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. The Company does not currently have any assets or liabilities 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 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 June 30, 2016 and September 30, 2015, and the changes in the fair value of the Level 3 assets during the nine months ended June 30, 2016 and 2015.



		Fair Value at June 30, 2016
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Financial Services:
Mortgage loans held for sale (b)	Mortgage loans held for sale	$	—	$	620.1		$	14.4	$	634.5
Derivatives not designated as hedging instruments (c):
Interest rate lock commitments	Other assets	—		14.1			—		14.1
Forward sales of MBS	Other liabilities	—		(9.4		)	—		(9.4		)
Best-efforts and mandatory commitments	Other liabilities	—		(1.1		)	—		(1.1		)



		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 Nine Months Ended June 30, 2016
	Balance at September 30, 2015		Net realized and unrealized gains (losses)		Purchases		Sales and Settlements			Principal Reductions			Net transfers to (out of) Level 3		Balance at June 30, 2016
	(In millions)
Debt securities collateralized by residential real estate (a)	$	33.9	$	2.2	$	—	$	(35.8	)	$	(0.3	)	$	—	$	—
Mortgage loans held for sale (b)	13.9		1.2		—		(15.6		)	—			14.9		14.4
	Level 3 Assets at Fair Value for the Nine Months Ended June 30, 2015
	Balance at September 30, 2014		Net realized and unrealized gains (losses)		Purchases		Sales and Settlements			Principal Reductions			Net transfers to (out of) Level 3		Balance at June 30, 2015
	(In millions)
Debt securities collateralized by residential real estate (a)	$	20.8	$	—	$	14.8	$	—		$	—		$	—	$	35.6
Mortgage loans held for sale (b)	12.0		0.3		—		(1.7		)	—			2.9		13.5

(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 sold all of the debt securities to a third party for $35.8 million in January 2016. The resulting gain of $4.5 million on the sale is included in homebuilding other income in the consolidated statement of operations for the nine-month period ended June 30, 2016.

(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 June 30, 2016 and September 30, 2015 include $14.4 million and $13.9 million, respectively, of loans for which the Company elected the fair value option upon origination and which the Company did not sell into the secondary market. Mortgage loans held for sale totaling $14.9 million and $2.9 million were transferred to Level 3 during the nine months ended June 30, 2016 and 2015, respectively, due to significant unobservable inputs used in determining the fair value of the loans. 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. The Company plans to sell these loans as market conditions permit.


(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 June 30, 2016 and September 30, 2015:



		Fair Value at June 30, 2016		Fair Value at September 30, 2015
		Fair Value at June 30, 2016		Fair Value at September 30, 2015
	Balance Sheet Location	Level 3		Level 3
		(In millions)
Homebuilding:
Inventory held and used (a) (b)	Inventories	$	—	$	10.1
Inventory available for sale (a) (c)	Inventories	3.9		2.8
Financial Services:
Other mortgage loans (a) (d)	Other assets	33.9		15.2
Real estate owned (a) (d)	Other assets	0.1		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 and were held at the end of the 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 June 30, 2016 and September 30, 2015:



	Carrying Value		Fair Value at June 30, 2016
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Homebuilding:
Cash and cash equivalents (a)	$	862.9	$	862.9	$	—	$	—	$	862.9
Restricted cash (a)	11.8		11.8		—		—		11.8
Senior notes (b)	2,785.7		—		2,904.1		—		2,904.1
Other secured notes (a)	11.4		—		—		11.4		11.4
Financial Services:
Cash and cash equivalents (a)	43.9		43.9		—		—		43.9
Mortgage repurchase facility (a)	504.2		—		—		504.2		504.2



	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.