Fair value of financial instruments

3 Months Ended

Mar. 31, 2014

The following table sets forth the financial assets and liabilities that we measure at fair value by level within the fair value hierarchy as of March 31, 2014 and December 31, 2013 ($ in thousands):



	Level 1		Level 2		Level 3
	Quoted prices in active markets		Observable inputs other than Level 1 prices		Unobservable inputs
March 31, 2014
Recurring basis (assets)
Mortgage loans	$	—	$	—	$	1,766,142
Nonrecurring basis (assets)
Real estate assets held for sale					$	4,928
Transfer of mortgage loans to real estate owned	$	—	$	—	$	96,528
Not recognized on consolidated balance sheets at fair value (liabilities)
Repurchase agreements at fair value	$	—	$	699,950	$	—
December 31, 2013
Recurring basis (assets)
Mortgage loans	$	—	$	—	$	1,207,163
Nonrecurring basis (assets)
Real estate assets held for sale					$	1,520
Transfer of mortgage loans to real estate owned	$	—	$	—	$	31,014
Not recognized on consolidated balance sheets at fair value (liabilities)
Repurchase agreements at fair value	$	—	$	602,382	$	—

Residential has not transferred any assets from one level to another level during the three months ended March 31, 2014 or December 31, 2013.

The carrying values of Residential's and our cash and cash equivalents, restricted cash, related party receivables, accounts payable and accrued liabilities, related party payables, preferred stock, and investment in New Source are equal to or approximate fair value. The fair value of mortgage loans is estimated using our proprietary pricing model. The fair value of transfers of mortgage loans to real estate owned is estimated using BPOs. The fair value of the repurchase agreements is estimated using the income approach based on credit spreads available currently in the market for similar floating rate debt.

The following table sets forth the changes in Residential's level 3 assets that are measured at fair value on a recurring basis ($ in thousands):



	Three months ended March 31, 2014			Three months ended March 31, 2013
Mortgage loans
Beginning balance at December 31	$	1,207,163		$	—
Investment in mortgage loans	612,508			88,257
Net unrealized gain on mortgage loans	65,130			1,128
Net realized gain on mortgage loans	9,321			387
Mortgage loan dispositions and payments	(39,458		)	(1,946		)
Real estate tax advances to borrowers	8,006			—
Transfer of mortgage loans to real estate owned	(96,528		)	(156		)
Ending balance at March 31	$	1,766,142		$	87,670

Net unrealized gain on mortgage loans held	$	38,197		$	1,128

The following table sets forth the fair value of Residential's mortgage loans, the related unpaid principal balance and market value of underlying properties by delinquency status as of March 31, 2014 and December 31, 2013 ($ in thousands):



	Number of loans	Carrying value		Unpaid principal balance		Market value of underlying properties
March 31, 2014
Current	329	$	44,280	$	86,860	$	76,452
30	25	2,838		5,238		4,995
60	20	2,446		4,046		4,068
90	2,120	326,308		566,858		483,245
Foreclosure	9,015	1,390,270		2,386,927		1,945,606
Mortgage loans	11,509	$	1,766,142	$	3,049,929	$	2,514,366
December 31, 2013
Current	238	$	31,649	$	60,051	$	52,506
30	26	2,087		4,492		3,763
60	23	3,376		5,683		4,738
90	1,555	245,024		419,836		355,451
Foreclosure	6,212	925,027		1,609,546		1,310,439
Mortgage Loans	8,054	$	1,207,163	$	2,099,608	$	1,726,897

The significant unobservable inputs used in the fair value measurement of Residential's mortgage loans are discount rates, forecasts of future home prices, alternate loan resolution probabilities, resolution timelines and the value of underlying properties. Significant changes in any of these inputs in isolation could result in a significant change to the fair value measurement. A decline in the discount rate in isolation would increase the fair value. A decrease in the housing pricing index in isolation would decrease the fair value. Individual loan characteristics such as location and value of underlying collateral affect the loan resolution probabilities and timelines. An increase in the loan resolution timeline in isolation would decrease the fair value. A decrease in the value of underlying properties in isolation would decrease the fair value. The following table sets forth quantitative information about the significant unobservable inputs used to measure the fair value of Residential's mortgage loans as of March 31, 2014 and December 31, 2013:



Input	March 31, 2014	December 31, 2013
Discount rate	15.0%	15.0%
Annual change in home pricing index	-0.3% to 7.6%	-0.3% to 7.6%
Loan resolution probabilities — modification	0% to 22.3%	0% to 22.3%
Loan resolution probabilities — rental	0% to 100.0%	0% to 100.0%
Loan resolution probabilities — liquidation	0% to 100.0%	0% to 100.0%
Loan resolution timelines (in years)	0.1 to 5.3	0.1 - 5.8
Value of underlying properties	$3,000 - $6,343,000	$3,000 - $3,550,000

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References+ Details