Financial Instruments and Fair Value Disclosures

The following table presents the carrying amounts and estimated fair values of financial instruments held by the Company at November 30, 2015 and 2014, using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The table excludes cash and cash equivalents, restricted cash, receivables, net, and accounts payable, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.



		November 30,
		2015			2014
	Fair Value	Carrying		Fair	Carrying	Fair
(In thousands)	Hierarchy	Amount		Value	Amount	Value
ASSETS
Rialto:
Loans receivable, net	Level 3	$	164,826	169,302	137,124	142,900
Investments held-to-maturity	Level 3	$	25,625	25,227	17,290	17,155
Lennar Financial Services:
Loans held-for-investment, net	Level 3	$	30,998	29,931	26,894	26,723
Investments held-to-maturity	Level 2	$	40,174	40,098	45,038	45,051
LIABILITIES
Lennar Homebuilding senior notes and other debts payable	Level 2	$	5,025,130	5,936,327	4,661,266	5,731,128
Rialto notes and other debts payable	Level 2	$	771,728	803,013	617,077	634,166
Lennar Financial Services notes and other debts payable	Level 2	$	858,300	858,300	704,143	704,143

The following methods and assumptions are used by the Company in estimating fair values:

Rialto—The fair values for loans receivable, net are based on the fair value of the collateral less estimated cost to sell or discounted cash flows, if estimable. The fair value for investments held-to-maturity is based on discounted cash flows. For notes and other debts payable, the fair value is calculated based on discounted cash flows using the Company’s weighted average borrowing rate and for the warehouse repurchase financing agreements fair values approximate their carrying value due to their short-term maturities.

Lennar Financial Services—The fair values above are based on quoted market prices, if available. The fair values for instruments that do not have quoted market prices are estimated by the Company on the basis of discounted cash flows or other financial information. For notes and other debt payable, the fair values approximate their carrying value due to variable interest pricing terms and short-term nature of the borrowing.

Lennar Homebuilding—For senior notes and other debts payable, the fair value of fixed-rate borrowings is based on quoted market prices and the fair value of variable-rate borrowings is based on expected future cash flows calculated using current market forward rates.

Fair Value Measurements

GAAP provides a framework for measuring fair value, expands disclosures about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs used in measuring fair value summarized as follows:

Level 1: Fair value determined based on quoted prices in active markets for identical assets.

Level 2: Fair value determined using significant other observable inputs.

Level 3: Fair value determined using significant unobservable inputs.

The Company’s financial instruments measured at fair value on a recurring basis are summarized below:



(In thousands)	Fair Value Hierarchy	Fair Value at November 30, 2015		Fair Value at November 30, 2014
Lennar Homebuilding Assets:
Investments available-for-sale	Level 3	$	523	480
Rialto Financial Assets:
Loans held-for-sale (1)	Level 3	$	316,275	113,596
Interest rate swaps and swap futures	Level 1	$	280	—
Credit default swaps	Level 2	$	6,153	1,694
Rialto Financial Liabilities:
Interest rate swaps and swap futures	Level 1	$	978	1,376
Credit default swaps	Level 2	$	720	766
Lennar Financial Services Assets:
Loans held-for-sale (2)	Level 2	$	843,252	738,396
Investments available-for-sale	Level 1	$	42,827	16,799
Mortgage loan commitments	Level 2	$	13,060	12,687
Forward contracts	Level 2	$	531	(7,576	)
Mortgage servicing rights	Level 3	$	16,770	17,353


(1)	The aggregate fair value of Rialto loans held-for-sale of $316.3 million at November 30, 2015 exceeds their aggregate principal balance of $314.3 million by $2.0 million. The aggregate fair value of Rialto loans held-for-sale of $113.6 million at November 30, 2014 exceeds their aggregate principal balance of $111.8 million by $1.8 million.


(2)	The aggregate fair value of Lennar Financial Services loans held-for-sale of $843.3 million at November 30, 2015 exceeds their aggregate principal balance of $815.0 million by $28.2 million. The aggregate fair value of loans held-for-sale of $738.4 million at November 30, 2014 exceeds their aggregate principal balance of $706.0 million by $32.4 million.

The estimated fair values of the Company’s financial instruments have been determined by using available market information and what the Company believes to be appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value. The use of different market assumptions and/or estimation methodologies might have a material effect on the estimated fair value amounts. The following methods and assumptions are used by the Company in estimating fair values:

Lennar Homebuilding investments available-for-sale— The fair value of these investments is based on third-party valuations and/or estimated by the Company on the basis of discounted cash flows and it is included in the Lennar Homebuilding segment's other assets.

Rialto loans held-for-sale— The fair value of loans held-for-sale is calculated from model-based techniques that use discounted cash flow assumptions and the Company’s own estimates of CMBS spreads, market interest rate movements and the underlying loan credit quality. Loan values are calculated by allocating the change in value of an assumed CMBS capital structure to each loan. The value of an assumed CMBS capital structure is calculated, generally, by discounting the cash flows associated with each CMBS class at market interest rates and at the Company’s own estimate of CMBS spreads. The Company estimates CMBS spreads by observing the pricing of recent CMBS offerings, secondary CMBS markets, changes in the CMBX index, and general capital and commercial real estate market conditions. Considerations in estimating CMBS spreads include comparing the Company’s current loan portfolio with comparable CMBS offerings containing loans with similar duration, credit quality and collateral composition. These methods use unobservable inputs in estimating a discount rate that is used to assign a value to each loan. While the cash payments on the loans are contractual, the discount rate used and assumptions regarding the relative size of each class in the CMBS capital structure can significantly impact the valuation. Therefore, the estimates used could differ materially from the fair value determined when the loans are sold to a securitization trust.

Rialto interest rate swaps and swap futures— The fair value of interest rate swaps (derivatives) is based on observable values for underlying interest rates and market determined risk premiums. The fair value of interest rate swap futures (derivatives) is based on quoted market prices for identical investments traded in active markets.

Rialto credit default swaps— The fair value of credit default swaps (derivatives) is based on quoted market prices for similar investments traded in active markets.

Lennar Financial Services loans held-for-sale— Fair value is based on independent quoted market prices, where available, or the prices for other mortgage whole loans with similar characteristics. Management believes carrying loans held-for-sale at fair value improves financial reporting by mitigating volatility in reported earnings caused by measuring the fair value of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of these servicing rights is included in Lennar Financial Services’ loans held-for-sale as of November 30, 2015 and 2014. Fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics.

Lennar Financial Services investments available-for-sale— The fair value of these investments is based on the quoted market prices for similar financial instruments.

Lennar Financial Services mortgage loan commitments— Fair value of commitments to originate loans is based upon the difference between the current value of similar loans and the price at which the Lennar Financial Services segment has committed to originate the loans. The fair value of commitments to sell loan contracts is the estimated amount that the Lennar Financial Services segment would receive or pay to terminate the commitments at the reporting date based on market prices for similar financial instruments. In addition, the Company recognizes the fair value of its rights to service a mortgage loan as revenue upon entering into an interest rate lock loan commitment with a borrower. The fair value of servicing rights is determined based on actual sales of servicing rights on loans with similar characteristics. The fair value of the mortgage loan commitments and related servicing rights is included in Lennar Financial Services’ other assets.

Lennar Financial Services forward contracts— Fair value is based on quoted market prices for similar financial instruments. The fair value of forward contracts is included in the Lennar Financial Services segment's other assets as of November 30, 2015. The fair value of forward contracts is included in the Lennar Financial Services segment's other liabilities as of November 30, 2014.

The Lennar Financial Services segment uses mandatory mortgage-backed securities (“MBS”) forward commitments, option contracts and investor commitments to hedge its mortgage-related interest rate exposure. These instruments involve, to varying degrees, elements of credit and interest rate risk. Credit risk associated with MBS forward commitments, option contracts and loan sales transactions is managed by limiting the Company’s counterparties to investment banks, federally regulated bank affiliates and other investors meeting the Company’s credit standards. The segment’s risk, in the event of default by the purchaser, is the difference between the contract price and fair value of the MBS forward commitments and option contracts. At November 30, 2015, the segment had open commitments amounting to $1.0 billion to sell MBS with varying settlement dates through February 2016.

Lennar Financial Services mortgage servicing rights — Lennar Financial Services records mortgage servicing rights when it sells loans on a servicing-retained basis or through the acquisition or assumption of the right to service a financial asset. The fair value of the mortgage servicing rights is calculated using third-party valuations. The key assumptions, which are generally unobservable inputs, used in the valuation of the mortgage servicing rights include mortgage prepayment rates, discount rates and delinquency rates. As of November 30, 2015, the key assumptions used in determining the fair value include a 12.2% mortgage prepayment rate, a 12.1% discount rate and a 7.5% delinquency rate. The fair value of mortgage servicing rights is included in the Lennar Financial Services segment's other assets.

The changes in fair value for Level 1 and Level 2 financial instruments measured on a recurring basis are shown below by financial instrument and financial statement line item:



	Years Ended November 30,
(In thousands)	2015			2014		2013
Changes in fair value included in Lennar Financial Services revenues:
Loans held-for-sale	$	(4,137	)	17,124		(7,927	)
Mortgage loan commitments	$	373		5,352		(5,378	)
Forward contracts	$	8,107		(9,020	)	4,014
Investments available-for-sale	$	26		—		—
Changes in fair value included in Rialto revenues:
Financial Assets:
Interest rate swaps and swap futures	$	280		—		—
Credit default swaps	$	477		(288	)	—
Financial Liabilities:
Interest rate swaps and swap futures	$	398		(1,346	)	(31	)
Credit default swaps	$	(148	)	349		(318	)
Changes in fair value included in other comprehensive income (loss), net of tax:
Lennar Financial Services investments available-for-sale	$	(65	)	130		—

Interest on Lennar Financial Services loans held-for-sale and Rialto loans held-for-sale measured at fair value is calculated based on the interest rate of the loan and recorded as revenues in the Lennar Financial Services’ statement of operations and Rialto's statement of operations, respectively.

The following table represents the reconciliations of the beginning and ending balance for the Level 3 recurring fair value measurements:



	Years Ended November 30,
	2015							2014
	Lennar Financial Services			Lennar Homebuilding		Rialto		Lennar Financial Services		Lennar Homebuilding		Rialto
(In thousands)	Mortgage servicing rights			Investments available-for-sale		Loans held-for-sale		Mortgage servicing rights		Investments available-for-sale		Loans held-for-sale
Beginning of year	$	17,353		480		113,596		11,455		40,032		44,228
Purchases/loan originations (1)	3,290			28,093		2,628,019		9,314		21,274		1,562,748
Sales/loan originations sold, including those not settled	—			—		(2,424,478	)	—		(51,934	)	(1,494,075	)
Disposals/settlements (2)	(3,577		)	(28,093	)	—		(2,308	)	(16,271	)	—
Changes in fair value (3)	(296		)	43		(899	)	(1,108	)	7,379		1,495
Interest and principal paydowns	—			—		37		—		—		(800	)
End of year	$	16,770		523		316,275		17,353		480		113,596


(1)	For the year ended November 30, 2014, the Lennar Financial Services mortgage and servicing rights included the $5.7 million acquisition of a portfolio of mortgage servicing rights. Lennar Homebuilding investments available-for-sale represent investments in community development district bonds that mature at various dates.


(2)	The Lennar Homebuilding investments available-for-sale that were settled related to investments in community development district bonds, which were in default upon purchase and reissued by the municipalities prior to being settled with third parties.

(3)

Changes in fair value for Rialto loans held-for-sale and Lennar Financial Services mortgage servicing rights are included in Rialto's and Lennar Financial Services' revenues, respectively. The changes in fair value in Lennar Homebuilding investments available-for-sale were not included in other comprehensive income (loss) because the changes in fair value were deferred as a result of the Company's continuing involvement in the underlying real estate collateral.

The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded valuation adjustments and write-offs. The fair values included in the tables below represent only those assets whose carrying values were adjusted to fair value during the respective periods disclosed. The assets measured at fair value on a nonrecurring basis are summarized below:



	Years Ended November 30,
		2015					2014				2013
(In thousands)	Fair Value Hierarchy	Carrying Value		Fair Value	Total Gains (Losses) (1)		Carrying Value	Fair Value	Total Losses (1)		Carrying Value	Fair Value	Total Gains (Losses) (1)
Financial assets
Rialto:
Impaired loans receivable	Level 3	$	127,319	116,956	(10,363	)	187,218	130,105	(57,113	)	237,829	221,690	(16,139	)
Non-financial assets
Lennar Homebuilding:
Finished homes and construction in progress (2)	Level 3	$	59,913	47,898	(12,015	)	8,071	4,498	(3,573	)	16,453	11,995	(4,458	)
Land and land under development (2)	Level 3	$	32,500	20,033	(12,467	)	7,013	6,143	(870	)	—	—	—
Investments in unconsolidated entities (3)	Level 3	$	—	—	—		—	—	—		20,921	20,024	(897	)
Rialto:
REO - held-for-sale (4)
Upon acquisition/transfer	Level 3	$	40,833	38,383	(2,450	)	26,750	25,145	(1,605	)	14,367	15,985	1,618
Upon management periodic valuations	Level 3	$	36,730	26,988	(9,742	)	50,115	42,279	(7,836	)	26,772	21,199	(5,573	)
REO - held-and-used, net (5)
Upon acquisition/transfer	Level 3	$	18,996	20,134	1,138		60,572	55,407	(5,165	)	79,775	86,262	6,487
Upon management periodic valuations	Level 3	$	8,066	5,442	(2,624	)	39,728	28,227	(11,501	)	22,743	12,226	(10,517	)


(1)	Represents losses due to valuation adjustments, write-offs, gains (losses) from transfers or acquisitions of real estate through foreclosure and REO impairments recorded during the years ended November 30, 2015, 2014 and 2013.


(2)	Valuation adjustments were included in Lennar Homebuilding costs and expenses in the Company's consolidated statement of operations for the years ended November 30, 2015, 2014 and 2013.


(3)	Valuation adjustments were included in Lennar Homebuilding other income, net in the Company's consolidated statement of operations for the year ended November 30, 2013.

(4)

REO held-for-sale assets are initially recorded at fair value less estimated costs to sell at the time of the transfer or acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-for-sale is based upon appraised value at the time of foreclosure or management's best estimate. In addition, management periodically performs valuations of its REO held-for-sale. The gains (losses) upon the transfer or acquisition of REO and impairments were included in Rialto other income, net, in the Company’s consolidated statement of operations for the years ended November 30, 2015, 2014 and 2013.

(5)

REO held-and-used, net, assets are initially recorded at fair value at the time of acquisition through, or in lieu of, loan foreclosure. The fair value of REO held-and-used, net, is based upon the appraised value at the time of foreclosure or management’s best estimate. In addition, management periodically performs valuations of its REO held-and-used, net. The gains (losses) upon acquisition of REO held-and-used, net and impairments were included in Rialto other income, net, in the Company’s consolidated statement of operations for the years ended November 30, 2015, 2014 and 2013.

See Note 1 for a detailed description of the Company’s process for identifying and recording valuation adjustments related to Lennar Homebuilding inventory, Lennar Homebuilding investments in unconsolidated entities and Rialto REO assets and loans receivables.