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Fair Value Measurements
 3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
Fair Value Measurements
16. Fair Value Measurements

Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs).

The following describes the methods and assumptions used by the Company in estimating fair values:

Cash and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reported in the consolidated balance sheets approximates fair value.

Mortgage Loans Held for Sale (Level 2) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value.

Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate and credit quality. Mortgage loans held for sale are valued on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.

The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. The Company classifies these valuations as Level 2 in the fair value disclosures.

The Company may also purchase loans out of a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to carry these loans at fair value. See Note 6, Mortgage Loans Held for Sale, for more information.

Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, earnings on escrow and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.

Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value. See Note 4, Advances and Other Receivables, Net for more information.

Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Quarterly, the Company estimates fair value using discounted cash flows, obtained from a third-party and supplemented with historical loss experience on similar assets, with the discount rate approximating that of similar financial instruments, as observed from recent trades with the HMBS. Key assumptions within the model are based on market participant benchmarks and include discount rates, cost to service, weighted average life of the portfolio, and estimated participating income. Discounted cash flows are applied based on collateral stratifications and include loan rate type, loan status (active vs. inactive), and securitization. Prices are also influenced from both internal models and other observable inputs. The Company determined fair value for all loans based on the applicable tranches established during the Merger valuation. Tranches are segregated based on participation percentages, original loan status as of the Merger date, and interest rate types, and loan status (active vs inactive). Prices are also influenced from both internal models and other observable inputs, including applicable forward interest rate curves. Additionally, historical loss factors are considered within the overall valuation. Because of the unobservable nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Reverse Mortgage Interests, Net for more information.

Derivative Financial Instruments (Level 2) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. These derivatives are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 2. In addition, the Company enters into IRLCs and LPCs with prospective borrowers and other loan originators. These commitments are carried at fair value based on the fair value of underlying mortgage loans which are based on observable market data. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised, and the loan will be funded. IRLCs and LPCs are recorded in derivative financial instruments in the consolidated balance sheets. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on market observable inputs. The Company has entered into Eurodollar futures contracts as part of its hedging strategy. The futures contracts are measured at fair value on a recurring basis and classified as Level 2 in the fair value disclosures as the valuation is based on market observable data. Derivative financial instruments are recorded in other assets and payables and other liabilities within the consolidated balance sheets. See Note 9, Derivative Financial Instruments, for more information.

Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported at amortized cost on the consolidated balance sheets approximates fair value. See Note 10, Indebtedness, for more information.

Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 10, Indebtedness, for more information.

Excess Spread Financing (Level 3) – The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.

Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Mortgage servicing rights financing liability is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information.

Participating Interest Financing (Level 3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. Participating interest financing is recorded in other nonrecourse debt within the consolidated balance sheets. See Note 5, Reverse Mortgage Interests, Net, and Note 10, Indebtedness, for more information.

HECM Securitizations (Level 3) – The Company estimates fair value using a market approach by utilizing the fair value of executed HECM securitizations. Since the executed HECM securitizations are private placements, the Company classifies these valuations as Level 3 in the fair value disclosures. HECM securitizations are recorded at amortized cost in other nonrecourse debt within the consolidated balance sheets. See Note 10, Indebtedness for more information.

The following table presents the estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis:
 
March 31, 2020
 
 
 
Recurring Fair Value Measurements
Fair value - Recurring basis
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
$
3,922

 
$
—

 
$
3,922

 
$
—

Forward mortgage servicing rights
3,109

 
—

 
—

 
3,109

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
263

 
—

 
263

 
—

Forward MBS trades
6

 
—

 
6

 
—

LPCs
25

 
—

 
25

 
—

Total assets
$
7,325

 
$
—

 
$
4,216

 
$
3,109

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
Forward MBS trades
$
223

 
$
—

 
$
223

 
$
—

Mortgage servicing rights financing
43

 
—

 
—

 
43

Excess spread financing
1,242

 
—

 
—

 
1,242

Total liabilities
$
1,508

 
$
—

 
$
223

 
$
1,285


 
December 31, 2019
 
 
 
Recurring Fair Value Measurements
Fair value - Recurring basis
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
Mortgage loans held for sale
$
4,077

 
$
—

 
$
4,077

 
$
—

Forward mortgage servicing rights
3,496

 
—

 
—

 
3,496

Derivative financial instruments
 
 
 
 
 
 
 
IRLCs
135

 
—

 
135

 
—

Forward MBS trades
7

 
—

 
7

 
—

LPCs
12

 
—

 
12

 
—

Total assets
$
7,727

 
$
—

 
$
4,231

 
$
3,496

Liabilities
 
 
 
 
 
 
 
Derivative financial instruments
 
 
 
 
 
 
 
Forward MBS trades
$
12

 
$
—

 
$
12

 
$
—

LPCs
3

 
—

 
3

 
—

Mortgage servicing rights financing
37

 
—

 
—

 
37

Excess spread financing
1,311

 
—

 
—

 
1,311

Total liabilities
$
1,363

 
$
—

 
$
15

 
$
1,348


The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:
 
Three Months Ended March 31, 2020
 
Assets
 
Liabilities
Fair value - Level 3 assets and liabilities
Mortgage servicing rights
 
Excess spread financing
 
Mortgage servicing rights financing
Balance - beginning of period
$
3,496

 
$
1,311

 
$
37

Total gains or losses included in earnings
(534
)
 
(35
)
 
6

Purchases, issuances, sales, repayments and settlements
 
 
 
 
 
Purchases
24

 
—

 
—

Issuances
123

 
24

 
—

Settlements and repayments
—

 
(58
)
 
—

Balance - end of period
$
3,109

 
$
1,242

 
$
43


 
Three Months Ended March 31, 2019
 
Assets
 
Liabilities
Fair value - Level 3 assets and liabilities
Mortgage servicing rights
 
Excess spread financing
 
Mortgage servicing rights financing
Balance - beginning of period
$
3,665

 
$
1,184

 
$
32

Total gains or losses included in earnings
(399
)
 
(69
)
 
2

Purchases, issuances, sales, repayments and settlements
 
 
 
 
 
Purchases
409

 
—

 
—

Issuances
66

 
245

 
—

Sales
(260
)
 
—

 
—

Settlements and repayments
—

 
(51
)
 
—

Balance - end of period
$
3,481

 
$
1,309

 
$
34



As of March 31, 2020 and December 31, 2019, the Company had no financial instruments classified as mortgage loans held for investment as the related portfolio was sold in September 2019. During the three months ended March 31, 2019, the Company had an immaterial change in mortgage loans held for investment.

No transfers were made into or out of Level 3 fair value assets and liabilities for the Company for the three months ended March 31, 2020 and 2019, respectively.

The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments:
 
March 31, 2020
 
Carrying
Amount
 
Fair Value
Financial instruments
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
579

 
$
579

 
$
—

 
$
—

Restricted cash
266

 
266

 
—

 
—

Advances and other receivables, net
685

 
—

 
—

 
685

Reverse mortgage interests, net
5,955

 
—

 
—

 
6,015

Mortgage loans held for sale
3,922

 
—

 
3,922

 
—

Derivative financial instruments
294

 
—

 
294

 
—

Financial liabilities
 
 
 
 
 
 
 
Unsecured senior notes(1)
2,259

 
2,055

 
—

 
—

Advance facilities(1)
489

 
—

 
489

 
—

Warehouse facilities(1)
4,551

 
—

 
4,551

 
—

Mortgage servicing rights financing liability
43

 
—

 
—

 
43

Excess spread financing
1,242

 
—

 
—

 
1,242

Derivative financial instruments
223

 
—

 
223

 
—

Participating interest financing(1)
4,056

 
—

 
—

 
4,056

HECM Securitization (HMBS)(1)
 
 
 
 
 
 
 
Trust 2019-2
295

 
—

 
—

 
295

Trust 2019-1
268

 
—

 
—

 
268

Trust 2018-3
189

 
—

 
—

 
189

Trust 2018-2
137

 
—

 
—

 
137



(1) 
The amounts are presented net of unamortized debt issuance costs, premium and discount.

 
December 31, 2019
 
Carrying
Amount
 
Fair Value
Financial instruments
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
329

 
$
329

 
$
—

 
$
—

Restricted cash
283

 
283

 
—

 
—

Advances and other receivables, net
988

 
—

 
—

 
988

Reverse mortgage interests, net
6,279

 
—

 
—

 
6,318

Mortgage loans held for sale
4,077

 
—

 
4,077

 
—

Derivative financial instruments
153

 
—

 
153

 
—

Financial liabilities
 
 
 
 
 
 
 
Unsecured senior notes(1)
2,366

 
2,505

 
—

 
—

Advance facilities
422

 
—

 
422

 
—

Warehouse facilities(1)
4,575

 
—

 
4,575

 
—

Mortgage servicing rights financing liability
37

 
—

 
—

 
37

Excess spread financing
1,311

 
—

 
—

 
1,311

Derivative financial instruments
15

 
—

 
15

 
—

Participating interest financing(1)
4,299

 
—

 
—

 
4,299

HECM Securitization (HMBS)(1)
 
 
 
 
 
 
 
Trust 2019-2
331

 
—

 
—

 
331

Trust 2019-1
300

 
—

 
—

 
300

Trust 2018-3
208

 
—

 
—

 
208

Trust 2018-2
148

 
—

 
—

 
148


(1) 
The amounts are presented net of unamortized debt issuance costs, premium and discount.