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NOTE 3 FAIR VALUE
 12 Months Ended
Dec. 31, 2011
Fair Value Disclosures [Text Block]

NOTE 3 FAIR VALUE


The carrying amounts and the estimated fair values of our financial instruments are as follows at December 31:


   

2011

   

2010

 
   

Carrying

Value

   

Fair

Value

   

Carrying

Value

   

Fair

Value

 
Financial assets:                        
Loans held for resale   $ 20,633     $ 20,633     $ 25,803     $ 25,803  
Loans, net – restricted for securitization investors     58,560       55,165       67,340       64,795  
Advances     3,733,502       3,733,502       2,108,885       2,108,885  
Receivables, net     83,202       83,202       69,518       69,518  
                                 
Financial liabilities:                                
Match funded liabilities   $ 2,558,951     $ 2,569,131     $ 1,482,529     $ 1,486,476  
Lines of credit and other secured borrowings     540,369       550,860       246,073       252,722  
Secured borrowings – owed to securitization investors     53,323       52,652       62,705       62,105  
Debt securities     82,554       92,125       82,554       75,325  
                                 
Derivative financial instruments, net   $ (16,676 )   $ (16,676 )   $ (15,351 )   $ (15,351 )

Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs. The three broad categories are:


  Level 1: Quoted prices in active markets for identical assets or liabilities.
     
  Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly for substantially the full term of the financial instrument.
     
  Level 3: Unobservable inputs for the asset or liability.

Where available, we utilize quoted market prices or observable inputs rather than unobservable inputs to determine fair value. We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table presents assets and liabilities measured at fair value categorized by input level within the fair value hierarchy:


   

Carrying
value

   

Level 1

   

Level 2

   

Level 3

 
At December 31, 2011:                        
Measured at fair value on a recurring basis:                        
Derivative financial instruments, net (1)   $ (16,676 )   $ —     $ —     $ (16,676 )
Measured at fair value on a non-recurring basis:                                
Loans held for resale (2)     20,633       —       —       20,633  
Mortgage servicing rights (3)     214       —       —       214  
                                 
At December 31, 2010:                                
Measured at fair value on a recurring basis:                                
Derivative financial instruments, net (1)   $ (15,351 )   $ —     $ —     $ (15,351 )
Measured at fair value on a non-recurring basis:                                
Loans held for resale (2)     25,803       —       —       25,803  
Mortgage servicing rights (3)     334       —       —       334  

(1) The derivative financial instruments are not exchange-traded and therefore quoted market prices or other observable inputs are not available. Therefore, we classify derivatives within Level 3 of the fair value hierarchy. Fair value is based on certain information provided by third-party pricing sources. See Note 19 for additional information on derivative financial instruments.

(2) Loans held for resale are measured at fair value on a non-recurring basis. All loans held for resale were measured at fair value because the cost exceeded the estimated fair value. Current market illiquidity has reduced the availability of observable pricing data. Consequently, we classify these loans within Level 3 of the fair value hierarchy. See Note 4 for additional information on loans held for resale.
   
(3) The carrying value of MSRs at December 31, 2011 and 2010 is net of a valuation allowance for impairment of $2,290 and $2,864, respectively. The carrying value of the impaired stratum, net of the valuation allowance, was $214 and $334 at December 31, 2011 and 2010, respectively. The estimated fair value exceeded amortized cost for all other strata. See Note 8 for additional information on MSRs.

The following tables present a reconciliation of the changes in fair value of Level 3 assets that we measure at fair value on a recurring basis:


For the year ended December 31, 2011:

 

Derivative
Financial
Instruments

 
       
Beginning balance   $ (15,351 )
         
Purchases, issuances, sales and settlements:        
Purchases     3,688  
Issuances     —  
Sales     —  
Settlements     85  
      3,773  
Total realized and unrealized gains and (losses) (1):        
Included in Other, net     (5,881 )
Included in Other comprehensive income (loss)     783  
      (5,098 )
         
Transfers in and / or out of Level 3     —  
Ending balance   $ (16,676 )

         

Trading Securities

       

For the year ended December 31, 2010:

 

Derivative
Financial
Instruments

   

Auction
Rate

Securities

   

Subordinates
and
Residuals

   

Total

 
Beginning balance (2) (3)   $ (45 )   $ 247,464     $ 59     $ 247,478  
Purchases, issuances, sales and settlements:                                
Purchases     —       —       —       —  
Issuances     —       —       —       —  
Sales     —       (146,810 )     —       (146,810 )
Settlements     (738 )     (92,745 )     —       (93,483 )
      (738 )     (239,555 )     —       (240,293 )
Total realized and unrealized gains and (losses) (1):                                
Included in Gain (loss) on trading securities     —       (7,909 )     (59 )     (7,968 )
Included in Other, net     (133 )     —       —       (133 )
Included in Other comprehensive income (loss)     (14,435 )     —       —       (14,435 )
      (14,568 )     (7,909 )     (59 )     (22,536 )
Transfers in and / or out of Level 3     —       —       —       —  
Ending balance   $ (15,351 )   $ —     $ —     $ (15,351 )

         

Trading Securities

     

For the year ended December 31, 2009:

 

Derivative
Financial
Instruments

   

Auction
Rate
Securities

   

Subordinates
and
Residuals

   

Total

 
Beginning balance   $ 193     $ 239,301     $ 4,369     $ 243,863  
Purchases, issuances, sales and settlements:                                
Purchases     —       —       —       —  
Issuances     —       —       —       —  
Sales     —       (3,700 )     —       (3,700 )
Settlements     —       —       —       —  
      —       (3,700 )     —       (3,700 )
Total realized and unrealized gains and (losses):                                
Included in Gain (loss) on trading securities     —       11,863       (677 )     11,186  
Included in Other, net     588       —       —       588  
Included in Other comprehensive income (loss)     —       —       —       —  
      588       11,863       (677 )     11,774  
Transfers in and / or out of Level 3     —       —       —       —  
Ending balance   $ 781     $ 247,464     $ 3,692     $ 251,937  

(1) Total losses attributable to derivative financial instruments still held at December 31, 2011 and 2010 were $5,114 and $13,775, respectively.
   
(2) The fair values of derivative financial instruments as of January 1, 2010 were adjusted to include $(826) related to an interest rate swap that is held by one of the newly consolidated securitization trusts.
   
(3) Effective January 1, 2010, we eliminated our investment in subordinate and residual securities that were issued by consolidated securitization trusts as more fully described in Note 1—Securitizations of Residential Mortgage Loans.

The methodologies that we use and key assumptions that we make to estimate the fair value of instruments are described in more detail by instrument below:


Derivative Financial Instruments


Exchange-traded derivative financial instruments are valued based on quoted market prices. If quoted market prices or other observable inputs are not available, fair value is based on certain information provided by third-party pricing sources. We review this information to ensure that it provides a reasonable basis for estimating fair value. Our review is designed to identify information that appears stale, information that has changed significantly from the prior period, and other indicators that the information may not be accurate.


Loans Held for Resale


Loans held for resale are reported at the lower of cost or fair value. We account for the excess of cost over fair value as a valuation allowance with changes in the valuation allowance included in Loss on loans held for resale, net, in the period in which the change occurs. All loans held for resale were measured at fair value because their cost of $34,890 exceeded their estimated fair value of $20,633 at December 31, 2011.


When we enter into an agreement to sell a loan to an investor at a set price, the loan is valued at the commitment price. The fair value of loans for which we do not have a firm commitment to sell is based upon a discounted cash flow analysis. We stratify our fair value estimate of uncommitted loans held for resale based upon the delinquency status of the loans. We base the fair value of our performing loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include collateral and loan characteristics, prevailing market conditions and the creditworthiness of the borrower. The fair value of our non-performing loans is determined based upon the underlying collateral of the loan and the estimated period and cost of disposition of the collateral.


Loans – Restricted for Securitization Investors


Loans – restricted for securitization investors are reported at cost, less an allowance for loan losses and are comprised of loans that are secured by first or second liens on one- to four-family residential properties. We base the fair value of our loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include expected prepayment rates and delinquency and cumulative loss curves.


Mortgage Servicing Rights


We estimate the fair value of our MSRs by calculating the present value of expected future cash flows utilizing assumptions that we believe are used by market participants. The most significant assumptions used in our internal valuation are the speed at which mortgages prepay and delinquency experience, both of which we derive from our historical experience and available market data. Other assumptions used in our internal valuation are:


  ● Cost of servicing   ● Interest rate used for computing float earnings
  ● Discount rate   ● Compensating interest expense
  ● Interest rate used for computing the cost of Servicing advances   ● Collection rate of other ancillary fees

The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, prepayment penalties, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. We derive prepayment speeds and delinquency assumptions from historical experience adjusted for prevailing market conditions. We develop the discount rate internally, and we consider external market-based assumptions in determining the interest rate for the cost of financing advances, the interest rate for float earnings and the cost of servicing. The more significant assumptions used in the December 31, 2011 valuation include prepayment speeds ranging from 13.96% to 21.71% (depending on loan type) and delinquency rates ranging from 15.61% to 25.49% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus 4% for computing the cost of financing advances, an interest rate of 1-month LIBOR for computing float earnings and a discount rate of 20%.


We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping our loans into the applicable strata based on one or more of the predominant risk characteristics of the underlying loans. The risk factors used to assign loans to strata include the credit score (FICO) of the borrower, the loan to value ratio and the default risk. Our strata include:


  ● Subprime   ● Re-performing
  ● ALT A   ● Special servicing
  ● High-loan-to-value   ● Other

Advances


We value advances that we make on loans that we service for others at their carrying amounts because they have no stated maturity, generally are realized within a relatively short period of time and do not bear interest.


Receivables


The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization.


Borrowings


Borrowings not subject to a hedging relationship are carried at amortized cost. We base the fair value of our debt securities on quoted market prices. The carrying value of match funded liabilities and secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other match funded or secured borrowings that bear interest at a fixed rate, we determine fair value by discounting the contractual future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We carry certain zero-coupon long-term secured borrowings with an implicit fixed rate at a discounted value and determine fair value by discounting the contractual future principal repayments at a market rate that is commensurate with the risk of the estimated cash flows.