Most of the Company’s assets and certain of its liabilities are measured at or based on their fair values. The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability of the significant inputs used to determine fair value. These levels are:

As a result of the difficulty in observing certain significant valuation inputs affecting “Level 3” fair value assets and liabilities, the Company is required to make judgments regarding these items’ fair values. Different persons in possession of the same facts may reasonably arrive at different conclusions as to the inputs to be applied in valuing these assets and liabilities and their fair values. Such differences may result in significantly different fair value measurements. Likewise, due to the general illiquidity of some of these assets and liabilities, subsequent transactions may be at values significantly different from those reported.

The Company identified its MSRs, its mortgage servicing liabilities (“MSLs”) and all of its non-cash financial assets to be accounted for at fair value so changes in fair value will be reflected in income as they occur and more timely reflect the results of the Company’s performance.

Following is a summary of assets and liabilities that are measured at fair value on a recurring basis:

As shown above, certain of the Company’s loans held for sale, Interest Rate Lock Commitments (“IRLCs”), MSRs and MSLs are measured using Level 3 fair value inputs. Following are roll forwards of assets and liabilities measured at fair value using “Level 3” inputs at either the beginning or the end of the period presented:

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


	Quarter ended
Liabilities	March 31, 2023
	(in thousands)
Mortgage servicing liabilities:
Balance, December 31, 2022	$	2,096
Changes in fair value included in income		(85)
Balance, March 31, 2023	$	2,011
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2023	$	(85)


	Quarter ended March 31, 2022
			Net interest		Mortgage
	Loans held		rate lock		servicing
Assets	for sale		commitments (1)		rights			Total

	(in thousands)
Balance, December 31, 2021	$	1,128,876	$	322,193	$	3,878,078	$	5,329,147
Purchases and issuances, net		2,134,778		161,309		—		2,296,087
Capitalization of interest and advances		32,111		—		—		32,111
Sales and repayments		(1,134,992)		—		—		(1,134,992)
Mortgage servicing rights resulting from loan sales		—		—		616,302		616,302
Changes in fair value included in income arising from:
Changes in instrument-specific credit risk		(5,816)		—		—		(5,816)
Other factors		(12,396)		(399,377)		212,659		(199,114)
		(18,212)		(399,377)		212,659		(204,930)
Transfers from Level 3 to Level 2		(1,365,971)		—		—		(1,365,971)
Transfers to loans held for sale		—		(46,226)		—		(46,226)
Balance, March 31, 2022	$	776,590	$	37,899	$	4,707,039	$	5,521,528
Changes in fair value recognized during the quarter relating to assets still held at March 31, 2022	$	(17,092)	$	37,899	$	212,659	$	233,466

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


Liabilities	Quarter ended March 31, 2022
	(in thousands)
Mortgage servicing liabilities
Balance, December 31, 2021	$	2,816
Changes in fair value included in income		(252)
Balance, March 31, 2022	$	2,564
Changes in fair value recognized during the quarter relating to liabilities still outstanding at March 31, 2022	$	(252)

The Company had transfers among the fair value levels arising from the return to salability in the active secondary market of certain loans held for sale and from transfers of IRLCs to loans held for sale at fair value upon purchase or funding.

Assets and Liabilities Measured at Fair Value under the Fair Value Option

Net changes in fair values included in income for assets and liabilities carried at fair value as a result of management’s election of the fair value option by income statement line item are summarized below:


	Quarter ended March 31,
	2023						2022
	Net gains on		Net				Net gains on		Net
	loans held		loan				loans held		loan
	for sale at		servicing				for sale at		servicing
	fair value		fees		Total		fair value		fees		Total

	(in thousands)
Assets:
Loans held for sale	$	165,947	$	—	$	165,947	$	(107,978)	$	—	$	(107,978)
Mortgage servicing rights		—		(236,532)		(236,532)		—		212,659		212,659
	$	165,947	$	(236,532)	$	(70,585)	$	(107,978)	$	212,659	$	104,681
Liabilities:
Mortgage servicing liabilities	$	—	$	85	$	85	$	—	$	252	$	252

Following are the fair value and related principal amounts due upon maturity of loans held for sale:


	March 31, 2023						December 31, 2022
			Principal						Principal
			amount						amount
	Fair		due upon				Fair		due upon
Loans held for sale	value		maturity		Difference		value		maturity		Difference

	(in thousands)
Current through 89 days delinquent	$	6,721,454	$	6,628,953	$	92,501	$	3,450,578	$	3,428,052	$	22,526
90 days or more delinquent:
Not in foreclosure		40,384		45,002		(4,618)		47,252		53,351		(6,099)
In foreclosure		10,585		18,200		(7,615)		11,470		16,811		(5,341)
	$	6,772,423	$	6,692,155	$	80,268	$	3,509,300	$	3,498,214	$	11,086

Assets Measured at Fair Value on a Nonrecurring Basis

Following is a summary of assets that were measured at fair value on a nonrecurring basis:


Real estate acquired in settlement of loans	Level 1		Level 2		Level 3		Total

	(in thousands)
March 31, 2023	$	—	$	—	$	2,324	$	2,324
December 31, 2022	$	—	$	—	$	1,850	$	1,850

The following table summarizes the losses recognized on assets when they were remeasured at fair value on a nonrecurring basis:

Fair Value of Financial Instruments Carried at Amortized Cost

The Company’s Assets sold under agreements to repurchase, Mortgage loan participation purchase and sale agreements, Notes payable secured by mortgage servicing assets, Unsecured senior notes and Obligations under capital lease are carried at amortized cost.

These liabilities are classified as “Level 3” fair value items due to the Company’s reliance on unobservable inputs to estimate their fair values. The Company has concluded that the fair values of these liabilities other than term notes and term loans included in Notes payable secured by mortgage servicing assets and the Unsecured senior notes approximate their carrying values due to their short terms and/or variable interest rates.

The Company estimates the fair value of the term notes and the Unsecured senior notes using indications of fair value provided by non-affiliate brokers and internal estimates of fair value of term loans. The fair value and carrying value of these liabilities are summarized below:


	March 31, 2023				December 31, 2022
	Fair value		Carrying value		Fair value		Carrying value

	(in thousands)
Term notes and term loans	$	2,466,450	$	2,471,930	$	1,677,476	$	1,794,475
Unsecured senior notes	$	1,490,375	$	1,780,833	$	1,550,750	$	1,779,920

Valuation Governance

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

Due to the difficulty in estimating the fair values of “Level 3” fair value assets and liabilities, the Company has assigned responsibility for estimating the fair values of these assets and liabilities to specialized staff and subjects the valuation process to significant senior management oversight:

●

The Company’s Financial Analysis and Valuation group (the “FAV group”) is responsible for estimating the fair values of “Level 3” fair value assets and liabilities other than IRLCs and maintaining its valuation policies and procedures.

●

The Company’s Capital Markets Risk Management staff develops the fair values of the Company’s IRLCs which is reviewed by its Capital Markets Operations group.

With respect to the non-IRLC “Level 3” valuations, the FAV group reports to the Company’s senior management valuation committee, which oversees the valuations. The FAV group monitors the models used for valuation of the Company’s “Level 3” fair value assets and liabilities, including the models’ performance versus actual results, and reports those results as well as changes in the valuation of the non-IRLC “Level 3” fair value assets and liabilities, including major factors affecting the valuations and any changes in model methods and inputs, to the Company’s senior management valuation committee. To assess the reasonableness of its valuations, the FAV group presents an analysis of the effect on the valuations of changes to the significant inputs to the models and, for MSRs, comparisons of its estimates of fair value of key inputs to those procured from nonaffiliated brokers and published surveys.

The Company’s senior management valuation committee includes the Company’s chief financial, risk, and capital market officers as well as other senior members of the Company’s finance, capital markets and risk management staffs.

Valuation Techniques and Inputs

Following is a description of the techniques and inputs used in estimating the fair values of “Level 2” and “Level 3” fair value assets and liabilities:

Loans Held for Sale

Most of the Company’s loans held for sale at fair value are saleable into active markets and are therefore categorized as “Level 2” fair value assets. The fair values of “Level 2” fair value loans are determined using their contracted selling prices or quoted market prices or market price equivalents.

Certain of the Company’s loans held for sale are not saleable into active markets and are therefore categorized as “Level 3” fair value assets. Loans held for sale categorized as “Level 3” fair value assets include:

●

Early buy out (“EBO”) loans. EBO loans are Government guaranteed or insured loans purchased by the Company from Ginnie Mae guaranteed securities in its loan servicing portfolio. The Company’s right to purchase a government guaranteed or insured loan arises as the result of the loan being at least three months delinquent on the date of purchase by the Company and provides an alternative to the Company’s obligation to continue advancing principal and interest at the coupon rate of the related Ginnie Mae security. Such a loan may be resold to an investor and thereafter may be repurchased to the extent it becomes eligible for resale into a new Ginnie Mae guaranteed security.

A loan becomes eligible for resale into a new Ginnie Mae security when the loan becomes current either through completion of a modification of the loan’s terms or after six months of timely payments following either the completion of certain types of payment deferral programs or borrower reperformance and when the issuance date of the new security is at least 120 days after the date the loan was last delinquent.

●

Scratch and dent loans. Loans that are not saleable into active markets due to identification of a defect by the Company or to the repurchase by the Company of a loan with an identified defect.

●

Closed-end second loans. At present, there is no active market with observable inputs that are significant to the estimation of fair value of the closed-end second loans the Company produces.

The Company uses a discounted cash flow model to estimate the fair value of its “Level 3” fair value loans held for sale. The significant unobservable inputs used in the fair value measurement of the Company’s “Level 3” fair value loans held for sale are discount rates, home price projections, voluntary prepayment/resale and total prepayment/resale 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.

Following is a quantitative summary of key “Level 3” fair value inputs used in the valuation of loans held for sale:



	March 31, 2023		December 31, 2022
Fair value (in thousands)	$	312,789	$	345,772
Key inputs (1):
Discount rate:
Range		5.1% – 10.2%		5.5% – 10.2%
Weighted average		5.3%		5.7%
Twelve-month projected housing price index change:
Range		(1.8)% – (1.7)%		(1.9)% – (1.7)%
Weighted average		(1.8)%		(1.8)%
Voluntary prepayment/resale speed (2):
Range		4.7% – 25.0%		4.7% – 25.6%
Weighted average		21.7%		21.6%
Total prepayment/resale speed (3):
Range		4.8% – 35.5%		4.8% – 36.1%
Weighted average		30.0%		29.4%

(1)	Weighted average inputs are based on the fair values of the “Level 3” loans.

(2)	Voluntary prepayment/resale speed is measured using Life Voluntary Conditional Prepayment Rate (“CPR”).

(3)	Total prepayment/resale speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayment/resale speeds.

Changes in fair value of loans held for sale attributable to changes in the loan’s instrument-specific credit risk are measured with reference to the change in the respective loan’s delinquency status and performance history at period end from the later of the beginning of the quarter or acquisition date. Changes in fair value of loans held for sale are included in Net gains on loans held for sale at fair value in the Company’s consolidated statements of income.

Derivative Financial Instruments

Interest Rate Lock Commitments

The Company categorizes IRLCs as “Level 3” fair value assets or liabilities. The Company estimates the fair values of IRLCs 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 loans will be funded or purchased (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 estimated fair values of MSRs attributable to the mortgage loans it has committed to purchase. Significant changes in the pull-through rate or the MSR component of the IRLCs, in isolation, could result in significant changes in the IRLCs’ fair value measurements. The financial effects of changes in these inputs are generally inversely correlated as increasing interest rates have a positive effect on the fair value of the MSR component of IRLC fair value, but increase the pull-through rate for the loan principal and interest payment cash flow component, which has decreased in fair value. Changes in fair value of IRLCs are included in Net gains on loans held for sale at fair value in the consolidated statements of income.

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



	March 31, 2023		December 31, 2022
Fair value (in thousands) (1)	$	58,846	$	25,844
Key inputs (2):
Pull-through rate:
Range		8.0% – 100%		10.3% – 100%
Weighted average		81.1%		82.8%
Mortgage servicing rights fair value expressed as:
Servicing fee multiple:
Range		1.7 – 7.8		(1.3) – 7.7
Weighted average		4.2		4.3
Percentage of loan commitment amount:
Range		0.4% – 4.1%		(0.2)% – 3.8%
Weighted average		2.1%		2.0%

(1)	For purpose of this table, IRLC asset and liability positions are shown net.

(2)	Weighted average inputs are based on the committed amounts.

Hedging Derivatives

Fair values of derivative financial instruments actively traded on exchanges are categorized by the Company as “Level 1” fair value assets and liabilities; fair values of derivative financial instruments based on observable interest rates, volatilities and prices in the MBS or other markets are categorized by the Company as “Level 2” fair value assets and liabilities.

Changes in the fair values of hedging derivatives are included in Net gains on loans held for sale at fair value, or Net loan servicing fees – Mortgage servicing rights hedging results, as applicable, in the consolidated statements of income.

Mortgage Servicing Rights

MSRs are categorized as “Level 3” fair value assets. The Company uses a discounted cash flow approach to estimate the fair value of MSRs. The key inputs used in the estimation of the fair value of MSRs include the applicable prepayment rate (prepayment speed), pricing spread (discount rate), and annual per-loan cost to service the underlying loans, all of which are unobservable. Significant changes to any of those inputs in isolation could result in a significant change in the MSR fair value measurement. Changes in these key inputs are not directly related. Changes in the fair value of MSRs are included in Net loan servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

Following are the key inputs used in determining the fair value of MSRs received by the Company when it retains the obligation to service the mortgage loans it sells:


	Quarter ended March 31,
	2023		2022

	(Amount recognized and unpaid principal balance of underlying loans in thousands)
MSR and pool characteristics:
Amount recognized	$	286,533	$	616,302
Unpaid principal balance of underlying loans	$	13,695,364	$	30,575,969
Weighted average servicing fee rate (in basis points)		50		43
Key inputs (1):
Annual total prepayment speed (2):
Range		9.2% – 23.2%		6.0% – 23.4%
Weighted average		11.7%		8.3%
Equivalent average life (in years):
Range		3.0 – 8.4		3.7 – 8.8
Weighted average		7.3		8.3
Pricing spread (3):
Range		5.5% – 11.7%		5.8% – 16.1%
Weighted average		7.7%		7.5%
Per-loan annual cost of servicing:
Range		$68 – $125		$80 – $177
Weighted average		$103		$104

(1)	Weighted average inputs are based on the UPB of the underlying loans.

(2)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

(3)	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 State Treasury Securities (the “Treasury”) yield curve for purposes of discounting cash flows relating to MSRs.

Following is a quantitative summary of key inputs used in the valuation of the Company’s MSRs and the effect on the fair value from adverse changes in those inputs:


	March 31, 2023	December 31, 2022

	(Fair value, unpaid principal balance of underlying
	loans and effect on fair value amounts in thousands)
Fair value	$ 6,003,390	$ 5,953,621
Pool characteristics:
Unpaid principal balance of underlying loans	$ 321,263,982	$ 314,567,639
Weighted average note interest rate	3.5%	3.4%
Weighted average servicing fee rate (in basis points)	37	36
Key inputs (1):
Annual total prepayment speed (2):
Range	5.2% – 18.0%	5.0% – 17.7%
Weighted average	8.2%	7.5%
Equivalent average life (in years):
Range	3.7 – 9.0	3.7 – 9.3
Weighted average	8.1	8.4
Effect on fair value of (3):
5% adverse change	($85,106)	($77,346)
10% adverse change	($167,216)	($152,192)
20% adverse change	($323,085)	($294,872)
Pricing spread (4):
Range	4.9% – 14.2%	4.9% – 14.3%
Weighted average	6.5%	6.5%
Effect on fair value of (3):
5% adverse change	($80,273)	($81,021)
10% adverse change	($158,416)	($159,863)
20% adverse change	($308,614)	($311,329)
Per-loan annual cost of servicing:
Range	$68 – $144	$68 – $144
Weighted average	$108	$109
Effect on fair value of (3):
5% adverse change	($41,653)	($41,263)
10% adverse change	($83,305)	($82,527)
20% adverse change	($166,610)	($165,053)

(1)	Weighted average inputs are based on the UPB of the underlying loans.

(2)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

(3)

These sensitivity analyses are limited in that they were performed as of a particular date; only contemplate the movements in the indicated inputs; do not incorporate changes to other inputs; are subject to the accuracy of the models and inputs used; and do not incorporate other factors that would affect the Company’s overall financial performance in such events, including operational adjustments made to account for changing circumstances. For these reasons, the estimates should not be viewed as earnings forecasts.

(4)	The Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSRs.

Mortgage Servicing Liabilities

MSLs are categorized as “Level 3” fair value liabilities. The Company uses a discounted cash flow approach to estimate the fair value of MSLs. The key inputs used in the estimation of the fair value of MSLs include the applicable pricing spread, annual total prepayment speed, and the per-loan annual cost of servicing the underlying loans. Changes in the fair value of MSLs are included in Net servicing fees—Change in fair value of mortgage servicing rights and mortgage servicing liabilities in the consolidated statements of income.

Following are the key inputs used in determining the fair value of MSLs:


		March 31,		December 31,
		2023		2022
Fair value (in thousands)	$	2,011	$	2,096
Pool characteristics:
Unpaid principal balance of underlying loans (in thousands)	$	28,380	$	33,157
Servicing fee rate (in basis points)		25		25
Key inputs (1):
Pricing spread (2)		8.0%		7.8%
Annual total prepayment speed (3)		17.0%		17.2%
Equivalent average life (in years)		4.9		4.9
Per-loan annual cost of servicing	$	1,136	$	1,177

(1)	Weighted average inputs are based on UPB of the underlying mortgage loans.

(2)	The Company applies a pricing spread to the Treasury yield curve for purposes of discounting cash flows relating to MSLs.

(3)	Annual total prepayment speed is measured using Life Total CPR, which includes both voluntary and involuntary prepayments. Equivalent average life is provided as supplementary information.

Quarter ended March 31,

(in thousands)

Real estate acquired in settlement of loans