Mortgage Servicing Rights

6 Months Ended

Jun. 30, 2016

NOTE 4—MORTGAGE SERVICING RIGHTS

Mortgage Servicing Rights (“MSRs”) represent the carrying value of the servicing rights retained by the Company for mortgage loans originated and sold. The initial capitalized amount is equal to the estimated fair value of the expected net cash flows associated with the servicing rights. MSRs are amortized using the interest method over the period that servicing income is expected to be received.

The fair values of the MSRs at June 30, 2016 and December 31, 2015 were $576.4 million and $510.6 million, respectively. The Company uses a discounted static cash flow valuation approach, and the key economic assumption is the discount rate. For example, see the following sensitivities:

The impact of a 100 basis point increase in the discount rate at June 30, 2016 is a decrease in the fair value of $18.6 million.

The impact of a 200 basis point increase in the discount rate at June 30, 2016 is a decrease in the fair value of $35.8 million.

These sensitivities are hypothetical and should be used with caution. These estimates do not include interplay among assumptions and are estimated as a portfolio rather than individual assets.

Activity related to capitalized MSRs for the three and six months ended June 30, 2016 and 2015 follows:


	For the three months ended				For the six months ended
	June 30,				June 30,
(in thousands)	2016		2015		2016		2015
Beginning balance	$	421,651	$	375,159	$	412,348	$	375,907
Additions, following the sale of loan		29,053		43,209		64,026		67,391
Purchases		44,774		—		44,774		—
Amortization		(23,233)		(19,750)		(45,956)		(38,570)
Pre-payments and write-offs		(4,152)		(3,598)		(7,099)		(9,708)
Ending balance	$	468,093	$	395,020	$	468,093	$	395,020

As shown in the table above, during the second quarter of 2016, the Company purchased the rights to service a HUD loan portfolio from a third-party servicer for $44.8 million of cash consideration, with $43.4 million paid at closing and the remaining $1.4 million due upon the successful resolution of one defaulted loan, which is expected to occur before the end of 2016. The servicing portfolio consisted of approximately $3.8 billion of unpaid principal balance and had a weighted average estimated remaining life of 10.8 years.

The following summarizes the components of the net carrying value of the Company’s acquired and originated MSRs as of June 30, 2016:


	As of June 30, 2016
	Gross		Accumulated		Net
(in thousands)	carrying value		amortization		carrying value
Acquired MSRs	$	177,611	$	(100,013)	$	77,598
Originated MSRs		556,528		(166,033)		390,495
Total	$	734,139	$	(266,046)	$	468,093

The expected amortization of MSRs recorded as of June 30, 2016 is shown in the table below. Actual amortization may vary from these estimates.


	Originated MSRs		Acquired MSRs		Total MSRs
(in thousands)	Amortization		Amortization		Amortization
Six Months Ending December 31,
2016	$	40,564	$	7,443	$	48,007
Year Ending December 31,
2017		72,809		13,910		86,719
2018		61,874		11,428		73,302
2019		55,295		10,081		65,376
2020		47,615		8,359		55,974
2021		38,521		6,452		44,973
Thereafter		73,817		19,925		93,742
Total	$	390,495	$	77,598	$	468,093

- 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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