Note 5 – Loans Held for Sale

Loans Held for Sale - Fair Value

Loans held for sale, at fair value, represent residential forward and reverse mortgage loans originated or purchased and held until sold to secondary market investors, such as GSEs or other third parties. The following table summarizes the activity in the balance of Loans held for sale, at fair value, during the nine months ended September 30:



	2014			2013
Beginning balance	$	503,753		$	426,480
Originations and purchases	3,923,870			5,988,501
Proceeds from sales	(4,010,644		)	(6,033,785		)
Transfers to loans held for investment - reverse mortgages	(110,874		)	—
Gain (loss) on sale of loans	39,486			(46,962		)
Other	(9,641		)	868
Ending balance	$	335,950		$	335,102

At September 30, 2014, Loans held for sale, at fair value with a UPB of $311.8 million were pledged to secure warehouse lines of credit in our Lending segment. See Note 11 – Borrowings for additional information.

Loans Held for Sale - Lower of Cost or Fair Value

Loans held for sale, at lower of cost or fair value, include residential loans that we do not intend to hold to maturity. The following table summarizes the activity in the balance of Loans held for sale, at lower of cost or fair value, during the nine months ended September 30:



	2014			2013
Beginning balance	$	62,907		$	82,866
Purchases	2,083,282			1,144,853
Proceeds from sales	(1,744,273		)	(654,916		)
Principal payments	(248,552		)	(317,528		)
Transfers to accounts receivable	(96,257		)	(190,185		)
Transfers to real estate owned	(4,575		)	(2,838		)
Gain on sale of loans	32,471			20,336
Increase in valuation allowance	(16,282		)	(6,510		)
Other	3,216			10,675
Ending balance	$	71,937		$	86,753

The balances at September 30, 2014 and September 30, 2013 are net of valuation allowances of $47.0 million and $27.0 million, respectively. At September 30, 2014, Loans held for sale, at lower of cost or fair value with a UPB of $21.1 million were pledged to secure a warehouse line of credit in our Servicing segment. See Note 11 – Borrowings for additional information.

The balances at September 30, 2014 and September 30, 2013 include $24.1 million and $60.8 million, respectively, of loans that we were required to repurchase from Ginnie Mae guaranteed securitizations as part of our servicing obligations. Repurchased loans are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables.

On March 3, 2014, we purchased delinquent FHA-insured loans with a UPB of $549.4 million out of Ginnie Mae guaranteed securitizations under the terms of a conditional repurchase option whereby as servicer we have the right, but not the obligation, to repurchase delinquent loans at par plus delinquent interest (the Ginnie Mae early buy-out (EBO) program). Immediately after their purchase, we sold the loans (the Ginnie Mae EBO Loans) and related advances to HLSS Mortgage for $612.3 million ($556.6 million for the Ginnie Mae EBO Loans and $55.7 million for the related servicing advances). We recognized a gain of $7.2 million on the sale of the loans.

On May 1, 2014, we purchased a second group of delinquent FHA-insured loans with a UPB of $451.0 million through the Ginnie Mae EBO program for $479.6 million, including delinquent interest. On May 2, 2014, we sold the Ginnie Mae EBO Loans to an unrelated third party for $462.5 million and recognized a gain of $1.3 million, including the value assigned to the retained MSRs. Separately, we sold $20.2 million of the advances related to these loans to HLSS SEZ LP.

The sales of advances to HLSS Mortgage and to HLSS SEZ LP did not qualify for sales treatment and were accounted for as a financing. See Note 11 – Borrowings for additional information. We refer to the purchase and sale of the Ginnie Mae EBO Loans and the sale of the related advances to HLSS Mortgage and HLSS SEZ LP as the Ginnie Mae EBO Transactions.

Gain on Loans Held for Sale, Net

The following table summarizes the activity in Gain on loans held for sale, net, during the three and nine months ended September 30:



	Three Months						Nine Months
	2014			2013			2014			2013
Gain on sales of loans	$	42,185		$	4,622		$	145,455		$	36,156
Change in fair value of IRLCs	(4,188		)	18,912			(2,315		)	5,918
Change in fair value of loans held for sale	(9,348		)	14,362			(97		)	1,452
Gain (loss) on economic hedge instruments	(1,145		)	(9,408		)	(32,183		)	30,989
Other	(286		)	(226		)	(819		)	(1,603		)
	$	27,218		$	28,262		$	110,041		$	72,912

Gains on loans held for sale, net include $10.7 million and $16.3 million for the three months ended September 30, 2014 and 2013, respectively, and $32.1 million and $63.2 million for the nine months ended September 30, 2014 and 2013, respectively, representing the value assigned to MSRs retained on transfers of forward loans.

Also included in Gains on loans held for sale, net are gains of $9.9 million and $50.6 million recorded during the three and nine months ended September 30, 2014, respectively, on sales of repurchased Ginnie Mae loans which are carried at the lower of cost or fair value. For the three and nine months ended September 30, 2013, gains on sales of repurchased Ginnie Mae loans were $4.3 million and $20.5 million, respectively.

Fair value gains recognized in connection with sales of reverse mortgages into Ginnie Mae guaranteed securitizations are also included in Gains on loans held for sale, net and amounted to $20.4 million and $51.4 million for the three and nine months ended September 30, 2014, respectively. Fair value gains for the three and nine months ended September 30, 2013 were $14.5 million and $20.6 million, respectively.