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Note 19 DERIVATIVE FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2012
Derivative Instruments and Hedging Activities Disclosure [Text Block]
NOTE 19 DERIVATIVE FINANCIAL INSTRUMENTS

Because many of our current derivative agreements are not exchange-traded, we are exposed to credit loss in the event of nonperformance by the counterparty to the agreements. We control this risk through credit monitoring procedures including financial analysis, dollar limits and other monitoring procedures. The notional amount of our contracts does not represent our exposure to credit loss.


The following table summarizes the changes in our holdings of derivatives during the year ended December 31, 2012:


    IRLCs     U.S. Treasury Futures     Forward MBS Trades     Interest Rate Caps     Foreign Exchange Forwards     Interest Rate Swaps  
                                                 
Beginning notional balance   $ —     $ —     $ —     $ 1,600,000     $ 46,200     $ 1,393,685  
   Homeward Acquisition     1,112,519       109,000       1,638,979       1,025,000       —       432,500  
   Other additions     —       —       —       —       —       —  
   Maturities     —       —       —       —       —       (330,230 )
   Terminations     —       —       —       (1,600,000 )     (46,200 )     —  
Ending notional balance   $ 1,112,519     $ 109,000     $ 1,638,979     $ 1,025,000     $ —     $ 1,495,955  
                                                 
Fair value of derivative assets (liabilities) at:                                                
December 31, 2012   $ 5,781     $ (1,258 )   $ (1,719 )   $ 168     $ —     $ (10,836 )
December 31, 2011   $ —     $ —     $ —     $ 3,600     $ (5,785 )   $ (14,491 )
                                                 
Maturity     2013       Mar. 2013       Jan. 2013 – Mar. 2013       Feb. 2015 – May 2016       —       Feb. 2013 – Mar. 2032  

Foreign Currency Exchange Rate Risk Management


We periodically enter into foreign exchange forward contracts to hedge against the effect of changes in the value of the India Rupee (INR) on amounts payable to our India subsidiary, OFSPL. Our operations in Uruguay also expose us to foreign currency exchange rate risk, but we consider this risk to be insignificant.


Interest Rate Management


Match Funded Liabilities


We entered into interest rate swaps in order to hedge against the effects of changes in interest rates on our borrowings under our advance funding facilities. These interest rate swap agreements require us to pay a fixed rate and receive a variable interest rate based on one-month LIBOR. At the time that we entered into the agreements, these swaps were designated as hedges for accounting purposes. We also purchased interest rate caps to minimize future interest rate exposure from increases in one-month LIBOR interest rates, as required by the certain of our advance financing arrangements.


Loans Held for Sale, at Fair Value


The mortgage loans held for sale which we carry at fair value are subject to interest rate and price risk from the loan funding date until the date the loan is sold into the secondary market. Generally, the fair value of a loan will decline in value when interest rates increase and will rise in value when interest rates decrease. To mitigate this risk, we enter into forward trades to provide an economic hedge against those changes in fair value on mortgage loans held for sale. 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.


IRLCs represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant, whereby the interest rate is set prior to funding. The loan commitment binds us (subject to the loan approval process) to fund the loan at the specified rate, regardless of whether interest rates have changed between the commitment date and the loan funding date. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of the commitment through the loan funding date or expiration date. The borrower is not obligated to obtain the loan, thus we are subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Our interest rate exposure on these derivative loan commitments is hedged with freestanding derivatives such as forward contracts. We enter into forward contracts with respect to fixed rate loan commitments.


MSRs, at Fair Value


The MSRs which we measure at fair value are subject to substantial interest rate risk as the mortgage notes underlying the MSRs permit the borrowers to prepay the loans. Therefore, the value of these MSRs generally tends to diminish in periods of declining interest rates (as prepayments increase) and increase in periods of rising interest rates (as prepayments decrease). Although the level of interest rates is a key driver of prepayment activity, there are other factors


that influence prepayments, including home prices, underwriting standards and product characteristics. The amount and composition of derivatives used, if any, will depend on the exposure to loss of value on the MSRs, the expected cost of the derivatives, expected liquidity needs and the expected increase to earnings generated by the origination of new loans resulting from the decline in interest rates.


We enter into economic hedges including interest rate swaps, U.S. Treasury futures and forward contracts to minimize the effects of loss in value of these MSRs associated with increased prepayment activity that generally results from declining interest rates. These interest rate swap agreements generally require us to pay a variable interest rate based on LIBOR and receive a fixed rate. Futures contracts are exchange-traded contracts where two parties agree to purchase and sell a specific quantity of a financial instrument at a specific price, with delivery or settlement at a specified date. Forward contracts are over-the-counter contracts where two parties agree to purchase and sell a specific quantity of financial instruments at a specified price, with delivery and settlement at a specified date.


The following summarizes our use of derivatives at December 31, 2012 and the gains (losses) on those derivatives for the year then ended. The table also indicates whether or not each derivative was designated as a hedge for accounting purposes at December 31, 2012:


Purpose   Expiration Date     Notional Amount     Fair Value (1)     Gains / (Losses)     Financial Statement Caption
Hedge the effect of changes in interest rates on interest expense on borrowings                                    
Interest rate swaps (pay fixed, receive variable)                                    
Not designated as hedges:                                    
Hedge the effects of a change in 1ML on borrowing under an advance funding facility (2)     2013     $ 250,000     $ (2,699 )   $ 3,605     Other, net
Hedge the effects of a change in the lender’s CP rate and 1ML on borrowing under an advance funding facility (3)     2013       321,659       (2,958 )     3,352     Other, net / AOCL
   Total not designated as hedges             571,659       (5,657 )     6,957      
                                     
Designated as hedges:                                    
Hedge the effects of changes in 1ML or the lenders’ CP rate on advance funding facilities (5)     2015       201,892       (7,746 )     (6,246 )   AOCL
Hedge the effects of changes in 1ML or the lenders’ CP rate on advance funding facilities (6)     2015       289,904       (2,211 )     (1,859 )   AOCL
   Total designated as hedges             491,796       (9,957 )     (8,105 )    
       Total swaps             1,063,455       (15,614 )     (1,148 )    
                                     
Interest rate caps                                    
Not designated as hedges:                                    
Hedge the effects of changes in 1ML on advance funding facilities (7)     2014       —       —       (3,195 )   Other, net
Hedge the effects of changes in 1ML on advance funding facilities (4)     2015-2016       1,025,000       168       —     Other, net
       Total caps             1,025,000       168       (3,195 )    
           Total hedges of debt             2,088,455       (15,446 )     (4,343 )    
                                     
Hedge the effect of changes in interest rates on MSRs measured at fair value                                    
Not designated as hedges:                                    
Interest rate swaps (pay variable, receive fixed) (4)     2014-2032       432,500       4,778       —     Other, net
U.S. Treasury futures (4)     2013       109,000       (1,258 )     —     Other, net
Forward MBS trades (4)     2013       314,000       67       —     Other, net
Total hedges of MSRs             855,500       3,587       —      
                                     
Hedge the effect of changes in interest rates on the value of mortgage loans held for sale and IRLCs                                    
Not designated as hedges:                                    
Forward MBS trades (4)     2013       1,324,979       (1,786 )     (1,226 )   Other, net
                                     
IRLCs     2013       1,112,519       5,781       153     Loss on loans held for sale, net
       Total derivatives           $ 5,381,453     $ (7,864 )   $ (5,416 )    

(1) Derivatives are reported at fair value in Receivables, Other assets or in Other liabilities.
(2) We discontinued hedge accounting for this hedging relationship effective July 1, 2011 and began amortizing to earnings the $6,179 of deferred losses in accumulated other comprehensive income. Amortization was scheduled to continue until the related advance facility matures in July 2013. In September 2012, we repaid the advance facility and wrote-off the remaining $2,317 of unamortized deferred losses in AOCL.
(3) The hedging relationship was terminated when the advance facility was assumed on March 5, 2012 by HLSS. At that time, we wrote-off the $5,958 of deferred losses in AOCL. See Note 3 and Note 13 for additional information regarding the match funded liabilities assumed by HLSS.
(4) Acquired in connection with the Homeward Acquisition.
(5) Monthly settlements on this forward-starting swap begin June 2013.
(6) Projected net settlements on the swap for the next twelve months total approximately $3,748 of payments to the counterparties.
(7) Sold in November 2012.

Included in AOCL at December 31, 2012 and December 31, 2011, respectively, were $9,878 and $12,114 of deferred unrealized losses, before taxes of $3,568 and $4,354, respectively, on the interest rate swaps that we designated as cash flow hedges. Other income (expense), net, includes the following related to derivative financial instruments for the years ended December 31:


    2012     2011     2010  
Gains (losses) on non-hedging derivatives (1)(2)   $ 6,256     $ (4,488 )   $ 17  
Ineffectiveness of cash flow hedges     41       (1,393 )     (150 )
Write-off of losses in AOCL for a discontinued hedge relationship (3)     (4,633 )     (1,545 )     —  
Write-off of losses in AOCL for hedge of a financing facility assumed by HLSS (See Note 3)     (5,958 )     —       —  
    $ (4,294 )   $ (7,426 )   $ (133 )

(1) Includes a gain of $3,359 during 2012 from the termination of foreign exchange forward contracts. Also includes a loss of $1,514 on the sale of the interest rate cap in 2012.
(2) Includes $1,368 of net unrealized gains during 2011 relating to the swap for which we discontinued hedge accounting effective July 1, 2011.
(3) Includes the write off in 2012 of the remaining $2,317 of unamortized losses when the borrowing under the related advance financing facility was repaid in full, and the facility was terminated.