Quarterly report pursuant to Section 13 or 15(d)

Mortgage Servicing Rights

v3.20.2
Mortgage Servicing Rights
 9 Months Ended
Sep. 30, 2020
Transfers And Servicing [Abstract]  
Mortgage Servicing Rights

6. Mortgage Servicing Rights

MSRs are recognized as assets on the Condensed Consolidated Balance Sheet when loans are sold, and the associated servicing rights are retained. The Company maintains one class of MSR asset and has elected the fair value option. To determine the fair value of the servicing right when created, the Company uses a valuation model that calculates the present value of future cash flows. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, including estimates of contractual service fees, ancillary income and late fees, the cost of servicing, the discount rate, float value, the inflation rate, estimated prepayment speeds, and default rates.

The activity of mortgage servicing rights was as follows for the three and nine months ended September 30, 2020 and 2019:

 

 

 

For the three months ended

September 30,

 

 

 

2020

 

 

2019

 

Balance - beginning of period

 

$

336,687

 

 

$

399,535

 

MSRs originated

 

 

96,510

 

 

 

61,416

 

Changes in fair value

 

 

 

 

 

 

 

 

Due to collection/realization of cash flows

 

 

(31,540

)

 

 

(27,907

)

Due to changes in valuation model inputs or assumptions

 

 

(9,466

)

 

 

(63,061

)

Balance - end of period

 

$

392,191

 

 

$

369,983

 

 

 

 

For the nine months ended

September 30,

 

 

 

2020

 

 

2019

 

Balance - beginning of year

 

$

418,402

 

 

$

511,852

 

MSRs originated

 

 

219,605

 

 

 

109,321

 

Changes in fair value

 

 

 

 

 

 

 

 

Due to collection/realization of cash flows

 

 

(85,270

)

 

 

(57,395

)

Due to changes in valuation model inputs or assumptions

 

 

(160,546

)

 

 

(193,795

)

Balance - end of period

 

$

392,191

 

 

$

369,983

 

 

The following table presents a summary of the weighted average discount rate and prepayment speed assumptions used to determine the fair value of MSRs as of September 30, 2020 and December 31, 2019:

 

 

 

September 30,

2020

 

December 31,

2019

Unobservable Input

 

Range (Weighted Average)

Discount rate

 

9.2% - 15.5% (10.1%)

 

9.2% - 15.5% (10.2%)

Prepayment rate

 

9.0% - 34.6% (20.6%)

 

8.9% - 30.0% (17.3%)

 

At September 30, 2020 and December 31, 2019, the MSRs had a weighted average life of approximately 4.6 and 4.9 years, respectively. See Note 2 for additional information regarding the valuation of MSRs.

Actual revenue generated from servicing activities included contractually specified servicing fees, as well as late fees and other ancillary servicing revenue, which were recorded within loan servicing and other fees as follows for the three and nine months ended September 30, 2020 and 2019:

 

 

 

For the three months ended

September 30,

 

 

 

2020

 

 

2019

 

Servicing fees from servicing portfolio

 

$

38,994

 

 

$

35,392

 

Late fees

 

 

1,193

 

 

 

1,715

 

Other ancillary servicing revenue

 

 

(28

)

 

 

(567

)

Total loan servicing and other fees

 

$

40,159

 

 

$

36,540

 

 

 

 

For the nine months ended

September 30,

 

 

 

2020

 

 

2019

 

Servicing fees from servicing portfolio

 

$

113,172

 

 

$

101,501

 

Late fees

 

 

3,828

 

 

 

4,578

 

Other ancillary servicing revenue

 

 

(531

)

 

 

(1,102

)

Total loan servicing and other fees

 

$

116,469

 

 

$

104,977

 

 

At September 30, 2020 and December 31, 2019, the unpaid principal balance of mortgage loans serviced totaled $57.4 billion and $50.6 billion, respectively. Conforming conventional loans serviced by the Company are sold to Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”) programs on a nonrecourse basis, whereby foreclosure losses are generally the responsibility of FNMA and FHLMC and not the Company. Similarly, certain loans serviced by the Company are secured through GNMA programs, whereby the Company is insured against loss by FHA or partially guaranteed against loss by the Department of Veterans Affairs (“VA”).

The key assumptions used to estimate the fair value of MSRs are prepayment speeds and the discount rate. Increases in prepayment speeds generally have an adverse effect on the value of MSRs as the underlying loans prepay faster. In a declining interest rate environment, the fair value of MSRs generally decreases as prepayments increase and therefore, the estimated life of the MSRs and related cash flows decrease. Decreases in prepayment speeds generally have a positive effect on the value of MSRs as the underlying loans prepay less frequently. In a rising interest rate environment, the fair value of MSRs generally increases as prepayments decrease and therefore, the estimated life of the MSRs and related cash flows increase. Increases in the discount rate result in a lower MSR value and decreases in the discount rate result in a higher MSR value. MSR uncertainties are hypothetical and do not always have a direct correlation with each assumption. Changes in one assumption may result in changes to another assumption, which might magnify or counteract the uncertainties.

The following table illustrates the impact of adverse changes on the discount rate and prepayment speeds at two different data points at September 30, 2020 and December 31, 2019, respectively:

 

 

 

Discount Rates

 

 

Prepayment Speeds

 

 

 

10% Adverse

 

 

20% Adverse

 

 

10% Adverse

 

 

20% Adverse

 

 

 

Change

 

 

Change

 

 

Change

 

 

Change

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

(16,677

)

 

$

(27,696

)

 

$

(32,799

)

 

$

(58,291

)

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

(23,682

)

 

$

(35,701

)

 

$

(31,329

)

 

$

(49,031

)