6. 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. During the six months ended June 30, 2018, there have been no changes in the valuation methodologies and classification pursuant to the valuation hierarchy.

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, 2018 or December 31, 2017.

Recurring Fair Value Measurements

The following summarizes the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:



	June 30, 2018
	Level One		Level Two		Level Three		Cash Collateral and Netting		Total
	(In millions)
ASSETS
Mortgage loans held for sale	$	—	$	50	$	5	$	—	$	55
Mortgage servicing rights	—		—		483		—		483
Other assets—Derivative assets:
Interest rate lock commitments	—		—		2		—		2
Assets related to discontinued operations	—		3		—		—		3
LIABILITIES
Mortgage servicing rights secured liability	$	—	$	—	$	437	$	—	$	437
Other liabilities:
Liability to deliver MSRs	—		—		1		—		1



	December 31, 2017
	Level One		Level Two		Level Three		Cash Collateral and Netting		Total
	(In millions)
ASSETS
Mortgage loans held for sale	$	—	$	94	$	9	$	—	$	103
Mortgage servicing rights	—		—		476		—		476
Other assets—Derivative assets:
Interest rate lock commitments	—		—		4		—		4
Assets related to discontinued operations	—		167		1		—		168
LIABILITIES
Mortgage servicing rights secured liability	$	—	$	—	$	419	$	—	$	419
Other liabilities:
Liability to deliver MSRs	—		—		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, 2018				December 31, 2017
	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	$	55	$	1	$	103	$	1
Aggregate unpaid principal balance	55		1		103		2
Difference	$	—	$	—	$	—	$	(1	)

Mortgage Servicing Rights. MSRs are classified within Level Three of the valuation hierarchy due to the use of significant unobservable inputs and the inactive market for such assets. The fair value of MSRs is estimated based upon projections of expected future cash flows considering prepayment estimates, the Company’s historical prepayment rates, portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors. On a quarterly basis, assumptions used in estimating fair value are validated against a number of third-party sources, which may include peer surveys, MSR broker surveys, third-party valuations and other market-based sources. During the three months ended June 30, 2018, the Company updated its fair value assessment of MSRs committed under the sale agreement with New Residential. As of June 30, 2018, the fair value of these committed MSRs to New Residential no longer includes calibration of the valuation model to the pricing associated with the sale agreement based upon the timing of the original agreement and the complexities of completing the sale. See Note 4, 'Servicing Activities' for further discussion of the MSR sale commitments.

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



	Six Months Ended June 30,
	2018		2017
Initial capitalization rate of additions to MSRs owned	1.12	%	1.14	%



	June 30, 2018		December 31, 2017
MSRs Owned
Capitalization servicing rate	0.65	%	0.67	%
Capitalization servicing multiple	2.2		2.3
Weighted-average servicing fee (in basis points)	29		29
Weighted-average life (years)	4.7		5.7



	June 30, 2018		December 31, 2017
MSRs Under Secured Borrowing Arrangement
Capitalization servicing rate	0.95	%	0.85	%
Capitalization servicing multiple	3.6		3.2
Weighted-average servicing fee (in basis points)	27		27
Weighted-average life (years)	5.9		5.6

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



	June 30, 2018		December 31, 2017
MSRs Owned
Weighted-average prepayment speed (CPR)	13.2	%	9.2	%
Option adjusted spread, in basis points (OAS)	736		393
Weighted-average delinquency rate	11.8	%	12.4	%



	June 30, 2018		December 31, 2017
MSRs Under Secured Borrowing Arrangement
Weighted-average prepayment speed (CPR)	9.9	%	11.2	%
Option adjusted spread, in basis points (OAS)	861		928
Weighted-average delinquency rate	4.0	%	4.0	%

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



	June 30, 2018
	Weighted- Average Prepayment Speed			Option Adjusted Spread			Weighted- Average Delinquency Rate
	(In millions)
MSRs Owned
Impact on fair value of 10% adverse change	$	(3	)	$	(1	)	$	(2	)
Impact on fair value of 20% adverse change	(5		)	(2		)	(5		)

MSRs Under Secured Borrowing Arrangement
Impact on fair value of 10% adverse change	$	(15	)	$	(18	)	$	(5	)
Impact on fair value of 20% adverse change	(29		)	(35		)	(9		)

The Company's exposure to the change in fair value of MSRs from adverse changes in the significant assumptions is generally limited to those associated with the MSRs owned in the preceding table. Any changes in fair value associated with the MSRs under secured borrowing arrangements fully offset between the MSRs secured asset and the MSRs secured liability, and have no impact to the Company.

These sensitivities are hypothetical and presented for illustrative purposes only. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.

Mortgage Servicing Rights Secured Liability. The fair value of MSRs secured liability is classified within Level Three of the valuation hierarchy due to the use of significant unobservable inputs, which is consistent with the fair value methodology of the related MSR asset. The fair value of MSRs secured liability is estimated based upon projections of expected future cash flows of the underlying MSR asset. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, including portfolio characteristics, interest rates based on interest rate yield curves, implied volatility and other economic factors.

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



	June 30, 2018		December 31, 2017
Weighted-average prepayment speed (CPR)	9.9	%	11.2	%
Option adjusted spread, in basis points (OAS)	861		928
Weighted-average delinquency rate	4.0	%	4.0	%

Derivative Instruments. Derivative instruments are classified within Level Two and Level Three of the valuation hierarchy. The average pull through percentage used in measuring the fair value of interest rate lock commitments ("IRLCs") as of June 30, 2018 and December 31, 2017 was 48% and 66%, respectively. The pull through 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. During the six months ended June 30, 2018, the Company lowered its pull through percentage based upon this historical analysis. In addition, actual loan pull through 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 pull through percentage, and the impact to fair value of a change in pull through would be partially offset by the related change in price.

Liability to Deliver MSRs. The fair value of Liability to deliver MSRs is classified within Level Three of the valuation hierarchy due to the use of significant unobservable inputs, which is consistent with the fair value methodology of the servicing rights within IRLCs. The Company initially established the value of the Liability to deliver MSRs based on the servicing value within the IRLC at inception. Thereafter, the carrying value of this liability is adjusted to fair value at each reporting date, and the changes in value are expected to offset changes in the associated servicing value within the IRLC or MLHS in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until the MSR is delivered to the counterparty.

Level Three Measurements

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



	Three Months Ended June 30, 2018															Three Months Ended June 30, 2017
	MLHS			MSRs			IRLCs, net			MSRs Secured Liability			Liability to Deliver MSRs			MLHS			MSRs			IRLCs, net			MSRs Secured Liability
	(In millions)
Balance, beginning of period	$	8		$	496		$	3		$	(443	)	$	(1	)	$	32		$	596		$	4		$	—
Purchases, Issuances, Sales and Settlements:
Purchases	1			—			—			—			—			3			—			—			—
Issuances	—			—			—			—			—			2			7			—			(113		)
Sales	(4		)	(3		)	—			—			—			(1		)	(19		)	—			—
Settlements	—			—			(5		)	13			1			(6		)	—			(7		)	1
	(3		)	(3		)	(5		)	13			1			(2		)	(12		)	(7		)	(112		)
Realized and unrealized gains (losses) included in:
Gain on loans held for sale, net	—			—			4			—			(1		)	—			—			7			—
Change in fair value of MSRs	—			(10		)	—			6			—			—			(29		)	—			(1		)
Net interest expense	—			—			—			(13		)	—			—			—			—			(1		)
	—			(10		)	4			(7		)	(1		)	—			(29		)	7			(2		)
Transfers into Level Three	1			—			—			—			—			6			—			—			—
Transfers out of Level Three	(1		)	—			—			—			—			(4		)	—			—			—
Balance, end of period	$	5		$	483		$	2		$	(437	)	$	(1	)	$	32		$	555		$	4		$	(114	)



	Six Months Ended June 30, 2018															Six Months Ended June 30, 2017
	MLHS			MSRs			IRLCs, net			MSRs Secured Liability			Liability to Deliver MSRs			MLHS			MSRs			IRLCs, net			MSRs Secured Liability
	(In millions)
Balance, beginning of period	$	9		$	476		$	4		$	(419	)	$	(2	)	$	47		$	690		$	9		$	—
Purchases, Issuances, Sales and Settlements:
Purchases	4			—			—			—			—			5			—			—			—
Issuances	—			3			—			—			—			3			18			—			(113		)
Sales	(9		)	(9		)	—			—			—			(17		)	(95		)	—			—
Settlements	—			—			(9		)	27			3			(9		)	—			(24		)	1
	(5		)	(6		)	(9		)	27			3			(18		)	(77		)	(24		)	(112		)
Realized and unrealized gains (losses) included in:
Gain on loans held for sale, net	—			—			7			—			(2		)	—			—			19			—
Change in fair value of MSRs	—			13			—			(18		)	—			—			(58		)	—			(1		)
Net interest expense	—			—			—			(27		)	—			1			—			—			(1		)
	—			13			7			(45		)	(2		)	1			(58		)	19			(2		)
Transfers into Level Three	3			—			—			—			—			11			—			—			—
Transfers out of Level Three	(2		)	—			—			—			—			(9		)	—			—			—
Balance, end of period	$	5		$	483		$	2		$	(437	)	$	(1	)	$	32		$	555		$	4		$	(114	)

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 and Comprehensive Income (Loss) 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,
	2018			2017			2018			2017
	(In millions)
Gain on loans held for sale, net	$	2		$	4		$	4		$	7
Loan servicing income, net	(2		)	(4		)	(1		)	(6		)

Fair Value of Other Financial Instruments

As of June 30, 2018 and December 31, 2017, 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. The total fair value of Debt as of June 30, 2018 and December 31, 2017 was $180 million and $244 million, respectively, and is measured using Level Two and Level Three inputs. As of June 30, 2018, the fair value was estimated using the following valuation techniques: (i) Level Two, $59 million was measured using observable spreads and terms for recent pricing of similar instruments; and (ii) Level Three, $121 million was measured considering contractual pricing and historical broker price quotes, which are intended to reflect fair value, due to the limited trading on the Company's unsecured term notes.