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Fair Value
 6 Months Ended
Jun. 30, 2015
Fair Value Disclosures [Abstract]  
Fair Value
Fair Value
Basis or Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — Valuation is based on unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 — Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 — Valuation is based on inputs that are both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure financial instruments at fair value and report the changes in fair value through net income or loss. This election can only be made at certain specified dates and is irrevocable once made. Other than mortgage loans held for sale, all of which the Company has elected to measure at fair value, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as assets and liabilities are acquired or incurred, other than for those assets and liabilities that are required to be recorded and subsequently measured at fair value.
Transfers into and out of the fair value hierarchy levels are assumed to be as of the end of the quarter in which the transfer occurred. There were no transfers between levels during the three and six months ended June 30, 2015 and 2014.
Items Measured at Fair Value on a Recurring Basis
The following table summarizes the assets and liabilities in each level of the fair value hierarchy (in thousands). There were no assets or liabilities measured at fair value on a recurring basis utilizing Level 1 assumptions.
 
 
June 30, 
 2015
 
December 31, 
 2014
Level 2
 
 
 
 
Assets
 
 
 
 
Mortgage loans held for sale
 
$
1,579,171

 
$
1,124,615

Freestanding derivative instruments
 
28,507

 
7,751

Level 2 assets
 
$
1,607,678

 
$
1,132,366

Liabilities
 
 
 
 
Freestanding derivative instruments
 
$
8,962

 
$
29,761

Level 2 liabilities
 
$
8,962

 
$
29,761

 
 
 
 
 
Level 3
 
 
 
 
Assets
 
 
 
 
Reverse loans
 
$
10,736,098

 
$
10,064,365

Mortgage loans related to Non-Residual Trusts
 
553,410

 
586,433

Charged-off loans
 
53,624

 
57,217

Receivables related to Non-Residual Trusts
 
20,800

 
25,201

Servicing rights carried at fair value
 
1,797,721

 
1,599,541

Freestanding derivative instruments (IRLCs)
 
50,750

 
60,400

Level 3 assets
 
$
13,212,403

 
$
12,393,157

Liabilities
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
4,791

 
$
263

Excess servicing spread liability
 
64,556

 
66,311

Mortgage-backed debt related to Non-Residual Trusts
 
616,794

 
653,167

HMBS related obligations
 
10,588,671

 
9,951,895

Level 3 liabilities
 
$
11,274,812

 
$
10,671,636

The following assets and liabilities are measured on the consolidated financial statements at fair value on a recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation. The following tables provide a reconciliation of the beginning and ending balances of these assets and liabilities (in thousands):
 
 
For the Three Months Ended June 30, 2015
 
 
Fair Value
April 1, 2015
 
Total
Gains (Losses)
Included in
Comprehensive Income
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value June 30, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
10,429,893

 
$
69,178

 
$
270,484

 
$
—

 
$
223,825

 
$
(257,282
)
 
$
10,736,098

Mortgage loans related to Non-Residual Trusts
 
567,912

 
12,000

 
—

 
—

 
—

 
(26,502
)
 
553,410

Charged-off loans (1)
 
50,845

 
15,707

 
—

 
—

 
—

 
(12,928
)
 
53,624

Receivables related to Non-Residual Trusts
 
22,935

 
(302
)
 
—

 
—

 
—

 
(1,833
)
 
20,800

Servicing rights carried at fair value
 
1,570,320

 
1,141

 
139,449

 
—

 
86,811

 
—

 
1,797,721

Freestanding derivative instruments (IRLCs)
 
84,925

 
(34,053
)
 
—

 
—

 
—

 
(122
)
 
50,750

Total assets
 
$
12,726,830

 
$
63,671

 
$
409,933

 
$
—

 
$
310,636

 
$
(298,667
)
 
$
13,212,403

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(204
)
 
$
(4,587
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(4,791
)
Excess servicing spread liability
 
(63,349
)
 
(5,694
)
 
—

 
—

 
—

 
4,487

 
(64,556
)
Mortgage-backed debt related to Non-Residual Trusts
 
(635,239
)
 
(8,274
)
 
—

 
—

 
—

 
26,719

 
(616,794
)
HMBS related obligations
 
(10,304,384
)
 
(62,363
)
 
—

 
—

 
(493,785
)
 
271,861

 
(10,588,671
)
Total liabilities
 
$
(11,003,176
)
 
$
(80,918
)
 
$
—

 
$
—

 
$
(493,785
)
 
$
303,067

 
$
(11,274,812
)
__________
(1)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $8.7 million during the three months ended June 30, 2015.

 
 
For the Six Months Ended June 30, 2015
 
 
Fair Value
January 1,
2015
 
Total
Gains (Losses)
Included in
Comprehensive Loss
 
Purchases
 
Sales
 
Originations / Issuances
 
Settlements
 
Fair Value June 30, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
10,064,365

 
$
192,087

 
$
509,859

 
$
(16,592
)
 
$
413,335

 
$
(426,956
)
 
$
10,736,098

Mortgage loans related to Non-Residual Trusts
 
586,433

 
20,164

 
—

 
—

 
—

 
(53,187
)
 
553,410

Charged-off loans (2)
 
57,217

 
21,691

 
—

 
—

 
—

 
(25,284
)
 
53,624

Receivables related to Non-Residual Trusts
 
25,201

 
(548
)
 
—

 
—

 
—

 
(3,853
)
 
20,800

Servicing rights carried at fair value
 
1,599,541

 
(128,094
)
 
167,162

 
—

 
159,112

 
—

 
1,797,721

Freestanding derivative instruments (IRLCs)
 
60,400

 
(9,330
)
 
—

 
—

 
—

 
(320
)
 
50,750

Total assets
 
$
12,393,157

 
$
95,970

 
$
677,021

 
$
(16,592
)
 
$
572,447

 
$
(509,600
)
 
$
13,212,403

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(263
)
 
$
(4,528
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
(4,791
)
Excess servicing spread liability
 
(66,311
)
 
(7,512
)
 
—

 
—

 
—

 
9,267

 
(64,556
)
Mortgage-backed debt related to Non-Residual Trusts
 
(653,167
)
 
(16,830
)
 
—

 
—

 
—

 
53,203

 
(616,794
)
HMBS related obligations
 
(9,951,895
)
 
(154,596
)
 


 
—

 
(951,233
)
 
469,053

 
(10,588,671
)
Total liabilities
 
$
(10,671,636
)
 
$
(183,466
)
 
$
—

 
$
—

 
$
(951,233
)
 
$
531,523

 
$
(11,274,812
)
__________
(1)
During the six months ended June 30, 2015, the Company sold $16.6 million in reverse loans and recognized $0.1 million in net losses on sales of loans.
(2)
Included in gains on charged-off loans are gains from instrument-specific credit risk, which primarily result from changes in assumptions related to collection rates and discount rates, of $8.7 million during the six months ended June 30, 2015.

 
 
For the Three Months Ended June 30, 2014
 
 
Fair Value
April 1, 2014
 
Total
Gains (Losses)
Included in
Comprehensive
Loss
 
Purchases
 
Originations / Issuances
 
Settlements
 
Fair Value
June 30, 2014
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
9,149,579

 
$
89,571

 
$
244,444

 
$
148,569

 
$
(150,133
)
 
$
9,482,030

Mortgage loans related to Non-Residual Trusts
 
569,097

 
16,871

 
—

 
—

 
(28,182
)
 
557,786

Charged-off loans
 
—

 
1,461

 
57,052

 
—

 
(3,516
)
 
54,997

Receivables related to Non-Residual Trusts
 
39,328

 
(681
)
 
—

 
—

 
(2,466
)
 
36,181

Servicing rights carried at fair value
 
1,513,830

 
(83,552
)
 
20,241

 
45,554

 
—

 
1,496,073

Freestanding derivative instruments (IRLCs)
 
38,190

 
37,336

 
—

 
—

 
—

 
75,526

Total assets
 
$
11,310,024

 
$
61,006

 
$
321,737

 
$
194,123

 
$
(184,297
)
 
$
11,702,593

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(720
)
 
$
633

 
$
—

 
$
—

 
$
—

 
$
(87
)
Mortgage-backed debt related to Non-Residual Trusts
 
(667,536
)
 
(13,579
)
 
—

 
—

 
29,331

 
(651,784
)
HMBS related obligations
 
(9,166,998
)
 
(62,635
)
 
—

 
(394,385
)
 
151,352

 
(9,472,666
)
Total liabilities
 
$
(9,835,254
)
 
$
(75,581
)
 
$
—

 
$
(394,385
)
 
$
180,683

 
$
(10,124,537
)
 
 
For the Six Months Ended June 30, 2014
 
 
Fair Value
January 1,
2014
 
Acquisition
of EverBank
Net Assets
 
Total
Gains (Losses)
Included in
Comprehensive
Income
 
Purchases
 
Originations / Issuances
 
Settlements
 
Fair Value
June 30, 2014
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
$
8,738,503

 
$
—

 
$
294,980

 
$
438,120

 
$
278,032

 
$
(267,605
)
 
$
9,482,030

Mortgage loans related to Non-Residual Trusts
 
587,265

 
—

 
27,654

 
—

 
—

 
(57,133
)
 
557,786

Charged-off loans
 
—

 
—

 
1,461

 
57,052

 
—

 
(3,516
)
 
54,997

Receivables related to Non-Residual Trusts
 
43,545

 
—

 
(1,668
)
 
—

 
—

 
(5,696
)
 
36,181

Servicing rights carried at fair value
 
1,131,124

 
58,680

 
(131,186
)
 
339,288

 
98,167

 
—

 
1,496,073

Freestanding derivative instruments (IRLCs)
 
42,831

 
—

 
32,695

 
—

 
—

 
—

 
75,526

Total assets
 
$
10,543,268

 
$
58,680

 
$
223,936

 
$
834,460

 
$
376,199

 
$
(333,950
)
 
$
11,702,593

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freestanding derivative instruments (IRLCs)
 
$
(3,755
)
 
$
—

 
$
3,668

 
$
—

 
$
—

 
$
—

 
$
(87
)
Mortgage-backed debt related to Non-Residual Trusts
 
(684,778
)
 
—

 
(25,414
)
 
—

 
—

 
58,408

 
(651,784
)
HMBS related obligations
 
(8,652,746
)
 
—

 
(250,808
)
 
—

 
(839,431
)
 
270,319

 
(9,472,666
)
Total liabilities
 
$
(9,341,279
)
 
$
—

 
$
(272,554
)
 
$
—

 
$
(839,431
)
 
$
328,727

 
$
(10,124,537
)
All gains and losses on assets and liabilities measured at fair value on a recurring basis and classified as Level 3 within the fair value hierarchy, with the exception of gains and losses on charged-off loans, IRLCs, servicing rights carried at fair value, and the excess servicing spread liability, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations on the consolidated statements of comprehensive income (loss). Gains and losses related to charged-off loans are recorded in other revenues while gains and losses relating to IRLCs are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss). The change in fair value of servicing rights carried at fair value and the excess servicing spread liability are recorded in net servicing revenue and fees on the consolidated statements of comprehensive income (loss). Total gains and losses included in the financial statement line items disclosed above include interest income and interest expense at the stated rate for interest-bearing assets and liabilities, respectively, accretion and amortization, and the impact of the changes in valuation inputs and assumptions.
The Company’s valuation committee determines and approves valuation policies and unobservable inputs used to estimate the fair value of items measured at fair value on a recurring basis. The valuation committee, consisting of certain members of the senior executive management team, meets on a quarterly basis to review the assets and liabilities that require fair value measurement, including how each asset and liability has actually performed in comparison to the unobservable inputs and the projected performance provided by the Company’s credit risk group. The valuation committee also reviews discount rate assumptions and related available market data.
The following is a description of the methods used to estimate the fair values of the Company’s assets and liabilities measured at fair value on a recurring basis, as well as the basis for classifying these assets and liabilities as Level 2 or 3 within the fair value hierarchy. The Company’s valuations consider assumptions that it believes a market participant would consider in valuing the assets and liabilities, the most significant of which are disclosed below. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuations for recent historical experience, as well as for current and expected relevant market conditions.
Residential loans
•
Reverse loans, mortgage loans related to Non-Residual Trusts and charged-off loans - These loans are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the loans. The discount rate assumption for these assets considers, as applicable, collateral and credit risk characteristics of the loans, collection rates, current market interest rates, expected duration, and current market yields.

•
Mortgage loans held for sale — These loans are valued using a market approach by utilizing observable quoted market prices, where available, or prices for other whole loans with similar characteristics. The Company classifies these loans as Level 2 within the fair value hierarchy.
Receivables related to Non-Residual Trusts — The Company estimates the fair value of these receivables using the net present value of expected cash flows from the LOCs to be used to pay debt holders over the remaining life of the securitization trusts and applies Level 3 unobservable market inputs in its valuation. Receivables related to Non-Residual Trusts are recorded in receivables, net, on the consolidated balance sheets.
Servicing rights carried at fair value — The Company accounts for servicing rights associated with the risk-managed loan class at fair value. The Company uses a discounted cash flow model to estimate the fair value of these assets. The assumptions utilized are based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies servicing rights within Level 3 of the fair value hierarchy.

Freestanding derivative instruments — Fair values of IRLCs are derived using valuation models incorporating market pricing for instruments with similar characteristics and by estimating the fair value of the servicing rights expected to be recorded at sale of the loan and are adjusted for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and, as a result, IRLCs are classified as Level 3 within the fair value hierarchy. The loan funding probability ratio represents the aggregate likelihood that loans currently in a lock position will ultimately close, which is largely dependent on the loan processing stage that a loan is currently in and changes in interest rates from the time of the rate lock through the time a loan is closed. IRLCs have positive fair value at inception and change in value as interest rates and loan funding probability change. Rising interest rates have a positive effect on the fair value of the servicing rights component of the IRLC fair value and increase the loan funding probability. An increase in loan funding probability (i.e., higher aggregate likelihood of loans estimated to close) will result in the fair value of the IRLC increasing if in a gain position, or decreasing, to a lower loss, if in a loss position. A significant increase (decrease) to the fair value of servicing rights component in isolation could result in a significantly higher (lower) fair value measurement.
The fair value of forward sales commitments and MBS purchase commitments is determined based on observed market pricing for similar instruments; therefore, these contracts are classified as Level 2 within the fair value hierarchy. Counterparty credit risk is taken into account when determining fair value, although the impact is diminished by daily margin posting on all forward sales and purchase commitments. Refer to Note 6 for additional information on freestanding derivative financial instruments.
Excess servicing spread liability — The Company uses a discounted cash flow model to estimate the fair value of this liability. The assumptions utilized are based on collateral stratifications including product type, remittance type, geography, delinquency, and coupon dispersion of the underlying loan portfolio. The Company classifies its excess servicing spread liability as Level 3 within the fair value hierarchy.
Mortgage-backed debt related to Non-Residual Trusts — This debt is not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value of the debt is based on the net present value of the projected principal and interest payments owed for the remaining life of the securitization trusts. An analysis of the credit assumptions for the underlying collateral in each of the securitization trusts is performed to determine the required payments to debt holders.
HMBS related obligations — These obligations are not traded in an active, open market with readily observable prices. Accordingly, the Company estimates fair value using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The discount rate assumption for these liabilities is based on an assessment of current market yields for HMBS, expected duration, and current market interest rates. The yield on seasoned HMBS is adjusted based on the duration of each HMBS and assuming a constant spread to LIBOR.
The following tables present the significant unobservable inputs used in the fair value measurement of the assets and liabilities described above. The Company utilizes a discounted cash flow model to estimate the fair value of all Level 3 assets and liabilities included on the consolidated financial statements at fair value on a recurring basis, with the exception of IRLCs for which the Company utilizes a market approach.
With the exception of IRLCs and collection rates associated with charged-off loans, significant increases (decreases) in any of the inputs related to assets disclosed below, in isolation, could result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in any of the inputs related to liabilities, other than IRLCs, and collection rates on charged-off loans, as disclosed below, in isolation, could result in a significantly higher (lower) fair value measurement. The impact on fair value for increases and decreases to significant unobservable inputs related to IRLCs is discussed above.
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Significant
Unobservable Input (1) (2)
 
Range of Input (3)
 
Weighted
Average of Input (3)
 
Range of Input (3)
 
Weighted
Average of Input (3)
Assets
 
 
 
 
 
 
 
 
 
 
Reverse loans
 
Weighted-average remaining life in years
 
1.5 - 10.0
 
4.4

 
1.8 - 12.3
 
4.7

 
 
Conditional repayment rate
 
14.09% - 45.38%
 
23.86
%
 
13.40% - 42.20%
 
21.68
%
 
 
Discount rate
 
1.86% - 4.93%
 
2.61
%
 
2.00% - 3.65%
 
2.76
%
Mortgage loans related to Non-Residual Trusts
 
Conditional prepayment rate
 
2.36% - 3.98%
 
3.07
%
 
2.24% - 3.76%
 
3.17
%
 
 
Conditional default rate
 
1.31% - 3.20%
 
2.24
%
 
1.68% - 3.51%
 
2.34
%
 
 
Loss severity
 
68.43% - 94.22%
 
87.54
%
 
76.12% - 92.53%
 
85.88
%
 
 
Discount rate
 
8.00%
 
8.00
%
 
8.00%
 
8.00
%
Charged-off loans
 
Collection rate
 
2.30% - 3.47%
 
2.37
%
 
2.34% - 4.53%
 
2.46
%
 
 
Discount rate
 
30.00% - 32.25%
 
30.18
%
 
30.00% - 32.25%
 
30.19
%
Receivables related to Non-Residual Trusts
 
Conditional prepayment rate
 
1.93% - 3.44%
 
2.54
%
 
1.89% - 3.33%
 
2.72
%
 
 
Conditional default rate
 
1.37% - 3.46%
 
2.43
%
 
1.92% - 3.81%
 
2.55
%
 
 
Loss severity
 
65.66% - 90.85%
 
84.25
%
 
73.26% - 89.78%
 
82.87
%
 
 
Discount rate
 
0.50%
 
0.50
%
 
0.50%
 
0.50
%
Servicing rights carried at fair value
 
Weighted-average remaining life in years
 
5.5 - 9.5
 
6.3

 
5.6 - 9.3
 
6.6

 
 
Discount rate
 
9.32% - 14.33%
 
10.60
%
 
8.24% - 29.16%
 
9.55
%
 
 
Conditional prepayment rate
 
5.66% - 12.02%
 
9.73
%
 
5.04% - 11.15%
 
7.87
%
 
 
Conditional default rate
 
0.05% - 2.16%
 
1.05
%
 
0.28% - 3.53%
 
2.36
%
Interest rate lock commitments
 
Loan funding probability
 
2.34% - 100.00%
 
75.07
%
 
3.44% - 100.00%
 
77.45
%
 
 
Fair value of initial servicing rights multiple (4) 
 
0.01 - 7.64
 
3.78

 
0.20 - 5.47
 
3.83

 
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Significant
Unobservable Input (1) (2)
 
Range of Input (3)
 
Weighted
Average of Input (3)
 
Range of Input (3)
 
Weighted
Average of Input (3)
Liabilities
 
 
 
 
 
 
 
 
 
 
Interest rate lock commitments
 
Loan funding probability
 
2.34% - 100.00%
 
81.58
%
 
28.00% - 100.00%
 
80.90
%
 
 
Fair value of initial servicing rights multiple (4)
 
0.01 - 8.04
 
4.27

 
0.67 - 5.47
 
4.06

Excess servicing spread liability
 
Weighted-average remaining life in years
 
6.7 - 7.1
 
6.9

 
7.2 - 7.4
 
7.3

 
 
Discount rate
 
13.85%
 
13.85
%
 
13.60%
 
13.60
%
 
 
Conditional prepayment rate
 
8.61% - 10.73%
 
9.53
%
 
7.71% - 7.89%
 
7.79
%
 
 
Conditional default rate
 
0.22% - 0.65%
 
0.39
%
 
0.86% - 2.31%
 
1.51
%
Mortgage-backed debt related to Non-Residual Trusts
 
Conditional prepayment rate
 
1.93% - 3.44%
 
2.54
%
 
1.89% - 3.33%
 
2.72
%
 
 
Conditional default rate
 
1.37% - 3.46%
 
2.43
%
 
1.92% - 3.81%
 
2.55
%
 
 
Loss severity
 
65.66% - 90.85%
 
84.25
%
 
73.26% - 89.78%
 
82.87
%
 
 
Discount rate
 
6.00%
 
6.00
%
 
6.00%
 
6.00
%
HMBS related obligations
 
Weighted-average remaining life in years
 
0.5 - 6.7
 
3.7

 
1.3 - 7.7
 
3.9

 
 
Conditional repayment rate
 
12.29% - 51.65%
 
22.95
%
 
11.30% - 48.65%
 
21.21
%
 
 
Discount rate
 
1.26% - 2.91%
 
2.07
%
 
1.44% - 3.06%
 
2.36
%
__________
(1)
Conditional repayment rate includes assumptions for both voluntary and involuntary rates as well as assumptions for the assignment of HECMs to HUD, in accordance with obligations as servicer.
(2)
Voluntary and involuntary prepayment rates have been presented as conditional prepayment rate and conditional default rate, respectively.
(3)
With the exception of loss severity, fair value of initial servicing rights embedded in IRLCs and discount rate on charged-off loans, all significant unobservable inputs above are based on the related unpaid principal balance of the underlying collateral, or in the case of HMBS related obligations, the balance outstanding. Loss severity is based on projected liquidations. Fair value of servicing rights embedded in IRLCs represents a multiple of the annual servicing fee. The discount rate on charged-off loans is based on the loan balance at fair value.
(4)
Fair value of servicing rights embedded in IRLCs, which represents a multiple of the annual servicing fee, excludes the impact of IRLCs identified as servicing released.
Fair Value Option
The Company has elected the fair value option for mortgage loans, receivables and mortgage-backed debt related to the Non-Residual Trusts; reverse loans; mortgage loans held for sale; charged-off loans; servicing rights associated with the risk managed loan class; excess servicing spread liability; and HMBS related obligations. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects their expected future economic performance.
Presented in the table below is the estimated fair value and unpaid principal balance of loans and debt instruments that have contractual principal amounts and for which the Company has elected the fair value option (in thousands):
 
 
June 30, 2015
 
December 31, 2014
 
 
Estimated
Fair Value
 
Unpaid Principal
Balance
 
Estimated
Fair Value
 
Unpaid Principal
Balance
Loans at fair value under the fair value option
 
 
 
 
 
 
 
 
Reverse loans (1)
 
$
10,736,098

 
$
9,976,945

 
$
10,064,365

 
$
9,340,270

Mortgage loans held for sale (1)
 
1,579,171

 
1,530,888

 
1,124,615

 
1,071,787

Mortgage loans related to Non-Residual Trusts
 
553,410

 
613,734

 
586,433

 
650,382

Charged-off loans
 
53,624

 
3,092,207

 
57,217

 
3,366,504

Total
 
$
12,922,303

 
$
15,213,774

 
$
11,832,630

 
$
14,428,943


 
 
 
 
 
 
 
 
Debt instruments at fair value under the fair value option
 
 
 
 
 
 
 
 
Mortgage-backed debt related to Non-Residual Trusts
 
$
616,794

 
$
620,399

 
$
653,167

 
$
657,174

HMBS related obligations (2)
 
10,588,671

 
9,758,457

 
9,951,895

 
9,172,083

Total
 
$
11,205,465

 
$
10,378,856

 
$
10,605,062

 
$
9,829,257

__________
(1)
Includes loans that collateralize master repurchase agreements. Refer to Note 13 for additional information.
(2)
For HMBS related obligations, the unpaid principal balance represents the balance outstanding.
Included in mortgage loans related to Non-Residual Trusts are loans that are 90 days or more past due that had a fair value of $1.9 million and $2.0 million at June 30, 2015 and December 31, 2014, and an unpaid principal balance of $10.3 million and $10.2 million, at June 30, 2015 and December 31, 2014, respectively. There are no mortgage loans held for sale that are 90 days or more past due at June 30, 2015 and December 31, 2014. All charged-off loans are 90 days or more past due.
Items Measured at Fair Value on a Non-Recurring Basis
The Company held real estate owned, net of $74.0 million and $88.4 million at June 30, 2015 and December 31, 2014, respectively. In addition, the Company had mortgage loans that were in the process of foreclosure of $160.2 million at June 30, 2015, which are included in residential loans at amortized cost, net and residential loans at fair value on the consolidated balance sheet. Real estate owned, net is included on the consolidated financial statements within other assets and is measured at net realizable value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation.
The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net:
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Significant
Unobservable Input
 
Range of Input
 
Weighted
Average of Input
 
Range of Input
 
Weighted
Average of Input
Real estate owned, net
 
Loss severity (1)
 
0.00% - 70.52%
 
9.15
%
 
0.00% - 59.58%
 
8.04
%

__________
(1)
Loss severity is based on unpaid principal balance related loan at time of foreclosure.
The Company held real estate owned, net of $61.7 million, $11.6 million and $0.7 million in the Reverse Mortgage and Servicing segments and Other non-reportable segment, respectively, at June 30, 2015. The Company held real estate owned, net of $55.3 million, $32.1 million and $1.0 million in the Reverse Mortgage and Servicing segments and Other non-reportable segment, respectively, at December 31, 2014. In determining fair value, the Company either obtains appraisals or performs a review of historical severity rates of real estate owned previously sold by the Company. When utilizing historical severity rates, the properties are stratified by collateral type and/or geographical concentration and length of time held by the Company. The severity rates are reviewed for reasonableness by comparison to third-party market trends and fair value is determined by applying severity rates to the stratified population. In the determination of fair value, the Company considers amounts typically covered by FHA insurance in the case of real estate owned associated with reverse mortgages. Management approves valuations that have been determined using the historical severity rate method.
Fair Value of Other Financial Instruments
The following table presents the carrying amounts and estimated fair values of financial assets and liabilities that are not recorded at fair value on a recurring or non-recurring basis and their respective levels within the fair value hierarchy (in thousands). This table excludes cash and cash equivalents, restricted cash and cash equivalents, servicer payables and warehouse borrowings as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value.
 
 
 
 
June 30, 2015
 
December 31, 2014
 
 
Fair Value
Hierarchy
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets
 
 
 
 
 
 
 
 
 
 
Residential loans at amortized cost, net
 
Level 3
 
$
542,892

 
$
557,788

 
$
1,314,539

 
$
1,377,213

Insurance premium receivables
 
Level 3
 
94,136

 
89,658

 
98,220

 
93,395

Servicer and protective advances, net
 
Level 3
 
1,550,592

 
1,492,812

 
1,761,082

 
1,691,443

 
 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
 
Payables to insurance carriers
 
Level 3
 
74,832

 
73,932

 
69,498

 
68,673

Servicing advance liabilities (1)
 
Level 3
 
1,243,280

 
1,245,318

 
1,362,017

 
1,367,519

Corporate debt (1)
 
Level 2
 
2,231,394

 
2,155,276

 
2,230,557

 
2,095,286

Mortgage-backed debt carried at amortized cost (1)
 
Level 3
 
488,774

 
495,866

 
1,086,660

 
1,121,369

__________
(1)
The carrying amounts of servicing advance liabilities, corporate debt and mortgage-backed debt carried at amortized cost are net of deferred issuance costs.
The following is a description of the methods and significant assumptions used in estimating the fair value of the Company’s financial instruments that are not measured at fair value on a recurring or non-recurring basis.
Residential loans at amortized cost, net — The methods and assumptions used to estimate the fair value of residential loans carried at amortized cost are the same as those described for mortgage loans related to Non-Residual Trusts carried at fair value on a recurring basis.
Insurance premium receivables — The estimated fair value of these receivables is based on the net present value of the expected cash flows. The determination of fair value includes assumptions related to the underlying collateral serviced by the Company, such as delinquency and default rates, as the insurance premiums are collected as part of the borrowers’ loan payments or from the related trusts.
Servicer and protective advances, net — The estimated fair value of these advances is based on the net present value of expected cash flows. The determination of expected cash flows includes consideration of recoverability clauses in the Company’s servicing agreements, as well as assumptions related to the underlying collateral and when proceeds may be used to recover these receivables.
Payables to insurance carriers — The estimated fair value of these liabilities is based on the net present value of the expected carrier payments over the life of the payables.
Servicing advance liabilities — The estimated fair value of the majority of these liabilities approximates carrying value as these liabilities bear interest at a rate that is adjusted regularly based on a market index.
Corporate debt — The Company’s 2013 Term Loan, Convertible Notes, and Senior Notes are not traded in an active, open market with readily observable prices. The estimated fair value of corporate debt is based on an average of broker quotes.
Mortgage-backed debt carried at amortized cost — The methods and assumptions used to estimate the fair value of mortgage-backed debt carried at amortized cost are the same as those described for mortgage-backed debt related to Non-Residual Trusts carried at fair value on a recurring basis.
Net Gains on Sales of Loans
Provided in the table below is a summary of the components of net gains on sales of loans (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Realized gains on sales of loans
 
$
18,696

 
$
102,517

 
$
80,075

 
$
189,350

Change in unrealized gains (losses) on loans held for sale
 
(15,649
)
 
23,353

 
(14,260
)
 
19,177

Gains (losses) on interest rate lock commitments
 
(38,640
)
 
37,969

 
(13,858
)
 
36,363

Gains (losses) on forward sales commitments
 
71,935

 
(63,956
)
 
33,287

 
(99,812
)
Losses on MBS purchase commitments
 
(13,107
)
 
(7,709
)
 
(18,786
)
 
(7,642
)
Capitalized servicing rights
 
86,811

 
45,554

 
159,112

 
98,167

Provision for repurchases
 
(4,532
)
 
(1,838
)
 
(6,557
)
 
(4,024
)
Interest income
 
13,885

 
8,721

 
25,613

 
17,066

Net gains on sales of loans
 
$
119,399

 
$
144,611

 
$
244,626

 
$
248,645


Net Fair Value Gains on Reverse Loans and Related HMBS Obligations
Provided in the table below is a summary of the components of net fair value gains on reverse loans and related HMBS obligations (in thousands):
 
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
 
2015
 
2014
 
2015
 
2014
Interest income on reverse loans
 
$
109,406

 
$
98,258

 
$
215,686

 
$
195,139

Change in fair value of reverse loans
 
(40,228
)
 
(8,687
)
 
(23,501
)
 
99,841

Net fair value gains on reverse loans
 
69,178

 
89,571

 
192,185

 
294,980

 
 
 
 
 
 
 
 
 
Interest expense on HMBS related obligations
 
(100,564
)
 
(91,470
)
 
(199,100
)
 
(182,030
)
Change in fair value of HMBS related obligations
 
38,201

 
28,835

 
44,504

 
(68,778
)
Net fair value losses on HMBS related obligations
 
(62,363
)
 
(62,635
)
 
(154,596
)
 
(250,808
)
Net fair value gains on reverse loans and related HMBS obligations
 
$
6,815

 
$
26,936

 
$
37,589

 
$
44,172