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Fair Value Measurements
 3 Months Ended
Mar. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value Measurements Fair Value Measurements
Fair value is the price that would be received if an asset were sold or the price that would be paid to transfer a liability in an orderly transaction between willing market participants at the measurement date. Required disclosures include classification of fair value measurements within a three-level hierarchy (Level 1, Level 2, and Level 3). Classification of a fair value measurement within the hierarchy is dependent on the classification and significance of the inputs used to determine the fair value measurement. Observable inputs are those that are observed, implied from, or corroborated with externally available market information. Unobservable inputs represent the Company’s estimates of market participants’ assumptions.

Fair value measurements are classified in the following manner:

Level 1—Valuation is based on quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2—Valuation is based on either observable prices for identical assets or liabilities in inactive markets, observable prices for similar assets or liabilities, or other inputs that are derived directly from, or through correlation to, observable market data at the measurement date.

Level 3—Valuation is based on the Company’s internal models using assumptions at the measurement date that a market participant would use.

In determining fair value measurement, the Company uses observable inputs whenever possible. The level of a fair value measurement within the hierarchy is dependent on the lowest level of input that has a significant impact on the measurement as a whole. If quoted market prices are available at the measurement date or are available for similar instruments, such prices are used in the measurements. If observable market data is not available at the measurement date, judgment is required to measure fair value.

The following is a description of measurement techniques for items recorded at fair value on a recurring basis. There were no material items recorded at fair value on a nonrecurring basis as of March 31, 2022 or December 31, 2021.
Mortgage loans held for sale: Loans held for sale that trade in active secondary markets are valued using Level 2 measurements derived from observable market data, including market prices of securities backed by similar mortgage loans adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk. Loans held for sale for which there is little to no observable trading activity of similar instruments are valued using Level 3 measurements based upon dealer price quotes and internal models.

IRLCs: The fair value of IRLCs is based on current market prices of securities backed by similar mortgage loans (as determined above under mortgage loans held for sale), net of costs to close the loans, subject to the estimated loan funding probability, or “pull-through factor”. Given the significant and unobservable nature of the pull-through factor, IRLCs are classified as Level 3.

MSRs: The fair value of MSRs is determined using an internal valuation model that calculates the present value of estimated net future cash flows. The model includes estimates of prepayment speeds, discount rate, cost to service, float earnings, contractual servicing fee income, and ancillary income among others. MSRs are classified as Level 3.

Forward commitments: The Company’s forward commitments are valued based on quoted prices for similar assets in an active market with inputs that are observable and are classified within Level 2 of the valuation hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below shows a summary of financial statement items that are measured at estimated fair value on a recurring basis, including assets measured under the fair value option. There were no material transfers of assets or liabilities recorded at fair value on a recurring basis between Levels 1, 2 or 3 during the three months ended March 31, 2022 or the year ended December 31, 2021.

Level 1Level 2Level 3Total
Balance at March 31, 2022
Assets:
Mortgage loans held for sale$— $8,506,382 $2,178,762 $10,685,144 
IRLCs— — 213,210 213,210 
MSRs— — 6,410,288 6,410,288 
Forward commitments— 667,908 — 667,908 
Total assets$— $9,174,290 $8,802,260 $17,976,550 
Liabilities:
Forward commitments$— $34,126 $— $34,126 
Total liabilities$— $34,126 $— $34,126 
Balance at December 31, 2021
Assets:
Mortgage loans held for sale$— $17,014,202 $2,309,366 $19,323,568 
IRLCs— — 538,861 538,861 
MSRs— — 5,385,613 5,385,613 
Forward commitments— 17,337 — 17,337 
Total assets$— $17,031,539 $8,233,840 $25,265,379 
Liabilities:
Forward commitments$— $19,911 $— $19,911 
Total liabilities$— $19,911 $— $19,911 
The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of:
March 31, 2022December 31, 2021
Unobservable InputRangeWeighted AverageRangeWeighted Average
Mortgage loans held for sale
Dealer pricing
89% - 101%
98 %
89% - 103%
99 %
IRLCs
Loan funding probability
0% - 100%
77 %
0% - 100%
78 %
MSRs
Discount rate
9.0% - 12.0%
9.5 %
9.0% - 12.0%
9.5 %
Conditional prepayment rate
6.5% - 15.0%
7.1 %
6.8% - 36.9%
8.7 %
The table below presents a reconciliation of Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2022 and 2021. Mortgage servicing rights are also classified as a Level 3 asset measured at fair value on a recurring basis and its reconciliation is found in Note 3, Mortgage Servicing Rights.
Loans Held for SaleIRLCs
Balance at December 31, 2021$2,309,366 $538,861 
Transfers in (1)522,640 — 
Transfers out/principal reductions (1)(618,320)— 
Net transfers and revaluation losses— (325,651)
Total losses included in net income(34,924)— 
Balance at March 31, 2022$2,178,762 $213,210 
Balance at December 31, 2020$579,666 $1,897,194 
Transfers in (1)718,158 — 
Transfers out/principal reductions (1)(307,462)— 
Net transfers and revaluation losses— (1,131,979)
Total gains included in net income472 — 
Balance at March 31, 2021$990,834 $765,215 
(1)    Transfers in represent loans repurchased from investors or loans originated for which an active market currently does not exist. Transfers out primarily represent loans sold to third parties and loans paid in full.

Fair Value Option

The following is the estimated fair value and unpaid principal balance (“UPB”) of mortgage loans held for sale that have contractual principal amounts and for which the Company has elected the fair value option. The fair value option was elected for mortgage loans held for sale as the Company believes fair value best reflects their expected future economic performance:
Fair ValuePrincipal Amount Due Upon MaturityDifference (1)
Balance at March 31, 2022$10,685,144 $10,798,888 $(113,744)
Balance at December 31, 2021$19,323,568 $19,018,552 $305,016 
(1)    Represents the amount of gains (losses) included in Gain on sale of loans, net due to changes in fair value of items accounted for using the fair value option.
Disclosures of the fair value of certain financial instruments are required when it is practical to estimate the value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

The following table presents the carrying amounts and estimated fair value of financial liabilities that are not recorded at fair value on a recurring or nonrecurring basis. This table excludes cash and cash equivalents, restricted cash, warehouse borrowings, and line of credit borrowing facilities as these financial instruments are highly liquid or short-term in nature and as a result, their carrying amounts approximate fair value:
March 31, 2022December 31, 2021
Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Senior Notes, due 10/15/2026$1,139,718 $1,058,874 $1,139,146 $1,151,932 
Senior Notes, due 1/15/202861,230 58,854 61,197 64,251 
Senior Notes, due 3/1/2029743,063 686,115 742,812 752,805 
Senior Notes, due 3/1/20311,237,943 1,126,338 1,237,605 1,273,675 
Senior Notes, due 10/15/2033841,907 748,034 841,731 857,718 
Total Senior Notes, net$4,023,861 $3,678,215 $4,022,491 $4,100,381 

The fair value of Senior Notes was calculated using the observable bond price at March 31, 2022 and December 31, 2021, respectively. The Senior Notes are classified as Level 2 in the fair value hierarchy.