XML 26 R15.htm IDEA: XBRL DOCUMENT

FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2024

NOTE 8—FAIR VALUE MEASUREMENTS

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:

●

Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

●

Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from, or corroborated by, market data by correlation or other means.

●

Level 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation.

The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis, and are carried at the lower of amortized cost or fair value. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement when there is evidence of impairment and for disclosure purposes (NOTE 3). 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 placement fee revenue from escrow deposits, 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 MSR assets.

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.

●

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 is classified within Level 3 of the valuation hierarchy.

●

Loans Held for Sale—All loans held for sale presented in the Condensed Consolidated Balance Sheets 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, such as changes in the U.S. Treasury rate. 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 Agency MBS using third-party broker estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2. Additional details on Pledged Securities are included in NOTE 9.

●

Contingent Consideration Liabilities—Contingent consideration liabilities from acquisitions are initially recognized at fair value at acquisition and subsequently remeasured using a Monte Carlo simulation that uses updated management forecasts and current valuation assumptions and discount rates. The Company determines the fair value of each contingent consideration liability based on probability of achievement, which incorporates management estimates. As a result, the Company classifies these liabilities as Level 3. Additional details on Contingent consideration liabilities are included in NOTE 7.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value:


							Balance as of
(in thousands)	Level 1		Level 2		Level 3		Period End
September 30, 2024
Assets
Loans held for sale	$	—	$	1,024,984	$	—	$	1,024,984
Pledged securities		47,054		156,891		—		203,945
Derivative assets		—		—		33,699		33,699
Total	$	47,054	$	1,181,875	$	33,699	$	1,262,628

Liabilities
Derivative liabilities	$	—	$	—	$	4,026	$	4,026
Contingent consideration liabilities		—		—		79,359		79,359
Total	$	—	$	—	$	83,385	$	83,385

December 31, 2023
Assets
Loans held for sale	$	—	$	594,998	$	—	$	594,998
Pledged securities		41,283		142,798		—		184,081
Derivative assets		—		—		31,451		31,451
Total	$	41,283	$	737,796	$	31,451	$	810,530

Liabilities
Derivative liabilities	$	—	$	—	$	28,247	$	28,247
Contingent consideration liabilities		—		—		113,546		113,546
Total	$	—	$	—	$	141,793	$	141,793

There were no transfers between any of the levels within the fair value hierarchy during the nine months ended September 30, 2024 and 2023.

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 and nine months ended September 30, 2024 and 2023:


	For the three months ended				For the nine months ended
(in thousands)	September 30,				September 30,
Derivative Assets and Liabilities, net	2024		2023		2024		2023
Beginning balance	$	21,272	$	20,241	$	3,204	$	15,560
Settlements		(108,571)		(80,213)		(253,824)		(259,655)
Realized gains (losses) recorded in earnings⁽¹⁾		87,299		59,972		250,620		244,095
Unrealized gains (losses) recorded in earnings⁽¹⁾		29,673		31,552		29,673		31,552
Ending balance	$	29,673	$	31,552	$	29,673	$	31,552

(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 September 30, 2024:


	Quantitative Information about Level 3 Fair Value Measurements
(in thousands)	Fair Value		Valuation Technique	Unobservable Input⁽¹⁾	Input Range ⁽¹⁾	Weighted Average ⁽²⁾
Derivative assets	$	33,699	Discounted cash flow	Counterparty credit risk	—	—
Derivative liabilities	$	4,026	Discounted cash flow	Counterparty credit risk	—	—
Contingent consideration liabilities	$	79,359	Monte Carlo Simulation	Probability of earnout achievement	0% - 100%	47%

(1)	Significant changes in this input may lead to significant changes in the fair value measurements.

(2)	Contingent consideration weighted based on maximum gross earnout amount.

The carrying amounts and the fair values of the Company's financial instruments as of September 30, 2024 and December 31, 2023 are presented below:


	September 30, 2024				December 31, 2023
	Carrying		Fair		Carrying		Fair
(in thousands)	Amount		Value		Amount		Value
Financial Assets:
Cash and cash equivalents	$	179,759	$	179,759	$	328,698	$	328,698
Restricted cash		39,827		39,827		21,422		21,422
Pledged securities		203,945		203,945		184,081		184,081
Loans held for sale		1,024,984		1,024,984		594,998		594,998
Loans held for investment, net⁽¹⁾		52,767		52,767		40,056		40,139
Derivative assets⁽¹⁾		33,699		33,699		31,451		31,451
Total financial assets	$	1,534,981	$	1,534,981	$	1,200,706	$	1,200,789

Financial Liabilities:
Derivative liabilities⁽²⁾	$	4,026	$	4,026	$	28,247	$	28,247
Contingent consideration liabilities⁽²⁾		79,359		79,359		113,546		113,546
Warehouse notes payable		1,019,850		1,020,236		596,178		596,428
Notes payable		769,376		780,487		773,358		786,500
Total financial liabilities	$	1,872,611	$	1,884,108	$	1,511,329	$	1,524,721

(1)

Included as a component of Other Assets on the Condensed Consolidated Balance Sheets.

(2)

Included as a component of Other Liabilities on the Condensed Consolidated Balance Sheets.

The following methods and assumptions were used for recurring fair value measurements as of September 30, 2024 and December 31, 2023.

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 third-party broker estimates of fair value.

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

Contingent Consideration Liabilities—Consists of the estimated fair values of expected future earnout payments related to acquisitions completed primarily in 2021 and 2022. The earnout liabilities are valued using a Monte Carlo simulation analysis. The fair value of the contingent consideration liabilities incorporates unobservable inputs, such as the probability of earnout achievement, volatility rates, and discount rate, to determine the expected earnout cash flows. The probability of the earnout achievement is based on management’s estimate of the expected future performance and other financial metrics of each of the acquired entities, which are subject to significant uncertainty.

Derivative Instruments—Consists 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 adversely 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 enters into a sale commitment with the investor simultaneously 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 the Company’s related commitments to the borrower to allow for, among other things, 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 of 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 effects of interest rate movements 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 the Company’s 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 September 30, 2024 and December 31, 2023:


			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
September 30, 2024
Rate lock commitments	$	755,874		31,219		(3,865)		27,354		27,354		—		—
Forward sale contracts		1,769,986		—		2,319		2,319		6,345		(4,026)		—
Loans held for sale		1,014,112		9,326		1,546		10,872		—		—		10,872
Total			$	40,545	$	—	$	40,545	$	33,699	$	(4,026)	$	10,872

December 31, 2023
Rate lock commitments	$	463,626	$	15,908	$	11,492	$	27,400	$	27,400	$	—	$	—
Forward sale contracts		1,035,964		—		(24,196)		(24,196)		4,051		(28,247)		—
Loans held for sale		572,338		9,956		12,704		22,660		—		—		22,660
Total			$	25,864	$	—	$	25,864	$	31,451	$	(28,247)	$	22,660