Note 8—Fair Value

The Company’s consolidated financial statements include assets and liabilities that are measured based on their estimated fair values. The application of fair value estimates may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability and whether management has elected to carry the item at its estimated fair value as discussed in the following paragraphs.

Fair Value Accounting Elections

Management identified all of its non-cash financial assets and its originated MSRs relating to loans with initial interest rates of more than 4.5% to be accounted for at estimated fair value so changes in fair value will be reflected in results of operations as they occur and more timely reflect the results of the Company’s performance. The Company’s financial assets subject to this election include the short-term investments and mortgage loans held for sale.

For originated MSRs relating to mortgage loans with initial interest rates of less than or equal to 4.5%, management has concluded that such assets present different risks to the Company than originated MSRs relating to mortgage loans with initial interest rates of more than 4.5% and therefore require a different risk management approach. Management’s risk management efforts relating to these assets are aimed at mainly moderating the effects of non-interest rate risks on fair value, such as the effect of changes in home prices on the assets’ values. Management has identified these assets for accounting using the amortization method.

Management’s risk management efforts in connection with MSRs relating to mortgage loans with initial interest rates of more than 4.5% are aimed at mainly moderating the effects of changes in interest rates on the assets’ values. At times during the nine months ended September 30, 2013, a portion of the IRLCs, the fair value of which typically increases when prepayment speeds increase, were used to moderate the effect of changes in fair value of MSRs, which typically decreases as prepayment speeds increase.

Financial Statement Items Measured at Fair Value on a Recurring Basis

Following is a summary of financial statement items that are measured at estimated fair value on a recurring basis:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets:
Short-term investment	$	127,487	$	—	$	—	$	127,487
Mortgage loans held for sale at fair value	—		526,063		4,185		530,248
Investment in PMT	1,701		—		—		1,701
Mortgage servicing rights at fair value	—		—		26,768		26,768
Derivative assets:
Interest rate lock commitments	—		—		21,717		21,717
Forward purchase contracts	—		21,226		—		21,226
Forward sales contracts	—		505		—		505
Total derivative assets before netting	—		21,731		21,717		43,448
Netting (1)	—		—		—		(19,382		)
Total derivative assets	—		21,731		21,717		24,066
	$	129,188	$	547,794	$	52,670	$	710,270
Liabilities:
Excess servicing spread financing at fair value	$	—	$	—	$	2,857	$	2,857
Derivative liabilities:
Interest rate lock commitments	—		—		159		159
Forward purchase contracts	—		215		—		215
Forward sales contracts	—		48,069		—		48,069
Total derivative liabilities before netting	—		48,284		159		48,443
Netting (1)	—		—		—		(42,667		)
Total derivative liabilities	—		48,284		159		5,776
	$	—	$	48,284	$	3,016	$	8,633

(1) Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

	December 31, 2012
	Level 1		Level 2		Level 3		Total
			(in thousands)
Assets:
Short-term investment	$	53,164	$	—	$	—	$	53,164
Mortgage loans held for sale at fair value	—		448,384		—		448,384
Investment in PMT	1,897		—		—		1,897
Mortgage servicing rights at fair value	—		—		19,798		19,798
Derivative assets:
Interest rate lock commitments	—		—		23,951		23,951
Forward purchase contracts	—		1,645		—		1,645
Forward sales contracts	—		1,818		—		1,818
MBS put options	—		967		—		967
Total derivative assets before netting	—		4,430		23,951		28,381
Netting (1)	—		—		—		(1,091		)
Total derivative assets	—		4,430		23,951		27,290
	$	55,061	$	452,814	$	43,749	$	550,533
Liabilities:
Derivative liabilities:
Interest rate lock commitments	$	—	$	—	$	11	$	11
Forward purchase contracts	—		389		—		389
Forward sales contracts	—		1,894		—		1,894
Total derivative liabilities before netting	—		2,283		11		2,294
Netting (1)	—		—		—		(1,785		)
Net derivative liabilities	$	—	$	2,283	$	11	$	509

(1) Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the setoff of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.

As shown above, certain of the Company’s mortgage loans held for sale, MSRs at fair value, IRLCs, and excess servicing spread financing at fair value are measured using Level 3 inputs. Following is a roll forward of these items for the quarters and nine month periods ended September 30, 2013 and 2012 where Level 3 significant inputs were used on a recurring basis:

	Quarter ended September 30, 2013
	Mortgage loans held for sale			Mortgage servicing rights			Net interest rate lock commitments (1)			Total
	(in thousands)
Assets:
Balance, June 30, 2013	$	4,525		$	23,070		$	(16,210	)	$	11,385
Repayments	(436		)	—			—			(436		)
Interest rate lock commitments issued, net	—			—			23,788			23,788
Purchases of MSR	—			1,116			—			1,116
Servicing received as proceeds from sales of mortgage loans	—			4,157			—			4,157
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—			—
Other factors	96			(1,575		)	10,585			9,106
	96			(1,575		)	10,585			9,106
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			—			3,395			3,395
Balance, September 30, 2013	$	4,185		$	26,768		$	21,558		$	52,511
Changes in fair value recognized during the period relating to assets still held at September 30, 2013	$	16		$	(1,575	)	$	21,558
Accumulated changes in fair value relating to assets still held at September 30, 2013	$	96					$	21,558

(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.

	Excess servicing spread financing
	(in thousands)
Liability:
Balance, June 30, 2013	$	—
Initial proceeds received from financing of excess servicing spread	2,828
Changes in fair value included in income	29
Repayments	—
Balance, September 30, 2013	$	2,857

Changes in fair value recognized during the period relating to liability still held at September 30, 2013	$	29
Accumulated changes in fair value relating to liability still held at September 30, 2013	$	29

	Quarter ended September 30, 2012
	Mortgage servicing rights			Net interest rate lock commitments			Total
				(in thousands)
Balance, June 30, 2012	$	23,449		$	12,710		$	36,159
Interest rate lock commitments issued, net	—			48,044			48,044
Servicing received as proceeds from sales of mortgage loans	30			—			30
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—
Other factors	(2,239		)	128			(2,111		)
	(2,239		)	128			(2,111		)
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			(27,449		)	(27,449		)
Balance, September 30, 2012	$	21,240		$	33,433		$	54,673
Changes in fair value recognized during the period relating to assets still held at September 30, 2012	$	(2,239	)	$	33,433
Accumulated changes in fair value relating to assets still held at September 30, 2012				$	33,433

	Nine months ended September 30, 2013
	Mortgage loans held for sale			Mortgage servicing rights			Net interest rate lock commitments (1)			Total
	(in thousands)
Assets:
Balance, December 31, 2012	$	—		$	19,798		$	23,940		$	43,738
Repurchases	5,529			—			—			5,529
Repayments	(1,059		)	—			—			(1,059		)
Interest rate lock commitments issued, net	—			—			78,722			78,722
Purchases of MSR	—			5,124			—			5,124
Sales of MSR	—			(550		)	—			(550		)
Servicing received as proceeds from sales of mortgage loans	—			4,177			—			4,177
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—			—
Other factors	(285		)	(1,781		)	(15,289		)	(17,355		)
	(285		)	(1,781		)	(15,289		)	(17,355		)
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			—			(65,815		)	(65,815		)
Balance, September 30, 2013	$	4,185		$	26,768		$	21,558		$	52,511
Changes in fair value recognized during the period relating to assets still held at September 30, 2013	$	(344	)	$	(1,781	)	$	21,558
Accumulated changes in fair value relating to assets still held at September 30, 2013	$	(285	)				$	21,558

(1) For the purpose of this table, the interest rate lock asset and liability positions are shown net.

	Excess servicing spread financing
	(in thousands)
Liability:
Balance, December 31, 2012	$	—
Initial proceeds received from financing of excess servicing spread	2,828
Changes in fair value included in income	29
Repayments	—
Balance, September 30, 2013	$	2,857

Changes in fair value recognized during the period relating to liability still held at September 30, 2013	$	29
Accumulated changes in fair value relating to liability still held at September 30, 2013	$	29

	Nine months ended September 30, 2012
	Mortgage servicing rights			Net interest rate lock commitments			Total
	(in thousands)
Balance, December 31, 2011	$	25,698		$	7,905		$	33,603
Interest rate lock commitments issued, net	—			65,192			65,192
Servicing received as proceeds from sales of mortgage loans	772			—			772
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk	—			—			—
Other factors	(5,230		)	—			(5,230		)
	(5,230		)	—			(5,230		)
Transfers of interest rate lock commitments (asset) liability to mortgage loans acquired for sale	—			(39,664		)	(39,664		)
Balance, September 30, 2012	$	21,240		$	33,433		$	54,673
Changes in fair value recognized during the period relating to assets still held at September 30, 2012	$	(5,230	)	$	33,433
Accumulated changes in fair value relating to assets still held at September 30, 2012				$	33,433

The information used in the preceding roll forwards represents activity for any financial statement items identified as using Level 3 significant inputs at either the beginning or the end of the periods presented. The Company had no transfers in or out among the levels other than transfers of IRLCs to mortgage loans held for sale at fair value upon funding of the respective mortgage loans.

Gains (losses) from changes in estimated fair values included in earnings for financial statement items carried at estimated fair value as a result of management’s election of the fair value option are summarized below:

	Quarter ended September 30, 2013									Quarter ended September 30, 2012
	Change in fair value of mortgage loans held for sale at fair value			Net servicing income			Total			Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	(6,060	)	$	—		$	(6,060	)	$	56,079	$	—		$	56,079
Mortgage servicing rights at fair value	—			(1,575		)	(1,575		)	—		(2,239		)	(2,239		)
	$	(6,060	)	$	(1,575	)	$	(7,635	)	$	56,079	$	(2,239	)	$	53,840
Liabilities:
Excess servicing spread financing at fair value	$	—		$	(29	)	$	(29	)	$	—	$	—		$	—
	$	—		$	(29	)	$	(29	)	$	—	$	—		$	—

	Nine months ended September 30, 2013								Nine months ended September 30, 2012
	Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total			Change in fair value of mortgage loans held for sale at fair value		Net servicing income			Total
	(in thousands)
Assets:
Mortgage loans held for sale at fair value	$	12,428	$	—		$	12,428		$	108,205	$	—		$	108,205
Mortgage servicing rights at fair value	—		(1,781		)	(1,781		)	—		(5,230		)	(5,230		)
	$	12,428	$	(1,781	)	$	10,647		$	108,205	$	(5,230	)	$	102,975
Liabilities:
Excess servicing spread financing at fair value	$	—	$	(29	)	$	(29	)	$	—	$	—		$	—
	$	—	$	(29	)	$	(29	)	$	—	$	—		$	—

Following are the fair value and related principal amounts due upon maturity of assets and liabilities accounted for under the fair value option as of the dates presented:

	September 30, 2013
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	529,244	$	496,853	$	32,391
90 or more days delinquent	1,004		1,297		(293		)
	$	530,248	$	498,150	$	32,098

	December 31, 2012
	Fair value		Principal amount due upon maturity		Difference
	(in thousands)
Mortgage loans held for sale:
Current through 89 days delinquent	$	447,889	$	418,650	$	29,239
90 or more days delinquent	495		623		(128		)
	$	448,384	$	419,273	$	29,111

Financial Statement Items Measured at Fair Value on a Nonrecurring Basis

Following is a summary of financial statement items that are measured at estimated fair value on a nonrecurring basis as of the dates presented:

	September 30, 2013
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	102,116	$	102,116
	$	—	$	—	$	102,116	$	102,116

	December 31, 2012
	Level 1		Level 2		Level 3		Total
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	—	$	—	$	51,180	$	51,180
	$	—	$	—	$	51,180	$	51,180

The following table summarizes the total gains (losses) on assets measured at estimated fair values on a nonrecurring basis:

	Quarter ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(in thousands)
Mortgage servicing rights at lower of amortized cost or fair value	$	(1,164	)	$	(1,000	)	$	(521	)	$	(1,784	)
	$	(1,164	)	$	(1,000	)	$	(521	)	$	(1,784	)

The Company evaluates its MSRs at lower of amortized cost or fair value for impairment with reference to the assets’ fair values. For purposes of performing its MSR impairment evaluation, the Company stratifies its MSRs at lower of amortized cost or fair value based on the interest rates borne by the mortgage loans underlying the MSRs. Mortgage loans are grouped into note rate pools of 50 basis points for fixed-rate mortgage loans with note rates between 3% and 4.5% and a single pool for mortgage loans with note rates below 3%. MSRs relating to adjustable rate mortgage loans with initial interest rates of 4.5% or less are evaluated in a single pool. If the fair value of MSRs in any of the note rate pools is below the amortized cost of the MSRs for that pool reduced by any existing valuation allowance, those MSRs are impaired.

When MSRs are impaired, the impairment is recognized in current period income and the carrying value of the MSRs is adjusted using a valuation allowance. If the value of the MSRs subsequently increases, the increase in value is recognized in current period income only to the extent of the valuation allowance.

Management periodically reviews the various impairment strata to determine whether the value of the impaired MSRs in a given stratum is likely to recover. When management concludes that recovery of the value is unlikely in the foreseeable future, a write-down of the cost of the MSRs for that note rate pool to its estimated fair value is charged to the valuation allowance.

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Cash as well as its Mortgage loans sold under agreements to repurchase, Note payable, Carried Interest due from Investment Funds, and amounts receivable from and payable to the Advised Entities are carried at amortized cost.

Cash is measured using “Level 1” significant inputs. The Company’s borrowings carried at amortized cost do not have active markets or observable inputs and the fair value is measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. The Company has classified these financial instruments as “Level 3” financial statement items as of September 30, 2013 and December 31, 2012 due to the lack of current market activity and the Company’s reliance on unobservable inputs to estimate the fair value.

Management has concluded that the carrying value of the Carried Interest due from Investment Funds approximates its fair value as the balance represents the amount distributable to the Company at the balance sheet date assuming liquidation of the Investment Funds. Management has concluded that the estimated fair value of the Note payable approximates the agreements’ carrying value due to the agreements’ short term and variable interest rates.

The Company also carries the receivable from and payable to the Advised Entities at cost. Management has concluded that the estimated fair value of such balances approximates the carrying value due to the short terms of such balances.

Valuation Techniques and Assumptions

Most of the Company’s financial assets are carried at fair value with changes in fair value recognized in current period income. Certain of the Company’s financial assets and all of its MSRs are “Level 3” financial statement items which require the use of significant unobservable inputs in the estimation of the assets’ values. Unobservable inputs reflect the Company’s own assumptions about the factors that market participants use in pricing an asset or liability, and are based on the best information available under the circumstances.

The Company has assigned the responsibility for estimating the fair values of “Level 3” financial statement items to its Financial Analysis and Valuation group (the “FAV group”), which is responsible for valuing and monitoring the Company’s investment portfolios and maintenance of its valuation policies and procedures.

The FAV group reports to the Company’s senior management valuation committee, which oversees and approves the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” financial statement items, including the models’ performance versus actual results and reports those results to the Company’s senior management valuation committee. The results developed in the FAV group’s monitoring activities may be used to calibrate subsequent projections used for valuation.

The FAV group is responsible for reporting to the Company’s senior management valuation committee on a monthly basis on the changes in the valuation of the portfolio, including major factors affecting the valuation and any changes in model methods and assumptions. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuation of changes to the significant inputs to the models.

Following is a description of the techniques and assumptions used in estimating the fair values of “Level 2” and “Level 3” fair value financial statement items:

Mortgage Loans Held for Sale

Most of the Company’s mortgage loans held for sale at fair value are salable into active markets and are therefore categorized as “Level 2” fair value financial statement items and their fair values are estimated using their quoted market or contracted price or market price equivalent.

Certain of the Company’s mortgage loans may become non-salable into active markets due to identification of a defect by the Company or to the repurchase of a mortgage loan with an identified defect. Because such loans are generally not salable into active mortgage markets, they are classified as “Level 3” financial statement items. The significant unobservable inputs used in the fair value measurement of the Company’s “non-salable” mortgage loans held for sale at fair value are discount rates, home price projections, voluntary prepayment speeds and default speeds. Significant changes in any of those inputs in isolation could result in a significant change to the loans’ fair value measurement. Increases in home price projections are generally accompanied by an increase in voluntary prepayment speeds.

The Company did not hold “Level 3” mortgage loans held for sale before 2013. Following is a quantitative summary of key inputs used in the valuation of “Level 3” mortgage loans held for sale at fair value:

		September 30, 2013
		Range (Weighted average)
Key Inputs
Discount rate		7.8% - 13.4%
		(9.2%)
Twelve-month projected housing price index change		6.7% - 7.3%
		(6.8%)
Prepayment speed (1)		2.1% - 5.6%
		(4.8%)
Total prepayment speed (2)		3.4% - 5.7%
		(5.1%)

(1) Prepayment speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(2) Total prepayment speed is measured using Life Total CPR.

Changes in fair value attributable to changes in instrument-specific credit risk are measured by the change in the respective loan’s delinquency status at period-end from the later of the beginning of the period or acquisition date.

Derivative Financial Instruments

The Company categorizes IRLCs as a “Level 3” financial statement item. The Company estimates the fair value of an IRLC based on quoted Agency MBS prices, its estimate of the fair value of the MSRs it expects to receive in the sale of the loans and the probability that the mortgage loan will fund or be purchased as a percentage of the commitment it has made (the “pull-through rate”).

The significant unobservable inputs used in the fair value measurement of the Company’s IRLCs are the pull-through rate and the MSR component of the Company’s estimate of the value of the mortgage loans it has committed to purchase. Significant changes in the pull-through rate and the MSR component of the IRLCs, in isolation, could result in a significant change in fair value measurement. The financial effects of changes in these assumptions are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC value, but increase the pull-through rate for loans that have decreased in fair value in comparison to the agreed-upon purchase price.

Following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:

	September 30, 2013	December 31, 2012
	Range (Weighted average)
Key Inputs
Pull-through rate	56.6% - 98.0%	61.6% – 98.1%
	(78.3%)	(79.1%)
MSR value expressed as:
Servicing fee multiple	2.1 - 5.0	3.2 – 4.2
	(4.0)	(4.0)
Percentage of unpaid principal balance	0.4% - 2.6%	0.6% – 2.2%
	(1.1%)	(0.9%)

The Company estimates the fair value of commitments to sell loans based on quoted MBS prices. The Company estimates the fair value of the MBS options and futures it purchases and sells based on observed interest rate volatilities in the MBS market.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value financial statement items. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. This approach consists of projecting servicing cash flows discounted at a rate that management believes market participants would use in their determinations of value. The key assumptions used in the estimation of the fair value of MSRs include prepayment rates of the underlying loans, the applicable discount rate or pricing spread, and the cost to service loans.

The results of the estimates of fair value of MSRs are reported to the Company’s senior management valuation committee as part of their review and approval of monthly valuation results. Changes in the fair value of MSRs are included in the consolidated statements of income under the caption Net servicing income — Amortization, impairment and change in estimated fair value of mortgage servicing rights.

Key assumptions used in determining the fair value of MSRs at the time of initial recognition are as follows:

	Quarter ended September 30,
	2013		2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
Unpaid principal balance of underlying loans	$315,869	$4,120,962	$4,217	$2,485,982
Weighted-average servicing fee rate (in basis points)	31	30	27	27

Pricing spread (1)	7.4% - 13.1%	5.4% - 15.9%	7.5% - 9.9%	7.5% - 9.9%
	(9.9%)	(8.2%)	(7.8%)	(9.8%)
Annual total prepayment speed (2)	8.8% - 17.2%	8.5% - 14.7%	8.4% - 9.5%	8.4% - 9.5%
	(9.2%)	(8.8%)	(9.2%)	(8.4%)
Life (in years)	3.6 – 7.0	2.9 – 6.9	6.4 – 6.7	6.4 – 6.7
	(6.9)	(6.7)	(6.4)	(6.7)
Cost of servicing	$68 – $120	$68 – $120	$68 – $100	$68 – $100
	($101)	($104)	($71)	($99)

	Nine months ended September 30,
	2013		2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
Unpaid principal balance of underlying loans	$318,066	$12,350,104	$17,504	$4,811,328
Weighted-average servicing fee rate (in basis points)	31	29	28	27

Pricing spread (1)	7.4% - 13.1%	5.4% - 15.9%	7.5% - 9.9%	7.5% - 9.9%
	(9.9%)	(8.2%)	(8.4%)	(9.8%)
Annual total prepayment speed (2)	8.8% - 17.2%	8.5% - 18.5%	7.8% - 9.5%	7.8% - 9.5%
	(9.2%)	(8.8%)	(8.6%)	(8.3%)
Life (in years)	3.6 – 7.0	2.9 – 6.9	5.9 – 6.9	5.9 – 6.9
	(6.9)	(6.7)	(6.4)	(6.7)
Cost of servicing	$68 – $120	$68 – $120	$68 – $100	$68 – $100
	($101)	($102)	($77)	($99)

(1) Pricing spread represents a margin that is applied to a reference interest rate’s forward rate curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans.

(2) Prepayment speed is measured using CPR.

Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs at period end and the effect on the estimated fair value from adverse changes in those assumptions (weighted averages are based upon unpaid principal balance):

Purchased MSRs backed by distressed mortgage loans

	September 30, 2013		December 31, 2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
	(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Carrying value	$10,125	—	$12,370	—
Unpaid principal balance of underlying loans	$1,051,220	—	$1,271,478	—
Weighted-average note rate	5.88%	—	6.01%	—
Weighted-average servicing fee rate (in basis points)	50	—	50	—

Discount rate	15.3% – 15.3%	—	15.3% – 15.3%	—
	(15.3%)	—	(15.3%)	—
Effect on value of 5% adverse change	($252)	—	($302)	—
Effect on value of 10% adverse change	($494)	—	($590)	—
Effect on value of 20% adverse change	($945)	—	($1,130)	—

Life (in years)	4.8 – 4.8	—	5.0 – 5.0	—
	(4.8)	—	(5.0)	—

Prepayment speed (1)	11.7% – 11.7%	—	10.7% – 10.7%	—
	(11.7%)	—	(10.7%)	—
Effect on value of 5% adverse change	($252)	—	($273)	—
Effect on value of 10% adverse change	($492)	—	($529)	—
Effect on value of 20% adverse change	($951)	—	($1,040)	—

Per-loan cost of servicing	$250 – $250	—	$270 – $270	—
	($250)	—	($270)	—
Effect on value of 5% adverse change	($223)	—	($290)	—
Effect on value of 10% adverse change	($447)	—	($580)	—
Effect on value of 20% adverse change	($893)	—	($1,159)	—

(1) Prepayment speed is measured using Life Voluntary CPR.

All other MSRs

	September 30, 2013		December 31, 2012
	Range (Weighted average)
	Fair value	Amortized cost	Fair value	Amortized cost
	(Unpaid principal balance of underlying loans and effect on value amounts in thousands)
Carrying value	$16,643	$226,090	$7,428	$89,177
Unpaid principal balance of underlying loans	$1,700,612	$20,024,781	$1,166,765	$8,730,686
Weighted-average note rate	4.68%	3.57%	5.22%	3.65%
Weighted-average servicing fee rate (in basis points)	27	28	26	28
Pricing spread (1)	6.4% – 17.5%	5.4% – 15.9%	7.5% – 19.5%	7.5% – 16.5%
	(8.9%)	(7.6%)	(10.6%)	(9.8%)
Effect on value of 5% adverse change	($303)	($4,833)	($113)	($1,814)
Effect on value of 10% adverse change	($596)	($9,488)	($222)	($3,562)
Effect on value of 20% adverse change	($1,153)	($18,303)	($430)	($6,870)

Average life (in years)	0.2 – 14.4	2.6 – 6.9	0.2 – 14.4	2.5 – 6.9
	(6.6)	(6.7)	(5.0)	(6.6)
Prepayment speed (2)	8.7% – 72.8%	8.5% – 16.0%	9.0% – 84.2%	8.7% – 28.3%
	(10.6%)	(9.0%)	(19.2%)	(9.2%)
Effect on value of 5% adverse change	($376)	($4,696)	($238)	($1,751)
Effect on value of 10% adverse change	($738)	($9,238)	($462)	($3,446)
Effect on value of 20% adverse change	($1,423)	($17,891)	($877)	($6,674)

Per-loan cost of servicing	$68 – $120	$68 – $120	$68 – $140	$68 – $140
	($77)	($102)	($76)	($99)
Effect on value of 5% adverse change	($150)	($2,383)	($77)	($963)
Effect on value of 10% adverse change	($300)	($4,766)	($153)	($1,926)
Effect on value of 20% adverse change	($601)	($9,531)	($307)	($3,852)

(1) Pricing spread represents a margin that is applied to a reference interest rate’s forward curve to develop periodic discount rates. The Company applies a pricing spread to the United States Dollar LIBOR curve for purposes of discounting cash flows relating to MSRs acquired as proceeds from the sale of mortgage loans and purchased MSRs not backed by pools of distressed mortgage loans.

(2) Prepayment speed is measured using CPR.

The preceding sensitivity analyses are limited in that they were performed at a particular point in time; only contemplate the movements in the indicated variables; do not incorporate changes in the variables in relation to other variables; are subject to the accuracy of various models and assumptions used; and do not incorporate other factors that would affect the Company’s overall financial performance in such scenarios, including operational adjustments made by management to account for changing circumstances. For these reasons, the preceding estimates should not be viewed as an earnings forecast.

Excess Servicing Spread Financing at Fair Value

The Company categorizes excess servicing spread financing as a “Level 3” financial statement item. The Company uses a discounted cash flow approach to estimate the fair value of excess servicing spread financing. The key assumptions used in the fair value estimate of excess servicing spread financing include pricing spread, average life, and prepayment speed. Significant changes to any of those inputs in isolation could result in a significant change in the excess servicing spread financing fair value measurement. Changes in these key assumptions are not necessarily directly related.

Excess servicing spread is generally subject to loss in value when mortgage rates decrease. Decreasing mortgage rates normally encourage increased mortgage refinancing activity. Increased refinancing activity reduces the life of the loans underlying the excess servicing spread, thereby reducing excess servicing spread financing’s value. Reductions in the value of excess servicing spread financing affect income primarily through change in fair value.

Interest expense for excess servicing spread financing is accrued using the interest method based upon the expected income from the excess servicing spread through the expected life of the underlying mortgages. Changes to expected cash flows result in a change in fair value which is recorded in Amortization, impairment and change in estimated fair value of mortgage servicing rights.

Following are the key inputs used in determining the fair value of excess servicing spread financing at the time of initial recognition:

	September 30, 2013		December 31, 2012
Key Inputs
Pricing spread	6.80	%	—
Average life	6.7		—
Prepayment speed	9.1	%	—