Note 8—Derivative Financial Instruments

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 when the Company 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 loan for sale.

Derivatives that were embedded in a master repurchase agreement that provided for the Company to receive incentives for financing mortgage loans that satisfied certain consumer relief characteristics under the master repurchase agreement.

The Company also engages in interest rate risk management activities in an effort to moderate the effect of changes in market interest rates on the fair value of the Company’s assets. 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 loans held for sale and the portion of its MSRs not financed with ESS.

The Company does not designate and qualify any of its derivatives for hedge accounting. 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, 2020					December 31, 2019
		Fair value					Fair value
	Notional	Derivative		Derivative		Notional	Derivative		Derivative
Instrument	amount	assets		liabilities		amount	assets		liabilities
	(in thousands)
Not subject to master netting arrangements:
Interest rate lock commitments	9,377,614	$	317,621	$	2,427	7,122,316	$	138,511	$	1,861
Repurchase agreement derivatives			8,187		—			8,187		—
Used for hedging purposes:
Forward purchase contracts	20,480,331		421,860		12,553	13,618,361		12,364		19,040
Forward sales contracts	20,196,818		23,346		334,111	16,220,526		17,097		18,045
MBS put options	10,700,000		4,062		—	6,100,000		3,415		—
Swaption futures purchase contracts	6,800,000		36,696		—	1,750,000		2,409		—
Put options on interest rate futures purchase contracts	4,925,000		13,676		—	2,250,000		3,945		—
Call options on interest rate futures purchase contracts	1,925,000		24,434		—	750,000		1,469		—
Treasury futures purchase contracts	650,000		—		—	1,276,000		—		—
Treasury futures sale contracts	810,000		—		—	1,010,000		—		—
Interest rate swap futures purchase contracts	2,560,000		—		—	3,210,000		—		—
Total derivatives before netting			849,882		349,091			187,397		38,946
Netting			(416,671)		(305,939)			(27,711)		(16,616)
		$	433,211	$	43,152		$	159,686	$	22,330
Collateral placed with (received from) derivative counterparties, net		$	(110,732)				$	(11,095)

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


	Notional amounts, quarter ended March 31, 2020
	Beginning of		Dispositions/	End of
Instrument	quarter	Additions	expirations	quarter
	(in thousands)
Forward purchase contracts	13,618,361	112,859,449	(105,997,479)	20,480,331
Forward sale contracts	16,220,526	130,436,231	(126,459,939)	20,196,818
MBS put options	6,100,000	22,000,000	(17,400,000)	10,700,000
Swaption futures purchase contracts	1,750,000	7,900,000	(2,850,000)	6,800,000
Swaption futures sale contracts	—	2,850,000	(2,850,000)	—
Put options on interest rate futures purchase contracts	2,250,000	7,600,000	(4,925,000)	4,925,000
Call options on interest rate futures purchase contracts	750,000	3,540,000	(2,365,000)	1,925,000
Put options on interest rate futures sale contracts	—	4,925,000	(4,925,000)	—
Call options on interest rate futures sale contracts	—	2,365,000	(2,365,000)	—
Treasury futures purchase contracts	1,276,000	2,035,000	(2,661,000)	650,000
Treasury futures sale contracts	1,010,000	2,461,000	(2,661,000)	810,000
Interest rate swap futures purchase contracts	3,210,000	1,225,000	(1,875,000)	2,560,000
Interest rate swap futures sales contracts	—	1,875,000	(1,875,000)	—


	Notional amounts, quarter ended March 31, 2019
	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

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, 2020						December 31, 2019
	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	$	317,621	$	—	$	317,621	$	138,511	$	—	$	138,511
Repurchase agreement derivatives		8,187		—		8,187		8,187		—		8,187
		325,808		—		325,808		146,698		—		146,698
Derivatives subject to master netting arrangements:
Forward purchase contracts		421,860		—		421,860		12,364		—		12,364
Forward sale contracts		23,346		—		23,346		17,097		—		17,097
MBS put options		4,062		—		4,062		3,415		—		3,415
Swaptions		36,696		—		36,696		2,409		—		2,409
Put options on interest rate futures purchase contracts		13,676		—		13,676		3,945		—		3,945
Call options on interest rate futures purchase contracts		24,434		—		24,434		1,469		—		1,469
Netting		—		(416,671)		(416,671)		—		(27,711)		(27,711)
		524,074		(416,671)		107,403		40,699		(27,711)		12,988
	$	849,882	$	(416,671)	$	433,211	$	187,397	$	(27,711)	$	159,686

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, 2020								December 31, 2019
			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	$	317,621	$	—	$	—	$	317,621	$	138,511	$	—	$	—	$	138,511
RJ O'Brien		38,109		—		—		38,109		5,414		—		—		5,414
JPMorgan Chase Bank, N.A.		27,313		—		—		27,313		2,196		—		—		2,196
Goldman Sachs		14,537		—		—		14,537		2,548		—		—		2,548
Citibank, N.A.		9,995		—		—		9,995		—		—		—		—
Deutsche Bank		7,894		—		—		7,894		9,138		—		—		9,138
Wells Fargo Bank, N.A.		5,848		—		—		5,848		—		—		—		—
Daiwa Capital Markets		3,084		—		—		3,084		—		—		—		—
Mizuho Securities		2,989		—		—		2,989		1,597		—		—		1,597
Federal National Mortgage Association		1,980		—		—		1,980		—		—		—		—
Others		3,841		—		—		3,841		282		—		—		282
	$	433,211	$	—	$	—	$	433,211	$	159,686	$	—	$	—	$	159,686

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, 2020						December 31, 2019
					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	$	2,427	$	—	$	2,427	$	1,861	$	—	$	1,861
Derivatives subject to a master netting arrangement:
Forward purchase contracts		12,553		—		12,553		19,040		—		19,040
Forward sale contracts		334,111		—		334,111		18,045		—		18,045
Netting		—		(305,939)		(305,939)		—		(16,616)		(16,616)
		346,664		(305,939)		40,725		37,085		(16,616)		20,469
Total derivatives		349,091		(305,939)		43,152		38,946		(16,616)		22,330
Assets sold under agreements to repurchase:
Amount outstanding		4,446,795		—		4,446,795		4,141,680		—		4,141,680
Unamortized debt issuance cost, net		(2,250)		—		(2,250)		(627)		—		(627)
		4,444,545		—		4,444,545		4,141,053		—		4,141,053
	$	4,793,636	$	(305,939)	$	4,487,697	$	4,179,999	$	(16,616)	$	4,163,383

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, 2020								December 31, 2019
			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	$	2,427	$	—	$	—	$	2,427	$	1,861	$	—	$	—	$	1,861
Credit Suisse First Boston Mortgage Capital LLC		1,552,669		(1,533,516)		—		19,153		1,235,430		(1,235,430)		—		—
JPMorgan Chase Bank, N.A.		870,965		(870,965)		—		—		936,172		(936,172)		—		—
Citibank, N.A.		657,315		(657,315)		—		—		655,831		(653,170)		—		2,661
Bank of America, N.A.		654,788		(643,834)		—		10,954		379,400		(374,190)		—		5,210
Morgan Stanley Bank, N.A.		296,497		(293,813)		—		2,684		582,941		(582,941)		—		—
Royal Bank of Canada		250,919		(250,919)		—		—		175,897		(175,897)		—		—
BNP Paribas		196,791		(196,433)		—		358		183,880		(183,880)		—		—
Federal National Mortgage Association		5,674		—		—		5,674		—		—		—		—
Mitsubishi UFJ Securities		1,396		—		—		1,396		—		—		—		—
Wells Fargo Bank, N.A.		—		—		—		—		11,212		—		—		11,212
Others		506		—		—		506		1,386		—		—		1,386
	$	4,489,947	$	(4,446,795)	$	—	$	43,152	$	4,164,010	$	(4,141,680)	$	—	$	22,330

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


		Quarter ended March 31,
Derivative activity	Income statement line	2020		2019
		(in thousands)
Interest rate lock commitments	Net gains on loans held for sale at fair value	$	178,543	$	16,727
Repurchase agreement derivatives	Interest expense	$	—	$	(557)
Hedged item:
Interest rate lock commitments and loans held for sale	Net gains on loans held for sale at fair value	$	(225,557)	$	(34,668)
Mortgage servicing rights	Net loan servicing fees–Change in fair value of mortgage servicing rights and mortgage servicing liabilities	$	1,036,570	$	134,557