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Fair Value Measurements | 6 Months Ended
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Jun. 30, 2021
Fair Value Disclosures [Abstract] |
Fair Value Measurements | 13. 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). There have been no significant changes to the valuation techniques and inputs used by the Company in estimating fair values of Level 2 and Level 3 assets and liabilities as disclosed in the Company’s Annual Reports on Form 10-K for the year ended December 31, 2020, with the exception of the following: 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 a discounted cash flow model which incorporates prepayment speeds, delinquencies, discount rate, ancillary revenues, float earnings and other assumptions (including costs to service, recapture rates and forbearance rates), with the key assumptions being mortgage prepayment speeds, discount rates, and cost to service. In the second quarter of 2021, the Company refined its estimate of the fair value of forward MSRs by incorporating an estimate of future cash flows from loans that are expected to be recaptured. The estimate of future cash flows related to recapture is consistent with recent pricing observed from various market participants, including the Company’s independent third-party valuation firms As a result of considering the recapture rate, the Company adjusted its discount rate assumption in order to ensure that the fair value of forward MSRs remains consistent with current market participant pricing and is reflective of an exit price. The estimated fair value was also corroborated with valuations provided by independent third parties. The net impact on the overall forward MSRs fair value was not significant during the three and six months ended June 30, 2021. 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. 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, 2021
|  |  | Recurring Fair Value Measurements
Fair Value - Recurring Basis | Total Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |
Mortgage loans held for sale | $ | 6,961 |  |  | $ | — |  |  | $ | 6,961 |  |  | $ | — |
Forward mortgage servicing rights | 3,307 |  |  | — |  |  | — |  |  | 3,307 |
Derivative financial instruments |  |  |  |  |  |  |
IRLCs | 204 |  |  | — |  |  | — |  |  | 204 |
LPCs | 10 |  |  | — |  |  | — |  |  | 10 |
Forward MBS trades | 27 |  |  | — |  |  | 27 |  |  | — |
Liabilities |  |  |  |  |  |  |
Derivative financial instruments |  |  |  |  |  |  |
LPCs | 1 |  |  | — |  |  | — |  |  | 1 |
Forward MBS trades | 25 |  |  | — |  |  | 25 |  |  | — |
Mortgage servicing rights financing | 21 |  |  | — |  |  | — |  |  | 21 |
Excess spread financing | 867 |  |  | — |  |  | — |  |  | 867 |
| December 31, 2020
|  |  | Recurring Fair Value Measurements
Fair Value - Recurring Basis | Total Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Assets |  |  |  |  |  |  |
Mortgage loans held for sale | $ | 5,720 |  |  | $ | — |  |  | $ | 5,720 |  |  | $ | — |
Forward mortgage servicing rights | 2,703 |  |  | — |  |  | — |  |  | 2,703 |
Derivative financial instruments |  |  |  |  |  |  |
IRLCs | 414 |  |  | — |  |  | — |  |  | 414 |
LPCs | 38 |  |  | — |  |  | — |  |  | 38 |
Forward MBS trades | 37 |  |  | — |  |  | 37 |  |  | — |
Liabilities |  |  |  |  |  |  |
Derivative financial instruments |  |  |  |  |  |  |
LPCs | 1 |  |  | — |  |  | — |  |  | 1 |
Forward MBS trades | 156 |  |  | — |  |  | 156 |  |  | — |
Mortgage servicing rights financing | 33 |  |  | — |  |  | — |  |  | 33 |
Excess spread financing | 934 |  |  | — |  |  | — |  |  | 934 |
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, 2021
| Assets |  | Liabilities
Fair Value - Level 3 Assets and Liabilities | Forward mortgage servicing rights |  | IRLCs |  | LPCs |  | Excess spread financing |  | Mortgage servicing rights financing |  |
Balance - beginning of period | $ | 2,703 |  |  | $ | 414 |  |  | $ | 38 |  |  | $ | 934 |  |  | $ | 33 |  |  |
Changes in fair value included in earnings | (190) |  |  | (210) |  |  | (28) |  |  | 14 |  |  | (12) |  |  |
Other changes | 34 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |
Purchases, issuances, sales, repayments and settlements |  |  |  |  |  |  |  |  |  |  |
Purchases | 218 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |
Issuances | 554 |  |  | — |  |  | — |  |  | — |  |  | — |  |  |
Sales | (12) |  |  | — |  |  | — |  |  | — |  |  | — |  |  |
Settlements and repayments | — |  |  | — |  |  | — |  |  | (81) |  |  | — |  |  |
Balance - end of period | $ | 3,307 |  |  | $ | 204 |  |  | $ | 10 |  |  | $ | 867 |  |  | $ | 21 |  |  |
| 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 |
Changes in fair value included in earnings | (1,055) |  |  | 235 |  |  | (101) |  |  | 12 |
Other changes | 43 |  | — |  |  | — |  |  | — |
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 |
No transfers were made in or out of Level 3 fair value assets and liabilities for the Company during the six months ended June 30, 2021 and 2020. The tables below present the quantitative information for significant unobservable inputs used in the fair value measurement of Level 3 assets and liabilities:
| June 30, 2021 |  | December 31, 2020
| Range |  | Weighted Average |  | Range |  | Weighted Average
Level 3 Inputs | Min |  | Max |  |  | Min |  | Max |
Forward MSR |  |  |  |  |  |  |  |  |  |  |
Discount rate | 9.5 | % |  | 13.8 | % |  | 11.0 | % |  | 8.2 | % |  | 12.0 | % |  | 9.4 | %
Prepayment speed | 12.4 | % |  | 18.8 | % |  | 13.6 | % |  | 14.2 | % |  | 21.3 | % |  | 15.4 | %
Cost to service per loan(1) | $ | 63 |  |  | $ | 223 |  |  | $ | 86 |  |  | $ | 66 |  |  | $ | 257 |  |  | $ | 98 |
Average life(2) |  |  |  |  | 5.5 years |  |  |  |  |  | 5.0 years
IRLCs |  |  |  |  |  |  |  |  |  |  |
Value of servicing (basis points per loan) | (0.7) |  |  | 2.3 |  |  | 1.4 |  |  | (1.0) |  |  | 2.2 |  |  | 1.2 |
Excess spread financing |  |  |  |  |  |  |  |  |  |  |
Discount rate | 9.5 | % |  | 13.8 | % |  | 11.2 | % |  | 9.9 | % |  | 15.7 | % |  | 12.2 | %
Prepayment speed | 12.6 | % |  | 15.3 | % |  | 13.5 | % |  | 13.9 | % |  | 15.0 | % |  | 14.4 | %
Recapture rate | 13.7 | % |  | 29.5 | % |  | 21.3 | % |  | 17.7 | % |  | 24.2 | % |  | 19.5 | %
Average life(2) |  |  |  |  | 5.4 years |  |  |  |  |  | 5.1 years
Mortgage servicing rights financing |  |  |  |  |  |  |  |  |  |  |
Advance financing and counterparty fee rates | 5.3 | % |  | 8.2 | % |  | 6.9 | % |  | 4.6 | % |  | 8.5 | % |  | 7.5 | %
Annual advance recovery rates | 18.9 | % |  | 22.7 | % |  | 20.8 | % |  | 18.3 | % |  | 22.0 | % |  | 19.9 | %
(1)Presented in whole dollar amounts. (2)Average life is included for informational purposes. The tables below present a summary of the estimated carrying amount and fair value of the Company’s financial instruments not carried at fair value:
| June 30, 2021
| Carrying Amount |  | Fair Value
Financial Instruments | Level 1 |  | Level 2 |  | Level 3
Financial assets |  |  |  |  |  |  |
Cash and cash equivalents | $ | 716 |  |  | $ | 716 |  |  | $ | — |  |  | $ | — |
Restricted cash | 113 |  |  | 113 |  |  | — |  |  | — |
Advances and other receivables, net | 837 |  |  | — |  |  | — |  |  | 837 |
Loans subject to repurchase from Ginnie Mae | 4,057 |  |  | — |  |  | 4,057 |  |  | — |
Financial liabilities |  |  |  |  |  |  |
Unsecured senior notes, net | 2,075 |  |  | 2,117 |  |  | — |  |  | — |
Advance and warehouse facilities, net | 7,310 |  |  | — |  |  | 7,317 |  |  | — |
Liability for loans subject to repurchase from Ginnie Mae | 4,057 |  |  | — |  |  | 4,057 |  |  | — |
| December 31, 2020
| Carrying Amount |  | Fair Value
Financial Instruments | Level 1 |  | Level 2 |  | Level 3
Financial assets |  |  |  |  |  |  |
Cash and cash equivalents | $ | 695 |  |  | $ | 695 |  |  | $ | — |  |  | $ | — |
Restricted cash | 135 |  |  | 135 |  |  | — |  |  | — |
Advances and other receivables, net | 940 |  |  | — |  |  | — |  |  | 940 |
Loans subject to repurchase from Ginnie Mae | 6,159 |  |  | — |  |  | 6,159 |  |  | — |
Financial liabilities |  |  |  |  |  |  |
Unsecured senior notes, net | 2,074 |  |  | 2,208 |  |  | — |  |  | — |
Advance and warehouse facilities, net | 6,258 |  |  | — |  |  | 6,269 |  |  | — |
Liability for loans subject to repurchase from Ginnie Mae | 6,159 |  |  | — |  |  | 6,159 |  |  | — |

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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=123874694&loc=d3e19207-110258 + Details
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