XML 72 R12.htm IDEA: XBRL DOCUMENT v2.4.0.6
Note 5 FAIR VALUE OF FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2012
Fair Value Disclosures [Text Block]

Note 5       Fair Value of Financial Instruments


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 (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
  Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
  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 carrying amounts and the estimated fair values of our financial instruments are as follows at the dates indicated:


        March 31, 2012   December 31, 2011
    Level   Carrying
Value 		  Fair
Value 		  Carrying
Value 		  Fair
Value
Financial assets:                                        
Loans held for resale (1)     3     $ 20,203     $ 20,203     $ 20,633     $ 20,633  
Loans, net – restricted for securitization investors (2)     3       56,365       52,905       58,560       55,165  
Advances (2)     3       3,001,569       3,001,569       3,733,502       3,733,502  
Receivables, net (2)     3       62,235       62,235       83,202       83,202  
Financial liabilities:                                        
Match funded liabilities (2)     3     $ 2,280,323     $ 2,293,124     $ 2,558,951     $ 2,569,131  
Lines of credit and other secured borrowings (2)     3       550,618       560,365       540,369       550,860  
Secured borrowings – owed to securitization investors (2)     3       51,622       50,870       53,323       52,652  
Debt securities (2)     2       26,119       24,682       82,554       92,125  
Derivative financial instruments, net (3)     3     $ (12,806 )   $ (12,806 )   $ (16,676 )   $ (16,676 )

(1) Measured at fair value on a non-recurring basis.
   
(2) Financial instruments disclosed, but not carried, at fair value.
   
(3) Measured at fair value on a recurring basis.

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


Our derivatives are not exchange-traded and therefore quoted market prices or other observable inputs are not available. Fair value is based on information provided by third-party pricing sources. Third-party valuations are derived from proprietary models based on inputs that include yield curves and contractual terms such as fixed interest rates and payment dates. Although we do not adjust the information obtained from the 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. For interest rate contracts, significant increases or decreases in the unobservable portion of the yield curves in isolation will result in substantial changes in the fair value measurement. See Note 15 for additional information on derivative financial instruments.


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 $34,164 exceeded their estimated fair value of $20,203 at March 31, 2012. At March 31, 2012 and December 31, 2011, the carrying value of loans held for resale is net of a valuation allowance of $13,961 and $14,257, respectively. Current market illiquidity has reduced the availability of observable pricing data.


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 loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. The more significant inputs used in estimating future cash flows on performing loans are: historical default rates, re-performance rates on defaulted loans, loss severity on defaulted loans, average resolution timeline, average coupon; and a discount rate. The more significant inputs used in estimating future cash flows on non-performing loans are: the current market value, the resolution timeline; estimated foreclosure and disposition costs; and a discount rate.


The more significant assumptions used in the March 31, 2012 valuation of performing loans include: historical default rates of 5% to 10%; re-performance rates on defaulted loans of 35%; loss severity on defaulted loans of 20% to 50%; an average resolution timeline of 12 months; an average coupon of 7.8%; and a discount rate of 10%. Significant assumptions used in the March 31, 2012 valuation of nonperforming loans include: the current market value of the underlying collateral based on third party sources such as appraisals or broker price opinions; a resolution timeline of 10 to 42 months depending on the state in which the property is located and the type of property; estimated foreclosure and disposition costs that are based on historical experience and considering that state in which the property is located and the type of property; and a discount rate of 15%.


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. The more significant assumptions used in our March 31, 2012 valuations were: prepayment speeds of 3% to 6%; default rates of 20% to 28%; and a discount rate of 20% to 22%.


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 March 31, 2012 valuation include prepayment speeds ranging from 14.32% to 22.14% (depending on loan type) and delinquency rates ranging from 15.97% to 24.17% (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


We base the fair value of our debt securities on quoted prices in markets with limited trading activity. 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 future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We estimate principal repayments of match funded liabilities during the amortization period based on our historical advance collection rates and taking into consideration any plans to refinance the notes. The more significant assumptions used in the March 31, 2012 valuation of match funded liabilities bearing a fixed interest rate were a discount rate of 2.5% to 3.5% and estimated repayments using an advance reduction curve that is based on historical experience.


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 March 31, 2012:                                
Measured at fair value on a recurring basis:                                
Derivative financial instruments, net   $ (12,806 )     —       —     $ (12,806 )
Measured at fair value on a non-recurring basis:                                
Loans held for resale     20,203       —       —       20,203  
MSRs (1)     204       —       —       204  
                                 
At December 31, 2011:                                
Measured at fair value on a recurring basis:                                
Derivative financial instruments, net   $ (16,676 )   $ —     $ —     $ (16,676 )
Measured at fair value on a non-recurring basis:                                
Loans held for resale     20,633       —       —       20,633  
Mortgage servicing rights (1)     214       —       —       214  

(1) Balances represent the carrying value of the impaired stratum of MSRs, net of a valuation allowance of $2,494 and $2,290 at March 31, 2012 and December 31, 2011, respectively. The estimated fair value exceeded amortized cost for all other strata.

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


    Derivative Financial Instruments  
For the three months ended March 31,   2012     2011  
                 
Beginning balance   $ (16,676 )   $ (15,351 )
                 
Purchases, issuances, sales and settlements:                
Purchases     —       —  
Issuances     —       —  
Sales     —       —  
Settlements     2,357       46  
      2,357       46  
                 
Total realized and unrealized gains and (losses) (1):                
Included in Other, net     3,468       (353 )
Included in Other comprehensive income (loss)     (1,955 )     3,261  
      1,513       2,908  
                 
Transfers in and / or out of Level 3     —       —  
Ending balance   $ (12,806 )   $ (12,397 )
                 

(1) Total net (losses) gains attributable to derivative financial instruments still held at March 31, 2012 and 2011 were $(4,272) and $(2,908), respectively.