25. Fair Value of Financial Instruments

Current accounting guidance on fair value measurements establishes a framework for measuring fair value and provides expanded disclosures about fair value measurements. The guidance:

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Defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date; and

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Establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the hierarchy are defined as follows:

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Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

•

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

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Level 3 inputs are unobservable inputs for asset or liabilities.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

Investments in Mortgage Revenue Bonds and Bond Purchase Commitments. The fair values of the Partnership’s investments in mortgage revenue bonds and mortgage bond purchase commitments have each been based on a discounted cash flow or yield to maturity analysis. There is no active trading market for the mortgage revenue bonds and price quotes for the mortgage revenue bonds are not available. If available, the Partnership may also consider price quotes on similar mortgage revenue bonds or other information from external sources, such as pricing services. The estimates of the fair values of these mortgage revenue bonds, whether estimated by the Partnership or based on external sources, are based largely on unobservable inputs the Partnership believes would be used by market participants. Additionally, the calculation methodology used by the external sources and the Partnership encompasses the use of judgment in its application. To validate changes in the fair value of the Partnership’s investments in mortgage revenue bonds between reporting periods, the Partnership looks at the key inputs such as changes in the ‘A’ rated municipal bond rates on similar mortgage revenue bonds as well as changes in the operating performance of the underlying property serving as collateral for each mortgage revenue bond. The Partnership validates that the changes in the estimated fair value of the mortgage revenue bonds move with the changes in these monitored factors. Given these facts the fair value measurement of the Partnership’s investment in mortgage revenue bonds is categorized as a Level 3 input. At December 31, 2016, the range of effective yields on the individual mortgage revenue bonds was 4.9% to 12.4% per annum. At December 31, 2015, the range of effective yields on the individual mortgage revenue bonds was 4.2% to 12.1% per annum.

The fair value of the bond purchase commitments is determined in the same manner as the mortgage revenue bonds.

Investments in PHC Certificates. The fair value of the Partnership’s investment in PHC Certificates has been based on a yield to maturity analysis performed by the Partnership. There is no active trading market for the trusts’ certificates owned by the Partnership, but it will look at estimated values as determined by pricing services when available. The estimates of the fair values of these trusts’ certificates begin with the current market yield rate for a “AAA” rated tax-free municipal bond for a term consistent with the weighted-average life of each of the Public Housing Capital Fund trusts, adjusted largely for unobservable inputs the Partnership believes would be used by market participants. Additionally, the calculation methodology used by external pricing services and the Partnership encompasses the use of judgment in its application. The Partnership validates that the changes in the estimated fair value of PHC Certificates move with the changes in the market yield rates of investment grade rated mortgage revenue municipal bonds with terms of similar length. Given these facts the fair value measurement of the Partnership’s investment in PHC Certificates is categorized as a Level 3 input. At December 31, 2016, the range of effective yields on the PHC Certificates was 4.3% to 6.0% per annum. At December 31, 2015, the range of effective yields on the PHC Certificates was 3.9% to 5.7% per annum.

Investment in MBS Securities. At December 31, 2015, the fair value of the Partnership’s investment in MBS Securities was based upon prices obtained from a third-party pricing service, which are indicative of market activity. The valuation methodology of the Partnership’s third party pricing service incorporates commonly used market pricing methods, incorporates trading activity observed in the marketplace, and other data inputs. The methodology also considered the underlying characteristics of each security, which were also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; geography; and prepayment speeds. The Partnership analyzes pricing data received from the third-party pricing service by comparing it to valuation information obtained from at least one other third party pricing service, ensuring they were within a tolerable range of difference which the Partnership estimates as 7.5%. The Partnership also looked at observations of trading activity in the marketplace when available. Given these facts, the fair value measurements of the Partnership’s investment in MBS Securities were categorized as Level 2 inputs.

Taxable bonds. The fair values of the Partnership’s investments in taxable bonds have each been based on a discounted cash flow or yield to maturity analysis. There is no active trading market for the taxable bonds and price quotes are not available. The estimates of the fair values of these taxable bonds, whether estimated by the Partnership or based on external sources, are based largely on unobservable inputs the Partnership believes would be used by market participants. Additionally, the calculation methodology used by the external sources and the Partnership encompasses the use of judgment in its application. To validate changes in the fair value of the Partnership’s investments in taxable bonds between reporting periods, management looks at the key inputs such as changes in the current market yields on similar bonds as well as changes in the operating performance of the underlying property serving as collateral for each bond. The Partnership validates the changes in the estimated fair value of the taxable bonds move with the changes in these monitored factors. Given these facts the fair value measurement of the Partnership’s investment in taxable bonds is categorized as a Level 3 input.

Interest rate derivatives. The effect of the Partnership’s interest rate derivatives is to set a cap, or upper limit, on the base rate of interest paid on the Partnership’s variable rate debt equal to the notional amount of the derivative agreement. The effect of the Partnership’s interest rate swaps is to change a variable rate debt obligation to a fixed rate for that portion of the debt equal to the notional amount of the derivative agreement. The fair value of the interest rate derivatives is based on a model whose inputs is not observable and therefore is categorized as a Level 3 input. The inputs in the valuation model include three-month LIBOR rates, unobservable adjustments to account for the SIFMA index, as well as any recent interest rate cap trades with similar terms.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are summarized as follows:

	Fair Value Measurements at December 31, 2016
Description	Assets and Liabilities at Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and Liabilities
Mortgage revenue bonds, held in trust	$	590,194,179		$	-	$	-	$	590,194,179
Mortgage revenue bonds		90,016,872			-		-		90,016,872
Bond purchase commitments (reported within other assets)		2,399,449			-		-		2,399,449
PHC Certificates		57,158,068			-		-		57,158,068
Taxable bonds (reported within other assets)		4,084,599			-		-		4,084,599
Derivative contracts (reported within other assets)		383,604			-		-		383,604
Derivative swap liability		(1,339,283	)		-		-		(1,339,283	)
Total Assets and Liabilities at Fair Value, net	$	742,897,488		$	-	$	-	$	742,897,488

The following tables summarizes the activity related to Level 3 assets and liabilities for the year ended December 31, 2016:

	For Twelve Months Ended December 31, 2016
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds ⁽¹⁾			Bond Purchase Commitments			PHC Certificates			Taxable Bonds			Interest Rate Derivatives ⁽²⁾			Total
Beginning Balance January 1, 2016	$	583,683,137		$	5,634,360		$	60,707,290		$	4,824,060		$	(972,898	)	$	653,875,949
Total gains (losses) (realized/unrealized)
Included in earnings		175,769			-			(54,605	)		-			17,618			138,782
Included in other comprehensive (loss) income		(17,342,217	)		(3,234,911	)		(1,480,497	)		(188,299	)		-			(22,245,924	)
Purchases		130,620,000			-			-			-			-			130,620,000
Sale of securities		(9,295,000	)		-			-			-			(399	)		(9,295,399	)
Settlements		(7,630,638	)		-			(2,014,120	)		(551,162	)		-			(10,195,920	)
Ending Balance December 31, 2016	$	680,211,051		$	2,399,449		$	57,158,068		$	4,084,599		$	(955,679	)	$	742,897,488
Total amount of losses for the period included in earnings attributable to the change in unrealized losses relating to assets or liabilities held on December 31, 2016	$	-		$	-		$	-		$	-		$	17,618		$	17,618

⁽¹⁾ Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.
⁽²⁾ Interest rate derivatives include derivative contracts reported in other assets as well as derivative swap liabilities.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2015 are summarized as follows:

	Fair Value Measurements at December 31, 2015
Description	Assets and Liabilities at Fair Value			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets and Liabilities
Mortgage revenue bonds held in trust	$	536,316,481		$	-	$	-	$	536,316,481
Mortgage revenue bonds		47,366,656			-		-		47,366,656
Bond purchase commitments (reported within other assets)		5,634,360			-		-		5,634,360
PHC Certificates		60,707,290			-		-		60,707,290
MBS Securities		14,775,309			-		14,775,309		-
Taxable bonds (reported within other assets)		4,824,060			-		-		4,824,060
Derivative contracts (reported within other assets)		344,177			-		-		344,177
Interest swap liability		(1,317,075	)		-		-		(1,317,075	)
Total Assets and Liabilities at Fair Value	$	668,651,258		$	-	$	14,775,309	$	653,875,949

The following tables summarizes the activity related to Level 3 assets and liabilities for the year ended December 31, 2015:

	For Twelve Months Ended December 31, 2015
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds ⁽¹⁾			Bond Purchase Commitments			PHC Certificates			Taxable Bonds			Interest Rate Derivatives ⁽²⁾			Total
Beginning Balance January 1, 2015	$	449,024,137		$	5,780,413		$	61,263,123		$	4,616,565		$	267,669		$	520,951,907
Total gains (losses) (realized/unrealized)
Included in earnings (interest expense)		-			-			-			-			(1,802,655	)		(1,802,655	)
Included in other comprehensive income		9,370,264			(146,053	)		462,297			(138,682	)		-			9,547,826
Purchases		188,572,000			-			-			-			-			188,572,000
Mortgage revenue bond exchanged for MF Property		(41,580,919	)		-			-			-			-			(41,580,919	)
Purchase interest rate derivative		-			-			-			-			562,088			562,088
Settlements		(21,702,345	)		-			(1,018,130	)		346,177			-			(22,374,298	)
Ending Balance December 31, 2015	$	583,683,137		$	5,634,360		$	60,707,290		$	4,824,060		$	(972,898	)	$	653,875,949
Total amount of losses for the period included in earnings attributable to the change in unrealized losses relating to assets or liabilities held on December 31, 2015	$	-		$	-		$	-		$	-		$	(1,802,655	)	$	(1,802,655	)

⁽¹⁾ Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.
⁽²⁾ Interest rate derivatives include derivative contracts reported in other assets as well as derivative swap liabilities.

The following tables summarizes the activity related to Level 3 assets and liabilities for the year ended December 31, 2014:

	For Twelve Months Ended December 31, 2014
	Fair Value Measurements Using Significant
	Unobservable Inputs (Level 3)
	Mortgage Revenue Bonds ⁽¹⁾			Bond Purchase Commitments			PHC Certificates			Taxable Bonds			Interest Rate Derivatives ⁽²⁾			Total
Beginning Balance January 1, 2014	$	285,318,171		$	(4,852,177	)	$	62,056,379		$	4,075,953		$	888,120		$	347,486,446
Total gains (losses) (realized/unrealized)
Included in earnings (interest expense)		-			-			-			-			(2,003,351	)		(2,003,351	)
Included in other comprehensive (loss) income		52,272,236			10,632,590			5,219,937			685,612			-			68,810,375
Purchases		142,794,827			-			-			-			-			142,794,827
Purchase interest rate derivative		-			-			-			-			1,382,900			1,382,900
Mortgage revenue bond and MBS Securities sales and redemption		(30,464,798	)		-			-			-			-			(30,464,798	)
Settlements		(896,299	)		-			(6,013,193	)		(145,000	)		-			(7,054,492	)
Ending Balance December 31, 2014	$	449,024,137		$	5,780,413		$	61,263,123		$	4,616,565		$	267,669		$	520,951,907
Total amount of losses for the period included in earnings attributable to the change in unrealized losses relating to assets or liabilities held on December 31, 2014	$	-		$	-		$	-		$	-		$	(2,003,351	)	$	(2,003,351	)

⁽¹⁾ Mortgage revenue bonds includes both bonds held in trust as well as those held by the Partnership.
⁽²⁾ Interest rate derivatives include derivative contracts reported in other assets as well as derivative swap liabilities.

Income and losses included in earnings for the periods shown above are included in interest expense.

The Partnership calculates a fair value of each financial liability using a discounted cash flow model based on the debt amortization schedules at the effective rate of interest for each period represented. This estimate of fair value is based on Level 3 inputs. The table below represents the fair value of the financial liabilities held on the Consolidated Balance Sheets at December 31, 2016 and 2015:

	December 31, 2016				December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Liabilities:
Debt financing and LOCs	$	555,199,700	$	553,083,924	$	468,993,716	$	475,415,345
Mortgages payable and other secured financing	$	51,379,512	$	51,595,281	$	69,247,574	$	67,735,213