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Note 4 FAIR VALUE | 12 Months Ended
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Dec. 31, 2012
Fair Value Disclosures [Text Block] |
NOTE 4 | FAIR VALUE
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 that 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.
| 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 and our nonfinancial assets measured at fair value are as follows at December 31:
|  |  |  |  | 2012 |  |  | 2011 |
|  | Level |  |  | Carrying Value |  |  | Fair Value |  |  | Carrying Value |  |  | Fair Value |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale, at fair value (1) |  |  | 2 |  |  | $ | 426,480 |  |  | $ | 426,480 |  |  | $ | — |  |  | $ | — |
Loans held for sale, at lower of cost or fair value (2) |  |  | 3 |  |  |  | 82,866 |  |  |  | 82,866 |  |  |  | 20,633 |  |  |  | 20,633 |
Advances and match funded advances(3) |  |  | 3 |  |  |  | 3,233,707 |  |  |  | 3,233,707 |  |  |  | 3,733,502 |  |  |  | 3,733,502 |
Receivables, net (3) |  |  | 3 |  |  |  | 167,459 |  |  |  | 167,459 |  |  |  | 83,202 |  |  |  | 83,202 |
Loans, net – restricted for securitization investors (3) |  |  | 3 |  |  |  | — |  |  |  | — |  |  |  | 58,560 |  |  |  | 55,165 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Match funded liabilities (3) |  |  | 3 |  |  | $ | 2,532,745 |  |  | $ | 2,533,278 |  |  | $ | 2,558,951 |  |  | $ | 2,569,131 |
Lines of credit and other secured borrowings (3) |  |  | 3 |  |  |  | 1,096,679 |  |  |  | 1,101,504 |  |  |  | 540,369 |  |  |  | 550,860 |
Debt securities (3) |  |  | 2 |  |  |  | — |  |  |  | — |  |  |  | 82,554 |  |  |  | 92,125 |
Secured borrowings – owed to securitization investors (3) |  |  | 3 |  |  |  | — |  |  |  | — |  |  |  | 53,323 |  |  |  | 52,652 |
Derivative financial instruments (1): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
IRLCs |  |  | 2 |  |  | $ | 5,781 |  |  | $ | 5,781 |  |  | $ | — |  |  | $ | — |
Interest rate swaps |  |  | 3 |  |  |  | (10,836 | ) |  |  | (10,836 | ) |  |  | (14,491 | ) |  |  | (14,491 | )
Forward MBS trades |  |  | 1 |  |  |  | (1,719 | ) |  |  | (1,719 | ) |  |  | — |  |  |  | — |
U.S. Treasury futures |  |  | 1 |  |  |  | (1,258 | ) |  |  | (1,258 | ) |  |  | — |  |  |  | — |
Interest rate caps |  |  | 3 |  |  |  | 168 |  |  |  | 168 |  |  |  | 3,600 |  |  |  | 3,600 |
Nondeliverable FX forward contracts |  |  | 3 |  |  |  | — |  |  |  | — |  |  |  | (5,785 | ) |  |  | (5,785 | )
Impaired stratum of MSRs (2)(4) |  |  | 3 |  |  | $ | — |  |  | $ | — |  |  | $ | 214 |  |  | $ | 214 |
MSRs, at fair value (1) |  |  | 3 |  |  | $ | 85,213 |  |  | $ | 85,213 |  |  | $ | 214 |  |  | $ | 214 |
(1) | Measured at fair value on a recurring basis.
(2) | Measured at fair value on a non-recurring basis.
(3) | Financial instruments disclosed, but not carried, at fair value.
(4) | The high-loan-to-value stratum is measured at fair value on a non-recurring basis and is classified as Level 3 because of the nature of the valuation inputs. The values are net of a valuation allowance of $2,378 and $2,290 at December 31, 2012 and 2011, respectively.
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, 2012: |  | Derivative Financial Instruments |  |  | MSRS at Fair Value |  |  | Total |
Beginning balance |  | $ | (16,676 | ) |  | $ | — |  |  | $ | (16,676 | )
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |
Purchases (1) |  |  | 4,946 |  |  |  | 85,183 |  |  |  | 90,129 |
Issuances |  |  | — |  |  |  | — |  |  |  | — |
Sales |  |  | (405 | ) |  |  | — |  |  |  | (405 | )
Settlements |  |  | 2,451 |  |  |  | — |  |  |  | 2,451 |
|  |  | 6,992 |  |  |  | 85,183 |  |  |  | 92,175 |
Total realized and unrealized gains and (losses) (2): |  |  |  |  |  |  |  |  |  |  |  |
Included in Other, net |  |  | 7,331 |  |  |  | 30 |  |  |  | 7,361 |
Included in Other comprehensive income (loss) |  |  | (8,315 | ) |  |  | — |  |  |  | (8,315 | )
|  |  | (984 | ) |  |  | 30 |  |  |  | (954 | )
Transfers in and / or out of Level 3 |  |  | — |  |  |  | — |  |  |  | — |
Ending balance |  | $ | (10,668 | ) |  | $ | 85,213 |  |  | $ | 74,545 |
For the year ended December 31, 2011 |  | Derivative Financial Instruments |
Beginning balance |  | $ | (15,351 | )
Purchases, issuances, sales and settlements: |  |  |  |
Purchases |  |  | 3,688 |
Settlements |  |  | 85 |
|  |  | 3,773 |
Total realized and unrealized gains and (losses) (2): |  |  |  |
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 |  | $ | (45 | ) |  | $ | 247,464 |  |  | $ | 59 |  |  | $ | 247,478 |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Sales |  |  | — |  |  |  | (146,810 | ) |  |  | — |  |  |  | (146,810 | )
Settlements |  |  | (738 | ) |  |  | (92,745 | ) |  |  | — |  |  |  | (93,483 | )
|  |  | (738 | ) |  |  | (239,555 | ) |  |  | — |  |  |  | (240,293 | )
Total realized and unrealized gains and (losses) (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 | )
(1) | Includes $4,946 of derivatives and $82,275 of fair value MSRs acquired in connection with the Homeward Acquisition. Also includes $2,908 of MSRs retained on the sale of loans.
(2) | Total losses attributable to derivative financial instruments still held at December 31, 2012 and 2011 were $1,173 and $5,114, respectively.
The methodologies that we use and key assumptions that we make to estimate the fair value of instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis are described below: Derivative Financial Instruments We use interest rate swaps to hedge against the effects of changes in interest rates on our borrowings under advance funding facilities. These 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 have not adjusted 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. In addition, we use interest rate caps to minimize future interest rate exposures on variable rate debt issued on servicing advance facilities from increases in one-month LIBOR interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk. We enter into forward trades to provide an economic hedge against changes in fair value on loans held for sale which we carry at fair value. Forward trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Forward contracts are actively traded in the market, thus they are classified within Level 1 of the valuation hierarchy. Interest rate lock commitments (IRLCs) represent an agreement to purchase loans from a third-party originator, or an agreement to extend credit to a mortgage applicant, or an agreement to sell a loan to investors, whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close), using models that consider cumulative historical fallout rates and other factors. We enter into derivative contracts including interest rate swaps, U.S. Treasury futures and forward contracts to hedge against the effects of changes in the value of the MSRs which we carry at fair value. The fair value of interest rate swaps is based upon projected short-term interest rates and volatility based on published market based sources. Because futures and forward contracts are actively traded in the market, they are classified within Level 1 of the valuation hierarchy. See Note 19 for additional information regarding derivative financial instruments. Loans Held for sale Loans held for sale that we measure at fair value on a recurring basis are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conforming mortgage loans are typically sold. For all other loans held for sale which we report at the lower of cost or fair value, 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. We base the fair value of uncommitted loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. The more significant assumptions used in the December 31, 2012 valuation of performing loans include: historical default rates of 5% to 10%; re-performance rates on defaulted loans of 25%; loss severity on defaulted loans of 20% to 50%; an average resolution timeline of 12 months; an average coupon rate of 7%; and a discount rate of 10%. Significant assumptions used in the December 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 one to 84 months depending on the stage of delinquency, 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 We based the fair value of Loans – restricted for securitization investors on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Significant assumptions included expected prepayment and delinquency rates and cumulative loss curves. Mortgage Servicing Rights Amortized Cost MSRs We estimate the fair value of 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, 2012 valuation include prepayment speeds ranging from 12.44% to 20.76% (depending on loan type) and delinquency rates ranging from 14.98% to 23.10% (depending on loan type). Other assumptions include an interest rate of 1-month LIBOR plus a range of 4% to 5.75% for computing the cost of financing advances, an interest rate of 1-month LIBOR for computing float earnings and a discount rate of approximately 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
As disclosed above and in Note 1 we established a valuation allowance for impairment on the high-loan-to-value stratum of our MSRs because the estimated fair value was less than the carrying value. For all other strata, the fair value exceeded the carrying value at December 31, 2012. Fair Value MSRs MSRs carried at fair value are classified within Level 3 of the valuation hierarchy due to the use of significant unobservable inputs and the inactive market for such assets. Fair value of these MSRs is sensitive to changes in unobservable inputs, as a change in those inputs to a different amount might result in significantly higher or lower fair value measurement. Significant unobservable inputs include mortgage prepayment speeds, constant default rates, discount rates, servicing advances and delinquency rates. We estimate the fair value of our MSRs carried at fair value by 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 key assumptions used in the valuation of these MSRs include:
| • | Mortgage prepayment speeds;
| • | Delinquency rates and
| • | Discount rates.
The primary assumptions used in the December 31, 2012 valuation include a 16.83% weighted average constant prepayment rate and a discount rate equal to 1-Month LIBOR plus a range of 9% to 10%. The cash flow and prepayment assumptions used in our discounted cash flow models are based on empirical data drawn from the historical performance of our MSRs adjusted to reflect current market conditions, which we believe are consistent with assumptions used by market participants valuing similar MSRs. On a quarterly basis, the valuation of our MSRs is reviewed by a third party valuation expert. 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 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 of the assumptions used in the December 31, 2012 valuation of the match funded liabilities bearing a fixed interest rate were discount rates of 2.23% – 5.92% and estimated repayments using an advance reduction curve that is based on historical experience. For the SSTL, we used a discount rate of 6.98% and the repayment schedule specified in the loan agreement. Prior to the redemption of our debt securities in 2012, we based their fair value on quoted prices in markets with limited trading activity.

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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/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=7578670&loc=d3e19207-110258 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 + Details
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