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Fair Value Measurements

6 Months Ended

Jun. 30, 2022

We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on Management's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.

Valuation Hierarchy

U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority given to unobservable inputs where no active market exists, as discussed below:

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which we can participate as of the measurement date,

Level 2 - Quoted prices for similar instruments in active markets and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument, and

Level 3 - Unobservable inputs that reflect our own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value by caption on the Consolidated Statements of Financial Condition and by level in the valuation hierarchy.


	June 30, 2022
	Level 1		Level 2		Level 3		Total Fair Value
	(Dollars in millions)
Investment securities available-for-sale
Agency - Commercial	$	—	$	1,486	$	—	$	1,486
Agency - Residential	—		561		—		561
Municipal obligations	—		16		—		16
Corporate debt obligations	—		57		—		57
Other MBS	—		225		—		225
Certificate of deposit	—		1		—		1
Loans held-for-sale
Residential first mortgage loans	—		3,181		—		3,181
Loans held-for-investment
Residential first mortgage loans	—		21		—		21
Mortgage servicing rights	—		—		622		622
Derivative assets
Rate lock commitments (fallout-adjusted)	—		—		34		34
Futures	—		2		—		2
Mortgage-backed securities forwards	—		43		—		43
Interest rate swaps and swaptions	—		183		—		183
Total assets at fair value	$	—	$	5,776	$	656	$	6,432
Derivative liabilities
Rate lock commitments (fallout-adjusted)	$	—	$	—	$	(9)	$	(9)
Mortgage backed securities forwards	—		(31)		—		(31)
Interest rate swaps	—		(41)		—		(41)

Total liabilities at fair value	$	—	$	(72)	$	(9)	$	(81)


	December 31, 2021
	Level 1		Level 2		Level 3		Total Fair Value
	(Dollars in millions)
Loans held-for-sale
Residential first mortgage loans	$	—	$	4,920	$	—	$	4,920
Investment securities available-for-sale
Agency - Commercial	—		747		—		747
Agency - Residential	—		696		—		696
Other MBS	—		267		—		267
Corporate debt obligations	—		73		—		73
Municipal obligations	—		20		—		20
Certificate of deposit	—		1		—		1
Derivative assets
Interest rate swaps and swaptions	—		77		—		77
Rate lock commitments (fallout-adjusted)	—		—		54		54
Mortgage-backed securities forwards	—		10		—		10
Loans held-for-investment
Residential first mortgage loans	—		15		—		15
Home equity	—		—		1		1
Mortgage servicing rights	—		—		392		392
Total assets at fair value	$	—	$	6,826	$	447	$	7,273
Derivative liabilities
Mortgage-backed securities forwards	$	—	$	(14)	$	—	$	(14)
Interest rate swaps and swaptions	—		(5)		—		(5)
Rate lock commitments (fallout-adjusted)	—		—		(1)		(1)

Total liabilities at fair value	$	—	$	(19)	$	(1)	$	(20)

Fair Value Measurements Using Significant Unobservable Inputs

The following tables include a roll forward of the Consolidated Statements of Financial Condition amounts (including the change in fair value) for financial instruments classified by us within Level 3 of the valuation hierarchy:


	Balance at Beginning of Period		Total Gains (Losses) Recorded in Earnings		Purchases / Closings		Sales		Settlement		Transfers Out		Balance at End of Period
	(Dollars in millions)
Three Months Ended June 30, 2022
Assets
Mortgage servicing rights (1)	$	523	$	34	$	97	$	(32)	$	—	$	—	$	622
Rate lock commitments (net) (1)(2)	(4)		19		47		—		—		(37)		25
Totals	$	519	$	53	$	144	$	(32)	$	—	$	(37)	$	647

Three Months Ended June 30, 2021
Assets
Loans held-for-investment
Home equity	$	2	$	—	$	—	$	—	$	—	$	—	$	2
Mortgage servicing rights (1)	428		(54)		64		(96)		—		—		342
Rate lock commitments (net) (1)(2)	74		47		179		—		—		(186)		114
Totals	$	504	$	(7)	$	243	$	(96)	$	—	$	(186)	$	458
Liabilities
DOJ Liability	$	(70)	$	—	$	—	$	—	$	70	$	—	$	—
Totals	$	(70)	$	—	$	—	$	—	$	70	$	—	$	—

(1)We utilized swaptions, futures, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines do not reflect the effect of our risk management activities related to such Level 3 instruments.

(2)Rate lock commitments are reported on a fallout-adjusted basis. Transfers out of Level 3 represent the settlement value of the commitments that are transferred to LHFS, which are classified as Level 2 assets.


	Balance at Beginning of Period		Total Gains (Losses) Recorded in Earnings		Purchases / Closings		Sales		Settlement		Transfers Out		Balance at End of Period
	(Dollars in millions)
Six Months Ended June 30, 2022
Assets
Mortgage servicing rights (1)	$	392	$	73	$	189	$	(32)	$	—	$	—	$	622
Rate lock commitments (net) (1)(2)	53		(155)		148		—		—		(21)		25
Totals	$	445	$	(82)	$	337	$	(32)	$	—	$	(21)	$	647

Six Months Ended June 30, 2021
Assets
Loans held-for-investment
Home equity	$	2	$	—	$	—	$	—	$	—	$	—	$	2
Mortgage servicing rights (1)	329		(20)		129		(96)		—		—		342
Rate lock commitments (net) (1)(2)	208		(122)		384		—		—		(356)		114
Totals	$	539	$	(142)	$	513	$	(96)	$	—	$	(356)	$	458
Liabilities
DOJ Liability	$	(35)	$	(35)	$	—	$	—	$	70	$	—	$	—
Totals	$	(35)	$	(35)	$	—	$	—	$	70	$	—	$	—

The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:

Fair Value

Valuation Technique

Unobservable Input

Range (Weighted Average)

(Dollars in millions)

June 30, 2022

Assets

Loans held-for-investment

Mortgage servicing rights

622

Discounted cash flows

Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan

3.9% - 21.6% (6.2%)

0% - 9.8% (7.9%)

$67 - $90 ($79)

(1)

Rate lock commitments (net)

Consensus pricing

Origination pull-through rate

76.2%

(1)

(1)Unobservable inputs were weighted by their relative fair value of the instruments.

Fair Value

Valuation Technique

Unobservable Input

Range (Weighted Average)

(Dollars in millions)

December 31, 2021

Assets

Loans held-for-investment

Mortgage servicing rights

392

Discounted cash flows

Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan

3.9% - 21.6% (7.1%)

0% - 11.1% (9.2%)

$67 - $90 ($80)

(1)

Rate lock commitments (net)

Consensus pricing

Origination pull-through rate

72.8%

(1)

(1)Unobservable inputs were weighted by their relative fair value of the instruments.

Recurring Significant Unobservable Inputs

Home equity. The most significant unobservable inputs used in the fair value measurement of the HELOANs are discount rates, constant prepayment rates and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value.

MSRs. The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates and cost to service. Significant increases (decreases) in all three assumptions in isolation result in a significantly lower (higher) fair value measurement. Weighted average life (in years) is used to determine the change in fair value of MSRs. For June 30, 2022 and December 31, 2021, the weighted average life (in years) for the entire MSR portfolio was 7.4 and 5.8, respectively.

DOJ Liability. The DOJ Liability was settled for $70 million in the second quarter of 2021, fully satisfying the Amendment and reducing the liability to $0 at June 30, 2022. Prior to settlement, the significant unobservable inputs used in the fair value measurement of the DOJ Liability were the discount rate, asset growth rate, return on assets, dividend rate and potential ways we might be required to begin making DOJ Liability payments and our estimates of the likelihood of these outcomes, as further discussed in Note 15 - Legal Proceedings, Contingencies and Commitments.

Rate lock commitments. The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e. the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation result in a significantly higher (lower) fair value measurement.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We also have assets that are subject to measurement at fair value on a nonrecurring basis under certain conditions. The following table presents assets measured at fair value on a nonrecurring basis:


	Total (1)		Level 2		Level 3		Losses
	(Dollars in millions)
June 30, 2022
Loans held-for-sale (2)	$	294	$	294	$	—	$	(5)
Commercial loans	—		—		—		—
Impaired loans held-for-investment (2)
Residential first mortgage loans	68		—		68		(7)
Repossessed assets (3)	5		—		5		(1)
Totals	$	367	$	294	$	73	$	(13)
December 31, 2021
Loans held-for-sale (2)	$	116	$	116	$	—	$	(1)
Commercial loans	18		—		18		—
Impaired loans held-for-investment (2)
Residential first mortgage loans	36		—		36		(5)
Repossessed assets (3)	6		—		6		(1)
Totals	$	176	$	116	$	60	$	(7)

(1)The fair values are determined at various dates dependent upon when certain conditions were met requiring fair value measurement.

(2)Gains (losses) reflect fair value adjustments on assets for which we did not elect the fair value option.

(3)Gains (losses) reflect write downs of repossessed assets based on the estimated fair value of the specific assets.

The following table presents the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements:

Fair Value

Valuation Technique

Unobservable Input

Range (Weighted Average)

(Dollars in millions)

June 30, 2022

Impaired loans held-for-investment

Residential first mortgage loans (1)

Fair value of collateral

Loss severity discount

0% - 100% (9.0%)

Repossessed assets (1)

Fair value of collateral

Loss severity discount

0% - 78.2% (25.0%)

December 31, 2021

Impaired loans-held-for sale

Commercial loans HFS (2)

Fair value of collateral

Market price

N/A

Impaired loans held-for-investment

Residential first mortgage loans (1)

Fair value of collateral

Loss severity discount

0% - 100% (12.7%)

Repossessed assets (1)

Fair value of collateral

Loss severity discount

0% - 96.3% (19.8%)

(1)Unobservable inputs were weighted by their relative fair value of the instruments.

(2)Fair value has been determined based on an unobservable market price.

Nonrecurring Significant Unobservable Inputs

The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.

Fair Value of Financial Instruments

The following tables present the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost:


	June 30, 2022
			Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	435	$	435	$	435	$	—	$	—
Investment securities available-for-sale	2,346		2,346		—		2,346		—
Investment securities held-to-maturity	173		166		—		166		—
Loans held-for-sale	3,482		3,482		—		3,482		—
Loans held-for-investment	14,655		14,523		—		21		14,502
Loans with government guarantees	1,144		1,144		—		1,144		—
Mortgage servicing rights	622		622		—		—		622
Federal Home Loan Bank stock	329		329		—		329		—
Bank owned life insurance	369		369		—		369		—
Repossessed assets	5		5		—		—		5
Other assets, foreclosure claims	13		13		—		13		—
Derivative financial instruments, assets	262		262		—		228		34
Liabilities
Retail deposits
Demand deposits and savings accounts	$	(9,141)	$	(7,497)	$	—	$	(7,497)	$	—
Certificates of deposit	(816)		(812)		—		(812)		—
Wholesale deposits	(836)		(807)		—		(807)		—
Government deposits	(1,717)		(1,532)		—		(1,532)		—
Company controlled deposits	(4,138)		(4,079)		—		(4,079)		—
Federal Home Loan Bank advances	(4,001)		(3,837)		—		(3,837)		—
Long-term debt	(394)		(339)		—		(339)		—
Derivative financial instruments, liabilities	(81)		(81)		—		(72)		(9)


	December 31, 2021
			Estimated Fair Value
	Carrying Value		Total		Level 1		Level 2		Level 3
	(Dollars in millions)
Assets
Cash and cash equivalents	$	1,051	$	1,051	$	1,051	$	—	$	—
Investment securities available-for-sale	1,804		1,804		—		1,804		—
Investment securities held-to-maturity	205		209		—		209		—
Loans held-for-sale	5,054		5,054		—		5,054		—
Loans held-for-investment	13,408		13,453		—		14		13,439
Loans with government guarantees	1,650		1,650		—		1,650		—
Mortgage servicing rights	392		392		—		—		392
Federal Home Loan Bank stock	377		377		—		377		—
Bank owned life insurance	365		365		—		365		—
Repossessed assets	6		6		—		—		6
Other assets, foreclosure claims	7		7		—		7		—
Derivative financial instruments, assets	141		141		—		87		54
Liabilities
Retail deposits
Demand deposits and savings accounts	$	(9,313)	$	(8,469)	$	—	$	(8,469)	$	—
Certificates of deposit	(951)		(952)		—		(952)		—
Wholesale deposits	(1,141)		(1,137)		—		(1,137)		—
Government deposits	(2,000)		(1,904)		—		(1,904)		—
Company controlled deposits	(4,604)		(4,580)		—		(4,580)		—
Federal Home Loan Bank advances and other	(3,280)		(3,288)		—		(3,288)		—
Long-term debt	(396)		(340)		—		(340)		—

Derivative financial instruments, liabilities	(20)		(20)		—		(19)		(1)

Fair Value Option

We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to more closely align the accounting method with the underlying economic exposure. Interest income on LHFS is accrued on the principal outstanding primarily using the "simple-interest" method.

The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(Dollars in millions)
Assets
Loans held-for-sale
Net gain on loan sales	$	(182)	$	214	$	(476)	$	127


Liabilities

Other noninterest expense	$	—	$	—	$	—	$	35

The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding for assets and liabilities for which the fair value option has been elected:


	June 30, 2022						December 31, 2021
	UPB		Fair Value		Fair Value Over / (Under) UPB		UPB		Fair Value		Fair Value Over / (Under) UPB
	(Dollars in millions)
Assets
Nonaccrual loans
Loans held-for-sale	$	21	$	18	$	(3)	$	18	$	16	$	(2)
Loans held-for-investment	13		10		(3)		15		13		(2)
Total nonaccrual loans	$	34	$	28	$	(6)	$	33	$	29	$	(4)
Other performing loans
Loans held-for-sale	$	3,229	$	3,163	$	(66)	$	4,790	$	4,904	$	114
Loans held-for-investment	14		11		(3)		5		3		(2)
Total other performing loans	$	3,243	$	3,174	$	(69)	$	4,795	$	4,907	$	112
Total loans
Loans held-for-sale	$	3,250	$	3,181	$	(69)	$	4,808	$	4,920	$	112
Loans held-for-investment	27		21		(6)		20		16		(4)
Total loans	$	3,277	$	3,202	$	(75)	$	4,828	$	4,936	$	108

- 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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