The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments when there is evidence of impairment. The Company's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur on occasion, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of the Company’s MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, estimated revenue from escrow accounts, delinquency status, late charges, costs to service, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value.

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company's assets and liabilities carried at fair value:

●

Derivative Instruments—The derivative positions consist of interest rate lock commitments with borrowers and forward sale agreements to the Agencies. The fair value of these instruments is estimated using a discounted cash flow model developed based on changes in the applicable U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company, and are classified within Level 3 of the valuation hierarchy.

●

Loans Held for Sale—Loans held for sale are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted observable inputs from market participants. Therefore, the

Company classifies these loans held for sale as Level 2.

●

Pledged Securities—Investments in money market funds are valued using quoted market prices from recent trades. Therefore, the Company classifies this portion of pledged securities as Level 1. The Company determines the fair value of its AFS investments in Agency debt securities using discounted cash flows that incorporate observable inputs from market participants and then compares the fair value to broker estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2.

On March 23, 2020, the U.S. Federal Reserve announced steps to support the U.S. economy during the COVID-19 Crisis, including directing the Federal Open Market Committee to purchase Treasury securities and Agency mortgage-backed securities in the amounts necessary to support stable market prices and smooth market function. Consequently, Agency mortgage-backed securities remain actively traded by market participants, and the value of the Company’s investments in Agency debt securities have remained stable despite the economic disruption caused by the COVID-19 Crisis. The fair value of the Company’s rate lock commitments tied to Agency loans and loans held for sale increased significantly from December 31, 2019 to March 31, 2020 as a result of (i) a significant increase in the balance of rate lock commitments and loans held for sale due to increased lending activity during the first quarter and (ii) a steep decline in the underlying interest rates, primarily the 10-year U.S. Treasury rate, from the time of rate lock and the end of the first quarter. The increase in the fair value of the Company’s loans held for sale and derivative assets related to the change in interest rates had an equal and offsetting increase in the fair value of derivative liabilities. No changes were made to the valuation methodologies used to estimate fair value.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2020, and December 31, 2019, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:


	Quoted Prices in		Significant		Significant
	Active Markets		Other		Other
	For Identical		Observable		Unobservable
	Assets		Inputs		Inputs		Balance as of
(in thousands)	(Level 1)		(Level 2)		(Level 3)		Period End
March 31, 2020
Assets
Loans held for sale	$	—	$	1,186,577	$	—	$	1,186,577
Pledged securities		8,543		112,952		—		121,495
Derivative assets		—		—		158,233		158,233
Total	$	8,543	$	1,299,529	$	158,233	$	1,466,305

Liabilities
Derivative liabilities	$	—	$	—	$	172,623	$	172,623
Total	$	—	$	—	$	172,623	$	172,623

December 31, 2019
Assets
Loans held for sale	$	—	$	787,035	$	—	$	787,035
Pledged securities		7,204		114,563		—		121,767
Derivative assets		—		—		15,568		15,568
Total	$	7,204	$	901,598	$	15,568	$	924,370

Liabilities
Derivative liabilities	$	—	$	—	$	36	$	36
Total	$	—	$	—	$	36	$	36

There were no transfers between any of the levels within the fair value hierarchy during the three months ended March 31, 2020.

Derivative instruments (Level 3) are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instruments is presented below for the three months ended March 31, 2020 and 2019:


	Fair Value Measurements
	Using Significant Unobservable Inputs:
	Derivative Instruments
	For the three months ended
	March 31,
(in thousands)	2020		2019
Derivative assets and liabilities, net
Beginning balance	$	15,532	$	2,839
Settlements		(174,295)		(103,860)
Realized gains recorded in earnings (1)		158,763		101,021
Unrealized gains (losses) recorded in earnings (1)		(14,390)		(2,286)
Ending balance	$	(14,390)	$	(2,286)

(1)	Realized and unrealized gains (losses) from derivatives are recognized in Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income.

The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of March 31, 2020:


	Quantitative Information about Level 3 Measurements
(in thousands)	Fair Value		Valuation Technique	Unobservable Input (1)	Input Value (1)
Derivative assets	$	158,233	Discounted cash flow	Counterparty credit risk	—
Derivative liabilities	$	172,623	Discounted cash flow	Counterparty credit risk	—

(1)	Significant increases in this input may lead to significantly lower fair value measurements.

The carrying amounts and the fair values of the Company's financial instruments as of March 31, 2020 and December 31, 2019 are presented below:


	March 31, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
(in thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	$	205,309	$	205,309	$	120,685	$	120,685
Restricted cash		30,745		30,745		8,677		8,677
Pledged securities		121,495		121,495		121,767		121,767
Loans held for sale		1,186,577		1,186,577		787,035		787,035
Loans held for investment, net		454,213		457,254		543,542		546,033
Derivative assets		158,233		158,233		15,568		15,568
Total financial assets	$	2,156,572	$	2,159,613	$	1,597,274	$	1,599,765

Financial liabilities:
Derivative liabilities	$	172,623	$	172,623	$	36	$	36
Secured borrowings		70,548		70,548		70,548		70,548
Warehouse notes payable		1,305,846		1,306,632		906,128		906,821
Note payable		293,371		272,874		293,964		297,750
Total financial liabilities	$	1,842,388	$	1,822,677	$	1,270,676	$	1,275,155

The following methods and assumptions were used for recurring fair value measurements as of March 31, 2020.

Cash and Cash Equivalents and Restricted Cash—The carrying amounts approximate fair value because of the short maturity of these instruments (Level 1).

Pledged Securities—Consist of cash, highly liquid investments in money market accounts invested in government securities, and investments in Agency debt securities. The investments of the money market funds typically have maturities of 90 days or less and are valued using quoted market prices from recent trades. The fair value of the Agency debt securities incorporates the contractual cash flows

of the security discounted at market-rate, risk-adjusted yields.

Loans Held for Sale—Consist of originated loans that are generally transferred or sold within 60 days from the date that the mortgage loan is funded and are valued using discounted cash flow models that incorporate observable inputs from market participants.

Derivative Instruments—Consist of interest rate lock commitments and forward sale agreements. These instruments are valued using discounted cash flow models developed based on changes in the U.S. Treasury rate and other observable market data. The value is determined after considering the potential impact of collateralization, adjusted to reflect nonperformance risk of both the counterparty and the Company.

Fair Value of Derivative Instruments and Loans Held for Sale—In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move between the time of the "lock-in" of rates by the borrower and the sale date of the loan to an investor.

To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company's policy is to enter into a sale commitment with the investor simultaneous with the rate lock commitment with the borrower. The sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than our related commitments to the borrower to allow, among other things, for the closing of the loan and processing of paperwork to deliver the loan into the sale commitment.

Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. The fair value of the Company's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:

●

the estimated gain from the expected loan sale to the investor (Level 2);

●

the expected net cash flows associated with servicing the loan, net of any guaranty obligations retained (Level 2);

●

the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and

●

the nonperformance risk of both the counterparty and the Company (Level 3; derivative instruments only).

The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan (Level 2). The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to the fair value of future servicing, net at loan sale (Level 2).

To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount (Level 2).

The fair value of the Company's forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

The fair value of the Company’s interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in interest rate lock commitments and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of our counterparties and the short duration of interest rate lock commitments and forward sale contracts, the risk of nonperformance by the Company’s counterparties has historically been minimal (Level 3).

The following table presents the components of fair value and other relevant information associated with the Company’s derivative instruments and loans held for sale as of March 31, 2020 and December 31, 2019.


			Fair Value Adjustment Components						Balance Sheet Location
													Fair Value
	Notional or		Estimated				Total						Adjustment
	Principal		Gain		Interest Rate		Fair Value		Derivative		Derivative		To Loans
(in thousands)	Amount		on Sale		Movement		Adjustment		Assets		Liabilities		Held for Sale
March 31, 2020
Rate lock commitments	$	2,824,387	$	49,475	$	108,151	$	157,626	$	157,642	$	(16)	$	—
Forward sale contracts		3,920,466		—		(172,016)		(172,016)		591		(172,607)		—
Loans held for sale		1,096,079		26,633		63,865		90,498		—		—		90,498
Total			$	76,108	$	—	$	76,108	$	158,233	$	(172,623)	$	90,498

December 31, 2019
Rate lock commitments	$	511,114	$	12,199	$	(1,975)	$	10,224	$	10,247	$	(23)	$	—
Forward sale contracts		1,285,656		—		5,308		5,308		5,321		(13)		—
Loans held for sale		774,542		15,826		(3,333)		12,493		—		—		12,493
Total			$	28,025	$	—	$	28,025	$	15,568	$	(36)	$	12,493