Quarterly report pursuant to Section 13 or 15(d)

Fair Value

v3.22.1
Fair Value
3 Months Ended
Mar. 31, 2022
Fair Value Disclosures [Abstract]  
Fair Value
4. 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:
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 were no transfers within the hierarchy for the Successor three months ended March 31, 2022 or for the Predecessor period from January 1, 2021 to March 31, 2021.
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.
Loans Held for Investment, Subject to HMBS Related Obligations, at Fair Value
HECM loans securitized into Ginnie Mae HMBS are not actively traded in open markets with readily observable market prices.
The Company values HECM loans securitized into Ginnie Mae HMBS utilizing a present value methodology that discounts estimated projected cash flows over the life of the loan portfolio using prepayment, loss frequency and severity, borrower mortality, borrower draw and discount rate assumptions management believes a market participant would use in estimating fair value.
 
Changes to any of these assumptions could result in significantly different valuation results. The Company classifies reverse mortgage loans held for investment as Level 3 assets within the GAAP hierarchy, as they are dependent on unobservable inputs.
The following table presents the weighted average significant unobservable assumptions used in the fair value measurement of loans held for investment, subject to HMBS related obligations, for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Conditional repayment rate
  
 
NM
 
 
 
21.6
    NM       20.8
Loss frequency
  
 
NM
 
 
 
4.2
    NM       4.5
Loss severity
  
 
2.4% - 6.9
 
 
2.6
   
3.1% - 7.7
    3.3
Discount rate
  
 
NM
 
 
 
3.4
    NM       2.4
Average draw rate
  
 
NM
 
 
 
1.1
    NM       1.1
The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.
Loans Held for Investment, Subject to Nonrecourse Debt, at Fair Value
Reverse Mortgage Loans
Reverse mortgage loans held for investment, subject to nonrecourse debt, include HECM loans previously purchased out of Ginnie Mae HMBS pools and non
FHA-insured
jumbo reverse mortgages, which have been subsequently securitized and serve as collateral for the issued debt. These loans are not traded in active and open markets with readily observable market prices. The Company classifies reverse mortgage loans held for investment, subject to nonrecourse debt as Level 3 assets within the GAAP hierarchy.
HECM Buyouts—Securitized (Nonperforming)
The Company values nonperforming securitized HECM buyouts, performing securitized HECM buyouts, and securitized non-agency reverse mortgage loans utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio.
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.
 
22
The following table presents the weighted average significant unobservable assumptions used in the fair value measurement of nonperforming securitized HECM buyouts for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Conditional repayment rate
  
 
NM
 
 
 
39.7
    NM       41.2
Loss frequency
  
 
 NM
 
 
 
60.5
   
25.0% - 100
    59.5
Loss severity
  
 
2.4% - 6.9
 
 
3.1
    3.1% -7.7     4.3
Discount rate
  
 
NM
 
 
 
5.8
    NM       4.1
HECM Buyouts—Securitized (Performing)
T
he following table presents the weighted average significant unobservable assumptions used in the fair value measurement of performing securitized HECM buyouts for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average remaining life (in years)
  
 
NM
 
 
 
9.0
 
    NM       9.0  
Conditional repayment rate
  
 
NM
 
 
 
13.4
    NM       13.3
Loss severity
  
 
2.4% - 6.9
 
 
6.9
   
3.1% - 7.7
    7.7
Discount rate
  
 
NM
 
 
 
5.0
    NM       3.7
Non-Agency
Reverse Mortgage—Securitized
T
he following table presents the significant unobservable assumptions used in the fair value measurements of securitized
non-agency
reverse mortgage loans for the periods indicated:
 
 
  
March 31, 2022
 
 
December 31, 2021
 
Unobservable Assumptions
  
Range
 
 
Weighted
Average
 
 
Range
 
 
Weighted
Average
 
Weighted average remaining life (in years)
  
 
NM
 
 
 
7.8
 
    NM       7.5  
Loan to value
  
 
0.1% - 69.0
 
 
43.1
   
0.1% - 64.7
    43.4
Conditional repayment rate
  
 
NM
 
 
 
17.5
    NM       18.6
Loss severity
  
 
NM
 
 
 
10.0
    NM       10.0
Home price appreciation
  
 
-4.3% - 15.8
 
 
4.7
   
-4.6% - 14
    4.7
Discount rate
  
 
NM
 
 
 
4.9
    NM       3.6
 
Commercial Mortgage Loans
Fix & Flip—Securitized
The securitized Fix & Flip loans are short-term loans for individual real estate investors, with terms ranging from 9—24 months. This product is valued using a discounted cash flow (“DCF”) model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.
The Company utilized the following weighted average assumptions in estimating the fair value of securitized Fix & Flip mortgage loans for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Prepayment rate (SMM)
  
 
NM
 
 
 
14.4
    NM       14.1
Discount rate
  
 
NM
 
 
 
7.5
    NM       5.7
Loss frequency
  
 
0.3% - 72.9
 
 
0.6
   
0.3% - 69.0
    0.6
The Company aggregates loan portfolios based upon the underlying securitization trust and values these loans using these aggregated pools. The range of inputs provided above are based upon the range of inputs utilized for each securitization trust.
Loans Held for Investment, at Fair Value
Reverse Mortgage Loans
Reverse mortgage loans held for investment, at fair value, consists of originated or purchased HECM and
non-agency
reverse mortgage loans not yet securitized, unsecuritized tails, and certain HECMs purchased out of Ginnie Mae HMBS (“Inventory Buyouts”) that the Company intends for future securitization transfers.
Originated or purchased HECM loans held for investment are valued predominantly by utilizing forward HMBS prices for similar pool characteristics and based on observable market data. These amounts are further adjusted to include future cash flows that would be earned for servicing the HECM loan over the life of the asset.
Unsecuritized tails consists of performing and nonperforming repurchased loans. The fair value of performing unsecuritized tails are valued at current pricing levels for similar Ginnie Mae HMBS. The fair value of nonperforming unsecuritized tails is based on expected claim proceeds from the U.S Department of Housing and Urban Development (“HUD”) upon assignment of the loans.
The fair value of repurchased loans is based on expected cash proceeds of the liquidation of the underlying properties and expected claim proceeds from HUD. The primary assumptions utilized in valuing nonperforming repurchased loans include loss frequency and loss severity. 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.
The Company classifies reverse mortgage loans held for investment, at fair value as Level 3 assets within the GAAP hierarchy.
 
Inventory Buyouts
The Company values Inventory Buyouts utilizing a present value methodology that discounts estimated projected cash flows over the life of the portfolio.
The following table presents the weighted average significant unobservable assumptions used in the fair value measurement of Inventory Buyouts classified as loans held for investment, at fair value for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Conditional repayment rate
  
 
NM
 
 
 
44.9
    NM       43.2
Loss frequency
  
 
NM
 
 
 
68.3
    NM       59.4
Loss severity
  
 
2.4% -6.9
 
 
4.9
   
3.1% - 7.7
    3.8
Discount rate
  
 
NM
 
 
 
5.8
    NM       4.1
Non-Agency
Reverse Mortgage Loans
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 following table presents the weighted average significant unobservable assumptions used in the fair value measurement of
non-agency
reverse mortgage loans classified as loans held for investment, at fair value for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average remaining life (in years)
  
 
NM
 
 
 
9.9
 
    NM       9.2  
Loan to value
  
 
2.9% - 69.1
 
 
47.2
   
0.2% - 68.7
    47.8
Conditional repayment rate
  
 
NM
 
 
 
13.6
    NM       14.8
Loss severity
  
 
NM
 
 
 
10.0
    NM       10.0
Home price appreciation
  
 
-4.3% - 15.8
 
 
4.3
   
-4.6% - 14.0
    4.4
Discount rate
  
 
NM
 
 
 
4.9
    NM       3.6
Commercial Mortgage Loans
Fix & Flip
The Fix & Flip loans are short-term loans for individual real estate investors, with terms ranging from 9—24 months. This product is valued using a DCF model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.
 
The Company utilized the following weighted average assumptions in estimating the fair value of Fix & Flip loans for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Prepayment rate (SMM)
  
 
NM
 
 
 
11.2
    NM       11.9
Discount rate
  
 
7.5% - 10.9
 
 
7.6
   
5.7% - 10.0
    5.9
Loss frequency
  
 
NM
 
 
 
0.4
    NM       0.4
Agricultural Loans
The agricultural loans are government-insured loans made to farmers to fund their inputs and operating expenses for the upcoming growing season with terms ranging from 7 - 17 months. The product is valued using a DCF model. The Company classifies these loans as Level 3 assets within the GAAP hierarchy.
The Company utilized the following assumptions in estimating the fair value of agricultural loans for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Discount rate
  
 
NM
 
 
 
6.2
    NM       4.8
Prepayment rate (SMM)
  
 
9.0% - 100.0
 
 
19.6
   
9.0% - 100.0
    22.1
Default rate (CDR)
  
 
0.0% - 1.0
 
 
0.9
    0% - 0.7     0.9
Loans Held for Sale, at Fair Value
Residential and Commercial Mortgage Loans
Mortgage loans held for sale include residential and commercial mortgage loans originated by the Company and held until sold to secondary market investors.
Residential Mortgage Loans
The Company originates or purchases mortgage loans in the U.S. that it intends to sell to FNMA, FHLMC, and Ginnie Mae (collectively “the Agencies”). Additionally, the Company originates or purchases mortgage loans in the U.S. that it intends to sell into the secondary markets via whole loan sales. Mortgage loans held for sale are typically pooled and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. In addition, the Company may originate loans that do not meet specific underwriting criteria and are not eligible to be sold to the Agencies. Two valuation methodologies are used to determine the fair value of mortgage loans held for sale. The methodology used depends on the exit market as described below:
Loans valued using observable market prices for identical or similar assets
- 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. The Company classifies these valuations as Level 2 assets within the GAAP hierarchy. During periods of illiquidity of the mortgage marketplace, it may be necessary to look for alternative sources of value, including the whole loan purchase market for similar loans, and place more reliance on the valuations using internal models. Due to limited sales activity and periodically unobservable prices in certain of the Company’s markets, certain mortgage loans held for sale portfolios may transfer from Level 2 to Level 3 in future periods.
Loans valued using internal models
– To the extent observable market prices are not available, the Company will determine the fair value of mortgage loans held for sale using a collateral based valuation model, which approximates expected cash proceeds on liquidation. For loans where bid prices or commitment prices are unavailable, these valuation models estimate the exit price the Company expects to receive in the loan’s principal market and are based on a combination of recent appraisal values, adjusted for certain loss factors. The Company classifies these loans as Level 3 assets within the GAAP hierarchy.
Commercial Mortgage Loans
The Company primarily originates two separate commercial loan products that it classifies as held for sale: Single Rental Loan (“SRL”) and Portfolio Lending.
SRL
The SRL product is designed for small/individual real estate investors looking to purchase and then rent out a single property. These are
30-year
loans with fixed interest rates typically between 5.0%—8.0%. This product is valued using a DCF model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.
The Company utilized the following weighted average assumptions in estimating the fair value of SRL mortgage loans held for sale for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Prepayment rate (CPR)
  
 
18.0% - 25.0
 
 
18.3
   
1.0% - 17.1
    14.2
Discount rate
  
 
NM
 
 
 
5.1
    NM       3.3
Default rate (CDR)
  
 
NM
 
 
 
1.0
   
1.0% - 57.2
    2.2
Portfolio Lending
The Portfolio Lending product is designed for larger investors with multiple properties. Specifically, these loans are useful for consolidating multiple rental property mortgages into a single loan. These loans have fixed coupons that typically range from 5.0%—6.2%, with 5 and
10-year
balloon structures, as well as a
30-year
structure. This product is valued using a DCF model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.
The Company utilized the following weighted average assumptions in estimating the fair value of Portfolio Lending mortgage loans held for sale for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Prepayment rate (CPR)
  
 
0.0% - 22.6
 
 
13.0
   
0.0% - 14.5
    8.7
Discount rate
  
 
NM
 
 
 
4.9
    NM       3.9
Default rate (CDR)
  
 
NM
 
 
 
1.0
   
1.0% - 54.0
    3.2
Fix & Flip
The Fix & Flip loans are short-term loans for individual real estate investors, with terms ranging from 9-24 months. This product is valued using a DCF model. The Company classifies these mortgage loans as Level 3 assets within the GAAP hierarchy.
 
MSRs
As of March 31, 2022 and December 31, 2021, the Company valued MSRs internally. The significant assumptions utilized to determine fair value are projected prepayments using the Public Securities Association Standard Prepayment Model, discount rates, and projected servicing costs that vary based on the loan type and delinquency. The Company classifies these valuations as Level 3 assets within the GAAP hierarchy since they are dependent on unobservable inputs.
Fair value is derived through a DCF analysis and calculated using a computer pricing model. This computer valuation is based on the objective characteristics of the portfolio (loan amount, note rate, etc.) and commonly used industry assumptions (Prepayment speed assumptions (“PSA”), discount rate, etc.). The assumptions taken into account by the pricing model are those which many active purchasers of servicing employ in their evaluations of portfolios for sale in the secondary market. The unique characteristics of the secondary servicing market often dictate adjustments to parameters over short periods of time.
Fair value is defined as the estimated price at which the servicing rights would change hands in the marketplace between a willing buyer and seller. The valuation assumes that neither party would be under any compulsion to buy or sell and that each has reasonably complete and accurate knowledge of all relevant aspects of the offered servicing. The fair values represented in this analysis have been derived under the assumptions that sufficient time would be available to market the portfolio.
The following tables summarize certain information regarding the servicing portfolio of retained MSRs for the periods indicated:
 
    
March 31,
2022
   
December 31,
2021
 
Capitalization servicing rate
  
 
1.3
    1.1
Capitalization servicing multiple
  
 
5.0
 
    4.4  
Weighted average servicing fee (in basis points)
  
 
26
 
    25  
The Company utilized the following weighted average assumptions in estimating the fair value of MSRs:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average prepayment speed (CPR)
  
 
0.1% - 10.5
 
 
6.7
   
0% - 12.8
    8.3
Discount rate
  
 
NM
 
 
 
8.3
    NM       8.5
Weighted average delinquency rate
  
 
0.8% - 12.4
 
 
1.4
   
0.8% - 14.3
    1.3
The following table summarizes the estimated change in the fair value of MSRs from adverse changes in the significant assumptions (in thousands):
 
    
March 31, 2022
 
    
Weighted
Average
Prepayment
Speed
    
Discount
Rate
    
Weighted
Average
Delinquency
Rate
 
Impact on fair value of 10% adverse change
  
$
(9,330
  
$
(15,406
  
$
(481
Impact on fair value of 20% adverse change
  
$
(18,140
  
$
(29,748
  
$
(963
These sensitivities are hypothetical and should be evaluated with care. The effect on fair value of a 10% variation in assumptions generally cannot be determined because the relationship of the change in assumptions to the fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may lead to changes in other factors, which could impact the above hypothetical effects.
 
Investments, at Fair Value
The Company invests in the equity of other companies in the form of common stock, preferred stock, or other
in-substance
equity interests. 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. The Company classifies these valuations as Level 3 in the fair value disclosures.
Derivative Assets and Liabilities
Some of the derivatives held by the Company are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilizes the exchange price or dealer market price for the particular derivative contract; therefore, these contracts are classified as Level 1 in the fair value hierarchy. The Company executes derivative contracts, including forward commitments, TBAs, interest rate swaps, and interest rate swap futures, as part of its overall risk management strategy related to its mortgage, reverse mortgage and commercial loan portfolios. The value of the forward commitments is estimated using current market prices for HMBS and are considered Level 2 in the fair value hierarchy. TBAs are valued based on forward dealer marks from the Company’s approved counterparties and are considered Level 2 in the fair value hierarchy. The value of interest rate swaps and interest rate swap futures is based on the exchange price or dealer market prices. The Company classifies interest rate swaps as Level 2 in the fair value hierarchy. The Company classifies interest rate swap futures as Level 1 in the fair value hierarchy. The value of the forward MBS is based on forward prices with dealers in such securities or internally-developed third party models utilizing observable market inputs. The Company classifies forward MBS as Level 2 in the fair value hierarchy.
In addition, the Company enters into IRLCs with prospective borrowers. Commitments to fund residential mortgage loans with potential borrowers are a binding agreement to lend funds at a specified interest rate within a specified period of time. The fair value of IRLCs is derived from the fair value of similar mortgage loans or bonds, which is based on observable market data. Changes to the fair value of IRLCs are recognized based on changes in interest rates, changes in the probability that the commitment will be exercised (pull through factor), and the passage of time. The expected net future cash flows related to the associated servicing of the loan are included in the fair value measurement of IRLCs. The Company adjusts the outstanding IRLCs with prospective borrowers based on an expectation that it will be exercised and the loan will be funded. Given the unobservable nature of the pull through factor, IRLCs are classified as Level 3 in the fair value hierarchy.
HMBS Related Obligations, at Fair Value
The HMBS related obligation valuation considers the obligation to pass FHA insured cash flows through to the beneficial interest holders (repayment of secured borrowing) of the HMBS securities and the servicer and issuer obligations of the Company.
The valuation of the obligation to repay the secured borrowing is estimated using Level 3 unobservable market inputs. 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.
The Company’s valuation considers 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 weighted average remaining life, borrower repayment rates, and discount rates.
 
The following table presents the weighted average significant unobservable inputs used in the fair value measurement of HMBS related obligations for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
    
Weighted
Average
   
Range
    
Weighted
Average
 
Conditional repayment rate
  
 
NM
 
  
 
21.6
    NM        20.8
Discount rate
  
 
NM
 
  
 
3.3
    NM        2.3
Nonrecourse Debt, at Fair Value
Reverse Mortgage Loans
Outstanding notes issued that are securitized by nonrecourse debt are paid using the cash flows from the underlying reverse mortgage loans, which serve as collateral for the debt. The fair value of nonrecourse debt is estimated using Level 3 unobservable market inputs. 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: borrower repayments rates and discount rates.
The Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability, including, but not limited to, assumptions for prepayment and discount rates. The following table presents the weighted average significant unobservable assumptions used in the fair value measurements of nonrecourse debt for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Performing/Nonperforming HECM securitizations
                                
Weighted average remaining life (in years)
  
 
0.7-0.9
 
 
 
0.8
 
    0.2 - 0.8       0.5  
Conditional repayment rate
  
 
16.1% - 26.0
 
 
19.9
   
30.8% - 54.4
    43.5
Discount rate
  
 
NM
 
 
 
4.1
    NM       2.3
Securitized
Non-Agency
Reverse
                                
Weighted average remaining life (in years)
  
 
0.8-2.2
 
 
 
1.6
 
    1.0 - 2.3       1.6  
Conditional repayment rate
  
 
15.6% - 37.0
 
 
26.3
   
18.4% - 35.9
    28.2
Discount rate
  
 
NM
 
 
 
4.0
    NM       2.2
 
Commercial Mortgage Loans
Outstanding nonrecourse notes issued that are securitized by loans held for investment, subject to nonrecourse debt, are paid using the cash flows from the underlying mortgage loans. The fair value of nonrecourse debt is estimated using Level 3 unobservable market inputs. The estimated fair value is based on the net present value of projected cash flows over the estimated life of the liability.
The Company’s valuation considers assumptions that it believes a market participant would consider in valuing the liability, including, but not limited to, assumptions for prepayment 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. The following table presents the significant unobservable assumptions used in the fair value measurements of nonrecourse debt for the periods indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
    
Weighted

Average
   
Range
    
Weighted

Average
 
Weighted average remaining life (in months)
  
 
NM
 
  
 
3.7
 
    NM        4.0  
Weighted average prepayment speed (SMM)
  
 
NM
 
  
 
15.7
    NM        14.0
Discount rate
  
 
NM
 
  
 
4.9
    NM        3.1
Deferred Purchase Price Liabilities
Deferred purchase price liabilities are measured using a present value of future payments which considers various assumptions, including future loan
origination volumes, projected earnings and discount rates. As of March 31, 2022 and December 31, 2021, the Company utilized a discount rates of

35
% to value the deferred 
purchase price liabilities. As this value is largely based on unobservable inputs, the Company classifies this liability as
Level 3 in the fair value hierarchy.
Tax Receivable Agreement (“TRA”) Obligation
The fair value of the TRA obligation resulting from the exchanges at the Business Combination Closing Date is derived through the use of a DCF model. The significant 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 an assumed weighted average state and local income tax rate, and a 13.5% discount
rate at March 31, 2022 and December 31, 2021 applied
 
to future payments under the Tax Receivable Agreements. The Company classifies the TRA obligation as Level 3 in the fair value hierarchy.
Nonrecourse MSR Financing Liability
The Company has sold to certain third parties the right to receive all excess servicing and ancillary fees related to identified MSRs in exchange for an upfront payment equal to the entire purchase price of the identified MSRs.
The Company has elected to account for the servicing liability using the fair value option. Consistent with the underlying MSRs, fair value is derived through a DCF analysis and calculated using a computer pricing model. This computer valuation is based on the objective characteristics of the portfolio (loan amount, note rate, etc.) and commonly used industry assumptions (PSAs, etc.). The assumptions taken into account by the pricing model are those which many active purchasers of servicing rights employ in their evaluations of portfolios for sale in the secondary market. The unique characteristics of the secondary servicing market often dictate adjustments to parameters over short periods of time.
Subjective factors are also considered in the derivation of fair values, including levels of supply and demand for servicing, interest rate trends, and perception of risk not incorporated into prepayment assumptions.
The Company classifies the valuations of the nonrecourse MSR financing liability as Level 3 in the fair value disclosures.
 
 
The Company utilized the following weighted average assumptions in estimating the fair value of the outstanding nonrecourse MSR financing liability:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average prepayment speed (CPR)
  
 
0.7% - 10.5
 
 
6.6
   
2.0% - 11.0
    7.7%  
Discount rate
  
 
8.1% - 10.1
 
 
8.5
   
8.1% - 10.1
    9.1%  
Weighted average delinquency rate
  
 
NM
 
 
 
1.3
    NM       1.3%  
Retained Bonds, at Fair Value
The retained bonds, at fair value, represents the U.S. Risk Retention Certificates, a 5% eligible vertical interest in the Company’s unconsolidated VIEs: HAWT 2021-INV1, HAWT 2021-INV2 and HAWT 2021-INV3. The beneficial interests retained consist of an interest in each class of securities issued by the Trust. Because of the nature of the valuation inputs and due to the lack of observable market prices or data the Company classifies retained bonds as Level 3 assets within the GAAP hierarchy. Quarterly, management obtains third party valuations to assess the reasonableness of the fair value calculations provided by the internal valuation model. The following table presents the weighted average significant unobservable assumptions used in the fair value measurement of retained bonds for the period indicated:
 
    
March 31, 2022
   
December 31, 2021
 
Unobservable Assumptions
  
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average remaining life (in years)
  
 
2.5 - 24.7
 
 
 
5.0
 
   
2.6 - 25.0
      5.1  
Discount rate
  
 
-2.6% - 8.9
 
 
4.1
   
1.9% - 8.2
    2.7
Warrants
The Company has determined that the FoA warrants are subject to treatment as a liability. The warrants issued are exercisable for shares of Class A Common Stock of FoA at an exercise price of $11.50 per share. 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. Accordingly, the warrants are classified as Level 1 financial instruments.
 
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, 2022
 
    
Total Fair
Value
    
Level 1
    
Level 2
    
Level 3
 
Assets
                                   
Loans held for investment, subject to HMBS related obligations
  
$
10,672,152
 
  
$
—  
 
  
$
—  
 
  
$
10,672,152
 
Loans held for investment, subject to nonrecourse debt:
                                   
Reverse mortgage loans
  
 
5,830,105
 
  
 
—  
 
  
 
—  
 
  
 
5,830,105
 
Fix & flip mortgage loans
  
 
405,885
 
  
 
—  
 
  
 
—  
 
  
 
405,885
 
Loans held for investment:
                                   
Reverse mortgage loans
  
 
1,103,163
 
  
 
—  
 
  
 
—  
 
  
 
1,103,163
 
Fix & flip mortgage loans
  
 
69,962
 
  
 
—  
 
  
 
—  
 
  
 
69,962
 
Agricultural loans
  
 
45,865
 
  
 
—  
 
  
 
 
  
 
45,865
 
Loans held for sale:
                                   
Residential mortgage loans
  
 
1,500,785
 
  
 
—  
 
  
 
1,480,312
 
  
 
20,473
 
SRL
  
 
131,137
 
  
 
—  
 
  
 
 
  
 
131,137
 
Portfolio
  
 
77,435
 
  
 
—  
 
  
 
 
  
 
77,435
 
MSRs
  
 
426,102
 
  
 
—  
 
  
 
 
  
 
426,102
 
Derivative assets:
                                   
Forward commitments, TBAs, and Treasury Futures
  
 
2,172
 
  
 
—  
 
  
 
2,172
 
  
 
 
IRLCs
  
 
2,736
 
  
 
—  
 
  
 
 
  
 
2,736
 
Forward MBS
  
 
34,867
 
  
 
—  
 
  
 
34,867
 
  
 
 
Interest rate swap futures
  
 
241,430
 
  
 
241,430
 
  
 
 
  
 
 
Other assets:
                                   
Investments
  
 
6,000
 
  
 
—  
 
  
 
 
  
 
6,000
 
Retained bonds
  
 
50,875
 
  
 
—  
 
  
 
 
  
 
50,875
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets
  
$
20,600,671
 
  
$
241,430
 
  
$
1,517,351
 
  
$
18,841,890
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities
                                   
HMBS related obligations
  
$
10,548,131
 
  
$
—  
 
  
$
—  
 
  
$
10,548,131
 
Nonrecourse debt:
                                   
Nonrecourse debt in consolidated VIE trusts
  
 
6,032,157
 
  
 
—  
 
  
 
—  
 
  
 
6,032,157
 
Nonrecourse commercial loan financing liability
  
 
127,639
 
  
 
—  
 
  
 
—  
 
  
 
127,639
 
Nonrecourse MSR financing liability
  
 
163,981
 
  
 
—  
 
  
 
—  
 
  
 
163,981
 
Deferred purchase price liabilities:
                                   
Deferred purchase price liabilities
  
 
7,852
 
  
 
—  
 
  
 
—  
 
  
 
7,852
 
TRA obligation
  
 
29,380
 
  
 
—  
 
  
 
—  
 
  
 
29,380
 
Derivative liabilities:
                                   
Forward MBS
  
 
1,183
 
  
 
—  
 
  
 
1,183
 
  
 
—  
 
Forward commitments, TBAs, and Treasury Futures
  
 
57
 
  
 
57
 
  
 
—  
 
  
 
—  
 
Interest rate swap futures
  
 
90,124
 
  
 
90,124
 
  
 
0
 
  
 
—  
 
Warrant Liability
  
 
5,648
 
  
 
5,648
 
  
 
—  
 
  
 
—  
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Total liabilities
  
$
17,006,152
 
  
$
95,829
 
  
$
1,183
 
  
$
16,909,140
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
    
December 31, 2021
 
    
Total Fair
Value
    
Level 1
    
Level 2
    
Level 3
 
Assets
                                   
Loans held for investment, subject to HMBS related obligations
   $ 10,556,054      $ —        $ —        $ 10,556,054  
Loans held for investment, subject to nonrecourse debt:
                                   
Reverse mortgage loans
     5,823,301        —          —          5,823,301  
Fix & flip mortgage loans
     394,893        —          —          394,893  
Loans held for investment:
                                   
Reverse mortgage loans
     940,604        —          —          940,604  
Fix & flip mortgage loans
     62,933        —          —          62,933  
Agricultural loans
     27,791        —          —          27,791  
Loans held for sale:
                                   
Residential mortgage loans
     1,902,952        —          1,885,627        17,325  
SRL
     98,852        —          —          98,852  
Portfolio
     50,574        —          —          50,574  
MSRs
     427,942        —          —          427,942  
Derivative assets:
                                   
Forward commitments, TBAs, and Treasury Futures
     1,763        —          1,763        —    
IRLCs
     23,222        —          —          23,222  
Forward MBS
     1,235        —          1,235        —    
Interest rate swap futures
     22,650        22,650        —          —    
Other assets:
                                   
Investments
     6,000        —          —          6,000  
Retained bonds
     55,614        —          —          55,614  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total assets
   $ 20,396,380      $ 22,650      $ 1,888,625      $ 18,485,105  
    
 
 
    
 
 
    
 
 
    
 
 
 
Liabilities
                                   
HMBS related obligations
   $ 10,422,358      $ —        $ —        $ 10,422,358  
Nonrecourse debt:
                                   
Nonrecourse debt in consolidated VIE trusts
     5,857,069        —          —          5,857,069  
Nonrecourse commercial loan financing liability
     111,738        —          —          111,738  
Nonrecourse MSR financing liability
     142,435        —          —          142,435  
Deferred purchase price liabilities:
                                   
Deferred purchase price liabilities
     12,852        —          —          12,852  
TRA obligation
     29,380        —          —          29,380  
Derivative liabilities:
                                   
Forward MBS
     1,644        —          1,644        —    
Forward commitments, TBAs, and Treasury Futures
     186        108        78        —    
Interest rate swap futures
     24,848        24,848        —          —    
Warrant Liability
     5,497        5,497        —          —    
    
 
 
    
 
 
    
 
 
    
 
 
 
Total liabilities
   $ 16,608,007      $ 30,453      $ 1,722      $ 16,575,832  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
Assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3, in thousands):
 
    
Successor
 
    
Assets
 
March 31, 2022
  
Loans held for
investment
   
Loans held for
investment,
subject to
nonrecourse
debt
   
Loans held
for sale
   
Derivative
assets
   
MSRs
   
Retained
bonds
   
Investments
 
Beginning balance, January 1, 2022
  
$
11,587,382
 
 
$
6,218,194
 
 
$
166,750
 
 
$
23,222
 
 
$
427,942
 
 
$
55,614
 
 
$
6,000
 
Total gain or losses included in earnings
  
 
(35,895
 
 
(313,720
 
 
(7,040
 
 
(20,486
 
 
52,368
 
 
 
(3,289
 
 
—  
 
Purchases, settlements and transfers:
                                                        
Purchases and additions, net
  
 
1,848,155
 
 
 
30,342
 
 
 
396,020
 
 
 
—  
 
 
 
53,444
 
 
 
—  
 
 
 
—  
 
Sales and settlements
  
 
(612,624
 
 
(586,276
 
 
(329,590
 
 
—  
 
 
 
(107,652
 
 
(1,450
)
 
 
—  
 
Transfers in/(out) between categories
  
 
(895,876
 
 
887,450
 
 
 
2,905
 
 
 
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance, March 31, 2022
  
$
11,891,142
 
 
$
6,235,990
 
 
$
229,045
 
 
$
2,736
 
 
$
426,102
 
 
$
50,875
 
 
$
6,000
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Successor
 
    
Liabilities
 
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, January 1, 2022
  
$
(10,422,358
 
$
(12,852
 
$
(5,857,069
 
$
(111,738
 
$
(155,108
 
$
(29,380
Total gains or losses included in earnings
  
 
85,582
 
 
 
—  
 
 
 
105,340
 
 
 
254
 
 
 
(16,038
 
 
 
Purchases, settlements and transfers:
                                                
Purchases and additions, net
  
 
(948,682
 
 
—  
 
 
 
(1,048,499
 
 
(60,658
 
 
7,165
 
 
 
—  
 
Sales and settlements
  
 
737,327
 
 
 
5,000
 
 
 
768,072
 
 
 
44,502
 
 
 
—  
 
 
 
—  
 
Transfers in/(out) between categories
  
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
—  
 
 
 
 
 
 
—  
 
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance, March 31, 2022
  
$
(10,548,131
 
$
(7,852
 
$
(6,032,156
 
$
(127,640
 
$
(163,981
 
$
(29,380
)
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Predecessor
 
    
Assets
 
March 31, 2021
  
Loans held for
investment
   
Loans held
for
investment,
subject to
nonrecourse
debt
   
Loans held
for sale
   
Derivative
assets
   
MSRs
   
Investments
 
Beginning balance, January 1, 2021
   $ 10,659,984     $ 5,396,167     $ 152,854     $ 88,660     $ 180,684     $ 18,934  
Total gain or losses included in earnings
     132,499       (37,757     2,764       (50,040     20,349       (9,464
Purchases, settlements and transfers:
                                                
Purchases and additions, net
     1,143,109       21,064       175,551       —         74,978       —    
Sales and settlements
     (534,738     (360,128     (152,579     (46     (8,647     —    
Transfers in/(out) between categories
     (229,118     272,098       (42,909     —         —         —    
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance, March 31, 2021
   $ 11,171,736     $ 5,291,444     $ 135,681     $ 38,574     $ 267,364     $ 9,470  
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
    
Predecessor
 
    
Liabilities
 
March 31, 2021
  
HMBS
related
obligations
   
Derivative
liabilities
   
Deferred
purchase
price
liability
   
Nonrecourse
debt in
consolidated
VIE trusts
   
Nonrecourse
MSR
financing
liability
 
Beginning balance, January 1, 2021
   $ (9,788,668   $ (1,084   $ (3,842   $ (5,257,754   $ (14,088
Total gain or losses included in earnings
     (41,434     —         (29     (30,770     390  
Purchases, settlements and transfers:
                                        
Purchases and additions, net
     (602,172     —         —         (575,668     (8,353
Sales and settlements
     506,142       148       657       658,300       —    
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance, March 31, 2021
   $ (9,926,132   $ (936   $ (3,214   $ (5,205,892   $ (22,051
    
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
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 unpaid principal balance (“UPB”) at March 31, 2022 and December 31, 2021, of financial assets and liabilities for which the Company has elected the fair value option (in thousands):
 
March 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
  
$
10,672,152
 
  
$
10,109,820
 
Loans held for investment, subject to nonrecourse debt:
                 
Reverse mortgage loans
  
 
5,830,105
 
  
 
5,481,952
 
Commercial mortgage loans
  
 
405,885
 
  
 
404,974
 
Loans held for investment:
                 
Reverse mortgage loans
  
 
1,103,163
 
  
 
988,321
 
Commercial mortgage loans
  
 
115,827
 
  
 
115,091
 
Loans held for sale:
                 
Residential mortgage loans
  
 
1,500,785
 
  
 
1,499,525
 
Commercial mortgage loans
  
 
208,572
 
  
 
211,516
 
Liabilities at fair value under the fair value option
                 
HMBS related obligations
  
 
10,548,131
 
  
 
10,109,820
 
Nonrecourse debt:
                 
Nonrecourse debt in consolidated VIE trusts
  
 
6,032,157
 
  
 
6,152,713
 
Nonrecourse MSR financing liability
  
 
163,981
 
  
 
163,981
 
Nonrecourse commercial loan financing liability
  
 
127,639
 
  
 
123,900
 
December 31, 2021
  
Estimated Fair
Value
    
Unpaid Principal
Balance
 
Assets at fair value under the fair value option
                 
Loans held for investment, subject to HMBS related obligations
   $ 10,556,054      $ 9,849,835  
Loans held for investment, subject to nonrecourse debt:
                 
Reverse mortgage loans
     5,823,301        5,165,479  
Commercial mortgage loans
     394,893        388,788  
Loans held for investment:
                 
Reverse mortgage loans
     940,605        815,426  
Commercial mortgage loans
     90,723        89,267  
Loans held for sale:
                 
Residential mortgage loans
     1,902,953        1,859,788  
Commercial mortgage loans
     149,425        145,463  
Liabilities at fair value under the fair value option
                 
HMBS related obligations
     10,422,358        9,849,835  
Nonrecourse debt:
                 
Nonrecourse debt in consolidated VIE trusts
     5,857,069        5,709,946  
Nonrecourse MSR financing liability
     142,435        142,435  
Nonrecourse commercial loan financing liability
     111,738        107,744  
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,
2022
 
  
January 1, 2021

to

March 31, 2021
 
 
  
Successor
 
  
Predecessor
 
Net fair value gains (losses) on loans and related obligations:
  
  
Interest income on commercial and reverse loans
  
$
163,694
 
   $ 160,568  
Change in fair value of loans
  
 
(507,327
     (51,346
Change in fair value of MBS
  
 
—  
 
     —    
    
 
 
    
 
 
 
Net fair value gains (losses) on loans
  
 
(343,633
     109,222  
    
 
 
    
 
 
 
Interest expense on HMBS and nonrecourse obligations
  
 
(106,643
     (119,201
Change in fair value of derivatives
  
 
165,579
 
     43,972  
Change in fair value of related obligations
  
 
295,132
 
     42,670  
    
 
 
    
 
 
 
Net fair value gains (losses) on related obligations
  
 
354,068
 
     (32,559
    
 
 
    
 
 
 
Net fair value gains (losses) on loans and related
obligations
  
$
10,435
 
   $ 76,663  
    
 
 
    
 
 
 
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, 2022 and December 31, 2021, all financial instruments were either recorded at fair value or the carrying value approximated fair value. For financial instruments that were not recorded at fair value, such as cash and cash equivalents including restricted cash, servicer advances, and other financing lines of credit, the carrying value approximates fair value due to the short-term nature of such instruments. The fair value of assets and liabilities whose carrying value approximates fair value is determined using Level 3 inputs, with the exception of cash and cash equivalents including restricted cash, which are Level 1 inputs.