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Fair Value Measurements
6 Months Ended
Jun. 30, 2017
Fair Value Measurements  
Fair Value Measurements

Note 6 – Fair Value Measurements

 

The Company adopted the provisions of ASC 820 Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 established a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories based on the inputs as follows:

 

Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.

 

Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, 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 assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

 

Level 3 — Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of investments. Fair value for these investments are determined using valuation methodologies that consider a range of factors, including but not limited to the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash held in money market funds

 

$

632

 

$

 —

 

$

 —

 

$

632

Loans, held for sale, at fair value

 

 

 —

 

 

149,240

 

 

57,466

 

 

206,706

Loans, held at fair value

 

 

 —

 

 

 —

 

 

170,128

 

 

170,128

Mortgage backed securities, at fair value

 

 

 —

 

 

 —

 

 

43,877

 

 

43,877

Derivative instruments, at fair value

 

 

 —

 

 

1,468

 

 

2,719

 

 

4,187

Residential mortgage servicing rights, at fair value

 

 

 —

 

 

 —

 

 

66,797

 

 

66,797

Total assets

 

$

632

 

$

150,708

 

$

340,987

 

$

492,327

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments, at fair value

 

$

 —

 

$

931

 

$

 —

 

$

931

Contingent consideration

 

 

 —

 

 

 —

 

 

8,939

 

 

8,939

Total liabilities

 

$

 —

 

$

931

 

$

8,939

 

$

9,870

 

The following table presents the Company’s financial instruments carried at fair value on a recurring basis as of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In Thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash held in money market funds

 

$

632

 

$

 —

 

$

 —

 

$

632

 

Short term investments

 

 

319,984

 

 

 —

 

 

 —

 

 

319,984

 

Loans, held for sale, at fair value

 

 

 —

 

 

164,485

 

 

17,312

 

 

181,797

 

Loans, held at fair value

 

 

 —

 

 

 —

 

 

81,592

 

 

81,592

 

Mortgage backed securities, at fair value

 

 

 —

 

 

 —

 

 

32,391

 

 

32,391

 

Derivative instruments, at fair value

 

 

 —

 

 

3,095

 

 

2,690

 

 

5,785

 

Residential mortgage servicing rights, at fair value

 

 

 —

 

 

 —

 

 

61,376

 

 

61,376

 

Total assets

 

$

320,616

 

$

167,580

 

$

195,361

 

$

683,557

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative instruments, at fair value

 

$

 —

 

$

643

 

$

 —

 

$

643

 

Contingent consideration

 

 

 —

 

 

 —

 

 

14,487

 

 

14,487

 

Total liabilities

 

$

 —

 

$

643

 

$

14,487

 

$

15,130

 

 

The following table presents a summary of changes in the fair value of loans, held at fair value, classified as Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In Thousands)

    

2017

    

2016

    

2017

    

2016

Beginning Balance

 

$

107,691

 

$

174,344

 

$

81,592

 

$

155,134

Realized gains, net

 

 

(32)

 

 

842

 

 

(6)

 

 

2,795

Unrealized gains (losses), net

 

 

1,548

 

 

1,722

 

 

2,178

 

 

1,646

Originations

 

 

64,351

 

 

79,753

 

 

91,850

 

 

188,805

Sales

 

 

(3,408)

 

 

(43,544)

 

 

(5,424)

 

 

(130,115)

Principal payments

 

 

(22)

 

 

(197)

 

 

(62)

 

 

(5,345)

Ending Balance

 

$

170,128

 

$

212,920

 

$

170,128

 

$

212,920

 

As of June 30, 2017 and December 31, 2016, the unrealized gains on loans, held at fair value were $4.6 million and $2.5 million, respectively.

 

The following table presents a summary of changes in the fair value of loans, held for sale, at fair value classified as Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In Thousands)

    

2017

    

2016

    

2017

    

2016

Beginning Balance

 

$

37,325

 

$

 —

 

$

17,312

 

$

 —

Realized gains, net

 

 

1,196

 

 

 —

 

 

2,113

 

 

 —

Unrealized gains, net

 

 

298

 

 

 —

 

 

824

 

 

 —

Purchases

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Originations

 

 

87,241

 

 

 —

 

 

156,907

 

 

 —

Sales

 

 

(67,908)

 

 

 —

 

 

(119,374)

 

 

 —

Principal payments

 

 

(686)

 

 

 —

 

 

(686)

 

 

 —

Transfer from loans, held-for-investment, net

 

 

 —

 

 

 —

 

 

370

 

 

 —

Ending Balance

 

$

57,466

 

$

 —

 

$

57,466

 

$

 —

 

As of June 30, 2017 and December 31, 2016, the unrealized gains on loans, held for sale, at fair value were $1.0 million and $0.1 million, respectively.

 

The following table presents a summary of changes in the fair value of MBS, at fair value classified as Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In Thousands)

    

2017

    

2016

 

2017

    

2016

Beginning Balance

 

$

31,365

 

$

117,105

 

$

32,391

 

$

213,504

Accreted discount, net

 

 

53

 

 

18

 

 

108

 

 

82

Realized gains (losses), net

 

 

(151)

 

 

(501)

 

 

38

 

 

(3,552)

Unrealized gains (losses), net

 

 

1,162

 

 

1,653

 

 

1,117

 

 

3,654

Purchases

 

 

14,448

 

 

 —

 

 

14,448

 

 

8,544

Sales / Principal Payments

 

 

(3,000)

 

 

(91,262)

 

 

(4,225)

 

 

(195,219)

Ending Balance

 

$

43,877

 

$

27,013

 

$

43,877

 

$

27,013

 

As of June 30, 2017 and December 31, 2016, the unrealized gain (loss) on MBS at fair value were $0.8 million and ($0.3 million), respectively.

 

The following table presents a summary of changes in the fair value of residential mortgage servicing rights, at fair value classified as Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In Thousands)

    

2017

    

2016

 

2017

    

2016

Beginning Balance

 

$

64,625

 

$

 —

 

$

61,376

 

$

 —

Additions due to loans sold, servicing retained

 

 

5,332

 

 

 —

 

 

10,384

 

 

 —

Loan pay-offs

 

 

(1,489)

 

 

 —

 

 

(2,739)

 

 

 —

Unrealized losses

 

 

(1,671)

 

 

 —

 

 

(2,224)

 

 

 —

Ending Balance

 

$

66,797

 

$

 —

 

 

66,797

 

 

 —

 

As of June 30, 2017 and December 31, 2016, the unrealized gains on residential mortgage servicing rights, at fair value were $4.7 million and $6.9 million, respectively. 

 

The following table presents a summary of changes in the fair value of derivatives instruments, at fair value classified as Level 3, or interest rate lock commitments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In Thousands)

    

2017

    

2016

 

2017

    

2016

Beginning Balance

 

$

1,378

 

$

 —

 

$

2,690

 

$

 —

Unrealized gains

 

 

1,341

 

 

 —

 

 

29

 

 

 —

Ending Balance

 

$

2,719

 

$

 —

 

$

2,719

 

$

 —

 

As of June 30, 2017 and December 31, 2016, the unrealized losses on derivative instruments, at fair value were $0.8 million and $0.8 million, respectively. 

 

The following table presents a summary of changes in the fair value of contingent consideration classified as Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

(In Thousands)

    

2017

    

2016

 

2017

    

2016

Beginning Balance

 

$

8,841

 

$

 —

 

$

14,487

 

$

 —

Adjustment for legal settlement

 

 

 —

 

 

 —

 

 

(5,744)

 

 

 —

Amortization

 

 

98

 

 

 —

 

 

196

 

 

 —

Ending Balance

 

$

8,939

 

$

 —

 

$

8,939

 

$

 —

 

As of June 30, 2017 and December 31, 2016, there was no unrealized gain (loss) on contingent consideration.

 

The Company’s policy is to recognize transfers in and transfers out as of the beginning of the period of the event or the change in circumstances that caused the transfer. Transfers between Level 2 and Level 3 generally relate to whether there were changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments. There were no transfers to or from Level 3 for the consolidated balance sheet periods presented.

 

Valuation Process for Fair Value Measurements

 

The Company establishes valuation processes and procedures designed so that fair value measurements are appropriate and reliable, that they are based on observable inputs where possible, and that valuation approaches are consistently applied and the assumptions and inputs are reasonable. The Company has also established processes to provide that the valuation methodologies, techniques and approaches for investments that are categorized within Level 3 of the fair value hierarchy are fair, consistent and verifiable. The Company’s processes provide a framework that ensures the oversight of the Company’s fair value methodologies, techniques, validation procedures, and results.

 

The Company designates a valuation committee (the “Committee”) to oversee the entire valuation process of the Company’s Level 3 investments. The Committee is comprised of various personnel who are responsible for developing the Company’s written valuation policies, processes and procedures, conducting periodic reviews of the valuation policies, and performing validation procedures on the overall fairness and consistent application of the valuation policies and processes and that the assumptions and inputs used in valuation are reasonable.

 

The validation procedures overseen by the Committee are also intended to provide that the values received from external third-party pricing sources are consistent with the Company’s Valuation Policy and are carried at fair value. To the extent that there are no exchange pricing, vendor marks or broker quotes readily available, the Company may use an internal valuation model or other valuation methodology that may be based on unobservable market inputs to fair value the investment.

 

The values provided by a third-party pricing service are calculated based on key inputs provided by the Company including collateral values, unpaid principal balances, cash flow velocity, contractual status and anticipated disposition timelines. In addition, the Company performs an internal valuation used to assess and review the reasonableness and validity of the fair values provided by a third party. The Company also performs analytical procedures, which include automated checks consisting of prior-period variance analysis, comparisons of actual prices to internally calculate expected prices based on observable market changes, analysis of changes in pricing ranges, and relative value and yield comparisons using the Company’s proprietary valuation models.

 

Upon completion of the review process described above, the Company may provide additional quantitative and qualitative data to the third-party pricing service to consider in valuing certain financial assets and liabilities, as applicable. Such data may include deal specific information not included in the data tape provided to the third party, outliers when compared to the unpaid principal balance and collateral value and knowledge of any impending liquidation of an investment. If deemed necessary by the third party and management, the investments are re-valued by the third party to account for the updated information.

 

The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level 3 of the fair value hierarchy as of June 30, 2017 using third party information without adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Predominant

 

 

 

 

 

 

Weighted

 

 

 

 

 

 Valuation

 

 

 

 

 

 

Average Price

(In Thousands, except price)

    

Fair Value

    

Technique

    

Type

    

Price Range

    

(a)

Loans, held at fair value

 

$

170,128

 

Single External Source

 

Third Party Mark

 

$

100.00 – 104.00

 

$

102.80

Loans, held for sale, at fair value

 

 

57,466

 

Single External Source

 

Third Party Mark

 

 

99.89 – 107.06

 

 

101.72

Mortgage backed securities, at fair value (b)

 

 

43,741

 

Broker Quotes

 

Third Party Mark

 

 

29.96 – 104.01

 

 

70.27

Mortgage backed securities, at fair value

 

 

136

 

Transaction Price

 

Transaction Price

 

 

99.00 – 99.00

 

 

99.00

Residential mortgage servicing rights, at fair value

 

 

66,797

 

Single external source

 

Discounted cash flow

 

 

N/A

 

 

N/A

Contingent consideration

 

 

8,939

 

Single external source

 

Option pricing model

 

 

N/A

 

 

N/A


(a)Prices are weighted based on the unpaid principal balance of the loans and securities included in the range for each class

(b)Price ranges and weighted averages exclude interest-only strips with a fair value of $1.4 million as of June 30, 2017.

 

The following table summarizes the valuation techniques and significant unobservable inputs used for the Company’s financial instruments that are categorized within Level 3 of the fair value hierarchy as of December 31, 2016 using third-party information without adjustment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Predominant

    

 

    

 

 

    

Weighted

 

 

 

 

 

Valuation

 

 

 

 

 

 

Average Price

(In Thousands, except price)

 

Fair Value

 

Technique

 

Type

 

Price Range

 

(a)

Loans, held at fair value

 

$

81,592

 

Single External Source

 

Third Party Mark

 

$

98.47 – 105.00

 

$

103.16

Loans, held for sale, at fair value

 

 

17,312

 

Single External Source

 

Third Party Mark

 

 

100.04 – 102.97

 

 

100.87

Mortgage backed securities, at fair value (b)

 

 

29,883

 

Broker Quotes

 

Third Party Mark

 

 

17.91 – 101.00

 

 

68.90

Mortgage backed securities, at fair value

 

 

2,508

 

Transaction Price

 

Transaction Price

 

 

99.00 – 99.00

 

 

99.00

Residential mortgage servicing rights, at fair value

 

 

61,376

 

Single external source

 

Discounted cash flow

 

 

N/A

 

 

N/A

Contingent consideration

 

 

14,487

 

Single external source

 

Option pricing model

 

 

N/A

 

 

N/A


(a)Prices are weighted based on the unpaid principal balance of the loans and securities included in the range for each class

(b)Price ranges and weighted averages exclude interest-only strips with a fair value of $1.5 million as of December 31, 2016.

 

The fair value measurements of these assets are sensitive to changes in assumptions regarding prepayment, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Significant changes in any of those inputs in isolation may result in significantly higher or lower fair value measurements. Generally, an increase in the probability of default and loss severity in the event of default would result in a lower fair value measurement. A decrease in these assumptions would have the opposite effect. Conversely, an assumption that the home prices will increase would result in a higher fair value measurement. A decrease in the assumption for home prices would have the opposite effect.

 

Financial instruments not carried at fair value

 

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the consolidated balance sheets and are classified as Level 3:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

(In Thousands)

    

Carrying Value

    

Fair Value

    

Carrying Value

    

Fair Value

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Loans, held-for-investment

 

$

1,586,157

 

$

1,652,082

 

$

1,585,088

 

$

1,639,982

Servicing rights

 

 

19,954

 

 

21,540

 

 

22,478

 

 

23,470

Total assets

 

$

1,606,111

 

$

1,673,622

 

$

1,607,566

 

$

1,663,452

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings under credit facilities

 

$

316,962

 

$

316,962

 

$

326,610

 

$

326,610

Promissory note payable

 

 

6,773

 

 

6,773

 

 

7,378

 

 

7,378

Securitized debt obligations of consolidated VIEs

 

 

397,911

 

 

408,838

 

 

492,942

 

 

483,381

Senior secured note

 

 

138,311

 

 

138,311

 

 

 —

 

 

 —

Guaranteed loan financing

 

 

332,812

 

 

349,995

 

 

390,555

 

 

409,751

Borrowings under repurchase agreements

 

 

520,169

 

 

520,169

 

 

600,852

 

 

600,852

Total liabilities

 

$

1,712,938

 

$

1,741,048

 

$

1,818,337

 

$

1,827,972

 

Other assets totaling $15.9 million at June 30, 2017 and $32.6 million at December 31, 2016 are not carried at fair value and include Due from servicers and Accrued interest, which are reflected in Note 21. Receivable from third parties totaling $106.6 million at June 30, 2017 and $7.2 million at December 31, 2016 are not carried at fair value. For these instruments, carrying value approximates fair value and are classified as Level 3.

 

Accounts payable and other accrued liabilities totaling $10.3 million at June 30, 2017 and $8.4 million at December 31, 2016 are not carried at fair value and include Payable to related parties and Accrued interest payable which are included in Note 21. For these instruments, carrying value approximates fair value and are classified as Level 3.