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Fair Value | 9 Months Ended
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Sep. 30, 2020
Fair Value Disclosures [Abstract] |
Fair Value |
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 measured, at fair value are as follows:
|  |  | September 30, 2020 |  | December 31, 2019
| Level |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial assets |  |  |  |  |  |  |  |  |
Loans held for sale |  |  |  |  |  |  |  |  |
Loans held for sale, at fair value (a) (e) | 3, 2 |  | $ | 366,966 |  |  | $ | 366,966 |  |  | $ | 208,752 |  |  | $ | 208,752 |
Loans held for sale, at lower of cost or fair value (b) | 3 |  | 23,665 |  |  | 23,665 |  |  | 66,517 |  |  | 66,517 |
Total Loans held for sale |  |  | $ | 390,631 |  |  | $ | 390,631 |  |  | $ | 275,269 |  |  | $ | 275,269 |
Loans held for investment |  |  |  |  |  |  |  |  |
Loans held for investment - Reverse mortgages (a) | 3 |  | $ | 6,849,930 |  |  | $ | 6,849,930 |  |  | $ | 6,269,596 |  |  | $ | 6,269,596 |
Loans held for investment - Restricted for securitization investors (a) | 3 |  | 11,012 |  |  | 11,012 |  |  | 23,342 |  |  | 23,342 |
Total loans held for investment |  |  | $ | 6,860,942 |  |  | $ | 6,860,942 |  |  | $ | 6,292,938 |  |  | $ | 6,292,938 |
Advances, net (c) | 3 |  | $ | 832,604 |  |  | $ | 832,604 |  |  | $ | 1,056,523 |  |  | $ | 1,056,523 |
Receivables, net (c) | 3 |  | 201,607 |  |  | 201,607 |  |  | 201,220 |  |  | 201,220 |
Mortgage-backed securities (a) | 3 |  | 2,150 |  |  | 2,150 |  |  | 2,075 |  |  | 2,075 |
Corporate bonds (a) | 2 |  | 211 |  |  | 211 |  |  | 441 |  |  | 441 |
|  |  | September 30, 2020 |  | December 31, 2019
| Level |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Financial liabilities: |  |  |  |  |  |  |  |  |
Advance match funded liabilities (c) | 3 |  | $ | 580,078 |  |  | $ | 580,602 |  |  | $ | 679,109 |  |  | $ | 679,507 |
Financing liabilities: |  |  |  |  |  |  |  |  |
HMBS-related borrowings (a) | 3 |  | $ | 6,606,543 |  |  | $ | 6,606,543 |  |  | $ | 6,063,435 |  |  | $ | 6,063,435 |
Financing liability - MSRs pledged (Rights to MSRs) (a) | 3 |  | 577,309 |  |  | 577,309 |  |  | 950,593 |  |  | 950,593 |
Financing liability - Owed to securitization investors (a) | 3 |  | 11,012 |  |  | 11,012 |  |  | 22,002 |  |  | 22,002 |
Total Financing liabilities |  |  | $ | 7,194,864 |  |  | $ | 7,194,864 |  |  | $ | 7,036,030 |  |  | $ | 7,036,030 |
Other secured borrowings: |  |  |  |  |  |  |  |  |
Senior secured term loan (c) (d) | 2 |  | $ | 183,822 |  |  | $ | 188,666 |  |  | $ | 322,758 |  |  | $ | 324,643 |
Other (c) (d) | 3 |  | 731,470 |  |  | 701,037 |  |  | 703,033 |  |  | 686,146 |
Total Other secured borrowings |  |  | $ | 915,292 |  |  | $ | 889,703 |  |  | $ | 1,025,791 |  |  | $ | 1,010,789 |
Senior notes: |  |  |  |  |  |  |  |  |
Senior unsecured notes (c) (d) | 2 |  | $ | 21,278 |  |  | $ | 18,501 |  |  | $ | 21,046 |  |  | $ | 13,821 |
Senior secured notes (c) (d) | 2 |  | 290,411 |  |  | 267,314 |  |  | 290,039 |  |  | 256,201 |
Total Senior notes |  |  | $ | 311,689 |  |  | $ | 285,815 |  |  | $ | 311,085 |  |  | $ | 270,022 |
Derivative financial instrument assets (liabilities) |  |  |  |  |  |  |  |  |
Interest rate lock commitments (a) (f) | 3, 2 |  | $ | 22,679 |  |  | $ | 22,679 |  |  | $ | 4,878 |  |  | $ | 4,878 |
Forward trades - Loans held for sale (a) | 1 |  | (83) |  |  | (83) |  |  | (21) |  |  | (21) |
TBA / Forward mortgage-backed securities (MBS) trades and futures - MSR hedging (a) | 1 |  | (579) |  |  | (579) |  |  | 1,121 |  |  | 1,121 |
Derivatives Futures (a) | 1 |  | (213) |  |  | (213) |  |  | — |  |  | — |
MSRs (a) | 3 |  | $ | 1,069,013 |  |  | $ | 1,069,013 |  |  | $ | 1,486,395 |  |  | $ | 1,486,395 |
(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 12 – Borrowings for additional information. (e)Loans repurchased from Ginnie Mae securitizations with a fair value of $26.4 million at September 30, 2020 are classified as Level 3. The remaining balance of loans held for sale at fair value at September 30, 2020 is classified as Level 2. The entire balance of Loans held for sale at fair value at December 31, 2019 was classified as Level 2. (f)Level 3 at September 30, 2020 and Level 2 at December 31, 2019. The following tables present a rollforward of the beginning and ending balances of Level 3 assets and liabilities that we measure at fair value on a recurring basis:
|  |  |  |  | Loans Held for Investment - Restricted for Securitization Investors |  | Financing Liability - Owed to Securitization Investors |  | Loans Held for Sale - Fair Value |  | Mortgage-Backed Securities |  |  |  | IRLCs |  |  |  |
Three months ended September 30, 2020
Beginning balance |  |  |  |  | $ | 11,664 |  |  | $ | (11,664) |  |  | $ | 25,950 |  |  | $ | 1,726 |  |  |  |  | $ | 17,818 |  |  |  |  |
Purchases, issuances, sales and settlements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  |  |  | — |  |  | — |  |  | 45,445 |  |  | — |  |  |  |  | — |  |  |  |  |
Issuances |  |  |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 87,311 |  |  |  |  |
Sales |  |  |  |  | — |  |  | — |  |  | (45,723) |  |  | — |  |  |  |  | — |  |  |  |  |
Settlements |  |  |  |  | (652) |  |  | 652 |  |  | 356 |  |  | — |  |  |  |  | — |  |  |  |  |
Transfers (to) from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale, at fair value |  |  |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | (77,785) |  |  |  |  |
Receivables, net |  |  |  |  | — |  |  | — |  |  | 157 |  |  | — |  |  |  |  | — |  |  |  |  |
|  |  |  |  | (652) |  |  | 652 |  |  | 235 |  |  | — |  |  |  |  | 9,526 |  |  |  |  |
Change in fair value included in earnings |  |  |  |  | — |  |  | — |  |  | 224 |  |  | 424 |  |  |  |  | (4,665) |  |  |  |  |
|  |  |  |  | — |  |  | — |  |  | 224 |  |  | 424 |  |  |  |  | (4,665) |  |  |  |  |
Transfers in and / or out of Level 3 |  |  |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Ending balance |  |  |  |  | $ | 11,012 |  |  | $ | (11,012) |  |  | $ | 26,409 |  |  | $ | 2,150 |  |  |  |  | $ | 22,679 |  |  |  |  |
|  |  |  |  | Loans Held for Investment - Restricted for Securitization Investors |  | Financing Liability - Owed to Securitization Investors |  | Mortgage-Backed Securities |  |  |  | Derivatives - Interest Rate Caps |  |  |  |
Three months ended September 30, 2019
Beginning balance |  |  |  |  | $ | 25,324 |  |  | $ | (23,697) |  |  | $ | 2,014 |  |  |  |  | $ | 47 |  |  |  |  |
Purchases, issuances, sales and settlements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Issuances |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Sales |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Settlements |  |  |  |  | (879) |  |  | 870 |  |  | — |  |  |  |  | — |  |  |  |  |
|  |  |  |  | (879) |  |  | 870 |  |  | — |  |  |  |  | — |  |  |  |  |
Change in fair value included in earnings |  |  |  |  | — |  |  | — |  |  | 22 |  |  |  |  | (47) |  |  |  |  |
|  |  |  |  | — |  |  | — |  |  | 22 |  |  |  |  | (47) |  |  |  |  |
Transfers in and / or out of Level 3 |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Ending balance |  |  |  |  | $ | 24,445 |  |  | $ | (22,827) |  |  | $ | 2,036 |  |  |  |  | $ | — |  |  |  |  |
|  |  |  |  | Loans Held for Investment - Restricted for Securitization Investors |  | Financing Liability - Owed to Securitization Investors |  | Loans Held for Sale - Fair Value |  | Mortgage-backed Securities |  |  |  | IRLCs |  |  |  |
Nine Months Ended September 30, 2020
Beginning balance |  |  |  |  | $ | 23,342 |  |  | $ | (22,002) |  |  | $ | — |  |  | $ | 2,075 |  |  |  |  | $ | — |  |  |  |  |
Purchases, issuances, sales and settlements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  |  |  | — |  |  | — |  |  | 103,955 |  |  | — |  |  |  |  | — |  |  |  |  |
Issuances |  |  |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 144,931 |  |  |  |  |
Deconsolidation of mortgage-backed securitization trusts |  |  |  |  | (10,715) |  |  | 9,519 |  |  |  |  | — |  |  |  |  | — |  |  |  |  |
Sales |  |  |  |  | — |  |  | — |  |  | (104,273) |  |  | — |  |  |  |  | — |  |  |  |  |
Settlements |  |  |  |  | (1,615) |  |  | 1,615 |  |  | (70) |  |  | — |  |  |  |  | — |  |  |  |  |
Transfers (to) from: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Loans held for sale, at fair value |  |  |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | (128,224) |  |  |  |  |
Receivables, net |  |  |  |  | — |  |  | — |  |  | (113) |  |  | — |  |  |  |  | — |  |  |  |  |
|  |  |  |  | (12,330) |  |  | 11,134 |  |  | (501) |  |  | — |  |  |  |  | 16,707 |  |  |  |  |
Change in fair value included in earnings |  |  |  |  | — |  |  | (144) |  |  | 1,328 |  |  | 75 |  |  |  |  | (4,506) |  |  |  |  |
Transfers in and / or out of Level 3 |  |  |  |  | — |  |  | — |  |  | 25,582 |  |  | — |  |  |  |  | 10,478 |  |  |  |  |
Ending balance |  |  |  |  | $ | 11,012 |  |  | $ | (11,012) |  |  | $ | 26,409 |  |  | $ | 2,150 |  |  |  |  | $ | 22,679 |  |  |  |  |
|  |  |  |  | Loans Held for Investment - Restricted for Securitization Investors |  | Financing Liability - Owed to Securitization Investors |  | Mortgage-backed Securities |  |  |  | Derivatives - Interest Rate Caps |  |  |  |
Nine Months Ended September 30, 2019
Beginning balance |  |  |  |  | $ | 26,520 |  |  | $ | (24,815) |  |  | $ | 1,502 |  |  |  |  | $ | 678 |  |  |  |  |
Purchases, issuances, sales and settlements |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Purchases |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Issuances |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Sales |  |  |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  |  |  |
Settlements |  |  |  |  | (2,075) |  |  | 1,988 |  |  | — |  |  |  |  | — |  |  |  |  |
|  |  |  |  | (2,075) |  |  | 1,988 |  |  | — |  |  |  |  | — |  |  |  |  |
Change in fair value included in earnings |  |  |  |  | — |  |  | — |  |  | 534 |  |  |  |  | (678) |  |  |  |  |
|  |  |  |  | — |  |  | — |  |  | 534 |  |  |  |  | (678) |  |  |  |  |
Transfers in and / or out of Level 3 |  |  |  |  |  |  |  |  | — |  |  |  |  | — |  |  |  |  |
Ending balance |  |  |  |  | $ | 24,445 |  |  | $ | (22,827) |  |  | $ | 2,036 |  |  |  |  | $ | — |  |  |  |  |
A rollforward of the beginning and ending balances of Loans Held for Investment and HMBS-related borrowings, MSRs and Financing liability - MSRs pledged that we measure at fair value on a recurring basis is provided in Note 6 – Reverse Mortgages, Note 8 – Mortgage Servicing and Note 9 — Rights to MSRs, 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 generally 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 purchase certain loans from Ginnie Mae guaranteed securitizations in connection with loan modifications, strategic early buyouts (EBO) and loan resolution activity as part of our contractual obligations as the servicer of the loans. On January 1, 2020, we elected to classify any repurchased loans on or after January 1, 2020 as loans held for sale at fair value. Modified and EBO loans purchased before January 1, 2020 are classified as loans held for sale at the lower of cost or fair value. We expect to redeliver (sell) the loans into new Ginnie Mae guaranteed securitizations (in the case of modified loans) or sell the loans to a private investor (in the case of EBO loans). The fair value of these loans was estimated using published forward Ginnie Mae prices or existing sale contracts at December 31, 2019. At September 30, 2020, as a result of the volatility of capital markets due to the COVID-19 pandemic, loans with a fair value of $26.4 million required the use of significant unobservable inputs, including the assumptions of the embedded MSR, margin and yield, and were classified as Level 3. Loans repurchased in connection with loan resolution activities are classified as 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. 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, unless facts and circumstances exist that could impact deal economics, at which point we use judgment to determine appropriate adjustments to recorded fair value, if any. We determine 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, including all future draw commitments for HECM loans. On January 1, 2019, we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated on or after January 1, 2019. In connection with our adoption of ASU 2016-13 on January 1, 2020, we made an irrevocable fair value election on all future draw commitments for HECM loans that were purchased or originated before January 1, 2019. Significant assumptions include expected future draws and 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.
Significant valuation assumptions | September 30, 2020 |  | December 31, 2019
Life in years |  |  |
Range | 1.0 to 8.2 |  | 2.4 to 7.8
Weighted average | 6.1 |  | 6.0 |
Conditional repayment rate |  |  |
Range | 10.4% to 34.1% |  | 7.8% to 28.3%
Weighted average | 14.3 | % |  | 14.6 | %
Discount rate | 1.8 | % |  | 2.8 | %
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, excluding future draw commitments, 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 from 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. MSRs We determine the fair value of MSRs primarily using discounted cash flow methodologies. 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. We engage third-party valuation experts who 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 and prepayment 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, incorporating available industry survey results and client feedback, and including risk premiums and liquidity adjustments. While the models and related assumptions used by the valuation experts are proprietary to them, we understand the methodologies 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 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 | • | 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
• | Curtailment on advances |  |
MSRs are carried at fair value and classified within Level 3 of the valuation hierarchy. The fair value is determined using 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 recorded 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 are contemplated along with other market-based transactions in their model validation. A change in the valuation inputs or assumptions might result in a significantly higher or lower fair value measurement. Changes in market interest rates predominantly impact the fair value for Agency MSRs via prepayment speeds by altering the borrower refinance incentive and the non-Agency MSRs due to the impact on advance costs. Other key assumptions used in the valuation of these MSRs include delinquency rates and discount rates.
Significant valuation assumptions | September 30, 2020 |  | December 31, 2019
Agency |  | Non-Agency |  | Agency |  | Non-Agency
Weighted average prepayment speed | 14.9 | % |  | 11.5 | % |  | 11.7 | % |  | 12.2 | %
Weighted average delinquency rate | 4.7 | % |  | 27.7 | % |  | 3.2 | % |  | 27.3 | %
Advance financing cost | 5-year swap |  | 5-yr swap plus 2.00% |  | 5-year swap |  | 5-yr swap plus 2.00%
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 | 9.5 | % |  | 11.4 | % |  | 9.3 | % |  | 11.3 | %
Weighted average cost to service (in dollars) | $ | 96 |  |  | $ | 271 |  |  | $ | 85 |  |  | $ | 277 |
Because the mortgages underlying these MSRs permit the borrowers to prepay the loans, the value of the MSRs generally tends to diminish in periods of declining interest rates, an improving housing market or expanded product availability (as prepayments increase) and increase in periods of rising interest rates, a deteriorating housing market or reduced product availability (as prepayments decrease). The following table summarizes the estimated change in the value of the MSRs as of September 30, 2020 given hypothetical shifts in lifetime prepayments and yield assumptions:
Adverse change in fair value | 10% |  | 20%
Weighted average prepayment speeds | $ | (55,715) |  |  | $ | (106,603) |
Weighted average discount rate | (15,696) |  |  | (30,468) |
The sensitivity analysis measures the potential impact on fair values based on hypothetical changes, which in the case of our portfolio at September 30, 2020 are increased prepayment speeds and an increase in the yield assumption. Advances We value advances at their net realizable value, which generally approximates fair value. Servicing advances have no stated maturity and do not bear interest. Principal and interest advances are generally realized within a relatively short period of time. The timing of recovery of taxes, insurance and other corporate advances depends on the underlying loan attributes, performance, and in many cases, foreclosure or liquidation timeline. The fair value adjustment to servicing advances associated with the estimated time to recover such advances is separately measured and reported as a component of the fair value of the associated MSR, consistent with actual market transactions. Refer to MSRs above for a description of the valuation methodology and assumptions related to the cost of financing servicing advances and discount rate, among other factors. 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 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 unaudited consolidated statements of operations. Advance Match Funded Liabilities For advance 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 advance 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 assume the notes are refinanced at the end of their revolving periods, consistent with how we manage our advance facilities. 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.
Significant valuation assumptions | September 30, 2020 |  | December 31, 2019
Life in years |  |  |
Range | 1.0 to 8.2 |  | 2.4 to 7.8
Weighted average | 6.1 |  | 6.0 |
Conditional repayment rate |  |  |
Range | 10.4 % to 34.1% |  | 7.8% to 28.3%
Weighted average | 14.3 | % |  | 14.6 | %
Discount rate | 1.6 | % |  | 2.7 | %
Significant increases or decreases in any of these assumptions in isolation would have resulted in a significantly higher or lower fair value. MSRs Pledged (Rights to MSRs) We have elected to measure and record 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. We determine the fair value of the pledged MSR liability following a similar approach as for the associated pledged MSRs. 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.
Significant valuation assumptions | September 30, 2020 |  | December 31, 2019
Weighted average prepayment speed | 11.6 | % |  | 11.9 | %
Weighted average delinquency rate | 29.4 | % |  | 20.3 | %
Advance financing cost | 5-year swap plus 0% to 2.00% |  | 5-year swap plus 0% to 2.00%
Interest rate for computing float earnings | 5-year swap minus 0% to 0.50% |  | 5-year swap minus 0% to 0.50%
Weighted average discount rate | 11.7 | % |  | 10.7 | %
Weighted average cost to service (in dollars) | $ | 286 |  |  | $ | 223 |
Significant increases or decreases in these assumptions in isolation would have resulted in a significantly higher or lower fair value. 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 SSTL, we base the fair value on valuation data obtained from a pricing service. Secured Notes In 2014, we issued Ocwen Asset Servicing Income Series (OASIS), Series 2014-1 Notes secured by Ocwen-owned MSRs relating to Freddie Mac mortgages. In 2019, we issued Ocwen Excess Spread-Collateralized Notes, Series 2019-PLS1 notes secured by certain of PMC’s private label MSRs. We determine the fair value of these notes based on bid prices provided by third parties involved in the issuance and placement of the notes. Senior Notes We base the fair value on quoted prices in a market with limited trading activity, or on valuation data obtained from a pricing service in the absence of trading data. 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. As of December 31, 2019, IRLCs were classified within Level 2 of the valuation hierarchy as the primary component of the price was 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. As of September 30, 2020, IRLCs are classified as Level 3 assets as historical fallout rates required significant unobservable adjustments to account for the COVID-19 uncertainties. We use derivative instruments, including forward trades of MBS or Agency TBAs and exchange-traded interest rate swap futures, as economic hedging instruments. TBAs and interest rate swap futures 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.

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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/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=117815213&loc=d3e19207-110258 + Details
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