11.	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 estimated fair value of NVR’s Senior Notes as of September 30, 2015 was $616,500. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy. The carrying value of the Senior Notes was $599,237 at September 30, 2015. Except as otherwise noted below, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments, which consist of cash equivalents, due to their short term nature.

Derivative Instruments and Mortgage Loans Held for Sale

In the normal course of business, NVR’s wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to buyers of single-family homes 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 sale 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, 2015, there were contractual commitments to extend credit to borrowers aggregating $683,479 and open forward delivery contracts aggregating $913,334, which hedge both the rate lock loan 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:

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, which averaged 118 basis points of the loan amount as of September 30, 2015, is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes an approximate 12% 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 carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. The fair value of loans held for sale of $260,074 included on the accompanying condensed consolidated balance sheet has been increased by $3,815 from the aggregate principal balance of $256,259.

The undesignated derivative instruments are included on the accompanying condensed consolidated balance sheet, as of September 30, 2015, as follows:

	Fair Value		Balance Sheet Location
Rate lock commitments:
Gross assets	$	11,282
Gross liabilities		1,532
Net rate lock commitments	$	9,750	NVRM - Other assets
Forward sales contracts:
Gross assets	$	12
Gross liabilities		4,713
Net forward sales contracts	$	4,701	NVRM - Accounts payable and other liabilities

The fair value measurement as of September 30, 2015 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	$	683,479	$	(1,031	)	$	3,536	$	7,245	$	—		$	9,750
Forward sales contracts	$	913,334		—			—		—		(4,701	)		(4,701	)
Mortgages held for sale	$	256,259		(18	)		946		2,887		—			3,815
Total fair value measurement			$	(1,049	)	$	4,482	$	10,132	$	(4,701	)	$	8,864

For the three and nine months ended September 30, 2015, NVRM recorded a fair value adjustment to income of $3,429 and $5,040, respectively. For the three and nine months ended September 30, 2014, NVRM recorded a fair value adjustment to expense of $1,379 and a fair value adjustment to income of $2,681, respectively. 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.