /		Exchange																still held
	Balance,		Realized		Included		Losses		Recognized										Transfers		Transfers				as of
	Beginning		(Gains) /		in		Included		in OCI or										into		out of		Ending		March 31,
In millions	of Period		Losses		Earnings		in OCI		Earnings		Purchases		Issuances		Settlements		Sales		Level 3⁽¹⁾		Level 3⁽¹⁾		Balance		2015
Liabilities:
Medium-term notes	$	197	$	-	$	5	$	-	$	(22)	$	-	$	-	$	-	$	-	$	-	$	-	$	180	$	(17)
Credit derivatives, net		244		9		(37)		-		-		-		-		(9)		-		-		-		207		(37)
Other
derivatives		24		-		(3)		-		-		-		-		-		-		-		-		21		(3)
Liabilities of
consolidated VIEs:
VIE notes		735		-		8		-		-		695		-		(51)		-		-		-		1,387		8
Total liabilities	$	1,200	$	9	$	(27)	$	-	$	(22)	$	695	$	-	$	(60)	$	-	$	-	$	-	$	1,795	$	(49)
_______________
(1) - Transferred in and out at the end of the period.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis for the Three Months Ended March 31, 2014
																									Change in
																									Unrealized
																									Gains
																									(Losses) for
																									the Period
																									Included in
					Unrealized																				Earnings for
					Gains /		Unrealized		Foreign																Assets
					(Losses)		Gains /		Exchange																still held
	Balance,		Realized		Included		(Losses)		Recognized										Transfers		Transfers				as of
	Beginning		Gains /		in		Included		in OCI or										into		out of		Ending		March 31,
In millions	of Period		(Losses)		Earnings		in OCI		Earnings		Purchases		Issuances		Settlements		Sales		Level 3⁽¹⁾		Level 3⁽¹⁾		Balance		2014
Assets:
Foreign governments	$	12	$	-	$	-	$	-	$	-	$	-	$	-	$	(5)	$	-	$	-	$	-	$	7	$	-
Corporate obligations		48		(1)		1		(1)		-		-		-		(1)		(19)		3		-		30		-
Residential mortgage-
backed agency		-		-		-		-		-		-		-		-		-		29		-		29		-
Residential mortgage-
backed non-agency		6		-		-		(1)		-		-		-		-		-		-		(5)		-		-
Commercial
mortgage-backed		14		-		-		-		-		-		-		(1)		-		1		-		14		-
Collateralized debt
obligations		82		-		-		3		-		5		-		(2)		-		33		(6)		115		-
Other asset-backed		58		-		-		5		-		-		-		(2)		-		24		-		85		-
State and municipal
bonds		19		-		-		-		-		-		-		(1)		-		44		-		62		-
Perpetual debt and equity securities		11		-		-		-		-		-		-		-		-		4		-		15		-
Assets of
consolidated VIEs:
Corporate obligations		48		-		-		-		-		-		-		(1)		-		17		-		64		1
Residential mortgage-
backed non-agency		4		-		-		-		-		-		-		-		-		1		-		5		-
Commercial
mortgage-backed		3		-		-		-		-		-		-		-		-		-		-		3		-
Collateralized debt
obligations		22		-		(3)		-		-		-		-		(2)		-		-		(3)		14		(1)
Other asset-backed		54		-		(12)		-		-		-		-		(4)		-		4		-		42		-
Loans receivable		1,612		-		(1)		-		-		-		-		(54)		-		-		-		1,557		(1)
Loan repurchase
commitments		359		-		5		-		-		-		-		-		-		-		-		364		5
Total assets	$	2,352	$	(1)	$	(10)	$	6	$	-	$	5	$	-	$	(73)	$	(19)	$	160	$	(14)	$	2,406	$	4

																									Change in
																									Unrealized
																									(Gains)
																									Losses for
																									the Period
																									Included in
					Unrealized																				Earnings for
					(Gains) /		Unrealized		Foreign																Liabilities
					Losses		(Gains) /		Exchange																still held
	Balance,		Realized		Included		Losses		Recognized										Transfers		Transfers				as of
	Beginning		(Gains) /		in		Included		in OCI or										into		out of		Ending		March 31,
In millions	of Period		Losses		Earnings		in OCI		Earnings		Purchases		Issuances		Settlements		Sales		Level 3⁽¹⁾		Level 3⁽¹⁾		Balance		2014
Liabilities:
Medium-term notes	$	203	$	-	$	12	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	215	$	12
Credit derivatives, net		1,147		339		(838)		-		-		-		-		(339)		-		-		-		309		(30)
Other
derivatives, net		-		30		1		-		-		-		-		-		-		-		-		31		1
Liabilities of
consolidated VIEs:
VIE notes		940		-		18		-		-		-		-		(105)		(41)		-		-		812		16
Currency derivatives,
net		11		-		(6)		-		-		-		-		-		-		-		-		5		(6)
Total liabilities	$	2,301	$	369	$	(813)	$	-	$	-	$	-	$	-	$	(444)	$	(41)	$	-	$	-	$	1,372	$	(7)
_______________
(1) - Transferred in and out at the end of the period.

Transfers out of Level 3 and into Level 2 were $11 million for the three months ended March 31, 2015. There were no transfers into Level 3 or out of Level 2. Other ABS and state and municipal bonds, comprised the majority of the transferred instruments out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.

Transfers into and out of Level 3 were $160 million and $14 million, respectively, for the three months ended March 31, 2014. Transfers into and out of Level 2 were $14 million and $160 million, respectively, for the three months ended March 31, 2014. Transfers into Level 3 were principally related to state and municipal bonds, CDOs, RMBS agency, other ABS and corporate obligations where inputs, which are significant to their valuation, became unobservable during the quarter. CDOs and RMBS non-agency comprised the majority of the transferred instruments out of Level 3 where inputs, which are significant to their valuation, became observable during the quarter. These inputs included spreads, prepayment speeds, default speeds, default severities, yield curves observable at commonly quoted intervals, and market corroborated inputs. There were no transfers into or out of Level 1.

All Level 1, 2 and 3 designations are made at the end of each accounting period.

Gains and losses (realized and unrealized) included in earnings related to Level 3 assets and liabilities for the three months ended March 31, 2015 and 2014 are reported on the Company’s consolidated statements of operations as follows:


		Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
				Change in				Change in
				Unrealized				Unrealized
				Gains (Losses)				Gains (Losses)
				for the				for the
				Period Included				Period Included
				in Earnings				in Earnings
				for Assets				for Assets
				and				and
		Total Gains		Liabilities still		Total Gains		Liabilities still
		(Losses)		held as of		(Losses)		held as of
		Included		March 31,		Included		March 31,
In millions		in Earnings		2015		in Earnings		2014
Revenues:
	Unrealized gains (losses) on
	insured derivatives	$	37	$	37	$	838	$	30
	Realized gains (losses) and other
	settlements on insured derivatives		(9)		-		(369)		-
	Net gains (losses) on financial instruments
	at fair value and foreign exchange		18		20		(13)		(13)
	Revenues of consolidated VIEs:
	Net gains (losses) on financial instruments
	at fair value and foreign exchange		3		4		(23)		(6)
Total		$	49	$	61	$	433	$	11

Fair Value Option

The Company elected to record at fair value certain financial instruments that have been consolidated in connection with the adoption of the accounting guidance for consolidation of VIEs, among others.

The following table presents the changes in fair value included in the Company’s consolidated statements of operations for the three months ended March 31, 2015 and 2014 for financial instruments for which the fair value option was elected:


		Three Months Ended March 31,
In millions		2015			2014
Investments carried at fair value		$	-		$	1	⁽¹⁾
Fixed-maturity securities held at fair value- VIE			(17)	⁽²⁾		(38)	⁽²⁾
Loans receivable at fair value:
	Residential mortgage loans		(58)	⁽²⁾		(56)	⁽²⁾
Loan repurchase commitments			6	⁽²⁾		5	⁽²⁾
Medium-term notes			17	⁽¹⁾		(12)	⁽¹⁾
Variable interest entity notes			89	⁽²⁾		121	⁽²⁾
_____________
(1) - Reported within "Net gains (losses) of financial instruments at fair value and foreign exchange" on MBIA's consolidated statements of operations.
(2) - Reported within "Net gains (losses) of financial instruments at fair value and foreign exchange-VIE" on MBIA's consolidated statements of operations.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding as of March 31, 2015 and December 31, 2014 for loans and notes for which the fair value option was elected:

		As of March 31, 2015							As of December 31, 2014
		Contractual						Contractual
		Outstanding		Fair				Outstanding		Fair
In millions		Principal		Value		Difference		Principal		Value		Difference
Loans receivable at fair value:
	Residential mortgage loans	$	1,478	$	1,320	$	158	$	1,554	$	1,377	$	177
	Residential mortgage loans (90 days or more past due)		220		52		168		227		54		173
	Other loans		108		108		-		721		711		10
	Other loans (90 days or more past due)		70		-		70		-		-		-
Total loans receivable at fair value		$	1,876	$	1,480	$	396	$	2,502	$	2,142	$	360

Variable interest entity notes		$	4,000	$	2,653	$	1,347	$	3,584	$	2,479	$	1,105

Medium-term notes		$	215	$	180	$	35	$	242	$	197	$	45

Substantially all gains and losses included in earnings during the periods ended March 31, 2015 and 2014 on loans receivable and VIE notes reported in the preceding table are attributable to credit risk. This is primarily due to the high rate of defaults on loans and the collateral supporting the VIE notes, resulting in depressed pricing of the financial instruments.

- 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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