Fair Value Measurements

3 Months Ended

Mar. 31, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

Fair value measurements are used for the Company’s marketable securities, mortgage loans held for sale, debt securities collateralized by residential real estate, IRLCs and other derivative instruments on a recurring basis, and are used for inventories, other mortgage loans and real estate owned on a nonrecurring basis, when events and circumstances indicate that the carrying value may not be recoverable. The fair value hierarchy and its application to the Company’s assets and liabilities, is as follows:

• Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. The Company’s U.S. Treasury securities are measured at fair value using Level 1 inputs.

• Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, or by model-based techniques in which all significant inputs are observable in the market. The Company’s assets/liabilities measured at fair value using Level 2 inputs are as follows:

▪ government agency securities, corporate debt securities and certificates of deposit;

▪ mortgage loans held for sale;

▪ best-efforts and mandatory commitments and over-the-counter derivatives such as forward sales of MBS and put options on MBS; and

▪ IRLCs.

• Level 3 – Valuation is typically derived from model-based techniques in which at least one significant input is unobservable and based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability. The Company's debt securities collateralized by residential real estate are measured using Level 3 inputs and are measured at fair value on a recurring basis. The assets shown below are measured using Level 3 inputs and are typically reported at the lower of carrying value or fair value on a nonrecurring basis:

▪ inventory held and used;

▪ certain mortgage loans; and

▪ real estate owned.

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis at March 31, 2013 and September 30, 2012, and the changes in the fair value of the Level 3 assets during the six months ended March 31, 2013.

		Fair Value at March 31, 2013
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Homebuilding:
Debt securities collateralized by residential real estate (a)	Other assets	$	—	$	—		$	18.6	$	18.6
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	—		388.6			5.7		394.3
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		3.3			—		3.3
Forward sales of MBS	Other liabilities	—		(2.3		)	—		(2.3		)
Best-efforts and mandatory commitments	Other liabilities	—		(0.2		)	—		(0.2		)

		Fair Value at September 30, 2012
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Homebuilding:
Marketable securities, available-for-sale:
U.S. Treasury securities	Marketable securities	$	75.7	$	—		$	—	$	75.7
Government agency and corporate debt securities	Marketable securities	—		212.3			—		212.3
Certificates of deposit	Marketable securities	—		10.0			—		10.0
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	—		345.3			—		345.3
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		6.1			—		6.1
Forward sales of MBS	Other liabilities	—		(6.9		)	—		(6.9		)
Best-efforts and mandatory commitments	Other liabilities	—		(0.8		)	—		(0.8		)

	Level 3 Assets at Fair Value for the
	Six Months Ended March 31, 2013
	Balance at September 30, 2012		Net realized and unrealized gains/(losses)		Purchases		Sales and Settlements			Net transfers in and/or (out) of Level 3		Balance at March 31, 2013
	(In millions)
Debt securities collateralized by residential real estate (a)	$	—	$	—	$	18.6	$	—		$	—	$	18.6
Mortgage loans held for sale (b)	—		0.4		—		(2.6		)	7.9		5.7

(a) In October 2012, the Company purchased $18.6 million of defaulted debt securities which are secured by residential real estate. The Company intends to foreclose on the property or negotiate an agreement to obtain the right to take possession of the residential real estate in order to develop the property and ultimately build and sell homes. These securities, which are included in other assets on the consolidated balance sheets, are classified as available for sale and are carried at estimated fair value, which approximates their original transaction price.

(b) Mortgage loans held for sale are reflected at fair value. Interest income earned on mortgage loans held for sale is based on contractual interest rates and included in financial services interest and other income. Mortgage loans held for sale includes $5.7 million of loans originated under the fair value option which the Company has not sold into the secondary market, but plans to sell as market conditions permit. The fair value of these mortgage loans held for sale is generally calculated considering the secondary market and adjusted for the value of the underlying collateral, including interest rate risk, liquidity risk and prepayment risk; therefore, they were transferred from a Level 2 valuation to a Level 3 valuation during the six months ended March 31, 2013.

(c) Fair value measurements of these derivatives represent changes in fair value since inception and are reflected in the balance sheet. Changes in these fair values during the periods presented are included in financial services revenues on the consolidated statement of operations.

The following table summarizes the Company’s assets at March 31, 2013 and September 30, 2012 measured at fair value on a nonrecurring basis:

		Fair Value at		Fair Value at
		March 31, 2013		September 30, 2012
	Balance Sheet Location	Level 3		Level 3
		(In millions)
Homebuilding:
Inventory held and used (a) (b)	Inventories	$	—	$	1.2
Financial Services:
Other mortgage loans (a) (c)	Other assets	23.7		25.8
Real estate owned (a) (c)	Other assets	0.7		0.9

(a) The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value in the respective quarter.

(b) In performing its impairment analysis in the periods presented, the Company used discount rates ranging from 12% to 16%.

(c) The fair values for other mortgage loans and real estate owned are determined based on the value of the underlying collateral.

For the financial assets and liabilities for which the Company has not elected the fair value option, the following tables present both their respective carrying value and fair value at March 31, 2013 and September 30, 2012:

	Carrying Value		Fair Value at March 31, 2013
			Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	1,127.7	$	1,127.7	$	—	$	—	$	1,127.7
Restricted cash (a)	54.5		54.5		—		—		54.5
Senior notes (b)	2,554.7		—		2,654.1		—		2,654.1
Convertible senior notes (b)	462.4		—		941.9		—		941.9
Financial Services:
Cash and cash equivalents (a)	22.8		22.8		—		—		22.8
Mortgage repurchase facility (a)	245.8		—		—		245.8		245.8

	Carrying Value		Fair Value at September 30, 2012
			Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	1,030.4	$	1,030.4	$	—	$	—	$	1,030.4
Restricted cash (a)	49.3		49.3		—		—		49.3
Senior notes (b)	1,854.2		—		1,973.9		—		1,973.9
Convertible senior notes (b)	447.0		—		821.2		—		821.2
Financial Services:
Cash and cash equivalents (a)	17.3		17.3		—		—		17.3
Mortgage repurchase facility (a)	187.8		—		—		187.8		187.8

(a) The fair value approximates carrying value due to its short-term nature, short maturity or floating interest rate terms, as applicable.

(b) The fair value is determined based on quoted market prices of recent transactions, which is classified as Level 2 within the fair value hierarchy.