filings.toolsItem 7A. Quantitative and Qualitative Disclosure About Market Risk.
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market risk is the risk of loss arising from adverse changes in market prices and interest rates. Our market risk arises from interest rate risk inherent in our financial instruments and debt obligations. Interest rate risk results from the possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate-sensitive assets, liabilities and commitments. Lower interest rates tend to increase demand for mortgage loans for home purchasers, while higher interest rates make it more difficult for potential borrowers to purchase residential properties and to qualify for mortgage loans. We have no market rate sensitive instruments held for speculative or trading purposes.
Our homebuilding segment is exposed to interest rate risk as it relates to its debt obligations. In September 2012, we issued $600,000 of 3.95% Senior Notes due 2022 (the “Notes”). The Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15 and September 15, commencing on March 15, 2013. Changes to interest rates generally affect the fair value of fixed-rate debt instruments, but not earnings or cash flows. We generally have no obligation to prepay the Notes prior to maturity, and thus interest rate fluctuations should not have a significant impact on our fixed-rate debt.
Our mortgage banking segment is exposed to interest rate risk as it relates to its lending activities. The mortgage banking segment originates mortgage loans, which are sold through either optional or mandatory forward delivery contracts into the secondary markets. All of the mortgage banking segment’s loan portfolio is held for sale and subject to forward sale commitments. NVRM also sells all of its mortgages held for sale on a servicing released basis.
NVRM has available a mortgage Repurchase Agreement, which provides for loan repurchases up to $25,000, subject to certain sub limits. The Repurchase Agreement is used to fund NVRM’s mortgage origination activities. Advances under the Repurchase Agreement carry a Pricing Rate based on the LIBOR Rate plus the LIBOR Margin, or the Default Pricing Rate, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 3.10%. At December 31, 2012 there was no debt outstanding under the Repurchase Agreement.
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The following table represents the contractual balances of our on-balance sheet financial instruments at the expected maturity dates, as well as the fair values of those on-balance sheet financial instruments at December 31, 2012. The table does not include the debt of our consolidated joint venture as it is non-recourse to us. The expected maturity categories take into consideration the actual and anticipated amortization of principal and do not take into consideration the reinvestment of cash or the refinancing of existing indebtedness. Because we sell all of the mortgage loans we originate into the secondary markets, we have made the assumption that the portfolio of mortgage loans held for sale will mature in the first year. Consequently, advances outstanding under the Repurchase Agreement would also be assumed to mature in the first year.
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Maturities (000’s)
| 2013 | 2014 | 2015 | 2016 | 2017 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
| Mortgage banking segment | ||||||||||||||||||||||||||||||||
| Interest rate sensitive assets: | ||||||||||||||||||||||||||||||||
| Mortgage loans held for sale | $ | 190,826 | — | — | — | — | — | $ | 190,826 | $ | 188,929 | |||||||||||||||||||||
| Average interest rate | 3.3 | % | — | — | — | — | — | 3.3 | % | |||||||||||||||||||||||
| Interest rate sensitive liabilities: | ||||||||||||||||||||||||||||||||
| Variable rate repurchase agreement | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Average interest rate | — | — | — | — | — | — | — | |||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||
| Forward trades of mortgage-backed securities (a) | $ | 490 | — | — | — | — | — | $ | 490 | $ | 490 | |||||||||||||||||||||
| Forward loan commitments (a) | $ | (1,094 | ) | — | — | — | — | — | $ | (1,094 | ) | $ | (1,094 | ) | ||||||||||||||||||
| Homebuilding segment | ||||||||||||||||||||||||||||||||
| Interest rate sensitive assets: | ||||||||||||||||||||||||||||||||
| Interest-bearing deposits | $ | 1,082,848 | — | — | — | — | — | $ | 1,082,848 | $ | 1,082,848 | |||||||||||||||||||||
| Average interest rate | 0.2 | % | — | — | — | — | — | 0.2 | % | |||||||||||||||||||||||
| Interest rate sensitive liabilities: | ||||||||||||||||||||||||||||||||
| Fixed rate obligations (b) | $ | 642 | $ | 115 | $ | — | $ | — | $ | — | $ | 600,000 | $ | 600,757 | $ | 618,757 | ||||||||||||||||
| Average interest rate | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % | 4.0 | % |
| (a) | Represents the fair value recorded pursuant to ASC 815, Derivatives and Hedging. |
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| (b) | The $600,000 maturing thereafter relates to the 3.95% Senior Notes due 2022. |
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