6. Fair Value

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:

Basis or Measurement

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 — Prices or valuations that require 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. The Company has elected to measure all reverse mortgage assets and liabilities and residential loans held for sale as well as servicing rights related to the risk-managed loan class at fair value. For all other assets and liabilities, the Company does not have a fair value election policy, but rather makes the election on an instrument-by-instrument basis as they are acquired or incurred. The Company elected to measure at fair value residential loans, receivables and mortgage-backed debt associated with the Non-Residual Trusts. In addition, with the acquisitions of Green Tree and S1L, the Company recognized contingent liabilities for a mandatory repurchase obligation, a professional fees liability related to certain securitizations, and contingent earn-out payments that it measures at fair value on a recurring basis in accordance with the accounting guidance for business combinations.

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 into or out of Level 3, and there were no transfers between Level 1 and Level 2, during the three and six months ended June 30, 2013 and 2012.

Items Measured at Fair Value on a Recurring Basis

The following tables summarize the assets and liabilities in each level of the fair value hierarchy (in thousands):


	Recurring Fair Value Measurements at June 30, 2013
	Level 1		Level 2		Level 3		Total
Assets
Reverse loans	$	—	$	—	$	7,906,635	$	7,906,635
Residential loans related to Non-Residual Trusts		—		—		613,627		613,627
Forward loans held for sale		—		1,664,215		—		1,664,215
Receivables related to Non-Residual Trusts		—		—		50,890		50,890
Servicing rights carried at fair value		—		—		880,950		880,950
Derivative instruments		—		167,703		61,680		229,383

Total assets	$	—	$	1,831,918	$	9,513,782	$	11,345,700

Liabilities
Mandatory repurchase obligation	$	—	$	—	$	8,867	$	8,867
Professional fees liability related to certain securitizations		—		—		7,350		7,350
Contingent earn-out payments		—		—		10,900		10,900
Derivative instruments		—		39,279		19,327		58,606
Mortgage-backed debt related to Non-Residual Trusts		—		—		721,080		721,080
HMBS related obligations		—		—		7,805,846		7,805,846

Total liabilities	$	—	$	39,279	$	8,573,370	$	8,612,649


	Recurring Fair Value Measurements at December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets
Reverse loans ⁽¹⁾	$	—	$	—	$	6,047,108	$	6,047,108
Residential loans related to Non-Residual Trusts		—		—		646,498		646,498
Forwards loans held for sale		—		16,605		—		16,605
Receivables related to Non-Residual Trusts		—		—		53,975		53,975
Derivative instruments		—		—		949		949

Total assets	$	—	$	16,605	$	6,748,530	$	6,765,135

Liabilities
Mandatory repurchase obligation	$	—	$	—	$	9,999	$	9,999
Professional fees liability related to certain securitizations		—		—		8,147		8,147
Contingent earn-out payments		—		—		6,100		6,100
Derivative instruments		—		1,102		—		1,102
Mortgage-backed debt related to Non-Residual Trusts		—		—		757,286		757,286
HMBS related obligations		—		—		5,874,552		5,874,552

Total liabilities	$	—	$	1,102	$	6,656,084	$	6,657,186

(1)	Includes $28.5 million in reverse loans held for sale at December 31, 2012.

The following assets and liabilities are measured in 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, 2013
	Fair Value April 1, 2013			ResCap Net Assets Acquisition		Total Gains (Losses) Included in Net Income			Purchases		Sales			Issuances			Settlements			Fair Value June 30, 2013
Assets
Reverse loans	$	7,106,943		$	—	$	101,304		$	464,494	$	(272	)	$	337,972		$	(103,806	)	$	7,906,635
Residential loans related to Non-Residual Trusts		627,430			—		16,938			—		—			—			(30,741	)		613,627
Receivables related to Non-Residual Trusts		53,671			—		1,219			—		—			—			(4,000	)		50,890
Servicing rights carried at fair value		759,683			—		65,077			19,885		—			36,305			—			880,950
Derivative instruments (IRLCs)		59,573			—		2,107			—		—			—			—			61,680

Total assets	$	8,607,300		$	—	$	186,645		$	484,379	$	(272	)	$	374,277		$	(138,547	)	$	9,513,782


Liabilities
Mandatory repurchase obligation	$	(9,695	)	$	—	$	566		$	—	$	—		$	—		$	262		$	(8,867	)
Professional fees liability related to certain securitizations		(7,739	)		—		(210	)		—		—			—			599			(7,350	)
Derivative instruments (IRLCs)		—			—		(19,327	)		—		—			—			—			(19,327	)
Contingent earn-out payments		(9,794	)		—		(1,106	)		—		—			—			—			(10,900	)
Mortgage-backed debt related to Non-Residual Trusts		(738,434	)		—		(15,845	)		—		—			—			33,199			(721,080	)
HMBS related obligations		(6,887,583	)		—		(74,353	)		—		—			(943,359	)		99,449			(7,805,846	)

Total liabilities	$	(7,653,245	)	$	—	$	(110,275	)	$	—	$	—		$	(943,359	)	$	133,509		$	(8,573,370	)


	For the Six Months Ended June 30, 2013
	Fair Value January 1, 2013			ResCap Net Assets Acquisition		Total Gains (Losses) Included in Net Income			Purchases		Sales			Issuances			Settlements			Fair Value June 30, 2013
Assets
Reverse loans ⁽¹⁾	$	6,047,108		$	—	$	184,581		$	1,258,891	$	(76,441	)	$	646,163		$	(153,667	)	$	7,906,635
Residential loans related to Non-Residual Trusts		646,498			—		29,957			—		—			—			(62,828	)		613,627
Receivables related to Non-Residual Trusts		53,975			—		5,056			—		—			—			(8,141	)		50,890
Servicing rights carried at fair value		26,382			242,604		44,002			530,367		—			37,595			—			880,950
Derivative instruments (IRLCs)		949			—		60,731			—		—			—			—			61,680

Total assets	$	6,774,912		$	242,604	$	324,327		$	1,789,258	$	(76,441	)	$	683,758		$	(224,636	)	$	9,513,782


Liabilities
Mandatory repurchase obligation	$	(9,999	)	$	—	$	404		$	—	$	—		$	—		$	728		$	(8,867	)
Professional fees liability related to certain securitizations		(8,147	)		—		(430	)		—		—			—			1,227			(7,350	)
Derivative instruments (IRLCs)		—			—		(19,327	)		—		—			—			—			(19,327	)
Contingent earn-out payments		(6,100	)		—		(4,800	)		—		—			—			—			(10,900	)
Mortgage-backed debt related to Non-Residual Trusts		(757,286	)		—		(29,850	)		—		—			—			66,056			(721,080	)
HMBS related obligations		(5,874,552	)		—		(116,370	)		—		—			(1,972,103	)		157,179			(7,805,846	)

Total liabilities	$	(6,656,084	)	$	—	$	(170,373	)	$	—	$	—		$	(1,972,103	)	$	225,190		$	(8,573,370	)

(1)	Includes $28.5 million in reverse loans held for sale at January 1, 2013. There were no reverse loans held for sale at June 30, 2013.


	For the Three Months Ended June 30, 2012
	Fair Value April 1, 2012			Total Gains (Losses) Included in Net Income			Settlements			Fair Value June 30, 2012
Assets
Residential loans related to Non-Residual Trusts	$	687,848		$	24,263		$	(33,429	)	$	678,682
Receivables related to Non-Residual Trusts		77,900			(5,663	)		(4,130	)		68,107

Total assets	$	765,748		$	18,600		$	(37,559	)	$	746,789

Liabilities
Mandatory repurchase obligation	$	(11,573	)	$	118		$	555		$	(10,900	)
Professional fees liability related to certain securitizations		(9,265	)		(268	)		673			(8,860	)
Mortgage-backed debt related to Non-Residual Trusts		(819,345	)		(17,204	)		35,211			(801,338	)

Total liabilities	$	(840,183	)	$	(17,354	)	$	36,439		$	(821,098	)


	For the Six Months Ended June 30, 2012
	Fair Value January 1, 2012			Total Gains (Losses) Included in Net Income			Settlements			Fair Value June 30, 2012
Assets
Residential loans related to Non-Residual Trusts	$	672,714		$	74,075		$	(68,107	)	$	678,682
Receivables related to Non-Residual Trusts		81,782			(5,104	)		(8,571	)		68,107

Total assets	$	754,496		$	68,971		$	(76,678	)	$	746,789

Liabilities
Mandatory repurchase obligation	$	(11,849	)	$	(177	)	$	1,126		$	(10,900	)
Professional fees liability related to certain securitizations		(9,666	)		(554	)		1,360			(8,860	)
Mortgage-backed debt related to Non-Residual Trusts		(811,245	)		(61,782	)		71,689			(801,338	)

Total liabilities	$	(832,760	)	$	(62,513	)	$	74,175		$	(821,098	)

All gains and losses of 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 IRLCs and servicing rights carried at fair value, are recognized in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. Gains and losses relating to IRLCs are recorded in net gains on sales of loans and changes in fair value of servicing rights carried at fair value are recorded in net servicing revenue and fees in the consolidated statements of comprehensive income. Total gains and losses included in net income include interest income and expense at the stated rate for interest bearing assets and liabilities, respectively, accretion and amortization, and the impact of changes in valuation inputs and assumptions.

The Company’s valuation committee determines and approves all valuation policies and unobservable inputs used to estimate the fair value of all items measured at fair value on a recurring basis, except for IRLCs and the contingent earn-out payments. The valuation committee consists of certain members of the management team responsible for accounting, treasury, servicing operations and credit risk. The valuation committee 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. Similar procedures are followed by the Company’s asset liability committee responsible for IRLCs and a sub-set of management responsible for the contingent earn-out payments. These fair values are approved by senior management.

The following is a description of the methods and assumptions 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.

Residential loans at fair value

Reverse 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 Company’s valuation considers assumptions that it believes a market participant would consider in valuing the loans including, but not limited to, assumptions for prepayment, default, mortality, and discount rates. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Company’s assessment of current and future economic conditions. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated HECM loans, expected duration of the asset, and current market interest rates.

Residential loans related to Non-Residual Trusts — 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 Company’s valuation considers assumptions that it believes a market participant would consider in valuing the loans including, but not limited to, assumptions for prepayment, default, loss severity and discount rates. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Company’s assessment of current and future economic conditions. The discount rate assumption for these assets is primarily based on the collateral and credit risk characteristics of these loans, combined with an assessment of market interest rates.

Forward loans held for sale — These loans are valued using a market approach by utilizing published forward agency prices. 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 Level 3 unobservable market inputs at 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. The estimate of the cash to be collected from the LOCs is based on expected shortfalls of cash flows from the loans in the securitization trusts, compared to the required debt payments of the securitization trusts. The cash flows from the loans, and thus the cash to be provided by the LOCs, is determined by analyzing the credit assumptions for the underlying collateral in each of the securitizations. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. The discount rate assumption for these assets is based on the risk-free market rate given the credit risk characteristics of the collateral supporting the LOCs. Receivables related to Non-Residual Trusts are recorded in receivables, net in 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 estimates the fair value of these servicing rights using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, default rates and discount rates. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the determination of the servicing rights’ fair value.

Derivative instruments — Fair values of IRLCs and LPCs are derived by using valuation models incorporating current market information or by obtaining market or dealer quotes for instruments with similar characteristics, and in the case of IRLCs, are adjusted for anticipated loan funding probability or fallout, which is a significant unobservable input. IRLCs and LPCs are classified as Level 3 and Level 2, respectively. The fair value of forward sales commitments is determined based upon the difference between the settlement values of the commitments and the quoted market values of the securities; therefore, these contracts are classified as Level 2. Counterparty credit risk is taken into account when determining fair value. Derivative instruments are included in either other assets or payables and accrued liabilities in the consolidated balance sheets. See Note 7 for additional information on derivative financial instruments.

Mandatory repurchase obligation — This contingent liability relates to a mandatory obligation for the Company to repurchase loans from an investor when the loans become 90 days delinquent. The Company estimates the fair value of this obligation based on the expected net present value of expected future cash flows using Level 3 assumptions that it believes a market participant would consider in valuing these liabilities including, but not limited to, assumptions for prepayment, default and loss severity rates applicable to the historical and projected performance of the underlying loans. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Company’s assessment of current and future economic conditions. The discount rate assumption for this liability is primarily based on collateral characteristics combined with an assessment of market interest rates. The mandatory repurchase obligation is included in payables and accrued liabilities in the consolidated balance sheets.

Professional fees liability related to certain securitizations — This contingent liability primarily relates to payments for surety and auction agent fees that the Company will be required to make over the remaining life of certain consolidated and unconsolidated securitization trusts. The Company estimates the fair value of this liability using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of the expected cash flows of the professional fees required to be paid related to the securitization trusts. The Company’s valuation considers assumptions that it believes a market participant would consider in valuing these liabilities including, but not limited to, estimates of collateral repayment, default and discount rates. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Collateral performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Company’s assessment of current and future economic conditions. The discount rate assumption for this liability is primarily based on collateral characteristics combined with an assessment of market interest rates. The professional fees liability related to certain securitizations is included in payables and accrued liabilities in the consolidated balance sheets.

Contingent earn-out payments — The estimated fair value of this contingent liability at December 31, 2012 and March 31, 2013 is based on the average earn-out payment under multiple outcomes as determined by a Monte-Carlo simulation, discounted to present value using credit-adjusted discount rates. The average payment outcomes calculated by the Monte-Carlo simulation were derived utilizing Level 3 unobservable inputs, the most significant of which include the assumptions for forecasted financial performance of S1L and financial performance volatility. At June 30, 2013, the Company revised its estimate of the fair value of the contingent earn-out payments to $10.9 million, the maximum earn-out, based on S1L’s performance during the six months ended June 30, 2013. The entire earn-out recorded at June 30, 2013 is expected to be paid by the end of January 2014. Contingent earn-out payments are included in payables and accrued liabilities in the consolidated balance sheets.

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. The Company’s valuation considers assumptions and estimates for principal and interest payments on the debt. 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. The assumptions that it believes a market participant would consider in valuing debt include, but are not limited to, prepayment, default, loss severity and discount rates, as well as the balance of LOCs provided as credit enhancement. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, as well as for current and expected relevant market conditions. Credit performance assumptions are primarily based on analyses of historical and projected performance trends, as well as the Company’s assessment of current and future economic conditions. The discount rate assumption for this debt is primarily based on credit characteristics combined with an assessment of market interest rates.

HMBS related obligations — The Company recognizes the proceeds from the sale of HMBS as a secured borrowing, which is accounted for at fair value. This liability 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 is based on the net present value of projected cash flows over the estimated life of the liability. The Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability including, but not limited to, assumptions for prepayments, discount rate and borrower mortality rates for reverse mortgages. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued 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 the swap curve.

The Company utilizes a discounted cash flow method in the fair value measurement of all Level 3 assets and liabilities included in the consolidated financial statements at fair value on a recurring basis with the exception of IRLCs for which the Company utilizes a market approach. The following table presents the significant unobservable inputs used in the fair value measurement of these assets and liabilities at June 30, 2013. Significant increases or decreases in any of these inputs in isolation would result in a significantly lower or higher fair value measurement.


	Significant Unobservable Input	Range	Weighted Average
Assets
Reverse loans	Weighted-average remaining life in years	1.3 - 11.6		4.5
	Conditional repayment rate	4.80% - 36.10%		18.46	%
	Discount rate	1.39% - 4.27%		2.35	%
Residential loans related to Non-Residual Trusts	Conditional prepayment rate	3.82% - 6.21%		5.50	%
	Loss severity	75.46% - 91.76%		87.00	%
Receivables related to Non-Residual Trusts	Conditional prepayment rate	3.91% - 6.22%		5.49	%
	Loss severity	72.70% - 89.19%		84.33	%
Servicing rights carried at fair value	Weighted-average remaining life in years	5.0 - 9.3		5.4
	Discount rate	9.17% - 10.40%		9.37	%
	Conditional prepayment rate	4.95% - 10.37%		9.31	%
	Conditional default rate	0.92% - 4.86%		4.02	%
Derivative instruments (IRLCs)	Loan funding probability	33.40% - 100.00%		80.00	%
Liabilities
Mandatory repurchase obligation	Conditional prepayment rate	6.92%		6.92	%
	Loss severity	70.55%		70.55	%
Professional fees liability related to certain securitizations	Conditional prepayment rate	3.91% - 6.83%		5.55	%
Mortgage-backed debt related to Non-Residual Trusts	Conditional prepayment rate	3.91% - 6.22%		5.49	%
	Loss severity	72.70% -89.19%		84.33	%
HMBS related obligations	Weighted-average remaining life in years	2.1 - 7.5		4.2
	Conditional repayment rate	10.40% - 36.00%		19.47	%
	Discount rate	0.92% - 2.81%		1.72	%
Derivative instruments (IRLCs)	Loan funding probability	19.20% - 100.00%		84.30	%

Items Measured at Fair Value on a Non-Recurring Basis

The following assets are measured in the consolidated financial statements at fair value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation (in thousands):


	June 30, 2013		December 31, 2012
Real estate owned, net	$	68,380	$	64,959

The following table presents the significant unobservable inputs used in the fair value measurement of Level 3 assets at June 30, 2013 measured in the consolidated financial statements at fair value on a non-recurring basis:


	Significant Unobservable Input	Range	Weighted Average
Real estate owned, net	Loss severity	0.00% - 71.17%		10.25	%

At the time a residential loan becomes real estate owned, the Company records the property at the lower of its carrying amount or estimated fair value less estimated costs to sell. Upon foreclosure and through liquidation, the Company evaluates the property’s fair value as compared to its carrying amount and records a valuation adjustment, which is recorded in other expenses, net in the consolidated statements of comprehensive income, when the carrying amount exceeds fair value. The Company reported real estate owned, net of $47.8 million, $18.9 million and $1.7 million in the Loans and Residuals, Reverse Mortgage and Other segments, respectively at June 30, 2013. The Company reported real estate owned, net of $49.1 million, $13.9 million and $2.0 million in the Loans and Residuals, Reverse Mortgage and Other segments, respectively at December 31, 2012. In determining fair value, the Company’s accounting department 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 acquisition type and length held. 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. Management approves valuations that have been determined using the historical severity rate method.

Real estate owned expenses, net, which are recorded in other expenses, net in the consolidated statements of comprehensive income, were $1.5 million and $2.6 million for the three months ended June 30, 2013 and 2012, respectively, and $1.5 million and $5.4 million for the six months ended June 30, 2013 and 2012, respectively. Included in real estate owned expenses, net are lower of cost or fair value adjustments of $0.3 million and $1.3 million for the three months ended June 30, 2013 and 2012, respectively, and $0.3 million and $2.2 million for the six months ended June 30, 2013 and 2012, respectively.

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):


	June 30, 2013					December 31, 2012
	Carrying Amount		Estimated Fair Value		Fair Value Hierarchy	Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	532,620	$	532,620	Level 1	$	442,054	$	442,054
Restricted cash and cash equivalents		1,057,503		1,057,503	Level 1		653,338		653,338
Residential loans at amortized cost		1,443,707		1,389,137	Level 3		1,490,321		1,436,592
Receivables, net:
Insurance premium receivables		106,734		101,347	Level 3		107,824		101,238
Other		111,397		111,397	Level 1		97,210		97,210
Servicer and protective advances, net		1,044,410		1,003,524	Level 3		173,047		160,632

Financial liabilities
Payables and accrued liabilities:
Payables to insurance carriers		67,548		66,617	Level 3		51,377		50,614
Other		548,078		548,078	Level 1		183,885		183,885
Servicer payables		959,565		959,565	Level 1		587,929		587,929
Servicing advance liabilities ⁽¹⁾		737,100		737,181	Level 3		99,508		99,915
Debt ⁽²⁾		3,588,254		3,646,543	Level 2		1,115,804		1,165,811
Mortgage-backed debt carried at amortized cost ⁽³⁾		1,244,458		1,249,739	Level 3		1,298,999		1,300,979

(1)	The carrying amount of servicing advance liabilities is net of deferred issuance costs of $0.5 million and $0.7 million at June 30, 2013 and December 31, 2012, respectively.

(2)	The carrying amount of debt is net of deferred issuance costs of $36.9 million and $30.4 million at June 30, 2013 and December 31, 2012, respectively.

(3)	The carrying amount of mortgage-backed debt carried at amortized cost is net of deferred issuance costs of $15.3 million and $16.4 million at June 30, 2013 and December 31, 2012, respectively.

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 basis.

Cash and cash equivalents, restricted cash and cash equivalents, other receivables, cash collateral for forward sale commitments, other payables and accrued liabilities, and servicer payables — The estimated fair value of these financial instruments approximates their carrying amounts due to their highly liquid or short-term nature.

Residential loans at amortized cost — The methods and assumptions used to estimate the fair value of residential loans at amortized cost are the same as those described for residential 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 customers’ 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, 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 these liabilities is based on the net present value of projected cash flows over the expected life of the liabilities at estimated market rates.

Debt — The Company’s term loan and convertible debt are not traded in an active, open market with readily observable prices. The estimated fair value of this debt is based on an average of broker quotes. The estimated fair value of the Company’s other debt, including master repurchase agreements, approximates their carrying amounts due to their highly liquid or short-term nature.

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.

Fair Value Option

The Company elected the fair value option for certain financial instruments, including residential loans, receivables and mortgage-backed debt related to the Non-Residual Trusts, residential loans held for sale, and reverse mortgage loans and the HMBS related obligations. The fair value option was elected for these assets and liabilities as the Company believes fair value best reflects the expected future economic performance of these assets and liabilities. The yields on residential loans of the Non-Residual Trusts and reverse mortgage loans along with any changes in fair values are recorded in either other net fair value gains (losses) or net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. The yield on residential loans held for sale along with any changes in fair value are recorded in net gains on sales of loans in the consolidated statements of comprehensive income. The yield on the loans includes recognition of interest income based on the stated interest rates of the loans that is expected to be collected as well as accretion of fair value adjustments.

Presented in the table below is the fair value and unpaid principal balance of loans, receivables and debt instruments for which the Company has elected the fair value option (in thousands):


	June 30, 2013				December 31, 2012
	Estimated Fair Value		Unpaid Principal Balance⁽¹⁾		Estimated Fair Value		Unpaid Principal Balance⁽¹⁾
Loans and receivables at fair value under the fair value option
Reverse loans ^(2) (3)	$	7,906,635	$	7,087,547	$	6,047,108	$	5,400,876
Residential loans related to Non-Residual Trusts		613,627		770,917		646,498		814,481
Forward loans held for sale ⁽³⁾		1,664,215		1,652,690		16,605		16,325
Receivables related to Non-Residual Trusts		50,890		51,464		53,975		54,604

Total	$	10,235,367	$	9,562,618	$	6,764,186	$	6,286,286

Debt instruments at fair value under the fair value option
Mortgage-backed debt related to Non-Residual Trusts	$	721,080	$	780,116	$	757,286	$	825,200
HMBS related obligations		7,805,846		6,899,305		5,874,552		5,169,135

Total	$	8,526,926	$	7,679,421	$	6,631,838	$	5,994,335

(1)	For the receivables related to Non-Residual Trusts, the unpaid principal balance represents the notional amount of expected draws under the LOCs. For the HMBS related obligations, the unpaid principal balance represents the balance outstanding.

(2)	Includes $28.5 million in reverse loans held for sale at December 31, 2012. There were no reverse loans held for sale at June 30, 2013.

(3)	Includes loans that collateralize master repurchase agreements. See Note 15 for further information.

Included in residential loans accounted for under the fair value option are loans that are 90 days or more past due that have a fair value of $1.3 million and $1.9 million and an unpaid principal balance of $7.2 million and $10.0 million at June 30, 2013 and December 31, 2012, respectively.

Included in other fair value gains (losses) and net fair value gains on reverse loans and related HMBS obligations are fair value gains and losses from instrument-specific credit risk that include changes in fair value due to changes in assumptions related to prepayments, defaults and severity. The Company recorded fair value gains (losses) from changes in instrument-specific credit risk for residential loans related to Non-Residual Trusts, reverse loans and receivables related to Non-Residual Trusts of $0.9 million, $(5.4) million and $0.8 million for the three months ended June 30, 2013, respectively, and $(3.8) million, $(8.8) million and $3.8 million for the six months ended June 30, 2013, respectively. The Company recorded fair value gains (losses) from changes in instrument-specific credit risk for residential loans related to Non-Residual Trusts and receivables related to Non-Residual Trusts of $10.7 million and $(6.7) million for the three months ended June 30, 2012, respectively, and $12.4 million and $(6.8) million for the six months ended June 30, 2012, respectively. Due to the short holding period of residential loans held for sale, related fair value gains and losses from instrument-specific credit risk are immaterial.

Fair Value Gains (Losses)

Provided in the table below is a summary of the components of other net fair value gains (in thousands):


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Other net fair value gains (losses)
Assets of Non-Residual Trusts	$	18,157		$	18,600		$	35,013		$	68,971
Liabilities of Non-Residual Trusts		(15,845	)		(17,204	)		(29,850	)		(61,782	)
Mandatory repurchase obligation		566			118			404			(177	)
Professional fees liability related to certain securitizations		(210	)		(268	)		(430	)		(554	)
Contingent earn-out payments		(1,106	)		—			(4,800	)		—
Other		94			(458	)		58			(907	)

Other net fair value gains	$	1,656		$	788		$	395		$	5,551

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, 2013			For the Six Months Ended June 30, 2013
Net fair value gains (losses) on reverse loans and related HMBS obligations
Reverse loans	$	101,084		$	179,889
HMBS related obligations		(74,353	)		(116,370	)

Net fair value gains on reverse loans and related HMBS obligations	$	26,731		$	63,519

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, 2013			For the Six Months Ended June 30, 2013
Gains on sales of loans	$	75,918		$	84,226
Unrealized losses on loans held for sale		(15,897	)		(2,271	)
Net fair value gains on derivatives		141,746			196,430
Capitalized servicing rights		27,605			28,895
Provision for repurchases		(2,010	)		(2,181	)
Interest income		8,473			9,261
Other		114			34

Net gains on sales of loans	$	235,949		$	314,394