Quarterly report pursuant to Section 13 or 15(d)

Servicing Activities (Notes)

v2.4.0.8
Servicing Activities (Notes)
 3 Months Ended
Mar. 31, 2014
Servicing Activities [Abstract]  
Transfers and Servicing of Financial Assets [Text Block]
rvicing Activities
Mortgage Servicing Rights, at Fair Value
On April 30, 2013, one of the Company’s wholly owned subsidiaries acquired a company that has approvals from Fannie Mae, Freddie Mac and Ginnie Mae to hold and manage MSR. The MSR acquired in conjunction with this acquisition and those subsequently purchased represent the right to service mortgage loans. The Company and its subsidiaries do not originate or directly service mortgage loans, and instead contract with fully licensed subservicers to handle all servicing functions for the loans underlying the Company’s MSR. The following table summarizes activity related to MSR for the three months ended March 31, 2014 and 2013.
 
Three Months Ended March 31,
(in thousands)
2014
 
2013
Balance at beginning of period
$
514,402

 
$
—

Additions from purchases of servicing rights
1,280

 
—

Changes in fair value due to:
 
 
 
Changes in valuation inputs or assumptions used in the valuation model
(20,250
)
 
—

Other changes in fair value (1)
(12,510
)
 
—

Other changes (2)
(6,259
)
 
—

Balance at end of period
$
476,663

 
$
—

____________________
(1)
Other changes in fair value primarily represents changes due to the realization of expected cash flows.
(2)
Other changes includes purchase price adjustments, principally contractual prepayment protection, and changes due to the Company’s repurchase of the underlying collateral.

As of March 31, 2014 and December 31, 2013, the key economic assumptions and sensitivity of the fair value of MSR to immediate 10% and 20% adverse changes in these assumptions were as follows:
(in thousands)
March 31,
2014
 
December 31,
2013
Weighted average prepayment speed:
10.5
%
 
9.5
%
Impact on fair value of 10% adverse change
$
(18,106
)
 
$
(19,305
)
Impact on fair value of 20% adverse change
$
(34,881
)
 
$
(37,187
)
Weighted average delinquency:
4.0
%
 
4.0
%
Impact on fair value of 10% adverse change
$
(7,291
)
 
$
(8,835
)
Impact on fair value of 20% adverse change
$
(14,613
)
 
$
(17,642
)
Weighted average discount rate:
9.0
%
 
9.0
%
Impact on fair value of 10% adverse change
$
(14,139
)
 
$
(21,037
)
Impact on fair value of 20% adverse change
$
(27,514
)
 
$
(40,642
)


These assumptions and sensitivities are hypothetical and should be considered with caution. Changes in fair value based on 10% and 20% variations in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSR is calculated without changing any other assumptions. In reality, changes in one factor may result in changes in another (e.g., increased market interest rates may result in lower prepayments and increased credit losses) that could magnify or counteract the sensitivities. Further, these sensitivities show only the change in the asset balances and do not show any expected change in the fair value of the instruments used to manage the interest rates and prepayment risks associated with these assets.
Risk Mitigation Activities
The primary risk of the Company’s MSR is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments that could reduce the value of the MSR. The Company economically hedges the impact of these risks with derivative financial instruments. Refer to Note 12 - Derivative Instruments and Hedging Activities for additional information regarding the derivative financial instruments used to economically hedge MSR.
Mortgage Servicing Income
The following table presents the components of servicing income recorded on the Company’s condensed consolidated statements of comprehensive income for the three months ended March 31, 2014 and 2013:
 
Three Months Ended March 31,
(in thousands)
2014
 
2013
Servicing fee income
$
29,871

 
$
—

Ancillary fee income
570

 
—

 
$
30,441

 
$
—



Mortgage Servicing Advances
In connection with the servicing of loans, the Company’s subservicers make certain payments for property taxes and insurance premiums, default and property maintenance payments, as well as advances of principal and interest payments before collecting them from individual borrowers. Servicing advances, including contractual interest, are priority cash flows in the event of a loan principal reduction or foreclosure and ultimate liquidation of the real estate-owned property, thus making their collection reasonably assured. These servicing advances, which are funded by the Company, totaled $12.7 million and $7.3 million and were included in other assets on the condensed consolidated balance sheet as of March 31, 2014 and December 31, 2013, respectively.
Serviced Mortgage Assets
The Company’s total serviced mortgage assets consist of loans owned and classified as mortgage loans held-for-sale, loans held in consolidated VIEs classified as mortgage loans held-for-investment in securitization trusts and loans underlying MSR. The following table presents the number of loans and unpaid principal balance of the mortgage assets for which the Company manages the servicing as of March 31, 2014 and December 31, 2013:
(dollars in thousands)
March 31, 2014
 
December 31, 2013
 
Number of Loans
 
Unpaid Principal Balance
 
Number of Loans
 
Unpaid Principal Balance
Mortgage loans held-for-sale
335

 
$
173,293

 
2,890

 
$
680,840

Mortgage loans held-for-investment in securitization trusts
510

 
381,455

 
537

 
425,209

Mortgage servicing rights (1)
207,025

 
41,596,256

 
210,441

 
42,324,328

Total serviced mortgage assets
207,870

 
$
42,151,004

 
213,868

 
$
43,430,377