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Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Fair Value Measurements

Fair Value Measurements

Note 7. Fair value measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP has a three-level hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). The Company’s valuation techniques for financial instruments use observable and unobservable inputs. Investments with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Investments measured and reported at fair value are classified and disclosed into one of the following categories:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets and liabilities that the Company has the ability to access.

Level 2 — Pricing inputs are other than quoted prices in active markets, including, but not limited to, quoted prices for similar assets and liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

Level 3 — One or more pricing inputs is significant to the overall valuation and unobservable. Significant unobservable inputs are based on the best information available in the circumstances, to the extent observable inputs are not available, including the Company’s own assumptions used in determining the fair value of financial instruments. Fair value for these investments are determined using valuation methodologies that consider a range of factors including, but not limited to, the price at which the investment was acquired, the nature of the investment, local market conditions, trading values on public exchanges for comparable securities, current and projected operating performance, and financing transactions subsequent to the acquisition of the investment. The inputs into the determination of fair value require significant management judgment.

Valuation techniques of Level 3 investments vary by instrument type, but are generally based on an income, market or cost-based approach. The income approach predominantly considers discounted cash flows which is the measure of expected future cash flows in a default scenario, implied by the value of the underlying collateral, where applicable, and current performance whereas the market-based approach predominantly considers pull-through rates, industry multiples and the unpaid principal balance. Fair value measurements of loans are sensitive to changes in assumptions regarding prepayments, probability of default, loss severity in the event of default, forecasts of home prices, and significant activity or developments in the real estate market. Fair value measurements of residential MSRs are sensitive to changes in assumptions regarding prepayments, discount rates, and cost of servicing. Fair value measurements of derivative instruments, specifically IRLC’s, are sensitive to changes in assumptions related to origination pull-through rates, servicing fee multiples, and percentages of unpaid principal balances. Origination pull-through rates are also dependent on factors such as market interest rates, type of origination, length of lock, purpose of the loan (purchase or refinance), type of loan (fixed or variable), and the processing status of the loan.

The fair value of the acquired contingent consideration was determined using a Monte Carlo simulation model which considers various potential results based on Level 3 inputs, including management’s latest estimates of future operating results. Fair value measurements of the contingent consideration liability are sensitive to changes in assumptions related to earnings before tax (“EBT”), discount rate and risk-free rate of return. Contingent consideration also consists of CERs. Pursuant to the CER agreement, if, as of the revaluation date, the sum of the updated fair value of the acquired portfolio less all advances made on such assets, plus all principal payments, return of capital and liquidation proceeds received on such assets exceeds the initial discounted fair value of the acquired portfolio, then the Company will issue to the CER holders, with respect to each CER, a number of shares of common stock equal to 90% of the lesser of the valuation excess and the discount amount, divided by the number of initially issued CERs divided by the Company share value, with cash being paid in lieu of any fractional shares of common stock otherwise due to such holder. In addition, each CER holder will be entitled to receive a number of additional shares of common stock equal to (i) the amount of any dividends or other distributions paid with respect to the number of whole shares of common stock received by such CER holder in respect of

such holder’s CERs and having a record date on or after the closing of the Mosaic Mergers and a payment date prior to the issuance date of such shares of common stock, divided by (ii) the Company share value. The probability-weighted expected return method (“PWERM”) was utilized to estimate the return of capital and liquidation proceeds of the acquired asset portfolio, considering each possible outcome, including the economic and projected performance of each acquired asset, using a probability of 65%-100% return of capital. The discounted cashflow technique was utilized by the Company to assess the updated value of the acquired portfolio as of the revaluation date. The fair value of dividend distributions to the CER holders was determined using a Monte Carlo simulation model which considers various potential results based on the CER payments, volatility of the Company’s share value and projected dividend distributions.

In certain cases, the inputs used to measure fair value may be categorized into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

The table below presents financial instruments carried at fair value on a recurring basis.


(in thousands)	Level 1			Level 2			Level 3			Total
June 30, 2022
Assets:
Loans, held for sale, at fair value	$	—		$	268,579		$	200,863		$	469,442
Loans, net, at fair value		—			—			9,956			9,956
Investments held to maturity		—			—			9,601			9,601
Paycheck Protection Program loans		—			763			—			763
MBS, at fair value		—			38,982			1,666			40,648
Derivative instruments, at fair value		—			44,131			2,399			46,530
Residential MSRs, at fair value		—			—			168,653			168,653
Investment in unconsolidated joint ventures		—			—			8,439			8,439
Total assets	$	—		$	352,455		$	401,577		$	754,032

Liabilities:
Derivative instruments, at fair value	$	—		$	1,303		$	—		$	1,303
Contingent consideration		—			—			92,548			92,548
Total liabilities	$	—		$	1,303		$	92,548		$	93,851
December 31, 2021
Assets:
Loans, held for sale, at fair value	$	—		$	321,070		$	231,865		$	552,935
Loans, net, at fair value		—			—			10,766			10,766
Paycheck Protection Program loans		—			—			3,243			3,243
MBS, at fair value		—			97,915			1,581			99,496
Derivative instruments, at fair value		—			4,683			2,339			7,022
Residential MSRs, at fair value		—			—			120,142			120,142
Investment in unconsolidated joint ventures		—			—			8,894			8,894
Total assets	$	—		$	423,668		$	378,830		$	802,498

Liabilities:
Derivative instruments, at fair value	$	—		$	410		$	—		$	410
Contingent consideration		—			—			16,400			16,400
Total liabilities	$	—		$	410		$	16,400		$	16,810

The table below presents the valuation techniques and significant unobservable inputs used to value Level 3 financial instruments, using third party information without adjustment.



(in thousands)	Fair Value		Predominant Valuation Technique (a)			Type	Range		Weighted Average
June 30, 2022
Investments held to maturity	$	9,601		Income Approach		Discount rate		12.0%		12.0%
Residential MSRs, at fair value	$	168,653		Income Approach		Forward prepayment rate \| Forward Default Rate \| Discount rate \| Servicing expense		(b)		(b)
Investment in unconsolidated joint ventures	$	8,439		Income Approach		Discount rate		9.0%		9.0%
Derivative instruments, at fair value	$	2,399		Market Approach		Origination pull-through rate \| Servicing Fee Multiple \| Percentage of unpaid principal balance		48.3 - 100% \| 1.1 - 6.5% \| 0.3 to 3.2%		85.1% \| 4.7% \| 1.6%
Contingent consideration- Red Stone	$	(8,200)		Monte Carlo Simulation Model		EBT volatility \| EBT discount rate \| Liability discount rate		25.0% \| 4.0% \| 6.5%		25.0% \| 4.0% \| 6.5%
Contingent consideration- Mosaic CER dividends	$	(18,475)		Monte Carlo Simulation Model		Equity volatility \| Risk-free rate of return \| Discount Rate		45.0% \| 2.14% \| 9.98%		45.0% \| 2.14% \| 9.98%
Contingent consideration- Mosaic CER units	$	(65,873)		Income Approach and PWERM Model		Revaluation discount rate \| Discount rate		8.50 - 12.00% \| 9.98%		9.6% \| 9.98%
December 31, 2021
Derivative instruments, at fair value	$	2,339		Market Approach		Origination pull-through rate \| Servicing Fee Multiple \| Percentage of unpaid principal balance		63.0 - 100% \| 0.4 - 5.2% \| 0.1 to 3.1%		86.7% \| 4.1% \| 1.3%
Residential MSRs, at fair value	$	120,142		Income Approach		Forward prepayment rate \| Forward Default Rate \| Discount rate \| Servicing expense		(b)		(b)
Investment in unconsolidated joint ventures	$	8,894		Income Approach		Discount rate		9.0%		9.0%
Contingent consideration	$	(16,400)		Monte Carlo Simulation Model		EBT volatility \| Risk-free rate of return \| EBT discount rate \| Liability discount rate		25.0% \| 0.4% \| 17.6% \| 3.8%		25.0% \| 0.4% \| 17.6% \| 3.8%

(a)	Prices are weighted based on the unpaid principal balance of the loans and securities included in the range for each class.

(b)Refer to Note 9 - Servicing Rights for more information on residential MSRs unobservable inputs.

Included within Level 3 assets of $401.6 million as of June 30, 2022 and $378.8 million as of December 31, 2021, is $212.5 million and $247.5 million of quoted or transaction prices in which quantitative unobservable inputs are not developed by the Company when measuring fair value, respectively.

The table below presents a summary of changes in fair value for Level 3 assets and liabilities.


(in thousands)	MBS			Derivatives			Loans, net			Loans, held for sale, at fair value			Investments held to maturity			PPP loans			Residential MSRs				Investment in unconsolidated joint ventures			Contingent Consideration			Total
Three Months Ended June 30, 2022
Beginning Balance	$	7,014		$	(2,616)		$	10,722		$	203,958		$	17,053		$	—		$	159,834		$	8,610		$	(92,148)		$	312,427
Purchases or Originations		—			—			—			5,900			—			—			—			—			—			5,900
Additions due to loans sold, servicing retained		—			—			—			—			—			—			12,448			—			—			12,448
Sales / Principal payments		(1,352)			—			—			(115)			(7,296)			—			(3,614)			—			—			(12,377)
Realized gains (losses), net		(1,449)			—			—			(1)			(156)			—			—			—			—			(1,606)
Unrealized gains (losses), net		2,661			5,015			(766)			(5,014)			—			—			(15)			(171)			(400)			1,310
Accreted discount, net		1			—			—			—			—			—			—			—			—			1
Transfer to loans, held for investment		—			—			—			(3,862)			—			—			—			—			—			(3,862)
Transfer to (from) Level 3		(5,209)			—			—			(3)			—			—			—			—			—			(5,212)
Ending Balance	$	1,666		$	2,399		$	9,956		$	200,863		$	9,601		$	—		$	168,653		$	8,439		$	(92,548)		$	309,029
Unrealized gains (losses), net on assets/liabilities	$	239		$	2,399		$	(1,000)		$	(13,953)		$	—		$	—		$	2,293		$	(757)		$	(800)		$	(11,579)

Six Months Ended June 30, 2022
Beginning Balance	$	1,581		$	2,339		$	10,766		$	231,865		$	—		$	3,243		$	120,142		$	8,894		$	(16,400)		$	362,430
Purchases or Originations		—			—			—			23,470			—			—			—			—			—			23,470
Additions due to loans sold, servicing retained		—			—			—			—			—			—			22,954			—			—			22,954
Sales / Principal payments		(1,352)			—			—			(32,709)			(7,296)			(1,400)			(7,026)			—			9,000			(40,783)
Realized gains (losses), net		(1,449)			—			—			(787)			(156)			—			—			—			—			(2,392)
Unrealized gains (losses), net		2,705			60			(810)			(15,774)			—			—			32,583			(455)			(800)			17,509
Accreted discount, net		1			—			—			—			—			—			—			—			—			1
Merger		—			—			—			—			17,053			—			—			—			(84,348)			(67,295)
Transfer to loans, held for investment		—			—			—			(3,862)			—			—			—			—			—			(3,862)
Transfer to (from) Level 3		180			—			—			(1,340)			—			(1,843)			—			—			—			(3,003)
Ending Balance	$	1,666		$	2,399		$	9,956		$	200,863		$	9,601		$	—		$	168,653		$	8,439		$	(92,548)		$	309,029
Unrealized gains (losses), net on assets/liabilities	$	239		$	2,399		$	(1,000)		$	(13,953)		$	—		$	—		$	2,293		$	(757)		$	(800)		$	(11,579)

Three Months Ended June 30, 2021
Beginning Balance	$	5,633		$	11,724		$	13,618		$	—		$	—		$	38,388		$	98,542		$	—		$	—		$	167,905
Accreted discount, net		2			—			—			—			—			—			—			—			—			2
Additions due to loans sold, servicing retained		—			—			—			—			—			—			11,925			—			—			11,925
Sales / Principal payments		—			—			(11)			—			—			(21,957)			(4,948)			—			—			(26,916)
Unrealized gains (losses), net		125			(5,594)			74			—			—			—			(4,699)			—			—			(10,094)
Transfer to (from) Level 3		(4,046)			—			—			—			—			—			—			—			—			(4,046)
Ending Balance	$	1,714		$	6,130		$	13,681		$	—		$	—		$	16,431		$	100,820		$	—		$	—		$	138,776
Unrealized gains (losses), net on assets/liabilities	$	286		$	6,130		$	(189)		$	—		$	—		$	—		$	(36,553)		$	—		$	—		$	(30,326)

Six Months Ended June 30, 2021
Beginning Balance	$	25,131		$	16,363		$	13,795		$	—		$	—		$	74,931		$	76,840		$	—		$	—		$	207,060
Purchases or Originations		—			—			—			—			—			3,866			—			—			—			3,866
Additions due to loans sold, servicing retained		—			—			—			—			—			—			23,973			—			—			23,973
Sales / Principal payments		(92)			—			(212)			—			—			(62,366)			(10,650)			—			—			(73,320)
Realized gains (losses), net		—			—			(5)			—			—			—			—			—			—			(5)
Unrealized gains (losses), net		1,194			(10,233)			103			—			—			—			10,657			—			—			1,721
Accreted discount, net		60			—			—			—			—			—			—			—			—			60
Transfer to (from) Level 3		(24,579)			—			—			—			—			—			—			—			—			(24,579)
Ending Balance	$	1,714		$	6,130		$	13,681		$	—		$	—		$	16,431		$	100,820		$	—		$	—		$	138,776
Unrealized gains (losses), net on assets/liabilities	$	286		$	6,130		$	(189)		$	—		$	—		$	—		$	(36,553)		$	—		$	—		$	(30,326)

The Company’s policy is to recognize transfers in and transfers out as of the end of the period of the event or the date of the change in circumstances that caused the transfer. Transfers between Level 2 and Level 3 generally relate to whether there were changes in the significant relevant observable and unobservable inputs that are available for the fair value measurements of such financial instruments.

Financial instruments not carried at fair value

The table below presents the carrying value and estimated fair value of financial instruments that are not carried at fair value and are classified as Level 3.


		June 30, 2022						December 31, 2021
(in thousands)		Carrying Value			Estimated Fair Value			Carrying Value			Estimated Fair Value
Assets:
Loans, net		$	9,701,653		$	9,795,382		$	6,986,528		$	7,112,282
Paycheck Protection Program loans			388,426			388,427			867,109			927,766
Investments held to maturity			149,440			149,440			—			—
Purchased future receivables, net			8,704			8,704			7,872			7,872
Servicing rights			84,858			88,455			84,457			89,470
Total assets		$	10,333,081		$	10,430,408		$	7,945,966		$	8,137,390
Liabilities:
Secured borrowings		$	3,212,383		$	3,212,383		$	2,517,600		$	2,517,600
Paycheck Protection Program Liquidity Facility borrowings			427,759			427,759			941,505			941,505
Securitized debt obligations of consolidated VIEs, net			4,533,789			4,499,632			3,214,303			3,238,155
Senior secured note, net			342,469			318,459			342,035			338,990
Guaranteed loan financing			304,158			318,209			345,217			366,887
Convertible notes, net			113,818			116,733			113,247			118,922
Corporate debt, net			565,230			550,057			441,817			457,741
Total liabilities		$	9,499,606		$	9,443,232		$	7,915,724		$	7,979,800

Other assets of $67.2 million as of June 30, 2022, and $45.6 million as of December 31, 2021, are not carried at fair value and include due from servicers and accrued interest, which are presented in Note 19 – Other Assets and Other Liabilities. Receivables from third parties of $7.5 million as of June 30, 2022, and $29.3 million as of December 31, 2021, are not carried at fair value but generally approximate fair value and are classified as Level 3. Accounts payable and other accrued liabilities of $30.3 million as of June 30, 2022, and $27.5 million as of December 31, 2021 are not carried at fair value and include payables to related parties and accrued interest payable which are included in Note 19. For these instruments, carrying value generally approximates fair value and are classified as Level 3.

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.

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