Note 10—Mortgage Servicing Rights and Mortgage Servicing Liabilities

Mortgage Servicing Rights Carried at Fair Value

The activity in MSRs carried at fair value is as follows:


	Quarter ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	(in thousands)
Balance at beginning of period	$	2,486,157	$	678,441	$	638,010	$	515,925
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to a change in accounting principle		—		—		1,482,426		—
Balance after reclassification		2,486,157		678,441		2,120,436		515,925
Additions:
Purchases		163,511		41		193,640		183,830
Mortgage servicing rights resulting from mortgage loan sales		149,000		5,773		448,604		19,702
		312,511		5,814		642,244		203,532
Change in fair value due to:
Changes in inputs used in valuation model (1)		64,293		(4,857)		239,538		(4,453)
Other changes in fair value (2)		(76,997)		(23,414)		(216,254)		(59,020)
Total change in fair value		(12,704)		(28,271)		23,284		(63,473)
Balance at end of period	$	2,785,964	$	655,984	$	2,785,964	$	655,984

					September 30,		December 31,
					2018		2017
					(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable					$	2,539,575	$	630,711

(1)

Principally reflects changes in discount rate and prepayment speed inputs, primarily due to changes in market interest rates, and changes in expected borrower performance and servicer losses given default.

(2)

Represents changes due to realization of cash flows.

Mortgage Servicing Rights Carried at Lower of Amortized Cost or Fair Value

The activity in MSRs carried at the lower of amortized cost or fair value is summarized below:


	Quarter ended		Nine months ended September 30,
	September 30, 2017		2018		2017

Amortized cost:
Balance at beginning of period	$	1,384,741	$	1,583,378	$	1,206,694
Transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to a change in accounting principle		—		(1,583,378)		—
Balance after reclassification		1,384,741		—		1,206,694
Mortgage servicing rights resulting from mortgage loan sales		153,061		—		412,206
Amortization		(48,448)		—		(129,546)
Balance at end of period		1,489,354		—		1,489,354

Valuation allowance:
Balance at beginning of period		(111,583)		(101,800)		(94,947)
Reduction resulting from transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to a change in accounting principle		—		101,800		—
Balance after reclassification		(111,583)		—		(94,947)
Increase in valuation allowance		(17,270)		—		(33,906)
Balance at end of period		(128,853)		—		(128,853)
Mortgage servicing rights, net at end of period	$	1,360,501	$	—	$	1,360,501
Fair value of mortgage servicing rights at:
Beginning of period	$	1,273,364			$	1,112,302
End of period	$	1,360,578

					December 31,
					2017
					(in thousands)
Fair value of mortgage servicing rights pledged to secure assets sold under agreements to repurchase and note payable					$	1,467,356

Mortgage Servicing Liabilities Carried at Fair Value

The activity in MSLs carried at fair value is summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	(in thousands)
Balance at beginning of period	$	10,253	$	18,295	$	14,120	$	15,192
Mortgage servicing liabilities resulting from mortgage loan sales		1,741		4,071		5,548		11,940
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		3,410		(176)		8,590		7,819
Other changes in fair value (2)		(5,635)		(6,114)		(18,489)		(18,875)
Total change in fair value		(2,225)		(6,290)		(9,899)		(11,056)
Balance at end of period	$	9,769	$	16,076	$	9,769	$	16,076

(1)

Principally reflects changes in expected borrower performance and servicer losses given default.

(2)

Represents changes due to realization of cash flows.

Servicing fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Loan servicing fees—From non-affiliates on the consolidated statements of income; late charges and other ancillary fees relating to MSRs and MSLs are recorded in Net mortgage loan servicing fees—Loan servicing fees—Ancillary and other fees on the Company’s consolidated statements of income. Such amounts are summarized below:


	Quarter ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	(in thousands)
Contractual servicing fees	$	147,182	$	126,416	$	421,536	$	345,231
Ancillary and other fees:
Late charges		5,087		6,326		19,595		18,915
Other		1,244		1,270		4,620		3,296
	$	153,513	$	134,012	$	445,751	$	367,442