Certain Transfers of Financial Assets

12 Months Ended

Dec. 31, 2019

The table below presents a reconciliation of the changes in loans held for sale:



	Year Ended December 31,
(in thousands)	2019			2018
Outstanding balance(1):
Beginning balance	$	1,949,785		$	1,012,580
Loans purchased and originated	10,183,057			6,753,709
Payments and loans sold	(9,564,480		)	(5,816,504		)
Ending balance	2,568,362			1,949,785
Fair value adjustment:
Beginning balance	19,689			(1,576		)
Increase/(decrease) to fair value	(10,917		)	21,265
Ending balance	8,772			19,689
Loans held for sale at fair value	$	2,577,134		$	1,969,474


(1)	Includes $5.8 million and $299,000 of loans held for sale that are carried at lower of cost or market as of December 31, 2019 and 2018, respectively, as well as $3.3 million as of December 31, 2017.

No loans held for sale were on non-accrual as of December 31, 2019 or December 31, 2018. At December 31, 2019 and December 31, 2018, we had $8.2 million and $16.8 million, respectively, in loans held for sale that were 90 days or more past due. The $8.2 million in loans held for sale that were 90 days or more past due at December 31, 2019 included $6.0 million in loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet. Interest on these past due loans accrues at the debenture rate guaranteed by the U.S. government. Also included in the $8.2 million were $1.9 million in loans that, pursuant to Ginnie Mae servicing guidelines, we have the unilateral right, but not the obligation, to repurchase if defined delinquent loan criteria are met, and therefore must record as held for sale on our balance sheet regardless of whether the repurchase option has been exercised. At December 31, 2018, $16.0 million of the $16.8 million in loans held for sale were loans guaranteed by U.S. government agencies that were purchased out of Ginnie Mae securities and recorded as loans held for sale, at fair value, on the balance sheet.

From time to time we retain the right to service the loans sold through our MCA program, creating MSRs which are recorded as assets on our balance sheet. A summary of MSR activity is as follows:



	Year Ended December 31,
(in thousands)	2019			2018
MSRs:
Balance, beginning of year	$	42,474		$	88,150
Capitalized servicing rights	39,774			39,149
Amortization	(11,541		)	(9,278		)
Sales	—			(75,547		)
Balance, end of period	$	70,707		$	42,474
Valuation allowance:
Balance, beginning of year	$	—		$	2,823
Increase (decrease) in valuation allowance	5,803			(2,823		)
Balance, end of period	$	5,803		$	—
MSRs, net	$	64,904		$	42,474
MSRs, fair value	$	64,904		$	44,502

At December 31, 2019 and 2018, our servicing portfolio of residential mortgage loans had an outstanding principal balance of $6.7 billion and $3.9 billion, respectively.

In connection with the servicing of these loans, we hold deposits in the name of investors representing escrow funds for taxes and insurance, as well as collections in transit to the investors. These escrow funds are segregated and held in separate non-interest-bearing bank accounts at the Bank. These deposits, included in total non-interest-bearing deposits on the consolidated balance sheets, were $63.7 million at December 31, 2019 and $37.9 million at December 31, 2018.

The estimated fair value of the MSR assets is obtained from an independent third party and reviewed by management on a quarterly basis. MSRs typically do not trade in an active, open market with readily observable prices; as such, the fair value of MSRs is determined using a discounted cash flow model to calculate the present value of the estimated future net servicing income. The assumptions utilized in the discounted cash flow model are based on market data for comparable assets, where available. Each quarter, management and the independent third party review the key assumptions used in the discounted cash flow model and make adjustments as necessary to estimate the fair value of the MSRs. At December 31, 2019, the estimated fair value of MSRs was adjusted as a result of the decline in mortgage interest rates during the year, which resulted in an impairment charge of $5.8 million. There was no impairment at December 31, 2018. The following summarizes the assumptions used by management to determine the fair value of MSRs:



	December 31,
	2019		2018
Average discount rates	9.06	%	9.55	%
Expected prepayment speeds	13.11	%	9.77	%
Weighted-average life, in years	5.8		7.0

A sensitivity analysis of changes in the fair value of our MSR portfolio resulting from certain key assumptions is presented in the following table:



	December 31,
(in thousands)	2019			2018
50 bp adverse change in prepayment speed	$	(10,768	)	$	(6,028	)
100 bp adverse change in prepayment speed	(17,965		)	(11,629		)

These sensitivities are hypothetical and actual results may differ materially due to a number of factors. The effect on fair value of a 10% variation in assumptions generally cannot be determined with confidence because the relationship of the change in assumptions to the change in fair value may not be linear. Additionally, the impact of a variation in a particular assumption on the fair value is calculated while holding other assumptions constant. In reality, changes in one factor may be correlated with changes in other factors, which could impact the sensitivity analysis as presented.

In conjunction with the sale and securitization of loans held for sale, we may be exposed to liability resulting from repurchase, indemnification and make-whole agreements. Our estimated exposure related to those agreements totaled $3.6 million and $1.6 million at December 31, 2019 and December 31, 2018, respectively, and is recorded in other liabilities in the consolidated balance sheets. We incurred $9.0 million in losses due to make-whole obligations during the year ended December 31, 2019 compared to $258,000 in 2018. The increase in make-whole obligation losses is primarily related to an increase in early payoffs resulting from the declining interest rate environment.