Note 6 – Mortgage Banking

Mortgage Servicing Rights

The activity in the mortgage servicing rights (MSR) is detailed in the table below for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2017			2016
Balance at beginning of period	$	80,239		$	74,007
Origination of servicing assets		11,630			12,392
Change in fair value:
Due to market changes		(2,218	)		(13,518	)
Due to run-off		(8,174	)		(7,367	)
Balance at end of period	$	81,477		$	65,514

In the determination of the fair value of the MSR at the date of securitization, certain key economic assumptions are made. For instance, Trustmark considers the conditional prepayment rate (CPR), which is an estimated loan prepayment rate that uses historical prepayment rates for previous loans similar to the loans being evaluated, and the discount rate in determining the fair value of the MSR. An increase in either the CPR or discount rate assumption will result in a decrease in the fair value of the MSR, while a decrease in either assumption will result in an increase in the fair value of the MSR. At September 30, 2017, the fair value of the MSR included an assumed average prepayment speed of 9.25 CPR and an average discount rate of 10.28% compared to an assumed average prepayment speed of 11.48 CPR and an average discount rate of 10.34% at September 30, 2016.

Mortgage Loans Serviced/Sold

During the first nine months of 2017 and 2016, Trustmark sold $871.9 million and $1.016 billion, respectively, of residential mortgage loans. Pretax gains on these sales were recorded to noninterest income in mortgage banking, net and totaled $13.6 million for the first nine months of 2017 compared to $14.5 million for the first nine months of 2016. The table below details the mortgage loans sold and serviced for others at September 30, 2017 and December 31, 2016 ($ in thousands):

	September 30, 2017		December 31, 2016
Federal National Mortgage Association	$	4,077,625	$	3,992,349
Government National Mortgage Association		2,386,089		2,291,398
Federal Home Loan Mortgage Corporation		48,911		55,006
Other		27,972		32,589
Total mortgage loans sold and serviced for others	$	6,540,597	$	6,371,342

Trustmark is subject to losses in its loan servicing portfolio due to loan foreclosures. Trustmark has obligations to either repurchase the outstanding principal balance of a loan or make the purchaser whole for the economic benefits of a loan if it is determined that the loan sold was in violation of representations or warranties made by Trustmark at the time of the sale, herein referred to as mortgage loan servicing putback expenses. Such representations and warranties typically include those made regarding loans that had missing or insufficient file documentation, loans that do not meet investor guidelines, loans in which the appraisal does not support the value and/or loans obtained through fraud by the borrowers or other third parties. Generally, putback requests may be made until the loan is paid in full. However, mortgage loans delivered to Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) on or after January 1, 2013 are subject to the Lending and Selling Representations and Warranties Framework updated in May 2014, which provides certain instances in which FNMA and FHLMC will not exercise their remedies, including a putback request, for breaches of certain selling representations and warranties, such as payment history and quality control review.

When a putback request is received, Trustmark evaluates the request and takes appropriate actions based on the nature of the request. Trustmark is required by FNMA and FHLMC to provide a response to putback requests within 60 days of the date of receipt. Currently, putback requests primarily relate to 2009 through 2013 vintage mortgage loans. The total mortgage loan servicing putback expenses, which were included in other expense, incurred by Trustmark during the first nine months of 2017 were $164 thousand compared to $315 thousand during the same time period in 2016.

Changes in the reserve for mortgage loan servicing putback expense for mortgage loans were as follows for the periods presented ($ in thousands):

	Nine Months Ended September 30,
	2017		2016
Balance at beginning of period	$	1,130	$	1,685
Provision for putback expenses		164		315
Other (1)		706		(944	)
Balance at end of period	$	2,000	$	1,056

(1)	Includes fair value adjustments for loans transferred due to underwriting issues as well as adjustments based on Trustmark’s mortgage loan servicing putback reserve analysis.

There is inherent uncertainty in reasonably estimating the requirement for reserves against potential future mortgage loan servicing putback expenses. Future putback expenses are dependent on many subjective factors, including the review procedures of the purchasers and the potential refinance activity on loans sold with servicing released and the subsequent consequences under the representations and warranties. Trustmark believes that it has appropriately reserved for potential mortgage loan servicing putback requests.