Derivatives

9 Months Ended

Sep. 30, 2011

Derivatives

Derivatives

5.  Derivatives

The Company did not have any derivative instruments designated as hedging instruments during the nine months ended September 30, 2011 or during the year ended December 31, 2010.  During the three and nine months ended September 30, 2011, the Company executed certain derivative transactions to serve as an economic hedge of a portion of the interest rate risk associated with its Mortgage servicing rights (MSRs).  The Company entered into these derivative transactions to ensure that there would be sufficient capacity under its debt facilities to fund higher origination volumes given the declining mortgage rates, while maintaining compliance with the leverage covenants in its debt agreements.  The increase in mortgage asset-backed debt, coupled with the decline in value of MSRs resulting from lower mortgage rates, could have the effect of increasing the indebtedness to tangible net worth ratio in the short term.

Derivative instruments are recorded in Other assets and Other liabilities in the Condensed Consolidated Balance Sheets, except for certain instruments related to the convertible note transactions which are recorded in equity. Derivative instruments and the risks they manage are as follows:

· Forward delivery commitments—Related to interest rate and price risk for Mortgage loans held for sale and interest rate lock commitments

· Option contracts — Related to interest rate and price risk for interest rate lock commitments

· MSR-related agreements — Related to interest rate risk for mortgage servicing rights

· Interest rate contracts—Related to interest rate risk for variable-rate debt arrangements and fixed-rate leases

· Convertible note-related agreements—Related to the issuance of the 2014 Convertible notes

· Foreign exchange contracts—Related to exposure to currency fluctuations that would impact our investment in, or borrowings related to, our Canadian operations

The following table presents the balances of outstanding derivative instruments on a gross basis and the application of counterparty and collateral netting:

	September 30, 2011								December 31, 2010
	Asset			Liability			Notional		Asset			Liability			Notional
	(In millions)
Interest rate lock commitments	$	177		$	2		$	7,705	$	42		$	46		$	7,328
Forward delivery commitments: (1)
Not subject to master netting arrangements	19			26			2,946		61			14			4,703
Subject to master netting arrangements(2)	66			173			16,136		248			68			16,438
Interest rate contracts	1			—			538		4			—			653
Option contracts	3			—			930		—			—			—
MSR-related agreements	5			—			1,020		—			—			—
Convertible note-related agreements(3)	14			14			—		54			54			—
Foreign exchange contracts	1			—			48		—			—			30
Total, gross	286			215					409			182
Netting adjustments:
Offsetting receivables/payables	(95		)	(95		)			(241		)	(241		)
Cash collateral paid/received	26			(70		)			—			190
Total, net	$	217		$	50				$	168		$	131

(1) The net notional amount of Forward delivery commitments was $7.9 billion and $10.3 billion as of September 30, 2011 and December 31, 2010, respectively.

(2) Represents derivative instruments that are executed with the same counterparties and subject to master netting arrangements.  Forward delivery commitments subject to netting shown above were presented in the Condensed Consolidated Balance sheets as follows:

	September 30, 2011				December 31, 2010
	Asset		Liability		Asset		Liability
	Derivatives		Derivatives		Derivatives		Derivatives
	(In millions)
Other Assets	$	19	$	48	$	10	$	3
Other Liabilities	47		125		238		65
Total	$	66	$	173	$	248	$	68

(3) The notional amount of derivative instruments related to the issuance of the 2014 Convertible notes was 9.6881 million shares of the Company’s Common stock as of September 30, 2011 and December 31, 2010.

The following table summarizes the gains (losses) recorded in the Condensed Consolidated Statements of Operations for derivative instruments:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(In millions)
Gain on mortgage loans, net:
IRLCs	$	509		$	508		$	942		$	1,089
Options contracts	(7		)	(12		)	(14		)	(24		)
Forward delivery commitments	(247		)	(130		)	(337		)	(376		)
Net derivative gain related to mortgage servicing rights:
MSR-related agreements	1			—			1			—
Fleet interest expense:
Interest rate contracts	(2		)	(2		)	(3		)	(8		)
Foreign exchange contracts	(1		)	(14		)	(6		)	(9		)