| Fair Value Measurements |
Fair Value Measurements
We utilize fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, we use present value techniques and other valuation methods to estimate the fair values of our financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, our future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used. Refer to Note 24 in the Consolidated Financial Statements and Notes as of and for the period ended December 31, 2015, included in this document, for a description of our valuation methodologies and information about the fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis.
The following tables present the financial instruments carried at fair value as of June 30, 2016 and December 31, 2015, by caption on the Consolidated Statement of Financial Condition and by level in the valuation hierarchy. | | | | | | | | | | | | | | | | | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | June 30, 2016 | (Dollars in millions) | Investment securities available-for-sale | | | | | | | | Agency - Commercial | $ | — |
| | $ | 640 |
| | $ | — |
| | $ | 640 |
| Agency - Residential | — |
| | 473 |
| | — |
| | 473 |
| Municipal obligations | — |
| | 32 |
| | — |
| | 32 |
| Loans held-for-sale | | | | | | | | Residential first mortgage loans | — |
| | 3,071 |
| | — |
| | 3,071 |
| Loans held-for-investment | | | | | | | | Residential first mortgage loans | — |
| | 6 |
| | — |
| | 6 |
| Second mortgage loans | — |
| | — |
| | 38 |
| | 38 |
| HELOC loans | — |
| | — |
| | 44 |
| | 44 |
| Mortgage servicing rights | — |
| | — |
| | 301 |
| | 301 |
| Derivative assets | 3 |
| | 92 |
| | 83 |
| | 178 |
| Total assets at fair value | $ | 3 |
| | $ | 4,314 |
| | $ | 466 |
| | $ | 4,783 |
| Derivative liabilities | $ | (3 | ) | | $ | (130 | ) | | $ | — |
| | $ | (133 | ) | Warrant liabilities | — |
| | (9 | ) | | — |
| | (9 | ) | DOJ litigation settlement | — |
| | — |
| | (84 | ) | | (84 | ) | Total liabilities at fair value | $ | (3 | ) | | $ | (139 | ) | | $ | (84 | ) | | $ | (226 | ) | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | December 31, 2015 | (Dollars in millions) | Investment securities available-for-sale | | | | | | | | Agency - Commercial | $ | — |
| | $ | 766 |
| | $ | — |
| | $ | 766 |
| Agency - Residential | — |
| | 514 |
| | — |
| | 514 |
| Municipal obligations | — |
| | 14 |
| | — |
| | 14 |
| Loans held-for-sale | | | | | | | | Residential first mortgage loans | — |
| | 2,541 |
| | — |
| | 2,541 |
| Loans held-for-investment | | | | | | | | Residential first mortgage loans | — |
| | 6 |
| | — |
| | 6 |
| Second mortgage loans | — |
| | — |
| | 42 |
| | 42 |
| HELOC loans | — |
| | — |
| | 64 |
| | 64 |
| Mortgage servicing rights | — |
| | — |
| | 296 |
| | 296 |
| Derivative assets | — |
| | 32 |
| | 26 |
| | 58 |
| Total assets at fair value | $ | — |
| | $ | 3,873 |
| | $ | 428 |
| | $ | 4,301 |
| Derivative liabilities | $ | (1 | ) | | $ | (17 | ) | | $ | — |
| | $ | (18 | ) | Warrant liabilities | — |
| | (8 | ) | | — |
| | (8 | ) | DOJ litigation settlement | — |
| | — |
| | (84 | ) | | (84 | ) | Total liabilities at fair value | $ | (1 | ) | | $ | (25 | ) | | $ | (84 | ) | | $ | (110 | ) |
We had no transfers of assets or liabilities recorded at fair value between fair value levels during the six months ended June 30, 2016 and 2015.
We utilized US Treasury future, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. Gains and losses for individual lines in the tables do not reflect the effect of our risk management activities related to such level 3 instruments.
Fair value measurements using significant unobservable inputs
The tables below include a roll forward of the Consolidated Statement of Financial Condition amounts for the three and six months ended June 30, 2016 and 2015 (including the change in fair value) for financial instruments classified by us within level 3 of the valuation hierarchy: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded in Earnings | | Recorded in OCI | | | | | Three Months Ended June 30, 2016 | Balance at Beginning of Period | Total Unrealized Gains / (Losses) | Total Realized Gains / (Losses) | | Total Unrealized Gains / (Losses) | Purchases / Originations | Sales | Settlements | Balance at End of Period | Assets | (Dollars in millions) | Loans held-for-investment | | | | | | | | | | Second mortgage loans | $ | 40 |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (2 | ) | $ | 38 |
| HELOC loans | 55 |
| (3 | ) | — |
| | — |
| — |
| — |
| (8 | ) | 44 |
| Mortgage servicing rights | 281 |
| (44 | ) | — |
| | — |
| 64 |
| — |
| — |
| 301 |
| Totals | $ | 376 |
| $ | (47 | ) | $ | — |
| | $ | — |
| $ | 64 |
| $ | — |
| $ | (10 | ) | $ | 383 |
| Liabilities | | | | | | | | | | DOJ litigation settlement | $ | (84 | ) | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (84 | ) | Derivative financial instruments (net) | | | | | | | | | | Rate lock commitments | $ | 61 |
| $ | 58 |
| $ | — |
| | $ | — |
| $ | 106 |
| $ | (126 | ) | $ | (16 | ) | $ | 83 |
| | | | | | | | | | | Three Months Ended June 30, 2015 | | | | | | | | | | Assets | | | | | | | | | | Other investments | $ | 100 |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 100 |
| Investment securities available-for-sale | | | | | | | | | | Loans held-for-investment | | | | | | | | | | Second mortgage loans | 50 |
| 2 |
| — |
| | — |
| — |
| — |
| (4 | ) | 48 |
| HELOC loans | 113 |
| (2 | ) | — |
| | — |
| — |
| — |
| (18 | ) | 93 |
| Mortgage servicing rights | 279 |
| 10 |
| — |
| | — |
| 77 |
| (49 | ) | — |
| 317 |
| Totals | $ | 542 |
| $ | 10 |
| $ | — |
| | $ | — |
| $ | 77 |
| $ | (49 | ) | $ | (22 | ) | $ | 558 |
| Liabilities | | | | | | | | | | Long-term debt | $ | (70 | ) | $ | — |
| $ | (1 | ) | | $ | — |
| $ | — |
| $ | 24 |
| $ | 11 |
| $ | (36 | ) | DOJ litigation settlement | (82 | ) | (2 | ) | — |
| | — |
| — |
| — |
| — |
| (84 | ) | Totals | $ | (152 | ) | $ | (2 | ) | $ | (1 | ) | | $ | — |
| $ | — |
| $ | 24 |
| $ | 11 |
| $ | (120 | ) | Derivative financial instruments (net) | | | | | | | | | | Rate lock commitments | $ | 55 |
| $ | (30 | ) | $ | — |
| | $ | — |
| $ | 93 |
| $ | (75 | ) | $ | (13 | ) | $ | 30 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Recorded in Earnings | | Recorded in OCI | | | | | Six Months Ended June 30, 2016 | Balance at Beginning of Period | Total Unrealized Gains / (Losses) | Total Realized Gains / (Losses) | | Total Unrealized Gains / (Losses) | Purchases / Originations | Sales | Settlements | Balance at End of Period | Assets | (Dollars in millions) | Loans held-for-investment | | | | | | | | | | Second mortgage loans | $ | 42 |
| $ | 1 |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | (5 | ) | 38 |
| HELOC loans | 64 |
| (3 | ) | — |
| | — |
| — |
| — |
| (17 | ) | 44 |
| Mortgage servicing rights | 296 |
| (92 | ) | — |
| | — |
| 121 |
| (24 | ) | — |
| 301 |
| Totals | $ | 402 |
| $ | (94 | ) | $ | — |
| | $ | — |
| $ | 121 |
| $ | (24 | ) | $ | (22 | ) | $ | 383 |
| Liabilities | | | | | | | | | | DOJ litigation | $ | (84 | ) | $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| (84 | ) | Derivative financial instruments (net) | | | | | | | | | | Rate lock commitments | $ | 26 |
| $ | 120 |
| $ | — |
| | $ | — |
| $ | 187 |
| $ | (220 | ) | $ | (30 | ) | $ | 83 |
| | | | | | | | | | | Six Months Ended June 30, 2015 | | | | | | | | | | Assets | | | | | | | | | | Other investments | $ | 100 |
| $ | — |
| $ | — |
| | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 100 |
| Investment securities available-for-sale | | | | | | | | | | Municipal obligation | 2 |
| — |
| — |
| | — |
| — |
| — |
| (2 | ) | — |
| Loans held-for-investment | | | | | | | | | | Second mortgage loans | 53 |
| 2 |
| 1 |
| | — |
| — |
| — |
| (8 | ) | 48 |
| HELOC loans | 132 |
| (6 | ) | — |
| | — |
| — |
| — |
| (33 | ) | 93 |
| Mortgage servicing rights | 258 |
| (16 | ) | — |
| | — |
| 146 |
| (71 | ) | — |
| 317 |
| Totals | $ | 545 |
| $ | (20 | ) | $ | 1 |
| | $ | — |
| $ | 146 |
| $ | (71 | ) | $ | (43 | ) | $ | 558 |
| Liabilities | | | | | | | | | | Long-term debt | $ | (84 | ) | $ | — |
| $ | (3 | ) | | $ | — |
| $ | — |
| $ | 24 |
| $ | 27 |
| $ | (36 | ) | DOJ litigation | (82 | ) | (2 | ) | — |
| | — |
| — |
| — |
| — |
| (84 | ) | Totals | $ | (166 | ) | $ | (2 | ) | $ | (3 | ) | | $ | — |
| $ | — |
| $ | 24 |
| $ | 27 |
| $ | (120 | ) | Derivative financial instruments (net) | | | | | | | | | | Rate lock commitments | $ | 31 |
| $ | 7 |
| $ | — |
| | $ | — |
| $ | 191 |
| $ | (172 | ) | $ | (27 | ) | $ | 30 |
|
The following tables present the quantitative information about recurring level 3 fair value financial instruments and the fair value measurements as of June 30, 2016 and December 31, 2015: | | | | | | | | | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | June 30, 2016 | (Dollars in millions) | Assets | | Second mortgage loans | $ | 38 |
| Discounted cash flows | Discount rate
Constant prepayment rate
Constant default rate | 7.2% - 10.8% (9.0%)10.9% - 16.4% (13.6%)
2.7% - 4.1% (3.4%) | HELOC loans | $ | 44 |
| Discounted cash flows | Discount rate | 7.8% - 11.7% (9.7%) | Mortgage servicing rights | $ | 301 |
| Discounted cash flows | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | 6.7% - 10.1% (8.4%)
13.4% - 19.3% (16.4%)
$57 - $85 ($71) | Liabilities | | | | | DOJ litigation settlement | $ | (84 | ) | Discounted cash flows | Discount rate | 5.6% - 8.3% (6.9%) | Derivative financial instruments | | | | | Rate lock commitments | $ | 83 |
| Consensus pricing | Origination pull-through rate | 65.5% - 98.3% (81.9%) |
| | | | | | | | | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | December 31, 2015 | (Dollars in millions) | Assets | | Second mortgage loans | $ | 42 |
| Discounted cash flows | Discount rate
Constant prepayment rate
Constant default rate | 7.2% - 10.8% (9.0%)13.5% - 20.2% (16.9%)
2.6% - 4.0% (3.3%) | HELOC loans | $ | 64 |
| Discounted cash flows | Discount rate | 6.8% - 10.1% (8.4%) | Mortgage servicing rights | $ | 296 |
| Discounted cash flows | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | 6.6% - 9.9% (8.2%)
10.3% - 14.8% (12.6%)
$57 - $86 ($72) | Liabilities | | | | | DOJ litigation settlement | $ | (84 | ) | Discounted cash flows | Discount rate | 4.9% - 9.5% (7.2%) | Derivative financial instruments | | | | | Rate lock commitments | $ | 26 |
| Consensus pricing | Origination pull-through rate | 67.6% - 101.5% (84.6%) |
Recurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the second mortgage loans are discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value.
The HELOC loans are valued utilizing a loan-level discounted cash flow model which projects expected cash flows given three potential outcomes: (1) paid-in-full at scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification at scheduled maturity into an amortizing HELOC. Loans are placed into the potential outcome buckets based on their underlying current delinquency, FICO scores and property CLTV all of which are unobservable inputs. Estimated cash flows are then discounted back using an unobservable discount rate. Loans within the HELOC portfolio contain FICO scores with a minimum of 444, maximum of 817, and a weighted average of 665. For the HELOC loans, increases (decreases) in the discount rate, in isolation, would lower (higher) the fair value measurement.
The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation would result in a significantly lower (higher) fair value measurement. Additionally, the key economic assumptions used in determining the fair value of MSRs capitalized during the three and six months ended June 30, 2016 and 2015 periods were as follows: | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | 2016 | | 2015 | | 2016 | | 2015 | Weighted average life (in years) | 7.0 |
| | 8.4 |
| | 7.0 |
| | 7.9 |
| Weighted average constant prepayment rate | 13.3 | % | | 9.3 | % | | 13.5 | % | | 11.4 | % | Weighted average option adjusted spread | 8.9 | % | | 8.7 | % | | 8.2 | % | | 8.6 | % |
The key economic assumptions reflected in the overall fair value of the entire portfolio of MSRs were as follows: | | | | | | | | June 30,
2016 | | December 31,
2015 | Weighted average life (in years) | 5.9 |
| | 7.3 |
| Weighted average constant prepayment rate | 16.4 | % | | 12.6 | % | Weighted average option adjusted spread | 8.4 | % | | 8.2 | % |
The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of our actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value measurement.
The significant unobservable input used in the fair value measurement of the DOJ litigation settlement is the discount rate. Significant increases (decreases) in the discount rate in isolation could result in a marginally lower (higher) fair value measurement. For further information on the fair value inputs related to the DOJ litigation, see Note 17 of the Notes to the Consolidated Financial Statements, herein. Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis We also have assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below: | | | | | | | | | | | | | | Total (1) | | Level 2 | | Level 3 | | (Dollars in millions) | June 30, 2016 | | Loans held-for-sale (2) | $ | 16 |
| | $ | 16 |
| | $ | — |
| Impaired loans held-for-investment (3) | | | | | | Residential first mortgage loans | 25 |
| | — |
| | 25 |
| Commercial and industrial loans | 1 |
| | — |
| | 1 |
| Repossessed assets (4) | 19 |
| | — |
| | 19 |
| Totals | $ | 61 |
| | $ | 16 |
| | $ | 45 |
| December 31, 2015 | | | | | | Loans held-for-sale (2) | $ | 8 |
| | $ | 8 |
| | $ | — |
| Impaired loans held-for-investment (3) | | | | | | Residential first mortgage loans | 40 |
| | — |
| | 40 |
| Commercial real estate loans | 2 |
| | — |
| | 2 |
| Repossessed assets (4) | 17 |
| | — |
| | 17 |
| Totals | $ | 67 |
| | $ | 8 |
| | $ | 59 |
|
| | (1) | The fair values are obtained at various dates during the six months ended June 30, 2016 and the year ended December 31, 2015, respectively. |
| | (2) | We recorded less than $1 million and $1 million in fair value losses on loans held-for-sale for which we did not elect the fair value option (included in interest income on the Consolidated Statements of Operations) during the three and six months ended June 30, 2016, respectively compared to less than $1 million and $1 million in fair value losses on loans held-for-sale during the three and six months ended June 30, 2015, respectively. |
| | (3) | We recorded $9 million and $20 million in fair value losses on impaired loans (included in provision (benefit) for loan losses on Consolidated Statements of Operations) during the three and six months ended June 30, 2016, respectively, compared to $21 million and $56 million in fair value losses on impaired loans during the three and six months ended June 30, 2015, respectively. |
| | (4) | We recorded $3 million and $2 million in losses related to write downs of repossessed assets based on the estimated fair value of the specific assets during the three and six months ended June 30, 2016, respectively and recognized net gain of zero and $1 million on sales of repossessed assets (both write downs and net gains/losses are included in assets resolution expense on the Consolidated Statements of Operations) during the three and six months ended June 30, 2016. We recorded zero and $1 million in losses related to write downs of repossessed assets based on the estimated fair value of the specific assets during the three and six months ended June 30, 2015, respectively, and recognized a net gains of $1 million and $1 million on sales of repossessed assets during the three and six months ended June 30, 2015, respectively. |
The following tables present the quantitative information about nonrecurring level 3 fair value financial instruments and the fair value measurements as of June 30, 2016 and December 31, 2015: | | | | | | | | | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | June 30, 2016 | (Dollars in millions) | Impaired loans held-for-investment | | | | | Residential first mortgage loans | $ | 25 |
| Fair value of collateral | Loss severity discount | 20% - 25% (21.7%) | Commercial and industrial loans | $ | 1 |
| Fair value of collateral | Loss severity discount | 50% - 55% (53.6%) | Repossessed assets | $ | 19 |
| Fair value of collateral | Loss severity discount | 18% - 99% (58.4%) |
| | | | | | | | | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | December 31, 2015 | (Dollars in millions) | Impaired loans held-for-investment | | | | | Residential first mortgage loans | $ | 40 |
| Fair value of collateral | Loss severity discount | 35% - 45% (35.2%) | Commercial real estate loans | $ | 2 |
| Fair value of collateral | Loss severity discount | 45% - 55% (50.1%) | Repossessed assets | $ | 17 |
| Fair value of collateral | Loss severity discount | 16% - 100% (48.7%) |
Nonrecurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties.
Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost: | | | | | | | | | | | | | | | | | | | | | | June 30, 2016 | | | | Estimated Fair Value | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | (Dollars in millions) | Assets | | | | | | | | | | Cash and cash equivalents | $ | 184 |
| | $ | 184 |
| | $ | 184 |
| | $ | — |
| | $ | — |
| Investment securities available-for-sale | 1,145 |
| | $ | 1,145 |
| | — |
| | 1,145 |
| | — |
| Investment securities held-to-maturity | 1,211 |
| | $ | 1,237 |
| | — |
| | 1,237 |
| | — |
| Loans held-for-sale | 3,091 |
| | 3,094 |
| | — |
| | 3,094 |
| | — |
| Loans with government guarantees | 435 |
| | 422 |
| | — |
| | 422 |
| | — |
| Loans held-for-investment, net | 5,672 |
| | 5,640 |
| | — |
| | 6 |
| | 5,634 |
| Repossessed assets | 19 |
| | 19 |
| | — |
| | — |
| | 19 |
| Federal Home Loan Bank stock | 172 |
| | 172 |
| | — |
| | 172 |
| | — |
| Mortgage servicing rights | 301 |
| | 301 |
| | — |
| | — |
| | 301 |
| Bank owned life insurance | 267 |
| | 267 |
| | — |
| | 267 |
| | — |
| Other assets, foreclosure claims | 178 |
| | 178 |
| | — |
| | 178 |
| | — |
| Derivative financial instruments, assets | 178 |
| | 178 |
| | 3 |
| | 92 |
| | 83 |
| Liabilities | | | | | | | | | | Retail deposits | | | | | | | | | | Demand deposits and savings accounts | $ | (5,071 | ) | | $ | (4,863 | ) | | $ | — |
| | $ | (4,863 | ) | | $ | — |
| Certificates of deposit | (1,023 | ) | | (1,038 | ) | | — |
| | (1,038 | ) | | — |
| Government deposits | (974 | ) | | (962 | ) | | — |
| | (962 | ) | | — |
| Company controlled deposits | (1,503 | ) | | (1,459 | ) | | — |
| | (1,459 | ) | | — |
| Federal Home Loan Bank advances | (2,646 | ) | | (2,635 | ) | | — |
| | (2,635 | ) | | — |
| Other long-term debt | (247 | ) | | (77 | ) | | — |
| | (77 | ) | | — |
| Warrant liabilities | (9 | ) | | (9 | ) | | — |
| | (9 | ) | | — |
| DOJ litigation settlement | (84 | ) | | (84 | ) | | — |
| | — |
| | (84 | ) | Derivative financial instruments, liabilities | (133 | ) | | (133 | ) | | (3 | ) | | (130 | ) | | — |
|
| | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | Estimated Fair Value | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | (Dollars in millions) | Assets | | | | | | | | | | Cash and cash equivalents | $ | 208 |
| | $ | 208 |
| | $ | 208 |
| | $ | — |
| | $ | — |
| Investment securities available-for-sale | 1,294 |
| | 1,294 |
| | — |
| | 1,294 |
| | — |
| Investment securities held-to-maturity | 1,268 |
| | 1,262 |
| | — |
| | 1,262 |
| | — |
| Loans held-for-sale | 2,576 |
| | 2,578 |
| | — |
| | 2,578 |
| | — |
| Loans with government guarantees | 485 |
| | 469 |
| | — |
| | 469 |
| | — |
| Loans held-for-investment, net | 6,165 |
| | 6,121 |
| | — |
| | 6 |
| | 6,115 |
| Repossessed assets | 17 |
| | 17 |
| | — |
| | — |
| | 17 |
| Federal Home Loan Bank stock | 170 |
| | 170 |
| | — |
| | 170 |
| | — |
| Mortgage servicing rights | 296 |
| | 296 |
| | — |
| | — |
| | 296 |
| Bank owned life insurance | 178 |
| | 178 |
| | — |
| | 178 |
| | — |
| Other assets, foreclosure claims | 210 |
| | 210 |
| | — |
| | 210 |
| | — |
| Derivative financial instruments, assets | 58 |
| | 58 |
| | — |
| | 32 |
| | 26 |
| Liabilities | | | | | | | | | | Retail deposits | | | | | | | | | | Demand deposits and savings accounts | $ | (5,008 | ) | | $ | (4,744 | ) | | $ | — |
| | $ | (4,744 | ) | | $ | — |
| Certificates of deposit | (826 | ) | | (833 | ) | | — |
| | (833 | ) | | — |
| Government deposits | (1,062 | ) | | (1,045 | ) | | — |
| | (1,045 | ) | | — |
| Company controlled deposits | (1,039 | ) | | (947 | ) | | — |
| | (947 | ) | | — |
| Federal Home Loan Bank advances | (3,541 | ) | | (3,543 | ) | | — |
| | (3,543 | ) | | — |
| Long-term debt | (247 | ) | | (89 | ) | | — |
| | (89 | ) | | — |
| Warrant liabilities | (8 | ) | | (8 | ) | | — |
| | (8 | ) | | — |
| DOJ litigation settlement | (84 | ) | | (84 | ) | | — |
| | — |
| | (84 | ) | Derivative financial instruments, liabilities | (18 | ) | | (18 | ) | | (1 | ) | | (17 | ) | | — |
|
The methods and assumptions used by us in estimating fair value of financial instruments which are required for disclosure only, are as follows:
Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value. Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information.
Loans with government guarantees. The fair value is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Loans held-for-investment. The fair value is estimated using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Federal Home Loan Bank stock. No secondary market exists for Federal Home Loan Bank stock. The stock is bought and sold at par by the Federal Home Loan Bank. Management believes that the recorded value equals the fair value.
Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the policies as reported by the insurance companies.
Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying amount.
Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities. Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.
Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates current borrowing rates for similar types of borrowing arrangements.
Fair Value Option
We elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to mitigate a divergence between accounting losses and economic exposure. Interest income on loans held-for-sale is accrued on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the fair value option has been elected: | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | 2016 | | 2015 | | 2016 | | 2015 | Assets | (Dollars in millions) | Loans held-for-sale | | | | | | | | | Net gain on loan sales | $ | 145 |
| | $ | 37 |
| | $ | 289 |
| | $ | 142 |
| Loans held-for-investment | | | | | | | | | Interest income on loans | $ | 2 |
| | $ | 4 |
| | $ | 2 |
| | $ | 7 |
| | Other noninterest income | — |
| | (25 | ) | | — |
| | (34 | ) | Liabilities | | | | | | | | Long-term debt | | | | | | | | | Other noninterest income | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | (25 | ) | Litigation settlement | | | | | | | | | Other noninterest expense | $ | — |
| | $ | 3 |
| | $ | — |
| | $ | 2 |
|
The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding as of June 30, 2016 and December 31, 2015 for assets and liabilities for which the fair value option has been elected: | | | | | | | | | | | | | | | | | | | | | | | | June 30, 2016 | | December 31, 2015 | | | (Dollars in millions) | |
| Unpaid Principal Balance | Fair Value | Fair Value Over / (Under) Unpaid Principal Balance | Unpaid Principal Balance | Fair Value | Fair Value Over / (Under) Unpaid Principal Balance | Assets | | | | | | | | Nonaccrual loans | | | | | | | | Loans held-for-sale | $ | 1 |
| $ | 1 |
| $ | — |
| | $ | 1 |
| $ | — |
| $ | (1 | ) | Loans held-for-investment | 22 |
| 10 |
| (12 | ) | | 21 |
| 10 |
| (11 | ) | Total nonaccrual loans | $ | 23 |
| $ | 11 |
| $ | (12 | ) | | $ | 22 |
| $ | 10 |
| $ | (12 | ) | Other performing loans | | | | | | | | Loans held-for-sale | $ | 2,921 |
| $ | 3,070 |
| $ | 149 |
| | $ | 2,451 |
| $ | 2,541 |
| $ | 90 |
| Loans held-for-investment | 90 |
| 78 |
| (12 | ) | | 112 |
| 101 |
| (11 | ) | Total other performing loans | $ | 3,011 |
| $ | 3,148 |
| $ | 137 |
| | $ | 2,563 |
| $ | 2,642 |
| $ | 79 |
| Total loans | | | | | | | | Loans held-for-sale | $ | 2,922 |
| $ | 3,071 |
| $ | 149 |
| | $ | 2,452 |
| $ | 2,541 |
| $ | 89 |
| Loans held-for-investment | 112 |
| 88 |
| (24 | ) | | 133 |
| 111 |
| (22 | ) | Total loans | $ | 3,034 |
| $ | 3,159 |
| $ | 125 |
| | $ | 2,585 |
| $ | 2,652 |
| $ | 67 |
| Liabilities | | | | | | | | Litigation settlement (1) | $ | (118 | ) | $ | (84 | ) | $ | 34 |
| | $ | (118 | ) | $ | (84 | ) | $ | 34 |
|
| | (1) | We are obligated to pay $118 million in installment payments upon meeting certain performance conditions. |
|
Fair Value Measurements
The Company utilizes fair value measurements to record or disclose the fair value on certain assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability through an orderly transaction between market participants at the measurement date. The determination of fair values of financial instruments often requires the use of estimates. In cases where quoted market values in an active market are not available, the Company uses present value techniques and other valuation methods to estimate the fair values of its financial instruments. These valuation models rely on market-based parameters when available, such as interest rate yield curves or credit spreads. Unobservable inputs may be based on management's judgment, assumptions and estimates related to credit quality, the Company's future earnings, interest rates and other relevant inputs. These valuation methods require considerable judgment and the resulting estimates of fair value can be significantly affected by the assumptions made and methods used.
Valuation Hierarchy
U.S. GAAP establishes a three-level valuation hierarchy for disclosure of fair value measurements. The hierarchy is based on the transparency of the inputs used in the valuation process with the highest priority given to quoted prices available in active markets and the lowest priority to unobservable inputs where no active market exists, as discussed below.
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets in which the Company can participate as of the measurement date;
Level 2 - Quoted prices for similar instruments in active markets, and other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 - Unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing and asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input within the valuation hierarchy that is significant to the overall fair value measurement. Transfers between levels of the fair value hierarchy are recognized at the end of the reporting period.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the financial instruments carried at fair value as of December 31, 2015 and 2014, by caption on the Consolidated Statements of Financial Condition and by the valuation hierarchy (as described above). | | | | | | | | | | | | | | | | | December 31, 2015 | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | (Dollars in millions) | Investment securities available-for-sale | | | | | | | | Agency - Commercial | $ | — |
| | $ | 766 |
| | $ | — |
| | $ | 766 |
| Agency - Residential | — |
| | 514 |
| | — |
| | 514 |
| Municipal obligations | — |
| | 14 |
| | — |
| | 14 |
| Loans held-for-sale | | | | | | | | Residential first mortgage loans | — |
| | 2,541 |
| | — |
| | 2,541 |
| Loans held-for-investment | | | | | | | | Residential first mortgage loans | — |
| | 6 |
| | — |
| | 6 |
| Second mortgage loans | — |
| | — |
| | 42 |
| | 42 |
| HELOC loans | — |
| | — |
| | 64 |
| | 64 |
| Mortgage servicing rights | — |
| | — |
| | 296 |
| | 296 |
| Derivative assets | | | | | | | | Rate lock commitments | — |
| | — |
| | 26 |
| | 26 |
| Mortgage backed securities forwards | — |
| | 7 |
| | — |
| | 7 |
| Interest rate swaps and swaptions | — |
| | 25 |
| | — |
| | 25 |
| Total derivative assets | — |
| | 32 |
| | 26 |
| | 58 |
| Total assets at fair value | $ | — |
| | $ | 3,873 |
| | $ | 428 |
| | $ | 4,301 |
| Derivative liabilities | | | | | | | | U.S. Treasury and euro dollar futures | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | (1 | ) | Forward agency and loans sales | — |
| | (6 | ) | | — |
| | (6 | ) | Interest rate swap on FHLB advances | — |
| | (4 | ) | | — |
| | (4 | ) | Interest rate swaps | — |
| | (7 | ) | | — |
| | (7 | ) | Total derivative liabilities | (1 | ) | | (17 | ) | | — |
| | (18 | ) | Warrant liabilities | — |
| | (8 | ) | | — |
| | (8 | ) | DOJ litigation settlement | — |
| | — |
| | (84 | ) | | (84 | ) | Total liabilities at fair value | $ | (1 | ) | | $ | (25 | ) | | $ | (84 | ) | | $ | (110 | ) |
| | | | | | | | | | | | | | | | | December 31, 2014 | Level 1 | | Level 2 | | Level 3 | | Total Fair Value | | (Dollars in millions) | Investment securities available-for-sale | | | | | | | | Agency - Commercial | $ | — |
| | $ | 540 |
| | $ | — |
| | $ | 540 |
| Agency - Residential | — |
| | 1,130 |
| | — |
| | 1,130 |
| Municipal obligations | — |
| | — |
| | 2 |
| | 2 |
| Loans held-for-sale | | | | | | | | Residential first mortgage loans | — |
| | 1,196 |
| | — |
| | 1,196 |
| Loans held-for-investment | | | | | | | | Residential first mortgage loans | — |
| | 26 |
| | — |
| | 26 |
| Second mortgage loans | — |
| | — |
| | 53 |
| | 53 |
| HELOC loans | — |
| | — |
| | 132 |
| | 132 |
| Mortgage servicing rights | — |
| | — |
| | 258 |
| | 258 |
| Derivative assets | | | | | | | | U.S. Treasury and euro dollar futures | 7 |
| | — |
| | — |
| | 7 |
| Rate lock commitments | — |
| | — |
| | 31 |
| | 31 |
| Mortgage backed securities forwards | 2 |
| | — |
| | — |
| | 2 |
| Interest rate swaps | — |
| | 6 |
| | — |
| | 6 |
| Total derivative assets | 9 |
| | 6 |
| | 31 |
| | 46 |
| Other investments | — |
| | — |
| | 100 |
| | 100 |
| Total assets at fair value | $ | 9 |
| | $ | 2,898 |
| | $ | 576 |
| | $ | 3,483 |
| Derivative liabilities | | | | | | | | Forward agency and loan sales | $ | — |
| | $ | (13 | ) | | $ | — |
| | $ | (13 | ) | U.S. Treasury and euro dollar futures | (1 | ) | | — |
| | — |
| | (1 | ) | Interest rate swaps | — |
| | (6 | ) | | — |
| | (6 | ) | Total derivative liabilities | (1 | ) | | (19 | ) | | — |
| | (20 | ) | Warrant liabilities | — |
| | (6 | ) | | — |
| | (6 | ) | Long-term debt | — |
| | — |
| | (84 | ) | | (84 | ) | DOJ litigation settlement | — |
| | — |
| | (82 | ) | | (82 | ) | Total liabilities at fair value | $ | (1 | ) | | $ | (25 | ) | | $ | (166 | ) | | $ | (192 | ) |
The Company had no transfers of assets or liabilities recorded at fair value between fair value levels during the year ended December 31, 2015. The Company transferred $4 million of municipal obligation to Level 3 from Level 2 in the valuation hierarchy during the year ended December 31, 2014. The municipal obligation was historically priced using Level 2 inputs and was transferred into a Level 3 asset due to the obligation not being a readily marketable security. The Company had no other transfers during the year ended December 31, 2014. The Company had no transfers of assets or liabilities recorded at fair value between fair value levels during the year ended December 31, 2013.
The Company utilized US Treasury future, forward agency and loan sales and interest rate swaps to manage the risk associated with mortgage servicing rights and rate lock commitments. The assets and/or liabilities transferred are valued at the end of the period. Gains and losses for individual lines in the tables do not reflect the effect of the Company's risk management activities related to such level 3 instruments.
Fair Value Measurements Using Significant Unobservable Inputs
The tables below include a roll forward of the Consolidated Statements of Financial Condition amounts for the years ended December 31, 2015, 2014 and 2013 (including the change in fair value) for financial instruments classified by the Company within Level 3 of the valuation hierarchy. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2015 | Balance at Beginning of Year | Recorded in Earnings | Recorded in OCI | Purchases / Originations | Sales | Settlement | Transfers In (Out) | Balance at End of Year | Changes In Unrealized Held at End of Year | Total Unrealized Gains/ (Losses) | Total Realized Gains/ (Losses) | Total Unrealized Gains/ (Losses) | | (Dollars in millions) | Assets | | Investment securities available-for-sale | | | | | | | | | | | Municipal obligation | $ | 2 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (2 | ) | $ | — |
| $ | — |
| $ | — |
| Loans held-for-investment | | | | | | | | | | | Second mortgage loans | 53 |
| 2 |
| 1 |
| — |
| — |
| — |
| (14 | ) | — |
| 42 |
| 2 |
| HELOC loans | 132 |
| (4 | ) | (1 | ) | — |
| — |
| — |
| (63 | ) | — |
| 64 |
| 5 |
| Mortgage servicing rights | 258 |
| (46 | ) | — |
| — |
| 260 |
| (176 | ) | — |
| — |
| 296 |
| 3 |
| Other investments | 100 |
| — |
| — |
| — |
| — |
| — |
| (100 | ) | — |
| — |
| — |
| Totals | $ | 545 |
| $ | (48 | ) | $ | — |
| $ | — |
| $ | 260 |
| $ | (176 | ) | $ | (179 | ) | $ | — |
| $ | 402 |
| $ | 10 |
| Liabilities | | | | | | | | | | | Long-term debt | $ | (84 | ) | $ | — |
| $ | (3 | ) | $ | — |
| $ | — |
| $ | 52 |
| $ | 35 |
| $ | — |
| $ | — |
| $ | — |
| DOJ litigation | (82 | ) | (2 | ) | — |
| — |
| — |
| — |
| — |
| — |
| (84 | ) | (2 | ) | Totals | $ | (166 | ) | $ | (2 | ) | $ | (3 | ) | $ | — |
| $ | — |
| $ | 52 |
| $ | 35 |
| $ | — |
| $ | (84 | ) | $ | (2 | ) | Derivative financial instruments (net) | | | | | | | | | | | Rate lock commitments | $ | 31 |
| $ | 60 |
| $ | — |
| $ | — |
| $ | 330 |
| $ | (342 | ) | $ | (53 | ) | $ | — |
| $ | 26 |
| $ | 32 |
| Year Ended December 31, 2014 | | | | | | | | | | | Assets | | Investment securities available-for-sale | | | | | | | | | | | Municipal obligation | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | (2 | ) | $ | 4 |
| $ | 2 |
| $ | — |
| Loans held-for-investment | | | | | | | | | | | Second mortgage loans | 65 |
| 2 |
| 2 |
| — |
| — |
| — |
| (16 | ) | — |
| 53 |
| 2 |
| HELOC loans | 155 |
| (3 | ) | 2 |
| — |
| 1 |
| — |
| (23 | ) | — |
| 132 |
| (26 | ) | Mortgage servicing rights | 285 |
| (67 | ) | — |
| — |
| 271 |
| (231 | ) | — |
| — |
| 258 |
| (27 | ) | Other investments | — |
| — |
| — |
| — |
| 100 |
| — |
| — |
| — |
| 100 |
| — |
| Totals | $ | 505 |
| $ | (68 | ) | $ | 4 |
| $ | — |
| $ | 372 |
| $ | (231 | ) | $ | (41 | ) | $ | 4 |
| $ | 545 |
| $ | (51 | ) | Liabilities | | | | | | | | | | | Long-term debt | $ | (106 | ) | $ | — |
| $ | (7 | ) | $ | — |
| $ | — |
| $ | — |
| $ | 29 |
| $ | — |
| $ | (84 | ) | $ | — |
| Litigation settlement | (93 | ) | 11 |
| — |
| — |
| — |
| — |
| — |
| — |
| (82 | ) | 11 |
| Totals | $ | (199 | ) | $ | 11 |
| $ | (7 | ) | $ | — |
| $ | — |
| $ | — |
| $ | 29 |
| $ | — |
| $ | (166 | ) | $ | 11 |
| Derivative financial instruments (net) | | | | | | | | | | | Rate lock commitments | $ | 10 |
| $ | 154 |
| $ | — |
| $ | — |
| $ | 273 |
| $ | (353 | ) | $ | (53 | ) | $ | — |
| $ | 31 |
| $ | 34 |
| Year Ended December 31, 2013 | | | | | | | | | | | Assets | | | | | | | | | | | Investment securities available-for-sale | | | | | | | | | | | Mortgage securitization | $ | 91 |
| $ | — |
| $ | (9 | ) | $ | 1 |
| $ | — |
| $ | (73 | ) | $ | (10 | ) | $ | — |
| $ | — |
| $ | — |
| Loans held-for-investment | | | | | | | | | | | Second mortgage loans | — |
| 1 |
| (6 | ) | — |
| 80 |
| — |
| (10 | ) | — |
| 65 |
| 14 |
| HELOC loans | — |
| (8 | ) | 11 |
| — |
| 171 |
| — |
| (19 | ) | — |
| 155 |
| 15 |
| Transferors' interest | 7 |
| — |
| 46 |
| — |
| — |
| (53 | ) | — |
| — |
| — |
| — |
| Mortgage servicing rights | 711 |
| 105 |
| — |
| — |
| 541 |
| (973 | ) | (99 | ) | — |
| 285 |
| 19 |
| Totals | $ | 809 |
| $ | 98 |
| $ | 42 |
| $ | 1 |
| $ | 792 |
| $ | (1,099 | ) | $ | (138 | ) | $ | — |
| $ | 505 |
| $ | 48 |
| Liabilities | | | | | | | | | | | Long-term debt | $ | — |
| $ | — |
| $ | (6 | ) | $ | — |
| $ | (120 | ) | $ | — |
| $ | 20 |
| $ | — |
| $ | (106 | ) | $ | — |
| Litigation settlement | (19 | ) | (74 | ) | — |
| — |
| — |
| — |
| — |
| — |
| (93 | ) | (74 | ) | Totals | $ | (19 | ) | $ | (74 | ) | $ | (6 | ) | $ | — |
| $ | (120 | ) | $ | — |
| $ | 20 |
| $ | — |
| $ | (199 | ) | $ | (74 | ) | Derivative financial instruments (net) | | | | | | | | | | | Rate lock commitments | $ | 86 |
| $ | — |
| $ | (150 | ) | $ | — |
| $ | 377 |
| $ | (241 | ) | $ | (62 | ) | $ | — |
| $ | 10 |
| $ | (18 | ) |
The following tables present the quantitative information about recurring Level 3 fair value financial instruments and the fair value measurements as of December 31, 2015 and 2014. | | | | | | | | | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | December 31, 2015 | (Dollars in millions) | Assets | | Second mortgage loans | $ | 42 |
| Discounted cash flows | Discount rate
Constant prepayment rate
Constant default rate | 7.2% - 10.8% (9.0%)
13.5% - 20.2% (16.9%)
2.6% - 4.0% (3.3%) | HELOC loans | $ | 64 |
| Discounted cash flows | Discount rate | 6.8% - 10.1% (8.4%) | Mortgage servicing rights | $ | 296 |
| Discounted cash flows | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | 6.6% - 9.9% (8.2%)
10.3% - 14.8% (12.6%)
$57 - $86 ($72) | Liabilities | | | | | DOJ litigation settlement (2) | $ | (84 | ) | Discounted cash flows | Discount rate | 4.9% - 9.5% (7.2%) | Derivative financial instruments | | | | | Rate lock commitments | $ | 26 |
| Consensus pricing | Origination pull-through rate | 67.6% - 101.5% (84.6%) |
| | | | | | | | | Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | December 31, 2014 | (Dollars in millions) | Assets | | Second mortgage loans | $ | 53 |
| Discounted cash flows | Discount rate
Constant prepayment rate
Constant default rate | 7.2% - 10.8% (9.0%)
11.3% - 17.0% (14.2%)
2.4% - 3.6% (3.0%) | HELOC loans | $ | 132 |
| Discounted cash flows | Yield
Constant prepayment rate
Constant default rate
Discount loss severity | 8.0% - 12.0% (10.0%)
7.2% - 10.8% (9.0%)
6.6% - 9.9% (8.3%)
60.2% - 90.2% (75.2%) | Mortgage servicing rights | $ | 258 |
| Discounted cash flows | Option adjusted spread
Constant prepayment rate
Weighted average cost to service per loan | 7.1% - 10.7% (8.9%)
12.2% - 17.1% (15.0%)
$67 - $88 ($78) | Liabilities | | | | | Long-term debt (1) | $ | (84 | ) | Discounted cash flows | Discount rate
Constant prepayment rate
Weighted average life | 6.4% - 9.6% (8.0%)
16.0% - 24.0% (20.0%)
0.5 - 0.7 (0.6) | DOJ litigation settlement (2) | $ | (82 | ) | Discounted cash flows | Discount rate | 6.4% - 11.0% (8.7%) | Derivative financial instruments | | | | | Rate lock commitments | $ | 31 |
| Consensus pricing | Origination pull-through rate | 66.2% - 99.3% (82.7%) |
| | (1) | In December 2015, the Company executed a clean-up call of long-term debt accounted for under the fair value option associated with the HELOC securitization trust. |
| | (2) | Refer to Note 1 and Note 23 o for a further discussion of the fair value of the DOJ litigation settlement |
Recurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the second mortgage loans are discount rates, constant prepayment rates, and default rates. The constant prepayment and default rates are based on a 12 month historical average. Significant increases (decreases) in the discount rate in isolation would result in a significantly lower (higher) fair value measurement. Increases (decreases) in prepay rates in isolation result in a higher (lower) fair value and increases (decreases) in default rates in isolation result in a lower (higher) fair value.
Our HELOC loans are valued utilizing a loan-level discounted cash flow model which projects expected cash flows given three potential outcomes: (1) paid-in-full at scheduled maturity, (2) default at scheduled maturity (foreclosure), and (3) modification at scheduled maturity into an amortizing HELOAN. Loans are placed into the potential outcome buckets based on their underlying current delinquency, FICO scores and property CLTV all of which are unobservable inputs. Estimated cash flows are then discounted back using an unobservable discount rate. Loans within the HELOC portfolio contain FICO scores with a minimum of 446, maximum of 818, and a weighted average of 681. For the HELOC loans, increases (decreases) in the discount rate, in isolation, would lower (higher) the fair value measurement and increases (decreases) in the volume of loans expected to default in isolation, would lower (higher) the fair value measurement.
For the HELOC loan related debt carried at fair value in 2014, increases (decreases) in the discount rate in isolation would result in a lower (higher) fair value measurement; increases (decreases) in prepayment rates (based on three month historical average) in isolation results in a shorter (longer) weighted average life and ultimately a higher (lower) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the MSRs are option adjusted spreads, prepayment rates, and cost to service. Significant increases (decreases) in all three assumptions in isolation would result in a significantly lower (higher) fair value measurement. Additionally, the key economic assumptions used in determining the fair value of MSRs capitalized during the years ended December 31, 2015, 2014 and 2013 were as follows. | | | | | | | | | | | For the Years Ended December 31, | | 2015 | | 2014 | | 2013 | Weighted-average life (in years) | 7.9 |
| | 7.8 |
| | 6.1 |
| Weighted-average constant prepayment rate | 11.3 | % | | 12.3 | % | | 13.8 | % | Weighted-average option adjusted spread | 8.8 | % | | 9.4 | % | | 6.9 | % |
The key economic assumptions reflected in the overall fair value of the MSRs were as follows. | | | | | | | | | | | December 31, | | 2015 | | 2014 | | 2013 | Weighted-average life (in years) | 7.3 |
| | 6.6 |
| | 7.3 |
| Weighted-average constant prepayment rate | 12.6 | % | | 15.0 | % | | 11.9 | % | Weighted-average option adjusted spread | 8.2 | % | | 8.9 | % | | 7.7 | % |
The significant unobservable input used in the fair value measurement of the rate lock commitments is the pull through rate. The pull through rate is a statistical analysis of the Company's actual rate lock fallout history to determine the sensitivity of the residential mortgage loan pipeline compared to interest rate changes and other deterministic values. New market prices are applied based on updated loan characteristics and new fallout ratios (i.e., the inverse of the pull through rate) are applied accordingly. Significant increases (decreases) in the pull through rate in isolation would result in a significantly higher (lower) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the DOJ litigation settlement are future balance sheet and growth rate projections for overall discount rate, including asset growth, MSR growth, peer group return on assets and return on assets improvement. The current assumptions are based on management's approved, strategic performance targets beyond the current strategic modeling horizon (2015). Significant increases (decreases) in the discount rate in isolation could result in a marginally higher (lower) fair value measurement.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets are measured at the lower of cost or market and had a fair value below cost at the end of the period as summarized below. | | | | | | | | | | | | | | Total (1) | | Level 2 | | Level 3 | | (Dollars in millions) | December 31, 2015 | | Loans held-for-sale (2) | $ | 8 |
| | $ | 8 |
| | $ | — |
| Impaired loans held-for-investment (3) | | | | | | Residential first mortgage loans | 40 |
| | — |
| | 40 |
| Commercial and industrial loans | 2 |
| | — |
| | 2 |
| Repossessed assets (4) | 17 |
| | — |
| | 17 |
| Totals | $ | 67 |
| | $ | 8 |
| | $ | 59 |
| December 31, 2014 |
|
| | | |
|
| Loans held-for-sale (2) | $ | 27 |
| | $ | 27 |
| | $ | — |
| Impaired loans held-for-investment (3) | | | | | | Residential first mortgage loans | 74 |
| | — |
| | 74 |
| Repossessed assets (4) | 19 |
| | — |
| | 19 |
| Totals | $ | 120 |
| | $ | 27 |
| | $ | 93 |
|
| | (1) | The fair values are obtained at various dates during the years ended December 31, 2015 and 2014, respectively. |
| | (2) | The Company recorded $2 million, $4 million and $4 million in fair value losses on loans held-for-sale for which the Company did not elect the fair value option (included in interest income on the Consolidated Statements of Operations) during the years ended December 31, 2015, 2014 and 2013, respectively. |
| | (3) | The Company recorded $84 million, $49 million and $155 million in fair value losses on impaired loans held-for-investment for which the Company did not elect the fair value option (included in provision for loan losses on the Consolidated Statements of Operations) during the years ended December 31, 2015, 2014 and 2013, respectively. |
| | (4) | The Company recorded $2 million, $4 million and $10 million in losses related to write downs of repossessed assets based on the estimated fair value of the specific assets, and recognized net losses of $2 million, $5 million and $26 million on sales of repossessed assets (both write downs and net gains/losses are included in assets resolution expense on the Consolidated Statements of Operations) during the years ended December 31, 2015, 2014 and 2013, respectively. |
The following tables present the quantitative information about nonrecurring Level 3 fair value financial instruments and the fair value measurements as of December 31, 2015. | | | | | | | | | Fair Value | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | December 31, 2015 | (Dollars in millions) | Impaired loans held-for-investment | | | | | Residential first mortgage loans | $ | 40 |
| Fair value of collateral | Loss severity discount | 35% - 45% (35.2%) | Commercial and industrial loans | $ | 2 |
| Fair value of collateral | Loss severity discount | 45% - 55% (50.1%) | Repossessed assets | $ | 17 |
| Fair value of collateral | Loss severity discount | 16% - 100% (48.7%) |
| | | | | | | | | Fair Value | Valuation Technique(s) | Unobservable Input | Range (Weighted Average) | December 31, 2014 | (Dollars in millions) | Impaired loans held-for-investment | | | | | Residential first mortgage loans | $ | 74 |
| Fair value of collateral | Loss severity discount | 35% - 47% (36.9%) | Repossessed assets | $ | 19 |
| Fair value of collateral | Loss severity discount | 7% - 100% (45.4%) |
Nonrecurring Significant Unobservable Inputs
The significant unobservable inputs used in the fair value measurement of the impaired loans and repossessed assets are appraisals or other third-party price evaluations which incorporate measures such as recent sales prices for comparable properties. Fair Value of Financial Instruments
The following table presents the carrying amount and estimated fair value of financial instruments that are carried either at fair value, cost, or amortized cost. | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | | | | Estimated Fair Value | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | (Dollars in millions) | Assets | | | | | | | | | | Cash and cash equivalents | $ | 208 |
| | $ | 208 |
| | $ | 208 |
| | $ | — |
| | $ | — |
| Investment securities available-for-sale | 1,294 |
| | 1,294 |
| | — |
| | 1,294 |
| | — |
| Investment securities held-to-maturity | 1,268 |
| | 1,262 |
| | — |
| | 1,262 |
| | — |
| Loans held-for-sale | 2,576 |
| | 2,578 |
| | — |
| | 2,578 |
| | — |
| Loans with government guarantees | 485 |
| | 469 |
| | — |
| | 469 |
| | — |
| Loans held-for-investment, net | 6,165 |
| | 6,121 |
| | — |
| | 6 |
| | 6,115 |
| Repossessed assets | 17 |
| | 17 |
| | — |
| | — |
| | 17 |
| Federal Home Loan Bank stock | 170 |
| | 170 |
| | — |
| | 170 |
| | — |
| Mortgage servicing rights | 296 |
| | 296 |
| | — |
| | — |
| | 296 |
| Bank owned life insurance | 178 |
| | 178 |
| | — |
| | 178 |
| | — |
| Other assets, foreclosure claims | 210 |
| | 210 |
| | — |
| | 210 |
| | — |
| Derivative financial instruments, assets | 58 |
| | 58 |
| | — |
| | 32 |
| | 26 |
| Liabilities | | |
| | | | | | | Retail deposits | | |
| | | | | | | Demand deposits and savings accounts | $ | (5,008 | ) | | $ | (4,744 | ) | | $ | — |
| | $ | (4,744 | ) | | $ | — |
| Certificates of deposit | (826 | ) | | (833 | ) | | — |
| | (833 | ) | | — |
| Government deposits | (1,062 | ) | | (1,045 | ) | | — |
| | (1,045 | ) | | — |
| Company controlled deposits | (1,039 | ) | | (947 | ) | | — |
| | (947 | ) | | — |
| Federal Home Loan Bank advances | (3,541 | ) | | (3,543 | ) | | — |
| | (3,543 | ) | | — |
| Long-term debt | (247 | ) | | (89 | ) | | — |
| | (89 | ) | | — |
| Warrant liabilities | (8 | ) | | (8 | ) | | — |
| | (8 | ) | | — |
| DOJ litigation settlement | (84 | ) | | (84 | ) | | — |
| | — |
| | (84 | ) | Derivative financial instruments, liabilities | (18 | ) | | (18 | ) | | (1 | ) | | (17 | ) | | — |
|
| | | | | | | | | | | | | | | | | | | | | | December 31, 2014 | | | | Estimated Fair Value | | Carrying Value | | Total | | Level 1 | | Level 2 | | Level 3 | | (Dollars in millions) | Assets | | | | | | | | | | Cash and cash equivalents | $ | 136 |
| | $ | 136 |
| | $ | 136 |
| | $ | — |
| | $ | — |
| Investment securities available-for-sale | 1,672 |
| | 1,672 |
| | — |
| | 1,670 |
| | 2 |
| Loans held-for-sale | 1,244 |
| | 1,196 |
| | — |
| | 1,196 |
| | — |
| Loans with government guarantees | 1,128 |
| | 1,094 |
| | — |
| | 1,094 |
| | — |
| Loans held-for-investment, net | 4,151 |
| | 3,998 |
| | — |
| | 26 |
| | 3,972 |
| Repossessed assets | 19 |
| | 19 |
| | — |
| | — |
| | 19 |
| Federal Home Loan Bank stock | 155 |
| | 155 |
| | 155 |
| | — |
| | — |
| Mortgage servicing rights | 258 |
| | 258 |
| | — |
| | — |
| | 258 |
| Other investments | 100 |
| | 100 |
| | — |
| | — |
| | 100 |
| Derivative Financial Instruments | | | | | | | | | | Interest rate swaps | 6 |
| | 6 |
| | — |
| | 6 |
| | — |
| U.S. Treasury futures | 7 |
| | 7 |
| | 7 |
| | — |
| | — |
| Rate lock commitments | 31 |
| | 31 |
| | — |
| | — |
| | 31 |
| Agency forwards | 2 |
| | 2 |
| | 2 |
| | — |
| | — |
| Liabilities | | | | | | | | | | Retail deposits | | | | | | | | | | Demand deposits and savings accounts | $ | (4,565 | ) | | $ | (4,291 | ) | | $ | — |
| | $ | (4,291 | ) | | $ | — |
| Certificates of deposit | (813 | ) | | (816 | ) | | — |
| | (816 | ) | | — |
| Government deposits | (918 | ) | | (884 | ) | | — |
| | (884 | ) | | — |
| Company controlled deposits | (773 | ) | | (770 | ) | | — |
| | (770 | ) | | — |
| Federal Home Loan Bank advances | (514 | ) | | (514 | ) | | (514 | ) | | — |
| | — |
| Long-term debt | (331 | ) | | (172 | ) | | — |
| | (88 | ) | | (84 | ) | Warrant liabilities | (6 | ) | | (6 | ) | | — |
| | (6 | ) | | — |
| DOJ litigation settlement | (82 | ) | | (82 | ) | | — |
| | — |
| | (82 | ) | Derivative Financial Instruments | | | | | | | | | | Interest rate swaps | (6 | ) | | (6 | ) | | — |
| | (6 | ) | | — |
| U.S. Treasury futures | (1 | ) | | (1 | ) | | (1 | ) | | — |
| | — |
| Forward agency and loan sales | (13 | ) | | (13 | ) | | — |
| | (13 | ) | | — |
|
The methods and assumptions used by the Company in estimating fair value of financial instruments which are required for disclosure only, are as follows:
Cash and cash equivalents. Due to their short-term nature, the carrying amount of cash and cash equivalents approximates fair value. Investment securities held-to-maturity. Fair values are generated using market inputs, where possible, including quoted prices (the closing price in an exchange market), bid prices (the price at which a buyer stands ready to purchase), and other market information.
Loans with government guarantees. The fair value is estimated by using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Loans held-for-investment. The fair value is estimated using internally developed discounted cash flow models using market interest rate inputs as well as management’s best estimate of spreads for similar collateral.
Federal Home Loan Bank stock. No secondary market exists for Federal Home Loan Bank stock. The stock is bought and sold at par by the Federal Home Loan Bank. Management believes that the recorded value equals the fair value.
Bank owned life insurance. The fair value of bank owned life insurance policies is based on the cash surrender values of the policies as reported by the insurance companies.
Other assets, foreclosure claims. The fair value of foreclosure claims with government guarantees approximates the carrying amount.
Deposit accounts. The fair value of deposits with no defined maturity is estimated based on a discounted cash flow model that incorporates current market rates for similar products and expected attrition. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for certificates of deposit with similar remaining maturities. Federal Home Loan Bank advances. Rates currently available for debt with similar terms and remaining maturities are used to estimate the fair value of the existing debt.
Long-term debt. The fair value of the long-term debt is estimated based on a discounted cash flow model that incorporates current borrowing rates for similar types of borrowing arrangements.
Fair Value Option
The Company elected the fair value option for certain items as discussed throughout the Notes to the Consolidated Financial Statements to mitigate a divergence between accounting losses and economic exposure. Interest income on loans held-for-sale is accrued on the principal outstanding primarily using the "simple-interest" method.
The following table reflects the change in fair value included in earnings of financial instruments for which the value option has been elected. | | | | | | | | | | | | | | For the Years Ended December 31, | | 2015 | | 2014 | | 2013 | Assets | (Dollars in millions) | Loans held-for-sale | | | | | | Net gain on loan sales | $ | 321 |
| | $ | 401 |
| | $ | 201 |
| Other noninterest income | — |
| | (2 | ) | | — |
| Loans held-for-investment | | | | | | Other noninterest income | 40 |
| | 44 |
| | 29 |
| Liabilities | | | | | | Long-term debt | | | | | | Other noninterest income | $ | 29 |
| | $ | 22 |
| | $ | 5 |
| Litigation settlement | | | | | | Other noninterest expense | (2 | ) | | 11 |
| | (74 | ) |
The following table reflects the difference between the aggregate fair value and aggregate remaining contractual principal balance outstanding as of December 31, 2015, 2014 and 2013 for assets and liabilities for which the fair value option has been elected. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2015 | December 31, 2014 | December 31, 2013 | | (Dollars in millions) | | Unpaid Principal Balance | Fair Value | Fair Value Over/(Under) UPB | Unpaid Principal Balance | Fair Value | Fair Value Over/(Under) UPB | Unpaid Principal Balance | Fair Value | Fair Value Over/(Under) UPB | Assets | | | | | | | | | | Nonaccrual loans | | | | | | | | | | Loans held-for-sale | $ | 1 |
| $ | — |
| $ | (1 | ) | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| Loans held-for-investment | 21 |
| 10 |
| (11 | ) | 11 |
| 5 |
| (6 | ) | 11 |
| 4 |
| (7 | ) | Total nonaccrual loans | $ | 22 |
| $ | 10 |
| $ | (12 | ) | $ | 11 |
| $ | 5 |
| $ | (6 | ) | $ | 11 |
| $ | 4 |
| $ | (7 | ) | Other performing loans | | | | | | | | | | Loans held-for-sale | $ | 2,451 |
| $ | 2,541 |
| $ | 90 |
| $ | 1,144 |
| $ | 1,196 |
| $ | 52 |
| $ | 1,110 |
| $ | 1,141 |
| $ | 31 |
| Loans held-for-investment | 112 |
| 101 |
| (11 | ) | 225 |
| 206 |
| (19 | ) | 257 |
| 234 |
| (23 | ) | Total other performing loans | $ | 2,563 |
| $ | 2,642 |
| $ | 79 |
| $ | 1,369 |
| $ | 1,402 |
| $ | 33 |
| $ | 1,367 |
| $ | 1,375 |
| $ | 8 |
| Total loans | | | | | | | | | | Loans held-for-sale | $ | 2,452 |
| $ | 2,541 |
| $ | 89 |
| $ | 1,144 |
| $ | 1,196 |
| $ | 52 |
| $ | 1,110 |
| $ | 1,141 |
| $ | 31 |
| Loans held-for-investment | 133 |
| 111 |
| (22 | ) | 236 |
| 211 |
| (25 | ) | 268 |
| 238 |
| (30 | ) | Total loans | $ | 2,585 |
| $ | 2,652 |
| $ | 67 |
| $ | 1,380 |
| $ | 1,407 |
| $ | 27 |
| $ | 1,378 |
| $ | 1,379 |
| $ | 1 |
| Liabilities | | | | | | | | | | Long-term debt | $ | — |
| $ | — |
| $ | — |
| $ | (88 | ) | $ | (84 | ) | $ | 4 |
| $ | (117 | ) | $ | (106 | ) | $ | 11 |
| Litigation settlement | (118 | ) | (84 | ) | 34 |
| (118 | ) | (82 | ) | 36 |
| (118 | ) | (93 | ) | 25 |
|
| | (1) | The Company is obligated to pay $118 million in installment payments upon meeting certain performance conditions. |
|