SERVICING RIGHTS

9 Months Ended

Sep. 30, 2016

The Company retains MSRs from certain of its sales of residential mortgage loans. MSRs on residential mortgage loans are reported at fair value. Income earned by the Company on its MSRs is derived primarily from contractually specified mortgage servicing fees and late fees, net of curtailment costs and third party subservicing costs. The Company retains servicing rights in connection with its SBA loan operations, which are measured using the amortization method.

Income (loss) from servicing rights was $2.1 million and $(2.3) million, respectively, for the three months ended September 30, 2016 and 2015, and $(6.5) million and $(689) thousand, respectively, for the nine months ended September 30, 2016 and 2015. The Company recognized losses on the fair value and runoff of servicing rights of $4.2 million and $5.5 million, respectively, for the three months ended September 30, 2016 and 2015, and $22.9 million and $8.6 million, respectively, for the nine months ended September 30, 2016 and 2015. These decreases were partially offset by increases in servicing fees. The Company recognized servicing fees of $6.3 million and $3.3 million, respectively, for the three months ended September 30, 2016 and 2015, and $16.4 million and $7.9 million, respectively, for the nine months ended September 30, 2016 and 2015. The decrease in fair value of servicing rights was due to generally lower interest rates and the increase in servicing fees was due to the increase in unpaid principal balance of loans sold with servicing retained. These amounts are reported in Loan Servicing Income (Loss) in the Consolidated Statements of Operations.

During the three months ended September 30, 2016, the Company entered into a flow-agreement establishing general terms for the purchase and sale to a third party MSR investor in connection with future residential mortgage loan sales to GSEs. The flow-agreement will allow the Company to sell its MSRs to a third party MSR investor contemporaneous with the Company’s sales of its servicing retained residential mortgages to the GSEs. Accordingly, entering into the flow-agreement will reduce the impact of volatility associated with the Company's MSRs by allowing the Company to sell its MSRs immediately, thus reducing the Company's exposure to market and other conditions in the future.

On February 1, 2017, the Company and the third party MSR investor agreed to suspend MSR flow sales due to Company announcements concerning the Special Committee investigation and management changes at the Company. The Company is currently exploring options for selling MSRs contemporaneously with the sale of SFR mortgage loans to the GSEs as well as the Company’s existing MSRs.

The following table presents a composition of servicing rights as of the dates indicated:



	September 30, 2016		December 31, 2015
	(In thousands)
Mortgage servicing rights, at fair value	$	62,676	$	49,939
SBA servicing rights, at cost	1,167		788
Total	$	63,843	$	50,727

Mortgage loans sold with servicing retained are not reported as assets and are subserviced by a third party vendor. The unpaid principal balance of these loans at September 30, 2016 and December 31, 2015 was $7.27 billion and $4.77 billion, respectively. Custodial escrow balances maintained in connection with serviced loans were $60.1 million and $21.1 million at September 30, 2016 and December 31, 2015, respectively.

Mortgage Servicing Rights

The following table presents the key characteristics, inputs and economic assumptions used to estimate the Level 3 fair value of the MSRs as of the dates indicated:



	September 30, 2016			December 31, 2015
	($ in thousands)
Fair value of retained MSRs	$	62,676		$	49,939
Discount rate	9.81		%	9.75		%
Constant prepayment rate	15.54		%	11.81		%
Weighted-average life	5.29 years			6.48 years

The following table presents activity in the MSRs for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(In thousands)
Balance at beginning of period	$	52,567		$	34,198		$	49,939		$	19,082
Additions	14,300			12,143			35,648			36,034
Changes in fair value resulting from valuation inputs or assumptions	(465		)	(3,097		)	(14,497		)	(2,087		)
Sales of servicing rights	—			—			(3		)	(5,862		)
Other	(3,726		)	(2,407		)	(8,411		)	(6,330		)
Balance at end of period	$	62,676		$	40,837		$	62,676		$	40,837

SBA Servicing Rights

The Company used a discount rate of 7.50 percent to calculate the present value of cash flows and an estimated prepayment speed based on prepayment data available. Discount rates and prepayment speeds are reviewed quarterly and adjusted as appropriate. The following table presents activity in the SBA servicing rights for the periods indicated:



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(In thousands)
Balance at beginning of period	$	1,083		$	744		$	788		$	484
Additions	122			132			505			471
Amortization, including prepayments	(38		)	(67		)	(126		)	(146		)
Balance at end of period	$	1,167		$	809		$	1,167		$	809

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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