Fair Value Accounting

12 Months Ended

Dec. 31, 2011

Fair Value Accounting [Abstract]

Fair Value Accounting

Note 4 — Fair Value Accounting

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in either case through an orderly transaction between market participants at the measurement date. The Company utilizes fair value measurements to record certain assets and liabilities at fair value and to determine fair value disclosures. 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, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves, credit spreads or unobservable inputs. Unobservable inputs may be based on management’s judgment, assumptions and estimates related to credit quality, asset growth, the Company’s 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 that is based on the transparency of the inputs used in the valuation process. The three levels of the hierarchy, highest ranking to lowest, are as follow:

• Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company 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.

• Level 3 — Unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing and 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.

The following is a description of the valuation methodologies used by the Company for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Assets

Securities classified as trading.  These securities are comprised of U.S. government sponsored agency mortgage-backed securities, U.S. Treasury bonds and non-investment grade residual securities that arose from private-label securitizations of the Company. The U.S. government sponsored agency mortgage-backed securities and U.S. Treasury bonds trade in an active, open market with readily observable prices and are therefore classified within the Level 1 valuation hierarchy. The non-investment grade residual securities do not trade in an active, open market with readily observable prices and are therefore classified within the Level 3 valuation hierarchy. Under Level 3, the fair value of residual securities is determined by discounting estimated net future cash flows using expected prepayment rates and discount rates that approximate current market rates. Estimated net future cash flows include assumptions related to expected credit losses on these securities. The Company maintains a model that evaluates the default rate and severity of loss on the residual securities collateral, considering such factors as loss experience, delinquencies, loan-to-value ratios, borrower credit scores and property type. At December 31, 2011 and 2010, the Company had no Level 3 securities classified as trading. See Note 11 — Private-label Securitization Activity, for the key assumptions used in the residual interest valuation process.

Securities classified as available-for-sale.  These securities are comprised of U.S. government sponsored agency mortgage-backed securities and CMOs. Where quoted prices for securities are available in an active market, those securities are classified within Level 1 of the valuation hierarchy. If such quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Due to illiquidity in the markets, the Company determined the fair value of certain non-agency securities using discounted estimated net future cash flows models and therefore classified them within the Level 3 valuation hierarchy as these models utilize significant inputs which are unobservable.

Loans held-for-sale.  The Company generally estimates the fair value of mortgage loans held-for-sale based on quoted market prices for securities backed by similar types of loans. Where quoted market prices were available, such market prices were utilized as estimates for fair values. Otherwise, the fair values of loans was computed by discounting cash flows using observable inputs inclusive of interest rates, prepayment speeds and loss assumptions for similar collateral. These measurements are classified as level 2.

Loans held-for-investment.  Loans held-for-investment are generally recorded at amortized cost. The Company does not record these loans at fair value on a recurring basis. However, from time to time a loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Once a loan is identified as impaired, the fair value of the impaired loan is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. The fair value of the underlying collateral is determined, where possible, using market prices derived from appraisals or broker price opinions which are considered to be Level 3. Fair value may also be measured using the present value of expected cash flows discounted at the loan’s effective interest rate. The Company records the impaired loan as a non-recurring Level 3 valuation.

Loans held-for-investment on a recurring basis are loans that were previously recorded as loans held-for-sale but subsequently transferred to the held-for-investment category. As the Company selected the fair value option for the held-for-sale loans, they continue to be reported at fair value and measured consistent with the Level 2 methodology for loans held-for-sale.

Repossessed assets.  Loans on which the underlying collateral has been repossessed are adjusted to fair value less costs to sell upon transfer to repossessed assets. Subsequently, repossessed assets are carried at the lower of carrying value or fair value, less anticipated marketing and selling costs. Fair value is generally based upon third-party appraisals or internal estimates and considered a Level 3 classification.

Residential mortgage servicing rights.  The current market for residential mortgage servicing rights is not sufficiently liquid to provide participants with quoted market prices. Therefore, the Company uses an option-adjusted spread valuation approach to determine the fair value of residential MSRs. This approach consists of projecting servicing cash flows under multiple interest rate scenarios and discounting these cash flows using risk-adjusted discount rates. The key assumptions used in the valuation of residential MSRs include mortgage prepayment speeds and discount rates. Management obtains third-party valuations of the residential MSR portfolio on a quarterly basis from independent valuation experts to assess the reasonableness of the fair value calculated by its internal valuation model. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. See Note 13 — Mortgage Servicing Rights, for the key assumptions used in the residential MSR valuation process.

Derivative financial instruments. Certain classes of derivative contracts are listed on an exchange and are actively traded, and they are therefore classified within Level 1 of the valuation hierarchy. These include U.S. Treasury futures and U.S. Treasury options. The Company’s forward loan sale commitments and interest rate swaps are valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy. Rate lock commitments are valued using internal models with significant unobservable market parameters and therefore are classified within Level 3 of the valuation hierarchy. The Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives. The derivatives are reported in either “other assets” or “other liabilities” on the Consolidated Statements of Financial Condition.

Liabilities

Warrants.  Warrant liabilities are valued using a binomial lattice model and are classified within Level 2 of the valuation hierarchy. Significant observable inputs include expected volatility, a risk free rate and an expected life. Warrant liabilities are reported in “other liabilities” on the Consolidated Statements of Financial Condition.

Litigation settlement.  The Company has elected the fair value option to account for the liability representing the obligation to make Additional Payments under the DOJ Agreement. The signed settlement contract with the DOJ establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. The Company is making the fair value election as of December 31, 2011, the date the Company first recognized the financial instrument in its financial statements

The specific terms of the payment structure are as follow:

• The Company generates positive income for a sustained period, such that part or all of the Deferred Tax Asset (“DTA”), which has been offset by a valuation allowance (the “DTA Valuation Allowance”), is likely to be realized, as evidenced by the reversal of the DTA Valuation Allowance in accordance with U.S. GAAP.

• The Company is able to include capital derived from the reversal of the DTA Valuation Allowance in the Bank’s Tier 1 capital, which is the lesser of 10 percent of Tier 1 capital or the amount of the DTA that the Company expects to recover within one year based on financial projections.

• The Company’s obligation to repay the $266.7 million in preferred stock held by the U.S. Treasury under the TARP program has been either extinguished or excluded from Tier 1 capital for purposes of calculating the Tier 1 capital ratio as described in the paragraph below.

• Upon the occurrence of each of the future events described above, and provided doing so would not violate any banking regulatory requirement or the OCC does not otherwise object, the Company will begin making Additional Payments provided that (i) each annual payment would be equal to the lesser of $25 million or the portion of the Additional Payments that remains outstanding after deducting prior payments; and (ii) no obligation arises until the Company’s call report as filed with the OCC, including any amendments thereto, for the period ending at least six months prior to the making of such Additional Payments, reflects a minimum Tier 1 capital ratio of 11 percent (or higher if required by regulators), after excluding any unextinguished portion of TARP.

• In no event will the Company be required to make an Additional Payment if doing so would violate any material banking regulatory requirement or the OCC (or any successor regulator under the Safety and Soundness Program) objects in writing to the making of an Additional Payment.

The fair value of the DOJ Agreement is based on a discounted cash flow valuation model that incorporates the Company’s current estimate of the most likely timing and amount of the cash flows necessary to satisfy the obligation. These cash flow estimates are reflective of the Company’s detailed financial and operating projections for the next three years, as well as more general growth earnings and capital assumptions for subsequent periods.

The timing of each of the metrics is dependent on the preceding metric being achieved and actual Bank operating results and forecasted assumptions could materially change the value of the liability. As the Bank’s profitability increases, the value of the deferred liability would also increase.

The cash flows are discounted using a 17.4 percent discount rate that is inclusive of the risk free rate based on the expected duration of the liability and an adjustment for nonperformance risk that represents the Company’s credit risk. The model assumes 12 quarters of profitability prior to reversing the valuation allowance associated with the deferred tax asset.

The liability is classified within Level 3 of the valuation hierarchy given the projections of earnings and growth rate assumptions are unobservable inputs. The litigation settlement is included in “other liabilities” on the Consolidated Financial Statements and changes in the fair value of the litigation settlement will be recorded each quarter in general and administrative expense within non-interest expense on the Consolidated Statements of Operations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the financial instruments carried at fair value as of December 31, 2011 and 2010, by caption on the Consolidated Statements of Financial Condition and by the valuation hierarchy (as described above).

December 31, 2011	Level 1		Level 2			Level 3			Total  Carrying Value
	(Dollars in thousands)
Securities classified as trading:
U.S. Treasury bonds	$	313,383	$	—		$	—		$	313,383
Securities classified as available-for-sale:
Non-agency collateralized mortgage obligations		—		—			365,256			365,256
U.S. government sponsored agencies		116,096		—			—			116,096
Loans held-for-sale:
Residential first mortgage loans		—		1,629,618			—			1,629,618
Loans held-for-investment:
Residential first mortgage loans		—		22,651			—			22,651
Residential mortgage servicing rights		—		—			510,475			510,475
Derivative assets:
U.S. Treasury futures		3,316		—			—			3,316
Agency forwards		9,362		—			—			9,362
Rate lock commitments		—		—			70,965			70,965
Interest rate swaps		—		3,296			—			3,296
Total derivative assets		12,678		3,296			70,965			86,939
Total assets at fair value	$	442,157	$	1,655,565		$	946,696		$	3,044,418
Derivative liabilities:
Forward agency and loan sales	$	—	$	(42,978	)	$	—		$	(42,978	)
Interest rate swaps		—		(3,296	)		—			(3,296	)
Total derivative liabilities		—		(46,274	)		—			(46,274	)
Warrant liabilities		—		(2,411	)		—			(2,411	)
Litigation settlement(1)		—		—			(18,300	)		(18,300	)
Total liabilities at fair value	$	—	$	(48,685	)	$	(18,300	)	$	(66,985	)

(1) Does not include the $15.0 million payment scheduled to be paid within 30 business days after the effective date of the DOJ Agreement.

December 31, 2010	Level 1			Level 2			Level 3		Total  Carrying Value
	(Dollars in thousands)
Securities classified as trading:
U.S. Treasury bonds	$	160,775		$	—		$	—	$	160,775
Securities classified as available-for-sale:
Non-agency collateralized mortgage obligations		—			—			467,488		467,488
U.S. government sponsored agencies		7,737			—			—		7,737
Loans held-for-sale:
Residential first mortgage loans		—			2,343,638			—		2,343,638
Loans held-for-investment:
Residential first mortgage loans		—			19,011			—		19,011
Residential mortgage servicing rights		—			—			580,299		580,299
Derivative assets:
Forward agency and loan sales		—			35,820			—		35,820
Rate lock commitments		—			—			14,396		14,396
Agency forwards		4,088			—			—		4,088
Total derivative assets		4,088			35,820			14,396		54,304
Total assets at fair value	$	172,600		$	2,398,469		$	1,062,183	$	3,633,252
Derivative liabilities:
U.S. Treasury futures	$	(13,176	)	$	—		$	—	$	(13,176	)
Warrant liabilities		—			(9,300	)		—		(9,300	)
Total liabilities at fair value	$	(13,176	)	$	(9,300	)	$	—	$	(22,476	)

Changes in Level 3 Fair Value Measurements

A determination to classify a financial instrument within Level 3 of the valuation hierarchy is based upon the significance of the unobservable factors to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (that is, components that are actively quoted and can be validated to external sources). Accordingly, the gains and losses in the table below include changes in fair value due in part to observable factors that are included within the valuation methodology. Also, the Company manages the risk associated with the observable components of Level 3 financial instruments using securities and derivative positions that are classified within Level 1 or Level 2 of the valuation hierarchy; these Level 1 and Level 2 risk management instruments are not included below, and therefore the gains and losses in the tables do not reflect the effect of the Company’s risk management activities related to such Level 3 instruments.

There were no transfers of assets or liabilities recorded at fair value on a recurring basis into or out of Level 3 fair value measurements during the years ended December 31, 2011 and 2010. The Company reclassified the 2010 and 2011 nonrecurring hierarchy disclosures for impaired loans and repossessed assets from Level 2 to Level 3 to reflect that the appraised values, broker price opinions or internal estimates contain unobservable inputs. The impact was limited to disclosure.

Interest rate swap derivatives were transferred from a Level 1 to a Level 2 during the fourth quarter 2011 because the derivatives are not actively being traded on a listed exchange. The interest rate swap derivatives are valued based on quoted prices for similar assets in an active market with inputs that are observable and are now classified within Level 2 of the valuation hierarchy.

Fair Value Measurements Using Significant Unobservable Inputs

The tables below include a roll forward of the Consolidated Statements of Financial Condition amounts for the years ended December 31, 2011, 2010 and 2009 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy.

For the Year Ended December 31, 2011	Balance at Beginning of Year		Recorded in  Earnings					Recorded in OCI		Issuances		Purchases		Sales			Settlements			Balance at End of Year		Changes In Unrealized Held at End of Year(5)
			Total Unrealized Gains/ (Losses)			Total Realized Gains/ (Losses)		Total Unrealized Gains/ (Losses)
	(Dollars in thousands)
Assets
Securities classified as available-for-sale(1)(2)(3)
Non-agency collateralized mortgage obligations	$	467,488	$	(24,038	)	$	—	$	11,367	$	—	$	—	$	(89,561	)	$	—		$	365,256	$	11,367
Residential mortgage servicing rights		580,299		(169,498	)		—		—		—		254,818		(87,265	)		(67,879	)		510,475		—
Derivative financial instruments:
Rate lock commitments		14,396		53,669			177,926		—		—		318,230		(308,768	)		(184,488	)		70,965		—
Totals	$	1,062,183	$	(16,897	)	$	—	$	11,367	$	—	$	573,048	$	(580,521	)	$	(157,440	)	$	946,696	$	11,367
Liabilities
Litigation settlement	$	—	$	—		$	—	$	—	$	—	$	—	$	—		$	18,300		$	18,300	$	—
For the Year Ended December 31, 2010
Securities classified as trading:
Non-investment grade residual interests(4)	$	2,057	$	(2,057	)	$	—	$	—	$	—	$	—	$	—		$	—		$	—	$	—
Securities classified as available-for-sale(1)(2)(3)
Non-agency collateralized mortgage obligations		538,376		(4,991	)		—		33,869		—		—		—			(99,766	)		467,488		33,869
Residential mortgage servicing rights		649,133		(90,718	)		—		—		—		238,791		(136,789	)		(80,118	)		580,299		—
Derivative financial instruments:
Rate lock commitments		10,061		21,116			202,325		—		—		215,737		(283,211	)		(151,632	)		14,396		—
Totals	$	1,199,627	$	(76,650	)	$	202,325	$	33,869	$	—	$	454,528	$	(420,000	)	$	(331,516	)	$	1,062,183	$	33,869
For the Year Ended December 31, 2009
Securities classified as trading:
Non-investment grade residual interests(4)	$	24,808	$	(22,751	)	$	—	$	—	$	—	$	—	$	—		$	—		$	2,057	$	—
Securities classified as available-for-sale(1)(2)(3)
Non-agency collateralized mortgage obligations		563,083		(20,747	)		—		109,411		—		—		—			(113,371	)		538,376		109,411
Residential mortgage servicing rights		511,294		63,804			—		—		—		335,445		(134,853	)		(126,557	)		649,133		—
Derivative financial instruments:
Rate lock commitments		78,613		5,662			146,145		—		—		570,708		(467,257	)		(323,810	)		10,061		—
Totals	$	1,177,798	$	25,968		$	146,145	$	109,411	$	—	$	906,153	$	(602,110	)	$	(563,738	)	$	1,199,627	$	109,411

(1) Realized gains (losses), including unrealized losses deemed other-than-temporary and related to credit issues, are reported in non-interest income.

(2) U.S. government agency securities classified as available-for-sale are valued predominantly using quoted broker/dealer prices with adjustments to reflect for any assumptions a willing market participant would include in its valuation. Non-agency securities classified as available-for-sale are valued using internal valuation models and pricing information from third parties.

(3) Management had anticipated that the non-agency securities would be classified under Level 2 of the valuation hierarchy. However, due to illiquidity in the markets, the fair value of these securities will be determined using internal models and therefore is classified within Level 3 of the valuation hierarchy and pricing information from third parties.

(4) Residual interests are valued using internal inputs supplemented by independent third party inputs.

(5) Changes in the unrealized gains (losses) related to financial instruments held at the end of the year.

(6) There were no transfers into or out of Level 3 assets or liabilities.

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These include assets that are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below.

Assets Measured at Fair Value on a Nonrecurring Basis (1)

	Total		Level 1		Level 2(1)		Level 3
	(Dollars in thousands)
December 31, 2011
Impaired loans held-for-investment:(2)
Mortgage loans	$	210,040	$	—	$	—	$	210,040
Commercial real estate loans		180,306		—		—		180,306
Repossessed assets(3)		114,715		—		—		114,715
Totals	$	505,061	$	—	$	—	$	505,061
December 31, 2010
Impaired loans held-for-investment:(2)
Mortgage loans	$	32,025	$	—	$	—	$	32,025
Commercial real estate loans		218,091		—		—		218,091
Repossessed assets(3)		151,085		—		—		151,085
Totals	$	401,201	$	—	$	—	$	401,201

(1) As of December 31, 2011 the Company reclassified impaired loans and repossessed assets from Level 2 to Level 3 to reflect that many of the appraised values, price opinions or internal estimates contain unobservable inputs.

(2) The Company recorded $121.8 million and $81.6 million in fair value losses on impaired loans (included in “provision for loan losses” on the Consolidated Statements of Operations) during the years ended December 31, 2011 and 2010, respectively.

(3) The Company recorded $20.4 million and $73.4 million in losses related to write-downs of repossessed assets based on the estimated fair value of the specific assets, and recognized net loss of $(4.7) million and a net gain of $4.4 million on sales of repossessed assets during the years ended December 31, 2011 and 2010, respectively.

Fair Value of Financial Instruments

The accounting guidance for financial instruments requires disclosures of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate their fair values. Certain financial instruments and all non-financial instruments are excluded from the scope of this guidance. Accordingly, the fair value disclosures required by this guidance are only indicative of the value of individual financial instruments as of the dates indicated and should not be considered an indication of the fair value of the Company.

The following table presents the carrying amount and estimated fair value of certain financial instruments.

	December 31, 2011						December 31, 2010
	Carrying Value			Fair Value			Carrying Value			Fair Value
	(Dollars in thousands)
Financial Instruments:
Assets:
Cash and cash equivalents	$	731,058		$	731,058		$	953,534		$	953,534
Securities classified as trading		313,383			313,383			160,775			160,775
Securities classified as available-for-sale		481,352			481,352			475,225			475,225
Loans held-for-sale		1,800,885			1,823,421			2,585,200			2,513,239
Loans repurchased with government guarantees		1,899,267			1,899,267			1,674,752			1,674,752
Loans held-for-investment, net		6,720,587			6,748,914			6,031,483			5,976,623
Accrued interest receivable		105,200			105,200			83,893			83,893
Repossessed assets		114,715			114,715			151,085			151,085
FHLB stock		301,737			301,737			337,190			337,190
Mortgage servicing rights		510,475			510,475			580,299			580,299
Customer initiated derivative interest-rate swaps		3,296			3,296			—			—
Liabilities:
Retail deposits:
Demand deposits and savings accounts		(2,520,710	)		(2,440,208	)		(2,153,438	)		(2,075,898	)
Certificates of deposit		(2,972,258	)		(3,001,645	)		(3,230,972	)		(3,292,983	)
Government accounts		(711,097	)		(705,991	)		(663,976	)		(664,572	)
National certificates of deposit		(384,910	)		(394,442	)		(883,270	)		(906,699	)
Company controlled deposits		(1,101,013	)		(1,095,602	)		(1,066,443	)		(1,048,432	)
FHLB advances		(3,953,000	)		(4,195,163	)		(3,725,083	)		(3,901,385	)
Long-term debt		(248,585	)		(80,575	)		(248,610	)		(100,534	)
Accrued interest payable		(8,723	)		(8,723	)		(12,965	)		(12,965	)
Warrant liabilities		(2,411	)		(2,411	)		(9,300	)		(9,300	)
Litigation settlement		(18,300	)		(18,300	)		—			—
Customer initiated derivative interest-rate swaps		(3,296	)		(3,296	)		—			—
Derivative Financial Instruments:
Forward delivery contracts		(42,978	)		(42,978	)		35,820			35,820
Commitments to extend credit		70,965			70,965			14,396			14,396
U.S. Treasury and agency futures/forwards		12,678			12,678			(9,088	)		(9,088	)

The methods and assumptions were used by the Company in estimating fair value of financial instruments that were not previously disclosed.

Cash and cash equivalents.  Due to their short term nature, the carrying amount of cash and cash equivalents approximates fair value.

Loans repurchased with government guarantees.  The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

Loans held-for-investment.  The fair value of loans is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.

FHLB stock.  No secondary market exists for FHLB stock. The stock is bought and sold at par by the FHLB. Management believes that the recorded value is the fair value.

Accrued interest receivable.  The carrying amount is considered a reasonable estimate of fair value.

Deposit accounts.  The fair value of demand deposits and savings accounts approximates the carrying amount. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposits with similar remaining maturities.

FHLB advances.  Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.

Long-term debt.  The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates the Company’s current borrowing rates for similar types of borrowing arrangements.

Accrued interest payable.  The carrying amount is considered a reasonable estimate of fair value.

Fair Value Option

The Company has elected, under the fair value option in ASC 825: Financial Instruments, to record at fair value certain financial assets and financial liabilities. The fair value election is typically made on an instrument by instrument basis. The decision to measure a financial instrument at fair value cannot be revoked once the election is made. Upon adoption of SFAS 159: The Fair Value Option for Financial Assets and Financial Liabilities, the Company made a policy decision to elect the fair value option for held-for-sale loans originated post 2009.

The Company has elected the fair value option to account for the liability representing the obligation to make Additional Payments under the DOJ Agreement. The signed settlement contract with the DOJ establishes a legally enforceable contract with a stipulated payment plan that meets the definition of a financial liability. The Company is making the fair value election as of December 31, 2011, the date the Company first recognized the financial instrument in its financial statements.

The Company elected the fair value option for held-for-sale loans and the litigation settlement liability to better reflect the management of these financial instruments on a fair value basis. Interest income on loans held-for-sale is accrued on the principal outstanding primarily using the “simple-interest” method. Interest expense on the litigation settlement will be included in the overall change in fair value of the liability each quarter.

At December 31, 2011 and 2010 the balance of the fair value of the loans held-for-sale were $1.6 billion and $2.3 billion, respectively. For the years ended December 31, 2011 and 2010, the fair value of held-for-sale loans at fair value decreased $714.0 million and $406.5 million, respectively. The change in fair value included in earnings was $356.3 million, $340.8 million and $530.7 million, respectively, for the years ended December 31, 2011, 2010 and 2009. Changes in fair value of the loans held-for-sale are recorded in net gain on loan sales on the Company’s Consolidated Statements of Operations.

At December 31, 2011 and 2010 the balance of the fair value of the loans held-for-investment were $22.7 million and $19.0 million, respectively. For the years ended December 31, 2011 and 2010, the fair value of held-for-investment loans at fair value increased $3.6 million and $7.7 million, respectively. The change in fair value included in earnings was $0.7 million, $0.2 million and $(0.9) million, respectively, for the years ended December 31, 2011, 2010 and 2009. Changes in fair value of the loans held-for-investment are reflected in interest income on loans on the Company’s Consolidated Statements of Operations.

At December 31, 2011, the fair value of financial liabilities, which related to the Company’s litigation settlement with the U.S. Department of Justice was $18.3 million, included in other liabilities in the Consolidated Statements of Financial Condition. The increase of $18.3 million included in earnings for the year ended December 31, 2011, and the changes in fair value of the litigation settlement are recorded within general and administrative expense within non-interest expense on the Consolidated Statements of Operations.

The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding as of December 31, 2011, 2010 and 2009 for loans for which the fair value option has been elected.

	For the Years Ended
	December 31, 2011							December 31, 2010							December 31, 2009
	(Dollars in thousands)
	Unpaid Principal Balance		Fair Value		Fair Value Over/ (Under) UPB			Unpaid Principal Balance		Fair Value		Fair Value Over/ (Under) UPB			Unpaid Principal Balance		Fair Value		Fair Value Over/ (Under) UPB
Assets
Nonaccrual loans:
Loans held-for-sale	$	281	$	291	$	10		$	—	$	—	$	—		$	—	$	—	$	—
Loans held-for-investment		2,989		2,963		(26	)		2,968		2,980		(12	)		2,529		2,491		(38	)
Total loans	$	3,270	$	3,254	$	(16	)	$	2,968	$	2,980	$	(12	)	$	2,529	$	2,491	$	(38	)
Other performing loans:
Loans held-for-sale	$	1,570,302	$	1,629,327	$	59,026		$	2,341,494	$	2,343,638	$	2,144		$	1,900,153	$	1,937,171	$	37,018
Loans held-for-investment		18,699		19,688		989			16,047		16,031		16			9,289		8,796		(502	)
Total loans	$	1,589,001	$	1,649,015	$	60,015		$	2,357,541	$	2,359,669	$	2,160		$	1,909,451	$	1,945,967	$	36,516