Fair Value

6 Months Ended

12 Months Ended

Jun. 30, 2014

Dec. 31, 2013

6. 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 — 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. Other than forward 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. In addition, through the S1L acquisition, the Company recognized a contingent earn-out payments liability that it measured 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, 2014 and 2013.

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):


	June 30, 2014		December 31, 2013
Level 1
Liabilities
Contingent earn-out payments	$	—	$	5,900

Level 1 Liabilities		—		5,900

Level 2
Assets
Forward loans held for sale		1,173,588		1,015,607
Freestanding derivative instruments		2,736		19,534

Level 2 Assets		1,176,324		1,035,141

Liabilities
Freestanding derivative instruments		28,387		2,127

Level 2 Liabilities		28,387		2,127

Level 3
Assets
Reverse loans		9,482,030		8,738,503
Forward loans related to Non-Residual Trusts		557,786		587,265
Charged-off loans		54,997		—
Receivables related to Non-Residual Trusts		36,181		43,545
Servicing rights carried at fair value		1,496,073		1,131,124
Freestanding derivative instruments		75,526		42,831

Level 3 Assets		11,702,593		10,543,268

Liabilities
Freestanding derivative instruments		87		3,755
Other accrued liabilities		14,438		14,789
Mortgage-backed debt related to Non-Residual Trusts		651,784		684,778
HMBS related obligations		9,472,666		8,652,746

Level 3 Liabilities		10,138,975		9,356,068

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, 2014
	Fair Value April 1, 2014			Total Gains (Losses) Included in Net Income			Purchases		Issuances			Settlements			Fair Value June 30, 2014
Assets
Reverse loans	$	9,149,579		$	89,571		$	244,444	$	148,569		$	(150,133	)	$	9,482,030
Forward 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	)
Other accrued liabilities		(14,165	)		(1,073	)		—		—			800			(14,438	)
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	$	(9,849,419	)	$	(76,654	)	$	—	$	(394,385	)	$	181,483		$	(10,138,975	)


	For the Six Months Ended June 30, 2014
	Fair Value January 1, 2014			Acquisition of EverBank Net Assets		Total Gains (Losses) Included in Net Income			Purchases		Issuances			Settlements			Fair Value June 30, 2014
Assets
Reverse loans	$	8,738,503		$	—	$	294,980		$	438,120	$	278,032		$	(267,605	)	$	9,482,030
Forward 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	)
Other accrued liabilities		(14,789	)		—		(1,493	)		—		—			1,844			(14,438	)
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	$	(9,356,068	)	$	—	$	(274,047	)	$	—	$	(839,431	)	$	330,571		$	(10,138,975	)


	For the Three Months Ended June 30, 2013
	Fair Value April 1, 2013			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
Forward 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		766,943			65,077			19,885		—			36,305			—			888,210
Freestanding derivative instruments (IRLCs)		59,573			2,107			—		—			—			—			61,680

Total assets	$	8,614,560		$	186,645		$	484,379	$	(272	)	$	374,277		$	(138,547	)	$	9,521,042

Liabilities
Freestanding derivative instruments (IRLCs)	$	—		$	(19,327	)	$	—	$	—		$	—		$	—		$	(19,327	)
Other accrued liabilities		(17,434	)		356			—		—			—			861			(16,217	)
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			Acquisition of ResCap Net Assets		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
Forward 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			537,627		—			37,595			—			888,210
Freestanding derivative instruments (IRLCs)		949			—		60,731			—		—			—			—			61,680

Total assets	$	6,774,912		$	242,604	$	324,327		$	1,796,518	$	(76,441	)	$	683,758		$	(224,636	)	$	9,521,042

Liabilities
Freestanding derivative instruments (IRLCs)	$	—		$	—	$	(19,327	)	$	—	$	—		$	—		$	—		$	(19,327	)
Other accrued liabilities		(18,146	)		—		(26	)		—		—			—			1,955			(16,217	)
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.

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, charged-off loans 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 on the consolidated statements of comprehensive income (loss). Gains and losses relating to IRLCs are recorded in net gains on sales of loans, changes in fair value of charged-off loans are recorded in other revenue, and changes in fair value of servicing rights carried at fair value are recorded in net servicing revenue and fees on the consolidated statements of comprehensive income (loss). Total gains and losses included in net income or loss 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 valuation policies and unobservable inputs used to estimate the fair value of 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 originations-focused risk 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 repayment, 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 HECMs, expected duration of the asset, and current market interest rates. Weighted-average remaining life in years, conditional repayment rate, and discount rate are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

•

Forward 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. Conditional prepayment rate, conditional default rate, and loss severity are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

•

Forward loans held for sale — These loans are valued using a market approach by utilizing observable forward to-be-announced prices of mortgage-backed securities. The Company classifies these loans as Level 2 within the fair value hierarchy.

•

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 Company’s valuation considers assumptions that it believes a market participant would consider in valuing the loans including, but not limited to, collection rate as a percentage of unpaid principal balance owed and discount rate. The Company reassesses and periodically adjusts the underlying inputs and assumptions used in the valuation for recent historical experience, particularly collections trends and collateral performance, as well as an assessment of current and future economic conditions. The discount rate assumption for these assets is primarily based on the expected collection rates and other credit risk characteristics of the loans. Collection rate and discount rate are considered to be the most significant unobservable inputs. Significant increases (decreases) in collection rates in isolation could result in a higher (lower) fair value, while an increase (decrease) in the discount rate in isolation could result in a lower (higher) fair value.

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. Conditional prepayment rate, conditional default rate, and loss severity are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. 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 the assistance of a third-party valuation specialist to develop the discounted cash flow model used to estimate the fair value of its servicing rights. The model utilizes several sensitive assumptions which are reviewed and approved by the Company, the most sensitive of which are assumptions for mortgage prepayment speeds, default rates and discount rates. The Company believes these sensitive assumptions reflect those that a market participant would use in determining fair value. 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 and can have a significant impact on the determination of the servicing rights’ fair value. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The Company classifies these servicing rights within Level 3 of the fair value hierarchy accordingly.

Freestanding derivative instruments — Fair values of IRLCs are derived by using both valuation models incorporating current market information or through observation of 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. IRLCs are classified as Level 3. 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. Significant changes in loan funding probability and the servicing rights component of IRLCs, in isolation, could result in a significant change to the fair value measurement. 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 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. 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 derivatives.

Freestanding derivative instruments are included in either other assets or payables and accrued liabilities on the consolidated balance sheets. Refer to Note 7 for additional information on freestanding derivative financial instruments.

Contingent earn-out payments — At December 31, 2012 and March 31, 2013, the estimated fair value of this contingent liability, which is related to the Company’s acquisition of S1L, was 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 included 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 $5.0 million made to the prior owners of S1L during the year ended December 31, 2013, no subsequent adjustments to this liability were made and the final amount to be paid was fixed and determinable at December 31, 2013. Therefore the liability was transferred out of Level 3 and was classified as Level 1 at December 31, 2013. The remaining liability recorded at December 31, 2013 was paid in February 2014. Contingent earn-out payments are included in payables and accrued liabilities on 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 the Company 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. Conditional prepayment rate, conditional default rate, and loss severity are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.

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 Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability including, but not limited to, assumptions for repayments, discount rate, and borrower mortality rates for reverse loans. 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. Weighted-average remaining life in years, conditional repayment rate, and discount rate are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.

The Company utilizes a discounted cash flow method in the fair value measurement 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. The following table presents the significant unobservable inputs used in the fair value measurement of these assets and liabilities.


		June 30, 2014				December 31, 2013
	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	2.1 - 12.9		4.8		2.0 - 12.9		4.4
	Conditional repayment rate	12.95% - 36.18%		20.69	%	10.67% - 36.61%		20.70	%
	Discount rate	1.89% - 4.13%		2.75	%	1.79% - 5.30%		2.98	%

Forward loans related to Non-Residual Trusts	Conditional prepayment rate	2.28% - 3.90%		2.91	%	2.20% - 3.78%		2.99	%
	Conditional default rate	1.54% - 4.75%		2.83	%	1.81% - 3.60%		2.90	%
	Loss severity	74.84% - 94.01%		87.76	%	75.90% - 96.67%		88.09	%

Receivables related to Non-Residual Trusts	Conditional prepayment rate	1.85% - 3.16%		2.54	%	1.93% - 3.11%		2.66	%
	Conditional default rate	1.73% - 5.03%		3.06	%	1.98% - 3.85%		3.16	%
	Loss severity	72.04% - 91.28%		84.85	%	72.94% - 94.16%		85.25	%

Charged-off loans	Collection rate	0.30% - 10.26%		2.29	%	—		—
	Discount rate	20.57% - 41.18%		22.18	%	—		—

Servicing rights carried at fair value	Weighted-average remaining life in years	5.3 - 10.4		6.5		6.0 - 10.8		6.8
	Discount rate	8.44% - 18.11%		9.59	%	8.87% - 18.11%		9.76	%
	Conditional prepayment rate	4.14% - 11.06%		8.05	%	3.85% - 8.08%		7.06	%
	Conditional default rate	0.24% - 3.85%		2.44	%	0.50% - 3.74%		2.90	%

Interest rate lock commitments	Loan funding probability	1.70% - 100%		76.69	%	11.99% - 100%		78.23	%
	Fair value of servicing rights⁽⁴⁾	0.87 - 9.49		3.97		1.64 - 5.60		4.21

Liabilities
Mortgage-backed debt related to Non-Residual Trusts	Conditional prepayment rate	1.85% - 3.16%		2.54	%	1.93% - 3.11%		2.66	%
	Conditional default rate	1.73% - 5.03%		3.06	%	1.98% - 3.85%		3.16	%
	Loss severity	72.04% - 91.28%		84.85	%	72.94% - 94.16%		85.25	%

HMBS related obligations	Weighted-average remaining life in years	1.6 - 7.7		4.1		1.9 - 7.8		4.1
	Conditional repayment rate	10.86% - 41.44%		20.20	%	10.22% - 38.67%		20.31	%
	Discount rate	1.31% - 3.24%		1.92	%	1.38% - 4.01%		2.36	%

Interest rate lock commitments	Loan funding probability	29.44% - 100%		80.36	%	46.50% - 100%		82.67	%
	Fair value of servicing rights⁽⁴⁾	1.96 - 5.21		4.19		1.89 - 5.30		4.52

⁽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 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⁾	Excludes the impact of IRLCs identified as servicing released.

Items Measured at Fair Value on a Non-Recurring Basis

Real estate owned, net is included on the consolidated financial statements within other assets and is measured at fair value on a non-recurring basis utilizing significant unobservable inputs or Level 3 assumptions in their valuation (in thousands):


	June 30, 2014		December 31, 2013
Real estate owned, net	$	79,079	$	73,573

The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net at June 30, 2014 measured on the consolidated financial statements at fair value on a non-recurring basis:

June 30, 2014

December 31, 2013

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% - 59.58%

8.42%

0.00% - 88.68%

9.48%

⁽¹⁾	Loss severity is based on projected liquidations.

The Company held real estate owned, net of $43.8 million, $34.2 million and $1.1 million in the Reverse Mortgage and Loans and Residuals segments and Other non-reportable segment, respectively, at June 30, 2014. The Company held real estate owned, net of $27.0 million, $45.3 million and $1.3 million in the Reverse Mortgage and Loans and Residuals segments and Other non-reportable segment, respectively, at December 31, 2013. 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. Management approves valuations that have been determined using the historical severity rate method.

Included in other expenses, net are lower of cost or fair value adjustments of $0.2 million and $0.3 million for the three months ended June 30, 2014 and 2013, respectively, and $0.6 million and $0.3 million for the six months ended June 30, 2014 and 2013, 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, 2014				December 31, 2013
	Fair Value Hierarchy		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents		Level 1	$	303,341	$	303,341	$	491,885	$	491,885
Restricted cash and cash equivalents		Level 1		811,670		811,670		804,803		804,803
Residential loans at amortized cost, net		Level 3		1,361,153		1,309,382		1,394,871		1,341,376
Insurance premium receivables		Level 3		100,527		95,904		103,149		97,902
Servicer and protective advances, net		Level 3		1,595,950		1,543,203		1,381,434		1,332,315
Financial liabilities
Payables to insurance carriers		Level 3		79,551		78,544		69,489		68,470
Servicer payables		Level 1		735,391		735,391		735,225		735,225
Servicing advance liabilities⁽¹⁾		Level 3		1,035,485		1,040,441		970,884		971,286
Warehouse borrowings⁽¹⁾		Level 1		1,147,935		1,151,216		1,084,112		1,085,563
Debt⁽¹⁾		Level 2		2,229,854		2,324,221		2,229,969		2,322,709
Mortgage-backed debt carried at amortized cost⁽¹⁾		Level 3		1,139,250		1,138,758		1,189,536		1,192,510

⁽¹⁾	The carrying amounts of servicing advance liabilities, warehouse borrowings, 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.

Cash and cash equivalents, restricted cash and cash equivalents, servicer payables and warehouse borrowings — The estimated fair values of these financial instruments approximates their carrying amounts due to their highly-liquid or short-term nature.

Residential loans carried 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 forward 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 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 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 this 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.

Fair Value Option

The Company has elected the fair value option for certain financial instruments, including forward loans, receivables and mortgage-backed debt related to the Non-Residual Trusts, forward loans held for sale, charged-off loans, 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 yield on forward loans of the Non-Residual Trusts and reverse loans along with any change in fair value are recorded 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). The yield on forward loans held for sale along with any change in fair value is recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss). The yield on charged-off loans along with any change in fair value is recorded in other revenues on the consolidated statements of comprehensive income (loss). With the exception of charged-off loans, the yield on 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. There is no contractual interest income recognized in relation to charged-off loans.

Presented in the table below is the estimated 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, 2014				December 31, 2013
	Estimated Fair Value		Unpaid Principal Balance		Estimated Fair Value		Unpaid Principal Balance
Loans and receivables at fair value under the fair value option
Reverse loans⁽¹⁾	$	9,482,030	$	8,741,715	$	8,738,503	$	8,135,927
Forward loans held for sale⁽¹⁾		1,173,588		1,106,136		1,015,607		976,774
Forward loans related to Non-Residual Trusts		557,786		687,940		587,265		727,110
Charged-off loans		54,997		3,272,912		—		—
Receivables related to Non-Residual Trusts⁽²⁾		36,181		36,524		43,545		43,988

Total	$	11,304,582	$	13,845,227	$	10,384,920	$	9,883,799

Debt instruments at fair value under the fair value option
Mortgage-backed debt related to Non-Residual Trusts	$	651,784	$	695,366	$	684,778	$	735,379
HMBS related obligations⁽²⁾		9,472,666		8,646,651		8,652,746		7,959,711

Total	$	10,124,450	$	9,342,017	$	9,337,524	$	8,695,090

⁽¹⁾	Includes loans that collateralize master repurchase agreements. Refer to Note 16 for further information.

⁽²⁾	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 forward loans related to Non-Residual Trusts are loans that are 90 days or more past due that have a fair value of $1.5 million and $1.7 million, and an unpaid principal balance of $8.2 million and $9.4 million, at June 30, 2014 and December 31, 2013, respectively. All charged-off loans are 90 days or more past due.

Included in other net fair value gains (losses) 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 forward loans related to Non-Residual Trusts and receivables related to Non-Residual Trusts of $0.5 million and $(0.6) million for the three months ended June 30, 2014, respectively, and $1.1 million and $(1.7) million for the six months ended June 30, 2014, respectively. The Company recorded fair value gains (losses) from changes in instrument-specific credit risk for forward loans related to Non-Residual Trusts and receivables related to Non-Residual Trusts of $0.9 million and $0.8 million for the three months ended June 30, 2013, respectively, and $(3.8) million and $3.8 million for the six months ended June 30, 2013, respectively. There were no gains or losses from instrument-specific credit risk relating to charged-off loans during the three and six months ended June 30, 2014 and 2013. As a result of being insured by the FHA, instrument-specific credit risk associated with reverse loans is insignificant. Due to the short holding period of forward loans held for sale, related fair value gains and losses from instrument-specific credit risk are insignificant.

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,
	2014			2013			2014			2013
Realized gains on sales of loans	$	102,517		$	67,218		$	189,350		$	75,526
Change in unrealized gains (losses) on loans held for sale		23,353			(15,897	)		19,177			(2,271	)
Gains (losses) on interest rate lock commitments		37,969			(17,217	)		36,363			41,404
Gains (losses) on forward sales commitments		(63,956	)		183,625			(99,812	)		179,688
Losses on MBS purchase commitments		(7,709	)		(24,662	)		(7,642	)		(24,662	)
Capitalized servicing rights		45,554			36,305			98,167			37,595
Provision for repurchases		(1,838	)		(2,010	)		(4,024	)		(2,181	)
Interest income		8,721			8,473			17,066			9,261
Other		—			114			—			34

Net gains on sales of loans	$	144,611		$	235,949		$	248,645		$	314,394

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,
	2014			2013			2014			2013
Net fair value gains (losses) on reverse loans and related HMBS obligations
Interest income on reverse loans	$	98,258		$	86,514		$	195,139		$	163,781
Change in fair value of reverse loans		(8,687	)		14,570			99,841			16,108

Net fair value gains on reverse loans		89,571			101,084			294,980			179,889

Interest expense on HMBS related obligations		(91,470	)		(79,545	)		(182,030	)		(149,220	)
Change in fair value of HMBS related obligations		28,835			5,192			(68,778	)		32,850

Net fair value losses on HMBS related obligations		(62,635	)		(74,353	)		(250,808	)		(116,370	)

Net fair value gains on reverse loans and related HMBS obligations	$	26,936		$	26,731		$	44,172		$	63,519

6.	Fair Value

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. Other than forward 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 which are required to be recorded and subsequently measured at fair value. 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. Other than the transfer of the contingent earn-out payment liability from Level 3 to Level 1, no transfers between levels occurred during the years ended December 31, 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):


	December 31, 2013
	Level 1		Level 2		Level 3		Total
Assets
Reverse loans⁽¹⁾	$	—	$	—	$	8,738,503	$	8,738,503
Forward loans related to Non-Residual Trusts		—		—		587,265		587,265
Forward loans held for sale		—		1,015,607		—		1,015,607
Receivables related to Non-Residual Trusts		—		—		43,545		43,545
Servicing rights carried at fair value		—		—		1,131,124		1,131,124
Derivative instruments		—		19,534		42,831		62,365

Total assets	$	—	$	1,035,141	$	10,543,268	$	11,578,409

Liabilities
Derivative instruments	$	—	$	2,127	$	3,755	$	5,882
Mandatory repurchase obligation		—		—		8,182		8,182
Professional fees liability related to certain securitizations		—		—		6,607		6,607
Contingent earn-out payments		5,900		—		—		5,900
Mortgage-backed debt related to Non-Residual Trusts		—		—		684,778		684,778
HMBS related obligations		—		—		8,652,746		8,652,746

Total liabilities	$	5,900	$	2,127	$	9,356,068	$	9,364,095


	December 31, 2012
	Level 1		Level 2		Level 3		Total
Assets
Reverse loans⁽¹⁾	$	—	$	—	$	6,047,108	$	6,047,108
Forward 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. There were no reverse loans held for sale at December 31, 2013.


	For the Year Ended December 31, 2013
	Fair Value January 1, 2013			Acquisition of ResCap Net Assets		Total Gains (Losses) Included in Net Income			Purchases		Sales			Issuances			Settlements			Transfers out		Fair Value December 31, 2013
Assets
Reverse loans⁽¹⁾	$	6,047,108		$	—	$	112,772		$	2,080,857	$	(76,441	)	$	981,390		$	(407,183	)	$	—	$	8,738,503
Forward loans related to Non-Residual Trusts		646,498			—		64,848			—		—			—			(124,081	)		—		587,265
Receivables related to Non-Residual Trusts		53,975			—		4,374			—		—			—			(14,804	)		—		43,545
Servicing rights carried at fair value		26,382			242,604		48,058			626,331		—			187,749			—			—		1,131,124
Derivative instruments (IRLCs)		949			—		41,882			—		—			—			—			—		42,831

Total assets	$	6,774,912		$	242,604	$	271,934		$	2,707,188	$	(76,441	)	$	1,169,139		$	(546,068	)	$	—	$	10,543,268

Liabilities
Derivative instruments (IRLCs)	$	—		$	—	$	(3,755	)	$	—	$	—		$	—		$	—		$	—	$	(3,755	)
Mandatory repurchase obligation		(9,999	)		—		181			—		—			—			1,636			—		(8,182	)
Professional fees liability related to certain securitizations		(8,147	)		—		(817	)		—		—			—			2,357			—		(6,607	)
Contingent earn-out payments		(6,100	)		—		(4,800	)		—		—			—			5,000			5,900		—
Mortgage-backed debt related to Non-Residual Trusts		(757,286	)		—		(57,678	)		—		—			—			130,186			—		(684,778	)
HMBS related obligations		(5,874,552	)		—		12,302			—		—			(3,203,959	)		413,463			—		(8,652,746	)

Total liabilities	$	(6,656,084	)	$	—	$	(54,567	)	$	—	$	—		$	(3,203,959	)	$	552,642			5,900	$	(9,356,068	)

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


	For the Year Ended December 31, 2012
	Fair Value January 1, 2012			Acquisition of RMS			Acquisition of S1L			Total Gains (Losses) Included in Net Loss			Purchases		Issuances			Settlements			Fair Value December 31, 2012
Assets
Reverse loans⁽¹⁾	$	—		$	5,331,989		$	88,929		$	65,030		$	565,171	$	29,143		$	(33,154	)	$	6,047,108
Residential loans related to Non-Residual Trusts		672,714			—			—			107,493			—		—			(133,709	)		646,498
Receivables related to Non-Residual Trusts		81,782			—			—			(11,711	)		—		—			(16,096	)		53,975
Derivative instruments (IRLCs)		—			—			—			949			—		—			—			949

Total assets	$	754,496		$	5,331,989		$	88,929		$	161,761		$	565,171	$	29,143		$	(182,959	)	$	6,748,530

Liabilities
Mandatory repurchase obligation	$	(11,849	)	$	—		$	—		$	(116	)	$	—	$	—		$	1,966		$	(9,999	)
Professional fees liability related to certain securitizations		(9,666	)		—			—			(1,091	)		—		—			2,610			(8,147	)
Contingent earn-out payments		—			—			(6,100	)		—			—		—			—			(6,100	)
Mortgage-backed debt related to Non-Residual Trusts		(811,245	)		—			—			(86,163	)		—		—			140,122			(757,286	)
HMBS related obligations		—			(5,254,231	)		—			(57,751	)		—		(596,066	)		33,496			(5,874,552	)

Total liabilities	$	(832,760	)	$	(5,254,231	)	$	(6,100	)	$	(145,121	)	$	—	$	(596,066	)	$	178,194		$	(6,656,084	)

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

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 on the consolidated statements of comprehensive income (loss). 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 on the consolidated statements of comprehensive income (loss). Total gains and losses included in net income or loss 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.

Residential loans at fair value

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. Conditional prepayment rate, conditional default rate, and loss severity are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.

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 the assistance of a third party valuation specialist to develop the discounted cash flow model used to estimate the fair value of its servicing rights. The model utilizes several sensitive assumptions which are reviewed and approved by the Company, the most sensitive of which are assumptions for mortgage prepayment or repayment speeds, default rates and discount rates. The Company believes these sensitive assumptions reflect those that a market participant would use in determining fair value. 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 and can have a significant impact on the determination of the servicing rights’ fair value. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. 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 both valuation models incorporating current market information or through observation of 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 or fallout. 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. IRLCs are classified as Level 3. 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. Significant changes in loan funding probability and the servicing rights component of IRLCs, in isolation, could result in a significant change to the fair value measurement. 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 to increase if in a gain position, or decrease, to a lower loss, if in a loss position.

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. Counterparty credit risk is taken into account when determining fair value, although its impact is diminished by daily margin posting on all forward sales and purchase derivatives.

Derivative instruments are included in either other assets or payables and accrued liabilities on the consolidated balance sheets. Refer to 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. Conditional prepayment rate, conditional default rate, and loss severity are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The mandatory repurchase obligation is included in payables and accrued liabilities on the consolidated balance sheets.

Professional fees liability related to certain securitizations — This contingent liability primarily relates to payments for surety and broker 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 prepayment, 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. Conditional prepayment rate and conditional default rate are considered to be the most significant unobservable inputs. A significant increase (decreases) to this input could result in a significantly lower (higher) fair value measurement. The professional fees liability related to certain securitizations is included in payables and accrued liabilities on 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 $5.0 million made to the prior owners of S1L during the year ended December 31, 2013, no subsequent adjustments to this liability were made and the final amount to be paid was fixed and determinable at December 31, 2013. Therefore the liability was transferred out of Level 3 and is classified as Level 1 at December 31, 2013. The remaining liability recorded at December 31, 2013 was paid in February 2014. Contingent earn-out payments are included in payables and accrued liabilities on the consolidated balance sheets.

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 repayments, discount rate, and borrower mortality rates for reverse loans. 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. Weighted-average remaining life in years, conditional repayment rate, and discount rate are considered to be the most significant unobservable inputs. Significant increases (decreases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.


	Significant Unobservable Input	Range of Input⁽¹⁾	Weighted Average of Input⁽¹⁾
Assets
Reverse loans	Weighted-average remaining life in years	2.0 - 12.9		4.4
	Conditional repayment rate	10.67%- 36.61%		20.70	%
	Discount rate	1.79% - 5.30%		2.98	%
Forward loans related to Non-Residual Trusts	Conditional prepayment rate	2.20% - 3.78%		2.99	%
	Conditional default rate	1.81% - 3.60%		2.90	%
	Loss severity	75.90% - 96.67%		88.09	%
Receivables related to Non-Residual Trusts	Conditional prepayment rate	1.93% - 3.11%		2.66	%
	Conditional default rate	1.98% - 3.85%		3.16	%
	Loss severity	72.94% - 94.16%		85.25	%
Servicing rights carried at fair value	Weighted-average remaining life in years	6.0 - 10.8		6.8
	Discount rate	8.87% - 18.11%		9.76	%
	Conditional prepayment rate	3.85% - 8.08%		7.06	%
	Conditional default rate	0.50% - 3.74%		2.90	%
Interest rate lock commitments	Loan funding probability	11.99% - 100%		78.23	%
	Fair value of servicing rights	1.64 - 5.60		4.21

Liabilities
Mandatory repurchase obligation	Conditional prepayment rate	4.19%		4.19	%
	Conditional default rate	2.75%		2.75	%
	Loss severity	72.28%		72.28	%
Professional fees liability related to certain securitizations	Conditional prepayment rate	1.93% - 3.79%		2.74	%
	Conditional default rate	1.98% - 4.57%		3.20	%
Mortgage-backed debt related to Non-Residual Trusts	Conditional prepayment rate	1.93% - 3.11%		2.66	%
	Conditional default rate	1.98% - 3.85%		3.16	%
	Loss severity	72.94% - 94.16%		85.25	%
HMBS related obligations	Weighted-average remaining life in years	1.9 - 7.8		4.1
	Conditional repayment rate	10.22% -38.67%		20.31	%
	Discount rate	1.38% - 4.01%		2.36	%
Interest rate lock commitments	Loan funding probability	46.50% - 100%		82.67	%
	Fair value of servicing rights	1.89 - 5.30		4.52

⁽¹⁾

With the exception of loss severity and fair value of servicing rights embedded in IRLCs, 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.

Items Measured at Fair Value on a Non-Recurring Basis


	December 31,
	2013		2012
Real estate owned, net	$	73,573	$	64,959

The following table presents the significant unobservable input used in the fair value measurement of real estate owned, net at December 31, 2013 measured on 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% - 88.68%

9.48

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 on the consolidated statements of comprehensive income (loss), when the carrying amount exceeds fair value. The Company held real estate owned, net of $45.3 million, $27.0 million and $1.3 million in the Loans and Residuals, Reverse Mortgage, and Other segments, respectively, at December 31, 2013. The Company held 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. These real estate owned properties are generally located in rural areas and are primarily concentrated in Texas, Mississippi, Alabama, Florida, Georgia, and Illinois. 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.

Included in other expenses, net are lower of cost or fair value adjustments of $0.8 million, $2.7 million and $5.4 million for the years ended December 31, 2013, 2012 and 2011, respectively.

Fair Value of Other Financial Instruments


	December 31, 2013						December 31, 2012
	Carrying Amount		Estimated Fair Value		Fair Value Hierarchy		Carrying Amount		Estimated Fair Value
Financial assets
Cash and cash equivalents	$	491,885	$	491,885		Level 1	$	442,054	$	442,054
Restricted cash and cash equivalents		804,803		804,803		Level 1		653,338		653,338
Residential loans at amortized cost, net		1,394,871		1,341,376		Level 3		1,490,321		1,436,592
Receivables, net:
Insurance premium receivables		103,149		97,902		Level 3		107,824		101,238
Other		172,501		172,501		Level 1		97,210		97,210
Servicer and protective advances, net		1,381,434		1,332,315		Level 3		173,047		160,632
Financial liabilities
Payables and accrued liabilities:
Payables to insurance carriers		69,489		68,470		Level 3		51,377		50,614
Other		398,079		398,079		Level 1		183,885		183,885
Servicer payables		735,225		735,225		Level 1		587,929		587,929
Servicing advance liabilities⁽¹⁾		970,884		971,286		Level 3		99,508		99,915
Debt⁽¹⁾		3,314,081		3,408,272		Level 2		1,115,804		1,165,811
Mortgage-backed debt carried at amortized cost⁽¹⁾		1,189,536		1,192,510		Level 3		1,298,999		1,300,979

⁽¹⁾	The carrying amounts of servicing advance liabilities, debt, and mortgage-backed debt carried at amortized cost are net of deferred issuance costs.

Cash and cash equivalents, restricted cash and cash equivalents, other receivables, other payables and accrued liabilities, and servicer payables — The estimated fair values 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.

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.

Debt — The Company’s term loan, convertible debt, and senior notes 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 values of the Company’s other debt, including master repurchase agreements, approximates their carrying amounts due to their highly-liquid or short-term nature.

Fair Value Option

Other than forward 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 which are required to be recorded and subsequently measured at fair value. 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 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 on the consolidated statements of comprehensive income (loss). The yield on forward loans held for sale along with any changes in fair value are recorded in net gains on sales of loans on the consolidated statements of comprehensive income (loss). 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.


	December 31, 2013				December 31, 2012
	Estimated Fair Value		Unpaid Principal Balance		Estimated Fair Value		Unpaid Principal Balance
Loans and receivables at fair value under the fair value option
Reverse loans⁽¹⁾⁽²⁾	$	8,738,503	$	8,135,927	$	6,047,108	$	5,400,876
Forward loans related to Non-Residual Trusts		587,265		727,110		646,498		814,481
Forward loans held for sale⁽²⁾		1,015,607		976,774		16,605		16,325
Receivables related to Non-Residual Trusts⁽³⁾		43,545		43,988		53,975		54,604

Total	$	10,384,920	$	9,883,799	$	6,764,186	$	6,286,286

Debt instruments at fair value under the fair value option
Mortgage-backed debt related to Non-Residual Trusts	$	684,778	$	735,379	$	757,286	$	825,200
HMBS related obligations⁽³⁾		8,652,746		7,959,711		5,874,552		5,169,135

Total	$	9,337,524	$	8,695,090	$	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 December 31, 2013.

⁽²⁾	Includes loans that collateralize master repurchase agreements. Refer to Note 18 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 forward 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 $1.7 million and $1.9 million, and an unpaid principal balance of $9.4 million and $10.0 million, at December 31, 2013 and 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 forward loans related to Non-Residual Trusts, reverse loans, and receivables related to Non-Residual Trusts of $(4.3) million, $(15.4) million and $2.9 million for the year ended December 31, 2013, respectively. The Company recorded fair value gains (losses) from changes in instrument-specific credit risk for forward loans related to Non-Residual Trusts, reverse loans, and receivables related to Non-Residual Trusts of $17.8 million, $(1.4) million and $(12.0) million for the year ended December 31, 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 Years Ended December 31,
	2013			2012
Realized gains on sales of loans	$	218,504		$	537
Change in unrealized gains on loans held for sale		24,771			266
Net fair value gains on derivatives		144,357			(153	)
Capitalized servicing rights		187,749			—
Provision for repurchases		(9,067	)		(18	)
Interest income		32,625			16
Other		35			—

Net gains on sales of loans	$	598,974		$	648

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 Years Ended December 31,
	2013			2012
Net fair value gains (losses) on reverse loans and related HMBS obligations
Interest income on reverse loans	$	347,497		$	44,314
Change in fair value of reverse loans		(239,417	)		20,716

Net fair value gains on reverse loans		108,080			65,030

Interest expense on HMBS related obligations		(321,820	)		(41,114	)
Change in fair value of HMBS related obligations		334,122			(16,637	)

Net fair value gains (losses) on HMBS related obligations		12,302			(57,751	)

Net fair value gains on reverse loans and related HMBS obligations	$	120,382		$	7,279

Other Net Fair Value Gains

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


	For the Years Ended December 31,
	2013			2012			2011
Other net fair value gains (losses)
Assets of Non-Residual Trusts	$	69,222		$	95,782		$	21,261
Liabilities of Non-Residual Trusts		(57,678	)		(86,163	)		(22,197	)
Mandatory repurchase obligation		181			(116	)		981
Professional fees liability related to certain securitizations		(817	)		(1,091	)		(607	)
Contingent earn-out payments		(4,800	)		—			2,096
Other		(47	)		(1,191	)		(490	)

Other net fair value gains	$	6,061		$	7,221		$	1,044

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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