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Fair Value
 6 Months Ended
Jun. 30, 2014
Fair Value Disclosures [Abstract]  
Fair Value
. Fair Value
Basis or Measurement
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A three-tier fair value hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 — 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