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NOTE 18 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 3 Months Ended
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Mar. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES |
Note 18 | Derivative Financial Instruments and Hedging Activities
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 the notional balance of our holdings of derivatives during the three months ended March 31, 2013:
|  | IRLCs |  |  | U.S. Treasury Futures |  |  | Forward MBS Trades |  |  | Interest Rate Caps |  |  | Interest Rate Swaps |
Balance at December 31, 2012 |  | $ | 1,112,519 |  |  | $ | 109,000 |  |  | $ | 1,638,979 |  |  | $ | 1,025,000 |  |  | $ | 1,495,955 |
Additions |  |  | 1,468,218 |  |  |  | 85,000 |  |  |  | 4,479,506 |  |  |  | — |  |  |  | 1,280,000 |
Amortization |  |  | (227,171 | ) |  |  | — |  |  |  | — |  |  |  | (12,000 | ) |  |  | — |
Maturities |  |  | (1,651,514 | ) |  |  | — |  |  |  | (2,940,387 | ) |  |  | — |  |  |  | (232,174 | )
Terminations |  |  | (84,778 | ) |  |  | (194,000 | ) |  |  | (2,471,538 | ) |  |  | — |  |  |  | (105,000 | )
Balance at March 31, 2013 |  | $ | 617,274 |  |  | $ | — |  |  | $ | 706,560 |  |  | $ | 1,013,000 |  |  | $ | 2,438,781 |
Fair value of net derivative assets (liabilities) at: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
March 31, 2013 |  | $ | 4,652 |  |  | $ | — |  |  | $ | (1,108 | ) |  | $ | 123 |  |  | $ | (18,758 | )
December 31, 2012 |  | $ | 5,781 |  |  | $ | (1,258 | ) |  | $ | (1,719 | ) |  | $ | 168 |  |  | $ | (10,836 | )
Maturity |  |  | Apr. 2013 – Jun. 2013 |  |  |  | — |  |  |  | Mar. 2013 – May 2013 |  |  |  | Feb. 2015 – May 2016 |  |  |  | Mar. 2013 – May 2027 |
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 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 derivatives, including 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 interest rate risk as the mortgage loans underlying the MSRs permit the borrowers to prepay the loans. Therefore, the fair 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. Effective April 1, 2013, we terminated our hedging program for fair value MSRs. Prior to their termination, we used 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. MSR Purchase In March 2013, we entered into an interest rate swap to hedge the impact on cash flows of changes in the purchase price to be paid for MSRs acquired from Ally Bank. This purchase was forecasted to occur in stages with the purchase price subject to adjustment based on changes in the 10-year swap rate between the date of the MSR purchase agreement and the date of each closing. We entered into an interest rate swap with a notional amount sufficient to yield changes in the fair value of the interest rate swap in response to changes in the swap rate that were essentially equal to and offsetting to changes in the purchase price of the MSRs. We designated the swap as a hedge for accounting purposes. We completed the transaction in April and terminated the swap agreement at the same time. See Note 25 – Subsequent Events for additional information regarding this transaction. The following summarizes our use of derivatives at March 31, 2013 and the gains (losses) on those derivatives for the three months then ended. The table also indicates whether or not each derivative was designated as a hedge for accounting purposes at March 31, 2013:
Purpose |  | Expiration Date |  |  | Notional Amount |  |  | Fair Value (1) |  |  | Gains / (Losses) |  |  | Consolidated Statement of Operations Caption
Interest rate risk of borrowings |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Not designated as qualifying hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedge the effects of a change in 1ML on borrowing under an advance funding facility (2) |  |  | 2013 |  |  | $ | 250,000 |  |  | $ | (1,569 | ) |  | $ | 1,143 |  |  | 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 |  |  |  | 297,180 |  |  |  | (1,917 | ) |  |  | 1,028 |  |  | Other, net
Total not designated as hedges |  |  |  |  |  |  | 547,180 |  |  |  | (3,486 | ) |  |  | 2,171 |  |  |
Designated as qualifying hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedge the effects of changes in 1ML or the lenders’ CP rate on advance funding facilities (4) |  |  | 2015 |  |  |  | 201,892 |  |  |  | (7,801 | ) |  |  | (55 | ) |  | AOCL
Hedge the effects of changes in 1ML or the lenders’ CP rate on advance funding facilities (5) |  |  | 2015 |  |  |  | 217,209 |  |  |  | (1,915 | ) |  |  | 285 |  |  | AOCL
Total designated as hedges |  |  |  |  |  |  | 419,101 |  |  |  | (9,716 | ) |  |  | 230 |  |  |
Total swaps |  |  |  |  |  |  | 966,281 |  |  |  | (13,202 | ) |  |  | 2,401 |  |  |
Interest rate caps |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Not designated as hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Hedge the effects of changes in 1ML on advance funding facilities |  |  | 2015-2016 |  |  |  | 1,013,000 |  |  |  | 123 |  |  |  | 46 |  |  | Other, net
Total hedges of debt |  |  |  |  |  |  | 1,979,281 |  |  |  | (13,079 | ) |  |  | 2,447 |  |  |
Interest rate risk of MSRs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Not designated as qualifying hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps |  |  | 2014-2027 |  |  |  | 222,500 |  |  |  | 1,597 |  |  |  | (2,480 | ) |  | Other net; Servicing and origination
U.S. Treasury futures |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (1,149 | ) |  | Other, net
Forward MBS trades |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (2,667 | ) |  | Other, net
Total hedges of MSRs |  |  |  |  |  |  | 222,500 |  |  |  | 1,597 |  |  |  | (6,296 | ) |  |
Risk of change in purchase price of MSRs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Designated as a qualifying hedge: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap (6) |  |  | 2013 |  |  |  | 1,250,000 |  |  |  | (7,153 | ) |  |  | (7,153 | ) |  | AOCL
Interest rate risk of mortgage loans held for sale and IRLCs |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Not designated as qualifying hedges: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Forward MBS trades |  |  | 2013 |  |  |  | 706,560 |  |  |  | (1,108 | ) |  |  | 10,189 |  |  | Loss on loans held for sale, net
IRLCs |  |  | 2013 |  |  |  | 617,274 |  |  |  | 4,652 |  |  |  | (1,237 | ) |  | Loss on loans held for sale, net
Total derivatives |  |  |  |  |  | $ | 4,775,615 |  |  | $ | (15,091 | ) |  | $ | (2,050 | ) |  |
| (1) | Derivatives are reported at fair value in Receivables, Other assets or in Other liabilities on our unaudited Consolidated Balance Sheets.
| (2) | We discontinued hedge accounting for this hedging relationship effective July 1, 2011 and began amortizing to earnings the $6.2 million of deferred losses in accumulated other comprehensive income. In September 2012, we repaid the advance facility and wrote-off the remaining $2.3 million 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 $6.0 million of deferred losses in AOCL. See Note 4 – Asset Sales and Financing and Note 14 – Match Funded Liabilities for additional information.
| (4) | Monthly settlements on this forward-starting swap begin June 2013.
| (5) | Projected net settlements on the swap for the next twelve months total approximately $5.3 million of payments to the counterparties.
| (6) | This swap was closed out on April 15, 2013 concurrent with the closing of the last stage of the MSR purchase.
Included in AOCL at March 31, 2013 and December 31, 2012, respectively, were $16.1 million and $9.9 million of deferred unrealized losses, before taxes of $6.1 million and $3.6 million, respectively, on the interest rate swaps that we designated as cash flow hedges. The change in deferred unrealized losses on cash flow hedges includes $6.9 million of losses recognized during the three months ended March 31, 2013, net of $0.7 million of losses reclassified to Other, net, because of the ineffectiveness of certain of the hedges. The statements of operations include the following related to derivative financial instruments for the three months ended March 31:
|  | 2013 |  |  | 2012 |
Servicing and origination expense |  |  |  |  |  |  |  |
Gains on economic hedges |  | $ | 1,000 |  |  | $ | — |
Loss on loans held for resale, net |  |  |  |  |  |  |  |
Gains (losses) on economic hedges |  |  | 8,952 |  |  |  | — |
Other, net |  |  |  |  |  |  |  |
Gains (losses) on economic hedges (1) |  |  | (5,079 | ) |  |  | 3,405 |
Ineffectiveness of cash flow hedges |  |  | (657 | ) |  |  | 63 |
Write-off of losses in AOCL for a discontinued hedge relationship |  |  | — |  |  |  | (772 | )
Write-off of losses in AOCL for hedge of a financing facility assumed by HLSS (See Note 4 – Asset Sales and Financing) |  |  | — |  |  |  | (5,958 | )
|  | $ | 4,216 |  |  | $ | (3,262 | )
| (1) | Includes a gain of $3.4 million recognized during the three months ended March 31, 2012 from the termination of foreign exchange forward contracts.

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. 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