Note 8—Derivative Activities

The Company holds and issues derivative financial instruments in connection with its operating activities. Derivative financial instruments are created as a result of certain of the Company’s operations and the Company also enters into derivative transactions as part of its interest rate risk management activities. Derivative financial instruments created as a result of the Company’s operations include:

IRLCs that are created when the Company commits to purchase or originate a mortgage loan acquired for sale.

Derivatives that are embedded in a master repurchase agreement that provides for the Company to receive incentives for financing mortgage loans that satisfy certain consumer relief characteristics under the master repurchase agreement.

The Company also 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 fair value risk resulting from interest rate risk, the Company uses derivative financial instruments acquired with the intention of reducing the risk that changes in market interest rates will result in unfavorable changes in the fair value of the Company’s IRLCs, inventory of mortgage loans held for sale and the portion of its MSRs not financed with ESS.

The Company records all derivative financial instruments at fair value and records changes in fair value in current period income.

Derivative Notional Amounts and Fair Value of Derivatives

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


	March 31, 2019					December 31, 2018
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Derivatives not designated as hedging instruments:
Not subject to master netting arrangements:
Interest rate lock commitments	3,821,942	$	68,248	$	2,183	2,805,400	$	50,507	$	1,169
Repurchase agreement derivatives			24,632		—			26,770		—
Used for hedging purposes:
Forward purchase contracts	9,313,389		61,932		3,170	6,657,026		35,916		215
Forward sales contracts	7,583,005		1,215		25,962	6,890,046		437		26,762
MBS put options	9,425,000		6,287		—	4,635,000		720		—
MBS call options	3,350,000		6,251		—	1,450,000		2,135		—
Put options on interest rate futures purchase contracts	3,350,000		2,639		—	3,085,000		866		—
Call options on interest rate futures purchase contracts	2,250,000		14,078		—	1,512,500		5,965		—
Treasury futures purchase contracts	1,810,000		—		—	835,000		—		—
Treasury futures sale contracts	1,075,000		—		—	1,450,000		—		—
Interest rate swap futures purchase contracts	1,025,000		—		—	625,000		—		—
Total derivatives before netting			185,282		31,315			123,316		28,146
Netting			(64,129)		(13,477)			(26,969)		(25,082)
		$	121,153	$	17,838		$	96,347	$	3,064
Deposits placed with derivative counterparties		$	50,652				$	1,887

The following table summarizes notional amount activity for derivative contracts used in the Company’s hedging activities:


	Quarter ended March 31, 2019
	Notional			Notional
	amount			amount
	beginning of		Dispositions/	end of
Instrument	quarter	Additions	expirations	quarter
	(in thousands)
Forward purchase contracts	6,657,026	52,621,845	(49,965,482)	9,313,389
Forward sale contracts	6,890,046	59,673,487	(58,980,528)	7,583,005
MBS put options	4,635,000	19,160,000	(14,370,000)	9,425,000
MBS call options	1,450,000	4,500,000	(2,600,000)	3,350,000
Put options on interest rate futures purchase contracts	3,085,000	6,675,000	(6,410,000)	3,350,000
Call options on interest rate futures purchase contracts	1,512,500	4,462,800	(3,725,300)	2,250,000
Put options on interest rate futures sale contracts	—	10,135,300	(10,135,300)	—
Treasury futures purchase contracts	835,000	4,111,200	(3,136,200)	1,810,000
Treasury futures sale contracts	1,450,000	2,761,200	(3,136,200)	1,075,000
Interest rate swap futures purchase contracts	625,000	400,000	—	1,025,000


	Quarter ended March 31, 2018
	Notional			Notional
	amount			amount
	beginning of		Dispositions/	end of
Instrument	quarter	Additions	expirations	quarter
	(in thousands)
Forward purchase contracts	4,920,883	45,330,785	(43,707,885)	6,543,783
Forward sale contracts	5,204,796	56,355,552	(54,636,002)	6,924,346
MBS put options	4,925,000	4,500,000	(5,675,000)	3,750,000
MBS call options	—	5,675,000	(5,675,000)	—
Put options on interest rate futures purchase contracts	2,125,000	5,525,000	(4,850,000)	2,800,000
Call options on interest rate futures purchase contracts	100,000	375,000	(250,000)	225,000
Put options on interest rate futures sale contracts	—	4,850,000	(4,850,000)	—
Call options on interest rate futures sale contracts	—	250,000	(250,000)	—
Treasury futures purchase contracts	100,000	1,904,900	(1,494,900)	510,000
Treasury futures sale contracts	—	3,406,200	(2,156,200)	1,250,000
Interest rate swap futures purchase contracts	1,400,000	465,000	(1,400,000)	465,000
Interest rate swap futures sale contracts	—	1,400,000	(1,400,000)	—

Derivative Balances and Netting of Financial Instruments

The Company has elected to present net derivative asset and liability positions, and cash collateral obtained from (or posted to) its counterparties when subject to a master netting arrangement that is legally enforceable on all counterparties in the event of default. The derivatives that are not subject to a master netting arrangement are IRLCs and repurchase agreement derivatives.

Offsetting of Derivative Assets

Following are summaries of derivative assets and related netting amounts:


	March 31, 2019						December 31, 2018
	Gross		Gross amount		Net amount		Gross		Gross amount		Net amount
	amount of		offset in the		of assets in the		amount of		offset in the		of assets in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	assets		balance sheet		balance sheet		assets		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements:
Interest rate lock commitments	$	68,248	$	—	$	68,248	$	50,507	$	—	$	50,507
Repurchase agreement derivatives		24,632		—		24,632		26,770		—		26,770
		92,880		—		92,880		77,277		—		77,277
Derivatives subject to master netting arrangements:
Forward purchase contracts		61,932		—		61,932		35,916		—		35,916
Forward sale contracts		1,215		—		1,215		437		—		437
MBS put options		6,287		—		6,287		720		—		720
MBS call options		6,251		—		6,251		2,135		—		2,135
Put options on interest rate futures purchase contracts		2,639		—		2,639		866		—		866
Call options on interest rate futures purchase contracts		14,078		—		14,078		5,965		—		5,965
Netting				(64,129)		(64,129)		—		(26,969)		(26,969)
		92,402		(64,129)		28,273		46,039		(26,969)		19,070
	$	185,282	$	(64,129)	$	121,153	$	123,316	$	(26,969)	$	96,347

Derivative Assets, Financial Instruments, and Cash Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative asset positions after considering master netting arrangements and financial instruments or cash pledged that do not meet the accounting guidance qualifying for netting.


	March 31, 2019								December 31, 2018
			Gross amount not								Gross amount not
			offset in the								offset in the
			consolidated								consolidated
	Net amount		balance sheet						Net amount		balance sheet
	of assets in the				Cash				of assets in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		received		amount		balance sheet		instruments		received		amount
	(in thousands)
Interest rate lock commitments	$	68,248	$	—	$	—	$	68,248	$	50,507	$	—	$	—	$	50,507
Deutsche Bank		24,632		—		—		24,632		26,770		—		—		26,770
RJ O'Brien		16,717		—		—		16,717		6,831		—		—		6,831
Bank of America, N.A.		4,052		—		—		4,052		2,781		—		—		2,781
JPMorgan Chase Bank, N.A.		3,494		—		—		3,494		1,399		—		—		1,399
Wells Fargo Bank, N.A.		2,275		—		—		2,275		3,707		—		—		3,707
Goldman Sachs		1,286		—		—		1,286		—		—		—		—
Citibank, N.A.		—		—		—		—		2,488		—		—		2,488
Others		449		—		—		449		1,864		—		—		1,864
	$	121,153	$	—	$	—	$	121,153	$	96,347	$	—	$	—	$	96,347

Offsetting of Derivative Liabilities and Financial Liabilities

Following is a summary of net derivative liabilities and assets sold under agreements to repurchase and related netting amounts. Assets sold under agreements to repurchase do not qualify for netting.


	March 31, 2019						December 31, 2018
					Net						Net
					amount						amount
	Gross		Gross amount		of liabilities		Gross		Gross amount		of liabilities
	amount of		offset in the		in the		amount of		offset in the		in the
	recognized		consolidated		consolidated		recognized		consolidated		consolidated
	liabilities		balance sheet		balance sheet		liabilities		balance sheet		balance sheet
	(in thousands)
Derivatives not subject to master netting arrangements – Interest rate lock commitments	$	2,183	$	—	$	2,183	$	1,169	$	—	$	1,169
Derivatives subject to a master netting arrangement:
Forward purchase contracts		3,170		—		3,170		215		—		215
Forward sale contracts		25,962		—		25,962		26,762		—		26,762
Netting		—		(13,477)		(13,477)		—		(25,082)		(25,082)
		29,132		(13,477)		15,655		26,977		(25,082)		1,895
Total derivatives		31,315		(13,477)		17,838		28,146		(25,082)		3,064
Assets sold under agreements to repurchase:
Amount outstanding		2,152,588		—		2,152,588		1,935,200		—		1,935,200
Unamortized debt issuance premiums and costs, net		(650)		—		(650)		(1,341)		—		(1,341)
		2,151,938		—		2,151,938		1,933,859		—		1,933,859
	$	2,183,253	$	(13,477)	$	2,169,776	$	1,962,005	$	(25,082)	$	1,936,923

Derivative Liabilities, Financial Instruments, and Collateral Held by Counterparty

The following table summarizes by significant counterparty the amount of derivative liabilities and assets sold under agreements to repurchase after considering master netting arrangements and financial instruments or cash pledged that do not qualify under the accounting guidance for netting. All assets sold under agreements to repurchase are secured by sufficient collateral or have fair value that exceeds the liability amount recorded on the consolidated balance sheets.


	March 31, 2019								December 31, 2018
			Gross amounts								Gross amounts
			not offset in the								not offset in the
	Net amount		consolidated						Net amount		consolidated
	of liabilities		balance sheet						of liabilities		balance sheet
	in the				Cash				in the				Cash
	consolidated		Financial		collateral		Net		consolidated		Financial		collateral		Net
	balance sheet		instruments		pledged		amount		balance sheet		instruments		pledged		amount
	(in thousands)
Interest rate lock commitments	$	2,183	$	—	$	—	$	2,183	$	1,169	$	—	$	—	$	1,169
Credit Suisse First Boston Mortgage Capital LLC		848,914		(845,622)		—		3,292		691,030		(690,766)		—		264
Deutsche Bank		692,010		(692,010)		—		—		741,978		(741,978)		—		—
BNP Paribas		199,395		(199,395)		—		—		149,675		(149,482)		—		193
Bank of America, N.A.		170,859		(170,859)		—		—		170,820		(170,820)		—		—
Citibank, N.A.		83,533		(82,659)		—		874		14,960		(14,960)		—		—
Morgan Stanley Bank, N.A.		80,998		(71,069)		—		9,929		77,687		(77,687)		—		—
JPMorgan Chase Bank, N.A.		50,875		(50,875)		—		—		54,326		(54,326)		—		—
Royal Bank of Canada		40,099		(40,099)		—		—		35,181		(35,181)		—		—
Federal National Mortgage Association		764		—		—		764		—		—		—		—
Others		796		—		—		796		1,438		—		—		1,438
	$	2,170,426	$	(2,152,588)	$	—	$	17,838	$	1,938,264	$	(1,935,200)	$	—	$	3,064

Following are the gains (losses) recognized by the Company on derivative financial instruments and the income statement line items where such gains and losses are included:


		Quarter ended March 31,
Derivative activity	Income statement line	2019		2018
		(in thousands)
Interest rate lock commitments	Net gains on mortgage loans held for sale at fair value	$	16,727	$	(7,376)
Repurchase agreement derivatives	Interest expense	$	(557)	$	(426)
Hedged item:
Interest rate lock commitments and mortgage loans held for sale	Net gains on mortgage loans held for sale at fair value	$	(34,668)	$	87,747
Mortgage servicing rights	Net mortgage loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	134,557	$	(103,593)