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Fair Value of Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2014

Carrying Values and Estimated Fair Values of Assets and Liabilities

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, 2014 and December 31, 2013.

		September 30, 2014								December 31, 2013
(In Thousands)		Carrying Value				Fair Value				Carrying Value				Fair Value
Assets
Residential loans, held-for-sale
At fair value		$	1,501,252			$	1,501,252			$	402,602			$	402,602
At lower of cost or fair value			1,502				1,662				1,665				1,817
Residential loans, held-for-investment, at fair value			238,326				238,326				-				-
Residential loans, held-for-investment			1,546,507				1,447,463				1,762,167				1,610,024
Commercial loans, held-for-sale			175,421				175,421				89,111				89,111
Commercial loans, held-for-investment
At fair value			70,712				70,712				-				-
At amortized cost			322,576				328,076				343,344				348,305
Trading securities			108,750				108,750				124,555				124,555
Available-for-sale securities			1,286,235				1,286,235				1,558,306				1,558,306
MSRs			135,152				135,152				64,824				64,824
Cash and cash equivalents			149,617				149,617				173,201				173,201
Restricted cash			455				455				398				398
Accrued interest receivable			15,261				15,261				13,475				13,475
Derivative assets			7,756				7,756				7,787				7,787
REO (1)			3,349				3,407				3,661				4,084
Margin receivable (1)			56,217				56,217				31,149				31,149
Other collateral posted (1)			5,000				5,000				5,000				5,000
Liabilities
Short-term debt		$	1,887,688			$	1,887,688			$	862,763			$	862,763
Accrued interest payable			10,480				10,480				6,366				6,366
Derivative liabilities			38,263				38,263				18,167				18,167
ABS issued			1,656,202				1,548,795				1,942,962				1,746,906
FHLBC Borrowings			203,756				203,756				-				-
Commercial long-term debt			-				-				49,467				49,467
Commercial secured borrowings			66,146				66,146				-				-
Convertible notes			287,500				285,344				287,500				299,719
Other long-term debt			139,500				101,835				139,500				111,600

(1) These assets are included in Other Assets on our consolidated balance sheets.

Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents the assets and liabilities that are reported at fair value on our consolidated balance sheets on a recurring basis at September 30, 2014, as well as the fair value hierarchy of the valuation inputs used to measure fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis at September 30, 2014

September 30, 2014		Carrying				Fair Value Measurements Using
(In Thousands)		Value				Level 1				Level 2				Level 3
Assets
Residential loans, at fair value		$	1,739,578			$	-			$	399,145			$	1,340,433
Commercial loans, at fair value			175,421				-				-				175,421
Trading securities			108,750				-				-				108,750
Available-for-sale securities			1,286,235				-				-				1,286,235
MSRs			135,152				-				-				135,152
Derivative assets			7,756				1,496				5,327				933
Liabilities
Derivative liabilities			38,263				3,709				34,472				82
Commercial secured borrowings			66,146				-				-				66,146

Changes in Level 3 Assets and Liabilities Measured at Fair Value on Recurring Basis

The following table presents additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2014.

Changes in Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis

		Assets																								Liabilities
(In Thousands)		Residential   Loans				Commercial  Loans				Trading   Securities				AFS   Securities				MSRs				Derivatives (1)				Commercial   Secured Borrowings
Beginning balance - December 31, 2013		$	391,100			$	89,111			$	124,555			$	1,558,306			$	64,824			$	(379)			$	-
Principal paydowns			(20,728)				(3,684)				(5,848)				(138,751)				-				-				(1,081)
Discount accretion			-				-				-				32,774				-				-				-
Gains (losses) in net income, net			35,971				14,986				(15,041)				9,389				(5,944)				6,434				2,179
Unrealized gains in OCI, net			-				-				-				28,328				-				-				-
Acquisitions			3,557,753				611,624				66,253				192,151				76,272				-				65,048
Sales			(2,621,349)				(536,671)				(61,169)				(395,962)				-				-				-
Other settlements, net			(2,314)				55				-				-				-				(5,204)				-
Ending balance - September 30, 2014		$	1,340,433			$	175,421			$	108,750			$	1,286,235			$	135,152			$	851			$	66,146

(1) For the purpose of this presentation, derivative assets and liabilities, which consist of loan purchase commitments, are presented net.

Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held and Included in Net Income

The following table presents the portion of gains or losses included in our consolidated statements of income that were attributable to Level 3 assets and liabilities recorded at fair value on a recurring basis and held at September 30, 2014 and 2013. Gains or losses incurred on assets or liabilities sold, matured, called, or fully written down during the three and nine months ended September 30, 2014 and 2013 are not included in this presentation.

Portion of Net Gains (Losses) Attributable to Level 3 Assets and Liabilities Still Held at September 30, 2014 and 2013 Included in Net Income

		Included in Net Income
		Three Months Ended September 30,								Nine Months Ended September 30,
(In Thousands)		2014				2013				2014				2013
Assets
Residential loans, at fair value		$	7,280			$	(1,864)			$	8,524			$	(3,088)
Commercial loans, at fair value			2,009				831				2,009				831
Trading securities			(1,882)				(1,525)				(16,033)				28,491
Available-for-sale securities			(188)				-				(434)				940
MSRs			3,509				1,344				(3,184)				12,561
Liabilities
Loan purchase commitments			932				-				932				-
Commercial secured borrowing			(420)				-				1,339				-

Assets and Liabilities Measured at Fair Value on Non-Recurring Basis

The following table presents information on assets recorded at fair value on a non-recurring basis at September 30, 2014. This table does not include the carrying value and gains or losses associated with the asset types below that were not recorded at fair value on our balance sheet at September 30, 2014.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis at September 30, 2014

																		Gain (Loss) for
September 30, 2014		Carrying				Fair Value Measurements Using												Three Months Ended				Nine Months Ended
(In Thousands)		Value				Level 1				Level 2				Level 3				September 30, 2014				September 30, 2014
Assets
Residential loans, at lower of cost or fair value		$	1,106			$	-			$	-			$	1,106			$	1			$	(1)
REO			1,944				-				-				1,994				0				(133)

Market Valuation Adjustments, Net

The following table presents the components of market valuation adjustments, net, recorded in our consolidated statements of income for the three and nine months ended September 30, 2014 and 2013.

Market Valuation Adjustments, Net

		Three Months Ended September 30,								Nine Months Ended September 30,
(In Thousands)		2014				2013				2014				2013
Mortgage banking activities
Residential loans, at fair value		$	13,446			$	(10,804)			$	34,554			$	(17,339)
Commercial loans, at fair value			4,305				3,171				13,644				2,826
Trading securities			(1,332)				(1,866)				(14,419)				36,399
Derivative instruments, net			(2,404)				442				(18,159)				51,009
Loan purchase and forward sale commitments			2,487				-				6,077				-
Total mortgage banking activites (1)			16,502				(9,057)				21,697				72,895
MSRs			2,321				460				(5,944)				9,628
Other
Residential loans, at lower of cost or fair value			43				(11)				54				68
Held-for-investment loans at fair value			(991)				-				(991)				-
Trading securities			(577)				540				(653)				(4,168)
Impairments on AFS securities			(188)				-				(565)				(1,666)
REO			(361)				(76)				(825)				(407)
Other derivative instruments, net			(1,632)				9				(10,986)				74
Total other			(3,706)				462				(13,966)				(6,099)
Total Market Valuation Adjustments, Net		$	15,117			$	(8,135)			$	1,787			$	76,425

(1) Income from mortgage banking activities presented above does not include fee income or provisions for repurchases that is a component of mortgage banking income presented on our consolidated statements of income as these amounts do not represent a market valuation adjustment.

Quantitative Information about Significant Unobservable Inputs Used in Valuation of Level 3 Assets and Liabilities Measured at Fair Value

The following table provides quantitative information about the significant unobservable inputs used in the valuation of our Level 3 assets and liabilities measured at fair value.

Fair Value Methodology for Level 3 Financial Instruments

September 30, 2014 (Dollars in Thousands)		Fair       Value				Unobservable Input		Range				Weighted    Average
Assets
Residential loans, at fair value:
Loans priced to securitization or priced to whole loan market and uncommitted to sell		$	758,501			Discount rate			4 - 5    %				4    %
						Prepayment rate			8 - 8    %				8    %
						Default rate			1 - 1    %				1    %
						Loss severity			20 - 20    %				20    %
						Credit support			8 - 8    %				8    %
						Spread to securitization			38 - 38    bps				38    bps
						Credit spread			118 - 173    bps				129    bps
Loans priced to whole loan market, committed to sell			581,932			Pool fallout assumption			10 bps - 10 bps				10    bps
Residential loans, at lower of cost or fair value			1,106			Loss severity			15-28    %				21    %
Commercial loans, at fair value			175,421			Credit spread			152 bps - 152 bps				152    bps
						Credit support			24 - 24    %				24    %
Trading and AFS securities			1,394,985			Discount rate			4 - 12    %				6    %
						Prepayment speed			1 - 35    %				12    %
						Default rate			0 - 35    %				8    %
						Loss severity			20 - 64    %				35    %
						Credit support			0 - 88    %				6    %
MSRs			135,152			Discount rate			8 - 11    %				10    %
						Prepayment rate			4 - 60    %				10    %
REO			1,994			Loss severity			13 - 96    %				34    %
Loan purchase commitments, net (1)			851			MSR Multiple			1 - 5x				4x
						Pullthrough rate			58 - 99    %				82    %
Liabilities
Commercial secured financing			66,146			Credit spread			152 bps - 152 bps				152    bps
						Credit support			24 - 24    %				24    %

(1) For the purpose of this presentation loan purchase commitment assets and liabilities are presented net.

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