Note 4 — 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:



		December 31,
		2018				2017
	Level	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets:
Loans held for sale:
Loans held for sale, at fair value (a)	2	$	176,525	$	176,525	$	214,262	$	214,262
Loans held for sale, at lower of cost or fair value (b)	3	66,097		66,097		24,096		24,096
Total Loans held for sale		$	242,622	$	242,622	$	238,358	$	238,358
Loans held for investment, at fair value
Loans held for investment - Reverse mortgages (a)	3	$	5,472,199	$	5,472,199	$	4,715,831	$	4,715,831
Loans held for investment - Restricted for securitization investors (a)	3	26,520		26,520		—		—
Total loans held for investment		5,498,719		5,498,719		4,715,831		4,715,831

Advances (including match funded) (c)	3	1,186,676		1,186,676		1,356,393		1,356,393
Automotive dealer financing notes (including match funded) (c)	3	—		—		32,757		32,590
Receivables, net (c)	3	198,262		198,262		199,529		199,529
Mortgage-backed securities, at fair value (a)	3	1,502		1,502		1,592		1,592
U.S. Treasury notes (a)	1	1,064		1,064		1,567		1,567
Corporate bonds (a)	2	450		450		313		313

Financial liabilities:
Match funded liabilities (c)	3	$	778,284	$	776,485	$	998,618	$	992,698
Financing liabilities:
HMBS-related borrowings, at fair value (a)	3	$	5,380,448	$	5,380,448	$	4,601,556	$	4,601,556
Financing liability - MSRs pledged, at fair value (a)	3	1,032,856		1,032,856		508,291		508,291
Financing liability - Owed to securitization investors, at fair value (a)	3	24,815		24,815		—		—
Other (c)	3	69,942		53,570		85,227		65,202
Total Financing liabilities		$	6,508,061	$	6,491,689	$	5,195,074	$	5,175,049
Other secured borrowings:
Senior secured term loan (c) (d)	2	$	226,825	$	227,449	$	290,068	$	299,741
Other (c)	3	155,713		155,713		255,782		255,782
Total Other secured borrowings		$	382,538	$	383,162	$	545,850	$	555,523



		December 31,
		2018						2017
Senior notes:
Senior unsecured notes (c) (d)	2	$	119,924		$	119,258		$	3,122		$	2,872
Senior secured notes (c) (d)	2	328,803			306,889			344,216			355,550
Total Senior notes		$	448,727		$	426,147		$	347,338		$	358,422

Derivative financial instrument assets (liabilities), at fair value (a):
Interest rate lock commitments	2	$	3,871		$	3,871		$	3,283		$	3,283
Forward mortgage-backed securities	1	(4,983		)	(4,983		)	(545		)	(545		)
Interest rate caps	3	678			678			2,056			2,056

Mortgage servicing rights:
Mortgage servicing rights, at fair value (a)	3	$	1,457,149		$	1,457,149		$	671,962		$	671,962
Mortgage servicing rights, at amortized cost (e)	3	—			—			336,882			418,745
Total Mortgage servicing rights		$	1,457,149		$	1,457,149		$	1,008,844		$	1,090,707


(a)	Measured at fair value on a recurring basis.


(b)	Measured at fair value on a non-recurring basis.


(c)	Disclosed, but not measured, at fair value.


(d)	The carrying values are net of unamortized debt issuance costs and discount. See Note 13 — Borrowings for additional information.

(e)

Effective January 1, 2018, we elected fair value accounting for our MSRs previously accounted for using the amortization method, which included Agency MSRs and government-insured MSRs. The balance at December 31, 2017 includes the impaired government-insured stratum of amortization method MSRs, which was measured at fair value on a non-recurring basis and reported net of the valuation allowance. At December 31, 2017, the carrying value of this stratum was $158.0 million before applying the valuation allowance of $24.8 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			Loans Held for Inv. - Restricted for Securitiza- tion Investors			Financing Liability - Owed to Securitiza - tion Investors			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2018
Beginning balance	$	4,715,831		$	(4,601,556	)	$	—		$	—		$	1,592	$	(508,291	)	$	2,056		$	671,962
Purchases, issuances, sales and settlements
Purchases	—			—			—			—			—		(667		)	95			13,712
Recognized (assumed) in connection with the acquisition of PHH	—			—			—			—			—		(481,020		)	—			518,127
Issuances (1)	920,476			(948,917		)	—			—			—		(279,586		)	—			—
Consolidation of mortgage-backed securitization trusts	—			—			28,373			(26,643		)	—		—			—			—
Sales	—			—			—			—			—		—			—			(6,240		)
Settlements	(400,521		)	391,985			(1,853		)	1,828			—		211,766			(371		)	(5,880		)



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Loans Held for Inv. - Restricted for Securitiza- tion Investors		Financing Liability - Owed to Securitiza - tion Investors			Mortgage-Backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2018
Transfers (to) from:
MSRs carried at amortized cost, net of valuation allowance	—			—			—		—			—			—			—			418,925
Loans held for sale, at fair value	(1,039		)	—			—		—			—			—			—			—
Receivables, net	(158		)	—			—		—			—			—			—			—
Other assets	(411		)	—			—		—			—			—			—			—
	518,347			(556,932		)	26,520		(24,815		)	—			(549,507		)	(276		)	938,644

Total realized and unrealized gains (losses) (2)
Included in earnings (1):
Change in fair value	238,021			(221,960		)	—		—			(90		)	19,269			(1,102		)	(153,457		)
Calls and other	—			—			—		—			—			5,673			—			—
Included in Other comprehensive income	—			—			—		—			—			—			—			—
	238,021			(221,960		)	—		—			(90		)	24,942			(1,102		)	(153,457		)
Transfers in and / or out of Level 3	—			—			—		—			—			—			—			—
Ending balance	$	5,472,199		$	(5,380,448	)	$	26,520	$	(24,815	)	$	1,502		$	(1,032,856	)	$	678		$	1,457,149



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities			Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2017
Beginning balance	$	3,565,716		$	(3,433,781	)	$	8,342		$	(477,707	)	$	1,836		$	679,256
Purchases, issuances, sales and settlements
Purchases	—			—			—			—			655			—
Issuances	1,277,615			(1,281,543		)	—			(54,601		)	—			(2,214		)
Sales	—			—			—			—			—			(540		)
Settlements	(444,388		)	418,503			—			59,190			(445		)	—
Transfers (to) from:
Loans held for sale, at fair value	(3,803		)	—			—			—			—			—
Receivables, net	(3,583		)	—			—			—			—			—
Other assets	(1,929		)	—			—			—			—			—
	823,912			(863,040		)	—			4,589			210			(2,754		)
Total realized and unrealized gains (losses) (2)
Included in earnings (1):
Change in fair value	326,203			(304,735		)	(6,750		)	(41,282		)	10			(4,540		)
Calls and other	—			—			—			6,109			—			—
Included in Other comprehensive income	—			—			—			—			—			—
	326,203			(304,735		)	(6,750		)	(35,173		)	10			(4,540		)
Transfers in and / or out of Level 3	—			—			—			—			—			—
Ending balance	$	4,715,831		$	(4,601,556	)	$	1,592		$	(508,291	)	$	2,056		$	671,962



	Loans Held for Investment - Reverse Mortgages			HMBS-Related Borrowings			Mortgage-Backed Securities		Financing Liability - MSRs Pledged			Derivatives			MSRs
Year Ended December 31, 2016
Beginning balance	$	2,488,253		$	(2,391,362	)	$	7,985	$	(541,704	)	$	2,042		$	761,190
Purchases, issuances, sales and settlements
Purchases	—			—			—		—			1,337			—
Issuances	1,107,046			(1,086,795		)	—		—			—			(1,548		)
Sales	—			—			—		—			—			(148		)
Settlements	(243,596		)	230,045			—		63,997			(156		)	—
	863,450			(856,750		)	—		63,997			1,181			(1,696		)
Total realized and unrealized gains (losses)
Included in earnings
Change in fair value	214,013			(185,669		)	357		—			(1,387		)	(80,238		)
Included in Other comprehensive income	—			—			—		—			—			—
	214,013			(185,669		)	357		—			(1,387		)	(80,238		)
Transfers in and / or out of Level 3	—			—			—		—			—			—
Ending balance	$	3,565,716		$	(3,433,781	)	$	8,342	$	(477,707	)	$	1,836		$	679,256


(1)	On January 18, 2018, Ocwen received a lump-sum payment of $279.6 million in accordance with terms of the agreements with NRZ. A $16.6 million reduction in the fair value of the Financing Liability - MSRs Pledged was recognized in connection with the receipt of the lump-sum payment. See Note 9 — Rights to MSRs.


(2)	On September 1, 2017, Ocwen transferred MSRs with UPB of $15.9 billion to NRZ and received a lump-sum payment of $54.6 million. A reduction in the fair value of the Financing Liability - MSRs Pledged of $37.6 million was recognized at the time of the initial transfer of the MSRs. See Note 9 — Rights to MSRs.


(3)	Total gains (losses) attributable to derivative financial instruments still held at December 31, 2018 and 2017 and 2016 were $(1.1) million, $0.1 million and $0.3 million for 2018, 2017 and 2016, respectively. Total losses for 2018, 2017 and 2016 attributable to MSRs still held at December 31, 2018, 2017 and 2016 were $153.5 million, $4.5 million and $78.3 million, 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

Residential forward and reverse mortgage loans that we intend to sell 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 loans for which we have no agreement to sell on the expected future cash flows discounted at a rate commensurate with the risk of the estimated cash flows.

Loans Held for Investment

Loans Held for Investment - Reverse Mortgages

We measure these loans at fair value based 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.



	December 31,
Significant valuation assumptions	2018		2017
Life in years
Range	3.0 to 7.6		4.4 to 8.1
Weighted average	5.9		6.4
Conditional repayment rate
Range	6.8% to 38.4%		5.4% to 51.9%
Weighted average	14.7	%	13.1	%
Discount rate	3.4	%	3.2	%

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.

Loans Held for Investment – Restricted for securitization investors

We have elected to measure loans held by consolidated mortgage-backed securitization trusts at fair value. The loans are secured by first liens on single family residential properties. Fair value is based on proprietary cash flow modeling processes for a third-party broker/dealer and a third-party valuation expert. Significant assumptions used in the valuation include projected monthly payments, projected prepayments and defaults, property liquidation values and discount rates.

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 understand 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 verification and analytical procedures, provide reasonable assurance that the prices used in our 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	•	Delinquency rates
•	Cost of servicing	•	Interest rate used for computing float earnings
•	Discount rate	•	Compensating interest expense
•	Interest rate used for computing the cost of financing servicing advances	•	Collection rate of other ancillary fees

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 sale, including transactions where we have executed letters of intent, in which case the fair value of the MSRs is disclosed 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.



	December 31,
Significant valuation assumptions	2018						2017
	Agency			Non-Agency			Agency			Non-Agency
Weighted average prepayment speed	8.5		%	15.4		%	8.1		%	16.6		%
Weighted average delinquency rate	6.6		%	27.1		%	1.0		%	28.5		%
Advance financing cost	5-year swap			5-yr swap plus 2.75%			5-year swap			5-yr swap plus 2.75%
Interest rate for computing float earnings	5-year swap			5-yr swap minus 0.50%			5-year swap			5-yr swap minus 0.50%
Weighted average discount rate	9.1		%	12.8		%	9.0		%	13.0		%
Weighted average cost to service (in dollars)	$	90		$	297		$	64		$	305


(1)	Valuation assumptions for Agency MSRs at December 31, 2018 include assumptions for MSRs we carried at amortized cost at December 31, 2017. Effective January 1, 2018, we elected fair value accounting for our remaining MSRs that we had previously carried at amortized cost.

Amortized Cost MSRs

Prior to our fair value election on January 1, 2018 for our remaining portfolio of MSRs carried at amortized cost, we estimated the fair value using a process that involved 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 disclosed actual Ocwen sale prices for orderly transactions where available in lieu of third-party valuations.



Significant valuation assumptions	December 31, 2017
Weighted average prepayment speed	8.8		%
Weighted average delinquency rate	10.9		%
Advance financing cost	5-year swap
Interest rate for computing float earnings	5-year swap
Weighted average discount rate	9.2		%
Weighted average cost to service (in dollars)	$	108

We performed an impairment analysis based on the difference between the carrying amount and fair value after grouping the underlying loans into the applicable strata, which we defined as conventional and government-insured.

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.

Automotive Dealer Financing Notes

We estimate the fair value of our automotive dealer financing notes using unobservable inputs within an internally developed cash flow model. Key inputs included projected repayments, interest and fee receipts, deferrals, delinquencies, recoveries and charge-offs of the notes within the portfolio. The projected cash flows are then discounted at a rate commensurate with the risk of the estimated cash flows to derive the fair value of the portfolio.



Significant valuation assumptions	December 31, 2017
Weighted average life in months	2.2
Average note rate	8.5	%
Discount rate	10.0	%
Loan loss rate	21.5	%

Mortgage-Backed Securities (MBS)

Our subordinate and residual securities are not actively traded, and therefore, we estimate the fair value of these securities using a process based upon the use of an independent third-party valuation expert. Where possible, we consider observable trading activity in the valuation of our securities. 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. We classify subordinate and residual securities as trading securities and account for them at fair value on a recurring basis. Changes in the fair value of our investment in subordinate and residual securities are recognized in Other, net in the consolidated statements of operations.

U.S. Treasury Notes

We classify U.S. Treasury notes as trading securities and account for them at fair value on a recurring basis. We base the fair value on quoted prices in active markets to which we have access. Changes in the fair value of our investment in U.S. Treasury notes are recognized in Other, net in the consolidated statements of operations.

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. These borrowings are not actively traded, and therefore, quoted market prices are not available. We determine fair value by discounting the projected recovery of principal, interest and advances 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. 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.



	December 31,
Significant valuation assumptions	2018		2017
Life in years
Range	3.0 to 7.6		4.4 to 8.1
Weighted average	5.9		6.4
Conditional repayment rate
Range	6.8% to 38.4%		5.4% to 51.9%
Weighted average	14.7	%	13.1	%
Discount rate	3.3	%	3.11	%

Significant increases or decreases in any of these assumptions in isolation would result in a significantly higher or lower fair value.

MSRs Pledged (Rights to MSRs)

We have elected to measure these borrowings at fair value. We recognize the proceeds received in connection with Rights to MSRs transactions as a secured borrowing that we account for at fair value. Fair value for the portion of the borrowing attributable to the MSRs underlying the Rights to MSRs is determined using the mid-point of the range of prices provided by third-party valuation experts. Fair value for the portion of the borrowing attributable to any lump sum payments received in connection with the transfer of MSRs underlying such Rights to MSRs to the extent such transfer is accounted for as a financing is determined by discounting the relevant future cash flows that were altered through such transfer using assumptions consistent with the mid-point of the range of prices provided by third-party valuation experts for the related MSR. Because we carry all MSRs at fair value, changes in the Financing Liability - MSRs Pledged value are partially offset by changes in the fair value of the related MSRs. See Note 9 — Rights to MSRs for additional information.



	December 31,
Significant valuation assumptions	2018			2017
Weighted average prepayment speed	13.9		%	17.0		%
Weighted average delinquency rate	20.3		%	28.9		%
Advance financing cost	5-year swap plus 0% to 2.75%			5-year swap plus 2.75%
Interest rate for computing float earnings	5-year swap minus 0% to 0.50%			5-year swap minus 0.50%
Weighted average discount rate	12.0		%	13.7		%
Weighted average cost to service (in dollars)	$	234		$	311

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.

Financing Liability – Owed to Securitization Investors

Consists of securitization debt certificates due to third parties that represent beneficial ownership interests in mortgage-backed securitization trusts that we include in our consolidated financial statements. We determine fair value using the measurement alternative to ASC Topic 820, Fair Value Measurement as disclosed in Note 3 — Securitizations and Variable Interest Entities. In accordance with the measurement alternative, the fair value of the consolidated securitization debt certificates is measured as the fair value of the loans held by the trust less the fair value of the beneficial interests held by us in the form of residual securities.

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 Senior Secured Term Loan (SSTL), we based the fair value on quoted prices in a market with limited trading activity.

Senior 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 or three-month Eurodollar rate (1ML or 3ML, respectively) interest rates. The fair value for interest rate caps is based on counterparty market prices and adjusted for counterparty credit risk.