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Fair Value Measurements

12 Months Ended

Dec. 31, 2023

18. 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 and Level 3) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac, and Ginnie Mae (collectively, the “Agencies”) 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.

Newly originated 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. Those loans 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 primarily derived from market observable inputs, 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 on a recurring basis. These loans are valued on a recurring basis using a market approach similar to newly originated loans as mentioned above, with adjustments for assumptions including fail rate, partial claim rate and modification status. As these prices are primarily derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures.

The Company may also repurchase loans that are unable to be securitized and sold, and fair value is based upon recent market trades for similar loans adjusted for delinquency rates or broker pricing. These loans are valued on a recurring basis and as the prices used are not primarily derived from market observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures.

From time to time, 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 fair value on a recurring basis and classifies these valuations as Level 3 in the fair value disclosures.

See Note 7, Mortgage Loans Held for Sale, for more information.

Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its 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. Beginning in the second quarter of 2023, the Company valued MSRs using a stochastic option adjusted spread (OAS) instead of a static discount rate. OAS is the incremental spread added to the risk-free rate to reflect embedded (prepayment) optionality and other risk inherent in the MSRs to discount cash flows. The cash flow assumptions used in the discounted cash flow model incorporate prepayment speeds, OAS, costs to service, delinquencies, ancillary revenues, recapture rates and other assumptions, with the key assumptions being mortgage prepayment speeds, OAS, and cost to service. The cash flow 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 5, 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 6, Advances and Other Receivables, for more information.

Equity Investments (Level 1 and Level 3) – The fair value of the common stock received from the previous sale of the title and field services businesses is measured quarterly based on the minimum exit value, which was established at the time of the transaction, and observable market indicators. Because of the nature of the unobservable inputs, the Company classifies these securities as Level 3 in the fair value disclosures.

The fair value of the common stock received from the previous sale of the valuation business is measured using the closing price reported on an active market in which the securities are traded. As the fair value is based on market observable inputs, the Company classifies these securities as Level 1 in the fair value disclosures.

Derivative Financial Instruments (Level 2 and Level 3) – 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. IRLCs and LPCs are carried at fair value primarily based on secondary market prices for underlying mortgage loans, which is observable data, with adjustments made to such observable data for the inherent value of servicing, which is an unobservable input. The fair value is also subject to adjustments for the estimated pull-through rate. The impact of the unobservable input to the overall valuation of IRLCs and LPCs is significant and results in a classification of Level 3 in the fair value hierarchy. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised, and the loan will be funded. The Company has entered into Treasury futures and swap 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 12, Derivative Financial Instruments, for more information.

Loans Subject to Repurchase from Ginnie Mae (Level 2) – As the Company has the unilateral right to repurchase these loans at the unpaid principal balance, the carrying amount, which is based on the unpaid principal balance, approximates fair value. See Note 10, Loans Subject to Repurchase from Ginnie Mae, 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 on the consolidated balance sheets approximates fair value. See Note 13, Indebtedness, for more information.

Unsecured Senior Notes (Level 2) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices in a market with limited trading activity. See Note 13, 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. Beginning in the second quarter of 2023, the Company valued excess spread financing using a stochastic OAS instead of a static discount rate. The cash flow assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds and OAS. Quarterly, management obtains a third-party valuation to assess the reasonableness of the fair value calculations provided by the internal cash flow model. 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 5, 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 5, Mortgage Servicing Rights and Related Liabilities, 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:


	December 31, 2023
	Total Fair Value		Recurring Fair Value Measurements
Fair Value - Recurring Basis			Level 1		Level 2		Level 3
Assets
Mortgage loans held for sale	$	927	$	—	$	846	$	81
Mortgage servicing rights	9,090		—		—		9,090
Equity investments	9		1		—		8
Derivative financial instruments:
Treasury futures	113		—		113		—
Forward MBS trades	22		—		22		—
IRLCs	21		—		—		21
LPCs	3		—		—		3

Liabilities
Derivative financial instruments:
Forward MBS trades	9		—		9		—
Mortgage servicing rights financing	29		—		—		29
Excess spread financing	437		—		—		437


	December 31, 2022
	Total Fair Value		Recurring Fair Value Measurements
Fair Value - Recurring Basis			Level 1		Level 2		Level 3
Assets
Mortgage loans held for sale	$	893	$	—	$	819	$	74
Mortgage servicing rights	6,654		—		—		6,654
Equity investments	47		2		—		45
Derivative financial instruments:
Forward MBS trades	8		—		8		—
IRLCs	22		—		—		22
LPCs	1		—		—		1

Liabilities
Derivative financial instruments:
Forward MBS trades	9		—		9		—
LPCs	1		—		—		1
Treasury futures	14		—		14		—
Mortgage servicing rights financing	19		—		—		19
Excess spread financing	509		—		—		509

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:


	Year Ended December 31, 2023
	Assets								Liabilities
Fair Value - Level 3 Assets and Liabilities	Mortgage servicing rights		Mortgage loans held for sale		Equity investments		IRLCs		Excess spread financing		Mortgage servicing rights financing
Balance - beginning of year	$	6,654	$	74	$	45	$	22	$	509	$	19
Changes in fair value included in earnings	(483)		18		(37)		(1)		8		10
Purchases/additions(1)	3,189		180		—		—		—		—
Issuances	273		—		—		—		—		—
Sales/dispositions(1)	(573)		(189)		—		—		—		—
Repayments	—		(6)		—		—		(9)		—
Settlements	—		—		—		—		(71)		—
Other changes	30		4		—		—		—		—
Balance - end of year	$	9,090	$	81	$	8	$	21	$	437	$	29


	Year Ended December 31, 2022
	Assets								Liabilities
Fair Value - Level 3 Assets and Liabilities	Mortgage servicing rights		Mortgage loans held for sale		Equity investments		IRLCs		Excess spread financing		Mortgage servicing rights financing
Balance - beginning of year	$	4,223	$	76	$	54	$	134	$	768	$	10
Changes in fair value included in earnings	549		(3)		(9)		(112)		133		9
Purchases/additions(1)	1,595		130		—		—		—		—

Issuances	554		—		—		—		—		—
Sales/dispositions(1)	(294)		(124)		—		—		—		—
Repayments	—		(2)		—		—		(293)		—
Settlements	—		—		—		—		(99)		—
Other changes	27		(3)		—		—		—		—
Balance - end of year	$	6,654	$	74	$	45	$	22	$	509	$	19

(1)Additions for mortgages loans held for sale include loans that are purchased or transferred in. Dispositions for mortgage loans held for sales include loans that are sold or transferred out.

The Company had immaterial LPCs assets and liabilities as of December 31, 2023 and 2022. No transfers were made in or out of Level 3 fair value assets for the Company during the years ended December 31, 2023 and 2022.

The tables below present the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities:


	December 31, 2023									December 31, 2022
	Range						Weighted Average			Range						Weighted Average
Level 3 Inputs	Min			Max						Min			Max
MSR(1)
Option adjusted spread(2)	6.9		%	12.3		%	8.0		%	N/A			N/A			N/A
Discount rate	N/A			N/A			N/A			10.4		%	13.7		%	11.4		%
Prepayment speed	6.8		%	9.3		%	7.5		%	6.3		%	12.2		%	7.2		%
Cost to service per loan(3)	$	56		$	160		$	80		$	54		$	155		$	80
Average life(4)							7.9 years									8.1 years

Mortgage loans held for sale
Market pricing	45.0		%	103.4		%	81.1		%	37.3		%	114.7		%	77.4		%

IRLCs
Value of servicing (reflected as a percentage of loan commitment)	1.1		%	3.5		%	1.9		%	(0.6)		%	3.9		%	2.3		%

Excess spread financing
Option adjusted spread(2)	7.0		%	12.3		%	8.8		%	N/A			N/A			N/A
Discount rate	N/A			N/A			N/A			10.0		%	13.8		%	11.3		%
Prepayment speed	7.7		%	9.1		%	8.4		%	6.9		%	13.3		%	9.2		%
Average life(4)							6.7 years									6.6 years

Mortgage servicing rights financing
Advance financing and counterparty fee rates	6.6		%	9.2		%	7.6		%	5.2		%	8.6		%	7.1		%
Annual advance recovery rates	12.2		%	14.8		%	13.0		%	15.9		%	20.6		%	17.3		%

(1)The inputs are weighted by investor.

(2)OAS represents incremental spread above a risk-free rate (one-month SOFR), which is an observable input. See discussion on methodology above.

(3)Presented in whole dollar amounts.

(4)Average life is included for informational purposes.

The tables below present a summary of the carrying amount and estimated fair value of the Company’s financial instruments not carried at fair value:


	December 31, 2023
	Carrying Amount		Fair Value
Financial Instruments			Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	571	$	571	$	—	$	—
Restricted cash	169		169		—		—
Advances and other receivables, net	996		—				996
Loans subject to repurchase from Ginnie Mae	966		—		966		—
Financial liabilities
Unsecured senior notes, net	3,151		—		3,056		—
Advance, warehouse and MSR facilities, net	4,302		—		4,318		—
Liability for loans subject to repurchase from Ginnie Mae	966		—		966		—


	December 31, 2022
	Carrying Amount		Fair Value
Financial Instruments			Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	527	$	527	$	—	$	—
Restricted cash	175		175		—		—
Advances and other receivables, net	1,019		—		—		1,019
Loans subject to repurchase from Ginnie Mae	1,865		—		1,865		—
Financial liabilities
Unsecured senior notes, net	2,673		—		2,209		—
Advance, warehouse and MSR facilities, net	2,885		—		2,896		—
Liability for loans subject to repurchase from Ginnie Mae	1,865		—		1,865		—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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