| FAIR VALUE MEASUREMENTS |
NOTE 8—FAIR VALUE MEASUREMENTS The Company uses valuation techniques that are consistent with the market approach, the income approach, and/or the cost approach to measure assets and liabilities that are measured at fair value. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: | ● | Level 1—Financial assets and liabilities whose values are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. |
| ● | Level 2—Financial assets and liabilities whose values are based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means. |
| ● | Level 3—Financial assets and liabilities whose values are based on inputs that are both unobservable and significant to the overall valuation. |
The Company's MSRs are measured at fair value at inception, and thereafter on a nonrecurring basis and are carried at the lower of amortized costs or fair value. That is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value measurement when there is evidence of impairment and for disclosure purposes (NOTE 3). The Company's MSRs do not trade in an active, open market with readily observable prices. While sales of multifamily MSRs do occur on occasion, precise terms and conditions vary with each transaction and are not readily available. Accordingly, the estimated fair value of the Company’s MSRs was developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, estimated placement fee revenue from escrow deposits, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing MSR assets. Undesignated Derivatives Loan commitments that meet the definition of a derivative are recorded at fair value on the Condensed Consolidated Balance Sheets upon the executions of the commitments to originate a loan with a borrower and to sell the loan to an investor, with a corresponding amount recognized as revenue on the Condensed Consolidated Statements of Income. The estimated fair value of loan commitments includes (i) the fair value of loan origination fees and premiums on the anticipated sale of the loan, net of co-broker fees (included in derivative assets, a component of Other Assets, on the Condensed Consolidated Balance Sheets and as a component of Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income), (ii) the fair value of the expected net cash flows associated with the servicing of the loan, net of any estimated net future cash flows associated with the guarantee obligation (included in derivative assets, a component of Other Assets, on the Condensed Consolidated Balance Sheets and in Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income), and (iii) the effects of interest rate movements between the trade date and balance sheet date. Loan commitments are generally derivative assets but can become derivative liabilities if the effects of the interest rate movement between the trade date and the balance sheet date are greater than the combination of (i) and (ii) above. Forward sale commitments that meet the definition of a derivative are recorded as either derivative assets or derivative liabilities depending on the effects of the interest rate movements between the trade date and the balance sheet date. Adjustments to the fair value are reflected as a component of income within Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. All loan and forward sale commitments described above are undesignated derivatives. Designated Derivatives In connection with the issuance of the Senior Notes during the first quarter of 2025, the Company entered into a standard swap agreement to hedge the exposure to changes in fair value of the Senior Notes related to interest rates. The swap converts the fixed interest payments required by the Senior Notes to a variable interest rate based on SOFR (i.e. the Company pays variable and receives fixed payments). The Senior Notes are the only fixed-rate debt the Company has outstanding, and as a result of the swap, all of the Company’s corporate debt is tied to variable rates. The Company has designated this hedging relationship as a fair value hedge, with the entire balance of the Senior Notes as the hedged item and the swap as the hedging instrument. As the terms of the swap mirror the terms of the Senior Notes, the Company is permitted to assume no ineffectiveness in the hedging relationship. The fair value adjustment to the Senior Notes is the offset of the fair value of the interest rate swap, with no net impact to the Condensed Consolidated Statements of Income. The initial fair value of the swap was zero. The swap agreement does not require the Company to post any collateral. The gain or loss on the hedging instrument (the interest rate swap) and the offsetting loss or gain on the hedged item (the fixed-rate debt) attributable to the hedged risk are recognized in the same line item associated with the hedged item in current earnings, which is Interest expense on corporate debt in the Condensed Consolidated Statements of Income. The swap agreement allows for a net cash settlement of the interest expense corresponding with the interest payment dates on the Senior Notes. The swap derivative is recognized as a derivative asset or derivative liability as a component of Other assets or Other liabilities, respectively, on the Condensed Consolidated Balance Sheets, depending on the swap’s variable interest rate in relation to the fixed rate of the Senior Notes. The related fair value adjustment to the Senior Notes is recognized as an adjustment in Notes payable on the Condensed Consolidated Balance Sheets. A description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. | ● | Derivative Instruments—Designated Derivatives and Hedged Item—The Company determines the fair value of the interest rate swap and hedged item using observable market data to determine the expected net cash flows of the receive-fix and pay-variable legs and is classified as Level 2 of the valuation hierarchy. |
| ● | Derivative Instruments—Undesignated Derivatives—These derivative positions primarily consist of interest rate lock commitments and forward sale agreements to the Agencies related to the Company’s mortgage banking activities. The fair value of these instruments is estimated using a discounted cash flow model developed based on changes in the U.S. Treasury rate and other observable market data. The value was determined after considering the potential impact of collateralization, adjusted to reflect the nonperformance risk of both the counterparty and the Company, and is classified within Level 2 of the valuation hierarchy. |
| ● | Loans Held for Sale—All loans held for sale presented in the Condensed Consolidated Balance Sheets are reported at fair value. The Company determines the fair value of the loans held for sale using discounted cash flow models that incorporate quoted observable inputs from market participants, such as changes in the U.S. Treasury rate. Therefore, the Company classifies these loans held for sale as Level 2. |
| ● | Pledged Securities—Investments in money market funds are valued using quoted market prices from recent trades and typically have maturities of 90 days or less. Therefore, the Company classifies this portion of pledged securities as Level 1. The Company determines the fair value of its AFS Agency mortgage-backed securities (“Agency MBS”) using third-party estimates of fair value. Consequently, the Company classifies this portion of pledged securities as Level 2. Additional details on pledged securities are included in NOTE 9. |
| ● | Contingent Consideration Liabilities—Contingent consideration liabilities from acquisitions are initially recognized at fair value at acquisition and subsequently remeasured using a Monte Carlo simulation that uses updated management forecasts and current valuation assumptions and discount rates. The Company determines the fair value of each contingent consideration liability based on a probability of earnout achievement, which incorporates management estimates, volatility rates, and discount rate to determine the expected earn-out cash flows. As a result, the Company classifies these liabilities as Level 3. Additional details on Contingent consideration liabilities are included in NOTE 7. |
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2025 and December 31, 2024, segregated by the level of the valuation inputs within the fair value hierarchy used to measure fair value: | | | | | | | | | | | | | | | | | | | | | | Balance as of | | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Period End | | June 30, 2025 | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | Loans held for sale | | $ | — | | $ | 1,177,837 | | $ | — | | $ | 1,177,837 | | Pledged securities | | | 17,966 | | | 200,469 | | | — | | | 218,435 | | Derivative assets | | | — | | | 52,370 | | | — | | | 52,370 | | Total | | $ | 17,966 | | $ | 1,430,676 | | $ | — | | $ | 1,448,642 | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | Derivative liabilities | | $ | — | | $ | 16,208 | | $ | — | | $ | 16,208 | | Notes payable —Senior Notes | | | — | | | 399,572 | | | — | | | 399,572 | | Contingent consideration liabilities(1) | | | — | | | — | | | 19,664 | | | 19,664 | | Total | | $ | — | | $ | 415,780 | | $ | 19,664 | | $ | 435,444 | | | | | | | | | | | | | | | | December 31, 2024 | | | | | | | | | | | | | | Assets | | | | | | | | | | | | | | Loans held for sale | | $ | — | | $ | 780,749 | | $ | — | | $ | 780,749 | | Pledged securities | | | 23,472 | | | 183,432 | | | — | | | 206,904 | | Derivative assets | | | — | | | 30,175 | | | — | | | 30,175 | | Total | | $ | 23,472 | | $ | 994,356 | | $ | — | | $ | 1,017,828 | | | | | | | | | | | | | | | | Liabilities | | | | | | | | | | | | | | Derivative liabilities | | $ | — | | $ | 915 | | $ | — | | $ | 915 | | Contingent consideration liabilities(1) | | | — | | | — | | | 30,537 | | | 30,537 | | Total | | $ | — | | $ | 915 | | $ | 30,537 | | $ | 31,452 | |
| (1) | For a detailed roll forward of this Level 3 liability, refer to “Roll Forward of Contingent Consideration Liabilities” in NOTE 7. | |
There were no transfers between any of the levels within the fair value hierarchy during the six months ended June 30, 2025 or 2024. Undesignated derivative instruments related to the Company’s mortgage banking activities (Level 2) are outstanding for short periods of time (generally less than 60 days). Designated derivatives related to interest rate swaps are outstanding for the length of the hedged item, which currently matures on April 1, 2033. A roll forward of derivative instruments is presented below for the three and six months ended June 30, 2025 and 2024: | | | | | | | | | | | | | | | | For the three months ended | | For the six months ended | | | | June 30, | | June 30, | | Derivative Assets and Liabilities, net (in thousands) | | 2025 | | 2024 | | 2025 | | 2024 | | Beginning balance | | $ | 11,635 | | $ | 13,797 | | $ | 29,260 | | $ | 3,204 | | Settlements | | | (122,935) | | | (91,209) | | | (214,752) | | | (145,254) | | Realized gains (losses) recorded in earnings(1) | | | 111,300 | | | 77,412 | | | 185,492 | | | 142,049 | | Unrealized gains (losses) recorded in earnings(1)(2) | | | 36,162 | | | 21,272 | | | 36,162 | | | 21,272 | | Ending balance | | $ | 36,162 | | $ | 21,272 | | $ | 36,162 | | $ | 21,272 | |
| (1) | Realized and unrealized gains (losses) from undesignated derivatives are recognized in Loan origination and debt brokerage fees, net and Fair value of expected net cash flows from servicing, net in the Condensed Consolidated Statements of Income. | |
| (2) | Unrealized gain (loss) from designated derivatives is recognized in Interest expense on corporate debt in the Condensed Consolidated Statements of Income. | |
The following table presents information about significant unobservable inputs used in the recurring measurement of the fair value of the Company’s Level 3 assets and liabilities as of June 30, 2025: | | | | | | | | | | | | | | Quantitative Information about Level 3 Fair Value Measurements | (in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input (1) | | Input Range (1) | | Weighted Average (2) | Contingent consideration liabilities | | $ | 19,664 | | Monte Carlo Simulation | | Probability of earnout achievement | | 0% - 100% | | 8% |
| (1) | Significant changes in this input may lead to significant changes in the fair value measurements. |
| (2) | Contingent consideration weighted based on maximum remaining gross earnout amount. |
The carrying amounts and the fair values of the Company's financial instruments as of June 30, 2025 and December 31, 2024 are presented below: | | | | | | | | | | | | | | | | | | June 30, 2025 | | December 31, 2024 | | | | | Carrying | | Fair | | Carrying | | Fair | | (in thousands) | Level | | Amount | | Value | | Amount | | Value | | Financial Assets: | | | | | | | | | | | | | | | Cash and cash equivalents | Level 1 | | $ | 233,712 | | $ | 233,712 | | $ | 279,270 | | $ | 279,270 | | Restricted cash | Level 1 | | | 41,090 | | | 41,090 | | | 25,156 | | | 25,156 | | Pledged securities | Level 1 & 2 | | | 218,435 | | | 218,435 | | | 206,904 | | | 206,904 | | Loans held for sale | Level 2 | | | 1,177,837 | | | 1,177,837 | | | 780,749 | | | 780,749 | | Loans held for investment, net(1) | Level 3 | | | 32,366 | | | 32,366 | | | 32,866 | | | 32,866 | | Derivative assets(1) | Level 2 | | | 52,370 | | | 52,370 | | | 30,175 | | | 30,175 | | Total financial assets | | | $ | 1,755,810 | | $ | 1,755,810 | | $ | 1,355,120 | | $ | 1,355,120 | | | | | | | | | | | | | | | | | Financial Liabilities: | | | | | | | | | | | | | | | Derivative liabilities(2) | Level 2 | | $ | 16,208 | | $ | 16,208 | | $ | 915 | | $ | 915 | | Contingent consideration liabilities(2) | Level 3 | | | 19,664 | | | 19,664 | | | 30,537 | | | 30,537 | | Secured borrowings(2) (NOTE 2) | Level 2 | | | 35,060 | | | 35,060 | | | 59,441 | | | 59,441 | | Warehouse notes payable(3) | Level 2 | | | 1,157,234 | | | 1,157,660 | | | 781,706 | | | 781,972 | | Notes payable(3)(4) | Level 2 | | | 828,657 | | | 848,448 | | | 768,044 | | | 778,481 | | Total financial liabilities | | | $ | 2,056,823 | | $ | 2,077,040 | | $ | 1,640,643 | | $ | 1,651,346 | |
| (1) | Included as a component of Other assets on the Condensed Consolidated Balance Sheets. |
| (2) | Included as a component of Other liabilities on the Condensed Consolidated Balance Sheets. |
| (3) | Carrying value includes unamortized debt issuance costs. |
| (4) | Carrying value includes unamortized debt discount. |
Fair Value of Undesignated Derivative Instruments and Loans Held for Sale—In the normal course of business, the Company enters into contractual commitments to originate and sell multifamily mortgage loans at fixed prices with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by the Company. All mortgagors are evaluated for creditworthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, the Company enters into a sale commitment with the investor simultaneously with the rate lock commitment with the borrower. The sale contract with the investor locks in an interest rate and price for the sale of the loan. The terms of the contract with the investor and the rate lock with the borrower are matched in substantially all respects, with the objective of eliminating interest rate risk to the extent practical. Sale commitments with the investors have an expiration date that is longer than the Company’s related commitments to the borrower to allow for, among other things, the closing of the loan and processing of paperwork to deliver the loan into the sale commitment. Both the rate lock commitments to borrowers and the forward sale contracts to buyers are undesignated derivatives and, accordingly, are marked to fair value through Loan origination and debt brokerage fees, net in the Condensed Consolidated Statements of Income. The fair value of the Company's rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable: | ● | the estimated gain of the expected loan sale to the investor; |
| ● | the expected net cash flows associated with servicing the loan, net of any guaranty obligations retained; |
| ● | the effects of interest rate movements between the date of the rate lock and the balance sheet date; and |
| ● | the nonperformance risk of both the counterparty and the Company. |
The estimated gain considers the origination fees the Company expects to collect upon loan closing (derivative instruments only) and premiums the Company expects to receive upon sale of the loan. The fair value of the expected net cash flows associated with servicing the loan is calculated pursuant to the valuation techniques applicable to the fair value of future servicing, net at loan sale. To calculate the effects of interest rate movements, the Company uses applicable published U.S. Treasury prices and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. The fair value of the Company's forward sales contracts to investors considers the effects of interest rate movements between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value. The fair value of the Company’s interest rate lock commitments and forward sales contracts is adjusted to reflect the risk that the agreement will not be fulfilled. The Company’s exposure to nonperformance in interest rate lock commitments and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of the Company’s counterparties and the short duration of interest rate lock commitments and forward sale contracts, the risk of nonperformance by the Company’s counterparties has historically been minimal. The following table presents the components of fair value and other relevant information associated with the Company’s derivative instruments and loans held for sale as of June 30, 2025 and December 31, 2024: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Adjustment Components | | Balance Sheet Location | | | | Notional or | | Estimated | | | | | Total | | | | | | | | | | | | Principal | | Gain | | Interest Rate | | Fair Value | | Derivative | | Derivative | | Fair Value | | (in thousands) | | Amount | | on Sale | | Movement | | Adjustment | | Assets(1) | | Liabilities(2) | | Adjustment | | June 30, 2025 | | | | | | | | | | | | | | | | | | | | | | | Undesignated derivatives | | | | | | | | | | | | | | | | | | | | | | | Rate lock commitments | | $ | 1,615,937 | | $ | 41,498 | | $ | 9,658 | | $ | 51,156 | | $ | 51,185 | | $ | (29) | | $ | — | | Forward sale contracts | | | 2,779,524 | | | — | | | (14,566) | | | (14,566) | | | 1,185 | | | (15,751) | | | — | | Loans held for sale(3) | | | 1,163,587 | | | 9,342 | | | 4,908 | | | 14,250 | | | — | | | — | | | 14,250 | | Total undesignated derivatives | | | | | $ | 50,840 | | $ | — | | $ | 50,840 | | $ | 52,370 | | $ | (15,780) | | $ | 14,250 | | Designated derivatives | | | | | | | | | | | | | | | | | | | | | | | Interest rate swap | | | 400,000 | | | — | | | (428) | | | (428) | | | — | | | (428) | | | — | | Senior Notes(4) | | | 400,000 | | | — | | | 428 | | | 428 | | | — | | | — | | | 428 | | Total designated derivatives | | | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (428) | | $ | 428 | | Total | | | | | $ | 50,840 | | $ | — | | $ | 50,840 | | $ | 52,370 | | $ | (16,208) | | $ | 14,678 | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2024 | | | | | | | | | | | | | | | | | | | | | | | Rate lock commitments | | $ | 472,905 | | $ | 19,968 | | $ | (5,338) | | $ | 14,630 | | $ | 14,930 | | $ | (300) | | $ | — | | Forward sale contracts | | | 1,258,323 | | | — | | | 14,630 | | | 14,630 | | | 15,245 | | | (615) | | | — | | Loans held for sale | | | 785,418 | | | 4,623 | | | (9,292) | | | (4,669) | | | — | | | — | | | (4,669) | | Total | | | | | $ | 24,591 | | $ | — | | $ | 24,591 | | $ | 30,175 | | $ | (915) | | $ | (4,669) | |
| (1) | Included as a component of Other assets on the Condensed Consolidated Balance Sheets. |
| (2) | Included as a component of Other liabilities on the Condensed Consolidated Balance Sheets. |
| (3) | Fair value adjustment included as an adjustment to Loans held for sale, at fair value on the Condensed Consolidated Balance Sheets. |
| (4) | Fair value adjustment included as an adjustment to Notes payable on the Condensed Consolidated Balance Sheets. |
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