FAIR VALUE MEASUREMENTS

Fair value measurements are used for the Company's 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.

•

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:


▪	mortgage loans held for sale;


▪	IRLCs; and


▪	loan sale commitments and 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;


▪	inventory available for sale;


▪	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 December 31, 2013 and September 30, 2013, and the changes in the fair value of the Level 3 assets during the three months ended December 31, 2013.



		Fair Value at December 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	$	—	$	—	$	20.3	$	20.3
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	—		293.9		5.9		299.8
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		0.4		—		0.4
Forward sales of MBS	Other assets	—		2.7		—		2.7
Best-efforts and mandatory commitments	Other assets	—		0.8		—		0.8



		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		)



	Level 3 Assets at Fair Value for the
	Three Months Ended December 31, 2013
	Balance at September 30, 2013		Net realized and unrealized gains/(losses)		Purchases		Sales and Settlements			Principal Reductions		Net transfers in/(out) of Level 3		Balance at December 31, 2013
	(In millions)
Debt securities collateralized by residential real estate (a)	$	20.3	$	—	$	—	$	—		$	—	$	—	$	20.3
Mortgage loans held for sale (b)	5.7		0.1		—		(0.2		)	—		0.3		5.9

(a)

In October 2012, the Company purchased 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 in 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) in 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. Mortgage loans held for sale at December 31, 2013 includes $5.9 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.


(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 in the consolidated statements of operations.

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



		Fair Value at		Fair Value at
		December 31, 2013		September 30, 2013
	Balance Sheet Location	Level 3		Level 3
		(In millions)
Homebuilding:
Inventory held and used (a) (b)	Inventories	$	—	$	0.5
Inventory available for sale (a) (c)	Inventories	—		10.8
Financial Services:
Other mortgage loans (a) (d)	Other assets	22.1		22.6
Real estate owned (a) (d)	Other assets	1.0		0.7

_______________________________________


(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 of communities, discount rates ranging from 14% to 18% were used in the periods presented.


(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 December 31, 2013 and September 30, 2013:



	Carrying Value		Fair Value at December 31, 2013
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	801.1	$	801.1	$	—	$	—	$	801.1
Restricted cash (a)	81.1		81.1		—		—		81.1
Senior notes (b)	2,783.5		—		2,834.8		—		2,834.8
Convertible senior notes (b)	487.0		—		859.7		—		859.7
Financial Services:
Cash and cash equivalents (a)	19.0		19.0		—		—		19.0
Mortgage repurchase facility (a)	185.8		—		—		185.8		185.8



	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

_______________________________________


(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.