Fair Values of Financial and Nonfinancial Instruments

12 Months Ended

Dec. 31, 2012

Fair Values of Financial and Nonfinancial Instruments

Fair Values of Financial and Nonfinancial Instruments

Note F: Fair Values of Financial and Nonfinancial Instruments

Financial Instruments

The Company's financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using other valuation techniques. Estimated fair values are significantly affected by the assumptions used. As required by ASC No. 820 ("ASC 820"), "Fair Value Measurements and Disclosures," fair value measurements of financial instruments are categorized as Level 1, Level 2 or Level 3, based on the types of inputs used in estimating fair values.

Level 1 fair values are those determined using quoted market prices in active markets for identical assets or liabilities with no valuation adjustments applied. Level 2 fair values are those determined using directly or indirectly observable inputs in the marketplace that are other than Level 1 inputs. Level 3 fair values are those determined using unobservable inputs, including the use of internal assumptions, estimates or models. Valuations, therefore, are sensitive to the assumptions used for these items. Fair values represent the Company's best estimates as of the balance sheet date and are based on existing conditions and available information at the issuance date of these financial statements. Subsequent changes in conditions or available information may change assumptions and estimates.

The carrying values of cash, cash equivalents, restricted cash and secured notes payable are reported in the Consolidated Balance Sheets and approximate their fair values due to their short-term natures and liquidity. The aggregate carrying values of the senior notes, net of discount, reported at December 31, 2012 and 2011, were $1.1 billion and $820.0 million, respectively. The aggregate fair values of the senior notes were $1.3 billion and $824.6 million at December 31, 2012 and 2011, respectively. The fair values of the Company's senior notes have been determined using quoted market prices.

The following table displays the values and methods used for measuring fair values of financial instruments on a recurring basis:

	FAIR VALUE AT DECEMBER 31,
(in thousands)	HIERARCHY		2012			2011
Marketable securities, available-for-sale:
U.S. Treasury securities	Level 1	$	3,099		$	1,555
Obligations of U.S. and local government agencies	Levels 1 and 2		155,293			146,820
Corporate debt securities issued under U.S. government/agency-backed programs	Level 2		–			1,456
Corporate debt securities	Level 2		165,194			125,666
Asset-backed securities	Level 2		27,314			45,744
Time deposits	Level 2		–			25,500
Short-term pooled investments	Levels 1 and 2		37,120			275
Mortgage loans held-for-sale	Level 2		107,950			82,351
Mortgage interest rate lock commitments	Level 2		4,737			3,359
Forward-delivery contracts	Level 2	$	(369	)	$	(1,235	)

Marketable Securities, Available-for-sale

At December 31, 2012 and 2011, the Company had $388.0 million and $347.0 million, respectively, of marketable securities that were available-for-sale and comprised of U.S. Treasury securities; obligations of U.S. government and local government agencies; corporate debt backed by U.S. government/agency programs; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. (See Note E, "Marketable Securities, Available-for-sale.")

Other Financial Instruments

Mortgage loans held-for-sale and forward-delivery contracts are based on quoted market prices of similar instruments (Level 2). IRLCs are valued at their aggregate market price premium or deficit, plus a servicing premium, multiplied by the projected close ratio (Level 2). The market price premium or deficit is based on quoted market prices of similar instruments; the servicing premium is based on contractual investor guidelines for each product; and the projected close ratio is determined utilizing an external modeling system, widely used within the industry, to estimate customer behavior at an individual loan level. At December 31, 2012 and 2011, contractual principal amounts of mortgage loans held-for-sale totaled $103.4 million and $79.7 million, respectively. The fair values of IRLCs were included in "Other" assets within the Consolidated Balance Sheets, and forward-delivery contracts were included in "Other" assets and "Accrued and other liabilities" within the Consolidated Balance Sheets. Gains realized on the conversion of IRLCs to loans totaled $25.0 million, $16.3 million and $18.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. Increases in the fair value of the locked loan pipeline totaled $1.4 million and $1.9 million for the years ended December 31, 2012 and 2011, compared to a decrease of $559,000 for the year ended December 31, 2010. Partially offsetting these items, losses from forward-delivery contracts used to hedge IRLCs totaled $8.1 million, $7.3 million and $6.1 million for the years ended December 31, 2012, 2011 and 2010, respectively. Net gains and losses related to forward-delivery contracts and IRLCs were included in "Financial services" revenues within the Consolidated Statements of Earnings.

At December 31, 2012 and 2011, the excess of the aggregate fair value over the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value totaled $4.6 million and $2.7 million, respectively, and was included in "Financial services" revenues within the Consolidated Statements of Earnings. At December 31, 2012, the Company held no loans with payments 90 days or more past due. At December 31, 2011, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $542,000 and an aggregate unpaid principal balance of $623,000.

While recorded fair values represent management's best estimate based on data currently available, future changes in interest rates or in market prices for mortgage loans, among other factors, could materially impact these fair values.

Nonfinancial Instruments

In accordance with ASC 820, the Company measures certain nonfinancial homebuilding assets at their fair values on a nonrecurring basis. See "Housing Inventories" within Note A, "Summary of Significant Accounting Policies," for further discussion of the valuation of the Company's nonfinancial assets.

The following table summarizes the fair values of the Company's nonfinancial assets that represent the fair values for communities and other homebuilding assets for which it recognized noncash impairment charges during the reporting periods:

	FAIR VALUE AT DECEMBER 31,
(in thousands)	HIERARCHY		2012		2011
Housing inventory and inventory held-for-sale1	Level 3	$	2,923	$	9,121
Other assets held-for-sale and investments in joint ventures2	Level 3		1,563		2,366
Total		$	4,486	$	11,487

¹

In accordance with ASC No. 330, ("ASC 330"), "Inventory," the fair values of housing inventory and inventory held-for-sale that were impaired during 2012 and 2011 totaled $2.9 million and $9.1 million at December 31, 2012 and 2011, respectively. The impairment charges related to these assets totaled $1.9 million and $9.5 million for the years ended December 31, 2012 and 2011, respectively.

²

In accordance with ASC 330, the fair values of other assets held-for-sale that were impaired during 2012 and 2011 totaled $263,000 and $973,000 at December 31, 2012 and 2011, respectively. The impairment charges related to these assets totaled $41,000 and $35,000 for the years ended December 31, 2012 and 2011, respectively. In accordance with ASC 330, the fair values of investments in joint ventures that were impaired during 2012 and 2011 totaled $1.3 million and $1.4 million at December 31, 2012 and 2011, respectively. The impairment charges related to these assets totaled $40,000 and $2.0 million for the years ended December 31, 2012 and 2011, respectively.