Note 5 — Fair Value

Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.


Level 1:	Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.


Level 2:	Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.


Level 3:	Unobservable inputs for the asset or liability.

We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement.

We have elected to fair value future draw commitments for HECM loans purchased or originated after December 31, 2018. The estimated fair value is included in Loans held for investment on our consolidated balance sheets with changes in fair value recognized in Reverse mortgage revenue, net in our consolidated statements of operations. The value of future draw commitments for HECM loans purchased or originated before January 1, 2019 is recognized as the draws are securitized or sold.

The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not measured, at fair value are as follows:



		December 31,
		2019				2018
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Loans held for sale
Loans held for sale, at fair value (a)	2	$	208,752	$	208,752	$	176,525	$	176,525
Loans held for sale, at lower of cost or fair value (b)	3	66,517		66,517		66,097		66,097
Total Loans held for sale		$	275,269	$	275,269	$	242,622	$	242,622
Loans held for investment
Loans held for investment - Reverse mortgages (a)	3	$	6,269,596	$	6,269,596	$	5,472,199	$	5,472,199
Loans held for investment - Restricted for securitization investors (a)	3	23,342		23,342		26,520		26,520
Total loans held for investment		6,292,938		6,292,938		5,498,719		5,498,719

Advances (including match funded), net (c)	3	1,056,523		1,056,523		1,186,676		1,186,676
Receivables, net (c)	3	201,220		201,220		198,262		198,262
Mortgage-backed securities (a)	3	2,075		2,075		1,502		1,502
U.S. Treasury notes (a)	1	—		—		1,064		1,064
Corporate bonds (a)	2	441		441		450		450



		December 31,
		2019						2018
	Level	Carrying Value			Fair Value			Carrying Value			Fair Value
Financial liabilities:
Match funded liabilities (c)	3	$	679,109		$	679,507		$	778,284		$	776,485
Financing liabilities:
HMBS-related borrowings (a)	3	$	6,063,435		$	6,063,435		$	5,380,448		$	5,380,448
Financing liability - MSRs pledged (Rights to MSRs) (a)	3	950,593			950,593			1,032,856			1,032,856
Financing liability - Owed to securitization investors (a)	3	22,002			22,002			24,815			24,815
Other (c)	3	—			—			4,419			4,419
Total Financing liabilities		$	7,036,030		$	7,036,030		$	6,442,538		$	6,442,538
Other secured borrowings:
Senior secured term loan (c) (d)	2	$	322,758		$	324,643		$	226,825		$	227,449
Other (c)	3	703,033			686,146			221,236			204,864
Total Other secured borrowings		$	1,025,791		$	1,010,789		$	448,061		$	432,313
Senior notes:
Senior unsecured notes (c) (d)	2	$	21,046		$	13,821		$	119,924		$	119,258
Senior secured notes (c) (d)	2	290,039			256,201			328,803			306,889
Total Senior notes		$	311,085		$	270,022		$	448,727		$	426,147

Derivative financial instrument assets (liabilities)
Interest rate lock commitments (a)	2	$	4,878		$	4,878		$	3,871		$	3,871
Forward trades - Loans held for sale (a)	1	(92		)	(92		)	(4,983		)	(4,983		)
TBA / Forward mortgage-backed securities (MBS) trades - MSR hedging (a)	1	1,121			1,121			—			—
Interest rate caps (a)	3	—			—			678			678

MSRs (a)	3	$	1,486,395		$	1,486,395		$	1,457,149		$	1,457,149


(a)	Measured at fair value on a recurring basis.


(b)	Measured at fair value on a non-recurring basis.


(c)	Disclosed, but not measured, at fair value.


(d)	The carrying values are net of unamortized debt issuance costs and discount. See Note 14 — Borrowings for additional information.

The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis:



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Loans Held for Inv. - Restricted for Securitiza- tion Investors			Financing Liability - Owed to Securitiza - tion Investors			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2019
Beginning balance	$	5,472,199		$	(5,380,448	)	$	26,520		$	(24,815	)	$	1,502	$	(1,032,856	)	$	678		$	1,457,149
Purchases, issuances, sales and settlements
Purchases	—			—			—			—			—		(1,276		)	—			162,300
Issuances	1,026,154			(962,113		)	—			—			—		—			—			—
Sales	—			—			—			—			—		(44		)	—			(4,344		)
Settlements	(558,720		)	549,600			(3,178		)	2,813			—		214,364			—			(7,309		)
Transfers (to) from:
Loans held for sale, at fair value	(1,892		)	—			—			—			—		—			—			—
Receivables, net	(327		)	—			—			—			—		—			—			—
Other assets	(513		)	—			—			—			—		—			—			—
	464,702			(412,513		)	(3,178		)	2,813			—		213,044			—			150,647

Total realized and unrealized gains (losses)
Included in earnings:
Change in fair value (1)	332,430			(270,473		)	—			—			573		(152,986		)	(678		)	(121,401		)
Calls and other	—			—			—			—			—		22,205			—			—
	332,430			(270,473		)	—			—			573		(130,781		)	(678		)	(121,401		)
Transfers in and / or out of Level 3	—			—			—			—			—		—			—			—
Ending balance	$	6,269,331		$	(6,063,434	)	$	23,342		$	(22,002	)	$	2,075	$	(950,593	)	$	—		$	1,486,395



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Loans Held for Inv. - Restricted for Securitiza- tion Investors			Financing Liability - Owed to Securitiza - tion Investors			Mortgage-Backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2018
Beginning balance	$	4,715,831		$	(4,601,556	)	$	—		$	—		$	1,592		$	(508,291	)	$	2,056		$	671,962
Purchases, issuances, sales and settlements
Purchases	—			—			—			—			—			(667		)	95			13,712
Recognized (assumed) in connection with the acquisition of PHH	—			—			—			—			—			(481,020		)	—			518,127
Issuances (2)	920,476			(948,917		)	—			—			—			(279,586		)	—			—
Consolidation of mortgage-backed securitization trusts	—			—			28,373			(26,643		)	—			—			—			—
Sales	—			—			—			—			—			—			—			(6,240		)
Settlements	(400,521		)	391,985			(1,853		)	1,828			—			211,766			(371		)	(5,880		)
Transfers (to) from:
MSRs carried at amortized cost, net of valuation allowance	—			—			—			—			—			—			—			418,925
Loans held for sale, at fair value	(1,039		)	—			—			—			—			—			—			—
Receivables, net	(158		)	—			—			—			—			—			—			—
Other assets	(411		)	—			—			—			—			—			—			—
	518,347			(556,932		)	26,520			(24,815		)	—			(549,507		)	(276		)	938,644
Total realized and unrealized gains (losses)
Included in earnings:
Change in fair value (2)	238,021			(221,960		)	—			—			(90		)	19,269			(1,102		)	(153,457		)
Calls and other	—			—			—			—			—			5,673			—			—
	238,021			(221,960		)	—			—			(90		)	24,942			(1,102		)	(153,457		)
Transfers in and / or out of Level 3	—			—			—			—			—			—			—			—
Ending balance	$	5,472,199		$	(5,380,448	)	$	26,520		$	(24,815	)	$	1,502		$	(1,032,856	)	$	678		$	1,457,149



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2017
Beginning balance	$	3,565,716		$	(3,433,781	)	$	8,342		$	(477,707	)	$	1,836		$	679,256
Purchases, issuances, sales and settlements
Purchases	—			—			—			—			655			—
Issuances (3)	1,277,615			(1,281,543		)	—			(54,601		)	—			(2,214		)
Sales	—			—			—			—			—			(540		)
Settlements	(444,388		)	418,503			—			59,190			(445		)	—
Transfers (to) from:
Loans held for sale, at fair value	(3,803		)	—			—			—			—			—
Receivables, net	(3,583		)	—			—			—			—			—
Other assets	(1,929		)	—			—			—			—			—
	823,912			(863,040		)	—			4,589			210			(2,754		)
Total realized and unrealized gains (losses) (4)
Included in earnings
Change in fair value (3)	326,203			(304,735		)	(6,750		)	(41,282		)	10			(4,540		)
Calls and other	—			—			—			6,109			—			—
	326,203			(304,735		)	(6,750		)	(35,173		)	10			(4,540		)
Transfers in and / or out of Level 3	—			—			—			—			—			—
Ending balance	$	4,715,831		$	(4,601,556	)	$	1,592		$	(508,291	)	$	2,056		$	671,962


(1)	The change in fair value adjustments on Loans held for investment for 2019 include $12.2 million in connection with the fair value election for future draw commitments on HECM reverse mortgage loans purchased or originated after December 31, 2018.


(2)	On January 18, 2018, Ocwen received a lump-sum payment of $279.6 million in accordance with terms of the agreements with NRZ. See Note 10 — Rights to MSRs.


(3)	On September 1, 2017, Ocwen transferred MSRs with UPB of $15.9 billion to NRZ and received a lump-sum payment of $54.6 million. See Note 10 — Rights to MSRs.


(4)	Total gains (losses) attributable to derivative financial instruments still held at December 31, 2019 and 2018 and 2017 were $(0.7) million, $(1.1) million and $0.1 million for 2019, 2018 and 2017, respectively. Total losses for 2019, 2018 and 2017 attributable to MSRs still held at December 31, 2019, 2018 and 2017 were $98.1 million, $153.5 million and $4.5 million, respectively.

The methodologies that we use and key assumptions that we make to estimate the fair value of financial instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis and those disclosed, but not carried, at fair value are described below.

Loans Held for Sale

Residential forward and reverse mortgage loans that we intend to sell are carried at fair value as a result of a fair value election. Such loans are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy because the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conventional and government-insured mortgage loans are typically sold.

We purchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications, strategic early buyouts (EBO) and loan resolution activity as part of our contractual obligations as the servicer of the loans. Modified and EBO loans are classified as loans held for sale at the lower of cost or fair value as we expect to redeliver (sell) the loans into new Ginnie Mae guaranteed securitizations (in the case of modified loans) or sell the loans to a private investor (in the case of EBO loans). The fair value of these loans is estimated using published forward Ginnie Mae prices or existing sale contracts. Loans repurchased in connection with loan resolution activities are classified as receivables. Because these loans are insured or guaranteed by the FHA or VA, the fair value of these loans represents the net recovery value taking into consideration the insured or guaranteed claim.

We report all other loans held for sale at the lower of cost or fair value. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price, unless facts and circumstances exist that could impact deal economics, at which point we use judgment to determine appropriate adjustments to recorded fair value, if any. We determine the fair value of loans for which we have no agreement to sell on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.

Loans Held for Investment

Loans Held for Investment - Reverse Mortgages

We measure these loans at fair value based on the expected future cash flows discounted over the expected life of the loans at a rate commensurate with the risk of the estimated cash flows, including future draw commitments for HECM loans purchased or originated after December 31, 2018. Significant assumptions include expected future draws and prepayment and delinquency rates and cumulative loss curves. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans, expected duration of the asset and current market interest rates.



	December 31,
Significant valuation assumptions	2019		2018
Life in years
Range	2.4 to 7.8		3.0 to 7.6
Weighted average	6.0		5.9
Conditional repayment rate
Range	7.8% to 28.3%		6.8% to 38.4%
Weighted average	14.6	%	14.7	%
Discount rate	2.8	%	3.4	%

Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the loans held for investment, excluding future draw commitments, are largely offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans.

Loans Held for Investment – Restricted for securitization investors

We have elected to measure loans held by consolidated mortgage-backed securitization trusts at fair value. The loans are secured by first liens on single family residential properties. Fair value is based on proprietary cash flow modeling processes from a third-party broker/dealer and a third-party valuation expert. Significant assumptions used in the valuation include projected monthly payments, projected prepayments and defaults, property liquidation values and discount rates.

MSRs

We determine the fair value of MSRs primarily using discounted cash flow methodologies. The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments.

We engage third-party valuation experts who generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model and a prepayment model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, incorporating available industry survey results and client feedback, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we understand the methodologies and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts. We believe that the procedures executed by the valuation experts, supported by our verification and analytical procedures, provide reasonable assurance that the prices used in our consolidated financial statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use.

We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:



•	Mortgage prepayment speeds	•	Delinquency rates
•	Cost of servicing	•	Interest rate used for computing float earnings
•	Discount rate	•	Compensating interest expense
•	Interest rate used for computing the cost of financing servicing advances	•	Collection rate of other ancillary fees
•	Curtailment on advances

MSRs are carried at fair value and classified within Level 3 of the valuation hierarchy. The fair value is determined using the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is recorded at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and are contemplated along with other market-based transactions in their model validation.

A change in valuation inputs or assumptions may result in a significantly higher or lower fair value measurement. Changes in market interest rates predominantly impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs due to the impact on advance costs. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.



	December 31,
Significant valuation assumptions	2019						2018
	Agency			Non-Agency			Agency			Non-Agency
Weighted average prepayment speed	11.7		%	12.2		%	8.5		%	15.4		%
Weighted average delinquency rate	3.2		%	27.3		%	6.6		%	27.1		%
Advance financing cost	5-year swap			5-yr swap plus 2.00%			5-year swap			5-yr swap plus 2.75%
Interest rate for computing float earnings	5-year swap			5-yr swap minus 0.50%			5-year swap			5-yr swap minus 0.50%
Weighted average discount rate	9.3		%	11.3		%	9.1		%	12.8		%
Weighted average cost to service (in dollars)	$	85		$	277		$	90		$	297

Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs that we carry at fair value as of December 31, 2019 given hypothetical shifts in lifetime prepayments and yield assumptions:



Adverse change in fair value	10%			20%
Weighted average prepayment speeds	$	(116,951	)	$	(224,689	)
Weighted average discount rate	(49,463		)	(95,885		)

The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at December 31, 2019 are increased prepayment speeds and an increase in the yield assumption.

Advances

We value advances and match funded advances at their net realizable value, which generally approximates fair value. Servicing advances have no stated maturity and do not bear interest. Principal and interest advances are generally realized within a relatively short period of time. The timing of recovery of taxes, insurance and other corporate advances depends on the underlying loan attributes, performance, and in many cases, foreclosure or liquidation timeline. The fair value adjustment to servicing advances associated with the estimated time to recover such advances is separately measured and reported as a component of the fair value of the associated MSR, consistent with actual market transactions. Refer to MSRs above for a description of the valuation methodology and assumptions related to the cost of financing servicing advances and discount rate, among other factors. The fair value of advances and match funded advances does not include the fair value of any servicer advance commitments that is included and measured as a component of the fair value of the associated MSR.

Receivables

The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization.

Mortgage-Backed Securities (MBS)

Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities using a process based upon the use of an independent third-party valuation expert. Where possible, we consider observable trading activity in the valuation of our securities. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we have invested trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation, the observability of inputs is further reduced. We classify subordinate and residual securities as trading securities and account for them at fair value on a recurring basis. Changes in the fair value of our investment in subordinate and residual securities are recognized in Other, net in the consolidated statements of operations.

U.S. Treasury Notes

We classify U.S. Treasury notes as trading securities and account for them at fair value on a recurring basis. We base the fair value on quoted prices in active markets to which we have access. Changes in the fair value of our investment in U.S. Treasury notes are recognized in Other, net in the consolidated statements of operations.

Match Funded Liabilities

For match funded liabilities that bear interest at a rate that is adjusted regularly based on a market index, the carrying value approximates fair value. For match funded liabilities that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We assume the notes are refinanced at the end of their revolving periods, consistent with how we manage our advance facilities.

Financing Liabilities

HMBS-Related Borrowings

We have elected to measure these borrowings at fair value. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the projected recovery of principal, interest and advances over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows. Significant assumptions include prepayments, discount rate and borrower mortality rates. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates.



	December 31,
Significant valuation assumptions	2019		2018
Life in years
Range	2.4 to 7.8		3.0 to 7.6
Weighted average	6.0		5.9
Conditional repayment rate
Range	7.8% to 28.3%		6.8% to 38.4%
Weighted average	14.6	%	14.7	%
Discount rate	2.7	%	3.3	%

Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value.

MSRs Pledged (Rights to MSRs)

We have elected to measure and record these borrowings at fair value. We recognize the proceeds received in connection with Rights to MSRs transactions as a secured borrowing that we account for at fair value. We determine the fair value of the pledged MSR liability following a similar approach as for the associated pledged MSRs. Fair value for the portion of the borrowing attributable to the MSRs underlying the Rights to MSRs is determined using the mid-point of the range of prices provided by third-party valuation experts. Fair value for the portion of the borrowing attributable to any lump sum payments received in connection with the transfer of MSRs underlying such Rights to MSRs to the extent such transfer is accounted for as a financing is determined by discounting the relevant future cash flows that were altered through such transfer using assumptions consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR.



	December 31,
Significant valuation assumptions	2019			2018
Weighted average prepayment speed	11.9		%	13.9		%
Weighted average delinquency rate	20.3		%	20.3		%
Advance financing cost	5-year swap plus 0% to 2.00%			5-year swap plus 0% to 2.75%
Interest rate for computing float earnings	5-year swap minus 0% to 0.50%			5-year swap minus 0% to 0.50%
Weighted average discount rate	10.7		%	12.0		%
Weighted average cost to service (in dollars)	$	223		$	234

Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value.

Financing Liability – Owed to Securitization Investors

Consists of securitization debt certificates due to third parties that represent beneficial ownership interests in mortgage-backed securitization trusts that we include in our consolidated financial statements. We determine fair value using the measurement alternative to ASC Topic 820, Fair Value Measurement as disclosed in Note 4 — Securitizations and Variable Interest Entities. In accordance with the measurement alternative, the fair value of the consolidated securitization debt certificates is measured as the fair value of the loans held by the trust less the fair value of the beneficial interests held by us in the form of residual securities.

Other Secured Borrowings

The carrying value of secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other secured borrowings that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. For the SSTL, we base the fair value on valuation data obtained from a pricing service.

Secured Notes

In 2014, we issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. In 2019, we issued Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 notes secured by certain of PMC’s private label MSRs. We determine the fair value of these notes based on bid prices provided by third parties involved in the issuance and placement of the notes.

Senior Notes

We base the fair value on quoted prices in a market with limited trading activity, or on valuation data obtained from a pricing service in the absence of trading data.

Derivative Financial Instruments

Interest rate lock commitments (IRLCs) represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant (locked pipeline), whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close) using models that consider cumulative historical fallout rates and other factors.

We entered into forward MBS trades to provide an economic hedge against changes in the fair value of residential forward and reverse mortgage loans held for sale that we carry at fair value until August 2019 and, beginning in September 2019, to hedge of our net MSR portfolio. Forward contracts are actively traded in the market and we obtain unadjusted market quotes for these derivatives; thus, they are classified within Level 1 of the valuation hierarchy.

In addition, we may use interest rate caps to minimize future interest rate exposure on variable rate debt issued on servicing advance financing facilities from increases in one-month or three-month Eurodollar rate (1ML or 3ML, respectively) interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.