Note 9—Mortgage Servicing Rights and Mortgage Servicing Liabilties

Mortgage Servicing Rights Carried at Fair Value:

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


	Year ended December 31,
	2018		2017		2016
	(in thousands)
Balance at beginning of year	$	638,010	$	515,925	$	660,247
Reclassification of mortgage servicing rights previously accounted for under the amortization method pursuant to adoption of the fair value method of accounting		1,482,426		—		—
Balance after reclassification		2,120,436		515,925		660,247
Additions:
Purchases		237,803		183,850		146
Resulting from mortgage loan sales		591,757		24,471		17,319
		829,560		208,321		17,465
Change in fair value due to:
Changes in inputs used in valuation model (1)		174,458		(4,771)		(80,244)
Other changes in fair value (2)		(303,842)		(81,465)		(81,543)
Total change in fair value		(129,384)		(86,236)		(161,787)
Balance at end of year	$	2,820,612	$	638,010	$	515,925

	December 31,
	2018		2017
		(in thousands)
Fair value of mortgage servicing rights pledged to secure Assets sold under agreements to repurchase and Notes payable	$	2,807,333	$	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:


	Year ended December 31,
	2018		2017		2016
	(in thousands)
Amortized cost:
Balance at beginning of year	$	1,583,378	$	1,206,694	$	798,925
Transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to adoption of the fair value method of accounting		(1,583,378)		—		—
Balance after reclassification		—		1,206,694		798,925
Mortgage servicing rights resulting from mortgage loan sales		—		556,630		560,212
Amortization		—		(179,946)		(139,666)
Application of valuation allowance to recognize other-than-temporary impairment				—		(12,777)
Balance at end of year		—		1,583,378		1,206,694

Valuation allowance:
Balance at beginning of year		(101,800)		(94,947)		(47,237)
Reduction resulting from transfer of mortgage servicing rights to mortgage servicing rights carried at fair value pursuant to adoption of the fair value method of accounting		101,800		—		—
Balance after reclassification		—		(94,947)		(47,237)
Increase in valuation allowance		—		(6,853)		(60,487)
Application of valuation allowance to recognize other-than-temporary impairment		—		—		12,777
Balance at end of year		—		(101,800)		(94,947)
Mortgage servicing rights, net at end of year	$	—	$	1,481,578	$	1,111,747
Fair value of mortgage servicing rights at:
Beginning of year			$	1,112,302	$	766,345
End of year			$	1,482,426	$	1,112,302

			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 mortgage servicing liability carried at fair value is summarized below:


	Year ended December 31,
	2018		2017		2016
	(in thousands)
Balance at beginning of year	$	14,120	$	15,192	$	1,399
Mortgage servicing liabilities resulting from mortgage loan sales		7,601		17,229		14,991
Mortgage servicing liabilities assumed		—		—		10,139
Changes in fair value due to:
Changes in valuation inputs used in valuation model (1)		10,787		6,526		5,264
Other changes in fair value (2)		(23,827)		(24,827)		(16,601)
Total change in fair value		(13,040)		(18,301)		(11,337)
Balance at end of year	$	8,681	$	14,120	$	15,192

(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—Mortgage loan servicing fees—Ancillary and other fees on the Company’s consolidated statements of income. Such amounts are summarized below:


	Year ended December 31,
	2018		2017		2016
	(in thousands)
Contractual servicing fees	$	585,101	$	475,848	$	385,633
Ancillary and other fees:
Late charges		27,940		25,097		19,341
Other		6,276		4,603		4,706
	$	619,317	$	505,548	$	409,680