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. 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.

The Company’s assets measured at fair value using Level 2 inputs on a nonrecurring basis are a limited number of mortgage loans held for sale with some degree of impairment affecting their marketability and are reported at the lower of carrying value or fair value. When available, fair value is determined by reference to quoted prices in the secondary markets for such assets.


•	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 and for which reference to quoted prices in the secondary markets is not available.

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 held for sale;


▪	certain other 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, 2018 and September 30, 2017, and the changes in the fair value of the Level 3 assets during the six months ended March 31, 2018 and 2017.



		Fair Value at March 31, 2018
	Balance Sheet Location	Level 1		Level 2			Level 3		Total
		(In millions)
Debt securities collateralized by residential real estate	Other assets	$	—	$	—		$	8.8	$	8.8
Mortgage loans held for sale (a)	Mortgage loans held for sale	—		651.8			4.4		656.2
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments	Other assets	—		18.2			—		18.2
Forward sales of MBS	Other liabilities	—		(1.8		)	—		(1.8		)
Best-efforts and mandatory commitments	Other liabilities	—		(0.4		)	—		(0.4		)



		Fair Value at September 30, 2017
	Balance Sheet Location	Level 1		Level 2		Level 3		Total
		(In millions)
Debt securities collateralized by residential real estate	Other assets	$	—	$	—	$	8.8	$	8.8
Mortgage loans held for sale (a)	Mortgage loans held for sale	—		580.2		5.6		585.8
Derivatives not designated as hedging instruments (b):
Interest rate lock commitments	Other assets	—		9.4		—		9.4
Forward sales of MBS	Other assets	—		1.1		—		1.1
Best-efforts and mandatory commitments	Other assets	—		0.6		—		0.6



	Level 3 Assets at Fair Value for the Six Months Ended March 31, 2018
	Balance at September 30, 2017		Net realized and unrealized gains (losses)			Purchases		Sales and Settlements			Principal Reductions		Net transfers to (out of) Level 3		Balance at March 31, 2018
	(In millions)
Debt securities collateralized by residential real estate	$	8.8	$	—		$	—	$	—		$	—	$	—	$	8.8
Mortgage loans held for sale (a)	5.6		0.6			—		(6.3		)	—		4.5		4.4
	Level 3 Assets at Fair Value for the Six Months Ended March 31, 2017
	Balance at September 30, 2016		Net realized and unrealized gains (losses)			Purchases		Sales and Settlements			Principal Reductions		Net transfers to (out of) Level 3		Balance at March 31, 2017
	(In millions)
Debt securities collateralized by residential real estate	$	—	$	—		$	3.9	$	—		$	—	$	—	$	3.9
Mortgage loans held for sale (a)	6.8		(0.1		)	—		(1.7		)	—		3.4		8.4

___________________

(a)

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 other income. Mortgage loans held for sale at March 31, 2018 and September 30, 2017 include $4.4 million and $5.6 million, respectively, of loans for which the Company elected the fair value option upon origination and did not sell into the secondary market. Mortgage loans held for sale totaling $4.5 million and $3.4 million were transferred to Level 3 during the six months ended March 31, 2018 and 2017, respectively, due to significant unobservable inputs used in determining the fair value of these loans. The fair value of these mortgage loans held for sale is generally calculated considering pricing in 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.


(b)	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 as other assets or accrued expenses and other liabilities. Changes in the fair value of these derivatives are included in revenues in the consolidated statements of operations.

The following table summarizes the Company’s assets measured at fair value on a nonrecurring basis at March 31, 2018 and September 30, 2017:



		Fair Value at March 31, 2018				Fair Value at September 30, 2017
	Balance Sheet Location	Level 2		Level 3		Level 2		Level 3
		(In millions)
Inventory held and used (a) (b)	Inventories	$	—	$	4.3	$	—	$	33.4
Inventory available for sale (a) (c)	Inventories	—		—		—		1.2
Mortgage loans held for sale (a) (d)	Mortgage loans held for sale	—		1.7		—		0.6
Other mortgage loans (a) (e)	Other assets	—		0.2		—		1.4

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(a)	The fair values included in the table above represent only those assets whose carrying values were adjusted to fair value as a result of impairment 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 10% 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, comparable sales or actual contracts.


(d)	These mortgage loans have some degree of impairment affecting their marketability. When available, quoted prices in the secondary market are used to determine fair value (Level 2); otherwise, a cash flow valuation model is used to determine fair value (Level 3).


(e)	The fair value of other mortgage loans was 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 March 31, 2018 and September 30, 2017:



	Carrying Value		Fair Value at March 31, 2018
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Cash and cash equivalents (a)	$	1,010.8	$	1,010.8	$	—	$	—	$	1,010.8
Restricted cash (a)	55.4		55.4		—		—		55.4
Notes payable (b) (c)	3,233.9		—		2,642.3		673.7		3,316.0



	Carrying Value		Fair Value at September 30, 2017
	Carrying Value		Level 1		Level 2		Level 3		Total
	(In millions)
Cash and cash equivalents (a)	$	1,007.8	$	1,007.8	$	—	$	—	$	1,007.8
Restricted cash (a)	16.5		16.5		—		—		16.5
Notes payable (b) (c)	2,871.6		—		2,584.1		431.1		3,015.2

___________________


(a)	The fair values of cash, cash equivalents and restricted cash approximate their carrying values due to their short-term nature and are classified as Level 1 within the fair value hierarchy.


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


(c)	The fair values of other secured notes and borrowings on the revolving credit facility and the mortgage repurchase facility approximate carrying value due to their short-term nature or floating interest rate terms, as applicable, and are classified as Level 3 within the fair value hierarchy.