Mortgage Loan Servicing and Loans Originated for Sale

12 Months Ended

Jun. 30, 2012

Mortgage Loan Servicing and Loans Originated for Sale:

Mortgage Loan Servicing and Loans Originated for Sale

4.   Mortgage Loan Servicing and Loans Originated for Sale:

The following summarizes the unpaid principal balance of loans serviced for others by the Corporation at the dates indicated:

(In Thousands)	As of June 30,
	2012	2011	2010
Loans serviced for Freddie Mac	$   4,727	$     3,269	$     3,745
Loans serviced for Fannie Mae	24,063	16,791	18,032
Loans serviced for FHLB – San Francisco	68,013	87,022	110,513
Loans serviced for other investors	2,072	2,269	2,457
Total loans serviced for others	$ 98,875	$ 109,351	$ 134,747

MSA are recorded when loans are sold to investors and the servicing of those loans is retained by the Bank.  MSA are subject to interest rate risk and may become impaired when interest rates fall and the borrowers refinance or prepay their mortgage loans.  The MSA are derived primarily from single-family loans.

Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and processing foreclosures.  Income from servicing loans is reported as loan servicing and other fees in the Corporation’s consolidated statements of operations, and the amortization of MSA is reported as a reduction to the loan servicing income.  Loan servicing income includes servicing fees from investors and certain fees collected from borrowers, such as late payment fees.  As of June 30, 2012 and 2011, the Corporation held borrowers’ escrow balances related to loans serviced for others of $302,000 and $330,000, respectively.

In estimating fair values of the MSA at June 30, 2012 and 2011, the Bank used a weighted-average constant prepayment rate (“CPR”) of 26.61% and 19.10%, respectively, and a weighted-average discount rate of 9.10% and 9.02%, respectively.  The MSA, which is included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition, had a carrying value of $327,000 and a fair value of $398,000 at June 30, 2012.  This compares to the MSA at June 30, 2011 which had a carrying value of $354,000 and a fair value of $589,000.  An allowance may be recorded to adjust the carrying value of each category of MSA to the lower of cost or market.  As of June 30, 2012, a total allowance of $164,000 was required for four categories of MSA, compared to a total allowance of $76,000 from three categories of MSA as of June 30, 2011.  Total additions to the MSA during the years ended June 30, 2012, 2011 and 2010 were $106,000, $16,000 and $18,000, respectively.  Total amortization of the MSA during the years ended June 30, 2012, 2011 and 2010 was $45,000, $45,000 and $81,000, respectively.

Loans sold to the FHLB – San Francisco were completed under the MPF Program, which entitles the Bank to a credit enhancement fee collected from FHLB – San Francisco on a monthly basis as described in Note 1 under PBM activities.

The following table summarizes the Corporation’s MSA for years ended June 30, 2012 and 2011.

		Year Ended June 30,
(Dollars In Thousands)		2012		2011
MSA balance, beginning of fiscal year		$ 430		$ 459
Additions		106		16
Amortization		(45	)	(45	)
MSA balance, end of fiscal year, before allowance		491		430
Allowance		(164	)	(76	)
MSA balance, end of fiscal year		$ 327		$ 354
Fair value, beginning of fiscal year		$ 589		$ 725
Fair value, end of fiscal year		$ 398		$ 589
Allowance, beginning of fiscal year		$   76		$   82
Impairment provision (recovery)		88		(6	)
Allowance, end of fiscal year		$ 164		$   76
Key Assumptions:
	Weighted-average discount rate	9.10%		9.02%
	Weighted-average prepayment speed	26.61%		19.10%

The following table summarizes the estimated future amortization of MSA for the next five years and thereafter:

		Amount
Year Ending June 30,		(In Thousands)
	2013	$ 136
	2014	96
	2015	66
	2016	36
	2017	18
	Thereafter	139
Total estimated amortization expense		$ 491

The following table represents the hypothetical effect on the fair value of the Corporation’s MSA using an unfavorable shock analysis of certain key valuation assumptions as of June 30, 2012 and 2011.  This analysis is presented for hypothetical purposes only.  As the amounts indicate, changes in fair value based on changes in assumptions generally cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.

	Year Ended June 30,
(Dollars In Thousands)	2012		2011
MSA net carrying value	$ 327		$ 354
CPR assumption (weighted-average)	26.61%		19.10%
Impact on fair value with 10% adverse change in prepayment speed	$ (18	)	$ (19	)
Impact on fair value with 20% adverse change in prepayment speed	$ (34	)	$ (37	)
Discount rate assumption (weighted-average)	9.10%		9.02%
Impact on fair value with 10% adverse change in discount rate	$ (11	)	$ (20	)
Impact on fair value with 20% adverse change in discount rate	$ (21	)	$ (39	)

The Corporation also has also recorded interest-only strips with a fair value of $130,000, comprised of gross unrealized gains of $127,000 and an unamortized cost of $3,000 at June 30, 2012.   This compares to interest-only strips at June 30, 2011 with a fair value of $200,000, comprised of gross unrealized gains of $197,000 and an unamortized cost of $3,000.  There were no additions to interest-only strips during fiscal 2012, 2011 or 2010.  Total amortization of the interest-only strips during the years ended June 30, 2012, 2011 and 2010 were $1,000, $1,000 and $48,000, respectively.

Loans sold consisted of the following for the periods indicated:

(In Thousands)		Year Ended June 30,
		2012	2011	2010
Loans sold:
	Servicing – released	$ 2,460,281	$ 2,115,845	$ 1,778,684
	Servicing – retained	13,121	1,999	2,541
Total loans sold		$ 2,473,402	$ 2,117,844	$ 1,781,225

During the years ended June 30, 2012, 2011 and 2010, the Corporation sold 43%, 45% and 65%, respectively, of its loans originated for sale to a single investor, other than Freddie Mac or Fannie Mae.  If the Corporation is unable to sell loans to its primary investor, find alternative investors, or change its loan programs to meet investor guidelines, it may have a significant negative impact on the Corporation’s results of operations.

Loans held for sale, at fair value, at June 30, 2012 and 2011 consisted of the following:

(In Thousands)	June 30,
	2012	2011
Fixed rate	$ 228,070	$ 182,103
Adjustable rate	3,569	9,575
Total loans held for sale, at fair value	$ 231,639	$ 191,678