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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2020
Fair Value Disclosures [Abstract] |
Fair value measurements | 14. Fair Value Measurements Fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a three-tiered fair value hierarchy has been established based on the level of observable inputs used in the measurement of fair value (e.g., Level 1 representing quoted prices for identical assets or liabilities in an active market; Level 2 representing values using observable inputs other than quoted prices included within Level 1; and Level 3 representing estimated values based on significant unobservable inputs). The following describes the methods and assumptions used by the Company in estimating fair values: Cash and Cash Equivalents, Restricted Cash (Level 1) – The carrying amount reported in the consolidated balance sheets approximates fair value. Mortgage Loans Held for Sale (Level 2) – The Company originates mortgage loans in the U.S. that it intends to sell into Fannie Mae, Freddie Mac and Ginnie Mae MBS. Additionally, the Company holds mortgage loans that it intends to sell into the secondary markets via whole loan sales or securitizations. The Company measures newly originated prime residential mortgage loans held for sale at fair value. Mortgage loans held for sale are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate and credit quality. Mortgage loans held for sale are valued on a recurring basis using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures. The Company may acquire mortgage loans held for sale from various securitization trusts for which it acts as servicer through the exercise of various clean-up call options as permitted through the respective pooling and servicing agreements. The Company has elected to account for these loans at the lower of cost or market. The Company classifies these valuations as Level 2 in the fair value disclosures. The Company may also purchase loans out of a Ginnie Mae securitization pool if that loan meets certain criteria, including being delinquent greater than 90 days. The Company has elected to carry these loans at fair value. See Note 6, Mortgage Loans Held for Sale, for more information. Mortgage Servicing Rights – Fair Value (Level 3) – The Company estimates the fair value of its forward MSRs on a recurring basis using a process that combines the use of a discounted cash flow model and analysis of current market data to arrive at an estimate of fair value. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, discount rates, ancillary revenues, earnings on escrow and costs to service. These assumptions are generated and applied based on collateral stratifications including product type, remittance type, geography, delinquency and coupon dispersion. These assumptions require the use of judgment by the Company and can have a significant impact on the fair value of the MSRs. Quarterly, management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal cash flow model. Because of the nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information. Advances and Other Receivables, Net (Level 3) - Advances and other receivables, net are valued at their net realizable value after taking into consideration the reserves. Advances have no stated maturity. Their net realizable value approximates fair value as the net present value based on discounted cash flow is not materially different from the net realizable value. See Note 4, Advances and Other Receivables, Net for more information. Reverse Mortgage Interests, Net (Level 3) – The Company’s reverse mortgage interests are primarily comprised of HECM loans that are insured by FHA and guaranteed by Ginnie Mae upon securitization. Quarterly, the Company estimates fair value using discounted cash flows, obtained from a third-party and supplemented with historical loss experience on similar assets, with the discount rate approximating that of similar financial instruments, as observed from recent trades with the HMBS. Key assumptions within the model are based on market participant benchmarks and include discount rates, cost to service, weighted average life of the portfolio, and estimated participating income. Discounted cash flows are applied based on collateral stratifications and include loan rate type, loan status (active vs. inactive), and securitization. Prices are also influenced from both internal models and other observable inputs. The Company determined fair value for all loans based on the applicable tranches established during the Merger valuation. Tranches are segregated based on participation percentages, original loan status as of the Merger date, and interest rate types, and loan status (active vs inactive). Prices are also influenced from both internal models and other observable inputs, including applicable forward interest rate curves. Additionally, historical loss factors are considered within the overall valuation. Because of the unobservable nature of the valuation inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. See Note 5, Reverse Mortgage Interests, Net for more information. Derivative Financial Instruments (Level 3 and Level 2) – The Company enters into a variety of derivative financial instruments as part of its hedging strategy and measures these instruments at fair value on a recurring basis in the consolidated balance sheets. Derivative instruments utilized by the Company primarily include IRLCs, LPCs, forward MBS trades, Eurodollar and Treasury futures and interest rate swap agreements. During the three months ended June 30, 2020, the Company changed the fair value classification of its IRLCs and LPCs derivatives from Level 2 to Level 3. IRLCs and LPCs are carried at fair value primarily based on secondary market prices for underlying mortgage loans, which is observable data, with adjustments made to such observable data for the inherent value of servicing, which is an unobservable input. The fair value is also subject to adjustments for the estimated pull-through rate. The impact of the unobservable input to the overall valuation of IRLCs and LPCs was previously much less significant, resulting in a classification of Level 2 in the fair value hierarchy as of December 31, 2019. During the three months ended June 30,2020, market interest rates continued to decline and fell to record lows, which drove an increase in the volume of the Company’s IRLCs and LPCs and increased the impact of the unobservable input on the overall valuation of IRLCs and LPCs. Such increased impact of the unobservable input on the overall valuation resulted in a classification of Level 3 in the fair value hierarchy as of June 30, 2020. For other derivatives, they are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, the Company classifies these contracts as Level 2 in the fair value disclosure. Derivative financial instruments are recorded in other assets and payables and other liabilities within the consolidated balance sheets. See Note 9, Derivative Financial Instruments, for more information. Advance Facilities and Warehouse Facilities (Level 2) – As the underlying warehouse and advance finance facilities bear interest at a rate that is periodically adjusted based on a market index, the carrying amount reported at amortized cost on the consolidated balance sheets approximates fair value. See Note 9, Indebtedness, for more information. Unsecured Senior Notes (Level 1) – The fair value of unsecured senior notes, which are carried at amortized cost, is based on quoted market prices and is considered Level 1 from the market observable inputs used to determine fair value. See Note 9, Indebtedness, for more information. Excess Spread Financing (Level 3) – The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being mortgage prepayment speeds, average life, recapture rates and discount rate. As these prices are derived from a combination of internally developed valuation models and quoted market prices based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Excess spread financing is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information. Mortgage Servicing Rights Financing Liability (Level 3) - The Company estimates fair value on a recurring basis based on the present value of future expected discounted cash flows with the discount rate approximating current market value for similar financial instruments. The cash flow assumptions and prepayment assumptions used in the model are based on various factors, with the key assumptions being advance financing rates and annual advance recovery rates. As these assumptions are derived from internally developed valuation models based on the value of the underlying MSRs, the Company classifies these valuations as Level 3 in the fair value disclosures. Mortgage servicing rights financing liability is recorded in MSR related liabilities within the consolidated balance sheets. See Note 3, Mortgage Servicing Rights and Related Liabilities, for more information. Participating Interest Financing (Level 3) – The Company estimates fair value based on the present value of future expected discounted cash flows with the discount rate approximating that of similar financial instruments. As the prices are derived from both internal models and other observable inputs, the Company classifies these valuations as Level 3 in the fair value disclosures. Participating interest financing is recorded in other nonrecourse debt within the consolidated balance sheets. See Note 5, Reverse Mortgage Interests, Net, and Note 9, Indebtedness, for more information. HECM Securitizations (Level 3) – The Company estimates fair value using a market approach by utilizing the fair value of executed HECM securitizations. Since the executed HECM securitizations are private placements, the Company classifies these valuations as Level 3 in the fair value disclosures. HECM securitizations are recorded at amortized cost in other nonrecourse debt within the consolidated balance sheets. See Note 9, Indebtedness, for more information. The following tables present the estimated carrying amount and fair value of the Company’s financial instruments and other assets and liabilities measured at fair value on a recurring basis:
| June 30, 2020 |  |  |  |  |  |
|  |  | Recurring Fair Value Measurements |  |  |  |
Fair value - Recurring basis | Total Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |
Mortgage loans held for sale | $ | 3,179 |  |  | $ | — |  |  | $ | 3,179 |  |  | $ | — |
Forward mortgage servicing rights | 2,757 |  |  | — |  |  | — |  |  | 2,757 |
Derivative financial instruments |  |  |  |  |  |  |
IRLCs | 370 |  |  | — |  |  | — |  |  | 370 |
Forward MBS trades | 3 |  |  | — |  |  | 3 |  |  | — |
LPCs | 18 |  |  | — |  |  | — |  |  | 18 |
Total assets | $ | 6,327 |  |  | $ | — |  |  | $ | 3,182 |  |  | $ | 3,145 |
Liabilities |  |  |  |  |  |  |
Derivative financial instruments |  |  |  |  |  |  |
Forward MBS trades | $ | 50 |  |  | $ | — |  |  | $ | 50 |  |  | $ | — |
Mortgage servicing rights financing | 49 |  |  | — |  |  | — |  |  | 49 |
Excess spread financing | 1,124 |  |  | — |  |  | — |  |  | 1,124 |
Total liabilities | $ | 1,223 |  |  | $ | — |  |  | $ | 50 |  |  | $ | 1,173 |
| December 31, 2019 |  |  |  |  |  |
|  |  | Recurring Fair Value Measurements |  |  |  |
Fair value - Recurring basis | Total Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |
Mortgage loans held for sale | $ | 4,077 |  |  | $ | — |  |  | $ | 4,077 |  |  | $ | — |
Forward mortgage servicing rights | 3,496 |  |  | — |  |  | — |  |  | 3,496 |
Derivative financial instruments |  |  |  |  |  |  |
IRLCs | 135 |  |  | — |  |  | 135 |  |  | — |
Forward MBS trades | 7 |  |  | — |  |  | 7 |  |  | — |
LPCs | 12 |  |  | — |  |  | 12 |  |  | — |
Total assets | $ | 7,727 |  |  | $ | — |  |  | $ | 4,231 |  |  | $ | 3,496 |
Liabilities |  |  |  |  |  |  |
Derivative financial instruments |  |  |  |  |  |  |
Forward MBS trades | $ | 12 |  |  | $ | — |  |  | $ | 12 |  |  | $ | — |
LPCs | 3 |  |  | — |  |  | 3 |  |  | — |
Mortgage servicing rights financing | 37 |  |  | — |  |  | — |  |  | 37 |
Excess spread financing | 1,311 |  |  | — |  |  | — |  |  | 1,311 |
Total liabilities | $ | 1,363 |  |  | $ | — |  |  | $ | 15 |  |  | $ | 1,348 |
The tables below present a reconciliation for all of the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:
| Six Months Ended June 30, 2020 |  |  |  |  |  |
| Assets |  |  |  | Liabilities |  |
Fair value - Level 3 assets and liabilities | Forward mortgage servicing rights |  | IRLCs |  | Excess spread financing |  | Mortgage servicing rights financing
Balance - beginning of period | $ | 3,496 |  |  | $ | 135 |  |  | $ | 1,311 |  |  | $ | 37 |
Total gains or losses included in earnings | (1,012) |  |  | 235 |  |  | (101) |  |  | 12 |
Purchases, issuances, sales, repayments and settlements |  |  |  |  |  |  |
Purchases | 24 |  |  | — |  |  | — |  |  | — |
Issuances | 249 |  |  | — |  |  | 24 |  |  | — |
Settlements and repayments | — |  |  | — |  |  | (110) |  |  | — |
Balance - end of period | $ | 2,757 |  |  | $ | 370 |  |  | $ | 1,124 |  |  | $ | 49 |
| Six Months Ended June 30, 2019 |  |  |  |  |  |
| Assets |  |  |  | Liabilities |  |
Fair value - Level 3 assets and liabilities | Forward mortgage servicing rights |  |  |  | Excess spread financing |  | Mortgage servicing rights financing
Balance - beginning of period | $ | 3,665 |  |  |  |  | $ | 1,184 |  |  | $ | 32 |
Total gains or losses included in earnings | (724) |  |  |  |  | (74) |  |  | 11 |
Purchases, issuances, sales, repayments and settlements |  |  |  |  |  |  |
Purchases | 689 |  |  |  |  | — |  |  | — |
Issuances | 169 |  |  |  |  | 438 |  |  | — |
Sales | (294) |  |  |  |  | — |  |  | — |
Settlements and repayments | — |  |  |  |  | (119) |  |  | — |
Balance - end of period | $ | 3,505 |  |  |  |  | $ | 1,429 |  |  | $ | 43 |
As of June 30, 2020 and December 31, 2019, the Company had no mortgage loans held for investment as the related portfolio was sold in September 2019. During the six months ended June 30, 2019, the Company had an immaterial change in mortgage loans held for investment. As of June 30, 2020 and December 31, 2019, the Company had LPCs assets of $18 and $12, respectively. The Company had less than $1 LPCs liabilities as of June 30, 2020 and LPCs liabilities of $3 as of December 31, 2019. During the six months ended June 30, 2020, the Company had an immaterial change in LPCs assets and liabilities. No transfers were made in or out of Level 3 fair value assets and liabilities for the Company for the six months ended June 30, 2020 and 2019, with the exception of the change in classification for IRLCs of $370 and LPCs of $18 from Level 2 fair value assets to Level 3 fair value assets during the three months ended June 30, 2020. The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments:
| June 30, 2020 |  |  |  |  |  |
| Carrying Amount |  | Fair Value |  |  |  |
Financial instruments |  |  | Level 1 |  | Level 2 |  | Level 3
Financial assets |  |  |  |  |  |  |
Cash and cash equivalents | $ | 1,041 |  |  | $ | 1,041 |  |  | $ | — |  |  | $ | — |
Restricted cash | 260 |  |  | 260 |  |  | — |  |  | — |
Advances and other receivables, net | 668 |  |  | — |  |  | — |  |  | 668 |
Reverse mortgage interests, net | 5,709 |  |  | — |  |  | — |  |  | 5,736 |
Mortgage loans held for sale | 3,179 |  |  | — |  |  | 3,179 |  |  | — |
Derivative financial instruments | 391 |  |  | — |  |  | 3 |  |  | 388 |
Financial liabilities |  |  |  |  |  |  |
Unsecured senior notes(1) | 2,261 |  |  | 2,307 |  |  | — |  |  | — |
Advance facilities(1) | 475 |  |  | — |  |  | 475 |  |  | — |
Warehouse facilities(1) | 4,031 |  |  | — |  |  | 4,031 |  |  | — |
Mortgage servicing rights financing liability | 49 |  |  | — |  |  | — |  |  | 49 |
Excess spread financing | 1,124 |  |  | — |  |  | — |  |  | 1,124 |
Derivative financial instruments | 50 |  |  | — |  |  | 50 |  |  | — |
Participating interest financing(1) | 3,886 |  |  | — |  |  | — |  |  | 3,857 |
HECM Securitization (HMBS)(1) |  |  |  |  |  |  |
Trust 2019-2 | 272 |  |  | — |  |  | — |  |  | 272 |
Trust 2019-1 | 243 |  |  | — |  |  | — |  |  | 243 |
Trust 2018-3 | 179 |  |  | — |  |  | — |  |  | 179 |
Trust 2018-2 | 127 |  |  | — |  |  | — |  |  | 127 |
(1)The amounts are presented net of unamortized debt issuance costs, premium and discount.
| December 31, 2019 |  |  |  |  |  |
| Carrying Amount |  | Fair Value |  |  |  |
Financial instruments |  |  | Level 1 |  | Level 2 |  | Level 3
Financial assets |  |  |  |  |  |  |
Cash and cash equivalents | $ | 329 |  |  | $ | 329 |  |  | $ | — |  |  | $ | — |
Restricted cash | 283 |  |  | 283 |  |  | — |  |  | — |
Advances and other receivables, net | 988 |  |  | — |  |  | — |  |  | 988 |
Reverse mortgage interests, net | 6,279 |  |  | — |  |  | — |  |  | 6,318 |
Mortgage loans held for sale | 4,077 |  |  | — |  |  | 4,077 |  |  | — |
Derivative financial instruments | 153 |  |  | — |  |  | 153 |  |  | — |
Financial liabilities |  |  |  |  |  |  |
Unsecured senior notes(1) | 2,366 |  |  | 2,505 |  |  | — |  |  | — |
Advance facilities(1) | 422 |  |  | — |  |  | 422 |  |  | — |
Warehouse facilities(1) | 4,575 |  |  | — |  |  | 4,575 |  |  | — |
Mortgage servicing rights financing liability | 37 |  |  | — |  |  | — |  |  | 37 |
Excess spread financing | 1,311 |  |  | — |  |  | — |  |  | 1,311 |
Derivative financial instruments | 15 |  |  | — |  |  | 15 |  |  | — |
Participating interest financing(1) | 4,299 |  |  | — |  |  | — |  |  | 4,299 |
HECM Securitization (HMBS)(1) |  |  |  |  |  |  |
Trust 2019-2 | 331 |  |  | — |  |  | — |  |  | 331 |
Trust 2019-1 | 300 |  |  | — |  |  | — |  |  | 300 |
Trust 2018-3 | 208 |  |  | — |  |  | — |  |  | 208 |
Trust 2018-2 | 148 |  |  | — |  |  | — |  |  | 148 |
(1)The amounts are presented net of unamortized debt issuance costs, premium and discount.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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