5. Derivatives

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 Mortgage loans held for sale and 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 Convertible notes due in 2014

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

Derivative instruments are recorded in Other assets and Other liabilities in the Condensed Consolidated Balance Sheets. The Company does not have any derivative instruments designated as hedging instruments.

DERIVATIVE ACTIVITY

The following table summarizes the gross notional amount of derivatives:

	June 30,		December 31,
	2013		2012
	(In millions)
Notional amounts:
Interest rate lock commitments	$	4,375	$	4,993
Forward delivery commitments	11,670		12,303
Option contracts	660		1,070
Interest rate contracts	692		614
Convertible note-related agreements(1)	—		—
MSR-related agreements	1,565		3,915

(1) The notional of derivative instruments underlying the Convertible-note related agreements is 9.6881 million shares of the Company’s Common stock. These instruments relate to the issuance of the Convertible notes due 2014.

The Company is exposed to risk in the event of non-performance by counterparties to our derivative contracts. In general, the Company manages such risk by evaluating the financial position and creditworthiness of counterparties, monitoring the amount of exposure and/or dispersing the risk among multiple counterparties. The Company’s derivatives may also be governed by an ISDA or an MSFTA, and bilateral collateral agreements are in place with certain counterparties. When the Company has more than one outstanding derivative transaction with a single counterparty and a legally enforceable master netting agreement is in effect with that counterparty, the Company considers its exposure to be the net fair value of all positions with that counterparty including the value of any cash collateral amounts posted or received.

The Company also has collateral posting arrangements with certain counterparties that do not qualify for net presentation. As of December 31, 2012, $1 million was recorded in Other assets in the Condensed Consolidated Balance Sheets for collateral that did not qualify for net presentation, and as of June 30, 2013, the amount was not significant.

In addition, the Company has global netting arrangements with certain counterparties whereby the Company’s outstanding derivative and cash collateral positions may be settled net against amounts outstanding under borrowing arrangements and other obligations when an event of default has occurred. These amounts are not presented net in the Condensed Consolidated Balance Sheets as the netting provisions are contingent upon an event of default.

Derivative instruments are recorded in Other assets and Other liabilities in the Condensed Consolidated Balance Sheets. The following tables present the balances of outstanding derivative instruments on a gross basis and the application of counterparty and collateral netting:

	June 30, 2013

	Gross Assets		Offsetting Payables		Cash Collateral Received		Net Amount
	(In millions)
ASSETS
Subject to master netting arrangements:
Forward delivery commitments	$	165	$	(127)	$	(37)	$	1
Option contracts	2		(2)		—		—
Derivative assets subject to netting	167		(129)		(37)		1
Not subject to master netting arrangements:
Interest rate lock commitments	26		—		—		26
Forward delivery commitments	49		—		—		49
Option contracts	22		—		—		22
Interest rate contracts	2		—		—		2
Convertible note-related agreements	12		—		—		12
Derivative assets not subject to netting	111		—		—		111
Total derivative assets	$	278	$	(129)	$	(37)	$	112

	Gross Liabilities		Offsetting Receivables		Cash Collateral Received		Net Amount
	(In millions)
LIABILITIES
Subject to master netting arrangements:
Forward delivery commitments	$	57	$	(127)	$	84	$	14
Option contracts	—		(2)		4		2
Derivative liabilities subject to netting	57		(129)		88		16
Not subject to master netting arrangements:
Interest rate lock commitments	37		—		—		37
Forward delivery commitments	6		—		—		6
Convertible note-related agreements	12		—		—		12
Derivative liabilities not subject to netting	55		—		—		55
Total derivative liabilities	$	112	$	(129)	$	88	$	71

	December 31, 2012
	Gross Assets		Offsetting Payables		Cash Collateral (Received) Paid		Net Amount
	(In millions)
ASSETS
Subject to master netting arrangements:
Forward delivery commitments	$	10	$	(12)	$	5	$	3
MSR-related agreements	5		(4)		(1)		—
Derivative assets subject to netting	15		(16)		4		3
Not subject to master netting arrangements:
Interest rate lock commitments	140		—		—		140
Forward delivery commitments	5		—		—		5
Option contracts	2		—		—		2
Interest rate contracts	1		—		—		1
Convertible note-related agreements	27		—		—		27
Derivative assets not subject to netting	175		—		—		175
Total derivative assets	$	190	$	(16)	$	4	$	178

	Gross Liabilities		Offsetting Receivables		Cash Collateral (Paid) Received		Net Amount
	(In millions)
LIABILITIES
Subject to master netting arrangements:
Forward delivery commitments	$	14	$	(12)	$	(1)	$	1
MSR-related agreements	—		(4)		9		5
Derivative liabilities subject to netting	14		(16)		8		6
Not subject to master netting arrangements:
Interest rate lock commitments	1		—		—		1
Forward delivery commitments	5		—		—		5
Convertible note-related agreements	27		—		—		27
Derivative liabilities not subject to netting	33		—		—		33
Total derivative liabilities	$	47	$	(16)	$	8	$	39

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

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
	(In millions)
Gain on mortgage loans, net:
Interest rate lock commitments	$	67	$	374	$	269	$	760
Forward delivery commitments	185		(124)		239		(153)
Options contracts	20		(6)		18		(10)
Net derivative (loss) gain related to mortgage servicing rights:
MSR-related agreements	(1)		2		(17)		(3)
Fleet interest expense:
Interest rate contracts	—		(1)		—		(1)
Foreign exchange contracts	—		1		—		1