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NOTE 18 DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
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.