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 nine months ended September 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 September 30, 2013
	Level 1		Level 2		Level 3		Total
Assets
Reverse loans	$	—	$	—	$	8,137,815	$	8,137,815
Residential loans related to Non-Residual Trusts		—		—		609,399		609,399
Forward loans held for sale		—		1,424,946		—		1,424,946
Receivables related to Non-Residual Trusts		—		—		45,849		45,849
Servicing rights carried at fair value		—		—		1,006,031		1,006,031
Derivative instruments		—		19,776		96,144		115,920

Total assets	$	—	$	1,444,722	$	9,895,238	$	11,339,960

Liabilities
Derivative instruments	$	—	$	77,882	$	—	$	77,882
Mandatory repurchase obligation		—		—		8,285		8,285
Professional fees liability related to certain securitizations		—		—		6,985		6,985
Contingent earn-out payments		—		—		6,650		6,650
Mortgage-backed debt related to Non-Residual Trusts		—		—		708,013		708,013
HMBS related obligations		—		—		8,132,753		8,132,753

Total liabilities	$	—	$	77,882	$	8,862,686	$	8,940,568


	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
Forward 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
Derivative instruments	$	—	$	1,102	$	—	$	1,102
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
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 September 30, 2013
	Fair Value July 1, 2013			Total Gains (Losses) Included in Net Income			Purchases		Sales		Issuances			Settlements			Fair Value September 30, 2013
Assets
Reverse loans	$	7,906,635		$	(165,150	)	$	315,699	$	—	$	192,326		$	(111,695	)	$	8,137,815
Residential loans related to Non-Residual Trusts		613,627			27,494			—		—		—			(31,722	)		609,399
Receivables related to Non-Residual Trusts		50,890			(1,803	)		—		—		—			(3,238	)		45,849
Servicing rights carried at fair value		880,950			25,297			19,234		—		80,550			—			1,006,031
Derivative instruments (IRLCs)		61,680			34,464			—		—		—			—			96,144

Total assets	$	9,513,782		$	(79,698	)	$	334,933	$	—	$	272,876		$	(146,655	)	$	9,895,238

Liabilities
Derivative instruments (IRLCs)	$	(19,327	)	$	19,327		$	—	$	—	$	—		$	—		$	—
Mandatory repurchase obligation		(8,867	)		102			—		—		—			480			(8,285	)
Professional fees liability related to certain securitizations		(7,350	)		(198	)		—		—		—			563			(6,985	)
Contingent earn-out payments		(10,900	)		—			—		—		—			4,250			(6,650	)
Mortgage-backed debt related to Non-Residual Trusts		(721,080	)		(19,015	)		—		—		—			32,082			(708,013	)
HMBS related obligations		(7,805,846	)		195,626			—		—		(638,727	)		116,194			(8,132,753	)

Total liabilities	$	(8,573,370	)	$	195,842		$	—	$	—	$	(638,727	)	$	153,569		$	(8,862,686	)


	For the Nine Months Ended September 30, 2013
	Fair Value January 1, 2013			ResCap Net Assets Acquisition		Total Gains (Losses) Included in Net Income			Purchases		Sales			Issuances			Settlements			Fair Value September 30, 2013
Assets
Reverse loans ⁽¹⁾	$	6,047,108		$	—	$	19,431		$	1,574,590	$	(76,441	)	$	838,489		$	(265,362	)	$	8,137,815
Residential loans related to Non-Residual Trusts		646,498			—		57,451			—		—			—			(94,550	)		609,399
Receivables related to Non-Residual Trusts		53,975			—		3,253			—		—			—			(11,379	)		45,849
Servicing rights carried at fair value		26,382			242,604		69,299			549,601		—			118,145			—			1,006,031
Derivative instruments (IRLCs)		949			—		95,195			—		—			—			—			96,144

Total assets	$	6,774,912		$	242,604	$	244,629		$	2,124,191	$	(76,441	)	$	956,634		$	(371,291	)	$	9,895,238


Liabilities
Derivative instruments (IRLCs)	$	—		$	—	$	—		$	—	$	—		$	—		$	—		$	—
Mandatory repurchase obligation		(9,999	)		—		506			—		—			—			1,208			(8,285	)
Professional fees liability related to certain securitizations		(8,147	)		—		(628	)		—		—			—			1,790			(6,985	)
Contingent earn-out payments		(6,100	)		—		(4,800	)		—		—			—			4,250			(6,650	)
Mortgage-backed debt related to Non-Residual Trusts		(757,286	)		—		(48,865	)		—		—			—			98,138			(708,013	)
HMBS related obligations		(5,874,552	)		—		79,256			—		—			(2,610,830	)		273,373			(8,132,753	)

Total liabilities	$	(6,656,084	)	$	—	$	25,469		$	—	$	—		$	(2,610,830	)	$	378,759		$	(8,862,686	)

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


	For the Three Months Ended September 30, 2012
	Fair Value July 1, 2012			Total Gains (Losses) Included in Net Income			Settlements			Fair Value September 30, 2012
Assets
Residential loans related to Non-Residual Trusts	$	678,682		$	19,346		$	(33,282	)	$	664,746
Receivables related to Non-Residual Trusts		68,107			(3,550	)		(4,155	)		60,402

Total assets	$	746,789		$	15,796		$	(37,437	)	$	725,148

Liabilities
Mandatory repurchase obligation	$	(10,900	)	$	482		$	320		$	(10,098	)
Professional fees liability related to certain securitizations		(8,860	)		(247	)		622			(8,485	)
Mortgage-backed debt related to Non-Residual Trusts		(801,338	)		(12,682	)		34,126			(779,894	)

Total liabilities	$	(821,098	)	$	(12,447	)	$	35,068		$	(798,477	)


	For the Nine Months Ended September 30, 2012
	Fair Value January 1, 2012			Total Gains (Losses) Included in Net Income			Settlements			Fair Value September 30, 2012
Assets
Residential loans related to Non-Residual Trusts	$	672,714		$	93,421		$	(101,389	)	$	664,746
Receivables related to Non-Residual Trusts		81,782			(8,654	)		(12,726	)		60,402

Total assets	$	754,496		$	84,767		$	(114,115	)	$	725,148

Liabilities
Mandatory repurchase obligation	$	(11,849	)	$	305		$	1,446		$	(10,098	)
Professional fees liability related to certain securitizations		(9,666	)		(801	)		1,982			(8,485	)
Mortgage-backed debt related to Non-Residual Trusts		(811,245	)		(74,464	)		105,815			(779,894	)

Total liabilities	$	(832,760	)	$	(74,960	)	$	109,243		$	(798,477	)

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 IRLCs and servicing rights carried at fair value, are recognized in either other net fair value gains or net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. Gains and losses related to IRLCs are recorded in net gains on sales of loans and changes in fair value of servicing rights 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 interest 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 observable forward to-be-announced 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. The Company classifies these servicing rights within Level 3 of the fair value hierarchy accordingly.

Derivative instruments — Fair values of IRLCs are derived by using valuation models incorporating current market information or through observation of market pricing for instruments with similar characteristics, and are adjusted for anticipated loan funding probability or fallout, which is a significant unobservable input. IRLCs are classified as Level 3. The fair value of forward sales commitments and MBS purchase commitments is determined based on observed market pricing for similar 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 the liability 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 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. Other than the payment of $4.3 million made to the prior owners of S1L during the three months ended September 30, 2013, no subsequent adjustments to fair value have been made. The remaining liability recorded at September 30, 2013 is expected to be paid in 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 the 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 September 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		Weighted
	Unobservable Input	Range	Average
Assets
Reverse loans	Weighted-average remaining life in years	1.3 - 12.3		4.4
	Conditional repayment rate	5.11% - 34.97%		18.62	%
	Discount rate	2.11% - 5.09%		3.04	%
Residential loans related to Non-Residual Trusts	Conditional prepayment rate	5.04% - 6.21%		5.59	%
	Loss severity	75.48% - 91.34%		87.56	%
Receivables related to Non-Residual Trusts	Conditional prepayment rate	5.02% - 6.22%		5.56	%
	Loss severity	72.73% - 88.63%		84.78	%
Servicing rights carried at fair value	Weighted-average remaining life in years	5.5 - 10.7		6.2
	Discount rate	9.17% - 11.61%		9.40	%
	Conditional prepayment rate	4.04% - 10.12%		8.16	%
	Conditional default rate	0.48% - 3.86%		3.21	%
Derivative instruments (IRLCs)	Loan funding probability	8.20% - 100.00%		75.70	%

Liabilities
Mandatory repurchase obligation	Conditional prepayment rate	6.86%		6.86	%
	Loss severity	70.76%		70.76	%
Professional fees liability related to certain securitizations	Conditional prepayment rate	5.02% - 8.05%		5.71	%
Mortgage-backed debt related to Non-Residual Trusts	Conditional prepayment rate	5.02% - 6.22%		5.56	%
	Loss severity	72.73% - 88.63%		84.78	%
HMBS related obligations	Weighted-average remaining life in years	2.0 - 7.5		4.1
	Conditional repayment rate	10.32% - 37.06%		19.83	%
	Discount rate	1.71% - 4.06%		2.51	%

Items Measured at Fair Value on a Non-Recurring Basis

Real estate owned, net is 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):


	September 30, 2013		December 31, 2012
Real estate owned, net	$	70,125	$	64,959

The following table presents the significant unobservable inputs used in the fair value measurement of real estate owned, net at September 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% - 74.20%		10.17	%

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 $46.3 million, $22.3 million and $1.5 million in the Loans and Residuals, Reverse Mortgage and Other segments, respectively at September 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 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. 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 $2.6 million and $0.3 million for the three months ended September 30, 2013 and 2012, respectively, and $4.1 million and $5.7 million for the nine months ended September 30, 2013 and 2012, respectively. Included in real estate owned expenses, net are lower of cost or fair value adjustments of $0.4 million and $(0.2) million for the three months ended September 30, 2013 and 2012, respectively, and $0.7 million and $2.0 million for the nine months ended September 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):


	September 30, 2013						December 31, 2012
	Carrying Amount		Estimated Fair Value		Fair Value Hierarchy		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	405,355	$	405,355		Level 1	$	442,054	$	442,054
Restricted cash and cash equivalents		922,522		922,522		Level 1		653,338		653,338
Residential loans carried at amortized cost		1,417,020		1,367,031		Level 3		1,490,321		1,436,592
Receivables, net:
Insurance premium receivables		106,176		100,045		Level 3		107,824		101,238
Other		101,934		101,934		Level 1		97,210		97,210
Servicer and protective advances, net		1,186,066		1,111,042		Level 3		173,047		160,632

Financial liabilities
Payables and accrued liabilities:
Payables to insurance carriers		81,415		80,310		Level 3		51,377		50,614
Other		368,485		368,485		Level 1		183,885		183,885
Servicer payables		851,231		851,231		Level 1		587,929		587,929
Servicing advance liabilities ⁽¹⁾		833,695		834,160		Level 3		99,508		99,915
Debt ⁽²⁾		3,235,774		3,310,927		Level 2		1,115,804		1,165,811
Mortgage-backed debt carried at amortized cost ⁽³⁾		1,216,302		1,220,142		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 September 30, 2013 and December 31, 2012, respectively.

(2)	The carrying amount of debt is net of deferred issuance costs of $33.9 million and $30.4 million at September 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 $14.8 million and $16.4 million at September 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 or non-recurring basis.

Cash and cash equivalents, restricted cash and cash equivalents, other receivables, 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 carried at amortized cost — The methods and assumptions used to estimate the fair value of residential loans carried 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, forward loans held for sale, and reverse loans and 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 or net fair value gains on reverse loans and related HMBS obligations in the consolidated statements of comprehensive income. The yield on forward 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):


	September 30, 2013				December 31, 2012
	Estimated		Unpaid Principal		Estimated		Unpaid Principal
	Fair Value		Balance		Fair Value		Balance
Loans and receivables at fair value under the fair value option
Reverse loans ^{(1) (2)}	$	8,137,815	$	7,556,982	$	6,047,108	$	5,400,876
Residential loans related to Non-Residual Trusts		609,399		748,286		646,498		814,481
Forward loans held for sale ⁽²⁾		1,424,946		1,349,089		16,605		16,325
Receivables related to Non-Residual Trusts ⁽³⁾		45,849		46,349		53,975		54,604

Total	$	10,218,009	$	9,700,706	$	6,764,186	$	6,286,286

Debt instruments at fair value under the fair value option
Mortgage-backed debt related to Non-Residual Trusts	$	708,013	$	758,121	$	757,286	$	825,200
HMBS related obligations ⁽³⁾		8,132,753		7,457,622		5,874,552		5,169,135

Total	$	8,840,766	$	8,215,743	$	6,631,838	$	5,994,335

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

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

(3)	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.

Included in residential loans related to Non-Residual Trusts accounted for under the fair value option are loans that are 90 days or more past due that have a fair value of $1.4 million and $1.9 million and an unpaid principal balance of $8.2 million and $10.0 million at September 30, 2013 and December 31, 2012, respectively.

Included in other net fair value gains 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 $1.9 million, $(5.2) million and $(1.9) million for the three months ended September 30, 2013, respectively, and $(1.9) million, $(14.0) million and $1.9 million for the nine months ended September 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 $2.1 million and $(1.9) million for the three months ended September 30, 2012, respectively, and $14.5 million and $(8.7) million for the nine months ended September 30, 2012, respectively. Due to the short holding period of forward loans held for sale, related fair value gains and losses from instrument-specific credit risk are immaterial.

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			For the Nine Months
	Ended September 30, 2013			Ended September 30, 2013
Gains on sales of loans	$	8,338		$	83,864
Unrealized gains on loans held for sale		67,970			65,699
Net fair value gains (losses) on derivatives		(11,927	)		184,503
Capitalized servicing rights		80,550			118,145
Provision for repurchases		(3,387	)		(5,568	)
Interest income		12,166			21,427
Other		—			34

Net gains on sales of loans	$	153,710		$	468,104

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			For the Nine Months
	Ended September 30, 2013			Ended September 30, 2013
Net fair value gains (losses) on reverse loans and related HMBS obligations
Interest income on reverse loans	$	89,561		$	253,342
Change in fair value of reverse loans		(254,711	)		(238,603	)

Net fair value gains (losses) on reverse loans		(165,150	)		14,739


Interest expense on HMBS related obligations		(84,811	)		(234,031	)
Change in fair value of HMBS obligations		280,437			313,287

Net fair value gains on HMBS related obligations		195,626			79,256


Net fair value gains on reverse loans and related HMBS obligations	$	30,476		$	93,995

Other Gains

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


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2013			2012			2013			2012
Other net fair value gains (losses)
Assets of Non-Residual Trusts	$	25,691		$	15,796		$	60,704		$	84,767
Liabilities of Non-Residual Trusts		(19,015	)		(12,682	)		(48,865	)		(74,464	)
Mandatory repurchase obligation		102			482			506			305
Professional fees liability related to certain securitizations		(198	)		(247	)		(628	)		(801	)
Contingent earn-out payments		—			—			(4,800	)		—
Other		(73	)		(226	)		(15	)		(1,133	)

Other net fair value gains	$	6,507		$	3,123		$	6,902		$	8,674