11. Fair Value Measurements

The Company updates the valuation of each instrument recorded at fair value on a quarterly basis, evaluating all available observable information, which may include current market prices or bids, recent trade activity, changes in the levels of market activity and benchmarking of industry data. The assessment also includes consideration of identifying the valuation approach that would be used currently by market participants. If it is determined that a change in valuation technique or its application is appropriate, or if there are other changes in availability of observable data or market activity, the current methodology will be analyzed to determine if a transfer between levels of the valuation hierarchy is appropriate. Such reclassifications are reported as transfers into or out of a level as of the beginning of the quarter that the change occurs. There has been no change in the valuation methodologies and classification pursuant to the valuation hierarchy during the six months ended June 30, 2016.

The incorporation of counterparty credit risk did not have a significant impact on the valuation of assets and liabilities recorded at fair value as of June 30, 2016 or December 31, 2015.

Recurring Fair Value Measurements

The following summarizes the fair value hierarchy for instruments measured at fair value on a recurring basis:



	June 30, 2016
	Level One		Level Two		Level Three		Cash Collateral and Netting			Total
	(In millions)
ASSETS
Mortgage loans held for sale	$	—	$	880	$	42	$	—		$	922
Mortgage servicing rights	—		—		679		—			679
Other assets—Derivative assets:
Interest rate lock commitments	—		—		39		—			39
Forward delivery commitments	—		8		—		(5		)	3
MSR-related agreements	—		112		—		(105		)	7
LIABILITIES
Other liabilities—Derivative liabilities:
Forward delivery commitments	$	—	$	18	$	—	$	(13	)	$	5
MSR-related agreements	—		—		—		8			8



	December 31, 2015
	Level One		Level Two		Level Three		Cash Collateral and Netting			Total
	(In millions)
ASSETS
Mortgage loans held for sale	$	—	$	704	$	39	$	—		$	743
Mortgage servicing rights	—		—		880		—			880
Other assets—Derivative assets:
Interest rate lock commitments	—		—		21		—			21
Forward delivery commitments	—		3		—		(2		)	1
MSR-related agreements	—		27		—		(23		)	4
LIABILITIES
Other liabilities—Derivative liabilities:
Forward delivery commitments	$	—	$	2	$	—	$	—		$	2

Significant inputs to the measurement of fair value and further information on the assets and liabilities measured at fair value are as follows:

Mortgage Loans Held for Sale (“MLHS”). The Company has elected to record MLHS at fair value which is intended to better reflect the underlying economics and eliminate the operational complexities of risk management activities and hedge accounting requirements. The following table reflects the difference between the carrying amounts of MLHS measured at fair value, and the aggregate unpaid principal amount that the Company is contractually entitled to receive at maturity:



	June 30, 2016					December 31, 2015
	Total		Loans 90 days or more past due and on non-accrual status			Total		Loans 90 days or more past due and on non-accrual status
	(In millions)
Carrying amount	$	922	$	8		$	743	$	9
Aggregate unpaid principal balance	909		11			738		11
Difference	$	13	$	(3	)	$	5	$	(2	)

The following table summarizes the components of mortgage loans held for sale:



	June 30, 2016		December 31, 2015
	(In millions)
First mortgages:
Conforming	$	720	$	616
Non-conforming	159		88
Total first mortgages	879		704
Second lien	4		4
Scratch and Dent	38		35
Other	1		—
Total	$	922	$	743

Mortgage Servicing Rights. The following tables summarize certain information regarding the initial and ending capitalization rate of MSRs:



	Six Months Ended June 30,
	2016		2015
Initial capitalization rate of additions to MSRs	1.02	%	1.11	%



	June 30, 2016		December 31, 2015
Capitalization servicing rate	0.73	%	0.89	%
Capitalization servicing multiple	2.6		3.1
Weighted-average servicing fee (in basis points)	29		29

The significant assumptions used in estimating the fair value of MSRs were as follows (in annual rates):



	June 30, 2016		December 31, 2015
Weighted-average prepayment speed (CPR)	12.3	%	9.1	%
Option adjusted spread, in basis points (OAS)	992		977
Weighted-average delinquency rate	5.4	%	5.3	%

The following table summarizes the estimated change in the fair value of MSRs from adverse changes in the significant assumptions:



	June 30, 2016
	Weighted- Average Prepayment Speed			Option Adjusted Spread			Weighted- Average Delinquency Rate
	(In millions)
Impact on fair value of 10% adverse change	$	(34	)	$	(28	)	$	(18	)
Impact on fair value of 20% adverse change	(66		)	(54		)	(37		)

These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, this analysis does not assume any impact resulting from management’s intervention to mitigate these variations.

The effect of a variation in a particular assumption is calculated without changing any other assumption and the assumptions used in valuing the MSRs are independently aggregated. Although there are certain inter-relationships among the various key assumptions noted above, changes in one of the significant assumptions would not independently drive changes in the others. The modeled prepayment speed assumptions are highly dependent upon interest rates, which drive borrowers’ propensity to refinance; however, there are other factors that can influence borrower refinance activity. These factors include housing prices, the levels of home equity, underwriting standards and loan product characteristics. The OAS is a component of the discount rate used to present value the cash flows of the MSR asset and represents the spread over a base interest rate that equates the present value of cash flows of an asset to the market price of that asset. The weighted average delinquency rate is based on the current and projected credit characteristics of the capitalized servicing portfolio and is dependent on economic conditions, home equity and delinquency and default patterns.

Derivative Instruments. Derivative instruments are classified within Level Two and Level Three of the valuation hierarchy. The average pullthrough percentage used in measuring the fair value of interest rate lock commitments (IRLCs) as of June 30, 2016 and December 31, 2015 was 73% and 74%, respectively. The pullthrough percentage is considered a significant unobservable input and is estimated based on changes in pricing and actual borrower behavior using a historical analysis of loan closing and fallout data. Actual loan pullthrough is compared to the modeled estimates in order to evaluate this assumption each period based on current trends. Generally, a change in interest rates is accompanied by a directionally opposite change in the assumption used for the pullthrough percentage, and the impact to fair value of a change in pullthrough would be partially offset by the related change in price.

Level Three Measurements

Activity of assets and liabilities classified within Level Three of the valuation hierarchy consisted of:



	Three Months Ended June 30, 2016									Three Months Ended June 30, 2015
	MLHS			MSRs			IRLCs, net			MLHS			MSRs			IRLCs, net
	(In millions)
Balance, beginning of period	$	41		$	770		$	28		$	41		$	986		$	38
Purchases, Issuances, Sales and Settlements:
Purchases	3			—			—			10			—			—
Issuances	2			17			—			2			28			—
Sales	(6		)	(3		)	—			(4		)	(12		)	—
Settlements	(4		)	—			(90		)	(3		)	—			(70		)
	(5		)	14			(90		)	5			16			(70		)
Realized and unrealized gains (losses) included in:
Gain on loans held for sale, net	—			—			101			—			—			54
Change in fair value of MSRs	—			(105		)	—			—			18			—
Interest income	1			—			—			2			—			—
	1			(105		)	101			2			18			54
Transfers into Level Three	9			—			—			8			—			—
Transfers out of Level Three	(4		)	—			—			(8		)	—			—
Balance, end of period	$	42		$	679		$	39		$	48		$	1,020		$	22



	Six Months Ended June 30, 2016									Six Months Ended June 30, 2015
	MLHS			MSRs			IRLCs, net			MLHS			MSRs			IRLCs, net
	(In millions)
Balance, beginning of period	$	39		$	880		$	21		$	42		$	1,005		$	22
Purchases, Issuances, Sales and Settlements:
Purchases	8			—			—			17			—			—
Issuances	3			30			—			2			48			—
Sales	(14		)	(5		)	—			(8		)	(25		)	—
Settlements	(5		)	—			(160		)	(5		)	—			(135		)
	(8		)	25			(160		)	6			23			(135		)
Realized and unrealized gains (losses) included in:
Gain on loans held for sale, net	—			—			178			1			—			135
Change in fair value of MSRs	—			(226		)	—			—			(8		)	—
Interest income	2			—			—			3			—			—
	2			(226		)	178			4			(8		)	135
Transfers into Level Three	20			—			—			15			—			—
Transfers out of Level Three	(11		)	—			—			(19		)	—			—
Balance, end of period	$	42		$	679		$	39		$	48		$	1,020		$	22

Transfers into Level Three generally represent mortgage loans held for sale with performance issues, origination flaws, or other characteristics that impact their salability in active secondary market transactions. Transfers out of Level Three represent Scratch and Dent loans that were foreclosed upon and loans that have been cured.

Unrealized gains (losses) included in the Condensed Consolidated Statements of Operations related to assets and liabilities classified within Level Three of the valuation hierarchy that are included in the Condensed Consolidated Balance Sheets were as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2016			2015		2016			2015
	(In millions)
Gain on loans held for sale, net	$	35		$	18	$	35		$	18
Change in fair value of mortgage servicing rights	(70		)	69		(165		)	81

Fair Value of Other Financial Instruments

As of June 30, 2016 and December 31, 2015, all financial instruments were either recorded at fair value or the carrying value approximated fair value, with the exception of Debt. For financial instruments that were not recorded at fair value, such as Cash and cash equivalents, Restricted cash, Accounts receivable and Servicing advance receivables, the carrying value approximates fair value due to the short-term nature of such instruments.

Debt. As of June 30, 2016 and December 31, 2015, the total fair value of Debt was $1.4 billion and $1.3 billion, respectively, and is measured using Level Two inputs. As of June 30, 2016, the fair value of Level Two Debt was estimated using the following valuation techniques: (i) $569 million was measured using a market based approach, considering the current market pricing of recent trades for similar instruments or the current expected ask price for the Company’s debt instruments; and (ii) $865 million was measured using observable spreads and terms for recent pricing of similar instruments.