Note 8 – Mortgage Banking

Mortgage Servicing Rights

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

	Years Ended December 31,
	2017			2016
Balance at beginning of period	$	80,239		$	74,007
Origination of servicing assets		15,860			16,745
Change in fair value:
Due to market changes		(1,050	)		(407	)
Due to runoff		(10,780	)		(10,106	)
Balance at end of period	$	84,269		$	80,239

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 December 31, 2017, the fair value of the MSR included an assumed average prepayment speed of 9.14 CPR and an average discount rate of 10.28% compared to an assumed average prepayment speed of 7.94 CPR and an average discount rate of 10.32% at December 31, 2016. In recent years, there have been significant market-driven fluctuations in loan prepayment speeds and discount rates. These fluctuations can be rapid and may continue to be significant. Therefore, estimating prepayment speed and/or discount rates within ranges that market participants would use in determining the fair value of the MSR requires significant management judgment.

Mortgage Loans Sold/Serviced

During 2017, 2016 and 2015, Trustmark sold $1.179 billion, $1.384 billion and $1.246 billion, respectively, of residential mortgage loans. Pretax gains on these sales totaled $18.9 million in 2017, $20.5 million in 2016 and $18.0 million in 2015. Trustmark receives annual servicing fee income approximating 0.33% of the outstanding balance of the underlying loans, which totaled $21.4 million in 2017, $20.4 million in 2016 and $19.3 million in 2015. The pretax gains on the sale of residential mortgage loans and the annual servicing fee are both recorded to noninterest income in mortgage banking, net in the accompanying consolidated statements of income. The investors and the securitization trusts have no recourse to the assets of Trustmark for failure of debtors to pay when due. The table below details the mortgage loans sold and serviced for others at December 31, 2017 and 2016 ($ in thousands):

	December 31,
	2017		2016
Federal National Mortgage Association	$	4,128,614	$	3,992,349
Government National Mortgage Association		2,421,456		2,291,398
Federal Home Loan Mortgage Corporation		47,071		55,006
Other		26,864		32,589
Total mortgage loans sold and serviced for others	$	6,624,005	$	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 were included in other expense.

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

	Years Ended December 31,
	2017			2016			2015
Balance at beginning of period	$	1,130		$	1,685		$	1,170
Provision for putback expenses		(836	)		420			315
Other (1)		706			(975	)		200
Balance at end of period	$	1,000		$	1,130		$	1,685

(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.