| Fair Value | 6. Fair Value Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based on the assumptions market participants would use when pricing an asset or liability and follows a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. All aspects of nonperformance risk, including the Company’s own credit standing, are considered when measuring the fair value of a liability. Following is a description of the three levels of the fair value hierarchy: Level 1 Inputs: Quoted prices for identical instruments in active markets. Level 2 Inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. Level 3 Inputs: Instruments with unobservable inputs that are significant to the fair value measurement. The Company classifies assets and liabilities in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There wer e no transfers within the hierarchy for the three months ended March 31, 2023 or 2022 . Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and the details of the valuation models, key inputs to those models and significant assumptions utilized. Within the assumption tables presented, not meaningful ("NM") refers to a range of inputs that is too broad to provide meaningful information to the user or to an input that has no range and consists of a single data point. Instrument Valuation techniques Classification of Fair Value Hierarchy Assets Loans held for investment, subject to HMBS related obligations (1) HECM loans - securitized into Government National Mortgage Association ("Ginnie Mae" or "GNMA") HMBS These loans are valued utilizing a present value methodology that discounts estimated projected cash flows over the life of the loan portfolio using conditional prepayment rate ("CPR"), loss frequency and severity, borrower draw, and discount rate assumptions. Level 3 Loans held for investment, subject to nonrecourse debt (1) HECM buyouts - securitized (nonperforming) These loans are valued utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio using CPR, loss frequency, loss severity, and discount rate assumptions. Level 3 HECM buyouts - securitized (performing) These loans are valued utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio using weighted average remaining life ("WAL"), CPR, loss severity, and discount rate assumptions. Level 3 Non-agency reverse mortgage - securitized These loans are valued utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio using WAL, loan to value ("LTV"), CPR, loss severity, home price appreciation ("HPA"), and discount rate assumptions. Level 3 Fix & flip mortgage loans This product is valued using a discounted cash flow model utilizing prepayment rate (single monthly mortality or "SMM"), discount rate, and loss rate assumptions. Level 3 (1) The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided are based upon the range of inputs utilized for each securitization trust. Loans held for investment Inventory buy-outs The fair value of repurchased loans is based on expected cash proceeds of the liquidation of the underlying properties and expected claim proceeds from the Department of Housing and Urban Development ("HUD"). The primary assumptions utilized in valuing nonperforming repurchased loans include CPR, loss frequency, loss severity, and discount rate. Termination proceeds are adjusted for expected loss frequencies and severities to arrive at net proceeds that will be provided upon final resolution, including assignments to FHA. Historical experience is utilized to estimate the loss rates resulting from scenarios where FHA insurance proceeds are not expected to cover all principal and interest outstanding and, as servicer, the Company is exposed to losses upon resolution of the loan. Level 3 Non-agency reverse mortgage The fair value of non-agency reverse mortgage loans is based on values for investments with similar investment grade ratings and the value the Company would expect to receive if the whole loans were sold to an investor. The Company values non-agency reverse mortgage loans utilizing a present value methodology that discounts estimated projected cash flows over the life of the loan portfolio. The primary assumptions utilized in valuing the loans include LTV, CPR, loss severity, HPA, and discount rate. Level 3 Fix & flip mortgage loans This product is valued using a discounted cash flow ("DCF") model with SMM, discount rate, and loss rate assumptions. Level 3 Agricultural loans The product is valued using a DCF model with discount rate, prepayment rate, and default rate assumptions. Level 3 Loans held for sale Residential mortgage loans This includes all mortgage loans that can be sold to the agencies, which are valued predominantly by published forward agency prices. This will also include all non-agency loans where recently negotiated market prices for the loan pool exist with a counterparty (which approximates fair value), or quoted market prices for similar loans are available. Level 2 Single Rental Loan ("SRL") This product is valued using a DCF model utilizing CPR, discount rate, and constant default rate ("CDR") assumptions. Level 3 Portfolio loans This product is valued using a DCF model utilizing CPR, discount rate, and CDR assumptions. Level 3 Mortgage Servicing Rights MSR The Company valued MSR internally through a DCF analysis and calculated using a pricing model. This pricing model is based on the objective characteristics of the portfolio (loan amount, note rate, etc.) and commonly used industry assumptions such as discount rate and weighted average CPR. Level 3 Derivative assets/liabilities Forward mortgage-backed securities ("MBS") and To Be Announced Securities ("TBAs") This product is valued using forward dealer marks from the Company's approved counterparties, forward prices with dealers in such securities, or internally-developed third-party models utilizing observable market inputs. Level 2 Interest rate swaps and futures contracts This product is valued using quoted market prices. Level 1 Other assets Retained bonds Management obtains third-party valuations to assess the reasonableness of the fair value calculations provided by the internal valuation model. The primary assumptions utilized include weighted average life remaining and discount rate. Level 3 Investments To the extent market prices are not observable, the Company engages third-party valuation experts to assist in determining the fair value of these investments. The values are determined utilizing a market approach which estimates fair value based on what other participants in the market have paid for reasonably similar assets that have been sold within a reasonable period from the valuation date. Level 3 Purchase Commitments - reverse mortgage loans Purchase commitments are valued based on the value of the underlying loan. These loans are valued based on an expected margin on sale of 3.00% as of December 31, 2022. There were not any reverse mortgage loan purchase commitments as of March 31, 2023. Level 3 Liabilities HMBS related obligations HMBS related obligations The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The estimated fair value of the HMBS related obligations also includes the consideration required by a market participant to transfer the HECM and HMBS servicing obligations, including exposure resulting from shortfalls in FHA insurance proceeds as well as assumptions that it believes a market participant would consider in valuing the liability, including, but not limited to, assumptions for repayment, costs to transfer servicing obligations, shortfalls in FHA insurance proceeds, and discount rates. The significant unobservable inputs used in the measurement include CPR and discount rates. Level 3 Nonrecourse debt Nonrecourse reverse mortgage loans financing liability The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The significant unobservable inputs used in the measurement include WAL, CPR, and discount rates. Level 3 Nonrecourse commercial loan financing liability The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability. The primary assumptions utilized include WAL, SMM, and discount rates. The Company estimates prepayment speeds giving consideration that the Company may in the future transfer additional loans to the trust, subject to the availability of funds provided for within the trust. Level 3 Nonrecourse MSR financing liability Consistent with the underlying MSR, fair value is derived through a DCF analysis and calculated using a pricing model. This pricing model is based on the objective characteristics of the portfolio (loan amount, note rate, etc.) and commonly used industry assumptions including CPR and discount rate. Level 3 Deferred purchase price liabilities Deferred purchase price liabilities These are measured using a present value of future payments utilizing discount rate assumptions. Level 3 Tax Receivable Agreements ("TRA") obligation The fair value is derived through the use of a DCF model. The significant unobservable assumptions used in the DCF include the ability to utilize tax attributes based on current tax forecasts, a constant U.S. federal income tax rate, and a discount rate. Level 3 Warrant liability Warrants The warrants are publicly traded and are valued based on the closing market price of the applicable date of the Condensed Consolidated Statements of Financial Condition. Level 1 March 31, 2023 December 31, 2022 Instrument / Unobservable Inputs Range Weighted Average Range Weighted Average Assets Loans held for investment, subject to HMBS related obligations Conditional repayment rate NM 19.3 % NM 21.9 % Loss frequency NM 4.0 % NM 4.1 % Loss severity 2.4% - 10.9% 2.5 % 2.4% - 12.1% 2.7 % Discount rate NM 4.7 % NM 5.0 % Average draw rate NM 1.1 % NM 1.1 % Loans held for investment, subject to nonrecourse debt: HECM buyouts - securitized (nonperforming) Conditional repayment rate NM 38.4 % NM 39.2 % Loss frequency 23.1% - 100.0% 51.2 % 23.1% - 100% 51.7 % Loss severity 2.4% - 10.9% 4.9 % 2.4% - 12.1% 5.2 % Discount rate NM 8.5 % NM 8.7 % HECM buyouts - securitized (performing) WAL (in years) NM 7.9 NM 8.0 Conditional repayment rate NM 15.6 % NM 15.2 % Loss severity 2.4% - 10.9% 4.8 % 2.4% - 12.1% 4.8 % Discount rate NM 7.9 % NM 8.2 % March 31, 2023 December 31, 2022 Instrument / Unobservable Inputs Range Weighted Average Range Weighted Average Non-agency reverse mortgage loans - securitized WAL (in years) NM 9.7 NM 9.7 LTV 0.0% - 77.0% 45.6 % 0.0% - 74.7% 43.1 % Conditional repayment rate NM 14.4 % NM 14.3 % Loss severity NM 10.0 % NM 10.0 % HPA (10.2)% - 7.8% 3.8 % (10.1)% - 7% 3.8 % Discount rate NM 6.6 % NM 7.1 % Fix & flip mortgage loans - securitized Prepayment rate (SMM) NM 11.2 % NM 11.2 % Discount rate NM 14.1 % NM 17.5 % Loss rate NM 0.5 % NM 0.5 % Loans held for investment: Inventory buy-outs Conditional repayment rate NM 41.2 % NM 41.3 % Loss frequency NM 49.0 % NM 47.6 % Loss severity 2.4% - 10.9% 3.8 % 2.4% - 12.1% 5.6 % Discount rate NM 8.5 % NM 8.7 % Non-agency reverse mortgage loans WAL (in years) NM 11.4 NM 12 LTV 0.1% - 74.6% 36.7 % 0.1% - 67.9% 36.4 % Conditional repayment rate NM 14.1 % NM 13.8 % Loss severity NM 10.0 % NM 10.0 % HPA (10.2)% - 7.8% 3.6 % (10.1)% - 7.3% 3.6 % Discount rate NM 6.6 % NM 7.1 % Fix & flip mortgage loans Prepayment rate (SMM) NM 10.1 % NM 9.5 % Discount rate 13.0% - 20.5% 15.6 % 16.3% - 25.8% 16.6 % Loss rate NM 0.2 % NM 0.2 % Agricultural loans Discount rate NM 9.5 % NM 9.7 % Prepayment rate (SMM) 19.0% - 100.0% 74.1 % 11.0% - 100.0% 11.8 % Default rate (CDR) 0.0% - 1.0% 0.9 % 0.0% - 1.0% 0.9 % Loans held for sale: SRL Prepayment rate (CPR) 18.5% - 25.0% 19.4 % 18.5% - 25.0% 19.7 % Discount rate NM 8.4 % NM 8.3 % Default rate (CDR) NM 1.0 % 0.0% - 0.0% 1.0 % Portfolio loans Prepayment rate (CPR) 0.0% - 23.7% 14.0 % 0.0% - 24.3% 18.4 % Discount rate NM 10.7 % NM 10.9 % Default rate (CDR) NM 1.0 % NM 1.0 % March 31, 2023 December 31, 2022 Instrument / Unobservable Inputs Range Weighted Average Range Weighted Average Mortgage Servicing Rights Weighted average prepayment speed (CPR) 0.8% - 12.2% 8.4 % 1.0% - 8.5% 6.4 % Discount rate NM 11.5 % NM 10.1 % Other assets: Retained bonds WAL (in years) 2.4 - 23.9 4.7 2.4 - 24.1 4.9 Discount rate (18.5)% - 11.9% 6.2 % (16.8)% - 12.2% 6.9 % Liabilities HMBS related obligations Conditional repayment rate NM 19.0 % NM 21.8 % Discount rate NM 4.6 % NM 5.0 % Nonrecourse debt: Reverse mortgage loans Performing/Nonperforming HECM securitizations WAL (in years) 1.3 - 1.4 1.4 1.5 - 1.6 1.6 Conditional repayment rate 17.6% - 20.0% 18.9 % 19.9% - 22.2% 21.1 % Discount rate NM 8.7 % NM 8.6 % Securitized non-agency reverse WAL (in years) 0.1 - 11 4.9 0.2 - 11.7 6.4 Conditional repayment rate NM 19.8 % 8.3% - 46.1% 16.5 % Discount rate NM 6.9 % NM 7.2 % Nonrecourse commercial loan financing liability WAL (in months) NM 4.3 NM 4.3 Weighted average prepayment speed (SMM) NM 15.6 % NM 15.3 % Discount rate NM 7.9 % NM 14.5 % Nonrecourse MSR financing liability Weighted average prepayment speed (CPR) 3.2% - 13.5% 7.6 % 0.8% - 9.2% 5.1 % Discount rate 10.0% - 12.0% 12.0 % 10.0% - 12.0% 10.2 % Deferred purchase price liabilities Deferred purchase price liabilities Discount rate NM 8.0 % NM 8.0 % TRA obligation Discount rate NM 34.3 % NM 48.3 % Fair Value of Assets and Liabilities The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis (in thousands): March 31, 2023 Total Fair Value Level 1 Level 2 Level 3 Assets Loans held for investment, subject to HMBS related obligations $ 16,623,561 $ — $ — $ 16,623,561 Loans held for investment, subject to nonrecourse debt: Reverse mortgage loans 8,009,079 — — 8,009,079 Fix & flip mortgage loans 365,748 — — 365,748 Loans held for investment: Reverse mortgage loans 724,306 — — 724,306 Fix & flip mortgage loans 11,787 — — 11,787 Agricultural loans 875 — — 875 Loans held for sale: Residential mortgage loans 58,751 — 58,751 — SRL 15,699 — — 15,699 Portfolio 3,044 — — 3,044 MSR 13,713 — — 13,713 Other assets: Retained bonds 47,048 — — 47,048 Total assets $ 25,873,611 $ — $ 58,751 $ 25,814,860 Liabilities HMBS related obligations $ 16,407,629 $ — $ — $ 16,407,629 Nonrecourse debt: Nonrecourse debt in consolidated VIE trusts 7,955,875 — — 7,955,875 Nonrecourse commercial loan financing liability 75,689 — — 75,689 Nonrecourse MSR financing liability 988 — — 988 Deferred purchase price liabilities: Deferred purchase price liabilities 4,522 — — 4,522 TRA obligation 2,202 — — 2,202 Warrant liability 1,581 1,581 — — Total liabilities $ 24,448,486 $ 1,581 $ — $ 24,446,905 December 31, 2022 Total Fair Value Level 1 Level 2 Level 3 Assets Loans held for investment, subject to HMBS related obligations $ 11,114,100 $ — $ — $ 11,114,100 Loans held for investment, subject to nonrecourse debt: Reverse mortgage loans 7,065,477 — — 7,065,477 Fix & flip mortgage loans 389,161 — — 389,161 Loans held for investment: Reverse mortgage loans 771,724 — — 771,724 Fix & flip mortgage loans 127,469 — — 127,469 Agricultural loans 8,805 — — 8,805 Loans held for sale: Residential mortgage loans 12,123 — 12,123 — SRL 69,187 — — 69,187 Portfolio 43,272 — — 43,272 Fix & flip mortgage loans 49,402 49,402 MSR 95,096 — — 95,096 Derivative assets: Interest rate lock commitments, loan purchase commitments, forward MBS, and TBAs 907 — 907 — Interest rate swaps and futures contracts 771 771 — — Other assets: Purchase commitments - reverse mortgage loans 9,356 — — 9,356 Retained bonds 46,439 — — 46,439 Total assets $ 19,803,289 $ 771 $ 13,030 $ 19,789,488 Liabilities HMBS related obligations $ 10,996,755 $ — $ — $ 10,996,755 Nonrecourse debt: Nonrecourse debt in consolidated VIE trusts 7,175,857 — — 7,175,857 Nonrecourse commercial loan financing liability 106,758 — — 106,758 Nonrecourse MSR financing liability 60,562 — — 60,562 Deferred purchase price liabilities: Deferred purchase price liabilities 137 — — 137 TRA obligation 3,781 — — 3,781 Derivative liabilities: Interest rate swaps and futures contracts 385 385 — — Warrant liability 1,117 1,117 — — Total liabilities $ 18,345,352 $ 1,502 $ — $ 18,343,850 Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3, in thousands): Assets Three months ended March 31, 2023 Loans held for investment Loans held for investment, subject to nonrecourse debt Loans held for sale MSR Retained bonds Purchase commitments Beginning balance $ 12,022,098 $ 7,454,638 $ 161,861 $ 95,096 $ 46,439 $ 9,356 Total gain (loss) included in earnings 244,759 298,636 (828) (1,369) 1,031 — Purchases, settlements, and transfers: Purchases and additions 6,462,274 26,981 40,468 405 — — Sales and settlements (406,942) (333,324) (198,338) (80,419) (422) (9,356) Transfers in (out) between categories (961,660) 927,896 15,580 — — — Ending balance $ 17,360,529 $ 8,374,827 $ 18,743 $ 13,713 $ 47,048 $ — Liabilities Three months ended March 31, 2023 HMBS related obligations Nonrecourse debt in consolidated VIE trusts Nonrecourse commercial loan financing liability Nonrecourse MSR financing liability Deferred purchase price liabilities TRA Liability Beginning balance $ (10,996,755) $ (7,175,857) $ (106,758) $ (60,562) $ (137) $ (3,781) Total gain (loss) included in earnings (147,451) (237,315) 381 748 — 1,579 Purchases, settlements, and transfers: Purchases and additions (5,648,041) (639,499) (22,600) — (4,385) — Settlements 384,618 96,796 53,288 58,826 — — Ending balance $ (16,407,629) $ (7,955,875) $ (75,689) $ (988) $ (4,522) $ (2,202) Assets Three months ended March 31, 2022 Loans held for investment Loans held for investment, subject to nonrecourse debt Loans held for sale MSR Retained Bonds Investments Beginning balance $ 11,587,382 $ 6,218,194 $ 158,156 $ 427,942 $ 55,614 $ 6,000 Total gain (loss) included in earnings (35,895) (313,720) (1,838) 52,368 (3,289) — Purchases, settlements, and transfers: Purchases and additions 1,848,155 30,342 430,806 53,444 — — Sales and settlements (612,624) (586,276) (368,656) (107,652) (1,450) — Transfers in (out) between categories (895,876) 887,450 — — — — Ending balance $ 11,891,142 $ 6,235,990 $ 218,468 $ 426,102 $ 50,875 $ 6,000 Liabilities Three months ended March 31, 2022 HMBS related obligations Deferred purchase price liabilities Nonrecourse debt in consolidated VIE trusts Nonrecourse commercial loan financing liability Nonrecourse MSR financing liability TRA Liability Beginning balance $ (10,422,358) $ (7,912) $ (5,857,069) $ (111,738) $ (155,108) $ (29,380) Total gain (loss) included in earnings 85,582 — 105,340 254 (16,038) — Purchases, settlements, and transfers: Purchases and additions (948,682) — (1,048,499) (60,658) 7,165 — Settlements 737,327 5,000 768,072 44,502 — — Ending balance $ (10,548,131) $ (2,912) $ (6,032,156) $ (127,640) $ (163,981) $ (29,380) Fair Value Option The Company has elected to measure substantially all of its loans held for investment, loans held for sale, HMBS related obligations, and non-recourse debt at fair value under the fair value option provided for by ASC 825-10, Financial Instruments-Overall. The Company elected to apply the provisions of the fair value option to these assets and liabilities in order to align financial reporting presentation with the Company's operational and risk management strategies. Presented in the tables below are the fair value and UPB, at March 31, 2023 and December 31, 2022, of financial assets and liabilities for which the Company has elected the fair value option (in thousands): March 31, 2023 Estimated Fair Value Unpaid Principal Balance Assets at fair value under the fair value option Loans held for investment, subject to HMBS related obligations $ 16,623,561 $ 15,850,053 Loans held for investment, subject to nonrecourse debt: Reverse mortgage loans 8,009,079 7,974,381 Commercial mortgage loans 365,748 373,052 Loans held for investment: Reverse mortgage loans 724,306 685,924 Commercial mortgage loans 12,662 12,946 Loans held for sale: Residential mortgage loans 58,751 67,794 Commercial mortgage loans 18,743 19,747 Liabilities at fair value under the fair value option HMBS related obligations 16,407,629 15,850,053 Nonrecourse debt: Nonrecourse debt in consolidated VIE trusts 7,955,875 8,139,139 Nonrecourse MSR financing liability 988 988 Nonrecourse commercial loan financing liability 75,689 74,604 December 31, 2022 Estimated Fair Value Unpaid Principal Balance Assets at fair value under the fair value option Loans held for investment, subject to HMBS related obligations $ 11,114,100 $ 10,719,000 Loans held for investment, subject to nonrecourse debt: Reverse mortgage loans 7,065,477 7,240,125 Commercial mortgage loans 389,161 405,970 Loans held for investment: Reverse mortgage loans 771,724 724,800 Commercial mortgage loans 136,274 143,373 Loans held for sale: Residential mortgage loans 12,123 15,529 Commercial mortgage loans 161,861 173,112 Other assets: Purchase commitments - reverse mortgage loans 9,356 9,356 Liabilities at fair value under the fair value option HMBS related obligations 10,996,755 10,719,000 Nonrecourse debt: Nonrecourse debt in consolidated VIE trusts 7,175,857 7,819,992 Nonrecourse MSR financing liability 60,562 60,562 Nonrecourse commercial loan financing liability 106,758 105,291 Net fair value gains on loans and related obligations Provided in the table below is a summary of the components of net fair value gains on loans and related obligations (in thousands): For the three months ended March 31, 2023 For the three months ended March 31, 2022 Net fair value gains on loans and related obligations: Interest income on reverse and commercial loans $ 301,046 $ 163,694 Change in fair value of loans 266,821 (510,802) Net fair value gains (losses) on loans 567,867 (347,108) Interest expense on HMBS and nonrecourse obligations (203,050) (106,643) Change in fair value of derivatives (4,589) 165,579 Change in fair value of related obligations (183,834) 295,132 Net fair value gains (losses) on related obligations (391,473) 354,068 Net fair value gains on loans and related obligations $ 176,394 $ 6,960 As the cash flows on the underlying mortgage loans will be utilized to settle the outstanding obligations, the Company's own credit risk would not impact the fair value on the outstanding HMBS liabilities and nonrecourse debt. Fair Value of Other Financial Instruments As of March 31, 2023 and December 31, 2022, all financial instruments were either recorded at fair value or the carrying value approximated fair value with the exception of notes payable, net . Notes payable, net, includes our senior secured high-yield debt and related-party credit line recorded at the carrying value of $409.0 million and $399.4 million as of March 31, 2023 and December 31, 2022, respectively, and have a fair value of $323.1 million and $231.9 million as of March 31, 2023 and December 31, 2022, respectively. The fair value for Notes payable, |
