Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments

Derivative Instruments

Note 10—Derivative Instruments

The Company is exposed to price risk relative to its mortgage loans held for sale as well as to its IRLCs. The Company bears price risk from the time an IRLC is made to PMT or a loan applicant to the time the mortgage loan is sold. The Company is exposed to loss in value of its IRLCs and mortgage loans held for sale when mortgage rates increase. The Company is also exposed to loss in value of its MSRs when interest rates decrease.

The Company engages in interest rate risk management activities in an effort to reduce the variability of earnings caused by changes in market interest rates. To manage this price risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of moderating the risk that changes in market interest rates will result in unfavorable changes in the value of the Company’s IRLCs, inventory of mortgage loans held for sale and MSRs. The Company does not use derivative financial instruments for purposes other than in support of its risk management activities.

The Company had the following derivative financial instruments recorded on its consolidated balance sheets:

	September 30, 2013							December 31, 2012
		Fair value							Fair value
Instrument	Notional amount	Derivative assets			Derivative liabilities			Notional amount	Derivative assets			Derivative liabilities
	(in thousands)
Derivatives not designated as hedging instruments
Free-standing derivatives:
Interest rate lock commitments	1,163,531	$	21,717		$	159		1,576,174	$	23,951		$	11
Forward purchase contracts	1,580,434	21,226			215			1,021,981	1,645			389
Forward sales contracts	3,086,889	505			48,069			2,621,948	1,818			1,894
MBS put options	—	—			—			500,000	967			—
Total derivatives before netting		43,448			48,443				28,381			2,294
Netting		(19,382		)	(42,667		)		(1,091		)	(1,785		)
		$	24,066		$	5,776			$	27,290		$	509

The following table summarizes the activity for derivative contracts used to hedge the Company’s IRLCs and inventory of mortgage loans held for sale at notional value:

Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Quarter ended September 30, 2013
Forward purchase contracts	2,071,590	13,386,366	(13,877,522	)	1,580,434
Forward sales contracts	4,226,940	18,727,428	(19,867,479	)	3,086,889
MBS call options	625,000	300,000	(925,000	)	—
MBS put options	260,000	50,000	(310,000	)	—

Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Quarter ended September 30, 2012
Forward purchase contracts	545,175	5,707,334	(5,351,309	)	901,200
Forward sales contracts	1,522,674	8,324,782	(7,336,268	)	2,511,188
MBS call options	5,000	5,000	(10,000	)	—
MBS put options	210,000	512,000	(387,000	)	335,000

Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Nine months ended September 30, 2013
Forward purchase contracts	1,021,981	35,012,198	(34,453,745	)	1,580,434
Forward sales contracts	2,621,948	51,199,986	(50,735,045	)	3,086,889
MBS call options	—	2,100,000	(2,100,000	)	—
MBS put options	500,000	2,210,000	(2,710,000	)	—

Period/Instrument	Balance beginning of period	Additions	Dispositions/ expirations		Balance end of period
	(in thousands)
Nine months ended September 30, 2012
Forward purchase contracts	130,900	10,197,428	(9,427,128	)	901,200
Forward sales contracts	510,569	16,424,121	(14,423,502	)	2,511,188
MBS call options	3,000	168,000	(171,000	)	—
MBS put options	29,000	885,000	(579,000	)	335,000

The Company recorded net losses on derivative financial instruments used to hedge the Company’s IRLCs and mortgage loans held for sale at fair value totaling $4.6 million and $39.0 million for the quarters ended September 30, 2013 and September 30, 2012, respectively. The Company recorded net gains on derivative financial instruments totaling $101.9 million for the nine months ended September 30, 2013 and net losses totaling $64.5 million for the nine months ended September 30, 2012. Derivative gains and losses are included in Net gains on mortgage loans held for sale at fair value in the Company’s consolidated statements of income.

The Company did not record any net gains or losses on derivative financial instruments used as economic hedges of MSRs for the quarter ended September 30, 2013.  The Company recorded net losses on derivative financial instruments used as economic hedges of MSRs totaling $1.3 million for the nine months ended September 30, 2013.  The derivative losses are included in Amortization, impairment and change in estimated fair value of mortgage servicing rights in the Company’s consolidated statements of income.