Fair Value Measurements

12 Months Ended

Dec. 31, 2021

Fair Value Measurements

Fair Value Measurements

Note 7. Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP has a three-level hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments 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). The Company’s valuation techniques for financial instruments use observable and unobservable inputs. 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:

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 — One or more pricing inputs is significant to the overall valuation and unobservable. 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 financial instruments. 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.

Valuation techniques of Level 3 investments vary by instrument type, but are generally based on an income, market or cost-based approach. The income approach predominantly considers discounted cash flows which is the measure of expected future cash flows in a default scenario, implied by the value of the underlying collateral, where applicable, and current performance whereas the market-based approach predominantly considers pull-through rates, industry multiples and the unpaid principal balance. Fair value measurements of loans are sensitive to changes in assumptions regarding prepayments, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Fair value measurements of residential MSRs are sensitive to changes in assumptions regarding prepayments, discount rates, and cost of servicing. Fair value measurements of derivative instruments, specifically IRLC’s, are sensitive to changes in assumptions related to origination pull-through rates, servicing fee multiples, and percentages of unpaid principal balances. Origination pull-through rates are also dependent on factors such as market interest rates, type of origination, length of lock, purpose of the loan (purchase or refinance), type of loan (fixed or variable), and the processing status of the loan. In addition, the fair value of the acquired contingent consideration was determined using a Monte Carlo simulation model which considers various potential results based on Level 3 inputs, including management’s latest estimates of future operating results. Fair value measurements of the contingent consideration liability, are sensitive to changes in assumptions related to earnings before tax (“EBT”), discount rate and risk-free rate of return.

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 table presents financial instruments carried at fair value on a recurring basis.

(in thousands)	Level 1		Level 2		Level 3		Total
December 31, 2021
Assets:
Loans, held for sale, at fair value	$	—	$	321,070	$	231,865	$	552,935
Loans, net, at fair value		—		—		10,766		10,766
Paycheck Protection Program loans		—		—		3,243		3,243
MBS, at fair value		—		97,915		1,581		99,496
Derivative instruments, at fair value		—		4,683		2,339		7,022
Residential MSRs, at fair value		—		—		120,142		120,142
Investment in unconsolidated joint ventures		—		—		8,894		8,894
Total assets	$	—	$	423,668	$	378,830	$	802,498
Liabilities:
Derivative instruments, at fair value	$	—	$	410	$	—	$	410
Contingent consideration		—		—		16,400		16,400
Total liabilities	$	—	$	410	$	16,400	$	16,810
December 31, 2020
Assets:
Loans, held for sale, at fair value	$	—	$	340,288	$	—	$	340,288
Loans, net, at fair value		—		—		13,795		13,795
Paycheck Protection Program loans		—		—		74,931		74,931
MBS, at fair value		—		62,880		25,131		88,011
Derivative instruments, at fair value		—		—		16,363		16,363
Residential MSRs, at fair value		—		—		76,840		76,840
Total assets	$	—	$	403,168	$	207,060	$	610,228
Liabilities:
Derivative instruments, at fair value	$	—	$	11,604	$	—	$	11,604
Total liabilities	$	—	$	11,604	$	—	$	11,604

The table below presents the valuation techniques and significant unobservable inputs used to value Level 3 financial instruments, using third party information without adjustment.

(in thousands)	Fair Value		Predominant Valuation Technique (a)		Unobservable Input	Range		Weighted Average
December 31, 2021
Residential MSRs, at fair value	$	120,142		Income Approach	Forward prepayment rate | Forward Default Rate | Discount rate | Servicing expense		(b)		(b)
Derivative instruments, at fair value	$	2,339		Market Approach	Origination pull-through rate | Servicing Fee Multiple | Percentage of unpaid principal balance		63.0 - 100% | 0.4 - 5.2% | 0.1 - 3.1%		86.7% | 4.1% | 1.3%
Investment in unconsolidated joint ventures	$	8,894		Income Approach	Discount rate		9.0%		9.0%
Contingent consideration	$	(16,400)		Monte Carlo Simulation Model	EBT volatility | Risk-free rate of return | EBT discount rate | Liability discount rate		25.0% | 0.4% | 17.6% | 3.8%		25.0% | 0.4% | 17.6% | 3.8%
December 31, 2020
Residential MSRs, at fair value	$	76,840		Income Approach	Discount rate		(b)		(b)
Derivative instruments, at fair value	$	16,363		Market Approach	Origination pull-through rate | Servicing Fee Multiple | Percentage of unpaid principal balance		47.6 - 100% | 0.5 - 12.8% | 0.1 - 2.9%		84.1% | 3.6% | 1.1%

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

(b) Refer to Note 9 - Servicing Rights for more information on residential MSRs unobservable inputs.

Included within Level 3 assets of $378.8 million as of December 31, 2021 and $207.1 million as of December 30, 2020, is $247.5 million and $113.9 million of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value, respectively.

The tables below present a summary of changes in fair value for Level 3 assets and liabilities.

(in thousands)	MBS		Derivatives		Loans, net		Loans, held for sale, at fair value		PPP loans		Residential MSRs			Investment in unconsolidated joint ventures		Contingent Consideration		Total
Year Ended December 31, 2021
Beginning Balance	$	25,131	$	16,363	$	13,795	$	—	$	74,931	$	76,840	$	—	$	—	$	207,060
Purchases or Originations		—		—		—		283,054		3,866		—		9,197		(12,400)		283,717
Additions due to loans sold, servicing retained		—		—		—		—		—		46,286		—		—		46,286
Sales / Principal payments		(92)		—		(3,201)		(68,001)		(75,554)		(19,904)		—		—		(166,752)
Realized gains, net		—		—		7		(1,635)		—		—		—		—		(1,628)
Unrealized gains (losses), net		1,253		(14,024)		165		86		—		16,920		(303)		(4,000)		97
Accreted discount, net		59		—		—		—		—		—		—		—		59
Transfer to (from) Level 3		(24,770)		—		—		18,361		—		—		—		—		(6,409)
Ending Balance	$	1,581	$	2,339	$	10,766	$	231,865	$	3,243	$	120,142	$	8,894	$	(16,400)	$	362,430
Unrealized gains (losses), net on assets/liabilities	$	154	$	2,339	$	(190)	$	3,133	$	—	$	(30,289)	$	(303)	$	(4,000)	$	(29,156)
Year Ended December 31, 2020
Beginning Balance	$	460	$	2,814	$	20,212	$	—	$	—	$	91,174	$	—	$	—	$	114,660
Originations		12,640		—		—		—		106,704		—		—		—		119,344
Additions due to loans sold, servicing retained		—		—		—		—		—		43,701		—		—		43,701
Sales / Principal payments		(13)		—		(5,649)		—		(31,786)		(20,777)		—		—		(58,225)
Realized gains, net		—		—		350		—		—		—		—		—		350
Unrealized gains (losses), net		(348)		13,549		(1,118)		—		13		(37,258)		—		—		(25,162)
Accreted discount, net		12		—		—		—		—		—		—		—		12
Transfer to (from) Level 3		12,380		—		—		—		—		—		—		—		12,380
Ending Balance	$	25,131	$	16,363	$	13,795	$	—	$	74,931	$	76,840	$	—	$	—	$	207,060
Unrealized gains (losses), net on assets/liabilities	$	602	$	16,363	$	(293)	$	—	$	—	$	(47,209)	$	—	$	—	$	(30,537)

The Company’s policy is to recognize transfers in and transfers out as of the end of the period of the event or the date of 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.

Financial instruments not carried at fair value

The table below presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value and are classified as Level 3.

	December 31, 2021				December 31, 2020
(in thousands)	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Assets:
Loans, net	$	6,986,528	$	7,112,282	$	4,009,636	$	4,103,200
Paycheck Protection Program loans		867,109		927,766		—		—
Purchased future receivables, net		7,872		7,872		17,308		17,308
Servicing rights		84,457		89,470		37,823		47,567
Total assets	$	7,945,966	$	8,137,390	$	4,064,767	$	4,168,075
Liabilities:
Secured borrowings	$	2,517,600	$	2,517,600	$	1,294,243	$	1,294,243
Paycheck Protection Program Liquidity Facility borrowings		941,505		941,505		76,276		76,276
Securitized debt obligations of consolidated VIEs, net		3,214,303		3,238,155		1,905,749		1,907,541
Senior secured note, net		342,035		338,990		179,659		188,114
Guaranteed loan financing		345,217		366,887		401,705		426,348
Convertible notes, net		113,247		118,922		112,129		68,186
Corporate debt, net		441,817		457,741		150,989		151,209
Total liabilities	$	7,915,724	$	7,979,800	$	4,120,750	$	4,111,917

Other assets of $45.6 million as of December 31, 2021 and $23.8 million as of December 31, 2020, are not carried at fair value and include due from servicers and accrued interest, which are presented in Note 19 – Other Assets and Other Liabilities. Receivables from third parties of $29.3 million as of December 31, 2021 and $1.2 million as of December 31, 2020, are not carried at fair value but generally approximates fair value and are classified as Level 3. Accounts payable and other accrued liabilities of $27.5 million as of December 31, 2021 and $23.8 million as of December 31, 2020, are not carried at fair value and include payables to related parties and accrued interest payable which are included in Note 19. For these instruments, carrying value generally approximates fair value and are classified as Level 3.