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 on a recurring basis.

•

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 and liabilities measured at fair value using Level 2 inputs on a recurring basis are as follows:


•	Government agency securities, corporate debt securities and certificates of deposit - These instruments are valued using quoted market prices of recent transactions or quoted market prices of transactions in very similar securities.

•

Mortgage loans held for sale - The fair value of these loans is generally calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. Closed mortgage loans are typically sold shortly after origination, which limits exposure to nonperformance by loan buyer counterparties to a short time period. In addition, the Company actively monitors the financial strength of its counterparties.

•

IRLCs - The fair value of IRLCs is calculated by reference to quoted prices in secondary markets for commitments to sell mortgage loans with similar characteristics. These valuations do not contain adjustments for expirations as any expired commitments are excluded from the fair value measurement. The Company generally only issues IRLCs for products that meet specific purchaser guidelines. Should any purchaser become insolvent, the Company would not be required to close the transaction based on the terms of the commitment. Since not all IRLCs will become closed loans, the Company adjusts its fair value measurements for the estimated amount of IRLCs that will not close.

•

Loan sale commitments and hedging instruments - The fair values of best-efforts and mandatory loan sale commitments and derivative instruments such as forward sales of MBS that are utilized as hedging instruments are calculated by reference to quoted prices for similar assets. The Company mitigates exposure to nonperformance risk associated with derivative instruments by limiting the number of counterparties and actively monitoring their financial strength and creditworthiness while requiring them to be well-known institutions with credit ratings equal to or better than AA- or equivalent. Further, the Company’s derivative contracts typically have short-term durations with maturities from one to four months. Accordingly, the Company’s risk of nonperformance relative to its derivative positions is not significant.

After consideration of nonperformance risk, no additional adjustments were made to the fair value measurements of mortgage loans held for sale, IRLCs or hedging instruments.

•

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 assets measured at fair value using Level 3 inputs on a recurring basis are its debt securities collateralized by residential real estate and a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability.

The Company’s assets measured at fair value using Level 3 inputs that are typically reported at the lower of carrying value or fair value on a nonrecurring basis are as follows:

•

Inventory held and used - In determining the fair values of its inventory held and used in its impairment evaluations, the Company performs an analysis of the undiscounted cash flows estimated to be generated by those assets. The most significant factors used to estimate undiscounted future cash flows include pricing and incentive levels actually realized by the community, the rate at which the homes are sold and the costs incurred to develop the lots and construct the homes. Inventory held and used measured at fair value represents those communities for which the estimated undiscounted cash flows are less than their carrying amounts and therefore, the Company has recorded impairments during the current period to record the inventory at fair value calculated based on its discounted estimated future cash flows.

•

Inventory available for sale - The factors considered in determining fair values of the Company's land held for sale primarily include actual sale contracts and recent offers received from outside third parties, and may also include prices for land in recent comparable sales transactions and other market analysis. If the estimated fair value less the costs to sell an asset is less than the asset's current carrying value, the asset is written down to its estimated fair value less costs to sell.


•	Other mortgage loans and real estate owned - Other mortgage loans include performing and nonperforming mortgage loans, which often become real estate owned through the foreclosure process. The fair values of other mortgage loans and real estate owned are determined based on the Company’s assessment of the value of the underlying collateral.

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



		Fair Value at September 30, 2013
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Homebuilding:
Debt securities collateralized by residential real estate (a)	Other assets	$	—	$	—		$	20.3	$	20.3
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	—		389.4			5.7		395.1
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		7.0			—		7.0
Forward sales of MBS	Other liabilities	—		(8.8		)	—		(8.8		)
Best-efforts and mandatory commitments	Other liabilities	—		(3.1		)	—		(3.1		)



		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
	Year Ended September 30, 2013
	Balance at September 30, 2012		Net realized and unrealized gains/(losses)		Purchases		Sales and Settlements			Principal Reductions			Net transfers in and/or (out) of Level 3		Balance at September 30, 2013
	(In millions)
Debt securities collateralized by residential real estate (a)	$	—	$	3.1	$	18.6	$	—		$	(1.4	)	$	—	$	20.3
Mortgage loans held for sale (b)	—		0.3		—		(3.5		)	—			8.9		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 reflected at fair value. The fair value of these securities was determined by estimating the future cash flows of the securities and the residential real estate utilizing discount rates of 6% and 18%, respectively. Unrealized gains or losses on these securities, net of tax, are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheets.

(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) expense. Mortgage loans held for sale at September 30, 2013 includes $5.7 million of originated loans for which the Company elected the fair value option upon origination and for 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 fiscal 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 measured at fair value on a nonrecurring basis at September 30, 2013 and 2012:



		Fair Value at September 30, 2013		Fair Value at September 30, 2012
	Balance Sheet Location	Level 3		Level 3
		(In millions)
Homebuilding:
Inventory held and used (a) (b)	Inventories	$	0.5	$	1.2
Inventory available for sale (a) (c)	Inventories	10.8		—
Financial Services:
Other mortgage loans (a) (d)	Other assets	22.6		25.8
Real estate owned (a) (d)	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 current quarter.


(b)	In performing its impairment analysis of communities, discount rates ranging from 12% to 18% were used in fiscal 2013 and 2012.


(c)	The fair value of inventory available for sale was determined based on recent offers received from outside third parties and actual contracts.


(d)	The fair values of 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 September 30, 2013 and 2012:



	Carrying Value		Fair Value at September 30, 2013
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	913.3	$	913.3	$	—	$	—	$	913.3
Restricted cash (a)	77.8		77.8		—		—		77.8
Senior notes (b)	2,783.3		—		2,811.5		—		2,811.5
Convertible senior notes (b)	478.7		—		762.4		—		762.4
Financial Services:
Cash and cash equivalents (a)	23.2		23.2		—		—		23.2
Mortgage repurchase facility (a)	238.6		—		—		238.6		238.6



	Carrying Value		Fair Value at September 30, 2012
	Carrying Value		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 of the notes, which is classified as Level 2 within the fair value hierarchy.