TWO Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value (Tables)

Fair Value (Tables)

3 Months Ended

Mar. 31, 2018

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis

The following tables display the Company’s assets and liabilities measured at fair value on a recurring basis. The Company often economically hedges the fair value change of its assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items, and therefore do not directly display the impact of the Company’s risk management activities.



	Recurring Fair Value Measurements
	March 31, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale securities	$	—	$	20,905,953	$	153,424	$	21,059,377
Mortgage servicing rights	—		—		1,301,023		1,301,023
Residential mortgage loans held-for-sale	—		470		28,958		29,428
Derivative assets	8,117		265,931		—		274,048
Equity securities	27,423		—		—		27,423
Total assets	$	35,540	$	21,172,354	$	1,483,405	$	22,691,299
Liabilities
Derivative liabilities	$	19,964	$	26,110	$	—	$	46,074
Total liabilities	$	19,964	$	26,110	$	—	$	46,074



	Recurring Fair Value Measurements
	December 31, 2017
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale securities	$	—	$	21,067,678	$	153,141	$	21,220,819
Mortgage servicing rights	—		—		1,086,717		1,086,717
Residential mortgage loans held-for-sale	—		474		29,940		30,414
Derivative assets	913		309,005		—		309,918
Equity securities	29,413		—		—		29,413
Total assets	$	30,326	$	21,377,157	$	1,269,798	$	22,677,281
Liabilities
Derivative liabilities	1,930		29,973		—		31,903
Total liabilities	$	1,930	$	29,973	$	—	$	31,903

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation

The following tables present the reconciliation for all of the Company’s Level 3 assets measured at fair value on a recurring basis:



	Three Months Ended
	March 31, 2018
(in thousands)	Available-For-Sale Securities		Mortgage Servicing Rights				Residential Mortgage Loans Held-For-Sale
Beginning of period level 3 fair value	$	153,141	$	1,086,717			$	29,940
Gains (losses) included in net income:
Realized gains (losses)	—		(28,902		)		(168		)
Unrealized gains (losses)	—		100,709			⁽¹⁾	486			⁽³⁾
Total gains (losses) included in net income	—		71,807				318
Other comprehensive (loss) income	283		—				—
Purchases	—		146,899				—
Sales	—		(300		)		—
Settlements	—		(4,100		)		(1,300		)
Gross transfers into level 3	—		—				—
Gross transfers out of level 3	—		—				—
End of period level 3 fair value	$	153,424	$	1,301,023			$	28,958
Change in unrealized gains or losses for the period included in earnings for assets held at the end of the reporting period	$	283	$	100,131		⁽²⁾	$	512		⁽⁴⁾

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(1)	The change in unrealized gains or losses on MSR was recorded in gain (loss) on servicing asset on the condensed consolidated statements of comprehensive (loss) income.


(2)	The change in unrealized gains or losses on MSR that were held at the end of the reporting period was recorded in gain (loss) on servicing asset on the condensed consolidated statements of comprehensive (loss) income.


(3)	The change in unrealized gains or losses on residential mortgage loans held-for-sale was recorded in other income on the condensed consolidated statements of comprehensive (loss) income.


(4)	The change in unrealized gains or losses on residential mortgage loans held-for-sale that were held at the end of the reporting period was recorded in other income on the condensed consolidated statements of comprehensive (loss) income.

Fair Value Inputs, Assets, Quantitative Information

The table below presents information about the significant unobservable inputs used by the third-party pricing providers in the fair value measurement of the Company’s MSR classified as Level 3 fair value assets at March 31, 2018:



March 31, 2018
Valuation Technique	Unobservable Input ⁽¹⁾	Range				Weighted Average
Discounted cash flow	Constant prepayment speed	7.1	-	9.2	%	8.1%
	Delinquency	1.5	-	2.2	%	1.8%
	Discount rate	9.0	-	11.9	%	10.4%



December 31, 2017
Valuation Technique	Unobservable Input ⁽¹⁾	Range				Weighted Average
Discounted cash flow	Constant prepayment speed	8.2	-	11.2	%	9.8%
	Delinquency	1.3	-	2.0	%	1.7%
	Discount rate	8.3	-	11.2	%	9.9%

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(1)	Significant increases (decreases) in any of the inputs in isolation may result in significantly lower (higher) fair value measurement. A change in the assumption used for discount rates may be accompanied by a directionally similar change in the assumption used for the probability of delinquency and a directionally opposite change in the assumption used for prepayment rates.

Fair Value, Option, Quantitative Disclosures

The following tables summarize the fair value option elections and information regarding the line items and amounts recognized in the condensed consolidated statements of comprehensive (loss) income for each fair value option-elected item.



	Three Months Ended March 31, 2018
(in thousands)	Interest income (expense)				Loss on investment securities		Other income		Total included in net income		Change in fair value due to credit risk
Assets
Available-for-sale securities	$	(1,989	)		$	6,358	$	—	$	4,369	N/A
Residential mortgage loans held-for-investment in securitization trusts	—			⁽¹⁾	—		—		—		$	—	⁽²⁾
Residential mortgage loans held-for-sale	307			⁽¹⁾	—		316		623		$	37	⁽³⁾
Liabilities
Collateralized borrowings in securitization trusts	—				—		—		—		—		⁽²⁾
Total	$	(1,682	)		$	6,358	$	316	$	4,992	$	37



	Three Months Ended March 31, 2017
(in thousands)	Interest income (expense)				Loss on investment securities		Other income			Total included in net income			Change in fair value due to credit risk
Assets
Available-for-sale securities	$	(1,704	)		$	2,002	$	—		$	298		N/A
Residential mortgage loans held-for-investment in securitization trusts	31,628			⁽¹⁾	—		13,039			44,667			$	—	⁽²⁾
Residential mortgage loans held-for-sale	398			⁽¹⁾	—		1,461			1,859			411		⁽³⁾
Liabilities
Collateralized borrowings in securitization trusts	(25,386		)		—		(6,355		)	(31,741		)	—		⁽²⁾
Total	$	4,936			$	2,002	$	8,145		$	15,083		$	411

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(1)	Interest income on residential mortgage loans held-for-sale and residential mortgage loans held-for-investment in securitization trusts is measured by multiplying the unpaid principal balance on the loans by the coupon rate and the number of days of interest due.


(2)	The change in fair value on residential mortgage loans held-for-investment in securitization trusts and collateralized borrowings in securitization trusts was due entirely to changes in market interest rates.


(3)	The change in fair value due to credit risk on residential mortgage loans held-for-sale was quantified by holding yield constant in the cash flow model in order to isolate credit risk component.

Schedule of Financing Receivables, Non Accrual Status

The table below provides the fair value and the unpaid principal balance for the Company’s fair value option-elected loans.



	March 31, 2018				December 31, 2017
(in thousands)	Unpaid Principal Balance		Fair Value ⁽¹⁾		Unpaid Principal Balance		Fair Value ⁽¹⁾
Residential mortgage loans held-for-sale
Total loans	$	36,016	$	29,428	$	37,632	$	30,414
Nonaccrual loans	$	12,764	$	10,578	$	13,511	$	10,963
Loans 90+ days past due	$	10,518	$	8,572	$	12,136	$	9,857

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(1)	Excludes accrued interest receivable.

Fair Value, by Balance Sheet Grouping

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at March 31, 2018 and December 31, 2017.



	March 31, 2018				December 31, 2017
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Available-for-sale securities	$	21,059,377	$	21,059,377	$	21,220,819	$	21,220,819
Mortgage servicing rights	$	1,301,023	$	1,301,023	$	1,086,717	$	1,086,717
Residential mortgage loans held-for-sale	$	29,428	$	29,428	$	30,414	$	30,414
Cash and cash equivalents	$	388,450	$	388,450	$	419,159	$	419,159
Restricted cash	$	712,791	$	712,791	$	635,836	$	635,836
Derivative assets	$	274,048	$	274,048	$	309,918	$	309,918
Equity securities	$	27,423	$	27,423	$	29,413	$	29,413
Federal Home Loan Bank stock	$	40,845	$	40,845	$	53,826	$	53,826
Equity investments	$	3,000	$	3,000	$	3,000	$	3,000
Liabilities
Repurchase agreements	$	19,148,679	$	19,148,679	$	19,451,207	$	19,451,207
Federal Home Loan Bank advances	$	865,024	$	865,024	$	1,215,024	$	1,215,024
Revolving credit facilities	$	20,000	$	20,000	$	20,000	$	20,000
Convertible senior notes	$	283,054	$	297,922	$	282,827	$	306,351
Derivative liabilities	$	46,074	$	46,074	$	31,903	$	31,903

- Definition

Tabular disclosure of the application of the fair value option for measurement and reporting of eligible financial assets and liabilities (as defined), as well as certain other eligible items (as defined) included in the statement of financial position, whether such option is elected for a single eligible item or a group of similar eligible items and is in addition to other disclosures concerning fair value which the company may be required to provide. Such disclosure might be expected to include: (1) for items included in the statement of financial position: (a) for each line item in the statement of financial position that includes an item or items for which the fair value option has been elected, provide the aggregate carrying amount of ineligible items included in each line item in the balance sheet, if any; (b) the difference between the aggregate fair value and the aggregate unpaid principal balance (assuming contractual principal amounts and fair value option elected) of: (i) loans and long-term receivables (other than securities otherwise reported at fair value) and (ii) long-term debt instruments; (c) for loans held as assets for which the fair value option has been elected: (i) the aggregate fair value of loans that are 90 days or more past due, (ii) if the policy is to recognize interest income separately from other changes in fair value, the aggregate fair value of loans in nonaccrual status, and (iii) the difference between the aggregate fair value and the aggregate unpaid principal balance for loans that are 90 days or more past due, in nonaccrual status, or both; (2) for items included in the income statement: (a) the amounts of gains and losses from fair value changes included in earnings and in which line in the income statement those gains and losses are reported whether or not combined with gains and losses from items required to be accounted for at fair value; (b) for loans and other receivables held as assets, the estimated amount of gains or losses included in earnings attributable to changes in instrument-specific credit risk; (c) for liabilities with fair values that have been significantly affected during the reporting period by changes in the instrument-specific credit risk, the estimated amount of gains and losses from fair value changes included in earnings that are attributable to changes in the instrument-specific credit risk; and (3) certain other disclosures as required or determined to be provided.

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