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Fair Value
9 Months Ended
Sep. 30, 2021
Fair Value Disclosures [Abstract]  
Fair Value Fair Value
GAAP assigns a fair value hierarchy to the inputs used to measure fair value.  Level 1 inputs are quoted prices in active markets for identical assets and liabilities.  Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs.
Financial Instruments
The following table presents the estimated fair values and carrying values of our Senior Notes as of September 30, 2021 and December 31, 2020. The estimated fair value is based on recent market prices of similar
transactions, which is classified as Level 2 within the fair value hierarchy.
September 30, 2021December 31, 2020
Estimated Fair Values:
3.95% Senior Notes due 2022$614,568 $630,000 
3.00% Senior Notes due 2030941,697 982,620 
Total$1,556,265 $1,612,620 
Carrying Values:
3.95% Senior Notes due 2022$599,396 $598,925 
3.00% Senior Notes due 2030917,148 918,470 
Total$1,516,544 $1,517,395 
Except as otherwise noted below, we believe that insignificant differences exist between the carrying value and the fair value of our financial instruments, which consist primarily of cash equivalents, due to their short term nature.
Derivative Instruments and Mortgage Loans Held for Sale
In the normal course of business, our wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to our homebuyers with fixed expiration dates.  The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM.  All mortgagors are evaluated for credit worthiness prior to the extension of the commitment.  Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  NVRM does not engage in speculative or trading derivative activities.  Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings.  At September 30, 2021, there were rate lock commitments to extend credit to borrowers aggregating $961,557 and open forward delivery contracts aggregating $1,107,575, which hedge both the rate lock commitments and closed loans held for sale.
The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:
i)the assumed gain/loss of the expected resultant loan sale (Level 2);
ii)the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and
iii)the value of the servicing rights associated with the loan (Level 2).
The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan.  The excess servicing and buydown fees are calculated pursuant to contractual terms with investors.  To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.  NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale.  Thus, the value of the servicing rights is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type.  NVRM assumes a fallout rate when measuring the fair value of rate lock commitments.  Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.
The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2).  The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold.  Fair value is measured using Level 2 inputs.  As of September 30, 2021, the fair value of loans held for sale of $287,525 included on the accompanying condensed consolidated balance sheet has been increased by $2,687 from the aggregate principal balance of $284,838. As of December 31, 2020, the fair value of loans held for sale of $449,760 were increased by $10,042 from the aggregate principal balance of $439,718.
The fair value measurement of NVRM's undesignated derivative instruments was as follows:
September 30, 2021December 31, 2020
Rate lock commitments:
Gross assets$11,540 $10,844 
Gross liabilities3,578 87 
Net rate lock commitments$7,962 $10,757 
Forward sales contracts:
Gross assets$3,800 $
Gross liabilities397 5,217 
Net forward sales contracts$3,403 $(5,216)
As of September 30, 2021 the net rate lock commitments and the net forward sales contracts are reported in mortgage banking "Other assets" on the accompanying condensed consolidated balance sheets. As of December 31, 2020, the net rate lock commitments are reported in mortgage banking "Other assets" and the net forward sales contracts are reported in mortgage banking "Accrued expenses and other liabilities".
The fair value measurement adjustment as of September 30, 2021 was as follows:
Notional or
Principal
Amount
Assumed
Gain/(Loss)
From Loan
Sale
Interest
Rate
Movement
Effect
Servicing
Rights
Value
Security
Price
Change
Total Fair
Value
Measurement
Gain/(Loss)
Rate lock commitments$961,557 $1,912 $(2,466)$8,516 $— $7,962 
Forward sales contracts$1,107,575 — — — 3,403 3,403 
Mortgages held for sale$284,838 858 (1,174)3,003 — 2,687 
Total fair value measurement$2,770 $(3,640)$11,519 $3,403 $14,052 

The total fair value measurement adjustment as of December 31, 2020 was $15,583. NVRM recorded a fair value adjustment to expense of $3,771 and $1,531 for the three and nine months ended September 30, 2021, respectively. NVRM recorded a fair value adjustment to income of $1,735 for the three months ended September 30, 2020, and a fair value adjustment to expense of $1,968 for the nine months ended September 30, 2020. Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income.  The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.