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, rental properties 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 as follows:


▪	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 other mortgage loans; and


▪	rental properties 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, 2015 and September 30, 2015, and the changes in the fair value of the Level 3 assets during the three months ended December 31, 2015 and 2014.



		Fair Value at December 31, 2015
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Homebuilding:
Debt securities collateralized by residential real estate (a)	Other assets	$	—	$	—		$	35.5	$	35.5
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	—		507.0			17.4		524.4
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		5.5			—		5.5
Forward sales of MBS	Other liabilities	—		(0.5		)	—		(0.5		)
Best-efforts and mandatory commitments	Other assets	—		0.1			—		0.1



		Fair Value at September 30, 2015
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Homebuilding:
Debt securities collateralized by residential real estate (a)	Other assets	$	—	$	—		$	33.9	$	33.9
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	—		617.1			13.9		631.0
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		3.6			—		3.6
Forward sales of MBS	Other liabilities	—		(6.0		)	—		(6.0		)
Best-efforts and mandatory commitments	Other liabilities	—		(1.1		)	—		(1.1		)



	Level 3 Assets at Fair Value for the Three Months Ended December 31, 2015
	Balance at September 30, 2015		Net realized and unrealized gains (losses)			Purchases		Sales and Settlements			Principal Reductions			Net transfers in (out) of Level 3		Balance at December 31, 2015
	(In millions)
Debt securities collateralized by residential real estate (a)	$	33.9	$	1.9		$	—	$	—		$	(0.3	)	$	—	$	35.5
Mortgage loans held for sale (b)	13.9		(0.1		)	—		(0.3		)	—			3.9		17.4
	Level 3 Assets at Fair Value for the Three Months Ended December 31, 2014
	Balance at September 30, 2014		Net realized and unrealized gains (losses)			Purchases		Sales and Settlements			Principal Reductions			Net transfers in (out) of Level 3		Balance at December 31, 2014
	(In millions)
Debt securities collateralized by residential real estate (a)	$	20.8	$	—		$	—	$	—		$	—		$	—	$	20.8
Mortgage loans held for sale (b)	12.0		0.2			—		(0.3		)	—			0.7		12.6

(a)

In October 2012, the Company purchased defaulted debt securities, which were secured by residential real estate, for $18.6 million in cash. In fiscal 2015, the Company purchased the residential real estate parcel and all additional defaulted debt securities associated with the parcel for $19.9 million in cash, of which $5.1 million was allocated to the land and $14.8 million was allocated to the debt securities. The Company is developing the property to build and sell homes and sold the debt securities to a third party in January 2016. 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 the securities was determined based on the proceeds received from their sale in January 2016. 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, 2015 includes $17.4 million of originated loans for which the Company elected the fair value option upon origination and 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, as calculated by reference to quoted prices for similar assets, 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, 2015 and September 30, 2015:



		Fair Value at December 31, 2015		Fair Value at September 30, 2015
		Fair Value at December 31, 2015		Fair Value at September 30, 2015
	Balance Sheet Location	Level 3		Level 3
		(In millions)
Homebuilding:
Inventory held and used (a) (b)	Inventories	$	3.8	$	10.1
Inventory available for sale (a) (c)	Inventories	0.7		2.8
Financial Services:
Other mortgage loans (a) (d)	Other assets	40.0		15.2
Real estate owned (a) (d)	Other assets	0.2		0.5

_______________________________________


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


(b)	In performing its impairment analysis of communities, discount rates ranging from 12% to 14% 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, comparable sales or 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 that the Company does not reflect at fair value, the following tables present both their respective carrying value and fair value at December 31, 2015 and September 30, 2015:



	Carrying Value		Fair Value at December 31, 2015
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	1,245.7	$	1,245.7	$	—	$	—	$	1,245.7
Restricted cash (a)	9.7		9.7		—		—		9.7
Senior notes (b)	3,326.6		—		3,394.3		—		3,394.3
Other secured notes (a)	10.6		—		—		10.6		10.6
Financial Services:
Cash and cash equivalents (a)	23.0		23.0		—		—		23.0
Mortgage repurchase facility (a)	397.1		—		—		397.1		397.1



	Carrying Value		Fair Value at September 30, 2015
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	1,355.9	$	1,355.9	$	—	$	—	$	1,355.9
Restricted cash (a)	9.7		9.7		—		—		9.7
Senior notes (b)	3,325.5		—		3,405.9		—		3,405.9
Other secured notes (a)	8.1		—		—		8.1		8.1
Financial Services:
Cash and cash equivalents (a)	27.9		27.9		—		—		27.9
Mortgage repurchase facility (a)	477.9		—		—		477.9		477.9

_______________________________________


(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.