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Fair Value | 9 Months Ended
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Sep. 30, 2016
Fair Value Disclosures [Abstract] |
Fair Value | Note 3 – Fair Value Fair value is estimated based on a hierarchy that maximizes the use of observable inputs and minimizes the use of unobservable inputs. Observable inputs are inputs that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The fair value hierarchy prioritizes the inputs to valuation techniques into three broad levels whereby the highest priority is given to Level 1 inputs and the lowest to Level 3 inputs.
Level 1: | Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: | Unobservable inputs for the asset or liability.
We classify assets in their entirety based on the lowest level of input that is significant to the fair value measurement. The carrying amounts and the estimated fair values of our financial instruments and certain of our nonfinancial assets measured at fair value on a recurring or non-recurring basis or disclosed, but not carried, at fair value are as follows at the dates indicated:
|  |  | September 30, 2016 |  | December 31, 2015
| Level |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale: |  |  |  |  |  |  |  |  |
Loans held for sale, at fair value (a) | 2 |  | $ | 302,114 |  |  | $ | 302,114 |  |  | $ | 309,054 |  |  | $ | 309,054 |
Loans held for sale, at lower of cost or fair value (b) | 3 |  | 37,651 |  |  | 37,651 |  |  | 104,992 |  |  | 104,992 |
Total Loans held for sale |  |  | $ | 339,765 |  |  | $ | 339,765 |  |  | $ | 414,046 |  |  | $ | 414,046 |
Loans held for investment - Reverse mortgages, at fair value (a) | 3 |  | $ | 3,339,641 |  |  | $ | 3,339,641 |  |  | $ | 2,488,253 |  |  | $ | 2,488,253 |
Advances and match funded advances (c) | 3 |  | 1,823,336 |  |  | 1,823,336 |  |  | 2,151,066 |  |  | 2,151,066 |
Receivables, net (c) | 3 |  | 279,883 |  |  | 279,883 |  |  | 286,981 |  |  | 286,981 |
Mortgage-backed securities, at fair value (a) | 3 |  | 9,040 |  |  | 9,040 |  |  | 7,985 |  |  | 7,985 |
|  |  | September 30, 2016 |  | December 31, 2015
| Level |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |
Match funded liabilities (c) | 3 |  | $ | 1,365,532 |  |  | $ | 1,364,988 |  |  | $ | 1,584,049 |  |  | $ | 1,581,786 |
Financing liabilities: |  |  |  |  |  |  |  |  |
HMBS-related borrowings, at fair value (a) | 3 |  | $ | 3,224,610 |  |  | $ | 3,224,610 |  |  | $ | 2,391,362 |  |  | $ | 2,391,362 |
Financing liability - MSRs pledged (a) | 3 |  | 494,532 |  |  | 494,532 |  |  | 541,704 |  |  | 541,704 |
Other (c) | 3 |  | 108,877 |  |  | 83,026 |  |  | 156,189 |  |  | 131,940 |
Total Financing liabilities |  |  | $ | 3,828,019 |  |  | $ | 3,802,168 |  |  | $ | 3,089,255 |  |  | $ | 3,065,006 |
Other secured borrowings: |  |  |  |  |  |  |  |  |
Senior secured term loan (c)(d) | 2 |  | $ | 310,278 |  |  | $ | 321,365 |  |  | $ | 377,091 |  |  | $ | 397,956 |
Other (c) | 3 |  | 352,892 |  |  | 352,892 |  |  | 385,320 |  |  | 385,320 |
Total Other secured borrowings |  |  | $ | 663,170 |  |  | $ | 674,257 |  |  | $ | 762,411 |  |  | $ | 783,276 |
Senior unsecured notes (c)(d) | 2 |  | $ | 346,511 |  |  | $ | 312,946 |  |  | $ | 345,511 |  |  | $ | 318,063 |
Derivative financial instruments assets (liabilities) (a): |  |  |  |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments | 2 |  | $ | 10,827 |  |  | $ | 10,827 |  |  | $ | 6,080 |  |  | $ | 6,080 |
Forward mortgage-backed securities trades | 1 |  | (2,525 | ) |  | (2,525 | ) |  | 295 |  |  | 295 |
Interest rate caps | 3 |  | 793 |  |  | 793 |  |  | 2,042 |  |  | 2,042 |
Mortgage servicing rights: |  |  |  |  |  |  |  |  |
Mortgage servicing rights, at fair value (a) | 3 |  | $ | 696,108 |  |  | $ | 696,108 |  |  | $ | 761,190 |  |  | $ | 761,190 |
Mortgage servicing rights, at amortized cost (c)(e) | 3 |  | 340,561 |  |  | 357,817 |  |  | 377,379 |  |  | 461,555 |
Total Mortgage servicing rights |  |  | $ | 1,036,669 |  |  | $ | 1,053,925 |  |  | $ | 1,138,569 |  |  | $ | 1,222,745 |
(a) | Measured at fair value on a recurring basis.
(b) | Measured at fair value on a non-recurring basis.
(c) | Disclosed, but not carried, at fair value.
(d) | The carrying values are net of unamortized debt issuance costs and discount. See Note 11 – Borrowings for additional information.
(e) | The net carrying value at September 30, 2016 and December 31, 2015 is net of the valuation allowance on the impaired government-insured stratum of our amortization method MSRs, which is measured at fair value on a non-recurring basis. Before applying the valuation allowance of $54.5 million, the carrying value of this stratum at September 30, 2016 was $172.4 million. At December 31, 2015, the carrying value of this stratum was $146.5 million before applying the valuation allowance of $17.3 million.
The following tables present a reconciliation of the changes in fair value of Level 3 assets and liabilities that we measure at fair value on a recurring basis:
| Loans Held for Investment - Reverse Mortgages |  | HMBS-Related Borrowings |  | Mortgage-Backed Securities |  | Financing Liability - MSRs Pledged |  | Derivatives |  | MSRs |  | Total
Three months ended September 30, 2016
Beginning balance | $ | 3,057,564 |  |  | $ | (2,935,928 | ) |  | $ | 9,063 |  |  | $ | (495,126 | ) |  | $ | 200 |  |  | $ | 700,668 |  |  | $ | 336,441 |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases | — |  |  | — |  |  | — |  |  | — |  |  | 638 |  |  | — |  |  | 638 |
Issuances | 509,900 |  |  | (297,457 | ) |  | — |  |  | — |  |  | — |  |  | (50 | ) |  | 212,393 |
Sales | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (5 | ) |  | (5 | )
Settlements | (289,428 | ) |  | 63,119 |  |  | — |  |  | 594 |  |  | — |  |  | — |  |  | (225,715 | )
| 220,472 |  |  | (234,338 | ) |  | — |  |  | 594 |  |  | 638 |  |  | (55 | ) |  | (12,689 | )
Total realized and unrealized gains and (losses): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings | 61,605 |  |  | (54,344 | ) |  | (23 | ) |  | — |  |  | (45 | ) |  | (4,505 | ) |  | 2,688 |
Transfers in and / or out of Level 3 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Ending balance | $ | 3,339,641 |  |  | $ | (3,224,610 | ) |  | $ | 9,040 |  |  | $ | (494,532 | ) |  | $ | 793 |  |  | $ | 696,108 |  |  | $ | 326,440 |
| Loans Held for Investment - Reverse Mortgages |  | HMBS-Related Borrowings |  | Mortgage-Backed Securities |  | Financing Liability - MSRs Pledged |  | Derivatives |  | MSRs |  | Total
Three months ended September 30, 2015
Beginning balance | $ | 2,097,192 |  |  | $ | (1,987,998 | ) |  | $ | 8,157 |  |  | $ | (581,219 | ) |  | $ | 155 |  |  | $ | 814,450 |  |  | $ | 350,737 |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases | — |  |  | — |  |  | — |  |  | — |  |  | 2,084 |  |  | — |  |  | 2,084 |
Issuances | 250,600 |  |  | (271,068 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (20,468 | )
Sales | — |  |  | — |  |  | — |  |  | — |  |  |  |  |  | (2,329 | ) |  | (2,329 | )
Settlements | (41,582 | ) |  | 43,725 |  |  | — |  |  | 21,160 |  |  | — |  |  | — |  |  | 23,303 |
| 209,018 |  |  | (227,343 | ) |  | — |  |  | 21,160 |  |  | 2,084 |  |  | (2,329 | ) |  | 2,590 |
Total realized and unrealized gains and (losses): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings | 13,305 |  |  | (14,263 | ) |  | 384 |  |  | — |  |  | (738 | ) |  | (24,777 | ) |  | (26,089 | )
Transfers in and / or out of Level 3 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Ending balance | $ | 2,319,515 |  |  | $ | (2,229,604 | ) |  | $ | 8,541 |  |  | $ | (560,059 | ) |  | $ | 1,501 |  |  | $ | 787,344 |  |  | $ | 327,238 |
| Loans Held for Investment - Reverse Mortgages |  | HMBS-Related Borrowings |  | Mortgage-backed Securities |  | Financing Liability - MSRs Pledged |  | Derivatives |  | MSRs |  | Total
Nine months ended September 30, 2016
Beginning balance | $ | 2,488,253 |  |  | $ | (2,391,362 | ) |  | $ | 7,985 |  |  | $ | (541,704 | ) |  | $ | 2,042 |  |  | $ | 761,190 |  |  | $ | 326,404 |
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases | — |  |  | — |  |  | — |  |  | — |  |  | 782 |  |  | — |  |  | 782 |
Issuances | 1,185,565 |  |  | (820,438 | ) |  | — |  |  | — |  |  | — |  |  | (1,325 | ) |  | 363,802 |
Sales | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (148 | ) |  | (148 | )
Settlements | (528,263 | ) |  | 161,995 |  |  | — |  |  | 47,172 |  |  | (81 | ) |  | — |  |  | (319,177 | )
| 657,302 |  |  | (658,443 | ) |  | — |  |  | 47,172 |  |  | 701 |  |  | (1,473 | ) |  | 45,259 |
Total realized and unrealized gains and (losses): (2) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings | 194,086 |  |  | (174,805 | ) |  | 1,055 |  |  | — |  |  | (1,950 | ) |  | (63,609 | ) |  | (45,223 | )
Transfers in and / or out of Level 3 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Ending Balance | $ | 3,339,641 |  |  | $ | (3,224,610 | ) |  | $ | 9,040 |  |  | $ | (494,532 | ) |  | $ | 793 |  |  | $ | 696,108 |  |  | $ | 326,440 |
| Loans Held for Investment - Reverse Mortgages |  | HMBS-Related Borrowings |  | Mortgage-backed Securities |  | Financing Liability - MSRs Pledged (1) |  | Derivatives |  | MSRs |  | Total
Nine months ended September 30, 2015
Beginning balance | $ | 1,550,141 |  |  | $ | (1,444,252 | ) |  | $ | 7,335 |  |  | $ | (614,441 | ) |  | $ | 567 |  |  | $ | 93,901 |  |  | $ | (406,749 | )
Purchases, issuances, sales and settlements: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases | — |  |  | — |  |  | — |  |  | — |  |  | 2,201 |  |  | — |  |  | 2,201 |
Issuances | 781,002 |  |  | (803,924 | ) |  | — |  |  | — |  |  | — |  |  | (1,139 | ) |  | (24,061 | )
Transfer from MSRs, at amortized cost | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 839,157 |  |  | 839,157 |
Sales | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (71,318 | ) |  | (71,318 | )
Settlements | (105,505 | ) |  | 107,522 |  |  | — |  |  | 54,382 |  |  | 346 |  |  | — |  |  | 56,745 |
| 675,497 |  |  | (696,402 | ) |  | — |  |  | 54,382 |  |  | 2,547 |  |  | 766,700 |  |  | 802,724 |
Total realized and unrealized gains and (losses) (2): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings | 93,877 |  |  | (88,950 | ) |  | 1,206 |  |  | — |  |  | (1,613 | ) |  | (73,257 | ) |  | (68,737 | )
Transfers in and / or out of Level 3 | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Ending balance | $ | 2,319,515 |  |  | $ | (2,229,604 | ) |  | $ | 8,541 |  |  | $ | (560,059 | ) |  | $ | 1,501 |  |  | $ | 787,344 |  |  | $ | 327,238 |
(1) | In the event of a transfer to another party of servicing related to Rights to MSRs, we are required to reimburse NRZ at predetermined contractual rates for the loss of servicing revenues. Settlements for Financing liability - MSRs pledged for the nine months ended September 30, 2015 include $2.2 million of such reimbursements. There have been no such payments in 2016.
(2) | Total losses attributable to derivative financial instruments still held at September 30, 2016 and September 30, 2015 were $0.5 million and $1.3 million for the nine months ended September 30, 2016 and 2015, respectively. Total losses attributable to MSRs still held at September 30, 2016 and September 30, 2015 were $62.4 million and $65.1 million for the nine months ended September 30, 2016 and 2015, respectively.
The methodologies that we use and key assumptions that we make to estimate the fair value of financial instruments and other assets and liabilities measured at fair value on a recurring or non-recurring basis and those disclosed, but not carried, at fair value are described below. Loans Held for Sale We originate and purchase residential mortgage loans that we intend to sell to the GSEs. We also own residential mortgage loans that are not eligible to be sold to the GSEs due to delinquency or other factors. Residential forward and reverse mortgage loans that we intend to sell to the GSEs are carried at fair value as a result of a fair value election. Such loans are subject to changes in fair value due to fluctuations in interest rates from the closing date through the date of the sale of the loan into the secondary market. These loans are classified within Level 2 of the valuation hierarchy because the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. We have the ability to access this market, and it is the market into which conventional and government-insured mortgage loans are typically sold. We repurchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications and loan resolution activity as part of our contractual obligations as the servicer of the loans. These loans are classified as loans held for sale at the lower of cost or fair value, in the case of modified loans, as we expect to redeliver (sell) the loans to new Ginnie Mae guaranteed securitizations. The fair value of these loans is estimated using published forward Ginnie Mae prices. Loans repurchased in connection with loan resolution activities are modified or otherwise remediated through loss mitigation activities or are reclassified to receivables. Because these loans are insured or guaranteed by the FHA or VA, the fair value of these loans represents the net recovery value taking into consideration the insured or guaranteed claim. For all other loans held for sale, which we report at the lower of cost or fair value, market illiquidity has reduced the availability of observable pricing data. When we enter into an agreement to sell a loan or pool of loans to an investor at a set price, we value the loan or loans at the commitment price. We base the fair value of uncommitted loans on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows. Loans Held for Investment – Reverse Mortgages We measure these loans at fair value. For transferred reverse mortgage loans that do not qualify as sales for accounting purposes, we base the fair value on the expected future cash flows discounted over the expected life of the loans at a rate commensurate with the risk of the estimated cash flows. Significant assumptions include expected prepayment and delinquency rates and cumulative loss curves. The discount rate assumption for these assets is primarily based on an assessment of current market yields on newly originated reverse mortgage loans, expected duration of the asset and current market interest rates. The more significant assumptions used in the September 30, 2016 valuation include:
• | Life in years ranging from 5.69 to 9.02 (weighted average of 6.37);
• | Conditional repayment rate ranging from 5.01% to 53.75% (weighted average of 20.05%); and
• | Discount rate of 2.53%.
Significant increases or decreases in any of these assumptions in isolation could result in a significantly lower or higher fair value, respectively. The effects of changes in the assumptions used to value the loans held for investment are largely offset by the effects of changes in the assumptions used to value the HMBS-related borrowings that are associated with these loans. Mortgage Servicing Rights The significant components of the estimated future cash inflows for MSRs include servicing fees, late fees, float earnings and other ancillary fees. Significant cash outflows include the cost of servicing, the cost of financing servicing advances and compensating interest payments. Third-party valuation experts generally utilize: (a) transactions involving instruments with similar collateral and risk profiles, adjusted as necessary based on specific characteristics of the asset or liability being valued; and/or (b) industry-standard modeling, such as a discounted cash flow model, in arriving at their estimate of fair value. The prices provided by the valuation experts reflect their observations and assumptions related to market activity, including risk premiums and liquidity adjustments. The models and related assumptions used by the valuation experts are owned and managed by them and, in many cases, the significant inputs used in the valuation techniques are not reasonably available to us. However, we have an internal understanding of the processes and assumptions used to develop the prices based on our ongoing due diligence, which includes regular discussions with the valuation experts. We believe that the procedures executed by the valuation experts, supported by our internal verification and analytical procedures, provide reasonable assurance that the prices used in our Unaudited Consolidated Financial Statements comply with the accounting guidance for fair value measurements and disclosures and reflect the assumptions that a market participant would use. We evaluate the reasonableness of our third-party experts’ assumptions using historical experience adjusted for prevailing market conditions. Assumptions used in the valuation of MSRs include:
• | Mortgage prepayment speeds | • | Interest rate used for computing the cost of financing servicing advances
• | Cost of servicing | • | Interest rate used for computing float earnings
• | Discount rate | • | Compensating interest expense
• | Delinquency rates | • | Collection rate of other ancillary fees
Amortized Cost MSRs We estimate the fair value of MSRs carried at amortized cost using a process that involves either actual sale prices obtained or the use of independent third-party valuation experts, supported by commercially available discounted cash flow models and analysis of current market data. To provide greater price transparency to investors, we disclose actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations. The more significant assumptions used in the September 30, 2016 valuation include:
Weighted average prepayment speed | 13.89 | %
Weighted average delinquency rate | 11.60 | %
Advance financing cost | 5-year swap |
Interest rate for computing float earnings | 5-year swap |
Weighted average discount rate | 8.85 | %
Weighted average cost to service (in dollars) | $ | 108 |
We perform an impairment analysis based on the difference between the carrying amount and fair value after grouping the underlying loans into the applicable strata. Our strata are defined as conventional and government-insured. Fair Value MSRs MSRs carried at fair value are classified within Level 3 of the valuation hierarchy. The fair value is equal to the mid-point of the range of prices provided by third-party valuation experts, without adjustment, except in the event we have a potential or completed Ocwen sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is carried at the estimated sale price. Fair value reflects actual Ocwen sale prices for orderly transactions where available in lieu of independent third-party valuations. Our valuation process includes discussions of bid pricing with the third-party valuation experts and presumably are contemplated along with other market-based transactions in their model validation. A change in the valuation inputs utilized by the valuation experts might result in a significantly higher or lower fair value measurement. Changes in market interest rates tend to impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the Non-Agency MSRs via a market rate indexed cost of advance funding. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates. The primary assumptions used in the September 30, 2016 valuation include:
| Agency |  | Non Agency
Weighted average prepayment speed | 16.86 | % |  | 16.58 | %
Weighted average delinquency rate | 1.06 | % |  | 29.35 | %
Advance financing cost | 5-year swap |  |  | 1-Month LIBOR (1ML) plus 3.5% |
Interest rate for computing float earnings | 5-year swap |  |  | 1ML |
Weighted average discount rate | 9.00 | % |  | 15.08 | %
Weighted average cost to service (in dollars) | $ | 75 |  |  | $ | 308 |
Advances We value advances at their net realizable value, which generally approximates fair value, because advances have no stated maturity, are generally realized within a relatively short period of time and do not bear interest. Receivables The carrying value of receivables generally approximates fair value because of the relatively short period of time between their origination and realization. Mortgage-Backed Securities (MBS) Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities based on the present value of expected future cash flows from the underlying mortgage pools. We use our best estimate of the key assumptions we believe are used by market participants. We calibrate our internally developed discounted cash flow models for trading activity when appropriate to do so in light of market liquidity levels. Key inputs include expected prepayment rates, delinquency and cumulative loss curves and discount rates commensurate with the risks. Where possible, we use observable inputs in the valuation of our securities. However, the subordinate and residual securities in which we have invested trade infrequently and therefore have few or no observable inputs and little price transparency. Additionally, during periods of market dislocation, the observability of inputs is further reduced. Changes in the fair value of our investment in subordinate and residual securities are recognized in Other, net in the Unaudited Consolidated Statements of Operations. Discount rates for the subordinate and residual securities are determined based upon an assessment of prevailing market conditions and prices for similar assets. We project the delinquency, loss and prepayment assumptions based on a comparison to actual historical performance curves adjusted for prevailing market conditions. Match Funded Liabilities For match funded liabilities that bear interest at a rate that is adjusted regularly based on a market index, the carrying value approximates fair value. For match funded liabilities that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. We estimate principal repayments of match funded liabilities during the amortization period based on our historical advance collection rates and taking into consideration any plans to refinance the notes. Financing Liabilities HMBS-Related Borrowings We have elected to measure these borrowings at fair value. We recognize the proceeds from the transfer of reverse mortgages as a secured borrowing that we account for at fair value. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the future principal and interest repayments over the estimated life of the borrowing at a market rate commensurate with the risk of the estimated cash flows. Significant assumptions include prepayments, discount rate and borrower mortality rates for reverse mortgages. The discount rate assumption for these liabilities is based on an assessment of current market yields for newly issued HMBS, expected duration and current market interest rates. The more significant assumptions used in the September 30, 2016 valuation include:
• | Life in years ranging from 4.67 to 9.02 (weighted average of 5.30);
• | Conditional repayment rate ranging from 5.01% to 53.75% (weighted average of 20.05%); and
• | Discount rate of 1.97%.
Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value. MSRs Pledged We periodically sell Rights to MSRs and the related servicing advances. Because we have retained legal title to the MSRs, the sales of Rights to MSRs are accounted for as financings. We initially establish the value of the Financing Liability - MSRs Pledged based on the price at which the Rights to MSRs are sold. Thereafter, the carrying value of the Financing Liability - MSRs pledged is adjusted to fair value at each reporting date. We determine fair value by applying the price of the underlying MSRs to the remaining principal balance related to the underlying MSRs. Since we have elected fair value for our portfolio of non-Agency MSRs, future fair value changes in the Financing Liability - MSRs Pledged will be largely offset by changes in the fair value of the related MSRs. The more significant assumptions used in determination of the price of the underlying MSRs at September 30, 2016 include:
Weighted average prepayment speed | 17.09 | %
Weighted average delinquency rate | 29.81 | %
Advance financing cost | 1ML plus 3.5% |
Interest rate for computing float earnings | 1ML |
Weighted average discount rate | 15.03 | %
Weighted average cost to service (in dollars) | $ | 314 |
Significant increases or decreases in these assumptions in isolation would result in a significantly higher or lower fair value. Secured Notes We issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. We accounted for this transaction as a financing. We determine the fair value based on bid prices provided by third parties involved in the issuance and placement of the notes. Other Secured Borrowings The carrying value of secured borrowings that bear interest at a rate that is adjusted regularly based on a market index approximates fair value. For other secured borrowings that bear interest at a fixed rate, we determine fair value by discounting the future principal and interest repayments at a market rate commensurate with the risk of the estimated cash flows. For the SSTL, we based the fair value on quoted prices in a market with limited trading activity. Senior Unsecured Notes We base the fair value on quoted prices in a market with limited trading activity. Derivative Financial Instruments Interest rate lock commitments (IRLCs) represent an agreement to purchase loans from a third-party originator or an agreement to extend credit to a mortgage applicant (locked pipeline), whereby the interest rate is set prior to funding. IRLCs are classified within Level 2 of the valuation hierarchy as the primary component of the price is obtained from observable values of mortgage forwards for loans of similar terms and characteristics. Fair value amounts of IRLCs are adjusted for expected “fallout” (locked pipeline loans not expected to close) using models that consider cumulative historical fallout rates and other factors. We enter into forward MBS trades to provide an economic hedge against changes in the fair value of residential forward and reverse mortgage loans held for sale that we carry at fair value. 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. Forward contracts are actively traded in the market and we obtain unadjusted market quotes for these derivatives, thus they are classified within Level 1 of the valuation hierarchy. In addition, we may use interest rate caps to minimize future interest rate exposure on variable rate debt issued on servicing advance financing facilities from increases in one-month LIBOR interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=66048111&loc=d3e19207-110258 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 30 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14172-108612 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 28 -URI http://asc.fasb.org/extlink&oid=6957238&loc=d3e14064-108612 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13537-108611 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13504-108611 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=73719730&loc=d3e13433-108611 + Details
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