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Derivative Financial Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Hedging Activities
Note 15 – 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 balances of our holdings of derivatives during the nine months ended September 30, 2014: 
 
IRLCs
 
Forward MBS Trades
 
Interest Rate Caps
Beginning notional balance
$
751,436

 
$
950,648

 
$
1,868,000

Additions
3,795,311

 
6,951,828

 
100,000

Amortization
94,571

 
—

 
(490,000
)
Maturities
(3,298,265
)
 
(3,379,589
)
 
—

Terminations
(876,254
)
 
(3,762,592
)
 
—

Ending notional balance
$
466,799

 
$
760,295

 
$
1,478,000

 
 
 
 
 
 
Fair value of derivative assets (liabilities) at:
 

 
 

 
 

September 30, 2014
$
6,117

 
$
(1,089
)
 
$
91

December 31, 2013
$
8,433

 
$
6,905

 
$
442

 
 
 
 
 
 
Maturity
Nov. 2014 - Jan. 2014
 
Nov. 2014 - Dec. 2014
 
Nov. 2016

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 on amounts payable to our India subsidiaries. Our operations in Uruguay and the Philippines also expose us to foreign currency exchange rate risk, but we currently consider this risk to be insignificant.
Interest Rate Management
Match Funded Liabilities
We terminated our interest rate swaps on May 31, 2013 primarily because the custodial account float balances, which earn a variable rate of interest, are well in excess of variable rate borrowings under advance facilities. The earnings on these deposits reduce our exposure to changes in interest rates. As required by certain of our advance financing arrangements, we have purchased interest rate caps to minimize future interest rate exposure from increases in one-month LIBOR interest rates.
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 MBS trades to provide an economic hedge against those changes in fair value on mortgage loans held for sale. Forward MBS trades are primarily used to fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market.
Interest Rate Lock Commitments
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
Effective April 1, 2013, we terminated our hedging program for fair value MSRs. Prior to the 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.
The following summarizes our open derivative positions at September 30, 2014 and the gains (losses) on all derivatives used in each of the identified hedging programs for the year to date period then ended. None of the derivatives was designated as a hedge for accounting purposes at September 30, 2014:
Purpose
 
Expiration Date
 
Notional Amount
 
Fair Value (1)
 
Gains / (Losses)
 
Consolidated Statements of Operations Caption
Hedge the effect of changes in interest rates on interest expense on borrowings













Interest rate caps













Hedge the effect of changes in 1ML on advance funding facilities

Nov. 2016

$
1,478,000

 
$
91

 
$
(374
)
 
Other, net
Interest rate risk of mortgage loans held for sale and of IRLCs
 
 
 
 
 
 
 
 
 
 
Forward MBS trades
 
Nov. 2014 - Dec. 2014
 
760,295

 
(1,089
)
 
(32,183
)
 
Gain on loans held for sale, net
IRLCs
 
Nov. 2014 - Jan. 2014
 
466,799

 
6,117

 
(2,315
)
 
Gain on loans held for sale, net
Total derivatives
 
 
 


 
$
5,119

 
$
(34,872
)
 
 

(1)
Derivatives are reported at fair value in Receivables, Other assets and Other liabilities on our unaudited Consolidated Balance Sheet.
Included in AOCL at September 30, 2014 and September 30, 2013, respectively, were $9.2 million and $12.2 million of deferred unrealized losses, before taxes of $0.5 million and $4.5 million, respectively, on interest rate swaps that we designated as cash flow hedges. Changes in AOCL during the nine months ended September 30 were as follows:
 
2014
 
2013
Beginning balance
$
10,151


$
6,441

Additional net losses on cash flow hedges
—


12,363

Ineffectiveness of cash flow hedges reclassified to earnings
—


(657
)
Losses on terminated hedging relationships amortized to earnings
(1,579
)

(9,434
)
Net increase (decrease) in accumulated losses on cash flow hedges
(1,579
)
 
2,272

Decrease (increase) in deferred taxes on accumulated losses on cash flow hedges
217

 
(933
)
(Decrease) increase in accumulated losses on cash flow hedges, net of taxes
(1,362
)
 
1,339

Other, net of taxes
(5
)
 
(711
)
Ending balance
$
8,784

 
$
7,069


Projected amortization of deferred unrealized losses from AOCL to earnings during the coming twelve months is $1.6 million.
Other income (expense), net, includes the following related to derivative financial instruments for the three and nine months ended September 30:
 
Three Months
 
 Nine Months
 
2014

2013

2014
 
2013
Losses on economic hedges
$
(6
)

$
(103
)

$
(374
)
 
$
(3,822
)
Ineffectiveness of cash flow hedges
—


—


—

 
(657
)
Write-off of losses in AOCL for a discontinued hedge relationship
(408
)

(7,780
)

(1,580
)
 
(9,434
)
 
$
(414
)

$
(7,883
)

$
(1,954
)
 
$
(13,913
)