Mortgage Loans

6 Months Ended

Mar. 31, 2020

SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]

MORTGAGE LOANS

MORTGAGE LOANS

Mortgage loans held for sale consist primarily of single-family residential loans collateralized by the underlying property. At March 31, 2020, mortgage loans held for sale had an aggregate carrying value of $1.4 billion and an aggregate outstanding principal balance of $1.3 billion. At September 30, 2019, mortgage loans held for sale had an aggregate carrying value of $1.1 billion and an aggregate outstanding principal balance of $1.0 billion. During the six months ended March 31, 2020 and 2019, mortgage loans originated totaled $4.9 billion and $3.6 billion, respectively, and mortgage loans sold totaled $4.6 billion and $3.6 billion, respectively. The Company had gains on sales of loans and servicing rights of $73.3 million and $147.0 million during the three and six months ended March 31, 2020, respectively, compared to $73.1 million and $132.9 million in the prior year periods. Net gains on sales of loans and servicing rights are included in revenues in the consolidated statements of operations. Approximately 90% of the mortgage loans sold by DHI Mortgage during the six months ended March 31, 2020 were sold to four major financial entities, of which one entity purchased 33%.

To manage the interest rate risk inherent in its mortgage operations, the Company hedges its risk using derivative instruments, generally forward sales of mortgage-backed securities (MBS), which are referred to as “hedging instruments” in the following discussion. The Company does not enter into or hold derivatives for trading or speculative purposes.

Newly originated loans that have been closed but not committed to third-party purchasers are hedged to mitigate the risk of changes in their fair value. Hedged loans are committed to third-party purchasers typically within three days after origination.

The Company is party to interest rate lock commitments (IRLCs), which are extended to borrowers who have applied for loan funding and meet defined credit and underwriting criteria. The Company manages interest rate risk related to its IRLCs through the use of best-efforts whole loan delivery commitments and hedging instruments.

In response to COVID-19, the U.S. government has taken various actions to support the economy and the continued functioning of the financial markets. On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included changes to current forbearance options for government-backed loans designed to keep homeowners in their homes. Due to the uncertainty surrounding these forbearance options, servicing values declined rapidly at the end of March. This resulted in lower net gains on loan originations during the three months ended March 31, 2020 compared to the prior year period. Additionally, in March 2020 the Federal Reserve announced its commitment to purchase U.S. Treasury securities, MBS, municipal bonds and other assets. This led to a significant increase in the price of MBS, which increased the change in the fair market value of the Company’s IRLCs and mortgage loans held for sale and decreased the fair market value of its hedging instruments. The net fair value change for the three and six months ended March 31, 2020 and 2019 recognized in revenues in the consolidated statements of operations was not significant.

The Company also occasionally uses hedging instruments as part of a program to offer below market interest rate financing to its homebuyers in certain markets. At March 31, 2020, the Company had MBS totaling $383.4 million that did not yet have interest rate lock commitments or closed loans created or assigned and recorded a liability of $4.9 million for the fair value of such MBS position.